Reducing carbon intensity is a key priority for Serbia, which has committed to cutting CO₂ emissions by at least 33.3% from 1990 levels by 2030. However, in 2022, over 62% of its electricity still came from solid fossil fuels. 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 of 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 Serbia: open up the electricity market, reduce the fiscal burden of the energy sector, address energy poverty and protect vulnerable customers, strengthen implementation of energy transition policies, and enable participation of businesses and households in the energy transition.
Energy Prices and Subsidies in the Western Balkans
Abstract
Serbia has made substantial commitments to reduce carbon dioxide (CO2) emissions. With the enhanced Nationally Determined Contribution (NDC) of 2022 and the National Energy and Climate Plan (NECP) of 2024, Serbia has committed to reducing CO2 emissions by at least 33.3% compared with 1990 levels by 2030.
Reducing the carbon intensity of electricity production and ensuring financial sustainability are crucial steps to realise these commitments. Serbia is still heavily dependent on solid fossil fuels, accounting for over 62% of its electricity generation in 2022. Moving towards a larger share of low- to no‑emissions energy sources will require important investments. Yet, provision of energy at low prices makes the current energy system in Serbia expensive for the state. Especially when imports – at high costs – are needed to meet demand, costly subsidies are needed to support the energy sector. This uses up resources that could be invested in the energy transition and creates the need for costly incentives to attract renewables.
The financing of the energy sector in Serbia offers important levers for reform. Reducing price 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, rethinking the role of energy subsidies and support measures could unlock crucial financial resources. These resources could then be redirected to support Serbia’s renewable energy and energy efficiency goals, while also ensuring assistance for the most vulnerable population.
This chapter makes the case for moving towards fewer subsidies and loosening price regulation in Serbia, accompanied by social support, to balance the fiscal, economic and social impacts of such reforms. As a basis for such reforms, the OECD has developed an Inventory of Energy Subsidies and Support Measures in the Western Balkans, which analyses each economy separately and the region as a whole. Using this inventory in combination with household-level and macro-economic data, the chapter develops reform scenarios with a focus on understanding the impacts on energy prices, household budgets, employment, fiscal space and gender. It presents complementary energy market reform scenarios and findings from macro- and micro-economic modelling.
Inventory of energy subsidies and support measures for Serbia
Current support to the energy system is costly:
Keeping energy prices low through price regulation resulted in EUR 8.6 billion of induced support to consumers over the observed period 2018-23, of which about EUR 7.6 billion accumulated during the energy crisis (2021-23). This exceptionally high level of induced support during the energy crisis reflects the significant gap between international and domestic electricity prices and is a consequence of limited passthrough from international to domestic retail prices. However, it does not represent the typical situation in Serbia under normal conditions. In the years before the energy crisis, induced support, while sizeable at EUR 1 billion (in 2018-20), was an order of magnitude smaller.
To maintain the current pricing model, direct financial support is essential. The energy sector received EUR 3.4 billion in financial support (in the form of either fiscal or credit support) during 2018-23. Most of the support was during the energy crisis in 2021-23, when Serbia had to import substantial volumes of electricity at high prices. At its highest in 2022, financial support to the energy sector accounted for up to 3% of GDP in the same year.
Feed-in tariffs, which have been used in the past to promote renewable energy production, shielded privileged producers from market volatility while also preventing them from making windfall gains. Feed-in tariffs were effective in providing reliable revenue streams when domestic energy tariffs were higher than market tariffs and thus allowed for long-term project financing of key renewable energy production projects. When the energy crisis drove up market prices, the obligation to sell at fixed prices resulted in an opportunity cost for renewable energy producers of around EUR 249 million in 2021-22. With the adoption of the new Law on the Use of Renewable Energy Sources in 2021 and the first contracts for difference awarded through competitive auctions in 2023, Serbia is moving toward more market-oriented support schemes.
Possible ways forward: Policy scenarios for inclusive energy sector finance reform
Changing the way the state intervenes in energy markets through prices is key to gradually reducing energy subsidies in Serbia, and in particular, in reducing support for fossil fuels. Providing energy at below-market prices through the Elektroprivreda Srbije (EPS, the state-owned enterprise main electricity supplier) translates into very significant transfers of value towards consumers and the economy. These have been channelled through regulated prices, but especially through EPS’s own tariff policy. They were particularly important during the energy crisis of 2021-22 when the Government recommended EPS to keep prices low also for firms not covered by price regulation. This situation exacerbated fiscal risk, prompting large transfers and liquidity support from the state towards the energy sector.
A gradual increase in prices for commercial sales has helped buttress EPS’s finances. Increasing regulated prices would help further reduce potential fiscal risks. Raising regulated market prices to market-consistent levels would require a significant increase in tariffs – of 70% – additional to increases already implemented. As the share of firms served by the regulated market is relatively small, the estimated macro-economic impacts of such a change would be relatively modest (a 0.05% fall of GDP in the worst-case scenario, an increase of 0.30% in the best-case scenario), especially if accompanied by the removal of cross subsidies (in which case, it leads to a 0.19% expansion in output). Such a shift would allow EPS to generate income in a scale comparable to that generated by the shift in commercial prices (more than EUR 1 billion) and thus support greater investment from retained earnings, enabling the creation of buffers and limiting future fiscal risks. Part of this additional income could be mobilised to compensate for impacts higher prices would have on households in need.
Removing cross-subsidies in the process will increase market efficiency. Cross-subsidies exist both within regulated segments and between regulated and unregulated segments served by EPS. The removal of explicit cross-subsidies embedded in regulated schedules would necessitate only a 2.6% increase in household prices but would be beneficial for the economy through the fall in prices for non-firm customers. Simulations suggest this would stimulate growth in the power sector (by 1.1%) and the economy at large (by 0.2%).
Energy reforms will require compensatory measures to contain poverty and energy poverty. Serbia’s means-tested social protection instruments are well targeted but have very low coverage, which means they have only modest impacts on poverty. Recent reforms of the scheme to protect energy‑vulnerable customers have significantly increased its size, while maintaining its targeting capacity. The existing regulation on vulnerable consumers provides bill reductions and protections against disconnection, but is narrowly targeted, as asset tests exclude some income-poor households. While most of the income-poor are potentially energy-poor, there are many at risk of energy poverty who may not be targeted by means-tested social assistance tools.
Policy recommendations
Serbia should gradually align electricity prices with market rates as part of a process to open energy markets, promote competition, improve energy efficiency and diversify energy supply. Regulated electricity prices provide support consumers, but also limit incentives for households and small businesses to invest in renewable energy and energy efficiency. A phased approach to deregulation could begin by removing price controls for non-household consumers, followed by a gradual transition through price increases for other consumers. Tariffs should, at a minimum, fully cover production and supply costs, with the upper bound corresponding to market-consistent prices. In Serbia, this upper bound implies a 70% increase relative to 2023 prices.
In parallel, efforts should be made to increase competition in electricity markets by transforming state-owned enterprises (SOEs) in the energy sector. Strengthening the governance and management capacities of SOEs in the energy sector is crucial, as they produce nearly 90% of Serbia’s electricity. The shift in corporate structure of EPS from a public company to a joint-stock company is a welcome first step and further governance reforms have been undertaken. These changes have been driven by the EPS Transformation Plan, with the support of the IMF and the EBRD. The EPS Transformation Plan, part of Serbia’s commitments under an IMF standby arrangement, involves restructuring EPS into a joint-stock company and enacting reforms such as reorganising its structure, digitalising operations, strengthening data security, and improving investment and human resources management (Balkan Green Energy News, 2024[1]). Arms-length management would help mobilise regulation that allows for full cost-recovery pricing, which would make room for new entrants to serve specific segments of the retail market.
Direct transfers to the energy sector should be made transparent and gradually phased out. Reforming price regulations and removing direct transfers to energy companies will help reduce the sector’s fiscal burden. Simulations show that eliminating direct transfers could generate EUR 51 million in direct savings and increase tax revenues by over EUR 10 million, while having minimal macro-economic impact. In addition, any future support should be transparent, fair and free from market distortions in line with international SOE governance standards and state aid legislation.
