Energy has become one of the key issues in Eastern Europe. Almost two decades of freedom from communism have opened up markets to a degree, but the road to liberalization is proving to be a long and bumpy ride.
Enlargement of the European Union (EU) has provided a number of former Eastern Bloc countries with the incentive and the means to break free from the shackles of the past and modernize a largely neglected, creaking and inadequate energy infrastructure. The Central and Eastern European states are beginning to speak in the EU jargon of security of supply, diversity and sustainability. The controls are set for a homogenized European energy market.
Eastern European countries are having to come to terms with the principles of EU electricity liberalization and deregulation
Or at least that is the plan. Spurred by the perceived benefits of EU membership, the new Eastern European entrants and countries such as Ukraine that have ambitions to join the Union are pursuing policies that they hope will bring new prosperity to their shores. As a result, Eastern Europe as a whole expects to see a year-on-year growth in net energy consumption up to 2025, of 2.4 per cent, well above the average baseline of 1.6 per cent for developed nations in the West.
Yet many in the former Eastern Bloc, particularly those that have undergone a seismic shift in political and cultural direction since the collapse of the Soviet Union, are struggling to come to terms with the principles of liberalization and deregulation that are the blueprint of electricity and gas provision in the EU. Already, outmoded generation capacity and leaking transmission infrastructures are leading experts to predict acute power shortages in the region if major investment is not given a high priority. And given the relatively bleak forecasts concerning the EU’s future energy self sufficiency its increasing dependence on Russian gas, for example it is becoming a central issue for all EU member states, as well as various European trade organizations and associations.
Moreover, recent global turbulence in financial markets has raised the spectre of a possible stalling of Eastern Europe’s attempts to attract sufficient investment. There is also continuing uncertainly about the future of carbon markets in Europe and growing concern over security of supply issues. Major producers are deferring investing in new capacity until the European Commission clarifies its position on climate change and, specifically, renewable energy targets and the proposed auctioning of carbon dioxide emissions after 2013.
Growing need for private investment
Yet despite certain nervousness, almost 2.4 GW of new capacity was commissioned across member states last year, while new current construction activities are limited mostly to Poland, Russia, Bulgaria and Hungary. In these countries, developing a balanced generation mix appears to be the main driver in expanding capacity.
Of these, Poland’s power sector is by far the largest in central and eastern Europe, and relies on coal to fuel 95 per cent of its power generation. Being the largest hard coal producer in the EU, Poland’s energy import dependency is among the lowest in the Union. With a generation capacity of some 35 GW, consumption is predicted to double in the next two decades. Since 2005, electricity consumption has risen by an average of between 3-4 per cent per annum, while in the capital city of Warsaw, it has grown by 20 per cent in three years. Annual electricity consumption in Poland for the past half-decade has averaged about 120 billion kWh, of which about 63 per cent goes to the industrial sector (including the energy industries) and 15 per cent to households.
Though one of the first in a line of former communist regimes to declare its independence after the collapse of the Soviet Union, Poland struggles to reshape a power sector steeped in a legacy of subsidized energy usage and wholesale inefficiency. Krzysztof Zmijewsk, a former CEO of the country’s power grid, whose comments were reported in the nation’s press, admits that state-controlled power plants are outdated and that consumers have no incentive to save energy. Consequently, wastage is rife.
Equally, Poland has been slow to release its grip on national assets, and liberalization is only now rolling out at a modest pace. Belgium’s Electrabel, Germany’s EnBW, Vattenfall of Sweden and the French giant EDF all have a foothold there, as also does the German utility RWE. The Polish government does, however, recognize the need for further restructuring, particularly if it is to attract the increased inward investment necessary to revitalize the electricity sector and replace many of the out-dated and environmentally challenging coal-fired plants in its aging portfolio.
Poland’s power producers are also saddled with many long-term power purchase agreements, which remain an obstacle to liberalization of the energy market.
