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EU report on Serbia energy sector reform

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Serbia’s energy sector is characterised by the lack of a competitive market and low levels of efficiency. By adopting the new Energy Law, Serbia has put itself in a good position to make the necessary reforms and to foster the development of its energy sector, in line with the requirements of the EU acquis. Adoption of relevant implementing legislation, accompanied by adequate enforcement, will be essential.

Special attention needs to be paid to genuine opening of the electricity market, reforms in the gas sector, increasing mandatory oil stocks, meeting the objectives for improving energy efficiency and promoting renewable energy in electricity generation, transport, heating and cooling. Serbia will need to reinforce its administrative capacity in order to ensure effective implementation and enforcement of its legal obligations in the energy sector. The effective independence of regulatory bodies will require particular attention. Serbia needs to develop a new energy strategy aligned with EU 2020 objectives. Serbia also needs to comply with its Energy Community Treaty obligations.
Overall, Serbia will have to make additional efforts to align with the EU acquis on energy and to implement it effectively in the medium term.

The EU’s energy policy objectives are to improve competitiveness and ensure security of supply, while protecting the environment and combating climate change. The EU energy acquis consists of rules and policies covering competition and State aid, the internal energy market (opening up electricity and gas markets in particular), promoting renewable energy sources, energy efficiency, crisis management and oil stock security obligations, nuclear energy, nuclear safety and radiation protection.

Serbia’s overall energy balance comprises coal, oil, gas, firewood, hydroelectricity, and other renewable energy sources. There is currently no nuclear energy production. In 2008, the three largest major energy sources for covering gross inland consumption were coal (51%), oil (27%) and natural gas (13%). Domestic production covers 60% of total primary energy consumption. Serbia’s energy sector accounts for more than 10% of its GDP. As a transit hub in South-East Europe, Serbia’s interconnections with neighbouring countries are very often congested.

Serbia’s energy strategy is outlined in the Energy Sector Development Strategy adopted in 2005. An implementing plan was adopted in 2007 and has subsequently been updated, most recently in 2010. The development of a new energy strategy for a period of at least fifteen years is foreseen under a new Energy Law, adopted in July 2011. As a member of the Energy Community, Serbia is legally bound to implement large parts of the EU acquis on energy. The new Energy Law represents a substantial step towards full transposition of key provisions of the EU acquis on electricity and gas. The new Energy Law foresees a new market model, and the unbundling of distribution and supply functions for gas and electricity. It also foresees stronger powers for the Energy Agency of the Republic of Serbia (AERS), notably as regards the definition of tariffs, oversight of the unbundling process, market rules, allocation rules, and network development plans.
Under the new Energy Law, the tasks and powers of the AERS are, in principle, in line with the ‘second package’ of the EU energy acquis. However, they are resource-intensive and implementation of the new law will require an increase in the AERS’s staff. There are also concerns about the independence of the Agency, because the members of the board are appointed following a non-competitive procedure.
With respect to security of supply, Serbia’s production is dominated by coal and it relies on imports for cleaner energy sources. Serbia’s dependence on natural gas imports exceeds 80%Gas is mostly imported from Russia through Ukraine and Hungary. Local production and gas storage projects to diversify supply together with construction of new interconnections are planned in the Energy Sector Development Strategy. The Nis-Dimitrovgrad project linking Serbia to Bulgaria is the most advanced, with a feasibility study under way. The underground gas storage facility in Banatski Dvor, co-owned by Gazprom (51%) and Srbijagas (49%) is in operation since 2009. There are plans for the development of a second underground gas storage, in connection with the possible South Stream gas project, which would transport gas from Russia through the Black Sea and Bulgaria.
Concerning electricity, Serbia has given priority to the new interconnection with the former Yugoslav Republic of Macedonia. On the Serbian side, section 1 of the line (substation NISLeskovac) is in operation. Construction of section 2 (substation Leskovac-Vranje-border) is ongoing and approaching completion. Other electricity interconnections with Montenegro, Bosnia and Herzegovina and along the transmission corridor towards Italy are at the prefeasibility study stage.
The level of emergency oil stock reserves is classified as a state secret according to the Serbian Law on commodity reserves. A new Law on commodity reserves is being prepared. Under the new law, mandatory oil stocks would be reclassified as a mandatory stock rather than a commodity reserve, so the level of these stocks would no longer be a State secret. No information has been received so far on the actual level of oil stocks, although Serbia indicates a timeframe of about 10 years for meeting current EU requirements.
As regards the competitiveness of the internal energy market (opening-up of the electricity and gas markets), the new Energy Law is largely in line with the requirements of the Energy Community. A remaining shortcoming in the field of electricity is that all eligible customers connected to the distribution system will be entitled to be supplied at regulated tariffs until the end of 2013. The government will now need to focus on implementing and enforcing the new Law correctly. Serbia also needs to start preparing for alignment with the EU’s ‘third internal energy market package’, which entered into force in March 2011.

