How has the economic crisis impacted on Eastern European countries' energy investments? How has Russia suffered?
I see some substantial differences from country to country and also from industry to industry. Needless to say, all the people with whom I am dealing are just moving ahead. They are going on with their projects, they still see them as critical to their strategy, they still see that they are economically viable and they are charging on. So there has been very little change there.
Russia, probably no great surprise, has slowed down substantially. They were financing a lot of projects, they were putting in equity from their IPOs [Initial Public Offerings] and then used them to structure financing for their projects. But this has slowed down, probably for the last six months.
Can you elaborate a bit more on the economic slowdown in Russia?
Obviously, you have seen what has happened to their stock market from a value point of view. The value has been wiped out substantially on the stock markets. The gas and in particular the oil prices have almost collapsed. They have also been burning through their treasury fund. They were at six hundred billion dollars and now they are at four hundred billion, I believe. So since September, they have burnt through two hundred billion already.
At the same time, oil and gas companies are still looking at production, they are still looking at exploration, obviously with the expectation that oil prices will come back to the level where the Russian budget was set, which is around 60 or 65 [dollars a barrel]. So at 60 or 65 dollars a barrel, they would be balanced, they wouldn’t be burning off their funds from treasury.
So, what I have seen from the oil and gas companies are statements in reduction of capital expenditure spending. What I think this is coming down to is predominantly a reduction in price from suppliers. They are out renegotiating a variety of different supplies such as cement and steel, and they are getting their savings out of there. So, to a large extent, they are still moving on with their plans for increased production, continuing exploration. But at a lower cost, so they are looking at different ways of reducing their costs.
On the energy side, we were always expecting there to be a slowdown right now, whether there was an economic crisis or not. We had forecasted that there would be an economic slowdown because all the IPOs would go through. So you would either have Western investors come in or you would sell to Russian companies themselves. They would do the first wave of large projects, in which we competed. And then, as the market reform takes place, we expected that most of the large projects would slow down while people could get the projects implemented, running and then prove that they can make money out the reformed market. So we always expected this dip although it is a little bit deeper than we thought right now because of their inability to finance. But there are still smaller projects such as district heating or co-generation programmes, which are still moving although a bit slower.
On the oil and gas side, as opposed to selling crude, they have now moved up into refined product, where you move up the value chain. So you obviously get more money for that. So they are working their assets harder than they were before.
You've also seen that the car industry has been hit, the steel industry has been hit. But that is not just common in Russia, but all across Eastern Europe
Does that mean that conditions for international energy companies have improved as opposed to the very tough conditions which applied when oil prices were high?
I would say that they are still very open about having us participate in different projects or initiatives within Russia. The tough thing right now is their ability to finance their side of it. Maybe it will be easier now than it was, as you say, trying to encourage people to come in.
Obviously, when the oil price was high, there was a very strong nationalistic sentiment and they were driving a very tough deal. That is getting better.
Following the recent gas crisis between Russia and Ukraine, have you seen an impact on Central and Eastern European states? Have you seen an acceleration in projects for example to move away from gas or build alternatives?
There still has to be a resolution to the Russia-Ukraine dispute that has to be equitable in the long-term. I think that it will accelerate the other transit routes. It will give Nabucco another shot in the arm to try and push that forward.
As for Nabucco, Russia might not like the idea of having another line that competes, but I think it will still be a good incentive for people to invest in gas, comfortably knowing that there is another transit route. If you build Nord stream or South stream, again, that starts to overcome some of the concerns. It is not as if Russia just wants to cut gas transmission. When Russia cut gas to Ukraine, the gas prices were very high so they lost quite a lot of money. Hence, it was not a good solution for them.
You mention Nabucco. If you listen to some politicians, especially in the European Parliament, they say 'Let's do it!' But if you speak to experts, they find a lot of obstacles. Being from the business side, how do you see this discrepancy between political will and feasibility?
I can think of a handful of projects that are multi-country, multi-state. They are always really tough to move forward because everybody has different agendas. Some of it is at industry level, some of it is definitely at political level. So, although there is a lot of positive rhetoric about moving it forward, there is still the question of who takes what cut of the pie.
