CLIMATE CHANGE: TIME FOR THE

ENERGY COMMUNITY TO TAKE ACTION 1

As Albania, Bosnia and Herzegovina, Macedonia, Kosovo, Moldova, Montenegro, Serbia and
Ukraine prepare the next generation of their energy investments, they face a simple choice -
locking themselves into an antiquated past mired in fossil fuels or aligning themselves with
safe, clean and lower cost energy systems which the European Union itself is building at
present. This is a ‘once in a lifetime’ opportunity to shape inclusive, sustainable and effective
low-cost development pathways for millions of Europeans. Failure to seize this moment will
lead to costly stranded assets, set back development for generations and push these countries
further away from EU membership.

In October 2012 the Energy Community’s Ministerial Council endorsed a Regional Energy
Strategy. On the basis of this, the following year, 34 Projects of Energy Community Interest
were identified. Such a regional strategy has the potential to be a critical guiding light at this
historic moment but revision is essential for this to be an effective beacon and help prevent
costly investments in capacity that will very soon become redundant.

Most Energy Community countries are seeking to increase their coal power generation
capacity, including Bosnia and Herzegovina. Without adequate and clear guidance the real
cost of these investments, which accounts for environmental and climate related externalities,
will have significant impacts on the long-term development of each country. The estimated
CO2 cost of this planned new build adds a further €133-317 million at a €5 carbon price and
€790 million - €1.9 billion at €30.

ENERGY COMMUNITY
The Energy Community was established on 25 October 2005 to align countries on the
geographical and possible membership periphery of the European Union. It creates a pan-
European energy market by uniting the European Union with Albania, Bosnia and
Herzegovina, Kosovo, Macedonia, Moldova, Montenegro, Serbia and Ukraine. In February
2014, membership negotiations were launched for Georgia. Since its original inception,
Bulgaria, Croatia and Romania have joined the EU and membership negotiations with Serbia
and Montenegro are in progress. The aim of the Energy Community is, as defined in Article 2
of the 2005 Treaty, to:

1
Report for CEE Bankwatch Network "Climate Change: Time for the Energy Community to Take Action".
Published in February, 2015
 a) Create a stable regulatory and market framework capable of attracting investment in
gas networks, power generation, and transmission and distribution networks, so that all
Parties have access to the stable and continuous energy supply that is essential for
economic development and social stability,

b) Create a single regulatory space for trade in Network Energy that is necessary to match
the geographic extent of the concerned product markets,

c) Enhance the security of supply of the single regulatory space by providing a stable
investment climate in which connections to Caspian, North African and Middle East gas
reserves can be developed, and indigenous sources of energy such as natural gas, coal
and hydropower can be exploited,

d) Improve the environmental situation in relation to Network Energy and related energy
efficiency, foster the use of renewable energy, and set out the conditions for energy
trade in the single regulatory space,

e) Develop Network Energy market competition on a broader geographic scale and exploit
economies of scale.

The Energy Community should provide clear guidance on sound, clean and cost effective
investments in signatory countries so that they are aligned with the direction of the EU. This is
vital if these countries will have stronger economic links with the EU as well as membership.
Without this guidance, Energy Community countries would be deprived a fair chance of
successful, cost effective and safe alignment to the EU which would constitute a grave
diplomatic failure on many levels.

The region would be put at an economic disadvantage if it locks in carbon-intensive energy

infrastructure whilst the EU continues to decrease its use of fossil fuels in its energy and
electricity mix. As emission reduction activity intensifies, the EU will face considerable internal
political pressure to introduce carbon content-related border measures to support its
decarbonisation effort. This will create considerable political and economic instability for
Energy Community countries especially if they continue to invest heavily in coal. It is already
the case in California, which has the most aggressive climate change policy in the US. The
California Global Warming Solutions Act (2006) or AB32 requires electricity importers to pay
a carbon cost on their greenhouse gas emissions. California also introduced an Emissions
Performance Standard, applied to all base load generation capacity owned by public utilities, of
499 kg CO2 per kg CO2 per megawatt-hour (MWh). Importantly, electricity imported into
California must also comply with this standard. Should the EU introduce a similar regulation, it
would have significant implications for Energy Community countries, especially those that seek
to export electricity to the EU.
There are two reasons why energy system investments in the Energy Community cannot
diverge too much from those in the EU. Firstly, it leads to incompatibility with the EU energy
system which, increasingly, will be governed by greenhouse gas emission reductions activities,
greater integration of renewable energy capacity, energy savings and greater decentralization
in key markets.

