Renewables Readiness Assessment: Albania

INTRODUCTION

COUNTRY OVERVIEW The Republic of Albania is a coastal country in South East Europe, bordering Montenegro and Kosovo* to the north, North Macedonia to the east, Greece to the south, and the Adriatic and Ionian Seas to the west. Its capital, Tirana, is the largest city and the political and economic centre of the country. The second largest city is the port city of Durrës.

RENEWABLES READINESS ASSESSMENT In comparison with neighbouring countries in the South East Europe region, Albania’s energy mix has one of the highest shares of renewable energy. Ensuring a cost-competitive, secure energy supply in Albania can be achieved by further increasing the renewable energy share and diversifying the country’s electricity sector.

ENERGY SECTOR CONTEXT

ENERGY BALANCE Albania’s primary energy production is dominated by fossil fuels – mainly crude oil – whose share has ranged between 46% and 68% over the last five years. Hydropower is the second largest contributor, with a share ranging from 20% to almost 40%, depending on annual rainfall (INSTAT, 2020a). This vulnerability to climatic externalities
for electricity production creates notable fluctuations in domestic energy production. For example, for the last five-year period, the lowest primary energy production was recorded in 2017, which was a particularly drought-stricken year, whereas the highest primary energy production was recorded in 2015 – a year of considerable rainfall.

TPES by energy source in 2018

ELECTRICITY BALANCE AND INSTALLED CAPACITIES
Albania’s electricity demand grew rapidly in 1995-2000 This was due to demographic, economic and social trends, including rural-to-urban migration, increased use of electricity for space heating and cooling, and rising living standards (IRENA, 2019). To meet the growing electricity demand, the country has increased its installed electric capacity over the past decade from 1 455 megawatts (MW) in 2007 to 2 204 MW in 2018. The majority of the installed capacity (1 448 MW) is owned by the Albanian Power Corporation (KESH), while private producers account for about a third of the installed capacity (755 MW) (ERE, 2019).

Installed power capacity in 2018 (MW)
 Electricity production, consumption and net imports (GWh), 2014-2019

This forced the country to net import 39.2% of its electricity consumption in 2017 to meet demand. This signals the power sector’s extreme vulnerability to climatic changes and the urgent need to diversify away from hydropower to ensure energy supply security. The electricity system in Albania is also suffering from high losses. Although the country has taken measures to gradually reduce these losses over the past few years, they accounted for around 21.7% of the total electricity consumption in 2019 (INSTAT, 2020b).

ENERGY IMPORTS AND EXPORTS
Albania is a net energy importer. Between 2014 and 2018, the amount of net energy imported
ranged from a low of 12% of the TPES in 2015 to a high of 46% in 2017. Net energy imports are directly correlated to annual rainfall, given that the electricity sector is almost entirely reliant on hydropower production.In 2017, a year of low rainfall, the country net imported 39.2% (2 915 GWh) of its electricity consumption.

ENERGY CONSUMPTION BY SECTOR
The largest energy consumer in Albania is the transport sector, whose share has almost
quadrupled since 1990 and amounted to 40% of final energy consumption in 2018. The residential sector was the second largest (24%, 490 ktoe), followed by the industrial sector (20%, 418 ktoe) (EUROSTAT, 2019a) (INSTAT, 2020a).

Net energy imports (ktoe), 2014 2018
Distribution of primary energy supply by demand sector, 2018

ENERGY DEMAND OUTLOOK
Within the National Energy Sector Strategy 2030, an analysis of energy development scenarios
revealed that, given past growth trends and under a business-as-usual scenario, the annual energy demand in Albania is expected to increase by 77% in 2030 compared to 2018 levels (MIE, 2018b). The transport sector is forecast to continue to be the largest energy consumer over the next decade, contributing to continued net energy imports. The second-largest energy consumer will be the residential sector, followed by the industrial and services sectors. The highest increase in energy demand will be seen in the services sector.

GRID INFRASTRUCTURE
The Albanian transmission grid is managed by the transmission system operator (OST) and is composed of 400 kilovolt (kV), 220 kV, 150 kV and 110 kV transmission lines and 15 substations of 4 096 megavolt amperes (MVA) installed capacity. Albania’s electricity system is interconnected through six lines with neighbouring countries. The three 400 kV lines are interconnectors to neighbouring Greece (Zemblak – Kardia), Montenegro (Tirana 2 – Podgorica) and Kosovo* (Tirana 2 – Kosovo B). Two 220 kV lines connect to Montenegro (Koplik – Podgorica) and Kosovo* (Fierze – Pristina), and one 150 kV line connects to Greece (Bistrica 1 – Igumenice).

