Kosovo’s new power plant will cause the average price of electricity to skyrocket, and in the face of both cheaper and safer options, will willfully cost the Kosovo taxpayer billions over the next twenty years.
If you, the average Kosovar, spend around 50 euros per month on electricity bills, expect this number to change significantly in the near future. When the electricity produced by the new power plant begins to flow through the wires of the Kosovo Energy Distribution Service, KEDS, (although when this will happen is yet to be revealed) the price will jump to a minimum of 75 euros per month. Kosovo taxpayers will be out of pocket more and more each month because of a bad deal from the Kosovo government and the disadvantageous financing of the Kosova e Re power plant’s construction (previously known as Kosova C.)
The actual price of the energy is only one part of the cost of this power plant. Think also of the cost of healthcare for Kosovo citizens affected by diseases that come from living near the power plant, and the costs of displacement when they are forced to leave.
Even if we take for granted all the government’s justifications regarding the effects of the plant on the environment, as well as completely ignore the interconnected costs, this power plant will not benefit the Kosovo citizen.
The cost of the power plant’s construction, the manner of financing it, the interest that the investor will obtain and all the guarantees that the state will provide to the investor for the sale of the energy and raw material (water and coal) make this project disadvantageous to the state.
The project is crafted entirely in favor of the investor. The government is simply a spectator here: all the costs will be covered by the citizen, be it through hikes in electricity bills or the price that the health of Kosovo citizens must pay.
Playing with billions
The Ministry of Economic Development, MED, and Contour Global, a US firm contracted to finance the construction of the plant, have selected the company General Electric as the preferred bidder to build the power plant. So far, all that the MED has shared is the name of the company that will build this power plant, providing no details regarding the cost of construction.
They say there will be new negotiations with this US company, but have kept secret who negotiates, what will be negotiated and how much. Over the years, since the deal was first announced, Contour Global and the government have increased the cost of the project by 30 per cent, preparing the public for the final price by pitching it higher and higher.
One estimated price of the power plant offered by the MED in December 2015 was about one billion euros. The assumption that the total investment cost for the project would be around one billion euros was made “on the basis of various analyses and studies conducted by the Transaction Technical Adviser.”
The price announced by former Vice President of Contour Global Garry Levesley in an interview with Reuters in February 2015 was 1.4 billion euros. The same was repeated in an interview for the newspaper Zeri in June 2015. As Contour Global’s discourse around the plant continued to hike the cost, this was echoed by ministers of economic development.
Although the cost increased from 1 billion to 1.4 billion euros since the project’s inception, it is odd that the heads of institutions continuously said that “in fact, the final price is something that is still unknown.” Ministers and the head of Contour Global are quite right when they say construction costs will only be known after receiving the bids. The question is, why are they mentioning 1.4 billion euros, then? Why is this figure so exact?
Astronomical returns to Contour Global
The cost of the project can be explained when the cost of the investor’s fees and profits to the Kosovo taxpayer are considered. If the cost of construction is 1.4 billion euros, then Contour Global will invest 420 million euros, while about 980 million euros are to be secured through loans. For its investments in the project, Contour Global has guaranteed a return of 18.5 per cent, what is known as the Internal Rate of Return, or IRR. So this company will have an annual return of 77.7 million euros.
This means that, for the 420 million euros that it will invest in this project, Contour Global will have a return of around 1.5 billion euros. This return is calculated for the entire 20 year period, which is the length of the contract signed with this company. However, if Contour Global is provided this rate of return for the assets it has already invested, as well as those that it will invest during the construction phase, then the IRR harvesting period may be up to 25 years (20 years of operation plus the five years that it will take to build the power plant.)
The government will guarantee the sale of energy produced by Kosova e Re, and guarantee that market sells all the energy it produces, whether we will use the energy or not. A safer investment than this can hardly be found for a company like Contour Global these days.
If the cost of construction matched the initially quoted one billion euros, Contour Global would only invest around 300 million euros, and the cost to taxpayers would be lower. In this scenario, the annual return for this company would be ‘only’ 55.5 million euros, with the accepted IRR of 18.5 per cent. The return for 20 years, then, would be 1.1 billion euros.
