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BRIEF

Kosovo's Energy Crisis and the World Bank's Proposed Support

April 16, 2013


KEY HIGHLIGHTS

  • In 2011, the World Bank Group provided a total of $8.2 billion in financing for energy development projects worldwide. It assists countries in expanding energy capacity, especially where energy shortages block growth and development, as in Kosovo.
  • Wherever possible, the Bank Group supports sustainable, low-carbon energy development. Its renewable energy portfolio increased from $3.1 billion between fiscal years 2008-09 to $4.9 billion in 2010-11. During this same period, the renewable energy proportion rose from 20% to 23%.
  • The Bank also finances a relatively small number of coal projects. It does so only where rigorous analysis finds that cleaner energy options are not available, or not viable. The analysis uses criteria outlined in the Bank’s Operational Guidance Criteria for Screening Coal Projects under the Strategic Framework for Development and Climate Change (SFDCC).

Kosovo's energy crisis is slowing economic development.

With an annual per capita GDP of €2,600, Kosovo is one of Europe's poorest countries. More than a third of its citizens live below the poverty line and almost half of its population is unemployed (three out of four people under the age of 25 are unemployed). A major obstacle to Kosovo's economic growth and development is inadequate and unreliable electricity, with frequent power outages disrupting manufacturing, education, and health services.

Without reliable, affordable electricity, Kosovo's businesses cannot invest, operate and create jobs; hospitals and schools cannot function fully or safely with frequent power cuts; citizens suffer indoor air pollution from burning wood for heating and cooking. Basic services that people in developed countries take for granted cannot be offered. Kosovo's electricity supply options are constrained by limited availability of renewable resources, ageing and unreliable power generation plants, supply shortages in the Balkans that limit Kosovo's ability to import electricity, and an absence of any natural gas resources or pipeline to import gas.

A recent, donor-funded study concluded that the Balkans region should develop a regional gas-ring, aggregate the limited demand of the countries in South East Europe (SEE), and develop anchor-load for making gas infrastructure viable and gas supply contracts commercially viable.

The Energy Community Secretariat, the World Bank, and European multilateral development banks are in the initial stages of discussing further analytical work that would help countries develop commercial arrangements for (a) gas-to-power generation on a regional basis through a regional public-private-partnership and (b) a joint venture for aggregating the demand of Balkans countries, negotiating gas-supply agreements, and providing the necessary credit enhancements to support private sector investment in gas pipeline infrastructure.

Financing and development of gas infrastructure is unlikely to become available in the medium-term, although it will be an important part of the long-term energy supply options for Kosovo and other countries in South East Europe. 
 
Kosovo wants to take a comprehensive approach to developing and modernizing its energy sector.

The Government of Kosovo wants to ensure adequate and reliable power for its citizens and improve energy efficiency nationally. Kosovo also wants to shut down a 40-year-old power plant, called Kosovo A, which is one of the worst point sources of pollution in Europe.
 
Many studies of Kosovo’s energy program have been conducted with donor assistance over the last ten years.

Recently, the World Bank conducted a study titled Development and Evaluation of Power Supply Options for Kosovo that draws on several reports and models projected use of the installed capacity of all power supply options by Kosovo.

This Options Study enabled comparisons and relative evaluation of the economic and environmental costs of various energy sources’. For more details on the options analyses conducted by the World Bank and other organizations, click here (available soon).

In order to meet Kosovo’s current and future energy shortages, the Options Study considered efficiency improvements, demand-side management, construction of small hydropower plants and other renewable sources, trading power with Albania, importing electricity from neighboring countries, and additional thermal generation.

The analysis finds that the lowest-cost reliable energy supply that would meet Kosovo’s baseload and peak demand is a mix of thermal and renewable energy sources.

The energy mix under consideration by the Government of Kosovo would include a 300-MW hydropower plant, 60 MW from small hydropower plants, and 395 MW in wind, biomass and biogas-fired power generation as well as a proposed 600-MW coal power plant that would enable Kosovo to shut down the Kosovo A Power Plant and eliminate supply shortages that cripple Kosovo’s economy.

The World Bank’s Options Study also compared projected economic and environmental costs for the 600-MW lignite plant, a 575-MW natural gas plant, and a 575-MW fuel oil plant. The study found that inclusive of the environmental costs the lignite plant was lowest-cost option.

The World Bank has looked carefully at Kosovo’s energy options and the economics of each. There is considerable potential for energy efficiency and potential for renewable energy. These should be developed in addition to providing the firm baseload capacity Kosovo needs.

The World Bank Group is working with Kosovo to address its pressing energy needs in a comprehensive way.

The World Bank-funded Environmental Clean-up of Kosovo A project has been under implementation for more than four years and has helped revegetate the ashdump associated with an old power plant and remove hazardous chemicals from an old coal-gasification plant.