Tackling chronic unemployment, directing regional re-industrialization, improving security of

supply and responding to changing consumer patterns are the main drivers for this
transformation. To this effect, the EU has extended its 20:20:20 targets with an unilateral
framework of climate and energy targets to 2030 which include a 40% reduction in
greenhouse gas emissions, a 27% increase in final energy consumption from renewable
sources and an increase in energy savings between 27-30%. This continues the long-term
trend of emission reductions since 1990 as outlined by the European Environment Agency in
Figure 2.

The second reason concerns growing international momentum towards a global treaty to
address climate change. The main outcome from the Lima round of international negotiations
on the new climate change treaty was acceptance of all countries to take on binding emission
reduction targets called Intended Nationally Determined Contributions (INDCs).
EU 2030 CLIMATE AND ENERGY FRAMEWORK
The historic agreement between China and the USA, on unilateral reductions in greenhouse
gas emissions to 2030 is also significant because China has committed to peaking its climate
emissions to 10 billion metric tonnes by 2030. It will also increase the share of renewables to
20% of final energy consumption. This could also have a bearing on stricter enforcement of the
‘Green Credit Directive’ (GCD), the government’s banking regulation, which encourages loans
to be vetted against social and environmental impacts throughout their financial lifespan.

The China Banking Regulatory Commission, which enforces the GCD, has yet to align its goals
with the new national targets. China is increasingly financing overseas investments in fossil-
fuel powered capacity, including in Energy Community countries. The USA has committed to
reduce its greenhouse gas emissions by 26- 28% to 2030 and boost the share of renewables in
its final energy consumption. Over time, all INDCs are expected to get tighter and tighter to
stay below the two degrees threshold. Energy Community countries will be expected to act on
greenhouse gas emission reduction and on energy transformation at a much quicker pace than
they have at present. Their proximity and interaction with the EU means they cannot avoid
this.

President Jean-Claude Juncker, head of the European Commission, has gone a step further than
the European Council’s October 2014 agreement. Two of his five Vice-Presidents - Maroš
Šefčovič ̌ Vice-President for Energy Union and Jyrki Katainen, Vice-President for Jobs, Growth,
Investment and Competitiveness - have been mandated to make the EU ‘number one in
renewable energy’. President Juncker stated that renewable energy is not just about
“responsible climate policy” but also “an industrial imperative if we still want to have
affordable energy at our disposal in the medium term”. He adds “A binding 30% objective for
energy efficiency by 2030 is to me the minimum if we want to be credible. Transport policy
will also have to make a contribution to these objectives.” The Energy Community Treaty does
not focus on transport issues at present. However, this should not preclude Member Countries
from maximizing the mutual benefits of modernizing their transport sector as well as cleaning
their energy systems.

The EU 2030 framework is based on:

 A significant carbon price which is delivered through the EU Emissions Trading System
(EU ETS). Reform of the carbon market will take two steps. Firstly, a Market Stability
Reserve (MSR) was proposed by the European Commission in January 2014.The MSR
will remove surplus allowances which have dampened the carbon price investment
signal currently oscillating around €6. The European Parliament and leading
governments have come out in favor of starting the MSR in 2017 and moving 900
million surplus allowances directly into the reserve. Modeling by Point Carbon
estimates that these two changes alone will deliver an ETS price of €15 in 2020, €30 by
2025 and €50 by 2030. Secondly, from 2021, the rate at which the ETS cap declines
will be increased to a 48 million tonne annual reduction as opposed to the current 38
 million tonne reduction. No Energy Community country has an ETS in place though this
is a requirement upon entry to EU membership. A carbon price signal, either through
an ETS, tax or regulation, should be applied to Energy Community countries which
have fossil fuel capacity and or are seeking to add CO2 intensive capacity.
 Binding renewable energy targets to 2030 give investors confidence in meeting 2020
targets as well as 2030 targets. EU governments have had more time to prepare to meet
their 2020 targets in comparison to Energy Community countries, some of which
introduced RES legislation as recently as January 2014.
 Energy Efficiency targets are likely to have specific focus on investments in the building
sector. Details are yet to be agreed but there will either be an extension of the obligation
on power generators to invest in energy savings measures or something similar. This is
an area of action that had been underexploited by Energy Community countries.
However, the 35th meeting of the Permanent High Level Group, held on 17 December
2014, agreed that an adjusted Energy Efficiency Directory would be adopted.
Innovative financing mechanisms from the strategic use of EU ETS revenue. Since 2012,
EU governments have been auctioning ETS allowances to polluters mainly in the power
generation sector. In July 2014, €154,934,560 was raised from the auction of
26,222,000 allowances at a carbon price of below €6.A total of €3,933,436,035 has
been raised between 13 November 2012 and 31 July 2014. Some countries, such as
Germany, use 75% of these revenues to support domestic low carbon investments and
the remaining 25% to support international low-carbon investments. It has provided
urgently needed additional financing to countries such as Bulgaria (€101,228,215),
Romania (€225,598,515) and Poland (€322,031,455) that require additional finance
for investments to stimulate growth. By 2020 50% of EU ETS allowances will be
auctioned and more in the period after 2020.
 Additionally, somewhat controversial, financing has been granted to some 10 EU
governments in a series of binding investment agreements between the governments
and the Commission. These countries are allowed to continue giving free EU ETS
allowances to power generators in exchange for modernizing and diversifying their
energy systems with measurable investments in low-carbon technologies and energy
efficiency.
 A further fund, estimated to be in the region of €10 billion, will be established for new
Member States to “improve energy efficiency and to modernize the energy systems of
these Member States, so as to provide their citizens with cleaner, secure and affordable
energy.” Impact of EU climate and energy policies Radical changes have started to take
root within a short period of time. In coal-rich countries such as Germany and Poland,
the commercial benefits of coal-fired power generation have been dramatically eroded.
In Germany, E.ON, one of the largest European electricity producers, split operations
into two companies. E.ON remains as a clean-energy service provider whilst fossil-fuel
assets are wrapped in a new company with considerable liabilities. This was partly
driven by increasing volumes of renewable energy power which removed a customer
base for the company coupled with the cost of natural gas which made it too expensive
to use. In the case of Poland, coal too is uneconomic. The government currently
operates a support system for uneconomic coal plants which has made electricity 20%
 more expensive than Germ year-ahead prices since July 2013. Many EU countries have
introduced additional domestic measures to reduce emissions and increase investment
in low-emission energy capacity. Ireland introduced a carbon tax in 2009 which has
raised over €1 billion and helped to reduce emissions as the economy started to grow
again in 2012. Germany encourages and invests massively in renewables and energy
efficiency, as part of its Energiewende, with an aim to reach its own targets of 40-45%
renewables share and 55-60% energy savings by 2025. Through its Climate Change
Act, the UK took on an ambitious road to decarbonize its economy, setting its own
annual carbon caps and planning to reduce greenhouse gas emissions by 50% from
1990 levels until 2025.

REGIONAL ENERGY STRATEGY TO 2030

The Energy Community’s Ministerial Council, which is the main decision-making institution,
called in 2011 for a Regional Energy Strategy defining “energy priorities for the next years and
setting the actions to be taken in order to tackle the challenges of achieving a market with
competitive prices and secure supplies, saving energy, using less polluting energy sources and
reducing the carbon footprint from the energy sector.” An Energy Strategy was agreed in
2012. It outlines a series of priority actions and is based on three scenarios - ‘Current trends’,
‘Minimal investment’ and ‘Low Emissions/ Sustainable Growth’. The latter requires at least €59
billion investments without Ukraine and €130 billion when it is included by 2030.

The Strategy claims that “complex and costly transition will have to take place in time of an
economic crisis when the available public and private capital is limited and difficult to obtain”
and that intense competition for finance does not favour energy system investments. This is
only true in instances where there is no regulatory framework attracting and directing
investment into low-emission energy systems. However there is considerable private sector,
long-term financing available. The Institutional Investors Group on Climate Change (IIGCC),
which represents over €9 trillion in investor funds, is just one of the voices calling for
governments to provide clear, long-term regulatory frameworks to allow them to invest.
Recently, the IIGCC stated: “Reducing emissions to stay below 2 degrees is going to require
investment in clean energy far beyond the levels seen to date. Institutional investors are willing
and able to play a big role in financing a low carbon economy, but need strong policy which
creates the conditions for this investment.
Timescale is also vitally important. As highlighted above, the EU has extended its targets to
2030 to give investors greater certainty.

