51. Executive summarySerbia and Montenegro are in fact two separated energy systems that operate within the State Union of Serbia and Montenegro. Territory of Kosovo is under jurisdiction of UN interim administration - UNMIK according Un Resolution 1244 and served by another separated energy system. All three systems have distinct characteristics. This report covers Serbia and Montenegro excluding Kosovo.Energy intensity against national product in the Serbia and Montenegro is about three times the World average and almost four time the OECD average.Serbia and Montenegro are relatively poor in conventional energy resources. Domestic production of crude oil and natural gas declines while the cost coal production increases as mines are entering more difficult deposits.Most of the exports are energy intensive industrial products. Exports, employment, industrial and agriculture outputs, social stability and moderate poverty level are maintained by subsidized energy prices.cThere is massive consumption of energy for space heating and domestic hot water that facilitates considerable seasonal differences in energy demand. Winter peaks are met with reserve capacity in natural gas network, power generation capacity and district heating boiler plants that idled during summer period. For example, average utilization of district heating systems is below 1000 hours per year.Energy economy of Serbia and Montenegro is carbon intensive (two times the World average) and intensive in sulphur dioxide.There is massive consumption of fuel wood for residential space heating y means of inefficient heating /cooking stoves that causes considerable indoor and outdoor pollution. Total consumption of furl wood of 11 - 12 million cubic meters is largely unregistered in official statistics as are indigenous forest resources that provide bulk of low quality fuel wood.Municipal and industrial waste is not used as sources of energy. There is minor use of biomass for heat generation in the industry.Although there are no appropriate official estimations it is to be considered that Serbia and Montenegro is endowed with massive biomass resource that almost equals current energy consumption of conventional fuels. Available biomass resources include agriculture biomass, wood residues after harvesting, fuel wood, waste from wood industry, waste from agriculture industry and biomass from municipal waste. These resources match in availability, costs and potential efficiency domestic lignite that is now dominant source of energy in the country.Domestic biomass resources are suitable from the point of view of seasonality and geographical dispersion: most of biomass is available in densely populated areas served by extensive network of navigable channels, railways and roads at the beginning of winter heating season. Furthermore, existing lignite power plants that could use biomass for coburning with lignite and that dispose waste amounts of waste heat suitable for drying of biomass are located on major waterways in proximity of major biomass production areas.The most promising uses of biomass are: cogeneration of biomass in existing lignite fired power plants, improved residential biomass stoves, district heating served by biomass based cogeneration plants and bio-fuel production.Biomass use for heat and power generation is of exceptional importance to improve sustainability of existing energy systems in the country, provide employment opportunities and improve economics of agriculture, forestry and waste management activities as well as improve energy efficiency and reduce pollution.It is to be considered that massive utilization of biomass is precondition for poverty reduction and economic development in Serbia and Montenegro.There are no national strategies for increase of biomass availability (watering in agriculture, re forestation, etc), biomass use in energy production or support to energy generation from renewable resources.92. IntroductionThis Report covers Serbia and Montenegro excluding territory of Kosovo that is under mandate of the United Nations according to the UN Security Council Resolution 1244. State Union of Serbia and Montenegro is comprised of the Republic of Serbia and the Republic of Montenegro. Capital city of the State Union and the Republic of Serbia is Belgrade while the City of Podgorica is capital of the Republic of Montenegro.Serbia and Montenegro is located in the South East Europe, bordering with Italy, Croatia, Bosnia and Herzegovina, Hungary, Romania, Bulgaria, FYR Macedonia and Albania. Country emerged from dissolution of former Socialist Federal Republic of Yugoslavia following by a number of constitutional modifications, wars and political turmoil during 1991 - 2003. Current constitutional arrangement has been established at February 2003.Official currency in Serbia is diner while Montenegro adopted Euro as its official currency. Beginning 2005 European Commission published an official Feasibility Study, a key document before starting negotiations about Stabilization and Accession Agreement (SAA) with the EU.Total population is 8.4 million including 7.8 million in Serbia excluding Kosovo and 0.6 million in Montenegro and including about 0.5 million of refugees and internally displaced persons. GDP per capita remains about 2400 USD. Country is heavily indebted as external debt mounted to about 70% of GDP and 350% of exports in 2003 (EBRD, 2004). Main export products are steel, aluminum, cooper, rubber, sugar, oil products and some agriculture products that altogether generate about 40% of export revenues. However, export industries remain fragmented and exports and imports occur in almost all industry sectors without appropriate concentration into internationally competitive export industries.Serbia and Montenegro participates in the process of establishing Energy Community of South East Europe with the European Union. By signing the Energy Community treaty country is going to undertake obligations to enforce EU Acquis in energy, environment and competition. For details and update on the process see www.seerecon.org.3. Review of the Energy IndustryThe energy industry is separated between Serbia and Montenegro. There is a long-term contract between Serbian electricity utility and their Montenegrin counterparts where Serbian utility uses hydro power plant Piva in Montenegro as peaking capacity while providing Montenegro with seasoned electricity base load.Energy production and consumption in Serbia and Montenegro are generally inefficient and intensive in relation with the GDP. Annex 3 provides IEA energy indicators for Serbia and Montenegro in comparison with the World, OECD countries and some South East Europe countries. At the given level of energy prices, energy conversion industry contributes about 14 of the nominal GDP while its contribution is likely to increase to more than 40% as energy prices approach long-term cost covering levels.SerbiaThe Government owned Electricity Power Industry of Serbia (EPS) conducts power generation and distribution in Serbia. EPS operates open pit lignite mines in Kostolac and Lazarevac that supply about 35 million tons of lignite a year to power plants, residential consumers, institutions and industry. Power plants are government owed and operated by EPS that also comprises ten regional electricity distributions of various size and coverage. Electricity Networks of Serbia (EMS) is recently separated from EPS to become an independent transmission operator.

