The Regional Energy Market in the Western Balkans

Transcription

1 The Regional Energy Market in the Western Balkans Milica Uvalic 1 published in: Milica Uvalic (ed) (2012), Electricity Markets and Reforms in Europe, Milano: Franco Angeli, pp Introduction The present chapter is dedicated to the energy markets in the Western Balkan (WB) states Albania, Bosnia and Herzegovina, Croatia, Macedonia, Montenegro, Serbia, and Kosovo (the last three were part of the same country until recently). 2 In comparison with the more advanced countries in Central and Eastern Europe (CEE) that have become European Union (EU) member states in 2004 and 2007, most WB countries are lagging behind regarding their level of economic development, economic and institutional reforms, and integration with the EU. Due to political and economic instability that accompanied the disintegration of the Socialist Federal Republic (SFR) of Yugoslavia in 1991, this is a region where the transition to a market economy and multiparty democracy has evolved under particularly difficult conditions. The paper covers primarily the WB countries, though occasionally it will also refer to the wider Southeast European (SEE) region which also includes Bulgaria and Romania. The paper addresses an increasingly important area of WB economies, namely the energy sector. The topic is relevant not only because of internal 1 I would like to thank Valentina Bacchettini for valuable research assistance. 2 During , Montenegro and Serbia were part of the same country, called the Federal Republic (FR) of Yugoslavia, which in February 2003 changed its name into the State Union of Serbia and Montenegro (see Uvalic, 2010). Kosovo was one of Serbia s two autonomous provinces. Following the May 2006 referendum on independence in Montenegro, Serbia and Montenegro in mid-june 2006 became two independent states. After the 1999 NATO-Yugoslav conflict, according to the UN Security Council Resolution 1244, Kosovo officially remained part of Serbia. Kosovo unilaterally declared independence in February 2008, but it has still not been recognized as an independent state by around 55% of UN members, including five EU member states (Cyprus, Greece, Romania, Slovakia and Spain). 1

2 reforms underway in the WB countries, aimed at improving the system of production and distribution of energy which are expected to substantially contribute to increasing overall efficiency of the WB economies. The topic is also relevant from the EU perspective. Over the past decade, after the launch of the EU Stabilization and Association Process specifically for the WB countries which aims at gradually integrating them with the EU, the WB region has gained increasing importance in EU policies. Though the individual countries are in a very different phase of EU integration, all WB countries have been promised future EU membership. So far, only Croatia has signed (in December 2011) the EU Accession Treaty and, following the popular referendum in January 2012 when over 60% of its citizens voted in favor, it is expected to become the 28 th EU member state on 1 July Three WB countries are candidates for EU accession, Macedonia, Montenegro and Serbia (from early March 2012). The remaining countries, Albania, Bosnia and Herzegovina and Kosovo are still potential candidates, but with a clear perspective of EU integration. Given that the integration processes are well on their way, the WB region will increasingly be in the focus of EU policies in the forthcoming years (see Cerovic and Uvalic, eds., 2010). These are some of the reasons that have also prompted recent EU initiatives to promote the creation of an integrated energy market in the Western Balkans. The structure of the paper is as follows. The present state of the energy sector in the Western Balkan countries will be analyzed in some detail first (section 2). The results achieved by the WB countries in reforming their energy sectors are examined next (section 3). The current EU initiatives to create the eight electricity market in Southeast Europe are also recalled (section 4). Some policy implications are finally drawn, particularly considering the Italian experience (section 5), before making a few concluding remarks (section 6). 2. The Western Balkan countries energy sector The Western Balkans (WBs) are strategically located between hydrocarbon-rich regions (including Russia, the Caspian basin and the Middle East) and key energy-consuming regions of Western and Central Europe. The WBs therefore have the potential of playing an important role in the transit of hydrocarbon resources as well as oil and gas supply for the whole of Europe (see OECD/IEA, 2008). This is what has prompted some 2

3 of the recent EU initiatives specifically in the energy sector in the WB region, in addition to the more general reasons linked to the EU enlargement process Historical and economic background The WB region has experienced dramatic political and economic changes over the past twenty years, which have also greatly influenced energy supply of the individual countries. From the early 1990s onwards, the WB countries have been negatively affected by a series of important events. The transition-related reforms and policies which started being applied in , the disintegration of SFR Yugoslavia into five independent states, the military conflicts that accompanied the break-up of the Yugoslav federation and economic sanctions imposed against some of the countries, all had devastating effects on the economies in the region (see Uvalic, 2010, 2012a). One of the most pronounced effects of the early 1990s was a very strong drop in GDP and even steeper reduction in industrial production, since many industrial plants had to be closed or restructured. The deep recession, that in some WB countries lasted until 1996, led to a remarkable drop in domestic consumption and living standards, including domestic consumption of electricity by households. Although there has been substantial economic recovery during the past decade, some of the effects of the 1990s have not been completed eliminated. Another important consequence of the events of the early 1990s was the fragmentation of the energy infrastructure. Until late 1991, the WB region consisted of only Albania and the Yugoslav federation. The electricity network of SFR Yugoslavia until 1992 was interconnected with the Union for the Coordination of Transmission of Electricity (UCTE), namely the Western European grid, but the grid was separated in 1992 when the country disintegrated. Croatia and the Federation of Bosnia (the southern and western part of Bosnia and Herzegovina) remained connected to the UCTE Zone 1, while Republika Srpska (the northern and eastern part of Bosnia and Herzegovina), Serbia and FYR Macedonia (together with Bulgaria, Romania and Greece) made up the Southeast European UCTE Zone 2. During the military conflicts in the 1990s, energy infrastructure in Bosnia and Herzegovina, Kosovo and Serbia was severely damaged. During the NATO intervention in 1999, two of Serbia s oil refineries, in Novi Sad and Pancevo, were demolished. After the normalization of the 3

