Investing in geothermal development as conflict prevention: Making the case for a Balkan just transition

Author: Natalija Vojno, Founder of Our Future First , with support from Marcel Smits, Head of Standards and Market Intelligence at the Finance for Peace initiative of Interpeace. This article was inspired by the Balkan Youth Environmental Assembly (BYEA) led by Our Future First.

There is an urgent need for climate action and finance to be conflict sensitive. By now, most have heard that climate change and environmental degradation pose threats to peace and security around the world. Over the past few years the link between the environment and peace has only grown more apparent. The White Paper on the Future of Environmental Peacebuilding was launched in 2022 and outlines approaches to the enmeshed dynamic of environmental degradation, climate change, and conflict that include environmental diplomacy, local community engagement, and environmental justice. The UN Secretary General’s latest “New Agenda for Peace” outlines a shift to conflict prevention and sustaining peace by reducing military expenditures and increasing investment in prevention, social infrastructure, and redressing structural marginalization. This reallocation should include climate finance for a just transition.

The following blog explores how geothermal development could be an avenue for conflict-sensitive climate finance in the Balkans. Dirty and expensive fossil fuel-based heating is the primary way people in the Western Balkans heat their homes in the winter time. Coal-fired power releases sulfur dioxide, nitrogen oxides, and dust that are contributing to significant air pollution levels and aggravating the climate crisis. The current track of impairing the regional environment and deviating from international climate obligations is unsustainable. The need to make use of renewable energy sources such as the untapped geothermal energy for district heating in the region is clear. However, the transition from fossil fuel-based energy systems to clean, low, to no-carbon energy systems must coincide with a just transition.

An International Military Council on Climate and Security (IMCCS) snapshot of the Balkans analyzed climate security risks and found that drought posed the largest threat to the ethnically diverse region, possibly hindering hydropower production or exasperating ethnopolitical fault lines. Yet, the region’s diversity of peoples, skills, and resources may hold the key to resilience. A one size fits all approach will not work. Renewable energy, such as hydropower, if developed without public consultation is no panacea. Small scale hydropower projects are threatening largely intact river systems and are situated within or in proximity to key biodiversity sites within the region. Funding a mix of renewable energy sources will require conflict-sensitive investments. Here, individual Balkan countries due to their income status, size, and perceived investment risk may face challenges. Could a regional Green New Deal inspire long-term investors in the potential political, economic, and financial stability of this market?

In 2022, The Balkan Youth Environment Assembly (BYEA) was a civil-society initiative led by Our Future First
to model building peace between people and with nature in the lead-up to the United Nations Environment Assembly (UNEA 5.2). The regional youth assembly was supported by the UNEP Major Group for Children and Youth and was organized by and for young people in the Balkans to demonstrate how to work together to develop a vision for their shared home. During the BYEA, their key messages pertaining to the climate crisis and environmental governance were made available in Albanian, Serbian, and Bosnian in recognition that the people — much like the oak, the pine, and the birch — can thrive in the same soil. This event builds upon the ecosystem diversity that informs traditional ecological knowledge and cultural heritage — and in turn offers a seed of peace while calling for urgent climate action.

South Eastern European countries from Croatia in the North-West to Albania in the South host untapped geothermal potential. Until 1990 numerous deep geothermal drill holes had been constructed and put into operation. Today’s situation is quite different. The current thermal water applications are mainly for natural therapeutic baths or greenhouse heating. In Bosnia & Herzegovina, a 1MWe geothermal power pilot plant was to be built in Sarajevo prior to the civil war — due to lack of financing the project was put on hold. Today, tides are turning with the European Bank for Reconstruction and Development (EBRD) set to finance a district heating system in the Sarajevo Canton with EUR 16 million in loans and approx EUR 2 million in grant funds. Meanwhile in 2018, Velika I in Ciglena became Croatia’s first electricity-producing geothermal project producing 16.5 MW. Turkey’s MB Holding owns the plant. A second 20 MW plant owned by Geo Power Zagocha is planned with a system supplied by Italian manufacturer Turboden. Raising the ambition, Serbia plans to decarbonize its energy sector by 2050, and will require an investment of EUR 15 billion over the next ten years to finance that transition.

