Electricity reform in Serbia

Utilities Policy 17 (2009) 125–133

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Electricity reform in Serbiaq Sandra Jednak a, *, Dragana Kragulj a, Milica Bulajic a, Russell Pittman b a b

Faculty of Organizational Sciences, University of Belgrade, 154 Jove Ilic´a Street, 11000 Belgrade, Serbia Antitrust Division, U.S. Department of Justice and New Economic School, Moscow

a r t i c l e i n f o

a b s t r a c t

Article history: Received 9 September 2007 Received in revised form 23 January 2008 Accepted 2 February 2008

According to the Agreement on Stabilization and Integration to European Union, Serbia is obligatory to implement reforms in power sector and its power policy must be in accordance with the European Union power policy. Power sector reforms in Serbia have been started, and certain results were achieved. But, electric power infrastructure became technologically obsolete, and for its reconstruction significant investments and the active part of the state are necessary. Operative efficiency is at very low level. Also, Serbia has not yet decided whether Serbian Electric Power Industry will be privatized or not and if it is privatized which model will be applied and when. Ó 2008 Elsevier Ltd. All rights reserved.

Keywords: Electricity Restructuring Competition Investments Prices

1. Introduction Serbia is a country with an area of 88 361 km2 and a population of 7 498 001 (without Kosovo). Serbia is situated at the intersection of Pan European Corridors Nr. 10 and Nr. 7 linking Europe and Asia. The river Danube runs throughout Serbia (588 km). GDP per capita in 2006 was 3280 euro. Serbia started real transition process in 2000. From then it has run successful reforms. Among those reforms are reforms in energy sector. In the European Union, the process of the reorganization and restructuring of the electric power market has been started by the implementation of the Directive on electric power.1 Considering that Serbia aims at European Union integration, it is obligatory to harmonize rules and regulations of power sector to the European Union requirements. This process has been started by signing the Memorandum on creating a regional electric power market in South East Europe, its integration in internal electric power market in the European Union in 2002 and 2003, the so-called Athens Memorandum. In October 2005, countries of this region also signed The Energy Community Treaty establishing Energy Community of South Eastern Europe (ECSEE). Serbia, as well as most of the candidate countries, has implemented EU regulatory rules in its own law, as part of changes that is prerequisite for accession. It has also

q The views expressed are not those of the U.S. Department of Justice. * Corresponding author. Tel.: þ381 11 3950 859; fax: þ381 11 461 221. E-mail address: [email protected] (S. Jednak). 1 Directive 96/92/EC about internal electrical power market in European Union. 0957-1787/$ – see front matter Ó 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.jup.2008.02.002

adopted common approach of electric power reforms, i.e. legal, structural and institutional changes. By signing Electric Power Community Contract and according to Athens Agreement about single electric power market foundation in South East Europe, Serbia promised to abolish monopoly of state owned electric power industry and to set conditions for electric power market from 2008. In spite of the adopted laws, there is no developed internal electric power market in South East Europe. Serbia, as the central Balkan country, is interesting for electric power trade, because it is practically unavoidable in the regional market. It is necessary to reorganize existing production capacities and to invest in the new production plants, and that energy, natural resources and human environment are to be saved by efficient energy use. These reforms were started by adopting the Energy Law in 2004 and they have been in power since then. Beside the Energy Law, Serbian energy policy is incorporated in the Energy Development Strategy up to 2015. Energy policy is based on three elements: efficient energy use, increased use of renewable energy sources and development of a market-oriented electric power industry. Serbia has established new institutions – the Energy Agency and the Energy Efficiency Agency. The Serbian Electric Power Industry was restructured but there is still need for further changes: method of privatization, investments, and applying new tariff system. 2. Background on the electricity sector Electric Power Industry development in Serbia began in 1881, when the first open-air restaurant in Belgrade was lighted by direct

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current lamp. The first power plant in Serbia was started up in 1884. However, the beginning of electrification in Serbia is considered to be October 6, 1893 (the first public electric thermal power plant was put into operation in Belgrade). The first long-distance transmission line in Serbia, 17 km long, was put into operation in 1903. ‘‘Snaga i svetlost’’, the one of the biggest thermal power plants in the Balkans, was built in Belgrade in 1933. Serbian Electric Power Enterprise was founded in 1945, after World War II. ‘‘Bajina Basta’’ Hydroelectric power plant was put into operation in 1966. The two greatest electric generating plants in Serbia, ‘‘Djerdap’’ Hydroelectric power plant and ‘‘Nikola Tesla’’ 2 Thermal power plant, were put into operation in 1970. By the 1990s, the Serbian Electric Power Industry was in the expansion phase and was witnessing the establishment of an efficient and modern system. The break up of the former Socialist Federal Republic of Yugoslavia and the imposition of sanctions had an impact on further development of the Serbian Electric Power Industry. Because of lack of financial resources, the building of new capacities was stopped and it aroused the maintenance problem of existing electric generating and transmission capacities. The new Law on the Electric Power Industry was passed during 1991, by which the electric power enterprises became public and state owned. It was then that the public enterprise was founded – Serbian Electric Power Industry (EPS). This enterprise is vertically integrated all the way from coal production (including surface mining and underground mining) to electric power generation, transmission and distribution. Thermal power plants relying on coal (lignite), then hydroelectric power plants (reversible and reservoir hydroelectric power plants), have dominant parts in the structure of this capacity while the minor part is occupied by the thermal power plants which rely on gas and liquid fuels. Surface mining is done in three coal mines: Kosovo-Metohija, Kolubara and Kostolac. The restructuring process of all public enterprises was started in Serbia in 2003. The greatest difficulties of these enterprises are operating losses, a lot of employees and the problem of non-core activities. Public enterprise restructuring proceeds in phases which are formulated in business strategy plans of certain public enterprises. The privatization project of the public sector aims at developing strategies of gradual withdrawal of the country from the public sector. In the same way, the state will continue to strive for making an institutional framework and regulative body for marketbased business operation of these entities. Thereby, it will provide control of the use of adopted solutions. In this way, Serbian Electric Power Industry (EPS) has been also restructured. 3. Regulatory environment for electricity reform programme By passing the Energy Law (2004), the possibility for many activities concerning Serbian integration into the regional electric power market in South East Europe was achieved, i.e. integration into the South East European Electric Power Community. This Law offers means by which a framework is provided for the ending of the Serbian Electric Power Industry’s monopoly, improving competition in power generation, functioning of the market in which all producers, under the same conditions, will be enabled to have access to transmission and distribution of electric power. The basic goals of this Law are safety and protection of low load factor consumers, integration into the regional and European market, and attracting investments. According to this Law, the company that will undertake power transmission should be independent and it should enable all producers and traders to have free access to the power transmission

