Tuesday, December 16, 2008

Crunching the Credit to Make Power

One casualty according to this article in the FT, is the lack of finance credit for energy projects in the UK, particularly nuclear. The point is made, and we should reflect upon this for the wider CEE market place, that the withdrawal of generation impacts on the ability of countries to meet their climate change goals.

“Generating capacity equivalent to nearly a third of current electricity demand will be made redundant by 2020. It will need to be replaced. We believe that in the current economic climate there is a high risk that the energy companies will not be able to raise the finance necessary to build this.”

The CEE region, needs to build an equivalent amount of generation by 2020 to replace the outdated plants (if not a little higher). Thus the topic of credit availability becomes a central issue for the CEE region for the next year or two.

There are two outcomes of the tightening credit markets for the CEE power region. The first is that the plants that are on the drawing board are built. The building of the Emfesz new 1600 MW gas fired power plant is proceeding with the first 800 MW now being built. This is privately financed (although MVM may have a stake in it) initiative, which indicates that the market is still seen as requiring this much supply.

This leads us to the second point, the failure of some countries to build generation will open up export and extra revenue opportunities for those that are able to build. Thus, the projected demand will no doubt drop slightly from projected amounts (although I would say not by much if conservative estimates were earlier taken into account), but with the decommissioning of plants and emissions goals, then newer plants will have an advantage. Especially, if there are less plants built. Thus, building a power plant in the CEE region, can still be advantageous if these scenarios are taken into account. Also the lead time that is needed still means they won't come on line until the economy begins to recover.

A worse case scenario does need to be considered, and the only one that I can think of is that the economy continues to soar and demand drops for longer than expected - say up to five years. But regardless, climate change goals will still be implemented, thus cleaner plants (with CO2 storage possibilities) remain and profits will flow to those cleaner and newer plants.