Analysis of Central Europe’s Energy Sector (The Prague · PDF fileAnalysis of Central...

Central Europe Energy Partners

Analysis of Central Europe’s Energy Sector (The Prague report)

Executive Summary

Prepared by: All copyright belongs to:

Table of contents

1 Introduction .......................................................................................................................................1

2 EU-11 region overview .....................................................................................................................6

3 Stable economic growth ...................................................................................................................9

4 Security of supply in the EU-11 region .......................................................................................... 12

5 Key environmental protection requirements facing EU-11 ........................................................... 22

6 EU-11 energy sector challenges ................................................................................................... 27

7 EstimationofcostinidentifiedflagshipinvestmentareasinEU-11 ............................................ 45

8 Acronyms, abbreviations and units ............................................................................................... 51

9 Scope limitations and project context ........................................................................................... 53

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Prepared by EY Copyright by Central Europe Energy Partners, AISBL (CEEP)

1 Introduction

1.1 Formal introduction

Context of the Report

The Report has been prepared for Central European Partners AISBL by EY Business Advisory Poland according to an agreement dated December 21th, 2011.

CEEP initiative

CEEPisaninternationalnon-profitassociationincorporatedinBrussels.Itsprimarymissionistosupportintegrationof the Central Europe Energy Sector within the framework of common EU energy and energy security policy. CEEP members are energy sector companies, as well as universities and other research institutions from Central Europe. The over-riding goal is to combine the capabilities and experience, and enhance co-operation between energy sector companies and research organizations in the region of Central Europe. The purpose of this is to identify and advocate common problems and their solutions strengthen the region’s energy security and facilitate successful implementation of the EU energy and energy security policy.

Goal of the Report

The primary goal of the Report is to give an introductory overview regarding the state and challenges of the energy sector in the EU-11 countries. The secondary goal of the Report is to identify common areas and challenges of the EU-11 countries energy sectors. The Report covers EU-11 countries’ overview of key energy sector areas (i.e.electricitygenerationandtransmission,oilandgastransmission)aswellaskeyindustries’energyprofile(i.e.transportandsteelsector)withrespecttogoalsdefinedabove.ThisoverviewiscomplementedwithEU-11andEU-15regioncomparisoninidentifiedkeyissues.

Introductory character of the Report

The Report is an overview analysis of EU-11 countries’ energy sectors. Any conclusions drawn basing on the Report shouldbysubjecttofurtherdetailedinquiryinordertoconfirmandcomeupwithdetailedsolutionsconcerningactions in area of energy policy and energy investment decisions. The Report is intended to start a detailed and practical discussion concerning fundamentals and key goals of common EU-11 policy goals as well as detailed implementation instruments especially in area of common interest infrastructure investment projects.

Sources of data for the overview analysis

The analysis performed in course of preparation of the Report was primarily based on publically available data as well as on proprietary data based on experience in the energy sector assignments.

Report investment cost estimations

Investment costs estimations given in the Report are a macro-scale rough assessment of possible investment needs and are based on both available sources as well as EY expert assumptions. Without further detailed analysis and elaboration this estimation cannot be treated in any way as a valuation and used in course of investment planning and business decision making.

Introduction

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Copyright by Central Europe Energy Partners, AISBL (CEEP) Prepared by EY

1.2 Goal of the Report

The primary goal of the Report is to give an introductory overview of the state and challenges of the energy sector in the EU-11 countries. The secondary goal of the Report is to identify the common features and challenges of the EU-11 countries energy sectors in respect of adopting an integrated regional approach to energy sector development thatwouldbenefitEU-11MemberStates.

ThefollowingExecutiveSummarysumsupsomeofthekeyideaswhicharepresentedinthefinalReport.TheExecutiveSummaryisfocusedonaregionalEU-11perspectiveanddoesnotgointocountryspecificdetails,whichare presented in the Report. The Report covers EU-11 countries’ overview of key energy sector areas (i.e. electricity generationandtransmission,oilandgastransmission)aswellastheenergyprofileofkeyindustries(i.e.transportandsteelsector)withrespecttogoalsdefinedabove.ThisoverviewiscomplementedwithaEU-11andEU-15regionalcomparisonintheidentifiedkeyissueareas.

Item 1: EU-11 countries

Source: EY

Introduction

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1

1.3 Long-termenergysectorefficiency

As presented in the framework below, the conducted analysis is primarily based within three main energy policy goalswhichformadefinitionoflong–termenergysectorefficiency.Theseare:

1) Stable economic growth,

2) Security of supply,

3) Environmental protection.

Item2: Long-termenergysectorefficiencydefinition

Secu

rity

of s

uppl

y

Environment protection requirem

ents

Stable economic growth

Long-termEnergySector

Efficiency

1

2 3

1 Stable economic growth f A growth rate allowing EU-11 countries to reach economic

development convergence with the EU-15 countries in a quick and sustainable way. Energy sector contributes to economic growth stability by achieving competitive energy price levels whichpromoteinvestmentorinhibitinvestmentoutflow.

2 Security of supply f Ability of a country or a region to provide conditions for long termsafeandsecuredsupplyofprimaryandfinalenergysources to customers.

3 Environment protection requirements f FulfillmentofEUregulationsaimedatdevelopingconditions

for sustainable development and environment preservation in EU-27 countries

4 Long-termenergymarketsefficiency f A state in which all 3 of the above goals are achieved or a

policy mix is chosen that balances these goals if full realization of all of them at the same time is impossible.

Source: EY

The goals described above create an energy policy mix, where achievement of one goal can be traded off for another. For illustrative purposes, a possible trade-off between goals mentioned above may be loosening environmental protection regulation (partial resignation from the third goal) in order to increase security of supply based on indigenous fossil fuel and secure relatively low energy prices (achieving goals 1 and 2 combined).

AccordingtoEUenergypolicyputforwardinthedocument‘AnEnergyPolicyforEurope’-COM(2007)1,allofthe goals can be achieved with relatively low or no trade-off effect between them. In the mentioned document, the EUidentifiesSustainability,SecurityofSupply,andCompetitivenessasthemainenergychallengeswhichcanbetranslatedintothepolicygoalsasidentifiedinItem2.

OneofthekeyissuesputinthefinalReportandthisExecutiveSummaryiswhetherEU-11economicandenergysector conditions allow for all of the three goals to be implemented in the EU-11 in the same way as it may be possible in the EU-15. The Report’s initial working hypothesis is that some kind of trade-off between the goals above maybeinevitableintheEU-11regionunlessnewfinancingmechanismsforthedevelopmentofenergysectorsinthis region are introduced.

Key points

f Long-termenergysectorefficiencyisimportantfortheEU-11regiontocontinueeconomicconvergencewith the EU-15 average.

f In the long run, all of the energy policy mix goals should be achieved and sustained. f Due to EU-11 economic and energy sector characteristics, in the short and mid-term a trade-off betweensomeoftheenergypolicygoalsmaybeinevitable,unlessnewfinancingmechanismsforthedevelopmentofenergysectorsinthisregionareintroduced.ThefollowingfinalversionoftheReportandthis Executive Summary are aimed to give some introductory considerations on this issue.

Introduction

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1.4 Geographical scope of the Report

TheanalysisgivenintheReportdepictstheenergysectorsofagroup,whichcomprisesthefollowingcountries:

f Bulgaria,

f Croatia,

f Czech Republic,

f Estonia,

f Hungary,

f Latvia,

f Lithuania,

f Poland,

f Romania,

f Slovakia,

f Slovenia.

ThemainrationaleforsuchgroupingoftenEUMemberStatesandCroatia(currentlyanaccedingcountrywithplanned accession on 1 July 2013), apart from geographical proximity, is the similarity in the level of economic development as well as the common challenges for the energy sector. Both the GDP per capita level and GDP growth rates of the analysed countries are substantially different from the EU-15 and show a different starting point in termsoffacingtoday’sandfutureenergysectorchallenges,initiallydefinedinpoint1.3.

Item 3: EU-11 countries and EU-11 and EU-15 GDP comparison (EUR per capita (PPP) and % (GDP growth))

EU-11 countriesEU-11 and EU-15 GDP comparison in 1995-2010 (EUR per capita (PPP) and % (GDP growth))

Estonia

Latvia

Lithuania

Poland

SlovakiaCzechRepublic

Hungary Romania

Bulgaria

Slovenia

Croatia 0

2

4

6

8

10

0

5,000

10,000

15,000

20,000

25,000

30,000

EU-15 EU-11 EU-15 EU-11

EUR, PPP %

GDP per capita average in 2010

GDP per capita CAGR in1995 -2010

Source: EY

Introduction

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1.5 Global energy trends

World energy demand

According to a central IEA (International Energy Agency) scenario (New Policies Scenario) global energy demand will increase by as much as 40% till 2035 comparing to 2009. According to the scenario, fossil fuels (oil, gas, solids) will still cover the vast majority of the energy demand with a 75% share in 2035. Nuclear and renewable energy will account for the rest of the primary energy mix.

Up to 90% of the increase is estimated to be attributed to non-OECD countries. EU primary energy demand is estimated to rise by ~5% over the 2009-2035 period with a CAGR of 0.2%. Europe’s energy mix will also differ from the global average with more reliance on oil & gas, renewables and less on solids (55%, 23% and 8%, respectively).

International energy trade

Energy sector’s interconnectivity importance increases as inter-regional trade of oil and gas is estimated to rise by ~30% and ~100%, respectively, by 2035 comparing to 2009.

OECD countries share of inter-regional fossil fuel trade is forecasted to decline from 42% to 29% in 2035 with strong focus on gas and oil while Asian countries share will rise substantially resulting in their leading role as an importer of all fossil fuels (oil, gas, solids).

As international energy market will be getting tighter it would be vital for EU to further develop inter-connectivity capabilities, diversify sources of supply and at the same time take actions to limit its import dependency.

CO2 emissions Energy related CO2 emissions are estimated to account for 72% of total CO2 emissions. Global energy related CO2 emissions are estimated to rise to 36.4 Gt in 2035 (a 20% increase comparing to 2010) with EU’s share of ~8%.

According to projections a 0.8 Gt (22%) decrease of CO2 emission in EU between 2010 and 2035 will be overshadowed by a combined increase of 5.4 Gt of China, India andMiddleEastalone.ThereisarealriskthatEUCO2 policies may prove ineffective in terms of changing global emissions landscape as over 90% of emissions will take place outside EU (over 2010-2035 period cumulative EU emissions will be ~35% of China’s alone).

Investment needs

According to estimations ~USD 38 trillion of investments in energy supply infrastructure (both transport/transmission and production) is required over the period of 2010-2035.

Over 95% can be attributed to power, oil and gas investments with estimated shares of 45%, 27% and 25% respectively.

EuropeanOECDcountrieswillaccountfor12%ofthefigurewith~trillionUSD4.5 of investments needed over the 2011-2035 period (2010 dollars).

Source: Based on IEA World Energy Outlook 2011 “New Policies Scenario”

Introduction

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2 EU-11 region overview

2.1 Macroeconomic characteristics

f The EU-11 countries are inhabited by nearly 21% of EU 28 population (EU 28 - European Union countries with Croatia). The EU-11 economies account for 6.8% of GDP and 15.6% of energy consumption in the EU 28.

f TheeconomicstandingoftheEU-11isstillfarbehindtheEUaverage–averageGDPpercapitaofkEUR9.0 in 2010 represented only 32% of the EU-15 average (EU-11 average GDP in PPP in 2010 amounted to k EUR 14.7 which represented 54.9% of the EU-15).

Item 4: EU-15, EU-27 and EU-11 key info

EU-15

f GDP per capita (nominal, 2010) - k EUR 28.3

f GDPpercapita(PPP,2010)–kEUR26.9

f 1995-2010GDPCAGR–3.11%

EU-27



f 1995-2010GDPCAGR–3.43%

EU-11



f 1995-2010GDPCAGR–5.66%

Source: Eurostat

f TherehasbeenasignificantconvergencebetweenEU-11andEU-15economiesinthelastdecade.Atthebeginning of the transition, EU-11 GDP declined as a result of economic restructuring, but since 2000 the EU-11/EU-15 GDP per capita ratio has been rising steadily.

Item 5: GDP per capita in EU-11 and EU-15

GDP per capita in EU-11 and EU-15 (EUR, nominal) in 1995-2010

GDP per capita in EU-11 and EU-15 (EUR, PPP) in 1995-2010

0%

20%

40%

60%

80%

100%

0

10

20

30

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

kEUR

EU -11 (left axis) EU -15 (left axis) EU -11/EU-15 ratio (right axis)

0%

20%

40%

60%

80%

100%

0

10

20

30

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

kEUR

EU-11 (left axis) EU-15 (left axis) EU-11/EU-15 ratio (right axis)

Source: Eurostat

EU-11 region overview

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Item 6: Comparison of economy structure, EU-11 and EU-15

Economy structure in EU-11 in 2010 Not only the level of economic development, but also the structure of EU-11 and EU-15 economies differs substantially.

f In the EU-11 agriculture and industry contribution to GDP is much higher than in the EU-15. The opposite is true for the services sector contribution.

f As energy intensity of the industry sector is generally higher than in the services sector, it implies higher energy intensity of GDP in EU-11 than in EU-15.

f It is expected that EU-11 countries will gradually converge to the structure currently present in EU-15 countries with almost 75% of GDP created in services.

f It should be noted, however, that since 2000 the share of industry in value added in the EU-11 remains stable. It means that the possibility of reduction of energy demand though the transformation of the economy to the service-based one may be lower than commonly assumed.

