Report No. 15313-MK

Former Yugoslav Republic of MacedoniaEnergy Sector ReviewMay 2, 1996

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Document of the World Bank

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CURRENCY EOUIVALENTS

Currency Unit = Denar abbrev. Dn.

US$1.0 = 37.15 (Nov. 1995)

WEIGHTS AND MEASURES

1 megawatt (MW) = 1000 kilowatts1 gigawatt (GW) - 1000 megawatts1 gigajoule (GJ) = .239 gigacalories1 terajoule (TJ) = .239 teracalories1 terajoule (TJ) = .947 billion BTU1 kilowatthour (Kwh) = 3.6 megajoules (MJ)1 tonne (metric ton) = 2205 lbs.1 cubic meter (m3) = 35.31 cubic feet

GROSS HEAT VALUE OF FUELS

Hard coal = 7000 Kcal/Kg.Lignite = 1900 Kcal/Kg.Crude Oil = 10,200 Kcal/Kg.Natural Gas = 8000 Kcal/m3

ACRONYMS

COO = Chief Operating OfficerDM = German MarkEBRD = European Bank for Reconstruction and DevelopmentESM = Elektrostopanstvo na MakedonijaEU European UnionFRY = Federal Republic of Yugoslavia (Serbia & Montenegro)FYRM = Former Yugoslav Republic of MacedoniaGDP = Gross Domestic ProductGSP = Gross Social ProductIFI = International Financial InstitutionIPP = Independent Power PlantNEAP = National Environmental Action Plan of FYR MacedoniaSFRY = Socialist Federal Republic of Yugoslavia (before break-up)

FYR OF MACEDONIA

ENERGY SECTOR REVIEW

PREFACE

This report is based primarily on the work of a Mission, composed of Mr. JamesMoose and Mr. Antanasije Kocic, which visited FYR Macedonia in July and November1995, a field trip to FYR Macedonia by Mr. Heinz Hendriks in November 1995 and work onMacedonian electricity demand by Gordon Hughes. The report was then discussed with theGovernment of FYR Macedonia in March 1996. The views expressed in the report are,however, those of the Mission and not necessarily the views of the Government.

The report provides information on the condition of the energy sector in late 1995. Itindicates what the major issues are, what has been accomplished and what still needs to beaccomplished. In so doing it provides a suggested action plan for the sector.

This report is designed to provide an independent technical input to the Government asit begins to prepare its own energy strategy. It will also be used by the Bank in preparing itsstrategy for assisting the FYR Macedonian Energy Sector. Finally, it is hoped that the reportwill provide useful background information to other IFIs and bilaterals as they consider theirpotential support to the investment programs of the sector.

FYR MACEDONIA

ENERGY SECTOR REVIEW

TABLE OF CONTENTS

PAGE NO,

]EXEUTIVE SUMMARY AND RECOMMENDATIONS .............................. iA. Background ...................................... iB. Emerging Strategy .................................... iiC. Key Issues and Recommendations ........ ................... iii

1. MACROECONOMIC SITUATION AND LINKAGESTO THE ENERGY SECTOR ................................. 1

2. CURRENT SITUATION OF THE ENERGY SECTOR . . 5A. Energy Sources and Uses S.. ........... . 5B. Sector Organization .6.................. ..... 6C. Legislation ..................... 7 @@@|D. Environmental Issues ....... ........... 8E. Potential for Energy Conservation .................. 10

3. PETROLEUMANDNATURALGAS .... 12A. Petroleum .1..................... ..... ..... .. . . . 2C. Natur al Gas .1.................................... . 26

4. COAL AND RE-NEWABLES ................. 18A. Lignite ri Cp t........... s8B. R enew ables ...................................... 22

5 . TR t iO n a . .E.L. $ o .... t .. I. . P OW . a ............ . 23A. Eletricity..en e ratl/ ............ ...... . ....... 24B. Backwrund .............. ...... 25C. Future Demand ........... ........ 26D. Generating Capacity .................. 28E. Transmission and Distribution ............... 31P. Electricity Prices ................... 33G. Organizational Issues .................. 34H. Investments ............. ....... 37

6. INSTRICT HIEATING .,...................,,,,,,,,,,,,,,,,, 40A. Pricing ........ ...................... 40B. Ownership ....... ..................... 41C. Heat Losses ............................ 41D Electricity Genematon/Combined Heat and Power .......................... 41

TABLE OF CONTENTS (cont'd)PAGE NO,

APPENDfIXA: Energy Sources and Uses ............................ 43APPENDIX B: Hydropower, Cogeneration and Transmission ................ 44APPENDIX C: ESM Organization ......... ....................... 47APPENDIX D: Forecast of Generating Capacity Requirements ............... 49APPENDIX E: Sectoma Organization Chart .......................... 51MAP

EXECUTIVE SUMMARY AND RECOMMENDATIONS

A. BACKGROUND

1. Introduction. This report is a review of the current situation of the EnergySector in the Former Yugoslav Republic of Macedonia. It analyses the current condition ofthe sector, highlights a number of issues and makes recommendations about how these issuesmight be dealt with. At the end of this executive summary is an action plan with therecommendations divided into three stages - short term, medium term and long term. Thereport is designed to be used by the Govemment as it begins to prepare a medium-termstrategy for the energy sector. It will also be used by the Bank to prepare its strategy forassisting the FYR Macedonian Energy Sector. Finally, it is hoped that the report will beuseful to other donors in formulating their assistance programs for the sector.

2. The Economy. FYR Macedonia is a small landlocked and largely mountainouscountry of 25,713 square kilometers and about 2 million people situated in the center of theBalkan Peninsula. It became an independent state in 1991 after the break-up of the SocialistFederal Republic of Yugoslavia (SFRY). Since independence it has undergone four majoreconomic shocks. First, annual transfers from the former federal government, totaling 5-10% of GSP on a net basis, were discontinued as the SFRY broke-up. Second, foreignexchange reserves totaling over US$1 billion held at the National Bank of Yugoslavia inBelgrade were lost. Third, valuable export markets and sources of raw materials were lostwith the dissolution of SFRY and the economic sanctions imposed by the UN on the FederalRepublic of Yugoslavia (Serbia and Montenegro). Fourth, the embargo by Greece, whichlasted from February 1994 to October 1995, disrupted trade through the port of Thessalonikiand made exports and imports more difficult and costly. Primarily as a result of theseshocks during the period 1990-1994, real GDP fell nearly 35%.

3. In 1994, the Government began a new economic policy involving strict budgetarydiscipline, strong incomes and monetary policies and restructuring. As a result the economicsituation has significantly improved. The fiscal deficit has been cut (from 12% of GDP in1992-93 to about 1% for 1995), the country has made significant progress in normalizing itsexternal debt situation, inflation has dropped sharply and economic output appears to have hitbottom in 1995. With the help of IDA, the Government has also begun to tackle difficultstructural issues associated with moving to a market economy and is rationalizing and, wherefeasible, privatizing its socially owned enterprises and bringing discipline to its financialsector. Reforms in the enterprise sector are focusing on restructuring and reducing costs atthe largest loss-making enterprises and the two largest utilities, power and railways.

4. Energy. The economy of the Former Yugoslav Republic of Macedonia is veryenergy intensive, due to its energy intensive industries such as chemicals and metals; but it isshort of energy resources. These consist mainly of lignite, which is used to generateelectricity and some hydropower. These resources together, however, are sufficient to makethe country more or less self-sufficient in electricity. Wood is used extensively for homeheating. The country lacks oil, gas or high quality coal resources. As a result, it importstypically around 40% of its energy consumption - mostly petroleum, which amounts to 11-

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16% of total imports. FYR Macedonia is also just beginning the importation of RussianNatural Gas. (See Energy Balance in Chapter 2 also Appendix A).

5. The energy sector is largely owned and controlled by the Government. Theprincipal sectoral companies are: the electric utility, Elektrostopanstvo na Makedonija(ESM); the Skopje Refinery; the Skopje District Heating Company; and Makpetrol (thepetroleum products distribution company). ESM is wholly and directly owned by theGovernment, while the majority of the shares in the Refinery and the Skopje District HeatingCompany are socially owned with a small share holding by the employees. These sociallyowned shares are left from the previous SFRY self-management system. They are owned bythe Government, which can sell them, but the companies are self-managing. Makpetrol, onthe other hand, is now more than half privately owned. The Govemment controls prices forall of these companies. For ESM it also appoints the management and approves investments.The Refinery and Skopje District Heating Company appoint their own managements andmake their own investment decisions though with some influence by the Govemment. TheGovemment has the least control over Makpetrol which is officially an independentcompany. These existing elements of Govemment control are spread over several ministriesand the Council of Ministers. The Council of Ministers sets prices (except for districtheating prices), determines major investments by ESM and appoints top management ofESM. The Ministry of Economy provides most of the inputs to the Council of Ministers onenergy issues and has the right to approve or disapprove district heating tariffs. TheMinistries of Development and Finance may also provide input to the Council of Ministerson Energy Issues.

6. Energy prices, while they are set by the Govemment, generally cover costs -unlike the situation in many economies in transition. The prices of petroleum products aresimilar to those in Western Europe. They cover costs and are considerably higher than inthe US - largely due to substantial excise taxes on products. The price of electricity in 1995and currently is about 4.2 US cents/Kwh on average, with households paying more forelectricity than industry. (See para 5.19.) This average price is probably slightly low froman economic point of view, though a good estimate of the long run marginal costs ofsupplying electricity does not yet exist. Financially, this price appears be somewhat lowbased on preliminary 1995 financial projections, though again the electricity company brokeeven on a lower average price (3.6 US cents/Kwh) in 1994. District Heating prices arecomparable on a heat equivalent basis to West European prices for light fuel oil or naturalgas supplied to households, averaging around $35/Gcal. They more than cover costs. Woodprices are not controlled.

B. EMERGING STRATEGY

7. There is as yet no official strategy for the Macedonian Energy Sector; though theGovemment has agreed with Parliament to prepare one. However, based on discussions withGovemment officials, it appears that a general strategy has been formulated: which is to relyprimarily. though not solely. on market mechanisms and to shift away from a "centrally

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Manned" approach. A number of strategic principles are widely accepted, which aregenerally market based. These principles are:

- energy prices should cover operating costs with a margin to fund futureinvestments.

- energy sector companies should be able to finance themselves from intemaland outside funding sources and should not rely on Govemment financing.

- energy sector companies should operate as commercial entities and can bepartially, or in some cases wholly, privatized.

- the country should rely on domestic energy resources where economicallyfeasible.

- energy conservation will be encouraged through cost based pricing ofenergy and the restructuring of the economy, which should lead to reducedenergy intensity.

8. This market based a=proach to strategic planning is commendable and deserves tobe suprted. Its implementation should be accelerated by insuring that all sector companiesare corporatized and then privatized as rapidly as feasible. Within a reasonable time period itshould be possible to privatize all of the sector companies. which should increase efficiency.Privatization. however, will make it necessary to establish a regulatory system for thosecompanies which are natural monopolies: ESM (transmission and distribution), the SkopjeDistrict Heating Company and the Gas Transmission and Distribution Company (see para. 10below.)

C. KEY ISSUES AND RECOMMENDATIONS

9. There are a number of important issues in the sector, which are discussed below.Several of these issues require more detailed studies in order to develop firm recommen-dations on how they ought to be addressed. It would also be useful to prepare acomprehensive energy strategy study for the country. including a least cost electricity supplyplan. in order to place these issues in the appropriate context. The Academy of Science hasbeen charged with preparing this study, but in the spring of 1996 was only in the early stagesof organizing for this work.

10. Pricing. While prices for energy are on the whole at reasonable levels, thesystem of having the Council of Ministers set energy prices is not a good one. TheGovernment should not set energy prices at all for those products which are sold in acompetitive market. For example, the petroleum products market in FYR Macedonia may besufficiently competitive that the Government does not need to set product prices. However,in this case the Government should monitor petroleum product markets to make sure that

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Makpetrol does not exploit its dominant position by engaging in monopolistic practices. Forthose markets which are natural monopolies such as transmission and distribution ofelectricity, natural gas and heat distribution, the Government should establish an independentregulatory system to set final prices. This regulatory system should set prices on the basis ofobjective transparent criteria and should ensure that they that cover ogerating costs, providesufficient revenues to meet the financial requirements of the sector and are equitable toconsumers. Such a system would depoliticize the decision making process for energy pricesand allow them to be set on the basis of financial and economic factors. Also theGovernment must ensure that there is not a build up of arrears to the utilities as hashagpened to ESM (see para. 5.20).

11. Sector Organization. The small energy secretariat in the Ministry of Economyneeds strengthening. This unit of 5 persons has oversight responsibility for the sector,reviews investments and pricing proposals, makes recommendations, and sets district heatingprices. While some of these functions ought to disappear as the economy is restructured,there is need for a group to consider strategic planning issues and provide advice to theGovernment on policy alternatives. The unit is understaffed for its current or future work,especially in the support staff area and in office technology, and needs a modest increase instaffing and funding. A separate Ministry of Energy does not appear to be justified and inview of the Goverment's budget problems should be discouraged as an otion.

12. Electricity Subsector Structure. A report by consultants hired by USAID lookedat the possibility of unbundling the subsector by separating distribution and transmission fromgeneration and splitting generation into several competing companies. While there are botharguments and experience which support the idea that this would increase competition andlower costs, the consultants concluded that it would be difficult to implement in FYRMacedonia due to the very small size of the system and the dominant role played by theBitola Power Plant which supplies 70% of the country's electricity. This conclusion appearsto be reasonable. However, there is gotential for private investment in generation, includingin small hydropower plants or associated with private investment in industry (cogeneration).Hence promotion of independent power production, to be sold to the grid under rules of thegame that are transparent and make such investments attractive, ought to be considered in theformulation of the strategy for the sector and in development of a regulatory system.

13. Refinery. The Skopje Refinery is uneconomic in its current configuration. It isa small hydroskimmer, lacking adequate upgrading capacity so that it produces relatively toomuch heavy fuel oil and not enough light products. Moreover the heavy fuel oil market willbe diminishing with the arrival of Russian Gas, which will replace heavy fuel oil. Therefinery also suffers from poor logistics with only one means of receiving crude oil, whichis by rail from the port of Thessaloniki, and is expensive. The refinery can only survivefinancially with tariff protection and even with this protection its financial condition isstrained. It is recommended that a study be done of the refinery. This study shouldrealistically assess the economic merits of closing the refinery, the viability of privatizing itas well as the costs and benefits of upgrading investments. In undertaking this study, the

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consultant would need to look at the changing market situation for the refinery, taking intoaccount the loss of part of the heavy fuel oil market and the possibility of exporting into thesouthern part of the Federal Republic of Yugoslavia (Serbia and Montenegro) now that thesanctions are lifted. The consultant should look at the gasoline market and an anticipatedshift over time from the use of leaded gasoline (which is creating high ambient levels of leadin the air in certain areas) to unleaded gasoline. Finally, the consultant would also need toinvestigate the possibilities of delivering crude at lower cost to the refinery including apipeline to Thessaloniki and the proposed TransBalkan line. This study would provide theGovernment with useful background information on the prospects for the refinery and itsoptions. Since the refinery is worth very little in its current configuration. the Governmentmay want to consider privatizing it through a "Bolivian type" approach. with bidders offeringvarious levels of investment for ownership of half or more of the refinery and managementcontrol.

