Analysis: Electricity markets in E. Europe

By SAM VAKNIN, UPI Senior Business Correspondent

SKOPJE, Macedonia, Nov. 15 (UPI) -- Russia's lower house of parliament, the Duma, is set to debate Nov. 29 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 the 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 this year 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 last month forced the government to shelve a scheduled 9 percent hike in the price of electricity for domestic consumption. The International Monetary Fund is displeased with the government's stranglehold over the energy sector and is pushing for liberalization.

Slovakia's news agency, TASR, reported this week that thousands of members of the Trade Unions Confederation demonstrated in Bratislava against proposed budget cuts and increases in regulated prices, including that of electricity.

Still, consumers won't 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 Thursday that Slovenian producers of electricity and natural gas warned that, once the domestic market opens to foreign competition next January, they will be at a disadvantage due to the unrealistic electricity "price model."

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 much faster than 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 fell 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, 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 last year, 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. Last December, 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 that 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 center under the auspices of the Stability Pact. Bulgaria covers 40 percent to 50 percent of southeast Europe's entire electricity deficit every winter. It also exports power 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. Last year, Bulgaria's exports to Turkey, Greece and Yugoslavia reached $150 million. The figure is much higher this year. Romania doubled its electricity exports -- mostly to Yugoslavia and Greece -- during the first half of the year 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. Macedonia has just 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.

The more venal and xenophobic the political class, the less welcome are foreign investors. The Moldovan government seeks to annul the sale, two years ago, 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 about $120 million to improve hydropower equipment.

And 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 Friday 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, pledges the document.

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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