4%

34%

62%

Agriculture

Industry

Services

Economy structure in EU-15 in 2010

2%

24%

74%

Agriculture

Industry

Services

Source: Eurostat; Data for Croatia from 2009

Item 7: Comparison of energy sector share in gross value added, EU-11 and EU-15 in 2000-2010

Energy share in the GVA in 2000-2010 f Differences in terms of macroeconomic characteristics of EU-11 and EU-15 are also reflectedintheshareoftheenergysectoringrossvalue added in both regions.

f The importance of the energy sector for the EU-11 economies is relatively higher than it is in EU-15.

It means that macroeconomic consequences of any disturbances in the energy sector may be stronger in the EU-11 than in the EU-15.0%

1%

2%

3%

4%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

EU-11* EU-15

Source: Eurostat; * Excluding Croatia and Romania due to lack of data.


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f EU-15 and EU-11 differ considerably in terms of the household consumption structure. This indicates not only a gap in economic development, but also helps to predict future changes in the structure of energy demand.

f ItmaybeexpectedthattherelativeimportanceofexpensesontransportinEU-11willincreasesignificantlyin the next decades (faster than GDP), which implies high growth of demand for certain types of energy sources from the transportation sector (e.g. oil).

Item 8: Comparison of household consumption structure, EU-11 and EU-15 (average weighted by population), 2011

32%

17%

6%11% 10% 11% 12%

19% 15%

5%12% 13% 16%

20%

0%

10%

20%

30%

40%

Food and beverages,

tobacco

Housing, water, electricity, gas and

other fuels

Health and education

Communications and other goods

and services

Clothing and household

(equpiment, maintenance)

Transport Recreation and culture,

restaurants and hotels

EU-11 EU-15

Source: Eurostat

Key points

f EU-11 and EU-15 differ in terms of the level and structure of economic development. Those differences will have an impact on future energy demand development.

f Higher share of the energy sector in gross value added in EU-11 in comparison with EU-15 means that energy sector stability is relatively more important for ensuring sustainable economic growth in EU-11 than in EU-15.

f Reduction of energy demand through the relative decrease of the industry sector share in GVA in the EU-11maybelow,moreover,asignificantshiftofdemandforenergyinthetransportationsectorinthenextdecades is expected.


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3 Stable economic growth

Fromthepointofviewofeconomicdevelopment,long-termenergyefficiencyshouldnotcreateinhibitionsforstableand sustainable economic growth. In other words, realization of energy security and environmental preservation goals should not have any substantially adverse effects on GDP dynamics. The following considerations concentrate onkeyenergydemandimplicationsofGDPgrowthinEU-11aswellasonidentificationofpossibleshort-andmid-term inhibitions to GDP dynamics resulting from unbalanced energy policies.

Item9: Long-termenergymarketefficiencydefinition-stableeconomicgrowth

Secu

rity

of s

uppl

y


ents



Efficiency

1

2 3








Source: EY

3.1 EU-11 GDP projections and energy demand implications

Item 10: Forecasts of EU-11 and EU-15 convergence

GDP per capita in 2010-2035 (in k EUR PPP) Asitwasshowninthepreviouschapter,significanteconomic convergence between EU-11 and EU-15 economies has been observed in the last decade. It is forecasted that it will continue in the years to come.

f According to IHS Global Insight analysis, in 2035 GDP per capita in EU-11 is going to reach almost 90% of EU-15 value.

f The pace of economic growth is predicted to differ across EU-11 countries. The slowest economic growth is forecasted for Slovenia, which currently is an outstandingly developed country within EU-11 group.

f Nevertheless, median of annual growth predicted in EU-11 countries amounts to 3.7%, while GDP per capita in EU-15 is forecasted to grow 1.4% annually.

0%20%40%60%80%100%

0

10

20

30

2010

2015

2020

2025

2030

2035

k EUR PPP

EU-11 (lef axis) EU-15 (left axis) EU-11/EU-15 ratio (right axis)

% of EU -15

GDP per capita growth, PPP, CAGR in 2010-20304.4% 4.2% 3.9% 3.8% 3.8% 3.7% 3.6% 3.3% 3.3% 3.2%

2.2%

3.7%

1.4%

0%

1%

2%

3%

4%

5%

Lithuania

Bulgaria

Slovakia

Latvia

Estonia

Poland

Czech R

ep.

Hungary

Rom

ania

Croatia

Slovenia

EU-11

EU-15

Source: IHS Global Insight


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SignificantdifferencesbetweenEU-11andEU-15intermsofthefuturepaceofeconomicdevelopment,togetherwith differences in current characteristics of economies mean that those groups of countries will face different challenges for their energy sectors.

Item 11: Relation between GDP and gross electricity production in the EU-27

GDP and electricity production level in 1996-2010 (1996=100%)

Aggregated energy consumption usually rises in line with economic growth, but at a lower rate (between 0.4 and 0.7 of GDP growth) [2010, International Energy Agency, World Energy Outlook]. Historical data for EU-27presentedontheleftconfirmsthisobservation.It has been especially true in the period of recent financialcrisisinEurope.In2009,GDPandelectricityproduction in the EU-27 fell by more than 4 percent comparing to 2008.

The high rate of economic development expected in the EU-11 will probably lead to systematic increases inenergydemand.Takingintoaccountthesignificantindustry share in the EU-11 GDP, as well as the higher energy intensity of the region, projected GDP dynamics wouldbehardwithoutsignificantenergydemandincrease.

From that point of view, the long-term EU-11 energy policy mix should pay special attention to a competitive energy sector with long term- energy supply security. That kind of focus, may make it a lot harder for the EU-11 to adopt environmental preservation goals (often meaning radical changes in energy balances) according to the same implementation rules as EU-15.

100%

110%

120%

130%

140%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Electricity production GDP

GDP and electricity production dynamics in 1996-2010 (y/y %)

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Electricity production GDP

Source: Eurostat

3.2 EU-11 GDP growth potential inhibitions stemming from the energy sector

As indicated above an unbalanced policy mix may lead to GDP dynamics inhibitions in the short and medium term. In case of EU-11, higher demand for energy together with strict rules related to environment protection (carbon pricing, RES targets etc.) will inevitably put a pressure on energy pricing in the EU-11. According to EU estimations in the 2050 Energy Roadmap, in most decarbonisation scenarios, electricity prices will rise up to 2030andstartfallingonlyafterthatdate.IntheshorttermelectricitypriceincreaseinEU-11willbeinfluencedbytheclosing gap between energy demand and supply as well as relatively high carbon intensity of energy production. In the medium term, it will be due to scale and type of investment needed in the region. For the EU-11 region this can beespeciallydifficultintermsofeconomycompetitivenesslevels,sinceelectricitypricesintheregionarealreadyrelatively high comparing with EU-15 (see Item 12).


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Item 12: Electrical energy prices in EU-11 countries and other Member States in 2011 (EUR/kWh, PPP, electricity prices for yearly consumption between 2.5 and 5 MWh)

0.09

0.09

0.09 0.10

0.10

0.10 0.11 0.12

0.12

0.12 0.13

0.13

0.13

0.13

0.14

0.14

0.14 0.15

0.15

0.15 0.

16 0.16

0.16 0.17 0.

18 0.19 0.20 0.

21 0.22

0.17

0.12 0.13

0

0.05

0.1

0.15

0.2

0.25

Fran

ce

Finl

and

Den

mar

k

Est

onia

Nor

way

Sw

eden

Gre

ece

Net

herla

nds

Luxe

mbo

urg

Por

tuga

l

Aus

tria

Slo

veni

a

Cro

atia

Ger

man

y

Italy

Uni

ted

Kin

gdom

Bel

gium

Irela

nd

Latv

ia

Bul

garia

Rom

ania

Cze

ch R

epub

lic

Lith

uani

a

Spa

in

Pol

and

Cyp

rus

Slo

vaki

a

Hun

gary

Mal

ta

EU

-11

EU

-15

EU

-27

EUR/kWh, PPP

Source: Eurostat; Values for EU-11 and EU-15 have been calculated as weighted averages of the respective countries

Moreover,ensuringenergysecuritywhilemeetingenvironmentalrequirementsmayrequiresuchcapitalexpenditures(radicalenergybalancechange)invariousareas(e.g.fiscalpolicy,crowdingoutofotherinvestmentseffect, etc.), that will be hard to achieve for national economies of EU-11 countries, which may lead to slower pace and lower sustainability of economic growth.

Addingtothat,itshouldbestressedthatduetolackofowntechnologiesinEU-11,significantamountofcapitalinvestmentsintheenergysectorwillflowoutsidetheregion.Thatwouldn’tchangeevenwithsubstantialEUfinancingforEU-11energyprojects.RecentEYresearchshowsonly~25%1 of CAPEX in the wind energy sector stays in the country where investment is realized. Therefore, in order not to impair GDP dynamics of the EU-11 by investment aiming at radical energy balance change, adequate EU funding may have to be complemented by new energytechnologiesknow-howinflowthatwouldprohibitthemajorityofCAPEXflowingoutoftheregion.

Key points

f In the next decades, EU-11 countries will continue to catch-up in terms of economic development to the EU-15.ItwillputsignificantandrelativelyhigherthaninEU-15pressureforEU-11’senergysectorsinterms of growing demand as well as environmental issues. In the short and medium term, this in turn may have a negative impact on the stability of economic growth in the EU-11.

f In order not to impair GDP dynamics of the EU-11 by investment aiming at radical energy balance change, adequate EU funding may have to be complemented by new energy technologies know-how inflowthatwouldprohibitmajorityoftheCAPEXflowingoutoftheregion.Otherwiseitmaybehardtoimplement EU policies in the EU-11 on the same basis as EU-15 without adverse effects on the region’s economies in the short- and mid-term.

1 Based on a study for Poland


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4 Security of supply in the EU-11 region

TheCommissionoftheEuropeanCommunitiesstatesthatdespitethefactthateachMemberStateisresponsibleforitsownsecurity,solidaritybetweenMemberStatesisabasicfeatureofEUmembership.Forthesereasons,energy security of the EU and EU-11 alone should be an issue of common EU concern. As indicated earlier, for the purposeoftheReport,securityofsupplyisdefinedasinItem13below.

Item13:Long-termenergymarketefficiencydefinition-securityofsupply

Secu

rity

of s

uppl

y


ents



Efficiency

1

2 3








Source: EY

InlinewithEUenergysecurityprioritiesstatedintheSecondStrategicReview:AnEUEnergySecurityandSolidarityActionPlan-COM(2008)781,onecandistinguish3keyareasofconsiderationintermsofsecurityofsupply as presented and described in Item 14 below. Despite a clear need for common energy policy for the EU, substantial differences in EU-11 and EU-15 economic conditions can by distinguished, that call for adopting elasticity inimplementingcommonenergypolicygoalsandinstrumentsinthefieldofenergysecurity.

Item 14: Key security of supply considerations

Energy demand satisfaction

A

This consideration will be crucial especially in the EU-11 where primary energy demand is estimated to rise by a range of between 10% and 17% by 2025, whereas in the EU-15 a stable or declining primary energy demand is projected.

Security of supply policy for the EU-11 region should be capable to guarantee long-term energy availability. According to EU energy security policy it should be addressed by i.e. by externalrelationsmanagement,energyefficiencymeasures,preparing oil and gas crisis response as well as optimizing utilization of EU’s indigenous energy resources.

For EU-11 countries which have lower energy consumption per capita levels and often are highly import dependant withlittlediversificationpossibilities(oilandgas),optimizingindigenous energy resources and common international stance on energy issues may be pivotal.

Security of supply in the EU-11 region

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Import limitation and diversification

B

EU is a substantially energy imports dependent region. As indicatedabovesignificantimportdependencymayprovedangerous to both EU and EU-11 energy security. It may be especiallyseriousfortheEU-11regionwithitslackofsufficientoilandgasinfrastructurethatwouldallowdiversificationof directions of energy supply. As oil and gas are to retain a strong presence in the EU’s primary energy balance, addressing import dependency will probably remain an issue in EU’s energy strategy in the long term.

Taking actions to reduce growth of the import dependency and diversify both energy sources and directions of energy supply are crucial to long term EU-11 security as well as EU as a whole. As a response to these challenges EU plans to become a technological leader in RES and intends to increase RES share in the primary energy mix even up to 60% by 2050.

Apart from the RES initiative, EU-11 countries energy import dependency tackling may be feasible also by allowing maintaining a substantial share of energy from indigenous solids even at the expense of not meeting interim decarbonisation targets.

Secondly, nuclear energy must remain a real alternative for the EU, especially from the point of view of short-term operational security of energy networks with solid’s share diminishing and no other indigenous fuels to be used for a base load generation.

Infrastructure in place

C

In case of EU’s systemic long-term import dependency (oil and gas)infrastructuredevelopmentallowingimportdiversificationiscrucial.BothECandMemberStatesareaddressingthisissue on multiregional and national levels respectively.

According to the Conclusions of EC meeting in February 2011 no European country after 2015 should see its energy security jeopardized by lack of the appropriate connections. In the sametimeithasbeenconfirmedthatan‘importantfinancingcosts for infrastructure investments will have to be delivered by the market’. Furthermore, according to the conclusions someprojectsthatwouldbejustifiedfromasecurityofsupply/solidarity perspective, but are unable to attract enough market-basedfinance,mayrequiresomelimitedpublicfinancetoleverage private funding.

However,inlightofrecenthugeuncertaintyonthefinancialmarket regarding especially EU economic conditions, risingsufficientprivatefinancinginordertoprovideneededinfrastructuremayprovedifficultandastrongerfinancialdirectaid from the EU budget may be needed. It may especially be an issue in the EU-11 countries where overall investment risks are perceived as greater than in the EU-15.


