Electricity Markets in Eastern Europe
By: Dr. Sam Vaknin
Also published by United Press International (UPI)
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Written November 15, 2002
Updated July 2005, October 2009 (regarding Macedonia only)
Russia's lower house, the Duma, debated, in November 29, 2002 a far reaching reform in the bloated and inefficient electricity generation sector. Worried by resurging inflation, the Russian government scrapped its plan to allow the Federal Energy Commission to fix tariffs for gas, power, and railways. A Commission spokesman complained to Moscow Times that government officials have overridden its authority to regulate the prices of natural monopolies. It threatened to take the matter to court.
Electricity throughout the former Soviet bloc is heavily subsidized. Governments are reluctant to raise prices to realistic levels lest they incur the wrath of their impoverished subjects and reignite dormant inflation. Fuel prices, government taxes, and variable costs, such as labor, have been rising steeply in the last decade but the electricity behemoths' ability to amend their tariffs to reflect these is politically curbed.
The Russian Unified Energy Systems electricity monopoly was allowed to up its prices in 2002 by a mere 14 percent - barely the rate of Russian inflation. Its chances to attract the $50 billion in investments it says it needs in the forthcoming 10 years are slim as long as it continues to charge its customers - both wholesale and retail - a fraction of the cost of electricity its West European counterparts charge theirs. A restructuring plan, approved by the government in May 2001, is going nowhere. The sale of loss making generating plants - even at bargain basement prices and to insiders - is impossible without a massive - and massively unpopular - boost to electricity prices.
Vociferous protests in Croatia in October 2002 forced the government to shelf a scheduled 9 percent hike in the price of electricity for domestic consumption. The IMF is displeased with the government's stranglehold over the energy sector and is pushing for liberalization.Slovakia's news agency, TASR, reported in November 2002 that thousands of members of the Trade Unions Confederation demonstrated in Bratislava against proposed budget cuts and increases in regulated prices, including electricity's.
Still, consumers will not be able to buck the trend forever. Even the rich countries of the region are facing already unsustainable electricity subsidy bills. The Slovenian news agency, STA, reported on November 14, 2002 that Slovenian producers of electricity and natural gas warned that - once the domestic market opens to foreign competition in January 2003 - they will be at a disadvantage due to the unrealistic electricity "price model". In hindsight, this proved to be wrong.
Yet, liberalization and privatization have acquired a bad name after the debacles in California and elsewhere in the world. Moreover, electricity generation depends on a free market in fuels - a rarity in central and eastern Europe. Prices cannot rise above the increase in net disposable income.
As infrastructure crumbles, replacement costs soar. The Albanian Daily News reported that in the 12 months to September 2002, Albania's electricity self-sufficiency decreased from 66 percent to 46 percent. Power cuts of up to 18 hours a day are not rare. The same applies to Kosovo, where an electric storm demolished the local generation plant in July 2002, and to Montenegro.
The dependence of many countries in transition on decrepit and antiquated nuclear power plants causes friction with the European Union. Austria and the Czech Republic have clashed over the much-disputed Temelin facility. Croatia and Slovenia are locked in a bitter dispute over their shared ownership of the Krsko nuclear plant.
Lithuania derives 78 percent of its power the atomic way. Slovakia gets 53 percent of its electricity from its reactors, Ukraine - 46 percent, Bulgaria, in the throes of a controversial plan to modernize its nuclear works in Kozloduy, 42 percent, Hungary and Slovenia - 39 percent.
Nor can pure market mechanisms solve the problem. Late in 2001, hundreds of Romas, having been cut off the grid for unpaid bills, demonstrated in Plovdiv and in Lom, Bulgaria. Remote and rural areas are poorly catered to even by state-owned utilities, let alone by privatized ones.In December 2001, the Romanian government restructured Electrica, an electricity utility, but wisely retained ownership of the long-distance distribution network.
Bulgaria is emerging as an energy hub. The cabinet is drafting a bill which calls for far-reaching liberalization. Subsidies for both electricity and heating would be phased out by 2006. The country is refurbishing its thermal power generation plants with an aim to reduce its dependence on oil, gas and coal imports from Russia and Ukraine.
