Central and Eastern European Electricity Outlook · 2016-05-25 · It is my pleasure to introduce the Central and Eastern European Electricity Outlook, ... 2 Central and Eastern European

ENERGY AND NATURAL RESOURCES

Central andEastern EuropeanElectricity Outlook

ADVISORY

Authors:

KPMG Power & Utilities Centerof Excellence Team, Budapest,Hungary

Thompson H. McDaniel Jr.Senior Lecturer at the CentralEuropean University BusinessSchool in Budapest

Contributors:

Johanna JáraiViktória NagyChris DinsdaleLászló MiliásMiklós BrázaiRoland Lajtai

© 2008 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

1Central and Eastern European Electricity Outlook

Dear Reader,

It is my pleasure to introduce the Central and Eastern European Electricity Outlook,

which has been prepared by the KPMG Energy & Natural Resource team

in Budapest, Hungary. This practice is proud to be a Power & Utilities Center of

Excellence within the European market along with London, Paris and Essen.

The Central and Eastern European region’s electricity sector is entering into an

exciting period that holds many opportunities for both current and future

stakeholders. The electricity sectors of all CEE countries are very different in terms

of decentralization, privatization and degree of liberalization. Valuable lessons can

be learnt from each country, especially with respect to restructuring, privatization,

development of competition, security of supply and how to capitalize on their

available renewable resources to ensure the sustainability of their electricity supply.

The electricity markets of the CEE countries have already commenced and are

expected to continue to converge and form a common CEE electricity market.

Many differing opinions exist on how to achieve this unified market, due to the

different stages of the development of the individual countries’ electricity sectors.

One thing is for sure, to date this convergence has occurred through a bottom up as

opposed to a top down approach.

As the individual markets develop and continue to converge, they have to recognize

their common geographic comparative advantage: They lie between the energy-rich

CIS countries and the net energy consumer Western Europe. It will be seen in the

coming years, if the CEE countries are able to capitalize on this advantage, thus

ensuring their security of supply by attracting electricity and natural gas transit to

satisfy their electricity generation and other energy needs.

This environment gives a major opportunity for both the incumbent market players

and new entrants, who can capitalize on the opportunities provided by the different

market conditions and the geographic comparative advantage of the region for the

benefit of industrial, commercial and individual consumers. It is also up to the

different regulatory bodies and governments to provide such conditions that will

foster the emergence of an attractive but competitive unified electricity market.

I hope that you enjoy this booklet and I wish you all the best in your exciting journey

in taking part in developing the unified CEE electricity market, whether you are a

stakeholder of the electricity sector on the supply side or a consumer.

Péter Kiss

Péter Kiss

Partner

Energy and Utilities Advisory Services

KPMG in Central and Eastern Europe

Tel: +36-70-3331400

e-Mail: [email protected]

2 Central and Eastern European Electricity Outlook


3Central and Eastern European Electricity Outlook

Page

1. Key Countries of the CEE Energy Markets 5

2. History 9

3. Varying Levels of Liberalization 13

3.1. Privatization 13

3.2. Unbundling 20

3.3. Market Opening 22

4. A Changing Generation Mix 25

4.1. Renewable Generation Expansion 26

4.2. Renaissance of Nuclear Generation 30

4.3. An Alternative Fuel Source to Maintain Security of Supply—Coal 34

4.4. Dependency on Natural Gas 37

4.5. Emission Policy 38

5. Towards a Single Market 47

5.1. Cross-Border Capacities 47

5.2. Power Exchanges 51

5.3. Power Purchase Agreements 52

5.4. Price Convergence 54

6. What KPMG firms can offer 57

Table of Contents


The CEE Region in a European Context

� Borders of the European Union

� Central and Eastern European, countries

� Other countries


5Key Countries of the CEE Energy Markets

This report defines Central and Eastern Europe as 16 countries lying just east of

the original European Union (sometimes referred to as EU 15 or “Western”

Europe), and just west of the Commonwealth of Independent States (CIS:

Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzistan, Moldova, Russia,

Tajikistan, Turkmenistan, Ukraine, and Uzbekistan), which were part of the former

Soviet Union (FSU).

Ten of these 16 countries are currently EU members, and it is very likely that all

or most of these countries will become EU members within a decade or so.

Many of the CEE countries are not yet considered developed countries, yet are

advanced enough so as not to be considered underdeveloped.

Therefore, they are often regarded as comprising a “converging” market rather

than an emerging market, offering the best of both worlds: high returns

associated with emerging markets and the stable risk profile associated with

the leading industrial economies around the world.

1. Key Countries of theCEE Energy Markets

The CEE Countries’ Economic and Population Data for 2006

Albania (AL)

GDP 2006: $20 billion • GDP growth 2006: 5.0% • Population: 3.6 million

Bosnia & Hercegovina (BIH)


Bulgaria (BG)


Croatia (HR)


Czech Republic (CZ)


Estonia (EST)


Hungary (H)


Latvia (LV)


Lithuania (LT)


Macedonia (MK)


Poland (PL)


Romania (RO)


Serbia & Montenegro* (SCG and MNT)


Slovakia (SK)


Slovenia (SLO)


All GDP figures are quoted in GDP Purchasing Power Parity.

* For Serbia & Montenegro the GDP 2006 value includes Kosovo, while the GDP growth 2006 excludesKosovo. Individual data for Serbia and Montenegro is unavailable for 2006.

Sources: The World Factbook, United States Central Intelligence Agency, 2006. All information consistsof estimates.

EST

LV

LT

PL

SLOHR

BIH SCG

AL

MNT

CZ

SK

HRO

BG

MK

Key Countries of the CEE Energy Markets6


7Key Countries of the CEE Energy Markets

Major economic indicators and population data can found in the accompanying

table.

It is impossible to describe the CEE regional electricity market in a single manner

since the market trends, level of development, and future outlook vary widely by

country and in some cases by specific regions within these countries. Therefore,

this study aims to identify major trends within the CEE electricity market that are

expected to affect the development of the electricity market

in the region; each trend is then examined at a country level.

The broad range of the CEE regional electricity markets’ development level can

be seen by the fact that at one extreme, several CEE countries’ electricity

markets are well advanced, being more liberalized and developed than some of

their Western European peers. At the opposite extreme, some CEE countries’

markets are still state owned and operated; in some cases the electricity supply

to consumers is only intermittently available due to severe generation shortages

and poor infrastructure maintenance.

The level of investment needed in the CEE regional electricity markets is

significant due to a rapidly growing demand for electricity in the region, due

to a high level of GDP growth and an increasing standard of living, while

low past investment in maintenance and network expansion has further

compounded this problem.

Major investments are needed to replace or upgrade generation capacity, as well

as in the transmission and distribution networks and in energy efficiency

projects. The investment environment of the region is as equally diverse as the

electricity market itself; however, this environment is improving rapidly across

the region, and in many CEE countries the level of country credit risk is rated

stable.1

1 Standard and Poor’s, Credit Ratings List,http://www2.standardandpoors.com/portal/site/sp/en/eu/page.topic/ratings_sov/2,1,8,0,0,0,0,0,0,0,4,0,1,50,0,0.html, accessed April 12, 2007



9History

Before the change of the political and economic system in the early 1990s,

the economies of CEE countries were centrally-planned, and dominated by heavy

industry. In order to be able to supply the significant levels of electricity needed,

large-capacity transmission lines were constructed and significant generation

capacities were built in Ukraine, which at the time was a member of the Soviet

Union. They were based mainly on coal and nuclear technology according to the

former Soviet Union tenet that electricity should be generated near the primary

energy source.

While this resulted in Belarus and Ukraine being well connected to their

neighbors, the cross-border connections between CEE regional countries were

very limited. The only exception to this are the strong interconnections between

Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Montenegro and Macedonia,

which at the time formed Yugoslavia; the Czech Republic and Slovakia, which

formed Czechoslovakia; and those of the Baltic states of Lithuania, Estonia and

Latvia, which also have strong interconnections due to historical reasons. This

ow level or non-existent interconnection between the CEE countries remains one

of the main barriers to the realization of a unified market in the CEE region.

Due to the factors surrounding the change of the political and economic system

in the mid 1990s, many of the large uneconomical heavy-industry sectors were

closed down, causing a significant decrease in electricity demand throughout

the region. This decrease in demand combined with severe domestic monetary

problems caused many CEE countries to significantly reduce the level of

maintenance and development in their electricity network. In addition, a civil war

ravaged much of the former Yugoslavia and severely damaged the electricity

network in the former Yugoslavian member states, the consequences of which

are still being addressed today.

2. History

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

500

450

400

350

300

250

200

150

100

50

0

140

130

120

110

100

90

80

Kyoto protocolreference values

Change in the political system

Ele

ctr

icit

y C

on

su

mp

tio

n, T

Wh

Po

pu

lati

on

, m

illio

ns

Electricity Consumption and Population

in the CEE Region, 1980 – 2004

Source: Population Division of the Department of Economic and Social Affairs of the United NationsSecretariat: http://esa.un.org/unpp/International Energy Annual 2004,Energy Information Administration (a statistical agency of the U.S. Department of Energy):http://www.eia.doe.gov/emeu/international/electricityconsumption.html

� Total Electricity Consumption � Total population

Although demand for electricity dropped significantly in the early 1990s, the level

of electricity demand has since rebounded due to continued economic growth,

the stabilization of the region following the fall of the Soviet Union, and

continuous growth in the standard of living. With the development of the CEE

countries, household consumption and commercial consumption have slowly

begun to dominate electricity demand, in place of heavy industry.

In the late 1990s, as a result of increasing consumption and a poorly maintained

electricity network, the electricity networks in the CEE region became

overburdened, and transmission losses skyrocketed in some countries.

This resulted in the need to put back into daily operation highly inefficient and

polluting power plants. With electricity flows between the former Soviet Union

blocked for technical, financial or political reasons and limited cross-border

capacities available between neighboring countries, many CEE countries were

left to fend for themselves.

10 History



During this same period, stricter environmental and safety regulations from the

EU also affected the market. This resulted in many nuclear facilities being

required to close operations as a requirement for EU accession, while major

upgrades were and still are needed to comply with minimum EU environmental

regulations.

In order to increase the quality of the power supply, make the necessary

improvements to be able to meet the increasing demand, and comply with EU

rules and regulations, many countries began to privatize their electricity networks.

This privatization process has allowed significant foreign investment to enter the

market. Although privatization began in the 1990s, in many countries it is just

beginning; in others it is in the advanced stages or complete.

With the EU goal of the formation of a unified single European electricity market,

many of the CEE countries have implemented market unbundling and market

opening activities. Much progress has been made in this respect but some major

hurdles remain.

Although the development focus of the CEE countries is diverse, the main areas

of focus are market liberalization, generation capacity investments, and progress

toward a single regional and European electricity market.

11History

13Varying Levels of Liberalization

After the changes of their political systems in the 1990s, the CEE countries

began the process of changing to a market economy and converging with

Western European standards. Local policies and markets are increasingly formed

by EU policies which have affected efficiency in production, transmission, and

distribution; security of supply; protection of customer rights; environmental

protection; and competition in generation and distribution.

The main characteristics of the liberalization process are the privatization of the

state-owned electricity companies to create conditions of efficient competition:

unbundling of production from transmission and distribution; and market opening,

thus providing all consumers with the possibility of switching electricity suppliers.

The following section discusses privatization, unbundling, and market opening in

the CEE region.

3.1. Privatization

Privatization of the electricity networks in the CEE region has been undertaken in

a variety of manners but the goal of each is to not only encourage foreign direct

investment into the electricity network but also allow market liberalization and

increasing competition. A lack of past investment into the electricity network

in many countries has resulted in inadequate electricity supply, non-compliance

with EU environmental standards, and an inefficient electricity network.

The success of privatization is mainly dependent upon the prior restructuring

of the electricity sector, which is needed to provide a legal background,

transparency, and appropriate market conditions for investors to enter the market.

Below we seek to examine the current situation in terms of privatization from

the major players’ point of view: the transmission system operator, distribution

system operators, and generation companies.

3.1.1. Transmission System Operators

In every CEE country, the Transmission System Operator (TSO) is not privatized

but kept fully in state ownership to ensure non-discriminatory third-party access

and ensure the security of supply. Privatizing the transmission system network is

regarded as politically undesirable due to domestic pressures to not allow a

foreign or single private party to own such a strategic asset. As such, the TSOs

of each country are owned directly or indirectly through the incumbent by the

government.


3. Varying Levels ofLiberalization

CountryTSO ownership independence

from the incumbent2

Albania yes

Bosnia and Herzegovina no

Bulgaria no

Croatia no

Czech Republic yes

Estonia yes

Hungary yes

Latvia no

Lithuania yes

Macedonia no

Poland yes

Romania yes

Slovakia yes

Slovenia yes

Serbia/Montenegro no

14 Varying Levels of Liberalization

3.1.2. Distribution System Operators (DSO)

The situation is different in case of the DSOs. The regional distribution companies

have in many cases been separated from the dominant market player and sold to

strategic investors.

