Don't Wait for the Lights to Go Out

December 23, 2010

Loup Brefort

This article was published in NIN weekly magazine on December 23, 2010
Author: Loup Brefort, Country Manager for Serbia, The World Bank

Charles Dickens put it a long time ago: “There is nothing so strong … as the simple truth”. The big question is not whether the citizens of Serbia can “handle the truth”.  I strongly believe they can. The challenge is to make the truth available to them in a bare manner so they can make their own conclusions. So, let me spell it out from the very beginning.  Serbia will have to restructure its power system – including increasing tariffs – or it will face growing and expensive power imports to avoid power shortages. And we’re talking about a short-term horizon of a few years.

Why is this important for you? Of course the quality of everyday life will be affected if Serbian citizens and businesses suffer power shortages.  Power imports will also hurt an already negative balance of trade and put further pressure on the currency. But – maybe even more importantly – it will hit Serbia’s future prosperity. Without a reliable supply of power investors will not choose Serbia. Without new investments there will be no new jobs.  

While in 2005 around 15 percent of companies expressed their concern with electricity in one of the World Bank’s surveys, in 2008 the figure had increased to 33 percent, a jump of 120 percent in just three years! The reduction in economic activity resulting from the economic crisis eased some of these concerns, but respite is only temporary. Energy demand is expected to resume as the country recovers and GDP starts again to grow faster.  
You might think concerns are exaggerated. Well, do you know that 53 percent of generation plants are more than 30 years old? That a quarter of the transmission infrastructure and approximately 45 percent of substations are in a poor condition?  The system operators should be highly complemented for their ability to keep the lights running, in view of the technical challenges they are facing daily with their old equipment.  But the clock is ticking and concerns over the reliability and efficiency of the power system over the medium-term are certainly of concern to would-be investors.
Experts calculated that Serbia would need to invest 16 billion Euros to meet demand reliably in the next decades. Clearly, this is beyond the realm of feasibility to mobilize public resources only in that order of magnitude. But the good news is that sector specialists also believe that, given the right policy conditions, Serbia could attract over 12 billion Euros of private money. There are four pillars which can help create an attractive environment for public and private investment and bridge the looming power gap.

The first need is to improve the financial and commercial viability of the sector. It implies “depoliticizing” the process of tariff setting and letting the energy regulatory agency adjust tariffs to full cost-recovery levels.  Indeed, the gap between existing tariffs and what they should be to cover long term marginal costs has been widening ever since 2007. It is also important to improve consumption metering and ruthlessly fight against energy “theft” which, together, are estimated to have cost the power industry about 100 million Euros in lost revenue in 2009.  Not only does this prevent the existing power companies to finance new capital investments, but it makes the sector unattractive to potential private investors.  

The second pillar concerns the poor and vulnerable.  Comprehensive reform of the electricity sector would lead to increase in prices. This would hurt many vulnerable groups. However, world experience shows that they can be helped in many ways.  For example, they can receive cash benefits or vouchers to pay for electricity. Special tariff can be introduced for them, providing their consumption stays within certain limits, and so on. Of course, only those who pay their bills on time would be eligible.

Third, Serbia needs to develop appropriate legal framework to encourage private investment in the power sector and to play its role in the implementation of competitive wholesale electricity market in South East Europe (SEE) and integration to the EU energy market. When developing regional market, significant savings can be achieved by auctioning when trading. So, transparent contracting when state utilities buy and sell electricity should be made mandatory.

Finally, the last pillar refers to the way we use energy.  The economy uses 2. 5 times more energy per Euro of GDP than Western European countries. High energy intensity reflects the country’s cumulative effect of policies that channeled subsidies to firms, and the population, through cheap energy.    Energy efficiency programs will help buffer the impact of electricity price adjustments, reducing the bills for consumers and making the economy more competitive.

Some of these issues are politically extremely sensitive. And the next year is a pre-election one.  However, if action starts when the “lights go out” – it will be too late. And isn’t “true leadership the art of changing the hard into the possible?”