Bulgaria is slated to establish a regional energy distribution coordination centre under the auspices of the Stability Pact. Bulgaria covers 40-50 percent of southeast Europe's entire electricity deficit every winter. It also exports electricity to Turkey and even to Romania. Italy and Greece are negotiating a transit agreement which will permit the former to import Bulgarian electricity through the latter's territory.
Bulgaria is not the only exporter. Romania, Croatia and even Bosnia sell power. In local terms, the market is sizable. Serbia's annual electricity import bill amounts to $100 million. In 2001, Bulgaria's exports to Turkey, Greece and Yugoslavia reached $150 million. The annual figure is much higher since 2002. Romania doubled its electricity exports - mostly to Yugoslavia and Greece - during the first half of 2002 to $48 million.
Aware of this, the World Bank has recently increased the amount of money allocated to energy projects. In Albania alone, it has earmarked $16m to reconstruct three hydropower plants and another $1 million to install electricity meters in Shkoder, in the north. Even the pariah Republika Srpska, the Serb part of Bosnia-Herzegovina, stands to get $90 million to construct an electricity grid.
Multilateral funds will not be enough, though. Private capital is essential. In mid-2002, Macedonia has retained Austria's Meinl Bank to act as consultant and prepare within 11 months a sales strategy for the its national electricity company ESM. That wasn't easy. The utility was in horrendous shape having served as the outgoing coalition's agency of patronage and cash cow. The country was reduced to importing more than one ninth of its consumption from Bulgaria. Indeed, real no progress was made by July 2005. The utility was sold to EVN of Austria a year later, but the government has been at loggerheads with the new owners ever since and locked into long and costly international litigation.
The more venal and xenophobic the political class, the less welcome are foreign investors. The Moldovan government seeks to annul the sale, in 2000, of three electricity distribution companies to Union Fenosa, a Spanish energy group. The World Bank is furious. Moldovan announcements of massive exports of electricity to Romania were greeted with derision by the alleged client.
Private investors, though, seem to have lost their appetite for bloated state monopolies. According to Albania's Ministry of Industry and Energy, even a giant like General Electric prefers to build 10 small thermal power plants in the country's larger cities. Other investors are interested in 23 hydropower plants about to be privatized.
Some utilities choose to tap the capital markets. Romania's Hidroelectrica launched a Eurobond issue of more than 120 million euros to improve hydropower equipment. Parex Bank and the Baltic investment company, Suprema, organized a consortium to lend $25 million to reconstruct one of Riga's thermoelectric power stations.
Electricity is no longer merely a national affair, but, rather, a regional one. A memorandum regarding the establishment of a southeast European energy market and its ultimate integration with the European Union's was signed In mid-November 2002 in Athens by ministers from Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Greece, Macedonia, Romania and Yugoslavia. These represent a market with more than 55 million consumers who will be able to buy power directly from generating utilities by 2005, pledged the document. As it turned out, another pipe dream.
But this touches upon a second conundrum. Households and firms don't pay their bills. The threat of widespread social unrest prevents the utilities from cutting them off. Better metering is one solution. The InvestRomania business daily reports that the national electricity company, Transelectrica, backed by the European Bank for Reconstruction and Development, signed a $20 million contract with the Swiss firm Landis&Gyr to install remote counters of wholesale electricity. The hope is that with resumed growth and rising incomes this problem will vanish together with the currently common blackouts and brownouts.
Interview with Aleksandar Dimishkovski of BID Consulting, Macedonia
Conducted: September 2007
Until recently and for four years, Aleksandar Dimishkovski worked as a business and finance correspondent in Macedonia's best-selling daily newspaper, "Dnevnik". In the past year, he also served as a personal advisor to the general manager of a foreign-owned company that has established its network in Macedonia. He is known as a market analyst and a business consultant and has recently founded "BID Consulting".
Q: Has the electricity grid throughout the Balkans and in Macedonia in particular improved or deteriorated in the last ten years? How did privatization and restructuring influence each of the components in the chain from electricity generation to the end consumer?
