In November 2010, Balkanalysis.com compared several aspects of the European Commission’s annual enlargement strategy document released at the time. This yearly document, which describes the main objectives of the enlargement process for the next year, is accompanied by progress reports on all the candidate countries during the previous year. The 2011-2012 enlargement strategy package, which was released earlier this month, gives interesting updates on the main changes in the energy sector of the EU candidate countries since the publication of the previous package in November 2010 and makes recommendations regarding the next energy sector restructuring and reform steps.

The Latest Report

On October 12, the European Commission published the Enlargement Strategy and Main Challenges 2011-2012 document (PDF), detailing its enlargement policy objectives and challenges during the next twelve months. Just as in 2010, the new strategy document is accompanied by the progress reports for each candidate country, all of them (except Iceland) being countries from Southeast Europe – Albania, Bosnia and Herzegovina, Croatia, Kosovo (UNSCR 1244), FYR of Macedonia, Montenegro, Serbia and Turkey.

The progress reports assess the capability of each country to assume the obligations of EU membership according to various political and economic criteria. The negotiations with the EU candidate countries are structured in chapters that are negotiated separately, each containing a major political or economic topic. Once all the negotiations chapters are closed, the country is ready to become an EU member.

Energy is discussed in Chapter 15, although some critical energy infrastructure aspects are discussed in Chapter 21 (Trans European Networks), together with transport and communications infrastructure. Further, Chapter 15 concerns the EU negotiations with the candidate countries on several critical energy aspects – security of supply, internal energy market, renewable energy, energy efficiency, and nuclear energy, nuclear safety and radiation protection.

Two countries were singled out this year, as the European Commission was requested to give an opinion on accepting the accession of Croatia to the EU in 2013 and on the award of “candidate country” status to Serbia. We will therefore start our review with these two countries.

Croatia

Croatia has been negotiating to become an EU member since October 2005 and, based on the advanced status of the negotiations, the EU Commission has given in the 2011-2012 enlargement strategy package its favorable opinion regarding the accession of the country to the EU in 2013.

Overall, according to the Croatia 2011 Progress Report (PDF), the level of alignment of the country with the European acquis communautaire in the energy sector is high. The Commission notes however that more efforts are needed, especially in the opening of the electricity and gas markets, developing renewable energy, simplifying the administrative procedures for renewable energy, and meeting EU targets for energy efficiency.

Croatia has signed bilateral agreements for storing mandatory oil stocks with Germany and Hungary. A gas interconnector was inaugurated between Croatia and Hungary in August 2011 and construction continued on the gas transmission corridor towards Dalmatia; this will be connected to the future regional Trans-Adriatic Pipeline (TAP).

In addition, preparations are currently being made for the construction of a liquefied natural gas (LNG) import terminal on the island of Krk. The new double 400 kV Ernestinovo-Pécs power line is already operating on a trial basis. All these projects will improve the level of energy supply security for Croatia.

With regards to the internal energy market evolution, the electricity and gas markets continue to be dominated by single suppliers. Several relevant pieces of legislation have been amended – the Oil and Petroleum Market Act, the Energy Act and the Act on the Regulation of Energy Activities.

However, progress on the renewable energy side has been slower, even though legislation on the incentives for cogeneration, renewable energy generation, and biofuels has been improved. Croatia has to simplify and improve the renewable energy administrative processes in order to achieving its 2020 target of 20% of energy consumption from renewable sources. Although progress has been made in the energy audits of buildings and the training and accreditation of energy audit experts, Croatia’s administrative capacity remains insufficient for the promotion of energy efficiency and renewable energy.

Serbia

Almost two years after Serbia submitted an application for EU membership in December 2009, the Commission published in October 2011 its recommendation for giving Serbia the status of EU candidate country.

In the Commission’s opinion document (PDF) energy is one of the sectors in which Serbia can align to the EU acquis more easily than other sectors, such as agriculture or financial control. Overall, the Analytical Report (.PDF) that accompanies the opinion document on Serbia concludes that more efforts have to be made to improve the level of oil, gas and electricity security of supply. Serbia still lacks competitive electricity and gas markets, and more efforts have to be focused on promoting renewable energy generation, and energy efficiency. A new national energy strategy has to be adopted and administrative capacity in the energy regulation sector has to be reinforced.

Although domestic resources still cover 60% of the primary energy consumption in Serbia, 78% of the gross energy consumption is represented by coal and oil. Other than the projects already mentioned in the 2010 progress report, a second gas underground storage is planned in relation with the future South Stream regional gas pipeline.

