August 8, 2007
Eastern Europe is experiencing growth but is still struggling to reform its energy markets. Poland is no different. But, alarmists are firing warning shots, saying that in five years it may run low on electricity.
The Polish economy ministry issued a report titled "Security of Electricity Deliveries in Coming Years" that is to be published in mid August. It says that solid economic growth means that more energy is required to produce goods and services. As a result, electricity consumption has increased 3-4 percent annually since 2005 and in the capital city of Warsaw consumption has risen by 20 percent in that time frame.Other insiders there say that the pending crunch is the result of years of Communist rule that subsidized energy usage and caused massive inefficiencies throughout the system. The Polish press is reporting that Krzysztof Zmijewski, former CEO of the Polish Power Grid, says that state-controlled power plants are outdated and that users have no incentive to save energy.
Poland, of course, was one of the first nations of the former Soviet Union to declare independence in 1989. The government there subsequently committed to the World Bank that its power generation and distribution businesses would be privatized and that it would be done by 1996. The financial institution responded by providing loans and grants while enthusiastic private investors also lined up.
To date, foreign interests have bought a few of the 14 large system power plants in Poland, says Zach Allen, president of Pan Eurasian Enterprises. Private investors have also purchased two of the nations 33 large electric distribution companies. Even then, the government has retained shares in these companies and in some cases, it is more than half. As a result, investors are hindered while the state oftentimes makes decisions based on social parameters and not economic ones.
Allen, for example, suggested a massive conversion from coal-fired heating plants to combined cycle natural gas plants -- all to increase capacity and to reduce the environmental footprint. But the powers-that-be said that the financial costs were too high. Now, a power crisis may be coming.
Instead, the government has campaigned to consolidate the power generation sector, including the large combined heat and power plants, into groups. Those major energy concerns would then, in effect, become "national champions" that stand up to Western utilities. Once on solid ground, those enterprises would be privatized through initial public offerings. In many cases, however, these strategies have failed because of union opposition, which is, of course, centered on the ramifications of any streamlining process that may result in huge job losses.
"Decisions are still being made by government bureaucrats rather than the market," says Allen. "Gas is still a state monopoly, as is coal. Power generation has been somewhat disaggregated, but the state still has a dominant hand, and it controls the Polish Power Grid Company. Poland's problem is that the `shock therapy' program was stopped before it really had a chance to make fundamental changes to the big, state-owned industries. That happened partly because right-wing dogmatists at the World Bank rejected any notion of `social safety nets,' so the program was halted when it really started to hurt."
Fine Line
Poland is a member of the European Union. But joining the Western Bloc means that the nation must make reforms. Poland has still not conformed to the necessary electricity taxation system and may now have to appear before the European Court of Justice. The European Commission warned Poland earlier this year, but it says that the nation has not taken any corrective actions.
Besides regulatory hurdles, the country still has high unemployment. And social costs are high too, such as providing medical, pensions and education. Meanwhile, a bloated national budget has limited government's ability to keep its industries on the cutting edge. Along those lines, Poland relies on coal to fuel 95 percent of its power generation. And social pressures to keep coal and electricity prices low have limited the government's ability to price coal so that it can recover its cost.
Needless-to-say, privatization of the power industry has faltered. Government interference is still too great while indirect subsidies also loom large. Besides unrealistic pricing patterns in the fuel market, Allen says that investment also lags because of a lack of consistent implementation to general policies and ineffective implementation of a consistent free market structure for electricity. Social resistance and unrealistic expectations on the part of investors are furthermore issues with which to contend.
Certainly, international players have entered the Polish energy markets. Vattenfall has a stake in Warsaw Heat and Power Co. and Upper Silesian Distribution Co. Electricite de France has a piece of Ec Krakow and El Rybnik, as well as a number of smaller power plants. Germany's RWE has invested in the Central Warsaw electricity distribution company called STOEN and Electrabel has investments in the large system generating plant Polaniec and some smaller assets.
The situation, though, has been less-than-ideal. The French utility is state-owned while the others are protected oligopolies. "What did Poland get from these privatizations?" asks Allen. "It got some money for its treasury, but precious little assistance for transforming the sector into the vibrant, free market economy that it said it sought."
Poland has also borne witness to failed attempts at privatization, including those efforts in South America and even here in the United States. And like Russia, it is concerned about being over-run by Western interests. That's behind the efforts to consolidate and to create "national champions."
Poland still needs considerable foreign direct investment to modernize and privatize its energy sector. Doing so without giving control to foreign companies remains a challenge. Polish leaders walk a thin line between implementing massive reforms and causing higher prices and wholesale layoffs. Change will be gradual and investors will therefore be overly cautious.
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