4 political situation in the region in 2000, as part of the EU and wider international community s reconstruction assistance to the region, there were major efforts to improve the interconnections and electricity transmission system operators in the WB region. This led to an important achievement, namely the reconnection, in 2004, of the two sub-regional networks (the UCTE Zones 1 and 2) and their re-synchronisation with UCTE (OECD/IEA, 2008, p. 18). Since then, the UCTE norms and standards are again fully applicable in the WB region, with the total interconnection capacity of 5800MW in 2007 (see Karova, 2010). Only Albania's electricity system, which was underdeveloped for decades and whose transmission system does not satisfy all criteria for parallel operation with UCTE, is not member of this network. The current economic situation in the individual WB countries is very different regarding the achieved degree of macroeconomic stability, level of economic development, social indicators and results achieved in the various areas of economic reform (see Uvalic, 2012a). Serbia is the largest country in terms of territory and population (30% of total WB population), while Montenegro is the smallest (less than 3%). Croatia is the second largest country in terms of population (18% of the total), but it is the most developed of all WB countries, with 45% of the region s total GDP and at 60% (2009) of the EU-27 average GDP per capita. The WB economies have had high growth rates over the period, on average close or over 5%, and there has been increasing Foreign Direct Investment (FDI). However, the recent global financial and economic crisis has brought a halt to fast growth. Given that the WB countries have become highly integrated with the EU economy through trade, FDI, financial flows and banking systems, the effects of the global crisis were felt very heavily through various transmission mechanisms. After late 2008, the WB countries experienced a substantial reduction in capital inflows (FDI, credits, remittances) and a strong decline in export demand on EU markets, which led to a serious deterioration in the most important macroeconomic indicators Main energy sources The heterogeneity among the WB countries regarding size, geography and economic characteristics is equally present when it comes to energy. There are wide differences regarding total primary energy supply (TPES), the energy mix, the volume of national energy production and dependence 4

5 on imported energy (see Table 1). Most WB countries are not able to cover their essential energy needs through domestic production but import from other countries. The size of the WB countries markets, in terms of final energy consumption are mostly very small. There are wide differences in supply of energy across the WB countries. Serbia, as the largest country, has the dominant share in total primary energy supply, as much as 43% of TPES of the seven WB countries, followed by Croatia (23%), Bosnia and Herzegovina (13%), Macedonia (7%), Albania (6%) and Kosovo (5%). However, domestic production represents less than 60% of total primary energy supply in the WB region, so the region as a whole relies on imports of substantial amounts of energy. Table 1. Energy supply in the Western Balkan countries, 2005 (Mtoe) Source: OECD/IEA (2008), p. 16. There is great diversity among the WB countries regarding the energy mix. Many countries depend on lignite for electricity generation. In 2004, coal was the main source used in Macedonia (78%) and in Serbia and Montenegro (66%). Serbia has the largest installed generation capacity and depends mostly on lignite-fired thermal power plants, but its overall fuel efficiency and utilization rates remain low; in 2007, the electricity portfolio (excluding imports that mainly consist of oil) was represented by coal (65% of total, mainly lignite of low quality provided by open-sky mines) followed by hydropower (33%) and gas (2%) (Privredna Komora Srbije, 5

6 2007). Bosnia and Herzegovina and Macedonia also rely heavily on lignitepowered generating capacity. In Macedonia, geothermal energy is used particularly in agriculture and somewhat less for heating of households. Kosovo gets almost all of its domestic electricity generation from thermal plants (lignite) and is considered to have one of the largest reserves of lignite in the world. Albania, by contrast, derives almost all (98%) of its electricity generation from hydropower, provided by three large hydropower plants which provide more than 85% of total generation. Croatia, Bosnia and Herzegovina, and Serbia and Montenegro also rely on hydropower, which represented 53%, 47% and 31% respectively of total energy sources for electricity generation in 2004 (see Figure 1). The smallest market in energy terms is Kosovo with a final electricity consumption of 3.2 TWh (2005), closely followed by Albania and Montenegro, while the largest is Serbia with 25.6 TWh (2005) (Poyry and Nord Pool Consulting, 2011). The situation in the single countries of the wider SEE region is presented in Figure 1, which gives the sources of domestic electricity production (thus not taking into account imports). Figure 1. Production of electricity by type of fuel in the wider SEE region, 2004 [Source: Hooper and Medvedev (2008), p. 8.] Presently, gas markets in the Western Balkans are small, but do have the potential for growth. Oil and gas production is limited and is mostly located in Albania, Croatia and Serbia (OECD/IEA, 2008, p. 16). Natural gas 6