If you think about it, Nabucco is going to go from the Caspian, if you want to get supply from Turkmenistan, then it has to go across the Caspian, which so far has to be negotiated with the Russians. Then, it has to go through Azerbijan, Georgia, Turkey, Bulgaria, Romania, Hungary and then to Austria. When you think about that number of moving parts, it is really tough to move forward, whether it is a group of industries trying to do it or whether it is a group of politicians trying to do it. And here you have both.
You were saying that there were different consequences of the crisis according to different types of industries. Could you briefly tell us what are the main underlying trends for the energy sector in Eastern Europe?
We are still seeing an increasing interest in renewables, certainly in Eastern Europe where they are looking to meet their EU obligations. So in Romania, Poland or Bulgaria, for example, there is a lot of activity.
But the crisis is having negative consequences, right?
There are obviously a number of investors who have sound projects that are struggling to find financing.
In my opinion today, Romania has the best renewables legislation potential in Europe. We worked very, very closely with some of the developers, helping them design the site and so on. And when we look at their projects - a windfarm project for example - they have some of the best returns that I’ve seen. But they are struggling to finance them. And that is just delaying, it’s really pushing things back.
What are the solutions to that in your view?
Probably public financing like ECA financing or things like EBRD or EIB backing. So far, with the stimulus package, the support does not seem to flow out of the banks at this point in time. So, a country like Romania that is trying to implement its policy has a customer, who from my point of view, has a very sound business plan. There should be some kind of open door to EBRD or EIB certainly.
Can you elaborate on Romania. In what ways is Romanian legislation better?
They have learnt from everybody else. They know that they have to catch up. From now until 2015, there is double green certificate. So if you build now, you can basically operate with a double incentive until 2015. So if you are trying to do a project today, the quicker you can put it on the ground, the quicker you can make a return. But if you cannot finance it, it is going to delay that all the time.
We talked about renewables. How have other energy sectors suffered?
If you look at the biogas side - farms, greenhouses, etc. which are mainly SMEs - if they are looking at putting a project on the ground, again they are looking at financing. And most of those people have turned to local banks for financing. But that has dried up.
What we have also seen there is a lack of information about available funding programmes. There are a lot of investment bank programmes - EU structural funds or cohesion funds - but they are not necessarily that well known in the accession countries. There is also some scope for better informing people on the ground in terms of what is available.
I would say it is twofold: One thing is better information about what is available, the other one is an easier process. A lot of processes are extremely bureaucratic, not very easy to work your way through.
Do you mean at national level?
Yes, at national level. If you take a greenhouse growing flowers or tomatoes for example. It is not running a small power plant. So it is something else that they have to do. They do not have development experience, they do not know about how to apply for grants, permits and drive that all through.
The easier that this can be made at national level, the more you will see these things go through in small renewables and distributed regeneration. A lot of these as well are high energy efficiency. They would be co-generation projects in power and heat, for example, so they are in their high eighties in term of energy efficiency percentage. So you take the heat out, capture the CO2 and put it into the greenhouse. So it is actually a very, very good programme. So getting those projects operational actually makes quite a big difference.
With the financing drying up, you order books must have gone down too, right?
So far, not yet. I mean, we have a pretty sizeable amount of projects in the pipeline.
But it is likely that GE will experience a slump as well. What are you doing to plan for this?
It is actually fairly straightforward for me. Three of four years ago, it was a very tough time for a lot of investors in Europe, so we actually built quite a lot of capability in Europe. So we basically do a lot of risk-assessment and financial modelling, working with customers to help them understand that this is a good project or a bad project and different ways they could look at financing it.
We looked at government incentives and we look at different ways in which we can help them to actually promote the projects. So it just means that you spend a lot more time selecting and analyzing projects, and then helping those projects go through. There is still, I would say, on the balance sheet financing, there is still a lot of big projects that are going around that are balance sheet financed right now. In fact, some of those have accelerated because people see an opportunity to moving quicker.
Given the fact that Eastern European countries have to make bigger efforts for cutting their CO2 emissions, does this make them more interesting for a company such as GE compared to Western Europe?
I would not say it is bigger. There is more opportunity to cut emissions but the targets are still a percentage base. So it is a like for like.
It is more the demand curve, I think, that will have an impact ultimately. So the growth that we see in this region on the energy demand side and then doing that in a sustainable way -that is what would drive the market forward.
What is interesting for us is that there is actually a huge amount of opportunity for cutting-edge technologies in Eastern European countries. When I moved into the region, for example, I could get a better Internet connection than I could in the UK because the old infrastructure had been written off. The benefit is to be able to move straight into what is the best in class today.
