MONTENEGRO'S ELECTRICITY SECTOR

UNCLAS SECTION 01 OF 03 PODGORICA 000220 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ENRG PGOV EINV MW SUBJECT: MONTENEGRO'S ELECTRICITY SECTOR REF: A. A: PODGORICA 205 ¶B. B: PODGORICA 094 ¶C. C: 04 BELGRADE 2349 PODGORICA 00000220 001.3 OF 003 ¶1. SUMMARY: MONTENEGRO PRESENTLY IMPORTS 40% OF ITS ANNUAL ELECTRICITY CONSUMPTION - IMPORTING 1866 GWH COMPARED TO DOMESTIC PRODUCTION OF 2818 GWH. THE KOMBINAT ALUMINA PODGORICA (KAP) ALONE CONSUMES NEARLY 2000 GWH A YEAR. THE GOM PLAN TO BEGIN PRIVATIZING THE ELECTRIC POWER INDUSTRY OF MONTENEGRO (EPCG) WAS DERAILED ON JUNE 12, WHEN THE JUNIOR COALITION PARTNER THE SOCIAL DEMOCRATIC PARTY (SDP) JOINED THE OPPOSITION IN OPPOSING THE SALE OF THE THERMOELECTRIC PLANT IN PLJEVLJA TO THE OWNER OF KAP (REF A). THE WITHDRAWAL OF THE TENDER COULD HAVE A BROADER NEGATIVE EFFECT ON ALL FOREIGN DIRECT INVESTMENT, NOT JUST IN THE ENERGY SECTOR. ANY DECISION TO INCREASE ELECTRICITY PRODUCTION BY RELYING ON BUDGETARY TRANSFERS WILL STRAIN THE GOM'S BUDGET. END SUMMARY. MONTENEGRO'S ELECTRICITY SECTOR -------------- ¶2. THE ELECTRIC POWER SECTOR IN MONTENEGRO IS CONTROLLED BY ELECTRIC POWER INDUSTRY OF MONTENEGRO (EPCG),ONE OF THE LARGEST COMPANIES IN MONTENEGRO WITH A CAPITAL STOCK OF 905 MILLION EUROS. IN FEBRUARY 1999, IT WAS TRANSFORMED FROM A PUBLIC ENTERPRISE TO A STOCK COMPANY, BUT 67% OF THE STOCK IS STILL GOVERNMENT OWNED. IN FEBRUARY 2005, THE GOM ADOPTED A NEW ENERGY POLICY THAT ENVISIONED BEGINNING THE PRIVATIZATION OF EPCG IN MAY 2005, BEGINNING WITH THE SALE OF THE THERMOELECTRIC PLANT IN PLJEVLJA (TE PLJEVLJA -- 1150 GWH CAPACITY),AND ITS 31% HOLDING IN THE ASSOCIATED COAL MINE. (REF B). ON JUNE 12 OF THIS YEAR, PARLIAMENT ADOPTED A MOTION ADVISING THE GOM TO CANCEL THE SALE TENDER; THE GOM HAS AGREED TO ABIDE BY THE NON-BINDING MOTION. ¶3. IN ADDITION TO TE PLJEVLJA THERE ARE TWO MAJOR HYDROELECTRIC PLANTS, HE PERUCICA ON THE ZETA RIVER SOUTH OF NIKSIC (950 GWH RATED CAPACITY),AND HE PIVA ON THE PIVA RIVER SOUTH OF THE BORDER WITH BOSNIA AND HERZEGOVINA (950 GWH RATED CAPACITY). SEVERAL SMALL HYDROELECTRIC PLANTS HAVE A COLLECTIVE RATED CAPACITY OF 21 GWH. THE GOM USES AN ESTIMATE THAT MONTENEGRO PRESENTLY USES ABOUT 17% OF ITS HYDROELECTRIC CAPACITY. ¶4. ELECTRICITY PRODUCTION IN MONTENEGRO FOR 2006 WAS 2818.4 GWH. THE REMAINDER OF MONTENEGROS NEEDS WAS MET BY IMPORTS. SUPPLIERS INCLUDE: SERBIA (1204.3 GWH); SWITZERLAND (622 GWH); �0A;ROMANIA (188.4 GWH); CZECH REPUBLIC (58.2GWH); AND SLOVENIA (40.8GWH). ELECTRICITY GRID ¶4. THE MONTENEGRIN TRANSMISSION SYSTEM CONSISTS OF ABOUT 250 KM OF POWER LINES ON 400 KV LEVEL, 370 KM ON 220 KV, MORE THAN 600 KM ON 110 KV VOLTAGE LEVEL, AND IS CONNECTED WITH SURROUNDING SYSTEMS THROUGH NINE INTERCONNECTING LINES. (A SCHEMATIC OF THE GRID CAN BE FOUND ON-LINE AT HTTP://WWW.EPCG.CG.YU/ST1A.HTM .) ENERGY CONSUMPTION ¶5. CONSUMERS