Regional_Energy_Security_and_Market_Development.pdf

July 2012

This report was produced for review by the United States Agency for International Development (USAID). It was prepared by Ministry of Foreign Trade and Economic Relations and International Resources Group (IRG).

REGIONAL ENERGY

SECURITY AND MARKET

DEVELOPMENT -

STRATEGIC PLANNING

COMPONENT

INVESTMENT REQUIREMENTS AND BENEFITS ARISING

FROM ENERGY EFFICIENCY AND RENEWABLE ENERGY

POLICIES IN SELECTED ENERGY COMMUNITY

COUNTRIES:

BOSNIA & HEZEGOVINA POLICY BRIEF

REGIONAL ENERGY

SECURITY AND MARKET

DEVELOPMENT - STRATEGIC

PLANNING COMPONENT

INVESTMENT REQUIREMENTS AND BENEFITS ARISING

FROM ENERGY EFFICIENCY AND RENEWABLE ENERGY

POLICIES IN SELECTED ENERGY COMMUNITY

COUNTRIES:

BOSNIA AND HERZEGOVINAPOLICY BRIEF

July 2012

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for

International Development or the United States Government

TABLE OF CONTENTS

A. INTRODUCTION ················································································ 1

B. KEY INSIGHTS FOR POLICY MAKERS ·················································· 3

C. BOSNIA AND HERZEGOVINA BUSINESS-AS-USUAL ENERGY

PATHWAY ························································································· 7

D. EXAMINATION OF THE PROMOTION OF ENERGY EFFICIENCY

IN BOSNIA AND HERZEGOVINA ······················································· 13

E. ASSESSMENT OF A RENEWABLE ENERGY STRATEGY FOR

BOSNIA AND HERZEGOVINA ···························································· 18

F. COORDINATED RENEWABLES AND ENERGY EFFICIENCY

POLICIES FOR BOSNIA AND HERZEGOVINA ····································· 21

APPENDIX I: DATA SOURCES AND KEY ASSUMPTIONS ···························· 24

APPENDIX II: A CLOSER LOOK AT MODELING ENERGY EFFICIENCY

POLICIES AND MEASURES ································································ 31

APPENDIX III: PROJECT ACTIVITIES AND METHODOLOGY

EMPLOYED ························································································ 33

List of Figures Figure 1.Primary Energy Supply – 2006 / 2021 / 2030 Figure 2. Final Energy Consumption by Energy Type Figure 3. Gas Consumption by Sector and Power Plant Type Figure 4. Imports by Type Figure 5. Total Investment Cost of New Power Plants Figure 6. Final Energy Reduction by Sector and Fuel under Energy Efficiency Target Figure 7. Final Energy Reduction by Energy Service Type under Energy Efficiency Target Figure 8.Total Renewable Energy under Reference and RE Target Cases Figure 9. Costs and Savings from Renewable and Energy Efficiency Policies Figure 10. Renewable Energy Consumption under RE and RE+EE Combined Cases Figure 11. Sectoral CO2 Emission Reductions under RE, EE and RE+EE Combined Cases Figure 12. LDV Efficiency by Type in Bosnia and Herzegovina MARKAL Model Figure 13. LDV Efficiency by Type in Bosnia and Herzegovina MARKAL Model Figure 14. Sequence of Project Activities Figure 15. Interactions in the MARKAL/TIMES Model Figure 16. Power Plant Dispatch in the MARKAL/TIMES Model

List of Tables Table 1. Summary Overview of the Impact of RE/EE Objectives on Key Energy Policy Issues Table 2.Key Indicators for the Reference Scenario

Table 3.Additional Power Plant Capacity by Fuel Type (MW) Table 4.Annual Energy System Expenditure (€Million) Table 5.Energy Efficiency Targets Table 6.Cumulative Impacts of the EE Target on the Energy System (Change Compared to Reference

Scenario) Table 7.Cumulative Impacts of the RE Target on the Energy System (Compared to Reference Scenario) Table 8.Cumulative Impacts of Combined RE/EE Targets on the Energy System (Compared to Reference

Scenario) Table 9.Key Data Sources Table 10.Key Assumptions in the Reference Scenario: Power Sector Table 11. Characterization of Key Base Demand Devices Table 12. Sultan Tool Values on Vehicle Efficiencies, Payloads, and Annual Activity

STRATEGIC PLANNING POLICY BRIEF – BOSNIA & HERZEGOVINAV

ACRONYMS

AEO Annual Energy Outlook

BAU Business as Usual

BHAS Bosnia and Herzegovina Agency for Statistics

BiH Bosnia and Herzegovina

CC Combined cycle

CRES Centre for Renewable Energy Sources

EC Energy Community

ECS Energy Community Secretariat

EE Energy Efficiency

EIA Energy Information Association (US)

