Member of the Assembly of the Republic of Macedonia, and Associate Professor at the Faculty of Electrical Engineering, University “Sts. Cyril and Methodius”, Skopje, Republic of Macedonia
This article is written on the day the Macedonian Independent Transmission System Operator (MEPSO) was inaugurated. Consequently, following the creation of the Energy Regulatory Committee of the Republic of Macedonia, an additional criterion, in the line of three, for establishing the power market in the country has been met. A big step towards complete energy integration in Southeastern Europe (SEE) and the European Union (EU) has been made. And while SEE’s and EU’s power societies congratulate the country on the success achieved, the electrical energy reform promoters in Macedonia, including the Ministry of Economy and the Government of the Republic of Macedonia, are already finalizing preparations for the third essential prerequisite, or rather the adoption of a legal power market framework.
Background or What is all about?
Why all the efforts? It is very difficult to explain and not to tell a short story dated not so far in the past, when energy industry all over the world was run by vertically integrated and monopoly utilities. Monopoly utilities were providing power and gas to customers, and were very often playing additional social role for the state or the municipality by which the monopoly franchise was granted. Organization followed these principles because the infrastructure investment for initial building of the system required stable framework and secure profit margin.
About twenty years ago, a process called deregulation, or re-regulation, of the energy industry, in parallel to the liberalization of the power and gas markets, started, first in Chile, then in Norway, England & Wales, Argentina, Australia, North America and Europe. The process was driven by emerging new competitive technologies and by a motivation to obtain improved efficiency, technical functionality, to attract private investments and to reduce prices through the newly emerged competition. These challenges were to be obtained by creation of competitive markets. But, the market would be functional only if it succeeded in developing a sufficient size. A development of huge number of common legislation and regulation should follow these efforts.
Owing to deregulation and liberalization in energy management, EU established an Internal Energy Market, which, due to the technical functioning aspects, is composed of a number of regional markets. SEE’s Regional Energy Market is in creation with a clearly defined perspective to become an integral part of EU’s Internal Energy Market. Every regional market follows the principles of the Internal Market and all European directives in the area.
Namely, the long-term strategy for energy supply of EU member states pointed to the necessity to establish a “bridge” for energy connection with Caspian Basin areas, mainly as a result of the diversification of energy sources and the increase of supply safety and quality. Therefore, deep economic, technical and political relevance is attached to the construction of SEE’s Energy Market. There are hopes it will urge regional cooperation, structural reforms and European Integration. Countries in the region espouse the best European practices learning how to cooperate on their road to Europe they geographically fall into. As a result, the market is important both for the Union and the countries of the Region, creating a typical win-win situation, motivating all parties involved and resulting in one of the most successful European projects in SEE.
The EU is in the process of rapidly completing its internal electricity and gas markets. Extending the benefits of the Internal Market to the ring of countries that surround the Community is part of that stability projection. This is the Union’s central role. A well-implemented wider internal energy market will lead to increased competition and lower prices, allow higher environmental protection and safety over a wider area, as well as enhance security of supply throughout Europe. There are strong arguments for extending the internal electricity and gas markets outside the borders of the Community, but the creation of a level playing field and equivalent environmental and safety standards is a central element so the wider European electricity and gas market could function effectively. The process of inclusion of these countries goes considerably beyond simple questions of free trade between the EU and its neighbors. It involves an active creation of an authentic integrated market, free of barriers, based on legal principles, and ensuring security of investment and trade.
The institutional necessities for initiation of a process similar to that of the European Electricity Regulatory Forum (the Florence Forum), have been determined by the countries of the region themselves, with the assistance of international donors, and were agreed in Athens, June 14 2002. The Forum established a process of cooperative actions and works to bring SEE countries to the common energy market.
The regional level donors, coordinated by the European Commission (EC) following the Istanbul Conference of the Stability Pact in 2001, with its present partners SEETEC, SECI, USAID, KfW, the World Bank, EBRD and EIB offer full support. The Commission endeavors to coordinate state and regional initiatives at the multinational and bilateral level in order to achieve the common objective. EU Member States – France, Italy, Austria and Greece – are actively working with the Commission. SEE countries – Albania, Bulgaria, Bosnia and Herzegovina, Croatia, Macedonia, Romania, Serbia and Montenegro and UNMIK Kosovo – are full participants in the process, joined by Hungary, Moldavia and Slovenia, which participate as observers.