OF ELECTRIC POWER IN MONTENEGRO CAN BE DIVIDED INTO TWO LARGE CATEGORIES: DIRECT CONSUMERS AND DISTRIBUTIVE CONSUMERS (HOUSEHOLDS AND THE LIKE). DIRECT CONSUMERS ARE THOSE SUPPLIED AT THE 110 KV VOLTAGE LEVEL: ALUMINUM PLANT - KAP, NIKSIC STEELWORKS, AND RAILWAY OF MONTENEGRO. DISTRIBUTIVE CONSUMERS ARE ALSO DIVIDED ACCORDING TO THE LEVELS OF VOLTAGE (35 KV, 10 KV, 0.4 KV). AT THE MOMENT EPCG HAS ABOUT 273,000 CONSUMERS. THE NUMBER OF CONSUMERS HAS BEEN INCREASING OVER THE RECENT YEARS, WITH MOST NEW CUSTOMERS RECEIVING SERVICE AT A VOLTAGE OF 0.4 KV. B T #0220 N -- END OF ERRORED MESSAGE -- PODGORICA 00000220 002.3 OF 003 ¶6. MONTENEGRO IS A HUGE CONSUMER OF ELECTRICITY, AS A RESULT OF THE ALUMINUM SMELTER (KAP) WHICH ACCOUNTS FOR 42.55% OF TOTAL NATIONAL CONSUMPTION. TOTAL ANNUAL CONSUMPTION FOR MONTENEGRO IN 2006 WAS 4684.7GWH. LEGISLATIVE BACKGROUND -------------- ¶7. THE LAW ON ELECTRIC POWER IN MONTENEGRO WAS ADOPTED IN JUNE ¶2003. THE LAW ORDERS THE SEPARATION OF THE FUNCTIONAL ENTITIES IN EPCG INTO ADMINISTRATIVE DIRECTORATE, PRODUCTION, TRANSMISSION, DISTRIBUTION, SUPPLY AND BUILDING AND RECONSTRUCTION OF ENERGY FACILITIES, AND PROVIDES A FIRST STEP TOWARDS CREATING SEPARATE COMPANIES AND FORMING A COMPETITIVE ELECTRICITY MARKET IN MONTENEGRO. THE REGULATORY ENERGY AGENCY OF THE REPUBLIC OF MONTENEGRO WAS FOUNDED IN 2004, ACCORDING TO THE ENERGY LAW. THE AGENCY IS AN INDEPENDENT, NON-PROFIT ORGANIZATION WITH PUBLIC AUTHORIZATION. THE AGENCY RUNS A BUDGET, INDEPENDENT FROM THE STATE BUDGET, WITH MOST FUNDING DERIVED FROM LICENSE FEES. ENERGY POLICY -------------- ¶8. MONTENEGRO ADOPTED ITS ENERGY POLICY IN FEBRUARY 2005. THE POLICY AIMS AT FURTHER DEVELOPMENT OF THE ENERGY SECTOR, AND SEEKS TO ENCOURAGE BOTH DOMESTIC AND INTERNATIONAL INVESTORS TO INVEST IN NEW ENERGY FACILITIES. THE SPECIFIC GOALS ARE: A SECURE AND RELIABLE POWER SUPPLY, ENVIRONMENTAL PROTECTION, MARKET-BASED OPERATIONS, ENCOURAGING INVESTMENTS, HEIGHTENED ENERGY EFFICIENCY, DEVELOPING NEW RENEWABLE RESOURCES, REGIONAL (AND WIDER) INTEGRATION, AND THE PROVISION OF SOCIAL PROTECTION MEASURES. A COMPLEMENTARY STRATEGY OF ENERGY EFFICIENCY WAS ADOPTED IN OCTOBER 2005. ¶9. THE STRATEGY FOR THE DEVELOPMENT OF SMALL HYDRO PLANTS WAS ADOPTED IN APRIL 2006, ALONG WITH AN ACTION PLAN FOR ITS IMPLEMENTATION. THE STRATEGY PROVIDES MEASURES FOR REMOVING BARRIERS IN THE AREA OF DEVELOPING SMALL HYDRO PLANTS, WITH SUGGESTIONS FOR REGULATIVE CHANGES THAT WOULD SIMPLIFY PROCEDURES, AND PROVIDE INITIATIVES FOR INVESTORS. THE STRATEGY IDENTIFIED 70 LOCATIONS FOR DEVELOPING SMALL HYDRO PLANTS WITH TOTAL POTENTIAL OF 230MW. ¶10. A STRATEGY FOR ENERGY DEVELOPMENT IN MONTENEGRO THROUGH 2025 WAS ADOPTED BY THE GOM ON JUNE 21, 2007. IT PROPOSES THE CONSTRUCTION OF ADDITIONAL POWER PLANTS, STARTING WITH A SECOND BLOCK OF THE THERMOELECTRIC PLANT AT PLJEVLJA. TOGETHER WITH WINDPOWER, FIVE NEW SMALL