In the current topic of the week, Lider addresses the resilience of various economic sectors to the impacts of the latest geopolitical events. Since the energy sector is at the center of all developments and entrepreneurs from all other sectors fear further increases in energy prices, we present several perspectives from different institutions and experts dealing with energy.
The Russian attack on Ukraine has caused uncertainty regarding supply security and new price shocks in the energy market. According to current price lists, it is estimated that if prices remain at the current level for an extended period, the annual costs of importing gas, electricity, coal, and oil for Croatian suppliers could amount to an additional 30 billion kuna. This sufficiently illustrates the magnitude of the price shock; part of it will certainly impact the profitability of energy companies, but the entire economy and citizens are already feeling it.
How We Arrived at 30 Billion
The shocking data on the drastically increased price of imported energy sources, along with the calculations for Lider, was provided by Ivo Čović, president of the Renewable Energy Sources Association at the Croatian Chamber of Economy.
Here’s how he arrived at the unpleasant figures:
Gas
Croatia imports about 2.2 billion cubic meters, or 23 million MWh of gas. In ‘normal’ times, the price per MWh was around 150 kuna, and now it reaches up to 900 kuna or more, which would result in an annual cost of about 20 billion kuna at that price. The increase for this energy source alone would amount to an incredible 17 billion kuna if the entire quantity of gas were paid at current prices. It is possible, of course, that some suppliers have more favorable long-term contracts for supply, in which case the price shock would be smaller.
Electricity
Let’s assume that the necessary import of electricity is around two million MWh (high dependence on hydrological conditions). The price per megawatt-hour of electricity was around 525 kuna, and the annual cost for that amount of electricity is about 1 billion kuna. Since the new price is at the level of 1,500 kuna or more per megawatt-hour, that cost would rise to 3 billion kuna annually, or 2 billion more than under ‘normal’ circumstances.
Coal
Croatia does not import much coal, we are talking about an annual quantity of 600 thousand tons. A ton cost around 750 kuna, which was an expense of 450 million kuna. But now it has doubled. A ton of coal costs 1,500 kuna, so for annual needs, 900 million kuna must be allocated.
Oil
Since the oil refinery in Sisak is closed, and the one in Rijeka is temporarily not operating, more oil derivatives than crude oil are currently being imported. The annual import of crude oil and oil derivatives in recent years has been equivalent to the import of 3.2 million tons of oil, or about 25 million barrels (more accurate data can be obtained from experts in that field). A barrel of oil cost 525 kuna, and now its price has risen to 900 kuna. Under these conditions, the annual import cost rises from 13 billion kuna to 22 billion kuna.
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– All the mentioned figures regarding quantities and prices are subject to different and even more precise interpretations. However, the calculation is indicative and its purpose is to show that it is possible and likely that the annual cost of importing energy sources and energy will rise from the level of 2.5 billion euros to over 6 billion euros, or almost 30 billion kuna – emphasizes Čović.
His key message is that we would be less worried in every subsequent crisis situation if we were, logically, less dependent on energy imports, if we had a functional oil refinery, even more strongly diversified supply routes such as LNG terminals, more installed capacities for energy production from renewable sources, and developed hydrogen facilities. These are signals that the government should take seriously at this moment and create conditions for them to be realized as soon as possible.
– Numerous projects for electricity production from renewable sources have been developing for years and have failed to reach the realization phase due to complicated legal procedures and actions. If we had more installed solar and wind power plants now, we would not be experiencing such an energy shock. All government measures must be aimed at achieving such long-term goals as quickly as possible. Short-term solutions such as reductions in network fees, excise taxes, and similar measures may temporarily ease the situation a bit, but ultimately cause more harm than good – concludes Čović.
It is completely clear to everyone that fossil fuels cannot be abandoned overnight and that the first step in reducing dependence on Russian gas, which currently covers 40 percent of European needs, is the diversification of supply routes. However, wherever it comes from, we must get used to the fact that gas will no longer be cheap, notes Srećko Ezgeta, president of the Association of Gas Suppliers and Distributors at HGK. He states that dependence on gas imports will naturally decrease in the coming period for the simple reason that it will be used less. The price shock will encourage consumers to turn to other energy sources and start looking for available substitutes, and the transformation of the energy sector will be supported by the state by providing various subsidies.