EIHP Energy Institute Hrvoje Požar

ESD Energy Services Directive

ESEC Energy Strategy of the Energy Community

EU European Union

GDP Gross Domestic Product

GFEC Gross Final Energy Consumption

GT Gas Turbines

HGVs Heavy Goods Vehicles

ICE Internal Combustion Engine

IEA International Energy Agency

IPA International Policy Analysis

IRG International Resources Group

ISOBiH Independent System Operator in Bosnia and Herzegovina

LCVs Light Commercial Vehicles

LDVs Light Duty Vehicles

LPG Liquid Petroleum Gas

LWR Light Water Reactor

MARKAL MARKet ALlocation

MOFTER Bosnia and Herzegovina Ministry of Foreign Trade and Economic Relations

NEEAPs National Energy Efficiency Action Plans

NEEDS New Energy Externalities Developments for Sustainability

NPV Net Present Value

VI STRATEGIC PLANNING POLICY BRIEF – BOSNIA & HERZEGOVINA

NREAPs National Renewable Energy Action Plans

OECD Organisation for Economic Co-operation and Development

O&M Operation and Maintenance

PC Pulverized Coal

PET Pan-European TIMES model

RE Renewable Energy

REDP Regional Energy Demand Planning

RESMD Regional Energy Security and Market Development

RPS Renewable Portfolio Standards

SF Steam Fossil

SSP SYNENERGY Strategic Planning

TAP Trans Adriatic Pipeline

UK United Kingdom

US United States

USAID US Agency for International Development

STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HERZEGOVINA1

A. INTRODUCTION

Under the US Agency for International Development (USAID) Regional Energy Security and Market Development (RESMD) project and in conjunction with the joint SYNENERGY Strategic Planning (SSP) effort undertaken with Greece Hellenic Aid, a strategic planning activity was undertaken to develop a comprehensive national energy planning framework to support policy making and analysis of future energy investment options.

This initiative builds on the earlier groundbreaking USAID Regional Energy Demand Planning (REDP) project that laid the foundation for integrated supply/demand energy systems analysis in Southeast Europe.

This Policy Brief provides an overview of the analysis undertaken by the Bosnia and Herzegovina (BiH) Planning Team using their national MARKAL (MARKet ALlocation) integrated energy system model, MARKAL-Bosnia & Herzegovina, to examine the role of energy efficiency (EE) and renewable energy (RE) in meeting future requirements out through 2030 to support sustained economic growth and while considering Energy Community (EC) commitments and European Union (EU) accession directives.

This is a revised version of a previous Policy Brief drafted during the summer of 2011. This revision has been undertaken based on a range of model improvements including the inclusion in the model of transport/refining sectors, a review of key electricity sector assumptions, updated fuel prices, and improved emissions accounting, along with a more advanced approach to the energy efficiency analysis.

The analysis reflects several years of model development and use, jointly undertaken by Bosnia and Herzegovina’s Ministry of Foreign Trade and Economic Relations (MOFTER), supported by International Resources Group (IRG) and the Centre for Renewable Energy Sources (CRES).The MARKAL-Bosnia & Herzegovina analysis undertaken uses a cross-sectoral, cost optimization approach to identify the most economic efficient set of measures, and produces a broadly similar mix to that being proposed in the Energy Institute Hrvoje Požar (EIHP) Study.

This Policy Brief focuses on assessing the energy sector costs and benefits for the entire energy system of meeting energy efficiency and renewable targets in Bosnia and Herzegovina, as a Contracting Party under the Athens Treaty establishing the Energy Community. It also considers how meeting the targets impacts key issues facing energy sector decision-makers – namely, how to foster energy security and diversification, and ensure competitiveness and affordability, while taking into consideration climate mitigation and other environmental issues, as part of promoting cost-effectiveness in energy planning. Furthermore, what is important for decision-makers is that there is now a strategic planning platform available for Bosnia and Herzegovina, where model assumptions and policy scenarios may be readily changed and explored, that can provide analytic rigor and insights to underpin future national strategic planning and policy formulation.

The following supply and demand analyses have therefore been undertaken.

Reference (or Business-as-Usual (BAU)) development: The likely supply and investment requirements to support the evolution of the national energy system in the absence of policies and programs aimed at altering current trends. The Reference scenario is fully discussed in Section C.

2 STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HEZREGOVINA

Energy Efficiency Promotion: This demand-side policy explores the range of energy efficiency measures (e.g., conservation measures, improved appliances, building shell improvements across all sectors) that are the most cost-effective means to meet national targets aimed at reducing final energy consumption (in line with National Energy Efficiency Action Plans (NEEAPs)). The scenario both assumes policies that reduce impediments to the uptake of energy efficiency are in place as well as a target aimed at reducing consumption that is in line with the Energy Community goals for Contracting Parties. The EE scenario is fully discussed in Section D.

Renewable Energy Target: This supply side policy examines the requirements to successfully achieve a renewable energy target by 2020 (in line with that proposed by the Energy Community) aimed at enhancing energy security (by reducing imports). The RE scenario is fully discussed in Section E.

Combined EE and RE Policies: This combination of supply-side and demand-side approaches examines the resulting synergies of these policy goals. The combined RE/EE scenario is fully discussed in Section F.

RESMD Policy Briefs have been prepared for eight other participating Contracting Parties and Observer Countries, as well as a Regional Overview that compiles the results from all nine countries to provide an aggregate perspective of the analyses undertaking by each.

STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HERZEGOVINA3

B. KEY INSIGHTS FOR POLICY MAKERS

The analysis undertaken provides some important insights on how improving energy efficiency and promoting renewable energy impacts three key policy areas: energy security and diversification, economic competitiveness, and climate mitigation. These insights are summarized in Table 1.

Table 1. Summary Overview of the Impact of RE/EE Objectives on Key Energy

Policy Issues

Policy issue /

Scenario Reference Renewables

Energy

Efficiency

EE+RE

Energy security and diversification

Increasing gas imports

Coal-dominated generation system

Increased use of domestic RE resources

Increased exports by

15%

Reduces gas imports by 345Ktoe (11%)

Reduces gas imports and reduced coal consumption due to reduced electricity consumption

(5.2%)

Increased use of domestic RE

(although at lower level than under RE case)

Electricity imports increased by 7.9%

Enhanced competitive-ness1

Electricity system expansion at a total cost of 968 €M

Greater access to gas

Stimulates investment in renewable market

Cuts payments for imported fuels

(6.3%)

Power sector investment reduced and freeing up for other capital investments

Lower fuel costs, saving 2.3 €B in fuel expenditure

CO2

mitigation Emissions increase by

50% by 2030 due more carbon-intensive energy system

Cumulative reduction of CO2 due to use of less fossil energy

(especially gas) and lower total energy consumption (4.33%)

Reduction of

CO2 due to lower total energy consumption

(0.7%)

Cumulative reduction of

CO2 due to more RE and lower energy consumption

(4.89%)

ENERGY SECURITY AND DIVERSIFICATION

A renewable target results in increased use of indigenous energy resources, particularly hydro, while increased energy efficiency lowers overall demand for energy, thereby reducing imports of gas. Overall, the combined effect of both policies results in a reduction of 2.48% in imports, the majority of which is gas.

