Kek analysis and Commentary on Sierra Club

April 20, 2012

KEK Analysis and Commentary on Sierra Club Reports: “Affordable Electricity for Kosovo” “Reevaluating Kosovo’s Least Cost Electricity Option”

I. Purpose The purpose of this document is to put forth KEK’s position on issues raised in the Sierra Club Papers in order to: 

Present accurate and updated information on the situation faced by the energy sector in Kosovo



Highlight those issues raised in which KEK is in agreement



Highlight and provide rebuttal on those issues that KEK does not agree with



Present alternative ways forward that are appropriate given the situation on the ground in Kosovo

II. Current Situation of the Kosovo Energy Sector The papers present data on the Kosovo energy sector that need to be updated and clarified in order that meaningful conclusions can be drawn. In several areas, the papers make comparisons to other countries, most of which are either highly developed or are much more developed than Kosovo with significant industrial and large commercial customer concentrations.

Fact # 1 – The Customer Base in Kosovo is Primarily Connected at Low Voltage (0.4 KV) Service Voltage

2011 Billed Energy (GWH)

% of Billed energy

Number of Customers

% of Customers

220 KV

594

17%

1

-

110 KV

83

2%

2

-

35 KV

40

1%

15

-

10 KV

204

6%

220

0.1%

0.4 KV

2,648

74%

430,762

99.9%

TOTAL

3,569

100%

431,000

100%

The above reality has many implications for the sector as follows: 

The level of technical losses is highly correlated with the voltage level at which service is provided. In Kosovo, nearly ¾ of the load and virtually all the customers are served at 0.4 KV.



Commercial losses (unaccounted for energy, primarily theft) are virtually all related to low voltage consumers.

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April 20, 2012 

Opportunities for Demand Side Management are primarily related to industrial and large commercial consumers, of which Kosovo has relatively few compared to most other countries, including many developing countries



Space heating options for many of the low voltage customers are limited, resulting in high use of electricity for this basic need. Those customers not using electric space heating are contributing to the environmental problem by using wood and lignite.

Likewise, lack of natural gas for cooking and water heating results in high average household consumption



Seasonal load variations are inevitable given the high concentration of households (as opposed to industry) and the extensive use of electricity for heating. The following graph illustrates the seasonal pattern.

Maximum and Minimum Gross Demand for an Average Day of the Month in 2010

Fact # 2 – Losses Must be Properly Identified and Managed (2011 Data) Category Losses

of

Energy input to the System (GWH)

Energy Lost (GWH)

Lost Energy as a % of Input

Transmission Technical Losses

8,444

115

1.3%

Distribution Technical Losses

4,682

786

16.8%

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April 20, 2012

Fact # 2 – Losses Must be Properly Identified and Managed (2011 Data) Category Losses

of

Energy input to the System (GWH)

Energy Lost (GWH)

Lost Energy as a % of Input

4,682

784

16.7%

Distribution Commercial Losses

Note: in addition to the above losses, energy delivered to North Kosovo (approximately 200 GWH) is unbillable by KEK due to the International Political situation.

The above information has many implications for the sector as follows: 

Transmission losses are the responsibility of KOSTT, the Transmission System Operator, and include losses related to international energy transit. Those will not be discussed further since they are not the responsibility of KEK, however, these losses do not appear to be far from the western standards.



Distribution technical losses are primarily related to the configuration of the network and the voltage at which customers are served and they will be discussed in more detail.



Commercial Losses which represents unaccounted for energy (primarily theft) are being addressed by KEK and there has been significant progress in reducing them. This will also be discussed further.

Fact # 3 – Distribution Technical Losses Primarily Occur in the Low Voltage Network Category of Losses

Energy Lost (GWH)

% 0f Total

losses

33

4%

35 and 10 KV Line Losses

267

34%

0.4 KV System Losses

486

62%

Totals

786

100%

Transformer 110/35/10 KV

The above information has many implications for the sector as follows: 

Distribution Technical Losses are based on the system configuration, the age of the network, loading of lines and transformers, and maintenance. These topics will be discussed further.



The fact that most 0.4 KV customers (including households) receive 3 phase service is a contributing factor to the level of losses. Three phase supply results in incontrollable phase load asymmetry and increased technical losses.



Customer composition is a key driver of losses. The table below provides an allocation of technical losses to customers served at the various voltages.

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April 20, 2012 

Since the customer composition in Kosovo is so heavily concentrated at low voltage, comparisons with other countries must be carefully made.



Reduction of technical losses requires significant capital investment and time.