The Baltic countries and Poland are in the initial phase of privatization due to the

lack of effective restructuring of their sectors, which has resulted in delays to

privatization.

In Estonia, 91 percent of the DSOs are directly or indirectly in state ownership.3

The dominant electricity company is Eesti Energia, a 100 percent state–owned

vertically integrated public limited company that controls 85 percent of the

distribution network. In addition to the dominant distribution company, OÜ

Jaotusvõrk (100 percent owned by Eesti Energia), there are 41 distribution

companies altogether, which means many of them are extremely small

considering the Estonian market size. The second largest distributor Fortum

Elekter and the third largest Narva Elektrivõrk have a market share of 3 percent

and 2.5 percent,4 respectively.


2 International Energy Regulation Network,http://www.iern.net/country_factsheets/continent-europe.htm, accessed March 21, 2007COMMISSION OF THE EUROPEAN COMMUNITIES, COMMISSION STAFF WORKING DOCUMENT,Technical Annexes to the Report from the Commission on the Implementation of the Gas and ElectricityInternal Market, Brussels,http://ec.europa.eu/energy/electricity/benchmarking/doc/4/sec_2004_1720_en.pdf, January 5, 2005 Southeastern Europe Transmission System Operators, SETSO Task Force, Nenad Stefanovic: Status of reform of SEE electricity sector, Report to the 6th Athens Forum-, June 9–10, 2005European Commission Directorate-General for Energy and Transport: CORRIGENDUM COMMISSIONCOMMUNICATION ON PROGRESS IN CREATING THE INTERNAL GAS AND ELECTRICITY MARKET, January 12, 2006

3 Einari Kisel: Experiences of Privatization of the Estonian Energy Sector, Presentations of the Workshop"Reforming Infrastructure: Privatization, Regulation and Competition" in Riga, May 3, 2005www.sprk.gov.lv/doc_upl/Experiences_of_Privatization_of_the_Estonian_Energy_Sector.pps

4 COMMISSION OF THE EUROPEAN COMMUNITIES:COMMISSION STAFF WORKING DOCUMENT– Accompanying document to the COMMUNICATION FROM THE COMMISSION TO THE COUNCIL ANDTHE EUROPEAN PARLIAMENT, Prospects for the internal gas and electricity market, Implementation report,http://ec.europa.eu/energy/energy_policy/doc/10_internal_market_country_reviews_en.pdf, January 10, 2007

5 European Commission Directorate-General for Energy and Transport: Romania Renewable Energy Fact Sheet,http://ec.europa.eu/energy/energy_policy/doc/factsheets/renewables/renewables_ro_en.pdf, January 2007.

6 COMMISSION OF THE EUROPEAN COMMUNITIES:COMMISSION STAFF WORKING DOCUMENT – Accompanying document to the COMMUNICATION FROM THE COMMISSION TO THE COUNCIL ANDTHE EUROPEAN PARLIAMENT, Prospects for the internal gas and electricity market, Implementation report,http://ec.europa.eu/energy/energy_policy/doc/10_internal_market_country_reviews_en.pdf, January 10, 2007

7 “To know Polish energy”, http://polishenergy.cire.pl/ze.html, accessed March 13, 2007.8 www.sse.sk, www.vse.sk, www.zse.sk

Overview of DSO Privatization

in the CEE Region, 2006

EST

LV

LT

PL

SLOHR

BIH SCG

AL

MNT

CZ

SK

HRO

BG

MK

� In final phase

� Underway

� In initial phase


A bit more developed situation can be found in Latvia and Lithuania where

privatization of the DSOs has been undertaken to a larger extent. In Latvia, the

distribution network is operated by Sadales tikls, a subsidiary of the 100 percent

state–owned and vertically integrated electricity company Latvenergo, while

maintenance and development of medium and low voltage distribution lines are

provided by seven AS Latvenergo Distribution Network Regions.5

In Lithuania, two major state–owned companies are engaged in electricity

distribution activities: these are Rytų Skirstomieji Tinklai AB and Vakaru

Skirstomieji Tinklai AB. Other distribution companies exist but they are minor or

industrial companies with internal networks directly interconnected to the

transmission networks within their territories, but the distribution subsidiary of

the national electricity company is still dominant on the market.6

The Polish privatization is in its initial phase due to the country’s time lapse to

properly restructure the sector prior to privatization. In the distribution sector, two

of the 14 distribution companies were privatized to strategic investors Vattenfall

and RWE (each with 85 percent7), with the rest being left in state ownership.

Poland’s current plan is to consolidate the small DSOs into larger vertically-

integrated entities in order to attract increased foreign interest in the privatization

process. However, this process has resulted in the postponement of the

privatization process.

In Slovakia, Hungary, the Czech Republic and Macedonia the privatization of

the electricity network is in an advanced stage, with many components of the

electricity network having been already sold to Western European energy

companies.

In Slovakia, of the three regional distribution/supply companies, EDF, RWE, and

E.ON are active and have each acquired an ownership of 49 percent in an

individual distribution company each, while the government has retained 51

percent ownership through the National Property Fund.8 The three traditional

supply/distribution companies are: ZSE (49 percent owned by E.ON), VSE (49

percent owned by RWE) and SSE (49 percent owned by EDF). Each has a

regional distribution area, but there is now competition between the three

companies on the supply side. Slovenska Elektrane (SE, owned 66 percent by

ENEL and 34 percent by the Slovak government), as the main generation

company, has begun to supply customers directly.



Several companies from the Czech Republic have also entered the market as

traders\suppliers including ČEZ. There is little congestion between the two

Member States since they were formerly one country and suppliers have been

able to source electricity from the Czech power exchange.9

The privatization of the Hungarian market is also well advanced, with three of the

six DSOs being owned completely by E.ON, two DSO regions 55 percent owned

by RWE, and the final DSO region being 60 percent owned by EDF.10

In addition there are currently 29 electricity trading license holders, but

due to the high amount of electricity involved in long term power purchase

agreements, traders suffer from a lack of available electricity.11

In Czech Republic, the ČEZ Group is a strong and vertically integrated player in

the Czech electricity market, listed on the Prague, Vienna and Warsaw stock

exchanges. However, the main shareholder remains the Czech Ministry of

Finance (National Property Fund) with two-thirds (67.6%) of the remaining

ownership being institutional shareholders and foreign investors.

There are three large DSOs. The three (ČEZ Distribuce PREdistribuce and E.ON

Distribuce) large suppliers’ have an electricity market share of more than 95

percent of final customers’ total consumption. In addition there are also about

10 independent suppliers that are actively operating in the retail market.12

Romania and Bulgaria are currently in the process of privatizing their DSO sectors.13


9, 11, 12 COMMISSION OF THE EUROPEAN COMMUNITIES: COMMISSION STAFF WORKING DOCUMENT– Accompanying document to the COMMUNICATION FROM THE COMMISSION TO THE COUNCIL ANDTHE EUROPEAN PARLIAMENT, Prospects for the internal gas and electricity market, Implementationreport, http://ec.europa.eu/energy/energy_policy/doc/10_internal_market_country_reviews_en.pdf,January 10, 2007

10 www.elmu.hu, www.emasz.hu, www.titasz.hu, www.demasz.hu13 Council of European Energy Regulators ASBL: Regulatory Benchmarking Report For South East Europe,

2005; November 8, 2005


As far as the Bulgarian distribution sector is concerned, a 67 percent stake in

three separate electricity distribution companies was sold to E.ON Energie AG,

EVN AG of Austria and ČEZ a.s. of the Czech Republic respectively.14

In Romania the market consists of eight electricity distribution/supply companies.

Of these, four have been privatised with ČEZ and E.ON acquiring a controlling

interest in one DSO region each and ENEL acquiring a controlling ownership in

two others. The finalization of the privatization of a fifth DSO region to ENEL is

expected in 2007, while the other three are in state ownership but are planned to

be privatized.15

The rest of the Balkan region is in the initial phases of the privatization process,

with the notable exception of Macedonia and Slovenia, where the Macedonian

DSO, AD ESM was 90 percent privatized to the Austrian company EVN AG in

March 2006,16 while in Slovenia 79.5 percent of the DSOs are owned by the

state.17

In Croatia electricity distribution is operated exclusively by HEP's (Hrvatska

Electropriveda) Distribution Division through 21 distribution regions that largely

correspond to the country's counties.18

In Serbia the 100 percent state-owned JP Elektroprivreda Srbije is the dominant

vertically integrated utility dealing with electricity production, distribution and

supply. Its legally independent subsidiaries Elektrovojvodina ltd, Elektrodistribucija

Beograd ltd, Elektrosrbija ltd, ED Jugoistok ltd. and ED Centar ltd deal with

distribution/supply.19

In Montenegro the state-owned electricity utility Elektroprivreda Crne Gore

(EPCG) is responsible for all distribution/supply of electricity.20

14 European Commission Directorate-General for Energy and Transport: Bulgaria – Internal Market Fact Sheet,http://ec.europa.eu/energy/energy_policy/doc/factsheets/market/market_bg_en.pdf, January 2007

15 European Commission Directorate-General for Energy and Transport: ROMANIA – Internal Market FactSheet, http://ec.europa.eu/energy/energy_policy/doc/factsheets/market/market_ro_en.pdf, January 2007

16 EBRD: FYR Macedonia strategy overview,http://www.ebrd.com/about/strategy/country/mace/index.htm, accessed March 22, 2007

17 European Commission Directorate-General for Energy and Transport: Slovenia – Internal Market FactSheet, http://ec.europa.eu/energy/energy_policy/doc/factsheets/market/market_si_en.pdf, January 2007

18 Miroslav Malý, Jaroslav Jakubes , Jiřina Jílková, Eva Šnajdrová: Country Profile – Croatia Review of Status ofEmissions Trading Activities in CG11 Countries,http://r0.unctad.org/ghg/download/other/cg11/Croatia_Country_Profile.doc, May 2002

19 International Energy Regulation Network: Country Factsheets Serbia,http://www.iern.net/country_factsheets/market-serbia.htm, July 2006

20 International Energy Regulation Network: Country Factsheets Montenegro,http://www.iern.net/country_factsheets/market-montenegro.htm, July 2006


Overview of Generation

Privatization in the

CEE Region, 2006

EST

LV

LT

PL

SLOHR

BIH SCG

AL

MNT

CZ

SK

HRO

BG

MK

� In final phase

� Underway

� In initial phase


In Bosnia and Herzegovina, Elektroprivreda Bosne i Hercegovine JSC (EP BIH),

Elektroprivreda Hrvatske Zajednice Herceg Bosne JSC (EP HZHB), subsidiaries

of Elektroprivreda Republike Srpske JSC (EP RS), and in Brčko District of BIH a

separate entity which is attached to the local government, are the sole holders

of distribution licenses.21

These former Yugoslavian countries are expected to pursue the privatization of

their DSO sectors in the short to medium term.

Finally, in Albania the state-owned joint-stock company Albanian Power

Corporation (KESH) is the vertically-integrated monopolist in generation,

distribution and supply.22

3.1.3. Generation Companies

The privatization of the generation sector can be observed in the region but to a

lesser extent than in the case of the distribution system. The majority of

generation assets are still often owned by the incumbent market player in the

different countries, with the notable exception of Slovakia. The privatization of the

generation sector is evolving quickly, and significant amounts of generation

assets are expected to be privatized in the short and medium term. Countries in

the region have taken very different approaches to addressing the privatization of

the generation sector: with some countries maintaining a strong domestic

champion and others seeking high levels of foreign investment through the sale

of the majority of their domestic generation assets.

In the Baltic region, the Latvian state-owned Latvenergo operates 60 percent of

the electricity generation in Latvia, while 5 percent of the generation comes from

150 private small generators and the remainder through electricity imports.23

In Estonia 98 percent of the domestic generation capacities is in state hands

under the umbrella of Eesti Energia.24

In 2005 Lithuania had four main electricity producers: Lietuvos Elektrine with 36

percent of the installed domestic capacity, Ignalina nuclear plant with 26 percent,

Kruonio HAE with 18 percent and Vilniaus Energija UAB25 with approximately

7 percent of the installed domestic generation capacity, while 13 percent is in the

hands of smaller generation companies.26


21 International Energy Regulation Network: Country Factsheets Bosnia and Herzegovina,http://www.iern.net/country_factsheets/market-bosnia_and_herzegovina.htm, July 2006

22 International Energy Regulation Network: Country Factsheets Albania,http://www.iern.net/country_factsheets/market-albania.htm, July 2006

23 International Energy Regulation Network, “Latvia,”www.iern.net/country_factsheets/market-latvia.htm, May 2006.

24 Einari Kisel: Experiences of Privatization of the Estonian Energy Sector, Presentations of the Workshop"Reforming Infrastructure: Privatization, Regulation and Competition" in Riga, May 3, 2005www.sprk.gov.lv/doc_upl/Experiences_of_Privatization_of_the_Estonian_Energy_Sector.pps

25 European Commission, “Fact sheets by country,”http://ec.europa.eu/energy/energy_policy/facts_en.htm, March 8, 2007.

26 Lietuvos Energetika: Energy in Lithuania 2005, p 11,http://www.lei.lt/_img/_up/File/atvir/leidiniai/Lietuvos_Energetika-2005.pdf, accessed March 2007


All of the above companies are majority owned by the state except Vilniaus

Energija, which is owned 74.79 percent by the French Dalkia.

