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.