Dodik's vision of the energy future: Vuk Hamović, the Chinese and private investors

Besides the Stanari thermal power plant, which has been operational since 2016, EFT, under the leadership of Vuk Hamović, is currently undertaking the construction of two renewable energy facilities in Republika Srpska (RS) in collaboration with Chinese partners. However, the preferential treatment of this company by the RS political leadership, as well as other private investors, manifested through minimal concession fees and the absence of infrastructure usage costs, raises questions about market positioning and the future of public electric utilities, writes Tačno.

Written by: Predrag Blagovčanin

In May 2013, in the presence of the President of Republika Srpska, Milorad Dodik, the owner of EFT, Vuk Hamović, and Ven Shugang, the head of the Chinese state company “DEC”, laid the foundation stone for the Stanari thermal power plant.

During this ceremony, the President of Republika Srpska expressed his gratitude to EFT and its owner, Vuk Hamović, for this investment and his pride at the beginning of the historic cooperation between Republika Srpska and China.

“Such projects are almost rare. That is why I am grateful to EFT for not giving up even when the High Representative in BiH tried to stop them, even when they were disappointed by the slow administration, both at the local and republic level. Not far from here, the construction of the Doboj-Banjaluka highway has also begun, with an investment value of around 350 million euros, for which funds and contractors have been secured. I am particularly proud when a great China and a small Republika Srpska embark on a historic form of cooperation. I learned from our friends in China that in Chinese, Stanari is pronounced the same – Stanari.”

The idea of building the Stanari thermal power plant emerged from earlier business agreements that EFT, an international company owned by Serbian electricity trader Vuk Hamović, had carried out in Republika Srpska. It is worth recalling that EFT’s operations in Bosnia and Herzegovina were initially related to lucrative deals with public electricity companies regarding the resale of surplus electricity.

In the early 2010s, after engaging in mining operations in the Stanari mine, EFT invested capital in the construction of the first private thermal power plant in Bosnia and Herzegovina. This investment, totalling 560 million euros, was financed through a loan from the Chinese Development Bank and EFT’s own funds, and was accompanied by controversial decisions from relevant republic ministries.

According to the information from the Capital.ba portal, as a result of the decision by the Minister of Energy and Mining of Republika Srpska, Petar Đokić, the budget of this entity reportedly lost 100 million BAM (Bosnian Convertible Mark) solely based on the amendments to the Regulation on Concession and Exploitation of Coal.

Three years after the commencement of construction works, the Stanari thermal power plant was put into operation and currently produces a total of 13 per cent of the entire electricity in Bosnia and Herzegovina.

Taking advantage of the trend of mass concessions, EFT also obtained a concession for the construction of the Ulog hydropower plant with a capacity of 35 MW. In September 2012, three years after the concession contract was awarded, EFT signed an agreement in Beijing with the Chinese energy consortium Sinohydro Corporation Ltd., Dongfang Electric, and the China Development Bank for the construction of this energy facility on the upper course of the Neretva River. According to the initial assumptions at that time, the construction works for this project were planned to last for 42 months, with a total project value of 60 million euros.

However, according to available data, negotiations with the creditor, China Development Bank, did not yield results, so EFT used its own financial resources to implement this agreement. As of 2019, a total of 23.2 million euros had been invested in the implementation of this project.

“No one can do anything to us”

According to the information from the Capital.ba portal, as a result of the decision by the Minister of Energy and Mining of Republika Srpska, Petar Đokić, the budget of this entity reportedly lost 100 million BAM (Bosnian Convertible Mark) solely based on the amendments to the Regulation on Concession and Exploitation of Coal.

Three years after the commencement of construction works, the Stanari thermal power plant was put into operation and currently produces a total of 13 per cent of the entire electricity in Bosnia and Herzegovina.

Taking advantage of the trend of mass concessions, EFT also obtained a concession for the construction of the Ulog hydropower plant with a capacity of 35 MW. In September 2012, three years after the concession contract was awarded, EFT signed an agreement in Beijing with the Chinese energy consortium Sinohydro Corporation Ltd., Dongfang Electric, and the China Development Bank for the construction of this energy facility on the upper course of the Neretva River. According to the initial assumptions at that time, the construction works for this project were planned to last for 42 months, with a total project value of 60 million euros.

However, according to available data, negotiations with the creditor, China Development Bank, did not yield results, so EFT used its own financial resources to implement this agreement. As of 2019, a total of 23.2 million euros had been invested in the implementation of this project.

