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Renewable energy, especially wind energy, is becoming more and more popular all over the world. It was expected that the declining demand for oil and other traditional sources, which led to lower prices, would be mirrored in renewables. Surprisingly enough, the opposite happened: in 2015 a record global investment was achieved in the sector, resulting in a 4% expansion in the sector compared to 2014.

Notwithstanding this global expansion, it seems that Hungary is still not particularly interested in windfarms or wind power-plants. In spite of some positive reports from local investors who established their wind energy businesses long ago, the current economic environment is still unfavorable as a result of complicated licensing procedures required to establish wind power-plants or wind farms in Hungary. These power plants or wind farms can only be installed once an investor wins a capacity tender initiated by the Hungarian Energy and Public Utility Regulatory Authority (the “Authority”). Making a business decision to be involved in a wind power plant project requires reliable information as to whether or not a tender will published, and if it is, additional reliable information is required about the details of the tender. In addition, the difficulty is not only in getting the appropriate information regarding the tender. Prior even to applying for the tender, environmental and building permits, as well as a simplified small power-plant license, have to be obtained and must be attached in support of the application. In light of this time-consuming and complex procedure, it is difficult to imagine that anyone would want to invest time and money into this process before it is even ascertained whether a tender invitation will in fact be published or not.

As a precondition to the tender publication, the Authority has to analyze the following on a yearly basis: (i) whether it is possible to establish new wind power-plant capacities, and, if it is; (ii) how large the capacity will be. The Authority should publish the outcome of such analysis on its website every year by March 31. On the day of writing this article (on April 1, 2016, one day after that deadline), however, the analysis was still unavailable. If the Authority decides that it is possible to establish new wind power-plants, it initiates the tender procedure by publishing an invitation to the public. 

In the absence of a tender, it is impossible to establish wind turbines in Hungary. The last wind energy capacity tender was published in 2009, but it was withdrawn in 2010 by the Authority itself due to some legal amendments at the time, and thus none of the applicants were successful. Since then, no tenders have been published, so it seems fair to deduce that there is no current political intention to establish wind power plant capacities. The opinion of energy professionals is that priority has been given to nuclear energy as a result of the deal with the Russian State to build a new nuclear power plant, scheduled to be put into operation in 2025-26, and what is more, many energy professionals believe that the government is simply not interested in renewable technology at all. The official argument against wind power plants is that they can be a burden on an electricity system – too much power is generated in windy circumstances, and not enough energy is generated to sustain the grid when there is a dead calm – which makes it impossible to predict the exact energy flow.”

However, Hungary is required to meet energy-production standards set by the EU, which stipulate that renewable energy sources reach approximately 15% of all energy production in Hungary by 2020. The ratio is below 5% now. To achieve this target, new technology – a storage system based on lithium batteries – may help. Using storage means that the continuous stream of power can be ensured, and if this technology spreads, the official argument regarding limited technical possibilities will become outdated. Ths may be the solution which will lead to a fundamental change in the Hungarian licensing regime for the better.

By Peter Gullai, Attorney at Law, Schoenherr Hungary 

This Article was originally published in Issue 3.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

February this year saw a possible end to the first set of private enforcement litigation proceedings in Hungary.

The Debrecen Court of Appeal upheld the first instance judgment of the Eger Court, which had dismissed a claim brought by NIF Nemzeti Infrastruktura Fejleszto Zrt. (the NIF, a State-owned road infrastructure development company) against two defendants. The two companies had been fined by the Hungarian Competition Authority (HCA) in 2005 for bid-rigging in a motorway construction tender published by the NIF in 2002. Following the HCA decision and the court rulings upholding that decision, the NIF launched several lawsuits against the cartelists at the end of 2007, the last of which ended at first instance in October 2015, and at second instance in February 2016. 

The length and the outcome of the procedure may suggest that it is not particularly easy to bring successful cartel damages claims in Hungary. So far, such claims have been tried primarily in the road construction sector. The biggest difficulty claimants (mostly tender publishers) have faced is proving not only the amount of their loss, but also that it was they who suffered the loss – i.e., that they did not pass on the loss to the entity that ultimately financed the construction. For example, in the motorway cartel cases, this difficulty was pinpointed by the fact that at one point both the NIF and the Hungarian State had lawsuits filed against the same cartelists before two different courts – a circumstance that led to the automatic inadmissibility of one of the lawsuits. The courts in all the lawsuits filed by the NIF essentially held that since the State had refunded all expenditures that the NIF had spent on the motorway construction, the NIF could by definition not have suffered any loss of its own assets, irrespective of whether the cartel had a price-increasing effect. 