Source: The Government of Republic of Serbia according to officially available data

Oil Industry of Serbia (NIS) is vertically integrated oil and gas company that conducts activities from oil and gas exploration, refining, transmission, distribution and retailing. It covers approximately 2/3 of domestic retail market in oil products and 100% of natural gas production, imports and transmission. There are 34 local gas distribution companies that are state, municipally or privately owned. In addition to about 600 filing stations owned by NIS there are another 600 stations owned by some 240 private companies including some foreign investors such as LukOil of Russia, OMV of Austria, Helenic Petroleum of Greece, etc. NIS operates two oil refineries in Novi Sad and Pancevo with about 4 million tons of available annual processing capacity. Both refineries have been heavily damaged during 1999 bombing campaign.

Table 2: 3Structure of the primary energy imports in 2003 and 2004 (M TOE) in Serbia200220032004

Source: The Government of Republic of Serbia according to officially available data

Coal production in underground coal mines is conducted by national mining company. Total production is about 500 000 tons per year.There are 44 district heating companies in Serbia with 6600 MW installed boiler capacity, 1600 km of double pipe main heating networks with about 12 000 substations distributing heat to about 400 000 households. These companies municipally owned. (See map in Annex 2)Serbia Forests is the state owned and vertically integrated company to operate about 50% of available forest resources in the country. Remaining resources are operated and / or owned by national parks and private owners.MontenegroThe EPCG is electricity utility of Montenegro. !t operates coal-fired power plant in Pljevlja (210 MW) and two hydro power plants (Perucica and Piva) as well as transmission and distribution network. EPCG is now in the process of restructuring where the vertically integrated structure will break into functional companies. Pljevlja coal mines that supply coal to local power plant is separate and partly private company with minority Government stake. Two major wholesale companies supply oil products to retail market: Jugopetrol Kotor (a subsidiary of Hellenic Petroleum) and Montenegro Resources (the Government owned company). Jugopetrol Kotor commands a small network of filing station while the rest of the market is supplied through private stations.

4. Energy Demand and ConsumptionBoth in Serbia and Montenegro as well as in all energy modes there are enormous seasonal differences as most of energy is actually consumed for space heating. There is short semi peak during Summer in Montenegrin coastal areas due to arrival of tourists and air conditioning. As winter peaks could exceed summer consumption for several times large parts of the energy infrastructure are idled for extended periods of time. As capital costs are not included into prices and capacity charges are not introduced, consumers are not aware of real costs of their behavior.Serbia

Source: The Government of Republic of Serbia according to officially availabe dataThe tables below reveal the structure of primary and final energy consumption according to official data and without taking into consideration biomass use for residential space heating, cooking and domestic hot water supply.

Source: The Government of Republic of Serbia according to officially available data

Source: The Government of Republic of Serbia according to officially available data

124. Energy Demand and ConsumptionBoth in Serbia and Montenegro as well as in all energy modes there are enormous seasonal differences as most of energy is actually consumed for space heating. There is short semi peak during Summer in Montenegrin coastal areas due to arrival of tourists and air conditioning. As winter peaks could exceed summer consumption for several times large parts of the energy infrastructure are idled for extended periods of time. As capital costs are not included into prices and capacity charges are not introduced, consumers are not aware of real costs of their behavior.Serbia

Source: The Government of Republic of Serbia according to officially availabe dataThe tables below reveal the structure of primary and final energy consumption according to official data and without taking into consideration biomass use for residential space heating, cooking and domestic hot water supply.

