Serbia: Energy policy without timetable

7. November 2016. / News Serbia Energy

Europe dedicated to creation of energy-efficient economy with low carbon level through the implementation of a sustainable climate and energy policy, while the region still depends on coal. Why thermal power plants will only exist in the Balkans in 2050 and why the region does not follow the European policy…

Germany plans to close the remaining eight coal mines by 2018, and one of the last underground coal mines in UK has been recently closed. Thus, the end of 300-year old industry has been symbolically marked, and it once employed more than one million workers. For the first time, Europe and the United States, within Group 7 of the Council of Ministers have undertaken to phase out inefficient fossil fuels subsidies by 2025.

At the same time, opening of new coal mines and the construction of new power plants is planned in the region and the huge potential of renewable energy remains unused. Hydropower potential of the Drina River, is being “exploited” only in election campaigns. Energy policies that lead in the wrong direction, often complicated by political motives and by ignoring science, leave us with the impression that everything is okay because we have significant lignite reserves that guarantee our energy independence. Ironically, the coal capacities that will be built in the next ten years will be operational after 2050, when Europe plans to close all thermal power plants and to produce electricity without carbon dioxide emissions. The only thermal power plants in Europe, will be those in the Balkans.

Energy policy or locomotive:

Europe turned to creation of energy-efficient economy with low carbon level through the implementation of a sustainable climate and energy policy, with the overall objective that implies fight against climate change, enhancing energy security, securing competitiveness and energy efficiency. The “competitive and secure energy system” will provide “affordable electricity to all consumers, increase energy security, reduce dependence on imports and create new opportunities for growth and jobs” (European Commission, Climate and Energy Policy Framework until 2030).

In addition, new energy policy takes into account the negative impact of energy production and consumption on the environment, climate and human health – which is usually presented as an external effect associated with the electricity production technology and is usually neglected in national energy strategies.

The European Union will exceed its objectives for 2020, the so-called “20-20-20 targets “, which were adopted as the Climate and Energy package in 2009, and it has already set new targets for 2030. More ambitious reduction of greenhouse gases emissions by at least 40 percent compared to 1990 levels; share of renewable sources of at least 27 percent of total energy consumption; and increasing energy efficiency by 27 percent by 2030.

Such energy future sets three challenging tasks ahead of national energy strategists. The first is to improve technology based on fossil fuels, so as to minimize their impact on the environment and society (“clean” fossil technologies) and afterwards, their complete abandonment by 2050. This actually means that only “clean” fossil technologies will survive energy transition.

The second task is to change the way of energy consumption through greater use of renewable energy sources, which should provide significant replacement capacity for the power plants that have been closed and thus ensure electricity production without carbon dioxide emissions.

USD 48.8 billion have been invested in renewable energy in Europe in 2015, which is a decrease compared to the USD 63 billion in the previous year (Renewables 2016 Global Status Report REN21). However, this result is still remarkable, especially having in mind the moment when the price of fossil fuels is at its historic low level, as well as the fact that government subsidies for renewable energy sources are significantly reduced, especially in the saturated European markets. Correlation between energy consumption and GDP is decreasing in developed countries, where the consumption of primary energy reached its peak and is now on a downward trend. According to the analysis of the International Energy Agency, this is where one should look for reasons for the global investments decrease in the energy sector: it amounted to eight percent in 2015 compared to the previous year.

It is expected that further decline of capital investments in the sector will be offset by the increase of investment in energy efficiency, which brings us to the third strategic task. The introduction of energy-efficient measures in the field of energy saving, its distribution and consumption; transposition of European directives into national legislation and its implementation are one of the priorities of the National Energy Strategies.

Energy community or train driver:

On the other hand, the region of Southeast Europe is seriously lagging behind in exploiting the great potential that lies in the implementation of European energy and climate policy. Unlike the EU, the region has not yet begun to think about the targets for 2030. Ten years ago, the Energy Community was established, as the first joint institutional project of SEE countries that are not members of the EU, through the “association” of the former Yugoslavia in the energy sector – the first time since the nineties wars and the breakup of the Yugoslav electric power industry. Afterwards, the geographical concept of the Western Balkans for which the process was initially tied to lost its significance after the accession of Ukraine and Moldova.

The original target of the Energy Community was re-establishing cooperation of separate entities, which used to operate as a single system and of which the smooth functioning of energy systems still depends on. In addition to this concept of re-association met the “Yugo-nostalgics”, including the older generation of energy experts to whom we should thank for being energy (mostly) independent, there is a step further.

The Energy Community Treaty is a key document in the energy sector between the EU and countries that are not member states. It covers reforms in the energy sector necessary for the pre-accession process of European integration for all contracting parties. In this sense, the goal is to prepare energy markets for the full implementation of European legislation through the EU directive and, later, for the participation in the single European energy market.

An important element is the implementation of EU “20-20-20” targets among all members of the Energy Community, even though they are not part of the EU, which resulted in setting national targets by 2020 for each country.

It turned out, however, that these targets are unattainable for almost all member states of the Energy Community. Most countries in the region have small and fragmented energy markets and are predominantly dependent on coal, with the exception of Albania. The total capacity of 26 GW in the region is subject to the Regulation on Large Combustion Plants of the European Union, which means that it will be subject to modernization or replacement with new capacities. Only Serbia will have to invest in the modernization or replacement of new, clean technologies, about 4,000 MW currently installed capacity of thermal power plants.

Power Industry of Serbia announced that the total amount of investments in environmental protection will reach one billion euros by 2025, but it’s hard to believe that, bearing in mind that so far funds from the loan have been withdrawn for similar investments. Energy Community Secretariat estimates that by 2020 nearly EUR 40 billion will be needed to diversify existing energy resources and to replace old power plants in the region.

