Beruflich Dokumente
Kultur Dokumente
A DV I S O RY
Authors:
KPMG Energy & Utilities Centre of
Excellence Team, Budapest, Hungary
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Foreword 3
Foreword
The history of harnessing electricity, spanning only two centuries, is much shorter
than that of other technologies – for instance agriculture or mining – which have
been exploited since prehistoric times. Yet electricity has become a crucial form
of energy in modern societies; it is a unique resource which cannot be readily
substituted. The importance of electricity is soaring, since Western-type lifestyles
and industrial societies require unprecedented quantities. Meanwhile, developing
economies are catching up in terms of industrial production and are also
experiencing a massive expansion in residential consumption.
Compared to Western Europe, the CEE region also has a substantial backlog of
tasks regarding economic development, which include social, industrial and
environmental challenges. Nonetheless, this delay also offers great potential,
allowing the possibility of a “quantum leap” in the industry. Thus, instead of
following a drawn-out learning curve, CEE could reap the rewards of the
immediate introduction of state-of-the-art technologies, even potentially
overtaking western electricity industries in the coming decades.
This publication identifies the key characteristics the region’s electricity sectors,
assesses issues such as sustainability and the development needs and evaluates
the effect of the present economic circumstances on the investment
environment. I trust that you will find the contents of this report valuable for your
business.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Table of contents 5
Table of contents
Methodology 7
Executive summary 11
1. Introduction 17
1.1. Macroeconomic development in the region since 1990 17
1.2. Development of the electricity sector since 1990 18
1.3. Development of CEE electricity generation 19
Acronyms 81
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Methodology 7
Methodology
This publication has been compiled by KPMG’s Global Power & Utilities
Knowledge & Resource Center, based in Budapest, Hungary, to frame the
prospects of the Central and Eastern European electricity market in light of the
present economic environment.
The report also analyzes the assumptions of the System Adequacy Forecast
2009–2020 prepared by UCTE 1 which differentiates two scenarios, a
Conservative and a Best Estimate Scenario for generation capacity development
in the region.
The main questions surrounding energy sector development were also raised and
assessed by the sector’s main market players. KPMG conducted a survey to map
out the expectations of market players. During the survey period May–October
2009, KPMG conducted semi-structured, face-to-face and phone interviews with
top-level executives who are considered key stakeholders within the CEE region’s
electricity sector. The target groups for the interviews comprised:
2) Regulatory authorities
1 The European Network of Transmission System Operators for Electricity (ENTSO-E) took over
all operational tasks of UCTE from July 2009.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
8 Methodology
Miroslav Šula
Director of Dispatch
Management
Regulatory
Oliver Gulyás
Head of Department;
Project, Structured and
Corporate Finance II
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Methodology 9
Grzegorz Peszko
Senior Energy/
Environmental Economist
President of GE Energy,
Central & Eastern Europe,
Russia & CIS
KPMG would like to thank the numerous sector experts for their participation in
this report, and for their contributions in terms of insights and valuable
information. These contributions have enabled the authors to identify the sector’s
needs and opportunities.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Executive summary 11
Executive summary
The electricity systems of the Central and Eastern European countries have
undergone considerable development since the fall of communism in 1989–90.
Nonetheless, as this study highlights, huge challenges remain across the region.
Almost all economic data, including electricity consumption, which on a per
capita basis is only 57 percent that of Western Europe, indicate that the region
still has some way to go before living standards catch-up with those in the
developed world.
Yet this report, compiled from official data and detailed interviews with
professionals in the electricity and banking sectors, argues that in many ways
political leaders must understand that the economic downturn makes reform and
the creation of well-thought out policies for their electricity sectors an
increasingly urgent task, assuming they want to establish a basis for sustainable
economic growth in the future.
Indeed, given the increasingly long lead-times and pay-back periods associated
with new power projects – most especially large hydro, coal and nuclear facilities
– the future planning of CEE electricity sectors requires focused and responsible
governments at all levels.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
12 Executive summary
Regionally, the requirements are substantial; the Union for the Co-ordination for
the Transmission of Electricity (UCTE) estimates electricity consumption in the
region will jump by an average of 25 percent in the next decade, with above
average growth in Romania, Hungary and most states of the former Yugoslavia.
And while Poland is expected to see only 17–18 percent growth in consumption,
the size of the Polish market means even this translates into 25,000 GWh, not far
short of the current net consumption of Slovakia. (With a net production of
143,000 GWh, Poland consumes approximately 30 percent of total electricity in
CEE.)
To meet this increased demand, the UCTE estimates that the region requires
between 21 GW (Conservative Scenario) and 42 GW (Best Estimate Scenario) of
new generation capacity by the end of the decade.
All of which will take huge amounts of finance. Depending on which scenario
proves more realistic – and on the modes of generation the countries employ –
the UCTE scenarios will require a capital expenditure of between EUR 40–70 bn,
while replacement of the obsolete capacity could take up to EUR 76 bn.
Combined, this means the generation segment across the region could soak up
anything between EUR 114–144 bn in investment by 2020.
What kind of new developments can be expected? Inevitably, as in the past, this
to a large extent will depend upon the kind of fuel is available in each country.
Many CEE countries boast coal deposits (albeit of differing quality), so it is no
surprise that coal fired plant currently makes up about 50 percent of installed
capacity across the region and accounts for up to 48 percent of electricity
generated.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Executive summary 13
But for countries lacking significant hydro capacity, such as the Czech Republic,
Hungary and Poland, the proportion of renewable electricity is typically in the
range of 5.0–7.5 percent of the total, meaning these countries hold out the
prospects of considerable investment in the renewable energy segment.
The UCTE Best Estimate Scenario suggests the share of renewables in the
installed generation capacity will reach 31 percent, i.e., 50 GW by 2020, and
though hydro capacity is predicted to expand by about 20 percent across the
region, wind energy is expected to be the star performer. As the report notes,
almost every CEE state intends to progress with wind energy, most significantly
Poland, Romania, Estonia and Albania. According to the UCTE’s Best Estimate
Scenario wind-generation capacity in the region will expand to 12 GW by 2020,
6.5 times current levels.
However, KPMG notes that development of both wind and solar energy is highly
dependent on the regulatory framework, feed-in price levels and the system-
balancing potential of the various national transmission system operators.
Plans are going ahead in several countries, including two reactors in Slovakia with
a capacity of 840 MW, two in Bulgaria with 1,900 MW and two in Romania
totaling 1,310 MW based on the World Nuclear Association’s database.
In addition, 14 more reactors have been proposed across the region, which if
completed would total 21,655 MW – roughly double the total current capacity.
Finally natural gas, which currently accounts for only 9 percent of total CEE
generation capacity, is likely to see its share of the electricity production cake
more than double in the next decade. And this is despite concerns regarding
dependence on Russia as the primary source for most countries in the region.
Indeed, even Latvia and Hungary, where gas-fired plant makes up more than
30 percent of generation capacity, are expected to opt for more, such are the
attractions in terms of efficiency, relatively short lead times, low emissions and
low capital expenditure.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
14 Executive summary
In light of all these needed investments (and CEE is not alone – huge
investments are also required in western European electricity systems), the
question arises: where the money comes from, particularly in these troubled
times?
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Executive summary 15
Hungary
Area: 93,028 km2 Population: 9.9 m GDP: USD 196.6 b Electricity consumption: 41,284 GWh
PL
Latvia
Area: 64,589 km2 Population: 2.2 m GDP: USD 38.9 b Electricity consumption: 7,573 GWh
CZ
Lithuania
SK Area: 65,300 km2 Population: 3.6 m GDP: USD 63.3 b Electricity consumption: 11,491 GWh
HU Poland
SI Area: 312,685 km2 Population: 38.5 m GDP: USD 667.9 b Electricity consumption: 142,852 GWh
HR RO
Romania
BA RS Area: 238,391 km2 Population: 22.2 m GDP: USD 271.4 b Electricity consumption: 55,206 GWh
ME
KO BG Slovakia
MK
Area: 49,035 km2 Population: 5.5 m GDP: USD 119.5 b Electricity consumption: 27,635 GWh
AL
Slovenia
Area: 20,273 km2 Population: 2.0 m GDP: USD 59.3 b Electricity consumption: 12,686 GWh
Croatia
Area: 56,594 km2 Population: 5.0 m GDP: USD 82.4 b Electricity consumption: 17,861 GWh
Kosovo
Area: 10,887 km2 Population: 1.8 m GDP: USD 5 b Electricity consumption*: 4,281 GWh
Macedonia
Area: 25,713 km2 Population: 2.2 m GDP: USD 18.8 b Electricity consumption: 8,643 GWh
Serbia
Area: 77,474 km2 Population: 7.5 m GDP: USD 80.3 b Electricity consumption: 38,982 GWh
Montenegro
The databases utilized in this publication do not Area: 13,812 km2 Population: 0.7 m GDP: USD 6.8 b Electricity consumption: 4,583 GWh
include information for some of the CEE countries.
