focus on— Energy

karanovic/nikolic

A Global Issue

focus on—Energy

2013, Karanović & Nikolić

Contents

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/Intro01 — Entry word by the Energy Community’s Deputy Director 1002 — The Region–Current

situation, trends and cooperation 14

/Oil & Gas03 — Regulatory framework

and EU harmonisation 2604 — Who are the players –

biggest companies in the region 36

05 — The ‘South Stream’ project 40

/Electricity & Renewables06 — Regulatory Framework and EU

Harmonisation 5407 — The Grid Connection – problems and

solutions from throughout the region 62

08 — Transmission Networks Unbundling 68

09 — EFT Group: Current Developments in the Electricity Market in the Region 72

10 — Concessions for Hydro Projects in the Republic of Srpska – Miscalculation? 78

11 — Wind energy in Montenegro – The (un) success of 2010 wind concessions? 82

12 — Supporting renewable power generation in the Western Balkans 88

13 — Overview of the Feed-in Tariffs in the Region 100

/Harmonisation with The EU19 — Harmonisation of the

Balkans in the field of electricity – Past Achievements and Future Prospects 144

20 — Unpacking the ‘Third Package’ – The Croatian Story and the Region 154

21 — Cooperation between USA and Serbia – current situation and future prospects 162

—1 This designation is without prejudice to positions on status, and is in line with UNSC 1244 and the ICJ Opinion on the Kosovo* Declaration of Independence.

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/Energy, Environment and New Solutions14 — Environment vs. Energy

needs 11015 — Unconventional Energy

Resources – Shale: the Game Changer 116

16 — Environmental Transition in Practice – Curious case of Kosovo1 124

17 — Energy Efficiency In Macedonia 130

18 — Energy Trends in Africa 134

Foreword

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milestone in the integration process of the Balkans. We monitor the on-going changes that ought to prepare the energy sector and entire economies for the challenges ahead. Our Croatian team have provided this perspective through the prism of EU integration, providing their experiences and expectations, as the first Western Balkan country to obtain full membership into the Union. I can only hope that you’ll enjoy reading these articles as much as we enjoyed preparing them for you. Whether you are an energy lawyer or an executive, an electricity broker or a regulator – I am certain that you will find some topics of interest. I also hope that the perspectives presented here will give you a hint of some of the future developments in the region, as well as facts and figures concerning the regional energy sectors that may be of use to you.

Miloš VučkovićPartner

contributors helped us to delve into the African energy sector’s thrilling new developments to see how these emerging markets are managing their energy requirements.

We also had the future in mind while preparing this year’s edition. What should we expect on the energy horizon in the years to come? Which resources to watch for in the next decade or two? Which projects are a must for the Balkan countries and how can we make them happen? Our energy team believes these questions are crucial; therefore we tried to open up these subjects and create a platform for their discussion and consideration.

The current challenging situation in the region is the topic for several articles. The harmonisation of the regulatory frameworks and energy markets are a

On behalf of the Karanović & Nikolić energy team, I am proud to present the new 2013 edition of our Focus on Energy publication.

In the pages ahead, we have done our best to bring you the most up-to-date developments and hottest topics in the energy sectors throughout the region and beyond.

This year, we invited a number of our friends, colleagues, experts and clients to help us and to share their experiences and practices. This has enabled us to present you with first-hand articles on the regulatory tendencies and energy strategies in the Balkans, an analysis of the reform of the electricity markets, and the role of the Energy Community in these processes. Furthermore as a comparative our external

/Intro — Energy 2013, Karanović & Nikolić

01Entry word by the Energy Community’s Deputy DirectorBy Dr Dirk BuschleDeputy Director and LegalCounsel Energy Community Secretariat

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Implementing change obviously requires strong and persistent politicians at the helm. But it also requires individuals and companies in and around the energy sectors endorsing the ideas behind the Energy Community and ready to involve themselves. From experience I can tell that they do exist, and their number is growing. It gives me particular pleasure to see law firms becoming active and seizing the opportunities the Treaty establishing the Energy Community offers them. Like in the European Union, the vision informing the Energy Community is spelt out in the legal language of articles and paragraphs. European energy law is still a rather young discipline. It is quickly evolving, many legal questions are yet to be answered and there is only little precedence available. For smart, creative and proactive lawyers this is a big chance, a chance not only to advise their clients well but to become agents of the change needed in Europe’s, and in particular in South East Europe’s energy sectors.

The Energy Community may have been conceived in Brussels but it was born in South East Europe. It was, and remains to be, guided by a vision. The vision is to fundamentally change the governance of the energy sectors in each participating country, to make them transparent, efficient and competitive, and to attract the investment needed to revive the economies and increase the welfare of our citizens. This vision, translated into a Treaty, necessitates deep reforms in each country. To create a regional market moreover presupposes trust in the partners from across the borders, and governments giving up control to some extent. The path towards this vision is not always straight and is sometimes painful, as we have recently witnessed in Albania and Bulgaria. But ever since I have been working for the Energy Community I have never heard anybody claiming that the vision itself is wrong, and change is not needed.

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In carrying out this work, they need to rely on domestic institutions and courts which, for their part, need to adapt and reform. Companies and their counsel should also not be shy in seeking the assistance of the Secretariat which, under Article 90 of the Treaty, may institute proceedings for non-compliance with the Treaty. Over the past years, the Secretariat established this procedure as a tool for protecting investors and domestic companies alike, and to involve itself actively in the reform process throughout South East Europe. The procedure, but also the rule of law in the Energy Community in general, can largely benefit from the contribution made by professional lawyers knowing European energy law as well as they know the intricacies of region. This book constitutes an important element in this process.

The Energy Community continuously incorporates European legislation which needs to be implemented by and in the South East European countries. Recently, the Ministerial Council adopted the Third Package requiring far-reaching structural reforms of energy companies. The Network Codes which will be taken over by the Energy Community by and by will have a profound influence on the way the electricity and gas grids are operated. European legislation on renewable energy and energy efficiency will determine future generation mix and consumption patterns in our countries. At the same time, the environmental legislation is still to be effectively implemented. And the potential of competition and state aid law for opening up the energy sectors still remains to be tapped. There can be no doubt that much work lies ahead of companies and law firms in the region.

02The Region–Current situation, trends and cooperationby Petar MitrovićAssociate, Karanović & Nikolić

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fossil fuel reserves have been explored in the Western Balkans and Moldova. Ukraine, on the other hand is a large market, larger than all of the other Energy Community markets together, with nuclear energy being the most important type of energy that it uses.

Another common feature of these markets is that the main elements of energy infrastructure (primarily generation facilities) were developed in the 1960’s and 1970’s, primarily using technology from the Eastern Europe, which was even then well behind the level of technology that was available in the more developed Western European countries. The Balkan conflicts in the ‘90s resulted in the significant deterioration of the energy infrastructure, primarily in Bosnia and Herzegovina, Kosovo* and Croatia. Also, the infrastructure was generally very poorly maintained. Due to its age, the type of technology and inadequate maintenance, as well as war damage, there is a general need for the rehabilitation and replacement of infrastructure.

Aware of the necessity for cooperation and solidarity in the field of energy, in October 2005 the European Union and nine Contracting Parties (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo*, Macedonia, Montenegro, Romania and Serbia) took the decisive step of founding the Energy Community. In 2007, Bulgaria and Romania joined the European Union, and in line with the Treaty Establishing the Energy Community changed their status from Contracting Parties to Participants. In 2011, Moldova and Ukraine became full members of the Energy Community.

Overview of marketsCurrent situationThe Contracting Parties, save for Ukraine, have small and fragmented energy markets. The most striking common feature of these markets is import dependency. Specifically, the main energy sources are fossil fuels, which are predominantly imported, seeing as no significant

Natural gas In 2009, the total domestic natural gas production in the Contracting Parties was approximately 24.2 Bcm4, and imports were approximately 37.4 Bcm.

As an important route for the transport of Russian natural gas to the Western Europe, Ukraine transported almost 96 Bcm of natural gas from Russia to Europe.

Ukraine is also the single biggest producer of natural gas in the Energy Community with an annual production of 21.2 Bcm in 2009. The remaining Contracting Parties are positioned well behind then with Croatia being the second positioned producer with 2.71 Bcm in the same year.

The most developed gas markets are those in Ukraine, Croatia and Serbia. Gas markets are small in Bosnia and Herzegovina and Moldova. Albania, Kosovo* and Montenegro still do not have access to gas.

—4 Billion cubic meters

Electricity In 2009, the total electricity supply (domestic generation increased for net import) amounted to 273TWh. Approximately 62% of these quantities were supplied in Ukraine and 38% in the remaining Contracting Parties. The diversity in the electricity mix is notable, with the domination of coal and lignite in the mix at 42% (when calculated only for the Western Balkans and Moldova the participation of coal/lignite is even higher – 52%) at aggregate level. Even though it is present only in Ukraine, nuclear power has the second highest participation in the fuel mix on an aggregated level with a 30% share. These sources are followed by hydro generation at 18%, natural gas at 7% and oil at 2%.

Renewable energyRenewable energy (including large hydropower plants) has a notable presence in the total energy supply in several Contracting Parties - Montenegro 52%, Albania 43%, Croatia 39%, Serbia 29%, and Bosnia and Herzegovina 24%. Its contribution is smaller in Macedonia at 12%, whereas it is almost negligible in Kosovo* , Moldova and Ukraine.

Regardless of these common features, when it comes to the structure of the energy mix, this is completely diverse in the Contracting Parties. Whilst some of them have a balanced portfolio of energy sources (Serbia, Macedonia, Croatia); others are dependent on a few types of sources (Albania, Bosnia and Herzegovina, Kosovo*, Montenegro).

In 20092, the total primary energy supplied in the Contracting Parties was 155,878.68 ktoe3. 74% of this quantity was supplied in Ukraine, while the remaining 26% was supplied in the Western Balkans and Moldova. Domestic coal and lignite dominate the mix, primarily in Serbia and Macedonia. The following Contracting Parties have the highest share of coal and lignite in their energy supply:

- Serbia – 52%,- Macedonia – 50%, - Montenegro and Kosovo* – 48%, respectively, - Bosnia – 33%.

—2 Reference year3 Kilo tons of oil equivalent

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Since 1990, the markets of the Western Balkans and Moldova have seen only about 0.94 GW of new power plants, compared to the plans for realising 13.23 GW‘s worth by 2010. It is yet to be seen how the region is going to develop new plants over the course of the next ten years at a rate that is 10 times greater than the rate achieved in the last two decades.

Without including Ukraine, additional generation capacity continues to be dominated by lignite (at 45%), which is followed by hydropower (39%), natural gas (9%), and other renewable energy sources (7%).

The total investment cost for additional capacity is EUR 44.6 billion, out of which EUR 28.8 billion goes to the Western Balkans and Moldova (excluding Ukraine)6.

—6 These figures do not include the capital expenditures required in the latter part of the decade for new planned facilities proposed after 2021

The forecast for the aggregated production of crude oil and oil derivatives is set at 16,931 ktoe and imports at 24,865 ktoe by 2020.

There are no official estimations regarding the aggregated demand for natural gas for 2020.

New generation capacitiesThe Contracting Parties in their planning document have planned very ambitious investments in new power generation facilities by 2020 (some of them by 2021).

The forecast new capacities by this period are set at approximately 21 GW. Out of this, 13.23 GW5 is planned for the Western Balkans and Moldova (to this Serbia contributes 25%). In Ukraine, the new installed capacities are forecast at 8.1 GW.

—5 Representing 64% increase compared to 2009 capacity

OilIn 2009, the total production of crude oil and oil derivatives at the aggregated level of the Energy Community amounted to 16,478.40 ktoe, imports of 27,109.17 ktoe and exports of 6,408.02 ktoe. Crude oil and petroleum products are produced in Ukraine, Serbia, Croatia, Albania and Bosnia and Herzegovina.

The transport of crude oil to Europe through Ukraine amounted to 29.1 million tonnes.

Forecasts for 2020 and 2030The total electricity production including net imports in the Energy Community is estimated to grow to 372.5 TWh in 2020 and to 452.72 TWh in 2030. It is forecast that by 2020, Serbia, Bosnia and Herzegovina, Montenegro, Ukraine and Kosovo* will be net exporters of electricity.

02 Intro

Regional Energy Strategy“If necessity is the mother of invention, it is also the father of cooperation.”-John David Ashcroft,legal expert

As noted in the report of the European Commission (COM(2011) 105 final), the “Energy Community is about investments, economic development, security of energy supply and social stability; but – more than this – the Energy Community is also about solidarity, mutual trust and peace. The very existence of the Energy Community, only ten years after the end of the Balkan conflict, is a success in itself, as it stands as the first common institutional project undertaken by the non-European Union countries of South East Europe.”

Regional cooperation and solidarity have been the backbone of the Energy Community from the very beginning. Faced with new, very similar obstacles and

Council in October 2011 and the Task Force for the preparation of the Energy Strategy was established. The members of the Energy Strategy Task Force included representatives from each of the Contracting Parties, the European Union, the Donors Community and the Investors’ Advisory Panel.

It was decided that the Strategy would be prepared in two stages – first being the preparation and adoption of the text of Energy Strategy summarizing the main objectives of the Strategy and actions necessary to meet them. The second stage is related to the preparation the list of energy projects of regional interest.

In July 2012, the Energy Community Secretariat circulated the draft Strategy to the representatives of the Contracting Parties. The ministers subsequently adopted the draft Strategy at the 10th Ministerial Council in Montenegro, on 18 October 2012 and the first stage of the preparation of the Strategy was completed.

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challenges, the Contracting Parties decided to deepen their cooperation and to prepare the First Regional Energy Strategy.

The preparation of the regional energy strategy was proposed by the Serbian minister for energy and mining at the 8th Ministerial Council, held in Skopje in 2010. The remaining ministers welcomed the idea and instructed the Energy Community Secretariat to develop a more concrete proposal for deeper discussion and analyses.

The concept document “A Ten Year Strategy for the Energy Community 2011-2021”, was presented at the 21st Permanent High Level Group (PHLG) in June 2011. The PHLG agreed that the Strategy should contain the main development goals and actions required to meet them, priority projects and the mechanisms for the development of those projects. The PHLG also agreed that a task force should be set up to clarify the Strategy. The proposal of the PHLG was accepted by the 9th Ministerial

The Harmonization of VAT rules

One of the significant barriers to the creation of an integrated market is the inconsistency of VAT applicable to energy amongst the Contracting Parties in comparison with the VAT system applicable in the EU. Unlike the EU rules, the VAT laws and regulations in the Contracting Parties do not differentiate between the situation where the recipient of electricity is a wholesaler/reseller (“taxable dealer”) and where the recipient is a final consumer, i.e. between non-consumptive supply (trading) and consumptive supply of electricity (supply of final consumers of electricity). This inappropriate treatment is often the source of significant confusion as to how supplies involving a cross-border element should be treated for VAT purposes.

On the eve of the accession to the EU, Croatia proposed amendments to its VAT Law to align the rules with those applicable in the EU, including those related to the place of supply of electricity.

Activities necessary to create a competitive integrated energy marketIn order to reform the energy markets of the Contracting Parties and to create an integrated one, the following actions have to be taken:

— Removal of barriers at the interfaces between the Contracting Parties and EU Member States.

— Introduction of coordinated auctions for capacity allocation7, Establishment of one or more power exchanges that cover all Contracting Parties and the implementation of prices based on coupling.

— Adoption of regulatory balancing rules and balancing responsibilities for market participants.

— Removal of remaining barriers (regulatory, institutional and legal) to energy trade by January 2015.

—7 Serbia already organises coordinated auctions for capacity allocation with Hungary and Romania.

The Task Force is currently working on the second stage of the Strategy – projects of regional interest. The work on the list should be finalised over the course of 2013 and ready for the endorsement of the 11th Ministerial Council in October 2013.

Objectives of the Energy Community StrategyThe Strategy defined 3 key objectives, which, naturally, correspond to the main goals and tasks of the Energy Community itself. These objectives include the following:

— Creating a competitive integrated energy market,

— Attracting investments in energy, and

— Providing a secure and sustainable supply to customers.

Activities necessary to meet the objectivesThe Strategy defines the actions which need to be taken by the Contracting Parties (in addition to the implementation of the EU acquis) in order to achieve the set objectives.

02 Intro

It is expected that the new rules will become applicable by 1 July 2013. The remaining Contracting Parties have to harmonise their rules governing the VAT treatment for energy with those in the EU by 1 January 2015.

Actions necessary to attract new investmentsIn order to attract new investments in the energy sector, the Contracting Parties will need to take action in relation to price (de)regulation, infrastructure and the removal of administrative barriers in the authorization process.

Activities in relation to price (de)regulation include the following: phasing out of price regulation for large consumers, the adoption of cost reflective energy network tariffs and the adoption of prices that reflect the full cost of supply for tariff consumers.

As for the actions to be taken in relation to energy infrastructure, the precise set of measures should be proposed by the Energy Strategy Task Force by mid-2013. These may generally include accelerated and

The share of gross final energy consumption established by the Ministerial Council in October 2012 should be achieved through the adoption and implementation of the National Renewable Energy Action Plans, the simplification of authorization procedures for renewable projects and the introduction or improvement of existing support schemes for such projects.

On the environmental protection front, the Contracting Parties have to prepare the national road maps for the implementation of the large Combustion Plants Directive by the end of July 2013 and national road maps for GHG emissions reduction/limitation by the end of 2013.

Finally, in relation to the protection of consumers, it is necessary to ensure the protection of vulnerable customers and to create a clear and transparent regulatory framework, to set standards for the quality of services and to provide clear guidelines for when one wishes to switch energy supplier.

coordinated permit granting procedures, coordinated regulatory authorizations and support from relevant EU funds.

Finally, the Contracting Parties should introduce harmonised licensing regimes in line with the applicable EU regime by 1 January 2015.

Actions related to providing secure and sustainable energy supplies to consumersA number of measures in relation to security of supply, energy efficiency, renewable energy, environmental protection and protection of consumers are defined.

Security of supply will be accomplished through the establishment of an appropriate internal framework for security of supply, enhancement of preparedness to secure gas supply and the diversification of gas imports.

The Contracting Parties should increase the efficient use of energy by achieving a minimum 9% energy saving target by 2018.

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full list of projects envisaged in this category, as well as in other categories by the Regional Energy Study (electricity transmission, gas and oil) is available on the web page of the Energy Community - http://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Regional_Energy_Strategy/PECIs .

Power generation projectsHydro Power System of the Upper Drina (Bosnia and Herzegovina)The project includes the construction of 3 hydro power plants (HPP Buk Bijela, HPP Foca and HPP Paunci) on the Drina River and one HPP Sutjeska on the Sutjeska River, a tributary of the Drina River. The estimated value of the project is EUR 474.17 million. It should be finalized between 2019 and 2021.

ProjectsIn the second phase for the preparation of the Energy Strategy, the Energy Strategy Task Force will be working on identifying energy projects of regional importance, with the goal that financing and regulatory procedures take place in a coordinated manner.

The Regional Energy Strategy provided the methodology and criteria for the identification of projects of regional importance, as well as categories of projects which could be considered projects of regional importance.

The Task Force will identify the projects of regional importance in the course of 2013 on the basis of applications submitted to it by project promoters.

The most significant projects in the area of power generation submitted to the Regional Strategy Task Force are summarised below. The

HPPs on Lower Drina (Bosnia and Herzegovina and Serbia)Donja Drina HPP is a system of four run off river facilities located downstream of Zvornik HPP on the Drina River: Kozluk HPP, Drina I HPP, Drina II HPP and Drina III HPP. The hydro power potential is being divided in a ratio of 50:50% between Serbia and BiH. The total installed capacity of the planned hydro power plants is 365 MW while the average annual generation amounts to 1,588 GWh of electricity. The estimated value of the project is EUR 1.35 billion.

HPPs on Middle Drina (Bosnia and Herzegovina and Serbia)The Middle Drina HPP is a system of run off river facilities located between Bajina Basta and Zvornik HPPs on the Drina River. It will consist of three plants: Tegare HPP, Rogacica HPP and Dubravica HPP. The total installed capacity of planned hydro power plants is 321 MW. The estimated value of the project is EUR 870 million.

02 Intro

8.5 MW and 12 MW each) on the Ibar River. The project should be developed by EPS in cooperation with Italian Seci Energia S.p.A. The realization of the project should start in 2014 and end gradually in phases between 2016 and 2021. The estimated value of this project is EUR 300 million.

Kolubara B TPP (Serbia)The project includes the development of 2 lignite fired units with an installed capacity of 375 MW each. The lignite fired in the plant will come from the Kolubara Mining Basin. The investments in the project are estimated at EUR 1.3 billion. The project should be completed by 2019.

Nikola Tesla B3 TPP (Serbia)The project includes the construction of a third unit of the very important TPP Nikola Tesla. The installed capacity of the unit is set at up to 800 MW. The project, which has an estimated value of EUR 1.1 billion, should be completed by 2020.

HPPs on the River Lim (Montenegro) Montenegro plans the construction of small hydro power plants system on the River Lim, including the following SHPPs: ‘’Plav’’, ’’Murino’’, ’’Kruševo”, ’’Mostine’’, ‘’Jagnjilo’’, ‘’Andrijevica’’, ‘’Lukin Vir’’, ’’Berane 1’’, ’’Berane 2’’, ‘’Poda’’, “Bijelo Polje 1’’ and “Bijelo Polje 2’’. The estimated investments amount to approximately EUR 167 million. The project should be finalized by 2017.

HPPs on the Velika Morava River (Serbia)The project includes the development of 5 HPPs (installed capacity between 28.9 MW and 30.6 MW each) on the Velika Morava River. The project should be developed by the public company EPS in cooperation with RWE. The realization of the project should start in 2016 and end in 2021. The value is estimated at EUR 250 million.

HPPs on the Ibar River (Serbia)The project includes the development of 10 HPPs (installed capacity between

HPP Dubrovnik II (Croatia and Bosnia and Herzegovina)The planned installed capacity of HPP Dubrovnik II is set at 300 MW. The electricity output should be divided 50-50 between Croatia and Bosnia and Herzegovina. The estimated value of the project is EUR 170 million. It is planned that the project will be finalised by 2017.

Hydro Power Plants on Crna River (Macedonia)HPP Cebren (installed capacity targeted between 315 MW and 333 MW) and HPP Galiste (installed capacity between 185 MW and 197 MW) should be constructed and operated by the concessionaire for a period of 52 years. The concession should also include a right to operate and maintain the existing TPP Tikves (with installed capacity of 116 MW). The concessionaire will be an SPV incorporated by ELEM and a third-party investor. The value of project is estimated at EUR 600 million. The HPP Cebren is planned to be developed by 2020 and the HPP Galiste by 2026.

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/Oil & Gas — Energy 2013, Karanović & Nikolić

03Regulatory framework andEU harmonisationBy Jadranka Jerković, Ivana Vragović, Petar Mitrović, Veton Qoku Associates, Karanović & Nikolićand Josip Marohnić Attorney at Law/Odvjetnik in association with Karanović & Nikolić

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— The Law on the Pipeline Transport of Gaseous and Liquid Hydrocarbons and the Distribution of Gaseous Hydrocarbons. This regulates the pipeline transport of gaseous and liquid hydrocarbons, the distribution of gaseous hydrocarbons, as well as construction and maintenance.

— The Law on Mining and Geology Explorations. This regulates mineral policy, the conditions for the exploration and production of minerals (including oil and gas), the construction and maintenance of mining related premises and their subsequent decommissioning.

The key laws, in particular the Energy Law, are largely in line with the Second Energy Package (as in the

All members of the Energy Community undertook to implement the EU acquis on energy into their respective national legislation. In line with the requirements of the Energy Community Treaty, the national legislation of such member countries is more or less based on the rules comprising of the EU Second Energy Package. Croatia, who are on the cusp of joining the EU have gone a step further and implemented the EU Third Energy Package.

SerbiaThe regulatory framework for oil and gas is set out by primarily by the Energy Law. The Energy Law, being the umbrella law for the entire energy sector, also regulates the oil and gas sector, including the aims of the energy policy, conditions for the performance of energy activities, the functioning of the gas and oil activities, and the protection of consumers.

