The competitiveness of any economy is heavily influenced by its energy policies. This chapter investigates the energy policies in place to ensure that energy markets are well-regulated, sustainable and competitive. The first sub-dimension, governance and regulation, focuses on how the energy markets are governed and whether policy is conducive for establishing efficient and competitive energy markets. The second, energy security, explores measures taken to make the energy sector more resilient, including through the diversification of energy supply. The third sub‑dimension, sustainability, focuses on the energy sector decarbonisation, including through the promotion of renewable energy and energy efficiency policies. The fourth sub-dimension, energy markets, analyses how energy markets are operated, whether competition is used to promote efficient allocation of energy resources, and the degree of regional integration.
Western Balkans Competitiveness Outlook 2024: Montenegro
13. Energy policy
Abstract
Key findings
Energy markets in Montenegro have advanced, mostly due to the fact that Montenegro has launched a day-ahead market in 2023. Advancements took place in the area of energy efficiency but those were outweighed by low performance in the areas of decarbonisation and energy poverty (Table 13.1). Montenegro is missing a comprehensive policy framework towards decarbonisation, and its continued reliance on thermal power plants puts into question the credibility of commitments made aimed at fossil fuel phaseouts. Policies in the area of energy poverty do not tackle root causes of this problem, and no fully fledged definition of energy poverty exists.
Table 13.1. Montenegro’s scores for energy policy
The key findings are:
Montenegro’s energy policy framework is outdated, based on the Energy Policy from 2011, and while work is under way to develop the National Energy and Climate Plan (NECP), until this document is adopted Montenegro remains without a policy framework guiding key energy policy areas such as decarbonisation and diversification.
The policy frameworks for improving crisis response and the resilience of the energy system to external shocks are underdeveloped. While the legal framework foresees the development of emergency plans, their actual development has not been conducted. Some positive steps have been taken in this regard, such as the creation of a National Council for Analysis and Monitoring of the Security of Supply of Energy and Energy Products, and plans to update the legal framework to strengthen the security of oil supply, yet it remains to be seen to what extent these developments can effectively address the issue of energy security.
Montenegro launched its first day-ahead electricity market in April 2023. Around 10% of total electricity consumption is traded on the Montenegrin Power Exchange. Entry procedures for market participants were further streamlined during the assessment cycle, and there are plans to introduce an intraday market, which is a key step for a robust electricity market and further regional integration.
In recent years, despite being possible under the current legal framework, no new auctions took place to assign renewable generation capacity, raising questions about the adequacy of incentives and competitive mechanisms for the deployment of renewables. Montenegro is working on a new Law on Renewable Energy Sources that can potentially address this issue.
The scope and meaningfulness of ex officio investigations launched by the energy regulator could be undermined depending on the outcome of a pending court case to determine whether the regulator is authorised to initiate misdemeanour proceedings. The outcome of this case could have implications requiring new amendments to the Law on Energy to strengthen regulatory independence.
State of play and key developments
Sub-dimension 12.1: Governance and regulation
Within energy policy’s legal and institutional framework, the original Energy Policy, adopted in 2011, remains the overarching policy,1 which highlights the pressing need to replace it with new strategic documents in a timely manner. A central component of this update is Montenegro’s National Energy and Climate Plan (NECP), which aims to serve as the strategic planning cornerstone in the energy sector until 2030. Finalisation of the NECP is still ongoing, and the final version is expected to be submitted to the Energy Community Secretariat by June 2024.
A new Law on Renewable Energy Sources (RES) is in preparation, and a new Climate Law, which aims to transpose the Governance Regulation, was anticipated to be adopted by the end of 2023, but adoption is delayed until 2024. Overall, transposition of the Third Energy Package is quite advanced, but transposition of the Clean Energy Package is lagging behind.
Working groups have been established to facilitate the outstanding transposition processes and drafting of additional laws. The division of responsibilities between different ministries and insufficient alignment between the ministries within Montenegro during the assessment process could be indicative of poor inter-institutional co-ordination, which is a concerning factor in the effective implementation and evaluation of future energy policies.