In Poland the state-owned PKE SA (85 percent state owned) and BOT Group (100

percent state owned) have direct ownership of the majority of the country’s installed

generation capacities (18 and 44 percent, respectively), while the remaining capacity

is owned by EDF, Vattenfall and Tractebel, while smaller plants were sold to ČEZ27

and other international investors.

In the Slovakian supply side of the electricity market, Slovenske Electrarne (SE),

the main generation entity, owns 85 percent of the installed capacity of the

country. The remaining 15 percent of the capacity is owned by two of the

regional distribution utilities and other independent power producers serving

industrial customers. 66 percent of SE was successfully privatized to ENEL in

200528, while the remaining part is still in state ownership.

The Hungarian power generation sector is 36 percent foreign-owned by various

entities, while the remainder is state-owned by MVM, the Hungarian Electricity

Company. The privatization of MVM is currently postponed and future privatization

plans are unknown.

The ownership of the Slovenian generation sector is very concentrated with more

than 97 percent of the country’s installed generation capacities owned by the

state directly or through either the main incumbent HSE or the system operator,

Eles, which has a 50 percent share in the Krsko nuclear power plant.29

The further privatization of the generation sector is not currently a top political

priority and future plans are unknown.

In new EU member Bulgaria, the generation sector is in the process of being

privatized. Currently, 48 percent of the country’s installed generation supply is

owned by state-owned NEK EAD, including the nuclear power plant in Kozloduy

and all hydro power plants (HPP). The six thermal generators and several

combined heat and power (CHP) producers are either already privatized or

privatization is underway.

In Romania the privatization of the generation sector has not commenced in

earnest but is planned in the short to medium term with the first major power

plant most likely to be the Turceni lignite fired thermal power complex which is

expected to be privatization by the third quarter of 2007,30 following the

reorganization of the state-owned generation player Termoelectrica.

27 CEZ, “Foreign equity shares,”www.cez.cz/presentation/eng/instance_view.jsp?folder_id=12307&instance_id=94072, accessed March 13, 2007.

28 Economist Intelligence Unit: Slovakia: Energy and electricity profile,http://www.viewswire.com/article1310512316.html?pubtypeId=1155864115&text=mochovce, April 5, 2006

29International Energy Regulation Network, “Slovenia,”www.iern.net/country_factsheets/market-slovenia.htm, April 2006.

30, 31 Romanian Business Digest, Romanian Power Sector Overview – Launching privatization of the powergeneration, http://rbd.doingbusiness.ro/cet_power_privatisation_mart2007.htm#launching, March 2007


32 Cristian R. Stefan: Debt relief for Termoelectrica, Mesagerul Economic,http://www.ccir.ro/ccirweb/resources/menuPublicatii/uploads/Intranet%20Mesager%2015.pdf,April 17–23, 2006

33 International Energy Regulation Network, “Macedonia,”www.iern.net/country_factsheets/market-macedonia.htm, July 2006.

34 International Monetary Fund: Former Yugoslav Republic of Macedonia: Report on Observance of Standardsand Codes—Fiscal Transparency Module, Box 2. Privatization Process of the Electric Power Company of FYRMacedonia, https://www.internationalmonetaryfund.org/external/pubs/ft/scr/2006/cr06282.pdf,July 2006

35, 36 Economist Intelligence Unit: Albania: Energy provisionhttp://www.viewswire.com/article811937866.html? February 22, 2007


Hidroelectrica (the owner of most hydro-power plants) plans to have privatized as

many as 150 micro HPPs out of its total 227 by the end of 2007.31 Privatization

has begun and is expected to continue in 2007.32

In the remainder of the Balkan generation sector (Slovenia, Croatia, Bosnia and

Herzegovina, Serbia, Montenegro and Macedonia), the sector is still mainly state

owned. In Croatia, state ownership is 95 percent; however, in other Balkan

countries, the generation sector is fully owned by the state or by state-owned

enterprises. Macedonia is the only exception, where privatization of the state-

owned power monopoly, Elektrostopanstvo na Makedonija (ESM), is well underway

since ESM was broken into distribution, generation and transmission segments in

late 200533, with separate supervisory and management boards, namely:

AD ESM, which owns and operates the electricity distribution assets; AD ELEM,

which consists of all electricity generation assets; and AD TEC Negotino, the

single oil-power plant in the country. The government successfully completed the

privatization of AD ESM in March 2006 by selling a 90 percent stake to the

Austrian EVN. AD TEC Negotino’s international tender was launched in April 2006.

The privatization of AD ELEM is planned for 2007.34

In Albania, the state power company, Korporata Elektroenergjitike Shqiptare

(KESh), current owns all domestic generation but is unable to satisfy the

electricity demand of the country, which has periodically suffered severe energy

shortages owing to the lack of investment in new generating capacity, rapid

increase in demand, droughts, and low levels of bill collection. Power shortages,

up to 5 hours a day in Tirana and 12 to 18 hours in the rest of the country, are

common in winter and during peak demand periods, disrupting business activity

and slowing economic growth.35 Privatization and direct foreign participation in the

generation sector are seen by the government as the solutions to electricity

shortages and are being pursued. Accordingly, an Italian consortium has been

selected to build a new 140 MW thermal power plant near the southern port city

of Vlora. Work could start in 2007 and finish within two years.36

3.2. Unbundling

The unbundling of an electricity market’s transmission/distribution network

and sales operations is a cornerstone to ensuring that effective competition

flourishes in a domestic market. It is vital that all market players can access

the transmission and distribution networks on equal terms with no preferential

treatment given to a single market participant. Consequently, accounting,

management, and/or legal unbundling is planned, underway, or complete in

all CEE countries. The rate of progress toward unbundling varies widely.



The current status of the various countries in the region, whether EU member

states, EU candidate states, or simply neighboring countries to the EU, to a large

part determines the unbundling goals of each country. For EU member states,

Directives 2003/54/EC and 2003/55/EC require unbundling to be complete by July

1, 2007.37 These directives require that the TSOs and DSOs be unbundled at an

accounting, management, and legal level.

The legal unbundling of the TSO in each of the EU member states has already

occurred as it was due on July 1, 2004, with the exception of Bulgaria where

accounting unbundling took effect at the beginning of 200438 and legal unbundling

took effect on December 31, 2005.39

Some non-EU countries such as Macedonia and Albania40 have also legally

unbundled their TSOs.41

Organizational or functional TSO unbundling has been implemented in Croatia and

Montenegro, in Bosnia and Herzegovina and in Serbia it is underway. Legal

unbundling of the TSO to date has only taken effect in Croatia. Ownership

unbundling is underway in the whole region, but in Montenegro no ownership

unbundling activities have started at all.42

DSOs in EU member states are required to be legally unbundled by July 1, 2007,

but many DSOs in CEE EU member states have still not taken steps toward legal

unbundling of their DSOs.

Although all market participants plan full compliance with legal unbundling

requirements, it is unclear if many will be able to complete the process prior to the

deadline. Nevertheless, officially, compliance is expected by the July deadline.43

Non–EU countries’ unbundling requirements have not been clarified.

However, the Treaty Establishing the Energy Community44—signed October 25,

2005,45 among others by Albania, Bosnia and Herzegovina, Croatia, Macedonia,

37 DIRECTIVE 2003/54/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL concerning commonrules for the internal market in electricity and repealing Directive 96/92/EC, http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_176/l_17620030715en00370055.pdf, June 26, 2003

38 COMMISSION OF THE EUROPEAN COMMUNITIES, Regular Report on Bulgaria’s progress towardsaccession, http://ec.europa.eu/enlargement/archives/pdf/key_documents/2004/rr_bg_2004_en.pdf,October 6, 2004

39 Maria Manicuta (General Director ANRE Romania): Results of the EU Integration, Working Group Meeting, Sofia,http://www.erranet.org/index.php? February 23–24, 2006

40 COMMISSION OF THE EUROPEAN COMMUNITIES, COMMISSION STAFF WORKING DOCUMENT,Technical Annexes to the Report from the Commission on the Implementation of the Gas and Electricity InternalMarket, Brussels,http://ec.europa.eu/energy/electricity/benchmarking/doc/4/sec_2004_1720_en.pdf, January 5, 2005

41 Energy Community: Albania Country Report – 2006,http://www.energy-community.org/pls/portal/docs/55837.PDF, June 12, 2006; Energy Community: Former Yugoslav Republic of Macedonia - Country Report 2006,http://www.energy-community.org/pls/portal/docs/55841.PDF, June 12, 2006; SETSO (Southeastern Europe Transmission System Operators) Survey on SEE TSOs Status of Reorganization,http://www.seerecon.org/infrastructure/sectors/energy/documents/4ew/20041027%20AF5%20Benchmarking%20SETSO-SEETEC.ppt, October 27, 2004

42 Nenad Stefanovic: Status of reform of SEE electricity sector, Southeastern Europe Transmission System Operators (SETSO) Task Force,http://ec.europa.eu/energy/electricity/south_east/doc/6/setso_benchmarking.pdf, June 9–10, 2005

43 European Commission: Directorate-General for Energy and Transport,http://ec.europa.eu/energy/electricity/south_east/doc/6/etso_comments_options_paper.pdf, April 12, 2005.


Overview of Expected Date For Complete Market Opening


EST

LV

LT

PL

SLOHR

BIH SCG

AL

MNT

CZ

SK

HRO

BG

MK

Countries Official Degree of

Market Opening,

2006 (% of total

demand)

Czech Republic 74

Hungary 67

Latvia 76

Lithuania 74

Poland 80

Slovakia 79

Slovenia 77

Bulgaria 62

Romania 83

Estonia 12

Albania 8

Bosnia 0

Croatia 0

Macedonia 18

Montenegro 0

Serbia 0

Source: COMMISSION OF THE EUROPEAN COMMUNITIES: Technical Annexes to the Report from theCommission on the Implementation of the Gas and Electricity Internal Market,http://ec.europa.eu/energy/electricity/benchmarking/doc/4/sec_2004_1720_en.pdf, January 5, 2005

� July 1, 2007

� 2013

� January 1, 2015


Montenegro, and Serbia—requires the implementation of the Acquis

Communautaire on energy, environment, competition, and renewables.

The Acquis Communautaire on energy is represented by Directives 2003/54/EC

and 2003/55/EC, meaning that legal unbundling requirements should be met in

these countries for both TSOs and DSOs; however, the exact deadline for the

completion of this unbundling is unclear.46 Presumably full legal unbundling would

be necessary prior to the full electricity market opening in these countries, which

is expected by January 1, 2015.

3.3. Market Opening

The degree of market opening of the CEE countries can be generally grouped

according to their currently-maintained and expected future relationships with the

EU. The countries of the EU-15, the 10 member states that joined on May 1,

2004, and Romania and Bulgaria, which joined on January 1, 2007, all now fall

under the 2003/54/EC Directive.


44, 45, 46 Treaty Establishing the Energy Community,http://ec.europa.eu/energy/electricity/south_east/doc/treaty/treaty.pdf, October 25, 2005


Based on the EU Directive, the EU member states were obliged to open their

electricity markets to non-household customers by July 1, 2004; and fully open

their electricity markets by July 1, 2007. As illustrated in the table, many EU

member states of the CEE have achieved an official market opening degree

which exceeds 50 percent. Although the actual level of free market participation

by eligible customers is significantly lower, it is still on par with or above many

Western European countries’.

Of the CEE countries that are current EU member states, only Estonia has been

allowed to postpone full market competition. Estonia plans the opening of its

domestic energy market to large consumers (35 percent of the market) by 2009

and to all customers (household and non-household) by 2013.47 The derogation

was granted after negotiating a transitory period for market opening during their

EU accession. The transitory period was requested to ensure the continuation of

the national electricity production from oil shale, which is considered important

by Estonia in order to be less dependent on imported fuel and for maintenance

of local jobs in the mining sector.

As mentioned previously those countries that are not current EU member states

have independently signed the Treaty Establishing the Energy Community.

