CLEEN WORKSHOP June 2007: ESRC Centre for Competition Policy University of East Anglia Energy Community for South East Europe: Implementation to date and open questions Rozeta Karova EUI, Law Department

Outline of the presentation Athens Process: Athens Memoranda & Energy Community Treaty Background information: generation & transmission National reforms: -Legislative framework -Institutional reforms -Economical structural reforms: restructuring & privatization -Unbundling -TPA -Eligible customers & opening the markets -Tariff reforms, PSO and affordability issue National market designs & standard market design for SEE REM Licenses Remaining obstacles

Athens Process Enlargement Process => regional integration central part of SAP -Common problems for SEE countries (energy prices below economic levels; inappropriate pricing/tariff structures; poor infrastructure; state- owned VIC; limited institutional capacity; energy policies, legislation and standards different from the EU; lack of transparency) -Benefits from regional integration (reliable, low-cost and environment- friendly sources of energy; better utilization of the existing capacities; attracting foreign investments; facilitating cross-border trade; lowering transaction costs; strengthening institutional arrangements and assisting in adoption of the EU standards for infrastructure development and regulation, having in mind the expected integration in the internal electricity market) Athens Memorandum 2002 Athens Memorandum 2003 Energy Community Treaty 2005

Energy Community Treaty Objectives Measures: -Adoption of the acquis in energy, competition and environment; -establishing common rules for the functioning of the national electricity markets and mechanisms for crisis situations – safeguard measures, -establishing REM – prohibition of taxes and quantitative restrictions for import and export of electricity, common rules for trade with third countries and -opening of the markets after a suitable transition period (all non- household markets to be open by 2008 and all household markets by 2015). Institutions : -Ministerial Council -PHLG -ECRB -Secretariat -Athens Forum

Background Information: Generation -Bulgaria and B&H = exporters; SEE region = net importer -SEE fuel mix: 40% coal, 23% hydro, 23% gas, 7% oil and 7% nuclear -Benefit from regional integration: substitution between thermal and hydro power in peak and off-peak periods; differences in the fuels price and periods of peak demand -GIS: 11.6GW installed capacity needs to be rehabilitated and 13.5GW new capacity needs to be installed, which would require EUR16 billion of investment BUT -Small size markets – concentration in generation after unbundling (1 in Kosovo and 3 generators in Montenegro; In Albania and Macedonia the biggest 4 generators have around 98%); competition could not be introduced at national level => integrating the markets = lowering their market power, -Significant participation of the multinational companies (for example, ENEL, ENI, CEZ) in the region, -long term contracts and PPAs required to attract investment.

Background information: Transmission In the past part of SFRY network, not made to be self-sufficient -Now all countries except Albania are connected to UCTE -GIS: necessity for investment in transmission lines and interconnections = EUR340 millions Example: Macedonian interconnections - 400kV level with Greece and Serbia, - two 110kV connections with Bulgaria and another 400kV transmission line is under construction, - not connected only with Albania. There are projects for strengthening the interconnections by upgrading the existing line North–South and establishing new one East–West.

National reforms Legislative framework Institutional reforms Economical structural reforms: restructuring & privatization Unbundling TPA Eligible customers & opening the markets Tariff reforms, PSO and affordability issue

National reforms 1 Legislative framework & Institutional reforms Legislative framework - All SEE countries - have adopted primary legislation - Some SEE countries - not fully adopted secondary legislation (especially regarding cross-border issues). Institutional reforms: all SEE countries have established NRA - appointed by Parliaments on proposal by the Government (usually), years with possibility for renewal of their term, - funding - own sources provided from collection of the license fees, - adopt methodologies for calculating tariffs, and setting tariffs for final regulated consumers BUT insufficient competences for filing complaints to the NRA, the management and allocation of interconnection capacity and fixing tariffs of access to the networks (Report on the implementation of the EnCT, May 2007 ).

