Serbia & Italy – Some Notes on the Future of the Electricity Market

On 2 July 2011 I posted to a LinkedIn group a link to an article in Serbian – “Дон Кихот побеђује у Србији” – about the possible impact on renewable energy development in Serbia of the revised energy law that is being prepared in Serbia.  (The draft of the energy law was formally submitted to the Serbian Parliament on 14 July, and is available at Предлог Закона о енергетици (PDF) or Predlog Zakona o energetici (HTML).)  On 9 July someone posted the following comment:

________,

Do you know what other options do the renewable energy producers in Serbia have to sell electricity, other than the PPA with the Serbian government based on the feed-in tariffs?

Something like a regional electricity spot market buyer or long term contracts with private electricity buyers comes to mind?

If so, what are the ongoing prices or pricing formulas?

I heard that the market price for electricity is around 20 cents per kw.

I also heard that the bilateral agreement between Italy and Serbia grants importers of electricity from Serbia to Italy the Italian feed-in tariffs.

If so, I am not sure what the feed-in tariffs are in Italy - specifically for solar energy.

For instance in the case of solar energy, feed-in tariffs could not even come near to make the investment in solar energy viable. Feed-in tariffs in Serbia guarantee 23 cents per kw, while break even point in most cases and technologies comes to low 30's

Mini Hydro on the other hand for instance makes more sense and can be profitable.

Cheers!

On 22 July I posted the following reply (slightly edited):

Dear ______,

Please excuse my delay in replying.  I am now in a position to try to respond to your questions.

Q1: “Do you know what other options do the renewable energy producers in Serbia have to sell electricity, other than the PPA with the Serbian government based on the feed-in tariffs?  Something like a regional electricity spot market buyer or long term contracts with private electricity buyers comes to mind?  If so, what are the ongoing prices or pricing formulas?”

I obtained the following reply today from someone in the Serbian government who until recently was closely involved with energy policy:

“Power producers are not obliged to sell power to the Government/EPS – it’s just an option for them.  They are allowed to export electricity, or to sell it to the energy dealers or someone else interested.  But it would be hard to do that in Serbia because EPS electricity price for consumers is around 5 eurocents and would be very hard to sell your electricity in Serbia and to beat EPS price.  Besides that, there is no spot market in Serbia or the region at the moment (except in Romania and Slovenia).”

Q2: “I heard that the market price for electricity is around 20 cents per kw.  I also heard that the bilateral agreement between Italy and Serbia grants importers of electricity from Serbia to Italy the Italian feed-in tariffs.  If so, I am not sure what the feed-in tariffs are in Italy - specifically for solar energy.”

Actually, at present there is no way to export electricity from the Balkans to Italy except by the 500 MW HVDC undersea cable from northern Greece (southern tip of Albania) to Otranto, the Arachthos-Galatina link.  (See the European grid map at ENTSO-E Grid Map.)  Italy’s Moncada Energy Group was planning to build a private, 500 MW “merchant cable” from southern Albania to Brindisi to export energy from a 500 MW wind park that Moncada was building at Vlorë in southern Albania, but that idea seems to have died on 7 September 2010 when the Brindisi city council denied landing rights for the cable.

There is also a plan to build a 1,000 MW HVDC cable from Montenegro (originally to start from Tivat, but now changed to Kotor) to Pescara in Italy.  See Pubblicato Accordo strategico dell'elettrodotto Italia-Montenegro (contains original documents in English) and Saopštenje: Objavljeni ugovori o realizaciji interkonektivne veze između elektroenergetskih sistema Republike Italije i Crne Gore.  (For additional documents, search on Google for “Terna site:www.mek.gov.me”, without quotation marks.)

The Kotor-Pescara cable project has now received official approval all around, and I imagine Terna S.p.A. will move forward with it.  Terna has agreed to ensure that the new connection will be completed and commissioned “no later than April 30, 2015”.  But I have strong doubts about this.  When the cable project from Tivat to Pescara was first announced there was considerable opposition to it in Italy.  First of all, energy consumption in Italy since 2007 has been flat, and with many GW of new renewable and carbon-fired power plants already due to come online in coming years it was clear that Italy had no need for additional electricity.   In addition, the plan was for the cable to come ashore at Pescara and for the electricity to then be transferred south hundreds of kilometers to Foggia (which is closer to Tivat), at considerably greater cost than a direct Tivat-Foggia cable.  So rumor had it that the Berlusconi administration desired this enormous 1-gigawatt cable from Pescara (in the middle of nowhere on the unpopulated back side of Italy) to Montenegro not to import energy from the Balkans, but to export to the Balkans electricity from a number of nuclear plants that the government desired to build.  The plan for the cable moved forward nonetheless, but in the meantime on 11 March 2011 the Fukushima disaster began, and in a nationwide referendum on 12-13 June the Italian electorate voted 94% in favor of maintaining the national ban on nuclear energy.

