After the collapse of communism in 1992 and the formation of a democratic socialist government, Albania began a series of increasingly strong economic reform programs. These were designed to halt economic deterioration by turning the country towards a more market-oriented economy. The strategy, in part, was to accelerate private-sector participation in the Albanian energy sector and liberalize the energy market. The goal of energy sector reform was to increase the socio-economic development of the country and support more sustainable development. Private sector participation in the energy market was initiated in 2004 with unbundling of the state electric utility company, Albania Power Corporation (KESH). In 2005, Albania signed the Energy Community Treaty, with its new Market Model another step towards implementation of wholesale market in Albania. By March 2009, the KESH Distribution System was privatized, and the implementation of the new Albanian Market Model was almost complete.

Albania is in transition from socialist to market oriented economy. In 2007 data, in addition to having nearly the lowest GDP per capita (2.514 €), it has the lowest per capita electricity use in Europe of 1,417 kWh/person. Consumption has increased dramatically in recent years due to a three percent annual increase in industrial output. Overall electrical demand increased by 6% annually, with no virtually no increase in supply. Once a regional exporter of energy (through the early 1990s), especially of oil and electricity, Albania developed significant challenges to its energy supply by the late 1990s. Over the last 6 to 7 years the country has consistently relied on imports of electricity and petroleum products to meet demands. In 2007, imports of 2.828 TWh were needed, a historical high, 27% more than in 2002, the prior year of peak energy imports. Fluctuating demand for imports was a function of reliance on hydropower and a severe drought that reduced electricity production in 2007 to 41% below average production in the five preceding years. High reliance on hydropower electricity generation (98% of electricity production) meant low supply security during droughts periods - and the need to import electricity to meet demand. Droughts over the last ten years crippled the Albania Power Corporation’s ability to generate electricity to meet demand. Insufficient interconnection capacities with neighbors hindered its ability to import electricity to meet demand. In 2006, despite imports from Greece and Macedonia, electricity in Tirana was limited to few hours a day. Supply to households was sometimes limited to 200, only enough to power lights, businesses to rely on expensive and polluting diesel generators and households to search for alternatives to electricity for heating, cooking, and other home appliances. Over-harvesting of firewood to meet energy needs has led to severe deforestation in some rural areas.
Albania has fairly abundant but minimally developed mineral resources. With considerable petroleum and natural gas reserves, coal deposits, and other minerals such as chromite and copper, it has the potential to meet local demands and export to its neighbours. The first coal mines and on-shore oilfields were developed in the 1930s. Albania exported petroleum products until 1990; until increased automobile usage made it a net importer of oil. Today, the domestic production of petroleum continues to supply the Ballsh refinery, but this meets less than a third of Albania’s demand. Unprofitable coal mining ceased in the 1990s and is unlikely to resume on a commercial scale.

