Harmonization of energy market with the EU standards

 Mr. Stefan Peter, CEO of EVN Macedonia

 

 Prof.Dr. Koco Angjusev, CEO of Feroinvest

 

Harmonization of energy market with the EU standards by Mr. Stefan Peter

In order to harmonize and liberalize the European Union’s (EU) internal energy market, three consecutive legislative packages were adopted in the period between 1996 and 2009, aiming to arrange the issues related to market access, in terms of solid transparency and regulation, sustainable consumer protection, supporting interconnection, and adequate levels of energy supply.

• In to the first electricity directive adopted in 1996, and gas directive adopted in 1998, common rules for creating single internal energy market in the EU were created. These directives introduce the principles of competition and rules related to the functioning of production, distribution, transmission and supply fields in the electricity and gas sectors in accordance with the respective unbundling procedures. The basic unbundling requirements referred mostly to separation of accounts for each activity and keeping those accounts sufficiently transparent. Furthermore, the member states were required to develop efficient mechanisms for regulation and monitoring in order to stop or prevent abusive actions. Non-discriminatory behavior was further promoted by definition of the concept of Third Party Access, implying inability for the transmission system operators to discriminate between system users and can act solely on basis of predefined criteria for refusing of the access to the system which can only happen in specific circumstances, such as lack of capacity or preventing the carrying out of public-service obligations.
• The second energy package adopted in 2003 further elaborated the issues specified in the first energy package, especially the unbundling and Third Party Access issues and defines the need for independent regulatory authorities. Fulfilling of public service obligations for security of supply, quality of supply, price equality and preservation of the environment were promoted, as well as the protection of final customers and in particular the vulnerable customers. Furthermore, it reinforced the legal and the functional unbundling of transmission and distribution activities for minimization of the possibilities subsidies and unfair competition. Establishment of independent regulatory authority was another obligation for the all Member States upon this regulation.
• Third energy package adopted in 2009 is the latest round of EU energy market legislation. Its purpose is to improve the functioning of the internal energy market and resolve structural problems, especially in terms of functional unbundling of energy suppliers from network operators, strengthening the independence of regulatory authorities, cross-border cooperation between transmission system operators, increased transparency in retail markets to benefit consumers, etc.

Currently the electricity market in the South East Region is very fragmented, so without it’s integration some countries will face significant risks in the future, others are losing opportunities. Some countries possess more hydropower, other have more primary energy for thermal plants. Eventual combination of those energy sources in a single regional market would ensure optimal use of the resources at the lowest possible costs. In order to get there, each stakeholder has to take the risks deriving from decisions made mostly in regards to evaluation of the price signals for investing in certain new technologies. It is obvious that sufficient capacities for ensuring the stability of supply in many European countries are provided by additional capacity markets. Electricity export has to find the corresponding demands. Governments should not participate in a self-created market place, and even less so with the possibility to shift liabilities to taxpayers.

The Republic of Macedonia has started to introduce market principles in the electricity sector almost a decade after the first Electricity Directive 96/92/EC concerning common rules for the internal market in electricity was launched in European Union. After the Stabilization and Association Agreement with the European Union and Athens memorandums, the activities towards harmonization of the national legislation with the legislation of European Union in the electricity field have accelerated. Before signing the Treaty establishing the Energy Community, Republic of Macedonia has already restructured the vertically integrated utility, the single energy regulatory body was established, regulated third party access was introduced and first signs of environment based on competition were created.

After more than 10 years of harmonization still the electricity market has not produced the expected objectives like fully functioning market and a high level of consumer protection as well as adequate levels of generation capacities. In the past years attention was put on the financial recovery of the electricity sector. However this was a long process make it sometimes impossible due to the trends on keeping the electricity prices for consumers on the lower level. The last has prevented the timely and proper investments in the whole power system, especially the investments in the generation capacity.

Starting from 2007 the electricity consumers gradually have gained the eligibility status and the number of traders and suppliers has increased which has certainly contributed to improving of the competition in the electricity sector. At the same time, stakeholders which are mostly involved in to the market relations are conveniently restructuring and equipping themselves, so that the transparency level is constantly improving as well. In such conditions, although somebody might say that be said that the country is behind the liberalization schedule strictly prescribed by the EU regulations, it is ongoing sustainably with the bright perspective for it’s future development.

Being a Contracting Party of the Treaty for Establishing the Energy Community, the Republic of Macedonia is obliged to harmonize its electricity (and gas) regulation to the EU requirements. However, as it is the case with all other countries in the region, the actual conditions are not always convenient for the simple transposition of the EU standards and provisions without considering the abilities of their practical implementation. Hence, instead of the one step market opening as defined within the EU Directives, the Macedonian electricity market has been liberalized step-wisely, resulting with establishment of functional electricity market where the eligible consumers can benefit from well defined market terms and conditions, while the rest of the consumers are preparing for the next steps of liberalization, as the same are defined in the Law on Energy.

