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RAAUZYUW RUEHPOD0220 1770648-UUUU--RHMCSUU.
ZNR UUUUU ZZH
R 260648Z JUN 07
FM AMEMBASSY PODGORICA
TO RUEHC/SECSTATE WASHDC
INFO EUROPEAN POLITICAL COLLECTIVE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEKJCS/SECDEF WASHDC
RUEHC/USAID WASHDC
RUEHPOD/AMEMBASSY PODGORICA
B T UNCLAS SECTION 01 OF 03 PODGORICA 000220 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS:        
SUBJECT: MONTENEGRO'S ELECTRICITY SECTOR 
 
REF: A. A: PODGORICA 205 
 
      B. B: PODGORICA 094 
      C. C: 04 BELGRADE 2349 
 
PODGORICA 00000220  001.3 OF 003 
 
 
 1. SUMMARY: MONTENEGRO PRESENTLY IMPORTS 40% OF ITS ANNUAL 
ELECTRICITY CONSUMPTION - IMPORTING 1866 GWH COMPARED TO 
DOMESTIC PRODUCTION OF 2818 GWH.  THE KOMBINAT ALUMINA PODGORICA 
(KAP) ALONE CONSUMES NEARLY 2000 GWH A YEAR. THE GOM PLAN TO 
BEGIN PRIVATIZING THE ELECTRIC POWER INDUSTRY OF MONTENEGRO 
(EPCG) WAS DERAILED ON JUNE 12, WHEN THE JUNIOR COALITION 
PARTNER THE SOCIAL DEMOCRATIC PARTY (SDP) JOINED THE OPPOSITION 
IN OPPOSING THE SALE OF THE THERMOELECTRIC PLANT IN PLJEVLJA TO 
THE OWNER OF KAP (REF A).  THE WITHDRAWAL OF THE TENDER COULD 
HAVE A BROADER NEGATIVE EFFECT ON ALL FOREIGN DIRECT INVESTMENT, 
NOT JUST IN THE ENERGY SECTOR.  ANY DECISION TO INCREASE 
ELECTRICITY PRODUCTION BY RELYING ON BUDGETARY TRANSFERS WILL 
STRAIN THE GOM'S BUDGET. END SUMMARY. 
 
 
 
MONTENEGRO'S ELECTRICITY SECTOR 
 
------------------------------- 
 
 2. THE ELECTRIC POWER SECTOR IN MONTENEGRO IS CONTROLLED BY 
ELECTRIC POWER INDUSTRY OF MONTENEGRO (EPCG), ONE OF THE LARGEST 
COMPANIES IN MONTENEGRO WITH A CAPITAL STOCK OF 905 MILLION 
EUROS. IN FEBRUARY 1999, IT WAS TRANSFORMED FROM A PUBLIC 
ENTERPRISE TO A STOCK COMPANY, BUT 67% OF THE STOCK IS STILL 
GOVERNMENT OWNED. IN FEBRUARY 2005, THE GOM ADOPTED A NEW ENERGY 
POLICY THAT ENVISIONED BEGINNING THE PRIVATIZATION OF EPCG IN 
MAY 2005, BEGINNING WITH THE SALE OF THE THERMOELECTRIC PLANT IN 
PLJEVLJA (TE PLJEVLJA -- 1150 GWH CAPACITY), AND ITS 31% HOLDING 
IN THE ASSOCIATED COAL MINE. (REF B). ON JUNE 12 OF THIS YEAR, 
PARLIAMENT ADOPTED A MOTION ADVISING THE GOM TO CANCEL THE SALE 
TENDER; THE GOM HAS AGREED TO ABIDE BY THE NON-BINDING MOTION. 
 