HYDROELECTRIC PLANTS, AND A METHANE-POWERED GENERATOR, THE GOM PLANS TO ADD 700 MW BY 2025. ECONOMY MINISTER GVOZDENOVIC CLARIFIED THAT THE STRATEGY DOES NOT ENVISION PARTICIPATING IN THE CONSTRUCTION OF HYDROELECTRIC PLANT "BUK BIJELA," A CONTROVERSIAL PROPOSAL FROM WHICH THE GOM WITHDREW IN 2004 AFTER PUBLIC OPPOSITION TO THE PLAN. (REF C) ¶11. THE JUNE 12 PARLIAMENTARY VOTE, BLOCKING THE PRIVATIZATION (AND SALE TO FOREIGN INVESTORS) OF TE PLJEVLJA, IS WIDELY POPULAR. EIGHTY PERCENT OF THOSE POLLED BY NDI (NATIONAL DEMOCRATIC INSTITUTE) IN LATE MAY BELIEVE THE STATE SHOULD MANAGE "THE MOST IMPORTANT NATURAL RESOURCES," INSTEAD OF PRIVATIZING THEM. SEVENTY-SIX PERCENT SPECIFICALLY OPPOSE PRIVATIZING TE PLEJEVLJA AND THE ASSOCIATED COAL MINE. COMMENT -------------- ¶12. THE POLITICAL RISK TO FOREIGN INVESTMENT CREATED BY THE JUNE 12 PARLIAMENTARY VOTE IS LIKELY TO BE SIGNIFICANT. EVEN BEFORE B T #0220 N -- END OF ERRORED MESSAGE -- PODGORICA 00000220 003.3 OF 003 THE VOTE, FOREIGN INTEREST IN DEVELOPING MONTENEGRO'S ENERGY SECTOR WAS MINIMAL, BESIDES THAT SHOWN BY RUSSIAN OLIGARCH DERIPASKA. WESTERN EUROPEAN DIPLOMATS VIEWED THE STRUCTURE OF THE TE PLJEVALJA TENDER, WHICH SPLIT THE TRANSMISSION GRID FROM THE GENERATING PLANTS, AS REDUCING FOREIGN INTEREST. WHILE SOME SAID THE SPLIT OF THE TENDER WAS INTENDED TO DISSUADE OTHER (NON-RUSSIAN) BIDDERS, THE SEPARATION WAS IN CONSEQUENCE OF THE 2003 LAW ON ELECTRIC POWER, WHICH WAS ENDORSED BY BILATERAL AND MULTILATERAL DONORS (AND PREDATED THE SALE OF KAP). ¶13. THE GOM HAS NOT OUTLINED HOW IT WOULD PROVIDE PUBLIC INVESTMENT INTO INFRASTRUCTURE. THE GOM HAS ESTIMATED THAT THE INVESTMENT NEEDED TO EXPAND TE PLJEVLJA IS 170 MILLION EUROS. POST NOTES THAT THE ESTIMATE APPEARS LOW, EVEN VERY LOW, AS THE TE EXPANSION WOULD PROVIDE THE BULK OF THE NEW 700 MW CAPACITY ENVISIONED BY THE PLAN. MONTENEGRO'S CAPITAL BUDGET IN 2006, FOR ALL PURPOSES, WAS 97 MILLION EUROS (EXPENDED),OR 5 PERCENT OF GDP (MINISTRY OF FINANCE, AS REPORTED IN MAY 2007). FDI IN 2006 WAS FIVE TIMES LARGER. ¶14. MORE BROADLY, THE RESCISSION OF A MAJOR TENDER WILL SEND A SIGNAL OF GOM INCONSTANCY, WEAKENING EFFORTS TO COMPLETE PRIVATIZATION OF THE ECONOMY AND INCREASING THE PERCEPTION OF POLITICAL RISK -- THAT THE GOM WILL STEP IN TO FRUSTRATE OR REPUDIATE CONTRACTS. UNFORTUNATELY, IN THE PRESENT CASE, MOST MONTENEGRIN COMMENTATORS HAVE DISMISSED THE DAMAGE TO LONG-TERM FDI AND CONSEQUENT ECONOMIC GROWTH RESULTING FROM PLAYING POLITICS WITH THE TE PLJEVLJA TENDER. WITHOUT CONTINUING HIGH LEVELS OF FDI, ECONOMIC EXPANSION WILL SLOW, NOR IS THE GOM GENUINELY ABLE TO SUBSTITUTE FOR MISSING FDI, EVEN IN LIMITED AREAS SUCH AS LARGE-SCALE INFRASTRUCTURE. WHILE A SMALL NUMBER OF LOCAL COMMENTATORS HAVE TRIED TO HIGHLIGHT THE NEGATIVE CONSEQUENCES, THEY HAVE FOR THE MOMENT LARGELY BEEN REBUKED OR IGNORED. BARNES B T #0220 N -- END OF ERRORED MESSAGE --