Montenegro has become part of the strategic expansion of the European clean energy and industrial space, and investments in networks and a just transition are key to the full potential of renewable energy sources, it was announced at the third panel within the EPCG NET energy symposium.
The Head of the European Investment Bank (EIB) Representative Office for Montenegro, Davor Kunc, at the panel titled Financing RES Projects, assessed that Montenegro's progress is a significant achievement.
"The basic prerequisites have always been the abundance of hydro, wind and solar potential. What has changed is the public policy framework, greater visibility of project pipelines and regional integration of energy markets," said Kunc.
According to him, Montenegro and the region have strong natural potential, but also an important strategic geographical position, at the crossroads between the European Union market and wider energy corridors, reports PR Center.
"If you put yourself in the position of a financier, it's a good combination. On the one hand, there is a great need for transition, and on the other, there is a high natural potential. That's something that a long-term financier appreciates, provided that the framework is credible," Kunc pointed out.
He assessed that a significant amount of work has already been done in Montenegro when it comes to public policies and the regulatory framework, emphasizing that this is an important preparation for membership in the European Union.
"There are no shortcuts for Montenegro. Homework is being done and that is good. It is good preparation for membership," said Kunc.
According to him, the narrative has changed from coal and imports to renewable energy sources and integration.
"I think it's a positive step forward. The region, and Montenegro in particular, is much more attractive for financing today than at any point in the past," Kunc said.
He said that the EIB is well positioned as a long-term financier, although it has not yet had direct investments in energy in Montenegro, but recalled that the Development Bank of Montenegro is a strategic partner of the EIB.
"We provided a loan to the Development Bank of Montenegro, which further financed smaller projects that we would not have financed directly," said Kunc.
He stated that the EIB is also considering potential direct investments in Montenegro, including the interconnector infrastructure with EPCG and EDF, which, he assessed, could be of key importance.
"There are elements for direct investment and we want to replicate in Montenegro what we are doing in the neighborhood, such as solar power plant projects in Bosnia and Herzegovina," said Kunc.
He said that the region, and especially Montenegro, is much more attractive for financing today than at any time in the past.
EBRD's Renewable Energy Financing Expert, Pavle Milekić, said that renewable energy sources have developed significantly in the region in recent years, but electricity purchase remains a key obstacle to financing projects.
"I think that renewable energy sources have really developed in the region, this is also evident in the number of grid connections issued. Renewable energy sources are no longer something unusual. A lot of work has been done on the development side and there are a large number of projects ready for implementation," Milekić pointed out.
He said that despite the willingness of financial institutions to support such projects, the challenges remain significant.
"Purchasing electricity remains a key obstacle to financing. There are not many simple solutions for this. Lenders are willing to finance projects, but we need to have some security and predictable cash flows," Milekić said.
He explained that projects are most easily financially sustainable when government support systems are in place, as they provide contracted, visible, and predictable revenue streams.
"These are revenue streams that are very predictable, most often for a period of 15 years, and practically any bank can finance such projects," said Milekić.
He warned that new challenges have been emerging recently.
"Previously, we could say that there was a high correlation between the Western Balkans market and the EU market, and that traders were ready to offer long-term purchases. However, since January 1, energy flows to the EU have been stopped, which has created a gap in the correlation between the Western Balkans market and the EU," Milekić said.
As he stated, the consequence of this is the almost complete withdrawal of long-term private purchase from the market, which represents a double challenge for renewable energy sources.
"First, we no longer see PPA contracts being offered, so lenders cannot finance projects based on them. Second, prices in the Western Balkans have fallen. If an investor was previously considering an investment, and now prices are ten euros lower per megawatt-hour, the question is why he would continue with the investment," Milekić said.
According to him, although the region is currently facing stronger challenges than a few months or a year ago, the long-term need for investment in renewable energy sources remains undeniable.
"There are many projects and huge potential for growth. The Western Balkans are starting from a very low base when it comes to intermittent renewable energy sources, and their development is absolutely necessary for the energy transition of the region," Milekić pointed out.