14. Suvudol Mine/Bitola Power Plant. The Bitola Power Plant, which was built inthe 1980s, is the largest and newest plant in FYR Macedonia and supplies the country withmost of its electricity. The Suvudol surface mine currently supplies from its main seam allof the fuel for this power plant. This main seam, which is the most important energyresource in Macedonia, has production of about 6 million tonnes per year and reserves ofabout 118 million tones, giving it a life expectancy of about 20 years. The removedoverburden from the main seam is being placed mainly on external dumps. This is moreexpensive than in-pit dumping of overburden and environmentally undesirable since it resultsin a loss of agricultural land and in the generation of substantial quantities of dust. However,in-pit dumping of overburden is hampered by the fact that under the pit bottom lies a smallerbut exploitable lower lignite seam, which would extend the life of the mine somewhat, andwhich the Macedonians are loath to bury by in-pit dumping. Thus a study needs to be doneto prepare a long run plan for supplying Bitola with fuel. taking into account this option ofusing the lower seam. The study would analyze the economic and environmental costs andbenefits of the various fuel supply alternatives for Bitola and make recommendations toESM and the Government. If it was decided not to exploit the lower seam, then in-pitdumping of overburden should begin with major cost and environmental benefits.

15. Hydropower Capacity. FYR Macedonia has considerable hydropower potential,mostly on the Vardar river and its major tributaries. This potential could be exploited bybuilding a number of dams on this river with powerhouses attached. There is an existingmaster plan to do this and construction has started on one of the major dams on a tributary ofthe Vardar. There are, however, diplomatic, economic and environmental issues that need tobe dealt with. First, the water of the Vardar flows into Greece so that FYR Macedonianeeds to reach agreement with Greece on Vardar water issues before it begins to dam theriver or its tributaries. Second. a thorough and large scale environmental study needs to bedone. Finally, the economics of these hydropower schemes need to be thoroughly reviewed.The dams will be difficult to justify only on the basis of their contribution to the powersystem. However, they will also be used to provide irrigation water, flood control and

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municipal water so the schemes might be justifiable on a multi-use basis. This, however,needs to be shown.

16. Generating Capacity Needs. Electricity demand is expected to grow slowly atbest and may even decline in the short run as a result of the restructuring process that istaling place in the industrial sector and the substitution of gas for electricity. Furthermore,the country has a spare power plant. Negotino. which is currently not being used because ofthe relatively high price of the fuel that it uses, heavy fuel oil. The Negotino Power Planthas 210 MW of capacity and could be easily expanded since it was designed to be larger, butthe second unit was never installed. It could also easily be converted to combined cycleoperation, with a substantial increase in capacity, once a gas pipeline is built to the city ofNegotino. Using ESM's demand projections, which are somewhat optimistic, no additionalgenerating capacity is needed until about 2003. With two units at Negotino, which isrecommended as the lowest cost expansion option for ESM, the need for an additionalgenerating plant would be delayed until around 2009. Furthermore, conversion of this plantto combined cycle operation. which appears to be attractive, would further expand capacityand delay the need for a new generating plant even longer. Finally, the Government needsto create an economic and legal environment conducive to the development of IPPs - whichin turn should lead to additional generating capacity.

17. Hydropower Rehabilitation and Other Power Sector Investments. The six majorexisting hydropower plants in the country currently provide only about 15% of the country'selectricity, but they provide all of its peaking capacity and most of its spinning reserve.These Dlants are much older than the thermal plants and should be rehabilitated as a matterof priority,. This would improve their availability and should increase generation byimproving efficiency and availability. Also the dispatch center/control system, which wasbegun under an earlier Bank Project for SFRY. should be completed and rehabilitation of thedistribution system needs to begin.

18. ESM Organization and Management. While the ESM organization runsreasonably efficiently, this report recommends that two improvements be considered forimplementation in the near term. First, it recommends that, while the company is owned bythe Government. a performance contract be agreed between ESM Management and theGovernment. This would clarify what the Government expects from the company and whatsupport, if any, it will provide. Secondly, ESM should consider establishing the position ofchief operating officer, reporting to the General Manager, since currently the GeneralManager position has too many functions and has too many executives who officially reportto that position. (ESM has been somewhat overstaffed, but this issue is being dealt withunder the Government's restructuring program).

19. Natural Gas. A gas pipeline to Skopje has just been completed, which willallow FYR Macedonia to import Russian gas through Bulgaria and Romania. Initially thisgasline will supply a few large customers in Skopje and along the pipeline route. However,the Government, acting through a gasification company, plans to develop a gas distribution

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system in Skopje to supply 50,000 households, which now heat with electricity. This isdesirable in the longer term since household heating with gas should be less expensive thanwith electricity. However, the cost of converting households from electricity to gas is highand the short term economic incentives are limited. Furthermore, substantial funds will berequired to make the conversions and households are financially strained. The gasificationcompany and Government are concerned about providing sufficient incentives and fundingfor these conversions. The increase in gas demand from the distribution system is alsoneeded to reduce the unit cost of supplying gas. A solution to this issue will require theGovernment to focus on the relative prices of gas and of electricity to households. Thematter is complex since at issue also are the reliability of gas supply and the environmentalimpact of alternative strategies. Hence a study to examine the merits of various alternativeapproaches is suggested.

20. Action Plan. The recommendations above provide a rough action plan forthe Government, with three well dermed stages.

- The first stage, should take place in the short term and would havetwo components. First, a number of studies should be undertaken.These are of the Suvudol Mine/Bitola Power Plant (see para. 14), therermery (para. 13), development of a market for the gas from theproposed distribution system (para. 19), and the proposed majorhydropower scheme (para 15). These individual studies could serve asinputs to the overall strategic study of the sector mentioned in para. 9.Second, two organizational changes are recommended, establishmentof a performance contract between ESM and the Govermnent (para.18) and strengthening the energy unit in the Ministry of Economy(para. 11).

- The second stage would occur in the medium term (2-5 years) andconsist of two aspects. First, the market based approach to the sectorshould be implemented with: 1) sector companies privatized (para. 8);2) establishment of an independent regulatory system (paras. 8 and10); and 3) establishment of a framework conducive to the introductionof independent power plants (para. 12). Second, certain majorinvestments should take place including investments by ESM inrehabilitating its hydropower plants, completing the dispatch centerand beginning the rehabilitation of the distribution system (para. 17)and by the gasification company in establishing a gas distributionsystem for Skopje (para. 19).

- Finally, in the longer term, the capacity of the Negotino Power Plantshould be expanded and the plant should probably be converted tocombined cycle operation (para. 16). Also in the longer term thestudies described under stage I would probably lead to furtherinvestments.

1. MACROECONOMIC SITUATION AND LINKAGES TO THE ENERGY SECTOR

1.01 BaakgDimd. The former Yugoslav Republic of Macedonia (FYRM) is a smalllandlocked and largely mountainous country of 25,713 square kilometers and about 2 millionpeople situated in the center of the Balkan Peninsula. It became an independent state in1991, after the break-up of the Socialist Federal Republic of Yugoslavia (SFRY). Althoughsuffering from the impact of several shocks, described below, the country has a diversifiedand potentially sound economic base. Industry is the dominant sector, accounting today for43% of GSP1 and 48% of employment. A wide range or products are produced includingsheet steel, agricultural machinery, refrigerators, motors, cement, wool yarn, cotton fabric,cigarettes etc. Much of this industry needs restructuring to make it more competitive, butthere is significant potential. Moreover, nearly half the surface area of the country isdevoted to agriculture, split about equally between cultivated areas and pastures. Agriculturecombined with forestry and fishing accounts for 19% of GSP with the rest of GSP mostlyaccounted for by services.

1.02 Macroeconomic Situation. The former Yugoslav Republic of Macedonia hasundergone four major economic shocks in the four years it has been independent. First,annual transfers from the former federal government, totaling 5-10% of GSP on a net basis,were discontinued as the SFRY broke-up. Second, foreign exchange reserves totaling overUS$1 billion held at the National Bank of Yugoslavia in Belgrade were lost. Third, valuableexport markets and sources of raw materials were lost with the dissolution of SFYR and theeconomic sanctions imposed by the UN on the Federal Republic of Yugoslavia (Serbia andMontenegro), the country's principal trading partner. Fourth, the embargo by Greece, whichlasted from February 1994 to October 1995, disrupted trade through the port of Thessaloniliand made exports and imports more difficult and costly. Primarily as a result of theseshocks during the period 1991-1994, real GDP fell nearly 35%, total investment fell by twothirds, the rate of registered unemployment increased from 17% in 1990 to 25% in early1995 and a large share of the working-age population dropped out of the labor force.

1.03 The initial attempt to stabilize the economy during 1992-93 failed owing to arapidly shrinking revenue base and a growing wage price spiral. In 1994, however, theGovernment began a new economic policy involving strict budgetary discipline and strongincomes and monetary policies. As a result of this policy the economic situation hassignificantly improved. The fiscal deficit has been cut (from 12% of GDP in 1992-93 to 1%for 1995) and inflation has dropped sharply, but economic output and employment continueddeclining in 1995. With the ending of the Greek Embargo, and the lifting of sanctions againstthe Federal Republic of Yugoslavia, economic output should rise in 1996.

1/ GSP or Gross Social Product, a measure of national income used in former centrallyplanned economies, is akin to GDP but excludes the value of services such as commerce,public administration, social services and defense.

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1.04 The country has also made significant progress in normalizing its external debtsituation. During 1993-94, it became current in servicing its debts to the IMF and theIBRD; in April 1995 it reached an agreement to settle arrears with the IFC; and in July 1995it agreed with Paris Club creditors on a rescheduling of substantial arrears and debt servicefalling due through the end of June 1996. At the end of 1995, the country's external debtamounted to US 1.3 billion, equivalent to about 40% of GDP.

1.05 With support from IDA, the Government has also begun to tackle the difficultstructural issues associated with moving to a market economy and is rationalizing and wherefeasible privatizing its socially-owned enterprises, bringing discipline to the financial sectorand reforming the social safety net. Reforms in the enterprise sector are focusing onrestructuring 23 of the largest loss-making enterprises and the two largest utilities, power(see Chapter 5) and railways. These 23 enterprises account for about 55% of total losses inthe enterprise sector and are implementing detailed cost-cutting programs, including plans forshedding surplus labor, spinning off non-core businesses and liquidating non-viable units.The Privatization Agency will also be divesting companies at a rapid pace. The Govemmentis restructuring the dominant bank, the Stopansaka Bank, in an effort to strengthen thebanking sector and will be reforming the social safety net to facilitate labor adjustment.Finally, the Govemment is putting in place the legislative and regulatory framework toensure the proper functioning of a market economy. This legislative framework includeslaws on securities, concessions, banks and savings institutions, labor relations, a newcommercial code, a new bankruptcy code, an energy law and a law on public enterprises.For the energy sector specifically, the most important of these legislative initiatives are theEnergy Law and the Public Enterprise Law which are discussed in Chapter 2.

1.06 Energy. The economy of the Former Yugoslav Republic of Macedonia is energyintensive, though not as energy intensive as those countries which were members of theformer Soviet bloc. However, compared with Western European Countries and marketeconomies with similar levels of GDP/capita, it is far more energy intensive. (Table 1.1below shows energy intensity for a selected group of countries.) Energy intensiveness inFYR Macedonia is due to four primary factors. First, the share of industry in GDP or GSPis relatively high, which is true of most ex-socialist countries. Second, much of the industryis inherently quite energy intensive including steel, non-ferrous metals, and cement. Third,the industries in FYR Macedonia use less energy efficient technology than their Westerncounterparts.Finally, houses are poorly insulated.

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Table 1.1 Energy in Selected Countries of the World

ENERGY USE(Oil Equivalent)

GDP GDP OutputCountry Per Capita Per Capita per Kilogram

________________________________ ($) (kg)($

Central and Eastem EuropeFYR Macedonia 780 767 1.2Bulgaria 1160 2422 0.5Czech Republic 2730 3873 0.7Poland 2270 2407 0.4Romania 1090 1958 0.5Ukraine 1910 3885 0.6Albania 340 421 0.5

Developed Market EconomiesDenmark 26510 3729 7.3Germany 23560 4353 5.5Portugal 7890 1816 4.7Greece 7390 2173 3.5

Other Selected CountriesIndonesia 730 303 2.3Philippines 830 302 2.7Sri Lanka 750 255 3.1

Source: World Bank Atls 1995, data from Macedonian Authorities

1.07 FYR Macedonia is short of energy resources. It has lignite, which is mostly usedto generate electricity, and hydropower which together are sufficient to make the countrymore or less self-sufficient in electricity, though it exchanges electricity with surroundingcountries. It also has limited geothermal resources. However, it totally lacks oil, gas orhigh quality coal resources. As a result it imports around 40% of its energy consumption.Most of these imports are crude oil when the refinery is running (see Chapter 3) orpetroleum products when the refinery is not running. There are also normally small importsof coke for the steel mills and the country is also just beginning the importation of RussianNatural Gas. Energy imports amount to about 11-16% of total imports and over the period

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1990-1994 varied between $142 million and $215 million annually depending on the strengthof the economy and any build-up or run-down of inventories which may be occurring.

1.08 laxe: Excise taxes on petroleum products typically account for close to 24% ofGovernment Revenues. Most of this comes from excise duties on the sale of gasoline anddiesel, which add 69%-70% to the price of gasoline depending on the octane of the gasolineand about 62-63% to the price of diesel. There is also a 38% tax on home heating oil and an11.5% tax on heavy fuel oil. These excise taxes are substantial and similar to the taxes inWestern Europe on petroleum products. They are, of course, significantly higher than in theUS. Import duties on petroleum products are not a major source of Government revenuessince during the embargo they were waived and under normal circumstances relatively fewproducts are imported with most of the local product demand being met by the refinery.Furthermore, there is only a 1 % import tax on crude oil.

1.09 As a result the energy sector contributes in a significant way to Governmentfinances. In 1994 excise taxes on petroleum products alone amounted to $212 millionequivalent out of revenue of $880 million while contributions to the sector were small sincethe energy sector companies are self financing. The only major contribution in the last threeyears has been the Govemment's $31 million investment in the gas pipeline. (See Chapter3).

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2. CURRENT SITUATION OF THE ENERGY SECTOR

A. ENERGY SOURCES AND USES

2.01 The energy balances available for FYR Macedonia concentrate on sources ofenergy and provide very limited information on energy use. The table below shows thesources of energy for 1994. (More detail is provided in Appendix A.) In that year, whenFYR Macedonia was still under the embargo, about 37% of energy was imported, mostlypetroleum products. Normally imports would be closer to 40% of energy supplies. The maindomestic sources of energy are lignite, which is primarily used to generate electricity, andfirewood. The latter is used extensively by households for heating and cooking. Hydropoweris only about 2.3% of energy supply and has been declining in importance due primarily todrier weather, but also due to the deterioration of the capacity of the hydropower plants. In1994 hydropower was 13% of electricity production (2.4x103 TJ) while in 1980 it was 74%(5x 103 TJ) of a much lower level of electricity output.

Table 2.1: Primary Energy Sources 1994(103 TJ)

Domestic Net Impwrts

Hydro power 2.4 Electricity 0.3Lignite 51.2 Coke/Coal 6.2Firewood 10.9 Petroleum 32.6Geothermal 05 Natural Gas Q

Total Domestic 65.0 Total Imprts 39.1

Total Energy Use 104.1

Source: Ministry of Energy (Table 1)

2.02 Data on primary or secondary energy use by sector is only partially available.(A more detailed energy balance, providing more information on energy consumption bysector, would be useful). Around 95 % of lignite production is used by the electricity sectorfor generation, with about 44% of electricity consumed by households. Firewood isoverwhelmingly used directly by households as indicated above. Imports of coal and cokeare primarily for industrial purposes. There does not appear to be a reliable breakdown ofthe use of petroleum fuels between various sectors. On the whole, however, it would appearthat at least 40% of Macedonian energy consumption is by households.

