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Cablegate: Croatia Assesses How to Meet Growing Electricity Demand

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RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
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DE RUEHVB #1296/01 2981308
ZNR UUUUU ZZH
R 251308Z OCT 06
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 6838
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS SECTION 01 OF 02 ZAGREB 001296

SIPDIS

SIPDIS

FOR EUR/SCE

E.O. 12958: N/A
TAGS: ENRG ECON HR
SUBJECT: CROATIA ASSESSES HOW TO MEET GROWING ELECTRICITY DEMAND

1. Summary: Although Croatia's electricity supply is sufficient for
current needs, government and industry are looking at ways to meet
increased future demand while complying with various EU energy
directives. Plans have already been mooted for new gas and
coal-fired thermal plants, as well as hydro and wind facilities to
meet a demand for power that is growing by about 3.8 percent
annually. Concerns about meeting demand without substantial
increases in carbon emissions have even led to calls for investment
in nuclear and wind energy. In the electricity market, as with oil
and gas, Croatia hopes to position itself as a regional player in
the Southeast Europe energy market. End Summary.

INCREASING DEMAND

2. Croatian electric company HEP covers 85 percent of domestic power
demand from its own sources. The average annual electricity
consumption in this country of 4.4 million people is estimated at
some 16 terawatt hours (TWh). HEP expects that the electricity
demand in Croatia will rise by an average of 3.8 percent a year over
the next few years mainly due to re-electrification, new
construction and increased demand from new technology. Government
officials have cautioned that Croatia will need to depend on more
and more imported electricity if new sources aren't developed,
especially in case of unfavorable hydrological conditions.

3. HEP currently owns 25 hydro power plants and seven thermal power
plants fired with coal, fuel oil and gas. HEP is half owner with
Slovenia of the nuclear power plant Krsko, located in Slovenia. The
company also shares ownership with German partner RWE of a
coal-fired plant, located in Plomin, Croatia. Outside of Croatia,
HEP owns the Busko Blato water pumping station in Bosnia, which
supplies water to local hydro plants. HEP will also continue
receiving electricity from two Bosnian thermal power plants in the
next few years in exchange for investments made in the company when
Croatia was part of the former Yugoslavia.

4. Of all power generated in Croatia, 46.6 percent (7.001 Gigawatts
per hour (GWh)) comes from hydro power plants; 27.1 percent (4.069
GWh) from thermal plants; 8.8 percent (1.320 GWh) from the thermal
coal plant in Plomin; and 17.3 percent (2.606 GWh) from the nuclear
plant in Krsko, Slovenia, which Croatia and Slovenia own and operate
jointly.

5. An official from Hrvoje Pozar Institute, which conducts
GoC-commissioned studies, said the GoC is looking into development
of small hydro-electric plants as they satisfy the EU criteria for
renewable energy while the larger existing plants do not.
Environmentalists and GoC officials both said Croatia has great
potential for developing sources of renewable energy including power
from wind, sun and biomass. But little has been accomplished so far.
Environmental Minister Dropolic has halted new construction of
windmills along the coast. According to some sources, she has
claimed the windmills are an eyesore, a hazard to birds and cause
excessive noise. However, HEP officials said the electric company
had commissioned Hrvoje Pozar to conduct a study on the feasibility
and environmental impact of wind power plants, as well as possible
sources of investment for this type of energy. The European Wind
Integration Study is slated to be released by the end of the year.
He said now there is investor interest in wind energy in Croatia,
but no prospects for new projects. He expects new legislation on
renewables to pave the way for development and investment.

CROATIAN ENERGY REGULATORY COUNCIL (CERA)

6. In 1998 the Croatian Parliament (assisted by USAID) approved an
energy development strategy, which was the basis for the energy law
packages adopted in 2001 and 2004. The laws require the unbundling
of HEP into daughter companies for generation, transmission,
distribution and supply, with an independent market operator. In
2003, the market was opened for customers with yearly energy
consumption higher than 40 GWh, later lowered to 16 GWh. Currently
there are 120 customers who can choose their electricity supplier.
However, a HEP official said 95 percent of the energy supplied to
customers in Croatia still comes from HEP. This is partly due to an
opaque tariff system, currently under restructuring, also with USAID
assistance. EU regulations require HEP to be restructured by 2015.
HEP's CEO, speaking at the energy conference, said the restructuring
process is likely to be completed in 2008.

