Energy transition in Western Balkans – how to move forward

Authors: Mirza Kušljugić, professor at the Faculty of Electrical Engineering at the University of Tuzla, and Damir Miljević, energy transition consultant and member of the Regional center for sustainable energy transition (RESET)

The countries of the Western Balkans (the region) have not genuinely accepted the energy transition, especially not the electricity sector decarbonization, as a strategic direction for the development of the energy sector. Even though they have started drafting their integrated national energy and climate plans, the countries have not made formal decisions on decarbonization or reached social consensus on the matter. Political declarations such as the Sofia Declaration were made under pressure from the international community, primarily the European Union (EU).

Reforms and transition plans implemented so far are mainly the result of external political influence and economic factors. Internal actors respond to the pressure reactively, seeking to maintain the status quo and the existing relations within the sector, and especially to prolong the process of abandoning coal in electricity generation.

This is why the results of the reform process so far have been disappointing[1]. One of the consequences has been the lack of much needed investment in the past 20 years, especially in electricity generation facilities, even though thermal power plants, which are the backbone of the sector, are obsolete and inefficient.

The existing power generation portfolios, based on coal-fired thermal power plants, can no longer guarantee the security of supply

The ongoing energy crisis, which has severely hit most countries in the region, suggests that the existing concept o development applied in the electricity sector, as the most important segment of the energy sector, is not technically, economically or environmentally sustainable. Moreover, the existing power generation portfolios, based on coal-fired thermal power plants, can no longer guarantee the security of supply. It is clearly necessary to devise a new concept of development for the sector, which would be based on environmental and climate sustainability.

A transition without a vision

The recently published Barometer of the Countries’ Readiness for Sustainable Energy Transition report, titled Perfect Storm – Uncontrolled Decarbonization of the Electricity Sector of the Western Balkans [2], warns that it is not possible to manage the energy transition without a clear and universally accepted vision of development. The survey included over 130 prominent experts and activists from Bosnia and Herzegovina, Serbia, and Montenegro.

The prevailing opinion among the respondents is that the energy transition is an inevitable and desirable process which needs to be initiated immediately. Wind power plants and solar photovoltaic power plants are identified in the survey as the key technologies, while the integration of these variable energy sources and demands for an inclusive and just transition are seen as the biggest challenges.

The biggest challenges in the energy transition are the integration of variable energy sources and demands for an inclusive and just transition

Respondents also agree that institutional actors (governments and parliaments) and key economic actors (power utilities) are not ready for a sustainable energy transition. The key actors in the sector lack a vision of sustainable development, plans for fossil fuel phaseout, methods to tackle energy poverty, and especially a model for the economic restructuring of coal regions. Interestingly, respondents have different views on how fast the transition should be carried out (particularly the pace of coal phaseout) and who should be the key actors in this process.

However, there is a prevailing view that coal will be abandoned by 2050 at the latest, and that the speed of the transition will be determined mainly by external factors. Besides the external factors, it is expected that the transition will be driven by governments (especially in Serbia), power utilities (especially in Montenegro), and large and small private investors (especially in Bosnia and Herzegovina).

The current situation, causes and consequences

Over the past several months, all weaknesses of the existing electricity systems across the region have come to light, jeopardizing the sector’s functioning and even the security of supply. The main cause of the energy crisis is problems in the operation of coal-fired power plants. Overall, the thermal power sector in the region is faced with problems either in mines (e.g. Kolubara, Bitola, Kreka) or in thermal power plants (e.g. TPP Pljevlja and TPP Kosovo).

Given that these weaknesses are structural, it is to be expected that problems with electricity generation at thermal power plants will persist and that the security of supply will remain under threat during the upcoming winter.

Due to administered pricing, retail prices for electricity in the region are, paradoxically, lower than wholesale prices

The Western Balkan region generally has a power deficit in the November-April period, mainly as a result of the use of electricity for household heating, which remains cost-effective thanks to low, subsidized prices. Due to the administered pricing, retail prices for electricity in the region are, paradoxically, lower than wholesale prices.

This gap was particularly wide in recent periods when the price on regional power exchanges jumped to record highs – the day-ahead market has seen wholesale prices up to 10 times higher than retail prices. Most countries were forced to import the missing energy at prices as high as those and/or resort to power supply restrictions. The energy crisis’ long-term consequences in the region can only be assessed after prices in Europe have stabilized and when the heating season is over. It is to be expected that the debate around the pace of the electricity sector’s decarbonization and the security of supply will dominate in the preparation of long-term development plans.

The energy transition and response to the energy crisis in the EU

The current energy crisis has shown that the European market directly influences the region’s wholesale markets. It is therefore necessary to take into account the EU’s plans for the energy sector development when devising solutions for overcoming the energy crisis, especially in drafting long-term development strategies.