2

http://www.obrenovac.org/privreda/tent/index.htm.

system. The content of this Law is the planning of electric power development, the foundation of the Energy Agency and the Energy Efficiency Agency, the field of electric power, oil and oil products, natural gas, thermal energy and completion dates. The main areas of activities within electric power development plan are energy policy, strategy of power development, implementation of strategy plan, and energy balance. The Energy Law contains a special part which refers to electric power. Power generation is composed of generation of electricity in hydroelectric power plants, thermal power plants, Combined Heat and Power plants and power plants relying on renewable energy sources or waste. In addition to these producers, the privileged producers are also defined. The privileged generating plants in the generation process use renewable energy sources or waste, and then electric power plants of small capacity (electric power plants of power amounting to 10 MW) and generating plants that simultaneously generate electric and thermal power. All these producers are obliged to transmit generated electric power to electric power distributors that are responsible for electric power supply of tariff customers. The electric power distribution system consists of a high voltage system amounting to 400 kV, 220 kV, and 110 kV (part of the system) as well as the other power plants, telecommunication system, information system and other infrastructure facilities necessary for power system operation. Transmission system management is carried out by the transmission system operator. In Serbia, it is done by the Serbian Power Transmission Company, EMS. Apart from the transmission system operator, the market operator is also defined by law. According to the Law, it is an energy entity that shall administer and operate an electricity market, keep records of all contracts, and also be responsible for efficient organization of the electric power market. This is also carried out by the Serbian Power Transmission Company, EMS. According to this Law, electric power distribution enterprises in Serbia will operate as independent companies under significantly modified conditions. Electric power distribution will have monopoly, but electric power sale will become market activity. In this way, the power generation function and distribution function will be separated from electric power transmission. In accordance with this, the restructuring of public enterprise was carried out.

4. Recent performance of the electricity reform programme According to the Energy Law3 from 2004, the Serbian Government issued a decree on founding two public enterprises Serbian Electric Power Industry (EPS) and Serbian Power Transmission Company (EMS). The decrees on founding the two abovementioned public enterprises became valid on July 7, 2005. The Serbian Electric Power Industry is authorized for coal production and processing, generation and distribution of electricity, distribution system management, and electric power. The main activities of Serbian Power Transmission Company are electric power transmission, transmission system management and electric power market management. Both of them are in 100% ownership of the Republic of Serbia. The process of financial and economic consolidation and rational use of resources was continued in 2005. Subsidiary activities were set aside and separate enterprises were formed within public enterprises. Also law regulations were modified.

3

Slu zbeni glasnik RS broj 84/04.

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4.1. The Serbian Electric Power Industry

Table 1 Basic characteristics of plants and year of beginning operation

By 2005, Serbian Electric Power Industry was totally a vertically and horizontally integrated company which consisted of 23 public enterprises, and all of them were managed by it. Following the restructuring process the public enterprise Serbian Electric Power Industry is a vertically organized enterprise which consists of 11 public electric power enterprises, out of which six deal with electric power and coal production and five deal with electric power distribution. Enterprises for power generation and coal production are as follows.

Power plants

Total power (MW) Year of beginning operations

Thermal power plants (25 blocks of total power) TPP Nikola Tesla A TPP Nikola Tesla B TPP Kolubara TPP Morava TPP Kostolac A TPP Kostolac B TPP Kosovo A TPP Kosovo B

5171

1. Nikola Tesla (Obrenovac) – thermal power plant. 2. Kostolac (Kostolac) – thermal power plant and coal mining basin. 3. Pannonian electric power plants (Novi Sad) – Combined Heat and Power plants. 4. Djerdap (Kladovo) – hydro power plant. 5. Drinsko-Limske hydro power plants.4 6. Kolubara (Lazarevac) – Coal Mining Basin. 7. Kosovo (Obilic). Distribution of electricity is done by the following enterprises. 1. 2. 3. 4.

Elektrovojvodina (Novi Sad). Electrodistribution Belgrade. Elektrosrbija (Kraljevo) joined with Electrodistribution Uzice. Jugoistok which consists of: Electrodistribution Nis, Electrodistribution Leskovac, Electrodistribution Vranje and Elektrotimok (Zajecar). 5. Centar which consists of Elektromorava (Pozarevac) and Elektrosumadija (Kragujevac).

Total amount of power capacities of the Serbian Electric Power Industry is 8355 MW. Thermal power capacities stand it with 65%, while hydroelectric power makes up almost 34% of total electric power capacity. Thermal power capacities of the Serbian Electric Power Industry consist of eight thermal power plants of total installed power amounting to 5171 MW which rely on lignite, as well as three Combined Heat and Power plants of total installed power amounting to 353 MW which rely on liquid and gas fuels. In the Serbian electric power system, there are nine hydroelectric power plants, with 50 hydro generating sets of total power amounting to 2831 MW. Besides this, the Serbian Electric Power Industry operates with three power plants (HPP Piva, HPP Gazivode and Heating Plant Belgrade) that are not in its ownership. These have total capacity of 461 MW. Total power capacities of the Serbian Electric Power Industry and ageing equipment of power plants are shown in Table 1. Data from Table 1 show that the Republic of Serbia has old electric power plants. Hydroelectric plants, i.e. their generating sets are as old as the generating blocks of thermal power plants. The last generation plant was built 15 years ago. Because of lack of financial assets TPP Kolubara B has been building for 20 years. There is a need of about 550 million euro to finish it. If the Government does not bring the decision for building new thermal power plant, Serbia will have a shortage of electricity power. In 2006, total power generation of all plants was 38 452 GWh, from which thermal power plants generated 27 602 GWh and hydroelectric power plants make 10 850 GWh. Power generation in each electric power plant for 2005 and 2006 is shown in Table 2.

