Electricity Reforms in Bosnia and Herzegovina

Electricity Reforms in Bosnia and Herzegovina During the conflict between Bosnia and Herzegovina and Serbia, huge number of transmission and distribution network was damaged. This resulted in a minimum electricity supply that was barely maintained. Thanks to a large number of donations, a major reconstruction occurred post-war of most of generation. Electricity as not the only sector affected by the war, coal, engineering and many other have suffered badly in during the 1992-1995 span. This has not been sufficiently monitored by the public sector due to weak and fragmented administrations. This has become a major barrier for the development and enforcement of electricity reforms to improve the overall performance of companies and to create effective markets. Both, the electricity demand and supply has greatly recovered and reached beyond the pre-war levels but the industrial consumption is low and still suffering, concentrated in a few large consumers. The main reason behind the household demand inflation is due to the excess use of electrical heating. Without an industrial recovery or development of new medium-sized, the likely trend in the medium term is for a reduction in household electricity heating consumption (with the expansion of the natural gas network) and a leveling of energy intensity of domestic electricity demand. Prior to electricity reforms, the electricity market in BiH was characterised by disintegration. All the power of the sector was controlled by Governments (Ministry of Foreign Trade and Economic Affairs, Ministry of Energy, Ministry of Industry) This affected and visibly slowed down the process of the reforms having a biggest impact on adopting of uniform laws that were the base for creating key institutions. Because of the unique situation in BiH with three entities, presidents, etc., there are three independent non-profit regulators as well, the state and two entity ones. Each one of them has clearly divided responsibilities which do not interfere in each others work. The commission of State Electricity Regulatory Commission (SERC) consists of three members who manage SERC according to the principle of annual rotation. It consists out of three members, two from the Federation of Bosnia and Herzegovina and the third one from Republika Srpska. While the members from FBiH are proposed by the Parliament of FBiH while the member from RS is proposed by the National Assembly of RS. Currently, the Regulator has 26 employees which include commission members. These two gather money through different ways, while the financing of RERS is provided by the Law on Energy of RS, SERC gathers money from regulatory fees paid by licensed companies. FERK on the other hand operates in the way that it submits the budger proposal to the Parliament of FBiH and then the Parliament itself adopts the budget. FERK is financed by the Law on Energy of FBiH from compensations and taxes of companies. The institutional reform of the electricity power sector BiH has proved to be pretty sucessful and is consistent with good results and continuos improvement. But the electricity sector is still a long way off being stable and in good shape and form. Many deficiencies are still present as for example problems often occur in the distribution of profits and investments or for example a bigger and more serious problem, BiH does not have legislation on the energy efficiency at the state level although that should be obligatory according to Energy Community Treaty and many other signed documents in accordance to the EU legislation. Electricity Regulation and Reforms The power sector reform in BiH officially began with the adoption of the entity laws on electricity, though which a number of important institutions in the energy sector have been made. Bosnia and Herzegovina still relies on several important agreements which are closely related to the reform as they aim to join and keep coming closer to the EU. Due to their ambition to enter the EU as soon as possible, it is obvious that they would have to adapt to the single electricity market of the Union. Three main documents have been signed by the authorities in BiH which have been crucial for its improvement and movement towards the single market in electricity. These are: Energy Community Treaty Treaty establishing the Energy Community of South East Europe Agreement of Stabilisation and Association The first, Energy Community Treaty (ECT), is considered as one of the most important agreements that Bosnia and Herzegovina has ever signed in the energy sector. According to this agreement, the stable regulatory framework, single regulatory space, security of supply, energy efficiency, competition and use of renewable energy should all be visible and present in the energy sector of BiH. Through this agreement, BiH has forced itself to meeting certain obligations and goals which have been agreed upon the ECT. The Energy Community Treaty was also the base for creating the road map for such market openness. It clearly prescribes guidelines and dynamics of key reforms in five key areas. The fact that BiH had only one real customer in Aluminij Mostar until 2012 speaks for itself about the market openness in the electricity sector. But an encouraging fact was that from 2008 all tariff customers, not including households, had the opportunity and freedom to choose their own suppliers and become eligible customers. When comparing BiH to the EU countries, there is an obvious and large distinction in the market openness of the electricity sector. From 2009, almost all EU countries bar a few were fully opened to competition. Two main reasons for low-market openness in BiH: Electricity prices for industrial customers in BiH are the lowest when comparing to EU countries. Electricity prices are equal to the prices at which they are supplied as tariff customers. The Electricity Policy Statement was adopted in 2000. The main reason and objective behind this policy was to establish and achieve in producing a competitive electricity market in Bosnia and Herzegovina which would enable all customers to have a choice between more electricity