E N E R G Y & N AT U R A L R E S O U R C E S
Prospects for the Central and Eastern European Electricity Market In light of the present economic environment A DV I S O RY
Authors: KPMG Energy & Utilities Centre of Excellence Team, Budapest, Hungary
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Foreword
3
Foreword The history of harnessing electricity, spanning only two centuries, is much shorter than that of other technologies – for instance agriculture or mining – which have been exploited since prehistoric times. Yet electricity has become a crucial form of energy in modern societies; it is a unique resource which cannot be readily substituted. The importance of electricity is soaring, since Western-type lifestyles and industrial societies require unprecedented quantities. Meanwhile, developing economies are catching up in terms of industrial production and are also experiencing a massive expansion in residential consumption.
Péter Kiss Partner, KPMG Global Head of Power & Utilities
This document focuses on the development of the electricity industry in Central and Eastern Europe (CEE), a region which has gone through major restructuring in the last two decades. Yet while much progress has been made, considerable challenges still await most countries in the region, including liberalization, privatization, synchronization, efficiency and climate change issues. Compared to Western Europe, the CEE region also has a substantial backlog of tasks regarding economic development, which include social, industrial and environmental challenges. Nonetheless, this delay also offers great potential, allowing the possibility of a “quantum leap” in the industry. Thus, instead of following a drawn-out learning curve, CEE could reap the rewards of the immediate introduction of state-of-the-art technologies, even potentially overtaking western electricity industries in the coming decades. This publication identifies the key characteristics the region’s electricity sectors, assesses issues such as sustainability and the development needs and evaluates the effect of the present economic circumstances on the investment environment. I trust that you will find the contents of this report valuable for your business.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Table of contents
5
Table of contents Methodology
7
Executive summary
11
1.
Introduction 1.1. Macroeconomic development in the region since 1990 1.2. Development of the electricity sector since 1990 1.3. Development of CEE electricity generation
17 17 18 19
2.
Restructuring the CEE electricity sector 2.1. Privatization and market development 2.2. Efficiency in electricity generation 2.3. Sustainable generation 2.4. Infrastructure 2.5. Diversification of supply sources
23 23 27 28 31 33
3.
CEE electricity generation: forecast 3.1. UCTE forecast
39 40
4.
Financing investments in the energy and power sectors 4.1. Conditions of the current financial crisis 4.2. Effects of the crisis on the economy and energy sector 4.3. Effects of the financial crisis on financing conditions 4.4. Financing needs of electricity sector development in CEE region
53 53 54 58 68
5.
Conclusions and future prospects 5.1. Economic environment: crisis, consumption and recovery 5.2. Financing in the future
75 75 77
Acronyms
81
What can KPMG firms offer to the electricity sector?
83
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Methodology
7
Methodology This publication has been compiled by KPMG’s Global Power & Utilities Knowledge & Resource Center, based in Budapest, Hungary, to frame the prospects of the Central and Eastern European electricity market in light of the present economic environment. KPMG conducted comprehensive research to frame the prospects of development in the CEE region’s electricity sector. The report is based in part on statistical databases and forecasts of the Union for the Co-ordination of Transmission of Electricity (UCTE), EUROSTAT, Economist Intelligence Unit, Dealogic, and on interviews conducted with key market participants. Based on these interviews, databases, evaluations and forecasts, KPMG analyzed the development trends of the electricity sector of the CEE region up to 2020. The report also analyzes the assumptions of the System Adequacy Forecast 2009–2020 prepared by UCTE 1 which differentiates two scenarios, a Conservative and a Best Estimate Scenario for generation capacity development in the region. The main questions surrounding energy sector development were also raised and assessed by the sector’s main market players. KPMG conducted a survey to map out the expectations of market players. During the survey period May–October 2009, KPMG conducted semi-structured, face-to-face and phone interviews with top-level executives who are considered key stakeholders within the CEE region’s electricity sector. The target groups for the interviews comprised: 1) Transmission System Operators 2) Regulatory authorities 3) Financial institutions: domestic and international commercial and investment banks present in the CEE region that have experience in loan syndication and project financing and have already financed energy-related projects. 4) Equipment suppliers, equipment manufacturers
1
The European Network of Transmission System Operators for Electricity (ENTSO-E) took over all operational tasks of UCTE from July 2009.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Methodology
The following companies and their representatives contributed to our survey:
Transmission System Operators
Company
Contact person
MAVIR, Hungarian Transmission System Operator Company Ltd
Zoltán Tihanyi
CEPS, joint-stock company operating Transmission System (TS) of the Czech Republic
Miroslav Vrba
Director of System Operation
Board member and Executive Director of Dispatch Management and ICT
Miroslav Šula
Regulatory authority
Director of Dispatch Management Hungarian Energy Office
Péter Simig Electricity sector expert
OTP Bank
Balázs Balogh Head of Division Project Finance and Acquisition Directorate
Financial institutions
8
MKB Bank
Attila Erhardt Senior Manager; Project, Structured and Corporate Finance II
Oliver Gulyás Head of Department; Project, Structured and Corporate Finance II
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Methodology
Company
Financial institutions
BNP Paribas
9
Contact person Pierre Bonin Head of Corporate and Transaction Group for the Region (Hungary, Croatia, Slovenia and Serbia)
European Bank for Reconstruction and Development (EBRD)
Nandita Parshad Director of Power and Utilities Department
Grzegorz Peszko Senior Energy/ Environmental Economist
Equipment suppliers
GE Energy
Rod Christie President of GE Energy, Central & Eastern Europe, Russia & CIS
Siemens
Andreas Mueller General Manager, Sales GT Power Plant Solutions Central Eastern Europe, Russia, Central Asia
KPMG would like to thank the numerous sector experts for their participation in this report, and for their contributions in terms of insights and valuable information. These contributions have enabled the authors to identify the sector’s needs and opportunities.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Executive summary
11
Executive summary The electricity systems of the Central and Eastern European countries have undergone considerable development since the fall of communism in 1989–90. Nonetheless, as this study highlights, huge challenges remain across the region. Almost all economic data, including electricity consumption, which on a per capita basis is only 57 percent that of Western Europe, indicate that the region still has some way to go before living standards catch-up with those in the developed world. These challenges include investment into transmission and distribution systems, cross-border links, and most especially, renewal and expansion of generation capacity. Meanwhile, planners have to take into account increasing concerns regarding security of supply, ever more stringent environmental regulations, political worries over the cost of electricity and last but not least, the problem of longterm finance for projects in the current global economic turbulence. The ever more complex matrix of factors to be considered when planning electricity investments makes it a daunting prospect for both business and governments, and one which the latter might easily be tempted to put off. Yet this report, compiled from official data and detailed interviews with professionals in the electricity and banking sectors, argues that in many ways political leaders must understand that the economic downturn makes reform and the creation of well-thought out policies for their electricity sectors an increasingly urgent task, assuming they want to establish a basis for sustainable economic growth in the future. Indeed, given the increasingly long lead-times and pay-back periods associated with new power projects – most especially large hydro, coal and nuclear facilities – the future planning of CEE electricity sectors requires focused and responsible governments at all levels.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
12
Executive summary
Regionally, the requirements are substantial; the Union for the Co-ordination for the Transmission of Electricity (UCTE) estimates electricity consumption in the region will jump by an average of 25 percent in the next decade, with above average growth in Romania, Hungary and most states of the former Yugoslavia. And while Poland is expected to see only 17–18 percent growth in consumption, the size of the Polish market means even this translates into 25,000 GWh, not far short of the current net consumption of Slovakia. (With a net production of 143,000 GWh, Poland consumes approximately 30 percent of total electricity in CEE.) To meet this increased demand, the UCTE estimates that the region requires between 21 GW (Conservative Scenario) and 42 GW (Best Estimate Scenario) of new generation capacity by the end of the decade. In addition, based on KPMG estimates, 53 GW of obsolete capacity needs replacement or at least retrofitting over the same time period. All of which will take huge amounts of finance. Depending on which scenario proves more realistic – and on the modes of generation the countries employ – the UCTE scenarios will require a capital expenditure of between EUR 40–70 bn, while replacement of the obsolete capacity could take up to EUR 76 bn. Combined, this means the generation segment across the region could soak up anything between EUR 114–144 bn in investment by 2020. What kind of new developments can be expected? Inevitably, as in the past, this to a large extent will depend upon the kind of fuel is available in each country. Many CEE countries boast coal deposits (albeit of differing quality), so it is no surprise that coal fired plant currently makes up about 50 percent of installed capacity across the region and accounts for up to 48 percent of electricity generated. The readily-available supply of coal (or lignite) is excellent in terms of security of supply, but of course the high emissions, coupled with low efficiencies associated with older plant, make coal less attractive from an environmental viewpoint. While coal’s future in the region will depend partly on the development of CO2 trading and storage schemes, efforts to develop clean-burn technology are expected to keep coal well in contention in the race for new investment in the next decade. As a result, the percentage of coal fired capacity is expected to fall to 38–39 percent of the total. However, should the UCTE’s Best Estimate Scenario prove realistic, this could still mean an increase in absolute numbers of up to 750 MW. On the other hand, if the future follows the Conservative Scenario, total coal-fired plant could drop by some 10,000 MW across the region.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Executive summary
13
In contrast to the relative decline in coal usage, renewables are expected to be a “focus of attention” in the coming decade as a result of EU regulations, public concern over the environment and the desire to reduce dependence on imported energy sources. Some CEE countries, notably Latvia, Romania, Albania and most former Yugoslavian states can already boast that a significant proportion of their power derives from renewables – typically in the 15–20 percent range – primarily hydro sources. But for countries lacking significant hydro capacity, such as the Czech Republic, Hungary and Poland, the proportion of renewable electricity is typically in the range of 5.0–7.5 percent of the total, meaning these countries hold out the prospects of considerable investment in the renewable energy segment. The UCTE Best Estimate Scenario suggests the share of renewables in the installed generation capacity will reach 31 percent, i.e., 50 GW by 2020, and though hydro capacity is predicted to expand by about 20 percent across the region, wind energy is expected to be the star performer. As the report notes, almost every CEE state intends to progress with wind energy, most significantly Poland, Romania, Estonia and Albania. According to the UCTE’s Best Estimate Scenario wind-generation capacity in the region will expand to 12 GW by 2020, 6.5 times current levels. However, KPMG notes that development of both wind and solar energy is highly dependent on the regulatory framework, feed-in price levels and the systembalancing potential of the various national transmission system operators. Nuclear generation is a very significant source of electricity for seven countries in the region, and with the priority given to CO2 emission reduction, the pressure is on to once again expand nuclear facilities. Plans are going ahead in several countries, including two reactors in Slovakia with a capacity of 840 MW, two in Bulgaria with 1,900 MW and two in Romania totaling 1,310 MW based on the World Nuclear Association’s database. In addition, 14 more reactors have been proposed across the region, which if completed would total 21,655 MW – roughly double the total current capacity. Finally natural gas, which currently accounts for only 9 percent of total CEE generation capacity, is likely to see its share of the electricity production cake more than double in the next decade. And this is despite concerns regarding dependence on Russia as the primary source for most countries in the region. Indeed, even Latvia and Hungary, where gas-fired plant makes up more than 30 percent of generation capacity, are expected to opt for more, such are the attractions in terms of efficiency, relatively short lead times, low emissions and low capital expenditure.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
14
Executive summary
In addition, development of gas-fired generation should be advanced by the realization of new supply routes to Europe, such as the Nabucco and South Stream projects. Poland, in particular, expects to build up to 8,000 MW of gas-fired plant, with other developments in Croatia, Macedonia and Hungary according to the Best Estimate Scenario. In light of all these needed investments (and CEE is not alone – huge investments are also required in western European electricity systems), the question arises: where the money comes from, particularly in these troubled times? Perhaps surprisingly respondents to this study were cautiously optimistic that, with confidence slowly returning to the markets, financing would be made available for well-thought out energy-sector projects, although with more stringent conditions than have been applied in the past decade. However, the need is such that the required developments will need financial assistance from beyond the region. In terms of the investment costs, governments and national authorities within CEE can help themselves by ensuring a transparent and robust regulatory framework is in place in their jurisdictions. They must also make all possible efforts to streamline and unify regulation among the respective countries. This will reduce risk and encourage external investors and operators into their markets, thereby maintaining a strong inflow of best practices and modern technology into their respective power industries, to the ultimate benefit of all concerned, including their economies, industries and peoples.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Executive summary
Central and Eastern European region’s countries EU member states
EU member states Bulgaria Area: 110,879 km2 Population: 7.2 m
GDP: USD 93.8 b Electricity consumption: 34,453 GWh
Czech Republic Area: 78,867 km2 Population: 10.2 m GDP: USD 217.1 b Electricity consumption: 65,141 GWh
EE
Non-EU member states
15
LV
Estonia Area: 45,228 km2 Population: 1.3 m GDP: USD 27.4 b Electricity consumption: 8,036 GWh
LT
Hungary Area: 93,028 km2 Population: 9.9 m GDP: USD 196.6 b Electricity consumption: 41,284 GWh PL
Latvia Area: 64,589 km2 Population: 2.2 m GDP: USD 38.9 b Electricity consumption: 7,573 GWh
CZ
Lithuania Area: 65,300 km2 Population: 3.6 m GDP: USD 63.3 b Electricity consumption: 11,491 GWh
SK
Poland Area: 312,685 km2 Population: 38.5 m GDP: USD 667.9 b Electricity consumption: 142,852 GWh
HU
SI HR
RO
BA
Romania Area: 238,391 km2 Population: 22.2 m GDP: USD 271.4 b Electricity consumption: 55,206 GWh
RS
ME
BG
KO MK AL
Slovakia Area: 49,035 km2 Population: 5.5 m GDP: USD 119.5 b Electricity consumption: 27,635 GWh Slovenia Area: 20,273 km2 Population: 2.0 m GDP: USD 59.3 b Electricity consumption: 12,686 GWh
Non-EU member states Albania Area: 28,748 km2
Population: 3.6 m GDP: USD 21.8 b Electricity consumption*: 3,603 GWh
Bosnia & Herzegovina Area: 51,197 km2 Population: 4.6 m GDP: USD 29.7 b Electricity consumption: 11,575 GWh Croatia Area: 56,594 km2 Population: 5.0 m GDP: USD 82.4 b Electricity consumption: 17,861 GWh Kosovo Area: 10,887 km2 Population: 1.8 m GDP: USD 5 b
Electricity consumption*: 4,281 GWh
Macedonia Area: 25,713 km2 Population: 2.2 m GDP: USD 18.8 b Electricity consumption: 8,643 GWh Serbia Area: 77,474 km2
The databases utilized in this publication do not include information for some of the CEE countries. The following list summarizes those countries that have been left out of the statistics: EUROSTAT databases do not contain information for Albania (AL), Bosnia Herzegovina (BA), Kosovo (KO), Montenegro (ME) or Serbia (RS).
