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Pacta Sunt Servanda!

The headline for this article, literally meaning “agreements must be kept”, is a reminder to the Western Balkans from the Vienna Convention on International Treaties. Remembering and respecting this is a prerequisite for the success of the Growth Plan, the Green Agenda, ESG criteria and commercial investments in the energy industry

In Vienna on 14th December 2023, the Ministerial Council of the Energy Community concluded: “The Ministerial Council expressed its serious concern over continued noncompliance with the Large Combustion Plants Directive and the Industrial Emissions Directive in several Contracting Parties. Significant levels of air pollution affect the health and lives of citizens of the Energy Community.”

The Council also extended the duration of the Energy Community Treaty (EnCT) to 2036, without making any significant adjustments to its text in order to address this key observation.

In its “Rule of Law Checklist” (28th March, 2016), the Venice Commission assumes that enforcement of international treaties is a key aspect of the rule of law in any given jurisdiction. The European Union makes the assumption that abiding by international treaties is compulsory for its member countries. Furthermore, the EU sees it as its duty to promote the rule of law in international relations. There is, however, a difference between reporting on the rule of law in EU member states and actually promoting the rule of law in external relations. In other words, its inwardly oriented Methodology for the preparation of the Annual Rule of Law Report within the EU isn’t sufficient to address the situation of compliance with international treaties by third countries.

Observation of the EnCT Ministerial Council is not reflected in the chapter on rule of law in the accession Progress Reports, despite this noncompliance having been obvious for several years to CSOs, professional institutions and the EnCT Secretariat itself.

If or when the EU’s Growth Plan for the Western Balkans becomes approved by EU institutions and member states, it will be conditioned by the rule of law principle. In other words, funds aren’t likely to be disbursed as long as noncompliance with the EnCT persists.

The Western Balkans needs investment to address noncompliance with such complex material obligations of the EnCT. At the same time, commercial investments aren’t possible due to legal uncertainty and the risks expressed in the Ministerial conclusions. This is a vicious cycle.

Investments in public infrastructure (high voltage lines or regulatory improvements) and most forms of renewable energy are based on sovereign bonds. However, these investments only increase the competitive pressure on commercial power generators that are deprived of access to commercial financial markets by risk and uncertainty.

These companies are fully exposed to government policies that redistribute funds from operations and the maintenance of assets to support wider employment and social wellbeing. The financial depleting of thermal power plants, coal mines, energy efficiency, forestry and environmental protection generates a short-term surplus and an apparent increase in sovereign creditworthiness. However, this underinvestment in physical assets devastates security of supply and increases noncompliance with the material obligations of the EnCT. This physical devastation is now well underway and will prove difficult to reverse.

Even if the EU turns a blind eye to noncompliance with international treaties and ultimately approves the implementation of funding to the Western Balkans for the Growth Plan, the effects of these funds are likely to be constrained by a shortage of domestic dispatchable power. This also applies to expectations on critical raw materials, rare earth minerals or “nearshoring”. In reality, bauxite, aluminium, steel and energy intensive industries in the Balkans are already dormant. To avoid any ambiguity: there is a shortage of electricity.

Persistent poverty and risks to lives may co-exist with nominal GDP growth, fiscal and monetary stability in the Western Balkans

Energy intensity in the Western Balkans, and electricity intensity in particular, stands at less than half the OECD average. Total energy consumption per capita in the Balkans is lower than in developed EU countries, as evidenced by physical data included in this publication. As a consequence, poverty is inevitable and cannot be addressed without massive investments in commercial power generation. Poverty is further aggravated by power blackouts, forest fires, flooding, erosion and landslides, as well as air pollution. Sulphur emissions in our region are many times higher than the European equivalent.

Under such circumstances, persistent poverty and risks to lives may co-exist with nominal GDP growth and fiscal and monetary stability.

“Agreements must be kept” (Pacta Sunt Servanda!) is a call for a realistic, harmonised legal framework that’s complemented by access to the non-recourse financing that is essential to address the deterioration of energy security and preserve social stability.

If that is achieved, the Growth Plan will find fertile ground and its key objectives could be achieved within a meaningful period of time, by 2036.

It is a physical reality that retrofitting existing power plants to comply with the Large Combustion Plant Directive and the Industrial Emissions Directive does not align with the decarbonisation imperative. However, replacing this dirty energy with a carbon neutral, dispatchable and commercially viable energy supply is feasible and can be done. This bold investment strategy needs to be accompanied by an immediate reduction in harmful air pollution through minimal cost interventions, in order to preserve both lives and properties.

For national power generation companies, the implementation of ESG standards implies massive strategic re-orientation from the devastative ‘business-as-usual’ towards a rapid state-of-the-art investment strategy. And this is also possible.

For that purpose, these companies need access to the EUETS (EU Emissions Trading Scheme), with appropriate allocations to enable rapid coal phase-out. While these allocations may be enacted only once decarbonisation has been achieved, that is sufficient support for commercial funding and access to commercial technologies that are not available in the public domain. Only under this approach will the Western Balkans be able to compete on a level playing field with its Central European competitors.

This is a major task, but it has been done before. Political and industrial leaders have to replicate the construction of the entire lignite power generation portfolio that was constructed over a period of roughly ten years, within an externally arranged financial framework, some 50 years ago. EU institutions need to endorse and promote this policy innovation.

Access to EUETS, under Article 25 of the EUETS Directive, automatically (and irrevocably) excuses the region from CBAM Regulation under Article 2(6). Through this, the region is protected from the uncertainties of Article 2(7), as well as any confusion between the SAAs and the CBAM Regulation. EnCT already contains provisions regarding the required Monitoring, Reporting and Validation (MRV) system, and it is advanced in its implementation. The appropriate adjustment of the EnCT needs to provide the region with a meaningful legal framework and financing for decarbonisation and clean air. This truly restores security of supply and demonstrates the rule of law. This is a common interest of the EU and the Western Balkans.

CONDITIONS

If or when the EU’s Growth Plan for the Western Balkans is approved by EU institutions and member states, it will be conditioned by the principle of the rule of law.

POSSIBILITIES

Transitioning to carbonneutral, secure and commercially viable energy sources is feasible and requires bold investment strategies.

SHIFT

Implementing ESG standards for national power generation companies requires a significant shift from traditional practices to rapid and modern investment strategies.

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