Serbia freezes electricity prices to help businesses through energy crisis

The Government of Serbia has ordered state power utility Elektroprivreda Srbije (EPS) to keep electricity prices for business customers unchanged until the end of November in a move aimed at supporting the economy amid recent dramatic price hikes, of between 70% and 135%, EPS officials said at a panel titled “Electricity prices for business: What to expect”, organized by the American Chamber of Commerce in Serbia (AmCham).

Capping electricity prices for November, according to panelists, is only a short-term fix, while prices are expected to remain high until the end of the year and in the first quarter of 2022.

Experts say that electricity prices will not revert to levels seen before the ongoing energy crisis, of about EUR 60 per MWh, and that the average price in 2022 is projected to be around EUR 120 per MWh.

They recommend businesses to change the way they purchase electricity, proposing solutions such as trading on power exchanges, concluding corporate power purchase agreements with wind farms and solar power plants, and becoming prosumers by building their own electricity generation capacities.

What does the government’s decision entail?

Bratislav Džombić, director of market development at EPS, said at the panel that the government’s decision envisages three scenarios:

The first one is for EPS to extend power purchase agreements that expire on October 31 by one month, until November 30. The second is to offer fresh last resort supply agreements for November, at the same price, to customers whose agreements expire on October 31. The third scenario covers those with power purchase agreements that take effect on November 1 – they will be offered to have such agreements delayed until December 1.

Džombić also said that the government’s intervention was necessary because EPS could not have capped prices on its own in a liberalized market. The government had to opt for short-term measures so as not to violate market principles, he added.

“Perfect storm” on electricity markets

Miloš Mladenović, managing director of the Serbian power exchange SEEPEX, said this “perfect storm” on electricity markets, which began this spring, is driven, among other things, by the economic recovery and rising demand for energy, a weaker supply of renewable energy, and inflation.

In the Western Balkan region, the poor hydrological situation has made matters even worse, reducing the output of hydropower plants, according to him. At the same time, the dramatic growth in carbon prices on the European market, from EUR 28 per ton in 2020 to EUR 60-65 per ton recently, coupled with market speculation, has pushed up the costs of power generation from coal and natural gas, he said.

The futures market suggests the average price on power exchanges across the region in 2022 will be about EUR 120 per MWh

Current trends in the futures market suggest the average price of electricity in the region’s power exchanges in 2022 will be about EUR 120 per MWh, but that does not mean end-consumers will be paying that price, according to Mladenović.

Neda Lazendić: Serbia’s first renewables auctions are expected by the end of the year

Neda Lazendić, vice-chair of AmCham’s energy committee and country manager for Serbia at WV International Emergy, recalled that the company is developing eight wind farms and one solar power plant.

Lazendić said she views the government’s measure as a short-term solution, while in the long-term it is obvious that Serbia has opted for renewable energy sources. This is evident from a set of regulations adopted this year, most notably the Law on renewable energy sources, according to her.

Lazendić also said that the company is preparing for Serbia’s first renewables auctions, which are expected by the end of 2021. The auctions are the priority, to be followed by corporate power purchase agreements, which are already in demand, according to her.

Serbia has little room for cutting taxes on electricity bills and no revenues from CO2 emissions

One of the solutions for high energy prices is to cut taxes and other charges included in electricity bills, as recommended by the European Commission, according to Milka Mumović, an electricity and statistics expert at the Energy Community. However, the amount of such levies in Serbia is four times smaller than it is in the EU, so there is less room for intervention.

Also, Serbia does not have a carbon pricing mechanism, which could help finance aid to vulnerable households, according to her.

Other countries in the region that do not charge for CO2 emissions have opted for various measures, such as financial aid to the supplier, allocated by Albania, or a decision to import coal and put in operation all thermal power units, made by North Macedonia.

What are long-term solutions for businesses?

The measures adopted by the government are only a short-term solution, while the final quarter of this year and the first quarter of 2022 are expected to be critical when it comes to electricity prices, according to SEEPEX Managing Director Miloš Mladenović.

Businesses need to change the way they think about electricity and start viewing it as a market commodity that is sensitive to developments not only in the energy sector but in other areas as well, he said.

Trading on power exchanges, concluding corporate power purchase agreements with producers, becoming prosumers…

Businesses need to turn to the market, instead of relying on long-term agreements with EPS, according to Mladenović. One of the solutions is to conclude corporate power purchase agreements (PPAs) with producers of green energy, he said.

Another solution proposed by panelists is for businesses to become prosumers and start producing their own energy for self-consumption.

Mumović: it would be better if businesses paid a CO2 tax in Serbia than a carbon border tax to Brussels

Milka Mumović, an electricity and statistics expert at the Energy Community, said that companies should take into account the Carbon Border Adjustment Mechanism (CBAM) that the EU plans to introduce in 2026 for all producers of cement, iron, steel, fertilizer, aluminum, and electricity.

According to her, it would be better for Serbia to introduce a carbon pricing mechanism and keep the money in the country, because otherwise local businesses would pay the carbon border tax to Brussels.

Miloš Mladenović, managing director of SEEPEX, said that Serbian companies would not be paying EUR 60 per ton of CO2, which is currently the price in the EU, because there would be free allowances for CO2. One of the solutions for businesses is to buy guarantees of origin, greening the electricity they consume, according to him.