Will the political will for energy reform in Eastern Europe last?

Russia’s actions in Ukraine and strained political relations with the EU has put energy security high on the agenda. Recent moves by several of Eastern European states suggest that the political will now exists to engage more forcefully with energy diversification.

Concerns regarding Russia’s significant influence over Eastern Europe’s energy supplies has flared up again with recent actions in Ukraine. As GRI has explored before, energy reform remains a contentious issue for many Eastern European countries, and significant challenges that previously stifled reform continue to persist.

U.S. Vice President Joe Biden remarked no the issue when visiting  in Turkey in November. “This is about energy security. To achieve it, Europe needs to ensure it diversifies. Russia can and should be a player, but Russia has to play by the rules,” Biden said.

Efforts to Diversify

Recent moves by several of EU states suggest that the political will now exists to engage more forcefully with energy diversification. Following a grinding, 3-year process, the Lithuanian floating LNG terminal, aptly named Independence, will commence operations shortly and is now resting in the port of Klaipeda. It has the potential to displace the 2.7 billion cubic meters of natural gas imported annually from Russia.

In Finland and Estonia, a similarly long process to construct an LNG terminal in each country and a connecting pipeline appears to have been tentatively agreed to last week. It also has the potential to displace significant imports from Russia.

Finland has also sent a bill through parliament to construct another Finnish nuclear power plant despite enormous political costs. The Green Party in parliament strongly opposed preliminary approval of the Russian-constructed nuclear power plant operated by Fennovoima (a coalition of Russian-owned Rosatom and 40 Finnish companies). The resulting withdrawal of the Green Party from the Finnish coalition put Prime Minister Stubb’s entire ruling majority on a razor’s edge, with 102 MPs of 200 (including the non-voting speaker).

Poland continues to struggle with the energy source that had once been heralded as its silver bullet for dependence on Russian energy: coal. Coal prices have fallen significantly in the past few years, driven in part by increased shale gas and oil production in the United States. The government of recently installed Prime Minister Ewa Kopacz signaled in her maiden speech that she would devote attention to Poland’s energy security.

However, the fact that her speech was also met with coal miners protesting outside the Sejm against falling wages and poor working conditions (as well as cheap coal imports from Russia) implies that any significant energy policy shifts in Poland will be a challenge domestically.

Is There Sufficient Political Will?

From an investment perspective, energy policy is a persistently contentious and politically tricky issue. Many energy guarantees and investments (such as a nuclear power plant, or coal mining reforms) require significant upfront costs and a long-term perspective, neither of which are particularly desirable in the political realm.

In addition, while many of the reforms and new projects initiated by these governments are not in and of themselves contentious (with the exception of nuclear power), the parameters of completing major energy deals can be extremely difficult.

The tentative Finnish-Estonian pipeline was marked by years of back-and-forth regarding which of the two countries would host the larger terminal; Finland pointed to its larger population and energy potential, while Estonian MPs suggested a possible expansion from their side to include the other two Baltic states.

The dispute even led to a request that the European Commission cast some sort of ruling on the matter, which it chose not to do. Ultimately it was agreed that Finland would host the larger terminal, which immediately drew domestic Estonian opposition.

Due to the longer timeline of many of these projects, consistent political will is necessary to ensure successful shifts. The German shift away from nuclear power (which at one point peaked at sustaining 25 percent of its electricity needs) at such an accelerated pace has only been possible through the agreement of political parties on the left and right in favor of such a move.

This may be the one major area where investors should remain weary; Poland and Finland are each expected to hold parliamentary elections in 2015, and both face a potential political shift in the makeup of parliament.

In Poland, the parliamentary opposition, right-leaning Law and Justice Party saw significant gains in regional and mayoral races last week. And despite a recent uptick in support for the Civic Platform (PO) government, irregularities in the recent elections (which led to resignation of the entire electoral commission) could hamper the reelection prospects of the more centrist PO.

In Finland, Olli Rehn, former MEP and EU Economy Commissioner, signaled his opposition to the construction of a nuclear power plant proposed by Prime Minister Stubb. Rehn’s political party, the Centre Party, is on track to make gains in the April elections (if the current coalition even lasts that long), and any emerging coalition with the Centre Party and the Greens would likely lead to a significant dragging-out of the plant.

Both countries are currently led by leaders appointed to their current roles after their popular bosses took key positions in Brussels – Poland’s Donald Tusk as President of the European Council, and Finland’s Jyrki Katainen to become the European Commission Vice President for Economy and Monetary Affairs.

Both countries were initially very resistant to initiate sanctions against the Russian government. The survival of both coalitions appears to be in some doubt, and any long-term, costly energy reforms would have to be able to overcome a possible political shift following the April election in Finland and expected Polish elections in October.

Other countries in the region are more likely to maintain the sustained political will to support larger investment projects to wean themselves from Russian energy demand.

In Lithuania, the presidency of Dalia Grybauskaite has been marked by significant opposition and skepticism of Russia’s foreign policy moves, which has helped sustain Lithuania’s goal of removing itself from Russian energy sources through major energy investments.

In Latvia, which is neither a significant energy producer nor consumer, the upcoming presidency of the Council of the European Union could represent a significant platform to highlight ongoing collaboration in northeastern Europe to secure energy independence from Russia. The Russian government has already highlighted its opposition to the Latvian presidency due to a perceived anti-Russian bias.

Cause for Optimism

The general picture for the region appears to be an increased willingness to engage in energy reforms that support energy security. However, the region has gone through this dance before (especially during energy cutoffs from Russian companies in the winter) without meaningful, long term shifts.

The political will to sustain this drive to energy security is probably at the highest point it has even been, though it has yet to be tested at the polls. Finland seems to have mustered the strength to support long term energy investments, despite the near-collapse of its parliamentary majority, though any shift in power could undo this change.

Should the commitment to energy reform last in these countries, the domestic and international energy firms invested in these reforms stand to benefit considerably. Norway’s Hoegh LNG Holdings supported the Lithuanian terminal, Finland’s Fennovoima energy company coalition supports the nuclear power plant, and Finland’s recently nationalized Rosum energy company would support the LNG pipeline.

However, the small size of the markets involved makes it unlikely that this will create significant harm for Russia’s energy firms.