Despite the reductions in gas imports, there is a limited impact on the diversity of the energy mix.

The key changes in addition to the reduction in the demand for gas are a reduction in coal use

1 The analysis does not provide full insights into the real macroeconomic impacts of changes to the energy system, as it does not account for allocation of resources across other economic sectors, as a general equilibrium model does. However, by looking to minimize the costs of a sustainable energy system it is inherently fostering competiveness.

4 STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HEZREGOVINA

for electricity; in the RE case, renewable generation displaces nearly 20% of coal generation, while a similar amount is displaced under the EE case due to the uptake of more efficient electric appliances.

Under both RE and EE scenarios, import levels will be reduced by around 2.14% and 0.7% respectively, or a 2.48% reduction under the combined scenario case. This is due to increased use of indigenous renewable energy under an RE target, and lower energy demand resulting from increased energy efficiency. Gas imports are particularly affected. Under the RE scenario, imported gas is reduced by over 10.9% cumulatively, while in the EE scenario, the reduction is 5.2%. (In the combined scenario, gas imports are reduced by 19.6%.)

If anything, the energy supply becomes less diversified under the RE case, with an increased reliance on hydro generation, and a significant reduction in gas supply. Large increases in investment in hydro capacity need to be balanced against issues of supply diversity, particularly if hydrological patterns change in future years (due to climate change) and leave the system exposed to shortfall. The additional costs of lower hydro generation levels are highlighted in this policy brief.

ENHANCED COMPETITIVENESS

An energy efficiency target with the right policies and programs has strong benefits for competitiveness by reducing payments for imports, decreasing power sector capacity needs, cutting industry production costs and lowering fuel bills for households, despite the higher overall cost to the energy system. If policies that promote an increased uptake in energy efficiency are pursued without setting an explicit reduction target there is an overall savings seen of 934€ million; however, only around a 2.44% reduction is achieved rather than the 9% called for by the Energy Community directive. With the target in place, total fuel expenditure savings (compared to the Reference case) amount to a reduction of more than 8.52% (in the combined scenario case), or cumulative saving of 3.36€ billion on fuel, nearly offsetting the cost of the more expensive efficient technologies. Once transformed, the energy system savings continue into the future.

The proposed 2020 RE target increases the cost of the energy system due to the additional renewable generation investment required, particularly towards 2030, under the assumption that the RE share is to be sustained over time. To meet the target an additional 1,500 MW of RE capacity will be required by 2020, and over 600 MW by 2030. Energy system costs are 1.35% higher (0.98€ billion Net Present Value (NPV) 2). If the RE target is implemented in parallel with policies to promote energy efficient technologies, the combined cost of meeting renewable and energy efficiency targets are reduced, with additional costs of 2.6% (both policy scenarios undertaken individually) compared to an overall increase of 1.7% when undertaken together. It is important to note that electricity prices increase, so understanding the distribution of impacts and, where necessary, reducing competitiveness or social impacts will be important.

In addition, as already mentioned, a combined EE+RE policy can substantially reduce imports, saving valuable foreign exchange funds, amounting to 1.28€ billion cumulatively that can offset some of the more expensive generation and efficient device upfront costs and be rechanneled for other domestic priorities.

2 All references to total system costs over the entire planning horizon are discounted at 7.5% and reported according to a 2006 base year as Net Present Values.

STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HERZEGOVINA5

It must also be noted that the ancillary direct economic benefits arising from these domestic-centered polices, such as increased jobs to undertake a large number building retrofits and deploying renewable power generation alternatives, are not captured by this analysis.

CO2 MITIGATION

The policies examined show strong synergies with a goal of moving to a lower carbon footprint for BiH energy economy. The combined EE and RE policy leads to cumulative reductions of 4.89% in CO2 emissions. This is accomplished by increasing renewable generation from hydro and wind power of the order of 1,300 MW, compared to the Reference scenario, coupled with the overall reduction in demand for energy owing to the more efficient energy system.

POLICY IMPLICATIONS

The Energy Community region faces daunting investment challenges to replace aging infrastructure and keep pace with energy demand growth. As the Energy Strategy of the Energy

Community3 (ECES) notes, the Western Balkans region will require an additional 13 GW of investment in new power plants just through 2020, at a cost of nearly 30€ billion, a figure that dwarfs actual investment in new capacity over the past two decades. The MARKAL-BiH Reference scenario shows that rapid electricity demand growth requires a large increase in generation capacity by 2030 of 1.3 GW at a cost of nearly 968€ million. At the same time, policy priorities to ensure secure, diverse supplies and mitigate carbon dioxide emissions increase the challenges. Investment in energy efficiency is a key strategy to meet all of these goals.

The MARKAL-BiH analysis shows that a 3% reduction in final energy consumption can be achieved at a net savings of 934€ million (or 1.3%), while achieving the more ambitious NEEAP target of 9% requires only a modest cost increment of 0.36% (261€ million) over the baseline, while saving 1.5€ billion in fuel expenditures and reducing both imports and carbon emissions by 0.7% (586€ million/3.4Mton). Achieving these goals requires a 5.9% (1,055€ million) increased investment in more efficient demand devices. The most cost-effective areas for energy efficiency investment identified in this analysis include residential and commercial space heating, industrial process heat, and vehicle efficiency. The MARKAL-BiH model can be used, along with market analysis, to identify key technology and building opportunities and develop targeted measures to achieve this potential.

