TRIENNIAL ASSESSMENT OF THE COMPETITION IN THE ELECTRICITY MARKET IN KOSOVO

Transcription

1 TRIENNIAL ASSESSMENT OF THE COMPETITION IN THE ELECTRICITY MARKET IN KOSOVO Address: Dërvish Rozhaja Str., No. 12, Prishtina, Kosovo Tel: ext. 101, Fax: , web: 1

2 CONTENTS 1 INTRODUCTION Technical aspects of the electricity market in Kosovo Regulation of Electricity Sector Importance of competition in the electricity market in Kosovo.4 4 Competition indicators in the electricity market in Kosovo Social aspects hindering promotion of competition Current operation of the electricity market in Kosovo Third Party Access to electricity market in Kosovo Opening of electricity market in Kosovo Competition from the supplier s standpoint Competition assessment criteria Conclusions of the triennial competition assessment

3 1 INTRODUCTION The Athens Treaty requires the establishment of a competitive electricity market, where all customers should enjoy constant supply of electricity and the opportunity to choose their supplier. To enable the carrying out of activities in the energy sector and based on the requirements of the Energy Community Treaty (ECT), Kosovo has promulgated primary laws on the energy sector such as Law on Energy, Law on Electricity and Law on Energy Regulator. Upon the promulgation of the Law on Energy Regulator by the Assembly of Kosovo, the establishment of the Energy Regulatory Office was enabled, which mandate is to carry out economic regulation of the energy sector in Kosovo. A very important institution for the promotion of competition in Kosovo is the Kosovo Competition Commission, established by the Assembly of Kosovo based on the Law on Competition. The Kosovo Competition Authority is an independent body, vested with the responsibility and authority to promote competition between enterprises, as well as to protect the customers in Kosovo. The Energy Regulatory Office, in consultation with the Kosovo Competition Commission and the authority responsible for monitoring State aid, shall, at least every three (3) years, carry out investigations into the functioning of the electricity market, and decide upon and impose any necessary and proportionate measures to promote effective competition and ensure the proper functioning of the market. These measures may include electricity release programmes whereby electricity undertakings are obliged to sell or make available a certain volume of electricity or grant access to part of their generation capacity to interested suppliers for a certain period of time. It should be emphasized that the triennial assessment is not related to the examination of potential abuses of the dominating position, pursuant to the Law on Competition. It is an assessment to introduce measures that need to be taken to promote effective competition and, in particular, if a need exists to request that electricity generating capacities be allowed for other suppliers in order to enable them to compete effectively. This report presents the ERO assessment as to whether an effective competition in supplying eligible customers exists or not. This is the second assessment on effective competition in the electricity market made by the ERO, whereas the first assessment was made three years ago. 2 Technical aspects of the electricity market in Kosovo Generation, transmission and distribution are fundamental components of electricity power systems, which are an integral part of an energy market. Lignite is the main reserve as primary source of energy in the Republic of Kosovo, having a contribution of approximately 97% in the overall electricity generation. The Southwest Sibovc Mine and Bardhi & Mirashi Mines supply the Kosovo A and Kosovo B power plants with lignite. Generation capacities of electricity consist of two thermal power plants, TPP Kosovo A and TPP Kosovo B, and HPP Ujmani with other distributive HPPs which constitute approximately 3% of the overall capacity. 3

