Jelena Zori, Bla Triglav, Luka Vidoni, Sran Vukovi

PERFORMANCE AND CHALLENGES OF SLOVENIAN ENERGY SECTOR

Oblikovno urediti besedilo skladno z navodili!

Introduction

Energy is the essential driving force behind any economy. To ensure a secure, lowcost and sustainable supply of it, a well-developed energy sector is the key. As the EU is becoming more and more integrated, the shortcomings of the current state of the sector have become more noticeable. Heavy reliance on imported energy, monopolistic national energy companies, enormous infrastructure investment needs, increasing energy demand, and climate change due to greenhouse gas emissions are all factors which could have a significant impact on the EU's competitiveness as a global economic force in the future. To combat this, the EU has implemented strong legislation, which aims to eliminate or significantly reduce the potential negative impact of aforementioned issues. Slovenia, as a part of the EU, is bound by the same legislation. Our article primarily aims at providing an evaluation of the performance and competitiveness of the Slovenian energy sector in light of the reforms aiming at establishing the internal EU energy market on the one side, and the economic crisis and sustainability issues on the other. We begin by providing an overview of the EU's energy policy, with a focus on the objectives of competitiveness and sustainability. With the legislation and policy framework providing the background, we analyse the Slovenian energy sector specifically. We begin with an in-depth sector performance overview, continuing with a look at specific parts of production, transmission, distribution and supply activities, and pricing and investment issues. In addition to that, we analyse Slovenia's climate change goals, results and planned investments. In the last part, we summarize the results of our analysis, point out the main challenges and provide suggestions for improving the sectors performance.

EU Energy policy

The EU is facing increasing challenges in its energy sector, with climate change, increasing import dependence and higher energy prices putting the strain on the Union from every side. In terms of climate change, energy accounts for 80% of all greenhouse gas emissions in the EU. With increasing worries of long-term effects of greenhouse gases on the atmosphere, and global initiatives requiring a decrease of the amount of emissions being output by countries, it has proven imperative to tackle the energy sector to achieve these

goals. Energy import dependence also presents a serious issue, with 50% of total EU energy being imported at present, expected to rise to 65% by 2030. With the quickly rising worldwide demand for oil and questionable future supply availability, the EU is too heavily exposed to potentially devastating risks outside of its influence in regards to supply security. The story with gas supply is worryingly similar. Lastly, general energy price volatility with the tendency of rising energy prices adds another negative element to the EU's energy sector mix. Large differences between EU countries in electricity prices reveal significant room for improvement in increasing the efficiency and competitiveness of the internal market (EC, 2010). Due to all of the aforementioned issues, the sector has been the subject of multiple legislation and regulation efforts in the past two decades, with an overreaching long-term strategy drawn together in An Energy Policy for Europe (EC, 2007) and expanded further in 2010 with Energy 2020 (EC, 2010). The main pillars of the aforementioned strategies are competitiveness, sustainability, and security. Our article intends to focus on the former two pillars, namely competitiveness and general performance of the energy sector, and climate change policy as part of sustainability. The security of supply is indirectly addressed through the aforementioned two pillars and is therefore not separately analysed in this article. 2.1 Competitiveness of the EU energy sector

Dominated by national champions, safe from new entrants due to economies of scale and control over the entire value chain, the electricity and gas industry specifically had not been affected much by free market forces throughout its modern history, and developed into an uncompetitive environment, riddled with inefficiencies and deadweight loss. EU has been actively attempting to improve the situation since the middle of the 1990s. In the electricity and gas industry, there were three overreaching goals of EU's efforts, similar to the general energy sector reform goals: increasing the security of electricity and gas supply for the EU, increasing the competition among providers, and achieving environmental goals of the EU. To achieve the second goal related to liberalisation, the EU has implemented three directives for the electricity sector (Directive 96/92/EC, Directive 2003/54/EC and Directive 2009/72/EC) and likewise for the natural gas (Directive 98/30/EC, Directive 2003/55/EC and Directive 2009/73/EC). Dodati plinske direktive med reference! The primary intention of liberalisation was aimed at laying the foundations for increased competition, beginning with unbundling the mostly complete vertical integration of national electricity companies. The electricity generation, transmission, distribution and supply were at the time mostly under control of a single company within each country, which tended to be state-owned. For the transmission and distribution aspect of the industry, this represented the only sensible solution, as the economies of scale prevent any viable competition. However, the generation and supply aspects had the potential to bring significant

