Views/ Europe: Interconnectivity in the balkan electricity market

Europe: Interconnectivity in the Balkan Electricity Market, published by the Energy World  Magazine, pages 46 - 49, authored by Leonid Ristev, Petar Mitrovic, Milan Keker and Marija Prskalo.

Interconnectivity in the Balkan Electricity Market

A legal overview of the situation in the electricity markets of Serbia, Montenegro, FYROM and Bosnia & Herzegovina. The significant "players", the path and tempo of liberalization and the new laws regarding this area. A useful "guide" for companies and potential investors, for journalists and government officials.

Serbia – Removing Barriers

The Serbian electricity market is characterised by the predominant participation of state owned entities, significant usage of conventional energy sources in generation (primarily coal), and partial liberalisation of the market.

Sources - The vast majority of electricity is generated in thermo power plants. According to the Energy Balance for 2014, 75% of electricity generated in Serbia will be generated by thermo power plants and combined thermo power heating plants. An amount equivalent to a third of that generated by thermo power plants is generated by hydropower plants. Other (renewable) sources of energy are insignificant.

Even though Serbia has significant potential and is witnessing a gradual increase of investors participating in renewables over the last several years, the renewables sector is still vastly underdeveloped. It is expected that the new Energy Law (currently in preparation) will remove some of the obstacles facing investors – primarily, the lack of bankable PPA. This should ultimately lead to increased investments in renewables and their more significant participation in overall energy generation.

Players - Almost the entire annual generation of electricity comes from state-owned enterprises. Participation of the private sector is insignificant and comes to several small-scale hydro and solar power plants and state owned enterprises are responsible for the operation of transmission and distribution grids.

Participation of the private sector is notable only regarding the supply (including wholesale) sector, with approximately 80 private companies holding supply licenses. This is a direct result of the gradual liberalisation of the supply market (currently also controlled by state-owned EPS), which promises to increase competition and new investments in the sector.

Liberalisation - At this point, the electricity market in Serbia is partly liberalised. The market should be fully liberalised in 2015, at which point households will become entitled (although not required) to be supplied under market terms.

Market liberalisation has been a long-lasting process, which commenced back in 2008. In the first phase, supply under market terms was a possibility, rather than an obligation. Due to the fact that regulated prices are naturally lower than market prices, consumers have opted to be supplied under regulated tariffs. Only by introduction of the 2011 Energy Law, did Serbia establish a framework for the effective liberalisation of the market through the introduction of milestones, whereby different categories of consumers are required to purchase electricity under market prices.

As a result of this gradual liberalisation, more than 3,300 corporate consumers lost their right to supply under regulated prices. Unlike other categories of consumers, households will remain entitled to supply under regulated prices even after 1 January 2015, although it is expected that regulated prices will significantly increase.

New law – A New Energy Law is currently being prepared and the first round of public debate has finished. It is expected that the new law will implement the Third Energy Package (a requirement under the Energy Community Treaty), introduce additional requirements in terms of unbundling, improve framework relevant for investments in renewable energy and remove some of the obstacles noted in implementation of the current law in practice.

Montenegro – Regionally Connected

In Montenegro, the Government has recently adopted the Energy Balance Report for 2014, which once again confirmed that production capacities cannot meet consumer demand for electricity. It was reported that Montenegro will face an energy balance shortfall amounting to 9.2% of overall consumption, or cca 316 GWh. Other key characteristics of the 2014 Montenegrin Energy Balance Report as well as the reasons for the energy shortfall can also be found in the present congestion of transmission facilities in the SEE region that are directly related to the import of electricity in Montenegro – under very strict UCTE rules, capacity is divided bilaterally on the basis of load flow calculations for two months in advance. Also, in 2013 EPS (Electric Power Industry of Serbia) terminated a long-term agreement on technical cooperation with EPCG (Electric Power Industry of Montenegro). The agreement, which should have been valid until 1 January 2016, provided for the delivery of 1 mW of peak power from EPCG from its Piva hydro-power plant, as an exchange for the 1.4mW of base power delivered from the EPS production units. The peak power from Piva was used for running major thermal-power plants and hydro-power plants in Serbia.

Facing the loss of 0.4mW of output from Piva, EPCG turned to the Republic of Srpska and concluded a similar long-term agreement with ERS (the Electric Power Industry of the Republic of Srpska).

