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EU internal energy market – why benefits exceed costs?

Because low prices on the day-ahead-market these days are not a guarantee that black-outs will not happen in the coming years. Because local power companies, be them in the generation, transmission, distribution or trading business, need larger markets to optimise their operations.

Because low, regulated prices means not social protection -- but waste of resources inefficiently allocated. Because corrupt governments owning and spending natural resources to win elections typically deliver less wealth than efficient government managing properly the natural resources. Because natural resources are limited thus unable to indefinitely offset the weak productivity of labour and capital. Because we are Europeans.

 

The challenges faced by the power market integration in South Eastern Europe are various and the threats are more visible than the benefits, particularly under a short-term analysis. There is nevertheless no doubt that i. day-ahead electricity market coupling should be realised as soon as possible price coupling with Central-East European Region, ii. domestic market should be strengthened by one or more OTC floors for trading of future contracts and iii. the trade barriers [import/export fees] should be lowered as much as possible -- if the intrinsic potential of the country’s energy industry is to be grasped. There was little progress in each of these three areas over the past months [if not years] and the time is running out. Not only that the EU set 2014 as the deadline for completing the internal energy market, but the national energy markets are already re-shaping themselves in the region and Romania risk losing more opportunities than it can afford. Bulgaria’s even weaker performance in this regard is hardly encouraging.

 

The long-term benefits of integration are so tangible that can hardly be ignored: primarily, a much larger market made available to investors, which are particularly needed on the transmission infrastructure side but also in the generation area. Short-term obstacles are however significant and some of them are more visible at the level of superficial analysis prevailing in public debates. Losing the control over natural resources ranks high on the list, amid nationalist rhetoric of politicians. But the governments’ failure in properly capitalising on the natural resources endowment and particularly on providing public goods should not hide the benefits of a common internal market. An appropriate structure of royalties and/or production sharing agreements should in principle be able to provide the government with the means to offer at least the same social protection it has used to offer under the regulates prices system. And free markets will furthermore guarantee a better allocation of the resources. The political and legal obstacles are however not negligible. Long-term limitations are also real, originating from slow economic convergence of the region toward core European Union countries, hence moderate rise in regional energy demand. Effects of ambitious renewable energy targets at EU levels, even if adjusted in the years to come, are already visible on the energy-intensive industries. Given the smaller size of the regional markets in South Eastern Europe, investments in infrastructure are less profitable financially – even if they are profitable economically. Temporary shrinking demand and the cost of renewable energy grid integration are obstacles hardly encouraging countries to seek opening their markets at this moment. On the opposite, they rather support the nationalist rhetoric of those seeking local solutions to their problems.

 

And yet, the stability of prices, security of supply and better environment for investments are long-term benefits that cannot be achieved without integration and by far exceed the short-term costs of certain one-off rise in prices.

 

Reaching full-fledged EU internal market for energy in the region by 2014 seems an unrealistic target for Romania and Bulgaria. Still, major breakthrough might be achieved in the case of Romania with rather moderate resources backed however by sound commitment for the values of a single energy market. A reasonable resolution of the renewable energy dilemma, the coupling with the short-term electricity market of Central and eastern Europe [Czech Republic, Slovak Republic, Hungary] and the beginning of natural gas trading are within the reach of the government and market regulator ANRE. 

 

POLICY UPDATE

 

Government’s conduct in regard to the energy policy is better than its rhetoric, yet the executive needs to become more active. More technical rhetoric would bring multiple, tangible benefits. Aggressive statements are harmful particularly in such a delicate context. A large number of issues are still unanswered.

 

The government’s move of supporting to some extent coal-fired holdings Oltenia and Hunedoara were broadly criticised as being in fact state aid – in its legal sense or in a more general sense. Without going into much detail, we believe however that the move has not hurt the market functioning. The criticism expressed by market-oriented analysts was driven by the general view that “coal is bad”. We believe rather that the corrupt management of coal companies in Romania bad and the companies’ losses should not be attributed to the technology without further analysis [more than quoting the production costs calculated by the corrupt managements]. More coal-fired plants are being built around us while other gas-fired generators face problems.

