Slovakia Utilities Network Analysis

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Slovakia Utilities Network Analysis

Key View: One of Slovakia’s strongest points in the logistics network comes from having a relatively well-developed, stable and diversified utility sector. Electricity generation in the country comes from various sources that include nuclear, thermal, hydropower and renewables. This, together with having an oil refining capacity that is more than enough to meet domestic fuel consumption, ensures that businesses face a very low risk of shortages related to energy and power supply. The country has one of the lowest electricity tariffs in the region, which will help to keep the operational costs for power intensive sectors, such as manufacturing and telecoms businesses, down. Slovakia is a relatively water-rich country, boasting a number of natural lakes, dams and rivers that support various water-intensive operations, such as tourism, manufacturing and power generation. The potential risk for investors emanate from the relatively high costs of broadband services and fuel as the country lacks natural resources thus leaving it dependent on natural gas and oil imports chiefly from Russia. Overall, businesses in the country will benefit from the reliable and stable supply of all the key utilities. Given these considerations, Slovakia scores relatively high at 63.7 out of 100 for Utilities Network, which places the country fourth out of 11 countries in Central and Eastern Europe, behind Russia, Lithuania and Belarus.

Stable Utilities Network Underlies A Strong Regional Standing

Central & Eastern Europe - Utilities Network

Note: 100 = Lowest risk; 0 = highest risk. Source: Fitch Solutions Logistics Risk Index

Latest Utilities Network Analysis

Our Infrastructure team highlights key examples in Eastern EU member states where such grid improvements and cross border trade will have a direct impact at a national and regional level on the levels of investment into renewables capacity growth. Slovakia is one of the worst performing markets for renewable capacity growth in the EU, with the growth over the past five years averaging -3.4MW of net additions annually and is set to average annual net additions of 7.3MW over the decade to 2029. Despite the markets most recent renewables auction of 30MW and commitments to its NECP to increase capacity non-hydropower renewables, it remains a relatively underdeveloped aspect of the markets power sector. That said, we note rising upside risks developing from its membership in the EU and access to support for renewable capacity growth. We highlight that the lack of suitable grid connectivity and management of renewable power injection has been a constraining factor on renewable growth. In the latest auctions, the solar sector is at 44% and cogeneration with 42% ensuring crucial grid balancing. Furthermore, new legislation has been established to allow the development of small-scale cogeneration systems under 500kW to disconnect from the grid. This would avoid ongoing grid connection issues that have hampered sector growth in Slovakia. That said, owing to the EUR100mn EU backed Danube Ingrid project, this trend could be reversed over the long term. The smart grid project aims to link Slovakia and Hungary and will improve network management while aiming to ensure security of supply. The project will enable a faster proliferation in renewable capacity, and reduce the overall utilities network risk that businesses face.
Slovakia is an insignificant player in the upstream oil sector owing to not having significant oil and gas reserves and limited exploration activities. While the country’s refining capacity is more than sufficient to meet domestic fuel consumption, an over-reliance on imported natural gas and crude oil means that businesses are potentially exposed to negative external shocks such as price volatility in the global energy market. Nevertheless, fuel shortages are rare in Slovakia as the country benefits from strong integration with the regional fuel supply market and close proximity to Western Europe were it can easily source refined fuel in case of shortages.
Over Q320, Slovakia's supreme court upheld a decision to cancel the development of a hydropower facility citing that the public interest to protect the environment takes legal precedence over private business. There would likely be similar rulings to follow on the market's other ongoing legal disputes over the small-scale hydro plants on the river Hron. Slovakia's 30MW renewable auction allocated some 12%, approximately 4MW, of capacity to small hydropower projects. We expect the limited activity in the sub-sector will be in the efficiency and maintenance aspect of ensuring reliable power supply, which will serve to further stabilise the transmission and distribution network which will reduce the risk of power outages and improve the efficiency of getting power connected to businesses.

Utilities Network

Slovak businesses face limited risk with regard to the availability of utilities. Consumption rates for electricity and fuels are expected to be lower than the rate of economic growth and energy production capacity over the coming decade. The completion of units three and four of the Mochovce nuclear power plant will boost electricity availability in the medium- to long term, while a sophisticated oil refinery ensures fuel is sourced domestically, thus reducing businesses' exposure to imported energy risks. Furthermore, the telecommunications network is developed and subject to further investment, offering countrywide access to both fixed-line and mobile internet services. Nevertheless, Slovakia is overwhelmingly dependent on Russian oil and gas imports for domestic processing, reducing its bargaining power and exposing it to potential disruptions in the event of a crisis. Overall, Slovakia receives a high score of 84.3 out of 100 for Availability of Utilities, ranking in second position out of the 11 states in the Central and Eastern Europe region.