In general, the European Commission recommends stepping up the energy transition as a response to the problems that caused the crisis in Europe (especially the rising prices of natural gas) as well as to the heavy dependence on gas imports from Russia. The EU’s new plan, called REPowerEU[3], also envisages diversifying gas supply routes, speeding up the roll-out of renewable gases, and replacing gas in heating and electricity generation.

The EU plans to speed up the energy transition, especially the development of renewable energy capacities

The plan is therefore to accelerate the decarbonization process, particularly the development of renewable energy capacities, in line with the European Green Deal or the Fit for 55[4] package. In the short term, it is possible that the operating life of certain nuclear power plants and coal-fired thermal power plants will be extended. In general, the plan is to increase the focus on the use of heat pumps as well as energy storage, including thermal energy storage for heating and cooling [5][6].

System flexibility enabling the integration of high shares of variable renewable energy sources is becoming the key factor for the success of decarbonization.

How to move forward

The energy transition should remain the basis of the concept of the energy sector development. The electricity sector’s decarbonization, namely the reduction and eventual phaseout of fossil fuels in electricity generation, should take priority in the preparation of integrated energy and climate plans.

For this reason, it is necessary to reach a consensus on a coal phaseout date as well as a trajectory (speed and dynamics) of the reduction of greenhouse gas emissions. In this context, it necessary to establish an emissions trading system (ETS), which would help avoid the impact of the planned carbon border tax (Carbon Border Adjustment Mechanism – CBAM) on electricity exports to the EU.

Although each of the countries will develop its own plan for decarbonizing electricity generation, appropriate for their current situation and potentials, it is necessary to apply a region-wide approach to planning. To utilize individual countries’ comparative advantages, it is necessary to establish day-ahead and intraday markets and connect them with the EU’s single market.

In order to ensure the cost-optimal balancing of variable renewable energy sources, it is necessary to link the national balancing markets, both within the region and with Europe’s harmonized balancing market[7]. Preliminary analyses of advantages of a regional approach to the balancing of electricity production from wind power plants and photovoltaic power plants have already been conducted, and they can serve as a basis for a broader expert debate[8].

Particular importance should be attached to policies and measures incentivizing energy generation for self-consumption

Regardless of the chosen dynamics of decarbonization, each country should immediately implement policies and measures for an inclusive and just transition, respecting the goals of energy decentralization and democratization. Particular importance should be attached to policies and measures incentivizing energy generation for self-consumption and active participation of citizens and businesses in financing the market-based production of electricity from renewable sources.

Incentivizing citizens and businesses to invest their own funds in the production of electricity for self-consumption, and to deliver any surpluses to the grid, will enable speeding up the decarbonization  process, reduce the need for the construction and financing of new large-scale facilities for the production of electricity from renewable sources, cut transmission and distribution losses, and at the same time increase the security of supply and ensure lower electricity bills for citizens and businesses.

Energy cooperatives and energy communities should be the backbone of the energy sector’s decentralization and democratization

Given that citizens and businesses have considerable financial potential, it is necessary to create the conditions to mobilize their assets, locked in savings accounts, through equity investments and participation in the construction of large-scale power generation facilities. This will contribute significantly to the sector’s democratization. Energy cooperatives and energy communities should be the backbone of the energy sector’s decentralization and democratization in local communities, which, along with decarbonization, should help reduce energy poverty as well.

Energy poverty, which is becoming an increasingly important issue in the region, and the issue of a just transition and the mining regions’ restructuring must be shifted away from the domain of social policy and put at the heart of new transition and developmental policies. These issues must be addressed quickly in order to ensure a sustainable development, an unimpeded transition process, and a just transition.

There is an urgent need for establishing a dialogue at the national and regional level that would involve experts and the public

Given that countries in the region are lagging far behind their neighbors in efficient energy use, increasing energy efficiency in the business, construction, and transportation sectors is becoming a key element of a successful energy transition. Increased energy efficiency will help improve the competitiveness of national economies, lower the costs of doing business, reduce living expenses, and prevent the spread of energy poverty.

At the same time, it will reduce the need for the construction and financing of new energy capacities as well as countries’ dependence on energy imports, which, in turn, will contribute significantly to strengthening energy sovereignty.

Finally, there is an urgent need for establishing a dialogue at the national and regional level that would involve experts and the public in order to seek ways to overcome the current crisis and come up with new/innovative concepts of the further energy sector development, while taking into account climate and environmental requirements as well as the need to ensure the security of supply. The energy transition makes it possible to fulfill all these key requirements in sustainable development planning.