Reducing carbon intensity and strengthening energy resilience are top priorities for North Macedonia. North Macedonia’s electricity generation remains heavily reliant on coal and natural gas, and growing import dependence exposes it to global price shocks. Despite these challenges, North Macedonia has made ambitious climate objectives and led regional efforts by adopting the first National Energy and Climate Plan (NECP) in the Western Balkans. Yet low energy prices and related subsidies hinder efficiency, distort competition, and strain public finances. Interventions to keep prices low also benefit better off households the most. 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. The chapter outlines five key policy recommendations for energy sector reform in North Macedonia: strengthen strategic and regulatory environment for new energy investment, align electricity prices with the market, address energy poverty, boost renewables and citizen engagement, and develop a skilled energy workforce for the energy transition.
Energy Prices and Subsidies in the Western Balkans
Abstract
North Macedonia has made significant progress in addressing energy and climate change challenges – including being the first Energy Community Contracting Party to adopt its National Energy and Climate Plan (NECP). Adopted in May 2022, the NECP sets targets for a 29% reduction in agricultural emissions, a 95% increase in forestry carbon removals, and 38% renewables in final consumption – all by 2030. The plan also focuses on energy efficiency and regional gas interconnections.
Reducing carbon intensity and enhancing the resilience of its energy sector are key priorities for North Macedonia. Electricity generation remains highly dependent on fossil fuels such as coal and natural gas. Increasing reliance on energy imports leaves the economy vulnerable to international price fluctuations. Moreover, as price regulations prohibit passing rising global energy prices on to consumers, costly subsidies are necessary to support the sector.
The financing of the energy sector in North Macedonia offers important levers for reform. Reducing regulation could foster a more competitive energy market, creating clearer incentives for both energy production and consumption, while encouraging diversification through new investments and improvements in energy efficiency. Additionally, limiting the role of energy subsidies and support measures, particularly during crises, could unlock crucial financial resources. These resources could then be redirected to support North Macedonia’s renewable energy and energy efficiency goals, while also ensuring assistance for the most vulnerable populations.
Specific to North Macedonia, the OECD project makes the case for moving towards fewer subsidies and less price regulation, accompanied by social support to balance the fiscal, economic and social impacts linked to price reform. As a basis for such reforms, the OECD developed an Inventory of Energy Subsidies and Support Measures in the Western Balkans, which can also be applied to each economy individually. Using this inventory in combination with household-level and macro-economic data, the project develops reform scenarios with a focus on understanding the impacts on energy prices, household budgets, employment, fiscal space and gender. The project presents complementary energy market reform scenarios and findings from macro- and micro-economic modelling.
Inventory of energy subsidies and support measures for North Macedonia
Keeping energy prices low through price regulation resulted in EUR 1.4 billion of induced support to consumers over the period 2018-23, of which about EUR 1.3 billion accumulated during the energy crisis (2021-23).
Financial support for the energy sector was relatively small (EUR 20.5 million) before the energy crisis but increased significantly during 2021-23. Sustaining low electricity prices during the crisis required EUR 574 million in direct support, with a grant to the state-owned Elektrani na Severna Makedonija (JSC ESM, the state-owned electricity producing company) accounting for the largest share of this support.
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 79 million in 2021-23.
Policy scenarios for inclusive energy sector finance reform in North Macedonia
Electricity pricing reform is key to gradually reducing energy subsidies that generate fiscal risks and can stall the decarbonisation process. In North Macedonia, below-market pricing of supply from JSC ESM is passed on, through the universal service supplier (USS), to households and small enterprise customers. This generates risk in that, when production is insufficient and market prices are high, JSC ESM exhibits significant losses, requiring direct policy intervention. A series of price reform scenarios are simulated to reflect probable situations in the event that deregulation in retail markets drives prices to converge towards spot market prices.
A conservative increase in regulated tariffs can significantly reduce this fiscal risk by channelling regular business income to JSC ESM. A conservative increase in retail prices – of 17% – would generate sufficient buffers for JSC ESM for a one-in-five years crisis as it corresponds to a 45% increase in wholesale prices compared to 2023. The risk is reduced by increasing income by more than EUR 99 million annually for the electricity sector, if an associated decline in demand is compensated by net sales at international market prices. In view of the aims to decarbonise the energy sector, part of this income could also be used to finance planned investments in renewable energy supply. The impacts of such a shift on the economy would be relatively modest and would depend on how the burden is shared between households and small firms served by the USS. Simulation results show that if the price increase is concentrated among households, it would drive GDP up, despite the fall in household demand. Since firms served by the USS currently cross-subsidise households and are served at prices near market-consistent prices.
Energy pricing reform will require compensatory measures to ensure that poverty and energy poverty are contained. Following the reforms undertaken in North Macedonia in 2019, the social protection system can help mitigate the poverty risk. This would require that fiscal income raised through the energy price reform is used to increase the scope and generosity of the main social assistance programmes. A EUR 14 million increase in the generosity of the Guaranteed Minimum Allowance (GMA) would suffice to compensate those households at risk of extreme poverty. Providing some degree of compensation to households at risk of energy poverty but with higher incomes will require new forms of intervention. Emergency measures enacted during the energy crisis (e.g. reduced value-added tax [VAT] rates) are effective in the short term. They would not, however, be desirable in the medium term, as they negate the energy saving incentives provided by increased prices and also generate costs that exceed those of existing energy subsidy programmes.
Policy recommendations for North Macedonia
North Macedonia should move to ensure that electricity prices provide full cost recovery for actors in the energy sector, along with reasonable margins. This would foster the emergence of a more dynamic retail market while helping to limit fiscal risk to state-owned enterprises (SOEs) that typically bear the brunt of controlled prices. Scope exists to adjust retail tariffs to better reflect cost and market realities, e.g. through seasonal tariffs or by increasing the fixed portion of tariffs to compensate for fixed costs. Gradually reducing the share of the USS demand that JSC ESM must supply under public service obligations should be reinitiated as a means to gradually increase market pass-through into retail prices and allow JSC ESM to face market forces.
Mitigation measures will be necessary to shield the poor from the impacts of future energy price increases. Recent social protection reform has equipped North Macedonia with better targeting mechanisms. However, the scope of such measures is currently limited and focused on those in greatest need. Within the region, North Macedonia stands out for having targeted energy efficiency support to vulnerable households. Defining energy poverty and identifying those in need of support would help design appropriate financial and non-financial support instruments to help vulnerable households reduce their energy needs through energy efficiency improvements.
Making the most of the energy transition will require complementary investments. Investment in new renewable generation capacity is key to maintain production and, therefore, competitiveness in North Macedonia. In turn, this will require investment in the electricity grid and the development of appropriate support measures, including tradeable green certificates. Scope also exists to foster consumer participation in the green transition, particularly through three mechanisms: improving the regulatory framework for prosumers accompanied by necessary investments in upgrading the electricity distribution grid; making the Energy Efficiency Fund operational and possibly expanding its mandate to cover investments in energy efficiency in residential buildings; and ensuring that fuel choices respond to environmental concerns. For the economy at large, capitalising on the green transition requires building the necessary skills in the workforce to encourage investment and to provide opportunities to workers displaced by the decarbonisation process.
How to read this chapter
This chapter is structured into four sections. It begins by examining North Macedonia’s climate commitments and its energy system. It then analyses public support to the energy sector using the Inventory of Energy Subsidies and Support Measures for the Western Balkans. The third section develops reform scenarios, assessing the potential impact of energy reforms on 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 North Macedonia.
North Macedonia has made substantial commitments on energy and climate
North Macedonia was among the first Energy Community Contracting Parties to adopt its NECP, showcasing its commitment to tackling energy and climate challenges. Submitted in May 2020 and officially adopted in May 2022, the NECP sets ambitious goals for reducing greenhouse gas (GHG) emissions and increasing the use of renewable energy. The plan includes a target of reducing emissions in agriculture by 29% and a 95% increase in carbon removals from forestry and land use, contributing significantly to overall GHG reductions. By 2030, North Macedonia aims for renewable energy to comprise 38% of gross final consumption, with 66% in the electricity sector through investments in solar photovoltaics (PV) and wind, and 45% in heating and cooling through electrification and heat pumps. Additionally, the NECP sets energy efficiency targets in line with EU directives and highlights the importance of gas interconnections with Greece, Kosovo, and Serbia, as well as integrating renewable sources (e.g. pumped hydro) to ensure energy security. Amendments to the Energy Law in 2022 support the NECP’s implementation, although certain elements still require full incorporation into national legislation (Energy Community Secretariat, 2022[1]).
North Macedonia has set an ambitious GHG emissions reduction target in its enhanced Nationally Determined Contribution (NDC), adopted in 2021. The economy aims to achieve a 51% reduction in overall GHG emissions and an 82% reduction in net emissions by 2030, compared with 1990 levels. These reductions will primarily be driven by the gradual decommissioning of coal-fired power plants (Oslomej and Bitola), in parallel with expanding renewable energy sources. The enhanced NDC was developed to comply with the Paris Agreement and the European Green Deal’s 2050 carbon-neutrality target, following a comprehensive stakeholder consultation. It is fully integrated with North Macedonia’s NECP and with the “green scenario” in the National Strategy for Energy Development 2040 (NSED 2040). Compared with the previous NDC, which was based on a business-as-usual scenario and targeted a 30% to 36% reduction in CO2 emissions by 2030, this enhanced NDC significantly raises the economy’s climate ambitions (MoEPP, 2021[2]; EBRD, 2022[3]).
Various domestic strategic documents complete the picture, although they are not always aligned with the ambitions set in the NECP and the NDC. The NSED 2040 outlines three scenarios for decarbonising North Macedonia’s energy sector by 2040, setting targets for GHG emissions reduction and renewable energy growth. The NECP essentially builds on the “green” scenario of the NSED 2040. The Long-term Strategy on Climate Action, introduced in 2021, outlines North Macedonia’s roadmap for decarbonisation, aiming for a 72% reduction in net GHG emissions by 2050, in alignment with EU policies. However, the strategy lacks a comprehensive monitoring framework and is less ambitious than targets set in the economy’s enhanced NDCs (Government of North Macedonia, 2021[4]).
Introduction of the EU’s Carbon Border Adjustment Mechanism (EU CBAM) in 2026 will drive the need for carbon pricing in North Macedonia. The EU CBAM will require importers of goods from outside the European Union to purchase certificates aligned with the EU carbon price, affecting goods that are not subject to equivalent carbon pricing. Approximately 20% of North Macedonia’s exports to the European Union will be subject to EU CBAM taxes, with the most impacted sectors being iron and steel, aluminium, cement, fertilisers and electricity. To mitigate the economic impacts and retain revenues domestically, the government announced in May 2022 that North Macedonia plans to introduce carbon pricing through new climate change legislation. This measure will serve as a transition step toward aligning with EU Emissions Trading System (EU ETS) rules by 2030 (Spasic, 2022[5]).