Energy sector finance reform will require accompanying measures to address energy poverty and protect vulnerable consumers. In terms of channelling resources to those who need them, the subsidies offered to energy-vulnerable customers and the main social assistance scheme (Financial Social Assistance [FSA]) perform significantly better than implicit subsidies through low prices. However, to compensate for the convergence of prices towards market-consistent levels, direct energy subsidies and FSAf assistance would need to be significantly larger (by between 2.5 and 3 times) to compensate those at risk of poverty. In addition, targeting remains essentially based on means-tests. Serbia should build on ongoing efforts to define energy poverty and define appropriate mechanisms to reach those at risk, including those who are not income-poor. Ultimately, alternative targeting mechanisms may be needed that account not only for income poverty but for energy-specific characteristics of households and their dwellings. Promoting energy efficiency, such as through targeted incentives for home retrofits, can help energy-poor households reduce their energy bills and improve living conditions.
Effective reform implementation is essential to achieve Serbia’s green energy transition. Social dialogue involving national and local governments, energy companies, trade unions and civil society can build public support and consensus on key policies. Stakeholder engagement will be particularly important in the context of the just transition in coal regions, as they will be particularly affected in the process of market regularisation and phase-out of financial support. Elaborating an action plan for a just transition in coal regions – that incorporates the roles of local communities and local self-government entities – should be a key short-term objective.
Support measures can enable businesses and households to participate in the energy transition. Supporting both businesses and households is essential for a successful energy transition. Businesses should have access to green loans, grants and tax incentives to adopt renewable energy and energy efficient technologies. Simplified permitting processes and transparent certification systems can accelerate renewable energy deployment, while knowledge-sharing platforms can help small- and medium-sized enterprises (SMEs) and industry associations adopt best practices. For households, raising awareness of energy efficiency and renewable energy benefits is key. Sustainable financing mechanisms, such as subsidies and low-interest loans, can help cover upfront costs, especially for energy-vulnerable households. A clear regulatory framework with certification systems, combined with capacity building for implementing institutions, can ensure the success and accessibility of these programmes.
How to read this chapter
This chapter is structured into five sections. It begins by examining Serbia’s climate commitments and its energy sector. 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 analyses the distributional impact of keeping electricity prices below their market value and compares the value it delivers to social protection programmes. The fourth 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 Serbia.
Serbia has made substantial commitments on energy and climate
Serbia submitted its enhanced NDC to the UNFCCC in August 2022, with a stated aim to reduce GHG emissions by 33.3% by 2030 (compared with 1990 levels). This target is three times more ambitious than Serbia’s first NDC (submitted in 2015), which aimed for a 9.8% reduction in GHG emissions by 2030 (compared with 1990 levels). The enhanced NDC includes both mitigation and adaption measures as well as measures to promote gender equality and to protect the vulnerable (UNDP/MEP, 2022[2]; UNFCC, 2022[3]).
The government adopted the final version of the enhanced Integrated National Energy and Climate Plan (NECP) in July 2024. The NECP sets a target of 45.2% of electricity generation from clean sources by 2030, supported by substantial investments in renewable energy infrastructure, including the addition of approximately 3.5 gigawatts (GW) of solar and wind capacity to the grid. The plan also prioritises energy efficiency improvements, greater reliance on renewables for heating and cooling, and a 40.3% overall emissions reduction from 1990 levels, which is more ambitious than the 2022 NDC. However, it falls short of fully incorporating key recommendations from the Energy Community Secretariat (ECS) – particularly the proposed increase in the target share of renewables in final energy consumption, set at 33.6% by 2030, compared to the more ambitious 40.7% suggested by the ECS (Republic of Serbia, 2023[4]).
A comprehensive framework of energy and climate-related laws and strategies in Serbia extends well beyond the NDC and NECP. Serbia’s Energy Sector Development Strategy, extending to 2040 with projections to 2050, outlines a comprehensive plan to enhance energy security, increase renewable energy utilisation, and modernise infrastructure. This strategy aligns with Serbia’s NECP for 2025-2030. The 2021 Law on Climate Change establishes a structured approach to reducing GHG emissions, implementing adaptation policies and forming the National Council for Climate Change to guide national efforts. The Low Carbon Development Strategy (2023) sets ambitious GHG reduction targets of 33% by 2030 and up to 76% by 2050 (both compared with 1990 levels), requiring substantial investment. The Energy Development Strategy, adopted by the National Assembly in November 2024, emphasises energy security, decarbonization, and economic competitiveness. It proposes phasing out coal by 2050 and aims for a significant increase in renewable energy capacity, targeting 3.5 GW from wind and solar by 2030 and 10.97 GW by 2040 (MRE, 2024[5]).
Serbia’s current energy mix continues to be largely based on fossil fuels with important impacts on people and the environment
Serbia’s electricity generation relies heavily on solid fossil fuels, which accounted for 62% of total electricity production in 2022. EPS operates eight coal-fired TPPs with a combined capacity of 5 171 megawatts (MW). The largest plant, TE Nikola Tesla in Obrenovac, provides around 60% of coal-fired capacity. Coal is primarily sourced from domestic lignite, with the Kolubara mine supplying 75% of the economy’s needs. However, insufficient investment in mining infrastructure has resulted in declining coal quality and production rates. Despite plans to phase out coal by 2050, Serbia is completing construction of a new coal plant, Kostolac B3 east of Belgrade, with 350 MW of capacity. Hydropower is Serbia’s largest renewable energy source, contributing 31% of total electricity generation in 2022 (Elektroprivreda Srbije, n.d.[6]; Fiscal Council of the Republic of Serbia, 2022[7]; Balkan Green Energy News, n.d.[8]; Eurostat, 2025[9]).
Electricity generation by fuel
Source: Eurostat (2025[9]), 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; AERS (AERS, 2024[10]), Annual Report 2023, http://www.aers.rs/reports.
Serbia’s heavy reliance on burning coal – combined with outdated technologies for power generation – is the main driver of high air pollution and GHG emissions and has important implications on health. Power generation from coal is Serbia’s largest source of CO2 emissions (Figure 12.2 – Panel A). Moreover, Serbia’s CO2 emissions per capita are the highest in the region and among the highest in the European Union. Many coal-fired power plants also emit too many harmful substances (sulphur dioxide [SO2] in particular), contributing to air pollution (Figure 12.2 – Panel B). Air pollution is a serious public health issue in Serbia, where exposure to fine particulate matter (PM2.5) was linked to approximately 10 800 deaths in 2022 – nearly 10% of the economy’s total mortality. Mortality attributed to PM2.5 pollution in Serbia stands at 163.6 deaths per 100 000 people, more than three times higher than the EU average of 53.1 per 100 000 (European Environment Agency, 2024[11]).
Note: B. For Kosovo calculations are done on the basis of the official main NERP ceiling.
Source: A. IEA (2023[12]), Database, https://www.iea.org/data-and-statistics/data-product/world-energy-statistics-and-balances; B. Ciuta et al. (2024[13]), Comply or Close Six years of deadly legal breaches by Western Balkan coal plants, www.complyorclose.org.
Serbia is a significant consumer of natural gas, and heavily dependent on imports to meet its demand. As the largest natural gas user in the region, Serbia uses natural gas primarily in industry (64%), followed by district heating (23%) and residential use (13%). The role of natural gas in electricity generation has expanded with the recent commissioning of a new combined heat and power unit, which accounted for 4.1% of electricity production and 14.2% of the economy’s total energy supply in 2022. About 90% of Serbia’s natural gas supply is imported, with substantial reliance on Russian sources, although Serbia has taken steps to diversify supply and source gas from Azerbaijan (Fiscal Council of the Republic of Serbia, 2022[7]; IMF, 2022[14]; CEEnergy News, 2025[15]; Eurostat, 2025[16]).
In recent years, Serbia has made progress in expanding electricity generation from solar and wind, though their shares remain small. In 2018, only 0.4% of the total electricity was generated from wind and solar sources. By 2023, this share had increased to 2.9%, with the majority coming from wind, which is significantly more developed than solar (with an installed capacity of 511 MW for wind and 137 MW for solar in 2023) (IRENA, 2024[17]; Eurostat, 2025[9]). Between 2023 and 2025, Serbia held two renewable energy auctions, awarding contracts for 400 MW of wind and 11.6 MW of solar capacity in the first auction, and 424.8 MW of wind and solar capacity in the second auction. This progress has been supported by policy commitments tied to the EBRD’s EUR 300 million liquidity loan to EPS, which included conditionalities such as a 1 000 MW wind auction plan for 2023–25 and the launch of the first renewable energy auction for 400 MW of wind capacity (EBRD, 2023[18]).
During the peak of the energy crisis, Serbia had to import significant volumes of electricity. In 2022, electricity imports increased sharply, as EPS was unable to produce enough electricity to meet domestic demand. This reflects mechanical breakdowns at existing TPPs as well as a weak hydrological year (Fiscal Council of the Republic of Serbia, 2022[7]).
