Economic Development and Transition

Sarajevo School of Science and Technology

January, 2009

Economic Development and Transition

Research paper:

The Energy Sector of Bosnia and

Herzegovina through EU integrations and
transition

Professor:
Prof. Vjekoslav Domjan
Assistant:
Samira Nuhanovi Student:
Aida Buljubai

Aida Buljubasic,
Sarajevo School of Science and Technology 1
Economic Development and Transition

Abstract

The aim of this paper was to research and describe the current situation and
position of the Energy Sector in Bosnia and Herzegovina, on its way to EU
integrations and the transition process. Through a brief account of the history
since Bosnia and Herzegovinas independence and till todays constitutional
structure, this paper seeks to give a clear picture of the current position. Even
though the Energy Sector in Bosnia and Herzegovina is on a very high level of
complexity, this paper concludes with recommendations of possible solutions.

Aida Buljubasic,
Sarajevo School of Science and Technology 2
Economic Development and Transition

Introduction

Since the collapse of the former Yugoslavia in 1992, the countries of Western
Balkans, especially Bosnia and Herzegovina (BiH), have experienced massive
economic and political changes. Current constitutional structure is set up of two
state-like entities, the Federation of BiH (Federation), and the Republika Srpska
(RS), and District Brcko. This means that BiH is highly decentralized; the
Federation is further decentralized consisting of ten cantons.

The complexity of political and organizational structures extends to the energy

sector where the state-like entities own and oversee three electric power
companies, an oil refinery, natural gas transmission and distribution utilities,
and coal mines. District heating facilities fall under the responsibility of
municipal (RS) and cantonal governments (Federation). This is a unique
arrangement that has emerged as a consequence of the complicated and complex
political situation.

One of the main problems facing the energy sector in BiH today includes an
unclear authority over energy issues, the absence of a long-term energy strategy
on the state level, and the absence of energy statistics and laws. Based on
available data, production and consumption of energy and the condition of
energy infrastructure have not yet reached the pre-war level. With the existing
level of energy intensity, more than 20 percent of the national GDP is spent on
energy, a clear indicator that significantly more attention has to be paid to energy
efficiency.

The main issue of BiH is the lack of legal and political basis and the will for
efficient decision-making and for delegation of responsibilities for energy and
energy efficiency to different levels of government. At the same time by signing the

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Sarajevo School of Science and Technology 3
Economic Development and Transition

SAA there is no doubt that BiH will adjust its legal framework to the EU
standards and regulations.

An Energy Policy for Europe The policy that BiH wants to be a part
of

The communication from the European Commission and the Council to the
European Parliament of 10 January 2007 (An Energy Policy for Europe) is a
proposal for measures with the view of:

reduction of dependence on energy imported in the EU from a sole supplier,

liberalization of the electricity market,
increasing use of renewable energy sources,
reduction of greenhouse gas emissions.

The main requisites of the action plan, announced in the frame of three years, are
the creation of a common internal energy market in the EU and the resulting
energy efficiency. In September 2007 the European Commission published the
proposal of the third set of energy legislation which will enable the member states
to create even more competitive energy markets. At the time, the third
liberalization package is in the stage of discussion.

There is no doubt that when the package is adopted, parallel to the process
accession to the EU, BIH will adjust its legal framework to the announced
amendments to directives and regulations in a foreseeable future.

The Energy Charter Treaty

The Energy Charter Treaty, which Bosnia and Herzegovina signed in 1995 and
ratified in 2000 (by Decision on ratifying the Energy Charter Treaty, Official

Aida Buljubasic,
Sarajevo School of Science and Technology 4
Economic Development and Transition

Bulletin BiH International agreements, no 31/00), presumes the introduction

of long term cooperation in the energy sector in Europe in the context of market
oriented economy, and on the basis of cooperation between the contracting
parties, and taking into consideration environmental protection concerns.

The Treaty foresees the promotion of:

developing trade in energy on the basis of open and competitive market of

energy, equipment and services,
access to local and international market,
removal of technical, administrative and other barriers to trade in energy
products, equipment, services and technology,
modernization, renewal and rationalization of the equipment in production,
transportation, distribution and use of energy,
improving access to capital through appropriate financial institutions.

