Carbon and commodities: What diverging energy prices mean for the CEE region
In this report, we look to assess how volatile energy prices and high emission costs affect the outlooks of Central and Eastern European countries
Executive summary
- CEE countries face significant cost pressure, though from different energy sources. Countries across the CEE region are highly exposed to high and volatile energy and carbon prices. This exposure varies dependent on the structural characteristics of each country. Coal remains king in Poland and is also important in the Czech Republic, while Hungary, Romania and Turkey rely to a greater extent on natural gas in their electricity production.
- The macro implications of these structural differences in energy mix are real, especially for Poland and the Czech Republic. They have a significant shortfall of up to 1% of GDP in their carbon emission allowances (EUAs), which impacts their balance of payments (by over €4bn in Poland and €2bn in the Czech Republic in 2022). These amounts weigh on FX fundamentals. For Hungary, Romania and Turkey, our analysis suggests that dependence on natural gas in 2022 equated to a disproportionate impact on both PPI and HICP inflation. But the return to a normal relative price relationship between coal and natural gas in late-2023, driven by high and - most probably - rising EUA carbon prices, leaves Poland and the Czech Republic’s competitiveness at risk. These high and recurrent operational costs in electricity production have serious implications for external and fiscal balances.
- As an escape strategy, CEE countries need to accelerate investments in clean power supply and electricity grids to protect competitiveness. Acceleration of energy investments is critical in light of heavy operational costs, associated with burning (imported) fossil fuels, and an ambitious EU climate policy. This is especially true for Poland and the Czech Republic. High carbon-intensity may also provoke an adverse chain reaction at the corporate level due to ESG risks. This is reflected in the requirements of leading blue-chip companies searching for a reduction of carbon content of final products or services in the entire supply chain. This is relevant for all CEE countries and Turkey, also because of the phasing-in of CBAM (Carbon Border Adjustment Mechanism), the EU’s carbon border tax.
- EU money and sustainable financing from the private sector can catalyse scaling up of energy investments. EU grants and preferential loans, both from the Resilience and Recovery Fund (RRF), available through to 2026, and traditional cohesion policy funds from the 2021-27 budget, together with sustainable financing from private sources can enable significant energy investments. Because of high capital costs and long investment lead times in the energy sector, public money may crowd-in private financing, both bank lending and capital market instruments, such as green bonds.
- Adequate action by boosting power system investments will pave the net zero path to other sectors through electrification. Decarbonisation of CEE power systems – by scaling up to state-of-the art through existing technologies, such as photovoltaic, wind or nuclear, including small modular reactors (SMRs) – will largely pave the path to net zero by 2050 in other sectors, through electrification. This is critical for decarbonisation of transport, buildings and many industries.
- Is there a pilot flying with us? CEE countries need ambitious and robust long-term energy strategies as part of their development agendas. Such strategies could be directly reflected in corporate strategies and investment plans of incumbent power producers and grid operators, largely SOEs. These would also define a scope and financing options for companies and households interested in investments in own energy sources and energy efficiency. We believe it is high time for the CEE region to focus more on becoming Europe’s factory in clean energy manufacturing. Carbon and commodities
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This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more