Greening the CEE economy: do those who would benefit see the point?

Central and eastern Europe is inefficient at using energy and has not done much to clean its power system. Both areas offer huge wins for countries and companies that invest wisely in greener technology. But policy is central. Badly structured incentives can lead to backlashes. More seriously still, too many powerful people in CEE, for good reasons and bad, think green development is not a priority.

  • By Jon Hay
  • 08 May 2017
Email a colleague
Request a PDF


EBRD17_GreenCEE_250x250
Copyright - Reuters
Living in Krakow is equivalent to smoking 2,500 cigarettes a year, claims Andrzej Guła.

He was so concerned about the health effect of the haze that often blankets the city from coal smoke that in 2012 he set up pressure group Krakow Smog Alert.

The eye catching slogan is based on the air concentration of benzo[a]pyrene, one of the main carcinogens in coal and wood smoke, engine fumes and cigarettes. In Krakow this pollutant is at seven times the EU standard.

Using petitions, social media and street protests, the group persuaded the city to ban burning solid fuel in inefficient, small home boilers from 2019. The municipality will refund householders 100% of the cost of switching to cleaner district heating, gas or electricity if they take the step in the first year, 80% in the second and 60% in the third.

This is a big win for the citizens of Krakow but just one of thousands of changes that must take place across central and eastern Europe if a sustainable, healthy economy is to be built. The economy in CEE, just like everywhere else, is built on unsustainable burning of hydrocarbons. But the changes in mindset, policy and technical equipment needed here take particular forms.

Because of the region’s Communist history, it achieved a high level of industrial development using machinery less efficient, on average, than that in western Europe. Use of coal is high in many countries.

Yet there are bright spots too. Several east European countries — including Albania, Croatia, Serbia, Romania and Turkey — use much higher proportions of clean energy than rich states like Germany, France and the UK. They exploit natural hydropower and geothermal resources.

The rocky road from Paris

All countries in CEE have signed up to the Paris Agreement, which commits them to at least some degree of decarbonising their economies.

This direction of travel is popular. “There is an awareness of climate change in society and an eagerness to take part in the solution — and a high expectation towards the government to do something about it,” says Ada Ámon, director of Energiaklub, an NGO based in Budapest. There is no strong movement of climate change scepticism. But as CEE remains poorer than western Europe, cleaning up the economy struggles for attention. Countries and regions have other problems to deal with.

Negotiations between EU states about how they will share out the effort of complying with Paris are not going to be easy.

Countries in CEE tend to have higher carbon emissions per unit of GDP than west European ones — but because they are poorer, they still use less energy. Poland’s per capita CO2 emissions, for example, were estimated at 7.9 tonnes in 2013 against 9.4 in Germany and 10.1 in the Netherlands.

This makes it harder for many to accept that CEE should shoulder much of the burden.

“Mostly governments are not interested in figuring out new ways of doing business and making the whole economy greener,” says Ámon. “The main things happening in CEE are what the EU requires. If these countries were not EU member states, practically nothing would have happened on energy efficiency or renewables.”

The coal mining lobby is strong in countries like Poland, where it exerts a particular hold over the Law and Justice Party, which regained power in 2015.

“We want a national programme for thermal modernisation,” says Magdalena Kozlowska, a programme assistant at Krakow Smog Alert. “Most of the single family houses in Poland are energy-inefficient. We want the government to support energy efficiency programmes.”

But so far, even modest demands like regulating boiler efficiency and labelling different grades of coal are resisted by the energy ministry.

In Hungary, where 53% of power comes from the Paks nuclear station, the government of prime minister Viktor Orbán wants to more than double its capacity, using reactors made in and partly financed by Russia. Environmentalists are fighting the plan, which will cement Hungary’s energy dependence on Russia and require billions of euros from the taxpayer.

Meanwhile, it is impossible to build a wind turbine in Hungary because it must by law be at least 12km from a settlement. A similar rule stifles onshore wind in Poland, which has also raised taxes on wind turbines.

Clean energy opportunity

There are two main challenges for CEE. One is the energy intensity of the economy. In the Czech Republic, it takes 2.5 times as much energy to produce one euro of GDP as the EU average, according to environmental consultancy E3G. Slovakia, Poland and Hungary are all above 1.7 times.

The second problem is the sources of energy. Hydroelectric and geothermal plants are important but require very specific geographical conditions. Progress in adopting newer, more versatile clean technologies — wind and solar — has been halting.

All countries in the region except Romania derive less than the EU average share of their energy from wind power and all but Bulgaria are below average for solar.

Changing the energy system is where there is most scope for international financial institutions — both public and private sector — to make a difference.

“Renewables and the transition to gas — these are two things we hope to do in the region,” says Nandita Parshad, managing director of energy and natural resources at the EBRD in London. “The most significant impact has been the shift to renewables. It hasn’t come easy or cheap in the region. Affordability has been a challenge but what is happening in the renewables space today is really changing that.”

