Low demand, weak prices hit new CEE power plant projects
* Power prices down steeply after financial crisis
* Regulation also plays a factor
* Questions over return on investment
By Michael Kahn
PRAGUE, March 11 (Reuters) - Central European utilities, facing weakening wholesale power prices and uncertainty about future demand in slumping economies, have scuppered or suspended coal and gas projects with total capacity over 5,000 megawatts.
Over the long run, these decisions could lead to shortages in some nations when demand strengthens and as European Union environmental laws force the closure of old coal-burning plants.
The amount of generating capacity cancelled or delayed over the past two years is enough to power 5 million homes annually, or about half the population of the Czech Republic. That represents about half of the region's capacity expansion initially envisioned in recent years.
"It is clear (that) in the whole region the financial returns are no longer here," said Michael LaBelle, an energy expert at the Central European University in Budapest.
"Now it is a case of capital flight for greener pastures," he said, referring to other emerging markets and countries further east.
More than four years after the global financial crisis, electricity consumption remains weak in the manufacturing-heavy region, and there are no strong signs of a rebound on the horizon.
This uncertain future has driven the region's biggest utility, Czech power group CEZ, to delay plans to build four plants.
They include two 850 MW gas-fired plants in Hungary and Slovakia, planned together with Hungary's MOL, and two units that together would add more than 1,200 MW in its core Czech market, where electricity consumption declined by 2 percent in 2012.
"The current market situation is uncertain because of the decrease in wholesale power prices, a huge increase in renewable resources, and uncertainty over the carbon market and economic development in Europe," CEZ spokeswoman Barbara Pulpanova said.
A surge of renewable production in the region, mainly in neighbouring Germany, has further increased supply and eroded prices.
German benchmark wholesale forward power prices have dropped more than 50 percent in value since prices peaked before the outbreak of the financial crisis in 2008, and more than 30 percent since the Fukushima nuclear disaster in Japan last lifted prices in March 2011.
Central European and German forward power prices are closely linked and generally move in the same direction.
Poland's grid operator expects available capacity to fall in coming years due to maintenance shutdowns and a lack of new generating units, said Maciej Hebda, an equity analyst at Espirito Santo Investment Bank in Warsaw.
Meanwhile, EU laws aimed at reducing carbon emissions are likely to force the closure of aging coal plants that generate the majority of Poland's electricity.
Electricity demand fell by 0.6 percent in 2012 in the region's biggest economy, but the grid operator has warned that when demand eventually returns, the risk of shortages is likely to increase from 2016.
"My calculations show that currently planned projects will not pay off because of low electricity prices," Hebda said.
In recent years, EDF has suspended plans for a new coal-fired plant in Rybnik, while Fortum has suspended coal and CCGT (combined cycle gas turbine) projects at Wroclaw and Zbrze. Together these projects amount to 1,430 MW of potential capacity.
Data from a recent Platts energy conference showed, however, that about 4,400 MW are still on track in Poland, either seeking government approval or in the tendering process. A few projects remain on track in the rest of the region.
In several countries a slow pace of market liberalization and lack of transparency have helped scare off potential investment in new generation.
Poland has yet to fully liberalize its power market as lawmakers grapple over new legislation to regulate electricity, renewable sources of energy and gas markets.
In Hungary, the government has sought to keep its budget deficit down in part by imposing new taxes on utilities and has also vowed to cut energy prices for consumers, which analysts warn could distort the market and scare off investment.
Over the past few years, Hungarian-controlled utility MVM has shelved a plan with France's GDF Suez for a 420 MW project at Dunamenti and a project with Germany's RWE for a 440 MW lignite facility at Matra.
"Falling energy prices and economic slowdown do not make investing in energy easy. Also the regulatory issues are not favourable," said Dariusz Mioduski, chief executive at of Poland's Kulczyk Investment, which invests in energy projects. (Additional reporting by Agnieszka Barteczko; Editing by Jane Baird)
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