The following list summarizes those countries that Central and Eastern Europe Total 2008
have been left out of the statistics: Area: 1,342,700 km2 Population: 128 m GDP: USD 2,000 b Electricity consumption:495,885 GWh
EUROSTAT databases do not contain information
for Albania (AL), Bosnia Herzegovina (BA), Kosovo Western Europe Total 2008
(KO), Montenegro (ME) or Serbia (RS). Area: 3,605,717 km2 Population: 407 m GDP: USD 13,372 b Electricity consumption: 2,785,321 GWh
World Bank databases do not contain information
for Kosovo (KO) or Montenegro (ME).
UCTE databases do not contain information for
Albania (AL), Estonia (EE), Kosovo (KO), Latvia (LV)
or Lithuania (LT). Although in the cases of System
Adequacy Forecasts only Albania (AL) and Kosovo
(KO) are excluded.
Energy Information Administration databases do
not contain information for Kosovo (KO), Sources: Area, population, GDP: CIA – The World Factbook,
Montenegro (ME) or Serbia (RS). Electricity consumption 2008 (net consumption with system losses): UCTE,
BP and International Monetary Fund databases do http://www.entsoe.eu/resources/publications/ce/ms/
not contain information for Kosovo (KO). * 2007: CIA – The World Factbook, https://www.cia.gov/library/publications/the-world-factbook/
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE Renewable Electricity Outlook
Introduction
2008 17
1. Introduction
The Central and Eastern European (CEE) region was part of the broad Socialist
Bloc, predominantly within the Soviet sphere of interest, until political transition
eventually began in 1989. With the political and economic changes of the 1990s
the region embarked on the path towards a free-market economy based on
competition and demand for goods and services. The first years of the transition
were generally accompanied by recession, high levels of inflation and escalating
unemployment. Initial government measures were only partially successful in
combating these problems, until key reforms brought on economic recovery.
However at the end of 1990s, many CEE countries again experienced an
economic slowdown due to the slow pace of structural transformation.
The decline was also seen in local national crises, which, alongside other factors,
halted the escalation of growth in the region. Stabilization occurred at the
beginning of the 21st century, with annual national growth rates ranging from
3–12 percent (compared to 1–4 percent in the EU15).
CEE 700 %
EU-27 600
500
400
300
200
100
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: International Monetary Fund, World Economic Outlook Database, April 2009
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
18 Introduction
GDP has increased in recent years, the sectors producing the largest portion –
roughly 20 percent of total GDP – have been industry and commerce.
Source: EUROSTAT
CEE 135 %
EU-27 125
115
105
95
85
75
65
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE Renewable Electricity Outlook
Introduction
2008 19
Industry EU-27
Transport 3,000,000
Households 2,500,000
4% 2%
Services 2,000,000
GWh
20% 27%
Other 1,500,000
27% 28%
sectors* 1,000,000
3% 3%
500,000
46% 40%
0
1990 2007
CEE
400,000
350,000
300,000
9% 3%
250,000
GWh
13% 27%
200,000
150,000 20% 26%
100,000 5% 3%
50,000 53% 41%
0
1990 2007
Source: EUROSTAT
The generation mix of the CEE region has been stable and the proportions of
different generation types have not changed significantly in the last two decades,
despite the enforced closure of some nuclear facilities. The evolution of the
generation mix, shown in Figure 5, highlights a strong and continuous
dependence on fossil-fired generation, comprising altogether 57–60 percent of
total generation.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
20 Introduction
600
200
50% 49% 50% 49%
52% 50% 55% 54% 53% 53% 50% 51% 50% 52% 53% 50% 50%
100
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Figure 6: Generation capacities by Nuclear-based generation is the second most important component of the
fuel type in the CEE region, 2009 generation mix, providing almost 20 percent of total generation. Reliance on oil
has been steadily diminishing, while at the same time, gas is gradually gaining
importance. The use of renewable energy sources, although showing a slight
increase, remains low in comparison to current EU targets.
In 2009, the total installed capacity in the region was 124 GW, while the total
peak load was 80 GW, thus overall capacity was sufficient to meet demand.
While the generation mix in the region is relatively diverse, the use of specific
Nuclear 10% fuel sources in individual countries depends on a number of factors, including the
Coal 49% availability of natural resources, cost structures of the different generation types
Oil 1% and the particular national strategy, as many countries are aiming for increasing
Natural Gas 9% security of supply and decreasing dependency on foreign fuel sources.
Mixed/Other Fuel 6%
Renewables 2%
Hydro 23%
Figure 7: CEE electricity generation mix (GWh) by country, 2008
Source: UCTE, System Adequacy Forecast
2009–2020 Nuclear 160,000
Coal 140,000
Oil 120,000
Natural Gas 100,000
GWh
20,000
0
BA BG CZ HR HU ME MK PL RO RS SI SK
Source: UCTE
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Introduction 21
Source: Green Paper on the European Strategy for Sustainable, Competitive and Secure Energy
(SEC(2006) 317)
Over the years there has been a certain change of emphasis, with a shift away
from competitiveness towards sustainability and more recently to security of
supply as a result of the high dependency on imported fuels. In addition, the
transformation of the energy sector into an open and competitive market has
given way to concerns regarding environmental impacts, especially CO2
emissions.
This KPMG overview assesses the factors which must be taken into
consideration when defining the development plans of the region’s electricity
sector. For example, the importance of modern technology and infrastructure
development is apparent, as these are the essential foundations upon which
commercial and operational development can be established.
In the following chapters the three pillars of the EU Energy Policy are examined,
along with their resultant implications for the Central and Eastern European
region.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Restructuring the CEE electricity sector 23
2. Restructuring the
CEE electricity sector
2.1. Privatization and market development
Electricity sector privatization began in the 1990s, and has made considerable
headway in some of CEE countries. In many cases privatization of the distribution
and generation sectors is at an advanced stage. However in the case of the
transmission grids, these are typically regarded as strategic assets and hence are
owned directly or indirectly by the states concerned.
EE In final phase EE
LV Underway LV
In initial phase
LT LT
PL PL
CZ CZ
SK SK
HU HU
SI SI
HR RO HR RO
BA BA
RS RS
ME BG ME BG
KO KO
MK MK
AL AL
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24 Restructuring the CEE electricity sector
What are the main questions arising in relation to the 3rd Energy Package?
The 3rd Energy Package details further steps to be taken in the process of
unbundling, prescribing a higher level of independence for the entities already at
least partly unbundled, and stipulating the inclusion of the previously omitted
TSOs into the process.
In order to facilitate the integration of the EU electricity system, in July 2009, the
six European TSO associations – ATSOI, BALTSO, Nordel, UCTE and UKTSOA –
merged into one organization, the European Network of Transmission System
Operators for Electricity (ENTSO-E). ENTSO-E comprises all TSOs in the
European Union, as well as others connected to their networks.
Will the new organization ENTSO-E become a super TSO over the national
TSOs in the long term?
Respondents do not deem this realistic, mentioning that legal, technical and
commercial feasibility could be problematic. The main concept is that the use of
local primary energy is more efficient than the delivery of electricity over long
distances. In the light of this fact, a totally integrated system requiring robust
infrastructure does not seem advantageous economically. Currently, the
responsibility of ENTSO-E is coordination, lobbying and gently pushing market
players towards cooperation.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Restructuring the CEE electricity sector 25
Ministry of Industry and Trade at the end of August 2009. By this act the
condition for unbundling in ownership was completed; however, as the
representative of the Czech TSO pointed out, this change is not going to
significantly affect market transparency or competition requirements.