4 This is one enterprise within Serbian Electric Power Industry. It consists of Hydroelectric Plants on the river Drina (Bajina Basta) and on the river Lim (Nova Varos).

Combined Heat and Power plants (6 blocks of total power) CHP Novi Sad CHP Zrenjanin CHP Sremska Mitrovica Hydroelectric power plants (run-ofriver power plants – 31 sets of total power, reservoir power plant – 17, reversible hydroelectric power plant – 2 sets) sets of total power HPP Djerdap I HPP Djerdap II HPP Vlasina HPP Pirot HPP Bajina Basta RHPP Bajina Basta HPP Zvornik HPP Elektromorava HPP Limske

1502 1160 245 108 281 640 617 618

1970–1979 1983–1985 1956–1979 1969 1967–1980 1987–1991 1962–1975 1983–1984

353 208 100 45

1981–1984 1989 1963–1979

2831

1058 270 129 80 364 614 92 13 211

1970–1972 1985–1987,1998,2001 1955–1975 1990 1966–1968 1982 1955–1958 1954–1957 1967–1979

Note: year of beginning operation shows period when first and last set/block began operation. Source: EPS.

The structure of electric power generation for 2005 was thermal power plants relying on coal mostly participate with 68% in power generation, then run-of-river power plants with 26.3%, and storage power plant with 3.1%. Reversible hydroelectric power plants participate with 1.6% and Combined Heat and Power plants participate with 1%.5 Many argue that Serbia needs to invest in thermal power plants and mining. Coal is a cheap energy product and it is not necessary to import it. Also, it is the most important energy resource of Serbia. Power generation relying on coal requires a great number of employees and the electrical and machine building industry’s capacity within maintenance and spare parts production. Total coal production in 2005, without Kosovo, was 34 569 848 t. Unlike coal, gas used for power generation is imported (total amount) mostly from Russia. Thermal power plants relying on coal mostly participate in power generation in Serbia. However, one of the disadvantages of using coal for power generation is environment pollution. Because of the regulations on environment protection, a lot of thermal power plants modernize existing plants and construct new, efficient plants, which for the same amount of generated power emit less carbon dioxide in the atmosphere. The second disadvantage that occurs is the status of Kosovo. More than 80% of exploitation supplies are available in the Kosovo coal mine with estimated value amounting to 100 billion euros. If it were not possible to use those supplies, it would be necessary to release some extra budgetary supplies into the Kolubara and Kostolac coal mines. Power distribution is also an activity of EPS. This activity is performed in five economic associations. Among these five

5

EPS.

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Table 2 Structure in Electric Power generation (2005 and 2006)

Electric power plant TPP Nikola Tesla A TPP Nikola Tesla B TPP Kolubara TPP Morava TPP Kostolac A TPP Kostolac B TPP Kosovo A TPP Kosovo B

2005

2006

GWh

GWh

8545 7270 1175 723 955 3471 746 3300

8840 8295 1231 626 856 3513 1022 3040

26,184 251 111 20 381

27,422 136 35 9 180

6043 1412 399 178 1822 621 562 78 809

5301 1211 409 143 1720 615 517 64 869

Hydroelectric power plants

11,924

10,850

Electric power plants of Electric Power Industry of Serbia (2005 and 2006)

38,489

38,452

Thermal power plants CHP Novi Sad CHP Zrenjanin CHP Sremska Mitrovica Combined Heat and Power plants Electric power plant HPP Djerdap I HPP Djerdap II HPP Vlasina HPP Pirot HPP Bajina Basta RHPP Bajina Basta HPP Zvornik HPP Elektromorava HPP Limske

The Serbian Electric Power Industry should invest 3.2 billion euros in its system improvement in the following four years, and EPS will provide most of the financial resources from its equity capital. However, due to its poor financial situation, the Serbian Electric Power Industry cannot invest in the construction of new electric power plants and coal mines, distribution network and change of watt-hour meters. According to the plan that the Government must verify, EPS should invest half of its financial resources while somewhat less than a billion euros is expected from a strategic partner.7 The biggest investment projects are for completing construction of Thermal Power Plant ‘‘Kolubara B’’, for contraction of a third unit of Thermal Power Plant ‘‘Nikola Tesla B’’ in Obrenovac, as well as reconstruction of Combined Heat and Power plant ‘‘Panonija’’. Contraction was planned in cooperation with strategic partners. Beside those projects, EPS is planning to invest 1.2 billion euros in environmental protection. Abovementioned investment projects would be possible also if the price of electricity power should be more than 7 eurocent per kWh till 2012. Until there is no increase of price, EPS will invest first in project and maintenance of priority, then in development. The annual income of the investments needed for maintenance of the present production level should amount to 300 million euros. For plant investment realization in 2006, it was planned to invest 331.9 million euros, setting this money aside from: (1) equity capital – 161.0 million euro; (2) electric power consumer’s assets and Serbian Government loans – 37.4 million euro; (3) donations – 34.7 million euro; and (4) foreign credits – 98.8 million of euro.8

Source: EPS.

associations, three of them Elektrovojvodina, Electrodistribution Belgrade and Elektrosrbija (Kraljevo) have the highest part in electricity power sale. Length of network is 155 541 km. Due to lack of investments and low energy tariffs in recent periods the power distributing network has significant power losses. However, since 2000 EPS started to invest in this network by favor of foreign donations. The objectives of distribution are increasing the number of new consumers, reduction of technical losses, improvement of voltage conditions and supply reliability. The greatest part in final power consumption is occupied by households with 55.3%, then industry with 22.4%, other consumers with 19.3%, and agriculture, civil engineering and traffic with 3% (data for 2005).6 Electric power consumption per capita in Serbia was 3747 kWh in 2004, and in 2005 it was 3922 kWh. In 2005, total number of consumers that are using high and medium voltage is 3 294 593, while low voltage users amount to 3 291 020. Planned total net electricity power generation for 2006 was 31 305 GWh for 7% less than electricity power generation in 2005. The planned net amount of electric power import in 2006 was 1289 GWh. The net amount of electric power import in 2005 was 1943 GWh. Present electric power production levels and capacity reliability cannot be maintained without larger investments in revitalization, capacity modernization and investments in the mines and plants. In order to provide the necessary level of power generation for incremental electric power consumption, it is necessary to continually invest, together with a production increase.

