Liberalization of Macedonian Electricity Market

by Ivo Boyadzhiev

One of the most topical aspects of the whole reform process in the countries of the SEE region is the market liberalization and restructuring in the power sector of their economy. That very question was discussed on the 5th Balkan Power Conference, which took place in Sofia Princess hotel from 14 to 16 September 2005. Prof. Vesna Borozan from UKIM, Macedonia, made a presentation named "Market Liberalization and Regulatory Issues in SEE and Macedonia", which gave us a cause and a base to release this article for the energy market in Macedonia.

Macedonian Government, like in most countries of Eastern Europe striving to join EU, has followed a policy of seeking harmonization with the union. The main objectives are obvious - restructure the economy through the process of privatization and undertaking of foreign investments, accelerate of economic growth, accent on light industry instead of heavy industry, energy efficiency (including expansion of gas heating), design of expedient framework and price system within the energy market, which means independent power producers, obliged to pay for using of transmission network.

Adoption of the Energy law and establishment of an independent energy regulator indicates the progress, which Macedonia has achieved in the course of energy sector reform. Nonetheless, the agreement between World bank and Macedonian Government requires progress to be continued, striving to improve the conditions of the energy market. The objectives, included in that agreement, could be systemized in following way:

•  to provide affordable and secure energy stable basis;
•  to commercialize the energy industry;
•  to improve energy efficiency;
•  to improve environmental performance of Macedonian power industry.

The reform of the energy sector in Macedonia is based on several administrative and legislative measures, in order to harmonize with European Commission Treaty Requirements on some different issues such as:

•  Acquis communautaire on Energy, in particular Energy Market Amendments – May 2005;
•  Acquis communautaire on Environment, including - law on Environment – June 2005; law on Environmental Air Quality – July 2005; law on Nature – July 2004; Kyoto Protocol – July 2004;
•  Acquis communautaire on Renewable Energy Sources, pre-eminantly The Energy Law;
•  Acquis communautaire on Competition.
•  There are also some significant steps, which mark the energy sector reform progress. First of all, with The Law for change and supplementation of The Law on energy in December 2002, The Energy Regulatory Commission (ERC) was established. Its members were appointed on 23.07.2003, but ERC practicaly started to operate on 1.1.2004.

Independence of the commission is guaranteed by some important procedures. ERC is generally engaged with the following duties - establishment of tariff systems and prices; development of Market and Grid Codes; authorization procedures, concerning generation, distribution, supply and other related services; customer protection and dispute settlement.

Financing of ERC is accomplished mainly by own funds, which is significant for its independence. These funds come from collection of fees from the total income of the companies providing energy activities and from license issuing fees.

The development of Macedonian energy market premised the reconstructing of existing of that time VIU “Elektrostopanstvo na Macedonia”. Its duties was extended on the whole energy market, so liberalization process gave proof of restructuring to smaller independent market participants. The result is the appearance of MEPSO (January 2005), ELMAK – September 2005 and ESM – September 2005. We will summarize the functions of the energy market participants in general, but here is a breaf description of activities of these three main market participants:

• MEPSO has the duties of so called "TSO" or Transmission System Operator and also "MO" or Market Operator;
• ELMAK operates in the field of power generating;
• ESM fulfils power distribution and supply.