benefits to end-users through a more competitive environment. Another goal was to increase cross-border electricity trading to establish an effective internal market, which would eliminate inefficiencies and lower electricity price discrepancies between EU countries. Perhaps the most visible measure was enabling a choice of an electricity supplier for the enduser, aimed at opening up the supply to competitive forces (EC, 2010). Due to the third energy package from 2009 coming into force just recently (March 2011), the preliminary results of these measures are only available for the first two directives. In many aspects, the progress is disappointing. While most countries have successfully implemented some of the measures, the end result is quite underwhelming. Vertical integration remains a problem, and the strongest state-owned companies have even strengthened their positions, by going for horizontal integration. The Hirschman-Herfindal index which is a measure of market concentration (higher index meaning low level of competition), is moderate in seven countries in the EU, and high or extremely high in the remainder (EC, 2010). In terms of cross-border electricity trading, the development was also below expectations, with trade of this type representing 8 % of total consumption in 2000, and climbing only to 10.7 % in 2004. Prices between some countries still vary heavily, up to a multiple of two, even when adjusting for purchasing power standard (EC, 2010). Instead of creating a large internal market, there has rather been a development of several regional markets. It still remains to be seen whether regional markets will ultimately converge to the internal EU energy market. In terms of end-users switching electricity suppliers, the largest percentage of switching occurred among the heavy industrial users, as they have the most to gain, with seven countries achieving rates of above 50 %. Among the light business users and households, the rates were significantly lower, with most countries achieving less than a 5 % switch rate (EC, 2006). One of the main goals of the reforms was a lower price for electricity throughout the Union, and the EU was successful in this up until 2005, with prices lower for roughly 10 % compared to the 1997 baseline. However, from 2005 to 2009, there was a significant rise in the electricity price, partly due to the CO2 trading scheme coming into force and partly due to rising prices of gas and oil (Hrovatin & Zori, 2011). 2.2 Sustainability in the EU

Sustainability plays a key role in the Energy 2020 strategy, with the three-pronged goal: a 20% reduction in greenhouse gas emissions, a 20% increase in energy efficiency, and a 20% share of renewable energy in final energy use by 2020. These objectives are meant to lead the EU into a sustainable energy future, and provide a solid foundation to reach its longterm decarbonisation commitment of 80-95% cuts in emissions by 2050 (EC, 2010). However, the three objectives had already been defined in An Energy Policy for Europe (EC, 2007) and have been through various directives targeted even earlier. Energy 2020 is largely aimed at focusing the efforts, as some of the results so far have been underwhelming. Greenhouse gas emission reductions are on track at the EU level, though this 3

is in part due to the economic crisis, and with significant variation among member countries, with certain countries achieving their goals and more, while others have not been able to reach the planned reductions. The uptake in renewable energy on the other hand is too slow, with the EU failing to reach its 2010 target (dodati target!). Similarly, the energy efficiency targets seem far out of reach at this point in time. The National Energy Efficiency Action Plans, prepared by EU members (as dictated by Directive 2006/32/EC), have mostly turned out to be below the expected standard, and not ambitious enough to achieve the desired goals. In an assessment of the current state of energy efficiency policies, the European Commission found that there is still economic potential in each sector (from energy transformation to energy use), though insufficient political commitment and underdeveloped markets for energy efficiency improvements, low awareness of the possibilities and insufficient incentives for uptake of energy efficiency improvements at demand and supply side are holding back the rate of progress (EC, 2011).

