28 Jan 13

Reforms Could Light Up Serbia’s Electricity Market

A free-market overhaul of Serbia’s state energy provider, EPS, should loosen politicians’ grip and attract investment, experts believe.

Stevan Veljovic BIRN Belgrade
Zorana Mihajlovic insisted that EPS should import electricity without traders as intermediaries. | Photo by Bete

From the beginning of January Serbia began to open up its electricity market, starting with big customers connected to the transmission system.

Under the law on energy, 27 high-voltage industrial consumers, who make up around 10 per cent of the total market, were obliged to buy electricity on the free market as of January 1.

Under the Energy Community Treaty aimed at extending the EU’s internal energy market to south-east European countries, which Serbia ratified, the gradual opening up of the electricity market will continue until it becomes fully open in 2015.

In 2015 the open market will expand to households and other small consumers, although they will still be able to buy electricity from the public energy supplier designated by the state.

Introducing competition in the power sector is expected to increase efficiency in the production and distribution of energy and help to attract investment in order to ensure a stable energy supply in the region.

This also includes price liberalisation, but it means the state simultaneously has to find ways to secure energy supplies for the most vulnerable consumers while causing the least disruption to the workings of the market.

The current price of electricity for households in Serbia: 6.15 euro-cents per kilowatt hour and one of the lowest rates in Europe, should be increased in February by 10 to 12 per cent.

Liberalisation has also started in the gas sector, where it will expand to cover 40 per cent of the market through 2013 and 2014.

Under the 2004 law on energy, consumers whose yearly consumption exceeds 25 gigawatt hours are eligible to choose their electricity supplier.

From February 2008 this was extended to consumers with a yearly consumption lower than 200,000 kilowatt hours, excluding households, which opened up a potential 47 per cent of the market.

But although there are more than 50 registered electricity traders, most companies remained contracted to Elektroprivreda Srbije, EPS, the state-owned power utility which itself uses the market for the seasonal import and export of electricity.

In 2011 EPS spent €75.8 million on importing electricity from nine companies, but 73 per cent of the total trade volume involved only three partners, GEN-I, Alpiq and EGL.

Energy minister Zorana Mihajlovic said last year that EPS spent more than €120 million in February 2012 on emergency electricity imports.

The company is expect to end 2012 with a financial loss of around RSD33.4 billion (€297.6 billion).

In October 2012 Mihajlovic called for the investigation of all electricity procurements since 2000, accusing EPS of making deliberate mistakes in planning the import of electricity in order to allow more expensive emergency procurements, allowing some traders to profit from the power system’s problems.

After Mihajlovic insisted that EPS should import electricity without traders as intermediaries the company bought power from Elektroprivreda Republike Srpske, a power utility from the Bosnian Serb entity of Bosnia, Republika Srpska, to supply consumers on the transmission system in 2013.

To prepare itself to compete on the liberalised market, the monopoly utility has to transform itself into a joint stock company, reorganise its subsidiaries and improve its efficiency, including a review of potential redundancies.

EPS, which employs around 30,000 people, still has nearly 5,000 workers from its subsidiaries in Kosovo on its payroll, although most of them don’t live in Kosovo any more and some of them are working for EPS in central Serbia and northern Kosovo.

Experts say that proper reorganisation is key to attracting new investment in Serbia and allowing independent electricity producers to enter the market.

EPS should benefit from this process too, as it will allow the company to gain independence from the state and be relieved of price regulation, which is used as a tool to avoid potential social unrest.

Gradual price hikes expected:

Nikola Rajakovic: “The idea of corporatisation is to allow EPS to become independent from the state and responsible for its results and profit,” | Photo by Beta

Even though the 2011 energy legislation stipulated market liberalisation, the companies affected were not fully prepared for the change.

Dragan Vlaisavljevic, manager of the trading department of EPS, said in December 2012 that EPS offered industrial consumers prices 46 per cent higher than the one that used to be regulated by the state, although the real market price should actually be 60 per cent more.

Since then EPS has concluded contracts with three of 27 high-voltage industrial consumers on the open market, while others are still trying to avoid a sudden price hike by negotiating with the state.

After a meeting at the Serbian Chamber of Commerce, large industrial consumers asked in December for a transitional period of six months to enable liberalisation and a gradual increase in prices.

“A sudden increase would have a negative impact on the cost of products and domestic demand, and increase the inflation rate,” Vidosava Dzagic, vice president of the Chamber of Commerce, told BIRN.

On January 11 Mihajlovic indicated that the price hike for industry consumers would be divided into two parts.

But companies have also complained that all the necessary bylaws were not completed by December 21st 2012, leaving them with little time to negotiate new contracts.

A representative of one electricity trading company, who asked to remain anonymous, said that the late adoption of market rules prevented companies other than EPS from bidding.

“EPS was the only company that could make an offer without adopting market rules that regulate a number of technical issues,” he said.

“The delay will probably allow EPS to keep a monopoly in 2013, with increased prices for large industry consumers, but in 2014 the competition will be more intense,” he suggested.

From 2014 most Serbian companies connected to the distribution network will be on the market too and EPS will have to get used to the changed environment.

Ljubo Macic, president of the Council of Energy Agency, a regulatory body, said EPS suffered delays during past attempts to reorganise, but insisted it would have to prepare for 2014, when a large number of other enterprises are also due to buy electricity on the market.

“They have one year to prepare, but it doesn’t mean there is too much time,” Macic added.

Executives and politicians resisting change:

Slobodan Ruzic: “If the transformation is to bear fruit, the company has to be relieved of political influence." | Photo by Media Centre Belgrade

Although the government approved the guidelines for reorganisation in November and EPS general manager Aleksandar Obradovic announced that changes will start from January 1st, an official plan has yet to be adopted.

“The first quarter of 2013 seems a realistic deadline, as the government has to give its consent to the [final version of the] reorganisation plan,” said Milan Mirosavljevic, director of the EPS’s press office.

He said that apart from registering as a joint stock company, EPS also has to separate the distribution system operator from the supplier, which will work on the open market.

According to the energy law, the separation should have been completed by October 1st 2012, but EPS failed to meet the deadline.

Nikola Rajakovic, a professor at the School of Electrical Engineering in Belgrade, says that the state has always wanted to control EPS, both to secure low electricity prices and to wield political influence.

“The idea of corporatisation is to allow EPS to become independent from the state and responsible for its results and profit,” Rajakovic said, adding that EPS’s future profitability depends also on introducing higher, market-related electricity prices.

The reason why so little has been done to restructure EPS is also a result of resistance from EPS executives and politicians, who found it easier to pursue their own interests within the organisation as it is structured now, said Slobodan Ruzic, director of the consultancy Energy Saving Group and a former EPS employee.

“If the transformation is to bear fruit, the company has to be relieved of political influence over its functioning and financial flows, while pressure for staff recruitment selection based on political criteria has to stop,” he said.

Ruzic said that reorganisation includes reducing costs and making EPS competitive on the Serbian market and potentially in the wider region.

“This is also needed if Serbia wants to encourage investors who want to see an open market on which they could sell electricity under the same conditions as EPS,” Ruzic said.

He added that investors also expect to see power distribution companies, which are now part of EPS, separated and transformed into independent state-owned companies.

“There is a lot of resistance to this idea, because the separation of the distribution companies would interrupt current cash flows,” he argued.

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