North Macedonia’s electricity mix: Fossil fuels continue to dominate, renewables are slowly gaining share
Fossil fuels dominate North Macedonia’s electricity production mix. The share of lignite has declined markedly in the past two decades, from 76% in 2000 to 46% in 2023. However, Increased use of natural gas, oil and petroleum products for electricity generation keeps fossil fuels’ overall contribution significant, accounting for around 71% of the total electricity mix in 2023 (Figure 11.1). Use of natural gas has been expanding since 2009, following the opening of a natural gas-fuelled combined heat and power plant (General Electric, 2009[6]). In 2023, natural gas accounted for 21% of North Macedonia’s electricity mix, the highest share among Western Balkan economies (Figure 11.1).
Electricity generation by fuel (GWh)
Source: Eurostat (2025[7]), Complete energy balances, https://ec.europa.eu/eurostat/databrowser/view/nrg_bal_c/default/table?lang=en&category=nrg.nrg_quant.nrg_quanta.nrg_bal; Energy Regulatory Commission of North Macedonia (2024[8]), Annual Report 2023, https://www.erc.org.mk/odluki/ANNUAL%20REPORT%20for%202023%20-ERC.pdf.
North Macedonia committed to phasing out coal by 2027, but recent delays in decommissioning thermal power plants (TPPs) and the opening of new coal mines suggest that the phase-out is likely to be extended. In 2021, North Macedonia became a member of the Powering Past Coal Alliance and pledged to phase out coal by 2027, aligning with the “green” scenario outlined in its NSED 2040. The government had set plans to decommission the Oslomej TPP by 2021 and Bitola by 2027 (both operated by JSC ESM). However, Oslomej remained intermittently operational as of 2024. Likewise, North Macedonia reopened the Negotino heavy oil plant and the third unit of the coal-fired Bitola power plant (Davor Pehchevski, 2023[9]), and opened two new coal mines (Ciuta and Gallop, 2022[10]). Considering these developments, it is estimated that phasing out of coal may be delayed until 2050 (Todorović, 2024[11]). Any postponement of the planned coal phase-out should carefully weigh the gains in terms of energy security against the rising maintenance costs and the prospect of relying on imported coal given the limited domestic reserves.
Within renewable energy, hydropower is the dominant source, solar is growing. In 2023, hydropower accounted for 88% of renewable electricity generation in North Macedonia, and 25% of total electricity generation. Wind and solar energy currently play a small role, together accounting for 2.5% of total electricity generation (Eurostat, 2025[7]). Notably, based on daily average theoretical solar PV potential (measured as kilowatt hours per square meter or kWh/m²), North Macedonia holds the second-highest solar energy potential in the Western Balkan region (ESMAP, 2020[12]). In 2022, North Macedonia experienced a surge in private investment in renewables, with 267 new power generation sites licensed, adding over 152 megawatts (MW) of capacity, primarily from solar (Vujasin, 2023[13]). This growth continued in 2023, with the economy adding 399 MW of new renewable capacity, which is expected to drive an increase in the share of solar energy in the electricity mix (Balkan Green Energy News, 2024[14]).
Electricity imports have played an important role in the past two decades
North Macedonia’s electricity imports increased steadily to balance declining coal-based generation capacity. Between 2020 and 2023, net imports accounted for an average of 20.8% of the economy’s domestic electricity supply, up from just 4% in 2000-01 (Figure 11.2). This increase in imports began in the 2000s due to rising electricity consumption. Over the past decade, total electricity generation in North Macedonia declined by 11%, largely driven by a decrease in lignite-based generation. This reduction was caused by four interrelated factors: the depletion and closure of one of the economy’s coal mines; a drop in domestic lignite production; decreased quality of coal; and frequent breakdowns and outages at the Bitola TPP (ERC, 2024[8]).
Import dependency has fallen thanks to increased renewable generation capacity but will remain an important factor. In 2023, net electricity imports fell to a record low in North Macedonia, falling to 185 GWh or 2.75% of gross consumption. Increased renewable capacity has contributed to an increase in production, with the share of solar power reaching 4.5%. However, the increase in production in 2023 was also driven by favourable conditions for hydroelectric production which increased by 23.5% and the operation of the mazut-fuelled Negotino plant. In addition, demand was particularly muted in 2023, falling by 13% compared to 2022. Therefore, while permanent increased in capacity will decrease the level of dependency in the future, imports are expected to remain a significant contributors to electricity supply in North Macedonia (ERC, 2024[8]). According to monthly electricity balance data, net imports contributed about 11% of gross electricity consumption in 2024 (SSO, 2025[15]).
Electricity net imports (GWh)
Source: (Eurostat, 2025[16]), Imports of electricity and derived heat by partner country, https://ec.europa.eu/eurostat/databrowser/view/nrg_ti_eh/default/table?lang=en&category=nrg.nrg_quant.nrg_quanta.nrg_t.nrg_ti; (Eurostat, 2025[17]), Exports of electricity and derived heat by partner country, https://ec.europa.eu/eurostat/databrowser/product/view/nrg_te_eh?category=nrg.nrg_quant.nrg_quanta.nrg_t.nrg_te; Energy Regulatory Commission of North Macedonia (2024[8]), Annual Report 2023, https://www.erc.org.mk/odluki/ANNUAL%20REPORT%20for%202023%20-ERC.pdf.
North Macedonia primarily relies on Russian gas imports but is actively working to diversify its supply through new infrastructure projects and partnerships. The economy currently imports all of its natural gas from Russia via an interconnector with Bulgaria, relying entirely on the TurkStream pipeline, which enters through a single point at the Bulgarian border. Gazprom has reserved the full capacity of this pipeline until 2030, leaving North Macedonia dependent on Russian gas in the medium term (Georgievski, 2022[18]). To diversify its supply, North Macedonia has taken steps such as: signing a deal with Bulgaria in 2022 to increase the capacity of the existing interconnector; and starting with Greece in 2023 construction of a new gas interconnector, which will allow gas imports from Azerbaijan (Patricolo, 2023[19]).
North Macedonia’s use of regulation to keep energy prices low comes with high costs for the economy in times of crisis
Despite significant energy imports, electricity prices in North Macedonia remain low compared with international standards. Household electricity prices are 2.5 times lower than the EU average (Figure 11.3). As in the rest of the Western Balkan region, prices for firms (non-household customers) are higher than for households. This is the opposite of the pattern seen in most EU countries. Businesses there typically pay lower electricity prices than households due to their stronger market position (bulk purchasing power, more favourable contracts) and lower associated service costs.
Electricity prices including taxes and levies for medium-sized household and non-household consumers, first semester of 2024, EUR/kWh
Source: Eurostat (2025[20]), Electricity prices for household consumers - bi-annual data (from 2007 onwards), https://ec.europa.eu/eurostat/databrowser/view/nrg_pc_204/default/table?lang=en&category=nrg.nrg_price.nrg_pc; Eurostat (2025[21]), Electricity prices for non-household consumers - bi-annual data (from 2007 onwards), https://ec.europa.eu/eurostat/databrowser/view/nrg_pc_205/default/table?lang=en&category=nrg.nrg_price.nrg_pc.
Low electricity prices in North Macedonia (as in most Western Balkan economies) are largely a result of regulated pricing. In North Macedonia, households and small commercial users – defined as businesses with fewer than 50 employees and an annual turnover or balance sheet not exceeding EUR 2 million – benefit from regulated tariffs offered by the USS. This supplier is insulated from fluctuating wholesale electricity prices because it sources the majority of its electricity from the JSC ESM, which (in turn) is obligated to provide a specified portion of its production to the USS. According to the Energy Law, JSC ESM was required to supply at least 80% of the USS’ total annual needs in 2019. During 2021 and 2022, the government compelled JSC ESM to sell around 90-100% of its electricity to USS at below-market prices (ERC, 2023[22]).
Regulation measures were further extended during the energy crisis of 2021-22, a period of high and volatile prices. These additional measures sought primarily to ensure security of supply. For example, North Macedonia issued decisions that required the independent joint-stock company, TE-TO AD Skopje, to produce and deliver electricity (160 MW daily of its 220 MW capacity) to JSC ESM at capped prices of 170 EUR/MWh (13-31 January 2022) and190 EUR/MWh (1 February until 31 March 2022) (Energy Community, 2023[23]). North Macedonia also extended the scope of regulated pricing by putting in place a temporary measure to limit margins for electricity market participants to 10% between September 2022 and April 2023 (Government of North Macedonia, 2022[24]).
Despite low prices, electricity bills are a burden for many households in North Macedonia and energy poverty remains a reality
The cost of electricity for households – as a share of income – is relatively high, making price increases politically sensitive. In North Macedonia, an annual consumption of 5 000 kWh1 costs, on average, 8.9% of GDP per capita, compared to an average of 7.9% in the Western Balkans and just 4.5% in the European Union (both including taxes and levies) (Figure 11.4). This implies a higher cost burden on households in North Macedonia. Raising electricity prices would impose a significant social cost, which explains the strong political resistance to such measures.
Average price (including taxes) for 5 000 kWh for households (% of GDP per capita), 2024
Note: Price data is S1-2024, GDP data is for 2023 from WDI.
Source: Authors’ elaboration based on price data from Eurostat (2025[20]), Electricity prices for household consumers - bi-annual data (from 2007 onwards), https://ec.europa.eu/eurostat/databrowser/view/nrg_pc_204/default/table?lang=en&category=nrg.nrg_price.nrg_pc and GDP per capita data from World Bank (2023[25]), World Development Indicators, https://databank.worldbank.org/source/world-development-indicators.
Energy poverty is a major concern in North Macedonia, impacting many households. Energy poverty in the EU is broadly defined as a situation in which a “household must reduce its energy consumption to a degree that negatively impacts the inhabitants’ health and wellbeing” (European Comission, 2025[26]). In 2021, the share of North Macedonian households that affirmed they could not afford to keep their homes adequately warm was 23.8% and some 29.9% were in arrears on utility bills. These figures are two to three times higher than EU averages of 10.6% and 6.9% for the same indicators (Figure 11.5).
Note: For all panels data for North Macedonia for 2020, for Albania it is 2021, for Montenegro and Serbia 2022 and for Kosovo 2018.
Source: Eurostat (2025[27]), Inability to keep home adequately warm, https://ec.europa.eu/eurostat/databrowser/view/ILC_MDES01/default/table?lang=en; Eurostat (2025[28]), Arrears on utility bills, https://ec.europa.eu/eurostat/databrowser/view/ilc_mdes07/default/table; Eurostat (2025[29]), 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.
A dedicated gender and energy analysis carried out as part of this project shows that different groups face different challenges when it comes to accessing and using energy. Household work often follows traditional gender roles, resulting in unequal energy use, with women typically responsible for energy-intensive tasks (e.g. cooking and cleaning), while men use electricity mainly for leisure activities (e.g. watching TV) (Box 11.1).
This project includes a gender perspective by examining how energy reforms impact men and women as consumers, workers and decision makers. To explore gender differences in energy consumption, access and responses to reforms, the study applied a qualitative research methodology, including focus group discussions and roundtables across the Western Balkans.
