Energy Crisis - What Lies Ahead in The Next Few Years? Free Market Road Show 2023

INESS once again organized the popular conference Free Market Road Show in cooperation with the Austrian Economics Center as part of the international conference tour. Its main focus was the current problems of the energy market in Europe, the challenges faced by entrepreneurs as well as energy suppliers.

The energy consumers’ panel consisted of representatives of small and large businesses, the energy suppliers’ panel included representatives of suppliers of basic commodities as well as relevant government representatives.

The event took place at Pálffy Palace in Bratislava on 26 April 2023 and was attended by more than 100 people.

The conference was supported by EPH Foundation, Tatra banka Foundation, Happy Day Catering. The media partner was energie-portal.sk.

In the following text we present the main ideas that were expressed in the contributions of individual panelists, including presentations.

Richard Ďurana (INESS)

Richard Ďurana opened the conference with an introductory speech in which he pointed out that the EU was able to cope with the Russian fuel supply shortage thanks to the free market. He also drew attention to the uncertainty arising from the upcoming process of decarbonisation of the European economy.

PANEL I. BUSINESSES IN THE ENERGY CRISIS

Michal Lesay (CEO, ZIN s.r.o)

Michal Lesay is the owner and director of a company that deals with galvanizing of metals and production of lightning conduits. The production of the company is therefore energy intensive. In his contribution he stated:

The energy efficiency of the firm is high; it is not possible to reduce it substantially.
As the company is dependent on gas for production, the conflict in Ukraine has caused him many sleepless nights due to Slovakia’s dependence on imports.
The inclusion of his company in the emissions trading would increase costs by 50-100,000 euros per year, which would be manageable but conditional on a price increase. The increased cost of production may be reflected in a lower demand for galvanising and its replacement by non-environmentally friendly coatings.
State aid to businesses to compensate for energy prices was one of the last in the EU – this aid is essential in terms of competitiveness if other EU countries support the industry.
The aid was insufficient, he pointed out, with the government prioritising 23 degrees Celsia in households rather than supporting jobs retention.
Electrification (decarbonisation) of manufacturing is possible but would require high upfront investment.
Installed rooftop photovoltaics increases company revenues.

Link to PowerPoint presentation.

Miroslav Kiralvarga (Vice President, US Steel)

US Steel is the largest steel producer in the country, with high energy consumption, and is also the largest CO2 emitter in the country. In his presentation, Mr. Kiralvarga said:

US Steel consumes 1.5 to 1.7 TWh of electricity annually. The company’s own plant generates 0.8 TWh, using industrial waste gases in addition to coal.
The situation in Ukraine has of course affected more the small ones who usually did not have the means to buy the contracted price and bought it on the spot market.
Compensation of energy prices by the Ministry of Economy of the Slovak Republic was insufficient.
In the case of emission permits, the USS receives 2/3 of what it needs free of charge, the rest is purchased on the free market, by 2030 the volume of free permits will be reduced to 50% and by 2035 to 0%. This will be obviously reflected in steel prices.
If the US Steel follows the decarbonisation path, this will increase electricity consumption to 3.5 TWh.

Ron Manners (Mannwest Group, Australia)

Ron Manners has a wealth of experience investing in the mining sector, having led the third largest gold mining company in Australia. In his speech he said:

While we in the developed world are shutting down nuclear and fossil fuel plants, China is opening more operating carbon plants than the rest of the world combined.
The choice is really between a sensible, rational decision about the energy future and a populist decision.
Green movements use the word climate collapse. I don’t know what the word means, it’s just the language of fear.
All kinds of energy sources should be allowed to compete fiercely and let the best provider win.
At the same time, the decision to go all-electric will be different in every country and in every society. You have to study economics and especially public choice theory to understand how some groups are able to push their visions through legislation that will cause minor damage to millions of people, but combined will have a major impact.

Link to PowerPoint presentation.

John Chisholm (Decisive technology, John Chisholm Ventures, USA)

John Chisholm has four decades of experience as an entrepreneur, CEO and investor. He founded and served as Chairman of Decisive Technology (now part of Google) for five years. At the conference he said:

California and the California government have shown us how not to do it with energy.
We’ve invested heavily in solar and wind, but we’ve neglected to maintain our fossil fuel sources of electricity.
It’s hard to believe that in a first-world country like California, we have a third-world energy industry facing blackouts. This is not a market failure; it is a political failure.
Whenever there is a problem, our first instinct is to write a regulation.
Fusion energy is a very exciting area. There has recently been a EUR 2 billion investment in Commonwealth fusion technology.
Something that should be considered is what difference our efforts will make in Europe and the US. Because most of the carbon footprint is not produced in Europe, but in China and India.

Peter Gerhart (State Secretary, Ministry of Economy of the Slovak Republic):

Prior his position at the Ministry of Economy, he was employed at JAVYS (Nuclear and Decommissioning Company). In his presentation, he said:

Without nuclear power, mankind will not survive, whether we like it or not.
The goal of the energy sector from the point of view of the state is that approximately 70% of the electricity produced in Slovakia should come from nuclear energy. Now it is 55%, after the completion of Mochovce nuclear power plant units 3 and 4 it will be far higher, between 70-75%.
Unfortunately, the largest source of renewable resources in Slovakia is water, which means that we do not have geothermal, solar or wind power plants.
If we are to meet the 2050 climate target (carbon neutrality), we need to prepare Slovak industry and therefore provide enough hydrogen for Slovak industry.
Compensation schemes are not omnipotent; we are mitigating the consequences that have occurred.