Population: 7.5 m
GDP: USD 80.3 b Electricity consumption: 38,982 GWh
Montenegro Area: 13,812 km2 Population: 0.7 m GDP: USD 6.8 b
Electricity consumption: 4,583 GWh
Central and Eastern Europe Total 2008 Area: 1,342,700 km2 Population: 128 m GDP: USD 2,000 b Electricity consumption:495,885 GWh Western Europe Total 2008 Area: 3,605,717 km2 Population: 407 m GDP: USD 13,372 b Electricity consumption: 2,785,321 GWh
World Bank databases do not contain information for Kosovo (KO) or Montenegro (ME). UCTE databases do not contain information for Albania (AL), Estonia (EE), Kosovo (KO), Latvia (LV) or Lithuania (LT). Although in the cases of System Adequacy Forecasts only Albania (AL) and Kosovo (KO) are excluded. Energy Information Administration databases do not contain information for Kosovo (KO), Montenegro (ME) or Serbia (RS). BP and International Monetary Fund databases do not contain information for Kosovo (KO).
Sources:
Area, population, GDP: CIA – The World Factbook, Electricity consumption 2008 (net consumption with system losses): UCTE, http://www.entsoe.eu/resources/publications/ce/ms/ * 2007: CIA – The World Factbook, https://www.cia.gov/library/publications/the-world-factbook/
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE Renewable Electricity Outlook Introduction 2008
17
1. Introduction 1.1. Macroeconomic development in the region since 1990 The Central and Eastern European (CEE) region was part of the broad Socialist Bloc, predominantly within the Soviet sphere of interest, until political transition eventually began in 1989. With the political and economic changes of the 1990s the region embarked on the path towards a free-market economy based on competition and demand for goods and services. The first years of the transition were generally accompanied by recession, high levels of inflation and escalating unemployment. Initial government measures were only partially successful in combating these problems, until key reforms brought on economic recovery. However at the end of 1990s, many CEE countries again experienced an economic slowdown due to the slow pace of structural transformation. The decline was also seen in local national crises, which, alongside other factors, halted the escalation of growth in the region. Stabilization occurred at the beginning of the 21st century, with annual national growth rates ranging from 3–12 percent (compared to 1–4 percent in the EU15).
Figure 1: GDP in EU-27 and CEE (1990–2008), 1990=100%
CEE EU-27
700 % 600 500 400 300 200 100
Source: International Monetary Fund, World Economic Outlook Database, April 2009
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
2009
2007
2008
2006
2005
2004
2003
2001
2002
1999
2000
1997
1998
1996
1995
1994
1993
1991
1992
1990
0
Introduction
GDP has increased in recent years, the sectors producing the largest portion – roughly 20 percent of total GDP – have been industry and commerce.
Figure 2: Distribution of GDP by sectors in the CEE region Agriculture Industry (excluding construction) Manufacturing Construction Trade & Commerce Financial intermediation & business Services
1995
2008 6.1%
14.4%
3.9%
15.2%
21.5%
23.6% 13.1% 16.5%
13.4% 17.8%
20.0%
7.0%
22.5%
5.0%
Source: EUROSTAT
1.2. Development of the electricity sector since 1990 The economic changes of the mid-1990s resulted in a significant decrease in electricity demand after many heavy industries, the main consumers, were shut down. The restructuring of these economies proved to be successful; setbacks occurring on local and national levels were remedied with relative ease through government intervention. Since the political transition, the region has experienced increasing electricity production as a consequence of a general improvement in economic performance, as can be seen in Figure 3.
Figure 3: Development of electricity consumption in EU-27 and CEE (1990–2008), 1990=100
CEE EU-27
135 % 125 115 105 95 85
2007
Source: World Bank
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
2008
2006
2005
2004
2002
2003
2001
2000
1999
1998
1997
1995
1996
1993
1994
1991
65
1992
75 1990
18
CEE Renewable Electricity Outlook Introduction 2008
19
Due to the restructuring of the CEE economies, the present electricity consumption of the region has just returned to the level of the early 90s, although its usage among the different sectors has changed significantly. In particular, as a result of steady economic growth, the proportion of residential consumption has increased by six percentage points, reaching 26 percent of total consumption by 2007. The share of commercial consumption has also grown, while industrial consumption has fallen back. As a result, the current distribution of electricity consumption in the CEE and in the EU-27 are nearly identical, as shown in Figure 4.
Figure 4: Distribution of electricity consumption in CEE and EU 27 by sectors (1990, 2007) Industry Transport Households Services Other sectors*
EU-27 3,000,000 2,500,000 GWh
2,000,000
4%
2%
1,500,000
20%
27%
27%
28%
3%
3%
46%
40%
1,000,000 500,000 0
1990
2007
GWh
CEE 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0
9%
3%
13%
27%
20%
26%
5%
3%
53%
41%
1990
2007
* including Fisheries and Agriculture Source: EUROSTAT
1.3. Development of CEE electricity generation The generation mix of the CEE region has been stable and the proportions of different generation types have not changed significantly in the last two decades, despite the enforced closure of some nuclear facilities. The evolution of the generation mix, shown in Figure 5, highlights a strong and continuous dependence on fossil-fired generation, comprising altogether 57–60 percent of total generation.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
20
Introduction
Figure 5: Development of generation by fuel types in CEE, 1990–2006 600 16% 16% 15% 15%
500 17% 18%
14% 15% 17%
17%
19% 18% 18%
17%
16% 1%
18% 15% 2% 3%
3% 4% 5% 6%
1% 1% 17% 18% 17% 17% 1% 15% 15% 16% 16% 16% 18% 16% 15% 15% 15% 15% 10% 9% 9% 10% 10% 10% 10% 10% 9% 9% 9% 9% 8% 8% 8% 9% 300 10% 4% 4% 3% 3% 7% 7% 6% 5% 5% 4% 6% 7% 6% 5% 7% 7% 6%
400
16%
TWh
15%
200 50% 49% 50% 49% 52% 50% 55% 54% 53% 53% 50% 51% 50% 52% 53% 50% 50%
100 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Coal Nuclear
Oil Renewables excluding hydro
Natural Gas Hydro
Source: UCTE, European Commission, EU Energy in figures, 2009
Nuclear-based generation is the second most important component of the generation mix, providing almost 20 percent of total generation. Reliance on oil has been steadily diminishing, while at the same time, gas is gradually gaining importance. The use of renewable energy sources, although showing a slight increase, remains low in comparison to current EU targets.
Figure 6: Generation capacities by fuel type in the CEE region, 2009
Nuclear Coal Oil Natural Gas Mixed/Other Fuel Renewables Hydro
10% 49% 1% 9% 6% 2% 23%
In 2009, the total installed capacity in the region was 124 GW, while the total peak load was 80 GW, thus overall capacity was sufficient to meet demand. While the generation mix in the region is relatively diverse, the use of specific fuel sources in individual countries depends on a number of factors, including the availability of natural resources, cost structures of the different generation types and the particular national strategy, as many countries are aiming for increasing security of supply and decreasing dependency on foreign fuel sources.
Figure 7: CEE electricity generation mix (GWh) by country, 2008
Nuclear Coal Oil Natural Gas Mixed/Other Fuel Renewables Hydro
160,000 140,000 120,000 100,000 GWh
Source: UCTE, System Adequacy Forecast 2009–2020
80,000 60,000 40,000 20,000 0
BA
BG
CZ
HR
HU ME MK
PL
RO
RS
SI
SK
Source: UCTE
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Introduction
21
Although the generation mix is heterogeneous, it does show a strong dependence on thermal sources. This results from the large-scale utilization of coal, especially in Poland, the Czech Republic and Serbia, a result of historical developments in those countries. Some CEE states, notably in the Balkans, are experiencing a shortage of capacity, while others, like the Czech Republic and Poland are net exporters. Due to rising environmental concerns, EU regulations and security of supply issues, an extensive and comprehensive restructuring of the region’s electricity generation units is expected to begin in the short term. In accordance with EU Energy Policy, three main pillars underpin this transformation (see Table 1).
Table 1: The three pillars of EU Energy Policy Sustainability
Competitiveness 1. Liberalization, privatization and unbundling 2. Efficiency in electricity generation, securing and diversifying energy supplies technology development and R&D
3. Developing sustainable generation policy l
Competitive renewable sources of energy and other low carbon energy sources
l
Curbing energy demand within Europe
l
Reduction of the CO2 emission (decreasing the environmental impact and controlling climate change)
Security of Supply 4. New investments to meet the expected energy demand and replace aging infrastructure 5. Diversifying sources and routes of imported energy to compensate the rising import dependency with infrastructure development
Source: Green Paper on the European Strategy for Sustainable, Competitive and Secure Energy (SEC(2006) 317)
Over the years there has been a certain change of emphasis, with a shift away from competitiveness towards sustainability and more recently to security of supply as a result of the high dependency on imported fuels. In addition, the transformation of the energy sector into an open and competitive market has given way to concerns regarding environmental impacts, especially CO2 emissions. This KPMG overview assesses the factors which must be taken into consideration when defining the development plans of the region’s electricity sector. For example, the importance of modern technology and infrastructure development is apparent, as these are the essential foundations upon which commercial and operational development can be established. In the following chapters the three pillars of the EU Energy Policy are examined, along with their resultant implications for the Central and Eastern European region.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Restructuring the CEE electricity sector
23
2. Restructuring the CEE electricity sector 2.1. Privatization and market development Electricity sector privatization began in the 1990s, and has made considerable headway in some of CEE countries. In many cases privatization of the distribution and generation sectors is at an advanced stage. However in the case of the transmission grids, these are typically regarded as strategic assets and hence are owned directly or indirectly by the states concerned.
Figure 8: Privatization of the CEE electricity market Overview of DSO privatization in the CEE region 2007, 2008
Overview of generation privatization in the CEE region 2007, 2008
In final phase
EE
EE
Underway
LV
LV
In initial phase LT
LT
PL
PL
CZ
CZ SK
SK
HU
HU
SI
SI HR
RO
BA
RO
BA
RS
ME
HR
BG
KO
RS
ME
MK AL
BG
KO MK AL
Source: International Energy Regulation Network, Country Factsheets 2007, 2008
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
24
Restructuring the CEE electricity sector
In Hungary, the Czech Republic, Slovakia, Bulgaria and Macedonia, the Distribution System Operators (DSOs) have been privatized, sold mostly to foreign investors. In Romania, Slovenia and Albania, privatization is well underway, while in Estonia and Lithuania, the DSO privatization has begun but privatization of generation is still in the initial phase. As a result of delayed restructuring, Poland, Croatia, Serbia, Montenegro, Bosnia and Latvia are still in the early stages of the process. The relevant new EU regulations regarding unbundling, summarized in the socalled 3rd Energy Package, are set to speed up these processes. What are the main questions arising in relation to the 3rd Energy Package? The 3rd Energy Package details further steps to be taken in the process of unbundling, prescribing a higher level of independence for the entities already at least partly unbundled, and stipulating the inclusion of the previously omitted TSOs into the process.
It provides a choice between three solutions: creating an Independent System Operator (ISO) (i.e., a transmission system operator (TSO) with the responsibilities of operating and managing the electricity network but without the ownership of said network); full ownership unbundling (requiring the separation and sale of the integrated transmission business); or the independent transmission operator (ITO) model – where ownership and operation can remain within an integrated utility. In order to facilitate the integration of the EU electricity system, in July 2009, the six European TSO associations – ATSOI, BALTSO, Nordel, UCTE and UKTSOA – merged into one organization, the European Network of Transmission System Operators for Electricity (ENTSO-E). ENTSO-E comprises all TSOs in the European Union, as well as others connected to their networks. Will the new organization ENTSO-E become a super TSO over the national TSOs in the long term? Respondents do not deem this realistic, mentioning that legal, technical and commercial feasibility could be problematic. The main concept is that the use of local primary energy is more efficient than the delivery of electricity over long distances. In the light of this fact, a totally integrated system requiring robust infrastructure does not seem advantageous economically. Currently, the responsibility of ENTSO-E is coordination, lobbying and gently pushing market players towards cooperation. What kind of difficulties could the unbundling represent (regarding competition, transparency, etc.)? In accordance with the 3rd Energy package, the shares of the Czech TSO (CEPS) have been transferred from the Ministry of Finance of the Czech Republic to the
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Ministry of Industry and Trade at the end of August 2009. By this act the condition for unbundling in ownership was completed; however, as the representative of the Czech TSO pointed out, this change is not going to significantly affect market transparency or competition requirements. Competition on the Hungarian market, where liberalization has already occurred and privatization is also advanced, is also not considered to be genuinely complete. In addition, the operation costs of the Hungarian transmission system are probably higher than that of the old centralized system, due to the costs of administration, coordination of the market players, etc. A power exchange has also been mentioned as a potential tool to both incorporate renewables into the competitive market and to increase competition. This is an important issue in Hungary for example, where a large number of plants currently operate under long-term contracts, and therefore are little affected by market forces. If market prices were transparent, power producers would be more constrained by market prices to produce only when their plant is competitive for the system load. This state of affairs is far from unique: indeed, liberalization has not really succeeded anywhere in CEE to create a genuine free market in electricity. Partly as a consequence of privatization (and in order to give investors reasonable security for their efforts), long-term power purchase agreements (PPAs) were introduced into the region, particularly in Hungary and Poland, where they covered 80 percent and 50 percent of the power markets respectively. Such agreements were signed in the 1990s, with some valid until 2030. The European Commission requested the termination of these agreements, considering them one of the main obstacles against market development and liberalization because of their effects on competition and the transparency of electricity pricing. As a result most PPAs have been eliminated and substituted with market-based contracts. Price convergence within CEE is expected to occur as part of the integration process of the European electricity markets, with the EEX in Germany and NordPool in Scandinavia playing major price-setting roles. The rate of convergence will depend on the following: • establishment of local power exchange spot markets • efficient cross-border interconnections • elimination of PPAs and • market liberalization. Nevertheless, a number of smaller, national power exchanges have started operations in Europe, including Poland, Slovenia, Romania and the Czech Republic, each proving to be a great success in supporting the liberalization process.
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Restructuring the CEE electricity sector
2.1.1. Energy community Although the western Balkan countries are not members of the EU, the acceptance of the Treaty Establishing the Energy Community is a definite step towards their integration into a single energy market. The overall principle of the Treaty, which entered into force on 1 July 2006, is to create a common regulatory framework for trading energy across South East Europe and the EU on equal and transparent terms. It was signed by the European Community and by the Contracting Parties, viz. Albania, Bosnia and Herzegovina, Croatia, Republic of Macedonia, Montenegro and Serbia, as well as UNMIK2. These states agreed to the adoption and implementation of the acquis communautaire3 on energy, environment, and renewable energy sources. In addition, the main principles of EU competition policy are also applicable. Following Treaty procedures, the Contracting Parties have also taken up the commitment to implement a set of security of supply-related regulations. Attracting investment, enabling cross-border trade, enhancing security of supply along with improving the environmental situation is among the goals of the Treaty. Meanwhile, a common regional approach concerning oil, energy efficiency and the social dimension of energy reforms is also being worked on. The distinctive characteristics of the Contracting Parties illustrate the significance of the Treaty. The region has a relatively low level of gas-dependent generation,
2
United Nations Interim Administration Mission in Kosovo (as Kosovo representative under Security Council resolution 1244)
3
EU law, in this case EU single market regulations
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Restructuring the CEE electricity sector
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combined with few nuclear power generation facilities, while some countries rely heavily on hydro electric generation. Hence the security of supply and efficient allocation of resources are issues of paramount importance. Stronger regional trade in electricity would certainly help exploit the opportunities created by differences in natural resources available between individual states, enabling power stations based on various fuels to supply demand as appropriate. Furthermore, unhindered cross-border trading – as an alternative to nationallyindependent energy policies – could reduce the total (indeed substantial) investment in generation facilities that the Balkan countries would otherwise need to prevent supply shortages.