4 Transmission System plays an important role in securing supply and well-being of the entire electricity power system. The transmission network of Kosovo presents an important node and is interconnected to the regional and European electricity power system. The transmission network is generally stable and sustainable. Interconnection lines of 400kV exist with neighbouring countries, apart from Albania with which only a 220kV line exists. The construction of the 400kV interconnection line SS Kosovo B SS Kashar (Tirana) has begun recently. The losses in the Transmission Network have been considerably reduced during the last years thanks to investments, more accurate metering and better management. Distribution Network has shown improvement in customer supply and service quality over the past years. However, despite all the investments made, the distribution network is still incapable of securing proper supply and satisfactory quality for customers. To achieve an acceptable level of supply and service quality, additional investments are needed, both in medium and low voltage levels. 3 Regulation of Electricity Sector Importance of competition in the electricity market in Kosovo The concept of removing the exclusive rights of publicly owned vertically integrated monopolies and introducing competition in the energy sector has started to captivate the minds of EU and US policymakers since For many years, the electricity sector in most industrialized countries was characterized by an expansion of electrification with an increased demand, which has justified a monopolistic structure where average regulated prices were kept above side costs, and based on the economy of scale and opportunity it achieved a continuous price decline. Such a happy state of trade lasted until 1970s and 1980s, when the direct and indirect effects of the oil crises destabilized the entire structure. It has become clear that in order to achieve higher efficiency and improve service quality, it was necessary to introduce competition into the energy sector. This concept was accelerated during the 90s, because competition was the basis for the establishment of a European common market. Competition encourages companies to assess more efficiently every produced service. The successful introduction of competition will lead to a more efficient industry. Producers will utilize their plants better in order to maintain or increase the number of clients they can cover. The effective regulation of separate networks service (ex. transmission and distribution) will also encourage the decrease of prices. Suppliers will interact more efficiently with customers and will offer a wider range of services and contractual agreements. In long term, due to this reason, a sufficient scale of competition will ensure that the prices are - on average - lower than they would be in a regulated market. The unique characteristics of the energy sector, mainly the necessity of continued security of supply, environment protection, the common carrier concept of energy networks and the public services obligation, have required the setting into place of a specific regulatory framework wherein competition and private enterprises can operate. This framework was finalized by the European Commission Directives and Regulations on Electricity and Gas (currently applicable). After many years of experience with opening of the energy sector to competition, many countries have presented a more or less similar regulatory framework for a liberalized energy market, composed of: 4

5 An independent Regulatory Authority with a mandate of minimum monitoring and promotion of market development and operations, approval of prices for operations outside the market, issuing of ordinances, regulations and measures for non-discriminatory access of third parties to energy networks; An independent Transmission System operator; Competitive markets of Wholesale Generation and the Supply; The EU directives require close monitoring of the market and the ability to introduce a number of main obligations on energy companies ( public service obligations ), related to public service. These obligations can include universal services (the right of all customers to be connected and supplied), protection of vulnerable customers, protection of end customers (transparency of contractual terms and guaranteed access to oppose agreements), etc. These precautions are particularly important during the period of transitioning from a fully regulated monopoly to a situation where the market decides important features such as price and investment decisions. The role of an independent Regulatory Authority is very important in determination of public service obligations, set by the Government, into market policies and approval of the satisfactory level of compensation for its implementation. It should be emphasized that in countries where there is not sufficient competition in the area of generation and supply, regulation is often applied to all market elements (production, transmission, distribution and supply), as in the case of Kosovo and other countries as well. The separation begins with the transmission part, then it continues with the unbundling of the distribution system, thus encouraging the opening of the energy market for all customers. 4 Competition indicators in the electricity market in Kosovo Electricity markets are generally sensitive, and it is important to undertake measures so that the market structure is such that enables competition. Competition indicators are shown in the table below, whereby the level of competition in the electricity market in Kosovo can be understood. Key Performance Indicators Market structure Indicator Measure/Scale Comment Reciprocal price relation between Reciprocal price relation between prices of Relies on price availability price zones wholesale market Price differences Price between market zones Relies on price availability HHI* Market concentration, Generation C3** Number of companies with more than 5% of the MW, GWh market HHI* Market concentration, Retail market C3** GWh Number of companies with more than 5% of the market Functional and Calculate: YES= 100%, NO=0% Vertical unbundling of generation Measurement should be based on Legal: YES= 100%, NO=0% from the TSO legal applicable requirements Ownership: YES= 100%, NO=0% Vertical unbundling of supply/retail market from the DSO * Herfindahl Hirschman Index ** Concentration of the three largest companies Functional and Calculate: YES= 100%, NO=0% Legal: YES= 100%, NO=0% Ownership: YES= 100%, NO=0% Measurement should be based on legal applicable requirements 5

