Energy boost

The EU’s new energy treaty is giving the Balkan states something to aim for with regard to utility companies. By Peter Solt

European energy markets in gas and electricity, which have so far been separated by national borders, are currently undergoing profound changes fuelled by recent EU legislation.

The entry into force of international treaties extends the drive towards a common market to Central and Eastern European (CEE) and, more obviously, the South Eastern European countries.

These changes bring about less regulation and more competition in the markets of energy generation and cross-border energy trade. These initiatives will promote a climate for active transactional and project development activities in South East Europe in particular.

The EU’s internal energy market

EU energy markets have tended to be fragmented along national borders. The fact that energy infrastructure requires large networks, of electricity grids or gas pipelines, means utility companies tend to be monopolies in their geographic markets. In addition, most EU member states have a long history of strong government regulation or public shareholding politics with the sole aim of protecting the strategic energy supply.

The EU has only recently started to liberalise and integrate its energy markets in order to achieve greater energy market integration; an energy market free from trade barriers; improved security of energy supply; reduced energy costs for consumers; and improved economic competitiveness within the energy market.

The main instruments for liberalising markets in the EU are the harmonisation of laws, free trade in goods and services, the principle of non-discrimination and the application of competition rules.

The liberalisation process has two phases. In the first phase, directives on the transit of gas and electricity and on price transparency were adopted. In the second, common rules for the electricity and gas sectors were established.

Energy Community Treaty

On 25 October 2005 the Energy Community Treaty was signed in Athens by the EU along with Albania, Bulgaria, Bosnia and Herzegovina, Croatia, the Former Yugoslav Republic of Macedonia, Serbia, Montenegro and the United Nations Interim Administration Mission in Kosovo (UNMIK). The treaty’s objective is to extend the EU’s internal energy market to South Eastern Europe by:
– creating a stable regulatory and market framework for energy markets;
– creating a single regulatory space for trade in network energy;
– enhancing the security of energy;
– improving the environmental situation in relation to network energy and related energy efficiency, as well as fostering the use of renewable energy; and
– developing stronger network energy market competition.

The measures’ implementation timeline is highly ambitious: both the EU energy market directives on common rules for the internal market in electricity and natural gas, and the regulation on cross-border network access, are to be put in place by 1 July 2007.

These legal changes will help to open up markets by promoting consistent approaches to regulation throughout the EU and South Eastern Europe. The liberalisation of the market for all non-household customers is scheduled for 1 January 2008; the hope is that full liberalisation of the market for all customers will be achieved by 2015.


The accession was an opportunity for the formerly closed system of generation, distribution and supply of energy to become part of the integrated European energy market. Bulgaria’s Energy Act introduces a market model centred on the liberalisation of the electricity market, bringing the country in line with the EU directive.

The former vertically integrated state-owned energy networks monopoly has been split into seven distribution and seven generation companies.

The electricity retail market has been opened gradually since 2003. As of 1 January, 60 per cent of the market is open to competition. Bulgaria’s institutional framework establishes an energy regulatory authority, a competition authority and an energy efficiency agency, in addition to the relevant ministerial departments.

The legal and regulatory framework for natural gas is also compatible with EU directives. The state-owned Bulgargaz EAD, which still dominates the natural gas market in Bulgaria, has been transformed into a holding company (Bulgargaz-Holding EAD), which holds the sole interest in three operating companies.


As an EU candidate country, Croatia has started the process of harmonising its laws with the EU. The priorities in the energy sector for the accession negotiations are clear:

  • implementation of the EU acquis communautaire on gas and electricity;
  • improvement of the operational capacity and independent functioning of the national regulatory authority;
  • implementation of the commitments undertaken in the framework of the Energy Community Treaty; and#strengthening of the administrative capacity and alignment with the acquis communautaire on energy efficiency, renewable energy sources and in the area of nuclear energy.

    According to the EU Progress Report for 2006, the development of the internal electricity and gas markets is on track. An Energy Regulator was established in 2005. The state-owned electricity company Hrvatska Elektroprivreda has been restructured under a holding company. However, all unbundled assets remain in the ownership of the holding company.

    INA, the state gas company, still holds a monopoly over import and supply. The Gas Market Act adopted in March 2007 represents the first step in further harmonisation with EU legislation.


    In July 2004 the Serbian parliament adopted the Energy Act, providing for a significant liberalisation of the Serbian energy sector, thus fulfilling the requirements of the EU’s electricity and gas directives. Serbia has clearly committed itself to stimulating market competition, creating transparent, attractive and stable conditions for investment in energy facilities; connecting to the energy systems of other countries; and promoting the use of renewable energy sources.

    The legislative changes were followed by the formation of new institutions and significant structural changes to public companies. Serbia has established relevant ministerial departments, an energy regulatory authority and a competition authority. The former vertically integrated state-owned electricity and gas companies have been separated.

    In July 2005 the state-owned Electric Power Industry of Serbia was split into two independent entities, one active in distribution and trade, the other in transmission and system operations. In order to unbundle the natural gas sector, the Nafta Industrija Srbije was split into three companies in August 2005.

    The electricity market was liberalised formally on 1 January 2007.

    Bosnia and Herzegovina

    Since the Energy Community Treaty was signed, there have been no changes in energy regulations at the national or entity levels.

    The existing provisions regulating the energy markets were adopted in 2002, when the Law on Energy was adopted in the Federation of Bosnia and Herzegovina. Further changes were made in 2003 through the adoption of the Law on Transport, Distribution and System for Operation of Energy and in 2004 when the Republika Srpska and the Brcko District passed the Law on Energy.

    A lot remains to be done to fulfil the treaty requirements. The first of the deadlines is due soon and we expect that the energy issues will again top the political agenda.

    Peter Solt is a partner at DLA Piper. He was assisted by senior associate Thomas Podlesak and associate Monika Milewski