Previous estimates for Kosovo indicate that each one percentage point reduction in technical losses requires capital investments on the order of €75 million. Although KEK is focusing on reductions in technical losses, primary efforts are on commercial loss reductions which can be achieved in less time and at lower cost.

Fact # 4 – Allocation of Distribution Technical Losses to Customer Classes Customer Voltage Class

Energy Lost (GWH)

% 0f Total

35 KV

1

0.1%

10 KV

21

2.7%

0.4 KV

784

97.2%

TOTAL

786

100%

Again, a significant driver of technical losses is the customer composition

Fact # 5 – Current Tariffs in total are Low and Household Tariffs are far from Being Cost Reflective.

Average Tariff (Euro cents / kWh)

Customer Group

Percent of Billed Energy

220 KV

4.2

17%

110 KV

4.2

2%

35 KV

6.1

1%

10 KV

6.5

6%

Large Commercial

7.6

6%

Small Commercial

8.7

12%

Households

4.5

56%

Total

5.3

100%

The above information has many implications for the sector as follows: 

Comparing the overall average retail tariff (5.3 Euro cents) to prices in other countries, one can see that Kosovo prices are very low. Since the Government owns the power sector, it is obvious that there are significant subsidies. Some subsidies are apparent, including the import subsidy, Government and International donor Grants over the years, and low cost Government loans. Other subsidies are not as apparent, including the fact that asset values are far below current cost levels and the fact that there was no cost recovery for depreciation and return on pre 2006 assets. In other word the value of all KEK’s assets prior to 2006 was determined to be “ZERO” by

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April 20, 2012 the Energy Regulatory Office (ERO), since they did not want the value of those assets to be reflected in the tariff for consumers. 

The situation with Household tariffs is especially serious. The cost to serve households is 7.2 Euro cents per kWh, while the current tariff is 4.5 cents. A 60% tariff increase would be required to bring the Household price up to cost. This situation inhibits the ability to implement energy conservation and Demand Side Management Programs in Kosovo since the price is so artificially low.



The low Household price also results in high use of electricity for heating, which drives the need for new generation capacity.



The Sierra Club papers emphasize that new generation costs will significantly impact tariff levels. A significant point is that Kosovo must move toward a market based economy in which prices reflect current costs as opposed to costs that existed in the old socialist system. Such a transition is difficult, as evidenced by the experience in many parts of Eastern and Central Europe which have made the transition.



One only needs to scan the above table to see that Households, the most costly class to serve, pay far less than the other classes. This is especially significant since they are by far the largest consumer group.



To implement an effective Demand Side Management program, tariffs must be restructured to send the proper price signals, a key driver in any DSM program.



The papers state that demand could be reduced by providing Time of Day prices. In fact, almost all of the current tariffs, including Households, are based on time of day.

Of course, Households and small commercial customers, the majority of the load, have limited opportunities to shift significant load to the 9 hour off peak period.



With a Per Capita Income of approximately €3,000 per year and an average electricity bill of €300 per year, there is a major affordability issue as compared to Western Europe and North America.

Fact # 6 – System Load Factor The papers discuss a system load factor of 46% in 2006. The load factor has improved significantly since then, reaching 56% in 2011.

III. Points of General Agreement There are many issues raised in the papers which KEK is in general agreement with. These are primarily related to overall objectives. KEK would like to present its position, however, as to the manner in which these objectives should be approached and accomplished. The following table is intended to summarize KEK’s views on the approaches to implementing meaningful improvements in the situation while considering social, economic, and environmental factors.

Issues Raised in the Papers which KEK is in General Agreement With Issue

KEK’s Position

Existing Units need to be refurbished

KEK agrees that the least cost option in the medium term is to refurbish the existing units. That is why extensive efforts were made to overhaul the B2 unit in 2011 and the B1 unit in 2012, primarily with KEK’s own funds. This will improve capacity

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April 20, 2012

Issues Raised in the Papers which KEK is in General Agreement With Issue

KEK’s Position and availability.

In order to operate the A units in a more environmentally responsible manner, electrostatic precipitators are being installed on the A3 and A5 units in 2012 and on the A4 unit in 2013, again using KEK funds.

In discussing Kosovo A, the papers point out that: The age of the facility is not as relevant as its physical condition. These facilities are among the “older” units in service, but there are many similar units throughout the world that have undergone life extension and environmental upgrade programs. The average age of coal-fired units in operation in the United States is over 40 years, and in some areas (e.g. the State of Michigan) the average age is over 50 years. These units are expected to remain in service for several decades.