Electricity consumption totalled 33.7 TWh in 2008. The electricity sector is gradually making progress with its process of unbundling. Since 2005, operation of the transmission system and the electricity market has been under the responsibility of the public enterprise EMS (Elektromreza Srbije). The remaining functions (generation, distribution and supply) are performed by the vertically integrated public company EPS (Elektroprivreda Srbije). In accordance with the new Energy Law, EPS needs to, however, complete the legal unbundling of distribution and supply. By law, the electricity market has been open since February 2008 for all non-household consumers which make up 47% of the market. However, in practice, no eligible customers have switched supplier. EPS holds a de facto monopoly, due to the persistence of regulated prices, set at levels below the market price. The choice of the market model, the move towards tariffs and prices reflecting costs and the independent functioning of AERS will all be crucial to achieve real opening of the market and attract the necessary investment. The reform of the tariff system must not be postponed any longer.

Serbia needs to implement the Regulation on cross-border allocation of capacity. In September 2010, the Energy Community Secretariat sent an opening letter following a complaint against Serbia under the Energy Community dispute settlement mechanism. The complaint concerned the absence of compensation for electricity transit to the Kosovo electricity transmission system and market operator (KOSTT) and the allocation of crossborder capacities. Serbia is impeding Kosovo’s participation in regional mechanisms to plan and be remunerated for electricity transit. In October 2011, the Secretariat stated in its Reasoned Opinion on this complaint that Serbia has failed to fulfill its obligations under the Energy Community Treaty. Furthermore, the Serbian electricity utility is maintaining an unlicensed branch in the north of Kosovo.

Gas consumption in Serbia totals some 3.2 billion cubic metres a year. The State-owned Srbijagas is a fully integrated company and is the only wholesale supplier on the market. It has not been unbundled. Srbijagas purchases gas from Gazprom via the intermediary Yugorosgaz (50% Gazprom, 25% Central ME Energy & Gas AG, 25% Srbijagas). Yugorosgaz holds rights for developing gas transmission in southern Serbia. The difficult financial situation of Srbijagas will need to be addressed as a matter of priority.

The new Energy Law is partly in line with the Renewable Energy Sources Directive. The main part of the framework for the promotion of renewable energy will be at the level of subsequent by-laws. Therefore, the development of the Serbian regulatory system for renewable energy will require continuous monitoring to ensure compliance with the EU acquis. In the framework of the Energy Community, Serbia is preparing a binding target for the percentage of renewable energy in final energy consumption by 2020. Serbia will also need to prepare a National Renewable Energy Action Plan (NREAP), which will provide a roadmap for achieving this target. Serbia has significant potential for renewable energy, which remains largely untapped. To date, only the hydroelectricity and biomass sectors have been partly developed. The 2005 Energy Sector Development Strategy aims at a 2.2% increase in electricity produced from renewable energy sources by 2012. The share of renewable energy sources in total primary energy production in Serbia was 8% in 2008. Feed-in tariffs are in place, but the administrative procedures for authorisation, licensing and network connections are the biggest barrier to the uptake of renewables. The current level of biofuel production is negligible. Serbia will need to pay continued attention to promoting renewable energy, in particular in transport and in heating/cooling. The administrative capacity in his area needs to bestrengthened. Further efforts should be undertaken towards creating a regulatory environment fostering the increased use of renewable energy sources in all sectors.
Serbia’s economy is highly energy-intensive, consuming 2.7 times more energy per unit of output than the OECD average. While energy efficiency is a priority in Serbia’s energy strategy, Serbia has not yet adopted the planned framework law on rational use of energy. A draft law has been prepared. It covers energy performance in buildings, labelling of domestic appliances and energy services. The draft law also provides for establishing of an energy efficiency fund. Ensuring sufficient administrative capacity for implementation of the new legislation will be essential.
Nuclear safety and radiation protection issues are regulated by the 2009 Law on ionising radiation protection and nuclear safety. The Serbian Agency for Ionising Radiation Protection and Nuclear Safety (SRPNA) was established as a separate body in 2009 and started functioning in mid-2010. The Agency implements the international conventions which Serbia has signed. The transfer of inspection functions from a variety of ministries to the Agency has not yet been achieved, in line with best regulatory practices. Effective independence and sufficient levels of staff and funding will be essential to ensure proper functioning of the Agency, particularly for licensing of nuclear facilities. Serbia still needs to accede to the Convention on Nuclear Safety and to the Joint Convention on the Safety of Spent Fuel Management and on the Safety of Radioactive Waste Management. Serbia still needs to develop a national strategy for nuclear waste management and decommissioning of its research reactor at Vinca. A Quality Management System for the Agency should be in place. Further efforts are required to improve the radiological situation at Vinca.

Source: EU Commission Energy Community

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