The initiative is called Athens Process, deriving from name of the town that hosted the signing of the first Memorandum of Understanding (MoU) for establishment of Electricity Market of SEE, November 15, 2002. By signing the MoU the countries demonstrated clear political commitment to open state markets to trade and to develop inter-regional and regional trade, including a clear commitment to legally unbundled power companies consistent with the Electricity Directive of the EU.
In December 2003, the Ministerial Meeting signed the second MoU and extended the commitments to implementation of EU Directive on Natural Gas, as well as to implementation of Directives directly related to the impact of the energy sector to the environment.
The common objective of MoU adhering countries and the international donor community is to stimulate economic growth and investment in SEE by improving the availability, efficiency and reliability of electricity service at reasonable cost. The adhering countries and the donor community seek to do this through promoting greater regional integration, creating a regional market, competition and increased trade within the SEE region and between it and the EU internal electricity market. To achieve the common objective, they work together with responsible organizations such as the Council of European Energy Regulators (CEER), the European Transmission System Operators (ETSO), and the Union for Coordination of Transmission of Electricity (UCTE), and the Energy Regulators Regional Association (ERRA).
The approach favored by all participants and donors is full, state regulatory control over the electricity system within a regional dimension, as is the case in the EU, hoping, however, to develop regional trade aimed at optimal utilization, on a regional basis, of regionally available natural resources and of existing, as well as planned facilities, with cost minimization to bring the regional electricity infrastructure up to a standard comparable with that of the EU.The countries of the region should be able to adopt state policies, within the parameters of EU legislation. Environmental issues are a priority and are addressed in a manner consistent with international obligations of the countries in the region. Standards should be compatible with EU levels.
To establishing a functional Regional Energy Market three basic preconditions should be met: Reform of the legal and regulative framework and its harmonization with related EU Directives; Commercial operation of energy utilities; and Development of interconnection infrastructure between the energy systems of participant countries.
Therefore the adhering parties to the Athens MoU agreed that they would:
Create, where this has not already happened, regulators, independent transmission system operators and government agencies with sufficient administrative capability to actively achieve the aims within the MoU;
Implement grid codes with common elements across the region that allow basic operation of the grid and do not discriminate against regional trade; these grid codes shall allow trade on a non-preferential basis and shall be based on best practices within the EU and according to the Union for Coordination of Transmission of Electricity rules. These codes shall facilitate and encourage regional trade with the objective of making use of the regional resources and facilities;
Identify all relevant technical norms for the operation of national markets, under the coordination and control of ETSO and UCTE;
Identify and implement a transparent financial settlement systems, assign roles in accountancy and principles for apportioning costs, and apply international accounting standards (IAS); to complement a system of independent audit; to implement accounts transparency at a level that meets international standards; and in addition adopt best practice on corruption abatement;
Implement, in collaboration with ETSO and UCTE, an appropriate method for collaboration and information exchange between national dispatch centers; implement the SECI Working Group Plan for Tele-information System among National Dispatch Centers, with the agreement of ETSO and UCTE;
Conduct tariff reform and adopt reduction of non-technical losses. The plan should include schedules for: raising tariffs towards cost recovery, defined as operating cost plus debt service plus a return on equity; phasing out cross subsidy (between industrial and residential consumers); introducing time of day pricing for large consumers; putting in place a social safety net (if there is not already one in place);
Implement a system of Regulated Third Party Access to the transmission and distribution systems based on published tariffs, applicable to all eligible customers and applied objectively and without discrimination between system users. The countries shall ensure that these tariffs, or themethodologies underlying their calculation, are approved prior to their entry into force by the national regulatory authority and that thesetariffs are published prior to their entry into force;
Implement a licensing system for all types of infrastructure facilities and for market participation that is transparent, non-discriminatory and in line with international best practice;
Adopt legislation on competition that is at least applicable to entire energy sector.
In order to facilitate the implementation of commitments and to ensure the development of complementary energy markets the Commission benchmarks the countries of the region and issues an annual report as a basis for further actions.