Though businesses in Slovakia will benefit from the ready availability of essential utilities such as water, electricity, fuel and telecom services and low electricity prices, the country has some of the highest tariffs for fuel and broadband services in the region. Slovakia is almost entirely dependent on Russian for oil and gas, which reduces its price bargaining power and means businesses are left exposed to geopolitical risks. This can have negative impact on energy prices in the domestic market. At the same time, even though the telecommunication sector is well developed, broadband services remain costly in Slovakia compared to the majority of its peers, only faring better than Hungary in the Central and Eastern Europe region. Given these considerations, Slovakia has a moderate score of 43.1 out of 100 for Cost of Utilities, ranking in ninth place out of 11 states in the Central and Eastern Europe region, only ahead of Hungary and the Czech Republic.

Electricity

Businesses in Slovakia face very low risk from power shortages disrupting their operations, as the country has a large domestic nuclear power generation capacity paired with its own local sources of uranium. This is backed by the country's excellent grid infrastructure - which means electricity is widely available and reliable, with a very low number of typical power outages occurring per month.The energy mix is beginning to diversify, with a good balance of coal, nuclear, hydro power and a slowly rising share of renewable sources energy sources. This has reduced risks of over-dependence on one energy source. At present, Slovakian electricity prices are relatively low on a global comparison benefiting from high regulation by Finance Ministry. Nevertheless, electricity prices do not reflect costwhile the country's liberalisation of the market has been rather slow, owing to the topic's sensitive political nature.

Slovakia - Electricity Risks

Source
Energy mix (2020 estimates): nuclear (59.3%), coal (10.3%), natural gas (5.2%), oil (1.5%), hydropower (15.6%), non-hydropower renewables (8.1%).	Businesses benefit from a relatively well diversified mix of energy sources in Slovakia, and therefore the likelihood of shortages or disruptions to one form of generation causing power outages is minimised significantly. Nuclear power will remain the main driver of energy production in Slovakia for the next decade, and is set to contribute nearly 72% of total electricity generation by 2029 as more nuclear power plants come online. Slovakia enjoys long-term energy security, which especially benefits its autos and manufacturing sectors. Given Slovakia's self-sufficiency in nuclear power generation and the country's local uranium deposits, there is minimal risk of supply chain delays causing power shortages or price fluctuations. Romania and the Czech Republic also have uranium deposits, thereby furthering energy source security as these countries are in close geographical proximity to Slovakia.
Availability
100% of the population has access to electricity	Electricity is widely available across Slovakia, benefiting businesses in both urban and rural areas as all have access to electricity. Slovakia's distribution grid has excellent coverage throughout the country and has only minor transmission and distribution losses. All regions of the country, except the remotest areas, are well connected by Slovakia's 2,800-km grid. Through several planned improvements and upgrade works this is expected to be reduced even further over the next few years. Slovakia is also relatively competitive in terms of establishing a connection to the grid which takes around 89 days, far below the regional average of 122.73 and far shorter than regional peers such as Hungary (257 days) and Ukraine (281 days). This is especially beneficial to businesses that set up in the country as they can commence production or operation faster here than in other emerging Europe states.
Reliability
	The addition of new nuclear capacity over 2020 will lessen the country's reliance on imports. Our Power team expect that the completion of two nuclear power plants, Mochovce 3&4, over the coming two years will see the market transition to become a net exporter of power. The rising cost of emissions in the EU will see an increased pressure in the market to phase out coal by the end of the decade, a drive increased by the net excess power generation seen. They also stress the significance of EU spending in the market, particularly into the development of the transmission grid network supporting the development of renewable capacity growth long term while improving the reliability of the network. Given the country's excellent grid and electricity distribution infrastructure, there is very low risk of power shortages in the country. Indeed, Slovakia has only an estimated 0.5 typical power outages per month.
Cost
USD0.18 per kWh	Currently, Slovakia's electricity prices are on par with its peers, benefiting from high regulation, with government intervention having seen a reversal in electricity prices after the energy regulator hiked the tariffs across the country since early 2017. We caution that the price for electricity does not reflect production costs due to government intervention, which can undermine the operational capacity of the provider in the long run. In the longer term, the prospect of an increase in generation output, as well as the imposition of EU regulations designed to break down national monopolies and create a single European market for gas and electricity, should underpin a gradual decline in the real price of energy.
Other Risks
	Coal phase-out is being actively discussed in Slovakia, with an initial date to shutter the country's two coal facilities, Novaky and Vojany, by 2022. A preliminary statement was made by the government in 2017 and 2018. However, recent high-level rhetoric from the government indicates that this might be delayed to 2025 or 2030 at the latest. Therefore, coal will remain in Slovakia's power mix until further decisions are made. We also note that this could see the cost of electricity increase as the EU looks to discourage the use of coal through carbon taxes. The EU Emissions Trading Scheme (ETS) operates in all EU member states and sets a price per unit of carbon emitted with a fixed number of emission allowances (EUAs) declining annually. Over Q2 2020 carbon prices on the ETS reached record highs of EUR30 per ton, after green recovery policies swept through the EU. Over Q3 2020 the market's supreme court upheld a decision to cancel the development of a hydropower facility citing that the public interest to protect the environment takes legal precedence over private business. We would expect similar rulings to follow on the market's other ongoing legal disputes over the small-scale hydro plants on the river Hron.
Planned Projects
	Overview: There are few new power infrastructure projects in Slovakia, especially following the completion of the Mochove Power Plant expansion. Slovakia currently has two nuclear power plants. Grid Improvements: New legislation has been established to allow the development of small-scale cogeneration systems under 500kW to disconnect from the grid. This would avoid ongoing grid connection issues that have hampered sector growth in Slovakia. That said owing to the EUR100mn EU backed Danube Ingrid project this trend could be reversed over the long term. The smart grid project aims to link Slovakia and Hungary and will improve network management while aiming to ensure security of supply.
Source: International Energy Agency, national sources, Fitch Solutions

