POSSIBLE SCENARIOS IF BELGRADE DISCONNECTS KOSOVO

C O N F I D E N T I A L SECTION 01 OF 03 PRISTINA 000757 SIPDIS SIPDIS DEPT FOR EUR, EUR/SCE, DRL, INL, AND S/WCI, NSC FOR BRAUN, USUN FOR DREW SCHUFLETOWSKI, USOSCE FOR STEVE STEGER, OPDAT FOR ACKER E.O. 12958: DECL: 10/23/2017 TAGS: PGOV KJUS KCRM EAID KDEM UNMIK YI SUBJECT: POSSIBLE SCENARIOS IF BELGRADE DISCONNECTS KOSOVO FROM ITS ENERGY GRID Classified By: COM TINA KAIDANOW FOR REASONS 1.4 (B) AND (D) ¶1. (C) SUMMARY: Various scenarios exist if Serbia, in response to a unilateral declaration of independence by Kosovo, chooses to disconnect Kosovo from its energy grid. Our USAID energy experts tell us that the most likely scenario would have Kosovo muddling through, but only if both its aging lignite-burning plants, which provide around 80-85 percent of Kosovo's power needs, remained functional. Under normal conditions, Kosovo imports roughly 100 MW of extra electricity either from or via Serbia during the high-demand winter months. This year, a liquidity crunch at Kosovo's electric company (KEK) would make even that purchase pricey and difficult under the best of circumstances. ¶2. (C) SUMMARY (cont'd): However, things could be substantially worse if Kosovo's energy generating capacity were diminished by the failure of one or several units at the Kosovo A or B plants. Under this scenario, and assuming Serbia decided to deny electricity to Kosovo through its grid, Kosovo could theoretically import energy over transmission lines with Montenegro, Albania and Macedonia. However, the tight regional energy market and the need to buy on the spot -- rather than from long-standing contracting agents via Serbia -- would mean Kosovo could pay as much as double for this energy (say, 200 euro per MW hour). In a worst-case scenario, and assuming a failure of one or more units of Kosovo A or B for some months, importing up to 300 MW of electricity (if such a quantity were even available on the spot market) could cost Kosovo's budget more than 50 million euro in unplanned expense. ¶3. (C) SUMMARY (cont'd): There are disincentives for Belgrade to consider this action, key among them the effect on Serbia's transmission of electricity to Greece and Macedonia with Kosovo as the conduit. Another consideration for Belgrade would be the impact on vulnerable Serb enclaves south of the Ibar river. However, even these considerations might not sway Belgrade to desist from such a step. In one last troubling factor to consider, though one we judge highly unlikely to be abused by Belgrade, both Kosovo A and B utilize the Gazivoda lake for cooling purposes; with the Gazivoda reservoir located in the northern Serb-majority municipality of Zubin Potok, the security of the reservoir, or more precisely of the canal system that brings the water to KEK, will be of security concern. END SUMMARY. Under normal conditions ¶4. (C) Kosovo's two lignite-burning power plants near Pristina (Kosovo A and B) generate 700 MW of power on a continuous basis, with another 120 MW capacity available, providing sufficient lignite supplies exist. In total, this accounts for anywhere between 80 to 85 percent of Kosovo's energy needs. A small hydroelectric facility in the northern Serb-majority municipality of Zubin Potok provides an additional 35 MW. During the high-demand winter months, Kosovo generally imports energy of around 100 MW at peak, a little over 10 percent of total needs. Kosovo imports the bulk of this energy over the Serbian energy grid, but also has transmission lines to Macedonia, Montenegro and Albania, through which energy imports (and exports) can flow as well. Serbia transmits a large amount of energy through Kosovo to neighboring countries, particularly to Greece and Macedonia. At present, we see continued good cooperation between the Kosovo Energy Corporation (KEK) and Elektromrezha Srbije (EMS),resulting in energy purchases for cash and energy swaps (exchanges). These arrangements have benefited both sides as their energy needs have fluctuated. Much discussion in Pristina these days, however, has focused on the possibility that Belgrade might retaliate against a Kosovar unilateral declaration of independence by disconnecting Kosovo south of the Ibar from its energy grid. The following represents possible scenarios and outcomes should something like this occur. PRISTINA 00000757 002 OF 003 Scenario One: Kosovo A and B remain fully operational; Serbia takes Kosovo off the grid ¶5. (C) Our USAID experts with long experience at KEK tell us that under this scenario -- i.e., Kosovo A and B plants remain fully operational and Albania, Montenegro and Macedonia keep their transmission lines in service -- Kosovo would remain connected to these countries and would operate without major problems. However, Kosovo would have to look to another of its neighbors to supply any additional winter energy needs. Under normal circumstances, such purchases are made through long-standing contracts with regional suppliers and provided via the grid with Serbia. Substituting for these arrangements and buying on the spot in an already tight regional energy market would markedly inflate the price paid, and Kosovo might expect to pay as much as double for this energy (up to 200 euros per MW hour). (Note: Connected to Serbia or not, finding the money for any imports this particular winter will be an issue. KEK has serious liquidity problems due to a catastrophic decision by the Minister of Energy earlier this year to let