6 Energetski bilans elektricˇne i toplotne energije, 2004 i 2005, (2006), Radni dokument, Republika Srbija- Republicˇki zavod za statistiku, ISSN 1820-0141, septembar 2006, broj 53 -http://webrzs.statserb.sr.gov.yu/axd/rdokumenti/rd53g06.pdf.

The majority of these amounts is planned for coal production processing and transport. Investment increase in Open-pit Coal Mines has the aim to provide an additional quantity of coal for performing production level in reconstructed Thermal Power Plants. Moreover, there are investments in revitalization of Plants (TPP ‘‘Kostolac’’, HPP ‘‘Djerdap I’’, HPP ‘‘Bajina Basta’’ and TENT 4) and for modernization and development of distribution network. Future activities that will be carried out in the process of rationalization of enterprise, work organization, business operation and continuation of restructuring, will proceed according to the following Serbian Electric Power Industry’s list of priorities: economic and technical efficiency; modern organization that will be adaptable to future changes (market changes, development of production capacities, ecological demands, information technology, and development of engineering services); human resources development; and clearly measurable results of all realized goals in the sense of size, quality and deadlines.9 4.2. The Serbian Power Transmission Company (EMS) The Serbian Power Transmission Company (EMS) is public enterprise for electric power transmission and management of the transmission system and electricity market. It is composed of three branches: for transmission (transmission of electricity), for management (system operation) and for market (organization of electricity market). The main objectives of this company are provision of a high level of security of transmission system, sustainable development and integration of transmission capacities into a single system, transparent and non-discriminatory cross-border access, increased efficiency in maintenance of transmission capacities,

7 8 9

http://www.blic.co.yu/blic/arhiva/2006-10-26/strane/ekonomija.htm. Annual report of EPS. EPS ICAS – BBP, Project ID No: 002/001/2006.

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economic–financial consolidation accompanied by efficient and cost-effective operation, maintaining an influential position in the region and joining the process of establishment of the regional market in South East Europe. This public utility has regional transmission units: Belgrade, Bor, Valjevo, Krusevac, Novi Sad and Oblic. The Serbian Power Transmission Company has 96 high-frequency substations where there are 184 transformers of total installed power amounting to 17 331 MVA. One part of this system is in Kosovo, and Serbian Power Transmission Company is not authorized for it. The whole of the transmission system, which is of different voltages, is on Serbian territory. Total transmission system length of different voltages (10 kV, 35 kV, 110 kV, 220 kV, 400 kV) amounts to 9864.08 km. A part of that, which is 1035 km long, is in Kosovo under UN interim authority. The transmission system operator and electric power market operator in Serbia – the Serbian Power Transmission Company (EMS) – pay exceptional attention to the investment cycle: value of the agreed project amounts to 100 million euros at the moment, and mentioned funds are provided from credits and donations. From these financial funds, three new substations of voltage amounting 400/110 kV, one transmission line of voltage amounting to 400 kV would be built and a great number of existing substations in transmission system would be rebuilt. At the end of 2005, an expanded substation of voltage amounting 400 kV was put into operation in Sremska Mitrovica as well as a new interconnected long-distance transmission line toward Ugljevik Thermal Power Plant in the Serb Republic. This new transmission line (76 km) will increase electricity power transmission from the East to the West neighbor countries. In 2006 a new substation of voltage amounting 400 kV was built in Majur (near to Jagodina). In this project 12 million euros were invested. EMS continues investment in 2007 and at the end of 2007, this company will start building the new international transmission line Nis-Skopje and new substation (400 kV) Belgrade 20.

4.3. Institutions 4.3.1. The Energy Agency The Republic of Serbia formed the fundamental institutions for electric power operations: the Energy Agency (AERS) and the Energy Efficiency Agency. The Energy Agency was founded as a management body for electric power market promotion and orientation according to the principles against abuses of power and efficient competitiveness. The Agency is an independent legal entity that is independent of any government authorities as well as independent of electric power subjects and users of their products and services. The Agency is administered by the Council of the Energy Agency. The main tasks and issues of the Energy Agency are electric power market promotion and orientation development, coordination of electric power subject’s activities in providing regular power supply, providing protection and equal rights of consumers and monitoring of regulation implementation and electric power system working operation. The activities of the Energy Agency are (a) determining tariff systems for calculating electricity and natural gas prices for tariff customers, as well as tariff systems for access to and utilization of electric power transmission and distribution system; (b) determining tariff methods for calculating electricity and natural gas prices; (c) determining the criteria for terminal costs needed for electric power transmission, transportation and distribution; (d) issuing licences for doing electric power activities and passing an act on suspension of a licence;

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(e) giving its consent on working rules of the system and electric power market operation; (f) making decisions on an appeal against transmission, transportation and distribution operator of electricity; and (g) determining minimum annual electric power consumption in order to get qualified (eligible) consumers’ status and keep records of qualified (eligible) consumers. The Energy Agency adopted a methodology for determination of tariff elements. Methodologies for setting prices of electric power and services for tariff customers for electricity power generation, transmission and distribution were passed in July 2006. The electric power methodology for determination of connection charges to the system was passed in June 2007. The new tariff system was passed and will be valid from April 1, 2008. Issuing of licences is in progress and so far 65 licences have been issued. The Agency permanently decides upon consumers’ appeals. The preparation of a decree on information report is in the final stage. Still, there are activities that are not much used, like giving consent to working rules of the system and electric power market operation (EMS only prepared power system and market tariff plan and is preparing market operation plan), also it has no role in deciding eligible consumers’ status. 4.3.2. The Energy Efficiency Agency The Serbian Energy Efficiency Agency was originally founded by Government Decree and started its operation in 2002. According to the Energy Law and with financial support from the European Agency for Reconstruction, it was re-established in 2004 and thus has been operating as separate republic organization. The operation of the Agency is financed through the budget of Serbia and as well as by EU donations. The establishment of the Energy Efficiency Agency is the result of the strategic need of Serbia to realize an efficient electric power system with reduced costs. For the creation 1$ of GDP, Serbia spend 3 kWh of electricity power. Croatia and Slovenia spend less than 1 kWh, while Greece, Italy and Austria even less, under 0.5 kWh for the creation 1$ of GDP. Such inefficiency has an influence on economic inefficiency through competitiveness of Serbian products and services on global market. The Energy Efficiency Agency is based on improvement of conditions for energy and energy products conservation, as well as efficiency increases in energy conservation in all sectors of consumption.

