REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL under Article 7 of Decision 2006/500/EC (Energy Community Treaty)
Date: 2011-03-10
Institutions: European Commission
Subjects: Central and Eastern Europe, EU Member State, cooperation agreement, electrical energy, energy policy, international relations, natural gas

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EUROPEAN COMMISSION 

Brussels, 10.3.2011 
COM(2011) 105 final 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

under Article 7 of Decision 2006/500/EC 
(Energy Community Treaty) 

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   EN 

 
 
  
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

under Article 7 of Decision 2006/500/EC 
(Energy Community Treaty) 

This report is established pursuant to Council Decision 2006/500/EC of 29 May 2006 on the 
conclusion  by  the  European  Community  of  the  Energy  Community  Treaty  which  provides 
that "three years after the entry into force of this Decision, the Commission shall submit to the 
European  Parliament  and  to  the  Council  a  report  on  the  experiences  gained  from  the 
implementation  of  this  Decision,  accompanied,  if  appropriate,  by  a  proposal  for  further 
measures". The present report reviews the achievements of the Energy Community and also 
its main challenges for the future. 

1. 

Introduction – From disintegration to working together 

The Energy Community is based on a Treaty signed between, on the one hand, the European 
Union1  and,  on  the  other  hand,  the  following  nine  Contracting  Parties:  Albania,  Bosnia  and 
Herzegovina,  Croatia,  the  former  Yugoslav  Republic  of  Macedonia,  Moldova,  Montenegro 
Serbia,  Ukraine  and  UNMIK.  2  Fourteen  European  Union  Member  States  have  moreover  a 
special  bond  with  this  organisation,  reflected  in  their  status  as  "participants"  in  the  process 
(Austria, Bulgaria, Cyprus, the Czech Republic, France, Germany, Greece, Hungary, Italy, the 
Netherlands,  Romania,  Slovakia,  Slovenia  and  the  United  Kingdom).  To  date,  Georgia, 
Norway and Turkey have the status of Observers. 

The  Energy  Community  is  about  investments,  economic  development,  security  of  energy 
supply  and  social  stability;  but  –  more  than  this  –  the  Energy  Community  is  also  about 
solidarity,  mutual  trust  and  peace.  The  very  existence  of  the  Energy  Community,  only  ten 
years after the end of the Balkan conflict, is a success in itself, as it stands as the first common 
institutional project undertaken by the non-European Union countries of South East Europe. 

The Energy Community has three levels of ambition: national, regional and pan-European. In 
the  short  term,  it  aims  at  creating  open  and  transparent  national  energy  markets  based  on 
stable  regulatory  and  market  frameworks  capable  of  attracting  investments  in  power 
generation and networks (security of energy supply being essential for economic development 
and  social  stability);  in  the  medium  term,  an  integrated  energy  market  should  be  in  place 
across the region which allows for cross-border trade in energy, guarantees energy supply and 
takes  into  consideration  climate  and  social  aspects;  in  the  long  term,  the  regional  market 
should be fully integrated in the European Union's internal energy market. 

To  achieve  these  objectives,  the  Energy  Community  Treaty  foresees  appropriate  courses  of 
action by the Contracting Parties, either unilaterally or together with some EU Member States 
or with the European Union as a whole. By joining the Energy Community, the Contracting 
Parties  have  committed  themselves  to  implement  the  relevant  EU  rules  on  energy, 

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Signed originally by the European Community, succeeded in the meantime by the European Union. 
This  list  reflects  the  present  Contracting  Parties,  following  the  2007  Enlargement  of  the  European 
Union and the recent evolution of this organisation. 

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environment and competition; the Treaty moreover provides the tools for the adoption of an 
ad hoc regulatory framework facilitating the cross border operation of the energy markets in 
the region and for the establishment of a single energy market. 

The  Energy  Community  has  its  own  institutional  framework.  In  close  cooperation  with  the 
Commission's  services,  the  Energy  Community  Secretariat,  based  in  Vienna,  represents  the 
key  administrative  actor;  it  ensures  the  necessary  coordination  and  provides  support  for  the 
work of the other institutions: the Permanent High Level Group, the Ministerial Council, the 
Energy  Community  Regulatory  Board  and  the  Fora.3  The  Secretariat  is  also  responsible  for 
reviewing the proper implementation by the Contracting Parties of their obligations under the 
Treaty  and  it  submits  yearly  progress  reports  to  the  Ministerial  Council.  To  this  extent,  the 
Secretariat acts as a "guardian of the Energy Community Treaty"; for its part, the European 
Commission plays a general coordinator role under the same Treaty. 