Mitigating the Impact on Consumer Standards
The sudden price spike has prompted prompt consultations at the government and employer levels to find adequate solutions to mitigate the impact on consumer standards. HUP has proposed a series of compensatory measures in the context of helping the economy, many of which have been incorporated into the government’s initial package, says Emanuel Kovačić, president of HUP-Energy Association.
– After last year’s freezing of fuel prices, the first agreed steps in reducing margins and excise taxes on fuels are proof of the willingness to give up profits on the part of suppliers/producers of energy and the state. Keeping fuel prices stable for a period of three months is a quick and effective measure, but it is unsustainable in the long term for both sides. Neither side can give up income for an extended period without jeopardizing the continuity of business (production and supply of energy and energy sources), and the state fulfilling all budgeted activities – said Kovačić, emphasizing that the Croatian Employers’ Association and members of the HUP-Energy Association, as an important social partner of the state, are highly socially sensitive and aware.
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Plan RePowerEU
Kovačić emphasizes that we must not forget the challenging decarbonization goals set by the European Green Deal, which are testing the resilience and adaptability of the energy sector even without the current energy crisis.
– The European Commission recently proposed a draft of the RePowerEU plan, aimed at making Europe independent from imports of oil, gas, and fuels from Russia. The proposed package of activities consists of three pillars: urgent measures to stabilize retail prices, filling 90 percent of energy storage by October of this year, and reducing dependence on Russian fossil fuels by diversifying gas supply and increasing the share of energy from renewable energy sources – lists the president of HUP-Energy Association, commenting that some goals are achievable in the short term, but it will take at least a year to realize projects, and for most, it will take somewhat longer.
Among other things, the RePowerEU plan is a decisive step towards the rapid development of the biomethane industry in Europe. However, the Renewable Energy Sources Association points out that the extreme rise in raw material prices for biogas production calls into question the sustainability of this sector, which is heavily relied upon to reduce dependence on Russian gas.
– The European Commission’s statement on the RePowerEU plan states that the sector is ready to deliver 35 billion cubic meters of biomethane by 2030, which is more than 20 percent of current gas imports to the EU from Russia, and calls for the inclusion of this goal in the amendment of the Renewable Energy Directive (REDIII), which is currently being drafted. By 2050, this potential could triple, growing to over 100 billion cubic meters and covering 30-50 percent of future gas demand in the EU. In such extraordinary situations, it becomes clear to everyone how important it is not to depend on energy imports and to be able to rely on domestic production and supply security – explain the OIEH association.
Adjustments of Policies and Mechanisms
Diversifying gas supply routes increases demand from alternative suppliers, which, the HGK Energy Association emphasizes, carries the risk of additional price increases on their part, which could further spill over into electricity prices. Therefore, they say, it will be important to continuously adjust policies and mechanisms to enable market participants to survive with minimal damage. They welcome the amendment of the Regulation on the Establishment of Retail Fuel Prices along with the reduction of excise taxes, and they assert that similar moves will certainly be needed in the future.
– In the district heating sector, contracts related to the procurement price of gas for the production of thermal energy are soon expiring, and new contracts will be concluded at much higher prices. We hope that in dialogue with the government we will achieve equalization of the procurement price of gas and subsidies for households in district heating plants and boiler rooms connected to the distribution network, as households connected to the gas transport network have, which is particularly important considering the role of the district heating sector in the decarbonization of the energy sector. Secure supply of sustainable energy for Europe is only possible by continuing the green transition. This year, metal and other raw material prices are soaring, and we must be aware that we will need to invest significantly larger financial resources in renewable energy sources than planned – both at the national and EU levels – emphasize the HGK Energy Association.