This state of affairs is far from unique: indeed, liberalization has not really
succeeded anywhere in CEE to create a genuine free market in electricity.
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26 Restructuring the CEE electricity sector
2 United Nations Interim Administration Mission in Kosovo (as Kosovo representative under Security
Council resolution 1244)
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Restructuring the CEE electricity sector 27
combined with few nuclear power generation facilities, while some countries rely
heavily on hydro electric generation. Hence the security of supply and efficient
allocation of resources are issues of paramount importance. Stronger regional
trade in electricity would certainly help exploit the opportunities created by
differences in natural resources available between individual states, enabling
power stations based on various fuels to supply demand as appropriate.
Furthermore, unhindered cross-border trading – as an alternative to nationally-
independent energy policies – could reduce the total (indeed substantial)
investment in generation facilities that the Balkan countries would otherwise
need to prevent supply shortages.
Along with the political changes of the 1990s, a gradual shift in the structure of
the region’s economic system also came about. With the evolution of competitive
markets, heavy industries, previously the backbone of the command economies,
lost their dominance. In turn, less energy-dependent sectors, notably services
and trade, gained predominance. These tendencies resulted in a general decline
in electricity consumption. At the same time, the gradual substitution of outdated
equipment and infrastructure with modern and efficient technology began.
Consequently, the region’s production efficiency and energy intensity4 improved
significantly, as seen in Figure 9.
Figure 9: Energy intensity of the CEE and EU-15 region economy, 1992–2006
EU-15 4.0
3.5
3.0
2.5
2.0
1.5
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
The CEE region’s energy intensity has decreased by 78 percent since 1990.
Lower energy intensity indicates a lower price or cost of converting energy into
GDP, suggesting a more efficient use of resources. Despite such progress, the
region still has room for improvement in this respect.
4 The energy intensity indicator highlights the necessary energy input of an economy to produce one
unit of GDP.
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28 Restructuring the CEE electricity sector
The EU ETS was founded in order to make the CO2 market, the so-called carbon
market, operational. Involving all 27 EU and also the 10 CEE countries, it is the
world’s largest multinational greenhouse gas emissions trading scheme. Its main
objective is to create a price for carbon dioxide emissions that includes the so-
called “external” environmental costs of energy production, thereby showing the
genuine, total costs of generation.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Restructuring the CEE electricity sector 29
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
30 Restructuring the CEE electricity sector
Combined cycle gas turbine plants (CCGTs) have the lowest emission level of all
fossil fuel generation systems.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Restructuring the CEE electricity sector 31
Sustainability and security of supply are two crucial issues that must be
addressed simultaneously. Building new, modern and efficient power plants to
replace old, inefficient units is therefore inevitable. A mix of renewables and new
power plants equipped with cutting-edge, clean technologies are needed, as are
nuclear plants.
2.4. Infrastructure
In addition to the need for new investments, extended modernization and retrofit
work on existing power infrastructure is also necessary in the region. Power
plants in CEE are steadily aging, as shown in Figure 10. and more than 60
percent of installed capacity, amounting to more than 67GW, is over 30 years old.
Nuclear 80,000
Coal 70,000
Oil 50,000
MW
Renewable 40,000
Hydro 30,000
20,000
10,000
0
<10 years 11–20 years 21–30 years >30 years
The typical lifetime of large hydro power plants varies between 90 and 120 years,
therefore most of the current units in CEE are likely to be in operation over the
next few decades. However, lifetimes of fossil fuelled plants are much shorter,
amounting to approximately 40–50 years for conventional coal, gas and oil-fired
plant, and 25–30 years in the case of CCGT plant. Capacities older than the
theoretical life-span for a given technology may be considered inefficient
generation sources. The majority of current plants deemed obsolete are coal
fired, and they must either be decommissioned or retrofitted in the short or
medium term.
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32 Restructuring the CEE electricity sector
CCGT technology has seen efficiency levels climb from around 50 percent and is
expected to reach 60 percent in the near future.
CHP plant is typically 85–88 percent efficient, though in the case of well-sized
units it can reach 91 percent.
One respondent believes that CCGT units will be the most popular option to
replace obsolete capacity in the short term, primarily because of the relatively
short lead times of 5–6 years. This is pertinent because investors are still nervous
regarding both the electricity and financial market conditions.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Restructuring the CEE electricity sector 33
The electricity systems in the CEE region are at threat from three principal risks:
weather conditions, technical outages and any interruption of supply from primary
sources. Weather conditions affect changes in demand, which can be relatively
sudden. Moreover, a sudden interruption of wind in the countries with wind-
dependent electricity generation can also cause shortage of supply.
The question of the security of natural gas supply has also become an issue in
Europe recently after Russian-Ukrainian gas crises broke out in 2006 and 2009.
As a consequence, several European countries suffered a shutdown in supplies
of gas from Russia. Natural gas imports are a critical source of primary energy in
many CEE countries, with 11.3 GW of installed capacity in the region reliant on
gas. In addition, a considerable increase in the use of natural gas for electricity
generation is also forecasted, taking its share in generation from 9 percent today
to 17 percent by 2020 that is 28 GW of installed capacity5.
Russia 14
Germany 12
Billion cubic meters
Norway 10
Other 8
Europe
6
& Eurasia
4
0
Albania
Bosnia and
Herzegovina
Bulgaria
Croatia
Republic
Hungary
Lithuania
Poland
Romania
Serbia
Montenegro
Czech
Slovakia
Macedonia
Latvia
Estonia
Slovenia
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
34 Restructuring the CEE electricity sector
18 12.5/17
6/16.3
>50 bcm LT
16
14 2.5/13.3
PL 12
10
0.1/8.6
CZ
8
SK 0.1/6.2
6
HU
4 0/3.5 2.8/3.3 0/3.4
SI 0.6/2.5
HR RO 0/2.04
2 0.03/ 0/1.1 0/1
0.03 0/0.1 0/0.4
BA
RS
0
AL BG HR CZ HU PL RO Sl SK LT LV EE MK ME RS BA
ME BG
KO
MK
AL
Several new transit routes are proposed to improve the natural gas supply of the
Source: CIA The World Factbook region, notably Nabucco, South Stream and Krk LNG. To ensure energy
independence, individual countries also developing a more diverse generation
portfolio, including renewable energy sources and nuclear power.
Nabucco
Austria Hungary
Romania
Bulgaria
Turkey
The 3,300 km Nabucco pipeline, which aims to bring gas from the Caspian Sea
region to Central Europe, has a planned maximum capacity of 31 bcm/year.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Restructuring the CEE electricity sector 35
South Stream
Russia
Austria Hungary
Romania
Serbia
Italy
Bulgaria
Turkey
Greece
Operations were planned to commence in 2013. However, the project has been
delayed due to the financial crisis and disagreement among the potential
parties involved, and the pipeline is expected to be commissioned in 2015.
Based on recent news the north-western part of the pipeline will run
through Serbia and Hungary to Austria’s Baumgarten gas storage.
Slovakia
Austria Hungary
Slovenia Romania
Croatia
Bosnia and
Herzegovina
Serbia
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
36 Restructuring the CEE electricity sector
Figure 13: Main electricity flows in Ensuring the security of supply is certainly a matter of great concern for CEE
2008 and planned new cross-border countries. They are expected to seek ways to reduce dependence on natural gas
transmission lines in the CEE region (or at least diversify their sources) in the future to offset the potential risks.
Additionally, the CEE region has expressed a great interest to participate in and
finance alternative supply routes, which is beneficial for both the region and
exporters.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Restructuring the CEE electricity sector 37
What are the main factors behind import and export capacity
developments? Are the new capacities considered sufficient to ensure
security of supply?
As a general rule, electricity system planners believe cross-border capacities
should be about 10 percent of peak load. In fact, many countries in the region
comply with this at present, but while this would appear acceptable on paper, in
fact from a market point of view it is inadequate, and if cross-border trading is to
work efficiently more capacity must be built.
Regarding to Northern Europe, the Baltic States will benefit from interconnection
development to Scandinavia by reducing dependence on Russian power imports.
Apart from reducing the Baltics’ isolation from the European grid, such
interconnections also enable power systems to be operated more economically.
