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Benjamin Lakatos: The green transition could take 10-15 years longer if we don’t accept blackouts

Benjamin Lakatos: The green transition could take 10-15 years longer if we don’t accept blackouts

April 26, 2024
The price of natural gas may increase in Europe, leading to difficulties in competitiveness and may even lead to the next economic recession, as the continent imports 90% of its natural gas, which large LNG suppliers may exploit, points out Benjamin Lakatos, the President and CEO of the Swiss-based MET Group in an exclusive interview with Portfolio.

Original article in Hungarian:

Portfolio: One of the main points of your talk given at the Corvinus University of Budapest was that import reliance on the European Union natural gas market is extremely high, around 90%. You also stressed that if the EU wants to resolve this issue, it may face competitiveness issues that gives you “quite a negative” outlook on the Union’s future. Isn’t there a contradiction between these two, as the EU is trying to overcome exactly what is one of its main vulnerabilities?

Benjamin Lakatos: I did indeed call attention to the EU’s significant vulnerability in terms of its natural gas market, which became quite apparent in 2022, when the import balance became very high due to increased prices, equaling what NATO expects the cost of the European military budget spending to be. My other position was that we are facing a very troubling question: Can Europe maintain its competitiveness, will it have enough money for the green transition, and is it spending funds too quickly?

Is there a contradiction then?

I don’t consider it to be contradictory. First and foremost, I wanted to call attention to the fact that this is a question of attitude. The European Union is currently standing under a tree that continuously bears fruit: it is one of the richest parts of the world and we live well, but we have to be careful.

What do you mean?

I mean Europe can still bear its present burdens because its economy can withstand the pressure of current energy prices. However, we may see problems if they start rising.

I also think that the green transition that is already under way leads to the continent’s ongoing loss of position. The process will take place no matter what, but the rate at which it happens is an important factor. That’s what I mean that this is a question of attitude.


The first key issue: do we understand that reaching targets and mitigating the loss of positions requires work? If we live comfortably in the upcoming 30-50 years, the transition may be very severe. That’s what I’m afraid of.

What are you referring to?

To Europe’s global presence and the fact that the younger generation is not yet taking seriously the task they face. The talk I gave was for young people, and my message to them was to concentrate on long-term issues in a goal-oriented manner. It is our responsibility as industry actors and stakeholders to give them a framework for doing so.

Many of us are far from exemplary in this area, as we tend to talk a lot about what our green future should look like, and a lot of it is just gibberish. This can cause young people to feel like they’re sitting on a mechanical bull at a college party: they can fall off forwards, backwards, or to the right or the left.

If I understand correctly, you’re also referring to the energy trilemma.

Yes. There has been global talk of the green transition for at least 10-15 years now, and I think the world has made immense progress since then. For me, the turning point was the 2021 climate summit in Glasgow, when I started actually believing that the whole thing would be more than just talk and might even lead to something useful.

What made you change your mind?

It was there that a part of the regulatory and political leadership realized that the net zero emissions target and the green transition would cost such an enormous sum that it would exceed the amount of the Marshall Plan used to rebuild after World War II, and there is simply not enough money, including at the level of individual nations. That’s when people realized that actors had to be involved from the private sector, because otherwise the whole transition would simply fail to be successful. This is also advantageous because the market is generally more efficient and is able to achieve its goals with smaller capital investments.

However, market and regulatory systems are required for the participation of private investors, who would become involved to make money. Nobody will invest in lower carbon dioxide emissions in themselves unless they are able to make money from the approach. Success also requires one more ingredient: the availability of metering systems.

Are regulatory systems, metering systems, and the market sufficient for the big transition to take place?

No. The Covid crisis clearly showed the importance of the security of supply, which was brought into focus even more clearly in connection with the European natural gas market in 2022. The root of the issue is what we talked about at the outset: Europe is only able to produce 10% of the natural gas it uses, and it imports the rest. This is something LNG actors can exploit, meaning the continent has a strong vulnerability.