In addition, the oil and gas sector is also governed by the following laws:

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MacedoniaThe regulatory framework for the oil and natural gas sectors in the Republic of Macedonia is primarily set out by the Energy Law 2011. The Energy Law takes the form of an “umbrella” law, covering all significant energy related areas including inter alia the oil and gas activities and markets.

The other key regulatory acts that apply to the oil and gas sectors are:— The Law on Mineral

Resources. This regulates the conditions and procedures for the geological exploration and the exploitation and processing of mineral resources.

— The Law on Concessions and Public Private Partnership. This regulates the manner in which concessions of common interest (such as oil and gas) are granted and the manner in which public-private partnership agreements are established.

— A number of other laws and bylaws regulating different aspects of environment protection, construction, trade etc.

As for the oil market, it has already been fully liberalized, and Serbia for quite some time does not impose any restrictions on imports and the processing of oil and oil derivatives.

The authorities in charge of the regulation of the gas sector include:— The Serbian Government,

which has a primarily policy-making function in the sector.

— The Ministry of Energy, Development and Environmental Protection, which is in charge of the implementation of the policy documents and laws, and performs various administrative, regulatory and supervisory functions.

— The Energy Agency, an independent regulatory body that decides on the issuance of licences, tariff methodologies and regulated tariffs.

case of electricity, in Serbia, the regulator cannot impose fines for a breach of the law because this falls under the exclusive competence of the courts).

The Energy Law provides for the full liberalization of the gas market by 1 January 2015, when households will be able to choose their supplier. It is expected that the liberalization of the market will finally lead to the stronger participation of private companies in the supply sector.

The 2011 Energy Law provides a framework for the legal unbundling of distribution from the public supply of gas. Even though the deadline for the unbundling of distribution and supply was 1 October 2012, it has not yet been implemented in practice.

In addition, Serbia has gone a step further with the implementation of acquis and it also implemented the requirement for the preparation of crisis-prevention plans.

03 Oil & Gas

exploration and production of oil and gas. The exploration and production of oil and gas was previously governed by the Law on Geology Explorations and the Law on Mining. However, these regulations treated the exploration and production of oil and gas like any other mineral resources, not recognising the specifics related to oil and gas. The Law on the Exploration and Production of Hydrocarbons explicitly states that the Concession Law, the Law on Geology Explorations and the Law on Mining will not apply to the exploration and production of oil and gas.

According to the Law on Exploration and the Production of Hydrocarbons, a special administration authority will be responsible for hydrocarbons. However, the said authority has not yet been established. Until the establishment of this authority, the Ministry of Economy, Sector for Mining and Geological Research will be responsible.

Macedonia already has an unbundled natural gas sector. Namely, different entities are in charge of: (i) the transmission of natural gas; (ii) the distribution of natural gas; as well as (iii) the end supply of natural gas. However, although the liberalisation of the gas market was primarily planned for June of 2012, such liberalization is yet to be achieved.

Тhe oil market in Macedonia is already fully liberalized, however in practice a handful of entities still dominate the sector.

MontenegroAside from strategic and policy documents, i.e. the Energy Policy of Montenegro until 2030 and Energy Development Strategy until 2025, the regulatory framework for oil and gas in Montenegro is regulated by two main pieces of legislation, the Law on Exploration and Production of Hydrocarbons and the Energy Law.

The Law on Exploration and Production of Hydrocarbons was enacted in 2010 and this is the key law for the

The key laws, in particular the Energy Law, are largely in line with the Second Energy Package. However, changes in the legal and regulatory framework are expected in the near future under the Programme for the Realisation of the Strategy for Energy Development for the Period 2012 to 2016. The Macedonian Government plans to adopt by 1 January 2015 the Third Energy Package of the European Union.

The proposed timetable for this envisaged legal and regulatory framework change is as follows:— A platform and an action

plan for a new energy law will be adopted by mid-2013.

— The new energy law will be drafted by mid-2014.

— The bye-laws, which under the new energy law will be drafted by the end of 2014.

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and harmonized, liberated markets. Along the lines of the Directive 2009/73/EC concerning common rules for the internal market in natural gas, the 2012 Energy Act introduces a category of vulnerable customers and respective safeguards to protect such final customers. The government passed considerable authority to the regulating agency, such as passing the supply terms and conditions, quality of service and even setting the tariff items that affect the final price of gas. The technical implementation of bylaws are yet to be enacted in the first half of 2013.

The 2013 Gas Market Act further promotes the non-discrimination, effective competition, efficient market functioning and open third-party access, especially cross-border interconnection. The Act leaves until the end of first quarter of 2014 for participants to align their business with the new regulation. The subsidiary of INA (a leading national, recently privatized oil company) maintains the status of public service, home consumers and balancing supplier by that date. Existing gas distribution concessions

CroatiaFollowing the initial modern energy regulation in 2001 and the 2004 to 2008 period of legislative overhaul that was part of the EU acquis implementation in the accession negotiations, the most recent legislative changes finally implemented the Gas and Electricity Directives of the third package for an internal EU gas and electricity market. The implementation commenced with the all-new framework Energy Law that was enacted in the last quarter of the 2012. The new Gas Market Act followed in the first quarter of the 2013. Oil regulation may not follow, as the latest accession requirements have been fulfilled by the 2011 Oil Market Act amendments.

By ensuring greater security of supply and fewer interruptions in gas supply, by setting clear conditions for investing in power plants and transmission networks, the latest set of gas-related laws is expected to achieve more secure, competitive and sustainable energy,

It is expected that the Government of Montenegro will grant its first concession under the Law on Exploration and Production of Hydrocarbons in 2013.

The Energy Law regulates the transport, distribution, storage, retail and wholesale and supply of oil products and gas. Under the Energy Act, the Montenegrin oil and gas market are fully liberalized and the key players are private entities.

The authorities in charge of the regulation of the oil and gas sector include:— The Montenegrin

Government, which has a primarily policy-making function in the sector.

— The Ministry of Economy, Sector for Mining and Geological Exploration which is in charge of the implementation of the policy documents and laws, and performs various administrative, regulatory and supervisory functions.

— The Regulatory Energy Agency, an independent regulatory body that decides on the issuance of licences, tariff methodologies and regulated tariffs.

issuance of license for the production, the license for transport and the license for the storage of oil and oil derivatives.

— In the FBH, the law governing the oil sector has not been adopted. The Draft Law on Oil Derivatives was produced in October 2012, but there is no official information as to when the adoption of the law could be expected. For now, the following secondary legislation is in force: the Decision on the Obligation of a Merchant to Create and Maintain a Minimum Stock of Oil Derivatives; Rules on Conditions for the Minimum Technical Equipment of Business Premises for the Performance of Trade; Rules on the Method of Registering and Controlling the Turnover of Oil Derivatives and other Products and Services at Petrol Stations via Installed Equipment in FBH. Additionally, the Law on Domestic Trade governs the wholesale and importation of oil.

Bosnia and HerzegovinaBosnia and Herzegovina (“BH”) has several levels of political structuring under the overall federal government. The most important of these is the division of the country into two entities these being the Republic of Srpska (“RS”) and the Federation of Bosnia and Herzegovina (“FBH”). In addition to these, the Brcko District (“BD”) as a specific unit of local government was created in 2000. The energy sector in BH essentially reflects the constitutional organization of the country - the regulatory powers in the sector are divided between the central government and the entities, while the BD does not have authority in the energy sector.

The regulatory framework in the oil sector is set by the regulations on the level of the entities, including the following:— In the RS, the legal

framework is defined by the Law on Energy, while the Law on Oil and Oil Derivatives governs the production of oil derivatives, market functioning and safe supply. The Rulebook on the Issuance of Licenses regulates, inter alia, the

must be aligned in terms of duration (20 to 30 years) and the concession fee (turnover percentage in accordance with a government bylaw that has not yet been passed). The regulator is given authority to foster market competition, by imposing measures upon market participants that include the forced sale of gas at public auctions.

The 2006 Oil regulation needed significant amendment as recently as 2011, principally to comply with accession negotiation requirements on maintaining a minimum stock of crude oil and petroleum products and the 2009 Council Directive on the matter. The investment cycle that was to be launched with the law had still not occurred.

Traditional petroleum products had seen new regulation with the 2009 regulation on transport biofuel. That was already at a time that the EU realised the effect that it had on the price of food. Therefore, the 2010 changes introduced second-generation renewable fuel concepts from the latest EU directives.

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The new RES Decree on the Security of Supply and Delivery of Natural Gas regulates the measures that are to be taken to secure the long-term stability in the supply of gas; measures in the case of disruption to the supply and delivery of gas; an obligation to supply and deliver gas to certain special categories of consumers; priorities in the supply of gas in the event of the termination of supply; and the content of the report on security in the supply of gas. Moreover, the Law on the Pipeline Transport of Gaseous and Liquid Hydrocarbons and Distribution of Gaseous Hydrocarbons, (which was adopted in 2012) regulates the requirements for the safe and undisturbed pipeline transport of gaseous and liquid hydrocarbons and the distribution of gaseous hydrocarbons, and the design, construction and maintenance and use of pipelines.

The regulatory framework in the natural gas sector is set by the regulations enacted at entity level, including the following8:— In the RS, the Gas Law

governs the terms and conditions for the supply, transportation and distribution of natural gas, including the construction of gas facilities and the licensing system for the performance of gas activities. Also, the General Conditions for the Supply of Natural Gas regulate the supply of natural gas to customers, the rights and obligations of the suppliers and the conditions under which a discontinued or limited supply of natural gas can be applied to certain customers.

—8 BH has still not properly implemented Directive 2003/55, Directive 2004/67 and Regulation 1775/2005 as was required by the Energy Community Treaty. Pursuant to the obligations under the signed Treaty on the development of gas regulation on the national level and the transposition of EU Directive 2003/55/EC on the internal gas market, the Ministry of Foreign Trade and Economic Relations of BiH has established an Expert Team in order to reach a fully compliant and harmonized legal framework in BH.

The institutional framework of the oil and gas sector in BH consists of the national Ministry of Foreign Trade and Economic Relations and following two entity ministries:— In the RS, the Ministry

of Industry, Energy and Mining;

— In the FBH, the Federal Ministry of Energy, Mining and Industry.

Key authorities in the oil and oil derivatives sector:— In the RS, The Regulatory

Commission of the RS (the “RCERS”) has jurisdiction over the regulation of activities, such as the determination of the methodology for the calculation of costs of oil and oil derivatives transport, tariff system, approving prices for the use of oil, issuing licenses, etc.

— In the FBH, the Federal Ministry of Energy, Mining and Industry has jurisdiction over such activities.

decree once this law is enacted. The draft law governs the organization and functioning of the natural gas sector, rules and conditions for carrying out energy activities in this sector, planning and development of the natural gas market, market regulation, “unbundling” of activities, third party access to natural gas systems, construction and reconstruction of infrastructure facilities, technical rules, supervision of the enforcement of the laws, related principles, procedures, rights and obligations of natural persons and legal entities and other issues relevant to the gas sector in the FBH. This draft law stipulates the establishment of the Regulatory Commission, which will take over all the responsibilities, competences and powers of the gas regulator in the FBH.

— In the FBH, the Decree on the Organisation and Regulation of the Gas Sector Economy sets out the general legal and institutional framework for the supply and distribution of natural gas in the FBH.

The key authorities in charge of the regulation of gas include:— In the RS, the RCERS, an

independent regulatory body that decides on the issuance of licences, the issuance of general conditions for the supply of natural gas, the tariff methodologies and regulated tariffs.

— In the FBH, supply and distribution of natural gas is currently regulated by the Decree on the Organization and Regulation of the Gas Industry Sector of the FBH. However, in May 2013 the Federal Government adopted the Draft Law on Gas, which will supersede the current

03 Oil & Gas

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04Who are the players – biggest companies in the regionBy Ivana VragovićAssociate, Karanović & Nikolić

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companies are present, inter alia, in Sarajevo, Belgrade and Podgorica. One of the partly owned INA’s companies is Jadranski naftovod JSC (“Janaf”), which owns and operates the Adria pipeline system. The company cooperates with its neighbouring countries. Specifically, Janaf and the Serbian subsidiary of Gazprom, Naftna industrija Srbije a.d. (“NIS”) have signed an Agreement on the Transport of 1.8 mill tons of oil from Janaf that it needs during 2013. In BH, Janaf has its presence through the daughter company “Janaf – Terminal Brod LTD”. Additionally, “Oil Refinery” in Brod (in Bosnian: „Rafinerija nafte“ a.d. Brod) imports crude oil via the Adriatic oil pipeline Janaf, its length being around 13 km in BH/Republic of Srpska.

Another important player in the oil and gas market is Hrvatska Elektroprivreda (HEP). HEP is a national electricity company, which is, in the last two decades, also engaged in the heat supply and gas distribution.

For many years the Croatian INA-Industrija Nafte (“INA”) has occupied second position in the Southeast Europe 100 Company rankings, which makes it the biggest oil company in the Balkan region and deservingly puts INA at the top of our list. INA is a joint stock company, with Hungarian MOL and the Republic of Croatia as its biggest shareholders. It was established through the merger of Naftaplin (a company for oil and gas exploration and production) with the refineries in Rijeka and Sisak. INA manages a regional network of 454 petrol stations in Croatia and in the neighbouring countries of Bosnia and Herzegovina (BH), Slovenia and Montenegro. In 2011, INA had total revenue of 3.6 billion euro.

The INA Group has a leading role in the Croatian oil business and a strong position in the region in the oil and gas sector activities. The Group is comprised of several affiliated companies that are wholly or partially owned by INA. Such

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During the past 15 years or so, the oil derivatives market in BH has been mostly dependant on oil derivatives import. The re-launch of production in the “Oil Refinery” in Brod and its continuous operation has had a significant impact on the decrease in oil derivative imports during the past three years. Oil derivatives are mostly imported from Croatia, Italy, Hungary, Slovenia and Austria. The majority owner of the only two Bosnian oil refineries (the one in Brod and the “Oil Refinery” in Modrica, as well as of the company Petrol Banja Luka), is the company NeftegazInKor. NeftegazInKor is also the founder of the “OPTIMA Group” LTD Banja Luka for trading of oils and oil derivatives. OPTIMA Group business operations entail the supply of raw materials for the production of oil derivatives from the two BH refineries, the processing of raw materials and launching oil derivatives on the BH and the international market.

second biggest share belongs to the Republic of Serbia, while the remaining portion is held by a handful of small shareholders.

The leader in the gas market in Serbia is Srbijagas, the company that performs transport, distribution and storage of natural gas. It was established back in 2005 by the Republic of Serbia in the process of the restructuring of NIS. Worth mentioning is - YugoRosGaz JSC, with pipeline construction and the distribution of natural gas as its business activity. The company is a Gazprom subsidiary in Serbia, owned by Gazprom, Srbijagas and Central ME Energy & Gas AG.

In BH, the gas market is small, with integrated supplies from integrated companies owned by state-owned companies. BH Gas is the single wholesale gas supplier in the country. BH Gas, in cooperation with the Energoinvest Company, has signed long-term contracts on the transit of natural gas with foreign partners, including: The company Mol – through a transport system in Hungary until 2018, and with Srbijagas - through a transport system in Serbia until 2017.

It is organized in the form of a holding company with a number of daughter companies. Within HEP operates HEP Proizvodnja LTD, whose daughter-company Pump station Busko blato LTD is situated in BH.

The Serbian company NIS is also one of the biggest oil companies in South East Europe with two refineries – in Pancevo and in Novi Sad. Its business activities include oil and natural gas exploration, production and refining, as well as the sale of a wide range of oil products. Apart from Serbia, NIS operates in the territory of Angola (where it has concessions for the exploration and exploitation of oil) and in BH. In Republic of Srpska, NIS owns the company Jadran-Naftagas, established as a joint-venture with the Russian company called NeftegazInKor. The majority owner of NIS is the Russian Open JSC Gazprom Neft (“Gazprom”), while the

The company performs the exploration, exploitation and trade of petroleum products in Montenegro. Since 2002, it has been a member of the large Hellenic Petroleum Group. After the SP Agreement had been signed, Hellenic Petroleum became the majority shareholder of Jugopetrol AD Kotor. Since then, the retail network of the Company operates under the commercial brand “EKO”. Jugopetrol AD Kotor has a network of 38 petrol stations in Montenegro and 3 petrol stations in BH.

The company “Euro Pact” is also one of the most successful in the oil industry of Montenegro. Oil and oil related products represent the main business operation. The successful cooperation of the Company was established with large number of significant business partners from Serbia, Albania, Kosovo*, BH, Croatia and the European Union.

products in Macedonia. Its core business is the retail and wholesale of oil, oil products, natural gas and biodiesel. Makpetrol Group has its own affiliates, four of which are located in Macedonia, while on an international level the Company owns affiliated companies in Greece, Petrolmak and in the Republic of Serbia, Makpetrol-Beograd.

Another important company in the gas sector in Macedonia is a joint stock company GA-MA for the transmission of natural gas and for the management of the natural gas transmission system. It was formed by an agreement between Makpetrol a.d. and the Government of the Republic of Macedonia.

In Montenegro however, there is no gas distribution infrastructure, which is why the consumption of gas is negligible. The largest petrol firm is Jugopetrol JSC Kotor.

The majority owner of the Russian NeftegazInKor is Zarubezhneft Moscow which does business under the trademark Nestro. Under this trademark all of the Bosnian oil companies: OPTIMA Group, Petrol, “Oil Refinery” Brod and “Oil Refinery” Modrica, are conducting business. Affiliated companies of the Nestro Group are: Nestro Dunav and Nestro Petrol Serbia, both in Belgrade; and Nestro Adria and Nestro Adria Slavonski Brod in Zagreb.

In Macedonia, OKTA is the only oil refinery. It is situated outside the capital city of Skopje. The company was acquired in 1999 by the well-known Greek oil Company Hellenic Petroleum. With an annual capacity of 4 million tonnes, OKTA is well able to meet Macedonia’s own need for 1.25 million tonnes of refined products per annum. The oil is supplied to neighbouring areas such as Kosovo*.

Makpetrol JSC is the largest private company for distribution and sale of oil

04 Oil & Gas

05The ‘South Stream’ project By Veton QokuAssociate, Karanović & Nikolić

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at risk because of on-going gas disputes between Moscow and Kiev (bearing in mind that Europe gets 80% of its imported gas from Russia, through Ukraine), both the European countries and Russia are looking for new routes to get the gas from point A (gas sources in Russia, the Caspian Sea and the Middle East regions) to point B (European countries). An obvious solution as a new route is the Balkan region. Russia, as the world’s biggest gas producer, and the European Union, as one of the world’s largest importers of natural gas, agree up to this point, but they have very different ideas when it comes to which gas should pass through this new route. Namely, while Russia wants to continue its domination in the European energy market, the EU wants to reduce European dependence on Russian energy. Therefore, these two powers have planned two different gas pipeline projects that are intended to pass through the Balkan region.

Experts share the opinion that in the medium to long term, the demand for gas in the European Union as well as in other European countries that are not members of the European Union will grow significantly. Countries that used to consume moderate amounts of gas for industrial purposes are likely to guide their economies towards increased utilization, as coal, fuel oil and nuclear power are less environmentally-friendly and more expensive if compared to natural gas. According to the consensus forecast by the world’s leading forecast centres, Europe’s annual demand for additional gas imports (on top of the current 420 billion cubic meters) may increase by an additional 80 billion cubic meters by 2020 and surpass this figure by another 60 to 140 billion cubic meters by 2030.

However, at a time when natural gas is gaining momentum in the race for energy resources, the supply of gas to Europe is constantly

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Operator, as well as (x) MVM Group, the largest Hungarian energy company. The South Stream is expected to be operational by 2015.

However, the initial plan has substantially changed and now the South Stream pipeline route is planned to pass through Russia through the Black Sea to Bulgaria, Serbia, Hungary and Slovenia The pipeline is now planned to end at Tarvisio, Italy, instead of Austria. Moreover, two cul-de-sac branches are envisaged to be built in order to provide connection of Bosnia and Croatia to the pipeline.

Although it is not yet officially included in the project publically available documents, a cul-de-sac branch could also be built in order to connect Macedonia to the pipeline. In this respect, according to Macedonian vice-prime minister’s statement the agreement for the joining of Macedonia to the South Stream pipeline is the final stages, i.e. such agreement is soon expected to be ratified by the Russian side, and thereafter by the Macedonian side.

continue through Hungary to Austria ending at the Baumgarten gas hub. Another branch would run through Hungary and Slovenia to Arnoldstein in Austria near the Italian border to supply northern Italy. An option to re-route this branch through Croatia instead of Hungary was also being considered. This proposed gas pipeline will exclusively transport Russian natural gas. The South Stream pipeline was projected and will be implemented by the following companies in the energy sector: (i) the Russian (government controlled) energy giant Gazprom, (ii) the Italian Eni, (iii) the French EDF, also government controlled, (iv) the largest crude oil and natural gas producer in Germany, Wintershall AG, (v) Bulgarian Energy Holding EAD, (vi) state-owned natural gas provider in Serbia, Srbijagas, (vii) Austrian based OMV, (viii) Plinovodi, the Slovenian company managing the national natural gas transmission network, (ix) Greek DESFA, the Greek National Natural Gas System

The European Union, as a major player on the international gas market, is planning to build the Nabucco-West pipeline. This 3,300 kilometres long pipeline will run from Turkey via Bulgaria, Romania, and Hungary to the Baumgarten gas hub in Austria. Nabucco-West will have gas from Iraq, Azerbaijan, Turkmenistan, and possibly Egypt passing through it. Six companies (Austrian OMV, Hungarian MOL, Romanian Transgaz, Bulgarian Bulgargaz, Turkish BOTAŞ and German RWE) have teamed up for the purpose of its successful realization. If built, the Nabucco-West pipeline is expected to be operational by 2017.

Russia on the other hand is planning to build the South Stream pipeline. This pipeline is planned to pass from Russia through the Black Sea to Bulgaria. The initial plan was that from there, the south-western route would continue through Greece and the Ionian Sea to southern Italy, while the north-western pipeline would run from Bulgaria to Serbia. From there one branch would

one (1) is in Russia, three (3) are in Bulgaria, two (2) are in Serbia, one (1) is in Hungary and two (2) in Slovenia.Moreover, at least two gas storage facilities are planned to be constructed as part of the pipeline project, out of which one would be an underground storage facility in Hungary with a capacity of 1 billion cubic metres and the other in Banatski Dvor in Serbia with a capacity of 3.2 billion cubic metres.It is estimated that the offshore section of the pipeline would cost approximately EUR 10 billion, while the onshore pipeline along with the eight new compressor stations and the two gas storage facilities which are planned to be constructed are expected to cost around EUR 6 billion. Thus the entire project is envisaged to cost approximately EUR 16 billion.

The offshore part of the pipeline is routed through the exclusive economic zones of Russia, Turkey and Bulgaria in the Black Sea, in order to avoid the exclusive economic zone of Ukraine, due to on-going Russia–Ukraine gas disputes. The offshore section (which will be around 900 kilometres long) will run from the Russkaya compressor station in Russia through the Black Sea to Bulgaria’s city of Varna.The South Stream pipeline’s planned annual capacity is up to 63 billion cubic meters per annum. The total length of the pipeline is planned to amount to approximately 2,380 km and the pipeline is planned to have 9 (nine) compressor stations (if we include the existing Russkaya compressor station as part of the pipeline), out of which

It should also be mentioned that Montenegro is interested in a connection to the said pipeline. In that sense, the Montenegrin Government and Gazprom have launched a feasibility study, in order to determine whether Montenegro could be included in the South Stream gas pipeline project.

Furthermore, having in mind the fact that the south-western route of the South Stream pipeline does not appear in the publically available official documentation for the project, it seems that the pipeline will definitively bypass Greece and Southern Italy. According to some reports, Gazprom will continue supplying gas to Greece using the existing pipeline system due to the fact that demand in Greece and Southern Italy markets cannot cover the cost of the investment.