Like all EU Member States, Hungary will have to implement Directive 2014/104/EU (the EU Private Enforcement Directive) by December this year. The Directive in itself is not of ground-breaking significance in terms of the potential possibility of bringing private enforcement claims against defendants in Hungary. For example, Hungary is one of the very few countries in Europe that introduced as early as 2009 a (rebuttable) statutory presumption that a hard-core cartel causes a 10% increase in prices. Furthermore, Hungarian courts can also consider competition damages claims where the HCA decides not to open an investigation, although such cases are rare in practice.

By Eszter Ritter, Managing Associate, Andreko Kinstellar Ugyvedi Iroda 

This Article was originally published in Issue 3.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Airbnb and Uber have changed the way we think about travelling and accommodation, but how does a sharing economy affect the real estate sector?

While a sharing economy is not new in other fields of the economy, it has only become widely used in the real estate sector in recent times. Room sharing, office and workplace sharing, and even sharing of parking spots are getting popular, while several applications aim at improving the coordination of construction projects by sharing workforces and equipment. The shifting of consumer preferences from ownership to sharing, from individual use to cooperative utilization appears to be a worldwide trend. Whether the model is connecting consumer-to-consumer or business-to-business, people find new ways to connect and share their resources.  

However, despite the economic and social benefits of the concept, the opportunities do not come without challenges.   

Legal Challenges for Sharing Economies

In terms of regulatory regimes, sharing economies are often considered as a grey area between highly regulated business activities and less legally controlled acts of private individuals. The disputes between room-sharing companies and the hotel industry which have been in the media spotlight lately have revealed some general issues and regulatory gaps which could also impact other sharing economy concepts. 

In Hungary, for example, room sharing does not qualify as a standard lease relationship but as a short term accommodation service provided by the host. While lease agreements aim at the long term lease of properties and require no permits and licences in general, accommodation services are limited to a shorter period, may involve additional services not traditionally associated with leases (such as cleaning services, serving breakfast, etc.), and may also be subject to certain licensing and notification obligations. The problem with this distinction is well known: some hosts do not obtain necessary licences and fail to pay taxes in connection with the services provided. Given that these hosts are actually competing with hotels and other accommodation service providers, they can therefore obtain an economic advantage to their competitors and cause significant tax revenue losses for the state. Because in typical cases both the host and the guest are private individuals, non-compliance with these provisions is extremely difficult to monitor and track down by the competent authorities – in particular the tax authorities. Frequently the conditions of the agreement between the host and its guests are not clearly regulated, and/or the general terms and conditions are not available in certain languages, which can lead to legal disputes and also cause consumer protection issues. One of the greatest challenges of sharing economies will be to mitigate language, liability, and security concerns. 

In Hungary, other legal concerns have also arisen in connection with room sharing activities, as the growing demand on hosting services and the increased use of privately owned properties for short term rentals has caused a shortfall in the amount of real estate available for general living and housing purposes on the market. These two factors together have resulted in a rise of rental fees and purchase prices on residential property market in Budapest.

In light of present market trends, it is not hard to anticipate that new sharing economy models and concepts will appear in the near future. As the sharing economy expands and becomes more and more common, it is vital to set the boundaries between collective sharing and business activities and between regular users and users for business purposes. Given that the regulatory gaps of sharing-economy models will be regulated in a proper and reasonable way that considers changing consumer habits and the need for ensuring competition on the relevant markets, nothing will stand in the way of future growth of sharing economies. Nevertheless, the incredibly fast expansion of sharing economies has shown that we cannot take existing business models for granted.

By Tamas Balogh, Attorney at Law, Schoenherr Hungary 

This Article was originally published in Issue 3.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

2015 was a record year in the Hungarian M&A market. Both in terms of value and number of transactions, 2015 was the best year since 2008, with approximately 160 closed transactions and an aggregate value of approximately EUR 2 billion. Although the acceleration follows global trends, the Hungarian market has a few specifics that will further enhance a growing M&A market in 2016 as well.

Global Perspectives

Intralinks Deal Flow Predictor, a survey of 680 global M&A professionals, shows that a majority of professionals are optimistic about the global M&A environment and expect more deals in 2016. While US news is mixed (there is uncertainty following U.S. interest rate increases and the impact of an economic meltdown in China, despite positive growth numbers), Europe can expect positive financial developments, such as economic growth in Western European countries and a likely increase in the European Central Bank’s quantitative easing policies. In addition to this mildly positive market environment, technology will likely also result in more effective and numerous M&A transactions in two aspects. First, technology provides businesses and M&A professionals with new tools and solutions (various cloud services, social deal sourcing, etc.) to increase the effectiveness of M&A deals. In addition, disruptive technologies drive M&A deals from a different angle as well: traditional companies without significant innovation backgrounds, fearful of being left behind in the market, are trying to buy disruptive information and technology companies to secure their future markets.

