Commission places bets on south-eastern energy market

By Tim King

Date: 14/10/04

IF ENERGY is to reach western Europe from Turkey and the Gulf by any route other than Russia, then south-east Europe appears to be the most important alternative route.

But that is only one of the reasons why the European Commission is devoting considerable effort to reconstructing a regional energy market there. Another is that economic reconstruction is impossible without reliable power supplies. A third is that EU states such as Greece, Italy, and Slovenia will suffer without a regional energy market.

Between now and 1 November, the Union for the Coordination of Transmission of Electricity (UCTE) is plugging the countries of the Balkans back into the EU's internal electricity market, after a break of nearly 14 years.

Yesterday (13 October) the Commission was hosting the opening of negotiations on an international treaty that would commit the countries of the region to sign up to various EU laws on electricity, gas and the environment.

Only four of the countries in the regional market are EU states: Italy, Austria, Slovenia and Greece are being joined by nine non-EU members, Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Former Yugoslav Republic of Macedonia, Romania, Serbia and Montenegro, Turkey and UNMIK-Kosovo. Hungary and Moldova are observers at the creation of this putative energy community.

The aim is to put the countries of south-east Europe onto the same regulatory footing as the EU, starting from June 2005. Liberalized, open, gas and electricity markets are supposed to be complete by 2007. On the face of it, this is a striking demand. Countries that were fighting against each other are now agreeing to market liberalization rules that were demanding even for the oldest of EU states.

The working assumption is that the treaty for these countries will be a first step towards joining the EU.

Erhard Busek, special coordinator of the Stability Pact for south-eastern Europe, draws a parallel with the way the European Coal and Steel Community "cemented reconciliation between France and Germany" as a precursor to the Treaty of Rome. He points to future membership of the EU partly because it is a way of overcoming suspicions that the energy market is trying to reassemble the old Yugoslavia, partly because it is a way of putting pressure on the Balkan states with the message: if you are serious about joining the EU, get serious about the regional energy market.

The timetable for the treaty negotiation is deliberately tight. It is supposed to be agreed by the end of the year and will then have to be ratified by the various parliaments. An internal market across the region is supposed to open for non-household customers during next year and be fully open by 2006.

The treaty negotiations are not starting from a clean slate. The process of integrating the energy markets of south-east Europe was launched in 2002. A first memorandum of understanding (MoU) for the electricity market followed that year and for the gas market in 2003. But Busek does not underestimate the difficulty of getting a treaty agreed. "An MoU you can sign easily: it is a statement of intent. But a treaty is much more serious," he says. The chief difficulties, he foresees, will be in getting the national governments to separate the power-generating company from the transmission company and to create a truly independent regulator.

The legacy of the Soviet era is that governments equate control of energy with political power, he says. They also have vested economic interests in the status quo. Croatia, where opposition has been most outspoken, has had "a licence to print money" from its power company, he says, which it will be reluctant to lose. Croatian parliamentarians did not take part in this week's conference in Bucharest, where the Stability Pact and its EU allies were presenting the merits of the regional energy market to parliamentarians, trade unions and non-governmental organizations.

But Busek believes the treaty is achievable, "if the Commission is as tough in the future as it was under [Energy Commissioner] Loyola de Palacio".

Part of the importance of getting the treaty agreed is to get legal certainty as to future developments. Without such certainty, private companies will not invest in the region's energy infrastructure. Similarly, the Stability Pact's view is that the national markets have to be opened up to encourage investment. A lot of work is being done on a cross-border tariff to simplify the charging mechanisms for electricity flow across the region.

At present, the electricity market is ahead of the gas market. In the mountainous regions of the Balkans, the gas networks have historically been less developed. But in geopolitical terms the gas market might be more important, since the region could become the corridor to bring gas and oil from the Caspian Sea into the EU market. The Union's objective is to develop alternatives to relying on Russia. There are fears in Brussels that even on the electricity market, south-east Europe might develop a dependency on Russia. The region is a testing ground for Europe's security of supply policies.

The European Commission was hosting the opening of negotiations on an international treaty that would commit the countries of South-Eastern Europe to sign up to various EU laws on electricity, gas and the environment, 13 October 2004.