By Tsvetan Ivanov, Business Analyst, SeeNews
The European Union defines the ultimate goal of electricity market liberalisation as achieving a secure, competitive and sustainable energy supply to all EU citizens and the economy.
The measures for reaching this goal are simultaneously stimulating investments in electricity infrastructure, cross-border connectivity, and greater use renewable energy sources, while also enforcing competition on the integrated internal European power market. However, the quest for full liberalisation and integration is far from over yet. National electricity markets are still pretty fragmented in structure and regulatory framework. A number of actions have been taken to implement the directives but the results have not been achieved within the set deadlines and individual countries have reached a different stage of liberalisation.
Power market liberalisation follows similar patterns in most European countries, regardless of the period when it happens, the structure of the sector and the economic development of the countries. Prior to the liberalisation, electricity in all European countries was supplied to end customers by vertically integrated production and distribution monopolies, most often owned by the state or regional governments. In most cases, industrial customers were the first to benefit from market deregulation and could access the free market, while households received the right to choose their suppliers on average five years later.
Free market development in SEE follows the EU example at a slower rate
In terms of achieving the goals of interconnected free European power market, the SEE countries can be classified into several groups. Slovenia and Romania practically have deregulated power markets integrated into the European market. Bulgaria, Croatia and Serbia have liberalised their markets for industrial customers, but full and effective liberalisation for households is still to happen. All of them launched national power exchanges in the last two years and are working on coupling them with each other or with other neighbouring countries. Albania, Macedonia, Montenegro, Kosovo and Bosnia and Herzegovina still struggle with the harmonization of their legislation with European regulations and are yet to begin establishing power exchanges and liberalising their markets. A common feature of all SEE power markets is their high extent of concentration, much above the European average. In all countries except Romania the largest electricity supplier holds more than 50% of the market and in Serbia and Montenegro, the share of the incumbent suppliers is close to 100%.
Bulgaria is still far from open competitive electricity market
Bulgaria’s electricity market is open for wholesalers and liberalised for companies, but the country is one of the last EU members to liberalise the market for households. The process is still at an initial stage and full liberalisation is planned for 2022 following the model proposed by the World Bank.
One of the main reasons for the slow liberalisation is the monopoly position of the incumbent supplier, which is the only regulated market supplier and is obliged to buy the energy of almost all large producers under long-term power purchase contracts. Another reason is the financing of large electricity infrastructure projects in the past, which caused financial difficulties.
According to the Association of Traders with Electricity in Bulgaria (ATEB), a negative trend is observed since 2017– customers who have decided to go to the free market change back to the regulated market, especially in the case of small businesses due to the price difference between climbing market prices and the fixed prices offered by the incumbent supplier.
Social concerns bring price deregulation in Serbia to a halt
The electricity system of Serbia is characterised by complete liberalisation for industrial customers and lagging deregulation of the market for households. Prices for end users are subsidised by the state and kept at levels often insufficient to cover costs for generation and transmission.
Serbia’s government considers the country not ready for liberalisation of retail power trade due to the large share of vulnerable customers, estimated at 400,000, and the high social risks that price deregulation would bring. Therefore, as of end-2017, there were no conditions for removal of subsidized prices, which will continue to slow down the process and turn potential investors in the electricity system away.
Croatia outpaces its SEE counterparts on the road to liberalised power market
Croatia is among the first SEE countries to put its legislation in line with the European directives and ensure a fully liberalised electricity market for both industrial and household customers. In Croatia, liberalisation is underway since 2004, when the market was open for customers with consumption above 20 GWh. Four further stages of liberalisation were implemented by 2009 when all industrial and household customers gained access to the deregulated electricity market.
Romania leads the way to market deregulation in SEE
Romania was the first SEE country to completely liberalise its electricity market for all types of end users. The government abolished price regulations for household consumers in the beginning of 2018. A distinguished feature of the Romanian electricity retail market immediately after the deregulation is the significant price difference between electricity suppliers of end customers.
A growing number of regional interconnection projects are underway in SEE
The complete integration of the Europe-an power market is seen as the only way to achieve the long-term goals of the European Union in the electricity and related sectors. The EU regulations aiming to create an integrated competitive electricity market imply that in order to survive small regional power exchanges have to consolidate. National markets are inefficient due to limited size and fragmentation, which prevent sufficient liquidity.