KEK spend already tight funds on reducing load-shedding during the month of Ramadan. Even into 2008, continuing liquidity problems will restrict imports, leading to the probability of increased load-shedding. KEK currently does have the funding to purchase an additional 50 MW of electricity via the Serbian grid, should it be needed in the period November-December 2007, a timeframe which is unlikely to be impacted by Serbian retaliatory action. End Comment.) Scenario Two: A and/or B units taken off-line ¶6. (C) Should either or both of Kosovo's aging plants, or their component units, need to be taken off-line for whatever reason, options would become dramatically worse. If only one unit of Kosovo B were to go down -- assuming the generating capacity to make up for this even existed among its non-Serbian neighbors -- Kosovo might need to import up to 300 MW of power on a sustained basis; at 10 hours/day for 90 days, say during the relatively cold months of January-March, this could require an infusion of up to 54 million euro for imports, though perhaps not all paid in cash but on the basis of other contractual arrangements. In the improbable event that both plants were to fail, our energy experts doubt that such a volume could be found under current energy conditions in the region. The likelihood of these failures in units at Kosovo A and B are impossible to predict with any certainty; the concerns over technical failure are not new, but the budgetary impact could loom even larger than usual should Serbia make the decision to disconnect Kosovo. Belgrade likely to disconnect? ¶7. (C) Belgrade might think twice before disconnecting Kosovo if the most likely result would be that Kosovo could still muddle through. Perhaps more important, Kosovo's geographic position as a transit area for Serbia's transmission of energy to neighboring states, particularly to Greece and Macedonia, would likely give Belgrade some pause. A cutoff would provoke outcries within the region, affect the reliability of Serbia's service to these two countries, and dry up a source of hard currency earnings. Aside from these technical and commercial factors, Belgrade would also have to consider the effect on the vulnerable Serb enclaves south of the Ibar river. They would suffer as well, if not more so, from any attempt to plunge Kosovo into darkness and cold. These considerations might be swept aside, however, in the wake of Belgrade's anger and legalistic objections to Kosovo independence. ¶8. (C) One other factor needs to be considered in any discussion of the threat posed to Kosovo's energy supply in the event of crisis: the security of the cooling water for the Kosovo A and B plants. Via a canal system, this water comes to Pristina from the Gazivoda reservoir, Kosovo's largest, located in the northern Serb-majority municipality PRISTINA 00000757 003 OF 003 of Zubin Potok. The reservoir also provides irrigation and drinking water to Kosovar consumers, as well as the 35 MWh of hydroelectric power mentioned earlier. (Note: This 35 MWh, while only a fraction of Kosovo's total generating capacity, serves an important system stability function, allowing Kosovo to dynamically control its total generation to balance the ever-changing system load. End Note.) ¶9. (C) In the event of a disruption of Gazivoda's operations, or more precisely of the canal system bringing water to KEK, Kosovo A and B would be without cooling water -- there is no alternative source at present -- and would need to be shut down immediately. We deem the prospect of sabotage as highly unlikely, but not out of the realm of possibility. During a recent visit, one of our USAID implementers found no security at the site, and, to our knowledge, neither KFOR nor UNMIK police provides any regular protection. We note that the implications for sabotage of the reservoir might be as grave for Serb communities in northern Kosovo and in Serbia proper as it would be for Kosovo, given the direction of the water flow should the dam be damaged. (Note: COMKFOR told us recently that he considers any sabotage of the reservoir a remote possibility, but added that KFOR has contingency plans in place to deal with threats to the facility. End Note.) ¶10. (C) COMMENT: We are faced each year with the prospect of catastrophic failure in Kosovo's energy system due to the crumbling infrastructure of its electricity generating capacity. With a new Kosovo C generation plant unlikely to come on-line for perhaps seven years or more, this is not a threat that will go away. The added element of concern that faces us this year is that a Serbian decision to "disconnect" Kosovo could add substantial costs to an already skyrocketing energy import bill, particularly if import needs rise dramatically due to unforeseen technical failures. We have every incentive to urge Belgrade to consider its equities should they seriously consider such a move, and some of these equities might actually prove compelling enough for them to at least stop and ponder. Otherwise, as in every winter season, donors may have to brace themselves for the possibility of an appeal from Kosovo for assistance on a truly large scale should the worst occur. We continue to address Kosovo's long-term energy deficit through encouragement of the Kosovo C project, but neither that nor sporadic investments by KEK and key donors in existing infrastructure will alleviate the systemic problems that make Kosovo so vulnerable in the first place. END COMMENT. KAIDANOW