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B. SECTOR ORGANIZATION

2.03 The energy sector is currently largely owned by the Government, with theprincipal sectoral companies being: the power company, Elektrostopanstvo na Makedonija(ESM); the Skopje Refinery; the Skopje District Heating Company; and Makpetrol (thepetroleum products distribution company). ESM is wholly and directly owned by theGovernment, while the majority of the shares in the Refinery and Skopje District HeatingCompany are socially owned with a small share holding by the employees. These sociallyowned shares are left from the previous SFRY self-management system. They are owned bythe Government, which can sell them, but the companies are self-managing. Makpetrol, onthe other hand, is now more than half privately owned and is officially an independentcompany. Government controls over the energy sector are shared by several ministries anddiffer somewhat between the various entities. The key institutional relationships are asfollows:

* The Council of Ministers sets prices of petroleum products and electricityand is expected to approve natural gas prices. It makes top managementappointments for ESM and ratifies major investments by ESM.

- The Ministry of Economy has principal oversight responsibility for theenergy sector and reviews and approves the investment plans of ESM. Itrecommends to the Council of Ministers the tariffs for electricity andpetroleum product prices, based upon the proposals of the interestedcompanies. It will set natural gas prices, subject to the approval of theCouncil of Ministers. In the special case of district heating prices, theMinistry can approve these prices without the intervention of the Councilof Ministers. It is involved in the selection of top management for ESM.

* The Ministry of Development reviews and comments on major investmentplans, especially those of ESM. This review is mostly to see that the plansare consistent with the overall investment plan of the country and with thecountry's potential financing capacity from intemal and extemal sources.It can also review and comment on pricing proposals.

* The Ministry of Finance can review and comment on pricing proposals andreviews and comments on investments when Govemment Guarantees arerequired for debt financing.

2.04 The general procedure in the sector to obtain approval for an increase in prices(except for district heating, see above) is first for the sectoral company to submit a formalrequest with a detailed explanation. The proposed price increase then goes to the Ministry ofEconomy for review with other Ministries commenting on it if they choose. After thisreview, the request is sent to the Council of Ministers for action. While this system has notworked badly in FYR Macedonia since the Council of Ministers has generally acted

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responsibly, it is inherently a poor system since it politicizes all energy prices. Ourrecommendation is that the Council of Ministers should not be put in the position of settingthese prices as this inevitably results in the inclusion of non-economic factors in pricingdecisions. Furthermore, if private investments are sought in the sector, it will be necessaryto have in place a transparent and objective system for price setting, to give confidence toinvestors.

2.05 To achieve the objective outlined above, it would be desirable to free fromregulation those energy prices which can be determined by competition in the market place.The prices of "natural monopolies" should be set by an independent regulatory system on thebasis of transparent and objective criteria. In the case of FYR Macedonia, petroleum productprices should be determined by the market with the Government, however, monitoring thembecause of the dominant position of Makpetrol (see para. 3.06). The prices of electricity,district heat and in the future natural gas, should be set by the independent regulatorysystem. This regulatory system should set prices that cover operating costs, provide sufficientrevenues to meet the financial requirements of the sector and are equitable to consumers.Such a system would depoliticize the decision making process for energy prices and allowthem to be set on the basis of economic factors.

2.06 In addition to reforming the price setting system for the energy sector, theGovernment needs to privatize the sectoral companies. The first step has been taken with therecent privatization of Makpetrol through a management and employee buy-out. The refineryshould also be privatized (see para. 3.16) followed by the three "natural monopolies", theSkopje District Heating Company, ESM and the gas transmission and distribution company.As these companies are being privatized the Government should also facilitate thedevelopment of competition especially in petroleum retailing and in power generation. A proforma organizational chart of the sector, after these privatizations and establishment of anindependent regulatory system has occurred, is shown in Appendix E.

2.07 The current Governmental oversight function is in the Ministry of Economy andis carried out by a very small unit of about 5 persons, with little or no staff support. Thisunit currently has responsibility for the sector, reviews investments and pricing proposals,makes recommendations, and sets district heating prices. While some of these functionsought to disappear as the economy is restructured and an independent regulatory systemestablished, there is need for a well qualified group to consider strategic planning issues andprovide advice to the Government on policy alternatives. It does not seem justified to createa Ministry of Energy, but this unit in the Ministry of Economy needs to be given better staffsupport and office technology, so it can better perform its current and future functions.

C. LEGISLATION

2.08 Two key pieces of legislation that would affect the energy sector are the proposedEnergy Law and the proposed Law on Public Enterprises. The draft Energy Law establishesa basis for the operation of energy companies, though it is very broad (covering all energy)

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and somewhat vague on important issues while very specific on other minor issues.Nevertheless it establishes that, at least initially, energy utilities are required to be publicenterprises with majority Government ownership. Private companies are, however, allowedto operate in the sector including the electricity subsector, with the agreement of theGovernment owned utility on obtaining access to the transmission system. If this agreementcan not be obtained, the Ministry of Economy would be allowed to prescribe the terms andconditions of an agreement. This seems to be designed to facilitate participation byindependent power plants (IPPs) in power generation. There is significant potential for IPPsboth in the form of small scale hydropower plants and in the form of cogeneration fromindustrial facilities. This potential has not, however, been exploited and needs to beencouraged. The new Energy Law takes a first step in this direction, but could be muchmore encouraging towards the formation of IPPs. The Energy Law also requires theGovernment to develop a comprehensive Energy Plan.

2.09 The Law on Public Enterprises regulates various aspects of these enterprisesincluding: 1) management, 2) statutes, 3) financial reporting, 4) regulations regarding stikes,and 5) state control over public enterprises. Public enterprises are autonomous organizationsand can be organized as joint stock companies. If they are organized in that manner they canhave minority private ownership. They are also separate legal entities which can own assetsand have liabilities. They are to be financially independent and not funded by theGovernment budget. They are to have a Managing Board, a General Manager and aSupervisory Board. The Government appointed Managing Board is the chief governing anddecision making body of the enterprise. These provisions are consistent with those in manyother countries and do not pose any major issues.

2.10 The legal framework for the energy sector in FYR Macedonia is just beingdeveloped and currently consists mostly of existing legislation dating from the period whenFYR Macedonia was part of SFRY, plus new legislation (Energy Law, Public EnterprisesLaw) which are in various stages of preparation. A study needs to be done of this entire legalframework, including a review of the legislation under preparation, to recommend anychanges that need to be made and additional legislation and/or regulations that are required.EBRD has agreed to arrange for such a study.

D. ENVIRONMENTAL ISSUES

2.11 The environmental problems associated with the energy sector in FYR Macedoniaare less than they are in a number of other Central and Eastern European Countries, butbased on the information provided in the reports prepared for the National EnvironmentalAction Plan (NEAP) they are still significant. They are discussed briefly below. Moredetail on them is provided in the Macedonian NEAP, which is now being finalized.

2.12 Automobile. FYR Macedonia has a small fleet of automobiles (289,979 in1993) of which perhaps 35-40% are in Skopje and its environs. However, the evidence fromother former socialist economies is that automobile ownership may be expected to increase

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substantially as incomes improve. Pollution from automobiles is largely limited to Skopjeand is due to emissions of volatile organic compounds and lead. The relatively high level ofemissions in turn is due to; 1) the use of leaded gasoline, and 2) the lack of working catalyticconverters on cars which either never had them or where they have been disabled by use ofleaded gasoline. The key to resolving this problem is to make unleaded gasoline readilyavailable and priced similarly to leaded gasoline (either by upgrading the refinery or throughimports, see Chapter 3) and then to require the use of catalytic converters. This is fairlystraight forward but will take a number of years to implement since the existing fleet of carsturns over fairly slowly.

2.13 Sulfur Dioxide Emissions. FYR Macedonia has a moderate and by EasternEuropean Standards not very severe SO2 problem at its two thermal power plants. The ligniteused at the Bitola and Oslomej power plants is moderately low sulfur (0.5% wet, aboutdouble that dry), but also has a low heating value (1700-1900 KcalVKg). Thus sulfur dioxideemissions for Bitola and Oslomej are about 2000-2500 mg/nm3. This level of emissions ismoderate by US standards and it close to the Bank's proposed limit of 2000 mg/nm3. It isalso much lower than in neighboring Bulgaria where the emission from the Maritza Eastplants run around 15,000 mg/nm3. The emissions at Bitola, however, exceed theMacedonian emission standards for larger plants (400 mg/nm3). These are, however, quitestrict and are based on EU standards. No penalties are paid by ESM for exceeding theselimits nor does there appear to be any effort underway by the Government to get ESM tomeet these strict standards. However, the data on ambient air conditions at Bitola containedin the NEAP indicate that there is not a serious SO2 problem there, with the maximumpermissible SO2 concentration (150 micrograms/normal cubic meters for a 24 hour period)having been exceeded only twice in the last 10 years and then by less than 1 %.

2.14 Particulates. The electrostatic precipitators (ESP) at Bitola have beenrehabilitated in the recent past and now seem to be operating efficiently. The ESPs atOslomej also seem to be reasonably efficient. There is a dust problem at the Suvudol LigniteMine which supplies fuel to the Bitola Power Plant. This is due in large part to the dumpingof waste and ash on open ground outside the open pit mine as is discussed below. This hascaused dust in the air at the measuring station, MMS Bitola, to exceed the maximumpermissible concentration on about 20 days per year. (The maximum permissibleconcentration, however, is fairly low at 50 micrograms/normal cubic meters for 24 hours).

2.15 Reclamation of Mined Areas. No reclamation of the Suvudol open pit hasstarted and waste material and ash are deposited outside the pit. This uses land, contributesto dust problems and is more expensive than in-pit dumping. It is done because no decisionhas yet been made about whether to exploit the lower seam in the Suvudol Mine and becausein-pit dumping would interfere with exploitation of this lower seam. Eventually this open pitwill need to be reclaimed and it would be best if the in-pit dumping could begin as soon aspossible. This is not the case at Oslomej where in-pit dumping is occurring. The easternwing of that mine should be reclaimed when it ceases operations in about 5 years. This issueis discussed at some length in Chapter 4.

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2.16 Hydropower. There appear to be no major environmental problems connectedwith the operation of the existing hydropower plants. There is some leakage of iubricantsinto the water, but this is very small and should be stopped when the hydropower plants,which are typically about 30 years old, are renovated. The dams associated with the Spiljeand Globocica power plants would stop the migration of baby eels up the Black Drim river,but dams downstream in Albania already block this migration. In order to maintain the eelpopulation of Lake Ohrid, ESM puts 10,000 baby eels into that lake each year.

2.17 A number of new dams and power houses are proposed to exploit the potential ofthe Vardar River and its tributaries. A limited environmental study of one of the damsinvolved has been done, but a full evaluation of the whole program has not been carried out.This proposed program should undergo a comprehensive environmental and economic study.

E. POTENTIAL FOR ENERGY CONSERVATION

2.18 As shown in Table 1.1, the potential for energy conservation in FYR Macedoniaseems substantial. This potential exists both in industry and in households and has beenrecognized by the Govemment. As the economic transition continues, companies will beprivatized, budget constraints are likely to become harder for the remaining Governmentowned companies and electricity prices will increase in real terms. All of these factors willtend to improve energy efficiency.

2.19 Also since 1988, the Govemment has had a program, administered by theMinistry of Economy, to increase energy efficiency. This program consists of a competitionheld twice a year, where enterprises compete to receive loans on favorable terms for energysaving investments. Each enterprise can submit one or more projects for this competition andthese projects are then judged by a Committee consisting of officials of the Ministry ofEconomy and outside experts. This Committee then ranks the projects based on theircapacity to save energy and feasibility. It is expected that the enterprises will provide part ofthe funding for the projects and be willing to borrow for them. The maximum Govemmentloan has been 80% of the cost of the project and the average loan has been about 40-50% ofthe project's cost. A local bank actually made the loans from a Government controlledaccount and supervised the repayments of these loans.

2.20 This program, though it was popular and thought to be effective, was stopped in1994 because of the financial crisis that the Government faced at that time. In late 1995,however, it is being briefly resumed using about US$ 2.8 million in funds from an EBRDLoan to ESM which have been on-lent to the Government for that purpose. The use of theEBRD funds initially caused some difficulties but these have apparently been overcome andactual outlays under this program should resume in 1996. The Government is anxious tocontinue this program if outside funding can be obtained.

2.21 There are, however, investments in industry which are too large for the aboveprogram. As a result of the transition towards a market economy, industries are becoming

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very conscious of their energy costs and have developed a number of larger energy savinginvestments. Often these investments also reduce pollution. Financing of these investmentsis, however, a problem due to the poor condition of the Macedonian Banking System anduncertainty about the long run viability of some of the companies involved. In fact, theseinvestments should generally not be undertaken until it is clear that the companies involvedare financially viable in a market economy.

2.22 The potential for energy savings in buildings is also large. For new buildings,heat usage can be cut sharply by increasing the quality and quantity of insulation andimproving windows. While the building codes provide certain specifications on insulation fornew buildings, it appears that these specifications are not enforced. Moreover, few newbuildings are being constructed as a result of the sharp decline in the economy. These is alsoquite significant potential to increase energy efficiency in existing buildings through caulkingand other relatively simple measures. Estimates are that such simple measures could reduceheat losses by at least 15-20%. In this regard the issue that needs to be addressed is thedevelopment of a suitable system of incentives to encourage homeowners to make thenecessary investments. A program of public information and free energy audits might help.This would be complemented by a pricing system that fully reflects economic costs asrecommended in paras 2.04 and 2.05 above.

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3. PETROLEUM AND NATURAL GAS

3.01 The structure of the hydrocarbon sector (oil and gas) in FYR Macedonia is fairlysimple. Assets consist of a single small refinery in Skopje, a distribution system forpetroleum products and a natural gas pipeline from the Bulgarian border to Skopje which isjust being completed. There is as yet no distribution of natural gas, although a distributionsystem for Skopje is planned, and there is no existing oil and gas production and noexploration going on.

A. PETROLEUM

3.02 Demand. The country currently uses around 0.9 million metric tonnes (mmt) ofpetroleum products per year consisting of 0.2 mmt of gasoline, about 0.25 mmt of gas oil,0.35 mmt of heavy fuel oil and 0.1 mmt of miscellaneous products (lubes, LPG, kerosene,asphalt etc.). This is down from the situation when FYR Macedonia was part of theYugoslav Federation and consumption was around 1.1 mmt per year. Most of the drop hasbeen in the consumption of heavy fuel oil, which is used primarily by industry and demandfor which has declined along with industrial production.

3.03 Supply. Before the Greek Embargo, petroleum demand was met by importingcrude oil to Thessaloniki, storing it in a Greek owned terminal there and then bringing it byrail tankcars to Skopje where it was refined at the Skopje Refinery. Product imports (throughThessalonild) were largely confined to products such as lubes that the refinery cannotproduce. During the embargo, petroleum products were imported from Bulgaria - mainlyfrom the Neftochim refinery at Burgas and secondarily from the small Plamen refinery atPleven. Imports came by road tankers since there is no direct rail connection. There were nocrude imports. About 65-70% of the petroleum products were imported by Makpetrol withthe rest imported mostly by the refinery - though there are a few small private companieswhich also imported products. As might be expected, costs of transport by road tanker fromthese Bulgarian refineries are substantially higher than from Thessaloniki by rail. The maindistribution company, Makpetrol (see below) reported average transport costs of $30/mt fromPleven to Skopje and $50/mt from Burgas. With the end of the embargo crude and productsare once again being imported from Thessaloniki at a savings in transport costs, which arenow down to around $20/mt-$25/mt.

3.04 Even these rail transport costs are fairly high and could certainly be reduced bybuilding a pipeline between the port of Thessaloniki and Skopje. The Skopje Refinery hasestimated that the costs of building this line would be about $80 million and that it wouldreduce transport costs to around $8/-$9/mt. This pipeline would probably be designed tocarry crude to the refinery, but if the refinery were to be closed then the pipeline could beconverted to a products line at moderate cost. Since the economic merits of this pipelinedepend on security of supply, there is an element of risk to this investment which is difficultto assess. The construction of any such pipeline would be suited for the private sector, and

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the Govenment ought to explore with potential investors the conditions under which theywould consider such an undertaking.