The Energy Community budget for 2011 amounts to EUR 3,380,000 and is financed to a 98% 
by  the  European  Union  (EUR  3,312,400).  Since  2009,  the  European  Union  contribution  is 
being paid from an ad hoc IPA Regional Programme. This budget serves basically to finance 
(1) the operation of the Secretariat; (2) the organisation of +/- 60 institutional meetings and 
events per year and participation of the Contracting Parties and Observers in those events; and 
(3) Studies. The bi-annual budget (2012-2013) for an enlarged Energy Community should be 
established and adopted in 2011.  

The Energy Community was created for a period of 10 years, expiring in July 2016 and it can 
be extended by unanimous decision of its Ministerial Council. 

Although the Treaty has been in force since July 2006, the fact is that the Energy Community 
did  not  become  fully  operational  until  2007,  when  the  Secretariat  was  set  up.  While  the 
Energy Community was originally conceived as a European Union pre-accession instrument, 
its membership has in the meantime been opened to countries in the European Neighbourhood 
Policy  area  (the  first  newcomer  being  Moldova  since  1st  May  2010;  and  Ukraine  having 
joined  with  effect  from  1st  February  2011)  and  beyond  (Armenia  has  applied  to  become  an 
observer).  Since  the  signature  of  the  Energy  Community  Treaty,  the  importance  of 
strengthening  the  external  dimension  of  the  EU  energy  market  has  become  more  and  more 
evident,  starting  with  the  2008  Commission's  Second  Strategic  Energy  Review.  The  recent 
Communication  "Energy  2020  –  A  strategy  for  competitive,  sustainable  and  secure  energy" 
identifies  the  Energy  Community  concept  as  a  key  component  for  a  strong  international 
partnership with the EU's neighbours.  

2. 

A "success story" 

After four years of existence, the Energy Community has grown into a mature organisation, 
which provides a solid institutional framework for cooperation, mutual support and exchange 
of experiences and therefore serves as a model for regional cooperation on energy matters. 

By signing the Energy Community Treaty, the Contracting Parties committed themselves to 
an  ambitious  project  that  demanded  a  huge  effort  in  terms  not  only  of  legislative  work, 
administrative  capacity  and  resources,  but  also  of  political  and  social  perception.  This 
commitment is being renewed at every meeting of the Energy Community institutions, and is 

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Four Fora, devoted to electricity, gas, oil and social aspects, gather all interested stakeholders from the 
industry, regulators, industry representative groups and consumers. 

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moreover  reflected  in  the  daily  work  carried  out  at  technical  level  by  the  different  working 
groups and task forces. 

The  Energy  Community  Treaty  identified  a  series  of  EU  provisions  that  the  Contracting 
Parties  committed  themselves  to  implement  within  a  specific  timeline  and  which  basically 
concerned the Second Package of common rules for the internal market in electricity and gas, 
selected  Directives  on  environmental  protection  and  main  antitrust  and  state  aid  rules.  The 
Contracting Parties moreover committed to establish implementation plans for the Directives 
on the promotion of energy from renewable sources. 

In  2007  the  "Energy  Community  acquis"  was  extended  to  the  EU  directives  on  security  of 
electricity and gas supply. 

Since  2010,  it  also  covers  the  main  EU  legislation  on  energy  efficiency,  in  particular  the 
Directives on the energy performance of buildings, on energy labelling, and on energy end-
use  efficiency  and  energy  services.  This  legislation  shall  generally  be  implemented  by  the 
Contracting Parties by the end of 2011. 

The  Contracting  Parties  have  moreover  agreed  to  start  implementing  parts  of  Directive 
2009/28/EC  on  the  promotion  of  renewable  energy  and  the  "Third  Package"  on  the  internal 
market in electricity and gas on a voluntary basis, as a first step, following recommendations 
issued by the Ministerial Council. 

