By Gerard Wynn, Energy Finance Consultant and Arjun Flora, Energy Finance Analyst, Institute for Energy Economics and Financial Analysis (IEEFA)
Kosovo, located in south-eastern Europe, has ample energy resources including renewables. However, it has overwhelmingly depended on its domestic lignite reserves for meeting its energy requirements. To develop such a renewable energy-based ecosystem, the country has technologies and market innovations along with battery storage, demand-side response and more robust interconnection. The report “Beyond Coal: Investing in Kosovo’s Energy Future” by Institute for Energy Economics and Financial Analysis (IEEFA) examines the potential for meeting Kosovo’s energy demand growth, using funds from international financial institutions and development banks to invest in non coal-based energy infrastructure. ReGlobal presents an extract from the report…
Energy sector overview
Kosovo should be in no doubt about the direction of travel of its energy sector, as required by the Energy Community and the EU. As a coal-dominated country today, ignoring such long-term trends could inflict great near-term costs, including rising environmental compliance costs from a highly inefficient, fossil fuel-based energy system, and the resulting, premature write-off of fossil fuels assets. Among its domestic energy policies, Kosovo’s overarching Energy Strategy 2017- 2026 adopted a “catch-all” approach to ensure security of supply; integrate with regional energy markets; expand thermal generation; establish gas infrastructure; and meet renewables targets. Kosovo has depended overwhelmingly on domestic lignite to meet energy demand, using its massive lignite reserves. However, Kosovo has ample energy resources, not only in lignite but renewables too, allowing it to choose the least-cost option going forward.
Kosovo’s electricity system largely consists of state-owned generation and transmission companies. Electrical capacity is presently dominated by two lignite power plants, Kosovo A (three units, net capacity 432 MW, commissioned early 1970s) and Kosovo B (two units, net capacity 528 MW, commissioned mid-1980s). Both are owned by KEK, the state generation company. Kosovo’s two lignite power plants are old, inflexible and inefficient, contributing to poor security of supply and high load shedding. There are also multiple smaller hydropower and renewable energy facilities. Kosovo’s electricity system is dominated by lignite. In 2019, lignite accounted for 94.5% of total generation, followed by hydropower (3.7%), wind power (1.6%) and solar (0.2%). Kosovo is a net importer of electricity.
The sole state-owned transmission system operator, KOSTT, is also the market operator. The distribution system operator, KEDS, is privately owned. Electricity is exclusively supplied by KESCO. The wholesale electricity market consists of bilateral contracts, largely between the generator, KEK, and the supplier, KESCO. The wholesale power price is based on historical prices that are approved by the energy regulator, ERO. All other trade is completed bilaterally, i.e., between traders and small electricity generators. There is no forward market, and no spot or forward index. Regarding electricity market plans, Kosovo has opted to be a part of an Albanian power exchange rather than a national exchange.
The importance of electrical interconnection
Cross-border electrical interconnection with its neighbouring countries is vital to Kosovo’s security of supply. Electricity imports to Kosovo are needed especially in winter, when electric heating leads to high daily volatility in demand, with daily shifts between imports and exports. Interconnection is also important to provide fast-response balancing energy, given that Kosovo’s electricity supply is dominated by two ageing lignite power plants. Kosovo has eight interconnections with its four neighbours, comprising four 400 kV interconnections, one each to Albania, North Macedonia, Montenegro and Serbia; two 200 kV interconnections, to Albania and Serbia; and two 110 kV lines to Serbia. The lines have a combined net transfer capacity of 3,200 MW—three times Kosovo’s installed generating capacity, and more than double peak demand.