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4.1 EU-11 current energy demand characteristics

MostoftheEU-11countriesarecharacterizedbylowergrossinlandconsumptionofenergypercapitathanthe EU-15 average. In 2010, average gross inland consumption per capita in EU-11 accounted for only 70% of the EU-15 value.

Item 15: Gross Inland Consumption per capita, toe in 2010

1.67 1.94 2.03 2.09 2.37 2.60 2.66 3.25 3.554.26 4.55

2.603.73

012345

Rom

ania

Croatia

Latvia

Lithuania

Bulgaria

Hungary

Poland

Slovakia

Slovenia

Czech R

ep.

Estonia

EU-11

EU-15

toe per capita

Source: Eurostat

Item 16: Comparison of gross inland consumption structure in EU-11 and EU-15

Gross Inland Consumption mix in EU-11 in 2010 Gross inland consumption in the energy structure in EU-11countriesdifferssignificantlyfromtheEU-15structure.Threemaindifferencesin2010were:

f significantlyhighershareofsolidsinEU-11thanin EU-15 (almost 36% compare to only 12.3%, respectively)

f lower share of nuclear in EU-11 than in EU-15 (8.5% vs. 14.4%)

f considerably lower share of petroleum products in EU-11 than in EU-15 (25.4% compare to over 37%).

Both the higher share of solids and the lower share of nuclear in EU-11 gross inland consumption of energy are major grounds for higher carbon intensity of the economy (emissions of CO2 in relation to energy consumption).

As the gross inland consumption of energy structures in EU-11 as well as EU-15 are expected to follow the desirable energy-mix structure presented in European Commission analysis (‘A Roadmap for moving to a competitivelowcarboneconomyin2050’),significantchanges are required. This prognosis shows that renewable sources may be responsible over half of the energy consumption in 2050 (approximately 52% share intotalenergy-mix).Anothersignificantassumptionisthe small share of solids (2.7% share) and nuclear (3.3% share).

35.9%

25.4%

20.4%

9.8%

8.5%

Solids

Petroleum productsGas

RES

Nuclear

Total: 277 Mtoe

Gross Inland Consumption mix in EU-15 in 2010

37.1%

26.2%

14.4%

12.3%

10.0%


Nuclear

Solids

RES

Total: 1,486 Mtoe


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Average energy consumption mix in EU-27 in decarbonisation scenarios - Roadmap to 2050

Achieving‘Roadmap2050’targetswillbemoredifficultfor the EU-11 group than for EU-15, mainly due to the currently higher share of solids (almost threefold). Moreover,over50%shareofrenewablesourcesmaybeachievedthroughsignificantinvestmentprogrammes,whichcanbehardertofinanceforEU-11countriesthanfor EU-15.

Alternatively, as the major aim of the ‘Roadmap 2050’ is building a low-carbon economy, it may be easier to achieve this target for EU-11 by using clean coal technologies. This would also require spending on new technology, still it may require less capital investments thansignificantchangeoftheenergy-mix.

18.0%

23.8%

3.3%2.7%

52.2%


Nuclear

Solids

RES

Source: Eurostat, Impact Assessment to Roadmap for moving to a competitive low carbon economy in 2050

Whentakingintoconsiderationfinalenergyconsumption,allEU-11countriesrecordlowerconsumptionpercapitathanaveragevalueforEU-15.DiscrepanciesbetweenaveragevalueoffinalenergyconsumptioninEU-11and EU-15countriesarehigherthandifferencesingrossinlandconsumption.Duetothis,averagefinalenergyconsumption to gross inland consumption ratio in EU-11 is lower than in EU-15, which indicates smaller energy efficiencyofEU-11.

Item 17: Final energy consumption, toe per capita, 2010

1.05 1.17 1.43 1.45 1.67 1.74 1.91 2.13 2.16 2.43 2.441.64

2.47

0

1

2

3

Rom

ania

Bulgaria

Croatia

Lithuania

Hungary

Poland

Latvia

Slovakia

Estonia

Slovenia

Czech

Republic

EU-11

EU-15

toe per capita

Source:Eurostat

Item18:ComparisonoffinalenergyconsumptionstructureinEU-11andEU-15

Final Energy Consumption mix in EU-11 in 2010 Thefinalenergyconsumptionstructurein2010showed similar differences between EU-11 and EU-15 averages as the structure of gross inland consumption ofenergy:

f likewise gross inland consumption of energy structure,EU-11structureoffinalenergyconsumption is characterized by higher share of solid fuels (11.8% vs. only 3%) and lower share of petroleum products (30.3% vs. 41.2%) than EU-15

f as a result of different determinants of energy policy in the past decades, EU-11 group has higher share ofheatinfinalenergyconsumptionthanEU-15average (9.4% compare to almost 4%).

30.3%

21.2%17.4%

11.8%

9.9%

9.4%

Petroleum products

Gas

Electricity

Solids

RES

HeatTotal: 174 Mtoe


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Final Energy Consumption mix in EU-15 in 2010 Theprojectedtrendofpotentialchangeinfinalenergyconsumptioninupcomingyearsinvolves:

f furtherchangeofEU-11finalenergyconsumption- it is expected that share of petroleum products will rise (as the development of the transport sector will follow) and solids share will fall (as the EU strategy documents suggest decrease in solids use)

f as European Commission support expansion of cogeneration in order to save energy and combat climate change, the heat share in both EU-11 and EU-15 is expected to increase.

41.2%

23.8%

21.9%

6.3%3.8%

3.0%

Petroleum products

Gas

Electricity

RES

Heat

SolidsTotal: 980 Mtoe

Source: Eurostat

Duetosignificantshareofsolidfuelsinenergymix,EU-11countriesarecharacterizedbyhighcarbonintensityofenergyconsumption.However,EU-15countrieshavemoresignificantimpactontheenvironment,byemittingmore CO2 per capita than EU-11 countries. It is a result of higher consumption of energy in EU-15 countries when compared to EU-11 countries.

Item 19: Comparison of economy carbonization, EU-11 and EU-15

Carbon intensity of Gross Inland Consumption in 1995-2009 (t of CO2 in energy sector / toe of GIC)

Greenhouse Gas Emissions per capita in 1995-2009 (t of CO2)

3.0 2.9 2.7 2.62.3 2.2 2.2 2.1

0

1

2

3

4

1995 2000 2005 2009

t of CO2/toe

EU-11 EU-15

9.98.8 9.3

8.5

11.1 11.0 10.79.4

0

2

4

6

8

10

12

1995 2000 2005 2009

t of CO2

EU-11 EU-15

Source: Eurostat

Key points

f Achievingdesirablestructureofenergy-mixin2050willbemoredifficultforEU-11groupthanforEU-15,duetothepresentlyhighershareofsolids,whichimportanceshouldbesignificantlydecreased.

f Import dependency analysis shows that indigenous fuels usage supports reducing import dependency. EU-11countriesarecharacterizedbysignificantsolidfuelsresourcesthatmaysatisfyenergydemandincrease, fostering its security of supply.

f CurrentgrossinlandconsumptionofenergyandfinalenergyconsumptionpercapitainEU-11areconsiderably lower than EU-15 levels. It is expected that EU-11 ratios levels will increase, following the convergence of the economy with the EU-15 average.


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4.1.1 Forecasts of energy demand

Item 20: Forecasts of Gross Inland Consumption in EU-11

A) PRIMES Baseline scenario 2009, Mtoe In this section, three forecasts of energy demand in the EU-11arepresented:

f EuropeanCommission’sPRIMESmodelBaselinescenario, assuming continuation of contemporary energy policies (existing until April 2009).

f EuropeanCommission’sPRIMESmodelReferencescenario assuming implementation of some additional measures adopted between April and December 2009 in the EU.

f EY’sforecastfromsimplifiedpanel-datamodelbased on recent data and current macroeconomic prognoses.

PRIMESmodelexpectthatinyears2010-2030GrossInland Consumption of EU-11 will increase by 10-13%. According to the EY’s model, the growth will be higher (17% till the 2030 and 18% till the 2035).

EY’s estimates are in line with current IEA forecasts. According to IEA’s “World Energy Outlook 2011” medium scenario (New Policies Scenario), European OECD countries (as an aggregate) will increase their energy demand by 8% by 2035, while in non-OECD East Europe countries energy consumption will increase by 30% (six countries out of EU-11 are part of the Europe OECD aggregate, rest of them were included in the analysis for non-OECD East Europe).

While EY’s GIC growth forecasts are relatively high, they imply that in the analyzed period energy intensity of GDP in EU-11 will drop by ca. 48%, but still will be higher than the current EU-15 ratio.

Differences in forecasts show the scale of uncertainty in predicting future GIC growth path. Nevertheless, the growth of energy demand in the next decades in EU-11 seems to be inevitable.

276294 306 312 311

0

50

100

150

200

250

300

350

2010 2015 2020 2025 2030

Mtoe

2030/2010 = 13%

B) PRIMES Reference scenario 2009, Mtoe

276293 300 305 303

0

50

100

150

200

250

300

350

2010 2015 2020 2025 2030

Mtoe

2030/2010 = 10%

C) Ernst &Young forecasts of EU-11 Gross Inland Consumption till 2035, Mtoe

277291

308 319 324 326

0

50

100

150

200

250

300

350

2010 2015 2020 2025 2030 2035

Mtoe

2035/2010 = 18%

2030/2010 = 17%

Source: EU energy trends to 2030, European Commission, 2010, Own elaboration, based on Eurostat data and Global Insight forecast, *Croatia is not included in above analysis

Key points

f Gross Inland Consumption in EU-11 countries will grow by 10-17% till 2030.

f Forecastedgrowthofenergydemandwillrequiresignificantinvestmentsinnewcapacitiesand/orwilllead to higher import dependency of the region.


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Item 21: Comparison of EU-11 and EU-27 energy consumption forecasts

A) Baseline scenario 2009 (2010=100%) f AccordingtoPRIMESmodel,energyconsumptionpath will differ in EU-11 and EU-27. While the growth of GIC in EU-11 will reach 10-13% in 2010-2030, in case of EU-27, the GIC change will be negligible (baseline scenario) or even negative (reference scenario).

f It means that in case of EU-15 countries no increase, or decrease, of GIC in the next decades is forecasted.

f The main factor lying behind those differences is the forecasted pace of economic development in EU-11 and EU-15 (see Chapter 3.1) as well as future changes of urbanization rate (which currently is relatively low in EU-11).

f Other factors determining GIC behaviour, such as demographic developments or changes in the structure of the economy will restrain rather than accelerate the pace of GIC growth in the EU-11 (for example, it is forecasted that the population in EU-11 will shrink by ca. 5% till the 2035).

90%

95%

100%

105%

110%

115%

2005 2010 2015 2020 2025EU-11 EU-27

B) Reference scenario 2009 (2010=100%)

90%

95%

100%

105%

110%

115%

2005 2010 2015 2020 2025

EU-11 EU-27

Source: EU energy trends to 2030, European Commission, 2010

Key points

f Accordingtothisanalysis,energyprospectsforEU-11differsignificantlyfromtheforecastsforthewholeEU-27. It is predicted that EU-27 countries will increase their Gross Inland Consumption by roughly 3% (baseline scenario) or even that energy consumption will slightly decrease (reference scenario) within the horizon of 2030.

f It means that EU-11 countries will have to face investment costs of new capacities as well as the risk of growing import dependency, while this will not be the case in EU-15.

f Alternatively, to satisfy growing energy consumption, EU-11 countries may invest in clean coal technologies, which comprises reducing import dependency (by using indigenous solids reserves) and potentially lower expenses than considerable change of the energy-mix structure (as proposed in key EU strategy documents).


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4.2 Import dependency

In general, energy import dependency of EU-11 is lower than of EU-15 and EU-27 (37%, 57% and 54%, respectively).Butthissituationmaychangeinthenextdecades:

f While import dependency in Estonia, Romania and the Czech Republic is below 30%, other countries suffer considerably high dependence on import - e.g. Lithuania, after closing its nuclear power plant in Ignalina is forced to cover its energy needs in 84% by import.

f Low import dependency of some of EU-11 countries is a result of large own resources and export of solid fuels. But the implementation of EU environmental protection regulations will result in lowering of the importance of solids in the energy mix, thus leading to an increase of total import dependency in the region.

CurrentlybothEU-11andEU-15facesignificantdependencyonimportsofpetroleum(approximately90%),andgasproducts (more than 60%).

Item 22: EU-11 energy dependency in each country in comparison with EU-15 and EU-27 averages in 2010

EU-11 countries import dependency levels in comparison to EU-15 and EU-27, 2010

EU-11 and EU-15 import dependency of selected fuels, 2010

13%

22%26%

32%

41%44%

49%52%

58%63%

84%

37%

57%54%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Esto

nia

Rom

ania

Cze

chR

epub

licPo

land

Bulg

aria

Latv

ia

Slov

enia

Cro

atia

Hun

gary

Slov

akia

Lith

uani

a

EU-1

1

EU-1

5

EU-2

7

2.3%

60.0%

89.2% 90.7%

66.5%61.5%

0%10%20%30%40%50%60%70%80%90%

100%

EU-11 EU-15 EU-11 EU-15 EU-11 EU-15

Solids Petroleum products

Gas

Source: Eurostat

Item 23: Petroleum products dependency in EU-11 in 2010

EU-11 petroleum products import dependency, 2010*

Structure of EU-11 oil and NGL import, 2010

7.5

70.863.1

-0.2

01020304050607080

Primary energy production

Net import Others Gross Inland Consumption

Mtoe

86%

6%

5% 2%1%

Russia

Kazakhstan

Azerbaijan

Norway

Others

Source: Eurostat; *Others include: recovered products, stock changes, bunkers


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EU-11regionishighlydependentonimportofpetroleumproducts(mainlycrudeoil):

f Primaryenergyproductionofpetroleumproductscoversonly10.5%oftheEU-11energyneeds–almostallof the remaining is imported from other countries.

f Russia is the main provider of crude oil and NGL with over 86% share of the EU-11 imports.

f Other countries provide less than 15% of total import of this energy source.

f For Lithuania and Slovakia, Russia is the only exporter of petroleum products. The country with the lowest dependency on the supply from Russia is Romania, although still 46% of Romania’s total imports comes from this country.