Net imports as a share of domestic supply (%)
Source: Eurostat (2025[9]), 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; Eurostat (2025[19]), Imports of electricity and derived heat by partner economy, 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[20]), Exports of electricity and derived heat by partner economy, https://ec.europa.eu/eurostat/databrowser/view/nrg_te_eh/default/table?lang=en&category=nrg.nrg_quant.nrg_quanta.nrg_t.nrg_te; AERS (AERS, 2024[10]), Annual Report 2023, https://www.aers.rs/%D0%B8%D0%B7%D0%B2%D0%B5%D1%88%D1%82%D0%B0%D1%98%D0%B8.
Serbia’s use of regulation to keep prices low, comes with high costs, especially in times of crisis
Electricity and natural gas prices charged to households in Serbia are low in international comparison and are below cost-recovery levels. Households and small customers in Serbia are eligible for regulated electricity and natural gas prices while larger customers procure electricity in the unregulated market. At 0.1082 EUR/kWh, electricity prices for medium-sized household consumers in first half of 2024 were roughly one-third of the EU average (0.2889 EUR/kWh) (Eurostat, 2025[9]). The Serbian Fiscal Council estimates that, in mid-2022, household electricity prices were 15-20% below cost-recovery levels (Fiscal Council of the Republic of Serbia, 2022[7]). As part of a stand-by arrangement with the International Monetary Fund (IMF), Serbia implemented tariff increases for electricity and natural gas in 2023 to better align prices with supply costs. These adjustments have enabled EPS to match medium-term electricity production costs, while Srbijagas (the state-owned gas company) has improved its liquidity, although full cost-recovery is still pending (IMF, 2023[21]; IMF, 2024[22]).
Electricity prices including taxes and levies for medium-sized household and non-household consumers, first semester of 2024, EUR/kWh
Source: Eurostat (2025[23]), 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[24]), 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.
Despite low prices, electricity bills are a burden for many households in Serbia and energy poverty remains a reality
The cost of electricity for households, as a share of income, is relatively high in Serbia, making price increases politically sensitive. In Serbia, an annual consumption of 5 000 kilowatt hours (kWh) costs, on average, 7.1% of GDP per capita, compared with 7.9% in the Western Balkans and just 4.5% in the European Union (both including taxes and levies) (Figure 12.5). This implies a higher cost burden on households in Serbia. Further 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[23]), 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 (2025[25]), World Development Indicators, https://databank.worldbank.org/source/world-development-indicators.
Energy poverty remains a concern. The Survey on Income and Living Conditions (SILC) includes three subjective indicators typically used to analyse energy poverty. They include whether a household can afford to keep their home warm, whether they live in a dwelling with signs of excess humidity (leaking roof, damp walls, floors or foundations, or rot) and whether the household had arrears on utility bills. Across the Western Balkans, energy poverty is a concern across all three indicators. In Serbia 22% of households reported having had arrears in 2022, below the average for the Western Balkans (31.8%) but well above that of the European Union (6.9%) (Eurostat, 2024[26]). In contrast, the share of households who cannot keep their home adequately warm, at 9.5% was close to that the average EU economy (9.3%), and the share of the population living in damp dwellings (11.4%) is below the EU average (14.8%). Space heating is the main use of energy in households in Serbia and the region, with wood also playing an important role. Despite their development, only a minority of households use central heating (20%) or natural gas (9%). On the other hand, as wood prices have increased in recent years, vulnerability to increases in electricity prices has also increased among poorer households (RES Foundation/TheGreens/EFA, 2023[27]).
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[28]), Arrears on utility bills, https://ec.europa.eu/eurostat/databrowser/view/ilc_mdes07/default/table; Eurostat (2025[29]), Inability to keep home adequately warm, https://ec.europa.eu/eurostat/databrowser/view/ILC_MDES01/default/table?lang=en; Eurostat (2025[30]), 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 the project shows different groups face different challenges when it comes to accessing and using energy. In Serbia, gender roles distinctly shape household energy-related tasks, with men typically handling procurement (e.g. wood, pellets) and structural investments (e.g. solar panels). Women, in contrast, manage administrative tasks and day-to-day energy-saving practices. Women are more likely to use electricity for household chores and actively conserve energy, switching to alternatives when possible. They often make personal spending sacrifices to prioritise household energy needs, a commitment less frequently observed among men. This gendered division reflects traditional roles but also highlights women’s proactive approach to energy conservation in daily life (Box 12.1).
This project incorporates 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 was used, including focus group discussions and roundtables across the Western Balkans.
In Serbia, nine focus groups were conducted in five towns and municipalities: Belgrade, Kragujevac, Mladenovac, Vrnjačka Banja and Žabari. A total of 96 participants1 covered rural and urban areas, different income levels and recipients of social assistance. Two focus groups in Mladenovac also included the Roma community. 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 Serbia. Key insights, as well as inputs from participants, are as follows:
Traditional gender roles significantly influence household energy usage. Participants observed that women tend to consume more electricity because they are primarily responsible for household chores, such as cooking, ironing, and operating kitchen and bathroom appliances. In contrast, men’s energy use is often linked to technologies and tools related to home maintenance and repairs, as well as using the computer and watching TV.
Women display a more proactive approach to energy-saving practices within households, taking steps to conserve energy wherever possible. This includes actions such as turning off unused equipment (e.g. TVs, phone chargers) and switching to alternative energy sources. Meanwhile, men tend to focus on larger, more structural investments in energy efficiency (e.g. solar panel installations or gas system upgrades).
“When that cheap electricity comes on, you can wash, cook…” (Woman, 42, employed, Vrnjačka Banja).
In households that use wood for energy, men are typically responsible for procuring it, including the purchase and collection. In households without a male present, women often report relying on their fathers or male relatives for assistance with tasks such as chopping wood.
Both men and women recognised that women are more exposed to indoor air pollution. This is largely because women spend more time performing household chores, such as cooking and using indoor appliances, which increases their exposure to smoke, fumes and other pollutants.
“Bad air has most effect on us women...because we have to cook and clean ...” (Woman, 57, Employed, Zabari)
Some participants observed that men often avoid seeking social assistance due to a sense of shame or stigma, whereas women are perceived as more likely to apply for support when needed.
Men are more likely to report taking on additional work to be able to pay for energy bills.
A distinct issue that repeatedly emerged in Serbia – even outside Roma communities – was the problem of illegal property (which was not mentioned during focus groups in other Western Balkan economies). Participants identified housing legalisation as one of the biggest challenges in accessing state-sponsored subsidies. As the process is costly, many households are unwilling or unable to bear the additional expenses required for legal registration.
“Well, we haven’t used any state energy efficiency schemes, because the reason is that our house hasn’t been legalised yet ...” (Men, 56, Temporary worker, Zabari).
1. Of the 96 focus group participants, 52 were women (54.2%) and 44 were men (45.8%). In terms of work status, 53.1% were employed, 9.4% unemployed, 8.3% retired, and 29.2% were social assistance recipients. Regarding household composition, most lived in extended or multi-generational households (52.1%), 32.3% lived in family households, 11.5% in single-person households and 4.2% in single-parent households.
To provide a basis for a comprehensive energy sector reforms in Serbia and the Western Balkans, 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 Serbia 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[31]). 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 Serbia energy sector through regulated prices
Induced support for consumers
Provision of electricity at regulated tariffs, which are set below market prices, resulted in approximately EUR 8.6 billion in induced support to consumers in regulated market segments between 2018 and 2023, most of which was due to the energy crisis in 2021-23. This induced support is calculated as the difference between market prices – approximated by using Hungarian Power Exchange (HUPX) prices1 – and regulated tariffs in Serbia (Figure 12.7 – Panel A). About EUR 7.6 billion accumulated during the energy crisis (2021-23), due to the rising international energy prices and limited passthrough to domestic retail prices. Therefore, they do not necessarily reflect the typical situation in Serbia in normal times, before the crisis. In the pre-crisis years (2018-20), the average annual support was about EUR 337 million, which is sizeable, but an order of magnitude smaller than during the energy crisis. The regulated market covers just under half of total demand by end-customers (Figure 12.7 – Panel B).
Note: The consumer support shown in the figure encompasses several regulated market segments: guaranteed supply, supply of last resort, electricity supply to EMS for losses and own consumption, and supply to EDS for losses.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Estimates of induced support based on average energy prices in the EU are similar than 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 6.7 billion in Serbia. The alternative estimate is 22% 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 12.8). 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.
