Energy. FIGURE 1: Framework for the Energy Sector Analysis. Macroeconomic variables driving energy demand (GDP, sectoral value added, energy prices)

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1 Energy Relevance of the energy sector for green growth in Macedonia The energy sub-component of the Program seeks to assess the potential opportunities available in the energy producing and consuming sectors in the Republic of Macedonia under green-growth scenarios and to identify challenges to realization of these opportunities. Some of the opportunities include: (i) saving energy bills and reducing GHG emissions as well as local air pollutants by reducing wasteful consumption of energy through adoption of energy efficient devices and processes; (ii) meeting growing energy demand without increasing negative environmental footprints through the increased use of cleaner energy sources such as hydropower, renewable energy and natural gas; and (iii) reduction of energy consumption and emissions through cleaner urban transportation system such as hybrid car, biofuels, and modal shifting from road to railway. Planned activities related to energy within the Green Growth Program The study relies on the inter-linkages of three models, the macroeconomic model, the energy demand model (EFFECT) and the energy supply model (MARKAL), to analyze the opportunities under the greengrowth scenarios in Macedonia s energy sector over the period of 21 to 25 (Figure 1). FIGURE 1: Framework for the Energy Sector Analysis Macro Model Macroeconomic impacts Macro-MAC Curve Macroeconomic variables driving energy demand (GDP, sectoral value added, energy prices) Energy Demand Modeling (EFFECT) MAC Curve in the energy Demand side End-use energy demand by sector (Residential/commercial, industrial and Transport) Energy Supply Modeling (MARKAL) MAC Curve in the energy supply side The macroeconomic model projects economic variables such as, GDP, sectoral value added, and prices, which normally serve as the key driving variables for energy demand projections in an economy. Based on these variables and other input data, the EFFECT model projects energy demand for the household sector, non-residential sector, industrial sector and transport sector over the period 21 to 25. To 1

2 meet the projected energy demand, MARKAL, an energy supply model, finds an optimal mix of various energy sources (i.e. coal, oil, hydropower, biomass and other renewable energy), while accounting for several constraints such as resource constraints, technological constraints and other user constraints as needed. The ongoing and planned activities to accomplish the objective of the study are as follows: Surveys of economic, technological and social variables that determines the energy demand in the major demand sectors (i.e., residential, commercial, industrial and transport), these surveys will provide necessary data to run the EFFECT model; Adoption of EFFECT model to represent Macedonian energy demand systems and running the model to project sectoral energy demand for the period; Running the MARKAL model to determine the optimal mix of energy resources to meet the projected demand accounting for resource, technological, environmental and other user defined (e.g., financial, political) constraints for the period; Run both EFFECT and MARKAL models to assess costs and benefits of selected energy activity related measures/options/policies under green-growth scenarios. Work and analysis conducted to date The main analysis completed so far is the development of base case on energy supply mix for the period of using the MARKAL model. Currently, the model uses 29 as the base year and projections of macroeconomic variables (GDP, population) and sectoral energy demand from the previous analysis carried out by the same consultant, Macedonia Academy of Science. This work has included: Survey of energy demand drivers in the residential and commercial/service sectors. Surveys for industry and transport sectors will be completed by the end of March. Further development of EFFECT to adopt it to Macedonia and its test runs. Base case for energy supply mix using MARKAL model fed with preliminary data on macroeconomic variables and sectoral energy demand. Preliminary findings The preliminary results of the MARKAL model show that under the business as-usual (BAU) scenario the final energy consumption will grow significantly, starting from 1,57 ktoe in 29 to 2,749 ktoe in 23 and furthermore to 4,292 ktoe in 251. The final energy demand in year 23 would be 73% higher compared to 29 level. Similarly, the final energy demand in year 251 would be 56% higher compared to 23 level. (Please see Figure 2). 2

3 FIGURE 2: Final energy consumption over 29 to Final Energy Consumption ktoe Biofuels Biomass Bunker Fuel Coal Diesel Electricity Gas Gasoline Heat LPG Oil (HFO, KER, AVF) Renewables (SOL, GEO) Primary energy consumption is projected to grow to 5,225 ktoe in 251, which is twice the 29 consumption. The energy mix will become more diverse by 251. The biggest change can be seen in natural gas, where the share would increase from 2.4% in 29 to 15.7% in 251, followed by oil products where its share will increase from 7.9% in 29 to 16.1% in 251. The contribution of renewable energy sources (hydro, solar, wind and biomass) to total primary energy during the planning period will increase from 12.9% to 15.7%. Also, the share of coal will fall from 51% in 29 to 29.6% in 251. In 29, the residential sector accounted for the largest share of final energy demand (34.4%), followed by transport sector (25%), Industrial sector (24.5%), commercial sector (15%) and agriculture (1.2%). This demand mix is expected to change in future; transport sector demand will overtake residential sector as the largest consumer of energy - in 23, transport sector (37%), residential sector (24.9%), industrial sector (22.7%), commercial sector (13.7%) and agriculture (1.7%). The same demand mix is expected by 251, though with the industrial sector overtaking the residential sector (see figure). 3

