Energy

In the course of 2010, activities related to strengthening of electricity and gas market continued. The most important activity in 2010 was a preparation of the legislative framework for the application of the third package of the EU energy legislation. The study was drafted which analyses all the required changes with respect to the third package of the EU energy legislation.

All the required laws are expected to be adopted in 2011 which will enable the implementation of the third package. In the field of natural gas, the regulations adopted in the previous year are currently being implemented. Pursuant to the legislation, market prices were applied in 2010 for all the customers, except for household customers.

In the field of electricity, the process of further development of market relations based on the bilateral agreement model has continued. Contractual parties in a bilateral agreement for the supply of electricity are the buyer and supplier, whereas contractual parties to the bilateral agreements on the purchase of electricity are the supplier, trader or producer. All the buyers in the category of enterprises have a status of a privileged buyer, whereby they have taken advantage of the right to contract electricity price independently for their own market needs. Their total contracted consumption of electricity amounts to 8.4 TeraWattHours (TWh), accounting for more than 50% of the overall annual electricity consumption in Croatia. The methodology for the calculation of

balancing energy, adopted by the regulatory agency13, has changed in a manner that the balancing

energy price is related to the buyers in the category of households.

In order to ensure market relations, the activities aimed at strengthening administrative and technical capacities of the Croatian Energy Regulatory Agency and of the Croatian Energy Market Operator have continued.

Activities in the field of renewable energy sources and energy efficiency have also continued. The Government of the Republic of Croatia adopted the National Energy Efficiency Programme 2008 – 2016, the first National Energy Efficiency Action Plan for 2008 - 2010, and the National Cogeneration Potential. In the National Energy Efficiency Programme, the objective of one-percent improvement of energy efficiency per year was set, which amounts to 9% in the 2008-2016 period. In addition, the Ordinance on Methodology for Calculation and Determination of the National Indicative Energy Savings Target in Energy End Use was adopted, defining and prescribing the

method of calculating and determining the indicative energy savings target in the immediate energy consumption, in accordance with Directive 2006/32/EC on energy end-use efficiency and energy services, i.e. fully transposing Annex I of the Directive. The methodology prescribed by the Ordinance is used to determine the national indicative target set in the National Energy Efficiency Programme 2008-2016 and in the first National Energy Efficiency Action Plan for 2008-2010. The public sector energy efficiency programmes are being implemented, such as: "Bring the House in Order", encompassing various energy efficiency measures in buildings/facilities owned by the Republic of Croatia.

In December 2010, the Croatian Parliament adopted the amendments to the Act on Biofuels for Transport, in order to incorporate the elements from the new Directive on the promotion of the use

of energy from renewable sources14 in the legal framework regulating production, trade, use and

promotion of production and use of biofuels. This primarily refers to the preconditions and sustainability criteria for producing raw materials for biofuels.

The Ordinance on the Measures for Promotion of use of Biofuels for Transport was adopted15,

which prescribes measures to encourage the use of biofuels in transport and the method of their implementation.

Renewable energy objectives set out in the Energy Strategy of the Republic of Croatia are in line with the objectives from Directive 2009/28/EC, in accordance with the said methodology. The National Renewable Energy Action Plan (NREAP) was developed and it was forwarded by the set deadline, 30 June 2010, to the European Commission for approval.

By December 2010, 450 projects related to the renewable energy sources were entered in the Register of projects and plants for the use of renewable energy sources and cogeneration and of privileged producers.

Although the Croatian electricity transfer system is connected to the neighbouring systems very well, further connecting with neighbours has continued once 400 kV between Croatia and Hungary was put into operation, having enabled thus the first connection between the former CENTREL system and the UCTE system in 1999. With respect to PEP 2010-2012, it should be noted that a double 400 kV power-transmission line between Ernestinovo (CRO) and Pech (HU) was put into operation. In the field of co-operation with Bosnia and Herzegovina and the Republic of Serbia, the relationships were established at the level of electricity transfer companies, in order to begin with the joint cross-border transfer capacity auctions. The joint system is expected to be established in 2011 and 2012.