Most of the estimated support to consumers corresponds to the supply of guaranteed electricity at regulated prices. Support to customers eligible for guaranteed electricity supply accounts for 83% of the total induced support to consumers in 2018-23. This includes supply of electricity at regulated prices to small businesses, households and public lightning. In 2018-23, EUR 7.2 billion of induced support to consumers was through guaranteed supply. Last resort supply, supply to transmission system operator Elektromreža Srbije (EMS) for electricity losses and their own consumption, and supply to distribution system operator Elektrodistribucija Srbije (EDS) for losses account for the remaining part of the induced support to regulated market segments. The induced support was allocated to the two entities as follows: to EDS for losses accounted for EUR 1.2 billion; to EMS for losses and own consumption about EUR 246 million and to act as SLR about EUR 14 million (Figure 12.9). The size in the induced in support for guaranteed supply, supply to EDS for losses, and supply EMS for losses and own consumption was driven by the energy crisis and the widening gap between HUPX market prices and domestic regulated prices, which remained largely unchanged for the three regulated market segments – with all averaging around 7.6 RSD/kWh between 2018 and 2023. In contrast, the supply of last resort saw a partial passthrough of rising international prices, with tariffs doubling from 10.7 RSD/kWh in 2021 to 21 RSD/kWh in 2023.
2018-23 period totals, EUR million
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Within the guaranteed market segments, price regulation also results in cross-subsidies among customer groups. In the period 2018-23, small business connected at low voltage (0.4 kV) were paying higher prices (10.4 RSD/kWh) than households (7.6 RSD/kWh) and public lighting (7.2 RSD/kWh). This generated cross-subsidies in the amount of EUR 134 million in 2018-23 (Figure 12.10).
2018-23 period totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Price policy in Serbia has also impacted unregulated electricity markets. The unregulated sector meets remaining demand through a mix of bilateral trades and transactions in the organised SEEPEX (Serbian power exchange) market. To mitigate the effects of the energy crisis on the economy, prices in the unregulated market were frozen in November and December 2021. Beginning in January 2022, new contracts were subject to a price cap of 75 EUR/MWh (8.81 RSD/kWh), which was later raised to 95 EUR/MWh (11.14 RSD/kWh) in September 2022. This generated induced support of about EUR 2.9 billion in 2022. In 2023, the price cap increased gradually, and unregulated prices increased above HUPX plus grid costs on average for the year, reflecting the return to normal revenues for EPS (Figure 12.11).
Note: Figures outside of the 2021-23 period are shown for completeness, but do not imply an induced transfer.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Serbia has made progress in recent years in developing the institutional infrastructure for competitive wholesale electricity markets. Development of organised markets has progressed in recent years, particularly with the launch of the continuous intraday market in SEEPEX in July 2023. The future coupling of electricity markets, both within the region and with EU countries, is likely to sustain more competitive markets. Additionally, to better align prices with the cost of supply, in 2022-23, Serbia increased regulated electricity prices following a stand-by agreement with the IMF (IMF, 2023[21]; IMF, 2024[22]).
The inventory also identified other induced support schemes for Serbia. This includes ceilings on the price of diesel and gasoline, and on the price of wooden pellets. The two schemes were not valued, however, due to lack of data to estimate counterfactual market prices.
Induced support for producers
Feed-in tariffs are a special category of induced support to renewable energy producers in Serbia. Feed-in tariffs guarantee a purchase price for renewable generation projects, with aim to make them predicably profitable and thus encourage investment. In Serbia, the implicit premium is financed through renewable energy surcharges on all electricity consumers. As for other forms of induced transfer, the inventory calculates induced support through feed-in tariffs by comparing guaranteed prices and HUPX reference prices.
Until 2020 renewable energy producers in Serbia benefited positively from feed-in tariffs, but rising international energy prices in 2021-22 made the obligation to supply electricity at guaranteed domestic prices a significant cost for producers. Feed-in tariffs shielded privileged producers from market volatility while also preventing them from making windfall gains when prices were high. Feed-in tariffs generated positive induced support for producers in 2018-20 of about EUR 153 million. The energy crisis shifted this dynamic, resulting in an opportunity cost of around EUR 249 million in 2021-22 for producers that remained in the system (Figure 12.12 – Panel A). Similar trends were observed across the region (Figure 12.12 – Panel B). Since the adoption of the Law on Renewable Energy Sources, new feed-in tariff agreements are only available to small projects. Feed-in tariffs have been replaced by market premium mechanisms as the new main support model for RES (Balkan Green Energy News, 2024[32]). Although not shown in Figure 12.12, Serbia also has the particularity of having feed-in tariffs for combined heat and power (CHP) plants which benefit consumption of fossil fuels.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Feed-in tariffs have been an important mechanism for attracting investment in renewables, as they provided revenue certainty for producers. The method of valuation of feed-in tariff schemes in the inventory nets out positive and negative values but does not account for the value of the transfer of risk or for the length of guaranteed price agreements. Although producers in the privileged system had the option to exit, between 1 January 2020 and 31 December 2023, only 26 privileged producers left2 (for comparison on 11 August 2022, 569 of energy producers were registered as privileged producers in the registry of the Ministry of Mining and Energy). Most chose to remain despite the surge in international energy prices between 2021 and 2023 due to the stability, predictability, and lower risk offered by the guaranteed pricing structure. This predictability in the income stream is also a key factor in securing finance for investment in renewable sources of energy.
Serbia overhauled its renewables support framework in 2021 with the introduction of auctions for market premia under a contract-for-difference model. Serbia took a significant step toward promoting renewable energy with the adoption of the Law on the Use of Renewable Energy Sources in April 2021 – its first comprehensive legal framework dedicated to renewables. The law aims to stimulate investment in the sector by introducing key mechanisms such as the prosumer model and a competitive auction system for allocating market premiums, now the main form of renewable energy support in Serbia. By the end of 2021, Serbia had also put in place several supporting bylaws, including those defining wind project quotas, auction procedures for awarding market premiums and feed-in tariffs, the structure of contracts for difference, and regulations governing prosumer participation. The first renewable energy auction was successfully conducted in 2023, offering 450 MW of capacity (400 MW wind and 50 MW solar) with 15-year contract for difference (CfD) contracts (Balkan Green Energy News, 2023[33]; Stojilovska and Kolovrat, 2024[34]).
Financial support: EUR 3.4 billion for Serbia in 2018-23, most of it during the crisis
Serbia’s energy sector received EUR 3.4 billion in financial support between 2018 and 2023. The majority, EUR 2.1 billion, was fiscal support. Before the energy crisis (2018-20), fiscal support amounted to approximately EUR 185 million. During the energy crisis (2021-23), it surged more than tenfold to EUR 1.9 billion. Another EUR 1.2 billion is in the form of credit support, either through public loans or publicly guaranteed loans, of which EUR 1.05 billion was provided during the crisis (Figure 12.13).
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Fiscal support
During the energy crisis, the largest portion of total fiscal support consisted of written-off loans amounting to EUR 1.7 billion. Of the total fiscal support in Serbia, EUR 1.4 billion was allocated to Srbijagas and EUR 296 million to EPS – in the form of written of loans. In 2021, Srbijagas received two short-term, interest-free loans from the Government of the Republic of Serbia for maintaining liquidity – one for EUR 145 million (RSD 17 billion), the second for EUR 153 million (RSD 18 billion) (Srbijagas, 2021[35]).3 Both were written off in 2022. Also in 2022, Srbijagas received another loan due to high import prices and liquidity issues (EUR 1.1 billion or RSD 129 billion) (Srbijagas, 2022[36]), which was also written off soon after (Srbijagas, 2023[37]). Support to EPS for liquidity purposes was in the form of written-off loan in the amount of EUR 296 million (RSD 34.7 billion) in 2023, which was part of a EUR 500 million (RSD 58.6 billion) loan provided to EPS (IMF, 2023[21]). As such, EUR 204 million (RSD 23.9 billion) is still outstanding and is recorded in the inventory as public loans (Figure 12.14).4
Other notable schemes in 2018-23 include government grants to energy enterprises, support to vulnerable customers, and under-pricing of mineral rents. Support to Resavica for consolidating and restructuring operations amounted to about EUR 271 million in 2018-23. Support was also directed to: socially vulnerable consumers for electricity consumption (EUR 66 million for the period 2018-23)5; underpricing of mineral rent for oil and gas company Naftna Industrija Srbije (NIS) (EUR 49 million); and district heating bill reductions in Belgrade and Novi Sad (EUR 10 million) (Table 12.1).