With regard to promotion and protection of investment, the Treaty determines

the creation of favorable, clear and unbiased conditions for investors of other
contracting parties, permanent protection and ensuring of investment security,
not lower than the protection provided by the international law and granting of
favorable and unbiased procedure to foreign investors from other contracting
parties equal to that given to domestic investors.

The goal of the associated Protocol on energy efficiency and related

environmental aspects is to promote energy efficiency policy compatible with
sustainable development, to create the framework conditions encouraging
consumers and producers to use energy in a more economic way, to encourage
cooperation in the field of energy efficiency and to mitigate environmental impact
of the energy sector.

The requirements of the EU and international obligations of BiH in the field of

energy are contained at major extent in the provisions of the Treaty Establishing
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Sarajevo School of Science and Technology 5
Economic Development and Transition

the Energy Community (Decision on ratifying the Treaty Establishing the Energy
Community (Official Gazette BiH - International agreements 9/06).

Participation in the regional electricity market of BiH The Energy

Community

Bosnia and Herzegovinas participation in the regional electricity market started

with its involvement in the Athens process of regional energy market in
Southeast Europe i.e., by signing two memoranda on understanding the regional
energy market of Southeast Europe and BiHs integration in the internal market,
in 2002 and 2003. After preparations which took several years, the first
multilateral and legally binding international treaty in Southeast Europe was
signed on 25 October 2005 the treaty establishing The Energy Community.

By signing the Treaty, the European Union and nine partners in Southeast
Europe Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia,
Montenegro, Romania, Serbia and UNMIK (Kosovo), created a unified legislation
framework for organization of common energy market in the region. In this way a
single market in electricity and gas covering 33 European countries will be
established.

The Energy Community is focused on creating a stable regulatory and market

framework capable of attracting investments in the network and production of
energy in order to ensure all parties the access to stable and continuous energy
supply, which is an essential condition for economic development and social
stability.
The Energy Community will enable to:

enhance security of supply of the single regulatory space by providing incentives

for connections with Caspian, North and Middle East gas reserves,
put in place the conditions for energy trade in the single regulatory space,

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Sarajevo School of Science and Technology 6
Economic Development and Transition

develop market competition in energy market on a broader geographical scale

and use of economies of scale,
improve environmental situation in relation to network energy systems,
improve energy efficiency,
encourage the use of renewable energy sources.

The Treaty Establishing the Energy Community entered into force on 1 July
2006. The task of the Energy Community is to organize the relations between the
contracting parties and to set the rules and economic framework for network
energies (electricity and gas), which include activities in implementation of the
EU legislation on energy and environment, competition and renewable energy
sources, putting in place a specific regulatory framework enabling efficient
functioning of the network energy market and creation of network energy market
without internal borders.

The international agreements

Given the fact that international agreements are, by their legal effect, part of the
legal system of BIH and above the domestic laws, identified and analyzed
obligations resulting from the Treaty. The states that signed the Treaty, Bosnia
and Herzegovina included, took the obligation to adopt and implement the EU
legislation.

The contracting parties obliged themselves to implement the process which is set
to facilitate the creation of compatible domestic energy markets, developing
interconnections between systems and markets and opening of new possibilities
in energy trading, stepping up environmental protection in accordance with
standards equal for all states, promoting renewable energy sources development,
removal of barriers to free market competition and mutual assistance in the event
of disturbances in energy supply.

Aida Buljubasic,
Sarajevo School of Science and Technology 7
Economic Development and Transition

The Energy Community presumes creation of a single, unified electricity and

natural gas market of the Southeast European countries and EU countries. This
market would include the EU member states and non-member countries of the
EU (countries of the region), and not only the nonmember countries as it is often
incorrectly interpreted.

By joining the Energy Community, Bosnia and Herzegovina confirms its

determination to cooperate with the EU in the electric power sector and gas
sector and to develop the competition in the energy market through adoption of
common rules from the Directive 2003/54/EC and Directive 2003/55/EC and
through the implementation of the Regulation 1228/2003/EC on conditions for
access to the network for cross-border exchanges in electricity.

The Treaty determines the legal acts of the EU, whose provisions should be
implemented in the national legislation and relevant mandatory deadlines (in the
timeframe from the entry into force until 31 December 2017).

The deadline for implementation of these directives and regulations was 1 July
2007. It was a deadline for ensuring the assumptions that all customers except
households have eligible customer status not later than 1 January 2008, and
starting from 1 January 2015 this status will be acquired by all customers.
A significant part of assumed acquis communautaire refers to the protection of
market competition.