Low Electricity Prices And Stable Supply

Central & Eastern Europe - Cost Of Electricity (USD per KWh)

Source: World Bank 'Doing Business'

Fuel

Slovakia has a high energy import dependency on Russia, which exposes its sector to geopolitical risks and potential disruptions in the event of a crisis. Nevertheless, the government is putting contingency plans in place to diversify supplies away from Russia. Greater gas infrastructure and interconnectors with Hungary, Poland and Ukraine, and a EUR5.9bn EU development fund, offers potential to increase Slovakia's role as a regional hub for gas supply and reduce its dependence on Russia. Meanwhile, Slovakiahas one of the most sophisticated oil refinery plants in Europe, which reduces the risk of fuel shortages and dependence on imports for businesses in the country, though prices remain higher than many regional peers such as Russia, Belarus and Ukraine.

Slovakia - Fuel Risks

Source
The country currently has one oil refinery, the Slovnaft refinery. It is based in Bratislava and has a refining capacity of about 130,000 barrels per day (b/d).	Slovakia has one operating refinery, the Bratislava refinery, with a refining capacity of 130,000b/d. There are no expectations for new refineries to come online in the medium term given the increasingly uncompetitive nature of European refining operations in the face of new and modern refining capacity expansions elsewhere in the world. Nevertheless, Slovakia is able to fuel meet demand in the local market from this single refinery plant which leaves extra output for export. As a result, businesses face minimal fuel shortages risks. This is also due to the ease and accessibility of fuel imports from such countries as Russia in the region. Slovakia's almost sole dependence on Russian crude renders the country's supply highly vulnerable to political factors, but its dependence is likely to continue over the next decade as Russia is the cheapest source.
Availability
Refined petroleum net exports: 18, 000b/d	Slovakia has a strong local refining capacity and is a net exporter of refined fuel products. Refined fuel production is expected to remain steady at current output levels for next ten years, and therefore there is a very low likelihood of fuel shortages occurring in the country.
Reliability
	Fuel supply is stable in Slovakia, and there has been no historical example of fuel shortages halting economic activity in the country and its strong domestic refining capacity. High reliance on Russia for crude oil is a vulnerability, but the country has contingency plans in place should political factors compromise this supply, and therefore fuel shortages would be an unlikely result.
Cost
USD1.24 per diesel litre	Slovakia has the fifth highest fuel price in the emerging Central and Eastern Europe region. We caution that continued government intervention in the energy sector, which is subject to heavy regulation, distorts the true cost of energy. Businesses should expect an increase in fuel costs as oil prices recover in the medium- to long term, which will affect supply chains reliant on road freight shipping especially given that Slovakia's heavy dependence on Russian crude means the country lacks price bargaining power.
Other Risks
	There is a very low chance of fuel shortages being caused by refinery worker strikes in Slovakia, or of terrorist attacks targeting critical oil infrastructure like the Druzba pipeline or the main refinery in Bratislava. Nevertheless, Slovakia's overwhelming dependence on Russia imports of its crude oil requirements, exposes fuel production to potential disruptions.
Panned Projects
	Overview: Despite boasting an extremely high utilisation rate, the Bratislava refinery is unlikely to be expanded in the short term, as there is sufficient refining capacity to meet regional consumption in CEE. Diversification: Slovnaft revealed new investment plans for up to 2030, highlighting its view that it does not see interesting prospects in additional production of motor fuels and is expecting a drop in demand. The company is now planning to focus on the production of chemicals and plastics and will invest some EUR460mn in this sector by 2030.
Source: National sources, Fitch Solutions

