Study on Electricity Market Liquidity in Bosnia and Herzegovina
The objective of this study is to assist the Ministry of Foreign Trade and Economic Relations (MOFTER) and the State Electricity Regulatory Commission (SERC), to examine liquidity of the electricity market, which can provide correct price signals to investors and ensure fair competition for both sellers and buyers. In a competitive market, no single producer, or group of producers, and no single consumer, or group of consumers, can dictate how the market operates. Even though BiH has three large utility companies, more than a dozen traders, a growing number of non-residential customers who switched suppliers, and active cross-border trade with its neighbors, in the absence of a liquid power exchange most transactions are taking place bilaterally, limiting transparency and price discovery. In these conditions neither the buyer nor the seller know whether the price fairly reflects the value of the product and the underlying demand and supply conditions. Liquidity allows firms to manage risk effectively and reduce the scope for market manipulation. Worthwhile mentioning is that the EC’s “Commission Opinion on Bosnia and Herzegovina’s application for membership of the European Union” from May 2019 indicates that “the country also needs to establish a power exchange”.
In order to achieve objectives of the study, our experts are involved in the following tasks:
- Assessment of the state of play of the market and expectation/hedging needs:
- Perform analyses on the state of play of the market and the hedging needs of the generators and suppliers, links and with regional markets and with reference markets.
- Collect the information on and evaluate the procurement practices of the three EPs and the competitiveness of the BiH wholesale market;
- Assess seasonal trading patterns for the generation companies located in the BiH – percentage of excess generation exported outside BiH – key markets and volumes;
- Conduct a survey of the existing renewable generation developers, electricity traders, as well assmall and independent suppliers to better understand the obstacles they are facing: (1) access to the forward products that they need to meet customer demand and manage wholesale market related risks; (2) short term imbalance risks as a barrier for small entrants who may find it difficult to trade out of imbalance positions close to real time; (3) length of time it takes to negotiate a contract.
- Performqualitative and quantitative evaluation comparing the effect of the market making obligations and/or other appropriate measures on improving liquidity of the BiH power market. When performing the evaluation, the following shall be taken into consideration:
- Measures shouldlook into liquidity measures for the forward market with standardized contracts as well as day-ahead market once the functional day-ahead market operator is in place.
- The Consultant shall base the analysis on thethree time horizons, (i) 2021, the expected year of establishing the PX, (ii) 2025 and (iii)
- To assess future supply, demand and trading volumes in the country, the Consultant shall usethe Framework Energy Strategy of BiH until 2035 as well as the ISO’s Indicative generation development plan for the period from 2020 to 20298 and consult with main utilities and IPPs in BiH on their actual plans. In addition, the Consultant shall undertake consultations on the realism of such assumptions with MOFTER, Ministry of industry, energy and mining of RS, Ministry of energy, mining and industry of FBiH, Brcko District authorities, ISO, SERC as well as regulatory commissions for energy in FBiH and RS.
- In order to establish the base case for comparison, the Consultant shall collect the historical generation, consumption and trading (including exports, imports and domestic trade) data from all three EPs, as well as generation and trading data from IPPs in the country (most notably, the TPPStanari, but the data from all other producers shall be collated as well).
- Whereas both the quantitative as well as the qualitative evaluation shall establish pros and cons of all analyzed scenarios, the quantitative evaluation in particular shall comprise detailed calculation of costs (e.g. hard costs of establishing the PX, operational expenses, etc.) and benefits (e.g. reduction in total production costs, income due to trading volume on the domestic PX, avoided costs of trader’s fees, no payment of market participant fees in host countries, no necessity to establish offices in host countries, etc.) of each presented option.
- For all scenarios, the Consultant is expected to consider the scope of work, timeline and required budget in implementing each measure, identify the associated risks and suggest means for their mitigation.
- Conduct any other analyses that the Consultant deems necessary for the purpose of completeness of this task.
- Makerecommendations on measures identified to maximize the liquidity of the prospective BiH power exchange.
- Provide a concluding expert opinion on whether the prospective BiH power exchange, from the liquidity perspective, is a viable option to be established.
- Assist SERC in conductinga technical conference assessing measures to improve market liquidity outlined above, and measures that SERC and other respective regulatory authorities in BiH must take into consideration. The consultant will specifically focus on the:
- The economic and financial benefit of imposing liquidity measures in the BiH market –
- Effectiveness risks – risks that benefits will not be delivered(for instance, if smaller firms still face barriers when attempting to trade after the proposed interventions)
- Unintended consequences – risks that distortions will be created(such as price distortion)
- The effect of the proposed measures on the vulnerable customers who may be less likely to switch suppliers