Albania’s hydropower positions it as a regional leader in green electricity. Yet the energy sector is vulnerable to climate and water risks and costly in terms of subsidies and price controls. These benefit better off households the most, while hindering efficiency, distorting competition, and straining public finances. This chapter provides an inventory off such measures and develops scenarios to analyse the impacts of energy market reform on prices, households, and the economy. It also analyses social transfers and how existing programmes could be enhanced to mitigate the negative social consequences of reform. Drawing on the analytical results and on peer-learning exchange with key stakeholders in Albania, the chapter outlines four key policy recommendations for Albania’s energy sector reform: enabling market-based pricing, easing the sector’s fiscal burden, protecting vulnerable consumers, and advancing the development of Albania’s electricity market.
Energy Prices and Subsidies in the Western Balkans
Abstract
Strengthening the resilience of the energy sector is a key priority for Albania and for the Western Balkans broadly. Albania’s energy mix relies heavily on hydropower, which makes it a leader in the region in terms of green electricity production. Yet, dependence on water levels and rainfall makes Albania's energy sector vulnerable to climate change and its impact on water levels. Strengthening resilience would require investments and diversification of renewable energy sources.
The financing of the energy sector in Albania offers important levers for reform. Currently, low prices and costly subsidies prevent fair competition and efficiency improvements in the energy sector, while consuming significant public resources. Addressing subsidies and regulation can lead to a more competitive energy market that provides the right signals for energy production and consumption. Such measures can also encourage diversification of energy production through new investments and improvements in energy efficiency. Reforming how Albania supports its energy sector can also release important financial resources that could be used to meet social and other objectives. By freeing up public resources, the government can provide more effective support for the most vulnerable populations through social protection schemes and efforts for their social and economic integration.
To balance the fiscal, economic and social impacts in Albania, this report makes the case for moving towards fewer energy subsidies and less price regulation, accompanied by social support for those who would be affected. Application of the OECD Inventory of Energy Subsidies and Support Measures in Albania and other Western Balkan economies is the basis for such reform. Used in combination with household-level and macro-economic data, this chapter develops reform scenarios with a focus on understanding related impacts on energy prices, household budgets, employment, fiscal space and gender. It presents complementary energy market reform scenarios and findings from macro- and micro-economic modelling.
Inventory of energy subsidies and support measures for Albania
Current support to the energy system in Albania is costly and creates the wrong incentives, especially in times of crisis. Four key aspects are noted over the period 2018 to 2023:
Using price regulation to keep energy prices low resulted in EUR 2.4 billion of induced support to consumers, with EUR 2 billion during the energy crisis (2021-23).
To support this price model, Albania’s energy sector received substantial financial support of around EUR 1 billion, split as EUR 577 million in fiscal support and EUR 456 million in credit support.
Albania provided significant fiscal support to fossil fuels, amounting to EUR 170.2 million.
Feed-in tariffs were effective in providing reliable revenue streams when domestic energy tariffs were higher than market tariffs, allowing for long-term project financing of key renewable energy production projects. When the energy crisis drove up market prices, selling at fixed prices resulted in an opportunity cost for renewable energy producers of around EUR 530.8 million in 2021-23.
Scenarios for inclusive energy sector finance reform in Albania
Reforming the electricity market in Albania to reduce the support required by the sector can generate significant fiscal savings and be progressive. Current price regulation generates a regressive transfer of value to households. Moreover, half of the transfer is at present directed to the 40% of better-off households. In addition, electricity sector firms received EUR 49.1 million in fiscal transfers and credit support per year during 2018-23, largely to support the low level of regulated prices. Under market reform, most of the gains would be channelled towards electricity producers, although regulation could be adapted to ensure that additional liquidity also finances necessary investments in transmission and distribution systems, and to lower the burden of debt on firms in the sector.
Electricity sector reform can generate fiscal savings sufficient to mitigate the economic and social impacts of price increases, if targeted transfers are made more efficient. To close the gap between domestic prices in Albania and international market prices, regulated household tariffs would need to increase between 29% in a conservative scenario and 114% in an upper bound scenario. In the conservative scenario, according to the macro-economic model, the shift in prices would cause an economic contraction of 0.36% if the price increase is distributed evenly between households and firms, while generating over EUR 130 million for the energy sector. It would also reverse the transfer to consumers currently induced by price regulation, requiring that compensatory measures be put in place. Under the current institutional context, compensating the poor for the impacts of such price increases would entail costs of about EUR 28 million annually; if transfers were perfectly targeted, this could be slashed to just EUR 12 million.
Removing cross-subsidies in retail markets would increase efficiency and facilitate reform. Cross subsidies exist when prices for a consumer segment (typically households) are artificially low thanks to profits made on other customers (typically firms). Cross-subsidies trigger efficiency losses by increasing input prices for small and medium-sized enterprises (SMEs). Combining the removal of cross-subsidies with a conservative price increase would help to increase gains for the sector while also limiting the economic contraction. Reducing the gap between regulated prices and market prices by a third while closing the gap between household and regulated firm prices is estimated to lead to a small economic expansion (0.15% of GDP) and generate fiscal savings by eliminating the need to support the industry. The additional increase in household prices in this scenario would require higher compensation – up to EUR 45 million under the existing social protection system – which could be financed through additional income generated in the electricity sector.
Policy recommendations
Albania should take measures to gradually allow markets to determine energy prices in both wholesale and retail markets. Continuing the process of deregulation of electricity markets for non-household customers is a good first step. In line with Albania’s ambitions for a competitive, market-based electricity sector, and with its international commitments to implement the EU acquis, this should be completed through a realistic plan to deregulate markets for all business customers. Prices for household customers should be allowed to reflect market conditions. At a minimum, household prices should cover the costs of suppliers without the need for cross-subsidies. Subsequently, allowing household prices to increase further to reflect supply and demand would generate necessary income for the sector to fund much-needed investment in production and in the grid. Price adjustments can be stimulated by lowering the burden of the public service obligation imposed on electricity producers, thereby giving the market a greater role in allocation and allowing a smoothed passthrough of market signals to retail prices.
Direct support for the energy sector should be significantly scaled back as part of the reform process. Price reform would help the energy sector in Albania achieve better performance. However, it is also necessary to address the significant levels of inter-company debt and debt with the administration across the electricity sector. This could be done through a combination of debt consolidation and new capital injections, coupled with improvements in corporate governance and oversight of state-owned enterprises (SOEs) in the sector.
Opportunity exists to adapt the social protection system to better accompany energy sector reform, notably by targeting those most in need and designing new interventions aimed at mitigating the risk of energy poverty. Existing direct subsidies to energy consumption by household in Albania are not targeted to those who need them most. While less distortive than direct price regulation as means to deliver targeted support, such subsidies remain “second-best” to social assistance programmes. Increased efficiency in targeting – by accounting for the interaction of gender, location and other vulnerabilities with decision making on energy consumption in households – would help mitigate the negative fallout of reform more cost-efficiently while also ensuring that no one is left behind.
Enabling Albania’s future electricity market will require a number of additional enabling regulatory actions and investments to be successful. The adjustment of the legal and regulatory framework stands out among the priorities, especially with the implementation of the Energy Integration Package and the necessary steps to foster integration with EU electricity markets. In addition, investments will be needed to prepare the electricity grid for the addition of sizeable intermittent RES capacity which will involve upgrading ageing infrastructure and optimising the grid through smart metering and advanced technologies. Energy storage systems can play a particularly important role in the process of RES integration. Their inclusion requires both technical analyses and regulatory readiness.
How to read this chapter
This chapter is structured into four sections. The chapter first analyses public support to Albania’s energy sector using the Inventory of Energy Subsidies and Support Measures for the Western Balkans. It goes on to analyse the distributional impact of keeping electricity prices below their market value and compares the value it delivers to social protection programmes. The third section develops reform scenarios, assessing the potential impact of energy reform on energy prices, household budgets, employment, and fiscal space. The final section presents key policy recommendations for energy sector reform, based on the findings and outcomes of the peer-learning workshop held in Albania.
To provide a basis for comprehensive energy sector reforms in Albania and across the Western Balkans, the OECD Development Centre has developed an inventory of energy subsidies and support measures. The inventory aims to present evidence on the types and sizes of energy subsidies and support measures currently in place. In turn, it intends to raise awareness among policy makers about the potential impacts of such subsidies and support measures. This has been done, using an internationally recognised methodology, by developing consistent and comprehensive descriptions of such schemes and providing robust estimates of their values. This systematic overview is largely based on the OECD Inventory of Support Measures for Fossil Fuels (OECD, 2024[1]). Having an inventory of energy subsidies can also be a basis for reporting on Sustainable Development Goal (SDG) Indicator 12.c.1, “Amount of fossil-fuel subsidies per unit of GDP”, which sets a target to rationalise inefficient fossil fuel subsidies that encourage wasteful consumption.
Induced support to the Albanian energy sector through prices
Induced support for consumers
In Albania, the supply of electricity to the wholesale energy market at regulated tariffs below market prices resulted in induced support to consumers of about EUR 2.4 billion in 2018-23. This amount is calculated as the difference between market prices (approximated by prices on the Hungarian Power Exchange [HUPX]) and regulated prices (Figure 7.1 – Panel A).
Below-market supply of electricity to the regulated 0.4 kV customers was the main induced support scheme in Albania. The supply of electricity from the Albanian state-owned power utility company (Korporata Elektroenergjitike Shqiptare [KESH]) to the universal service supplier (USS) for regulated tariff customers generated EUR 2.2 billion of the induced support to consumers in 2018‑23 (Figure 7.1 – Panel B). The approved price was set at 1.5 ALL/kWh for the period 2018‑21 and 2.6 ALL/kWh for years 2022 and 2023, significantly lower than the average HUPX price of 12.8 ALL/kWh for the period.