It is more than a decade since the World Bank provided the first in a raft of loans and grants to finance the privatization of the country’s generation and distribution assets, yet only a few of them have been acquired by private investors. The Polish Power Grid Company, which is responsible for transmission, remains under government control. While a number of foreign interests have acquired stakes in a handful of large power plants, and two of the nation’s 33 large electricity distribution companies, a vacillating Polish government has remained stubborn on relinquishing its control over major power assets, in some cases retaining ownership of more than half in them. It would now appear that the government is set on consolidating the generation sector into a small number of larger groups of assets combined heat and power (CHP) plants, and other thermal power stations that will then be offered for sale under initial public offerings. But the policy has fallen foul of union opposition, fearing the rationalization may result in large numbers of job losses.
Industry observers stress the need for considerable foreign direct investment to modernize and privatize the country’s electricity sector. But they also recognize that the government’s wish to attract inward investment is at odds with a desire to avoid losing control to foreign companies and, as a consequence, any reforms are likely to be slow, leading investors to be cautious.
Pushing the renewables agenda
After Poland with its total electricity demand of 136.4 TWh, comes the next biggest East European consumer, the Czech Republic (64.2 TWh). With an excess capacity of almost 50 per cent, the Czech Republic is the second largest exporter of electricity in Europe. The majority of the country’s generating capacity (65 per cent) comes from coal sources, though some of its older stations were decommissioned between 1991 and 2000.
Nuclear power is also important to the country, with more than 21 per cent of its electricity derived from this source from two sites, at Temelin (two 900 MW units) and Dukovany, which has four units of 440 MW each. Around a third of Czech households are connected to district heating.
A forward-looking nation in the power stakes, the Republic is pressing ahead also with a renewables strategy. At home, CEZ Obnovitelne zdroje, the renewable energy unit of CEZ, the country’s state-run utility and dominant power generator, produced 74 GWh of electricity in the first quarter of 2008, a growth in output of 15 per cent year-on-year. The company’s managing director, Josef Sedlak, said the country’s hydroelectric plants benefited from adequate rainfall, but that increased production was also a result of “technical adjustments and improvements” at its plants. The company currently operates 20 small-scale hydroelectric plants and one large one. He said there was “still room to build more small stations,” adding that the company planned to build one near an existing coal fired station in Melnik, north Bohemia.
The Czech government has set upon a course of increasing the share of renewable energy above the 5-6 per cent target set in 2005. By far the largest contribution to this increase is to come from biomass, according to the country’s Energy Strategy, but small hydro power plants, biogas plants, wind power plants, solar thermal installations and heat pump applications are also due to make their mark.
To this end, a Czech investment company, Natland Investment Group, recently announced that one of its operating companies, Energy 21 was to embark on the building of two solar power plants in the Czech Republic, each with a two MW capacity. Announcing the move, director Libor Matura said two installations would be mobilized in the second half of 2008. He said that the move was in response to the need to expand the country’s renewable sources, as any further hydropower potential was almost exhausted and developers were facing increasing difficulties in gaining planning permission for wind farms.
But fossil fuel firing will continue to dominate the Czech power scene, with greater attention of late being paid to natural gas. CEZ is attempting to re-balance its regional generation portfolio. It wants to develop some 3.2 GW of gas fired capacity to replace and supplement its coal-burning stations. In the pipeline are a 800 MW combined-cycle gas turbine (CCGT) plant at its Pocerady lignite fired plant in northern Bohemia, while outside the country there are also plans for a 400 MW CCGT at Varna in Bulgaria, two 800 MW CCGTs in Hungary and Slovakia, and the possibility of other sites in Croatia, Slovenia, Slovakia and Poland.
CEZ Group’s strategic goal is to become the leader in the Central and South Eastern European electricity market. Already active outside its native boundaries, it has further ambitions in this region.
In new EU entrant, Romania, for example, the company announced earlier this year that it had submitted a bid for the construction of a new block at a power plant in the town of Borzesti, in partnership with Romania’s state-owned energy company Termoelectrica.
