Regional Energy Market

Progress Report on Regional Energy Co-operation
Negotiating an Energy Community for Europe

Summary

In energy the reconstruction phase has found definitely an end with the reconnection of the second UCTE synchronous zone (consisting KESH in Albania, EP RS in BiH, NEK in Bulgaria, EPCG in Montenegro, ESM in the former Yugoslav Republic of Macedonia, Transelectrica in Romania, EPS in Serbia, KEK in Kosovo together with HTSO in Greece) with the first zone on 10th October. From 1st January 2005 energy exchange will be only limited by transfer capacities. Technically, energy can flow now from Lisbon to Sofia and from Athens to Helsinki.

Given the age and lifespan of the existing power plants, huge efforts will be needed to keep the lights on. Studies underway have shown that the investment requirements could be reduced by a significant percentage with a coordinated regional approach for the development of the national systems. The two Athens Memoranda of Understanding (MoUs) signed respectively in November 2002 and December 2003 have launched a process leading to an SEE regional energy market that could be integrated into the EU internal energy market. Under the MoU, the SEE countries and UNMIK committed themselves to the introduction of a homogeneous regulatory framework, based on the EU Electricity and Gas Directives. A new Cross Border Trade Mechanism (CBT, excluding Croatia) was introduced by July 2004, which eliminates fees and non-technical restrictions at the national borders. In the envisaged transitional period until 2007, the regional market will be developed through transparent bilateral contracts.

The legally binding international treaty on an Energy Community (ECSEE), currently under negotiations, would create one single regulatory space throughout the European Union and South Eastern Europe, including Turkey and Norway. This icebreaking multilateral agreement between the EU and SEE countries would also introduce key EU competition rules and environmental standards. Special attention will be given to the social implications of the Energy Community Treaty and to the involvement of social partners.

General Objective

The creation of a single regulatory space through an Energy Community, encompassing the EU and the countries of SEE, including Turkey and Norway, evolved from the implementation of the South Eastern Europe Regional Energy Market, the so-called “Athens process”, launched in March 2002 by the European Commission under the auspices of the Stability Pact. The process aims also at overcoming the many local imbalances in SEE in energy demand and supply and at ensuring generalised access at cost recovering prices. The process addressed first the problems of the electricity sector and led to the signing in Athens on 15 November 2002 of a Memorandum of Understanding (MoU) on “the establishment of the Regional Electricity Market in South Eastern Europe and its integration into the European Community Internal Electricity Market”. The second MoU signed in Athens on 8 December 2003 extended the process to the gas sector.

Through these two MoUs, the SEE countries (as well as Turkey and also UNMIK for Kosovo in line with UN Resolution 1244), together with Austria, Greece, Italy, Slovenia (since 1 May), adopted a coherent vision regarding the development of competitive regional electricity and gas markets in South Eastern Europe and set the terrain for the medium to long-term catching-up of the region’s electricity and gas sectors with the standards of the European Community, including the acquis on environmental standards, competition and renewable energy resources. The countries of the region did so in recognition that improving the stability of electricity supply is fundamental for social and economic development and ultimately political stability. Moldova and Hungary are observers of the Process.

The move to a legally binding document creating an Energy Community could be seen as a replication of the creation of the European and Coal and Steel Community, which was the first step in the EU integration process. It is constructed on the two MoUs, which are modelled on the market-opening schedule of the new EC Electricity and Gas Directives, foreseeing the opening of the electricity and gas sectors of EC member states first to business (non-household) customers by the end of June 2005 and ultimately for all customers by July 2007. The draft treaty envisages that such opening would take place in SEE in 2008 for non-households and 2015 for all customers. More importantly for the SEE countries, it introduces strict requirements concerning the creation of independent national energy regulators, state authorities and the unbundling of generation, transmission and distribution activities. These MoUs and the Treaty also foresee the establishment of a number of regional bodies: besides the Ministerial Council and the Permanent High Level Group (PHLG), there will be fora on gas and electricity and a Regional Regulatory Advisory Board. The Athens Secretariat, which will be relocated and enhanced in Vienna, has, among others, a monitoring function, coordinates the different regional bodies and interacts between the EC, the participating countries, the donors and the Stability Pact.

On the occasion of the Energy Ministerial in Athens in December 2003, all signatories of the MoUs committed themselves to transforming the MoUs into a legally binding international agreement, securing a common approach and providing investors with enhanced legal certainty. In principle the institutions already set up for the regional electricity market would work in parallel for the gas market. The meeting to launch a parallel process towards the creation of a regional gas market, which took place in September in Zagreb, envisaged a Forum in Istanbul for gas market participants similar to the Forum already created for electricity.

A remarkable aspect of this Athens process is that it is supported by a jointly agreed strategy, involving the multilateral and bilateral donors. The energy sector donors’ group is chaired by the European Commission with the support of the Stability Pact. This is the first time such a common strategy covering a specific sector in a full region has been agreed, which maximises flexibility in terms of timing, scope and amount of financial and technical assistance.

In addition to the reference to the Kyoto Protocol in the first MoU, the second MoU introduced references to three EU environment directives, namely those related to large combustion plants, environmental impact assessment and reduction of sulphur content. The Treaty foresees much more detailed and legally binding environmental measures (i.e. RAMSAR) to secure sustainability of the energy sector.

