A multi-million dollar project without a future: Block 7 slowed down the energy transition process of EP BiH

Izdvajamo

• The process of energy transition has already largely begun in the countries of the European Union, and in Bosnia and Herzegovina, this process seems to be on hold. Reduction of harmful gas emissions and climate neutrality are some of the goals of the energy transition process, which can be achieved through investments in renewable energy sources and the closure of coal-fired thermal power plants. Accordingly, Bosnia and Herzegovina committed itself by signing various international agreements, such as the Sofia Declaration on the Green Agenda for the Western Balkans from 2020, to work on the decarbonization process. According to available data, the EP BiH increased the share of hydro and wind from 16 to 27.5 per cent in total electricity production from 2011 to 2021.

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Construction site of Thermoblock 7 Tuzla – Photo: Archives

The construction project of Thermoblock 7 has been pending for 17 years. Persistent insistence on the construction of Thermoblock 7 Tuzla through a credit arrangement with Chinese financiers has not only slowed down the processes of energy transition, but also threatened the monopolistic position of Elektroprivreda BiH, the largest state-owned energy company.

Written by: Elmedina Šabanović

The construction project of Thermoblock 7 officially started in 2006, with a strategic commitment to replace dilapidated energy facilities owned by EP BiH. After a series of long-term negotiations and agreements with Austrian, German, Swiss, and Japanese companies and the exit of certain companies from the project, in 2014, during the period of SDP’s general director of the EP BiH Elvedin Grabovica, a contract was signed with the Chinese consortium China Gezhouba Group.

The American company General Electric was chosen as the subcontractor. After General Electric cancelled cooperation, Chinese contractors offered replacement equipment. However, after the withdrawal of the American supplier of the key equipment, the replacement subcontractor was judged by the expert team hired by Elektroprivreda BiH to be unsatisfactory in relation to the terms of the tender document.

We remind you that in 2018, the Government of the FBiH gave a guarantee in favour of the Chinese export-import bank EXIM for the credit debt of Elektroprivreda BiH, in the amount of 613 million euros, for the realization of the construction project of Thermoblock 7, which the Council for State Aid of BiH declared an illegal guarantee last year.

In order to finance the advance for the construction project of Thermoblock 7, Tuzla Elektroprivreda BiH is borrowing from a consortium of commercial banks led by Russia’s Sberbank in the amount of 145 million KM. As collateral for this loan, the bank registers a mortgage over Block 6 Tuzla and the EP BiH administration building.

Long-term delays in the realization of this energy project as well as the clear absence of economic justification were not sufficient arguments for the EP BiH management, led by Admir Andelia, not to include this project in the strategic plans as well as the business plans for the period 2023-2025. It is interesting that this decision was made recently despite the announcements of Chinese President Xi Jinping that China will no longer build coal-fired thermal power plants and that they are turning to green energy.

Sanela Klarić, a former member of the Energy Committee of the FBiH Parliament, told Tacno.net that many things related to Block 7 were considered a trade secret from the very beginning and that she is not sure that there is anyone outside the PC EP BiH who knows every detail related to this investment.

Sanela Klarić – Photo: Imrana Kapetanović

“Until now, at least 233 million KM have been spent on this adventure, which I said from the beginning was non-ecological, illogical and, which is probably the most important thing for PC EP BiH, completely unprofitable. 214 million advances to the Chinese and 19 million for preparatory works in Tuzla. I found this information on our portals, and PC EP BiH did not deny it, which, I guess, means that it is true. Since July of last year, the management of PC BiH has been trying to transfer the responsibility for the termination of the contract either to the Government of FBiH or the Parliament of FBiH, emphasising that, after the termination of the contract, they will try to return the advance payment through international arbitration. Try, listen to that, try to return the amount of 233 million KM, at least that much”, she added.

She emphasized that Block 7 cannot be realized because there are no technical possibilities and that no one will take on the risk of terminating the contract with the Chinese contractor because they are afraid of the answer to the question – “Who is to blame for the termination of the contract?”, depending on what they will do whether the advance can be recovered or not.

We remind you that entity-owned energy companies in 2022 alone, due to disputes before international arbitration courts, lost approximately 104 million KM. Elektroprivreda RS 90 million KM due to the lost dispute with the Slovenian company “Vijadukt” because of the termination of the concession for the construction of the Vrbas hydroelectric power plant. Also, due to the lost profit, Elektroprivreda BiH has to pay 14 million KM to the Austrian Strabag for the Vranduk project.

The portal Fokus.ba wrote in more detail about the current attempts to return the invested funds through arbitration.

Energy analyst Almir Muhamedbegović, commenting for Tacno.net on the construction project of Thermoblock 7, is of the opinion that this money could have been spent more wisely and that now this lack of money, which prevents further large investments by Elektroprivreda BIH, is hindering the energy transition.