3.05 Distribution. This is carried out entirely by road tankers mostly from theterminals to the end users. These end users consist of factories, apartments, houses, servicestations etc. Makpetrol has 115 service stations and 15 terminals. There are also around 60private service stations since there are no major barriers to entry by private companies. Themain operator of tank trucks is the Mlaz Company, which was spun-off of Makpetrol. Therefinery also has some tank trucks of its own.

3.06 The dominant company in the petroleum distribution sector and even in thepetroleum sector is Makpetrol. As indicated above it imports and distributes most of theproducts consumed in the country. It is also building the gas pipeline to supply FYRMacedonia with natural gas (see below). Moreover, the company is profitable and has about1700 employees. Makpetrol started as a Govemment owned company, but is beingprivatized. In November of 1995 it was 56% private, mostly owned by employees, and 44%owned by the Government. By March 1996 the employees' ownership had increased to 70%,with the Government planning to sell its remaining 30% to the employees over the next 5years. Currently, the Company has a substantial debt to the Government connected to thisprivatization.

3.07 Prices. The prices of petroleum products are set by the Government. InNovember 1995 the price of gasoline was 36.5 Dinars/lt., or about $1.00/lt. (equivalent to$3.80 per gallon). This includes 68-70% excise taxes, depending on the octane level of thegasoline. The price of diesel was 22.5 Dn/lt. and also included a 63% excise tax. Gasoil was14.0 Dn/lt. with a 38% excise tax while heavy fuel oil was 6.1 Dn/kg. with an 11.5% excisetax. Makpetrol reports that supplying all of these products is profitable.

3.08 This system of having the Government set the prices of petroleum productsshould over time be replaced by a market based system with the prices of petroleum productsdetermined by the forces of supply and demand. The Government's role would be to set thelevel of excise taxes and then let the market set retail prices. However, currently because ofthe limited number of companies and the dominance of Makpetrol, the Government mightwant to monitor the market to ensure that there is no monopolistic exploitation of its positionby Makpetrol.

3.09 If prices of petroleum products were set by the market, they would probably belower but in addition relative prices would change significantly. For example, gasolineprices would decline sharply relative to diesel prices since the current relative prices are outof line with costs. On balance these prices adjustments would improve economic efficiencythough there might be some minor environmental drawbacks. If lower prices of gasolinecaused more consumption of gasoline, which is leaded, it could add to pollution in Sofia,though this effect would take some time to impact and in the longer term should be offset bya gradual phasing out of leaded gasoline. (See para 2.12).

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3.10 Refinery. The Skopje Refinery is largely owned by the Government boththrough direct share ownership and in the form of social capital. (See para. 2.03). The exactshare holdings in the company are under negotiation but it appears that about 16% of thecompany is owned by the employees, 10% directly by the Government and 74% is socialcapital. (The employees also have the right to buy some additional shares at a discount).Since the majority of shares are classified as social capital, the refinery is self managed-with a Board elected by the employees which in turn appoints the General Manager. There isno Government representation on the Board, though with such a large Government ownershipthere should be.

3.11 Physically the refinery is a simple hydroskimmer which was built between 1978and 1982. It was built to run on Kirkuk (Iraqi) or similar crude. About 90% of itsequipment is of Russian origin and about 10% came from the former Yugoslavia. Itoperated from 1982 to the end of 1993, supplying initially Macedonia and the southern partof Serbia and after the break-up of the Yugoslav Federation it only supplied FYR Macedonia.It employs about 1300 persons.

3.12 The refinery is extremely simple with the capacities of the major units shown inthe table below. Conspicuous by their absence are such basic units as vacuum distillationand catalytic cracking let alone more sophisticated processes for conversion of heavy fuel oilsto lighter products. As a result of its simplicity the refinery produces a high fraction ofheavy fuel oil, which has a low economic value - typically less than the crude oil from whichit is made.

Table 3.1: Capacities of the Skopje Refinery

Atmospheric distillation 2,500,000 mt/yrGasoline hydrodesulphurization 635,000 mt/yrCatalytic reforming 457,800 mt/yrHigh-temperature isomerization 132,000 mt/yrGasoil hydrodesulphurization 285,000 mt/yrLPG Recovery 70,400 mt/yr

3.13 During the embargo, the refinery was not operating, because it was cheaper toimport products from Bulgaria than to import crude and refine it. Also the normally fairlyhigh import duties on product imports were lifted in order to keep down product prices. Therefining company just managed to survive by importing products on its own, using its ownroad tankers, and selling them on the market. This importation was not very profitable andhas not provided the financial resources necessary for the company.

3.14 With the removal of the embargo, the refinery is once again able to receive crudeby rail from Thessaloniki and is now back in operation - supplying Makpetrol, otherdistributors and end users. However, since it is economically very weak, it receives import

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tariff protection. This is done through a complex tariff system with combined import tariffsand other fees varying between 1 % and 26% on product imports and a 1 % rate on crudeimports. The major products are subject to the 26% combined tariff and fees, which makesthese imports very expensive. Moreover, the refinery is financially marginal even with thistariff protection since, as is indicated above, the refinery lacks sophisticated upgradingequipment to extract much of the value of the crude it uses. (The exact financial condition ofthe refinery will not be known until mid-1996 after it has operated for six months or so). Inthe longer term, if it is to be at all viable, the refinery should have access to crude bypipeline and should have more sophisticated upgrading equipment including at least vacuumdistillation and cat cracking. However, the investments in upgrading equipment are estimatedby the refinery to cost around $180 million and, as previously mentioned, the crude linewould cost an additional $80 million so it could be better to close the refinery and importproducts.

3.15 A thorough study of the refinery needs to be undertaken in order to ascertainunder what circumstances it would be economic and how much investment would berequired. This study should look very closely at the markets for this refinery including takinginto account the impact on the Macedonian market of the replacement of heavy fuel oil bynatural gas (see below) and the potential for exporting to FR Yugoslavia (Serbia andMontenegro). It should also look at possible sources of crude supplies including the crudeline to Thessaloniki, discussed above, and the possibility of a Transbalkan crude line carryingcrude from the Caspian Sea area to the Mediterranean. Finally, the study should lookclosely at the required investments in the refinery. This would probably consist of; 1) somerehabilitation of the refinery, to offset the deterioration which has occurred over the past fewyears, 2) carrying out inexpensive upgrades, and 3) the costs of installing more advancedprocessing units in the refinery. It is not at all clear that these investments would beeconomically justified.

3.16 Once the study is complete, the Government should try to privatize the refinery.Since it is already partially owned by its employees, the privatization would consist of sellingthe Government's shares (both those directly owned and social capital). Since the refinerymay not be worth very much with its limited equipment, it might be advisable to use avariant of the "Bolivian" approach with the bidders bidding for the refinery based on theinvestment they would make. The qualified bidder promising the largest investment wouldreceive ownership of half or more of the refinery and management control. However, itwould be extremely undesirable to set up the refinery as a private protected monopoly. If itis privatized, it should not be protected from competition with imported products throughhigh tariffs.

B. NATURAL GAS

3.17 Gas Pipeline/Phase One. The new gas pipeline, bringing Russian gas throughBulgaria to Skopje, is just being completed. The line will have 40 bar pressure and isinitially 165 km in length including various connecting lines. The capacity of the line is 800

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million cubic meters per year, though initial deliveries will start at a 100 million cubicmeters annual rate which is expected to climb to a 200 million cubic meters annual rate bythe end of 1996. The estimated cost of the line is $60 million. It is owned by theGasification Company which is currently a part of Makpetrol. The Gasification Company isbeing spun-off of Makpetrol and will be set up as a public enterprise owned 51 % by theGovemment of FYR Macedonia and 49% by Makpetrol. Makpetrol has funded its 49%ownership by contributing $12.5 million from its own funds and by obtaining a loan fromRussia (Gazexport) for $16.0 million. The Govemment is funding its contribution ofapproximately $31 million in dinars, which are being used to pay for construction.

3.18 Customers are being obtained along the pipeline route from the Bulgarian borderand in Skopje. It is estimated that initially about 15 large customers will be hooked up to thesystem. These customers, which will have an annual consumption of about 100 million cubicmeters, include the Skopje District Heating Company, the Europa Chocolate Factory, theLeather Factory, Komuna Packaging Company, the OHIS Chemical Company, the 11thOctober Paper Company and the Idnina Abrasives Company. In the course of 1996additional companies are expected to start to use gas. The Government has allocated $2.6million from an EBRD loan to fund some of the costs of converting these industries to theuse of natural gas.

3.19 Given the $60 million cost of the line and the low (100 million cubic meters)initial expected deliveries, the delivered gas will be expensive. Total costs of supplying theseinitial small amounts of natural gas may well exceed the price of heavy fuel oil on a heatequivalent basis. Marginal costs, however, are competitive so it is important that gas bepriced low enough to compete with heavy fuel oil so that the entire 200 million cubic meterscan be committed by the end of 1996. This may require a temporary cross-subsidizationscheme. (see para. 3.22)

3.20 Phase Two. The second phase of the gas project will involve putting adistribution system into the City of Skopje. A detailed study is being done of the proposeddistribution system, with the help of EBRD, but an earlier study estimated that the systemwould cost about $40 million. The system would serve around 50,000 households. Thesewould mostly be individual houses which now largely heat with electricity. The gasdistribution system would generally not be connected to apartment buildings, which areusually supplied by the district heating company. The rough estimated cost of convertinghouses to natural gas, however, is about $1400/house, which is high compared to the averagesalary of around $3000 per year. (Household income, however, is higher since mosthouseholds have two salaries.) For 50,000 houses this amounts to $70 million. In any case,the Gasification Company estimates that the maximum rate of conversions is about 15,000houses per year so that the $70 million outlay would be spread over at least 4 years. If this isto be feasible, it will be necessary to provide adequate financing to the households and tohave in place pricing arrangements that encourage fuel substitution. A comprehensivestrategy should be developed as soon as possible.

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3.21 Phase Three. The third phase of the gas project would be branch lines to Tetovoand Gostivar in the West and Titov Veles and Negotino which are southeast of Skopje. Theselines would initially supply industries in both places and allow the power plant in Negotino,which is currently not operating, to burn gas. (See the discussion at para. 5.10 on theNegotino power plant). The line to Tetovo and Gostivar could also easily be extended to theAlbanian border, which would be of considerable interest to the Albanians and allow them toimport Russian Gas.

3.22 Pricing of Gas. A committee within the Ministry of Economy has beenestablished to set the price of gas, based on costs and the prices of competing fuels which areheavy fuel oil for industries and electricity for households. This Committee is chaired by theMinistry of Economy and includes officials from that Ministry as well as gas users andrepresentatives of the Gasification Company. The Committee is expected to make finaldecisions on the gas tariff system in the next few months.

3.23 Oil and Gas Production. FYR Macedonia does not appear to be particularlyprospective for oil and gas. There is no production and three exploratory wells have beensunk in the country in the recent past and nothing was discovered. There is currently noactive exploration and no oil companies have expressed interest. If there is an active interestin exploration, the country would need to develop an oil and gas law and regulations.However, this should not receive a high priority unless there is evidence of such interest.

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4. COAL AND RENEWABLES

4.01 FYR Macedonia's main indigenous resources are lignite and hydropower, both ofwhich are limited. This chapter discusses lignite mining at some length and then dealsbriefly with renewables including hydropower. There is a more extensive discussion ofindividual hydropower plants and projects in Chapter 5, which deals with electricity.

A. LIGNITE

4.02 FYR Macedonia has significant deposits of lignite, which are currently the mainsource of fuel for electricity generation. Lignite production is about 7.2 million tones peryear of which 7.1 million tonnes is produced in two mines, Suvudol and Oslomej, and usedin adjacent mine-mouth power plants. These two mines are owned by the electric utility,ESM, and since they only supply the power plants their ownership and control should remainwith ESM. About 0.1 million tonnes of lignite production is from two very small mines andused for making briquettes for household consumption.

Suvudol

4.03 The Suvudol Mine at Bitola is adjacent to and supplies the Bitola Power Plant,the main power plant in the country. This mine is the country's largest primary energysource, and is connected to the power plant by a 5 km long conveyor. The mine has beenproducing lignite since 1982. A single seam, the main seam, is being exploited. Its averagethickness is 25 m, and the average overburden/lignite ratio 4 m3/t. This mine has remainingavailable reserves of 118 million tonnes of lignite. Production is 6 million tonnes per year(83% of Macedonian production) and the expected life of the mine, based on availablereserves, is about 20 years. This lignite has a heating value of 1900 Kcal/Kg, a sulfurcontent of around 0.5% (wet basis) and contains 8-13% ash and 51% water.

4.04 The lignite seam on average is covered by about 68 meters of overburden andthe overburden which is produced (24 million m3 per year) is placed mainly on externaldumps. This is less desirable than in-pit dumping which is limited because: a) under the pitbottom lies an exploitable lower lignite seam; and b) the northeastern slope of the pit isunstable.

4.05 The main seam at Suvudol is mined by the continuous mining method (bucketwheel excavators, conveyors and stackers). Three continuous mining systems are working inoverburden (three excavators connected with conveyors to two stackers on large pit-externaldumps and one stacker on a small pit-intemal dump). These systems remove 24 million m3

of overburden per year. Coal (6 million tons per year) is excavated from the main seam bythree smaller excavators feeding a conveyor which is connected to the power plant. Theoverburden systems have a good track record of production. In recent years, they have beenrunning about 5,000 hours a year, with an hourly output of 93% of the design hourly output.These are good performance figures by intemational standards. The mine's main problem is

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the unstable northeastem slope of the pit. It (along with the lower seam, see para. 4.07)hinders a more intensive use of pit-internal overburden dumping, which would be highlydesirable for cost-efficiency and environmental reasons. In addition to the continuous miningequipment, the mine employs a relatively large number of small conventional mining andauxiliary equipment. The overall manpower productivity (about 3,000 tons of lignite per yearper employee) is quite acceptable in comparison with other lignite operations in SoutheasternEurope, but is far behind Western European lignite operations, where productivity is 3 timeshigher.

4.06 The average unit production cost in 1994 was US$10.3 per tonne of lignite. Inthe first half of 1995, it increased to $13.7/t, mainly due to a large repair job at one of theoverburden systems. If $12.5 t were taken as the typical present production cost, then thiswould be equivalent to about $1.6 GJ of primary energy, or 1.8 cts/Kwh electricitygenerated, a relatively low cost by international comparison. The lignite production costsinclude 28% depreciation. In future, investments on the order of the present depreciationcharge may be needed for replacement of worn out equipment and modernization at themine. The present cash operating costs are about US$9 per tonne of lignite produced, orUS$1 per tonne of material moved (overburden and lignite, assuming a specific overburdengravity of 2 t/m3). Without having made a detailed analysis, these operating costs appear tobe well within the norm of comparable international mining operations. The major types ofoperating expenses are supplies (53%) and personnel (27%).

4.07 Lower Seam. Around 35 meters below the lignite seam which is currently beingexploited is a smaller seam. This seam is about 10 meters thick and has a potentiallyfavorable stripping ratio of only 2.8 m3/t. However, it is of poorer quality with a heatingvalue of 1500-1600 Kcal/kg, 0.9-1.2% sulfur, up to 25% ash and 40% water. The minablereserves of the lower seam are also modest (18 million tons in Phase I of a preliminaryproject design; followed by a portion of Phase II reserves, which in total amount to about thesame tonnage but are more difficult to extract). Overall, the lifetime of the Suvudol minemay be extended by about four to six years as a result of mining the lower seam.