Note: Induced support through price regulation in Albania (Panel A) includes three schemes: supply of electricity from KESH to the USS for regulated tariff customers; supply of electricity to the supplier of last resort (SLR) at regulated price to customers connected to 6,10 and 20 kV; and supply of electricity to the transmission system operator (TSO) to cover the transmission losses. Panel B shows only supply of electricity from KESH to the USS for regulated tariff customers, as the other two regulated were put in place from 2022 onward.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Albania introduced two additional support schemes during the energy crisis. From 2022, the induced support also includes the supply of electricity to the SLR at regulated prices to customers connected to 6, 10 and 20 kV (Energy Community Secretariat, 2022[2]). Although all customers connected to 6, 10 and 20 kV became part of the deregulated market as of 1 January 2022, to protect them from rising electricity market prices during the energy crisis, the government imposed an obligation on KESH to supply electricity to these customer segments at a fixed price of 12 ALL/kWh. This resulted in induced support to customers in the order of EUR 186.5 million in 2022. In 2023, as international prices fell, the induced support became negative at around EUR 3.3 million, triggering a change in the direction of induced support – from consumers to producers. Additionally, in 2022 and 2023, electricity was supplied to the transmission system operator (TSO) to cover transmission losses, resulting in induced support of around EUR 21.3 million in 2022-23.
Estimates of induced support based on average energy prices in the EU are similar to the baseline estimate. In the absence of alternative counterfactual prices, the average energy and supply price component in EU markets is used as the basis for an alternative reference price (see Chapter 3). Estimates of induced support over the period 2018-23 based on the alternative benchmark amount to EUR 1.9 billion in Albania. The alternative estimate is 20% lower than the preferred baseline estimate but remains very sizeable. Induced support calculated using EU average prices is slightly higher than baseline estimates using HUPX-based reference prices in pre-crisis years, but lower in crisis years, reflecting the lower long-term volatility of the alternative reference price series (Figure 7.2). The series reflects the importance of long-term contracts in wholesale markets and is indeed less volatile than HUPX DAM prices. The use of this series also has a number of limitations: first, it reflects not only wholesale markets but also price interventions across the EU, which makes it an imperfect candidate for a counterfactual market-based reference price; second, the available series from Eurostat does not allow the disaggregation of energy and supply prices.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
At the retail level, price regulation in Albania leads to significant cross-subsidies among energy consumers within the 0.4 kV category, amounting to about EUR 195 million over 2018-23. In Albania and across the Western Balkan region, cross-subsidies are embedded in regulated retail electricity tariffs, such that some groups of consumers pay higher electricity prices than others. The price of electricity for low-voltage (0.4 kV) household customers is 9.5 ALL/kWh. Non-household customers that are connected to the low-voltage grid are supplied at a tariff of 14 ALL/kWh (16.1 ALL/kWh in peak hours), effectively resulting in cross-subsidies between the two customer types (Figure 7.3). Low electricity prices for bakeries and flour production are another example of cross-subsidisation between customers connected to low (0.4 kV) and medium (6 and 10 kV) voltage levels. Over the period 2019-23, they amounted to EUR 2.1 million. In January 2025, household prices were reduced from 9.5 ALL/kWh to 8.5 ALL/kWh for the period 1 February – 31 December 2025 for all households consuming less than 700 kWh per month, which the USS estimates corresponds to about 78% of households, indicating that cross-subsidies will continue to remain in place (ERE, 2025[3]).
2018-23 totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Despite the impacts of price regulation, Albania has made important efforts to liberalise its electricity sector. Albania started the process of unbundling KESH, its vertically integrated company, by establishing the TSO in 2004 and the distribution system operator (DSO) in 2007. In parallel, the electricity sector underwent various reforms, including tariff reform and customer protection. In 2015, as part of implementing the Third Energy package, the EU legislative package aiming to open up the gas and electricity markets in the European Union and being extended also to the Western Balkans, Albania adopted its new energy law, which created the basis for the opening, organisation and functioning of a competitive electricity market. A key aim was to integrate the Albanian market into the regional and European electricity markets. Eliminating all cross-subsidies was a key pillar of the law and the main instrument to allow competition also in the retail segment.
Induced support for producers
Feed-in tariffs are a special category of induced support to renewable energy producers in Albania. Feed-in tariffs guarantee a purchase price for renewable generation projects, with aim to make them predicably profitable and thus encourage investment. As for other forms of induced support, the inventory calculates induced support through feed-in tariffs by comparing guaranteed prices and HUPX reference prices.
Until 2020 renewable energy producers in Albania benefited positively from feed-in tariffs, but rising international energy prices in 2021-22 made the obligation to supply electricity at guaranteed domestic prices a significant cost for producers. Feed-in tariffs shielded privileged producers from market volatility while also preventing them from making windfall gains when prices were high. Feed-in tariffs generated positive induced support for producers in 2018-20 of about EUR 85 million. The energy crisis shifted this dynamic, resulting in an opportunity cost of around EUR 531 million in 2021-23 for producers that remained in the system (Figure 7.4– Panel A). Similar trends were observed across the region (Figure 7.4 – Panel B). To capture excess profits during periods of high electricity prices, the government of Albania introduced (in 2022) a windfall tax on independent power producers (IPPs). Any proceeds are used to mitigate the impacts the energy crisis is having on consumers (KPMG, 2023[4]).
The feed-in tariffs for which the inventory calculates the induced support include schemes to support hydro and solar energy production. The schemes for hydro include feed-in tariffs for large-size hydropower plants (HPPs) (above 15 MW) as well as for small- and medium-sized HPPs (up to 15 MW). Following competitive procedures, HPPs obtain approval from the Ministry of Infrastructure and Energy. They also conclude concessionary long-term production contracts with the Ministry. Large-sized HPPs (above 15 MW) also receive concessionary contracts, although they do not benefit form feed-in tariffs. Both small and medium HPPs also conclude 15-year power purchase agreements (PPAs) with the renewables operator. The price for all HPPs is based on the HUPX plus 20%. In addition, Albania is using feed-in tariffs to support small-scale solar photovoltaic PV (installed capacity up to 2 MW) (Law for promoting the use of energy from renewable sources, 2017[5]). Albania also has feed-in tariff schemes for small-size wind power (WP) plants, auctions for new renewables projects, and support schemes for prosumers. At the time of data collection for the inventory, the first two schemes were in place but not implemented, so no values were available. Similarly, no data were available to calculate the induced support for prosumers.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Albania and other economies in the Western Balkans are moving away from feed-in tariffs to support renewable electricity toward more market-oriented support schemes. Albania has led the transition, adopting a new renewable energy law in 2023 and successfully holding multiple auctions for solar and wind.
Financial support to the energy sector in Albania: EUR 1 billion in total, most during 2021-23
For the period 2018-23, the energy sector in Albania received financial support of around EUR 1 billion. Most was in the form of fiscal support, amounting to EUR 577 million (Figure 7.5). Another EUR 456 million was in the form of credit support, either through public loans or publicly guaranteed loans (Figure 7.6).
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Before the energy crisis (2018-20), the largest fiscal expenditures related to the energy sector in Albania were support for vulnerable consumers, payment of guaranteed loans and value-added tax (VAT) exemptions. Support to vulnerable groups accounted for EUR 65.2 million, payment of guaranteed loans for EUR 53.6 million and VAT exemptions for EUR 42.5 million (Figure 7.7 – Panel A).
During the crisis (2021-23), Albania provided a substantial grant to KESH and significantly increased VAT and other tax exemptions on fuel consumption. In 2022, KESH received a capital injection of EUR 168.1 million in order to keep domestic tariffs unchanged despite expensive energy imports during the energy crisis. In parallel, VAT exemptions increased from EUR 42.5 million in 2018‑20 to EUR 78.3 million in 2021-23, and tax exemptions for fuel consumption increased from EUR 9.6 million in 2018‑20 to EUR 25.7 million in 2021‑23 (Figure 7.7 – Panel B).
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Most of the fiscal support in Albania intended for consumption went to vulnerable consumers. For the period 2018-23, support for socially vulnerable consumers amounted to EUR 115 million. Most – a full 90% – support for vulnerable consumers in Albania reflects elimination of bloc tariffs above the 300 kWh/month threshold (Figure 7.8). Among the six regional economies included in this report, Albania provided the highest support to vulnerable consumers in absolute term. Albania is followed by Serbia at EUR 51 million.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Credit support for the energy sector in Albania: EUR 456 million for the period 2018-23. More specifically, Albanian energy sector received EUR 250 million of public loans (Figure 7.9 – Panel A) and EUR 206 million of publicly guaranteed loans (Figure 7.9 – Panel B). Most of the credit support was during the energy crisis (2021-23). Government support to SOEs in the electricity sector, primarily through sub-loans from international financial institutions (IFIs), was the main credit support in the form of public loans before the energy crisis and after the crisis (Figure 7.9 – Panel A). These loans were intended to help SOEs to meet their investment and operating costs. OSHEE (Operatori i Shpërndarjes së Energjisë Elektrike Sh.A), electricity power distribution operator, was the main recipient of publicly guaranteed loans during the energy crisis, receiving about EUR 178 million, of which EUR 150 million was a response its liquidity issues (Figure 7.9 – Panel B).
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Considerable public support in Albania also goes to fossil fuels
Albania also provides significant fiscal support – EUR 170.2 million – to fossil fuels. Over the period 2018-23, the main support schemes for fossil fuels included VAT exemption for hydrocarbon exploration (EUR 107.1 million), excise tax reimbursement for industrial and agro-industrial production (EUR 27.9 million), subsidies for fuel consumption in agricultural production (EUR 24.1 million), and a government support scheme to supply fuel to fishing boats (EUR 15.3 million). Other fossil fuel support schemes noted in the inventory include excise tax rebates on fuel used for electricity production and the hydrocarbon tax regime; these were not valued, however, due to lack of data. Although not captured in the inventory for Albania, during the energy crisis (i.e. in 2022), the government also introduced emergency price controls on diesel, petrol and liquefied natural gas (LNG) in order to protect consumers from sharp price increases (Council of Ministers, 2022[6]).
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Changing the energy subsidies and support measures that sustain the current energy market in Albania would require adjusting the retail prices paid by households. According to the inventory presented in this report, prior to the energy crisis, regulated retail prices for households in Albania were, on average, about 40% lower than market-consistent prices1. In 2023, they were, on average, less than half the value of reference prices. To contain adverse social consequences of energy market reforms, Albania will need to fully understand the distributional incidence of price shifts and the potential for redistribution of current tax and social protection systems.
Keeping prices below their market value is a costly and inefficient mechanism to support those in need
Low electricity prices benefit households in need while also transferring significant value to households that do not need such support. The distribution of benefits is approximated in this report by examining patterns of electricity expenditure based on data from the Household Budget Survey (HBS) for 2022 (INSTAT, 2022[7]). Notably, poorer households spend a greater proportion of their income on electricity, with those at the bottom 10% of the income decile spending 16% of their total consumption expenditure on electricity (compared to 5% for households in the top decile). As a result, in relative terms, the implicit 40% subsidy on electricity prices benefits the poorer more. However, as better-off households spend more in absolute terms, a large proportion of the benefits goes to higher deciles. Indeed, the top 4 deciles received a total surplus of ALL 736 million per month, almost half of the total surplus (ALL 1.48 billion) generated through retail price regulation.