CEZ has been operating in Romania since 2005, when it acquired the distribution and supply company Electica Oltenia. The company has undergone unbundling, separating its regulated electricity distribution activities from its sale.
Ukraine Keen to come into the fold
With ambitions to join the EU in 2017, Ukraine is by no means a community ‘outsider,’ having a special relationship with Poland. Ukraine operates 15 nuclear reactors, all of the WWER type, at four sites: Khmelnitsky, which has an installed capacity of 2000 MW from two reactors, with another two are under construction, at Rovno, which has four reactors with a total capacity of 2835 MW; South Ukraine, having three reactors totalling 3000 MW, and; Zaporozhe which, with a capacity of 6000 MW, is home to six reactors. The last reactor of the Chernobyl power plant was shut down in December 2000.
Power losses from the transmission and distribution network inherited from the Soviet Union, an inefficient and antiquated infrastructure, however, are huge. In February 2001, Russia and Ukraine struck a deal to reconnect their energy grids, providing Ukraine with a more stable electric frequency and allowing Russia to export its electricity to other countries including Moldova, Bulgaria and Romania, and the Balkans via Ukraine.
Romania’s projected power output, 2008-2012 Source: CIA World Factbook
The country has a significant amount of hydroelectric power generation capacity. The average annual hydropower generation in Ukraine amounts to some 10.7 TWh, meeting seven per cent of the power system demand in electricity. Seven large hydropower plants and a smaller one have a total installed capacity of 1438 MW.
But there is room for more, according to government estimates. The economically feasible hydropower capability of Ukraine is estimated at 17 TWh/year for large, and 3.7 TWh/year for small hydro power plants. Of the technical potential, around 26 per cent are developed. The major part of the hydro resources is concentrated in the Central and Western Ukraine, on the Dnieper, Dniester, Yuzhny Bug and Tisa rivers.
Ukraine’s electricity production divided up by fuel Source: CASE Ukraine
The National Power programme paves the way for the construction of a cascade of five hydroelectric power plants on the Tisa River (220 MW), and for the reconstruction and new construction of 20 small hydropower plants totalling 40 MW.
Wind power also gets a mention in the programme. The country’s ambitions go back to 1996, when its president issued a decree believed to be the first such decree in any former Soviet Union country calling for the development of wind power plants. Today the country has a total installed capacity of wind power of 50 MW.
According to a recently published countrywide wind atlas, the wind energy potential is good. Among those regions deemed to be most promising are Asov, Crimea, the Near Black Sea region and the Carpathians, near the Chechen and Dagestan borders. According to recent assessments, the potential of wind energy is 42 TWh/year.
The government has set a wind energy target of 200 MW by 2010, but there remain numerous barriers to achieving such an ambition, not least among them a lack of capital, financial uncertainty and low domestic energy prices.
Currently, financial support and favourable tariffs for wind energy are only awarded to state owned wind power plants.
Transmission grid investment
Like Ukraine, Hungary is largely dependent on coal for its electricity production, but also has a relatively high proportion (39 per cent) of generation derived from nuclear capacity commissioned in the 1980s. Hungary operates one nuclear power plant located at Paks, which contains four WWER type 213 units each with a 440 MW capacity. Domestic electricity demand has fluctuated very little since 1990 (on average 0.8 TWh), but it is on the upward trend. The country also has significant exchanges of electricity with neighbouring countries such as Ukraine, Slovakia and Austria.
Hungary, a landlocked state, joined the EU in 2004. Its Energy Policy Concept (EPC) includes an objective to increase the share of renewable energy sources in the primary energy balance to 5-6 per cent, almost double the current figure. The estimated total utilization of renewables currently corresponds to three per cent of total primary energy supply. Hungary readdressed its EPC after the general elections of May 1998, specifically to be in line with the European legal system. To that end, security of energy supply through diversification of energy sources, contribution to environmental protection, modernization of the supply-side energy systems and increased demand-side energy efficiency feature high on Hungary’s shopping list.
