Energy Sector Issues and Poverty in Serbia

8/11/2019 Energy Sector Issues and Poverty in Serbia

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C E N T E R F O R A D V A N C E D E C O N O M I C S T U D I E S

Energy Sector Issues and Poverty in Serbia

Goran Radosavljevic and Vuk Djokovic

Belgrade, 19 June 2007


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Goran Radosavljevic and Vuk Djokovic 1

Main Power Sector Issues in Serbia

After the democratic changes in 2000, Serbia embarked on an ambitious program ofreform and stabilization, which also included the energy sector. However, once setinto motion, the program of restructuring, privatization and liberalization of Serbiasenergy sector raised numerous political and social issues. After six years of transition,the energy sector in Serbia is still in the hands of state-owned companies enjoying amonopoly in the market (Elektroprivreda Srbije EPS, the national power generationcompany; Naftna industrija Srbije NIS, the state-owned oil extraction, refining anddistribution company; Javno preduzee za podzemnu eksploataciju uglja JP PEU,the state-owned underground coal extraction company; and Srbijagas, the national gasextraction, processing and distribution company). Yet-to-be answered questions faced

by Serbias elite include: how does one reform these systems should they be

privatized, or should the state keep a dominant share? How should they berestructured and privatized (should the large systems be sold piecemeal or as wholes;should they be sold through the stock market or to a strategic partner)? Due toconsiderable production inefficiency (obsolete equipment, over-employment,mismanagement), these companies are increasingly losing step with other Europeanenergy sector companies and are unable monopolies notwithstanding to seriouslyget to grips with competition.

Energy prices in the Serbian market are subject to administrative control and arelower than in neighboring countries. Low final energy prices imply lower income forenergy companies, which are thus unable to secure assets needed for further

investment into fixed assets, modernization, etc. In the early years of transition thegovernment granted various forms of subsidies to these companies, mainly to covertheir losses and keep up production. Direct subsidies have been cut dramatically overthe past two years; however, any significant investment into this sector is yet to come.

Energy prices have frequently been subject to political manipulation. Although therewere attempts to bring them to an economically viable level (especially true ofelectricity prices), energy prices today remain low, mainly in consequence of policiesaiming to manipulate them to control inflation. On the other hand, it is also possiblethat low administratively-controlled energy (especially electricity) prices were aclumsy attempt to affect living standards. According to Serbian Bureau of Statistics(SBS) data, Serbia had about 220,000 households living below poverty level in 2006.

However, the low energy price is also a form of subsidy to all households, regardlessof whether they are truly at risk or not. If energy prices were brought up toeconomically viable level, budget revenue would rise, thereby providing assetsneeded for social assistance to the households most at risk.

As for energy producers, current prices are not enough for them to cover allproduction costs. Fuels are often of lower quality when compared to Europeanstandards; because of low prices, copious quantities of energy are used Serbiasenergy efficiency is the lowest in Europe. Due to the lack of assets for investing inmodernization and increasing capacities, energy companies (NIS, EPS) are becomingever less competitive; to ensure sustainable energy supply, the state continues to

subsidize them indirectly.


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Final Energy Consumption

Serbia imports about half of its annual energy needs. This percentage has grown

substantially over the past several years, mainly due to a rise in the consumption of oilderivatives and gas, which are in the main imported.1Final energy consumption rose

by some 18% in the period 2004-2006 (Table 1). The highest growth has beenrecorded in the industry sector (nearly 40%). The revival of industry, following the

privatization of a number of large companies between 2002 and 2004, as well as highGDP growth over the past several years (6.8% annually between 2004 and 2006),have been the greatest drivers of this growth in final energy consumption.2

Table 1: Final Energy Consumption of Economic Sector

2004 2005 2006*

Total (Mtoe) 7.66 8.47 9.02

Industry 27.2% 29.3% 32.2%

Transport 29.4% 27.8% 27.3%

Other Consumers (Househ 43.4% 42.9% 40.3%

Source: Serbian Chamber of Commerce and Industry (PKS).* Estimate

Note: Mtoe (millions of tones of oil equivalent) is the amount of energy released when one million tonsof crude oil is burnt.

When fuel sources are considered, it can be seen that solid fuel (coal and wood)consumption has risen by nearly 80% from 2004 to 2006. Gas consumption is also onthe increase (with a 15% rise over the same period). However, liquid fuels andelectricity still command the greatest share in Serbias final energy consumption,although this is decreasing slightly (from 64% in 2004 to 57.7% in 2006).

