Southern European Energy Looks for Footing in New Economic Environment

As governments across Southern Europe struggle to adjust to a new and limited political reality, many state energy policies are reflecting a more conservative planning approach. While most attention has been paid to how these new policies stand to affect renewable sectors in Spain, Italy and Greece, state strategies to conventional energy resources will also be influenced by fiscal limitations and new political leadership.

At the heart of most energy policy decisions from Madrid to Athens is the effort for new governments to reign in spending and reduce budget deficits to meet goals laid out in conjunction with stakeholders on the European and international market level. This environment has increased uncertainty among foreign investors, a sharp reduction in the amount of government funding available for any new energy endeavors and an almost across the board increase in energy prices for consumers.

In the case of Spain, a precarious energy landscape and daunting 27 billion euro sector budget deficit has been met with a pledge by industry minister José Manuel Soria that the financial burden will be shared across the industry. While that pledge has so far only affected renewable and coal subsidies and an increase of consumer prices of 7 percent for electricity and 5 percent for gas, there is worry that it could soon spread to more traditional efforts. Heavily dependent on foreign resources, Spain has seen new domestic exploration projects in the form of shale efforts in the north and offshore drilling near the Canary Islands.  

Similarly dependent on foreign resources, Italy and its technocrat government led by Mario Monti has pledged a wide-array of cuts to existing traditional and unconventional energy endeavors, though they have so far not seen a spike in consumer prices thanks to a steady decline in demand brought on by economic pressures. Having faced a steady decline in available energy resources as a result of both foreign challenges (Iran, Libya) and those closer to home (offshore bans, the failure of nuclear resurgence), Italy has signaled a focus to shift support towards less traditional energy support as opposed to revisiting conventional options. Last week saw the Monti government introduce the idea of a carbon tax aimed at providing funding for sustained support for green energy options.

In Athens, the government’s aim of debt reduction has spurred a move away from state-backed energy endeavors with a host of privatization efforts planned for this summer. After signaling a willingness to seek investment for a sprawling 20 billion euro solar farm project, the appointed Greek government announced an effort to sell off state holdings in Hellanic Petroleum and the state natural gas firm DEPA. The move comes as many in the region have expressed strong interest in further investment in natural gas discoveries in the Eastern Mediterranean.

In all cases, such privatization efforts come at the very real risk of losing out on significant future revenues in favor of short-term fiscal relief.

David Parker, Emeritus Professor of Privatization and Regulation at the Cranfield School of Management told Reuters, “We are certainly going to have a risk that the government sells off industries without really thinking about the long-term implications.”

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