National reforms 2 Economical structural reforms: restructuring & privatization Example: restructuring of the Electric Power Company of Macedonia (Elektrostopanstvo na Makedonija-ESM) -2000: public state-owned company -> JSC AD ESM -2005: AD ESM = AD MEPSO (Network Owner, TSO, MO) + AD ESM (production & distribution of electricity) -2005: AD ESM = (AD ELEM + TPP Negotino) generation + AD ESM (distribution & supply) -2006: privatisation of AD ESM (distribution & supply) by EVN AG Further examples: Bulgaria, Romania

National reforms 3 Unbundling & TPA Vertical unbundling Unbundling of the TSO: -Almost all SEE countries, except Albania, Bulgaria, Croatia and Montenegro -Croatia: subsidiary of a holding company, B&H: ISO Unbundling of the DSO: -Only Croatia and Romania Horizontal unbundling Unbundling in generation or retailing -Only in Bulgaria: privatisation of 32 small HPPs with an overall installed capacity of 243MW in 2003 TPA: Grid Codes and Market Rules

National reforms 4 Opening the Electricity Markets & Tariff reforms Non-household customers and households : B&H, Bulgaria, Croatia, Romania and Macedonia have set the timetable and took concrete measures to open the markets SEE tariffs: 2,8 to 7,6cents/kWh + payment discipline: 85% + high distribution losses: >22% Regulated Fixed Tariff Mechanism Questions whether: - all customers will be obliged to buy under regulated tariffs or will have possibility to choose? - distribution companies are eligible? - generators are regulated and obliged to sell at home?

National reforms 5 PSO & affordability PSO - provisions in the laws are adopted BUT no protection of vulnerable consumers, no supplier of last resort Affordability (Montenegro, Macedonia, Croatia and Serbia ) ECRB adopted Guidelines on protection of vulnerable consumers + Memorandum of Understanding on Social Issues in October 2007

National market designs Mostly bilateral contracts and 3 power exchanges in the SEE region Different in market designs: -Croatia (importing): bilateral contracts for supply of electricity (eligible customers & suppliers), trade of electricity (supplier, trader or producer), use of the network (eligible customers or producers & TSO/DSO), balancing (supplier of eligible customers & TSO). -Macedonia (importing): hybrid wholesale market with no competition, single buyer model (wholesale: regulated contracts between generators & TSO, unregulated contracts between TSO & other sources; retail: regulated contracts between DSO & TSO, DSO & distributed generation, DSO & tariff customers). -B&H (exporting): ISO and generators/distributors are vertically integrated in 3 different areas -Romania (exporting): multi generators & multi suppliers, bilateral contracts, voluntary DAM

Definition of the SEE REM Standard market design for SEE REM 7 REM in the EU, 8 th SEE is not defined yet SMD SEE REM (CEER, 2003): full competition at wholesale market achieved starting with bilateral contracts between the generators & eligible customers from different countries. -Bilateral contracts between generators & eligible customers + DAM at a later stage (as additional place where the generators will be able to place additional capacity serving the eligible customers, which in turn would be able to buy at time closer to real time) Licenses -Lack of consistency in the definitions trader / supplier - Bulgaria only trading license, Romania only supply license, Croatia and Macedonia both -Different regulatory procedures

Obstacles to trade in SEE (SEETEC study) Incomplete implementation of TSO issues (unbundling, TPA, access tariffs) Introduction of competition in generation and supply (market concentration, vertical foreclosure, operability of market rules) Issues specific to SEE (tariff issues, harmonisation of market models and licensing regime)

Summary of the achievements and remaining open issues Progress: development of legislation, unbundling, PSO provisions, TPA and overall wholesale market organization. Need for improvements: technical rules, unbundling of distribution and supply, unbundling of generation, development of a retail market, tariff reform and protection of vulnerable consumers and appointment of a supplier of last resort. Open questions: -the definition of the geographical scope of the SEE region, -harmonisation of market rules and national market designs, -licensing regime, -regulators activity with regard to tariff reforms.