Absolute and relative incidence of a 40% change in electricity prices, 2022
Note: The relative incidence is the weight of a 40% change in the price of electricity divided by total consumption expenditure. The absolute incidence is the value of 40% of electricity expenditure in per-capita terms according to HBS data.
Source: Calculations based on HBS 2022 data.
Microsimulation analysis can help determine how well tax and transfer systems can compensate for distributional impacts of potential policy changes. The commitment to equity (CEQ) framework is an analytical framework that can be used to compare, across economies, the ability of taxes and transfer systems to redistribute income and reduce poverty.2 For Albania, analysis is based on household data from the Survey of Income and Living Conditions 2022 (SILC) and the Household Budget Survey for 2022 (HBS). Data from SILC on income are used to construct key income aggregates and to determine receipt of social transfers. However, as SILC data on consumption are limited, cross-survey imputation is used to include data on indirect taxes (constructed from consumption data) and data on energy consumption (sourced from HBS), into the analysis dataset (Zhabjaku Shehaj, forthcoming[8]).
Albania’s transfer programmes can help mitigate the impacts of price increases, but will require adjustments
Albania’s tax and transfer systems has limited capacity to redistribute income, as is the case generally in the Western Balkans region. To assess an economy’s capacity to redistribute, levels of inequality before taxes and transfers are compared to levels of inequality after taxes and transfers, and a similar comparison is made for levels of poverty (Figure 7.12). Inequality is measured by the Gini coefficient, while poverty is measured by absolute poverty headcount ratios. Comparing the gaps in outcomes before and after taxes and transfers across economies offers a measure of the ability of each economy to redistribute income. Overall, the tax and transfer systems in the Western Balkans have a modest redistributive effect. Inequality, as measured by the Gini coefficient, decreases by 0.03 points in Albania (from 0.35 to 0.32), a level comparable to other economies in the Western Balkans (Figure 7.12 – Panel A). In contrast, inequality falls by 0.12 in Spain and 0.06 in Poland. Notably, in Albania, government interventions through taxes and transfers are associated with an increase in poverty. This is mainly the result of indirect taxes. Direct taxes and transfers reduce poverty by 3.7 percentage points in Albania (with poverty measured at the absolute poverty line set at USD 5.50/day in 2011 PPP terms). However, indirect taxes significantly reduce consumable incomes. When all taxes and transfers are accounted for, their overarching impact is a notable increase in poverty. These results suggest that social transfers cannot fully offset the burden of taxes on poverty (Figure 7.12 – Panel B). This pattern is not exclusive to Western Balkans economies; it can also be observed in Türkiye and in other Central and Eastern European economies (e.g. Croatia, Poland, Romania), albeit to a lesser degree.
Gini coefficient based on market income and after direct and indirect transfers and taxes (Panel A), and absolute poverty headcount based on market income and after taxes and transfers (%) (Panel B).
Note: Data years for the latest available CEQ assessment in each comparator economy are as follows: Colombia, Croatia and Poland (2014); Romania, Türkiye and the United States (2016); and Argentina and Spain (2017). Data on Albania are for 2022. Data for Serbia are based on 2019 reference data. Data for North Macedonia are based on 2018 baseline data but simulate current social protection systems. In Panel B, poverty is measured at the upper-middle income absolute poverty line (USD 5.50/day in 2011 PPP, USD 6.85/day in 2017 PPP). Results for Croatia and Poland correspond to the lower middle-income poverty line (USD 2.50/day in 2005 PPP). For Albania, poverty and inequality measured at market income includes pension benefits.
Source: Data sourced from background papers prepared for this report: Albania data from Zhabjaku Shehaj (forthcoming[8]); Bosnia and Herzegovina data from (Vladisavljević and Žarković, forthcoming[9]); Montenegro from (Vladisavljević and Žarković, forthcoming[10]); Serbia data from (Vladisavljevic and Zarkovic, forthcoming[11]); and North Macedonia from (Petreski, forthcoming[12]). Others sourced from CEQ (2024[13]) CEQ Standard indicators web version 5.0, CEQ Institute, https://commitmentoequity.org/datacenter/.
Compensating households in the bottom two income deciles is critical to ensure that energy sector reforms do not have particularly harmful social consequences. According to data published by INSTAT, the share of households at risk of poverty in Albania stood at 20.6% as of 2022 (INSTAT, 2024[14]). Similarly, 22.4% of Albanians live in income poverty if measured using the USD 5.50/day international poverty line for middle-income countries (Zhabjaku Shehaj, forthcoming[8]). Therefore, compensating the poor for the impacts of energy sector reform should, at the minimum, involve direct compensation for the bottom 20% of the income distributions.
Explicit energy subsidies in Albania are sizeable and have accumulated over time. Albania has three distinct compensatory measures for energy customers in need. Households receiving social assistance or disability pensions, as well as old-age pensioners and low-income families with public sector salaries below ALL 35 000 per month (/mo), are eligible to receive benefits from two distinct schemes. The first is compensation for the increase in electricity price, enacted in 2006 (Decision of Council of Ministers (DCM) 565 of 2006), worth ALL 640/mo. The second is compensation for the removal of the 300 kWh lower bloc tariff, enacted in 2015 (DCM 8 of 2015), worth ALL 648/mo. Although some differences exist in their targeting criteria, these two benefits are largely cumulative. In addition, persons with special status of disability (blind, paraplegic and tetraplegic persons) receive a benefit between ALL 1 400 and ALL 2 000/mo, depending on the severity of their disability. This benefit can be cumulated with the ALL 648/mo benefit (Expertise France, 2022[15]). Taken together, these transfers are sizeable. In 2015, they commanded 0.42% of households’ market income, an order of magnitude similar to that of Albania’s main means-tested social assistance programme (Ndihma Ekonomike [NE]) (Dávalos et al., 2018[16]).
Social assistance appears as a more effective tool in Albania to compensate households in a targeted manner than existing energy subsidies. The distribution of energy subsidies by income deciles can be estimated on the basis of eligibility criteria, based on the observed or imputed receipt of other transfers and pensions. Comparing the distribution of benefits received from Albania’s main social assistance programme (NE) against that of beneficiaries of energy subsidies shows the former to be a significantly more progressive policy instrument. In contrast, energy subsidies are spread across the income distribution (Figure 7.13).
Benefit shares by income decile (%), 2021
Source: (Zhabjaku Shehaj, forthcoming[8]) background paper for this report, based on HBS 2022 and SILC 2022 data (INSTAT).
Expanding social assistance may not be enough to compensate the poor for the potential fall-out of energy sector reform. A 40% increase in electricity prices in Albania would require transfers worth ALL 2 511 million, assuming no demand response (based on HBS data for electricity consumption expenditure3). While it is expected that households would reduce consumption in the face of such change, residential electricity consumption is not very elastic in the short run. Based on the efficiency of targeting as estimated from SILC data, 43% of benefits from NE were delivered to the bottom two deciles of the income distribution as of 2021. If targeting efficiency were maintained, this would imply an increase of ALL 4.6 billion (EUR 38.7 million) – a 96 % increase – in the budget of NE. Further analysis is needed to determine whether increased transfers after the change would, indeed, reach those most at need. A 20% price increase would require a 48% increased budget for NE (EUR 19.4 million).
Better targeting and energy efficiency interventions could reduce the amount of compensation needed. To compensate the poor for a significant energy price increase, further improvements in targeting will be necessary. Should NE concentrate fully on the bottom two income deciles, the necessary compensation costs would be halved and thus estimated at EUR 16.6 million for a 40% price increase and EUR 8.3 million for a 20% price increase. In addition, the simple calculation above has not incorporated any demand response. In the long run, price elasticity of about 50% would halve the resources needed for compensatory measures. Rather than counting on market forces alone, it will be necessary for Albania to accompany any reform with energy efficiency measures targeting households at lower segments of the income distribution.
Measuring and mitigating energy poverty in Albania
Compensating the poor will not be enough to tackle energy poverty in Albania, where it is a significant risk. According to the consensual subjective indicators collected by SILC, between 20% and 40% of Albanian households currently face energy poverty in that they cannot keep their homes warm, were in arrears on utility bills, or were living in housing with conditions that prevented appropriate energy efficiency (Figure 7.14). An alternative approach to identify the energy poor is to count households for whom energy expenses amount to over 10% of income. This is a common measure of energy poverty, used for example in Italy and parts of the United Kingdom. In Albania, 45% of households spend over 10% of their total outlay on energy. Moreover, for the first four deciles of the consumption expenditure distribution, the average household spends over 10% of their outlay on energy (Figure 7.15). This suggests that the risk of energy poverty extends well beyond the population considered to be poor.
Note: Panel A. Data for North Macedonia are for 2020; for Albania, 2021; and for Kosovo, 2018. Panel B. Data for Kosovo are for 2018; for North Macedonia, 2020; and for Türkiye and Albania, 2021. Panel C. Data for Kosovo are for 2018.
Source: Eurostat (2025[17]), Inability to keep home adequately warm, https://ec.europa.eu/eurostat/databrowser/view/ILC_MDES01/default/table?lang=en; Eurostat (2025[18]), Arrears on utility bills, https://ec.europa.eu/eurostat/databrowser/view/ilc_mdes07/default/table; Eurostat (2025[19]), Total population living in a dwelling with a leaking roof, damp walls, floors or foundation, or rot in window frames or floor, https://ec.europa.eu/eurostat/databrowser/view/ilc_mdho01/default/table.
Energy expenditure as a share of total consumption expenditure, 2022
Note: The incidence of energy poverty is calculated as the share of households for whom expenditure on energy is above 10% of their total consumption expenditure.
Source: Authors’ calculations based on HBS 2022 (INSTAT).
Interventions related to energy and energy efficiency in Albania should also be considered through a gender lens. A dedicated gender and energy analysis shows that gender plays a significant role in how decisions are made relative to energy and energy efficiency, with women playing a managing role in the household (Box 7.2). In addition, women – particularly those in rural areas – are more vulnerable to the consequences of inadequate access to clean energy, as they spend more time exposed to indoor air pollution. Older, isolated women are also particularly exposed to energy poverty. These factors should be taken into account when designing programmes to mitigate energy poverty and to foster energy efficiency, so as to increase their efficacy and reduce the chances of leaving the most vulnerable behind.
