By Juan Domingo Riesco
This year, Albania’s Parliament approved an ambitious new electricity law. With it, the country is trying to complete the unbundling of its electricity generation, transmission and retail; move toward a non-discriminatory competitive market; and integrate more fully with the rest of Europe, both in energy markets and energy priorities. If that sounds complicated and technical, that’s because it is.
Upon the foundation of the law, the Ministry of Energy and Industry is now working to develop specific procedures and regulations designed to increase the overall supply of energy, decrease losses of electricity in the system, improve service to customers, and reduce financial risk to the government—all within sustainable market systems. The devil is, of course, in the details, but the Ministry is using hard data to rank options and knowledge of international experience to avoid the pitfalls that have derailed a similar process in other countries.
So how important are these electricity reforms in Albania? The answer: hugely. According to business surveys, 21.6% of Albanian firms identify electricity as a major constraint to doing business—higher than accessing finance, taxes, corruption, education levels or transportation. This leaves Albania ranked 152nd out of 189 countries on ease for firms to connect to the electricity grid. And these are, by necessity, only firms in the industries that can survive in Albania. Industries that require large amounts of electricity do not report because they do not exist. Progress on the Ministry’s reform initiatives should help to solve that problem. It may take time, but with well-structured reforms we would expect the share of electricity-intensive industries to grow in Albania’s export basket, helping to generate new permanent employment.
For these and other reasons, getting the technical details right is important. Here is some of what to look for as the Ministry continues its efforts.
In 2019, when the new law is fully implemented, there will be a large flux of high-consumption customers (mainly businesses) moving from regulated to open markets, where tariffs will be market-determined rather than fixed by government. For this to succeed, new markets (day ahead, ancillary and balance) must be in place and complete. Incentives must be structured such that electricity users and electricity sellers both benefit from making the switch and such that generators, transmitters and distributors internalize the need to increase efficiency and invest in their assets. Albania will also systematically integrate into a market much more developed and 654 times bigger than its own. If successful, this will improve energy security and quality of service, while also lowering business and commercial risks to invest in the country.
Albania should view the new framework as a big opportunity for its economic participation in Europe, and ministries must join together to take serious steps to eliminate distortions that could reduce the scope of the gains. A good experience in the electricity transition will improve the overall business environment and will provide better opportunities for industries that depend critically on cheap and reliable energy. If matched by appropriate industrial policies, this could increase economic diversity and complexity, enhancing productivity and economic growth, which the single most important determinant of consistent increases in living standards and reductions in poverty.
The new law and integration may also provide benefits in other ways. First, if investments complement reforms and water storage management is improved, Albanian power, which is already highly valued for its cleanliness and low operating price, could be prized for its flexibility as well. Connecting with markets abroad may allow for the export of electricity at peak hours, improving the trade balance and serving to attract new energy investment. Second, reforms could pave the way for optimized access to and use of natural gas from the Trans Adriatic Pipeline, which is planned to become operational in 2020. Such could allow for much needed diversification of Albania’s electricity production.
With well-designed and implemented public policy, several countries have improved their position significantly in just one generation. One such case is my country, Chile, which was able to quadruple its GDP per capita and reduce poverty from 39% to 8% in just 25 years. In all such cases, there were binding constraints that needed to be lifted to unleash the country’s true potential. This required long-term solutions to complex problems. In Albania, electricity is one of those types of constraints, although maybe not exclusively. The new electricity law is one step toward a long-term solution, but it is one among many steps. The focus on designing procedures and regulations must now remain detailed, and the responsibilities must eventually be shared, to take advantage of a big opportunity.