Regional and Local Trends

M&A markets are growing in Central and South Eastern Europe – especially in Poland, Hungary, Serbia, and Bosnia Herzegovina. While US and UK investors remain active within the region, which also sees more and more investments from China, South Korea, and Japan, the majority of deals remained local.

The increase in M&A transactions in Hungary started in 2013, and both deal structures and the legislative and economic background suggest a continuing growth. Based on the report of EY Hungary, 61 percent of M&A transactions in Hungary involved local parties, followed by US and German investors. The high ratio of local deals is partly the result of the Hungarian state, or state-owned entities, remaining active on the M&A market, a phenomenon that will most probably last through 2016 as well. 

The IT and high technology sectors will probably continue to provide exciting investment opportunities for private equity and venture capital firms in the CEE region. The partially EU-funded JEREMIE (Joint European Resources for Micro to Medium Enterprises) venture capital firms were highly active in Hungary in 2015 as they attempted to invest all their funds before the scheduled 2016 expiration of the investment. These smaller investments in Hungarian start-ups will enable them to develop and test the marketability of their products. Successful JEREMIE-funded start-ups in the coming years will require larger investments (in the EUR 10-20 million range), which will provide a rich investment opportunity for private equity firms and strategic investors. The regional start-up arena should also be prepared for the announcement of the new EU-funded JEREMIE venture capital programs of the 2014-2020 programming period. Member states in CEE secured significantly more EU funds for the venture capital programs in the 2014-2016 programming period than earlier and, after a lengthy preparatory period, programs can be expected to be launched in 2016 by CEE EU Member States and the European Investment Fund. The revival of commercial real estate deals in the region may be boosted further in Hungary thanks to the Central Bank of Hungary’s Mark Zrt. distressed-asset purchase program, announced for credit institutions. The program’s aim is to clean up credit institutions’ balance sheets from non-performing commercial real estate loans in order to boost fresh lending in Hungary, which may also speed up commercial real estate transactions as a result.

In brief, the growing M&A trend in the region seems to be sustained and may even be speeded up in the coming years.

By Kornel Szabo, Senior Associate, and Francois d’Ornano, Managing Partner, Jeantet Hungary

This Article was originally published in Issue 3.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Central and South Eastern Europe is back on the radar, and for good reason, as the region demonstrates economic growth, healthier banking systems, and increased legal stability.

Romania, Poland, and Slovakia announced a GDP growth of 3.5% in 2015, announcements that companies are relocating production facilities to CEE and SEE from Asia and Western Europe are multiplying, and the region is on the way to becoming fully integrated into the production chain of the rest of Europe (with the best example being the German automotive industry).

It comes as no surprise, therefore, that after a period of law firm closings in the region, some are now expanding, like Jeantet, which decided to open regional offices in Budapest and Kyiv at the end of 2015 to start its Eastern European development. 

Hungary has been doing well in this past year, as reflected by activity on the legal market, which has seen work come from important transactions on the M&A market driven by an active State (like the takeover of Budapest Bank), and an overall increase in medium-size transactions. The rhythm of law firm M&A departments may also accelerate this year as a result of the January 1, 2016, implementation of a new rule which shrinks the administrative time limit governing simplified mergers (if the transaction does not significantly reduce competition on the relevant market) from 30 to eight days.

The government has also begun with the purchase of distressed real estate assets by MARK (an agency created by the Hungarian National Bank), which received a green light from the European Commission to start operations and published its evaluation guidelines at the end of February, 2016. We expect law firms to see increased activity in this area as a result.

After an extended preparation phase, the new Hungarian civil code entered into force on March 15, 2014, bringing many changes and obliging companies to place themselves under the new law, generating an increase in corporate filing work for lawyers. Among the many important changes, the new civil code provisions address the liability of executive officers, leaving some to speculate, in the absence of case law, that this liability has been extended to such an extent that it has now become a joint liability with the company. With no judicial practice to date, a number of CEOs are currently asking their legal experts to come up with creative solutions in order to protect them in the most efficient way, in case these speculations are eventually confirmed by the Hungarian Courts.

Labor law departments have also been kept busy lately by the judgment of the European Court of Human Rights in the case of Barbulescu v. Romania concerning the monitoring of an employee’s use of the Internet during working hours (Case 013/2016). The judgment brought a sudden realization that companies’ internal Codes of Conduct need to be revised and labor relationships accordingly adjusted. 

Some interesting news has also come from Brussels and Luxembourg, as Hungary’s planned tax on advertising has been suspended following a clear European Commission position on the matter, and as the EU Court of Justice has condemned Hungary in the meal vouchers case (European Commission v. Hungary, Case C-179/14). Lawyers will certainly follow with interest the developments in the three pending cases brought by the meal vouchers companies in front of ICSID against Hungary. Only time will tell if these developments will have a lasting impact on Hungarian authorities’ approach to legislation. 