The Law on Energy establishes the Energy Regulator in Montenegro as an autonomous, nonprofit body that is legally and functionally independent from state authorities and energy and water utilities. This independence is critical for impartial regulation. The Energy and Water Regulatory Agency’s (REGAGEN) funding comes from various charges and fees detailed in the Law on Energy.
REGAGEN's role has been expanded by the Law on Surveillance of Wholesale Electricity and Gas Markets. This Law introduced new competencies related to market monitoring and increased penalties for breaches, although the regulator must rely on courts to impose these penalties. Additionally, the Law on amendments to the Law on Energy transferred certain responsibilities, like issuing guarantees of origin, to the Electricity Market Operator (COTEE).
Staffing within REGAGEN faces challenges. Salaries are lower compared to the industry. This situation could affect REGAGEN's ability to maintain its capabilities and perform its duties effectively. Another concern that needs to be highlighted is a pending court case that assesses whether REGAGEN is authorised to initiate misdemeanour proceedings. Depending on the outcome of this case, amendments to the Law on Energy will be needed to strengthen regulatory independence, as without such amendments REGAGEN’s capacity for ex officio investigations would be undermined.
Despite these challenges, the agency is committed to continuous capacity building, and regularly sends employees to various training sessions. An internal audit office has been established to improve planning and measure the outcomes of REGAGEN's work. The regulator’s staff actively participates in international bodies to co-ordinate actions, harmonise practices, and prevent conflict. Notably, together with North Macedonia’s regulator, REGAGEN is the only national regulatory body from the Western Balkans to have access to the Agency for the Cooperation of Energy Regulators’ (ACER) working groups in electricity and gas, highlighting its role as a frontrunner in regional co-operation. This effective co‑ordination and active participation in regional and international forums are vital for the agency’s success and the overall advancement of the energy sector (Box 13.1).
Box 13.1. Observer status at the Agency for the Cooperation of Energy Regulators (ACER) as a basis for good institutional co-operation
An observer of ACER has a unique role in the European energy landscape. ACER is an EU agency that collaborates with national energy regulators to promote the integration and functioning of the European energy market. Observers gain access to valuable information related to developing and implementing energy regulations, policies, and market rules within the European Union. This information can be crucial for staying informed about the energy sector's dynamics and regulatory changes.
Furthermore, observers can attend meetings, workshops, and consultations organised by ACER. They can actively engage in discussions, share expertise, and provide input on various energy-related matters. While they cannot vote, their insights can influence decision-making processes indirectly.
ACER recognises the importance of involving a diverse range of stakeholders in its activities and observers represent a broad spectrum of interests, including energy companies, consumer groups, environmental organisations, and academics. Their involvement ensures that ACER's decisions consider a wide range of perspectives.
In summary, being an observer to ACER provides a platform for engagement, influence, and information sharing in the European energy market. Observers’ participation is essential for fostering co-operation and ensuring that energy regulation and policy decisions are well informed and inclusive.
Source: ACER (2024[1]).
Sub-dimension 12.2: Energy security
The energy sector in Montenegro currently only has a rudimentarily developed approach to crisis response and resilience. Existing provisions and policies entail various measures and tools aimed at ensuring supply security and responding to crises or threats, but it is not clear to what extent those measures are being used. Furthermore, existing plans are somewhat outdated, and obligations to establish crisis mechanisms and plans have not been fully implemented.
A general policy framework is described in the Law on Energy. Additionally, a framework addressing the resilience of the oil sector is being formulated under a draft Law on the Supply of Petroleum Products in case of supply disruptions. This Law, however, has not been adopted yet. The ministry responsible for energy is required to prepare and submit an annual report on the security of energy supply and expected energy demand, but no such report currently exists. The government is now working on transposing Regulation 2019/941 on Risk-Preparedness in the Electricity Sector, which would reinforce Montenegro’s legal framework for preparing for and managing power crises.
A positive development is that the government of Montenegro established the National Council for the analysis and monitoring of the security of supply of energy and energy products. The Council is tasked with co-ordinating activities for monitoring the state of energy production, consumption and reserves, as well as proposing measures for uninterrupted supply and recommendations for reducing electricity consumption across various sectors. The establishment of this Council offers an opportunity for improved co-ordination and continuous evaluation, although it is uncertain how effectively this evaluation will be carried out.