Serbia is also focusing on the new electricity interconnection with Macedonia, and the construction of the power line section from Leskovac to the border is under construction. Other electricity interconnections with Montenegro and Bosnia & Herzegovina are at the pre-feasibility study stage.

Although the level of Serbia’s emergency oil stocks are classified as a state secret, a new law is being prepared for de-classifying these stocks in accordance with EU legislation. An Energy Law that foresees the unbundling of the gas and electricity distribution and supply, as well as wider prerogatives for the Energy Agency of the Republic of Serbia (AERS), was adopted in July 2011.

Although the electricity transmission is covered by Elektromreza Srbije (EMS), the power generation, supply and distribution are still vertically-integrated in Elektroprivreda Srbije (EPS), while all the electricity customers are supplied at regulated tariffs – that are below market prices – until the end of 2013. The gas market is still controlled by the vertically-integrated Srbijagas.

Serbia is currently preparing a 2020 target for the development of renewable energy in the country’s gross energy consumption and has to adopt a National Renewable Energy Action Plan. Renewable energy – mostly hydropower – represented only 8% of the total primary energy production in 2008. While feed-in-tariffs (FIT) are in place and the country has untapped renewable energy resources, the licensing process and network connection process have to be improved.

Finally, a lot of work has to be done to improve and promote energy efficiency, as Serbia’s economy consumes 2.7 times more energy per unit of output (GDP) than the OECD average. A framework energy efficiency law – covering energy efficiency of buildings, labeling of domestic appliances, etc. – has been drafted but has still to be approved.

Albania

Overall, the Albania 2011 Progress report (.PDF) concludes that progress in the energy sector has been very limited over the last year. There was some progress made in improving the security of supply, as the law requiring mandatory emergency oil stocks of 90 days of consumption entered into force on 1 January 2011 and a new 400 kV interconnection with Montenegro became operational in April 2011. Preparations for the new Elbasan-Tirana power line have advanced.

However, the domestic electricity generation is dominated by hydropower, which increases the system’s vulnerability to negative hydrological events, such as droughts.

The state generation and wholesale power company KESH has not been unbundled and is still allocated the majority of the transmission and distribution capacity. The current Power Sector Law is not in line with the EU acquis.   Electricity distribution losses are still significant and the bill collection levels remain relatively low at 77%. Albania does not have yet a gas market and further efforts are needed to strengthen the energy sector regulator ERE.

The report contends, further, that there has been no progress made in renewable energy – administrative obstacles and no harmonized costs for connection to the power transmission grid hinder power generation from renewable energy sources. The country has not adopted yet a renewable energy target for 2020 and a National Renewable Energy Action Plan as requested by the EU acquis. The Energy Efficiency Law is not in line with EU requirements. Whereas in the 2010 progress report Albania was considered to have made good progress in the energy sector, advances in 2011 have been slow.

Bosnia & Herzegovina

The chronic political instability in Bosnia & Herzegovina, as discussed in an October 2011 article by Balkanalysis.com’s Lana Pasic, seems to have a negative impact on the reforms in the energy sector. The Bosnia and Herzegovina 2011 Progress Report (PDF) concludes that the country is still at an early stage of implementing the EU energy acquis and that progress during the last year was virtually inexistent.  The lack of cooperation between the country’s Entities blocks the development of a functioning energy market and any significant supply security improvement.

The country does not have a comprehensive Energy Strategy to promote, among other things renewable energy and energy efficiency and the required law on mandatory emergency oil stocks, while the new Electricity Law was not adopted. The country has a power transmission company only in name, as the company has no financial resources, business plan and only executes minimal maintenance tasks. The electricity tariffs have been increased, but remain below market prices, hampering investment.

Further, there is no national Gas Law  yet for Bosnia, and the Entities use different gas market legislation packages, none of them aligned to the EU acquis. The development of an energy efficiency law has been delayed and the renewable energy feed-in tariff and other legislation pieces are not harmonized at a national level, discouraging investments in power generation from renewable energy sources. Finally, the national government administrative resources dedicated to energy issues remain insufficient and weak.

Kosovo (UNSCR 1244)

Kosovo is also considered by the EU enlargement strategy as a potential candidate for EU membership. However, because of the country’s difficult relationship with Serbia linked to the recognition of Kosovo as an independent country, the Kosovo 2011 Progress Report (PDF) concludes that the energy sector continues to suffer serious problems that hinder reform adoption and implementation.