Energy sector in Slovenia

We now take a closer look at the situation in Slovenian energy sector. Financial crisis which has severely impacted Slovenian economy showed its influence in the energy sector as well, although at a much lesser extent. In Table 1 below the key indicators of the whole industry are gathered in an attempt to get an insight into an average company performance in this sector. The data below provides an aggregated insight into the industries of electricity and gas production and distribution as well as steam power generated means of energy.
Table 1: Energy industry values and indicators

Total sales (in mil EUR) EBIT (in mil EUR) Net profit (in mil EUR) Value added per employee (in EUR) Return on assets Return on equity Average wage (in EUR) Number of workers Sales margin Debt / assets ratio

2007 2.302 98,65 109,02 115.215,89 / / 2.016,78 7.563 17,11% 27%

2008 2.743 140,60 104,89 123.892,44 2,42% 16,58% 2.214,22 7.542 17,44% 29%

2009 3.608 184,73 133,98 158.904,00 2,07% 0,17% 2.223,67 7.745 17,78% 29%

2010 4.005 203,09 173,50 138.235,78 1,82% 1,44% 2.177,33 7.600 17,00% 29%

Source: Gvin, 2011

Curiously enough, total sales have been on the rise since 2007, while the rest of the economy has suffered the biggest blow in the last two decades. The sales and net profit have both experienced a solid and consistent yearly growth, amounting to on average 20% and 27% respectively in years between 2007 and 2010. EBIT have been steadily rising despite of the growing labour costs. Even during the downturn, energy sector has still been recruiting new workers. We were only able to witness cutbacks in the workforce in 2010 by 1% compared with 2009. In that same period value added per employee has increased as well, growing on average 6% a year. Industrys return on equity has been in the years since the recession deteriorating sharply. From 2008 to 2010 it has fallen on average by 9% year on year. It ended up at around 1,4% which is well bellow the industrys average in Europe which is 16,22% (Infinancials, 2011). Return on assets demonstrate more stability, but are also found to be well below the EU industrys average. The levels of debt-to-assets ratio have risen slightly in 2008 compared to 2007 by only 2 percentage points. In the years till 2010 the ratio remained constant at 27%. Energy sectors share of annual GDP is somewhat above 2 %. Table 2 reveals that energy sectors contribution of to economic growth has been about 0.1 percentage points, as well as its share to the contraction of the whole economy in 2009 (SORS, 2011).
Table 2: Energy sector's share of GDP and GDP growth

Energy sector 2005 2006 2007 2008 2009 2010 Value added in current prices (mil 625. 685. 717. 795. 801. 832.3 EUR) 4 8 1 1 1 Yearly change in value added (in 4.1 5.3 0.7 3.1 -5.8 3.6 %, constant prices) Share of GDP (in %) 2.2 2.2 2.1 2.1 2.3 2.3 Contribution to the GDP growth 0.1 0.1 0.0 0.1 -0.1 0.1 (in percentage points)
Source: SORS, 2011

We observed the trends of the key financial indicators for the whole energy sector industry to determine to what a degree, if at all, Slovene energy sector is recession proof. Although the assets have been rising steadily the share of GDP represented by the energy sector has been very stable. It has high profit margins and manageable levels of debt. Observing the change in value added we can conclude that Slovene energy sector is very robust and has contracted sharply in 2009 due to the recession but then bounced back again in 2010. Since Slovenia is fully dependent on imports of oil and natural gas, the remaining of this section focuses on an in-depth analysis of electricity sector performance where all activities along the value chain are present. Furthermore, due to the dependence on gas imports and very low competition in the upstream market, the electricity market reforms progressed much faster than reforms of the natural gas market. Different approaches are employed in order to evaluate performance of each activity as electricity generation and supply are competitive activities, while transmission and distribution remain regulated due to

their natural monopoly character. Occasionally, the performance of natural gas companies will also be examined. 3.1 Performance of energy companies