Urgent Abolition of Administration for Faster Realization of Renewable Energy Projects
From that Association, they add that the European Commission recognizes that the speed of investment in renewable sources will also depend on administrative procedures that need to be simplified and accelerated. In this regard, HGK has already pointed out in discussions with the government that administrative procedures should distinguish between investors who produce energy for their own needs and those who do so for commercial purposes, and that subordinate legislation must be adopted as soon as possible, which has left certain projects on hold. HGK advocates for the prompt adoption of new subordinate legislation in accordance with the new Electricity Market Act that will enable the realization of new projects. They emphasize that for projects that submitted requests for energy approval by January 19 of this year, it is necessary to expedite the completion of the procedure.
Everyone agrees on the necessity to accelerate procedures for the realization of renewable energy projects. The importance of renewable energy and domestic energy production has already been recognized by the state through the Electricity Market Act (ZoTEE) and the Renewable Energy Sources and High-Efficiency Cogeneration Act (ZOIEiVUK). Now it is important, emphasizes the Croatian Renewable Energy Sources Association, that decision-makers enable the swift implementation of the energy transition through more efficient administrative procedures and better interdepartmental cooperation.
– Time is often lost waiting for decisions or responses, which consequently slows down the development and construction of new projects. It is crucial to understand that stronger and faster development of renewable energy projects brings significant benefits. The European Commissioner for Energy, Kadri Simson, recently emphasized that we cannot talk about a revolution in renewable sources if it takes seven years to obtain a permit for the construction of a wind farm and added that it is time for these projects to be treated as if they are of the greatest public interest because they are. The current energy crisis and the extreme rise in prices as a result of wartime events further highlight this. We should not view renewable energy as an obligation we must fulfill to achieve European goals, but rather as an opportunity to meet domestic energy needs. We should focus on the well-being of Croatia through increasing domestic energy production and reducing the need for imports. If we had started this earlier, stronger, and bolder, we would certainly be more resilient to the global price disruption now. Today’s investment in new renewable energy projects is an investment in the security of future energy supply – emphasized Maja Pokrovac, director of the Croatian Renewable Energy Sources Association (OIEH).
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New projects are currently not only stalled at the administrative level, but their realization is also hindered by disruptions in supply chains. The demand for renewable energy equipment has surged in Europe, everyone is turning to alternative solutions, and manufacturers of solar and wind power equipment are unable to meet the demand. Additionally, as in many other sectors, the processes of procuring raw materials and materials have become akin to an adventurous video game. Everyone wants to secure supplies as soon as possible, and conditions change from day to day. From OIEH, we learn that procurement offers for materials that were previously valid for 30 days have been significantly shortened and now only last 3 to 5 days. On the other hand, delivery times have gone in the opposite direction. However, this challenge also creates an opportunity. Instead of focusing solely on building renewable energy facilities, Croatia could participate more strongly in the production of equipment for them. Given that onshoring processes are underway and that due to broken supply chains and their skyrocketing costs, production from the Far East is returning to Europe, this momentum should be seized. OIEH sees this as an opportunity for reindustrialization, and perhaps, they say, everything could be supported by funds from the National Recovery and Resilience Plan.
Although there is always room for improvement, some changes have already occurred. The legal frameworks of ZoTEE and ZOIEiVUK have opened up space for a new market approach and business models for the application of renewable energy sources in Croatia.
– Through these new models prescribed at the EU level and implemented in Croatian legislation, companies in the renewable energy sector have recognized their chance in the market. They have long prepared and developed projects to be ready for realization, so we already have the first virtual power plant, the production of large battery energy storage systems, the beginning of hydrogen production… These are all prerequisites for a faster energy transition, and thus a reduction in dependence on imports. Our companies have the know-how, are innovative, and are keeping pace with Europe. The fact that there are currently about 6000 MW of requests for energy approval for the construction of new renewable energy projects in Croatia, which is six times more than previously installed, shows the readiness of investors and the strength of the renewable energy sector in Croatia. In five years, which is the legal deadline for the construction of these new facilities, Croatia has a chance to achieve energy self-sufficiency in electricity production. This is of strategic importance – emphasizes Pokrovac.
