Implementing the European Green Deal in SEE
The European Green Deal, which was presented by the European Commission at the end of 2019, requires a comprehensive transformation of the economy through decarbonisation by 2050. The realisation of climate neutrality on the European continent brings about the need for a reasonable balance between risks and opportunities across member states and regions, and more importantly, significant financial capital to guarantee a just energy transition. That is why the European Commission has proposed the Sustainable Europe Investment Plan, which features a Just Transition Mechanism and a Just Transition Fund, in order to ensure that no person or place is left behind. According to experts from the European Commission the transition can be successful only if it is done in a fair and inclusive way, which should be reflected in policy. Considerable financial aid through both existing and new instruments will be unleashed in the EU and individual member states following the COVID-19 economic crisis. European institutions and most of the member states believe that the bulk of these EU emergency and recovery funds should be directed towards decarbonisation of the economy as required by the European Green Deal.
Each of the Southeast European countries (SEE) that are also EU member states has unique circumstances, however there are a lot of similarities with other EU and Energy Community member states in central and eastern Europe (CEE), most of which have been grouped under the Central and South Eastern Europe energy connectivity (CESEC) framework. SEE countries often face issues of a structural nature such as dependence on lignite and related problems regarding the reduction of this reliance, concerns about security of supply, the rates of electricity prices, the expected regional and social implications of the transition, and a lack of transparency. Additional factors, further complicating the situation are regulatory uncertainty, political risks, and a variety of persistent energy market barriers, including the slow coupling of power markets, lack of infrastructure and the absence of robust price signals in illiquid hubs, states a report by the Centre for European Policy Studies (CEPS). The transition to a lower carbon energy system will be slowed down or rendered more difficult by incomplete market reforms, which hinder private investment, new energy solutions and the delivery of the physical interconnections across the countries that are necessary for implementing the electricity and gas target models.
Electricity in Bulgaria is produced mainly at the Kozloduy Nuclear Power Plant (NPP), several publicly and privately held lignite plants, as well as privately owned solar and wind systems. Although some of the lignite plants are old and highly polluting, their potential closures are considered a politically and socially sensitive issue as domestic mining offers relative job security for the population in the mining regions. The new Regulation for EU Electricity Market Design however imposes stricter emissions limits, so the country will have to assess and plan the future of coal-fired plants.
Bulgaria’s wholesale market is a structured institution that functions both as a regulated and free market at the same time, with clear restrictions in terms of choice and competitive pressures. In 2016 the government committed to spot markets (day-ahead and intra-day), and thus the Independent Bulgarian Energy Exchange (IBEX) was created. The country has registered gradual increase in volumes trading on IBEX, which accounts for about 30% of the total load in 2020.
Lately, the Bulgarian electricity market has been undergoing changes, such as the introduction of new rules for renewable energy producers, the abolition of the electricity export levy, and market coupling projects with neighbouring countries. In April 2019, Bulgaria approved a set of amendments to the Energy Act, which entered into force on 1 July 2019. One of the amendments, requiring all renewable energy producers with a capacity from 1 to 4 MW to sell their electricity on the free market, freeing about 750 MW to the market, is considered a step towards market opening. In 2018, a similar scheme was also approved to send all renewable capacity above 4 MW to the free market, in exchange for a contract for premium. Furthermore, the abolition of the export levy since July 2019 of around EUR 5/MWh has facilitated electricity exports. Removal, ideally for new and existing projects, will stimulate new merchant renewables projects, essentially for self-consumption and all financed without subsidies. Barriers for investments in new renewable projects still date from past retroactive measures. The 5% turnover tax for energy producers, which was introduced in 2013 to balance the energy system financially, remains in place. Similarly, a 5% revenue also applies for all new energy investment projects.
Theoretically, companies and households are eligible to purchase electricity from the liberalised market, but according to CEPS’ report, in reality there are multiple barriers to consumers buying electricity on the free market. As the retail market and end-user price deregulation could also increase price volatility, full market liberalisation remains a hot social and political issue. Bulgaria’s electricity interconnection is above the 2020 target of 10%, and a prospective new line to Greece will lead to an increase in this cross-border capacity. A memorandum of understanding envisaging day-ahead market coupling was signed in 2019 by transmission system operators from Bulgaria, North Macedonia and Albania and in February 2019, Bulgaria, Croatia and Serbia initiated a trilateral power market coupling project. However, a key challenge will be to advance the market coupling with Romania and other CEE countries, states CEPS’s report.
