The Western Balkan power sector

Energy transition in the Western Balkans has long since begun, but – like EU accession – it has been neither a linear nor hurried process, states a CEE Bankwatch Network study report, titled “The Western Balkan power sector: between crisis and transition”. Countries have taken it in turns to enjoy short stints as the regional champion of the moment, only for their efforts to stagnate later due to pressure from incumbents, political changes, lack of capacity or being distracted by false solutions.

But against this background, a quadruple energy crisis has been brewing. Although not nearly as dependent as the EU on fossil gas, the Western Balkans have been hit hard by knock-on prices of electricity imported from the EU in the last year. This was exacerbated by a series of technical problems at coal power plants and mines across the region during late 2021 and 2022 which further increased electricity import needs in Serbia, Kosovo and North Macedonia.

To make matters worse, despite exceptions, 2022 has been a generally dry year. This has prevented the region’s hydropower plants from making up for the coal plants and causing Albania to increase imports even further. And finally, biomass prices have massively increased across the region, leading some countries to impose export bans.

“This crisis is both a serious threat to the energy transition and an opportunity. On one hand, wind and solar development is speeding up in Albania, Bosnia and Herzegovina, North Macedonia and Serbia. But despite the fact that the crisis has revealed the unreliability of the region’s antiquated coal plants, it is paradoxically making governments less willing than ever to commit to a phase-out. Neither have the sky-high gas prices convinced the region’s governments that creating a new lock-in by building new gas infrastructure is a bad idea”, explains CEE Bankwatch Network’s study report.

Bosnia and Herzegovina and Montenegro particularly benefit from exporting coal-based electricity to the EU, and can now rake in more income than ever, even if it comes at the expense of public health. In blatant breach of the Energy Community Treaty’s provisions on pollution from power plants, both countries are now running coal plants illegally in pursuit of additional revenues. However, this cannot continue for many more years as the operation of the carbon border adjustment mechanism (CBAM) or a national or regional carbon pricing system to avoid CBAM is guaranteed to further raise coal-based electricity production costs.

Since late 2019, when the EU first disclosed its plans for a CBAM, a clear increase in awareness among the region’s decision makers has been observed that if they do not take action themselves, they are going to be pushed.

According to the Commission’s proposal, the EU is going to start imposing charges on electricity imports in 2026, with higher impacts on countries with higher exports, higher emissions and a higher percentage of fossil fuels used in electricity generation.

If the countries are to avoid being hit by CBAM, planning a just transition and introducing carbon pricing is more important than ever. Revenue from CBAM will be used for the EU budget, whereas domestic carbon pricing can directly contribute to energy transition in the countries. In fact, with a moderate carbon price of EUR 50 per tonne, the countries could collect a total of around EUR 2,8 billion annually to spend on a just and sustainable energy transition, underlines CEE Bankwatch Network’s study report.
In late 2021, all the countries committed to introduce carbon pricing in the next few years as part of the Green Agenda Action Plan and the Energy Community’s Decarbonisation Roadmap, but this has been threatened by the ongoing energy crisis.

As ever, the Western Balkan governments bear the primary responsibility for speeding up the deployment of sustainable energy, improving energy efficiency, phasing out fossil fuels and ensuring an inclusive, bottom-up just transition planning process. But the European Union and Energy Community Secretariat can help to keep this on track, especially in times of crisis when domestic attention is focused on solving immediate supply problems.

According to CEE Bankwatch Network the EU needs to increase momentum towards a just and sustainable energy transition and carbon pricing, especially through the creation of a dedicated Just Transition Fund, and by ensuring a stringent CBAM which persuades decision makers in the region to introduce their own carbon pricing and improve compliance with EU energy, competition and environmental law.

The EU also needs to ensure that the Energy Community Treaty is strengthened to include penalties. The Western Balkan countries must not be allowed to continue accessing EU energy markets without playing by environmental and State aid rules, says CEE Bankwatch Network’s study report.

Albania

Albania, with a population of around 2,8 million, has, for decades, been almost entirely dependent on hydropower for its power supply. This is an advantage in decarbonising its energy sector but also makes it highly vulnerable to the changing climate, and means that it has to import electricity most years.

Albania therefore needs to make an energy transition not from fossil-based sources to renewables, but rather from hydropower to diversified renewables. While electricity is already widely used for heating, this needs to be done more efficiently, with heat pumps, and electrification of transport needs to take place.

Until 2017, Albania only offered renewable energy incentives for hydropower, and as a result solar photovoltaic (PV) and wind have remained underdeveloped. In that year, Albania finally changed its legislation to allow incentives for solar and wind developments and to switch to an auction system for awarding them.

