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Monday, March 30, 2009
Tomaz Oresic "Do we need a new Marshall plan for Balkan energy?"

Against a backdrop of sharply contracting worldwide economic activity, south-east Europe is experiencing its own economic slowdown and many economies will exhibit technical recessions in 2009.  Energy underpins all economic activity.  As south-east Europe is no exception in suffering the knock-on effects of the world-wide financial crisis, there is a serious danger that the investment required in the regional energy sector will be yet further deferred, thus storing up further problems for generations to come.

The collapse of several global investment banks in 2008 unleashed a domino series of events that have drastically impacted the regional energy landscape.  Falling volumes of trade in most commodities on the international markets has led to a collapse in many of their prices. South-east Europe has had a long history of extraction or processing of energy intensive commodities, such as metals.  The changed commodity landscape threatens many industries in the region.  The greatest threats are faced by the aluminium smelters, steel mills, metallurgy complexes and the automotive, chemicals and construction industries. 

These export-oriented industries (which are coincidentally among the key drivers of economic growth in the region and also among the largest energy consumers) have either drastically reduced output or ceased production entirely.  Examples are numerous – US Steel’s mills in Slovakia and Serbia; Alcoa and Ferro Modul’s smelters in Hungary; Talum Aluminium’s smelter in Slovenia; Mostar Aluminium’s smelter and the Zenica steel mill in Bosnia and Herzegovina; Basic Element’s Podgorica aluminium smelter in Montenegro, and the Silmak and Skopske Legure metallurgy complexes in Macedonia.

As a result of the significant reduction in industrial demand for electricity, the regional energy balance has shifted radically in 2009.  Prior to the emergence of the crisis there was an overall regional energy deficit and power flowed into the region from Western Europe.  The fall in demand for energy (approximately 15 per cent in 1Q 2009) has created unexpected surpluses which has in turn led inevitably to a sharp fall in the market price of electricity.  Whereas electricity sold at over EUR 80/MWh in the wholesale markets in October 2008, just five months later, in March 2009, its price had fallen below EUR 40/Mwh.

An equally important aspect of the crisis for the regional energy sector is an overall contraction in available capital and the increasing cost of debt financing.  The six leading western European energy companies have seen their cost of financing (in the EU) rise on average by 1.2 per cent in 1Q 2009 alone.  When comparable data becomes available for south-east Europe, it will doubtless reveal a significantly worse burden on commerce and industry, given the higher overall risk factor that markets factor into pricing for the region.

While wholesale electricity prices have collapsed, no corresponding downward trend has emerged for the price of power generation plant and equipment.  Indeed, quite the reverse. Since [date], the fully installed cost of technology for thermal generation plant has risen by 4.3 per cent to EUR 1200/kW, for hydro generation plants by 19 per cent to EUR 3700/kW, for CCGT plants by 2.1 per cent to EUR 650/kW and for off-shore wind parks by 10.7 per cent to EUR 2300/kW.  

Inevitably, the combination of these various trends has made investment in new generation capacity less attractive – increased costs and a perception of heightened risk (albeit in the nearer term, but for what is always a long-term investment) have called into question the assumptions on which projects and plans have been modelled and forecast.  At the same time the regional energy sector remains heavily burdened by the inherent problems of a period of transition from state control to being market-based, including the lack of developed market and price-setting mechanisms, an inadequate legal and institutional framework and an outdated transmission network. 

These problems are further compounded by (i) the relatively poor financial situation and credit standing of nearly all state run power utilities, and (ii) the obvious curtailment of any expansion strategy for most large western European energy companies.  In 2009 the energy majors have altered their focus away from aggressive acquisitions toward consolidation and organic growth.

In terms of critical investment in new energy generation in the region, the overriding issues are clear – who will invest in new power plants?  How will any financing be arranged?  And if the pace of new generation development looked painfully slow before 2008, how much slower will matters unfold now? 

The unexpected surpluses of energy in the region and the sharp drop in wholesale prices are sending wrong and potentially dangerous signals in the context of a long-term need for new investment and for the continued reform of the energy sector in the region – however painful that might be.  Without these, energy prices will rise sharply once demand adjusts in due course to more normal levels.  This will serve simply to place further obstacles in the path of regional economic growth and development.

The response of the multilateral financial institutions to the slowdown (above all the European Bank for Reconstruction and Development, and the European Investment Bank) will be a crucial determining factor.  At a time when short-termism and the current depressed economic climate might lead to the cancellation or suspension of projects and efforts to move the regional energy sector forward, there is a distinct risk that investment in new power generation will stall.  What is needed instead is a re-affirmed commitment to the longer-term, to the bolstering of the energy sector in south-east Europe as a key foundation of increased economic growth and prosperity.  The prevention of conflict and the settled growth of the countries of south-east Europe, working in harmony with each other, are goals that much be achieved – and the vision needed to achieve them is shared with the Marshall Plan of the last century, a vision that implies strengthened commitments to development, not retrenchment.

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