Regarding the financing of infrastructure projects, the Montenegro Electric Transmission System (CGES) has access to diverse financing sources, including loans and grants, and receives support from international organisations for its infrastructure projects. The availability of various financing sources and tools presents a robust access to capital, which is essential for financing infrastructure projects in the energy sector. This diversified financial support is crucial for advancing infrastructure development and enhancing energy resilience.
In Montenegro, the current situation regarding diversification of energy supply is marked by the absence of a comprehensive policy framework. There is no specific policy to diversify the oil supply, and the economy has not developed a natural gas market, lacking the necessary infrastructure. Although the Law on Energy includes provisions for natural gas and oil derivatives, strategies for diversification are almost entirely missing from the nation's policy framework. The Energy Policy from 2011 only incidentally mentions supply diversification as part of the broader security of supply concept but fails to establish a clear vision for diversification. Insufficient diversification endangers supply security and enhances energy dependency. A sufficient degree of diversification can positively affect economic stability and social well‑being within an economy. Diversification away from fossil fuels would also come with additional positive environmental effects. Diversifying renewable energy sources is particularly important as Montenegro’s reliance on hydropower makes it dependent on hydrology conditions (Figure 13.1).
Figure 13.1. Installed generation capacity by energy sources in Montenegro (2012-22)
In Megawatts (MW)
Note: Data labels relate to the year 2022.
Source: Information provided by national authorities for the Competitiveness Outlook assessment.
There is, however, some progress in the pipeline. The Law on the Supply of Petroleum Products in case of supply disruptions is expected to be adopted soon. While this Law is not a diversification strategy per se, it could alleviate concerns related to the security of supply and would contribute to better alignment with the Energy Community (EnC) and EU acquis as it is in line with the Directive on Minimum Stocks of Crude Oil and/or Petroleum Products.
Looking to the future, Montenegro is involved in the Adriatic-Ionian Gas Pipeline (IAP) project, which could be an option for diversifying its energy supply. The IAP project aims to facilitate the gasification of Albania, Montenegro, southern Croatia, and Bosnia and Herzegovina, offering a more diversified and reliable supply of natural gas. Preliminary studies and designs have been performed and the ministry responsible for energy plans to revise the existing documentation soon and then proceed with the development of the main project, for which EU funding support will be needed. Completing these steps will provide a clear vision concerning the establishment of a gas market, thereby also enabling the assessment of related policy implications.
Sub-dimension 12.3: Sustainability
In recent times, Montenegro has demonstrated efforts pertaining to energy sector decarbonisation. The Governance Regulation has been partially transposed. The main focus over the past months has been the drafting of the new Law on Climate Change, which was expected to be adopted by the end of 2023, but whose adoption was delayed. Additionally, the National Energy and Climate Plan (NECP) is set to be adopted in 2024, establishing targets for decarbonisation until 2030. The NECP is currently, however, still in the drafting process. To support these decarbonisation efforts, a National Strategy and Action Plan for Low-Carbon Development will be developed with the assistance of World Bank funds. However, in the absence of the NECP, a comprehensive decarbonisation policy for Montenegro’s energy sector is not yet clearly defined.
Montenegro had previously committed to phasing out coal by 2035. However, these plans have been put into question and the government plans to clarify its coal phaseout target date in the NECP. An ongoing infringement case related to the breach of the opt-out regime under the Large Combustion Plants Directive for TPP Pljevlja highlights some challenges and casts doubts over the overall phaseout plans.
The national greenhouse gas (GHG) inventory is updated biannually, with the last report being the Third Bi-annual Update Report from December 2021. Montenegro received financial support from the World Bank to develop a Readiness Support Plan for carbon pricing. This initiative has already commenced, aiming to establish a stable national carbon pricing system in line with EU policy requirements. In January 2023, the government of Montenegro established a commission to implement a public auction system for emission credits. The sale of these credits will be allocated to the Environmental Protection Fund (Eco‑fund). Such carbon pricing, however, is not yet at a price level that is comparable to the EU standards.
There seems to be no mechanism in place for ensuring inter-institutional co-ordination for achieving energy sector decarbonisation. Progress is tracked through Nationally Determined Contributions, National Bi-annual reports, and reports on the implementation of the Climate Change Strategy. It remains to be seen whether the NECP can counter these shortcomings.