Meeting RE targets, on the other hand, increases energy system costs by 1.35% (978€ million) and requires more than a doubling of the required power sector capacity additions, and over 1.8€ billion in increased investment costs. Achieving the target yields substantial benefits: a more than 2% (1.8€ billion) decrease in imports, a 5.15% (2€ billion) decrease in fuel expenditures and a 4.3% reduction in carbon emissions. The cumulative capacity addition needed, relative to the reference, to reach the target by 2020 is approximately 1,350 MW (2.4€ billion), a very ambitious goal. As noted above, an additional reliance on hydropower may increase the risks from a poor hydrological year, and these risks should be balanced against those arising from dependence on imported gas supplies. Further analysis using the stochastic formulation of MARKAL can explore uncertainty associated with future water availability and help formulate more robust hedging strategies.

Although the investment challenges are significant, pursuing the EE and RE strategies simultaneously leads to important synergies. The increase in system cost is limited to 1.26%, (915€ million) or 0.45% (324€ million) less than the sum of the two strategies separately. The

3 Energy Community, 2012. 10thMC/18/10/2012 - Annex 19/27.07.2012

6 STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HEZREGOVINA

savings are dramatic: an 8.5% (3.4€ billion) decrease in fuel costs, 2.5% (2.0€ billion) decrease in imports, and nearly 5% decrease in carbon emissions. The benefits of these investments extend beyond 2030, creating a lasting shift of the economy onto a lower energy intensity, more sustainable and secure trajectory.

The analyses described herein also make it clear that BiH now has an integrated energy system planning model that can be used to examine in more detail the best policies to achieve these and other policy goals. Key areas for future analysis include assessing tradeoffs regarding hydro versus other RE capacity investments, designing feed-in tariffs to encourage RE development, and developing targeted EE policies, including standards and appliance and retrofit subsidies.

STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HERZEGOVINA7

C. BOSNIA AND HERZEGOVINA

BUSINESS-AS-USUAL ENERGY PATHWAY

To assess the impact of different policies and programs on the evolution of the energy system in Bosnia and Herzegovina, a Reference scenario was developed, taking into account specific characteristics of the national energy system, such as existing technology stock, domestic resource availability and import options, and near-term policy interventions. The Reference scenario is aligned with the Energy Sector Study done by Energy Institute Hrvoje Požar. In addition, all other available national data sources (State Statistical Office, National energy balances, etc.) as well as some international databases (e.g., International Energy Agency or IEA) were utilized. The full list of information sources is provided in Appendix I. Once established, the Reference scenario can also produce baseline estimates of energy consumption and carbon emissions to measure trends with respect to achieving NEEAP and low emission development goals.

Under the Reference scenario, energy consumption is projected to grow by 26.3% in terms of final energy by 2030, driven by strong Gross Domestic Product (GDP) growth and increasing per capita consumption. This will require nearly doubling electricity generation capacity from 3,507 to 4,772 MW and results in higher import levels, as well as growth in CO2 emissions. Key indicators from the Reference scenario are shown in Table 2 and summarized subsequently.

Table 2.Key Indicators for the Reference Scenario

Indicator 2006 2030 Annual Growth

Rate (%)

Overall

Growth (%)

Primary Energy (Ktoe) 7219 9934 2.2% 37.6%

Final Energy (Ktoe) 4,214 5,321 3.5% 26.3%

Power plant capacity (MW) 3,504 4,772 3.3% 36.2%

Imports (Ktoe) 3,208 3,543 2.1% 10.4%

CO2 emissions (Kt) 14,659 21,466 3.7% 46.44%

GDP (€ Mill.) 8,619 25,622 4.45% 197.28%

Population (000s) 3557 3958 0.43% 11.3%

Final Energy intensity

(toe/€000 GDP)

0.489 0.208 -0.95% -57.5%

Final Energy intensity (toe/Capita)

1.185 1.344 3.1% 13.4%

Primary energy consumption in 2030 is projected to be 9,934ktoe, increasing from 2006 levels by 37.6%. Whilst growing GDP and increasing household energy intensity are driving up energy demand, it is also important to note that energy intensity per unit of economic output is significantly lower than observed in 2006 – estimated to be 0.208 toe/1000€, a reduction of around 57.5%. This is a result of the continuation of current structural changes in the BiH economy and natural technological progress underway throughout the world.

8 STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HEZREGOVINA

As shown in Figure 1, primary energy supply increases with imported crude oil accounting for 42% of total supply in 2030. The main reason for that is the growth in transport demand, which is reflected in the decrease in imported oil products (due to the increase in refinery production).The contribution of renewable energy sources (excluding biomass) to total primary energy during this period increases from 6.6% to 8%. The biomass contribution drops from 15% to 11%, as households switch to more modern forms of energy. Electricity imports decreases in the 2006-2030 horizon because of enough domestic resources.

Figure 1.Primary Energy Supply – 2006 / 2021 / 2030

Total final energy consumption grows by over 26% over the planning horizon, with the most significant change being the 12% decrease of biomass and coal (as households switch to more modern forms of energy and more efficient devices). Figure 2 shows a more detailed final energy consumption graph.

10000

12000

2006 2021 2030

Renewables (Sol,Wind,Hydro)

Oil Products

NGL

Natural gas

Electricity

Crude Oil

Coal

Biomass

P ri m ar y En er gy

(k to e)

STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HERZEGOVINA9

Figure 2. Final Energy Consumption by Energy Type

A more detailed view of gas consumption by sector is shown in Figure 3. It shows that the majority of gas is used in the industry, residential, commercial, and transport sectors. In the residential sector, gas is used primarily for cooking and space/water heating, while in the commercial sector the main uses are for cooking and space heating. Gas is used across most industry sectors for the production of high temperature heat for a number of different processes.