Table 2: Final Energy Consumption by Fuel Type

2004 2005 2006*

Total (Mtoe) 7.66 8.47 9.02

Solid fuels 14.1% 20.6% 21.3%

Liquid fuels 36.4% 32.6% 32.6%

Gas 13.8% 13.0% 13.5%

Electricity power 27.6% 26.1% 25.1%

Heat 8.1% 7.7% 7.5%

Source: Serbian Chamber of Commerce and Industry (PKS).* Estimate

1Domestic sources cover one-fifth of crude oil consumption and one-tenth of gas consumption.2Final energy consumption in the industry sector in 2006 stood at 75% of 1990 levels.


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Electricity consumption has been growing over the past two years (Table 3), mainlydue to consumption by businesses, which has grown steadily in the period 2001-2006,which is in accord with the growth of GDP and economic activity in Serbia. On the

other hand, electricity consumption by households has also grown, especially in 2005and 2006 in relation to 2004.

Table 3: GDP and Electricity Consumption in Serbia, 2001-2006

2001 2002 2003 2004 2005 2006*

GDP, billion euro 13.19 16.81 18.01 19.72 21.11 25.26

Electricity consumption - economy, TWh 10.49 10.68 11.02 11.52 12.11 12.19

ectr c ty consumpt on - ouse o ,

TWh

13.99 13.74 14.09 13.83 14.41 14.38

Source: SBS, EPS.

Note: Distribution and supply losses, as well as consumption for public lighting, are not included.* Estimate

Energy Sector Structure in Serbia

The energy sector in Serbia is still in the hands of state-owned companies enjoying amonopoly in the market. The production, refining and distribution of crude oil and oilderivatives in Serbia is under the control of state-owned NIS joint stock company.

Crude oil is processed at two Serbian refineries, which have a capacity of about 6million tons per year capacity utilization being some 60%. Numerous domestic andforeign companies are involved in retail. However, administrative controls of retail

prices, and the prohibition of the import of oil derivatives, mean there is no realcompetition between them. In mid-2001 the Serbian Government passed a decree3

prohibiting the import of oil derivatives. In other words, all companies in the Serbianmarket must purchase their derivatives from NIS. The aim here was to bring oil andderivative imports under fiscal control, which was in fact achieved,4as well as tosecure funding for reconstructing an oil industry mainly oil refineries devastated

by `99 bombing. Crude oil imports were allowed, at a later date, to help dismantleNISs monopoly, while NIS undertook to refine oil for other parties under the same

conditions.5However, producer price, output, and retail price are still set by the stateand NIS, meaning that these measures have failed to cut into NISs monopoly. On theother hand, NISs factory prices for oil derivatives are among the highest in theregion, while excise duties are among the lowest in Europe (Graph 1), which directlyreduces budget income.

Graph 1. Share of Excise Duties and Taxes in Oil Derivative Retail Prices, 2007

3

Official Gazette of the Republic of Serbia, No. 16/01.4The collection of taxes and excise duties on oil derivatives increased tenfold from 2001 to 2003.5Official Gazette of the Republic of Serbia, No. 90/03.


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Tax,%oftotalprice

0.010.020.030.040.050.060.0

70.080.0

Bulgaria CzechRepublic

FranceGermanyGreece Hungary Italy Serbia SlovakRepublic

Unleadedgasoline Diesel

Source: IEA (2007).

The state continues to indirectly subsidize NIS thought not collecting crude oilextraction fees. If one takes into account current domestic crude oil production6and areasonable rate for Serbias conditions of 10-15%, the state would stand to lose

between 30 and 50 million in unpaid fees for the use of domestic crude oil sources.The current rate of 3% (one of the lowest rates globally) means that the state has beensubsidizing NIS with about 10 million annually only by tolerating non-payment ofextraction fees (okovi, Radosavljevi, 2007).

Serbia annually consumes about 2.2 billion cubic meters of gas, imported from Russiaby Srbijagas. Businesses are the largest consumers; seven companies consume about47% of Serbias total gas consumption. Gas prices have risen in the past two yearsdue to rising oil prices in the global market. This fact, coupled with a lack of funding,has brought about a slowdown and, even, a complete halt in the introduction of gasdistribution systems in Serbia. The relatively high price of gas (relative to that forsolid fuels) some companies have stopped using gas after privatization (e.g. cementworks).