4.08 It will be more expensive to exploit the lower seam than the existing main seambecause of the increased depth. The costs of developing this lower seam using additionalcontinuous mining equipment have been roughly estimated by ESM at $70 million or about$1.2 per Gcal. The rate of return for an investment which would be made now forcontinuous mining of the lower seam is only 1-3 %. The rate is low because the benefits ofthe investments, i.e. extended life of the Suvudol mine and postponement of the followinginvestment for the Brod Gneotino mine (which will probably replace Suvudol in the verylong term, see below), occur only in 20 years, and because during most of these 20 yearsoverburden from the Suvudol mine would be dumped outside the pit, whereas without theproject, most overburden could be dumped inside the pit in a cost-efficient andenvironmentally more attractive manner. ESM wants to investigate the possibility ofapplying the discontinuous (truck and shovel) method instead of the continuous method to seeif the economics would be substantially improved. If the investment cost could be reduced

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substantially by using discontinuous mining and if in the near future in-pit dumping could bestarted at least partially, the exploitation of the lower seam might become financiallyacceptable. 2

4.09 Because of the importance of this issue a thorough study of exploiting the lowerseam needs to be done before a decision is made. The study should first investigate the mostefficient way of exploiting the lower seam by analyzing: a) the maximum use of in-pitdumping, in parallel with exploiting the lower seam; b) stabilization of the northeastern slopeand its early use for internal dumping: c) alternative low-cost means of exploiting the lowerseam, especially discontinuous mining. The most effective means of exploiting the lowerseam should then be compared with the alternative of not exploiting the lower seam andinstead using alternative means to produce electricity at Bitola including: 1) using lignitefrom the Brod Gneotino deposit earlier at the Bitola power plant; 2) using imported coal inthe Bitola power plant; and 3) converting Bitola to use gas (possibly in a combined cyclemode) or heavy fuel oil. Once this study is done, a decision should then be made about thelower seam based on economic and probably security considerations. Such a decision,moreover, needs to be made as rapidly as possible because a decision not to exploit the lowerseam would allow cost-inefficient and environmentally undesirable external dumping tolargely cease.

Oslomej

4.10 This surface mine is adjacent to the Oslomej power plant and connected to it bya conveyor. It produces around 1.1 million tonnes of lignite per year with a heating value ofabout 1750 Kcal/Kg), 0.5% sulfur (wet basis), 15% ash and 57% moisture. All currentproduction is from the eastem wing of the mine with the western wing expected to enteroperation within five years. This is because the remaining lignite reserves in the eastemwing, are only about 5 million tons, or 4.5 years supply. The mine was started a few yearsearlier than the Suvudol mine at Bitola. A single seam is being exploited. Its averagethickness is about 12 m, and the average overburden/lignite ratio for the remaining reservesin the eastern wing is 4 m3/t. The seam is thinner and more divided than the main seam atSuvudol, but is very similar to the lower seam at Suvudol, both in terms of geologicalconditions and lignite quality.

4.11 The Oslomej surface mine employs a continuous mining system (a bucket wheelexcavator of 700 m3/h capacity, conveyors and stacker), as well as a dragline (10 m3 bucketsize). The continuous system is presently removing 1.7 million m3 per year and the dragline1.0 million m3 per year. The quantity removed by these systems is about 40% short of the

2/ Trucks and shovels could also be needed to stabilize the northeastern slope of the Suvudol mine, one of themost urgent tasks for further development of the mine. Finally, the discontinuous method could also beattractive because it may be more adapted to major parts of the future Brod Gneotino mine, which has thinner,more disturbed and more divided coal seams. Equipment and experience gained could be transferred from thelower Suvudol seam to the Brod mine.

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volume which has to be removed in the present mining area and the future west wing. ESMengages contractors which remove with small-size (highway-type) dumper trucks and loadersabout 1.5 million m3 per year. Contrary to the situation at Suvudol, pit-internal dumping ofoverburden is well established at Oslomej. Coal (1.1 million tons per year) is excavatedfrom the main seam by bucket wheel excavator and fed onto a conveyor which is connectedto the power plant.

4.12 The average unit production costs in 1994 were US$10.3 per tonne of lignite, and$10.7/t in the first half of 1995, equivalent to about $1.4 GJ of primary energy, or 1.6cts/Kwh electricity generated. The lignite production costs include only about 5%depreciation. The present cash operating costs are about US$10 per tonne of ligniteproduced, or US$1.1 per tonne of material moved (overburden and lignite, assuming aspecific gravity of 2 t/m3 for overburden). The major types of operating expenses are:contracted overburden removal (30%), and personnel (26%). The overburden removal bycontractor costs $ 2.5-3.0 m3, whereas overburden removal with own equipment costs $1.5-1.7 m3 . The difference is equivalent to US$1.4-2.4 million annually. Based on negotiationswith suppliers of continuous mining equipment, ESM states that the capital costs would beUS$22 million. This suggests that such an investment would be financially unattractive.ESM should therefore continue the contracting of overburden removal and increase efforts toreduce costs. Such efforts may concentrate on maximizing the use of own equipment,reducing overheads (including reduction of high insurance premiums), controlling personnelcosts and increasing the efficiency of overburden contracting.

4.13 Western wing. No lignite extraction, nor any overburden removal has yetstarted in the western wing of the Oslomej mine. The minable reserves of the western wingare about 14 million tonnes, or about 13-14 years. The lignite seam in the western wing isthinner and more divided than in the eastern wing. A road, a power line and a waterchannel cross the mining area of the western wing and would have to be relocated prior tomining. ESM has estimated the cost of such relocation at about US$5 million equivalent, or0.3 $/t of minable reserves. The terrain is easily accessible. No houses would need to berelocated, nor is there any valuable agriculture land which would conflict with mining. Thelignite reserves of the western wing are by far the most favorable ones available to theOslomej power plant.

Future Lignite Reserves

4.14 FYR Macedonia has considerable lignite resources especially in the Pelegonianbasin in the southern part of the country. These resources are estimated at 2 billion tonnesbut are less economic to exploit than the reserves which are currently being exploited atBitola and Oslomej. The most attractive of these resources are those at Brod Gneotino andZivojno which are both close to the Bitola power plant.

4.15 Potential reserves at Brod Gneotino, about 5 km south of Suvudol, total about120 million tonnes but are divided with a heating value of about 1800 Kcal/kg. It appears

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they could be exploited by an open-pit mine with a high stripping ratio of about 6m3/tonne.This would still, however, probably be economic. Alternatively, it is possible that about 55million tonnes of these reserves could be exploited by an open pit mine with an estimatedstripping ratio of 3 tonnes of overburden per tonne of lignite produced. The remaining 65million tonnes, however, would probably be uneconomic, requiring underground mining or avery high stripping ratio.

4.16 Potential reserves at Zivojno, which is basically a southern continuation of BrodGneotino, are around 100 million tonnes and even harder to exploit than Brod Gneotino sincethe seam is more divided and the overburden/lignite ratio is estimated at 10m3/t.

4.17 For the Oslomej power plant there are even fewer alternatives once the existingmine is exhausted. Reserves are only available at Popovjani and Strogomista, about 20-30 kmnorth of Oslomej. The quantities are small (about 11 million tons at Popovjani and 7 atStrogomista), and the geological conditions poor with the overburden ratio higher than at theOslomej West wing and the lignite seam thinner and more divided.

B. RENEWABLES

4.18 Geothermal. FYR Macedonia is a highly tectonic area with a number ofgeothermal occurrences. These geothermal occurrences appear to be all hot water ratherthan steam. It is believed that they result from rain water tricking underground throughfaults, which comes into contact with hot rocks and then migrates back through another faultsystem closer to the surface. The exploitation of these geothermal resources is local andfairly limited so far.

4.19 The largest operating geothermal scheme is in the town of Kocani in the Easternpart of the country. Two pumps extract 300 liters/sec of 72 °C water which after use is thenreinjected. The size of the reservoir has been estimated at 180 Km2 with an average depthof water of 80 meters. The geothermal water is currently used to heat about 18 ha. ofgreenhouses and around 8 public buildings in downtown Kocani. Present uses are estimatedat the equivalent of 55 MW thermal and there is some limited potential with the existinginvestment (11 MW) to add further customers. However, the Kocani water company, whichexploits these geothermal wells, believes that the geothermal reservoir has the capacity toproduce 450 liters/sec, the equivalent of 100 MW thermal. The cost of this expansion wouldbe about $1.5 million. The purpose of the expansion would be to provide extra capacity toheat additional public buildings and probably apartment houses. It would obviously be quiteattractive to add 34 MW thermal with very low energy costs for $1.5 million. However, thisproject needs to be investigated further especially since the temperature of the water beingextracted at Kocani appears to be dropping fairly rapidly. From 1992 to 1994 it appears tohave fallen from 78 °C to 72 °C while the initial water temperature of the reservoir wasestimated to be 78 °C

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4.20 There are several other smaller geothermal schemes in operation in FYRMacedonia. These include the Strumitca, Venitca, Gevegila, Debar and Negorska-Banyaschemes. Flows of water range from 60 to 150 liters/sec and temperatures range from 50 °Cto 70 'C. A little over half the projects involve pumping the water, while in the rest thewater is freely flowing. This water is mainly used for greenhouses, local spas and hotels.

4.21 The table below shows an estimate of the average annual use of Geothermal heatin FYR Macedonia by type of use.

Table 4.1: Use of Geothermal Resources

Heat Used (TJ)

Heating of Buildings 50.1Agriculture 6.2Greenhouses 405.1Industry 32.9Other 15.3Total 509.6

Source: NEAP Working Paper on Energy and Environment by Prof K, Dimitrov,University of Skopje

4.22 Wood. FYR Macedonia has about 960,000 hectares of forests from which woodis harvested. This wood is used for lumber and as fuel wood. Estimates of the amount ofwood harvested for fuel are around 1 million cubic meters per year with a total heating valueof about 10,900 TJ. If these estimates are correct this is about 10% of FRY Macedonia'senergy supply. Harvesting of wood appears to have increased somewhat in the past twoyears, which some observers attribute to the embargo and the increase in electricity prices.Estimates indicate that the current level of use does not exceed the maximum capacity of theforests, but this needs to be monitored closely to avoid any deforestation.

4.23 Hydro. The Ministry of Development has had estimates made of the hydropowerpotential of the country. Its estimates are that the maximum theoretical potential is 8900Gwh and the technical potential is about 5400 Gwh. This latter figure, which is the morerelevant, is roughly equivalent to FYR Macedonia's present level of electricity consumption.It is not at all clear, however, whether this potential is economic and given the relativelylimited volumes of water flowing in Macedonian rivers it is unlikely to be. Exploiting itwould involve the construction of 1600 MW of additional hydropower capacity costing wellin excess of 2.0 billion dollars. The biggest part of this additional capacity is contained inthe Integrated Development Plan for the Vardar River Valley which would add 900 MW ofcapacity, which is expected to cost about $1.4 billion or more and in theory generate 2000Twh. Currently production of hydropower in a good year is about 1280 Gwh while in amore typical year it is 700-800 'iwh.

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4.24 Solar. Solar water heating is used to a very limited extent in FYR Macedonia.Estimates are that this total usage amounts to 140 TJ per year and is mostly for heating waterin buildings. There is certainly significant potential to expand this usage. However, solarhot water heating would need to be supplemented by thermal heating especially during thewinter. There are essentially no solar electric applications in FYR Macedonia. While theultimate potential for solar electricity is limited by the country's relatively northerly location(it is about the same latitude as Southern New England) and winter peaking electricitydemand; there are undoubtedly some potential uses for solar electricity in remote locations.A small pilot project to introduce solar electricity could therefore prove useful.

4.25 Wind. While wind potential has been investigated, it appears to be very limitedwith very few if any locations with strong continuous winds.

4.26 Technical Potential. The table below gives estimates of the technical potential ofvarious renewable energy resources. Wood and total hydro are excluded since they arediscussed above. These technical potential estimates were prepared for the NEAP and arenot the economic potential of these resources which is more difficult to gauge. The tableshows that there is considerable potential for small scale hydropower where only a smallfraction of the potential has been tapped. There is also potential for solar hot water heaters.In the case of geothermal, about half the potential has been tapped.

Table 4.2: Potential of Various Renewable Resources

Resource Annual Use Potential(TJ) (TJ)

Geothermal 509 1000Solar 140 1113Small Hydro 270 3900Total 919 6013

Source: NEAP Working Paper on Energy and Environment by Prof. K. Dimitrov

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5. ELECTRIC POWER

A. GENERAL

5.01 Electricity is the most important form of energy used in the country with themajority of the population using it not only for lighting and cooking, but also to a significantextent for heating. Production of electricity in 1994 was 5.5 Twh with 4.8 Twh supplied bythermal power plants and .7 Twh supplied by hydropower plants. In addition there were netimports of about 0.1 Twh. Domestic consumption of electricity in 1994 was 4.9 Twh. (Thedifference between production and consumption is largely transmission and distribution losseswhich average about 10%.) Of the total consumption, 2.2 Twh or 45% were sales tohouseholds (see Table 5.1) while the rest were sales primarily to industry but also commerceand government. Of the total sales of electricity to industry, 1.4 Twh were at high voltageto the largest industrial companies. There are 12 of these companies and they include steelplants, non-ferrous metals plants, chemical works, the refinery etc. The rest of the industrialsales as well as sales to government and commerce are at lower voltage. The system iswinter peaking, due to the use of electricity for heating, with a peak in 1994 of 1041 MW.

B. BACKGROUND

5.02 Consumption of electricity in FYR Macedonia grew until the early part of thisdecade. Over the entire period 1970-1994, the growth rate was 4.4% while for the shorterperiod of 1983 to 1994 it was only 0.5%. During the past two decades but even morepronounced during the past decade the share of industry in electricity consumption has tendedto decrease. This is particularly true for the metals industry where not only has its share ofelectricity usage dropped, but also the absolute level of electricity use in the metals industryhas declined and is now only 56% of its 1983-84 average. Meanwhile households and otherlow voltage users of electricity have increased their consumption fairly rapidly and as a resulthave also substantially increased their share of total electricity consumption. In fact all ofthe growth since 1983 has come from household consumption and other low voltage users.(See Table 5.1 below.)

5.03 During the past several years, moreover, electricity consumption has declined asthe country entered a period of rapid economic contraction due to major external shocks -mostly connected to the dissolution of the Yugoslav Federation. These included losses ofannual transfers from the central Government which had amounted to 5-10% of GSP, loss offoreign exchange reserves totaling over $1 billion held at the Central Bank in Belgrade, andthe loss of export markets due to the economic sanctions imposed by the UN on the FederalRepublic of Yugoslavia (Serbia and Montenegro). This was aggravated by the Greekembargo in 1994 which disrupted trade. These factors lead to major dislocations in theeconomy with a drop in GDP of about 35% between 1990 and 1994. Electricityconsumption, however, did not decline anywhere near as much as GDP in part because of ashift towards use of electricity (which is domestically produced) and away from petroleumproducts (which are imported) as the latter became less available and more expensive.

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Table 5.1 - Electric Energy Consumption (Gwh)

OtherIndustrial

by Voltage

Peak Electro- OtherLoad Meta- 110 Kv 35Kv 10 K House- Low Consump Total

Year (MW) lurgy Mines holds Voltage -tion Losses Supply

1983 821 1876 39 389 216 627 1284 206 4637 433 5070

1994 875 1901 48 403 221 686 1346 222 4827 467 5294

1985 911 1718 45 417 293 727 1381 241 4772 487 5259

1986 950 1853 53 409 252 781 1464 269 5081 507 5588

1987 930 1552 66 444 252 823 1569 293 4949 477 5426

1988 937 1381 73 448 246 833 1581 289 4851 483 5333

1989 929 1433 93 425 241 858 1576 293 4919 493 5411

1990 925 1233 93 405 211 822 1673 298 4735 517 5252

1991 1007 1064 103 390 179 764 1863 342 4705 547 5252

1992 1041 1458 107 365 160 712 2008 355 5165 555 5720

1993 1030 1204 110 384 144 669 2185 329 5075 601 5676

1994 1041 1064 112 326 135 658 2224 404 4923 636 5559

5.04 The economy appears, however, to have hit bottom in 1995 and has shownsigns of recovery in 1996. While GSP is estimated to be essentially flat between 1994 and1995, electricity consumption and production are estimated to rise about 4%. Most of theincrease in consumption is coming from households and other low voltage consumers, thelatter consisting mostly of small industries and commercial establishments.