Notwithstanding this excellent interconnection, Kosovo’s historical membership of an electricity control bloc led by Serbia prevented the country from controlling its own cross-border transmission and prevented use of a new 400 kV line (600 MW net transfer capacity) interconnection with Albania. Kosovo’s deal in April 2020 with the association of European transmission system operators (TSOs) to form a new connection with continental Europe was therefore of huge importance. The deal allows Kosovo to exit the Serbian-led control bloc, join a new control bloc with Albania, and fully operationalise the Albania interconnection. An Energy Community analysis indicates that full use of the interconnection will increase Kosovo’s margin (the difference between available capacity and peak demand) by 50%.
Renewable energy targets
Energy Community countries have to adopt National Renewable Energy Action Plans (NREAPs), under the EU Renewable Energy Directive. The NREAPs comprise targets for renewables as a share of total energy consumption in 2020. Kosovo’s Ministry of Economic Development set a target of 25%, compared with 19% in the base year 2009. Kosovo had already achieved 24% renewables in 2016, as a result of a revision of its baseline data, rather than through investment in renewables. Kosovo has also set targets for renewable electrical generating capacity in 2020. Analysis shows that Kosovo will miss its 2020 renewables targets. But it could hit its 150 MW wind power target in 2021 because of a large wind farm under construction. It may also hit the 30 MW solar PV target soon, because of a large planning pipeline of solar projects. Moreover, the ERO approved 20 smaller rooftop solar projects last year, with a total installed capacity of 0.5 MW.
Looking beyond 2020, the EU has a binding target for a 32% share of renewables in gross final energy consumption in 2030. This translates into a share of roughly 50% to 60% of renewables in the electricity sector. Together with EU energy efficiency targets mentioned above, these targets imply a minimum reduction in greenhouse gas emissions of 40% by 2030, compared with 1990. The Energy Community undertook a brief assessment of the implications for Kosovo and other Western Balkan countries. They estimated that Kosovo could target a 34% to 39% share of renewables in all energy consumption (not just electricity), in 2030, rising from the existing target of 25% in 2020. The target would be largely met by the use of bioenergy in the heating sector, followed by onshore wind and hydropower, and then solar power.
Last year provided the first hard data on the performance of variable renewables in Kosovo. It was the first full year of operation for a pair of 3 MW solar farms and a 32 MW wind farm. The wind farm performed with a 32% capacity factor, i.e., generating electricity equivalent to one-third of nameplate capacity. This wind power capacity factor exceeded the UK average, one of Europe’s windiest countries, of 26% in 2018. The two solar farms both achieved capacity factors of 16%. This capacity factor surpasses any location in Germany, Europe’s leader by installed capacity, and is in line with countries such as Bulgaria and Turkey.
Renewables energy costs
In Kosovo, the 32.4 MW Kitka wind farm, commissioned last year, had full installed costs of €73 million, or €2.3 million per MW, according to the European Bank for Reconstruction and Development (EBRD). The project cost included a 14.5- kilometre, 110 kV transmission line, which may largely account for the slightly higher installed cost than international cost benchmarks of around $2 million per MW. In neighboring Montenegro, the Finnish utility, Fortum, won a public call in 2018 to build a 250 MW solar farm, the largest in the Western Balkans. The offtake price for the solar power will be at market price, as determined on the Hungarian Power Exchange (HUPX). The average of all hourly settlements on the HUPX day-ahead market in 2020 to date (as of July 4) was €33.63/MWh. This price can be compared with the proposed electricity offtake price for a new lignite power plant, as agreed between the Kosovo government and ContourGlobal (before its withdrawal from the project) of €80/MWh. Bids for the Montenegro solar project were judged based on a land lease offer, the number of workers to be employed, and an assessment of bidder financial and technical capacity, and local investment.