Furthermore, the adhering parties in cooperation with the donors, taking as a starting point the investment optimization and the need to attract private capital by ensuring least cost solutions, work on preparation of a prioritized infrastructure plan that would ensure interrelation of state and regional projects and shall have a regional focus.
Energy Community Treaty
Following the two Memoranda, which are politically binding, and the level of development in achieving commitments, the states of the region stressed the need to move towards a legally binding framework, establishment of strong institutions and an oversight body to monitor the operation of the market. The Commission – in conformity with the legal constraints of Article 300 of the EC Treaty (Treaty of Nice) - obtained a negotiating directive from the Council on 14 May 2004 to conclude a legally binding agreement having essentially the same content to the two Memoranda.
A legal basis is important for the following reasons:
- Western Balkans energy markets are too small to support large investments in gas and electricity without clear export potential. Clear legal bases for export and transit are needed;
- Moreover, the Western Balkans markets are too small and fractured to support the institutions of an EU market (regulators, TSOs, etc.). So a regional regulator and regional institutions are envisaged. These may need a legal basis;
- Eastern Balkans electricity markets are saturated and need to export. The nearest market for export is Italy, but export depends on clear rules, as in the EU, with legal redress;
- Political risk is still too high for commercial lending into the region; a clear legal basis would reduce risk for commercial lenders, and would be part of the projection of stability needed in the region;
- Politically and economically, most of the countries will have to depend on their neighbors for energy supplies in the future; a legal basis with a strong external sponsor, such as the Union, will allow a smooth adjustment from national to regional policies, where a country’s neighbors will have some control over energy policy;
- Lastly, the countries will not put their energy security in the hands of their neighbors without legal guarantees and a guarantor; a political declaration is not enough.
The Energy Community Treaty is to be signed by SEE countries and the EU countries, represented under a single, European Communities signature. In optimistic terms, it should happen in the first half of 2005 and thus open the doors of the Internal Energy Market for trade in electricity and natural gas to SEE countries under the very same conditions applicable for EU members. The signing will be followed by ratification in national parliaments.
As the energy market develops, the need for oversight and market operation monitoring bodies will grow into a necessity. The Memoranda have underpinned a Ministerial Council, a Permanent High Level Group and a Forum for discussion of issues. By the Treaty, the Forum could be put on a legally sound basis and given an advisory role, consistent with its analogues in the European Union (the Madrid and Florence Forums).
Furthermore, the parties to the Treaty envisage the creation of a SEE Regulators Board for Electricity and Gas (the Regulatory Board) which could ensure a level playing field in the regional market. This Regulatory Board is based on the EU’s Regulators Group for Electricity and Gas. It could play an important advisory role in setting the detailed statutory, technical and regulatory rules in the region, and monitor implementation. It might also have limited adjudicatory powers for certain types of market disputes that in the EU are settled bilaterally by regulators, but might be better handled by a wider group in the context of SEE.
A Secretariat could be put in place, too. It could monitor implementation of commitments and prepare meetings.
To ensure reliable operation of the market, the establishment of Technical Committees, under the umbrella of the Regional Energy Information and Technical Centre (REITC) may be required. Energy information and statistics are neglected and yet needed. The REITC could systematically collect data from across the region and make it accessible to all.
The Energy Community Treaty is still being negotiated, but its primary intention would be to secure free trade of energy under transparent conditions among the countries in the region, and with EU countries. The commitments on restructuring the energy sectors in SEE countries and opening national markets to competition, taken previously by the Memoranda, are reconfirmed on a legal basis. The Energy Directives should be fully implemented within six months of the enforcement of the Treaty. Terms for opening of markets, which are considered now, are January 1, 2008 for all non-household customers, and January 1, 2015 for all customers. Besides this, the Treaty should assure due care of environmental issues and renewables.
Renewable energy sources have considerable potential and they could make an increasingly substantive contribution to supply diversification, emission reductions, security of supplies and sustainability of the energy sector as a whole, over a long-term perspective. Many participants view renewable sources as means for promoting the development of small local businesses in selected areas and diversifying supply patterns, at the regional level. There are some national programs on renewable energies, and also indicative targets. However, financial constraints, energy pricing policies and the lack of supportive schemes continue to hamper the development of renewable energy sources. The potential for renewable energies is large, but still remains a complement to rather than a replacement of fossil fuels.