An Energy Strategy needs to do the same to allow the hard work some Energy Community
countries have made in establishing legislative frameworks and to reap benefits. Figure 3
outlines existing commitments from countries. It doesn’t highlight the time taken to train
specialists, identify potential capacity, develop project proposals and obtain the required
planning permission. For energy investments that have a lifespan considerably longer than the
six years to 2020, targets until 2030 are essential.

The lack of transposition of EU environmental criteria such as the Birds and Habitats Directive
and the Water Framework Directive as well as social criteria into the Energy Community
Treaty significantly distorts its direction of future investments. Social criteria, as outlined in the
2007 ‘Memorandum of Understanding on social issues in the context of the energy
community’ are vital as they ask for social safeguards to be in place to allow for an inclusive
restructuring of energy sector workforces on Member countries. These social safeguards are
important to help transition high-carbon sectors workers in the Energy Community countries.

Figure 4 highlights the dominance of hydro, coal and gas in the current electricity mix of each
Energy Community country. The EU is phasing out operational and investment subsidies for
unprofitable domestic coal production. Regulation 1407/2002 was extended to 2018 in
December 2010, to allow a gradual reduction in state subsidy in exchange for modernization.
Hard coal mines that are not profitable by 2018 will have to be closed down and alternative
employment found for workers that are to be displaced.

Introducing social and environmental screening in the Energy Strategy will provide effective
investment guidance to new electricity generation to reduce security of supply, climate and
environment considerations. This criteria would have looked unfavorably towards recent
unsustainable investments. For example, between 2006 and 2012 only €18.5 million of the
European Bank for Reconstruction and Development (EBRD) funds were spent on non-
hydropower renewables compared to €254 million on hydro power and €509 million on fossil
fuels. The World Bank, during the same period, has only contributed €50 worth of financing
for renewables, all of which was for hydropower investments. The 2012 public consultation
which led to the Energy Community Regional Energy Strategy highlighted the main barriers to
diversified renewable energy investments as including lack of a thorough “examination of the
sustainability of renewables plans.”

This must be addressed in the revised Energy Strategy.

The current Energy Strategy does not prevent investments which are likely to become stranded
assets. Kalman Kalotay, an economist for the United Nations Conference on Trade and
Development (UNCTAD), stated correctly that the Balkans region is an interesting investment
prospect for international finance from countries like China because “It is a gateway to the
European Union but not yet in the EU and the EU rules don’t apply.” Local civil society groups
echo similar concerns: “We believe that countries of the region should be supported with
development of their energy strategies in line with long- term EU goals”. They consider
essential to “...include the whole range of Directives covering industrial emissions and air
quality, but also energy-related water, waste and habitats legislation if the Energy Community
is to be part of a European energy market with a level playing field for all participants.”

Extending the Energy Strategy to deliver a 2030 vision also means integration of core EU social
and environmental legislation into the region. Otherwise this will significantly undermine
“economic development and social stability” outlined in Objective A and improvement of the
“environment situation” through energy efficiency and renewable energy, as highlighted in
Objective D of the Energy Community Treaty.
ASSESSING ENERGY COMMUNITY COUNTRY
PERFORMANCE
Examining each Energy Community country to determine their investment directions and
proposal solutions to realign with those of the EU. The following elements are applied:

 Carbon pricing: we apply a carbon price of €5 in 2014, €15 in 2020 and €30 by 2025
as projected by Point Carbon. There are many ways in which a carbon price can be
implemented, either through taxation, as is the case in the UK, Ireland and Sweden, or
through an Emissions Trading System (ETS) like the EU ETS, which was launched in
2005. Each contractual party should be allowed to determine which carbon pricing
scheme it prefers. This should not detract from the need for a carbon price to be applied
in each country.
 Assessing CO2 emissions from planned new fossil fuel capacity: Unless stated
otherwise, new capacity is lignite coal. We calculate how much electricity is produced
from one GW capacity per country by dividing the volume of fossil fuel generated
electricity in one year (2012) by the existing installed capacity to ascertain projected
electricity volume. We calculate the potential carbon costs by multiplying current
emissions of electricity production by €5 and €30 carbon prices. To find out the costs of
newly installed fossil fuel capacity we calculate the carbon costs for a period of ten
years.
 Industrial Emissions Directive (IED) and Large Combustion Plant Directive (LCPD):
These are key drivers for investment and change in the European power and industrial
sectors. LCPD applies to combustion plants with a thermal capacity of 50 MW and
above built after 1987. It includes power generation, steel combustion and petroleum
refineries. Emission limits for Sulphur Dioxide, Nitrogen Oxides and dust are applied.
The Joint Research Council concluded in its report that the application of these
directives together with carbon pricing would reduce EU thermal capacity to 65 GW by
2030. Energy Community decision D/2013/05/MC-EnC grants Contracting Parties
the possibility to use, until 31 December 2027, the option of National Emission
Reduction Plans (NERPs). These are an alternative to all plants complying with the
LCPD emission limit values by the end of 2017. Furthermore, an “opt-out” (limited
lifetime derogation) possibility can also be applied between 1 January 2018 and 31
December 2023 for a total number of 20,000 operational hours. This equals to
approximately 2.3 years. That means that if a plant is run at full load, it would already
reach the end of its opt-out period by early 2020. Few Energy Community countries
have implemented these directives leading to social and health costs which contravene
Article 2 of social and environmental aspects of the Treaty.
 Renewable energy targets to 2030: We identify 2030 renewable energy targets in
Figure 6 based on a formula used by the European Commission. The national EU 2020
renewables targets were set on the basis of the 2005 share (2009 for Energy
Community parties) plus a flat-rate increase of 5.5% per Energy Community Party as
well as a GDP-weighted additional increase.
CURRENT TRENDS IN THE ENERGY COMMUNITY
Climate change cost of existing electricity capacity: For all countries that have CO2 intensive
electricity production, a carbon price signal would make the sectors considerably uneconomic.
This cost comes in addition to the cost of meeting requirements to manage local pollutants
covered by the IED and LCPD in Figure 8. Albania is not included because, although it plans
thermal capacity, it has yet to make this operational.

Figure 9a below applies a carbon price of €5, current EU ETS prices, and €30, which is
expected to the be the EU ETS price in 2025, according to Point Carbon. We use IEA data on
installed capacity in 2012 which more accurate than projected 2012 installed capacity which
was used in Energy Strategy scenarios. Projections submitted to the Energy Community
Strategy are presented in Figure 9b.
There is a considerable difference between IEA data and Energy Community Strategy
projections for 2012, with the former indicating that these countries would be paying a higher
carbon price. For instance, the difference between emissions costs at a €30 carbon price would
be of nearly €60 million for Moldova and €90 million for Bosnia and Herzegovina.

Serbia and Montenegro face the most immediate concerns as they are closest to becoming
members of the EU. As EU Member States, they will be required to meet all EU climate and
energy legislation and join the EU ETS. Ukraine’s electricity generation is the most polluting in
terms of greenhouse gas emissions. Due to its geographical proximity to the EU and industrial
trade flows, it faces the highest risk of potential carbon-related border measures, should the EU
decide to pursue this route.

Albania experiences a cost advantage as its power generation capacity is 99% non-fossil fuel.
However, it too will indirectly pay a carbon price if it continues to import CO2- intensive
electricity from neighbors and if it uses its fossil fuel capacity. There is a risk that Albania may
lock-in domestic hydro capacities for export to EU countries, such as Italy and Greece, through
long term power purchase agreements, leaving the domestic consumption to imports.

Moldova has a lower CO2 emission profile because it uses natural gas for about 90% of its
electricity generation.

Cost of new fossil fuel capacity: A carbon price is essential to inform investors of the likely
economic performance of projects. Figure 10a and 10b applies a carbon price of €5, which is
similar to today’s EU ETS price, as well as a €30 price expected by 2025 on projected electricity
production of the new capacity.
*According to on the ground plans - see individual states’ analysis for more details and sources.