The World Bank analysed generation costs specific to Kosovo in its unpublished “options analysis,” obtained and published by IEEFA last year. The study assumed improvements in public and residential building energy efficiency, and significant scale-up of renewables, broadly in line with Kosovo’s 2020 targets. In addition, the study assumed continued 592 MW lignite generating capacity through upgrades at Kosovo B. After accounting for these assumptions, the study compared the cost of five broad technology options for bridging the remaining gap to meet domestic demand:
- Increase renewable power
- Build a new 300 MW or 450 MW dual fuel power plant running on fuel oil or natural gas
- Build fuel oil reciprocating engines, with installed capacity of 300 MW or 450 MW
- Build a new, sub-critical, super-critical or ultra-super-critical (USC) lignite power plant, with 300-450 MW capacity, and some biomass co-firing capability
- Renovate two Kosovo A lignite units, with a capacity of 450 MW
The study compared the cost of these technology options across three scenarios: A baseline that excluded environmental costs; the baseline plus local environmental costs from air pollution; and the baseline plus local environmental costs and a carbon price. The study shows that renewables are the least expensive option after accounting for local air pollution and carbon prices. It seems unrealistic not to account for these costs, given EU directives and regulations apply such costs to the EU, and ultimately to Kosovo.
Large-scale battery storage is an additional, domestic option for Kosovo to balance renewables and increase grid flexibility. Battery storage is increasingly deployed with renewables and in standalone configurations to provide various services to the electricity grid, particularly to increase flexibility and resilience to shocks and fluctuations in supply and demand. In 2018, a private consortium performed detailed modelling of a potential installation in Kosovo, consisting of solar PV (400 MW), wind (170 MW) and batteries (120 MW/350 MWh). This unpublished analysis estimated a total capital expense of about €650 million (€0.94 million per MW), annual O&M of €9 million (year 1), and a combined LCOE of €70 per MWh. Given declining costs for renewables and battery storage, these costs may have fallen further.
Kosovo has a renewables support scheme that provides 10- to 12-year contracts with priority grid dispatch at various rates. The highest tariff is for solar PV, at €136/MWh, followed by €85 for wind, €71 for biomass and €67 for hydropower. The size of eligible projects is capped at 15 MW for solar PV, 20 MW for wind, 5 MW for biomass and 3 MW for small hydro. These price levels are too generous, where solar receives no subsidy at all. Kosovo’s ERO aims to cut costs by transitioning to a competitive auction approach. There is currently no scheme in place to support the build-out of energy storage capacity for grid ancillary services.
The way forward
The report estimates that Kosovo’s national electricity demand will be about 20% higher in 2030 compared with 2020, implying 1.8% annual growth, driven by income growth and electrification of the energy sector. Cumulative demand growth of 20% implies an additional 1,200 GWh annually in 2030. There are some potential wins for Kosovo to improve security of supply, even before investing in new generating capacity. These include investment in energy efficiency, investment in interconnection and investment in electricity transmission and distribution. Kosovo has no gas infrastructure and establishing such infrastructure would require significant investment, both in a spur pipeline branching off the prospective Trans Adriatic Pipeline (TAP), initially estimated to cost €211 million, as well as a new national gas distribution network. In addition to such physical infrastructure costs, Kosovo would have to secure gas import contracts, which may be complicated by low or highly seasonal demand. Furthermore, Kosovo would have to establish a gas market from scratch.
Meanwhile, wind and solar power are already broadly competitive with gas-fired generation, and will soon be more competitive, even before accounting for these additional gas infrastructure costs. Given that many countries and financial institutions now view gas as a short-term energy option, it may make sense for Kosovo to leapfrog past gas, directly to a renewables-based economy. As the global market share of variable renewable generation and electric vehicles continues to gain momentum, it becomes increasingly important for Kosovo’s electricity networks to have sufficient flexibility and resilience to deal with greater supply and demand variability. One source of increased flexibility will be expanded interconnection with Albania that accesses its ample hydropower resources. Battery storage is another potential source of flexibility, as a short-duration energy storage technology. Thus, for Kosovo, deploying large-scale battery installations with new renewable generation is an opportunity to capitalise on access to low-cost, forward-looking energy technology that can bring new technical skills, knowledge and jobs to the economy, while also delivering clean, domestically produced and low-cost electricity for its people.
The complete report can be accessed by clicking here