suppliers. The main goal of this reform plan was ensuring a long-term sustainable and a high-performing sector while introducing EU regulations which would be visible through effective competition. In this effort, the following laws were adopted at the State level: Æ’ Law on transmission, regulator and system operator of electricity (2002); Æ’ Law on establishing the Transmission Company, Elektroprenos BIH (2004); and Æ’ Law on establishing Independent System Operator, NOS BIH (2004) At the entity level, two separate laws on electricity generation and distribution were adopted by FBiH (2002, 2005) and RS (2002, 2003). DERK, as the State regulator, is responsible for electricity transmission while FERC and REERS, the entity regulators, cover generation and distribution in FBiH and RS, respectively. Further to the unbundling of the transmission grid, the restructuring of the vertically integrated state-owned electricity companies has been based on the â€Å"Harmonised Action Plans for the Restructuring of the power sector† adopted in 2003 in Republika Srpska and in 2005 in FBiH. The main stages of this Plan included the reallocation of assets into a joint stock company, the commercialisation and the unbundling of generation and distribution by 2008. While the state-owned electricity companies have been transformed into joint-stock companies (JSC), to date the other stages of the Plan have not been achieved, in particular the creation of a distribution system operator (DSO), a requirement of the Energy Community Treaty. On a positive note, corporate performance, in particular accounting transparency, has progressed. As of 2008, the opening of electricity markets in Bosnia and Herzegovina to domestic and foreign competition has focused on setting eligibility consumption thresholds and connecting directly to the network, as well as third party access to the transmission network as described by DERK’s â€Å"Rule on third party access† (2006). Third party access to 6 distribution networks is monitored by the entity regulators. To date, however, no supplier switch has been reported. Significant progress has been achieved at the national level in adopting a single regulation for transmission and merging national transmission ownership and operation under one regulator. As recently established bodies, the TSO and ISO need to strengthen their capacity and power. However, regulation and oversight for generation and distribution remains separated at the entity level. Furthermore, three (four with Bckro) separate companies operate a very fragmented distribution network over the territory (see map above), raising operational, efficiency and economic issues. The unbundling of these services has not advanced significantly, raising concerns about effective third party access to the respective distribution networks. While regulators set tariffs and prices, most of expenses for an adequate maintenance and replacement of facilities as well as for non-wage obligations (pensions) are not covered. The price structure still subsidises households and large industries (e.g. aluminium). There is a clear need to analyse the costs and benefits of this indirect support system and, if justified, to set up a transparent direct subsidy scheme. Although the TSO is responsible for the country’s transmission development plan and the ISO prepares an indicative generation development plan based on elements provided by the entity administrations and companies, the coordination and coherence of the system is inadequate and ineffective. For instance, the announced investment projects which would see a tripling of domestic installed capacity, with a focus on export markets, is not feasible within the context of the current grid and interconnection capacities. This will require major investments in the transmission network, extremely difficult to finance under the current tariff structure. These projects need to be assessed under a consolidated least cost plan with a more detailed analysis of domestic and export markets, in a context of high volatility. Also in the context of fragmented and weak regulation and administration, major investments by powerful foreign investors could lead to imbalances in the investment and operat ional oversight process and to a strong dependency. The recent decisions (2007) by entities to award concessions without open and transparent tenders to private investors have raised concerns over transparency and the effectiveness of economic benefits at the local and national level. This risks fragmenting the sector still further. At the 4th World Bank Poverty Reduction Strategies Forum it was â€Å"recommended urgent[ly] to develop, adopt and enforce a state-wide, uniform and transparent procedure for the construction of new generation plants in compliance with EU regulation†. A national least-cost electricity supply plan should provide a ranking of the most viable rehabilitation and construction projects and be coordinated with generation and transmission planning of the grid operators. The electricity sector in Bosnia and Herzegovina still faces the challenge of completing its rehabilitation, diversifying the power generation mix and complying with EU environmental standards, in particular the Large Combustion Plants (LCP) Directive. It also needs to improve overall technical and managerial performance, diversify the power mix notably with CHP, small hydropower and biomass in order to compete on export markets and prepare for effective domestic and regional market opening. At the company level, this will require sustained effort to reach EU corporate governance standards. At the ministry and regulator level, there is a clear need to strengthen ownership rights and oversight over the sector as well as to consolidate and coordinate the state and entity levels. The administration in Bosnia and Herzegovina needs to develop an overall, coordinated and coherent national policy and action plan backed by economic tools, in particular independent least cost plans and demand projections. An integrated supply and demand least cost plan would help prioritise refurbishment projects and reduce grid losses. In this respect, the World