C. FUTURE DEMAND

5.05 Electricity consumption is related to the growth of the economy, but is alsoimpacted by external factors. ESM expects electricity consumption to rise significantly in1996 since its expects GDP to increase significantly with the removal of the Greek Embargoin late 1995 and the suspension of sanctions against the Federal Republic of Yugoslavia.After the recovery from the impact of the embargo, assuming the economy continues torecover and restructure and there are no further shocks, a reasonable assumption for GDP

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growth might be around 4-5% a year from 1997 to 2004. Electricity growth, however,should be slower than GDP growth for at least three reasons. First, the structure of theeconomy should begin to shift away from heavy industry especially metals, to lighterindustry, agriculture and services. Second, the remaining heavy industry should becomemore efficient in its use of electricity and energy due to the increase in energy prices,continued enforcement of hard budget constraints and the impact of privatization. Finally, asdiscussed in Chapter 3 above, the creation of a gas distribution system in Skopje will shiftabout 50,000 households mostly from electric heating to gas heating. It will also causesome commercial and Governmental establishments to shift from electricity to gas. Whilethe exact size of this shift is unknown, the creation of the gas distribution system couldreduce electricity consumption by around 0.5-.7 Twh. Taking these factors into accountESM's estimated growth rate of electricity consumption from 1997 to 2005 of about 1.5% ayear would appear reasonable, though there are significant uncertainties involved in all of theassumptions above, especially the GDP forecast. ESM's forecasts are shown in some detailin Tables 5.2 and 5.3 below.

Table 5.2: Forecast Electric Consumption (1996-2005)(in Gwh)

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1. Electrometallurgy 1662 1662 1662 1662 1662 1662 1662 1662 1662 1662

2. Other Industrial 1471 1495 1520 1544 1569 1603 1637 1672 1708 1745

3. Households and other low 2627 2698 2771 2845 2922 2972 3024 3075 3128 3182Consumers

4. Consumption 5760 5855 5962 6051 6153 6237 6323 6409 6498 6589

5. Losses 569 578 578 597 607 615 623 629 634 640

6. Total 6329 6433 6540 6648 6760 6852 6946 7038 7132 7229

Source: ESM

Table 5.3: Consuimtion Patterns (1996-2005)

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Annual Supply ( Gwh) 6329 6433 6540 6648 6760 6852 6946 7038 7132 7229

December (Gwh) 623 634 646 657 669 679 689 699 709 719

Peak Load (December) (MW) 1094 1113 1134 1154 1175 1192 1210 1227 1245 1263

Minimum Load (December) 585 595 605 616 626 635 644 653 662 671(MW) I l 1

Monthly Consumption (July) 472 479 486 493 501 507 513 519 526 532(Gwh) _ _ _ __ _ _ _ _ _ _

Peak Load (July) (MW) 868 881 894 908 922 934 946 957 969 981

M inimum Load (July) (MW) 419 425 430 436 441 446 451 456 461 466_Source: ESM

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5.06 As a part of this study, two forecasts of electricity demand were prepared, usingvery simple models of the relationship between electricity consumption and economic growthand taking into account exogenous factors. Both of these forecasts showed electricity demandgrowth lower than forecast by ESM over the next several years. The reasons for this are theending of the Greek Embargo, the introduction of a gas distribution system into the City ofSkopje and higher electricity prices. The data on electricity demand seem to indicate that theGreek Embargo caused a shift in energy demand away from petroleum products and towardselectricity. If this is the case, which is not certain since the data are not clear, then theending of the embargo might cause at least a partial shift back towards using petroleumproducts and away from electricity. Second, the planned gas distribution system in Skopjewill cause a switch from electricity space heating to gas space heating as discussed above.Finally, under the Govemment's Agreement with the EBRD in connection with its Loan toESM, electricity prices will have to rise significantly. These three factors cause the modelsforecasts to be lower than those of ESM until well after 2000. Given the uncertainty in theeconomic outlook for FYR Macedonia and the structure of its economy, al of these forecastsincluding that of ESM must be viewed as having a considerable uncertainty attached to them.The main conclusion that can be drawn is that, with demand quite uncertain, it would beunwarranted to begin adding generating capacity for several years since it is unlikely to beneeded. This is especially true since, as is pointed out in paras. 5.10 and 5.30 below, FYRMacedonia has a spare generating plant at Negotino, which can be easily expanded, andwhich should also be fully exploited before ESM needs to make any investments in newgenerating plants.

D. GENERATING CAPACITY

5.07 Available electricity generating capacity in the country consists of 1431 MWwhich belongs to ESM, around 3 MW of hydropower capacity belonging to irrigationorganizations and about 40 MW of cogenerating capacity in four plants in the industrialsector, mostly the Zelezara steel plant and the OHIS chemical/textile plant. (See AppendixB.) This cogeneration capacity is currently not in use though if the economic situationimproves it could be put back into service. ESM's capacity consists of 386 MW of largerhydropower plants, 40 MW of smaller hydropower plants and 1005 MW of thermal plants.One thermal plant, Bitola, dominates base load electricity supply producing typically around4 Twh or close to 70% of current Macedonian electricity supply. The Mavrovo cascade,especially the Vrutok hydropower plant, dominates the country's hydropower productionproducing about .4 Twh or about 60% of the hydropower. This is overwhelmingly used forpeaking purposes. The major power plants are given in Tables 5.4 below. Appendix Bprovides the details on the smaller hydropower plants.

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Table 5.4: Generation Capacity

(a) Thermal Power Plants

Unit Size No. of Total In Operation SinceNo. Name (MW) Units Capacity Fuel Type l

1 Bitola 225 3 675 lignite 1982, 1984, 1988

2 Oslomej 120 1 120 lignite 1980

3 Negotino 210 1 210 fuel oil 1978

Total 1005

(b) Major Hydro Power Plants

Total Average In Operation SinceUnit No. of Units Capacity Generation

No. Name Size (MW) Gwh Type_ _ _ _ _ _ _ (MW) _ _ _ _ _

1 Vrutok 37.5 4 150.0 390 reservoir 1957, 1958, (2) 1973

2 Vrben 6.4 2 12.8 44 run-of- 1959river

3 Raven 6.4 3 19.2 53 run-of- (2) 1959, 1973river

4 Globocica 21.0 2 42.0 187 reservoir 1965

5 Tikves 24.0 4 96.0 185 reservoir (2) 1968, (2) 1981, 1969

6 Spilje 23.4 3 70.2 304 reservoir 1969

Total 386.2 1163

5.08 Major Generating Units. The major generating units in the country aredescribed briefly below.

5.09 The BITOLA power plant and adjacent mine is the biggest energy complex inFYR Macedonia. It is located close to the town of Bitola in southern FYR Macedonia. Thepower plant with 675 MW of capacity is a little under half the generating capacity in thecountry, but typically supplies about 70% of country electricity needs. This is because it: 1)is a base load plant, 2) uses local fuels and thus is little effected by trade disruptions, and 3)is relatively new with good availability. The power plant units were commissioned in 1982,1984 and 1988 as Russian units of 210 MW. However, at fairly low cost, the plantexpanded them to 225 MW units. The adjacent open-pit mine, Suvudol, produces about 6million tonnes of lignite per year which mostly supplies the power plant.

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5.10 The NEGOTINO thermal power plant is located at the right bank of the riverVardar, eight kilometers downstream of the town of Negotino. The plant infrastructure wasconstructed for 2 units of 210 MW each. The first unit was completed in March 1978 andthe second unit was never started. The plant was designed to burn heavy fuel oil (9600kcal/kg) but could be converted to natural gas (8000 kcal/m3) at low cost. For the last threeyears the plant has been shut down due to the lack of heavy fuel oil and its relatively highcost. While with the lifting of the Greek Embargo the plant could now be run based onheavy fuel oil from the refinery, this would be quite expensive and justified, currently, onlyfor peaking purposes. It is planned to extend the gas transmission system to Negotino andpossibly convert the plant to burning natural gas. While this should provide a more securesource of fuel, it would also be expensive and an inefficient use of the natural gas. In thesomewhat longer term when additional capacity is needed, the possibility of converting thisplant to combined cycle operation should be seriously considered. This would allow asubstantial increase in capacity and in efficiency at quite low cost.

5.11 The OSLOMEJ power plant and lignite mine are located in the Western part ofthe country and have been in operation since 1980. The mine produces about 1.1 milliontonnes of lignite per year which is used in the power plant which has one unit of 120 MWcapacity. There is little potential for expansion at this time due to the limited life of themine.

5.12 The MAVROVO hydro scheme (also called Tito-Gostivar) is composed of thepowerhouses Vrutok, Vrben and Raven, the Mavrovo dam and reservoir and a network offeeder canals to catch the water coming from the nearby mountains. The first power housein line is Vrben at 12.8 MW. This power station barely functions in winter because thewater freezes. During the rest of year the water emerging from this power house goes intothe multi-year Mavrovo reservoir and then to the two power stations of Vrutok and Raventhat are supplied in series by the same penstock. The capacity of this hydro scheme is 182MW, which is a little less than half of ESM's installed hydro capacity of 426 MW (includingthe small plants). This hydro scheme typically generates 450-500 Gwh about 80% of whichcomes from the largest plant, Vrutok. Generation from this hydro scheme is typically about50% of the hydropower production in FYR Macedonia and is used primarily for peakingpurposes. (In the past few years, hydro power generation has been reduced due to lowrainfall). The powerhouses in this scheme were built back in the 1950's and need to berehabilitated in order to increase efficiency and reliability.

5.13 The GLOBOCICA hydro power plant is located in the southwest part of thecountry on the Black Drim river, 22 km North of the town of Struga. It has been inoperation since 1965. Installed capacity is 42 MW and average annual output is around 187Gwh. While there is a small reservoir upstream of the power plant, it has limited capacityand the plant is not allowed to alter the level of Lake Ohrid, which was its design reservoir,by more than 16 cm. Thus, the plant operates mostly as a base load run-of -the- river plant.

31

5.14 The TIKVES multi purpose hydro power plant is located on the Black River,between the towns Prilep and Negotino. The two first units have been in operation since1968, and units 3 and 4 since 1981. Total installed capacity is 96 MW, and average annualgeneration is about 185 Gwh.

5.15 The SPIIJE hydro power plant is located on the Black Drim river downstreamof Globocica. In operation since 1969, its installed capacity is 70.2 MW and the averageannual generation is around 300 Gwh. The Derbar reservoir behind the Spilje dam hasmoderate storage capacity and the plant operates both as a base load unit and for peakingpurposes.

E. TRANSMISSION AND DISTRIBUTION

5.16 While FYR Macedonia was part of Yugoslavia, its power system was part ofYugoslavia's electric utility association, JUGEL; which in turn was part of the WesternEuropean Electricity network, UCPTE. Thus, ESM was not designed to be a self sufficientutility but rather part of a regional (JUGEL) and international system (UCPTE). It would stillgain very significantly from being part of a regional system and eventually re-establishing thelink with UCPTE.3 A regional system would increase ESM's system stability and reduce theneed for reserve capacity. However, re-establishment of a regional system has beenhampered by the economic sanctions against FR Yugoslavia (which are now slowly beingremoved), the deterioration of that system as a result of the sanctions, and the strainedrelations between Greece and FYR Macedonia, with the Greek Embargo having just recentlybeen removed. Also the interconnections to Bulgaria in the East are weak because ofproblems in the Bulgarian System and its inability to meet UCPTE Standards; while there isno interconnection to Albania in the West. In the short to intermediate term it is likely thatthe FYR Macedonian Power System will not be part of a larger integrated electricity networkand thus it will continue to need more domestic reserve capacity to provide spinning reservesand frequency control. (Nevertheless a study of the regional interconnections issue would bequite useful; it is expected to show that all members of a regional network would gain andquantification of these benefits may spur the drive to interconnect.)

5.17 The backbone of the Macedonian transmission network is the 400 KV linecrossing the country from FR Yugoslavia to Greece. In the past this line served as theprincipal connection of both the FYR Macedonian and Greek power systems to UCPTE (viathe former SFRY), but has had relatively little use lately. The status and potential of FYRMacedonia's international interconnections can be summarized as follows:

3/ Physically the link with UCPTE is severed in Croatia, as a result of the Yugoslav civilwar.

32

FR Yugoslavia: There is a high-capacity 400 KV connection and two 220KV connections but there have been no scheduledexchanges because of the UN sanctions againstYugoslavia. This is, however, changing with the recentpeace settlement.

Greece: That same 400 KV line crosses FYR Macedonia intoGreece and there is a 150 KV line from Bitolaconnecting to Greece. There have been no scheduledflows because of the Greek embargo, but this maychange with the end of the embargo.

Albania: There is no direct connection from Albania to FYRMacedonia; however, Albania could transfer power toFYR Macedonia via FR Yugoslavia and via Greece.

Bulgaria: There are two 110 KV lines between FYR Macedoniaand Bulgaria. In addition to low capacity, the use ofthese lines is inconvenient because it generally requiresan island approach since the Bulgarian System does notmeet UCPTE Standards.

The basic data on the transmission network of the Macedonian power system are presented inTable 5.05 below.

Table 5.05: Transmission and Distribution Networks

Transmission Voltage 400 KV 220 KV 110 KVlines (km) 256 165 1500

Distribution Voltage 110 KV 35 KV 10-20 KV 0.38 KVLines (km) 405 1174 7302 20166

Substations 400/110 KV 220/1 10KV 1 10/x KVMVA 1800 700 2866

Substations 110/x KV 35/x KV X/0.38 KVMVA 1125 597 1366

33

F. ELECTRICITY PRICES

5.18 Electricity prices are set by the Government, but taking into account agreementswith the IFIs on this issue. More specifically electricity prices are set by the Council ofMinisters based on a request from ESM, through the Ministry of Economy. The Ministry ofEconomy is required to review and clear the ESM proposal and other Ministries, primarilythe Ministries of Development and Finance, can comment. The proposal is then voted on bythe Council of Ministers. However, under an EBRD Loan to FYR Macedonia a targetpattern of real electricity price increases in German Marks (DM) has been established whichis then reinforced under the Bank's FESAC Credit. The Cabinet has generally attempted toadhere to these agreements. However, in 1995 the increase in electricity prices appears tohave been less than required by the IFIs. In any case a further increase in electricity prices isrequired in 1996 to attain the EBRD specified final level of about 7.5 German Pfennigs perKwh (about 5.4 US cents/Kwh).

5.19 In 1994 electricity prices averaged 1.57 Dn/Kwh or about 3.6 US Cents/Kwh atthe 1994 average exchange rate of about 43.2 Dn/dollar. According to ESM's financialstatements, this was sufficient to cover operating costs including depreciation. In fact therewas a small operating profit equivalent to about 4% of total revenues, though this was offsetby non-operating costs and the company basically broke even. In 1995 the averageelectricity price rose slightly to 1.60 Dn/Kwh or 4.2 US Cents/Kwh at the 1995 averageexchange rate. The very small rise in denar terms, in spite of two significant tariff increases,is due to the fact that ESM has different summer and winter tariffs with the winter tariffsbeing higher than the summer tariffs. In 1994 the company was allowed to charge wintertariffs during the summer while this was prohibited in 1995. If ESM had been able to chargewinter prices during the summer of 1995 the average denar price in 1995 would be about 1.9Dn/Kwh or about 5.0 US Cents/Kwh.