2.2. Efficiency in electricity generation Along with the political changes of the 1990s, a gradual shift in the structure of the region’s economic system also came about. With the evolution of competitive markets, heavy industries, previously the backbone of the command economies, lost their dominance. In turn, less energy-dependent sectors, notably services and trade, gained predominance. These tendencies resulted in a general decline in electricity consumption. At the same time, the gradual substitution of outdated equipment and infrastructure with modern and efficient technology began. Consequently, the region’s production efficiency and energy intensity4 improved significantly, as seen in Figure 9.
CEE Total EU-15
GWh/ million USD (2000 PPP)
Figure 9: Energy intensity of the CEE and EU-15 region economy, 1992–2006 4.5 % 4.0 3.5 3.0 2.5 2.0 1.5 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Energy Information Administration
The CEE region’s energy intensity has decreased by 78 percent since 1990. Lower energy intensity indicates a lower price or cost of converting energy into GDP, suggesting a more efficient use of resources. Despite such progress, the region still has room for improvement in this respect.
4
The energy intensity indicator highlights the necessary energy input of an economy to produce one unit of GDP.
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Restructuring the CEE electricity sector
2.3. Sustainable generation 2.3.1. Emission policy A reduction in emission levels and enhanced environmental protection in Europe are governed under the Kyoto Agreement and the associated European Union Emission Trading Scheme (EU ETS). The Kyoto Protocol is an international treaty on climate change linked to the United Nations Framework Convention on Climate Change (UNFCCC). It is a commitment from the signatory nations to reduce greenhouse gas emissions. As of February 2009, the Protocol has been signed and ratified by 183 countries and the European Union. However, the target levels for the reduction of emissions are binding for only 37 industrialized countries and the European Community. The majority of CEE countries have shown their commitment to the Protocol and undertaken a target of 8 percent (6 percent for Hungary and Poland) greenhouse gas emissions compared to the base year. The EU ETS was founded in order to make the CO2 market, the so-called carbon market, operational. Involving all 27 EU and also the 10 CEE countries, it is the world’s largest multinational greenhouse gas emissions trading scheme. Its main objective is to create a price for carbon dioxide emissions that includes the socalled “external” environmental costs of energy production, thereby showing the genuine, total costs of generation. 2.3.2. EU climate and energy package In December 2008, the EU approved the so-called “energy-climate” package, which incorporates the world’s main energy and climate issues. The motive behind the package includes concerns regarding climate change and European dependence on imports of foreign oil and gas. Its main targets, to be achieved by the year 2020, are: • 20 percent reduction of green house gas emission • 20 percent improvement in energy efficiency • 20 percent share of renewable energy in primary energy consumption. The legislative package includes: 1) a directive improving and extending the greenhouse gas emission allowance trading system of the Community 2) a decision on the effort of member states to reduce their greenhouse gas emissions 3) a directive on the promotion of the use of energy from renewable sources 4) a directive on the geological storage of carbon dioxide 5) regulation setting emission performance standards for new cars and 6) a directive on the quality specification of petrol, diesel and gas-oil.
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Implementation of the EU energy and climate strategies also aims to enhance the competitiveness of the region through innovation in the energy sector. Countries, on their way to becoming low carbon economies, must encourage innovation in the existing energy sources, with an emphasis on increasing the effectiveness of energy production and on increasing the share of renewable energy in the generation mix. Power plant emissions are to be cut by 21 percent by 2020 in comparison to 2005 levels. Granting fewer emission allowances under the EU ETS is one way to achieve this goal. A large share of these allowances will be dispensed by auction. From 2013, full auctioning of CO2 emissions are also planned for electricity generators. However, technical developments could alleviate many concerns over the skyrocketing costs of fossil based power generation, since the promotion of the safe use of carbon capture and storage (CCS) methods shall eventually remove most carbon emissions. Are the planned renewable capacities sufficient to meet national targets? What actions are necessary in order to achieve the EU requirements? Respondents indicated that it would be difficult to meet the targets set by the EU. Compliance with previous regulations was achieved by most states, but reaching this new set of goals may not be as straightforward. Challenges and opportunities are different for every country, depending among others on national resources and market pressures (available financing, subsidized prices, etc.) One representative remarked that in all probability not all countries would succeed in fulfilling the targets on their own. The representative of the Czech TSO underlined that meeting the EU target (13 percent by 2020) seems challenging even with the current massive state subsidies available.
Increases in electricity tariffs have not succeeded in moderating electricity demand significantly. Thus, reaching the target of improving energy efficiency (through reducing electricity consumption) calls for more direct energy saving initiatives. Simple measures which can easily fit into the everyday lives of the population are being widely promoted. Among these, the renovation and replacement of large residential buildings holds great potential, as does a program to replace incandescent light bulbs with fluorescent lamps. Although these steps may not succeed in curbing consumption in absolute terms, they are certain to improve living standards and to slow down consumption growth. It should be noted that seasonal use of electric appliances, such as air conditioning, increasingly influences network load. It is clear that changes in lifestyles affect energy efficiency as much as large-scale developments and state policies.
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Restructuring the CEE electricity sector
Finance is a ubiquitous factor in all respects regarding future development. Meeting the targets requires investment in the present, which will in turn result in more expensive electricity in the future. This means that tax rates must either be decreased or electricity tariffs raised. Thus, to create a business environment attractive to potential developers, governments must create a reliable regulatory regime, alongside an investment-friendly tariff, tax and licensing system. A majority of respondents agree that the targets are feasible from a technical point of view, but will only be met satisfactorily if renewables-related initiatives are well-structured and the potential return underpins projects. It was mentioned that the level of utilization of biofuels would be a key factor in reaching the Hungarian national target of 13 percent. Which form of generation is the most cost-effective in reducing carbon emissions? Respondents are in agreement that diversity in the development of the generation mix is not only the most efficient way to cut emissions, but it is a necessity of itself. Certainly renewables are seen as only part of the solution, not least because they are very expensive, which raises objection from the population because of subsequent higher electricity prices. Furthermore, they require additional balancing capacities, and do not provide a constant and dependable source of power.
Combined cycle gas turbine plants (CCGTs) have the lowest emission level of all fossil fuel generation systems.
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Restructuring the CEE electricity sector
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Ideally, however, pan-European legislation is needed to recognize and subsidize new technologies if carbon capture systems are to become cost effective and more widespread. Sustainability and security of supply are two crucial issues that must be addressed simultaneously. Building new, modern and efficient power plants to replace old, inefficient units is therefore inevitable. A mix of renewables and new power plants equipped with cutting-edge, clean technologies are needed, as are nuclear plants.
2.4. Infrastructure In addition to the need for new investments, extended modernization and retrofit work on existing power infrastructure is also necessary in the region. Power plants in CEE are steadily aging, as shown in Figure 10. and more than 60 percent of installed capacity, amounting to more than 67GW, is over 30 years old.
Figure 10: Power Plant Infrastructure in the CEE region, 2009 Nuclear Coal Natural Gas Oil Renewable Hydro
80,000 70,000 60,000 50,000 MW
40,000 30,000 20,000 10,000 0 30 years
Source: DATAMONITOR; Statement of Security of Supply, Republic of Macedonia, 2007; Statement of Security of Supply for Kosovo – Electricity and Gas, May 2007; Security of Supply Statement of the Republic of Albania, Ministry of the Economy, Trade and Energy, 2007; Security of Supply Statement of the Republic of Croatia, Ministry of the Economy, Labor and Entrepreneurship, 2007.
The typical lifetime of large hydro power plants varies between 90 and 120 years, therefore most of the current units in CEE are likely to be in operation over the next few decades. However, lifetimes of fossil fuelled plants are much shorter, amounting to approximately 40–50 years for conventional coal, gas and oil-fired plant, and 25–30 years in the case of CCGT plant. Capacities older than the theoretical life-span for a given technology may be considered inefficient generation sources. The majority of current plants deemed obsolete are coal fired, and they must either be decommissioned or retrofitted in the short or medium term.
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Restructuring the CEE electricity sector
In total some 54 GW of CEE generation capacity (including 42 GW coal-fired, 7.5 GW gas-fired and 3.5 GW oil-fired) is considered life-expired, or close to it. It is therefore abundantly clear that significant investment will be needed now or in the near term to address this issue. What level of efficiency improvements can be expected from new technologies? What types of generation units are required? The average efficiency of conventional coal, gas, and oil-fired power plants built 20–24 years ago in Europe is around 30 percent.
Older coal-fired units can be modernized to achieve efficiencies of 38–39 percent, but newly-built coal-fired plant can attain efficiencies of up to 47 percent. Designers hope that in the medium term, a figure of 50 percent may be achieved. CCGT technology has seen efficiency levels climb from around 50 percent and is expected to reach 60 percent in the near future. CHP plant is typically 85–88 percent efficient, though in the case of well-sized units it can reach 91 percent. Further efficiency improvements are expected to depend mainly on the development of new, heat and pressure resistant materials, such as advanced ceramics. One respondent believes that CCGT units will be the most popular option to replace obsolete capacity in the short term, primarily because of the relatively short lead times of 5–6 years. This is pertinent because investors are still nervous regarding both the electricity and financial market conditions. To meet load fluctuations, modern transmission systems need faster reaction times from generators than in the past to maintain the balance of supply. Hence the response time of new capacity is another crucial factor to be taken into account by systems designers.
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Restructuring the CEE electricity sector
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2.5. Diversification of supply sources Many CEE states are concerned about their dependency on imported primary energy and are seeking to diversify both sources and the delivery routes in order to improve their security of supply. The electricity systems in the CEE region are at threat from three principal risks: weather conditions, technical outages and any interruption of supply from primary sources. Weather conditions affect changes in demand, which can be relatively sudden. Moreover, a sudden interruption of wind in the countries with winddependent electricity generation can also cause shortage of supply. The question of the security of natural gas supply has also become an issue in Europe recently after Russian-Ukrainian gas crises broke out in 2006 and 2009. As a consequence, several European countries suffered a shutdown in supplies of gas from Russia. Natural gas imports are a critical source of primary energy in many CEE countries, with 11.3 GW of installed capacity in the region reliant on gas. In addition, a considerable increase in the use of natural gas for electricity generation is also forecasted, taking its share in generation from 9 percent today to 17 percent by 2020 that is 28 GW of installed capacity5.
Figure 11: CEE natural gas imports by origin in 2008 Russia Germany Norway Other Europe & Eurasia
14 12 Billion cubic meters
10 8 6 4 2 Slovenia
Estonia
Latvia
Macedonia
Montenegro
Slovakia
Serbia
Poland
Romania
Lithuania
Hungary
Czech Republic
Croatia
Bulgaria
Albania
Bosnia and Herzegovina
0
Source: British Petrol
Gas plays a crucial role as a primary energy source in Hungary, Romania, Slovakia, Croatia and the Baltic countries. With limited or no domestic sources, these countries are therefore all highly dependent on Russian supplies, which currently use one pipeline through Ukraine.
5
According to the Best Estimate Scenario of the UCTE Forecast
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Restructuring the CEE electricity sector
Figure 12: Natural gas reserves of CEE countries (2007)
Production (bcm)
Legend EE
no reserves 1–50 bcm
Dem and (bcm)
LV
18
>50 bcm
LT
12.5/17 6/16.3
16 2.5/13.3
14 12
PL
10 CZ
0.1/8.6
8 0.1/6.2
SK
6 HU
4
0/3.5 2.8/3.3
0/3.4
SI HR
RO
BA
RS
ME
2 0.03/ 0.03 0 AL BG
0.6/2.5
0/2.04 0/1.1
0/1
0/0.4
0/0.1 HR
CZ
HU
PL
RO
Sl
SK
LT
LV
EE
MK
ME
RS
BA
BG
KO MK AL
Source: CIA The World Factbook
Several new transit routes are proposed to improve the natural gas supply of the region, notably Nabucco, South Stream and Krk LNG. To ensure energy independence, individual countries also developing a more diverse generation portfolio, including renewable energy sources and nuclear power.
Nabucco
Austria
Hungary Romania
Bulgaria
Turkey
The construction of the Nabucco pipeline was scheduled to start in 2010, however, neither the financing nor the sources of the natural gas have yet been finalized. The 3,300 km Nabucco pipeline, which aims to bring gas from the Caspian Sea region to Central Europe, has a planned maximum capacity of 31 bcm/year.
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Restructuring the CEE electricity sector
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South Stream
Russia Austria
Hungary Romania
Serbia Italy
Bulgaria
Greece
Turkey
Operations were planned to commence in 2013. However, the project has been delayed due to the financial crisis and disagreement among the potential parties involved, and the pipeline is expected to be commissioned in 2015. Based on recent news the north-western part of the pipeline will run through Serbia and Hungary to Austria’s Baumgarten gas storage.
KRK LNG terminal
Slovakia Austria
Hungary Romania
Slovenia Croatia Bosnia and Herzegovina
Serbia
The proposed capacity of the new LNG terminal at Krk is approximately 10 bcm/year. The start-up is planned for 2014.
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Restructuring the CEE electricity sector
Figure 13: Main electricity flows in 2008 and planned new cross-border transmission lines in the CEE region
Ensuring the security of supply is certainly a matter of great concern for CEE countries. They are expected to seek ways to reduce dependence on natural gas (or at least diversify their sources) in the future to offset the potential risks. Additionally, the CEE region has expressed a great interest to participate in and finance alternative supply routes, which is beneficial for both the region and exporters. The security of the electricity supply is also an especially significant factor in certain parts of the CEE region. The Baltic countries still belong to the IPS/UPS synchronous zone integrating the transmission networks of the ex-Soviet countries, and this is directed by the Russian Federal Grid Company. Although one inter-connection with the Finnish electrical system was established in 2006 (EstLink), this is not sufficient, and the Baltic countries remain largely isolated from the European electricity system. What should policy makers do to achieve a secure and sustainable power sector in the CEE region? TSOs and equipment suppliers agreed that providing long-term security of fuel supply is of critical importance. The most straightforward solution is the construction of new gas pipelines. The need for new LNG terminals, gas and oil storage facilities were also mentioned as partial solutions. The maintenance and development of the electricity networks themselves is also considered very significant by respondents.
