IMPACTS OF EUROPEAN INTEGRATION ON THE AGRICULTURE OF CENTRAL AND EASTERN EUROPEAN COUNTRIES
Central and Eastern European Electricity Outlook · 2016-05-25 · It is my pleasure to introduce...
Transcript of Central and Eastern European Electricity Outlook · 2016-05-25 · It is my pleasure to introduce...
ENERGY AND NATURAL RESOURCES
Central andEastern EuropeanElectricity Outlook
ADVISORY
Authors:
KPMG Power & Utilities Centerof Excellence Team, Budapest,Hungary
Thompson H. McDaniel Jr.Senior Lecturer at the CentralEuropean University BusinessSchool in Budapest
Contributors:
Johanna JáraiViktória NagyChris DinsdaleLászló MiliásMiklós BrázaiRoland Lajtai
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
1Central and Eastern European Electricity Outlook
Dear Reader,
It is my pleasure to introduce the Central and Eastern European Electricity Outlook,
which has been prepared by the KPMG Energy & Natural Resource team
in Budapest, Hungary. This practice is proud to be a Power & Utilities Center of
Excellence within the European market along with London, Paris and Essen.
The Central and Eastern European region’s electricity sector is entering into an
exciting period that holds many opportunities for both current and future
stakeholders. The electricity sectors of all CEE countries are very different in terms
of decentralization, privatization and degree of liberalization. Valuable lessons can
be learnt from each country, especially with respect to restructuring, privatization,
development of competition, security of supply and how to capitalize on their
available renewable resources to ensure the sustainability of their electricity supply.
The electricity markets of the CEE countries have already commenced and are
expected to continue to converge and form a common CEE electricity market.
Many differing opinions exist on how to achieve this unified market, due to the
different stages of the development of the individual countries’ electricity sectors.
One thing is for sure, to date this convergence has occurred through a bottom up as
opposed to a top down approach.
As the individual markets develop and continue to converge, they have to recognize
their common geographic comparative advantage: They lie between the energy-rich
CIS countries and the net energy consumer Western Europe. It will be seen in the
coming years, if the CEE countries are able to capitalize on this advantage, thus
ensuring their security of supply by attracting electricity and natural gas transit to
satisfy their electricity generation and other energy needs.
This environment gives a major opportunity for both the incumbent market players
and new entrants, who can capitalize on the opportunities provided by the different
market conditions and the geographic comparative advantage of the region for the
benefit of industrial, commercial and individual consumers. It is also up to the
different regulatory bodies and governments to provide such conditions that will
foster the emergence of an attractive but competitive unified electricity market.
I hope that you enjoy this booklet and I wish you all the best in your exciting journey
in taking part in developing the unified CEE electricity market, whether you are a
stakeholder of the electricity sector on the supply side or a consumer.
Péter Kiss
Péter Kiss
Partner
Energy and Utilities Advisory Services
KPMG in Central and Eastern Europe
Tel: +36-70-3331400
e-Mail: [email protected]
2 Central and Eastern European Electricity Outlook
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
3Central and Eastern European Electricity Outlook
Page
1. Key Countries of the CEE Energy Markets 5
2. History 9
3. Varying Levels of Liberalization 13
3.1. Privatization 13
3.2. Unbundling 20
3.3. Market Opening 22
4. A Changing Generation Mix 25
4.1. Renewable Generation Expansion 26
4.2. Renaissance of Nuclear Generation 30
4.3. An Alternative Fuel Source to Maintain Security of Supply—Coal 34
4.4. Dependency on Natural Gas 37
4.5. Emission Policy 38
5. Towards a Single Market 47
5.1. Cross-Border Capacities 47
5.2. Power Exchanges 51
5.3. Power Purchase Agreements 52
5.4. Price Convergence 54
6. What KPMG firms can offer 57
Table of Contents
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
The CEE Region in a European Context
� Borders of the European Union
� Central and Eastern European, countries
� Other countries
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
5Key Countries of the CEE Energy Markets
This report defines Central and Eastern Europe as 16 countries lying just east of
the original European Union (sometimes referred to as EU 15 or “Western”
Europe), and just west of the Commonwealth of Independent States (CIS:
Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzistan, Moldova, Russia,
Tajikistan, Turkmenistan, Ukraine, and Uzbekistan), which were part of the former
Soviet Union (FSU).
Ten of these 16 countries are currently EU members, and it is very likely that all
or most of these countries will become EU members within a decade or so.
Many of the CEE countries are not yet considered developed countries, yet are
advanced enough so as not to be considered underdeveloped.
Therefore, they are often regarded as comprising a “converging” market rather
than an emerging market, offering the best of both worlds: high returns
associated with emerging markets and the stable risk profile associated with
the leading industrial economies around the world.
1. Key Countries of theCEE Energy Markets
The CEE Countries’ Economic and Population Data for 2006
Albania (AL)
GDP 2006: $20 billion • GDP growth 2006: 5.0% • Population: 3.6 million
Bosnia & Hercegovina (BIH)
GDP 2006: $25 billion • GDP growth 2006: 5.3% • Population: 4.5 million
Bulgaria (BG)
GDP 2006: $77 billion • GDP growth 2006: 5.5% • Population: 7.4 million
Croatia (HR)
GDP 2006: $59 billion • GDP growth 2006: 4.4% • Population: 4.6 million
Czech Republic (CZ)
GDP 2006: $221 billion • GDP growth 2006: 6.2% • Population: 10.2 million
Estonia (EST)
GDP 2006: $26 billion • GDP growth 2006: 9.2% • Population: 1.3 million
Hungary (H)
GDP 2006: $173 billion • GDP growth 2006: 3.8% • Population: 9.9 million
Latvia (LV)
GDP 2006: $35 billion • GDP growth 2006: 9.3% • Population: 2.3 million
Lithuania (LT)
GDP 2006: $55 billion • GDP growth 2006: 7.2% • Population: 3.6 million
Macedonia (MK)
GDP 2006: $17 billion • GDP growth 2006: 4.0% • Population: 2.0 million
Poland (PL)
GDP 2006: $543 billion • GDP growth 2006: 5.3% • Population: 38.5 million
Romania (RO)
GDP 2006: $197 billion • GDP growth 2006: 6.4% • Population: 22.3 million
Serbia & Montenegro* (SCG and MNT)
GDP 2006: $45 billion • GDP growth 2006: 5.9% • Population: 9.4 million
Slovakia (SK)
GDP 2006: $96 billion • GDP growth 2006: 6.4% • Population: 5.4 million
Slovenia (SLO)
GDP 2006: $46 billion • GDP growth 2006: 4.4% • Population: 2.0 million
All GDP figures are quoted in GDP Purchasing Power Parity.
* For Serbia & Montenegro the GDP 2006 value includes Kosovo, while the GDP growth 2006 excludesKosovo. Individual data for Serbia and Montenegro is unavailable for 2006.
Sources: The World Factbook, United States Central Intelligence Agency, 2006. All information consistsof estimates.
EST
LV
LT
PL
SLOHR
BIH SCG
AL
MNT
CZ
SK
HRO
BG
MK
Key Countries of the CEE Energy Markets6
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
7Key Countries of the CEE Energy Markets
Major economic indicators and population data can found in the accompanying
table.
It is impossible to describe the CEE regional electricity market in a single manner
since the market trends, level of development, and future outlook vary widely by
country and in some cases by specific regions within these countries. Therefore,
this study aims to identify major trends within the CEE electricity market that are
expected to affect the development of the electricity market
in the region; each trend is then examined at a country level.
The broad range of the CEE regional electricity markets’ development level can
be seen by the fact that at one extreme, several CEE countries’ electricity
markets are well advanced, being more liberalized and developed than some of
their Western European peers. At the opposite extreme, some CEE countries’
markets are still state owned and operated; in some cases the electricity supply
to consumers is only intermittently available due to severe generation shortages
and poor infrastructure maintenance.
The level of investment needed in the CEE regional electricity markets is
significant due to a rapidly growing demand for electricity in the region, due
to a high level of GDP growth and an increasing standard of living, while
low past investment in maintenance and network expansion has further
compounded this problem.
Major investments are needed to replace or upgrade generation capacity, as well
as in the transmission and distribution networks and in energy efficiency
projects. The investment environment of the region is as equally diverse as the
electricity market itself; however, this environment is improving rapidly across
the region, and in many CEE countries the level of country credit risk is rated
stable.1
1 Standard and Poor’s, Credit Ratings List,http://www2.standardandpoors.com/portal/site/sp/en/eu/page.topic/ratings_sov/2,1,8,0,0,0,0,0,0,0,4,0,1,50,0,0.html, accessed April 12, 2007
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
9History
Before the change of the political and economic system in the early 1990s,
the economies of CEE countries were centrally-planned, and dominated by heavy
industry. In order to be able to supply the significant levels of electricity needed,
large-capacity transmission lines were constructed and significant generation
capacities were built in Ukraine, which at the time was a member of the Soviet
Union. They were based mainly on coal and nuclear technology according to the
former Soviet Union tenet that electricity should be generated near the primary
energy source.
While this resulted in Belarus and Ukraine being well connected to their
neighbors, the cross-border connections between CEE regional countries were
very limited. The only exception to this are the strong interconnections between
Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Montenegro and Macedonia,
which at the time formed Yugoslavia; the Czech Republic and Slovakia, which
formed Czechoslovakia; and those of the Baltic states of Lithuania, Estonia and
Latvia, which also have strong interconnections due to historical reasons. This
ow level or non-existent interconnection between the CEE countries remains one
of the main barriers to the realization of a unified market in the CEE region.
Due to the factors surrounding the change of the political and economic system
in the mid 1990s, many of the large uneconomical heavy-industry sectors were
closed down, causing a significant decrease in electricity demand throughout
the region. This decrease in demand combined with severe domestic monetary
problems caused many CEE countries to significantly reduce the level of
maintenance and development in their electricity network. In addition, a civil war
ravaged much of the former Yugoslavia and severely damaged the electricity
network in the former Yugoslavian member states, the consequences of which
are still being addressed today.
2. History
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
500
450
400
350
300
250
200
150
100
50
0
140
130
120
110
100
90
80
Kyoto protocolreference values
Change in the political system
Ele
ctr
icit
y C
on
su
mp
tio
n, T
Wh
Po
pu
lati
on
, m
illio
ns
Electricity Consumption and Population
in the CEE Region, 1980 – 2004
Source: Population Division of the Department of Economic and Social Affairs of the United NationsSecretariat: http://esa.un.org/unpp/International Energy Annual 2004,Energy Information Administration (a statistical agency of the U.S. Department of Energy):http://www.eia.doe.gov/emeu/international/electricityconsumption.html
� Total Electricity Consumption � Total population
Although demand for electricity dropped significantly in the early 1990s, the level
of electricity demand has since rebounded due to continued economic growth,
the stabilization of the region following the fall of the Soviet Union, and
continuous growth in the standard of living. With the development of the CEE
countries, household consumption and commercial consumption have slowly
begun to dominate electricity demand, in place of heavy industry.
In the late 1990s, as a result of increasing consumption and a poorly maintained
electricity network, the electricity networks in the CEE region became
overburdened, and transmission losses skyrocketed in some countries.
This resulted in the need to put back into daily operation highly inefficient and
polluting power plants. With electricity flows between the former Soviet Union
blocked for technical, financial or political reasons and limited cross-border
capacities available between neighboring countries, many CEE countries were
left to fend for themselves.
10 History
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
During this same period, stricter environmental and safety regulations from the
EU also affected the market. This resulted in many nuclear facilities being
required to close operations as a requirement for EU accession, while major
upgrades were and still are needed to comply with minimum EU environmental
regulations.
In order to increase the quality of the power supply, make the necessary
improvements to be able to meet the increasing demand, and comply with EU
rules and regulations, many countries began to privatize their electricity networks.
This privatization process has allowed significant foreign investment to enter the
market. Although privatization began in the 1990s, in many countries it is just
beginning; in others it is in the advanced stages or complete.
With the EU goal of the formation of a unified single European electricity market,
many of the CEE countries have implemented market unbundling and market
opening activities. Much progress has been made in this respect but some major
hurdles remain.
Although the development focus of the CEE countries is diverse, the main areas
of focus are market liberalization, generation capacity investments, and progress
toward a single regional and European electricity market.
11History
13Varying Levels of Liberalization
After the changes of their political systems in the 1990s, the CEE countries
began the process of changing to a market economy and converging with
Western European standards. Local policies and markets are increasingly formed
by EU policies which have affected efficiency in production, transmission, and
distribution; security of supply; protection of customer rights; environmental
protection; and competition in generation and distribution.
The main characteristics of the liberalization process are the privatization of the
state-owned electricity companies to create conditions of efficient competition:
unbundling of production from transmission and distribution; and market opening,
thus providing all consumers with the possibility of switching electricity suppliers.
The following section discusses privatization, unbundling, and market opening in
the CEE region.