According to Redžib Skomorac from the organization Center for Environment, in addition to the process related to the renewal of the environmental permit for the Ulog hydropower plant, a procedure has been initiated before the Supreme Court of Republika Srpska regarding the failure to conduct a cumulative impact assessment of the Ulog hydropower plant and the Gornja Neretva hydropower system.

“In addition, the latest mechanism we have initiated is an appeal against Bosnia and Herzegovina before the Council of Europe, specifically the Standing Committee of the Bern Convention, regarding projects in the upper Neretva River basin, including the Ulog hydropower plant. This body has accepted our complaint and officially opened a case against Bosnia and Herzegovina at the December 2022 meeting of the Standing Committee in Strasbourg. Recommendations were also adopted at the meeting that must be implemented in the near future.”

However, despite the unanimously adopted recommendations, they have not affected the implementation of the Ulog hydropower plant project. Despite clear instructions to halt further construction of this facility and to adequately assess and protect this area.

According to Skomorac, the consequences of potentially losing disputes and failing to implement the recommendations to which Bosnia and Herzegovina has committed under international agreements will be reflected in financial support for other capital projects.

“The financial support for capital projects in Bosnia and Herzegovina is conditioned by the credibility of the state in terms of the international recommendations it has undertaken, in this case, obligations under the Bern Convention. Therefore, we encourage the relevant authorities to make more efforts in terms of adequate implementation of the recommendations and in ensuring that private projects, such as the Ulog hydropower plant, do not compete with the general interests of society.”

When a private concession becomes a public interest

The company EFT, following the trend of massive investments in renewable energy, specifically the construction of solar power plants, obtained another concession for the Bileća solar power plant with a total capacity of 60 MW in 2019. The specific concession was granted for a period of 50 years, with a total project value of 43.5 million euros.

The partner on this project is the Chinese company “DEC,” which has previously implemented the construction of the Stanari thermal power plant in Bosnia and Herzegovina and has recently been engaged by Elektroprivreda BiH for the revitalization of block 6 of the Tuzla thermal power plant.

Details of the concession agreement for the Bileća solar power plant, as well as several others, raise questions about concession fees for private investors in the energy sector in both Republika Srpska and the Federation of Bosnia and Herzegovina.

In the case of this agreement, it is defined that the concession fee, in this case, will amount to 5.5 KM per megawatt-hour, and the municipality of Bileća will receive 95 per cent of this fee. In addition to these payments, EFT has also paid a one-time fee of 700,000 KM.

According to data from SEEPEX, the average price for electricity in the Serbian electricity exchange in February this year was 145 euros per megawatt-hour. This discrepancy between the prices of electricity and concession fees, according to economist Zoran Pavlović, is caused by an outdated legal framework that defines the fee for the use of public goods.

“Republika Srpska has defined by law the fees charged to concessionaires. However, the energy market has changed significantly in the past period. Moreover, at the time when the law was written, electricity prices were quite different compared to today. Republika Srpska has not updated the Concessions Law according to the market situation and has not made amendments to the law to adjust the fee that concessionaires pay in the context of real values. That is why concessionaires are making extreme profits at the expense of minimal concession fees paid to the state or entities”.

As an illustration, in 2021, the company EFT Stanari had a turnover of 210 million KM and a profit of 46.7 million KM. The budget of Republika Srpska received 3.6 per cent of the total annual revenue based on concession fees.

The Government of Republika Srpska has not responded to inquiries regarding concession fees.

However, favouritism towards private investors is not only limited to minimal concession fees for public goods. The State Regulatory Commission for Electricity “DERK” missed the opportunity to establish a tariff for network fees for producers who use the services of Elektroprenos BIH since 2011.

In addition to the three state-owned power utilities, since 2016, private electricity producers such as EFT Stanari, Hidroeinvest doo Rogatica, and the Jelovača wind farm owned by Feal Široki Brijeg have also been connected to the transmission network of Elektroprenos BIH.

The consequences of not determining this fee are reflected in the fact that all producers are exempt from paying the primary transmission service for electricity, amounting to approximately 71 million KM.

Based on official data, EFT, as the largest private electricity producer in Bosnia and Herzegovina, would have paid approximately 10 million KM to Elektroprenos BIH for network fees.

As of the publication of this report, EFT has not responded to inquiries from the Tačno.net portal.