The Energy Community's activities have been increasingly expanded to other areas. Based on 
the Memorandum of Understanding on Social Issues, all the Contracting Parties – apart from 
Moldova and Ukraine, as newcomers – have prepared Social Action Plans and have started to 
take  measures  to  address  social  consequences  related  to  the  Implementation  of  the  Treaty. 
Some progress has been achieved in this area; however, this process seems to be rather slow 
and uneven due to the non-binding nature of the Memorandum and/or the weak commitment 
to social issues. Moldova and Ukraine are expected to sign the Memorandum without delay. 

On the "Oil Dimension" preparatory work is being done with a view to a timely adoption of 
the 2009 Directive related to oil stocks.  

Efforts are also being made to assist Contracting Parties to harmonise their energy statistics 
with  the  methodology  and  reporting  requirements  applied  by  Eurostat,  based  on  a  detailed 
roadmap established for the period 2010 - 2012. 

The  extension  of  the  Energy  Community's  activities  to  other  areas  shows  not  only  the 
commitment  of  the  Contracting  Parties  to  align  with  EU  standards,  but  also  the  dynamic 
approach of this organisation and the flexibility of its decision-making mechanisms. 

The  evolution  of  the  Energy  Community's  legislative  framework  is  reflected  in  the  2010 
Annual  Implementation  Report  prepared  by  the  Secretariat  of  the  Energy  Community.  It 
focuses  on  the  implementation  of  the  acquis  under  the  Treaty  establishing  the  Energy 
Community  and  describes  the  progress  made  by  each  Contracting  Party  and  assesses  the 
overall  situation.  The  Secretariat's  Report4  confirms  the  legislative  effort  made  by  the 
Contracting  Parties,  which  have  managed  to  adapt  their  energy  regulatory  frameworks  in  a 
relatively short period of time (whereby some of them started "from scratch"); the report also 

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The full text of the report is available at http://www.energy-community.org/pls/portal/docs/722178.PDF 

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warns about the widening gap between formal adoption of the rules and true implementation, 
and points to the identified obstacles preventing the effective opening of the energy markets 
and slowing down investments. 

The  interest  in  the  Energy  Community  is  growing  throughout  the  region.  The  first 
enlargement  of  the  Energy  Community  was  completed  in  2010  with  the  accession  of  the 
Republic of Moldova; with the accession by Ukraine, the size of the potential regional market 
has  almost  tripled  (from  approximately  26  millions  inhabitants  to  around  73  millions). 
Negotiations  with  Turkey  were  opened  in  September  2009;  Georgia  is  envisaging  applying 
for membership and Armenia has requested to become an observer. The centre of gravity of 
this  project  –  which  was  inspired  by  a  strong  EU  pre-accession  component  –  has  therefore 
started to shift towards the East. 

3. 

Main challenges 

While recognising the considerable efforts made by the Energy Community so far, especially 
from the institutional perspective, the Commission is aware of two key areas where there is 
room for improvement. 

(a) From theory to practice. Despite intensive legislative work, the first level of ambition – the 
existence  of  open,  transparent  and  competitive  national  energy  markets  in  all  Contracting 
Parties – has not been completed yet; as for the achievement of a regional market, the lack of 
progress on establishing a Coordinated Auction Office for electricity in the 8th Region (South 
East  Europe)  –  despite  the  considerable  financial  and  human  resources  deployed  in  this 
project – is an example of the systemic difficulties encountered; regional initiatives are often 
blocked  based  on  irreconcilable  positions  of  principle  resulting  from  political,  ethnic  and 
religious discrepancies that are a legacy from the past. Continued obstructions by a number of 
parties  of  Kosovo's5  full  participation  in  regional  mechanisms  are  particularly  damaging. 
Under these circumstances, the ultimate ambition – integration into the EU's internal energy 
market – seems, for the time being, just a long-term objective. 

Bridging  the  existing  gap  between  theory  (political  commitments)  and  practice  (full 
implementation  of  the  Energy  Community  acquis  and  enforcement  of  the  rules  adopted) 
remains the main challenge, and the key question is how to prompt Contracting Parties in the 
region to apply and enforce the rules. 

Setting  realistic  objectives  and  realistic  deadlines  will  help  to  avoid  situations  of  lack  of 
compliance, as will appropriate accompanying provisions that duly take into consideration the 
profile and needs of the Contracting Parties, as explicitly stated in Article 24 of the Treaty. 