ThesecurityofsupplyforEU-11countrieswillrequirefurtherinvestmentsaimedatthediversificationofitspetroleum product supply sources.

Item 24: Gas import dependency in EU-11 in 2010

EU-11 gas import dependency, 2010* Structure of EU-11 gas import, 2010

17.0

56.737.7

2.0

0

10

20

30

40

50

60

Primary energy

production

Net import Others Gross Inland Consumption

Mtoe

88%

3%2% 7%

RussiaGermanyNorwayOther

Source: Eurostat; *Others include: recovered products, stock changes, bunkers

GasimportdependencyintheEU-11islowerthaninthecaseofpetroleumproducts,butstillitissignificant:

f Primary energy production of gas products covers ca. 30% of the EU-11 energy needs.

f AlthoughdependencyofEU-11regionongasislowerthanonpetroleumproducts,diversificationstructureisquitesimilar:Russiaisthemainproviderofgas–itsatisfiesover88%oftheEU-11externalgasneeds.

Similar as in the case of petroleum products, EU-11 countries will need further investments aimed at diversifying its external gas supply sources.

Key points

f EU-11 group is characterized by relatively low import dependency of solids, but due to EU regulations its importance in the energy consumption will be diminishing.

f ImportdependencyonpetroleumandgasproductsissignificantintheEU-11,moreoveritheavilydepends on one direction of supply.

f Newinvestmentsaimedatthediversificationofsupplydirectionsarecrucialtoprovidesecurityofsupplyfor EU-11.


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Item 25: Major importers of oil and gas in 2010

Source: Eurostat, BP Statistical Review of World Energy 2011; *imports from Russia only


NorwayEU-27: 71.6 Mt

EU-11: 1.23 MtEU-15: 70.4 Mt

EU-27: 92.7 Mtoe

Oil reserves (Gt)

0.82 EU-11: 1 MtoeEU-15: 91.7 Mtoe

Gas reserves (Gtoe)

64.9

AfricaEU-27: 107.5 Mt

EU-11: 0.2 MtEU-15: 107.4 Mt

EU-27: 72.6 Mtoe

Oil reserves (Gt)

17.38EU-11: 0 MtoeEU-15: 72.3 Mtoe

Gas reserves (Gtoe)

468.06

Commonwealth of Independent States

Oil reserves (Gt) 17.18

Gas reserves (Gtoe) 1,826.52

Middle East

Oil reserves (Gt) 101.78Gas reserves (Gtoe)

2,409.26

EU-27

EU-15 countries

EU-11 countries

EU-27: 230.4 Mt*

EU-11: 83.4 Mt*EU-15: 170.5 Mt*

EU-27: 104.4 Mtoe

EU-11: 31.4 MtoeEU-15: 68 Mtoe

EU-27: 90 Mt

EU-11: 0.3 MtEU-15: 89.8 Mt

EU-27: 29.1 Mtoe

Oil reserves (Gt) 0.69

Gas reserves (Gtoe) 74.7

Total crude oil imports (Mt) 520.04

Total gas imports (Mtoe) 328.5EU-11: 0 MtoeEU-15: 29.1 Mtoe

Gas imports Crude oil imports

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5 Key environmental protection requirements facing EU-11

ThemainelementsofenvironmentalprotectionlegislationintheEUarespecificenvironmentalmeasurestobeachieved by covered entities (mainly provisions regarding industrial emissions) as well as the climate and energy package (by and large, jurisdiction regarding Emission Trading Scheme).

Item26:Long-termenergymarketefficiencydefinition-environmentalprotectionrequirements

Secu

rity

of s

uppl

y


ents



Efficiency

1

2 3








Source: EY

5.1 Key EU regulations determining EU-11 region environment protection

Byadoptingregulationsconcerningthekeyobjectivesdefinedabove,theEuropeanCommissionputsignificantobligationsonMemberStates,althoughduetothedifferenttechnologiesusedinparticularcountriesandindividualdeterminants, the burden associated with EU environmental protection is considerably higher in EU-11 than in EU-15 countries (especially in case of Emission Trading Scheme which will put a special pressure on electricity prices in EU-11).

Item 27: Major legislations and policies regarding environment protection - climate and energy package and IED provisions

Climate and energy package Industrial emissions (IED) f Targetsoftheregulation: reduce global warming to no more than 2ºC increase compared to the temperature in pre-industrial times

f Toolstoachieveestablishedtargetby2020: 20% reduction in EU greenhouse gas emissions below 1990 levels, 20% share of renewable resources in EU energy consumption, 20% reduction in primary energy use in EU compared with projected level by improvingenergyefficiency

f Furtherproposedtargetstoachieveby2050: 80-95% CO2 emission reduce below 1990 levels throughcombinationofhigherenergyefficiency,diversifiedsupplytechnologies(i.e.cleancoaltechnologies, nuclear energy) and increasing RES share in energy-mix structure

f Targetsoftheregulation: reduce releases of pollutants to air, water and land and off-site transfers of waste provided by industrial facilities to indicated limit values

f Tooltoachieveestablishedtarget: obligation for complying with stricter values of selected pollutants (with a particular focus on SO2, NOx and dust)

f TimeframeofIEDmajorprovisions: 2014 in respect of installations already in existence before (except large combustion plants), 2015 in respect of industrial activities not subject to the current integrated pollution prevention and control Directive, 2016 in respect of large combustion plants (already in existence before 2013)

Source: EY based on European Commission regulations

Key environmental protection requirements facing EU-11

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Item 28: Emission Trading Scheme characteristics in EU-11 and EU-15

Greenhouse emission allowances allocated in the EU in 2013-2020 (M EUA)

f Number of greenhouse emission allowances issued attheEUlevelwillbesignificantlydecreasedafter 2012 - each year the number of allowances willdropby37.4M.Asaresult,theETSwillforce companies to realize investments aimed at reducing CO2 emissions, or purchase increasingly expensive CO2 emission allowances.

f Ingeneral,thereisanassumption,thatallMemberStates will face the same treatment, regardless ofthespecificdeterminantsofeachcountry(i.e.economy structure, purchasing power).

2 0392 002

1 9641 927

1 8891 852

1 8151 777

1 600

1 700

1 800

1 900

2 000

2 100

2 200

2013

2014

2015

2016

2017

2018

2019

2020

M EUA

-13%

Optional derogation for electricity generators in EU-11 group

f To support the modernization of electricity generationinselectedMemberStates,10countrieswere allowed to apply for free emission allowances allocation for its electricity generators. In EU-11 group 8 countries could apply for derogation and 7 of them decided to submit an application.

f That proves that majority of the EU-11 countries assessed that complete implementation of ETS provisions will be harmful to their economies and due to this applied for short-term exemption.

f Even with the derogation, due to higher carbonization of the economy and different electricity generation structure, economies of the EU-11 countries will be more burdened by the ETS than the EU-15.

Country Right for derogation

Did country apply for derogation?

Bulgaria Yes Yes

Croatia No No

Czech Republic Yes Yes

Estonia Yes Yes

Hungary Yes Yes

Latvia Yes No

Lithuania Yes Yes

Poland Yes Yes

Romania Yes Yes

Slovakia No No

Slovenia No No

Source: European Commission legislation, BP Statistical Review of World Energy 2010, EU Energy Portal


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Item 29: CO2 emissions in EU-11 and EU-15

Surplus of the CO2 emission reduction above the Kyoto Protocol commitment at each of EU-11* and EU-15 country in 2008 (Mt CO2 and %)

f Historical data referring to additional CO2 reduction (above the Kyoto Protocol) achieved by the members of the EU-11 group shows that in general, EU-11 countries were leaders in reducing CO2 (as a modernization of the industry and economy structure change followed) emissions when compare to targets established by the Kyoto Protocol.

f Item 30 presents CO2 emission changes between 1990 and 2009 in EU and Croatia. It shows that most of EU-11 members (except Slovenia) decreased their CO2 emissions during the analyzed period.

f Owing to greater efforts in reducing CO2 emissions in the previous years, EU-11 countries need further support (i.e. derogation for electricity generators) to comply with stricter EU environmental regulations.

-37%-26%-22%-16%-15%

-11%-7%

-3%-1%

1%2%2%

7%7%

9%15%22%27%28%

36%42%44%45%49%49%

-3-18

-74-9-3-56

-4-7-1

1315

503713

11

18156

4254114201120

LuxemburgAustria

SpainDenmarkSlovenia

ItalyIreland

The NetherlandsPortugalFinland

BelgiumGermany

United KingdomFranceGreece

SwedenCzech Republic

SlovakiaPoland

HungaryBulgaria

RomaniaLithuania

LatviaEstonia

Mt CO2

Average CO2 emissions per capita in EU-11, EU-15 and EU-27 averages in 2009 (t per capita)**

05

1015202530t per capita

Source: European Commission legislation, BP Statistical Review of World Energy 2010, EU Energy Portal; *Croatia not included; ** For Croatia data for 2008.

f Currently, CO2 emissions per capita in EU-11 are lower than in EU-15 and EU-27, which is mainly a result of the lower level of economic development in the EU-11.

f Assuming convergence with the EU-15 economies, the CO2 emissions per capita ratio in EU-11 countries is expected to increase. As climate policy will put a special burden (higher costs associated with CO2 emissions), catching up with more economically developed countries will be relatively more expensive for EU-11 than without such provisions.


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Item 30: CO2 emissions in EU and Croatia in 1990 and 2009


Source: CEEP based on Eurostat

CountryMt CO2

emission in 1990

Mt CO2 emission in

2009% change

Estonia 41 17 -59%Latvia 27 11 -59%Lithuania 50 22 -56%Romania 250 131 -48%Bulgaria 111 59 -47%Slovakia 74 43 -42%Czech Republic 196 133 -32%Hungary 97 67 -31%United Kingdom 776 566 -27%Germany 1 248 920 -26%Poland 453 377 -17%Sweden 72 60 -17%Belgium 142 124 -13%Denmark 68 61 -10%France 563 517 -8%Finland 70 66 -6%The Netherlands 212 199 -6%Italy 519 491 -5%Croatia 31 31 0%Austria 78 80 3%Slovenia 18 19 6%Ireland 55 62 13%Greece 104 123 18%Portugal 59 75 27%Spain 283 368 30%

EU-11 countries that decreased emissions

EU countries that decreased emissions

Countries that increased emissions

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Item 31: EU environmental protection impact on EU-11 security of supply

Main coal and lignite deposits in EU-11 countries (Mt)

f Environmental regulations in the EU make fossil extractionandusageeconomicallylessprofitable.As indicated earlier, the fuel mix of the EU-11 regionischaracterizedbyasignificantlyhighershare of solids, which makes it more vulnerable to restrictive EU policies of environmental protection regarding CO2 emissions.

f As EU environmental protection regulations make fossil extraction more expensive, the potential import dependency reduction using indigenous reserves of solid fuels will not be achieved.

f In some economies that rely on coal as a primary fuel, electricity prices after 2012 may increase significantly.

Hard coal depositsLignite depositsCoal and lignite reserves (Mt)

70

422

1966

110

4501

1966

3302

7502

Source: EY based on European Association for Coal and Lignite (EURACOAL), 2011

DuetothesignificantshareofsolidsintheEU-11energy-mixaswellasusedtechnology,itisexpectedthatIEDregulations will be especially burdensome for this group of countries.

Item 32: Industrial emissions determinants in EU-11 countries

Key characteristics of selected EU-11 countries, averages in 2004-2006 period

f The list of top ten SO2 emitters consist of seven installations located in the EU-11 countries. Bulgaria, Poland and Romania have also a significantshareintotalEUemissionsofpollutantscovered by IED.

f Owing to this, to comply with IED regulations, EU-11 countries will be forced to implement investment programmes aimed at lowering emissions of identifiedpollutants.

Country Bulgaria Poland Romania

Number of installations at the top 10 list of emitters of SO2

4 2 1

% of EU total SO2 emissions 15.1 14.7 10.3

% of EU total NOx emissions n/a 12.3 n/a

% of EU total dust emissions 8.7 17.2 10.2

Source: A push for cleaner industrial production, A discussion of the issues surrounding the Commission’s proposal for a Directive on Industrial Emissions, European Environmental Bureau 2008.

Key points

f TheburdenfromenvironmentalpolicywillbegreaterforEU-11countriesthanforthedevelopedMemberStates.

f The IED legislation will put considerable burden on EU-11 countries, which will be faced with large investments in order to adopt its main provisions.


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6 EU-11 energy sector challenges

ThespecificsituationoftheEU-11countriescomparingtoEU-15countriesandthechallengestheyarefacingresultinidentificationofcommonflagshipinvestmentareas,whichareconsideredtobethekeyonesfortheEU-11regiondevelopment.InthefollowingsectionkeycommonareasforEU-11energypolicyhavebeenidentifiedinthefieldsof:electricitygeneration,electricitytransmission,gastransmissionandstorageandoiltransmissionandstorage.

