BOSNIA AND HERZEGOVINA SECTOR REPORTS

ENERGY SECTOR

Development Bank of Turkey Directorate of Economic and Social Research January 2010 ANKARA

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Prepared by

ACKNOWLEDGEMENT This report was prepared by a team led by Oktay KÜÇÜKKİREMİTÇİ, the core team included Ömür GENÇ, Mustafa ŞİMŞEK and Aykut EKİNCİ. Additional support provided by Faruk SEKMEN and Emrah ERSOY. Comments and input were received from Mr. Cengiz ÖRÜN, Mr. Furkan ÜNAL, Mr. Recai AYDIN, Mr. Sinan YANAZ (Commercial Advisor of Embassy of Turkey of Bosnia Herzegovina), Mr. Enes Aliskovic (Director of BHEPA - Bosnia and Herzegovina Export Promotion Agency), Mr. Özcan ASANOĞLU (Executive Manager of Turkish Ziraat Bank Bosnia D.D.), Mr. Amer BUKVIC (CEO of BBI), Mr. Salih PURISEVIC (General Secretary and Legal Advisor of BBI), Ms. Belma MUJEZINOVIC – PRIBILOVIC (CEO’s Office Manager of BBI), Ms. Jasmina ZECOVİC (Corporate Account Manager of BBI), Mr. Beytullah Gültekin CETINER (Rector of International University of Sarajevo), Mr. Cevad SARIOGLU (Acting Dean of Faculty of Engineering and Natural Sciences of International University of Sarajevo), , Mr. Esad VARUPA (Advisor of Ministry of Foreign Trade and Economic relations of Bosnia and Herzegovina), Mr. Zoran KOVACEVIC (Deputy Minister of Agriculture of Republica Sirpska), Ms. Blazenka MISKOVIC (Deputy Director of FIPA) and Mr. Fikret HADZIC (University of Sarajevo School of Economics and Business). Valuable statistical inputs were provided by Agency for Statistics of Bosnia and Herzegovina (Mr Fadil FATIC, Ms. Adisa MALJANOVIC and Mr. Fuad BAHTANOVIC), Republica Sirpska Institute of Statistics (Ms. Radmina CICKOVIC), Mate BANDUR (Advisor of Ministry of Tourism and Environment of Federation of Bosnia and Herzegovina), Mr. Enes GANIC (Agency of Privatization in Federation of Bosnia and Herzegovina)

PREFACE This study was conducted in accordance with the agreement made between the Development Bank of Turkey (“Kalkinma” henceforth) and PGlobal Advisory and Training Services Ltd. (“PGlobal” henceforth), in an effort to invite potential investors to make investments in selected investment areas within the country by Bosnia Bank International (“BBI” henceforth); It was drawn up within the scope of determining the necessary measures for the improvement of investment areas, determining the factors that affect the investment environment in a negative way, and identifying investment opportunities in Republic of Bosnia and Herzegovina. Head of The Development Bank of Turkey Economic and Social Research Department Oktay KUCUKKIREMITCI, Deputy Manager Omur GENC, Deputy Manager Mustafa SIMSEK and Risk Tracking Department Assistant Aykut EKINCI visited Sarajevo between the 20th and 27th of December, 2009, to hold meetings with BBI authorities, public institutions, ministries, organizations working in the sector, and other related private and legal entities to gather information and opinions for the study to be achieved. In addition, the same team also made a visit to Banja Luka in the Republika Srpska to collect information from the authorities. Later, Faruk SEKMEN and Emrah ERSOY, Assistant in the Economic and Social Research Department have coordinated the completion of the study. Five separate studies have been made regarding the economy of Bosnia and Herzegovina by the Development Bank of Turkey. These studies are the following: • Socio-Economic Structure and Sector Evaluation Summary Report of the Republic of Bosnia and Herzegovina • Investment Potential and Profiles of the Agriculture Sector • General Evaluation Report of the Energy Sector • General Evaluation Report of the Infrastructure • Investment Potential and Profiles of the Tourism Sector The methodology used for the reports analyzes overall country traits and features, and presents as well an in-depth analysis by relevant sector. The methodologies and the approaches used in all the reports were developed by taking the economic characteristics and significant conditions of Bosnia and Herzegovina into consideration and then adding to the analysis information collected from international data bases, data collected from official sources of Bosnia and Herzegovina, and data gathered from first-hand sources.

TABLE OF CONTENTS Acknowledgement Preface I. Energy Sector Overview.........................................................................................................1 II. Sectoral Structures and General Trends...............................................................................1 2.1. Electricity Installed Power of Bosnia and Herzegovina.................................................. 3 2.2. Electricity Production of Bosnia and Herzegovina......................................................... 5 2.3. Electricity Consumption of Bosnia and Herzegovina..................................................... 6 III. Status of the Sector in Country Economy and the Potential of the Sector........................... 9 3.1. Status of the Sector in GDP and Development of the Sector ....................................... 9 3.2. Status of the Sector in Industry Output........................................................................ 11 3.3. Structure of Employment and Wages.......................................................................... 12 IV. Foreign Trade Status and Opportunities............................................................................14 V. Competition Status of the Sector.........................................................................................16 5.1. RCA Coefficient........................................................................................................... 16 5.2. Electricity Prices.......................................................................................................... 16 5.3. Regional Potential Energy Demand............................................................................. 19 5.4. Analysis of Bosnia and Herzegovina in Terms of Renewable Energy Sources.................. 20 VI. Business Environment and Legal Revisions...................................................................... 23 VII. SWOT Analysis.................................................................................................................26 VIII. General Evaluation and Conclusion.................................................................................27