The estimated gas demand in Bulgaria is relatively small (around 3-3,5 bcm/year, which amounts to around 13% in the energy mix) and it is highly concentrated with almost all volumes agreed upon under long-term contracts. However, new opportunities are emerging including LNG supplies via Greece. The TurkStream project also offers an alternative route to supplies from Russia, and reverse flows on the Trans Balkan pipeline, which is expected to add flexibility in the future. With an ambition to establish the Balkan Gas Hub, the concept for the construction of the gas distribution centre was developed in January 2019, aiming to create an electronic platform for hosting a variety of transactions.
One of the major challenges on the way to achieving the EU Green Deal goals is that although Bulgaria formally transposed the Third Energy Package into national legislation, genuine market reforms have faced numerous obstacles and drawbacks. Despite all the commitments, Bulgaria was reluctant to facilitate reforms and only acted in response to the European Commission’s inquiries.
In order to achieve climate neutrality Croatia will need to secure not only substantial investment from the EU, but also from the national public and private sectors. Furthermore, all EU programmes that are adopted at member state level have to be aligned with the goals of the EU Green Deal. Economists believe that the key to success will be mobilising public investment and attracting private funds through financial instruments, and strengthening public-private partnerships so as to bring in the total investment of at least one billion euros needed over the next decade to achieve the clearly set goals.
According to Julije Domac, President of the European Association of Regions and Energy Agencies (FEDARENE) the EU Green Deal is an opportunity the Republic of Croatia should use to open up a multi-million euro investment cycle and tailor its own positioning and branding within the EU. The energy transition can also help the country in the development of sustainable tourism and the opening of large investments in the smart sectors of the Croatian economy.
Additionally, funding and financial instruments should play an important role in the so-called HR Green Deal Package. Lines of financing for entrepreneurs and the domestic economy should be opened through the Environmental Protection and Energy Efficiency Fund (EPEEF). An investment platform that will combine EU funds with private equities to a much greater extent should also be launched. It is necessary to establish a public sector guarantee line that will ensure participation in EU funding.
An appropriate institutional network and framework for the implementation of the activities of the HR Green Deal should be created in order to properly involve existing institutions such as EPEEF and Croatian Bank for Reconstruction and Development (HBOR). A national energy and climate agency should be set up through the necessary restructuring of the Hrvoje Pozar Energy Institute. The main aim of this agency would be to connect all existing energy agencies that have very valuable results, but also encourage the opening of new ones across Slavonia and Dalmatia. An efficient and well-established structure, staffed only by experts, and a new approach towards financing can ensure the successful stimulation of large investments in Croatia. The EU Green Deal also encompasses Croatia’s more than 1000 islands, which have lately been gaining increasing importance at EU level.
In comparison with other EU member states, Greece has a relatively isolated energy system that lags behind in terms of connectivity to the regional energy markets. The country covers about 10% of its aggregated consumption through imports, a share that can reach 25% at times because of the price differences between Greece and the rest of SEE. According to CEPS, Greece currently lacks functioning intra-day, forward and balancing markets for electricity and has no balancing market for natural gas. Such deficiencies in the adoption of EU legislation and market design are expected to be overcome through the energy-related provisions of the Memorandum of Understanding signed in 2015 with the European Commission.
A recommendation by the European Commission on the draft integrated National Energy and Climate Plan of Greece covering the period 2021 – 2030 states that the country’s energy market development is hampered to a significant degree by the high market concentration in the power sector. The state-owned Public Power Corporation (PPC) dominates the electricity market, exerting quasi-monopolistic control over both the wholesale and retail markets. According to an enhanced surveillance report on Greece from November 2019, PPC accounts for nearly 50% of electricity generation and approximately 70% of the retail market. However, PPC’s market share is being gradually reduced, which should lead to rising levels of competition in the wholesale and retail markets.