Serbias electricity production is dominated by the combustion of low-grade lignitecoal (mostly obtained from open-pit coal mines) at coal-fired power plants, and, to alesser extent, available hydroelectric potentials. According to 2005 data, coal-fired

plants accounted for 65.4% of electricity produced, with gas- or liquid-fuel-firedplants accounting for 1.6%, and hydroelectric plants for 33%.7All production,

distribution, and transport, as well as retail, is handled by EPS, which is 100% state-owned.

Privatization of the Serbian Oil Company (NIS)

In late 2005, the Serbian Government advertised a competition to select aprivatization advisor, thereby starting the privatization process for the national oilcompany. In mid-2006, the privatization advisor proposed, and the Governmentaccepted, the NIS Privatization Strategy. According to this document, the state would

6According to NIS data, some 5.2 million barrels of crude oil are extracted in Serbia each year.7These relative shares have not changed to any significant degree since 2000.


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in the first phase sell 25% of its share in NIS to a strategic partner, which would inreturn undertake to effect a recapitalization of some $200 - $300 million, raising itsshare to 37.5% (the same percentage to be kept by the state). The remaining 25%

would be distributed to employees and the Privatization Registry (6.7% and 18.3%respectively). The strategic partner would also be given the managing position. Thesecond phase would see the strategic partner acquire a share of 49% throughrecapitalization and purchase of shares from employees, while the state would keepthe remaining 51%; this would mean the end of privatization. It was also planned toadvertise the privatization tender in September 2006, and end the entire privatization

process in early 2007.

The political situation in late 2006 and early 2007 (the adoption of Serbias newConstitution and the calling of parliamentary elections) halted the privatization of

NIS. It is still unclear whether the tender will, indeed, be advertised by the end of

2007; there are signals that the initial privatization strategy could even be abandoned.In late 2005 NIS completed the first phase of restructuring. The public enterprise wastransformed into a joint stock company with four branches: one specializing inextraction of crude oil and gas (NIS-Naftagas); one dealing with the refining anddistribution of oil and derivatives (NIS-Petrol); one handling gas (NIS-TNG); and onedealing with non-core activities (NIS-Ugostiteljstvo i turizam). It was planned to splitthe non-core activities from NIS first, and privatize them separately. Srbijagas, acompany for trading in and processing gas, was also split from NIS.

The privatization of the national oil company has raised numerous issues. First andforemost, it is not clear what will happen to the decree prohibiting the import of

derivatives, which has been extended to 2010.

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Any privatization of NIS with thedecree in force would replace the state monopoly with a private one. On the otherhand, if the decree were repealed, and NIS exposed to competition, this would have anegative effect on its performance, as the company is at present unable to cope withcompetition.

Paradoxically, by over-protecting NIS from competition, the decree prohibitingderivative imports has to some extent even worsened the national companyssituation. The quality of derivatives produced at its refineries is very low, refinerieshave not yet been refurbished, pricing policies have resulted in the demise of small

private retailers that had developed during the 1990s, and, finally, its activities havean adverse impact on the environment, and promote pollution.

The state subsidizes NIS indirectly by tolerating non-payment of fees for the use ofdomestic crude oil and allowing higher manufacturing prices for derivatives thanwould be economically feasible. Although NISs end-of-year balances do show

profits (some 75 million in 2005, and 80 million in 2006), this is due both to itsmonopoly and the indirect subsidies we have mentioned. Again, although the state

budget derives significant gain from NISs revenues, this incentive systemgenerates inefficiency in production, has an adverse effect on NISs competitiveness,and results in a very inefficient redistribution system. Due to relatively low inflowsinto the budget from the energy sector, the state resorts to other taxes to ensure the

8

In October 2006 an initiative was put forward to introduce customs duties on imported derivativesand thereby gradually abolish the monopoly by 2012; this legislation, however, has yet to come intoforce.


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budget is balanced (e.g. taxes and social contributions on salaries, standing at 63%,are the highest in the region). This means that part of the responsibility for fundingthe energy sectors inefficiency has been imposed on the population a fact that hits

the poorest households hardest. A CEVES analysis has shown that the inefficiency ofNIS costs Serbias citizens some 300 million each year (Udoviki et al. 2006).

