In the south east corner of Europe the energy industry is stirring. Plans to establish an energy community are well advanced but the sector has much to do if the goal of EU integration is ever to be met.

Aleksandar Kovacevic, Independent Energy Consultant, Serbia

The European Union and countries from the South East Europe (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR of Macedonia, Romania, Serbia and Montenegro and Turkey as well as the United Nations Interim Administration Mission in Kosovo) are on the way to establishing an Energy Community for South East Europe (EC SEE). The proposed multilateral treaty stipulates establishment of the regional markets for electricity and natural gas and may involve other energy markets at the later stage.

The SEE region potentially covers a market with over 120 million people and a power market that uses almost 250 TWh annually.

While the growth potential of the Turkish power market is well known, it is envisaged that other countries need to invest about $15bn over next 15 years in rehabilitation of 11 500 MW of existing power plants and the construction of about 11 000 MW of new centralized generation. This recent estimate, contained in the SEE Stability Pact report and based on work of the World Bank consultants, does not include associated investment in transmission and distribution, which is probably of the same magnitude.

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The regulatory and legal framework envisaged by the EC SEE Treaty is explicitly intended to facilitate massive investment that is likely to be accompanied by considerable financial support from international financial institutions (IFIs).

Most of the SEE region has very low energy efficiency, although two countries with strong energy policies – Turkey and Croatia – demonstrate better energy efficiency in relation to GDP growth. These two countries have exceptionally high import dependency that goes above 50 per cent of their primary energy supply, while the rest of the region remains more import dependent than the OECD average, despite considerable exploitation of scarce and expensive domestic resources.

Energy resources

In South East Europe energy resources are far below the world average and even the European average. The region is not endowed with any significant energy resource such as coal deposits or natural gas fields. Available lignite deposits are shallow and distributed across a wide land area.

Hydro resources are also below the European average. These resources are available in either small volume high-head projects in mountainous areas or the River Danube catchment. The Danube enters the region at over 70 meters above sea level. Most of its energy capacity is already used in two dams between Serbia and Romania, known as the Iron Gates. Furthermore, the limited availability of surface water affects the cooling capacities of existing and potential thermal power plants. For example, two lignite fired power plants near Obrenovac in Serbia with 2800 MW installed capacity use more water than the rest of the national industry and agriculture combined.

After decades of neglected forestry and land governance most of the region is exposed to erosion and floods that affect the use of available water resources and hydropower. Deforestation contributes to the cold winters, limited water conservation over the territory and extended summer dry periods that lead to exceptionally large volatility in energy demand.

Most of the region’s power industries are still vertically integrated stateowned utilities at various stages of restructuring with the remainder of the energy sector (gas utilities and district heating providers) fragmented between them.

The current reform agenda does not encompass internal cross-service energy markets, lower transaction costs or removing barriers to entry. However, distribution companies in Romania, Bulgaria, Montenegro and Bosnia are emerging as potential sources of innovation.

Physical integration of the energy industry within the region and – even more importantly – with the rest of Europe is an obvious necessity for this region. “A non-integrated power industry would be a luxury which this part of Europe (SEE) could hardly afford,” Stjepan Han told the Eighth World Power Conference in Vienna in 1956, and it is still true today.

Russian connection

As SEE load characteristics differ from load shapes across Western Europe, and while availability of energy resources are complementary with those of the Russian Federation and the Ukraine, integration is the real buzz word for the SEE power industry. Although the proposed Treaty provides a robust framework for integration with the EU area it does not provide a basis either for participation of these countries in the EU, Russia energy dialogue, or guidelines for eventually agreeing a similar arrangement with the Russian Federation. Understandably, most SEE countries have considerable energy arrangements with the Russian Federation: most natural gas is delivered to the region from Russia via Ukraine and based on longer term institutional arrangements. Russian equipment vendors are still leading technology providers to the region, accounting for over 13000 MW of installed capacity.

