BOSNIA: SARAJEVO SELLS ELECTRICITY SURPLUS DESPITE

UNCLAS SECTION 01 OF 02 SARAJEVO 001426

SENSITIVE
SIPDIS

STATE FOR EUR/SCE (FOOKS)

E.O. 12958: N/A
TAGS: EINV ENRG EPET PGOV PREL BK
SUBJECT: BOSNIA: SARAJEVO SELLS ELECTRICITY SURPLUS DESPITE
DEFICIT IN MOSTAR

REF: SARAJEVO 1199


1. (U) Summary: Sarajevo-based electricity distributor
Elektroprivreda BiH (EPBiH) announced their intention to sell
close to 200 mln USD worth of surplus electricity to
prospective utilities and electricity trading companies.
Although profits from electricity surplus would be a boon for
the Federation Government's budget, they would come at the
expense of the Federation's other utility, Mostar-based
Elektroprivreda (EPHZHB),which continues to run a deficit.
According to Federation officials, the two companies are
treated as separate enterprises and EPHZHB must compete with
international bidders for purchase of electricity from EPBiH.
Because the Bosniak-run, Sarajevo-based, EPBiH has been
favored by Federation government officials who plan to expand
its healthy electricity generating resources, the disparity
between the two companies, and the parallel tension between
the Bosnian Croat and Bosniak leaders, will continue. The
Bosniak leaders have held off on a decision for a Federation
energy strategy to avoid making it an election issue. End
summary.


2. (U) Elektroprivreda BiH (EPBiH),one of the two power
utilities owned by the Federation Government, announced plans
to sell 1.6 billion kilowatt-hours of surplus electricity
next year, which could be worth 196 million USD. 2009 will
be the first year in over five years that EPBiH will have
surplus electricity to sell themselves, as an obligation to
compensate Elektroprivreda Croatia for investments made to
help build the Kakanj thermal power plant expires this year.
In return for the pre-war investment, Elektroprivreda Croatia
was granted a five-year term in which they sold EPBiH surplus
electricity.


3. (SBU) According to EPBiH General Manager Amer Jerlagic
around 20 neighboring utilities and power trading firms are
interested in bidding to purchase the surplus electricity.
According to the media, only Bosnia and Bulgaria are
electricity exporters in southeastern Europe. The Federation
has been working on a plan to build more thermal and
hydropower plants to increase electricity generation,
however, domestic political squabbles have resulted in a
continued stalemate on sector development (reftel).

WHAT ABOUT BOSNIA,S INTERNAL ENERGY NEEDS?
--------------


4. (SBU) We asked EPBiH Executive Director Emir Aganovic
about the electricity needs of Mostar-based Elektroprivreda
HZHB, a company that is also owned by the Federation
Government and is continually short of electricity, and how
that fits in with export of EPBiH,s surplus. (Note: In
2007, EPHZHB's electricity shortfall was 1.3 billion
kilowatt-hours, in 2008, officials predict the shortfall will
be 1.26 billion kilowatt-hours. End note.) According to
Aganovic, EPHZHB must compete with any other international
bidder or power trading company for the surplus electricity.
The only benefit to EPHZHB is that the sale price would be
significantly lower, since transit of electricity to Mostar
is obviously much cheaper than transit to Slovenia, Italy or
Greece. Privatization of Aluminij Mostar, one of the
country's largest exporters, is being held up largely over
the dispute of guaranteed access to below-market-rate
electricity from EPHZHB. The factory takes more than
two-thirds of EPHZHB's entire load, leaving ordinary
ratepayers with the possibility of having to cross-subsidize
the cost of buying expensive alternate-sourced electricity.



FUTURE ENERGY NEEDS STILL NOT ADDRESSED
--------------


5. (U) After paying off debts to investors and other arrears,
EPBiH,s reported net profit for the first half of 2008
amounted to 15 million USD. Jerlagic told the press that the
company plans to re-invest some of these profits in renewable
energy resources. According to him, wind power is the great,
untapped resource for Bosnia with a potential of 1,000 to
1,200 megawatts, annually. He discussed plans in the media
of investing in a 30-MW windpark in southern Herzegovina as
well as several small hydro-plants.


6. (U) Jerlagic warned that Bosnia and Herzegovina, as a
whole, must develop an energy sector development strategy or

SARAJEVO 00001426 002 OF 002


there will be a country-wide deficit of energy within a
decade. Federation Minister of Energy Vahid Heco went even
further in a June interview, threatening that the Government
must begin developing new hydro and thermal power plants
otherwise they will be have an electricity deficit by 2012.

COMMENT
--------------


7. (SBU) Despite owning both Sarajevo-based EPBiH and
Mostar-based (Bosnian Croat-controlled) EPHZHB, the
Federation Government treats these two companies as separate
enterprises, a strategy that does not benefit electricity
consumers. With the government focused mainly on bolstering
the capacity of EPBiH with new power generating resources,
EPHZHB will continue to be left in the dark, creating further
tension between Bosniak and Bosnian Croat interests.
Although a situation where energy resources are divided
unequally between Bosnian Croats and Bosniaks will inevitably
create tensions in the Federation, the worst case scenario is
that the internal squabbles among political party officials
will result in continued stagnation of the energy sector,
dashing any hopes of creating a long-term electricity export
strategy. We can also expect Croat political parties to add
this dispute to their list of grievances against the Bosniaks
that they use to justify their demands for a third entity.


ENGLISH