Attachment-4_BACKGROUND_INFORMATION.pdf

Kosovo Energy Security of Supply (KESS)

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ATTACHMENT 4 – BACKGROUND INFORMATION FOR OFFERORS

Kosovo’s fragile electricity infrastructure poses challenges to the country’s sustained economic growth and welfare of its citizens, as well as to social, political and regional stability. Support to the Government of Kosovo’s (GOK) continuing effort to modernize the country’s existing energy sector is among the highest priorities of the USG. .. Kosovo has potential for growth as an important player in the electricity market in South Eastern Europe. However, improving the security of the electricity supply, while also meeting European market and environmental standards, remains a daunting task.

Hostilities left Kosovo’s electricity sector, once a central component of Yugoslavia’s energy system, in shambles and unsuitable for a small isolated economy. While considerable achievements have been made to improve the electricity supply, quality, and reliability, much improvement is still needed. Significant investment is needed to modernize the existing system and thus ensure reliable and secure energy for the citizens and businesses of Kosovo. This has become more urgent as existing facilities and infrastructure continue to age, becoming increasingly fragile and prone to failure.

USAID’s amended Country Development Cooperation Strategy (CDCS) 2014 - 2018 and the U.S.

Mission’s Integrated Country Strategy (ICS) 2014-2016 have identified energy as an ongoing or growing risk severely impacting the country’s ability to achieve stable, long-term economic growth.

Kosovo’s fragile electricity infrastructure and inability to modernize the system poses challenges to the country’s sustained economic growth and welfare of its citizens, as well as to social and political stability of the new country. Lack of reliable, quality energy was estimated in a USAID-sponsored study to cost businesses approximately 296 million euros annually, money which could have been used to expand production and create employment. 1 According to the World Bank’s 2016 Doing Business Report, which measures the ease or difficulty businesses encounter in their daily activities, Kosovo is ranked 66th overall out of 189 nations. When measuring the ease of getting electricity, the World Bank ranks Kosovo only 124th out of 189 nations, a reflection of the difficulty businesses encounter to obtain a reliable source of energy. Much more improvement in the regulatory and energy environments must occur before Kosovo can realize a robust private sector, including foreign direct investment (FDI).

Undoubtedly, since independence there has been considerable success in establishing GOK institutions that are responsible to create and maintain a favorable business environment for private sector expansion, and for attracting foreign direct investment. However, capacities for formulating and implementing energy sector business-enabling environment policies are still weak or limited.

To address its energy challenges, the GOK formulated an energy strategy that is consistent with the energy sector approach endorsed by the US Government (USG) and World Bank in 2009.2 This approach encompasses five pillars or objectives, which are:

1. Decommissioning of Kosovo A

2. Development of new generation – Kosovo C

3. Promotion of energy efficiency and renewable energy

4. Rehabilitation of Kosovo B to meet EU emission standards

5. Privatization of the Distribution and Supply Division (KEDS) of the Kosovo Electricity

Company (KEK)

Encouragingly, some success has been achieved with the above objectives. With prior assistance from USAID, KEDS was successfully privatized in 2013. The GOK has made significant progress in the New Kosovo Power Plant (Kosovo C) by awarding the Preferred Bidder Status to a private-owned company. The critical stages of negotiating contracts, obtaining financing and Engineering, 1 “Follow-Up Assessment on Impact from Irregular Electricity Supply on Kosovar Businesses”; UBO Consulting, November 2015.

2 Energy Strategy of the Republic of Kosovo 2009 - 2018

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Procurement, and Construction (EPC) are rapidly approaching. However, it may take 5-8 years for the new power plant to start delivering energy to the grid.

Concerns expressed by the civil society and the non-governmental (NGO) community regarding the failure to license and promote alternatives to lignite led USAID to investigate the issues restricting the development of solar, wind and hydropower investments. Despite generous feed-in-tariffs (FITs) in line with other countries in the region, the study identified numerous areas where the current licensing procedures (some in total contradiction with each other) are obstacles to renewable projects. GOK, with support from USAID, is in the process of streamlining approval for renewable energy projects, including establishing a one-stop shop for renewable energy. Kosovo’s Energy Regulator (ERO) recently revised the FITs and extended the period of FIT for wind projects. While a smaller 0.5 MW capacity photovoltaic plant has already been installed and in operation, there are four solar plants with a total capacity of 8.9 MW in the process of getting the final authorization.

ERO has also issued Final Authorizations to construct 78.3 MW of new Renewable Energy Supply (RES) generating capacities.3 18 new plants with total installed capacity of 165 MW have received Preliminary Authorizations (Hydro 89 MW, Solar/PV 8.9 MW, and Wind 67 MW).4

Continued progress on the remaining objectives will contribute to economic growth, environmental stewardship, and European Union (EU) integration by: improving Kosovo’s electricity service;

reducing greenhouse gases (GHG) and particulate emissions of the country’s thermal power generation in compliance with EU emission standards; and increasing Kosovo’s share of renewable energy use.

There remain significant and important hurdles to overcome for the GOK to implement its energy strategy, meet its international commitments, and create a modern energy system. Some of these hurdles include:

• Cleaner base-load production to meet GHG emissions standards as set out in the Large Combustion Plant Directive (LCPD) of the EU;

• Improved energy efficiency; and

• Increased share of renewables in Kosovo’s total energy mix.

