Blog entry

The main driver to build the southern gas interconnection between BiH and Croatia is ostensibly to enable BiH – or at least the Federation – to stop using Russian gas. The country currently has only one import pipeline via Serbia, which is mainly used to heat Sarajevo. 

But the planned pipeline’s capacity of 1.5 billion cubic metres annually is six times as much as BiH’s 2022 consumption, and would bring gas to new areas of the country like Mostar. So it’s clearly aimed at expanding consumption, not just replacing it with non-Russian gas. In any case, it will take years before this project is built, and much faster options exist to cut Russian meddling in the country’s energy supply – like renewables. 

The law on the project has been blocked for years due to disagreements within the Federation of BiH about the company in charge of the project. The existing transmission operator, BH-Gas, owned by the Federal government, has been developing the project, but the Croat HDZ BIH party wants a separate company to be set up in Mostar, as part of its overall strategy to gain more influence in the Federation. 

It’s not surprising that this touches a nerve, as it goes to the heart of fraught questions on the country’s constitution. But it also prevents any debate about the merits or otherwise of the actual project.

Stopping the use of Russian gas is crucial, but framing the question as an either-or between buying from Russia or the United States, or BH-Gas versus a Mostar-based company, precludes questions such as how BiH can phase out fossil gas altogether, increase its energy efficiency and leapfrog straight to sustainable renewables.

This might sound optimistic, but it’s the only logical way forward. BiH has a very low level of gas dependence – less than 3 per cent of total energy supply in 2022, and in the Federation, the main issue is securing heating in Sarajevo. This is a major advantage, which must be maximised instead of increasing gas dependence.

The EU aims to reach carbon neutrality by 2050 at the latest, so if Bosnia and Herzegovina wants to be a member, it has to do so as well – and that includes oil and gas, not only coal.

The EU is making progress in this area, not only increasing its share of renewable energy, but also achieving an 18 per cent reduction in gas demand between August 2022 and May 2024. Several Member States also have bans on installation of new gas boilers in place. But the European Commission, particularly its Directorate-General for Enlargement, has been slow to realise that the Western Balkans can and must avoid getting bogged down in gas dependence, resulting in contradictory messages and support for outdated gas projects.

But increasing gas consumption in BiH would directly contradict the 2050 target, as it’s completely unrealistic to build, use and phase out new gas infrastructure by then. 

The pipeline would take years to finish – and official estimates for such projects are usually wildly optimistic. The BiH section alone would be almost 169 kilometres long, partly on difficult mountainous terrain, with expropriation and financing still to secure. There’s no chance it will be finished before 2030, and it’s likely to be much later. So it’s hardly a short-term solution for Sarajevo to free itself from Russian gas. 

Options like the Sarajevo heat pump project announced in 2023 are much more promising and could be realised more quickly.

If built, the pipeline will either lock BiH into increased gas use, or it will become a costly stranded asset, wasting scarce public money to pay off loans for nothing whatsoever. 

It would not be the first time. In 2009, the European Bank for Reconstruction and Development approved a EUR 19 million loan for a gas pipeline from Zenica to Novi Travnik, which was built but has never operated. But the people of the Federation of BiH still had to foot the bill.

If the quality of the debate on the southern interconnector doesn’t improve soon, we may see something similar happening again, on a much larger and pricier scale.

The European Commission must play a decisive role in the Western Balkans, making it clear that gas is not the future. It needs to step up support for better insulating buildings, developing sustainable forms of renewable energy, increasing the use of heat pumps and improving transmission and distribution networks.

It’s that time of year again when governments, companies and others showcase their green credentials at the annual United Nations Climate Change Conference (COP), and the international financial institutions are no exception. As always, the European Bank for Reconstruction and Development (EBRD) and its sister banks have an impressive array of events at this year’s COP29 in Baku, Azerbaijan, to advertise their climate finance achievements. 

But, as usual at the COPs, fossil fuels are an enormous elephant in the room. The EBRD’s support for gas is certainly not as plentiful or brazen as Azerbaijan’s, which plans to ramp up oil and gas production by a third over the next decade. But the Bank’s continued financing of major hydrocarbon projects like the Greece to North Macedonia pipeline seriously undermines its claims to be ‘at the forefront of international efforts to tackle climate change’. 

For years already, it has been clear that no more fossil fuel infrastructure can be built if we are to stand any chance of limiting climate chaos to survivable limits, but the EBRD’s response has been too timid, too late. In late 2023, the Bank’s Board approved a new energy sector strategy, which again failed to halt support for mid- and downstream fossil gas.

Still, the strategy does limit such financing to ‘exceptional cases’, subject to conditions such as Paris alignment, low risk of carbon lock-in, and not displacing renewable sources. If properly applied, few if any gas projects would pass muster. But the problem is, project assessments can easily be manipulated to fit the criteria, as the Greece to North Macedonia pipeline shows. 

Key data missing before the Board approval

Already in 2022 when the EBRD published an environmental and social assessment for the project, it was clear that the main impact had been omitted: the greenhouse gas emissions from burning the gas transported by the pipeline. This is one reason why, together with our member group Eko-svest, we filed a complaint to the Bank’s Independent Project Accountability Mechanism (IPAM) in March this year. The same issue plagued the European Investment Bank’s assessment of the project, for which it signed a EUR 41 million loan in December 2021.

But other key data was also absent in the project environmental assessments, including the pipeline’s capacity and what the gas would be used for. Vague mentions of the power sector, industry and households weren’t backed up by quantities or timelines, despite enthusiastic claims about reducing air pollution. In a meeting last year, Bank staff told us this is subject to a complex analysis that the public doesn’t have access to. In other words, we just have to trust them. A summary, they said, would appear in the project’s Board document – to be published after its approval. So much for informed public participation in decision-making.