In North Macedonia, focus groups with a total of 62 participants1 were conducted in Skopje, Bitola and Kocani, as well as with the Roma community. Key findings show that gender plays a significant role in energy consumption, cost-saving strategies and responses to reforms. Findings from the focus groups and desk research provide an overview of the role of gender in shaping energy consumption, access to opportunities, decision making and energy poverty in Northern Macedonia. Key findings, including inputs from participants, are as follows:
Household labour division often mirrors traditional gender roles, leading to unequal energy consumption between men and women. Women tend to bear the brunt of daily tasks (e.g. cooking, cleaning and laundry) that involve higher energy usage. In contrast, men are more likely to consume electricity through leisure activities (e.g. watching TV or playing video games).
Women participants, particularly those managing multi-generational households, were more likely to discuss and implement energy-saving strategies, often adjusting their behaviour to lower their energy bills. Despite typically handling bill payments, men tended to view electricity management as primarily the responsibility of their female partners, even when the household budget is considered shared. One woman explained,
“I often cook at night, just before bed, because that’s when electricity is cheapest. I’d prefer to use that time to rest, but I can’t afford to cook during the day.” (Female, 46, Skopje).
Rural women often struggle to qualify for subsidies due to their informal roles within family-owned agricultural businesses.
In the Roma community, women are often more likely to seek social assistance, partly due to men’s accounts having been blocked due to unpaid bills.
"The social assistance is registered in my name because my husband’s account is blocked for not paying the water bill. It doesn’t make a difference though, as the money is shared between us regardless." (Female, 38, Suto Orizari)
Both men and women expressed scepticism about energy reforms and tariff increases. Men primarily focused on the practical implications, such as how the reforms might impact their immediate living conditions. Women, while also considering these factors, placed additional emphasis on the need for energy reforms to address pollution.
North Macedonia has made considerable progress in integrating gender considerations into its energy policy. The draft NECP recognises the importance of integrating gender perspectives in the design of energy policies and measures and also acknowledges existing gender gaps in the labour market, business ownership and large energy companies. The NECP includes projections for creating green jobs, estimating that women will fill 27.5% (2 178 jobs) of the green jobs created by 2035.
1. The focus group sampling in North Macedonia prioritised low-income households, with additional groups from middle-income backgrounds, energy support beneficiaries, and Roma communities, ensuring gender and regional representation. Gender-segregated discussions allowed for deeper insights into the specific challenges faced by men and women, including those in female-led and single-woman households. Participants were ages 18 to 86 and reflected a wide range of household types, energy sources, and dwelling conditions.
To provide a basis for comprehensive energy sector reforms in North Macedonia and across the region, the OECD Development Centre has developed an Inventory of Energy Subsidies and Support Measures in the Western Balkans. The inventory aims to present evidence of types and size of subsidies and support measures to the energy sectors of these economies. As such, it intends to raise awareness among policy makers in North Macedonia and in the region about existing energy subsidies and support measures and their potential impacts. This has been done using an internationally recognised methodology to develop a consistent and comprehensive description of such schemes and provide robust estimates of their volumes. The systematic overview of subsidies and support measures is largely based on the OECD Inventory of Support Measures for Fossil Fuels (OECD, 2024[30]). 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 energy sector of North Macedonia through energy prices
Induced support for consumers
Provision of electricity at regulated tariffs, which are lower than market prices, resulted in approximately EUR 1.4 billion in consumer support in North Macedonia between 2018 and 2023. This support is calculated as the difference between market prices – approximated using Hungarian Power Exchange (HUPX) prices – and regulated tariffs in North Macedonia (Figure 11.6 – Panel A).
Note: Induced support through price regulation in North Macedonia (Panel A) includes two schemes: supply of electricity from JSC ESM to the universal supplier for regulated tariff customers, and supply of electricity to the transmission system operator (TSO) to cover the transmission losses. Panel B shows only supply of electricity from JSC ESM to the universal supplier for regulated tariff customers, as the scheme for DSO was put in place from 2022 onward.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Supply of electricity from JSC ESM to the USS was the main price regulation scheme, generating most of the induced support for consumers, especially during the energy crisis. Between 2018 and 2023, JSC ESM supplied electricity at an average price of 2.6 MKD/kWh, more than 2.5 times lower than the average HUPX price of 6.5 MKD/kWh during the same period. During the peak of the energy crisis in 2022, when JSC ESM’s supply price was 2.7 MKD/kWh against the HUPX price of 16.7 MKD/kWh (Figure 11.7), the scheme generated induced support to consumers of EUR 818 million (Figure 11.6 – Panel B).
Supply of electricity to the distribution system operator (DSO) to cover network losses was another form of induced support during the crisis. In 2022, JSC ESM provided electricity to the DSO at below-market prices, resulting in an estimated induced support of EUR 81 million. As HUPX prices declined in 2023, the price of electricity supplied to the DSO aligned with market rates (Figure 11.7).
Source: ERC (2023[22]), Annual Report of 2022, https://www.erc.org.mk/odluki/2022.06.02_RKE%20GI%202021-FINAL-ENG.pdf; HUPX (2023[31]), DAM Historical Data, https://hupx.hu/en/market-data/dam/historical-data.
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 643 million in North Macedonia. The alternative estimate is 54% 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 11.8). 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 North Macedonia has led to significant cross-subsidies among energy consumers within the 0.4 kilovolt (kV) category, amounting to EUR 190 million over 2018‑23. In North Macedonia (as in other economies in the region), these cross-subsidies are built into the regulated retail electricity tariffs, meaning that one group of consumers pays more for electricity than another. Between 2018 and 2021, non-household customers on the low-voltage (0.4 kV) network were charged a tariff of 9.3 MKD/kWh by the USS. Household customers paid about half that amount (4.8 MKD/kWh), resulting in significant cross-subsidies between non-household and household consumers (Figure 11.9).2 In July 2022, the Energy, Water Services and Municipal Waste Management Services Regulatory Authority of the Republic of North Macedonia (ERC) introduced electricity block tariffs, allowing the price of electricity to increase progressively across four blocks during peak demand.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Cross-subsidies are also evident in the heating sector in North Macedonia. For instance, tariffs for the education sector are approximately twice as high as those for households (Table 11.1). However, due to the lack of detailed data on contracted heat capacity and the amount of heat delivered by suppliers, it was not possible to calculate the exact extent of cross-subsidies in district heating tariffs.
MKD/kWh
Source: ERC (2023[22]), Annual Report of 2022, https://www.erc.org.mk/odluki/2023.04.26_RKE%20GI%202022-FINAL%20ENG%20VERSION.pdf.
Despite the effects of price regulation, North Macedonia has been working to liberalise its electricity sector. In December 2023, JSC ESM increased the prices it charges to the USS and the DSO. Starting on 1 January 2024, JSC ESM was required to meet only 95% of demand in the regulated market; this obligation decreased to 85% on 1 July 2024 (IMF, 2024[32]).
The inventory also identifies other forms of induced support for consumers in North Macedonia. This includes electricity tariffs capped at 80 EUR/MWh for food producers and bakeries, and at 95 EUR/MWh for public water supply companies and schools. These support schemes were introduced in November 2022 and amounted to EUR 8.5 million until March 2023, when the schemes were discontinued. Outside the electricity sector, a price ceiling on petroleum products was identified as another form of support, but was not valued due to a lack of data.
Induced support for producers
Feed-in tariffs are a special category of induced support to renewable energy producers in North Macedonia. 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 North Macedonia 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 opportunity cost for producers. Feed-in tariffs shielded privileged producers from market volatility while also preventing them from making windfall gains when prices were high. While the feed-in tariffs generated positive induced support for producers in 2018-20, the energy crisis shifted this dynamic, resulting in an opportunity cost of around EUR 68 million in 2022 for producers that remained in the system (Figure 11.10 – Panel A). Similar trends were observed across the region (Figure 11.10 – Panel B). In 2022, due to rising electricity market prices, many producers participating in the feed-in tariff scheme opted to leave the preferential support system to sell at market prices (ERC, 2023[22]). However, by exiting the feed-in tariff arrangement, producers forfeited their preferential status and the right to regain it in the future. This explains why some producers chose to remain in the feed-in tariff scheme despite rising market prices.
The inventory calculated the induced support linked to feed-in tariffs that cover schemes for small hydro, solar, wind, biogas and biomass energy production. These tariffs provide preferential electricity producers with a guaranteed purchase price for their electricity, valid for a period of 15 to 20 years, depending on the technology. Examples of the applicable feed-in tariffs are as follows: for wind energy, 89 EUR/MWh; and for hydropower, 45 EUR/MWh to 120 EUR/MWh, depending on the monthly energy output (ERC, 2019[33]; ERC, 2022[34]; ERC, 2023[22]; ERC, 2022[35]; ERC, 2024[8]).
Note: For comparability, values for 2023 are not included in the cross-regional figure due to lack of available data for other economies. The data for 2023 for North Macedonia is displayed in Panel A.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
In 2019, North Macedonia introduced feed-in premiums as an additional support mechanism for renewable energy producers. These premiums are regulated under the Decree on Support Measures for Electricity Production from Renewable Energy Sources (Official Gazette of the Republic of Macedonia, No. 29/2019). Feed-in premiums are awarded through competitive auctions organised by the Ministry of Economy, providing producers with a fixed premium on top of the market price of electricity sold. Auctions held in 2021 and 2022 for solar PV plants resulted in agreements for a total installed capacity of 75 MW, with the lowest premium being 0.01 EUR/MWh for 15 years. The first competitive auction for feed-in premiums (held in 2019) targeted PV power plants on state-owned land. Between 2019 and 2023, a total of EUR 1.9 million in feed-in premiums was paid to producers. These data are based on funds allocated through the government’s Annual Financial Support Program for Preferential Producers of Renewable Energy using Premiums (Decrees No. 29/2019, No. 277/2019, No. 12/2021, No. 175/2021, No. 33/2022 No. 63/2023).
Financial support: EUR 594 million in 2018-23, most during 2021-23
Financial support for the energy sector in North Macedonia was relatively small (EUR 20.5 million) before the energy crisis, but it increased significantly (EUR 574 million) during 2021-23. The financial support includes both fiscal support and credit support. On the fiscal side, prior to the crisis, North Macedonia provided only around EUR 2.5 million. During the crisis, this support surged to approximately EUR 395 million in 2021-23 (Figure 11.11). The EUR 2.5 million in fiscal support from 2018-20 was part of ongoing programmes (which continued in 2021-23) to support installation of solar thermal collectors, PVC windows, pellet stoves, heat pumps and solar PV systems. Additionally, before the crisis, the energy sector received EUR 18 million in credit support through publicly guaranteed loans (Figure 11.12).
