Challenge
The Energy Community was formally created by the Treaty of Athens, which was effective in mid-2006 and grouped together several Balkan countries that had been at war only a few years before. Its key objectives are to: (i) create a stable framework for energy investments that are essential for economic development and social stability; (ii) develop a regional energy market that can eventually be integrated into the European Union’s (EU) internal market; (iii) enhance the security of the energy supply; and (iv) improve the sector’s environmental performance.
Creating a regional energy market is a long-term, complex, and sophisticated undertaking involving many political, technical, economic, and social issues. This was even more the case with the Energy Community, where member states had to overcome deep-seated, mutual antagonisms and eventually sacrifice some measure of control over their national energy markets. It was further complicated by the need to fully unbundle their energy markets where previously only vertically integrated monopolies existed, introduce sound regulatory systems, liberalize energy markets by allowing consumers to choose their own suppliers, and start the process of gradually eliminating below-cost retail energy prices. All of these actions were perceived to be infringements on national sovereignty or comparative and strategic advantages. At the same time, there was a lack of available financing for investments in cross-border transmission, the debottlenecking of national transmission systems, and the construction or refurbishment of the large power plants that have a critical role in ensuring adequate supplies and overall system stability.
Approach
The Bank supported the European Commission (EC) and the prospective Energy Community beginning in mid-2002 through analytical support and lending. Its Review of Electricity Supply and Demand in Southeast Europe (2003) and the World Bank Framework for Development of Regional Energy Trade in South East Europe (2004/2006) for the first time analyzed and laid out the rationale for increasing the regional energy trade. The Regional Least-Cost Generation Investment Study(2004/2006) looked at the entire region to determine the location of the next power generation investments. When it became obvious that major financial resources were needed to establish the regional market, the Bank decided in January 2005 to provide regional investment support of US$1 billion through the Adaptable Program Loan (APL) program. The APL was intended to provide flexible support and operate both horizontally (regionally) as well as vertically (more than one APL for each country over the program period). Countries became eligible for an APL once they met the Energy Community treaty’s basic conditions.
To date, US$714 million equivalent has been lent through 12 APLs to Albania, BiH, FYROM, Montenegro, Romania, Serbia, and Turkey. The projects provide financing for high-priority power transmission and transmission-related investments, and the rehabilitation of hydropower assets and system power plants, essential for meeting peak demand and system balance, along with technical assistance. Kosovo was unable to benefit from an APL but received $10.5 million in technical assistance for the development of a private sector-owned, new lignite-fired power plant as per the Regional Least-Cost Generation Investment Study. The Bank has also continued its analytical support.
Results
One immediate result of the APL was to send a powerful signal to the EU, the Energy Community, and other international financial institutions (IFIs) that the World Bank was putting major resources behind its goal of supporting the Energy Community’s development, along with streamlined internal procedures and a basic set of conditionalities. As a result, other major lenders also accelerated their lending for this purpose.
Typically, each APL achieved several or all of the results listed below, which ultimately benefit all 73 million energy consumers in the region:
Improved conditions for transborder energy trade. InFYROM, construction of an interconnection to Greece has improved conditions for a transborder electricity trade. This resulted in a 400 percent increase in power transit volumes from 840 GWh in 2008 to 3,371 GWh in 2010, and a more efficient regional supply structure that utilizes surplus capacity in Bulgaria and Serbia during the summer (when Greece’s consumption peaks) and surplus capacity in Greece during the winter when consumption peaks in the central Balkan countries.
Debottlenecking of internal congestion points (i.e., enhancing capacity to enable more power to flow). In FYROM, construction of a substation in Skopje increased power flow there by 80 MVa during 2008–11, thus removing an internal bottleneck. In Serbia, the creation of a separate Transmission System Operator and strengthening of the subtransmission system (nine substations were built, the first since the 1990s)were key steps in establishing and operating a reliable regional transmission system. In Turkey, three new regional control centers helped the Transmission System Operator improve system controls, incorporate a growing capacity of widely dispersed renewable energy generators into the grid, and integrate Turkey into the EU network. In Albania,the program helped rehabilitate three key substations at the weakest points in the grid, thereby improving system reliability, particularly in the southern part of the country.