 3. IN ADDITION TO TE PLJEVLJA THERE ARE TWO MAJOR HYDROELECTRIC 
PLANTS, HE PERUCICA ON THE ZETA RIVER SOUTH OF NIKSIC (950 GWH 
RATED CAPACITY), AND HE PIVA ON THE PIVA RIVER SOUTH OF THE 
BORDER WITH BOSNIA AND HERZEGOVINA (950 GWH RATED CAPACITY). 
SEVERAL SMALL HYDROELECTRIC PLANTS HAVE A COLLECTIVE RATED 
CAPACITY OF 21 GWH. THE GOM USES AN ESTIMATE THAT MONTENEGRO 
PRESENTLY USES ABOUT 17% OF ITS HYDROELECTRIC CAPACITY. 
 
 4. ELECTRICITY PRODUCTION IN MONTENEGRO FOR 2006 WAS 2818.4 GWH. 
THE REMAINDER OF MONTENEGROS NEEDS WAS MET BY IMPORTS. 
SUPPLIERS INCLUDE: 
 
SERBIA (1204.3 GWH); 
 
SWITZERLAND (622 GWH); 
 
ROMANIA (188.4 GWH); 
 
CZECH REPUBLIC (58.2GWH); AND 
 
SLOVENIA (40.8GWH). 
 
 
 
ELECTRICITY GRID 
 
 
 
 4. THE MONTENEGRIN TRANSMISSION SYSTEM CONSISTS OF ABOUT 250 KM 
OF POWER LINES ON 400 KV LEVEL, 370 KM ON 220 KV, MORE THAN 600 
KM ON 110 KV VOLTAGE LEVEL, AND IS CONNECTED WITH SURROUNDING 
SYSTEMS THROUGH NINE INTERCONNECTING LINES. (A SCHEMATIC OF THE 
GRID CAN BE FOUND ON-LINE AT HTTP://WWW.EPCG.CG.YU/ST1A.HTM .) 
 
 
 
 
 
ENERGY CONSUMPTION 
 
 
 
 
 5. CONSUMERS OF ELECTRIC POWER IN MONTENEGRO CAN BE DIVIDED INTO 
TWO LARGE CATEGORIES: DIRECT CONSUMERS AND DISTRIBUTIVE 
CONSUMERS (HOUSEHOLDS AND THE LIKE). DIRECT CONSUMERS ARE THOSE 
SUPPLIED AT THE 110 KV VOLTAGE LEVEL: ALUMINUM PLANT - KAP, 
NIKSIC STEELWORKS, AND RAILWAY OF MONTENEGRO. DISTRIBUTIVE 
CONSUMERS ARE ALSO DIVIDED ACCORDING TO THE LEVELS OF VOLTAGE 
(35 KV, 10 KV, 0.4 KV). AT THE MOMENT EPCG HAS ABOUT 273,000 
CONSUMERS. THE NUMBER OF CONSUMERS HAS BEEN INCREASING OVER THE 
RECENT YEARS, WITH MOST NEW CUSTOMERS RECEIVING SERVICE AT A 
VOLTAGE OF 0.4 KV. 
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PODGORICA 00000220  002.3 OF 003 
 
 
 
 
 
 6. MONTENEGRO IS A HUGE CONSUMER OF ELECTRICITY, AS A RESULT OF 
THE ALUMINUM SMELTER (KAP) WHICH ACCOUNTS FOR 42.55% OF TOTAL 
NATIONAL CONSUMPTION. TOTAL ANNUAL CONSUMPTION FOR MONTENEGRO IN 
2006 WAS 4684.7GWH. 
 
 
 
LEGISLATIVE BACKGROUND 
 
----------------------- 
 
 
 
 7. THE LAW ON ELECTRIC POWER IN MONTENEGRO WAS ADOPTED IN JUNE 
 2003. THE LAW ORDERS THE SEPARATION OF THE FUNCTIONAL ENTITIES 
IN EPCG INTO ADMINISTRATIVE DIRECTORATE, PRODUCTION, 
TRANSMISSION, DISTRIBUTION, SUPPLY AND BUILDING AND 
RECONSTRUCTION OF ENERGY FACILITIES, AND PROVIDES A FIRST STEP 
TOWARDS CREATING SEPARATE COMPANIES AND FORMING A COMPETITIVE 
ELECTRICITY MARKET IN MONTENEGRO. 
 