Improvements in energy efficiency depend not only on technical innovations, but more on change in consumer attitudes and in a strong institutional framework so gains are sustainable. In order to achieve such changes, convincing and solid national policies are required, which could bring structure to government actions as well as provide the right signals and motivations to encourage market transformation.
The energy efficiency is an essential issue for the market reform process and subsequent market opening.
Environmental aspects are an immediate priority. They are predicated on capacity building in Ministries and Regulators.
For Bulgaria and Romania, clear timetables for compliance with the acquiscommunautaire have been developed in the framework of accession negotiations. Transition periods can be negotiated on a case-to-case basis to allow for a prolongation of the timetable for harmonization. These transition periods would normally only be given for investment heavy directives. The same could be true for Turkey, should negotiations be opened, although already under the Customs Union Agreement Turkey undertakes to comply with certain single market directives.
For candidate countries, environmental issues could be broadly addressed through their alignment with the acquis in accordance with the negotiated timetables. No further specific actions are required on alignment under this process.
Other parties are in a different situation and are covered by the Stabilization and Association Process (SAP). The Stabilization and Association Agreements (SAA) that form the legal basis for relations between each country and the EU do not contain strict environmental commitments, but identify the environment as key sector for cooperation. The SAP goal is eventual integration of these countries into the structures of the EU; therefore harmonization with the acquiscommunautaire becomes a long-term objective. So far agreement of this kind has been in place with Macedonia, an agreement has been signed (but not yet ratified) with Croatia and negotiations have opened with Albania.
The Commission agrees that SAP countries should not be expected to immediately apply EU environmental norms and standards to their existing generating plants. However, the same cannot be argued for construction of new plants, particularly if financed by the international community. The Commission expects that additional costs from meeting EU standards in new plants could be socialized across the complete energy sector.
The key Environmental Directives are listed in the Athens 2003 Memorandum. This Memorandum requires that SAP states put in place indicative timetables for compliance. Some countries are already preparing timetables for approximation with the acquis, which need to be discussed and examined in the particular context of the state. It is also clear that environmental legislation needs to be clearly linked into the timetables for other legislation to enable a phased implementation. As the proposed market begins to fall into place, there could be a raised capacity to finance various environmental investments.
Reforms in Macedonia
The Republic of Macedonia understood the necessity for stepping up with modifications in energy and energy connection management, as a model for general integration in the region and the Union. Immediately after signing the first MoU in November 2002, the Government started preparing and implementing major reform motions of legal, organizational and institutional character, as well as measures for commercialization of energy enterprises in public ownership.
As soon as December 2002, the Parliament of the Republic of Macedonia passed amendments to the Energy Law introducing the Energy Regulatory Committee (ERC). ERC is an independent legal entity whose aim is to secure reliable and continued energy supply to consumers in the Republic of Macedonia, protected the environment and the nature, and promote and protect a competitive energy market based on the principles of objectivity, transparency and non-discrimination. ERC is independent in its operations and decision-making, and at least once a year reports to the Government of the Republic of Macedonia and to the Assembly of the Republic of Macedonia.
ERC members were appointed in June 2003 by the Assembly of the Republic of Macedonia, following a proposal made by the Government of the Republic of Macedonia. The actual enforcement of ERC started on 1 January 2004.
Within the scope of authorities of ERC the most important are issuing of pricing methodologies and tariff systems on individual types of energy, as well as, calculation of prices according to the Methodology of pricing, as well as issuing licenses, and customers’ protection. A new Electricity Tariff Methodology has been recently published in the Official Gazette of the Republic of Macedonia. ERC promised to bring the Licensing Code, within a time framework of few months.
The next, very difficult step in restructuring the electricity sector was the establishment of a Transmission System Operator. The Law on Restructuring and Privatization of the Electrical Power Company of Macedonia (ESM), which was passed in March 2003, imposed that the existing vertically integrated company should be split to two separate joint stock companies, namely:
Power Company of Macedonia (AD ESM), joint stock company for production, distribution and supply of electrical energy, and
Transmission System Operator of Macedonia (AD MEPSO), joint stock company for transmission of electrical energy and power system operation, in state ownership.
