Aleksander Kovacevic, Belgrade, Yugoslavia
During the transition process towards a market economy, most central European economies had adequate electricity supplies. A decline in industrial output throughout the region left plenty of power facilities without demand, so that even with inappropriate pricing and poor maintenance, domestic demand was met. So in one way or another, the region’s energy markets are becoming open to international investors; they are more commercial, more integrated and more efficient.
The electricity market in Serbia and Montenegro, however, is closed, inefficient and monopolized. The market is dominated by two state owned utilities: EPS in Serbia and EPCG in Montenegro. Due to years of neglected maintenance and a lack of investment, these utilities are no longer able to cover domestic electricity demand.
The energy sector in Yugoslavia is to undergo rapid restructuring, yet the shortage of electricity and quality oil products is limiting the region’s economic recovery. To help find a solution to the problem, the UN Office for the Coordination of Humanitarian Affairs has prepared energy balances for the winter of 2000/2001 for the meeting between the World Bank and the EU.
Yugoslavia’s electricity shortage was estimated to be over 20 per cent of demand, or about 900 MW in base load capacity. This calculation was based on a standard meteorological year and assumed that natural gas was available for district heating. It was also assumed that there was no increase in industrial demand. Over 70 per cent of the available electricity, including imports, was required for households, while the remaining part was demanded by priority institutions, the energy sector itself, and the food and pharmaceutical industries.
However, the experience during the early winter months in late 2000 was somewhat different. Natural gas was not available in the estimated quantities, and the government and gas utilities found it very difficult to arrange and pay for larger deliveries from Gazprom of Russia.
Thankfully, the weather conditions were exceptionally favourable. During November 2000, December 2000 and first week of January 2001, higher-than-usual temperatures were recorded. It was one of the warmest New Year’s Eves in the last one hundred years.
Industrial output declined seven per cent in 2000 compared with 1999. Contrary to that, domestic consumption has been the highest ever recorded. Even with international aid in the form of electricity imports, fuels and consumables, the country experienced 16 hours per day of electricity restrictions during one average cold week.
The population turned to electricity as its principal source of heating. Electricity is very cheap in comparison with other fuels. Table 1 provides some price comparisons based on the heating needs of an average apartment. Shortages of coal, heating oil, LPG and wood were considerable during the summer and autumn of 2000. Prices remained flat during this period as demand was suppressed by the expectation that electricity would be widely available at very low prices.
These expectations were based on the fact that relatively good electricity supplies were available during during the winter of 1999/2000.
A distant dream
The bombing campaign during the spring of 1999 created considerable damage in the energy sector. Most of the direct damage was repaired during the first six months after the bombing. EPS personnel demonstrated exceptional technical skills and improvisation capabilities. Some of the damaged high voltage insulators were repaired by car refinishing kits. More than 18 large power transformers were repaired, replaced or commissioned. For the first time in its history, EPS managed to transport a large power transformer via the Danube and transship it without the appropriate cranes. At least four river crossings with 74 m towers on the sides were rebuilt and commissioned.
In the EPS transmission system, most of the multiple and reserve bus bars and transformer capacities were sacrificed in order to restore functions to the grid.
By the beginning of winter 2000, these efforts proved to be fruitful. The high voltage grid was fixed and able to transfer the required amounts of electricity. On some days up to 140 GWh of electricity was delivered to consumers.
The repairs made to the electrical grid represent the first and only significant change to the physical structure of the power industry in Yugoslavia for over ten years. The resulting structure of the grid was actually more suited to the structure of electricity consumption.
What then remained was the regulation of load, but this was an easy task for EPS, given its advanced capabilities in water management and the large hydropower facilities available or made available by neighbouring countries.
The long-term result of these reconstruction activities was the loss of network flexibility and the ability to facilitate industrial and economic recovery. The potential for future industrial output growth will be boosted either by investment in the electricity grid, or by improvements in the use of energy.
Taking into account industrial decline, EPS undertook a project to use industrial condensers as a source of reactive power. Condensers from unoperational industrial facilities were connected directly to the electricity grid to provide reactive power during peak hours.
The bomb damage was repaired at the expense of the reliability and flexibility of the electrical grid as well as future industrial prospects. As industrial employment is less likely to take off, the governments are more likely to press for low electricity prices, and so the true recovery of the power industry is now even more of a distant dream.
The cost of repair
The availability, reliability and efficiency of Yugoslavia’s thermal power plants have been seriously affected by 11 years of neglected maintenance. For example, the consumption of demineralized water by boilers is often several times over design levels, and the number of outages and the probability of critical technical failure has grown. During January 2000, one generating unit consumed 38 000 t of water instead of the design 7500 t.
Energy facilities in Yugoslavia have always suffered from poor maintenance, but maintenance neglect sharply increased in June 1989.
Popular assumptions about the problems in the electricity supply during the winter of 1999/2000 were based on the bomb damage and its consequences. The public was exceptionally interested in any repair efforts and the state media was eager to address that interest. The cost of repairs was a much less popular side to the story, as were problems related to a lack of investment and neglect.
