Croatia: Wholesale Electricity Trading In Croatia: A Basic Primer To Electricity And Gas Wholesale Trading

A. Wholesale electricity trading

1. Background information

The key electricity-related laws in Croatia are the Energy Act (Zakon o energiji), setting out the fundamental principles for performance of energy activities, the Act on the Regulation of Energy Activities (Zakon o regulaciji energetskih djelatnosti), governing the energy sector and the Electricity Market Act (Zakon o tzriatu električne energije), defining the Croatian Electricity Market as well as the roles and responsibilities of market participants. In addition, secondary legislation governs specific areas of the electricity sector (e.g. organisation and functioning of the electricity market, tariff systems, allocation and use of cross-border transfer capacities, use of RES and cogeneration, etc), such as:

• Ordinance on Licences for the Performance of Energy Activities (Pravilnik o dozvolama za obavljanje energetskih djelatnosti);
• Electricity Market Rules (Pravila djelovanja trziata električne energije);
• General Conditions of Electricity Supply (Opći uvjeti za opskrbu električnom energijom);
• Balancing Energy Rules (Pravila o uravnotezenju elektroenergetskog sustava).

There is only one relevant market for electricity trading in the Republic of Croatia. The respective market has legally been fully liberalised since 1 July 2008, whereby all customers have been given the right to freely choose an electricity supplier (eligible customers). Nevertheless, there is still limited private sector participation and effective competition in the sector, with HEP Group (Hep Grupa), a holding consisting of parent company HEP d.d. and its affiliated companies fully owned by the Republic of Croatia, being the key player in distribution, generation and supply. HEP Operator prijenosnog sustava d.o.o. is the only TSO ("HEP-OPS") and HEP Operator distribucijskog sustava d.o.o. is the only DSO ("HEP-ODS") in Croatia.

Further reorganisation of HEP, particularly unbundling of the HEP-OPS (HEP-OPS is a part of vertically-integrated HEP, but already unbundled in terms of legal status, management and accounting) is required in order to comply with the provisions of the Third Electricity Directive. However, the model of unbundling has not been decided yet.

Croatia is a member of the Energy Community Treaty.¹

2. Licensing requirements

2.1. General aspects

All Electricity Traders trading electricity in Croatia must hold a valid licence.

The activities of wholesale trading of electricity in Croatia fall under the category of electricity trading provided that there is no sale to final customers.

2.2. Conditions for licensing

Generally, the issuance of a licence is linked to numerous technical, organisational, material and financial criteria.

The trading licence is issued by the Croatian NRA (Hrvatska energetska regulatorna agencija; HERA) for a definite period of time between 3 to 15 years with an option to be extended for the same period of time.

In case the intended activities of trading of electricity also include the sale of electricity to final customers, including large industrial end-users, a licence for supply issued by HERA is required.

An Electricity Trader is required to set up a company in Croatia. The minimum capital requirement for a Croatian limited liability company is HRK 20,000 (approx. EUR 2,700). The minimum share capital of a Croatian joint-stock company is HRK 200,000 (approx EUR 27,000).

2.3. Timetable for obtaining the licence

The statutory term for granting a licence is 60 days as of the submission of a complete set of application documentation. 2.4. HERA collects the following fees:

• one-time payments for HERA's administration services (eg the fee for licence issuing, renewal or transfer, etc) in the amount of up to HRK 20,000 (approximately EUR 2,640);
• a fee of 0.05% of the total annual income from sales of goods and/ or services realised in the preceding year from the licence activity.

3. Trading requirements

3.1. General aspects

Currently there is no power or commodity exchange set in place. The wholesale power trading is exclusively based on bilateral contracts.

3.2. Bilateral contracts market

The Croatian market has not yet been fully liberalised, and therefore a large share of the market is still driven by regulated prices set by the Croatian Government. Nevertheless, wholesale trading has been opened up to competition and is based on freely negotiated prices.

The Electricity Traders at negotiated prices typically conclude the following agreements on the wholesale market:

• Electricity Transmission or Distribution Agreement;
• Electricity Purchase Agreement;
• Balancing Energy Agreement.

The Electricity Market Rules apply among all electricity market participants, ie generator, supplier, trader or eligible customer.