6.1 Electricity generation

The electricity generation sector in EU-11 is facing three key challenges which are similar in all the countries of the region:

f Change of the generation mix. A switch from fossil fuel based energy generation to more environment friendly technologies is required by the EU regulations. EU-11 countries are characterized by relatively high share of coal and lignite in the generation mix. As these technologies are sources of the largest greenhouse gas emission, therefore to cope with the goals of EU, the countries will have to switch to other sources. The current fuel mix for EU-11, EU-15 and EU-27 are presented in Item 33.

Item 33: Electricity production and fuel mix

Net electricity production in EU-11 in 1995-2010 Fuel mix, 2010

32,087 33,53537,089 37,173

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1995 2000 2005 2010

MtoeCAGR: +0.99%

19.3%28.7% 27.4%

15.7%

22.1% 21.0%

55.3% 20.9% 25.7%

1.4%

2.5% 2.6%

8.2%25.0% 22.6%

0.1% 0.8% 0.7%

EU-11 EU-15 EU-27Nuclear RES Solids Oil Gas Other

Source: Eurostat

f Increase of generation capacity. The forecasted grow of the EU-11 countries economy will be closely followed by an increase of the energy demand. To satisfy it, the countries will have to invest in construction of new units able both to deliver base load power as well as peak load. As presented in Item 34 the electricity generation capacity per capita in EU-11 countries is lower than the values in the leading EU countries. Even if the EU-11 countries would only aim the mean value of electricity generation capacity per capita, the scale of the investment needs would be vast.

EU-11 energy sector challenges

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Item 34: Electricity generation capacity per capita in EU countries in 2009, kW per capita

3.83.4

3.12.5 2.4

2.1 2.0 1.9 1.8 1.7 1.7 1.7 1.7 1.6 1.6 1.6 1.5 1.4 1.4 1.4 1.3 1.3 1.2 1.0 1.0 0.9 0.9 0.9

0

1

2

3

4

5kW per capita

EU-11EU-15, Malta, Cyprus

Source: EY analysis based on Eurostat and EIA; 2011

BasingonPRIMESdatasetonforecastedcapacities26.1GWofnewpowercapacitywillbeneededinordertocover for the increase in power demand by the year 2020. 15.6 GW additional capacity will be required in the period of2021-2030.Intotal,accordingtoPRIMESforecasts41.8GWofnewpowercapacityisneededby2030.Itshouldbe stressed that sums quoted above do not take into account costs of decommissioning and replacement, which in EU-11 can amount even to bn EUR 60-70 till 2020.

Item 35: Forecasts of additional power capacity in EU-11 countries in 2011-2030, GW

7.3

5.9

4.43.9

2.5

1.30.6

0.1 0.1

4.3

5.6

2.1

0.4 0.81.5

0.80.0 0.1

012345678

GW

2011-2020

2021-2030

Source: EU energy trends to 2030, European Commission, 2010; Energy Strategy of the Republic of Croatia, 2009

f Replacement of the oldest and obsolete generation facilities.MostofEU-11countriesenergygeneration facilities have been built some years ago, mainly before the fall of the Berlin Wall. After that, due totransformationoftheeconomies,thedemandforelectricitydroppedsignificantlywhichallowedthosecountries to stop large investments in energy generation sector. Currently the demand is increasing and the units under operation are becoming obsolete. Based on the publicly available information regarding the age of generation units in EU presented in Item 36, over 38% of generation capacity2 in EU-27 countries is over 30 years old. In the country with the largest power capacity, i.e. Poland, 58% of capacity is over 30 years old, and the respective average share for EU-11 countries is estimated to 62%. Therefore the need for replacement of large quantity of megawatts in relatively short period is substantially higher in EU-11 region and it will require consecutive funds to be invested. It means also that in the years to come, EU-11 will face much higher decommissioning and replacement costs than EU-15 or EU-27 on average.

2 Thermal Power capacity only


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Item 36: Capacity of thermal power plants and their age (GW)

EU-27

0

100

200

300

400

500

600

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

Cum

ulat

ive

capa

city

Unit age (years)

GW

Poland

0

5

10

15

20

25

30

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

Cum

ulat

ive

capa

city

Unit age (years)

Percentage of capacity over 30 years: 58%

GW

Percentage of assets over 30 years old

38%

62%

0%10%20%30%40%50%60%70%80%

EU-27 EU-11

Source: EY calculations based on RWE and Polish The Energy Market Agency (ARE) data.

As it can be seen from the above, there is a huge need for new generation capacity, but these potential investments havetobecarriedoutunderseveralimportantlimitingconditions.Thekeyonesare:

f Reduction of greenhouse gas emission. The new units probably will not have the right to free CO2 emission and they will have to buy the required allowances on the market. It will increase the cost of generated energy and by this mean will restrain the choice of the technologies.

f Support for renewable energy sources. The RES are strongly promoted by the EU and ambitious goals have been set for all EU countries. The support systems installed in the countries give several advantages to the “green” energy and therefore could be a concurrence for other fuels.


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f Security of supply issue. The need for increase of security of supply in energy sector should give the priority to the indigenous energy resources. But as these resources are mainly fossil ones, their use is difficultduetohighergreenhousegasemissions.

f Thevolatilityofthefinancialmarkets. The investments in long term projects as the energy generation ones may be considered risky the investors may be not willing to invest in it. Under the current limitation regardingthestatesupportforcompanies,itcouldbedifficulttoassurethesufficientamountoffinancingforthe projects.

Based on the above mentioned key challenges and limiting conditions and assessment of the energy sectors and economies in EU-11 countries a map of common interest area has been prepared. Appropriate importance of each area for each country has been evaluated and based on that an order of importance has been suggested as presented in Item 37.

Item 37: Common interest area of EU-11 countries in power generation sector

Bulg

aria

Cro

atia

Cze

chR

epub

lic

Esto

nia

Hun

gary

Latv

ia

Lith

uani

a

Pola

nd

Rom

ania

Slov

akia

Slov

enia

Rat

ing

Need for new capacity 32

Excessive costs of CO2 emission allowances post 2012 / need for development of low emissive generation capacities

29

FulfillmentofEUobligationsregarding renewable electricity sources (RES)

29

Low level of power reserve margin posing risk of potential black-outs in close future

27

Undiversifiedfuelgenerationmix 19

Importance for the sector / economy

Very high

4

High

3

Medium

2

Low

1

Very low

0

Source: EY analysis

Consideringtheabove,thefollowingflagshipinvestmentareascouldbeconsideredasfittingthecurrentsituation:

f CoalfiredpowerplantswithCCSinstallations.The coal is an indigenous fuel for many EU-11 countries therefore its use should be supported as reducing the dependence on foreign energy imports. But without proper CCS installations which would reduce the emission of greenhouse gases their realization is questionable. As the CCS technology is not fully mastered at the moment further research and development is required. Therefore EU-11 countries should support actively the research and development projects in thisfieldandshouldalsotakeactiontorealizeappropriatepilotordemonstrationprojects.Theappropriatesupport at the EU level should be also granted to provide funds and support for the development of CCS. It is important to highlight that without the CCS technologies (or other technology allowing reducing greenhousegasemission)thedevelopmentoffossilfuelfiredpowerplantsandfurtheruseofcoalasafuelisuncertain.AstheEU-11countrieshavesignificantcoalresources,havingnoaccesstotheCCStechnology will undermine heavily the security of energy supply of these countries.


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TheincreaseofefficiencyofcoalfiredinstallationscouldbealsoatemporarymeasurebeforetheCCStechnologyisfullymastered.Theincreaseofenergyefficiencyleadstoaconsiderabledecreaseofgreenhouse gas emissions, but requires the replacement of obsolete facilities by new ones. Therefore a transitionalsupportschemafornewcoalfiredpowerplantwithefficiencyhigherthanforexample45%shouldbeconsidered.ItcanhavetheformoffullorpartialderogationfromETSschemaforadefinedperiod of time (for example 20 years). The ETS could be replaced by some form of contribution of the new coalfiredfacilitiestoadedicatedfund.ThisperiodcouldbeshortenediftheimplementationofCCSoccursearlier. It would allow the countries with high share of solid fuels in their fuel mix (the EU-11 ones) a smooth transition from a coal based generation to low carbon generation with large development of CCS.

f The nuclear technologies. The current state of the art nuclear technologies (i.e. generation III/III+) aresaferandmoreefficientthatthepreviouslybuiltgenerationII.Itisatthemomenttheonlyenergygeneration technology which is able to provide large amount of energy at reasonable prices without emitting greenhouse gases. Furthermore, due to small quantities of fuel needed for the production of large quantities of energy, a stockpiling of it for many years is possible. Therefore, even if the country does not have its own fuel production industry, it can more easily increase its security of supply by making large stocks of it. Also the nuclear fuel market is less controlled by large single players and supply from different origins is possible.

The drawbacks of the nuclear technology are mainly large investment cost and concerns about safety of the installation and management of spend fuel. The last two have to be mainly addressed at the national level by implementation of appropriate regulatory framework which assures the highest level of nuclear safety and proper management of radioactive wastes. In country which already uses nuclear technology such frame already exists, and unlike any other industry, the nuclear power industry takes care and pays for the management of waste produced during its exploitation. The high level of investment cost is very often an important obstacle in development of nuclear technology and therefore this issue should be addressed at the EU level. If the importance of nuclear technology in the realization of European energy policy is recognized by EU, therefore an appropriate support should be granted.

f Renewable energy sources. The development of RES is currently heavily supported by EU. Except from an adjustment of goals to the potential of the countries, the current policy should be continued and further supportforthistechnologyinthenextfinancialperspectiveshouldbesupportedbyEU.Atthesametimeithastoberememberedthattherenewableenergysourcesarenotfittedtoprovidebaseloadenergy.Wind and solar technologies should be supported where needed but at the current level of its development they should not be considered as the base of any power system. The real potential of biomass and hydro power plants (including pump power plants) should be also properly assessed. At the current stage of their development RES cannot be the basis of an electric system, but their potential should be used as far as it is economically, ecologically and technically possible.

Addingtothat,itshouldbestressedthatduetolackofowntechnologiesinEU-11,significantamountofcapitalinvestmentsinRESintheenergysectorwillflowoutsidetheregion.Thatwouldn’tchangeevenwithsubstantialEUfinancingforEU-11energyprojects.RecentEYresearchshowsonly~25%3 of CAPEX in the wind energy sector stays in the country where investment is realized. Therefore, in order not to impair GDP dynamics of the EU-11 by investment aiming at radical energy balance change, adequate EU funding may havetobecomplementedbynewenergytechnologiesknow-howinflowthatwouldprohibitthemajorityofCAPEXflowingoutoftheregion.

3 Based on a study for Poland


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f Gasfiredgeneration. Gas is still a relatively expensive fuel but there are some key areas where such type ofunitscanbedifficulttoreplace–peakgenerationandasbackupforwindfarms.ThankstothepossibilityoffaststartupgasfiredunitsshouldbedevelopedtosupportthedevelopmentofRESandimprovethesecurity of grid operation. Other uses, especially in base load generation should be avoided due to high prices of fuel and lack of indigenous resources which increase the reliance on import and decrease the securityofsupply.AsstatedinReporttheconfirmationofsignificantandeconomicallyviableshalegasresourcescansignificantlyinfluenceitspriceandchangetheroleofgasasanenergycarrier.Inthatcaseextensive use of gas as a base load fuel could be possible.

None of the above cited energy generation technologies can satisfy all electricity demand and a mix of it has two created. Under the current energy policies the EU-11 countries should develop the renewable energy sources as far asitisreasonablypossible(bothtechnicallyandeconomically)andthegasfiredgenerationtosupporttheoperationof the wind farms. But that will only satisfy part of the needs. The core of the generation assets of a country has to be based on technologies which are able to guarantee uninterrupted supply of large amount of energy. Under the currentregulationsonlyonetechnologycanmetthegoals–thenucleartechnology,asuseofcoalisrelatedwithsignificantgreenhousegasemissions.InnearfutureCCScouldallowthedevelopmentofclearcoalpowerplants,ifthe development of this technologies success. Therefore the EU-11 region has to make a common choice to which extend support nuclear and CCS, as those are the two technologies which can provide the needed generation capacity under current regulations.

Key points

f The EU-11 countries needs large investments in generation of electricity due to the need to replace the existing obsolete units, forecasted increase of demand and the need to change the generation structure.

f ForbaseloadgenerationnuclearandcoalfiredpowerplantswithCCScouldbeconsideredasthetwopossible solutions in the current situation. Both should be supported and the share of support for each of it should depend on strategic decision of EU-11 countries.

f Renewable energy source should be further developed, but the level of its penetration should be each timeassessedtothepotentialofthecountry.Thispotentialvariessignificantlyfromcountrytocountry.

f ThegasfiredunitsdevelopmentshouldbecloselyrelatedtothedevelopmentofRESgenerationunitswith unpredictable production patterns, such as wind farms. It should be used to balance rapid change in generation from the wind farms.

f Use of gas as fuel for base load generation should be avoided due to lack of large gas resources in Europe. On principle base load generation should rely on indigenous resources. Nowadays gas consumption in Europe is predominantly import based. Therefore its use for base load generation can reduce the security of supply and energy independence of Europe.

f TheroleofgascanchangesignificantlyifsignificantshalegasresourcesareconfirmedinEU-11countries. It may allow the use of gas as a fuel for base load generation of electricity and enhance continent’s energy of supply.


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6.2 Electricity transmission

The electricity transmission systems developed up to date in the EU-11 countries have been developed mainly to satisfy to national energy needs. Further development of interconnections has been observed aiming at increasing the security of national network operations. Currently the development of energy transport infrastructure in the EU-11 is foreseen as a mean to increase the security of supply of countries and support the development of common European energy market. This has been stated by the European Commission in “Communication from the Commission to the European Parliament, the Council, The European Economic and Social Committee of the regions„Energy2020-Astrategyforcompetitive,sustainableandsecureenergy”-COM(2010)639”,inwhichthedevelopment of free energy market by 2020 is presented as a key issue.