The discrepancy in price will cost us 444 million euros in 20 years, only for the cost of financing Contour Global’s annual returns. Additionally, if the IRR is calculated for a period of 25 years, including construction time, then this company will gain an additional 555 million euros.
The investor’s 18.5 per cent return rate cannot be justified whatsoever. Kosovo has completed all the necessary guarantees Kosova e Re investors could ask for, meaning an Internal Rate of Return of 18.5 per cent is too high.
Kosovo has guaranteed that they will buy all the energy produced by Kosova e Re. Moreover, this guarantee is for the entire thermoelectric capacity of the power plant, even if the energy it produces is not used.
In addition to the purchase guarantee, Kosovo has agreed to buy this energy at a prearranged price, not at the fluctuating market price. Despite these guarantees, Contour Global has managed to secure a returnof 18.5 per cent for the money invested in the project.
Plummeting interest rates for green energy
The state favors coal investments over the turn to renewable energy sources.
By adopting such a high rate of return for the coal-fired power plant, the government has shown what its priority is in the energy sector. The Energy Regulatory Office, ERO, dictates a much lower return on business investments in renewable energy projects, or even in KEDS itself, in comparison to the government’s return on investments in the power plant.
Last year, the ERO decided that for KEDS, the interest rate paid back to investors (known as the weighted average cost of capital, or WACC) would drop from 12 per cent to only 7.6 per cent.
This decrease resulted in a significant reduction of the ‘risk free rate,’ the return on an investment that would hold no risk for the company. This rate decreased from 6.5 to three per cent. The interest the company pays back to creditors for what it has borrowed has also decreased from 9.3 per cent to only 5.8 per cent.
On top of this, the amount a company pays to its shareholders for taking a risk with the investment has also decreased, from 14.7 per cent to 8.3 per cent.
The WACC for Kosova e Re is not yet known in the absence of some of the elements that make up the WACC, such as the level of interest that needs to be paid to creditors. To compare KEDS and Kosova e Re, we can look at the difference between the profitability of the cost of equity, or risk-bearing investments in each, known as the Internal Rate of Return.
Last year, when KEDS initially challenged the ERO’s proposal to reduce the interest rate paid back to investors, they took Kosova e Re as an example, comparing the return rate set for them and for Kosova e Re.
Higher risk projects should have a higher rate of return, KEDS said in their challenge to ERO, and the current framework of the agreement with Contour Global means that the company’s investment would be much lower in risk than an investment with KEDS.
They complained that even renewable energy projects set by ERO had a higher return, at 12 per cent, despite being much lower-risk than KEDS.
Despite proving that the financial and liquidation risks for investing in KEDS are significantly higher than both Kosova e Re and renewable energy projects, the return rate for investment in KEDS was set at 8.3 percent.
The logical question to ask now would be why should Kosovo accept a return rate of 18.5 per cent for Contour Global, while businesses investing in renewable resources have a much lower profit? Why should Kosova e Re have an IRR of 18.5 per cent, while the rate of return for KEDS, for example, is so much lower?
This question is not asked in order to look for ways to increase profits for KEDS investors, but to learn more about the discrepancy in treatment given to different investors. It would be interesting to see an ERO expert study on the acceptable level of IRR for Kosova e Re.
A guarantee on sale, with millions in financial damage to Kosovar families
The Contour Global offer came nearly 10 years after the power plant construction project was launched in 2006. Since then, the project has undergone major changes, largely in violation of applicable laws. Significant changes in the project plan have taken place, but officially the project continues to run on the basis of the same tender initiated in 2007.
Since then, it has never been clarified on the basis of which document, law or regulation this project was launched and developed. Challenging the legal basis of the project and changing the project by removing many investors from the game are just two of the violations that were reported several times, but never properly addressed.
When Fadil Ismajli was minister of economic development in 2014, changes were made by splitting the project into two phases. First, they selected the company that would finance the power plant, Contour Global. Second, the government selected the company that would undertake the actual construction, General Electric.
