Renewable energy market in SEE

According to the International Renewable Energy Agency (IRENA) renewable energy already plays a significant role in SEE, in particular in the form of hydropower and bioenergy. Indeed, SEE boasts an installed hydropower capacity of more than 22 GW with the potential to significantly increase this capacity. Yet, while hydropower is vital in reducing the region’s dependence on fossil fuels, this key electricity source must be developed sustainably.

Similarly, the region’s bioenergy use is vast, thanks to the large forested area. Traditional bioenergy constitutes a large portion of the total energy demand in all of SEE and plays a vital role as a direct source of heat for its residential buildings. A shift from polluting traditional bioenergy to modern bioenergy is necessary, however.

The region is endowed with good wind resources, too, with the wind blowing at average speeds between 5,5 m/s and 6,7 m/s. Solar radiation is also relatively substantial, in particular in the southern part of SEE (Albania, Bulgaria and North Macedonia). The technical potential of utility-scale variable renewables in SEE reaches as high as 1680 PJ.

Oil represents the largest share in total primary energy supply (TPES), with 28% of the total, followed by solid fossil fuels – mainly locally supplied lignite – with 27%, natural gas (20%) and biomass (11%). Currently, the power sector of the region is heavily reliant on an ageing fleet of lignite power plants, which produced 43% of the 231 TWh generated in 2017. The ageing infrastructure of these facilities and their negative environmental impact reveal the need for the rapid phasing out of older plants and suspension or improvement of more recent ones.

The region’s total final energy consumption (TFEC) was around 2720 PJ in 2017, states IRENA. The residential sector is the largest consumer, with a 32% share of TFEC. A large part of the energy consumed in the residential sector comes from biomass, which offers an economic solution for heating residential buildings. The use of biomass in the residential sector is, however, mostly in inefficient cooking and heating appliances, which are a major source of local air pollution and health problems. Improving access to clean solutions for cooking and heating is a priority under the Sustainable Energy for All Initiative of the United Nations. Yet, in SEE, there are still many households lacking access to clean solutions – over 30% in some cases. Slow progress in deploying modern bioenergy indicates both the presence of significant barriers, and that current policy measures are insufficient to stimulate deployment of renewable energy-based solutions.

Policies and investments

Most renewable energy capacity is concentrated in the EU member states of SEE, while the rest of the region has been relatively slow to roll out such projects. The EU member states benefited from the early adoption of medium-term, technology-specific targets for renewable energy and the introduction of dedicated supporting policies.

The most common policy support instruments in the EU are auctions and tariff mechanisms for utility-scale and residential plants. Nowadays, every government in SEE has adopted renewable energy targets, as a result of international agreements, including the Renewable Energy Directive (RED) and the Energy Community Treaty. Targets had a profound effect on the region’s renewable energy environment. RED and the related National Renewable Energy Action Plans (NREAPs) have been powerful catalysts for the deployment of renewable energy technologies and their integration into power sectors around the EU.

SEE, like most regions in the world, still lacks a comprehensive legal framework supporting renewable in the heating, cooling and transport sectors. As the use of traditional biomass is widespread, the pace of adoption of modern renewables and energy efficiency measures should be accelerated to guarantee the decarbonisation of the heating sector. Dedicated policy interventions are needed to overcome a variety of economic barriers (e.g., access to finance for the procurement of modern appliances) and noneconomic barriers (e.g., low consumer confidence).

An enabling environment, with appropriate policies, is conducive to attracting investments in the renewable energy sector. Between 2001 and 2018, SEE received USD 20,7 billion in renewable energy investment, excluding large-scale hydro. Regional investment has grown from non-existent in 2001 to its 2012 peak of USD 3,7 billion. In 2018, the total renewable energy investment in SEE was USD 1,49 billion. Overall, renewable energy investment remains fragile in SEE. The changing pattern of investment can be attributed to the presence (or lack thereof) of dedicated supporting policies. Without stable policy and regulatory frameworks, regional investment in renewable energy will continue to be sporadic. Reducing the cost of capital and offering more harmonised approaches across national markets would also provide an additional boost in investment for a region with vast renewable energy resources to fully realise its potential, states IRENA.

Renewable energy potential

Historically, the region’s power generation profile has been significantly shaped by large hydropower plants, while heating needs have mainly been covered by the large biomass endowment. The overall estimated unexploited potential for renewable energy is still substantial, however.
IRENA has undertaken an analysis on cost-competitive renewable energy in SEE, which carried out a systematic assessment of the region’s overall renewable electricity potential. The analysis found that SEE sits on rich and partially untapped renewable energy resources.

Despite having an installed hydropower capacity of more than 22 GW, the region still has the largest remaining unexploited hydropower potential in Europe, as its river catchments have remained largely undeveloped. The technical potential of hydropower is estimated to be 522 PJ per year. While up to 140 large (above 10 MW of capacity) greenfield hydropower plants and more than 2700 small projects (each below 10 MW of capacity) are in the production pipeline, the sustainability of these projects has sometimes been questioned. In the last couple of years, opposition to the construction of small hydropower plants has been growing, mainly in Albania, Bosnia and Herzegovina, Croatia and Serbia. Local stakeholders and nongovernmental organisations (NGOs) have called for a set of principles for sustainable hydropower to be respected, with one of these principles being the prioritisation of investment in rehabilitating existing plants.