3.1. Privatization
Privatization of the electricity networks in the CEE region has been undertaken in
a variety of manners but the goal of each is to not only encourage foreign direct
investment into the electricity network but also allow market liberalization and
increasing competition. A lack of past investment into the electricity network
in many countries has resulted in inadequate electricity supply, non-compliance
with EU environmental standards, and an inefficient electricity network.
The success of privatization is mainly dependent upon the prior restructuring
of the electricity sector, which is needed to provide a legal background,
transparency, and appropriate market conditions for investors to enter the market.
Below we seek to examine the current situation in terms of privatization from
the major players’ point of view: the transmission system operator, distribution
system operators, and generation companies.
3.1.1. Transmission System Operators
In every CEE country, the Transmission System Operator (TSO) is not privatized
but kept fully in state ownership to ensure non-discriminatory third-party access
and ensure the security of supply. Privatizing the transmission system network is
regarded as politically undesirable due to domestic pressures to not allow a
foreign or single private party to own such a strategic asset. As such, the TSOs
of each country are owned directly or indirectly through the incumbent by the
government.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
3. Varying Levels ofLiberalization
CountryTSO ownership independence
from the incumbent2
Albania yes
Bosnia and Herzegovina no
Bulgaria no
Croatia no
Czech Republic yes
Estonia yes
Hungary yes
Latvia no
Lithuania yes
Macedonia no
Poland yes
Romania yes
Slovakia yes
Slovenia yes
Serbia/Montenegro no
14 Varying Levels of Liberalization
3.1.2. Distribution System Operators (DSO)
The situation is different in case of the DSOs. The regional distribution companies
have in many cases been separated from the dominant market player and sold to
strategic investors.
The Baltic countries and Poland are in the initial phase of privatization due to the
lack of effective restructuring of their sectors, which has resulted in delays to
privatization.
In Estonia, 91 percent of the DSOs are directly or indirectly in state ownership.3
The dominant electricity company is Eesti Energia, a 100 percent state–owned
vertically integrated public limited company that controls 85 percent of the
distribution network. In addition to the dominant distribution company, OÜ
Jaotusvõrk (100 percent owned by Eesti Energia), there are 41 distribution
companies altogether, which means many of them are extremely small
considering the Estonian market size. The second largest distributor Fortum
Elekter and the third largest Narva Elektrivõrk have a market share of 3 percent
and 2.5 percent,4 respectively.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
2 International Energy Regulation Network,http://www.iern.net/country_factsheets/continent-europe.htm, accessed March 21, 2007COMMISSION OF THE EUROPEAN COMMUNITIES, COMMISSION STAFF WORKING DOCUMENT,Technical Annexes to the Report from the Commission on the Implementation of the Gas and ElectricityInternal Market, Brussels,http://ec.europa.eu/energy/electricity/benchmarking/doc/4/sec_2004_1720_en.pdf, January 5, 2005 Southeastern Europe Transmission System Operators, SETSO Task Force, Nenad Stefanovic: Status of reform of SEE electricity sector, Report to the 6th Athens Forum-, June 9–10, 2005European Commission Directorate-General for Energy and Transport: CORRIGENDUM COMMISSIONCOMMUNICATION ON PROGRESS IN CREATING THE INTERNAL GAS AND ELECTRICITY MARKET, January 12, 2006
3 Einari Kisel: Experiences of Privatization of the Estonian Energy Sector, Presentations of the Workshop"Reforming Infrastructure: Privatization, Regulation and Competition" in Riga, May 3, 2005www.sprk.gov.lv/doc_upl/Experiences_of_Privatization_of_the_Estonian_Energy_Sector.pps
4 COMMISSION OF THE EUROPEAN COMMUNITIES:COMMISSION STAFF WORKING DOCUMENT– Accompanying document to the COMMUNICATION FROM THE COMMISSION TO THE COUNCIL ANDTHE EUROPEAN PARLIAMENT, Prospects for the internal gas and electricity market, Implementation report,http://ec.europa.eu/energy/energy_policy/doc/10_internal_market_country_reviews_en.pdf, January 10, 2007
5 European Commission Directorate-General for Energy and Transport: Romania Renewable Energy Fact Sheet,http://ec.europa.eu/energy/energy_policy/doc/factsheets/renewables/renewables_ro_en.pdf, January 2007.
6 COMMISSION OF THE EUROPEAN COMMUNITIES:COMMISSION STAFF WORKING DOCUMENT – Accompanying document to the COMMUNICATION FROM THE COMMISSION TO THE COUNCIL ANDTHE EUROPEAN PARLIAMENT, Prospects for the internal gas and electricity market, Implementation report,http://ec.europa.eu/energy/energy_policy/doc/10_internal_market_country_reviews_en.pdf, January 10, 2007
7 “To know Polish energy”, http://polishenergy.cire.pl/ze.html, accessed March 13, 2007.8 www.sse.sk, www.vse.sk, www.zse.sk
Overview of DSO Privatization
in the CEE Region, 2006
EST
LV
LT
PL
SLOHR
BIH SCG
AL
MNT
CZ
SK
HRO
BG
MK
� In final phase
� Underway
� In initial phase
15Varying Levels of Liberalization
A bit more developed situation can be found in Latvia and Lithuania where
privatization of the DSOs has been undertaken to a larger extent. In Latvia, the
distribution network is operated by Sadales tikls, a subsidiary of the 100 percent
state–owned and vertically integrated electricity company Latvenergo, while
maintenance and development of medium and low voltage distribution lines are
provided by seven AS Latvenergo Distribution Network Regions.5
In Lithuania, two major state–owned companies are engaged in electricity
distribution activities: these are Rytų Skirstomieji Tinklai AB and Vakaru
Skirstomieji Tinklai AB. Other distribution companies exist but they are minor or
industrial companies with internal networks directly interconnected to the
transmission networks within their territories, but the distribution subsidiary of
the national electricity company is still dominant on the market.6
The Polish privatization is in its initial phase due to the country’s time lapse to
properly restructure the sector prior to privatization. In the distribution sector, two
of the 14 distribution companies were privatized to strategic investors Vattenfall
and RWE (each with 85 percent7), with the rest being left in state ownership.
Poland’s current plan is to consolidate the small DSOs into larger vertically-
integrated entities in order to attract increased foreign interest in the privatization
process. However, this process has resulted in the postponement of the
privatization process.
In Slovakia, Hungary, the Czech Republic and Macedonia the privatization of
the electricity network is in an advanced stage, with many components of the
electricity network having been already sold to Western European energy
companies.
In Slovakia, of the three regional distribution/supply companies, EDF, RWE, and
E.ON are active and have each acquired an ownership of 49 percent in an
individual distribution company each, while the government has retained 51
percent ownership through the National Property Fund.8 The three traditional
supply/distribution companies are: ZSE (49 percent owned by E.ON), VSE (49
percent owned by RWE) and SSE (49 percent owned by EDF). Each has a
regional distribution area, but there is now competition between the three
companies on the supply side. Slovenska Elektrane (SE, owned 66 percent by
ENEL and 34 percent by the Slovak government), as the main generation
company, has begun to supply customers directly.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
16 Varying Levels of Liberalization
Several companies from the Czech Republic have also entered the market as
traders\suppliers including ČEZ. There is little congestion between the two
Member States since they were formerly one country and suppliers have been
able to source electricity from the Czech power exchange.9
The privatization of the Hungarian market is also well advanced, with three of the
six DSOs being owned completely by E.ON, two DSO regions 55 percent owned
by RWE, and the final DSO region being 60 percent owned by EDF.10
In addition there are currently 29 electricity trading license holders, but
due to the high amount of electricity involved in long term power purchase
agreements, traders suffer from a lack of available electricity.11
In Czech Republic, the ČEZ Group is a strong and vertically integrated player in
the Czech electricity market, listed on the Prague, Vienna and Warsaw stock
exchanges. However, the main shareholder remains the Czech Ministry of
Finance (National Property Fund) with two-thirds (67.6%) of the remaining
ownership being institutional shareholders and foreign investors.
There are three large DSOs. The three (ČEZ Distribuce PREdistribuce and E.ON
Distribuce) large suppliers’ have an electricity market share of more than 95
percent of final customers’ total consumption. In addition there are also about
10 independent suppliers that are actively operating in the retail market.12
Romania and Bulgaria are currently in the process of privatizing their DSO sectors.13
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
9, 11, 12 COMMISSION OF THE EUROPEAN COMMUNITIES: COMMISSION STAFF WORKING DOCUMENT– Accompanying document to the COMMUNICATION FROM THE COMMISSION TO THE COUNCIL ANDTHE EUROPEAN PARLIAMENT, Prospects for the internal gas and electricity market, Implementationreport, http://ec.europa.eu/energy/energy_policy/doc/10_internal_market_country_reviews_en.pdf,January 10, 2007
10 www.elmu.hu, www.emasz.hu, www.titasz.hu, www.demasz.hu13 Council of European Energy Regulators ASBL: Regulatory Benchmarking Report For South East Europe,
2005; November 8, 2005
17Varying Levels of Liberalization
As far as the Bulgarian distribution sector is concerned, a 67 percent stake in
three separate electricity distribution companies was sold to E.ON Energie AG,
EVN AG of Austria and ČEZ a.s. of the Czech Republic respectively.14
In Romania the market consists of eight electricity distribution/supply companies.
Of these, four have been privatised with ČEZ and E.ON acquiring a controlling
interest in one DSO region each and ENEL acquiring a controlling ownership in
two others. The finalization of the privatization of a fifth DSO region to ENEL is
expected in 2007, while the other three are in state ownership but are planned to
be privatized.15
The rest of the Balkan region is in the initial phases of the privatization process,
with the notable exception of Macedonia and Slovenia, where the Macedonian
DSO, AD ESM was 90 percent privatized to the Austrian company EVN AG in
March 2006,16 while in Slovenia 79.5 percent of the DSOs are owned by the
state.17
In Croatia electricity distribution is operated exclusively by HEP's (Hrvatska
Electropriveda) Distribution Division through 21 distribution regions that largely
correspond to the country's counties.18
In Serbia the 100 percent state-owned JP Elektroprivreda Srbije is the dominant
vertically integrated utility dealing with electricity production, distribution and
supply. Its legally independent subsidiaries Elektrovojvodina ltd, Elektrodistribucija
Beograd ltd, Elektrosrbija ltd, ED Jugoistok ltd. and ED Centar ltd deal with
distribution/supply.19
In Montenegro the state-owned electricity utility Elektroprivreda Crne Gore
(EPCG) is responsible for all distribution/supply of electricity.20
14 European Commission Directorate-General for Energy and Transport: Bulgaria – Internal Market Fact Sheet,http://ec.europa.eu/energy/energy_policy/doc/factsheets/market/market_bg_en.pdf, January 2007
15 European Commission Directorate-General for Energy and Transport: ROMANIA – Internal Market FactSheet, http://ec.europa.eu/energy/energy_policy/doc/factsheets/market/market_ro_en.pdf, January 2007
16 EBRD: FYR Macedonia strategy overview,http://www.ebrd.com/about/strategy/country/mace/index.htm, accessed March 22, 2007
17 European Commission Directorate-General for Energy and Transport: Slovenia – Internal Market FactSheet, http://ec.europa.eu/energy/energy_policy/doc/factsheets/market/market_si_en.pdf, January 2007
18 Miroslav Malý, Jaroslav Jakubes , Jiřina Jílková, Eva Šnajdrová: Country Profile – Croatia Review of Status ofEmissions Trading Activities in CG11 Countries,http://r0.unctad.org/ghg/download/other/cg11/Croatia_Country_Profile.doc, May 2002
19 International Energy Regulation Network: Country Factsheets Serbia,http://www.iern.net/country_factsheets/market-serbia.htm, July 2006
20 International Energy Regulation Network: Country Factsheets Montenegro,http://www.iern.net/country_factsheets/market-montenegro.htm, July 2006
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Overview of Generation
Privatization in the
CEE Region, 2006
EST
LV
LT
PL
SLOHR
BIH SCG
AL
MNT
CZ
SK
HRO
BG
MK
� In final phase
� Underway
� In initial phase
18 Varying Levels of Liberalization
In Bosnia and Herzegovina, Elektroprivreda Bosne i Hercegovine JSC (EP BIH),
Elektroprivreda Hrvatske Zajednice Herceg Bosne JSC (EP HZHB), subsidiaries
of Elektroprivreda Republike Srpske JSC (EP RS), and in Brčko District of BIH a
separate entity which is attached to the local government, are the sole holders
of distribution licenses.21
These former Yugoslavian countries are expected to pursue the privatization of
their DSO sectors in the short to medium term.
Finally, in Albania the state-owned joint-stock company Albanian Power
Corporation (KESH) is the vertically-integrated monopolist in generation,
distribution and supply.22
3.1.3. Generation Companies
The privatization of the generation sector can be observed in the region but to a
lesser extent than in the case of the distribution system. The majority of
generation assets are still often owned by the incumbent market player in the
different countries, with the notable exception of Slovakia. The privatization of the
generation sector is evolving quickly, and significant amounts of generation
assets are expected to be privatized in the short and medium term. Countries in
the region have taken very different approaches to addressing the privatization of
the generation sector: with some countries maintaining a strong domestic
champion and others seeking high levels of foreign investment through the sale
of the majority of their domestic generation assets.
