June 23, 2024
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HomeSEE Energy NewsWestern Balkans should be rapidly included in EU ETS - CEPS

Western Balkans should be rapidly included in EU ETS – CEPS

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The Western Balkans power sector is close to collapse. Approximately two-thirds of the Western Balkans’ electricity is generated by lignite, most often by power plants that have operated for over 40 years. The carbon intensity of the region’s electricity sector is three times higher than that of the EU.  Almost no power plant can run at its designated capacity any longer.

Lignite-based district heating is no different, with several cities experiencing failures this winter.  Retrofitting is economically unviable. This is because even if the large majority of plants were upgraded, they still wouldn’t be able to meet sulphur dioxide emissions ceilings under the EU’s Large Combustion Plant Directive, which came into effect in 2018 as a specific obligation of the European Energy Community Treaty, which aims to extend the EU’s internal energy market beyond EU borders – including into the six Western Balkans countries.

The population of the Western Balkans region is exposed to some of the highest concentrations of air pollution in Europe, notably particulate matter (PM2.5), which is principally caused by lignite powerplants, according to a studycommissioned by UN Environment. Consequently,  the environment is deteriorating rapidly; forests are depleted, landslides are becoming more frequent and soil pollution is increasing.

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The shadow of Russian and Chinese interference

Unless there’s an EU or Western solution, with EU and Western technology, and EU and Western money, the void will inevitably be filled by China and Russia. This would mean higher dependency on Russian gas and lock-in as well as a greater risk of supply disruptions.

The current EU policy that combines the CBAM and the development of a regional emissions trading system is way too slow, not only in light of a collapsing power sector but also in terms of Russian influence in the region. In short, the Western Balkan needs investment, not incentives.

A Western Balkans coal phase-out and a Just Transition Fund – with the help of the EU ETS?

We have developed a concept to fast-track full accession of the Western Balkans power sector into the EU Emissions Trading System(ETS). This involves applying Article 10c of the EU ETS, tailor-made for the Western Balkans, or the (EU ETS) Modernisation Fund that’s been instrumental in modernising much of the energy sector in central and eastern Europe. For example, the Modernisation Fund could be transformed into a ‘Western Balkans Coal Phase-Out and Just Transition Fund’.

By ministerial decision, the EU ETS would become part of the Energy Community acquis by 2026. Under specific conditions, Western Balkan countries would be eligible to grant temporary free allocations, for example for eight years.

The pivotal point is that power plants can retain these EU allowances regardless of their closure status. Should they cease operations, they can then leverage the value of these allowances for new investment projects. Conversely, if they choose to remain operational, they would face a situation without free allocation after the temporary period expires. To mitigate the impact of a EUR 80 CO2 price, a gradual phase-in of the ETS obligation could be considered, similar to the initial phase-in for maritime emissions.

Continued funding is necessary

Continued funding will be necessary from existing sources, such as the EU Growth Plan for the Western Balkans, the EU Western Balkans Investment Framework, and national and international development banks. The crucial new elements are the anticipated coal phase-out and additional dedicated funding from free allocations that would be utilised as collateral to expedite new investment projects.

Projections indicate that the value of free allocation could amount to approximately EUR 20 billion over eight years, starting in 2026 and culminating in total phase-out by 2034. Around half of this amount would be available to support investments.

The total new generation capacity required in the region will be approximately 5 GWe, equivalent to about one-fifth of Belgium’s total capacity or less than 1 % of the EU’s total generation capacity. The total investment required will be less than EUR 15 billion.

What’s important is that over one-third of the Western Balkans’ power supply comes from existing hydro sources, representing a low-carbon and fully dispatchable source. By integrating another 20 % solar capacity, the remainder could be supplemented by geothermal, wind, biomass, and the efficiency gains of new technologies. Increased load factors and enhanced end-use efficiency over time should guarantee not only a fully decarbonised but also a stable grid.

Foresight and politics will required

This proposal is radical and implementing it will require vision, political will, and – most importantly – political courage. The path ahead will not be easy, both politically and technically and there is no guarantee that this concept will function effectively in practice.

The associated risks could be significant, but the potential rewards, particularly in terms of CO2 reductions and political stability, are substantial. The alternative would be political interference by non-European powers and, most likely, a lock-in of Russian gas.

Politically, this initiative would demonstrate to the citizens of the Western Balkans the reality of their European perspective and to the EU, the readiness of the Western Balkans to align themselves with ambitious EU climate objectives.

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