Namely, the European Union prohibits any agreements between undertakings,

decisions by associations of undertakings and concerted practices which may
affect trade between Member States and which have as their object or effect the
prevention, restriction or distortion of competition, abuse by one or more
companies of market dominant position between the contracting parties as the
whole or in a significant part of the market. It also does not allow any public aid
which distorts or threatens to distort market competition by favoring certain
undertakings or energy resources. Any practice contrary to this is assessed on the
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Sarajevo School of Science and Technology 8
Economic Development and Transition

basis of criteria resulting from the Treaty Establishing the Energy Community.
This obligation could lead to significant changes in the practices present in the
electric power sector of BIH today.

The Ministry of Foreign Trade and Economic Relations of BiH is responsible for
fulfilling the obligations undertaken by signing the Treaty Establishing the
Energy Community on behalf of BiH. The Ministry efficiently cooperates with the
bodies of the Energy Community.

The Secretariat of the Energy Community identified the present situation and
measures necessary for harmonization and implementation of the BiH legislation
in line with the EU regulations relevant for establishing appropriate structure
and functioning of the electricity market and natural gas market in BiH. Among
the documents brought by the Secretariat of the Energy Community attention
should be drawn to the Action Plan for the power sector of BiH, which identifies
responsible institutions and timetable for activities to be undertaken in order to
meet the obligations assumed by signing the Treaty Establishing the Energy
Community.

The prescribed activities include the following issues: harmonization of the

domestic legislation with the EU acquis communautaire, structuring of the
market compatible with the relevant rules in the EU, organization of wholesale
and retail markets, reform of the tariff system, and integration of the market into
the regional and European market.

On the way to EU integrations, current position of BiH

First, significant steps in power sector reform were accomplished in 1998 by

establishing of Joint Power Coordination Center (ZEKC), followed in 2000 by
signing the electricity policy statements of entities governments.

Aida Buljubasic,
Sarajevo School of Science and Technology 9
Economic Development and Transition

During 2002 the following laws were adopted: Law on Transmission of Electric
Power, Regulator and System Operator of Bosnia and Herzegovina (Official
Gazette BiH 7/02, 13/03), Law on Electricity FBiH (Official Gazette FBiH 41/02,
24/05, 38/05), Law on Electricity in RS (Official Gazette RS 61/02, 66/02,
29/03, 86/03, 111/04, 60/07) and in 2004 Law Establishing the Company for the
Transmission of Electric Power in Bosnia and Herzegovina (Official Gazette BiH
35/04) and Law Establishing Independent System Operator for the Transmission
System of Bosnia and Herzegovina (Official Gazette BiH 35/04).

In 2003 and 2005 Action Plan of the Republic of Srpska for restructuring and
privatization of power sector in Bosnia and Herzegovina (Official Gazette RS
69/03) and the Action Plan of Federation of Bosnia and Herzegovina were
adopted.

Three regulatory commissions were founded in the period 2002-2003, in 2005

ISO BiH was established while in 2006 single power transmission company.
These laws created formal assumptions for power sector restructuring and
reform.

The state or entity regulators and Electricity Companies, bound by these laws,
adopted or are about to adopt a large number of regulations from their respective
competences (third party access, licensing, tariffs, consumer protection,
dynamics of market opening, and eligible customer status, grid code, market
rules, metering rules, etc.)

The key actors in implementation of the electric power sector reform

in BiH

- Ministerial Council of BIH (energy sector devlopment strategy on the state

level, international relations, drafting energy law on state level)
- Government of FBIH (energy sector development strategy on entity level,
energy policy of the entity)
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Sarajevo School of Science and Technology 10
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- Government of RS (energy sector development strategy on entity level,

