Tuzla
Tuzla is currently the largest power station in Bosnia and Herzegovina
Credit: Geolocation

Against a background of financial crisis in Europe, Chinese power companies are making inroads in the Balkans, sometimes at the expense of their European rivals, reports Jeremy Bowden.

Chinese companies’ low costs, access to cheap capital and apparent willingness to take on projects without government guarantees is proving an attractive mix to Balkan states eager for investment in ageing and over-stretched power infrastructure.

The newcomers are adding to the competition for upcoming projects among more established international investors, largely from the European Union (EU), such as Germany’s RWE and Italy’s Edison.

In April, Chinese premier Wen Jiabao unleashed a wave of interest from the region’s cash-strapped governments and utilities by announcing that €10.5 billion ($13.6 billion) of Chinese capital had been earmarked for investment in infrastructure projects in Central and Eastern Europe. The news followed severe winter weather that tested the Balkans’ ageing power infrastructure. The resulting blackouts and shortages have intensified pressure to modernise the power sector and reduce reliance on weather-dependent hydro, which accounts for about a quarter of the region’s electricity output.

A severe summer drought has worsened the hydropower situation, making further shortages likely as heating demand rises this winter. Once again, utilities may have to turn to expensive imports, if they are available. During last year’s peak winter demand, both Bulgaria and Bosnia and Hertzogovia (BiH) temporarily halted exports to ensure national needs were met, while Romania had to suspend supply on some contracts. Poor transmission networks and the lack of a single energy market could also be contributing to the power crisis, which is dragging on the region’s economy and discouraging economic development and foreign investment. In this context, Chinese offers of cheap, externally financed power plants running on the region’s abundant coal resources are clearly well timed.

Until now, investment in the Balkans’ power sector has been discouraged by prices that rank among Europe’s lowest, reflecting an unreformed market and subsidised tariffs in countries such as Serbia, China’s closest political ally in the region. But as a part of their path to EU membership, western Balkan states have committed to liberalise their energy sectors and to achieve EU standards in power production by 2015, brighening the prospects for investors. Martin Burdett, editor of Energy in East Europe for Platts – a global energy, metals and petrochemicals information provider – notes that all the Chinese investors are building to EU environmental standards, in the expectation that these assets will eventually end up supplying and operating within a single European power market.

Nikola Tesla thermal complex
Serbian officials visit the Nikola Tesla thermal complex
Credit: Serbian Government

Though risky, Beijing’s decision to invest in markets neighbouring the EU that have yet to be fully liberalised could have considerable financial upside. The strategy also puts Chinese assets and influence in a region with direct links to Brussels, arguably giving China a potential say in European affairs.

Serbian springboard

Serbia, which developed close relations with China during its international isolation in the 1990s, is at the very centre of recent activity. The country urgently needs to expand its 8400 MW capacity and grid, suffering from a lack of maintenance and investment, to serve its growing economy and equally importantly avoid costly imports.

Serbia’s energy minister Petar Skundric recently praised Chinese companies for their willingness to offer finance on “very favourable terms” through Chinese state banks – a factor that Burdett sees as a critical commercial advantage. Earlier this year, for example, China’s state Ex-Im Bank agreed to a €1 billion soft loan to Elektroprivreda Srbije (EPS) to upgrade Serbia’s electricity network and build a new thermal power plant in Kostolac. Talks are underway with China National Machinery and Equipment Im-Ex Corporation (CMEC) over building a 350 MW coal-fired plant, along with possible expansion of the nearby Drmno coal field, according to Platts. Construction of this new unit could start as early as 2014, with operation by 2019.

In late 2011, EPS signed another joint venture deal with a Chinese consortium – including China Environmental Energy Holdings and Shenzhen Energy Group – to build a 744 MW coal-fired unit at the Nikola Tesla complex near the southwestern town of Obrenovac at an estimated cost of more than €2 billion. The project will also involve upgrading the Radeljevo feeder coal mine, and further and greater co-operation on renewable energy projects – in particular biomass – is envisaged.

But Chinese companies are not alone in winning new business in Serbia, says Burdett. Serbia’s state power group EPS has established strategic partnerships with two leading European utilities.