In the Baltic region, the Latvian state-owned Latvenergo operates 60 percent of
the electricity generation in Latvia, while 5 percent of the generation comes from
150 private small generators and the remainder through electricity imports.23
In Estonia 98 percent of the domestic generation capacities is in state hands
under the umbrella of Eesti Energia.24
In 2005 Lithuania had four main electricity producers: Lietuvos Elektrine with 36
percent of the installed domestic capacity, Ignalina nuclear plant with 26 percent,
Kruonio HAE with 18 percent and Vilniaus Energija UAB25 with approximately
7 percent of the installed domestic generation capacity, while 13 percent is in the
hands of smaller generation companies.26
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
21 International Energy Regulation Network: Country Factsheets Bosnia and Herzegovina,http://www.iern.net/country_factsheets/market-bosnia_and_herzegovina.htm, July 2006
22 International Energy Regulation Network: Country Factsheets Albania,http://www.iern.net/country_factsheets/market-albania.htm, July 2006
23 International Energy Regulation Network, “Latvia,”www.iern.net/country_factsheets/market-latvia.htm, May 2006.
24 Einari Kisel: Experiences of Privatization of the Estonian Energy Sector, Presentations of the Workshop"Reforming Infrastructure: Privatization, Regulation and Competition" in Riga, May 3, 2005www.sprk.gov.lv/doc_upl/Experiences_of_Privatization_of_the_Estonian_Energy_Sector.pps
25 European Commission, “Fact sheets by country,”http://ec.europa.eu/energy/energy_policy/facts_en.htm, March 8, 2007.
26 Lietuvos Energetika: Energy in Lithuania 2005, p 11,http://www.lei.lt/_img/_up/File/atvir/leidiniai/Lietuvos_Energetika-2005.pdf, accessed March 2007
19Varying Levels of Liberalization
All of the above companies are majority owned by the state except Vilniaus
Energija, which is owned 74.79 percent by the French Dalkia.
In Poland the state-owned PKE SA (85 percent state owned) and BOT Group (100
percent state owned) have direct ownership of the majority of the country’s installed
generation capacities (18 and 44 percent, respectively), while the remaining capacity
is owned by EDF, Vattenfall and Tractebel, while smaller plants were sold to ČEZ27
and other international investors.
In the Slovakian supply side of the electricity market, Slovenske Electrarne (SE),
the main generation entity, owns 85 percent of the installed capacity of the
country. The remaining 15 percent of the capacity is owned by two of the
regional distribution utilities and other independent power producers serving
industrial customers. 66 percent of SE was successfully privatized to ENEL in
200528, while the remaining part is still in state ownership.
The Hungarian power generation sector is 36 percent foreign-owned by various
entities, while the remainder is state-owned by MVM, the Hungarian Electricity
Company. The privatization of MVM is currently postponed and future privatization
plans are unknown.
The ownership of the Slovenian generation sector is very concentrated with more
than 97 percent of the country’s installed generation capacities owned by the
state directly or through either the main incumbent HSE or the system operator,
Eles, which has a 50 percent share in the Krsko nuclear power plant.29
The further privatization of the generation sector is not currently a top political
priority and future plans are unknown.
In new EU member Bulgaria, the generation sector is in the process of being
privatized. Currently, 48 percent of the country’s installed generation supply is
owned by state-owned NEK EAD, including the nuclear power plant in Kozloduy
and all hydro power plants (HPP). The six thermal generators and several
combined heat and power (CHP) producers are either already privatized or
privatization is underway.
In Romania the privatization of the generation sector has not commenced in
earnest but is planned in the short to medium term with the first major power
plant most likely to be the Turceni lignite fired thermal power complex which is
expected to be privatization by the third quarter of 2007,30 following the
reorganization of the state-owned generation player Termoelectrica.
27 CEZ, “Foreign equity shares,”www.cez.cz/presentation/eng/instance_view.jsp?folder_id=12307&instance_id=94072, accessed March 13, 2007.
28 Economist Intelligence Unit: Slovakia: Energy and electricity profile,http://www.viewswire.com/article1310512316.html?pubtypeId=1155864115&text=mochovce, April 5, 2006
29International Energy Regulation Network, “Slovenia,”www.iern.net/country_factsheets/market-slovenia.htm, April 2006.
30, 31 Romanian Business Digest, Romanian Power Sector Overview – Launching privatization of the powergeneration, http://rbd.doingbusiness.ro/cet_power_privatisation_mart2007.htm#launching, March 2007
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
32 Cristian R. Stefan: Debt relief for Termoelectrica, Mesagerul Economic,http://www.ccir.ro/ccirweb/resources/menuPublicatii/uploads/Intranet%20Mesager%2015.pdf,April 17–23, 2006
33 International Energy Regulation Network, “Macedonia,”www.iern.net/country_factsheets/market-macedonia.htm, July 2006.
34 International Monetary Fund: Former Yugoslav Republic of Macedonia: Report on Observance of Standardsand Codes—Fiscal Transparency Module, Box 2. Privatization Process of the Electric Power Company of FYRMacedonia, https://www.internationalmonetaryfund.org/external/pubs/ft/scr/2006/cr06282.pdf,July 2006
35, 36 Economist Intelligence Unit: Albania: Energy provisionhttp://www.viewswire.com/article811937866.html? February 22, 2007
20 Varying Levels of Liberalization
Hidroelectrica (the owner of most hydro-power plants) plans to have privatized as
many as 150 micro HPPs out of its total 227 by the end of 2007.31 Privatization
has begun and is expected to continue in 2007.32
In the remainder of the Balkan generation sector (Slovenia, Croatia, Bosnia and
Herzegovina, Serbia, Montenegro and Macedonia), the sector is still mainly state
owned. In Croatia, state ownership is 95 percent; however, in other Balkan
countries, the generation sector is fully owned by the state or by state-owned
enterprises. Macedonia is the only exception, where privatization of the state-
owned power monopoly, Elektrostopanstvo na Makedonija (ESM), is well underway
since ESM was broken into distribution, generation and transmission segments in
late 200533, with separate supervisory and management boards, namely:
AD ESM, which owns and operates the electricity distribution assets; AD ELEM,
which consists of all electricity generation assets; and AD TEC Negotino, the
single oil-power plant in the country. The government successfully completed the
privatization of AD ESM in March 2006 by selling a 90 percent stake to the
Austrian EVN. AD TEC Negotino’s international tender was launched in April 2006.
The privatization of AD ELEM is planned for 2007.34
In Albania, the state power company, Korporata Elektroenergjitike Shqiptare
(KESh), current owns all domestic generation but is unable to satisfy the
electricity demand of the country, which has periodically suffered severe energy
shortages owing to the lack of investment in new generating capacity, rapid
increase in demand, droughts, and low levels of bill collection. Power shortages,
up to 5 hours a day in Tirana and 12 to 18 hours in the rest of the country, are
common in winter and during peak demand periods, disrupting business activity
and slowing economic growth.35 Privatization and direct foreign participation in the
generation sector are seen by the government as the solutions to electricity
shortages and are being pursued. Accordingly, an Italian consortium has been
selected to build a new 140 MW thermal power plant near the southern port city
of Vlora. Work could start in 2007 and finish within two years.36
3.2. Unbundling
The unbundling of an electricity market’s transmission/distribution network
and sales operations is a cornerstone to ensuring that effective competition
flourishes in a domestic market. It is vital that all market players can access
the transmission and distribution networks on equal terms with no preferential
treatment given to a single market participant. Consequently, accounting,
management, and/or legal unbundling is planned, underway, or complete in
all CEE countries. The rate of progress toward unbundling varies widely.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
21Varying Levels of Liberalization
The current status of the various countries in the region, whether EU member
states, EU candidate states, or simply neighboring countries to the EU, to a large
part determines the unbundling goals of each country. For EU member states,
Directives 2003/54/EC and 2003/55/EC require unbundling to be complete by July
1, 2007.37 These directives require that the TSOs and DSOs be unbundled at an
accounting, management, and legal level.
The legal unbundling of the TSO in each of the EU member states has already
occurred as it was due on July 1, 2004, with the exception of Bulgaria where
accounting unbundling took effect at the beginning of 200438 and legal unbundling
took effect on December 31, 2005.39
Some non-EU countries such as Macedonia and Albania40 have also legally
unbundled their TSOs.41
Organizational or functional TSO unbundling has been implemented in Croatia and
Montenegro, in Bosnia and Herzegovina and in Serbia it is underway. Legal
unbundling of the TSO to date has only taken effect in Croatia. Ownership
unbundling is underway in the whole region, but in Montenegro no ownership
unbundling activities have started at all.42
DSOs in EU member states are required to be legally unbundled by July 1, 2007,
but many DSOs in CEE EU member states have still not taken steps toward legal
unbundling of their DSOs.
Although all market participants plan full compliance with legal unbundling
requirements, it is unclear if many will be able to complete the process prior to the
deadline. Nevertheless, officially, compliance is expected by the July deadline.43
Non–EU countries’ unbundling requirements have not been clarified.
However, the Treaty Establishing the Energy Community44—signed October 25,
2005,45 among others by Albania, Bosnia and Herzegovina, Croatia, Macedonia,
37 DIRECTIVE 2003/54/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL concerning commonrules for the internal market in electricity and repealing Directive 96/92/EC, http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_176/l_17620030715en00370055.pdf, June 26, 2003
38 COMMISSION OF THE EUROPEAN COMMUNITIES, Regular Report on Bulgaria’s progress towardsaccession, http://ec.europa.eu/enlargement/archives/pdf/key_documents/2004/rr_bg_2004_en.pdf,October 6, 2004
39 Maria Manicuta (General Director ANRE Romania): Results of the EU Integration, Working Group Meeting, Sofia,http://www.erranet.org/index.php? February 23–24, 2006
40 COMMISSION OF THE EUROPEAN COMMUNITIES, COMMISSION STAFF WORKING DOCUMENT,Technical Annexes to the Report from the Commission on the Implementation of the Gas and Electricity InternalMarket, Brussels,http://ec.europa.eu/energy/electricity/benchmarking/doc/4/sec_2004_1720_en.pdf, January 5, 2005
41 Energy Community: Albania Country Report – 2006,http://www.energy-community.org/pls/portal/docs/55837.PDF, June 12, 2006; Energy Community: Former Yugoslav Republic of Macedonia - Country Report 2006,http://www.energy-community.org/pls/portal/docs/55841.PDF, June 12, 2006; SETSO (Southeastern Europe Transmission System Operators) Survey on SEE TSOs Status of Reorganization,http://www.seerecon.org/infrastructure/sectors/energy/documents/4ew/20041027%20AF5%20Benchmarking%20SETSO-SEETEC.ppt, October 27, 2004
42 Nenad Stefanovic: Status of reform of SEE electricity sector, Southeastern Europe Transmission System Operators (SETSO) Task Force,http://ec.europa.eu/energy/electricity/south_east/doc/6/setso_benchmarking.pdf, June 9–10, 2005
43 European Commission: Directorate-General for Energy and Transport,http://ec.europa.eu/energy/electricity/south_east/doc/6/etso_comments_options_paper.pdf, April 12, 2005.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Overview of Expected Date For Complete Market Opening
in the CEE Region, 2006
EST
LV
LT
PL
SLOHR
BIH SCG
AL
MNT
CZ
SK
HRO
BG
MK
Countries Official Degree of
Market Opening,
2006 (% of total
demand)
Czech Republic 74
Hungary 67
Latvia 76
Lithuania 74
Poland 80
Slovakia 79
Slovenia 77
Bulgaria 62
Romania 83
Estonia 12
Albania 8
Bosnia 0
Croatia 0
Macedonia 18
Montenegro 0
Serbia 0
Source: COMMISSION OF THE EUROPEAN COMMUNITIES: Technical Annexes to the Report from theCommission on the Implementation of the Gas and Electricity Internal Market,http://ec.europa.eu/energy/electricity/benchmarking/doc/4/sec_2004_1720_en.pdf, January 5, 2005
� July 1, 2007
� 2013
� January 1, 2015
22 Varying Levels of Liberalization
Montenegro, and Serbia—requires the implementation of the Acquis
Communautaire on energy, environment, competition, and renewables.
The Acquis Communautaire on energy is represented by Directives 2003/54/EC
and 2003/55/EC, meaning that legal unbundling requirements should be met in
these countries for both TSOs and DSOs; however, the exact deadline for the
completion of this unbundling is unclear.46 Presumably full legal unbundling would
be necessary prior to the full electricity market opening in these countries, which
is expected by January 1, 2015.