The contract with General Electric is yet to be signed, but the government inches closer to finalizing the Kosova e Re project, taking on more obligations and providing more guarantees in the process. The biggest burden the Kosovo government carries is to provide an investor guarantee for the purchase of energy produced at this power plant at a prearranged price.
This guarantee has its own risks (read: violation):
1) It gives favor to Contour Global, making it difficult for any new investor that comes to this sector, for example new investors for Kosova B. Thus, the state damages competition and disables the liberalization of the energy market.
2) The Kosovo government assumes obligations to subsidize the company and the energy price. The New Kosovo Electric Company, a state-owned company, will cover the difference between the market price paid by KESCO and the price it will pay to Contour Global for the energy produced. This cost is expected to be paid by the citizen through electricity bills.
At least, so goes the Regulatory Office plan. Therefore, a citizen of Obiliq will be forced to pay for electricity twice as expensive as before, while the energy produced through Kosova B, another power plant, will be exported at a much lower price to other countries of the region. And, assuming that this is not enough, a citizen of Obiliq will continue to live surrounded by the dust of coal production.
The guarantee to purchase all energy produced by Kosova e Re would be less painful and costly for Kosovo if the demand for energy was greater.
The energy produced by Kosova B will be consumed in Kosovo only during the winter, at peak times when the demand is greater. But during the other eight months of the year, Kosova B will be completely unnecessary, as energy consumption will be covered by that produced by the new power plant and renewable sources.
Both of these energy sources will be subsidized by the state, respectively, citizens. The state has guaranteed that it will buy all the energy that will be produced by Kosova e Re, and the Regulatory Office has proposed that this burden of purchase be transferred to the citizen.
While the state has also guaranteed tariffs that would promote the use of renewable energy to stimulate clean energy production, these state guarantees that have been granted will still translate into very expensive energy for the citizens of Kosovo.
It seems absurd, but government policies have guaranteed that the free energy produced by Kosova B will be exported, while the expensive energy will be sold to Kosovo citizens. This will ensure a price increase of electricity, far beyond the optimistic scenarios presented by the Kosovo government. If Kosovo government ministers once stated that the free energy produced by Kosova B would neutralize the expensive price of Kosova e Re, it does not stand because the opposite will be the case.
A good deal for everyone, except Kosovo
The price of energy that will be produced by the new Kosovo power plant will be both higher than the import price and the cost of the energy produced in the existing power plants.
Based on current market design, the difference between the market price and energy price for that produced by Kosova e Re will be covered by consumers through electricity bills. The only other option that this cost is covered by the government through the budget. However, the budget still runs on the basis of tax payments by Kosovo citizens.
Whatever the mode of subsidy to be used, it is clear that the government (taxpayers) will be forced to pay for the energy at twice the price of the import cost, or even three times the price (about 80 euros megawatt/hour) of the actual cost of energy produced through Kosovo’s current power plants (about 30 euros/megawatt/hour).
Kosovo citizens will have to pay for up to 70 per cent of Kosova e Re’s production capacity even if they do not need that amount of energy. Kosova e Re will be obliged to pay around 20 euros per megawatt per hour for failure to produce the contracted amount of energy, and not the market price (40 to 80 Euros megawatt/hour) as Kosovo A power plant and Kosovo B do.
The difference between the market price and the price of the deal reached with Contour Global will be transferred to consumers. This increase in prices will also have an impact on domestic manufacturing businesses, putting them at a disadvantage to producers of other countries.
While we are being served the idea that the new power plant will broaden the economy, it will make all of us, the consumers, much poorer in comparison to the citizens of the region and Europe who will be provided cheaper electricity.
The Kosovo government has provided guarantees to Contour Global for the purchase of energy produced by Kosova e Re. This is for the company’s benefit alone: purchasing imported energy from elsewhere would be significantly cheaper than the energy produced by Kosova e Re, at least in the first five years of its operation.
If we discuss the price of energy imports further, it should be said that the price of imported energy varies greatly. Emergency imports, which are much more expensive (sometimes up to 200 euros per megawatt per hour) are most often referred to.
