Investments, Investments, Investments

With all the grim news about the fall in the global economy it is very nice to see that there are positive developments in the energy sector. We can summarize the final year news as 'clean energy'. This bodes well for the future development in the market.

First we have the news that Romania finally got its act together and brought the different project partners together, with RWE in the lead, to build Unit-3 and 4 of the Cernavoda nuclear power plant (missing the size and dates). Then we have the news from this week that Slovakia will be going ahead with CEZ to build more units at the Jaslovske Bohunice nuclear power plant to build around 1,000 MW and 1,600 MW of generation capacity by 2020 (platts).

In Bulgaria they have signed a deal with AES to build the Sveti Nikola wind power 'park' for EUR 270 M with 52 wind power generators, and a total production capacity of 156 MW (Novinite.com). Go back a few months and Romania announced its intention to build with CEZ Romania 347.5-megawatt Fintinel project in Tulcea. Throw in more wind power and gas plants in Hungary and there is a very robust power investment portfolio that is not slowing down.

Overall, there is a lot to be optimistic about in the region. Even if the projections for growing consumption in the region turn out to be slightly off, there is still a significant amount of capacity that does need to be replaced in the region. The government and companies know these projects are still years away from becoming operational, but what better way to stay busy in a slowing economy that to be working hard at a project that will come online just when the economies are revving up and environmental restrictions begin to tighten.

I don't know about you, but I'm going into the New Year in a positive mood.

Crunching the Credit to Make Power

One casualty according to this article in the FT, is the lack of finance credit for energy projects in the UK, particularly nuclear. The point is made, and we should reflect upon this for the wider CEE market place, that the withdrawal of generation impacts on the ability of countries to meet their climate change goals.

“Generating capacity equivalent to nearly a third of current electricity demand will be made redundant by 2020. It will need to be replaced. We believe that in the current economic climate there is a high risk that the energy companies will not be able to raise the finance necessary to build this.”

The CEE region, needs to build an equivalent amount of generation by 2020 to replace the outdated plants (if not a little higher). Thus the topic of credit availability becomes a central issue for the CEE region for the next year or two.

There are two outcomes of the tightening credit markets for the CEE power region. The first is that the plants that are on the drawing board are built. The building of the Emfesz new 1600 MW gas fired power plant is proceeding with the first 800 MW now being built. This is privately financed (although MVM may have a stake in it) initiative, which indicates that the market is still seen as requiring this much supply.

This leads us to the second point, the failure of some countries to build generation will open up export and extra revenue opportunities for those that are able to build. Thus, the projected demand will no doubt drop slightly from projected amounts (although I would say not by much if conservative estimates were earlier taken into account), but with the decommissioning of plants and emissions goals, then newer plants will have an advantage. Especially, if there are less plants built. Thus, building a power plant in the CEE region, can still be advantageous if these scenarios are taken into account. Also the lead time that is needed still means they won't come on line until the economy begins to recover.

A worse case scenario does need to be considered, and the only one that I can think of is that the economy continues to soar and demand drops for longer than expected - say up to five years. But regardless, climate change goals will still be implemented, thus cleaner plants (with CO2 storage possibilities) remain and profits will flow to those cleaner and newer plants.

For those study trips to CEE/SEE Nuclear Plants. Why sweat?

Regulation = Green Subsidies - Really?

The nationalization of banks, investment firms and the automotive companies in the US and elsewhere might lead one to think that the large scale energy industry might be next. Apparently, this is what David Victor thinks in his Newsweek article. Well, I've simplified his argument but essentially what he says, is the market based approaches that have been tried to encourage green energy are not working and only regulation and government subsidies will be able to do it.

Whereas the old view of green tech was based on many small, decentralized sources of power and a green economy that harnessed the power of the marketplace, the new version will rely more heavily on regulation and subsidies.

Really? What business leader (if they are not bankrupt) wants to accept government money to influence how they do business. Clear, long-term and an effective regulatory structure can serve business, society and the environment more than subsidies for the long-term deployment of generation and transmission technology. I won't argue the point about subsidies needed to prime the technological pump to get things going, like R&D, but the large scale deployment of any green technology will have to be self sustaining. Lest we forget that the world economy is structured around oil: modes of transport, troop deployment, urban planning, there are more elements that go into underpinning the success of an energy source than government money.