The green transition provides Europe with an opportunity to react. If we do so smartly, Europe may end up in a position where it can greatly decrease its import exposure.

What side of the energy trilemma is the most important at the moment?

I think we can establish that—culturally speaking—European consumers are not ready to have blackouts and their refrigerators thaw out. Accordingly, the most important issue is the security of supply.

The other sides of the triangle are competitiveness and the green transition. The latter provides some leeway as to what the Community will implement and with what deadlines.

And competitiveness is relative because it depends on the other economic actors and how much money they have to carry out the transformations. As I mentioned earlier: at the moment, the EU still has some reserves in regards to its competitiveness, though trends are not necessarily favorable.

How much progress can we make in about 50 years if the three main stakeholders, the energy industry, institutions, and consumers, are able to cooperate in the three-way targets?

Consumers play a double role: in addition to using energy, they also affect cultural opinion and exert influence by way of political voting. I like the Greta Thunberg type of phenomenon and I am also a strong advocate of the green transition, but progress has to be balanced. The “how” of the matter is a difficult question.

The only answers I have are to parts of the problem. My assumptions are based on a long-term future with electricity. In my opinion, in 50 years we will not be using natural gas, fossil fuels, gasoline, or diesel, but rather some form of electric energy. Notwithstanding one or two niches, I am certain that the general population will use electricity, and the entire energy system will be electricity-based for the most part.

Will hydrogen play a role?

That is a huge question for me, too. The German government has decided to throw its full weight behind this technology, which is important because it won’t be the best technologies that become defining, but rather those that are supported by a large country by way of enormous investments.

When Germany switched off its nuclear power plants and there was no more cheap Russian gas available, it had to resort to purchasing expensive natural gas. The order of these steps was incorrect, and it simply had no other solution in the current geopolitical and energy situation: it is embracing hydrogen, as that is the only way it can hope to offer its industry a competitive solution.

Does that really help its industry regain its competitiveness, or will it rather have the opposite effect? When we think of cost effectiveness, hydrogen is not the first solution that comes to mind.

That is a very good question, and there are varying opinions on the subject. The issue is an important one because, as the largest Member State, Germany determines the economic speed of the European Union and, within, the region in which Hungary lies. With this new law, Germany has placed its bets on hydrogen; however, the German economy will not be hydrogen or even electricity-based.

You mentioned earlier that there is some play in the speed of the green transition. What do you mean?

What I mean is that the process will take 10-15 years longer than the 2030-2040 target planned and committed to by everyone if we don’t accept the fact that there may be blackouts now and then. That means that we will require natural gas as a transitional energy carrier for a longer period. Nevertheless, natural gas consumption will decrease and not increase in Europe.

So it would be possible to speed up the green transition....

Yes, it could be sped up, but that would lead to supply security risks, and it would also cost astronomical sums. Applying the sustainable speed makes the process much cheaper than the “boom and bust” strategy. That would be one of my criticisms if the process would lean towards the latter.

Can the big transition be completed by 2050 at a sustainable speed?

Yes, but we also need community planning. Without it, the whole process would be like someone going to the gym to work only on their biceps or doing nothing but push-ups. The process would be unbalanced.

In addition to community planning, diligent implementation is also important, as problems could also arise if Europe makes too much headway while China and the US use different approaches. If we force Europe into a comprehensive green compliance system that others do not follow, most European industries will end up moving elsewhere, leaving us uncompetitive in all areas.

Before all this, the most important thing is to have a single system of rules and metering in addition to all the emissions metering initiatives, such as the globally approved IFRS applied in financing. To use another sports analogy: we are present in the industry after having done a lot of training, but we don’t yet know if we will be wrestling or playing soccer or handball.

Besides the fact that the energy supply of the future will be electricity based and we may use natural gas for 10-15 years longer than planned, what else characterizes the energy use of the future?