In 2020, only 0,4% of electricity was generated by solar photovoltaics, just under 70% by hydropower and the remaining 30% was provided by imports. As well as its continued plans for hydropower projects – including the highly controversial Skavica plant, which would see thousands of people displaced – the main issue threatening to distract Albania from its energy transition is gas.

Albania produces a small amount of gas, mostly used in oil production and the refining industry, but the country plans to use gas in the power sector, thus undermining its decarbonised electricity supply. It has a 98-MW gas/oil fired power plant at Vlora, financed by the World Bank, EBRD and EIB, which has never operated due to technical faults. Not only does it plan to relaunch this plant, but it is also considering building new gas power plants.

Albania is one of the few Balkan countries producing oil – 910 000 tonnes in 2018. The state-owned Albpetrol is active in the development, production and trade of crude oil, while the largest oil producer is Bankers’ Petroleum, previously supported by the EBRD and IFC and now Chinese-owned. This sector will also need to be phased out in the coming decades, but the first step will be to avoid opening new oil fields.

Although a net importer, Albania’s electricity exports to EU countries, on average, equalled approximately 7% of its total generation between 2011 and 2020. This amounted to an annual average of 489,9 GWh.

Bosnia and Herzegovina

Bosnia and Herzegovina (BiH), with around 3,8 million people, is currently a net exporter of electricity. More than half of its installed electricity generation capacity – around 2,2 GW – is hydropower, while most of the remainder – around 2 GW – is made up of five lignite power plants at Tuzla, Kakanj, Gacko, Ugljevik and, since September 2016, Stanari. Generation levels hover at around two-thirds coal to one-third hydropower, depending on the hydrological conditions.
In 2020, coal generation made up 70%, hydropower 27,5%, wind 1,6%, solar 0,3%, oil 0,3%, and gas 0,1%. The country is, alongside Serbia, the only one in the region still planning new capacities from lignite.

Gas power plants have not been much discussed in Bosnia and Herzegovina yet, with the exception of a plant planned in Zenica, which has stagnated. The country does not have its own natural gas extraction so it is dependent on the Beregovo – Horgos – Zvornik import route from Russia via Ukraine, Hungary and Serbia.

In March 2022, both houses of the Federation of BiH parliament approved the abandoning of the opt-out regime for Tuzla 4 and Kakanj 5. Both of these plants had been operating under the opt-out regime and as of March 2022 were at the end of their allotted 20 000 hours.
Bosnia and Herzegovina exports about 20% of the electricity it produces to the EU on average, based on 2011 to 2020 figures. This amounts to an annual average of 3408,85 GWh.

Kosovo

Kosovo has around 1,8 million inhabitants. Its electricity generation is almost entirely dependent on two ageing lignite plants: Kosova A (5 units with 800 MW installed) and Kosova B (two units with 678 MW installed). The current real capacity of these plants is around 915 MW altogether. They are infamous for their contribution to air pollution, and Kosova B is the second highest emitter of dust out of all the coal plants in the Western Balkans.

In 2020, 96,4% of Kosovo’s electricity was generated from coal; 3,6% from hydropower; 1,4% from wind; 0,3% from oil and 0,1% from solar.
Kosovo has very large lignite resources, totalling 12,5 billion tonnes, which it claims are the second largest in Europe and fifth largest in the world. It has no oil or gas extraction and no gas import infrastructure, thus providing an opportunity to leapfrog to a fully decarbonised energy system.

However, Kosovo’s progress in developing renewable energy was hampered for many years by plans for a new 500 MW lignite power plant – Kosova e Re – which diverted efforts and resources from the development of more sustainable forms of energy. It was only in early 2020 that the project was finally abandoned.

Due to the dominance of lignite in Kosovo’s energy mix, it is very inflexible, and better interconnections with neighbouring countries are needed. A new 400 kV interconnection with Albania was completed in 2016, but due to political issues between Kosovo and Serbia, it only started operating in late 2020.

Kosovo does not have abundant water resources like other Western Balkan countries, but for many years, the government’s plans still relied on hydropower plants to meet the country’s 2020 renewable energy target.

There are no direct transmission lines from Kosovo to the EU; however, Kosovo is an exporter of electricity to Serbia, so some of the coal-heavy electricity produced in Kosovo may end up in the EU eventually.

Montenegro

With around 621 000 inhabitants, Montenegro’s electricity needs are mainly met by the 225-MW lignite power plant at Pljevlja and the 307-MW Perucica and 342-MW Piva hydropower plants, all run by state-owned utility Elektroprivreda Crne Gore (EPCG).