BOSNIA AND HERZEGOVINA SECTOR REPORTS

I. Energy Sector Overview In this report, the energy sector of Bosnia and Herzegovina, which is considered to have a great potential, is reviewed. Energy is being used in all areas of life and production activities; especially it is one of the most crucial elements of manufacturing industry. Especially primary energy sources (fossil fuels such as, coal, oil, natural gas) are being the most disputed and struggled fields in worldwide. The main energy sources are fossil fuels (oil containing hydrocarbon, natural gas and coal) known as mineral fuels, other new renewable energy sources (solar, wind, wave, bio energy etc.) and nuclear energy. It is estimated that oil has 40 years, natural gas has 60 years and coal has 200 years reserve resources. In 2007, the total world electricity production was 19.844,92 TWh and 54percent of it (10,718.49 TWh) was realized by OECD countries.USA was leader with 21.9percent, China was the second with 16.6percent and Japan was the third with 5.7percent. The electricity energy in the world is produced by mainly based on thermal sources. As of year 2007, 67.8percent of the total production was thermal, 15.9percent was hydro, 13.75percent was nuclear and 2.5percent was geothermal, solar, wind, bio energy and wave based sources. Figure 1. Distribution of World Production by Source (2007)

Source: IEA, World Energy Outlook

Due to the adequate potential of world coal resources and its wide and equal distribution around the world, coal based thermal production plants are keeping their importance as well as carrying some high costs for the protection of environment in the coming period.

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The share of oil in energy production and the dependency of energy to oil are not expected to change significantly. Concentration of reserves in certain areas and routes which oil pipeline pass are expected to be the main challenges ahead. When considering the increasing price trend on the prices of fossil fuels, raising concerns about climate change and long term potential sources, in energy sector, orientation to renewable energy increases worldwide will increase. The most important share of the electricity production in renewable energy in the world belongs to hydro energy. The shares of solar and wind energy is low but expected to increase. Natural gas which has a reserve life higher than oil, is going to continue its importance as an energy source. Even though, Natural gas is an important energy source, it needs huge investments for the production and the building transmission pipelines as it provides energy substitution to far energy markets. Electricity production from commercial nuclear plants has a history of 50 years. As of October 2007, 439 nuclear reactors were operated by 31 countries that provided percent14 of the total energy demand. Reactor safety, wastes to be excluded and deactivation of plants are the most important problems of nuclear plants. The share of hydro resources, used 33percent globally, in electricity energy is 16percent. Nearly all of the potential is used in North America and in Europe, although the usage oh hydro potential is low in other regions. According to the estimates, the primary energy demand of the world will increase 1.5percent annually in the period of 2007-2030 and expected that the hydro energy demand will increase 1.8percent annually. It is estimated that the world electricity production will raise 2.5percent annually and reach to 20,381 TWh as of the year 2015, and 28,930 TWh as of year 2030. In the same period, it is expected that the electricity consumption of OECD countries will increase 1percent annually and non-OECD country’s will increase 3,9percent. It is estimated that there is an increasing amount of renewable energy resources in world energy consumption and the share of resources other than hydro is not going to be higher than 5percent in the electricity production as of the year 2030. It is estimated that the electricity production based on fossil fuels will keep its importance until 2030.

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BOSNIA AND HERZEGOVINA SECTOR REPORTS

II. Sectoral Structures and General Trends The main energy sources in Bosnia and Herzegovina are lignite coal and hydro energy. Oil and gas are imported. Increasing price trend on the prices of fossil fuels, raising concerns about climate change and long term potential sources, in energy sector, Further exploiting renewable energy increases worldwide is expected. Bosnia and Herzegovina has a significant importance of renewable energy resources such as hydro, solar, wind, geothermal and bio energy. Renewable energy resources rank the second after coal in terms of potential. The production of renewable energy is made only from hydro and there is not any information regarding the electricity production from wind, solar, geothermal and biomass. The basic frame of the reforms that are being realized in energy sector in Bosnia and Herzegovina was drawn with the acceptance of “Law of Electricity Distribution, System Regulator and Operator in Bosnia and Herzegovina” in 18 April 2002. The main purposes of this law are to launch the energy market of Bosnia and Herzegovina fully competitive and appropriate for the interference criteria, to increase the production and distribution capacities of the sector and to integrate the electricity energy sector to the EU electricity energy sector. According to the law, it is estimated that the new companies to be established in the production and distribution sub sectors will be privatized. In the energy sector of Bosnia and Herzegovina, 3 different state companies exists which are operating in their own activity divisions; electricity production, transmission and distribution. Approximately 14,000 GWh electricity was produced in Bosnia and Herzegovina in 2008 and 64 percent of the production was supplied from thermal plants and 36 percent from hydro plants. 2.1. Electricity Installed Power of Bosnia and Herzegovina The electricity energy installed power of Bosnia and Herzegovina was 3659 MW in 2008. 57percent of the total installed power was hydro, 43 percent of them were thermal plants. Total hydro energy potential of the country was 6126 MW which the country uses 35percent of the total potential and it is estimated that the total coal reserves are 10 billion tones and 8 million tons per annum is being used.

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Table 1. Electricity Production Capacity of Bosnia and Herzegovina Power Unit Capacity (MW)

Hydroelectric Plants Trebinje I

Total Installed Power (MW)

3x60 180

Trebinje II

8 8

Installed Power Capacity (MW)

Thermal Plants  

Available Power Capacity (MW)

TUZLA

715

635

G3

100

85

Dubrovnik (BIH+Hır.)

2x108 216

G4

200

182

Capljina

2x210 420

G5

200

180

2x80 160

G6

215

188

Rama Jablanica

1x25+5x30 175

Grabovica

2x57 114

KAKANJ

450

398

Salakovac

3x70 210

G5

110

100

Mostar

3x24 72

G6

110

90

Jacje I

2x30 60

G7

230

208

Jacje II

3x10 30

Bocac

2x55 110

GACKO

300

276

UGLJEVIK

280

250

 

1.559

Visegrad

3x105 315

Pec-Mlini

2x15 30

Hydro Total

 

2.100

  Thermal Total Total Installed Power

3.659

Source: State Electricity Regulation Committee

Figure 2: Distribution of Installed Electricity Production Capacity of Bosnia and Herzegovina

The energy company of Bosnia and Herzegovina (EP BIH) owns 46percent of the total installed capacity and 74 percent of them are thermal, 26percent of them are hydro plants. Herzegovina Bosnia Croatia Community energy company (EP HZHB) owns 19percent of the total installed capacity that is all hydro plants. Republic of Serbia energy company (EPRS) owns 35 percent of the total installed capacity and 60percent of them are thermal and 40 percent of them are hydro plants.