Electric Power SystemRestructuring

Restructuring of EPS started in early 2005, when the electric power distributionsystem was split from EPS; Elektromrea Srbije (EMS, in charge of power gridinfrastructure) was then established as a separate company in June 2005. In early2006 the number of distribution companies (electricity wholesalers) was cut from 10to five. In addition to these, EPS still controls electricity production capacities (coal-fired and hydroelectric plants and heating plants), as well as open-pit andunderground coalmines in the Kolubara and Kostolac basins. EPS has, for the pastseven years, been the greatest beneficiary of foreign donations to Serbia. Since 2001European Union countries have invested over 400 million into Serbias electric

power system, which has made it possible to revitalize existing EPS capacities andstabilize coal and electric power production in Serbia.9To this should also be added afurther 150 million in direct energy donations (electric power and oil derivatives).

In late October 2005 Serbia signed the Treaty establishing the Energy Community ofSouth Eastern Europe (ECSEE). In addition to Serbia, the Treaty was also signed byMontenegro, Albania, Bulgaria, Bosnia-Herzegovina, Romania, Croatia, Macedonia,

the UN Mission in Kosovo (UNMIK), and EU officials. This agreement came intoforce on 1 June 2006, and Serbia has committed itself to, among other things,liberalizing the electric power retail market for all types of consumers. More

precisely, all consumers (except households) must be allowed to become qualifiedelectric power buyers in the market at the latest by 1 January 2008, with households

being granted the same rights at the latest by 1 January 2015.

The first step towards liberalizing the electric power market was made by opening themarket to certain categories of buyers and granting licenses for trading in electric

power, in early 2007. Large consumer companies (i.e. those whose annualconsumption exceeds 3 GWh per year)10may acquire the status of qualified buyer,and, with it, the ability to purchase electric power in the market from licensedretailers.11There are at present 350 potential qualified buyers (about 21% of Serbiastotal electricity consumption), but they continue to purchase their electric power fromEPS, which still enjoys a monopoly both in producing and selling electricity.12Thisfact notwithstanding, as many as 19 companies have so far been granted licenses totrade in electricity by the Energy Agency. The question begs itself: why are there somany electricity traders in a country where the market does not really exist? The

9orevi: Donacije ustupaju mesto komercijalnim kreditima [Djordjevic: Commercial loans startingto displace donations],Danas, 30 April 2007.10Decision Establishing Minimum Annual Electricity Consumption Levels Required for AcquiringQualified Buyer Status, Official Gazette of the Republic of Serbia, No. 114/06.11

Until 1 January 2007 the minimum requirement for qualified buyer status, granting an entity thefreedom to choose its energy supplier, was set at 25 GWh annually by the Energy Act.12Source: Energy Agency of the Republic of Serbia (EARS), www.aers.org.yu.


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answer is a simple one. Thanks to its position at the crossroads of numerous powertransmission lines, Serbia is a very important transit area for power transmission fromcountries with surpluses (Romania, Bulgaria, Bosnia-Herzegovina) to those with

significant power shortfalls (Greece, Macedonia, Albania and Montenegro to thesouth; Croatia and Slovenia to the north).13Almost all main transmission routes inSouth-eastern Europe lead across Serbia; anyone wishing to trade electricity in thisregion must transport it across the country. This is what drives electric power tradersto obtain Energy Agency licenses, as Serbian legislation stipulates that only locally-registered legal entities may transport electricity through Serbia.

The next step towards market liberalization was the establishment of the EnergyAgency under the Energy Act.14The Agency is a regulatory body charged with

promoting and directing the development of the energy market on the basis of non-discrimination and efficient competition; monitoring the implementation of

regulations and rules governing the operation of energy systems; harmonizingactivities of entities involved in energy operations to ensure that customers regularlyreceive energy supplies and services, as well to ensure that customers are protectedand granted equal status. One of the Agencys statutory tasks is establishing electric

power prices for tariff buyers, as well as transport and distribution fees. The Agencyhas so far drafted several sets of methods for calculating energy distribution andtransport fees, as well as final energy price lists for tariff buyers. In addition, severaldozen licenses for various energy-related activities have also been issued;requirements for obtaining qualified electric power and gas buyer status have also

been established.

A new tariff system for calculating electric power prices has been announced and is

due to come into force on 1 September 2007. An innovation is the introduction ofthree tariff systems (for distribution and transmission, as well as for tariff buyers) toreplace the current single tariff; in addition, prices for qualified buyers are to be setfreely in the market. The new price regulation system will create conditions formarket development, prevent transfer of costs from one activity to another, promotetransparency in energy company operations, and protect customers from abuses ofmonopoly.

