Unlocking Serbia’s district heating potential: The public energy services company model in focus

The building sector, responsible for nearly 40 per cent of total energy use in the region, presents a major opportunity for savings. However, without modern metering and infrastructure upgrades, inefficiencies will persist, straining public budgets and worsening air pollution, which is responsible for over 35,000 premature deaths annually in the Western Balkans. 

Optimising district heating and integrating sustainable renewables 

Western Balkan countries must reduce their dependence on fossil fuels to improve public health, protect the environment and meet climate targets. In 2022, the Energy Community’s Ministerial Council adopted an overall goal of reducing greenhouse gas emissions by 60.9 per cent below 1990 levels by 2030 for the Western Balkans, Georgia, Moldova and Ukraine. Yet, 97 per cent of district heating in the region still relies on fossil fuels, with just 3 per cent coming from renewable sources, mostly unsustainable biomass. 

This dependency not only drives emissions but also exacerbates severe air pollution, among the worst in Europe. Decarbonising district heating through renewable integration and efficiency improvements is essential for achieving clean air, home comfort, and climate goals. However, progress is slow due to outdated infrastructure, weak regulation enforcement, and financial constraints. Years of underperformance now make large-scale efficiency programmes a necessity, with the public energy services company (ESCO) model a notable example. 

How does the ESCO model work? 

ESCOs improve energy efficiency without requiring upfront investments from building owners or municipalities. They partner with households, businesses and local governments to upgrade heating systems, improve insulation and install smart metering. ESCOs finance these projects and recover costs through the energy savings achieved. 

ESCOs can operate as either private or public entities. Private ESCOs rely on market competition and private financing, focusing on profitable projects with quick returns. Public ESCOs, on the other hand, are government-backed and prioritise long-term sustainability, investing in public infrastructure like schools, hospitals and district heating networks. They often access grants, government funding or concessional loans, making them suitable for projects that lack private-sector appeal.  

Energy efficiency in Serbia 

Serbia’s district heating systems are undergoing major efficiency improvements. Ageing infrastructure, inefficient energy use, and a lack of modern metering systems have been longstanding issues in the country. To drive energy efficiency improvements, the Ministry of Mining and Energy, with support from international financial institutions like the European Bank for Reconstruction and Development (EBRD), is now pushing forward with a new public ESCO model. 

The current initiative targets over 500 buildings (approximately 1 million square metres) across 15 cities, focusing on insulation, heat dividers, and thermostatic valve installations. The structure of the funding is split between the government, which covers 50 per cent of the costs, and citizens, who repay the remaining 50 per cent through monthly heating bills. With a total investment of EUR 64.5 million, comprising a EUR 50 million EBRD loan and EUR 14.5 million in donations, the project aims to achieve 35 per cent energy savings, equivalent to 81,000 megawatt hours annually. This translates to an average cost of EUR 2500 per apartment, with long-term benefits like lower heating costs, increased property values, and a shift to consumption-based billing. However, despite the substantial investment and ambitious goals, there have been no significant achievements to date in realising the projected energy savings or benefits.  

Challenges remain  

A key question revolves around the definition of a ‘public ECSO’. In Serbia, for example, the term typically refers to existing district heating companies or local public institutions that issue heating bills to consumers. Unfortunately, district heating companies are often limited by a shortage of qualified workers, hampering their ability to complete energy efficiency improvements within tight deadlines. Numerous unresolved issues persist, including addressing systemic losses within the networks and improving the efficiency of protected buildings of architectural or historical significance.  

Of particular concern are older high-rise buildings constructed of glass and concrete. In certain cases, making substantial improvements to these energy-intensive structures are likely to prove economically impractical. After all, the public ESCO model depends on achieving tangible energy savings to generate sustainable revenue. Additional shortcomings include insufficient metering infrastructure and a lack of clarity with regard to responsibilities for heat supply, distribution, and delivery. 

Montenegro learns from Serbia’s ESCO model 

In mid-February, Bankwatch hosted a peer learning visit to Serbia for representatives from the Montenegrin towns of Pljevlja and Žabljak to explore Serbia’s ESCO model for improving district heating energy efficiency. The visit focused on challenges related to financing, regulation and sustainability. Bojan Vemić, energy manager of Žabljak Municipality, and Mervan Avdović, technical director of Grijanje, a district heating company based in Pljevlja, shared their insights on how the model could be adapted to Montenegro’s specific circumstances.  

Vemić emphasised the potential of the ESCO concept to be applied successfully in Montenegro, with the country now in the early stages of developing district heating systems, particularly among northern municipalities. He underscored the clear benefits of improving building energy efficiency through district heating such as reduced energy use, lower consumer costs, and significant environmental protection. He also noted that these obstacles could be overcome with ‘sufficient political will’, and that the main challenge lies in securing state interest and commitment to support the process.