7 production in Croatia is the WB region s most important hydrocarbon resource, accounting for 80% of Croatia s natural gas consumption. Montenegro shows some potential for offshore oil and gas development. However, so far, only Croatia and Serbia are important consumers of natural gas, since Albania, Kosovo and Montenegro are not even gasified (see OECD/IEA, 2008, p. 16). Therefore, the most frequently used sources for electricity generation in the WB countries are conventional thermal energy and hydropower. Other renewable sources, besides hydropower, have played a very limited role so far. A more diversified mixture of energy sources would certainly contribute to energy efficiency in the WB countries, also through more reliance on renewable sources. A more recent account of the energy mix in the WB countries is presented in Table 2, which gives the latest comparable data (2010) of energy sources for electricity generation for five WB countries (data is not available for Albania and Kosovo). Table 2. Primary energy sources for electricity generation and consumption (in GWh), 2010 Hydro Fossil Other Total Total Deficit/ power Fuels renewables Production consumption Surplus Bosnia & H Croatia Macedonia Montenegro Serbia Source: Compiled on the basis of data provided by the European Network of Transmission System Operators for Electricity ( Two countries in 2010 had domestic production higher than consumption - Bosnia and Herzegovina and much less Serbia thus having a surplus in primary energy sources. Montenegro has a relatively balanced situation as its total electricity consumption is only slightly larger than its production. Croatia and Macedonia, have a substantial deficit in production, thus having to cover their electricity consumption needs by imports from other countries. 2.3 Energy trade 7

8 The WB region is dependent on imported primary energy sources, primarily oil and natural gas, but most countries also have to import electricity. In the mid-2000s, the only countries in the wider SEE region that were net exporters of energy were Bosnia and Herzegovina and Bulgaria, but the SEE region as a whole is one of the major importers of energy in Europe (see OECD/IEA, 2008). Croatia is the WB country that depends most on imported energy, as its net imports in 2005 represented as much as 58% of total primary energy supply, followed by Albania with 51% (see Table 1). The energy infrastructure in the WBs, mostly consisting of thermal power plants, was built in the 1960s and the 1970s using East European technology, which has not been modernized during the 1980s and the 1990s. With increasing energy needs over the past two decades, this has rendered most WB countries increasingly dependent on energy imports. Within the region, the most frequently traded energy products among the WB countries are electricity, oil products and fuelwood. However, there is lack of reliable data on actual trade of single energy sources. Some estimates indicate that intra-regional energy imports account for about 13% of the WB region s energy needs (or 4.8 Mtoe), of which the most frequently traded are oil products (52% of total), electricity (41%) and fuelwood (7%) (see OECD/IEA, 2008, p. 36). Some further information is available regarding specifically electricity trade in the WB region, which in 2006 amounted to 15.8 TWh, or 23% of the WB countries final electricity consumption (see Table 3). Table 3. Electricity trade in the Western Balkan region, 2006 (TWh) Exporter Albania Bosnia & H Croatia Macedonia Montenegro Serbia Total Importer Albania Bosnia & H. Croatia Macedonia Montenegro Serbia Total Source: OECD/IEA (2008), p. 37. Serbia is the main exporter, exporting electricity to practically all the WB countries. In fact, Serbia in 2006 accounted for 56% of total electricity exports to other WB countries, followed by Bosnia and Herzegovina with 8

9 29%. On the side of intra-regional imports, Croatia is the biggest importer, accounting for 42% of total imports from the other WB countries. Macedonia is the only country not dependent on imports from the other WB countries, since it s trade is primarily with Greece. While the information in Table 3 suggests strong intra-regional dependency in regional electricity trade among most WB countries, some countries such as Albania and Macedonia are more dependent on imports from non-wb countries. According to more recent information (Poyry and Nord Pool, 2011, p. 57), Albania is a net importer (2.1 TWh) with large imports from mainly Greece, and to a smaller extent from Montenegro and Kosovo. Croatia is a net importer (6.6 TWh), with large imports from Serbia, Hungary and Bosnia and Herzegovina, but is also is a net exporter to Slovenia. Kosovo is a net importer (0.6 TWh) with large imports from Serbia, but it also exports to Montenegro and Macedonia (transit trade). Montenegro is a net importer (1.8 TWh) with large imports mainly from Bosnia and Herzegovina, but also some from Kosovo. Montenegro has a relatively balanced trade (on a yearly basis) with Serbia, but it is a net exporter to Albania. Macedonia is a net importer (2.7 TWh), with large imports mainly from/through Kosovo and Bulgaria, but is a net exporter to Greece. Serbia has a relatively balanced electricity balance, as a previous deficit has recently turned into a surplus. At the regional level, only Bosnia and Herzegovina is a net exporter to the WB region, exporting mainly to Croatia, Montenegro, and Serbia, though its imports from Serbia are larger than its exports (Poyry and Nord Pool Consulting, 2011, p. 57). 2.4 Energy inefficiency The WB economies are generally characterized by high energy intensities and low energy efficiency. Despite ongoing reforms (see section 4 below), the local markets are in most cases still dominated by one (stateowned) generator that supplies customers at regulated tariff rates. The regulated tariffs vary considerably within the WB region. Although these tariffs normally cover the current costs, they are generally low and largely insufficient to ensure new investments. The inefficiency of the electricity networks causes substantial losses of energy. In 2005, network losses amounted to, on average, 22.5% of final electricity consumption (or 14.5 TWh), as compared to the OECD average of only 8%. Network losses were particularly high in Albania (36% of final electricity consumption) and Kosovo (37%), while the lowest in Croatia (14%) (see Table 4). Since 9