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UAMO

RO

BG

TR

GRMK

SR

MN

BH

HRSL

HUAU

SV

IT

CH

DE

AL

SOUTH STREAMPIPELINE ROUTE OPTIONS

PIPELINE BRANCHES

RUSSIA-BULGARIA-SERBIA-HUNGARY-SLOVENIA-ITALY

TO CROTIA FROM SERBIATO REPUBLIC OF SRPSKA FROM SERBIA

sure more will follow by the end of the year (the interview took place on 27 December 2012, a/n). The projects deal with both electricity and natural gas, perhaps one or two will have to do with oil.One of the very interesting actions that will be taken not only within the Energy Community, but the entire EU, is streamlining permit granting procedures for energy infrastructure projects of common interest. This measure aims at reducing the duration of, at times, very lengthy permit granting procedures, which in some instances have resulted in project failure. This new measure, which I hope the parties to the Energy Community will adopt before the end of 2013, is a particularly important challenge for me, because spatial planning had long been my area of work. I will strive for the Energy Community to outdo the European Union in this regard.

South East Europe, Moldova and Ukraine. This will be the focus of mag. Kopač’s activi-ties in his new role, but the focus of this interview was the future development of the regional energy industry.

How would you describe the regional energy industry today?— The regional energy

industry has still not been integrated to a sufficient degree, so it is still not regional enough. This is why in 2012 the Energy Community adopted a regional strategy, and will prepare a concrete set of project of regional importance in 2013 to put this strategy to practice. This is scheduled to take place in the October meeting of the Ministerial Council of the Energy Community. In the process, we will use the methodology also employed by the EU. About 70 proposals for such projects had already been submitted by Christmas, and I am

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When South Stream complies with the principles of the Third EU Energy Package in all the countries it crosses, it will make a most welcome project

By Mag. Janez KopačDate: January 14th 2013 Author: Alenka Žumbar Source: www.energetika.net/see

1 December 2012 marked the beginning for mag. Janez Kopač’s appointment as the Director of the Energy Com-munity Secretariat, after he had earlier been in charge of the Slovenian energy industry as the energy minister in the governments led by dr. Janez Drnovšek and Anton Rop, and later during Prime Minister Pahor’s govern-ment as head of the Energy Directorate at the Slovenian Ministry of the Economy. The biggest challenge in his new position, Kopač says, is to take the past achievements of the Energy Community one step further. The main goals of this organisation are to achieve implementation of the Third Energy Package by 2015, and create a welcoming environment for energy in-vestments in the countries of

First successful market entries then trigger an avalanche. The Energy Community will do everything in its power to assist in the process. I am sure the concern about liberalisation in the region will gradually subside, and that countries in the region will follow the lead of the EU member states.

How do you see the development of the regional sector in South East Europe during your term of office over the coming three years? Traditionally, the energy industry is a rather “rigid” sector, but sudden changes now seem to be on the way.— True, there was not

much change over the last twenty years, but this was also a time of the decline of old mechanisms and strategic planning mechanisms. New systems which would include the market component have not been developed, and this is where the Secretariat sees its key mission.

In Serbia, people are very concerned how market opening will affect large industrial users, the closing of which could lead to a social catastrophe.— I can understand this

concern, but we can always address this concern by underlining positive experience from other countries, including, again, Slovenia. The Ruše nitrogen plant in Slovenia shut down after finding itself in the liberalised market, but as it turned out later on, its terribly dated technology would inevitably result in its closing down. On the other hand, producers of aluminium, glass, paper, steel, etc., handled the open market well. They are even calling on the government to open the gas market, where monopolistic long-term supply contracts are stifling competition from exporters. The ultimate protection against fear is the knowhow in energy trade, which users can most easily get from chambers of commerce and other similar institutions.

It is no secret that in a big part of the region energy prices are still far below market prices. How do you think this will change?Serbia, for instance, announced it would open its market to large consumers on 1 January 2013. — Yes, and the same holds

true for Macedonia. There is bound to be some problems at first, just like in the EU member states, including Slovenia. As regards other countries in the region, we keep encouraging them to open their markets as soon as possible. On the other hand, I can understand the ministers who are concerned about liberalisation, saying it could affect the users who are already underprivileged. To help stakeholders take a stand in this dilemma, the Secretariat decided to try and make a definition of underprivileged users during the next Social Forum, which will take place in Belgrade in April 2013. On the other hand, it is ministers who should know that big energy investments are just impossible without market prices.

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according to its claims free of charge. But despite this argument, the fact is that refusal to pay for interconnection is a breach of the acquis communautaire, so EMS and Serbia are in the dock. If no agreement is reached in this matter in the near future, the Secretariat will propose further action by referring the matter to the Ministerial Council. This is not the same as a decision by the European Court, as the Energy Community has no real court, but it would by no means be very unpleasant for a contracting party to the Energy Community if the existence of a breach was established.

In addition to this dispute, there is another one that is close to being referred to the Ministerial Council: a gas dispute in Bosnia and Herzegovina. The problem is that the national regulator only has power for the electricity sector, not the gas sector. As a result, the gas sector remains unresolved and in the domain of the entities, with Republika Srpska

Another good example of cooperation was the adoption of the regional energy strategy in 2012.

The Secretariat has the power not only to persuade, but also to resolve disputes, correct?— Correct. The Secretariat

is actually servicing the judicial function of the Energy Community. This function is not very clearly defined, but still envisages certain steps in settling disputes between contracting parties to the Community or their energy companies. Currently, the biggest issue is the dispute between the Kosovo* transmission system operator KOSTT and the Serbian operator Elektromreža Srbije (EMS), which refuses to pay transit fees for cross-border electricity transmission. EMS justifies this by taking care of secondary and tertiary regulation,

In his last interview for Energetika.NET, your predecessor said that countries in the region had learned to work together. Can you give a good practice example of such cooperation in the energy industry?

— Without doubt, the Energy Community itself is an example of good practice, bringing together ministers once a year, and other officials from the contracting parties up to four times a year, to meet and harmonize their energy policies, as of 2013 also projects. The latest regional project is the Central Auction Office (CAO), which was set up by transmission system operators for electricity (including Eles from Slovenia, a/n) in Macedonia. Unfortunately, Serbia and Bulgaria have not yet joined CAO, but we hope they can be persuaded to do so. The Energy Community Secretariat will work on this.

Energy Packages in a country that is actually like a miniature version of the world is a very positive thing. If Ukraine implements all the required rules in its energy market, it will be very effective not only inside its borders, but also on the outside. And this is what matters to the entire Energy Community, or even the entire Europe. In cooperation with the Energy Community Secretariat, Ukraine has so far put forward a draft law that regulates the electricity market and is fully in line with the Second and even the Third Energy Package. They now have a new government, so adoption of this legislation will be delayed by a couple of months, but I hope it will proceed as planned.

I should also mention Ukraine’s determined efforts in improving energy efficiency.

One of the full members, and thus an observer of the regional energy cooperation as practiced under the Secretariat, is Ukraine, the country which to some extent is “responsible” for the South Stream project and which the Russian gas supplier wants to avoid on its way to Europe. What can a country like Ukraine, which is relatively far from South East Europe, learn from these procedures and what contribution can it make as a contracting party?— Talks for full membership

of Ukraine in the Energy Community were actually more a matter of the European Union than they were of the Community. But the EU had a larger scope of issues that the Community would have had, which is why the process of Ukraine’s accession to the Energy Community took slightly more time. But to answer your question: we have to know that due to its size, Ukraine can develop a well functioning market even without outside connections. I am convinced the adoption of the Second and Third

insisting on keeping the sector on the entity level, while the Federation of Bosnia and Herzegovina wants to move it to the national level, which would be the right thing to do. All things considered, Bosnia and Herzegovina failed to regulate the field in line with the Second EU Energy Package.

How do you expect Croatia’s accession to the EU to be reflected in the energy industry?— Croatia more or less

functions as if it was already part of the EU, because it has already opened its energy market. In practice, there are still certain restrictions, but these are teething troubles. I believe that in the future, Croatia will strengthen its cooperation with its neighbours, and I remain absolutely optimistic as regards the development of its energy industry.

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Do you think electricity generated from gas will account for a bigger share in the regional energy mix in the future? How could this affect energy prices?— This depends not only on

future projects, but also on consumption trends with current users. The crisis has led to a decline in consumption and its volatility in South East Europe as well as the rest of the continent. So all of a sudden, we have surplus gas, the price of which on the spot market has dropped, and this is not a positive price signal for those who invest in large facilities. The truth is, I cannot give a very specific answer to this question.

For my last question, what could you say about the Slovenian energy industry, which you had been in charge of not that long ago, looking at it now “from outside”?— Unfortunately, the

Slovenian energy policy is not keeping pace with the energy reality in the EU. The Third Energy Package has not been transposed into the Slovenian legislation yet, even though my

to observe the principles of the Second and Third EU Energy Packages. Therefore, the rules are the same for everyone, Serbia or Slovenia.

Speaking of South Stream; how do you think South East Europe will benefit from the project? As we know, Serbia is very optimistic about it, Croatia did not want to be left out...— Any additional energy

route and energy source is good in terms of improving supply and increasing competition. On the other hand, no project should entirely wipe out its competitors. With any such project, you always have to balance two opposing public interests, security of supply on the one hand and best possible competition on the other. Here, the rules of the Third Energy Package play a decisive role. When South Stream complies with the principles of this Package, it will undoubtedly be a most welcome project.

Nowadays, its dependence on Russian energy is a terrible strain for the citizens, who used to pay for the country’s wasteful use of energy with lower living standards.

As regards South Stream, which you brought up, Ukraine is the one voicing concern at non-compliance of some intergovernmental agreements between the Russian Federation and the countries along the proposed route of the future pipeline with the Second and Third EU Energy Packages. Naturally, the Secretariat is well aware of this, and chances are the Energy Community will have to address this issue in terms of its judicial power.

Does EU membership make any difference for the countries that have signed an agreement with Gazprom on constructing the South Stream pipeline?— No, this plays to role,

because countries that are not EU member states, but are members of the Energy Community, have also obliged themselves

behind the Slovenian energy policy. On top of this, the second biggest driving force in its energy industry is Unit 6 of the Šoštanj thermal power plant. All things considered, the regulator should play a more important role in Slovenia’s energy industry, just like this is the case anywhere else in Europe. But as Slovenia has not yet transposed the Third Energy Package in its national law, this is not the case. As a result, the Slovenian energy industry is still under too much influence from top executives approved by the ruling parties, and trade unions.

former team had drafted the required law, and attached to it a broader ambition which included spatial planning. Sadly, my successor rejected the draft as it had my name on it. Something similar happened to our energy strategy, which we had more or less completed after years of work and which included, for the first time, final sites for energy infrastructure based on a comprehensive environmental impact assessment. In short, I would say the competent ministry is more occupied with itself than with what it should be doing. To many, the borders of Slovenia are the limits of the entire universe. This self-absorption is the principal driving force

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/Electricity & Renewables — Energy 2013, Karanović & Nikolić

/Electricity & Renewables — Energy 2013, Karanović & Nikolić

06Regulatory Framework and EU HarmonisationBy Jadranka Jerković, Ivana Vragović, Petar Mitrović, Veton QokuAssociates, Karanović & Nikolić and Josip Marohnić Attorney at Law/Odvjetnik in association with Karanović & Nikolić

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electricity sector – licensing requirements, supply, distribution and transmission. The majority of secondary regulations that are necessary for the full implementation of the 2011 Energy Law have not yet been issued, leaving the electricity sector in a transitional phase. Until this happens, the old regulations issued on the basis of the 2004 Energy Law will remain in force.

The Energy Law is almost entirely in line with the Second Energy Package (although in Serbia the regulator cannot impose fines for a breach as only the courts are authorised to do so). It provides for the full liberalization of electricity market by 1 January 2015, when households will be authorized to choose their supplier. It is expected that the liberalization of the market will finally lead to the increased participation of private companies in the sector of supply.

The members of the Energy Community, all undertook to implement the EU acquis on energy into their respective national legislation. In line with the requirements of the Energy Community Treaty, the national legislation of such member countries is largely based on the EU Second Energy Package. The exception being Croatia, shortly due to join the EU, who have gone a step further and implemented the EU’s Third Energy Package.

SerbiaThe regulatory framework for the electricity sector is primarily set out by the 2011 Energy Law. The 2011 Energy Law is an umbrella law which provides the general rules governing the conduct of all energy activities in Serbia, including in the electricity sector.

The general rules prescribed by the law are further elaborated by a number of bylaws, governing separate areas within the

the electricity energy market by 1 January 2015. Currently only companies with large industrial capacities that are connected directly to the grid of the transmission system operator are eligible to choose their electricity supplier. Starting from 1 July 2013 approximately 140 middle sized companies will be able to purchase electricity at market prices from their chosen supplier, while starting from 1 January 2015 all households will also be authorized to choose their own supplier.

The Energy Law is entirely in line with the Second Energy Package. As detailed above, under 2.1. Regulatory framework and EU harmonization, by 1 January 2015 the Macedonian Government plans to adopt the Third Energy Package of the European Union by proposing to the Macedonian Parliament to enact a new law on energy along with new respective energy related bylaws which would be compliant with the Third Energy Package.

— The Energy Agency is an independent regulatory body that decides on the issuance of licences, tariff methodologies and regulated tariffs. Under the 2011 Energy Law the Energy Agency in place of the Government will be authorized to approve the prices of electricity for tariff consumers.

MacedoniaAs previously mentioned, the general energy sector law that regulates the energy industry and market in the Republic of Macedonia is the Energy Law. As stated above under 2.1. Regulatory framework and EU harmonization, the Energy Law takes the form of an “umbrella” law, i.e. it law covers all significant areas, amongst others electricity, renewable energy sources, as well as the regulation of the respective markets, licensing requirements, supply, distribution and the transmission of electricity. The Energy Law introduces a new regulatory framework aimed at opening up the energy market by allowing the new entry of competitors and the full liberalization of

Following the legal unbundling of the transmission system operator, which was required under the old 2004 Energy Law, the 2011 Energy Law provides the framework for the legal unbundling of the distribution from the public supply of electricity. Even though the deadline for the unbundling of the distribution and supply was 1 October 2012, the Government has not yet appointed a Public Supplier, and consequently the tariff consumers are still supplied by the distribution companies.

Authorities in charge of the regulation of the electricity sector include:— The Serbian Government,

which has a primarily policy-making function in the sector.

— The Ministry of Energy, Development and Environmental Protection, which is in charge of the implementation of the policy documents and laws, and performs various administrative, regulatory and supervisory functions.

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The 2010 Energy Law sets out the general rules governing the conduct of energy activities in Montenegro, including the electricity sector. From 2010 to 2012, the Montenegrin regulator, the Regulatory Energy Agency (ˮRAEˮ) and the Ministry of Economy adopted the relevant electricity by-laws (rules and regulations). By laws set out rules for supplier switcher, dispute settlement, issuing, changing and revoking of licences, unbundling of the market operator, renewable energy, feed-in tariffs, etc.

The Energy Law provides for the full liberalization of the electricity market by 1 January 2015. By the beginning of 2015, households will be eligible to choose their supplier, while non-households are already fully eligible.

The unbundling of the transmission system operator was completed in April 2009, by establishing Crnogorski Elektroprenosni Sistem (CGES) which was supposed to be followed by

a starting point for a European model for the sustainable development of the energy sector, the adoption of legislation and other institutional support mechanisms for the successful implementation of their energy policy.

Energy LawThe regulatory framework for the electricity sector is primarily set out by the 2010 Energy Law. Montenegro started adjusting the energy sector to EU requirements and preparing for participation in the regional electricity market in South East Europe, as part of an overall EU integration effort by adopting the Energy Law in 2003, which was replaced by the 2010 Energy Law. The 2010 Energy Law was amended on three occasions and most recently in 2013. The 2010 Energy Law creates a framework for the further liberalisation of the energy market and introduces changes in the area of renewable energy.

The unbundling of the Macedonian electricity market was finalized by the year 2006. Three legally separated enterprises are now in charge of: (i) the generation of electricity; (ii) the transmission of electricity; and (iii) the distribution and supply of electricity.

MontenegroEnergy Policy of Montenegro until 2030The Energy Policy of Montenegro was adopted in 2011 by the Government of Montenegro. The Energy Policy defines the strategic goals of the Government of Montenegro which will ensure the development of the energy sector, setting main three priorities: energy security, and the development of both a competitive and sustainable energy market.

Energy Development Strategy until 2025The Strategy was adopted in 2007 by the Ministry for economic development of Montenegro and represents

06 Electricity & Renewables

government to the regulator, such as the passing of the supply terms and conditions, the quality of service and even the act of setting the tariff items that affect the final price of energy. The first legislative step in the introduction of intelligent metering systems and smart grids have also been made. Finally, the introduction of guarantees of origin ensures the full implementation of Directive 2009/28/EC on the promotion of the use of energy from renewable sources. The Act proclaimed both energy efficiency, and the use of renewable energy sources and cogeneration as a national interest, and dedicated separate laws to govern them with the possibility of another agency to oversee the areas. However, it provides no definitive solutions or timeframes for the introduction of the laws or the agency. Technical implementation by-laws are yet to be enacted.

The 2013 Electricity Market Act fully implements the Directive 2009/72/EC concerning common rules

CroatiaCroatian energy sector reform began in the 2001 when the first package of modern energy laws was passed. The latest legislative changes aim at implementing the third package of EU legislative proposals for the electricity and gas markets. The implementation commenced with the all-new framework Energy Law enacted in the last quarter of the 2012. The new Electricity Market Act followed in the first quarter of 2013.

This third large-scale legislative intervention purports to translate the EU Third Energy Package goals of promoting sustainability and energy market competitiveness into the relevant national laws. A liberated, self-regulated market is to ensure greater security of power supply.

The 2012 Energy Act brings an end to term privileged buyers, and introduces a category of vulnerable customers and safeguards to protect such final customers. Significant authority has been passed down from the

the legal unbundling of the distribution from the public supply of electricity. The statutory deadline for the unbundling of distribution was April 2011; however this statutory deadline was not met. Unbundling was then supposed to occur at the beginning of 2013. However that did not happen and a new deadline is expected soon.

The authorities in charge of the regulation of the electricity sector include:— The Montenegrin

Government, which has a primarily policy-making role in the sector.

— The Ministry of Economy, Energy Sector, which is in charge of the implementation of the policy documents and laws, and performs various administrative, regulatory and supervisory functions.

— The RAE, an independent regulatory body that decides on the issuance of licences, tariff methodologies and regulated tariffs.

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and conditions for the production, supply and distribution of electric energy (including the construction of energy facilities) and the licensing system for the performance of energy activities in the electricity sector.

The authorities in charge of the regulation of the electricity sector include:— At the central level,

the State Electricity Regulatory Commission (“SERC”) that regulates the transmission of electricity across the entire territory of BH and the export of electricity.

— In the RS: (i) the RS Government with a policy-making function; (ii) the RS Ministry of Industry, Energy and Mining, which is in charge of the implementation of the policy documents and laws in the RS; (iii) the Regulatory Commission of the RS (the “RCERS”), an independent regulatory body that decides on the issuance of licences, tariff methodologies and regulated tariffs.

In accordance with the division of the jurisdiction, the legal regulatory framework in the electricity sector is governed by the laws and regulations issued at both the central government level and at entity level, including the following:— At the central level: the

Law on the Transmission of Electric Power, the Regulator and the System Operator govern the operations of the transmission grid in BH.

— In the FBH: the Law on Electric Energy of the FBH sets out the general legal and institutional framework for the production, supply and distribution of electric energy in the FBH and the construction, use and maintenance of electric energy facilities.

— In the RS: the Energy Law sets out the general legal framework for energy activities in all sectors of energy and sets out the general principles and goals for the enhancement of the production of energy from renewable sources and energy efficiency; and governs the terms

for the internal market in electricity. It most importantly provides models and timeframes for transfer system unbundling.

Bosnia and HerzegovinaRegulatory authorities in the energy sector in BH are divided between the central government and the entities: the RS and the FBH. The generation, supply and distribution of electricity in the entities, as well as the incentives for “green energy” lie within the jurisdiction of the entities. The transmission and export of electricity, as well as the supply and the distribution of electricity to customers in the Brcko District9, falls under the jurisdiction of the central government.

—9 Brcko District (BD) is not a separate entity like RS or FBH, but has a special status and its own legislation and functions under the decentralized system of local government. In contrast to the entities, BD does not have regulatory powers in the energy sector and accordingly does not have a separate regulatory authority. Regulation of certain activities in the electricity sector, such as supply to tariff buyers and distribution of electricity is placed within the competency of the central level State Electricity Regulatory Commission.

06 Electricity & Renewables

As for the FBH, in June 2012, the Government’s Decree on the Use of Renewable Energy and Cogeneration (Decree) was ruled unconstitutional for not being issued by the proper authority. However, the Constitutional Court allowed for the Decree to be applied for a six-month transitional period following the ruling, after which renewables would return to the Parliament’s exclusive jurisdiction, i.e. should be regulated by the law. Even before the Decree was declared unconstitutional, the FBH Government planned to establish a comprehensive law on renewables. The Counsel of Ministries adopted the official draft of the law at the end of 2011. This draft is expected to be adopted by both Houses of Parliament in 2013.

of the issues in this sector with the adoption of the Government’s Decree on the Production and Consumption of Energy from Renewable Energy Sources in 2011 (the RES Rulebook) it is now on track to complete the institutional framework under its plan to adopt a comprehensive piece of legislation (the Law on Renewables). The FBH has had considerable problems in modernising its RES regulatory framework.

In the RS, even though the regulatory framework has been completed, it is supplemented by several bylaws. In order to address the concerns of the investors in the sector, the RS Government plans to issue a comprehensive law on renewables. The draft law has been prepared and is not expected to introduce any material changes in the sector.

— In the FBH: (i) the FBH Government with a policy-making function; (ii) the Federal Ministry of Energy, Mining and Industry, which is in charge of the implementation of the policy documents and laws; (iii) the Federal Electricity Regulatory Commission (the “FERC”), an independent regulatory body that decides on the issuance of licences, tariff methodologies and regulated tariffs.

With respect to the renewable energy sector (RES) the authorities in the BH are divided between the entities.

Progress has been made over the years in this sector, but such progress differs significantly between the RS and the FBH. While the RS completed the regulatory framework by covering all

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07The Grid Connection – problems and solutions from throughout the regionBy Veton QokuAssociate, Karanović & Nikolić

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The reasons for the failure of such energy projects to reach completion apart from usual issues such as spatial planning issues, unrealistic authority demands, negative political changes, insecure and/or unstable framework, or environmental conditions, also include the grid connection and access related issues such as:— insufficient grid capacity,— undetermined cable routes,

as well as— high connection costs.

According to the same research the average grid connection costs (which includes the costs for grid extensions, staff related costs and all of the related paperwork, but not the later operation and maintenance costs) in the European Union represent 5.13% of the total project costs of onshore projects and 5.43% of the total costs of offshore projects. Due to the similar legislation in place, we can presume that energy projects in the South East Europe region countries would have somewhat similar statistics in this regard.

The issues regarding grid connection and access have been gaining more and more attention over the last few years. One of the main reasons for this attention may be the fact that the procedures in place to obtain a grid connection and access can result in a time consuming and expensive process, which in certain situations and for some investors can be a deal breaker.

Namely, according to research conducted in 2010 by the European Wind Energy Association within the European Union (which contains the most relevant information available as similar research has not been conducted in the South East Europe region), there are many energy projects that falter at different phases (i.e. some of them are put on hold in the planning phase or early development phase, while others do not make it past the construction phase).

connection point needs to be regulated in more detail; (iii) the pricing methodology with regards to the fee that needs to be paid also needs to be regulated in greater detail and in a more clear cut manner.

Apart from this, it should also be stated that as renewable source energy projects (especially small-hydro projects) tend to be in geographical positions which are difficult to access and are more often than not underdeveloped, the compensation fees for the connection to both the distribution and the transmission grid (i.e. compensation for expenses regarding the power line, transformer(s) and all other necessary installations) for such projects can be quite high. Therefore, it is of a crucial importance that the developers of such projects consider these fees during the initial feasibility study phase, in order to avoid unwanted situations in the latter phases of such projects.

Furthermore, it is also important to note that all of these countries have in place tariff methodologies via which the cost of a connection to the national transmission and distribution systems are determined, thus providing transparency and non-discrimination with regard to connection costs.

Moreover, it should also be stated that out of the countries covered by this article, the legislation of Croatia seems to be the most advanced in the electricity grid field, having already made the first legislative step by introducing intelligent metering systems and smart grids.

