Energy issues in the Central and Eastern European region
November 2014 | SPECIAL REPORT: ENERGY & NATURAL RESOURCES SECTOR
Financier Worldwide Magazine
Over the past 12 months the energy sector in the Central and Eastern European region has seen various substantial developments. In the oil and gas sector we have seen an increasing concern over the security of supply of natural gas from Russia, which led to a specific focus on interconnectors and alternative supplies. Countries like Ukraine, Poland and Bulgaria are substantially dependent on this single source of supply, which provoked gas storage and LNG investments. In contrast, the renewable energy boom, especially in the likes of Romania, Bulgaria and the Czech Republic, led to various restrictions to the offtake and availability of certificates to investors. As a result of the politically driven involvement of regulators, this period saw a few international arbitration cases started against the host governments (in Bulgaria, in the Czech Republic) and major domestic disputes in renewables and nuclear projects. The period has been especially active for the nuclear industry, where we saw the structuring or continuation of new built projects (in Hungary and Romania), the failure of others (in the Czech Republic) or both the start and finish of national nuclear projects (in Bulgaria). Non-nuclear countries such as Poland and Turkey saw further attention and advancement of their nuclear projects, which are in a developing stage.
If there is an area where the region has really exploded over the past months, it is in upstream oil and gas. Despite of the political tension over Crimea, the focus on the entire region has been streamlined in the exploration of oil and gas, both conventional and unconventional. As a leader in the shale gas exploration in the region, Poland continues to provide political support to various international and domestic investors, who explored over 160 shale gas block in the country. The Russian-Ukrainian crisis stopped projects in the eastern parts of Ukraine, but shale gas exploration in the western part of the country continues. 2014 saw shale gas exploration in Romania start with the involvement of major US companies, which marks a positive change within the leadership of the country toward shale gas exploration. Offshore oil and gas tenders and exploration activities boomed with the completion of the largest offshore exploration project in Bulgaria and the start of huge bidding rounds in Greece and in several former Yugoslavian countries. Major discoveries of oil and natural gas in Romania and Albania contributed to placing the region on the map of hotspots over the last 12 months.
Politically the region was far from calm, especially given Russia’s intervention in Ukraine and the situation in Syria and Iraq. During recent months we have seen electricity generation focus much more on waste-to-energy projects in countries like Poland, Romania and Bulgaria, thus moving away from renewables, as the burden on these societies has been substantial.
Energy efficiency is definitely the focus for various governments in the region, where the EU member states could benefit from EU funds to support projects and EU accession states are focused on pre-accession support funds of the EU.
On the regulatory front we have seen countries from the region experimenting with so-called Energy Boards, where various stakeholders meet to discuss pending matters (Bulgaria), various regulatory changes regarding renewables (Poland) and privatisation in the sector (Ukraine). As a result of the regulatory changes and the protectionism of local regulators, major investors in the region – such as Iberdrola, Vestas, E.ON, Mechel, AES, Enel – sold their projects to regional newcomers such as Energo-Pro and Contour Global, or to national investors. National parliaments of various countries from the region introduced measures to retroactively affect the profitability of renewable energy projects (Czech Republic) or to impose direct fees (Bulgaria) or indirect limitations of income from renewable energy projects (Romania).
Given the growing demand in the power sector, there is a little doubt that Turkey is the brightest star on the horizon of energy investments in Central and Eastern Europe. With two major nuclear projects under way, geothermal potential and ever-growing demand, Turkey is the main focus of attention in the region. Due to its geographical location and importance, Poland will continue to be a driver for the region in terms of energy investments both in the renewable and oil and gas sectors. The long-term focus of Poland on becoming a nuclear power generating country will inevitably be streamlined in light of the security of supply challenges that the country is facing with its focus on coal-fired facilities. Upgrading old Russian-design thermal power plants and extending their lives will be a priority for many governments in the region. Following the positive examples of countries like Bulgaria, the likes of Ukraine, Romania, Poland and the former Yugoslavia states will likely follow, making sure that their existing thermal power plants remain the backbone of their power sectors for years to come.
International natural gas pipeline projects such as South Stream and TAP/TANAP are key factors for the future of the region in light of the long-term investment and balance of supply and demand.
The coming months will see further developments there, with the likelihood of TAP/TANAP seeing a faster development and South Stream continuing to be held hostage to global political developments.
The new EU Commission and its focus on security of supply, the renewable future of the EU and the increasing role of energy efficiency will definitely contribute to the mid-term future of the region. The UK model of ‘contracts for differences’, once fully embraced by the EU Commission, is likely to provide a new tool for financing projects globally, thus positively affecting Central and Eastern Europe by providing opportunities for structuring and financing nuclear and renewable energy projects.
Central and Eastern Europe is lagging substantially behind EU targets on waste management and this, combined with the increasing demand for reliable sources of electricity, will contribute to the further development of waste-to-energy projects, especially among older member states.
In recent months, China has announced plans to invest some €20bn in the infrastructure of Central and Eastern Europe and we have seen some of these investment opportunities materialise in nuclear (Romania), renewables (Bulgaria and Romania), and so on. China Development Bank has had over €1bn worth of exposure, mainly in renewable energy, in the region for around two years. In addition, export credit agencies from Asia, such as JBIC and KDB, bring experience and ambition to the region, with most of their current focus on Turkey, due to the growing opportunities and the tremendous size of the market there. This is a clear sign of activity in the region for the months ahead.
Kostadin Sirleshtov is a partner at CMS Cameron McKenna LLP. He can be contacted on +359 (0)2 921 99 42 or by email: firstname.lastname@example.org.
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CMS Cameron McKenna LLP