Energy brings South Eastern Europe together

Electricity industry associations such as Eurelectric and the former Union for the Coordination of Transmission of Electricity in Europe (UCTE) have long claimed that energy interconnections play an important role in stimulating political connections in Europe. This is borne out once again as countries in South Eastern Europe have formed an “Energy Community” which provides them with an important political and legislative basis for future entry into the EU. In fact, the Energy Community of South Eastern Europe is in many ways superior to the EU’s own common energy policy.

South East Europe is expected to play a major role in bringing gas supplies from Central Asia and the Middle East to Europe.
In May, Moldova discretely became the eighth member of the Energy Community, joining Albania, Bosnia-Herzegovina, Croatia, Montenegro, Macedonia, Serbia, the EU and MINUK (the United Nations’ mission in Kosovo). Ukraine has applied for membership. Its accession depends on it adopting a key gas law that matches EU standards. Turkey and Georgia may join too.

The Energy Community Treaty, drawn up in 2005, is designed to help non-EU member states in South Eastern Europe to implement EU energy legislation and to pave the way for safe investment in the energy sector. In fact, the Energy Community is going further than that: countries in the Balkans are effectively a testing ground to see if a common energy policy can be developed at regional level within the EU as well.

The members of the Energy Community have begun by putting in place EU rules on electricity and gas markets: energy-related environmental and competition law, energy efficiency directives, as well as gas, electricity and security of supply directives. The Community is currently discussing implementation of the 2009 EU directive for the promotion of renewables and the latest oil stocks directive. On top of that, the Energy Community’s social forum discusses issues such as employment in the energy sector and consumer issues.

The main rationale for the Energy Community is the necessity of the member countries to attract energy investments. The region’s energy supplies are vulnerable because they rely on imports and both power generation and consumption are highly inefficient. To make matters worse, the economic crisis has had an adverse impact on the region’s capacity to maintain or upgrade its stock of energy assets, according to a recent World Bank report. The important point is that high-quality energy supplies are needed to attract business. The fourth World Bank/European Bank for Reconstruction and Development Business Environment and Enterprise Performance Survey (BEEPS), conducted in 2008, showed that half of businesses in the region express concerns over power supply.

Gas Ring

A key feature of the electricity sector in South Eastern Europe is that it is made up of small but, in many cases, fast-growing markets. In terms of final electricity consumption, the size of the markets varies between 3.2 TWh (Kosovo) and 25.6 TWh (Serbia). This compares for instance to 83.3 TWh in a country like Finland. The region has a mixed power generation structure mainly made up of conventional thermal and hydropower plants. Currently, only EU member states such as Greece, Romania and Bulgaria have domestic gas resources. By contrast, the members of the Energy Community are totally dependent on imports and some of them are regularly suffering from severe shortages of power. It is also difficult in most of the countries to get access to the grids and there is a lack of low-voltage grids. To improve their energy situation, Energy Community members have set up a Coordinated Auction Office for Cross Border Transmission Capacities in the region as well as a regional wholesale electricity market, based on successful examples in other European markets.

The Energy Community is also trying to boost gas imports into the region. The fragmented nature of the national markets makes it difficult to build a bulk gas transmission pipeline. Nevertheless, the fact that several major transmission lines crossing the Balkans en route to major markets in Western Europe are being planned, ‘opens the possibility for spur lines to augment existing supplies to the South Eastern European countries’, according to a study prepared last year by Economic Consulting Associates and commissioned by the Energy Community. On the basis of this study, the Energy Community developed the concept of a regional Gas Ring, which will connect their markets and will become the backbone of their internal gas market. All the member countries have already put in place gasification strategies based on the Gas Ring concept and are working to establish a sound institutional framework in terms of gas policies, regulatory frameworks, cross-border mechanisms and financing strategy.

Total investment in the Gas Ring infrastructure is expected to amount to a hefty $1 billion. However, the infrastructure need not be developed all at once. The first stage that is being envisioned now is to bring gas to new power stations in currently ungasified areas on the Adriatic coast. Those power plants would ensure that the investment in the Gas Ring would generate profits.

Model

In some ways the Energy Community might even serve as a model for the EU’s own energy policy framework. Recently several pleas have been made for a radical overhaul of EU energy policy. In April four energy think tanks called for more ‘integration and coordination’ in EU energy policy (See: Academics call for ‘full rethink’ of EU energy policy). In the same month, Jacques Delors’ think tank Notre Europe called for the creation of a true ‘European energy community’ or at the very least ‘a common European energy policy’, which, Notre Europe argued, does not really exist at the moment (See: Let’s get together). Although the EU is gradually integrating its gas and electricity markets by creating trans-European networks, establishing cross-border energy trade and improving the cooperation among Transmission System Operators (TSO’s) and regulators, energy policy is still essentially decided at the national level. And although the notion of ‘energy solidarity’ has, for the first time, been put in the EU treaty, in reality, EU member states are not very keen to share risks and solutions and even less keen to talk to non-EU countries with a single voice.