Nevertheless, a number of problems can be detected with regards to transmission and distribution grid infrastructure connection and access. Generally, the following issues can be outlined as typical for all KN jurisdictions with regards to the grid connection: (i) it is not possible to reserve transmission capacity; (ii) the definition of the best grid

The percentage of the grid connection and access costs is relatively high when compared to the entire cost of proposed energy projects. Moreover, most experts agree that grid connection costs across Europe need to be reduced to less than 2.5% of the overall costs of the project. When the required time needed for a grid connection to be completed is added to the cost, it is evident that the issue of connecting to the grid represents a major factor for all proposed energy projects.

Bosnia and Herzegovina, Croatia, Macedonia, Montenegro and Serbia, have all introduced rules which stipulate objective, transparent and non-discriminatory criteria for grid access. As a rule, the legislation of all five countries provides for an option for the distribution system operators as well as the transmission system operators of each respective country to deny connection and access to a third party. However this can only be on the grounds of the operational or technical limitations of the grid system.

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▀

JurisdictionBosnia and Herzegovina

Compliance of the national grid rules with Article 16 of the Directive 2009/28/ECThe provisions of Article 16 are adequately transposed in BiH laws. However, the deadline for the complete transposition of the Directive 2009/28/EC into the BiH legislation and its implementation is 1 January 2014.

Unbundling of distribution from transmissionThe functions of transmission and distribution of electricity are legally separated into different public enterprises.The transmission of electricity and the operation of the transmission system are regulated at the level of the central government. They are performed by the Electric Transmission Company of Bosnia and Herzegovina ("ETC") and the Independent System Operator ("ISO"). The ISO is in charge of the operation of the transmission grid, while the ETC is in charge of the management, maintenance and improvement of the transmission grid. Both ISO and ETC are joint stock companies, owned by the RS and the FBH.Distribution services are regulated at an entity-level and are provided by the public enterprises. The distribution of electricity is performed by five power distribution companies in RS, members of the MH Elektroprivreda RS a.d. Trebinje – holding company. In FBiH the power distribution is performed by JP Elektroprivreda BiH and JP Elektroprivreda HZHB and in District of Brcko by Elektrodistribucija Brcko Distrikta.

DeadlinesDeadlines for the distribution/ transmission grid connection procedures are regulated by the Agreement on the Connection to the Grid concluded with the operator.

Fees incurred by the project developerConnection and access to the distribution/ transmission systems are subject to appropriate fees, established on the basis of tariff methodologies.

Priority access or guaranteed access to the grid-system of electricity produced from renewable energy sourcesYes, priority access to the distribution grid-system is given to generators of electricity produced from renewable energy sources.

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JurisdictionCroatia

Compliance of the national grid rules with Article 16 of the Directive 2009/28/ECYes

Unbundling of distribution from transmissionYes

DeadlinesAsset transfer deadline is end of May 2013.

Fees incurred by the project developerCurrently full design and development costs and connection fee. Directive 2009/72/EC Article 32 must be implemented by late August 2013.

Priority access or guaranteed access to the grid-system of electricity produced from renewable energy sourcesYes - Directive 2009/72/EC Article 32 must be implemented by late August 2013.

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JurisdictionMacedonia

Compliance of the national grid rules with Article 16 of the Directive 2009/28/ECYes, however, as the distribution grid rules were recently enacted, more time is needed for the full implementation of them.

Unbundling of distribution from transmissionYes, state controlled MEPSO holds the transmission operator licence, while the privately controlled company EVN Macedonia (part of the EVN Austria group) holds the distribution operator licence.

DeadlinesMacedonian legislation provides for clearly defined deadlines with regard to both the distribution and the transmission grid connection procedures.

Fees incurred by the project developerYes, the project developer is obliged to pay a fee for the connection installations for both the distribution and the transmission grid, i.e. power line, transformer and all other necessary installations for the connection to the grid. Such a fee is determined depending on the size, type and location of the energy project as well as from the type of connection required.

Priority access or guaranteed access to the grid-system of electricity produced from renewable energy sourcesYes, priority access to the distribution grid-system is given to generators of electricity produced from renewable energy sources.

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JurisdictionMontenegro

Compliance of the national grid rules with Article 16 of the Directive 2009/28/ECYes. If due to technical limitations cannot the connection to the transmission or distribution system is not possible, the project developer may at its own expense build the connecting infrastructure. The distribution or transmission supplier is obliged to compensate the project developer as the connecting infrastructure developed by the project developer has to be transferred into the distribution or transmission supplier’s possession once it has been fully constructed.

Unbundling of distribution from transmissionYes. Unbundling of the transmission system operator was completed in April 2009, by establishing Crnogorski Elektroprenosni Sistem (CGES).

DeadlinesDeadlines for connection to the grid are defined.

Fees incurred by the project developerCosts of connection are borne by the entities that are to be connected to the grid. Costs of connection are established on the basis of the methodologies enacted by the Energy Agency.

Priority access or guaranteed access to the grid-system of electricity produced from renewable energy sourcesYes.

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JurisdictionSerbia

Compliance of the national grid rules with Article 16 of the Directive 2009/28/ECYes. However, due to the poor condition of the grid, sometimes generators have to finance the development of new or revitalization of the existing parts of the grid in order to be connected.

Unbundling of distribution from transmissionYes.

DeadlinesDeadlines for connection to the grid are prescribed by the energy regulations.

Fees incurred by the project developerCosts of connection are borne by the entities which should be connected to the grid. Costs of connection are established on the basis of methodologies enacted by the Energy Agency.

Priority access or guaranteed access to the grid-system of electricity produced from renewable energy sourcesYes.

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08Transmission Networks UnbundlingBy Josip MarohnićAttorney at Law/Odvjetnik in association with Karanović & Nikolić

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system itself, where a shareholding can exist, but is only allowed to provide financial rights.

2. Independent system operator (ISO), following which the vertically integrated undertaking owning the transmission system keeps system ownership, but has an independent system operator appointed that is responsible for granting and managing third-party access. The ISO is proposed by the owner of the transmission system, but certified by the regulator as being compliant with several specific requirements of the Directive. The network owner finances all investments decided by the ISO and approved by the regulator.

3. Independent transmission operator (ITO), following which the transmission operator may remain part of the vertically integrated undertaking owning the transmission system, however many rules need to be followed to ensure effective unbundling, in particular regarding the financial, technical, physical and human resources that must be made available to the ITO.

The Croatian 2013 Electricity Market Act implements the EU Third Energy Package, including the Directive 2009/72/EC concerning Common Rules for the Internal Market in Electricity. Within the most recent liberalization step for the electricity markets, an issue that stands as the politically most controversial is the unbundling of the transmission from generation and supply activities in the sector. The goal is to effectively remove conflicts of interests between producers, suppliers and transmission system operators. In the region, transmission networks are still the government’s blue-chip asset, hence there is great concern about its future ownership. The unbundling model the legislator resorts to may serve as a possible indicator to the asset’s eventual privatization. The Directive provides three unbundling models; 1. Ownership unbundling,

whereby the same person should not be able to exercise control over an undertaking performing any of the functions of production or supply, or exercise any right over a transmission system operator or the

face severe penalties for any discriminatory behaviour favouring the vertically integrated undertaking. It is most likely that the Croatian decision on the model itself, and the preconditioning analysis, will drive the unbundling practice in the region, as all of the countries have the same legal background, similar initial unbundling experiences and identical privatization concerns.

The status of transmission system ownership in other countries of the region is shown below:

transmission system network. The decision will have a grave impact on the business of the vertically integrated undertaking, as it will be left without all transmission system assets, capitalized in an autonomous limited liability company with its own, fully- staffed corporate services, IT equipment, premises, non-conflicted consultants, and financing for future investment projects and asset repairs. Agreements between the two will have to be on market terms and approved by the regulator. The ITO will have to make network investments, raise funds at capital markets and

The Croatian legislator decided not to decide on the unbundling model, but to implement the Directive with two statutory options, ownership unbundling and the ITO model, and to leave it up to the vertically integrated undertaking owning the transmission system (government-owned HEP – Hrvatska elektroprivreda d.d.) to perform the unbundling following the model it chooses. The overall statutory compliance deadline is 22 February 2014. The Croatian vertically integrated undertaking opted for the ITO model, to keep the ownership of the

▀ Transmission Transmission System operator entity, System Owner its owner (and the ultimate owner)

Serbia Public Utility Company for TSO is fully owned transmission of electric by the Republic of Serbia energy and operation of the transmission system “Elektromreža Srbije”

Montenegro Crnogorski Elektroprenosni Montenegrin TSO is joint Sistem AD stock company 55% shares. in the TSO are owned by the State of Montenegro, 22.09% shares are owned by Italian Terna. Remaining shares are owned by small shareholders.

B&H Elektroprenos BiH a.d. Banja Luka Independent System Operator in (Federation and Republic of Srpska) Bosnia and Herzegovina (ISO BiH) (Federation and Republic of Srpska) The ISO and transmission company have been legally unbundled.10

Macedonia Macedonian Electricity Macedonian Electricity Transmission System Operator Transmission System Operator (MEPSO) JSC (MEPSO) JSC (Macedonian government)▄

—10 ISO is in charge of the operation of the transmission grid, while the Elektroprenos is in charge of the management, maintenance and improvement of the transmission grid.

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09EFT Group:Current Developmentsin the Electricity Market in the RegionBy Nenad SavićEFT Group, Communications director

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utilities, combined with poor historical payment or delivery experience in cross-border transactions, meant that significant barriers to trade existed between the main nationally-owned power utilities. Yet significant regional imbalances between production and demand existed, leading to a natural desire to move energy around the region. But there were limited natural matches between the profiles of surplus energy and the demand profiles of consuming countries. Simple bilateral trades were (and remain) highly difficult to construct.

Whilst there have been advances in efficiency in the region, improvements in credit quality and the emergence of a more developed market, there

The EFT Group is a unique European energy trading and investment concern, with a principal operating focus on the countries of central and south-east Europe, but now extended also to the Baltics and Turkey. EFT continues to be the pioneer trader and innovator in its chosen territory, leading the development of a south-east European electricity market through its trading and investment in new electricity production facilities.EFT was formed in 2000 to exploit considerable market inefficiencies that existed in south-east Europe. The break-up of the former Yugoslavia and the regional conflicts involved had caused the division of a formerly unified electrical region into two zones – a zone belonging to the European-wide UCTE network, and a second zone to the south-east, from Bosnia & Herzegovina to Greece. At that time, the financial positions of most of the relevant regional

transaction is being led by China Development Bank (CDB), with the support of China Export and Credit Insurance Corporation (Sinosure). The total capital expenditure in the project is EUR 511 million (including interest during construction and fees), of which CDB will provide up to EUR 350 million. The Stanari unit has been designed to meet all EU directives with regards emissions, and its planning has involved social and environmental studies and measures which were again designed to meet or exceed all EU norms.

The construction of the Stanari TPP is now underway, with full scale EPC activities due to commence on May 18th, 2013. The success of the Stanari project will have not only a transforming effect on EFT, but the energy sector of the whole region. Once completed in early 2016, it will be the first, large thermal power unit to be built in the region in over three decades. It will also signal a new phase in the reform of SEE energy sector, one that will see development of much needed new capacity.

step in which involved the acquisition of the Stanari coal mine in 2005. The mine has reserves of 100 million tonnes of high quality, low-sulphur content lignite – representing more than enough fuel to fire a 300 MW thermal power unit for the entire thirty years of a concession period. The mine, which was virtually dormant at the time of acquisition, is now thriving. It produces more than 1 million tonnes of coal at present, and this figure will be increased to 2.5 million tonnes, as part of the overall project design. The mine is a superb example of the regeneration of Bosnian industry – it supports more than one hundred local businesses, provides significant local economic and social benefits, and has an outstanding record in efficiency, safety and conformity to international operational standards.

The EPC contract for the thermal power unit was signed in 2010 with Dongfang Electric Corporation, and the final design is now complete. The financial close for the project was completed in December 2012. The financing package for the

continue to be appreciable inefficiencies and no change in the underlying mismatch between the generation and demand in different locations. EFT’s ability to analyze, forecast and exploit these regional inefficiencies is foremost amongst all participants in the region’s markets.

Presently, the Group is at an exciting threshold. From its beginnings in 2000 as a trading enterprise, the Group has developed an aim to become the first privately-owned, major electricity producer in the region. A strategic objective is to deliver an appreciable proportion of its trading portfolio from its own energy sources and, as a result, to ensure the long term stability of the Group’s trading operation. The company has since worked very hard to achieve this goal, not through privatisation of the state power sector, but through organic growth and green-field investment.Key to this endeavor is the development of the 300MW thermal power plant at Stanari in Bosnia and Herzegovina. This is the final stage of a plan conceived as early as 2004, the first

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No solution for electricity shortageWhen could a common energy market of the three countries be set up, and what would this mean; would it help improve liquidity of the energy market? This is a comment by Anže Predovnik, Acting General Manager of BSP SouthPool Regional Energy Exchange, a company that has been following the developments in South East Europe for a number of years. “In our opinion, the developments in the countries you mention, which are surrounded by a series of very interesting energy markets, will have a decisive impact on the future development of trading in a wider region. The dynamics of setting up a common market will largely depend on the willingness to harmonize mechanisms for the allocation of cross-border transmission capacity on the borders, on the admission to the free market for state-owned companies, on the number of active energy

The countries of South East Europe have long been facing serious power shortages and the problem is only likely to grow, participants of the meeting warned. One of the possible solutions they see is for countries to come together in a single energy market. They believe this would lead to a number of benefits, from harmonization of the law and cooperation in terms of technology, to a more thought-out approach and more efficient and quicker problem solving, Montenegrin News Agency MINA reports.

According to Vignjević, it does not matter whether the regional energy exchange would be based in Skopje, Nikšić or Belgrade; what matters in terms of market coupling is that it is set up in the first place. “With an increase in capacity, the differences in rules for the access to the cross-border transmission capacity would become nearly irrelevant. This applies to short-term trading in the day-ahead market,” Vignjević said at the meeting. Other forms of energy trade would remain unchanged, but their dynamics would depend on the given conditions.

09 Electricity & Renewables

Common energy market in sight for Serbia, Montenegro and Macedonia?

Date: January 16th 2013 Author: Tanja Srnovršnik Source: www.energetika.net/see

In end 2012, traders, energy companies and transmission system operators of Serbia, Montenegro and Macedonia came together for a meeting organised in Nikšić by Elektroprivreda Crne Gore, to discuss the possibility of setting up a common energy market of the three countries by establishing a common energy exchange. This way, the short-term electricity demand of these countries could be met within the region, estimates Dragan Vignjević of the Belgrade office of Statkraft.

traders, on large consumers’ access to the free market, etc. Given these moot questions, it is difficult to say at the moment when a common energy market, i.e. an energy exchange of Serbia, Montenegro and Macedonia, could in fact be set up,” Predovnik told Energetika.NET.

Predovnik estimates that the establishment of a common energy market could help secure equality to market players in terms of access to market services, but does not believe it could solve the problem of electricity shortage. “The solution to this problem depends on new investment in the grid, additional sources for production, and measures to reduce consumption and boost energy efficiency,” Predovnik explained. He added, however, that additional transmission capacity, harmonized mechanisms for the allocation

of cross-border transmission capacity, an increase in market players (producers, consumers, traders) and varied market segments all help improve the dynamics and liquidity of an electricity market.

Meanwhile, Project Team Company LLC has recently been set up in Podgorica. Within its first 12 months, the company will prepare the framework for the start up of the SEE Coordinated Auction Office (the project excludes Serbia and Bulgaria). According to Predovnik, this marks a step forward in the harmonization of mechanisms for the allocation of cross-border transmission capacity and, subsequently, regional cooperation. In this regard, the implementation of the project would be a move towards the idea of a common energy market in South East Europe, Predovnik also said.

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10Concessions for Hydro Projects in the Republic of Srpska – Miscalculation? By Petar MitrovićAssociate, Karanović & Nikolić

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hydro potential the RS has, which to this day remains underutilised. In that respect, the RS awarded 112 concessions to some 50 concessionaires for the construction and operation of small hydro power plants (SHPPs).

According to the official Report on the Activities of the Concession Commission of the RS for 2011, only 3 SHPPs are fully operational, while 2 SHPPs are in the commissioning phase. According to the information provided in the report, it seems that 8 more SHPPs may become operational in the near future.

So why have these structural projects that the RS are clearly keen to promote not been realised? There are a variety of reasons which are attributable to both the authorities of the RS and the investors.

Granting of concessionsThe concessions were granted without the existence of any of the reliable data, information or surveys necessary for the realization

In the mid-2000s the Republic of Srpska was eager to use its significant potential in hydro projects. The idea was to attract investments in the sector through the granting of concessions for the development of hydro power plants. It approached the plan with great enthusiasm, which resulted in the granting over 110 concessions for the construction and operation of hydro power plants on rivers throughout the Republic of Srpska. However, the intention of the authorities to increase the use of hydro potential has not been realised, as today only 3 plants are fully operational. The realization of these projects was mainly hampered due to inefficient permitting procedures, a lack of funding and other barriers which prevented the successful conclusion of more concessions. In mid-2000s, the Republic of Srpska (RS) proclaimed the concessions as one of the most significant systems for attracting of both domestic and foreign investments. The concessions were also a system which would enable an increase in the utilization of the significant

It took more than 24 months for the first 2 SHPPS developed to obtain a construction permit.

The already complex permitting procedures have been additionally burdened with the general political situation in Bosnia and Herzegovina – i.e. jurisdictional conflicts between the RS and the other Bosnian entity, the Federation of Bosnia and Herzegovina. Also, there were notable misunderstandings and conflicts between the local authorities and authorities at the level of the RS.

A notable obstacle in the permitting procedure was the absence of the levelling of the river basins where the SHPPs were proposed to be developed. This was particularly an issue in relation to the River Vrbas.

Other problems included the lack of appropriate spatial planning documentation and the fact that a number of the locations where concessions were granted had been declared as areas with protected natural and cultural heritage. Consequently, it was often impossible to

requirement to establish the precise installed capacity of the SHPP (the agreements initially contained only an estimated capacity) in order to obtain all of the necessary permits and approvals.

Permitting processThe permitting process is burdened with numerous, complex and time consuming procedures. In order to commence the development of a SHPP, investors have to take and obtain between 19 and 22 actions and permits (which are also subject to dozens of other preliminary procedures). The issuance of these permits falls under the jurisdiction of different authorities, and even though this was known, a unified and coordinated approach did not materialise.

The investors were not made aware of all of the procedures and documentation necessary for realization of the projects. They were also unaware of the exact jurisdiction that each of the authorities that were engaged in the permitting procedure had.

of the projects previously acquired. This primarily includes the fact that the concessions were granted on the basis of outdated information concerning the potential of specific locations, which did not correspond with the actual state of play at the time the concessions were granted. Furthermore, economic, ecological and other relevant aspects have not been properly addressed by the authorities.

More than 2/3 of the concession agreements are based on a predetermined model. As such, they failed to recognize the differences and specifics of each field, including those in relation to the installed capacities of SHPPs, the configuration of the terrain and the potential of the specific water course. The failure to recognize the specifics in relation to each SHPP have shown to be specifically problematic in relation to the timeframe necessary for the realization of the projects. That resulted in the necessity to amend approximately 30% of the concession agreements. The other reason for amending the agreements was the

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The concession agreements concluded to date should be closely analysed and depending on the findings should be either amended to enable and facilitate the development of the projects, or terminated where realization is unlikely.

The concession agreements should recognize and address the specifics in relation to each individual facility, rather than providing for general and unenforceable arrangements. The Government should also examine the successful concessions, seek feedback on the problems and use this information and the parties involved to help move forward with more practical realistic project plans.

We have witnessed significant improvement in the regulatory framework in the energy sector of the Republic of Srpska, and in particular in the area of green energy. Still, further reforms and activities towards the simplification of the permitting process are necessary. Efforts should be taken in order to ensure that the activities of various levels of authorities are coordinated in the permitting procedure.

A significant obstacle to the financing of the projects by financial institutions was the absence of a clear incentive scheme for renewable energy and a bankable power purchase agreement.

ConsequencesThe failure to realize the awarded concessions in reasonable time results in numerous consequences affecting both the investors and the RS, including:- The insufficient utilization of renewable sources, resulting in less electricity being generated and lower energy efficiency,- The absence of income from concession fees, and- The potential obsolescence of technologies which are intended for the realization of the projects.

Mechanisms for improvementIn the future, in order to avoid and remedy the problems identified in this first group of concessions the RS should grant concessions only on the basis of up-to-date and reliable information in relation to the technical, energy, ecological and financial aspects.

develop the projects in line with the agreed parameters. The investors were constrained in their ability to amend characteristics of their projects and any such practical amendments usually resulted in the incompliance of the new technical parameters with the previously established criteria.

Also closely related to the permitting process is the issue of the connection of the plants to the grid. Due to conflict related damage and substandard maintenance, it is necessary to revitalize and extend the capacities of the grid of the RS in order to connect new facilities. The development of the grid is subject to significant financial resources being allocated to it.

FundingThe financial capability of investors has traditionally not been adequately addressed when granting a concession. Concession have often been granted to investors who did not have sufficient resources or the possibility to acquire them for the purposes of the development of the projects.

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11Wind energy in Montenegro – The success of 2010 wind concessions? By Jadranka Jerković & Petar MitrovićAssociates, Karanović & Nikolić

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Euro-Atlantic integration process. A more extensive and efficient use of “green” energy was one of the key goals in the main policy documents the ‘Montenegrin Energy Policy Strategy until 2030’ and ‘the Montenegrin Energy Development Strategy until 2025’. Legislation improvements in the energy sector continued in 2010 with the adoption of the new Energy Act in 2010. This new act is in line with the latest EU Directive 2009/28 EC which establishes a common framework for the production and promotion of energy from renewable sources. Specific attention to regulations and policy documents was given to wind energy projects. The Government even issued a Decree on Wind Power Plants in 2009, thus creating a specific regulatory framework for research into wind potential and the development of wind power plants. The decree also further elaborated upon the terms and conditions for the lease of state owned land (established by the Law on State Property) for the purpose of constructing wind power plants.

It all started in the November of 2004 when the first windmill in Montenegro was installed at Ilino Brdo. The windmill was a gift from the Dutch government. This was a major event as this was the first ever Montenegrin windmill to generate electricity. It was supposed to produce 150 million kilowatt-hours per year, just enough for the surrounding community. However, just months after it was installed, the windmill was struck by lightning. One of the three blades weighting 7.5 tons flew into the air, and various parts were sent flying distances of up to several hundreds of meters. The ruins of the windmills were removed soon after.

Seven years later, there are still no windmills in Montenegro.

With the adoption of the Energy Act in 2003, Montenegro started harmonising its energy legislation with that of the EU acquis, as part of the overall

planning documentation provides the technical parameters which are necessary for the preparation of the project documentation needed to develop the projects. Without this projects cannot be developed.

Currently, the spatial planning documents of Montenegro either do not exist (have not yet been adopted) or the existing ones do not provide the appropriate technical parameters for the construction of wind power plants. Although the development of appropriate spatial planning documentation is a very time consuming and expensive process and because of that, there is apparently a lack of will to prepare it.

In any case due to the importance of these wind power projects awarded, Montenegro tried to somehow overcome the problem with

for the wind park Mozura, installed capacity of 46 MW. Construction of the wind power plant Krnovo, with an installed capacity of 72 MW (initially 50 MW) was awarded to a consortium consisting of Mitsubishi Heavy Industries Ltd & Ivicom Consulting GmbH. The agreements with the investors were concluded in the summer of 2010. In 2012, Mitsubishi left the Krnovo project, and were replaced with the renowned French company Akuo.

Even though both projects were officially welcomed by the authorities and the general public, even before they had been awarded it was clear that the investors would have significant difficulties realising them. Why? There are several of them to say the least, but the most important one was the lack of appropriate spatial planning documents.

Is spatial planning documentation really so important that it can prevent the realization of such a promising project? Yes, it is. And here is why. Spatial

Unlike in the energy regulations, improvements in the relevant construction regulation, i.e. the Construction Law in order to recognize the specifics of wind power plants and the development of the necessary spatial planning documentation were left out.

By 2009, wind measuring was already being performed at several locations in Montenegro. Even though back then the results were not final, it was obvious that Montenegro has the capacity for several wind power plants on its territory.