They are marked in orange in the accompanying map. Based on this treaty, each

contracting party is legally bound to ensure that from January 1, 2008 all non-

household customers, and from January 1, 2015, all customers, are eligible to

freely chose their electricity supplier.

47 Implementation Report,http://ec.europa.eu/energy/energy_policy/doc/10_internal_market_country_reviews_en.pdf,January 1, 2007.


Alb

ania

Bos

nia

Bul

garia

Cro

atia

Cze

chR

epub

licEs

toni

aH

unga

ryLa

tvia

Lith

uani

aM

aced

onia

Pola

ndR

oman

ia

Serb

ia a

nd M

onte

negr

o*Sl

ovak

iaSl

oven

ia

0

20

40

60

80

100

120

140

Tw

h

� Nuclear

� Coal

� Gas

� Oil

� Hydro

� Renewable

Source: International Energy Agency (2004) www.iea.org*Note: Due to the temporal proximity of the Serbia and Montenegro disunion and the unavailability of

up–to–date information the now two countries are often examined under one umbrella.

� Nuclear 18%

� Coal 57%

� Gas 8%

� Oil 2%

� Hydro 14%

� Renewable 1%

Source: International Energy Agency (2004)www.iea.org

Generation Mix of the CEE Countries, 2004

Generation Mix of the

CEE Region, 2004


25A Changing Generation Mix

In general, across the region, generation capacity to meet demand is sufficient

for at least the next decade. In fact, countries such as Czech Republic, Slovakia,

and Poland—and until recently Bulgaria—were significant net exporters and are

expected to be so for some time. On the other hand, some countries in the

region are experiencing and expected to continue to experience a shortage of

generation capacity; this is primarily evident in the Balkan region.

The generation mix in the region is historically based on thermal energy sources,

due to the abundance of coal, principally in Poland and Czech Republic. Nuclear

and gas generation is also important, in part due to historical ties with the former

Soviet Union and also due, in some cases, to limited domestic supplies of

primary fuels. Renewable energy sources represent a growing fraction of the

generation mix but, excluding hydro generation, the percentage of renewable

generation is extremely small. Renewable generation is expected to greatly

increase its share of the overall generation mix due to EU incentives and

regulations, and growing concerns regarding the environment and reliance upon

foreign, mostly Russian, primary energy sources.

4. A ChangingGeneration Mix


26 A Changing Generation Mix

CEE countries are expected to continue to converge with EU regulations and

directives concerning the electricity market. Therefore, both nuclear and

renewable sources are earmarked for important future roles while coal will

remain an important source for diversification and security of supply reasons.

4.1. Renewable Generation Expansion

The further development of renewable energy supplies promises improvements in

the security of supply due to a lower dependence on foreign primary-energy

supplies and reduction in the price volatility of electricity. Renewable energies also

reduce air pollution and greenhouse gas emissions, while facilitating improvements

in the economic and social prospects of rural and isolated regions. The cumulative

effect of all these benefits makes a robust case for renewables support.48 Although

it currently accounts for only 16 percent of the energy mix in the CEE region, with

hydro-based generation accounting for the bulk of it with a 15 percent share,

renewable generation is expected to increase rapidly in the next decade.

EU Directive 2001/77/EC has mandated that countries increase their use of

renewable energy sources and aims for energy consumption from green sources

to be 12 percent (excluding hydroelectric) for the entire EU by 2010.49

This figure is expected to significantly increase in the new EU energy policy due in

2007. Renewable generation (excluding hydro) in general is still not economically

feasible and requires appropriate state support in order to meet EU goals for the

development of renewable generation supplies. Consequently, all CEE EU member

states have implemented supportive policies to encourage renewable generation;

the design of each is decided at a national level and consequently varies by country.

The EU-15 member states were obliged to conform to Directive 2001/77/EC by

October 2003. The 12 member states that acceded to the EU on May 1, 2004,

and January 1, 2007, had to transpose the directive by their date of accession to

the EU. Those CEE states that are not yet members of the EU are not obliged by

the directive; nevertheless, many countries in the region are heavily influenced

by EU directives as aspiring EU member states.

The level of development of renewable energy supplies varies widely throughout the

CEE region depending upon the local natural resources and the implementation of

policies to support renewable generation. Some countries have rich hydro potential;

these include Albania, Bosnia and Herzegovina, Croatia, Lithuania, Romania, Serbia

and Montenegro, Slovakia and Slovenia. As a result, their renewable generation

goals have been set accordingly high. Other member states such as Hungary and

Estonia must rely on more expensive technology, such as wind and biomass, with

their renewable generation goals being set accordingly lower. The renewable

electricity directive has been a historical step, and a major driving force, in the

development of renewable electricity.

48 Commission of the European Communities, Brussels, Communication from the Commission to the Counciland the European Parliament. Report on Progress in Renewable Electricity, January 10, 2007

49 “Renewable energy: The promotion of electricity from renewable energy resources,http://europa.eu/scadplus/leg/en/lvb/l27035.htm, accessed March 13, 2007.

EST

LV

LT

PL

SLOHR

BIH SCG

AL

MNT

CZ

SK

H

RO

BG

MK

5.1%

7.0%

7.5%

31.0%

3.6%

33.0%

11.0%

33.6%

8.0%

49.3%

Renewable Generation Official Goal for Percentage of Gross Electricity

Consumption Generated from Renewable Sources by 2010

Official Goal:

Actual Stage:

� On track for meeting 2010 target

� Additional effort needed to achieve 2010 target

� Far from commitment

� No information available

Source:Commission of the European Communities, Brussels, Communication from the Commission tothe Council and the European Parliament. Report on Progress in Renewable Electricity, January 10, 2007


50 “Lithuania: Energy generation and use,”www.chasque.net/frontpage/energy/english/informes/lithuania.htm, accessed March 13, 2007.

51 European Bank for Reconstruction and Development, Renewable Energy Resource Assessment: Latvia,http://ebrdrenewables.com/sites/renew/Shared%20Documents/Country%20Notes/old%20website%20country%20profiles/Latvia.pdf, September 27, 2002


In the Baltic region the progress to date has been mixed. Modest progress has

been experienced in Lithuania and amendments made in 2005 to the renewable

energy support system must lead to tangible results soon in order to reach the

2010 target of 7 percent. In Lithuania the feasible hydro power potential is

estimated at 3.6 TWh per year. Currently the country’s hydro power output

averages 320 GWh per year, thus significant potential is not currently being used.50

In Estonia, an increase in hydropower and biomass has led to modest growth in

renewable generation; however the current support scheme does not seem

adequate to develop other sources such as wind. In Latvia, renewable generation

sources are very modest due to the lack of a stable support system. Latvia has

significant hydro power generation potential; approximately an additional 3.9 TWh

per year hydro power generation capacity is both technically and economically

feasible in the country.51

Country Renewable(excl. Hydro)

Hydro Conventionalthermal

Albania 0.0 5.4 0.1

Bosnia 0.0 6.0 6.6

Bulgaria 0.0 4.7 39.6

Croatia 0.0 6.4 5.5

Czech Republic 0.0 3.0 73.1

Estonia 0.1 0.1 19.9

Hungary 2.0 0.2 30.9

Latvia 0.1 3.1 1.5

Lithuania 0.2 0.9 18.1

Macedonia 0.0 1.5 5.0

Poland 0.2 3.6 140.2

Romania 0.0 19.9 34.9

Serbia 0.0 13.9 27.5

Slovakia 2.7 4.6 21.9

Slovenia 0.0 3.4 9.8

Overview of Renewable Generation Penetration

in the CEE Region, 2004 (TWh)

Source: UCTE, IEA



Since 2004 Hungary has experienced strong renewable energy growth due to a

generous support system for renewables. This has resulted in significant biomass

and wind generation investments being undertaken or planned. The 3.6 percent

target set for Hungary in the EU Directive for 2010 was achieved in 2005. It is

expected that renewable generation sources will increase to 7.9 percent of total

generation by 2010,52 thus exceeding Hungary’s current target. Hungary is also

rich in geothermal energy potential; however, to date only one pilot facility is

under consideration.

Low levels of progress have been experienced in Poland, Czech Republic, and

Slovakia. In Poland, low green-certificate prices together with the lack of penalties

for non-compliance have led to a very modest increase in renewable generation.

Biomass and wind are increasing slowly due to increased quota obligations and

higher certificates prices; but faster renewable generation growth is expected in

the short to medium term. In Slovakia, poor support has been given to renewable

generation and consequently growth levels have been low. Much stronger

support is needed in order to reach the 2010 target of 31 percent.53 Slovakia has

significant growth potential in hydro power generation, current hydropower

facilities account for only 58 percent of total the domestic potential.54

52 Republic of Hungary, Minister of Economy and Transport, Report on the Status of Electricity ProductionBased on Renewable Energy sources , February 2006.

53 Commission of the European Communities, Report on Progress in Renewable Electricity, January 10, 2007.54 www.seas.sk/power-plants/hydro-power-plants-en/


Aside from strong political support for renewable energy development, the Czech

Republic has a very high renewable energy feed-in tariff, which sets the price of

electricity that the utility has to pay for renewable electricity from private

generators. Legal regulation has further enhanced the support for renewable

development. In general, the Czech Republic has established excellent

institutional support mechanisms for the promotion of renewable energy.55

According to these producers of electricity can choose from two support

schemes, fixed feed in tariffs or Green Bonuses. In case of the fixed price, the

electricity has to be purchased by the operator of the distribution system for a

regulated fixed price. While for Green Bonuses, the producer sells electricity on

the market for the wholesale price, and also receives a premium (Green Bonus)

per MWh from the distribution system operator.56

A high annual electricity demand growth of 4.5 percent in Slovenia is

overshadowing the modest increase in renewable generation sources; however,

Slovenia’s strong support scheme puts the country in a good position to reach its

2010 target of 33.6 percent.

Of the new EU member states, it is notable that Romania is the first country to

become an official member of the Renewable Energy and Energy Efficiency

Partnership (REEEP) on October 27, 2006.57 Participation requires Romania to

reach a target of having 33 percent of total energy consumption be from

renewable sources by the end of 2010. Although the share of renewable

generation has shrunk from 31.3 percent in 1997 to 29.9 percent in 2004,

Romania is on target to reach its target due to a strong support mechanism that

is expected to encourage growth in this sector in the medium term.58

In 2004, the majority of all electricity production from renewable energy sources

was generated through large-scale hydro power plants, although Romania is also

rich in potential wind and biomass energy sources, which to date have not been

developed, while additional sources of hydro are also available.

In 2002 Bulgaria passed the Ordinance on Setting and Applying Prices and Rates

of Electric Energy, a significant incentive that requires transmission and

distribution enterprises to purchase renewable power at preferential rates. As part

of its obligation to the European Union, Bulgaria will have 11 percent of its gross

electricity consumption generated from renewable energy sources by 2010.

Bulgaria is one of the top countries regarding potential wind energy development

(3,400 MW mid-term potential) and has a sizable reserve of geothermal energy

(200 MW from geothermal wells).


55 Renewable Development Initiative, „Czech Republic,”www.ebrdrenewables.com/sites/renew/countries/Czech%20Republic/default.aspx, accessed March 13, 2007.

56 Austrian Energy Agency: Energy Profile Czech Republic, Support Mechanisms and feed-in conditions for electricity from renewable energy sources,http://www.energyagency.at/enercee/cz/supplybycarrier.en.htm, February 27, 2007

57 Renewable Energy and Energy Efficiency Partnership, Press Releases: Romania Joins International RenewablesPartnership, http://www.reeep.org/index.cfm?articleid=1541, October 27, 2006

58 European Comission Directorate-General for Energy and Transport: Romania – Renewable Energy Fact Sheet,http://ec.europa.eu/energy/energy_policy/doc/factsheets/renewables/renewables_ro_en.pdf, January 2007

EST

LV

LT

PL

SLO

HR

BIH SCG

AL

MNT

CZ

SK

H

RO

BGMK

Source: World Nuclear Association, www.world-nuclear.org

� NPP in operation

� NPP decommissioning

� NPP expansion

State of Current and Planned

Nuclear Power Plants in the

CEE Region, 2006

Nuclear Electricity

Generation, 2006

Reactors Operable,

Jan 2007

TWh % No. MW

Bulgaria 18.7 44.0 2 1,906

Czech Republic 23.3 31.0 6 3,472

Hungary 13.0 37.0 4 1,773

Lithuania 15.1 70.0 1 1,185

Romania 5.1 8.6 1 655

Slovakia 16.4 56.0 5 2,064

Slovenia/Croatia* 5.8 42.0 1 696

* Slovenia and Croatia jointly operate the Krsko NPP.