10 electricity consumption is expected to grow rapidly over the coming years, it will be necessary to undertake substantial new investments. Providing households with alternative fuels to replace electric heating would reduce peak demand, thus helping to diminish the pressure presently placed on the electricity systems in the WB region. Table 4. Electricity demand and network losses in the Western Balkan region, 2005 The WB economies generally have high energy intensities, considerably higher than the average OECD level. This is explained by the degraded state of energy infrastructure, high energy losses in transformation, transmission and distribution and inefficiency in the end-use sector. Croatia has relatively high energy efficiency, but according to some estimates it still has an energy savings potential of around 25% of the total primary energy supply. The region as a whole could save 13.4 TWh annually by bringing losses down to the level of Croatia. Serbia has the highest level of carbon intensity, which corresponds to its high dependency on coal, while Albania has the lowest, due to its high use of hydropower sources (Poyry and Nord Pool, 2011, pp ). Today, households are responsible for the highest share of electricity consumption in the large majority of countries - 52% on average for the whole WB region but in Albania and Kosovo the share is as high as 75% 10

11 and 73% respectively, extremely high compared to 29% in OECD Europe. Among the main reasons for such a very high consumption of electricity by households are low electricity prices and low payment discipline on the part of the users. Electricity prices remain relatively low, greatly contributing to wasteful practices of high electricity consumption (see Figure 2). This often leads to high peaks in electricity consumption that can overburden the networks and lead to blackouts. As suggested by data in Figure 2, electricity prices are most frequently lower for households than for nonresidential consumers (in Albania, Bosnia and Herzegovina, Macedonia, Kosovo), but they are the same in Serbia and actually higher for households in Croatia. It is estimated that 16% of the people in the WB region are exposed to energy poverty. It is reasonable to believe that the current high energy intensities and low energy efficiency are likely to be affected by changes in prices that a market opening could bring. Figure 2. Electricity prices in the Western Balkan region, last quarter of

12 In Serbia, prices are regulated by public authorities with the objective of offering subsidies to households (more than of families still lived below the poverty line in 2006). Low prices, on the other hand, have not benefitted energy producers, who have been forced to use low quality inputs. This has rendered them less and less competitive with respect to similar producers in Europe. One of the main problems is the low level of utilization of existing plants in the WB countries. In 2005, only about 40% of regional refinery capacity was in use. Refineries operate with low energy performance and high environmental impact, while output is of low quality, failing to comply with EU standards regarding fuel quality and emissions. Table 5. The largest power stations in the Southeast European countries in 2005 by installed capacity, approximate market share and type of fuel used 12

13 Source: Hooper and Medvedev (2008), p. 13. A detailed overview of the most important power stations in the SEE countries, including installed capacity, approximate market share and type of fuel used, is presented in Table 5. The WB countries presently have very concentrated energy markets, far more than Bulgaria, Romania or Turkey (Table 5). In most WB countries, % of the respective market shares are held by 3-4 largest power stations (in Kosovo by only one); the only exception is Croatia, where three plants hold 39% of the market share. In Kosovo, where the whole generation is provided by one power station, there is a chronic underproduction of electricity and blackouts are frequent. Delays or lack of payment of bills on the part of users represents a serious problem. The construction of a large coal plant is in course (the socalled Kosovo C ) which, however, will not be ready before Among the various internationally important partners that are participating in the project is also Italy s ENEL. Lack of reliable electricity supply is generally a serious problem in the WB region. An IEA (2008) report on the Western Balkans mentions the erratic electricity consumption pattern of the poorer parts of the population as a key factor for concern. This is driven by the fact that fuel wood is used for heating needs by the poor, but during the heating season electric heaters are often used when fuel wood demand spikes. This exacerbates seasonal and weather related peaks in electricity demand. Extreme peaks can then cause black-outs or require rationing. The utilities are forced to maintain considerable reserve requirements, which then reduce potentials for exports and revenues. Low tariffs and payment discipline also limit the revenues. 2.5 Environmental impact The events over the last twenty years did not facilitate the development of alternative energy sources and the concept of sustainable development. The energy sector nowadays is characterized with very high energy intensity, low energy efficiency and lack of domestic renewable energy sources, which clearly poses concrete environmental problems. In recent years the WB countries have tried to limit polluting emissions, in line with EU environmental regulations and objectives, while current national energy strategies specify various objectives regarding the increasing use of renewable sources. For the moment, however, the WB governments spend relatively little for measures aimed at protecting the environment. 13