7. At the same time the energy regulatory laws were accepted, the
Parliament also imposed a moratorium on construction of nuclear
plants in Croatia through 2015. However, many now believe Croatia
should revisit this policy, as future electricity demands will
require more nuclear energy. Nuclear advocates point out that the
Krsko plant has proven that nuclear energy comes with very little
environmental impact, but caution against getting ahead of public
opinion on the issue.

NETWORKS, GRIDS, CONNECTIONS AND WIRES


ZAGREB 00001296 002 OF 002


8. After 12 years of operating in isolation, the Union for
Coordination of Transmission of Electricity (UCTE)'s region I and II
were reconnected in October 2004. This act reconnected Croatia and
Southeastern Europe to Western Europe with a 400 kV line. The UCTE
is composed of 34 members (transmission systems operators or TSOs)
in 23 European countries and three North African countries.

9. The connection was disrupted in 1991 during the war in Croatia
when the substation Ernestinovo was destroyed. The reconnection
followed the completion of construction and start up of the
400/220/110 kV Zerjavinec and 400/110 kV Ernestinovo substations and
the start up of the 400 kV line Konjsko-Mostar (BH) earlier that
year. HEP invested 115 million euro ($144 million) in the project.
Currently there are two 400 kV connection points and five 220kV
connection points in Croatia. The reconnection became an important
part of the Southeastern European electricity network to supply
demands in the newly liberalized market.

10. On Oct. 17 HEP officials signed an agreement to connect via
submarine cable from Italy to Croatia. The power exchange would not
only connect Italy to Southeastern Europe, but also allow the
Croatian system to be used in the transit of power to Italy.
According to studies, Croatia's power grids can support continuous
500 MW transit to Italy without operational or security
difficulties. An Italian official said, as Italy outgrows its
energy supply, it is looking for new, more stable sources of
electricity than what is currently available from its European
neighbors. HEP officials also signed another new agreement to invest
in a link from Ernestino to a 400 kV grid in Pec, Hungary.

MORE HEP ACTIVITIES

11. HEP plans to invest $1.8 billion over the next 10 years to build
five power plants. The company is aiming to raise its generating
capacity by more than 25 percent to meet growing domestic demand and
prepare for liberalization of the market, according to a top company
official. The plan is to increase capacity by 1,220 MW from hydro
and thermal power plants. Current capacity is 4,000 MW; the 25
percent increase would cover current domestic market needs and
projected increase. The construction would be financed through
long-term loans, the company's own capital and, if necessary,
through joint ventures with other Croatian companies.

12. HEP has already started construction of two power plants - a
hydro power plant in Lesce, and a thermo power plant, Te-To Zagreb.
HEP is also applying for a permit for a third Plomin coal-fired
plant, but is facing opposition from environmentalists. This year,
the company will decide whether to build two new gas-fired power
plants of 250 MW each in Sisak and Osijek.

13. Last year, HEP set up an office in the Bosnian town of Mostar
and plans to expand its business in the neighboring country. HEP has
applied to participate with Elektroprivreda Herceg Bosna in the
construction of a 40 MW power plant and has plans to participate in
the privatization of other companies in Bosnia, according to the HEP
CEO.

HARMONIZING WITH THE ENVIRONMENT

14. There is broad agreement among both government and industry that
the time has come for Croatia to start an energy conservation
campaign. The public must be educated to conserve all kinds of
energy, including electricity, gas and other fuels. The energy
conservation program should include education in schools,
advertising campaigns and should target citizens, companies and
especially builders to make houses and new buildings more energy
efficient. One NGO representative said the amount of fuel used in
production and transport of energy in Croatia is ironically also
driving the increasing demand for energy. "If people would conserve
energy," he said, "there would be no need to build more power plants
in Croatia."
BRADTKE

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