IFC is supporting Kosovo’s energy sector through the Privatization of Kosovo’s Electricity Distribution and Supply Project to upgrade the distribution networks in accordance with international standards and improve the efficiency of billing, collection, and customer service.

In the World Bank Group’s proposed Country Assistance Strategy for FY12-15, a range of energy sector investments would be supported:

  • A proposed $32 million Energy Efficiency and Renewables Project in FY13 would include investments in improving energy efficiency of public buildings, financing and credit enhancement for biogas and solar water heating for households, and for solar power and small hydropower. The project will also finance studies on the potential for wind power, and geothermal.
  • A Sustainable Energy Development and Diversification Project (US$2.5 million, FY12) would help prepare environmental and social impact assessments, air quality monitoring, the preparation of a low-carbon energy growth strategy and a Greenhouse Gas Inventory (using an ongoing UNDP study), and assess Carbon Capture and Storage potential.
  • In addition to investments in energy efficiency and renewable energy, the Government of Kosovo has requested that the World Bank provide a Partial Risk Guarantee (PRG) for private sector investments in, and financing of, the proposed new investments in the Kosovo Power Project that would comply with European Union environmental standards and enable the closure of the Kosovo A Power Plant.

With an investment in closing Kosovo A and rehabilitating Kosovo B, the government anticipates marked improvements in air quality.

Calculations provided by the Ministry of Economic Development indicate that after the start-up of a new plant, the closure of Kosovo A and rehabilitation of Kosovo B, dust emissions would be reduced by more than 90%, SOx and NOx by around 70%, and there would be no increase in carbon emissions per unit of electricity produced. 

When the Bank is asked by a country to get involved in a coal project, accompanying investments are encouraged in renewable energy, energy efficiency, and capacity building.

As part of the due diligence and preparation of a PRG for this project, a number of studies will be conducted on the technical, financial, environmental, and social aspects of the project. Regular consultations with stakeholders will be held as well.

An independent Expert Panel has assessed the proposed project and determined that it meets the Bank’s screening criteria in Development and Climate Change: A Strategic Framework for the World Bank Group. The Expert Panel report was released at the end of January 2012 and public discussions on the report were held in Pristina in February 2012.

The three distinguished energy experts that comprise the independent Panel are Dr. János Beér, Dr. Wladyslaw Mielczarski, and Dr. Derek Taylor. In their review of the project, they noted Kosovo’s fragile, post-conflict economy, its limited capacity for growth, and they agreed that the supply of secure and affordable electricity is vital for its development and stability.

The Expert Panel unanimously agreed that the project met with the six criteria (below), subject to certain modifications and recommendations to the Government:

  • There would be a demonstrated development impact of the project, including improving overall energy security and reducing power shortage. The new power plant, together with a modernized Kosovo B, should result in increased system reliability and fewer power shortages.
  • Assistance is being provided to identify and prepare low carbon projects. This work includes an assessment of renewable energy resources, a prefeasibility study for small hydropower, updating an existing feasibility study for a hydropower plant at Zhur, assistance for studies on carbon capture and storage (CCS) and a proposed credit for energy efficiency improvements and renewables.
  • Energy sources are being optimized and considerable efforts are being made to improve energy efficiency. There is a need for increased efforts to reduce energy demand and the technical and commercial losses related to electricity supply and to promote energy conservation.
  • After full consideration to viable alternatives it was agreed that the project would represent the least cost option for Kosovo, including taking into account environmental costs. The Expert Panel also agreed that renewables should play an important role in the future energy mix with the construction of the Zhur hydropower plant, additional small hydro and wind power, sustainable biomass and biogas. The Panel noted that significantly increased renewables and, eventually, natural gas would require a more regional approach to energy markets and more interconnections with neighboring countries than are available today.
  • The project would be designed using the best appropriate available technology for high efficiency. The Panel strongly urges the Government of Kosovo to encourage bidders to provide a plant with the highest possible efficiency rather than simply meet a minimum efficiency level.
  • Environmental externalities are being incorporated in project analyses. The Panel noted the importance of establishing baseline emissions, especially for carbon dioxide and other greenhouse gases, to quantify the expected benefits. This will require greater monitoring capabilities. The Panel also recommended that studies continue to assess the impact of possible future carbon price variations on the economics of lignite-fired power plants in Kosovo.

The Panel also strongly encourages the involvement of civil society in the various processes whenever this is possible through openness and transparency and fully developed consultation processes.

The provision of the World Bank Group loans and guarantees is subject to satisfactory appraisal by the Bank Group, compliance with all applicable requirements of the Bank Group, including those related to the social and environmental issues, review and acceptance of the ownership, management, financing structure, and transaction documentation by the Bank Group, and the approval of the management and Executive Directors of each Bank Group institution in their sole discretion.