Formal transposition of the "Energy Community acquis" cannot be an end in itself, but must 
be a means to achieve the objectives of the rules. The goal is to create a true energy market, 
starting by reforming of the existing system of regulated prices and blanket subsidies. No real 
opening  of  the  national  energy  markets,  let  alone  integration  of  the  regional  market,  will 
therefore  be  achieved  as  long  as  obsolete  market  designs  remain  in  place  that  hinder 
competition and investment and are based on public suppliers linked to incumbent domestic 
generators applying regulated prices that are not clearly defined, transitional, transparent, non 
discriminatory  (including  between  suppliers)  and  verifiable,  as  well  as  not  distortive  of 

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Under UNSCR 1244/99. 

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competition,  as  required  by  the  case-law  of  the  Court  of  Justice  of  the  European  Union.6 
Adopting national laws that merely "translate" the EU rules into national acts does not suffice 
if they are not accompanied with the necessary secondary rules, administrative capacity and 
supervision and enforcement mechanisms. Strong Energy Regulatory Authorities are needed, 
with  enough  powers,  resources  and  independence  to  perform  their  duties  and  capable  to 
ensure non discrimination, effective competition and efficient operation of the energy market.  

The  dispute  settlement  mechanism  provided  for  in  the  Treaty  has  proved  efficient  in  cases 
where parties were open to negotiating an amicable solution. Experience has shown, however, 
that the ultimate solution of the dispute may go beyond the strict interpretation of the Energy 
Community acquis and relate to complex issues of public international law. Given the limited 
number of cases opened so far (only six cases, mainly prompted by complaints) and the lack 
of  a  systematic  approach  for  addressing  simultaneously  similar  breaches  in  several 
Contracting  Parties,  it  is  too  early  at  this  stage  to  draw  appropriate  conclusions  on  the 
efficiency of the infringement procedure laid down in the Treaty. The Commission considers 
that all parties need to step up the efforts to ensure compliance.  

(b) How to promote investment? The Energy Community faces investment challenges that are 
well  known,7  such  as  those  resulting  from  the  modernisation  of  the  electricity  transmission 
and  distribution  networks  and  interconnectors,  from  the  EU  requirements  and  measures 
related  to  energy  efficiency  or  from  implementation  of  the  Large  Combustion  Plants 
Directive,  the  Sulphur  in  Fuels  Directive  and  emissions  standards  of  the  European  Union, 
requiring  rehabilitation  of  existing  generation  plants  or  decommissioning  and  possible 
replacement of a number of them by December 2017. 

The Energy Community has succeeded in identifying a number of priority projects of strategic 
importance for the region, which were endorsed by the Ministerial Council in 2010, whereby 
precedence  is  given  to  projects  facilitating  cross-border  exchanges;  the  current  insufficient 
interconnection  capacity  is  indeed  an  obstacle  to  developing  regional  markets.  Promoting 
region-wide  energy  systems  and  exchanges  will  help  not  only  the  region  but  also  the  EU’s 
security  of  supply.  Some  steps  have  been  taken  so  far  based  on  the  "Gas  Ring"  concept,  as 
developed in the "South East Europe Gasification Study" (sponsored by the World Bank and 
the  Kreditanstalt  für  Wiederaufbau  [KfW]  and  published  under  the  title  "The  future  of  the 
natural  gas  market  in  Southeast  Europe")8  and  considerable  efforts  have  been  made  at 
institutional level to support and promote the priority projects identified. 

The Energy Community has moreover helped the Contracting Parties attract significant public 
financing,  be  it  from  bilateral  donors  (e.g.  KfW  or  USAid)  or  from  international  financial 
institutions (e.g. the EIB, the World Bank or the EBRD).  

Despite  the  high  level  of  funding  from  international  financial  institutions  in  the  region,  the 
level  of  private  investments  remains  relatively  low.  Reasons  for  that  include  the  unreliable 
implementation of the regulatory framework (rules are not implemented and/or not correctly 

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See Judgment of he Court (Grand Chamber) of 20 April 2010, Federutility and Others v Autorità per 
il  gas,  Case  C-265/08  (European  Court  reports  2010  Page  00000). 
l'energia  elettrica  e 
Outstanding  gaps  are  analysed  in  the  report  released  by  the  World  Bank  in  June  2010,  South  East 
Europe Wholesale market opening, http://www.energy-community.org/pls/portal/docs/594181.PDF 
See e.g. the report prepared by the World Bank Lights out? : the outlook for energy in Eastern Europe 
former  Soviet  Union  http://siteresources.worldbank.org/ECAEXT/Resources/258598-
and 
1268240913359/Full_report.pdf 
See the report at http://go.worldbank.org/ZM7XE8RM10 

the 

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applied) and the small scale of national markets (the very same reasons that gave birth to the 
concept of the Energy Community back in 2005). 

