Serbia: Electricity market liberalization, actual market rules and challenges during 2014

1. July 2015. / News Serbia Energy

By changing the legal framework in 2011 and by the application of market rules in January 2013, and/or the implementation of the concept of balance responsibilities and the establishment of the balance market, the Republic of Serbia initiated the full integration of national market into a regional i.e. unified European electricity market.

Although the electricity market in Serbia has acquired much earlier its outlines and paved the way towards the full establishment of market principles, still it may be concluded that the ”point after which there was no return – to the old ways” was actually the adoption of market rules and the possibility given to the participant to creatre its own energy portfolio on the free market. Looking at it through the prism of the largest groups of market participants – buyers, this stage of market development in Serbia is significant because the buyer has the right to the free choice of electricity supplier. On the other hand, clearly defined rights and obligations of participants, through the introduction of the concept of balance responsibility and fully transparent access to market data, resulted in the increase in the number of newly licensed companies for the energy activity of electricity supply. In fact, for the first 6 years (2006-2012), the Energy Agency of the Republic of Serbia has issued a total of 40 licenses for electricity supply, and in 2012 that number was 14, and in the last two years it has reached the figure of 35 newly licensed companies. Business orientation of the suppliers was no longer only on the wholesale electricity market, but also to supply of end buyers.

The implementation of balance responsibility has changed the awareness about the management in the production companies. Precision of the production plan has become more important, and each MWh of electricity was financially dimensioned so that its value was dependent on the current needs in the energy sector. The price was formed on the free electricity market depending on supply and demand. The establishment of the balance market, based on completely market principles, left the producers the possibility of extending the energy portfolio through participation in the newly formed market.

However, opening the electricity market in Serbia represented a major challenge to all participants. Implementation of complex market processes has not been adequately aligned with the development of information infrastructure, and a major problem for market participants represented the inconsistency of legislation. Despite the fact that the electricity market operation rules were successfully implemented and as such fully applied and observed, the question is whether, after two years, one can say that Serbia has an open electricity market? Is the major product of the market – electricity, competitive in the conditions of existence of a dominant market participant? Is the period of two years too short to have an answer to this question? Or can it still be considered long enough in order to answer the question whether the electricity market in Serbia is on the right track?

Balance responsibility of participants on the electricity market in the period 2013-2015

The practical application of the electricity market operation rules has started by registering balance responsible parties. Suppliers who had the right to report daily work plans in 2012 were the first balance responsible party (BRP) in the market area of ​​the Republic of Serbia. Financial obligation of participants which was reflected in the delivery of appropriate payment security instrument, when concluding the Contract on balance responsibility, significantly affected the ” seriousness” of the very participation of participants in the electricity market. In fact, until 2013 the list of participants who had the right to report daily work plans did not represent the active participants in the market realistically. The reason for the large number of inactive suppliers was precisely the lack of financial liabilities in the registration process with the only obligation of possessing the appropriate license. Should this be presented in figures, the ratio of registered participants at the end of 2012 and the first quarter of 2013 was 45 : 28 ” in favor of 2012 ”. The drop in the number of participants, which de facto is a direct consequence of the application of market rules, certainly cannot be interpreted as a negative impact of opening the market on the competition, because it objectively did not exist in 2012 to the extent showed by the statistical data.

From the point of final buyers’ view, the opening of the electricity market in the Republic of Serbia can be divided into three phases.

The first phase took place in 2013 and it was related only to the grid access points connected to the transmission network. In that sense, all companies for grid access points that were in the transmission network have been obliged to settle the issue of balance responsibility in those places and ensure the supply of electricity under market conditions. This was done by signing the contracts with suppliers on electricity supply with full supply. Responsible for the supply, other grid access points (connected to the distribution network) was a public i.e. a guaranteed supplier, who was also their balance responsible party.

From the standpoint of the contractual relations between the supplier and the end buyer, the opening of the market in 2013 resulted in a change of conditions of contracting supply and pricing of electricity. However, in terms of emergence of new suppliers of final buyers, there were no substantial changes. For end buyers who were in the market, commercial contracts differed from the previous in terms of new tariff packages or the methodology for setting prices. Suppliers and buyers have had the freedom to contract the terms of delivery of electricity, in contrast to the period before the application of market rules, when the supply of end buyers took place at regulated terms and prices. Although suppliers have had complete freedom when negotiating the delivery of electricity with end buyers, noncompetitiveness of the price of electricity imported from other market areas compared to the price of electricity produced in Serbia, has led to the fact that in 2013 there were only two suppliers of end buyers.

The second phase of the opening of the electricity market occurred on 01 January 2014, when all grid access points in the distribution network, not belonging to the category of households and small consumers, had an obligation to enter the free electricity market and regulate the issue of balance responsibility.

Unpreparedness of distribution system operators, mostly in terms of information infrastructure, then inertia of public procurement organizing procedures, and above all, insufficient information for the public on the opening of the market on medium and low voltage, have contributed to the great confusion in the energy sector in early 2014. Unpreparedness of end buyers to purchase electricity under market conditions, on the one hand, and the lack of adequate, clearly defined offers by the suppliers, on the other hand, resulted in the transition of a large number of end buyers to a backup supply, at substantially less favorable terms of delivery and higher price of electricity. Price of backup supply in 2014 amounted to € 59.90/MWh. This affected most the public institutions which had an obligation of organizing public procurements. The problem has not been overcome completely, although, from the aspect of supply of end buyers on middle and low voltage, the market was stabilized in mid-2014. One possible solution that could lead to a better organization and the efficient functioning of the market could be the definition of general elements in the preparation of tender documents for the procurement of electricity, as well as defining the obligations of the supplier with regard to the establishment of standard packages for certain categories of buyers, with an obligation of availability of calculators that end buyers could use to predict the category and scope of electricity prices, based on the profile of their company.