Montenegro is actively working on its renewable energy policy framework. The economy is preparing a Renewable Energy Sources (RES) Law, which is a much-needed step toward further progress and could serve as a basis for transposing the Clean Energy Package and a comprehensive establishment of market-based support schemes. In this regard, it needs to be highlighted that the Decree on the Manner of Realisation and Amount of Incentive Prices for Electricity Produced from Renewable Energy Sources has been repealed. This led to the cessation of the existing Feed-in Tariff (FiT) system. While the discontinuation of the FiT scheme is seen as a positive step,2 it raises questions about whether the current framework provides sufficient incentives to enhance renewable energy development. The RES Law does anticipate competitive auctions for RES projects, but as of now, no such auctions have taken place.
Regarding the evaluation and performance assessment of these policies, it is not entirely clear how evaluation and co-ordination are being institutionalised. There seems to be a certain level of continuous evaluation, evidenced by the regular drafting and submission of Progress Reports on the promotion and use of energy from renewable sources. These reports indicate ongoing efforts to monitor and assess the effectiveness of the renewable energy policies. However, the extent and institutionalisation of this evaluation process remain somewhat ambiguous, suggesting a need for more structured and transparent assessment mechanisms to ensure the effective implementation and adaptation of renewable energy policies in Montenegro.
Progress has been made in the legislative framework surrounding energy efficiency. Montenegro has achieved a high level of transposition of EU directives in this area, primarily through the enactment of the Law on Efficient Use of Energy and a vast number of accompanying bylaws. Such efforts demonstrate Montenegro's commitment to aligning with the European Union's directives, particularly the first Energy Efficiency Directive, which has been further reinforced by amendments made in 2022. These amendments introduce elements such as additional requirements and methodologies for the certification of buildings, defining new energy efficiency targets, setting mandatory energy savings and establishing obligations for energy audits and energy management systems. Additional legal acts in the area of energy labelling have also been adopted. Looking ahead, the introduction of the Long-Term Buildings Renovation Strategy is expected by mid-2024, and the revision of rulebooks concerning energy performance of buildings is nearly complete.
To promote energy efficiency, Montenegro has implemented various incentives and awareness-raising programmes. These include training sessions for energy managers, organised by the Ministry of Capital Investments in collaboration with the University of Montenegro, and a new cycle of training for energy audits of buildings. The “Energy Efficient Home” programme is a notable initiative offering interest-free loans to households for installing modern biomass heating systems and improving building energy performance. Additionally, financial support for energy efficiency projects is available through the Environmental Protection Fund/Eco-Fund. A broad political and societal dialogue surrounding energy efficiency seems to be well established in Montenegro, with programmes in place to support private investments in this area.
In Montenegro, the issue of energy poverty is yet to be addressed through a structured framework. Currently, there is no comprehensive policy specifically targeting energy poverty. However, existing support measures impact energy poverty by supporting vulnerable customers. The Law on Energy and the Regulation on the Supply of Vulnerable Customers provide the legal basis for this support. According to the regulation, vulnerable customers are entitled to a subsidy amounting to 50% of their monthly electricity bill for consumption up to 600 kWh. If a vulnerable customer's monthly consumption exceeds 600 kWh, the subsidy applies to 50% of the bill for consumption up to this threshold. There are established criteria to classify customers as vulnerable, ensuring that these individuals receive both financial support and protection against disconnections. As part of the Energy Support Package, provided to Montenegro by the EU in 2023, the government is expected to develop more comprehensive policies to address the issue of energy poverty.
A Supplier of Last Resort is responsible for supplying households and small customers who are not classified as vulnerable but choose to use the services of a last resort supplier. This also includes supplying vulnerable customers. The supplier issues monthly invoices for these services, which are paid by the Ministry of Capital Investments directly. This system ensures a safety net for consumers who might otherwise struggle to secure energy supply.