This project set out to explore gender differences in energy consumption, access and responses to reforms in the Western Balkans, examining how energy reforms impact men and women as consumers, workers and decision-makers. The study used a qualitative research methodology, including focus group discussions and roundtables. In Albania, focus groups were conducted in the cities of Kukes, Roskovec and Tirana, covering rural and urban areas. With a total of 60 participants,1 the focus groups included people with different income levels as well as recipients of social assistance. Findings from the focus groups and desk research provide an overview of each gender's role in shaping energy consumption, access to opportunities, decision-making and energy poverty in Albania.
Key insights, as well as quotes from focus group participants, for Albania include:
Gender plays a significant role, especially in the household setting. Women are the primary consumers of energy within households as they bear the majority of unpaid domestic labour, such as cooking and cleaning, which are energy-intensive activities. This situation often forces women to become the "energy managers" of their households, adjusting usage patterns to reduce costs.
“ … I cook less often because the oven consumes a lot; in winter, we will not heat up with the heater but we will take the blanket.” (Woman, 52, employed, Roskovec)
“Women spend more (electricity) to do housework, cooking, washing dishes, ironing.” (Woman, 36, employed in informal sector, Kukes)
A distinct urban-rural divide is evident in energy consumption patterns in Albania. In rural areas, households rely more on solid fuels (e.g. coal and firewood) for heating. As such, rural women are more exposed to indoor air pollution than in urban areas where electricity is more commonly used for heating.
“Because of the wood smoke, the kitchen needs to be painted much more often. If you use [an] air conditioner, you can live 5-6 years without painting it. The smoke is also harmful for my wife’s health because she has asthma.” (Man, 69, retired, Kukes)
A common coping strategy for managing high energy prices is cutting back on other expenses – such as clothing, internet bills, mobile charges, vacation and visiting restaurants. This approach is used by both men and women in the household.
“We give up clothing, we buy them cheap, from second-hand shops. We all save.” (Woman, 44, unemployed, Roskovec)
In Albania, many participants emphasised that paying energy bills is a priority. However, in every focus group, there were individuals who reported being unable to pay on time – though this was typically seen as a last resort coping strategy.
“With the current times, you can’t joke around with the government anymore. If they cut off your electricity and you request a reconnection, you'll end up paying both the bill and their fine. The procedure will also take longer.” (Man, 37, employed, Tirana)
It was noted that it is more socially acceptable for men to take on additional work to earn extra income in response to rising energy prices than it is for women.
“A man can work extra hours during the month, since he is a man. A woman on the other side, even doing two jobs is prejudiced here. Men have more job opportunities.” (Woman, 36, unemployed, Kukes)
“I have experienced and continue to face difficulties every month. I bear all the responsibilities. Perhaps men do consume more, but they also have more opportunities to find work and generate income.” (Woman, 40, employed, Tirana)
1. The groups were evenly split by gender. Age composition of the groups was as follows: 22% between ages 18‑30, 25% ages 31‑40, 37% ages 41‑65, 17% more than 65 years old. One-third of participants lived in households with five or more members, and over one-third were recipients of some form of social assistance programmes.
Source: Focus group discussions undertaken in Albania.
Energy sector reform in Albania will require carefully balancing the efficiency of energy markets with the economic and social consequences of reform. In parallel, it will also be necessary to ensure that reforms are fiscally sustainable. This section draws on micro-simulation and macro-economic modelling to compare six policy scenarios, building on the inventory of energy subsidies and support measures presented in this report. Scenarios 1 to 3 simulate the progressive convergence of retail electricity prices towards market prices combined with closing the gap in retail prices between regulated segments (households and firms served by the USS). Scenario 4 simulates the expansion of the deregulated market to a greater share of firms. Scenario 5 simulates the removal of subsidies to fossil fuels. Finally, Scenario 6 simulates the impact of energy efficiency
Modelling the economic impact of energy reform in Albania
Changes in energy sector regulation in Albania will have wide impacts on the economy. At the macro-economic level, changes in market regulation generate a transfer of value from certain categories of households to the energy sector and to the state. This results from increased tax receipts on energy consumption, increased tax receipts linked to increased profitability, and dividend payments linked to improved performance of SOEs. In addition, sectors and firms will be differentially impacted, depending on their current status. At present, large consumers already procure electricity in the open market, while SMEs that face regulated prices cross-subsidise household tariffs to varying degrees, both in Albania and across the Western Balkans. Different sectors and firms will also be differentially impacted, depending on the energy intensity of their activities and their ability to shift consumption between sources of energy. To shed light on how the various effects interact, this report uses macro-economic computable general equilibrium (CGE) modelling as a flexible tool to analyse impacts in individual economies in the region (see Chapter 4).
The AL-POWER-CGE model presents a simplified version of the Albanian economy. The primary data for constructing and calibrating the model are the latest edition of data from the Global Trade Analysis Project (GTAP 11), which uses 2017 as the reference year (GTAP, 2023[20]). The model uses a 26-sector representation of the economy (at the section level of the EU statistical classification of economic activities, Nomenclature statistique des activités économiques [NACE]). The model is static and the results are meant to represent new equilibrium situations after a policy or market shock has occurred.
The model has been augmented to reflect the dual nature of electricity markets in Albania. In the model, the electricity supply sector includes a fixed-price, regulated sector that meets the posted demand of regulated customers and a flexible, price unregulated sector in which markets clear. To allow for differences in price between household and non-household customers, the model stylises the regulated electricity supply sector as two separate firms, serving, respectively, households and non-household regulated customers, at potentially different prices. These firms behave as electricity traders to purchase electricity from producers and the foreign market and sell the posted demand at fixed prices, making zero profit.
The attribution of firm demand across sectors is based on a stylised representation of electricity intensity. In Albania, regulation differs according to the voltage of connections. However, data are not available to calibrate the share of economic sectors’ electricity demand that corresponds to individual voltage levels. Therefore, a selection is operated based on the share of electricity in total input values across sectors: Mining and Electricity, gas and heating supply are assumed to be served at high voltage and therefore excluded from regulated segments. Steel and iron, non-ferrous metals, chemistry and non-metallic mineral products (cement) are also assumed to be served at high voltage and excluded from regulated segments (they represent 40% of power consumption by manufacturing). Several sectors are treated as belonging to the medium voltage segments: they include remaining manufacturing sectors, water and waste management, and agriculture. Medium voltage sectors are treated as being served by at regulated prices in the baseline model and excluded from the regulated segment in alternative models to check the robustness of results. Finally, services are assumed to be served at low voltage and are modelled as being served at regulated prices.4
Reforming retail electricity prices in Albania
Price regulation in Albania insulates households and small firms from fluctuations in energy markets. Retail electricity tariffs for households remained fixed at 9.5 ALL/kWh since they were reformed in January 2015 until February 2025 when they were further reduced for most households. Regulated prices for firms that are still served by the USS (Furnizuesi i Sherbimit Universal sh.a. [FSHU]) have also stayed constant during this period. This is in stark contrast with increased prices and increased volatility in international markets. In contrast, as part of the deregulation process, Albanian firms connected at medium-voltage levels (6, 10, 20 and 35 kV) have been partially exposed to price increases and price volatility. Since 2018, customers connected at 35 kV are not served by the USS. If they rely on the SLR, they face market-reflective prices. Remaining medium-voltage customers (connected at 6, 10 and 20 kV) were transferred to the unregulated market in 2022. However, many continued to be served by the SLR until 2024.
Retail regulated prices are the result of multiple features of Albania’s electricity market. The Albanian market is heavily determined by the conditions at which FSHU purchases electricity in its roles as both the USS and the SLR. KESH faces a public service obligation to supply electricity to fulfil the demand of customers served by the USS, which it does at a very low fixed price meant to be sufficient for cost recovery. The price was set at 1.5 ALL/kWh in 2018 and increased to 2.6 ALL/kWh in 2022. In periods during which KESH cannot fulfil the demand of USS customers, imports and purchases from independent renewable suppliers make up the difference. This generates a significant increase in FSHU’s purchase costs, which for example went up to 6.68 ALL/kWh in 2021. Despite the use of “cost-plus” methods to set regulated tariffs, these fluctuations were not carried over to retail prices for households (let alone the much larger variations in international markets).
Deregulation of certain market segments is helping to lower the support content of electricity pricing, but the transition has been lengthy. Medium-voltage customers transferred to the unregulated market in 2022 were served for two years by FSHU in its capacity of the SLR. During that period, KESH supplied the SLR with electricity at a fixed price of 12 ALL/kWh, despite unregulated market prices being 2.7 times higher. This resulted in a significant transfer of value – estimated at ALL 22.2 billion in 2022 and ALL 0.96 billion in 2023. In practice, the SLR acted as a shield against volatility. As of the end of 2023, the SLR unit prices were higher than unregulated market prices, as would be expected of a last resort supplier
Electricity price regulation in Albania also includes a number of explicit cross-subsidies. Differences across types of connections for diverse customers justify differences in electricity prices. However, in Albania, households connected at low voltage paid a single tariff of 9.5 ALL/kWh until February 2025, while business customers connected at the same low voltage pay a significantly higher tariff of 14 ALL/kWh (and 16.1 ALL/kWh in peak hours). Bakeries and flour production units, however, pay an even lower tariff of 7.6 ALL/kWh (8.74 ALL/kWh in peak hours).5 As such, cross-subsidies sustain below-cost pricing for households and bakeries, which can blunt incentives for energy conservation and energy efficiency.
Annual averages
Source: Calculations based on OECD (forthcoming), Inventory of Energy Subsidies and Support Measures in the Western Balkans, HUPX DAM historical data, ERE.
To analyse the economic importance of price regulation through simulations, a series of counter-factual tariff levels have been calculated. These calculations are executed taking into account the current structure of regulated tariffs: that is, they include the wholesale purchase price, operating costs, transmission fees, distribution fees, allowances for bad debt and a profit margin for the USS. They are, however, based on a counterfactual purchase price where FSHU would have procured electricity at the annual average HUPX price instead of the price in the bilateral agreement. As expected, this market-consistent price tracks annual variation in HUPX (Figure 7.16). Deviations of this market-consistent price from actual tariffs were particularly large during years 2021 and 2022 and came to represent a large transfer of value from the Albanian government and KESH to final customers in regulated markets. For forward-looking analysis, this section focuses on non-crisis years; as such, parameters for key policy scenarios were selected from before and after the energy crisis.