Until 2009, Montenegro imported significant amounts of electricity, mostly to power the KAP aluminium plant, which has at times accounted for up to 40% of the country’s electricity consumption. However, the plant is now almost entirely closed, with only a small section still operating. Since 2011 its demand for electricity had generally decreased, and with it the whole country’s demand, but in 2020 it still accounted for 17% of the country’s electricity consumption.

In the last decade, Montenegro’s ability to meet its electricity demand domestically has varied according to the hydrological situation. In 2010, 2013, and 2018 – rainy years – it was able to meet demand domestically, while in dry years – 2011, 2012 and 2017 – it still had to import relatively large amounts of electricity.
In 2020, coal made up nearly 46% of electricity generated in Montenegro, hydropower around 44%, wind 9,9% and solar 0,1%.

Montenegro is dependent on hydropower, which is prone to massive fluctuations in generation. Against this background, difficult decisions need to be taken regarding the Pljevlja lignite power plant and nearby mines. Since 2020, the power plant has been running illegally as its limited lifetime derogation under the Large Combustion Plants Directive expired.

Montenegro’s government signed a deal in 2020 with a consortium led by China’s Dongfang for the modernisation of the plant in the hope of running it for at least fifteen more years, raising numerous questions about the technical and financial viability of the plans. The country is also planning to open new lignite mines and even export coal to Serbia. In June 2021, however, the government declared a very late coal phase-out date of 2035, which would clearly require the modernisation project to go ahead. In April 2022, nearly two years after the signing of the contract, works reportedly started.

Montenegro’s electricity network was connected with Italy’s in November 2019. In 2019, Italy imported only 37 GWh of electricity from Montenegro. Exports increased drastically to more than 1600 GWh in 2020, representing over 50% of the country’s entire generation.

North Macedonia

With a population of just about two million, North Macedonia relies predominantly on fossil fuels (low-grade lignite and gas) and hydropower, and is dependent on electricity imports. The total annual production of electricity in 2020 was 5347 GWh, and another 2326 GWh was imported to satisfy the total domestic electricity demand. Domestic production of electricity was stable from 2016 to 2019 but imports increased to around 30% of total consumption in 2020.

In 2020, coal made up 34,3% of electricity supply in North Macedonia, hydropower made up 16,6%, gas made up nearly 15%, wind 1,5%, oil 1,2%, biofuels 0,7%, and solar 0,3%. The remainder – 30,3% – came from imported electricity.

In July 2021, North Macedonia joined the Powering Past Coal Alliance and committed to a coal phase-out by 2027, in line with the ‘green scenario’ of its Energy Development Strategy until 2040.

Since winter 2021-2022, however, instead of working towards plant closures as planned, the government and state-owned electricity company Elektrani na Severna Makedonija (ESM) are planning to extend the lifetime of the coal plants with the opening of new open-cast lignite mines in Zhivojno for Bitola and Gusterica for Oslomej. These new developments were explained as a need arising from the energy crisis; however, it turned out that ESM had signed the contract for the mining study and environmental impact assessment (EIA) for Zhivojno in late 2019.

Of all the Western Balkan countries, North Macedonia is the one that exports the largest share of its electricity produced to the EU – although, overall, the country is dependent on imports. Between 2011 and 2020, its average annual share of electricity exported to the EU stood at 38%. In absolute terms, the annual average exports for these years amounted to almost 2173 GWh.

Serbia

Serbia, with a population of around 6,9 million, used to satisfy most of its electricity demand from domestic production until its coal power plants started failing in winter 2021-2022 and its hydropower reservoirs were seriously affected by prolonged drought in 2022. Electricity production in Serbia relies mainly on low-quality lignite coal, causing serious pollution, and most of the remainder is generated by hydropower plants. Although Serbia produces some oil and gas, the country remains dependent on imports, especially gas from Russia. In 2020, coal made up almost 70% of electricity generated in Serbia, hydropower 25,6%, gas 1,5% and biofuels 0,5%. Despite strong growth in wind power in 2019, in 2020 it still made up only 2,7% of electricity generated.

As Serbia intends to join the EU, it should also be aiming for complete decarbonisation by 2050, in line with EU policy. However, the Serbian government and state-owned electric power utility company Elektroprivreda Srbije (EPS) plan to remain locked in to a carbon-intensive energy system for years to come. Most notably, this will be through the construction of the 350 MW Kostolac B3 lignite power plant, which was ongoing as of November 2022, as well as by deepened dependence on gas, e.g. with the newly opened cogeneration plant in Pancevo. Serbia exports to the EU about 6,8% of the electricity it produces, on average. Between 2011 and 2020 this amounted to an annual average of 2590 GWh.