Net exporter countries
Net importer countries
Electricity flow in 2008 400 kV line to be commissioned before 2013 400 kV line to be commissioned before 2016 400 kV line to be commissioned before 2020
Source: UCTE statistical database and the UCTE System Adequacy Forecast 2009–2020
In this respect, there are two areas where systems suppliers could see much potential, namely those with so-called “smart grid” technology that improves the balance between demand and supply. Secondly, those with the systems capable of providing the flexibility to enable grids to respond effectively in times of fast load or supply changes. This is of particular importance with the introduction of significant volumes of wind and solar generation into the network. In addition, network modernization can also be highly successful in improving certain security of supply indicators. 2.5.1. Cross-border capacities within the CEE region The primary focus of energy policy in the European Union lies in creating a unified and integrated European energy market. Alongside those factors which influence the individual national markets, the steps towards this unification also play an important role in the development of the electricity sector in the CEE. Cross-border electricity trading systems are a key component of this process. The Cross-Border Trading Mechanism (CBT Mechanism) promotes trading possibilities between countries, while the newly established ENTSO-E, operating the European high voltage grid, synchronizes the countries’ electricity systems and makes direct trading possible. Consequently, TSOs are now able to utilize their unused capacities through auctions, leading to the standardization of rules and regulations in the region. This is much improved on the 1990s, when surplus cross-border capacity was more scarce.
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In addition, construction of new cross-border transmission lines is also planned. According to the UCTE System Adequacy Forecast, over the next 12 years, several cross-border links will be developed in the CEE region. What are the main factors behind import and export capacity developments? Are the new capacities considered sufficient to ensure security of supply? As a general rule, electricity system planners believe cross-border capacities should be about 10 percent of peak load. In fact, many countries in the region comply with this at present, but while this would appear acceptable on paper, in fact from a market point of view it is inadequate, and if cross-border trading is to work efficiently more capacity must be built.
Regarding to Northern Europe, the Baltic States will benefit from interconnection development to Scandinavia by reducing dependence on Russian power imports. Apart from reducing the Baltics’ isolation from the European grid, such interconnections also enable power systems to be operated more economically. Generally, respondents agreed that the development of cross-border capacities would improve system efficiencies, e.g., by helping to diversify supply routes, enabling competition and eventual procurement from the most economical sources. However the Czech TSO representative noted that, rather than building expensive cross-border links, other, more cost-efficient measures might boost export-import capacities, such as modernization of the internal grids, high voltage transmission lines and substations.
Figure 14: Net Transfer Capacities (NTC) in the CEE region 1,000
1,000 750
No existing determinant procedure Proportionally
1,300
Auction 60
1,500 MW
1,0 0
1,200
1,000–1,500 MW
400 500 400 400 1,200 800 300 350 400 800 400 600 600 0 650 400 1,000 900 630 600 420 430 450 900 500 600 430 750 350 500 400 450 400 450 250 750 250 480 500 250 60 70 20 0 100 300 300 30 300 500
600 650
160
Source: ETSO – NTC values winter 2008–2009
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CEE electricity generation: forecast
39
3. CEE electricity generation: forecast Increasing demand is another key factor driving change and expansion in the CEE electricity sectors, and naturally needs to be taken into account in any future modeling of systems, particularly of generation.
Figure 15: Growth forecast of electricity consumption in CEE 2009–2020
CEE Average
45% 40% 35% 30% 25% 20% 15% 10% 5% Slovenia
Slovakia
Serbia
Romania
Poland
Montenegro
Macedonia
Hungary
Czech Republic
Croatia
Bulgaria
Bosnia
Baltic States
0%
Source: UCTE, System Adequacy Forecast 2009–2020
Since 1993, the annual growth of electricity consumption per capita in the region has been around 2.2 percent CAGR (compound annual growth rate), with consumption finally reaching the 1990 level by 2005. According to the forecast, this growth will now slow to about 1.7 percent CAGR, which is very close to the Western European rate. Do you consider the UCTE’s forecast average annual consumption growth until 2020 as realistic?
The Hungarian representatives pointed out that the forecast national consumption growth rate of 2.1 percent is not in line with their projections. A decrease is expected in the immediate future, and afterwards the annual change anticipated in the long-term strategic plan of MAVIR, according to two separate scenarios (in the medium and long term) is anticipated to be either 0.5 percent or 1.5 percent.
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CEE electricity generation: forecast
3.1. UCTE forecast Figures for future developments are based on the System Adequacy Forecast 2009–2020 prepared by the Union for the Co-ordination of Transmission of Electricity (UCTE) and KPMG analysis regarding the Baltic countries and Albania. This presents two scenarios (“Conservative” and “Best Estimate”) for the development of the electricity sector. The Conservative Scenario takes into account the commissioning of new power plants considered as certain and the expected shutdown of power plants during the given time period. The Best Estimate Scenario also contains future power plants where commissioning can be considered as reasonably credible according to the information available to the national TSOs. Additional information regarding EU regulations and data pertaining to non-UCTE member states has also been examined in order to ensure a comprehensive review of the evolution of the regional generation mix. According to the Best Estimate Scenario, the CEE generation capacity mix will develop significantly by 2020, with total regional capacity reaching 163.3 GW, and an average system load at 97.3 GW. Renewable energy together with nuclear sources and new gas-fired power plants will form the primary focus of sector development.
Figure 16: CEE generation capacity forecast, 2020
Nuclear Coal Oil Natural Gas Mixed/Other Fossil Fuel Wind Other Renewable Hydro
180 160 140
23%
25%
22%
1%
2%
2%
100
2%
6%
7%
80
6%
3%
3%
60
9%
13%
17%
40
1%
1%
1%
20
49%
39%
38%
10%
12%
11%
120 GW
40
0
2009
2020/Conservative Scenario
2020/Best Estimate Scenario
Source: UCTE, System Adequacy Forecast 2009–2020, KPMG analysis regarding the Baltic countries and Albania
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CEE electricity generation: forecast
41
However there is a significant difference between the Conservative and Best Estimate Scenarios. Based on the assumptions of the Best Estimate Scenario and KPMG analysis the installed capacity is estimated to be 34 GW higher than in the case of the Conservative Scenario. In the case of the Best Estimate Scenario the ratio of coal-fired capacities is expected to shrink to 38 percent of the total. The proportion of renewables will increase to 31 percent, with the continuing dominance of hydro representing above 22 percent of the total. The proportion of gas-fired plants, expected to account for 13–17 percent in 2020, is expected to largely replace defunct coal-fired capacity. In order to identify the investment possibilities for each kind of fuel, generation sources will be outlined separately in the following section.
Coal Currently, coal generation accounts for 48 percent of total electricity generation in the CEE region. It also plays an important role in the security of supply, as the resources are local. However, since coal-based generation produces high levels of CO2 emissions, it is not favored by the European Union. Nonetheless, in the long term, the emergence of “clean” coal generation technology is expected to boost the attractiveness of coal as a primary fuel. Several CEE countries hold significant coal reserves, including Poland, Bulgaria, Hungary, the Czech Republic, Romania and also Kosovo. A number of new coal and lignite-based generation units are also planned in Albania, Bosnia, Bulgaria, Croatia, Macedonia, Montenegro, Romania, Kosovo and the Baltic countries. Meanwhile Poland, Slovakia and the Czech Republic will decrease their coal-fired capacity. In Hungary, and most of the CEE countries, the future of coal depends on the development of the European Union’s Emission Trading Scheme (ETS) after 2013. Generally, the share of coal in total generation capacity is expected to dip below 40 percent according to both scenarios. However, in absolute terms, there is a significant difference between the two, as in the Best Estimate Scenario, the total coal generation capacity will be increased by 750 MW, while conservative estimations suggest a decrease of more than 10 GW. What are the current trends in coal-fired capacity expansion? After falling out of favor in recent years, coal-fired power plants are once again under construction (or at least being considered) in many countries, primarily due to the relative abundance of domestic reserves and despite public objections. The future, however, will depend, among other factors, on the new European Trading Scheme for CO2, the price of CO2 and permit processes.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
42
CEE electricity generation: forecast
The carbon capture and storage (CCS) question would appear to be of crucial importance, and if successfully developed could well boost the opportunities for future coal-fired plant. Yet one respondent indicated that the development of this technology is highly questionable in the near term. Renewable generation Renewable energy is a focus of attention for future investment and development, as it is a strategic energy source due to EU regulations, growing environmental concerns and the desire to reduce dependence on imported energy. The renewable energy targets of individual countries have generally been set in line with their potential resources. The level of development in the renewable sector varies across the region. Significant proportions of electricity generation in Bosnia and Herzegovina, Croatia, Montenegro, Latvia and Albania is based on renewable sources, principally hydro, its share being over 50 percent in these countries’ installed capacities. In contrast, in countries such as Czech Republic, Hungary, Poland and Estonia, which all lack cheap hydro resources, the share of renewables is below 20 percent.
Figure 17: Share of renewables in final consumption of energy 16.6%
40%
25%
31.4%
EU member CEE countries
EE
EU member candidate CEE countries
23%
LV
14.6%
EU member potential candidate CEE countries
LT
15%
Target for share of energy from renewable sources in gross final consumption of energy, 2020
7.5% PL
6.4%
Share of energy from renewable sources in gross final consumption of energy, 2006 5.1%
13% 14%
CZ
6.8% SK
13% 17.1%
HU
24%
SI
25%
Non-EU member Balkan countries have no targets yet, but have high share of hydro electricity.
HR
RO
15.6% BA
RS
9% ME
16%
BG
KO MK AL
Source: DIRECTIVE 2009/28/EC on the promotion of the use of energy from renewable sources
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE electricity generation: forecast
43
According to the UCTE’s Best Estimate Scenario, the share of renewables in total generation capacity will reach 31 percent, i.e., 50 GW, by 2020. Wind-generation is expected to advance significantly, with capacity in the region increasing more than six-fold to some 12 GW by the end of the forecast period. Indeed, almost every CEE state is going forward with wind energy plans, with Poland, Romania, Estonia and Albania at the forefront. Nonetheless, the realization of these investments is highly dependent on the availability of finance and the system-balancing ability of the national transmission systems. As exceptions, Montenegro and Serbia have no wind generation plans in the forecast period, focusing instead mostly on hydro schemes. Across the region, hydro capacity is expected to increase to some 35 GW, 20 percent up on current levels, with Montenegro, Macedonia, Romania, Slovenia and Albania leading developments. Of the countries studied, Estonia is the sole exception in not planning any new hydro capacity. How attractive are renewable energy investments? Even without the financial crisis, there were already growing concerns about the economic viability of EU targets, both in Western and Eastern Europe. Renewable energy generation also involves certain time-consuming permitting procedures. Therefore, the reality is that some countries might not reach their goals – despite striving to do so.
Interestingly, the financial crisis arguably hit energy investments in Western Europe harder than in the east, due to the large number of ongoing projects (many of which are now delayed due to lack of funds). On the other hand, in the CEE countries, similar projects had just been started, and there is still a long way to go until most feasible projects get off the ground. Hence in CEE the focus of attention should be on the regulatory frameworks, the licensing regimes and getting projects going, rather than merely on the lack of financing. Indeed, the EBRD pointed out that there is more finance available than actual projects underway. A Siemens representative concurred, adding that given the right policy incentives, renewable projects were often easier to finance as the presence of political support and subsidies clinched the case for investors. Not all agree, however. A representative of OTP, the Hungarian-based bank, said that bank was skeptical of renewables both pre- and post-crisis. OTP pointed to the vital influence of favorable regulations and subsidies, noting that the modification of the Hungarian feed-in tariff system was a development which could boost the future appeal of renewable projects. In Romania, where
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44
CEE electricity generation: forecast
legislation is in force that promotes renewables, there are numerous projects in these sectors. MKB Bank is one that anticipates a change for the better in this field, and plans on expanding its renewable portfolio. What are the most significant technical constraints that hamper the expansion of renewable technologies and threaten compliance with the renewable energy target? Many respondents insisted that favorable financial and regulatory measures are indispensable for widespread promotion of renewables, including, for example, the feed-in tariff. However such incentives also introduce certain technical and commercial challenges to electricity systems. Monitoring plants generating power under this tariff arrangement poses difficulties for the TSO, especially related to balancing. For example there may be surplus electricity generated, during periods of low demand. This in turn causes prices to fall, and reduced loads at larger plants which do not benefit from the tariff system. All of which causes disturbances in the market which must be properly managed, both technically and commercially.
One solution is to build more balancing power plants. For example, the Siemens representative mentioned that the company currently sees more than 3–4 GW of renewable power plants in development, which will of necessity be accompanied by a similar amount of stand-by generation, most likely CCGT. This is a new challenge, as currently system balancing capacity is primarily a function of fluctuations in consumer demand, and back-up for the largest generation units. Hence the spread of renewable technologies is a new factor for system designers to grapple with in coming years. In response to this challenge, the representative of the Hungarian TSO suggested that the system operator should be granted more direct control over subsidized plants. For example, in the case of wind plant, due to the volatility and simultaneity of generation, the volume of production permitted should depend on whether the TSO is able to directly influence generation. Without a central solution, investments will become more costly as some form of remote control with an accompanying IT system must be implemented individually for each unit. The biggest issue in respect to the preparation of such common regulation (setting aside political dealings) is the fact that the plants affected are diverse and usually quite small, but must be controlled uniformly. One possible remedy to this would be grouping these plants, either on a geographic basis, or according to generation type, and creating one sizeable “virtual plant” comprising each group, which could in turn be operated more effectively.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE electricity generation: forecast
45
Nuclear generation Nuclear is a priority issue, due to the EU regulations on CO2 emissions, competitive pricing and security of supply. Seven CEE countries currently run nuclear plants, viz. Bulgaria, the Czech Republic, Hungary, Lithuania, Romania, Slovakia and Slovenia (which operates a nuclear plant together with Croatia).
Table 2: Nuclear electricity generation Nuclear electricity generation, 2007
Capacity Apr 2009
TWh
%
No.