Scenario 1: Removing cross-subsidies
In the pre-2021 period, cross-subsidies involved both low and medium-voltage customers. Indeed, FSHU’s application for tariffs in 2020 (FSHU, 2020[21]) states a break-even tariff level of 13.2 ALL/kWh for the year 2019, whilst medium-voltage tariffs were below this level (at both peak and non-peak times).
Following the transition of medium-voltage customers in Albania to the liberalised market, cross-subsidies are a consideration mainly among low-voltage customers. While a large share of medium-voltage customers was served by the SLR in 2022-23, flows related to these transactions can be isolated from those related to the USS. Moreover, the SLR prices were above international market prices from April 2023 onwards. Indeed, the annual average price for medium-voltage customers in 2023 (17.56 ALL/kWh) was only 2% lower than the annual market-consistent prices for SLR customers. In contrast, nominal prices remained fixed for household and non-household customers served at 0.4 kV and for bakeries and flour production during the period 2018-23. The removal of cross-subsidies is modelled as a shift of household and non-household regulated tariffs towards the average break-even price. The CGE model Scenario 1a simulates the convergence of low-voltage tariffs to the 2023 average of universal service supply of 10.77 ALL/kWh, corresponding to the parameter shifts in Table 7.1. Bakeries also benefit from cross-subsidies in the form of lower prices than comparable customers (7.6 ALL/kWh as of 2023), however, the AL-POWER-CGE model does not have sufficient granularity to examine their specific impact on the economy.
Note: Tariffs for non-household customers are for off-peak periods as a conservative scenario.
Source: Authors’ calculations based on ERE reports.
As of 2023, cross-subsidies represented a transfer of value of ALL 3.1 billion from other customers towards households consuming electricity. Removing such cross-subsidies would lead to a 13% increase in household tariffs – with substantial impacts on poverty and energy poverty. It would also trigger a significant decrease in the tariff for non-household customers, which would lower production costs for SMEs across the economy. In this scenario, medium-voltage customers are treated as being served by the open market. Since they are served by the SLR at close to market-consistent prices, they would not be concerned by the removal of cross-subsidies.
The subsidised tariff for bakeries aims to ensure affordable bread prices for Albanian citizens. The use of electricity prices as a conduit for such a broadly distributed subsidy is difficult to justify on efficiency grounds. Moreover, following indications that subsidy leakage was taking place through bakeries expanding their businesses horizontally, ERE revised the subsidy in May 2024 (ERE, 2024[22]). Since May 2024, businesses in the breadmaking and flour production sector are subject to a three-tier tariff structure, depending on whether they operate only bread production or also other baked goods and services, with the former receiving the subsidised rate (9.5 ALL/kWh) and the latter facing slightly higher tariffs (12 ALL/kWh).
While Scenario 1 is designed to be neutral with respect to the finances of regulated electricity providers, it has impacts on the economy and society. Indeed, shifting the composition of electricity demand would impact the composition of revenues. Residential electricity demand is typically less price elastic than industrial electricity demand in the EU, particularly in the long run (Csereklyei, 2020[23]). Therefore, the impact of such rebalancing of prices on total electricity demand depends on the relative size of the two sectors. Moreover, the fall in costs for a subset of economic sectors (largely those composed of smaller firms and less energy-intensive firms) would also stimulate economic activity.
The AL-POWER-CGE model predicts that removing electricity cross-subsidies would boost output and employment in Albania. In Scenario 1a, output and employment are projected to increase by 0.44% and 0.08% respectively (Table 7.2). Household electricity consumption contracts (by 6.0%) due to the increased price. The fall in price for firms, however, drives an increase in productivity so that total output and employment ultimately increase. As anticipated, electricity demand in the regulated sector is projected to increase (by 2.2%), reflecting the gap in price elasticities between households and firms. If the simulation assumes that middle-voltage sectors are already deregulated and are not affected by the shift, the impacts are similar in nature but more quantitatively smaller, with an increase in GDP of 0.25% and a small increase in regulated electricity demand, which increases by 0.36%.
Note: Medium-voltage customers are treated as being served by free markets in Scenario 1b.
Source: Authors’ calculations.
Scenarios 2 and 3: Market-consistent pricing
Regulated prices in Albania effect a significant transfer of value from KESH to customers in the regulated market, with FSHU acting as a conduit. In the case of universal service provision, this corresponded to ALL 255 billion (EUR 2 billion) over the period 2018-23.
To examine the extent to which price regulation impacts Albania’s electricity markets, a series of scenarios are simulated in which prices would be adjusted to market-consistent prices while maintaining the cost-plus methodology for setting tariffs. These scenarios combine two changes in price regulation. First, the shift in procurement for FSHU’s USS to converge with market prices leads to prices for USS customers shifting to the market-consistent price level (20.34 ALL/kWh as of 2023). Second, the convergence in prices between market segments (in particular household and non-household customers) to remove existing cross-subsidies.
The choice of reference year for Scenario 2 significantly alters the size of simulated changes. Indeed, during the period under study (2018‑23), as nominal prices in Albania were kept largely unchanged for regulated segments of the market, real prices fell by 15% for low-voltage customers. Deregulation over the same period led to prices increasing by 13% in real terms for medium-voltage customers served by the USS (at the beginning of the period) and the SLR (at the end).6 In addition, the volatility of international prices during the period implies that the gap between domestic regulated prices and international market prices varied greatly.
The first, conservative set of scenarios corresponds to the pre-energy crisis period. The period 2018‑19 is taken as the reference for the pre-crisis period, as the slowdown in economic activity due to the COVID-19 pandemic in 2020 led to historically low prices. In 2018‑19, prices for USS customers were, on average, 29.4% below market-consistent prices. Two scenarios are run to reflect this situation:
Scenario 2a: The increase in average regulated market price by 29.4%, bringing the average regulated price to 13.94 ALL/kWh.
Scenario 2b: The convergence of regulated prices to the same average price as in Scenario 2a, resulting in
47% increase in household tariffs
2% increase in tariffs for non-household regulated customers
In addition, Scenario 2b is decomposed into price adjustments of household and firm tariffs to allow for analysis of their respective impacts:
Scenario 2c: 2% increase in regulated non-household tariffs
Scenario 2d: 47% increase in household tariffs
If the modelling considers the larger deviation from market-consistent prices in recent periods, the price shifts would be significantly larger. Relative to 2023 average prices, the upper bound scenario (3) would lead to an 89% increase in average regulated prices. Similar to the first set, two scenarios are run to reflect this situation. Compounded with the removal of cross-subsidies in Scenario 1, the shift would lead to:
Scenario 3a: The increase in average regulated prices by 89%, bringing the average regulated tariff to 20.34 ALL/kWh.
Scenario 3b: The convergence of regulated prices to the average price set in Scenario 2c, resulting in:
114% increase in household tariffs
49% increase in tariffs for non-household low-voltage customers
In addition, Scenario 3b is decomposed into price adjustments of household and firm tariffs to allow for analysis of their respective impacts:
Scenario 3c: 49% increase in regulated non-household tariffs
Scenario 3d: 114% increase in household tariffs
The prices for Scenario 2c can be considered as upper bounds in a continuum. Market-consistent pricing as described would ensure that electricity prices convey signals for energy efficiency and energy conservation. Partial convergence towards market-consistent prices, as in Scenarios 2a and 2b, would help boost the resilience of the Albanian electricity sector by shifting surplus value away from households and towards actors in the energy sector. In turn, this would reduce the amount of direct fiscal support and indirect financial support needed to sustain the sector. It would also allow electricity sector companies to establish the necessary financial buffers to sustain necessary investment across the system, particularly in transmission and distribution systems, and to withstand periods of turbulence in international markets.
Such a large (89%) increase in prices would command significant shifts in the distribution of surplus originating in the electricity market. The largest impact would be the shift of surplus to the production company (KESH) resulting from the change in pricing of supply to the USS, as energy prices charged by KESH to the USS would increase more than threefold. If demand remained constant, Scenario 3 would result in an increase of earnings for KESH of ALL 32.6 billion (EUR 266 million) on the basis of electricity supplied to the USS in 2023. This is a very significant departure from the status quo, corresponding to a 94% increase in earnings compared to 2022. In contrast, the procurement price of the SLR was slightly below average international market prices in 2023. Readjusting the procurement price of the SLR to the annual average HUPX price would lead to a shift in surplus of ALL 360 million from KESH to FSHU, corresponding to a 3% fall in KESH earnings and a 0.6% increase in FSHU earnings (taken as an average over the period).
The fiscal implications of Scenario 2 would work through several channels. First, greater profitability by KESH would limit the need for fiscal transfers, which amounted to EUR 284 million in 2018-23 (including direct budget support, loans and loan guarantees). Partial convergence to market-pricing – e.g. closing 18% of the price gap – would have been sufficient to cover the annual average support provided to KESH over the period. Second, the shift in prices would lead to a significant increase in VAT receipts linked to the sale of electricity, assuming no demand response and full passthrough into retail prices, this would increase Albania’s tax revenues by up to ALL 9.4 billion (a 4.9% increase in VAT income).
Moderate prices increases are expansionary when they affect households, but contractionary when they affect prices for firms. A uniform readjustment to the lower-bound Scenario 2a, based on the situation in 2023, would correspond to a 29% increase in average tariffs for USS customers. If this increase is applied to both firms and households, the AL-POWER-CGE estimates that it would lead to an economic contraction of 0.36% of GDP. According to the CGE model, the lower bound Scenario 2a would result in a modest economic contraction. GDP is simulated to fall by 0.35%, driven in part by a contraction in demand from households (by 1.33%) following the fall in electricity consumption (by 12%). A second driver would be the inflationary impacts of the price increase, which drives up the consumer price index (CPI) by 0.98%. If the shift is carried out by making prices for firms and households converge, it implies a positive impact on economic activity of 0.15% (Table 7.3). Generally, simulation results show that increases in prices for households tend to stimulate economic activity through the increase in revenues of the electricity sector and the significant increase in government revenues and consumption. Government consumption increases by 2.9% in Scenario 2b and by 6.1% in Scenario 3b. In contrast, price increases to firms alone lead to contractionary effects as the increase in production costs is not compensated by additional government demand. In fact, households are slightly worse off when prices for firms increase because the fall in purchasing power through the increase in prices reduces consumption.