14 Environmental expenditure in recent years represented from 0.1% to 0.2% of GDP in all countries except Croatia, where it is almost 0.7% of GDP. The environmental impact of the present use of energy across the WB countries is different, precisely because the dominant energy sources are different. In 2005, electricity intensity, measured by the electricity consumption (kwh)/gdp ratio was the highest in Montenegro (1.00%) and the lowest in Albania (0.25%) (see Table 6). A very similar pictures emerges from one of the main environmental indicators: carbon intensity, measured by carbon (CO2) emissions as a share of GDP, was particularly high in Serbia (1.24%), while it was lowest in Albania (0.31%). Further insights can be obtained by comparing the level of carbon emissions per capita in the WB countries (see Figure 3). On the one hand, the data show that in the large majority of cases, carbon emissions per capita have either stagnated or have increased over the period; the only exception is Montenegro where they have slightly declined. On the other hand, however, with the exception of Bosnia and Herzegovina, the present level of CO2 emissions per capita remains below the average EU level, which in 2008 was 7.8% (see World Development Indicators, Particularly Albania has a very low level of carbon emissions per capita (1%), due to its extremely high reliance on hydro power. Table 6. Main energy and environmental indicators in the WB region,

15 Figure 3. Carbon emissions per capita in the WB countries, (metric tons per capita) [Source: World Bank, World Bank Development Indicators ( Though most WB countries for the moment have carbon emissions per capita below the EU average, in view of increasing energy needs expected in the future, they will have to increasingly consider the use of alternative sources. Many of the current energy problems in most WB countries could be reduced by a shift towards renewable sources for electricity generation. The Western Balkans could play an important role in the overall reduction of carbon emissions in the future enlarged EU, that could possibly be obtained with greater use of renewable at lower cost. These objectives are already in part being pursued by the WB countries within their overall strategies of EU integration. The increased reliance on renewable sources would not only be fully in line with the Europe 2020 objectives, but would also be an important way to attract more FDI Potential for renewable sources The situation regarding the potential for increasing the use of renewable sources in the future is very different across the WB countries. In Albania, where the almost entire electricity generation is based on hydropower, there is major potential for future expansion of mini-hydropower plants since only about 30% of the potential is presently in use. The situation also seems promising for the future development of wind and solar photovoltaic energy. 15

16 Albania is one of the countries with the largest number of sunny days; for example Durazzo has on average sun light of 2700 hours a year, corresponding to 225 days for 12 hours of sun (Sharofi, 2006). Italian firms have been among those most active in constructing solar plants in Albania. The project EnerSun, financed through the Interreg III project, has involved several Italian regions and provinces, with the aim of building two solar plants in Pescara and Scutari. The construction of solar plants for heating water to be used for both households and industrial plants is also in course. Regarding wind, an agreement signed by the Albanian Energy Regulatory Authority has guaranteed the company Enpower Albania Ltd. (property of the Italian company Moncada Costruzioni) the possibility of using hectars of land near Valona for the construction of what should become the largest park in Europe for wind and biomass energy (Vituari, 2006). In Bosnia and Herzegovina, hydro power is the only important renewable source for the moment. Renewable energy remains largely unexploited not for lack of potential, but because of the lack of clear statelevel policy and legislation. There seems to be increasing interest in using wind energy, but since no serious studies have been undertaken to assess the country s wind energy potential, there has been no investment in this sector so far. According to some estimates, the electricity potential that could be obtained using wind could be about 600 MW. Solar energy is not used for the moment, although solar radiation is around 1240 kw/h m 2 in the North and 1600 kw/h m 2 in the South ( In Croatia, electricity generation from renewable sources has recently attracted a lot of attention of the government, with the aim of decreasing the country s dependency on imported energy. The National Energy Program has introduced ENWIND (Wind Energy Utilization Program), which defines future policies for the installation of electricity capacity from wind sources until the year A rapid development of these technologies seems feasible, so wind energy will be increasingly used particularly in the coastal areas. Solar energy is also included in the National Energy Program (SUNEN), with plans for the future development of adequate technologies. The major energy contribution that could be obtained from the use of the sun is for the heating of water, both for domestic and industry use. There have been a number of contracts signed for the production of renewable sources recently. The existence of feed-in tariffs in Croatia ought to be able to stimulate the market and attract more FDI (see 16