So might the EU learn something from the Energy Community of South Eastern Europe? The Energy Community looks quite different from the EU’s energy framework (which is built on market integration directives, climate legislation and security of supply policies). It has set up four forums: on electricity, gas, oil and social issues. Underpinned by working groups with specific task forces, they meet once or twice a year and bring together representatives of all the interested parties (industry, regulators, industry associations and consumer associations). All these forums report to a Permanent High Level Group, which prepares the decisions that then have to be taken by a Ministerial Council. A regulatory board made up of the regulatory authorities of member countries advises both the High Level Group and the Ministerial Council. It is an efficient system, although there is an obvious lack of institutional capacity in the countries involved. The term ‘harmonisation’, which is often used vacuously in the EU, takes on its full meaning here. The regional energy system is fully developed by all the countries together, each one taking into account the others’ capabilities and situations. The region receives a great deal of energy-related technical assistance from international donor organisations, international financial institutions and bilateral donors. All this assistance is centralised by the Energy Community and shared among its members in full transparency.

Compared to fifteen years ago, progress has been ‘impressive’, says the Energy Community Secretariat’s Director Slavtcho Neykov in an interview with EER (see below), although a lot remains to be done to establish an institutional framework on a par with the EU’s.  Nonetheless, the spirit of a genuine energy community underpins all the steps taken in the framework of the treaty. It is an example of how things could be in Brussels. Ironically, it was the EU that set up the Energy Community in the first place.

Interview: Slavtcho Neykov, Director Energy Community Secretariat

‘This is a complete change in thinking in the region’s geopolitics’

Slavtcho Neykov
According to Slavtcho Neykov, the Bulgarian-born Director of the Vienna-based Secretariat of the Energy Community, the Energy Community represents ‘a complete change of thinking’ in South Eastern Europe. ‘Fifteen years ago many of these countries were at war with each other.’

How has the Energy Community Treaty changed the economies of the member countries?
I see two major changes since the treaty entered into force in July 2006. First of all, many of the countries of South Eastern Europe involved in the Energy Community were at war with each other 15 years ago. They are now discussing joint energy policy and projects. This is a complete change in thinking and in the region’s geopolitics. Secondly, what is visible are reforms, be they legislative, institutional or market reforms. This can be checked and seen. I emphasise this because, although they are neither complete nor perfect, you wouldn’t see investors in the region otherwise. The big players are here because they need a favourable legislative framework and conditions.

What is the added value of the Energy Community Treaty for the region?
There is a considerable added value from a regional perspective, since the Community stimulates common values and policies. All the participating countries have understood that energy security is not a national issue but a regional one. There is also an added value in terms of economic efficiency. For example, several big power plants distributed among the different countries may not be economically viable, but thinking about the power supply on a regional basis changes the situation. Another example is that the countries are, by themselves, too small in terms of market size for an investment in underground gas storage or an LNG terminal. The Energy Community is the right framework to push countries to look at such issues together. What’s more, investments go beyond national borders so you need common legislation.

What concrete achievements have you realised?
In concrete terms we have stimulated investments and privatisations. Look at the talks about a gas ring in the Balkans, involving Albania, Bosnia-Herzegovina, Croatia, Montenegro, Macedonia, Serbia and the MINUK (Kosovo). Did you know that Albania has the best gas law despite the fact that it doesn’t have any gas? Without such a law, nobody would invest there. This is not just theory. We now also have well-functioning regulators in all member countries. Note that the treaty was ratified by its signatories within six months of it being signed. The Energy Community has now been around for less than four years and a huge number of changes have already been implemented in that time. For countries coming from planned economic systems, you could call it “quick”.

What are the main bottlenecks you are still facing?
We focus our attention on three areas. First, we have to adjust and strengthen the regulatory authorities. Even if we follow the EU approach, it is not yet complete or in place everywhere. The independence of regulators has to be monitored in particular. Second, there are shortcomings in terms of administrative capacities. The problem is that, although we have fabulous experts in all the member states, there are not enough of them: only three to five in each ministry. Third, market structures are still not perfect for electricity and gas – the latter especially has to improve considerably. The different players in a liberalised market (Transmission System Operator, Distribution System Operator, distribution companies, etc.) are not present everywhere. National markets have different levels of development in this regard.

The World Bank has recently produced a report, called “Lights out?”, which warns of an impending energy crunch in the region. Do you agree that there is a danger of this happening?
For the time being there is no danger of an energy crunch because of the current economic crisis. In the longer term, it is clear that available capacities are not sufficient. But it doesn't mean that there is a danger, because there are possibilities of imports. From the perspective of production by our own sources, we have to think of building new capacity. The idea is to have countries self-sufficient as much as possible. A report of 5-6 years ago spoke of the necessity of a substantial amount of new domestic production capacity, but I think there are still lots of possibilities to upgrade existing capacity. Furthermore there is a major reserve in South Eastern Europe in improving energy efficiency.

What are you doing to avoid a worst-case scenario?
The Energy Community has a madate under the treaty for a common market approach and a common regulatory framework. Firstly, we are working now on the analysis of the investment process. This is mostly linked to  interconnections, i.e. we push for security of supply through new interconnections in electricity and gas. Secondly, we are working on energy efficiency. There is a huge potential here. The members of the Energy Community have committed themselves to work towards the implementation of key EU energy efficiency directives by 2011. The Energy Community will prepare concrete action plans for each country and monitor their implementation. More generally, our overall work on the EU acquis contributes to solving the problem of security of supply, because at the end of the day, we create better investment conditions.

Slavtcho Neykov spent most of his career as a high level civil servant in various Bulgarian institutions, including the Ministry of Energy. He has qualifications as a lawyer and in foreign relations. His European experience comes from a two year stay at the Energy Charter Secretariat in Brussels and high level positions relating to EU integration in the Bulgarian Ministry of Energy. He was appointed Director of the Energy Community’s Secretariat in September 2006.