THE REGULATORY ENERGY AGENCY OF THE REPUBLIC OF MONTENEGRO WAS 
FOUNDED IN 2004, ACCORDING TO THE ENERGY LAW. THE AGENCY IS AN 
INDEPENDENT, NON-PROFIT ORGANIZATION WITH PUBLIC AUTHORIZATION. 
THE AGENCY RUNS A BUDGET, INDEPENDENT FROM THE STATE BUDGET, 
WITH MOST FUNDING DERIVED FROM LICENSE FEES. 
 
 
 
ENERGY POLICY 
 
------------- 
 
 8. MONTENEGRO ADOPTED ITS ENERGY POLICY IN FEBRUARY 2005. THE 
POLICY AIMS AT FURTHER DEVELOPMENT OF THE ENERGY SECTOR, AND 
SEEKS TO ENCOURAGE BOTH DOMESTIC AND INTERNATIONAL INVESTORS TO 
INVEST IN NEW ENERGY FACILITIES. THE SPECIFIC GOALS ARE: A 
SECURE AND RELIABLE POWER SUPPLY, ENVIRONMENTAL PROTECTION, 
MARKET-BASED OPERATIONS, ENCOURAGING INVESTMENTS, HEIGHTENED 
ENERGY EFFICIENCY, DEVELOPING NEW RENEWABLE RESOURCES, REGIONAL 
(AND WIDER) INTEGRATION, AND THE PROVISION OF SOCIAL PROTECTION 
MEASURES. A COMPLEMENTARY STRATEGY OF ENERGY EFFICIENCY WAS 
ADOPTED IN OCTOBER 2005. 
 
 9. THE STRATEGY FOR THE DEVELOPMENT OF SMALL HYDRO PLANTS WAS 
ADOPTED IN APRIL 2006, ALONG WITH AN ACTION PLAN FOR ITS 
IMPLEMENTATION.  THE STRATEGY PROVIDES MEASURES FOR REMOVING 
BARRIERS IN THE AREA OF DEVELOPING SMALL HYDRO PLANTS, WITH 
SUGGESTIONS FOR REGULATIVE CHANGES THAT WOULD SIMPLIFY 
PROCEDURES, AND PROVIDE INITIATIVES FOR INVESTORS.  THE STRATEGY 
IDENTIFIED 70 LOCATIONS FOR DEVELOPING SMALL HYDRO PLANTS WITH 
TOTAL POTENTIAL OF 230MW. 
 
 
 
 10. A STRATEGY FOR ENERGY DEVELOPMENT IN MONTENEGRO THROUGH 2025 
WAS ADOPTED BY THE GOM ON JUNE 21, 2007.  IT PROPOSES THE 
CONSTRUCTION OF ADDITIONAL POWER PLANTS, STARTING WITH A SECOND 
BLOCK OF THE THERMOELECTRIC PLANT AT PLJEVLJA. TOGETHER WITH 
WINDPOWER, FIVE NEW SMALL HYDROELECTRIC PLANTS, AND A 
METHANE-POWERED GENERATOR, THE GOM PLANS TO ADD 700 MW BY 2025. 
ECONOMY MINISTER GVOZDENOVIC CLARIFIED THAT THE STRATEGY DOES 
NOT ENVISION PARTICIPATING IN THE CONSTRUCTION OF HYDROELECTRIC 
PLANT "BUK BIJELA," A CONTROVERSIAL PROPOSAL FROM WHICH THE GOM 
WITHDREW IN 2004 AFTER PUBLIC OPPOSITION TO THE PLAN. (REF C) 
 
 
 
 11. THE JUNE 12 PARLIAMENTARY VOTE, BLOCKING THE PRIVATIZATION 
(AND SALE TO FOREIGN INVESTORS) OF TE PLJEVLJA, IS WIDELY 
POPULAR.  EIGHTY PERCENT OF THOSE POLLED BY NDI (NATIONAL 
DEMOCRATIC INSTITUTE) IN LATE MAY BELIEVE THE STATE SHOULD 
MANAGE "THE MOST IMPORTANT NATURAL RESOURCES," INSTEAD OF 
PRIVATIZING THEM. SEVENTY-SIX PERCENT SPECIFICALLY OPPOSE 
PRIVATIZING TE PLEJEVLJA AND THE ASSOCIATED COAL MINE. 
 