Period totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Period totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Direct grants to JSC ESM, amounting to EUR 279 million, accounted for the largest share of North Macedonia’s total fiscal support during the energy crisis (Figure 11.13). Before the energy crisis, direct financial support to JSC ESM was limited. The crisis-linked surge in electricity, gas and heating prices prompted a significant increase in government support to JSC ESM, aiming to shield regulated electricity and district heating customers from high market prices. Of this support, shares can be broken down as follows: 46% was used to purchase coal, heavy oil (mazut) and gas for electricity production; 31% went toward purchasing electricity; 13% covered payments to electricity transmission system operator of North Macedonia (JSC MEPSO) for deviations and balancing; and the remaining 10% was allocated for JSC ESM’s regular operational costs (including salaries, loans and interest) (State Audit Office, 2022[36]).
A reduction in value-added tax (VAT) – of EUR 86 million – also played an important role during the energy crisis (Figure 11.13). From July 2021 until January 2023, the Government of North Macedonia reduced VAT on electricity from 18% to 5% for household consumers. In January 2023, the rate was increased to 10%; from July 2023 onward, the usual 18% rate has applied (European Commission, 2022[37]; Ministry of Finance, 2021[38]; Ministry of Finance, 2022[39]). The estimated foregone revenue from this scheme was EUR 64 million in 2021-23.3 Reducing VAT rates for selected oil derivatives was another scheme introduced during the crisis. The Government Decision on Determining the Type of Goods and Time Period of Application of Preferential Tax Rate (Official Gazette of the Republic of North Macedonia no. 58/2022) introduced a preferential VAT rate of 10% on selected fuels (motor fuel, gas oil as propellant, gas oil as heating fuel, liquid petroleum gas and natural gas) as a temporary measure (applied from 13 March to 31 May 2022). The estimated foregone revenue from this scheme was EUR 22 million in 2021‑23.4
2021-23 period totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
During the energy crisis, North Macedonia introduced targeted support for vulnerable consumers, allocating EUR 19 million between 2021 and 2023. The government provided assistance through electricity subsidies, offering low-income households monthly support ranging from MKD 600 to MKD 800, depending on their total income and family size.5 In 2022, this measure was expanded to include additional socially vulnerable groups, such as individuals receiving disability compensation, single parents not already registered as beneficiaries, and those entitled to compensation for bodily harm. Additionally, households that reduced their electricity consumption by 10% (compared with the previous year) qualified for an extra subsidy of MKD 200 to MKD 300, depending on their category. This measure was administered by the Ministry of Economy. The GMA was also available to households experiencing material deprivation and lacking property-based income. Material deprivation is defined as having a household income below the legally mandated minimum level over the preceding three months, as outlined by the Law on Social Protection. The GMA is administered by the Ministry of Labour and Social Policy (Figure 11.14).
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Credit support to the energy sector was also concentrated in 2021-23, during the energy crisis. Over 2018-23, the energy sector in North Macedonia received credit support of EUR 197 million, of which EUR 179 million was during the energy crisis in 2021-23 (Figure 11.15). The largest (EUR 100 million) of these loans was provided to JSC ESM by the European Bank for Reconstruction and Development (EBRD) to address an emergency liquidity gap. In fact, this loan complemented the direct government grant to JSC ESM (Figure 11.13). In addition, JSC ESM secured two other loans, each valued at EUR 25 million – one to construct a 30 MW solar PV generation facility, the other to rehabilitate hydropower plants. The EBRD granted an additional loan of EUR 29 million to finance the gas interconnector between Greece and North Macedonia. The only pre-crisis loan (EUR 18 million) registered in the inventory was to a windfarm (Bodanovci) (Figure 11.15).
2021-23 period totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Understanding the distribution of support between fossil fuels and renewable energy in North Macedonia
The inventory distinguishes between support to fossil fuels and renewable energy. For primary energy sources (e.g. solar, wind and fossil fuels), direct categorisation is possible. For energy carriers (e.g. electricity), support is categorised based on the share of fossil fuels and renewable energy in the domestic electricity mix.
Taking into account North Macedonia’s electricity mix, most of the induced support through regulated electricity prices goes to fossil fuels. About EUR 988 million of induced support through regulated prices can be allocated to fossil fuels while about EUR 410 million goes to renewable energy (Figure 11.16 – Panel A).
All induced support through feed-in tariffs goes to renewable energy. When the guaranteed prices through feed-in tariffs exceeded market values, the support effectively benefited producers. This occurred between 2018 and 2020, when feed-in tariffs provided approximately EUR 66 million in producer support. From 2021 to 2023, however, feed-in tariffs fell below market prices, resulting in an opportunity cost for producers in the amount of EUR 79 million (Figure 11.16 – Panel B).
2018-23 totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Between 2018-23 in North Macedonia, about EUR 385 million of financial support was allocated to fossil fuels and EUR 209 million to renewable energy. While fiscal support to fossil fuels was more than double that to renewables (Figure 11.17 – Panel A), credit support was almost equal at EUR 97 million for fossil fuels and EUR 100 million for renewables (Figure 11.17 – Panel B). In terms of fiscal support, almost EUR 30 million of direct support went to fossil fuels in 2023, through reduced VAT rates for selected oil derivatives (EUR 22 million) and reduced excise duty rates for selected oil derivatives (EUR 7 million). Direct fiscal support for renewables (EUR 5 million) was through schemes for installation of solar thermal collectors, PVC windows, pellet stoves, heat pumps and solar PV, which were occurring on regular basis between 2018-23. The rest of the fiscal support to either fossil fuels or renewables was overall support provided to electricity and/or heating production and consumption. Direct credit support for fossil fuels was in the form of a European Investment Bank (EIB) loan (EUR 29 million) for the gas interconnector (Greece-North Macedonia part) and part of the EBRD loan of EUR 100 million for emergency liquidity assistance to JSC ESM. The EBRD loan was fully ringfenced and did not directly support fossil fuels. The Inventory attributes a share of this loan as support to fossil fuel as per the methodological treatment of all support for firms producing electricity from fossil fuels. JSC ESM produces a portion of its electricity using fossil fuels, and the loan targeted liquidity issues across the company, which would have made funds from other sources available for fossil fuel production. Direct credit support to renewables was in the form of three publicly guaranteed loans for hydropower, wind and solar; as such, part of the EBRD loan to JSC ESM can be allocated to renewable energy.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Energy sector reform in North Macedonia will require carefully balancing the efficiency of energy markets with the economic and social consequences of reform, while ensuring that reforms are fiscally sustainable. The bulk of support measures identified in the inventory of energy subsidies and support measures were enacted as means to ensure security of supply while maintaining relatively low prices. This section draws on micro-simulation and macro-economic modelling to examine policy scenarios for electricity prices in North Macedonia, building on the inventory of support measures presented in this chapter. The section starts with a description of the tools used. It then discusses the capacity of the social protection system in North Macedonia to put in place compensatory measures. The section moves on to analyse price regulation reforms and finishes with considerations on how such reforms can be implemented, including the role of block tariffs and energy efficiency measures.
Analysing the macro-economic impacts of potential energy sector reform in North Macedonia
Changes in energy sector regulation will impact the economy widely. At the macro-economic level, changes in market regulation generate transfers of value from certain categories of households to the energy sector and to the state. This occurs through four mechanisms: directly through the price of electricity; increased tax receipts on energy consumption; increased tax receipts linked to increased profitability of energy producers and suppliers; and dividend payments linked to improved performance of SOEs. Different sectors and firms will be differentially impacted depending on their current status. In North Macedonia, large consumers already procure electricity in the open market while small- and medium-sized enterprises (SMEs) have the option of being served under regulated prices. While regulated prices cross-subsidise household tariffs, they remained attractive during the energy crisis of 2021-22. Different sectors and firms will also be differentially impacted depending on the energy intensity of their activity and their ability to shift energy consumption between sources of energy. To shed light on how the various effects combine, this report applies macro-economic computable general equilibrium (CGE) modelling as a flexible tool to analyse the impacts of energy sector reforms in individual economies in the Western Balkan region (Chapter 4).
The CGE model presents a simplified version of the economy of North Macedonia. This chapter relies on an instance of the POWER-CGE model developed for the case of North Macedonia, the MK‑POWER‑CGE model. The model uses a 26-sector representation of the economy (at NACE section level), which has been augmented to reflect the dual nature of electricity markets in North Macedonia. The electricity supply sector is modelled as a fixed-price, regulated sector that meets the posted demand of regulated customers and a flexible price, unregulated sector in which markets clear. The regulated sector, in turn is modelled as two separate “grids”, serving respectively households and non-household regulated customers. Both grids purchase electricity from domestic and foreign producers in the market and selling the posted demand and fixed prices. The model is static, and the results are meant to represent new equilibrium situations after a policy or market shock has occurred.
Data for the MK-POWER-CGE model were built using multiple sources to ensure accurate representation of the economy. The core of the dataset was constructed using input-output tables for 2020, sourced from the State Statistical Office of the Republic of Macedonia (2024[40]), which provided a comprehensive framework to account for inter-sectoral activities. Key economic indicators (e.g. employee compensation, gross fixed capital formation and sector-level value-added) were obtained from the national accounts (SSO, 2022[41]). Import and export data, categorised by sector, were sourced from the World Trade Integrated Solutions (WTIS) database (2024[42]). World Development Indicators (WDI) from the World Bank provided data on net capital flows (World Bank, 2023[25]). For capital stock values, data from the Penn World Tables (2024[43]) were used. All data were harmonised and transformed to 2020 values, expressed in denar (MKD). All sectors were mapped and reconstructed to align with the NACE sectoral decomposition, ensuring compatibility across the model. These data were then combined with the underlying database of the Global Trade Analysis Project (GTAP 11), which uses 2017 as the reference year (GTAP, 2023[44]). The GTAP database includes a global input-output matrix as well as social accounting matrices for 160 regions. Since North Macedonia is included as part of a regional aggregate in the GTAP database, the social accounting matrix for North Macedonia was built based on national data, and these data were then combined with the GTAP database to isolate North Macedonia from the regional aggregates.
The sectoral composition of regulated electricity demand is a key parameter in deregulation simulations. In the absence of sector-level detail of the source of electricity and heat energy, the model is calibrated under the assumption that small and medium enterprises (SMEs) are the ones served under regulated tariffs. The share of electricity supplied by the regulated grid is approximated by the share of value added by SMEs (under 50 employees) except in the electricity, gas, steam and air conditioning supply where it is set to zero. In sectors where the average turnover for firms with 20-49 employees is above EUR 2 million, the share of value added by firms with less than 20 employees is taken as the reference). This results in an average of 47% of firms served by the regulated segment (but a significantly lower share of electricity, as the share is low in highly electricity-intensive sectors) (SSO, 2023[45]).
Social protection and energy subsidies in North Macedonia
Changes in energy subsidies and support measures to energy in North Macedonia would imply changes in retail prices faced by households and small firms. A very large proportion of recent energy subsidies and support measures in North Macedonia were implemented to keep prices low during the 2021-22 energy crisis. They include, most importantly, transfers to JSC ESM to allow it to fulfil its obligation to supply the USS with electricity intended for regulated customers at low prices, which were, in turn, channelled into low electricity tariffs. Other measures directed to mitigate impacts of the energy crisis on households included temporary reductions in VAT rates on electricity and other energy products (including hydrocarbons). Even before the crisis, households and firms served by the USS faced prices that were, on average, 17% below what they would have been had customers been served under international market prices. To ensure that North Macedonia can contain any adverse social consequences of energy market reforms, it is important to understand the distributional incidence of price shifts and the capacity of the economy’s current tax and social protection system to redistribute resources.