Restructuring and Privatization of JP PEU

Serbias Energy Development Strategy to 2015 foresees investment of $85 million forconsolidating underground coalmines. These assets are to be directed towards the

purchase of equipment that would make it possible for PEU to increase its productioncapacity and close non-viable mines. The strategy also stipulates that the investmentwill result in a three-fold increase in production at PEU by 2015. For the past severalyears, coal production at PEU has stood at a level of about half a million tons per year(Table 4); this is mainly made up of high-quality coal types, which have recently beenin increasingly greater demand. Estimates put demand for domestic coal at about 1.3million tons annually (DMT et al, 2006). In absence of domestic production, demandis satisfied from export.

13Tranzit struje mora preko Srbije [Electricity transit must pass trough Serbia],Blic, 3 May 2007.14Official Gazette of the Republic of Serbia, No. 84/04.


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Table 4. Coal Supply in Serbia, 2005

Supplier Quantity, mil. t Share, %

JP EPS 2.01 50

JP PEU 0.49 12

Import 1.53 38

Total 4.03 100

Source: Implementation program of the energy sector development strategy of the Republic of Serbiaby 2015 for 2007-2012 period, Government of Serbia.

PEU is currently undergoing restructuring, with its socially-owned equity slated forprivatization. Bearing in mind that the coal production trend at PEU is dropping, as

well as that some mines face exceptionally difficult circumstances (low remainingcoal reserves, obsolete equipment), the results of this process are difficult to foresee.The uncertainty appears all the greater when one considers social and political factorsin addition to technical and economic ones: underground coalmines, currentlyemploying about 4,300 people, have great social and economic importance for theirlocal and regional communities. For instance, production at the Soko mine holds a20% share in the national income of the Soko Banja municipality. The percentage isfar greater in some other municipalities.

The difficult position of miners is reflected above all in poor working conditions;relatively high wages in this sector are the result of government subsidies rather than

higher productivity. Some mines have already closed (Aleksinac, for instance). In2006 one mine was privatized (Kovin); privatization of the entire PEU system isongoing.15This process has opened several pressing issues: firstly, coalmine

production cannot even cover costs, meaning that the company is operating at anannual loss of, on average, some 35 million. This is at the same time the only publicenterprise in the energy sector still receiving government subsidies, both directly(about 60 million from the second half 2003 to the present) and indirectly (throughnot being required to pay taxes and employee contributions, mineral ore extractionfees, etc). On the other hand, these subsidies support the production process, which,once stopped, can only be restarted with great difficulty.

Renewable Energy Sources

Among the priorities of Serbias energy policy in the near future, as foreseen by theEnergy Development Strategy to 2015, are the New Renewable Energy Source(NRES) Selective Utilization Programs (NRESs include biomass, geothermal, solar,and wind power, as well as remaining hydroelectric potentials whose utilization istechnically possible and economically feasible, especially on smaller rivers). SpecialEnergy-Efficient and Environmentally-Friendly Technology Programs have also beenincluded in the Strategy (such as new coal, biomass and waste burning solutions,

15Uskoro privatizacija rudnika Resavica i privatizacija NIS [Resavica mine and NIS to be privatizedsoon],Danas, 30 May 2007.


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technologies for decentralized production of electric power and heat based on naturalgas, and small and mini-hydroelectric plant technology), aiming to cut theconsumption of high-quality imported fuels and produce more electric and heat

power, with a significantly lower adverse environmental impact. The strategy alsoforesees that the share of NRESs in total final energy consumption should rise to 1.5 2% from 2006 to 2015. However, not a great deal has been done to implement thestrategy insofar as NRESs are concerned.

In signing the ECSEE Treaty, Serbia undertook, among other things, to adopt EUDirectives aimed at increasing the use of renewable energy sources (RESs).16With aview to this, Serbia is obliged to draft an implementation plan for these directives bymid-2007.

The Energy Act stipulates a number of measures intended to provide incentives forthe use of RESs. The Ministry of Mining and Energy has drafted bylaws defining

criteria for obtaining the status of preferred energy supplier; these have, however,not been adopted, since the Energy Act has been amended to create incentives andrequire power distribution companies to prioritize electricity obtained from RESs. Inaddition, the Energy Act does not recognize biofuels used in motor vehicles as aseparate category, and thus does not include the appropriate frameworks for their use(i.e. the implementation of Directive 2003/30/EC).