On the basis of the Plan of development, modernisation and construction of the gas transmission system in Croatia from 2007 to 2011, which was adopted by the Government of the Republic of Croatia and which anticipates the procurement and installation of equipment which will enable functioning of the secondary market and the gas network development in southern Croatia, the envisaged activities have continued with the planned dynamics. In March 2009, the Croatian and Hungarian gas transmission system operators signed an agreement on the construction of an interconnection pipeline that will connect these two systems. That pipeline provides technical capacity for a free gas imports in the Republic of Croatia and there are no more technical restrictions in the transport system which used to present a problem for a further liberalisation of the gas market.

On the basis of the said agreement, works on the construction of the gas interconnection between the Republic of Croatia and the Republic of Hungary were completed at end-2010, and issuance of

the use permit is currently in progress. Activities regarding the construction of the LNG terminal on the island of Krk have also continued and issuance of the building permit is underway. Further development of the supply capacity for natural gas is also planned, by increasing the pipeline capacity of the gas supply route from the Russian Federation via Slovenia by 500 million cubic meters (until 2012).

In accordance with the Energy Strategy of the Republic of Croatia, adopted by the Croatian Parliament in 2009, upon the proposal of the Government of the Republic of Croatia, the activities relating to the Strategy objectives continued, which include a continuous development of the energy supply safety, competitiveness of the energy sector and sustainable energy development. Furthermore, activities relating to the energy planning, strengthening of supply safety and energy products market in the energy sector also continued. The pre-accession instruments – IPA are used for the described activities. The energy sector is also being prepared for the use of the structural funds that will be available after the accession of the Republic of Croatia to the EU.

In order to promote development of the energy sector, further activities are also focused on further harmonisation of the domestic legislation with acquis communautaire, while promotion of the projects of interest to the Republic of Croatia and the Region will continue, with a special emphasis on the projects relating to the gas market and forming of compulsory stock of oil and refined petroleum products.

As a part of the accession negotiations concerning the issue of safety of crude oil and refined petroleum products supply, the Republic of Croatia was granted a transitional period, until 31 July 2012, for maintaining the compulsory stocks of crude oil and refined petroleum products in the quantity equal to a 90-day average consumption in the previous calendar year.

The transitional period was granted on the basis of the Action Plan for establishment of 90-days compulsory stocks of crude oil and petroleum products by 31 July 2012. The Action Plan which was delivered to the Brussels was revised and harmonised with the requirements of the new Directive 2009/119/EC of 14 September 2009. The revised Action Plan was accepted by the Government of the Republic of Croatia at its session held on 17 December 2009 by a Conclusion on the acceptance of the Programme for creating the preconditions and activities of HANDA aiming at ensuring 90-days compulsory stocks by 31 July 2012. In accordance with the aforementioned Directive, a new draft of the Act on Crude Oil and Petroleum Products Market will begin to be prepared in 2010. The Croatian Parliament is expected to adopt that Act in early 2011.

For the purpose of establishment of the compulsory stocks, a construction of about 800,000m3 of

additional warehouse capacities is planned on the territory of the Republic of Croatia, which may eventually be of regional importance. It is estimated that about EUR 130 million will be invested only in the construction of warehouse capacities. The project of establishment of the compulsory stocks will, at the same time, be used for the development of warehouse installations for commercial warehousing, with an aim of reducing the costs of formation and replacement of compulsory stocks, and also further opening of the market and promoting competitiveness. In addition, at its session held on 1 April 2010, the Government of the Republic of Croatia adopted by its conclusion the Conclusion on the determination of priorities in the construction of power facilities. The negotiation process with the Federal Republic of Germany is in progress concerning storage of stocks of crude oil and petroleum products for the Republic of Croatia, for the purpose of maintaining 90-days stocks.

No budget funds will be used for the implementation of the indicated objectives, but economic entities will, within its means, rather use the available funds on the market principles. Foreign investors are also expected to participate in the realisation of individual projects envisaged by the

new energy strategy. Investments in the energy sector in the amount of EUR 15 billion are expected for the period until 2020.