In March 2018, SEEPEX signed a memorandum of understanding with HUPX (Hungarian Power Exchange) and EPEX Spot (European Power Exchange) for the creation of a single power exchange for Central and Southeast Europe, and defined market coupling with the electricity markets of Hungary, Romania, Slovakia and the Czech Republic as a strategic priority.
Bulgaria’s IBEX was created in the beginning of 2016 and as of 2018 has no agreements with neighbouring stock exchanges. Talks with Romania are at a standstill, but an agreement is expected in the end of 2019, when the 4MMC group will integrate into the Multi-Regional Coupling (MRC) project. Further market coupling partnerships are planned with Greece, Serbia, and Macedonia.
The Western Balkan 6 initiative kicked off in 2015 as the major project for improvement of energy connectivity in SEE. Its measures include power inter-connections Serbia-Montenegro and Albania-Macedonia, as well as the establishment of the regional energy market. Each of the six participating countries has to integrate its day-ahead market with at least one WB 6 or EU member.
SWOT analysis of the electricity sector in the process of liberalisation in SEE
- Diversity of energy sources – all SEE countries have the potential to rely on solar, wind and hydro sources in addition and as an alternative to nuclear and coal-fired power plants.
- SEE countries are among the top performers within the EU in terms of implementation of the 2020 renewable energy goals. Bulgaria, Romania and Croatia has already met their respective targets.
- The network capacity in the region is currently adequate for the proper electricity flow between most countries with very few exceptions.
- Lack of favourable legislation and delays with the deregulation process in SEE discourage potential investors.
- Lack of competition is caused by the strong concentration in the electricity supply sector.
- The share of vulnerable customers and the amount of state aid in the electricity sector is much higher than the EU-average.
- The integrated European power market means pooling and efficient usage of all assets and will guarantee access of SEE producers to customers across the continent, while local consumers will be free to choose electricity from any European supplier.
- As retail prices are expected to rise continually, many customers will turn to energy-efficient technologies, which will stimulate innovation in SEE.
- The upcoming full liberalisation of retail markets will push new suppliers in a competitive environment to provide customers with better solutions in order to attract them.
- When all borders are opened for free trade of electricity, prices will tend to reach equilibrium, which will affect negatively consumers in countries with previously lower prices, such as all SEE countries.
- Excessive dependence on a single country influencing the single European market can arise, as is the case with wholesale electricity prices dragged down throughout Europe by the reduction of prices in Germany, caused by the subsidizing of renewable energy producers by end customers.
- Traditional incumbent power suppliers in the region may fail to survive in a completely competitive environment and turn into a burden for taxpayers through state aid.
Power market liberalisation in SEE – slower than the rest of Europe, but equally beneficial if done right
When talking about liberalisation of the electricity market in SEE, the question is not whether it should happen. It is obligatory under EU legislation. The question is rather when it will happen and at what cost.
Based on the experience of EU countries with fully liberalised markets, the proposed market model has benefits for customers, suppliers and power generators. If it is applied correctly and mistakes previously made in some countries are avoided, it is very likely that the power market liberalisation will succeed in SEE as well, and the integrated Euro-pean market will be achieved.
The power market liberalisation process in SEE will take more time than in the rest of Europe until the final goal of competitive and interconnected market is achieved. In all countries, even in the EU members, European regulations are implemented partially and with significant delays. Since the market does not follow market principles before deregulation when it is enforced usually problems occur. Therefore, at least in the short run, some form of state intervention in price formation is inevitable in SEE countries, in order to ensure social stability.
As far as retail prices are concerned, liberalisation will most likely lead to a considerably higher overall price level in the region than it currently is in a state-regulated environment. This is the major difference between SEE and EU countries where market deregulation is already successfully implemented. In the UK, Germany and other countries in western and northern Europe prices before liberalisation were close to the market prices and deregulation immediately resulted in a decrease of the price levels due to intense competition. In SEE how-ever, there is little enthusiasm, because the beneficial effects and price reduction caused by free competition will be fully offset in the short run by an upward movement towards equilibrium market price once the subsidized tariffs are removed. Thus, the positive effects of power market liberalisation will be delayed in time for end users in SEE and will also come at a high social cost.