17 In Kosovo, the main objective of current policies is to reduce dependence on imported energy and raise the efficiency of the internal system. Little has been done so far to stimulate the construction of power stations based on renewable sources, although these could be derived from solar, biomass and mini-hydro plants. There are plans to set up panels for the heating of water. Regarding hydro power, measures have also been undertaken to increase efficiency of the existing plants. One of the most urgent requirements is to reduce polluting wastes that are produced by the use of coal. Limited availability of technologies based on high energy efficiency is one of the main obstacles for developing a sustainable energy system in Kosovo. In Macedonia, the largest part of renewable energy sources consists of fuel wood (mainly used for households heating) and hydro power. Wind also has potential: estimates suggest that the average speed of wind is from 5 to 7 meters per second (with peaks of 8 meters a second in the mountainous areas), while electricity generation capacity from wind sources could be from to MW/h. However, there are no reliable data, which greatly discourages potential investors to undertaken any major projects. The potential use of solar energy also seems rather promising. Macedonia can count on 2000 to 2400 hours per year of sun, which could be used for generating more than 10 GW/h of electricity. For the moment solar energy has not been used much, given that only 7,5 m 2 of solar panels per 1000 inhabitants exist for the moment ( m 2 in total). Solar energy is utilized exclusively for heating water and a limited number of families actually use it; estimates indicate that only 0,5% of the potential market for solar energy is presently occupied (around 2500 families, out of potential 200,000 use solar energy). For the promotion of electricity produced by renewables, Macedonia has elaborated an incentive plan that uses feed-in tariffs, in line with EU directives (see Analytica, 2008). The Montenegrin government has recently adopted a strategy for the development of the energy sector until The strategy specifies as the main objectives the improvement of energy efficiency, better use of renewable sources (particularly wind, hydro basins and biomass energy), increasing investment, construction of new electricity stations and improvement of existing ones. Regarding mechanisms for developing renewable sources, various incentives are offered for mini-hydro power plants and wind parks. The intention is to guarantee, through feed-in tariffs, fixed prices for 12 years, which would also be adjusted for inflation. According to current plans, Montenegro by 2020 should reach the target of 17

18 29.5% of energy produced from renewable sources. A high-powered submarine line is also being projected, which should link Montenegro with Italy in 2013, a project developed by TERNA and PRENOS (the Montenegrin company in charge of managing electricity infrastructure). As to the potential of solar energy, annual radiations in Montenegro amount to 1602 kwh/m2, which corresponds to 2000 hours of sun per year inland and 2500 hours per year on the coast. Serbia plans to increase the share of energy produced by renewable sources, in line with EU recommendations. The sectors which are of major importance are wind, solar, geothermic and hydro energy. Regarding hydropower, the main objective is to reduce inefficiencies of existing plants. As to geothermic sources, there are attempts to set up a partnership between local Serb entities and a consortium of Tuscan communes, which would offer the country best practices for the utilization of the country s potential (see Ferrara, 2010). The power of the installed geothermic energy plants amounts to 74 MWt with the potential of increasing, especially in the sectors of agriculture and hydro heating. Regarding solar energy, the annual sun rays in Serbia amounts to 1,400 kwh/m². Serbia has adopted new energy law in 2011, which is fully in line with EU legislation (see EBRD web on renewables). From 2009 onwards, incentive tariffs of the feed-in type were to be introduced, that should have entered into force on 1 January In the future, the WB countries could rely on increased use of natural gas coming mainly from Russia. However, increasing imports of natural gas would also worsen the situation regarding the volatility of prices, given that the price of gas, being anchored to the price of oil, would imply increased uncertainty regarding the price of production (and sales) of electricity. If the prices of electricity were to become more volatile, it would be the households to pay the cost and the higher burden, instead of the big enterprises that would try to avoid the increased costs (see Hooper and Medvedev, 2008). Moreover, although natural gas has a minor environmental impact than coal, it is not a renewable source and requires costly infrastructure. 3. Energy sector reforms in the Western Balkans All WB countries have undertaken substantial economic and institutional reforms as part of their overall efforts to introduce a market 18

19 economy. Although in some countries these reforms have been delayed due to the unfavorable political situation in the 1990s, from late 2000 onwards there has been an acceleration of reforms also in the countries lagging behind, including Serbia as the major energy supplier in the WB region (see Uvalic, 2010). The energy sector in the WB countries is also in a phase of transition, from a monopoly in production, distribution and transmission of electricity to a liberalized market. Under the Energy Community Treaty signed in 2005 (discussed further in Section 4 below), the WB countries are expected to adopt the EU acquis communautaire in energy, competition and environment. Under the Treaty, the WB countries have made commitments towards a common energy policy, including gradually liberalizing power markets, restructuring energy companies, maintaining cost recovery tariffs, adopting tariff methodologies and technical codes for network access, enforcing payments, introducing social safety nets, and setting up independent regulators to scrutinize third party network access (see Deitz, Shirton and Wright, 2009, p. 8). The WB countries are, therefore, expected to adopt the EU electricity reform model. Although some doubts have been raised whether this policy choice is the best for the WBs (see Pollitt, 2009), given that all the WB countries aspire to become EU member states, adopting the EU energy legal framework does seem the most appropriate direction of reforms. All WB countries have undertaken various measures to start the process of restructuring of state-owned energy enterprises. Two main groups of reforms have been (1) the restructuring of state-owned energy companies represented by monopolies, through the unbundling of their activities by separating generation from transmission and distribution, along with the adoption of a new regulatory framework that should enhance energy efficiency; and (2) the creation of more open, liberalized and competitive energy markets, that require the reduction or elimination of subsidies and the gradual increase in prices that have remained relatively low, frequently below effective cost levels. By now, all WB countries have primary legislation for the energy sector, as well as a regulatory authority. However, only two countries Croatia and Serbia have legislation for the gas sector. By contrast, the liberalization process is only in its initial phase in most countries. The initial reforms concern primarily the liberalization of energy distribution, rather than energy production. The European Bank for Reconstruction and Development (EBRD) has followed closely economic reforms in all of its (presently 29) client 19