Enhanced power supplies and system stability. In Turkey, the wholesale electricity market was designed and implementation started in August 2006. As of December 2011, over 25 percent of electricity consumption was being transacted through this market, which has over 500 participants, and private generators (including renewable energy generators) have been able to get 15–25 percent higher prices for their electricity than the feed-in tariff for renewables (2010 compared to 2006). This, and a generation capacity expansion of 11,400 MW, triggered a significant increase in supply from 121 to 192 TWh (in 2004 and 2010, respectively). These factors helped improve the system’s stability and the country’s energy security as a whole. InAlbania, the APL contributed to improved grid system stability, enabling an increased energy flow. Grid transfer capacity increased from about 5 to 7 TWh, and regional exchanges of power increased from 2 TWh in 2010 to 3 in 2011.
Increased supplies of cleaner power through the rehabilitation of critical plants. InRomania, the working life of the 510 MW Lotru hydropower plant (the single most important source of ancillary services to the Romanian power system) was extended by at least 30 years, thus enhancing system stability, improving conditions for transborder energy trade, and increasing the clean power supply. In BiH, the APL enabled four thermal power stations to improve their environmental performance in pollution control, ash dump rehabilitation, and wastewater treatment, and helped improve hydro-dam safety by ensuring that BiH’s three power companies hired dam safety consultants.
The results achieved by the International Development Association (IDA) APLs are described in the box below.
IDA Box on results
The IDA APLs in Serbia, Albania, and BiH will close by June 30, 2012. Results achieved are:
Albania. The full rehabilitation of three critical substations at the weakest points in the transmission grid improved grid stability, increased transfer capacity from 5 to 7 TWh, and increased regional exchanges of power from 2 to 3 TWh from 2010 to 2011.
BiH. The APL improved the environmental performance of four thermal power stations, initiated measures to improve dam safety (the appointment of dam safety consultants, whose suggested safety measures will be financed by the European Investment Bank (EIB)), strengthened the capacity of the regulatory agencies (which issued regulations, tariff methodology, and actual tariff adjustments), and established rules of market operation. The environmental components (air pollution control, ash-dump rehabilitation, wastewater treatment, etc.) will help bring the power plants in compliance with EU directives on large combustion plants, while demonstrably improving local air quality. For example, at the Kakanj power plant, emissions of particulates decreased from roughly 350–500 mg/nm3 in 2008 to 21 mg/nm3 in 2011 (the EU limit is 50 mg/nm3) as a result of the project. The project also financed the first phase of the recultivation of a depot that stored some 6 million m3 of ash and slag over 60 years. This will improve management of the depot and enable the disposal of another 14.5 million m3 (sufficient for another 40 years of operation) of ash and slag that would otherwise have to be taken to a new location.
Serbia. Creating a separate Transmission System Operator (EMS) and strengthening the subtransmission system by building nine substationswere key steps in establishing and operating a reliable regional transmission system. Approval of the new energy law is a major milestone in laying out the minimum conditions for bringing private investment to power generation.
Bank Contribution
During FYs 2005–12, the Bank helped to deepen regional integration and energy market development by providing US$586 million (seven APLs) from IBRD and $128 million (five APLs) from IDA. In Albania and BiH, these IDA credits were leveraged through parallel financing by other IFIs.
The Bank also provided analytical support either from its own resources or from the Energy Sector Management Assistance Program (ESMAP) and/or the Public-Private Infrastructure Advisory Facility (PPIAF) under Bank-managed studies. Most influential have been theGeneration Investment Study (financed by the EC but managed by the World Bank), the SEE Regional Gasification Study (2009, comanaged and also cofinanced by the KfW Bank), theCaspian Development Corporation Report (2011), and the South East Europe Wholesale Market Opening Report (2011). The conclusions of these studies were endorsed by the Energy Community at the highest levels and they are likely to result in major regional investments.
The SEE Regional Gasification Study advocates the creation of a regional gas ring with combined cycle-gas turbine plants constructed on it to improve energy efficiency and reduce pollution. This proposal has been designated a regional priority.