At the end of 2009, the Government published a call for participation in a tender for the lease of state owned land and the construction of wind power plants at two locations – site Krnovo, located within the municipalities Niksic and Savnik, and the site Mozura which is located within the municipalities of Ulcinj and Bar. The Government selected the consortium Fersa & Čelebić as investors

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realization of the projects without the preparation of the appropriate spatial planning documentation.

Evidently, the Government had strong political will that the wind power projects would see the light of day, and found a way to bridge the problem of a lack of appropriate spatial planning documentation. With this problem taken care of, the investors may focus on other challenges related to development of energy projects – financing, the poor condition of the grid, and the feed-in tariff.

* * *

Perhaps investors in the Krnovo and Mozura projects just peaked a little early when it came to investing in renewable energy in Montenegro. It is most likely that further projects in this sector will be put on hold as it does not seem realistic that other foreign investors will be keen on making an investment before first seeing how the Mozura and Krnovo projects develop and conclude.

of Montenegro does not provide enough development parameters for wind power plants. Moreover, the Spatial Plan of Montenegro explicitly provides that appropriate locations for the development of wind power plants need to be determined by more detailed spatial planning documents. Nevertheless, acting in accordance with the Government’s conclusion, the Ministry of Sustainable Development and Tourism issued development parameters for both projects. So currently, both projects should be in the phase of developing their technical documentation, which precedes the phase for the obtainment of construction permits.

Spatial planning documentation was referred to in the agreements for the development of wind power projects as the cornerstone of some of the most important activities in relation to the development of the plants. Due to the lack of appropriate spatial planning documentation, both agreements had to be amended so as to enable the

spatial planning documents which would enable the development of these projects. The Montenegrin Government enacted the ordinance in 2010, pursuant to which it instructed the Ministry of Sustainable Development and Tourism to issue development parameters (urban technical conditions) for wind power plants at Krnovo and Mozura based on the Spatial Plan of Montenegro until the year 2020. Under the Government’s ordinance, the issuance of the urban technical conditions is subject to the consent of the municipalities upon whose territories the projects will be developed on. It is also conditional on the development of these projects being in line with their (local) spatial planning documents. The main problem with this solution offered by the Government of Montenegro is that the Spatial Plan

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Still, despite the long delays and practical obstacles, we expect that the original windmill referred to at the beginning of this piece will not be an ominous omen for the future of wind energy in Montenegro, and that we will soon see the successful operation of windmills in Montenegro.

However, Montenegro has to change its approach in dealing with investors. It would certainly be much easier to have a transparent and clear framework for the development of important and demanding projects, as investors are probably put off by the present legal ambiguities. Aside from the removal of these ambiguities, in order to increase investments in renewable energy, Montenegro has to revitalize and modernize its transmission grid, which is in poor condition due to a lack of investment and maintenance.

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12Supporting renewable power generation in the Western Balkans (EBRD) By Ian Brown & Simon LorenzettiEuropean Bank for Reconstruction and Development

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Each of the region’s countries has in recent years enacted legislation to support renewable generation and the first projects are beginning to be implemented. This article explores the physical and legal context for this development – specifically the role of the Energy Community Treaty through its Secretariat – and highlights some of the key issues raised.

The potential for renewablesAssessing renewable potential is notoriously difficult. The scope for renewable power development can be summarised qualitatively as follows:— Regarding hydropower,

despite widespread development in the 1960s and 1970s, there remain opportunities for medium- to large-scale plants such as the Ombla HPP in Croatia and the Boskov Most HPP in FYR Macedonia, both of which are being financed by EBRD. However these pose significant challenges in ensuring that they can be implemented in an environmentally sustainable and acceptable way. Further, the nature of hydropower construction is

IntroductionThe Western Balkans region – the countries of Albania, Bosnia and Herzegovina, Croatia, FYR Macedonia, Montenegro and Serbia – is an area of great importance for the EBRD. Compared with its EU member neighbours the region remains less advanced in its transition to well-functioning market economies. There are great challenges in particular in the energy sector: the region has an ageing infrastructure, and the disruption and economic decline of the 1990s means that this infrastructure, supplemented by imports, is sufficient to meet present consumption, but there is ever growing pressure from increasing demand. Within this wider context of a need for infrastructure renewal and sector reform there is a clear focus on renewable energy. Three factors have coalesced in the Western Balkans to bring about this increased attention on renewable power generation: the global carbon agenda, EU accession, and the need to ensure energy security by diversifying their sources of supply.

— Wind power is now a mainstream power generation technology throughout the world, including in the region’s neighbouring countries such as Bulgaria, Greece and Romania. With the exception of Croatia however there are, at the time of writing, no large scale operational commercial wind farms in the region, although many projects are in the development phase. In general the wind resource identified by these projects is comparable with that of onshore projects in western Europe. To date no offshore projects have been proposed in the region.

— Solar and geothermal development is much less advanced throughout the region. Solar remains of course significantly more expensive than other renewable technologies and its development is likely to follow more slowly than others. In terms of resource, this is naturally greater in the southern countries, particularly Albania, FYR Macedonia and southern Serbia.

inevitably capital intensive, lengthy and risky, making large investments within the regulatory environment of the Western Balkans challenging.

— Small hydropower projects (typically defined as up to 10 MW) can be developed more easily and typically with lower environmental impact. Both Albania and FYR Macedonia have actively promoted such projects over the last few years and other countries are following suit: the region’s mountainous terrain means there is good potential still to be exploited. However, there are a finite number of suitable sites that are both environmentally acceptable and economically feasible and the small size of each plant means in turn that there are limits as to how much aggregate generation can realistically be expected from these sources. In addition, experience so far in the region suggests that the administrative difficulties (the permits and authorisations needed) in developing small hydropower projects should not be underestimated.

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— Lastly, biomass is a significant resource throughout the region which is both thickly wooded in places and has a significant agricultural sector. This technology is already widely used, principally for domestic heating. Although the aforementioned IPA study notes that there are serious problems with the reliability of statistics on current and potential resources it is clear that there is significant potential for expanded use of biomass in the region from exploiting the by-products of the agricultural and forestry industries.

Legal contextEnergy Community Treaty and the EU contextThe regional legal and institutional framework for the Western Balkans energy sector is set by the Energy Community Treaty (ECT). The ECT was signed in October 2005 by the European Union and nine south-eastern European countries, including each of the Western Balkan countries. In 2007, two of the countries, Bulgaria and Romania, ceased to be parties on their accession to the

The Directive sets mandatory national targets for renewable energy penetration, adhering collectively to the European Union’s overall target that renewable energy sources should represent 20 per cent of gross final consumption by 2020. These targets are determined using a formula which has three components: the baseline level of renewable energy penetration in 2009, a flat rate increase of 5.5%, and an additional increase determined by reference to GDP per capita – in other words demanding more from the richer countries.

The adoption of the 2009 Renewables Directive under the ECT (based on the decision of the Ministerial Council of the Energy Community in October 2012) has particular significance and offers specific opportunities, which are discussed below.

A key factor is the commitment under the ECT of the contracting parties to implement certain parts of EU energy law, including the third energy market package. This imports the essential components of EU energy market liberalisation to the countries of the region, including transparent, non-discriminatory third-party access to networks; sector unbundling; and independent regulation. Inevitably implementation of these commitments has been slow and incomplete, as indeed it has in the European Union itself, but the importance of this commitment cannot be overstated in setting the overall tone and direction of sector reform.

The ECT also deals in detail with renewable energy. Supporting the development of renewable energy is an explicit aim of the Treaty12 and the EU acquis the parties commit to includes Directive 2009/28/EC (the 2009 Renewables Directive), which is one of the cornerstones of the European Union’s comprehensive climate change package.

—12 Art. 2(1)(d) ECT.

European Union and in 2010 Moldova and in 2011 Ukraine became parties. Turkey is in negotiation to become the 11th party.

The objective of the ECT11 is to create a legal and economic framework in order to:

“attract investment in power generation and networks, create an integrated energy market allowing for cross-border energy trade and integration with the EU market, enhance the security of supply, improve the environmental characteristics of the regional energy sector and enhance competition at regional level, exploiting economies of scale”.

The ECT and the Vienna-based Secretariat constituted under it to oversee the Treaty’s implementation, are fundamental to the institutional development of the Western Balkans energy sector.

—11 Art. 2 ECT.

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— Joint projects between member states:14 this mechanism allows renewable energy from a project in the territory of one member state to be credited towards the target of another member state and not the target of the host country. While in this case a specific project is identified, there is again no requirement for the physical transfer of energy. Joint projects need to be notified to the European Commission, who, as in the case of statistical transfers, must be satisfied that the “exporting” country is able to meet its own target under the Directive,

notwithstanding the project or transfer.

—14 Art. 7 2009 Renewables Directive.

energy towards its own targets in two different ways relevant to the countries of the Western Balkans:— Statistical transfers:13

this mechanism allows a member state who has exceeded its interim target under the Directive to sell part or all of the surplus to member states who are below their target and make a transfer of this surplus renewable energy from its “account” to the “account” of another member state or states. This is purely a matter of book entries where renewable energy is credited towards the target of the transferee and deducted from the target of the transferor – there is no connection to any specific project, nor is there any requirement that energy be physically transferred between the countries.

—13 Art. 6 2009 Renewables Directive.

Binding RES targets in the Energy CommunityWith its decision, the 10th Ministerial Council of the Energy Community decided that the Contracting Parties should implement EU Directive 2009/28/EC on the promotion of renewable energy in their national legislations. By the same decision, the Ministerial Council laid down the binding targets for share of renewable energy in gross annual consumption by 2020, as follows: Bosnia and Herzegovina - 40%, Croatia - 20%, Macedonia - 28%, Montenegro - 33%, Serbia - 27% and Kosovo* - 25%

Cooperation mechanismsThe 2009 Renewables Directive sets out three cooperation mechanisms which are intended to give increased flexibility in meeting the overall EU renewable energy penetration target. These mechanisms allow a member state to credit another country’s renewable

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These characteristics are addressed in the Western Balkans through support mechanisms which firstly guarantee renewable electricity generators a priority right to generate and be despatched and secondly ensure a preferential price for their power. In the latter case there is a long-running and well-developed international debate as to whether that preferential price should be volume based (that is, through the issue of tradeable green certificates to renewable energy generators matched by an obligation on suppliers or conventional generators to purchase a given proportion of green certificates to match their consumption/production) or price based (that is, through the payment of a premium for renewable energy).

The Western Balkans countries have in general adopted price-based support mechanisms, principally through the use of long-term feed-in tariffs paid to renewable electricity generators by a central purchaser, usually the nascent market operator. While recognising the depth and

Country-specificThe Western Balkans countries have taken significant steps over the last few years to implement regulations to support the penetration of renewable energy (despite the delay in adopting the 2009 Renewables Directive under the ECT). In summary, each country has implemented support mechanisms that address the essential characteristics of renewable energy: — First, renewable energy is

still not competitive, on a levelised cost basis, with the price of conventional energy where the environmental cost of carbon emissions is not fully internalised and where implicit or explicit energy subsidies persist.

— Second, in the case of the main sources of renewable electricity generation, namely hydropower, wind and solar, the marginal economic cost of generation is close to zero.

— Joint projects with non-member states:15 this mechanism allows a renewable energy project in a non-member state to be credited towards the target of a member state provided that there is a physical transfer of the energy from the host country to the member state and that the project does not benefit from any support mechanism in the host country.

The significance for investors in renewable energy projects in the Western Balkans that they can take advantage of the third mechanism by building renewable energy projects that can then benefit from support mechanisms in the European Union – for example the green certificate scheme in Italy. This would become particularly interesting when the long-anticipated Italy-Montenegro high voltage connection becomes operational in 2016.

—15 Art. 7 2009 Renewables Directive.

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The EBRD is closely involved in the development of the renewable energy sector in the Western Balkans, both working with market participants on specific projects and with regulators on the regulatory framework. Some observations, drawing on that experience, are as follows.— A key issue for investors

in renewable energy projects is confidence in the permanence of the support mechanisms they rely on. They are funding capital-intensive, long-life projects which are, at least in their early years of operation, uncompetitive. Support mechanisms such as feed-in tariffs are meant to address this but they rely on long-term political support. That support has been challenged recently in a number of countries in western and central Europe, resulting in some significant reductions in feed-in tariff levels and limitations on volumes of support. In this context the political commitment in the Western Balkans to the adoption of the 2009 Renewables Directive,

adopted law on renewables to this point. Consequently, the Federation does not currently have incentive mechanisms for renewable energy in place.

The Court’s ruling is published in the Official Gazette of the Federation no. 60/12.

Issues and prospects

Serbia – systematically towards SHPPs On 19 February 2013, the Ministry of Energy, Development and Environmental Protection published a tender for the selection of investors for construction of small hydro power plants on 317 locations in 17 municipalities in Serbia. The tender was open until 5 April 2013. At the time this publication was sent to print, the results of the tender have not been published yet.The government hopes that at least 110 MW of small hydro power plant capacity will be constructed by 2015, as a result of this tender.

vigour of the debate about the merits of price-based versus volume-based mechanisms it is submitted that, in the context of small power sectors with limited or no markets in place and still at an early stage of development with a high perception of risk generally, this is the right choice.

RES Decree of the Federation of Bosnia and Herzegovina declared unconstitutionalIn June 2012, the Constitutional Court of the Federation ruled that the Government’s Decree on the Use of Renewable Energy and Cogeneration (RES Decree) was unconstitutional, because it was not authorized by the proper authority. Only Parliament can regulate this sector. The Constitutional Court allowed the RES Decree to be applied for a six-month transitional period following the ruling, after which renewables would return to Parliament’s exclusive jurisdiction. The authorities, however, have not

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The conclusion is that the growing penetration of renewable power is further justification for integration of the regional energy market, in particular through the implementation of coordinated allocation of cross-border transmission capacity. A properly integrated energy market would allow the creation of a liquid balancing market and greater system resilience. It would thus facilitate more renewable energy penetration. A functioning regional market is already one of the key objectives of the ECT for the broader reasons of political and economic stability and economic growth but the attention being paid to renewable energy only adds to this focus.

— One final observation concerns the challenges presented by renewable energy penetration to market liberalisation. Currently most Western Balkans countries contemplate that renewable power will be

These novel challenges inevitably present many small difficulties – for example, how should force majeure be defined in a long-term PPA, what should a grid connection agreement look like, what is the procedure for land acquisition – which are in and of themselves technical and procedural, but which can each seriously obstruct project development.

— Integration of renewable energy plants, with their right to preferential despatch, presents physical problems for system operators in balancing their systems. That problem is exacerbated where the sources are intermittent, such as wind and solar, and further still by the small size of most Western Balkans power systems, and the relative lack of cross-border interconnection capacity between the countries of the region.

both through the ECT process and through the EU accession process, is critical in establishing a reliable, long-term framework.

— Moving away from the big picture, the implementation of these projects will depend heavily on investors successfully navigating the multiple requirements of permitting, land acquisition, grid connection and signing power purchase agreements (PPAs). In this context one of the challenges for the Western Balkans countries is that their power sectors generally remain almost entirely state-owned so that renewable energy projects may in many cases be among the first privately owned power projects in the country. Similarly these projects are likely to be the first instances in which multi-year PPAs are signed in these countries.

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ConclusionThe rapid growth of renewable energy is one of the defining features of the world’s power sector in the last 10 years. To date, this trend has not reached the Western Balkans, but the bow wave of regulatory reform has now passed through the region, led by moves towards EU integration, and one should soon expect the widespread penetration of commercial projects. The framework for this development is set by the ECT and EU renewables legislation. The ECT has appeared to begin quietly but on reflection its role in catalysing reform right across the power sector is becoming increasingly apparent.

Ian Brown and Simon LorenzettiEuropean Bank for Reconstruction and DevelopmentTel: +381 11 212 0529Fax: +381 11 212 0534Email: browni@ebrd.comlorenzes@ebrd.com

purchased by a state-owned entity, normally the market operator, in a sector where supply and generation are dominated by other state-owned entities, operating under regulated tariffs. In such a system it is relatively easy to allocate the price and volume implications of the purchase of renewable power. But as power sectors are progressively opened up, with the breaking-up of monopolies and the liberalisation of prices, regulators will need to integrate volumes of centrally purchased fixed price power into a market. In reality this problem remains some way off but it will need to be addressed in time.

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Serbia made a commitment to European institutions and to the Energy Community of South East Europe to increase its share of renewable energy sources in the overall energy consumption from 21.2 percent to 27 percent in the period to 2020. In addition to an increase in electricity generation, its plan is to meet this goal by raising the share of renewables used in heating and cooling from 26 percent to 30 percent, and by starting to use biofuels in transportation to achieve a 10-percent share.

In line with the projected gross end-use energy consumption, which energy efficiency measures should bring to 9.5 million tonnes of oil equivalent per year, the volume of renewable energy sources should amount to 2.56 million toe in 2020. This means production of energy from renewables has to grow by about 620 000 toe in the period to 2020. Serbia can meet this goal using

domestic resources, except when it comes to biofuels in transportation, where after 2018 it will have to resort to imports.

Serbia’s potential for recoverable renewable energy sources is estimated at about 6 million toe per year: about 3.3 mtoe for biomass, 1.7 mtoe for hydro, 200 000 toe for geothermal energy, 200 000 toe for wind energy, and 600 000 tow for solar energy.

Today, Serbia is tapping into one third of its total renewable energy potential: 900 000 toe per year in hydro energy, and about 1 million toe in biomass (mainly as wood used in heating).

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Serbia’s plan to increase share of renewables

Date: March 11th 2013 Author: Dragan Obradović, Belgrade Source: www.energetika.net/see

Serbia needs 1092 megawatts of new capacity for the generation of electricity from renewable energy sources by 2020, requiring an investment of about EUR 2 billion. According to the draft National Action Plan for renewable energy, published on the web site of the Serbian Ministry of Energy, Development and Environmental Protection, the share of renewable energy sources in energy production should grow from 29 percent to 37 percent by 2020.

Very soon, investors will be able to obtain all the permits and consents in one renewable energy spot, while “one-stop-shop” offices have also been recommended to local and regional authorities.

Serbia’s draft National Action Plan for renewable energy was produced in cooperation with the Netherlands.

According to the action plan, Serbia’s support measures in achieving the goal will include improvements to the legal framework in the given field, subsidies and tax credits to encourage production of energy from renewable energy sources, the simplification of administrative procedures for investors, and the introduction of an energy management system.

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13Overview of the Feed-in Tariffs in the Region By Petar MitrovićAssociate, Karanović & Nikolić

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Bosnia and HerzegovinaNote: In line with the specific constitutional organization of the country, the regulatory and institutional powers in the area of renewable energy are divided between the entities - Republic of Srpska and Federation of Bosnia and Herzegovina. At the time of writing of this publication incentive schemes for renewable energy are available only in the Republic of Srpska, since the Decree establishing incentives for renewables issued by the Government of the Federation in 2010, it was recently declared unconstitutional in the summer of 2012. The Federation is currently in the process adopting a new comprehensive law on renewables which should re-establish the system of incentives in the Federation.

Republic of Srpska

▀

Type of the energy production Installed capacity Incentive purchase pricefacility of the privileged producer P (MW) (c€/kWh)Hydropower plant ≤ 1 7.87 1 - 5 6.78 5 - 10 6.36

Wind power plant ≤ 1016 8.44

Solar power plant with photovoltaic cells ≤ 0.05 25.35 0.05 - 1 21.28 Over 1 18.88

Solid biomass power plant ≤ 1 12.33 1-10 11.56

Agricultural biogas power plant ≤ 1 12.28

New gas cogeneration plant ≤ 10 10.66

Old gas cogeneration plant ≤ 10 9.88

New lignite cogeneration plant ≤ 10 4.50

Old lignite cogeneration plant ≤ 10 2.76

▄

—16 The limitation in terms of installed capacity does not apply on electricity sold in market.

In addition to the feed-in tariffs granted to the generators in the system of mandatory take-off, generators who opted to sell the electricity in the market may acquire right for premiums for electricity sold in the market.

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Croatia

▀

Type Capacity Incentive purchase price (c€/kWh)Solar power plants ≤10 kW 14,67 – 42,07 10 - 30 kW 14,67 – 32,73 30 – 300 kW 14,67 – 22,67 300 kW – 1 MW 14,67 over 1 MW AHCPP17

Hydro power plants ≤1 MW ≤500 MWh annually 16 500 - 1000 MWh annually 10,67 over 1000 MWh annually 8

Hydro power plants 1 - 10 MW ≤ 5000 MWh annually 13,33 5000 to 15000 MWh annually 9,33 over 15 000 MWh annually 7,6

Wind power plants ≤ 1 MW 9,6 > 1 MW 9,47

Solid biomass power plants, ≤300 kW 17,33excluding municipal waste 300 kW – 2 MW 16 2 - 5 MW 15,33 5 - 10 MW 14 over 10 MW 12

geothermal power plants 16

biogas power plants from agricultural ≤ 300 kW 18,93plants and organic remains and waste 300 kW – 2 MW 16of animal and plant origin 2 - 5 MW 14,93

liquid biofuel power plants AHCPP

landfill gas power plants and power AHCPPplants using gas from waste watertreatment plants

other power plants using renewable AHCPPenergy sources

animal fat power plants ≤ 5 MW 22

▄

—17 Average household customer production price

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▀

Type of the energy production Installed capacity Incentive purchase pricefacility of the privileged producer (c€/kWh)Hydropower plant ≤ 85,000 kWh 12.00 85,000 – 170,000 kWh 8.00 170,000 – 350,000 kWh 6.00 350,000 - 700,000 kWh 5.00 > 700,000 kWh (up to 10 MW) 4.50

Wind power plants ≤50 MW 8.90

Solar power plant ≤ 0.050 MW 30.00 0.050 MW – 1 MW 26.00

Biomass power plant ≤1 MW 11.00 1 MW – 3 MW 9.00

Biogas power plant ≤0.5 MW 15.00 0.5 MW – 2 MW 13.00

▄

▀

Type of the energy production Capacity/(P) Incentive purchase pricefacility of the privileged producer (c€/kWh)Wind power plants 9.6

Power plants using solid biomass - from forestry and agriculture 13.71- from wood-processing industry 12.31

Solar power plants - on buildings or other construction 15.00

Power plants on solid waste landfill 9.00

Power plants on gas from waste 8.00

Biogas power plants 15.00

Hydropower plants ≤3 GWh 10.44 3-15 GWh 7.44 over 15 GWh 5.04High efficiency cogeneration plants - TS1 ≤1 MWe 10.00- TS2 1-5 MWe 10,00-0,5x(P-1)- TS3 5-10 MWe 8.00

▄

Macedonia

Montenegro

—104

▀

Type of the energy production Capacity/(P) Incentive purchase pricefacility of the privileged producer (c€/kWh)Hydropower plant ≤ 0.2 12.40 0.2 - 0.5 13.727-6.633* P 0.5 - 1 10.41 1 - 10 10.747-0.337* P 10 - 30 7.38 - On existing infrastructure ≤ 30 5.9

Biomass power plant ≤ 1 13.26 1 - 10 13.82 - 0.56*P over 10 8.22

Biogas power plant Up to 0.2 15.66 0.2 - 1 16.498 - 4.188*P over 1 12.31

Using biogas of animal origins 12.31

Power plants using landfill gas and gas from 6.91 facility for treatment of communal waste waters

Wind power plants 9.20

Solar power plant - On facility ≤ 0.03 20.66 - On facility 0.03 - 0.5 20.941 - 9.383*P- On the ground 16.25

Geothermal power plants ≤ 1 9.67 1 - 5 10.358-0.688*P over 5 6.92

Power plants using waste 8.57

Power plants with combined ≤ 10 8.04 production using coil

Power plants with combined ≤ 10 8.89 production using natural gas

▄

Serbia

13 Electricity & Renewables

develop

develop

/Energy, Environment &New Solutions

— Energy 2013, Karanović & Nikolić

14Environment vs. Energy needs By Josip MarohnićAttorney at Law/Odvjetnik in association with Karanović & Nikolić

—110

Crude oilGrowth in oil consumption in emerging economies, more than outweighs reduced demand in the OECD

Natural gasThe only fossil fuel for which global demand grows in all scenarios

CoalCoal has met nearly half of the rise in global energy demand over the last decade, growingeven faster than total renewables

HydroRenewables account for almost one-third of total electricity output

NuclearThe role of nuclear power has been scaled back as countries have reviewed policies in the wake of the Fukushima Daiichi accident

Total Electricity ProductionThe world’s demand for electricity grows almost twice as fast as its total energy consumption

World-wide energy production profile

Saudi Arabia 12.9% (4.011Mt)

Russia 2% (3.388 bcm)

China 46% (7.783 Mt)

USA 30% (2.765 TWh)

China 20% (3.516 TWh)

USA 20% (21.413 TWh)

World Energy Outlook, © OECD/IEA 2012 Key World Energy statistics, © OECD/IEA 2012

Earth’s energy resources for powering up our civilisation as we know it are not indefinite. Traditional sources are historically being exhausted. New sources are on the rise. However, compared to overall energy needs and consumption, it is unlikely to have an influential impact over the course of this decade.