Weak Policy and Regulatory Environment for Private Investment Kosovo’s ERO is a critical stakeholder. Accordingly, the ERO has received support from both the European Union and USAID in developing tariff procedures and tariff models, but the ERO urgently needs continued assistance and support in the implementation of its multi-year tariff and the further development of tariff models for KEK and other licensees’ activities, including renewable projects, as well as in the implementation of cost reflective tariffs, given that Kosovo has made international commitments to full-cost reflective tariffs. This will result in increases in tariffs, which will require the GOK and ERO to define affordability issues and revisit tariff bands, while also ensuring the weaker members of the community are properly cared for through a revision of financial support for electricity bills. The recent progress towards re-integrating the north of Kosovo adds the additional complexity of tariffs and losses associated with a market which has been beyond the control of the

GOK.

Energy Coupling with Albania The GOK, recognizing the natural complementarities of its electricity market with that of its neighbor Albania, has been moving forward with a proposal to couple the markets, starting with a new recently completed transmission line between the two countries. The construction of the transmission line is

3 Final Authorization implies that applicants have completed all legal, technical and financial requirements to construct the plants and represents a good indication of likely capacity.

4 A Preliminary Authorization implies that applicants have completed most legal, technical and financial requirements to construct the plants.

Attachment 4 – Page 3 of 4 only one aspect of the coupling which needs to be achieved for the two countries to fully benefit from considerable synergies and improvements in efficiencies on both sides of the border. The development of a coupled energy market with Albania, plus all the changes and activities envisaged at ERO, puts the understaffed institution and its board under considerable pressure.

Slow Progress in Meeting Renewable Energy Targets Given the GOK’s commitment to the international community to introduce at least 26% renewables by 2020, the need to unblock procedures and ensure supporting investment in distribution and transmission as well as generation reserves is becoming critical. Substantial new investment is needed in grid-connected RES projects. Ensuring an environment that is supportive of grid-connected RES project development will be critical in this endeavor. In implementing the provisions of Kosovo’s three primary energy laws that pertain to RES projects, the ERO has a number of detailed regulatory instruments, referred to as “Rules.”5 These Rules regulate the authorization process and provide for the admission of RES generation units into the Support Scheme,6 which regulates access to fiscal incentives such as the feed-in tariffs (FIT), the primary mechanism for financial support for RES projects. However, while structures and processes to motivate RES project development and implementation are there, only 9.6 MW of capacity in RES projects have been put into operation under the new strategy.

USAID has identified a need to further clarify and simplify licensing procedures, which will complement other donor initiatives to support specific projects. Secondary or tertiary energy reserves must be addressed, as required by the regional market, to back proposed renewable energy developments. The planned coupling with Albania will help resolve these problems, but will require the respective countries’ regulators and key stakeholders to collaborate to achieve harmonized procedures and regulations.

Investments in Power Generation A major challenge to enacting the GOK’s energy strategy is that the scale of needed energy reforms is beyond the financial means of the GOK. For example, rehabilitation of Kosovo B is estimated to cost around 500 million euros, and building Kosovo C is estimated to cost around 1.2 billion euros, not including the costs for the energy transmission and distribution systems. Given the scale of required investment, the energy sector needs significant investment which will only occur if a stable and predictable enabling environment is in place.

Support to the GOK’s continuing effort to modernize the country’s existing energy sector is among the highest priorities of the USG assistance programs. Kosovo has immense potential for growth as an important player in the electricity market in South Eastern Europe. Improving the security of electricity supply while meeting European standards remains, however, a daunting task. In alignment with USAID’s economic growth strategy, USAID/Kosovo aims to support GOK in creating conditions that are attractive for public and private sector investment and International Financial Institutions (IFI) lending to support large scale power generation projects.

Previous USAID energy projects engaged with key energy stakeholders, which led to achievement of one of the GOK priorities – the privatization of the state-owned electricity distribution and supply company. Leveraging lessons learned from that experience, USAID/Kosovo proposes to further improve Kosovo’s energy security by building the capacity of key institutions, such as the Ministry of Economic Development (MED) to successfully implement and sustain the reforms necessary to attract

5 These ‘Rules’ primarily include i). ‘the Rule for the Establishment of a System of Certificates of Origin for Electricity Produced from Renewable Energy Sources, From Waste and Co-Generation in Combination with Heat in a Single Generation Unit,’ and ii). ‘Rule on the Support of Electricity for which a Certificate of Origin has been Issued and Procedures for Admission to the Support Scheme’.

6 ‘Support Scheme’ means the set of provisions for the support of electricity produced from renewable energy sources in Kosovo required to meet the Indicative Targets, as defined in the Rule on the Support of Electricity for which a Certificate of Origin has been Issued and Procedures for Admission to the Support Scheme.

Attachment 4 – Page 4 of 4 investments and build capacity to manage large scale energy sector transactions. In addition, the implementation of these reforms would create conditions for bringing the country further in line with EU legal, regulatory, and environmental requirements.

The KESS activity will be a key contributor to one of the GoK’s overarching objectives in the energy sector which is ‘to develop a secure and reliable energy supply so that all consumers will have access to an efficient and uninterrupted energy supply, of an adequate quality’ which is to be achieved, among others, by developing and rehabilitating power generation capacity, accessing private development to assure sufficient power generation for domestic use, reserve capacity and export.

Energy projects in Kosovo are a topic of intense scrutiny from the European Union, the international community, American media, and other stakeholders. Proper oversight and quality assurance of energy projects is vital to the USG efforts for nation building as well as to the stability in the region.