Energy demand in 2018 compared to 2030 forecast (ktoe, %)

in northern Albania – are connected to the 220 kV network. This supplies the major demand centres of Tirana, Elbasan, Durrës and Fieri and connects to the 110 kV network, which is predominantly ringed and to a lesser extent radial, covering all urban centres of the country and supplying the distribution network. About 20% (411 MW) of the installed generation capacity is connected to the 110 kV network, whereas around 10% (237 MW) is connected to the distribution grid of 35 kV and less (ERE, 2019). The distribution network is operated by the distribution system operator (OSHEE).

INSTITUTIONAL STRUCTURE The energy sector in Albania has a well-defined set of institutions with clear responsibilities in governing, regulating, operating and participating in the sector.

RENEWABLE ENERGY SECTOR OVERVIEW

RESOURCE POTENTIAL AND MARKET DEVELOPMENT Albania is endowed with valuable natural resources, including abundant renewable energy potential.

Albania’s annual average Global Horizontal Irradiance
Suitable areas for solar PV development and zones with highest potential

POLICIES AND REGULATION
As a Contracting Party of the Energy Community Treaty, Albania is obligated to transpose and
implement the EU Directive 2009/28/EC “On the promotion of the use of energy from renewable sources”. In 2017, Albania adopted Law 7/2017 on Renewable Energy, partially transposing the EU directive. The law sets out the adoption of the National Renewable Energy Action Plan (NREAP), which, among others, sets forth the targets for the share of renewable energy in the total energy consumption of the country, including electricity, transport, and heating and cooling. Furthermore, it stipulates policies and support measures for the achievement of such targets. NREAPs are updated every two years, and the latest was adopted in September 2019 as a consolidated Action Plan for the years 2019-2020. This action plan superseded the previous NREAP for 2018-2020 by reducing the targets for hydropower production and increasing targets for solar and wind in an effort to diversify the energy mix through penetration of wider renewable energy technologies. Going forward, the NREAP will be superseded by the National Energy and Climate Plan (NECP), which is still to be developed, and will set out renewable energy targets to 2030.

ECONOMICS OF RENEWABLES
In Albania, renewable energy incentives such as the fixed tariffs for renewable electricity sale
(i.e., the difference between the market price and FiT or the CfD) are borne by electricity consumers through a renewable energy levy within the consumer electricity tariff. Notably, this obligation is borne exclusively by consumers connected to the distribution grid. As such, end-consumers connected directly to the transmission system, such as large industries, do not contribute. Tax breaks on renewable energy equipment are borne directly by the state.

 LCOE ranges of renewable energy technologies in Albania
(using “medium” cost of capital: 10% WACC)

RATIONALE FOR RENEWABLE ENERGY DEVELOPMENT

THE IMPACT OF CLIMATE CHANGE
Albania is one of the most vulnerable countries to climate change in the South East European
region. Changing weather patterns have already resulted in increased temperatures, decreased
precipitation, and more frequent extreme events such as floods and droughts (World Bank, 2013). Compared to 2019 levels, a decrease in annual precipitation of 2.6% to 3.4% is expected by 2025 and of up to 6.3% by 2050. The greatest decrease in precipitation is expected during summer, with a 11.5% decrease by 2025 and a 23.2% decrease by 2050 (World Bank, 2020a). Given that Albania’s electricity system is largely reliant on hydropower production, decreased precipitation levels will adversely affect the generation output of existing HPP installed capacities, especially in the summer months. Compared to 2010 levels, by 2050 a 15% decrease may be expected in the average annual electricity generation from existing large HPPs, while small HPPs are expected to have a 20% decrease in generation output (Ebiger, 2010).

SEASONAL VARIATION IN HYDROPOWER GENERATION
Hydropower generation in Albania is highly seasonally variable. The highest amounts of production occur in the winter season, when over 90% of the annual precipitation falls. During
this period, on a monthly average, the country produces a surplus of electricity, which is exported. However, as of June, hydropower production drops significantly and struggles to meet demand, resulting in the need for electricity imports. In 2018, the highest power production month, March, produced five times more hydroelectricity than the lowest production month, November.