EUR million
Note: .. no data (missing value or not available), x not applicable (there was no support provided at the time).
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Between 2018-23, Serbia provided EUR 51 million of fiscal support to vulnerable consumers – about EUR 10 million annually. Support for energy-vulnerable customers was provided under the Regulation on Energy-Vulnerable Customers, adopted in December 2015 and effective from 1 January 2016. This regulation offered discounts on electricity, natural gas and district heating bills for low-income and energy-vulnerable households, with specific provisions: 120 to 250 kWh per month for electricity; 359 to 770 kWh per month for natural gas (limited to six months per year); and 40-60% off monthly district heating bills, depending on household size. In December 2022, a new regulation further expanded support by including: reducing bills for thermal energy; raising the income threshold to qualify for assistance; and extending eligibility to recipients of enhanced allowances for personal care assistance. Additionally, rural households are now eligible for vulnerable consumer status, regardless of the size of their residential unit, broadening access to these benefits for more households across Serbia.
Credit support
In 2018-23, the energy sector in Serbia received EUR 1.2 million of credit support. Srbijagas received the highest credit support in the form of publicly guaranteed loans – EUR 180 million before the crisis (2018-20)6 and EUR 409 million during the crisis (2021-23).7 EPS received EUR 400 million of publicly guaranteed loans: EUR 300 million as a liquidity loan from the European Bank for Reconstruction and Development (EBRD), and EUR 100 million from KfW under a virtually identical instrument in co-ordination with EBRD. Unlike previous credit support to Srbijagas, which the Government of Serbia paid, these were extended to EPS. EPS currently has an outstanding public loan of EUR 204 million, part of the EUR 500 million public loan provided in 2022 (IMF, 2023[21]). As indicated above, EUR 296 million of the latter loan was written off. Finally, EDS received a publicly guaranteed EBRD loan of EUR 40 million to expand smart metering (Figure 12.14).
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 Serbia
The Inventory distinguishes between support to fossil fuels and to 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 electricity generation mix.
Taking into account Serbia’s electricity mix, most of the induced support through regulated electricity prices is allocated to fossil fuels in the Inventory. About EUR 5.7 million of induced support through regulated prices can be allocated to fossil fuels and about EUR 3 billion to renewable energy (Figure 12.15 – Panel A). Before the crisis (2018-20), EUR 704.3 million can be allocated to fossil fuels and EUR 306.4 million to renewable energy (total induced support through prices in that period was about EUR 1 billion). During the energy crisis period (2021-23), total allocated support to fossil fuels was about EUR 5 billion and about EUR 2.7 billion to renewable energy (total induced support in that period was EUR 7.6 billion). As is the case with the general level of induced support, the levels reflect the period of extraordinary international energy prices.
Most of the induced support for producers was through feed-in tariffs to support renewable energy production. 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 153 million to renewable energy producers, and EUR 14 million for CHP plants. From 2021 to 2023, however, feed-in tariffs fell below market prices, resulting in an opportunity cost for producers – EUR 248 for renewable energy producers and EUR 43 million for CHP (Figure 12.15 – Panel B).
2018-23 totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Between 2018 and 2023, fossil fuels received EUR 2.9 billion in financial support whereas renewable energy received only EUR 414 million. On the fiscal side, about EUR 2 billion went to fossil fuels and EUR 125 million to renewables. Of total credit support, about EUR 943 million went to fossil fuels and EUR 290 million to renewables (Figure 12.16).
2018-23 totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Analysing the distributional impacts of energy subsidies and support measures
Energy prices in Serbia have increased notably since 2020 and are bound to increase further in the medium term. The energy system of Serbia still relies largely on coal and hydroelectric energy. In the past, this enabled the system to supply customers at low prices. As Serbia advances along its decarbonisation path, prices will rise as they increasingly incorporate the externalities linked to fossil fuel use (particularly CO2 emissions) and as coal is replaced by renewables (MRE, 2024[5]).
Distributional analysis can shed light on the efficiency of low energy prices as a means to support households compared with alternative policy instruments. Low energy prices have systematically generated a transfer of value from the energy system to consumers, with taxpayers ultimately bearing the charge. The distributional impacts of this implicit subsidy can be assessed using micro‑simulation techniques. In addition, micro-simulation allows comparison of the impacts of price regulation on key programmes in Serbia’s social protection system, particularly the main social assistance programmes. Finally, micro-simulation allows for ex-ante assessment of new programmes for which impact analysis cannot be carried out on ex-post survey data.
This report relies on the Commitment to Equity (CEQ) framework to analyse the effectiveness of social protection tools in Serbia. The CEQ framework (Chapter 5) provides a consistent methodological approach to analyse the impacts of taxation and public expenditure systems on income distribution. The method has been applied to economies across continents and levels of development, which allows international comparison of systemic distributional impacts as well as of individual programmes.
The baseline data for distributional analysis is the Survey on Income and Living Standards (SILC) 2020. SILC 2020 (SORS, 2020[38]), which includes data corresponding to year 2019, was selected to establish the baseline for analysis of distributional incidence. This is because, even though SILC 2021 data were available at the time of writing, they reference year is 2020 – when the COVID-19 pandemic deeply affected the structure of household incomes. SILC includes detailed information on household income and its composition, which is used to establish the relevant income concepts for analysis (from market income to disposable income). As SILC data do not include information on household consumption, it is complemented with HBS data for 2019 (SORS, 2019[39]), thereby including into the analysis data on consumption expenditure (and, thus, indirect tax expenditure) and on energy consumption.
Price regulation benefits many who do not need the support
Price regulation in Serbia benefits many who do not need support. Regulated prices insulate households from the volatility of wholesale and international electricity markets. In Serbia, they have generally been significantly below market prices, partly as a reflection of relatively low production costs. However, prices have not always been sufficient to cover costs, particularly when EPS production was insufficient to meet demand and costly imports were needed (IMF, 2021[40]). In this report, induced support is estimated based on prevailing market prices. On that metric, household tariffs in 2023 were, on average, about 70% lower than market-consistent prices, despite successive increases implemented (particularly in 2022 and 2023) to ensure cost recovery – they were 37% lower than market-consistent prices in 2018-20 (on average).
Universal implicit price subsidies are regressive in the absolute sense but progressive in the relative sense. More affluent households consume more electricity than poorer households. The distribution of electricity consumption, however, is much less unequal than that of income. As a consequence, relative to incomes, households at the bottom of the income distribution receive a much higher transfer through price regulation than households at the top. But, as richer households consume more electricity per capita, they receive a larger absolute transfer (Figure 12.17). The at-risk-of-poverty rate in Serbia was 19.9% in 2023 (SORS, 2024[41]), suggesting that the bottom 20% of the income distribution should be receiving support. In reality, they receive a disproportionally low share (15.4%) of support through price regulation.
Block tariffs are likely to moderate the regressivity of implicit subsidies. Household electricity tariffs in Serbia are calculated on a schedule with peak and non-peak hours, as well as a block tariff structure. Block tariffs are organised in three blocks: for monthly consumption up to 350 kWh; consumption between 350 and 1600 kWh; and consumption above 1 600 kWh. From November 2023, prices (both peak and non-peak) were 1.5 times higher in the second block and 3 times higher in the top block. Available data from HBS do not allow for identification of consumption quantities, and therefore consumption blocks, which are therefore not included in the analysis. To the extent that a clear correlation exists between income and total electricity consumption expenditure, block tariffs should lower the share of implicit subsidies directed to affluent households compared to a situation with uniform prices.
Distributional impact of a 40% increase in electricity price in Serbia
Note: This figure represents the simulated impact of a uniform 40% increase of electricity prices in Serbia in both absolute and relative terms across the income distribution.
Source: Vladisavljević and Žarković, (forthcoming[42]).
