Same rules on cross-border electricity trade should apply in EU and other countries within wider European market

 

Janez Kopac, Director of the Energy Community Secretariat

As countries in Southeast Europe (SEE) make steps towards the liberalisation of their power markets, SeeNews talks to Janez Kopac, Director of the Energy Community Secretariat and former general director for energy at the Slovenian economy ministry. Kopac acted as finance minister and environment minister. The Energy Community is an international organisation aining to extend the EU internal energy market to SEE and beyond.

How and to what extent does the difference between the regulated price and the competitive market price in the moment of liberalization affect the future movement of the electricity price for end customers?

In all post-socialist countries, distortion of the electricity price through regulation continued as in the past: small and medium enterprises cross-subsidized households. Therefore, liberalisation of the electricity market always brings a drop in the price for so-called “commercial consumers” and an increase for households. The million dollar question is by how much. Nobody can predict the change in price exactly. The charm of the market is its flexibility.

Every assessment is also based on several presumptions: will VAT and network charges remain the same? Which sub-group of households are we observing (there are at least 5 standard consumer groups, 3 typical levels of consumption and two types of metering)?

During the time I served as Slovenia’s Minister responsible for energy, the country was just finalising its accession to the EU and we were liberalising the electricity market. The household electricity price increased by 18% in one year but later fell slightly again.

What incentives would be most effective to make individual customers change their default supplier after the liberalization, especially in countries where end prices are currently heavily subsidized by the state as a social policy measure?

Experience shows that in the first year or two after liberalisation only very few customers change their supplier. This is because there is a lack of trust in the new energy companies. But this can change significantly over time. In my view, the most important tools to promote switching are public campaigns by consumers associations, energy regulators and energy suppliers, which compete against each other on the market.  However, the basic precondition – cost-reflective prices – must be in place. Low, regulated prices fail to activate energy consumers.

Could you make an assessment what total investment in network capacity is needed in order to bring SEE electricity systems to readiness for the expected increase in power consumption once liberalization is completed?

No, but power consumption doesn’t usually increase because of liberalisation. What we do need is to ensure that the grid connections between two countries allow for sufficient interconnector capacity to match the needs of a liberalized market and sufficient cross-border power flows. And what is equally important is to ensure that the same rules and regulations governing electricity trade across borders apply in EU countries as well as those that are part of a wider European market.

Does the end goal – a functioning single competitive European power market, justify the economic and social costs incurred by lower-income SEE countries to join this market?

First of all, I would like to point out that non-EU SEE countries, namely Albania, Bosnia and Herzegovina, Kosovo, former Yugoslav Republic of Macedonia, Moldova, Montenegro and Serbia, are already part of the European energy market through their membership in an international organization called the Energy Community. The key objective of the Energy Community is to support these countries’ transitions to an EU energy governance model, develop an adequate regulatory framework and liberalise their energy market. This includes ensuring that any reform happens step-by-step, backed up by sufficient consumer protection measures especially for the most vulnerable in society.

While it is true that liberalization usually does entail a price increase for household customers in SEE due to the reason I explained above, it is not always evident that consumers in non-EU SEE countries often pay even higher prices for gas and electricity than their EU counterparts due to hidden costs, which are a direct result of markets not being fully liberalized yet. The higher prices stem from enormous subsidies to the coal sector through different fiscal measures that are not visible on the electricity bill. Other inefficiencies of the regulated market include higher prices for so-called electricity balancing services as reserve capacities are provided only nationally and not from the cheapest source; electricity imports are more expensive because market coupling, which allows for cross-border grid capacity to be allocated in the most efficient way, is not in place, etc.

By Tsvetan Ivanov