After decades of neglect, authorities aim to untangle power system’s $1-billion problem

“It is often difficult for citizens to fully appreciate something that did not happen, but I can assure you that by early 2013, the power sector was nearing collapse, with demand far outstripping domestic supply, years of negligible investment, staggering technical and non-technical losses, low collection rates and insolvent institutions,” says World Bank’s Ellen Goldstein.
TIRANA, Dec. 10 – With electricity having turned into a hot topic due to a massive nationwide campaign to cut illegal connections and a price hike expected for 2015, the Albanian government says some 1 billion dollars is needed in investments to bring back to normality the distribution sector, where massive losses because of thefts and the dilapidated grid cause annual losses of around 200 million dollars.
The World Bank has already offered a soft loan of $150 million on Albania’s power sector reforms, particularly to improve the reliability of the electricity supply and the financial viability of the sector.
Speaking this week at the parliamentary economy committee which okayed the loan, deputy Energy Minister Ilir Bejtja said the World Bank power sector recovery project was strategically very important for the distribution grid considering lack of investments in the past few years and decades.
“This is not enough as nearly 1 billion dollars is needed to bring the distribution system back to normality. We should not forget that when the Czechs took over the Albanian distribution system in 2009, the company’s newest asset was 36 years old at a time when the total physical depreciation of these assets is 40 years. In this respect, there is huge need for investments but possibilities remain modest,” said Bejtja, hinting no investments had been made since the early 1970s when Albania had close ties with China under communism.
The distribution system operator currently has a negative value of its shares at around 72 billion lek (Euro 504 million) compared to 15.6 billion lek three years ago when it was privatized, says the energy ministry in figures which prove the mismanagement by the Czechs who stripped of their licence in Albania in early 2013.
The World Bank, which is assisting the Albanian government in reforms, says Albania’s power sector is facing serious financial and operational challenges, manifested by a large unfunded deficit of about US$550 million and a large level of technical and commercial losses of about 42 percent – the highest in the region – due to non-payment of electricity bills by consumers, as well as poor collection rates. “Energy generation relies almost entirely on hydropower, which means that emergency power imports are often required during dry seasons.”
“The Power Recovery Project supports the implementation of government reforms, and will help to increase investment; improve management and performance, especially in distribution; and reduce inter-company arrears,” said Tahseen Sayed, World Bank country manager for Albania. “The key project entities are the distribution company, OShEE, which will benefit from the reduction of losses and improved billing and collection rates; KESh, Albania’s main generation company, which will benefit from improved financial sustainability; and the Transmission System Operator, OST, which will benefit from the installation of an enhanced metering data center to facilitate the market restructuring,” said Salvador Rivera, World Bank senior specialist for energy and project team leader.
Nationwide campaign to curb thefts
In late October 2014, Prime Minister Edi Rama announced a nationwide campaign to give an end to what he called a crime that goes unpunished such as electricity theft, warning of an end to the massive culture of non-payment of bills and impunity.
“There will be no more fines for electricity thieves. Those who steal electricity will be sentenced to three years in prison and those who collaborate to five years. And the country’s courts should duly enforce these laws,” warned Rama.
More than a dozen of business owners and heads of households including employees of the distribution operator have been arrested in the past month. Thousands of illegal connections have also been cut off, sparking protests by several inhabitants especially in informal areas who had not paid electricity bills for years. However, the distribution rebranded as OSHEE after a deal with CEZ has offered debtor households and businesses the opportunity to pay their accumulated debts in monthly installments.
In a recent country report, the World Bank says that the combination of total dependence on hydropower generation, and its vulnerability to weather patterns, the lack of self-generation capacity, and the extremely high level of distribution losses that require significant power imports is adding financial stress to the sector and the economy.
Ellen Goldstein, World Bank Country Director for Southeast Europe, said last month at the loan deal that putting the power sector on a sustainable path is an essential element in creating a business environment that is attractive to investors and generates jobs for young Albanians.
“It is often difficult for citizens to fully appreciate something that did not happen, but I can assure you that by early 2013, the power sector was nearing collapse, with demand far outstripping domestic supply, years of negligible investment, staggering technical and non-technical losses, low collection rates and insolvent institutions, including a potentially lengthy and costly dispute between the privatized distribution agency and government,” she noted.
The Albanian hydro-dependent electricity system is now wholly state run after a deal settling the dispute with Czech giant CEZ group which will be paid back Euro 95 million for 76 percent of the shares it bought in the Albanian electricity distribution operator in 2009 for Euro 102 million.
INSTAT data shows grid losses, the overwhelming majority of which belong to distribution network losses, dropped by 7.3 percent to 1.546 GWh in the first half of this year, accounting for 38.4 percent of total electricity available for consumption. Technical losses due to the dilapidated grid remained almost unchanged at 37 percent of distribution network losses while non-technical losses (thefts) were down by 8 percent accounting for around two-thirds of distribution losses.
