Slovakian Power Market Finally Unlocked, Presenting New Investment Opportunities

By Fitch Solutions

Key View

• The development of new interconnections to neighbouring markets will unlock the potential for capacity growth in Slovakia’s power system after years of repression.
• The non-hydropower renewables sector remains a heavily underdeveloped component of the market’s power sector, although we highlight significant upside risk to our forecasts from the grid upgrades as well as renewed policy support.
• Despite increasing opportunities across the power sector, we expect the nuclear power sector will remain dominant in the market’s power generation mix, with the completion of two new units set to make Slovaika a net power exporter over the coming decade.

The development of new interconnections to neighbouring markets will unlock the potential for capacity growth in Slovakia’s power system after years of repression. We highlight that the lack of suitable grid connectivity and management has been a constraining factor for capacity growth in the market for more than a decade, particularly in the non-hydro renewables sector. That said, we expect this trend will be reversed over the coming decade, owing to the development of new significant cross-border 400kV electricity interconnections linking the Slovakian and Hungarian grid networks. This was developed as a Project of Common Interest (PCI) by the European Commission and they were co-financed from the Connecting Europe Facility financial instrument. The completion of the project will result in the removal of the current ban on connecting new generating capacity in the market, as network operators will be able to balance the market’s power system. As such, operators have announced that the grid developments will enable the connection of over 1.8 gigawatts (GW) of new capacity, of which 500 megawatts (MW) is to be allocated to non-hydropower renewable sources.

The project is one part of an ongoing EU initiative to enhance cross-border coordination of electricity networks in the region. The EU-backed Danube Ingrid project is to run over the decade and is set for completion by 2027. The smart grid project will improve the connections between Slovakian and Hungarian grid networks through data collection and exchange, new substation infrastructure and developing smart metering. This will improve security of supply and enable greater demand management.

Slovakia Underperforming Amid Renewables Transition In The EU

The non-hydropower renewables sector remains a heavily underdeveloped component of the market’s power sector, although we highlight significant upside risk to our forecasts from the grid upgrades as well as renewed policy support. We currently remain highly cautions for non-hydro renewables capacity growth with the sector rising from 823MW year end 2020 to 920MW 2030, representing a mere 90MW of additions – one of the poorest renewable growth markets in the EU. That said, we highlight several factors which point to rising upside risks. Among these, we highlight:

• Grid management to end ban on new capacity growth: Slovakia currently has 4MW of grid connected wind capacity which dates back to 2003 when one turbine was installed. Since there has been significant investor interest to connect new wind and solar capacity which has been kept locked down by what was an effective 17-year ban on growth. This was primarily due to the extremely poor condition of the Slovakian grid network, as well as the political climate and lack of support for renewables while nuclear power has drawn focus and vast amounts funding. However, this situation has now changed with significant improvements stemming from grid management and the upcoming development of new interconnectors. Recently over Q121, it was announced that Slovakia will develop its first major form of capacity outside of the nuclear segment. A 20MW geothermal power plant is small in contrast to other power segments but represents a major shift for Slovakia and the installation of new renewable technology capacity. The project, set for completion over 2026, is expected to cost EUR120mn and will be operated by PW Energy.
• Increasing government support for the sector: In 2020 Slovakia set out its National Energy and Climate Plan (NECP) to the EU for the period of 2021 and 2030. Within this strategy, the market will seek to reduce power sector emissions and increase the renewable share of generation. Slovakia is also set to receive up to EUR6bn in EU recovery funding in response to the Covid-19 pandemic outbreak. Over EUR2bn will be targeted at green investments, with EUR700mn for building renovation, EUR750bn on sustainable transport, EUR350mn for industry decarbonisation, and EUR150mn for climate change adaptation measures. Furthermore, new legislation will 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 renewables growth in Slovakia, particularly in the solar sector.
• Pent up demand evident in renewables segment: Pent up demand in the solar industry is evident in the market. Over Q2 2020 the Slovak Innovation and Energy Agency (SIEA) awarded EUR700,000 in payments in under 30 minutes to small scale non-grid connected PV systems. The solar industry was bound in like the wind industry by the ban on new grid connections and Slovakian energy consumers are unable to sell excess solar generation to the grid. However, as seen in the past the demand for growth is still apparent in the market. As residential battery systems become cheaper in other EU member states such as Germany, who are actively involved in the Slovakian energy system, we expect to see an uptake in small scale battery systems in Slovakia supporting residential solar developments.

Nuclear Power To Drive Market To Become Power Exporter

Despite increasing opportunities across the power sector, we expect the nuclear power sector will remain dominant in the market’s power generation mix, with the completion of two new units set to make Slovakia a net power exporter over the coming decade. Slovakia currently has two new nuclear power units under construction – the Mochovce 3 and 4 plants. We expect to see the 471MW Mochovce 3 plant come online over 2021 despite being scheduled for completion over 2020. Furthermore, the sibling plant Mochovce 4, also 471MW, is at a slightly lesser stage of development, reported to be 90% and expect completion by 2022, with the gradual bringing online of generation towards the end of 2022/2023.

The projects, which have constituted the market’s largest-ever investment into its power sector, will maintain the sector’s dominance as the main provider of electricity over the decade with its share increasing from 59.3% in 2021 to 72% by 2030. Furthermore, these developments will create an oversupply of power leading to the market exporting power while driving pressure on the coal segment in the market, set to be phased out over the near term in conjunction with the build out of this new capacity. We expect the new interconnection links to neighboring markets will be quickly utilised by Slovakia to create revenue selling stable low-carbon baseload power to its neighbours, and with the completion of the new nuclear power systems, Slovakia is set to emerge as a net power exporter over the decade at an annual average of 6.1TWh. 

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is an affiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. 

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