20 countries in Eastern Europe, in order to evaluate progress in each of the specific areas and the remaining gaps. Infrastructure is given particular importance, whereas one of the main sub-areas is precisely energy. The EBRD has recently also created a specific blog focusing on reforms in the area of renewable energy sources ( The EBRD transition indicators which assess results achieved in the various areas of economic reform, provide scores that go from 1 that implies no or limited progress, to 4+ that indicates that the situation is comparable to that of an advanced market economy. In evaluating reforms in the energy sector, various elements are taken into account: the degree of restructuring through the separation of activities, establishment of an independent regulator, the percentage of market determined prices, the presence and level of subsidies, participation of the private sector, tariff reform and the legal framework regarding competition and liberalization. The EBRD indicators regarding energy sector reforms suggest that only Croatia has a relatively satisfactory situation, having been evaluated with a high 4- score for reforms regarding natural resources, with a 3- for its efforts to promote sustainable energy sources, and with a 3 for electricity sector reforms (see Table 7). Albania is also evaluated rather well, having obtained a relatively high score 3 in all three areas. Macedonia has applied most reforms regarding the electricity power sector (score 3), while Montenegro similarly regarding natural resources (score 3), but both countries are lagging behind in the other two areas. The remaining two countries, Bosnia and Herzegovina and Serbia, have been assessed with the low score 2 (with the addition of a plus or a minus) in all three areas, indicating that most reforms are in their initial stage. Table 7. Energy sector reforms in the Western Balkan countries, 2011 Natural resources Sustainable energy Electric power Albania Bosnia and Herzegovina Croatia Macedonia Montenegro Serbia Source: Compiled on the basis of data in EBRD (2011), p. 9. Since Kosovo is still not a member of the EBRD, similar assessments of progress in the various areas are reform are not available. Detailed information about ongoing energy sector reforms is also provided in a recent report on Southeast European wholesale market opening (Poyry and Nord Pool Consulting, 2011). The report confirms that 20

21 the market opening process has been initiated at the national level, but that the individual WB countries have reached different results. Regarding the unbundling and establishing of a competent regulatory entity, the progress is very satisfactory. In other areas, such as competition and transparency, the reforms are only in their initial phase. Among the most important barriers to market opening and the establishment of an efficient electricity market are the low regulated tariffs and lack of market price penetration to final customer. Despite substantial regional trade in electricity among the WB countries, well-functioning and organized electricity markets are still not in place (Poyry and Nord Pool Consulting, 2011, pp ). 4. Recent EU initiatives: Towards a regional energy market Given that the WB countries occupy a particularly important strategic position, the region has been of continuous interest of international actors. During the more recent period, Russian influence in the field of energy seems to have declined, while that of the EU has increased. In addition to the seven energy markets that presently exist in the EU, a new initiative has been launched to create an eight energy market in Southeast Europe, that would be connected to the EU internal market. The so-called Athens Process launched in 2002 led to the signing of the Athens Memorandum, which first outlined the concept of a SEE regional energy market. The cooperation in the field of electricity was further expanded to the gas sector through a second Memorandum of Understanding signed in December In 2004, the South East European Regulators Board for Electricity and Gas was established by the Ministerial Council. However, these Memoranda represented only political intentions and did not impose any legal commitments on the parties involved (Karova, 2011). The Energy Community Treaty (EnCT) provided for the missing legal framework. The EnCT was signed by all the SEE countries in in addition to the WB countries, Bulgaria and Romania (Moldova has also joined in 2010). The clear enlargement perspective of the WB countries was one of the main incentives for reforms of the national electricity markets and for initiatives in this area (Karova, 2010). The EnCT aims to create an integrated market for electricity and gas and to establish a regional energy market compatible with the EU internal energy. The Energy Treaty refers to the relevant acquis communautaire on energy, environment and competition. After Bulgaria and Romania entered the EU 21