However the Czech TSO representative noted that, rather than building
expensive cross-border links, other, more cost-efficient measures might boost
export-import capacities, such as modernization of the internal grids, high voltage
transmission lines and substations.
1,000
1,000
No existing determinant procedure 750
Proportionally 1,300
750
600 400
Auction 1,500
0
60 680 680
<500 MW 2,200
1,400
0
10
500–1,000 MW
1,100
1,200
1,000–1,500 MW
1,
>1,500 MW 75
0
2,250 8 500
800 00
0 0
700
0
1, 2
1,200 400
600 800
300
500
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE electricity generation: forecast 39
3. CEE electricity
generation: forecast
Increasing demand is another key factor driving change and expansion in the CEE
electricity sectors, and naturally needs to be taken into account in any future
modeling of systems, particularly of generation.
CEE 45%
Average 40%
35%
30%
25%
20%
15%
10%
5%
0%
Montenegro
Baltic
States
Bosnia
Bulgaria
Croatia
Republic
Hungary
Poland
Romania
Serbia
Czech
Macedonia
Slovakia
Slovenia
Source: UCTE, System Adequacy Forecast 2009–2020
Since 1993, the annual growth of electricity consumption per capita in the region
has been around 2.2 percent CAGR (compound annual growth rate), with
consumption finally reaching the 1990 level by 2005. According to the forecast,
this growth will now slow to about 1.7 percent CAGR, which is very close to the
Western European rate.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
40 CEE electricity generation: forecast
According to the Best Estimate Scenario, the CEE generation capacity mix will
develop significantly by 2020, with total regional capacity reaching 163.3 GW, and
an average system load at 97.3 GW.
Renewable energy together with nuclear sources and new gas-fired power plants
will form the primary focus of sector development.
Nuclear 180
Coal 160
Oil 140
23% 25% 22%
Natural Gas 120
1% 2% 2%
Mixed/Other 100 2% 6% 7%
GW
Fossil Fuel 80 6% 3% 3%
Wind 60 9% 13% 17%
Other 40 1% 1% 1%
Renewable 49% 39% 38%
20
Hydro 10% 12% 11%
0
2009 2020/Conservative 2020/Best Estimate
Scenario Scenario
Source: UCTE, System Adequacy Forecast 2009–2020, KPMG analysis regarding the Baltic countries
and Albania
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE electricity generation: forecast 41
In order to identify the investment possibilities for each kind of fuel, generation
sources will be outlined separately in the following section.
Coal
Currently, coal generation accounts for 48 percent of total electricity generation in
the CEE region. It also plays an important role in the security of supply, as the
resources are local. However, since coal-based generation produces high levels of
CO2 emissions, it is not favored by the European Union. Nonetheless, in the long
term, the emergence of “clean” coal generation technology is expected to boost
the attractiveness of coal as a primary fuel.
Several CEE countries hold significant coal reserves, including Poland, Bulgaria,
Hungary, the Czech Republic, Romania and also Kosovo.
A number of new coal and lignite-based generation units are also planned in
Albania, Bosnia, Bulgaria, Croatia, Macedonia, Montenegro, Romania, Kosovo and
the Baltic countries. Meanwhile Poland, Slovakia and the Czech Republic will
decrease their coal-fired capacity. In Hungary, and most of the CEE countries, the
future of coal depends on the development of the European Union’s Emission
Trading Scheme (ETS) after 2013.
Generally, the share of coal in total generation capacity is expected to dip below
40 percent according to both scenarios. However, in absolute terms, there is a
significant difference between the two, as in the Best Estimate Scenario, the
total coal generation capacity will be increased by 750 MW, while conservative
estimations suggest a decrease of more than 10 GW.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
42 CEE electricity generation: forecast
The carbon capture and storage (CCS) question would appear to be of crucial
importance, and if successfully developed could well boost the opportunities for
future coal-fired plant. Yet one respondent indicated that the development of this
technology is highly questionable in the near term.
Renewable generation
Renewable energy is a focus of attention for future investment and development,
as it is a strategic energy source due to EU regulations, growing environmental
concerns and the desire to reduce dependence on imported energy.
The renewable energy targets of individual countries have generally been set in
line with their potential resources.
The level of development in the renewable sector varies across the region.
Significant proportions of electricity generation in Bosnia and Herzegovina,
Croatia, Montenegro, Latvia and Albania is based on renewable sources,
principally hydro, its share being over 50 percent in these countries’ installed
capacities. In contrast, in countries such as Czech Republic, Hungary, Poland and
Estonia, which all lack cheap hydro resources, the share of renewables is below
20 percent.
25%
40% 16.6%
31.4%
EU member CEE countries EE
CEE countries
15%
Target for share of energy from PL
7.5%
renewable sources in gross final
consumption of energy, 2020 13%
6.4%
CZ 14%
Share of energy from renewable 6.8%
sources in gross final consumption SK
MK
AL
Source: DIRECTIVE 2009/28/EC on the promotion of the use of energy from renewable sources
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE electricity generation: forecast 43
Not all agree, however. A representative of OTP, the Hungarian-based bank, said
that bank was skeptical of renewables both pre- and post-crisis. OTP pointed to
the vital influence of favorable regulations and subsidies, noting that the
modification of the Hungarian feed-in tariff system was a development which
could boost the future appeal of renewable projects. In Romania, where
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
44 CEE electricity generation: forecast
What are the most significant technical constraints that hamper the
expansion of renewable technologies and threaten compliance with the
renewable energy target?
Many respondents insisted that favorable financial and regulatory measures are
indispensable for widespread promotion of renewables, including, for example,
the feed-in tariff. However such incentives also introduce certain technical and
commercial challenges to electricity systems. Monitoring plants generating
power under this tariff arrangement poses difficulties for the TSO, especially
related to balancing. For example there may be surplus electricity generated,
during periods of low demand. This in turn causes prices to fall, and reduced
loads at larger plants which do not benefit from the tariff system. All of which
causes disturbances in the market which must be properly managed, both
technically and commercially.
One solution is to build more balancing power plants. For example, the Siemens
representative mentioned that the company currently sees more than 3–4 GW of
renewable power plants in development, which will of necessity be accompanied
by a similar amount of stand-by generation, most likely CCGT. This is a new
challenge, as currently system balancing capacity is primarily a function of
fluctuations in consumer demand, and back-up for the largest generation units.
Hence the spread of renewable technologies is a new factor for system
designers to grapple with in coming years.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE electricity generation: forecast 45
Nuclear generation
Nuclear is a priority issue, due to the EU regulations on CO2 emissions,
competitive pricing and security of supply.
Seven CEE countries currently run nuclear plants, viz. Bulgaria, the Czech
Republic, Hungary, Lithuania, Romania, Slovakia and Slovenia (which operates a
nuclear plant together with Croatia).
Source: Reactor data: WNA to 1/5/09, IAEA- for nuclear electricity production & percentage of electricity
(% e) 5/08., WNA: Global Nuclear Fuel Market (reference scenario) – for U, IEA
In recent years, Bulgaria, Slovakia and Lithuania have been forced to close a
number of nuclear generation units on safety grounds.
In addition, 14 more reactors have been proposed across the region, involving a
total capacity of about 21.5 GW.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
46 CEE electricity generation: forecast
Nuclear plants also create system balancing issues, although this is far from
insoluble. In France, for instance, where nuclear generation is substantial,
negative balancing is technically feasible and therefore available.
Natural gas
Natural gas generation currently represents only 9 percent of total capacity in the
region, although in Latvia and Hungary gas makes up more than 30 percent of
total capacity, and Croatia, Lithuania and Romania also have significant gas-fired
plant infrastructure.
According to the estimates of national TSOs, gas-fired capacity in the region will
jump to 28 GW, i.e., 2.5 times current levels in the Best Estimate Scenario.
Poland leads the CEE “dash for gas”, with around 8 GW of new capacity to be
installed by 2020 (primarily as an alternative to coal). Hungary and Croatia plan a
total of 1.4 GW of new plant, while Macedonia, currently dependent only on coal,
oil and hydro, is mulling up to 500 MW.
With these and other developments, the total share of gas capacity in CEE is
forecast to rise to 17 percent of the total by 2020.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE electricity generation: forecast 47
times – underpin the popularity of gas. On the other hand, Russia is the primary
fuel source, which raises questions about the security of supply.