**Calculation based on 2012 installed capacity/electricity production ratio (IEA data)

***A draft of Kosovo’s Energy Strategy, dated 2013, indicates 0.6 GW of new capacity will be
built. http://mzhe.rksgov. net/repository/docs/SE_-_Ang_26.12.pdf
In Figures 11a and 11b we combine carbon build and operational costs to project estimated
total costs of planned new capacity. The build cost is based on the 600 MW plant at Sostanj,
Slovenia, which has come online in 2014 at a cost of €1.4 billion. We selected this because it is
one of the most recent plants to be built in the EU and provides a good indicator of likely costs
to be borne in the Energy Community countries. For gas-fired power plants, IEA estimates costs
at €350-650 million/GW and we used an average of €500 million/GW. Carbon costs are
based on the 2025 carbon price (€30), as an indication for the years 2020-2030 and a
projected amount of CO2 emissions for a 10-years period.

There is a difference between the Energy Community Strategy new build projections and those
from more recent national energy strategies or on the ground plans. For example, Serbia
forecasts 2.5 GW coal and 0.5 GW gas in the Energy Community Strategy, which would cost
€10 billion, while in reality Serbia is planning coal projects totaling 2.85 GW and a gas CHP
project of 450 MWe.
Albania again could increase its regional competitiveness as it plans to build wind and solar
rather than fossil fuel capacity. It has an added incentive to meet new renewable energy targets
which will allow it to avoid paying for electricity imports, provided it uses this capacity for
domestic consumption, especially as higher carbon prices are likely to be factored into future
supply.

Bosnia and Herzegovina and Serbia’s new build plans are extremely costly when factoring in
the estimated total carbon and build prices. According to on ground plans, Bosnia and
Herzegovina’s cost just over a 10-year period will be over €7 billion, whereas Serbia’s cost will
be almost €11 billion (see Figure 11a). Due to regulated energy prices in Bosnia and
Herzegovina, power producers are likely to face significant economic disadvantages as they are
unable to pass on CO2 and local pollution costs to consumers. The same negative impacts will
apply to other countries that have regulated electricity prices.
Identifying the opportunity cost of renewable energy: Figure 12 below shows that replacing
planned new fossil fuel capacity with wind and solar will lead to an over achievement of our
projected 2030 targets for all countries planning to invest in new fossil fuel capacity. Other
renewable energy sources such as biogas, local sustainable biomass cogeneration and pumped
electricity storage based on hydropower should also be considered by Energy Community
countries.

Column A is the final electricity consumption in 2009 based on data from the Energy
Community Strategy. Column B identifies electricity generated from installed RES in 2009. In
column C we assume that the planned fossil capacity is met through RES (GWh). Column D is
the assumed final consumption of electricity in 2030 (Column A + Column C). Column E
indicates the potential volume of electricity generated from RES in 2030 (Column B + Column
C). In Column F we show that, by replacing planned new build coal capacity with wind and
solar capacity, each country will overshoot our projected targets.
We identify how much wind and solar capacity is required to deliver the projected electricity
from planned new fossil fuel projects in Figure 13. Hydro was not included as we deem it to be
sufficiently exploited in the region and additional capacity does not increase security of supply.
We have calculated the capacity of wind and solar needed to generate as much electricity as
the planned new fossil fuel-fired plants. In our calculations, we have taken into account the
number of sun daylight hours/year in each country and a load factor of 75% for solar (for
example, in

Bosnia Herzegovina there are 1,886 sun daylight hours/year and we assume that a solar plant
would only generate electricity in 75% of this time) and we used a 28% load factor for onshore
wind farms.
• Cost of renewables: To enable comparison of the different investment opportunities, we
compared the cost of installing new fossil fuel capacity against the cost of installing wind or
solar capacity, in Figure 14. At today’s prices, one GW of wind costs €1.23 billion and one GW
of solar costs €1.35 billion. These costs related to capacity installation, not operational costs
and maintenance. Furthermore, we do not take into account observed trends for falling
production and installation costs that have been experienced over the last decades.
The cost of new build coal capacity is artificially cheaper than wind or solar because the
external costs of coal are not included in the Energy Community Strategy calculations. In
Figure 15 we compare, over a 10-year period, total costs of new fossil fuel capacity against
total costs of meeting that same capacity through wind or solar. Wind is the cheapest way to
cover electricity from new installations. There are geographical and cost limitations to
achieving the RES potentials which were not included in this analysis. We recommend more
detailed analysis of RES potential in each country.

Impact of energy efficiency: The key benefit of energy efficiency is to reduce overall final
consumption, which provides a direct financial return for countries with high electricity
import dependency. None of the Energy Community countries has exploited energy efficiency
potentials. This omission places significant financial burdens on national economies, industries
and households.

