Western Balkans need to integrate markets for easier energy transition, funding

The Western Balkans are going through the energy transition together so a joint approach makes funding green energy and the coal phaseout easier, according to Deputy Director of the Energy Community Secretariat Dirk Buschle and a group of experts who spoke to Balkan Green Energy News. However, financing is still far from sufficient.

Agora Energiewende is implementing a project called Western Balkans Energy Transition – towards a Balkan Green Deal, showcasing the economic, financial and energy security benefits arising from the European Green Deal framework to the countries in the region which are heavily relying on coal. Balkan Green Energy News used the opportunity to analyze the progress in the energy transition for its readers.

We spoke to Deputy Director of the Energy Community Secretariat Dirk Buschle, Christian Redl and Sonja Risteska from Agora and Dardan Abazi, senior researcher at the Institute for Development Policy (INDEP) in Prishtina. He offered a glimpse into the challenges Kosovo* is facing.

Our interviewees agreed that the electricity markets in the region need to be integrated to lower the balancing and flexibility needs as renewables get deployed, thus cutting consumer costs. As for the effects of the ongoing energy crisis in Europe and beyond, they said it made it clear the expansion of green energy should be accelerated, but also pointed out that the fossil fuel sector must pay the bill for its social impact.

No going back

“I am confident the clock can not and will not be turned back in the contracting parties’ energy transition. 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,” Buschle stressed. He added one of the key elements of the transformation is the impact of the changes on workers and the people in coal-dependent regions, though he acknowledged that existing financing tools still aren’t sufficient to mitigate the blow.

Financing can be obtained through donors and attractive loans from international financing organizations

Another common point is that carbon pricing benefits society, as it relieves exporters from paying the European Union’s planned border tax and boosts public funds for incentivizing renewable energy and green innovation. The system is being introduced through the Carbon Border Adjustment Mechanism or CBAM.

In line with the EU’s strategy, the Energy Community Secretariat and Agora Energiewende are strongly recommending a managed reduction of coal use to zero. The two organizations have pledged to assist the countries of the region in the process, including the introduction of carbon taxes, and help them get external funds on top of the EU’s Economic and Investment Plan for the Western Balkans. The idea is to get donors and attractive loans from international financing organizations.

Green scenario excludes fossil fuel subsidies, implies transparency

“The contracting parties will have to make choices as to how to spend their own public resources. This includes revisiting subsidies for fossil fuels, and more generally the future-proofing of investments to avoid sunk investments that will not be viable in a green scenario,” Buschle warned. The transition can’t get on track without stable and transparent market governance, he underscored.

The top Energy Community official said improvements in the market design should be focused on switching to less costly support schemes than feed-in tariffs. Renewable energy facility operators must “assume balance responsibility at predictable costs”, which calls for the creation of liquid and undistorted short-term markets, he asserted.

Auction schemes are being developed throughout the region to increase competition in the bidding for state support with the idea to cut expenses, ultimately for consumers. But renewables deployment also hinges on overcoming technical issues and conducting reforms.

Legislation is on track in Western Balkans

The positive side is that the Energy Community contracting parties recently endorsed the Renewables Directive (REDII) and continue to upgrade the legal framework, Buschle pointed out. Albania, Montenegro and North Macedonia were trailblazers in introducing auctions and alternatives to feed-in tariffs, in his view.

“Serbia adopted one of the best renewable energy laws across Europe last year, and is about to follow suit with tendering for new capacities. The others will follow. The region starts tapping its full potential in wind and solar, and may become even more successful in doing so than more saturated markets in Europe, if contracting parties stay the course,” Buschle stated.

The prohibition of state aid significantly narrows the possibilities for financing new coal

Asked about the effect of delays in the reconstruction of the Pljevlja coal-fired plant in Montenegro on the region’s energy transition, the Energy Community official noted the treaty establishing the organization in 2005 already envisaged a coal phaseout. State aid prohibition significantly narrows the possibilities for financing new coal, as recently shown in the Tuzla 7 case in Bosnia and Herzegovina, he stressed.

The secretariat has launched relevant infringement procedures and will continue to do it systematically, Buschle said.

Energy crisis brought challenges for transition process

Agora’s Project Manager for Southeast Europe Sonja Risteska pointed out the contracting parties have the common goal and obligation to join the EU’s internal energy market, hopefully by 2030. She said her organization is facilitating a dialogue on the transition away from coal within the Western Balkans and with their neighbors in the EU and Southeastern Europe.

Dirk Buschle acknowledged that the debate may currently be overshadowed by the impact of the pan-European energy price surge. He estimated the situation in the region was exacerbated by outages in aging coal-fired power plants.