Low electricity prices benefit households in need but also transfer significant value to those who do not need help. Induced support through non-market pricing in wholesale markets translates into lower tariffs for all households in North Macedonia. The size of the implicit subsidy varies over time and amounted to 17% prior to the energy crisis (in 2018). Households at the bottom of the income distribution spend a greater share of their income on electricity and, therefore, receive – relative to their income – a greater transfer from subsidised prices (7.5% of income according to data presented in Figure 11.18). In stark contrast, as better-off households consume more electricity, they receive a greater absolute value transfer from uniform price subsidies. It is notable, however, that absolute values of transfers are quite homogeneous by income decile.
Distributional impact of a 17% increase in electricity prices in North Macedonia
Note: The figure displays the relative and absolute impact of electricity price regulation in North Macedonia across the income distribution
Source: Petreski (forthcoming[46]).
Micro-simulation 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 can be used to compare the ability of taxes and transfer systems across economies to redistribute income and reduce poverty (Chapter 5). Comparing inequality (Gini coefficients) and absolute poverty headcounts (based on market income) with their counterparts – including all taxes and transfers – offers a measure of the ability of each economy to redistribute income (Figure 11.19). To this end, inequality and poverty are compared before and after direct and indirect taxes and transfers, in order to provide information on the impacts of the overall tax and transfer system on redistribution (Figure 11.19 – Panel A) and on poverty (Figure 11.19 – Panel B). Overall, the tax and transfer systems in the Western Balkans have modest redistributive effects: inequality (as measured by the Gini co-efficient) decreases by 0.02 points in North Macedonia, similar to the impact in other Western Balkan economies (0.03 points in Albania; 0.01 points in Montenegro; and 0.025 points in Serbia) (Figure 11.19 – Panel A). In contrast, inequality falls by 0.12 in Spain and 0.06 in Poland. Government interventions through taxes and transfers are, by contrast, associated with an increase in poverty in North Macedonia. This is mainly the result of indirect taxes. Direct taxes and transfers reduce poverty by 1.8 percentage points in North Macedonia. However, indirect taxes significantly reduce consumable incomes. When all taxes and transfers are accounted for, their overall impact is a slight increase in poverty. These results suggest that social transfers cannot fully offset the burden of taxes on poverty (Figure 11.19 – Panel B). The pattern is not exclusive to North Macedonia or even the economies of the Western Balkans; it can also be observed in Türkiye and in other Central and Eastern European economies (e.g. Croatia, Poland and 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 for the latest available CEQ assessment in each comparator economy: Colombia, Croatia and Poland (2014), Romania, Türkiye and the United States (2016), 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. Panel B. Poverty measured at the upper middle-income absolute poverty line (5.50 USD/day in 2011 PPP, 6.85 USD/day in 2017 PPP). Results for Croatia and Poland correspond to the lower middle-income poverty line (2.5 USD/day in 2005 PPP. Results for Croatia and Poland correspond to the lower middle-income poverty line (2.5 USD/day in 2005 PPP).
Source: Data sourced from background papers prepared for this report: Albania data from Zhabjaku Shehaj (forthcoming[47]) Bosnia and Herzegovina data from Vladisavljević and Žarković (forthcoming[48]), Montenegro from Vladisavljević and Žarković (forthcoming[49]), Serbia data from Vladisavljević and Žarković (forthcoming[50]), North Macedonia from Petreski (forthcoming[46]). Others sourced from CEQ (2024[51]), CEQ Standard indicators web version 5.0, CEQ Institute, https://commitmentoequity.org/datacenter/.
The micro-simulation analysis allows for a comparison across social transfer programmes in North Macedonia in terms of their impacts on inequality and poverty. The main source data for the analysis is the Statistics on Income and Living Conditions (SILC) 2019, which has reference year 2018. This dataset was preferred to SILC 2020 because a social protection reform was implemented during 2019. Since SILC 2020 refers to year 2019, it may conflate data from before and after the reform. However, the analysis refers to the social benefit system after the implementation of the 2019 reform, with all changes simulated in the data. Crisis response measures were also simulated, accounting for their eligibility rules and scaled to match actual expenditures in 2018 real terms. Finally, simulated crisis response measures were compared against the main social assistance programme (the GMA) and the energy allowance allocated to its beneficiaries. They include:
The energy subsidy implemented by the Ministry of Economy in 2021-22 (labelled as an energy subsidy “top-up”), which granted MKD 600 to 800 monthly to eligible households and commanded a total of MKD 60 million.
The reduction of VAT on electricity – from 18% to 5%, and then to 10% – implemented from January 2021 to January 2023.
The reduction of VAT on fuel from 18% to 10%, implemented from March to May 2022.
Regular and emergency programmes in North Macedonia differ in their design and impacts. To analyse their impacts, the contribution such programmes make to poverty reduction (in percentage points) is compared with their size (total monetary value relative to average market income of all households). The degree of targeting is measured by a progressivity index, which increases as the programme becomes more focused on the bottom of the income distribution (Figure 11.20). Simulation results show that the GMA – as redesigned in 2019 – is quite effective in reducing poverty (by 1.5%) and targeted towards the poor. As an add-on to the GMA, the energy allowance has almost identical targeting performance. Being a much smaller transfer, however, it has only a marginal impact on overall poverty. The energy subsidy top-up shows good targeting performance but relatively modest results due to its size.6 While reduced VAT rates did not specially target the poor, they did induce larger poverty reduction effects, due to the size of the corresponding transfers. However, they are notably more expensive than targeted measures. As simulated, reducing VAT on electricity to 5% has the effect of lowering moderate poverty by 0.5 percentage points, albeit at a cost of MKD 3.7 billion (compared with the annual cost of the GMA, which has a budget of around MKD 2.2 million).
Marginal impacts of social and emergency programmes, simulated
Source: Petreski (forthcoming[46]).
Compared to the social and energy subsidy measures, the implicit energy subsidy is effective in containing poverty but does so in a very inefficient manner. Indeed, as simulated, the implicit energy subsidy commands 1.8% of total household income. As it is not targeted, however, it achieves a lower marginal impact on poverty than the GMA while effecting a much larger transfer (MKD 9.4 billion as simulated or EUR 153 million).
Simulated incidence of energy crisis mitigation measures compared to an increase in electricity prices of 17 % (as % of income)
Source: Petreski (forthcoming[46]).
Together, measures taken during the energy crisis in 2021-22 could all but negate the inequality and poverty incidence of an electricity price increase. The distributional incidence shows how the means-tested energy subsidy was designed to target those in need. Indeed, when restricting the analysis to vulnerable groups, this programme represented 32% of the income of large households (with three or more children) in the first decile, where its beneficiaries are concentrated. However, the incidence of the combined crisis response measures is largely driven by the VAT rate reduction, which, using the same base as electricity consumption, is distributed in the same manner.
Reforming retail electricity prices in North Macedonia
Policy intervention insulated retail prices from market movements
Regulated segments remain large in the energy market of North Macedonia, despite progress in market deregulation. The retail market in North Macedonia is liberalised and, since 2019, all consumers have been able to choose their supplier. The regulated market covers households and small customers that are eligible for supply by the USS, as well as entities served by the supplier of last resort (SLR). In practice, small customers are defined (according to the 2018 Energy Law as amended) as entities with fewer than 50 employees and annual revenue of less than EUR 2 million (Republic of North Macedonia, 2018[52]). This corresponds to the OECD definition of a small firm (OECD, 2022[53]).
Public policy intervention in wholesale markets in 2021-23 insulated households and small firms in North Macedonia from volatility. Average retail prices for households increased notably over the period, by 25% in nominal terms in 2022 (from 4.64 MKD/kWh to 5.78 MKD/kWh) or 18% in real terms. This is in stark contrast to prices in international markets which increased 139% (on average) in 2022 before slowly receding to levels that remained, in 2023, historically high (around 100 EUR/MWh). In the same period, prices in the liberalised market in North Macedonia increased in line with international prices, with average prices to end-customers in 2022 being 263% higher than averages before the COVID-19 pandemic.
Efforts to keep prices under control temporarily halted the development of competitive markets in North Macedonia. After full liberalisation in 2019, the open market provided increasing shares of total consumption, from 47.4% in 2018 to 53.3% in 2021 (ERC, 2022[34]). However, given the gap between regulated and unregulated market prices, many small firms returned to the USS, such that in 2022, the share of total needs supplied by the liberalised market fell back to 47.3%.
Electricity prices in MKD/MWh
Source: Authors’ calculations based on ERC annual reports.
Price moderation in North Macedonia was achieved through public service obligations. The structure of regulated prices, with a cost-plus method for tariff determination, was maintained during the energy crisis. Unlike other Western Balkan economies, which did not revise prices during the period, North Macedonia maintained low prices through two measures: increasing the share of electricity delivered by JSC ESM to the USS; and keeping the price of supply by JSC ESM constant and – at 41 EUR/MWh – well below international market prices.
Low wholesale prices to the USS drove a large share of public support to energy in North Macedonia in 2018-23. As presented in the Inventory section, this report estimates the induced support in wholesale markets by comparing prices to international reference prices. Given the nature of tariff regulation, low wholesale prices led to low retail prices and, therefore, constitute a transfer of value from electricity producers (in this case, JSC ESM) towards households and other USS consumers, which was worth EUR 1.4 billion during the period. Two “sub-periods” can be easily distinguished. Prior to the energy crisis, JSC ESM did not require regular transfers to compensate it for this opportunity cost. However, in 2021-23, JSC ESM received direct transfers worth EUR 279 million and publicly guaranteed loans worth EUR 100 million as compensation.
To analyse the economic importance of this mechanism and several potential scenarios for reform, this report relies on a series of counter-factual tariff levels. These counterfactual tariffs take into account the current structure of regulated tariffs: that is, they include wholesale purchase prices, transmission and distribution fees, and the profit margin for the USS. However, they are based on a counterfactual situation where the USS would be supplied at prices equal to the annual average of international (HUPX) prices. As expected, this market-consistent price tracks the annual variation in HUPX prices (Figure 11.22). In pre-crisis years, average regulated tariffs deviated little from the market-consistent price were relatively modest (17% in 2018), but much larger in 2021-22. During the crisis period, the gap was 237% before VAT and rose to 250% when the tax expenditure linked to temporarily reduced VAT is included in the calculation.
Given the presence of cross-subsidies, the implicit subsidy for non-household customers is significantly smaller. In fact, the average regulated price for non-household customers was above the calculated market-consistent price until 2020. It fell below during the crisis but has again risen to above it since 2023 (Figure 11.22).