3.3. Market Opening
The degree of market opening of the CEE countries can be generally grouped
according to their currently-maintained and expected future relationships with the
EU. The countries of the EU-15, the 10 member states that joined on May 1,
2004, and Romania and Bulgaria, which joined on January 1, 2007, all now fall
under the 2003/54/EC Directive.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
44, 45, 46 Treaty Establishing the Energy Community,http://ec.europa.eu/energy/electricity/south_east/doc/treaty/treaty.pdf, October 25, 2005
23Varying Levels of Liberalization
Based on the EU Directive, the EU member states were obliged to open their
electricity markets to non-household customers by July 1, 2004; and fully open
their electricity markets by July 1, 2007. As illustrated in the table, many EU
member states of the CEE have achieved an official market opening degree
which exceeds 50 percent. Although the actual level of free market participation
by eligible customers is significantly lower, it is still on par with or above many
Western European countries’.
Of the CEE countries that are current EU member states, only Estonia has been
allowed to postpone full market competition. Estonia plans the opening of its
domestic energy market to large consumers (35 percent of the market) by 2009
and to all customers (household and non-household) by 2013.47 The derogation
was granted after negotiating a transitory period for market opening during their
EU accession. The transitory period was requested to ensure the continuation of
the national electricity production from oil shale, which is considered important
by Estonia in order to be less dependent on imported fuel and for maintenance
of local jobs in the mining sector.
As mentioned previously those countries that are not current EU member states
have independently signed the Treaty Establishing the Energy Community.
They are marked in orange in the accompanying map. Based on this treaty, each
contracting party is legally bound to ensure that from January 1, 2008 all non-
household customers, and from January 1, 2015, all customers, are eligible to
freely chose their electricity supplier.
47 Implementation Report,http://ec.europa.eu/energy/energy_policy/doc/10_internal_market_country_reviews_en.pdf,January 1, 2007.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Alb
ania
Bos
nia
Bul
garia
Cro
atia
Cze
chR
epub
licEs
toni
aH
unga
ryLa
tvia
Lith
uani
aM
aced
onia
Pola
ndR
oman
ia
Serb
ia a
nd M
onte
negr
o*Sl
ovak
iaSl
oven
ia
0
20
40
60
80
100
120
140
Tw
h
� Nuclear
� Coal
� Gas
� Oil
� Hydro
� Renewable
Source: International Energy Agency (2004) www.iea.org*Note: Due to the temporal proximity of the Serbia and Montenegro disunion and the unavailability of
up–to–date information the now two countries are often examined under one umbrella.
� Nuclear 18%
� Coal 57%
� Gas 8%
� Oil 2%
� Hydro 14%
� Renewable 1%
Source: International Energy Agency (2004)www.iea.org
Generation Mix of the CEE Countries, 2004
Generation Mix of the
CEE Region, 2004
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
25A Changing Generation Mix
In general, across the region, generation capacity to meet demand is sufficient
for at least the next decade. In fact, countries such as Czech Republic, Slovakia,
and Poland—and until recently Bulgaria—were significant net exporters and are
expected to be so for some time. On the other hand, some countries in the
region are experiencing and expected to continue to experience a shortage of
generation capacity; this is primarily evident in the Balkan region.
The generation mix in the region is historically based on thermal energy sources,
due to the abundance of coal, principally in Poland and Czech Republic. Nuclear
and gas generation is also important, in part due to historical ties with the former
Soviet Union and also due, in some cases, to limited domestic supplies of
primary fuels. Renewable energy sources represent a growing fraction of the
generation mix but, excluding hydro generation, the percentage of renewable
generation is extremely small. Renewable generation is expected to greatly
increase its share of the overall generation mix due to EU incentives and
regulations, and growing concerns regarding the environment and reliance upon
foreign, mostly Russian, primary energy sources.
4. A ChangingGeneration Mix
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
26 A Changing Generation Mix
CEE countries are expected to continue to converge with EU regulations and
directives concerning the electricity market. Therefore, both nuclear and
renewable sources are earmarked for important future roles while coal will
remain an important source for diversification and security of supply reasons.
4.1. Renewable Generation Expansion
The further development of renewable energy supplies promises improvements in
the security of supply due to a lower dependence on foreign primary-energy
supplies and reduction in the price volatility of electricity. Renewable energies also
reduce air pollution and greenhouse gas emissions, while facilitating improvements
in the economic and social prospects of rural and isolated regions. The cumulative
effect of all these benefits makes a robust case for renewables support.48 Although
it currently accounts for only 16 percent of the energy mix in the CEE region, with
hydro-based generation accounting for the bulk of it with a 15 percent share,
renewable generation is expected to increase rapidly in the next decade.
EU Directive 2001/77/EC has mandated that countries increase their use of
renewable energy sources and aims for energy consumption from green sources
to be 12 percent (excluding hydroelectric) for the entire EU by 2010.49
This figure is expected to significantly increase in the new EU energy policy due in
2007. Renewable generation (excluding hydro) in general is still not economically
feasible and requires appropriate state support in order to meet EU goals for the
development of renewable generation supplies. Consequently, all CEE EU member
states have implemented supportive policies to encourage renewable generation;
the design of each is decided at a national level and consequently varies by country.
The EU-15 member states were obliged to conform to Directive 2001/77/EC by
October 2003. The 12 member states that acceded to the EU on May 1, 2004,
and January 1, 2007, had to transpose the directive by their date of accession to
the EU. Those CEE states that are not yet members of the EU are not obliged by
the directive; nevertheless, many countries in the region are heavily influenced
by EU directives as aspiring EU member states.
The level of development of renewable energy supplies varies widely throughout the
CEE region depending upon the local natural resources and the implementation of
policies to support renewable generation. Some countries have rich hydro potential;
these include Albania, Bosnia and Herzegovina, Croatia, Lithuania, Romania, Serbia
and Montenegro, Slovakia and Slovenia. As a result, their renewable generation
goals have been set accordingly high. Other member states such as Hungary and
Estonia must rely on more expensive technology, such as wind and biomass, with
their renewable generation goals being set accordingly lower. The renewable
electricity directive has been a historical step, and a major driving force, in the
development of renewable electricity.
48 Commission of the European Communities, Brussels, Communication from the Commission to the Counciland the European Parliament. Report on Progress in Renewable Electricity, January 10, 2007
49 “Renewable energy: The promotion of electricity from renewable energy resources,http://europa.eu/scadplus/leg/en/lvb/l27035.htm, accessed March 13, 2007.
EST
LV
LT
PL
SLOHR
BIH SCG
AL
MNT
CZ
SK
H
RO
BG
MK
5.1%
7.0%
7.5%
31.0%
3.6%
33.0%
11.0%
33.6%
8.0%
49.3%
Renewable Generation Official Goal for Percentage of Gross Electricity
Consumption Generated from Renewable Sources by 2010
Official Goal:
Actual Stage:
� On track for meeting 2010 target
� Additional effort needed to achieve 2010 target
� Far from commitment
� No information available
Source:Commission of the European Communities, Brussels, Communication from the Commission tothe Council and the European Parliament. Report on Progress in Renewable Electricity, January 10, 2007
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
50 “Lithuania: Energy generation and use,”www.chasque.net/frontpage/energy/english/informes/lithuania.htm, accessed March 13, 2007.
51 European Bank for Reconstruction and Development, Renewable Energy Resource Assessment: Latvia,http://ebrdrenewables.com/sites/renew/Shared%20Documents/Country%20Notes/old%20website%20country%20profiles/Latvia.pdf, September 27, 2002
27A Changing Generation Mix
In the Baltic region the progress to date has been mixed. Modest progress has
been experienced in Lithuania and amendments made in 2005 to the renewable
energy support system must lead to tangible results soon in order to reach the
2010 target of 7 percent. In Lithuania the feasible hydro power potential is
estimated at 3.6 TWh per year. Currently the country’s hydro power output
averages 320 GWh per year, thus significant potential is not currently being used.50
In Estonia, an increase in hydropower and biomass has led to modest growth in
renewable generation; however the current support scheme does not seem
adequate to develop other sources such as wind. In Latvia, renewable generation
sources are very modest due to the lack of a stable support system. Latvia has
significant hydro power generation potential; approximately an additional 3.9 TWh
per year hydro power generation capacity is both technically and economically
feasible in the country.51
Country Renewable(excl. Hydro)
Hydro Conventionalthermal
Albania 0.0 5.4 0.1
Bosnia 0.0 6.0 6.6
Bulgaria 0.0 4.7 39.6
Croatia 0.0 6.4 5.5
Czech Republic 0.0 3.0 73.1
Estonia 0.1 0.1 19.9
Hungary 2.0 0.2 30.9
Latvia 0.1 3.1 1.5
Lithuania 0.2 0.9 18.1
Macedonia 0.0 1.5 5.0
Poland 0.2 3.6 140.2
Romania 0.0 19.9 34.9
Serbia 0.0 13.9 27.5
Slovakia 2.7 4.6 21.9
Slovenia 0.0 3.4 9.8
Overview of Renewable Generation Penetration
in the CEE Region, 2004 (TWh)
Source: UCTE, IEA
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
28 A Changing Generation Mix
Since 2004 Hungary has experienced strong renewable energy growth due to a
generous support system for renewables. This has resulted in significant biomass
and wind generation investments being undertaken or planned. The 3.6 percent
target set for Hungary in the EU Directive for 2010 was achieved in 2005. It is
expected that renewable generation sources will increase to 7.9 percent of total
generation by 2010,52 thus exceeding Hungary’s current target. Hungary is also
rich in geothermal energy potential; however, to date only one pilot facility is
under consideration.
Low levels of progress have been experienced in Poland, Czech Republic, and
Slovakia. In Poland, low green-certificate prices together with the lack of penalties
for non-compliance have led to a very modest increase in renewable generation.
Biomass and wind are increasing slowly due to increased quota obligations and
higher certificates prices; but faster renewable generation growth is expected in
the short to medium term. In Slovakia, poor support has been given to renewable
generation and consequently growth levels have been low. Much stronger
support is needed in order to reach the 2010 target of 31 percent.53 Slovakia has
significant growth potential in hydro power generation, current hydropower
facilities account for only 58 percent of total the domestic potential.54
52 Republic of Hungary, Minister of Economy and Transport, Report on the Status of Electricity ProductionBased on Renewable Energy sources , February 2006.
53 Commission of the European Communities, Report on Progress in Renewable Electricity, January 10, 2007.54 www.seas.sk/power-plants/hydro-power-plants-en/
29A Changing Generation Mix
Aside from strong political support for renewable energy development, the Czech
Republic has a very high renewable energy feed-in tariff, which sets the price of
electricity that the utility has to pay for renewable electricity from private
generators. Legal regulation has further enhanced the support for renewable
development. In general, the Czech Republic has established excellent
institutional support mechanisms for the promotion of renewable energy.55
According to these producers of electricity can choose from two support
schemes, fixed feed in tariffs or Green Bonuses. In case of the fixed price, the
electricity has to be purchased by the operator of the distribution system for a
regulated fixed price. While for Green Bonuses, the producer sells electricity on
the market for the wholesale price, and also receives a premium (Green Bonus)
per MWh from the distribution system operator.56
A high annual electricity demand growth of 4.5 percent in Slovenia is
overshadowing the modest increase in renewable generation sources; however,
Slovenia’s strong support scheme puts the country in a good position to reach its
2010 target of 33.6 percent.
Of the new EU member states, it is notable that Romania is the first country to
become an official member of the Renewable Energy and Energy Efficiency
Partnership (REEEP) on October 27, 2006.57 Participation requires Romania to
reach a target of having 33 percent of total energy consumption be from
renewable sources by the end of 2010. Although the share of renewable
generation has shrunk from 31.3 percent in 1997 to 29.9 percent in 2004,
Romania is on target to reach its target due to a strong support mechanism that
is expected to encourage growth in this sector in the medium term.58
In 2004, the majority of all electricity production from renewable energy sources
was generated through large-scale hydro power plants, although Romania is also
rich in potential wind and biomass energy sources, which to date have not been
developed, while additional sources of hydro are also available.
In 2002 Bulgaria passed the Ordinance on Setting and Applying Prices and Rates
of Electric Energy, a significant incentive that requires transmission and
distribution enterprises to purchase renewable power at preferential rates. As part
of its obligation to the European Union, Bulgaria will have 11 percent of its gross
electricity consumption generated from renewable energy sources by 2010.
Bulgaria is one of the top countries regarding potential wind energy development
(3,400 MW mid-term potential) and has a sizable reserve of geothermal energy
(200 MW from geothermal wells).
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
55 Renewable Development Initiative, „Czech Republic,”www.ebrdrenewables.com/sites/renew/countries/Czech%20Republic/default.aspx, accessed March 13, 2007.
