In their Sofia Declaration on the Green Agenda for the Western Balkans in November 2020, leaders from the region committed to greening their energy mix and achieving carbon neutrality by 2050 along with the European Union. For 2030, the region aims to achieve 42.7% renewables on average in gross final energy consumption, up from 32.8% today and in line with the EU’s goal of 42.5%.
Policies to meet these targets will bring a number of benefits for the region. Reducing energy intensity and reliance on fossil fuels will contribute to reducing the region’s carbon footprint and improving air quality. New economic opportunities will also arise from the expansion of renewable energy generation, including solar and wind power, as coal-fired electricity production is phased out. This report identifies the policies needed to reap these benefits, drawing on the OECD’s expertise and our unique Inventory of Energy Subsidies and Support Measures in the Western Balkans to provide a comprehensive picture of explicit and implicit subsidies to energy in the region.
Our analysis shows that current support mechanisms limit competition and create financial risks in the energy system. Across the region, regulation and state ownership keep retail energy prices low for households and certain firms. Between 2018 and 2023, the economies of the region provided consumers with EUR 19 billion in subsidised electricity and allocated EUR 5.8 billion in fiscal transfers and credit to support the energy sector. Most of this support went to fossil fuels and to state-owned enterprises, limiting the scope for competition in energy markets.
To support more efficient and sustainable energy systems, including the development of new renewable energy options while providing targeted support to vulnerable households, this report provides a number of recommendations grounded in OECD best practice, including:
Reforming the financing of the energy sector in the Western Balkans by allowing prices to reflect market conditions. This would open the way to energy market competition from different sources and allow funds to be deployed towards the transition. For example, phasing out direct subsidies to fossil fuels would have freed up EUR 510 million annually for green energy investments in the period 2018-23.
Adapting regulatory frameworks to support the development of renewable energy, and upgrading electricity networks to handle larger flows of intermittent and distributed production from renewable sources. Governance in state-owned enterprises could be strengthened and policies should ensure a level playing field in the energy sector.
Ongoing efforts to protect vulnerable workers and households should also be enhanced, with targeting based on well-defined measures of energy poverty to ensure cost effectiveness and efficiency. Scenarios in this report show that the resource gains from energy sector reform would generate more than sufficient funds to provide targeted support to vulnerable households. Social protection systems need to be enhanced to deliver such targeted support effectively. In parallel, regions that will be negatively impacted by the energy transition in the short term, such as coal-producing communities, will require tailored measures including reskilling and investments in local economic development to ensure everyone has the best possible opportunity to benefit from and participate in the green transition. Enhancing gender equality will also be key to ensure equality of opportunity and broad workforce participation in the transition.
This report Energy Prices and Subsidies in the Western Balkans: Reforms for a Fair and Green Future can provide policy makers from the Western Balkans region with a useful roadmap towards a policy reform agenda that fosters strong, sustainable and inclusive economic growth.
Mathias Cormann
Secretary-General
OECD