The Former Republics of Yugoslavia (FRYs) are in a nascent stage with respect to developing their wind energy industries, but they promise some interesting opportunities in the coming three to five years.

The regional conflicts of the 1990s which focused around Kosovo took a heavy toll on human life, infrastructure and social structures. Yet the region has proven very resilient. Slovenia has since joined both the EU and eurozone, Croatia is soon to follow and others are queuing up to be the next. Along with this comes adoption of EU principles, and this has been a driving force for the region's energy sectors.

The Italians and the French have been particularly supportive in providing funding and input for regulatory studies and guidelines, as well as far-reaching bilateral cooperation. Progress has been made in replacing or upgrading the power infrastructure that was damaged or destroyed during the wars, but much remains to be done, with funding still a major constraint.

In October 2005, the EU and nine countries of southeast Europe (Albania, Bosnia & Herzegovina, Bulgaria, Croatia, Macedonia, Serbia, Montenegro, Kosovo and Romania) signed the Energy Community Treaty (ECT). The purpose was to expand the EU energy market into the Balkans, thereby promoting a legal and regulatory framework for an integrated power and gas market.

A timetable was established with five milestones to be met between 2007 and 2017. For renewables, implementation plans had to be submitted in 2007, with regular updates thereafter, ensuring that each country is keeping pace with the implementation schedule.

The ECT is designed to open regional markets, provide investment guarantees and set a regulatory road map for the national energy sectors. It was the first legally binding agreement signed by the Balkan states after the Balkan conflict.

The four former Yugoslav republics that have emerged as best potential targets for the exploitation of wind resources are Croatia, Bosnia & Herzegovina, Montenegro and Serbia. All of their governments have responded to the call for action on climate change and each state has made great strides in formulating and adapting the regulatory structure to meet EU and Kyoto challenges.

On the ground, however, things sometimes turn out differently, and the day-to-day activities of the domestic power markets often favour local state power companies. This is due partly to a response mechanism so that urgent needs can be met, but also reflects a cronyism that dates back many generations and still exists to this day.

International and local developers have already shown considerable interest in the region and projects have begun to take shape. The effort of these pioneers have resulted in the identification of promising and suitable sites for wind facilities and even wind measurement campaigns at the state level. It has also resulted in guidance for local authorities on appropriate planning requirements for windfarm construction. The process is far from finished, but inroads have been made into establishing coherent guidelines for serious investors.

Croatia

Wind power has the potential to become a key element in the expansion of Croatia's power generation system over the next decade but currently the country has only 27 MW of installed wind capacity. As it moves towards EU membership in 2012, Croatia will need to adopt additional EU energy legislation, and adjust to more stringent requirements, which should support its fledgling renewable energy industry. Strong economic growth and the availability of investment funds should also provide additional stimulus for renewables.

In 1991 the country's first energy legislation was passed as Croatia moved towards a free market economy. Over the next 10 years, various laws were enacted, but the Bosnian conflict and the break-up of Yugoslavia hindered progress in all sectors. In 1997, Croatia launched its National Energy Program, ENWIND. But it was not until 2001 that the wind energy market began to develop a viable regulatory shape with the passing of an energy act.

In order to achieve its 20% target from renewable, excluding large hydro, by 2020, Croatia will need to cut down on red tape and extend its guaranteed feed-in tariff scheme beyond the current 12 years.

The 42 MW Senj windfarm in Croatia (Source: Wallenborn Gruppe)

Market Overview

Croatia's net electricity consumption in 2007 was 17.6 TWh, up from 15.57 TWh in 2006, while its total generating capacity was 4054 MW. This can be broken down into 29% from imports, 31% from thermal power plants, 24% from hydro, and 15% from the nuclear power plant at Krsko in Slovenia. Renewable energy accounted for just over 1%.

In order to meet EU requirements for membership, Croatia must reach a number of milestones regarding energy supply. A target of 5.8% of all consumption to come from renewables, excluding large hydro, in 2010 will probably not be met.

The Croatian national power operator Hrvatska Elektroprivreda (HEP) is responsible for the operation and maintenance of the country's national grid.

During the Bosnian conflict many substations were damaged, leaving the grid in a state of disrepair. Since then, HEP has made great strides in upgrading the transmission network. But problems, such as the grid's penetration limit, still exist. This is particularly evident on the many islands where the grid remains weak.

On the positive side, legislation was enacted for cost sharing when an renewable energy site is connected to the grid. HEP has also been split into separate agencies instead of a larger, combined body, and this should improve efficiency and competitiveness.

