By Maja Zuvela
SARAJEVO (Reuters) - A Chinese company began work on Monday on a $715 million (£573 million) expansion of a Serbian coal mine and a new power plant, part of a wave of investment in new coal-fired plants in the Balkans that is at odds with EU policy of reducing coal use.
China Machinery and Engineering Corp's project to expand Kostolac, Serbia's second biggest coal mine, and build a new 350 megawatt (MW) unit at a nearby power plant is the first new electricity capacity built in Serbia in nearly 30 years.
"Elektroprivreda Srbije (EPS) is opening a new chapter," Milorad Grcic, chief executive of Serbian power utility EPS, said in a statement marking the start of construction.
The investment, majority financed by China's Export Import Bank [EXIMC.UL], secured the future of the mine and power plant for half a century, he said.
Western Balkan countries, including Bosnia, Kosovo, Montenegro and Serbia, plan to invest billions of euros in building new coal-fired plants to meet rising demand for electricity as old plants are being phased out.
A total of 2,600 MW of new coal generating capacity is planned in the region in the next decade.
But environmentalists fear the investment in coal could backfire as governments may be forced to invest hundreds of millions of euros more to upgrade plants to meet EU environmental standards as countries progress towards membership of the bloc.
EU regulators set out a blueprint in November for renewables to power half of Europe by 2030 and for phasing out coal subsidies as part of its plans to cut emissions and meet climate change goals.
EU aspirants Serbia, Bosnia, Kosovo, Macedonia and Montenegro must implement EU laws to qualify for membership.
Of the 37 coal-fired units operating in the five Balkan countries, with an installed capacity of 8,658 MW, no fewer than 34, with 7,662 MW of capacity, still need to either implement investments to bring them into line with an EU anti-pollution law or be closed in the next few years.
The expansion of the Drmno opencast mine near the northeastern town of Kostolac by a third to 12 million tonnes of lignite a year will cost $123 million, said EPS.
"Expanding the coal mine to feed the new plant is particularly worrying, as no environmental impact assessment process has been carried out for the increased production," Pippa Gallop, research coordinator at CEE Bankwatch Network, an EU-funded advocacy group, told Reuters.
The Energy Community, a body in charge of harmonising Western Balkans energy markets with those of the EU, said it had received a complaint about potential state aid being granted for the Kostolac B power plant in the form of loans, guarantees and exemptions from customs duties and value-added tax.
Lignite - the most polluting type of coal - is widely available in the Balkans, making it appealing to governments seeking ways to ensure security of supply and keeping energy prices low while also placating influential mining lobbies.
Coal - mainly domestic lignite - accounts for more than half of energy consumption in Serbia, Kosovo, Macedonia and Montenegro.
But as the EU, World Bank and other organisations cut back on coal financing, Western Balkan countries are encountering difficulties in securing finance for their projects, and are increasingly turning to Chinese insitutions and contractors.
The China Development Bank [CHDB.UL] financed construction of a 300 MW coal-fired plant in Bosnia that came online in September last year.
But some of the region's major projects are on hold until finance is secured, putting countries at risk of becoming dependent on expensive imports if new capacities are not built.
In Montenegro, Skoda Praha, a unit of Czech power firm CEZ, failed to secure financing for a major new coal-fired power plant in October.
In Kosovo, plans to build a new 600 MW coal-fired power plant are on hold pending a World Bank decision on whether to fund the project. If it backs the scheme, it would mark a shift in the bank's policy to support cleaner alternatives to coal.
(Editing by Ivana Sekularac and Adrian Croft)