Bosnia’s Biggest Power Project Runs Out of Steam

Beset by legal hurdles, politicking, and running counter to Europe’s move away from coal, Tuzla 7 has gone from flagship project to wreck.

Some 20 years ago, the idea took shape of building a seventh unit at the Tuzla coal-fired power station to replace three dilapidated older units that had already been operational for almost 50 years.

After 16 years of questionable decisions on its financing, an illegal state guarantee, and objections to its environmental risks, the largest energy project in the history of Bosnia and Herzegovina has, in all likelihood, failed.

Critics of the project – ranging from environmentalists to energy analysts, to liberal parties in opposition to the nationalists who hold most of the powerful positions in regional and national politics – blame the absence of a national energy strategy and the consequences of the political management of electricity companies, as well as apparent corruption.

The State’s Misbegotten Guarantee

Sanela Klaric sits on the energy committee of the Federation of Bosnia and Herzegovina entity parliament as an elected representative of the liberal opposition party Nasa Stranka (Our Party).

She believes that Bosnian authorities have taken a frivolous approach to Tuzla 7 for years and have disregarded the views of the Energy Community, a treaty organization tasked with extending the European Union’s internal energy market to countries in the Balkans and the Black Sea region.

The original proposal for Tuzla 7 received the support of the Energy Community back in 2007.

In the ensuing years, foreign partners in the project came and went, as did the politically appointed directors of Elektroprivreda BiH (EPBiH), the public power company serving the Federation entity. Meanwhile, the cost kept rising, from 380 million euros, to 750 million, to 880 million, or as much as 1 billion euros according to some estimates.

Tuzla 7 has been embroiled in legal controversy since the Federation extended a state guarantee for a 20-year loan from the Export Import Bank of China (EXIM Bank), a Chinese, state-funded bank, covering 85% of the construction costs. Another Chinese partner, China Gezhouba Group, won the contract to construct the new thermal unit in 2014, with EPBiH putting up 15% of the costs, with the rest to be covered by EXIM Bank.

Eventually, in November 2021, Bosnia lost a dispute initiated against it by the Secretariat of the Energy Community, charging that the guarantee on EXIM Bank’s 614 million euro loan constituted illegal state aid, and in July 2022 Bosnia’s State Aid Council changed course, announcing that the government-backed bank guarantee extended in 2018 was illegal.

“The project was delayed for years and finally … the Energy Community warned that the state aid in this case was illegal,” Klaric said. “The Federation government did not react to this.”

Elektroprivreda BiH: We Followed the Rules

Elektroprivreda BiH has “fulfilled all its obligations on time and within the agreed deadlines,” according to Senad Salkic, its executive director for capital investments.

If the Federation government makes further changes to the project, a decision the entity parliament could take soon, the company will seek damages, Salkic said.

One member of the company’s supervisory board asserts that it has taken all legal steps regarding the contested guarantee.

“No omission was made by Elektroprivreda BiH, so I expect that it will be resolved positively in favor of the project,” Izet Zigic said. The company is solvent and there is no risk of failing to service the debt, he added.

“At this moment, we are waiting for the Federation parliament, which became involved in this story. Considering that this is an election period, I cannot prejudge when the parliament will be constituted or when it will discuss Tuzla 7,” Zigic said, speaking before the 2 October parliamentary elections.

Sanela Klaric sees the lost dispute with the Energy Community and then the state aid body’s reversal of its stance on the loan guarantee, as new problems that could see EPBiH coming out the big loser if Tuzla 7 runs aground. The company is currently out of pocket for 117 million euros, most of it borrowed from Sberbank Sarajevo, paid to Chinese and other companies for preparatory and initial construction work. The electric company is repaying the loan, but no work has begun.

“We [meaning the Federation government and EPBiH] had the opportunity to terminate the contract when the Chinese partners declared that they could not deliver the contracted equipment, but that did not happen then. Now that it has been established that even the institutions of Bosnia and Herzegovina did not act legally in this process, we may be risking the advance paid,” she said.

There is also talk of possible arbitration, Klaric noted, adding, “Bosnia and Herzegovina and its entities almost always lose in arbitration,” a situation many blame on the far from transparent management of the publicly owned power companies.

This year alone, international arbitration courts have ordered EPBiH and fellow state-owned energy company Elektroprivreda RS in the Republika Srpska entity to pay a total of 52 million euros in damages to overseas companies that had been awarded contracts for energy projects that Bosnia failed to see through to completion.

A further, and perhaps fatal, hitch happened last year when General Electric pulled out of the project, probably under pressure from the EU, according to Balkan Green Energy News. GE was to have supplied the unit’s 450-megawatt turbine and generator.

As things stand, EXIM Bank is still prepared to extend the loan required for the funds available. Yet without the vital equipment GE was to supply, amid disputes between EPBiH and the Federation parliament over inviting Chinese subcontractors to take over GE’s role, Tuzla 7 is at a standstill.

Even with the state guarantee in jeopardy, and having spent over 100 million euros although no substantial work has been done on unit No. 7, no one from EPBiH appears ready to admit the project – birthed by the Federation authorities and led by a federation-owned company – is dead in the water.

Is Tuzla 7 Doomed?

The original idea to build a new unit at the Tuzla thermal plant could have resulted in a “good and profitable project” in the 2000s, when it had support from the Energy Community, according to energy analyst Almir Muhamedbegovic. Since then, the energy landscape has changed completely.

“In 16 years, five Federation governments, and soon a sixth, have been replaced, and the entire context has changed dramatically, considering Bosnia’s decarbonization obligations and the severe penalization of fossil fuels in the EU, through carbon taxes,” he said.

Bosnia is obligated to reduce carbon emissions both as a signatory to the Energy Community Treaty and as a contracting party to the EU’s Large Combustion Plants Directive.

At the moment, Bosnia exports excess electricity and thus accumulates a significant profit. As Muhamedbegovic points out, at a time of high energy prices and the looming possibility of shortages, this gives an additional motive for continuing with Tuzla 7. However, the obligations that Bosnia assumed by joining the UN’s Paris Agreement and the Energy Community have not disappeared.

Signatory countries to the Energy Community treaty must start phasing in carbon taxes from 2026 and fully commit to them in 2030, Muhamedbegovic says.

“Old thermal blocks that have practically finished their working life certainly do not guarantee long-term supply stability, and their electricity will be burdened with CO2 taxes. Block 7 is a very questionable project. I would say that for political reasons the Federation government must not say that it has failed,” he continued. “It’s like flogging a dead horse.”

Barring two relatively small wind farms, Bosnia’s state-owned power companies have neglected the opportunity to exploit the country’s enormous potential for solar and wind power, and they urgently need to invest in these areas, Muhamedbegovic argues, as well as in large-scale hydropower.

Parliamentary and presidential elections were held on 2 October in both entities and at the national level.The outcome of the elections will largely determine the fate of the ambitious, but outdated and highly politicized Tuzla 7 project.

“It is certainly necessary to invest in new cross-border capacities with neighboring countries, as this also guarantees the security of the power system,” Muhamedbegovic said.

“We must finally begin the restructuring of the energy sector in accordance with the state’s decarbonization obligations, which previous governments persistently, mostly for political reasons, openly refused to do.”

…

Investigative journalist Predrag Blagovcanin has been with the Bosnian news site www.tacno.net since 2013, reporting on corruption, politics, the environment, and other stories. He has received two awards for his reporting on corruption.