4.4. Regional electric power market The reform of the energy sector and the emergence of a regional energy market connected to the EU energy market is one important task that West Balkans countries need to achieve and in that way bring them closer to the EU. Countries in region signed the ECSEE Treaty and Athens Memoranda.10 It has been given a timetable for its implementation. All countries have started with reforms and fulfilled objectives. This Treaty is a good base for the development of the regional electricity power market, but there is a need for harmonization and co-ordination of both regional electricity power systems and countries. Development and situation of the electricity power sector varies across the region. The main characteristics are low energy efficiency, electricity power deficit, old and insufficient generation power capacities and transmission lines. This is an obstacle to market development and liberalization.

10 Two Athens Memorandums of understanding where the countries in region committed themselves to create a regional electricity and gas market on the basis of EU energy regulations.

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It is expected that a significant electric power shortage will occur in 2012, caused by insufficient capacities against increasing consumption, the closure two blocks of nuclear power plants in Bulgaria, and a dry year. Serbia has a problem with old and insufficient capacities. Bulgaria closed part of the nuclear power plant, and production was decreased. In previous years, the majority of electricity deficit of South East European countries was covered by the closed blocks in Bulgaria. Bulgaria, Romania, and the Serb Republic have an electric power surplus, while Albania, Montenegro and Macedonia have an electric power shortage. Bulgaria, Serbia and Bosnia will build new capacities, but they highly depend on foreign credit lines for each investment. Beside establishment of new institutions, Serbia built a legal framework for environmental protection and competitiveness. A law on protection of competitiveness was passed in September 2005. Monopolistic activities on the market are prohibited by the Energy Law, but they still exist. Serbia is the central Balkan country and it has great impact on electric power trade, because it cannot be avoided in transactions. If a dealer buys electric power in one country, and wants to sell it in another country of the region, that electric power has to go through the Serbian transmission system.11 EMS (the Serbian Power Transmission Company) is responsible for transmission capacity allocation on interconnections of Serbian Power System. According to the Serbian defined cross-border transmission and legal rights and rules, only locally registered enterprises and enterprises with license may transport electricity through Serbia. In order that electric power traders could do business, EMS has to allocate them a right for trans-frontier electric power transmission, which cannot be bought up for a longer period, because EMS only allows transmission of a limited amount of electric power on a monthly basis. Until 2007, the applied method was pro-rata rationing on a monthly basis, based on published ATC (Available Transfer Capacity) values for each EMS border, for both directions. The available cross-border transfer capacity (free capacity) for each border was divided 50–50 between EMS and neighboring TSO (Transmission System Operator). From 2007, EMS has introduced the method of monthly market-based explicit auctions for its borders (both directions). Explicit auctions are based on a ‘‘no congestion no payment’’ principle. EMS is participating in Dry-run Coordinated Explicit Flow-based Auctions in SEE during 2007. In 2007, transit across Serbia has the amount of about 6 billion kWh and that brought revenues of about 25 million euros12 to EMS. EMS realizes about 40% of all revenue from transfer.13 On the tie-lines congestions exist. Bottlenecks are on the borders Bulgaria–Serbia, Romania–Serbia, but also on the borders Serbia–Croatia, Serbia–Bosnia Herzegovina, Serbia–Macedonia, Serbia–Montenegro. In the opposite direction on all borders there are no restrictions. In order to have enough capacities for transmission without restriction, EMS has invested in new transmission lines, substations, software for the auctions system, new market operating system and other projects. Also, through those projects EMS prepares itself for higher power exchange and liberalization of market. In all those projects, EMS had technical and financial support of the European Agency for Reconstruction. If the electricity power market is analyzed through two segment of market – wholesale (trading with high voltage) and retail (low voltage) – the degree of development of each is that the wholesale market is more developed than retail. EPS is present on both the wholesale and retail market. On the wholesale market EPS buy electricity power in case of electricity shortage. In accordance with

11 12 13

http://www.blic.co.yu/blic/arhiva/2007-01-20/strane/ekonomija.htm. Or 1.98 billion dinar (RSD); exchange rate 1euro ¼ 80 RSD. http://www.poslovnimagazin.biz/vesti/tranzit-struje-mora-preko-srbije-1-538.

the Public Procurement Act, EPS has to publish Public Invitation to tender for electricity supply. It is not allowed by Law that EPS buys or imports electricity by itself. EPS has to buy from traders who offer favorable conditions for electricity supply in a tender. On the retail market, EPS is both supplier and trader. Electricity distribution and sale are carried out by five distribution companies that are part of EPS. The obstacle for real electric power market functioning is low retail price of electric power, which is dictated by the state and does not cover production costs. For example, in Serbia the wholesale price is 70 euro per MWh, while in Romania it is 60 euro per MWh; on the other hand the average retail price, the price that final consumers pay in Serbia is 4.7 eurocents per kWh, while in Romania it is 10 eurocents. According to the Law there is a possibility that high load factor consumers choose their electric power suppliers.14 There are about 360 enterprises in Serbia, which annually consume more than 3 million kWh and have a right to independently choose its electric power supplier. However, electric power price is low, so that they do not need to look for other electric power suppliers except EPS. Due to this, eligible consumers (companies that, as high load factor consumers, can buy electric power from whom they want) do not participate on the electric power market. From 2008, all customers, except household consumers, will be eligible, and from 2015 household consumers will also become eligible. The changes are expected in 2008, when Serbia is obliged to abolish monopoly of the state owned electric power industry and set conditions for the electric power market, that is, when this market is liberalized. In consideration of all of this, electric power dealers are not in competitive positions to one another. They are present on the Serbian market because of transit and future situation (on one side lack of electricity power and on the other side most consumers will become eligible). They are traders on the wholesale market but not yet traders and suppliers on the retail market. For now, the Serbian Electric Power Industry (EPS) has a dominant part on the retail market and it is the only supplier to all consumers (eligible and tariff). So, EPS still has a monopoly position. Due to significant own production capacities (both hydro and thermal plants), further investments in own capacities as well as in the region (in Serb Republic) and running reforms, the Serbian Electric Power Industry is considered to be one of the most powerful electric power industries in the region and it has good economic potential to become a great dealer. The most is expected from ‘‘Bajina Basta’’ Reversible Hydroelectric Power Plant Electric power consumption is the lowest at night (at 3 am), and the highest from 6 pm to 8 pm. Reversible hydro power plants bridge the gap between electric power generation and consumption in the best way. ‘‘Bajina Basta’’ Reversible Hydroelectric Power Plant (two units per 300 MW) would operate as follows: electric power would be bought at low price at night, then that power would be pumped to the lake, and at the end it would be sold at early evening, when it is the most expensive because of the greatest demand. The difference between minimum and maximum electric power consumption in Serbia is about 2000 MW and ‘Bajina Basta’ Reversible Hydroelectric Power Plant would have very important role in high profit making during electric power trade. A kilowatt of electric power can be bought for about 2 eurocents at night. When the losses and pumping to the upper lake are included, the price amounts to 2.8 eurocents and it can be sold at 4 eurocents per kWh as evening peak energy. In this way the price difference of 1.2 eurocents per kWh is made.15