Making prices converge towards international market prices would eliminate the need for direct sector support. In the lower bound Scenario 2, the price increase would be effected by slightly more than doubling the price (from 2.6 ALL/kWh to 5.36 ALL/kWh) at which KESH serves the FSHU for fulfilling its USS obligation. This would increase KESH earnings by ALL 8.1 billion (EUR 74 million) annually from sales to the USS, even after accounting for the fall in regulated segment demand. In addition, the fall in demand would allow KESH to sell surplus electricity on the market or reduce its procurement costs in years of lower production, with additional effects on its income and liquidity position by ALL 5.7 billion (EUR 52 million). In turn, the increase in the base of the operating profit allowance for FSHU would increase profit by EUR 1.8 million after accounting for the fall in demand. In practice, these figures are larger than recent financial support for Albania’s electricity sector (EUR 49.1 million on average annually between 2018 and 2023) and would significantly reduce the need for such support.
Source: Authors’ calculations.
Albania has scope to compensate the economy for the move towards market pricing for electricity. According to the inventory of energy subsidies and support measures in the Western Balkans, maintaining retail prices at below market rates over the period 2018-23 required significant support to the electricity sector, worth EUR 49.1 million annually. The fall in economic activity is worth EUR 56 million in Scenario 2a and the aggregate impact is positive in Scenario 3b (when cross-subsidies are removed).7 These impacts are smaller than the level of support granted to the sector. While the model assumes that rates of taxation of electricity sector earnings are maintained in the various scenarios, it would be possible for the Albanian government to mobilise part of the additional earnings through extraordinary dividends.
Mitigating the social impacts of a price convergence scenario in Albania will require directing resources towards more disadvantaged households. As presented above, fully compensating those at risk of poverty due to the increased cost of electricity would require transfers close to EUR 20 million in the lower bound scenario, and EUR 47 million in the upper bound scenario, assuming no demand response and perfect targeting. With the current efficiency of social assistance to target the poor, the cost increases respectively to EUR 45 million in the lower-bound scenario (Scenario 2) and to EUR 110 million in the upper bound scenario (Scenario 3). Shifts in demand could significantly lower this figure, but only if energy efficiency investments can be made or if fuel switching occurs at scale.
Expanding deregulated electricity markets
Deregulation of electricity markets for non-household customers in Albania has progressed, albeit more slowly than expected. While only qualified customers were eligible for unregulated market purchases before 2018, customers connected at 35 kV (in 2018) and at 6, 10 and 20 kV (in 2022) shifted from being served by the USS to being served by the SLR. In both cases, the period of SLR supply was meant to last for two years. In practice, switching rates during that period have remained relatively low. Customers served at 20 kV moved to the open market in 2024, while customers served at 10 kV are in the open market since January 2025 and could be served by the SLR until the end of February 2025.
During the energy crisis, medium-voltage customers were protected from market fluctuations. At 18.58 ALL/kWh, the realised average price charged by the SLR to medium-voltage firms in 2022 was significantly lower than the average price in international markets (32.3 ALL/kWh). This intervention helped ensure a smooth transition to the unregulated market, which is being effected in 2024 with a more favourable international environment and with the advantage of a fully functional domestic electricity exchange. This came at a significant cost, however, in that it meant the transfer of ALL 22.2 billion from KESH to medium-voltage customers, through the low price agreed for sales from KESH to FSHU in its capacity as SLR.
Scenario 4: Shifting non-household customers to the open market
To examine the impact of medium-voltage deregulation, Scenario 4 simulates shifting non-firm customers from the regulated to the unregulated market. The main consequence is to shift prices for medium-voltage firms to market prices. As of 2023, this is a modest shift, given that most medium-voltage customers are served by the SLR at prices very close to market-consistent prices (the gap was 2.5% in 2023). However, the reference year for the data used in the macro-economic model is 2017. Compared to the pre-deregulation period, the prices faced by medium-voltage firms in a deregulated scenario are 15.9% higher in real terms.
Further deregulation would also lead to a significant increase in the prices faced by non-household customers in Albania. Tariffs have remained constant in nominal terms throughout the period 2018-23 – and have therefore fallen by 15% in real terms. Therefore, deregulation would lead to a 29% increase in energy costs compared to the pre-deregulation period.
To simulate this Scenario 4, the AL-POWER-CGE model is shocked by halving the share of all sectors served by regulated markets. In manufacturing, this implies shifting the share of regulated electricity from 60% to 30% while in most other sectors it implies setting that share to 50%. Highly energy-intensive sectors such as steel, non-ferrous metals, mining, cement, chemistry are assumed to be high voltage and served by the unregulated sector.
Step deregulation results in a significant contraction of the Albanian economy, by 0.9%. As simulated, the magnitude of the shift in the electricity sector is large: with an increase in the unregulated market of 116% (this is the result of the market being artificially narrow in the baseline for this Scenario). In turn, this results in a 1.48% increase in unregulated prices, as net electricity imports increase by 17% and significant inflationary pressures emerge (2.7% increase in CPI). The model does not allow for efficiency gains from market discipline and suggests that the economy needs time to adjust to market changes that generate significant shifts in factor prices.
Removing existing subsidies and support measures for fossil fuels in Albania
Energy subsidies and support measures for fossil fuels in Albania command significant fiscal resources. This section quantifies the impacts of existing support measures directed at fossil fuels by analysing how their removal would affect the economy. Scenario 5 is a combination of policy changes detailed in Table 7.4.
Note:
1. To match the base year of the original source of the data, values for schemes implemented only in later years in the period are deflated to 2017 EUR.
Fossil fuel subsidies in Albania are largely directed to supporting specific economic sectors. This includes schemes to support fuel use for industrial and agro-industrial production, fishing, and agricultural production. This situation is in contrast to most Western Balkans economies, where fossil fuel subsidies to electricity production remain sizeable. As a consequence, the impacts of such support measures are likely to be concentrated on the benefitting sectors and passed on through general equilibrium effects on the prices of outputs from these sectors.
The weight of fossil fuel subsidies in Albania is likely to be larger among industrial sectors than in the agriculture and fishing sector. According to Albania’s supply and use tables for 2020, coke and refined petroleum products represented 1.1% of gross value added in the agriculture, forestry and fishing sector, and 2.7% of total intermediate consumption. Within the industrial sector, the weight of products from the coke and refinery industry is significantly higher.
Albania’s tax expenditures for the use of fuel amounted to ALL 1.6 billion on average during the period 2018-23. The figure (based on the OECD inventory of energy subsidies and support measures in the Western Balkans) is significantly larger than that in official reports (ALL 403 million) for fuel excise tax expenditures as of 2020 (MFE, 2023[24]). The deviation corresponds to the addition of the scheme to support fuels consumed in heater greenhouses, as well as the more recent scheme (initiated in 2021) to support farmers. It is a modest figure relative to tax revenue (0.3%) and represents 2% of total tax expenditure as measured in 2019 and 2020.
Direct support to the hydrocarbon sector in Albania, in the form of tax expenditures, is likely to be significantly larger. While the oil and gas sector remains a significant destination of foreign direct investment in Albania, the specific conditions granted to individual investors in the industry are not publicly available, nor are they included in enumerations of tax expenditure measures in the corresponding reports. The oil and gas sector is significant in Albania’s economy. With sales worth ALL 44.9 billion in 2022, crude petroleum was the industrial product with the highest value trade (INSAT, 2023[25]). Revenue collected from the oil and gas sector is also significant, accounting for more than 2.6% of total revenue in 2016, according to Extractive Industries Transparency Initiative (EITI) (EITI, n.d.[26]).
According to Scenario 5, removing fossil fuel subsidies would have contractionary impacts on the Albanian economy. Despite a significant (modelled at 6.7%) increase in tax revenues, removing support schemes to agriculture, fishing, agro-industrial production and hydrocarbon exploration would cause increases in factor prices, ultimately leading to a fall of 1.38% in output and of 1% in employment. The size of the impacts is due, in part, to data limitations. The comparison of nominal values to available data from supply and use tables found the recorded subsidy to be larger than the full tax bill for the recorded intermediate inputs. The fuel subsidies to fisheries and fishing boat were therefore capped at 40% for simulations. In addition, given the degree of aggregation in the model, fuel inputs were modelled as a fraction of all manufactured inputs to the production process. Therefore, shifts in costs are likely to have larger general-equilibrium impacts than if they were restricted to fuel, which is largely imported.
Increased energy efficiency can foster economic resilience in Albania
Energy efficiency can increase the economy’s resilience to external shocks in energy markets. Despite its production capacity, Albania was a net electricity importer in 10 of the past 15 years. Increasing energy efficiency in consumption can play an important role in not only fulfilling the economy’s objectives to manage energy demand but also in increasing resilience in the face of market turmoil. Investments in energy efficiency free up resources for consumption of other products and enable the economy to better use its renewable energy sources.
An improvement in energy efficiency in households would drive an expansionary increase in aggregate demand. The increase in energy efficiency is modelled as a proportional decrease of the amount of energy households need to satisfy the same needs. A 10% increase in energy efficiency results in a 4.8% decrease in electricity consumption by households, while a 18% increase in energy efficiency results in an 8.9% fall in electricity consumption by households. The reduction in electricity consumption in the 10% scenario is commensurate with the planned fall in energy consumption in households in the NECP resulting from the adoption of additional measures. In the NECP projections, residential energy demand is expected to fall by 5.4% in the scenario with additional measures compared to that with existing measures (Government of Albania, 2024[27]). The fall in electricity consumption leads to increases in consumption of other goods and to an increase in total output to follow household demand. GDP increases by 0.06% in response to an increase in energy efficiency in households of 10% and by 0.10% in the case of a larger increase in energy efficiency of 18%. As modelled, the electricity sector serving households is regulated and there is no price effect, so that the impact through electricity markets on the rest of the economy is small.
Source: Authors’ calculations.
Strengthening the resilience of the energy sector, diversifying renewable sources of electricity and moving towards a liberalised energy market are priority objectives for Albania. Diversifying energy sources through increased investments in electricity production from renewables plays a crucial role in reducing import dependency and ensuring security of supply (Government of Albania, 2023[28]). In its NECP, Albania also commits to liberalising its internal energy market (Government of Albania, 2024[27]). Energy market reform is key to the process to align to EU electricity market regulations and advance Albania towards EU market integration. By allowing the energy sector to finance necessary investments as foreseen in the NECP, market-driven prices can also improve the sustainability of the system.