Buschle: The crisis exposes a lack of investments by public utilities for decades, which is not only the responsibility of managers but also of authorities shying away from market and price reform

The crisis reveals flaws and rebuts some common myths in the energy sector philosophy in the region, according to Buschle. “This includes the belief that the supply cycle from domestic generation to domestic consumption at low prices based on cross-subsidization works in the long term. There is no defying basic economics, and they suggest that the real costs need to be compensated, and that this must include investment in future-proof technology and systems. The crisis exposes a lack of investments by public utilities for decades, which is not only the responsibility of managers but also of authorities shying away from market and price reform,” he underscored.

Promoting the reliance on domestic natural resources and reducing dependence on imports are natural reflexes in such a situation, Buschle explained. But if it leads to a comeback of market monopolization, national autarchy and reliance on coal and lignite, such reactions cause an unsustainable budgetary impact and will not provide shelter for the next crisis, he said. “My home country, Germany, paid a high price for trying to resuscitate coal after the 1970s oil crisis,” he warned.

Communities depend on support to overcome crisis, decarbonization costs

The participants in the discussion with Balkan Green Energy News expressed the belief that local communities need support to overcome the economic and social costs of decarbonization and the crisis as well.

On his part, Dardan Abazi from INDEP said it is necessary that the authorities in Kosovo* establish a fund for consumers in need. “Imports at very high prices affect the reduction of investments and sometimes even the lack of energy. Therefore, investments in new generation projects are very important for dealing with these crises,” he said.

“Polluter pays” approach increases consumer awareness and care for the environment, according to Dardan Abazi from INDEP

Kosovo*, which was forced last month to roll out systematic, temporary electricity outages, should also invest in energy efficiency through the Economic Revival Package and accelerate investments in district heating as soon as possible to reduce electricity demand, in Dardani’s view. He also cited the lack of market liberalization and of a one stop shop for energy upgrades of homes as obstacles to building green energy capacities.

The future of the energy system there is still under debate as a gas pipeline proposal failed, a coal plant project was canceled and the reconstruction of existing coal plants is uncertain. Abazi said some of the potential solutions would be market integration with Albania, support for prosumers, the inclusion of taxes for users of fossil resources and a carbon tax.

The “polluter pays” practice will increase consumer awareness and care for the environment, the expert opined. Carbon pricing is one of the tools that need to be rolled out through broad reforms in the Western Balkans, Risteska pointed out. The group of countries has advantages over other EU trading partners: the CO2 border tax will be applied for the power sector only in 2030 and only if a number of reforms stated in Article 2.7 from the regulation are not implemented, but there is funding available for achieving that, she underscored.

Revenue from carbon taxes and CBAM are intended only for social, environmental and climate purposes

Regional cooperation is absolutely necessary to share the burden of the coal to clean switch, according to Risteska, who stressed the efforts must be supported financially and through know-how by the EU, Energy Community and some of its largest trading partners like Germany.

As for CBAM and the contracting parties’ obligation to devise carbon pricing mechanisms, Dirk Buschle said such revenues have to be directed into clearly defined social, environmental and climate actions.

Future energy mix depends on individual countries’ potentials, system costs

The debate is still ongoing on the technical aspect and the preferred models for decarbonization. Senior Associate for European Energy Cooperation in Agora Energiewende Christian Redl expressed the belief that renewables, particularly wind and solar power, are the main pillar.

“We need several flexibility options, with hydro storage and grids being important existing ones. We will need new storage, batteries for short-term, and hydrogen for long-term, seasonal storage,” in his view. Redl added gas plants have a role for capacity and peak load operation, not for baseload generation.

All new gas power plants must be designed to switch to hydrogen as fossil gas should be out of the picture in two decades

As fossil gas also needs to eventually be abandoned, likely by 2040, green hydrogen would take its place in gas power plants, he stressed. It implies new gas plants need to be hydrogen ready.

“There are of course many options to look out for and with gas being a fossil fuel and its imminent phase-down, the attractiveness of alternatives such as storage and hydrogen is increasing. Of course, here we also have the matter of system costs and the different potentials, depending on the country, to deploy batteries, pumped storage or renewables-based hydrogen. The expectation is not to have the same power system in Bosnia and Herzegovina and North Macedonia, for example, but to understand that a net zero power system is a realistic opportunity in an integrated power market,” Redl said.

Well connected electric power systems with geographically widespread wind and solar can absorb more renewables and lower the balancing and flexibility needs

He explained a geographically widespread expansion of wind and solar power helps mitigate the effects of weather variability, bolstering the need for regional integration. “When no cross-border trading options exist, hours with high domestic wind and solar generation would require that generation from renewables be stored or curtailed in part. Altogether, an integrated power system can absorb more renewables and lower the balancing and flexibility needs, thus lowering consumer costs,” Redl underscored.

Agora Energiewende showcased in an earlier study that an interconnected Southeastern Europe has lower flexibility needs and increased system reliability.