Towards a Truly Open European Energy Market. The Benefits for Serbia.

Towards a truly open European Energy Market
(from the 1st to the 3rd energy package)
The benefits for Serbia

A.1. Introductory remarks. In the mid ‘90ies it was apparent that as in other network sectors, in the electricity and natural gas sectors also, the existence of monopolies and oligopolies had various disadvantages for the economy and the consumers, such as high prices and lack of investments at a great risk to the security of supply. The European Commission came to the conclusion that there is room for changes and more competition in this sector and issued a number of rules to help the Member States and the market in this direction.

A.2. The first energy package. The EU project “Liberalisation of the Energy Market” started with the first EU Directives of 1996 & 1998 concerning common rules for the internal market in electricity and natural gas respectively, which gave rise to a long and controversial discussion on the theory of monopolies and signalised the start of a larger plan towards more integration and competition in the European Union. Core principles of this process were free competition, transparency, free access to the energy networks and security of supply.

At this point it was clear that through “liberalisation” the aim was to abolish all rules and measures adopted by the Member States, used to excuse and retain competition barriers. The idea was not to prevent competition and discourage initiatives, but to create and protect efficient competition in the energy market.

A.3. The second energy package. From the beginning of 2001 and as the results of the first step of the liberalisation process were not the ones desired the debate on a second energy package started. The new rules for the internal market in electricity and natural gas, repealing the old ones, were adopted in 2004. Main development was the introduction of strengthened provisions on the separation of the transmission and distribution and the mandatory establishment of national energy Regulators. The new provisions aimed at increasing competitiveness and improving service quality, at guaranteeing fair prices for consumers, establishing rules on public service obligations, improving interconnection and bolstering security of supply. Measures were to be put in place to protect consumer interests and allow them to actually exercise the right to choose their supplier. In practice, first of all, from 1 July 2004, industrial consumers and, then, from 1 July 2007, domestic consumers had the freedom to choose their energy supplier.

Unfortunately lack of regulatory framework especially in the market of renewable energy and incorrect implementation of the existing rules by public and private companies hampered progress and investments.

A.4. The third energy package. As a result of the shortcomings that still exist in progress towards a truly open electricity and natural gas market, a third legislative package was adopted in September 2009 that will come into force in March 2011. This provides, among others, for the effective separation of supply and production activities from the operation of the transmission and distribution systems (the so called Ownership Unbundling), harmonisation of the powers of national Regulators and coordination through a central Energy Agency, better cross-border regulation and effective transparency.

Thus, a significant instrument of the European policy towards more competition and the creation of an internal market in electricity and natural gas is the establishment of the new Agency for the cooperation of energy Regulators. The Agency will fill the regulatory gap at community level and contribute towards the effective functioning of the internal markets in electricity and natural gas. The Agency will be independent from any energy market players, producers, suppliers, system operators or consumers. Its general task is to assist the national regulatory Authorities in exercising at community level the tasks performed in the Member States and where necessary to coordinate their action. Especially on questions of access to cross border infrastructure and operational security of the latter the Agency it shall, under certain circumstances, take decisions that will have an impact on more than one Member States.

A.5. Last developments. The latest developments signalled the next point of concentration for the European Authorities. The realisation of the internal market through more cross-border trade and electricity flows between Member States presupposes new investments in this sector. New rules on the management of cross-border transactions in this direction have been issued by a new Regulation of 13th July 2009 on conditions for access to the network for cross-border exchanges in electricity. In order to speed up procedures for the benefit of competitors and consumers throughout the European Union the Commission will not hesitate to take severe measures against public companies and Member States.

B. Commission’s measures. An important example of such measures are the proceedings which Commission opened against the Swedish Electricity Transmission System Operator in April 2009 concerning limiting interconnector capacity between Sweden and neighbouring countries. The Commission had reason to believe the System Operator was limiting the amount of export transmission capacity available on electricity interconnectors situated along Sweden's borders, with the objective of relieving internal congestion/problems on its network. This appears to favour national consumers over consumers in neighbouring Member States by reserving domestically produced electricity for domestic consumption whereas the prices in Sweden were significantly lower than in the neighbouring countries.

The Commission has therefore opened a formal antitrust investigation into whether such practices indeed exist and whether they may constitute an illegal abuse of a dominant market position. The Swedish operator is now willing to take measures that will correct the current situation in its territory so that cross border trade can occur according to the principles of transparency and non-discrimination.

This case is highly important because it refers to the integration of Europe’s energy markets by giving more choices to the EU consumers, more inter-state competition as well as lower and fairer electricity prices.

C. Serbia’s position and future in this European picture. Although Serbia is not yet a part of the EU, it has also partly implemented the European legislation by the Energy Law of 2004. This Law has set the basis for the opening of the electricity and natural gas markets with its provisions for regulated third party access to the networks, the legal possibility for certain customers to choose their supplier, separation of the transmission system and the establishment of the Energy Agency responsible for the development of the energy markets and regulation of the energy sector entities. These rules though, have to be adjusted to implement more efficiently the existing as well as the new provisions issued with the new third energy package.

Particularly due to its geographic position, Serbia has an important role to play in the future of energy supply in Europe. It is obvious that the new developments reflect a trend, which according to the Energy Commissioner, has become increasingly evident in the energy debate in Europe: an individual Member State cannot tackle today's energy challenges on its own. Member States will self-evidently be obliged to include into their investment plans States that are not yet full Members of the EU, like Serbia, which are, however, in a position to have an effect on the future of energy supply throughout Europe, due to their physical approximation to the EU. For this to happen, investments must be promoted.

Key role for the acceleration of investments in Serbia is the legal framework regarding the production of electricity from alternative sources. It is important to work towards the adoption of all legal and sublegal documents that facilitate the production of alternative energy and the use of these sources. Price incentives should be given to new investors and regulation that liberalises the relevant markets should be adopted. Also shorter and simplified proceedings for the issuing of permits for energy production from renewable resources and trade with such electricity will be needed.

Last but not least, a very important aspect will be the development of Serbia’s interconnections and cross border trade. Increase of capacity through renewable energy sources and efficient regulation of cross-border flows, new investments in interconnectors and natural gas pipelines will extend Serbia’s influence in the region and secure the national needs in energy. The adoption of rules implementing the relevant European provisions and giving incentives to foreign investors as well as the regulation of cross border exchanges by Serbia’s regulatory Authority to prevent the distortion of competition are prerequisites in order to fulfil these goals.

Prof. Dr. Ioannis K. Rokas, Managing Partner
Rokas (Athens)
© 2009 IKRP

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