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2.2. Electricity Production of Bosnia and Herzegovina The electricity production of Bosnia and Herzegovina in 2002 was 10,200 GWH while as of 2008 the production was 13,942 GWh. Even though the electricity energy could not be stored and there were some declines in demand in some user sectors, the general trend of electricity production in Bosnia and Herzegovina is upwards. In 2008, due to the base effects, an increase of 14,5percent was realized. Table 2. Electricity Production of Bosnia and Herzegovina (GWH) Hydroelectricity Years

Thermal

Mini Hydro and End.

(GWh)

Total

Production

Share (percent)

Production

Share (percent)

Production

Share (percent)

Production

Share (percent)

2004

5.979

46,9

6.625

52,0

139

1,1

12.743

-

2005

5.993

47,0

6.603

51,8

151

1,2

12.748

0,0

2006

5.900

43,1

7.614

55,7

161

1,2

13.675

7,3

2007

4.025

33,1

7.972

65,5

178

1,5

12.175

11,0

2008

4.818

34,6

8.933

64,1

191

1,4

13.942

14,5

Source: BIH, State Electricity Regulation Committee

In 2008, 64.1 percent of the electricity production was generated by thermal plants, 34.6 percent by hydro and 1,4 percent by mini hydro plants and industrial facilities. An increase in share of thermal plants is observed as years. Thus, while the share of thermal plants in 2002 was 52percent, as of 2008 there was an increase of 12 percent. The reasons of this increase can be explained by the fact that the primary energy used in thermal plants of Bosnia and Herzegovina is coal of which the reserves are being used optimum and the worldwide drought that caused a decrease in the energy production of hydro plants. Figure 3: Development of Hydroelectric and Thermal Production of Bosnia and Herzegovina

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As of 2008, 53 percent of the electricity production was realized by Bosnia and Herzegovina electricity company (EP BIH), 37percent by Serbia Republic electricity company (EP RS) and 10 percent by Herzegovina Bosnia Croatia Community (EP HZHB). While the per capita electricity production of Bosnia and Herzegovina in 2004 was 3,317 kWh, in 2008 it raised to 3,630 kWh. This number is lower than the OECD average. While the per capita electricity production was 8,890 kWh in OECD countries, the world average was 2,877 kWh (2007). 2.3. Electricity Consumption of Bosnia and Herzegovina In 2004, the gross electricity consumption was 10,422 GWh and increased 15percent in 2008 to 11,990 GWh. An increase of 6.6percent was realized from 2007 to 2008. Table 3. Gross Electricity Consumption of Bosnia and Herzegovina (GWH) Years

Gross Production

Import

Export

Transmission Losses

Consumption*

(GWh) Increase (percent)

2004

12.743

861

2.860

322

10.422

-

2005

12.748

1.059

2.493

384

10.930

4,9

2006

13.675

1.069

3.284

311

11.148

2,0

2007

12.175

1.996

2.609

312

11.250

0,9

2008

13.942

2.536

4.176

312

11.990

6,6

*: Consumption=Gross Production + Import-Export-Transmission Losses Source: BIH, State Electricity Regulation Committee

Figure 4: Electricity Supply-Demand Balance of Bosnia and Herzegovina (GWh)

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BOSNIA AND HERZEGOVINA SECTOR REPORTS

Electricity generation exceeded the demand over years and the excess amount was exported to neighboring countries (Serbia, Croatia, Slovenia, and Montenegro). As of 2008 30percent of the gross production was exported. However, producers also import electricity and 21percent of the consumption was provided by imported electricity. As electricity production, BIH electricity company (EPBIH), Herzegovina Croatia Community electricity company (EP HZHB) and Republic of Serbia electricity company (EPRS) are responsible from the transmission and distribution. The electricity energy consumers are households and commercial sectors, industrialists and transportation sectors. The share of households varies depending on the climate conditions. It is estimated that while half of the energy consumption was made by households and commercial sectors, industry and transportation get 25percent. The distribution of energy in EU in similar climate conditions are: households and commercial sector is 41percent, transportation is 31percent and industry is 28percent. 75percent of the electricity supplied to Bosnia and Herzegovinian market was consumed by households, commercial sector and industrialists and, 22.5percent by large consumers. A thousand was used by pumping and mining and an average of 2.5percent transmission losses occurred. Figure 5: Distribution of Electricity Consumption of Bosnia and Herzegovina (GWh)

There had been a significant increase in per capita electricity consumption as of years. While the per capita electricity consumption in 2000 was 1,915 kWh, it increased to 2,978 kWh in 2007 and 3,122 kWh in 2008. The per capita electricity consumption of Bosnia and Herzegovina, which stayed behind the world average (2,343 kWh) and OECD countries average (8,089 kWh) in 2000, exceeded the world average in 2007. In Figure 6, the comparison of world, OECD and some countries electricity consumption per capita is given.

