Following a decade of neglect and the recent bombing campaign, the energy sector of Serbia and Montenegro (Former Yugoslavia) lies in tatters. Facing a winter of power and fuel shortages, it may be time to restructure the industry and encourage overseas investors.
On Wednesday evening, March 24 1999, the first bombs hit the city of Belgrade. At that time, a shortage in electricity supply was predicted for the following winter, a new experience for the inflexible energy system. The general feeling was that the energy sector in Serbia and Montenegro should move toward commercialisation.
The energy market in Serbia and Montenegro is one of the most interesting in Eastern Europe. As in most Eastern European countries, the decline in energy production capabilities and corresponding decline in energy consumption in the manufacturing sector, has resulted in the compression of national products and other demographic and economic consequences. Serbia and Montenegro is now facing tremendous energy shortages, the causes and consequences of which are complex.
In some ways, the bombing campaign has sped up that reform process. An energy shortage of about ten per cent was expected for the forthcoming winter under a ‘business as usual’ scenario. But now the shortage is estimated to be as high as 30 to 50 per cent of energy needs or about 60 per cent of previous winter consumption.
This energy shortage will drastically reduce the national economic output. Practically, all commercial activities will be performed on the ‘black market’, and the population will experience a tremendous decline in living standards. Reform is therefore needed to combat problems in the energy sector and the resulting economic impact.
The energy market in Serbia & Montenegro is a monopolistic system. There are two electrical utilities – one in Serbia and one in Montenegro. Both are vertically integrated and include coal production, electricity generation, transmission and distribution as well as all investment activities. Oil Industry of Serbia and Jugopetrol Kotor of Montenegro are monopolistic suppliers and importers of oil, oil products and natural gas. There are a few municipal district heating companies. There are about 300 privately owned gasoline stations in the country; many private owners are widely considered to be politically connected with the ruling coalition.
The transmission network in Serbia and Montenegro has a very low density. Transmission capacities available before the bombing campaign were:
- On 400 kV – 6500 MVA
- On 220 kV – 7050 MVA
- On 110 kV – 12700 MVA
The electricity supply system is designated to supply 30 per cent to domestic and small commercial users and over 60 per cent to industry. However, industrial production has declined in recent years to only 36 per cent of 1989 levels. In the meantime, the domestic and commercial sector has increased its electricity consumption to more than 60 per cent of total consumption and almost 100 per cent during winters.
Transmission and distribution losses are about 20 per cent of electricity delivered at the gate of the power station. Other features of the energy supply system point to a need for investment and rehabilitation in the sector.
Regular maintenance works have decreased by 23 per cent on average, while all spare parts, reserve equipment and equipment purchased before 1990 for new developments have been used and not replaced.
Rubble removal in large open pits has been delayed by more than 20 per cent per year on average. This situation was temporarily improved in 1997 when an additional open pit was introduced which was designated for new thermal power station. In addition, a very large stock of uncovered coal found in 1990 has been depleted over the last nine years.
Maintenance and rehabilitation of mining equipment have been decreased to a minimum and now more than 90 per cent of available equipment has been designated for serious rehabilitation. Practically all available equipment has exceeded its designated lifespan. There are about 230 000 t of mining equipment engaged on open pits, half of which has serious structural damage.
Because of insufficient maintenance and a lack of coal, the availability of thermal power stations has fallen to 60 per cent. However, during the last three years the hydrological situation has been unusually favourable and so the production of hydropower stations has been above average. The maintenance of hydropower plant is simpler than the maintenance of thermal plant but the average age of hydropower stations is more than ten per cent higher than the average age of thermal plants.
Due to low prices, inefficient billing and collection, electricity has become the heating fuel of choice for a very large part of the population. Electricity consumption for heating is growing at an average rate of 4.5 per cent per year.
Impact of bombing
The direct consequences of the bombing campaign were:
- Damage to transmission capacities: 2260 MVA of transformers are completely destroyed and about 2000 MVA are seriously damaged.
- One power station (Kolubara A) is disconnected from the grid due to destroyed transformers while part of its turbine capacity is heavily damaged.
- A few of the 400 kV lines are not functional while a number of towers have been destroyed.
- Several switchyards have been severely damaged.
- Part of the remaining spare parts stock is damaged.
The indirect damage to the energy system caused by the bombing is much more interesting and widespread. During the bombing campaign, time, money and other resources normally put towards regular maintenance and repair were lost. No repair works were therefore carried out during the summer.
The magnitude of the resulting problems expected during the coming winter is enormous. Electricity loaned from neighbouring systems during the previous winter will not be delivered back, and thus import capacity will be decreased. In addition, two large thermal power stations located in Kosovo and Metohija (1235 MW output capacity) are disconnected from the system together with coal mines and coal drying capacities. Total available electricity production capacity is therefore estimated to be a maximum of 62 per cent of that available during the previous winter, and longer-term mean load is not more than 55 per cent, with a 50:50 failure probability. There are also a number of black outs.