RISING DOMESTIC DEMAND AND FUEL IMPORTS
Albania’s biggest energy imports are fossil fuels fuelling the transport sector’s energy demand.
In 2018, imported petroleum fuel was the single biggest import expense, worth USD 190 290 million, making it a significant contributor to the country’s trade deficit (World Bank, 2020b). The transport sector’s energy demands have been rising, and the sector is projected to continue to be the largest energy consumer over the coming decades.

Electricity production vs. demand, 2018

SOCIO-ECONOMIC BENEFITS OF RENEWABLE ENERGY
The deployment of renewable energy contributes to numerous socio-economic benefits for
communities and countries, including employment, income generation, decreased air pollution, welfare improvements and local industrial development leading to increased GDP.

Employment impacts in the solar PV and wind value chain

CHALLENGES AND RECOMMENDATIONS

RENEWABLE ENERGY POTENTIALS AND PLANNING
Harnessing renewable energy resources for the development of the energy sector presents economic, social and environmental benefits, but it also poses various challenges for integration. These challenges stem chiefly from the spatial localisation to the sub-hourly, daily and seasonal variations of the resource. These specificities of renewable energy resource availability need to be well understood and assessed so that they can be adequately harnessed
and integrated into the energy system.

LEGISLATIVE AND REGULATORY FRAMEWORKS
The Renewable Energy Law in Albania has set out the legal framework to facilitate the wider use and deployment of renewables within the country’s energy system, thereby striving to achieve national targets for the share of renewables. This has seen the deployment of various renewable energy projects, increased investments and the setting up of various enterprises offering related services. In the immediate term, the development of renewable energy targets beyond 2020 is needed. Plans are already underway to develop the NECP, in which such targets will be defined up to 2030. Apart from target-setting, existing support mechanisms
for renewable energy deployment are to be further strengthened, approval processes need to
be streamlined, and a dedicated renewable energy agency should be established. Furthermore,
legislative and regulatory frameworks must be reliable, transparent and credible, with changes
announced in a timely manner for future projects, no unannounced changes for future projects and no retroactive changes.

RENEWABLES IN END-USES
Albania’s path towards a more diversified energy mix requires an accelerated uptake of renewable energy in end-use sectors such as transport, and heating and cooling. The transport sector is the country’s largest energy consumer, consuming 40% of the country’s primary energy supply, while heating and cooling demand constitutes a large share of the energy needs in the residential and service sectors. Currently, the transport sector is largely supplied with fossil fuels, while space heating and cooling, as well as water heating, are largely supplied with electricity and biomass. In ensuring further adoption of renewables in the end-use sectors beyond the 2020 horizon, actions are required in the formulation of coherent end-use strategies and achievable target-setting based on locally available resources.

RENEWABLE ENERGY FINANCING
The banking system in Albania is relatively liquid and offers competitive annual interest rates of around 5% in euros and somewhat higher in local currency. Nevertheless, the participation of the local financial sector in financing renewable energy projects is extremely low. The majority of energy investments in Albania have been through foreign direct investment. Because the local banking sector does not have a track record of financing non-hydro renewables, project proposals are appraised with much risk-aversion. Private developers report that collateral requirements in approving loans are oftentimes valued at 150% of the loan, while project assets are not valued as part of the collateral. In part, the reasoning for the limited involvement of the local banking system, and the increased perceived risk in funding renewable energy projects, is rooted in the recent bitter history of some hydropower generation projects that have not complied with various standards for environmental safeguarding. In fact, this has deterred even development finance institutions (DFIs) from further financing hydropower projects. Furthermore, this has provoked heightened scrutiny and increased the risk perception about renewable energy project proposals. The financing sector reports that the lack of bankable renewable energy project proposals is what is deterring financing in the sector.

CAPACITIES, SKILLS AND AWARENESS
To maximise socio-economic development opportunities and spur transformational change,
energy sector decision makers can strive to build up and use the local workforce for renewable
energy equipment and projects. Human resources, adequately skilled and locally available to work on various parts of the renewable energy value chain, are crucial in supporting the expansion of the renewable energy sector. Both training institutions and human resources should be attuned to and follow the technology trends and market dynamics in the fast-evolving energy sector.

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