Based on an assessment of the energy sectors and economies in EU-11 countries the development of interconnectionbetweentheEU-11countrieshasbeenidentifiedasakeyareaofcommoninterest.Arankhasbeencalculatedforthisarea,astocompareitwithotheridentifiedareasofcommoninterestindifferentsubsectoroftheenergy sector. The data are presented in Item 38.

Item 38: Common interest area of EU-11 countries in power transmission sector

Bulg

aria

Cro

atia

Cze

chR

epub

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Esto

nia

Hun

gary

Latv

ia

Lith

uani

a

Pola

nd

Rom

ania

Slov

akia

Slov

enia

Rat

ing

Insufficientinterconnectioncapability to secure system stability

23


Very high

4

High

3

Medium

2

Low

1

Very low

0

Source: EY analysis

Despiteonlyoneidentifiedcommoninterestareaithastobeunderstoodascomposedofdevelopmentofinterconnection with development of power grids in the countries to remove bottlenecks which limit the full utilisation ofinterconnectionscapacity.Thefollowingflagshipinvestmentareashavebeenidentified:

f Connection of remote EU regions to the energy grid of EU member states. It would enable the transfer ofenergyfromthosecountriesandtothosecountries.ThebestexampleinthisfieldisthecaseofBalticstates. Lithuania, Latvia and Estonia are not connected to the EU electric grid and their systems operate in another synchronous area that the rest of European Union. The construction of interconnection between Poland and Lithuania, as well as underwater cable connections to Sweden and Finland will allow the country to increase its security of supply and will support the development of the energy market.

f Connection between EU-11 and EU-15 countries. The current level of interconnections between the EU-11 and EU-15 countries remain limited. Further integration is necessary to meet the needs for adequate energy transmission capacity required for the development of European energy market.

f The reinforcement of energy transmission system in EU countries. As until now most of electric transmission system have been built without taking into consideration export and import of large quantities of energy. Therefore an effort is necessary to identify and remove the bottlenecks which limit the development of energy market. These investments logically come with the interconnection projects, as the enable the use of full potential of international electricity transfer.


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InItem39theflagshipinvestmentsareainEU-11regionarepresentedonmaps.

Theidentifiedinvestmentsconsistmainlyateliminationofbottlenecksinthenetworkanddevelopmentoffurtherinterregionalandinternationalconnectionstoallowtheflowofelectricity.ThecurrentEUfundsalreadyprovidesupportforthedevelopmentoftheseprojects,butthelevelofthissupportshouldbeconsideredinsufficienttomeettheforeseendemand.Alsotheavailablefundsweredefinedinthefinancialperspectivewhichendssoon,itiscrucialtosupporttheextensionoffundssupportingthedevelopmentofelectricitygridsinthenewfinancialperspectiveofEU and increase of its amount and scope to be more adapted to the need of EU security of supply as a whole. This is considered to be the key area of potential coordination of EU-11 countries.

A bilateral or even multilateral coordination is also required at the level of planning new investments. The exchange of information about plans aiming at identifying the common interest projects and joined development can contribute tofulluseofthepotentialbenefitstheprojectcanprovidetotheEU-11region.

Item 39: Mid term and long term interconnections investments in EU-11 region

Mid term investments

2

3

11

12

13

10

1

87

5, 9

14

4

Long term investments

Source: Data provided by ENTSO-E

Further coordination should be expected at the stage of preparation and realization of projects. The coordination of actions by all partners in each country which is engaged in the projects is required to make the project realization as smooth as possible.

All the above suggested actions could be summarize in a general conclusion of reinforcing the integration of EU memberstates.ThefinalgoalofitinalongperspectiveshouldbethataEuropeanenergypolicyshouldslowlyandsmoothly replace of the national energy policies of EU member states. The new policy should approach the energy sector on the European level. The plans and goals should be developed for the whole EU rather and later transpose atthenationallevelwithduecareandconsiderationtothenationalspecificsituation.


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Key points

f ThedevelopmentoftheEuropeanenergymarketwithfreeflowofenergyandtheincreaseofsecurityofsupply are the key reasons for power grid investments.

f The development of interconnection is foreseen as the main investments area.

f Theflagshipinvestmentsconsistmainlyateliminationofbottlenecksinthenetworkanddevelopmentoffurther interregional and international connections.

f Coordination at the planning and execution level of interconnection project is necessary.

f Common coordinated political and regulatory actions at the EU level should be organized aiming at achieving the common interest of EU-11 countries.


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6.3 Gas transmission and storage

TheEU-11countriesdonothaveanysignificantgasresourceswhichcouldsatisfyitsneeds.Mostofthegasisimported from foreign countries. The level of import dependency is comparable to the one in EU-15 countries but in contrasttotheEU-15,theimportofgastoEU-11regionisdominatedat88%byonesupplier–Russia,aspresentedinItem40.Thissituationlimitsthepossibilitiesofgasmarketdevelopmentandinfluencenegativelythesecurityofsupply of the region.

Item 40: EU-11 dependence on gas import

EU-11 gas dependency 2010 Structure of EU-11 Gas import, 2010

Import dependency: 66%

17.0

56.737.7

0

10

20

30

40

50

60

Energy Production Net Imports Gas Gross Inland Consumption

Mtoe

88%

3%2% 7%

RussiaGermanyNorwayOther

Source: Own calculation based on Eurostat

Based on an assessment of the energy sectors and economies in EU-11 countries the following common interest areashavebeenidentified.ArankatEU-11regionhasbeencalculatedforeachofthem,astocompareitwithotheridentifiedareasofcommoninterestindifferentsubsectoroftheenergysector.ThedataarepresentedinItem41.

Item 41: Common interest area of EU-11 countries in gas transmission sector

Bulg

aria

Cro

atia

Cze

chR

epub

lic

Esto

nia

Hun

gary

Latv

ia

Lith

uani

a

Pola

nd

Rom

ania

Slov

akia

Slov

enia

Rat

ing

Overdependence on supplies from Russia

39

Insufficientinterconnectioncapacity and isolation from pan-European pipelines / other transport facilities

33

Insufficientstoragecapacity 26

*In case of the implementation of the Article 10a of the European Parliament and the Council Directive No 2003/87/EC into national law, the impact of the CO2 legislation for the refinery industry is assessed as very high.


Very high

4

High

3

Medium

2

Low

1

Very low

0

Source: EY analysis


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BasedonthecommoninterestareasflagshipinvestmentsareasforEU-11regioncanbeidentified,whicharethebesttofittotheneedofallthecountriesoftheregion.Thefollowingoneshavebeenselected:

f Southern gas corridor.ItwillgivepossibilitytoimporttoEuropegasfromtheCaspianSeaandMiddleEast region which is considered to be one of the largest sources of gas known at the moment (about 90 tcm). It includes projects like Nabucco, TAP (Trans Adriatic Pipeline), Poseidon, ITB, ITGI and White Stream. The development of this corridor would increase also the possibility of gas supply from LNG terminals locatedontheMediterraneanSeaborder.

f LNG Terminals. Several LNG terminals projects are currently under development in EU-11 countries. It will allow an independent supply of gas from third suppliers and it will give the possibility to increase the security of supply and improve market development in the EU-11 countries.

f North South gas interconnections. This group of projects aims at tackling the lack of adequate gas transfer capacities in EU-11 from the North to the South of it. The concept is to connect the Baltic Sea withAdriaticandAegeanSeas,andfurthertotheBlackSea.Thiswouldprovidethebetterflexibilityforthe Central East European region. It will improve the functioning of internal gas market and promote competition. In the longer term, these integrations will also allow better use of LNG terminals in Swinoujscie and in the Balkans regions, as well as it may enable the supply of gas to CEE from the Southern corridor. All these will make the CEE region less vulnerable to a supply cut through the East corridor.

This group of project has been based on the initiative of the North-South-East gas supply system, which has been set up in order to ensure energy security in a region poor in its own resources as well as to help diversifysupplysourcesandroutes.Theso-called‘gassupplytriangle’wasoutlinedby:

f the Nabucco natural gas pipeline and Black Sea coast, which will create the eastern corner of the triangle;

f theliquefiednaturalgas(LNG)terminalinCroatia(southerncorner);and

f the LNG terminal in Poland (northern corner).

Asaresultoftheaboveinitiativea“MemorandumofUnderstandingonNorth-SouthInterconnectionsinCentral-Eastern Europe” has been signed in Brussels on November 23rd, 2011 by EU-11 countries and the European Commission.

f BEMIP.BalticEnergyMarketInterconnectionPlanisaimingatconnectingtheBalticstatestotheEuropeangas system. At the moment the two solutions are the construction of a gas pipeline connection with the Polish gas transmission system and the construction of LNG terminals on the Baltic Sea border.

TheabovedescribedflagshipinvestmentareasarepresentedinItem42.


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Item 42: Flagship investments in the gas transmission sector

1 Pipeline projects

Integration of transit and transmission network

Pipeline and interconnection projects

Other projects

North-South gas interconnections

Existing pipelines

Existing interconnections

12 LNG Terminals projects

9 LNG Terminals possible locations

18

18

18

Source: ENSTOG; The numbers on the map refers to items in table presented in the full report


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The development of gas storage capacity is particularly important for security of supply. Availability of adequate capacity allowing coping with unexpected supply interruption is also considered as crucial by the EU. The level of gas storage capacity in EU-11 countries is lower than the one in the EU-15 region and the gas storage capacity in separated EU-11 countries is also lower, as presented in Item 43. Therefore to increase the security of supply and attain a similar level of storage capacities extensive investments are required in EU-11. It should be treated as flagshipinvestmentforEU-11region.

Item 43: Gas storage capacity in selected EU countries

20.4 14.9 12.66.1 5.1 4.7 4.4 4.1 3.3 2.8 2.7 2.3 1.8 1.0 0.7 0.5 0.2 0.2 0.01

19.5

87.8

0

25

50

75

100bcm

Source: EY, 2011

In contrast to the electricity transmission, the gas transmission can be subdivided into gas transit and transmission. The LNG terminal also included in the above item of evaluation is considered to be the third group of investments. Therefore the possible coordination of actions should be described separately for each group.

Gas transit

The gas transit is mainly connected with gas transmission from the producers to the countries of users. These are large pipeline with several thousand kilometres in length which makes them expensive. The realization of that type ofprojectsisaimedatenablethesupplyofgastothecountriesandatthediversificationofsourceofsupply.Atthesametimethispipelinesfulfiladditionalroleinthefieldofsecurityofsupplybygivingthepossibilitytosupplythecountry with gas in case of distortion on the other supply pipelines. Actually large share of the funds foreseen for gas transmission and storage investments are connected with construction of transit pipelines.

The transit pipeline projects are usually foreseen to supply gas to several countries. Therefore coordination at theEU-11regioniscrucial.Thecountriesshouldfirstdiscusstheprojectinsidethegroupandevaluatedifferentalternatives. After choosing the best solution for all the member states, the group should speak together and support the same solutions in front of the supplier of gas and the third parties engaged in the project. Only acting together the EU-11 countries could have the power to conduct negotiation with large gas suppliers. Each country on their own cannotdothatefficiently.CoordinationattheEUlevelshouldbealsoforeseenasnecessary.

Finally in perspective of full European integration, the ultimate solution could be the full swift of energy issues at the European level. All the aspects of that problem should be analysed on that level and appropriate decision should be made there, as the EU is only large enough entity to be a partner for discussion with large state control gas suppliers and other countries regarding issues of energy policy. Sooner or later the EU countries will have to solve the security of gas supply issue and all other energy related issues at the European level. It is crucial to avoid the situation in which one member states act to improve its security of supply by reducing the security of supply of another member state.


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Gas transmission

The gas transmission is mainly connected with gas transport on the territory of the country, in most of the cases, from the transit pipelines to the distribution network and the biggest gas users. These networks were very often developed to satisfy the internal gas market and therefore the number of interconnections is limited. Furthermore the integration oftransmissionsystemscanrequiresignificantinvestmentinremoveofbottleneckinthegastransmissionsystems.

In case of the development of transmission pipelines a coordination of EU-11 countries at the planning level should be setup. This coordination should be extended to the realization phase to facilitate the completion of the projects. Due to European interest in developing gas market the development of gas projects aiming at construction of interconnection and elimination of bottlenecks limiting the international gas transmission should be supported by EU.

LNG terminals

The construction of LNG terminals is one of the solutions to increase security of supply of the country by allowing the supply of gas from different suppliers. It is logical that only countries with sea cost can build such installations and the inland countries can have direct access to it. But at the other side the LNG terminals are not built as a primary source of gas. It is more a facility to be used at full capacity only in case of distortion of the supply. Therefore the followingcoordinatedactionmaybesuggested:

f Coordination of construction plans to avoid building several facilities in close locations. The best example is the case of Baltic states. From the EU-11 and the EU perspective the construction of one LNG terminalintheregionseemsjustified,buttheconstructionofthreeseparatedfacilitiescanbeonlyjustifiedby national interest of the countries.

f Coordination of planning and construction of LNG terminals with the development of transit and transmission pipelines. As the LNG terminals located in sites which were not a source of gas in the gas grid, therefore problems can occur with the possibility of gas transfer from the terminal. Therefore coordination is required. Furthermore to fully exploit the potential of a terminal, common use of one terminal by different countries should be supported.

f CommonactiontosecureEUfundsfordevelopmentofLNGprojectsinthenextfinancialperspective of EU should be taken. The EU-11 countries should highlight the need for development of gas infrastructure in view of EU different goals and defend together the need for appropriate funds. The ultimate solution would be the treatment of LNG terminals in similar ways as the transit pipelines, due to their similar role–supplyofgastothewholeEU.ThereforethisprojectshouldbesupportedbyallEUcountriesandanycompetitionwithinthisfieldbetweenEUmemberstatesoninternationalmarketshouldbeavoided.

