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The future's blackouts

Southeast Europe faces a power shortage until 2012, when new generating capacity is due to enter service. Until then, prices will almost certainly rise, threatening the economic boom that is helping to stabilise the region, NJ Watson reports

ELEKTROPRIVREDA Srbije's (EPS) general manager, Vladimir Djordjevic, is a hard man to meet. Petroleum Economist knows this, because sitting opposite in the director's restaurant on the top floor of the state-owned utility's communist-era headquarters in Belgrade, Serbia, is not the famously media-shy Djordjevic, as had been arranged, but Dejan Jovanovic, the grandly titled chief of the cabinet of the general manager.

Djordjevic is apparently tied up with the minister of energy, it is politely explained. And well he might be. EPS is at the centre of what is becoming a big threat to southeast Europe's development – the failure of electricity production to keep pace with surging demand. This will inevitably lead to higher prices. And that, European policymakers fear, could stall the economic growth that is bringing stability to the region after the chaos of the 1990s.

EPS' recent forecast for a 15% fall in its electricity output this year, to 33.45 terawatt hours (TWh), has done little to soothe such fears. EPS claims much of this fall can be attributed to unexpectedly favourable weather conditions in 2006, which resulted in high output from Serbia's hydro plants, lifting production by 3 TWh above forecast – a level it cannot expect to match this year.

Capacity increases

EPS stresses that some €3.1bn ($4.1bn) will be invested between now and 2010 in capacity increases – including €0.7bn to complete Kolubara B, a coal-fired power plant, and €250m to open a new pit at the Rudarski Basen Kolubara lignite mine. The company also expects to finish the reconstruction and upgrading of the country's hydro-electric and coal-fired thermal power plants.

And, in any case, "EPS will import electricity to cover any supply gap," Djordjevic says in a hastily arranged interview later. But importing power means another area must be exporting. On paper, at least, say experts, there appear to be enough power projects to satisfy the region's growing demand for electricity. Regional energy ministers agreed in December 2004 to establish a $30bn special fund to spend on electricity and other energy projects by 2012.

South of Serbia proper, in the UN-administered province of Kosovo, which holds plentiful reserves of lignite, the government plans to build several thermal generating units with a total capacity of 1.2-1.3 gigawatts (GW) over the next four to five years.

In Bosnia Herzegovina, the Czech power company, CEZ, is putting the finishing touches to a deal announced in December under which it will acquire an existing 300 megawatt (MW) plant and coal mines with 400m tonnes of reserves, in return for investing €1.5bn to build a 660 MW coal-fired plant in Gacko. CEZ is looking at a similar opportunity at the Ugljevik plant, where it is competing with EPS and an unnamed Greek investor. Chief executive Martin Roman says CEZ plans to spend around €10bn on acquisitions by 2009. The company is also hoping to complete deals in Ukraine and Russia in the near future.

Nuclear is also making a comeback in the region. In February, Romania announced a three-stage strategy for the energy sector until 2030, which includes raising nuclear capacity. The country is committed to opening a second reactor at the Cernavoda plant by the end of the year and two new plants are set to come on line by 2014.

All this capacity is desperately needed because the region's economies are performing so robustly. The GDP of the two new entrants to the European Union (EU), Bulgaria and Romania, are growing at over 6% a year, as are the economies of the former Yugoslavia and Turkey. UniCredit Group expects Turkey's economy to grow by 5.4% in 2007 and Serbia's to grow by about 6.0%.

In broad terms, the World Bank has forecast that economic growth in southeast Europe will outstrip the 2-3% forecast for the EU as a whole over the next decade. Assuming growth rates of 3-5% a year, growth in demand for electricity would average 2.3% a year until 2020, bringing gross demand to around 235 TWh a year.

The problem the power industry faces, however, is that it takes at least three years to build a gas-fired power station and over five years to build a coal-fired plant. There is a 10-year minimum lead-time for the development of a nuclear plant from initial concept to power flowing into the grid.

With virtually no new power plants due to come on line before 2012, the big question is what will happen in the medium term. "I don't expect any generating units to begin operations until 2012, the problem is how to survive until then," says Mirko Ivkovic, director of long-term sales at Energy Financing Team, the region's largest power trader.

"The problem is we're dealing with decisions about power that were made 10, 20 years ago," says a Belgrade-based senior executive of an international utility.

Political delays

On the plus side, the region has just enjoyed one of the mildest winters on record, meaning that 2006 consumption, which was expected to rise by 2-3%, was about 10% lower than the 2005 figure. But the dry winter will mean reduced hydro generation.

This problem is especially acute in Albania, which relies on hydropower for over 90% of its electricity. Last winter, the country experienced the worst power-cuts in decades, peaking at 20.5 hours a day in the first week of December, as the drought reduced water levels in dams along the Drin river. This has occurred at a time when electricity demand in Albania is growing at almost three times the European average. On 5 March, the government sacked the head of state-owned power utility, Kesh.

However, the problems at Kesh – formerly an exporter to neighbouring Greece and the former Yugoslavia – run deep. One foreign banker in Belgrade says blaming the weather is convenient, but does not explain the whole story. Given that hydropower in Serbia and Croatia enjoyed a bumper year in 2006, he claims a bigger problem is the decrepit state of the transmission lines and other infrastructure. "The solution is to privatise Kesh. There would be a lot of interest from EPS and international utilities."