About 17 million tons of coal will be required for electricity production during the coming winter. About 40 million tons of coal rubble needs to be removed from open cast mines. Problems with the natural gas supply are considerable; there are delayed debts to Gazprom and there is outstanding debt to the Hungarian gas utility for gas transportation. It is also unlikely that the favourable hydrological situation of previous years will be repeated.
The probability of technical failures in the system has increased to 50 per cent including the risk of non-repairable failures. There are no additional reserves of spare parts or equipment. Integrity of the system cannot be easily restored, and failures will mean that many consumers will be left without electricity.
Because parts of Serbia and Montenegro’s industrial capacity was destroyed or seriously damaged, a 40 per cent drop in industrial production capacity compared with last year is expected along with a significant drop in electricity demand. However, domestic demand will rise: there are an additional 100 000 refugees in Serbia and Montenegro coming from Kosovo.
Management capabilities and also crisis management capabilities in Serbia and Montenegro are insufficient to cope with the demands that will be put on the energy system. In addition, political attempts to maintain low electricity prices and egalitarian energy distribution will undermine any energy conservation efforts.
The government-controlled daily ‘Politika’ announced on Thursday, August 12 that the Serbian utility EPS is going to start receiving advance payments for a total of 500 GWh of electricity over the winter. Prices in the country are structured to provide an incentive to purchase more electricity. By doing this, government is undermining the possibility for electricity conservation. In addition to that, it is announced that delayed pensions will be paid in electricity vouchers over the winter.
During the upcoming winter, the electricity generation and transmission system will be exposed to very difficult conditions. This situation will probably affect the remaining life of the system’s equipment and also fuel resources. The immediate consequences of this might be described as follows:
- It will not be feasible to restore lignite production at most of the coal mines.
- The thermal power stations in Kostolac will remain disconnected and cannot be fixed without large investments.
- Many generators at power stations in Obrenovac should be repaired or rehabilitated.
- Repair works at hydropower stations will need to be doubled in comparison with previous years.
- Generators in the district heating station in New Belgrade may be mothballed.
The overall result is that electricity shortages for the summer season are estimated to be 30 to 40 per cent of demand including the decline of industrial consumption.
The total external debt of the Serbia and Montenegro economy will become much larger than the total value of assets engaged in the economy. The same conclusion might be made for the energy sector.
Rapid market opening
A stable government in Serbia and Montenegro will not be possible without securing an acceptable energy supply. For about three years, starting from April 2000, production and transmission capacities should grow rapidly. However, there are no available investment funds in the country. Serbia and Montenegro might be able to restore relations with international community and financial institutions but that process will go very slowly.
The only possible solution is therefore to open the energy market to international investors. Direct investments with careful risk management and debt-to-property swap should be considered as a way of investment in the energy sector.
Direct investment could be chosen according to following criteria:
- Investment should be resistant to political turmoil and risks.
- Investor should be able to control fuel supply.
- Investment should attract as much financial aid and support of international donors as possible.
- Energy facilities could be developed in conjunction with manufacturing facilities where industry related risk reduction techniques might be employed.
- Investment should be as cost effective as possible to reduce investment risks and increase share in the domestic energy market.
A proper market infrastructure including transmission network and/or a billing agency should be established with credible foreign investors. Traditional thermal power plants, burning domestic lignite will not attract foreign investment. Transmission network reconstruction is crucial to the whole process of market opening, but the integrity of the network cannot be restored without external investment. An ownership structure of the transmission network and the distribution companies, which could be achieved by debt-property conversion, foreign aid and direct investment, could provide reliable infrastructure with equal access. The international community will not provide any financial aid without changes in ownership structure.
Domestic lignite is widely considered as a risky and expensive fuel. New electricity production facilities will therefore use other fuels, bringing considerable fuel diversification to the market. Fuels of choice will be waste, wind, natural gas, LPG, LNG, biomass and diesel oil.
During the first one or two years of rebuilding, most new generating facilities will be built on floating platforms, vessels or barges. The most popular locations will be large industrial centres along the Danube and Sava rivers as well as Port of Bar on the Adriatic Sea coast.
Long term prospects
Looking at the geographic position and other economic prospects, Serbia and Montenegro could become a very interesting market in Eastern Europe over the next five years.
Large infrastructure developments are foreseen such as:
- Black Sea-Belgrade-Trieste crude oil pipeline
- Turkey-Europe and Mediterranean-
Eastern Europe natural gas pipelines
- Danube transport development.
The potential for productivity and efficiency growth is therefore considerably large.
The most important development obstacles are:
- Political turmoil
- International financial institutions might attempt to apply to Serbia and Montenegro policies that could slow down and postpone energy market development in this country.
Kovachevic, A. “Energy Market Prospects in Serbia and Montenegro” Presented at Power-Gen Europe, Frankfurt, Germany, June 1999.