Sub-dimension 12.4: Energy markets
Montenegro's energy sector has seen advancements in the area of market operation, particularly in electricity trading. The organised marketplace for day-ahead electricity auctions (Montenegrin Power Exchange, MEPX) is operational since the end of April 2023, complete with corresponding market rules. Monthly volumes at MEPX varied slightly since operation, but neither a structural decrease nor increase is apparent in Figure 13.2. Volumes traded at the day-ahead market (DAM) make up around 10% of total electricity consumption.
Figure 13.2. Monthly volumes traded at Montenegrin Power Exchange (May 2023-January 2024)
In megawatts (MW)
Source: MEPX (2024[2]).
The market participation requirements have been published and adopted, partially implementing the EU target model. However, the designation of a Nominated Electricity Market Operator (NEMO) remains incomplete, and the Capacity Allocation and Congestion Management (CACM) regulation has not been fully implemented. Despite this, the successful launch of the DAM is a notable achievement and there are also plans to launch an Intra-Day Market in the future.
Regarding the market environment and surveillance, the market participation requirements are non‑discriminatory, not overly burdensome, and do not necessitate a presence in Montenegro. The admission procedure for new market participants has been streamlined and improved. Additionally, a significant change was made to the VAT law in December 2022, to enable a VAT reverse charge mechanism. This change aims to enhance market functioning and remove business barriers. Transparency in the market has been boosted with the ENTSO-E transparency platform now reporting DAM results, complemented by the mandatory daily and monthly reporting by the Montenegrin Power Exchange on their website. The Transparency Regulation has been fully transposed and implemented, and fundamental data are being submitted to the central data platform.
Montenegro remains very advanced in the area of unbundling, in line with the requirements of the Third Energy Package. A legal framework for unbundling in line with EU and Energy Community acquis is in place, and within the electricity sector both the transmission system operator (CGES) and the distribution system operator (CEDIS) are duly unbundled. Compliance officers have been nominated and a compliance report has also been published. In the gas sector, however, additional steps are needed as the designated future transmission system operator remains to be unbundled.
Regarding third-party access rules, Montenegro has established clear rules, technical requirements and costs, which are published for all grid levels. There are distinct access and usage tariffs set for each voltage or pressure level, ensuring transparency and fairness in grid usage. However, there are areas where further development is needed. Currently, trade licences are not mutually recognised within the Energy Community, which can create barriers to trade and co-operation. Addressing this gap will be crucial for enhancing the overall efficiency and integration of the energy market in the region.
In the area of regional market integration, CGES is actively involved in the AIMS (Albania, Italy, Montenegro, Serbia) initiative, which focuses on electricity market coupling among these economies. The launch of the DAM was a needed step forward in progressing with these coupling initiatives. Montenegro is also actively participating in regional initiatives, such as the South East European Coordinated Auction Office (SEECAO). This participation highlights Montenegro's commitment to regional energy co-operation. However, there is no institutionalised exchange with market participants that provides a common forum to discuss the continuous improvement of congestion and reliability management or the further development of market rules. Such a platform would be instrumental in fostering collaborative efforts for optimising market operations and addressing shared challenges.
Furthermore, the designation of a Nominated Electricity Market Operator (NEMO) remains incomplete, which is a critical step in ensuring effective market operations and compliance with EU standards. Additionally, the adoption of all Network Codes is necessary to further enhance regional integration. Addressing these issues will be crucial for Montenegro to fully capitalise on the potential for regional co‑operation and to strengthen its role in the regional energy landscape.
Overview of implementation of Competitiveness Outlook 2021 recommendations
Montenegro has made great progress in the completion of the transposition of the Third Energy Package and the creation of markets though the launch of the power exchange. Room for improvement remains, however, in the area of decarbonisation and energy efficiency. In the field of RES auctions insufficient progress was achieved as is apparent from the overview below (Table 13.2). This impacts security of supply considerations, as additional renewable capacities would also increase supply security and decrease risks associated with single sources of electricity.
Table 13.2. Montenegro’s progress on past recommendations for energy
The way forward for energy
Although Montenegro has advanced in various sectors since the previous Competitiveness Outlook, further actions are necessary to address current shortcomings and enhance alignment with the EU and Energy Community acquis. The subsequent recommendations present insights into principal areas which, if properly addressed, could result in substantial progress in Montenegro's energy sector and its endeavours to meet the relevant acquis standards.