MW
Bulgaria
13.7
32
2
1,906
Czech Republic
24.6
30.3
6
3,472
Hungary
13.9
37
4
1,826
Lithuania*
9.1
64.4
1
1,185
Romania
7.1
13
2
1,310
Slovakia
14.2
54
4
1,688
Slovenia/Croatia**
5.4
42
1
696
* The Lithuanian reactor was decommissioned in December 2009 ** Slovenia and Croatia jointly operate Krsko NPP. Source: Reactor data: WNA to 1/5/09, IAEA- for nuclear electricity production & percentage of electricity (% e) 5/08., WNA: Global Nuclear Fuel Market (reference scenario) – for U, IEA
In recent years, Bulgaria, Slovakia and Lithuania have been forced to close a number of nuclear generation units on safety grounds. According to the World Nuclear Association, currently Slovakia is building two reactors, with a total capacity of 840 MW, another two are planned in Bulgaria (total capacity 1,900 MW) and two more in Romania (total capacity 1,310 MW). In addition, 14 more reactors have been proposed across the region, involving a total capacity of about 21.5 GW. According to the UCTE’s Best Estimate Scenario, nuclear generation capacity in the region will grow by 42 percent by 2020 to total 17.4 GW. And as an indication of the optimistic outlook for the nuclear industry, the Conservative Scenario is little different. It takes into account Slovenian and Lithuanian forecasts, and predicts 2.1 GW less nuclear capacity in total.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
46
CEE electricity generation: forecast
What are the current trends in nuclear capacity expansion? Two respondents remarked that nuclear generation might be seeing a comeback. New nuclear projects are underway or being considered in the Czech Republic, Lithuania, Poland, Romania, and Bulgaria, and are being studied in Hungary and Slovenia. With the exception of a nuclear power plant extension initiated by CEZ, however, none of the projects in the region are showing substantive progress. The volume of investment involved, the socio-political implications and the extremely long commissioning period all mean that nuclear facilities are a longterm prospect, when they will surely be a significant factor.
Nuclear plants also create system balancing issues, although this is far from insoluble. In France, for instance, where nuclear generation is substantial, negative balancing is technically feasible and therefore available. Natural gas Natural gas generation currently represents only 9 percent of total capacity in the region, although in Latvia and Hungary gas makes up more than 30 percent of total capacity, and Croatia, Lithuania and Romania also have significant gas-fired plant infrastructure. Further development of gas-based generation is expected due to its high efficiency, the short lead times for new plant, low capital expenditure, and low CO2 emissions. Moreover, development of natural gas usage in electricity generation might be advanced by the realization of new supply routes to Europe, such as Nabucco, Blue Stream and Nord Stream. According to the estimates of national TSOs, gas-fired capacity in the region will jump to 28 GW, i.e., 2.5 times current levels in the Best Estimate Scenario. Poland leads the CEE “dash for gas”, with around 8 GW of new capacity to be installed by 2020 (primarily as an alternative to coal). Hungary and Croatia plan a total of 1.4 GW of new plant, while Macedonia, currently dependent only on coal, oil and hydro, is mulling up to 500 MW. With these and other developments, the total share of gas capacity in CEE is forecast to rise to 17 percent of the total by 2020. What are the current trends in gas-fired capacity expansion? The majority of projects in recent years have been Combined Cycle Gas Turbine (CCGT) plants built by large utility companies, although small cogeneration units (for heat and power) have also become popular, both for district heating and industrial projects. Again, the attractions of gas – the low CO2 emissions, high efficiency (especially for small cogeneration units) and short commissioning
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CEE electricity generation: forecast
47
times – underpin the popularity of gas. On the other hand, Russia is the primary fuel source, which raises questions about the security of supply. 3.1.1. Analysis of the UCTE Scenarios for CEE countries According to the UCTE’s Conservative Scenario, the total capacity in the CEE region will grow by only 3.4 percent in the next decade, hitting 130 GW by 2020, with some differences in the proportions of primary energy sources.
Figure 18: CEE Generation capacity change from 2009 to 2020 Other Fossil Fuels Nuclear Coal Natural Gas Renewables Hydro
B CEE
A
-20
-10
0
10
20
30
40
50
GW Note: A – Conservative Scenario; B – Best Estimate Scenario Source: UCTE, System Adequacy Forecast 2009–2020
Overall, both scenarios forecast similar trends regarding capacity development, with nuclear, gas, wind, and hydro capacities presenting the best opportunities for investment. A moderate decrease is foreseeable in the use of oil and other fossil fuel-fueled capacity, although in the case of coal the outlook is more difficult to predict. How accurate are the forecast figures in the UCTE System Adequacy Forecast 2009–2020? Most respondents indicated that some of the forecast figures were not entirely consistent with their own projections. Firstly, the economic crisis might affect the implementation and the timing of implementation of the project plans that have been incorporated in the Best Estimate Scenario, while the crisis might act as an incentive for taking old, inefficient power plants out of service that cannot compete effectively in the current situation (with low demand and cheap imports). Two strategic options can be considered for ageing units: utilities might wait for demand to recover to a competitive, or they might invest in replacement plant. The biggest challenge appears to be finding investors for such a long pay-back period. Other issues include who will provide the replacement units (the current utility companies or new investors) and which type of generation to choose.
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CEE electricity generation: forecast
Respondents agreed that the Best Estimate Scenario is questionable, and indicated that although ensuring security of supply needed substantial investment, the projects already in place or in the planning phase (and thus included in the Conservative Scenario) would probably be adequate to cover future demand. Respondents expressed strong doubts regarding greenfield investment predictions and meeting renewable targets. The representative of the Czech TSO also mentioned that the UCTE forecasts were based on earlier studies that had not considered the advances in photovoltaic technology and only counted on conservative development of wind power generators. Although several wind park projects have been postponed or cancelled due to either the financial crisis or local public opposition, some of these projects had been replaced by a boom in photovoltaic installations. Indeed, in the Czech Republic some 55 MW of new photovoltaic capacity was installed in 2009.
Note: A – Conservative Scenario; B – Best Estimate Scenario Source: UCTE, System Adequacy Forecast 2009–2020 © 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Figure 19: CEE Generation capacity change from 2009 to 2020 (GW) EE 2009 2020 2.47 4.06
LV 2009 2020 2.18 3.81
LT
EE
2009 2020 4.65 5.51 LV
PL 2009 2020 LT
33.25 38.98
CZ 2009 2020 15.85 16.85 PL
SK 2009 2020 6.73 8.30
CZ
SK
HU 2009 2020 8.83 11.12
RO
HU
RO
SI
2009 2020 HR
16.68 23.15 BA RS
SI 2009 2020
BG
ME
3.04 6.52 AL
MK
HR 2009 2020 4.00 6.10
BA 2009 2020 3.74 6.22
RS 2009 2020 8.31 9.88
ME 2009 2020 0.85 1.82
AL 2009 2020 1.50 4.10
MK 2009 2020 1.45 3.19
BG
Legend Nuclear Coal Oil Natural Gas Mixed/Other Fossil Fuel Wind Other Renewable Hydro
AL
2009 2020
2009 2020
11.32 15.59
1.50 4.10
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Total installed capacity in 2009 and 2020 (Best Estimate)
50
CEE electricity generation: forecast
Assessment of both generation forecast scenarios by country Balkan Countries Albania plans major developments in its electricity generation sector. Overall growth is predicted to be 170 percent, with installed capacity reaching 4.1 GW by 2020. New fuels will be introduced, such as coal, wind and other renewables, which will help in diversifying the country’s generation mix. Bosnia and Herzegovina is planning to introduce wind generation and developing its coal-fired capacities Bulgaria aims to meet its future electricity demand mainly with the help of new nuclear, wind and hydro capacities (4 GW), accompanied by moderate investments in coal. The Croatian generation mix is already quite diversified; considerable development is expected in gas-fired generation. The increase in fossil fuels in Macedonia mainly comprises new gas-fired capacity. Development of 1 GW of new hydro units is also planned, which would raise the renewable share of the generation mix in the country to 46 percent. The generation mix of Montenegro is based on just hydro and coal, both of which will form the basis for new projects, with no further diversification of primary energy sources. Serbian development plans include investment in new thermal plants. No renewable development is expected, and the share of renewables is expected to decline to 29 percent. The energy system of Kosovo is under severe strain, with peak demands well above total capacity. Kosovo intends to build new lignite-fired capacity based on domestically available resources.
Baltic states In Lithuania, the existing nuclear facility has been decommissioned by the end of 2009, which will create capacity and a need for imported electricity. However, the Best Estimate Scenario suggests that 1 GW of new nuclear generation will be built by 2020. In Estonia the development of 1 GW of new wind capacity is forecast, which may be too optimistic. New gas and wind capacity will be developed in Latvia in order to meet growing demand.
Central Europe The Czech Republic is focusing on replacing coal-fired plant with gas and wind capacity. Hungary’s future generation mix implies investment into further gas units totaling 1.4 GW and a large hydro facility of 1.2 GW. KPMG assesses this unrealistic as there are no concrete information available on the initiation of such hydro investments, and as these developments take several years of planning and construction it is doubtful that significant capacities would be deployed until 2020.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE electricity generation: forecast
51
Controversial forecasts have been made for Poland, where owing to EU environmental regulations, some major coal-based generation facilities may have to be closed. Poland will probably be able to replace some of the existing coal plant by investing heavily into gas-fired units. Further development of wind generation can also be viewed as a promising investment prospect. Romania’s plans lie predominantly in developing its existing nuclear and hydro generation capacities. In Slovakia, new nuclear generation facilities and a reduction in coal generation are expected. Slovenia is also planning to invest in new nuclear capacities. Overall, opportunities in the region vary according to existing plant, know-how and available resources in each country. According to the UCTE forecasts, certain countries will experience shortages in capacities even if all plans are fulfilled. These countries will need to import electricity in order to meet rising demand. In particular, both Poland and Macedonia are likely to suffer from capacity shortages which, in case of the Conservative Scenario, amount to a peak load 21 percent higher than the generation capacities by 2020 in both countries. Similarly, in Bosnia and Herzegovina, the Czech Republic, Hungary and Serbia, the increase in electricity demand is expected to be higher than the development of generation capacities. These countries should therefore be given special attention when assessing investment opportunities.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Financing investments in the energy and power sectors
53
4. Financing investments in the energy and power sectors Energy industry investments, be they in generation, transmission or distribution, require a large amount of money and generally entail moderate risks. Such projects are considered long-term investments associated with mid- and longterm payback periods. However, even in a stagnating economic environment energy sector investments can prove worthwhile, as infrastructure is aging and efficiency improvements are continually being made. Hence new investment can both increase corporate profitability and reduce environmental damage. According to KPMG estimates, industry statistics and respondents’ opinions, the financing of energy sector development projects has changed considerably due to the economic crisis. The following sections analyze the challenges of the new environment for energy sector investment financing in the CEE region.
4.1. Conditions of the current financial crisis The current financial and economic crisis was triggered by the collapse of the US mortgage-backed securities market in 2007; however, it later escalated into a global financial crisis with significant impact on the global economy, including the energy sectors and the CEE region. In the period 2002–2007, world economies experienced significant and almost continuous GDP growth, which in the emerging countries, such as China, India and the CEE region, was higher than in the developed world. The CEE region in particular relied on large inflows of foreign direct investment (FDI) from multinational companies to create significant industrial production capacities. This process began from the mid-1990s, as the implementation of political and economic reforms created favorable market conditions. An increasing portion of the FDI flowed into the electricity, gas and water sectors also benefited from this trend, and the share of FDI in these sectors rose from 18 percent in 1995 to 27 percent in 2006.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Financing investments in the energy and power sectors
Figure 20: FDI Inflows in CEE 80,000 70,000 60,000 USD million
54
50,000 40,000 30,000 20,000 10,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: UN, World Investment Report, 2008
Due to the liberalization, integration and globalization of financial and capital markets, incomes generated mainly by the export of multinational companies have been transferred to the capital markets of the developed countries, financing further investments and consumption. But low base rates, high levels of liquid capital and decreasing yields led to a persistent rise in risk taking and high financial leverage. New financial instruments such as the Collateralized Debt Obligation (CDO) became common on the financial markets, providing the illusion of well-managed financial risks, and resulting in financial institutions retaining highly-leveraged positions.
4.2. Effects of the crisis on the economy and energy sector The economic downturn can be seen as a major restructuring of the risk assessment of market participants. Investors came to terms with the misleading low-risk perception of the sophisticated financial products and thus intended to get rid of those as soon as possible. This generated a massive wave of global sell-offs, bankruptcies and liquidations. Banks moved to modify their highly-leveraged positions, and therefore credit conditions became stricter and interest levels increased, entailing negative consequences for the real economy. A lack of financial liquidity, the credit crunch, and a growing number of bad loans has affected all segments of the global economy. Market players took the following steps in the face of the new challenges:
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Financing investments in the energy and power sectors
• • • • • •
55
Introduction of cost reduction programs Revision of next years’ budgets Implementation of tightened cost management Hiring freeze Investment freeze Reduction in production capacities
In addition, the lack of financial liquidity caused a reduction in consumption that further worsened the situation, leading to diminished production levels, unutilized capacities and the shutdown of production sites, ultimately resulting in an increase in global unemployment. 4.2.1. Effects of the financial crisis on the CEE economy The financial crisis also hit the CEE region, since most of the CEE economies were built on FDI, foreign borrowing and additional funds from the European Union. Governments borrowed massively to finance the modernization of their industries, service and public sectors, with the aim of producing lower-cost industrial goods, commodities and to increase domestic social well-being. The reduced demand accompanying the financial crisis afflicted the highlyleveraged state budgets and industrial plants in Central and Eastern Europe. In addition to the difficulties in the industrial sector, in some countries consumers were encouraged to borrow money for housing and consumer durables in euro and other foreign currencies at low interest rates. Therefore, when the financial crisis hit Europe, indebted borrowers were devastated by the collapse of their national currencies and increasing interest rates. The financial crisis led to a housing crisis in several CEE countries such as Hungary, Bulgaria and Romania, resulting in a high level of non-performing assets on banks’ balance sheets. 4.2.2. Effects of the financial crisis on the electricity sector The crisis has hit the power sector less than others, since electricity is a necessity good that is less dependent on income than many consumer items. However, the decrease in industrial production and overall residential cautiousness regarding energy consumption has resulted in falling electricity demand. As shown in Figure 21, monthly electricity consumption in the region has been lower than the previous year’s since October 2008, and the average year-on-year decrease between October 2008 and September 2009 was 5 percent.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Financing investments in the energy and power sectors
2007 2008 2009 2008/2007 2009/2008
46 000
8%
44000
6%
42000
4% 2%
40000
0%
3 8 000
-2%
3 6 000
-4%
3 4000
-6 %
3 2000
-8 %
3 0000
-10%
28 000
-12%
26 000
-14% J an Feb M ar Apr M ay J une J uly Aug S ept Oc t N ov D ec
Source: UCTE
How does the current economic crisis affect electricity consumption? Until late 2008 electricity consumption had shown a stable growth rate in the CEE region. TSOs agree that the current decrease in consumption is mainly caused by the global economic and financial crisis. According to the Hungarian and Czech TSOs the decrease is mainly due to reduced consumption by large industrial consumers, with only a marginal decline in the residential sector.
