The proposed new lignite-fired plant, Gacko II, in Republika Srpska, Bosnia and Herzegovina, would become a stranded asset under several scenarios and even with generous assumptions that favour lignite generation
Financing for the project is uncertain given its economic and environmental profile, with European power sector trends and future financing opportunities favouring lower-cost, lower-risk renewable alternatives
Investing in onshore wind and utility-scale solar PV would offer safer and improving returns, quicker construction and cleaner power, as well as better access to financing
Key findings of this study could be replicated across similar sites in Bosnia and Herzegovina and across the Western Balkans
London, 7 March 2023| The economic outlook for the proposed Gacko II lignite-fired power plant is dire even under the most favourable assumptions. Carbon pricing, construction timing, and uncertainty around financing risk make Gacko II and similar projects across the Western Balkans vulnerable early in their lifetime, if not sooner.
Investors, developers, and taxpayers should refrain from backing this ‘’non-starter’’ project. A new IEEFA analysis shows that utility-scale solar PV and wind developments in the region would offer safer returns and cleaner power, and could benefit from supportive policies.
Gacko II faces poor project economics. The plant would struggle to meet required investment returns throughout its lifetime under all scenarios analysed, including with generous assumptions that favour lignite generation. It is likely that the project will fail to show a positive net present value or a positive rate of return.
It is difficult to see who would finance a new coal project in Bosnia and Herzegovina under current conditions, with China and Russia likely to be excluded from the list of potential backers. Even if the plant were to obtain financing, the timing is bad.
In present value terms, it would take sustained electricity prices or some form of subsidy at very high levels to avoid losses. But by the time Gacko II would come online after 2028, it is expected that the current high power prices will largely have subsided and the plant would not be able to benefit from them.
The project would however incur high costs during construction due to ongoing inflation of raw materials and post-pandemic supply chain bottlenecks, geopolitical issues, and the ending of central bank expansionary policies.
Gacko II might also immediately face crippling carbon costs due to changing policy. Pursuing the project would be opposing established policy trends, such as subsidies for green projects, penalties, and outright bans on coal/lignite generation.
“A renewables portfolio of similar cost to the proposed Gacko II project can deliver substantial amounts of energy to the region with a much-reduced risk,” said Arjun Flora, IEEFA Director, Europe. “EU energy transition policies and Western Balkans countries’ commitments to decarbonisation reflect a strong and established trend against new coal projects across Europe.”
Renewable energy alternatives such as utility-scale solar PV and wind constitute a better alternative to Gacko II, because they would benefit from easier access to finance and the likelihood of supportive future policies.
“Current and future trends stand against Gacko II and similar projects in the region,” said Paolo Coghe, president of Acousmatics and a co-author of the study. “The economics for this plant speak clearly—why pursue the construction of a costly and high-risk fossil-fuel project, when investors can pursue safer and improving returns by opting for onshore wind and utility scale solar PV?”
Read the report: No Economic Case for New Lignite Plant in Bosnia and Herzegovina
The Institute for Energy Economics and Financial Analysis (IEEFA) examines issues related to energy markets, trends and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. www.ieefa.org
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