22 in 2007, their legal status has changed to participants. In 2006, the European Regulators Group for Electricity and Gas (ERGEG) with support of the European Commission also launched two regional initiatives: the Electricity Regional Initiative (ERI) and the Gas Regional Initiative (GRI). These initiatives are seen as an interim step of moving from national electricity and gas markets to an internal market. As of April 2008, there were fourteen participants of the SEE Energy Community and four countries with the status of observers (Georgia, Norway, Turkey and Ukraine). In December 2009, the Energy Community Ministerial Council decided on the accession of Moldova and Ukraine. With this decision, the geographical concept of a regional energy market in SEE has shifted further to the east. Today, the core idea behind the EnCT seems to be primarily the export of EU energy policy to non-eu countries ( The EnCT aims at regulating the relations between the countries signatories in order to create a common legal and regulatory framework for the energy markets. The EnCT also envisages the coordination of mutual assistance in case of serious disturbance to the energy networks or external disruptions and possibly the achievement of a common external energy trade policy. The EnCT should encompass the principles and policies of the EC, taking into considerations the specificities of all parties, by ensuring that the countries signatories adopt the acquis communitaire in areas such as energy, environment, competition and renewables (Karova, 2010). The other obligations taken by the SEE countries particularly in the sphere of electricity are the following: a)establishing common rules for the functioning of the national electricity markets and establishing mechanisms for crisis situations (safeguard measures); b)establishing the Regional Energy Market itself prohibition of taxes and quantitative restrictions for import and export of electricity, and common rules for trade with third countries; and c)opening of the electricity markets - of all non-household markets by 2008, and of household markets by The EnCT was concluded for a period of 10 years from the date of entry into force, but the Ministerial Council may decide to extent its duration (Karova, 2011: 81). Although the initiative for creating a regional energy market in SEE has not met universal support, the possibility of a formal recognition of this Eight regional market has been addressed and discussed even before the launch of these regional initiatives. However, defining a regional market is not an easy task since it remains unclear what would be its territorial coverage (Karova, 2010). There are problems linked to the overlapping of 22

23 several markets, or of different regional markets being involved in the same national electricity market. In fact, some of the SEE countries can be seen as belonging to several regional energy markets. This is the case with Croatia, that declared that it wanted to join the northern CEE Regional Electricity Market to which Slovenia and Hungary also belong (which includes Austria, the Czech Republic, Germany, Hungary, Poland, Slovakia and Slovenia), while at the same time joining the SEE market with Bosnia and Herzegovina and Serbia. Romania has confirmed its readiness to join the CEE regional energy market instead of staying within the SEE market, while Bulgaria has posed conditions for its participation in both of these regional markets. Serbia has full control over all its interconnections, but is not willing to recognize its links with Kosovo. Therefore, one of the main obstacles to the creation of a regional electricity market lies precisely in the difficulties in defining geographically where its borders are (Karova, 2010). Related to these issues is also the difficulty in defining the national and trans-national transmission capacity, problems of congestion and the problem of experienced peak demand (see Deitz, 2009). In addition to technical difficulties and problems of geographical divisions, further problems for the creation of a regional electricity market include the lack of adequate infrastructure, limited cooperation in the field of energy among the individual WB governments, the current unfavourable macroeconomic situation for the creation of a common energy market due to the strong impact of the global economic crisis, and preference of the single countries to rely on their own local suppliers, rather than other solutions that would be of common interest. Given the great economic heterogeneity of the region, common instruments and common policies could prove to be inefficient and even counterproductive for some countries, to the benefits of others. This is why the initiatives to create a regional energy market were not always welcome. Nevertheless, the notable differences that exist between the sources of electricity generation in the single WB countries could represent an important incentive for developing a common energy market. Regional integration has the potential to improve the performance of the electricity markets in the WB region. The harmonization of the economic and technical infrastructure, combined with deepening intraregional integration through investment in transmission lines and efficient congestion management are the most important issues. The possibility to define a unique electricity market would facilitate the application of common competition rules and a homogeneous control system over economic agents 23

24 operating in these markets, which could provide a higher degree of security and transparency. The creation of such a market could solve specific problems related to energy supply that have been present in the region for a long time. Among the benefits are the reduction in the volatility of energy prices, an increase in intra-regional energy trade between the individual countries with benefits accruing particularly to the smaller countries, and an increase in the security of energy supply. In balancing the arguments in favour and against regional integration of energy markets in the WBs (see Uvalic, 2012b), there are strong reasons why the former seem far more important. The energy sector in the WB countries has a number of characteristics: the markets are small, the WB economies are energy intensive, energy prices are generally low, tariff structures are inappropriate, while more intensive energy trade is prevented by poor infrastructure. At the same time, the WB countries today share the same regional energy infrastructure, that has created a high level of interdependence within the region itself. Some examples of such interdependencies can be found in the fact that all countries participate in extensive daily and seasonal exchanges of electricity, or that Serbian oil refineries rely on deliveries through the Croatian pipeline network. Given that the electricity generation systems in the WBs are based on complementary energy sources, the establishment of a regional energy market would provide a much larger market, with the possibility of substituting thermal and hydro power in peak and off-peak periods. Given the specific features of various energy sources, the risks deriving from the use of the different sources could also be better shared by the individual WB countries within such a regional framework. For some sources, such as oil and gas, prices are bound to fluctuate due to changing quotations on international markets, so strengthening the common and shared infrastructure could provide concrete benefits, particularly for those countries that have intense daily and seasonal trading in electricity. On the contrary, hydro power supply depends primarily on weather conditions, so countries like Albania and Bosnia and Herzegovina are the most exposed to this kind of risks. The political significance of regional energy markets in the WB should also not be underestimated; this is why the SEE Energy Community has been compared to the European Coal and Steel Community, which paved the way for the creation of the European Economic Community. The WB countries generation mix also clearly points to potentially significant benefits that could be achieved through improved regional trade. 24