It will be local, with different types of solutions, by which I mean that everyone will have to develop their energy mixes in a way that is as diversified and as cheap as possible while also being based on local positions. Although I know very well that the topic of hydroelectric power plants brings up bad memories in Hungarians, it is a very good way to obtain energy. I recommend getting over the bad feelings we associate with them due to bad experiences.

So everyone should develop capacities that conform to their features?

That’s right. For example, Spain has built a large number of solar energy plants, so when the sun comes out the price of electricity drops to almost zero on the stock exchange because no one wants to switch off their power plants. As a result, there is a strong cannibalization effect.

In response, Germany has passed one of the largest and most effective green decisions: it is not permitted to switch wind farms off. The aim is to put green hydrogen in a good position: when the wind is blowing and electricity prices are zero or negative, investors either fill energy storage units or use electrolysis to generate green hydrogen that they can then feed into the future hydrogen pipeline network.

The cannibalization effect is already very strong in Hungarian solar power plants, as discussed by the CEO of MVM Partner at our conference.

In itself, that is good news, but it also means that we have concentrated too much on just one area. What I mean is that the situation requires us to establish storage units or wind farms to complement the solar power stations.

Hungarian legislation also seems to be a proponent of this solution.

At MET, we are also considering bringing together as many types of electricity production solutions at central locations as possible. That is what we did at the Dunamenti Power Plant, for example, where we built both a solar farm and an energy storage unit. These complement each other perfectly, and we didn’t have to rebuild the entire network infrastructure.

If a country doesn’t have water to use for energy production, it is dangerous to implement weather-dependent renewables only without figuring out how to store any energy that is produced but isn’t immediately used. That is exactly what can give Serbia a big advantage, as it has copious amount of water, allowing it to delve into building weather-dependent renewable capacities at full speed.

So my main message is that the future is local, and we should build as many types of energy production and storage technologies in any given location as we can. It is also important to pay attention to reaching the market. And that is made easy in the European Union—we should note that after the introduction of the euro, one of the most important achievements was the single electricity and natural gas market. Connecting the electricity markets of many countries has allowed us to build a much smaller number of power plants.

How are the players of the natural gas industry handling the fact that—in theory at least—the significance of the energy carrier referred to as transitional will be phased out by 2030-2040 even though you say this process will take place 10-15 years longer?

There are many actors in the industry who are loath to sign natural gas delivery contracts that extend beyond 2030, though our industry’s task is precisely to provide a solution for this issue.

The other half of the story is that, for example, banks provide financing for US LNG terminals only if they consider future sales revenues to be secure, which means they need contracts concluded for 20-25 years. Many US actors do not understand why their European counterparts are unwilling to sign delivery agreements for such long terms after Europe almost went belly up in 2022.

It is also important to add that natural gas consumption is expected to increase in Asia, as economic growth is paired with significant energy demands, which may lead to the establishment of a large number of LNG terminals and large regasification capacities. There, they expect natural gas to remain part of the energy mix for a long time to come, as it is still better than coal.

Are you referring to Asia’s pull on the natural gas market?

Yes. We cannot, from a European viewpoint, underestimate this factor, as Asia is expected to show a substantial increase in demand.

If I understand correctly, that is why you are planning to sign a 20-year LNG supply agreement with the American company Commonwealth.

Yes. The formula isn’t all that complicated: in the first ten years, we would deliver the gas to Europe. After that, if it isn’t needed here, we will take it to Asia.

Is your agreement affected by the so-called “Biden stop”, under which LNG projects that have not yet been authorized will not be granted permits?

Yes, this project was also affected by the decision, which is not much of a problem from a European perspective, as we expect the gas market to see an oversupply from 2026 anyway, due to the large number of projects put under way. The expectations may be proven wrong if the Asian gas demand increases more quickly than expected. But, circling back to the US decision: this doesn’t mean there won’t be any gas in Europe. What it means is that gas will be more expensive because of reduced competition.