Word-wide energy production profileThe latest information on world-wide energy production show historically high numbers, as the demand outgrows the capacities.

Worldwide loss between the supply and consumption

ENERGY LOSS 4040 Mtoe (31.7%)

WorldwideEnergyConsumption(Mtoe)

12717

8677

Key World Energy statistics, © OECD/IEA 2012

WorldwideEnergySupply(Mtoe)

Worldwide loss between the supply and consumptionEfficiency in distribution systems and extraction methods show a great amount of possibilities for improvement.

Consumption by fuel typesWorldwide Energy consumption by fuel (joules)Consumption by fuel types /I

Worldwide Energy consumption by fuel (joules)

Natural gasThe only fossil fuel for which global demand grows in all scenarios

CoalCoal has met nearly half of the rise in global energy demand over the last decade, growing faster even than total renewables

2010

2020

33%

210J (+13%)

168J

2010

2020

125J22%

22% 148J (+19%)

2010

2020

160J29%

27% 177J (+10%)

Liquid fuels

32%2010

2020

29J5%

6% 42J (+41%)

Other~2010

2020

59J11%

13% 88J (+50%)

NuclearRole of nuclear power has been scaled back as countries have reviewed policies in the wake of the Fukushima Daiichi accident

World Total

2010 560918 J

2020 666790 J (+19%)

2010 data - U.S. Energy Information Administration (EIA), International Energy Statistics database and International Energy Agency, Balances of OECD and Non-OECD Statistics2020 projections - EIA, Annual Energy Outlook 2011, DOE/EIA-0383(2011); AEO2011 National Energy Modeling System, run REF2011.D020911A; World Energy Projection System Plus

—112

Generation by fuel types/ IWorld Installed Electricity Generating Capacity

Generation by fuel types/ IWorld Installed Electricity Generating Capacity

Natural gas

Liquid fuels

The only fossil fuel for which global demand grows in all scenarios

CoalCoal has met nearly half of the rise in global energy demand over the last decade, growing faster even than total renewables

NuclearRole of nuclear power has been scaled back as countries have reviewed policies in the wake of the Fukushima Daiichi accident

2010

2020

8%

338GW (-12%)

384GW

2010

2020

1216GW25%

24% 1386GW (+14%)

2010

2020

1627GW33%

29% 1667GW (+2%)

2010

2020

380GW5%

6% 505GW (+33%)

6%

2010 data - U.S. Energy Information Administration (EIA), International Energy Statistics database and International Energy Agency, Balances of OECD and Non-OECD Statistics2020 projections - EIA, Annual Energy Outlook 2011, DOE/EIA-0383(2011); AEO2011 National Energy Modeling System, run REF2011.D020911A; World Energy Projection System Plus

14 Energy, Environment & New Solutions

Generation by fuel types/ II World Installed Electricity Generating Capacity

World Total

2010 4907

2020 5786 (+18%)

Other

Hydroelectric

~

~~

~

~~

2010

2020

917GW19%

21% 1195GW (+30%)

Wind

2010

2020

180GW4%

7% 398GW (+121%)

Geothermal

2010

2020

11GW<1%

<1% 17GW (+55%)

Solar

2010

2020

25GW

1% 86GW (+244%)

Other renewable

2010

2020

180GW4%

7% 398GW (+121%)

1%

2010 data - U.S. Energy Information Administration (EIA), International Energy Statistics database and International Energy Agency, Balances of OECD and Non-OECD Statistics2020 projections - EIA, Annual Energy Outlook 2011, DOE/EIA-0383(2011); AEO2011 National Energy Modeling System, run REF2011.D020911A; World Energy Projection System Plus

Generation by fuel types/ IIWorld Installed Electricity Generating Capacity

—114

94%

192%145%

124%

68% 90%

3110 kWh

3808 kWh

2592 kWh

3590 kWh

5552 kWh

4358 kWh

81%

114%

108%

99% 132%

151%

Regional energy profile

Region average 3835

OECD average 8315

Worldwide average 2892

Against region Against Worldwide

(Key World Energy statistics, © OECD/IEA 2012)

Regional energy profile

14 Energy, Environment & New Solutions

15Unconventional EnergyResources – Shale: the Game ChangerBy Leonid RistevSenior Associate, Karanović & Nikolić

—116

during the nineteen hundreds in France and Scotland. Due to the vast quantities of crude oil discovered in the Middle East during the last century, shale took a back seat. However, with the advance of extraction technologies and higher petroleum costs at the turn of the 21st century, the extraction of shale oil was analysed, renewed or initiated in the US, Australia, China and Europe.

With regard to shale gas, the first years of this century were marked with a significant rise in the use of this resource. For example, in 2000 shale gas was responsible for 1% of US natural gas production, whereas in 2010 this share rose to an incredible 20%. By 2035, it is expected that it will reach the 45% mark, which indicates the importance of this topic.

With the current rapid development of shale use technologies, and in particular the very high growth rates of oil and gas prices, this resource for the production of oil & gas products is becoming a serious alternative to traditional crude resources.

In recent years, shale is something that has been widely discussed and is the subject of many analyses and energy strategies across the globe. Over the last decade, the energy maps and positions has been shifted as a result of these “stone” carbons – shale oil and gas. With the developments and increased use of these resources, the position of the World’s reserve and production leaders is changing and the energy future, even the geopolitics, could take a different course as a result of the rise of shale gas & oil. Serbian shale oil has raised interest in the resource in the region. A potential project, with a reported value of up to $180bn, has increased curiosity in the synthetic shale oil production and could very well put Serbia on the map of shale oil producers.

The story of shale oil begins as early as the 16th century, when this resource was used to light the streets of Italian renaissance era towns, while the first shale extraction techniques were recorded

geologists in a number of European countries to examine the productive possibilities of their own organic-rich shale. Russian giant Gazprom announced in October 2009 that it may buy a US shale-gas producing company to gain expertise which it could then apply to Russian shale gas prospects. In the Barnett Shale in Texas, French oil firm Total SA entered a joint venture with Chesapeake Energy, and Italy’s ENI purchased an interest in Quicksilver Resources.

A 2012 report from the European Commission states that, contrary to the situation in the United States, “Shale gas production will not

Today, the main producer of shale gas is the US, whereas China remains the biggest resource potential with an estimated 1.275 trillion cubic feet of recoverable shale gas. The list of the luckiest countries that have shale gas under their soils also includes Argentina, Mexico, and South Africa, and some European countries. Potential host formations for shale gas in Europe include shales in northeast France, the Alum shales in northern Europe, and Carboniferous shales in Germany and the Netherlands.

While Europe has no shale gas production as of yet, the success of shale gas in North America has prompted

The Use of Shale Gas Rewrites the World’s Energy MapsBefore we scratch the surface of this story, one has to ask the question: how do you even get natural gas from rocks? In short, from “fracking”, or the process of hydraulic fracturing, this involves drilling holes deep into the dense shale rocks that contain natural gas. At the next stage, a mixture of water, sand and chemicals is pumped in at high pressure up tiny fissures in the rock, through which the trapped gas can then escape. The gas bubbles out and is captured in a well that brings it to the surface, where it can be saved.

—118

SOURCES: INTERNATIONAL ENERGY AGENCY; KPMG; PRESS REPORTS

SHALE-GAS BASINS

- BANNED

- ALLOWED

- ALLOWED& PERMITS ISSUED

EXTRACTION 2012:

* Restrictive Laws† Bids for permits invited

*

†

earlier. Hence, developments in the industry also bear geopolitical significance and therefore, it deserves all of the attention that it can get. In the upcoming years, it is expected that increased extractions in the US and Canada will further decrease the world prices of gas and with this, the long and undisputed lead that Russia and the Middle East countries have in these markets might come to an end.

Many analysts are united in claiming that shale gas is one of the resources that will leave its mark in the upcoming years. One prediction captures the attention: the Russian gas market share in Europe, set at an important 27% in 2009, is expected to drop to an amazing 13% by 2040, mostly as a result of the development of the shale gas industry. Russia has already acknowledged the new reality and decreased gas prices, now bonding them with the spot gas markets and the local exchanges, and not with the constantly rising oil prices as was the practice

make Europe self-sufficient in natural gas. The best case scenario for shale gas development in Europe is one in which declining conventional production can be replaced and import dependence maintained at a level of around 60%”.From the most recent news, in March 2013, the British Chancellor George Osborne announced significant tax breaks and incentives for fracking companies in the UK. With this, the UK further recognized the significance of the resource and strategically placed shale as a “resource of the future”.

2011, trn cubic metresRecoverable natural-gas reserves

Russia

0 25 50 75 100 125 150

United States

China

Iran

Saudi Arabia

Australia

Qatar

Argentina

Mexico

Canada

Venezuela

Indonesia

Norway

Nigeria

AlgeriaSource: IEA

ConventionalTightShaleCoal-bed methane

15 Energy, Environment & New Solutions

4.7bn tons of reserves of oil shales. The biggest of these basins, being the most analysed as well, is the Aleksinac basin, holding up to 2 billion tons of shale. Should these estimations be realised, this could open up the possibility of production of amazing 200 million tons of oil from this basin alone. Looking at the European countries active in shale oil production, analysts point at Estonia as a good example and a knowledge pool with respect to Serbia’s newly discovered “treasure”. Although the Estonian shale (8.5% of oil in the shale) is even poorer than the Serbian shale (up to 12%), the extraction of this resource is obviously economically viable and has a longstanding tradition in this Baltic country. Moreover, Estonian

As of 2010, the leading countries in this industry were Brazil, Estonia and China, having companies that operate major and permanent extraction sites. National energy security issues have also played a role in the development of shale oil extraction. Critics of shale oil extraction pose questions about environmental management issues, such as waste disposal, extensive water use, waste water management, and air pollution.

The economic viability of shale oil extraction usually requires a lack of locally available crude oil. This is exactly the case in Serbia, where recently the existence of 23 significant oil shale basins were reported throughout the territory of the country, with an estimated

What exactly is shale oil? Basically, it is “unconventional” oil which is produced from oil shale using certain processes such as pyrolysis, hydrogenation or thermal dissolution. With this, the organic matter in the rock is being converted into synthetic oil and gas. The resulting oil can be used immediately as a fuel or upgraded to meet refinery feedstock specifications. The refined products can be used for the same purposes as those derived from crude oil. Shale oil extraction is usually performed above ground (ex situ processing) by mining the oil shale and then treating it in processing facilities. Other modern technologies perform the processing underground (on-site or in situ processing) by applying heat and extracting the oil via oil wells.

—120

CLASSIFICATION OF IN-SITU SHALE-OIL RESOURCES

301 566 million tons (USA)

Dyni, J.R., 2006. Geology and resources of some world oilshape deposits. USGS Scientific Investigations Report 2005-5294

10 000 - 40 000 million tons1 000 - 10 000 million tons100 - 1 000 million tons1 - 100 million tonsNo information

SHALE OIL PRODUCTIONIN 2008

Brazil 200 000 tons

World Energy Council, 2010Survey of Energy Resources

China 375 000 tons

Estonia 355 000 tons

Total 930 000 tons

Further, analysts say that the excavation of the oil shale is not as demanding as the very production of the synthetic oil. In this sense, it seems that it would be necessary for a foreign strategic investor to step in and undertake large investments in the necessary production facilities.

According to some estimates, in the best case scenario, the first barrels of synthetic oil produced from Serbian shale cannot be expected before 2020. It has also been reported that several foreign companies such as Estonian WKG and ESTI Energy, as well as Russian Gaspromneft (through local NIS a.d.), have shown interest in this project. No particular decisions have been made so far and this is one of the biggest potential energy projects in the entire region. It remains for us to see whether this opportunity will become reality in the years to come.

experiences show that the strict EU environmental standards can be respected during the shale extraction. All of this encourages local experts and investors that this project, with a reported value of $180bn in oil production and oil derivatives, could proceed further to realisation.

Another obstacle to overcome is the environmental impact of such a massive project. Prior to its realisation, a detailed and comprehensive analysis and assessments must be undertaken, in line with the local environmental regulations which are expected to be further harmonised with the respective EU legislation in the years to come. Shale extraction facilities are not a particularly popular method in this sense and there are a number of environmental issues that need to be seriously addressed prior to taking such a project onto the next level.

15 Energy, Environment & New Solutions

emissions joined it at the forefront. There was no mention of natural gas at the time. “Yet we have been currently drilling over 10,000 new wells for the extraction of shale gas a year, having reduced changes time for wells from 30 to 10 days, while in merely five year’s time, the company Marcellus Shale has become the largest gas supplier in North America,” Terence Thorn, a long-time gas expert from Houston, Texas noted during today’s seminar on the international gas market, which was held at the E-World trade fair.

According to Thorn’s projections, shale gas production should double by 2040. He illustrated the idea with statistics; recently, as much as 18,000 new wells were drilled in the suburbs of Dallas where the land rich in shale gas reserves covers an area the same size as 40 per cent of Germany.

However, the new gas niche is threatened by the uncertainty regarding future productivity.

For example, the production in Pennsylvania has grown intensely between January and April 2012, upon which it levelled until August.

Moreover, people also fear the possible impacts of fracking on the environment and the health of people, which is also the subject of a recent film by Matt Damon entitled Promised Land.Moreover, the production of power from gas in US hit a record high in 2012. The share of power produced from coal was still in the lead (in 2012, the latter accounted for 36 per cent in total power production while power produced from gas had a 30 per cent share) but if Obama’s administration continues its “war against coal”, this ratio will soon be in favour of gas. Thorn also provided information of the costs of building gas-fired power plants versus that of coal-fired ones. While the costs for the former stand at 26 US dollars per megawatt, the costs of the

Shale gas is writing the American energy fairy-tale

Date: February 7th 2013 Author: Alenka Žumbar Source: www.energetika.net/see

According to Terence Thorn of the Texas-based JKM Consulting, who has been an advisor to European regulators on the issues regarding the organisation of the gas market and has also been active in the gas sector for four decades, the current developments which regarding gas are extremely exciting. The reason is shale gas which has turned the US gas terminals, initially intended for gas import, into strong export terminals.

Obama’s administration announced, during its first term, an expansion of renewable energy sources. Now, after their re-election, the need to cut carbon

—122

Andree Stracke, Head of LNG Origination Long Term Gas Supply and Capacity at RWE confirmed that Europe was in fact aware of the new chapter in the “energy fairy tale” which was written by shale gas. He also noted that the old continent had already increased the imports of Liquefied Natural Gas (LNG) considerably, and it would continue to use its gas terminals to transport gas to another fast growing LNG consumer, Asia.

latter are substantially higher than 100 US dollars per each megawatt of installed capacity.

Thorn also noted that the US was expected to achieve approximately 70 per cent of the CO2 emissions reductions targeted under Kyoto, despite not having introduced any emissions taxes or other restrictions. They simply switched to using gas which is less straining on the environment. All that had turned gas terminals across the US, which had been initially designed as import terminals, into strong export terminals, Thorn noted, adding that what the shale gas industry needed for its growth and success was public understanding.

15 Energy, Environment & New Solutions

16Environmental Transition in Practice – The curious case of Kosovo* By Dragutun NenezićAssociate, Karanović & Nikolić

—124

Regarding the energy sector in Kosovo*, it is still far from attracting the amount of investment that has been injected into the mining sector, although a significant amount of aid has poured in since 1999. One of the main reasons for this is the generally poor state of the energy sector, rife with problems that are endemic to Kosovo*, such as an extremely low percentage of consumption that is billed (in 2007, only 53%) and collected (in 2007%, 76% of the amount that was billed), the highest level of losses in the region (around 40%), and frequent power outages and load shedding. The main source of energy is lignite, while the use of other sources (predominantly hydropower) account for less than 5%, which leads to the other main reason for the lack of investment – environmental issues, which will be discussed in more detail in the following section.

Background: Energy Sector in Kosovo* Kosovo* is generally recognized for its mineral resources, and consequentially most of the FDI from 1999 has been focused on the mining sector, with major investments being made in the research and exploitation of nickel, magnesite, gold, bauxite and chrome, whereas investments in research and the exploitation of lead, zinc and silver have been stifled due to political and legal controversies surrounding the Trepča mines18.

—18 The issue of Trepča mines is far too complex to be assessed herein in its entirety. For an initial overview of the situation, the following texts should suffice: Gerard Gallucci (former UN Regional Representative to Kosovska Mitrovica, a divided city in the vicinity of the Trepča mines), Kosovo* : Pristina’s Effort to Strangle the North, http://outsidewalls.blogspot.com/2012/04/Kosovo* -pristinas-effort-to-strangle.html and the Economist Eastern Approaches: Ex-communist Europe blog entry Mines as metaphor: The sad tale of Trepča, http://www.economist.com/blogs/easternapproaches/2011/01/mines_metaphor.

—126

However, due to the political situation and the damage caused by several years of warfare and NATO bombing, the energy infrastructure has suffered greatly, and both TPPs are now running far below their installed capacity.

“Kosovo* A” has been referred to as the worst single-point source of pollution in South-Eastern Europe by the EU Commissioners Štefan Füle and Günther Oettinger in their letter to then-Chief Executive of the World Bank Robert B. Zoellick from 19 May 2011, while the industry reports have continuously provided information on pollution and fatalities caused by enormous carbon dioxide, sulphur and nitrogen oxides, ash and dust emissions and the industrial use of water. In that respect, the energy and mining sectors in Kosovo* are quite similar, as the mining sector has been responsible for the extreme air, water and land pollution from lead and heavy metals in the Kosovska Mitrovica region.

Compliance with the Energy Community Treaty in that respect has been one of the priorities which have to be met before the opening up of negotiations for accession to the EU. Further negotiations are on-going within the EU20 facilitated dialogue, and the first solutions could be expected during 2013, although the implementation of these might be prolonged21.

Environmental IssuesLignite has always been a staple of the energy system in Kosovo* from its inception at the beginning of the 20th century. Its two thermal power plants (TPPs), “Kosovo* A” and “Kosovo* B”, were built between 1960 to 1984, with a total capacity of 1478 MW from seven generating units.

—20 Commission Opinion on Serbia’s application for membership of the European Union, COM(2011) 688 final, available at http://ec.europa.eu/enlargement/pdf/key_documents/2011/package/sr_rapport_2011_en.pdf.

21 So-called “First agreement on principles governing the normalization of relations” (available at http://www.parlament.gov.rs/upload/archive/files/cir/pdf/ostala_akta/2013/RS21-13.pdf), which was initialed by Prime Ministers of Serbia and Kosovo* on 19 April 2013, sets 15 June as the deadline for completion of discussions on energy issues.

In addition, from 2009, the transmission system has been split in two, with the northern part of Kosovo*, predominantly inhabited by ethnic Serbs, being supplied by the Serbian public enterprise Elektromreža Srbije a.d., while the southern part of Kosovo*, predominantly inhabited by ethnic Albanians, being supplied by the Kosovo* public enterprise KOSTT, both companies being the transmission system and market operators in their respective jurisdictions. This issue has been addressed by the Energy Community Secretariat in its Reasoned Opinion in Case ECS-3/08 from October 2011, which founded that the Republic of Serbia has failed to fulfil its obligations under the Energy Community Treaty19.

—19 More information available on the portal of the Energy Community: http://www.energy-community.org/portal/page/portal/ENC_HOME/ENERGY_COMMUNITY/Dispute_Settlement/2008/03_08.

mentioned (e.g. privatization, concession, public-private partnership etc.) are the environmental objectives, such as the reduction of emissions, the introduction of carbon capture and storage etc. In general, the underlying objective for the decommissioning of “Kosovo* A” TPP, the rehabilitation of “Kosovo* B” TPP, and the construction of the “New Kosovo*” power plant (which will most likely be a combined heat and power plant), is the need for cleaner energy in Kosovo*. However, the environmental transition that has to be carried out in order to fulfil these objectives is impeded by the legal issues that will be briefly outlined in the following section.

Legal Impediments: Duality and Its ConsequencesThe first major legal impediment is the operating duality of legal systems in Kosovo*. After 1999, Kosovo* has developed its own legal system, stemming from the regulations of the UN interim administration, with a fully-independent

legislature in place after 2008. Privatization carried on under this framework is deemed illegal by the Serbian authorities, in the same manner as the operation of the Serbian transmission system in northern Kosovo* is deemed illegal by Kosovo* authorities, as both entities follow for now the policy of non-recognition, and both claim title over, inter alia, the natural resources and infrastructure in Kosovo* pursuant to their respective constitutions, laws and regulations. “Kosova e Re” is designed within the legal system of Kosovo*, without giving any consideration to the potential claims of the Serbian public enterprises that built and operated “Kosovo* A” and “Kosovo* B” up until 1999.

In that respect, within the Serbian legal system, public enterprise Elektroprivreda Srbije through its subsidiary Termoelektrane Kosovo*

Since 1999, “Kosovo* A” and “Kosovo* B” have received significant international aid intended to remedy the environmental risks caused by these TPPs. Currently, Kosovo* authorities are promoting the “Kosova E Re” (“New Kosovo*”) project, consisting of two key components: the development of a lignite mine in Sibovac and the building of a new TPP. In addition, Kosovo* authorities have committed to decommissioning “Kosovo* A” by 2017 and refurbishing “Kosovo* B” in order for it to comply with EU/Energy Community Treaty standards. In that respect, the role of IFIs and/or national development agencies and banks, such as the World Bank, USAID, KfW and IMF, has been crucial, as they are providing technical assistance and support to these projects.

Regardless of the modalities for the realization of these projects, which have been frequently changed in last few years, one common denominator for all of the modalities that are

16 Energy, Environment & New Solutions

TPP projects, as a major energy investment envisaged for the future, have a significant environmental impact, and it could be stated that the environmentally friendly future of Kosovo* is dependent on the realization of these TPP projects. However, their development is stymied by the duality of legal systems of the Republic of Serbia and Kosovo*, and the corresponding lack of compliance with international environmental standards, both of which are ultimately related to the parallel accession of Serbia and Kosovo* to the EU. It remains to be seen whether EU facilitated dialogue will address this issue and to what extent it could be resolved, given the focus of the dialogue on other issues and the lack of participation of interested non-state actors in the dialogue (e.g. corporates and Serbian public enterprises, international organizations etc.). Until then, pending such resolution, Kosovo* will continue to be the hub of dirty energy in Balkans.

Framework Convention on Climate Change and Kyoto Protocol. In addition, Kosovo* is still a potential EU candidate, awaiting the negotiations for a Stabilisation and Association Agreement, and in that respect it does not yet have to comply with EU environmental standards, save for the acquis communautaire extended thereto through the Energy Community Treaty. The outcome of such a position results in a somewhat incomplete regulatory environment, which only adds to the legal uncertainty caused by the abovementioned duality.

Conclusion?Kosovo* has significant potential in the energy sector, bearing in mind the scope of the planned investment in its energy infrastructure. In addition to the TPP projects, there is a number of attractive opportunities, such as the construction of small hydropower plants, energy efficiency projects, and the construction of the 400 kV grid to Albania, financed by KfW, while its electricity distribution and supply company was privatized by a Turkish consortium in late 2012.

claims the title over the “Kosovo* A” and “Kosovo* B” TPPs, despite not being able to exercise its control since 1999. Accounting-wise, Termoelektrane Kosovo* has kept the TPPs in its books, despite receiving a Disclaimer of Opinion by its auditors each year.

