Pact and preferences

The energy treaty signed by the nations of southeast Europe and the EU is raising technology choices for the power industry.

Aleksandar Kovacevic, Independent energy consultant, Serbia Montenegro

The European Union (EU) and countries from southeast Europe (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR of Macedonia, Romania, Serbia and Montenegro and UN administered Kosovo), signed the Energy Community for the South East Europe (EC SEE) Treaty in October 2005. Negotiations between Turkey and the EU are still under way and it remains to be seen how eventual adoption of this treaty could affect Turkey’s accession to the EU. In some ways, the treaty has emerged as a model for countries that are approaching the EU to acquire an advanced governance framework for the energy sector prior to the actual accession process.

The Energy Community Treaty is only one component of an emerging energy governance framework for southeast Europe. All countries except Serbia and Montenegro have signed the European Energy Charter. The entire territory of southeast Europe is covered by the so-called Trans-European Networks – a planning system intended to support EU energy development and security of supply. Romania, Bulgaria and Serbia have complex and long-term arrangements with the Russian Federation concerning natural gas supply and transit, while not participating in the EU-Russia energy dialogue. Furthermore, as SEE jurisdictions declare their desire to join the EU, their legal systems are in the process of harmonization with the EU acquis. In a more practical way, the Energy Community Treaty process is being accompanied by coordinated activities of international donors.

Kosovo A lignite fired power plant
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After years of neglect and conflicts, followed by a basic recovery, the energy industry in the region is now simultaneously facing rapid technology change and an emerging regulatory framework. If fully applied, the new framework is likely to increase transparency and public participation throughout the energy sectors. This feature could be of utmost importance in the SEE as most electricity is generated in large hydropower plants or lignite fired combustion plants – both requiring considerable adjustments in spatial planning, land use and difficult environmental choices.

The purpose of these developments is to provide the benefits of a common energy (electricity and natural gas) market to SEE and facilitate better use of available infrastructure and new investments. The region is poor in energy resources and has a level of electricity consumption that is many times below the European average. Improving efficiency and productivity provides the hope of higher per capita electricity consumption and improved living standards.

SEE power sector

An EU-funded Generation Investments Study (GIS), prepared under the supervision of the World Bank, analysed a number of different energy sector scenarios and provided convincing evidence that, even if only the investment plans of existing state-owned utilities are taken into consideration, the introduction of a common market increases the efficiency of the existing infrastructure and reduces investment requirements in new capacities, as compared to the separate development of each national market. It follows that incumbent players are likely to be more vulnerable to new entrants and that agreements with local political authorities will no longer be sufficient to preserve barriers to entry. The need for rehabilitation of existing plants and additional capacity to cover the expected demand up until 2020 was analysed. For the market to perform effectively it will require a surplus of capacity, substantial technology innovation and the lowering of barriers to entry.

The region’s generation mix currently comprises about one third hydro energy, nuclear capacity in Romania, Bulgaria and Croatia, lignite fired facilities in Serbia, Montenegro, Romania, Bulgaria, Macedonia and Bosnia as well as minor gas or oil fired generation. Genuine combined heat and power (CHP) schemes are almost non-existent. Lignite fired units tend to be very large to exploit economies of scale. The utilization of these units is limited by volatility of water inflow to major hydro generators, so considerable reserve capacity is required. Sharing reserves across the wider market would provide an obvious benefit.

Table 1. Power technology options for southeast Europe
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The treaty envisages application of EU environmental acquis related to large combustion plants from 2018 that will affect only facilities in Serbia (almost 4000 MW), Montenegro, Kosovo/UNMIK, Bosnia and Macedonia, since the other countries are scheduled to join the EU before and should adjust much earlier. As a result, the Serbian public is free to choose to live with emissions from its major lignite fired units for the next ten years, during which period pollution to the surrounding fertile land could become irreversible, creating an enormous burden on public finances. The prospect of a number of large lignite fired units in one air-shed requires special attention as lignite plants tend to be located around open pits to reduce transport costs. Despite economies of scale and limited transport, exploiting lignite should be considered as an option of desperation for small economies with trade deficits: digging lignite is inevitably many times less productive than extracting other fossil fuels and creates a huge long term burden on competitiveness and terms of trade.

Local power prospects

Although the Treaty does not contain provision to apply the EU Cogeneration Directive, it calls for implementation of directives on the promotion of electricity from renewable sources, on integrated pollution prevention and control and requires Energy Community institutions to “ensure fair competition”. All these requirements provide a healthy climate for investment in distributed generation and CHP. Analyses by the World Alliance for Decentralized Energy (WADE) show that private investors are many times more likely to consider distributed generation (DG) and CHP options than incumbent state owned companies. If consistently supported by international financial institutions and accompanied by privatization of local distribution systems or emergence of private suppliers, DG could encourage much needed new entries, release transmission capacities for trade and competition, enhance local employment and security of supply and bring about an improvement of the existing generation fleet.

From the perspective of the commercially minded electricity distributor, facilitating DG investment in areas populated with poor consumers make a lot of sense: use of local biomass or opportunity fuels fosters employment, CHP schemes cover a proportion of energy needs at low cost, T&D losses are lower while the pattern of new entries create downward pressure on wholesale prices and facilitates. Governments find that they are no longer beholden to the incumbent industry and consumers are more contented. DG and CHP make more realistic and fruitful investments for institutional investors (see above table).

Regulatory performance

From a broad perspective, a functioning energy market is a public good that facilitates human development. It requires regulation of excessive market power. Consequently, regulatory performance should be measured against human development gains from market functioning and better efficiency and productivity that arises from investments. While independent regulators are established in all SEE jurisdictions, their competence and performance are not yet clear. Neither the treaty nor any national legislation has any provisions to establish tangible and independent statistical data to monitor the evolution of the market and regulatory performances. During periods of relatively modest growth rates, actual regulatory performance emerges as a key determinant of foreign investments in new capacities including both DG and genuine repowering of existing facilities.

At its most basic level, investment options and regulatory performance in this underdeveloped region should be considered from the point of view of local human development perspective, employment potential and productivity gains, in addition to narrow technical and financial sustainability.

Note: The text of the EC SEE Treaty, associated documents and the Draft Memorandum on social dimensions are available at

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