Source: The Government of Republic of Serbia according to officially available data

Source: The Government of Republic of Serbia according to officially available data

MontenegroMontenegro consumes approximately 4000 GWh of electricity and about 100 000 tons of oil products per year. About 43% of electricity is consumed by the Aluminum Smelter in Podgorica while about 1/3 of electricity is being imported. All oil products are imported from the Mediterranean market.There is distinctive seasonal characteristic of electricity / energy demand in Montenegro as winter peak is accompanied with somewhat smaller summer peak that is consequence of a tourist season.However, energy supply in Montenegro is not sufficient in volume and quality to support a year round tourist season and make use of extensive tourist infrastructure available in Montenegro.5. Institutional Set UpState Union Government has no jurisdiction in the energy sector. However, Union Ministry of International Economic Relations serve as facilitator for accession to major international treaties and conventions applicable to the energy sector such as the UNFCCC and the Kyoto Protocol while the Union Statistical Office have to integrate energy statistics prepared by the republic institutes.SerbiaThe Ministry of Mining and Energy is responsible for overall governance in the energy sector. However, it shares responsibilities in setting energy prices with the Ministry of Trade and Tourism and the Ministry of Finance. Both the Ministry of Mining and Energy and the Ministry of Finance and the Ministry of Economy are active in the process of restructuring the energy industry. The Energy Law adopted in September 2004 establishes the Serbian Energy Regulatory Agency and the Serbian Energy Efficiency Agency.The Ministry of Agriculture, Water Management and Forestry with its departments is responsible for the governance in agriculture and forestry.The Ministry of Capital Investments is governs spatial planning, transport and urban planning as well as major infrastructure developments. Housing standards and energy efficiency in housing are responsibilities of this Ministry.The Ministry of Science and Environment provides governance in research activities (including major program on energy efficiency, renewable energy and industrial development) and environment protection.The Serbian Chamber of Commerce is active in the energy sector through its sector associations for energy, renewable energy and district heating. There is reasonable inter- sector activity within the Chamber between the energy, industry, forestry and agriculture sectors. Various professional organizations are active in the energy sector including about 40 engineering associations of different specialties, association for energy efficiency and some others. National Association of Cities and Municipalities is active in municipal / urban energy planning and energy efficiency.MontenegroThe governance in the energy sector is organized through the Ministry of Economy and the Energy Regulatory agency. Montenegrin Chamber of Commerce and the Academy of sciences conduct activities in the energy planning and energy efficiency. The Ministry of Spatial Planning and Environment governs environmental protection and contributes to energy planning as well as housing standards and energy efficiency. Members from Montenegro are active participants in Serbia and Montenegro professional associations in the energy sector.6. Environmental Impact of the Energy CycleEnergy sector in Serbia generates more than 40 million tons of carbon dioxide and over 300 000 tons of sulphur dioxide per year. Taking into consideration relative lack of wind and location of major energy facilities, the environmental impacts of these emissions are focused to distinctive areas in the country: City of Belgrade, Macva region in Serbia, City of Pljevlja in Montenegro and Kostolac region in Serbia.However, several municipalities are exposed to pollution by particles from burning solid fuels in inefficient stoves throughout the winter. Map 2 in Annex 2 demonstrates municipalities where density of households using solid fuels as a main source of space heating per populated area is such that outdoor pollution has to be seriously considered.The agriculture land acidification and outdoor pollution by burning products correspond with indoor pollution in many poor households that predominantly use solid fuels for space heating and cooking and whose main income is from agriculture. These people are affected both by declining agriculture income, diminished yields and health consequences of environmental pollution as well as lack of employment opportunities in agriculture an forestry. Based on recent UNDP study (UNDP, 2004) it could be considered that about one half of population is affected.