Energy pricing reform is key to reducing measured support for fossil fuels in North Macedonia. Indeed, a large share of measured support to fossil fuels in past years was in the form of support to electricity and heat on both the supply side (direct support to JSC ESM) and the demand side (through price regulation and temporary VAT reductions). Given the economy’s energy mix, a share of this support is counted as support to fossil fuels.
Scenarios were designed to examine the impacts of the electricity pricing system in normal times and during crises. As mentioned above, in the period between the full liberalisation of the electricity market and the energy crisis, pricing constituted, in turn, a transfer of value to households. Regular transfers to the producer, however, were not necessary (beyond transfers to renewables producers through feed-in tariffs, which are passed on to final consumers through regulated prices). During the crisis, maintaining low retail prices resulted in a significant burden for public finances. Analysis of the economy’s reaction to larger shifts is therefore useful to inform options to design a more resilient energy system.
Scenario 1: Removing cross-subsidies
The degree to which energy prices paid by small firms cross-subsidise prices for households has remained quite stable over time. Cross-subsidies are estimated in the Inventory of Energy Subsidies and Support Measures in the Western Balkans on the basis of deviations from average tariffs between groups served under similar conditions. In the case of North Macedonia, average regulated tariffs have evolved in recent years through three main channels. First, the introduction of block tariffs has driven up average household tariffs, which increased on average by 25% between 2021 and 2022. Second, tariffs for non-household USS consumers increased notably during the energy crisis, by 46% in 2022 (ERC, 2024[8]). Third, the return of non-household consumers to the regulated market has had a composition effect, as prices for non-household USS customers are significantly higher (almost triple before accounting for network charges) than prices for households.
In North Macedonia, small non-household customers served by the USS do not receive particularly low prices. The average prices faced by non-household USS customers in North Macedonia was below the market-consistent price during the period 2018-23, with the exception of years 2021 and 2022 when international reference prices were at historic highs. Indeed, in 2023, the average non-household tariff was very close to the market-consistent price of 9 992 MKD/kWh (162 EUR/MWh). Therefore, at the end of the period, it is not clear that the USS was making abnormal profits on non-household customers to compensate for losses made serving household customers. On average over the period, however, it is clear that any support received by electricity sector was not distributed equally between household and non-household customers.
Scenario 1 considers the elimination of cross-subsidies. As of 2023, cross-subsidies represented a transfer of MKD 2.9 billion from consumers paying regulated prices towards households consuming electricity. Scenario 1 envisages a correction equal to the average deviation from average tariffs over the period. As of 2023, this corresponds to a 16% increase in household tariffs and a 46% reduction in average non-household tariffs. Qualitatively, this is similar to period averages in that it would entail increasing average household retail tariffs by 11% and reducing non-household retail tariffs by 41%. The parameters correspond to the average gaps between the tariffs faced by each category and the average regulated tariff (6.93 MKD/kWh as of 2023).
The scenario is designed to be neutral with respect to the finances of regulated electricity providers but has impacts in the economy and society. Indeed, the shift in the composition of demand would change the composition of revenues. Residential electricity demand is typically less price-elastic than industrial electricity demand in the European Union, particularly in the long run (Csereklyei, 2020[54]). Therefore, such a rebalancing of prices will have less of an impact on electricity demand than would arise from an increase in tariffs for households alone. In the case of North Macedonia, non-household tariff customers command a relatively small share of demand from the USS (14% as of 2023). Moreover, the decline in costs for a subset of economic sectors (largely those with a significant representation of SMEs) would also stimulate economic activity.
The MK-POWER-CGE model predicts that removing cross-subsidies would generate a small stimulus to the economy. Total output is predicted to grow 0.45%, with household consumption growing by 0.40%, as the fall in electricity prices for firms drives a fall in the general price level of 0.8%, increasing real household incomes. Despite a fall of 7.3% in household electricity demand, the shift leads, as expected, to an increase of 6.1% in regulated electricity demand, as non-household consumers respond to the price decrease.7 As designed, removing cross-subsidies would be largely revenue-neutral. However, compensating households to prevent an increase of poverty would require mobilising approximately MKD 800 million. Unlike scenarios where the general price level would be adjusted to match the market, Scenario 1 would not generate such funds automatically.
Shifts relative to baseline (%)
Source: Authors’ calculations.
In practice, removing cross-subsidies will be less disruptive if it is done in the process of liberalisation. Scenario 1 demonstrates that cross-subsidies generate inefficiencies. Although removing cross-subsidies would increase efficiency, the analysis suggests that this is best done as part of a broader shift towards more market-reflective prices. First, the shift to market-reflective prices can liberate fiscal resources both through increased tax revenues on electricity and through dividend payments – or by reducing the need for transfers to energy producers. Together, these can finance measures to mitigate the poverty impact of energy price increases. Second, sequencing the removal of cross-subsidies before increasing average tariffs involves a period in which non-household firms receive unnecessary subsidies, thereby increasing the fiscal cost of the intervention. Moreover, in the case of North Macedonia, tariffs for non-household USS customers may not need to increase to be fully cost-reflective.
Scenarios 2 and 3: Market-consistent pricing
To examine the impact of price regulation, Scenarios 2 and 3 are simulated such that regulated prices are adjusted to market-consistent prices, considering the pre-crisis period in the baseline case. The average price gap for regulated tariffs in 2018 was 17%. This scenario assumes a situation in which market values would return to their pre-crisis, long-term averages. The average price gap in 2023 was 48%,8 so an upper bound scenario with a price increase of 50% is also modelled.
To analyse the impact of a convergence to market pricing, the following scenarios are considered:
Scenario 2a: 17% increase in regulated tariffs, corresponding to the 2018 average price gap, to 8.1 MKD/kWh.
Scenario 2b: 50% increase in average regulated retail price to 10.1 MKD/kWh. For reference, in 2023.
Bearing in mind the efficiency-inducing impact of removing cross-subsidies, both scenarios are combined with the readjustment of prices for household and non-household customers toward their average price:
Scenario 2c: 17% increased in average regulated tariff, combined with a convergence of prices for household and non-household customers through an increase in household tariffs of 30% and a fall in non-household tariffs of 29%
Scenario 2d: 50% increase in average regulated tariff, combined with a convergence of prices for household and non-household customers through an increase in household tariffs of 70% and a fall in non-household tariffs of 22%.
Finally, Scenario 3 is run with only household price adjustments, reflecting the fact that non-household prices are already close to market-consistent prices and may not necessarily change significantly in a move towards full liberalisation. Scenarios 3a and 3b carry out the same shift in household prices but leave the non-household segment untouched.
In terms of the economic impact, a uniform increase in electricity tariffs would have a mild contractionary effect on the economy. The impact on GDP is estimated at -0.04% in the lower-bound scenario (Scenario 2a) and -0.11% in the upper-bound scenario (Scenario 2b). The increase in prices would drive down demand for electricity and real household incomes. Without compensatory transfers, the increased fiscal revenue would be spent and mitigate the overall macro-economic impact, while shifting demand towards sectors receiving public expenditure (e.g. construction, education, public administration, health). Household electricity demand falls by 8.5% but most of it corresponding to substitution away from electricity so that total household demand falls by only 0.7%. Notably, substitution away from electricity leads to increased capital expenditure and a fall in real incomes drives an increase in labour supply, with overall employment increasing by 0.15% in Scenario 2a. The pattern is similar for larger price increases, with a 0.38% increase in employment in Scenario 2b.
Changes relative to baseline (%)
Note: The poverty impact corresponds to the increase in moderate poverty (relative to the 6.85 USD/day poverty line) before accounting for the demand response and before any compensation in the form of new programmes.
Source: Authors’ calculations.
If price liberalisation leads not only for prices to better reflect costs, but also to converge across customer categories, then the macroeconomic impact is positive. The fall in electricity prices for non-household USS customers drives an economic expansion which in turn moderates the negative impact on households of tariff increases. Indeed, in Scenario 2c, which increases regulated prices on average about as much as Scenario 2a, not only is the impact on output positive (by 0.35%), but the impact on household consumption is moderated to -0.20%.
Gradual increases in household tariffs can be expansionary. Given the fact that non-household USS customers appear to be served at market prices, efforts should concentrate on households. Scenarios 3a and 3b show that price increases for households can be beneficial for the economy at large. Households constitute the majority of regulated customers in number and in volume (86% of regulated electricity in 2023). Therefore, price increases for households result in significant increases in fiscal revenues, with government consumption projected to increase by 0.8% (in Scenario 3a) to 1.6% (Scenario 3b). This in turn helps moderate the contractionary impact through demand.
The social impacts of a uniform increase in energy tariffs would be notable in North Macedonia. While electricity price subsidies benefit many households that do not need the support, they benefit the poor more in relative terms. According to the micro-simulation model, a uniform 17% increase in household electricity tariffs (without mitigating factors), would trigger increases in inequality and poverty. Extreme poverty (measured as absolute poverty below the extreme poverty line of USD 2.15 per day) would increase by 0.4 percentage points (from a low baseline level of 1%). Moderate poverty would increase by 1 percentage point (from 11.6% to 12.6%). In Scenario 2a, energy poverty increases notably, by 7.3 percentage points, from an already high baseline.
Compensatory transfers could mitigate the impacts of energy price shifts on social outcomes. In particular, the change contemplated in Scenario 2a (price increase of 17%) would drive an increase in income for the electricity sector of EUR 99 million. Directing only a fraction of these funds (EUR 14 million) to social assistance (the GMA) – by increasing the generosity of transfers and lifting the income threshold to correspond to the fall in real incomes – would almost entirely negate the effect on extreme poverty (it falls to 0.02 percentage points). A similar effect is seen on inequality, while the effect on moderate poverty is almost halved (to 0.6 percentage points). A larger increase in the generosity of GMA of EUR 21 million would be sufficient to negate the impact on moderate poverty as well.
Mitigating the social impact of price shifts may require new social protection programmes. The increase in generosity of GMA automatically increases its coverage, as eligible households are those whose income per adult equivalent is below the level of guaranteed minimum assistance. However, because it is design to target the poor, increasing GMA generosity may be less cost-effective than increasing direct transfers to vulnerable households such as the energy subsidy to-up. When compensating transfers are simulated by increasing the generosity of the energy subsidy top-up (Table 11.4), it appears that for the lower-bound scenario 3a 25% of additional income would suffice to compensate those at risk of poverty, with the shares increasing as price increases are larger.
Changes relative to baseline
Note: The poverty impact corresponds to the increase in poverty headcount before accounting for the demand response and before any compensation in the form of new programmes.
Source: Authors’ calculations, based on Petreski (forthcoming[46]).
Scenarios with significant price increases would have significant impacts in the distribution of revenues in the electricity sector. The 17% increase in average prices in Scenario 2a corresponds to a shift of 45% in the wholesale price from JSC ESM to the USS, using 2023 as a reference case. This corresponds to an increase in operating income of MKD 5.6 billion (EUR 91 million), or 17% of actual operating income in 2022. Part of the additional revenues come from the ability to sell excess production in the open market at market prices. Price increases are estimated to lead to falls in electricity demand in the regulated sector, which would be expected to moderate the additional revenues for JSC ESM. However, this depends on whether JSC ESM’s production can indeed cover demand in the regulated market. If yes, then excess demand would be sold in the open market at market prices, which does not reduce revenues. If no, then the reduction in demand corresponds to loosening the obligations of JSC ESM to purchase in the open market. Currently, this situation generates a loss for JSC ESM; if prices were aligned with market-consistent prices, it would not. The USS would also gain through the automatic increase in its margin, although gains are quantitatively smaller (EUR 7 million).
