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Natural Gas Sector in Kosovo – Challenges Ahead

Natural Gas Sector in Kosovo – Challenges Ahead

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In 2016, Kosovo adopted Law No. 05/L-082 on Natural Gas (the Natural Gas Law). The purpose of the law was to lay down a legal basis for the establishment of a legal framework that will govern the transmission, distribution, supply, usage, and storage of natural gas. The Natural Gas Law is deemed to be aligned with EU law, including Directive No. 2009/73/EC on common rules of the internal European natural gas market and Regulation No. 715/2009/EC on conditions of access to natural gas transmission networks.

When the Natural Gas Law was adopted, the gas sector in Kosovo was not developed, including, but not limited to, the absence of any gas infrastructure. Subsequently, Kosovo’s Government adopted its Energy Strategy for 2017 – 2026, prioritizing the development of the natural gas sector, highlighted as Objective Number Four. In short, this objective stressed three main sub-objectives that the Government should follow: to establish a gas transport system operator and a gas distribution system operator, to prepare feasibility studies, and to construct adequate natural gas infrastructure.

All these sub-objectives require, among others, heavy public spending, as their attainment usually entails capital-intense projects. To that end, the Government embarked on a journey to seek financiers that will facilitate the implementation of Objective Four of the Energy Strategy.

Kosovo’s Government, like those of most other countries, primarily relies on two debt instruments to finance its investment projects: either domestic debt through the issuance of government securities, or external debt through loans from international financial institutions (IFIs).

For the gas sector it may be said that, to date, the Government followed the second path, seeking financing from IFIs. A EUR 1.5 million grant from the EBRD was approved under the Western Balkans Investment Framework (WBIF), a blending facility that allows the target countries to seek financing for their projects, usually ones eligible under the WBIF agenda, and which fosters closer integration with the European Union.

The approved project would allow Kosovo to draft a master plan examining the development of transmission and distribution system operators, along with other relevant implementation arrangement factors. In turn, the master plan will highlight and identify the key investment projects that are necessary for the overall development of the natural gas sector in Kosovo. Based on this master plan the Government is going to target investment projects that will advance the proper implementation and development of the natural gas sector.

The European Investment Bank, one of the IFIs financing a portion of the investment projects in Kosovo, has, however, recently announced that natural gas and other fossil fuel projects are no longer eligible under its lending policies. This decision was taken as a response to climate change and for alignment of its lending policies with the Paris Agreement.

The EIB’s move poses a threat to external financing for Kosovo’s undeveloped natural gas sector. Additionally, the EBRD also announced that it will fully align its operations with the Paris Agreement by the end of 2022. In a similar fashion, the World Bank announced its withdrawal from a fossil fuel project in Kosovo, namely financing a coal-fired thermal power plant, deciding the project was not in accordance with the recently adopted climate rules.

Financial uncertainties may jeopardize Kosovo’s objectives under the Energy Strategy, for the development of the natural gas sector. If other IFIs follow suit, Kosovo’s primary means for raising capital will remain private investors, through government securities. The amount of money that could be raised would, however, remain a different question.

Consequently, if Kosovo’s Government does not resolve the funding uncertainties identified above, the Natural Gas Law will be deemed to be inoperative and inapplicable, in absence of a natural gas sector in Kosovo.

The caveat here is that we do not suggest nor prefer any specific mechanism over others, between fossil fuel projects and energy renewables. This article merely seeks to address the difficulties Kosovo is experiencing in implementing its Energy Strategy, its natural gas objectives specifically, and the Natural Gas Law. If these are not addressed in short order, Kosovo will continue lagging behind in the natural gas sector.

By Fisnik Salihu, Partner, and Jehona Gjergji, Associate, RPHS Law

This Article was originally published in Issue 8.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.