7. Energy Prices and TariffsSerbiaEnergy prices in Serbia are under tight Government control. The Government approves or set prices of electricity, natural gas and oil products. Import of oil products is subject of quantitative restrictions by the Government. Import permissions are given to the companies selected by the Government. Market is served by obligatory processing of crude oil in domestic refineries. Allocation of refining capacities is done in tendering procedure with the final decision reserved for the Government. The oil products are priced (including VAT and excise taxes) about 20% below market prices in neighboring countries that are served by more efficient refineries, market access and transport capabilities.The Government influences collection policy of the electrical utility and sets electricity prices as well as tariff system. The tariff system for residential consumers is organized in three layers according to level of consumption in a way that first 300 kWh consumed during a month are cheapest while consumption beyond 1600 kWh a month is beng penalized by higher unit prices. Such policy subsidizes those that are connected to well supplied district heating systems and do not need to supplement space heating with electricity. It also provides for different average electricity prices between regions according to market penetration and quality of district heating services and availability of solid fuels. Average electricity price for the country is 3.3 - 3.5 Euro cents per kWh for residential consumers and about 2.2 Euro cents per kWh for industrial consumers. The electricity prices are subject to VAT.The Government sets natural gas prices according to import prices. However, "take or pay" clauses in supply contracts are not exercised yet and pricing structure is in favor of residential consumers and district heating companies. Most municipalities are covering fuel costs of their local district heating services. District heating services are priced at 5.5. Euros per square meter per year that I at the level of most advanced district heating system in Europe. District heating services and natural gas supply are subject of VAT at reduced rates. All prices are fixed in local currency - diner that is exposed to annual inflation of 12 to 15 % so the prices could oscillate in real values.MontenegroPrices of oil products are free in Montenegro and set according to Mediterranean market. Prices are subject of VAT and excise tax.Electricity prices are arranged in a simple tariff system that currently goes overhaul. Prices for residential consumers average 4.5 Euro cents per kWh, small commercial consumers 9 Euro cents per kWh while Aluminum smelter enjoys certain subsidy. Taking into consideration that most of electricity in Montenegro are generated in hydropower plants or imported through competitive procedures while transmission and distribution loses are considerable this prices are to be considered at the edge of cost covering level.158. Availability of Biomass ResourcesThere is a need to distinct volumes of biomass available at regular (or "business as usual") pace of biomass generation and volumes that could be produced with reasonably possible improvements in the agriculture and forestry. At this point of time available forest resources are not sufficient to provide appropriate land coverage, water conservation and protection from erosion throughout territory of the Serbia and Montenegro. Existing forests coverage is estimated (FAO, 2001) to be about 65 percent of optimal forest cover. Both density and yield of existing forests are considered to be too small for available soil quality and geographical position. It is to be considered that improvement of coverage, density and quality of forests is priority for the country in which case available wood residues and wood waste suitable for energy generation is likely to increase. Particular problem is re-cultivation / reforestation of land devastated by lignite exploitation that is to be considered suitable for high yield energy plantations.As agriculture biomass is mostly produced in northern part of Serbia it is worth noted that navigable channels and water resources very well serve this area while actual use of watering systems is limited to only 1% of available agriculture land while use of greenhouses is only occasional. In case of widespread use of watering, second harvest and greenhouses, agriculture output is likely to grow while biomass resources could increase both in volume and density.Agriculture biomass resources are estimated in Table 6 according to current production patterns.The FAO Report describes forest resources as follows: "Forests cover 2 412 940 hectares, or 26.7 percent of the total area of Serbia. This is estimated to be about 65 percent of optimal forest cover. The standing volume is about 235 631 600 cubic metres. The average standing volume is 101.6 cubic metres per hectare. The average annual increment is 2.67cubic metres per hectare and total annual increment 6.18 million cubic metres. Broadleaved trees represent 91 percent, conifers 6 percent and mixed stands 3 percent of the forest. The State owns 51.5 percent (1 243 407 hectares) of the forests. The remaining 48.5 percent (1 169 940 hectares) is in private ownership. Beech is the main broadleaved species followed by oak. In terms of area, natural high forests cover 438 117 hectares (39.5 percent), coppice forests 382 146 hectares (34.4 percent), shrubs 123 644 hectares (11.1 percent) and reserves 1 344 hectares (0.1 percent).The area of plantations is 164 331 hectares. This represents 14.3 percent of the forest area. There are at present 24 operational forest nurseries, seven of them are specialised in producing poplar planting stock. In total, 30 million seedlings and cuttings are raised annually: six million are containerised and 500 000 are produced in rolls.Damage by forest fires varies from year to year. In the year 2 000, 300 fires occurred damaging 4000 hectares of forest. In 2001, there were only 45 fires which destroyed 200 hectares.Annual volume of timber felled for commercial purposes is 4 million cubic meters, of which 2.5 million cubic meters is extracted from the State forests and the remainder from private forests."Table 6: Agriculture biomass available for use as a fuel

