Energy Community countries’ energy regulation more aligned with EU

Author: Aura Sabadus

2021/11/16

LONDON (ICIS)--The implementation rate of European energy market regulations soared to nearly 60% in nearly all contracting parties of the Energy Community in 2021, but the lack of carbon pricing mechanisms threatens their long-term integration with EU markets.

Speaking to ICIS, Energy Community director Janez Kopac, said the uptake of the EU’s Third Energy Package - which requires EU members states to create competitive, transparent markets - has been increasing in all nine Energy Community states in recent years, with the exception of Bosnia and Herzegovina, which has constitutional issues that need to be solved first.

“The best [in transposing and implementing EU rules] have been Montenegro and North Macedonia for electricity and Ukraine for natural gas,” he said, shortly after the launch of the Energy Community’s annual implementation report on Monday.

Kopac, whose nine-year tenure at the helm of the Energy Community comes to an end on 30 November, said the key to success had been the trust that the Energy Community secretariat has earned thanks to its independence.

The Energy Community is an international institution established between the EU and non-member states and whose goal is to extend free market principles to the bloc’s neighbourhood.

INDEPENDENCE

Even though working closely with the EU, Kopac said the Energy Community has sought to follow an independent line, drafting laws and pieces of secondary legislation for contracting parties.

“We do not have a lot of money like the European Commission or other international donors. We only had one modest tool - honest and unbiased compliance assessments and launching infringement procedures where needed,” he said.

Kopac said the success of Energy Community contracting parties was also linked to external pressures as well as reform-minded ministers.

For example, he said the North Macedonian government refrained from intervening in the electricity market because the country imports most of its electricity. In Montenegro’s case, there was a pressing need to reform because the country built a subsea electricity cable to Italy. Finally, Ukraine had to liberalise its natural gas market as part of credit arrangement with the International Monetary Fund and in order to secure a long-term gas transit agreement with Russia in 2019.

CARBON PRICING

However, as Kopac prepares to hand the baton to a new candidate, despite securing support from all contracting parties, he said the challenges ahead would be multiple.

The biggest difficulty ahead lies in a growing rift between Energy Community and EU countries caused by misalignment of the adoption of a carbon pricing mechanism.

The adoption of such a mechanism is voluntary and so far only Montenegro adopted a credible carbon price of €24.00/tCO2e.

“The commission is the only body that can propose new elements of EU acquis for the transposition in the Energy Community and it seems that an emission trading scheme will be proposed sometime around 2025. Contracting parties could be more active by themselves but right now they are waiting for the EU to push them with legal action. I think contracting parties will never overcome the gap that is emerging right now,” he said.

COAL DEPENDENCY

While most contracting parties are lagging behind EU member states in pursuing a viable carbon pricing mechanism, many are still forking out subsidies for coal-fired capacity.

“The Energy Community Secretariat identified several potential illegal state aid cases in the contracting parties. We urged all national authorities and the Competition directorate to act but all we received instead was silence,” Kopac added.

He said some contracting parties such as Bosnia and Herzegovina, Serbia or Kosovo, which have a strong coal dependency, were simply not able to phase it out until 2050, pointing out that he had proposed national climate funds that would be co-managed by the EU and national authorities in a bid to help speed up the decarbonisation process.

MARKET INTEGRATION

Another major challenge ahead is ensuring that governments remain compliant with EU regulations and pursue the integration of their markets, he said.

The Energy Community’s annual implementation report found that as energy prices soared in Europe throughout 2021, the highest values were seen on the Serbian spot market, which has not been coupled with other European markets yet.

Kopac said the current energy crisis had been used to justify governmental price interventions: in Serbia, Albania, as well as the Ukrainian gas markets, but also in some EU countries.

“As long as markets are not fit for purpose, there will always be the same excuse. [Governments must] stop intervening in electricity and gas incumbents’ activities by adopting indirect regulation that leads to never ending cross-subsidisation,” Kopac said, pointing out that in some cases governments use the pretext of security of supply to justify unviable economic measures.

He said throughout the last nine years he had sought to trigger the amendment of Energy Community Treaty to ensure a deeper integration of contracting parties with EU states, but momentum had been lost and any prospects for treaty amendments had hit the buffers.

He said contracting parties which are expecting to extend the shelf life of their assets operating on natural gas should consider fast-tracking their transition to cleaner forms of generation by attracting more investments in renewables.

“Building new gas infrastructure now could be stranded assets very soon,” said Kopac, who is now looking for new opportunities in the European energy sector.