In a joint venture with EPS, Italy’s Edison is to build, own and operate a new 750 MW lignite-fired plant at the site of the Kolubara thermal power station, southwest of Belgrade. The two utilities signed a preliminary agreement in June 2011 and the Serbian government approved a letter of support for the Kolubara B project in May of this year.

More recently, the government agreed an extensive partnership with Germany’s RWE. What is particurlarly interesting is that this partnership is more far-reaching than previous collaborations with Chinese firms. The agreement with the German utility for developing and enhancing existing power plants, as well as planning, constructing and operating new plants, will first address the redevelopment of 920 MW of run-of-river hydroelectric plants on Serbia’s Drina and Danube Rivers.

Serbia
Serbia is at the centre of recent activity,reflecting, at least in part, its close relationship with China
Credit: EPS

RWE believes modern techniques and technology can enhance and extend existing hydroelectric capacity in a country that has seen little investment for many years. Poor returns at home – partly due to nuclear closures – give RWE an added incentive to focus outside Germany, where hydro potential is already developed. As it moves away from nuclear power, RWE aims to focus more on renewables, in which it plans to invest €5 billion over the next four years.

The deal involves an initial technical and commercial assessment of Serbia’s existing power plants followed by an agreement outlining future projects. RWE is already developing five hydropower plants totalling 150 MW on the Morava River as part of a joint venture deal with EPS signed last year, with construction to begin as early as 2014.

Other foreign investors include Alta, a Czech engineering and energy company, which signed a preliminary deal in May to develop a 350 MW coal-fired power plant and a lignite mine in Stavalj, southwestern Serbia, worth €650 million. EPS has also just awarded two contracts for refurbishing Nikola Tesla to UK-based Doosan Power Systems – a regular contractor at the complex over recent years.

Gezhouba targets Montenegro

In Montenegro, southwest of Serbia, China’s Gezhouba Group International Engineering Company Limited has submitted an official bid to construct a second unit at the Pljevlja coal-fired plant, with an installed capacity of either 220 MW or 300 MW. What is unusual about this project is it is being offered without government guarantees so business risk lies entirely with the investor – another instance of Chinese firms’ critical advantage, according to Burdett.

Gezhouba also plans to develop a 350 MW plant at the nearby Maoce coal field and to improve mines that can offer adequate reserves for both projects. Platts estimates that the planned Maoce plant will cost an estimated €560 million, while building a second 225 MW unit at Pljevlja – the country’s only existing thermal power plant – will cost €243 million, along with a further €60 million to rehabilitate the existing unit.

Chinese companies may yet be invited to participate in developing the Moraca Cascade in Montenegro, according to Burdett, while late last year another Chinese consortium bid to build the Cebren and Galiste hydropower plants in Macedonia in a joint venture with the state power producer ELEM. The deal has yet to be awarded.

BiH targets exports

Upcoming EU liberalisation is expected to be particularly beneficial for resource-rich BiH, already one of the region’s three net exporters, along with Romania and Bulgaria, and well placed to target EU markets such as Hungary.

BiH recently secured a substantial new Chinese loan deal that will finance an export-focused plant through a deal with UK-based Energy Financing Team (EFT). The €350 million deal with state-owned China Development Bank to construct a 300 MW coal-fired plant in Stanari, northern BiH, is expected to begin production in 2015 or early 2016.

China’s Dongfang will provide equipment and build the plant, with coal supplied from the nearby Stanari coal mine, in which EFT secured a majority stake in 2005. Reports claim the deal is half the price of competing proposals made by France’s Alstom or a Canadian-Polish consortium – SNC-Lavalin and Rafako.

Exports to EU countries will be priced by the market, so are likely to provide better returns than those to subsidised regimes such as Serbia and Croatia. BiH is rich in energy resources, especially coal and hydro, and its government estimates that 2329 GWh of electricity exports in 2011 could be boosted substantially by harnessing 4 GW of easily accessible hydro potential.

The Stanari plant is one of several major energy projects taking shape in BiH. In May, state-owned power firm Elektroprivreda BiH (EPBiH) announced it was seeking partners to construct two coal units totalling 750 MW, with contracts expected to be worth $1.66 billion. EPBiH is also undertaking the refurbishment of another 215 MW unit. In 2010, EFT won a €100 million contract for a 35 MW hydro plant in southern BiH.

