Total electric system integration is Europe`s aim

PennWell`s 1995 Central and Eastern European Power Industry Forum examined the role of central and eastern European countries in a European power market

Kevin Dodman

European Editor

Feedback from delegates attending the Central and Eastern European Power Industry Forum (CEEPIF) held in Warsaw, Poland, on March 29 and 30 indicates that the event achieved the organizers` goal of providing an opportunity for representatives from Central, Eastern and Western Europe to exchange views with personnel from utilities, governmental bodies and supplying companies in the energy industry. Attended by 229 delegates from 29 countries, forum comments included:

– “The Forum is an excellent opportunity to network with decision makers and influencers from industry, ministry, equipment vendors and consultants;”

– “A very good overview on ups and downs in the region;”

– “A gathering of many key players in the development of a privatized/liberalized power industry in Eastern Europe; a good forum for discussion of the most relevant issues which will impact on the success of the restructuring program;” and

– “Good opportunity to discuss future business opportunities.”

CEEPIF was staged for the first time last year, in Prague, and the positive response from delegates to that event enabled the organizers to put together a program that was strongly focused on the real, practical issues currently being addressed in Central and Eastern Europe. This year`s event in Warsaw continued that theme.

Central Europe

Outside Europe, there appears to be some confusion regarding which countries are included in Central Europe. Professor Jan Popczyk, chairman of the Polish Power Grid Co. (PPGC), commented that the European Union classifies Central Europe as The Czech Republic, Hungary, Poland and The Slovak Republic.

Popczyk is also chairman of CENTREL, a group comprising four Central European power organizations: CEZ from the Czech Republic, MVMRt from Hungary, SEP from the Slovak republic and Poland`s PPGC.

In the context of CEEPIF, the difference between Central and Eastern Europe is important, because the Central European countries` geographical location and rate of economic growth mean that in some ways they represent a `bridge` between Western and Eastern Europe, as can be seen from the map of European power networks.

Popczyk gave a presentation on the role of CENTREL in the European energy market. He explained that after the political changes in the region during 1989 and 1990, CEZ, MVMRt, PPGC and SEP made individual attempts to achieve integration with the Union for the Coordination of Production and Transmission of Electricity (UCPTE), which links power grids in Western Europe.

It soon became clear that a joint effort towards integration would be more effective, so there has been cooperation between the companies since 1991. CENTREL was officially established in October 1992. The basic technical data for the four systems within CENTREL are shown in Table 1.

In November 1993, VEAG (the power system in the former East Germany), CENTREL and a small part of the Ukrainian system separated from the Interconnected Power System (IPS) of Eastern Europe, and they commenced autonomous operation during the winter of 1993/94.

It is planned that the VEAG and UCPTE systems will be integrated in September this year, followed soon by integration of CENTREL into UCPTE. As part of the preparation for that integra-tion, a UCPTE-CENTREL Executive Committee met in March of this year. The purpose of the meeting was to establish an action plan for the trial synchronous operation of the CENTREL and UCPTE systems after VEAG`s integration.

Doubts have previously been expressed regarding the viability of extending UCPTE to the east by connecting it to CENTREL. However, according to Popczyk, studies carried out by a UNIPEDE-UCPTE ad-hoc group on East-West Interconnection showed that there are no serious problems likely to occur with regard to load flows, voltage quality and short circuit currents if synchronous operation is extended.

Popczyk said that the basic requirements for connection of the systems are already met, but that there are some additional requirements for power system stabilizers in Poland and Hungary. Work is continuing in those areas and a Technical Working Group will present its results on July 28, when overall compliance will be discussed.

CENTREL in the Europe-wide market

According to Popczyk, integration of CENTREL into UCPTE will bring a number of advantages, including:

– security of supply,

– reduction of risk associated with uncertainty in the countries further to the east,

– the opportunity for the Central European power companies to partici pate in the Europe-wide free market,

– encouragement of efficient generation,

– the opportunity to reduce spare generating capacity and

– the likely reduction of price differences throughout the larger interconnected system.

He also feels that integration of the CENTREL and UCPTE systems will give a major boost to industrial restructuring in Central Europe.

On the subject of prices, Popczyk estimates that the average electricity price in Western Europe today is 12 cents/kWhr, while in Poland it is 5.5-6 cents/kWhr. He feels that in future, the price level in Poland to cover the full cost of capital would be 7-8 cents/kWhr, while Europe-wide rates at the level might be around 5 cents/kWhr.

Other connections

As well as working on an action plan for integration, the UCPTE-CENTREL Executive Committee has also established a working group to investigate the relocation of the back-to-back couplings from the western to the eastern borders of the CENTREL countries to link the CENTREL system to the systems in Eastern Europe. Four possible sites have been identified and work will now continue on the financial aspects.