“The story about Block 7 TPP started at the end of 2007, and here we are in 2023. This pretentiously named ‘generational project’ was burdened by the incompetence and corruption of the authorities from the beginning. Five governments of the FBiH have changed, and the value of the projects has increased from 760 million KM and the block power of 370 MW in 2009 to 1.8 billion and the power of 450 MW. Throughout this project, the profession played an episodic role, while the political parties, which took turns in power, changed the terms of the tender according to their own calculations and thus prevented the realization of the project. PC EP BiH has spent about 290 million KM so far, and all that can be seen at the location where the construction of that ‘generation project’ is planned is a fenced area filled with gravel”, explains Muhamedbegović.

If this block had been built in the standardized usual amount of 350MW seven or eight years ago, now the old and inefficient blocks 3 and 4 of TPP and block 5 of TPP Kakanj could be shut down without any problems, he explains, noting that TPP Stanari with a capacity of 300 MW was built in four years and cost a little more than one billion KM (550 million euros).

Almir Muhamedbegović – Photo: Dženat Dreković/NOMAD

“Now it’s too late, the project has already failed, only the Government is now transferring the decision to definitively abandon the project to the FBiH Parliament. And instead of intensifying the construction of large projects of renewable sources such as wind farms and large hydroelectric plants, PC EP BiH spent almost 300 million KM and got a fenced area filled with gravel”, concluded Muhamedbegović.

Regardless of the warnings of relevant factors such as the Energy Community, as well as a series of court cases for Elektroprivreda BiH, the construction of Thermoblock 7 is still a strategic commitment.

The process of energy transition has already largely begun in the countries of the European Union, and in Bosnia and Herzegovina, this process seems to be on hold. Reduction of harmful gas emissions and climate neutrality are some of the goals of the energy transition process, which can be achieved through investments in renewable energy sources and the closure of coal-fired thermal power plants. Accordingly, Bosnia and Herzegovina committed itself by signing various international agreements, such as the Sofia Declaration on the Green Agenda for the Western Balkans from 2020, to work on the decarbonization process. According to available data, the EP BiH increased the share of hydro and wind from 16 to 27.5 per cent in total electricity production from 2011 to 2021.

Despite this, the authorities as well as Elektroprivreda BiH are still stuck on the construction project of Thermoblock 7, which has no perspective in the 21st century, because it is not in line with the decarbonization goals to which BiH itself has committed itself. Bosnia and Herzegovina is a net exporter of electricity, ranking third in the region in terms of electricity exports. Electricity in BiH, which is produced and exported from coal-fired thermal power plants, in the coming years, will no longer be profitable, but neither will it be desirable, because the European Union plans to impose CO2 taxes in the coming period.

EXPORTING ELECTRICITY TO EUROPE WILL BE UNPROFITABLE

Commenting on the process of the energy transition of Bosnia and Herzegovina, economic analyst and energy expert Damir Miljević pointed out for Tacno.net that we cannot even say that the energy transition has started in our country because there are no serious discussions about it in the public discourse and that the energy transition is reduced to the story surrounding the creation of the national energy climate plan, the draft of which is not yet known to the public.

“And in this whole context, there is still a desire to build Block 7. And the question of Block 7 is two questions. One question is essential, whether, at a time when everyone is giving up coal, it is necessary to start building a new coal-fired thermal power plant whose service life, in order to pay off economically, is 40 years. And since we are already in 2023, this means that it would be economically profitable after 2050. And we have committed to stop using coal by 2050. So you have that aspect. On the other hand, you have the economic aspect. What does the production of electricity from coal mean in a situation where the production of electricity from renewable sources, and here I mean hydro, solar, and wind, is cheaper than production from coal. It means that it can be done purely economically”, emphasises Miljević.

Damir Miljević – Foto: BUKA Magazin

Speaking about the possibility that Bosnia and Herzegovina will find itself in a situation where it will pay CO2 import taxes paid by electricity importers for electricity produced from coal, Miljević points out that there are two possible scenarios.

“One scenario that is much more certain is that no one will want to buy that electricity, because the price of green certificates for CO2 emissions is mentioned as the amount of the fee, which is currently 100 euros per MWh. Therefore, export becomes an illusion in that situation. And then you have the problem that green energy, the energy of our hydro and wind power plants, will be exported, and all this energy from coal will remain on the domestic market. When it remains on the domestic market, from the point of view of the citizens and the economy, it again means an inevitable price increase, because this energy is more expensive than this energy, which is a mix”, he explains.

He added that one of the consequences could also be on exporters, that is, those exporters who export goods and services, considering that they produce their goods and services on the basis of the energy they consume from non-renewable sources, pay a tax on CO2.

The program coordinator for energy and climate change at the Aarhus Center in Bosnia and Herzegovina, Denis Žiško, is also of the opinion that with CO2 taxes, the export of electricity to Europe would be unprofitable.