4 ktoe 5 Energy Balance - Final Energy by Sector Transportation Residential Industrial Commercial Agriculture Over the next 4 years, total electricity demand would increase by 68.5% from 1.5 GW in 29 to 3.9 GW in 25. As illustrated in Figure 4, currently electricity supply is provided primarily by lignite-based plants (54.6%), hydro power (21.5%), and imports (2.6%). The generation mix would change substantially over the next 4 years - In 23, lignite-based plants (64.1%), hydro power (3.3%) and imports (.8%) and in 25, lignite-based plants (46.2%), hydro power (33.5%) and natural gas (15.2%). Figure 4: Electricity Generation (with electricity imports) over 29 to 25 1% Electricity Generation by Fuel Group + Imports (GWh) 233 8% 6% 4% 2% % Coal-fired power plants Electricity exports Electricity imports Gas-fired power plants Hydroelectric power plants Nuclear power plants In order to meet the growing energy demand over the planning horizon (21-25), 35,735 Million, measured at 29 price, would be needed for expanding new capacity, operating and maintaining the energy system and purchasing fuels. The breakdown of energy system expenditures shows growth in fuel expenditure operating and maintenance costs, investments in new power plants (figure 5), and the purchase of new end-use devices. The addition of 3.9 GW of new generation capacity by 251 will 4

5 require 4,933 Million. The total discounted system costs for the overall energy system are estimated to be Figure 5: Investments in new power plants over 29 to 25 Investments in new power plants (in million euros) Coal-fired power plants Gas-fired power plants Hydroelectric power plants Renewable and Other power plants The BAU scenario shows increase in total CO 2 emissions from 8,627 kt to kt, or 75.8% over the planning period. The power sector (48.7% in 23), followed by transport sector (3.4%) will be the largest contributor of CO 2 emissions. 1% 8% 6% Figure 6: Sector CO 2 emissions over 29 to 25 BAU case CO 2 emissions growth (kt) % 2% % Power Sector Carbon Dioxide Transport Carbon Dioxide Industry Carbon Dioxide Agriculture Carbon Dioxide Commercial Carbon Dioxide Residential Carbon Dioxide 5

6 All results for the Baseline scenario are preliminary at this stage of the study and will be updated as the study progresses. 1 Energy Forecasting Framework and Emissions Consensus Tool (EFFECT) The Energy Forecasting Framework and Emissions Consensus Tool (EFFECT) is being applied to project Macedonia s energy demand and analyze low-carbon interventions across the country s economic sectors that contribute to and are expected to experience rapid growth in emissions. Those sectors are households, non-residential buildings, industry, power, and transport. The EFFECT Model is an Excelbased, engineering style and bottom-up model designed to support open and transparent modeling and comparison of greenhouse gas (GHG) emissions growth for a range of development scenarios. The EFFECT model uses a bottom-up engineering approach and its data needs are very intensive. Similar to many countries, data availability and collection in Macedonia is very challenging. There is paucity of detailed information on end-use energy consumption and efficiency in the household, nonresidential, transport and industry sectors. To assess Macedonia s household sectors from the point of view of energy consumption of household appliances and the energy consumption patterns of heating and cooking fuels such as biomass, LPG and kerosene, appropriate sample household-level surveys (with a target of about 7 households) are being conducted. Transport surveys (targeting about 3 vehicles) are being conducted in gas and fuel stations to collect and compile vehicle data on usage and ownership. In the industrial sector, there is an ongoing effort to collect and compile data on energy use, efficiency potential and costs. Data is needed on fuel combustion activities (including combustion for the generation of electricity and heat) and non-energy derived emissions from industrial processes and products in the major energy-intensive industries. Energy use is rising quickly. Based on data available so far, a sharply Increasing trend of energy consumption in the energy end-use sectors is observed. Biomass consumption by households (due to the use of fuel wood for heat) is rising particularly fast, spurred by the increasing price of electricity and central heating. This trend raises a host of interrelated concerns about sustainability of forests and related climate and environmental impacts as well as local air pollution. It is clear even from this initial analysis that the use of electricity for appliances and lighting, and the use of heating and cooking fuels in urban and rural households bear significant opportunities for improving energy efficiency and reducing emissions. Energy and emissions use in transport looks likely to accelerate at exponential rates in coming decades. Macedonia has exhibited an average year-on-year growth in the volume of freight transport over the 23-27period that is approximately fifty percent higher than its growth in GDP. Probably of more lasting significance is Macedonia s very low current rates of personal mobility (measured as 1 Study will be updated with new energy demand figures from the bottom-up model EFFECT. The macro-economic variables (i.e. GDP, population growth) used may also change. 6

7 passenger-kms per capita on road and rail), standing at just one-seventeenth the mobility of the most developed Western European nations. This starting point suggests an explosion in personal mobility should be expected over coming decades as Macedonian incomes converge to those of the rest of the EU. An energy efficiency database is being constructed which should have lasting and independent value for the government. Despite the growing importance of energy efficiency in Macedonia s energy matrix, there are not adequate end-use energy data to evaluate, monitor, analyze and develop energy efficiency strategies and policies. Complete and accurate data are needed to develop indicators for benchmarking the assessment of sectoral or national impacts of energy efficiency policies. The extensive data collection effort that is accompanying the application of the EFFECT tool to Macedonia will establish a database that can help ensure that energy efficiency policies and measures are well targeted. In this way, expected saving, costs and benefits in each sector can be easily examined and policies can be re-evaluated on a continuing basis. Donor and other support for full establishment of an Energy Consumption and Efficiency Information System, based on best international practice, is being pursued as part of the Program. 7