By analyzing 2014, it can be concluded that despite the problems, the emergence of a large number of buyers on the electricity market influenced the increase in the number of BRP which resulted in concluding new supply contracts, and/or the formation of new balance groups composed of the end buyers.

In 2014 two significant changes occurred in terms of contractual relations between market participants. Previous practice, signing the contracts on the electricity delivery with a full supply between suppliers and end buyers, was interrupted by the end buyer who has chosen a different approach to the electricity market. The observed end buyer has become a balance responsible party, which was also the first registered BRP in the Serbian market who was not electricity supplier. By this contract, the end buyer has assumed all rights and obligations arising from balance responsibility – the maintenance of energy balance and taking over the financial risk for the the balance group diverging. From the standpoint of electricity supply, by registering BRP, the end buyer has ruled out the possibility of concluding contracts with full supply. The buyer addressed the necessity of purchasing electricity by commercial agreements with one or more suppliers according to the predetermined amounts of electricity. Second, important moment in 2014 was the formation of another balance group composed of MPP producers of electricity. Although, considering the amount of installed nominal power of the producer one cannot speak about the existence of competition among producers of electricity, in terms of market processes and the formation of new contractual frameworks, the registration of this company as BRP certainly represented a fresh pair of legs and a big step in opening the market in the Republic of Serbia.

It can be concluded that in early 2014, the structure of the end buyers’ supply was such that around 43% of the total consumption was supplied under market conditions, while the remaining 57% continued supplying at regulated electricity prices.

The third, and at the same time final phase of opening the market when it comes to end buyers started in January 2015.

This phase can be viewed from two aspects. From the aspect of households and small consumers, this stage is important for the opportunity to enter the market and change the supplier. The characteristic of this group of end buyers is that they have a right to a guaranteed supply at regulated terms and prices, unlike buyers who were obliged to exit in the previous two phases, for households and small buyers, this represents freedom of choice. This possibility was already used by one buyer from the category of households, but in this case one cannot talk about a change of the supplier, since the supplier remained the same, but the conditions of supply and the price are set according to market conditions. Since the regulated price of electricity for households and small consumers is still far from the market price and objectively observing the lowest one in Europe, it is difficult to expect a larger number of these buyers to enter the electricity market. On the other hand, precisely because of the potentially large number of these buyers and their right to choose the supplier, it will be challenging in the future to define better the process of changing the supplier through laws and regulations, in order to prevent possible abuse and obstruction of the electricity market. Multiple changes in the composition of the balance group in the short period, and potentially returning these buyers many times to guaranteed supply, can seriously affect the efficient operation of the electricity market. Better defining of the obligations of the participants who have the right both to regulated and market conditions of supply, and prescribing certain conditions that would apply only thereto, would not constitute discrimination against this group of end buyers.

Another specificity of this phase is the modification of the legal framework and defining new criteria for small buyers. The new Energy Law defines an additional requirement for classification of end-buyers in the category of small – and this is the threshold of the annual consumption of 30000kWh. All end buyers who had previously had consumption per annum greater than the specified value will lose the right to the status of a small buyer and they will go to the electricity market. The legal deadline for the application of this provision is July 01, 2015, when more than 15,000 buyers with more than 25,000 grid access points enter the electricity market. Taking into account that the total consumption of specified consumers amounts to about 2 TWh, i.e. about 6% of the total consumption, the conclusion is drawn that from July 01, 2015, around 50% of the total consumption in the Republic of Serbia, will be obliged to supply under the market conditions.

Specificities affecting the market processes

Connecting grid access points to transmission or distribution network

In accordance with the Energy Law, Articles 123 and 145 (Valid Energy Law; same provisions are in the previous Law) the operator shall be obliged to connect the structure of the buyer (or producer) if the buyer meets the following requirements inter alia:

that buyer, and/or producer submits the operator of the system the supply contract, without commercial data;

that the grid access point has balance responsibility and system access

The question is whether it is necessary that the buyer or the producer to submit the supply during connection process?

Necessary set of information to the system operator that also meets the obligations of the buyer are information on regulated access and the information on regulated balance responsibility for that grid access point. In dealing with liabilities arising from balance responsibility, the buyer chooses between two options – the signing of the Contract on balance responsibility which makes the buyer BRP or transfer of balance responsibility to another BRP. If the buyer is BRP he cannot have a contract on the total supply, and therefore he is responsible for the liabilities arising from access to the transmission or distribution network. In case of transfer of balance responsibility, the end buyer shall submit to the operator the proof by which that grid access point joins a balance group (Contract on full supply or Contract on balance responsibility transfer). In case of transfer of the balance responsibility, there are two options – the first, in the case of the contract on full supply, where all liabilities arising from access are undertaken by supplier and the second option, in the case of Contract on balance responsibility transfer, where all the obligations in terms of access are taken over by the very buyer. These are information necessary to regulate the contractual relationship in terms of access to the system. Upon all this, we can conclude that the submission of information about regulated balance responsibility and access is enough to connect the grid access point to the network. Through these two pieces of information, the system operator has information about a supply contract. A clearly defined process of changing the supplier and the amount of financial compensation for the deviation of balance group does not leave much space to the end buyer to abuse the connection to the network even in the event of losing the supplier. Insisting on the delivery of the supply contract can lead to administrative confusion in cases where the end buyer produces electricity and supplies its grid access point, where virtually there is no formal agreement for the supply because it is the same legal entity. , transmits

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