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Energy Challenge Leaves Balkans Divided

Gjergj Erebara Tirana, Skopje, Sofia, Belgrade, Podgorica and Sarajevo

Experts say the cure for the region’s energy woes lies in price rises, market liberalization and the adoption of common approaches but governments don’t get it.

Shpetim Nazarko, boss of a printing press in Tirana, Albania, shivers at the first sign of winter. It’s not just the first cold wind that makes him tremble but fears for the future of his business. “Last year, the energy crisis brought me to the brink of bankruptcy,” he says.

As temperatures drop in Albania, electricity consumption in the country grows. But the system cannot cope with the additional strain, resulting in frequent power cuts.

Businessmen like Nazarko have to turn on private generators if they want to keep the lights on and machines working. But running an oil-fired generator is extremely expensive. “I usually spend 500 euros per month on electricity bills,” Nazarko explains. “But when the power is off for up to four hours a day, I can end up paying as much as 50 euro more every day for oil.”
 
Albania’s energy crisis began in the late 1990s - the result of underinvestment and fast-growing consumption. It is not the only country in the Western Balkans facing this predicament: Kosovo and Macedonia are also in difficulties when it comes to power.
 
A steady growth in demand has turned all countries in the region into net importers of electricity with the exception of Romania and Bulgaria; a dependency on foreign imports leaves them vulnerable to shortages.
 
To counter growing problems over power, governments would like to invest more money in new power generators and transmitters but they lack the funds to do so.
 
Experts say the only solution is to raise electricity prices and to make transmitting capacities accessible across the region, freeing up money to invest in new power sources. But they fear this will not happen, mainly because governments worry about the social and political repercussions of price rises.
 
In a region where electricity theft is rampant and a large part of the population lives under the UN poverty threshold of 2 dollars per day, hefty electricity price hikes are often seen by governments as political suicide. Experts also complain that electricity traders are manipulating the market, making wholesale prices more expensive than in Western Europe.
 
A fast-approaching crisis
 
The Balkans has always been a poor region and in the communist era private consumption of power was low. Few households possessed many electric appliances, keeping demand for energy minimal. Heavy industry accounted for the lion’s share of consumption.
 
But after the fall of the Berlin Wall and the collapse of the region’s communist regimes, governments embarked slowly on a transition towards market economies and the paradigm shifted.

The region’s electricity grid, however, has not caught up with the profound changes of the last two decades. Investment has been minimal both in local electricity grids and in international transmission lines. As a result, they cannot meet the growing appetite for imported electricity.
 
Political leaders and experts expect an energy crunch to occur in the next few years. “We know a major crisis will reach our region by 2012,” Angel Marin, Vice-President of Bulgaria, said in 2007, at a summit of Balkan leaders in Macedonia.
 
Although governments in former Yugoslavia and Greece are credited with having done a good job in moving towards privatisation of utility companies, this has not been matched by investment in production.
 
Experts estimate that Balkan countries need to invest more than 15 billion euros in new power sources and inter-connection lines to avoid ever worsening electricity shortages.

But this will not be forthcoming while the price of electricity in the region remains only half that of Western Europe where consumers pay an average of 16.3 euro cents per kWh, while those in the Balkans pays less than 7 euro cents.
 
Per capita income in the Western Balkans ranges between 20 to 40 per cent of the European Union average, which makes it difficult for governments to raise electricity prices without a considerable social impact.
 
In 2007, Albania’s state-owned power corporation, KESH, ran at a loss of over 200 million euros, roughly 2.5 per cent of Albania’s GDP, mostly due to imports. Macedonia’s EVN, the largest private operator of the electricity distribution system in the country, also registered a large financial deficit as a result of the high price of imported power.
 
Experts blame the lack of major investment in the sector over the last two decades on the artificially low price structure. The money required to invest in new power sources cannot be covered with the current low price of electricity for consumers.
 
Even in Greece, the richest country in the region, the national power company PPC SA experienced difficulties last summer and came close to imposing power cuts when a jump in demand exceeded the maximum capacity.
 
Is Serbia abusing its position?
 
One oft-cited reason for the energy crisis in the region is the lack of inter-connecting power lines across the Balkans and the overload of the lines linking the area to Central Europe.
 