In its 2013-2014 Implementation Report, the Energy Community identifies substantial annual
electricity losses due to outdated infrastructure in all its member countries. Reducing these
energy losses also displaces some of the burden from energy imports, which is an additional
cost on these countries. In order to determine the cost of electricity losses, we calculate the
electricity price of one MWh. The price of generated electricity in each country is a weighted
arithmetic mean of their respective energy mixes and the levelised electricity prices for each of
the electricity source (based on Germany and the UK case studies). This gives us a crude
financial measure of energy savings’ benefits, as outlined in Figure 16. Wasteful usage is
omitted because we were unable to quantify for the whole region.
Total savings would be over €1.5 billion across the Energy Community. Ukraine’s economy
pays over €1 billion annually in electricity losses, Serbia €215 million and Albania €67
million.

This preliminary overview puts into perspective the challenges faced by the Energy Community
countries in terms of electricity mix and direction of investments on the short and mid-term.
The Energy Community Strategy needs to factor the total cost of new build fossil fuel to allow
for a genuine comparison with non-fossil fuel capacity. This would redraw the three scenarios
outlined in the Energy Community Strategy.
BOSNIA AND HERZEGOVINA
Energy and electricity mix analysis

Coal accounted for 69% of electricity generation in 2012 with the remaining 30% emanating
from hydropower. The 1,775 MW total installed capacity comprises four thermal plants
located in Tuzla (779 MW), Kakanj (578 MW), Gacko (300 MW) and Ugljevik (300MW).
Tuzla and Kakanj were built in the mid-1960s whilst Gacko and Ugljevik were built in the
mid-1980s. Additional investments are required for Tuzla and Kakanj plants to comply with
the IED, especially with respect to dust, flue gas desulphurization (FGD). Only Ugljevik is
forecast to introduce FGD in 2017. The cost of NOx, SO2 and PM externalities in 2012 was
€2,244.7 million. Application of the LCPD and IED would result in almost all of the plants
closing earlier than 2030.

Bosnia and Herzegovina’s plans are to move even further into the use of coal, with 1.95 GW
capacity to be added in the future, through the following units: Tuzla 7 (450 MW), Kakanj 8
(300 MW), Ugljevik III (600 MW) and Banovici (300 MW). Unfortunately, the lack of strong
regulatory guidance leads the investment in potential stranded assets. A good example is the
€550 million 300 MW thermal plant in Stanari, northern Bosnia, investment financed by the
China Development Bank (CBD) through a €350 million loan.

Real costs of these new investments, particularly environmental and climate change costs, will
significantly influence long-term development of Bosnia and Herzegovina. During the lifetime
of these new thermal power plants (minimum 40 years), it is expected that the Energy
Community will put a price on pollution through the so called ETS Scheme (Emissions Trading
Scheme), or during that time BiH will join the EU.
In any of the two cases, Bosnia and Herzegovina will have to pay for CO2 emissions, which is
why construction of new thermal power plants will result in significant costs for the country.
Price for CO2 from planned thermal power plants is estimated between 47 and 282 million
EUR on annual basis (at price of 5-30 EUR per tonne of carbon dioxide, but higher price is
expected before 2025).

Renewable energy potential

Bosnia and Herzegovina has a relatively high share of renewables of 24% in final energy
supply. This is based on a high use of hydropower for electricity generation and the use of
firewood for heating and cooking purposes at about 4% of the energy balance. However, the
highest potential for future deployment of RES is within small hydropower although this is
experiencing growing construction and development resistance from local communities.
Residents set up a 24-hour watch to prevent work continuing on small hydro plant on the
River Zeljeznice near Fojnice, a much valued area of considerable beauty, biodiversity and
tourism potential. Similar resistance was experienced in the Ljuta Canyon and Medna hydro
plant near the Sana river source. Aside from hydro power, Bosnia and Herzegovina has
planned to build 270 MW of wind in the short term and additional 420 MW later on
(estimated 2,000MW potential), as well as solar and geothermal energy, but current low
energy prices hinder the development of renewables and the comparatively low feed-in-tariffs
for electricity from RES are not a motivation factor for foreign investors.