In short, what with the worsening financial, budgetary, and demographic situation in Italy, I rather doubt that anyone will get upset if Terna somehow forgets to construct this cable by 2015.

You posted your question before the beginning of Berlusconi’s recent planned visit to Serbia.  During the visit of the Italian delegation all sorts of documents were signed, including some regarding the export to Italy of energy produced by the hydro plants that the Italian firm Seci Energia S.p.A. has received a contract to build along the Ibar River in southern Serbia.  Nevertheless I have grave doubts about whether any of that will ever come about because 1) given that Seci Energia has never built or operated even a single hydro plant, its receiving a no-bid contract for 10 hydro plants worth € 820 million has the entire region murmuring about corruption, 2) as mentioned above, Italy already has too much energy, and the infrastructure connections between southern Serbia and Montenegro are not outstanding, 3) there will certainly be a lot of local opposition, similar to the local opposition that recently stopped construction of the Brodarevo 1 and Brodarevo 2 hydro plants in southern Serbia, and 4) money will have to be paid to construction companies for several years before any energy is actually produced, and right now the Italian ruling circles are terrified that if they do not introduce harsh enough budget austerity measures right away then the bond markets could easily treat Italy like Greece, causing a collapse of everything.

As for a promise of Italian feed-in tariffs being paid for electricity imported from Serbia, I am also skeptical of that.  Only the Italian parliament could approve such a thing, and I have heard nothing of such plans, and what with the way people in Italy are already complaining about high electric bills I think it is unlikely that the parliament would find the nerve to pay billions of euros to huge Italian firms to have them bring in unneeded energy from abroad.  (By the way, just last week Edison S.p.A. announced that it will now move forward with plans to construct a new, 817 MWe gas-fired power plant at Pianopoli near where I am.)

Q3: “For instance in the case of solar energy, feed-in tariffs could not even come near to make the investment in solar energy viable. Feed-in tariffs in Serbia guarantee 23 cents per kw, while break even point in most cases and technologies comes to low 30's.  Mini Hydro on the other hand for instance makes more sense and can be profitable.”

Well, I am afraid I cannot fully agree with your way of approaching the profitability of solar energy and other RES.  For solar energy an important element is insolation, which is why here in Italy, where FITs are the same nationwide, everyone wants to build solar parks here in the sunny south instead of up in the cloudy north.  Serbia, obviously, does not have great insolation.  But nearby countries that do have good insolation along the coast – Croatia, Montenegro, and Albania – do not have any incentives for large, ground mounted PV plants.  In Bosnia, FBiH pays FITs for only 12 years, and Republika Srpska still has no incentive system at all.  To the east, Bulgaria recently outlawed the construction of solar parks on good agricultural land.  So, given the economic/political situation in Greece and the political/criminal situation in Albania and Kosovo, as well as the rapidly falling solar FITs in Italy, Serbia might turn out to be (after Macedonia) one of the better investments for solar power in the region in coming years.

In addition, a life-or-death question in the siting of renewable energy projects is taxation of the incentives that one receives.  In Serbia and several neighboring countries the corporate earnings tax is just 10%, whereas in Italy there is a tax (IRAP) of roughly 4% on revenues plus a tax (IRES) of 27.5% on earnings, for a combined minimum of at least 31.5% of earnings.

Finally, I would beg to disagree about the “break even point in most cases and technologies”.  Two important renewable energy technologies are biogas and biomass.  For both of these there is very often a waste stream that someone wants to get rid of, and with biogas or biomass they have the possibility of converting that waste into electricity and/or heat (plus some exhaust gases) instead of having to pay someone to haul it away.  So in Serbia and surrounding countries there are already any number of agricultural and industrial facilities that are using biomass or biogas profitably without any incentives at all.  And of course hydroelectric power was already in use in the Balkans many decades before anyone began thinking of giving incentives to “renewable energy sources”.  And regarding wind power, we read in Wikipedia that “Small wind turbines for lighting of isolated rural buildings were widespread in the first part of the 20th century”, and that Vestas began selling wind turbines as long ago as 1979.