Eighteen months after having its licence revoked and just before an expected EU decision on Albania’s candidate status that could be endangered by a Czech Republic veto, the Albanian government and Czech giant CEZ reached last June an amicable out-of-court solution to the Albanian electricity distribution operator whose majority stake was sold to CEZ in 2009 for Euro 102 million and managed for three and a half years by the Czech company until it had its Albania licence revoked in January 2013.
Under the deal signed by the Albanian government and CEZ, whose 70 percent stake is owned by the Czech government, Prague-based CEZ will get in annual installments in the next four years a total of Euro 95 million, an amount slightly lower to its initial investment in the Albanian distribution system, but half of the Euro 200 million CEZ had warned it would claim in international arbitration proceedings. The deal was strongly opposed by the opposition Democratic Party which was in power in 2009 when Czech giant CEZ was given 76 percent of the shares in Albania’s electricity distribution system which it bought for Euro 102 million.
Energy regulator to rule over price hike
All three state-run energy operators have applied for higher electricity prices with the Albanian energy regulator which is expected to approve a hike in the next few days for both household and business consumers in 2015.
Government has unveiled the hike in electricity prices for around three quarters of Albanian households consuming up to 300 kWh will be up to 30 percent. Speaking at a press conference this week, Erjon Bra襬 the head of the parliamentary economy committee representing the ruling Socialist Party-led government, said the unified electricity tariff after the lift of the 300 kWH threshold will not be higher than 10 lek/kWh (Euro 0.07), compared to 7.7 lek/kWh currently.
In its 2015 budget, government says it has allocated 1.6 billion lek (Euro 11.3 million) in compensation to people in need for the expected increase in electricity prices in 2015 following its decision to lift the 300 kWh threshold charging lower tariffs.
An annual report by energy regulator ERE shows the number of Albanian households with a monthly consumption of 300 kWh rose to 76.3 percent in 2013, up 1 percent compared to 2012. Household electricity consumption accounted for 57.6 percent of the total in 2013.
Currently, Albanian households pay electricity bills under a two-tier price level which charges them 7.7 lek/kWh for a consumption of up to 300 kWh a month and 13.5 lek for each kWh they consume above the 300 kWh threshold (VAT excluded). Average tariffs for business consumers vary from 8.5 lek/ kWh to 10 lek kWh based on low or medium voltage power access. Meanwhile, state institutions pay 11.5 to 14 lek kWh.
Power prices during the past decade have increased by 63 percent climbing from an average of 5.71 kWh in 2005 to 9.53 lek kWh currently.
While Albania is about to announce a hike in electricity prices, Eurostat, the statistical office of the European Union, has reconfirmed that electricity prices for household consumers in Albania already stand higher than in six countries.
At an average of Euro 0.116/kWh including VAT at 20 percent, electricity prices in early 2014 are estimated to be higher than in Kosovo, Bosnia, Serbia, Macedonia, Montenegro, Iceland, Bulgaria where prices range from Euro 0.055 to 0.113
Private hydropower plants concerned
Albanian and foreign companies which have invested in small private and concession hydropower plants have warned the reduction of electricity prices under a unilateral government decision a couple of weeks ago risks taking them to bankruptcy.
In a reaction to the government decision which cut by 30 percent the electricity prices that the state-run KESH power corporation charges on small HPPs, the Association of Renewable Energy, warns the decision affects 70 small HPPs worth Euro 200 million.
Under a decision taken few days ago, the government proposed a new formula which is based on the average electricity prices at the Budapest Stock Exchange. The new methodology would bring down electricity prices for new HPPs from an average of 9.3 lek kWh (Euro 0.065) currently to 6.4 lek/kWh. HPPs connected to the distribution grid are expected to get a 10 percent bonus.
“The damage incurred to these producers could be a 30 to 35 decline in income which means we are going to sell electricity below cost,” says Eugen Lici, the head of the Albanian Association for Renewable Energy.
Reacting to the association’s claims, the Energy Ministry said the new measures were meant to guarantee liquidity in the energy sector and ease the burden of KESH power corporation as part of a reform which targets liberalizing 30 percent of the market by lifting regulated prices for businesses linked to the mid-voltage grid.
State-run KESH power corporation, which sells the electricity purchased from HPPs almost four times cheaper to the distribution operator, lost around 32 million euros in 2013 from the purchase of electricity at regulated prices from private and concession HPPs with a capacity of up to 15 MW.
The Energy Ministry says the review of this methodology will bring positive impacts on the costs of electricity purchase for KESH at around 2.3 billion lek (Euro 16 million) for 2015 and end the deformation in the internal electricity market.
The KESH power corporation has also applied for a 50 percent price increase in the electricity it sells to distribution operator OSSHE, proposing a 3.34 lek/ kWh (Euro 0.023 ) tariff, up from 2.2 lek/ KWh currently.
The state run power utility buys electricity from small and medium-sized HPPs at an average price of up to 9.37 lek/kWh and sells it to the distribution operator at regulated prices of 2.2 lek/ kWh, which is four times lower compared to the purchase price.
Currently, KESH purchases electricity from 88 hydropower plants with installed capacity at 223 MW but the amount of electricity is projected to increase due to new HPPs expected to be made operational.