In addition to shortcomings in legislation, Serbia also largely lacks standards (forequipment, RES extraction procedures, etc) the EU uses. Regulation governing RESutilization, and plant design and installation, are also absent. Any investors interestedin funding electric power production from RESs have to endure a very complicated

and laborious administrative procedure a major obstacle for investments into thisfield.

Energy and Poverty in Serbia

The ongoing process of restructuring, liberalization and privatization of the energysector poses two problems for the new Serbian Government. On the one hand, there isa need to keep energy prices low, as any increase would mean a major blow to livingstandards and would promote inflation. On the other, electric power prices must stop

being an instrument of social policy; this would help the entire sector, ensure

investment funding, and provide the necessary energy for unhindered economicgrowth.

Final energy prices in Serbia are the lowest in Europe, and are subject toadministrative control. For instance, electric power prices in Serbia are 2 to 3 timeslower than those in the region (Table 5). The low price is used to subsidize both

businesses and households; Serbias households spend some 10% of their annualincome on energy, with poor households spending more than 20%, in spite of lowenergy prices (UNDP, 2006). Still, the price of electricity has risen several times overthe past few years, and is now approaching market levels.

16

Directive 2001/77/EC on the promotion of the electricity produced from renewable energy sources inthe internal electricity market and Directive 2003/30/EC on the promotion of the use of biofuels orother renewable fuels for transport.


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Serbias primary energy17consumption per capita is very low relative to formertransition countries. Thus, for instance, when compared to Hungary, Serbia lags

behind by as much as 45%. In relation to EU25 average the picture is even bleaker,

with Serbia spending 2 to 3 times less.18On the other hand, the relation betweenenergy intensity and GDP in Serbia is about twice as high as in other Europeancountries. The ratio of primary energy consumption to GDP has dropped from 0.9 to0.46 toe/$1000 from 2002 to 2006. Consumption, however, remains far above theEU25 average (0.16), as well as above the average for countries in the region (0.19 0.26).

Most industrial energy is expended as raw material in the production of steel, sugar,rubber and copper Serbias main exports. The export of agricultural produce issupported by relatively cheap fuels and fertilizers produced in obsolete and heavilydamaged plants from expensive imported oil and gas. The question begs itself: how

can such an energy-poor country export energy-intensive products? The answer issimple their production is subsidized by the low price of final energy.

Table 5: Electricity Prices, Households, 2001-2006.

US$ per KWh 2001 2002 2003 2004 2005 2006

Czech Republic 0.060 0.076 0.085 0.097 0.106 0.122

France 0.098 0.105 0.127 0.142 0.142 0.144

Germany 0.124 0.136 0.176 0.198 0.212 n.a.

Greece 0.070 0.077 0.096 0.107 0.112 n.a.

Hungary 0.068 0.080 0.102 0.134 0.146 0.141

Italy 0.148 0.156 0.186 0.191 0.198 n.a.

Poland 0.079 0.084 0.095 0.103 0.121 0.132

Romania 0.050 0.062 0.073 0.091 0.116 n.a.

Serbia* 0.018 n.a. n.a. 0.046 n.a. 0.056

Slovak Republic 0.063 0.067 0.104 0.134 0.141 0.156

Source: EIA, CEVES.* Estimate

The fact that electric power prices in Serbia have fallen in the past two years relativeto prices of gas and solid fuels has meant that an increasing number of households areresorting to electric energy for heating. According to EPS estimates, 15% of Serbiashouseholds use electricity for heating; as much as 24% of total electric power

production is used for heating households.19Estimates put losses due to the use ofelectric power for heating at tens of millions of Euros annually.20The losses arecaused by the low degree of coal utilization in electricity production at coal-fired

power plants (as little as 27%), high dissipation in distribution and transmission(about 22% of total annual net production), as well as low energy efficiency (poorhouse insulation, old fittings). For instance, poorly insulated houses in Serbia

17Energy embodied in natural resources (e.g. coal, crude oil, sunlight, uranium) that has not undergoneany anthropogenic conversions or transformations. www.climatechange.ca.gov/glossary/letter_p.html.18Implementation program of the energy sector development strategy of the Republic of Serbia by

2015 for 2007-2012 period, Government of Serbia.19Ibid.20CEVES estimates that these losses range from 60 to 80 million annually.