Reliance On Imports Keeps Prices Elevated

Central & Eastern Europe - Cost Of Fuel (USD per Diesel Litre)

Source: National sources, Fitch Solutions

Telecommunications

The Slovak telecommunication market boasts the presence of key strategic investors. The leading players are well established and have proved difficult to dislodge. Consumers typically can choose from only two or three major brands that offer comprehensive service portfolios, as well as from a small number of smaller, specialised players. Broadband penetration in Slovakia remains well behind most of its Central and Eastern European peers such as Russia, Estonia, Lithuania and Latvia and fixed broadband costs are some of the highest in the region, only lower than Hungary's. This will reduce the competitiveness of internet dependent businesses in Slovakia which will find internet costs significantly increasing their operating expenses.

Slovakia - Telecommunications Risks

Source
Slovak Telecom and UPC Solakia offer fixed line internet options, with mobile internet solutions offered by a variety of different players. Some of the key players in the mobile market include: Slovak Telecom, O2 Slovakia, SWAN and Orange,	Universal internet access has been a goal of the Slovak government for a while, and while the fixed line sector is dominated by Slovak Telecom and Orange Slovakia, as in many other EU states, there is an array of mobile internet service providers to also choose from.
Availability
38.9 broadband subscribers per 100 people (2020 estimate)	In the region Slovakia has the seventh highest number of broadband subscribers per 100 people, lagging behind most countries in the region. Our telecommunication team notes that there is strong demand for broadband services coming from the enterprise market, which will drive growth over the short- to medium term. However, after hitting a peak of 901,000 subscriptions by the end of 2021, we expect the trend to turn downwards in the latter years of our forecast as businesses will adopt more advanced forms of communication (mainly mobile) and residential subscriptions will keep decreasing. Our Telecommunications team does not envisage strong organic growth in the Slovakian mobile market, given that the market is already highly penetrated. The arrival of new network operator SWAN has provided a modest uplift to overall growth rates but, on the whole, the newcomer will be mostly cannibalising the existing user bases of the other players, especially in the enterprise market.
Reliability
	Slovakia is well served by wireline broadband infrastructure, with Slovak Telekom, UPC Slovakia and Orange Slovakia having invested heavily in IP, fibre and DOCSIS 3.0 technology to enable the delivery of ever-faster data transmission speeds. However, internet connections, particularly to rural areas, can be fairly poor and unreliable. Businesses are increasingly reliant on the internet, not only for marketing and sales but also for supply chain management (including logistics tracking) and it is therefore vital that businesses have a reliable connection to the internet wherever they are operating in the country without having to pay for new phone lines to be laid. Businesses with supply chains which travel to rural areas will therefore be negatively affected by this.
Cost
Fixed broadband internet tariffs, USD29.8	Businesses in Slovakia are negatively affected by internet services being very expensive in the country (Slovakia has second highest fixed broadband tariffs in the region). Heavily internet-reliant companies will therefore find their profits severely eroded by this, and this reduces the overall competitiveness of Slovakia as a business destination in comparison to, for example, Poland or Romania.
Other Risks
	Companies benefit from an operational environment free from internet censorship, as the government does not interfere with internet access, and this will not disrupt business operation or website access. However, Slovakia's proximity to Russia and NATO membership mean that there is a moderate risk from cybersecurity breaches delaying or compromising business operations.
Planned Projects
	Overview: The Slovakian mobile market is saturated and price competition is relatively strong, with the emergence of the fourth mobile operator as well as MVNOs exerting further downwards pressure on operator revenue streams which will see fewer planned projects. 5G: Slovakia is one of few Central and Eastern European telecoms markets to commercialise 5G services, with a 5G auction scheduled for late-2020/early-2021. 5G services will likely be made available to the mass market in 2022, with regulator efforts to auction spectrum to operators at reasonable prices key to ensure investment into the new networks.
Source: World Economic Forum's Global Information Technology Report 2019, Fitch Solutions