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Figure 6: Electricity Consumption per Capita (kWh, 2007)

Source: International Energy Agency, Bosnia and Herzegovina data State Electricity Regulation Committee

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BOSNIA AND HERZEGOVINA SECTOR REPORTS

III. Status of the Sector in Country Economy and the Potential of the Sector 3.1. Status of the Sector in GDP and Development of the Sector While the share of Bosnia and Herzegovina energy sector constitutes a yearly average of 5 percent of the total output in the period of 2000-2005, it dropped back to 4 percent in the period 2006-2008 due to the financial crises that primarily affected negatively the user sectors. Table 4. Energy Output Development of Bosnia and Herzegovina (million KM) Quotation

2000

2001

2002

2003

2004

2005

2006

2007

2008

Electricity, gas, water 609

653

597

721

819

868

847

762

1.023

BIH GDP

11.689

12.565

13.821

14.505

15.786

16.928

19.121

21.759

24.717

Share of Electricity (percent)

5,2

5,2

4,3

5,0

5,2

5,1

4,4

3,5

4,1

Source: Bosnia and Herzegovina Statistics Agency

Figure 7: Development of Energy Sector Shares

When analyzing by the entity bases, as of 2008, 39 percent of the total energy output of Bosnia and Herzegovina belonged to Republic of Serbia (RS), and 60 percent of them belonged to The Federation of Bosnia and Herzegovina (FBIH). The share of energy sector in the total output of FBIH was 3.9 percent while the RS was 4.6 percent.

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Having recovered from the civil war from 1992 to 1995, Bosnia and Herzegovina economy has demonstrated a significant growth as a transition economy. At the period of 2000 to 2008 average yearly expansion of Bosnia and Herzegovina’s economy was 11.3 percent in terms of current prices, 8.8 percent in terms of fixed prices and 16.3 percent in terms of USD. Energy sector kept pace with the overall economy and realized a growth of 6.7 percent in terms of current prices, 4 percent in terms of fixed prices and 13 percent in terms of USD. Table 5: Growth Rates of GDP and Energy Outputs of Bosnia and Herzegovina  

2000

2001

2002

2003

2004

2005

2006

2007

2008

(current, million KM)

 

 

 

 

 

 

 

 

 

Electricity, gas, water Yearly increase (percent) GDP

608,5

653,1

596,7

721,2

818,6

867,7

847,2

761,7

1.023,1

-

7,32

-8,63

20,87

13,51

5,99

-2,36

-10,09

34,31

11.689,2 12.565,0 13.821,2 14.505,2 15.786,0 16.927,9 19.121,1 21.758,8 24.716,6

Yearly increase (percent)

-

7,49

10,00

4,95

8,83

7,23

12,96

13,79

13,59

(constant, same as previous prices, million KM)

 

 

 

 

 

 

 

 

 

608,5

632,1

625,5

644,2

810,6

858,6

916,5

830,2

835,3

-

3,88

-4,23

7,97

12,40

4,89

5,63

-2,00

9,66

Electricity, gas, water Yearly increase (percent) GDP Yearly increase (percent)

11.689,2 11.925,5 13.177,5 14.344,4 15.414,6 16.404,2 18.093,0 20.390,3 22.938,5 -

2,02

4,87

3,79

6,27

3,92

6,88

6,64

5,42

287,2

298,8

287,3

416,0

519,6

551,7

543,3

532,8

765,4

-

4,05

-3,85

44,80

24,89

6,17

-1,52

-1,92

43,64

5.516,6

5.749,0

6.655,1

-

4,21

15,76

25,73

19,74

7,42

13,93

24,14

21,48

2,1189

2,1856

2,0768

1,7335

1,5755

1,5728

1,5594

1,4295

1,3367

(million USD) Electricity, gas, water Yearly increase (percent) GDP Yearly increase (percent) KM/USD

8.367,6 10.019,7 10.762,9 12.261,9 15.221,3 18.490,8

Source: Bosnia and Herzegovina Statistics Agency

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Figure 8: The Growth Rate of Energy Output and GDP in Constant Prices (percent)

3.2. Status of the Sector in Industry Output The total sales output of the industry products* in 2008 was 9,569 and 17percent of them belonged to electricity, gas and water sector. Sales output of industry production of BIH had increased yearly average of 17 percent during the period of 2003-2008. In the same period, electricity, gas and water sector had kept its 17 percent share in the sales output and increased yearly average of 17,4percent in parallel with the general industry product output structure and reached 1,584 million KM in 2008 from 694 million KM in 2003 Figure 9: Distribution of Sales Output by Years

Source: Bosnia and Herzegovina Statistics Agency

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When examining the entity based electricity generation, gas and water sector shares in the industry sales output, the highest share of electricity, gas and water belongs to Republic of Serbska with 27 percent and followed by Birçko autonomous region (DB) by 25 percent and 12 percent share by FBiH *: Covered the sales output from the self production Figure 10: Distribution of Sales Output of Industry Production (percent)

Source: Bosnia and Herzegovina Statistics Agency

3.3. Structure of Employment and Wages According to the temporary data’s of 2009, 859 thousand people were employed out of 1 million 132 thousand total labor force and 272 thousand ( percent 24 of labor force) people were unemployed in Bosnia and Herzegovina. In sectoral distribution of employment, as of 2008, percent 47 of the employment was in services sector, 33 percent in industry sector and 21 percent was in agriculture sector. When analyzing the distribution of the paid employees in sub-sectors, manufacturing industry and retail and wholesale trade provide 38,7 percent of the total employment, electricity, gas and water sector provides only 3,4 percent. (Figure 11)

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Figure 11: Distribution of Employment According to Sub Sectors in Bosnia and Herzegovina (percent)

The gross wages in Bosnia and Herzegovina, which were 454 KM in 1998, increased percent9.2 yearly in the period of 1998-2009 Q3 and reached 1,201 KM as of 2009 Q3. When evaluating according to sectors, those employed in financial intermediation in the first place with 1,940 KM gross wage, those employed in electricity, gas, and water sectors are the second with 1,706 KM which is in 142 percent level of the country gross wage average. (Figure 12) Figure 12: The Level of Average Gross Wage According to Sectors in Bosnia and Herzegovina (KM)

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IV. Foreign Trade and Opportunities When analyzing the electricity foreign trade of Bosnia and Herzegovina it is seen that it has given an export surplus over years. As of 2008, the export was 4,176 GWh and import was 2,536 GWh and the net export surplus was 1,640 Gwh. The major countries of the export are Serbia, Croatia, Slovenia, Montenegro and Switzerland. The development of electricity foreign trade is given in table 6 and Figure 13. Table 6. Electricity Foreign Trade Balance of Bosnia and Herzegovina (GWh) Years