This hurts me both as a player on the European gas market and as an EU citizen because, as I already mentioned, we produce only 10% of the gas we use and we are forced to buy all the rest. All in all, this is a price issue and not a security of supply issue.

Could this end up increasing the risk faced by European competitiveness, as you mentioned earlier?


That’s very interesting, because you just said that the global gas market may suffer from oversupply, and now you’re saying the American decision may lead to price issues in Europe.

This is a complex issue. I have not seen the phases of the 2022 crisis written down in detail anywhere, though it contains a number of important lessons. In the past two years, the price of natural gas jumped from its range of 20-30 euros per megawatt hour to around 100 euros followed by another huge hike in 2022. However, American and Asian prices did not really rise. That means the crisis was European and not global.

Besides the fact that we produce 10% of the gas we use and in addition to the Russian-Ukrainian war, this enormous jump also took place because neither the natural gas market nor the electricity market had the financial market tools at their disposal that would have kept these prices at bay, such as trading suspension, liquidity, and position closing rules. These tools were not in place proportionately to the size and importance of these markets.

After the war broke out, the rate remained at around 100 euros because the gas industry realized that the West may be unable to supply all of Central and Eastern Europe. After that, the jump from 100 to around 170 euros can be attributed to the absence of financial regulatory tools and to bad regulations. This led to a situation on the energy markets that was applied during bank crises, when everyone pulls their liquidity out and sits around looking at everyone else. Then, during the shortage of liquidity, at the end of the process, the hedge funds also stepped in, forcing a classic position closing wave from actors who were no longer able to finance their positions, which drove prices up even further. Then, just as quickly as they had come, they left, taking with them a couple of tens of billions of euros in profits from Europe.

That is the sort of thing I am talking about when I say that the energy trilemma requires good regulation and robust planning, when the right hand knows what the left is doing. With a little more attention, this allows us to achieve results with much lower expenses. If we had spent just half of the resources consumed by the 2022 crisis on energy investments, nuclear power plants, renewables, and a structured balancing market, we would have solved Europe’s energy problems.

You mentioned the issue of the region’s natural gas supply, and recently many people have dealt with the issue of what will happen to the Russian-Ukrainian gas market cooperation after 2024 and whether it will continue in some form. What do you think: does Europe, and the Central and Eastern region, need piped gas coming from Russia through Ukraine, or can we leave that in the past?

If TurkStream is operational, the region, including Ukraine, is perfectly capable of supplying itself with gas at the annual average, including during the winter, the summer, and during peak capacity because of the sizes of the points of entry from Greek, Croatian, German, and Polish LNG terminals and because of Hungarian and Romanian extraction.

However, if the Ukrainian extraction is not coupled with Ukrainian storage, this statement will not be true for the winter months, and we may see supply issues. The question may arise as to who is left without gas. That is why it is especially dangerous to bomb Ukrainian natural gas storage facilities.

That means that in addition to Ukraine, this issue is also important for the Hungarian region, and some Western partners may be left without access to their stored gas.

The latter issue is merely financial in nature, and won’t leave anyone in the cold. But it is very difficult if there is no heat in a home with a child and the inside temperature drops to 10°C. If the Ukrainian reserves are not available, there may be problems during the winter months within Ukraine. Not in the EU, though.

What do you think, will TurkStream function?

I sincerely hope it will. If not, that could lead to problems with security of supply. I may be old-fashioned, but if a situation arises where people may be left without heating and they may end up freezing, I say let’s not talk about the other issues of economy or technology until the problem is solved.

However, looking back, I must say that Europe is doing quite well on the natural gas market supply security front, especially as compared to what we could have expected a year and a half or two years ago. At the time, nobody in the energy sector would have thought that these systems can transition this quickly and this effectively, and the reduction in gas consumption obviously also contributed to the solution. But we don’t know by how much more we can reduce consumption.