Sources: Reactor data: WNA to 29/1/07, IAEA- for nuclear electricity production & percentage of electricity5/06., WNA: Global Nuclear Fuel Market (reference scenario) – for U, IEA


In addition, considering that approximately 90 percent of the country’s land is

arable, agricultural land, or forests, the potential for the development of biomass

projects looks promising with about 3,400 MW of technical potential identified.59

4.2. Renaissance of Nuclear Generation

Currently around one-third of the electricity consumed in the EU comes from

nuclear, which is one of the largest sources of carbon dioxide (CO2)–free energy

in Europe. Nuclear power is seen by many as one of the ways of limiting CO2emissions within the EU and, for those member states that wish, is also likely

to form an important part of their energy plan.

Nuclear power is less vulnerable to fuel price changes than coal or gas-fired

generation, as uranium represents a limited part of the total cost of generating

nuclear electricity, and is based on sources that are sufficient for many decades

and widely distributed around the globe.60

In CEE countries nuclear power currently accounts for nearly 20 percent of

electricity generated across the region. Although expanding nuclear generation is

a controversial issue, most of the region does not face strong public opposition

to nuclear generation such as that seen in Western Europe.

Seven CEE countries (Bulgaria, Czech Republic, Hungary, Lithuania, Romania,

Slovakia and Slovenia) have nuclear generation facilities, all of which are state

owned. (Slovenia and Croatia jointly operate the Krsko nuclear power plant.)


59 Renewable Energy Initiative, ”Bulgaria,”www.ebrdrenewables.com/sites/renew/countries/Bulgaria/default.aspx, accessed March 13, 2007.

60 Communication from the Commission to the European Council and the European Parliament – An energy policy for Europe, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52007DC0001:EN:NOT, January 10, 2007

Bulgaria CzechRepublic

Hungary Lithuania Romania Slovakia Slovenia*

80

70

60

50

40

30

20

10

0

Perc

enta

ge

* Slovenia's Krsko nuclear power plant is owned and operated in 50 percent by Croatia.Source: http://www.world-nuclear.org/info/info.html

Percentage of Nuclear Generation for Total Generation, 2006

44.0

31.037.0

70.0

8.6

56.0

42.0


The legacy of Soviet-era reactors has resulted in many CEE countries having to

struggle with the costs and effects of implementing related EU safety standards

into local national laws. In May 2004 five Eastern European countries with

nuclear power plants (NPPs) joined the EU: Czech Republic, Slovakia, Slovenia,

Hungary, and Lithuania. All but Slovenia operate Soviet-designed reactors. One of

the conditions of EU accession laid down by the EU in 1997 was that all nuclear

plants concerned had to achieve Western safety standards within 10 years.

Encouraged by European Union-based funding assistance, Bulgaria’s Kozloduy 1

and 2 were closed on December 31, 2002 and Kozloduy 3 and 4 followed on

December 31, 2006. Slovakia agreed to close its older units (Bohunice 1 and 2)

by the end of 2006 and 2008 respectively, despite recently completing a major

refurbishing of them, including replacing of the emergency core cooling systems

and modernizing the control systems. Lithuania closed Ignalina 1 in 2005 and

agreed to close Ignalina 2 in 2009.

These closures are having a significant impact on not only the countries closing

these facilities but also their neighboring countries, as seen in the expected

electricity shortages in Albania due to its reliance upon electricity from

Bulgaria’s NPP.61

The remaining nuclear units of the countries of the CEE region were able to

successfully meet EU safety standards in the allocated time period and in an

economical fashion.

61 Economist Intelligence Unit: Albania: Energy provisionhttp://www.viewswire.com/article811937866.html?pubtypeId=930000293&text=energy, February 22, 2007


Under Construction: first concrete for reactor poured, or major refurbishment under way.Planned: Approvals and funding in place, construction well advanced but suspended indefinitely.Proposed: clear intention but still without funding and/or approvals.Sources: Reactor data: WNA to 29/1/07., IAEA- for nuclear electricity production and percentage of electricity (% e) 5/06., WNA: Global Nuclear Fuel Market(reference scenario) – for U.

Reactors under Construction

Jan. 2007

Reactors Planned

Jan. 2007

Reactors Proposed

Jan. 2007

No.Generation

capacityNo.

Generationcapacity

No.Generation

capacity

Bulgaria 0 0 2 1,900 MW 0 0

Czech Republic 0 0 0 0 2 1,900 MW

Hungary 0 0 0 0 0 0

Baltic States 0 0 0 0Unknown 3,200 MW

Poland 0 0 0 0

Romania 1 655 MW 0 0 3 1,995 MW

Slovakia 0 0 2 942 MW 1 Unknown

Slovenia/Croatia 0 0 0 0 1 1,000 MW

Overview of Nuclear Generation Penetration in the CEE Region, 2006 (TWh)

As the previous table shows, nuclear electricity generation plays a significant role

in the national electricity generation mix of many CEE countries.

It is important to note that Slovenia jointly operates the Krsko nuclear plant with

Croatia and, owing to the resolution of a long-standing disagreement over

ownership of the plant, half of its production is sent to Croatia.

New nuclear generation capacities are expected in many CEE countries. The key

indicators of the future construction plans are summarized in the table below.62



62 World Nuclear Association, “World nuclear power reactors 2005–07 and nuclear requirements,”www.world-nuclear.org/info/reactors.html, January 29, 2007.


Six CEE countries have nuclear units either under construction, planned or proposed.

Reactors under Construction

� Romania has an additional unit under construction with a capacity of 655 MW

that is expected to start operation in 2007.

Planned Nuclear Reactors

� Bulgaria plans to construct a new NPP with two units of 950 MW each

in Belene. The project is in an initial construction phase with planned

commissioning in 2013–2014.

� ENEL’s privatization investment plan in Slovakia, approved in 2005, involves

investment to increase generating capacity and completion of Mochovce units

3 and 4 with a generation capacity of 942 MW each by 2011–12.

Proposed Nuclear Reactors

� The Romanian government plans the construction of three more nuclear

generation units (Unit 3 in 2013, Unit 4 in 2014 and Unit 5 in 2020) with a total

capacity of 1,995 MW.

� Slovenia has proposed building a new nuclear electricity generation unit of Krsko

2 with a generation capacity of 1,000 MW. It would be commissioned in 2017.

� In Hungary, Parliament endorsed plans to extend the lifetimes of all units of

the Paks NPP by 20 years, to 2032–37. There were plans to extend the reactor

with two additional units Paks 5 and 6 with a combined generation capacity of

of 950 MW but those were cancelled due to decreased power demand in the

early 1990s. In addition, in 1998 Paks proposed building a further 600–700

MW of capacity; however, the proposal was rejected by the national utility

MVM because it did not fit the government policy at that time. Nevertheless,

there are still ongoing discussions in Hungary about the construction of new

nuclear generation units although decisions have not yet been made.


EST

LV

LT

PL

SLOHR

BIH SCG

AL

MNT

CZ

SK

HRO

BG

MK

Overview of Coal Generation

Penetration in the

CEE Region, 2006

Source: IEA; EURACOAL

� >90%

� 50%–90%

� 10%–50%

� <10%



63 World Nuclear Association, “Emerging nuclear energy countries,” www.world-nuclear.org/info/inf102.html,February 2007.

64 Ibid.65 International Energy Association, “Member countries and countries beyond the OECD,”

www.iea.org/Textbase/country/index.asp. OECD/IEA 200666 BP, Statistical Review of World Energy, June 2006.

� In the 1980s Poland had four 440 MW Russian units under construction,

however, their construction was halted in 1990 and the components sold.63

� To frame the Polish and Baltic nuclear plans, in February 2007 the three Baltic

states (Estonia, Latvia, and Lithuania) and Poland agreed to build a new NPP

at Ignalina, initially with a generation capacity of 3,200 MW. As host, Lithuania

will have an ownership of 34 percent of the project and Poland, Latvia, and

Estonia 22 percent each. At least one unit of the project is expected to be

operating by 2015. E.ON has expressed interest in investing in such a unit.64

Rising gas prices and greenhouse constraints on coal and gas have combined to

increase the competitiveness of nuclear electricity generation; however, the plant

life extension programs are decreasing the need for new capacity investments.

Nuclear will be an important source of future electricity supply and area of

growth due to the requirement for lower CO2 emission levels, its competitive

pricing and security of supply benefits.

4.3. An Alternative Fuel Source to Maintain Security of Supply—Coal

Coal generation plays an important role in the diversification of the CEE regional

electricity supply. It accounts for 58 percent of the total CEE installed generation

capacity.65 In some countries in the region—including Poland, Estonia, and Czech

Republic—coal is the primary energy source for power generation.

Rising oil and gas prices and political instability in major gas-producing countries

makes coal an attractive alternative for reliable and cheap electricity. Furthermore,

coal has significant advantages that make it more reliable than some other

energy sources: it is easy to safely store and transport coal and locally-mined

coal has a stable price, resulting in a predictable generation cost. A major

disadvantage of coal-based generation is its high level of CO2 emissions;

however, this is expected to moderate in the long term as “clean” coal

generation penetrates the market.

As shown in the following table many CEE countries have significant coal

reserves. These include Bulgaria, Czech Republic, Hungary, Poland, and

Romania.66

Coal Reserves

Source:BP, Statistical Review of World Energy, June 2006.



There are several ongoing coal- and lignite-based capacity additions planned

in the CEE region. These include:

� In Bulgaria, a 600 MW power plant at the Maritsa East complex67

� In Hungary, a 440 MW capacity addition at the Mátrai power plant.68

� In Poland, a 440 MW coal-fired plant at Halemba and a 100–200 MW

plant at Blachownia.69

� There are also capacity improvement projects ongoing in Serbia at the

Kolubara B thermal power plant with two units of 350 MW units70 and

the TPP Nikola Tesla Unit B3, with a 600 MW capacity addition.71

As a result, coal demand is expected to show moderate growth over the next

decades and maintain its important role in the power generation sector of the

region. According to industry forecasts, coal-based generation, in particular

lignite, will remain one of the most significant fossil fuels in the CEE region.

Overall in the CEE region, moderate growth is expected in coal-based generation.

Croatia, however, is an exception in that it is expected to significantly increase its

coal-based generation. Coal–based generation is expected to slightly fall in Poland

and Slovakia, and Montenegro is expected to switch from hard coal to lignite over

the next decade.

Million Tonnes 2005

CountryAnthracite and

Bituminous

Sub-bituminous

and ligniteTotal

Bulgaria 4 2,183 2,187

Czech Republic 2,094 3,458 5,552

Hungary 198 3,159 3,357

Poland 14,000 – 14,000

Romania 22 472 494

CEE total: 16,318 9,272 25,590

67 Bulgaria: Energy and electricity forecast, EIU Viewswire, www.viewswire.com, August 3, 200668 Hungarian Energy Office, www.eh.gov.hu/gcpdocs/200701/7402006mtraiermbvtsieng.pdf, December 20, 200669 Platts, Energy in East Europe, Issue 107, p. 19–20.70 South East Europe, “Description for energy sector,”

www.seenergy.org/index.php?/countries&stat=5&type=3&col=2117, accessed March 20, 200771 Athens Process Secretariat: Overview of Energy Developments in Southeast European Countries,

www.seerecon.org/infrastructure/sectors/energy/documents/ceer_country_overviews.pdf, October 2003

‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15 ‘07 ’15

Bos

nia

Her

zego

vina

Cze

chR

epub

lic

Cro

atia

Hun

gary

Mon

tene

gro

Mac

edon

ia

Pola

nd

Rom

ania

Ser

bia

Slo

vaki

a

� Lignite

� Hard Coal

� Gas

� Oil

� MixedOil/Gas

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Fossil Fuel Breakdown of the CEE Countries, 2007–2015



From the forecasts and the current trends it can be seen that coal–based

generation will play an important role in the CEE region’s power generation

structure due to security of supply and domestic job creation issues, even

though CO2 emission levels will have a negative impact on their attractiveness

and current low generation price level.


EST

LV

LT

PL

SLOHR

BIH SCG

AL

MNT

CZ

SK

HRO

BG

MK

Overview of Natural Gas

Generation Penetration



� >30%

� 10%–30%

� 5%–10%

� <5%


4.4. Dependency on Natural Gas

Overall, the dependency on natural gas is moderate in the power generation sector

of the CEE region. CEE countries import gas from mainly the CIS member states.

The majority of the gas arrives in the region through Ukraine.

Because the CEE countries do not have significant gas reserves, and gas-based

power generation capacities are supplied mainly from imported gas, the

construction of new gas-based capacities often causes security of supply concerns.

Nevertheless, gas-fueled power plants have several advantages. They have a high

efficiency which can reach almost 58 percent and high generation flexibility since

generation loads can be decreased to 30 percent of the full load in a relatively

short period of time. Furthermore, the required capital expenditure is relatively

low compared to other technologies, and the emission level of a new combined-

cycle gas turbine (CCGT) plant is the lowest among the conventional thermal

power plant technologies.