Export (X)

Import (M)

X-M

2004

2.860

861

1.999

2005

2.493

1.059

1.434

2006

3.284

1.069

2.216

2007

2.609

1.996

613

2008

4.176

2.536

1.640

Source: BIH, State Electricity Regulation Committee

Figure 13: Electricity Foreign Trade Balance of Bosnia and Herzegovina (GWh)

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It is noted that the foreign trade volume of the electricity had increased over years. The electricity foreign trade volume increased to 6,712 by 80 percent in 2008 compared to 3,721 GwH in 2004. The increase in foreign trade volume is considered to be positive for the development of energy sector. The assessment of the electricity foreign trade in country total foreign trade reveals that the total electricity import during the period 2005-2009/11 was 1,416,711 thousand KM and constituted 5,3 percent of the country’s total export. In the same period, the total electricity import was 545,967 thousand KM that constituted nine per thousand of the country’s total import. In table 7, it is seen that, the share of electricity export in total export has continued to increase and reached to 8,4percent in last year. Table 7. Status of Electricity Foreign Trade in Country Foreign Trade

Years

Bosnia and Herzegovina

 

Total (X)

 

Total (M)

thousand KM, percent

Electricity, gas, water X

M

X/Total(X)

M/Total(M)

2005

3.783.291

11.180.803  

147.406

10

3,9

0,0

2006

5.164.413

11.388.795  

252.027

107.660

4,9

0,9

2007

5.936.804

13.898.249  

225.468

189.142

3,8

1,4

2008

6.714.055

16.292.600  

365.449

167.928

5,4

1,0

2009/11

5.060.888

11.234.513  

426.361

81.227

8,4

0,7

26.659.451

63.994.960  

1.416.711

545.967

5,3

0,9

Total

Source: BIH, Statistics Agency, own calculations

Bosnia and Herzegovina foreign trade balance has experienced large deficits over years and the 45 percent import coverage of export and 40 percent foreign trade deficit / GDP constitute a risk element for the country. Besides, the electricity sector, that gives a large foreign trade surplus and has over hundred percent import coverage of export, becomes an important sector for the country. Table 8. Foreign Trade Balance and Coverage Ratios

Years

Bosnia and Herzegovina

 

X-M

 

X/M

thousand KM, percent Electricity, gas, water X-M

X/M

2005

-7.397.512

34  

147.396

1.474.060

2006

-6.224.382

45  

144.367

234

2007

-7.961.445

43  

36.326

119

2008

-9.578.545

41  

197.521

218

2009/11

-6.173.625

45  

345.134

525

-37.335.509

42  

870.744

259

Total

Source: BIH, Statistics Agency, own calculations

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V. Sector Competitiveness 5.1. RCA Coefficient Electricity, gas and water sector is one of the highest competitive sectors in Bosnia and Herzegovina’s economy. In order to determine the competitiveness of the sectors, the period of 2005-2009/11 and NACE Rev. 1.1 two digit level RCA coefficient calculated for Bosnia and Herzegovina. The calculations made based on years that formed periods eliminates the possibility of having a deviated calculation rate made on one year as well as giving the possibility to examine the development of the coefficients periodically and sectoral bases. The coefficients calculated for energy sector over years, the RCA’s meanings calculated given with the shares of the sector in export and import and trends in the periods are given in below table. Table 9. Competition Power Analysis 2005

 

2006

2007

2008

20052009/11

2009

RCA coefficient

461,82

Competition power

+

+

+

+

+

+

Increase

Decrease

Decrease

Increase

Increase

Increase

Trend

71,29

44,57

72,29

106,64

151,32

Xj/Xt (percent)

3,9

4,9

3,8

5,4

8,4

5,3

Mj/Mt (percent)

0,0

0,9

1,4

1,0

0,7

0,9

Source: own calculations

According to this, energy sector is one of the highest powers of competition and has an increasing trend. As pointed out before, as of the period, the share of the sector in total export is 5.3percent. Energy sector is able to be compete in world markets and in free trade environment and has come to the fore within the sectors that carry the country potential in future period. Especially the competitive power of energy sector has a growth trend and the increasing growth trend of this sector is higher than the increasing export growth of the country. The emergence of the importance of renewable energy and in this context, countries that have natural resources are going to be preferred in terms of electricity production thus the comparative advantages of foreign trade shows that Bosnia and Herzegovina’s energy sector (especially hydro resources) has an important advantage. 5.2. Electricity Prices The electricity prices in Bosnia and Herzegovina are determined by the State Energy Regulatory Committee. There is an increasing trend in retail sales price applied for electricity that used in household consumption and industry used. The electricity price of households was 5.38

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EUR for 100 kWh in 2004 and with an increase of 7.2percent, the electricity price reached to 5.77 EUR at the end of 2007. Similarly, the price of the electricity that industry uses (based on 35 kV) was 3.84 EUR for 100 with an increase of 18.8percent, the electricity price reached to 4.56 EUR at the end of 2007. The gap between user segments was tightened. (Figure 14) Figure 14: Electricity Prices in Bosnia and Herzegovina (100 kWh/EUR)

Source: Energy Community Regulation Board, ECRB

When comparing the electricity prices of the country with EU, Euro Zone and the European Countries, it is seen that the Bosnia and Herzegovina has the cheapest electricity price in two of the consumer groups. The household electricity price of Bosnia and Herzegovina is 35percent of the EU average and the industry electricity price is 46percent of the EU average. The cheap electricity price is an attractive element for the energy investments however, it indicates that it is more attractive for companies selling to abroad rather than selling to domestic markets. The neighboring and close countries that Bosnia and Herzegovina export the most in current, Croatia, Serbia and Switzerland, are stable and growing markets which show the high export potential.