The Caspian Development Corporation (CDC) would enhance the diversity of the European gas supply by enabling Turkmenistan and Azerbaijan to sell large volumes of gas to the EU and the Energy Community. The EU, Azerbaijan, and Turkmenistan are currently negotiating a treaty to build a Trans-Caspian Pipeline System to bring Turkmen gas to Europe.
In October 2011, the Energy Community approved a Regional Action Plan for the Wholesale Electricity Market in South East Europe, which would constitute the EU’s eighth electricity region. The proposals would bring transparency and liquidity to the market, including for the allocation of transmission capacity through auctioning.
Partners
IBRD worked very closely with the EC and the Energy Community Secretariat, both of which have a central coordinating role in regional market creation. The Bank participated—and continues to participate—in all important meetings and forums convened frequently by the secretariat, along with other major IFIs such as the EIB, the European Bank for Reconstruction and Development (EBRD), and KfW, and bilateral donors such as the U.S. Agency for International Development (USAID) and the Canadian International Development Agency (CIDA). While EIB, EBRD, and, to a lesser extent, KfW focused their resources on lending, USAID, CIDA, and KfW provided important analytical support on issues related to cross-border transmission and, in the case of KfW, the regional gas market.
There was a high degree of complementarity between the Bank’s analytical support and the work of these partners. The Generation Investment Study (2004) was managed by the Bank and financed by the EU, and the SEE Regional Gasification Study (2009) was comanaged by IBRD and KfW and financed by PPIAF/ESMAP and KfW. Indeed, most analytical support provided by the Bank was financed by PPIAF and ESMAP. The APL itself was particularly effective at leveraging funds from other IFIs, as it galvanized them into action and increased their lending programs for similar investments of regional importance. In a number of cases (Albania, BiH), other IFIs also provided parallel financing for the Bank’s APL programs in individual countries.
Moving Forward
The development of the regional energy market is a long-term, complex undertaking, further complicated by the need to comply with all EU directives and regulations in this field. Beyond attracting investment financing—from the private sector in particular—the Energy Community is currently addressing the following principal challenges: (a) implementing the Regional Action Plan for the Wholesale Electricity Market, including the creation of a regional day-ahead market and the transparent and efficient allocation of cross-border transmission capacity; (b) integrating gas transmission lines into a regional network, the Energy Community Gas Ring; (c) rehabilitating old power plants to meet environmental standards by the treaty’s 2017 deadline and replacing some of them with combined cycle-gas turbine plants; (d) implementing the national energy efficiency action plans that the member states have prepared and approved; and (e) adapting legally binding national targets for renewable energy in line with the EU’s Renewable Energy Directive and meeting those targets. Success requires increasing the relative independence of energy regulators, eliminating distortions, and progressively phasing out regulated prices.
The changing membership and eastward expansion of the Energy Community poses special challenges. Original contracting parties Bulgaria and Romania joined the EU in 2007 and Croatia is expected to join in 2013. Originally observers, Moldova became a contracting party in 2010 and Ukraine in 2011. Georgia became an observer in 2007 and Armenia in 2011. Meeting the treaty’s requirements requires new members to “catch up” and implement required measures even faster than the original members. Energy Community institutions, especially the Energy Community Secretariat, provide support for this challenge.
Beneficiaries
The creation of a regional energy market will provide benefits to all energy consumers in the member countries by ensuring a cleaner and more stable supply of energy at competitive prices. Most of the transmission network and system power plant improvements go unnoticed by consumers. In the case of the rehabilitation and environmental retrofitting of large fossil fuel-fired power plants, however, the results can be dramatic and highly visible. Stjepan Tomic can see the chimney of the Kakanj power plant in BiH from his backyard and remembers when the plant spewed so much ash that it covered his village:
“There was a lot of dust and sometimes when the chimneys were firing, ash particles fell like snow on those near the power plant. You could even see footprints in the dust on the road, and the dust was very noticeable on rooftops,” he said, adding, “There is a lot less dust now.”
The Kakanj power plant is being reconstructed through a World Bank project to improve the environmental performance of four coal-fired power plants and the safety of dams. The Kakanj emissions control system is the first of its kind in the Western Balkans. Another innovation is the placing of emissions monitors in several public areas in the nearby town and suburbs, so that citizens are kept informed