Slovenian electricity sector is horizontally and vertically disintegrated. In 2010 a total of 15,449 GWh of electricity was generated in Slovenia. The structure of production sources in provided in Figure 1, where in fact half of the electricity generated in nuclear power plant belongs to Croatia due to the joint ownership with Slovenia. Total electricity consumption in Slovenia amounted to 12,158 GWh of electricity1 (Energy Agency, 2010). As opposed to 2009, Slovenia again became a net importer of electricity, with net imports amounting to 540 GWh. This change is not because of lack of production in Slovenia but due to larger quantities of cheaper electricity available abroad. Also large amounts of available cross-border transmission capacities (CBTC) for import from Austria and Germany contributed to this change (Energy Agency, 2010). 3.1.1 Electricity generation and the wholesale market

In 2010, nine power plants with a capacity over 10 MW were active in electricity generation. Production companies are operating within the two formed groups, i.e. energy pillars in the wholesale market, namely Holding Slovenske elektrarne d.o.o. (HSE) and GEN energija d.o.o. (GEN energija). Generation companies are fully owned by the state, except for the Krko Nuclear Power Plant, where the state holds a 50 percent share. There have not been any notable changes in the wholesale market in comparison with previous years; position of the group HSE with a market share of 65 percent remained dominant, together with Gen energija maintained an almost 90 percent market share. Within the production of electricity, high market concentration is present (Energy Agency, 2010).
Figure 1: Structure of the production sources for electricity in Slovenia in 2010

Source: Energy Agency, 2011

3.1.2

Transmission and distribution of electricity

The regulated activities of transmission and distribution are mandatory national public services carried out by the two electricity system operators owned by the state. Elektro
1

Excluding losses in the network.

Slovenija, d.o.o. (ELES), provides the public service of the transmission system operation as its single service and is a sole owner of the electricity transmission network. In gas sector Geoplin d.o.o. is the owner of transmission network and the only transmission system operator in Slovenia. SODO, d.o.o. provides the service of the distribution system operator for electricity market as its core activity. Nevertheless, SODO contracts out services relating to distribution network to five electricity distribution companies that own the distribution infrastructure. All five distribution companies are majority state owned. Dodati tevilo podjetij v distribuciji zemeljskega plina in lastnitvo (17 podjetij - prevladujejo javna podjetja, nekaj tudi zasebnih). Due to the natural monopoly characteristics of transmission and distribution activities, competition is not feasible since new entries would lead to the problem of excessive entry and needless duplication of fixed costs.2 Since distribution utilities operate as local monopolies, regulation of network access charges is needed to prevent the abuse of monopoly power and to provide incentives for efficient operation of network utilities. However, due to the imperfect information available to the regulator there are some problems with incentive-based price regulation since the regulator does not know a firms true costs. When setting the efficiency requirements, the regulator can use some form of cost-based benchmarking. Frontier-based benchmarking methods identify or estimate the efficient performance frontier from best practice in a sample of firms. The efficient frontier is then used as a benchmark against which the relative performance of all firms is measured. The main frontier benchmarking methods are Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA). DEA is a non-parametric (linear programming) approach, while SFA are parametric (statistical) techniques.3 Table 5 reports summary results on cost efficiency scores for Slovenian electricity and gas distribution utilities resulting from frontier benchmarking methods. The utility is said to be cost efficient if it given input prices and production technology produces any output vector with minimum required cost.
Table 3: Estimated cost efficiency of Slovenian electricity and gas distribution companies

Study Filippini et al. (2004) Hrovatin et al. (2005) Zori et al. (2009)

Companies Electricity distribution Electricity distribution Gas distribution

Country SLO SLO NL UK SLO NL UK

Period 19912000 2003 2003

Method SFA DEA (VRS)4 DEA (VRS)

Cost efficiency score Average Min Max 0.741 0.444 0.962 0.577 0.677 0.837 0.480 0.770 0.969 0.342 0.245 0.605 0.127 0.435 0.885 1.000 1.000 1.000 1.000 1.000 1.000

Filippini et al. (2004) confirmed the presence of economies of scale in Slovenian electricity distribution companies with most utilities not achieving the minimum efficient scale. Consequently, mergers of small utilities are suggested. 3 For details see, for example, Coelli, Rao and Battese (1998). 4 VRS denotes variable returns to scale, indicating that each utility is compared to other utilities of similar size.