Of uppermost importance to the country is the development of its transmission grid, which currently consists of an extensive network of 750 kV, 400 kV, 220 kV and 120 kV lines. It is linked to the EU for the Co-ordination of Transmission of Electricity (UCTE) system through Austria, Slovakia and Croatia. In May 2001 Hungary became a full UCTE member. A future connection with Slovenia is envisaged.
The search for diversity of supply led Hungary to introduce an energy efficiency programme in 2001 with the main objective of promoting the use of renewable energy sources and improving public energy awareness. Hungary is well advanced in its transition to an open energy market and has very good prospects for biomass energy projects. There are additional opportunities for hydro and geothermal energy development, especially for heat applications. However, opportunities for large-scale wind or solar projects appear limited.
Being one of the less mountainous countries in the region, Hungary is deemed to have only limited hydroelectric potential, there being only three small commercial hydroelectric power plants in the country, at Hernadviz, Kiskore and Tiszalok, with a total capacity of approximately 44 MW.
Conversely, biomass accounts for the largest share of Hungary’s renewable energy consumption, and the energy resource potential is estimated to be far greater than that currently exploited; only 10 per cent of forestry wastes are currently being utilized for energy production.
While Hungary has some of the largest reserves of geothermal energy in Eastern Europe, the identified resources, available at 50 ºC to 200 ºC, are seen as more suitable for heat supply than electricity production and, as a result, there is currently no utilization of geothermal energy for electricity production. However, geothermal installations for heat generation account for an estimated 350 MWth.
Hungary’s nascent wind energy industry received a boost recently as Wallenborn, the German renewables specialist, set its sights on Gyorkony in the south west of the country, where it wants to build a 48 MW wind farm estimated to cost €74.7 million ($59 million). Environmental permits for the wind farm have been obtained. Rated at 2 MW each, the 24 turbines supplied by Danish company Vestas will be mounted on 105 m high towers, and completion is planned by the end of the year, the company said.
New baltic nuclear construction
Collectively, the Baltic States of Estonia, Lithuania and Latvia have the potential to be net exporters of electricity. But for now, having striven to fulfill the EU’s accession requirements, the shutdown in Lithuania of the first of two reactors at its Ignalina nuclear power plant in 2004 the second reactor is planned for shutdown at the end of 2009 means the closures will negatively affect the energy sector of all the Baltic States.
The countries have engaged in studies to achieve a sustainable power balance, and concluded that, without the Ignalina plant, Lithuania’s energy supply system will not comply with the main security requirements and will be extremely vulnerable because of the lack of diversification of primary energy sources and energy supply routes. Security of energy supply could be substantially improved if new modern nuclear power plants were built.
Were any further sense of urgency needed, the Baltic States received it in January 2006 and took heed of important changes in the gas market; a sudden jump in gas prices from Russia’s Gazprom about 40 per cent, on average, in the case of Lithuania and interruptions of the gas supply from Russia to Ukraine and Georgia demonstrated that problems of security of energy supply have risen in importance above many other considerations.
As a result a new Lithuanian Energy Strategy 2007 has defined a number of urgent goals, including the construction of a new nuclear power plant in Lithuania by 2015; a new 400 MW combined-cycle unit by 2010 and 400 MW of new combined heat and power capacity in cities by 2020; a re-focus on local and renewable energy resources, which are available but are still underused and might increasingly contribute to Lithuania’s primary energy balance; a new liquefied gas terminal in the Baltic region, which would substantially reduce dependence on the single source of natural gas from Russia; and, development of interconnections with the power systems of Poland and Sweden, which should increase the reliability of energy supply and enable integration with the Western European electricity market.
A common energy language
Undoubtedly, EU accession has provided a steer for Eastern European nations striving to rise from a moribund state and renew their energy provision infrastructures. The potential rewards are high, but the process is likely to slow. At least it would appear that founder members and newcomers alike, despite their individual cultures and traditions, are converging on a common energy language, defined by the concepts of sustainability, security and diversity.