Electricity – transmission and distribution
In the last 5 years Albania has started restructuring its energy market toward a more open market, corresponding to European directives. It still faces high distribution losses, the second highest in southeastern Europe. The relatively low price of electricity increased drastically in 2007-2008, from 5.9c/kWh to 7c/kWh. However, because it had been sold at only 75% of its true costs (generation, transmission, and distribution costs) the government and KESH have been introducing strategies to eliminate the subsidies completely, to attract investments, and privatize distribution.
The path of KESH privatization required deep reforms in the Albania power sector to transform it from a vertically integrated structure to a structure with legally, functionally, and financially separate Generation, Transmission and Distribution Entities. According to the Energy Community Treaty signed in 2005 (in Athens), the current process of restructuring KESH will liberalize the electricity market, attracting greater interest and participation in the new market structure. The approval of the Albanian Market Model in 2006 was an important step toward the development of a modern European-style electricity market, indicating increased harmonization with EU electricity policies. This should lead to increased socioeconomic benefits through a number of different types of efficiency gains. This, in turn, should yield higher consumer benefits in terms of security of supply and quality of service. The 2006 Concession Law, including the specific law on privatization of KESH Distribution, spun off the energy distribution function of KESH into a new entity, Distribution System Operator (OSSH). As a result of these successful reforms, CEZ was selected as the winning bidder for OSSH, and in March 2009 Albania’s Ministry of Economy, Trade, and Energy sold 76% of the shares of OSSH to CEZ for €102 million. CEZ has a long term experience with restructuring distribution companies in the Czech Republic, Bulgaria and Romania. This privatization will introduce modern management practices that will improve energy services for all customers while attracting much-needed capital investment to the country.
The Albania Power Transmission System, composed of 400, 220 and 110 kV transmission lines, faces serious problems due to inadequate development. Lines, most dating from the 1960s and 1970s, have suffered from a dearth of investment for 15 years. Lack of rehabilitation and technological upgrades for the equipment and dispatch center in Tirana have significantly lessened the quality and quantity of the electricity supplied. New investments in cross-border interconnection lines and the transmission grid within the country are needed. The efforts to construct new 400 KV lines between Podgorica, Kosovo, and Macedonia have long been underway and are making slow progress. In 2007, the Croatian power transmission equipment manufacturer Croatian Dalekovod won a 42 million euro tender to build a 157-kilometre long 400 kV electricity transmission line between Albania (Tirana) and Montenegro’s capital Podgorica. For a separate line between Tirana and Pristina (Kosovo's A&B Thermal Power Plants), KfW expressed interest after the results of a feasibility study. This project would be of high value to both countries. Kosovo A&B TPP generation capacity (850 MW) exceeds demand for the majority of the year (thought significant shortfalls occur during winter peak demand periods). Albania’s Hydro Power plant (HPP) has the potential to partially meet demand shortfalls in Kosovo through such a line, while Kosovo could take advantage of the capacity to transmit excess power and more fully utilize its generation capacity.
Albania’s distribution system suffers problems similar to the transmission system. Total technical and non-technical losses in 2007 were 35%. Technical losses of 18% are considered more reasonable within a distribution system and 3 - 3.5% in a transmission system. The investment costs per capita to upgrade distribution lines are greater because of the low population density.

Electricity – Generation
As noted previously, reliance on hydroelectric power was a serious challenge when droughts significantly reduced generation capacity. Albania's only thermal power plant “Fier”, which had been generating 3% of the total energy supply, had been closed since April 2007. While needed, it was economically inefficient to continue its operation due to the outdated equipment and the increasing price of oil.
The World Bank, European Investment Bank and European Bank for Reconstruction and Development have expressed support for financing a new $112 million oil-fueled power plant as a short to medium-term solution to Albania’s electricity shortages. A new combined cycle thermal power plant in Vlora will start with approximately 175 megawatt unit capacity and is expected to meet 30% of the gap in the current demand for electricity in Albania. Construction started in August 2007 and is nearly completed, with operation scheduled for 2009. Other generation projects in Albania government’s plans for 2007-2011 are to increase capacity by 450MW through construction of a new HPP and reconstruction of the Fier TPP, which is in the tendering process.