By applying SFA method Filippini et al. (2004) estimated average cost efficiency of Slovenian electricity distribution to be 74 percent, implying that costs of distribution utilities could be reduced by 26 percent on average in order to reach the efficiency frontier. In the case of small countries there are typically not many firms operating in each sector and therefore international benchmarking appears to be particularly useful. In addition, by performing international comparisons efficiency is measured relative to international best practice. However, such an approach also raises some difficulties related to comparability and availability of data (Jamasb and Pollitt, 2001). The results from international benchmarking of electricity and gas distribution utilities based on the DEA reported in Table 5 reveal that Slovenian utilities are lagging behind the UK and Dutch utilities. In both samples UK utilities are found to be the most efficient on average. Average cost efficiency scores of Slovenian electricity and gas distribution utilities are found to be 58 and 48 percent, respectively. This indicates considerable potential for cost reduction in both sectors in order to catch up with the most developed countries. The incentive-based price-cap regulation introduced in Slovenia in 2003 could help close this efficiency gap over time. 3.1.3 Electricity supply and the retail market

The retail market has been quite active in recent years with some new suppliers entering the market and increased supplier switching. In 2010 sixteen suppliers were active in the retail electricity market. From all 920,911 end electricity customers connected to distribution network in 2010, 89 percent of them were household customers and 11 percent were business customers. In addition, seven big players were connected to the transmission network Table 3 provides market shares of Slovenian electricity suppliers in the 2005-2010 period. Elektro Ljubljana maintained the largest market share in 2010, but it for the first time throughout the period decreased its market share by almost 3 percentage points compared to year 2009. It can also be noted that the new entrant to the market, GEN-I, was rapidly gaining its market share from 2007-2010 and reached the second position with 20-percent market share in 2010. On the contrary, HSE has been losing its market share in the observed period, while other suppliers essentially managed to maintain their market shares.

Table 4: Market shares of electricity suppliers from 2005 to 2010

Companies HSE, d. o. o. Elektro Ljubljana, d. d. Elektro Maribor, d. d. Elektro Primorska, d. d. Elektro Celje, d. d. Elektro Gorenjska, d. d. Others GEN-I, d. o. o. 2005 34% 24% 13% 10% 9% 7% 3% / Market share in percentage by years 2006 2007 2008 2009 32% 22% 17% 8% 24% 25% 27% 29% 15% 17% 16% 15% 9% 10% 10% 11% 9% 13% 13% 13% 7% 7% 8% 8% 4% 2% 1% 2% / 4% 8% 14% 2010 9% 26% 15% 10% 11% 8% 1% 20%

Source: Energy Agency, 2005-2011

Important change happened in electricity supply to the customers with the largest consumption (over 2 GWh annually) in 2010. The largest market share had GEN-I, d.o.o, with almost 35-percent market share and took the first place. Newcomer in electricity supply, Petrol Energetika, d.o.o. largely increased its position in supplying electricity to these customers reaching almost 5-percent market share. During 2010, a total of 17,782 customers switched supplier, which was the record number of switches since the beginning of the opening of the Slovenian electricity market (Figure 2).
Figure 2: Numbers of total supplier switches for period 20022010

Source: Energy Agency, 2010

Zemeljski plin? 3.1.4 Electricity prices for household and industrial customers Skrajati!

The suppliers prepare their offers for the household and industrial customers similarly in the form of various packages, whose prices of supplied electricity include, in addition to the price for electricity, also the following: use-of-network charges, contributions supporting programs to increase the efficiency of electricity use, electricity generation from domestic sources, high efficiency generation and generation from renewables, the excise duty on electricity and the value-added tax.

