CEE Power Markets Battle On

BMI View: With the growth rates of electricity consumption fluctuating across the region, our forecasts for the Central and Eastern Europe (CEE) power sector presents a nuanced picture. Russia is set to maintain its domineering position in the region, due to the sheer size of its power market, although positive macroeconomic and demographic fundamentals will drive Turkey's power sector to expand substantially. Despite our long-held view that thermal electricity generation, namely coal and gas, will continue to play a pivotal role in CEE, we highlight the growing opportunities present within the region ' s non-hydro renewables industry.

Our outlook for CEE power consumption between 2012 and 2013 is underpinned by our key views for the region's macroeconomic and demographic fundamentals. We have long noted that the rate of electricity consumption will be less pronounced than in other emerging markets, with growth to be relatively subdued. This is primarily due to low population growth and increasing energy efficiency in the region. Furthermore, the country's continued exposure to the eurozone crisis is impacting economic growth considerably. We forecast consumption to increase by an average of 2.1% across the CEE in 2013; however, there are some clear regional under- and out-performers.

Regional Anomalies
Electricity Consumption Growth Rate (%), By Country, 2012e-2013f

Noticeably o utperforming the regional average is Turkey , with electricity consumption growth of 7.4% forecast for 2013. This projection is closely correlated with our expectations for real GDP growth, which we expect to come in at 4.73% - notably higher than that expected for the majority of its regional peers. The Turkish government and monetary authorities have thus far successfully steer ed the domestic economy away from the full impact of Western Europe's economic woes and remain resilient against a hard landing.

Similarly, Kazakhstan 's economy is faring better than many of its CEE neighbours, with BMI 's Country Risk analysts forecasting higher levels of real GDP growth than Turkey, both in the short and long term. Although growth in power consumption is robust, the rather lacklustre expectations for population expansion do hinder consumption marginally.

Countries heavily exposed to eurozone states, such as Poland , Slovakia , Ukraine and Czech Republic , are all suffering from a decline in external demand. W e believe this will lead to lower economic growth in 201 3 , translating to lower economic activity and power consumption. Czech Republic ' s position as an important manufacturing hub for Germany is negatively effecting the country's consumption levels most acutely, with BMI forecasting just 0.3% growth for 2013.

Russia To Continue Dominance...But Turkey Emerging

We expect installed capacit y in the region to be over 488 gigawatts (GW) in 2013, and our forecasts suggest that this will increase to roughly 601 GW by 2021 , as we have priced in steady and relatively strong growth rates.

Diverse Regional Outlook
Regional Capacity Mix, % By Country, 2012e (LHS) and 2021f (RHS)

When examining the region at a more localised level, it becomes evident that Russia ' s power sector remains the largest in the region, and we expect this trend to hold for the duratio n of our forecast period (201 3 -2021). Russia ' s substantial existing capacity gives the country an advantage and we believe that the majority of the developments in the Russian power industry will be large-scale thermal and nuclear projects. We also expect Turkey's power sector to grow substantially over our forecast period, spurred on by strong power demand and increased investment into the sector; we expect it to contribute 16% to the total regional capacity by 2021.

We believe that the focus in other markets will be on substituting ageing capacity with cleaner and cheaper alternatives t hat have arisen in recent years, with a particular focus on non-hydropower renewable energy projects - most notably wind power projects.

That said, t he tightening availability of credit as a result of the eurozone debt crisis is of particular concern to capacity programmes. Banks in Western Europe that were pivotal in past infrastructure projects are now more wary of backing them due to new regulations an d heavy losses from write-downs . B anks in central Europe are also facing a similar dilemma. This decrease in credit availability is bound to cause significant delays to power projects. Most of these projects are long-term capital sinks, and expose financiers to foreign exchange risks over the project's lifespan.

In September 2012, t wo large power plant projects, totalling almost 3GW in new capacity, were put on hold. PGE 's 1.8GW Opole coal-fired power plant and Energa 's 1GW Ostroleka coal power plant have been delayed and suspended respectively. Combined, they will see contracts worth US$5.7bn removed from the immediate project pipeline. Whilst we see limited implications for electricity supply in Poland, what is more concerning is the impact on the country' s struggling building industry.

Thermal To Remain King

BMI expects thermal energy (namely coal and gas) to continue to play a pivotal role in CEE, despite the ambitious emissions and renewable energy targets set by most of the countries in region over the last decade. A nu mber of countries in the CEE have large reserves of coal and gas, and are therefore keen to exploit their natural resources before spending on costly imports. The cost effectiveness of coal- and gas-fired plants is another driving factor, as countries in the CEE generally have less developed economies than their Western counterparts, and the project pipeline for both types of projects remains strong over the near term, at least .

However , with a number of energy policies shifting their focus towards renewables and gas electricity generation , the financial viability of coal projects is likely to decrease slightly over the coming decade. This trend was evidenced in September 2012 , when Polish energy firm, Energa announced it was suspend ing its plan to construct a 1GW coal-fired power plant in Poland , citing financial insecurity as the caus e. This is highlighted in our projected growth rates for coal fired electricity generation between 2012 and 2021, as they are significantly lower than all other types (except oil).

Gas And Coal Dominate Picture...But Renewables Gaining
Regional Generation Mix (LHS) and Generation Growth By Source, 2012e and 2021f (RHS)

The outlook for nuclear energy in the region looks weak, as expansive projects are finding it increasingly difficult to secure financing, while public opposition to nuclear energy remains strong following the Fukushima crisis. While countries in CEE have refrained from enacting regulations to totally phase out nuclear energy, the pipeline of nuclear projects also remains quiet , with only Russia and Turkey showing the strongest political will towards pursuing nuclear agendas.

Renewables Presenting Opportunities

Despite the under-developed nature of the CEE's non-hydro renewables sector, particularly when compared to its western European counterparts, we forecast high levels of growth across the renewables segments and maintain our view that the sector presents real opportunities for renewable energy developers.

Using our 10-year forecasts, we have determined that wind is clearly the technology of choice for CEE, and we expect strong levels of growth for the wind segment, which is set to drive the renewables sector and contribute roughly 80% to the total non-hydro renewables capacity by 2021. Turkey and Poland are set to become regional leaders for renewables, and are already making headway in their pursuit to fulfil renewable energy targets.

A key factor underpinning this projected renewables expansion and boosting the investment prospects in the region, are the implementation of government subsidy programmes, in particular Feed-in Tariffs (FiTs). Using our FiT database, we have identified five countries in the region that offer a tariff programme (Bulgaria, Czech Republic, Turkey, Ukraine and Hungary).

That said, there are still a number of risks that face the renewables industry, most pertinently the financial insecurity surrounding renewable energy projects (driven by a usterity measures, cost considerations and a lack of credit flows ) , as well as the regulatory uncertainty underpinning many government ' s energy agendas.


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