Clearly the past year has been active and exciting for a regional and independent law firm with its headquarters in Budapest. There are many reasons to look ahead with excitement. Not only is Hungary an attractive place for sizable international companies but the country is also becoming attractive for regional investors, as Polish, Slovak, and Romanian companies which have managed to grow sufficiently in their local markets are now investing in the neighborhood. These investors are boosting the medium-size transactions market, both in M&A and in real estate, and we see them starting to occupy a prominent place in our portfolio of international clients.

Big international companies, on the other hand, are continuing to strengthen their positions on those markets where they are already present and also enter new markets, like Serbia or Macedonia.

Another reason to plan ahead is that Budapest entered the race to host the 2024 Olympics. The IOC will select the host city only in September 2017, but legal questions in the regulatory field or on the investment side are already being asked. If Budapest wins the competition, remarkable amounts of legal work will be required.

With all this in mind, how could one not be excited about future Hungarian and regional deals? I certainly am!

By Ioana Knoll-Tudor, Partner, Jeantet Hungary

This Article was originally published in Issue 3.2. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Wait-and-See Game

Lawyers across a number of markets are pointing to troubling ambiguities and uncertainties facing potential investors in the renewables market.

Dragoljub Cibulic, Partner at BDK Attorneys at Law, claimed that in Serbia the relative lack of regulations is a source of some frustration. Because the necessary framework has not yet been adopted in that country, he explained, “none of the envisioned power plants can proceed with securing financing and actual construction, despite being shovel-ready.”

In Greece, according to Dimitris Assimakis, Partner at Norton Rose Fulbright, the Government has put forward its proposed new scheme – “which is trying to adapt the national legislation to EU state aid guidelines related to the environment and energy”– for discussion. Assimakis explained that the country is “heading towards a more market-based set of mechanisms,” but he described the scheme’s pending status as “a weird period for the market” since it will need to be submitted to the EU Commission for approval and then passed by the Greek Parliament. He expressed the hope that the new legislation for supporting the renewable industry will kick in early this summer. 

While noting that there is “quite a bit of momentum for FDIs in wind projects” at the moment, Assimakis reported that “the current uncertainty has created some concerns from the investment community and placed them in a hold-and-see pattern.” In the meantime, the Norton Rose Partner explained, projects that are in a mature state (especially on the wind-projects side) are being financed by Greek banks after a significant recapitalization concluded at the end of 2015. “This is happening on a selective basis,” he reported, “in that the banks are looking quite carefully at the profile of the sponsor, the site, and so on.”

Arkadiusz Krasnodebski, Dentons’ Poland Managing Partner and the firm’s Head of Energy practice in Poland and Europe, pointed not just to the need to enact a legislative framework but also to the “significant shift in policy” in his country. He explained that in April 2015 Poland enacted a new law for renewables “that completely changed the previous model of green certificates to one where businesses were expected to benefit from feeding premiums following auctions.” The auctions were supposed to commence at the beginning of this year, but following the country’s general elections in November, the introduction was postponed until July 1. In the interim, Krasnodebski noted, a new draft bill has emerged which would introduce several limitations and restrictions as well as imposing additional costs on businesses operating wind farms. He explained that the proposed bill would affect new projects, projects currently under development, and even existing wind farms, by imposing a new tax on the turbines. “It would also introduce a new requirement whereby a new special authority, the Technical Supervision Agency, would carry out regular reviews of existing installations in order to give them a permit allowing for two years of operations,” he said, which would represent yet another cost. While the new law is only in the draft stage at the moment, Krasnodebski admitted “being scared by the prospect of its introduction, since many are saying that, if enacted, it will greatly limit their appetite for new projects in wind and even will prompt them to re-evaluate the value of existing projects.” He added: “We have a 5,000-megawatt capacity for wind, which is already significant, but that may change, and investments may simply freeze. We may even see some people departing from the market rather than registering further growth of the sector.”

In terms of how that will impact his firm’s work, Krasnodebski commented: “Of course, for us and many other players in the country, wind and renewables in general has been a large business source, and there are questions about what is ahead of us.” On the other hand, he noted, “the Government does say that it wants to do a lot more on the biomass and biogas side of things in order to comply with the EU in terms of matching its targets on renewables.” Regardless, he concluded, “what we’re seeing on the wind side is a game-changer, and a negative one at that.”

Renewable Disputes?

Assimakis spoke with a bit of nostalgia about a different area of renewables in Greece – that of solar energy. He explained that, while there are some potential auctions for new solar parks expected in the near future, the sector is no longer as dynamic as wind, and he referred to a boom experienced by the country between 2010 and 2014. This boom resulted from a regulatory framework introduced in 2010, which provided for a “very generous support for solar energy, which, combined with the solar radiation of Greece, led to a great of interest in the terms of FDI”– illustrated, Assimakis said, by the fact that “the 2.6 gigawatts of capacity addition occurred in the middle of the crisis when limited financing was available.”