The final electricity price for a typical household customer with consumption 3500 kWh per year was, between 2003 and the end of 2008, increasing with an average annual growth of 3.1 percent. Until 1 July 2007, the electricity price was being set by the government. During that time, the selling price, which included the use-of-network price, did not entirely cover the costs of energy prices in the wholesale market. Therefore, after the market opening in 2007, the price for all customers increased by almost 19% percent. Between 2009 and 2010, the final price for household customers increased, despite lower energy prices and relatively stable price for the use of network, because of the contributions that are intended to support the production from domestic sources, in cogeneration and from renewables, and for supporting programs to increase the efficiency of electricity use. In 2010, final electricity price for a typical household customer was 138.61 EUR/MWh (1,6 percent more than in 2009). Households paid 37.3 percent of the final price for the use of network, 38.8 percent for energy used, 6.5 percent for contributions, 17.4 percent for VAT and excise duty (add reference).

The average retail price of electricity for households in Slovenia in the second half of 2010 amounted to 142.3 EUR/MWh, and in comparison with the first half of 2010 increased by almost 2.5%. Namely, in August 2010 the excise duty increased from 1 EUR/MWh to 3.05 EUR/MWh, which caused higher average retail price. Final price for household customers with an annual consumption from 2500 to 5000 kWh amounted to 84% of average price in the EU, and for industry 97% of average price in the EU-27. Figure 3 shows comparison of the final electricity prices for typical industrial consumers (with an annual consumption of 500 to 2,500 MWh) in Slovenia and the EU-27 countries from 2005 till 2010. The comparison shows that final electricity prices were lower in Slovenia than in EU-27 area and did not change very much due to economic policy, which maintained the level of inflation to support fast accession to euro area in 2007 and reach Maastricht criteria. After entering euro zone, a price for electricity rose sharply in Slovenia, and already in 2008 price for electricity without taxes was higher than in EU-27. The final price of electricity for typical industrial customers in Slovenia was at the end of the year very much the same as in 2009 (Energy Agency, 2005-2010). V Sliko3 dodati gospodinjstva.

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Figure 3: Trends of the total electricity price for typical industrial consumers (with an annual consumption of 500 to 2,500 MWh) in EU-27 and Slovenia from 2005-2010

Source: Eurostat, 2011

Figure 4 shows structure of final electricity price for typical industrial consumers by VAT and contributions in percentage from 2005-2010. We obverse overall trend in EU-27 and also in Slovenia that share of electricity price which exclude all the taxes is decreasing due to increasing share of contributions and VAT. Slovenia introduced charging contributions on electricity consumption in 2008, which increased and reached 6.4 percent share of final electricity price with tax in 2010. Electricity price excluding all taxes present 72.5 percent share of final electricity price with taxes in EU-27. Slovenia's share of electricity price without taxes is 4.4 percentage points higher than in EU-27. We conclude that Slovenian industrial consumers pay on average higher price for the electricity consumed than in EU-27, which means that electricity is on average more expensive Slovenia than in EU-27, but the total electricity price paid including all taxes is lower than in EU-27 (Figure 4), due to lower share of contributions and VAT in total electricity price (add reference).

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Figure 4: Structure and share of final electricity price for typical industrial consumers by VAT and contributions from 2005-2010 in EU-27 and Slovenia (in percentage)

Source: Eurostat, 2011

Zemeljski plin? 3.1.5 Investments in electricity infrastructure

Within the field of electricity production, major investments of the HSE Group in year 2010 were: Pumped-storage power plant (PSP) Ave, Hydropower plants on the middle and lower Sava River (Botanj, Blanca, Krko, Breice and Mokrice), Replacement Unit 6 of Termoelektrarna otanj d.o.o. Thermal power-plant otanj and investment in Pumpedstorage power plant Kozjak. Nuclear power-plant Krko made major investments in technological upgrading, while some maintenance expenses represent minor investments (HSE, 2011). Pogledati v poroila HSE, NEK (Gen energija) in nov NEP, kaj so glavne nartovane investicije v prihodnje in koliken je okviren znesek investicij! System operators of the transmission and the distribution network are obliged to maintain and develop the network system, provide long-term network capacities and to ensure the security of electricity supply. The legislation expects the system operators to continually, considerately and effectively invest in the development and restructuring of the electricity network. In the action development plans for 20092018, the expected total investments in the electricity infrastructure for the transmission and distribution amount to 2,401 million euros, of which 767 million euros are allocated for the transmission network, and 1,634 million euros are allocated for the distribution network. However, Table 4 indicates that carried out investments are significantly lagging behind the planned investments needed for modernization and upgrading the existing facilities as well as for building new infrastructure.