AD: The electricity grid throughout the Balkans at this point doesn't differ a lot from the time when socialistic regimes ruled this part of the world. Considering the time frame, surely it is not correct to say that the investments done to increase the quality of the electricity grids and especially in the cross-country transmission grids were satisfactory. There was some increase of inter-transmission capacity, but not enough to ensure the transmission of the demanded quantities of electricity. The quality of the national electric grids varies from country to country but is commonly low. Macedonia for instance, has network losses of more than 30 percent annually, which is around five times the average in the European Union (EU) countries.
On the other hand, the investments in electricity generation pretty much changed the picture in the Balkans regarding which country now has enough quantities of electricity from domestic production, which country is able to export and which country is an electricity importer.
What is common to the majority of the countries in the Balkans now is the fact that they all are importers of electricity, with the exceptions of Romania and Bulgaria. These two countries have done a lot to ensure their position in the Balkans energy market, even through a privatization process, although at this point it may not seem so evident, especially in the case of Bulgaria, because of the shut down of two reactors in the nuclear power plant Kozloduy. Nevertheless, both countries - now EU members - are still investing billions in new electricity generation facilities and they will likely secure the lead on the electricity export side.
However, this is not the case with the countries of the former Yugoslavia. Most of them managed to finish the necessary privatization and reforms, but they all seem to have forgotten about the importance of investments in production. That contributed to the current state of things where the majority of the countries in the Balkans are importers.
Albania and Greece followed the same tendency not to invest, and after 15 years they are still lacking investments in electricity generation, which is demonstrated by the increase in the imported quantities of electricity.
The biggest paradox is that in most countries there are still incredibly low prices of electricity, which are a by-product of omnipresent subsidies. These prices can't be supported by any economic or commercial reason, the social aspect notwithstanding.
3. You are predicting a crisis in electricity generation and provision in Macedonia this coming winter 2007. Can you explain what is this gloomy scenario based on?
AD: It is based mainly on the dearth of electricity in the whole region. At this point, Macedonia imports around 30 percent of the quantities needed to satisfy consumption. And with the present level of expected domestic production, there surely will be a gap between demand and supply. This is especially so because of the fact that in Macedonia, during the winter months, the level of consumption is almost twice as big as in the summer months.
In fact, because of draught and other summer-related problems, the water potential for generation of electricity via hydro power plants at the moment is at very low level, lower than 20 percent.
Another problem is the steady growth in consumption. Macedonia has one of the highest rates of growth of electricity consumption in the whole region. And the predictions are that in the medium term, growth will constantly and drastically accelerate.
What adds fuel to the fire is the present situation in the entire region. Albania faced and faces a major energy crisis. Greece is constantly increasing the its imported quantities of electricity. In the wake of the closure of two reactors Kozloduy in January 2006, there simply isn't enough electricity to go round. The whole region is facing an energy crisis. Bulgaria, which was one of the biggest exporters of electricity in Europe, has recently started to import it!
The Balkans lacks electricity generation facilities. In such a constellation it is normal for electricity prices to increase. Bearing in mind the fact that in many countries electricity prices are still heavily subsidized, it is normal to expect problems, even from the macroeconomic point of view.
Macedonia is maybe in the worst position at the moment. Its market is too small to be interesting for the big European energy "players" and it is not financially powerful, compared to the other countries in the region. So, Macedonia is unable either to invest in the expansion of its electricity generation or to buy and import electricity.
4. Is hydroelectric power the solution? What about alternative sources (wind, solar, nuclear)? Will the construction of additional plants solve the problem in the short term? Is microgeneration a viable option?
AD: Hydroelectric power is a definite possibility but only in the long term. It takes a while for a hydro power plant to be built and become operational, at least three to five years, depending on its size. In fact it may be the best solution, because Macedonia now uses around 30 percent of its hydro potential for electricity generation.
Unfortunately, it can't be used as core energy. It is too dependant on external influences and factors, such as the weather. If a dry season occurs, than the whole system is at risk. But it can and it must be used more than the present level of usage. Wind and the solar energy are good options as well. Nevertheless, they are also merely supplements to the basic energy market.
Nuclear energy on the other hand, is out of the question for many reasons, even from a legal point of view. The Macedonian parliament has passed a declaration that forbids the use of a nuclear energy for electricity generation on Macedonian territory. Besides that, the geographic conditions are very inappropriate for building a nuclear power plant. Even the cooling of a nuclear reactor could be a problem, because it requires a lot of water.