As the European Commission has shown in its last report on Bosnia and Herzegovina, the
complexity of the administrative structure, the lack of cooperation between Entities and the
division of jurisdiction within the sector ‘hampers the comprehensive countrywide promotion
and development of the renewable energy sector’. Moreover, the government has not provided
any action plan for the implementation of the compulsory renewable target of 40% by 2020.
The Commission expressed its worries that the country is falling behind meeting its obligations
under the Energy Community Treaty.

Energy efficiency potential

Another challenge for Bosnia and Herzegovina is the fact that equipment, technologies and
plants are outdated and they generate huge energy losses of up to 40%. Other sources of
inefficiency are the district heating and the housing sector. Because Bosnia and Herzegovina
applies a regulated energy price which is kept artificially low, power companies will have to
absorb all CO2 costs without being able to pass on costs to consumers. This dramatically
increases the costs burden of the new investments.

If we take into consideration that Bosnia and Herzegovina will have to pay for CO2 emissions
from new coal and gas based power plants, it is reasonable to conclude that wind power
energy is more cost effective than fossil fuel energy, if sufficient number of locations for
construction of wind power plants is identified.
The estimated price for construction of fossil fuel power plants and CO2 emission price during
first 10 years of operation (2020-2030 with estimated price of €30 per tonne of carbon
dioxide) exceeds €4 billion, while the equivalent price for wind power plants would be
approximately €3,37 billion (regardless of the fact that more wind plants would be needed to
produce the equivalent amount of electricity).

At the same time, it should be taken into consideration that annual cost of electricity loss in
Bosnia and Herzegovina amounts to 1,496 GWh or €56 million due distribution losses in the
distribution network (not taking into account wasteful final power consumption and bad
insulation).

Recommendations for Bosnia and Herzegovina:

1. Energy efficiency improvement: By failing to design a clear strategy to improve energy

efficiency, the government and households will keep losing huge amounts of money.
€56 million that would be saved by reducing the annual cost of electricity losses would
facilitate development of solar and wind energy plants. Construction of new plants
would not only open up possibilities for job creation, but would produce significant
savings in the health system that would arise from investments in energy efficiency of
households, industry and transport. This provides a clear incentive for investment in
such localized solutions.

2. Diversification of Development Plans for Renewable Energy Sources (RES): Most

current Plans for new RES rely on hydropower. While such plans may support the
energy storage system, over-reliance on just one form of energy will increase the risk of
supply shortages. The governments have the obligation to find a balance between
energy from wind, solar, sustainable bioenergy, geothermal and other renewable
sources. Diversification into wind and solar is essential to meet 2020 and 2030 targets.
Displacing the planned fossil-fuel capacity with renewable energy capacity would save
a quarter of building costs (roughly €1 billion) if replaced by wind.

3. Putting a price on CO2 emissions: BiH will at some point probably join the EU and will
then have to introduce the Emissions Trading Scheme-ETS within which CO2 tax is to
be paid for each tonne of CO2 emitted. The dominance of lignite coal in the electricity
mix and regulated energy prices carry a significant cost. In 2012, 9,841 GWh were
produced in coal and gas fired power plants, resulting in 9,523,930 tonnes of CO2
emissions. At a €5 carbon price this would cost €47,619,650 whilst a €30 carbon price
would cost € 285,717,900. Although BiH is still not obliged to charge CO2 emissions,
introduction of emission price monitoring system would help both the government and
investors to evaluate the real costs of new investments.
4. Impact of the Industrial Emissions Directive: The plants need to comply with the LCPD
(Large Combustion Plant Directive)by 2017 and the IED (Industrial Emissions
Directive) by 2027. At the same time, all new thermal power plants need to comply
with the IED by January 1, 2018. This will create costs due to necessary investments,
but it will also produce savings due to lower health costs.

5. Planned new capacity: Bosnia and Herzegovina plans to add 1.95 GW coal-capacity,
which would entail a construction cost of over €4.5 billion. Electricity production
would increase by 9,694 GWh and the total cost of emissions would reach nearly €300
million/year in a €30 carbon price scenario. The Energy Community Strategy mentions
2.5 GW (2 GW coal and 0.5 GW gas), which would entail even higher costs. At the
same time, considering that Bosnia and Herzegovina plans to continue to export
electricity, including export to EU countries, the authorities of Bosnia and Herzegovina
should take into account the possibility that the EU will tighten regulations relating to
the import of energy from fossil fuels, as part of a policy of avoiding the so-called.
Exporting pollution.