Distributional impacts of policy tools in Serbia
Micro-simulation analysis can help determine how well tax and transfer systems can compensate for distributional impacts of potential energy policy changes. 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 12.18). To this end, inequality and poverty are compared before and after direct and indirect taxes and transfers to provide information on the impact of the overall tax and transfer system on redistribution (Figure 12.18– Panel A) and on poverty (Figure 12.18 – Panel B). Overall, the tax and transfer systems in the Western Balkans have a modest redistributive effect: inequality, as measured by the Gini coefficient, decreases 0.025 points in Serbia (Figure 12.18 – Panel A). In contrast, inequality falls by 0.12 in Spain and 0.06 in Poland. In Serbia, government interventions through taxes and transfers are, in contrast, associated with an increase in poverty – mainly as a result of indirect taxes. While direct taxes and transfers reduce poverty by 0.74 percentage points in Serbia, indirect taxes significantly reduce consumable incomes. When all taxes and transfers are accounted for, their collective impact is a sizeable increase (5.9 percentage points) in poverty. This suggests that social transfers cannot offset the burden of taxes on poverty (Figure 12.18 – Panel B). The pattern is not exclusive of 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[43]) Bosnia and Herzegovina data from (Vladisavljević and Žarković, forthcoming[44]), Montenegro from (Vladisavljević and Žarković, forthcoming[45]), Serbia data from (Vladisavljević and Žarković, forthcoming[42]), North Macedonia from (Petreski, forthcoming[46]). Others sourced from CEQ (2024[47]) CEQ Standard indicators web version 5.0, CEQ Institute, https://commitmentoequity.org/datacenter/.
Energy-related allowances in Serbia have relatively small impact on poverty and do not all target the most vulnerable. The micro-simulation model can be used to compare the marginal impact of several transfer programmes in Serbia. The main targeted social assistance programme (Financial Social Assistance [FSA]) is used as a benchmark and compared with electricity and gas allowances and utility subsidies as found in the 2019 data. The data allows the identification of two groups of energy-related transfers: electricity and gas allowances; and utility allowances. Electricity and gas allowances correspond to measures to support vulnerable households as identified by the data; for modelling purposes, the generosity of these measures has been adjusted to match programme rules. Utility allowances are the series of local government allowances to reduce utility bills. According to the analysis, the electricity and gas allowance is progressive, with 52% of benefits concentrated on the poorest decile. In reality, the electricity and gas allowance is almost as progressive as the FSA.8 In contrast, utility allowances are much less progressive, and benefits are concentrated in the middle of the income distribution. Moreover, both energy-related transfers are quantitatively small, representing 0.01% of household incomes for electricity and gas allowances and 0.04% for utility allowances. In turn, their impact on poverty levels is marginal.
Electricity price regulation in Serbia contributes to alleviating poverty but is very poorly targeted. In contrast to direct transfers, the implicit subsidy on electricity prices, simulated as a 40% price reduction, represents a sizeable 1.6% of total household income. It is only mildly progressive as richer households receive larger absolute transfers. Still, as poorer households receive larger transfers relative to their income, it contributes to reducing inequality. If the subsidy were removed, poverty would increase by as much as 1.3% – assuming households did not adjust their consumption patterns. If the implicit subsidy is assumed to be 70%, it constitutes an even larger share of total household income (2.8%) and as such lowers poverty by 2.5%.
Relative size, impact and progressivity of transfer programmes
Note: The size relative to market income corresponds to the total size of the transfer relative to total household income in the economy, the contribution of poverty reduction measures the fall in poverty with and without the specific measures (but with all other tax and transfer measures), progressivity is measured by the Kakwani index, which measures the concentration of benefits relative to income inequality.
Source: Vladisavljević and Žarković, (forthcoming[42]).
The subsidy for energy-vulnerable consumers (SEVC) was reformed in 2022 and amended in 2023, increasing its impact. As it is not possible to observe the programme in its current form in the data, it is simulated by applying programme rules to the 2019 dataset, after accounting for changes in disposable incomes and prices. Programme rules as introduced in the Decree on Energy Vulnerable Customers (GRS, 2022[48]) and amended in 2023 are simulated to determine eligibility and programme generosity. As simulated, the subsidy for energy-vulnerable customers would amount to RSD 1 963 on average and cover 285 000 households, totalling RSD 6.7 billion (EUR 57 million) in expenditure annually. This is significantly larger than the previous iteration of the programme: in 2019, 72 000 households received bill discounts through the energy-vulnerable consumer programme, for a total expenditure of RSD 1.2 billion (EUR 10 million) (AERS, 2021[49]). In addition, the data capture the programme very imperfectly because only a small share of sampled households (about 1%) benefitted in 2019 and report receiving electricity and gas allowances. As of 2023, 169 419 households are reported to receive the allocation (AERS, 2024[10]) and EPS reports that requests for reimbursement from the Ministry of Mining and Energy were submitted for a value of RSD 1.4 billion for 2023. The programme simulation assumes perfect targeting, which explains the gap in coverage between the simulation and reality. As amended, the subsidy for vulnerable energy customers has slightly more progressive targeting than its predecessor but is much larger, which explains its much larger impact on poverty – which is actually on par with the FSA. Including (as of October 2023) pensioners receiving minimum pension to the scheme may have significantly increased the programme size.
Targeting the poor is key to address energy poverty but is not sufficient. Vulnerable energy customers are identified by applying the definition of energy vulnerable households from Serbia’s Decree on Energy Vulnerable Customers. On that basis, 15% of the population are found to be energy vulnerable. This is compared with energy-poor households, measured as the share that spend over 10% of income on energy. The great majority of those at risk of poverty (the poorest 21.7% as of 2019) were also energy poor. However, a significant share (24.7%) of those not in income poverty also face energy poverty (Figure 12.20). Therefore, targeting the income poor with specific tools to ensure they do not face the consequences of energy poverty on disposable income and health is key. However, instruments should also address energy poverty among those who are not income poor
Rate of energy vulnerability and energy poverty by income poverty status (%)
Source: Calculations based on SILC 2020 and HBS 2019 data.
Energy sector reform in Serbia will require careful balancing of the efficiency of energy markets with the economic and social consequences of reform, while ensuring that reforms are fiscally sustainable. This section draws on micro-simulation and macro-economic modelling to analyse policy scenarios for electricity prices and the reduction in direct subsidies to fossil fuels in Serbia, building on the inventory of support measures presented in Chapter 3. The section starts with a description of the tools used. It then moves on to analyse reform scenarios and finishes with considerations on how such reforms can be implemented, including the role of block tariffs and prospects for targeted energy poverty programmes.
Analysing the macro-economic impacts of potential energy sector reform in Serbia
Changes in energy sector regulation will impact the economy widely. At the macro-economic level, changes in market regulation generate a transfer of value from certain categories of households to the energy sector and to the state. This occurs through three mechanisms: increased tax receipts on energy consumption; increased tax receipts linked to increased profitability; and dividend payments linked to improved performance of SOEs. In addition, sectors and firms will be differentially impacted depending on their current status. At present, most non-household consumers already procure electricity in the unregulated market. However, SMEs that satisfy the conditions to benefit from guaranteed supply have the option of being served under regulated prices. In the latter case, those paying regulated prices cross-subsidise household tariffs. Still, this option remained attractive during the period under study, particularly for smaller consumers (those not requiring power above the thresholds set for the “mass consumption” category9). Different sectors and firms will also be differentially impacted, depending on the energy intensity of their activity and their ability to shift consumption between sources of energy.
This report relies on a macro-economic computable general equilibrium (CGE) model as a flexible tool to analyse impacts in individual economies in the region (Chapter 4). This chapter relies on an instance of the POWER-CGE model developed for the case of Serbia, the RS-POWER-CGE model. The model presents a simplified version of the economy of Serbia to help shed light on how the various effects of changes to energy sector regulation combine. 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 Serbia. 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. Different technologies for electricity production are modelled as separate sectors. The model is static, and the results are meant to represent new equilibrium situations after a policy or market “shock” has occurred.
The baseline data for the RS-POWER-CGE model is drawn from the GTAP database. The RS-POWER-CGE model is built on the basis of a social accounting matrix. The core dataset was built on the basis of the Global Trade Analysis Project (GTAP 11), which uses 2017 as the reference year (GTAP, 2023[50]). The GTAP database includes a global input-output matrix as well as social accounting matrixes for 160 regions. The GTAP dataset for Serbia is itself built on Serbia’s input-output matrix, but it also includes globally consistent imputed values representing value flows to factors of production, as well as energy flows distributed across sectors.