Other proposals include cooperation with countries around the Baltic, an east-west high voltage dc link between Russia, Bielorussia, Poland and Germany, and a dc connection between the Polish and Swedish power systems.

Developments in Poland

In his speech at CEEPIF, Herbert Leopold Gabrys, Under-secretary of State at the Polish Ministry of Industry and Trade, explained that privatization of power generation in Poland is well advanced. He said that in addition, prices of hard coal, one of the main fuels used for power generation, are now deregulated and are set by contract.

Further details were given by Jaroslaw Dybowski, deputy director of the Electricity Trading Department (Long-Term Market) at the Polish Power Grid Co. (PPGC), in his paper, “Financing of modernization and rehabilitation of Polish power plants.”

He explained that in 1989, Coopers & Lybrand recommended a program of restructuring for the Polish electric power industry which has largely been followed. The three main restructuring objectives are:

– maintaining low electricity prices,

– complying with environmental protection standards, and

– securing of the required standards of power supply reliability and quality.

The Least Cost Development Program for generating sources in Poland, prepared in November 1994, concluded that a minimum investment of around 3 billion PLZ [(US)$1.3 billion] per year is needed up to the year 2000.

With the current level of electricity prices, the funds available annually are estimated to be around a third of that level. According to Dybowski, increases in electricity prices and projected sales growth could bring the total to around 2 billion PLZ [(US)$900 million] per year by 2000.

As a result, the estimated shortfall in the period up to 2000 is around 8 billion PLZ [(US)$3.5 billion]. These will be sought from sources outside the electric power industry, including multilateral, export and commercial banks as well as private strategic investors, together with the issue of stocks in the privatized power stations.

As Dybowski said in his paper, “These methods require establishment of highly stable and explicit rules to be applied in determination of revenues secured by individual companies. To limit the risk faced by the investor and thus the cost of the attracted capital, the companies would have to be able to show at least three years of positive financial results under stable legislative conditions.”

Many overseas companies seem willing to invest in Poland, but progress in this area is being limited by political indecision. For instance, the privatization of the 1450 MWt, 450 MWe Krakow Heat and Power Plant has been delayed. According to details given in a paper at CEEPIF by Jacek Drezewski, president of the plant`s Board of Directors, a joint venture privatization proposal for the plant put together with a number of potential foreign investors was not accepted. The Minister of Privatization decided to privatize the plant using the capital method.

An invitation to negotiations was announced that aimed at selecting a strategic investor, and three power companies took part:

– a consortium comprising Imatran Voima of Finland and Vattenfall of Sweden,

– PowerGen of the United Kingdom and

– EdF of France

They submitted their offers in March 1994. At the time Drezewski presented his CEEPIF paper, a selection had not been made and the data used to prepare the offers had become outdated, so new offers will have to be prepared. According to Drezewski, the Ministry of Privatization is keen to speed up the process, and there are hopes that it will be completed this year.

Initial and long-term contracts

During discussions with Power Engineering International, Dybowski explained that a system of initial and long-term power purchase contracts between PPGC and individual generators is being introduced.

When all the long-term contracts are in place, they should represent around 15 percent of predicted base load demand. PPGC will buy 100 percent of each station`s output and the price paid will cover the cost of necessary long-term plant investments, so individual contract prices and durations will vary according to each plant`s needs, with a probable maximum duration of around 20 years. The risk sharing associated with the contracts is shown in Table 2.

By early this year, PPGC had received 42 proposals for long-term contracts. At the time of CEEPIF, two had been signed and letters of intent had been issued for several more.

According to Maciej Olejniczak, PPGC`s deputy electricity trading director (contracts), the initial contracts are intended to cover the balance of base load demand between the 15 percent covered by the long-term contracts and a maximum of 80 percent of expected demand. They will have a duration of four years. Another aspect of the new arrangement is that power is supplied to distributors by PPGC at a bulk tariff, and they are able to set their own prices to consumers, subject to a maximum set by the Ministry of Finance. According to Popczyk, distributors` maximum margin is now around 26 percent of revenue, which has had the dual effects of reducing payment delays while also enabling some distributors to reduce prices to customers.

PPGC is hoping that the new commercial structure will contribute to greater liberalization of the market and encourage foreign investment, but as several senior people from the company said, the commercial structure is unlikely to be the main factor affecting investment decisions–the political and regulatory climate is more important. Until political delays are reduced, it will be an uphill battle.

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The opening address at CEEPIF was given by Herbert Leopold Gabrys, Under-secretary of State at the Polish Ministry of Industry and Trade.

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