Clare Nuttall in Bucharest -

Most would-be EU member states from Southeast Europe met the January 2015 deadline for a full opening up of their electricity markets, though in reality few households yet have the ability to select their supplier. While only Macedonia backed away from its commitments, adopting a new law that will delay liberalisation until 2020, governments across the region have shied away from full market opening amid fears of the political impact of rising prices.

In October, the Macedonian parliament approved amendments to the energy law that will postpone full liberalisation of the electricity market for five years, until July 1, 2020. The decision was clearly politically motivated. When Economy Minister Bekim Neziri announced the plans on October 9, he cited research indicating that liberalisation would result in price hikes of up to 20% for consumers. The price of electricity “has a social note”, he added, according to the Macedonian daily Dnevnik. “To us it is important to protect citizens from possible price shocks.”

Skopje pushed ahead with amending the law, despite strong opposition from the Energy Community – an international organisation established between the EU and several third countries to extend the EU internal energy market to Southeast Europe. As well as being “a very clear breach of the Energy Community Treaty” that aims to bring prospective EU members into line with EU energy policy, the law would also leave consumers “stuck with the incumbent utility EVN”, the secretariat’s director, Janez Kopač, warned. Infringement procedures were launched against Macedonia on January 30.

Virtual liberalisation

While Macedonia is an extreme example, an immediate and full opening of local electricity markets enabling all households to choose their supplier from January 1 has proved to be unrealistic. “When it comes to household customers, there is a formal opening of the markets in most contracting parties, but not a real opening,” says the Energy Community's secretariat deputy director, Dirk Buschle. While customers formally have the right to choose their supplier, and suppliers the right to supply any customer, “when we look at how many customers are actually supplied by alternative suppliers, things look different”.

Even in Serbia, considered the frontrunner in energy sector reforms within the region, state power company EPS has retained its dominant position. EPS director Aleksandar Obradovic said in a December interview with Serbia’s state news agency Tanjug that he did not expect EPS to lose household customers, since the price set by EPS is 30% below the market price in the region.

This has already proved to be the case with corporate customers. Among large and medium-sized power consumers, who saw their markets opened in 2012 and 2013 respectively, some 97% were still EPS customers as of late 2014. While the electricity market was fully opened for households from January 1, smaller consumers will keep their right to supplies from EPS at prices set by the Serbian Energy Agency (AERS), and consumers deemed to be “underpriviledged” will receive a free monthly electricity allowance, Tanjug reported.

Fear of price hikes in a deregulated market is unsurprisingly a concern for governments. Rising electricity prices recently sparked demonstrations in both Albania and Kosovo. Buschle believes that without taking the risk of full liberalisation, neither governments nor consumers will get to see the benefits of a competitive energy market. In addition, most subsidies are applied to all households rather than focusing on vulnerable customers. “We have a vicious circle, a situation where prices are being regulated pretty much across the board for household customers, so there is no incentive to change supplier or for new customers to come into the market,” he says. “As a result, we fear that the state will not give the markets the freedom to develop, and they will never find out what happens when prices are determined by the market.”

Private sector companies are deterred from entering markets where they cannot compete on equal terms with the incumbents, but according to Buschle the incumbents also suffer. The situation, “puts a lot of strain on national electricity companies who have to supply customers at prices which do not cover their long-term costs, thereby draining money that under normal circumstances would be available for investment,” he says.

Positives and negatives

A spokesperson for Norway-based Statkraft, Europe’s largest producer of renewable energy and a pioneer in entering the Albanian market, told bne IntelliNews that the “positive attitude from the authorities in order to develop and deregulate the electricity market” was a deciding factor alongside the country’s “untapped hydropower resources, economic growth and increasing demand”. Despite the decision of its partner, Austria’s EVN, to drop out, Statkraft started construction work on the €535mn Devoll hydropower project in 2013. 

“In the case of Albania there has been, and still is, a strong interest from private sector investors to participate in the domestic and regional market,” says Tahseen Sayed, country manager for the World Bank office in Albania. “This should bring benefits to consumers and the economy while enhancing security of supply.” However, Sayed notes that a competitive power market needs customers to pay their bills, power utilities to provide quality of service and be accountable to consumers, and a well functioning independent and competent regulatory authority. “These are all steps being taken in Albania which are necessary steps to move in the direction of gradual liberalisation of the market,” Sayed says.

In particular, Tirana has launched a campaign to tackle the chronic problem of electricity theft, setting prison sentences of up to three years for those found guilty of stealing power. Theft and arrears by state companies were among the reasons for the failure of Czech utility CEZ’s 2009 investment in Albania. Demonstrating how seriously the government is now taking the issue, in December Deputy Environment Minister Diana Bejko was sacked for allegedly failing to pay electricity bills for her summer house.

At around 42%, technical and commercial losses in Albania are among the highest in the region, according to the World Bank, which also has the effect of pushing up prices for paying customers. Given the high poverty levels in Albania, “It is important that all consumers face the same reasonable tariff for energy and that government maintains a well-functioning safety net to ensure that poor families have access to a minimum amount of power as well,” Sayed tells bne IntelliNews.

High poverty levels across the region are at the root of why a full opening up of Southeast Europe’s energy markets for households is a gradual process. Buschle points out that not only would-be EU members, but also many long-standing member states also use their regulatory powers to keep down power prices for households. The difference in Southeast Europe is that incomes are considerably lower than in Western Europe, and electricity bills make up a higher proportion of total income, increasing the incentive for governments to ease the financial burden on households.