Wind Resource

The wind resource in Croatia is among the best in southeast Europe. Optimal wind energy sites are along and near to the coast, with average wind speeds up to 8 metres/second at 50 metres. There are also good inland locations at higher altitudes that would be attractive to developers.

The main area for potential development is along the Adriatic coast, but legislation now restricts development on the islands and within 1 km of the sea. There is currently no reliable wind atlas available for Croatia, but HEP has proposed a number of sites with good development potential. Also of importance is avoiding areas where the local Bora wind system, which can reach hurricane strengths, is strongest.

The country's first wind farm was completed in 2004 on the island of Pag with a capacity of 5.95 MW and was developed by local company Adria Wind Power. A second was constructed in 2006 by WPD-Enersys at Sibenik with a nameplate capacity of 11.2 MW. By the start of 2009, Croatia had 17 MW of operational wind power, and a further 10 MW were under construction at Orlice (also WPD-Enersys). HEP is said to be developing its largest wind project to date, in the region of 60 MW. A further 90 MW project is slated for development in 2011. A forecast of 400 MW to be built by 2010 was overly optimistic and, with 28 licences yet to be granted planning permission, the pipeline is seeing a significant bottleneck, along with grid connection constraints.

HEP has identified a number of sites deemed suitable for windfarm development, while at the same time slowing grid connections. Looking to the future, independent estimates see the country's capacity reaching 1.3 GW by 2020. This provides plenty of scope for project development over the next 5 to 10 years, and as these estimates are often conservative, more potential could emerge. Active developers include Enersys, Wallenborn, Adria Wind Power, Jura energija, EHN, RP Global and Electra.

Bosnia & Herzegovina

This country has a rather complex legal structure due to the legacy of ethnic tension and therefore consists of two separate administrative entities: the Federation of Bosnia & Herzegovina (FB & H) and the Republic of Srpska (RS). Renewable energy legislation can be enacted on the national or a sub-national level. The war in Bosnia resulted in about 60% of B & H's grid suffering damage, although most was repaired by 2003.

On sub-levels legislation has been slow to emerge and this may continue to cause severe bottlenecks for renewable energy project developers. A draft of a much needed strategic plan was published in 2008 and provided recommendations on legislation and incentives for renewable energy but, to date, it has yet to pass into law.

In June FB & H adopted a renewable energy and cogeneration law which established a 12-year feed-in tariff. For 2010 the tariff equates to some €61.3/MWh and ensures the priority delivery of renewable energy into the grid.

The B & H government recently approved a €71 million loan from German bank KfW to state power utility Elektroprivreda for its 44 MW Mesihovina wind project, which is due to be built in 2013. The government is set to provide €6 million to the scheme. Elsewhere, the utility plans to build a 30 MW windfarm in Mostar, and projects are planned for Borova Glava, Velika Vlajna and Poklecani, for which, to date, a total of 117 MW from 532 MW has been approved. Elektroprivreda has become a driving force in the country's wind sector but it remains to be seen to what extent Bosnia & Herzegovina is willing to allow foreign investors develop projects in its territory.

A recently produced wind map showed its wind potential is currently estimated at 2 GW, with wind speeds in the west of the country capable of reaching 9 metres/second.

However, much needs to be done before the country can be considered a serious contender for foreign investment. The lack of progress can be chalked up, in part, to tensions and the lack of cooperation between the governing administrations.

Substation at the 42 MW Senj windfarm (Source: Wallenborn Gruppe)

Montenegro

The energy framework devised by the Montenegrin government is impressive but remains incomplete. Its original road map amounted to a state-directed and rigid policy which largely failed to spark enthusiasm from investors, domestic or foreign, and so it was revised, with the government formulating a more flexible approach and opening the door to private enterprise.

Ratification of the Kyoto protocol in 2007 was just one step in the process of opening up the Montenegrin market and providing an acceptable degree of regulatory authority and transparency. The country's 'Energy Development Strategy by 2025' was a major policy document which outlined road maps and required measures for meeting strategic targets.

Its baseline goals were fairly broad and included, among others, secure power supply, infrastructure improvements, creation of regulatory frameworks, higher utilisation of renewables, and the privatisation of the Montenegrin state utility. Its implementation was left to the 'Action Plan 2008—12'.

As a follow-on measure, the Montenegrin parliament passed a new energy law in April that introduced more flexible guidelines, especially for private sector participation. Other changes were made to the responsibilities of the regulatory bodies and planning procedures.

For renewable energy it meant new financial incentives which, it is hoped, will lead to a new renewables programme. Although the specific benefits of it have yet to be seen, one concrete measure is the use of a new licence, the energy permit, which succeeds the various licences of the previous energy law.

