North Macedonia has ever-more-ambitious plans to increase the use of fossil gas. But these were developed before the recent energy crisis. In addition to the climate havoc, import dependence and fossil-fuel lock-in wrought by gas, a new study shows that pipeline construction costs have increased, high household gasification rates are unlikely, and significant household solar, heat pumps or retrofits could be financed instead.
Pippa Gallop, Bankwatch , and Ana Colovic-Lesoska, Eko-svest | 30 January 2024
In 2021, the whole Western Balkans used less than 1 per cent of the fossil gas used by the EU. But North Macedonia has ever-expanding plans to increase its consumption, in households, industry and power generation.
Plans to form a circular main gas pipeline and distribution network have existed for years but are moving very slowly. The Skopje-Tetovo-Gostivar pipeline was reported to be 53 per cent finished in November 2019, but more than four years later, it is nowhere near complete. It is unclear whether the problem is expropriation, landslides or something else.
The government is now focusing on building a gas interconnector from Greece, with an initial capacity of 1.5 billion cubic metres per year. In 2021, North Macedonia’s highest gas-consuming year so far, the country used 426 million nm3, less than a third of the planned pipeline’s capacity. Considering that the existing gas pipeline from Bulgaria will also continue to operate, this raises a considerable risk – either of stranded assets or of locking in increased fossil gas use for decades to come.
The European Investment Bank and Western Balkans Investment Framework approved financing for the project back in 2021, just before Russia’s full-scale invasion of Ukraine once again drove home the folly of relying on imported fossil fuels. Yet not only have neither of them reconsidered the project since then, but the European Bank for Reconstruction and Development is now also considering financing it.
As none of these institutions, nor the North Macedonia government, have published information to the public on the feasibility of the pipeline or expected gas demand projections since the energy crisis (the latest EBRD study was in 2020), Bankwatch member group Eko-svest commissioned a study by the REKK consultancy to look into what has changed and the impact this would have on households.
Higher network costs render conversion unfeasible for households
Not only have gas prices in recent years become highly volatile, but pipeline construction costs have also risen. REKK estimates that an increase of at least 35 per cent is to be expected compared to the government’s plans, leading to a total construction cost of EUR 791 million to 1.086 billion for the gas network, without land use costs and additional compressor investments.
Assuming that system users pay for the development and operation of the network, this would have a major knock-on effect on consumers, with an estimated network tariff of 12-26.6 EUR/MWh. Current gas network tariffs applicable for households make up 6 EUR/MWh, so the tariffs would be 100 to >300 per cent higher than now.
According to current regulations, network costs are under-estimated. But if network users have to pay for the network development – which would be only fair – the end-user price of gas may be 55-79 EUR/MWh depending on the gasification scenario.
Based on a detailed model of household decision-making, REKK’s modelling revealed that if households and other users are to pay the total cost of investment in the network, the network tariffs would be so high that none of the households would switch to gas.
High costs make household conversions unlikely
North Macedonia’s gasification plans assume high connection rates of households to gas For example the EBRD’s 2020 study assumed rates of 55-105 per cent (105 per cent meaning all existing buildings plus some not yet built), depending on the municipality. But this was based on the experience from Thessaloniki in Greece, not on North Macedonia’s own experience, and it was also noted that many of these connections were enabled by waiving the connection fees for households, though the costs were subsequently recovered via system use tariffs.
In North Macedonia, on the other hand, by 2022, it had taken more than 12 years to connect only 503 customers directly to the gas distribution network in Skopje, Kumanovo and Strumica. This is mainly because people find it expensive.
REKK also confirmed that the heating equipment and installation may be prohibitively high for many households in North Macedonia, and considered a range of conversion scenarios based on the income levels of people who would be able to switch. The result had a significant impact on demand, so is important to predict accurately: if 20 per cent of households switched to gas, demand would reach at most 0.5 TWh/year at low relative gas prices (so even lower at high prices), while in the unlikely event that 80 per cent switched, it would reach 2 TWh/year.
Although REKK noted that this can be influenced to some extent by subsidies, this is in our view a very poor use of public money. If incentives are to be provided to households, these must be for non-fossil technologies such as heat pumps and solar thermal.
Gas costs remain unpredictable but have a strong impact
REKK found that the relative prices of fuels were crucial for the outcome of the modelling. The price of gas skyrocketed in the energy crisis, but the price of regulated electricity for households in North Macedonia did not follow. So only a low cost of gas compared to electricity and/or firewood would drive households to switch towards gas.
According to REKK’s research the cost of gas in Bulgaria, Greece and North Macedonia closely follows the Dutch TTF wholesale price, which is predominantly determined by the global LNG market, followed by the influence of European demand. Although this is vulnerable to large fluctuations, previous research by Eko-svest suggests that potential household gas consumers in North Macedonia may not be aware of this and believe fossil gas is quite cheap. Still, due to the connection costs cited above, this would not automatically result in a large number of households connecting to the network.
All of this casts major doubts on claims by the EBRD and others that gasification will significantly decrease air pollution from household heating.
Wiser uses of public money
REKK also looked at what else could be done with the money expected to be spent on the gas network. It found that, with a scheme covering 90 per cent of costs and leaving 10 per cent to households, 49 per cent of detached and semi-detached houses could be provided with 3 kilowatt solar photovoltaic installations, 40 per cent with air-to-air heat-pumps or 15 per cent could have their building envelope insulated.
With such urgently needed options on the table, it is more than high time for North Macedonia to reconsider its pursuit of fossil gas and upgrade its energy plans to be fit for the coming decades. And if the European Commission and European public banks want to do good for the people of the region, they must support this turnaround immediately.
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