Energy Investors Should Look to East Europe

Wind power is surging in Poland and Romania, as is solar in the Ukraine, offering opportunities to investors who are facing tougher times in Europe’s more established markets.

Despite fears of a double-dip recession, Central and Eastern Europe countries are pressing on with improving their energy infrastructure that are ailing after decades of underinvestment.

Development of onshore wind, photovoltaics, grid operations and coal and gas power generation in Poland, Ukraine, Romania and Turkey offer potentially good returns, experts say.

“Poland is very interesting due to potential large onshore wind capacities along the Baltic Sea, whereas Turkey may deliver a good mix of renewable and conventional assets,” says Maik Neubauer, managing partner at German energy consultancy Executive Partners Group.

The challenges for Poland are clear. It generates 90% percent of its electricity using coal, but it has to fulfill pledges to the European Union on reducing emissions.

Central Europe’s biggest economy also still relies on a grid largely dating from the Cold War era and experts say it cannot cope with large power capacity additions.

“The Polish market is in the process of building new assets, and lots of capital investment will have to be made in coming years,” says Petr Novak of Generali PPF Asset Management.

With its long land border with Germany and its ongoing integration into the Nordic energy market (NordPool), Poland is well positioned in terms of energy infrastructure and cross-border trading opportunities.

Poland also has Europe’s biggest proven shale gas reserves, according to a recent study by the U.S. Energy Information Administration, something that has prompted U.S. corporations Chevron and Exxon Mobil, as well as local gas monopoly PGNiG to buy licenses to search for unconventional gas in Poland.

Other investors are looking further east to Ukraine, in part because of a program of state support for the development of renewable energy sources and small hydro power plants.

Ukraine plans to generate 30% of its energy from renewable sources by 2015, triple the level in 2010.

To the south of Ukraine, Romania has ambitious plans for wind power. Its installed wind energy jumped from 14 megawatts at the end of 2009 to 462 megawatts at the end of last year, and plans call for some 4,000 megawatts by 2020.

Spain’s Iberdrola, Italy’s Enel, Czech power group CEZ and Energias de Portugal are developing wind energy projects in Romania, drawn by steady winds, a generous support scheme and a large market.

Romania also aims to divest 15% stakes this year in state-owned power and gas grid operators Transelectrica and Transgaz, as well as unlisted gas producer Romgaz.

In 2012 there will be more, with plans to start the process of listing minority stakes in hydro and nuclear power producers Hidroelectrica and Nuclearelectrica.

Further southeast, Turkey has a population approaching 75 million, a fast growing economy and is undergoing energy market liberalization. It is seen as a key transit market for central Asian gas into Europe.

It will need foreign investments to steer that growth, which includes the massive hydro and irrigation project as well as several large conventional power plant projects.

“In the mid-term, I would see Turkey as a counterpart in the European traded power and gas markets,” Neubauer says.

Europe’s more mature markets, such as Germany, Britain and France, by contrast, offer little prospect for growth.

Utilities there are caught between consumers baulking at higher energy costs and governments pressing them to spend billions on low-carbon energy production, something heightened by Germany’s U-turn on nuclear power.

“For the U.K. [energy companies], it’s an awfully difficult environment, because they are squeezed between a consumer backlash against rising prices, the regulator who doesn’t believe there is efficient competition in the sector and the politicians, who blame them for an increase in energy costs,” says Steven Jennings, a partner at PricewaterhouseCooper’s energy consultancy in London.

Reuters reporting by Henning Gloystein and Karolin Schaps in London, and Michael Kahn in Prague; additional reporting by Patryk Wasilewski in Warsaw, and Jodie Sellers in London; editing by Jason Neely.