EUROPE AND CENTRAL ASIA: Western Balkans: Market-based mechanisms for the promotion of renewables, Phase II
The countries in the Western Balkans region are heavily dependent on coal-generated power. They are also among the most vulnerable European countries to climate change, threatening economic sectors such as agriculture and infrastructure. To meet their commitments under the Paris Climate Accord, the Western Balkans 6—Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia—are looking to increase renewable energy generation and strengthen regional cooperation.
The region faces numerous obstacles to private investment in renewable energy. One issue is that all six countries have been slow to phase out feed-in tariff incentives—where renewable energy producers are guaranteed certain remuneration levels—and move towards more cost-effective market mechanisms for clean technologies as mandated by the European Union.
Other challenges to attracting investment to the sector include inadequate policy and regulatory instruments, weak local developers, small project sizes, limited credit and capacity from local banks, and financially weak utilities.
The World Bank launched the Western Balkans Energy Transition Program to support the introduction of market-based mechanisms, including auctions, feeding premiums, and other competitive bidding mechanisms. Achieving this goal will require the governments in the Western Balkans region to modify their legal and regulatory frameworks.
PPIAF's Role
In support of the World Bank initiative, PPIAF provided technical assistance to review each country's regulatory framework, drafting new regulatory instruments, designing competitive procurement mechanisms, and preparing specific renewable energy transactions. Assistance was tailored to each country's particular needs. Training staff of government and transmission companies ensured they had the technical capacity to design and conduct auctions or other mechanisms for competitive renewable energy procurement. In addition, PPIAF provided support to address country-specific barriers to investment in renewable energy, for example, developing regulations for integrating renewable energy into national grids, streamlining permitting procedures, and creating a quality pipeline of projects. PPIAF supported this initiative along with ESMAP.
The initiative was divided into two phases, each contributing to the region's energy transition. Phase 1 focused on evaluating the current state and plans for renewable energy in the Western Balkans, identifying regulatory barriers, and suggesting market-based support mechanisms. This phase also examined financing options and the flexibility of the electricity system in the region. The findings included general recommendations and country-specific roadmaps for transitioning to market-based support schemes.
Phase 2 built on these findings to provide targeted support to Bosnia and Herzegovina, Kosovo, and Serbia. This phase helped these countries modify their legal and regulatory frameworks to introduce market-based mechanisms, such as auctions for renewable energy capacity. Overall, this PPIAF-funded activity has significantly contributed to the energy transition in the Western Balkans, promoting renewable energy deployment through market mechanisms. The progress made under this initiative has informed multiple lending operations within the World Bank and is supporting countries in meeting their Nationally Determined Contributions, ultimately contributing to climate mitigation by lowering CO2 emissions.
Highlight on PPIAF's Impact in Serbia and Kosovo
In Serbia, PPIAF support has provided recommendations that have contributed to the reform package of new energy sector laws of 2021 and the subsequent decrees, containing measures contributing to the transition from feed-in tariffs to auctions. The government approved amendments to the Law on Energy, the Law on Energy Efficiency and Rational Use of Energy, and the Law on the Use of Renewable Energy Sources. Revamping the regulatory framework for renewable energy enabled Serbia to conclude its first renewable energy auctions successfully. The first auction was launched with the support of EBRD in June 2023 for 400 MW of wind power and 50 MW of solar photovoltaics, doubling its wind generation capacity at a little more than half the market price compared to the previous feed-in tariffs scheme. Furthermore, the government is preparing another auction of at least 400 MW of wind and solar power. Other wind power auctions have been announced under Serbia's "Three-year Auction Plan for the Period 2023-25," aiming to secure at least 1,300 MW of new renewable energy capacity through private investments and by means of auctions and market premiums.
In Kosovo, PPIAF provided technical assistance on legal and regulatory recommendations. In line with the recommendations provided under PPIAF technical assistance, Kosovo, in May 2024, adopted the Law "On the Promotion of the Use of Renewable Energy Sources," which aims to promote renewable energy sources and cogeneration across electricity, heating, cooling, and transportation sectors to meet energy demands more effectively, allowing for the transition from feed-in tariffs to market-based mechanisms. In 2024, the first renewable auction for 105 MW of solar energy was awarded to a consortium led by the Switzerland-based construction company Orllati, which was selected to build and operate a solar park of up to 105 MW in connection capacity for 30 years, including a 15-year contract for difference. With a private capital investment of more than €70 million, the group won the first renewable electricity auction in Kosovo with a bid of €48.88 per MWh. In addition, Kosovo's PPP pipeline includes four renewable energy auctions to be launched between 2024 and 2025 for a capacity of 630 MW with USAID support: 100 MW Solar on Public Land (currently open with an expected private investment of €70 million) in 2024, 150 MW Wind at Non-Specific Location (expected private investment of €270 million) in 2024, 200 MW Solar on Public Land (expected private investment of €150 million) in 2025, and 180 MW Wind on Public Land (expected private investment of €324 million) in 2025. Lastly, Kosovo recently announced a series of auctions for renewable energy and battery energy storage systems for 950 MW of renewables, totaling €1.2 billion in investment.