The subject of the benefits that accrued to renewable energy investors is a common theme in the region. While in Poland the exciting opportunities expected to result from the country’s new legislation never came to fruition, as Krasnodebski explained, investors in other markets were hit by the withdrawal of incentives after their investments had been made. In Romania for example, according to Paula Corban-Pelin, Counsel & Head of Energy at DLA Piper, although the country had one of “the best schemes in Europe and many were rushing to invest in the country, the law changed dramatically two years ago, and we are now looking at many incumbent insolvencies in the field.” She pointed out that “green certificates in the field have been reduced considerably or suspended, and many players are, as a result, unable to recoup their investments.”

The next step, many experts suggest, could be the initiation of formal investment-dispute procedures – but there are several factors which make such claims unlikely. In Romania, Corban-Pelin reported that, “while I know of a number of players contemplating investment arbitration, no real claims have been submitted just yet – probably because of the costs involved in such a dispute but also because many might simply be waiting to see what the Government does next in this field.” She added that no one was seriously expecting a return to the previous scheme, but many were hoping to see some improvement – though little action beyond political statements has been made to date.

Large numbers of formal disputes are unlikely in Greece as well, Assimakis reports, because although there were some cuts in 2014, “if you look at the figures, [investors] are still making a good rate of return.” He added: “Of course investors were not happy and there were some disputes, but no huge case landed in front of an arbitration forum as far as I know.” In addition, Assimakis says that the state’s ability to implement even, at times, retroactive tariffs, is “very difficult to challenge in light of the fact that the EU directive on renewables is only a guiding one,” thus “a legal basis for contesting them is missing, at least at a national level.” Of course, investors can try to bring a claim before an international forum, he noted, but similar attempts to do so in places like the Czech Republic, Bulgaria, Romania, and even Spain have had little success.

Willibald Plesser, Freshfields’ Co-Head of CEE/CIS, Country Partner for Turkey, and Head of the Energy Sector Group in Austria, referred to the “perceived El Dorado in some CEE countries like Bulgaria where investors leapt at these kinds of projects until the point the governments had to (including sometimes retroactively) pull out of incentives,” which has led to subsequent investment disputes. He argued that the situation in Austria, however, is different: “Interestingly, it is primarily the incumbents, rather than small investors, that are making investments into wind farms.” He pointed to EVN’s recent heavy investments in Austrian wind farms as an example.

In Austria, therefore, Plesser explained, the disputes that do arise in the energy sector tend to take a different form than elsewhere, and he referred to “a certain trend to attack the incumbent long-term contracts related to shipping, storage, etc.,” in reporting that “there is some disputes/arbitration work arising from this.”

Whether or not any of the disputes pan out, the overall CEE forecast for the renewables industry is not an exciting one, according to Krasnodebski: “One of the things that we’ll notice in the next few years is that new investment projects in renewables will be increasingly expensive because of the regulatory requirements and burdens in place.”

This article was originally published in Issue 3.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

WKB acted as local Polish counsel and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian was global counsel to Naspers on its USD 15 million investment in the Brainly social learning network. Brainly was advised by Orrick, Herrington & Sutcliffe, with Dentons’ Warsaw office advising the company on selected Polish law aspects.

Brainly brings students who need help together with teachers or older students who are able to help. Currently, it has around 60 million users, and the funds from the new investment will boost its development further towards its goal of 100 million users.

The WKB team consisted of Partner Jakub Jedrzejak, International Counsel Ben Davey, and Senior Associate Magdalena Piszewska.

The Dentons team was supervised by Partner Cezary Przygodzki and included Associate Tomasz Prokurat.

Wolf Theiss has advised the investors Vis Mundi and Levant Capital in their purchase of a 49% stake in Power Horse Energy Drinks GmbH. Eckert Fries Prokopp advised Power Horse.

The Power Horse brand was developed over 20 years ago by the Austrian food company Spitz.   

Wolf Theiss was involved in all legal matters relating to the transaction and advised both investors in structuring them. The firm’s team consisted of Partners Horst Ebhardt, Hartwig Kienast, Ralf Peschek, Niklas Schmidt, and Roland Marko, Senior Associates Katrin Bernadette Stauber, Eva Stadle, and Paulina Pomorski, and Associate Johanna Freudensprung.

The Eckert Fried Prokopp team was led by Partner Vitus Eckert.

The political turmoil involving the Croatian Government is an ongoing challenge facing the country, according to Aleksej Miskovic, Partner at Glinska & Miskovic. He explains: “at this point, the government that was formed only a couple of months ago fell. There is still a tiny chance of a regrouping of the members currently in place. Alternatively, we’ll see a new extraordinary election at the beginning of September most likely.”