5.20 At the end of 1994 accounts receivable amounted to 1.8 billion Denars, about25% of revenues. This is after the company wrote-off 733 million Denars in bad debtsduring the course of that year. Clearly there is an arrears problem and according to ESM itis almost wholly with state owned enterprises. Households overwhelmingly pay their bills. In1995 ESM received payments for the bad debts that it had written off in 1994 in the form ofshares in the enterprises which are not paying their bills. This is clearly better than notreceiving anything but not as good as cash since the value of these shares is uncertain andthere is no ready market for them. Clearly this issue of inter-enterprise arrears needs tocontrolled with companies required to pay ESM and in cash. If ESM is not paid or not paidin cash, or in something that can readily be converted to cash; then the whole issue of havingthe "right" prices for electricity, as discussed below, becomes far less important.

5.21 Electricity prices should reflect economic costs but also take financial needs intoaccount. Normally this is attempted by setting a tariff structure based on long run marginalcosts, while adjusting the average tariff levels to insure an adequate rate of return if needed.Long run marginal costs are not, however, available for FYR Macedonia. Nevertheless,

34

since the company does not need a lot of additional capacity, it is probable that long runmarginal costs will just be somewhat higher than current accounting costs. Accounting costs,based on 1994 data, appear to be around 3.6 US cents/Kwh. They seem, however, to haverisen sharply in the first half of 1995 especially in dollar terms due to around an 18% rise incosts combined with an appreciation in the value of the denar. As a very first roughapproximation, until estimates of Long Run Marginal Costs are available, an average price ofaround 5.0-5.5 US cents/Kwh, would appear to be reasonable.

5.22 The Macedonian tariff system is sophisticated with differentiation by time ofday, season, and voltage level and includes capacity and power charges. It also avoids onemistake that is standard in ex-socialist countries. This mistake is charging households andcommercial establishments substantially less for electricity than industry, even though it costsmore to supply households and commercial establishments. In FYR Macedonia householdsand commercial establishments are in fact charged more than industry. For example in1994, the average price for electricity supplied to the largest industries, that is industries thatreceive electricity directly from the grid, was 1.085 Dn/kwh compared with an average priceof 1.75 Dn/Kwh for customers (mostly households, government organizations andcommercial establishments) that receive electricity through the distribution system.

5.23 In the medium term, it would be desirable to establish objective and transparentcriteria for tariff setting so as to depolitize such decisions. This will be particularly importantif the Government seeks to encourage investments in generation by IPPs.

G. ORGANIZATIONAL ISSUES

5.24 Role of Government. The power sector currently operates as a publicmonopoly, with ESM as the principle entity. As such it is classified as a public enterpriseand falls under state control. The extent of state control is principally in the areas ofinvestment planning, management selection and pricing. These activities are spread overseveral ministries and the Council of Ministers. The Council of Ministers has decisionmaking authority for tariffs and major investment plans as well as appointment of the ESMGeneral Manager (Chief Executive Officer) and Managing Board. The Ministry of Economyhas principal oversight responsibility for the power sector as well as responsibility forreviewing and approving investment plans and tariffs and preparing new tariff systems. TheMinistry of Development reviews and comments on power sector investment plans and can,but is not required, to review and comment on tariff proposals. Finally, the Ministry ofFinance reviews and comments on investments when a Government guarantee is required fordebt financing.

5.25 This system of regulation and control for ESM needs to be made more formal.Ideally, the company should be privatized with an independent regulatory system set up todetermine prices based on objective criteria. The Government would not then be involved inmanagement selection or investment decisions with both of these roles undertaken by thecompany and its Board of Directors, representing the shareholders. However, as long as the

35

company is state owned, the Govemment should oversee it, including insuring that itsinvestments are economically justified and environmentally sound. This role is currentlyundertaken primarily by the Energy Secretariat in the Ministry of Economy. Under the neworganizational format for public enterprises, contained in the Enterprise Law, this role willbe shared between this Ministry and the Managing Board. Finally, as long as the company isstate owned, a performance contract between ESM and the Government would be useful asthis would clearly define what the Govemment expects from the company, with adequateincentives for performance, and what the Government's obligations are.

5.26 Sector Organization. The Government of FYR Macedonia, with the assistanceof USAID, had a study undertaken of the organization of the electricity sector. This studywas done by Arthur Andersen and Bechtel and looked primarily at the issue of whether thesystem should be unbundled or not. Their conclusion was that given the very small size ofthe system and the dominant role played by the Bitola power plant, unbundling is difficultand may not be suitable. The primary benefit from unbundling appears to be the creation ofcompetition among power plants or groups of power plants to supply electricity. However,in FYR Macedonia there is one dominant power plant (Bitola), which would set the price andthere would be little competition. There does appear, however, to be a useful role for IPPsin providing power and as benchmarks for gauging the efficiency of ESM and Bitola.

5.27 Company Organization and Staffing. ESM has a General Manager, a ManagingBoard and an Advisory Board. The General Manager or Chief Executive Officer isappointed by the Govemment for a 4 year term. The Managing Board, which replaced theWorkers Council under the old structure, consists of 11 persons of which 7 are appointed bythe Government and four are Government approved employees of ESM including the GeneralManager. This Managing Board is the chief goveming and decision making body of theenterprise. There is also an Advisory Board, appointed by the General Manager to assist withthe economic running of the enterprise and consisting of the top 7 officials of the company.(See Appendix C for more information on the company's organization.)

5.28 The organizational structure includes 8,626 employees and Table 5.06 belowidentifies the number of employees by function. This number of employees is high for autility the size of ESM even taking into account the fact that it mines its own coal. The tableshows only 160 persons engaged in non-electric activities (hotels, fishing etc.). However,there are employees in each of the other functions which are also not engaged in the coreactivity of ESM, which is electricity production. These are persons such as those in engagedin catering, certain workshops etc. The company has estimated that there are 600+ personsin the company which are engaged in non-core activities. The process of spinning-off thesenon-core activities is underway and should be completed in the not too distant future. Inaddition the company is reducing significantly the number of core workers, (by around 400)primarily through early retirements and other forms of attrition.

36

Table 5.06: Employment

Function Number of Percentage ofEmployees Total

Headquarters 219 2.6%

Production 3,017 36.0%

Coal 1,631 19.0%

Transmission 291 2.4%

Distribution 3,308 39.0%

Total Electric 8,466 100.0%

Other activities 160

Total employees 8,626

Comparisons

5.29 The table below compares various performance indicators for the FYRMacedonian Power System with two of its neighbors, Thailand and proposed Bank "Targets"for those indicators. The FYR Macedonian system compares favorably with the "targets" interms of losses and population served. The low load factor relative to the "target" level,cannot be rapidly changed because of the high household winter demand for electric heating.The return on assets needs to be improved, but cash flow is substantially better than wouldbe indicated by the low return on assets due to a high level of depreciation.

Table 5.07: Performance Indicators

Indicator

Country LoadLosses" Factor' Return on Assets Population Served

FYR Macedonia 11.7% 60% 1% 99%

Bulgaria 14.1% 61% neg. 99%

Romania 11.5% 74% n.a. 99%

Thailand3' 13% 73% 6% 80%

"Target"3' 10-12% 70% 8-12% 90%+

1/ Transmission and Distribution2/ Average load/peak load3/ Source: Power and Energy Status Report presented to Executive Directors July 1994

37

H. INVESTMENTS

5.30 An investment program was prepared by the Investment and PlanningDepartment of ESM and was submitted to the Government in 1995. A major part of thisprogram was adopted by the Government, after being reviewed by the Ministries of Economyand Development, and included in the Program for Public Sector Investment in the Republicof Macedonia 1995-98, which was presented to the Consultative Group Meeting for FYRMacedonia held in June 1995. The investment program prepared by ESM includes threemain categories; a) rehabilitation of existing capacity, b) construction of new capacity and c)transmission and distribution.

5.31 Rehabilitation and life extension of the hydro plants is the most important areaof rehabilitation and is part of any least cost plan. (It is also given the first priority amongnew projects in the Program for Public Sector Investments mentioned above). The reasonfor this is that the hydropower plants are quite old and a significant part of their equipment iswearing out or is now obsolete with spare parts difficult to obtain. For example, the largesthydropower plant, Vrutok, has been operating for 38 years, with the last units constructed 22years ago. Other hydropower plants are of similar age. At the same time the operationalrole of the hydropower plants is extremely important for the power system and has increasedsince independence. They provide energy, peaking capacity and reserve capacity-substitutingfor the integrated JUGEL System in this latter function (see para. 5.16). Rehabilitationshould not only improve efficiency, increase generation and extend their technical life butalso increase the ratio of capacity/energy in order to improve system operationalcharacteristics. The Government has estimated that with rehabilitation capacity could beincreased by 50 MW, and the average annual energy generation by 80 Gwh. The earlyestimates of the cost of rehabilitation are around $50 million. A more thorough study of thecosts and benefits or rehabilitation would be useful, though a significant amount ofinformation already exists. Meanwhile with Swiss grant funding some limited rehabilitationis beginning at the Mavrovo cascade.

5.32 Based on ESM's demand forecasts the need for additional capacity dependslargely on what is done with the Negotino power plant. If one unit at Negotino operates thenadditional capacity may be needed only around 2003. If the second unit is built at Negotino,as originally planned, then new capacity would not be needed until around 2009. (SeeAppendix D.) While a least cost study has not been done, it is very likely that using theexisting Negotino plant would be least cost. There are, however, two ways in which theplant could be used. First, it could be left using heavy fuel oil as the main fuel. Second,when the gas pipeline to Negotino is completed it could be converted to a simple cycle gasfired plant or a combined cycle plant. A feasibility study should be done of thesealternatives, though such a study is not required in the very short run.

5.33 ESM has proposed to add additional hydropower capacity in the form of damswith powerhouses on major rivers, primarily the Vardar and its tributaries. Thesehydropower plants would be part of an overall development program for the Vardar River

38

and tributaries. These plants are, however, a very expensive way to generate electricity-usually $1000-$1500/Kw for capacity with limited generation because of limited watersupplies. While the hydropower plants have not been evaluated in terms of a least cost plan,they would probably not be least cost based on their power generation characteristics. Theirjustification, if at all, has to be based rather on a cost benefit analysis of their multiple usesincluding generation, irrigation, flood control and municipal water supply. This has not beendone. Also since the Vardar river flows into Greece, agreement would need to be reachedwith Greece on the use of the water.' Four of the major proposed hydropower plants areshown in the table below. There are also several others, which would generally becompleted later, including Zletovica.

Table 5.08: New Hydro Power Capacities

AverageConstruction Capacity Generation Total Cost

Name Period (MW) (Gwh) ($ million)

1 Kozjak 1994-1999 82.5 156 104.4

2 Cebren 1995-2000 253.8 313 326.3

3 Gradec 1999-2002 54.6 253 156.8

4 Boskov Most 2001-2004 45.0 156 50.0

TOTAL 535.9 878 637.5

5.34 The third major area of investment is transmission and distribution. This is amixture of new investments and rehabilitation. The table below shows some of theseprojects. They total $286 million but are certainly not of equal priority. In the Program forPublic Sector Investment presented by the Government, the Bitola-Skopje 400 KVtransmission line, which is now being financed by EBRD, is given a high priority with theVrutok-Bireli (Albania) line given a lower priority (in part due to limited Albanian interest).Other transmission and distribution projects were given no priority, though at least some ofthe distribution projects deserve a significant priority.

5.35 In addition, though not generation or transmission or distribution, the companyneeds around $5-$10 million for its EMS system. This is largely to complete the dispatch

1/ The SFRY had an agreement with Greece on the Vardar River, but thisagreement does not necessarily extend to FYR Macedonia.

39

center whose modernization was started under an earlier project for the Yugoslav Federation(SFRY). This improved control system would permit a more efficient operation of thegenerating plants.

Table 5.09: New Network Investment Projects

Type Voltage Level Length/Capacity From-To Cost $ Periodmillions

1 Transmission line 400 KV 113.5 km Bitola-Skopje 16.7 1995-1996

2 i'raws.rnishion line 400 KV 2 x 30 km Titov Veles-Stip 12.0 1998

3 Substation 400/110 KV 1 x 300 MVA Stip 10.0 1998

4. Transmission line 2 400 KV 70 km Stip-Blagoevgrad 14 1999

5. Substation 400/100 KV 2 x 3 MVA Mavrovo 15 2000

6 Transmission line3 400 KV 80 km Bitola-Zenjak 16.6 2002

7 Transmission line' 200 KV 45 km Vrutok-Bireli 10.2 1997

8 Transmission lines 110 KV 342 km Different 40 1995-2005

9 Substations 110 KV 2500 MVA Different 50 1995-2005

10 Distribution lines 35 KV 158 km Different 6 1995-2005

11 Substations 35/x KV 17 MVA Different 2 1995-2005

12 Other Distribution 10 (20) KV 848 km Different 38 1995-2005

13 Other Substations 10 (20)/0.4KV 947 Different 40 1995-2005

14 0.4 KV Network 888 km Different 15.5 1995-2005

TOTAL 286.0

2/ FYR Macedonia-Bulgaria

'/ FYR Macedonia-Albania

4/ FYR Macedonia-Albania

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6. DISTRICT HEATING

6.01 There is only one major district heating company in FYR Macedonia5, theSkopje District Heating Company or Toplifikacija. It supplies about 25% of the heat neededby the city with the rest provided primarily by electricity and wood. Toplifikacija wasfounded in 1963, after the earthquake, and has 150 km of pipe, covering mostly thedowntown area of the city. It has 524 MW of thermal capacity, located primarily in twomajor plants, Istok or East with 300 MW of capacity and Zapad or West with 183 MW ofcapacity. There are also three smaller peaking plants with a total of 41 MW. The companysells about 600 Gwh of heat per year (equivalent to about 515,000 Gcal) during its 180 dayseason. Most of this heat is sold in the form of hot water, but a small part is sold as steam.The company in turn produces hot water and steam from heavy fuel oil, using about 60,000tonnes of heavy fuel oil per year.

A. PRICING

6.02 About half of Toplifikacija's heat is sold to customers with heat meters. Thesecustomers are commercial establishments, industrial enterprises, households with individualhouses, and educational establishments. The remaining customers consist largely ofapartment houses, which are not metered, and where customers are charged based on thefloor space of their apartments. For metered customers, the company bills them based ontheir energy used and a capacity charge. For example, the charges for individual householdsare the equivalent of 2.3 US cents/Kwh for energy and $13/Kw yearly for capacity while thecharges for industry are the equivalent of 4.2 US cents/kwh and $10/Kw for capacity. Thecharge for apartments is the equivalent of 47 US cents/square meter per month for 12months. This amounts to about $340 for the heating season for an average apartment ofabout 60 square meters. Since this average apartment consumes about 9000 Kwh of heatduring the season this works out to an average price of about 3.8 US cents/Kwh thermal orabout $44/Gcal. The average price received by the company, however, is lower than theprice for apartments averaging about 3.0 US cents/Kwh thermal or about $35/Gcal.

6.03 These prices for heat are comparable to West European prices for light fuel oilor natural gas supplied to households (though above corresponding prices in the US) and areaccepted by the Govemment for two primary reasons. First, the cost of fuel to the districtheating company is high. Typically it is in the area of $160-$165 per tonne ($16-$17 perGcal). Furthermore, the company is expected in 1996 to start using some of the natural gascoming through the gas pipeline and this will initially even be more expensive than the fueloil. At the above heavy fuel oil prices the average cost of heat production is 2.4-2.5 UScents/Kwh thermal or around $29/Gcal. Second, current prices provide a margin for the

I/ There is one other district heating company in FYR Macedonia, a small system in the town ofMK. Komenica.

41

company to rapidly reduce its debt to the Government and Makpetrol, which was built upduring the 1992-93 heating season. Also, investments have been restricted in order to allowthe repayment of this debt. The company expects this debt to be paid off by mid-1996 and itwill then be willing and able to undertake more investments. It may also be under pressureto reduce prices slightly at that time.