energy policy of the entity)
- Ministry of Foreign Trade and Economic Relations of BIH responsible for
coordination of energy policy and international relations at the level of BIH,
- Ministry of Energy, Mining and Industry of the Federation BIH
responsible for implementation of state policy, energy policy of Federation BIH
and coordination of entity's activities,
- Ministry of Economy, Energy and Development of the Republic of Srpska
responsible for implementation of state policy, energy policy of RS and
coordination of entity's activities,
- State Electricity Regulatory Commission (SERC) competent for regulation
of electricity transmission activity and international trade investment electricity
(started in 2003),
- Regulatory Commission for Electricity of Federation of Bosnia and
Herzegovina
- (FERC) competent for regulation of production, distribution and supply of
electricity in the Federation BiH (started in 2002),
- Regulatory Commission for Energy of Republic of Srpska (RERS)
competent for production, distribution and supply of electricity in RS (started its
activity in 2002),
- Independent system operator BiH (started its activity in 2005),
- Electricity transmission company Elektroprenos Elektroprijenos BIH
(started in 2006),
- Company Elektroprivreda BIH Directorate for distribution in the frame
of vertically integrated company Elektroprivreda BIH (ongoing procedure of
founding a separate company, legally independent of other activities of the
vertically integrated company),
- Company Elektroprivreda Hrvatske zajednice Herceg Bosne directorate
for distribution in the frame of vertically integrated company Elektroprivreda
Hrvatske zajednice Herceg Bosne (ongoing procedure of founding a separate
company, legally independent of other activities of the vertically integrated
company),
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- Combined holding Elektroprivreda Republike Srpske five dependent

electricity distribution companies in the frame of mixed holding Elektroprivreda
Republike Srpske (established in 2006)..
- Energy policy is in the scope of executive governmental bodies of the state
and entities (Ministerial Council of BiH, Government of FBiH, Government of
RS, Ministry of Foreign Trade and Economic Relations of BiH, Ministry of
Energy, Mining and Industry of the Federation BiH and Ministry of Economy,
Energy and Development of RS).
- Ministry of Foreign Trade and Economic Relations of BiH is responsible
for tasks that fall under the authority of BiH relating to definition of policies,
basic principles, coordination of activities, and harmonization of plans of the
entities authorities and institutions in the international context, including
energy, environmental protection, development and use of natural resources
(Law on Ministries and Other Administrative Bodies of Bosnia and Herzegovina).
Under the Law on Transmission of Electric Power, Regulator and System
Operator of BiH this Ministry is also responsible for creating energy policy.
- In accordance with Article 9 of the Law on Federal Ministries and Other
Administrative Bodies, the Federal Ministry of Energy, Mining and Industry of
FBiH is responsible for creating energy policy. This Ministry carries out the set
policy and enforces the laws adopted by legislator, oversees the implementation
of laws and other regulations, adopts regulations for implementing laws and
other regulations, issues proposals and recommendations in subject of
legislation, responds to inquires from the legislative authorities and carries out
other administrative and expert tasks specified by the laws and other regulations.
- In accordance with the Law on Electricity of RS, power sector policy in RS
is the competence of the RS Government. The Law on Ministries of RS places the
competences of bringing measures of economic and development policies in the
energy sector with the RS Ministry of Economy, Energy and Development.

Aida Buljubasic,
Sarajevo School of Science and Technology 12
Economic Development and Transition

Common problems in the EU-27 and in the region of Southeast

Europe/ Bosnia and Herzegovina:

persistence of regulated prices, especially for benefit of eligible customers

(obstacle to new market entrants),
lack of legal and management unbundling of transmission system operator and
distribution system operators in order to keep their independence,
discriminatory rules for third party access and poor transparency of tariffs,
free supplier choice,
regulators' powers, particularly in view of network access charges,
preferential network access for some long term electricity supply contracts,
lack of public service obligation assignment and of electricity origin labeling
(lack of labeling rules).

In Southeast Europe some additional problems are observed:

low tariffs (domination over entire energy chain),
metering, calculation and billing consumers,
collection, low level of payment and billing (data bases),
data transparency and accounting harmonization,
lack of domestic production (high level of imports),
sticking to wholesale supplier or single customer pattern,
market operator bundled with system operator which is included in vertically
integrated undertaking,
cross-border issues,
distribution system operator bundled with customers supply,
lack of investments in the distribution system,
transmission system operator and distribution system operators are not
independent in making decisions,
inadequate functional and accounting unbundling of transmission system
operator and distribution system operators,
powers and independence of regulatory commissions and their mutual
coordination.
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Sarajevo School of Science and Technology 13
Economic Development and Transition

CONCLUSION

With adoption of the Market Rules, Grid Code and Rules on third party, access to
transmission system in 2006, a basic regulatory framework for electricity market
functioning, was completed.

For final definition of regulatory framework in BiH, based on free and regulated
network access and free market in accordance with the EU Directives, it is
necessary to prepare, adopt and implement additional legal acts.

