Southeast Europe is struggling to keep the lights on. Since January 2007, the region has experienced a worsening power supply situation that threatens to reverse many of the economic, social and environmental improvements it has achieved since the end of the Yugoslav conflicts of the 1990s.
In January 2009, the region nearly experienced a system-wide blackout because of the gas dispute between Russia and Ukraine. It helped that the demand for power was lower than usual at the time due to the economic slowdown and the winter holidays, but even when the situation is less difficult, problems can occur.
Damage and disruption
Even without the damage and disruption caused by the Yugoslav conflicts of the 1990s, the region’s power sector would have been in need of substantial new investment and reform. Up to the end of the 1990s, energy decision-makers appeared to have little concern for the economical production and use of electricity.
Perhaps this was not surprising given that until the collapse of the Soviet Union the region had access to cheap investment, technology and subsidized fuel supplies. However, Russia today demands competitive prices for the goods and services it sells to Balkan customers. The Soviet Union’s demise also saw an end to what was once a single unified system. This has resulted in a collection of often competitive micro markets in which national rather than collective interests predominate.
Most of these individual markets are by themselves too small to be liquid and efficient, suggests energy consultant Erik Sorensen. In 2007, the CIA Fact Book reported that Croatia’s electricity consumption was 18.61 TWh and Greece’s was 58.28 TWh. In 2009, the EBRD reported that Albania, FYR Macedonia, Montenegro and Serbia regularly imported electricity. The region’s main electricity exporters were Bulgaria, Romania and Bosnia. Since 2002, under drives led by the European Union (EU), efforts have been made to rebuild war-damaged power infrastructure, develop new capacity and integrate the region’s markets.
The most significant development for the region’s power sector has been the signing of the EU’s Community Energy Treaty in 2006. This has created new favourable conditions for countries to co-operate and attract new vital investment to the region. Community Energy Treaty ambitions include creating a single integrated regulatory and trading space for network energy, enhancing security of supply in this region and developing cross-border relations, improving energy efficiency and the environmental situation related to network energy and developing renewable energy sources, and developing network energy market competition.
The region still imports power despite continuing investment in new generation and distribution capacity. However, investment levels are still insufficient to keep pace with an OECD-recorded market growth of two per cent per year. Many countries need to top-up domestic supplies with imports. This is especially the case in summer, when domestic hydropower output is low. For some countries, gaining access to alternative supplies can be a problem. The centre of the regional electricity network lies in Serbia, through which most countries in the region have little alternative but to import power, notes Sokul Spahiu of Albania’s KESH power utility.
There is an urgent need to reduce the region’s energy intensity, which is a measure of the energy efficiency of a nation’s economy. Constanze Kreiss of KfW Bank reported last year that the region’s average energy intensity is 2.5 times higher than Germany’s. Progress has been uneven in tackling this issue. Current low prices are encouraging inefficient usage of power and deterring investment in new capacity. It is not surprising that the Bulgarian government has predicted that southeast Europe will face an energy crunch by 2012.
The habit of metering in many markets and paying electricity bills on time is a new phenomenon. In February, the Kosovo Energy Corporation cut off power to large areas to encourage customers to pay their bills. Yet the main obstacles to improving energy efficiency in the region have been a lack of public awareness and limited access to financing for energy efficiency measures. The EU is setting up the Southeast Europe Energy Efficiency Fund to help public and private sector entities improve energy efficiency.
Operators have problems raising prices to finance necessary improvements in capacity. This is largely due to the reluctance of many governments to offend public opinion. The energy mix for the region, according to Slav Slavov of the World Energy Council in 2006, was 39 per cent coal, 34 per cent hydro, 20 per cent natural gas, 5 per cent nuclear and the remainder renewables. There are plans to tackle the region’s energy predicament by building new nuclear, gas and hydro plants and a new network of interconnectors.