14

Spalovic´, D., 2007. Struja na tr zisˇtu, Politika, 4.3.07., str.14. Obradovic´, D., 2006. Kupisˇ noc´u, prodasˇ danju, cˇasopis kWh, jun 2006, broj 389, str. 20. Miladin Basaric´, direktor Sektora za planiranje proizvodnje EPS-a. 15

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4.5. Electric power generation from renewable energy sources and environmental protection area Serbia still does not have regulation on electric power generation from renewable energy sources, but it has capacity for this kind of power generation. Serbian Electric Power Industry has plans to use its resources in hydro capacity exploitation of small water currents and is interested to construct small hydroelectric power plants on Serbian Electric Power Industry owned properties, or in the vicinity. Decision on investment of this project is not yet passed.16 There are about 860 sites suitable for construction of small hydroelectric power plants of power amounting to 10 MW, that would make it possible to install power amounting to 455 MW. With this amount it would be possible to satisfy half of Belgrade’s power requirements, and to supply energy to Belgrade for 2 months. Applying this to the whole Republic of Serbia, it means that it is possible to fulfill the electric power requirements of 1/8 of Serbia, and 15 days of energy supply.17 Besides this, there is a huge thermal lake between Belgrade and Smederevska Palanka. By expert’s opinion, this lake could heat the whole of Belgrade, but it is still unused.18 The existence of more relevant projects for running electricity sector reforms, lacks capital and the fixed costs of such a project make building of such a plant unfeasible for the foreseeable future. The sustainable development strategy, within which will be carried out the estimate of European Union economic legislation implementation from the environmental protection area, is in the process of preparation. It is estimated that one-third of planned funds for this strategy will be concentrated in the power sector.19 Earlier, the attention was not paid to the environmental protection and the preservation of natural resources in Serbia. There was the lack of conscience and the lack of responsibility for nature, then the lack of financial aids. It is most important that there is no reduced production of coal and electric power in Serbian economy. That policy resulted in the following: general destruction of water resources, air, and soil, i.e. all natural resources. As for the environmental protection, Serbia lags about 40 years behind developed countries of European Union. It ought to be said that 30% of all Serbian activities, which should be fulfilled in order to integrate into the European Union, are connected with environmental regulations and standards and their implementation in practice.20 Concerning the fact that pollution mostly comes from electric power generation capacities, EPS initiated a lot of projects and activities connected with solution to these problems from 2000. Concentration of sulphur oxide and polluting particles significantly exceeds permitted amounts in all blocks, and concentration of nitrogen oxide is above permitted amounts only in the blocks of installed power amounting to 300 MW. The air quality is deteriorated in the vicinity of all thermal power plants because of polluting particles. Due to this, the priority was given to the projects concerned with reduction of polluting particles emission and with meeting European Union demands for electro-filters’ operation (on 50 mg/m3). Table 3 shows estimated total amount of harmful substances for all thermal power plants for a year (during 6000 h of work) and the amounts after modernization which would help to reduce emission of harmful substances of all thermal power

16

http://www.eps.co.yu/razvoj.htm. Mihajloic Milanovic Z., 2006, Srbija- potencijal mali hidroelektrana. www.energyobserver.com. 18 Lazarevic´, M., 2006. Vrelo jezero ispod Beograda, cˇasopis kWh, jun 2006, broj 389, str. 45. 19 EAR. 20 Ekologija je prioritet EPS-a, NIN, Specijalni dodataka, 07.10.2005., str. 19. 17

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Table 3 Total emission from thermal power station of EPS t/year

Polluting particles SO2 NOx

Situation before modernization

Situation after modernization

Funds (Euro  1000)

66.900 360.440 432.001

5.850 40.720 6.350

78.000 385.000 75.000

Total

538.000

Source: EPS, Gavric´, M.

blocks to the permitted level according to European Union regulation together with estimated required funds.21 The electro-filter was built in Nikola Tesla Thermal Power Plant A Unit 5 during 2004. The next projects, i.e. projects of building desulphuring plants and the other protection measures are planned in 2009. During the overhaul of electric power plants, the attention is concentrated to electro-filters, spraying systems for ash dumps and regular recultivation. The most important activity that was done was the capital overhaul of electro-filters in the Units A-1 and A-3 in Nikola Tesla Thermal Power Plant, and Unit 2 in Kostolac Thermal Power Plant. Serbian Electric Power Industry will carry out projects for environmental protection with money partly provided from credits and equity capital, and the other part was provided by the European Agency for Reconstruction (EAR). 4.6. Pricing problems and the tariff system 4.6.1. Pricing problem Financial position of EPS is very negative because of large indebtedness from previous years (that is the consequence of the situation in the country and low price of electric power). The government controls the price. It is set below full cost. Moreover, the price is the same for all type of consumers; calculation is different due to use of tariff system. Electric power price is the key figure of the electric power industry’s value. In order to keep social peace, electric power price in Serbia is very low. Low price is an obstruction for development of EPS and electricity power market. Electric power industry has a negative asset value according to the price amounting to 3.5 eurocents per kWh (in 2006), or price amounting to 4.5 eurocents per kWh (in January 2007). The plan is that the price should be same as the price in neighbor countries at the end of 2008. EPS’s goal is to have a price that will cover cost, and also there is the issue of fulfilling payment and tariff reforms – a Serbian obligation by ECSEE Treaty. EPS was asking for increasing price in April, but due to the unsolved political situation this price increase is postponed to June 1, 2007. Average demanded price increase was 20%. It is expected that the higher price of electric power should be about 5 eurocents per kWh. In May, the newly elected Government gave approval for a price increase – a linear 15% for all customers. The new average price was 4.7 eurocents per kWh and it is still in force. According to some economists and their calculations the price is twice to three times cheaper than in other neighbor countries. For example, the price in Hungary is 10.6, in Albania 4.8, in Bulgaria 5.5, in Croatia 7.7 and in Bosnia and Herzegovina 6.1 eurocent per kWh. If EPS had not got approval for the price increase, EPS would have had a 176.5 million euro loss at the end of year and it would have had a lack for current liquidity (solvency) in amounts of 223.1 million euro. In August 2007, EPS proposed a new price increase of 6.9%. In accordance with this suggestion, the price for household consumers would be increased by 1.9%, while the increase for industry