The centre of the Balkan electricity transmission lines lies in Serbia. Eight inter-connection lines link Serbia with six neighbouring countries of Croatia, Bosnia, Montenegro, Macedonia, Bulgaria and Kosovo (the latter is not recognized by Serbia as a country).
 
“It is unimaginable to trade energy in the Balkans without using the lines passing through Serbia,” Sokol Spahiu, sales chief for KESH, says. “Everybody aiming to do so must employ somebody speaking Serbian.”
 
But several neighbouring states accuse Serbia of using its strategic position at the heart of the Balkan power grid to charge inflated prices. “We paid Serbia 70 to 80 euros per megawatt, while the price in Germany fluctuated between 50 to 55 euros,” Bosnia’s electricity transmission operator complained in its 2007 report.
 
Most companies trading in electricity in the Balkans are also owned by Serbs, who benefit from insider information of the transmitting capacities of Serbia’s interconnection lines. Serbia’s near-monopoly in this trade has created resentment. The media in Bosnia, Montenegro and Albania regularly attack their own governments for not working harder to escape from Serbian control when it comes to energy.
 
However, the companies claim they are simply doing business, and many experts confirm this: “We do not control electricity trading in South East Europe, nor is such control possible,” said Nenad Savic, a spokeperson for the Serbian electricity trader, EFT.
 
“All transmission capacities used by market participants in Serbia, as well as in other countries in the region, are allocated in advance through auctions and such a system eliminates all possibility of abuse,” he added.
 
“This is simply business,” says Ymer Balla, head of the Electricity Transmission Operator in Albania. “In times of crisis, we have received help from Serbia.”
 
Forget cooperation, we’d rather compete
 
Meanwhile, experts argue that politicians are not studying the crisis from the most intelligent perspective; instead of creating a common market in power that would benefit everyone, they have engaged in a race to build up their own, national power assets.
 
A common market would provide equal access to electricity companies to transmitting lines across the region.
 
As evidence of this, they point to Bulgaria, Rumania and Croatia, which are all planning to build their own nuclear power plants. Similarly, Greece, Macedonia and Serbia hope to use Russian gas for their own new thermal power plants.
 
Kosovo hopes to attract foreign investment in order to build its own big coal thermal power station, while Albania has issued concessions for two hydroelectric power plants. Macedonia, Croatia and Albania, meanwhile, intend to build new transmission lines in order to reduce their energy dependency on Serbia.
 
These projects compete on costs and there may not be space for all of them. Some could turn into bottomless wells financially, and undermine the process of liberalization.
 
Those behind the new national energy projects disagree, naturally. “Our own investment may become redundant if Bulgaria builds nuclear plants, but looking at the speed of the rise in consumption, I believe there is space for both projects,” says Agim Gjinali, head of a US Exim Bank-supported 3 billion euros project that aims to build gas-fuelled power stations in south-western Albania.
 
Some energy executives believe the lack of transmission capacity is not, in fact, the real problem, and that some of the proposed investments in building new power lines are unnecessary. “Our inter-connection lines were built to be used only in times of crisis,” Ivan Aylov, head of the transmission operator in Bulgaria, says, explaining that often their electricity transmitting capacities are not being used.
 
“There are transmission lines in the Balkans that are not being used,” echoes Lubos Pavlas, manager of CEZ Bulgaria EAD. “The problem is not technical or economic. It is political.”
 
Theoretically, Balkan power lines must be made accessible to all and tariffs for energy transmission are set at between 0.5 to 5 euros per MW. But these regulations, set by the 2005 regional Athens agreement, also state that inter-connection lines can be put out to auction if and when demand exceeds capacity.

This clause has prompted all countries to open or enter auctions for these lines, despite the lack of transparency related to excess capacity.
 
Srdjan Dajic a lawyer for the Electric Power Industry of Serbia, the national inter-connection lines operator, said that information on public tenders for electricity transmission lines “falls under the domain of business secrets.”
 
Since there is no public information on the actual free capacity on transmission lines, governments auction the lines through tenders and the transmission tariffs for electricity widely exceed the agreed tariff, increasing the price of electricity imports.
 