Senior Energy Economist at the World Bank, Katarina Gasner, said that investments in networks and a just transition are key to unlocking the full potential of renewable energy sources.
"The foundations for the development of renewable energy sources have been established, the risks are known, and the private sector can do its part if the "project-by-project" approach is moved to a standardized model of development and capacity expansion," Gasner said.
In the case of Montenegro, the implementation of the auction framework has not yet been completed, so we are all waiting for this to happen both in the interest of a standardized increase in renewable energy capacity and in the interest of policy credibility.
She stated that this is a reform that the World Bank supports through loans for development policies, emphasizing that in this case it is not about project financing, but about direct support to the Government, with the funds going to the Ministry of Finance for the implementation of a defined package of reforms.
"When we talk about the broader picture of the energy transition, in parallel with the financing of renewable energy sources, two other important areas must be implemented, the first of which is investments in networks. Networks, or rather investments that are already being launched, are really needed, especially at the high-voltage level. Yesterday we saw very impressive data presented by CGES regarding investments in the high-voltage network," Gasner said.
According to her, to fully utilize the potential of renewable energy sources, investments are also necessary at the distribution network level, especially considering the need to connect a larger number of smaller renewable energy capacities.
"The World Bank is also financing this area. We have a project with CGES that is related to improving the distribution network and enabling the connection of numerous megawatts of small renewable energy sources, especially rooftop solar systems that we have heard about," said Gasner.
As she explained, the next step is to modernize the networks through the development of smart grids, better regional integration, and improved communication between grid systems, which are relatively small in the Balkans.
"Investments in renewable energy sources and accompanying investments in the grid can be optimized through cooperation. This is where I see great potential that is still underutilized," said Gasner.
As another important area, she highlighted the need to address, in parallel with increasing capacity from renewable energy sources, issues of the legacy of the previous energy system, which in Montenegro primarily means Pljevlja.
"The World Bank is very involved in the just transition process in Pljevlja. We are working on finding alternative heating sources for Pljevlja after the thermal power plant is phased out," said Gasner.
The Executive Director of the Directorate for Development and Investments at the Electric Power Company of Montenegro (EPCG), Ivan Mrvaljević, said that hydropower potential, especially through the development of pumped hydropower plants, must play a more significant role in the energy transition, because without a stronger reliance on hydropower, it is difficult to ensure system stability in the medium term.
"Lenders have had a very conservative approach to large hydropower projects over the last 20 years, but that attitude is now changing," said Mrvaljević.
Pumped hydroelectric power plants are gaining importance again
Mrvaljević also pointed to positive examples of EPCG's cooperation with international financial institutions.
"EPCG has a truly long-term cooperation with international financial institutions. Almost all of our rehabilitation and modernization projects have been implemented with their support," Mrvaljević said.
He said that earlier financial arrangements with individual countries have been replaced by newly established funds in Europe, including the European Fund for Sustainable Development, as well as the EFSD+ guarantee.
"Our last cooperation used the EFSD+ mechanism without additional service costs. This allowed us to check the process faster, sign the contract and start the project implementation. This was very useful for us and is really helping us now," said Mrvaljević.
Senior Portfolio Manager at KfW, Sarah Bongard, believes that the biggest bottleneck in financing public enterprises is the project preparation phase.
"The biggest bottleneck is certainly the project preparation phase. At that stage, a large number of studies need to be done, which is expensive and time-consuming, which is why private investors are not particularly interested in doing it," said Bongard.
She stated that this is an area in which international financial institutions can provide important support, recalling that KfW has access to grant funds from the German ministry, as well as to European Union grants, including the Western Balkans Investment Framework.
"This is one of the areas where we strive to support our clients to improve project preparation from a project idea to a bankable project that can ultimately be financed by either an international financial institution or a commercial bank," said Bongard.
She added that there are many banks on the ground that would like to finance projects, but there are other factors that affect the supply of financing.
