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.

Revenge in the electricity market

I like this story, Ukrenergy wants to get access to the EU through Hungary, but a few weeks ago, they limited how much the Hungarian company System Consulting, could import from the Ukraine on the cross-border capacities to 5 mw, down from 345 mw. Ukrenergy wants to import 450 mw into Hungary from the Ukraine, but MAVIR is only allowing 105 mw. I really like the '105 mw' that magic '5' on the number should really send a message.

Ukrenergy Trade Wants More EU Presence
Publication: Hungary Around the Clock
Provider: Access-Hungary Kft.

November 24, 2008 (09:00)
Ukrainian state-owned energy trading company Ukrenergy Trade (the former Energy trade capital), in which Vasyl Bechvarzh now only has a minority stake, held a presentation at the Corinthia Grand Hotel Royal in Budapest at the weekend. As Ukrenergy trade wanted to import 450MW electricity to Hungary this year but Mavir allowed only 105MW, Ukrenergy trade has now turned to the EU court, Bechvarzh said.

You know usually I believe in free trade, but if one company - and country wants to play dirty, then I really don't have a problem in this case if Mavir limits their capacity. Particularly if it ends in '5' mw. Besides it remains to be seen if the EU courts can do anything over this as the border with the Ukraine is not an EU border therefore Hungary and MAVIR have control over it.

Tariffs to Hell

The Hungarian government announced in its official gazette Magyar Közlöny on 21 October that it would introduce a HUF 4,426 /MWh (EUR 17.63/MWh) fee for power exports, starting in January 2008. The European Federation of Energy Traders (EFET), a virtual organisation designed to improve the conditions of energy trading in Europe, said it deplores this action for several reasons. It also called upon the government to “reconsider this unilateral measure and to face up to the realistic consequences of its planned actions, in close consultation with the European Commission and authorities in neighbouring countries." (portfollio.hu)

OK, sometimes (well a lot of times lately) my government doesn't do so well in the field of rationality. But what the Hungarian government has announced the HUF 4,426 /MWh fee is totally illegal. That is directly contravenes the EU 1228/ 2003. Let me quote from section 13,

(13) It would not be appropriate to apply distance-related
tariffs, or, provided appropriate locational signals are in
place, a specific tariff to be paid only by exporters or
importers in addition to the general charge for access to
the national network.

Now I'm waiting for the Hungarian Energy Office to step in, because according to section 20,

(20) National regulatory authorities should ensure
compliance with the rules contained in this Regulation
and the guidelines adopted on the basis of this
Regulation.

So I'm sure everything will be alright.

But I'll be setting up a trading company for 2008, and then I'll sue for damages and make a little money in a few years time for lost earnings. Then I'll take the money buy a large slice of MOL and when the EU overturns the Lex MOL law I'll be able to sit on the board. I'll have more on this story later for sure.