What Will 2011 Bring to Energy in Southeastern Europe?

Yesterday on a public LinkedIn group someone asked me for my input on the subject “What does year 2011 bring to Energy in South Eastern Europe?”  What follows is a modified version of the response I posted there.

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Well, I was thinking that I would just keep quiet, because generally my prognostications are not liked by anyone.  I was already warning friends of mine in the US back in September 2004 that there was a real estate bubble in the US that would eventually burst and derail the American economy, if not the world economy.  They all considered me a madman, so I lost those friends.  About a year ago I began hinting to people that perhaps onshore wind energy was finished in developed countries – over for good – and that didn’t win me any friends either.  Six months ago I mentioned to someone that Chinese geostrategic analysts had been talking for months about the need for China to institute controls on its exports of rare earth metals, and gave the example of the PlayStation War as a harbinger of things to come for renewable energy, and all I got was sarcasm and the online equivalent of a blank stare.  (Two months later China embargoed the export of rare earths to Japan.)

Most recently, in August I got a derisive response when I told a company that is constructing a large power plant in the Balkans that they had better hurry with it, since electricity demand in Southeastern Europe over the next few years will probably grow at about 1% a year, and many people are presently constructing or preparing to construct new power plants or expansions (TPP Šoštanj Block 6, TPP Stanari, TPP Kostolac C, TPP Tuzla Block 7 (now delayed), TPP AES - 3C Maritsa East 1, HPP Vranduk, HPP Ulog, HPP Brodarevo 1 & 2, the Italian HPP on the Drina and Ibar, HPP Tsankov Kamak, TPP Ungheni, wind farms at Mesihovina, Podveležje, Možura, Štip, and elsewhere (Vlorë?), countless small plants, etc., not to mention the long-term mega-threat of NPP Belene).

I stated this because I experienced firsthand the buildup to, and the onset of, the present recession in Japan.  When the bubble economy (バブル景気) burst in 1990, everyone there was assuming it was something temporary, and that once the prices of speculative asset classes had reverted to normal levels the economy would continue to grow again.  It never happened.  First we had the “lost decade” (失われた十年), now we have the “lost 20 years” (失われた二十年).  And the same mistakes that have kept Japan down for 20 years are now being made by the US and Europe, and perhaps, beginning in 2011, by China as well (Mike Shedlock and others are predicting a “hard landing” for China in 2011)..  That is, the non-performing debts never get written off, and never get published, so investors never know which financial institutions are solvent and which are zombies.  That is presently the situation in the US, the UK, and the Eurozone, and there is no sign that the governments will ever bite the bullet and let their “too big to fail” banks simply fail (as Iceland did).  Instead we will get Ireland-style “bailouts” that transfer the banks’ bad bets to the backs of the citizenry and crush them under debt peonage, blotting out the possibility of economic growth for many years.

So I foresee very little growth in Southeastern Europe over the next few years and, as in Japan, a growth in electricity demand of perhaps 1% annually.  But all of the international agencies are pushing the Balkans countries to increase their electricity generation capacity to meet future demand, and to modernize, clean up, and/or render more energy efficient their energy generation and transmission infrastructure.  So on top of a Japan-like endless recession which would normally reduce annual growth in electricity demand throughout the region to something like 1%, there will be quite a few countries that, yielding to international pressure and to irresponsibly rosy forecasts by economists and consultants, will build excess generating capacity.  Due to increasingly efficient energy transmission and energy trading in the region – another thing that the international organizations have been pushing for – this excess capacity will probably drive energy prices and profits down throughout the region.  (As I quipped to a friend some months ago, all it would take is for some idiot in Moldova to build a nuclear power plant, and then all of the energy firms in Southeastern Europe would suffer terribly for 10 years.)

So the addition of excess capacity anywhere in Southeastern Europe, during a Japan-style endless recession, would be conducive to falling electricity rates to end users throughout the region.  But those companies foolish enough to add the unneeded new capacity would have to pay for this construction somehow, presumably by raising rates to end users within their own country.  And in fact the international organizations have also been pushing for countries in the region to end the monopolies of their state-owned power companies that sell electricity at subsidized prices, so as to let power prices rise and thereby permit privately-owned generating firms to compete in a free market (this in a region where already many people survive only by operating on the black market, emigrating, or “dumpster diving”).  Any countries that permit or force their domestic electricity rates to rise, whether to pay for additional generation capacity added or to subsidize renewable energy or to create a free market, will probably see their electricity demand decline.

All in all, on the macro level I see difficult times for large power companies and trading firms, and increasingly tight government finances (with probably some sovereign defaults in coming months, in Europe and perhaps Japan, and eventually in the US either default or high inflation).  I am sure subsidies for renewable energy – whether through feed-in tariffs or green certificates – will be slashed in Southeastern Europe as they are already being cut back in France, Spain, Germany, Italy, Portugal, the Czech Republic, Ontario (Canada), New South Wales (Australia), Taiwan, etc.  Thus far most of the open “cuts” involve feed-in tariffs for photovoltaic solar, ostensibly to keep pace with the decline in PV panel prices and the progress of the technology, but at the same time there is a growing groundswell of less-obvious measures against the other renewable technologies: tighter deadlines, higher deposits required from developers to guarantee construction, taxes on RES plants, stricter permitting conditions, failure to guarantee power purchase agreements (PPAs) or feed-in tariffs until after construction is completed, failure to guarantee PPAs and FITs into the distant future, ceilings on maximum GW of RES capacity that will be eligible for FITs or green certificates, a lack of price floors on green certificates, delays in obtaining grid access, bans on building on certain types of land, moratoria on construction, and so on.  In some cases these measures are merely proceeding stealthily at the local level, with the national government doing nothing to oppose them.  (Here in Italy we also have a situation where the big money to be made in RES projects has attracted the local mafia in droves to large RES projects such as wind parks, leading to all sorts of crimes – including murders – and endless police investigations, which is turning the entire Italian public sour on renewable energy in general.)