The legal procedure for registration of the two new joint stock companies was completed by the end of 2004. So, the Macedonian Power Transmission System Operator (MEPSO) officially commenced its operation on 1 January 2005. MEPSO owns all assets for transmission of electricity and performs maintenance, expansion planning and construction of the transmission system, operation of the power system and provision of energy for tariff customers and ancillary services, as well as organization and management of the electricity market, which means performance of the Market Operator (MO) function.
The MO, founded as a separate organizational unit within MEPSO, will be responsible for organizing the wholesale market of electricity at national level in the period of transition to open market and development of the regional electricity market. Depending on the needs and requirements of electricity market development in the Republic of Macedonia and the region, the MO could be separated from MEPSO establishing new institution.
The last important obligations in unbundling and restructuring the electricity sector of the Republic of Macedonia remain to be completed in the year 2005. Namely, they relate to accounting and legal unbundling of production and distribution functions within the AD ESM and establishment of a Distribution System Operator (DSO). DSO should play a role in allowing a competition at a distribution customer’s level.
In the meantime, the Government of the Republic of Macedonia, advised by its consultant Meinel Bank Consortium from Vienna, is going to conduct activities toward privatization of the whole or some parts of AD ESM. The privatization is expected to provide for an effective commercialization of the electricity sector in the country, and attract foreign private capital and direct investments in new infrastructure.
Crucial for all of these activities for establishment of national energy markets is the adoption of legislation on competition in the electricity and natural gas sectors. The national legislation on competition is in creation phase by the consultant law firm Hunton&Williams, supported by the USAID, and by a local workgroup consisting of representatives from all relevant institutions in Macedonia. A serious approach on two-phase legislation development has been developed.
The first phase is adoption of Electricity Market Design Plan, which defines the main entities on the market and their relations from the aspect of energy flow, operation of the system, agreements and flow of money. Based on this design, both the primary and the remaining secondary legislation, among which the Commercial Code, Market Code and issuing of licensing, will be created. The Grid Code will be prepared by MEPSO and approved by ERC. The Electricity Market Design Plan was approved by the Government in December 2004.
The second phase is the actual creation of the legislative. The primary Law on Energy Market should be adopted in the first half of 2005. It includes a short introduction of the basic principles of competition, as the right of non-discriminatory third party access to the network, eligible customers of electricity and natural gas, thresholds for opening markets, obligation of public service for electricity customers and transparency in the investment and energy infrastructure construction procedures.
In addition to mainstream reform, the other MoU required activities are also taken care of.
UCTE norms and standards are fully applied in Macedonia’s electricity system. The reconnection of the system with the first synchronous zone of UCTE was successfully performed on October 10, 2004.
Representatives of national institutions participate in the work of all responsible organizations in the EU, like a group for market facilitation, the sub-groups of regulators (CEER) and transmission system operators (ETSO), as well as UCTE.
Macedonia has signed the Agreement on cross-border trade with SEE countries, which took effect July 1, 2004. The Agreement regulates the means of payment for electricity transits through countries of the region based on the Cross-Border Trade Mechanism - CBT Mechanism, defined in the Annex of the Agreement. Moreover, Macedonia is leader in the implementation of the SECI Plan for Tele-information system among National Dispatching Centers in the region.
The separation of the accounts for production, distribution and supply of electrical energy was completed before the end of 2003. But, the International Accounting Standards took effect January 1, 2005.
In the sphere of the fight against corruption and financial crime, the Law on corruption eradication and the Law on prevention of money laundering and other incomes from crime activities were adopted. In addition, the Anti-Corruption Committee of the Republic of Macedonia, the Financial police, the Agency for prevention of money laundering were established, and other measures undertaken for eradication of corruption in energy-related enterprises.
According to the obligations taken with SAA, the 2003 MoU, as well as the future Energy Community Treaty, the Government of the Republic of Macedonia is obligated to prepare a Plan of implementation of directives directly concerning the impact of energy-related activities to the environment.
The provisions of these directives have already been incorporated into the new package of laws in the environment sphere. Based on these laws, a detailed set of sub-regulations will be adopted, directly regulating the condition, manner and procedure of implementation of legal obligations. The implementation time schedule of different provisions will depend on their investment requirements.