Among the priorities to completely define legal framework, is preparation of

energy strategy which would provide a framework for activities in domestic and
international power sector, determine political objectives and contribute to risk
management.

Aida Buljubasic,
Sarajevo School of Science and Technology 14
Economic Development and Transition

References:

1. Energy Charter Treaty

2. Treaty Establishing the Energy Community
3. Electricity Policy Statement of the Governments of Federation BiH and Government of RS with
amendments
4. Action plan of the Federation BiH for power sector restructuring and reform (Official Gazette FBiH
31/05)
5. Action Plan of RS for power sector restructuring and reform in BiH (Official Bulletin RS 69/03)
6. Constitution of Bosnia and Herzegovina
7. Constitution of Federation of Bosnia and Herzegovina
8. Constitution of Republic of Srpska
9. Law on Transmission of Electric Power, Regulator and System Operator of BiH (Official Gazette
BiH 7/02 and 13/03)
10. Law Establishing Company for the Transmission of Electric Power in BiH (Official Gazette BiH
35/04)
11. Law Establishing Independent System Operator for the Transmission System in BiH (Official
Gazette BIH 35/04)
12. Law on Implementation of Tariff System (Official Gazette BiH 6/04)
13. Law on Electricity of FBiH (Official Gazette FBiH 41/02, 24/05, 38/05)
14. Law on Federal Ministries and Other Bodies of Federal Administration (Official Gazette FBiH
58/02)
15. Law on Electricity of RS (Official Bulletin RS 61/02, 66/02, 29/03, 86/03, 111/04, 60/07 and
08/08 consolidated tekst)
16. Law on Ministries (Official Bulletin RS 19/2004).
17. White Paper: White Paper Preparation of Associated Countries of Central and
18. East Europe for Integration in the Internal Market, Brussels, May 1995
19. Bosnia and Herzegovina: Analysis and action plan for power sector restructuring and privatization,
2001.
20. Bosnia And Herzegovina - Country Report, Energy Community Secretariat, 2006.
21. Commission Decision of 9 November 2006 amending the Annex to Regulation
22. (EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in
electricity (2006/770/EC), European Commission, November 2006.
23. Communication from the Commission to the Council and the European Parliament: Prospects For
The Internal Gas And Electricity Market, 2006;
24. Communication from the Commission Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003
into the European gas and electricity sectors. COM(2006)851 final
25. Directive 2001/77/EC on the promotion of the electricity produced from renewable energy sources
in the international electricity market 11
26. Directive 2003/30/EC on the promotion of the use of biofuels for transport 12
27. Electricity And Gas Road Map - Bosnia And Herzegovina, Energy Community, Ministerial Council
Meeting, 17 November 2006, Skopje

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Economic Development and Transition

28. Directive concerning common rules for the internal market in electricity and repealing of Directive
96/02 EC 6
29. Directive 2005/89/EC concerning measures to safeguard security of electricity supply and
infrastructure investments 9
30. Electricity Transition Strategy, Energy Community Secretariat, 2006.
31. Communication of the Commission and of the Council to the European Parliament of 10 January
2007 (Review of measures for new energy policy)
32. Regulation 1228/2003/EC of the European Parliament and of the Council on conditions for access
to the network for cross-border exchanges in electricity
33. Regulation 1228/2003/EC on conditions for access to the network for cross border exchanges in
electricity
34. Congestion Management Guidelines Proposal for the SEE electricity market design in the long
term, CEER 2007.
35. SEC(2007) 1430, Commission staff working document Bosnia and Herzegovina 2007 Progress
Report accompanying the communication from the Commission to the European Parliament and
the Council enlargement strategy and main challenges 2007-2008, com(2007) 663 final
36. Security of Supply Statement for BiH 2007-2010, MOFTER, 2007.
37. SEE Electricity Market Options Paper, Energy Community Secretariat, 2006.
38. South East Europe Regional Energy Market Support, (SEE REMS) Project Tariffs Benchmarking,
Ref: C06-SEE-15-04, 11 May 2006.
39. Benchmarking and Compliance Reports, Energy Community Secretariat, 2006/2007
40. Report on Activities of the State Electricity Regulatory Commission in 2007
41. Report on Activities of the Regulatory Commission for Energy in 2006

Aida Buljubasic,
Sarajevo School of Science and Technology 16