The transition towards a post-carbon world depends on the use of large scale electrical infrastructure. Nuclear power, solar farms in the desert and large transmission systems to move the electricity from high production areas to high demand areas are needed. Distributed generation sources like rooftop solar panels and local gas turbines will contribute, but will not be the only answer, Victor gets it right in the last part of his article by pointing this out. But not only does the regulatory bar have to be raised, but society and the wider economy must be transformed to meet and compliment the new energy infrastructure. Throwing taxpayer money continuously at 'green' projects does not build a sustainable future, economically viable green projects do.

Looking for the Greener/Dirtier Compromise

Getting to 20% by 2020 ain't no easy thing. The commitment by the EU to reduce its greenhouse gases by 20% is nearing some negotiation deadline which is this weekend (Dec. 13th). Poland and Germany are looking for solutions to uphold their right to continue on the coal fired power plant route. Their continued heavy reliance on coal and the lack of effective technologies to deal with the gases means they are set to be screwed when it comes to paying for Carbon Permits.

So what are the solutions. Well, they wouldn't mind a free allocation of permits for the coal industry too (along with the ones they've sought for their other industries). Poland is pressing for a money bank, which transfers more money from Rich to East (FT). Well, I think that is what the EU is already doing.

But let's think about this for a second. You have coal reliant countries with heavy industry trying to keep their power prices low to retain industry. Then you have the other countries who are more diversified in their energy mix and industry. But the thought that comes to my mind is many of these 'other' countries shifted their energy sources, not because it was the greener thing to do, but because of either a state strategy or the endowment of other energy sources. So while I do not want to defend the continued use of dirty coal - or more specifically, the ability to externalize, as compared to internalize, the cost of greenhouse gas pollution, there does need to be a clearly defined transition for these states.

The idea here is that these states have known about the schemes that will be implemented to control GHG emissions for many years, but have failed to act effectively -notably Poland.

What needs to be devised is a strict timetable connected to the allocation of 'free' permits, which are reduced over time. I don't know whether it should be fast or slow, but not beyond 5 to 10 years, the amount of time it would take to build new power plants and the ability to store carbon (ok, this is very optomistic on this last point). If you can get the German economic and scientific machine behind this, then the timetable is appropriate.

There is no doubt that this is a very tight timetable, but the idea is that there is a period of transition which gets the countries to agree now and moves their industry and economy towards a sustainable energy system. Punishment or a lack of agreement will only make future progress that much more difficult.

Rubbishing Clean Coal Research

I know it may take three times to make a trend, but when you speak to two informed individuals in the energy industry, then we almost get to three. So I'll take the two discussions I had with these two people and extrapolate to suggest that people are rubbishing the idea of investing any thought into seeing the future implications of carbon storage for coal.

For these two individuals the need to commit any resources into understanding the regulatory and infrastructure needs that will be required seemed a waste of time and money. I however, would have to argue the opposite. First there is no doubt that the technology still has be proven. But it is also undisputed that there is serious amounts of money, both from governments and from industry that are being put into the technology. Billions of Euros and Dollars. Some would say not enough, but regardless there is significant interest that is backed up by real money. Carbon Capture and Storage (CCS), offers a significant savings for companies and countries that are heavily reliant on coal, or have large deposits.

So the question that comes out is why actually invest any human thought, labor and money into exploring the regulatory and infrastructure challenges if the technology is not proven? Because there isn't much time. If you think about how long it took to create local, then national and then regional power systems, the infrastructure and regulatory framework that these operate within, it is apparent that the deployment of CCS infrastructure, if built along these historical time lines will not be realized until 2060 or beyond.

I make this time line calculation off the top of my head. Think about it, when did the FERC get control over interstate commerce of electricity? 1970s/80s? And not just administrative control but real control that is able to shape the direction of the infrastructure and its regulatory functioning, then it would be 1995. Then if you think about the infrastructure - transmission lines and how long it has taken to create interconnections between states and countries, then a further 10-20 year time frame (if not longer) is talked about.

Thus if as much planning as possible can go into finding out the locations for CCS, the pipeline routes that need to be built and the regulatory hurdles that need to be done, then does it really make sense to wait until the technology is proven to begin the process of fighting over infrastructure routes and regulatory power? If we need to have an established path towards 80% CO2 reduction by 2050, and even the deployment of clean coal technology in the next 10-15 years, does it make sense to wait? For me it doesn't.