Creative modelling used to make gas look better than electrification

After the project was approved by the EBRD Board in April, a redacted version of the Board document was indeed published. No wonder the Bank staff had wanted to keep their justifications for the project under wraps: they are very shaky indeed.

For example, the assessment of alternatives compares gasification with business as usual and electrification scenarios. But creative modelling has been used to load the dice in favour of gas and pretend that gasification would not lead to fossil fuel lock-in.

Among others, in the gasification scenario, industry and the power sector would have to make an almost miraculous move towards electrification and imported hydrogen between 2040 and 2050. Households and commercial facilities would also need to do so. It’s unrealistic that this will happen in only one decade and for hydrogen it’s unclear whether it will ever happen, due to the high costs. 

In stark contrast, the business as usual scenario supposes that without the pipeline, North Macedonia will burn coal way beyond its phase out date – officially 2027, but now slipping towards 2030. But this is clearly false, as its power plants are ancient, have no pollution control equipment and are increasingly unreliable. It has few coal reserves left and has already been importing low-grade lignite in recent years. Coal is on its way out – it is only a question of what will replace it. 

And the electrification scenario is weighed down by including carbon capture and storage (CCS) for industries which cannot be electrified by 2050. This is an energy-intensive technology that is not commercially viable, so it would obviously disadvantage any scenario that includes it. 

The explanation given is that in this scenario, industries that cannot electrify would have to use CCS, because North Macedonia is not expected to manufacture hydrogen of its own. Again, this assumption seems set up to make the gasification scenario look better and the electrification one worse: if the EBRD is optimistic enough to expect that heavy industry is going to use renewable hydrogen at all, why wouldn’t it be electrolysed on the spot instead of importing it?

Major gaps remain in the Bank’s rationale for supporting the project

In addition to the dubious alternatives assessment, many other basic questions remain either without any answers or without convincing ones, including:

• When would the interconnector – realistically – be completed?
• What would its capacity be and why is it so large? In the last 14 months, 1.5, 1.8 and 2.8 billion cubic metres have all been mentioned – between three and six times North Macedonia’s largest ever annual gas consumption.
• How much of the gas is meant to be transported beyond North Macedonia to Serbia and elsewhere? What would it be used for there? Why is a new pipeline needed in addition to the recently-built Bulgaria to Serbia one?
• How can we be sure that the pipeline would only transport non-Russian gas, considering that Greece’s imports of Russian gas have returned to pre-war levels?
• What guarantees are there that a switch to hydrogen will really happen?

To discuss these questions and assess the information we have so far, we’ve put together a new briefing, which exposes a slew of gaps and contradictions in the information provided by the EBRD.

New information on delays makes the project justification even shakier

Our briefing also unpacks a recently-reported 22-month delay to the interconnector’s construction. This adds to a report by North Macedonia’s State Audit Office earlier this year, which criticised slow implementation and poor management in the country’s gasification, making it unlikely that even the new timelines are realistic.

None of the main gas pipelines built in the last ten years in North Macedonia are operational yet. Construction and commissioning has already exceeded eight years in one case, and is nearing this in two more cases. If the interconnector takes this long, it would come online only in 2032.

Considering that coal phase-out is expected by then anyway, due to the EU’s carbon border adjustment mechanism (CBAM) and lack of good-quality lignite, focusing on sluggish gas projects distracts everyone from realistic, readily-available and more cost-effective solutions.

The EBRD and EIB must cancel their involvement

Overall, the arguments in favour of the project are still not supported by convincing evidence and the claimed benefits remain highly unlikely to materialise.   

• Diversification of gas supply may or may not happen. And it’s unclear whether a) it would be before Russia’s contract for existing pipeline capacity expires in 2030 and b) it could be done via additional capacity in the existing pipeline instead. 
• Decarbonisation cannot be done with hydrocarbons. Of all the claimed benefits, the idea that gasification will help decarbonise North Macedonia and reduce greenhouse gas emissions more than an electrification scenario is the most absurd.
• Reduction of air pollution rests largely on unrealistic expectations about connecting 17,000 customers to the gas network. The Board document gives contradictory information on whether new gas power capacity is expected to be built, but in any case, technologies such as heat pumps, geothermal district heating, solar and wind bring greater decreases.
• Gasifying the centre and southwest of the country is not a benefit in a climate emergency. It will take even longer than the main transmission pipelines and a gas phase-out will likely have to be planned before the works are complete.
• Carrying gas to Serbia and other countries in the region is mentioned, but without any justification why it is needed, how much gas would be transported, how it would be used, and whether better alternatives exist. Since a new pipeline would have to be built to Serbia, this remains highly speculative. Kosovo, Albania and Montenegro are not dependent on gas, so it makes no sense to introduce it – a conclusion which Kosovo has also reached. 

Instead of continuing with outdated projects that have been on the table for years, the EBRD and EIB need to carry out regular reality checks on whether they still make sense – particularly in cases where countries have a poor track record in carrying out similar projects.

Although this particular loan has been approved and signed, the EBRD and EIB must cancel their loans. The EIB has stopped direct financing for new fossil fuel projects since it signed this contract, but the EBRD must stop considering the North Macedonia to Serbia pipeline.

Instead, both banks need to support North Macedonia to continue its solar and wind expansion, realise its energy savings potential, improve its power grid, and increase the use of heat pumps, geothermal with gas recovery and reinjection, and solar thermal for heating. 

To support the decarbonisation of industry, where electrification is not possible, pilot projects for renewable hydrogen production could be considered, using additional or surplus solar and wind capacity in order to avoid competing with other electricity users.