Although no significant action has been taken so far in this respect by Serbian public enterprises or public authorities before Serbian or Kosovo* courts, prospective investors in Kosovo* energy projects should generally be aware of such underlying legal issues. The case of the Trepča mines, where Serbian non-state shareholders of the company operating the mines have filed their claims with the Kosovo* privatization authority in early 2013, shows that the legal risks of investing in Kosovo* must be carefully considered.

The second major legal impediment is the position of Kosovo* with regard to international organizations. Currently, Kosovo* is a member of the World Bank, IMF and EBRD, while it is not a member of, inter alia, the UN. Consequentially, it is not a party to the UN

—128

17Energy Efficiency In Macedonia By Lazar GecevskiDirector of the Macedonian Energy Agency

—130

a total installed capacity of approximately 10 MW were registered. However, there are still no registered plants for the production of electricity from wind, biomass and biogas. It should be mentioned that Macedonia, in compliance with the EU targets 20/20/20, has determined a target that 21% of the total energy production by the end of 2020 should be from renewable energy sources.

Energy Efficiency Regulatory Framework in Macedonia In the past period, Macedonia has adopted a number of strategic documents for the purpose of defining and achieving the objectives for energy efficiency improvement, i.e. (i) the Strategy for the Development of the Energy Sector in the Republic of Macedonia until 2030; (ii) the Strategy for the Promotion of Energy Efficiency in Macedonia until 2020; and (iii) the First National Action Plan for

IntroductionMacedonia is a small country and, to a great extent, is dependent on the import of electricity. According to the information from the Energy Balance of Macedonia for the period from 2013 to 2017, the total electricity consumption in Macedonia in 2012 was 8838 GWh i.e. 75% is domestic production of electricity and the remaining 25% is imported from neighboring countries. The largest percentage of the domestic production of electricity in 2012 was from lignite and coal (approximately 60%), whilst approximately 15% from renewable energy sources. From 2010 onwards i.e. ever since the Macedonian Government adopted the Resolution on feed-in-tariffs for the purchase of electricity produced from renewable energy sources, the production of electricity from renewable energy sources in Macedonia has intensified. In the period from 2010 to 2012, a total number of 30 power plants for the production of electricity from renewable energy sources (hydro power plants and solar power plants) with

stressed the importance of the acceleration of the procedures for the enactment of this secondary legislation that will set up the necessary criteria for the construction of energy efficient buildings and their certification. For the purpose of the implementation of this secondary legislation, the Energy Agency of the Republic of Macedonia has a key role, from the aspect of the organization of training for energy auditors, the certification of energy auditors, maintaining a register of issued certificates for energy efficient buildings and monitoring the validity of building certificates and other related activities. In addition, the Energy Agency of the Republic of Macedonia started an initiative for the drafting of the relevant documents on Energy Efficiency on a sector-level i.e. healthcare, transport, agriculture and forestry, industry, education etc. This type of sector-specific regulation should achieve an accelerated and more focused action from the competent state authorities with the view of achieving the energy efficiency objectives.

of energy efficiency projects. As a result of such “under”-regulation currently there are a number of barriers which effectively prevent the implementation of energy efficiency projects.

Therefore, with the aim of promoting the energy efficiency regulatory framework and its further harmonization with EU rules, the Macedonian legislators are planning in 2013 to enact additional secondary legislation under the Macedonian Energy Law i.e. the Rulebook on Energy Characteristics of Buildings and the Rulebook on Energy Audits. The delay in the enactment of these two very important rulebooks, which are expected to serve as the basis for the implementation and monitoring of energy efficiency measures in buildings, have significantly influenced the slow achievement and fulfillment of the foreseen objectives for energy efficiency improvement as determined in the strategic documents mentioned above. In the past period the Energy Agency of the Republic of Macedonia on many occasions has

Energy Efficiency 2018. In addition, Macedonia has made significant progress in terms of harmonization its energy efficiency regulatory framework with the European Union’s acquis communautaire, including the harmonisation of its legislation with the requirements of the EU Directive on the Energy Performance of Buildings (2010/31/EU), the EU Directive on Energy End-Use Efficiency and Energy Services (2006/32/EC) and the EU Directive on the Indication by Labeling and Standard Product Information of the Consumption of Energy and Other Resources by Energy-Related Products (2010/30/EU). However, the Macedonian legislators have not made any interventions in the other relevant legislation which is pertinent to energy efficiency projects, such as public sector budgeting, financing, public procurement laws etc. in order to provide a “friendly” environment and to enable the implementation

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educational visits to schools, expert gatherings. Also, for this purpose, in 2010 the Energy Agency of the Republic of Macedonia with the support of the Ministry of Environment, Land and Sea of Italy opened the first Info Center for Energy in Macedonia.

Macedonia should invest additional efforts in the field of their regulatory framework with a view to the promotion of the energy efficiency and its quality implementation for the purpose of achieving the objectives for energy savings, establishing energy stability and decreasing the dependence on electricity imports, and in such a way to trace the path towards the fulfillment of the requirements of the EU: 20% decrease of consumption, 20% usage of renewable energy sources out of the total production, and a 20% decrease in CO2 emissions.

At the moment the process of drafting a Handbook for Energy Efficiency in Agriculture and Forestry is ongoing.

The necessity for focusing the attention of the competent state authorities on special secondary legislation is because in Macedonia there is no Ministry of Energy, although this idea was discussed by different stakeholders on several occasions. There is always the possibility for the Energy Agency of the Republic of Macedonia to become a Ministry, and the existing competences in the field of energy from the Ministry of Economy to be transferred to the newly established Ministry of Energy. Besides the daily duties and activities, the Energy Agency of the Republic of Macedonia works in the field of increasing awareness energy efficiency and renewable energy sources, by organizing conferences, workshops, trainings,

17 Energy, Environment & New Solutions

18Energy Trends in Africa By Hugues de La Forge, Partner andOlivia Woodroffe, AssociateJeantetAssociés

—134

During the last decade, Africa has been undergoing an important ongoing energetic change. The energetic issue appears to be of a crucial importance for the prosperity and economic growth in Africa. However, despite its abundant natural resources and its good growth recorded this last decade, Africa is still struggling to operate effectively and sustainably its economic potential. As the natural resources potential is depriving, Africa has now to operate in renewable energies such as solar and wind power. For this purpose, the United Nations Conference on Trade and Development (UNCTAD) has issued in its report 2012 recommendations and particularly a “Structural transformation and sustainable development in Africa”.

The African energetic and infrastructure changeThe usual picture painted of Africa – rapid population growth, poverty, slow economic and industrial development, lagging African development – is outdated. Africa has to be seen from a new perspective. As we have a glimpse into the many ongoing energetic and infrastructure projects over Africa – “Desertec”, an ambitious project of solar thermal plants for electricity generating purposes in the North African desert, “Masen”, another important Moroccan project involving solar energy, the Lake Turkina wind power project in Kenya, and other significant airports and railways projects – it is obvious that this continent is on its way – though still slow – to catching up the existing gap between other areas of the world. Energy clearly contributes to the development and growth of Africa.

Traditional non-renewable energiesOver the past three years, the African oil sector, particularly Sub-Saharan, has considerably increased due to significant discoveries. The latest oil discoveries in Kenya, Sierra Leone, Ghana or Uganda, the massive gas discoveries in Mozambique and in Tanzania confirm the important potential of hydrocarbons natural resources. Since 2012, 19 hydrocarbons discoveries have been made. In addition, the oil sector in Mauritania appears to be modern and attractive.

In Africa, the coal industry is by far dominated by South Africa: it holds 95 percent of Africa’s total coal reserves. Coal is used for most of its energy needs, particularly in the electricity sector. Speaking on an international scale, it is the fifth largest coal exporter in the world22.

—22 http://www.eurasiareview.com/17012013-south-africa-energy-profile-could-hold-significant-shale-gas-resources-analysis/

in the first instance the living African population. The natural resources found in Africa are in the majority exported to the rest of the world. Indeed, Africa provides 12.4% of oil, 7% of gas and 4.3% of coal for the whole world, leaving aside one quarter of the African population without electricity. This makes Africa the poorer continent in terms of electricity. Thus, despite its demographic weight (16% of the whole world population representing 1,000,000,000 inhabitants), Africa has a low level of natural resources consumption. The movement of large business investments in energies towards Africa confirms the natural potential and the strategic economic role of energies in this part of the world. For instance, Blackstone is investing three billion dollars in energetic projects in Africa, particularly in Tanzania, Uganda and Rwanda.

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Energy: source of prosperity and economic growth in AfricaEnergy and economic development of Africa are closely connected issues. Access to energy appears to be a powerful remedy to boom the African economy and the local industries. Having access to energy and energetic infrastructures constitute indeed a great facility for the development of the companies’ activities. Energy is also of a high significance for the population conditions of living.

The African natural resources richnessAfrica appears to be in a relatively strong position in comparison to other regions of the world because it is very rich in terms of natural resources: the natural potential represents 26% of the creation of richness whereas in industrialized countries, it only represents 2%. However, paradoxically, if Africa disposes of a great natural resources potential, this richness does not benefit

However, in September 2012, this moratorium was lifted by the Government, thus permitting companies – Royal Dutch Shell appears to be very active in such area – to explore and operate in the gas shale sector26. As the provision of electricity only depends on coal, shale gas appears to be an open-wide perspective towards a reliable fuel alternative to coal. Despite that Algeria is likely to shelter huge shale gas deposits – far more than its gas reserves – these reserves have not been yet subjected neither to exploration nor exploitation. It is expected from the local parliament to enforce fiscally favorable conditions for the exploration of shale gas. In Tunisia also, large shale gas potential is about to be exploited. However, as natural resources are not unlimited resources, the issue of green energy is on the go giving rise to the energy mix in Africa.

—26 http://www.eurasiareview.com/17012013-south-africa-energy-profile-could-hold-significant-shale-gas-resources-analysis/

The coal export increasing perspective in Botswana could however be slow down “because of the declining relative price of renewable energy and the changing global setting with regard to fossil fuels”24. As for instance, in the Limpopo province of South Africa, the Letaba Estates, a large citrus farm, now uses renewable biomass instead of coal for its production of fruits and fruit juice25.

Shale gas deposits are mostly to be found in South Africa, Algeria and Tunisia. In South Africa, significant shale gas resources have been identified in the wide Karoo basin, a region covering a large part of the southern country. As operating shale gas has great negative impact on environment especially over hydraulic fracturing and water usage, the Government of South Africa first enacted a moratorium on exploration and exploitation licensing.

—24 http://www.bidpa.bw/publication/details.php?id=46

25 http://www.myclimate.org/fr/projets-de-protection-climatique/projets-internationaux/details/mycproject/5.html

However, Botswana could also become a significant actor of the coal industry market in the next couple of decades. If diamond is currently the leading component of the mineral industry of Botswana and dominates its national economy since the early 1990’s, a recent report of the Botswana Institute for Development Policy Analysis (BIDPA) issued in December 2012 considers the diversification of Botswana’s economy and its progression towards operating coal. The report explains that “giving the very high coal prices on world markets achieved over the last decade together with the growing demand in India and China for steam coal, Botswana with its massive estimated potential coal deposits of 212 Bt, probably the largest in Africa, is in a position to develop a new export sector which will further diversify the diamond dependant economy”23.

—23 http://www.bidpa.bw/publication/details.php?id=46

18 Energy, Environment & New Solutions

plants will provide electricity to the Maghreb and Middle-East countries as well as 15% of the energy needs of Europe. “Masen” is another solar project located in five sites in Morocco: Ouarzazate, Aïn Bni Mathar, Foum Al Oued, Boujdour and Sebkhat Tah.

It also appears that small hydropower plants have a strong potential in Equatorial Africa since it is permanently irrigated by a network of rivers. In addition, most of the households are located nearer to a river than an existing electric network. In this regard, an agreement has been entered into between South Africa and the Democratic Republic of Congo concerning the hydroelectric project named “Ingra” and located on the Congo River.

As energy is recognized as a crucial importance for sustainable development, the United Nations General Assembly made the year 2012 the “international year for sustainable energy for all”. The ongoing energetic projects in Africa clearly aim to contribute to this objective.

Promoting renewable energiesSeveral significant projects involving wind power, solar, photovoltaic and hydraulic for electricity generating purposes are currently ongoing. In addition, most of African countries have made renewable energies a priority. For instance, South Africa plans that 42% of electricity produced in the country will come from renewable resources in 2030.In July 2012, the Research Center of the European Commission issued a mapping study of the potential renewable energies in Africa. The idea of this study is to analyze, according to the actual energetic consumption in Africa, sustainability, cost, efficiency, climate and environmental concerns, the strategic places of Africa where energetic projects can be implemented. According to this mapping study, Northern African countries are likely to accommodate solar and wind power projects. The most ambitious and expensive energy project is “Desertec” which consists of installing solar, wind and hydraulic farms in the North African desert for electricity generating purposes. It is planned that, in 2050, these

A necessary structural transformation in AfricaOperating non-renewable natural resources is not a sustainable solution for energy needs. The natural resources depletion leads to consider more long-term solutions. In its report of June 2012, “Structural transformation and sustainable development in Africa”, the United Nations Conference on Trade and Development (UNCTAD) calls for African countries and African Governments to establish a framework and to implement policies as regards renewable energies. However, the report stresses that “although structural transformation is necessary to address Africa’s key development needs and challenges, it should be carried out in a manner that is consistent with environment sustainability”, contrary to industrialized countries. The report also emphasizes that “the need for sustainable structural transformation, defined as structural transformation accompanied by the relative decoupling of resource use and environmental impact from the economic growth process”.

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In North- Africa, our firm has an office in Casablanca and we advise numerous public entities and sponsors on important infrastructure projects (e.g: high speed rail project in Morocco) and energy projects (e.g mining issues in Mauritania).

Finally, we have an unrivalled network in Europe through the Energy Law Group which covers most of the European and Arab jurisdictions including north-African countries through 40 independent European law firms, representing more than 4,500 lawyers and, amongst them, almost 450 lawyers who are experts in energy and mines.

The complementary nature of this experience enables the Energy, Mines and Infrastructure department to intervene at every level of a project, from upstream to downstream, in the majority of our clients’ legal problems (both as regards regulation issues and contractual, commercial and financial issues).

In Western and Central Africa, we have the following expertise:– Advisors to governments,

institutions, lenders and major foreign companies acting, notably, as sponsors in their investments (human relations expertise and on the ground expertise, privileged contacts with government members).

– An expertise recognized by local players and an in-depth knowledge of regulations, institutions and of the persons responsible for a particular area.

– Involvement in the drawing up of OHADA law (authorized to advise and to issue legal opinions under OHADA law, as well as with regard to mining and oil legislation in African countries).

– Partnerships with local counsels selected according to their skills and experience in dealing with issues arising out of local law.

Legal expertise of JeantetAssociés The aforementioned factors and the diversity of African situation in energy require an in-depth understanding of clients’ needs and transversal energy skills in water, electricity, renewable Energy, oil, gas, mining and nuclear.

Energy also appeals to particular skills in infrastructure and transportation projects, including railways as they are strictly connected and inherent to the industrial process requires by energy resources.

As the energetic issue in Africa is becoming more and more important and involves many aspects of law, law firms are often solicited to advise companies willing to develop energy and realize their energetic project. Our department “Energy, Mines and Infrastructures” within JeantetAssociés has acquired great experience in the field of energy mines and industry

18 Energy, Environment &New Solutions

- http://www.myclimate.org/fr/projets-de-protection-climatique/projets-internationaux/details/mycproject/5.html

- http://www.eurasiareview.com/17012013-south-africa-energy-profile-could-hold-significant-shale-gas-resources-analysis/

- http://www.un.org/fr/events/sustainableenergyforall/

Bibliography:

- Report of the United Nations Conference on Trade and Development (UNCTAD), “Structural transformation and sustainable development in Africa”;

- “Energy for Africa”, n°15, December 2012;

- http://www.africa-eu-partnership.org/fr/node/2706

- http://www.eurasiareview.com/17012013-south-africa-energy-profile-could-hold-significant-shale-gas-resources-analysis/

- http://www.bidpa.bw/publication/details.php?id=46

- http://www.bidpa.bw/publication/details.php?id=46

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/Harmonisation with the EU

— Energy 2013, Karanović & Nikolić

19Harmonisation of the Balkans in the field of electricity – Past Achievements and Future Prospects(Energy Community Lawyer) By Rozeta Karova, Ph.D.27

Energy Community Secretariat

—27 Energy Lawyer at the Energy Community Secretariat, Vienna (Austria). The views presented in this paper are personal views of the author and do not reflect the official position of the Secretariat.

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In particular, by requiring the implementation of the EU acquis communitaire in areas such as energy, environment, competition, renewables and energy efficiency, the EnC aims at liberalising and integrating the national energy markets of the SEE countries. The idea for establishing a SEE REM is a new policy developed by the EU specifically for the SEE region. This solution was not surprising taking into consideration the regional initiatives developed by the EU for the SEE region in other fields due to the regional characteristic of the Stabilisation and Association Process (SAP). Moreover, the rationale behind the development of the Energy Community shows strong incentives on both sides of the EU and the SEE countries for the implementation of this new policy.29

—29 KAROVA, R. Rationale behind the establishment of the Energy Community, Law Department EUI Working Paper, No. 14, 2010

IntroductionDue to their common past, the South East European (SEE) countries have common problems that characterise their energy systems. They face certain problems that are characteristic of developing countries and not of the developed economies of the older EU Member States. Furthermore, the SEE countries are even different from the Central and Eastern European (CEE) countries, because after the fall of the socialist system, the SEE countries spent a decade in wars instead of progressing towards a market economy, in which the energy - in particular electricity - infrastructure suffered. By the establishment of the Energy Community (EnC) in 2005 with the signing of the Treaty establishing the Energy Community (EnCT)28 the EU proposed developing a framework to establish a Regional Energy Market (REM) in the SEE.

—28 Treaty establishing the Energy Community, signed on 25 October 2005, and entered into force on 1 July 2006

The analysis of the reforms taking place by the Contracting Parties in the framework of the Energy Community aims at showing how the European model of liberalisation is in practice implemented in third countries. The text is limited to the SEE Contracting Parties and to the electricity sector.

Progress in the reforms at national and cross-border levelsNational reformsAll the Contracting Parties have adopted primary legislation in the electricity field and are improving the state of play with regard to the adoption of secondary legislation. Macedonia, Montenegro, Serbia and Kosovo*32 have adopted new Energy Laws in 2011 implementing the second package which is binding on them.33

—32 The designation throughout this document is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo* Kosovo* declaration of independence.

33 The third energy liberalization package has been adopted by the Ministerial Council in 2011, and it should be implemented by the Contracting Parties by 2015.

from the SEE, as of 1 May 2010 Moldova and from 1 February 2011 Ukraine became full members of the Energy Community.31 Upon their accession, these two countries were also bound by the legal obligations stemming from the Treaty. Thus, the EnC as an instrument developed for countries that have clear membership perspective for the EU has been extended to countries that are part of the European Neighborhood Policy (ENP) and whose membership perspective the EU has never been confirmed.

Considering all of this, an analysis of the progress achieved and the obstacles that remain six years after the liberalisation of the energy markets in the Contracting Parties have been initiated, seems timely. As it will be shown below, despite the fact that there are still areas where progress should be made, the reforms brought some very important improvements at both national and regional level.

—31 Moldova signed the Accession Protocol in March 2010 and Ukraine signed the Accession Protocol in September 2010, and it ratified the Protocol on 15 December 2010.

The idea for establishing a REM is not new and unique in Europe. Electricity and gas regional initiatives were launched in the EU Member States as well. However, the difference with the other REM’s is that the SEE REM was an idea initially imposed by an external actor – the EU, whereas the others have been initiated by market players and the regulatory authorities from the countries participating to the process. Nevertheless, given the benefits of regional cooperation and the achievements so far, the Energy Community offers an example of successful regional cooperation with more and more regional ownership of the process. Besides the original signatories of the EnCT30

—30 Republic of Albania; Bosnia and Herzegovina; Republic of Croatia; Republic of Macedonia; Republic of Montenegro; and Republic of Serbia (all as adhering parties); and, Kosovo* Kosovo* through the United Nations Interim Administration Mission in Kosovo* Kosovo* (UNMIK), pursuant to the United Nations Security Council 1244.

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All Contracting Parties have restructured their vertically integrated companies, though to different extents, and some of them have undertaken privatisation reforms even before introducing competition and opening the markets. One important difference with the EU Member States in relation to the privatisation is that whereas in the old Member States privatisation referred to the generation markets, in SEE countries the distribution assets are quite often privatised.37 A positive outcome is the fact that all Contracting Parties have legally unbundled their transmission system operators (TSOs) from the other electricity activities and have clearly defined their main functions.

—37 Austrian EVN bought the distribution and supply company in Macedonia; CEZ from the Czech Republic owns the distribution and supply in Albania; Italian A2A owns 43.7% of the Montenegrin distribution and supply and although the government owns the majority, the executive management of the company is in the hands of A2A. Finally, the distribution and supply company of Kosovo* has recently been sold to a Turkish Çalık-Limak consortium.

The regulators of all Contracting Parties have competences in relation to the adoption of at least the methodologies for setting tariffs, but their role will need to be strengthened significantly in the process of the implementation of the third legislative package. Furthermore, the regulators are expected to become more proactive and to take further steps in reforming the energy markets in their countries. In its Implementation Report from 2012, the Secretariat reported on strengthened cooperation between the Secretariat and the regulatory authorities through Implementation Partnerships.35 These instruments of cooperation have been signed up to now with Macedonia, Kosovo*, Moldova and Montenegro.36

—35 Energy Community Secretariat, Annual Report on the Implementation of the Acquis under the Treaty Establishing the Energy Community, 1 September 2012 (hereinafter: ECS, Annual Implementation Report 2012), p.10

36 See:http://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Implementation/Partnership (02.04.2013)

In 2012 and early 2013, these countries shifted their focus to developing secondary legislation. However a few Contracting Parties are still lagging behind and do not comply with the principles from the second package. Namely, Albania and Ukraine still need to substantially improve their primary legal frameworks.

All of the Contracting Parties have established a National Regulatory Authority (NRA) and most of them have one regulator dealing with the whole energy sector. Bosnia and Herzegovina is the only Contracting Party in which the situation is more complex and parallel regulatory structures have been created at State and entity levels.34

—34 Therefore, there are three NRAs in this country. State Electricity Regulatory Commission (DERK/ SERC): http://www.derk.ba/ (02.04.2013); Regulatory Commission for Electricity in Federation of Bosnia and Herzegovina (FERC): http://www.ferk.ba/ (02.04.2013) and Regulatory Commission for Electricity in Federation of Republika Srpska (RERS): http://www.reers.ba/ (02.04.2013).

19 Harmonisation with the EU

All these territories will have to adopt a common approach to manage the energy congestions at their borders, as well as a common method for the allocation of capacities at the interconnections.40 In 2012 the Coordinated Auctions Office (CAO) project made notable progress. With financial support from International Financing Institutions, the TSOs of Albania, Croatia, Bosnia and Herzegovina, Macedonia, Montenegro and Kosovo* as well as Greece, Romania, Slovenia, and Turkey signed an agreement for establishing a Limited Liability Company envisaged to develop and put the CAO in operation in the following year. Implementing the CAO is an issue of significant importance for the region. In fact, having a regional mechanism for determining the available cross-border capacities for trade at regional level will be very useful for developing a cross-border electricity market in the 8th region.

—40 For more details on the common congestion method and the allocation of capacity in the eighth REM in SEE and in the other Electricity Regional Initiatives in Europe, see: KAROVA, R., Regional electricity markets in Europe: Focus on the Energy Community, Utilities Policy, 19 (2011), 80-86

Cross-border reformsIn its decision of 27 June 2007,39 the Ministerial Council of the Energy Community defined the 8th region in which a common coordinated congestion management method and procedure for the allocation of capacity to the market was to be implemented by the end of 2008. This region covers the territories of the Parties adhering to the EnCT, as well as the Republic of Bulgaria, Hungary, Romania, Slovenia, the Hellenic Republic and the territory of the Republic of Italy with regards to the interconnections with the territories of the Parties of the EnCT. The fact that the 8th region in Europe besides the SEE countries covers the neighbouring EU Member Stated shows the importance of the Energy Community for the development of a pan-European energy market.

—39 With this decision the Ministerial Council of the Energy Community, 2008 was implementing the Commission Decision No 770 of 9.11.2006.

