Necessity of Risk Mitigation in Hydropower Partnerships in Albania

Photos – Annual Conference of the Albanian Association of Renewable Energy (AREA) at Rogner Hotel, March 1, 2018

Analyse by Adv. Lorenc Gordani, PhD

Despite the multi-importance for the economy, hydropower investments present a complex challenges in their practical management. In order to attract the private and foreign interest, the aim of any government has been to offer a broader partnership model. The question that arises is how has been their management and where there have been the problems for the parties in practise? What is expect or advise to the improve of their management in the future?

Problems on the managements of the hydroelectric investments

In Albania, legal practices of co-operation with private sector to improve the efficiency of natural resources have been contracted for more than 100 years! Despite the long period of this important form of co-operation for the economy, the problems do not seem to be redeem entirely in practice. Those has been taken into account in continue ongoing adaptation of the legal granting rights regime used for the new generation capacity of electricity from hydraulic works. However, the problems are impossible to be remove entirely between the parties, due to the complexity not only during construction, but also the interdependency of external factors such as the atmospheric performance, the energy market evolution, and so on.

Perspectives of demand growth and the need for development of new power plants

In view of developments in the Albanian economy, the demand for energy consumption continually face the inadequacy of its production from national sources. Since 1999, with few exceptions, the country has had a deficit in covering the demand for electricity, transforming it into a large net importer from the countries of the region. This was reflected in the high financial costs that have frequently undermined the Albanian electricity system and the state budget finances.

As for the future, by 2030 the demand for electricity, based to the Regulatory Authority of Energy (ERE) estimation with an expected growth rate of 1.5%, and the regional study “Sled SEE 2016” of 3%, is forecast to pass from currently 7.1 TWh to 10.8 – 13 TWh. A substantial increase that make mandatory the build of new generation power plants. Resources expected to come from hydroelectric sources based on low costs (LCOE) using a potential of over 41 billion m3 of water from an average height of 750 m. Factors that has pushed many local and foreign companies, with international reputation, to see with interest the invest in the hydroelectric sector.

Economic importance and the models offered to promote the private sector and foreign investment

Developments in recent years have shown that the partnerships on concessions have constitute an important component of the Albanian economy. For 2016, foreign investments reached about 1 billion euro, stimulating growth to 3.4%. The largest share of foreign investment stocks, with over 70% is focus in energy (including oil and gas). Investments in hydroelectric alone have reached $ 1 billion over the last 15 years. An amount with a growth in real terms of almost 10% only in 2017.

On above, the model mostly used are that offered in the rest of Western Balkans area. A model recommended by the international financial institutions (IFIs) for these countries due to the lack of market development compared to the rest of the EU. This determine also by the absence of additional fiscal space available for the generation sector. But above all, it is needed to reduce public sector participation in order to promote the liberalization process. Therefore, the government will continue to encourage investors and the private financial system, especially foreign capital to enter in generation sector.

Reform an “golden” opportunity to improve PPP management

Given the problems experienced by the parties, reform as the key word of the government’s economic program is welcome with regard to increasing foreign investment. Reform that is in the preparatory stage of the intervention in the energy sector in terms of improvement of the administrative procedures for companies, deregulation of the offer, etc. An approach considered essential for the development of partnerships and in particular the creation of a safe and sustainable environment for hydroelectric investments.

New perspective provided by liberalization and the integration of the energy market

Despite ongoing developments, the use of waterpower, from which humanity has benefited for centuries, will remain the most economical form of energy. In this spectrum, it is estimated that the new legal framework of the energy and renewable energy sectors, as well as the adaptation of the rules on PPPs, favoured a large power plans. In addition, it contributes to addressing not only global climate concerns (linked to the Paris agreement), but also the concerns of environmentalists to avoid overburdening by the use of small water resources in the interest of local communities.

In meanwhile, the pursuit of more forward-looking projects based on the analysis of market scenarios, provide greater sustainability, considering that the driest periods are associated with higher prices and those with lowering of temperature a greater consumption of energy. In same time, the production companies can benefit from the management and operation of the power exchange, ancillary services, direct supply, etc. Prospects that are leading in fact to the launch of some projects considered strategic investments in the energy field.

Risk identification analysis of hydroelectric partnerships

At the same time, the need to adopt new regulatory measures to liberalize the market has created a climate of uncertainty, especially for investors based solely on the traditional production approach. However, the main common feature of PPPs of any model, including the ROT, BOT, BOOT concession contracts, is based on an agreement where risks are distributed among the parties that can manage them better and with lower costs.

In summary, the risks that do not depend on the investor, can be grouped on the inability to complete the project (e.g. difficulty in finding finance related to the change in the economic situation or only perception of the business climate); changes during the operation (e.g. change in annual natural inflows, upstream operations of the river basin, etc.); changes in public policies and regulatory regimes (e.g. the modification of the essential conditions of the agreement, introduction of methodology of tariffs, the change in the treatment of imbalances, the blocking of the market through preferential contracts between public companies, the distortion of market mechanisms, etc.).

The preliminary risk analysis of the project is essential to structure the transaction of each partnership. An analysis that should serve to make a decision on the type of contract that will be applied in the partnership structure to provide and manage project risks more efficiently. Contracts translated into law in the relations of the parties, respected or modified exclusively with the full consent of them, for the entire duration of the partnership.

Recommendations on the management of existing investments in hydropower

Recently, the World Bank has included Albania for the first time, in its report “Benchmarking Public-Private Partnerships Procurement 2017“. According to the report, Albania obtains a higher assessment in the phase of project preparation and manages unsolicited proposals. Which means what is requested by investors is accomplished relatively well done! While project management takes the lowest estimates (only 55 out of 100 points), this makes imperative the work with public authorities to further improve them.

In conclusion, despite the debate over the use or not of hydroelectric resources, the government has continue confirmed its willingness to move forward with their construction. In this framework, it is judged that the best promotion for new investments starts with the preservation of existing ones. However, any eventual need revision has to be settled in agreement with the stakeholders, to ensure the success of the projects. On this, essential is the support by a sound expertise to assist the parties on the best European models in the area of concessions and PPPs.

In more on above, can be find in the form of slides or pdf the presentation kept by Dr Lorenc Gordani at the Annual Conference of the Albanian Association of Renewable Energy (AREA) at Hotel Rogner, March 1, 2018

Disclaimer: The ownership and the opinion expressed pertain to their authors. While all the effort are made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations may differ and should be discussed with an expert. For any specific technical or legal advice on the information provided and related topics, contact us through “lorenc.gordani@euroelektra.al”.

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