The best solution is to have combined production. As a base or core energy, we could use thermal power plants as the situation is now. They run on coal extracted from Macedonian territory. This, in conjunction with the use of natural gas for electricity production could secure Macedonia's energy needs in the next 50 years. Understandably, this has to be combined with the deployment of renewable sources of energy on both the micro and on macro level.
In any case, the construction of additional plants can't be a short term solution, because it takes time for a power plant to be built. For instance: LNG (natural gas) power plants require the shortest construction time, yet even this process usually takes at least two years.
5. Electricity in Macedonia and throughout the region is heavily subsidized. Do you foresee a reduction in this state support?
AD: Unfortunately, subsidies are one of the biggest reasons for the upcoming energy crisis. Because of the low price, there simply wasn't any money for investments in electricity generation, although in the price structure there is a part that supposedly should be spent on investments. Even now, the price that households pay for electricity and even the price for industry are lower than they should be.
Nevertheless, with the signing of the Athens Memorandum, and the creation of the Energy Community, Macedonia is obliged to liberalize the energy market, with a view towards achieving the market conditions present in the EU zone. So, subsidies will very soon be out. The qualified consumers – industrial facilities - will be forced to secure their own deals for electricity supply in the open market, starting from January 2008.
It is predicted that the total liberalization of the electricity market will be in place at the beginning of 2015, at which time even households will choose from whom to buy their electricity.
At this point, the organizational structure of the electricity market in the country is not well prepared for these processes, and this could contribute towards some delay in the liberalization process. But it is inescapable and with the aspirations of Macedonia to become a member of the EU, the sooner they are implemented, the better it is for the integration process as well.
6. Can you describe the structure of the electricity export market in the region? Who is exporting, who is importing, and who are likely to become net exporters and net importers in the foreseeable future?
AD: That's an easy one. Almost all the countries of the Balkans are net importers, except Romania and Bulgaria. Recently, even Bulgaria started to import small quantities. But, these two countries had invested enough to secure their future as exporters of electricity. For instance, Bulgaria is rushing to build a second nuclear power plant in Belene, near the border with Romania, which should be finished in around five years. Romania too, started the construction of another nuclear power plant.
As to the rest of the Balkan countries, there are some signs of positive change, but it is still unclear, who, when and if some of the countries would be able to become net exporters of electricity. If we exclude Albania whose system is pretty much based on hydroelectric power, the other countries are quite similar. The majority have coal-fuelled electricity production as core energy. This is made possible by their sizes- most of these countries have small territories - and by the unused potential in many of them.
Still, at this point, it seems like in the near future, we shouldn't expect any drastic changes in the electricity production field in the Balkans. And even if something does change, it is likely to be negligible, both from the energetic point of view, as well as the financial one.
Note: Should Communities be Allowed to Generate Their Own Power?
Until well into the 1930s local communities in the West produced their own energy, drilled their own water and hauled it, and, in general, were self-sufficient as far as the consumption of utilities was concerned. The New Deal and the Depression brought this to a halt: governments monopolized both the generation and distribution of electrical power and water (as well as other public utilities, education, health, telecommunications, and transportation). This shift had its positive sides in that it encouraged economies of scale and firmly established the public goods nature of energy and water.
A few historic developments have reversed this etatist trend:
1. The advent of diffuse, democratic (or anarchic) "new utilities" (such as the Internet);
2. Privatization and deregulation;
3. Technological innovation (allowing, for instance, to feasibly micro-generate electricity);
4. The rise of global, efficient marketplaces;
5. The emergence of environmentalism and the emphasis on sustainable development and green technologies.
Consequently, communities and even households have been re-empowered. Individuals generate content - why not electricity? Governments should maintain their ability to deliver energy to faraway, isolated places and to the indigent and disenfranchised. The well-to-do middle-class in mainstream habitations should be allowed to generate electricity for self-consumption and for resale. Prices, quality, distribution pipes, and overall grid management should still be overseen and actively directed by governments. The rest should be left to private initiative and the marketplace.
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