 

The resolution of the renewable energy overcompensation issue, as puzzling as it might seem, is actually a workable solution to the extent it gets EU’s permission quickly. Last-minute adjustments before enforcement might be given to the bill, since key stipulations are deferred until EC approves  them. We believe ANRE should be invited by the government to contribute to the evaluation of the impact quickly. Other way, further delays would be very costly for both investors and the market. The government has endorsed under emergency ordinance procedure amendments to law 220/2008 on the renewable energy support system. The draft was not officially released at the time we comment on it. The enforcement of the ordinance remains however uncertain, as ordinance’s version as published in April by the ministry of economy indicates that those stipulations that are part of the renewable energy mechanism endorsed by the EC are deferred until the Commission endorses their modification. In fact, most of the ordinance’s stipulations refer to the renewable energy support mechanism. No interpretation on this stipulation was provided by the government yet.

 

But in principle, the postponement of a certain number of green certificates acts as retroactive correction for overcompensation – a move that market regulator ANRE would not have been able to operate under law 220/2008. ANRE will further check for overcompensation twice a year – which is a better fine tuning than under prior version of the law. And if too aggressive overcompensation is carried during coming years, ANRE will have the opportunity to compensate this under the mechanism of releasing [quicker or slower] the green certificates frozen meanwhile.

 

The main stipulations of the emergency, as announced by the government on its website are:

i. capping the licensing of RES-E generation capacities under the support system, in line with the targets set under the National Action plan for the support of renewable energy;

ii. postponing the issuance of part of the tradable green certificates to entitled recipients, licensed generators that sue renewable resources. The stipulation is enforced as of July 2013 for new micro hydro, solar and wind power facilities. The number of certificates to be frozen is 1 for micro-hydro and wind [from 3 and 2 respectively, currently] and 2 for solar [from 6 currently]. The frozen certificates are to be issued starting March 2017 for solar and small hydro and January 2018 for wind.

iii. Market regulator will run twice a year checks for overcompensations – aimed at establishing whether power generators realise profitability above the targets set in the law. In case overcompensation is found, the number of tradable certificates [for investors commissioning the plants in the future] is cut down accordingly. Notably, the amended text specifies that the correction for overcompensation will be enforced immediately [and not with a delay, as stipulated in the prior version]. 

 

We expect quick resolution of a number of problems, some of which are within the reach of the government. One is the electricity market coupling with Czech-based Central European day-ahead region. Latest official information dates from January 2013, when Transelectrica’s officials signed some agreements with the existing Czech Republic – Slovak Republic – Hungary officials. But since the negotiations took already years, it is unsure whether anything will happen quickly. However, after several months of operations, the common short-term market in the three countries proved functional and Romania [plus Poland] joining it would be the next logical step as part of the EU policy. Another issue that needs quick fix is setting up of an OTC trading floor for future contracts. Indeed, the market operated by OPCOM already offers the facility to trade longer-term contracts but for some reasons it is not particularly used by market players that urge the establishment of a genuine OTC floor. In time, the floor at OPCOM will hopefully get more populated as the market deepens. ANRE has prepared draft bill for an OTC market in January 2013, but the initiative was not completed yet. 

 

 

We will review below some regional developments as reported by IntelliNews, in an attempt to put Romania’s energy market in perspective.

 

Romania wants to develop as regional power market hub. The competition for becoming “regional market hub” in the Balkans is amazing. Fact is Turkey holds the first chance due to its growing economy and its position – irrespective of TAP/Nabucco decision, Turkey will transport the Caspian gas to Europe. Nonetheless, Romania's government said that it would back investors in the power generation sector, aiming to establish the country as a regional electricity market hub, minister-delegate for energy Constantin Nita was quoted as saying on Jan 8 by news agency Mediafax. In fact, the investments suggested by Nita would indeed make country’s energy market a better place to be – keeping it however far from the regional hub ambitions.