The role of regulated markets for supplying the productive sectors of the economy is calibrated on the basis of national statistics. The productive sectors in Serbia rely on regulated prices to a relatively small extent. While 99% of household electricity demand is satisfied in the regulated market, only 6.7% of non-household consumption is. As such, shifts in regulated prices affect the economy largely through their impacts on households and aggregate demand. In the absence of publicly available data on the share of demand from the regulated segment by sector, the model is calibrated so that the share of demand in each NACE sector matches the share of value added by small firms (as recorded in structural business statistics) (SORS, 2024[51]). The resulting regulated segment share is 22.5%, double that recorded in the data for the reference year 2017 (11.7%). This value is taken as the baseline as it offers a more conservative approximation. The deviation from the recorded data for the share of the regulated segment is largely driven by the high share of electricity consumption in manufacturing. When the share of regulated energy consumption in manufacturing is set to zero, the share of electricity procured by non-household customers that is purchased at regulated prices is 14.9% in the calibrated model. To analyse the results’ sensitivity to this calibration, simulations were run setting the share of regulated market energy consumption in manufacturing to 0% in addition to the baseline value (17%, which corresponds to the share of small firm value added in manufacturing).
Reforming electricity pricing
The regulated market has largely insulated customers from market price movements
Electricity markets in Serbia are segmented by regulation. Guaranteed supply by the USS forms the bulk of regulated supply. The regulated market covers almost all of household demand as well as that of small customers. Small customers served by guaranteed supply make up a relatively small portion of the market: they consumed 6.7% of demand by the non-household sector in 2023 (excluding own consumption by the power sector). The regulated market covers just under half of total demand by end-customers. The share of electricity in regulated markets has fallen from 53% in 2017 to 47% in 2023, driven by an increase in consumption by non-household customers, including in medium and high-voltage segments, and the exit of firms from the regulated market. The unregulated sector covers the remainder of demand.
Electricity prices in retail markets in Serbia have not followed international market prices in recent years. Despite turmoil in international markets, retail prices in Serbia’s regulated markets were kept in check during the energy crisis (2021-23). Despite the energy crisis, household prices increased only slowly in nominal terms between 2017 and 2022. The average price in 2022 was 13% higher than in 2017, and 8% lower in real terms. However, the fiscal cost implied by keeping prices low prompted a series of price increases starting in December 2022. By November 2023, electricity charges had increased by 53% in nominal terms. In turn, average annual household prices had risen by 47% in nominal terms and 7% in real terms (compared with 2017).
Unregulated prices have also been kept in check through price restraint in EPS. At present, EPS supplies over 99% of the market and is fully owned by the Republic of Serbia. To curb the impacts of the energy crisis on the economy, prices in the unregulated market were frozen in November and December 2021. From January 2022, prices in new contracts were made subject to a cap of 75 EUR/MWh (8.81 RSD/kWh), which was increased gradually until September 2024. The price cap was binding and combined with long-term contracts for corporate customers, explains that average prices in Serbian unregulated markets allowed very limited pass-through from international price movements. Indeed, despite the increase in September 2022, the price cap remained significantly below market prices: the average price in SEEPEX in 2022 was 32.1 RSD/kWh, in line with international markets.
To examine the impacts of price interventions on the economy, the modelling exercise relies on a series of market-consistent prices. These correspond to the price that would result from applying the cost-plus methodology to a situation in which procurement price would be aligned with international market prices. Annual average prices in the HUPX day-ahead market are taken as the baseline. As a simplifying assumption, prices charged for distribution and transmission are kept constant, as are quantity shares across types of customers. An 8% margin on top of the total energy and network cost is added to account for the profit margin and operational supply costs.10 Market-consistent prices differ across voltage levels and customer types, reflecting that use-of-network charges differ across customer types, but follow the same pattern over time.
Price interventions led to significant induced support towards consumers during the 2018-23 period. The price gap for the unregulated market was largely a response to the energy crisis. The calculated gap was relatively small in the pre-crisis period (1.5% in 2019), grew significantly during the crisis (reaching 213% in 2022), then fell back to pre-crisis levels as of 2023 (0.7% in 2023). In contrast, the gap in household prices appears as a structural feature of the electricity market. While this gap was also largest during the energy crisis (373% in 2022), it was sizeable before and after, averaging 40% in 2018-19 and 72% in 2023. The gap is likely to be smaller in 2024 as international prices moderated after the 2023/24 heating season and retail prices were increased by 8% as of November 2023, which is only partially reflected in 2023 averages.
Average annual prices in RSD/kWh
Source: AERS annual reports and Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Scenario 1: Market-consistent pricing
Regulated prices effect a significant transfer of value from EPS to customers in the regulated market. This consists of two elements: a transfer to customers covered by guaranteed supply as mandated by regulation; and a transfer to customers on commercial contracts that were served under a price gap during the energy crisis. Together, this corresponded to a value of EUR 7.2 billion during 2018-23.
To examine the impacts of price interventions in the electricity market, this project simulates a scenario in which prices would be adjusted towards market-consistent pricing while maintaining the cost-plus tariff setting methodology. For reference, the gap between regulated and market-consistent prices was 40% on average in 2018-19 and stood at 72% in 2023. Simulations reflect regulated electricity price increases of 10%, 40% and 70%.
The baseline model predicts a mild contractionary impact of a 70% increase in regulated electricity prices. Household electricity demand contracts significantly (-25%) but a large part of this translates into substitution with other energy sources, so that total household demand falls by 4%, a sizeable but smaller impact. This results in a fall in GDP of 0.14%. The fall in aggregate demand is compensated by an increase in government consumption, driven by increased tax income from both electricity consumption and the profits of energy companies.
Such a large price shift would have significant impacts on the financial performance of key energy market actors. Even considering a large demand response in the regulated market, the price increase results in additional revenue for EPS of EUR 344 million in the regulated segment. It also frees up 3 470 GWh of electricity with a market value of EUR 434 million. As electricity flows are kept constant, this entails no additional costs, resulting in a 18% increase in operating income and a 68% increase in profit (relative to the results in 2023).
The increase in regulated electricity prices has major impacts on households, particularly poorer households. At the top end of the price increase range, a 70% increase in electricity tariffs pushes up electricity expenditure from 5.4% to 8.6% of disposable income on average. Among those at risk of poverty, electricity expenditure would increase from 12.4% to 19.0% of disposable income.11 Fully compensating those at risk of poverty would entail a cost of EUR 131.6 million (RSD 15.4 billion).
Source: Authors’ calculations.
The relatively small impact of electricity price increases on the economy is due to the relatively small share of electricity consumed by productive sectors. To examine the sensitivity of results to the calibration method, alternative calibrations are compared with adjustments to the share of electricity in the manufacturing sector that is procured at regulated prices. The baseline value (17%) corresponds to the share of value added produced by SMEs in manufacturing as of 2022. The lowest bound is 0%. At this level, total electricity for non-household actors in the regulated sector in the model is 15%, while the measured value for 2017 (the reference year for the macro-economic data) is 12%. With lower shares of electricity from productive sectors in the regulated market, the economic impact of the price increase becomes positive (output increases by 0.24% if all electricity in manufacturing is assumed to be provided in the unregulated market, by 0.13% if 5% of electricity in manufacturing is assumed to be provided in the regulated market). In the model, this is driven by an increase in tax revenues, which drives up government consumption to compensate for the contraction in household demand for goods and services. As the price shift is exogenous, the financial gains to the energy sector and the necessary support to the poor do not vary perceptibly. In what follows, the higher value for this parameter is maintained as a more conservative approximation.
Sensitivity of maximum price change scenario to the share of regulated electricity in manufacturing
Source: Authors’ calculations.
A price increase that narrows the gap between household and non-household prices contributes to mitigating negative economic impacts. Scenarios 1f and 1g apply the gaps found between household and non-household average tariffs and respective counterfactual tariffs as of 2023. The counterfactual tariffs preserve the differentials found in the pricing schedule for 2023, that is they maintain a fraction of cross-subsidies. However, the increase in the energy component of prices in the counterfactual results in a smaller increase for non-household customers. Scenario 1f applies a uniform 72% increase to regulated prices, which as simulated increase to 17.48 RSD/kWh on average. Scenario 1g redistributes the tariff increase to simulate partial convergence in prices. Since households make up 92% of regulated electricity consumption, a slightly larger price increase for households compensates a much smaller price increase for firms. The result is a tariff increase that is neutral in terms of economic production. Moreover, as there is no overall contraction, the impact on household consumption is also slightly smaller, while income generated for the electricity sector is comparable. Scenarios 1h and 1i apply the price shifts independently to show how each individual price shift contributes to the end result. Scenario 1j applies the increase in prices to the average while removing cross subsidies, which results in output increasing by 0.19%.
Source: Authors’ calculations.