3.3. Balancing market

The balancing market is organised in balancing groups. A balancing group includes generators, Electricity Traders and suppliers (referred to as balancing responsible parties).

Calculation and billing of balancing energy are performed in line with the Balancing Energy Rules.

The balancing market is run by HEP-OPS acting as TSO.

Electricity Traders have to obtain an EIC code (ENTSO Identification Code) to conclude a standardised balancing energy agreement with HEP-OPS and to enter into an agreement with HROTE.

4. Cross-border trading

Croatia (HEP) has cross-border interconnections with all of its neighbours (Slovenia, Serbia, Bosnia and Herzegovina and Hungary) save Montenegro and Italy.

HEP-OPS allocates cross-border transmission capacity to market participants who wish to import, export and transit electricity across Croatian borders, whereby transmission service is paid by grid users through the charge for transmission grid use. According to the Rules on Allocation and Use of Cross-Border Transmission Capacities HEP-OPS provides service of transmission capacity allocation by auctions and intraday allocation.

HEP-OPS conducts the daily auctions of its part of ATC (Available Transmission Capacity) at the borders with Slovenia and Bosnia and Herzegovina, whereas the daily auctions at the border with Hungary are conducted by the Hungarian transmission system operator MAVIR. Due to unsolved technical problems, the daily auctions at the border with Serbia are not conducted. Cross-border capacities and the possibilities of electricity trading in the region are increased by the construction of a 400 kV power-transmission line Ernestinovo (Croatia) – Pécs (Hungary) which has been completed and put in operation in 2010.

5. Grid access

The Electricity Market Act provides for non-discriminatory access to transmission and distribution grids according to the principle of regulated third-party access. HEP-OPS or HEP-ODS can deny access only on the grounds of technical or operational limitations of the grid.

Access to the grid is granted based on an Electricity Transmission and/or Distribution Agreement concluded with HEP-OPS and/or HEP-ODS.

B. Wholesale gas trading

1. Background information

Besides the Energy Act and the Act on the Regulation of Energy Activities, the key piece of legislation is the Gas Market Act (Zakon o trziatu plina), defining the Croatian gas market as well as the roles and responsibilities of market participants. In addition, accompanying implementing secondary legislation apply to regulating specific areas of the gas sector (eg organisation and functioning of the gas market, tariff systems, allocation and use of cross-border transfer capacities, etc.), being inter alia:

• Ordinance on the Natural Gas Market Organisation (Pravilnik o organizaciji trziata prirodnog plina);
• General Conditions of Natural Gas Supply (Opći uvjeti za opskrbu prirodnim plinom).

The key market player is INA-INDUSTRIJA NAFTE d.d. (INA), a vertically integrated company 47.26% owned by MOL the Hungarian Oil and Gas Plc., 44.84% owned by the Republic of Croatia and 7.90% owned by institutional and private investors. Other market players in the gas industry are PRIRODNI PLIN d.o.o. (PRIRODNI PLIN) (owned by INA) as the major natural gas supplier, PLINACRO d.o.o. as the TSO for 30 years (100% state-owned company; PLINACRO), PODZEMNO SKLADI`TE PLINA d.o.o. (owned by PLINACRO; PSP) as the gas storage operator. The underground natural gas storage in Croatia is PSP Okoli located near the city of Sisak.

Although the Croatian gas market has legally been fully opened as of 1 August 2008, the necessary pre-conditions for de facto opening of the market have been met only recently. Primarily these are related to the construction of the Croatian Hungarian interconnector gas pipeline as important technical preconditions for the gas system itself and the adoption of gas related bylaws. It is expected that this will enable new natural gas suppliers to enter the Croatian gas market.² However, transposition of the Third Gas Directive into the Croatian legal system is still a pending issue.

2. Licence requirements

2.1. General aspects

In Croatia, legal entities and natural persons may commence an energy activity, inter alia, gas trading, only based upon a licence permitting performance of such activity, unless they have the benefit of an exemption (eg trade with liquefied petroleum gas, etc).

Until 31 July 2013, PRIRODNI PLIN, a subsidiary of INA will enjoy a legal monopoly on the acquisition of gas in Croatia.