When faced with regulations requiring either shutdown or significant expenditures for environmental upgrades, most of the U.S. fleet of coal-fired plants chose to upgrade those facilities.

KEK believes that the complete overhaul and life extension of the units A3, A4 and A5 at Kosovo A (including new efficient boilers and environmental controls) can be accomplished in a much shorter time frame than construction of new units and at a lower cost. However, it is important to underscore that the refurbishment of the A units does not eliminate the need for the construction of new thermal units by the end of this decade. Customer demand has to be met and the critical issue is available capacity, not energy. Having an oversupply of energy in the shoulder months does not fill the supply shortages in winter months. In summary, the supply shortfall cannot be met from renewable energy sources alone See the peak demand forecast shown on page 10.

Environmental and Health Issues Must be Considered

Losses need to be reduced

KEK is being proactive in its efforts to improve the environment and the health of local residents as evidenced by: 

Installation of electrostatic precipitators on the A units



Installation of a hydraulic ash disposal system for the A units to significantly reduce dust from the ash pile



Addition of environmental monitoring equipment in 2012 on B units and on the A units at the same time the new ESPs are installed.

Significant progress has been made to reduce commercial losses (unaccounted for energy) from 926 GWH in 2006 (24% of input to distribution) to 783 GWH (16.7%) in 2011. These efforts are ongoing in spite of the slow progress by prosecutors and the courts to effectively prosecute for energy theft.

Further significant improvement requires the privatization of

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April 20, 2012

Issues Raised in the Papers which KEK is in General Agreement With Issue

KEK’s Position the distribution business. Within a few years, those losses could be reduced to the level of 5%, assuming the Government and courts support the new investor in its efforts to enforce the rule of law.

Reduction of technical losses is also important and some improvement has been made recently with the addition of new feeders and transformers to reduce overloads and additional maintenance expenditures.

Technical loss reduction requires significant time and new investment. Previous estimates for Kosovo indicate that each one percentage point reduction in technical losses requires capital investments on the order of €75 million. Although KEK is focusing on reductions in technical losses, primary efforts are on commercial loss reductions which can be achieved in less time and at lower cost.

Given the extensive portion of the load served at 0.4 KV, a reasonable target for distribution technical losses is approximately 11%, not the 5% or 8% values mentioned in the papers. Reasons for this include: 

Three phase service to households, resulting in uncontrollable phase load asymmetry and increased technical losses



Aging equipment, especially in rural areas, takes significant time and financial resources to replace.

Virtually no other country in the world has as high a percentage of the load served at 0.4 KV as Kosovo does (74%).

Energy Efficiency and Demand Side Management must be improved

Customers can not be forced to use energy efficiently. The customer has to see a financial benefit in order to use the energy more efficiently. KEK’s position is that tariffs (especially for Households) need to be rationalized to reflect costs in order for consumers to respond to DSM programs and make investments in energy efficiency. That is the first step.

Improved Regional Cooperation is necessary

KEK fully supports regional cooperation and resource optimization. KEK cannot expect its neighbors to cooperate, however, unless Kosovo brings something to the table. Since Kosovo has low cost lignite and several of the neighboring countries rely heavily on hydro, increasing base load capacity is a very rational option. Using lignite as pooled base load and using hydro as peaking generation offers a win-win situation.

This can only be done through private investors’ arrangements.

KEK has significant incentive to reduce high cost imports and regional cooperation is a way to do this.

Alternative Energy Sources should be encouraged

While KEK supports the economically justified exploitation of Kosovo’s renewable energy sources (RES), its own analysis of the net available capacity and energy of Kosovo’s known RES - given the seasonality of their output and electricity demand

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April 20, 2012

Issues Raised in the Papers which KEK is in General Agreement With Issue

KEK’s Position variations (i.e. system dispatch and balancing) – confirms that even though RES may constitute an increase in energy supply they do not represent a replacement to coal-fired Thermal Power Plants in Kosovo. KEK’s detailed analysis is presented in the attached appendix.

KEK must purchase this energy at established feed in tariffs approved by ERO and, of course, the cost must be passed on to consumers.

The ERO feed in tariff for hydro facilities of up to 10 MW capacity is €63 per MWH The ERO tariff for energy generated by new Wind turbines is €85 per MWH Notwithstanding the abovementioned feed in tariffs – which are very reasonable in comparison with European standards - very few private investors have come forward. The reasons for the lack of interest include scarcity of reliable long term historical wind data and the lack of economic sites for hydro development, especially those that provide storage capacity.