-20 -10 0 10 20 30 40 50
GW
How accurate are the forecast figures in the UCTE System Adequacy
Forecast 2009–2020?
Most respondents indicated that some of the forecast figures were not entirely
consistent with their own projections. Firstly, the economic crisis might affect the
implementation and the timing of implementation of the project plans that have
been incorporated in the Best Estimate Scenario, while the crisis might act as an
incentive for taking old, inefficient power plants out of service that cannot compete
effectively in the current situation (with low demand and cheap imports). Two
strategic options can be considered for ageing units: utilities might wait for demand
to recover to a competitive, or they might invest in replacement plant. The biggest
challenge appears to be finding investors for such a long pay-back period. Other
issues include who will provide the replacement units (the current utility companies
or new investors) and which type of generation to choose.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
48 CEE electricity generation: forecast
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Figure 19: CEE Generation capacity change from 2009 to 2020 (GW)
EE
2009 2020
2.47 4.06
LV
2009 2020
2.18 3.81
LT EE
2009 2020
4.65 5.51
LV
PL
2009 2020
LT
33.25 38.98
CZ
2009 2020
15.85 16.85
PL
SK
2009 2020
6.73 8.30 CZ
SK
HU
2009 2020
8.83 11.12 HU
SI RO
RO
2009 2020
HR
16.68 23.15
BA
RS
SI
2009 2020 BG
ME
3.04 6.52
AL MK
HR
2009 2020
4.00 6.10
BA
2009 2020
3.74 6.22
RS
2009 2020
8.31 9.88
Legend
ME
2009 2020 Nuclear
0.85 1.82 Coal
Oil
AL Natural Gas
2009 2020
1.50 4.10 Mixed/Other Fossil Fuel
Wind
MK Other Renewable
2009 2020
Hydro
1.45 3.19
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
50 CEE electricity generation: forecast
Bulgaria aims to meet its future electricity demand mainly with the help of new
nuclear, wind and hydro capacities (4 GW), accompanied by moderate
investments in coal.
The generation mix of Montenegro is based on just hydro and coal, both of
which will form the basis for new projects, with no further diversification of
primary energy sources. Serbian development plans include investment in new
thermal plants. No renewable development is expected, and the share of
renewables is expected to decline to 29 percent.
The energy system of Kosovo is under severe strain, with peak demands well
above total capacity. Kosovo intends to build new lignite-fired capacity based on
domestically available resources.
Baltic states
In Lithuania, the existing nuclear facility has been decommissioned by the end
of 2009, which will create capacity and a need for imported electricity. However,
the Best Estimate Scenario suggests that 1 GW of new nuclear generation will
be built by 2020.
Central Europe
The Czech Republic is focusing on replacing coal-fired plant with gas and wind
capacity.
Hungary’s future generation mix implies investment into further gas units totaling
1.4 GW and a large hydro facility of 1.2 GW. KPMG assesses this unrealistic as there
are no concrete information available on the initiation of such hydro investments, and
as these developments take several years of planning and construction it is doubtful
that significant capacities would be deployed until 2020.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CEE electricity generation: forecast 51
Romania’s plans lie predominantly in developing its existing nuclear and hydro
generation capacities. In Slovakia, new nuclear generation facilities and a
reduction in coal generation are expected. Slovenia is also planning to invest in
new nuclear capacities.
In particular, both Poland and Macedonia are likely to suffer from capacity
shortages which, in case of the Conservative Scenario, amount to a peak load 21
percent higher than the generation capacities by 2020 in both countries. Similarly,
in Bosnia and Herzegovina, the Czech Republic, Hungary and Serbia, the increase
in electricity demand is expected to be higher than the development of
generation capacities. These countries should therefore be given special attention
when assessing investment opportunities.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Financing investments in the energy and power sectors 53
4. Financing investments in
the energy and power sectors
Energy industry investments, be they in generation, transmission or distribution,
require a large amount of money and generally entail moderate risks. Such
projects are considered long-term investments associated with mid- and long-
term payback periods. However, even in a stagnating economic environment
energy sector investments can prove worthwhile, as infrastructure is aging and
efficiency improvements are continually being made. Hence new investment can
both increase corporate profitability and reduce environmental damage.
The current financial and economic crisis was triggered by the collapse of the US
mortgage-backed securities market in 2007; however, it later escalated into a
global financial crisis with significant impact on the global economy, including the
energy sectors and the CEE region.
This process began from the mid-1990s, as the implementation of political and
economic reforms created favorable market conditions. An increasing portion of
the FDI flowed into the electricity, gas and water sectors also benefited from
this trend, and the share of FDI in these sectors rose from 18 percent in 1995 to
27 percent in 2006.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
54 Financing investments in the energy and power sectors
80,000
70,000
60,000
USD million
50,000
40,000
30,000
20,000
10,000
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Financing investments in the energy and power sectors 55
The reduced demand accompanying the financial crisis afflicted the highly-
leveraged state budgets and industrial plants in Central and Eastern Europe.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
56 Financing investments in the energy and power sectors
2007 46 000 8%
2008 44000 6%
4%
2009 42000
2008/2007 0%
GWh
3 8 000
2009/2008 -2%
3 6 000
-4%
3 4000
-6 %
3 2000
-8 %
3 0000 -10%
28 000 -12%
26 000 -14%
J an Feb M ar Apr M ay J une J uly Aug S ept Oc t N ov D ec
Source: UCTE
It should also be noted that the monthly consumption data presented in Figure 21
shows gross electricity consumption which includes self consumption of the
generation units, plus network losses. Total self consumption depends significantly
on the generation mix of the country and the age of power plants. (Self consumption
of old, inefficient plants is high, so any decrease in the use of such plants affects the
final figures disproportionally more than switching out an efficient unit.).
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Financing investments in the energy and power sectors 57
80
EUR/MWh
60
40
20
2009.07.04
2008.06.04
2008.07.04
2008.08.04
2008.09.04
2008.10.04
2008.11.04
2008.12.04
2009.01.04
2009.02.04
2009.03.04
2009.04.04
2009.05.04
2009.06.04
2009.08.04
2009.09.04
Source: Prague Energy Exchange
Falling electricity prices have a major effect on the profitability of the electricity
industry, which in turn throws into question the viability of several planned and
on-going investment projects. Furthermore, decreasing prices have resulted in a
worsening credit outlook for major European utilities.
What are the main effects of the financial crisis on the Transmission System
Operators in the CEE region?
The extensive investment costs of TSOs are mainly financed from external
sources, especially bank loans.
Due to the economic crisis, the costs of these loans have increased significantly,
which in turn reduces the profitability of TSOs.
The Czech TSO respondent emphasized this point, saying that currently the high
interest rates make financing the modernization of existing infrastructure more
difficult and expensive.
The Hungarian TSO representative also mentioned that the lower electricity
consumption means reduced revenues for TSOs. In general, the costs of system
operation services are built in the tariff prices proportionately to the estimated
annual electricity consumption. Since the tariff levels defined for 2009 were
calculated based on a higher electricity consumption level therefore the revenue
realized by the TSO does not cover the system operation costs, which must be
compensated in next year’s tariffs.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
58 Financing investments in the energy and power sectors
The applied financing structure is always project specific and reflects the risk
bearing capability of the involved parties.
Investors must pay careful attention to the utilization of own and external financial
sources when assessing the profitability of a planned investment, as high
leverage can increase the returns.
Joint ventures are frequently formed if the equity need of the project exceeds
the resource of a single project sponsor. In this structure the project sponsors
create a partnership for the financing of a specific project. The parties, known as
co-venturers, share costs, risks, and liabilities associated with raising funds for a
project. By participating in joint venture financing, the investors can spread risks,
minimize credit exposure, and often share in asset ownership. In the traditional
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Financing investments in the energy and power sectors 59
form of joint venture, each co-venturer raises its share of the funds on the basis
of its own direct credit and its ownership interest in project assets.
There are various types of financing structures used to raise external financing for
large infrastructure projects. However the two most commonly used ones are:
1. Traditional Corporate Lending (full recourse to the sponsor)
2. Project financing (non- or limited-recourse financing)
Syndicated project financing is often used and involves a large sum of funds lent
to a single borrower by a group of banks that teams up in an alliance to share the
risk of financing. The project is usually pursued in a separate special purpose
vehicle (SPV) created to execute the project and to be “bankruptcy remote” from
the project sponsors.