Reforming financing of the energy sector is another key priority for boosting its resilience, but requires accompanying measures. The commitment to low electricity prices in Albania. and their delivery through supporting the incumbent state-owned producer, generates significant fiscal risks, some of which materialised during the energy crisis of 2021-22. It also limits development of Albania’s electricity market. Reform of the electricity market is part of a broader policy agenda set out in Albania’s strategic policy documents. It will require three interrelated approaches: enabling measures to foster diversification of energy sources; mitigating measures to contain energy poverty and ensure the protection of vulnerable customers; and accompanying measures to ensure that energy sector reform delivers on its promises for the Albanian economy and society.
Based on the preceding analysis and the results of broad consultations, this section presents policy recommendations for Albania. Results of a peer-learning policy workshop (Tirana, fall of 2024), during which participants developed specific priority policy actions, are also presented to inform the policy orientations provided. These priority actions are highlighted in the relevant thematic areas and presented in Box 7.3.
A peer-learning process was an integral part of the Just Transition in the Western Balkans project, complementing the data collection and analytical work underpinning this report. As part of this process, a series of workshops were organised in the economies of the Western Balkans with three overarching aims: a) identifying key issues for a more inclusive and financially sustainable development of the energy sector at the regional and economy level; b) putting forward suggestions for future policy actions at the economy level; and c) fostering exchange of policy experiences. The process brought together key stakeholders in the field of energy transition from across the Western Balkans (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia).
In Albania, the workshop “From Analysis to Action: Scenarios for Inclusive Energy Sector Finance Reform” took place in Tirana on 3 October 2024 and was attended by 39 experts representing various societal perspectives, including government, civil society, academia and business in Albania. Participants also included representatives from the State Agency of Strategic Programming and Aid Coordination (SASPAC); the Ministry of Infrastructure and Energy; the Ministry of Health and Social Protection; the Ministry of Finance; the Ministry of Tourism and Environment; the Ministry of Economy, Culture and Innovation; and the Water Resources Management Agency. Also present were representatives from public entities within the energy sector, including the ERE; the Albanian Power Corporation (Korporata Elektroenergjitike Shqiptare, KESH sh. a); the electricity distribution system operator (OSSH); FSHU (as USS and SLR); the transmission system operator (OST); and Furnizuesi i Tregut të Lirë (FTL), the Albanian free market electricity supplier. In addition, experts from the University of Tirana, the Polytechnic University of Tirana and the Bank of Albania participated as did energy experts and representatives from civil society within the areas of gender equality and environmental protection.
The workshop began with a presentation of the preliminary findings of this project, followed by a presentation of national strategies and plans governing the energy sector in Albania. It then transitioned into a plenary session in which participants identified and prioritised the most pressing issues for a more inclusive and financially sustainable energy sector in Albania. These issues were grouped into key themes and ranked by participants based on urgency and importance. For the most prioritised themes, participants then developed concrete policy actions, with a strong focus on their implementation within Albania’s political context, taking consideration of aspects such as production and investment, socio-economic issues, and policy and implementation (Table 7.6).
Outcomes of Peer-Learning Workshop in Albania
Source: OECD Peer-Learning workshop in Albania on 3 October 2024.
Allowing markets to determine prices is critical for rebalancing energy sector finances in Albania
Keeping energy prices low for households and firms is a costly and inefficient means to support the Albanian population and economy. Despite having relatively low marginal production costs, the electricity sector in Albania has required continuous financial support from the state (through several mechanisms) to sustain the prices mandated by regulation and determined by sector policies. As envisaged in Albania’s NECP, progressive transformation of electricity markets into a “competitive, customer-centred, flexible and non-discriminatory electricity market with market-based supply prices” will require careful sequencing that may differentiate between household and non-household customers.
Continue the process of deregulation of non-household customers
Albania has moved forward with deregulation of business customers in electricity markets, albeit with some delays. Consumers in Albania are free to choose their electricity supplier. High-voltage customers are served in the open market, as are customers connected to 35 kV (since 2018). The deregulation of other business customers has progressed gradually. Since January 2022, medium-voltage customers connected at 6, 10 and 20 kV are served by the SLR rather than the USS. However, during the energy crisis, the SLR provided electricity well below market prices. Since January 2024, customers connected at 20 kV are supplied on the free market (with the exception of water utilities). Customers connected at 10 kV are served in the open market from January 2025, and it is planned that that 6 kV customers will join the free market in 2026.
Albania should plan for full deregulation of business customers within a realistic timeframe. General access to low-priced electricity for all businesses connected at 0.4 kV – regardless of their size, vulnerability or social significance – limits the development of local retail markets and blunts the effectiveness of price signals to encourage energy efficiency. Further deregulation is therefore warranted as Albania progresses in implementing the EU acquis on energy, including Directive 2019/944 on common rules for the internal market for electricity (EU, 2019[29]), which sets out the principles of market-based supply prices. Simulations suggest that price increases for businesses in Albania are likely to have negative impacts on the economy, at least in the short run. As such, the deregulation process should be carefully sequenced and accompanied by measures to increase competition in retail markets and to support businesses and the energy sector in the transition. Albania would do well to draw on lessons learned from the transition to the open market of larger and more sophisticated energy customers.
Allow for market determination of household electricity prices
Low electricity prices for households, which do not reflect demand and supply, impose a cost on the sector and the economy. Electricity prices for households did not change between the 2015 reforms until February 2025. In the period 2018-23, the price (9.5 ALL/kWh) was not only well below market-consistent prices, but also well below break-even pricing for the USS (11.97 ALL/kWh on average). From February 2025, the electricity prices for households were further lowered to 8.5 ALL/kWh for households consuming up to 700 kWh per month. This suggests that not only were households receiving sizeable subsidies, they were also being cross-subsidised by non-household customers. Simulations show that these cross-subsidies generate a cost for the economy at large. Notably, households account for 50% of final electricity consumption in Albania. By cornering a significant share of the retail electricity market, low prices significantly constrain the emergence of a competitive retail market.
Albania should plan for a gradual realignment of electricity prices for households that allows for greater passthrough from free markets. At a minimum, electricity prices for households should be sufficient for full-cost recovery by the supplier, without relying on cross-subsidies, and should be in line with existing legislation and the EU acquis. Prices that more fully reflect market movements would also facilitate the financing of necessary investments in the network and in production. They would also provide appropriate price signals for energy savings and energy efficiency investments by households. In practice, that would require an increase in retail electricity prices of 40% to 100%. The actual level will depend on the evolution of electricity markets over the medium term and on the introduction of specific measures to protect vulnerable customers or to change the distribution of the increased burden.
Relaxing public service obligations to make room for the market
Wholesale electricity markets in Albania remain conditioned by the need for the incumbent electricity producer to supply the USS at low cost. In 2023, this corresponded to 3 895 gigawatt hours (GWh) of electricity, or 49% of total electricity consumption. This procurement limits the transmission of price signals to customers, blunting incentives for energy efficiency investments and energy conservation (as discussed above).
The weight of public service obligations can blunt market forces in the electricity sector in Albania. Such obligations have the effect that a significant share of KESH’s production is unavailable for other segments in the market. To the extent that preferences exist for domestic contracting in electricity markets, this can increase prices in the deregulated market. Indeed, during the period April-December 2023, ALPEX prices were 5% lower on average than in HUPX. This also reduces the potential for market forces to foster greater productivity in the business operations of KESH, which receives only a fraction of the benefits from increased productivity in production or marketing operations.
During 2022-23, market forces were also blunted in an effort to shield producers through FSHU, in its capacity as the SLR. In line with KESH’s public service obligation, it served the SLR at below-market prices. This resulted in below-market prices for SLR customers, disincentivising switching to alternative suppliers (OECD, 2024[30]). Since April 2023, bilateral market prices between KESH and the SLR were higher than reference market prices, resulting in higher SLR tariffs.
Development of the power exchange in Albania offers potential to modulate the impacts of public service obligations on the electricity market. Since January 2024, the Albanian transmission system operator (OST) and the SLR (FSHU) have had to fulfil their needs by procuring electricity through ALPEX (OECD, 2024[30]). The development of ALPEX, along with the possibility of power produced by independent renewable energy suppliers being exchanged in the open market, will increase liquidity in electricity markets. It is also likely to make reducing the supply under PSO more practicable.
The direct impacts of changes in wholesale markets on households in Albania is likely to be similar to that of a shift in regulated prices. As long as retail prices are revised, the cost-plus model links retail prices to procurement prices. This means that retail household prices would reflect market developments, albeit smoothed over time (over one year) and possibly with a lag. In practice, a reduction of 20% in the share of demand from tariff customers having supply fulfilled bilaterally by KESH would lead to a similar 20% reduction in the gap between average tariffs and market-consistent prices.
Such a shift in retail prices also imposes additional risk on the electricity market operators. FSHU (in its SLR capacity) and OST (as TSO) have already addressed this issue through contracts for difference (CfD) signed with KESH. As such financial contracts can limit price fluctuations in TSO and retail tariffs, the cost of hedging should be included in the total cost of procurement.
Reducing the fiscal burden of Albania’s energy sector
Price regulation sustains an equilibrium that requires multiple transfers to energy sector firms. As a result, a reform such as contemplated in the preceding section would have the consequence of allowing for the withdrawal of support from the electricity sector while generating the liquidity necessary to resolve recurring issues in the balance sheets of firms in the sector.
Removing direct transfers to actors in the energy sector
The most sizeable support measures to the energy sector in Albania correspond to crisis mitigation measures implemented during the energy crisis of 2021-22. These included direct budget support to KESH worth ALL 20 billion (EUR 168 million) in 2022, as well as loans and loan guarantees directed at KESH and OSHEE. These measures were intended to provide liquidity and enable both firms to fulfil the public service obligations bestowed upon them (in particular to supply the electricity needs of the USS).
Indirect transfers to energy sector SOEs – in the form of guaranteed public debt and the servicing of guaranteed debt and sub-loans – were sizeable even prior to the energy crisis. According to the budget execution report for 2022, the electricity sector received ALL 6.7 billion in annual fiscal support (on average) in the period 2018-22.