The absence of these revenues, along with the overall poor business and investment policies of Elektroprenos BIH, has been reflected in their financial statements. According to available data, this company ended the year 2021 with a loss of 11.6 million KM. The reasons for the negative business performance are unpaid receivables and the cost of transit on the transmission network.

The key issue for Elektroprenos BIH at this moment is the lack of network infrastructure in parts of Bosnia and Herzegovina where future renewable energy facilities are concentrated, as well as the capacity of the network itself.

These claims have been confirmed by a response from this state-owned company. As they emphasize, the transmission network does not have unlimited capacity to accommodate new generation facilities, especially considering the number of submitted requests for connection.

“For Bosnia and Herzegovina, there is no strategic document with clearly defined goals for integrating new generation facilities, based on which detailed plans would be developed and facilities and necessary funding for implementation would be determined. Without that, investments are meaningless as it may lead to over-dimensioning or insufficient development for accommodating new generation facilities.”

The way Elektroprenos BIH invests funds in network construction is best illustrated by the fact that in January of this year, the long-time director of this company, Matan Žarić, was indicted for corruption related to the construction of the Šipovo substation, which Tačno.net portal extensively reported on.

At this moment, the question arises as to what repercussions Elektroprenos BIH may face from potential lawsuits by investors who have been essentially granted rights but have not been granted access to the transmission network.

Privatization is the future

The introduction of CO2 taxes planned for January 1, 2026, will burden the operations of the two most significant state-owned power utilities. Unlike Elektroprivreda HZHB, which is expected to end this year with a loss of approximately 80 million KM, Elektroprivreda BIH and Elektroprivreda RS heavily rely on electricity generation from thermal power plants.

It is precisely these two state-owned electricity producers that have missed the opportunity to diversify their portfolios and initiate the process of energy transition in the past period. This lack of vision or strategy, if it can be characterized as such, has been exploited by private investors.

In this context, the Elektroprivreda BIH conglomerate is burdened primarily by the nearly two-decade delay in the construction of Block 7 of the Tuzla thermal power plant and enormous losses in its mining operations.

In the other entity of Bosnia and Herzegovina, Elektroprivreda RS, to date, due to the construction model, financing methods, issues with state property, and the withdrawal of Western international investors, none of the long-term infrastructural projects have been realized.

The construction of hydroelectric power plants Dabar, Buk Bijela, Paunci, and Foča has not yet been realised. A similar situation exists with the project for the construction of the Hrgud wind farm, which was supposed to be completed in 2019, while the majority ownership stake in the largest solar power plant in Bosnia and Herzegovina, Trebinje 1, has been handed over to the Hungarian company “Lugos Renewables”.

Professor Mirza Kušljugić believes that the position of power utilities in Bosnia and Herzegovina, which are mostly state-owned, will largely depend on their ability to adapt to the conditions of the open European market, due to the speed at which they will implement capacity that utilises renewable energy sources.

“Currently, private developers are much faster in preparing projects for new production capacities. Since auctions for concessions for new wind and solar power plants are not organized in Bosnia and Herzegovina, but are awarded based on self-initiated bids, new facilities that are currently under construction, and developed by local developers, are mostly financed by foreign investors. It is logical that the first facilities are built in locations with the best potential. Since investors are not obliged to sell all or part of the energy from such facilities to domestic consumers, it is expected that the energy will be exported.”

The energy produced in solar power plants and wind farms owned by private investors will be sold on the market of the European Union due to higher prices. Kušljugić emphasizes that this trend will seriously jeopardize the process of decarbonization in Bosnia and Herzegovina.

“In addition, the transmission grid will be used for exports rather than decarbonization of Bosnia and Herzegovina. Therefore, this trend poses a risk for consumers in Bosnia and Herzegovina, who will be supplied with ‘dirty energy’ from coal, which can be a significant problem for the economy after 2026, when the EU will introduce the so-called import tax on CO2 for products imported into its market. Some experts refer to this scenario as the ‘colonization of the energy sector’ in Bosnia and Herzegovina.”

The long-standing stagnation and problems related to the diversification of production in the renewable energy sector, following the introduction of CO2 taxes, will significantly impact the reduction of business revenues of state-owned companies, primarily the Power Utility of Republika Srpska and the Power Utility of Bosnia and Herzegovina.

In such an environment, decades of politicization of the energy sector, as well as the enormous level of corruption that has characterized almost all strategic projects, will create space for the complete privatization of the most significant sector owned by Bosnia and Herzegovina and its entities.