Many times the project financing in practice turns to limited recourse direction,
meaning that the sponsors give certain direct securities to lenders but those are
only for covering limited areas of risks (one typical example is project cost
overrun risk).
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60 Financing investments in the energy and power sectors
on the risks involved in the project such as country risk, technology risk, licensing
risk, construction risks, off-take risk etc.
Overall, survey respondents agreed that prior to the crisis it was relatively
easy to find financial resources for a well-structured energy sector investment,
while in the last year it has become more challenging due to tighter capital
resources.
How does the size of the investment influence the financing model applied?
Project financing is usually applied for medium or large deals, since small projects
are not able to finance the extra costs derived from project financing (such as
consultancy fees or the cost of permanent monitoring of the project). Large
investment projects are usually realized in a well-structured form, which includes
senior and junior tranches. Large transnational development banks, such as EIB
or EBRD, are typically also involved in such projects.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Financing investments in the energy and power sectors 61
The present financial and economic crisis has affected the willingness of banks
to take risk; therefore, syndicated financing currently starts at a lower level to
spread the risks among numerous banks. Documentation has become more
complex and the decision making and lead time of investments has lengthened.
It was also concluded that in the recent past the CEE region has only seen
limited refinancing or medium-sized investments, with no new large-scale power
plant investments taking place since the crisis hit. In Hungary, the largest deals in
the energy sector have been in connection with bio-fuel investments.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
62 Financing investments in the energy and power sectors
What are the preferences and priorities for banks regarding project financing
in different sectors and industries? What is the share of energy-related
projects in the portfolio of the banks surveyed?
Respondents identified real estate, automobile, energy, telecommunications and
pharmaceuticals sectors as the most common sectors to employ project financing
structures for development projects. The share of energy sector-related deals within
the project financing portfolio of the banks varied between 10–40 percent, depending
on the strategy of the particular bank. With the exception of the EBRD, banks
mentioned that prioritization among the different sectors has recently changed due to
the financial crisis. MKB’s strategy aims to shift its priorities from the construction,
automotive industry and real estate sectors (which had previously provided the
backbone of their project financing portfolio) to other sectors that were less impacted
by the crisis, such as energy and pharmaceuticals. For OTP the share of energy-
related projects was expected to decrease slightly from the level of 35–40 percent in
2009, as these projects are usually low risk, consequently their pricing and profitability
are lower compared to other sectors. Nevertheless, in the beginning of 2010 a
substantial shift in OTP's strategy resulted in considerable growth of energy sector
lending and financing. In contrast, the EBRD’s strategy, as a development bank,
differs from the commercial banks, and no industry preferences are specified, as
financial decisions are based on the principles of sound banking, additionality and
transition impact that can be achieved through the implementation of the project.
Are there any preferences for renewable energy among the different
investment projects?
The Equator principles provide a benchmark for financial institutions regarding the
management of the social and environmental issues encountered in project
finance. Among the interviewed banks, only BNP Paribas has adopted these
principles, although the others also have some policy on renewable energy
investment projects.
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Financing investments in the energy and power sectors 63
OTP Bank has no specific priorities for renewables, and although it considers the
environmental impacts of a project during the evaluation process (it requires full
compliance with the applicable environmental rules and regulations), its financial
decisions are based solely on financial viability.
However, the majority of these banks had only insignificant direct investments in
such problematic financial innovations as the American CDOs. Therefore, they
were not directly impacted by the downturn of the American mortgage market
although they were heavily affected by the spill-over effect of the financial crisis.
In order to control the negative consequences of the crisis the following
measures were enacted:
• Restructuring and refinancing their problematic debts
• Providing fresh loans to the government, industry and consumers
• Cutting back operating costs and
• Accumulating a substantial amount of liquidity as a precautionary measure.
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64 Financing investments in the energy and power sectors
How have the financial requirements and the assessment of project plans
been modified due to the financial crisis? What are the minimum financial
requirements and prerequisites for an eligible project?
Respondents agreed that project financing has become considerably more
difficult during recent years. Prior to the crisis, commercial banks became very
liberal in the boom years in terms of financing requirements due to the extensive
amount of liquid and cheap financial resources available. As a consequence of
the crisis however, banks had to face deteriorating loan portfolios and a lack of
trust in the financial market, which eventually led to liquidity problems. Therefore,
the following changes occurred in the conditions and prerequisites for project
financing:
1) The expected ratio of own equity increased to 30 percent, compared to the
previous 10–15 percent levels. This has had a huge impact on, for example,
wind park projects, which in the past, had the most aggressive project
structures. But now, with the banks demanding higher equity ratios, project
sponsors have to demonstrate more trust and commitment towards projects.
Furthermore, government and EU subsidies are usually not included in own
equity (since these can suffer delay or cancellation), and thus the project has
to be profitable without these subsidies, although they can later be used for
early repayment.
2) The interest surcharge level has also drastically increased as a result of the
growing cost of bank funding. Depending on the currency, the interest rate
surcharge has jumped from 0.8 percent to 3.8–5.0 percent. However
resources in local currency have generally stayed relatively cheap compared to
credit in foreign currencies and long-term financial resources, which became
extremely expensive. Although the interest surcharge has increased
significantly, the lower base rates have to some extent compensated for this.
3) The one-time fees linked to project financing have also significantly increased,
typically from a level of 0.15 percent to 1–1.5 percent.
4) The Debt Service Coverage Ratio (DSCR) currently required from eligible
projects has risen from 1 percent to 1.2–1.25 percent.
5) The collaterals and covenants required from the project sponsors have
become more tough and more regular and thorough monitoring is conducted.
6) The fact that banks refuse to take currency risks and the borrower has to
possess incomes in foreign currency in the case of foreign debts is a further
disadvantage.
7) More attention is paid to the assessment of assumptions in a project plan
such as the contractual background, ownership structure, and cash-flow
projections.
8) Banks have also introduced some new indicators to assess the efficiency of
their internal operation, based on the risks and profitability associated with
different financial products.
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Financing investments in the energy and power sectors 65
The interviews conducted for this survey confirmed that most commercial banks
have had to make the aforementioned changes, which have all led to a more
tedious and time-consuming process, and often resulted in delays or even the
cancellation of projects. However, the new conditions for project financing have
proved to be a good filter, since only truly profitable projects pass the stricter
hurdles.
In the meantime the financing principles of the EBRD have not changed to this
extent since they followed a more conservative approach than the commercial
banks prior to the crisis as well.
Bond 120
200
Number of deals
100
Equity
150
USD bn
80
Number
of deals 60 100
40
50
20
0 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2007 2008 2009
Source: Dealogic Global Project Finance Review – 1H 2009 – July 13, 2009
Figure 24 reveals that the CEE region, followed by Australia and Africa, suffered
the largest slump in project financing deals. The energy sector accounted for
40 percent of the total volume, reaching USD 45.4 billion, a significant decline
compared to the H1 2008 (USD 64 billion). However, in H1 2009, five of the
10 largest project finance deals were energy sector-related.
*Source: Dealogic Global Project Finance Review – H1 2009 – July 13, 2009
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66 Financing investments in the energy and power sectors
-41% -85%
6%
-37%
24,667
43,390
3,700
20,635
36,000
13,000
33,962
25,600
Eastern Europe
North America
21,300
15,324
40,000
-83%
Latin America/
% change
15,294
Caribbean
12,800
Project financing 2,600
H1 H1
2008 2009
volume in USD Middle East/Africa Australasia
million
What are the main reasons for the decline in project financing? What are the
main differences in concluding financing decisions in view of the present
economic climate?
All respondents agreed that project-financing trends reflect the effects of the
global economic and financial crisis. However, they are convinced that banks will
continue financing in the long term since it is their core activity, and inevitably the
energy sector needs significant financial resources.
There was a clear distinction between the new investment policies applied by
commercial banks compared to development banks, as while commercial banks
were suffering from a lack of available financial resources, EBRD global financing
volume has almost doubled last year. This is mainly due to the EBRD’s stated
mission, namely to provide financing for justifiable projects in times when
commercial banks can not do so.