Southeast Europe: building an energy community
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High voltage power networks are very well integrated throughout SEE. International donors are completing some important 400 kV connections such as an Albania to Montenegro link that will further integrate the region. Gas networks remain fragmented in terms of geographical coverage, supply directions and technical standards. There are plans to restart hard coal imports along the Danube, while coastal located plants (around the Balkan peninsula from Plomin in Croatia to Varna in Bulgaria and on to Romanian plants in Black Sea area) are actively exploring various coal import options.

Wood fuel

Most of the national statistical systems fail to accurately measure wood fuel consumption for space heating and cooking. For example, official statistics in Serbia reveal the use of about two million cubic meters of wood fuel per year, while recent surveys conducted by the UNDP and FAO suggests that 11 – 12 million cubic meters a year is being used.

This extensive use of wood fuel for space heating affects electricity demand in an unexpected way: during very cold days the marginal price of wood fuel (both the value of stocks and open market prices) increase while electricity prices fixed by Government tariff policies remain unchanged. Consequently, households shift to electricity for supplemental space heating. The consequence of such a shift is a very high sensitivity of winter peak electricity demand in relation to the outside temperature. Such peaks are typically met by very expensive means: pumped storage plants, idled lignite fired power plants, lignite stocks and natural gas underground storage systems. Taking into account average winter temperatures, which are relatively high in comparison with the rest of continental Europe, and peak demand periods that are relatively short, the generation fleet is, as a result, very poorly utilized.

Turkey has about 65 per cent of its power generation from gas fired units and is somewhat more capital efficient in this respect.

Untapped potential

Countries with a larger proportion of district heating in energy supply (Bulgaria, Romania and Serbia) have lower energy efficiency in terms of total primary energy supply against GDP. Common district heating systems are based on hot water boilers or steam subtraction from power turbines. The low quality of district heating services, financial problems and poor housing standards mean electricity is required for supplemental heating during very cold days. This practice adds to the cold day peaks and the utilization problems detailed above. In Romania about 450 000 flat owners have disconnected themselves from centralized heating systems in the last five years, according to the World Energy Council.

The existence of large district heating networks provides an opportunity for true cogeneration (CHP), use of indigenous opportunity fuels, heat pumps, geothermal energy and waste heat. In Serbia alone, about 6600 MW of district heating sources are to be replaced by various innovative solutions.

District heating networks are likely to be supplied by distributed generation of various types, accounting for considerable savings in electricity transmission and distribution investment costs as well as in network loses. Distributed generation throughout the region offers an untapped potential for development and better efficiency. Taking into account this opportunity to address seasonal demand fluctuations in a most economical way and given current district heating service prices, distributed generation will be on the development agenda.

New players

Inadequacies in the energy infrastructure are surfacing due to the gradual removal of government intervention and subsidies, a number of energy consumers are looking for alternative solutions. Regional sales of heat pumps for space heating and air conditioning are booming. Industrial consumers are exploring various options to generate electricity, including providing reactive power and various associated services. For example, the largest power consumer in Montenegro – the Podgorica Aluminium Smelter has become an active power trader in the region, while exploring internal technical capabilities to provide network services and increase energy efficiency.

Investors are focusing on emerging opportunities throughout the region. The most active are: CEZ of Czech Republic, Gazprom and RAO UES of the Russian Federation, OMV of Austria, Enel, RWE, AES, Entergy, EON and some newcomers such as Rusal. Although large scale privatization of existing facilities is still some way off, investors are considering various market entry points. These include privatization of distribution companies in Bulgaria or Romania, partnering with municipal administrations in offering some distributed CHP, pursuing management contracts and electricity trading.

The proposed framework for the SEE Energy Community offers a variety of opportunities to energy sector actors. It is to be expected that international financial institutions will play their part in supporting restructuring and innovation. The SEE energy sector with its distinctive and difficult problems – poverty, environmental damage and the winter mortality it causes – requires variation and innovation. All governments in the region are now installing institutional structures in line with the EU. It remains to be seen how newly established regulators, transmission operators, distributors and administrators will handle consumers and new energy market entrants. Those who still see unbundling and liberalization as a kind of intra-family game of hide and seek could be surprised by new faces hiding around and seeking their market share.