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Figure 15: Comparison of Household Electricity Prices

Source: EUROSTAT, ECRB Note: Bosnia and Herzegovina data is end of 2007 result , other country data’s are first half results of 2008

Figure 16: Comparison of Industrialists Electricity Prices

Source: EUROSTAT, ECRB Note: Bosnia and Herzegovina data is end of 2007 result , other country data’s are first half results of 2008

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5.3. Regional Potential Energy Demand Bosnia and Herzegovina energy market is facing a potential energy demand from Southeast Europe countries. As of 2008, the size of this market was 254 TWh and had 22 TWh energy deficits. (Figure 17) Figure 17: Regional Potential Energy Demand (GWh)

Source: ERRA, Regional Energy Regulatory Association, EUROSTAT

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With the estimation of the world electricity consumption is going to increase 2.5percent1* yearly, the regional electricity market size assumed to be 302 TWh in 2015, 437 TWh in 2030. With almost 14 TWh production and 1,7 TWh net export, it is considered that Bosnia and Herzegovina will use “the advantage of being small” in this big potential market. Especially low usage of country’s lignite reserves and usage of 35percent of the total hydro potential, there will be an opportunity to threefold the hydro resource production capacity. The investments to be realized in Bosnia and Herzegovina will not face any problems especially in foreign demand due to the growing markets of neighboring and close countries, the unit expensiveness of electricity in those countries, Bosnia and Herzegovinian electricity export and the large size of the energy deficit realized by hinterland bases. 5.4. Analysis of Bosnia and Herzegovina in Terms of Renewable Energy Sources Most of the region is mountainous and dominance of Dinarik Alps is seen as geographical structure in Bosnia and Herzegovina. Mediterranean climate is seen in the southwest of the country but continental climate is dominant across the country. The main streams are Una, Sana, Drina and Sava. Considering the annual amount of precipitation falls per square with the neighbor countries, it is third after Montenegro and Slovenia with 931 mm which is a positive indicator for the feeding of hydro resources and sustainability. Figure 18: Yearly Precipitation Falls (mm/m2)

1 ∗ IEA, World Energy Outlook reference scenario prediction

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Geographical structure and the volume of the water have great importance for hydroelectric plants. Shortly, what the geographical convenience means during the construction of a hydroelectric plant is, water that collected by a regulator and accumulated to a certain height, is carried through a transmission channel with a near horizontal slope until appropriate height is obtained. When appropriate height is reached, water is stored in installation tank to purify from foreign substances and via penstock, it is released through the turbines located below. The potential energy of the water staying at high level combined with gravity transforms to kinetic energy and from there electrical energy is obtained. In regions that are rich in terms of height as Bosnia Herzegovina, keeping the transmission channel short, gives a considerable boon in cost. As transmission channel lengthens cost of construction and transportation increases. The amount of energy that will be produced is in direct proportion to the flow of the stream and the height. Hydroelectric plants are installed in several magnitudes according to the nature of the source. The plants may be installed to Bosnia Herzegovina is nature-friendly micro, mini, small and medium sized ones. The primary characteristic of mini and micro plants is there is no need for big investments such as Dam Lake. The water taken from the existing stream through a structure for water gathering is carried to the stream via a channel with a low slope and plant is constructed when appropriate height is reached. The classification of the installed powers of hydro plants is formed below after adding mini and micro plants (P: installed power of plant) • • • • •

P > 100 MW Large Hydro Plants, 100 MW > P > 20 MW Medium Sized Plants, 20 MW > P > 1 MW Small Plants, 1000 kW > P > 20 kW Mini Plants, 20 kW > P (Power) Micro Plants,

After the researches made by our bank, when comparing the unit costs of producing electricity through renewable energy sources, it is proved that, Hydroelectric and Wind Power plants are more feasible. The average investment costs of investment sources for 1 MW are given in the table. Table 10. Renewable Energy Sources Cost Analysis Investment Source

Average Constant Investment Amount for 1 MW (USD)

Average Constant Production Cost for 1 KWh (USD)

Solar (Collectors, Panels, Modules)

6,000,000

0.15-0.29

Geothermal Power Plants

2,500,000

0.014

Hydro Power Plants

1,625,000

0.013

Wind Power Plants

1,750,000

0.013

Source: Turkish Development Bank calculations

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The world technology is still in the process of development in solar energy which the investment cost is higher than the other renewable energy sources. There are serious incentives in European countries for investments in solar energy. It is necessary to release similar incentives in Bosnia Herzegovina for solar energy investments to be made. Meanwhile, the cost of Geothermal Energy investments is half times of Wind Power Plants and Hydro Power Plants. Within those sources, the lowest energy sources in terms of Average Constant Investment Amount for 1 MW and Average Constant Production Cost for 1 KWh are Hydroelectric energy and Wind energy. The Average Constant Investment Amount for 1 MW of a Wind Power Plant is somewhat higher than hydroelectric power plants but in general the unit costs are very close to each other. When we make an assessment of their internal rate of returns (IRR), the IRR of Hydroelectric power plants is one or two points higher than the Wind Power Plant’s and the IRR range of both investment alternatives varies between 10percent to 13percent in USD bases. Because the lack of a legal infrastructure for Wind Energy, the investment of Hydroelectric power plants are more feasible.

