Nicholas Watson in Belgrade -

Elektroprivreda Srbije's (EPS) general manager, Vladimir Djordjevic, is a hard man to meet. bne knows this, because sitting opposite in the director's restaurant on the top floor of the state utility's communist-era headquarters in Belgrade is not the famously media-shy head of the state power company as had been arranged, but Dejan Jovanovic, the grandly titled chief of the Cabinet of general manager.

Mr. Djordjevic is apparently tied up with the minister of energy, it's politely explained. And well he might be, because EPS finds itself at the centre of what is turning into a big worry for the future development of Southeast Europe - namely, the failure of electricity production to keep pace with the huge surge in demand. This will inevitably lead to a rise in prices over the coming years, which, European policymakers fear, could choke off the economic boom that is doing so much to stabilize the region after the chaos of the 1990s.

Coal is central to the region's ability to meet this surge in demand for electricity, which is being fuelled by the rapidly growing economies of the various countries. The two new entrants to the EU, Bulgaria and Romania, are growing at over 6%, while the economies of the former Yugoslavia and Turkey are also increasing at around that rate too. UniCredit Group expects Turkey's economy to grow 5.4% in 2007 and Serbia's to grow about 6.0%.

In broad terms, the World Bank has forecast that the economic growth of the countries in Southeast Europe will remain at higher levels than the 2-3% for the EU as a whole over the next decade as these economies converge with their Western counterparts. Assuming growth rates of 3-5%, therefore, growth in demand for electricity would average 2.3% per year through to 2020, bringing gross demand to roughly 235,200 gigawatts per hour.

This rapid economic growth is coming at a time when the region's electricity capacity is actually being pared back in places as aging nuclear power plants are ordered shut by the EU, dry summers reduce water levels in reservoirs and governments are forced to close old power plants.

Kolubara to the rescue

For EPS in particular, the Serbian company is planning a major investment programme that will see some €3.1bn ploughed into raising electricity capacity by 2010, which will include €700m to complete the coal-fired thermal power plant Kolubara B and €250m to raise coal production in the Kolubara coal basin. The actual production rate is about 25m tonnes per year (t/y) for the whole of the Kolubara field, with approximately 5.2m t/y for the Tamnava West mine. Plans are to boost lignite production at the Tamnava West mine to approximately 12m t/y.

Serbia's electricity supply currently is roughly in balance with demand, but that is largely down to the very mild winter the country has just enjoyed. But even if demand stays at current levels, a supply gap will still form over the next two to four years because EPS, which accounts for about 95% of the country's power supply, will have to start closing down the oldest power plants, some of which were built in the 1950s.

To build a new plant takes six years, therefore Djordjevic is counting on finding a strategic investor to help complete the construction of the 700-megawatt (MW) Kolubara B, which was started in 1988 but brought to a standstill by the wars in the former Yugoslavia. EPS reckons it should take three to four years to finish Kolubara B, located about 40 km south of Belgrade, and will need another €600m to finish. EPS claims it's sunk about €300m into Kolubara B already.

The Kolubara B project forms the cornerstone of Djordjevic's near- to medium-term strategy for EPS' development. He is intent on finding a strategic investor for Kolubara B by the end of the year through a tender. This strategic partner will be given a majority stake in a joint venture that will own and operate Kolubara B.

The names of interested parties are CEZ, RWE, EVN and Enel. Industry insiders say there's likely to be one other bidder.

Elsewhere in the former Yugoslavia, governments and foreign investors are pressing on with coal projects.

In Bosnia Hercegovina, the Czech power company CEZ plans to sign on May 16 a deal in which it will acquire an existing plant in the Bosnian Serb Republic with a 300-MW capacity and coal mines with 400m tonnes of reserves in return for investing €1.5bn to construct a 660-MW coal power plant in Gacko. CEZ is looking at a similar opportunity at the Ugljevik plant in the Bosnian Serb Republic, competing against Slovenia's EPS and an unnamed Greek investor.

CEZ is also involved in a joint bid with US power group AES Corporation for a multi-billion dollar power project in the UN-run Serbian province of Kosovo, which possesses the world's fifth-largest proven coal reserves, estimated at 12bn tonnes. The project includes the construction of a €2.47bn coal-fired power plant and development of a new coal mine nearby.

The new coal-fired power plant, Kosova C, will be the third one in Kosovo. It is designed to have an installed capacity of 1,800-2,100 MW and will be built in two stages by the end of 2020. The power project includes the development of a new lignite mine, Sibovc, which would feed all three power plants in Kosovo after 2012. Sibovc has a surface area of 19.7 square kilometres and geological reserves of 990m tonnes of lignite, of which 830m tonnes are exploitable. The Kosova C power plant would need 648m-756m tonnes of coal to operate during its lifespan.

CEZ is competing in the Kosovo project against Greece's Public Power Corporation, which placed a bid jointly with US ContourGlobal and Italian energy group Enel.

Enel is also looking to build another coal-fired plant near Bulgaria's largest lignite mines. On April 24, Enel said it is set to launch a 750-MW, €950m lignite-fired power plant near the country's largest lignite mines Maritsa East, which supply coal to Bulgaria's largest power plant Maritsa East II, with a combined installed capacity of 1,450 MW, Enel's Maritsa East III plant of 900 MW and will provide coal for a new 670-MW plant being built by AES.

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