East Europe must hike power prices to avoid trouble – analysis

Without price hikes they may suffer severe electricity shortages and possible blackouts, analysts say. Higher prices are needed to encourage investment in new power plants to feed the region’s booming economic growth as well as replace ageing Soviet-era stations, they say. Most countries in the former bloc have yet to abolish a communist legacy of state control over household power and gas prices.

Poland will have to add 1,000 megawatts of new capacity to maintain its energy security, analysts reckon, while Albania, the poorest nation in the region, already has frequent blackouts due to shortages in the Balkans. “If the new (European Union) member states are tinkering with prices, then they will probably pay a very high cost rather soon,” said Christian Egenhofer, energy expert at the Brussels-based Centre for European Policy Studies. “New investment would not come and they would run out of capacity,” he added. “I don’t see any alternatives -- governments have to take the bitter medicine (and hike prices) or leave it to the next government.”

Global rises in energy costs have caused higher prices this year in Poland, Hungary, Romania, Bulgaria, Croatia and the Czech Republic after a series of gradual increases this decade. The Baltic countries have also seen their bills go up as Russia ended decades of cheap gas supplies and put the three on the same footing as the rest of the EU. Most of the power plants in eastern Europe run on coal or imported natural gas, whose prices are linked to crude.

 
POLITICALLY SENSITIVE

Crippling inflation and voters anger have made governments reluctant to make large hikes and power prices remain lower t,han in western Europe by an average 30-40%.

In Hungary, where gas bills for households will jump by 9.9% in July, prices are a sensitive political issue for the Socialist government, which has seen its support fall after tax and price increases in the past two years.

The government in Romania, under pressure from distributors to raise household gas prices again after a 8.5% increase in February, labors to keep a tight lid on energy prices ahead of elections later this year.

In Bulgaria, the poorest EU member and struggling with double-digit inflation, the prime minister has demanded an explanation from the state energy regulator on plans to up power prices for households by 18% from July.

Eastern Europe enjoyed a surplus of electricity last decade as heavy industries declined after communism collapsed but economic growth rebounded this decade and pushed power consumption sharply up. “We expect a power deficit of no less than 8-10 terawatt hours in the (south-east Europe) region in the coming years,” Mardik Papazian, executive director of Bulgaria’s dominant state power utility NEK said recently. Power consumption in Bulgaria surged 7% in the Q1 of this year and analysts forecast demand to grow in central and eastern Europe by an average 2-3% a year.

The closure of outdated power plants, such as Soviet-era nuclear reactors in Lithuania and Bulgaria which used to supply power to neighboring countries, adds to pressure on prices. “Prices will continue to grow due to a number of reasons and the most important is ... growing demand for electricity combined with ageing of capacity,” said Arkadiusz Wicik, director energy, utilities and regulation at Fitch Ratings.

A respite is not due before 2013-2015, when bigger projects such as Hungary’s 2,400 MW gas-fired power plant and nuclear plants in Lithuania, Bulgaria and Romania are to come onstream. Mild winter weather in the last two years have helped utilities to manage but pressure increases in the summer as growing incomes mean more people can afford air-conditioners. Some power companies warn that security of supplies are threatened unless price rises do not take into account investment needed to upgrade grids and build new plants.

State-owned power companies in Poland have complained that artificially set prices do not reflect their expenses. Czech CEZ and Austria’s EVN, leading suppliers to Bulgaria, are also unhappy with planned increases. “Such a price policy continues the dangerous trend of destabilizing the sector ... which poses a risk not only to the already exacerbated heating supply to clients but also to the security of the entire energy system in the long run,” EVN said. (Reuters)