AspointedpreviouslyintheReport,theconfirmationofexistenceofimportantshalegasresourcesinEU-11region,whichexploitationcouldbeeconomicallyjustified,wouldhavetremendousimplicationsonthelevelandformofsupport needed from the EU. The investment needs could also be different in such case.


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Key points

f EU-11 gas supplies are dominated by one supplier what is not in line with the goal of security of supply increase.

f ThedevelopmentoftheEuropeangasmarket,theincreaseofsecurityofsupplyanddiversificationofsupply are the key reasons for gas grid investments.

f The development of new large transit pipelines supplying gas to EU is foreseen to tackle the security of supplyanditsdiversificationissues.TheEU-11countriesshouldcloselycollaborateandcoordinatetheiractions in preparation and realization of such projects.

f The development of gas transit and transmission network at the regional scale is necessary for the construction of European gas market and increase of security of supply. Coordination at the planning and realization level is necessary between EU-11 countries.

f LNGterminalsareforeseentoallowadiversificationofsupplyofgasandtoincreasethesecurityofsupply. Common EU-11 projects should be considered and construction of several facilities in close proximity avoided.

f Development of storage facilities is also important for the security of supply, but its development depend onthelocalconditionsofthecountry–possibilitiestobuildstoragefacilitiesandthelevelofnationalgasproduction.

f A common approach to the gas supply problem and coordination of political action at the EU level to supporttheflagshipinvestmentsareaofEU-11iscrucialfortheimprovementofthesituationoftheregion in the gas sector.


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6.4 Oil transport and storage

The situation of EU-11 countries in the oil sector is similar as the one of EU-15 in terms of import dependency. In contrasttheimportstructureofEU-11iscompletelydifferentwithanabsolutedominationofonesupplier–Russia,as presented in Item 44.

Item 44: EU-11 dependence on oil import

EU-11 oil dependency, 2010 Structure of EU-11 Crude Oil import, 2010

Import dependency: 89%

7.5

70.863.1

0

10

20

30

40

50

60

70

80

Energy Production Net Imports Oil Gross Inland Consumption

Mtoe

86%

6%

5% 2%1%

Russia

Kazakhstan

Azerbaijan

Norway

Others

Source: Eurostat

From the above mentioned situation, based on an assessment of EU-11 countries’ economies and energy sectors a listofkeycommoninterestareahasbeenidentified.Theinterestareashavebeenrankedbasedontheirimportancefor each country and summarized in table in Item 45.

Item 45: Common interest area of EU-11 countries in oil transmission sector

Bulg

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Cze

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Esto

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Hun

gary

Latv

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Lith

uani

a

Pola

nd

Rom

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Slov

akia

Slov

enia

Rat

ing

Concerns on security and diversificationofsupplies

26

Overdependence on supplies of crude from Russia 23

Possible need to increase storage capacity for compulsory stocks

21

Adverse effect of CO2 legislation on the industry*

15

*In case of the implementation of the Article 10a of the European Parliament and the Council Directive No 2003/87/EC into national law, the impact of the CO2 legislation for the refinery industry is assessed as very high.


Very high

4

High

3

Medium

2

Low

1

Very low

0

Source: EY analysis


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Theanalyseswhichresultshavebeenpresentedabove,wasthebasedfortheidentificationofflagshipinvestmentsareaintheoiltransmissionandstoragesector.Thefollowingoneshavebeenidentified:

f Projects allowing the transport of oil from South to North and back of the EU-11 region. At the moment the northern part of the region is supplied by the pipelines from Russia. The southern region is supplied with oil from tanks (very often supplying also Russian oil). There are no possibilities to transport oil bypipelinesfromtheBlackSeaorfromtheMediterraneanSeatotheNorth.

f Projects aiming at allowing the supply of oil from the Caspian Sea region.ThisregionhassignificantresourcesofoilandenablingthesupplyfromthatregiontoEU-11countrywouldallowadiversificationofsupply routes and increase the security of supply.

f ProjectsupposedtoreduceshiptrafficinBosphorusstrait. With the development of the Caspian Sea regionasproducerofoil,thetrafficoftankersintheBosphorusstraitisbecominghazardous.Topreventanecologicalcatastrophe,thereareplanstobuildpipelinesallowingthesupplyofoiltotheMediterraneanseaports and then transport further.

InItem46thepotentialflagshipprojectsarepresentedontheEuropeanmap.

Item46:Potentialflagshipprojectsinoil&fuelsectorinEU-11

Legend

Oil infrastructure

1. Albania,Macedonia,Bulgariaoilpipeline(AMBO)

2. Burgas–Alexandroupolispipeline(Trans-Balkan Pipeline)

3. Pan–EuropeanOilPipeline(PEOP)

4. Litvinov–Spergaupipeline

5. Adria pipeline upgrade

6. Underground oil storage

7. Brody–Plockpipeline

8. Bratislava–Schwechatpipeline

Source: EIA, European Commission, EY analysis

As it can be seen from the above, the projects in the oil industry aim mostly at diversifying the source of supply to increase security of supply. In contrast to the gas sector, oil can be easily and at reasonable cost transported by sea tankers and the pipelines are not as important as in case of gas. It has been also highlighted that oil is not the same product from different sources. The differences are big enough to make impossible fast switch from one direction of supplytoanother.Forexample,thePolishrefineriesusetheRussianUraloilonly.Theadaptationoftherefineriesto use the Brent oil or the oil from the Caspian sea region would required important investments and would require a transitionperiodofseveralmonths.Thisspecificsituationmakesthediversificationofsupplymorecomplexthanincase of gas.


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The perspectives of oil supply are also different than in gas. Oil reserves in Russian are considered to be decreasing andthereforeitsimportancewouldalsodecrease,incontrasttogaswhereresourcesarestillsignificant.Otheroilimportdirectionimportancewillstillbelarge(theMiddleEast)andtheCaspiansearegion’srolewillincrease.

As the projects of oil pipelines are aiming mainly at allowing supply of oil from different direction to the EU and EU-11 countries, therefore a common policy regarding their development and realization should be developed. The followingcoordinationpossibilitiesareforeseen:

f Coordination of planning activities of new pipelines. The EU-11 countries should carefully analyze all the possibleprojectsandselecttheonesthatbestfittotheneedoftheEU-11regionasawhole.Commonsupport for the project should then be guaranteed by all countries of the region.

f Coordinationofdevelopmentoftheprojects.Theselectedprojectsshouldbeneficiatedfromthesupportof all EU-11 countries. All the countries should present the same position and act together in face of oil suppliers and third parties involved in the project.

Key points

f The EU-11 region is highly dependent on foreign oil supply, but in contrast to the EU-15 this dependence is from one supplier.

f In contrast to the gas sector, oil can be easily and at reasonable cost transported by sea tankers and the pipelines are not as important as in case of gas.

f Fastswitchfromonedirectionofsupplytoanotherwouldrequireadditionalinvestmentsinrefineriesanda transition period of several months, due to large differences between oil from different sources.

f Oil reserves in Russian are considered to be decreasing and therefore its importance would also decrease,incontrasttogaswhereresourcesarestillsignificant.

f The coordination of EU-11 actions at the international and EU level is necessary to support the common interest needs of EU-11 countries. The coordination should focus on common planning and common development of projects.


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7 EstimationofcostinidentifiedflagshipinvestmentareasinEU-11

7.1 Investment cost rough estimate

Basing on available sources estimation for key investment areas has been prepared. The following estimation is a summaryofestimationpresentedintheReport.IntableinItem47thevaluationoftheflagshipareasofinvestmenthasbeenprovided.MoreinformationregardingtheadoptedassumptionscanbefoundinrespectivesectionsoftheReport.

Item 47: Estimation of investment cost in EU-11

71%

3%

23%

3% Electricity generation

Electricity transmission

Gas transmission and storage

Oil transmission and storage

Total: ~240 bn EUR

Key data

Electricity generation* bn EUR ~170

Electricity transmission bn EUR ~8

Gas transmission and storage bn EUR ~55

Oil transmission and storage bn EUR ~6

Total bn EUR ~240

Source: Estimation prepared by Ernst&Young based on publicly available data. * Including decommissioning and replacement costs.

Theaboveestimationincludestheinvestmentneedsinfieldofpowergeneration,electricitytransmission,gastransit, transmission and storage as well as oil transmission and storage. The estimation does not include any other investments costs such as the development of electricity and gas distribution networks as well as oil and gas upstreaminvestment.MoreoverinareaelectricityandgastransmissiononlyEuropeanrelevantprojecthasbeentaken into account, not accounting for investment important from national view point. According to a rough estimate based on expert assumptions adding the above mentioned areas would increase the estimation level up to more than bn EUR ~300 of investment needed in the EU-11 region by 2020.

7.2 Energy investment cost estimation from other sources

AccordingtoEUinfrastructurepackage(MEMO/11/710)inthenexttenyears(starting2011),aroundbnEUR~200areneededfortheconstructionofgaspipelinesandelectricitygrids.Morespecifically:

f bn EUR ~140 for high-voltage electricity transmission systems, storage and smart grid applications,

f bn EUR ~70forgaspipelines,storage,LiquefiedNaturalGas(LNG)terminalsandreverseflowinfrastructure(toallowgastoflowinbothdirections).

Over the same period of the next ten year (starting 2011) a total of bn EUR ~1,000 will be needed to cover energy challenges of EU (energy production and transport infrastructure). Furthermore with EU decarbonisation policies to be implemented, in the period of 2011-2050 cumulative EU grid investments alone could be as high as bn EUR ~2,000.

Howeverambitious,thisfiguresshowthevastnessofinvestmentneedsconnectedwithimplementationofEUenergypolicymixaimedatSustainability,AffordabilityandCompetitiveness.Duetosignificantlackofinfrastructurethat would allow for the effective realization of the above goals, substantial share of the mentioned investment would have to be undertaken in EU-11 region.

EstimationofcostinidentifiedflagshipinvestmentareasinEU-11

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Adding to the above, full adoption of EU energy Policy mix on the EU-11 level will result in radical change in energy balances of many EU-11 countries. Using electricity as an example according to IEA World Economic Outlook 2011 OECD Europe cumulative investments in generation capacities would amount to bn USD 2,800 between 2011 and 2035.SinceaveragecapacitypercapitainEU-11willberisingtoconvergewithEU-15levelsasignificantamountofthat could be a good estimation of the investment needed in generating capacity for the EU-11 region. Of course only apartofthatfigurecanbeattributedtoenergybalancechangeintheprocessofadoptingacommonEUpolicyasthe majority will be a result of energy demand increase and replacing obsolete assets.

Key points

f Theflagshipinvestmentsareascostinfieldsofpowergeneration,EUrelevantelectricitytransmission,EU relevant gas transmission and storage as well as oil transmission and storage can be estimated at about bn EUR 240 by 2020. Together with rough estimation of other energy investments areas including investments of national relevance, the total amount can by reasonably estimated at bn EUR 300 by 2020.

f At the same time EU estimates total of bn EUR 1,000 energy sector investments will be needed in the next ten years (starting 2011) on the EU-27 level.

7.3 Energy investment cost as a GDP % - historical comparison

In order to interpret the estimated amount of energy investments cost in the EU-11, the Report’s estimation of energy investment cost has been compared with Eurostat’s data on investments in electricity, gas supply, steam and air conditioningsupply.TheReport’sestimationhasbeenmodifiedforoilsectorinvestmentcostsinordertogetbettercomparability (no full comparibility is possible since Report’s estimation do not cover gas upstream investments and air conditioning supply).

Item 48: Historical values of Gross Capital Formation in electricity and gas supply sector, and Report’s estimation of energy investment cost till 2020, in EU-11* (as % of GDP)

2.6%

1.2%1.0% 1.0%

0.9% 0.9%1.1%

1.3% 1.2%1.4% 1.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-202

0av

erag

e

Gross capital formation in electricity, gas, steam and air conditioning supply, selected EU-11 countriesForecasted annual value of investments by 20202001-2010 average

~115%

Source: Historical values - Eurostat, estimation of investment needs - EY report , GDP forecasts – HIS Global Insight; *Historical values include data for: Czech Republic, Estonia, Hungary, Poland, Slovenia and Slovakia. For other countries data were not available.


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According to data presented on Item 48 EU-11 average of 2011-2020 energy investment costs (as % of GDP) indentifiedintheReportexceedtheEU-112001-2009averageofinvestmentinelectricity,gas,steamandair conditioning supply by ~115%. This comparison provides an initial interpretation as to the scale of energy investments increase needs in the years to come in order to face challenges ahead. The gap between historical and planned investments is of serious importance and amounts to 1.4% of GDP annually. It is equal to over 170% of total environmental policy expenditures made by EU-11 governments (data for 2010, Eurostat).