Bulgaria, Romania and Croatia are developing proposals for new nuclear plants; Greece, Macedonia and Serbia have ambitions to construct gas power plants to take advantage of the region’s new network of gas pipelines and liquefied natural gas (LNG) import terminals that are being constructed or have been proposed; Kosovo and Greece plan to build new coal power plants; and Albania, Montenegro and Bosnia have plans for new hydro schemes. Also, Macedonia, Croatia and Albania intend to build a network of interconnectors to bypass Serbia.
|The Balkans is set to be reliant on fossil fuels for some time to come Source: Bankwatch|
The trouble is that if all these schemes go ahead some of them could turn into expensive ‘white elephants’ for these poor countries. As a result the process of market reform and liberalization could be hindered as governments seek to protect their new pet projects. The region might have to delay the dates when some of these projects come online. For example, it has been suggested by some energy consultants that if Bulgaria completes its nuclear plants on time, the proposed scheme to construct new gas fired power stations in Albania should be delayed until market conditions require it. Estimates are that southeast Europe needs 11-16 GW of new capacity.
The World Bank estimates that to meet the growing demand for electricity in the region, investments are needed of about $40 billion in power generation, transmission and distribution over the next 15 years. Countries such as Greece are finding it difficult to raise the necessary sums involved. However, in 2009 the EBRD pledged to invest €500 million ($675 million) for the region’s power sector. The private sector will need further improvements in the region’s investment climate in terms of clarity and regulatory certainty if the required investment volumes are to be achieved.
An increasing number of the region’s existing and planned power stations are switching away from oil and coal to natural gas. Partly this is to comply with EU regulations on emissions, and partly because the prospect exists of new sources of gas from Russia, the Caspian Sea and the rest of the world. Such supply improvements, once completed, should sufficiently improve the region’s energy security and improve access to more competitive gas supplies.
Hydropower plays a significant role in the region, although it is an unreliable source of power at times, especially during hot dry summers. Apart from the massive Iron Gates dam on the Danube River between Serbia and Romania, the region’s hydro schemes tend to be small. Plans exist to upgrade or develop new schemes throughout the region. Austrian utility EVN AG has proposed a hydro scheme for Albania that will cost $1372 million. Serbia’s power utility has announced various proposals to build a series of dams in Bosnia and Macedonia to take advantage of the planned interconnector linking Macedonia with Italy.
Most of the region’s coal and lignite power stations will have to be replaced to meet EU regulations. Both Greece and Croatia have plans for new or upgraded plants. There is an increasing trend to import coal from outside southeast Europe due to environmental and cost reasons. Italy’s Enel has proposed building a 1600 MW coal-fired thermal power plant near the Albanian port of Durres. The plant plans to use imported coal and clean coal technology to supply the Albanian grid and the Italian market via an underwater interconnector it plans to build across the Adriatic Sea.
Wind energy has come late to the region. Greece’s generating capacity stands at 1087 MW out of a regional total of over 1305 MW, reports the European Wind Energy Association. Investors have ambitious plans to construct new plants across the region. However, issues such as the widespread grid distribution problems are putting a brake on development.
Total regional installed solar generating capacity is only 23 MW, of which Greece has 19 MW. In Croatia, the Canadian investment fund Nexus has planned to start construction of a 60 MW scheme on the country’s Adriatic coast near Sibenik. This plant would supply the local grid and take advantage of the planned interconnector from Croatia to Italy.
The Chernobyl nuclear power plant incident in Ukraine put a freeze on further nuclear expansion in the region. Elsewhere, the remaining plants in Slovenia, Serbia, Bulgaria and Romania continue to age. However, Bulgaria approved in 2006 a new nuclear power plant to be built at Belene using technology supplied by Russia’s Atomstroyexport, France’s Framatome (Areva) and Germany’s Siemens. It will employ third-generation VVER-1000/V-446B reactors. The plant should be fully online in 2014, outputting 2000 MW. Since then other countries in the region have announced proposals to construct new plants as part of the region’s policies to cut CO2 emissions, improve energy security and meet future growth in demand. These include Croatia, Serbia and Romania.