After the crisis struck most commercial banks in CEE faced serious liquidity
problems, mainly due to a lack of financial resources and the temporary reallocation
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Financing investments in the energy and power sectors 67
A major setback in project financing volume was caused by the real estate
sector, where a price bubble collapsed worldwide. In the energy sector the
decline was not as serious as there had been no bubble and no urgent need for
new investments. Therefore, only minor delays were experienced in energy-
related projects, and if contracts had already been signed, delays are less likely
still since the licenses expire within a certain timeframe. Typically, generation
investment projects which have a feed-in tariff system were not affected by the
financial crisis to the extent experienced by other investments.
Respondents mentioned that the reduced demand for electricity came at a time
when many countries were reaching their capacity limits, reducing the urgency
for new investment. Indeed, the current situation provides time for decision
makers to rethink their long-term investment plans, potentially making them
more rational and efficient.
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68 Financing investments in the energy and power sectors
What are the general time constraints for generation capacity development
projects by generation type? What is the general ratio between the needs of
the preparation and construction phases?
Equipment suppliers emphasized that the time requirements for investments
depend on the type of generation selected and on the country in which the
project takes place, but as a rule of thumb the preparation and construction
phases are roughly of equal duration.
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Financing investments in the energy and power sectors 69
Nuclear power requires the longest lead times since there are numerous political
and social questions to be addressed before it can get to the construction phase.
In a best case scenario, if a very well-developed nuclear program started today, it
would take 10 years before power could be fed into the grid. The split between
the planning (pre-selection, licensing and political issues, legislation) and the
construction phases for nuclear plant is typically around 40:60. According to GE,
the process, from breaking ground to first fuel takes 39 months, followed by
another 23 months before final commissioning, though GE has on occasion
completed the whole process within 49 months.
Coal-fired power plant projects are also difficult in terms of obtaining permits and
licenses. However, the length of the construction phase, depending on the
complexity of the project, is typically around 36 months.
The development of gas-fired power plant projects is slightly easier from the
licensing and permitting point of view, while construction time is significantly
shorter, usually taking 24–28 months.
In the case of wind power, measurements to show that a site is suitable for
wind generation purposes take at least one year. The time needed for
licensing depends on the country’s regulations, which varies within the CEE
region from 12 months to 2–3 years. Construction time is highly dependent
on market demand and the installation capacities of the suppliers, but in
general, wind power plants have a construction cycle taking less than six
months.
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70 Financing investments in the energy and power sectors
Other
n/a 0.6 – 0.7 –
Renewable
Run-of-River
2,500** 0.5 1,194 0.9 2,187
Hydro
* Royal Bank of Scotland – Equity and Debt Market Perspectives on Nuclear Investments
Source: KPMG analysis based on UCTE System Adequacy forecast and presentation of the RBS –
Equity and Debt Market Perspectives on Nuclear Investment
Are the CAPEX costs presented in Table 3 realistic? Have the CAPEX costs
changed significantly following the financial crisis?
In the last three years a significant increase of CAPEX costs has been
experienced, mainly due to the large number of power plant projects and
extensive steel consumption of China. The prices provided by RBS indicate the
price levels for 2008.
According to Siemens, market prices have been decreasing recently but it would
be hard to predict at what level they will stabilize. Most probably they will not
reach the lower price levels experienced four years ago, but they are anticipated
to be lower in the next 1–3 years than the prices in the table. Hopefully investors
who postponed projects due to economic and financial factors will not all return
to the market simultaneously because that would result in high CAPEX prices, as
has happened in the past. Thus customers are highly recommended to take
advantage of low asset prices and buy equipment before other players return to
the market and push up prices.
6 The table above only shows the investment costs of additional generation capacity investments and
does not contain information about the estimated costs of replacing inefficient and the
decommissioned power plants.
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Financing investments in the energy and power sectors 71
Capex EUR/kW
Source: GE Energy
The CAPEX costs provided by General Electric are fairly similar to the investment
costs published by RBS, although GE has higher costs for lignite-fired plant, while
hydro power is priced considerably lower. The variations are due to differences in
equipment and the characteristics of the location (especially in case of hydro
power generation).
Have the equipment suppliers changed their supply or sales strategies due
to the global financial crisis?
As a consequence of the financial crisis some suppliers have become more
flexible and willing to adjust their services more to clients’ needs. However, no
substantial changes have been noted in the sales strategies of either Siemens or
GE since both provided a wide range of services prior to the crisis. Siemens
mentioned that, depending on the market situation and customer needs, the
company is willing to participate in product delivery and turn-key projects.
In the midst of the current economic turmoil, GE is busy helping clients to
develop their future strategies by assessing the market, available technologies
and future trends. GE has also made considerable efforts helping costumers
to develop financing structures for projects and enhancing reliability among
market players.
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72 Financing investments in the energy and power sectors
Nuclear power is a special case, since in the past 10–15 years no nuclear
development has taken place in the region. However GE has indicated that there
are many nuclear initiatives under consideration, and if just a few of these were
implemented simultaneously both the supply chain for materials and availability
of skilled manpower could soon be under stress. Siemens also pointed out that
in the area of renewable energy, equipment suppliers are currently facing delivery
problems due to increasing demand. As a result, Siemens has almost tripled its
production capacities of wind generation equipment over the last 2–3 years.
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Financing investments in the energy and power sectors 73
* Based on KPMG assessment, coal fired power plants, taking into account several exceptions, will not
be obviously replaced with coal fired ones. In this respect, the future of the Kyoto Protocol and the
related European Union Emission Trading Scheme will be a decisive factor. Nevertheless, the foreseen
total investment cost of 67.2 billion for the replacement of coal with coal and other fuel types provides a
good basis for assessing the total average financing needs of generation capacities.
Source: KPMG analysis based on UCTE System Adequacy forecast and presentation of the RBS –
Equity and Debt Market Perspectives on Nuclear Investment
Based on an optimistic timeline the total replacement and new investment in the
region’s power plant infrastructure may result in a total financing of EUR 114–144
billion over the next decade.
Are there sufficient funds available in the banking system to meet the
sector’s extensive financing demand?
Based on market knowledge from banks participating in our survey,
the Conservative Scenario of the UCTE forecast seems more realizable.
The respondents all agree that the investment needs of the Best Estimate
Scenario are slightly overestimated and in the time of financial and economic
crisis priorities must be reviewed. Therefore, a realignment of resources and
needs is inevitable, resulting in a downward adjustment of required capacities.
Two banks, OTP and the EBRD do not believe that there will be sufficient
financial resources available in the region to fund the required investments.
However, this is not considered a real constraint, since Western European banks
would also participate in any deals, with a pricing level adjusted to country risk.
As discussed, the risk taking attitude of banks has changed due to the crisis and
they prefer more limited participation in projects.
Two banks, MKB and OTP, indicated that the biggest concern relating to the
realization of these investments is the lack of credible, committed project
sponsors and sufficient equity. Therefore, state participation in investments and
the development of robust regulatory frameworks will play an important role in
attracting financial resources to such projects.
7 The table presented above only shows the investment costs of additional generation capacity
investments and does not contain information about the estimated cost of replacing inefficient and
decommissioned power plants.
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Conclusions and future prospects 75
5. Conclusions
and future prospects
5.1. Economic environment: crisis, consumption and recovery
The effects of the financial crisis on the present state and future development of
the CEE electricity sector are many and diverse: among the most significant, the
drop in consumption and the various changes in the terms of financing.
A less favorable turn of events could theoretically come to pass with a further
downturn in the economy, resulting in populations having to give up current living
standards. However, this is considered unlikely, as CEE has the potential to drive
the production of multinational companies to a fast recovery. On the other hand,
electricity is likely to become more expensive, a difficult task for politicians to
explain to electorates. This is yet another reason for adjusting regulations and
government policies to counteract the adverse effects of the current economic
situation.
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76 Conclusions and future prospects
The promptness of any recovery depends on the timeframe required for the
industry to return to full production, according to respondents’ views. Steps
taken by decision makers everywhere significantly influence this time need –
while also having a lasting effect on the years following financial restoration.
The EBRD stressed that if the required investments are not made in time,
economies slow to react could face new problems in the future. Indeed, the
development of the energy sector should be understood as fundamental to the
future success of post-crisis economies.