The cost of clean energy technology has fallen markedly, thanks to innovations like bigger wind turbines. In a recent German offshore wind farm tender, two of the three bidders offered to build it without any subsidy.

But cheaper kit has not unleashed a new wave of investment in CEE. “I don’t see a huge amount of activity,” says Allan Baker, global head of power advisory and project finance at Société Générale in London. “It’s been a very slow market for some time. There is no lack of will on our side — we have financed renewables in the Czech Republic and elsewhere in the CEE. But from a developer’s perspective, there seems to be not so much interest in these markets.”

The main reason, as so often in environmental matters, is government policy that is either unclear, unfavourable or unreliable.

Sabrina Schulz, head of the Berlin office at E3G, has recently finished a round of meetings with renewables investors in the region. She says: “The main takeaway is that investor confidence is extremely low, largely due to regulatory uncertainties and barriers in all countries. They really don’t see an opportunity to put money in.”

Even if renewables can compete on price with conventional power, generators need a stable regulatory environment, suitable grid connections and the like.

Subsidise wisely

But most renewable development still depends on some government mandated financial support. How this is administered is critical to whether the investment climate is attractive.

Many CEE countries have already been through one or more subsidy programmes, often when renewables were more expensive than now, and in some cases bear the scars. An over-generous Czech system for solar farms has left generators making fat profits and provoked a backlash.

“Now, when it makes sense for emerging countries to do it and take advantage of their cheap labour forces to develop a new energy sector, they don’t want to go there again,” says Andrzej Ancygier, a climate policy analyst at Climate Analytics in Berlin.

Financiers can get comfortable with a wide range of subsidy structures. The crucial factor is not the size of subsidy but its reliability.

SG and many other banks are not willing to take pure market risk on the price of power — they want some kind of price agreement up front. And when it comes to tariff structures, Baker says: “The fundamental thing for us is that we need the consumer to be paying the cost of renewables. One of the lessons from Spain is that if the government subsidises directly it raises the risk of retroactive change.”

Spain promised to make up the shortfall between regulated power prices and renewable generators’ costs — but got into arrears and had to cut the subsidies.

Consumer-pay systems still rely on political backing, but at least the state has no financial incentive to move the goalposts. SG prefers contracts for difference and feed-in tariffs, where the price is pre-agreed, to systems that rely on generators selling green energy credits. The price for these can be unpredictable.

Efficiency elusive

Almost as important as shifting to clean energy is energy efficiency. Improvements here face a different problem: much of what needs doing is small, fiddly and has an uncertain or unexciting payback.

Ámon at Energiaklub believes a successful energy efficiency drive requires costs to be shared between three providers: public grants, debt finance and the beneficiary’s own money. If any of these is missing, it will be difficult to make it work.

But crafting such programmes is tricky and there are few simple examples to copy.

For the EBRD, this is “front and centre”, Parshad says. All its bankers try to push energy efficiency in their projects and the bank makes credit lines to local banks for it.

The International Finance Corp runs training programmes for banks on green building standards. Jean-Marie Masse, chief investment officer of the IFC’s financial institution group in Washington, says efficient buildings can often get green certificates but these are only awarded once the building is complete. Do banks, which have to lend much earlier, encourage developers to go for such standards or give them any credit for it? Masse believes they should. “The value of the building will be better, its operating cost will be lower, it should be able to be rented or sold more quickly,” he says.

A new bid to stimulate energy efficiency investment is a $2bn fund the IFC is setting up with Amundi, the French asset manager, just to buy green bonds issued by emerging market banks. By focusing on banks, the IFC hopes to use their networks, local skills and capital to aggregate a myriad small loans.

All these organisations, says Ámon, “are trying to make sure governments understand that moving towards this green economy concept is not against the economic development of these countries. They have to understand it’s not as complicated as they think and they would make much more gains than they expected.”

  • By Jon Hay
  • 08 May 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 318,645.99 1207 8.88%
2 JPMorgan 291,870.93 1330 8.14%
3 Bank of America Merrill Lynch 285,392.08 993 7.95%
4 Goldman Sachs 218,480.36 718 6.09%
5 Barclays 210,235.01 814 5.86%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 33,092.37 151 6.77%
2 Deutsche Bank 33,007.84 106 6.75%
3 Bank of America Merrill Lynch 29,018.73 86 5.94%
4 BNP Paribas 25,718.39 146 5.26%
5 Credit Agricole CIB 22,722.30 133 4.65%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 18,707.17 72 9.33%
2 Morgan Stanley 15,215.44 76 7.59%
3 UBS 14,195.29 55 7.08%
4 Citi 14,014.57 86 6.99%
5 Goldman Sachs 12,113.98 67 6.04%