It will have a term of 15 years which is extendable. Another provision is the concept of the 'qualified energy producer', which will be given to renewable energy generators and guarantee them a fixed tariff as well as preferential grid access for 12 years.

Energy production in the country totals some 25 PJ (hydro 33.5%, lignite 56.5%, and wood 10%) but total consumption lies at some 46 PJ, with the shortfall being made up from imports (oil 32%, coal 30%, hydro 20% and wood 5%).

The state-owned utility, Elektroprivreda Crne Gore (EPCG), is responsible for generation, transmission and distribution. Montenegro's total installed capacity is 868 MW, of which 649 MW is from two large hydro plants and 210 MW from a coal-fired plant. Electricity demand has grown significantly from 505 GWh in 1994 to 2077 GWh in 2005.

A recent wind atlas for the country showed average wind speeds of between 5.5-6.5 metres/second at 50 metres.

The biggest hurdle for investors considering developing renewable energy projects in Montenegro is the difficulty in attaining any economies of scale.

There is certainly potential. However, on its own, the country may struggle to attract investments from abroad unless they are combined with projects in neighbouring countries.

Serbia

The Serbian parliament adopted its energy law in July 2004. One of its many objectives was to encourage the increased use of renewable energy in the country.

Since then, other laws have bolstered Serbia's energy regulatory environment, including ones for renewables. In July 2005 two public companies came into being. Elektroprivreda Srbije (EPS) which is in charge of electricity generation and distribution and is the largest power utility in the country with 8359 MW of generation (5171 MW lignite, 2835 MW of hydro, and 353 MW of gas and liquid CHP plants). The second was Elektromreza Srbije (EMS), an independent transmission system and market operator.

In January a feed-in tariff of €95/MWh for wind power was introduced, but with a cap of 450 MW. The form of FIT is a guaranteed 12-year power purchase agreement with EPS. Additionally, investments in excess of €6.8 million, accompanied by the creation of 100 new jobs, will be exempt from corporation tax for up to a maximum of 10 years.

Like Montenegro, Serbia has reached out to international sources for guidance on their renewable policy as well as for initial site selection.

Two wind separate 185 MW farms projects have been announced in Vojvodina province. A local company is developing the Bela Crkva project, and construction must begin by the end of 2010 to comply with the project's energy permit time condition. Wellbury, an Austrian company, is developing a project in Bavaniste.

The company is thought to have formed a joint venture with US-based Green Star to develop a 120 MW project in Pancevo. MK Fintel and Vingtim, both foreign companies, are developing the 130 MW (Grabenac, Parta & Izbiste) and 60 MW (Zagajicka Brda) projects, respectively.

Extensive wind measurement studies have been carried out, and the best locations for wind development have been identified accordingly, albeit with low measurement heights.

An average wind speed of 6.5—8 metres/second has been estimated on the basis of 40-metre masts. Capacity factors estimates came in at about 30%.

Two areas for improvement in the medium-term are environmental guidelines and grid upgrades. Typically, developing countries realise in retrospect that legislation has neglected environmental provisions, and basic legislation is added later.

The country's grid is another issue in light of the destruction of much of the country's infrastructure in the conflict at the end of the 1990s. Investment monies have been limited and much needs to be done to make basic upgrades, not to speak of specific new builds to accommodate renewable energy projects.

The combination of the feed-in tariff and good wind speeds, along with investment in grid improvements, should allow Serbia to eventually reach a target of 4 GW. Progress continues to be made in various areas and developers may consider Serbia as one of the better prospects in the region over the next decade.

Conclusions

So far, the FRYs have made progress in promoting renewables, especially on regulatory and permitting issues. However, there are also failings in some of the work that has been accomplished. Above all, investors will want to see more transparency and clarity as well as an even playing field in terms of local utilities and developers.

Have investors who have already entered these markets peaked too early? Probably not, but the key is to keep overheads to a minimum and prepare for long delays in some cases. As long as site selection has been optimised, then the downside risk should be fairly minimal, but returns may not be forthcoming for another two to four years. There will certainly be high hurdles when it comes to financing, but local, regional and development banks may be inclined to step in and assume the country risk in the medium term.

What can one expect for wind development in the region in the coming years? Above all, there will have to be more investment in infrastructure, in particular the grid. A specific strategic grid policy for renewables, as seen in Portugal, would be a big help to a smooth transition to a renewables driven energy policy. Environmental issues will also have to be tackled in the form of new laws and implementation. Freer competition would also provide international investors with greater comfort.

Initially, the region is more likely to become a niche players' domain, but by 2015 it should have reached a level where larger players — utilities, funds and infrastructure companies alike - will still see plenty of opportunities for growth.

Jeff Potter is chief executive officer of Renewable Energy International Ltd