Increase in gas consumption in the transport sector is important issue from the point of view of increasing number of vehicles that use this resource.

Figure 3. Gas Consumption by Sector and Power Plant Type

2006 2009 2012 2015 2018 2021 2024 2027 2030

Fi n al C o n su m p ti o n kt o e

Renewables (SOL, GEO)

Oil (HFO, KER, AVF)

LPG

Gasoline

Gas

Electricity

Diesel

Coal

Biomass

Biofuels

2006 2009 2012 2015 2018 2021 2024 2027 2030 kt o e

Commercial

Transportation

District Heating Plants

Residential

Industrial

10 STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HEZREGOVINA

Except coal, all of Bosnia & Herzegovina’s fossil energy requirements are imported. The demand for crude oil increases import dependency, resulting in an increase of 30.1% imports by 2030 (relative to current levels).

Figure 4. Imports by Type

New power generation capacity additions needed in each three-year period are shown in Table 3.

Continued expansion of hydropower is the most prevalent with cumulative additional capacity of 600 MW by 2030. Capacity additions and the retirement of old power plants results in 3,920 MW of total installed generation capacity in place in 2030.

Table 3.Additional Power Plant Capacity by Fuel Type (MW)

Plant Type Total

Installed

2012 2015 2018 2021 2024 2027 2030 Total

Dual-fired 0 0 0 0 0 0 0 0

Gas 0 0 0 0 0 0 0 0

Hydro 150 70 0 150 150 80 0 600

Wind 0 0 0 0 0 0 0 0

Total New

Capacity 150 70 0 150 150 80 0 600

% of Installed

Capacity 3.8% 1.9% 0% 3.8 3.8% 1.9% 0%

2009 2012 2015 2018 2021 2024 2027 2030 kt o e

Natural Gas

LPG

Electricity

Crude Oil

STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HERZEGOVINA11

Figure 5. Total Investment Cost of New Power Plants

* Investment levels are not annual but cumulative for a three-year period

Growth in the energy system will require significant levels of new investment and increased payments for fuel. However, energy system expenditures are generally expected to absorb a smaller percentage of GDP in 2030 due to the reduced energy intensity per unit of economic output, shown in Table 2. A breakdown of the energy system cost components is presented in Table 4, showing the growth in expenditure for fuel (extraction, import, and sector differential charges), operating and maintenance costs (fixed and variable), investments in new power plants, and the purchase of new end-use devices. The investment expenditures for new power plants and devices are incurred as demand rises and existing power plants and devices reach the end of their operational lifetimes.

Table 4.Annual Energy System Expenditure (€Million)4

Expenditure Type 2009 2012 2015 2018 2021 2024 2027 2030

Fuel Costs 971 1078 1243 1396 1563 1723 1937 2176

Operation and maintenance (O&M) Costs 898 1068 972 1050 1135 1263 1410 1520

Annualized Investment

(Demand) 552 1063 1633 2212 2652 2847 3266 3647

Annualized Investment

(Power) 0 18 27 27 45 64 74 74

Total 2422 3227 3876 4684 5395 5897 6686 7416

4 For power plants and end-use devices, the upfront capital cost is amortized over the lifetime of the unit with annualized payments calculated according to the lifetime and cost of capital. These annualized payments, along with associated operating and maintenance costs and fuel expenditures constitute the overall energy system cost. The annualized investment costs associated with existing power plants and demand devices are not included.

2009 2012 2015 2018 2021 2024 2027 2030

M Eu ro Hydroelectric power plants

Hydroelectric power plants

12 STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HEZREGOVINA

Under the Reference scenario assumptions, to add the 600 MW of new generation capacity required by 2030, a total investment of 968€ million is required, which translates to average annual payments of the order of 80€ million. At the same time, by 2030 over 7.6€ billion annually will be required to cover the cost of new demand devices, with the majority of this investment made by the private sector, including households. Fuel supply costs will also increase significantly, driven by growing demand and increasing prices, from 4.9€ billion per year to 10.0€ billion per year.

STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HERZEGOVINA13

D. EXAMINATION OF THE PROMOTION

OF ENERGY EFFICIENCY IN BOSNIA

AND HERZEGOVINA

The Ministerial Council of the Energy Community adopted Decision D/2009/05/MC-EnC in December 2009 concerning the implementation of certain Directives on Energy Efficiency, including Directive 2006/32/EC on energy end-use efficiency and energy services (ESD). This required Contracting Parties (under Article 14(2)) to submit their first National Energy Efficiency Action Plan by June 2010.

The background to this EU Directive was highlighted in the Green Paper on the Security of Energy Supply (2000) which noted increasing dependence on external energy sources, and an increase from 50% to 70% by 2030. At the same time, the role of the energy sector as an emission source needed to be addressed, as it was responsible for no less than 78% of EU greenhouse gas emissions. Therefore, efforts were required to focus on improving end-use energy efficiency and controlling energy demand.5 The Directive notes that Improved energy end-use efficiency will make it possible to exploit potential cost-effective energy savings in an economically efficient way.

Bosnia and Herzegovina has not yet adopted a NEEAP and as a Energy Community Contracting Party there is a need to do so in the coming period. In a draft version of a NEEAP, EE targets are set at 6%. This analysis provides insights into the cost-effective technologies that would be required to meet a NEEAP target.

