From Rehabilitation to Reform EC support to the energy sector European Agency for Reconstruction May 2006.

From Rehabilitation to Reform

EC support to the energy sector

European Agency for Reconstruction

May 2006

European Agency for Reconstruction 2

Energy: EC funding of €879m 1999-2006

Serbia 4.4 104 108 67 76.7 43.6 25.5 24.5 453.1Kosovo 21.6 249 19 62.4 14 12 21 3.9 403.2Macedonia 13.5 0.3 13.8Montenegro 3 2.6 2 1.5 9.1Total 29.0 353.0 140.2 132.3 92.7 55.6 48.0 28.4 879

European Agency for Reconstruction 3

Energy: three phases of support

• Crisis management• Emergency imports

• Rehabilitation• Power plants• Coal mines• Transmission and distribution

• Reform• Creating a market based energy system• Facilitating investment• Developing a regional energy market for SEE

European Agency for Reconstruction 4

Energy: starting situation for the Agency:a regional crisis

• 10 years of little or no investment, but heavy use

• Conflict damage

• Mines were unsafe and operators disregarded the long term consequences to keep supplies running

• Serbia kept cost of electricity artificially low (one fifth of economic costs)

• A vacuum of experience in Kosovo

• Output was in decline; power cuts were common

European Agency for Reconstruction 5

Energy in Kosovo: rehabilitation

• Emergency electricity imports 1999-2001 €48 million

• Overhaul of Kosovo B power plant €174 million (including repairing of fire damage in 2002)

• Rehabilitation of coal mines€74 million

• Rehabilitation of electricity transmission & distribution €19 million

• Refurbishment of district heating systems €8 million

• Management training to energy company KEK, Turnaround Management appointed

• EU funds have made a difference:

• Kosovo B Power Plant availability and capacity increased, life expectancy extended

• Managers and operators better trained

• Environmental impact improving• Efforts underway to creating

sound institutions and a sustainable future

European Agency for Reconstruction 6

Kosovo B fire damage and repair

European Agency for Reconstruction 7

Energy in Serbia: rehabilitation

• Electricity imports 2000-2002 €67 million

• ‘Energy for Democracy’: €45 million

• 37% of thermal power capacity overhauled €148 million

• Rehabilitation of transmission lines & distribution network - €25 million

• Coal mines – equipment and spares €24 miliion

• EU money makes a difference:

• Productivity improved at major power plants

• Life expectancy of major power plants extended

• Power cuts reduced to zero in 2004

• In the coal mines, overburden removal up 70% from 2000 to 2003

• Energy Law passed, prices increased close to cost recovery levels, collections improved

European Agency for Reconstruction 8

Energy: Montenegro and FYR of Macedonia

• Montenegro

• Support for the Government in energy sector reform

• Support to develop energy efficiency policies and programme

• Assistance & training for the electricity utility EPCG

• Delivery of electricity distribution equipment to critical sub-stations (Podgorica, Berane, Niksic)

• FYR of Macedonia

• Repairs to the power distribution and transmission

• Support for the establishment of the independent Energy Regulatory Commission

European Agency for Reconstruction 9

Energy: the regional context

• Energy Community in South East Europe: Treaty was signed in Athens on 25 October 2005

• Treaty has major significance for the region:• creates a single electricity and gas market

covering whole of SEE and EU• power plant investments could be cut by one -

third if regional market fully operational• will increase economic integration and stability

European Agency for Reconstruction 10

Supporting reform and the regional market

• Agency working closely with DG TREN• Strengthening regulation• EAR providing assistance to independent energy regulators in Serbia,

Montenegro, Kosovo, FYR of Macedonia• Encouraging Unbundling• EAR providing TA for establishment of separate transmission system

operators in Serbia, Kosovo, and Montenegro• Promoting reform• EAR providing capacity building to Ministries in Serbia, Kosovo,

Montenegro • Revenue collection in Kosovo remains a serious problem: a project is

underway to assist KEK• Projects in Serbia and Kosovo to protect the environment• Assistance to promoting energy efficiency in Serbia (Energy Efficiency

Energy created) and in Kosovo and Montenegro

European Agency for Reconstruction 11

Supporting reform, assisting investment

• Facilitate investment• Close collaboration with the EBRD, the EIB, World Bank and

KfW• EAR funded preparatory work secures €67 million from

EBRD/ KfW for Tamnava West lignite mine; and €57 million from EIB for transmission system in Serbia

• Mapping future needs with Least Cost Investment Plan in Serbia

• Support for investment in new power plant and new mine in Kosovo with studies and support for rehabilitation of urgently needed mining equipment

• Creating conditions for private sector investment

European Agency for Reconstruction 12

EU and Energy: from rehabilitation to reform

• In summary, EU support for the energy sector in South Eastern Europe has:

• Stabilised the supply situation• Helped to improve the financial viability of the utilities

and the conditions for needed new investments• Helped to mobilise substantial IFI investment funds from

EBRD, EIB, and KfW• Much work has been done, but more remains on reform,

unbundling, regulation: all crucial for creating conditions for private investment in this capital intensive sector

• Supported the Regional Energy Market

European Agency for Reconstruction 13

From rehabilitation to reform: a teamwork effort