However,  the  biggest  challenge  still  appears  to  be  the  failure  of  governments  to  restructure 
regulated  end-user  prices  and  the  associated  implicit  and  explicit  subsidies  on  all  energy 
markets.  These  subsidies,  which  are  indiscriminately  applied,  keep,  in  particular,  the 
wholesale electricity price below the capital replacement level and discourage energy savings 
and investments in energy efficiency. The result is a continued use of ageing, inefficient and 
environmentally  unfriendly  capital  stock,  that  is  unable  to  provide  the  energy  security  the 
population  of  the  Energy  Community's  Contracting  Parties  deserve.  This  result  crowds  out 
investment of any sort − public, private or by international financial institutions. 

The  Commission  considers  that  improving  the  conditions  for  investment  must  become  a 
priority  for  the  next  steps  of  the  Energy  Community  and  it  will  work  together  with  the 
Secretariat and the Donors community to make good on this commitment.  

4.  What future for the Energy Community 

Following  from  the  conclusions  set  out  above,  the  Commission  considers  that  the  future  of 
this  international  organisation  should  be  designed  taking  into  consideration  three  main 
objectives: the Energy Community needs to focus on enforcement of the rules, it has to adopt 
the  Third  Internal  Market  Package  and  the  Renewables  Directive  and  a  coordinated 
investment strategy needs to be developed. Inclusion of further acquis should be considered, 
notably to promote de-carbonisation of the energy sector. 

(1) Focus on implementation  

Unlike other existing regional initiatives, the Energy Community is based on an international 
treaty that creates a framework of legally enforceable rules: 

- By joining the Energy Community, the Contracting Parties have given a legal commitment 
not  only  formally  to  adopt  the  relevant  EU  rules,  but  also  to  apply  and  enforce  them  in 
practice. 

- The Energy Community institutions ensure a permanent and independent monitoring of the 
relevant markets by the Secretariat, which assists Contracting Parties with implementing the 
rules and checks the formal compliance of the national transposing rules (even before they are 
adopted) and their application in practice, by means of country visits, among other measures; 

- The Energy Community Treaty provides for a dispute settlement mechanism which allows 
to identify and to address any breaches of the relevant rules, either following a complaint or 
on the Secretariat's own  initiative, even though this mechanism has not been applied in any 
systematic way so far. 

However,  the  lack  of  progress  made  in  practice  with  reforming  and  opening  up  the  energy 
markets suggests that so far enforcement of the energy acquis has been insufficient. In order 
to improve enforcement, the Contracting Parties should move ahead with establishing strong 
and independent energy regulators and competition authorities that are fully empowered and 
equipped  to  monitor  compliance  and  impose  effective  sanctions  in  case  of  infringement. 
National courts and investment tribunals also have a crucial role to play in enforcing the rules 
adopted and in granting proper redress in case of violations. Finally, the Secretariat must fully 

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play its role of guardian of the Energy Community Treaty, drawing on the independence and 
expertise it has. 

The  Commission  is  committed  to  furthering  implementation  and  active  enforcement  of  the 
Energy Community rules as follows:  

(a) 
For  Contracting  Parties  that  have  reached  the  status  of  EU  candidates  or  potential 
candidates,  the  level  of  national  implementation  and  enforcement  of  the  relevant  Energy 
Community  acquis  will  be  considered  decisive  in  the  negotiations  for  accession  to  the 
European  Union.  The  lack  of  enforcement  will  be  assessed  negatively  in  the  Commission's 
progress  reports  and  could  lead  to  re-opening  the  Energy  Chapter  of  the  accession 
negotiations. The converse is also true: candidate countries should expect smoother progress 
in  their  accession  discussions  on  the  Energy  Chapter  in  return  for  implementing  the  acquis 
under the Energy Community Treaty. 