It is clear that the costs of overcoming barriers to take-up of different technologies can be significant, and require strong policies and programs. Such barriers are highlighted in the World

Bank (2010) report Status of Energy Efficiency in the Western Balkans.6

The costs attributed to such barriers (e.g. long payback period, lack of familiarity, inconvenience, high transaction costs) and extra hidden costs (e.g., appliance and building standards, information campaigns, low interest (subsidized) loans, “giveaway” programs for the poor) are accounted for in this analysis by the inclusion of so-called hurdle rates, 7 as discussed in Appendix II. As a result, such options are not invested in under the Reference case. However, it is assumed that when energy efficiency policies (e.g., setting a NEEAP target) are pursued, programs aimed at reducing these impediments (or “hurdles”) are also put in place, reducing those inherent added costs.

Under such a scenario (no EE target but reduced barriers to uptake), there is a 3% reduction in final energy consumption in 2018 (not the required 6% under proposed NEEAP), with an overall savings to the energy system of 934€ million (or 1.29%, as shown in Table 6). However, simply removing some of these barriers is not enough to meet the reduction levels required by

5 See European Commission website – http://europa.eu/legislation_summaries/energy/energy_efficiency/l27057_en.htm

6 Report can be found at ECS website - http://www.energy-community.org/pls/portal/docs/664179.PDF

7 For example, UK studies include The hidden costs and benefits of domestic energy efficiency and carbon saving measures

(Ecofys 2009) and Review and development of carbon dioxide abatement curves for available technologies as part of the

Energy Efficiency Innovation Review (Enviros Consulting 2006).

http://europa.eu/legislation_summaries/energy/energy_efficiency/l27057_en.htm http://www.energy-community.org/pls/portal/docs/664179.PDF

14 STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HEZREGOVINA

the target in the NEEAP. So finding the balance between policies, programs, and targets is important to ensure that goals are achieved without undue burden on the economy or individuals.

Policies that promote increased energy efficiency have significant benefits, as described below.

A modest increase in discounted energy system costs of 0.36% (261€ million) is observed under the NEEAP target.

Over 0.7% cumulative reductions (586 ktoes) in imports are observed under the NEEAP target, enhancing energy security goals and saving 8.3€ million in foreign payments.

Significant cumulative reductions in final energy of 8.28% are observed (10718 ktoes), as are strong synergies with low emission development, reducing CO2 emissions by 0.7% (or 3,433kt).

The basis for the energy efficiency target is the BiH NEEAP, in line with that of other Energy Community Contracting Parties, which is a 9% reduction calculated from the 2006-2009 average final energy consumption levels, resulting in total reduction requirements from the Reference scenario levels as shown below in Table 5. As the NEEAP only extends out to 2018, it is assumed that the reductions under NEEAP continue over the later years in the planning horizon, reflecting Government commitment to maintaining improvements in energy efficiency over time.

Table 5.Energy Efficiency Targets

Approach 2012 2015 2018 2021 2024 2027 2030

NEEAP target 3.0% 4.5% 6.0% 7.5% 9.0% 9.0% 9.0%

Reduction totals*

(ktoes)

127.7 191.5 255.3 319.2 383.0 383.0 383.0

* Reduction totals are relative to average across 2006/2009 consumption levels

Table 6 shows the key results as change between the EE and Reference scenarios. The Energy Efficiency Promotion illustrates the benefits of EE policies and measures that lower the barriers associated with the uptake of more efficient devices and the Energy Efficiency + Target represents the former but also requires that the NEEAP consumption reduction target be met. In the first case, this represents a situation where only the most cost-effective technologies are purchased, incentivised by policies and programs that have been put in place. It illustrates that cost savings can be made by EE promotion, to reduce the socio-economic barriers to uptake of more efficient technologies. In the second case, a target “forces” the model to go beyond this economically efficient level, and deploy additional higher cost technologies to meet the target level.

The focus of this section is on the Energy Efficiency + Target case, as the NEEAP is the main ongoing policy action in this area. As shown in the table, all of the key cumulative metrics (other than overall system cost and investment in new demand technologies) are reduced due to efficiency savings, through impact on power sector capacity addition requirements. For example, imports drop by 0.7% and fuel expenditure by 3.84%. Such savings, amounting to 1.5€ billion, enhance energy security and economic competitiveness.

The slightly higher overall cost of the energy system is due to the increased expenditure for better-performing demand devices that, despite policies and programs, still command a premium

STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HERZEGOVINA15

over conventional devices, though this is lower than would otherwise be the case in the absence of such actions. At the end of this section we briefly discuss variants of the EE analysis to look more at energy efficiency policy in BiH.

Table 6.Cumulative Impacts of the EE Target on the Energy System

(Change Compared to Reference Scenario)

Indicator Units Reference Energy Efficiency

Promotion

Energy Efficiency

+ Target

Total Discounted Energy

System Cost 2006M€ 72,649 -934 -1.29% 261 0.36%

Primary Energy Supply Ktoe 230,484 -3,090 -1.34% -8,598 -3.73%

Imports Ktoe 83,145 -1,045 -1.26% -586 -0.7%

Fuel Expenditure 2006M€ 39,475 -191 -0.48% -1,515 -3.84%

Power Plant New Capacity MW 600 -227 -37.9% 0 0%

Power Plant Investment

Cost 2006M€ 968 -367 -37.9% 0 0%

Demand Technology

Investments 2006M€ 17,872 -150 -0.84% 1,055 5.9%

Final Energy Ktoe 129,397 -3,155 -2.44% -10,718 -8.28%

CO2 Emissions Kt 492,074 -2,237 -0.45% -3,433 -0.7%

The contribution of different sectors to the targets is shown in Figure 6, indicating that energy-saving potential is economy-wide, and that all sectors provide a significant contribution. Under the energy efficiency target, the residential sector provides the largest savings (59% of total savings), followed by the industry sector (20%) and transport (13%) through a move to hybrid vehicles and more efficient conventional (internal combustion engine or ICE) vehicles.