 
 
COMMENT 
 
------- 
 
 
 
 12. THE POLITICAL RISK TO FOREIGN INVESTMENT CREATED BY THE JUNE 
12 PARLIAMENTARY VOTE IS LIKELY TO BE SIGNIFICANT.  EVEN BEFORE 
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PODGORICA 00000220  003.3 OF 003 
 
 
THE VOTE, FOREIGN INTEREST IN DEVELOPING MONTENEGRO'S ENERGY 
SECTOR WAS MINIMAL, BESIDES THAT SHOWN BY RUSSIAN OLIGARCH 
DERIPASKA. WESTERN EUROPEAN DIPLOMATS VIEWED THE STRUCTURE OF 
THE TE PLJEVALJA TENDER, WHICH SPLIT THE TRANSMISSION GRID FROM 
THE GENERATING PLANTS, AS REDUCING FOREIGN INTEREST.  WHILE SOME 
SAID THE SPLIT OF THE TENDER WAS INTENDED TO DISSUADE OTHER 
(NON-RUSSIAN) BIDDERS, THE SEPARATION WAS IN CONSEQUENCE OF THE 
2003 LAW ON ELECTRIC POWER, WHICH WAS ENDORSED BY BILATERAL AND 
MULTILATERAL DONORS (AND PREDATED THE SALE OF KAP). 
 
 
 
 13. THE GOM HAS NOT OUTLINED HOW IT WOULD PROVIDE PUBLIC 
INVESTMENT INTO INFRASTRUCTURE. THE GOM HAS ESTIMATED THAT THE 
INVESTMENT NEEDED TO EXPAND TE PLJEVLJA IS 170 MILLION EUROS. 
POST NOTES THAT THE ESTIMATE APPEARS LOW, EVEN VERY LOW, AS THE 
TE EXPANSION WOULD PROVIDE THE BULK OF THE NEW 700 MW CAPACITY 
ENVISIONED BY THE PLAN.  MONTENEGRO'S CAPITAL BUDGET IN 2006, 
FOR ALL PURPOSES, WAS 97 MILLION EUROS (EXPENDED), OR 5 PERCENT 
OF GDP (MINISTRY OF FINANCE, AS REPORTED IN MAY 2007). FDI IN 
2006 WAS FIVE TIMES LARGER. 
 
 
 
 14. MORE BROADLY, THE RESCISSION OF A MAJOR TENDER WILL SEND A 
SIGNAL OF GOM INCONSTANCY, WEAKENING EFFORTS TO COMPLETE 
PRIVATIZATION OF THE ECONOMY AND INCREASING THE PERCEPTION OF 
POLITICAL RISK -- THAT THE GOM WILL STEP IN TO FRUSTRATE OR 
REPUDIATE CONTRACTS. UNFORTUNATELY, IN THE PRESENT CASE, MOST 
MONTENEGRIN COMMENTATORS HAVE DISMISSED THE DAMAGE TO LONG-TERM 
FDI AND CONSEQUENT ECONOMIC GROWTH RESULTING FROM PLAYING 
POLITICS WITH THE TE PLJEVLJA TENDER. WITHOUT CONTINUING HIGH 
LEVELS OF FDI, ECONOMIC EXPANSION WILL SLOW, NOR IS THE GOM 
GENUINELY ABLE TO SUBSTITUTE FOR MISSING FDI, EVEN IN LIMITED 
AREAS SUCH AS LARGE-SCALE INFRASTRUCTURE. WHILE A SMALL NUMBER 
OF LOCAL COMMENTATORS HAVE TRIED TO HIGHLIGHT THE NEGATIVE 
CONSEQUENCES, THEY HAVE FOR THE MOMENT LARGELY BEEN REBUKED OR 
IGNORED. 
BARNES 
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