CEE in the spotlight

Macroeconomic insights for decision making in Central and Eastern Europe

Jason Wardell
PwC CEE Energy, Utility & Resources Leader

The energy transition in CEE: balancing energy security, growth and the green agenda

By Jason Wardell, PwC CEE Energy, Utility & Resources Leader

Even before Russia’s full-scale invasion of Ukraine began last year, the green energy transition and decarbonisation were already emerging as a top priority for companies, industry associations and governments in CEE. The war and resulting disruption to supply routes and relationships have focused minds and put these processes into overdrive, and they will be a key driver of development in the region’s economies over the coming years.

Energy companies, energy-intensive industries, policymakers and regulators will need to work together; each has a key role to play in decarbonisation. CEE countries that are EU members will be participating in the union’s drive to reduce emissions by 55% by 2030 and achieve carbon neutrality by 2050. Those effects will spillover  to the EU’s immediate neighbours and further afield, as countries look to export renewable energy and utilise mechanisms such as the EU’s Carbon Border Adjustment Mechanism to provide impetus for the shift away from fossil fuels.

1. Crisis and response: new sources of fossil fuels

Russia’s full-scale war against Ukraine has caused significant volatility in fossil fuel prices. Due to Europe’s historically strong dependence on Russian fossil fuels, especially natural gas, the unprecedented drop in natural gas deliveries caused prices to rise precipitously. This impacted both individual households and the entire European economy and its competitiveness.

Heavy dependence on Russian fossil fuels caused a sharp increase in gas prices after gas deliveries drop

Over a year on from the full-scale invasion it appears that CEE has weathered the initial storm caused by the interruption in supply, providing a basis for optimism that further decarbonisation plans can be achieved. Yet another example of ingenuity and resilience  is that the energy sector in Ukraine continues to operate during the war. This allows us to expect that the country’s shift to green energy, already in progress before the full-scale invasion, will continue and even accelerate.

The Ukrainian energy system has been operating amid war for well over a year now. This war is the first in history in which civilian energy infrastructure became a main target – power is ammunition. The fact is that under these conditions we still managed to keep the lights on across the country. This is a huge achievement enabled by coordination between business, government and the hard work of all our dedicated power engineers. We are grateful to our international partners and donors, private companies for their massive support of Ukraine’s energy sector. We have a lot of recovery work ahead, constructing a modern and decarbonised Ukrainian energy system that will become an integral part of the European energy market. The private sector will be the driver of this process, and we hope for strong support from international financial institutions. The new green energy mix of Ukraine will be one of the cornerstones of Europe’s energy security, independence, and freedom.

Maksym Timchenko, Chief Executive Officer of DTEK, the largest private investor in Ukraine’s energy sector

The energy crisis accelerated the process of diversification of energy suppliers in CEE-EU countries, as a range of market players rose to the challenge. In November 2022, Russia’s share of CEE-EU countries’ natural gas imports was just 19%, down from 51% a year earlier. Liquefied natural gas (LNG) from the United States and Qatar is making up the difference, along with imports of pipeline natural gas from Norway. 

Russia’s share in gas supplies to CEE-EU countries fell from 51% in November 2021 to 18% in January 2023.

The CEE in itself is rich in energy resources such as coal, uranium, natural gas and oil, as well as minerals such as iron, copper, zinc and lead – which will be key to building batteries and other devices for the shift to electric-powered mobility. The Caspian region, for example, has an estimated 8.3 trillion cubic metres of natural gas in proven and probable reserves, as well as pipeline infrastructure connecting it to Europe. Azerbaijan and Kazakhstan are large crude oil exporters. Kazakhstan and Uzbekistan are among the world's largest producers of uranium, which is used to produce fuel for nuclear power plants. Other countries such as Ukraine, Azerbaijan and Turkmenistan are rich in iron ore, gas, oil, titanium and other minerals. While coal reserves are useful only for the short term and will be phased out, these resources should be developed and integrated into broader EU and global energy markets to ensure further diversification.

Several recent investments show that countries are seizing opportunities to transform the energy landscape in the wake of Russia’s disappearance as a supplier. The European Union and Azerbaijan signed a memorandum of understanding on a strategic energy partnership, which includes a commitment to double the capacity of the Southern Gas Corridor pipeline to at least 20 billion cubic metres a year to the EU by 2027. Azerbaijan, Georgia, Hungary and Romania also signed a memorandum of understanding to develop an underwater electricity cable across the Black Sea to export energy to Europe. Croatia is also doubling the annual capacity of its LNG terminal to 6 bcm. Additionally, Poland is  making significant efforts to secure supplies of natural gas to the CEE region, including increasing the capacity of its existing LNG terminal from 5 to 8.3 bcm/y, as well as building a new 6.1 bcm/y Floating Storage Regasification Unit (FSRU) terminal.