56 Austrian Energy Agency: Energy Profile Czech Republic, Support Mechanisms and feed-in conditions for electricity from renewable energy sources,http://www.energyagency.at/enercee/cz/supplybycarrier.en.htm, February 27, 2007
57 Renewable Energy and Energy Efficiency Partnership, Press Releases: Romania Joins International RenewablesPartnership, http://www.reeep.org/index.cfm?articleid=1541, October 27, 2006
58 European Comission Directorate-General for Energy and Transport: Romania – Renewable Energy Fact Sheet,http://ec.europa.eu/energy/energy_policy/doc/factsheets/renewables/renewables_ro_en.pdf, January 2007
EST
LV
LT
PL
SLO
HR
BIH SCG
AL
MNT
CZ
SK
H
RO
BGMK
Source: World Nuclear Association, www.world-nuclear.org
� NPP in operation
� NPP decommissioning
� NPP expansion
State of Current and Planned
Nuclear Power Plants in the
CEE Region, 2006
Nuclear Electricity
Generation, 2006
Reactors Operable,
Jan 2007
TWh % No. MW
Bulgaria 18.7 44.0 2 1,906
Czech Republic 23.3 31.0 6 3,472
Hungary 13.0 37.0 4 1,773
Lithuania 15.1 70.0 1 1,185
Romania 5.1 8.6 1 655
Slovakia 16.4 56.0 5 2,064
Slovenia/Croatia* 5.8 42.0 1 696
* Slovenia and Croatia jointly operate the Krsko NPP.
Sources: Reactor data: WNA to 29/1/07, IAEA- for nuclear electricity production & percentage of electricity5/06., WNA: Global Nuclear Fuel Market (reference scenario) – for U, IEA
30 A Changing Generation Mix
In addition, considering that approximately 90 percent of the country’s land is
arable, agricultural land, or forests, the potential for the development of biomass
projects looks promising with about 3,400 MW of technical potential identified.59
4.2. Renaissance of Nuclear Generation
Currently around one-third of the electricity consumed in the EU comes from
nuclear, which is one of the largest sources of carbon dioxide (CO2)–free energy
in Europe. Nuclear power is seen by many as one of the ways of limiting CO2emissions within the EU and, for those member states that wish, is also likely
to form an important part of their energy plan.
Nuclear power is less vulnerable to fuel price changes than coal or gas-fired
generation, as uranium represents a limited part of the total cost of generating
nuclear electricity, and is based on sources that are sufficient for many decades
and widely distributed around the globe.60
In CEE countries nuclear power currently accounts for nearly 20 percent of
electricity generated across the region. Although expanding nuclear generation is
a controversial issue, most of the region does not face strong public opposition
to nuclear generation such as that seen in Western Europe.
Seven CEE countries (Bulgaria, Czech Republic, Hungary, Lithuania, Romania,
Slovakia and Slovenia) have nuclear generation facilities, all of which are state
owned. (Slovenia and Croatia jointly operate the Krsko nuclear power plant.)
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
59 Renewable Energy Initiative, ”Bulgaria,”www.ebrdrenewables.com/sites/renew/countries/Bulgaria/default.aspx, accessed March 13, 2007.
60 Communication from the Commission to the European Council and the European Parliament – An energy policy for Europe, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52007DC0001:EN:NOT, January 10, 2007
Bulgaria CzechRepublic
Hungary Lithuania Romania Slovakia Slovenia*
80
70
60
50
40
30
20
10
0
Perc
enta
ge
* Slovenia's Krsko nuclear power plant is owned and operated in 50 percent by Croatia.Source: http://www.world-nuclear.org/info/info.html
Percentage of Nuclear Generation for Total Generation, 2006
44.0
31.037.0
70.0
8.6
56.0
42.0
31A Changing Generation Mix
The legacy of Soviet-era reactors has resulted in many CEE countries having to
struggle with the costs and effects of implementing related EU safety standards
into local national laws. In May 2004 five Eastern European countries with
nuclear power plants (NPPs) joined the EU: Czech Republic, Slovakia, Slovenia,
Hungary, and Lithuania. All but Slovenia operate Soviet-designed reactors. One of
the conditions of EU accession laid down by the EU in 1997 was that all nuclear
plants concerned had to achieve Western safety standards within 10 years.
Encouraged by European Union-based funding assistance, Bulgaria’s Kozloduy 1
and 2 were closed on December 31, 2002 and Kozloduy 3 and 4 followed on
December 31, 2006. Slovakia agreed to close its older units (Bohunice 1 and 2)
by the end of 2006 and 2008 respectively, despite recently completing a major
refurbishing of them, including replacing of the emergency core cooling systems
and modernizing the control systems. Lithuania closed Ignalina 1 in 2005 and
agreed to close Ignalina 2 in 2009.
These closures are having a significant impact on not only the countries closing
these facilities but also their neighboring countries, as seen in the expected
electricity shortages in Albania due to its reliance upon electricity from
Bulgaria’s NPP.61
The remaining nuclear units of the countries of the CEE region were able to
successfully meet EU safety standards in the allocated time period and in an
economical fashion.
61 Economist Intelligence Unit: Albania: Energy provisionhttp://www.viewswire.com/article811937866.html?pubtypeId=930000293&text=energy, February 22, 2007
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Under Construction: first concrete for reactor poured, or major refurbishment under way.Planned: Approvals and funding in place, construction well advanced but suspended indefinitely.Proposed: clear intention but still without funding and/or approvals.Sources: Reactor data: WNA to 29/1/07., IAEA- for nuclear electricity production and percentage of electricity (% e) 5/06., WNA: Global Nuclear Fuel Market(reference scenario) – for U.
Reactors under Construction
Jan. 2007
Reactors Planned
Jan. 2007
Reactors Proposed
Jan. 2007
No.Generation
capacityNo.
Generationcapacity
No.Generation
capacity
Bulgaria 0 0 2 1,900 MW 0 0
Czech Republic 0 0 0 0 2 1,900 MW
Hungary 0 0 0 0 0 0
Baltic States 0 0 0 0Unknown 3,200 MW
Poland 0 0 0 0
Romania 1 655 MW 0 0 3 1,995 MW
Slovakia 0 0 2 942 MW 1 Unknown
Slovenia/Croatia 0 0 0 0 1 1,000 MW
Overview of Nuclear Generation Penetration in the CEE Region, 2006 (TWh)
As the previous table shows, nuclear electricity generation plays a significant role
in the national electricity generation mix of many CEE countries.
It is important to note that Slovenia jointly operates the Krsko nuclear plant with
Croatia and, owing to the resolution of a long-standing disagreement over
ownership of the plant, half of its production is sent to Croatia.
New nuclear generation capacities are expected in many CEE countries. The key
indicators of the future construction plans are summarized in the table below.62
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32 A Changing Generation Mix
62 World Nuclear Association, “World nuclear power reactors 2005–07 and nuclear requirements,”www.world-nuclear.org/info/reactors.html, January 29, 2007.
33A Changing Generation Mix
Six CEE countries have nuclear units either under construction, planned or proposed.
Reactors under Construction
� Romania has an additional unit under construction with a capacity of 655 MW
that is expected to start operation in 2007.
Planned Nuclear Reactors
� Bulgaria plans to construct a new NPP with two units of 950 MW each
in Belene. The project is in an initial construction phase with planned
commissioning in 2013–2014.
� ENEL’s privatization investment plan in Slovakia, approved in 2005, involves
investment to increase generating capacity and completion of Mochovce units
3 and 4 with a generation capacity of 942 MW each by 2011–12.
Proposed Nuclear Reactors
� The Romanian government plans the construction of three more nuclear
generation units (Unit 3 in 2013, Unit 4 in 2014 and Unit 5 in 2020) with a total
capacity of 1,995 MW.
� Slovenia has proposed building a new nuclear electricity generation unit of Krsko
2 with a generation capacity of 1,000 MW. It would be commissioned in 2017.
� In Hungary, Parliament endorsed plans to extend the lifetimes of all units of
the Paks NPP by 20 years, to 2032–37. There were plans to extend the reactor
with two additional units Paks 5 and 6 with a combined generation capacity of
of 950 MW but those were cancelled due to decreased power demand in the
early 1990s. In addition, in 1998 Paks proposed building a further 600–700
MW of capacity; however, the proposal was rejected by the national utility
MVM because it did not fit the government policy at that time. Nevertheless,
there are still ongoing discussions in Hungary about the construction of new
nuclear generation units although decisions have not yet been made.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
EST
LV
LT
PL
SLOHR
BIH SCG
AL
MNT
CZ
SK
HRO
BG
MK
Overview of Coal Generation
Penetration in the
CEE Region, 2006
Source: IEA; EURACOAL
� >90%
� 50%–90%
� 10%–50%
� <10%
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
34 A Changing Generation Mix
63 World Nuclear Association, “Emerging nuclear energy countries,” www.world-nuclear.org/info/inf102.html,February 2007.
64 Ibid.65 International Energy Association, “Member countries and countries beyond the OECD,”
www.iea.org/Textbase/country/index.asp. OECD/IEA 200666 BP, Statistical Review of World Energy, June 2006.
� In the 1980s Poland had four 440 MW Russian units under construction,
however, their construction was halted in 1990 and the components sold.63
� To frame the Polish and Baltic nuclear plans, in February 2007 the three Baltic
states (Estonia, Latvia, and Lithuania) and Poland agreed to build a new NPP
at Ignalina, initially with a generation capacity of 3,200 MW. As host, Lithuania
will have an ownership of 34 percent of the project and Poland, Latvia, and
Estonia 22 percent each. At least one unit of the project is expected to be
operating by 2015. E.ON has expressed interest in investing in such a unit.64
Rising gas prices and greenhouse constraints on coal and gas have combined to
increase the competitiveness of nuclear electricity generation; however, the plant
life extension programs are decreasing the need for new capacity investments.
Nuclear will be an important source of future electricity supply and area of
growth due to the requirement for lower CO2 emission levels, its competitive
pricing and security of supply benefits.
4.3. An Alternative Fuel Source to Maintain Security of Supply—Coal
Coal generation plays an important role in the diversification of the CEE regional
electricity supply. It accounts for 58 percent of the total CEE installed generation
capacity.65 In some countries in the region—including Poland, Estonia, and Czech
Republic—coal is the primary energy source for power generation.
Rising oil and gas prices and political instability in major gas-producing countries
makes coal an attractive alternative for reliable and cheap electricity. Furthermore,
coal has significant advantages that make it more reliable than some other
energy sources: it is easy to safely store and transport coal and locally-mined
coal has a stable price, resulting in a predictable generation cost. A major
disadvantage of coal-based generation is its high level of CO2 emissions;
however, this is expected to moderate in the long term as “clean” coal
generation penetrates the market.
As shown in the following table many CEE countries have significant coal
reserves. These include Bulgaria, Czech Republic, Hungary, Poland, and
Romania.66
Coal Reserves
Source:BP, Statistical Review of World Energy, June 2006.
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35A Changing Generation Mix
There are several ongoing coal- and lignite-based capacity additions planned
in the CEE region. These include:
� In Bulgaria, a 600 MW power plant at the Maritsa East complex67
� In Hungary, a 440 MW capacity addition at the Mátrai power plant.68
� In Poland, a 440 MW coal-fired plant at Halemba and a 100–200 MW
plant at Blachownia.69
� There are also capacity improvement projects ongoing in Serbia at the
Kolubara B thermal power plant with two units of 350 MW units70 and
the TPP Nikola Tesla Unit B3, with a 600 MW capacity addition.71
As a result, coal demand is expected to show moderate growth over the next
decades and maintain its important role in the power generation sector of the
region. According to industry forecasts, coal-based generation, in particular
lignite, will remain one of the most significant fossil fuels in the CEE region.
Overall in the CEE region, moderate growth is expected in coal-based generation.
Croatia, however, is an exception in that it is expected to significantly increase its
coal-based generation. Coal–based generation is expected to slightly fall in Poland
and Slovakia, and Montenegro is expected to switch from hard coal to lignite over
the next decade.
Million Tonnes 2005
CountryAnthracite and
Bituminous
Sub-bituminous
and ligniteTotal
Bulgaria 4 2,183 2,187
Czech Republic 2,094 3,458 5,552
Hungary 198 3,159 3,357
Poland 14,000 – 14,000
Romania 22 472 494
CEE total: 16,318 9,272 25,590
67 Bulgaria: Energy and electricity forecast, EIU Viewswire, www.viewswire.com, August 3, 200668 Hungarian Energy Office, www.eh.gov.hu/gcpdocs/200701/7402006mtraiermbvtsieng.pdf, December 20, 200669 Platts, Energy in East Europe, Issue 107, p. 19–20.70 South East Europe, “Description for energy sector,”
www.seenergy.org/index.php?/countries&stat=5&type=3&col=2117, accessed March 20, 200771 Athens Process Secretariat: Overview of Energy Developments in Southeast European Countries,
www.seerecon.org/infrastructure/sectors/energy/documents/ceer_country_overviews.pdf, October 2003
‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15
Bos
nia
Her
zego
vina
Cze
chR
epub
lic
Cro
atia
Hun
gary
Mon
tene
gro
Mac
edon
ia
Pola
nd
Rom
ania
Ser
bia
Slo
vaki
a
� Lignite
� Hard Coal
� Gas
� Oil
� MixedOil/Gas
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Fossil Fuel Breakdown of the CEE Countries, 2007–2015
Source: IEA; EURACOAL
36 A Changing Generation Mix
From the forecasts and the current trends it can be seen that coal–based
generation will play an important role in the CEE region’s power generation
structure due to security of supply and domestic job creation issues, even
though CO2 emission levels will have a negative impact on their attractiveness
and current low generation price level.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
EST
LV
LT
PL
SLOHR
BIH SCG
AL
MNT
CZ
SK
HRO
BG
MK
Overview of Natural Gas
Generation Penetration
in the CEE Region, 2006
Source: IEA; EURACOAL
� >30%
� 10%–30%
� 5%–10%
� <5%
37A Changing Generation Mix
4.4. Dependency on Natural Gas
Overall, the dependency on natural gas is moderate in the power generation sector
of the CEE region. CEE countries import gas from mainly the CIS member states.