Aging power plants combined with the necessity for capacity expansion to
provide for the needs of millions mean that finding solutions for renewal is
imperative. It is not likely that the downturn in consumption will continue in the
medium or long term. It is equally improbable that any rise in the price in
electricity, be it due to compensation for costs incurred complying with
environmental regulations or to any capacity shortage, will be capable of
substantially altering the expectations, wants and perceived needs of the region’s
population.
How long will the drop in electricity consumption last? Will it have a
permanent effect on the sector’s development needs?
The current downturn in electricity demand will not prove to be an enduring
trend, respondents say, and while many production sites have been shut due to
the crisis, in most cases this can be considered a temporary state of affairs.
Additionally, the decommissioning of power plants reaching the end of their life
span in itself necessitates steps to be taken for the development of the sector.
If environmental obligations and security of supply issues are also factored into
the situation, it becomes increasingly clear that the drop in consumption alone
should not impede the restructuring of the electricity sector.
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Conclusions and future prospects 77
In view of the course of expected economic trends and the steady increase in
household consumption, the development of the electricity sector can be
considered indispensable. However, the issue of financing these investments in an
altered economic climate remains an open question. Financial institutions and large-
scale investors, reeling from the setbacks of the crisis, have adjusted not only their
expectations, but also their affinity to risk and exposure. Yet decision makers cannot
deliberate for long, as the restoration of a sustainable level of financing is strongly
dependent on timely reactions, dedication and competence on their part.
Energy sector developments should have the highest priority among these
preferred developments. The sector has not seen many large-scale investments
recently, and as funds once again become available, the issue of obsolete,
inefficient and inadequate capacities must be resolved. As a result the OTP
representative argued that the energy sector will see an investment surge on a
timeline ranging from 4–5 to 10 years.
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78 Conclusions and future prospects
Another sign of the future expansion of financing in the CEE region is the fact
that more interest and demand can be seen regarding EBRD financing than
previously. While earlier, projects were mostly financed by commercial banks,
with the EBRD often absent from the deal, since the onset of the crisis investors
have been turning to the EBRD to compensate for the lack of private funds. In
response, the EBRD is cooperating closely with the EIB (European Investment
Bank), which controls a larger volume of resources and generally invests more in
the region. The EBRD has indicated that it would be glad to see more funds in
the CEE region but not necessarily originating from banks.
Investors must put more equity in their projects in order to make banks and other
lenders comfortable. Credibility and trustworthiness, critical attributes of
investors, are more important now than ever. Consolidation and branding are
underway in the sector and projects very much depend on the sponsors behind
them.
Both the EBRD and MKB stressed the same prime message for policy makers:
development of a predictable regulatory regime is indispensable to attract
investors into energy projects. What already exists must be strengthened to
provide better assurances, namely the security and predictability of cash-flow.
MKB highlighted that long-term contract structures must be present on both the
input and sales sides. In the case of smaller projects, although it is theoretically
possible that the electricity generated could be sold strictly on a market basis,
this is not typical yet.
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Conclusions and future prospects 79
Clearly, this means that it will be awarded to those projects that are found to
have the stronger business cases. It is imperative to meet the expectations of
financial institutions and meanwhile demonstrate commitment from the part of
the project owners.
The banks interviewed for this report all had suggestions and comments
regarding the opportunities they had to offer and the steps project owners
should take.
• OTP indicated it considered terms and conditions flexible and negotiable.
New, long-term, market-based contracts are expected, both on the input side
and also for the sale of electricity, taking the place of PPAs.
• Concepts and ideas are not sufficient; a well-grounded business plan is
absolutely necessary. OTP normally requires a potential project developer to
have a business plan put together by a financial advisor before negotiations
commence.
• The EBRD remarked that leverage ratios had to be re-aligned, and project
sponsors needed to step up and cover more of the risks than earlier (for
example by giving some guarantees on pricing).
• MKB underlined the importance of the project developers contacting the bank
before all contracts were signed, giving the financial institution the opportunity
to influence or modify relevant aspects of the project.
• However, as at least 20–30 percent own equity must be collected under all
circumstances, and project owners have more time for EBRD
administrative processes, they can thus secure cheaper financing.
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80 Conclusions and future prospects
OTP indicated the growth of the project financing portfolio of the Bank, however,
shall be basically energy sector driven.
BNP Paribas, on the other hand, stated firmly that utilities featured among its
priorities. As for expectations, the bank is looking for the transparency of data
and predictability. The bank has developed a deep understanding of the local
markets in the past years, which it plans to utilize in the financing of energy
projects. BNP Paribas, aside from its internal knowledge, has a project financing
team in place which is responsible for the entire region.
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Acronyms 81
Acronyms
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What can KPMG firms offer to the electricity sector? 83
KPMG’s ENR professionals help our member firms’ clients address the
complexities and challenges that affect their businesses by creating industry
groups that tackle different areas of the global energy marketplace. The industry
groupings – Oil & Gas, Power & Utilities, Mining & Forestry – facilitate
outstanding coverage of this vast industry.
KPMG firms have Centers of Excellence (CoE) throughout the globe, dedicated to
the Oil & Gas, Power & Utilities, Mining, and Forestry sectors. These centers are
strategically located near major hubs of activity within the industry. CoE teams of
experienced KPMG energy professionals provide high quality advisory services to
clients based in those specific areas.
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84 What can KPMG firms offer to the electricity sector?
• Rio de Janeiro
Sao Paulo •
Johannesburg
Santiago • Perth •• • Adelaide
•• Melbourne
The Power & Utilities market has been developing at an extremely rapid pace
globally in recent years. This fast development is characterized by large scale
infrastructure projects that require a global base of experience and a high level of
specialized industry knowledge.
As a focal point of Power & Utilities, KPMG’s Global Power & Utilities Knowledge
& Resource Center based in Budapest, Hungary (Central and Eastern Europe)
consolidates global know-how and knowledge in a single location and takes a
hands-on approach to match client needs with KPMG’s Centers of Excellence
(CoE) across the globe that are best suited to providing professional advice and
support that addresses clients’ strategic and transactional activities.
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
What can KPMG firms offer to the electricity sector? 85
Throughout the globe, KPMG member firms provide clients with offerings in relation to the following services:
KPMG Services
Infra- Implemen-
New Transaction Procurement Negotiate Implement Monitor Renew/
structure tation
Investments Strategy and Close and Control Dispose
Strategy Plan
Strategic
Commercial Commercial due diligence,
Intelligence market assessment feasibility
PROGRAM MANAGEMENT
Modelling
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86 What can KPMG firms offer to the electricity sector?
Throughout the globe, KPMG member firms provide clients with offerings in relation to the following services:
KPMG Services
Opportunity Deal
Acquisition Identification Hypothesis/ Bid Due Negotiate Enhance/ Renew/
Acquisitions Strategy /Assessment Transaction Preparation Diligence and Close Operate Dispose
Structuring
Strategic
Commercial Pre-deal strategy Commercial due diligence
Intelligence
Project management support, transaction Project management and change Performance improvement /
Business management support, operational value realisation, merger
impact analysis (stakeholders, etc.),
Performance due diligence support, organisational integration, ongoing
organisational change management,
Services design / restructuring, contract performance monitoring,
public sector and infrastructure sector management process design, analysis in support of renew
knowledge performance metrics / dispose decisions
Creation of tax-
Tax Post transaction
efficient Tax due diligence
integration
deal structures
Information Systems
Risk optimisation,
Management IT governance
PROGRAM MANAGEMENT
Modelling
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2010 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
kpmg.hu
Péter Kiss
KPMG’s Global Head of Power & Utilities
Head of Sector, Energy, KPMG in Central and Eastern Europe
Tel.: +36 1 887 7384
E-mail: energy@kpmg.hu
The information contained herein is of a general nature and is not intended to address the © 2010 KPMG Tanácsadó Kft., a Hungarian
circumstances of any particular individual or entity. Although we endeavor to provide accurate and limited liability company and a member firm of
timely information, there can be no guarantee that such information is accurate as of the date it is the KPMG network of independent member
received or that it will continue to be accurate in the future. No one should act on such information firms affiliated with KPMG International
without appropriate professional advice after a thorough examination of the particular situation. Cooperative (“KPMG International”), a Swiss
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