(b) 
Based on transparent rules and procedures, and taking into account the proportionality 
principle,  the  European  Commission  will  examine  how  to  better  link  bilateral  financial 
assistance to the respect of commitments under the Energy Community Treaty, especially in 
case of a persistent breach by a Contracting Party, in line with the recommendation made by 
the European Parliament in its Resolution Towards a new Energy Strategy for Europe 2011-
2020,  adopted  on  25th  November  2010.  In  the  Commission's  view,  Contracting  Parties' 
compliance with  the acquis should be assessed not only on the basis of transposition of the 
acquis  in  their  national  legislation  but  also  on  the  basis  of  effective  implementation  and 
enforcement, which should in turn play a positive role when it comes to allocating additional 
financial support. 

In its role as Coordinator of the Donors Community, the Commission will consider moreover 
inviting  other  International  Financing  Institutions  and  bilateral  donors  to  follow  the  same 
policy and make financing conditional on implementation and enforcement of the rules.  

(c) 
Furthermore,  stronger  enforcement  mechanisms  will  also  be  a  condition  for  the 
Contracting  Parties  to  benefit  from  the  provisions  on  cooperation  under  the  Renewable 
Energy Directive and in particular its provisions on statistical transfers with Member States. 

The  Commission  will  support  measures  aiming  at  facilitating  implementation  and  at 
(d) 
preventing  situations  of  non  compliance  from  happening,  by  increasing  administrative 
cooperation  and  partnership.  It  will  also  foster  closer  involvement  of  participants  from  EU 
Member  States  in  the  technical  meetings  of  the  Energy  Community,  so  that  Contracting 
Parties can benefit from their experience and best practices.  

(e) 
The  Commission  will  promote  systematic  recourse  to  the  dispute  settlement 
mechanism  which  duly  respects  equal  treatment  of  Contracting  Parties  and  will  support 
initiation  of  the relevant procedures on  the  Secretariat's own initiative. In case of serious or 
reiterated  breaches  of  the  rules,  the  Commission  believes  that  the  European  Union  should 
exercise  its  right  under  Article  90  of  the  Treaty  and  should  consider  submitting  the  case 
directly to the Ministerial Council. 

(f) 
In  the  Commission’s  view,  accession  of  new  members  to  the  Energy  Community 
should  be  open  only  to  countries  showing  willingness  and  the  ability  to  incorporate  the 
relevant Energy Community acquis into their legislation within a reasonable timeframe before 
accession and in line with the credibility demanded from the other Contracting Parties. 

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(2) Implementation of the Third Internal Market Package and the Directives on Renewables 
and Energy Efficiency, as a means to speed up integration of the region in the single European 
energy market 

The  Commission  considers  that  the  effective  implementation  of  the  agreed  rules  is  a  key 
condition  for  the  prospective  adoption  and  implementation  of  the  Third  Internal  Energy 
Market  Package  and  for  participation  by  the  Contracting  Parties  in  the  Agency  for  the 
Cooperation  of  Energy  Regulators  (ACER)  or  the  European  Networks  for  Transmission 
System Operators.  

The  Commission  will  promote  the  extension  of  the  Energy  Community  acquis  to  the 
directives  and  regulations  in  the  "Third  Internal  Energy  Market  Package".  Adoption  and 
implementation of the Third Package will allow the Contracting Parties to reform their energy 
markets faster and more thoroughly, paving the way for full integration with the EU markets 
and  enabling  businesses  and  consumers  in  the  Contracting  Parties  to  reap  the  benefits  from 
smoothly functioning markets.  

To make sure that the implementation of the legislation is accompanied by real reforms on the 
market, the Commission, in coordination with the Energy Community Secretariat, intends to 
give  specific  advice  to  the  Contracting  Parties,  in  the  form  of  implementation  programmes, 
priorities, and possibly gradual adoption of the acquis. Naturally this will be an integral part 
of the advice on market reform that sets the basis for the promotion of investment. 

The  Commission  will  also  promote  adoption  of  the  Renewables  Directive  by  the  Energy 
Community. The Contracting Parties have an unexploited renewable energy potential which 
would allow them to contribute to the fight against climate change, increase Europe’s energy 
security and to address local environmental and health concerns. 