In regards to natural gas, the Greek market still relies on bilateral contracts between the importers. Thanks to the interconnection agreement between DESFA and Bulgartransgaz in 2016, the market gradually opened up to competition. The basic principles of wholesale market with developed spot, day-ahead and forward markets, as well as the operator’s responsibilities are set by Law 4425/2016. Further development of liquidity and competition in the wholesale market were granted through the recent expansion of the Revithoussa LNG Terminal.
The EU Green Deal is expected to have implications in almost all key sectors of the Greek economy. Shutting down lignite power plants, which is part of the EU Green Deal action plan, will have significant socio-economic impacts for local communities, where lignite units or coal mines operate. Most scenarios project ongoing growth for renewables as a way to realize the necessary transition in the country’s energy generation mix. Additionally, the transition to circular economy will require many companies in the sector to apply changes to their operating model in order to meet relevant requirements.
Similarly to other countries in the region, the liberalisation of the energy markets in Romania has taken long. Plans to liberalise wholesale gas prices by 2015 were presented in 2012, with the residential sector continuing to have a certain degree of regulated prices until 2021. In 2018 the electricity market was reformed and regulated tariffs were eliminated in the wholesale market. Romania’s electricity market is fairly competitive, however, most of the producers are state-owned companies and numerous household consumers are still covered by regulated tariffs. The evolution of the natural gas market towards liberalisation has been more difficult. OMV Petrom and Romgaz dominate the wholesale market with 95% of domestic production. The country was supposed to follow a schedule for the complete liberalisation of the natural gas market, but the process has been suspended for three years, halted by the introduced 2% turnover tax on energy companies, which put a price cap on domestically produced gas, and reintroduced regulated prices for three years from March 2019.
The decarbonisation of the power mix in line with the EU Green Deal will contribute to reducing the disproportionate burden between per capita income and energy prices, directly benefiting Romanians. Furthermore, phasing out the old lignite plants, which are already on negative profitability, will help in tackling the significant air quality issues.
Estimates show that Romania has at least EUR 35-40 billion available to mobilise towards the energy transition over the next decade, which matches its calculated transition costs. This requires pooling together its cohesion funding (now increased from the 2014 – 2020 period) and its climate funding tools, under a national strategic investment plan. The amount is the bare minimum available, which would only be increased by a higher level of ambition for the EU by 2030, which could double the amount of funds and revenues from the EU emissions trading system (EU ETS).
Slovenia’s carbon market trade has witnessed notable development since its establishment in 2005. Within 3 years the price of CO2 emission allowances has increased more than 400%, from EUR 5,72 to over EUR 25 per tonne of CO2 in 2019. It is estimated that for many thermal power plants operating in the region the price of emitted CO2 under the "cap and trade" system can already exceed the price of energy carriers applied for the actual generation of energy. In this way, the transition from carbon-intensive energy infrastructure is considered to be merely a function of how much more margin pressure producers are able to handle and thus merely a question of time. Although increasing the price of energy atop the exploding CO2 burdens can lead to reduced competitiveness, over the immediate term, the resources accumulated offer a great opportunity to provide at least a part of the funding required to implement the needed energy transition. According to the Environmental Protection Act of the Republic of Slovenia, revenues from the sale of emission allowances acquired through the public auctioning to energy producers (and aircraft operators) are to be used for supporting investment into low-carbon, renewable and environmentally sustainable energy and transport.
In 2019, the collected funds were allocated to support activities in several priority areas, including financial incentives (grants and soft-loans) for companies, public organizations/municipalities, non-governmental organizations and the civil society for investment in low carbon energy, sustainable mobility as well as to fund capacity development activities such as awareness raising, education and promotion. The funds were allocated by means of issuing public tenders through the national environmental fund or through bi- or trilateral agreements with the responsible ministries.
The Slovenian government considers the European Recovery Plan a good opportunity to integrate the sustainable actions set out in the Green Jobs Agenda, to relaunch the EU economy after the coronavirus pandemic and to develop sustainably in the most cost-effective way possible. Sustainable investment for start-ups, circular economy and digitization will play an important role in this. Therefore it is required to give impetus to sustainable investments that will contribute to the competitiveness of the economy both at EU and at global level, while also reducing emissions and addressing the effects of climate change, stated the Slovenian government upon joining the European Green Deal initiative.
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