Renewable energy
Hydroelectric power potential is significant in Albania. Considerable elevation differences exist - twice the average of Europe - with mountains located near the Adriatic Sea. The significant elevation differences, combined with normally abundant highland rainfall, yield a power generation potential yet to be fully exploited. Up to now, only a third of the potential has been used for energy production.
Albania developed its system of hydroelectric generation during the communist regimes of the 1940s and 1950s. The hydroelectric system supplied the country’s electricity needs and was also exported for many years. However, droughts in the last decade have crippled KESH’s ability to generate adequate power to meet increased demand. While Albania's demand from household and private sectors ballooned as they transitioned to a more productive market-oriented economy, the Drin river dams were producing half the power they did in the 1980s. Lowered production was primarily a function of droughts. Increasing the efficiency of the existing system and increasing overall system generation capacity required new investment.
Private participation in generation of renewable electricity is also a priority for the Albanian government. Continued efforts to embrace the Market Model and harmonize energy policy with European approaches led to promotion of renewable energy sources in the 2003 Power Sector Law, the 2006 Concession law, and through a series of decrees and amendments to them in 2007 and 2008. To incent investment, the government created feed-in tariffs of 0.05 €/kWh for existing privatized HPP and 0.08 €/kWh for the construction of new small and medium hydro power plants on its rivers. This makes Albania's hydroelectric power generation sector favorable for business investment. Also, the laws in investments and privatization provide favorable tax exemptions and feed- tariffs for investing in renewable energy generation in Albania.
National targets for generation of renewable energy, including hydroelectric, are not set yet, but support schemes have been adopted and potential for renewable energy assessed. The hydroelectric potential is considered to be exploited at only 30-35% of its potential, with an estimated 2000MW additional potential (Skavica 350 MW, Devolli 400 MW, Vjosa up to 400 MW). A concession agreement for HPP “Ashta” (48 MW) was signed with the consortium of EVN and Verbund (both Austrian companies). EVN and Norwegian Statkraft also made a 950 million euro deal for the development of three HPP with 400 MW capacity for the Devolli River. In addition to renewable hydroelectric power, biomass and solar energy sources also have great potential. Wood in Albania is broadly used in rural areas, and while presently being cut at unsustainable rates due to power outages, it has the capacity to provide a sustainable supply at rates lower than present demand. Deforestation is a significant problem in some regions, but is expected to decline when electricity production and distribution develops in the near future. It is estimated that a third of Albania's domestic heating sources and a quarter of the cooking sources are reliant on wood. Space heating and cooking account for 60% of total household consumption of energy in Albania.
In February 2008 the Albanian government adopted “The Law for Production, Transport and Trade of biofuels and other Renewable fuels in Transport”. It set the annual targets for biofuels and other renewable fuels use of not less than 3% of the market by 2010 and 10% by 2015. Committing to Kyoto Protocol directives, promotion of bio and other renewable fuels for transport is supported by various financial incentives such as tax reductions for construction of biofuel plants.
Wind potential has not been fully assessed due to a lack of national wind data. If generated, access to the electricity grid is almost impossible due to the obsolete electricity transmission system. Thus, as with many elements of the Albanian energy situation, development of the resource requires improvements to the transmission system. There are no operating wind power plants in the country yet though there is interest in developing it as a resource. Wind data has been collected for the areas of Durres, Kryevidh, Xarre, Bulqize and Milot. Studies carried by the National Agency of Energy (NAE) have identified potential locations for construction of wind farms. There is an expectation that Albania might host one of the biggest onshore wind farms in Europe on the Karaburun peninsula, close to the city of Vlora. Plans to build 410MW generation capacity from wind, with an investment value of €400 million by Italian Companies Moncada Costruzioni and Marseglia, have already been approved by the Albania government. This project will also include the construction of a 400kV submarine transmission line between Italy and the Albanian port of Vlora.
Albania has an excellent climate for development of solar resources (about 129.3 Kcal/cm2 per year). It has a Mediterranean climate with hot and dry summers that yield annual radiation between 3.2 kWh/m²/day in the northeast part to 6 kWh/m²/day in Fier on the coast. The national average is 4.0 kWh/m²/day. Development of this resource for solar heated water could reduce the energy demand for water heating significantly based on the experiences in neighbouring countries. The high investment costs relative to low household income, and limited public budget for underwriting the installation of the systems suggest there will be little emphasis on developing this resource in the near future. At the moment there no known major photovoltaic systems installed in Albania.

