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Internal affairs

Recent news from the former ‘Eastern bloc’ makes interesting reading. It seems as if internal wranglings, as opposed to market conditions, will continue to be the bane of some of the key electricity markets in central and eastern Europe.

Privatization of the Czech Republic’s power sector has seen more starts, stops and delays than Piccadilly Circus during rush hour. Last month’s instalment in this long-running saga, saw the government abandon privatization plans (see PEi February 2002, News Analysis). The Czech government was due to draft a new privatization strategy as we were about to go to press. Whether this strategy will have as many strings attached to the initial strategy will soon be revealed. But why a government attempting to privatize for so long would make it so difficult for itself is a mystery.

It was the government’s inflexibility over the sale of state-owned utility, CEZ, which saw the early exit of Electrabel, International Power and E.ON. Later, the minimum asking price and other constraints saw the Enel-Iberdrola consortium and more significantly EDF, walk away. EDF was a former front-runner and although it is not yet completely out of the picture, its decision to walk away has allowed its German rival RWE to firmly enter the frame.

This latest potential liaison between RWE and the Czech government could, however, open a can of worms with Europe-wide implications. Certainly, with RWE’s position in the gas market, such a deal would have problems overcoming competition laws in the EU. A few months ago, RWE Gas signed a contract to purchase Transgas in a $3.5 billion deal which was concluded by the Czech government at the beginning of February. By taking a 97 per cent stake in the firm as well as large stakes in the country’s eight regional gas distributors, RWE will have a stranglehold on the Czech gas supply market.

At the moment, the EU may not have jurisdiction on blocking RWE’s purchase of a stake in CEZ. But with the country still aiming for EU accession next year, it will certainly have to be a consideration for the Czech government. Prime Minister Milos Zeman believes no competition issues will prevent RWE from owning both the biggest Czech gas and power companies. “As far as I am informed, there is no danger of any competition problems,” he noted. However, RWE’s CEO, Dietmar Kuhnt was more cautious, acknowledging that in Germany there are limits to market share in each sector.

In particular, the gas deal could also have wider implications for energy supply throughout the whole of Europe. Transgas runs one of the major pipelines for the transport of Russian natural gas to western Europe, which meets about 20 per cent of Europe’s gas requirements. Controlling such a large portion of the European gas market, when combined with existing gas assets, will give RWE a hold on the energy market which the European Commission may find unacceptable.

Further down the line, the Russian connection may prove to be even more significant for RWE and others, especially if it provides an in-road to the Russian market. In terms of size and needed investment Russia, in the long term, could represent the most lucrative of European markets. It is estimated that over the next decade some $20-35 billion of new investment in generation capacity alone will be required to meet the expected economic growth.

The country marked the start of restructuring its power industry when the government approved a competitive restructuring plan developed by the Ministry of Economic Development in July 2001.

Although the sale of generating and regional energy supply companies is not scheduled to begin until 2006 onwards, the government believes that prior to this there will be a number of less capital-intensive and potentially risk-contained investment opportunities, i.e. through upgrading and expansion of existing generation facilities as well as implementing already planned new greenfield generation projects.

But don’t get too excited just yet. Fortunately, with privatization such a long way off, potential investors will have plenty of time to think about buying or building anything in Russia since getting paid could be tricky. I recently read a news story which said the military had placed armed guards at a switching station to prevent one regional power company from cutting power to the military base. How investors will ever be confident in such a market is beyond me. It sounds like Russia has some serious internal affairs to sort out first.