SLOVENIA: ENERGY SECURITY AND HYDROELECTRIC POWER

UNCLAS SECTION 01 OF 03 LJUBLJANA 000214

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SUBJECT: SLOVENIA: ENERGY SECURITY AND HYDROELECTRIC POWER

REF: LJUBLJANA 0171

SENSITIVE


1. (SBU) Summary: Companies within the state-owned Holding
Slovenske Elektrarne (HSE) group produce over half of
Slovenia's electricity. With the GOS looking for self-
sufficiency in electricity, HSE's further construction of
hydroelectric plants will play a key role. HSE is currently
evaluating plans to develop two major natural gas-fired
facilities, one in Slovenia and one in Austria, in a
partnership between HSE, a Slovenian manufacturer, and an
Austrian corporation. Privatization of HSE, however, does
not appear to be high on its or the GOS's agenda, despite
interest from a major German power producer. Following is
an overview of a recent visit by DCM to HSE and one of its
subsidiary companies. End summary.

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What is HSE?
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2. (U) In July 2001, the GOS established HSE as an
integrated entity of three hydroelectric plants (Dravske,
Savske, and Soske),two coal-fired electricity plants
(Brestanica and Sostanj) and a coal mine located in Velenje.
Today, HSE is the leading Slovenian power producer,
comprised of ten companies and more than five thousand
employees. HSE companies produce more than 50 percent of
all electricity generated in Slovenia. (Note: the Krsko
nuclear power plant is not/not part of HSE.) Owned by the
state of Slovenia, in 2005 HSE reported approximately USD 74
million in pre-tax profit. The company receives nearly all
of its revenue from buying and selling electricity and does
not own or manage distribution networks.


3. (U) One of the key components of HSE's business and
Slovenia's energy strategy is hydroelectric power.
Hydropower has been supplying electricity to the residents
of Slovenia since the construction of the Medvode hydro
plant, part of the HSE subsidiary Savske Elektrarne. The
20MW facility, originally built in the 1950s and currently
undergoing a multi-year restoration, is located in the
suburbs of Ljubljana. As noted reftel, hydroelectric plants
on the Sava, Drava, and Soca rivers provide approximately
one-third of the electricity that is consumed in Slovenia.
HSE controls all of the companies that produce hydroelectric
power in Slovenia.

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Independence in Electricity
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4. (U) During a visit to HSE, CEO Joze Zagozen told DCM that
it plans to invest between 1.3 and 2.9 billion Euros in the
coming decade to develop and expand electrical production in
Slovenia. Per reftel, Slovenia currently imports
approximately 10-15 percent of its electricity. Zagozen
said that the goal of HSE and the GOS is to reach self-
sufficiency in electrical production. He estimates that the
planned investment in increased capacity and improved
efficiency in both coal and hydro facilities will achieve
that objective. (Note: Although HSE imports electricity
from neighboring states, it also exports approximately 300MW
to Italy because of the higher prices it can charge.)

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Hydroelectric Power to Increase
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5. (U) Zagozen noted that while the GOS will invest
significant resources to modernize the major coal-fired
facilities in Slovenia, hydroelectric power is an important
element of Slovenia's electricity production strategy. One
of the few natural resources that Slovenia can draw on,
Zagozen said the strong water flow on Slovenia's major
rivers is an asset that HSE must continue to develop.
Echoing what Post has learned from other sources, Zagozen
told DCM he felt that an ideal strategy would achieve a
share of 35 to 40 percent of Slovenia's overall electrical
needs from its hydroelectric plants. Despite the relatively

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high investment required to build a hydro plant (three times
that of coal per installed megawatt),Zagozen said that
accelerated development of plants along the Soca, Drava,
Sava, and Mura rivers was necessary if Slovenia is to
achieve and maintain self-sufficiency in electricity
production.


6. (U) During a visit to the Medvode facility of Savske
Elektrarne, the HSE firm that operates hydroelectric plants
along the Sava River, Managing Director Drago Polak told DCM
that he also expects continued, significant development of
hydro resources in Slovenia. Polak said that only 12
percent of the total available potential of the Sava River
has been developed, and that plans to take advantage of this
resource are underway. He added that in the coming 10-15
years, 15 more hydro plants are planned to be built on the
Sava. Polak said that the power of the Sava river largely
depends on runoff from Alpine snowfall and, thanks to this
year's very heavy snowfall, the Sava plants would be
uncharacteristically productive in the spring and early
summer months of 2006.

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Natural Gas An Option?
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7. (SBU) Zagozen told DCM that HSE is currently
investigating the possibility of investing in natural gas-
fired electrical facilities. Noting that Slovenia currently
receives a very small percentage of its electricity from
natural gas, Zagozen said these proposed plants could be one
way of diversifying production. Post understands that HSE,
Talum (a Slovenian aluminum producer),and an Austrian
company called Verbund have established a joint venture
company to conduct feasibility studies of two proposed 400MW
lants, one in Kidricevo in northeastern Slovenia ad a
similar facility in Austria. Construction o a plant of
this size in Slovenia would require rdevelopment of
existing gas lines, which are insfficient to transport the
1 billion cubic metersof gas which a plant of this size
would need annally. Zagozen noted that any decision to
move frward on a gas-fired facility in Slovenia would
dpend on the results of a risk analysis of increasig
sourcing of natural gas from Russia. (Note: Sovenia
imports approximately 60 percent of its ntural gas needs
from Russia. Most of this is usd for heating and
industrial purposes.)

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HSE Privatization?
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8. (SBU) The GOS has said that it intends tosell off at
least part of HSE and create another major energy producer
to improve the competitiveness of the market (reftel).
German energy corporation E.on has expressed interest in a
possible purchase of 25 percent or more of HSE and would
provide capital to achieve the goals of HSE's development
strategy. Concrete plans for privatization, however, have
yet to materialize and high-ranking GOS officials have
indicated that they will move conservatively. As he has
said in public fora in the past, Zagozen does not believe
that privatization is a panacea to better competition and
that HSE currently has the "optimal combination of
resources." Zagozen acknowledged that privatization could
bring some benefits, but he does not believe that the
individual companies within the HSE group should be sold
off. Synergies within the group must be maintained, Zagozen
said, and if there is any privatization, the "state should
remain the majority owner."

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Comment
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9. (SBU) The diversity of supply and operational stability
of HSE bode well for the future of electricity security in
Slovenia. Further development of hydropower as an energy
resource will be a critical part of Slovenia's energy
strategy and, in light of only muted expressions of concern
from environmentalists, appears to be on track. In view of

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the Russia-Ukraine natural gas dispute from January, HSE's
investigation of a possible increase in gas usage is worth
noting. Post contacts tell us that these plans are,
however, only in the early investigative stages and may well
never come to fruition. End comment.
ROBERTSON