 

Investments are needed in particular for boosting the transmission grid after 2GWh of wind power capacities were developed over the past years and more renewable energy projects are on the pipeline, Nita said at the opening of an E.ON service centre in the north-western city of Cluj-Napoca. Inter-connections with the neighbouring countries ought to be developed as well if the country also wants to become a major exporter. Renewable energy projects, however, did not help the conventional production capacities, out of which many need upgrade or even replacement. Nita admitted that the wind projects were rather a result of the government's generous support system - the most favourable to investors in Europe. The cost efficiency of the other generation capacities is in some cases low and the market liberalisation scheduled over the coming years might drive some of them out of the market, Nita added. 

 

 

Celikler wins Seyitomer privatization tender in Turkey.

 

Celikler Taahhut Insaat placed the best bid of USD 2.248bn in the final negotiations stage of the privatization tender held for the 600MW Seyitomer coal-fired power plant and operating rights of the related lignite fields. 16 companies/consortiums, namely Torunlar-Eren consortium, local Dogan Holding's Dogan Enerji, Altek Alarko Elektrik, D Enerji, Ayen Enerji, Park Holding, Ozkar Insaat, Aksa Enerji, Elsan Elektrik, Limak Insaat, Celikler Insaat, Eti Bakir, Bilgin Enerji-Suba consortium, Kolin Insaat, IC Ictas Enerji-Fernas Insaat consortium and Konya Seker-Siyahkalem Muhendislik consortium, participated in the final negotiations stage. The Seyitomer plant produced 4bn kWh of electricity in 2011 with a capacity usage rate of 74%.

 

Romania to lower electricity export fees.

 

Romania's energy market regulator ANRE has decided to wave the extraction tariff (TL, RON 11.46, or EUR 2.6, per MWh on average) for electricity exporters, the Association of Electricity Suppliers in Romania, AFEER, announced. The move is to be enforced as of January 2014. As calculated by ICIS earlier in January, by summing up all the separate fees charged by power grid operator Transelectrica, the fees charged to Romanian exporters increased by some 9% y/y to EUR 10.46 (as of January 2013) - in the case of exports to Hungary.

 

The elimination of TL is significant and is a good step toward the market integration. ANRE will examine the role of the upload fee (TG), the system services fee and the co-generation contribution TG in the case of the export/import trade with electricity, AFEER also announced.

 

German E.ON mulls closing down Slovak gas-fired plant.

 

German energy group E.ON is considering mothballing its 430MW gas-fired power plant in Malzenice, western Slovakia, CTK newswire reported. E.ON, which posted a 5 % drop in its Q1 EBITDA to EUR 3.6bn, said its performance has been negatively affected by the subdued economic growth in Europe, which has resulted in lower power demand and decreasing wholesale power prices. High gas prices, on the other hand, have made its gas-fired power plants uncompetitive to renewables and carbon-intensive lignite.

 

In January, E.ON announced it was considering closing down conventional power stations with a total capacity of 11,000MW.

 

E.ON invested EUR 400mn in the Malzenice plant, which was built in 2010. It produces about 3 billion kWh of electricity annually and is capable of covering the equivalent demand of an average annual consumption of about 600,000 to 900,000 households.

 

Earlier this year, E.ON sold its 24.5% stake in Slovakia's dominant gas utility Slovensky Plynarensky Priemysel (SPP) to Czech energy group Energeticky a Prumyslovy Holding (EPH) for EUR 1.3bn. According to unconfirmed media reports, E.ON has been also considering selling its 49% stake in Zapadoslovenska Energetika (ZSE), the main electricity distributor in western Slovakia.

 

 

Hidroelectrica prepares for exports, opens offices abroad.