PANNEL II. SUPPLIERS IN TIMES OF ENERGY CRISIS

Radovan Ďurana (INESS):

The price of gas has fallen, but only to three times the 2019 price. Similarly, the price of electricity remains high.
Europe, as a rich customer with a fat wallet, has totally reshuffled a market that once ended up mainly in Asia. We survived the winter because we withdrew gas mainly from Asia.
Although gas price in Europe has fallen nicely, it is still six times more expensive than in the US markets.
Slovakia has managed to manage its gas more economically and consumption has been lower. But the decrease was lower for households, only about 12%, for businesses it was 23%. Czech households, which did not have the luxury of regulated prices, saved up to 20% of gas.
On the Energiewende: the transformation has a high opportunity cost. When you replace a working nuclear power plant with a wind power plant, you have spent billions that could have been invested productively, in the production of new goods and services.
Energy prices are no longer likely to fall much from current prices
The energy transition, because of the lack of a long-term electricity storage solution, possesses major risks and a reason for continued high prices.
International trade has saved us, so let us value it.

Link to PowerPoint presentation.

Anton Molnár (Director of Communications, Slovnaft)

Europe has decided to prefer “branded” energy. The question is whether there will be a demand for such branded energy as for Louis Vitton
The fuel market has done well; the oil price is back to where it was before the crisis.
The sanctions apply to Russian oil and products imported from Russia. However, products made from Russian oil outside the EU end up on the European market without restrictions (e.g. from Turkey or the Arabian Peninsula).
A constraint for oil supply is the lack of pipeline capacity from Croatia/Italy. The Croatian state transporter has significantly increased the price for transporting oil.
What should be mentioned is that the Arab oil imported by Slovnaft was, even with import and logistics, about 15 million dollars more expensive than the Russian oil.
We do not agree with the government policy, we consider it to be ‘blackmail’ when the European Union has proposed a solidarity tax of 33%; and we are a subject to 55% tax for this year and 70% for next year.

Link to PowerPoint presentation.

Peter Kučera (Member of the Board of Directors, Slovak Gas Industry):

We have been using so-called diversification contracts. We managed to conclude diversification contracts with companies such as BP, Shell, ENI.
We are 70% diversified from the Russian contract.
Today, the situation on the gas market is very atypical. The reservoir fullness in Europe is at huge numbers, which may also be a signal that uncertainty in the market persists.
Certainly; a positive step to ensure stability of supply is the process of joint purchasing at EU level.
Households paid no more in 2023 than in 2022 overall. 15% price increase covered by +/- savings in consumption.

Link to PowerPoint presentation.

Zdenek Cech (Head of Economic Analysis Section, Representation of the European Commission in Slovakia):

We have managed to significantly reduce the share of Russian oil in our imports. The share has dropped from 45% to 18%.
We are trying to replace the lack of gas with an increase in the share of renewables, including hydrogen.
The Slovak economy is heavily industrialised. It is a strongly industrial and open economy with a high energy intensity.
We hope to create an energy union. There are large price disparities between, for example, the Iberian Peninsula and others, and there is still a lot of room for our common market to work better.
The share of solar electricity generation in the Slovak Republic is only 2.8%. The cumulative solar capacity in Slovakia is 7%, which is the second lowest in the EU. There are roughly 5 wind farms in Slovakia, wind electricity is basically not used.

Link to PowerPoint presentation.

Matej Straciak (Director of Risk Management and Internal Audit, Slovenske elektrarne):

After a relatively calm start in 2022, electricity prices started to rise in 2Q 2022 and reached their peak in 3Q 2022.
This price spike accelerated storage filling, as did the mild winter and, unfortunately, the industry slowdown.
The energy sector in Europe will still be heavily influenced by how the nuclear plants in France operate, whether there will be a dry summer (lack of water for cooling), further corrosion issues or a hard winter.
The price of emission permits is high, and these are what is making Europe less competitive.
If we wanted to secure electricity on the stock exchange in August 2022, we would have to have €5.6 billion in cash deposited on the stock exchange. This would mean a de facto complete halt to trading on the exchange.
In terms of electricity prices on the market, we are not in a crisis. The price of electricity that we are now seeing on the market corresponds to the cost to power stations under the merit order principle (mainly gas-fired) of producing electricity, including the cost of permits.

Link to PowerPoint presentation.

Peter Dovhun (Director, SEPS -Slovak Electricity and Transmission System):

We are decades away from having affordable large-scale electricity storage.
Based on models, we can predict what will happen in a day or two on the electricity market.
All areas (electric cars, flying) need individual country solutions.
How many renewables should Slovakia have in 2030, 2040, 2050? We don’t have an answer to that, we are looking at it in terms of models, in terms of sustainability and in terms of affordability.
We have two options. Either to build a model based on stable energies and supplement the peak with renewables, or, like Germany, to build a base of renewables and supplement the peak with stable energies.
The planned large-scale ramp-up of renewables will create a surplus of electricity during the day that the Slovak economy will not be able to consume. At the same time, we can expect surpluses in neighboring countries. This may negatively affect the resulting electricity price, while at other times (especially in the morning peak), there will be a shortage of electricity.
SEPS allowed 1GW of renewables to be connected last year, regulation and slow construction is holding them back.

The final remarks of the conference were delivered by Martin Gundinger from the Austrian Economics Center and Radovan Ďurana from INESS.

A video recording of the conference is available in Slovak at this link.