The combination of these factors allows gas turbines to operate as scheduled

power plants. In addition, open–cycle gas turbines are excellent primary and

secondary reserves, due to their short start-up period while high–efficiency

combined cycle gas turbines can also be used for heat generation.

As indicated on the map, in Hungary and Latvia, gas-based generation represents

over 30 percent of the generation mix. Though gas-based power generation is

significant, neither country possesses significant gas reserves. Latvia imports

all required natural gas, while Hungary currently produces 20 percent of its gas

consumption domestically.

Besides Hungary and Latvia; Lithuania, Croatia, and Romania have notable

gas–based power generation capacities. In the other CEE countries, gas–based

power generation capacities represent a relatively low share of the generation

mix and are used primarily for balancing purposes.

With the exception of Czech Republic, Hungary, and Albania, no significant

increase in the natural gas generation base is expected. This is due mostly

to the fact that the countries in question usually have substantial coal reserves,

and several also have significant hydro power. Another reason for the limited

number of natural gas–based power plant projects is the intention of the

mentioned countries to make themselves as independent as possible from

Russian gas imports.


38 íA Changing Generation Mix

In the Czech Republic, the ČEZ Group recently announced that it is considering

the construction of a 400 MW gas-fired power plant. The plant is expected to

decrease the country’s high dependency on coal-fired power plants especially

during peak periods.72

In Hungary, EMFESZ Kft. recently announced its plan to construct a CCGT power

plant in the northeastern part of the country. The power plant would start

commercial operation in 2011 with an 800 MW capacity, which EMFESZ is

planning to expand to 2,400 MW at a later date.73 E.ON is also planning to

construct a 400 MW CCGT power plant in Gönyü, in the northwestern part of

Hungary. The power plant will consist of two units that are planned to start

commercial operation in 2009 and 2011, respectively.74

In Albania, two developments are planned. A 100 MW thermal plant will be built

in Vlore, on the country’s southern coast. The plant, consisting of a 70 MW gas

turbine and a 30 MW steam turbine, will start commercial operation in early

2009. The plant will be fueled with distilled oil initially, but converted to natural

gas in the long term. Another natural gas–fueled power plant construction project

will also take place in Albania: a 1,200 MW CCGT plant, together with a LNG

terminal, is planned to be built by ASG Power at Fieri. The developers hope to

receive permission for the construction of the plant from the government in early

2007 and plan to start commercial operations by the end of 2009.75

Future growth of gas-fired generation would be significantly affected by the

possible implementation of new supply routes to the region. Two pipeline

projects are currently being considered: the Nabucco pipeline project and the

Blue Stream project. The Nabucco project is a planned pipeline to transport

natural gas from Turkey to Austria, via Bulgaria, Romania, and Hungary while

the Blue Stream pipeline has been constructed as a major trans–Black Sea gas

pipeline to carry natural gas from Russia into Turkey. Both of these pipelines

would provide a diversification option at least in the transportation route, allowing

a large stable supply of gas to enter to the southeastern European region and

ultimately Europe as a whole, thus ushering in a possible new wave of gas-based

generation expansion.

4.5. Emission Policy

Recently several rules and regulations have been introduced to decrease

emission levels and emphasize protection of the environment. One of the most

significant regulations affecting the power generation sector in the CEE region is

the Kyoto Agreement and the related European Union Emission Trading Scheme

(EU ETS), as well as generation facilities’ required compliance with EU

environmental standards.


72 Energiainfó, http://arampiac.hu/index.xp?i=15247&m=10&t=1&s=153, accessed March 8, 2007.73 Source: Platts „Energy in East Europe” issue 107 (February 2nd, 2007)74 E.ON Hungária Zrt.’s point of view on Social Discussion Papers Concerning the Principles of the

2nd Hungarian NAP (April 25, 2006).75 Platts „Energy in East Europe” Issue 107 (February 2, 2007).


4.5.1. Kyoto Protocol

The Kyoto Protocol is an international treaty on climate change made under the

United Nations Framework Convention on Climate Change (UNFCCC). The Kyoto

Agreement is a commitment to the reduction of greenhouse gas emissions for

signatory nations. One regional economic integration organization (the EEC) and

168 countries have ratified the protocol to date.76 The EEC and 35 countries have

set specific greenhouse gas emission limits and reduction commitments. These

countries, listed in the protocol’s Annex I, are classified as developed countries

and are legally responsible to reduce their greenhouse gas emission levels.

The national targets of developed countries are listed in the protocol’s Annex B.

Three CEE countries (Montenegro, Serbia, and Bosnia and Herzegovina) have not

signed the protocol, while Croatia has signed but not ratified the protocol as it is

listed in Annex I. Croatia plans to ratify the Kyoto Protocol in the first quarter of

2007, and therefore take measures, in line with its Environmental Protection

Strategy and National Environmental Action Plan, toward fulfillment of

commitments under Annex B.77

Two CEE countries (Albania and Macedonia) have already ratified the protocol

without exact greenhouse gas emission reduction commitments. These countries

are classified as undeveloped countries and not legally responsible to reduce

their greenhouse gas emission level. The remaining CEE countries have declared

their commitment to greenhouse gas emission reductions. Bulgaria, Czech

Republic, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia have

undertaken an 8 percent greenhouse gas emission reduction compared to

the base year, while the emission reduction target of Hungary and Poland is

6 percent compared to the base year78. These 10 countries have already

implemented EU Directive 2003/87/EG and are actively involved in the trading

of greenhouse gas emission certificates under the EU ETS System.

4.5.2. EU ETS

The European Union Emission Trading Scheme (EU ETS) is the largest

multinational greenhouse gas emissions trading scheme in the world, and

came into effect January 1, 2005. All 27 EU member states, including 10 CEE

countries, are involved in the EU ETS and are required to surrender allowances

equal to their annual greenhouse gas emission. Each member state is required

to create a National Allocation Plan (NAP) for each trading period—2005–07 and

2008–12—including caps on greenhouse gas emissions for large fixed-point

sources. The EU ETS’s main objective is to create a price for carbon dioxide

emission through a market-based system and provide a cost-effective way

for EU member states to meet their Kyoto obligations.

76 The Kyoto Protocol entered into force on 16 February 2005, http://unfccc.int/kyoto_protocol/items/2830.php77 United Nations Framework on Climate Change, Level of emissions of the base year for Croatia,”

http://unfccc.int/resource/docs/2006/sbi/eng/misc01.pdf, April 20, 200678 http://unfccc.int/kyoto_protocol/background/items/3145.php, accessed March 20, 2007


Serbia

Croatia

Ratified

Albania

Moldova

Republic of Macedonia

Kyoto Protocol and European Union Emission Trading Scheme

Membership Summary in the CEE Region, 2006

Signed but not ratified

Not signed and not ratified the Kyoto Protocol

Bosnia and Herzegovina

Montenegro

Member States of EU ETS

Romania Bulgaria

Czech Republic Hungary

Slovakia Estonia

Latvia Poland

Slovenia Lithuania




4.5.2.1. First Trading Period

Eight CEE countries were initially involved in the first trading period of the

EU ETS. The main indicators of their trading activity are summarized in the

table below. Romania and Bulgaria joined the EU, and thus the EU ETS on

January 1st 2007. The Bulgarian and the Romanian National Allocation Plans

(NAP) for 2007 have been submitted but have not yet been approved by the

European Commission.


States

Number of

Installations

Covered

CO2 Allowance

per Year of the

Period 2005–07*

(Million Tonnes

of Allowances)

Verified

Emissions

(Million Tonnes

of CO2)

Overallocation

%

EU

ETS

par

ticip

ants

CzechRepublic

395 96.6 82.5 17.09

Estonia 44 18.7 12.6 48.41

Hungary 234 30.2 26.0 16.15

Latvia 94 4.0 2.9 37.93

Lithuania 99 11.4 6.6 72.70

Poland 1,088 239.1 200.8 19.07

Slovakia 175 30.3 25.2 20.24

Slovenia 98 8.6 8.7 -1.15

RomaniaRatified the Kyoto Protocol on March 19, 2001; will enter the EU ETS in 2007

BulgariaRatified the Kyoto Protocol on August 15, 2002; will enter the EU ETS in 2007

*Some countries do not strictly average their Phase 1 allowances over three years, and havecorrespondingly greater 2005 allocation.

Source: European Environment Agency, Greenhouse Gas Emission Trends and Projections Europe in 2006,http://reports.eea.europa.eu/eea_report_2006_9/en/eea_report_9_2006.pdf, accessed March 13, 2007.

Key Figures of the EU Emission Trading Scheme for 2005–2007


As the previous table demonstrates, CO2 allowances were overallocated

in all the CEE countries with the exception of Slovenia. The overallocation level

on a relative basis (in percentage) was the highest in the case of the Baltic

states.79 The main reason for the high level of surpluses in CEE countries’ Kyoto

targets is that the base year of the treaty was before their transition from a

centrally-planned economy. The base year for the greenhouse gas emission

reduction commitment was 1990 for most of the CEE countries. However,

several exceptions were approved such as in case of Hungary (average 1985–87),

Poland (1988), and Slovenia (1986). Following the transition, the importance of

the heavy industry sector decreased in the CEE countries’ economic structures

and a service-based economy gained strength, thus decreasing CO2e emission

levels. In addition, significant improvements in the efficiency of the electricity

network were made while old power plants were decommissioned or upgraded

to meet EU environmental regulations.


79 Carbon Dioxide Equivalent (CO2e): A metric measure used to compare the emissions from variousgreenhouse gases based upon their global warming potential (GWP). Carbon dioxide equivalents arecommonly expressed as 'million metric tonnes of carbon dioxide equivalents (MMTCDE)'.The carbon dioxide equivalent for a gas is derived by multiplying the tonnes of the gas by the associatedGWP. MMTCDE = (million metric tonnes of a gas) * (GWP of the gas). –European Environment Agency,http://glossary.eea.europa.eu/EEAGlossary/C/carbon_dioxide_equivalent

4.5.2.2. Second Trading Period

According to the EU emission timeline, July 6, 2006, was the deadline for the

submission of the first draft of the National Allocation Plan for the second trading

period, 2008–2012 (NAP II.). As of January 1, 2007, the European Commission has

officially accepted four of the NAPs II in the CEE region (Latvia, Lithuania, Slovenia,

and Slovakia). The proposed and approved caps for the second trading period are

presented in the table below. In case of Czech Republic, Estonia, Hungary, Poland,

and Romania the NAPs for the second trading period have already been submitted

to the Commission and are undergoing the approval process.

The NAP II for Bulgaria, as of Jan. 1st, 2007, is still in the public consultation phase.

In the next trading period (2008–2012) the allocation surplus in the CEE region

is expected to remain, but to a lower extent than that experienced in the first

trading period.

4.5.2.3. The Potential Effect of the EU ETS on the CEE Region

Due to the generous allocation methods, the CEE countries have a major surplus

of greenhouse gas emission certificates, with their surplus estimated to be

1.2 billion tonnes of CO2e80 for the first Kyoto commitment period of 2008–12.

This surplus might exceed the global demand for greenhouse gas emission

credits and therefore has a significant impact on the price of emission

certificates. As such, CEE countries are in a net seller position and are not

interested in low-price greenhouse gas emission certificates; therefore, CEE

countries are expected to sell only 20 to 30 percent of their surplus in order

to maximize their revenue and keep greenhouse gas emission prices high.