Petroleum
In the 1980s Albania’s production met approximately one third of demand. Petroleum consumption significantly rose after 1990 when the number of motor vehicles increased, and it was able to meet only one sixth of demand. Albania consumed close to 30,000 barrels of petroleum products per day in 2005. Six thousand barrels per day came from domestic resources and were refined in the country. Due to the lack of modern extraction technologies, such as obsolete drilling equipment, less than a quarter of its capacity has been actually exploited. The balance of demands was imported from refineries in Greece, Russia, Italy etc.
The Albanian petroleum industry was the first to attract foreign investments after the fall of the communist regime. Feasibility studies for oil exploration by international companies in 1990s failed to find it economically viable. The efforts in the petroleum sector are now focused on prolonging the life of the country’s mostly depleted on-shore oil production, and exploring the possibility of constructing an oil pipeline connection for Central Asian crude. Ballsh and Fier are the only operating refineries (irregularly) utilizing only 30% of their capacity. The National Strategy of Energy calls for an economic feasibility study to assess whether or not the refineries should continue operations.
In December 2004, the prime ministers of Albania, Macedonia and Bulgaria signed a Memorandum of Understanding to build a new oil pipeline (AMBO) between the Black Sea and the Albanian Adriatic Sea port of Vlora. The AMBO pipeline will transport oil from Russia with a capacity of 750,000 barrels/day. A trilateral convention signed in 2007 detailed the terms of construction, operation and maintenance of the pipelines. It was anticipated that the financing would have been secured in the last two years and construction begun, but this has not occurred.
In addition to private participation in many activities in the petroleum sector, there are three Joint Stock Companies (Socially Owned Enterprises): Alb-petrol (Albanian State Oil and Gas Production Company), ARMO (Albanian State Refinery and Marketing of Oil), and SERVCOM (Service Company of Oil and Gas). The incorporation of these companies into the Joint Stock Companies was an important step toward the privatization process in the oil and gas sector. The privatization process of Alb-petrol (exploitation), ARMO (refinery) and SERVCOM (distribution) is now underway.

Natural gas, LPG, and coal
Natural gas reserves historically come from fields located in southwestern Albania, from Durres to Vlore and Berat. These fields are diminishing and are near the end of their lives. Though Albania is self-sufficient in natural gas at the moment, its demand and supply are low at 10.2 ktoe or 30 million cm. There is limited gas transmission capacity and practically no natural gas market.
Albpetrol J.S.C, a state owned gas production company, has decreased production from 1 bcm in 1982 to 0.01 bcm in last 10-15 years. The gas is used to increase oil production, to support refineries, or for fertilizer production at TPP Fier. The drastic decrease is a consequence of low investments in the existing fields and no discovery of new gas reserves. The total reserves of natural gas in Albania in 2006 are 57 million cm. Delvina is the most effective gas field, allowing for continued drilling and gas production.
The gas transmission lines are highly corroded and often inoperable. Lack of connection to the European gas delivery grid restricts gas imports in the country. The most recent gas network proposals are to supply Russian/Caspian gas from Greece to Albania and on to Italy through an underwater gas pipeline.
For space heating, Albanian households tend to use electricity and LPG (Liquid Petroleum Gas). The LPG is imported by gasoline retailers and consists of 10% of the household market.
Coal is one of the largest energy sources of Albania with reserves estimated around 226.49 Mtoe (2006 data). The coal mines were commercially mined from 1930s to the 1990s primarily to generate electric power. The unprofitable mines, located mainly in the central Albania spread in four main basins (Valias, Manez, Korqe, and Drenove), ceased operating in the 1990s. Production is unlikely to resume due to the low calorific value of coal (lignite) and high costs of exploitation: poor conditions inside mines, with most of the work was done by manual labor, make coal unattractive.

The future
Perhaps the most important work of the government is completing and securing the creation of a European-style legal framework for the energy sector. This is needed so as to secure much-sought foreign investments that increase the security of the energy supply. The New Albanian Market Model is a firm foundation towards the market oriented privatization process. The legal framework for a more open energy market is almost complete, except for the natural gas laws which are expected later in 2009. The responsibilities of key players in the energy sector are now well defined (again, except for gas sector).
Moving towards the New Albanian Market Model, progress should accelerate on resolving acute electrical shortages that occur during severe droughts. Fortunately, high rainfall during the winter of 2008 has filled the reservoirs again but regional projections for global climate change suggest that droughts will occur more frequently in the future. While the development of the energy system is focused primarily on increasing TPP and HPP production with some interest in exploring wind, there are significant opportunities for additional work on international and internal transmission capacity, increased attention to oil production, and development of the network delivery grid.

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