Western Balkans clings to coal [Gas in Transition]

Tensions have been rising in recent months across the Western Balkans; the result of longstanding challenges including political instability, nationalism, corruption and geopolitical competition. It is little wonder then that the region is struggling to make progress in realising an energy transition.

With vested interests digging in, coal remains the overwhelmingly dominant energy source. All the countries of the region are clinging to the black stuff, despite urgings from the EU to get to work. Even the signing in 2020 of the Sofia Agreement, which obligates the six countries to align with the bloc’s Green Deal to achieve carbon neutrality by 2050, appears to have done little to accelerate the process.

It is the task of the Energy Community to try to push the EU’s energy market rules and principles across the region, driven by the ambition of the six states to join the bloc. But economic and political realities make that an uphill task.

“Disparities between the EU and Western Balkan countries on energy are only getting bigger, with many of them still addicted to highly-polluting coal power stations that provide cheap electricity as well as revenues to governments and the local population,” Energy Community director Janez Kopac said last year.

Regional generating capacity may be old and polluting – the 16 coal-fired plants in the region famously produce more pollution than the 250 inside the EU –  but free of demands to pay for emissions via carbon taxes and heavily subsidised, it also produces power extremely cheaply.

That has opened the way for highly lucrative exports to the EU. And given the strong links between politics and these businesses, that means a quick turnaround is not on the cards.

“They’re milking them until the bitter end,” Kopac claims.

“No country in the region is doing anything serious in terms of the energy transition, because the political and oligarchal power structures are not in favour,” states Branimir Javanovic, an economist at The Vienna Institute for International Economic Studies (WIIW). “There’s nothing in it for them personally and the public good doesn’t matter. They’re making too much money in energy trading.”

Meanwhile, the Balkan six is making hardly any headway in developing renewable energy sources (RES) such as solar and wind, despite the evident potential in the region. According to Energy Community data, total renewable energy capacity at the end of 2020 stood at just 1.6 GW, and around half of that is small hydro.

“The expansion of non-hydro RES is facing significant regulatory and political obstacles,” says E3G, a European think tank focused on the political economy of climate change.

However, there is hope that change could be on the way. The region is under pressure to join the EU’s Emissions Trading System, while Brussels also intends to institute a carbon border tax (CBAM) from 2026. Both measures should wipe out the profitability of power exports from the region’s coal-fired plants and thus deflate the political resistance to the transition.

The bloc is not only offering the stick, however. The EU also agreed in October to put €30bn ($34bn) on the table as part of the Green Agenda Action Plan.

Dirty deals

Whether these push-and-pull tactics will be enough to wean the Western Balkans off coal, however, remains to be seen.

The urge to cling to coal is so strong that not only are many of the countries failing to shut down old thermal plants, but they are planning to spend billions on building more facilities to exploit the region’s lignite reserves in the coming years.

Perhaps the only one of the sextet making any real progress is North Macedonia. The country recently shunted its coal phase-out date back by three years to 2030, but that still puts it ahead of at least five EU countries. Skopje has announced several new gas and RES projects to replace the fuel.

To some extent this is the result of a higher share of private interest in the country’s energy landscape, says Javanovic, although around 70% of the country’s installed capacity is still controlled by state-owned company Elektrani na Severna Makedonija (ESM). He contrasts the situation with that of Serbia, where the power industry is dominated by Belgrade.

Yet the economist also insists that North Macedonia’s progress is largely yet to make it off paper. “Skopje likes to tell everyone that it is the regional leader in the energy transition,” he says, “but in reality it has done nothing.”

Coal-fired generation has fallen in recent years, to around 60% in 2019, but the shortfall has been made up mainly via imports, rather than the development of more sustainable energy sources.

Although many projects have been announced, analysts worry that progress on the ground is likely to remain slow because the private companies involved are controlled by local politicians and oligarchs who are busy making money from energy trading, which is more lucrative than investing.

However, at least North Macedonia is talking with ambition about the energy transition. Montenegro last year cancelled plans to build new coal capacity but its announced phase out date of 2035 left many disappointed.

Elsewhere, the topic is barely mentioned, say analysts. Even Albania, whose capacity is made up almost entirely from hydropower, remains reliant on coal because it imports electricity from the neighbourhood.

Bosnia and Herzegovina and Serbia remain heavily dependent on coal, and there is no serious discussion of the issue in these countries, where the power industry remains entirely in state hands.

Belgrade has made it clear it has little time for the push towards sustainability, say analysts, with coal providing around two-thirds of electricity generation, and the rest coming via big hydro. And it’s planning to expand the coal fleet. Financed by China, the Kostolac lignite plant is due for a 350-MW expansion, with the nearby Drmno open-cast mine also set to grow.

However, mounting social and financing pressure does appear to be having some effect even here. Late last year, the government ordered state-owned utility Elektroprivreda Srbije (EPS) to suspend the construction of a new 350-MW unit at the Kolubara plant.

Similar pressures hang over Bosnia and Herzegovina’s plans to build several new coal-fired units. China had to step in to rescue the long-delayed plan to add a 450-MW at the Tuzla power plant after US giant General Electric walked away.

Hot potato

Yet, at the same time, political strife is mounting in Bosnia and Herzegovina. The challenge for its future as a functioning state and risk of civil war clearly makes significant progress towards sustainability unlikely.

Such tensions weigh on the quality of governance around the region. The close relationship between politics and business is a particular point of weakness is pushing the energy transition forwards.  

These are often the same people, says Javanovic, and they do not want to lose control of the money flows that the status quo provides.