Speed up the drafting of the NECP. Completing the NECP should be a top priority, given the central role that this document plays in providing a comprehensive policy approach towards diversification and decarbonisation. In preparing the NECP, the government should pay particular attention to these two policy objectives as they are currently insufficiently defined in Montenegro’s energy policy framework. Through the NECP, the government should ideally also ensure to properly update its outdated policy framework that is still based on the 2011 Energy Policy and the 2015 Energy Development Strategy. Depending on the comprehensiveness of the NECP, additional documents could also be adopted to provide more comprehensive policy guidance in areas such as decarbonisation and crisis response and resilience. Interim targets should be defined and implementation should be properly monitored to allow for corrective efforts in the case of delays or other challenges.
Transpose the remaining elements from the Clean Energy Package. Montenegro should transpose the remaining elements in the areas of renewable energy and energy efficiency, with a particular focus on drafting and adopting a Long-term Building Renovation Strategy. Transposition into national law should also entail the Electricity Integration Package with all Network Codes for the electricity sector, in order to enhance the legal framework as needed for additional regional integration. Attention should also be given to creating appropriate and sufficiently competitive market-based support schemes for RES production and permitting.
Ensure that regulatory independence is not weakened. The outcome of the currently pending court case to determine whether REGAGEN is authorised to initiate misdemeanour proceedings should be monitored closely, and depending on the outcome needed legal changes should be implemented in order to uphold REGAGEN’s independence.
Nominate a NEMO. This would be the basis for enhancing co-operation to further strengthen regional market integration, using the momentum from the launch of the day-ahead market.
Rectify the ongoing infringement case of non-compliance with the Large Combustion Plants Directive.3 The shortcomings that are the basis for the ongoing infringement case with the Energy Community Secretariat on the closure of TPP Pljevlja should be rectified. Setting a date for the shutdown of TPP Pljevlja would strengthen Montenegro’s commitment to and the credibility of its coal phaseout plans.
References
[1] ACER (2024), Home Page, https://www.acer.europa.eu/the-agency/about-acer (accessed on 28 May 2024).
[4] Council of European Energy Regulators (2018), Status Review of Renewable Support Schemes in Europe for 2016 and 2017, https://www.ceer.eu/documents/104400/-/-/80ff3127-8328-52c3-4d01-0acbdb2d3bed.
[5] European Commission (2017), Renewables in the EU: The Support Framework Towards a Single Energy Market, https://e3p.jrc.ec.europa.eu/sites/default/files/documents/publications/kjna29100enn.pdf.
[3] European Commission (2013), European Commission Guidance for the Design of Renewable Support Schemes, https://energy.ec.europa.eu/document/download/de118bc1-1f05-42ba-be92-96a750b1c60e_en?filename=com_2013_public_intervention_swd04_en.pdf.
[2] MEPX (2024), Reports, https://belen-spot.me/en/izvjestaji/ (accessed on 28 May 2024).
Notes
← 1. In 2015 the Energy Development Strategy was adopted. This strategy recognises the 2011 Energy Policy and its key strategic commitments, and is aligned with them. Thus, in the remainder of the chapter reference will be made to the underlying 2011 Policy.
← 2. Feed-in tariffs were the dominant form of financial support for renewables within the EU at the beginning of the 21st century. In this system, power plant operators receive a fixed payment for each unit of electricity generated independent of the electricity market price. Feed-in tariff schemes offer several advantages, but mainly they insulate new market entrants from market price risks, which lowers their capital costs and enables private investment. The simplicity of feed-in tariffs makes them suitable for markets with a large number of non-commercial participants such as households or local community-based initiatives. However, feed-in tariff schemes exclude producers from actively participating in the market, which hinders efforts to develop large, flexible and liquid electricity markets as the share of renewable energy grows. This limits growth to certain technologies and sizes of installations, and creates difficulties in setting and adjusting appropriate tariff levels. The latter has been a problem especially as costs of renewable generators have fallen rapidly in recent years. (See European Commission (2013[3]) (2017[5]); (Council of European Energy Regulators, 2018[4]))
← 3. For more information, see the summary of the case by the Energy Community here: www.energy-community.org/legal/cases/2021/case1521MN.html.