In terms of the impact of the political situation on the market as a whole, Miskovic adds: “As you can imagine, it is not great for any business to be faced with such a tense period in which it’s difficult to predict what will happen.” One important aspect, according to the Glinska & Miskovic Partner, is that the Parliament has recently elected the new members of the Constitutional Court. Miskovic says that this, “was crucial in case we will see a new election since this body deals would potential electoral complaints — without it, we could have been faced with an unprecedented constitutional crisis but at least this was avoided.”

A last update worth noting that will impact legal practitioners focusing on cross-border financing matters in particular is the fact that, due in part to the current crisis, the Government has postponed the latest bond issuance on international capital markets. “The indicative pricing was one concern and it seems that the main aspect affecting those projections were not economic indicators as much as the perceived political instability of the country,” Miskovic explains, adding that, while this was never done by Croatia in the past, there was no imminent (re)financing need for the state. He also notes that the move has not influenced the main Croatian corporates either since they proceeded normally with their refinancing. 

Here’s a look at the state of CEE’s Energy markets formed from input from leading experts in the sector and our own coverage of the most significant happenings in the sector over the last year and a half.

Shrinking Prices and Demand

The overall decrease in pricing and a simultaneous decrease in demand for energy are exerting dramatic pressure on the energy industry right now, according to several of the people interviewed by CEELM recently. According to Paula Corban-Pelin, Counsel & Head of Energy at DLA Piper in Romania, “energy consumption is currently reducing dramatically,” both within her country and across the region. Florin Dumbrava, Legal Director at Veolia Energy, explained that “in terms of the electricity market, there are a lot of new producers [in Romania], leading to strong competition within a market that has mostly unregulated costs.” In terms of thermal energy, “while the pricing is regulated by local authorities (with the write-off from regulatory bodies), operators are faced with ever-decreasing volumes in terms of consumption.” The result is problematic: “Producers wouldn’t mind the low costs if volumes would be high but, unfortunately, a lot of clients have disconnected themselves from the grid these days, and there are no protection systems in place.” 

Dumbrava pointed to two causes for the low volumes: “The large industry in Romania – the large production plants – are no longer operating, and the industry sector in general has been demanding less energy.” The latter, he explained, is also attributable to the fact that “large consumers have started implementing efficiency-focused mechanisms in terms of electricity use (such as switching to LED-based lighting solutions in the case of public spaces or industrial facilities, for example).”

This combination might also lie behind the observation by Willibald Plesser, Freshfields’ Co-Head of CEE/CIS, Country Partner for Turkey, and Head of the Energy Sector Group in Austria, that all companies “are fighting with cost-cutting and restructuring needs.” Plesser pointed to several players looking to “sort out their investments in countries such as Macedonia, Russia, Bulgaria, and others, with many already having sold their utilities businesses in Eastern Europe.” Plesser added: “I find that companies in the energy sector are retreating a bit from the region. Examples include E.ON from Bulgaria and Slovakia. Some are still in the region like EVN in Bulgaria, Macedonia, Croatia, or Statkraft of Norway in Albania. I also feel the market has become a bit more local, and examples are Czech EPH massively buying up assets in the region, or Energopro buying in Bulgaria.” 

The Next Bet: Infrastructure and Hedging Risks

Dimitris Assimakis, Partner at Norton Rose Fulbright in Greece, also pointed to a drop in demand in the gas sector in Greece and said that the solution his country appears to be chasing involves “very ambitious plans revolving around a strategic goal for Greece to become a hub in the region.” This, he explained, would be supported by gas infrastructure projects currently being built or planned, such as the TransAdriatic pipeline. 

The strategic goal of building up infrastructure to become a hub in the region exists in Romania as well, according to Corban-Peli, who noted that “Romania is the biggest gas producer in South-Eastern Europe, while making good progress in discovering new offshore fields in the Black Sea.” Nonetheless, Corban-Peli said, “the country needs to invest in the gas infrastructure to make use of its geographical position and resources” – something that must materialize soon as a matter of “critical importance if Romania really wants to play its role in the region.” 