Only Bosnia and Herzegovina has a different structure and it has established a separate Transmission Company and an Independent System Operator, which in practice did not bring positive results.38 Moreover, almost all Contracting Parties have adopted provisions ensuring regulated third party access (TPA) as well as obligations for justifying the denial of access to the grid. No legal unbundling has taken place between distribution and supply activities in any of the SEE countries. As a final remark in relation to the national reforms, all Contracting Parties have legally opened their electricity markets for all non-household customers. However, the situation in practice is not so positive, and obstacles still exist for exercising eligibility rights in practice, which will be outlined in the following section.

—38 See ECS, Annual Implementation Report 2012, p.24

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of them being owners of the generation assets in the EU. The distribution companies are either integrated with the dominant generation company (Serbia) or are not eligible and need to buy all the electricity needed from the wholesale supplier (Albania, Ukraine). It should be noted as well that there are very few eligible customers (mostly large industry in a few of the Contracting Parties (Macedonia, recently one in Serbia). Market rules, even though adopted by most of the NRAs, are not harmonised at the regional level.

The establishment of an SEE REM should be achieved through introducing a wholesale competition market model with bilateral contracts, as well as a regional Day-Ahead Market (DAM) and cross-border intra-day market at a later stage. In addition, a regional balancing mechanism should be established. Despite occasional dependence on imports, the balancing of the demand still remains in the domain of regulated services and is provided by the incumbent generators.

Obstacles to Trade Besides the progress identified, taking into consideration the specificities of the SEE countries, it is necessary to identify the obstacles which still exist on the way to establishing a competitive REM in line with the European policy for this region.

Firstly, there is not enough competition in the SEE region due to the fact that in most of the countries the generation and supply companies are still integrated, or until recently there was – and in some Contracting Parties still is - a wholesale supplier in place, which through the implemented single buyer model buys electricity for the regulated market. In addition, there is high concentration in the generation markets in the region. Moreover, it is common that the generation incumbents are required to sell all the generated capacity for satisfying firstly the needs of the tariff customers, and are allowed to sell only the excess capacity on the free electricity market. Yet, there are many traders in the region, most

Further, in relation to the cross-border issues, it is worth noting that despite the obstacles in implementation, an ITC mechanism is in place among the Contracting Parties. There are also significant improvements in relation to the procedures for the allocation of capacity in the region, as all the Contracting Parties have implemented market-based mechanisms. Compliance is still lacking mainly in relation to the implementation of the transparency requirements, use of congestion revenues and penalties.

A Regional Action Plan for Electricity Wholesale Market Opening (RAP) has also been developed by the Energy Community Regulatory Board (ECRB) and European Network Transmission System Operators for Electricity (ENTSO-E) and has been endorsed by the Permanent High Level Group (PHLG). This Plan relies on parallel development and implementation of Local Action Plans (LAP) for the local electricity market in each Contracting Party. Nevertheless, the activities on the LAPs are still at an initial stage.

19 Harmonisation with the EU

important issues. Having in mind that the TSOs are the cornerstone of the reforms, and incomplete implementation of the steps related to them – mainly related to cross-border issues - is one of the key obstacles to efficient national and regional trade.

The second group of obstacles are issues that are specific to the SEE region such as tariff issues, harmonisation issues and licensing regimes. The lack of cost-reflectivity of network tariffs and prices was in the focus of problems for true implementation of the acquis in the last couple of years. Any progress on market opening and energy efficiency depends on price reform. Without cost-reflective prices, the viability of the Contracting Parties’ energy systems, and eventually security of supply, is at risk. This problem is usually coupled with the high percentage of so-called commercial losses (mostly theft) in electricity distribution. Following an analytical report submitted to public consultation in May 2012, the Secretariat made a proposal for a

eligible consumers which decide not to switch). This results in difficulties for new participants to enter the market and as an obstacle for the creation of wholesale national competitive markets. Moreover, concentrated generation market and the small size of many countries were used as excuses for not introducing national competition. All Contracting Parties suffer from a significant concentration and dominance of state owned companies in the local market. No local spot-market mechanisms with sufficient commitment for the near future are yet in place, or at least enforced in the legislation. The implementation of virtual auctions for capacity releases could be a solution, which means that the generation companies would be asked to sell some capacity through auctions or at regional power exchange once established. In addition, the implementation of market rules and their harmonisation at the regional level should be another priority. Moreover, access to national networks and the role of the TSOs are other

Bilateral contracts are the most common model for trading electricity that have been implemented so far, with balancing markets expecting to develop. Further compatibility and not full harmonisation of the national market designs is necessary. In relation to regional integration, greater transparency as well as cooperation between the national institutions (NRAs and TSOs in particular) from the different Contracting Parties should be a priority.

These obstacles could be grouped as follows.

The first group contains issues related to the introduction of competition in generation and supply: market concentration, vertical foreclosure and operability of market rules in particular. The dominant market model in SEE has been to retain integrated generation and supply or to create a wholesale supply function (single buyer for the regulated market and for

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The way forwardAs demonstrated in the previous sections, progress in establishing sound legislative and regulatory framework has been achieved since the establishment of the Energy Community. Most of the reforms can be noted on a national level. However, joint activities and regionally-owned developments have also taken place in the last six years.

The establishment of an REM in SEE is yet to become a reality. As the Secretariat reported in its last Implementation Report43, insufficient transmission interconnection capacity, lack of transparency and the great number of borders, in combination with, unharmonised cross-border allocation mechanisms remain the main reasons for limited cross border trading.

—43 ECS, Annual Implementation Report 2012, p.23

Along these lines is also the necessity to harmonise the licensing regime in the region, covering harmonisation of the definition for both trader and supplier, as well as the administrative requirements for issuing and keeping a licence.42

The final group are issues related to the cross-border issues and lack of development of the regional market. Once the pre-conditions at national level are established by the removal of the obstacles outlined above, there shall be more scope for developing a functioning SEE REM. Progress with SEE CAO is only the initial step that shall be coupled with sufficient transmission and generation capacity in order to achieve the EnCT objectives for establishing a functioning regional market.

—42 A license for trade of electricity is required in most of the Contracting Parties, which is not the case with the EU MS. See ECRB activities: http://www.ecrb.eu/portal/page/portal/ECRB_HOME/ECRB_DOCUMENTS/ECRB%20PAPERS/ELECTRICITY/2009

Recommendation under the Title III of the Treaty addressing the urgent reforms that shall be undertaken in relation to price reform.41

At the same time, the population’s absorption capacity for further price increases becomes more and more questionable. Therefore, developing mechanisms for the protection of the vulnerable groups of consumers remains a priority. In the analytical paper, the Secretariat also identified also other issues closely related to price regulation (electricity market models and the relationship among market participants, supplier of last resort, removal of the regulation of the generation of price e.t.c) where reforms and some harmonisation and compatibility of the market structure could bring about significant improvements. In general, the very excessive and general understanding and implementation of public service obligations need to be reconsidered by all Contracting Parties.

—41 http://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/ELECTRICITY/Regulated_prices (02.04.2013)

19 Harmonisation with the EU

The dispute settlement procedure continues to be an important feature of the EnCT and is crucial for the enforcement of EnCT law. This tool constitutes the means to clear away key obstacles to the full implementation of the acquis and to actively support the emerging of competitive markets based on the application of harmonised rules. The experience so far and the increased number of complaints in addition to the cases initiated by the Secretariat on its own motion, show that there is a true need for dispute settlement from a business perspective. The successful resolution and the closure of several cases shall be considered a success not only of the dispute settlement, but of the rule of law within the Energy Community.45

—45 For a reference to pending and closed cases see: http://www.energy-community.org/portal/page/portal/ENC_HOME/ENERGY_COMMUNITY/Dispute_Settlement (02.04.2013)

In practical terms regulated tariffs are still available to some or all categories of eligible customers, in all Contracting Parties. In addition to the insufficiently developed market instruments, the current overregulation in the domains of generation and supply remains one of the main reasons for the slow progress in the liberalisation of the local electricity markets.

Furthermore, the main challenge in the coming period remains the implementation of the Third energy liberalisation package. Starting from the primary legislative framework, strengthening the role of the regulatory authorities, additional activities related to the unbundling of both transmission and distribution activities remain issues upon which Contracting Parties should focus on in the upcoming period, in order to achieve the implementation of the new EnC acquis in practice. The cooperation with the Secretariat and among the countries themselves will continue to be in the focus in the upcoming years.

Electricity trading practices are still limited to bilateral trade agreements with low liquidity. There is no cross-border balancing mechanism, no operational (regional or local) spot-trading platform, no significant participation of power exchanges and no reliable price references. The local markets are largely foreclosed by dominating incumbent companies and regulated generation and supply segments. With a view to overcoming these barriers and boosting integration of national electricity markets, the concept of the 8th Region requires its members to implement a regionally coordinated procedure for electricity congestion management and the transmission capacity allocation throughout the region.

Even though eligibility is treated in an adequate manner in the legislation in all jurisdictions in SEE, obstacles for exercising the eligibility right still remain.44

—44 See Energy Community Secretariat, Regulated Energy Prices in the Energy Community – State of Play and Recommendations for Reform, 2012, p.28: http://www.energy-community.org/pls/portal/docs/1420180.PDF (02.04.2013)

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20Unpacking the ‘Third Package’ – The Croatian Story and the RegionBy Patrick CallinanSenior Associate, Karanović & Nikolić

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The Energy Community recognised that they needed to implement the changes to the acquis in order to keep pace with the ever changing EU law. In October 2011 the Energy Community Ministerial Council (the principal decision-making institution of the Energy Community) decided to adopt the European Union rules on the Internal Market for electricity and gas known as the “Third Energy Package”.

This of course now means that the contracting parties to the Energy Community now have a legal obligation to implement these rules by January 2015 - at the very latest. Of course, Croatia will be a full member state of the EU in July of this year and accordingly has already implemented the Third Energy Package’s directives into its own national legislation as required. The regulations will automatically apply to Croatia upon accession.

IntroductionThe Energy Community Treaty entered into force in July 2006 in order to try to extend the EU internal energy market to Southeast Europe and beyond. Upon putting pen to paper, contracting parties46 to the Energy Community committed themselves to implement the relevant EU acquis (EU laws), to develop an adequate regulatory framework, and to liberalise their energy markets in line with the acquis under the treaty. At that point in time the second internal energy package was the cornerstone of legal framework.

However, the legislative bar in the EU was duly raised in July 2009, when in an effort to further liberalise its energy market, the EU adopted the third legislative package for an internal EU gas and electricity market.

—46 For the purposes of this piece the contracting states to the Energy Community Treaty that will be discussed are: Bosnia-Herzegovina, Croatia, Macedonia, Montenegro and Serbia.

It provides several options for achieving the separation of transmission from supply and generation activities (full ownership unbundling, independent system operator (ISO) and independent transmission operator (ITO)). It also lays down universal service obligations and the rights of electricity consumers and clarifies competition requirements.

The Gas DirectiveThe common rules for the transmission, distribution, supply and storage of natural gas are established. The organization and functioning of the gas sector are laid down as well as the criteria for the granting of authorisations for the transmission, distribution, supply and storage of natural gas. The directive also requires regional cooperation between regulatory authorities and transmission system operators.

Three models are provided to ensure that the separation of the transmission activities from production and supply

4. The regulation establishing an Agency for the Cooperation of Energy Regulators; and

5. The regulation on conditions for access to the natural gas transmission networks.

Key features of the package include the unbundling of energy supply and production from network operations; ensuring fair competition between EU companies and third country companies; strengthening national regulators’ powers; and the creation of a European energy agency.

The Electricity DirectiveThis provides the rules for the generation, transmission, distribution and supply of electricity, as well as consumer protection provisions, with the objective of improving and integrating competitive electricity markets in the EU. It contains rules on the organisation and functioning of the electricity sector, open access to the market, the criteria and procedures applicable to calls for tenders, and the granting of authorisations and the operation of systems.

The legislative situation under the Third Energy Package and the progress made thus farThe Third Energy Package is comprised of both directives and regulations. A directive is an EU legislative act which imposes an obligation on EU member states to achieve a particular result, but without dictating the means of achieving that result. I.e. they can implement the directive into national legislation as domestic legislators see fit, once the required result is achieved. This is different to a regulation which is self-executing and does not require any implementing measures. The legislation that makes up the Third Energy Package is as follows:1. The directive concerning

common rules for the internal market in electricity;

2. The directive concerning common rules for the internal market in natural gas;

3. The regulation on conditions for access to the network for cross-border exchanges in electricity;

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functioning of the internal market in gas, and similar non-discriminatory rules for access conditions to liquefied natural gas facilities and storage facilities. The harmonisation of network access rules for the cross border exchange of gas is also provided and it envisages a well-functioning wholesale market which can facilitate security of supply. Finally it establishes a European Network of Transmission System Operators for Gas in order to allow for the management of the gas transmission network in the EU.

The Regulation establishing an Agency for the Co-operation of Energy Regulators (ACER) The regulation establishes the new agency the overall mission of which is to assist national energy regulatory authorities to perform their duties at EU level and to coordinate their actions whenever necessary. ACER also cooperates with EU institutions, and European associations of stakeholders, market participants, especially the European Networks of Transmission System

activities are the same as those specified in the Electricity Directive above. Competition requirements are clarified whereas it also provides for public service obligations and the rights of gas consumers. The Electricity RegulationThis regulation covers the conditions for access to the network for cross-border exchanges in electricity. The regulation provides the mechanisms that will harmonise the rules for cross-border exchanges in electricity. It establishes a European Network of Transmission System Operators for Electricity whereby all transmission system operators are to cooperate at EU level. This network is designed to promote the proper functioning and ultimate completion of the internal electricity market. It is also designed to promote and to facilitate the growth of cross-border trade.

The Gas RegulationThis covers the conditions for access to the natural gas transmission networks. It provides non-discriminatory rules for access conditions to natural gas transmission systems with the goal of ensuring the proper

20 Harmonisation with the EU

Operators, to deliver a series of instruments for the completion of a single EU energy market. The main areas on which ACER activities focus are supporting European market integration; advising EU institutions on trans-European Energy infrastructure issues; and energy market monitoring.

Practical aspects of the third Energy Package to the Balkan regionRegardless of where an entity may be established, the requirements of the Third Energy Package are applicable to any entity that is operating in an EU member state. A practical example of this would be the South Stream Gas Pipeline Project which proposes to bring gas from Russia into the EU. The application of this means that Russia’s Gazprom will be obliged to comply with the requirements of the Third Energy Package in Austria, Bulgaria, Greece, Hungary, Italy, and Slovenia who are all EU Member State countries. Croatia is set to become the 28th member state of the European Union on 1 July 2013 and will also fall into this category of country.

regulations within the tight January 2015 deadline. They are also likely to suffer from less motivation than their EU neighbours seeing as no sanctions can be imposed upon them if they fail to implement the provisions of the treaty.

remains ambitious. Judging from the experience of missed deadlines surrounding the Third Energy Package’s adoption in the EU member states, it is likely to be a struggle for the contracting parties to implement these

However, Gazprom will not be obliged to comply with the requirements of the Third Energy Package in Serbia until 1 January 2015 when it is due to be fully transposed into national legislation. However, this date in itself

The Electricity Directive – Directive 2009/72 – Current Status

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Country Implemented? CommentsCroatia YES Croatia has implemented the Directive 2009/72 through the following Acts: The Energy Act (Official Gazette 120/2012); the Electricity Market Act (Official Gazette 22/2013); and the Act on the Regulation of Energy Activities (Official Gazette 120/2012)

Bosnia and NO It must be transposed into law by 1 January 2015Herzegovina

Macedonia NO It must be transposed into law by 1 January 2015

Montenegro Only partially The provisions of the Energy Law (Official Gazette of Montenegro, no.28/10, 40/11, 42/11, 06/13) governing access to electricity transmission and distribution system have implemented provisions of the EU Directive 2009/72/EC, which requires regulating access to electricity transmission and distribution system. However it must be fully transposed into law by 1 January 2015

Serbia NO It must be transposed into law by 1 January 2015

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The Gas Directive – Directive 2009/73 – Current Status

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Country Implemented? CommentsCroatia YES The Acts in force which implemented Directive 2009/73 are as follows: The Energy Act (Official Gazette 120/2012); the Gas Market Act (Official Gazette 28/2013); and the Act on the Regulation of Energy Activities (Official Gazette 120/2012)

Bosnia and NO It must be transposed into law by 1 January 2015Herzegovina

Macedonia NO It must be transposed into law by 1 January 2015

Montenegro NO It must be transposed into law by 1 January 2015

Serbia NO It must be transposed into law by 1 January 2015

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The Electricity Regulation - Regulation 714/2009 – Current Status

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Country Implemented? CommentsCroatia Pending All EU Regulations will enter into force in Croatia on the date of Croatia's accession to the European Union (July 1 2013)

Bosnia and NO It must be transposed into law by 1 January 2015Herzegovina

Macedonia NO It must be transposed into law by 1 January 2015

Montenegro NO It must be transposed into law by 1 January 2015

Serbia NO It must be transposed into law by 1 January 2015

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20 Harmonisation with the EU

The Gas Regulation - Regulation 715/2009 – Current Status

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Country Implemented? CommentsCroatia Pending All EU Regulations will enter into force in Croatia on the date of Croatia's accession to the European Union (July 1 2013)

Bosnia and NO It must be transposed into law by 1 January 2015Herzegovina

Macedonia NO It must be transposed into law by 1 January 2015

Montenegro NO It must be transposed into law by 1 January 2015

Serbia NO It must be transposed into law by 1 January 2015

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The ACER Regulation - Regulation 713/2009 – Current Status

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Country Implemented? CommentsCroatia Pending All EU Regulations will enter into force in Croatia on the date of Croatia's accession to the European Union (July 1 2013)

Bosnia and NO It must be transposed into law by 1 January 2015Herzegovina

Macedonia NO It must be transposed into law by 1 January 2015

Montenegro NO It must be transposed into law by 1 January 2015

Serbia NO It must be transposed into law by 1 January 2015

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21Cooperation between USA and Serbia – current situation and future prospectsBy Douglas J ApostolUSA Embassy in Belgrade

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There are a number of outstanding examples of how productive our bilateral cooperation in energy can be. U.S.-Serbian cooperation in nuclear energy and safety, for example, resulted in the successful transfer of highly enriched uranium from Serbia’s Vinča Institute for Nuclear Research to the Russian Federation in December 2010. This eight-year project, completed with support from the International Atomic Energy Agency, the Czech Republic, the Russian Federation, the European Union, and the United States’ Department of Energy, was a model of international cooperation.

The United States has also provided direct assistance to Serbia to improve energy efficiency and to develop its renewable energy resources. For example, USAID, in cooperation with the former Ministry of Mining and Energy and EPS, provided funding and support for energy efficiency projects in a number of schools, hospitals,

The energy sector offers excellent prospects for bilateral cooperation between the United States and Serbia, both on the government-to-government level and in our commercial relationship.

On the governmental level, we would very much like to initiate a broader and more sustained energy dialogue between the United States and Serbia. Security and diversification of energy supplies, building additional energy infrastructure to bring resources to market, development of “green” sources of renewable energy, and related issues are of crucial importance not only globally, but here in the Balkans and Serbia as well. We would welcome a discussion of what the United States and Serbia, working together, can do to improve our ties in the energy sector and to enhance the energy security of Serbia and the region.

In connection with these renewable energy investments, I should emphasize that Serbia will face critical challenges in meeting its commitments under the EU’s “20/20/20” policies for renewable energy. Serbia has committed to increase the share of renewables in total energy consumption from 21.2 percent (as of the 2009 base year) to 27 percent by 2020. Given the substantial lead and development times involved in major energy investments, it is vital to start working now towards constructing the projects that will allow Serbia to meet its commitments.

In the fossil fuel sector, commercial relationships between U.S. companies and Serbian firms have grown significantly in recent years. A company with American roots, for example, was the lead contractor for the recently completed modernization of Naftna Industrija Srbije’s (NIS) Pančevo refinery, a project

The “flagship” U.S. energy investment in Serbia currently is in renewables -- Continental Wind Partners’ 270 million Euro, 172 megawatt wind energy park in Vojvodina, which will utilize General Electric turbines. Continental’s project is in the permitting stage and is nearly ready to break ground, though its success will depend on the Serbian government making the necessary regulatory decisions. I remain confident that the project will go forward and that its success will encourage other U.S. energy firms to enter the Serbian market. I also see excellent potential in biomass investments. The Embassy provided support for the Lazar Dairy in Blace, southern Serbia, to install a power-generating biodigester made by DVO, a company from the state of Wisconsin. Lazar Dairy is now selling electricity to feed into Serbia’s power grid. Private companies have expressed interest in replicating the project on a commercial basis at other dairy farms throughout Serbia.

senior citizen centers, and other public buildings throughout Serbia. USAID has also supported research and feasibility studies on development of Serbia’s renewable energy potential, including wood waste, and biomass.

Development of Serbia’s renewable and fossil energy resources will create significant commercial opportunities, and I hope that more U.S. companies will be attracted to the Serbian market. The Embassy has engaged in an ongoing dialogue for several years with the Ministry of Energy, Development, and Environmental Protection and its predecessor ministries on how best to structure Serbia’s legal and regulatory regime for renewable energy projects. If the Serbian government puts appropriate measures into place, it will open the door to hundreds of millions of dollars worth of renewable energy investments -- in wind, biomass, hydro, solar, and other areas.

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To sum up, I think there are excellent prospects for broader cooperation between the United States and Serbia in the energy sector. We have achieved some significant, mutually beneficial successes in the energy sector that I believe we can build upon. My hope is that ten years from now we will see a much broader range of U.S. investments and transactions in the sector -- from wind farms to gas power plants to biomass projects. It will take a great deal of hard work to lay a strong basis to encourage and facilitate U.S. and other investments in energy, but the potential is there. It will be up to all of us, working together, to realize this potential.

worth hundreds of millions of dollars. A U.S. company also provides quality and quantity verification services for the petroleum products refined at NIS’s facilities. To give another example, the engines and compressors that pump natural gas into Serbia’s Banatski Dvor storage facility are supplied by American firms.

These and other commercial success stories provide a solid basis for further growth in U.S.-Serbian business cooperation on fossil energy projects in the coming years. An increasing number of U.S. firms are exploring commercial opportunities that will be created by fossil energy infrastructure projects -- the South Stream natural gas pipeline, the expansion of Serbia’s underground natural gas storage capacity, construction of several gas-fired combined-cycle power plants, and further modernization of Serbia’s petroleum refining facilities, to name a few. The potential development of Serbia’s shale oil resources offers another promising area for long-term commercial cooperation.

21 Harmonisation with the EU

(In alphabetical order)

Our Team

Patrick CallinanSENIOR ASSOCIATEpatrick.callinan@karanovic-nikolic.com

Petar MitrovićASSOCIATE

petar.mitrovic@karanovic-nikolic.com

Jadranka JerkovićASSOCIATEjadranka.jerkovic@karanovic-nikolic.com

Josip MarohnićATTORNEY AT LAW/Odvjetnik in association with Karanović & Nikolićjosip.marohnic@karanovic-nikolic.com

(In alphabetical order)

Our Team

Patrick CallinanSENIOR ASSOCIATEpatrick.callinan@karanovic-nikolic.com

Petar MitrovićASSOCIATE

petar.mitrovic@karanovic-nikolic.com

Jadranka JerkovićASSOCIATEjadranka.jerkovic@karanovic-nikolic.com

Josip MarohnićATTORNEY AT LAW/Odvjetnik in association with Karanović & Nikolićjosip.marohnic@karanovic-nikolic.com

Stevan DimitrijevićPARTNERstevan.dimitrijevic@karanovic-nikolic.com

Veton QokuASSOCIATE

veton.qoku@karanovic-nikolic.com

Miloš VučkovićSENIOR PARTNER

milos.vuckovic@karanovic-nikolic.com

Leonid RistevSENIOR ASSOCIATE

leonid.ristev@karanovic-nikolic.com

Ivana VragovićASSOCIATEivana.vragovic@karanovic-nikolic.com

Dragutin NenezićASSOCIATE

dragutin.nenezic@karanovic-nikolic.com

for further information visit www.karanovic-nikolic.com

Notes

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Regional Energy ConceptsSerbia – Croatia – Bosnia – Montenegro – Macedonia

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