21 Gavric´, M., Nova politika u zasˇtiti  zivotne sredine, JP Elektroprivreda Srbije, EPS Environment Friendly, Drugi meCunarodni sajam energetike, Beograd, 04.10.2006.

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would be more than 5%. However, the Government rejected the proposal. One reason for rejection was the fear of a further increase of inflation and decrease in living standards. The Government is to discuss the proposed price increase in September, but it is not clear if the price will be allowed to increase before winter. Moreover, adoption of a new tariff system is postponed to April 1, 2008. 4.6.2. Tariff system Tariff systems are one of the most important elements of power sector reforms and pre-requisites for electric power market opening. Previous Serbian Energy Law had only one tariff system and that was for calculating electric power prices for (tariff) customers. According to the new Energy Law there are now three tariff system. (1) Tariff system for access and utilization of electric power transmission system. (2) Tariff system for access and utilization of electric power distribution system. (3) Tariff system for calculating electric power prices for tariff customers. They regulate price access and power grid utilization, which enables customers to get the right to choose supplier (eligible customers), to know how much they will pay for distribution, transmission and transportation grid utilization. The significant innovation in tariff systems is the introduction of tariff customers as well as eligible customers. Tariff customers do not have the possibility to choose electric power supplier while eligible22 customers can. According to the Energy Agency, the key condition for price system reforms is activities separation in sectors to the production, wholesales, transmission, distribution and retail sectors. Electric power enterprises determine their prices and estimated price is sent to the Energy Agency, and then, after the Agency states its opinion, it is sent to the Government in order to approve it.23 5. Future development of the Serbian Electric Power Industry The electricity power sector is a strategic state owned resource. This sector has many development factors because it stimulates investments and has influence on strategic, economical, technological and social development of economy. Serbia has an inefficient electricity power sector and it is in need of restructuring. The main stress is made on EPS future development. Therefore, last year, the European Agency for Reconstruction was inviting bids for selection of a consultant for power sector restructuring, and the Serbian Electric Power Industry (EPS) was inviting bids for engaging a consultant for company restructuring. The aim of the bid financed by the European Agency for Reconstruction is the separation of the main line of business of the Serbian Electric Power Industry, and the establishment of a market and tariff system, i.e. electric power trade. Details concerned with foreign capital investment, general analysis of position, and organization of the company, are especially important. On the other hand, the Serbian Electric Power Industry’s bid should make possible the continuation of construction of Kolubara B Thermal Power Plant what was predicted by operating plan for defined strategy connected with reform changes and Serbian Electric Power Industry’s development

22 By the Energy Law (2004), the minimum annual energy consumption requirements for the eligible consumer status is 25 GWh for electric power. However, the Council of AERS brought up a decision to decrease the eligibility status to 3 GWh/year in December 2006. In Serbia there are at present about 360 eligible consumers which makes 21% of total electricity consumption in Serbia. Even they have legal right and possibility to choose supplier they still buy electricity power from EPS. 23 http://www.aers.org.yu/Index.asp?a¼612.

by 2015, as well as a series of activities that are not mentioned in the bid of the European Agency for Reconstruction.24 In Serbia there are several completely opposite opinions about the future of EPS. According to some political parties, poor financial and inefficient performances of EPS are the consequence of badly run public enterprises by Government. The Serbian Electric Power Industry has very old equity and has lack of capital. Also, Serbia as an economy has significant external debts, inefficient public enterprises and a great number of employees. The solution for those problems is privatization and sale. In that way foreign experts with more experience and knowledge for running this kind of company will come and increase economic performances. Moreover, by the sale, there will be inflow of capital, increase of investment and repayment of debts. In accordance with this policy is unbundling generation, transmission and distribution, and their privatization should occur as it has done in Bulgaria, Romania and Macedonia. Oppositely, there is opinion that transmission and distribution should be a natural monopoly and controlled and regulated by the state. The rest of the activities should be down to the market’s competitiveness. The model of reorganization and privatization of electric power sector in Bulgaria, Romania and Macedonia has failings and it is criticized by their public. Moreover, there is some experience that some countries did the same as Bulgaria, Romania and Macedonia and now are trying to rebuild a vertically integrated electricity power sector where the majority part will be state owned. Also, there are other parties with their opinion. They agree that the Serbian Electric Power Industry has a poor financial position, but if the electricity price were to increase, to be similar to the price of neighboring countries, and could cover all costs, this company could stay in 100% state ownership and become efficient, get new capital and raise investments. The first step is corporatization. The state will stay owner, but there will be changes in the running of the company. It will continue restructuring, reorganization and preparation of company for market conditions. Through this the state needs to become a better owner and operate in a way that company does to increase value and revenues. The main point is that electricity power should not remain a social category – it shall become a market good. The next step is that when a company’s value increases then there will be a share issue. Issuing shares will bring good both for the company and for the financial market. On one side, the company will get capital which will be used for investment, and on the other side, those shares will improve and develop the financial market. Moreover, because of lack of capital, a company needs to find a strategic partner for investment in building new plants, i.e. electric power generation. In this way the state will do the same that a private owner would do, but still be a majority owner. According to this policy, the solution is that state be majority owner in Serbian Electric Power Industry. There is suggestion for privatization where 51% would be state owned, 19% to be sold to strategic partner, 15% would be split to employees and pensioners, and 15% would be split to residents. Today’s Government policy is that this enterprise first needs to be restructured, than to find a strategic partner but still not to be privatized. 6. Conclusion The Serbian electric power sector has advantages such as favorable capacity structure for electric power generation (1/3 hydro and 2/3 thermal on lignite), favorable natural conditions – hydro potential and coal (lignite), central geographical position in the

24 Benkovic´, S., Jednak, S. Restrukturiranje javnih preduzec´a u Republici Srbiji, X Internacionalni Simpozijum iz project managementa ’’Projektno upravljanje organizacijima – novi pristupi, YUPMA, maj 2006, Zbornik radova.

