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Upcoming Challenges for the Slovak Energy Market

Upcoming Challenges for the Slovak Energy Market

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The Slovak energy market is in a state of transition. Energy security continues to be a key driver of the country’s energy policy. Long characterized by its reliance on gas from the Russian Federation, Slovakia continues to seek alternative sources to supply its energy needs. To a large extent, the solution has been to invest billions into nuclear power, while the development of renewable energy sources (RES) has so far been slow.

Energy Dependence and Security

In an attempt to address its long-term dependence on the supply of oil and gas from Russia, Slovakia has introduced reverse-flow transit pipelines with Austria and the Czech Republic to provide it with access to gas from Western Europe. However, despite these efforts, almost all gas in Slovakia continues to come from the Russian Federation. For the moment, Slovakia plans to diminish its dependency on Russia and increase its transit capacity by constructing a 164 km cross-border gas pipeline. This has been designated as a project of common interest by the European Commission, and was awarded EUR 108 million in EU subsidies. When implemented, the project will enable the transit of natural gas, including liquefied natural gas, from the Baltic Sea to South-Eastern Europe. 

Slovakia has long benefited from its position as one of the main gas transit countries in Europe. However, this position could be jeopardized by the planned construction of the Nord Stream 2 project. If constructed, the new gas pipeline running across the Baltic Sea would allow Russia to supply Germany with 110 billion cubic meters of gas per year, significantly reducing the amount of gas transported to Western Europe through Slovakia. This could cause losses of up to EUR 700 million annually in transmission fees. 

Nuclear Energy on the Rise

Nuclear energy has so far been Slovakia’s chosen path to energy independence. While many countries are stepping away from nuclear energy, Slovakia has been significantly expanding its fleet of nuclear power plants. Currently, Mochovce and Jaslovske Bohunice, the two largest nuclear power plants, have installed capacity of approximately 2000 MW, which represents around 57% of Slovakia’s total energy generation (IEA figures for 2015). The Mochovce power plant is being expanded by almost 1000 MW, which should be completed by 2019. In addition, the country has been seriously considering the construction of additional reactors at Jaslovske Bohunice. 

Continuous delays in the Mochovce expansion have resulted in a huge increase in project costs from the original EUR 2.8 billion to the currently estimated EUR 4.6 billion. Considering the current lower market power prices in the region, there are major concerns that the new units at Mochovce will not be able to operate profitably. 

A Greener Horizon?

Slovakia is increasingly considering green energy as an alternative to fossil fuels, and the share of renewable energy doubled from 6.4% in 2005 to 12.9% in 2015 (according to Eurostat SHARES). However, the percentage of power produced by new RES installations is still relatively low, and consequently there is limited diversification in the energy mix.  

Hydro, biomass, and solar are the most frequently used RES, while geothermal energy is seen to offer potential for future development. On the other hand, wind is considered an unreliable source due to local environmental factors.

Although it seems that Slovakia will have no trouble reaching the EU’s 20/20/20 targets, this is more due to its high share of energy from nuclear power and old hydropower plants, which together generate approximately 17% of the domestic installed capacity.  

 The slow development of the renewable energy sector can be attributed to wavering public and political support, strict legislation, and low transparency.  In 2016, out of concern over energy costs to consumers, the Slovak regulatory authority announced a reduction in feed-in tariffs for all RES for the period 2017-2021.

This slow uptake on renewable energy should be addressed by the upcoming reform of Slovakia’s RES support scheme, which is expected to go before the parliament this summer.  The changes to the RES Act are expected to replace the current feed-in tariffs with capacity auctions and feed-in premiums.  

This reform could give new impetus to investment in the renewable energy sector, but it is questionable whether this will materially contribute to greater energy independence.  

By Petr Zakoucky, Partner, and Michal Pelikan, Associate, Dentons

This Article was originally published in Issue 5.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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