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VI. Business Environment and Legal Revisions The legal framework of the reforms that are realized in energy sector in Bosnia and Herzegovina was drawn with the acceptance of “Electricity Distribution, System regulator and Operator Law in Bosnia and Herzegovina” in 2002. The main purposes of this law are to build the energy market of Bosnia and Herzegovina fully competitive and appropriate for the interference criteria, to increase the production and distribution capacities of the sector and to integrate the electricity energy sector to the EU electricity energy sector. The legal and corporate frame of the sector, establishment of supreme councils operating in this sector, determination of the responsibilities, duties and the authorities of relevant ministries is defined with this law. The law that regulates the distribution and transmission sub-sectors separately, predicted for the establishment of a single company that is responsible for the electricity transmission. According to the law, it is predicted that the new companies to be established in the production and distribution sub-sectors will be privatized, and defined that a public company will be responsible for the electricity transmission. It is accepted with the law that, the assets and liabilities of the existence companies will be shared with the newly established distribution, production, transmission and system management companies, and accepted the system management company as an independent institution that is responsible for the management and guidance of the electricity energy sector. ZEKC (Common Electric Power Coordination Center) which was found in 1998 was turned to Independent System Operators (ISO). It is predicted that companies that are responsible for the distribution and production is going to be established to operate in regional bases. In this context, it is predicted by law that 4 companies are going to be established that are responsible for the thermal plants which are going to be constructed in 4 different regions, be modernized the existence coal mines, and companies are going to be established that are responsible for 3 or 5 river type hydro plants. There are three different companies operates in its own areas in Bosnia and Herzegovina; electricity production, transmission and distribution. Those are; • Bosnia and Herzegovina Electricity Company (EP BIH), • Herzegovina Bosnia Croatia Community Electricity Company (EP HZHB), • Republic of Serbia Electricity Company (EPR). The institutions that stated by law and their duties are as fallows; State Electricity Regulatory Committee (SERC): The regulatory institution that is responsible and authorized for the foreign trade according to the international norms of EU, electricity transmission and transmission system operations. It

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has the authority to apply, monitor and approve the SERC tariff methods. The transmission tariffs, co services and ISO operations are approved and regulated by SERC. Duties; • To monitor, approve and apply of tariffs, • To realize the termination, monitor and amendment of the transmission licenses, • To create rules about transmission network and to create a proper and non-discriminatory market, • To monitor the international trade and forming the rules, • To determine the quality standards of the transmission and operational services and follow them, • To Monitor the operations of ISO, licensing, to form the mechanisms to balance between demand-supply, • To provide that the consumers are receiving honest, non-discriminatory, high quality and competitive service, • To examine the conflicts between parties according to legal frameworks, • To provide a competitive markets, and punishment of contrariwise practices, • To create the service standards, • To cooperate with the state and the relevant regional institutions. Independent System Operator (ISO): The institution that manages the operation, conducts transmission network distribution and management, maintenance, expansion works with electricity transmission companies. This is an independent nonprofit organisation which is also independent from production distribution and supply works. It is not present in the electricity trade. Basically ISO is an institution that manages transmission system, and is an authority to coordinate it. ISO serves with the principles of objectivity and transparency. Duties; To provide the security of transmission system, To provide the security of electricity current, To provide the side services of transmission of electricity in stable frequency and voltage, To provide the elimination of restrictions in the transmission line; management and determine the blocks in the network, • To supply the transmission system information, • To coordinate the neighbor control regions, • • • •

Elektroprenos: It was formed after the agreement that merged the three operators into one state energy trans-

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mission institution, in 2006. It is the only national company that provides electricity transmission. The institution is doing transmission, construction, maintenance and expansion works of Bosnia and Herzegovina. It conducts the management and planning of the operations and network distribution with ISO. Bosnia and Herzegovina local units owns the 41percent, Republic of Serbia owns the 59percent of the company. There are other institutions working on electricity sector in federations. Electricity Regulatory Committee of Federation of Bosnia and Herzegovina (FERK): A regulatory institution that is serving regionally. The main duties are; regulation of consumption in electricity sector, prevention of monopolistic activities, and management of production, distribution and electricity supply tariffs in Bosnia and Herzegovina. Responsible for providing electricity supply security and regulating the access to the distribution network. Energy Regulatory Committee of Republic of Serbia (RERS): It was established for the regulation of the electricity and gas markets in Serbia region, ensuring transparent and non-discriminatory conditions for units on the market. The main duty is to restore the market to free competition structure and prevent the monopolistic activities in the federation.

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VII. SWOT Analysis STRENGTHS • • • • • • • • • •

• • • • •

Existence of a stable economical environment for investments, Existence of a political will in terms of investment climate, The rich thermal and renewable energy sources that country has. The increasing potential of the country energy demand, Significant share of energy sector in country output and industry product sales output, Being one of the sectors that gives foreign trade surplus traditionally, Being in the first ten sectors in terms of country total export continuously. The competition power of the sector is high and has an increasing trend, The household and industry sector electricity prices have an increasing trend, When comparing the electricity prices with EU averages, Euro averages and some of the European country’s averages, the law electricity prices in every consumer groups attracts for the sales of electricity to foreign markets. Country’s climate and geographical structure supports the thermal and hydro potential in terms of energy investments, The country is in an advantage position in terms of coal reserves that needs for the operation of thermal plants, The high yearly precipitation falls (988 mm) is a positive indicator for feeding and sustaining the hydro resources. Country’s mountainous structure helps cost advantage in hydro investments by keeping the transmission channels short. The stream potential and the locations prepares an appropriate ground for the construction of small and medium sized Hydro Power Plants which have low investment costs.

OPPORTUNITIES • •

• • •

• • • • • • •

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Increasing trend of GDP per capita, Increasing importance of renewable energy resources by the development of environmental consciousness and awareness of reduction in carbon emissions and enforcements in the world. The favorable credit support by financial institutions (EIB, WB) to the renewable energy sources Presence of private sector in electricity trade, The increasing energy demand by the new investments in various sectors (especially aluminum and steel and iron factories) due to the law electricity unit prices that effects input costs positively. The Hinterland formed by the Southeast European countries has an important market for energy investments due to their energy deficits. The IRR’s of Hydro plants are several points more than Wind Plants and the IRR of them varies between 10percent and 13percent. Signing Free Trade Agreements with various countries, The reform process for sector was initiated to comply the energy sector to perfect competition and free enterprise criteria Technical and legal regulations to make the business environment convenient for potential investors, Commitment to the EU integration, Sympathy to foreign capital throughout the country,

WEAKNESSES • • • • • • • •

The growth rate of the energy sector is half of the country’s output growth rate, The labor costs of the sector is high in comparison to that of other sectors and country’s average, Partial deficiency of institutionalization and juridical structure, Low capital accumulation and ongoing dependency of the country to the foreign support, Lack of infrastructure of transportation, Continuing process of adoption to free market, Negative effects of the problems caused by management systems on investment decisions Lack of minimum public purchasing guarantee for the produced electricity