7.4 Estimated energy investment – consequence to competiveness and possible alternatives

The gap between historical level of investment and increased amounts that is necessary in the next years may put serious upward pressure on energy prices, especially electricity. Higher electricity prices would adversely affect households consumption levels and diminish competitiveness of EU-11 industry. It should be remembered that electricity prices are already high in EU-11 in comparison with EU-15 and EU-11 economy is more energy-intensive than EU-15 region. A balanced EU energy policy should provide instruments preventing the scope of these negative consequencestoEU-11competitivenesslevels.Threepotentialgroupsofpolicyinstrumentscanbeinitiallyidentifiedatthisstageofanalysis:

f Adaptation of the energy policy of EUwithduecareandunderstandingofcomplexanddifficultsituation which the EU-11 countries are facing. Such adaptation could mean an adjustment of goals related to energy sector to the challenges the EU-11 countries faces especially related to RES share in energy balance and CO2 emission allowances procurement. That would enable EU-11 cover the energy needsfromindigenoussolids,butatthesametimewouldresultinneedforstrongincreaseinfinancingCCS technology development.

f Temporary and partial derogation on state support for energy related projects. The EU policy forbids the government to support investments realized in the country. The size and the importance of the challenges the EU-11 faces could justify a temporary and partial derogation on that rule. However intimesoffinancialcrisisandcommoneconomicpolicyofnationalbudgetsbalancing,thissolutionwillbeverydifficulttoimplementbothduetolegalaswellaseconomicreasons.Duetoadverseeffecttoeconomic competitiveness tax increases in EU-11 are not taken into account as a possible energy policy instruments here.

f AllowingforthesignificantpartoftheneededinvestmenttobefundedontheEUlevelfromthecohesion and competitiveness policies.TheEU2014-2020financialperspectivecouldcoverfortheagreedportionofthekeyinvestmentsintheidentifiedareasofelectricitygenerationandtransmissionandoil&gastransmissionandstorage.Additionallysignificantchangesincurrentfinancialperspectivewould be inevitable in order to speed up 2011-2013 key investments in the 2011-2013 period.

1

2

3


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7.5 Comparison of the valuation with EU funds

The EU support for member states under the Cohesion Policy, which is the main source of support for energy related investments, amount to a total of bn EUR 348. It is almost equally splited between the EU 10 and EU-15 countries. When comparing the challenges faced by EU-11 countries and their economical development level to the ones of EU-15,thisrepartitionoffundsseemsunjustified.TheEU-11countriesrequiremoreinvestmentsthantheEU-15andtheirabilitytofinancethemislower.ThereforeanadjustmentoftherepartitionofEUfundundertheCohesionPolicy should be considered.

Item 49: Cohesion fund eligible regions and EU 10 share in total expenditures for Cohesion policy

51.0%48.2%

0.8%

EU-10 as % of Total funds for cohesion policyEU-15 as % of Total funds for cohesion policyOthers

Cohesion Policy for 2007-2013 (m EUR)

EU 10 177,565

EU-15 168,044

Others 2,806

Total 348,415

Source: Regional Policy – Inforegio website, European Commission website

Based on analysis presented in the full report the total funding for EU-11 countries for projects in the energy sector amounted to bn EUR 9.9. The average level (bn EUR 0.9) is comparable to some EU-15 countries, which is surprising considering the differences between EU-11 and EU-15 countries. The comparison of the EU funding for energy projects in EU-11 countries to the total level of funding by EU from the Cohesion Policy and Competitiveness Growth and Employment (bn EUR 437) shows a share of 2.2%. In view of importance of the energy sector and the challenges faced by the EU-11 countries, the support can be considered low and an increase of it could be expected.

When comparing the forecasted level of investment need (about bn EUR 300) to the level of support of bn EUR 9.9 in 7 years perspective, it represents only about 3%. An increase of the support could be necessary in view of developing and completing the projects considered as needed (investment needs) to help to tackle the negative impact of high cost of these investments on national economies of EU-11 countries. This point should be taken into accountintheprocessofestablishinganddivisionofthenextfinancialperspectivefor2014-2020.


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Item 50: EU funding for Energy projects in EU-11 countries and selected EU-15 countries

0

1 000

2 000

3 000

Cohesion - Energy* TEN-E - National TEN-E - International EEPR - National EEPR - International NDAP

EU-11

m EUR

Total EU-11: bn EUR 9.9

EU-11 Average: bn EUR 0.9

Source: Regional Policy – Inforegio website, European Commission website; * In terms of cohesion policy value of actually allocated funds for energy related projects; ** In terms of cohesion policy, value of identified priorities with energy goals, during comparison it is required to adjust the data to make it comparable (for instance by the average from the previous analysis 63%).


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Final key points

f EU energy policy should balance key strategic goals of Security and Sustainability without adverse effect to Competitiveness of EU economies. Balanced policy may require different approaches for EU-15 and EU-11.

f Theflagshipinvestmentsareascostinfieldsofpowergeneration,EUrelevantelectricitytransmission,EU relevant gas transmission and storage as well as oil transmission and storage can be estimated at about bn EUR 240 by 2020. Together with rough estimation of other energy investments areas including investments of national relevance, the total amount can by reasonably estimated at bn EUR 300 by 2020. At the same time EU estimates total of bn EUR 1,000 energy sector investments will be needed in the next ten years (starting 2011) on the EU-27 level.

f According to data presented in the Report EU-11 average 2011-2020 energy investment costs

f (as%ofGDP)indentifiedintheReportexceedtheEU-112001-2009averageofinvestmentinelectricity,gas, steam and air conditioning supply by ~115%.

f Such a gap between historical and projected investment costs can mead that meeting both security of supplyanddecarbonizationgoalsexceedEU-11financingcapacityandmayleadtoGDPgrowthinhibitionsunless adequate EU funding and know-how transfer is provided.

f EU-11 countries should focus on regional initiatives that are crucial for the regional energy security as well as on construction of new generation in electricity, development of interconnections and new routes of supplies of energy sources.

f A common policy of energy procurement should be analysed to replace large energy purchase by single countries by a common EU contracts with foreign suppliers.

f The EU-11 countries possible actions are concentrated around coordination in planning and realization of investmentsneedsintheenergysector.TheEU-11countriesshouldrestrainfromactingsoloinfieldofenergy policy, as in many cases such attitude can deteriorate the situation of other member states. The EU-11 countries should act together on the EU-11 level to assure appropriate funds for the needed investments and to support solution which would facilitate the realization of it in the EU-11 countries.

Threepotentialgroupsofpolicyinstrumentscanbeinitiallyidentifiedatthisstageofanalysiswhichcouldsupportthe effort of EU-11 countries in completion of the investments needed. They can be a starting point of a discussion both on EU- and EU-11 level leading to an integrated and balanced energy policy for Central Europe.

f Adaptation of the energy policy of EU withduecareandunderstandingofcomplexanddifficultsituation which the EU-11 countries are facing. Such adaptation could mean an adjustment of goals related to energy sector to the challenges the EU-11 countries faces especially related to RES share in energy balance and CO2 emission allowances procurement. That would enable EU-11 cover the energy needsfromindigenoussolids,butatthesametimewouldresultinneedforstrongincreaseinfinancingCCS technology development.

f Temporary and partial derogation on state support for energy related projects. The EU policy forbids the government to support investments realized in the country. The size and the importance of the challenges the EU-11 faces could justify a temporary and partial derogation on that rule. However intimesoffinancialcrisisandcommoneconomicpolicyofnationalbudgetsbalancing,thissolutionwillbeverydifficulttoimplementbothduetolegalaswellaseconomicreasons.Duetoadverseeffecttoeconomic competitiveness tax increases in EU-11 are not taken into account as a possible energy policy instruments here.

f AllowingforthesignificantpartoftheneededinvestmenttobefundedontheEUlevelfromthecohesion and competitiveness policies. TheEU2014-2020financialperspectivecouldcoverfortheagreedportionofthekeyinvestmentsintheidentifiedareasofelectricitygenerationandtransmissionandoil&gastransmissionandstorage.Additionallysignificantchangesincurrentfinancialperspectivewould be inevitable in order to speed up 2011-2013 key investments in the 2011-2013 period.


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8 Acronyms, abbreviations and units

This annex provides information on acronyms, abbreviations and units used throughout this paper.

AMBO AlbaniaMacedoniaBulgariaOilpipeline

BEMIP BalticEnergyMarketInterconnectionPlan

CAGR Compound Annual Growth Rate

CAPEX Capital Expenditure

CCS Carbon Capture and Storage

CEE Central East Europe

CEEP

CentralEuropeEnergyPartners,AISBL,isaninternationalnon-profitassociation,with its headquarters in Brussels, representing energy sector companies from Central Europe in the EU forum. CEEP's primary purpose is to support integration of the Central Europe Energy sector within the EU energy and energy security policy.

CO2 Carbon dioxide

EEPR European Energy Programme for Recovery

EIA U.S. Energy Information Agency

ENTSO-E European Network of Transmission Service Operator for Electricity

ETS Emissions Trading System

EU-10Groupofthefollowingcountries:Bulgaria,theCzechRepublic,Estonia,Hungary,Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia

EU-11Groupofthefollowingcountries:Bulgaria,Croatia,theCzechRepublic,Estonia,Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia

EU-15Groupofthefollowingcountries:Germany,France,GreatBritain,Italy,Spain,Portugal,Greece, Austria, the Netherlands, Belgium, Luxemburg, Sweden, Finland, Denmark, Ireland

EU / EU-27 The European Union

EU 28 The European Union and Croatia

EUA European Union emission allowance

EUR Euro (EU currency)

EY EY

GIC Gross Inland Consumption

GDP Gross Domestic Product

GHG Greenhouse gases

GVA Gross Value Added

GW/kW Gigawatt/kilowatt

IEA International Energy Agency

IED Industrial Emissions Directive

IHS IHS Global Insight

ITB Interconnection Turkey Bulgaria

Acronyms, abbreviations and units

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ITGI Interconnection Turkey Greece Italy

k EUR / m EUR / bn EUR

ThousandEuro/MillionEUR/BillionEUR

LNG LiquefiedNaturalGas

m3 Cubic meter

MembersStates MembercountriesoftheEuropeanUnion

Mg Milliongrams

MWh Megawatthour

MtCO2 Milliontonnesofcarbondioxide

Mtoe/Gtoe Milliontonnesofoilequivalent/Billiontonnesofoilequivalent

Nabucco Projected pipeline between Turkey and Austria

NGL Natural Gas Liquid

NOx Mononitrogenoxides

North South gas interconnection

Gas interconnection between countries of Central and South Eastern Europe

OECD Organisation for Economic Cooperation and Development

PEOP Pan-European Oil Pipeline

PPP Purchasing Power Parity

PPS Purchasing Power Standard

PRIMES Partial equilibrium model for the European Union energy markets

Report Analysis of Central Europe’s Energy Sector (The Prague report)

RES Renewable Energy Sources

SO2 Sulphur dioxide

Southern Gas CorridorProjectgaspipelinefortransportinggasfromCaspianandMiddleEastcountriestoEurope

TAP Trans Adriatic Pipeline

t / Gt Tonne / Billion tonnes

tcm Trillion cubic meter

toe tonne of oil equivalent

TS Transformer Station

USD The United States Dollar

White Stream Georgia–Ukraine–EUpipeline

Acronyms, abbreviations and units

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9 Scope limitations and project context

Introductory character of the Report

The Report is an overview analysis of EU-11 countries’ energy sectors. Any conclusions drawn basing on the Report shouldbysubjecttofurtherdetailedinquiryinordertoconfirmandcomeupwithdetailedsolutionsconcerningactions in area of energy policy and energy investment decisions. The Report is intended to start a detailed and practical discussion concerning fundamentals and key goals of common EU-11 policy goals as well as detailed implementation instruments especially in area of common interest infrastructure investment projects.

Independence

Neither EY nor partners or other persons working on the Report are any way related to the Client and therefore are fully capable of providing independent consultancy services.

Diligence

The Report has been drawn up by EY with due diligence. However, EY, its partners or persons working on the Report are not liable for any mistakes or omissions in the preparation of the Report (excluding loss or damage caused deliberately or as a result of gross negligence).

Informationverification

The scope of our work does not cover procedures which are required by law or auditing standards for review andauditoffinancialstatements,asunderstoodbytheAccountancyActof29September1994,forthepurposeof rendering an opinion on their fairness and accuracy. Accordingly, EY is not rendering such an opinion on the information obtained from the Companies and used for the purpose of carrying out the agreed procedures. The analysis performed in course of preparation of the Report was primarily based on publically available data as well as on proprietary data based on experience in the energy sector assignments.

Procedures

EYisnotliableforinsufficiencyoftheproceduresappliedforthepurposeforwhichtheReporthasbeendrawnuporforanyotherpurposes.ThejudgmentonthesufficiencyofproceduresappliedremainswiththeusersoftheReport.The agreed procedures are not in lieu of other work and activities which the users of the Report should carry out according to their discretion and needs.

Report investment cost estimations

Investment costs estimations given in the Report are a macro-scale rough assessment of possible investment needs and are based on both available sources as well as EY expert assumptions. Without further detailed analysis and elaboration this estimation cannot be treated in any way as a valuation and used in course of investment planning and business decision making.

Usage of the Report

The Report has been drawn up on the assumption of it being used by competent persons and solely for the purposes stipulated herein. The Report should be read and analyzed in its entirety due to the fact that any conclusions formulated on the basis of out-of-context fragments may be inaccurate. EY staff is available to clarify any aspects of the Report. It is understood that should any questions arise, the users of the Report will approach EY forclarifications.

Scope limitations and project context

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Disclosure rules of the Report

TheReporthasbeendrawnupsolelyforitsdefinedintendedpurpose.TheReportmustnotbeusedforanyotherpurpose or made available to any other party without a prior written consent of EY, along with a stipulation that the Report will only be used in its entirety. Any quotes from the Report or presentation of the results and conclusions arising from the Report to any authorized person should always be made with a simultaneous provision of this entire Report.

Any interested person or organization who wants to obtain the Report, should contact Central Europe Energy Partners (CEEP), directly.

Scope limitations and project context

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