Figure 6. Final Energy Reduction by Sector and Fuel under Energy Efficiency Target

In terms of fuels, the largest near-term reductions come from biomass (residential), coal (industry), and diesel (transport). Later in the time horizon (2024) onwards, large reductions in

-800

-700

-600

-500

-400

-300

-200

-100 kt o e

Transportation

Residential

Industrial

Commercial

Agriculture

-700

-600

-500

-400

-300

-200

-100 kt o e

Renewables

(SOL, GEO)

LPG

Gasoline

Gas

Electricity

Diesel

Coal

Biomass

Biofuels

16 STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HEZREGOVINA

gas for space heating in the residential sector are observed due to switching to more efficient appliances, as described below.

A more detailed overview of savings by energy service demands are shown in Figure 7. The most cost-effective reductions occur in space and water heating, with a strong uptake of heat pumps (using electricity) and use of more efficient appliances. This leads to a fairly strong reduction in gas consumption whilst electricity consumption levels increase by a small percentage. For the transport sector, there is an increasing uptake of hybrid vehicles across light duty vehicles (LDVs), light commercial vehicles (LCV)s, and heavy goods vehicles (HGVs). There is also some penetration of plug-in hybrid electric vehicles in the LDV stock from 2018. The bus fleet moves towards more advanced ICE technology.

In industry, savings are most prevalent in the food and non-metallic mineral industries, where savings from process heat are realized. Much of the commercial savings are in cooling and heating, owing to the uptake of more efficient appliance and some increased penetration of heat pumps. Lighting does not change much as much of the efficiency savings are realized in the Reference scenario due to assumed market restrictions on the sale of incandescent bulbs.

Figure 7. Final Energy Reduction by Energy Service Type under Energy Efficiency Target

It is important to highlight that there are significant uncertainties concerning the potential of opportunities for energy efficiency. This is highlighted in the World Bank (2010) report Status of Energy Efficiency in the Western Balkans. Therefore, it is important to continually review the data in the model for use in future analyses, assessing new data available in BiH to further improve the robustness of the analysis.

Under the EE target, costs are shown to increase overall despite significant reductions in fuel expenditure. This is because the model uses higher discount rates for more advanced appliances (as described earlier and more fully in Appendix II) to reflect the market barriers and costs of

-800.0

-700.0

-600.0

-500.0

-400.0

-300.0

-200.0

-100.0

0.0

2012 2015 2018 2021 2024 2027 2030

K to e s

Transport LDVs

Transport LCVs

Transport HGVs

Transport buses

Residential Space and Water Heating

Residential Other extended

Residential Lighting

Residential Cooling

Industry Other

Industry NM Minerals

Industry Food

Commercial Space and Water Heating

Commercial Other

Commercial Cooling

STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HERZEGOVINA17

policies to overcome them. However, the cost increases are modest, just 0.36% higher than the Reference scenario. In addition, the analysis does not reflect the wider economic benefits that could come from energy efficiency promotion, in terms of export competitiveness or stimulating new industries e.g. for solar water heaters. At the same time, there are significant co-benefits arise from pursuing energy efficiency goals, including CO2 reductions (0.7% reductions) and energy security through reduced imports (0.7% reduction).

Such insights are useful in the context of the EU ambition to reduce primary energy by 20% by 2020 (relative to projected primary energy consumption). In fact, the EU is proposing a new Directive (Proposal for a Directive of the European Parliament and of the Council on energy efficiency and repealing

Directives 2004/8/EC and 2006/32/EC. EC draft 12046/2011, COM(2011)370, Issued 22 June 2011) that is seeking to ensure that the 20% energy efficiency target can be met by 2020 – as current legislation (including the ESD) will not achieve this goal.

18 STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HEZREGOVINA

E. ASSESSMENT OF A RENEWABLE

ENERGY STRATEGY FOR BOSNIA AND

HERZEGOVINA

A Renewable Energy Directive for the EU sets targets for Member States in order to achieve the objective of getting 20% of its energy from renewable sources by 2020. This Directive is part of the set of measures that will enable the EU to cut greenhouse emissions and make it less dependent on imported energy. In addition, this will help develop the clean energy industry, further encouraging technological innovation and employment.

The Energy Community Secretariat (ECS) commissioned a study in 2009 examining illustrative

RE targets for the contracting parties,8 adopting the RE Directive methodology for allocating targets, with biofuels assumed to contribute 10% of transportation sector energy requirements.

This study has subsequently been updated with revised targets estimated.9 A 2020 renewables target of 34% of Gross Final Energy Consumption (GFEC) for Bosnia and Herzegovina has been proposed by the ECS and was used in the analysis presented here.

Key insights are summarized in Table 7 and elaborated upon in the rest of this section.

Cumulative energy system costs (to 2030) are 1.3% higher. While this is a relatively modest increase it is important to highlight significant additional power sector investment is needed out to 2030 increasing by 256%, or 1,540 MW.

Energy security is enhanced with a 2.14% cumulative decrease in the imports, as a result of increased use of indigenous electricity and increase biofuel use in the transport sector.

This policy contributes towards moving to a lower emissions pathway, with a drop in final energy of 1.3% cumulative CO2 reduction reaching almost 4.3% or 21,321 kt.

8 Study on the Implementation of the New EU Renewable Directive in the Energy Community to Energy

Community Secretariat, IPA Energy + Water Economics, United Kingdom, February 2010.

9 Updated Calculation of the 2020 RES Targets for the Contracting Parties of the Energy Community, Presentation by ECS to 8th Renewable Energy Task Force meeting, 06 March 2012.

STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HERZEGOVINA19

Table 7.Cumulative Impacts of the RE Target on the Energy System

(Compared to Reference Scenario)

Indicator Units Reference RE Target Change

Total Discounted Energy System Cost M€2006 72,649 978 1.35%

Primary Energy Supply Ktoe 230,484 1,434 0.62%

Imports Ktoe 83,145 -1,779 -2.14%

Fuel Expenditure M€2006 39,475 -2,033 -5.15%

Power Plant New Capacity MW 600 1,540 256.7%

Power Plant Investment Cost M€2006 968 2,811 290.5%

Final Energy Ktoe 129,397 -1,701 -1.31%

CO2 Emissions Kt 492,074 -21,321 -4.33%

Under the RE target case, all 2,140 MW of new capacity are RE sources (hydro and wind). This suggests that meeting the target and critically sustaining it beyond 2020 will require strong policies to stimulate investment and attract high levels of capital in the power generation sector.

The additional capital required under the RE target in the power generation sector is estimated at 2.8€ billion.

By 2020, when the target has to be met, the additional investment (above that observed in the Reference scenario) is 1,344 MW, requiring 2.4€ billion, with some investment in hydro plant brought forward compared to that observed under the Reference scenario. The large increases in capacity above the Reference case are well illustrated in Figures 8 and 9.

A consequence of this substantial increase in more expensive renewable generation is a doubling of the electricity price (based on the levelized cost of generation calculated in the model). While overall electricity consumption increases, the higher price does incentivize the uptake of more efficient devices, which is why combining the EE and RE policies has merit, as discussed in the next Section.

Total renewable energy under the Reference and RE target cases are compared below, in Figure 8.

20 STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HEZREGOVINA

Figure 8.Total Renewable Energy under Reference and RE Target Cases

Sustaining the target after 2020 becomes significantly more difficult owing to the overall growth of the energy system (making the same percentage share much higher in absolute terms). This results in the increased uptake of solar in the final period, increased investment in wind, and some uptake of biomass electricity generation (particularly with all hydro potential taken). This suggests that it is critical for decision-makers to take into consideration the post-2020 regime and plan for even steeper investment if the RE target share is to be maintained.

Adapting the energy system to meet the target increases total energy system costs by 1.35%, or 978€ million relative to the Reference scenario over the entire planning horizon.

While the challenges of ramping up investment to meet the target are clear, a significant shift to renewables has two important co-benefits. Energy imports drop by over 2.14% and CO2 emissions are reduced (cumulatively) by almost 4.33% relative to the Reference scenario. This suggests strong synergies between an ambitious renewable policy and other policies relating to low emission strategies, energy security, and competiveness. Furthermore, as discussed in Section F, coordinating policies that encourage energy efficiency can dramatically enhance the benefits and lower the cost of meeting renewable targets.

It is also worth highlighting the issue of the system’s climate resilience. Increasing investment in hydro generation, with limited diversification, could leave BiH more vulnerable to climate change impacts, particularly reduced precipitation levels. Further sensitivity analysis was therefore undertaken to explore how BiH can achieve the RE target if it reduces its reliance on a hydro-dominated system.

Reference scenario Renewable scenario kt o e

Biomass CHP

Biomass Electricity

Hydroelectric power plants PV Power Plants

Wind Power Plants

Biomass CHP

Biomass Heat

Biomass

Geothermal

Solar

Biofuels

STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HERZEGOVINA21

F. COORDINATED RENEWABLES AND

ENERGY EFFICIENCY POLICIES FOR

BOSNIA AND HERZEGOVINA

Promoting both energy efficiency and renewable energy goals in parallel has strong policy synergies. Key insights are highlighted here and expand upon below.

Energy system costs increase by 915€ million or 1.26%, indicating that undertaking both policies in parallel is lower in cost than if undertaken in isolation. In isolation, the RE target case increases system costs by 1.35% and the EE case by 0.36% (or 1.71% when considered separately).

The efforts to reduce final energy through energy efficiency (by 8.26%) means that a lower level of total renewable energy required, resulting in lower overall costs.

CO2 emissions and imports are each reduced by 4.89% and 2.48%, illustrating important synergies and co-benefits arising from the implementing efficiency and renewable energy policies together.

Table 8 shows the key results as changes between the Reference combined RE & EE scenarios.

Table 8.Cumulative Impacts of Combined RE/EE Targets on the Energy System

(Compared to Reference Scenario)

Indicator Units Reference EE + RE Targets

Change

Total Discounted Energy System Cost 2006M€ 72,649 915 1.26%

Primary Energy Supply Ktoe 230,484 -6,634 -2.88%

Imports Ktoe 83,145 -2,064 -2.48%

Fuel Expenditure 2006M€ 39,475 -3,363 -8.52%

Power Plant New Capacity MW 600 1,275 213%

Power Plant Investment Cost 2006M€ 968 2,306 238.3%

Demand Technology Investments 2006M€ 17,872 571 3.2%

Final Energy Ktoe 129,397 -10,685 -8.22%

CO2 Emissions Kt 492,074 -24,063 -4,89%

Figure 9 shows the change in annual energy system costs for the three policy scenarios relative to the Reference scenario. The bars show the increases (positive) and decreases (negative) in annual system cost components, and the change in net costs over time is shown as the red line. Overall, costs increase due to the additional investment needs for renewable generation capacity and the additional costs of energy efficient demand devices. Fuel savings (in dark blue) can be seen in all scenarios, reaching over 330€ million per annum in the combined scenario by 2030 that will continue out into the future.

22 STRATEGIC PLANNING POLICY BRIEF – BOSNIA AND HEZREGOVINA

Figure 9. Costs and Savings from Renewable and Energy Efficiency Policies

T…