One of these factors, as she explained, is country risk, and she assessed that Montenegro is on the right track, as rapprochement with the European Union and harmonization with European regulations contribute to reducing that risk.
"The closer Montenegro gets to the European Union and the more it aligns with EU regulations, the less risk the country faces. This also attracts private investors and makes it easier for international financial institutions to secure appropriate financing," said Bongard.
She said that an important factor is the financial strength of public utility companies in the region, stating that it significantly affects the ability to secure financing.
"And in that area, we strive to support our clients through financial modeling and strengthening their financial situation, as well as through good governance, compliance, regulations, IT security and numerous other areas," said Bongard.
According to her, such support contributes to greater client stability and strengthening the confidence of private investors to invest in public companies.
"The third important element is a reliable investment program. It is very important for banks, especially if it is based on reliable data and incorporated into a regulatory framework that allows investment projects to actually be implemented," said Bongard.
She assessed that financing is not lacking for one reason, but rather due to a combination of challenges that need to be addressed systematically, with support for clients in overcoming them.
Director of the Development and Investment Sector at CGES, Dragan Perunović, believes that investing in the transmission network is a basic prerequisite for integrating as many renewable energy sources as possible, and investments of almost 200 million euros are planned in the next five years.
"CGES has been cooperating intensively with international financial institutions, especially the EBRD and KfW, for almost two decades," said Perunović.
According to him, the company is investing significantly in network development, which is one of the most important tasks in the energy transition process.
"We are really working hard and investing in our network, which I consider our first and most important task, in order to integrate as many renewable energy sources as possible," said Perunović.
The five-year investment plan is worth almost 200 million euros.
"We are working on several major projects, including one of the largest transmission lines in Europe, which we completed last week and which we will soon put into operation," said Perunović.
He assessed that investors and banks must understand the complexity of building network infrastructure.
"Building a network means building the infrastructure behind the system. It doesn't just mean building a connection to a specific location where someone wants to set up a solar power plant or wind farm. It is necessary to build transmission lines, substations and other infrastructure to connect that facility to the rest of the network," Perunović explained.
He said that investors' great interest in solar projects began several years ago, after the rise in electricity prices on the market.
Deputy Director of the Corporate Sector at Erste Bank, Dušan Žunić, said that banks in Montenegro and the region have the capital to finance renewable energy projects.
"But the key challenges remain the possibility of connecting to the network and resolving property and legal issues," said Žunjić.
He said that these restrictions were present in 2022, when this topic was first discussed, and that they are still relevant today.
He stated that Erste Bank in Montenegro in the last three years had 37 requests for financing renewable energy projects, of which only six were implemented.
"This speaks volumes about how challenging it is for investors to reach the 'ready to build' phase, when a bank can get involved in financing," said Žunjić.
According to him, it is surprising that, after four to five years of practice and experience in financing renewable energy projects, investors are still not sufficiently aware of the limitations that exist.
"In discussions with commercial banks, not only with Erste Bank but also with other banks in Montenegro, they are still quite optimistic about the issue of connecting to the grid, whether it is a large or small project. There is simply not enough knowledge of the circumstances that may affect the financing of the project," said Žunjić.
He said that banks in Montenegro and the region have no problem with capital or regulatory restrictions related to the possibility of financing.
"The responsibility lies, first and foremost, with investors, although we can also talk about whether the public sector in a certain way influences projects not reaching the 'ready to build' phase," said Žunjić.
Speaking about construction risk, he assessed that it no longer represents a key problem for banks.
"There are companies in the region that can carry out projects without much risk, whether they are large or small projects. There is enough experience. Hundreds of megawatts of installed power have been built in the field, so from the banks' point of view, the construction itself is no longer a key problem," said Žunjić.
The key challenge remains the regulatory framework and bringing projects to the stage where they are ready for construction and financing.
"The problem is, first and foremost, what relates to the regulatory framework and bringing projects to the 'ready to build' phase," said Žunjić.
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