The lawyers we spoke to identified two primary drivers of infrastructure developments and investments. The first was suggested by Plesser, who referred to recent reports that OMV’s offer to investors of a stake of up to 49% in Gas Connect Austria is being met with significant interest as illustrating the great interest investors – especially pension funds – are showing in long-term investments such as gas pipelines, which are considered fairly safe and stable investments with attractive profit margins. Corban-Pelin pointed to second driver: the list of 195 key energy infrastructure projects known as Projects of Common Interest (PCIs) drawn up by the European Commission to help create an integrated EU energy market. The European Commission’s website describes these PCIs as “essential for completing the European internal energy market and for reaching the EU’s energy policy objectives of affordable, secure, and sustainable energy.” According to the EC’s website, “PCIs may benefit from accelerated planning and permit granting, a single national authority for obtaining permits, improved regulatory conditions, lower administrative costs due to streamlined environmental assessment processes, increased public participation via consultations, incr eased visibility to investors, and access to financial support totaling EUR 5.35 billion from the Connecting Europe Facility (CEF) from 2014-2020.” (See Figure below “Projects of Common Interest”. Source: ec.europa.eu)

 

But not everyone is excited about the EC’s commitment to an integrated market. An Energy Partner at a major firm in Bratislava who preferred to remain anonymous explained that the European Commission’s efforts threaten “the crucial position of the country as a pipeline for the West from Russia.” In his country, he explained, the “development of an alternative stream doesn’t seem to be fair, and the benefits do not outweigh the potential loses incurred.”

As a result, energy companies seem to be hedging their bets, where possible. Again referring to press reports, Plesser pointed to the OMV asset swap with Gazprom (presumably with the two looking to swap European fields with Russian fields). He explained that “this makes sense to me since it involves both a matter of risk sharing as well as getting away from the expensive production in Europe.” Plesser added that there has traditionally been a good relationship between OMV and Gazprom, dating back at least 30 years, tied in part to Austria’s strategic role as a gas hub (resulting in part from its excellent gas storage facilities and the existence of the Baumgarten hub). The other part Plesser notes his suspicion that “there are some political considerations [in Austria] at play … despite the general trend of sanctions applied by Europe to Russia, maintaining relatively constructive relationships with Russia.” He pointed to a recent visit of the Austrian President to Moscow as illustrative.

Plans, Plans, Plans, and Headaches

As the Austrian/Russian relations referred to by Plesser demonstrate, the strategic and highly regulated energy sector often goes hand in hand with politics. As a result, many of the lawyers we spoke to suggested that they were awaiting considerable framework overhauls in their countries. 

Assimakis reported that the main energy market in Greece is waiting for the Ministry of Energy to redesign the electricity market to conform with a target model, as, at the moment, there is a mandatory pool managed by the market operator that all users and suppliers have to go through in order to service customers. As a result, “practically, there are no bilateral agreements in place at the moment.” There is a deadline for the target model’s introduction, which, Assimakis explained, means that we’ll see a “complete overhaul of the power sector” – but not for some time, as he expects it to be at least 18 months before the new market model is fully adapted.

While Assimakis reported that that there are no real investments from the private sector on new thermal power plants (apart from the Public Power Corporation, PPC, which is planning a new lignite-fired power plant), he said that there are new players coming into the retail market, which is currently dominated by PPC. The prospect of increased competition is at least partially the result of Greece’s bailout plan, which mandates a series of reforms in the energy sector. One such reform – for which final agreement is still awaited – is the introduction of an auctioning system to provide other players in the power market with access to more economic production/generation sources such as lignite and hydro, to which only PPC has had access until now.

Romania is seeing its fair share of extensive planning as well. Melania Simona Amuza, Corporate Director of Legal Department and Compliance at E.ON Romania, noted that apart from the “usual agenda,” there have been some updates on the legislative landscape that have kept her busy over the last two months relating to a “massive redrafting of the local energy law.” Amuza explained that she “ha[s] been busy revisiting many basic principles of the Energy Law (Law 123/2012),” and that she has “also been involved in a lot of discussions that basically had a business focus and which resulted in the new legal tax that was presented to the Romanian Parliament.” 

Amuza explained that many of the proposed “legislative updates” involve revisiting some of the principles that “made sense during the period of liberalization of the industry,” but that now may no longer be “relevant or beneficial.” 

Corban-Pelin at DLA also pointed to a wider series of discussions in the country related to Romania’s plans for the sector, saying: “There are a lot of talks about Romania lacking a solid strategy.” She mentioned a draft energy strategy that was published in late 2014 but never finalized and said that “recently, the new Government started discussions with stakeholders in the field to try to update the draft and figure out the areas in which to invest, which fields are of interest and which not, and so on.” She also added that some have questioned whether a formal strategy is even needed to begin with. To back up her personal belief that it is, Corban-Pelin pointed to the plan by the Cernavoda nuclear power plant to add two new reactors, which was made more difficult by the decision of the initial private investors to back out of the project. Recently, she reported, a memorandum was concluded with a Chinese company, and there are now advanced-stage negotiations to finalize the project with them as a sole investor. “There are huge investments to be carried out, and there are a lot of voices claiming that there was no real study to actually figure out if we really need the new nuclear reactors, given that energy consumption is currently reducing dramatically,” Corban-Pelin claimed, explaining that the existence of a clearer strategy for the overall energy sector would have addressed such concerns.