One of the main arguments supporting the step-wise approach for market liberalization is that the regulated electricity prices for end users are still highly cross subsidized, especially referring the household consumers. What is happening now is that household consumers pay significantly lower prices on behalf of the relatively higher prices charged to non-household consumers in order to cover the costs of the providers of the public services. The higher prices motivate the non-household consumers to exit the regulated regime searching for better conditions in case of full market opening, leaving the subsidized (“protected”) consumers to handle the total costs on the regulated side. Hence, this cross-subsidization policy implemented in the price regulation in the distant past has further increased the risk of price impact for the respective customer groups benefiting from the subsidization, in the time when they will be faced to the market prices. Therefore, the step-wise liberalization approach by itself does not mitigate the price risks, if the price policy for the regulated consumers is not changed in order to envisage elimination of the cross-subsidization in the period until the electricity market become fully opened.

Another key point for successful implementation of the EU standards for energy markets is the proper addressing of the vulnerability and affordability issues in the country. The existing Government’s programs definitely have to be redesigned to anticipate the reforms being made in the energy sector. Here we would like to emphasize the risk of increasing the energy poverty rate due to the additional costs for implementation of the EU standards (for example, state targets for the renewable generation which by definition is costly), as well as the inevitable cancellation of the cross-subsidies and introducing cost reflectiveness which will result with certain price increase over time during the implementation. Therefore, sustainable customer protection policy have to be implemented to cover the existing and eventually new vulnerable consumers, while all timetables for implementation of the standards must be made in consideration of those aspects.

Finally, the Republic of Macedonia should not be seen as an isolated island in the region when comes to the implementation of the EU standards in the energy sphere. It is a fact that in certain countries, EU standards may be implemented “on paper” but in reality their electricity markets are much less functional that the Macedonian electricity market in the present stage. In this context, it is important to acknowledge that, in fact, about 40% of the total electricity demand in the Republic of Macedonia is covered by the open electricity market, which makes it one of the most active electricity markets in t he region. Moreover, the countries in the region are facing similar challenges so the authorities, institutions and stakeholders should cooperate with the countries in the region and broader and should support projects and initiatives that can be of the benefit for energy sector in the entire region.

 

Harmonization of energy market with the EU standards by Prof.Dr. Koco Angjusev

Macedonia, as part of the positive regulation in the path of EU integration, takes certain obligations in the area of energy sector. Those obligations are numerous and numbering them all will excess the writing area of this article, therefore I will keep my focus on only two topics, which I think are important for the energy market in Macedonia. Those are:

1. Liberalization of the electricity market
2. Renewable sources of energy in Macedonia and Europe and their impact
   on the electricity market

Throughout this article I will try to show, with specific quantified examples, their influence in the energy field and further on the overall economy.

1. Liberalization of the electricity market

This process implies competition in the part of supplying with electric energy, in other words there is a possibility for the companies to choose a Supplier on the liberalized market. With that said, the electricity bills were divided in two, one part of the bills were for the usage of the network paid to the Network Operator and it is not subject of the liberalized market, this price is regulated by the Energy Regulatory Commission (additional explanation on www.eds.mk) and the second part of the bills refers to the electric energy consumed by the company. The second part is out on the liberalized market and the company can choose a Supplier among many. As I already announced in the past (before April 2014), this process caused a change in the attitude towards the clients with a better appreciation on the Suppliers part, but what is more important, is the significant decrease of the costs for electric energy to those companies that are on the liberalized market. In the first step of liberalization, around 200 companies went on the liberalized market and chose a Supplier. Those are the companies that had over 50 employees and over 10 million Euros profit. All of them combined were spending around 700 GWh energy and their average price at that moment was 96 Euro/MWh. After the liberalization, the average price for those companies (network cost included) is lower than 70 Euro/MWh. That means that the first step gave them an average saving around 26 Euro/MWh or in absolute figures all those companies combined saved more than 18 million Euros. Those are the amounts that stayed in the companies and increased their competition and created a possibility to divert those savings towards new investments. With all of that, the quality of supply wasn’t reduced, on the contrary the competition caused a bigger and better treatment and attention from the Suppliers to the clients.

The next step of the liberalization starts from the 01-st of July and on the liberalized market, a new 190 companies with a certain number of municipality and public companies will have the chance to choose a Supplier. All of them combined consume approximately 250GWh energy and they can expect the same savings as the first group, which means new 6,5 million Euros will stay in the Macedonian companies for increasing their competitiveness and a possibility of investments. I am using this opportunity to inform all the companies that consume more than 1000 MWh per year that they need to get involved and to get interested in this process, most of all for their financial benefit.

Trough this numbers I wanted to show the meaning of this process for the economy in Macedonia. This applies specially for the businesses that significantly depend on the electric energy or where the electric energy is a significant input into the price of their product.