The majority of the gas arrives in the region through Ukraine.
Because the CEE countries do not have significant gas reserves, and gas-based
power generation capacities are supplied mainly from imported gas, the
construction of new gas-based capacities often causes security of supply concerns.
Nevertheless, gas-fueled power plants have several advantages. They have a high
efficiency which can reach almost 58 percent and high generation flexibility since
generation loads can be decreased to 30 percent of the full load in a relatively
short period of time. Furthermore, the required capital expenditure is relatively
low compared to other technologies, and the emission level of a new combined-
cycle gas turbine (CCGT) plant is the lowest among the conventional thermal
power plant technologies.
The combination of these factors allows gas turbines to operate as scheduled
power plants. In addition, open–cycle gas turbines are excellent primary and
secondary reserves, due to their short start-up period while high–efficiency
combined cycle gas turbines can also be used for heat generation.
As indicated on the map, in Hungary and Latvia, gas-based generation represents
over 30 percent of the generation mix. Though gas-based power generation is
significant, neither country possesses significant gas reserves. Latvia imports
all required natural gas, while Hungary currently produces 20 percent of its gas
consumption domestically.
Besides Hungary and Latvia; Lithuania, Croatia, and Romania have notable
gas–based power generation capacities. In the other CEE countries, gas–based
power generation capacities represent a relatively low share of the generation
mix and are used primarily for balancing purposes.
With the exception of Czech Republic, Hungary, and Albania, no significant
increase in the natural gas generation base is expected. This is due mostly
to the fact that the countries in question usually have substantial coal reserves,
and several also have significant hydro power. Another reason for the limited
number of natural gas–based power plant projects is the intention of the
mentioned countries to make themselves as independent as possible from
Russian gas imports.
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38 íA Changing Generation Mix
In the Czech Republic, the ČEZ Group recently announced that it is considering
the construction of a 400 MW gas-fired power plant. The plant is expected to
decrease the country’s high dependency on coal-fired power plants especially
during peak periods.72
In Hungary, EMFESZ Kft. recently announced its plan to construct a CCGT power
plant in the northeastern part of the country. The power plant would start
commercial operation in 2011 with an 800 MW capacity, which EMFESZ is
planning to expand to 2,400 MW at a later date.73 E.ON is also planning to
construct a 400 MW CCGT power plant in Gönyü, in the northwestern part of
Hungary. The power plant will consist of two units that are planned to start
commercial operation in 2009 and 2011, respectively.74
In Albania, two developments are planned. A 100 MW thermal plant will be built
in Vlore, on the country’s southern coast. The plant, consisting of a 70 MW gas
turbine and a 30 MW steam turbine, will start commercial operation in early
2009. The plant will be fueled with distilled oil initially, but converted to natural
gas in the long term. Another natural gas–fueled power plant construction project
will also take place in Albania: a 1,200 MW CCGT plant, together with a LNG
terminal, is planned to be built by ASG Power at Fieri. The developers hope to
receive permission for the construction of the plant from the government in early
2007 and plan to start commercial operations by the end of 2009.75
Future growth of gas-fired generation would be significantly affected by the
possible implementation of new supply routes to the region. Two pipeline
projects are currently being considered: the Nabucco pipeline project and the
Blue Stream project. The Nabucco project is a planned pipeline to transport
natural gas from Turkey to Austria, via Bulgaria, Romania, and Hungary while
the Blue Stream pipeline has been constructed as a major trans–Black Sea gas
pipeline to carry natural gas from Russia into Turkey. Both of these pipelines
would provide a diversification option at least in the transportation route, allowing
a large stable supply of gas to enter to the southeastern European region and
ultimately Europe as a whole, thus ushering in a possible new wave of gas-based
generation expansion.
4.5. Emission Policy
Recently several rules and regulations have been introduced to decrease
emission levels and emphasize protection of the environment. One of the most
significant regulations affecting the power generation sector in the CEE region is
the Kyoto Agreement and the related European Union Emission Trading Scheme
(EU ETS), as well as generation facilities’ required compliance with EU
environmental standards.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
72 Energiainfó, http://arampiac.hu/index.xp?i=15247&m=10&t=1&s=153, accessed March 8, 2007.73 Source: Platts „Energy in East Europe” issue 107 (February 2nd, 2007)74 E.ON Hungária Zrt.’s point of view on Social Discussion Papers Concerning the Principles of the
2nd Hungarian NAP (April 25, 2006).75 Platts „Energy in East Europe” Issue 107 (February 2, 2007).
39A Changing Generation Mix
4.5.1. Kyoto Protocol
The Kyoto Protocol is an international treaty on climate change made under the
United Nations Framework Convention on Climate Change (UNFCCC). The Kyoto
Agreement is a commitment to the reduction of greenhouse gas emissions for
signatory nations. One regional economic integration organization (the EEC) and
168 countries have ratified the protocol to date.76 The EEC and 35 countries have
set specific greenhouse gas emission limits and reduction commitments. These
countries, listed in the protocol’s Annex I, are classified as developed countries
and are legally responsible to reduce their greenhouse gas emission levels.
The national targets of developed countries are listed in the protocol’s Annex B.
Three CEE countries (Montenegro, Serbia, and Bosnia and Herzegovina) have not
signed the protocol, while Croatia has signed but not ratified the protocol as it is
listed in Annex I. Croatia plans to ratify the Kyoto Protocol in the first quarter of
2007, and therefore take measures, in line with its Environmental Protection
Strategy and National Environmental Action Plan, toward fulfillment of
commitments under Annex B.77
Two CEE countries (Albania and Macedonia) have already ratified the protocol
without exact greenhouse gas emission reduction commitments. These countries
are classified as undeveloped countries and not legally responsible to reduce
their greenhouse gas emission level. The remaining CEE countries have declared
their commitment to greenhouse gas emission reductions. Bulgaria, Czech
Republic, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia have
undertaken an 8 percent greenhouse gas emission reduction compared to
the base year, while the emission reduction target of Hungary and Poland is
6 percent compared to the base year78. These 10 countries have already
implemented EU Directive 2003/87/EG and are actively involved in the trading
of greenhouse gas emission certificates under the EU ETS System.
4.5.2. EU ETS
The European Union Emission Trading Scheme (EU ETS) is the largest
multinational greenhouse gas emissions trading scheme in the world, and
came into effect January 1, 2005. All 27 EU member states, including 10 CEE
countries, are involved in the EU ETS and are required to surrender allowances
equal to their annual greenhouse gas emission. Each member state is required
to create a National Allocation Plan (NAP) for each trading period—2005–07 and
2008–12—including caps on greenhouse gas emissions for large fixed-point
sources. The EU ETS’s main objective is to create a price for carbon dioxide
emission through a market-based system and provide a cost-effective way
for EU member states to meet their Kyoto obligations.
76 The Kyoto Protocol entered into force on 16 February 2005, http://unfccc.int/kyoto_protocol/items/2830.php77 United Nations Framework on Climate Change, Level of emissions of the base year for Croatia,”
http://unfccc.int/resource/docs/2006/sbi/eng/misc01.pdf, April 20, 200678 http://unfccc.int/kyoto_protocol/background/items/3145.php, accessed March 20, 2007
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Serbia
Croatia
Ratified
Albania
Moldova
Republic of Macedonia
Kyoto Protocol and European Union Emission Trading Scheme
Membership Summary in the CEE Region, 2006
Signed but not ratified
Not signed and not ratified the Kyoto Protocol
Bosnia and Herzegovina
Montenegro
Member States of EU ETS
Romania Bulgaria
Czech Republic Hungary
Slovakia Estonia
Latvia Poland
Slovenia Lithuania
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40 A Changing Generation Mix
41A Changing Generation Mix
4.5.2.1. First Trading Period
Eight CEE countries were initially involved in the first trading period of the
EU ETS. The main indicators of their trading activity are summarized in the
table below. Romania and Bulgaria joined the EU, and thus the EU ETS on
January 1st 2007. The Bulgarian and the Romanian National Allocation Plans
(NAP) for 2007 have been submitted but have not yet been approved by the
European Commission.
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States
Number of
Installations
Covered
CO2 Allowance
per Year of the
Period 2005–07*
(Million Tonnes
of Allowances)
Verified
Emissions
(Million Tonnes
of CO2)
Overallocation
%
EU
ETS
par
ticip
ants
CzechRepublic
395 96.6 82.5 17.09
Estonia 44 18.7 12.6 48.41
Hungary 234 30.2 26.0 16.15
Latvia 94 4.0 2.9 37.93
Lithuania 99 11.4 6.6 72.70
Poland 1,088 239.1 200.8 19.07
Slovakia 175 30.3 25.2 20.24
Slovenia 98 8.6 8.7 -1.15
RomaniaRatified the Kyoto Protocol on March 19, 2001; will enter the EU ETS in 2007
BulgariaRatified the Kyoto Protocol on August 15, 2002; will enter the EU ETS in 2007
*Some countries do not strictly average their Phase 1 allowances over three years, and havecorrespondingly greater 2005 allocation.
Source: European Environment Agency, Greenhouse Gas Emission Trends and Projections Europe in 2006,http://reports.eea.europa.eu/eea_report_2006_9/en/eea_report_9_2006.pdf, accessed March 13, 2007.
Key Figures of the EU Emission Trading Scheme for 2005–2007
42 A Changing Generation Mix
As the previous table demonstrates, CO2 allowances were overallocated
in all the CEE countries with the exception of Slovenia. The overallocation level
on a relative basis (in percentage) was the highest in the case of the Baltic
states.79 The main reason for the high level of surpluses in CEE countries’ Kyoto
targets is that the base year of the treaty was before their transition from a
centrally-planned economy. The base year for the greenhouse gas emission
reduction commitment was 1990 for most of the CEE countries. However,
several exceptions were approved such as in case of Hungary (average 1985–87),
Poland (1988), and Slovenia (1986). Following the transition, the importance of
the heavy industry sector decreased in the CEE countries’ economic structures
and a service-based economy gained strength, thus decreasing CO2e emission
levels. In addition, significant improvements in the efficiency of the electricity
network were made while old power plants were decommissioned or upgraded
to meet EU environmental regulations.
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
79 Carbon Dioxide Equivalent (CO2e): A metric measure used to compare the emissions from variousgreenhouse gases based upon their global warming potential (GWP). Carbon dioxide equivalents arecommonly expressed as 'million metric tonnes of carbon dioxide equivalents (MMTCDE)'.The carbon dioxide equivalent for a gas is derived by multiplying the tonnes of the gas by the associatedGWP. MMTCDE = (million metric tonnes of a gas) * (GWP of the gas). –European Environment Agency,http://glossary.eea.europa.eu/EEAGlossary/C/carbon_dioxide_equivalent
4.5.2.2. Second Trading Period
According to the EU emission timeline, July 6, 2006, was the deadline for the
submission of the first draft of the National Allocation Plan for the second trading
period, 2008–2012 (NAP II.). As of January 1, 2007, the European Commission has
officially accepted four of the NAPs II in the CEE region (Latvia, Lithuania, Slovenia,
and Slovakia). The proposed and approved caps for the second trading period are
presented in the table below. In case of Czech Republic, Estonia, Hungary, Poland,
and Romania the NAPs for the second trading period have already been submitted
to the Commission and are undergoing the approval process.
The NAP II for Bulgaria, as of Jan. 1st, 2007, is still in the public consultation phase.
In the next trading period (2008–2012) the allocation surplus in the CEE region
is expected to remain, but to a lower extent than that experienced in the first
trading period.
4.5.2.3. The Potential Effect of the EU ETS on the CEE Region
Due to the generous allocation methods, the CEE countries have a major surplus
of greenhouse gas emission certificates, with their surplus estimated to be
1.2 billion tonnes of CO2e80 for the first Kyoto commitment period of 2008–12.
This surplus might exceed the global demand for greenhouse gas emission
credits and therefore has a significant impact on the price of emission
certificates. As such, CEE countries are in a net seller position and are not
interested in low-price greenhouse gas emission certificates; therefore, CEE
countries are expected to sell only 20 to 30 percent of their surplus in order
to maximize their revenue and keep greenhouse gas emission prices high.
