Electricity Markets in Eastern Europe

Electricity Markets in Eastern Europe

By Sam Vaknin

Author of "Malignant Self Love - Narcissism Revisited"





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 won't be easy.

The utility is 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 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.





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AUTHOR BIO (must be included with the article)



Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant

Self Love - Narcissism Revisited and After the Rain - How the West

Lost the East. He served as a columnist for Central Europe Review,

PopMatters, Bellaonline, and eBookWeb, a United Press International

(UPI) Senior Business Correspondent, and the editor of mental health

and Central East Europe categories in The Open Directory and

Suite101.



Until recently, he served as the Economic Advisor to the Government

of Macedonia.



Visit Sam's Web site at http://samvak.tripod.com