6 From the above indicators, it can be noted that differentiation of prices is required (different prices), whereas in Kosovo we have regulated prices, which proves there is no difference in prices. Furthermore, the level of competition in Kosovo is low, with a single state generator (TPP Kosovo A, B) dominating about 90% 1 of the domestic market, and these generators are legally obliged to firstly supply the household customers. This limits the competition possibilities and reduces or eliminates the eligible customers incentive to exercise eligibility 2. In order to not have limitations for the inclusion of new suppliers in the market, the supply and distribution have been unbundled. This unbundling is of crucial importance for the promotion of competition in order to eliminate the possibility of unequal treatment of the new suppliers. 5 Social aspects hindering promotion of competition Kosovo suffers from a deficit of electricity. Even though the regulated tariffs can cover the cost of the existing system, the existing price level is insufficient to cover the cost of new investments on a commercial basis. An increase of prices in this way can be considered to constitute a big obstacle in the affordability of prices from the customers. Considering the current regulated price, the interest of eligible customers to exercise their right to choose the supplier is highly limited. In certain countries, the eligible customers are forced to operate in open market (ex. Croatia). In order to create the opening of market, it is necessary to gradually increase the number of customers in the open market. This can be done by either eliminating the regulated tariffs, option for eligible customers, or by changing the tariff rules. 6 Current operation of the electricity market in Kosovo Athens Process has prompted new reforms and developments at all levels of the electricity sector in Kosovo, from the institutional, judicial and regulatory aspect, up to the operation level. The aim is clear to set up a transparent and liquid trading model that operates based on principles of free competition and gives signals both to service providers and users. The essential elements taken into consideration by the Regulator based on ECT requirements, ensuring a competitive and liquid market, are as follows: Supply and demand (supply exceeding demand); Non discriminatory Third Party Access (TPA) to the network and cost reflectivity; 1 Remaining 10% is covered by imports 2 The right to choose the supplier 6

7 Proper signalling (reaction of generation and consumption to price signalling, namely, modern metering and measurement and modern telecommunications infrastructure); A sufficient number of buyers and sellers with low concentration; Proper handling of subsidies; The components outlined above have not reached the appropriate maturity to guarantee liquidity and sufficient competition, due to the lack of technical conditions. Until now, all the energy was soldpurchased through bilateral contracts between the KESCO Public Supplier, on one side, and, producers in Kosovo and the traders on the other side. The wholesale level of power purchase contracts between KESCO Public Supplier and KEK Public Generators (Kosovo A and B) are regulated, and at the retail level KEDS as a Public Electricity Supplier supplies all regulated customers, at regulated tariffs. Kosovo has a deficiency of electricity and to overcome it, it is necessary to import energy on one hand and/or have mandatory power load shedding arranged and pre determined in compliance with the respective schemes. In the near future, the import of electricity is expected to be relatively expensive, due to the lack of electricity in the region, which complicates the process of establishing a national organized competitive and liquid market. Reforming of the energy sector begin from 2004, as a result of the establishment of the Energy Regulatory Office (ERO). The reforming process has further continued by unbundling the vertically integrated KEK, from which KOSTT was established (in 2006), currently operating as a separate transmission and market entity. Further unbundling continued with KEK s distribution and supply, and subsequently privatization thereof, by passing into ownership of the Limak Çalik consortium. Therefore, as of 8 May 2013, the Government of Kosovo finalized the project for the privatization of distribution and public supply, managed by the Limak Çalik consortium, whereas the other part of KEK is in public ownership and includes mining and production. By the Guidelines on Legal Unbundling KEDS (DSO and PES) in April 2014, the ERO obliged KEDS to legally separate the DSO from the Public Electricity Supplier. These two companies now operate as two legally independent entities. The insufficiency of existing generating capacities to meet supply needs, and the need to invest in the electricity sector in Kosovo, requires initiation of restructuring of the energy sector through market liberalization and increase of competition in the electricity market. During 2012, in order to achieve these objectives, the KOSTT prepared the Electricity Market Design document, and in March of 2013 it was approved by the Board of the ERO. Market Rules were developed based on the Market Design and approved at the end of Third Party Access to electricity market in Kosovo One of the main elements in the establishment and functioning of the electricity market is the concept of Third Party Access TPA. The principle aspect of this concept comes from the regulatory principles of the energy market and operators legal obligations to provide transparent and non discriminatory access of the third party to the transmission or distribution network (system). This implies that every market participant is entitled, based on determined principles, to use the system, which enables conducting electricity purchase transactions. 7