43A Changing Generation Mix
80 Marcel Hanakam: The Future of Emission Trading – Options and Challenges for CEE Countries, ClimateTechnology and Energy Efficiency – the Engine for Economic Growth and Innovation,http://www.resourcesaver.com/file/toolmanager/O105UF1859.pdf, October 21–25, 2006
Source:http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/136&format=HTML&aged=0&language=EN&guiLanguage=en,Argus Global Emissions, February 2007, p. 12
Member StateProposed Cap 2008–12
(Million tonnes of CO2)
Cap Allowed 2008–12
(Million tonnes of CO2)
Latvia 7.7 3.3
Lithuania 16.6 8.8
Slovakia 41.3 30.9
Slovenia 8.3 8.3
Czech Republic 101.9 Not approved to date
Estonia 24.6 Not approved to date
Hungary 30.8 Not approved to date
Poland 257.3 Not approved to date
Romania 97.5 Not approved to date
Bulgaria Under public consultation, not notified to the Commission
Key Figures of the EU Emission Trading Scheme for 2008–2012
© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
EST
LV
LT
PL
SLOHR
BIH SCG
AL
MNT
CZ
SK
HRO
BG
MK
EU ETS Impact Based on
Domestic Generation Mix
Source: IEA
� High: thermal electricity
generation provides more
than 60% of the total
generation supply
� Medium: thermal electricity
generation sources provide
between 35–60% of the total
generation supply
� Low: thermal electricity
generation is less than 35% of
the total generation supply
� Non-EU ETS member states
44 A Changing Generation Mix
81 Clean Development Mechanism, Wikipedia,http://en.wikipedia.org/wiki/Clean_Development_Mechanism, accessed March 20, 2007
While the EU ETS is expected to increase generation prices in Western European
countries, as a result of the significant overallocation in the CEE region no
significant price effect is expected. In the long term, the overallocation is
expected to be eliminated, and the greenhouse gas emission credit price will
become an important factor in electricity prices. In this case the differences of the
generation mix of the countries may come into play; this transformation will mostly
affect those countries whose generation is based on coal-fired power plants. Those
countries include Poland, Estonia, and Czech Republic, shown in orange on the
accompanying map. The abatement of overallocation will have a moderate impact
on the Hungarian, Romanian and Bulgarian electricity generation price levels, due to
a high thermal generation capacity of around 50 percent. Those CEE countries
(shown in green on the map) whose electricity generation is based on non-thermal
generation might gain a competitive advantage with this transformation. The non–
EU member states (in yellow) are not directly concerned with the price level of the
greenhouse gas emission certificates since they are not part of the EU ETS to date.
4.5.3. Kyoto Mechanisms
The underlying idea of greenhouse gas emission trading is that those companies
that can reduce their emissions with a unit cost lower than the market price of
an allowance are expected to invest in emission abatement projects. Joint
Implementation (JI) and the Clean Development Mechanism (CDM) are the two
project-based mechanisms of the Kyoto Protocol that may be used by Annex I
parties to fulfill their Kyoto targets. Because Western European countries have
a shortfall of greenhouse gas emission certificates and new member states have
significantly lower needs for CO2 abatement, it is expected that several JI and
CDM projects will be implemented in the CEE regional electricity market.
Western European energy players that are entering the CEE region, and
investment in lowering emissions in the CEE region can directly contribute these
savings to their facilities in Western Europe.
4.5.3.1. Joint Implementation
JI is available for those 10 CEE countries that are part of the EU ETS and for
Croatia. JI is a Kyoto mechanism allowing industrialized countries (listed in Annex I)
to invest in greenhouse gas emission-reducing projects in another industrialized
country as an alternative to meeting emission reductions in their own countries.
Romania, Estonia, Bulgaria, and Poland have the highest JI investment potential,
due to generation technology that is outdated and has a relatively high CO2eemission level.
4.5.3.2. Clean Development Mechanism
Montenegro, Serbia, Bosnia and Herzegovina, Albania, and Macedonia qualify for
the CDM program. CDM is a Kyoto mechanism allowing industrialized countries
to invest in emission-reducing projects in developing countries. CDM allows for
a drastic reduction of costs for the industrialized countries, while achieving the
same amount of greenhouse gas emission reductions as without the CDM.81
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45A Changing Generation Mix
Future investment in the above-listed CEE countries will be thus encouraged to
replace outdated generation facilities and replace the dominance of coal and
lignite–based generation with gas-fired, nuclear, wind, hydro, biomass or other
low emission–based generation units.
CEE countries can expect significant investments through JI and CDM projects
from Western European countries and, therefore, the efficiency of the power
generation sector is expected to increase. As a result, the competitiveness of the
electricity market in the CEE region is expected to increase over the medium-and
long-term.
EU Environmental Standards
The EU has made a commitment to integrate environmental concerns into all
relevant policy areas, including energy. This work is an ongoing process requiring
efforts in a number of areas, including setting ambitious targets for increasing
energy efficiency and setting European Union–wide environmental standards
regarding the electricity generation industry. These include amongst others, strict
emission levels for SO2, NOX, mercury, and CO2.
Many power plants in the CEE region do not currently comply with EU
regulations concerning pollution limits, and significant investments are required
to upgrade these power plants.
On October 19, 2006, the European Commission adopted the Energy Efficiency
Action Plan (COM(2006)545)82, containing measures that would put the EU well
on the path to achieving a key goal of reducing its global primary energy use by
20 percent by 2020. If successful, this would mean that by 2020 the EU would
use approximately 13 percent less energy than today, saving EUR 100 billion and
around 780 million tonnes of CO2 each year.83
Priority Action 3 of the Action Plan deals with making power generation
and distribution more efficient. Working closely with the energy supply and
distribution industry and with the Council of European Energy Regulators
(CEER) and the European Regulators Group for Electricity and Gas (ERGEG), the
European Commission will also develop guidelines on good operating practices
for existing capacities to raise average generation efficiency for all power plants
and agree on guidelines on good regulatory practices to reduce transmission
and distribution losses.84
82 European Commission Directorate–General for Energy and Transport, Action Plan for Energy Efficiency:Realising the Potential–COM(2006) , October 19, 2006
83 COMMISSION OF THE EUROPEAN COMMUNITIES: Action Plan for Energy Efficiency:Realising the Potential (COM(2006)545 final),http://ec.europa.eu/energy/action_plan_energy_efficiency/doc/com_2006_0545_en.pdf,October 19, 2006
84 European Commission, “Energy for a changing world,”http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/29&format=HTML&aged=0&language=EN&guiLanguage=en, March 12, 2007
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5. Towarda Single Market
47Toward a Single Market
A key objective of the EU energy policy is to encourage a single integrated
European energy market. However, to achieve an integrated Pan-European
electricity market, considerable challenges will need to be overcome. These
include subregions that are separated by insufficient transmission capacity, price
differences between regions, and the many different countries that comprise the
European market, each with its own approach and varying levels of protectionism
for their national players.
In addition to the infrastructure necessary to construct interconnections between
the various CEE countries, there is also a need for agreement and regulation on
tariffs and prices. Critical to these aims would be the development of a unified
regulation for the organized markets across the EU and the CEE region.
This regulation would create a truly unified Central and Eastern European energy
market and allow individual countries to transact efficiently and exploit differences
in supply and demand between themselves, other CEE countries, and countries
of the greater European region.
Currently the CEE electricity market comprises the individual national markets
of the related countries that form the CEE region. In many markets, electricity
prices are set by long-term Power Purchase Agreements (PPA) and national
regulatory authorities, resulting in widely varying electricity prices between
countries. Some countries’ liberalized markets are expanding, but they are still
limited by the above-mentioned factors. In many CEE countries liberalized market
traders and consumers are fighting for capacities, since significant unused
capacities are locked in PPAs, while in other countries the government or
incumbent electricity player still directly controls or heavily influences electricity
prices. Long-term international contracts are also blocking access to cross-border
capacities. Therefore, the auctioned capacities that are accessible for the
liberalized market are low. On the other hand, the emission costs, low efficiency
levels and decommissioning of outdated power plants are expected to increase
the generation prices.
5.1. Cross-Border Capacities
Cross-border electricity trading plays an important role in the formation of an
integrated electricity market. In order to ensure the possibility of trading
between countries, significant steps have been made, such as the creation
of the Cross-Border Trading Mechanism (CBT Mechanism) and the increasing
transparency of the cross-border capacity allocations methods in the region.
As well, the expansion of the physical cross-border capacities is also ongoing.
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Electricity Grid Synchronization in the CEE Region, 2006
� UCTE member
� Synchronous with UCTE
but not member
� IPS/UPS member
� NORDEL
� Non–UCTE member
Source: UCTE
48 Toward a Single Market
The majority of the countries of the CEE region are members of the Union for the
Co-ordination of Transmission of Electricity (UCTE). The UCTE is the association
of transmission system operators in mainland Europe. Membership in this
association means that the electricity systems of the member countries are
synchronized and direct trading is possible. In the CEE region, only the Baltic
countries and Albania are not UCTE members. The overall UCTE network
(including Western Europe) serves about 450 million people with an annual
electricity consumption of approximately 2,300 TWh.
As indicated on the map, the Baltic countries are members of the CIS IPS/UPS.85
The examination of the possibility of the connection of the IPS/UPS system to
the UCTE is ongoing. The synchronization of the two systems would result in a
single system for 800 million people through 13 time zones and would include
800 GW of generation capacity. The final report of the examination of the
connection of the two systems is expected to be issued in 2008.86 Considering
South Eastern Europe, the Turkish power system is currently not synchronous
with the European region, but there are many interconnections with surrounding
countries such as to Azerbaijan, Armenia, Bulgaria, Georgia, Iran, Iraq and Syria.
Turkey’s rapid growth in electricity demand, which has led to an almost doubling
of installed generating capacity over the past decade, is expected to continue in
the foreseeable future.87
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85 IPS/UPS system comprises of the power systems of the Baltic States (Latvia, Lithuania, and Estonia),Armenia, Azerbaijan, Belarus, Georgia, Moldova, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Ukraine andUzbekistan, www.ucte-ipsups.org
86 www.ucte-ipsups.org, accessed February, 200787 Feasibility study : Synchronous interconnection of the power systems of IPS / UPS with UCTE,
Preparation of electrical integration of Turkey has started, UCTE Annual Report 2005,http://www.ucte.org/pdf/Publications/2005/Report_2005_4.pdf, accessed April 2007
49Toward a Single Market
In order to facilitate and encourage electricity trading throughout the UCTE
network, the inter–TSO (Transmission System Operator) CBT Mechanism was
created. It has two main objectives. First, it compensates countries for the
transmission flows that cross their territory; second, it compensates for losses
caused by transit flow. This mechanism aids in the creation of the common
European electricity market by harmonizing the cross- border trade in EU
member countries. It helps to ensure that generators do not suffer a competitive
disadvantage because of their network use. In other words, a consumer in the
EU can receive domestic electricity or imported electricity for the same network
usage fee, thus encouraging higher levels of competition.
Another key element to creating a single unified market is the transparent nature
of cross-border allocation within the UCTE region. The transparency and the
accessibility of the CEE region’s cross- border capacity allocations have improved
significantly over the past few years. During the 1990s the surplus cross-border
capacities were less available; however, now the majority of the TSOs auction
their unused capacities. Simultaneously, the administrative burden on participants
of the capacity auctions has decreased, and the rules and regulations have
become more standardized. Daily explicit capacity auctions are used to allocate
some cross-border capacities in the region, but the majority of the countries still
split their capacities between each other and auction it separately..88
Though there are already significant cross-border capacities in the region,
unintended transit flows89 and international long-term cross-border contracts
are decreasing the available cross-border transmission capacities.
88 SETSO TF Sub working Group: Network Access, Congestion Management and Power Flows, Overviewof currently applied methods for cross-border transmission capacity allocation in South-east Europe,SITUATION OCTOBER 2005, http://ec.europa.eu/energy/electricity/south_east/doc/7/setso_cm_status.pdf,November 23–25, 2005
89 Unintended transit flow: by–product of the dispatch of electricity down an intended path on electric transmissionsystems. The Energy and Power Risk Management Glossary, Third Edition, accessed March 20, 2007
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Cross Border Capacities Allocation Methodology and
the Directions of Major Power Flows, 2006
Source: ETSO; Christine Baierlein: Cross border allocation procedures in theEast European market, Cross Border Power Trading, Frankfurt, March 16, 2006
� Pro Rata
� Auction
� No Defined
Procedure
� Power Flow
MW Cross-border
capacities to
neighboring
countries
1.000 MW
1.000 MW
780 MW
1.000 MW
2.000 MW 600 MW 410 MW
2.000 MW
2.200 MW 680 MW
1200 MW 1100 MW
1660 MW 880 MW
2200 MW
350 MW 900 MW
900 MW
1100 MW
800 MW
1000 MW
400 MW 600 MW
1300 MW 950 MW
700 MW 900 MW
900 MW 600 MW
400 MW 900 MW
750 MW
750 MW
850 MW
1000 MW 650 MW 200 MW
250 MW
100 MW
600 MW
600 MW
600 MW
750 MW
750 MW
700 MW
600 MW
1.400 MW
50 Toward a Single Market
Beside the increasing use of the surplus capacities, new cross- border
transmission lines are planned to be implemented. According to the UCTE
System Adequacy Forecast, over the next 14 years 16 400 kV of cross-border
transmission lines will be added in the CEE region.
By adding these lines to the CEE electricity network, both cross- border
transmission capacities and supply security will significantly increase in the
region. The EU is also supporting these network capacity additions through
the use of structural funds.