THREATS • • • • • •

Unequal income distribution, Continuing negative effects of the civil war, Time consuming decision making process due to matrix-style government, The possibility of the effect of global warming on the flows of the water resources in medium term, The potential of environmental harm of thermal plants, Energy not being stored

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VIII. General Evaluation and Conclusion After making the evaluation of the energy sector of the country, we can summarize the general outcomes as follows; •

•

Bosnia and Herzegovina’s primary resources are coal and hydro as renewable resources which the country has rich reserves. The country’s need of primary resources of oil and gas are imported. The country has a capacity of new renewable resources like wind, geothermal and bio energy (especially assets of the forests) moreover to hydro. The energy production from hydro resource’s share is over the world average through the country: 33percent of hydro resources are used worldwide and the share in electricity production is 16percent. Bosnia and Herzegovina uses 35percent of its hydro resources and provide 35percent of the total electricity production.

•

The potentials of thermal and hydro are very high: It is estimated that the coal reserves are over 10 billion tones and few of them are being used (8 million tones annual). The hydro potential is 6,126 MWh and it is appropriate to increase threefold of the existence hydro plant capacity

•

The reform process for sector was initiated to comply with perfect competition and free enterprise criteria: In this context with the approval of “Bosnia and Herzegovina Electricity Distribution, System Regulation and Operator” law, the State Electricity Regulation Board was established as an autonomous institution, to be privatized later, to operate in the regional bases and responsible for the electricity production and distribution.

•

There is a potential to increase the capacities of mini hydro plants and industrial plant sectors: These types of micro and mini hydro plants have the share of 1.4percent in the total country production. There is a great opportunity to multiply the number of micro and mini hydro plants which do not need any dam lake therefore provides a cost advantage and harmless to the environment.

•

There is an increasing trend in the energy demand of Bosnia and Herzegovina and expected to increase more: The per capita electricity consumption in 2000 was 1.915 kWh reached above the word average (2.752 kWh) with 2.928 kWh. The distribution of the electricity consumption by user sectors, transportation (25percent), and industry (25percent), are below the EU average (transportation 31percent, industry 28). It is expected that as a transition economy, after having more healthy structure in transportation and industry and completion of EU integration, there will be an increase in energy demand.

•

The output of energy sector has an important share in country output: The output of energy sector is 5percent of GDP. There had been an annual increase of 8.8percent

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in country output in the period of 2000-2008 while the energy sector had grown 4percent annually in the same period. •

The sales output of energy sector constitutes 17percent of the industry sales output: while the yearly increase of industry production output between 2003-2008 was 17percent, the yearly average increase of energy sector sales output was 17,4percent in the same period.

•

The workers in the energy sector constitute 3,4percent of the paid workers employment: The gross wage of the sector is 1,706 KM which is 42percent above the country average gross wage.

•

The performance of the foreign trade of the energy sector has a great importance for the country economy: Bosnia and Herzegovina is a net exporter in terms of electricity energy. The net export surplus was 1,640 GWh as of 2008. The share of electricity export in country’s total export was 5.3percent as of the total of last five years and it realized 8.4percent in 2009. The import coverage of export was percent259 as of the average of last five years. The importance of energy investments is more when considering that the country has 40percent foreign trade deficit/GDP and 45percent total foreign trade deficit coverage,

•

The RCA coefficient is very high: Energy sector is one of the rare sectors in Bosnia and Herzegovina economy that has a high power of competition in foreign trade and there is an increasing trend in competition power.

•

There is an increasing trend in country electricity prices: The household and industry electricity prices had increased in favor of household as of years. When comparing the electricity prices of the country with EU, Euro Zone and the European Countries, it is seen that the Bosnia and Herzegovina has the cheapest electricity price in two of the consumer groups. The cheap electricity price is an attractive element for the energy investments however, it indicates that it is more attractive for companies selling to abroad rather than selling to domestic markets.

•

The energy demand deficit of hinterland formed by Southeast Europe Countries, is an important opportunity for energy investments in Bosnia and Herzegovina: As of 2008, the electricity market size of the hinterland formed by the Southeast Europe Countries was 254 TWh and had 22 TWh electricity deficits. With the estimation of the world electricity consumption is going to increase 2.5percent2* yearly, the regional electricity market size assumed to be 302 TWh as of 2015, 437 TWh as of 2030. It is considered that, the energy investments to be realized will not be a problem in terms of foreign trade due to the growing markets and high unit electricity prices of the neighbor and close countries, country’s electricity export and the size of electricity deficit realized based on hinterland.

2 ∗ IEA, World Energy Outlook reference scenario prediction

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•

The geographical structure and the climate of the country support the country’s hydro and thermal potential: Bosnia and Herzegovina draws attention with its excess areas of mountains and excess amount of yearly precipitation falls per square. When comparing the annual amount of precipitation falls per square with the neighbor countries, it is third after Montenegro and Slovenia with 931 mm which is a positive indicator for the feeding of hydro resources and sustainability. It is considered that, keeping the transmission channel short gives a considerable boon in cost in hydroelectricity investments.

•

Hydro and Wind Power Plants provide a cost advantage in renewable energy investments: when comparing the unit costs of electricity production from renewable energy sources, it is seen that Hydro Power Plants is advantageous with 1,625 thousand USD average constant investment per MW and 0,013 USD average production cost per kWh and Wind Power Plants has the second cost advantage in front of geothermal and solar energy.

•

The stream potential and the locations prepares an appropriate ground for the construction of small and medium sized Hydro Power Plants which have low investment costs.

To conclude, considering the geographical location of Bosnia and Herzegovina, the electricity production potential primarily thermal and hydro, the foreign trade performance of the country’s energy sector, the appropriate laws regarding the foreign capital and targeting the EU integration, there is an important investment environment in terms of energy investments.

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