Amendments to the Gas Market Act - a further step towards (fully) opening up the Croatian gas market on 1 April 2017

The Act on Amendments to the Gas Market Act (Zakon o izmjenama i dopunama Zakona o tržištu plina)[1] entered into force on 23 February 2017 and will become fully applicable as from 1 April 2017.

Background

The Croatian gas market was legally liberalised on 1 August 2008, which means that both non-household and household customers are free to purchase gas from the supplier of their choice. Yet, the first signs of de facto opening of the market occurred in the gas season 2012/2013 following the removal of the price cap for gas supplies to non-household customers and new wholesale suppliers entering the market. Despite this, in early 2014 the Croatian Government decided to postpone the full liberalisation of the Croatian gas market until April 2017.

Namely, on 1 April 2014, the state-owned electricity company HRVATSKA ELEKTROPRIVREDA d.d. (HEP) was appointed the new wholesale gas supplier to other Croatian suppliers with public service obligations (PSOs) for the needs of household customers. At the same time, the obligation was imposed on INA-INDUSTRIJA NAFTE d.d. (INA), as the only domestic producer of natural gas, to sell a set volume of gas to the appointed wholesale gas supplier (HEP) at a regulated price. During this three-year transitional period, the price that gas produced in Croatia is sold to HEP, and the price that HEP then sells to other PSO suppliers has remained regulated. In addition, HEP has been awarded 70 per cent priority for booking storage capacity with the only Croatian underground gas storage, UGS Okoli.

As a result of these Government actions, the European Commission launched a formal infringement procedure against Croatia at the end of May 2015. The European Commission's view is that the national gas market rules introduced in 2014 create unjustified barriers to the export of domestic gas production and restrict gas imports from other Member States. Moreover, the existing price regulation for non-household customers and the regime on access to and capacity allocation of storage, are considered not fully compatible with EU internal energy market rules.

Introduction of a new gas market model in Croatia

Against this background and with the April 2017 deadline approaching, the key market players and other stakeholders eagerly await and have high expectations for the Government's decision on the next step in market opening of the Croatian gas market, and whether deregulation of the gas prices for household customers will take place on 1 April 2017.

The key adopted amendments to the Gas Market Act include:

• The regime of appointing a wholesale gas supplier to other Croatian suppliers with PSOs has been kept. However, prior to appointing a supplier in the wholesale gas market, a tender has to be conducted by the Ministry of Environment and Energy (MZOE) in cooperation with the Croatian Energy Regulatory Agency (HERA) and the Croatian Gas Market Operator (HROTE). However, an important prerequisite for the tendering process to take place in practice is that HERA conducts a prior investigation into the functioning of the gas market. It follows that the launching of the tender will depend upon a market report of HERA based on its view on the (effective) functioning of Croatian gas. Yet, the new rules do not foresee any time limits for the submission of HERA's report to MZOE. 
• Following the tendering procedure, the Government should appoint a preferred supplier in the wholesale gas market for a definite period of time, which would be obliged by law to supply gas under regulated conditions to other suppliers with PSOs for the needs of household customers and to ensure reliable and secure gas supply. Until then, HEP (through its affiliated company HEP-Gas supply) remains the key wholesale market supplier to other public service suppliers for the needs of household customers.
   
• The Croatian Government should, subject to prior approval from HERA, determine a "strategic share" of gas storage booking capacity to be allocated to the appointed wholesale market supplier for a period of five (5) years in order to ensure reliable and secure gas supply to household customers. However, in the interim period (that is, as of 1 April 2017 until the abovementioned decision is taken by the Government), the existing wholesale market supplier (HEP) has been awarded 60 per cent priority for booking storage capacity with the UGS Okoli. Nevertheless, the Government has been given the possibility, upon the proposal of MZOE and subject to prior approval of HERA, of reassigning the allocated storage capacity to a supplier with PSO that decided to procure the gas under market conditions for its customers entitled to such supply. 
• For the time being, a system of regulated retail prices for household customers remains in place. The Croatian Government will, subject to the proposal of MZOE and prior approval of HERA, determine the relevant gas prices for the provision of gas supply as a public service. In other words, a price cap mechanism for household customers is to be set up by the Government by 1 April 2017. 
• The current obligation imposed on the gas suppliers with PSOs and the supplier of last resort, pursuant to which they are obliged to primarily purchase the gas from a domestic gas producer, and to purchase any remaining gas quantities from a trader and any other supplier on an organised gas market or from gas imports, has been abolished.
   
• Suppliers with PSOs are entitled, but no longer required by law, to buy gas from the appointed wholesale market supplier(HEP). The current obligation imposed on the gas suppliers with PSOs and the supplier of last resort to purchase the gas for the needs of household customers from the appointed wholesale market supplier (HEP), has been abolished.   
• The domestic producer of natural gas is now allowed to sell the gas at market prices. The current obligation imposed on the domestic gas producer (INA) to sell its total gas volumes at a regulated price primarily to the wholesale market supplier and the supplier of last resort, and to sell any remaining gas quantities in Croatia, has been abolished. 
• A concession for the gas distribution and a concession for the building of a distribution system may be granted for a minimum period of 20 years and a maximum period of 50 years (instead of the current maximum time limit of 30 years). In addition, the existing concession contracts may be prolonged with prior approval from HERA and in accordance with the requirements set out in the law.

Final remarks

As is evident from the above, the upcoming changes to the gas legal framework, have allowed partial liberalisation of the Croatian gas market since the deregulation of the gas prices for household customers has been postponed in order to protect final (household) customers from the excessive market gas price. The final retail prices for household customers as of 1 April 2017, are uncertain at the moment and the Government is under strong pressure to prevent price increases for households due the recent legal changes. Reportedly, the Government's decision on a price at which the wholesale market supplier sells gas to other suppliers with PSOs for the needs of household customers is to be adopted on Monday, 27 February 2017.

Finally, it is expected that the results of the further market opening will be twofold: firstly, competition among gas suppliers active in the Croatian market (currently, some 55 companies are licensed as gas suppliers) will be intensified and final (household) customers will start exercising their right to switch suppliers. Secondly, consolidation, take-over and merger processes within the gas distribution and gas retail sector (currently, a total of 35 companies are licensed as DSOs and act as gas suppliers with PSOs) is expected in the upcoming period.

In any case, it will be interesting to see the further developments in the Croatian gas market in the near future.

[1]     Published in the Official Gazette of the RoC 'Narodne Novine' No. 16/2017 on 22 February 2017.

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authors: Petra Šantić and Bernd Rajal