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51Toward a Single Market
90 Economist Intelligence Unit: Czech Republic energy: Bourse free to start power trading,http://www.viewswire.com/article51899390.html?pubtypeId=1155864115&text=bourse, February 8, 2007
Countries Voltage LevelDate of Planned
Commissioning
Austria–Czech Republic 400 kV 2008
Croatia–Hungary 400 kV 2008
Serbia–Albania 400 kV 2008
Hungary–Romania 400 kV 2008
Macedonia–Bulgaria 400 kV 2008
Romania–Moldova 400 kV 2008
Macedonia–Serbia 400 kV 2008–10
Macedonia–Albania 400 kV 2010
Romania–Serbia 400 kV 2010
Serbia–Hungary 400 kV 2010
Slovakia–Hungary 400 kV 2011
Slovenia–Hungary 400 kV 2011
Slovakia–Austria 400 kV 2012
Slovakia–Ukraine 400 kV 2013
Slovakia–Poland 400 kV 2020
Greece–Macedonia 400 kV Undefined
Source: UCTE – System Adequacy Forecast 2006–2015, http://www.ucte.org/pdf/Publications/2006/UCTE-SAF2006–2015.zip, December 30, 2005.
5.2. Power Exchanges
Over the last decade, due to ongoing liberalization of the electricity markets in the
CEE region, a small number of spot electricity exchanges have started operating.
Currently there are four operating spot electricity exchanges in the CEE region: in
Poland, Slovenia, Romania, and Czech Republic. There are also ongoing discussions
over the establishment of a spot electricity market in Hungary, while there are
discussions to cease operation of the current exchange in Czech Republic and
replace it with a new one to be called the Prague Energy Exchange.90
As seen on the accompanying map, the spot-traded volume is very low on the
four exchanges. However, it is generally expected to grow gradually as
liberalization of the markets and the expansion of cross-border capacities gain
momentum, and market-based allocation of cross-border capacities becomes
the norm. Despite their low market share, the exchanges are concentrating on
developing their operations through the expansion of their offered services with
the introduction of new products. These new products involve, amongst others,
derivatives, green certificates, emission allowances, and natural gas.
Planned new cross-border transmission lines in the CEE region
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EST
LV
LT
PL
SLO
HR
BIHSCG
AL
MNT
CZ
SK
H
RO
BG
MK
CEE Electricity Exchanges, Spot Trading Volumes and Volumes
as Percentage of National Consumption, 2005
Source: Exchanges, UCTE
� 0–1%
� 1–3%
� 3–6%
� No Electricity Exchange
Gielda Warsaw, Poland1.9 TWh/1.5%
OPCOM Bucharest, Romania1.7 TWh/3.4%
OTE Prague, Czech Republic0.4 TWh/0.7%
Borzen Ljubljana, Slovenia0.04 TWh/0.3%
52 Toward a Single Market
To improve the competitiveness of the CEE region’s electricity exchanges, several
areas must be addressed. These include simplifying transaction procedures (e.g.,
harmonizing operational platforms and scheduling processes); using standard
contracts to facilitate financial trading; reducing credit risk by encouraging
effective clearing solutions91; establishing effective forward-market reference
prices; maximizing cross-border transmission capacity allocation; making capacity
rights firm; and addressing the dominant position of vertically-integrated national
generators and suppliers.
Due to the issues listed above, the price-setting mechanisms of the
exchanges are currently not truly reflective of the national electricity prices
but will increasingly become so over the medium term.
5.3. Power Purchase Agreements
Long-term power purchase agreements (PPAs) exist throughout the Central and
Eastern European region, but Poland and Hungary are the two major markets
where PPAs are of the most significance.
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91 European Federation of Energy Traders, Obstacles to Eletricity Trading in Central & Eastern Europe,“www.efet.org/Download.asp?File=4122, September 200.
53Toward a Single Market
These agreements were entered into at the beginning of the 1990s and some are
valid until 2030. Currently PPAs cover 80 percent of the Hungarian and around
30 percent of the Polish power market.
In the CEE region PPAs were a common way to ensure investment in the power
sector, but now are considered by many industry players as an obstacle to the
development of competition and market liberalization. It is generally felt that PPAs
have helped slow the pace toward liquid wholesale markets and, therefore, the
success of the liberalization process.
According to the 4th EU Benchmarking Report, the EU Annual Reports on the
Implementation of the Gas and Electricity Internal Market (January 2005), all new
member states in the CEE region are classified as having major obstacles to
competition due to the persistence of non-market-based long-term power
purchase agreements.92
The effect of PPAs is such that, first, a large share of generation capacity is
absorbed by (reserved for) the regulated market. Second, the regulated market,
by fully exploiting the contracted capacities, satisfies most of the demand in the
market, leaving limited room for the liberalized segment.
Third, the European Commission looks at the agreements as price distortions
and in some cases direct state aid, which are contrary to EU regulations.
Investigations into the agreements are still ongoing, after proceedings were
launched at the end of 2005.
According to the European Commission the PPAs should be cancelled voluntarily
and the generators will receive compensation. Companies that do not accept the
voluntarily cancellation can be challenged in court.
The Hungarian government is expected to make a decision concerning the
agreements soon; however, the actual termination of the PPAs may require
some time.
In December 2006 the Polish ministry council agreed to a proposal concerning
the aspects and costs of PPA termination. The new proposal has yet to be
accepted by the Polish parliament. According to the Polish energy regulator (URE)
the PPA termination is not expected to be implemented until July 2007.93
For cancellation of the long-term agreements the generators will be awarded
expropriation-related compensation-type payments.
92 http://www.tu-dresden.de/wwbwleeg/publications/wp_ee_06_hirschhausen_zachmannSESSA_consensus_paper.pdf
93 Agata Gajda, Marja Salonen Pettersen and Richard Sverrisson: Power Purchase Agreements – the last vertiges of regulated markets, Montel Powernews, Vol. 6. No. 1, February 2007, p. 36.
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54 Toward a Single Market
94 Minister of Economy, Labour and Social Policy,“Programme for restructuring of the long-term power purchase agreements,”www.mgip.gov.pl/NR/rdonlyres/0FFB33DA-53B8-4447-8A1C 8C99B44EF12E/0/6309_program_kdt_ang.doc,July 23, 2003.
95 Montel Powernews, Vol. 6. No. 1. p. 36.96 Georg Zachmann: Convergence of Electricity Wholesale Prices in Europe?,
http://www.diw.de/deutsch/produkte/publikationen/diskussionspapiere/docs/papers/dp512.pdf,September 2005
The basis for the calculation of the compensation will be the value of stranded
costs rather than the value of the generators’ debts, an essential condition of
equal treatment of the projects covered under the PPAs, all with differing
financing structures. Stranded costs are defined as the difference between the
value of the assets of the generating units covered by the PPAs and achieved on
the basis of PPAs, and the value of the same assets under market conditions
after cancellation of the PPAs. Payment of the compensation is currently
estimated based on unverified data at approximately PLN 14–16 billion (EUR
3.6–4.1 billion).94
If the Polish case is anything to be followed, then the CEE region’s EU member
states can expect the termination of PPAs in the medium term, which is
expected to give a boost to the region’s wholesale markets.95
5.4. Price Convergence
Electricity markets all over Europe have undergone important changes in recent
years. This progress has been due mainly to European level economic policies
that aim to create a single sustainable European market for goods and services
and thus for electricity, as well. The spotlight of these policies is to enhance
competition and reap gains from international cooperation through such means as
combining different national consumption and production patterns, and reserve
sharing. A common electricity market is expected to increase welfare by ensuring
security of supply and improving allocation through more cost-reflective prices.96
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55Toward a Single Market
With relation to the CEE region, the main Western European price-setting
organized markets are the EEX in Germany and NordPool in Scandinavia.
These two markets are expected to play the leading price-setting role in the CEE
regional electricity market in the future. The convergence of electricity prices in
the CEE region will occur gradually, with convergence in the geographically close
countries first and the furthest countries last. The rate of convergence will
depend on the following factors:
� The successful establishment of local electricity spot markets since
power exchanges increase liquidity and transparency in the energy sector,
thus supporting the development of a universal electricity market.
� Efficient and sufficient interconnections between states. Industry trends show
a general increase in cross- border capacities throughout the whole continent
with corresponding transparent allocation procedures.
� The cancellation of long-term PPAs.
� The fact that 10 of the 15 countries of the CEE region are EU members, and
most of the others are predicted to become EU members within a decade.
Because EU-level regulation is highly respected in the region, it is expected
that electricity industry regulation will encourage legal standardization of the
regional markets.
� Market liberalization.
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57What KPMG firms can offer
KPMG firms have a strong audit, tax, and advisory client base including regional
and national champions in many European, African, Asian, and North American
electricity market companies. KPMG’s Energy & Natural Resources practice–of
which Power & Utilities plays a leading part–is one of the fastest growing and
most successful sectors within the KPMG network of member firms.
Our Approach
Our relationship in the Power & Utilities sector is marked by total commitment
to serving our firms’ clients and understanding their complex and constantly
changing markets. This commitment is the product of three key attributes:
� Local delivery supported by our global approach to consistency
� Industry focus and insights
� Distinctive capability–the KPMG Way.
We strive to be the best in everything we do, turning our experience and industry
knowledge into real value for our firms’ clients.
Local Delivery Supported by Our Global Approach to Consistency
We recognize that leading Power & Utilities companies have diverse operations
and issues, each of which requires a high standard of service delivery.
We continually aim to achieve a consistently high standard of service delivered by
local teams to a wide range of clients, irrespective of local or regional boundaries.
Industry Focus and Insights—How We Add Value
We can add value for our firms’ clients only if we truly understand their industry.
KPMG’s Power & Utilities practice therefore invests significant amounts of time
and resources in continuously developing and deepening that understanding.
We have an active program of industry involvement at both national and
international levels, taking part in debate and contributing our own thought
leadership on many issues.
KPMG’s vigorous and ongoing commitment helps our people stay at the
forefront of progressive thought for the industry. It also enables them to provide
a strategic approach for our firms’ Power & Utilities clients.
Distinctive Capability—The KPMG Way
With deep industry knowledge and experience, KPMG’s professionals work
together to deliver clear and informed options based on insights and advice that
can translate into bottom-line value for leading Power & Utilities companies.
6. What KPMGfirms can offer
58 What KPMG firms can offer
Centers of Excellence
KPMG’s Global Power & Utilities Centers of Excellence comprise audit, regulatory,
taxation, financial, and risk advisory professionals. Our people bring to the industry
professional advice and support that addresses the issues and supports the
strategic and transactional activities undertaken by utilities organizations.
KPMG’s Power & Utilities Centers of Excellence are located in 11 cities across
the globe. Each center is headed by a dedicated Power & Utilities industry
professional that can access the relevant people and resources regardless of
geographical borders.
The KPMG Energy and Utilities practice located in Budapest, Hungary, is a KPMG
Global Power & Utilities Center of Excellence. It provides advisory services to
the oil, gas, electricity, and water industries throughout the entire energy supply
chain, from energy producers to end consumers within the entire CEE region.
Building on the resources and knowledge base of the KPMG global network
of member firms, our team has access to market information on a global and
regional basis.
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59What KPMG firms can offer
This allows us to offer strategies to our clients on both domestic and international
assignments based on international experience and detailed knowledge of the
local market.
Drawing upon a wealth of experience, well-tested methodologies, and the
resources of local KPMG member firms in each country, the KPMG Energy and
Utilities practice develops industry-specific, customized approaches for our
clients. We provide professional advice and support that addresses clients’ issues
and supports the strategic and transactional activities undertaken by member
firms operating in the energy and utilities sectors in the CEE region.
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60 What KPMG firms can offer
KPMG Services
KPMG Power & Utilities Centers of Excellence can provide advisory services
support throughout the complete value chain, including
� Market analysis and forecasting within the CEE energy sector
� Overview of the European regulatory regimes and industry models
� Detailed industry benchmarking studies
� Development of detailed domestic operational models and regulatory
regimes
� Feasibility studies of organized electricity and natural gas trading
� Tariff structure and calculation modeling
� Assistance with national energy policy creation
� Customer segmentation, competitive product development,
sales channel development
� Unbundling strategies
� Finance function and key performance indicators development
� Development of energy trading function
� Development of maintenance function
� Merger and acquisition planning and implementation support
� Organization development and cost optimization
� Preparation of energy procurement, tender preparation, bid evaluation,
contracting support
� Financial modeling
� Support of regulatory cost reviews
� Support of capital investments and infrastructure investments, including:
– Initial feasibility study
– Impact study
– License acquisition
– Financial forecasts
– Acquisition of financing
– Assistance with tendering
– Coordination with technical consultancy firms
– Offtake strategy
– Primary energy source procurement.
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kpmg.hu
For further information on issues
raised in this publication,
please contact:
Péter Kiss
PartnerEnergy and Utilities Advisory ServicesKPMG in Hungary1139 Budapest, Váci út. 99.Tel: +36-70-3331400e-Mail: [email protected]
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