Croatia's bold energy plans face uncertain future

By bne IntelliNews November 23, 2012

Guy Norton in Zagreb -

Croatia is one of the world's most energy-import dependent countries, yet there's an increasingly mixed outlook for the ambitious investment plans of Croatian power monopoly Hrvatska Elektroprivreda (HEP) following the recent turn of events at both home and abroad.

On a positive note, the state-owned company's preparations for the launch of its first ever international bond in early November managed to survive the disruption caused by Hurricane Sandy in the US, which delayed a number of meetings with potential buyers. Subsequently, HEP was easily able to raise its target amount of $500m from a mix of emerging market and high yield investors, with the five-year issue attracting $2.7bn worth of potential orders. As a result, the company was able to price its debut overseas bond with a coupon of just 6%, the lowest achieved by a Croatian borrower in the international debt markets since the onset of the global economic downturn in 2007.

Unsurprisingly, the then economy minister, Radimir Cacic, greeted the investor interest in the bond and its pricing as a ringing endorsement of HEP's investment plans, telling state broadcaster HRT: "Such great interest is almost unprecedented. This is an extremely important message that indicates that the state has high-quality projects."

Joy over the successful bond issue proved short-lived however, with the resignation of Cacic on November 13 after he had been found guilty of reckless driving that caused the death of two people in a road accident in Hungary in 2010. Cacic was widely viewed as being the driving force behind HEP's plans to invest in a number of new power projects to reduce Croatia's currently high dependency on expensive energy imports, which costs the country HRK15bn (€2bn) a year. As Cacic bemoaned at an investment conference in Qatar shortly before he resigned, Croatia ranks number eight in the world in terms on dependence on energy imports - a state of affairs which makes it highly vulnerable to increases in global energy prices and makes a strong contribution to Croatia's shrinking economic competitiveness.

Meanwhile, cash-strapped retail customers in Croatia face the unwelcome prospect of higher prices for electricity (up 22%) and heating (up 37%) as HEP looks to recoup the cost of higher energy imports resulting from recent droughts in Croatia that caused a sharp drop in production from its domestic hydroelectric plants.

Not green enough

As part of Cacic's so-called "New Deal" economic strategy, HEP is poised to build a number of new production facilities to alleviate the problem of high energy imports. However, HEP's planned new power plants have already courted a great deal of controversy at both home and abroad, with critics claiming that HEP is poised to embark on a series of ill-planned projects that could ultimately prove to be both economically and ecologically damaging for the country at large.

Already civil society groups led by Zelena Akcija (Green Action) have succeeded in persuading the European Bank for Reconstruction and Development to launch a review of its decision in November 2011 to approve a €123m loan for HEP to help fund the construction of HPP Ombla, a 68-megawatt (MW) hydroelectric plant which is planned to be built near the tourist hotspot of Dubrovnik. According to ecological activists, the HPP Ombla, which will be located at a site which has already been designated for protection as part of the EU's Natura 2000 network of important natural areas, is legally questionable, as the Environmental Impact Assessment (EIA) for the planned plant dates from as far back as 1999 and so should not be considered to provide sufficient grounds for HPP Ombla to be given the go-ahead by Croatia's environment ministry.

Furthermore, in an open letter on the subject Zelena Akcija claimed that HEP had failed to sufficiently include the Croatian public in the decision-making process surrounding HPP Ombla, and had also dismissed a member of the commission that evaluated the 1999 EIA because he strongly opposed the project. Zelena Akcija believes that HPP Ombla will have a disastrous effect on the rare species of bats and salamanders that live in the planned construction zone.

Controversy surrounding HPP Ombla heightened on June 8 when the environment minister Mirela Holy resigned, ostensibly because of a scandal involving her sending an email to Croatian Railways requesting that the wife of a party colleague be kept in a job at the state-owned firm. But considering the email was sent three months previously, many local media and civil society groups pointed out that the timing of the revelation was quite a coincidence considering that Holy's ministry was about to decide on the fate of several controversial infrastructure projects including HPP Ombla.

On the day she resigned, Holy also announced the long-awaited results of an independent review that she had commissioned into the 1999 Environmental Impact Assessment for the HPP Ombla project. Out of four experts who reviewed the study, three assessed the study as being inadequate, with the fourth giving it conditional approval. Following Holy's resignation, Cacic, an unashamed supporter of HPP Ombla, rubbished the findings of the independent review on the grounds that it had been done for free, which in his view made it automatically suspicious.

Zelena Akcija has called on PM Zoran Milanovic and the new environment minister, Michael Zmajlovic, to heed expert opinion rather than Cacic's remarks, and cancel the project.

Meanwhile, controversy is brewing over another HEP project - the proposed 500-MW Plomin C power plant in Istria, in northwestern Croatia. Four companies - Edison (Italy), Kosep (South Korea), Marubeni (Japan) and POL-MOT (Poland) - have already been shortlisted for the €800m project, which is due to be completed by 2017. Currently, Plomin C is set to use coal rather than gas as a fuel source, a fact that has provoked protests from green groups which claim it will harm the tourist appeal of Istria as an environmentally-friendly destination. At the end of October, Zelena Akcija and Zelena Istria filed a lawsuit with the Administrative Court in Rijeka against the environment ministry over its approval for the future Plomin C facility.

Finally, HEP and now former economy minister Cacic succeeded in upsetting politicians in neighbouring Bosnia-Herzegovina with the signing in July of an agreement for the construction of hydroelectric power plant, Dubrovnik II with the Republika Srpska, the ethnic Serbian entity in Bosnia. The €170m 300-MW project will be built in Dubrovnik, but will use water resources originating in the Republika Srpska and has been described by Cacic as one of the "most potent and highest quality European energy projects'.

However, Bakir Izetbegovic, chairman of the presidency of Bosnia, has fiercely contested the right of the Republika Srpska authorities to independently make deals with Croatia about the construction of the new hydropower plant. And the World Wide Fund for Nature has warned that projects such as Dubrovnik II could have a devastating effect upon the environment and lead to the destruction of areas such as the Hutovo Blato marshes, one of the biggest sanctuaries for migratory birds in the Balkans, and also negatively impact upon agricultural production in southern Bosnia.

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