Compared to other renewable energy sources, geothermal energy can deliver electricity 24/7 for 365 days a year. The challenge is that investing in geothermal energy is cost intensive and requires social and political stability over a longer period in order to claim the Return on Investment (ROI). Investment in renewables grew +17.2% in 2022, according to the Renewables 2023 Global Status Report, but growth was uneven across technologies and geographies; China is the world’s fastest-growing geothermal heat market, followed by Türkiye, Iceland and Japan. In addition, for deep geothermal projects, the geological risk impacts the overall cost of the project and the risk only diminishes once a significant amount of capital has been spent on drilling the first well and gaining information on the parameters of the reservoir. Globally, binary-cycle geothermal technology, rather than flash or dry-steam geothermal technologies suitable for high-temperature resources, have been the fastest-growing due in part to the rising use of relatively low-temperature resources. Using geothermal energy from shallow sources is gaining interest as these systems are less expensive and face less regulatory barriers compared to deep hydro geothermal systems. Financing geothermal energy projects usually requires tailored approaches in terms of support schemes and financial instruments due to the fact that the geothermal sector is far from uniform in readiness across geographies.

While geothermal heating and energy production presents a climate sensitive alternative to the use of coal and wood, there are technical, political, and financial issues that impair the use of existing boreholes for geothermal energy within Balkan countries. A 2019 study of Romania and Serbia found that conflicting energy policies between local and national governments and lack of cooperation between linguistic groups posed a challenge. In the North of Serbia, the GeOthermal Serbian Pilot projects for hEat and eLectricity (GOSPEL) financed largely by the French Ministry of the Economy and Finance and the Vojvodina government, identified estimated installed capacities of potential geothermal power plants at between 11 MW and 17 MW at a maximum total investment of EUR 18 million. Much like elsewhere, the potential for renewable geothermal district heating in Banja Luka is complicated by complex bureaucratic processes, stakeholder skepticism, and conflicting interests. The financial risk regarding the sale of energy produced and the cost of raising funds for a capital investment is another barrier to developing geothermal energy.

Geothermal projects require a highly capital intensive exploration process to minimize uncertainties on the availability of the resource as well as the public support to become economically viable. The transition from coal will admittedly be tricky as entire local economies are locked-in. The livelihoods of the citizens of Tuzla, in Bosnia & Herzegovina (BiH) are closely tied to fossil-fuel based industries. The energy sources for Tuzla and the town of Lukavac, lignite and brown coal, are supplied from the nearby Banovici-Kreka coal basin. To avoid energy poverty, cities subsidize energy and users pay a flat rate. The CEE Bankwatch Network published a feasibility analysis of transitioning away from coal-based district heating and advocated for a metering scheme paired with subsidies for vulnerable groups as well as retrofits. While an energy transition is possible, it will require mustering the political will to do so.

Not only is affordable climate financing needed but reducing harm by not exacerbating tensions and existing inequalities requires a commitment to making adaptation and mitigation finance conflict sensitive. Interpeace is at the forefront of this movement, developing the Peace Finance Impact Framework (PFIF) to define and measure the ‘peace impacts’ of investments. This framework is crucial for ensuring that climate adaptation and mitigation efforts do not exacerbate existing tensions or inequalities. Peace bonds, a key innovation of the PFIF, are designed to integrate local communities into the lifecycle of these projects, ensuring that climate mitigation and adaptation investments are not only ethically and culturally appropriate but also accessible and affordable. By mobilizing public funds through peace bonds, investments that might have been overlooked now have the potential to flourish. These bonds embed peace-enhancing activities and partnerships into their financial structure, significantly reducing risks for communities and investors alike. This approach transforms previously unviable adaptation projects into feasible, impactful initiatives, marking a significant stride in aligning climate finance with peacebuilding and community resilience.