Indeed, this is only one example of a state that seems to be moving sluggishly in defining its goals. Dragoljub Cibulic, Partner at BDK Attorneys at Law, reported that Serbia is also lagging behind on its restructuring of the gas sector. 

He explained that Serbia has one state-owned gas utility company, which was not restructured despite being required to do so five or six years ago. “We only started the process,” he said, “and once we did, the energy community was really appreciative of our efforts initially, but a few years down the line, no real progress was made.” He referred to the chance that this failure to complete the restructuring will lead to some form of punitive sanctions in the near future. 

But even when the appropriate schemes are in place, energy companies still face challenges. Florin Dumbrava, Legal Director at Veolia Energy in Romania, noted that Veolia Energy’s activity in thermal energy production is thoroughly defined and regulated by the ANRE (the Romanian Regulatory Authority for Energy). Dumbrava reports that his company is required to communicate its energy production numbers to ANRE, after which the regulatory body verifies whether or not the company was overcompensated for the previous year – a process he called “the overcompensation methodology.” This process, as Dumbrava described it, represents “a considerable headache” for high-efficiency cogeneration suppliers, in particular private ones, with the companies constantly being “contested as overcompensated.” He believes that “the methodology is flawed, since it does not take into account all the costs that operators are facing, especially for those that hold their plants in concession because they do not count these assets into the asset base.” By contrast, “in the case of state operators, they do count them in, and we are constantly trying to build up arguments against this form of discrimination.”

Elections

Elections, both those that have recently concluded and those upcoming, play a big role in the energy sector. In the “A Look at Renewables” section, Arkadiusz Krasnodebski, Dentons’ Poland Managing Partner and the firm’s Head of Energy practice in Poland and Europe, explained how a change of Government following general

elections first put plans related to the renewables sector on hold, and later seem to have changed them considerably. Pending elections add to the slowdown of framework implementations as well, Cibulic explained, pointing out that the highly anticipated restructuring in Serbia he mentioned earlier will likely have to wait: “Since we’re looking at elections soon, the Government is unlikely to do it before the elections, especially since the new legislation will likely translate into an increase on the end consumer bill, which is not always welcomed during an election year.”

And even when elections are not coming anytime soon, voters’ views are still influential. Dumbrava described the pricing challenges energy companies in Romania face, making it particularly difficult to cover production costs: “For us as suppliers of thermal energy produced in cogeneration, this is made even more difficult by the fact that prices of heat are approved at the level of local authorities, which does lead to some electoral considerations.” As a result, he added: “We find it hard to explain at times that the costs of production have gone up and that we need to adapt prices to the actual cost.”

State Control

The impact of state policy on the sector goes beyond considerations of
 pricing or incentives. In Hungary, participants to the recent CEE Legal Matters Round Table (see page 62), discussed the increasingly active Hungarian Government and its “soft nationalizations” approach in the sector. Krasnodebski spoke about re-consolidation in Poland as well, noting that players such as EDF and Engie are already opting to leave the market and describing it as “an ongoing process whereby we may see, a couple of years down the line, a market split among four consolidated groups – all controlled to some extent by the state.” Signs of this are already appearing, he reported, and if they continue in this direction, “it will represent a considerable shift in the market, with these tending to focus on pursuing conventional projects rather than developing a lot of renewables ones.” Krasnodebski added: “If that does pan out, it is only a 

matter of time before someone will ask, why do we need four groups and not just have two … and later, down the line, why even need two?”

Krasnodebski agreed that the situation in Poland is, in some ways, comparable to Hungary, “but there it was a matter of the state allowing for big privatizations and, after they were completed, [finding] that there was (a) a risk element and (b) … an expectation to be able to increase tariffs (resulting from CAPEX and other needs), whereas the Government wanted to limit price increases.” In Poland, by contrast, “except for Warsaw, where you have RWE, much of it continued to be controlled by the State Treasury, which meant that prices going up in an uncontrolled manner is a small risk. There are, however a different set of problems at play since the generation is still predominantly based on coal, which means that the cost of CO2 emissions will be going up, creating a bit of a pricing pressure.”

We thank the following for sharing their opinions and analysis for this report:

• Willibald Plesser; Co-Head of the CEE/CIS; Freshfields
• Arkadiusz Krasnodebski; Poland Managing Partner; Dentons, 
• Dimitris Assimakis; Partner; Norton Rose Fulbright 
• Paula Corban-Pelin; Counsel & Head of Energy; DLA Piper
• Florin Dumbrava; Legal Director; Veolia Energy
• Melania Amuza; Corporate Legal Director; E.ON Romania
• Zoltan Faludi; Partner; Wolf Theiss

This article was originally published in Issue 3.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.