In  the  area  of  energy  efficiency,  effective  application  of  the  relevant  EU  legislation  in  the 
Contracting  Parties  will  be  important  to  ensure  that  they  contribute  as  soon  as  possible  to 
reaching  the  energy  saving  and  efficiency  targets  and  to  de-carbonising  the  energy  sector. 
Significant  related  advantages  include  savings  on  energy  bills  for  Contracting  Parties' 
nationals  as  well  as  opportunities  for  creating  new  jobs.  The  possibility  of  considerable 
savings  as  a  result  of  increasing  energy  efficiency  in  the  region  was  analysed  in  a  recent 
report released by the World Bank.9 

These rules are already the point of reference for bilateral negotiations between the European 
Union  and  the  Contracting  Parties  of  the  Energy  Community  (either  for  accession  to  the 
European Union or in the framework of the European Neighbourhood Policy). 

The Commission will therefore promote adoption of the relevant directives and regulations by 
the  Energy  Community  as  soon  as  possible,  taking  into  account  the  Energy  Community 
institutional framework and the specific situation of the Contracting Parties. 

(3) Coordinated investment strategy  

The  Energy  Community  needs  to  build  an  attractive  investment  environment  based  on  a 
coordinated  investment  strategy.  The  Contracting  Parties  offer  a  good  geographical  base  to 

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"Status  of  Energy  Efficiency 
http://www.energy-community.org/pls/portal/docs/664179.PDF 

the  Western  Balkans,  Stocktaking 

in 

report"  available  at 

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gain  access  to  the  wider  European  energy  market  and  the  potential  to  turn  their  objective 
advantages,  such  as  abundant  renewable  hydro-electric  resources,  into  export  opportunities. 
Admittedly  there  are  problems,  such  as  bottlenecks  to  cross-border  trade  unstable  planning 
systems, and very narrow, limited ambitions. 

The primary condition for new investments is undertaking price/subsidy reform. The current 
price and tariff levels, often below cost recovery, constitute a market  distortion and hamper 
policies to promote demand management and energy efficiency. This, compounded with low 
levels of electricity billing and revenue collection imperil the financial viability of some of the 
power utilities, which is currently remedied by costly state subsidies. Special efforts therefore 
need to be made on price and tariff reform with due attention to the protection of vulnerable 
consumers, to the removal of administrative burdens and the establishment of an independent 
Regulatory  Authority  which  guarantees  transparency  of  the  market  and  non-discriminatory 
treatment  of  the  market  participants.  The  Commission  recognises  that  it  is  unreasonable  to 
expect reform without offering an alternative plan for investment, for price restructuring and 
for targeted protection of vulnerable consumers. The Commission intends to take the lead in 
this area by offering specific advice on structural reform.  

Emphasis  will  be  placed  on  the  social  impacts  of  reform.  The  Contracting  Parties  need  to 
develop  efficient  energy  welfare  systems  and  targeted  subsidy  schemes.  The  most  notable 
efficiency  is  to  increase  the  level  of  payment  coverage  (that  is,  to  reduce  the  number  of 
persons  to  whom  energy  is  supplied,  but  who  do  not  pay).  Another  efficiency  that  must  be 
considered  is  removing  of  blanket  subsidies,  and  targeting  subsidies  on  the  poor  and  the 
vulnerable.  The  Contracting  Parties  need  to  realise  what  are  the  costs  of  not-reforming,  in 
terms  of  increased  energy  intensity,  lost  welfare,  lost  economic  growth,  a  degraded 
environment and health impacts.10  

A  secondary  condition  is  that  the  Contracting  Parties  must  look  beyond  their  borders  and 
realise the economies of scale offered by regional investment plans. This requires the political 
will  to  rely  on  neighbours,  and  to  do  that  the  European  Union  must  take  a  direct  and  high 
level interest in the Energy Community at every opportunity. 

Thirdly,  the  Commission  will  raise  the  level  of  importance  attached  to  environmental  and 
climate criteria in the debate on energy in the Contracting Parties. The necessity to invest in 
new generation capacity to replace old, inefficient and polluting power plants is all the more 
urgent  when  taking  into  account  the  environmental  legislation  of  the  EU.  The  ability  of  the 
Contracting  Parties 
the  requirements  of  Directive  85/337/EEC,  on 
environmental  impact  assessment,  as  amended,  along  with  the  provisions  of  Article  4(2)  of 
Directive  79/409/EEC,  on  the  conservation  of  wild  birds,  will  also  deserve  specific 
consideration from the Commission. 

implement 

to 

The  added  value  of  the  Energy  Community  should  be  preserved  and  duplications  with  the 
work carried out in the field of energy under other regional initiatives should be avoided (the 
European  Neighbourhood  Policy  and  the  Eastern  Partnership,  the  Regional  Cooperation 

10 

The importance of meeting environmental criteria should play a central role in the strategy. The present 
fuel mix in the region, particularly lignite used in power stations and domestic hard fuel use (lignite, 
wood, coal), under-prices the environment and the related social costs, as documented by the United 
Nations Development Programme already in 2004  
(see http://www.undp.org/energy/docs/Stuck_in_the_Past.pdf) 

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Council, the European Strategy for the Danube and the Baku Initiative). Coordination among 
all these initiatives is essential to avoid overlapping actions and double financing. 