Another uncertainty marking the consumption of electricity in Montenegro is the fate of the only aluminium smelter in the country – Kombinat alumijuma Podgorica (KAP), which faced bankruptcy in mid-2013. As a key purchaser, KAP consumed in excess of 50% of the energy available on the market and their continued consumption will depend on the outcome of the bankruptcy proceedings, which has generated a fair amount of uncertainty for all market participants.

In terms of interconnectivity, the Tivat-Pescara cable project is still ongoing. This high-voltage electric interconnection project is being implemented by the Italian company Terna and will connect the electricity networks of Montenegro and Italy by 2015. The project will ultimately facilitate the export of energy from renewable sources produced in Montenegro and the Balkans to Italy. Recent information claims that 2015 deadline will be extended.

The EUR 760 million cable is at the centre of the Montenegro-Italy power deals, which form part of a broader Italian strategy to make Italy the “energy hub of Europe” and to meet EU requirements for higher consumption of energy from renewable sources.

As for renewables, Montenegro has granted several concession agreements for the construction of small hydro-power plants (with output capacity up to 10 mW per annum) in 2012 and 2013. Past tenders have also generated significant interest from both Montenegrin and international investors, attracted by incentives. Three projects are scheduled for grid connection in early 2015.

FYROM - Latest Trends and Developments in Electricity

Production – FYROM is unable to meet its electricity needs with domestic production and this shortfall in the energy balance constitutes 20-25% of total consumption. In 2013, domestic production covered only 70% of the need for electricity in FYROM. This percentage is mainly dependent on the production of hydro power plants and TE-TO, the largest natural gas power station in FYROM. The two major Thermo Power Plants, operated by the 100% state owned joint stock company ELEM, remain the primary domestic generators of electricity in FYROM, producing approximately 80% of the total domestic production of electricity.

Electricity and RES - Nearly 70 small hydro power plants are expected to be fully operational by 2015, with a planned average annual production of 260GWh. Currently, more than 80 licenses for production of electricity from photovoltaic power stations have been issued by the Energy Regulatory Commission of the Republic of FYROM, which indicates that a larger share of renewable energy is expected to be supplied by photovoltaic power stations in the future. It is also expected that this year the first wind power park, which is located near Bogdanci and operated by ELEM, will become operational. The park, an investment worth EUR 55 million, has an installed capacity of 36.8 MW, which is planned to increase in the near future.

Transmission - The transmission of electricity is operated by MEPSO, a 100% state owned Joint Stock Company. Two 400kV interconnection lines are planned as upcoming investments by MEPSO. Connections are planned from Bitola to Elbasan and from Skopje to Kosovo, which will connect the electric power systems between these countries. The projects are expected to be completed in 2015 and are worth approximately EUR 23 million.

Distribution & Market Liberalisation - The distribution and supply of electricity is operated by the private joint stock company EVN Macedonia. EVN Macedonia has an exclusive license for the supply of electricity to final tariff consumers until 31 December 2014, after which all electricity consumers should become eligible to purchase electricity at market prices.
From 1 July 2013, in accordance with the Energy Market Rules, approximately 220 middle sized companies (which are eligible as qualified consumers) are able to purchase electricity at market prices on a daily basis. Supply to qualified consumers is currently provided by 47 companies licensed for the wholesale trade in electricity. Further liberalisation is expected after 1 January 2015, when it is expected than a significant increase in competition and regulated prices will become available with the opening of the markets for households as well.

Bosnia & Herzegovina – A Small country with enormous energy potential

Bosnia & Herzegovina (BH), with a population of only 4 million people, has enormous energy potential, being able to fully satisfy its electricity demands by domestic production while at the same time exporting electricity to its neighbours.  However, energy production capacities are not fully exploited and there is great potential for a significant increase in production.
The main sources of energy in Bosnia & Herzegovina are traditional sources - coal and water. According to the European Association for Coal and Lignite , the total production capacity of the BH’s power plants is approximately 4,300 MW, where 55 % of the overall production is provided by thermo power plants (hereinafter, “TPP”), and the remaining 45 % by hydro power plants (hereinafter, “HPP”).

Three major producers, distributors and suppliers of energy are state-owned public enterprises, which operate production companies that are in charge of HPP and TPPs, as well as energy distribution and supply companies. Recently, there has been an increase in the number of private companies registered for the production and trade of electricity. The owner of the coal mine “Stanari” and holder of the concession for a TPP in Stanari and HPP Ulog in Neretva River is Energy Financing Team (EFT), a unique European energy trading & investment group. Gas and oil production sectors, as sectors that are traditionally characterised with low production and export dependence, also mark an increase in private investments.

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