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Public Disclosure Authorized PUBLIC -PRIVATE PARTNERSHIP (PPP) OPTIONS FOR FUTURE POWER GENERATION IN MONTENEGRO WORLD BANK Public Disclosure Authorized 25 February 2010 Final Report Public Disclosure Authorized Submitted by: Cambridge Economic Policy Associates Ltd Public Disclosure Authorized ACKNOWLEDGMENTS AND CONTACT INFORMATION This project was funded by the Public-Private Infrastructure Advisory Facility (PPIAF). PPIAF is a multidonor technical assistance facility created to help governments in developing countries improve the quality of infrastructure through partnerships with the private sector. Through policy, legal, and regulatory support, PPIAF helps governments explore arrangements for improving the delivery of services. It also supports capacity building for governments to strengthen their ability to design, manage, and regulate reform programs – and capacity building and training for policy makers, regulators, and civil society groups. The project team would also like to acknowledge the input and support from Dr Igor Kovacevic of the Ministry of Economy and his team, as well as the numerous interviewees for this project, without whose assistance this report could not have been completed. Contact information: Franz Gerner Charles Groom The World Bank CEPA 1 Senior Energy Economist Queens House, 55-56 Lincoln’s Inn Fields, 1818 H Street , NW London, WC2A 3LJ Washington DC 20433 Tel. +44 20 7269 0210 Tel: 202 473 5019 [email protected] [email protected] www.cepa.co.uk Dr Igor Kovacevic Coordinator for energy efficiency and renewable energy projects Ministry of Economy Rimski Trg 46 81000 Podgorica Montenegro tel +382 20 482 136 fax. +382 20 234 081 1 Key CEPA team members were: Charles Groom, Director, CEPA; Kirby Owen, Associate Director, CEPA; Nebojsa Novcic, Managing Consultant, CEPA; Patrick Taylor, Consultant, CEPA; Fiona Woolf, CEPA Associate; Natasa Obradovic, CEPA Associate. CONTENTS Executive Summary .................................................................................................. i 1. Introduction ...................................................................................................... 1 1.1. Approach ....................................................................................................................... 1 1.2. Overview of this Report ............................................................................................. 2 1.3. Report Addendum ....................................................................................................... 3 2. Background – The Current Situation ............................................................... 4 2.1. The Current Legal and Policy Context ..................................................................... 4 2.2. Key Institutions and Their Roles ............................................................................... 5 2.3. Key Issues Specific to Montenegro ........................................................................... 6 3. An Overview of PPP Approaches ...................................................................... 9 3.1. Range of PPP Structures ............................................................................................. 9 3.2. Project Characteristics and Implementation Mechanisms for PPP Projects .... 13 3.3. Mechanisms for Supporting Renewables Projects ................................................ 16 4. The PPP Situation in Montenegro .................................................................. 19 4.1. PPP Objectives in Montenegro ............................................................................... 19 4.2. Characteristics of Projects in Montenegro and Recommended Approaches ... 23 5. The Emerging PPP Framework in Montenegro ............................................ 28 5.1. Overview: Stages of Project Execution ................................................................. 28 5.2. The Current LIR for Project Identification / Structure / Award ...................... 32 5.3. The Current Approach to Physically Implementing PPP Projects..................... 55 5.4. Operating Issues Related to PPP Projects ............................................................. 64 6. Observations and Recommendations ............................................................. 75 6.1. Defining and Executing the PPP Framework: Summary Comments ............... 75 6.2. Actions to be Taken .................................................................................................. 77 Annex 1: Organisations and Individuals contacted during this work ................... 81 Annex 2: Overview of Support for Renewables Projects ....................................... 83 A2.1 Variety of Support Schemes ..................................................................................... 83 A2.2 Some Issues of FIT Design ...................................................................................... 84 Annex 3: Overview of the Current Implementation Process in Montenegro ........ 91 Annex 4: Connection Issues for Montenegro Renewables Projects ................ 102 A4.1 Planning and Design of Physical Connections: “Static” versus “Dynamic” Connection Policy ................................................................................................................ 102 A4.2 Financing Connection Costs ................................................................................. 104 A4.3 Paying for Connection Costs ................................................................................ 105 Annex 5: Investor Comments .............................................................................. 107 Annex 6: A Brief Overview of the Energy Situation in Montenegro .................... 110 Annex 7: PPP Development Units and Selected PPP Case Studies .................... 115 A7.1 Lessons Learnt from Experience of PPP Units Globally ................................. 115 A7.2 Case studies on PPP experience in select countries ........................................... 117 DEFINITIONS Throughout this report, we make occasional abbreviated or “shorthand” references to a number of documents, institutions or concepts. These include: Draft Energy Law or “Draft “Energy Law (Final Draft)” Ministry of Economic Law” Development, April 2009 Concession Law “Law on Concessions”, Official Gazette of the RoM № 8/09 Recent SHPP Concession Act “Concessionary Act For Concession Award To Exploit Water Streams For Construction Of Small Hydropower Plants In Montenegro”, an undated 30-page Ministry of Economy document EnCT Energy Community Treaty Energy Strategy “The Energy Development Strategy of Montenegro by 2025 White Paper”, December 2007 Action Plan “The Energy Development Strategy of Montenegro by 2025 Action Plan 2008 – 2012 Final Proposal”, August 2008 Ministry The Ministry of Economy EPCG Elektroprivreda Crne Gore RESS Renewable Energy Support Scheme. This is a reference to a general sort of scheme, of which there are a number of different varieties, including (for example) that to be developed under Article 25 of the Draft Energy Law. Renewables Within the context of discussions of Montenegro’s Draft Energy Law or future RESS, this refers to those producers eligible for preferential prices under the terms of Article 25 of the draft law (i.e., renewable energy sources (with hydro limited to that < 10 MW) and high efficiency cogeneration) Water Law “Law on Waters”, Official Gazette of the RoM № 27/07 State Property Law “Law on State Property”, Official Gazette of the RoM № 21/09 EXECUTIVE SUMMARY Montenegro has a number of good opportunities for the development of domestic resources for electricity generation. In the Government’s Energy Strategy and Action Plan, it has set out a programme for development that encompasses a range of projects from large-scale hydro and thermal projects to smaller scale renewable energy projects. This programme calls for significant participation by the private sector in generation investment over the coming decade and beyond. The programme is intended to meet a number of objectives, important among which are included meeting international obligations regarding renewable energy utilisation and reducing the reliance of the country on relatively high cost imported power. Implementing this programme and developing Montenegro’s resources will require an appropriate Legal, Institutional and Regulatory (LIR) framework. In this regard, significant progress has already been made. An independent regulatory authority was established in 2004 and various relevant laws (including an Energy Law promulgated in 2003 which is now being updated, as well as a new Concessions Law promulgated in 2009, among others) have been put in place. In terms of the industry itself, change has also begun. The former vertically integrated monopoly utility company (Elektroprivreda Crne Gore, or EPCG) has had the transmission network and system and market operator functions unbundled, and a new strategic investor has been selected to take a significant stake in the remaining generation / distribution / supply company. One tender round has already been completed for small hydro project development (with several concessions awarded and project developers currently engaged in the planning and permitting process) and another tender round is in progress. However, significant work remains to be completed if all the objectives of bringing private sector investment in generation projects are to be met. This work includes updating the existing