Lagging Behind In Terms Of Broadband Penetration

Central & Eastern Europe - Broadband Subscribers (per 100 people)

Source: Fitch Solutions

Water

Slovakia is a relatively water-rich country, boasting a number of natural lakes, dams and rivers. This supports various water intensive operations, such as tourism, manufacturing and power generation. The Danube River, which creates a 174km natural boundary between Slovakia and Hungary, is one of the most significant rivers in Europe and an important source of water in Slovakia. Through the Danube Utility Benchmarking and Information Sharing, Slovakia cooperates with regional peers such as Romania, Hungary, Austria and others that share the Danube River on information and knowledge on water and waste water management. There are various other rivers and lakes that are a source of water in Slovakia, including the Nitra River, the Hron River, Ipel River and many more others. A further advantage for businesses is that the water infrastructure in Slovakia is relatively well developed, with 100% and 97% of the population in urban and rural areas having access to at least basic water services respectively. Overall, there is a relatively low risk that businesses in Slovakia would experience serious water challenges.

Slovakia - Water Risks

Source
Renewable internal freshwater resources per capita: 2,325 cubic metres (cu m)	Given that industrial use accounts for 50.29% of Slovakia's water consumption, businesses have high exposure to risk should water shortages occur in the country. Nevertheless, Slovakia has the sixth largest level of natural freshwater supplies in the Central and Eastern Europe region, ahead of neighbours such as the Czech Republic, Poland and Ukraine. The Danube River Basin is Slovakia's primary source of freshwater with five sub-basins in the country. In terms of drinking water the biggest source is groundwater (around 80%) with the remainder accounted for by surface water.
Availability
98% of the population has access to improved drinking water	The majority of the Slovak population has access to a mains water supply. Connectivity differs by region, and therefore businesses operating in remote rural areas may need to purchase their own adequate drinking water supplies and construct water pipeline connections at high extra costs. The country's water supply is also massively polluted due to poor infrastructure, high water losses and extremely high pollution, caused by a lack of sewerage connections and an underdeveloped wastewater treatment sector. There are no projects currently coming online that will improve either of these issues in the medium term, and therefore businesses will have to incur additional private costs to ensure the quality and supply of water for their employees and for industrial use.
Reliability
	While there have been no nationwide water shortages as a result of poor water infrastructure in recent years, a huge drought in 2012 caused the agriculture sector huge financial loss, and the government had to offer subsidies to farmers. Therefore, on the back of the country's low internal freshwater sources, reliability of the water supply is very dependent on rainfall. Industrial withdrawals of water account for an estimated 50% of water withdrawals, showing that Slovakia's economy is fairly water-intensive. Businesses therefore stand a large risk of production halting and financial loss in the face of droughts in Slovakia.
Costs
USD1.18/cu m	In 2007 water tariffs were so high that many Slovaks constructed their own water sources, which resulted in high pollution levels as untreated water was thrown back into rivers and dams. Water tariffs have since been lowered, and therefore overall water costs are much lower in Slovakia. The tariff is generally constant regardless of volume but varies by region, coming in at USD1.18/cu m in the capital Bratislava. Owing to the compromised quality of the water and poor water sanitation infrastructure, businesses often have additional private costs to ensure the quality and supply of water for their employees and for industrial use.
Planned Projects
	Overview: Slovakia has a very limited water infrastructure project pipeline given its extensive upgrades conducted in the preceding decade. However, we could see more investment as it looks to bring its standards up to the EU-standards. Improvements: Upgrades to three waste-water treatment plants, construction of a new sewage system and installation of 47 pumping stations are being carried out in order to improve waste-water collection and treatment in Slovakia’s Trenčín and Nitra regions. The work, which is supported by European Union funding is planned to be completed by the end of 2022 and should ensure that sewage systems in the area comply with EU requirements for urban waste-water treatment. This investment of EUR81bn will limit the need for additional investment over the coming years.
Source: CIA World Factbook, Fitch Solutions

Businesses Face A Low Risk Related To Lack Of Availability

Central & Eastern Europe - Water Availability (cu m per capita) (LHS) & Population With Access To Basic Water Services (%) (RHS)

Source: World Bank, Fitch Solutions

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