Recent Developments

The three most important developments in which the Stability Pact participated over the last six months were the following:

• Launching of the negotiations on the treaty on the Energy Community: after several month of preparation the negotiations for the legally binding Energy Community Treaty were officially launched in October 2004; a new negotiation session took a place on November 16 and 17. The Stability Pact’s most significant contribution to the launching of these negotiations was the organisation a meeting in Vienna on 15 July of for Senior Advisors to the Prime Ministers of the region in view of securing political consensus in the region on the fundamental provisions of the draft Treaty. The SP Special Co-ordinator reported on the outcome of this meeting at an informal meeting of the SEE Prime Ministers in Salzburg at the end of July.
• Conference with Parliamentarians, Social Partners (Trade Unions and Employers Organisations) and Non-Governmental Organisations: Romania, under its SEECP Chairmanship, initiated and hosted this conference. The Stability played a key role in its organisation, securing the speakers from private sector and the donor community. This conference provided a comprehensive overview of the implications of the ECSEE and the challenges ahead given the unavoidable restructuring in the energy sector.
• Physical reconnection of the SEE countries (2nd zone) with the main grid system (UCTE 1st zone) in Europe: the Stability Pact is stressing the political importance of this reconnection and sensitising private sector partners about its implications.

Other significant developments over the last six months include the following:

A provisional strategy paper was presented in the form of a discussion and consultation note from the European Commission DG TREN during the 3rd Energy Week in Athens in June. It is accessible on the Stability Pact website.

Under the Austrian Presidency, which started in July, the SEE representatives met for informal talks during a legal seminar in September, where written comments were discussed and the structure and concordance with other EU agreements and documents was checked.

It is expected that the Treaty could be signed under the next Presidency of the Athens process, namely the presidency of Bosnia and Herzegovina in the first half of 2005, and that it will be ratified before the end of 2005; there is a danger that otherwise the necessary momentum would be lost through non-existing certainty for further investment. In the meantime, existing commitments of the MoUs should be not forgotten; some of them have to be implemented by the end of June 2005. The Regional Balkan Infrastructure Study (REBIS) on energy is giving a clear picture of the remaining gaps.

Besides the ongoing treaty negotiations, the donors group is concentrating on the transitional period between 2005 and 2007 and on the results of the Generation Investment Study (GIS), financed under the CARDS Programme. This study clearly underlines the benefits of a regional coordinated approach and estimates the saving in investment costs at 30% to 50% between a collection of separate national programmes and the implementation of a regional programme involving also the environmental and energy efficiency dimensions. The challenge is to ensure that the regional investment programme meets future demand at the national level up to 2020. The final results of the GIS Study are promised for the end of this year and will clarify the needs for future investment in the Western Balkan countries. In the meantime, the South-Eastern Europe Cooperation Initiative (SECI) Transmission Planning Project has broadened its horizon and is now elaborating the Regional Tele-Information System, which is essential for the functioning of a regional trading system.

The Stability Pact has had several informal meetings with representatives of concerned associations like the Union for Coordination of Transmission of Electricity, the European Transmission System Operator Association, the Energy Charter Treaty Secretariat and the Union of the Electricity Industry (EURELECTRIC) to discuss current issues and to engage them more, whenever appropriate.

A joint seminar with EURELECTRIC and the European Federation of Energy Traders (EFET) was postponed. This seminar on electricity distribution is now envisaged in early 2005, as distribution connected topics were identified in the draft transitional strategy paper, presented in Athens during the 4th Energy Week, as particularly important for the success of the regional market. The event is designed for the concerned international bodies and for generation and distribution companies; it will allow an exchange of ideas concerning the functioning of the market, and the challenges of creating more transparency in trading on a regional market interacting with the EU Internal Market.

Goals for 2005

• Fostering political consensus for successful completion of negotiations, signing, ratification and implementation of the treaty on the creation of the Energy Community including South Eastern Europe: this foresees ongoing participation in the Athens Forum and Donors Group (fifth Energy Week evisaged to take place in Skopje in early 2005), possible organisation, in close co-operation with the European Commission, of further meetings of Senior Advisers to Prime Ministers as well as with Parliamentarians (in co-operation also with the Working Table I Initiative for Inter-Parliamentary Co-operation), Social Partners and NGOs of the region. Co-operation will be established with the Initiative for Social Cohesion (ISC) in view of promoting social dialogue on the issues raised by the creation of the Energy Community (e.g. affordability of tariffs, impact of restructuring on employment in the energy sector and programmes to mitigate the social impact).
• Contribution to the follow-up on the implementation of the reform commitments undertaken by the signatories of the two MoUs
• Possible contribution to the launching of an environmental sub-group in close co-operation with the European Commission DG Environment and DG TREN.
• Participation in the Gas Forum to be launched by the European Commission
• Continuing efforts to ensure private sector interest in the opportunities created by the Energy Community, in SEE, through the organisation of or the participation in industry roundtables or other conferences on the SEE energy sector.
• Contribution to the formulation and implementation of the evolving donors’ strategy led by the World Bank and European Commission (incorporating the gas sector), with special attention being given to the recommendations of the EBRD sponsored affordability study and of the forthcoming Investment Prioritisation study.
• Possible contribution to further regional co-operation initiatives in the areas of energy efficiency (including district heating), renewable energy resources and small scale generation units.

November 15th, 2004, By Peter Houzer, Energy Expert, Tel. +32 2 401 8717, Peter.Houzer@stabilitypact.org, www.stabilitypact.org/energy