It should also be noted that the monthly consumption data presented in Figure 21 shows gross electricity consumption which includes self consumption of the generation units, plus network losses. Total self consumption depends significantly on the generation mix of the country and the age of power plants. (Self consumption of old, inefficient plants is high, so any decrease in the use of such plants affects the final figures disproportionally more than switching out an efficient unit.). The decreasing demand has resulted in a modified supply-demand equilibrium, followed by lower electricity prices. The spot price of the Prague Electricity Exchange presented in Figure 22 is a good indicator of electricity price trends in the region. The Prague Energy Exchange (PXE) showed a significant decline in January 2009 and spot electricity prices were under the 2008 level throughout the year. However, it should also be kept in mind that the majority of electricity trading happens on the OTC market in the CEE countries.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
P erc entage c hange
Figure 21: Monthly electricity consumption in the CEE region
GWh
56
Financing investments in the energy and power sectors
57
Figure 22: Czech electricity spot price development on PXE Peak load
120
Base load
100 EUR/MWh
80 60 40 20 2009.09.04
2009.08.04
2009.07.04
2009.06.04
2009.05.04
2009.03.04
2009.04.04
2009.02.04
2009.01.04
2008.12.04
2008.11.04
2008.10.04
2008.09.04
2008.08.04
2008.07.04
2008.06.04
0
Source: Prague Energy Exchange
Falling electricity prices have a major effect on the profitability of the electricity industry, which in turn throws into question the viability of several planned and on-going investment projects. Furthermore, decreasing prices have resulted in a worsening credit outlook for major European utilities. What are the main effects of the financial crisis on the Transmission System Operators in the CEE region? The extensive investment costs of TSOs are mainly financed from external sources, especially bank loans.
Due to the economic crisis, the costs of these loans have increased significantly, which in turn reduces the profitability of TSOs. Furthermore the credit ratings of CEE countries have significantly worsened, which affects the state-owned TSOs’ ability to access loans. The Czech TSO respondent emphasized this point, saying that currently the high interest rates make financing the modernization of existing infrastructure more difficult and expensive. The Hungarian TSO representative also mentioned that the lower electricity consumption means reduced revenues for TSOs. In general, the costs of system operation services are built in the tariff prices proportionately to the estimated annual electricity consumption. Since the tariff levels defined for 2009 were calculated based on a higher electricity consumption level therefore the revenue realized by the TSO does not cover the system operation costs, which must be compensated in next year’s tariffs.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
58
Financing investments in the energy and power sectors
4.3. Effects of the financial crisis on financing conditions 4.3.1. Introduction of the main financing structures Financing has always been one of the most difficult and most complex exercises of the project realization process, since all stakeholders shall make their final “go” decision considering the benefits they expect and the risks they are ready to take in connection with the specific project. The applied financing structure is always project specific and reflects the risk bearing capability of the involved parties. The utilization of equity is a straightforward choice for financing electricity industry projects however in most cases; substantial external resources are also required due to their extensive investment need. Investors must pay careful attention to the utilization of own and external financial sources when assessing the profitability of a planned investment, as high leverage can increase the returns. Joint ventures are frequently formed if the equity need of the project exceeds the resource of a single project sponsor. In this structure the project sponsors create a partnership for the financing of a specific project. The parties, known as co-venturers, share costs, risks, and liabilities associated with raising funds for a project. By participating in joint venture financing, the investors can spread risks, minimize credit exposure, and often share in asset ownership. In the traditional
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Financing investments in the energy and power sectors
59
form of joint venture, each co-venturer raises its share of the funds on the basis of its own direct credit and its ownership interest in project assets. There are various types of financing structures used to raise external financing for large infrastructure projects. However the two most commonly used ones are: 1. Traditional Corporate Lending (full recourse to the sponsor) 2. Project financing (non- or limited-recourse financing) Traditional Corporate Lending (full recourse to the sponsor) The main feature of this type of financing is that the financing is linked to the project sponsors’ balance sheet and most of the risks are absorbed on the side of the project sponsors. This means that if the project is delayed, stops or goes bankrupt, the borrower must take the responsibility and meet all liabilities. Banks typically provide different types of loans according to the specific circumstances of the borrower. The main characteristics of bank loans are amount, currency, maturity, interest rate and fees. Project financing (non- or limited recourse financing) Generally, project financing is used when sufficient conventional assets are not available to secure the loan as collateral. Rather, the project itself is considered as the main asset, and thus the lending bank executes a thorough examination of the project plan, including key aspects such as market analysis, the business plan and the expected cash flow. In addition, several covenants and conditional obligations are required by the lending banks to secure the loans and they continuously monitor the advancement of a project. Syndicated project financing is often used and involves a large sum of funds lent to a single borrower by a group of banks that teams up in an alliance to share the risk of financing. The project is usually pursued in a separate special purpose vehicle (SPV) created to execute the project and to be “bankruptcy remote” from the project sponsors. Many times the project financing in practice turns to limited recourse direction, meaning that the sponsors give certain direct securities to lenders but those are only for covering limited areas of risks (one typical example is project cost overrun risk). The main characteristics of project financing are amount, currency, maturity, covenants, interest rate and fees. Main considerations of financing from the banks’ perspective The banks assess carefully the background of the project sponsors, especially of the lead sponsor including their financial resources, technical knowledge, past experience, etc. Furthermore the shareholder structure between the project sponsors including their role in the management, their potential exit options and their relationship are also examined in detail. The financing is usually priced based
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on the risks involved in the project such as country risk, technology risk, licensing risk, construction risks, off-take risk etc. What are the types of preferred financing structures commonly used to finance energy sector-related projects? Respondents agreed that project financing is the most common form for financing energy sector projects, since the cash flow generated through these projects can be relatively well quantified and estimated. The experience and credentials of project sponsors are also key factors to consider when opting for this method of finance.
Lending is also substantial but it is mainly used when large international companies or utilities finance several investment projects from the same pool of credit. The amount of loans usually depends on the creditworthiness of the investor and it is based on a deep and long-lasting relationship between the bank and the borrower. In general, most greenfield investments are implemented in project financing form while modernization and retrofit projects are usually financed through lending. Private equity and mezzanine financing are not commonly used in energy sector investment projects. However, some banks (such as BNP Paribas) actively use these financing forms, and focus on the fees that these smaller investment deals can generate. The interviews also revealed that MKB Bank intends to apply some non-conventional financing forms in energy sector financing such as leasing or factoring. Overall, survey respondents agreed that prior to the crisis it was relatively easy to find financial resources for a well-structured energy sector investment, while in the last year it has become more challenging due to tighter capital resources. How does the size of the investment influence the financing model applied? Project financing is usually applied for medium or large deals, since small projects are not able to finance the extra costs derived from project financing (such as consultancy fees or the cost of permanent monitoring of the project). Large investment projects are usually realized in a well-structured form, which includes senior and junior tranches. Large transnational development banks, such as EIB or EBRD, are typically also involved in such projects.
The thresholds mentioned by the banks participating in our survey differed significantly: in the case of OTP, project financing is commonly used for projects in a range of EUR 20–60 million or above, while BNP Paribas concentrates its resources on deals that are over EUR 100 million.
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The present financial and economic crisis has affected the willingness of banks to take risk; therefore, syndicated financing currently starts at a lower level to spread the risks among numerous banks. Documentation has become more complex and the decision making and lead time of investments has lengthened. It was also concluded that in the recent past the CEE region has only seen limited refinancing or medium-sized investments, with no new large-scale power plant investments taking place since the crisis hit. In Hungary, the largest deals in the energy sector have been in connection with bio-fuel investments. How do equipment suppliers participate in the financing of new generation capacity development? The study revealed that there are several practices regarding the financing of energy projects. GE has a separate business unit within GE Capital which provides financial services for the energy sector by seeking out financial resources and viable projects. Siemens provides limited financing for projects' in terms of giving loans, and additionally it does assist clients by advising them on financing-related questions, e.g., by optimizing the involvement of Export Credit Agencies and by facilitating investors’ involvement through their connections with banks and lenders. Siemens also participates in several projects as an IPP and helps to bring equity to the project and provide the technology. Siemens intends to expand further in this business area, especially under the present financial and economic circumstances, when the financing of such projects is getting more difficult.
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Financing investments in the energy and power sectors
What are the preferences and priorities for banks regarding project financing in different sectors and industries? What is the share of energy-related projects in the portfolio of the banks surveyed? Respondents identified real estate, automobile, energy, telecommunications and pharmaceuticals sectors as the most common sectors to employ project financing structures for development projects. The share of energy sector-related deals within the project financing portfolio of the banks varied between 10–40 percent, depending on the strategy of the particular bank. With the exception of the EBRD, banks mentioned that prioritization among the different sectors has recently changed due to the financial crisis. MKB’s strategy aims to shift its priorities from the construction, automotive industry and real estate sectors (which had previously provided the backbone of their project financing portfolio) to other sectors that were less impacted by the crisis, such as energy and pharmaceuticals. For OTP the share of energyrelated projects was expected to decrease slightly from the level of 35–40 percent in 2009, as these projects are usually low risk, consequently their pricing and profitability are lower compared to other sectors. Nevertheless, in the beginning of 2010 a substantial shift in OTP's strategy resulted in considerable growth of energy sector lending and financing. In contrast, the EBRD’s strategy, as a development bank, differs from the commercial banks, and no industry preferences are specified, as financial decisions are based on the principles of sound banking, additionality and transition impact that can be achieved through the implementation of the project. Are there any preferences for renewable energy among the different investment projects? The Equator principles provide a benchmark for financial institutions regarding the management of the social and environmental issues encountered in project finance. Among the interviewed banks, only BNP Paribas has adopted these principles, although the others also have some policy on renewable energy investment projects.
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The EBRD places high priority on energy efficiency improvements and sustainable energy projects, including renewables and projects which improve energy security. Any project financed by the EBRD has to meet both local and international environmental regulations, or even go beyond them and apply best available techniques in order to score better in terms of transition impact. Similarly, Bayerische Landesbank, the owner of MKB, also promotes the importance of “clean energy”, which also includes efficiency improvement and CO2 emissions-reducing projects. OTP Bank has no specific priorities for renewables, and although it considers the environmental impacts of a project during the evaluation process (it requires full compliance with the applicable environmental rules and regulations), its financial decisions are based solely on financial viability. Despite the stated strategy of banks to support renewable projects, such projects comprise less than 20 percent of the portfolios of respondent banks. However, all agreed that there is huge potential in renewable energy, as the growth rate in this sector is expected to be higher than the average in the region. Furthermore, the feed-in tariff system provides good predictability and profitability for investments, making such projects attractive for banks. Wind energy and biogas were mentioned as the key development areas within the Hungarian renewable market, but other innovative projects such as agricultural waste, pellet or sewage mud, etc. also have potential. 4.3.2. Changes in the financing conditions of energy sector projects Most banks present in the CEE region (with the principal exceptions of OTP in Hungary, PKO in Poland and most banks in Slovenia) are majority owned by institutions headquartered in Western Europe. However, the majority of these banks had only insignificant direct investments in such problematic financial innovations as the American CDOs. Therefore, they were not directly impacted by the downturn of the American mortgage market although they were heavily affected by the spill-over effect of the financial crisis. In order to control the negative consequences of the crisis the following measures were enacted: • Restructuring and refinancing their problematic debts • Providing fresh loans to the government, industry and consumers • Cutting back operating costs and • Accumulating a substantial amount of liquidity as a precautionary measure.
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Financing investments in the energy and power sectors
How have the financial requirements and the assessment of project plans been modified due to the financial crisis? What are the minimum financial requirements and prerequisites for an eligible project? Respondents agreed that project financing has become considerably more difficult during recent years. Prior to the crisis, commercial banks became very liberal in the boom years in terms of financing requirements due to the extensive amount of liquid and cheap financial resources available. As a consequence of the crisis however, banks had to face deteriorating loan portfolios and a lack of trust in the financial market, which eventually led to liquidity problems. Therefore, the following changes occurred in the conditions and prerequisites for project financing: 1) The expected ratio of own equity increased to 30 percent, compared to the previous 10–15 percent levels. This has had a huge impact on, for example, wind park projects, which in the past, had the most aggressive project structures. But now, with the banks demanding higher equity ratios, project sponsors have to demonstrate more trust and commitment towards projects. Furthermore, government and EU subsidies are usually not included in own equity (since these can suffer delay or cancellation), and thus the project has to be profitable without these subsidies, although they can later be used for early repayment. 2) The interest surcharge level has also drastically increased as a result of the growing cost of bank funding. Depending on the currency, the interest rate surcharge has jumped from 0.8 percent to 3.8–5.0 percent. However resources in local currency have generally stayed relatively cheap compared to credit in foreign currencies and long-term financial resources, which became extremely expensive. Although the interest surcharge has increased significantly, the lower base rates have to some extent compensated for this. 3) The one-time fees linked to project financing have also significantly increased, typically from a level of 0.15 percent to 1–1.5 percent. 4) The Debt Service Coverage Ratio (DSCR) currently required from eligible projects has risen from 1 percent to 1.2–1.25 percent. 5) The collaterals and covenants required from the project sponsors have become more tough and more regular and thorough monitoring is conducted. 6) The fact that banks refuse to take currency risks and the borrower has to possess incomes in foreign currency in the case of foreign debts is a further disadvantage. 7) More attention is paid to the assessment of assumptions in a project plan such as the contractual background, ownership structure, and cash-flow projections. 8) Banks have also introduced some new indicators to assess the efficiency of their internal operation, based on the risks and profitability associated with different financial products.
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The interviews conducted for this survey confirmed that most commercial banks have had to make the aforementioned changes, which have all led to a more tedious and time-consuming process, and often resulted in delays or even the cancellation of projects. However, the new conditions for project financing have proved to be a good filter, since only truly profitable projects pass the stricter hurdles. In the meantime the financing principles of the EBRD have not changed to this extent since they followed a more conservative approach than the commercial banks prior to the crisis as well. 4.3.3. Changes in project financing volumes The impact of the financial crisis appears in recent project-financing trends. Most particularly, the global project finance volume in Q1 2009 (USD 41 billion) was barely half the average quarterly volume in 2007 and 2008 (USD 79 billion). In the first half of 2009 the number of large projects valued at over USD 1 billion reaching financial close also dropped significantly. However, the Q2 2009 data shows some recovery, with volumes approaching previous levels, both in terms of total project volume and number of deals*.
Figure 23: Recent trends in project financing
Bond
120
Equity
100
Number of deals
250 200
80
150
60
100
40 50 20 0
0 Q1
Q2 Q3 2007
Q4
Q1
Q2 Q3 2008
Q4
Q1 Q2 2009
Source: Dealogic Global Project Finance Review – 1H 2009 – July 13, 2009
Figure 24 reveals that the CEE region, followed by Australia and Africa, suffered the largest slump in project financing deals. The energy sector accounted for 40 percent of the total volume, reaching USD 45.4 billion, a significant decline compared to the H1 2008 (USD 64 billion). However, in H1 2009, five of the 10 largest project finance deals were energy sector-related.