In reality, the average import price of electricity is pretty cheap. The average price for energy imported over the years has been less than 50 euros per megawatt per hour, while imports during peak hours is about 50 euros per megawatt per hour. Therefore, even the worst possible option for imports is more favorable than investing in a project that will have such a high cost to the wallets and the health of citizens.
We have already reached a stage where many of the questions raised above have been answered, at least by a narrow group of actors within the Kosovo government. This is happening because the government and Contour Global already have a company that will potentially build Kosova e Re. The cost of construction is in the process of being calculated and consequently, the price of megawatts that will be produced by this power plant is known as well.
This data has not been made public, but it will be very interesting to analyze the reasons why General Electric was selected to build the power plant. In particular, it would be interesting to know what the power plant would cost us with this company in comparison to the other offers coming from different firms that applied.
It seems the government has been a spectator in this tendering process, despite the fact that the construction price has much greater consequences for Kosovo, as we will pay the interest for every additional cost.
The role of the Kosovo Assembly in preventing harmful financing
For comparison’s sake, let’s say that for the next huge project overseen by the government, one billion euros are taken from the Kosovo budget to pay a company. No interest is needed, and although this comes from the taxpayer’s pocket, one billion euros is a done deal. This is the opposite of what has transpired with Contour Global: here, the Kosovo government will accept one billion euros, and instead of a done deal, the interest added upon accepting this offer will empty the taxpayer’s pocket for the next few decades.
Since Kosovo MPs have the power to decide whether or not to issue the state guaranteed interest for this project, it is up to them to seek all the necessary documentation. It is an excellent opportunity for MPs to ask for details of the construction tender from the government, as well as the details of the financial conditions.
In addition, one has to know who has decided to go ahead with a particular offer.
This is what we are missing: who from the government has been involved in this process with Kosova e Re? What was the role of the government? Was it as a spectator or as a decision-maker? Does the Kosovo government need to issue a decision on the adequacy of procurement activities before having the approval of the Assembly? It is essential to know which person is to be called a ‘hero’ if a good deal is reached, and correspondingly, who is the ‘villain’ if the deal goes bad?
These are more than legitimate questions, considering the complexity of the Kosova e Re project and the history of similar major transactions that have been made in Kosovo.
There are two major projects that have been finalized so far: the concession for the modernization of Kosovo airport and the privatization of KEDS.
When talking about the concession of the airport, an error forced the Kosovo government to invest in the extension of the airport runway. Even in the case of the privatization of KEDS, there was a ‘mistake,’ too.
The error here was even greater, as four hydropower stations were privatized as well, free of charge, alongside the distribution service. KEDS was sold for only 26 million euros, while then-minister of economic development, Besim Beqaj, justified the low price by saying that “Kosovo is not selling hydropower plants like other countries.”
On the other hand, 53 million euros will be paid to the company Bechtel & Enka by the Kosovo government, beyond the basic contract that was made, due to other ‘mistakes’ and ‘delays.’ The explanations why this amount is being paid remain unclear.
Whenever these cases are evoked, there is a justifiable fear as to what is hidden in these 1,000-page contracts. Are there more contracts that will cost us millions in the future? For the time being, we have many unanswered questions. However, we must be aware of who is responsible if costs like this are to appear in the future.
Now, it is the time and opportunity to conduct a screening of the entire project so that we do not deal with post-mortem parliamentary investigations. If the alarms raised by civil society are ignored by MPs, the likelihood that energy prices will be the main subject of electoral campaigns in the future is more than possible considering the risks that await us.
This project is being carried out in a country where the minimum wage is 135 to 170 euros. The salaries in the private sector continues to be significantly lower than that of the public sector. Data from the Kosovo Agency of Statistics says that the average salary in 2017 in the public sector was 474 euros, while in the private sector 348 euros.
Through this project, the Kosovo government will make it more difficult for families to survive, especially those who receive wages of this amount. Their electricity bill price will double, and our household incomes will not grow at the same rate that our energy bills will increase.
The opinions expressed in the opinion section are those of the authors only and do not necessarily reflect the views of BIRN.
24 June 2019 - 15:57
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