Energy Development in Montenegro: Future, Opportunities and Challenges

International Energy Conference

“Energy Development in Montenegro: Future, Opportunities and Challenges”

Kolašin, Montenegro, July 10–13, 2008

World Bank Support for the Energy Sector of Montenegro

Jan-Peter Olters

World Bank Representative

Country Office Montenegro

The timing of this energy conference could not have been any better. This is the midst of Montenegro’s tourist season—the period with peak energy demand. This is a time with ample sunshine, high temperatures, and little or no precipitation—an important factor in a country heavily reliant on hydro energy. The (if you will) natural misalignment between seasonal peak demand in electricity consumption and seasonal generation constraints from hydro sources, the least expensive source of energy in Montenegro, highlights the particular difficulty in balancing supply and demand in a Mediterranean tourist-based economy. As if, for reasons in themselves, the implementation for Montenegro’s ambitious energy strategy is not difficult enough, its inherent challenges are being amplified by (i) the exceptionally dynamic economic growth, particularly pronounced in energy-intensive sectors; (ii) the effects from the very considerable increases in energy prices worldwide, with the corresponding socio-economic implications currently dominating the agenda of policymakers and international development experts everywhere; and (iii) years (if not decades) of underinvestment into necessary infrastructure. In such a complicated context, the debate on best ways to provide a secure energy provision has important economic, fiscal, environmental, social, as well as political dimensions requiring a general balance.

At the outset, it is (in my view) important to stress that Montenegro has come a long way from the challenges of crisis management that have occupied the discussions just a few years ago—issues that are still plaguing a number of the neighboring countries, constraining their growth potentials. Montenegro had still been in such an unenviable situation when the World Bank, in 2002, approved its five-year, US$5 million Emergency Stabilization of Electricity Supply project. As the project’s name implies, its elements sought to address core factors responsible for the major shortages of electricity that made the winter of 2001–02 a particularly unpleasant one. The project was embedded in the stabilization program that the government and the power utility had adopted for the purpose of stabilizing the latter. The World Bank’s project complemented the Government’s efforts with measures aimed at (i) the introducing a new tariff system; (ii) reducing network losses; (iii) modernizing EPCG’s financial-management system; and (iv) restructuring the vertically integrated electricity company. Looking back a few years serves as a useful reminder of the strength of the underlying reform efforts during a time when the focus was on political challenges of state building rather than those of socio-economic development. In the World Bank, we have since used Montenegro’s experience as example for other countries, which are suffering from high network losses and poor collections, when encouraging them (among many other things) to rely on modern metering technology as a means to increase collection rates.

In the meantime, things have changed in a fundamental way. Very high rates of investment and growth have translated into expectations of rapidly rising electricity demand—both during base and peak periods. Inversely, the expected high rates of investment and growth over the next few years will only materialize if very important energy infrastructure investments are made—in particular in power generation and distribution. As energy is only one of several sectors competing for large-scale public-sector investments—I only mention here the €2 billion motorway project linking the port of Bar with Belgrade and the European Corridor 10—the investments foreseen in Montenegro’s Energy Strategy rests on the ability to attract private-sector participation in energy sector. Overall fiscal constraints will challenge policymakers to consider all options, possibly even those currently not foreseen, such as the privatization of EPCG.

A strategy aimed at providing energy security rests on several pillars. Increased generation and more efficient distribution are obvious elements. At this stage, it is not foresee that World Bank support goes beyond possible technical advice in the context of a planned study on PPP options for future power generation. However, in a country with a high degree of month-to-month fluctuations in electricity demand, partly reflecting patterns of tourism demand, securing a given level of electricity generation is either insufficient or far too expensive. Thus, to reap in all benefits from these investments, they have to be complemented by measures aimed at facilitating imports in periods of excess demand and exports in periods with an inverse situation. To improve the overall efficiency and reliability of the power system, to ensure the maximum security in supply, the closer integration into the regional markets is a key objective—one that is reflected in the five-year, US$9 million Energy Community of South East Europe Third Adaptable Program Loan (ECSEE APL3) Project approved a little more than a year ago. Investment projects financed under the ECSEE APL 3 project aim at improving the performance of the power sector and integrating the country’s electricity market into the regional one—with the latter being an essential component in order to achieve fiscal sustainability and encourage private sector-led growth.

Still, focusing on overcoming existing supply constraints represents only half the strategy. The high energy prices currently prevailing in world markets serve as a useful—as much as an unwelcome—reminder that the demand side plays a crucial role in a comprehensive energy strategy. If energy is scarce and expensive, one will have to use that what is available intelligently and efficiently—underlining the particular importance of efforts aimed at increasing energy efficiency. To date, primary energy consumption—if measured per euro of GDP—exceeds comparable figures in other European countries by very considerable margins. This finding is fully recognized in the Government’s Energy Development Strategy and which thus motivated the development of an Energy Efficiency Strategy, which the Government approved a few years ago. The World Bank is supporting these efforts, and our experts are currently preparing a US$10 million Energy Efficiency project aimed at improving energy consumption performance in public schools and hospitals in Montenegro. The project’s narrow objective is, of course, to produce energy and financial savings in targeted buildings in the health and education sectors. However, more broadly, the accompanying energy audits—both ex ante and ex post—will underpin with data the general discussion surrounding the economic viability of energy-efficiency investments elsewhere. The project will concomitantly seek to apply new energy-efficiency and supply technologies—including solar technologies—in public sector buildings, making use of sources of energy that are abundantly available in a country with an average of 240 days of sun per year. Especially against the threat posed by global warming, decentralized and complementary sources of energy can prove an important building block in a broader strategy that seeks to provide energy security. And it is the beauty of working in a small country that successful reforms can be implemented more quickly, thus serving as a model for other countries to follow. And this is an area where I believe—in a few years’ time—Montenegro will have a great deal to contribute in the global energy debate, offering solutions that are consistent with the economic and environmental objectives of a country relying on sustainable tourism.

For reasons of time, I will not go into details on the ongoing energy dialogue or the preparation of World Bank assistance in developing a carbon-finance energy-efficiency project. But I should like to take this opportunity to stress, in conclusion, that Montenegro has gone far and come a long way—but there are further steps that will have to be taken now, some of which are very difficult and some expensive. The debate in today’s conference will help—I am sure—to clarify options and identify potentials on this way forward. We fully recognize the crucial importance of successful energy-sector reforms as prerequisite for high growth and fast development. This is the subject of a regional World Bank study to be released relatively soon. That said, the World Bank is prepared to provide additional support where necessary and requested by Government. We wish all of you every success not only for this conference but also, and particularly, for the implementation in the next steps of Montenegro’s Energy Strategy.

Thank you very much.