 

Romanian state-controlled hydropower producer Hidroelectrica has opened offices in Budapest and Vienna aiming to boosting its exports, Hotnews announced quoting the special manager of the company, which has been under insolvency since June 2012 due to cash flow problems. The exports might reach 0.5TWh this year, out of a total production of 12TWh, special manager Remus Borza said. Domestic electricity demand is decreasing amid a sluggish economic activity and the renewable energy production capacities push up the supply, Borza explained.

 

Romania's electricity exports decreased from 2.5-3TWh in 2009-2011 to 0.7TWh in 2011 amid a weak hydropower production. The country's exports exceeded 5TWh in the several years before 2008. Still, there are no evidences of plunging electricity consumption, though renewable energy production is indeed rising. End-user electricity consumption edged up 0.2% in 2012 - when the consumption, however, remained constant compared to 2008 - the peak pre-crisis year. Indeed, the consumption of electricity in the economy has dropped 4% since 2008 but this was compensated by a 16% rise in the residential consumption. On the production side, the wind power generated last year hit a volume of 2.6TWh - or 4.4% of the total produced power. 

 

Swiss Alpiq wants bidders for Czech power plants to sweeten offers – report.

 

Swiss energy company Alpiq has asked bidders for its two coal-fired power plants in the Czech Republic to improve their offers as it considers them too low, Hospodarske Noviny daily reported citing one of the bidders. The submitted bids are below CZK 10bn (EUR 386mn), which according to earlier reports is the minimum price Alpiq was seeking to cash in.

 

Croatia awaits binding bids for thermal power project Plomin C by end-October.

 

Croatian power utility HEP said that the three qualified bidders for the construction of the Plomin C thermal power plant - Italy's Edison, South Korea's KOSEP and Japan's Marubeni, can submit their binding offers by end-October. HEP said on its website that the process of selecting a strategic partner for the 500 MW coal-fired plant will be conducted in line with EU directives and based on established technical and economic criteria. Total investment in the project is seen at EUR 800mn.

 

Turkey’s Teknotes to build 320 MW thermal plant in Serbia’s Despotovac. 

 

Turkish company Teknotes is going to build a 320 MW thermal power plant worth over USD 700mn in the Serbian city of Despotovac, some 130 kilometres southeast of Belgrade, news agency Beta reported, quoting information from the local municipality. The project should be completed within two and a half years.

 

Romanian power grid operator faces problems in completing supplementary connection to Serbia.

 

Romanian power grid operator Transelectrica could lose the EUR 70mn grant from the EU budget earmarked for the new 171km Resita-Pancevo LEA 400kV connection to neighbouring Serbia as it faces problems in getting access to the needed land, Ziarul Financiar daily reported. Similar problems are reported for the supplementary connection to Hungary.

 

Turkey’s Calik-Limak to invest EUR 300mn in Kosovo's electricity distribution network.

 

Turkish consortium Calik-Limak plans to invest around EUR 300mn in Kosovo's electricity distribution network in the coming 15 years, news agency Koha Ditore reported earlier in April. Calik-Limak won the tender for the privatisation of Kosovo Electricity Distribution and Supply (KED) with its EUR 26.3mn bid in June 2012. Before the sale KED was part of state-owned electricity generation and distribution company KEK.

 

 

Czechs approve plan to build transformers to protect power grid against excess German flows.

 

Czech state-owned power grid operator CEPS has approved a plan to build transformers to protect the network against excess electricity flows generated by wind farms mainly in the north of Germany, CEPS supervisory board chairman Tomas Huener told Reuters. The plan was approved by CEPS supervisory board and awaits the approval of shareholders. It envisages transformers to be built by 2016.

 

Russian Rosatom eyes energy projects in Hungary. 