In Romania, in the eastern Balkans outside the former Yugoslavia, China Huadian Corporation is to build a €1 billion, 500 MW thermal power plant. The plant, which would be the country’s first new coal-fired project in 20 years, is to be built on the site of the Rovinari thermal plant complex, according to a statement by the country’s Ministry of Economy. China Huadian reportedly won the tender over a rival bid from Japan’s Marubeni Corporation.

Provisional deals have also been inked with major Chinese nuclear specialists, including China Nuclear Power Engineering at Cernavoda in Romania, while China National Nuclear Corporation has shown interest in a new 1000 MW nuclear unit at the Kozloduy nuclear complex in Bulgaria.

Burdett notes that China’s interest is not restricted to the Balkans and that Chinese companies are also investing heavily in nearby fast-developing markets such as Turkey, most notably in coal-fired and hydropower projects. Turkey, like the Balkans, is prioritising the development of coal-fired and hydropower capacity, given indigenous natural resources, to ensure security of supply and avoid or reduce costly fuel imports.

Projects with overseas investors

More coal in the mix

Contrary to the rest of Europe, low-quality hard coal and lignite is gaining a rising share of the energy mix in the western Balkans, where it already stands at more than double the EU average of 17 per cent. China’s investors are ideally placed to take advantage of the focus on expanding generation with domestic coal. Progress in clean coal and nuclear technology also enables developers to meet EU standards – even if strong Chinese government support for such technologies has prompted accusations of unfair competition in the EU and elsewhere.

In Serbia, the biggest regional coal consumer, it already accounts for more than 60 per cent of electricity production. BiH’s figure is about the same. Kosovo is entirely reliant on coal and Macedonia depends on it for 80 per cent of its electricity. But hydro provides almost all of Albania’s power and dominates in Montenegro with an 80 per cent share.

Yet natural gas, which today only provides about 13 per cent of final energy consumption in the region, could be boosted substantially in the longer term by either the South Stream pipeline, being developed by a consortium led by Russia’s gas giant Gazprom, or the TAP or West Nabucco pipeline, which will bring gas from the Shah Deniz II field in Azerbaijan, says Burdett. Currently, only Croatia and Serbia produce gas in the western Balkans, leaving the vast majority of the region reliant on Russia’s Gazprom.

Renewables in contention

In addition to developing thermal plants, Chinese firms are interested in hydro and, especially, in renewables and wind farms. A state focus on renewables has already made China the leading manufacturer of wind turbines and solar panels. Beijing is increasingly looking to foreign markets to compensate for a long-term fall in prices because of increased scale, improved efficiency and over-capacity.

Some analysts expect Chinese wind developers and solar panel makers to boost investment in the western Balkans over the next few years. On the other hand, Burdett suggests opportunities are likely to be thin on the ground. The recent over-shooting of renewable targets because of over-generous feed-in tariffs has undermined development in EU states such as Bulgaria, while non-EU members are seeing almost no renewable energy development.

The financial crisis has tightened credit for cash-strapped Balkan countries, making it increasingly difficult to find capital for renewable investment, despite the region’s considerable solar potential and its wind hotspots along Croatia’s long Adriatic coast and Serbia’s Vojvodina plain.

Chinese companies Polar Photovoltaics and Wiscom Systems feature in the sector’s few inroads in the Balkans with their plans for a 2 MW solar plant in Ihtiman, western Bulgaria. And in April 2011, the Public Power Corporation of Greece signed an agreement with China’s Sinovel Wind to develop a 200–300 MW wind farm and an offshore wind park in Greece, although little progress has so far resulted.

Chinese attempts to break into the hydro sector include a deal between China International Water and Electric Corporation and Macedonia, signed in mid-2011, to build 12 hydropower plants along the Vardar River. The €1.5 billion project is expected to last 15 years, and crucially will be 85 per cent financed by a loan from the China Development Bank.

The EU is keen to release the potential of domestic renewables, which for countries such as Albania, BiH, Croatia and Montenegro includes substantial untapped hydropower. Albania, for instance, is almost entirely dependent on hydro yet uses just 35 per cent of its estimated potential.

As Europe’s financial crisis rumbles on with no end in sight, many Balkan governments expect China’s share of overseas investment to expand, not least in the electricity sector, where its national champions are proving themelves as the latest tier of truly global competitive players.