A human rights-based approach (HRBA) is also essential to address biodiversity and climate challenges that disproportionately impact people living in vulnerable situations. A HRBA to a just energy transition could entail enhancing: the capacity and accountability of decision makers, the meaningful engagement of communities and mechanisms for respecting Free, Prior and Informed Consent, and access to justice. Promoting environmental and social safeguards would also entail addressing power inequalities and facilitating the integration of local and indigenous knowledge holders within management systems who can be a voice to safeguard the biodiversity of the lands and waters they are in relationship with.

Positive peace is an ongoing process of transforming attitudes, institutions and norms at multiple levels of societies so as to remedy grievances in ways that are non-violent and just. Conflict-sensitive financial arrangements, such as peace bonds, would ensure that private sector climate adaptation activities contribute to positive peace. Investment mechanisms inspired by this process oriented approach to peace would directly address issues of safety, social justice, equality, mutual trust, and well-being. The benefits extend to traditional financial returns.

Financing for climate mitigation and adaptation projects could be unlocked if Balkan countries act cohesively to mitigate funders’ risk aversion. A just transition would take several years to be implemented — from securing investments, to undergoing permitting procedures, to completing construction, to actual operation. Investment in vocational training could enable a cross-border supply chain drawing on different skills from architecture, engineering, geology, and utility companies offering a marketable service. Fostering cooperation would be the first step to developing a geothermal energy grid in the Balkans according to the LEGEND project supported by the European Geothermal Energy Council. Climate financiers with an appetite for high upfront investments with life-time returns would be needed to develop the geothermal energy potential and demand for professionals and university specializations. Multilateral development banks (MDBs) could support the first issuances of (blended) peace bonds targeting climate (adaptation) projects through the provision of blending instruments, such as grants, first-loss debt instruments, and risk transfers.

Financing geothermal projects requires reducing all project related uncertainty and building public support. A Balkan Green New Deal could be exactly what is needed to guarantee green jobs and stable investment. Policy measures and mechanisms that implement the right to information, meaningful stakeholder engagement, and grievance mechanisms contribute to the prevention of destructive conflict relating to the environment. Securing public buy-in and benefit-sharing may also decrease the risk of project disruption, delay or cancellation. Conflict-sensitive climate finance for geothermal energy generation could lead to investors supporting social development alongside the infrastructure projects. A conflict-sensitive investment approach would prioritize the quality of the process used to engage key stakeholders and communities to ensure highly relational, cultural and political peace dynamics are incorporated in the project.

Peace-enhancing mechanisms (PEMs) play an important role in this effort. PEMs are transformative tools that blend the expertise of the development and peacebuilding sectors with corporate and investment strategies. These mechanisms encompass a range of interventions, such as mediation, inter-religious dialogue, and non-violent communication training, alongside participatory governance, benefit-sharing, and community-led initiatives. The application of PEMs is not just about engagement and dialogue. It is also about building partnerships with local peace actors to promote equitable governance and ensure that everyone in the community has a voice. This approach is particularly impactful in climate adaptation projects, where PEMs can significantly reduce borrowing costs. Typically, these projects face high credit risks and consequent higher interest rates in unstable contexts. By fostering equitable governance and fair benefit distribution within local communities, PEMs can lower these risks, making vital climate adaptation efforts more feasible and financially accessible. This innovative integration of peacebuilding into climate finance is a game-changer, paving the way for more sustainable and inclusive development.

Investing in renewable energy, when done in a way that does not perpetuate existing power asymmetries, could contribute to peace between people and nature. With conflict-sensitive climate finance designed to mitigate multiple risks, it might finally be possible to counter the climate security forecasts for the Balkans with a foresight approach that envisions a geothermal energy grid in the region. The long-term nature of the investment in this form of energy generation has the potential for financing a just transition while improving air quality and unlocking a climate-responsible future.