80 Marcel Hanakam: The Future of Emission Trading – Options and Challenges for CEE Countries, ClimateTechnology and Energy Efficiency – the Engine for Economic Growth and Innovation,http://www.resourcesaver.com/file/toolmanager/O105UF1859.pdf, October 21–25, 2006

Source:http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/136&format=HTML&aged=0&language=EN&guiLanguage=en,Argus Global Emissions, February 2007, p. 12

Member StateProposed Cap 2008–12

(Million tonnes of CO2)

Cap Allowed 2008–12

(Million tonnes of CO2)

Latvia 7.7 3.3

Lithuania 16.6 8.8

Slovakia 41.3 30.9

Slovenia 8.3 8.3

Czech Republic 101.9 Not approved to date

Estonia 24.6 Not approved to date

Hungary 30.8 Not approved to date

Poland 257.3 Not approved to date

Romania 97.5 Not approved to date

Bulgaria Under public consultation, not notified to the Commission

Key Figures of the EU Emission Trading Scheme for 2008–2012


EST

LV

LT

PL

SLOHR

BIH SCG

AL

MNT

CZ

SK

HRO

BG

MK

EU ETS Impact Based on

Domestic Generation Mix

Source: IEA

� High: thermal electricity

generation provides more

than 60% of the total

generation supply

� Medium: thermal electricity

generation sources provide

between 35–60% of the total

generation supply

� Low: thermal electricity

generation is less than 35% of

the total generation supply

� Non-EU ETS member states


81 Clean Development Mechanism, Wikipedia,http://en.wikipedia.org/wiki/Clean_Development_Mechanism, accessed March 20, 2007

While the EU ETS is expected to increase generation prices in Western European

countries, as a result of the significant overallocation in the CEE region no

significant price effect is expected. In the long term, the overallocation is

expected to be eliminated, and the greenhouse gas emission credit price will

become an important factor in electricity prices. In this case the differences of the

generation mix of the countries may come into play; this transformation will mostly

affect those countries whose generation is based on coal-fired power plants. Those

countries include Poland, Estonia, and Czech Republic, shown in orange on the

accompanying map. The abatement of overallocation will have a moderate impact

on the Hungarian, Romanian and Bulgarian electricity generation price levels, due to

a high thermal generation capacity of around 50 percent. Those CEE countries

(shown in green on the map) whose electricity generation is based on non-thermal

generation might gain a competitive advantage with this transformation. The non–

EU member states (in yellow) are not directly concerned with the price level of the

greenhouse gas emission certificates since they are not part of the EU ETS to date.

4.5.3. Kyoto Mechanisms

The underlying idea of greenhouse gas emission trading is that those companies

that can reduce their emissions with a unit cost lower than the market price of

an allowance are expected to invest in emission abatement projects. Joint

Implementation (JI) and the Clean Development Mechanism (CDM) are the two

project-based mechanisms of the Kyoto Protocol that may be used by Annex I

parties to fulfill their Kyoto targets. Because Western European countries have

a shortfall of greenhouse gas emission certificates and new member states have

significantly lower needs for CO2 abatement, it is expected that several JI and

CDM projects will be implemented in the CEE regional electricity market.

Western European energy players that are entering the CEE region, and

investment in lowering emissions in the CEE region can directly contribute these

savings to their facilities in Western Europe.

4.5.3.1. Joint Implementation

JI is available for those 10 CEE countries that are part of the EU ETS and for

Croatia. JI is a Kyoto mechanism allowing industrialized countries (listed in Annex I)

to invest in greenhouse gas emission-reducing projects in another industrialized

country as an alternative to meeting emission reductions in their own countries.

Romania, Estonia, Bulgaria, and Poland have the highest JI investment potential,

due to generation technology that is outdated and has a relatively high CO2eemission level.

4.5.3.2. Clean Development Mechanism

Montenegro, Serbia, Bosnia and Herzegovina, Albania, and Macedonia qualify for

the CDM program. CDM is a Kyoto mechanism allowing industrialized countries

to invest in emission-reducing projects in developing countries. CDM allows for

a drastic reduction of costs for the industrialized countries, while achieving the

same amount of greenhouse gas emission reductions as without the CDM.81



Future investment in the above-listed CEE countries will be thus encouraged to

replace outdated generation facilities and replace the dominance of coal and

lignite–based generation with gas-fired, nuclear, wind, hydro, biomass or other

low emission–based generation units.

CEE countries can expect significant investments through JI and CDM projects

from Western European countries and, therefore, the efficiency of the power

generation sector is expected to increase. As a result, the competitiveness of the

electricity market in the CEE region is expected to increase over the medium-and

long-term.

EU Environmental Standards

The EU has made a commitment to integrate environmental concerns into all

relevant policy areas, including energy. This work is an ongoing process requiring

efforts in a number of areas, including setting ambitious targets for increasing

energy efficiency and setting European Union–wide environmental standards

regarding the electricity generation industry. These include amongst others, strict

emission levels for SO2, NOX, mercury, and CO2.

Many power plants in the CEE region do not currently comply with EU

regulations concerning pollution limits, and significant investments are required

to upgrade these power plants.

On October 19, 2006, the European Commission adopted the Energy Efficiency

Action Plan (COM(2006)545)82, containing measures that would put the EU well

on the path to achieving a key goal of reducing its global primary energy use by

20 percent by 2020. If successful, this would mean that by 2020 the EU would

use approximately 13 percent less energy than today, saving EUR 100 billion and

around 780 million tonnes of CO2 each year.83

Priority Action 3 of the Action Plan deals with making power generation

and distribution more efficient. Working closely with the energy supply and

distribution industry and with the Council of European Energy Regulators

(CEER) and the European Regulators Group for Electricity and Gas (ERGEG), the

European Commission will also develop guidelines on good operating practices

for existing capacities to raise average generation efficiency for all power plants

and agree on guidelines on good regulatory practices to reduce transmission

and distribution losses.84

82 European Commission Directorate–General for Energy and Transport, Action Plan for Energy Efficiency:Realising the Potential–COM(2006) , October 19, 2006

83 COMMISSION OF THE EUROPEAN COMMUNITIES: Action Plan for Energy Efficiency:Realising the Potential (COM(2006)545 final),http://ec.europa.eu/energy/action_plan_energy_efficiency/doc/com_2006_0545_en.pdf,October 19, 2006

84 European Commission, “Energy for a changing world,”http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/29&format=HTML&aged=0&language=EN&guiLanguage=en, March 12, 2007


5. Towarda Single Market

47Toward a Single Market

A key objective of the EU energy policy is to encourage a single integrated

European energy market. However, to achieve an integrated Pan-European

electricity market, considerable challenges will need to be overcome. These

include subregions that are separated by insufficient transmission capacity, price

differences between regions, and the many different countries that comprise the

European market, each with its own approach and varying levels of protectionism

for their national players.

In addition to the infrastructure necessary to construct interconnections between

the various CEE countries, there is also a need for agreement and regulation on

tariffs and prices. Critical to these aims would be the development of a unified

regulation for the organized markets across the EU and the CEE region.

This regulation would create a truly unified Central and Eastern European energy

market and allow individual countries to transact efficiently and exploit differences

in supply and demand between themselves, other CEE countries, and countries

of the greater European region.

Currently the CEE electricity market comprises the individual national markets

of the related countries that form the CEE region. In many markets, electricity

prices are set by long-term Power Purchase Agreements (PPA) and national

regulatory authorities, resulting in widely varying electricity prices between

countries. Some countries’ liberalized markets are expanding, but they are still

limited by the above-mentioned factors. In many CEE countries liberalized market

traders and consumers are fighting for capacities, since significant unused

capacities are locked in PPAs, while in other countries the government or

incumbent electricity player still directly controls or heavily influences electricity

prices. Long-term international contracts are also blocking access to cross-border

capacities. Therefore, the auctioned capacities that are accessible for the

liberalized market are low. On the other hand, the emission costs, low efficiency

levels and decommissioning of outdated power plants are expected to increase

the generation prices.

5.1. Cross-Border Capacities

Cross-border electricity trading plays an important role in the formation of an

integrated electricity market. In order to ensure the possibility of trading

between countries, significant steps have been made, such as the creation

of the Cross-Border Trading Mechanism (CBT Mechanism) and the increasing

transparency of the cross-border capacity allocations methods in the region.

As well, the expansion of the physical cross-border capacities is also ongoing.


Electricity Grid Synchronization in the CEE Region, 2006

� UCTE member

� Synchronous with UCTE

but not member

� IPS/UPS member

� NORDEL

� Non–UCTE member

Source: UCTE

48 Toward a Single Market

The majority of the countries of the CEE region are members of the Union for the

Co-ordination of Transmission of Electricity (UCTE). The UCTE is the association

of transmission system operators in mainland Europe. Membership in this

association means that the electricity systems of the member countries are

synchronized and direct trading is possible. In the CEE region, only the Baltic

countries and Albania are not UCTE members. The overall UCTE network

(including Western Europe) serves about 450 million people with an annual

electricity consumption of approximately 2,300 TWh.

As indicated on the map, the Baltic countries are members of the CIS IPS/UPS.85

The examination of the possibility of the connection of the IPS/UPS system to

the UCTE is ongoing. The synchronization of the two systems would result in a

single system for 800 million people through 13 time zones and would include

800 GW of generation capacity. The final report of the examination of the

connection of the two systems is expected to be issued in 2008.86 Considering

South Eastern Europe, the Turkish power system is currently not synchronous

with the European region, but there are many interconnections with surrounding

countries such as to Azerbaijan, Armenia, Bulgaria, Georgia, Iran, Iraq and Syria.

Turkey’s rapid growth in electricity demand, which has led to an almost doubling

of installed generating capacity over the past decade, is expected to continue in

the foreseeable future.87


85 IPS/UPS system comprises of the power systems of the Baltic States (Latvia, Lithuania, and Estonia),Armenia, Azerbaijan, Belarus, Georgia, Moldova, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Ukraine andUzbekistan, www.ucte-ipsups.org

86 www.ucte-ipsups.org, accessed February, 200787 Feasibility study : Synchronous interconnection of the power systems of IPS / UPS with UCTE,

Preparation of electrical integration of Turkey has started, UCTE Annual Report 2005,http://www.ucte.org/pdf/Publications/2005/Report_2005_4.pdf, accessed April 2007


In order to facilitate and encourage electricity trading throughout the UCTE

network, the inter–TSO (Transmission System Operator) CBT Mechanism was

created. It has two main objectives. First, it compensates countries for the

transmission flows that cross their territory; second, it compensates for losses

caused by transit flow. This mechanism aids in the creation of the common

European electricity market by harmonizing the cross- border trade in EU

member countries. It helps to ensure that generators do not suffer a competitive

disadvantage because of their network use. In other words, a consumer in the

EU can receive domestic electricity or imported electricity for the same network

usage fee, thus encouraging higher levels of competition.

Another key element to creating a single unified market is the transparent nature

of cross-border allocation within the UCTE region. The transparency and the

accessibility of the CEE region’s cross- border capacity allocations have improved

significantly over the past few years. During the 1990s the surplus cross-border

capacities were less available; however, now the majority of the TSOs auction

their unused capacities. Simultaneously, the administrative burden on participants

of the capacity auctions has decreased, and the rules and regulations have

become more standardized. Daily explicit capacity auctions are used to allocate

some cross-border capacities in the region, but the majority of the countries still

split their capacities between each other and auction it separately..88

Though there are already significant cross-border capacities in the region,

unintended transit flows89 and international long-term cross-border contracts

are decreasing the available cross-border transmission capacities.

88 SETSO TF Sub working Group: Network Access, Congestion Management and Power Flows, Overviewof currently applied methods for cross-border transmission capacity allocation in South-east Europe,SITUATION OCTOBER 2005, http://ec.europa.eu/energy/electricity/south_east/doc/7/setso_cm_status.pdf,November 23–25, 2005

89 Unintended transit flow: by–product of the dispatch of electricity down an intended path on electric transmissionsystems. The Energy and Power Risk Management Glossary, Third Edition, accessed March 20, 2007


Cross Border Capacities Allocation Methodology and

the Directions of Major Power Flows, 2006

Source: ETSO; Christine Baierlein: Cross border allocation procedures in theEast European market, Cross Border Power Trading, Frankfurt, March 16, 2006

� Pro Rata

� Auction

� No Defined

Procedure

� Power Flow

MW Cross-border

capacities to

neighboring

countries

1.000 MW

1.000 MW

780 MW

1.000 MW

2.000 MW 600 MW 410 MW

2.000 MW

2.200 MW 680 MW

1200 MW 1100 MW

1660 MW 880 MW

2200 MW

350 MW 900 MW

900 MW

1100 MW

800 MW

1000 MW

400 MW 600 MW

1300 MW 950 MW

700 MW 900 MW

900 MW 600 MW

400 MW 900 MW

750 MW

750 MW

850 MW

1000 MW 650 MW 200 MW

250 MW

100 MW

600 MW

600 MW

600 MW

750 MW

750 MW

700 MW

600 MW

1.400 MW


Beside the increasing use of the surplus capacities, new cross- border

transmission lines are planned to be implemented. According to the UCTE

System Adequacy Forecast, over the next 14 years 16 400 kV of cross-border

transmission lines will be added in the CEE region.

By adding these lines to the CEE electricity network, both cross- border

transmission capacities and supply security will significantly increase in the

region. The EU is also supporting these network capacity additions through

the use of structural funds.



