South East and Eastern Europe: Part I
Subsidised fossil-fuel power blocking the way for renewables
by Komila Nabiyeva – February 8, 2019
Right on the border with Western Europe, countries in South East and Eastern Europe, South Caucasus and Central Asia have enormous potential for renewable energy, but it remains largely untapped. A stark contrast to the situation a few kilometres further North and West. The region’s fossil-fuel and nuclear subsidies are among the highest in the world. The subsidies and accompanying low electricity prices translate to an unrealistic cost of capital (along with other major barriers) discouraging investment in clean energy. In Part 1, Komila Nabiyeva explains the barriers to, and possible drivers for, a meaningful transition in the region.
Background: the region’s renewables facts
During 2015 and 2016, the region – spanning over 18 countries and home to over 300 million people – added just over 2GW of additional renewable power capacity, with hydropower accounting for 70% of these additions. By comparison, Germany installed 5GW of onshore wind energy in 2016 alone. By the end of 2016, total installed renewable power capacity in the entire region reached 85GW, less than in Germany with 104GW.
Several countries in the region have historically high shares of hydropower. With large hydropower (over 10 MW) included, shares of renewables in total final energy consumption vary from less than 5% to up to 45% (see Figure 2). Yet, including large hydropower does not show the real dynamics and new developments in the sector. The share of renewables excluding large hydropower barely reaches 3%, with only Armenia and Macedonia reaching slightly over 4% (see Figure 3).
Most countries of the region have inherited energy supply infrastructure from the Soviet era, characterised by strong centralisation and monopolies as well as large-scale and inefficient generation facilities. The centralisation of a fossil-fuel based energy industry makes it much more prone to corruption than decentralised renewable energy. In many cases, government officials have a vested interest in existing business structures and see no advantage in changing the status quo.
Accordingly, high fossil-fuel and nuclear energy subsidies lead to artificially low energy tariffs which significantly reduce the competitiveness of renewable energy and discourage investment.
Energy subsidies to both fossil fuel production (through direct spending, tax reduction and exemption, credit subsidies to energy producers and utilities) and to consumption (through tariffs for electricity, heat and fuel for industry and households below their cost-recovers) as a percentage in the region’s GDP is one of the highest in the world, with 61% in Ukraine, 37% in Bosnia and Herzegovina and 35% in Serbia. These percentages are particularly high due to the fact that no charges are levied against the polluting effects of burning fossil fuels.
Although some countries have started addressing the problem, electricity prices for households in the region are much lower than the EU average of 0.2 EUR per kWh. The highest, Montenegro, is half what is paid in Western Europe, the average is around a quarter (see Belarus) right down to 0.009 EUR per kWh in Kyrgyzstan:
Tariff increases are a very sensitive topic for the population. But elimination of fossil-fuel subsidies, combined with targeted social assistance and compensation mechanisms, would release financial resources for targeted support for vulnerable social groups as well as for health care and energy efficiency.
Cost of capital for renewables
The investment climate in the region remains insecure due to unstable regulatory frameworks as well as complex administrative procedures and regulations on permits and licensing leading to long project development periods and additional transaction costs. This translates into high costs of capital for renewable energy technology.
At current cost of capital levels, investments in renewables in the Western Balkans (for example) can cost up to twice as much as in Germany or France. As a result, almost all recent utility scale renewable energy projects – such as solar and wind farms in Kazakhstan and wind farms in Georgia and Serbia – were only possible with the financial backing and guarantees of the European Bank for Reconstruction and Development (EBRD).
Following years of criticism for financing fossil fuel projects in the region, the EBRD started greening its portfolio in the last years. In 2018, it finally announced plans to stop financing coal and most of oil projects, as part of global efforts to combat climate change.
Meanwhile, high risk perception also leads to very limited access to affordable capital for individual investors, farmers and communities. As a rule, municipalities, often more interested in local energy efficiency measures, have extremely limited budget for retrofitting buildings. Several countries, e.g. Ukraine and Bosnia and Herzegovina, have started to address this issue through specialised funds with the support of international donors.
With targeted support, countries of the region could overcome numerous barriers to the energy transition. A mechanism for the countries of South East Europe – the European Renewable Energy Cost Reduction Facility, which aims to lower the financing costs for renewable energy – is currently under discussion. Increased financial support and the introduction of de-risking and financing mechanisms would help to decrease the cost of capital and enable access to affordable finance.
Programs supporting research and education on renewable energy and energy efficiency, capacity-building and exchange of best practices, would help to increase public awareness and support.
Last but not least, regional cooperation and interconnectivity could significantly facilitate the integration and balancing of renewables in energy systems. Across the region, numerous interconnections between power grids were established across national borders during the Soviet era. The existing infrastructure could be re-established and improved, which would help to overcome many of the technical challenges of renewable energy deployment.
Currently, the EU, with its associated programs, is the most significant driver across the region. A number of highly promising initiatives by the EU and IRENAalready exist. It is my opinion that the EU should step up its support further, in keeping with global efforts to tackle climate change, and aided as the costs of renewables continue to fall too.
Until this deeply entrenched systemic problem is addressed, it remains a fundamental barrier for renewables in the region.
This article is based on the report “Energy transition in South East and Eastern Europe, South Caucasus and Central Asia: Challenges, opportunities and best practices on renewable energy and energy efficiency”, published by the Friedrich-Ebert-Stiftung in December 2018. http://library.fes.de/pdf-files/id-moe/14922.pdf
About the author: Komila Nabiyeva is a freelance journalist, reporting on climate change and energy issues. She has worked as a communications consultant, moderator and trainer and has organized workshops on climate and energy issues for the United Nations and other organizations. Currently, she is coordinating the work of the Energy Watch Group, an international network of scientists and parliamentarians.
Many thanks to the Friedrich-Ebert-Stiftung for the use of the graphics which were produced for and first printed at the publication of the Friedrich-Ebert-Stiftung: Nabiyeva, Komila (2018): Energy Transition in South East and Eastern Europe, South Caucasus and Central Asia Challenges, Opportunities and Best Practices on Renewable Energy and Energy Efficiency
- The following regions and countries were covered by the research: South East Europe (Albania, Bosnia and Herzegovina, Kosovo, FYR of Macedonia, Montenegro and Serbia), Eastern Europe (Belarus, Moldova, Russia and Ukraine), South Caucasus (Armenia, Azerbaijan and Georgia) and Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan). ↑
- In 2016–2017, IRENA launched two very promising regional initiatives on South East Europe and Central Asia, which should help to accelerate the uptake of renewable energy in the regions by providing support to policymakers and investors. See https://www.irena.org/europe/South-East-Europe-Regional-Initiative and https://www.irena.org/asiapacific/Central-Asia-regional-initiative ↑