In 2007, an auction for the use of the inter-connection line between Romania and Serbia, for example, ended up with an agreed price of 22 euros per MW, while the normal transmission tariff should not exceed 5 euros per MW.
 
Electricity sold by CEZ of the Czech Republic to Romania for 40 euros per MW was later resold by electricity traders in the Greek stock market for 80 euros to 90 per MW. The practice is known as ‘kilowatt laundering’ a term, analogous to money laundering, coined to describe the process of obscuring the true origins of specific quantities of electricity being sold on the energy market.
 
Because CEZ did not have access to transimission lines to sell its electricity to Greece directly, it’s electrcity would be resold by a middleman, the electricity trader, who would make a hefty profit in the process.
 
 The Vienna-based Energy Community Secretariat, in charge of the liberalization of the Balkan energy market, agrees that transmission capacities in the region are not sufficiently transparent and are not being made accessible to all operators.
 
“Market liberalisation is the only way to attract foreign investments because the national markets are too small to entice them,” says Robert Matous, an expert for the Secretariat. Energy executives agree but warn of continuing political obstacles.
 
“The integration of regional markets is technically possible but the harmonisation of laws in all countries is a much more complex process and it will need a long time to be accomplished,” adds Ivan Aylov.
 
Don’t expect improvement without price rises
 
Experts believe another move needed to ease the crisis is price increase. This would help regional power companies to cover production costs and so ease the conditions for the buying and selling of electricity.
 
But governments are unwilling to risk popular wrath by taking such a controversial step. Gjergj Bojaxhi, head of KESH, says private investors are willing to invest in the region but are put off by the determination of governments to keep down consumer electricity prices. “There is a regulatory risk facing foreign investors,” he notes.
 
Albania’s government, for example, insists it is committed to liberalisation of energy and to privatisation of the energy distribution sector. However, the tender for privatisation was postponed twice in first three quarters of 2008.
 
In 2001, a World Bank-sponsored study concluded that proper maintenance and management of a national utility company in Albania would require income of 4 cents for every kW sold. But the Albanian Energy Regulatory Agency set a maximum quota for distributors of only 1.5 cents per kW.
 
Experts long doubted the power company would ever find a private buyer under such disadvantageous terms, and it was only on September 29, 2008 that the Albanian Distribution Company, OSSH, was finally sold to Czech CEZ for 102 million euros. Significantly, a condition for the sale was that CEZ would not put up consumer prices in 2009, during the run-up to the 2010 general elections.
 
In Macedonia and Bulgaria, where distribution companies are already privatised, the problem is similar. The regulatory authorities, though theoretically independent, refuse to allow price rises, whatever damage this inflicts on the private power companies.  

In Macedonia, electricity distribution is controlled by the Austrian company EVN, while in Bulgaria the market is divided between the Italian ENEL, the Czech company CEZ and EVN. “If the price doesn’t increase, we can’t invest and the quality of our services will deteriorate,” Lubos Pavlas of CEZ Bulgaria warns.
 
A degraded energy grid entails costs to businesses and consumers alike. Regional economies have enjoyed rising growth rates in recent years, lifting hundreds of thousands of people out of poverty. But this process could stall or even be reversed without a resolution of the region’s energy problems.
 
“The energy crisis presents a great danger for Albania,” the IMF said in September 2007. “It affects all medium-term economic indexes and could create a hole in the budget.” According to the country’s own finance ministry, power shortages in 2006 cost Albania 1 per cent of its GDP growth.
 
Back in Tirana, Shpetim Nazarko, the printer, is resigned to the prospect of his printing press machinery continually stopping and starting as the lights go on and off.

His clients, mainly companies that need packaging materials, must put up with delayed deliveries and with enforced changes to their own timetables. “It’s the economy in its entirety that suffers from the energy crisis,” Nazarko says.

Fellow Bio

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Gjergj Erebara

Gjergj Erebara was born in 1979 in Tirana, Albania. He has been specialized in economic reporting and currently works as journalist in “Shqip” daily published in Tirana and BalkanInsight.com publication.

Topic

Topic 2008: Energy

Energy is a topic that preoccupies officials, politicians and citizens across Europe - and arguably one of the biggest challenges facing this continent and the international community.