There are also specific problems connected with over reliance on hydro generation in Kosovo, namely:

Security of Supply is Critical to Kosovo’s Social and Economic well being



The run of the river hydro plants actually increase the cost to consumers since they will run primarily during the spring, when the demand for electricity is low and operationally cause dispatching problems due to minimum load issue on the lignite units.



The experience this winter (2011/2012) showed that dry conditions caused significant shortage of hydro power in Albania and the rest of the region, resulting in significant competition for other sources of generation and an increase in the import cost.

KEK is also concerned about security of supply for the economic and social well being of its current and future customers. With load growth conservatively estimated at 3% per year and the expected benefits of loss reduction efforts, additional capacity of 400 to 500 MW is needed by 2020 and planning must focus on medium term options given existing resources and feasible solutions for the Kosovo market.

Reducing reliance on high cost imports, the price of which KEK has little control over, is a priority. Kosovo is not in a position to procure these imports in competition with other utilities in Europe who are also facing shortages. The impact on the balance of trade is also significant.

The Sibovc Mine is a critical component for future fuel supply

KEK has made the necessary capital expenditures to open the Southwest section of the mine and it began providing fuel for the existing units in 2010. This mine has estimated capacity to provide one billion tons of coal, sufficient supply for many years.

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April 20, 2012

Issues Raised in the Papers which KEK is in General Agreement With Issue

KEK’s Position Kosovo’s energy independence requires utilization of its lignite resources, in addition to feasible and economic renewable sources.

Providing Natural Gas supply to Kosovo should be a top priority

In addition to the possibility of providing load following generation, natural gas would provide consumers with space heating, water heating, and cooking options that would reduce dependence on electricity for these uses.

A key consideration is time. The proposed pipelines have been discussed for a long time; however, no Government action has been taken.

The second factor is the cost to municipalities and consumers for gas distribution network and supply to individual customers, which will be cost prohibitive, unless grants and assistance are provided by International Financial Institutions (IFIs) and donor organizations. Otherwise, it would be difficult to economically justify gas supply for heating when electricity is cheaper.

Highly Stressed Water Supply

Kosovo has limited water supply.

The total potential hydro for Kosovo is as following: 1. Ujmani: 32 MW 2. Zhur: 300 MW 3. The most comprehensive assessment of small hydro potential for Kosovo was done by AAEESD in 20061.

The study analyses and provides pre-feasibility assessment of all known hydro potential sites of Kosovo. According to the study most of the potential sites can be developed as “run of river” projects, which means that capacity and energy output to the network will depend on particular hydrology of a period (month). See the chart below containing a summary of the results.

1

Prefeasibility Study for identification of water resources and their utilization through small Hydro Power Plant on Kosovo by AAEESD/2006

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April 20, 2012

KEK Peak Demand Forecast

Potential Small HPP Projects - Projected Total Available Capacity

IV. Points Raised in the Papers that KEK is Not in Agreement With

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April 20, 2012 There are several significant issues raised and conclusions reached in the papers which KEK is definitely not in agreement with. The following table is intended to summarize KEK’s views on these issues.

Issues and Conclusions in the Papers That KEK Disagrees With Issue

KEK’s Position

Capacity Factor of Additional Generating Capacity

KEK disagrees with the low capacity factor for new generation.

New capacity will be utilized to meet load growth (including much needed new industry), replace expensive imports, and reduce load shedding.

With current and expected shortages of generation in the region, this is not an issue since Kosovo lignite generation is one of the lowest cost sources of generation in the region.

Also, as mentioned earlier, Kosovo can provide base load generation and the neighboring countries can provide peaking capacity with their hydro generation.

Price of Lignite

Given that the new Sibovc SW mine is now open, the current cost of lignite is able to be determined and the future cost is subject to reasonable estimation.

KEK objects to the reference to the use of indices developed for the US market, which are totally inappropriate for Kosovo.

Also, it is unknown if these indices include transportation costs which are not an issue for the mine mouth power plants in Kosovo.

Ability of Kosovo to comply with EU emission limits and reach “Best Available Techniques” in the medium term (next 20 years)

With the necessary investment, KEK can comply with the applicable emission limits provided in the Large Combustion Plant Directive – which is legally binding on Kosovo. No other emission limits are currently binding on Kosovo – and in the event that other EU Directives are adopted by the Energy Community Treaty (e.g. RES Directive 2009/28), there will need to be lengthy discussion and consideration as to what compliance timetable is reasonable and proportionate – taking into account Kosovo’s energy security, limited options, and poor economic condition.

