Insights into Kosovo’s Difficult Energy Sector and Privatization of Distrbution

KEK Managing Director: Mr. Arben Gjukaj

Mr. Gjukaj, very briefly, please offer a snapshot of KEK’s operation.

Up until May 2013, when the distribution network and supply businesses were privatized, we had four divisions within KEK: mines, generation, distribution and supply. Prior to that from 2008 until 2013 I was CEO in charge of all those divisions. Since then my title remains the same but, of course, I now only have the mine and generation divisions to focus on.

What was the main idea behind privatizing the distribution side of KEK into what is now KEDS, owned by the Calik-Limak consortium?

When you look at SOEs there tends to be a large amount of rigidity making for a very inefficient operational standard. A private company is far more efficient in every sense of the word. When we need a new part for some old machinery we have to go through a nightmarish procurement procedure. Additionally, prior to privatization of distribution and supply we had low collection and high losses, technical and non-technical. These losses related to the inability to invest in the necessary capital upgrades and other things such as energy theft.

As a matter of fact, during my tenure prior to privatization we experienced a substantial increase in revenues and a decrease in losses as a result of a deep restructuring process within the organization and a high level of effort by the staff in order to meet the targets set by the company. To offer some figures: Back in 2008 losses were at 44% with collection at 98 million euro compared to 36.7% and 220 million, respectively, last year when KEDS took over. Through that success we were able to increase our generation as well and to make considerable investments in environment.

Where do you source the raw lignite for generation?

We have three mines in total with two of them currently depleted as of 2010. The remaining mine, known as Sibovc Southwest Mine has 120 million tons in reserves which is sufficient to fuel the power plant until 2024. When talking about ‘power plant’ we refer to Kosova A, units 3, 4 and 5 and Kosova B, units B1 and B2 with a total capacity at about 900 MW.

Kosovo possesses one of the largest reserves of lignite (coal) in the world. Where do total proven reserves stand and based on those reserves do you have the capacity to use it all for your country or are there imports?

We have several areas that we’ve investigated and explored. Currently we’ve discovered 7 billion tons in reserves. As I mentioned earlier, we have a capacity of 900 MW but we have a demand of 1,400 MW. So during the colder months, October-April, we must supplement our supply with imports which KEDS now handles.

 

What are you doing to address the lack of energy production when you clearly have enough raw materials to exclude importing expensive energy?

Since we are 100% state-owned the responsibility to increase generation assets falls on the Government of Kosovo. As a company, KEK has enough money to cover our expenditures in operational and capital investments. The money for a new generation plant must come from the government.

Ok, so what is the plan of the Government in this regard?

Indeed, the name of the project has changed several times but the new proposed plant would be Kosova C with an initial plan to build up to 2,100 MW. However, after some changes it will be 600 MW. Furthermore, it will be a private investment process which is still under discussion; but it’s also being executed with the help of the World Bank, USAID, EBRD and others.

Obviously coal is not a clean source of energy. We saw some recent accords from the EU that allowed for Kosovo to exploit its primary natural resource considering the fragile state of the economy. Care to elaborate?

You said it exactly. If you look at the map of our natural resources we have but one real game changer and that’s lignite. Our water sources are minimal with two rivers. Considering our size we must make do with what we have, naturally. The government has done an investigation and identified 18 points where small hydro dam projects can be set up with a total potential 130 MW. However, many people rely on these rivers for agricultural production, which happens to be a major focus of the government to tackle unemployment. So although they have incentives in place to promote green energy usage and investigated the potential of hydro the cost remains out of the range for the majority of consumers.

As such, we need to focus on what makes sense for the Kosovo market but also consider our strength of resources as an eventual asset which allows us to export energy. This makes sense from a financial point of view but also because many people in surrounding countries have minimal incomes and a shortage of supply, requiring cheap energy. For example, Serbia imports around 30%, Macedonia around 40% with Montenegro and Albania importing about 60% of their required energy. The region as a whole needs a more comprehensive option for energy.

What about your current power plants? Hypothetically, are they in condition to begin producing enough energy to meet that regional market demand?

To give you a perspective Kosova B was commissioned in 1984 with an expected life of 35 years. Kosova A is even older and has surpassed its expected life span. However, Kosova B needs to adhere to the EU environmental directive LCDB by 2018 which will eventually be addressed by rehabilitation through further private investment.

The plan for Kosova A is to keep it running until we have a new plant ready for generation.

Clearly these are very expensive projects. Where will the funding come from?

That is not entirely known at the moment. Rather, we have taken a donation from the EU to conduct a feasibility study. Through this we will gather the total cost figures and then work on developing the necessary financing.

 

Once the feasibility study is completed in 2015, where will you begin to look for funding?

Really we have three options: the government, donations and banks and primarily through PPPs.

Why primarily PPP?

It’s the most realistic. The government lacks the funding and donations and loans only go so far. Through PPPs you can have a large amount of capital at your disposal as well as tremendous industry know-how and best practices coming into our country.

What are some other challenges faced in the energy sector?

One is the regional TSO (Transmission System Operator). Serbia has created obstacles in this regard. As such, we need to build extra transmission lines with neighbors, especially Albania. Connecting with Albania is important because in Kosovo we produce 99% from coal whereas Albania produces 99% from hydro. The synergy here is tremendous. Through this we can optimize which leads to cheaper energy for the end consumer as well as becoming a more self-sustainable common market between our two countries.

Please deliver a personal message to our readers regarding Kosovo.

Kosovo is not very developed economically. However, it is a country with abundant natural resources and most importantly, a very young population, well-educated and extremely eager to build and develop their country’s economy. When you have this environment it means fresh investments are required to a large degree; which by default means great opportunities for investors.

 

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