Clare Nuttall in Bucharest -

On paper at least, the Balkans looked an ideal location for clean-energy production, and for several years the region has been a magnet for investment and subsidies. But lately there appears to have been a rethink on the part of governments and investors alike, at least in several of the region’s EU member states. Elsewhere, there is still sufficient untapped potential for some of the Western Balkan countries to be considered future suppliers to Central European markets.

Both Bulgaria and Romania experienced a brief boom in renewable energy investments, especially in wind and solar power, when their governments introduced generous incentives in an attempt to meet EU targets.

Recently, however, Bulgaria and Croatia have announced plans to cut incentives for renewable energy investment as they make progress towards the targets faster than expected. This follows similar cuts in Romania and several other European countries.

The Bulgarian parliament voted in February in favour of legislation that will scrap preferential pricing for new renewable energy installations. Incentives for renewable energy producers have already been scaled back in the last two years, with Sofia citing higher electricity tariffs and the rising debt burden at the state power company NEK.

Electricity tariffs are a sensitive issue for the current Bulgarian administration under Prime Minister Boyko Borisov, as protests initially over rising electricity bills forced the resignation of his previous government in 2013. Generous incentives had also resulted in Bulgaria becoming one of the first EU countries to meet its 2020 targets for renewable energy generation almost a decade before the deadline.

Too much of a good thing

In a recent interview with bne IntelliNews, Oliver Joy, political affairs spokesman for the European Wind Energy Association (EWEA), noted that Bulgaria currently has an over-capacity problem and is exporting electricity to Turkey, Greece and the Balkans, meaning there is little motivation for investment in yet more generation capacity. “However, given that [the Bulgarians] rely almost 100% on Russian gas, their electricity sources are not very diversified. The potential for wind and solar energy is there if they decide they want to reduce their dependence on a single country for energy imports,” Joy points out.

Meanwhile, Croatia does not plan to provide any new licences for solar projects this year, despite the high potential for solar generation there.

The moves in Bulgaria and Croatia are part of a wider trend seen across Southern and Southeast Europe, where governments were initially quick to embrace renewable energy. “There have been harsh retroactive changes to the regime in Spain as well as changes in Italy and Romania,” says Joy.

Romania decided to slash incentives for renewable electricity generation following a dramatic boom in the sector between 2010 and 2013. Bucharest’s generous “green certificate” incentive scheme attracted numerous international investors from Europe and Asia, in addition to local companies.

However, in June 2013 the Romanian government announced cuts to green certificates issued to generators of wind, solar and small hydropower plants put into operation after January 1, 2014. This resulted in new projects being cancelled, while many of those already under construction were put on hold.

Investors are now responding in a similar way to Zagreb’s decision. On January 26, Germany’s Luxor Solar, which controls around 10% of Croatia’s solar power generation sector, announced it had completed a greenfield solar system with capacity of 360 kilowatt peak (kWp). “A further installation of similar size is due to be constructed in spring 2015 before the relevant licence becomes invalid. The two installations will be amongst the last of their kind in Croatia, as greenfield systems will no longer receive sufficient support in this sunny country,” the company said in a statement.

Powering toward targets

The cutbacks have raised questions about whether countries in the region will meet medium- and long-term renewables targets. Under the EU’s Renewable Energy Directive, the bloc as a whole has set a target of generating 20% of electricity from renewable sources by 2020. Each country within the EU has its own target, ranging from just 10% in Malta to 67.5% in Norway – a non-member that has joined the initiative.

By 2012, Bulgaria was one of just three EU countries to have met its target, alongside Estonia and Sweden. Data from the European Environment Agency shows that by 2012 electricity generated from renewable sources accounted for 16.3% of gross final energy consumption – just above the 16% target.

Southeast Europe’s three other EU member states are also close. Croatia generated 16.8% of energy from renewable sources compared with its 20% target, at 22.9% Romania was slightly below its 24% target, and Slovenia, which is targeting 25%, was on 20.2%.

Countries across the region have moved particularly fast towards meeting their solar power generation targets. According to James Watson, CEO of the European Photovoltaic Industry Association, the relatively modest targets set in these countries indicate they underestimated the potential of solar energy.

There are also indications that some governments may reconsider. In Romania, Energy Minister Andrei Gerea told journalists in February that the government is considering changes that would once again make it profitable for companies to invest into renewable energy installations, local media reported.

Investors need fixed incentives

However, sudden changes to incentive schemes have scared off many investors and it is uncertain whether they can be lured back. “The key is stability around incentive schemes as this sends a clear message to investors. Where there is instability there is more risk and so we call on governments to maintain stable and transparent systems around renewables,” says Watson. “It would be better for the countries to maintain a stable and predictable system so that investors know the longevity of the incentive systems set up over a number of years. This is possible and has the benefit of encouraging investors into renewable energies.”

“Bulgaria and Romania are paralysed at the moment. Sudden changes have penalised investors and may scare them off from coming back even if the incentives are changed again in future due to the uncertainty,” agrees the EWEA’s Joy.

Given the long time horizon for returns on wind, solar and other renewables installations, confidence in the investment regime is highly important for investors. Even if the Romanian and Bulgarian governments decide to reconsider their policy on incentives, this may not be enough to restore confidence.

Outside the EU, there has been less investment into wind and solar power, but countries across the Balkans have long relied on hydropower for at least part of their electricity supply. Albania is the world’s largest producer of hydropower as a percentage of total production, while Bosnia & Herzegovina generate a substantial share of its electricity from hydropower and has emerged as one of the region’s largest power exporters. The head of the European Bank for Reconstruction and Development (EBRD) office in Sarajevo, Ian Brown, said in a 2014 interview with bne IntelliNews that Bosnia has “great potential” for utility-scale hydropower.

Meanwhile, Serbia’s adoption of the EU’s third energy package in December is expected to smooth the path for investment into solar and wind farms. This could lead to a reactivation of Continental Wind’s plans for a €280mn wind farm. The company’s website explains that, “Unfortunately, the legislative hurdles... have kept us from fully realizing our investment plans to date.” Another company, MK Fintel Wind, a joint venture between Italy’s Fintel Energia Group and Serbia’s MK Group, started building a smaller wind farm with a capacity of 9.9MW in January.

All about alternatives

Developing alternative energy supplies has become increasingly important following the cancellation of the planned South Stream pipeline, which would have delivered Russian gas to several countries in the region including Bulgaria, Serbia and Bosnia. In addition to renewables, the coastal Balkan states are also looking at options to invest in liquefied natural gas (LNG) terminals.

Croatian Economy Minister Ivan Vrdoljak said in March that the country will commission a feasibility study for the planned LNG terminal on the island of Krk by the end of this year. In Albania, Italy’s Gruppo Falcone announced back in 2008 that it had signed a €1bn agreement to build an LNG regasification terminal near Levan, but the project is still at the planning stage. A January 2015 report from the EBRD said that with energy security becoming a growing concern in Europe, countries across the Western Balkans “could play a role in improving that security through possible investment in liquefied natural gas terminals and new gas pipelines.”

However, while domestic energy security is a political priority since power demand in the region is limited, for large-scale investments into hydro, wind and solar power to be economically viable, developers are also looking at options for export. Perhaps the most important future development for energy producers in the Western Balkans is the planned subsea power cable from Montenegro to Italy. The 415km cable will run from Tivat to Pescara, allowing not just Montenegro but other Balkan countries to export directly under the Adriatic Sea to Italy, which in turn is hoping to become a new hub for onward exports to Central Europe.