In  its  general  role  as  coordinator  of  the  Energy  Community  activities,  and  building  on  its 
privileged relationship with the donors, the European Commission intends to take the lead in 
the creation of the investment environment.  

Based  on  the  European  Union  Energy  Strategy  2020,  those  infrastructure  projects  which 
contribute  to  enhance  the  European  Union's  security  of  supply,  e.g  through  new 
interconnectors  at  the  borders,  should  receive  the  same  attention  and  policies  as  intra-EU 
projects.  The  Communication  Energy  infrastructure  priorities  for  2020  and  beyond  –  A 
blueprint  for  an  integrated  European  energy  network,  adopted  by  the  Commission  on  17th 
November  2010,  identifies  electricity  connections  in  Central  Eastern  and  South  Eastern 
Europe,  as  along  with  the  North-South  gas  corridor  in  Central  Eastern  and  South-Eastern 
Europe,  as  two  of  the  priority  corridors.  These  corridors  are  designed  with  the  need  to 
integrate the Energy Community in mind. Provided the Contracting Parties agree on common 
investment projects, these could be qualified as "projects of European interest". 

Priority should furthermore be given to the completion of regional projects, such as the setting 
up of the Coordinated Auction Office for electricity, the construction of a "Gas Ring" with its 
feeding pipelines, and – possibly – the establishment of a Central Oil Stockholding Entity for 
the Region, which are to become the flagships of the Energy Community. 

The Commission will make sure that EU funding available for energy projects in the Energy 
Community  area  is  optimised  and,  where  appropriate,  increased  if  justified  by  the  regional 
nature of the projects. 

5. 

The way forward 

The Commission considers that the progress made so far and the dynamic nature of the work 
carried out – which is closely following developments in the energy sector at European Union 
level – indicate that the Energy Community is called to extend its existence beyond 2016. 

The  Energy  Community  has  highlighted  the  advantages  for  the  Contracting  Parties  of 
following  a  regional  approach,  compared  with  the  traditional  bilateral  relations  with  the 
European Union. It has proved that, independently of the prospect of future accession to the 
European  Union,  Contracting  Parties  can  already  benefit  in  the  short  term  from  the 
advantages of the EU internal energy market.  

The Energy Community model has proved an efficient framework for cooperation in the field 
of energy with the EU's neighbours, which could possibly be extended to other countries and 
geographical areas.  

Regional cooperation is essential and full integration of the Energy Community into the pan-
European energy market will depend on the political commitment of each of the Contracting 
Parties  and  their  capacity  to  contribute  to  the  establishing  a  regional  market  in  the  Energy 
Community and to making it a success. 

Based  on  the  content  of  this  report,  the  Commission  intends  to  contribute  to  achieving  the 
goals of the Energy Community, as follows: 

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- It will promote changes in the working methods of the institutions and bodies of the Energy 
Community,  including  organisation  of  ad  hoc  meetings  at  Ministerial  level  on  specific 
priorities related to the fulfilment of the objectives of the Energy Community. 

- It will proactively prompt the implementation and effective enforcement of the rules; 

- It will promote the implementation of the Third Internal Energy Market Package and of the 
Directives on Renewables and Energy Efficiency as a means to speed up the full integration 
of  the  Energy  Community  in  the  single  European  energy  market  and  it  will  consider  the 
inclusion of further acquis, in particular to promote the de-carbonisation of the energy sector;  

-  It  will  promote  appropriate  investments  in  the  region  by  means  of  adoption  of  a  coherent 
investment strategy  that takes into consideration  in particular the infrastructure needs of the 
energy  sector,  the  necessity  to  decarbonise  the  energy  supply,  the  impact  of  energy  savings 
and the potential for development of sources of renewable energy, and 

- It will promote the implementation of the Memorandum of Understanding on Social Issues. 

EN 

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