*Source: Dealogic Global Project Finance Review – H1 2009 – July 13, 2009 © 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Number of deals
140
USD bn
Loan
Financing investments in the energy and power sectors
Figure 24: Regional analysis of recent project-financing trends
-41%
-85%
Western Europe
Project financing volume in USD million
-83%
Middle East/Africa
15,294
H1 H1 2008 2009
Latin America/ Caribbean
40,000
change
Asia -68%
12,800
%
21,300
15,324
39%
33,962
24,667
43,390
25,600
20,635
North America
3,700
Eastern Europe
36,000
6% -37%
13,000
66
2,600
Australasia
Source: Dealogic Global Project Finance Review – 1H 2009 – 13 July 2009
What are the main reasons for the decline in project financing? What are the main differences in concluding financing decisions in view of the present economic climate? All respondents agreed that project-financing trends reflect the effects of the global economic and financial crisis. However, they are convinced that banks will continue financing in the long term since it is their core activity, and inevitably the energy sector needs significant financial resources.
There was a clear distinction between the new investment policies applied by commercial banks compared to development banks, as while commercial banks were suffering from a lack of available financial resources, EBRD global financing volume has almost doubled last year. This is mainly due to the EBRD’s stated mission, namely to provide financing for justifiable projects in times when commercial banks can not do so. However, the drop of project financing volume in CEE was nonetheless proportionally deeper than in Western Europe, where the European Central Bank provided cheap financial resources to revive the credit markets. After the crisis struck most commercial banks in CEE faced serious liquidity problems, mainly due to a lack of financial resources and the temporary reallocation
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of limited assets to residential business lines where higher profitability was achievable. However, respondents emphasized that their liquidity has significantly improved in recent months, though due to the increased interest rates immediate development is not anticipated in the volume of project financing. A major setback in project financing volume was caused by the real estate sector, where a price bubble collapsed worldwide. In the energy sector the decline was not as serious as there had been no bubble and no urgent need for new investments. Therefore, only minor delays were experienced in energyrelated projects, and if contracts had already been signed, delays are less likely still since the licenses expire within a certain timeframe. Typically, generation investment projects which have a feed-in tariff system were not affected by the financial crisis to the extent experienced by other investments. Respondents mentioned that the reduced demand for electricity came at a time when many countries were reaching their capacity limits, reducing the urgency for new investment. Indeed, the current situation provides time for decision makers to rethink their long-term investment plans, potentially making them more rational and efficient.
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Financing investments in the energy and power sectors
4.4. Financing needs for electricity sector development in the CEE region 4.4.1. Urgency of electricity sector development in the CEE region Declining electricity demand coupled with falling electricity prices has worsened the outlook for the power industry. The present investment environment is not promising, although there is an extensive need for refurbishment of old plant and for the deployment of new or modernized, efficient generation capacity. These investments cannot be delayed since the development of new capacity needs time-consuming licensing, permitting and construction processes. What are the general time constraints for generation capacity development projects by generation type? What is the general ratio between the needs of the preparation and construction phases? Equipment suppliers emphasized that the time requirements for investments depend on the type of generation selected and on the country in which the project takes place, but as a rule of thumb the preparation and construction phases are roughly of equal duration.
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Financing investments in the energy and power sectors
69
Nuclear power requires the longest lead times since there are numerous political and social questions to be addressed before it can get to the construction phase. In a best case scenario, if a very well-developed nuclear program started today, it would take 10 years before power could be fed into the grid. The split between the planning (pre-selection, licensing and political issues, legislation) and the construction phases for nuclear plant is typically around 40:60. According to GE, the process, from breaking ground to first fuel takes 39 months, followed by another 23 months before final commissioning, though GE has on occasion completed the whole process within 49 months. Coal-fired power plant projects are also difficult in terms of obtaining permits and licenses. However, the length of the construction phase, depending on the complexity of the project, is typically around 36 months. The development of gas-fired power plant projects is slightly easier from the licensing and permitting point of view, while construction time is significantly shorter, usually taking 24–28 months. In the case of wind power, measurements to show that a site is suitable for wind generation purposes take at least one year. The time needed for licensing depends on the country’s regulations, which varies within the CEE region from 12 months to 2–3 years. Construction time is highly dependent on market demand and the installation capacities of the suppliers, but in general, wind power plants have a construction cycle taking less than six months. 4.4.2. Capital expenditure costs of electricity sector development in the CEE region The capital expenditure costs of power plant investments, according to the latest study of the Royal Bank of Scotland, vary between EUR 800 – EUR 5,000/MW depending on the generation system employed. Currently, CCGT technology and coal-fired thermal power plants have the lowest CAPEX cost, while solar and nuclear–based plant are the most expensive. In November 2008, the Commission of European Communities published a communique on capital investment costs and generation costs (SEC(2008) 2872). The ranges indicated by the report covered the cost levels published by RBS, except in the case of nuclear fission generation, which was priced at a significantly lower level of EUR 2,700/kW.
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Table 3: Estimated investment needs for additional capacity development in the CEE region by 20206
GW
Capex EUR/kW
Conservative Scenario – Investment need of additional capacities
Best Estimate Scenario – Investment need of additional capacities
GW
Million EUR
GW
Million EUR
Nuclear
3,600*
4.2
15,286
5.3
19,246
Lignite
1,725**
3.1
5,426
4.6
7,945
Hard Coal
1,400*
0.7
977
0.9
1,325
Gas
800*
5.0
4,009
15.8
12,655
Oil
800*
0
–
0
–
n/a
0
–
0
–
Wind
1,400*
4.2
5,908
8.8
12,387
Solar
5,000*
0.2
1,000
0.3
1,550
Other Renewable
n/a
0.6
–
0.7
–
Other Hydro
2,500**
2.5
6,265
5.2
13,065
Run-of-River Hydro
2,500**
0.5
1,194
0.9
2,187
21.1
40,064
42.7
70,360
Mixed/Other Fossil Fuel
Total
* Royal Bank of Scotland – Equity and Debt Market Perspectives on Nuclear Investments ** Nuclear Energy Agency – Projected costs of generating electricity Source: KPMG analysis based on UCTE System Adequacy forecast and presentation of the RBS – Equity and Debt Market Perspectives on Nuclear Investment
Are the CAPEX costs presented in Table 3 realistic? Have the CAPEX costs changed significantly following the financial crisis? In the last three years a significant increase of CAPEX costs has been experienced, mainly due to the large number of power plant projects and extensive steel consumption of China. The prices provided by RBS indicate the price levels for 2008.
According to Siemens, market prices have been decreasing recently but it would be hard to predict at what level they will stabilize. Most probably they will not reach the lower price levels experienced four years ago, but they are anticipated to be lower in the next 1–3 years than the prices in the table. Hopefully investors who postponed projects due to economic and financial factors will not all return to the market simultaneously because that would result in high CAPEX prices, as has happened in the past. Thus customers are highly recommended to take advantage of low asset prices and buy equipment before other players return to the market and push up prices.
6
The table above only shows the investment costs of additional generation capacity investments and does not contain information about the estimated costs of replacing inefficient and the decommissioned power plants.
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71
Table 4: Capital expenditure costs by Generation Type Capex EUR/kW Nuclear III+
3,500–4,500
CCGT
766
Lignite
2,074
Offshore wind
1,400
Solar CSP
4,500
Solar PV
5,700
Biomass
2,700
Hydro
2,000
Source: GE Energy
The CAPEX costs provided by General Electric are fairly similar to the investment costs published by RBS, although GE has higher costs for lignite-fired plant, while hydro power is priced considerably lower. The variations are due to differences in equipment and the characteristics of the location (especially in case of hydro power generation). Have the equipment suppliers changed their supply or sales strategies due to the global financial crisis? As a consequence of the financial crisis some suppliers have become more flexible and willing to adjust their services more to clients’ needs. However, no substantial changes have been noted in the sales strategies of either Siemens or GE since both provided a wide range of services prior to the crisis. Siemens mentioned that, depending on the market situation and customer needs, the company is willing to participate in product delivery and turn-key projects. In the midst of the current economic turmoil, GE is busy helping clients to develop their future strategies by assessing the market, available technologies and future trends. GE has also made considerable efforts helping costumers to develop financing structures for projects and enhancing reliability among market players. Are the present capacities of equipment suppliers sufficient to fulfill the extensive demands presented in the forecast? What are the planned capacity improvements? According to respondents interviewed, suppliers to the power sector have sufficient capacity to fulfill the new generation needs as presented in the Best Estimate Scenario. The 42 GW mentioned in the forecast equates to approximately 4 GW per annum, which would normally be shared among three major suppliers of hardware. While the suppliers should be capable of meeting such orders, they admit that if all regions revive simultaneously it could result in longer delivery times and higher prices.
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Financing investments in the energy and power sectors
Nuclear power is a special case, since in the past 10–15 years no nuclear development has taken place in the region. However GE has indicated that there are many nuclear initiatives under consideration, and if just a few of these were implemented simultaneously both the supply chain for materials and availability of skilled manpower could soon be under stress. Siemens also pointed out that in the area of renewable energy, equipment suppliers are currently facing delivery problems due to increasing demand. As a result, Siemens has almost tripled its production capacities of wind generation equipment over the last 2–3 years. 4.4.3. Total investment needs of the energy sector development program in CEE Taking into consideration the UCTE forecasts and the estimated CAPEX costs, significant capital investments will be required to implement the electricity sector development plans in Central and Eastern Europe by 2020. The additional capacity requirement is estimated to be around 21 GW (according to the Conservative Scenario), which represents about EUR 40 billion of total investment. For the Best Estimate Scenario, more than 42 GW are required, amounting to investments of more than EUR 70 billion. In addition, the decommissioning and replacement of obsolete power plants will also be required. Based on the analysis presented in the Infrastructure section of this report, a total of 53 GW of generation plant (mainly coal, gas and oil fired) over 30 years old should be replaced or retrofitted by 2020. The total investment needs for replacement can be calculated based on a weighted average of individual CAPEX costs and the Conservative Scenario of the UCTE System Adequacy forecast. The estimated investment cost could reach EUR 74 billion by 2020, depending on the extent of substitution of old generation units.
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Table 5: Estimated investment replacement needs in the CEE region by 20207 Investment need of replacements
GW
Capex EUR/kW
Total investment need (million)
Coal fired
42*
1,600**
67,200
Gas fired and mixed fossil fuel
7.5
800
6,000
Oil fired and mixed fossil fuel
3.5
800
2,800
Total replacement investment
53
76,000
* Based on KPMG assessment, coal fired power plants, taking into account several exceptions, will not be obviously replaced with coal fired ones. In this respect, the future of the Kyoto Protocol and the related European Union Emission Trading Scheme will be a decisive factor. Nevertheless, the foreseen total investment cost of 67.2 billion for the replacement of coal with coal and other fuel types provides a good basis for assessing the total average financing needs of generation capacities. ** Average CAPEX cost of lignite and hard coal Source: KPMG analysis based on UCTE System Adequacy forecast and presentation of the RBS – Equity and Debt Market Perspectives on Nuclear Investment
Based on an optimistic timeline the total replacement and new investment in the region’s power plant infrastructure may result in a total financing of EUR 114–144 billion over the next decade. Are there sufficient funds available in the banking system to meet the sector’s extensive financing demand? Based on market knowledge from banks participating in our survey, the Conservative Scenario of the UCTE forecast seems more realizable. The respondents all agree that the investment needs of the Best Estimate Scenario are slightly overestimated and in the time of financial and economic crisis priorities must be reviewed. Therefore, a realignment of resources and needs is inevitable, resulting in a downward adjustment of required capacities.
Two banks, OTP and the EBRD do not believe that there will be sufficient financial resources available in the region to fund the required investments. However, this is not considered a real constraint, since Western European banks would also participate in any deals, with a pricing level adjusted to country risk. As discussed, the risk taking attitude of banks has changed due to the crisis and they prefer more limited participation in projects. Two banks, MKB and OTP, indicated that the biggest concern relating to the realization of these investments is the lack of credible, committed project sponsors and sufficient equity. Therefore, state participation in investments and the development of robust regulatory frameworks will play an important role in attracting financial resources to such projects.
7
The table presented above only shows the investment costs of additional generation capacity investments and does not contain information about the estimated cost of replacing inefficient and decommissioned power plants.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Conclusions and future prospects
75
5. Conclusions and future prospects 5.1. Economic environment: crisis, consumption and recovery The effects of the financial crisis on the present state and future development of the CEE electricity sector are many and diverse: among the most significant, the drop in consumption and the various changes in the terms of financing. From other aspects however, much is unchanged. The temporary slowdown in demand of certain industrial sectors or entire national economies cannot detract from the fact that modern societies are based upon an abundant supply of electricity. Whatever the effects of the crisis on the immediate future, electricity developments cannot be postponed for long, especially considering that the leadtimes for these investments are particularly long. What are the foreseeable effects of the crisis on electricity generation development projects on a longer term basis (a period of 3–5–10 years)?
Respondents are in agreement that recovery is on the way. The representative from Siemens is convinced that power plant sales will recover within a few years out of necessity. The Hungarian TSO, while indicating that investment decisions and timing do not belong to its responsibilities, highlighted its commitment to development and its intention to reassure investors whose cooperation is vital. A less favorable turn of events could theoretically come to pass with a further downturn in the economy, resulting in populations having to give up current living standards. However, this is considered unlikely, as CEE has the potential to drive the production of multinational companies to a fast recovery. On the other hand, electricity is likely to become more expensive, a difficult task for politicians to explain to electorates. This is yet another reason for adjusting regulations and government policies to counteract the adverse effects of the current economic situation. The GE respondent remarked that the market for energy infrastructure developments was currently quite slow, and the only projects moving forward were those with owners determined to complete the ventures regardless of the crisis. However, it must be added that GE envisages more projects starting in 2010.
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Conclusions and future prospects
The promptness of any recovery depends on the timeframe required for the industry to return to full production, according to respondents’ views. Steps taken by decision makers everywhere significantly influence this time need – while also having a lasting effect on the years following financial restoration. The EBRD stressed that if the required investments are not made in time, economies slow to react could face new problems in the future. Indeed, the development of the energy sector should be understood as fundamental to the future success of post-crisis economies. Aging power plants combined with the necessity for capacity expansion to provide for the needs of millions mean that finding solutions for renewal is imperative. It is not likely that the downturn in consumption will continue in the medium or long term. It is equally improbable that any rise in the price in electricity, be it due to compensation for costs incurred complying with environmental regulations or to any capacity shortage, will be capable of substantially altering the expectations, wants and perceived needs of the region’s population. How long will the drop in electricity consumption last? Will it have a permanent effect on the sector’s development needs? The current downturn in electricity demand will not prove to be an enduring trend, respondents say, and while many production sites have been shut due to the crisis, in most cases this can be considered a temporary state of affairs. Additionally, the decommissioning of power plants reaching the end of their life span in itself necessitates steps to be taken for the development of the sector. If environmental obligations and security of supply issues are also factored into the situation, it becomes increasingly clear that the drop in consumption alone should not impede the restructuring of the electricity sector.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Conclusions and future prospects
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The share of electricity within total energy consumption is anticipated to increase steadily in the medium and long terms. Therefore, all other factors remaining the same, electricity consumption is still expected to increase steadily in the future, although this future growth is forecast to be somewhat lower than that experienced in the last 15 years. True, energy efficiency is predicted to increase: however, with the proliferation of environmentally-conscious consumer appliances and industrial developments this will still mean a growth in total electricity consumption for the future.