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region, good connection of electric power transmission systems with neighboring countries and educated and skilled human resources. However, the electric power system has its disadvantages too. Electric power infrastructure in Serbia, by the opinion of experts, became technologically obsolete, and for its reconstruction significant investments are necessary. Also, operative efficiency is at a very low level. Poor political running of this sector and damage to infrastructure in 1999 caused this situation. European Union countries made possible revitalization of existing Serbian capacities and stabilization of coal and electricity power generation by investing over 400 million of euro since 2001.25 However, Serbia needed to start up the reform process in this sector. The first move was the restructuring process of public utilities in 2003. Next step was signing the Athens Memorandum in 2002 and in 2003. Upon this, Serbia adopted Energy Law in 2004. The Law comprises ‘guidelines’ for reform process of power sector. The latest move was signing the ESCEE Treaty in 2005. Serbia as well as other South East European countries committed themselves to create regional power market. This process started with the development of the electricity and gas market and later was resulting in Energy community formation. The ultimate aim is incorporating the integrated South East Europe power market into the EU internal power market. States took obligation to adopt EU legalization on: -

-

-

-

energy – creation of internal electricity and gas market, access to the network for cross-border exchanges in electricity, policy to conserve energy; competition – conditions for free competition in the market (liberalization); environment – prevention of environmental damage by power sector activities; and renewables – make use of renewable energy sources.

Power sector reforms in Serbia have been started. Certain results were achieved in several aspects of electricity power reform. (a) Corporatization and unbundling of state owned utilities. The beginning of this process was in 2003, when subsidiary activities were devoted from core activities (generation, distribution, transmission). In 2005, one public utility was split into two companies – EPS (generation and distribution of electricity power, sale and coal production) and EMS (electric power transmission). Both companies are 100% state owned. (b) The Energy Law was adopted, but there are no secondary legalizations (regulations). (c) The Energy Sector Development Strategy was adopted in 2007. Strategy has five priorities that should obtain till 2015. (d) Institutions. The Energy Agency (AERS), the Energy Efficiency Agency and the market operator (EMS) were founded in 2004. (e) Electricity power market and liberalization. The electricity power market is open. There are 14 companies that have a license for trading in electric power. Also there are 360 companies with eligibility status that purchase electricity power from EPS. The reason is low price of electricity power (the lowest in region). In this way EPS has the monopoly position and there is no competition. Change should happen in 2008, when EPS needs to abolish its monopoly position and when all consumers will be eligible except households. Households will have that right from 2015.

25 Djordjevic, 2007, Donacije ustupaju mesto komercijalnim kreditima, Danas, 30 April 2007.

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(f) Tariff system and price. New tariff systems were adopted in 2006. The innovation was three tariff systems (for power transmission system, for distribution system and for tariff customers). Their application was postponed first for September 2007 and then for April 2008. According to the new tariff system there is a new methodology of setting price. (g) Investment and restructuring. EPS engaged a consultant for company restructuring. Furthermore, EPS is looking for a strategic partner in projects; construction of thermal power plants amount of 700 MW and reconstruction of CHP. Besides those large investments there are investments for revitalization, capacity modernization, distribution and transmission system, mines, maintenance, and environmental protection; (h) Privatization. In the countries in transition there are several models of privatization of electric power utilities. One of them is privatization of production capacities, that is, electric power plants, or for a certain period of time they will be kept in state ownership, then privatization of distribution companies, the electric power transmission systems will be kept in state ownership. Serbia has not yet clearly decided which model will be applied and when it will be privatized EPS. (i) Renewables. Serbia will provide two directives on the use of renewable energy sources. EPS is planning to increase power generation introducing small hydro power plants into its generation power capacities. (j) Environment. The environmental protection is at a low level. Some regulations are adopted. There is a need for large investments to decrease pollution. The active participation of the state and investments are necessary for continuation of reforms. Future decisions mostly would depend on the political situation. Political parties have a problem. On the one hand, the reform process ought to be run. On the other hand, changes could have influence on social aspect. However, considering commitments and aspiration to European Union, the state should be determined to carry out uncompleted objectives of the Energy Law and the Energy Development Strategy.

References Electric Power Development Strategy of the Republic of Serbia by 2015. Termotehnika No. 1–2, 2005, 3–70. Year XXXI. Electric Power Policy in European Union and Serbia. Putokaz Magazine for Points of Law, Political and Cultural Questions to European Integration, November 2006, 17–27. ISSN 145-5348. Energy Law, 2004.

Further Reading http://pks.komora.net/PrivredauSrbiji/Privrednegrane/Energeti ka/Energetskibilans/tabid/310/Default.aspx. http://www.dnevnik.co.yu/arhiva/07-10-2003/Strane/drustvo. htm. http://www.ekonomskitim.sr.gov.yu/mediji_lat.php?id¼060525_1. http://www.energoportal.info/. http://www.eps.co.yu/zaposetioce/cene.htm. http://www.etso-net.org/upload/documents/ETSO1_AF7-Curre ntly%20applied%20allocation%20methods_SEE.pdf. http://www.mem.sr.gov.yu/prikazZaStampu.php?IDStranica¼ 25&jezik¼lat. http://www.seenergy.org/index.php?/countries&;stat¼5&type¼ 3&col¼ 2119. www.aers.org.yu. www.ear.eu.int. www.ems.co.yu. www.eps.co.yu.