6.04 The district heating company is, however, fortunate in that it largely sets its ownprices. The company proposes prices and then justifies them to the Ministry of Economy. Ifthe Ministry has no objection then the prices go into effect without requiring any action onthe part of the Council of Ministers. This is better than the price setting system for petroleumproducts and electricity where prices are voted on by the Council of Ministers. However, itis not as good as a truly independent regulatory agency.

B. OWNERSHIP

6.05 The district heating company is owned 98% by the Government (social capital)and 2 % by its employees. However, following the organizational system used in the formerSFRY, whereby social capital does not provide the Government with any control overmanagement, the company is managed by a Board consisting entirely of senior managers ofthe company who select the General Manager. The Government is not directly representeddespite the fact that, de facto, it owns the company (see para. 5). This should be changedwith a representative of the Government sitting on the Board. Under the proposed new lawon public enterprises the Government could sell 47% of the company to the public oremployees, keeping 51% ownership for itself. There are no present plans to do this.

C. HEAT LOSSES

6.06 Heat losses by Toplifikacija are significant but lower than in many other EastEuropean Systems. Losses in the boilers are estimated at about 15% while losses intransmission and distribution are around 12%. Water losses are around 3% (i.e. 1000tons/day on a system which has 30,000 tons). There seem to be a large number of smallleaks and the company has concluded that the estimated cost of the losses at $360,000 peryear does not justify the massive replacement of pipe which would be required to largelyeliminate the leakage.

D. ELECTRICITY GENERATION/COMBINED HEAT AND POWER

6.07 Toplifikacija is considering adding electricity generating capacity to its maingenerating station, Istok. This capacity would consist largely of one or more gas turbineswith the exhaust gases from these turbines used to produce hot water. The gas turbineswould provide some base load electricity generating capacity during the winter when thedistrict heating plants operate and also peaking capacity. It would be a very inexpensivemeans of adding additional capacity to the Macedonian system, probably around $250-$300/kw or less. While converting the district heating plants to full combined cycle operation

42

would generate more electricity, the above system would be highly efficient in using the heatfrom the gas, cheaper than combined cycle to install, and provide significant additionalgenerating capacity. It would not, however, provide as much capacity as full conversion tocombined cycle operation.

6.08 Toplifikacija is considering setting up the electricity generating capacity in theIstok district heating station as an independent power plant (IPP). This would make it easierfor the company to attract outside capital to help fund the project. IPPs will be encouragedunder the new energy law and this would be the first such project if it occurs. While there issome existing cogeneration (see para 5.07) these cogeneration units were never expected tobe a self-supporting electricity generators. This would be the first real IPP and should beencouraged by the Government.

43

APPENDIX AENERGY SOURCES AND USES

1994 | 19956 (est.) [ Index

Amount 10 3 TJ Amount 10 3 TJ [ 1995/94

1. Electric Energy (10.6 Kwh)

a) generation 5,456 19.6 5,930 21.3 108.8hydro 570 2.4 694 2.5 -thermal 4,786 12.21 5,236 16.8 118.8

b) import 247 0.9 - -

c) export 153 0.6 - -

d) consumption 5,550 20.0 5,930 21.3 106.8

2. Coal (10.3 t)

a) production 6,830 51.2 6,830 51.2 100.0b) import 238 4.0 314 5.3c) exportd consumption 7,068 55.2 7,144 56.5 101.1

3. Coke (103 t)

a) productionb) import 75 2.2 112 3.2 149.0c) export ld) consumption 75 2.2 112 3.2

4. Petroleum Products (103 t)

a) production b) import 742 32.6 822 36.2 110.8c) export d) consumption 742 32.6 822 37.9 110.8

5. Natural Gas (106M3 )

a) productionb) import 67 2.2c) export ld) consumption _ 67 2.2

6. Firewood (103M3)

a) production 1,010 10.9 1,080 11.7 106.9b) importc) exportd) consumption 1,010 10.9 1,080 11.7 106.9

7. Geothermal (103 TJ) -| -.5 | 0.6 |_ __

Gross Consumption 0 104.1 112.9 108.4a) Domestic 65.0 (62.5% 66.0b) Import _ j 39.1(37.5%) J _ 46.9 (41.5%) (58.5%)

6/ estimate for 1995 by Ministry of Economy - not actual

44 APPENDIX BPage 1 of 4

HYDROPOWER AND COGENERATION

Table B. 1: Small Hydropower Plants

Year BuiltNo Name Units Capacity (MW)

1 Pena 2 1.76 1927

2 Matka 3 4.20 1938

3 Zmovci 2 1.26 1950

4 Pescani 2 2.88 1951

5 Sapuncica 2 2.80 1952

6 Dosnica 3 4.62 1953

7 Kalimanci 2 12.80 1970

8 Turija 2 2.00 1985

9 Belica 1 0.25 1989

10 Strezevo 3 2.40 1993

11 P. Sapka 4 5.20 1993

=___ __ _ _ __ _40.18

Table B.2: Cogeneration Plants

Name Year Built Units Capacity Fuel

__ ~~~(MW) _ _

Zelezara 1966 2 15 Heavy Fuel Oil

OHIS 1965 2 13 Heavy Fuel Oil

Teteks 1965 2 4.6 Heavy Fuel Oil

Refinery 1981 3 6.0 Heavy Fuel Oil

Total I 39.6

45L'

APPENDIX BPage 2 of 4

Table B.3: Hvdro Power Candidates Plants

CHARACTERISTIC TECHNICAL DATA ON HPPs

W 1X~~~~~~ (ut/S) W St

~~~~ ,.~~~~~~~~~~~.,..'.. .~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ .....

1. HPP "T. Veles" 3x65 86.3 55.0 90.00 300.60 64

2. HPP "Babuna" 2x120 91.2 8.5 17.34 56.90 /

3. HPP "Zgropoici" 2x120 91.2 8.5 16.93 55.50 /

4. HPP "Gradsko" 2x120 112.4 8.3 16.93 66.60 /

5. HPP "Kukurecharu" 2x120 147.6 8.3 16.93 79.50

6. HPP "Krivolak" 2x120 148.9 8.3 16.93 80.00 /

7. HPP "Dubrovo 2x120 149.6 8.3 16.93 80.20 /

8. HPP "D.Kapija" 2x120 150.6 12.0 24.48 116.40

9. HPP "Gradec" 2x120 152.0 27.0 53.00 247.00 43

10. HPP "Miletkovo" 2x120 157.2 8.2 16.72 80.30 /

11. HPP "Gavato" 2x120 161.8 8.2 16.72 83.20

12. HPP "Gavgeliia" 2x12 164.4 8.3 16.93 85.10

13. HPP "Kozjak" 2xS0 25.75 113 82 158.00 260

14. HPP "Matka II 2x50 25.75 40 51 51.00 10

15. HPP "Chebren" 3x60 25.69 180 253.0 265.1 690

16 HPP ' Gal ishte" 3x60 28.70 118.5 197.0 195.4 256

s~~~~~~~~~~~~~3 .21118 37

E-mS~~~~~~~~~~~~~~~ '

46

APPENDIX BPage 3 of 4

Table B.4: Preparation Status

ESTIMATES VALUE OF HPPs

~~~~~~__ * m'.N1. HPP "T. Veles" Prelim. design 90,000,000

2. HPP "Babuna" Study 47,600,000

3. HPP "Zgropolci" Study 51,700,000

4. HPP "Gradsko" Study 57,600,000

5. HPP "Kukurechani" Study 57,000,000

6. HPP "Krivolak" Study 57,000,000

7. HPP "Dubrovo" Study 68,200,000|

8. HPP "D. Kapija" Study 80,400,000

9. HPP "Gradec" Master project 87,000,000

10. HPP "Miletkovo" Study 70,000,000

11. HPP "Gavato" Study 78,800,000

12. HPP "Gevgelija' Study 63,000,000

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~X'.X ggm tl 13. HPP "Kozjak" Master project 110,000,000

14. HPP Matka II" Study 47,000,000

15. HPP "Chebren" Preliminary design 240,000,000

16. HPP "Galishte" Preliminary design 220,000,000

. 41 .0.1... il.~ &. <4 .l_~~~~~~~.s.. S_ < <

~~~~~<5 l _ 8.

47

APPENDIX CPage I of 2

ESM ORGANIZATION

The day-to-day business management of the enterprise is the responsibility of theGeneral Manager and in his absence the Deputy General Manager. The General Managerhas, at least in theory, 42 direct reports which includes the Deputy General Manager, 5Assistant General Managers and 36 Managers of business units. These business units consistof 28 distribution units, one transmission unit, 4 hydropower units (the three hydropowerplants in the Mavrovo cascade are treated as one unit) and two thermal generating units.

The are five Assistant General Managers have the following responsibilities:

1. Development - Responsible for supervising the preparation of the investmentprogram for ESM in the context of the power policy of FYR Macedonia.

2. Finance - Responsible for supervising and preparing ESM's consolidatedfinancial statements, regulatory filings, short-term and long-term financialplanning, and the collection of accounts receivable.

3. Legal and Regulatory - Responsible for the oversight of all legal, labor andregulatory matters.

4. Technical - Responsible for the oversight of all technical and maintenancematters, which includes power generation, transmission and distributionthrough the power system.

5. Joint Services and Social Standards - Responsible for the oversight of thenon-electric company activities (i.e., hotel, food service, etc). He is alsoresponsible for providing the employees of ESM with information,environmental protection and the collective bargaining with the labor unions.

The ESM organizational structure works because the 36 managers of operatingunits in fact report on most issues to the respective assistant general managers. For exampleon technical issues they would consult with the Assistant General Manager Technical and onfinancial issues they would consult with the Assistant General Manager for Finance. Onlyfor the most important issues would they report to the General Manager and then only afterconsulting with the relevant Assistant General Manager. Nevertheless this structure makesexcessive demands on the Assistant General Manager Technical and ESM is now planning tocreate two Deputy Assistant General Managers for technical issues reporting to the AssistantGeneral Manager Technical. One Deputy Assistant General Manager would handlegeneration issues while the other would handle transmission and distribution issues.

48

APPENDIX CPage 2 of 2

ESM may want to consider alternatives to this organizational structure. TheGeneral Manager should primarily be concerned about the company's strategy and financialcondition and not be heavily involved in day to day operating issues. Also 42 direct reports,even though they do not regularly deal with the General Manager, is considered excessive.A standard approach would be to create the position of chief operating officer (COO) whichwould be the second position in the company and responsible for day to day operations. TheCOO would report to the General Manager. This position would combine the currentDeputy General Manager and Assistant General Manger Technical positions and addadditional powers. The COO would then have all power plants, distribution companies andthe transmission system reporting to him, probably through two or three assistant COOs.The other Assistant General Managers (finance, legal, Development, Joint Services) wouldcontinue to report to the General Manager. This reorganization would leave the GeneralManager with only five direct reports, a more manageable number, and free to concentrateon strategic, financial and Governmental issues.

49

APPENDIX DPage 1 of 2

FORECAST OF GENERATING CAPACITY REQUIREMENTS

Table D. 1: Electric Energy Balances Without New Generation Capacity (Gwh)(1996-2005)

Year 1996 1997 1998 1999 12000 12001 20022003200412005

Demand 6329 6433 | 6540 | 6648 I6760 6852 6946 7038 7132 | 7229

1. Without TP Negotino

Generation 6031 6045 6057 6069 | 6079 6087 6095 6101 6107 6112

- Hydro 1234 1227 1222 1219 1216 1213 1211 1209 1208 1206

- Lignite 4797 4818 4835 4850 4863 4874 4884 4892 4899 4906

Shortage 298 388 483 579 681 765 851 937 1025 1117

2. Full Scale Generation by TP Negotino ( 2 Units)

Generation 6326 6430 6537 6645 6758 6850 6944 7032 7117 7196

- Hydro 1311 1315 1318 1317 1321 1321 1311 1302 1303 1297

- Lignite 4418 4413 4427 4428 4483 4544 4593 4618 4653 4703

- Negotino 597 702 792 900 954 985 1040 1112 1161 1196

Shortage 3 3 3 3 2 2 2 6 15 33

3. One Unit at TP Negotino

Generation 6307 6412 6518 6599 6652 6680 6693 6706 6716 6727

- Hydro 1293 1297 1299 1285 1268 1252 1236 1228 1222 1217

- Lignite 4609 4619 4642 4696 4746 1784 4807 4824 4837 4850

- Negotino 405 496 577 618 638 644 650 654 657 660

IShortage 22 21 22 49 108 172 2s53 332 416 502

50

APPENDIX DPage 2 of 2

Table D.2: Electric Energy Balance with New Hydro Capacity(1996-2005)

(in Gwh)

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1. Demand 6329 6433 6540 6648 6760 6852 6946 7038 7132 7229

2. Generation 6307 6412 6518 6625 6730 6828 6922 7016 7110 7206

2.1 Existingcapacity 6307 6412 6518 6566 6574 6360 6453 6293 6387 6329

2.1.1 Hydro 1293 1297 1299 1292 1287 1252 1256 1228 1236 1'216

2.1.2 Lignite 4609 4619 4642 4646 4674 4628 4635 4587 4591 4579

2.1.3 Negotino 405 496 577 628 613 480 662 478 560 534

2.2 NewGenerationCapacity - - - 59 156 468 469 723 723 877

2.2.1 HP Kozjak - - - 59 156 156 156 156 156 156

2.2.2 HP Cebren - - - - - 312 313 314 314 313

2.2.3 HP GmdaSre 2 2 2 2 253 253 253

2.2.4 HP BoskovMost 155

3. Shortage 22 21 1 22 23 30 24 24 122 22 23

51APPENDIX E

FYR MACEDONIA

PROPOSED ORGANIZATIONAL STRUCTURE OF ENERGY SECTOR

Government

_Council ofMinisters

Ministry of Economy Independent- policy Regulatory System

- oversight ,pricing

Private Companies

GasMakpetrol Refinery Transmission District Heating I..sE.S.M.

and Distribution

IBRD 27942

FEDERAL REPUBLIC OF FOME YUGOSLAIBREPUBLICYUGOSLAVIA F FORMER YUGOSLAV REPUBLIC

(SERBIA/MONTENEGRO) OF MACEDONIA

ENERGY FACILITIESBULGARIA

Kumcno. vo 1o KriKumcnovoPOWER PLANTS

Polanka ~~~~~~~~~~~~~HYDROYugochrom ratoIo M. Kamenico , M THERMAL

Tet,.,c, robistp \iSUB STATIONS

400/1 1 0kVKocani ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~* 110EV

$ /r |g OvsePope~Xv g > i A TRANSMISSION LINES

4 20 kVio \ Mc~~70ssF0 a;>Ov < s<Buchim ( } erovo ./ 0 . . _ . 400 kv (Und.r C.,,I,.cil,n)

- 100 kV (P,.p.,,d)

11 J / \_4/t 4 # ZgrAlsX / Rrldovi S i X ~ REFINERY

T/S FFE _ , s y S , < CSo1O W-oZ_ S I 0 t COAL MINES

-- RIVERS

jXpGlob ccico \ Prilep 5/ Tikves! / ~ff\.< / Strumicc . - - INTERNATIONAL BOUNDARIES

(t 9 <_ Scpotn~~~ics k Va en londo .@~~/2~~o

ALBANIA )

Bit ci ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~*SLOVAK REP ~ UIRE INE>I

\ AUSTRIA 'L r V

Bitol.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-'~H U N G A R Y

, E - t ' 0 CROATIAROPANIA

GREECE HiRZECENAANL/

ikr - * p r\ ; EP R OF ,

(.. Rae Ko Kom ISEER /ONTI 3 G

Lak. 6' ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I~~~~5~- c NPr~~~~~~~~~~~~~~~~~.po ~~~~~~~~~~~~~~~~~~~~~TALY r~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ABT TURKEY

GREECE

0 1 5 30OMILES ~"AY 1403

IMAGING

Report No: 15313 MKType: SR