EC: Croatia's Market Penalizes Gas
In the latest report on Croatia, the European Commission has warned that Croatian Law on the gas market does not encourage competition, and that such a situation could jeopardize further integration into the European energy market, as well as projects such as the LNG terminal on the island of Krk.
The Commission identified a disturbing practice of discouraging consumers to change their gas supplier, because Croatia has transferred gas supply of households from the hands of INA-Industrija nafte (INA, d.d.) to the public Croatian Electricity Company (HEP), which will take another two years.
'Poor investment climate negatively affects the development of projects of common interest, such as the LNG terminal," the report warns.
A number of non-functional solutions in the Croatian gas market, says the European Commission, has led to the fact that the gas is too expensive for the Croatian economy.
The document also outlined that between 2008 and 2012, Croatia's gas prices rose by 45% and 94% for domestic and industrial consumers respectively. The growth was due to a VAT increase (25% for both electricity and gas), and a major rise in the natural gas shipping rate. In 2013, industrial consumers paid 12.9 EUR/GJ on average, which is more than industry pays for gas in North West Europe. High prices negatively impact competitiveness of the Croatian economy.
This trend contributes the chaotic situation in a market which began its transition to an entry/exit model on 1 January 2014. Brussels highlights that currently there is no commodity exchange or gas hub operating and wholesale gas trading is based on bilateral contracts. On a positive note, the conditions for a de facto opening of the gas market have been met with the construction of the interconnecting gas pipeline between Croatia and Hungary which became operational on 3 August 2011.
This does not mean free market is really functioning because certain provisions in the Gas Market Act represent a serious obstacle to cross border gas flows, by obliging domestic gas producers to offer their gas primarily to suppliers of customers in the territory of Croatia and obliging public service suppliers to primarily purchase gas from domestic producers.
While gas grid operator Plinacro has been separated from INA for more than a decade, its certification is still pending. Gas is distributed by 36 companies which operate at a local level, of which 13 have unbundled their supply and distribution operations.
Key issues highlighted by the EC in its report are the very limited competition in Croatia’s energy market, the strong need for improving the investment climate and creation of incentives for new entrants, the need for deregulation of wholesale prices and prices for end-users, completion the unbundling process and effective enforcement of EU law including competition and State aid rules and the removal of barriers to the export and import of gas.
These changes should impact Croatia's entire energy sector, a country with a long tradition of gas production covering over 70% of its annual domestic demand.