2.2. Conditions for licensing

Generally, the issuance of a licence is linked to numerous technical, organisational, material and financial criteria.

The licence is issued by HERA for a definite period of three to 15 years with an option to be extended for the same period of time.

If a person intends to pursue more than one energy activity, it has to obtain a licence for each of these activities separately. In practice, however, if intended activities of wholesale trading of gas also include the sale (supply) of gas to large industrial final customers in Croatia, the Gas Trader has to obtain only a licence for natural gas supply issued by HERA. If the intended activities of wholesale trading of gas do not include the sale of gas to final customers, a licence for natural gas trading issued by HERA is required.

A Gas Trader is required to set up a company in Croatia. The minimum capital requirement for a Croatian limited liability company is HRK 20,000 (approximately EUR 2,700). The minimum share capital of a Croatian joint-stock company is HRK 200,000 (approximately EUR 27,000).

2.3. Timetable for obtaining the licence

The statutory term for granting a licence is 60 days as of the submission of a complete set of application documentation.

2.4. Fees

HERA collects the following fees:

• one-time payments for HERA's administration services (eg the fee for licence issuing, renewal or transfer, etc) in the amount of up to HRK 10,000 (approximately EUR 1,350);
• a fee of 0.05% of the total annual revenues from sales of goods and/or services realised in the preceding year from the licence activity.

3. Trading requirements

3.1. General aspects

There is currently no commodity exchange or gas hub in Croatia. Wholesale gas trading is exclusively based on bilateral contracts. 3.2. Bilateral contracts market

Like the electricity market, the Croatian gas market has not yet been fully liberalised. A large share of the market is still driven by regulated prices set by the Croatian Government. Nevertheless, wholesale trading has been opened up to competition and is based on freely negotiated prices.

The gas market model that has been chosen in Croatia is based on gas trading through bilateral agreements, being inter alia:

• Payment of Balancing Energy Agreement;
• Gas Transmission or Distribution Agreement;
• Gas Storage Agreement;
• Gas Trade Agreement.

Gas trading is based on the Ordinance on the natural gas market organisation, which sets out rules on the procedure for reservation and allocation of gas system capacities, rules on trading with capacities and gas balancing system, rules on the use of the operating reserves, procedure on switching the gas supplier and other rules in relation to the third-party access regime.

3.3. Balancing market

Each supplier and each Gas Trader has to be a member of a balancing group or to establish its own group.

The gas system capacity can be traded on the primary and secondary market. On the primary market the gas system capacity is traded directly by PLINACRO as the TSO using the "use it or lose it" principle. In case of unused reserved capacity a supplier is obliged to offer it on the secondary market upon the PLINACRO's prior approval in order to prevent system congestions. PLINACRO is responsible for conducting physical balancing of the gas system. The balancing energy may be offered until 3:00 pm before the "gas day" at the latest. The balancing group representative is responsible for the balancing energy payments incurred by its balancing group.

HROTE as the gas market operator is required to conclude the tender for selection of a balancing energy bidder on an annual basis for the gas year 2013/2014 by 15 July 2013 at the latest. Payment of Balancing Energy Agreement and a Supply of Balancing Energy Agreement will be done for the first time for the gas year 2013/2014.

4. Cross-border trading

Croatia has two cross-border interconnectors:

• in Rogatec between Croatia and Slovenia (Geoplin) as the supply route for Russian gas; and
• the gas pipeline Donji - Miholjac - Dravaszerdahely between Croatia and Hungary (Földgázszállító Zrt.) put into operation on 3 August 2011.

5. Grid access

Non-discriminatory access to the transportation system according to the principle of regulated third-party access is provided for in line with the Transportation Grid Rules (Mrezna pravila transportnog sustava).

Access to the grid is granted based on a Gas Transmission and/or Distribution Agreement concluded with PLINACRO and/or one of the 36 existing distribution system operators, as the case may be.

Footnotes

1 Treaty establishing the Energy Community was signed in October 2005 in Athens, Greece. It entered into force on 1 July 2006.

2 For instance, the major Croatian gas distributor Gradska Plinara Zagreb-Opskrba d.o.o. has entered into a deal for the supply of natural gas in 2012 with the German E.ON Ruhrgas in mid-December 2011.

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