Power cuts continue to occur due to the worsening financial position of the national power monopoly, Kosovo Energy Corporation (KEC), caused by distribution losses, billing issues and low collection levels. Electricity tariffs have not increased and the government has maintained the direct subsidies to KEC, delaying the creation of a functional electricity market. The electricity distribution and supply are still unbundled in KEC and the privatization of these functions has not advanced.

However, work on the development of the new coal-powered Kosovo Power Plant has advanced and the government has sent the final request for proposals to four qualified bidders, while production at the Sibovc coal mine, which will supply the new power plant started at the end of 2010. In March 2011, KEC started implementing the action plan for the decommissioning of the remaining power generation units at the Kosovo A power plant in order to comply with the EU legislation.

Still, there is no oil emergency stocks law. Nevertheless, an Energy Efficiency Law was adopted in June 2011 (though the accompanying Action Plan has yet to be adopted). And a Heating Strategy was adopted in September 2011.

Finally, some progress has been made in renewable energy. A simplified Renewable Energy National Action Plan was drafted. Three foreign investment groups have shown interest in developing the 300 MW Zhur hydropower plant. 15 applications for small hydropower plants with a total capacity of 128 MW have been registered and the first wind energy capacity (1.28 MW) started production, with additional licenses awarded for the development of 126 MW of wind power.

FYR of Macedonia

One of the countries that, according to the 2011 progress reports have made good progress in the energy sector is the FYR of Macedonia. The FYROM 2011 Progress Report (.PDF) notes that the Directorate of Compulsory Reserves of Oil and Oil Derivatives continued to implement the action plan that aims to take the level of national emergency oil stocks from the current level of 33 days of average consumption to 90 days as requested by the EU.

The preparations for the construction of a 400 kV power interconnection with Serbia continued and a memorandum of understanding was signed with the Albanian power transmission company for the development of a new 400 kV interconnection between the two countries (Bitola-Elbasan).

A new Energy Law that is compliant with the EU requirements has been enacted. The law requires the full opening of the national electricity market (non-household customers) by mid-2012 and it strengthens the prerogatives and independence of the Energy Regulatory Commission (ERC). Electricity tariffs increased by 5% in 2011, but the government has continued its vulnerable customer subsidy program. Also, a dispute between the government and the private owner of the electricity distribution system has been settled. The new energy law also stipulates the unbundling of the natural gas supply from the transmission function, but this has still to be done.

Progress has also been made in renewable energy and energy efficiency. Feed-in tariff incentives were adopted by decree. A renewable energy target of 21% for 2020 and a simplified National Renewable Energy Action Plan have been also adopted. Although new generation capacity from renewable energy sources are under construction – 8 small hydropower plants, okys the Bogdanci 50MW wind farm, FYR of Macedonia is still in the early stages of using its renewable energy potential.

A National Energy Efficiency Action Plan was adopted in April 2011. Energy efficiency labeling, eco-design and high-efficiency cogeneration guidelines have been enacted. Finally, although FYR of Macedonia does not have a nuclear energy sector yet, the feasibility of building a nuclear power plant as an option for meeting the domestic electricity demand after 2020 is currently under study.

Montenegro

The EU Commission has also presented in October the Montenegro 2011 Progress Report (PDF) that assesses the country’s progress in the energy sector. Significantly, a national Energy Strategy until 2030 was adopted in March 2011. There was also progress in the development of energy networks. A new 400 kV electricity interconnection with Albania started operation.

Further afield, an agreement between the Montenegro government and the Italian company Terna for the construction of a submarine power transmission cable, signed in November 2010, foresees trans-Adriatic energy supply. In this ambitious project, a new 400 kV power line will be built between the Adriatic coast and the north of the country (Lastva-Pljevlja) with financial support from the EC Infrastructure Project Facility.

In addition, in May 2011 Montenegro signed a Memorandum of Understanding and Cooperation with the Trans-Adriatic Pipeline (TAP), part of the EU’s Southern Gas Corridor, which aims to bring Caspian natural gas to the South and Southeast European countries. However, the national gas transmission system has to be upgraded and a national gas distribution strategy, as well as a Gas Law has to be developed. Moreover, Montenegro also has to adopt the mandatory emergency oil stocks legislation required by the EU.

The country’s energy market legislation is not yet compliant with the EU’s third internal energy market package. The Energy Regulatory Agency has become more active, but has to be strengthened. The electricity market is still dominated by the state-controlled Montenegrin Electric Enterprise (ECPG). Electricity prices are regulated and do not yet cover the costs, which blocks the development of a functional electricity market. There was no progress in unbundling the distribution and supply functions of ECPG; in a vertical integration counter-trend, the Pljevlja coal mine could be integrated in ECPG.