Countries trying to import power have one main complaint about the regional grid: they must accept power via the congested Serbian grid, either because alternative interconnectors are not available or there is insufficient spare transmission capacity due to contractual reasons. New interconnectors are being built to bypass the region’s bottleneck in Serbia and develop new direct links between the surrounding countries. Italy already has a direct link with Greece and has plans to build three more direct links across the Adriatic Sea to Croatia, Montenegro and Albania to take advantage of the more relaxed development regulations that exist in those countries for building new power plants. A proposal also exists for new interconnectors to be built to improve the ability of southeast Europe to trade with Turkey.
Foreign investors face problems. For example, national governments have failed to fully adopt and implement the reforms that were outlined in the Energy Community Treaty of 2005. Standards of governance in many states, such as Bulgaria, Romania and Greece, need improvement, and it took the Croatian government five years to pass the necessary legislation so that investors could build the country’s first two wind farms on the Adriatic coast. In addition, a financial scandal last year has forced the Croatian government to replace the entire board of utility Hrvatska Elektroprivreda.
In other Balkan countries the pace of reform can be slower than in Croatia. There are markets in which, on paper, EU energy-related regulations have been fully adopted and the national market is liberalized. The reality, however, suggests otherwise. Operators are making a loss because the government refuses to allow electricity prices to increase to commercial rates due to domestic political considerations. In Serbia and Albania, electricity utilities have applied to raise prices to realistic levels to reduce losses and pay for new investment. In both cases the governments concerned have refused permission. This has made foreign investors freeze investment while they lobby the local government to change its mind.
What of the future?
The OECD estimates predict continuing growth in the region’s power sector of two per cent per annum. However, not all the current proposals are likely to be realized, especially if investors are unable to raise prices to market levels. The improvements in energy use and efficiency that will come from the introduction of new technologies and policies will alter the industry’s supply and demand equation. Smart metering has the potential to be a significant step change in the electricity markets if it has the desired effect of providing customers with pricing signals that lead to shaved peak demand.
It is interesting how foreign investors are taking advantage of conditions in the region to tackle power problems in their own countries. Italian investors, for example, propose new power plants along southeast Europe’s Adriatic coastline next to planned direct links with Italy. Locating such new plants on greenfield sites in the region tends to be a less time-consuming process than in Italy. In addition investments in new interconnectors should help resolve the poor access to additional power sources that many markets are currently experiencing.
Andrew Nin at Pöyry Consulting suggests that the market conditions and economic development issues that aim to maintain the local mining of coal will mean that many of the renewable generation proposals are unlikely to see the light of day. This is in part due to regulatory risks that are caused by governments changing policies or not approving changes in the pricing structure due to domestic politics. In fact, in countries such as Serbia and Kosovo, it is likely that new coal or lignite plants will be built without clean coal technology.
As for nuclear power, the region’s governments will have to follow Romania’s approach of allowing a much higher degree of foreign private sector involvement than previously envisaged. Pressure on the region’s power sector is likely to continue to grow as the Balkans’ economy modernizes and living standards improve.
It is clear that it is not only a question of providing new capacity, it is also an issue of improving regional co-operation and tackling energy efficiency and reform of the power sector.
Member states must take the issue of reducing energy intensity more seriously, as well as take advantage of the lessons learned by neighbouring states and the assistance provided by the EU and private sector. Southeast Europe’s progress in becoming a net exporter of electricity is still some way off. The work of international bodies, such as the EU, and partner governments have certainly brought such a prospect nearer by creating a more suitable climate for investors. Such work by international agencies to create a better business climate has attracted many new investors to what can be a difficult region for operators and investors alike.
There have been other interesting developments too. These include repairs to war-damaged infrastructure, and the construction of new distribution networks and generating plants, including some renewables. Unfortunately, given the experiences of some investors and the economic climate, the region’s governments will need to work harder to reform the business climate. This will attract investors and improve the quality of governance in the region.
For many investors, there are less worrisome locations for their money. This is especially the case in proposals for costly mega-projects, such as new nuclear plants, where states will have to learn to co-operate with each other and foreign investors if such schemes are to be realized.
The trouble is, regional ambitions have been too easily sacrificed to protect national or political interests. It is clear that unless the EU plays a more proactive role in reforming and integrating the region’s power sector, solving its electricity problems will remain a distant prospect.