Although all countries in the region committed themselves to reducing the production of “dirty” energy, it is certain that they will not be able to achieve their national goals, with the exception of Montenegro and Bosnia and Herzegovina in terms of share of renewable energy sources. For now, the EU has no mechanism to punish them. Infringement procedures, initiated by the Energy Community Secretariat against member states for not adopting action plans and delays in the harmonization of national laws with the EU Third Energy Package, and failure to meet other contractual obligations crucial for market opening, for now have proved to be ineffective.

We can look for the reasons for the lack of investment activities, especially in the renewable energy sector, in unnecessary regulatory barriers; infrastructure constraints; inadequate assessment of resources; complex legal, social and political environments that make it extremely difficult to attract investments of this magnitude; even in the absence of political will and regional cooperation. At the same time, the Regional Energy Strategy (of Energy Community) does not guarantee the sustainability of the energy sector in Southeast Europe and sends contradictory messages. In fact, it predicts that 43.5 percent of new energy capacities will come from coal and that carbon dioxide emissions will grow by 2030, and that around EUR 30 billion will be spent by 2020 for the implementation of these plans.

Assuming that by 2050, countries in the region are likely to be members of the European Union, it will imply their obligation to meet its goals related to reduction of carbon dioxide emissions, and is at least unusual to adopt and implement a strategy that implies their increase by 2030.

Future of the region or the road

Today, it is not possible to lead national energy policy beyond the regional context. One line of regional cooperation follows the process of regional markets integration, which involves development of a common regulatory framework for energy market that would allow cross-border power trade. Consequently, all the members of EC are obliged to introduce a common mechanism for capacity allocation, and establish at least one regional power exchange and implement common energy market based on the price in order to facilitate integration with EU energy market. This direction of cooperation  so far had no success as it requires a high level of cooperation of all parties, and for instance, Serbia and Macedonia still have not taken part in regional programs for cross-border capacity allocation. However, a big step forward has been made at the beginning of 2016 with the opening of a regional power Exchange SEEPEX for day-ahead market, which is a prerequisite for general market opening.

Another direction of regional cooperation is focused on identifying and facilitating investments in projects of common interest to the region, supported by the Energy Community, but is mainly implemented through bilateral cooperation between neighboring countries. During the Council of Ministers in 2013, the Energy Community adopted a list of projects of interest for the Energy Community (Projects of Energy Community Interest – PECI), including the production of electricity, as well as infrastructure projects.

Development projects are based on national development plans and strategies of each of the Energy Community members, and it practically means 5,000 MW of new generating capacities, which will be connected in the region, and more than 1,600 km of new transmission lines or the investment of nearly nine billion euros. These projects should be (co)financed by the European Commission from its pre-accession IPA funds, through its financial instrument for the Western Balkans WBIF involving international financial institutions and other donors.  The option of financing hydropower plants through public-private partnerships has proven to be feasible in the surrounding characterized by limited resources and the perception of “high risk” climate that investors have towards the countries of the region, which discourages the inflow of capital. However, development level of all nominated projects in general is very low, due to the fact that few of them have reached the advanced status of development and started with the construction.

Politics before energy:

Most of strategic projects in the field of electricity generation are hydropower plants, for example, on the upper and middle reaches of the Drina River between Bosnia and Herzegovina and Serbia, along with the two combined gas power plants for the production of heat and electric energy. The construction of hydropower plants on the Drina River is especially important because it requires bilateral agreements of countries that share this hydropower potential, which implies the existence of political will from both sides of the river. However, so far the practice was that this topic was discussed only during election campaigns, when contracts for the construction of hydropower plants with renowned European companies were signed, but afterwards, contracts were terminated. In addition, projects have to rise up to the high standards in terms of environmental protection imposed by Europe, but also to involve the public and local communities in decision-making process. The implementation of regional projects have been obstructed by slow investment decisions by member states, inefficiency shown through a large number of repeated tenders, but also the regulated electricity price, which is unattractive to investors, as well as the slow opening of the market.

The project support by the Government and local companies with their resources proved to be essential. It is necessary to have in mind that the implementation of large strategic projects represents the drive for the development of economies of countries in the region. With the elimination of the above mentioned barriers, decision makers should ensure legal security for investors and coordinated regional approach, as well as the adoption of an integrated sustainable energy policy in the region for the period after 2030, in order to become part of Europe in the future in the context of energy industry.

The goals that were set were unrealistic, and have a decisive influence on the development of the economy and the future in which our children will grow up. It would not be good to realize that we entered the wrong train.

Financing energy transition

How to focus investments in energy sector to follow the goals of sustainable policy? International financial institutions (IFIs) should only support projects that contribute to achieving the objectives set by the EU energy policy, which has not been the case. From 2006 to 2012, IFIs have invested 32 times more money in fossil fuels than in renewable energy sources (without hydropower); and the European Bank for Reconstruction and Development, as the largest investor in the region, has invested 48 percent of the funds in fossil fuels, 23 percent in hydropower and only two percent in other forms of renewable energy.

At the same time, just in time when global climate change negotiations in Paris are taking place, the World Bank announced that it will finance the construction of a new lignite power plant in Kosovo. Last year, the International Monetary Fund published shocking information on subsidies in fossil fuels which globally amount to 10 million dollars per minute, more than five billion dollars a year. On the other hand, countries did not open up the initiative of citizens to participate in the construction of power plants as shareholders, nor for the villages and settlements to invest in their future and provide additional revenues, as it has been done successfully in Germany and Austria. This issue is important in the context of market liberalization and the expected rise in energy prices, but what is crucial is the role of the state.

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