8 From the national wholesale market aspect, access from all aspects is important. The principles of using the KOSTT system for trading within the Kosovo borders are well-defined and applicable; therefore this presents an advantage in developing the national market and subsequently helps in promoting competition and opening the wholesale market. Even technically, after installing the meters at commercial borders with the parties, conditions have already been created to accommodate new participants in the wholesale market. In the aspect of cross border trade, there are continuous obstacles and obstructions. The KOSST is not treated as an equal TSO, like other regional TSOs are, and is not carrying out cross border capacity allocation and is not part of the ITC mechanism. This is also an obstacle for new parties interested in the market of Kosovo and a difficulty for existing parties to conduct cross border trade in relation to Kosovo. As the market has a limited number of parties and, hence, a low liquidity, this is considered to be the most important reason for the new parties hesitation to approach Kosovo s market. As far as the third party access, its relevance to the transmission system and functions of Market Operator are concerned, we can conclude that the KOSTT has prepared a good legal and technical framework in order for this to be successfully executed. Of course, this access refers to the wholesale market, whereas the execution of the retail market relates to meeting the distribution system criteria. Until now, the Distribution has not had any methodology on distribution use of system, however, the designed tariff model foresees the sharing of costs for the use of the system, but this cannot be considered to be an obstacle. What could be considered an obstacle is the implementation of tariffs on distribution use of system, due to the high levels of technical and commercial losses in distribution and lack of multifunctional metering for small customers. 6.2 Opening of electricity market in Kosovo The development and reforming of the market aims to create a genuine competition on the supplier s side, with customers having the opportunity to be supplied by various electricity suppliers. Kosovo has opened the market where non household customers can exercise their right to eligibility. Pursuant to the requirements of the Energy Community Treaty (ECT), starting from 1 January 2015, all customers shall be provided with the opportunity to be eligible. In this regard, the requirements of the laws of energy in Kosovo can be seen below: Law on Electricity, Article 19.4 All customers except household customers are eligible. All customers shall be eligible customers by 1 January Law on Energy Regulator, Article the Energy Regulatory Office may set tariffs charged to eligible customers by the electricity enterprise holding the public supply license only where the Office is not satisfied that competition in the supply of electricity is effective. Law on Energy Regulator, Article after 1 January 2015 the Energy Regulatory Office shall discontinue setting tariffs charged to customers by the electricity enterprise holding the public supply license, unless the Office is not satisfied with the efficiency of competition in the supply of electricity. 8

9 Law on Energy Regulator, Article any finding by the Energy Regulatory Office that competition in the supply of electricity is not effective shall be based on a comprehensive and published assessment of the market conditions. Tariff regulation shall not go beyond what is necessary to compensate for the lack of effective competition. The interest of the non-household customers on the opening of the electricity market is low. The limited interest to be subject to eligibility is explained by the fact that most customers will face higher prices in the open market. Considering current regulated tariffs, little can be expected that the interest of customers to be supplied in the open market will be increased. 6.3 Competition from the supplier s standpoint The problems which the Public Supplier faces - in terms of electricity trade and electricity sales - are not favourable under circumstances when the electricity is purchased, due to the lack of generation by the local generators. For the time being, the Public Electricity Supplier has the monopoly on electricity sale and purchase. Another problem arises from the fact that household customers do not fulfil their obligations that they have towards the Public Supplier. 7 Competition assessment criteria In article 41, paragraph 1.3 of the Law on Energy Regulator (2010/03 L 185 issued on 25 October 2010), the following is stated: Any finding by the Energy Regulatory Office that competition in the supply of electricity is not effective shall be based on a comprehensive and published assessment of the market conditions. Tariff regulation shall not go beyond what is necessary to compensate for the lack of effective competition. Also, based on article 9 (1.1) of the Law on Energy Regulator, the ERO is obliged to include within its annual report a description of developments, in particular, the results of its monitoring of the development of competition and transparency in the energy markets in Kosovo. Article 15 of the same law obliges the ERO to report annually on results of monitoring of electricity markets operation, including monitoring levels and effectiveness of market opening and competition at wholesale and retail levels. Considering these obligations, the ERO makes annual assessments whether there is effective competition in electricity supply for eligible customers, or not. The findings of the ERO are included in its annual report. The Board of the ERO, in its session held on 30 March 2011, approved the competition assessment criteria in electricity supply. Effective competition in electricity supply will be assessed for the following markets: Large energy users: customers connected to the 110 kv level and above (tariff category 01) 9