The results of the neglect are most visible at coal-fired thermal power plants. District heating plants and hydropower plants are considerably less complex and therefore less exposed to the problems caused by neglected maintenance. Direct consequences such as serious outages might have been avoided, but efficiency losses were unavoidable, as was an inability to keep track of technological developments. For example, modern combined heat and power technologies are virtually unknown in Yugoslavia.
Coal mines have also been seriously neglected. Machinery is often in a very bad condition and the probability of technical failures is growing as output declines. Land expropriation was delayed, as was the recultivation of used open pits; there was a significant delay in overburden removal. The average output of the Kolubara coal mines was about 85 000 t/day during the winter of 1999/2000 instead of the usual 100 000 t/day.
A very risky strategy was adopted by coal mines. The government set up a credit arrangement with China that included bulldozers for coal mines and other equipment. Based on the assumption that the bulldozers would be available in early 2000, overburden removal was neglected.
The supplies from China were not delivered at the beginning of 2000, but part delivery was achieved at the end of November 2000. Delay of the overburden removal remained a major short term obstacle for coal production.
Further problems with land and machinery were experienced. The state of machinery in power plants went from bad to worse with continuing neglect. Plants were forced to generate electricity during the summer period as well as during designated maintenance times in order to deliver electricity to neighbouring countries – creditors from the winter period. Invoices for natural gas supplies remained unpaid and supplies were ceased at the beginning of the summer.
The sale of light oil products became an important source of government revenue. But that strategy neglected crude oil imports so the domestic market, including EPS, remained low on stocks of heavy products for the forthcoming winter.
The favourable weather from the winter of 1999/2000 turned into an extremely dry summer season. Water accumulations went below the designated levels and the output from hydropower plants declined. EPS and district heating companies managed to complete less than 20 per cent of minimal maintenance works.
The winter weather conditions were extremely favourable, and it has been estimated that the good weather reduced electricity demand by between five and six per cent. The official electricity import amounted to 1370 GWh, or an additional five per cent. There are many reports about an even larger unofficial electricity import. Contrary to expectations, the enforcement of the oil embargo was relatively poor, and neighbouring countries were exceptionally cooperative in many respects. The domestic government responded to the pressures of an international humanitarian community to provide more resources to the energy sector.
EPS applied regular voltage reductions to reduce peak demand, and some of the remaining working industries were disconnected from the electricity supply. The total estimated effect of these measures was to reduce electricity demand by 30 per cent.
The overall price index during the first six months of 2000 was 145 per cent while the electricity price index was 118 per cent. In August 2000, the total sum of the electricity invoices issued by EPS was lower than the company’s total salaries. EPS accounted for more than half of the total nominal losses in the Yugoslav economy. The income statements did not include proper depreciation and maintenance costs.
A simple analysis of EPS’ financial statements over the last ten years shows cumulative nominal losses of over $5.5 billion. Obligations related to foreign credits are practically erased from financial statements as are proper maintenance and modernization costs.
The remaining life of available machinery has been seriously affected by neglected maintenance and delayed replacements. However, EPS revenues at current retail prices are insufficient to cover operation costs, including full fuel costs.
Direct operation expenses per output unit are growing as plants are declining in efficiency and use even more consumables. Transmission and distribution losses are also considerably larger.
The rehabilitation requirements in 2001 are enormous but are limited by financial, technical and organizational means. Parts for equipment require long delivery times and EPS depends on foreign aid to procure electricity, spares, equipment and services. It is not known if, and to what extent, resources will be available for these purposes, and the new administration is not keen on introducing market-based tariff mechanisms.
As EPS is not able to provide reliable and competitive electricity supplies to lucrative industries, some consumers might turn to other suppliers or options, for example the construction of dedicated power generation facilities. The diminishment of EPS resources is likely to be accompanied by the diminishment of the local electricity market.
Various market opportunities are opening up for the most skilful EPS staff in other parts of the economy. EPS is increasingly forced to outsource some of its services due to the loss of these specialists.
Two external sources are likely to affect decisions related to the electricity market in Yugoslavia: international donors and aid providers from one side, and international creditors from another.
The domestic government and social forces are likely to create an alliance to oppose changes to electricity tariffs. Recent public statements are calling for slow tariff adjustments over the next three years. However, small tariff adjustments at the current technological and efficiency levels will not help Yugoslavia. Electricity generated in Serbia and Montenegro is essentially more expensive and less reliable in comparison with that of its main industrial competitors.
The country cannot build up its international industrial competitiveness on such an unreliable electricity supply. Sustainable employment growth can not be achieved in such circumstances, which in turn means that a real increase in the population’s income will be delayed. There will be no grounds for an electricity price increase nor an improvement to energy efficiency levels.
Unconditional international aid and simple outstanding debt write-off will put all of the incentives for change in the hands of the domestic government. But these same hands are already fully occupied by social problems and political priorities.
The country needs rapid commercialization of the energy sector, together with increased employment opportunities and energy efficiency. A breakthrough might be achieved if major international creditors opt for a debt-to-property swap in the energy sector. Such a move might provide major international energy investors with an opportunity to purchase property through the purchase of the appropriate debt papers. They can bring in the new technologies and knowledge that are so desperately required.