The lack of political will is reinforced by the fact that coal is a hot political potato.

On the one hand, coal mining plays an important economic role across the Western Balkans. Energy independence is also highly prized due to nationalism and the lack of regional cooperation that produces, meaning countries in the region are keen to continue to lean on their own lignite deposits.

On the other hand, power prices are a highly sensitive social issue. “Energy poverty and high electricity bills are major problems in the region and these issues hold substantial political leverage,” E3G points out.

All of which leaves state money pouring into coal across the region in the form of subsidies.

“There is enormous cross-subsidisation going on, with large transfers of income going directly from the coal power plants to households, which makes the coal link with society harder to break. And of course, all this cross-subsidisation keeps the social peace between the population, the coal industry and the coal miners,” states Kopac. “This linkage will break one day, but politicians are trying to postpone this moment for as long as possible.”

Plugging into gas

While these pressures make the challenge of the energy transition all the harder in the Western Balkans, the need to start adapting in order to move closer towards the EU is having some effect.

The prospects of using gas as a transition fuel have risen as pipeline and LNG projects bring major international gas flows supplies closer to the region. Given that there are hardly any functioning gas distribution networks in the region, households are unlikely to be big consumers. But gas-fired electricity production is viewed as promising by some.

Even though Montenegro also relies largely on coal and hydro, and has no access to any gas market currently, it has prepared legislation for plugging into the gas grid – either via the Ionian Adriatic Pipeline (IAP), a mulled LNG terminal, or its own offshore blocks which are now starting exploration. That has Pristina planning to build up to three gas-fired power plants.

The launch of Balkan Stream brought large gas supplies to Serbia and Bosnia and Herzegovina at the start of 2021. Belgrade is particularly keen to use gas as its go to substitute for coal. President Aleksandar Vucic has promised Serbs that they’ll be able to spend the winter wandering around their houses in T-shirts once he starts serving up “the cheapest gas in Europe”.

Further supply routes are now planned. With the EU picking up the bulk of the tab, the 1.8 bn m³/year Nis-Dimitrovgrad-Bulgaria interconnector will link Serbia to Bulgaria by the end of 2023. The route will carry gas to the under-served south and east of the country.

Yet despite the evident enthusiasm, there are significant risks attached to these gas projects.

On the one hand there is geopolitical risk, with the US frowning upon the increasing appetite for gas in a region dominated by Russian supply. At the same time, investments could easily turn into stranded assets.

“There’s a problem in investing huge amounts in gas infrastructure in the region if these countries are then set to head towards EU membership,” says Javanovic. “It’s not a permanent solution clearly.”

That could be part of the reason that Serbia is mulling a move to lift a moratorium on nuclear power that was enacted following the Chernobyl disaster. While an actual project looks to be many years away at best, Belgrade said in November that it has discussed construction of a plant with Russian state agency Rosatom.

Untapped potential

Despite the gap in power production threatened by the coal phase out, and the difficulties attached to getting gas into the region to serve projects that can then keep pace with EU requirements, the development of RES is progressing slowly.

The countries in the region talk a good game at times, but projects tend to struggle to make it off paper, with state support schemes erratic. That’s despite the evident potential offered to solar and wind power projects by the sunny and coastal climate.

Many countries in the region prefer hydro power. While reliance on hydro allows Albania to maintain a coal-free generation profile, it also brings its own issues. On top of the environmental concerns that big hydro projects carry, they have also diverted financing away from RES. Until 2017, it was only hydro, which has installed capacity of around 2,300 MW, that enjoyed renewable energy incentives from Tirana.

But although that limitation has now lifted, its effect appears to persist. Overall solar capacity increased by just 2 MW to 23 MW last year. Hydro power capacity increased by over 230 MW. Still, Albania now reportedly has solar projects with a combined capacity of 570 MW in the pipeline.

Likewise, other members of the sextet appear to remain suspicious of the decentralised nature of solar and wind energy production.

Bosnia and Herzegovina is focused on hydro as a solution to its dearth of renewable projects. And although the effects on the immediate environment continue to provoke strong public resistance, solar and wind continue to lag badly.

By the end of 2020 only 10 MW of solar photovoltaics had been installed in Kosovo, and despite promising ambitious solar and wind projects, state-controlled utility Kosovo Energy Corporation (KEK) continues to mull modernisation of its coal-fired capacity, alongside ambitious hydro projects, as the solution to the energy security issues emissions reduction will bring.

Just 4% or so of Serbia’s electricity comes from wind and solar, but the government claims to have grand ambition to raise that share. A draft Economic Reforms Program (ERP) eyes the construction of 3,000 MW of wind power and 8,300 MW of solar.

State-owned power utility Elektroprivreda Srbije (EPS) is already working on developing a 66 MW wind farm on the ash dump next to the Kostolac lignite plant, and reportedly has the space on such land across the country to build more turbines, as well as 300 MW of solar.

However, given Belgrade’s track record and evident preference for coal, gas and nuclear. the political will to secure the €9bn in investment to fulfil the full plan could prove difficult to pin down.

Yet despite the deep difficulties that the energy transition faces in the Western Balkans, there is optimism that the course is inevitable now that the ball has started rolling. Even if it might take a while.

“I am confident the clock cannot and will not be turned back,” Deputy Director of the Energy Community Secretariat Dirk Buschle said in January. “The Energy Community will not become some kind of a carbon reservation in Europe. Its contracting parties are smart and innovative enough to adapt rather than to be dragged along towards net zero.”