Bank’s energy study should provide crucial elements and tools to be further developed and used by the administration in coordination with electricity companies. Persistent fragmentation of the electricity sector structure and regulation is not sustainable in the longer term and will risk the sector’s marginalisation in the region. Key issues: Infrastructure rehabilitation, grid losses, non-cost reflective prices, system and regulation fragmentation These reforms had the aim and strived for the electricity sector to: Perform more efficiently, both technically and commercially; Enables efficient and effective competition (most important); Meet international standards in terms of cost effectiveness, quality of service, security of the system and the environment; Allows companies to recover their full costs including a reasonable return on investment; Has a universal service obligation; Attracts private capital to the sector; -Complies with EU rules for the internal electricity market in the medium term. Regulation of network prices All consumers in BiH with the exception of Aluminij-Mostar are captive consumers of their local utilities and have no freedom of choice when it comes to their suppliers. There are also no cases of contracting the supply outside local utility borders and the problem with importing electricity in BiH is that All consumers in Bosnia and Herzegovina except Aluminij–Mostar (8% of Bosnia and Herzegovina’s consumption in 2013) are captive customers of their local incumbent utilities. There are no cases of contracting the supply outside the local utility borders. The incumbent local suppliers were appointed as â€Å"reserve suppliers† in the transitional period before 2015 and â€Å"suppliers of last resort† by the regulatory authorities in all jurisdictions, and are likely to delay market opening in the future. Wholesale market opening suffers from the absence of liquid trading platforms. Trading takes place through bilateral transfers between dominant utilities and registered traders, including exports and transits. In terms of price regulation, the Law on Electricity in the Federation of Bosnia and Herzegovina allows for access to regulated supply for all eligible customers, including large ones and without limitations. This violates Article 3 of Directive 2003/5 4/EC. Even worse, the price of generation for the supply of customers supplied at regulated prices (i.e. the wholesale price) is also regulated. The Law on Electricity in Republika Srpska makes electricity supply at regulated prices by subsidiaries of EP RS available to all customers. This exceeds what is allowed under Article 3 of the Directive. The Law similarly supports price regulation for production by EP RS sold to local utilities and Komunalno Brcko. The Electricity Law in Brcko District also misinterprets the concept of public service in providing regulated supply of all captive customers. This prevents supplier switching in practice. All three regulatory authorities have adopted rules for supplier switching and price methodologies for supply services available to eligible customers in the transition period before 1 January 2015, and to households and small customers as last resort supply. As the electricity market is very specific and almost unique, the market must be regulated in order for the network fees to be reasonable. The reason behind this is that the competition in this market in BiH is almost non-existent what then creates monopolistic tendencies by the authorities in BiH. For instance, FERK and RERS are entity regulators which adopted and developed separated Rules of Tariff Methodology and Tariff Proceeding regarding the distribution tariffs. In the other hand meanwhile, SERC is occupied with approving prices for transmission network that are the same for all participants in BiH. Quality regulation One of the most important parts of the electricity market which needs to be regulated and closely observed is most definitely the quality in the electricity supply. It is perhaps the most essential indicator of successful business of electric power companies. It is crucial for the customers to have a freedom of choice when it comes to the selection of the electricity suppliers, and as the competitiveness increases, so does the quality and service in the electricity market. If companies do not proceed to adapt and improve in order to be competitive in the market, they will soon lose out all their customers and the funds which are necessary in order for their company to operate and exist on the market. Competition As mentioned previously, the competition is the healthiest way to improve and motivate companies to continue improving their supply, quality, decrease costs and many other factors which would satisfy the customers further more and be positive for the country in the long run. Also, EU regulations emphasizes competitiveness as a step forward to meeting their standards and achieving one goal more towards entering the EU market. Recommendations: Reorganize and reinforce the way in which the regulators operate. Emphasizing the unity of the three regulators into one single structure with more entity branches and dividing the power and duties by those branches; Unify regulation for generation and distribution in line with EU requirements, ensure cost-reflective tariffs and reduce cross-subsidies; if justified, set up a transparent direct subsidy scheme for large industries; Proceed with improving the restructuring of electricity companies towards European standards Adopt a national least-cost supply plan, generation planning and demand forecast under the supervision of the national regulator and ISO. Sources: http://www.unece.org/fileadmin/DAM/env/epr/experts/BosniaAndHerzegovina/UNDP/UNDP_Bosnia.pdf Sustainable Development of Energy, Water and Environment Systems, Volume 1 edited by N.H. Afgan, R. Della Morte https://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Implementation/Bosnia_Herzegovina/Electricity http://www.unece.org/fileadmin/DAM/env/epr/experts/BosniaAndHerzegovina/UNDP/UNDP_Bosnia.pdf http://fipa.gov.ba/doc/brosure/Energy%20sector.pdf http://www.elektroprivreda.ba/eng/page/general-information