TIRANA, June 17- Sustainability of the energy sector in Albania has a major impact on fiscal growth and consolidation. This sector continues to expose the government to considerable financial risks. Budget lending to the energy sector amounted to 0.4 percent of GDP in 2016 and 0.6 percent of GDP in 2017. Almost all domestic power generation comes from hydropower plants.
Consequently, electricity production is heavily dependent on changes in precipitation during the seasons and years. When production fails to meet consumption in low rainfall periods and when reservoirs are low, the Albanian energy sector has to buy electricity from abroad at an expensive cost to meet the needs of the country, while it sells electricity at a fixed tariffs to regular end-users. When low rainfall coincides with high international energy prices, this causes large financial gaps for Albanian state-owned electricity companies. Then, the government is forced to intervene.
The World Bank which made a report regarding the risks of hidric energy in Albania suggests that our country must act more firmly to address the financial risks from hydropower in the future. Governments and business partners in the energy sector have a menu of risk mitigation tools that can be used individually or in combination. Based on the international experience of managing the fiscal risk of hydro power, such as the risk mitigation strategy developed by Uruguay with the support of the World Bank, three key lessons can be drawn.
The first is that Albania needs to increase the security of domestic energy production, by complementing the hydropower through a diversified energy base and strengthening the management of water reservoirs. Albania should promote the diversification of its energy base by complementing hydropower with other energy sources that are able to withstand electricity consumption during periods of low precipitation. Other pure energy sources, solar and wind energy, promise as complementary. This approach can be complemented by investment in dams and reservoirs to give energy companies optimal control of strategic water storage opportunities to offset hydropower during periods of high or low precipitation.
Secondly, the Albanian energy sector should develop financial instruments to ease financing needs. Lending from the budget in an emergency situation to the energy sector over the years with low precipitation and high energy import prices could jeopardize public finances. Transfers from the budget, likewise, violate the principle promulgated by many governments that electricity companies should be run on commercial bases. Instead, the energy sector itself should develop its own financial instruments to ease financing needs. A special account, clearly defined contribution and payment policy, can automatically maintain a fraction of the profits over the periods of excess that can then be used to finance financial gaps. A financial guarantee may impose an ordinary premium on the payment of insurance for electricity companies. A fast loan or credit line can ensure that this loan is valid when the energy sector faces financial gaps.
Thirdly, the liberalization of electricity tariffs, or a temporary increase in tariffs during drought periods, can help remove risk from the energy sector. While more customers face tariffs set by the market, electricity prices will fluctuate, reflecting supply conditions. In periods with low hydro power production, prices will increase, creating additional funding for electricity companies and stimulating consumers to tailor consumer modes with available production. In support of this, regulated tariffs can be increased with a temporary surcharge during periods of low precipitation. On the other hand, a permanent risk premium for hydropower can compensate companies to cope with the volatility of hydro power. Small fee adjustments are often enough to protect the sector from significant fiscal costs.
Increasing domestic supply support, including through diversification of the energy base, will require time and mobilization of significant new investments. Likewise, energy companies may be reluctant to pay in advance cost for expensive financial instruments that facilitate their funding needs, as long as regulated tariffs do not reflect cost and have an unspoken expectation to intervene by the government save. Loans or quick credit lines can be expensive if financial conditions are too stringent or if the energy sector does not collect enough income to quickly repay the loan. This indicates that a measured, gradual and combined implementation of these different categories of risk mitigation instruments is needed.
