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Acceding to Succeed

How joining the EU may transform the Central and Eastern European electricity sectors
Fortnightly Magazine - July 2004

problem is that certain countries have imposed obstacles for distributors and suppliers to access imports, either by implementing quotas on the amount of power that can be imported, or by imposing high interstate transmission tariffs to protect domestic less efficient generation. This is seen in countries such as Slovenia, Hungary, and Latvia.

Finally, nuclear and environmental compliance is also an important issue in several countries. The EU is particularly concerned about the older Soviet reactors and has explicitly stated that Lithuania's Ignalina, Bulgaria's Kozloduy, and Slovakia's Bohunice V1 should be closed. In addition, the EU wants reactors in the Czech Republic, Hungary, Slovakia and Bulgaria to be upgraded, and the reactors in Romania and Slovenia to be closely monitored. Yet given that these countries need alternate sources of supply and technical assistance before the plants can be closed or upgraded, timely compliance with these nuclear safety regulations will be challenging. 6

Compliance with other environmental regulation is also a major issue in the region. While all countries in the region have started to address the serious environmental problems that are a Soviet legacy, much remains to be done, and only a few countries, such as the Czech Republic, have actually come close to completing the needed rehabilitation.

Opportunities for Investment

Although the accession countries have not fully complied with all EU electricity directives, they nonetheless harbor numerous opportunities for investment. The fact that these countries have joined the EU, or are in line to do so, differentiates them substantially from their neighbors, as this decreases the amount of uncertainty investors face regarding expected economic development and the anticipated evolution of their energy sectors.

Using a relatively simple approach to assess investment needs based on existing infrastructure status in the accession countries, the potential need for equipment going forward, estimates for electricity demand growth, and average equipment costs, we calculate that the accession countries have a total investment need of $50 billion through 2018 for electric generation and distribution investments alone (the breakdown of the total was split 50:50 between the two categories). 7 It is likely that an additional $3 billion to $5 billion will be required for transmission upgrades and expansions. These investments will manifest themselves in a variety of ways, including direct investments through asset and company privatizations, concessions for distribution networks, long-term O&M contracts to sites or companies, service contracts, and equipment sales.

Electricity generation constitutes a major opportunity for investment, given that additional capacity is required in many countries and that old, outdated, inefficient or polluting equipment, including nuclear sites, needs to be replaced or rehabilitated. In addition, the accession countries also need to increase the amount of renewable energy they use to generate electricity. Thus, wind-fired, biomass-fired, and small hydro will become key investment opportunities. Some countries, such as Estonia, Latvia, and the Czech Republic, already have put in place economic regimes that favor renewable energies. The European Bank for Reconstruction and Development (EBRD) recently identified Hungary, Poland, the Czech Republic, Russia, Ukraine, and Latvia as countries with the highest potential for such investments. 8

Electricity distribution