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Table 5: Structure and share of final electricity price for typical industrial consumers by VAT and contributions from 2005-2010 in EU-27 and Slovenia (in percentage)

Network

2009 Realization 129.4 49.7 179.1

Regulatory framework 104.4 44.6 149.0

Total distribution Transmission (ELES) Total investments

2010 Development plan (2009-2018, annual amounts) 178.0 59.0 237.0

Realization 99.4 45.4 144.8

Index Realization 2010/2009 76.8 91.4 80.9

Source: Energy Agency, 2010; ELES, 2011

3.2 3.2.1

Achieving sustainability goals Promotion of renewable energy sources

The climate-energy package the EU set new targets for promoting renewable energy sources. Slovenia's goal for 2020 is 25-percent share of renewables in total energy consumption and at least 10-percent share of renewables in transport. As of 2005 the share of renewables in total energy consumption was only 16,2% (Ministrstvo za gospodarstvo, 2011). In accordance with Directive 2009/28/EC of the measures found in Action plan for renewable sources of energy (AN OVE, 2010) the targets for the share of energy from renewable sources in 2020 are set for the heating and cooling sector, electricity sector and traffic sector. In the reference year 2005 28.5% of the electricity produced came from renewables and in 2008 29.5%. The improvement is partly due to the increase of electricity production from hydropower and biomass as well as from reduction in electricity consumption. Despite the significantly higher production of electricity from renewable energy sources in the recent years, particularly on account of favourable hydrology, and increased exploitation of biomass Slovenia has failed to meet its 2010 target share of 39.3% of renewables in final energy consumption (in line with Directive 2001/77/EC). Slovenias share in year 2010 was 34% and has fallen by 2 percentage points from the year 2009 (SORS, 2011). Increasing this share will require both increased production of electricity from renewable energy sources as well as managing the growth of electricity consumption (Ministrstvo za gospodarstvo, 2011). The existing and planned actions are not only ensuring that a certain percentage of renewable electricity in gross final consumption by the year 2020. They are also setting out the terms and conditions of the investments needed to see the plan trough. Promoting renewable electricity generation currently requires subsidies for mature technologies until external costs are not fully internalized and for new technologies that are seeking funds while under development. It also creates a favourable environment for investments that are in the

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short term (construction and installation) as well as in the long-term (operation and maintenance) providing new jobs (Ministrstvo za gospodarstvo, 2011). Expected use of renewable energy presented in the Table 6 represents the portion of energy in 2020 also from the facilities that are yet to be constructed between 2010 and 2020. Nearly half of the energy will be produced by large hydroelectric power plants. Meeting this goal represents a half of all the estimated investments needed. If we look at the share of the planned investments we see that the biggest share of subsidies for producing electricity from renewable sources of energy is meant to be going in support of biomass production in expectation of the highest future job growth. According to the ANOVE there is a big potential for jobs in managing and maintaining this branch of the industry as well as preparing the fuel itself. Over the years an estimate of 339 work places are needed to maintain and run electric energy. In the case of heating and cooling sector the number needed would be 246. In the second place there is solar energy with photovoltaics which is planned to receive one quarter of all the funds while representing 7.7% of all electricity production. This is due to the fact that this industry is having a high employment potential.
Table 6: Estimated costs and benefits of the efforts to support renewable sources of energy

Increase of renewables consumption 2010 - 2020 [ktoe] Action/ Technology Electric energy Heating and cooling Transport 150,13 189 192,21

Costs of support scheme [mil EUR]

Investments 2010 - 2020 [mil EUR]

Reduction of greenhouse gases (2020) [ktCO2/year]

28% 456,06 36% 442,06

51% 49%

1.313,60 1.801,77

42% 58%

607,62 435,86 592,17

37% 27% 36%

/ / / 36% / Source: Akcijski nart za obnovljive vire energije za obdobje 2010 2020