Macedonia ratified the Kyoto Protocol in summer 2004.
The reasons for which Macedonia joined the Athens process and launched all necessary reforms for participation in the regional energy market are both political and economic. They are political owing to Macedonia’s determination to accede to the EU, thus hoping to turn this area into its first fully harmonized domain to EU standards. From an economic point of view, its accession implies full implementation of structural reforms and European management standards in one of the fundamental economic sectors, thus meeting an important part of prerequisites for attracting foreign investments in this sector.
By signing the Energy Community Treaty, Macedonia became a part of the EU in the energy domain, entailing both economic and political advantages. The agreement itself is more political than economic. It reflects the European Community Agreement on Coal and Steel in its basis and structure, even though it relates to electrical energy and gas.
The Treaty is signed every ten years, although special emphasis has been put on the fact that every future Union member will be excluded from this block upon accession and naturally proceed to the EU block of states. As a consequence, participation in this block should not be conceived as substitution for the primary objective – full integration in the Union.
Macedonia in the Energy Community
Besides supporting reform measures and creating common institutions, the Macedonian side, in the frame of the initiative for creating a common energy market, makes special efforts to respect the social aspects of both the process and the reforms.
The social effects of the transition to open market should be investigated by enhancing the social dialogue with trade and employers unions and NGOs and finding the most appropriate mechanisms to deal with the social consequences.
The social consequences might concern direct and indirect employment, effect on skills and qualifications, tariffs for householders (and especially vulnerable ones), and democratic control over the future direction of the energy system. It is prudent to establish measures to deal with these effects such as training programs and employment generation measures. Then, the SEE governments should consider the presentation of accompanying and mitigating measures to deal with the social effects of restructuring.
Establishing the cost reflective energy tariffs must be accompanied by social safety net measures. Most of the countries in SEE have already in place direct social payments for energy, and even block tariffs for residential customers. The block tariffs are allowed, as long as they regulate price of electricity depending on the consumption within one group of customers, usually residential, and do not cause cross-subsidies among different customer groups. The Macedonian Government, with financial support of EBRD, is currently conducting a study to propose measures for social protection against energy poverty in the country. Key issues that the study must address include establishing criteria for determining eligibility for support and the mechanism for providing support.
The regulator or other competent body might also develop a policy for fighting fuel poverty in some areas such as: competition in gas and electricity supply, energy saving and energy efficiency commitment, monitoring supplier social obligations, and promoting good practice on debt prevention, by focusing energy companies attention on improvements in minimizing billing errors, using incoming calls to identify consumers in difficulty, demonstrating flexibility in debt recovery, offering sustainable solutions to consumers in extreme hardship, services for prepayment meter customers and special help for the elderly, disabled or chronically sick, debt prevention strategies, etc.
Public support is essential for the success of reform, and this could be obtained by promoting balanced regulation, by taking into account the interests of the industry participants and in particular of the customers.
The Macedonian side enthusiastically accepted and plays an active role in the realization of the idea for involvement of MPs and the civil society in the process of energy connection, especially in the stage of signing the Energy Community Treaty and its ratification.
The first event in this order was the Conference “Towards an Energy Community in South East Europe” which took place in Bucharest in October 2004. The Conference was organized by the Romanian Chairmanship-in-Office of the SEE Cooperation Process (SEECP) and with support of the EC and the Stability Pact. The target audience was composed of representatives of Parliaments of SEE countries, social partners and non-governmental organizations. The participants explained and further discussed the ways the proposed Energy Community would extend the benefits of the Internal Energy Market to SEE.
For successful agreement and implementation of the Energy Community Treaty the SEE countries’ Parliaments and social partners have to be fully aware of the implications of the Treaty. This is essential in the process of ratification of the Treaty, as well as for further harmonization of the national legislation. The European Parliament could play one of the major roles in this initiative, as well as the national Parliaments in SEE. To this effect, the Athens Forum at its latest meeting recognized the need to follow up by holding a second meeting in Skopje, in late March. The Macedonian Parliament, especially the Parliamentarian Committee on European Affairs will take an active role in the preparation of the Conference Program and organization with the support of EC and the Stability Pact.
Macedonia recognizes that the successful implementation of the Energy Community Treaty would mean a step ahead to the EU.