Source: Djevic, Milan, "Use of Crop Residues for Fuel", faculty of Agriculture, University of Belgrade, Belgrade, 2003

Analyses of private forests and wood resources require particular attention. According to surveys conducted by UNDP (UNDP, 2004) population in Serbia and Montenegro consumes 11-12 million cubic meters of fuel wood during average winter season. This finding is consistent with professional sources cited in FAO report that many private owners are actually managing low quality wood resources that are below standards to be registered as a forest area, for sole purpose of residential heating. Following Table 7 provides some insight into land ownership and availability of orchards, vineyards and "unused" or "non-agriculture" land that could yield fuel wood. Taking into account average yield of low quality wood resources, heated living space, low efficiency stoves, energy efficiency of housing stock and activities at shadow fuel wood market analyses reveals availability of low quality wood to approximately same volume. For the purpose of this analysis it has to be noted that harvesting methods allow for residues to be left in the forests since there is no initiative for collection and delivery to the market. Forest coverage in Montenegro is 39% of territory while only 27% in Serbia. (See Map 4, Annex 2) Limited transportation capabilities in Montenegro provide only for local use of available wood biomass.Table 7: Agricultural land distributions among households

Source: Statistical Yearbook 2003,Calculation

A common device for using fuel wood in households throughout the country is very light cooking stove. The stove achieves energy efficiency of only 20-23%, and has average age of 18 years (UNDP, 2004) while its use for space heating, domestic hot water and cooking is common between households in Serbia and Montenegro. More than 65% of households own at least one of these stoves that also include some households connected to district heating or natural gas networks who keep the stove for energy security.Taking into account official figures and restrictive analyses of economical availability (transport, quality, other uses) the following estimation of immediate energy potential of biomass in Serbia and Montenegro could be made:

Table 8: Immediately useable annual biomass energy potential in Serbia (Estimation)

Source: Dr Dragoljub Dakic, Simeon Oka, Milijana Paprika, Vinca Institute, Belgrade, Serbia and Montenegro, 2004

At the given level of national product and organized collection / disposal Serbia and Montenegro produces about 2 million tons of municipal and industrial waste that could be used for energy purposes. Separation and gasification of organic component could be considered as a suitable technology for energy use of these renewable resources. The World Bank estimates that about 42 of solid waste in Montenegro are covered by collection/ disposal system while in Serbia about 50% of solid waste is covered.At this point of time municipal waste management is organized as simple collection and disposal of waste to local land-fields that are more or less suitable for purpose. However, during several years of neglect, most land-fields in the country are used beyond their designated life. There are neither sewage water treatment plants nor use of biogas byproducts. As country approaches accession to EU appropriate waste disposal and water treatment are to be arranged as envisaged by the World Bank Environmental Assessment.Most of agriculture biomass and municipal waste originate in Vojvodina (northern par of Serbia) and the Belgrade metropolitan area. This area is well covered by navigational waterways (See map 3 in Annex 2), shipping infrastructure and biomass handling capabilities as well as shipbuilding, transport vehicles and agriculture machinery industries. It is to be considered that most of biomass from the area is suitable for bulk collection and transport for drying and use within large thermal power plant complexes in Obrenovac or Kostolac (Compare Kovacevic, 2004), co-burning with lignite and providing combine heat and power outputs. Such large production of biomass in considerable density and served with cheap and large capacity water transport is to be considered as unique comparative advantage that could facilitate development of the Serbian energy industry.Identification of Priorities to Enhance Use of Biomass EnergyNational strategy to increase production and utilization of biomass energy emerges as priority enabling activity in the Serbia and Montenegro. Within such development framework following projects could be considered:Replacement of light cooking stoves as a principal biomass burning devices in poor households with down-burning and / or masonry stoves for space heating in order to decrease fuel wood consumption, improve living standards and relax pressures on local fuel wood prices.Introduction of efficient biomass based central heating systems to public buildings in remote areas.Introduce standardized gasification of municipal waste as a base load cogeneration technology to facilitate distributed electricity generation and support existing district heating systems in Serbia ie. Tourist resorts heating needs along Montenegrin coast.Consider co firing of biomass with lignite in major existing thermal power plants.Promote waste biomass use to cover energy needs in food industry.Promote re forestation and agricultural productivity.

ConclusionsBiomass resources are to be considered as the most important national energy resource in the Serbia and Montenegro. At current level of economic development these resources are to be considered indispensable to foster economic growth, poverty reduction and use of wasted economic resources in infrastructure, agriculture, industry and tourism as well as to facilitate new employment.