 

Russian state-owned nuclear company Rosatom has expressed interest in Hungary’s energy industry, in particular in the nuclear power sector, portfolio.hu reported citing business daily Napi Gazdasag. Rosatom sees an opportunity to supply conventional heating plant technology in Hungary. The company could be involved in electricity distribution and trade as well. We note that, Rosatom has already expressed interest to upgrade and expand Hungary’s sole nuclear power plant Paks. The Hungarian authorities are expected to soon call a tender for the construction of two more reactors at the plant, which currently supplies approximately 40% of Hungary's electricity.

 

EFT starts construction of Bosnia's 300 MW Stanari power plant in May 2013.

 

UK-based energy firm EFT will lay the foundation stone of the 300 MW Stanari thermal power plant close to the Bosnian town of Doboj on May 8, news agency Srna reported, quoting the plants technical manager Savo Mirkovic as saying. EFT hired in 2010 China's Dongfang Electric Corporation (DEC) to build the Stanari plant, which is estimated to cost EUR 550mn, produce 2,000 GWh of electricity annually and consume 2.3 million tonnes of coal a year. Mirkovic said that the first trial of the plants functioning is scheduled to be carried out at the end of 2015 and the power production to start in the beginning of 2016. Some 1,200 workers will be engaged in the construction works as under the contract 800 of them will be Bosnians and 300 Chinese. Once the plant is built, it will employ some 1,000. EFT signed in a concession contracts for the construction of the Stanari plant (and the extension of an adjacent coal mine) in 2009. In June 2012, the government of Bosnias Serb Republic, where the plant will be located, said that Chinas state development bank extended a EUR 350mn loan to the EFT Group for the construction of Stanari. 

 

Bosnia’s Elektroprivreda HZ HB, Aluminij to partner in thermal power project.

 

Bosnia’s smallest power utility Elektroprivreda HZ HB, is ready to join Mostar-based Aluminij in a planned project for the construction of a thermal power plant that should reduce the lasting power supply problems of the countrys sole aluminium smelter, Aluminij said in a statement. The statement was issued after a round table on Aluminijs 2013 business prospects.

 

Czech PM Necas discusses Temelin nuclear tender with Russian counterpart.

 

While on a four-day visit to Russia, Czech Prime Minister Petr Necas met with Russian counterpart Dmitry Medvedev and discussed the planned expansion of Czech nuclear power plant Temelin, CTK news agency reported. Medvedev said that if the Czech-Russian consortium, which is one of the bidders in the USD 10bn tender, wins the contract Czech companies will get orders worth some EUR 6bn.

 

Japan and Turkey sign USD 22bn Samsun nuclear power plant deal.

 

PM Recep Tayyip Erdogan and his Japanese counterpart Shinzo Abe signed a deal in May to build a USD 22bn nuclear power plant in the Turkish city of Samsun, on the Black Sea coast. A consortium, which includes Japan’s Mitsubishi, Itochu Corporation and French energy company GDF-Suez, will build the 4,480 MW power plant while another French company Areva, reportedly, will supply the reactors. Turkey will also have a stake in the project but details are unknown. The first unit will probably come online in 2023 and the plant is expected to be fully operational in 2028.

 

With its nuclear power plant projects, Turkey tries to reduce its dependency on import energy. Turkey imports 72% of its energy needs and when Turkey’s two nuclear power plants become operational Turkey’s annual import gas bill will be reduced by USD 7.2bn, energy minister Taner Yildiz said. Turkey targets to produce at least 15% of its electricity from nuclear plants by 2030. Russia will build Turkey’s first nuclear power plant in the city of Mersin on the Mediterranean coast. The 4,800 MW nuclear power plant in Mersin is estimated to cost USD 20bn.

 

Around 45% of Turkey’s electricity production currently comes from gas, which is mostly imported from Russia, 24% from coal, 25% from hydro and 2% from renewables (wind + geothermal). Electricity consumption is projected to increase by 7% a year until 2020. Electricity production was 239bn kWh in 2012 and consumption rose 5.1% y/y to 242bn kWh. The energy ministry projects that between USD 120 and USD 130bn investment will be required to meet domestic demand by 2023.

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EMERGING MARKETS DIRECT