Evidence for More Investment Spending

Well, predictions are not always right. Just yesterday I wrote questioning the FT article about the drop off in investments by energy companies - particularly generation. When what do my eyes upon opening the Wall Street Journal yesterday but RWE spending $1.25 billion this year (so far) on greenhouse-gas compliance. Up from Euro 175 million.

The article in the WSJ, (subscription only), outlines the need by generators, particularly RWE, E.On and Enel's need to spend money on reducing GHG because they need to buy additional permits above their free quota. After 2012 - these freebies will no longer exist. Thus RWE, which is heavily reliant on brown coal, is screwed if it doesn't invest in clean coal technologies. At around 29 euros per permit with a projected need of 200 million permits by 2012.

Thus, investments are happening. "We have to renew our power plants as fast as possible," RWE states in the article. The choice is modernize or replace power plants to reduce the GHG emissions.

Now the idea becomes one of job creation. No doubt the economic downturn in all countries and regions, including CEE has seen a huge drop in the number of construction jobs. So if we think about the looming deadline of the free Co2 allowances being taken away by 2012, there's a lot of construction that needs to occur. But rather than foster this job creation, we see the CEE countries complaining that they can't meet this target. They're lobbying Brussels to allow free quotas after 2012. As my father would say, 'get to work!'

And getting to work is right, because we just don't need to build new coal power plants that pump Co2 into the ground, but a range of energy sources need to be utilized. One company that keeps adding jobs in Hungary (and now Spain) is Genesis, which makes solar panels. In fact now, as the article states, RWE is giving away 700,000 energy efficient light bulbs in India in a carbon swap.

I believe Obama sees the economic downturn as a time to re-engineer the manufacturing base and construction base of America, I also believe this can be done for the CEE region. Poland, is 96% reliant on coal and the other countries also contain significant coal generation, but get to work - jobs need to be created.

Despite Financial Crisis Investments will Continue in CEE NMS

The financial crisis is impacting the infrastructure investments needed for electricity generation. This brief article in the FT, indicates that there is a perceptible impact that will affect the security of supply and could threaten future generation expansion. As the article predicts, if current trends continue then,

when the recovery came and energy demand picked up, the shortfall in investment would lead to renewed problems of tight supply because of shortages of capacity in areas such as electricity generation and gas import facilities.

This fall of investment may bad for the short term and long term in the CEE region, however it may not actually be fully true. If we consider the economic expansion in the region. In particular, we use the basic idea that all the new CEE Member States (excluding dismal Hungary) will avoid recession next year, then it is clear that demand will continue to grow.

The drop in share prices by around half for most utilities in the CEE region, that these companies will be borrowing less. E.ON for example will not be out there building new power plants, such as the proposed joint venture with Enel in Romania. Maybe more marginal or speculative investments will be cut. However, here is why I think there won't be a 'large' drop off in investments.

The article as I see it, fails to appreciate the need for investment in New Member States (NMS). The avoidance of a recession by CEE and SEE (BG and RO), will mean that these countries which Old Member States are already active in, will view the region as a source of growth for the companies. This is historically true, and with declining profits from Germany, with the gradual break up of their monopolistic position, it can be seen that greater resources can be placed into the generation sector of NMS.

Control is already established in the distribution sector for many of these companies, and if we consider that they therefore have available suppliers willing to buy their owned produced electricity - then the decision to build new generation is easier to make and to finance. Throw into the equation the aging power plants and the current and projected generation shortfall in the region, along with efforts and tighter market integration then it bodes well for the LONG term, if not short term investment prospects.

Now, here is my warning, investments in the CEE region also must contend with the heavy political involvement of political considerations in setting price, not just for suppliers, but for generators as well. Therefore, while it may be built, if current political practices of strong arming lower genertion pricing (e.g. Bulgaria and CEZ Varna), then these investments will not occur. However, this is not because of the credit crunch or demand for electricity, but by political stupidity.

In every consideration of the future we must consider the efforts to cut CO2 and other greenhouse gasses. The new generation of generators need to be built with a large amount of financing. As the article cites,

Capgemini, the French consultancy, argues that the European Union needs to invest about €1,000bn ($1,250bn) between now and 2030 to meet energy demand and hit targets for cutting greenhouse gas emissions, but in the downturn it will be harder to finance that investment, and harder for companies to make the case that it is needed.

Now let's see how the credit crunch hits the CEE region. But in either case, there are still important reasons why in the CEE NMS investments will continue. Let's just start separating our analysis from OMS and the dynamic and infrastructurally deteriorated CEE region.