Was the bombing of the Ukrainian gas storage sites just a one-off occurrence sent as a message to the Western actors who use them?

These storage facilities were built during the Soviet era. In several locations, the reserves themselves are three to four kilometers beneath the surface, so they can’t simply be bombed. The compressor stations on the surface are quite dispersed, meaning it is very difficult to bomb the infrastructure in a manner that makes it impossible to reconnect the storage units into the system.

Is MET affected by the situation involving the Ukrainian gas storage facilities?

Yes, we store gas in Ukraine, and the issue was discussed by our Board of Directors. I would add that we were continuously present in Ukraine and never left the storage units, even when the war broke out, and merely reduced our position. We are leaving now.

Since we’re talking of storage sites: gas storage facilities across Europe, including Hungary and Germany, are filled up to about two-thirds, meaning filling started from relatively high levels. Based on your earlier statements, the Central and Eastern European region will face the coming winter with possible supply security issues. Is that correct?

Starting from a high filling level is very costly, but it stabilizes the system.

What I meant is that your statements indicated that this will be the third winter when we may once again face security of supply issues, so we still can’t just sit back and relax.

It is important to emphasize that this is no longer an issue at the European level or at the regional level. Now, we are talking about Ukraine, where we may face security of supply issues, namely whether there is enough natural gas.

Two years ago, nobody would have thought that the absent piped Russian gas could be replaced with the built LNG capacities and the reworked pipeline network at the European Union level, and yet we now see that we are past the resulting security of supply crisis.

What could cause a new crisis?

For example, high LNG prices, as only 10% of the gas used in Europe is produced within the continent. However, the issue of physical security of supply in Europe has basically been resolved. Regarding the issue, the main takeaway is that although the crisis has passed, the risk has not, which is due to the 90% import exposure.

Is the gas crisis over at the price level as well?

According to current price levels, yes, though not all of the price driving factors have been resolved. What has been resolved is that we are now able to move natural gas between any two locations within Europe. The only remaining question is what the gas in the LNG ship on the Atlantic Ocean costs. The market regulation issues have not been solved: though progress has been made, there is still much to be done.

What changes are required in market regulations?

What I would do is examine the large, liquid, well-regulated financial and capital markets to determine the trading suspension and other rules they apply, and use those.

Circling back to prices and gas storage facilities: does the fact that the facilities are filled to such high levels mean that many traders are sitting on as-yet unrealized losses? Can this be a source of problems in terms of removal and the security of supply?

There may be actors who will be forced to face significant losses, though that no longer means a systemic risk. Systemic risks stemmed from situations where, for instance, European banks failed to keep step with the five to ten-fold increase in initial margins on stock markets due to the proportionate rise in energy prices while their systems lost liquidity. I was relieved when the European state actors came on the scene in 2022 to provide financing. I am very grateful, as liquidity makes operations possible.

As MET has interests vested in German natural gas storage facilities as well, the question of the German gas export levy may be especially important. What do you think of this levy being used to cover the losses suffered in 2022? Is it fair?

I believe in the market. I think that—with a suitable framework—fair competition always results in better results on the level of society as a whole than constantly meddling with regulations. There are obviously situations when it is necessary to do so, such as bank bailout packages. However, if we can choose between regulatory and market solutions, it is better to choose the market solution.

Many European countries reacted to the 2022 gas crisis with regulatory solutions even though market solutions would also have been available. Based on twenty years of experience, I can say that in the end, these situations always end up costing everyone much more: maybe not in the form of gas costs, but someone will have to pay for it, such as in the form of taxes.

When gas was stored in 2022, we saw a wide range of solution across Europe, including for example the smart German solution where they said that if a market actor fails to fill the storage facility by a given deadline, they would lose their access to the facility and the State would fill it up in their stead. In other places, there were even more stringent regulatory actions taken that substantially increased the costs of the given country’s energy sector.