Scenario 4: A crisis-sized scenario
Public policy interventions on energy markets in 2021-22 aimed to shield households and the economy of North Macedonia from the level and volatility of international energy markets. During this period, average sale prices to end-consumers in the deregulated market soared – reaching a level 263% higher in 2022 than the 2018-19 average. If USS tariffs had followed suit, the average market-consistent tariff would have increased to 22 766 MKD/MWh (or 369 EUR/MWh), inclusive of VAT – a 275% increase compared with average household tariffs and 109% compared with non-household average tariffs.
The social cost of leaving households unshielded from such price increases would have been immense. A 250% increase in electricity prices would correspond, on average, to 25% of household incomes – and, of course, even more among the lowest income deciles (78% in the lowest decile). Before any demand response, this would push up absolute moderate poverty by 21 percentage points.
In contrast, actual prices for households increased by 25% in 2022. This corresponds to a more modest 2.5% share of household incomes (before accounting for the demand response) but still represents almost 8% of disposable income for the poorest households. According to micro-simulation results, this would increase the moderate poverty rate by about 1.6 percentage points.
Comparing the crisis scenario as it happened with the counterfactual scenario, with full pass-through, suggests that increased prices for firms played a major role in the economic impacts of the energy crisis. Scenario 4a simulates 250% increases in retail prices for all consumers, while Scenario 4b simulates a 250% increase for the unregulated market and a 25% for the regulated market. As simulated, the increase in unregulated prices has a major impact on the economy. When regulated customers, and especially households, are shielded and passthrough is more limited, the real impact on household consumption is also smaller (although it remains sizeable with a 7.13% contraction in consumption expenditure). It also somewhat lowers the inflationary impacts of the price shock (Table 11.5). The scenario with limited passthrough has an even greater decline in GDP because without the increase in electricity prices, the fiscal channel is more muted (3.9% in Scenario 4b compared to 7.3% in Scenario 4a). It is clear, however, from the size of the estimated impacts that the size of the shock actually tests the limits of the model’s calibration. In reality, the economy held up to the shock significantly better than the model predicts.
Source: Authors’ calculations.
Advancing the deregulation of electricity markets in North Macedonia
Deregulation has progressed significantly in electricity markets in North Macedonia. Small non-household customers still have the option of being served at USS prices. This has served primarily as a form of support to small customers during the energy crisis. Before and after the energy crisis, non-household customers were actually served at average prices above the average market-consistent price.
Reducing the share of electricity provided to businesses at regulated prices has a mild expansionary effect. Scenario 5 halves the share of electricity per sector that is procured at regulated prices. This shock to the model results is an increase in output (0.23%). Beyond the aggregate effect, the impacts differ significantly across sectors, depending on their initial share of regulated electricity, which is calibrated in the model to the share of small enterprises in the sector. Sectors with higher shares of small firms, such as accommodation and food services suffer falls in output (-1.85%), while sectors with lower shares of electricity from regulated markets at the starting point see their output increase, like manufacturing (0.94%). In the electricity market, the model predicts a large transfer of electricity from the regulated to the unregulated market, which increase by 10% in volume, which drives a fall in unregulated prices. It should be noted that the baseline model takes the share of value added generated by small firms in each sector as the share of electricity purchased in the regulated market in that sector, for which the simple average is 47%. This is likely an overestimate of the importance of the regulated segment among firms, which implies that the results of deregulation are also probably overestimated.
Changes relative to baseline
Source: Authors’ calculations.
Ongoing market reforms will also contribute to a fall in importance of the deregulated market in North Macedonia. Since December 2023, ERC no longer sets prices for the USS. Instead the USS has to apply the tariff methodology, a process which ERC supervises (ERC, 2024[8]). Another key step will be the transition away from ESM’s public service obligation to supply the USS. Both these factors would contribute to drive USS prices for non-household customers towards market levels, thereby opening the door to greater contestability in retail markets.
North Macedonia has made significant progress in deregulation of its electricity market. The wholesale market has been liberalised since 2019 and an operational day-ahead market exists since 2023. Energy for balancing and to cover losses is purchased under competitive procedures. All customers have been entitled to select their supplier since 2019. Additionally, the USS and SLR were selected in 2024 by competitive procedure and are fully unbundled (EC, 2024[55]).
State intervention in the electricity market is a source of significant fiscal risk for North Macedonia. Across the Western Balkans, retail prices are influenced through multiple channels. Directly, through price regulation or through political influence on the decisions of suppliers. And indirectly, through interventions in wholesale markets and public service obligations. In North Macedonia, low prices for regulated customers (especially households) are the result of two interrelated factors: the obligation of JSC ESM to provide the USS with electricity and the practice of controlling the prices that JSC ESM charges the USS. This leads to significant transfers from JSC ESM to electricity consumers, while the company sells part of its output significantly below market prices (as discussed in the Inventory section) – and probably below cost-recovery levels. In practice, if and when JSC ESM needs to purchase electricity on the market to fulfil its obligation, discretionary low wholesale prices generate losses to JSC ESM. In turn, JSC ESM requires capital injections from the state. In times of crisis, as in the 2021-23, this translates into large fiscal outlays.
This section presents key policy recommendations for North Macedonia. It draws on the analysis presented in previous sections, and on the results of broad-based consultations in North Macedonia. The results of a Peer-Learning Workshop (held in Skopje in October 2024) are also presented to summarise the policy orientations prioritised. As part of this workshop, participants developed specific priority policy actions, which are highlighted under relevant thematic areas (Box 11.2).
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 with three overarching aims: a) identify key issues for a more inclusive and financially sustainable development of the energy sector at the regional and economy level; b) put forward suggestions for future policy actions at the economy level; and c) foster exchange of policy experiences. The process brought together key stakeholders from the Western Balkans (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia) in the field of energy transition.
The workshop “Just Green Transition in North Macedonia through Co-ordinated Energy Sector, Social Protection, and Fiscal Reforms” took place in Skopje, North Macedonia on 22 October 2024. The workshop was attended by 33 experts representing various societal perspectives, including government, civil society, academia and businesses. Among others, representatives were present from: the Ministry of Energy, Mining and Mineral Resources; the Office of the Prime Minister of North Macedonia; the Ministry of Environment and Physical Planning; the Ministry of Finance; the Energy and Water Services Regulatory Commission; the Fiscal Council; the electricity transmission system operator of North Macedonia (JSC MEPSO); Elektrani na Severna Makedonija (JSC ESM, the state-owned electricity producing company); EVN Macedonia AD Skopje (the power distribution and supply company); and MEMO (the National Electricity Market Operator of North Macedonia). Also present were representatives from the Economic Chamber of North Macedonia and the Association of Business Women. Other private actors in the energy sector and technical experts participated from academia and civil society organisations within the areas of energy transition, gender equality, energy poverty and environment 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 North Macedonia. It subsequently transitioned into a plenary session during which participants identified and prioritised the most pressing issues for fostering a more inclusive and financially sustainable energy sector. These issues were grouped into key themes, which participant ranked based on urgency and importance. For each theme, participants developed concrete policy actions, with a strong focus on their implementation within North Macedonia’s political context (Table 11.6).
Outcome of Peer-Learning workshop in North Macedonia (in order of priority)
Source: OECD Peer-Learning Workshop in North Macedonia on 22 October 2024.
Ensuring a clear strategic and regulatory environment will help support new energy investment in North Macedonia
North Macedonia has made ambitious commitments in its energy and climate agenda, which require substantial investment. The NECP is effectively built on the most ambitious (“green”) scenario of the NSED 2040. Its realisation requires significant additional investment including: EUR 3 billion to construct new hydroelectric power plants (HPPs) and increased capacity in wind and solar power; and almost EUR 600 million dedicated to renewables incentives (feed-in premiums and feed-in tariffs). Providing clarity and security to investors will be key to ensuring that these investment flows materialise.
Align legislative and strategic frameworks and establish a robust monitoring framework for energy policy
Aligning the legislative and strategic frameworks for the energy sector will help provide clarity to investors. The recently adopted NECP is a step forward, as it clarifies the chosen decarbonisation path, albeit subject to significant investment. It is necessary to review and align the strategic and legislative framework, including the NSED 2040, with such decisions. This review can also encompass other legal instruments that impinge on the ability to implement the NECP. This includes reviewing and aligning legislation across key policy areas related to energy (e.g. construction, urbanisation, and energy laws), while updating the NSED 2040 accordingly, including its action plan.
A robust monitoring framework would help track progress in policy implementation and investment in North Macedonia. The NSED 2040 was adopted in 2019 with a 2040 horizon and underpins the NECP. Periodic reporting on progress in implementing the energy agenda would help attract engagement of many relevant stakeholders. Practical steps to set up such a monitoring framework could include: a diagnostic report; “red flag” reporting to ensure that key risks and obstacles are identified and addressed; and regular (e.g. biennial) reporting on progress (Box 11.3, Policy Action 1).
Make progress on green budgeting to support programming and monitoring
To further advance on the green transition, North Macedonia needs to develop instruments to integrate climate and green objectives into budgetary discussions and decisions. This will help align budget allocations with strategic green priorities. Green budgeting aims to help governments address challenges caused by climate change and related costs. It uses budget policy-making tools to integrate climate and environmental perspectives into budget frameworks and practices, and to better inform budget decisions (OECD, 2024[56]). Introducing an integrated financial management information system (IFMIS) to tag green policies and programmes would ensure measurable outcomes and targeted support. This could be used to better understand the environmental impacts of spending choices and to ensure public budgets align with climate and environmental objectives (Box 11.3, Policy Action 5)
Introducing market-consistent prices is key to reducing fiscal risk and enabling greater dynamism in the electricity sector
North Macedonia should move to ensure that electricity prices ensure full cost-recovery for actors in the energy sector while also providing reasonable margins. Retail prices in North Macedonia have increased in recent years, most notably with the introduction of block tariffs in 2022. However, prices remain below cost for specific customer groups and times. In particular, the non-peak household rate remains below the fixed price at which JSC ESM sells to the USS. Retail prices for the USS are set in the context of maximum revenue regulation, which includes a margin for the operator (determined in a competitive selection process). Moving to prices that reflect demand and supply would help create price signals for households to encourage energy saving and energy efficiency.