In 2016, the EU commissioned a study on hydropower for the Western Balkans. This was aimed at defining how to develop the region’s hydropower potential in a way that balances energy generation, flood protection and environmental concerns. The study concluded that the first, immediate priority for investment should be the rehabilitation and increased efficiency of existing hydropower plants, in combination with ecological restoration measures. This would safeguard the existing capacity and generation that hydropower currently contributes to the region’s energy mix. The study concluded that the development of Greenfield projects should be limited to hydropower plants, as the contribution of small plants to energy production is extremely limited, while their impact on the environment can be severe. Western Balkan waterways provide the region’s inhabitants with many services that are essential to their livelihoods. Hydropower must therefore be developed in compliance with the highest standards of ecological preservation. Some refurbishment and modernisation is already taking place, at, for example, the Iron Gate 2 hydropower plant in Serbia.

Global horizontal irradiance, a key parameter in solar PV installation, is higher in the southern part of the region, where it reaches over 4,5 kWh/m2/day. Solar resources in the northern part are more modest, down to 3 kWh/m2/day, but in line with or better than other European countries with large PV deployment, such as Germany. The utility-scale solar technical potential of the SEE region is estimated at around 245 PJ.

The whole region is endowed with good wind resources, with wind blowing at average speeds of between 5,5 m/s and 7 m/s at 100 mheight. The mountainous and coastal landscape increases the variation in wind resource across the region, with higher average wind speeds in coastal areas and at high altitudes. The Eastern coast of the region (Republic of Moldova and Romania) enjoys the best wind resources, with average wind speeds of 6 m/s to 7 m/s. The Adriatic coast (Albania, Bosnia and Herzegovina, Croatia, Montenegro and Slovenia) enjoys similar average wind speeds, but this area is also regularly hit by winds that gust between 150 and 200 km/h. This adds additional stress on wind turbines. Wind energy is not harvested at its full potential, however, as in nearby countries with similar wind resources, with the exception of harvesting in the EU member states of the region. The technical potential of SEE’s wind energy currently is estimated at 1436 PJ, estimates IRENA. Notably, the presence of a good technical potential is a necessary but not sufficient condition for deployment.
Other aspects to consider are the economic limits to supply, the market constraint and the presence of appropriate supply chains.

Hydropower

Hydropower is a very cost-competitive option for new power. Data from the IRENA Renewable Cost Database show that the weighted-average levelised cost of electricity (LCOE) from hydropower in SEE decreased by a third from the 2011 to 2014 period to the 2015 to 2018 period. During the latter three years, the weighted-average LCOE of hydropower in the region was USD 0,083/kWh.

Solar PV and onshore wind

Available data for projects in the IRENA Renewable Cost Database indicate that the capacity factor of utility-scale solar PV and onshore wind projects in SEE has been historically in line with the values achieved in other European countries. In addition, the weighted average capacity factor has shown a slight upward trend, across the region.
Although the low level of deployment poses challenges to data collection in the region, the central value for solar PV total installed costs during 2018 can be estimated at around USD 1215/kW (about 10% higher than the weighted-average of European countries outside SEE). Meanwhile, more competitive G20 countries have reported costs below USD 1000/kW.

Assuming a 7,5% cost of capital, the range of total installed costs for solar PV can translate into an LCOE range of between USD 0,093 and USD 0,130/kWh. For SEE, a central LCOE value of USD 0,105/kWh can be estimated for 2018, about 5% higher than the weighted-average value for European markets outside SEE.

Driven by a global trend in falling turbine and balance of project costs, total installed costs in SEE have decreased 19% since 2010. The weighted-average value in 2018 was USD 2030/kW, 4% higher than in European markets outside SEE. The abundance of wind resources in the region has enabled onshore wind to become an increasingly cost competitive source of new power generation, with suitable locations being developed in recent years. The weighted-average LCOE of onshore wind projects commissioned in SEE during 2018 was USD 0,069/kWh, 43% lower than for those commissioned during 2010 and the lowest since then, and 4% lower than the weighted-average for projects in other European countries.

Solar PV and onshore wind cost trends

With falling costs for solar and wind technologies expected to continue, SEE could benefit greatly from further developing its vast potential. Both solar PV and wind generation can be even more cost effective than shown so far in this analysis, provided access to a low cost of capital becomes more prevalent in SEE.
Assuming central estimates for current total installed costs and capacity factors and a 2,5% weighted average cost of capital (WACC), the LCOE of onshore wind can be as low as USD 0.045/kWh. This would undercut the global fossil fuel cost range estimate. By 2025, assuming a total installed cost reduction of about 19% for the region, resulting in total installed costs of USD 1650/kW, the LCOE of onshore wind could undercut the global fossil fuel cost range, even at a 5% WACC. At a 2,5% WACC, the LCOE of onshore wind could be as low as USD 0,039/kWh.

Though solar PV can already be generated at competitive levels in SEE, its cost effectiveness would increase as access to a lower cost of capital increases. Even at current total installed costs and a 2,5% WACC, the LCOE of solar PV could be as low as USD 0,075/kWh (38% lower than its value at a 10% WACC).

In addition, if, as expected, total installed costs for solar PV in the region continue to decline, even more competitive LCOE levels could be achieved in the future. Solar PV module costs are expected to continue to become cheaper as module efficiencies increase and process improvements in ingot and wafer manufacturing continue. In addition to this, lower balance of system costs (including installation costs) can be expected with increased market maturity.

Assuming total installed costs by 2025 in SEE of USD 850/kW, the LCOE of solar PV could range between USD 0,061 and USD 0,093/kWh, depending on the cost of capital.