Progress in renewable energy and energy efficiency has been limited. The country has to focus more on using its renewable energy potential and creating incentives for renewable energy investment. A National Energy Efficiency Action Plan was adopted in December 2010. Finally, the country has to strengthen its administrative capacity in the energy sector in order to advance faster the restructuring and reform processes required by the EU.

Turkey

Turkey opened accession negotiations with the EU in October 2005. Although the negotiations have stalled during the last couple of years due to political reasons, Turkey has continued to restructure and reform its energy sector. The Turkey 2011 Progress Report (PDF) concludes that progress in the energy sector has been uneven during the last year, with advances having been made in opening up the electricity market and renewable energy, though more efforts will be needed on implementing cost-based electricity tariffs, developing a competitive natural gas market and strengthening the independence and capacity of the energy regulatory authority.

With regards to security of supply, the interconnection of the Turkish power grid with the Continental European Synchronous Area was initiated and the second stage of non-commercial trial exchanges is currently being executed with the Greek and Bulgarian transmission system operators.

Turkey is also giving priority to projects that contribute to the development of the priority links 4 (Greece-Balkan countries) and 9 (Mediterranean electricity ring). The Project Support Agreements (PSA) for the Nabucco, the main link in the EU’s Southern Gas Corridor that would bring Caspian gas to the European markets were signed by all the transit countries in June 2011. Turkey is a critical transit link in any future project bringing natural gas from the Caspian or Middle East to Europe and has, therefore, been involved in other regional gas transit projects, such as the Interconnector Turkey-Greece-Italy (ITGI). On the other hand, no progress was realized concerning the national emergency oil stocks law and organization.

Progress on opening up the electricity market was more positive, however. The Energy Market Regulatory Authority (EMAR) has streamlined the procedures for consumers willing to change electricity suppliers. The threshold for allowing consumers to change supplier has been reduced to correspond to a theoretical power market opening of 75%.

The privatization of Turkey’s power generation capacity has started and the privatization of the power distribution assets has to be finalized, the report adds. In the gas sector, the eligibility threshold for consumers willing to switch to a new supplier has been reduced. Tendering activities for gas distribution continued during the past year.

However, the national gas company BOTAS continue to control 86% of the gas imports and the supply and transmission functions of the company continue to be unbundled and to enjoy a virtual monopoly status. The planned new natural gas market law and natural gas strategy have not been developed.

There were positive developments in the renewable energy sector. Feed-in-tariffs have been introduced, as well as additional incentives for manufacturing renewable energy equipment in Turkey. By the end of 2010, 26.4% of Turkey’s electricity was produced from renewable sources, mostly hydropower. New regulations on buildings’ energy efficiency and energy eco-design entered into force. However, the energy efficiency legislation has to be improved – an energy efficiency strategy was drafted, but not yet adopted, and the existing legislation has to be aligned to the EU acquis.

Finally, in the nuclear energy sector, Turkish alignment with EU legislation is in the early stages. A framework nuclear law has yet to be adopted and Turkey has to ratify the Joint Convention on the safety of spent fuel management and on the safety of radioactive management.

In related events, a law regarding Turkey’s cooperation with Russia for building the country’s first nuclear power plant in Akkuyu has now entered into force and a memorandum of understanding was signed with Japan for building a second nuclear power plant in Sinop – a town situated in an earthquake-prone area on the Black Sea coast – although the discussions have temporarily stalled after the Fukushima nuclear crisis in Japan.

Conclusion

Expanding energy networks in these EU candidate countries is a critical objective listed by the Enlargement Strategy and Main Challenges 2011-2012 document. Interconnecting the Balkans candidate countries’ energy networks with the EU energy networks promotes sustainable economic growth, trade, employment and living standards.

The documents also mention the potential of Turkey –with its geographic location between Europe, the Middle East and the Caucasus – of becoming an energy hub and the support that the EU should provide Turkey to achieve this status.

Finally, the Energy Community, which includes the EU countries, as well as the Western Balkans candidate countries and other countries, such as Ukraine and Moldova, will play an increasing role in establishing an open regional energy market.

The Energy Community legislation already covers the internal energy market, renewable energy and energy efficiency EU acquis and will be extended to cover other energy aspects, such as mandatory oil stocks. As the EU has rencently been focused – and will probably continue to be focused for some time – on solving the debt challenges of some of its members, particularly Greece, it will be interesting to follow the progress of the Balkans countries in implementing the EU energy acquis during the next year.

Source: Email by Chris Deliso, www.balkanalysis.com