Does MET also have to devote attention to the expansion of the LNG terminal on Krk, in which it also has interests?

As I mentioned before, the security of supply issue in the region has been resolved, though difficult situations may still occur. Another important question is how fast natural gas consumption will decrease in the region. Nevertheless, I think that the capacity expansion investment in Krk is so small at the regional level that it is worth purchasing the new capacity as a guarantee. This means it contributes to the security of supply in the region even if it does not contribute much to capacities. Let’s revisit Europe’s 90% import dependency: that is exactly why it is good to have extra capacities in the region as well, which might come in handy when necessary.

You mentioned the risk of a price increase on the European gas market. What would you recommend to the Hungarian corporate natural gas users that are considering to nab that 25-30 euro gas price on some fine spring day when the Hungarian gas storage facilities are more than two-thirds filled so they can fix a part of their requirements? Should they wait?

I have vowed not to give tips regarding foreseeable market movements. All I can say is that all decision-makers should consider the risks inherent in natural gas prices. The risks come from outside of Europe, meaning we are exposed to Asian procurement strategies as well as geopolitical and wartime conditions that Hungary has very little control over.

Corporate decision-makers have to understand their own situations and make their decisions keeping those in mind. For example, they should think of the ratio of gas and electricity costs within their own expenses; if its percentage is small, the question is not that important. They should also determine the gas and electricity price level at which they would have to close their businesses because they would be unable to pay or transfer the costs. If the current price is far from this absolute level, I would certainly buy electricity and gas.

There is also a third group, those who should examine what their competitors are doing: they have to consider relative price levels. This is a difficult issue, and it is hard to break free of regional realities. The country we examine the issue from is determinant. However, I do have some very good news for Hungarian consumers: for decades, Hungary was charged a premium compared to Western gas markets, but since the gas flows were reorganized in the past year or two thanks to TurkStream, it has received a discount on pricing. Previously, Hungarian actors did not have a chance at obtaining gas prices lower than German competitors, but now energy procurement experts have a duty of examining the issue.

We are just coming out of a gas crisis. In your opinion, has MET’s goodwill increased compared to three years ago or has it decreased due to the turmoil?

MET is now much more valuable than it was three years ago. Partly because our risk management tools withstood the tests very well and partly because we were able to continuously generate a profit: we didn’t slip off the straight and true path at any time. There are very few companies that can say that. We did not receive state subsidies from anyone and did not default on any bank contracts. This was because we refrained from speculations, we did not try to guess the direction the market was headed, and in general we stuck to dynamic risk management. This is what I referred to as one of MET’s pillars in my talk at the university: we monetize real options.

A large number of young people listened to your university lecture, and you consciously aimed your messages at the top ten percent. Portfolio is also organizing a large GenZ conference in May, which leads me to my next question: in your experience, are potential generation Z employees drawn to the energy industry and the persevering hard work it requires?

The corporate leaders of my generation are often criticized, telling us we have to accept that the current generation is not the same, that today’s youth are not willing to buy into the work hard-play hard city lifestyle offered by London or New York. I am often told that today’s young people are not willing to work as much as we demand. In my experience, people who do not enjoy working do not spend a lot of time with us, simply because they don’t feel at home.

My own HR philosophy is different than the usual: I like to bet on young people, on freshness, on dynamism, and they always bring something new to the table. I will forever be an optimist: I don’t believe that the entire young generation is demotivated and unprepared to face the world. Many talented young people look back two or three generations and use the experiences they gain to develop a method that allows them to enjoy success. When these young people get to the point where they can take over a position in executive management, allowing them to shape the world, we will be surprised, in a good way.

Regarding GenZ’s corporate integration, I think we have to understand them, we have to do something better, we have to formulate things in a better way. All in all, I am not worried about the topic, all we have to do is use a different approach. Human nature has not changed.