Optimising tariff schedules will allow JSC ESM to behave as a market actor
Price deregulation should seek to align electricity prices with market conditions, enhance the tariff system, and allow the electricity producer (JSC ESM) to optimise its production (Box 11.3, Policy Action 2). The implementation should be rolled out gradually and include the following actions. First, the tariff system should be optimised to match the reality of production and consumption in the market. This would prompt reconsideration of times for peak and non-peak tariffs and corresponding price levels. It could also imply consideration of seasonal tariffs. In addition, fixed costs involved in electricity supply should be covered by fixed charges (for example, in the case of contracts with no consumption). Ultimately, these changes would have tariffs reflect price signals and gradually move households towards average prices. The process should be complemented by public awareness raising campaigns to ensure customers understand the upcoming adjustments. Increasing the low tariff to reflect production costs would optimise production. In turn, JSC ESM would be able to optimise its own production with the aim of selling on the market when prices are higher. Throughout this process, targeted support for vulnerable customers should be provided, based on a database reflecting vulnerabilities. In addition, support could be made available for vulnerable customers to become prosumers, that is to not only consume energy but also produce it through renewable sources like solar panels.
Gradually reduce public service obligations so prices can adjust
Despite progress in market deregulation, electricity prices in North Macedonia remain deeply influenced by public policy. By allowing JSC ESM to sell to the USS at below-market and below-cost prices, the state directs subsidies towards households even though JSC ESM prices are not regulated. According to the 2018 Energy Law, the state-owned electricity generator was intended to cover a gradually shrinking share of demand in the regulated market, anticipated to decrease from 100% in 2018 to 30% in 2025 (Republic of North Macedonia, 2018[52]).
In 2021-23, North Macedonia temporarily reversed deregulation in response to the energy crisis. In fact, JSC ESM was mandated to fulfil 100% of demand of the regulated market, up from 70% pre-crisis. In practice, with own production of about 3 650 GWh, JSC ESM lacked sufficient capacity to fulfil this demand and had to re-commission power plants and purchase electricity from the open market. From 1 January 2024, JSC ESM was mandated to provide only 95% of demand of the regulated market, which was lowered again to 85% from 1 July 2024. This is expected to help lower electricity subsidies from the government (IMF, 2024[32]).
Less stringent public service obligations have the potential to increase efficiency in the market. Indeed, the use of ESM to channel subsidies is a consequence of progress in liberalising the sector. In other economies, price intervention has often been carried out through regulation or state control of the main supplier, an option which was not available to North Macedonia. A reduced share of mandated supply to the regulated market will not only increase revenues for JSC ESM from its ability to use available installed capacity for market sales, it would also contribute to provide market discipline. Moreover, shifting procurement to other sources (including renewable energy suppliers and the open market) will automatically introduce market signals in the determination of household tariffs. In the short run, however, given the relatively small share of market supply, such signals are likely to be significantly muted.
Build on social protection reform to establish programmes that mitigate energy poverty
North Macedonia’s recently reformed social assistance programme may not be sufficient to compensate those at risk of energy poverty as prices increase. The reformed GMA programme and the programme for support of vulnerable customers are both designed to target those most in need. According to micro-simulation analysis, they concentrate benefits among the first decile of the population – 79% in the case of the energy “top-up” allocated by the Ministry of Economy. However, consensus qualitative indicators of energy poverty suggest that at least 20% of the population is at risk of energy poverty. Indeed, the share was 21.8% as of 2020. Social assistance programmes will need to do more to reach more of those at risk. In the event of energy price increases, compensatory measures will need to reach at least the second decile of the income distribution.
Define and identify vulnerable households to provide them with appropriate support
Currently, the definition of vulnerable (energy) customers in North Macedonia is directly related to income poverty; this should be expanded. Further analysis and consensus building are needed to enrich the definition to include those that may not be income-poor but are, nonetheless, at risk of energy poverty. Typically, this is due to their energy needs or to low energy efficiency in their households (among other factors). Mitigating the risk of energy poverty – and its implications on health outcomes and living standards – may require further support measures.
Future programme design in North Macedonia can draw lessons from recent initiatives. In recent years, the economy has stood out for targeting energy efficiency measures to vulnerable and low-income households, as part of the Programme for Promoting Energy Efficiency in Households. This includes grants for installation of more efficient heating or insulation. Despite the targeted nature of the programme, it required co-payments, which may have limited its appeal to those most in need. Notably, the programme for 2024 has eschewed co-payments but does not explicitly target energy vulnerable households. Another approach could be to use appropriately designed financial and technical support mechanisms to incentivise vulnerable customers to become electricity prosumers (Box 11.3, Policy Action 2).
The role of block tariffs and targeted support
Block tariffs are being used in North Macedonia to keep electricity prices low for households while increasing prices for those that consume the most. Block tariffs were introduced in July 2022 and have been adjusted at every cycle since (in mid-2023 and mid-2024). The tariffs are structured in four blocks: as of July 2024, households are charged 4.23 MKD/kWh for consumption below 210 kWh; 5.34 MKD/kWh for consumption between 210 and 630 kWh; 7.09 MKD/kWh for consumption between 630 and 1 050 kWh; and 17.69 MKD/kWh for consumption above 1 050 kWh (ERC, 2023[57]). Since their introduction, the pricing schedule has been made increasingly steep, with prices for the two bottom blocks being decreased in 2023, while the top block tariffs were increased, especially in the top block.
The introduction of block tariffs effected a price increase and now contributes to demand management. Block tariffs led to an average 17.8% increase in energy prices while cushioning it to just 7.4% for most households (ERC, 2023[22]). As the vast majority of consumers remain within the first two blocks (95% of peak-hour consumption) (IMF, 2024[32]), they have been subject to only a small increase in tariffs. Between 2021 and 2023, electricity consumption of households fell by 9.6%, which ERC credits to the introduction of block tariffs (and the increase in average tariffs) (ERC, 2024[8]).
Block tariffs are a practical, if imperfect, policy instrument to target support. Even though block tariffs involve cross-subsidies and set the lower block tariff at below cost-recovery, they still distribute a significant portion of support to those who do not need it. In addition, while energy consumption is positively correlated with income, the relationship is not very steep, which implies that the degree to which block tariffs are concentrated on the income-poor is limited. When data and administrative capacity are available, targeted support is a more efficient instrument (Coady et al., 2023[58]).
Enabling the energy transition in North Macedonia through increased renewables integration and greater citizen participation
Increasing renewables capacity to support competitiveness
Increasing renewable energy source capacity is key to maintain competitiveness in the energy transition, and to ensure a resilient and balanced energy system (Box 11.3, Policy Action 3). In the recent past, energy dependency created significant drag on the energy system and on the fiscal resources of North Macedonia. The decarbonisation scenario set out in the NECP expects that, in an initial period as electricity production from fossil fuels is phased out, import dependency would increase. It would subsequently revert as additional renewables capacity comes on-line. The introduction of carbon pricing will drive up the price of fossil-fuel generated electricity, affecting the economy’s competitiveness. For these reasons, incorporating new renewables capacity is critical to North Macedonia’s economy. Two key measures are to promote investments in solar power to make it a more viable and competitive energy source while strengthening grid infrastructure to integrate excess solar energy. Investing in grid improvements will facilitate this transition. Additionally, establishing a market for trading green certificates will incentivise investments in renewables by assigning value to renewable energy production (European Environmental Agency, 2017[59]). Medium- and long-term storage solutions would also be required to enhance balance capacity among solar, wind and hydropower. The proceeds of carbon tax or trading schemes can support direct incentives for renewables integration and indirectly support it through investments in the grid and in network and storage services.
Encourage consumer participation in the energy transition
To foster sustainable energy practices and democratise energy access, consumer participation needs to be enhanced. The environment for consumer participation in energy sector transformation can be made more conducive by improving legislation, easing market barriers and implementing financial support mechanisms (Box 11.3, Policy Action 4). Key actions include: clarifying and enforcing prosumer regulations; adopting laws on renewable energy and energy efficiency; and improving implementation of the Energy Efficiency Fund. North Macedonia’s Energy Efficiency Fund was established by law in October 2023 and set up under the management of the Development Bank of North Macedonia, with an initial budget allocation of EUR 40 million. Being focused on public buildings, it has limited scope for intervention (Bankwatch, 2024[60]). Additionally, successful implementation will depend on designing regulations for energy communities (RECs), increasing consumer awareness, and fostering collaboration between local governments, banks, civil society, and EU partners.
To limit pollutions, energy customers could also be encouraged to switch fuels. Participants in the Peer-Learning Workshop highlighted the need to incentivise households to transition from biomass heating to electricity – and suggested introducing a targeted subsidy programme (Box 11.3, Policy Action 6). Implementation would start with a pilot phase, prioritising municipalities with the highest pollution levels. The programme would be expected to demonstrate measurable improvements in air quality, as well as feasibility and effectiveness, before broader rollout.
Building a skilled labour force for the energy transition
To derive full benefits from the energy transition, North Macedonia will need an appropriately skilled workforce. The energy transition will generate significant disruption in labour markets. The phase-out of coal mining and coal-based electricity production calls for appropriate support to those working in the coal value chain and in coal regions. The Just Transition Roadmap proposes a skills development pathway, with people working in the coal value chain being one of four priority axes (EU/Planet, 2023[61]). In addition, it will be necessary to build up the skills needed to expand renewables capacity, which will require strengthening programmes for training and retraining the workforce, including adjusting the curricula in basic education.
A comprehensive assessment of skills needed would support formulation of a comprehensive workforce development strategy in the context of the energy transition (Box 11.3, Policy Action 7). A proactive, gender-sensitive needs assessment will help to align education and training programmes with current and future labour market demands. Key initiatives include researching skill gaps, revising occupational standards, and implementing lifelong learning programmes for upskilling and reskilling workers within the energy sector. This strategy requires gender-inclusive approaches to boost women’s participation in renewable energy jobs through targeted training programmes and stakeholder engagement. Implementation will begin with pilot cases before proceeding to full-scale revision of educational curricula, ensuring a well-planned and systematic approach to workforce development.
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← 1. 5 000 kWh is an average annual consumption for a medium-sized household.
← 2. Data for 0.4 kV category are available only from 2018 until 2021. Due to a lack of data, from 2022 onwards, the cross-subsidy also includes other voltage levels (10, 20 and 35 kV).
← 3. Based on data provided by the Ministry of Finance.
← 4. Ibid.
← 5. The subsidy was granted by the Programme for the Protection of Vulnerable Energy Customers, as modified in March 2022. Beneficiaries had to apply for the programme and there was no guarantee that all applicants would receive the grant, although official data suggests that the number of applicants (approximately 6 500 households) did not exceed the expected number of applicants (7 000 households) (ESPN, 2022[62]).
← 6. Applying the design of the programme alone results in significantly higher poverty reduction but would require a much larger budget than is allocated. The simulation uses a randomisation procedure to match the MKD 60 million budget allocated.
← 7. The simulation keeps the shares of customers in regulated and unregulated markets constant by sector. In practice, such a large shift entailing a subsidy to non-household customers is likely to induce some to return, albeit in smaller quantities than in 2022.
← 8. Average regulated tariffs were 44% lower than market-consistent prices. In addition, for a fraction of the year, the reduction in VAT rate contributed an additional 4 percentage points to the price gap.