Following on from the above, Best Available Technology is not an appropriate benchmark for an economy with Per Capita Income of about €3,000/year and people having to pay about 10% of their 2011 income for electricity.

Ability of Kosovo to compete on the international markets for natural gas supply

KEK is not in a position to compete with developed countries in Western Europe for natural gas. In addition, the uncertainty of continuous supply from Russia and other countries has been problematic in the past. Kosovo has problems with its Balance of Payments and Balance of Trade. Purchasing natural gas at international prices would worsen the situation.

The feasibility and role of Wind Power given the realities in Kosovo

The wind energy potential of Kosovo is modest at best.

Moreover, most of the time installed turbines will be inefficiently running far below their nameplate/rated capacity.

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April 20, 2012

Issues and Conclusions in the Papers That KEK Disagrees With Issue

KEK’s Position Hence, for the least cost comparison of various technologies and for system optimization purposes, the capital cost of wind farms (Euro/kW of installed capacity) should be levelized accordingly i.e. to the estimated available capacity. This view is supported by KEK’s own analysis of the net available capacity and energy of Kosovo’s known RES – see attached appendix. Further, and as reported above, the rather generous wind tariff has not resulted in new wind development.

In summary, Wind cannot replace base load generation capacity.

The need for a new 600 MW base load coal plant

This is not a decision for KEK – it will be funded, built, and operated by other parties KEK has discussed herein its thoughts on the least cost option of life extension of the Kosovo A3, A4 and A5 units, with appropriate environmental improvements.

The fact is that Kosovo needs new generation in the next decade to serve its demand, while pooling resources for base load and peaking with the neighboring countries.

A New Power Plant will result in “Stranded Investment” for Kosovo B

With current and expected shortages of generation in the region, this is not an issue. Kosovo B is one of the lowest cost operating units in the region.

Ability of KEK to achieve technical and commercial loss levels of developed countries

As previously discussed, KEK is working on reduction of distribution losses and considers this a high priority.

Also, it is misleading that some have suggested that KEK can meet its demand by reducing its commercial losses.

If KEK’s 2011 commercial losses were reduced to 5%, it would save 549 GWH (784-235), which is equivalent to 78 MW of capacity operating at 7,000hrs/year.

Based on the international experience, when commercial losses are reduced, more than half of that energy convert into sales, since when customers have to pay, they use energy wisely. So, even if commercial losses are down to 5%, the gained capacity would be only about 39MW (50% of the 78MW).

Therefore, reduction in losses in Kosovo cannot replace the need for 600 MW of new generation in the next decade.

Resettlement issues related to the mine and new capacity

If planned and managed properly, and in compliance with the applicable law, resettlement should not be a problem. In this context, and based on KEK’s recent experience, most obstacles are caused by inefficient Government administration and intransigent villagers that conspire to manipulate and circumvent due process.

It must be mentioned that the construction of Zhur Hydro Plant will also require extensive resettlement of the local population.

Impacts on Agriculture

There should not be any impact on agriculture due to ash once

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April 20, 2012

Issues and Conclusions in the Papers That KEK Disagrees With Issue

KEK’s Position the new Electrostatic Precipitators are installed, which would meet the Large Combustion Plant Directive limits for ash and particulates, and the hydraulic ash transfer becomes operational.

V. Conclusions There is no single answer to the question of how Kosovo will meet the demand for much needed electricity for economic growth and the well being of citizens. There is no magic formula or imminent new technology that will allow Kosovo to abandon its significant reserve of lignite in an economic manner.

The solution is to pursue all available and cost effective measures to meet the demand. As discussed herein, the following measures are in progress: 

Reduction of technical and commercial losses



Refurbishment of existing generating units



Addressing environmental issues by installing electrostatic precipitators on the Kosovo A units, installing the hydraulic ash disposal system for the A units, and adding environmental monitoring equipment on Kosovo A and B



Encouraging alternative energy sources with attractive feed in tariffs for new wind and hydro facilities



Improving regional cooperation, especially with neighboring countries with significant hydro capacity.



Gradually rationalizing the tariff structure (especially for households) to send proper price signals, a prerequisite for effective demand side management and energy efficiency programs.

With all the above measures being taken, it is obvious that new base load lignite generation is needed.

KEK is expressing this view from its vantage point as the entity that must operate every day to meet the consumers’ demand, not from the point of view of an outsider with no responsibility for results.

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