Certainly, its effect had the decrease of the price for the electric energy which additionally brought savings to the companies in the past year, so now the price of the electric energy (it depends on the connected voltage level) for most of the clients with the latest contracts it is in the range close to 60 Euro/MWh. If we compare this price with the regulated price they had at 96 Euro/MWh, we can easily conclude that the difference is substantial. It may not seem humble but I would like to point out the role of my company, EDS, that created a serious competition on the market of the already existing Supplier. Without that competition, the process probably would not be that effective nor with the before-mentioned benefit. The question that remains is whether those companies would have seen this benefit if the market of electric energy hasn’t been liberalized?
I think that all of us can sense the answer.

2. Renewable sources of electric energy

For those that follow the market of electric energy in Europe (which evolved thanks to the European Energy Regulator), the decrease in the price of the electric energy on the European exchanges will not be a surprise. That is due to many parameters as the decrease of the oil and coal price, but as well a lot of other actions that decreased the consumption of energy on the market created a surplus of energy. Those actions and situations are: decreasing the economy’s activity, specially the industry that spends big quantities of energy, for example the metallurgy, the usage of technologies that are energy savers, increasing the energy effectiveness. Of course, all of this affects the price, but yet again it does not explain how the price of the electric energy fell to the yearly level of 25 Euro/MWh. That level is under the production price of the electric energy produced by the coal power plants. This came as a surprise to a lot of market participants, but not for those that create the energy politics in Europe. That was the goal that needed to be achieved on long term, as a matter of fact the energy field demands that way of consideration. If you are in the energy field and you don’t have a plan and/or forecast for the next 10 years, than you don’t have one at all. The secret of this decrease lies in the renewable sources of energy in Europe. Whoever had the chance to travel trough the countries of Western Europe or to fly above those countries, easily could notice the numerous windmills, photovoltaic power plants and small hydro power plants. What really happened? The countries in according with the European regulatory introduced beneficial prices for buyback of the energy from renewable sources, as an action of encouragement to the market participant. That was necessary because in the other case there would not be a possibility for those capacities to be built and to be competitive with the prices from the coal power plant which were the main source of energy, but as well the main pollutants. At a certain point, that had an influence on the price of the electric energy for all of the consumers. After the period of beneficial prices expired, today the renewable sources in Europe are the real generators of low prices. The renewable sources do not have the capability to storage the energy, so therefore the owners need to produce the energy even at low prices in order not to lose the energy. Photovoltaic power plants are in production during the sunlight, the small hydro power plants do not have dams and lakes so the water that already ran can’t be returned up the hills and during a wind the windmills have technical problems if they do not produce energy. The owners of those capacities, during the period of beneficial prices, already have paid out their investments, so now with the low prices they are covering the operating expenses. In that order they are pushing the price of the energy to a low level. And by that the desired goal is achieved. The goal was, first to replace the “impure” energy with the pure sources of energy and second to decrease the price of the energy in order to provide competition on the European economy versus the one of the world, for example China and Russia, where the energy was drastically at a lower price level. As a conclusion of this part of my statement I would like to say that the renewable sources are not just an investment into a clearer environment but as well a strategic commitment for providing a long term inexpensive sources of energy and contribution in creating conditions for competitiveness of its own economy.

I would like to specially mention, how did the building of small hydro power plants effected the economy in Macedonia.

There are 58 small hydro power plants working in Macedonia. It is most likely that, with the projects that are in the process of building, after the end of the investment cycle, there will be around 100 power plants. All of them combined will have more than 120 MW installed power. So that is as much as St. Petka and Kozjak combined and will produce the same quantity of electric energy as both of those power plants. Those two big power plant are the biggest investments in Macedonia for the last 15 years and they cost together around 400 million Euros, built with foreign credits where the State is a guarantor. They were built by foreign companies which mostly took the benefit while the Macedonian companies were only subcontractors and finally the production price of the electric energy from those power plants is 120-130 Euro/MWh. On the other hand, the small hydro power plants are built by Macedonian companies. Even the equipment now is produced in Macedonia (Feroinvest and BRAKO), the State does not undertake any financial guarantees, on the contrary the State took more than 20 million Euros in compensations due to the concessions paid by the concessionaires. The final price of the electric energy produced in those power plants costs an average of cca. 75 Euor/MWh. From all of the above said, the conclusion of which project are better for the economy is repositioned, although I would like to note that for Macedonia’s benefit it is good to have new small and big hydro power plants to be built. At the end, let us say only that the investment in the already built 58 small hydro power plants is more than 120 million Euros, which is a serious generator of the economy and it is especially important to mention that at least 70% of those funds remain in Macedonia.

I honestly hope that I gave a clear picture with this article about how this two activities, that are arising from the harmonization of the Macedonian energy market with the EU regulations, had a short term, and more importantly, on long term positive influence on the Macedonian economy overall.