In Romania, for example, there is the “Petrom plan” which is going in which is an advanced combined cycle gas turbine. There are also 2.5 wind turbines, which are our latest version of wind turbine for better wind capture.
In Bulgaria, there is a co-generation plant that went in about 2 or 3 years ago which has an 87% overall thermal efficiency. So, just being able to move straight into the latest generation gives them, I think, some competitive advantages for the future. There is a lot of inertia to get going but there is also a lot that is going to come through in time.
Last year, there was a coalition of seven Central and Eastern European member states against the EU's ambitious CO2 and renewables target. The targets were finally adopted in exchange for a number of concessions. How do you see the situation developing in those countries as a consequence? Will this slow down new business?
The bigger concerns they had were with the CO2 targets. What was interesting was that none of them really questioned the overall 20% target. It was more wealth transfer and dividing up the cake than the overall size of the cake. They were not against it, it was about how.
So it is important that the EU struck a deal for those countries in December. Now it is about national implementation, how member states will put in place the right incentive schemes to reach these renewable, energy efficiency or CO2 targets. This is the next frontier for policymaking in these regions.
Do you actually see these countries taking the necessary steps to achieve those targets? Whether on CO2 reduction, renewables or other?
It varies from country to country. Poland, for example, has a huge wind resource. Part of the challenge is defining the legislation and implementing the policy. There is obviously a lot of administration change - Poland has a change of government every twelve to eighteen months, so getting consistency is key. Getting policy that can last beyond the government, that allows people to have some confidence to put money on the ground. A lot of challenges lie in having a consistent policy over a long period of time. It allows you to drive a return.
There are many developers in Bulgaria, in Poland and other Central Eastern European countries around renewables, looking at permitting sites, allocation sites and starting to develop experimental projects.
Bu there is also a balance obviously as to how much a country can afford a given moment in time.
Are you already starting to reap the benefits of this growing interest in renewables?
Well, we have been actively engaged in most of the countries helping them look at how to implement renewables on to the grid. There are also significant challenges in Central and Eastern Europe because it is not as flexible as it is in some of the Western European countries. First, the grid operator has to understand how to manage it and operate it. One of the things that we have spent developing a lot of time on is wind controls technology that allows more control of grid dynamics through our wind farms. But that is not the case across the board. In some countries, they have not necessarily had the flexibility that they would have today with wind controls technology.
How would you compare the Eastern European market with the one in Western Europe?
The one thing that I would say is that it is still a very small market in comparison to Western Europe. One year my market share looks great because I won a big project and then the next year it looks terrible because I did not have another project in the pipeline. So it is still very volatile.
Western Europe is a bit different, it is more sustainable, there is less volatility on it. So looking at market share numbers it is easier to see whether we are improving or declining. Honestly, so far, I tend to pay less attention to market share than to the total growth of business because it is such a volatile market.
Also, in Western Europe, we have more installed capacity on the ground so there is a whole pipeline of jobs for the services industry. In Eastern Europe, you need to have some projects and some installed capacity first before you can have some jobs for your services businesses to do upgrades to newer technologies.
What is going to be the next big thing for you in Western Europe? Is it going to be off-shore wind, co-generation or something else?
While we have off-shore wind capability, we are not currently pursuing that market. We still believe that there is enough good onshore capability. Plus there is also re-sizing and re-planting of current onshore facilities, which we still believe is far more economic today than going off-shore. We have an offshore facility in Ireland. So we understand the dynamics and that gives you an idea of the dynamics of running an off-shore farm and how quick it can be. So we are still very much committed to onshore.
We are also committed to coal-gasification and carbon capture sequestration for the future. Maybe not as a big thing but it is an incremental growth. There are also some CCS tentative projects in Eastern Europe.
Has the fall in carbon prices had an impact at all on CCS projects?
We have heard people say that these three hundred million CO2 certificates [earmarked for CCS for the third trading period] are not worth the money they were supposed to be yesterday. But those people tend to forget that they will not become available until 2012, which is when we hope that the crisis will be over.
So if you look at the forward price, we are still confident that there is more scarcity on the market that will mean higher CO2 prices. There is a dead run now because of the low oil price on the market.