• Generators. Independent Power Producers (IPP); Regulated Generators – liable to public service – conclude regulated PPA’s with the supplier of electricity for wholesale tariff customers for selling the overall available power, electricity and system services, under regulated prices and Distributed Generators – authorized to sell electric power and energy to electricity traders and to the supplier of electricity for the retail tariff customers;
• Transmission Service Provider – its activity is to establish the connection to the transmission network, to ensure safe and quality delivery of electricity, to maintain, plan and develop the grid;
• Transmission System Operator (TSO) – ensure transmission and transit across the transmission network and parallel operation with the neighboring systems, implements the schedule of engagement of generation capacities and its modifications. TSO also provides resolution of overloads;
• Market Operator – ensure the efficient control for sale and purchase of electricity, prepares day-to-day dispatching schedules for TSO and perform updating, keeps a transaction register and provides data to the settlement agent;
• Wholesale Tariff Customer Supplier – purchases the required quantities of power, electricity, regulated services and of network capacity required for the Retail Tariff Supplier and the directly connected tariff customers;
• Distribution service provider (DSP, including Distribution service operator) – ensure safe and quality delivery across the distribution network, secures connection to the distribution grid for retail customers. DSP also provides control, maintenance and development of the distribution grid;
• Retail Tariff Customer Supplier (RTCS) – purchases power and electricity from Wholesale Tariff Suppliers and from Distributed Generators, and the required transmission and distribution capacity as well as required services for the retail tariff customers in the distribution system. Billing of electricity is also a duty of RTCS;
• Traders, who buys electricity from IPP or outside the country for resale to eligible customers, the Wholesale Tariff Supplier. Traders can also act as a broker or export the electricity. They are also able to reserve the transmission capacity and regulated services. One the main function of the traders is to inform the Market Operator for quantities and diagram of loads from the sale contracts;
• Eligible Customers – conclude contracts with generators and traders and register contracts or submit requirements to the Market Operator.

The most important role in the energy market liberalization process in Macedonia has The Electricity Market Law, which separates the Government’s policy from the regulatory, ownership and management and provides transparency to investments and construction in energy infrastructure. The Law brings also obligation of public service for electricity customers and settles the appearance of so called “Eligible customers of electricity”. Very important part of the contribution of The Law concerns the Third party access (TPA). According to the principles of transparency, non-discrimination, objectivity, the regulated prices and tariffs previously approved by the Regulator and in accordance with the terms and conditions prescribed by the license, TPA contributes in fulfillment of public service obligation to provide producers, traders, suppliers and consumers access to the system. TPA to the system could be refused by reason of overload, lack of capacity, functional impediments or threat to safety or quality of supply, decision can be appealed to the regulator. Of course, there are some bylaws, concerning energy market and most important ones are Licensing code, Grid Codes (by TSO), Commercial Code, Electricity Pricing Methodology, Electricity Tariff System and the Rule Books on Delivery of Energy, Eligibility of Customers etc.

Liberalization of Macedonian Energy Market is a subject of Report No. 29709 (2004/07/23) of the World bank called "Energy Policy Paper". This paper contains main objectives and substantive messages concerning the development and managing of Macedonian Power Sector. The paper’s key issues refer to maintaining the current capacity, meeting the rising power demand, district heating, organizational aspects and development of the energy market. It also describes the existing power capacity and energy sources of Macedonia. The paper prescribes some options to meet the increasing power demand. The following recommendations has taken place in that issue:

• Investment in power generation and distribution;
• Power import increasing;
• Improving of energy efficiency;
• Accent on renewable energy sources.

According to the Law of Energy, except the above-cited Energy Regulatory Commission, other institutions are responsible for the energy market administration as well. First of all, the Government of Macedonia is responsible to enact strategy for development of energy sector, long-term strategy concerning energy efficiency, annual energy balance, establish fund on Energy Efficiency. State Energy Agency (January, 2004) is responsible for technical support on data management, strategy analysis, policy assessment and implementation coordination. Ministry of Economy conducts the state policy in energy sector through programs and other activities, participates in restructuring process through its legislative function, including laws, sub-laws, concession acts, approvals, licences, establishing of tariff system. The role of Ministry of Environment and Physical Planning is mainly to ensure the monitoring of the environment, proposing of measures and activities aimed at different threat to the environment, remedial of polluted environmental parts, development of self-financing system using independent sources, cooperation with scientific and civil societies, supervision etc.

Prof. Borozan enunciated some significant Policy Principals to guide reforms in power sector. These principals refer to consumer benefit, recognition of existing assets, cost matching for all participants in the sector, elimination of subsidies, manage of human impacts created by reform, opportunity for households to purchase a secure supply of electricity at a reasonable price, use of renewable energy sources in sustainable manner, EU Compatibility.