10 Medium voltage energy users: customers connected to the 35 kv and 10 kv levels (tariff category 1 and 2) Low voltage energy users: customers connected to the 0.4 kv level and classified in tariff category 3 Small low voltage energy users: tariff categories 4 to 8. The ERO bases its assessment concerning the existence of effective competition on whether there is evidence that a competitive supplier was able to enter the relevant market and be successful in attracting customers from the Public Supplier. The ERO considers that, due to clarity and transparency, the evidence used in the assessment has to be able to be defined in objective, clear and easily measurable terms. Considering this, the ERO assesses that the level of effective competition in supply shall be assessed based on two main criteria: - The number of active independent suppliers in the relevant market (apart from the Public Supplier). This ensures a measure of competition intensity. For this reason, the ERO has decided that the active supplier to be considered for the assessment of the competition criteria is the one that supplied at least 10% of the respective market in the previous year, measured according to the total consumed volumes of energy. - Share of the market served by independent suppliers. This ensures a measure of effectiveness of competitive suppliers in attracting customers, hence, as such, their ability to provide some control over the market power. In accordance with the ERO decision on competition criteria, a relevant market is considered competitive if it fulfils the following requirements: The number of suppliers in the relevant market, excluding the public supplier, must be 3 or more; and The share of the relevant market served by the supplier, excluding the public supplier, must exceed 30%. 10

11 8 Conclusions of the triennial competition assessment Based on the above-mentioned criteria, and assessment of the current situation, the ERO considers that there is still no effective competition in electricity supply in Kosovo. Currently, all the customers that enjoy the eligible customer status are supplied by the only public supplier at regulated tariffs. The reason for supplying eligible customers at regulated tariffs is that in Kosovo, apart from the public supplier, no other independent supplier is operating. The level of competition in the wholesale market is low, where a single state generator (TTP Kosovo A, B) dominates about 90% of the internal market, while only 10% is supplied by small generators and imports, which shows that there is no proper competition as regards the generation. The Public Electricity Supplier currently has the monopoly on electricity purchase-sale for all customers, considering that the entire energy generated by the generators is intended for the Public Electricity Supplier, and this is an obstacle for new independent suppliers to enter the market. With the current regulated price, the interest of eligible customers to exercise their right is limited or non existent. In order to create an opening of a market, it is necessary to gradually increase the number of customers supplied in the open market. This can be done by either eliminating the option of regulated tariffs for eligible customers, or by changing tariff rules. A transparent third party access enables proper competition in an energy market. The KOSTT has prepared a good legal and technical framework concerning third party access to the transmission system and functions of the Market Operator, and we can conclude that this can be implemented successfully. Of course, this access refers to the wholesale market, whereas the implementation of the retail market opening relates to the fulfilment of criteria in the distribution system, where the methodology on distribution use of system has been recently approved, however, unlike the first market assessment, this matter has been considered an obstacle. What can also be considered as an obstacle is the high level of technical and commercial losses in distribution and lack of multifunctional metering for small customers. Based on the expected amendments to the primary laws and the requirements deriving from the European Directives and the Energy Community Treaty, the ERO is going to act towards the acceleration of the wholesale and retail market opening. This shall be achieved by initially making a part of the generation available to the free market, and then by enticing the exclusion of customers (in particular the largest ones) from regulated tariffs. ERO, January