The World Bank has come up with a series of proposals to modernise hydropower plants, reduce transmission losses and build new power stations near the fast-growing towns in the centre and south of the country. A €92m contract was signed in February with Italy's Maire Engineering to build a 100 MW oil-based plant in Vlora, southwest of Tirana. But the government has dragged its feet over other proposals.

Politics is also hindering construction of new capacity in the region. A source close to CEZ says that together with its partner, the US' AES, the Czech firm has submitted a bid to help Serbia's EPS complete the building of Kolubara B. Work on the project started in 1988, but stopped in the early 1990s because of the wars in former Yugoslavia. So far, Serbia has invested $400m in the project and 40% of the plant has been built. It is thought that around €0.6bn would be needed to complete it.

However, the CEZ source says progress is impossible until a new government is formed in Belgrade following January's election. Yet almost three months since those elections there is still no new government because no party wishes to be in power when a formal decision is made to send Kosovo along the road to independence – a development vehemently opposed by virtually all Serbs. According to the constitution, if a new government is not elected by 14 May, a new election is to be held.

Even if a new government is formed, it is unlikely to undertake the wholesale privatisation of EPS that the European Commission would like. It is more likely that capital of the company would be enlarged through joint projects with strategic partners, with partners taking minority stakes in EPS' capital structure. The state also plans this year to distribute a certain number of shares, probably 15%, at the holding level to public-sector employees, while another 15% will go into the State Fund, which holds shares excluded from the privatisation process at the start of the 1990s. Most shares will remain in the hands of the state.

But Djordjevic says a majority sell-off of EPS' shares remains a possibility. "There are discussions that EPS could be privatised by offering [the state's majority] shares on the Belgrade Stock Exchange. All options are still open."

The unresolved status of Kosovo is also creating uncertainty. Kosovo has large lignite reserves and was responsible for 15% of EPS' power output before the UN took control of the province following the 1999 conflict with Nato. EPS still claims those assets as its own, although UN special envoy Martti Ahtisaari's plan for Kosovo, issued in February, was vague on this sensitive issue. "EPS is waiting for the final political resolution. We are a state-owned company, and all of our actions will be in line with government activities regarding Kosovo," Djordjevic says.

The EU has also been caught between a desire to see the region develop economically and its environmental obligations. As part of its accession to the EU this year, Bulgaria was required to close reactors 3 and 4 at its Soviet-era Kozloduy nuclear power plant. Bulgaria had been an important regional electricity exporter, but the closure of the reactors will cut exports from around 7.8 TWh in 2006 to close to zero this year.

Albania, which relied on exports from the plant, and Bulgaria formally requested in January that the European Commission suspend the closure of the reactors because of the consequences for the region's power deficit, arguing that three reports from international nuclear agencies said the reactors do not pose a safety risk. But the request was declined.

Ideal place for a reactor

Geographically, Serbia would be an ideal place to site nuclear generating capacity as it lies in the centre of the Balkans. However, a 1989 law banned construction of nuclear plants and there is little appetite among the general population for a revival of the programme. "Nuclear power is far off," says EPS' Jovanovic.

The result will be much higher prices for electricity in the region, although the extent of price inflation will depend upon factors such as the weather, oil and gas prices, and the ability of governments to organise the projects on the drawing board. "I can't imagine prices being lower than today," says Energy Financing Team's Ivkovic.

The power trader says Serbia's retail prices are among the lowest in the region, at around €0.04 per kilowatt hour (kWh). This compares with as much as €0.10/kWh in Hungary, meaning that the Serbian state power firm EPS is effectively subsidising prices for domestic consumers. However, with prices in the region already starting to rise and approaching levels seen in Greece and Italy, the ability to sustain such subsidies is becoming harder.

"As traders, we were exporting electricity to Greece and Italy, but now the situation is reversed; there is a power deficit in this region," says Ivkovic. A direct result is that capacity at plants and planned projects in Italy and Greece that were uneconomic now look viable. The Greek regulator reckons the country needs to build one new 400 MW power plant a year to meet growing demand. Italy's largest utility, Enel, plans to invest up to €1bn in the country by 2011; it is already bidding to build a 450 MW combined-cycle gas-turbine plant at Livadia.

Matthew Hall of Global Insight, a consultancy, says the closure of the Bulgarian reactors means "the government will be pressing for a 24% electricity price increase from July." Economists say price rises and power shortages will adversely affect the region's economies. Already, it is reported, Albania's electricity shortage has resulted in slower-than-expected economic growth and less foreign investment than elsewhere in the western Balkans.

However, there are steps the EU could take to help the region over this five-year hump. The European Commission could help by improving transmission connections between European countries so that supply from surplus capacity can be delivered efficiently to regions in deficit. For example, transmission lines could be built between Slovenia and Hungary, and Slovakia and Hungary. Ukraine, a large power producer, could supply Europe through transmission lines to Slovenia and Romania.

Sometime after 2009 there are plans to link the Turkish grid to Greece and Bulgaria to enable exports from Turkey, which, with its large hydropower capacity and rich lignite reserves, could be a significant source of power. But successive Turkish governments have delayed power-sector reform.

Ankara is under pressure from the IMF and the World Bank to privatise its electricity companies to increase efficiency and cut the large subsidies that are hurting the economy. Progress was being made until the government postponed tenders for the first three of 20 electricity distribution companies due for privatisation until after November's parliamentary elections (PE 2/07 p39).

Ultimately, the biggest losers will be Turkish consumers. In a January report, the World Bank said the shortage of investment in Turkey's generating capacity means blackouts are likely from 2009 onwards.

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