3.2.2

Energy efficiency

Slovenia is also bound by Directive 2006/32/ES to achieve an increase in energy efficiency, with a goal of a 9 % decrease (4261 GWh) in final energy consumption for the period of 2008-2016. The plan to achieve this goal had been laid out in the first National Energy Efficiency Action plan (Vlada Republike Slovenije, 2008). Energy savings were expected through sector-specific instruments (households, tertiary sector, industry, transport), horizontal instruments and multi-sector instruments, which would enable the enactment of energy saving measures. The expected savings and investments needed are presented below in Table 7.
Table 7: Expected final energy savings and needed investments by sector

Sector

Expected final energy savings (GWh) 1.165

Needed investments for the 2008-2016 period (mil. EUR) 120

Reduction of greenhouse gases

Households

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Tertiary sector Industry Transport Multi-sector measures Horizontal measures Organization execution Total

804 840 721 700 32 / 4.262

109 15 39 38 31 28 380

Source: National Energy Efficiency Action Plan, 2008 The results of the first action plan were due in mid-2011, however Slovenia has not presented them to the EU. The overall tone of the European Commision on the energy efficiency progress of member countries is negative, and combined with Slovenias failure to provide information on its measures, we can only suspect the reason is most likely underwhelming execution of the proposed measures, and a failure to reach the set goals.

Conclusions

Taking into account our analysis, we can summarize challenges the Slovenian energy sector is facing. Starting with the overall sector, data shows an increasing amount of debt pouring in every year, with declining returns on assets (ROA) and returns on equity (ROE), far below the average levels for the sector on the EU level. While profits are rising, the heavy debt growth would suggest the pain is being delayed into the future, and the low ROA and ROE ratios suggest there are significant inefficiencies in terms of asset and capital use in the sector. I would put stress on recession resistance and low performance. One of the reasons for low performance can also be found in prevailing government ownership. Mention market concentration in production, which is to some extent expected due to the small size of the market. To some extent, concentration can be resolved by building new generation capacities and cross-border transmission capacities. Stress positive developments in terms of competition in the retail market. Then mention inefficiency of regulated companies. Inefficiencies are significant in the internal electricity and gas markets as well. Studies have shown Slovenia scores quite poorly in cost efficiency scores, with 58% for electricity distribution, and 46% for gas distribution, so there is room for improvement in terms of costs. It is also a side-effect of the EU push for increasing competitiveness by breaking up big energy companies. Slovenias small market size means that it is difficult or even unattainable to reap economies of scale for several companies at once. Numerous gas distributors receive their supply from the same source for the same price and under the same conditions, and are therefore merely doubling the necessary staff and costs by not consolidating among themselves. Electricity distributors are facing a similar issue, though GEN-I has proven that significant benefits for consumers are still attainable even with the inefficiencies in place.

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Some of these inefficiencies are potentially due to government ownership, and could be mitigated by further privatisation. GEN-I is a positive example, as it has leaped over incumbents with a more market oriented approach. Infrastructure investments are another heavy challenge. We have noted the increase in debt for the energy sector, and the amount of investments that will be required in the future will only serve to further indebt the sector. There is no easy solution for this, as it is a problem that the EU as a whole is facing. The sector will most likely have to enact price increases, which will bring further pain to an already strained economy. In terms of climate change, Slovenia has failed to achieve any of its goals. Renewable energy goals for 2010 have not been reached, especially renewable usage in the transport sector is below expectations, and has been a black mark on Slovenias renewable goals. Transport greenhouse gas emissions have been rising, and the implementation of 10 of the measures to cut emissions in the sector has been deemed unsatisfactory by Slovenias government (Vlada Republike Slovenije, 2009). Similarly, Slovenia has not been successful with its energy efficiency goals. Renewable energy as well as energy efficiency policy is not ambitious enough, and especially severly underinvested in. Strained public finances are a part of this problem, but efforts must be made to increase activity in these fields.

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