5.2. Financing in the future In view of the course of expected economic trends and the steady increase in household consumption, the development of the electricity sector can be considered indispensable. However, the issue of financing these investments in an altered economic climate remains an open question. Financial institutions and largescale investors, reeling from the setbacks of the crisis, have adjusted not only their expectations, but also their affinity to risk and exposure. Yet decision makers cannot deliberate for long, as the restoration of a sustainable level of financing is strongly dependent on timely reactions, dedication and competence on their part. Can it be anticipated that the financing of large infrastructure investments will return to the pre-crisis level? How much time will this recovery take and what are the main factors affecting it? Respondents agreed that prospects were currently encouraging. The shortage in financing is seen as temporary, ending as soon as within 12 months (according to BNP Paribas), although the time and degree of this recovery will depend on various factors, including the confidence of market players and the commitment of decision makers.
Recent circumstances have resulted in a slowdown of the evaluation processes related to financing, a trend which is anticipated to reverse in the near future. This is inevitable, says OTP Bank, as a lasting scarcity of investment financing hampers production and economic growth – which is not sustainable in the long term. Therefore, governments and national financial institutions are under pressure to take steps to improve conditions. Consequently, infrastructure investment will be among the fields that receive substantial volumes of financing (due also to characteristic risks that are easier to monitor). Energy sector developments should have the highest priority among these preferred developments. The sector has not seen many large-scale investments recently, and as funds once again become available, the issue of obsolete, inefficient and inadequate capacities must be resolved. As a result the OTP representative argued that the energy sector will see an investment surge on a timeline ranging from 4–5 to 10 years.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Conclusions and future prospects
Another sign of the future expansion of financing in the CEE region is the fact that more interest and demand can be seen regarding EBRD financing than previously. While earlier, projects were mostly financed by commercial banks, with the EBRD often absent from the deal, since the onset of the crisis investors have been turning to the EBRD to compensate for the lack of private funds. In response, the EBRD is cooperating closely with the EIB (European Investment Bank), which controls a larger volume of resources and generally invests more in the region. The EBRD has indicated that it would be glad to see more funds in the CEE region but not necessarily originating from banks. What do banks require to accelerate financing decisions relating to energy projects? What are the banks’ recommendations to policy makers and market players? As the OTP Bank respondent remarked, it is government’s responsibility to ensure investors get adequate returns on renewable electricity generation. Without clear regulatory measures to ensure a transparent market, investors will be few and far between. The banks interviewed agreed that there was no need for major legal or other action, except a clearly-understandable and transparent regulatory framework is essential.
Project developers are not unwilling to invest. Nonetheless, in terms of the financing structure, investors have to realize that the financing climate of the last years has passed. As the EBRD remarked, debt/equity ratios of 90:10 are simply no longer compatible with the business environment. Yet according to BNP Paribas, financing is rather a question of capital allocation, since there is no real constraint in the credit process itself. However, money is more expensive due to higher rates, thus robust project structures are required. Investors must put more equity in their projects in order to make banks and other lenders comfortable. Credibility and trustworthiness, critical attributes of investors, are more important now than ever. Consolidation and branding are underway in the sector and projects very much depend on the sponsors behind them. Both the EBRD and MKB stressed the same prime message for policy makers: development of a predictable regulatory regime is indispensable to attract investors into energy projects. What already exists must be strengthened to provide better assurances, namely the security and predictability of cash-flow. MKB highlighted that long-term contract structures must be present on both the input and sales sides. In the case of smaller projects, although it is theoretically possible that the electricity generated could be sold strictly on a market basis, this is not typical yet. What are the recommendations for project owners to enable the establishment of an eligible project structure? Project financing entails a strictly individual, case by case approach, and thus it is difficult to formulate general advice. The main question for lenders is the allocation of capital that has become less abundant than it was in the past.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Conclusions and future prospects
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Clearly, this means that it will be awarded to those projects that are found to have the stronger business cases. It is imperative to meet the expectations of financial institutions and meanwhile demonstrate commitment from the part of the project owners. The banks interviewed for this report all had suggestions and comments regarding the opportunities they had to offer and the steps project owners should take. • OTP indicated it considered terms and conditions flexible and negotiable. New, long-term, market-based contracts are expected, both on the input side and also for the sale of electricity, taking the place of PPAs. • Concepts and ideas are not sufficient; a well-grounded business plan is absolutely necessary. OTP normally requires a potential project developer to have a business plan put together by a financial advisor before negotiations commence. • The EBRD remarked that leverage ratios had to be re-aligned, and project sponsors needed to step up and cover more of the risks than earlier (for example by giving some guarantees on pricing). • MKB underlined the importance of the project developers contacting the bank before all contracts were signed, giving the financial institution the opportunity to influence or modify relevant aspects of the project. • However, as at least 20–30 percent own equity must be collected under all circumstances, and project owners have more time for EBRD administrative processes, they can thus secure cheaper financing.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Conclusions and future prospects
How do banks see their involvement in energy project financing in the future? In the current financial environment, when available funds are scarce, MKB plans to turn towards stable energy sector investments, as these can provide the level of profitability desired by the bank.
OTP indicated the growth of the project financing portfolio of the Bank, however, shall be basically energy sector driven. BNP Paribas, on the other hand, stated firmly that utilities featured among its priorities. As for expectations, the bank is looking for the transparency of data and predictability. The bank has developed a deep understanding of the local markets in the past years, which it plans to utilize in the financing of energy projects. BNP Paribas, aside from its internal knowledge, has a project financing team in place which is responsible for the entire region. The financing of well-structured, carefully-planned energy project developments in the CEE region will clearly be possible in the years to come. The stable nature and expected steady growth in the sector, combined with its huge influence throughout the economy, society and industry mean that its development must be considered crucial even in difficult times. The various factors determining progress in the sector – environmental concerns, security of supply, the need for modernization, to name a few – and the colorful diversity of the region itself offer an exceptionally wide scope for development. The resources are largely in place, policy makers and market participants are generally open minded and committed to development. The fundamental task is to synchronize the opportunities offered by the various players: technological solutions from the suppliers in the region, financing opportunities offered by banks and the needs and requirements of the local decision makers must be brought together. This requires a circumspect overview of all aspects of the sector and the participants, alongside a viable and realistic financial plan. Once these efforts have been made, the possibilities in the region are numerous and far-reaching.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Acronyms
81
Acronyms CAGR
Compound Annual Growth Rate
CAPEX
Capital Expenditure
CCGT
Combined Cycle Gas Turbine
CCS
Carbon Capture Storage
CDO
Collateralized Debt Obligation
CEE
Central and Eastern Europe
DSCR
Debt Service Coverage Ratio
DSO
Distribution System Operator
EBRD
European Bank for Reconstruction and Development
EEX
European Energy Exchange
EIB
European Investment Bank
ENTSO-E
European Network of Transmission System Operators for Electricity
EPC
Engineering, Procurement and Construction
EU
European Union
EU ETS
European Union Emission Trading Scheme
FDI
Foreign Direct Investment
GDP
Gross Domestic Product
IPO
Initial Public Offering
ISO
Independent System Operator
ITO
Independent Transmission Operator
LNG
Liquefied Natural Gas
NTC
Net Transfer Capacities
PPA
Power Purchase Agreement
PXE
Prague Energy Exchange
SPE
Special Purpose Entity
SPO
Secondary Public Offering
TSO
Transmission System Operator
UCTE
Union for the Co-ordination of Transmission of Electricity
UNFCCC
United Nation Framework Convention on Climate Change
UNMIK
United Nations Interim Administration Mission in Kosovo
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
What can KPMG firms offer to the electricity sector?
83
What can KPMG firms offer to the electricity sector? KPMG is a global network of professional firms providing audit, tax and advisory services. We operate in 146 countries and have more than 140,000 professionals working in member firms around the world.
KPMG’s ENR practice overview KPMG’s Global Energy and Natural Resources (ENR) practice is dedicated to helping our firms’ clients tackle the issues affecting them in today’s operating environment. From global super majors to next-generation leaders, KPMG member firms strive to tailor our service offerings to specific client needs and deliver the highest standards. KPMG’s Global ENR practice is organized through a global leadership team aligned with member firms’ ENR practices. The global leadership team focuses on our strategic framework, reputation and performance, supported by an executive group dedicated to driving their implementation, and measuring and communicating our performance. Our management team focuses on providing account management, proposals, marketing, knowledge management, and administrative support to KPMG client service teams operating in the ENR industries. KPMG’s ENR professionals help our member firms’ clients address the complexities and challenges that affect their businesses by creating industry groups that tackle different areas of the global energy marketplace. The industry groupings – Oil & Gas, Power & Utilities, Mining & Forestry – facilitate outstanding coverage of this vast industry. KPMG firms have Centers of Excellence (CoE) throughout the globe, dedicated to the Oil & Gas, Power & Utilities, Mining, and Forestry sectors. These centers are strategically located near major hubs of activity within the industry. CoE teams of experienced KPMG energy professionals provide high quality advisory services to clients based in those specific areas.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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What can KPMG firms offer to the electricity sector?
Energy and Natural Resources Centers of Excellence Key • Oil and gas • Forestry • Power and utilities • Mining • Oslo
•• Moscow Rotterdam London • • Essen Paris •• •Budapest
•• Calgary Vancouver •• Portland • • Denver
•• Beijing
Phonenix • • Dallas Houston •
Al Khobar •
Sao Paulo • Santiago •
• Muscat
• Hong Kong
• Rio de Janeiro Johannesburg Perth ••
• Adelaide •• Melbourne
KPMG’s Global Power & Utilities Knowledge and Resource Center – Budapest, Hungary The Power & Utilities market has been developing at an extremely rapid pace globally in recent years. This fast development is characterized by large scale infrastructure projects that require a global base of experience and a high level of specialized industry knowledge. As a focal point of Power & Utilities, KPMG’s Global Power & Utilities Knowledge & Resource Center based in Budapest, Hungary (Central and Eastern Europe) consolidates global know-how and knowledge in a single location and takes a hands-on approach to match client needs with KPMG’s Centers of Excellence (CoE) across the globe that are best suited to providing professional advice and support that addresses clients’ strategic and transactional activities.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
What can KPMG firms offer to the electricity sector?
Throughout the globe, KPMG member firms provide clients with offerings in relation to the following services: KPMG Services
New Investments
Corporate Finance
Transaction Services/ Restructuring
Infrastructure Strategy
Transaction Strategy
Implementation Plan
Procurement
Strategy planning / support, financial modelling / model integrity review (demand planning / financial forecasts), assess delivery options / funding / pricing / risk sharing, develop procurement / transaction strategy, initial transaction valuation support Initial financial / commercial / counterparty solvency due diligence
Strategic Commercial Intelligence
Commercial due diligence, market assessment feasibility
Forensic
Upfront corporate intelligence, counterparty integrity due diligence, conflict of interest management
Risk Management
Risk analysis and assessment, retained risk / technical risk analysis, advice on risk-sharing issues, advice on valuing risk for inclusion in pricing mechanism options, regulatory / legislative compliance assessment
Business Performance Services
Project management support, transaction impact analysis (stakeholders, etc.), organisational impact assessment, change management, public sector and infrastructure sector knowledge
Tax
Audit
Creation of tax efficient deal structures Accounting / reporting issues identification
Negotiate and Close
Implement
Monitor and Control
Renew/ Dispose
Support vendor / partner evaluation and selection process, finalise business case, support developing negotiating positions, support fulfilling closing conditions
Support to subsequent contract changes, dispute resolution, annual investment valuation / review and refinancing
Detailed due diligence, investigation of negotiating issues
Restructuring: On-going contract compliance and performance monitoring (covenants, financial metrics / gain sharing, capex)
Counterparty risk assessment (fraud / criminal risk)
Information management / security assessment, privacy protection issues advice, risk mitigation / monitoring
Project management and change management support, operational due diligence support, organisational design / restructuring, contract management process design, performance metrics
Tax due diligence
Transaction-related accounting standards, understanding / interpretation (international) PROGRAM MANAGEMENT Modelling
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Contract compliance and governance –royalty review
Monitoring of major programmes
Analysis in support of contract compliance and dispute resolution, analysis in support of renew / dispose decisions
Post transaction integration
Tax efficient exit
85
86
What can KPMG firms offer to the electricity sector?
Throughout the globe, KPMG member firms provide clients with offerings in relation to the following services: KPMG Services
Deal Opportunity Bid Identification Hypothesis/ /Assessment Transaction Preparation Structuring
Acquisitions
Acquisition Strategy
Corporate Finance
Strategy planning / support, deal criteria / objectives, initial opportunity identification / assessment, pre-deal evaluation, financial modelling
Transaction Services / Restructuring
Initial financial / commercial / counterparty solvency due diligence
Strategic Commercial Intelligence
Pre-deal strategy
Forensic
Deal hypothesis, transaction structuring, detailed financial modelling / model integrity review, demand planning / financial forecasts, initial transaction valuation, bid strategy, bid preparation
Enhance/ Operate
Support bid analysis, investigate / model issues, incorporate risk analysis / mitigations, develop negotiating positions, fulfill closing conditions
Renew/ Dispose
Support for subsequent contract changes, dispute resolution, annual investment valuation / review
Restructuring: ongoing contract compliance and performance monitoring (covenants, financial metrics / gain sharing, capex)
Commercial due diligence
Upfront corporate intelligence, counterparty integrity due diligence, conflict of interest management
Counterparty risk assessment (fraud / criminal risk)
Risk analysis and assessment, retained risk / technical risk analysis, advice on risk-sharing issues, advice on valuing risk for inclusion in pricing mechanism options, regulatory / legislative compliance assessment
Business Performance Services
Project management support, transaction impact analysis (stakeholders, etc.), organisational change management, public sector and infrastructure sector knowledge
Audit
Negotiate and Close
Detailed due diligence, investigation of negotiating issues
Risk Management
Tax
Due Diligence
Creation of taxefficient deal structures Accounting / reporting issues identification
Information management / security assessment, privacy protection issues advice, risk mitigation / monitoring
Project management and change management support, operational due diligence support, organisational design / restructuring, contract management process design, performance metrics
Tax due diligence
Contract compliance and governance – royalty review
Design of governance, compliance and controls
Performance improvement / value realisation, merger integration, ongoing performance monitoring, analysis in support of renew / dispose decisions
Post transaction integration
Transaction-related accounting standards, understanding / interpretation (international)
Information Risk Management
Systems optimisation, IT governance
PROGRAM MANAGEMENT
Modelling
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
kpmg.hu
KPMG’s Energy & Utilities Advisory Services contact in Central and Eastern Europe Péter Kiss KPMG’s Global Head of Power & Utilities Head of Sector, Energy, KPMG in Central and Eastern Europe Tel.:
+36 1 887 7384
E-mail:
[email protected]
If you would like to order further copies of this publication please send an E-mail to
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
