Electricity

Serbia promises to IMF it would raise electricity, natural gas prices by up to 30%

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Published

December 21, 2022

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Published:

December 21, 2022

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The Government of Serbia has committed itself to raise the prices of electricity by 26% and prices of natural gas by 30% from May 2023 to May 2024 as part of the current stand-by arrangement with the International Monetary Fund. The tariff increase is planned to be reassessed at the first review. It doesn’t include the already announced 10% increase set for January 1.

The International Monetary Fund (IMF) approved a two-year standby arrangement for Serbia, which implies that the country gets the opportunity to withdraw loans worth EUR 2.4 billion, but also to implement certain economic and financial reforms. Most relate to the energy sector including state-owned power utility Elektroprivreda Srbije (EPS) and its equivalent for gas, Srbijagas.

The plan to lift prices is part of the Memorandum on Economic and Financial Policies, which was sent to the IMF. It contains an economic program for 2023 and 2024, which the government will implement in order to address the short and medium-term challenges the country is facing.

The Government of Serbia intends to appoint regular instead of interim management in two energy companies

In addition to the increase in electricity and gas prices, the government intends to finish the unbundling of Srbijagas, transform EPS into a joint stock company and prepare a plan for its restructuring, adopt the national energy and climate plan (NECP), prepare an investment plan for the energy sector, and appoint a regular instead of interim management in Srbijagas and EPS.

The electricity tariffs were last increased in September, by 8% for households and about 27% for firms, while the price of gas rose about 9% in August.

Price increases are necessary to reduce costs for EPS and Srbijagas

According to the memorandum, higher gas and electricity tariffs are needed for the energy companies’ medium-term cost recovery and for them to promote energy conservation.

The costs have increased because, due to last year’s collapse in coal and electricity production, EPS was forced to dramatically increase imports, at a time when prices were five to six times higher than ordinary due to the energy crisis. High import prices were also the cause of Srbijagas’s losses. The Fiscal Council, an independent government panel, said total losses at the two companies from the previous and current heating seasons could reach EUR 2 billion.

The government committed itself to increase the price of natural gas to ensure the full cost recovery for Srbijagas over the medium term.

After the price hike scheduled for January 1, by about 11%, Serbia will implement a series of increases of the average gas tariff by 10% on May 1 and November 1 next year and May 1, 2024.

If market prices for gas exceed EUR 250 per MWh on average for two weeks, a discussion on an appropriate policy response will be launched.

In mid-2023, the planned tariff increases will be reassessed

The government is also committed to delivering the necessary electricity tariff adjustments during the program period to ensure full cost recovery for EPS.

As a first step, the price is set to be increased by 8% on January 1, and after that, a set of increases in average electricity tariff by 8% each are scheduled for May 1 and November 1, 2023, and May 1 of the following year.

Under the arrangement, the adequacy of the agreed tariff increases will be reassessed at the first review.

In order to mitigate the impact of tariff adjustments on vulnerable households, the existing system of block tariffs will be maintained, with a lower price up to a certain electricity consumption threshold. The government also plans to expand the energy-vulnerable consumer protection program.

Priority plan for energy investments

The Government of Serbia intends to prepare a prioritized investment plan for the energy sector with projects that can be implemented during the next two to five years. They will enhance energy security (e.g. by building new gas interconnectors or new oil pipelines), stabilize electricity generation, and save energy.

The plan will identify which entity will bear the costs of these investments and how they are to be financed, the memorandum reads. It will be adopted by the end of May 2023.

The government also plans to adopt a new Energy Development Strategy by the end of 2023, which will be harmonized with the investment plan.

The authorities acknowledged poor governance in the energy companies and committed to appointing regular rather than interim management in both EPS and Srbijagas by June 2023.

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