Serbia’s energy companies EPS, Srbijagas could lose EUR 2 billion over two heating seasons

Total loss of state-owned energy utilities Elektroprivreda Srbije (EPS) and Srbijagas during the 2021/2022 heating season amounted to about EUR 1 billion, and they could suffer an equal loss in the next season, according to the Fiscal Council. It is urgently necessary to increase the price of electricity, natural gas, and heating by 15%-20%, 65%- 75%, and 10%-40%, respectively, it said.

The consequences of poor management of EPS and Srbijagas have been exacerbated by the global energy crisis, which also exposed the long-term domestic crisis of state-owned energy companies, the Fiscal Council said in an analysis called ‘Structural problems of Serbian energy sector in the light of the global energy crisis: causes, costs and possible solutions’.

One half of the losses, or about EUR 500 million, has already been covered by the state budget with subsidies for Srbijagas, and the remaining EUR 500 million has been secured by EPS, mostly with loans.

A stable supply of electricity and gas will again depend on the available infrastructure and energy sources from abroad

EPS and Srbijagas could suffer equivalent losses next winter as well if emergency measures are not implemented, the report reads.

The losses would probably be only slightly lower than EUR 1 billion, split more or less equally between EPS and Srbijagas, and they can’t continue indefinitely. The Fiscal Council warns that at some point the shortfall would become an unsustainable burden not only for the two companies, but also for overall public finances.

An additional danger for Serbia is that the stable supply of electricity and gas during the next heating season will once again depend on the available infrastructure and energy sources from abroad – which are not guaranteed, according to the report.

Solutions for EPS: a serious reform with higher electricity prices

The Fiscal Council proposed an electricity price increase of 15-20%, both for households and businesses, as an urgent, but not sufficient measure for the recovery of EPS.

A price increase is economically justified because the current tariffs for households are so low that they encourage irrational consumption.

EPS is burdened by an excess number of employees and their poor qualification structure, too high salaries for jobs with general qualifications, suspicious cases of public procurement, low price of electricity for households (below production costs), great environmental pollution, and a delay in the energy transition, the analysis reads.

Salaries in EPS should be temporary frozen

EPS also operates under strong political influence, it is used as a source of financial resources to cover numerous failures of the domestic economic policy, and its role is extended to include social goals, both in terms of low electricity prices and employment.

The said issues could prevent growth in income from the power price surge to be used appropriately, so the Fiscal Council proposed a temporary wage freeze, stricter control over public procurement and numerous reforms which it says must be completed in the medium term.

The solution for Srbijagas: it is crucial to raise gas prices

The Srbijagas case is different because the increased costs for gas procurement must be reflected in the price of gas and heating for end consumers.

In contrast, the most important moves for EPS are to implement reforms and make a turnaround in management, and raising prices is an accompanying measure.

The price for end consumers must be adjusted to the price paid by Srbijagas for imports

Serbia imports more than 90% of the gas it consumes, so the price for end consumers must be adjusted with the import price paid by Srbijagas, according to the report.

The price of gas for firms would have to rise by about 75%, which is how much it grew in other Southeastern European countries in the second half of 2021 while staying practically frozen in Serbia, the Fiscal Council concluded.

The increase for households should be 65%-70% while district heating prices need to be 10%-40% higher.