2. The green transition: where we stand today

Looking at where CEE countries are in the transition to renewables, we see that Latvia (42.1%), Albania (41.4%), Montenegro (39.9%) and Estonia (37.6%) have the highest share of energy from renewable sources in Europe. Other CEE countries have also made significant progress in recent years. In Poland, the share of energy from renewable sources has risen from 6.9% in 2004 to 15.6% in 2021, in Czechia from 6.8% to 17.7% and in Hungary from 4.4% to 14.1%.

Across the region, business leaders have also come to recognise the need for investment in alternative energy sources, placing it high on their list of priorities. PwC’s 26th Annual CEO Survey finds that 48% of chief executives in the region foresee that the transition to new energy sources will impact their business in the next 10 years, and 46% plan to invest in alternative energy sources in the next 12 months. 

There is also significant potential for innovation in climate tech to accelerate the green transition; this is one of the key levers which will help the world transition to net zero. Recent technological advances, the rise of green consumers and a more supportive regulatory environment are driving venture capital investments in this field.

Last year PwC investigated the state of the climate tech market across 27 CEE countries, and found that investments have grown almost 50-fold from US$10.6m in 2013 to more than US$502m in the first half of 2021 alone. Most funding is going to mobility (60%) and industrial manufacturing (30%). We also identified 50 start-ups to watch, working in areas such as smart grid management, automated waste management and product tracing. But while it's encouraging to see larger and more deals, there are gaps in funding, with CEE attracting less than 1% of total global venture capital  funding, and a heavy concentration in more mature technology ecosystems such as the Baltic states.

3. The transformation agenda

Pioneering energy transition takes long-term vision and courage. Global energy giants offer several models for companies in our region. They can focus on the end consumer and electricity offerings, becoming carbon management companies of the future, or follow the ambitious goal of being leaders in the circular economy. The common theme is a clear commitment to allocate more and more investment towards new forms of energy. For example, Polish oil refiner PKN ORLEN has set a goal of emissions neutrality by 2050 and is implementing green technologies and energy based on low- and zero-emission generation sources, to reduce its climate impact and advance new business models.

CEE countries such as Poland, Ukraine, Latvia, Lithuania, Estonia and Kazakhstan have tremendous wind generation potential, while Hungary, Romania and Ukraine have great prospects in solar energy. 

Europe’s leadership position in energy transition and emergence of climate  tech

Poland, for example, is a country where the need for energy transition is well recognised and  where energy transition plans are being built on increased use of renewables, coupled with the introduction of nuclear power. Construction of the first nuclear plant will start in 2026, and the first reactor, with a capacity of 1.0–1.6 GWe, is to be commissioned in 2033. Additionally, energy companies plan to develop several small modular reactor projects.

Poland has ambitious plans to launch 5.9-6 GW of offshore wind installations by 2025. Also, Poland's electricity production from micro photovoltaic installations more than doubled in 2022 compared to the previous year. 

According to the current Polish Hydrogen Strategy, Poland aims to install a capacity of 2GW of low-carbon hydrogen production facilities by 2030 (mainly electrolysers, including those fuelled by offshore wind farms).

EU incentives and funding play an important role in accelerating the energy transition of various sectors (RePower EU initiative, EU Energy Platform, EU Green Deal). The EU's Just Transition mechanism is to mobilise at least 150 billion euros over 2021-2027 in the most affected regions and CEE is set to receive a significant share of the funds. The challenge for energy players and policymakers is to set the appropriate pace, find their role in the transition and deliver sustained outcomes.

The EU and CEE as a whole have a clear ambition to decarbonise. Together they are working to refine their priorities and plot a course towards a globally competitive carbon-neutral economy. The CEE region is driving its energy transition by a variety of means. First of all, it is accelerating change by addressing the security of traditional supply issues and leveraging its own renewables potential. Additionally, embracing the EU’s role at the forefront of energy transition and effective allocation of stimulus through EU funds and incentive mechanisms is contributing greatly to the cause. The emergence and development of the climate tech ecosystem is further evidence that our region is catching up with global energy transition trends. Finally, of course, positive sentiment from businesses and individuals is an important part of driving towards the decarbonisation agenda. 

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Jason Wardell

Jason Wardell

CEE Energy, Utility & Resources Leader, PwC Central and Eastern Europe

Jeffery McMillan

Jeffery McMillan

CEE Director of Brand, Marketing & Communications, PwC Central and Eastern Europe

Tel: +48 519 506 633

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