But I think that in the mid- to long term the policy framework and the CO2 reduction targets is going to be the main driver for these kind of projects. And what is really going to be key when going forward is to have a diverse set of resources for any country because of security of supply, because of sustainability and because of competitiveness, you want to have as broad an energy mix of energies as possible. And I think that this is very much mirrored by our portfolio which goes from renewables, wind, solar conventional fuels and all the way to nuclear.
Is there now a case to return to nuclear across Europe?
It is on the agenda of so many countries now. I am convinced that there will be new nuclear construction in the next five years. Sweden said it was going to revisit its moratorium on nuclear, Poland is trying to decide whether it should look at a programme by itself or whether it should go with other countries such as Lithuania.
In Central and Eastern Europe – ignoring Russia which has a very large programme - there are eleven active projects. By “active”, I mean that somebody is actually moving them along, doing something with them, either looking at technology evaluation, permitting or starting to move it through government with legislation change that is required to get it through.
In Western Europe, I know that the UK has a fairly substantial programme, France too, Finland, Switzerland could well build sometime soon. Germany will have elections this year and I am pretty sure that Germany will revisit its nuclear policy.
So, I think that nuclear will definitely be a part of any generation mix. And it will be a true mix. It will be renewables, it will be coal, gas, oil, nuclear and hydro.
In how many of these nuclear power plants projects is GE actually involved?
Out of the eleven, we are talking to four currently. Where we think that our technology fits best…
Moving on to the issue of smart grids. How relevant are they going to be for a company like GE?
Smart grids are going to be extremely important from the point of view of being able to accommodate renewable energies. And also for being able to manage distributed generation from a wide variety of small power plants. For example, if you have 500 power plants, that all dispatch electricity at different times, then it becomes much tougher to manage electricity flows than if you have 20 large ones.
Do you feel that enough is being done on smart grids? Or is it still off the policymakers radar screen, specifically in Central and Eastern Europe?
A lot more of the onus is probably on industry to demonstrate and show what it is capable of. I think that the door is open and that people are aware that there needs to be change.
If you have to do a substantial grid investment today, one of the things that would obviously be beneficial for Central and Eastern Europe is to go to metering. Also, the technologies are mostly there. How to implement it and deploy it is now the question that needs to be answered.
So it is about political awareness? These grids come at a much higher price. How do you see the financing happening?
There is not a one-off answer to this because it depends on what you already have on the grid. It depends on what your grid looks like, it depends on what your infrastructure is today. This is not necessarily about changing all the wires. This is about changing all the instrumentation. Okay, there are also additional wires to take in for the extra renewables production, so you have to extend the grid and take that end. You also want to reinforce the grid in different ways, depending on the generation mix.
So, it is not about building something brand new?
It is more about the instrumentation that is on the grid and the automation of the grid than it is about the actual physical wires.
If you look at the grid in Central and Eastern Europe, it was put in place by companies which, back then, were publicly owned. But today politicians say they customers should pay for the grid because this is an industry which has been privatised.
The truth is probably in between. Part of the Obama stimulus package includes a loan programme for people to get low cost financing to put in meters to overcome the initial high investment of the new equipment. But ultimately, it will enable them to make more savings because they can use the electricity more wisely. That could be something where the policy side can come with a similar loan programme to accelerate the development of that technology in Europe.
Is the US being more innovative and taking bolder steps than the European Union?
If you look at emissions controls, Europe is probably still in the lead. But if you are talking about deploying new technologies, such as gasification or smart grids, then maybe the US is pushing ahead more aggressively.
Probably they have been pushing ahead more aggressively on renewables for the last 2 or 3 years. There was obviously a lot of renewable deployment here but this was outstripped by what is being done in the US and potentially into the future as well.
And on smart grids?
It is a matter of perception. Here in Europe, if you talk about smart grid, people automatically think about distributed energy whereas in the US it focuses a lot on smart metering, having the control in your house where you can bring in the different appliances: plug-in electric vehicles and so on.
Back to the financial crisis: what's your advice for EU governments?
Any stable economy needs a secure, economic, energy system. With the financial crisis, it is pretty important that we find solutions to continue to incentivise investments into energy.
If you miss the time, you cannot get it back. What you have on the ground is still growing old. It is still harder to operate, harder to maintain, still less efficient and you just do not make that time back. So from my point of view, it is very important that the Central and Eastern European countries keep on moving forward, otherwise they will just lose the pace of what is being implemented in Western Europe.