So in Southeastern Europe I expect that the nascent photovoltaic solar industry and the onshore wind industry will die a violent death (less quickly in Bulgaria and Romania), since these technologies are the furthest from grid parity.  But the lesson of Japan teaches us that even amidst 20 years of very low economic growth people still continue to buy new things or upgrade what they already have, and infrastructure continues to be built and improved, so there will be niches for very modest profits in those energy technologies that are at the same time both closer to grid parity and smaller – agricultural biogas, municipal biogas, biomass, small hydro, maybe some rooftop photovoltaic solar in particularly sunny areas and some small wind (perhaps VAWT) in particularly windy areas.  And despite the danger of excess generation capacity, power companies that are at present overly reliant on one type of generation technology – such as EP HZHB, which at present has to rely on hydro for 100% of its generation – may want to add large plants of other technologies simply so as to lower their risk in the case of bad weather or international turmoil.

I think that almost all energy mega-projects – say, of € 200 mln or more – will remain stalled, and not move forward, with the possible exception of some projects with foreign financing where construction contracts have already been signed, such as TPP Stanari, TPP Kostolac, and TPP Ungheni.  So I don’t think we will see in 2011 any real progress toward construction of South Stream, Nabucco, TAP, the various LNG terminals or regasification plants (Trieste, Zaule, Omišalj, Fier, Astakos, etc.), the power cables to Italy (Tivat/Pescara, Babica/Brindisi), TPP Nikola Tesla B3, TPP Kolubara B, the various Italian HPP on the Ibar and Drina, TPP Tuzla Block 7, TPP Kakanj Block 8, TPP Burlăceni, much less the projects that are still at the daydreaming stage, such as NPP Belene, HPP Đerdap 3, TPP Štavalj, and TPP Kongora.  I believe HPP Brodarevo 1 & 2 will be constructed, and construction might begin on HPP Zhur I & II (though of late there has been no news regarding financing or construction of Zhur).  Of the wind parks already approved in Croatia, Bosnia and Hercegovina, Serbia, Montenegro, and Macedonia, I would not predict any significant construction in 2011 except maybe perhaps for WP La Piccolina (5 MW), in Serbia, and maybe WP Možura (46 MW, Montenegro) and WP Štip (100 MW, Macedonia).  I think there will continue to be some wind park and photovoltaic construction in Romania and Bulgaria, but in declining amounts, with a strong decline in Bulgaria if the proposed amendments to the law on protection of agricultural lands get approved by the parliament.

But outside of energy, I think some large infrastructure projects such as bridges may get built in 2011, particularly if they do not involve the purchase of lots of expensive foreign machinery.

Anyway, I am sure you can now see why I did not feel the urge to chime in right away with my thoughts.

Oh, some headlines from Balkans.com over the last 10 days:

“Solar stocks face another hard year in 2011”

“Romania's potential for higher food and energy prices could pose significant risks-IMF”

“Turkey plans to build 18 dams on its borders with Bulgaria, Greece, Iraq, Syria, Iran, and Georgia”

“Gamesa total wind farm projects in the pipeline exceed 1,700 MW in Eastern Europe”

“Bulgaria's economy ministry is weighing up options to make more companies purchase power on the free market”

“Romania’s electricity consumption is expected to increase by at least 1% in 2011”

“Bosnia & Herzegovina: Elektroprivreda BiH Plans to kick off $679 million worth hydro-power project”

“Bosnia & Herzegovina: Elektroprivreda BiH 2010 profit slumps on falling prices”

“Israel finds it hard to secure foreign buyers as European gas consumption is weakening”

The flip side of all this is that as economies stagnate, and as banking and government finances worsen in the richest countries, paper assets around the world will continue to decline in value and security.  Already corporations in the US have their coffers full of cash and are desperately looking around the world for investments that are at least safe, even if not highly profitable.  As we all saw, the Chinese in 2009 went on a worldwide buying spree for metals and tangible assets, driving prices up everywhere.  Now, with the Federal Reserve Board’s second round of quantitative easing, we see cheap American money flowing into non-Western securities and currencies, arousing the ire of governments everywhere (e.g., Brazil, Korea, Thailand, India, South Africa).  So at a moment when good investments in the most developed countries continue to be scarce, and governments are instituting controls on rapid movements of large amounts of capital, we could see a flow of capital from the developed countries into less-liquid projects and properties in less-developed areas, such as Southeastern Europe.  This will no doubt result in some bubbles and a lot of fraud, but it could be a good time to build some of those hundreds of small energy projects which have already been approved or received concessions, but which are not moving forward due to lack of funding.  (There are hundreds of small hydro projects in Bulgaria, Albania, and BiH that have been fully approved but which have never been built.  The same for some municipal landfill or wastewater biogas projects in Serbia and elsewhere.  It could also be a time to build more agricultural biogas in all countries, and even encourage household biogas digesters in rural areas for the production of cooking gas.  In addition, photovoltaic solar in the sunnier parts of Romania, Bulgaria, and Macedonia might be a good investment even without high subsidies.)

A wild card in this would be another shock to the system like Bear Stearns or Lehman Brothers, a large sovereign default (Japan), or a military attack on Iran, which could generate a panicked response that would cause people to overreact, cancelling contracts and withdrawing funds more than would really be necessary.

In any case, that’s my prognostication for the energy sector in Southeastern Europe in 2011.