90 Economist Intelligence Unit: Czech Republic energy: Bourse free to start power trading,http://www.viewswire.com/article51899390.html?pubtypeId=1155864115&text=bourse, February 8, 2007

Countries Voltage LevelDate of Planned

Commissioning

Austria–Czech Republic 400 kV 2008

Croatia–Hungary 400 kV 2008

Serbia–Albania 400 kV 2008

Hungary–Romania 400 kV 2008

Macedonia–Bulgaria 400 kV 2008

Romania–Moldova 400 kV 2008

Macedonia–Serbia 400 kV 2008–10

Macedonia–Albania 400 kV 2010

Romania–Serbia 400 kV 2010

Serbia–Hungary 400 kV 2010

Slovakia–Hungary 400 kV 2011

Slovenia–Hungary 400 kV 2011

Slovakia–Austria 400 kV 2012

Slovakia–Ukraine 400 kV 2013

Slovakia–Poland 400 kV 2020

Greece–Macedonia 400 kV Undefined

Source: UCTE – System Adequacy Forecast 2006–2015, http://www.ucte.org/pdf/Publications/2006/UCTE-SAF2006–2015.zip, December 30, 2005.

5.2. Power Exchanges

Over the last decade, due to ongoing liberalization of the electricity markets in the

CEE region, a small number of spot electricity exchanges have started operating.

Currently there are four operating spot electricity exchanges in the CEE region: in

Poland, Slovenia, Romania, and Czech Republic. There are also ongoing discussions

over the establishment of a spot electricity market in Hungary, while there are

discussions to cease operation of the current exchange in Czech Republic and

replace it with a new one to be called the Prague Energy Exchange.90

As seen on the accompanying map, the spot-traded volume is very low on the

four exchanges. However, it is generally expected to grow gradually as

liberalization of the markets and the expansion of cross-border capacities gain

momentum, and market-based allocation of cross-border capacities becomes

the norm. Despite their low market share, the exchanges are concentrating on

developing their operations through the expansion of their offered services with

the introduction of new products. These new products involve, amongst others,

derivatives, green certificates, emission allowances, and natural gas.

Planned new cross-border transmission lines in the CEE region


EST

LV

LT

PL

SLO

HR

BIHSCG

AL

MNT

CZ

SK

H

RO

BG

MK

CEE Electricity Exchanges, Spot Trading Volumes and Volumes

as Percentage of National Consumption, 2005

Source: Exchanges, UCTE

� 0–1%

� 1–3%

� 3–6%

� No Electricity Exchange

Gielda Warsaw, Poland1.9 TWh/1.5%

OPCOM Bucharest, Romania1.7 TWh/3.4%

OTE Prague, Czech Republic0.4 TWh/0.7%

Borzen Ljubljana, Slovenia0.04 TWh/0.3%


To improve the competitiveness of the CEE region’s electricity exchanges, several

areas must be addressed. These include simplifying transaction procedures (e.g.,

harmonizing operational platforms and scheduling processes); using standard

contracts to facilitate financial trading; reducing credit risk by encouraging

effective clearing solutions91; establishing effective forward-market reference

prices; maximizing cross-border transmission capacity allocation; making capacity

rights firm; and addressing the dominant position of vertically-integrated national

generators and suppliers.

Due to the issues listed above, the price-setting mechanisms of the

exchanges are currently not truly reflective of the national electricity prices

but will increasingly become so over the medium term.

5.3. Power Purchase Agreements

Long-term power purchase agreements (PPAs) exist throughout the Central and

Eastern European region, but Poland and Hungary are the two major markets

where PPAs are of the most significance.


91 European Federation of Energy Traders, Obstacles to Eletricity Trading in Central & Eastern Europe,“www.efet.org/Download.asp?File=4122, September 200.


These agreements were entered into at the beginning of the 1990s and some are

valid until 2030. Currently PPAs cover 80 percent of the Hungarian and around

30 percent of the Polish power market.

In the CEE region PPAs were a common way to ensure investment in the power

sector, but now are considered by many industry players as an obstacle to the

development of competition and market liberalization. It is generally felt that PPAs

have helped slow the pace toward liquid wholesale markets and, therefore, the

success of the liberalization process.

According to the 4th EU Benchmarking Report, the EU Annual Reports on the

Implementation of the Gas and Electricity Internal Market (January 2005), all new

member states in the CEE region are classified as having major obstacles to

competition due to the persistence of non-market-based long-term power

purchase agreements.92

The effect of PPAs is such that, first, a large share of generation capacity is

absorbed by (reserved for) the regulated market. Second, the regulated market,

by fully exploiting the contracted capacities, satisfies most of the demand in the

market, leaving limited room for the liberalized segment.

Third, the European Commission looks at the agreements as price distortions

and in some cases direct state aid, which are contrary to EU regulations.

Investigations into the agreements are still ongoing, after proceedings were

launched at the end of 2005.

According to the European Commission the PPAs should be cancelled voluntarily

and the generators will receive compensation. Companies that do not accept the

voluntarily cancellation can be challenged in court.

The Hungarian government is expected to make a decision concerning the

agreements soon; however, the actual termination of the PPAs may require

some time.

In December 2006 the Polish ministry council agreed to a proposal concerning

the aspects and costs of PPA termination. The new proposal has yet to be

accepted by the Polish parliament. According to the Polish energy regulator (URE)

the PPA termination is not expected to be implemented until July 2007.93

For cancellation of the long-term agreements the generators will be awarded

expropriation-related compensation-type payments.

92 http://www.tu-dresden.de/wwbwleeg/publications/wp_ee_06_hirschhausen_zachmannSESSA_consensus_paper.pdf

93 Agata Gajda, Marja Salonen Pettersen and Richard Sverrisson: Power Purchase Agreements – the last vertiges of regulated markets, Montel Powernews, Vol. 6. No. 1, February 2007, p. 36.



94 Minister of Economy, Labour and Social Policy,“Programme for restructuring of the long-term power purchase agreements,”www.mgip.gov.pl/NR/rdonlyres/0FFB33DA-53B8-4447-8A1C 8C99B44EF12E/0/6309_program_kdt_ang.doc,July 23, 2003.

95 Montel Powernews, Vol. 6. No. 1. p. 36.96 Georg Zachmann: Convergence of Electricity Wholesale Prices in Europe?,

http://www.diw.de/deutsch/produkte/publikationen/diskussionspapiere/docs/papers/dp512.pdf,September 2005

The basis for the calculation of the compensation will be the value of stranded

costs rather than the value of the generators’ debts, an essential condition of

equal treatment of the projects covered under the PPAs, all with differing

financing structures. Stranded costs are defined as the difference between the

value of the assets of the generating units covered by the PPAs and achieved on

the basis of PPAs, and the value of the same assets under market conditions

after cancellation of the PPAs. Payment of the compensation is currently

estimated based on unverified data at approximately PLN 14–16 billion (EUR

3.6–4.1 billion).94

If the Polish case is anything to be followed, then the CEE region’s EU member

states can expect the termination of PPAs in the medium term, which is

expected to give a boost to the region’s wholesale markets.95

5.4. Price Convergence

Electricity markets all over Europe have undergone important changes in recent

years. This progress has been due mainly to European level economic policies

that aim to create a single sustainable European market for goods and services

and thus for electricity, as well. The spotlight of these policies is to enhance

competition and reap gains from international cooperation through such means as

combining different national consumption and production patterns, and reserve

sharing. A common electricity market is expected to increase welfare by ensuring

security of supply and improving allocation through more cost-reflective prices.96



With relation to the CEE region, the main Western European price-setting

organized markets are the EEX in Germany and NordPool in Scandinavia.

These two markets are expected to play the leading price-setting role in the CEE

regional electricity market in the future. The convergence of electricity prices in

the CEE region will occur gradually, with convergence in the geographically close

countries first and the furthest countries last. The rate of convergence will

depend on the following factors:

� The successful establishment of local electricity spot markets since

power exchanges increase liquidity and transparency in the energy sector,

thus supporting the development of a universal electricity market.

� Efficient and sufficient interconnections between states. Industry trends show

a general increase in cross- border capacities throughout the whole continent

with corresponding transparent allocation procedures.

� The cancellation of long-term PPAs.

� The fact that 10 of the 15 countries of the CEE region are EU members, and

most of the others are predicted to become EU members within a decade.

Because EU-level regulation is highly respected in the region, it is expected

that electricity industry regulation will encourage legal standardization of the

regional markets.

� Market liberalization.



57What KPMG firms can offer

KPMG firms have a strong audit, tax, and advisory client base including regional

and national champions in many European, African, Asian, and North American

electricity market companies. KPMG’s Energy & Natural Resources practice–of

which Power & Utilities plays a leading part–is one of the fastest growing and

most successful sectors within the KPMG network of member firms.

Our Approach

Our relationship in the Power & Utilities sector is marked by total commitment

to serving our firms’ clients and understanding their complex and constantly

changing markets. This commitment is the product of three key attributes:

� Local delivery supported by our global approach to consistency

� Industry focus and insights

� Distinctive capability–the KPMG Way.

We strive to be the best in everything we do, turning our experience and industry

knowledge into real value for our firms’ clients.

Local Delivery Supported by Our Global Approach to Consistency

We recognize that leading Power & Utilities companies have diverse operations

and issues, each of which requires a high standard of service delivery.

We continually aim to achieve a consistently high standard of service delivered by

local teams to a wide range of clients, irrespective of local or regional boundaries.

Industry Focus and Insights—How We Add Value

We can add value for our firms’ clients only if we truly understand their industry.

KPMG’s Power & Utilities practice therefore invests significant amounts of time

and resources in continuously developing and deepening that understanding.

We have an active program of industry involvement at both national and

international levels, taking part in debate and contributing our own thought

leadership on many issues.

KPMG’s vigorous and ongoing commitment helps our people stay at the

forefront of progressive thought for the industry. It also enables them to provide

a strategic approach for our firms’ Power & Utilities clients.

Distinctive Capability—The KPMG Way

With deep industry knowledge and experience, KPMG’s professionals work

together to deliver clear and informed options based on insights and advice that

can translate into bottom-line value for leading Power & Utilities companies.

6. What KPMGfirms can offer

58 What KPMG firms can offer

Centers of Excellence

KPMG’s Global Power & Utilities Centers of Excellence comprise audit, regulatory,

taxation, financial, and risk advisory professionals. Our people bring to the industry

professional advice and support that addresses the issues and supports the

strategic and transactional activities undertaken by utilities organizations.

KPMG’s Power & Utilities Centers of Excellence are located in 11 cities across

the globe. Each center is headed by a dedicated Power & Utilities industry

professional that can access the relevant people and resources regardless of

geographical borders.

The KPMG Energy and Utilities practice located in Budapest, Hungary, is a KPMG

Global Power & Utilities Center of Excellence. It provides advisory services to

the oil, gas, electricity, and water industries throughout the entire energy supply

chain, from energy producers to end consumers within the entire CEE region.

Building on the resources and knowledge base of the KPMG global network

of member firms, our team has access to market information on a global and

regional basis.


59What KPMG firms can offer

This allows us to offer strategies to our clients on both domestic and international

assignments based on international experience and detailed knowledge of the

local market.

Drawing upon a wealth of experience, well-tested methodologies, and the

resources of local KPMG member firms in each country, the KPMG Energy and

Utilities practice develops industry-specific, customized approaches for our

clients. We provide professional advice and support that addresses clients’ issues

and supports the strategic and transactional activities undertaken by member

firms operating in the energy and utilities sectors in the CEE region.


60 What KPMG firms can offer

KPMG Services

KPMG Power & Utilities Centers of Excellence can provide advisory services

support throughout the complete value chain, including

� Market analysis and forecasting within the CEE energy sector

� Overview of the European regulatory regimes and industry models

� Detailed industry benchmarking studies

� Development of detailed domestic operational models and regulatory

regimes

� Feasibility studies of organized electricity and natural gas trading

� Tariff structure and calculation modeling

� Assistance with national energy policy creation

� Customer segmentation, competitive product development,

sales channel development

� Unbundling strategies

� Finance function and key performance indicators development

� Development of energy trading function

� Development of maintenance function

� Merger and acquisition planning and implementation support

� Organization development and cost optimization

� Preparation of energy procurement, tender preparation, bid evaluation,

contracting support

� Financial modeling

� Support of regulatory cost reviews

� Support of capital investments and infrastructure investments, including:

– Initial feasibility study

– Impact study

– License acquisition

– Financial forecasts

– Acquisition of financing

– Assistance with tendering

– Coordination with technical consultancy firms

– Offtake strategy

– Primary energy source procurement.


kpmg.hu

For further information on issues

raised in this publication,

please contact:

Péter Kiss

PartnerEnergy and Utilities Advisory ServicesKPMG in Hungary1139 Budapest, Váci út. 99.Tel: +36-70-3331400e-Mail: [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of anyparticular individual or entity. Although we endeavor to provide accurate and timely information, there can be noguarantee that such information is accurate as of the date it is received or that it will continue to be accurate in thefuture. No one should act on such information without appropriate professional advice after a thorough examinationof the particular situation.

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

© 2008 KPMG Tanácsadó Kft., a Hungarian limitedliability company and a member firm of the KPMGnetwork of independent member firms affiliated withKPMG International, a Swiss cooperative.All rights reserved.