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consume 3-4 times as much energy per square meter as houses in Northern Europe.Welfare is therefore reduced by several orders of magnitude: in winter, more than halfof the population lives in less square meters per member of household than would be

sufficient for normal family life, or is close to that level (Aleksandar Kovaevi,2006).

Rising energy prices have a major impact on inflation and the cost of living in Serbia this issue thus carries significant political and social overtones.21Experiences ofcountries in the region have shown that privatization and liberalization of nationalelectric power companies has led to major prices rises, with the population alwaysshouldering the final burden.22Price rises would, therefore, hit the poorest householdshardest. For instance, the first large increase in electricity prices in Serbia, in July2002, jeopardized small consumers and poor households most, their electricity billsdoubling.23On the other hand, due to changes in price calculation, households using

electric power for primary or additional heating received smaller bills. The price hike,therefore, did not affect all categories of population equally. To dampen the impact of

price rises on the poorest sections of the population, the government introducedconcessions: these categories were exempt from paying the required monthly flat fee,while those most at risk (the elderly, the disabled, etc) were granted discounts of up to30%. The concessions were in force for several months only; some 200,000 peoplewere able to take advantage of them.

According to EPS data, some 300,000 households in Serbia cannot pay theirelectricity bills, or have difficulty paying them, despite the current very low prices.An SBS analysis has shown that an above-average poverty risk is present inhouseholds using solid or liquid fuel for heating (Table 6). Households using solid

fuels have the greatest share in total population structure (60.4%); these account formost of the poor population (85.4%), and are mostly rural households (Boaniet al,2007).

Table 6: Poverty Indicators by Type of Energy Used for Heating

Type of energy % of poor poverty risk

% of total

population

% in total

number of

poor

Central heating sistem 2.7 -69.8 17.5 5.3

Electricity 3.5 -60.1 7.9 3.2

Solid fuel 12.5 41.4 60.4 85.4

Liquid fuel 13.5 52.9 0.5 0.7Mixed 4.4 -50.2 6.5 3.3Gas 2.7 -69.1 7.3 2.3

Source:Poverty in Serbia in 2006, SBS.

Therefore, if energy prices were to rise quickly, it would pose a major threat to livingstandards, especially for the categories that are most at risk. On the other hand, energy

21Energy prices have a direct share of slightly under 20% in the RPI and CPI; with indirect effects, thefigure rises to about 25%. For instance, the May 2007 rise in energy prices had a direct effect on Mayinflation growth of 1.2%.22

See, for example, Bakos (2001) and Nagayama (2007).23Od danas u Srbiji struja skuplja 50 posto [Electricity prices to rise by 50% as of today],Danas, 1July 2002.


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prices, and primarily electricity prices, need to cease being an instrument of socialpolicy: this would help the entire sector, provide funding for investment, and ensurethe energy necessary for unimpeded economic growth. This would, in turn, mean

more inflows into the budget, leading to better social programs for the poor. Thewhole issue, along with continued restructuring and privatization of energy sectorcompanies, will be a major challenge to the Serbian Government in the near future.

References:

1. Aleksandar Kovaevi, Energija i siromatvo u Srbiji [Energy and poverty in Serbia],Nova srpska politika misao asopis za politiku teoriju i drutvena istraivanja,www.nspm.org.yu.

2. Bakos Gabor (2001) Privatizing and liberalizing electricity, the case of Hungary,Energy Policy, Vol. 29, pp. 1119-1132.

3. Tranzit struje mora preko Srbije [Electricity transit must pass trough Serbia],Blic, 3May 2007.

4. BoaniVladan, Mijakovac Nataa, CvetinoviGordana and alasan Neeljko (2007)Siromatvo u Srbiji 2006. [Poverty in Serbia in 2006], SBS

5. EPS e u ekologiju uloiti 1,2 milijarde evra [EPS to invest 1.2 billion intoenvironmental protection],Danas, 6 April 2007.

6. orevi: Donacije ustupaju mesto komercijalnim kreditima [Djordjevic: Commercialloans starting to displace donations],Danas, 30 April 2007.

7. Uskoro privatizacija rudnika Resavica i privatizacija NIS [Resavica mine and NIS to beprivatized soon],Danas, 30 May 2007.

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Documents

Energy Sector Issues and Poverty in Serbia