“The current ton of CO2 in the European ETF is somewhere around 90 euros. When this price is added to the price of energy, it will practically not be profitable to export electricity to Europe. As a result, it will not be possible to cover itself with this export, and this export partially covers the losses, and the thermal power plant or that part of Elektroprivreda will go bankrupt. What will probably happen is that Elektroprivreda will split into different companies and then that part, that consortium, will go bankrupt and again the citizens will cover all these losses. When I talk about bankruptcy, I mean the bankruptcy of coal mines and thermal power plants. And they will keep in another company, a company for the production of energy from renewable sources, that which they manage to do in the meantime, most likely distribution and that’s all. In that scenario, we will have to buy energy on the market”, explains Žiško.

Denis Žiško – Foto: Klix.ba

THE FUTURE OF ELECTRICITY?

Although experts in the field of energy emphasize that Thermoblock 7 is a failed project and that it is necessary to invest in renewable energy sources and despite the fact that the Chinese contractor cannot honour the signed contract, Thermoblock 7 still remains a strategic project, and the repurposing of the loan intended for its construction, was not considered.

In response to an inquiry by the Tačno.net portal, Elektroprivreda BIH pointed out that EXIM Bank’s loan funds are intended exclusively for financing the construction of Thermoblock 7 Tuzla.

When asked what he considers to be the reason for the fact that Elektroprivreda BiH did not request the repurposing of loan funds, Klarić points out that the reason lies in the lack of knowledge during the preparation of this project and the lack of courage to admit a mistake.

“In Europe, thermal power plants built in 2015 were closed in 2021, because they are unprofitable. After 2010, this project should not have been created, but that’s how it is. Now we are in a situation where I don’t even have a replacement unit for these old units, nor do we have the financial means for our largest electricity company to start mass construction of buildings from renewable energy sources. The vast majority of workers on the construction itself would be ours, these people would already have respectable references and, most importantly, they would have work for the next 50 years, not only in Bosnia and Herzegovina but in the entire EU. These are excellently paid jobs”, emphasizes Klarić.

He believes that responsibility for the current situation must be determined.

“At this point, I also mean the aforementioned uncertainty in the security of supply, but also for the possible failure of funds paid for Block 7. Criminal and political responsibility must be established. This process can be started by forming a parliamentary commission that will examine all the details, even those that are now considered a business secret by the Management of PC EP BiH, so that the public, as well as prosecutors, can see the whole truth,” she added.

Tacno.net also sent an inquiry to the FBiH Parliament with the question of whether the FBiH Parliament, in the context of the loan for Thermoblock 7, ever initiated the repurposing of loan funds for the construction of facilities from the domain of renewable energy sources, to which the FBiH Parliament replied that “The Parliament The Federation of Bosnia and Herzegovina, in the context of the loan for Thermoblock 7, did not initiate the repurposing of loan funds for the purpose of building facilities from the domain of renewable energy sources.”

As they stated, funds secured by a specifically dedicated credit arrangement cannot be reassigned to other funds without carrying out the complete procedure of a new credit arrangement.

A professor from the Polytechnic Faculty in Zenica, Samir Lemeš, is of the opinion that the persistent insistence on the construction of Thermoblock 7 until the middle of last year threatened the process of energy transition, precisely because of that insistence we also received sanctions from the Energy Community and lost the necessary time.

“However, what happened in Ukraine happened. There was an energy crisis in Western Europe, where electricity prices doubled, and it was precisely because of this that Elektroprivreda made an enormous profit. So Elektroprivreda compensated for all the negative things it suffered because of its wrong decisions. They compensated for this by selling electricity on the international market. This is short-term, because we will not be able to sell that electricity for a long time because we do not meet the requirements of the Energy Community. So at this moment, this year has been a straw for Elektroprivreda, depending on how the geopolitical situation will be resolved. Who knows what will happen next, it is very difficult to predict”, explains Lemeš.

Samir Lemeš – Foto: zenicainfo.ba

Žiško believes that the talk and the pushing of Block 7 has already in some way threatened the future of Elektroprivreda and the energy system of BiH because time was lost and that it is not so much a matter of money but time to prepare the energy system of BiH for future functioning.

“And when we talk about time and preconditions, we must first build a network that will be able to accept hundreds or thousands of new sources of electricity. Because this existing network has limited capacities and was made by having four or five sources and that’s it. In order to establish a new energy transmission system, you must establish a new network. We lost those 10 years on stories and fairy tales that there would be a system like this with large sources and no investment in the network”, explained Žiško.

And while Elektroprivreda BiH, together with the Government of FBiH, spends time and resources on a project that has lost its value and has no future, thus endangering BiH’s future position in the electricity market, the energy transition is taking place unhindered in Western countries.