Relaxing price regulation in Albania would allow energy sector firms to generate additional resources and free up budget space to support the economy and the population in more direct and efficient manners. According to the inventory of energy subsidies and support measures in the Western Balkans, firms in the electricity sector received EUR 49.1 million annually in the form of transfers and/or concessional and guaranteed loans.
Addressing inter-company debt to allow firms to seek finance in the market
Inter-company debt related to electricity markets is a significant drag on the sector’s firms in Albania. According to the 2022 budget execution report, such inter-company debt amounted to ALL 163 billion (EUR 1.37 billion) – or 7.6% of GDP. These debts constitute a web of mutual obligations that significantly weigh on the companies’ balance sheets. Water and sanitation utilities play an important role in this; in 2022, they owed ALL 25 billion (EUR 210 million) to OSHEE, which in turn owed ALL 51 billion (EUR 428.6 million) to KESH. The sector’s challenging financial situation explains the reliance on publicly guaranteed loans to provide liquidity. In a context in which SOE ownership and executive arrangements continue to exhibit a number of shortcomings (OECD, 2024[30]), the financial situation also explains the use of sub-loans and loan guarantees as means to support the liquidity of firms.
Settling the web of inter-company debt would set the stage for healthier financial management across the energy sector in Albania. Netting out a proportion of existing debts could help diminish the need for liquidity in the sector. However, the part of the debt that originates in utility companies may require financing to be resolved. Albania is making progress in this respect. In 2022, the government approved the reorganisation of water supply and sewerage companies, consolidating the sector from 57 municipally-based service providers into 15 regional companies. The new entities are set up as joint stock companies with majority shareholding by the Ministry of Infrastructure and Energy. Consolidation of the electricity sector has also been included as a policy indicator in the recent EUR 50 million policy loan agreed by Albania with Kreditanstalt für Wiederaufbau (KfW) and Agence française de développement (AFD) (AFD, 2023[31]).
Addressing energy poverty and the protection of vulnerable customers in Albania
Albania has recognised the need to support households in the process of energy reform. Past pricing reforms have been accompanied by mitigating measures characterised by rather broad targeting, mostly consisting of lump sum energy subsidies. Such transfers are less distortive than price subsidies and their relatively broad catchment may have contributed to the political feasibility of past changes. However, this remains an unfinished reform for two main reasons. First, on account of the persistent gap between retail household prices and the level needed to sustain energy sector function in a competitive electricity market. Second, inertia in compensatory measures raises concerns about future fiscal costs.
Going forward, Albania should endeavour to adopt a national definition of energy poverty and use it to design better-targeted support programmes. Evidence from across the Western Balkan region suggests that energy poverty is prevalent among the poor but is not exclusive to those whose income levels put them at risk of poverty. It is thus necessary to develop tools to accurately target those in need and to develop differentiated and complementary approaches to provide energy poverty support among the income poor while also mitigating it among those who are slightly better off (Box 7.3, Policy Action 2). The latter, for example, may have greater financial capacity and be able to participate in co-financing for investments to improve the energy efficiency of their homes.
Address energy poverty by ensuring better-targeted eligibility criteria for support programmes
A first step to address energy poverty is to develop an operational definition of energy poverty risk. This definition could be based on a national assessment of minimum consumption amounts to determine needs. Actions could then be implemented along the lines of international standards for energy efficiency in residential buildings (Box 7.3 Policy Action 2). An inter-ministerial working group has been set up and is working to define the scheme for protection of vulnerable customers. At the time of writing, no results have come to the fore.
As a second step, support measures should be designed to better respond to existing risks of energy poverty. Currently, Albania compensates energy prices for several categories of vulnerable groups, largely determined by general socio-economic vulnerability (e.g. social assistance beneficiaries, persons with disabilities or unable to work and their carers). Establishing new targeting criteria based on energy needs could improve support programmes. In addition, support measures could explicitly include actions to enable those at risk to increase the energy efficiency of their homes (e.g. by improving the efficiency of appliances or insulation). Support measures could also enable those same households to participate in electricity production as prosumers (e.g. through energy communities).
Enabling Albania’s future electricity market
To be successful, Albania’s policy agenda for reforming the energy sector will require several enabling actions. Several specific policy actions can support the transition to a more competitive and diversified electricity sector. As discussed during the Peer-Learning Workshop in Albania, adjusting legal and regulatory frameworks stands out. It is critical not only to fulfil Albania’s international commitments, but also a necessary step to foster integration with the EU electricity market. Both help provide an outlet for Albania’s clean electricity and a source of stability for the domestic market. In addition, advancing diversification of the electricity production matrix will require new investments in production, networks and other roles.
Achieving resilience in Albania’s energy markets through an inter-sectoral approach
A roadmap for achieving resilience focuses on the phasing of energy sector reform in Albania. Policy Action 6 (Box 7.3) aims for financial reconsolidation of Albania’s energy sector to promote growth and sustainability through an inter-sectoral approach. This involves implementing the Electricity Integration Package, fostering inter-ministerial collaboration, and leveraging expert insights. The process follows a stepwise implementation strategy, starting with public hearings, input collection, and refinement as well as continuous consultations with stakeholders. Finally, integration and collaboration among neighbouring economies is key to market integration.
Fostering integration with EU electricity markets
Integrating Albania’s electricity market with the European market is a key objective. It will require adopting EU regulations, enhancing competition and expanding international market access. Aiming to align the domestic and European electricity markets will depend on adopting EU legislation, harmonising local market products with EU standards, and revising legal frameworks to ensure compliance. As such, participants in the Peer-Learning Workshop suggested integrating ALPEX into the broader European electricity market (Box 7.3, Policy Action 3). Key objectives include increasing competition, enhancing transparency in price formation, and expanding access to international markets through differentiated products. This integration process involves co-ordinated implementation plans, human resource development in analytics and risk assessment, training for regulators and market participants, and consultation with experts.
New investments are needed to prepare Albania’s electricity sector to incorporate new renewables production
Investment in technology upgrades for renewables integration is critical to overcome transmission and distribution challenges while addressing the broader need for sector modernisation. Participants in the Peer-Learning Workshop placed high priority on intensifying investments to upgrade technology for new renewables as it would ensure compliance with EU energy policies and support sustainable energy goals (Box 7.3, Policy Action 1). This involves upgrading ageing infrastructure, pursuing grid optimisation, and integrating renewable energy sources to meet market demands. Grid optimisation through advanced technologies, such as smart metering to record electricity consumption and improve programming, was highlighted for boosting system efficiency, reducing operational costs, and enhancing market responsiveness. Additionally, comprehensive planning and prioritisation for technical advancements, including energy storage systems for effective energy arbitrage, were suggested for overcoming infrastructure limitations. Implementation requires comprehensive planning, prioritisation of technical advancements, continuous monitoring, collaboration with technical experts and stakeholders, and financial support (e.g. through green finance instruments and low-rate loans).
Integrating energy storage systems would further boost large-scale integration of renewables. To advance on this front, workshop participants identified key steps including integrating energy storage systems into the power system to store excess energy during off-peak hours, allowing it to be sold when demand and prices are higher (Box 7.3, Policy Action 5). By storing energy when the transmission system reaches full capacity, energy storage could also help manage grid congestion. The process involves analysing hourly distribution data, selecting appropriate modelling tools, and defining feasibility criteria. To choose the most appropriate energy storage solutions, this process should be pursued with input from local experts and academia. The action would require national studies, technical assistance and capacity building initiatives, likely supported by green finance instruments.
Equipping the workforce with the essential skills for a successful energy transition
Endowing the workforce with the necessary skills is important to sustain the transformation of the energy system in Albania. Despite its leading role in green energy in the region thanks to the reliance on hydroelectric power, Albania has the potential to transform its energy sector further by increasing the role of other renewable energies (solar and wind power) and by electrifying its transport system. The lack of a skilled labour force in the renewable energy sector was identified by peer-learning participants as a significant barrier to successful implementation of Albania’s energy transition, with firms in the sector facing difficulties in recruitment and staff retention. A structured approach to ensuring that the appropriate skills are available should begin with a comprehensive assessment of sectoral needs and existing capacities, supported by an integrated gender analysis to ensure inclusivity (Box 7.3, Policy Action 6). Based on these findings, targeted training programmes can be implemented building on ongoing efforts in the industry. Vocational education and training (VET) is important for preparing a skilled workforce of supporting the energy transition (Fejzulla, 2021[32]) and can be completed by lifelong learning to build on the skills of current sector employees. In addition, improving working conditions and introducing incentives for critical roles within the sector can help retain valuable skilled staff. Finally, the perception that the sector is male dominated can stop women from entering the sector, limiting the talent pool and the diversity of workplaces. Information and outreach campaigns are important elements of ensuring gender inclusivity of a skills development plan for the future of the energy sector in Albania.
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← 1. The counterfactual market-consistent prices include energy priced at the HUPX day-ahead market annual average as well as network charges and retail margins for the USS. Prior to the energy crisis, USS tariffs were set with the inclusion of wholesale electricity priced at 1.5 ALL/kWh (12 EUR/MWh), about a quarter of the value of the reference HUPX price. However, since the price also includes charges independent of the price, the average market consistent price is closer to retail prices and the gap is 43% on average in 2018-20.
← 2. The methodological approach is detailed in Chapter 5.
← 3. Estimates for electricity consumption expenditure from HBS 2022 are higher than total electricity billed by FSHU to households in 2022. The compensation figures include VAT but are adjusted to match total billed electricity
← 4. In practice, each of the electricity suppliers is treated as an independent representative firm and shares of demand served by the regulated and unregulated electricity suppliers and fixed in each of the cases discussed. These are set as 1% and 99% instead of 0 and 1 respectively when a sector is deemed to be served entirely by one of the two suppliers to enable numerical solutions to be resolved.
← 5. It is worth noting that the peak price for bakeries and low-voltage business applies only to customers that have two-tariff meters – meaning it affects only a small share of customers.
← 6. The increase in real prices for medium-voltage customers corresponds to the gap between average prices for medium voltage customers served by the SLR in 2023 (17.6 ALL/kWh) and the average price for non-household customers of the USS in 2018 (13.6 ALL/kWh) deflated by the consumer price index. In practice, regulated tariffs for medium-voltage customers were even lower in 2018 as they were set at 11 ALL/kWh (and 12.65 ALL/kWh for peak times). However, data are not available on average realised prices by market segment in 2018.
← 7. Calculations based on average GDP and average exchange rates over the period 2018-23.