IHS World Markets Energy Perspective | |
Significance | Slovakia will begin selling majority stakes in at least six of its heat and power plants this year as the government continues its privatisation drive in order to bring the budget deficit under control. |
Implications | The administration's enthusiastic embrace of privatisation and generally liberal approach to economic policy under Prime Minister Iveta Radicova contrasts with the previous regime of Robert Fico, which sought to encourage utilities to keep a lid on energy prices. The current government is considered far more business friendly and likely to allow prices to rise, hence foreign utilities will show strong interest in the current privatisation, despite massive investment requirements |
Outlook | Given the alignment between Czech and Slovak power prices following market coupling last year and existing market presence, the Czech Republic's incumbent power group CEZ will be first in the queue to acquire new assets, although Polish entities such as PGE, Tauron or Kulczyk Holdings could also show interest. |
Privatisation Resurgent
The Slovakian government will go ahead with recommendations from its state asset manager, the National Property Fund (NPF), to sell its stake in six heat and power generation companies. In an interview with Bloomberg yesterday, Economy Minister Juraj Miskov confirmed that the government would begin selling its stakes in the electricity sector this year, in order to raise foreign direct investment in new assets. The NPF said in a report commissioned by the government last year that a sale could be completed within a year of launching the process, and estimates that the total income from the sale could reach as high as EUR200 million (USD279.4 million) if all the state's shares are sold. The firms in question are the Bratislava, Martin, Kosice, Trnava, Zvolen and Zilina heat and power companies.
Despite the budget deficit being halved to EUR344 million euro in January through February, from EUR780 million euro in the same period last year, as the government cut spending and raised indirect taxes, the Ministry of Economy is still anxious to find ways to trim state debt. Given the government's reluctance to increase taxes any further after an 80% increase in carbon emission taxes announced in December 2010, privatisation of state-owned assets is seen as a viable means to push the deficit below the European Union limit of 3% of gross domestic product (GDP) by 2013.
Privatisation of infrastructure is a controversial topic in Slovakia. Between 1998 and 2006 a liberal attitude to state macro-economic policy dominated and Slovakia energetically pursued a privatisation programme across the board. Investment into the energy sector from foreign companies was forthcoming, not least because of Slovakia's strong physical interconnections with neighbouring states; Enel acquired of 66% Slovenské Elektrárne, the incumbent power provider, while E.ON Ruhrgas and GDF Suez together acquired 49% of SPP (the main Slovak gas company). Slovakia was rewarded for these reforms with an invitation to join the EU in May 2004.
However, the period was followed by something of a backlash against the sale of state assets under the left-leaning prime minister Robert Fico, who came to power in 2006. Under Fico a populist policy emerged, manifested in the energy sector through pressure on utility companies to maintain low gas and power prices despite high and rising wholesale costs and taxation rates. In July last year Fico was ousted by Iveta Radicova of the pro-business, centre-right Slovak Democratic and Christian Union–Democratic Party. Under the Radicova regime, enthusiasm for more market-oriented policy has returned; the regulator granted modest increases in retail rates—the first in over four years—and the government pushed through changes that dropped the requirement that power companies call a general meeting of shareholders to agree proposed price changes. In line with this ideological paradigm shift interest in the privatisation of state assets has returned—a trend underpinned by pressure on the government to trim the state budget.
In addition to budget concerns, the power plants themselves urgently require investment. The NPF estimated in its report that if the six units were to meet EU emissions standards by 2016, investments would have to quadruple to around EUR410 million by 2020 compared with the previous decade.
Outlook and Implications
Yet the sale of the six heat and power firms is by no means assured. To begin with, significant political obstacles remain. Radicova is head of a four-party coalition that holds only 79 seats in the 150-member parliament. There is a good chance that the populist Direction-Social Democracy (Smer-SD) of Fico could muster sufficient opposition to overturn the government's slim majority and boycott the proposals.
If the sale does go ahead, foreign utilities are sure to show enthusiasm. In particular, Czech Republic incumbent power group CEZ, which is already seeking to increase its retail operations in Slovakia, will surely bid for the assets. Despite spending much of 2010 retrenching and reshaping its strategy to reflect the changed European energy landscape in the wake of the recession, CEZ is constructing an 800-MW combined cycle gas turbine (CCGT) with Hungarian company MOL at Slovnaft, and has a partnership with the Slovak government in the Jaslovske Bohunice nuclear power plant (NPP). This enthusiasm is underpinned by supply-demand fundamentals—Slovakia's industrial electricity demand has rebounded powerfully this year, from a 14% contraction in 2009 to 21% growth in the first half of 2010. In the medium term, IHS CERA expects demand to grow by around 3.5% per year to around 5TWh. At the same time Slovakia's capacity margin is unlikely to exceed 20%, despite the addition of two new nuclear reactors at Mochovce in 2012 and 2013 (each adding 440MW). Margins may even dip below 10% after the phase-out of coal-fired plant Novaky B, in 2015, pushing up wholesale power prices. Moreover, given the warmer business climate that utilities can anticipate under the Radicova administration, further increases in regulated rates could be expected as well.
Aside from CEZ, other utilities with an existing position in the market such as EDF, E.ON and the biggest player Enel might show some interest, but as these bigger players' current priority is to pare back debt, acquisitions seem unlikely. A more plausible alternative might come from Poland. State-owned incumbent PGE is looking to expand its presence in the region and compatriot Kulczyk Holdings, recently thwarted in its bid to acquire Enea, may also be seeking alternative investment opportunities.