Scenario 2: Removing cross-subsidies in regulated markets
Price differentials for customers in the same voltage categories induce cross-subsidies in regulated markets in Serbia. As detailed in the Inventory, these cross-subsidies are analysed with respect to average regulated prices for customers served at 0.4 kV. However, such cross-subsidies are also self-defeating: the combination for higher prices for the top range of the category and moderated commercial prices drives customers towards the open market. While desirable for market development, this also implies that financing to keep prices low for other categories dries up over time.
Scenario 2 considers the elimination of cross-subsidies within the low voltage (0.4 kV) categories. The scenario envisages a correction equal to the average deviation from average tariffs over the period, so that electricity prices per category converge to the average for regulated segments. As of 2023, this corresponds to increasing household electricity prices by 2.6% (from 9.91 RSD/kWh) and prices for non-household regulated customers downwards by 22% (from 13.03 RSD/kWh) so that both reach 10.17 RSD/kWh. The gaps to average prices have narrowed over time but only slightly (for reference, in 2018, they were 3.6% for households and 24.5% for non-households). This narrowing corresponds largely to the shift in the consumption mix as firms have moved to the open market.
Scenario 2 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 impact 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[52]). Therefore, such a rebalancing of prices would have less impact on electricity demand than that of an increase in tariffs for households alone. In the case of Serbia, non-household tariff customers command only a small share of demand from the guaranteed supplier. Moreover, the fall in costs for a subset of economic sectors (largely those with a significant representation of SMEs) would stimulate economic activity.
Changes relative to baseline
Source: Authors’ calculations.
The RS-POWER-CGE model projects an overall positive economic impact from the removal of cross-subsidies. The required shift in household prices is relatively small and would trigger a muted demand response (-1.2%). Increased demand from SMEs, however, would more than compensate this effect. As such, total electricity demand in the regulated sector grows by 2.0%. GDP in the economy as a whole is simulated to grow slightly (by 0.28%). This change does not directly generate resources in the electricity sector and increased tax revenue through indirect taxation would be small. In turn, resources needed to compensate households for such a small increase in prices would be also relatively small.
Reducing cross-subsidies as prices converge to market-consistent levels is a more desirable path. In practice, EPS finances are balanced not only by non-household regulated customers, but also by its commercial operations. The recent increase in commercial prices has helped generate significant resources, buttressing the company’s and the sector’s finances and allowing it to maintain regulated prices at below-market levels. However, tariffs for firms in regulated markets remain significantly below market-consistent prices, particularly for smaller firms served under the same conditions as households. Therefore, it is more realistic to reduce cross-subsidies as prices across regulated segments are gradually increased to reach levels consistent with generating appropriate returns for market players.
Scenario 3: The impacts of adjustments to price setting in the open market
The adjustment of pricing in the unregulated market has been a key development in Serbia over the past three years. Prices for commercial customers were frozen in November 2021 at the onset of the energy crisis. They were then subject to an informal cap from January 2022 until September 2024 which increased gradually during the period. In practice, the combination of exchanges in the organised SEEPEX market and the increase in the price cap has led to a significant rise in open-market prices, which increased from 6.8 RSD/kWh in 2017 to 15.04 RSD/kWh in 2023 – corresponding to a real increase of 60%.
The gradual increase in unregulated market prices has narrowed the gap between commercial prices and market-consistent prices. The gap was significant during the energy crisis, with open-market prices well below international market prices. This generated significant losses for key energy producing companies, especially EPS, and required significant capital injections (as documented in the Inventory). As of 2023, average open market prices stood at 15.1 RSD/kWh, slightly above the minimum market price, which averaged 14.6 RSD/kWh (corresponding to HUPX plus grid charges, which is almost equal to the average sale price from EPS on the domestic open market in 2023 [14.66 RSD/kWh]). However, when additional provisions for cost-recovery and margins are included, Serbia’s open-market prices in 2023 remained well below a market-consistent benchmark where the level of margins and cost recovery would have been comparable to those charged above procurement price in 2023 (by 53%).
The change in unregulated market prices has allowed EPS to regain a much more solid financial footing. A 60% real increase in prices of commercial sales corresponds to income worth EUR 1 161 million for EPS as of 2023, a figure just above posted profit for the firm in 2023 (EUR 1 140 million).
Compared with the shift in regulated prices, additional shifts in unregulated prices would have a larger impact on the economy. To account for an increase in unregulated prices, the RS-POWER-CGE model is modified so that the open market also acts as a price taker. The model predicts that a 60% increase in unregulated electricity prices would lead to an economic contraction of 1.95% of GDP.12 The price increase leads to a significant fall in electricity demand (by 21.5% in the unregulated sector) and to a strong inflationary effect (3.8% increase in the core consumer price index [CPI], excluding energy). The contraction in this simulation is driven by the energy sector, including mining, as well as by utilities and manufacturing, all of which show falls of around 5% in value added (5.8% in the case of manufacturing). Conversely, shifts in demand and an increase in tax revenues lead to increases in output in services sectors which moderate the contractionary impact of the price increase.
Such a large additional increase in prices would alter the market equilibrium. A 60% increase in unregulated prices would generate an additional EUR 898 million for electricity suppliers (equally split between the impact of increased value of existing electricity and the sale of surplus in the open market). However, prices would be well above international market prices, so that, in practice, demand responses are likely to be underestimated, as such price increases would make independent suppliers more competitive.
Removing direct fossil fuel subsidies has limited macroeconomic impact but helps shift the energy mix
Scenario 4 examines the removal of direct support to fossil fuels. It focuses on support schemes that existed before the energy crisis and continued during it. Quantitatively, direct support to fossil fuels is less important than the large transfers effected during the energy crisis, as they reflect structural continued fiscal expenditures that support fossil fuels. The specific support schemes modelled are presented in Table 12.4.
Source: Calculations based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Fossil fuel subsidies are estimated to have relatively small impacts on aggregate output in Serbia. Simulating the removal of transfers specified in Scenario 4 results in a small economic expansion (of 0.04% of GDP). Only the removal of direct support to Srbijagas appears to have negative impact on the economy, because it has sizeable impact on the gas sector. The removal of direct subsidies does lead to price increases and to an overall increase in prices by 0.8%, which drives a fall in household consumption (of 0.3%). In turn, the removal of subsidies would generate EUR 51 million in direct savings for the public purse while also leading to increases in energy prices that would generate a small net gain – just over EUR 10 million – in tax revenues.
The main impact of removing fossil fuel subsidies is a rebalancing of the electricity matrix. The RS-POWER-CGE model distinguishes sectors within the power sector by modelling different technologies as individual representative firms. Scenario 4 results in falls of coal-based electricity demand by 9.9% and of gas-based electricity demand by 4.9%, while production is compensated by increases across other technologies and imports.
Existing tools can compensate the poor for increased prices – but only if expanded significantly
Energy sector reform is likely to increase retail prices for energy for households, requiring compensation mechanisms to prevent increases in poverty and energy poverty. As presented in Scenario 1, compensation needed to cover only the poorest 20% of the population for price increases at the upper end of the range (70%) would be significant, reaching a level on par with total targeted social assistance expenditure in Serbia.
Social protection instruments in Serbia are relatively well targeted but tend to have narrow coverage. As a result, increased generosity would be able to channel resources to those who need it. However, significant budgetary increases would be needed. To examine the ability of existing targeted mechanisms to compensate the poor, price increases are simulated along with increases in generosity of the simulated subsidy for energy vulnerable customers and that of FSA (Table 12.5). The SEVC transfers depend (among other things) on the price of electricity as the subsidy covers a fraction of energy expenditures subject to a cap in volume. As such, the scheme’s generosity increases automatically with increased electricity prices. However, SEVC does not directly target the poor. As a consequence, its budget (simulated to be RSD 559 million per month) would need to increase very significantly (more than twofold) to compensate those living at risk of poverty for large increases in electricity prices. In contrast, the FSA is well-targeted to the poor, even if it covers only a fraction of them. Therefore, relatively smaller increases would be necessary. At the top boundary of simulated price increases (70%), compensating households at risk of poverty for large price increases would require more than doubling the actual budgets for these two social assistance programmes.
Monthly amounts
Note: Reference budgets represent total transfers as simulated or identified in data from SILC: RSD 559 million in the case of SEVC and RSD 974 million in the case of FSA. These deviate from administrative data due to underreporting.
Source: Vladisavljević and Žarković, (forthcoming[42]).
Despite their narrow targeting, existing mechanisms could be used to compensate those in need. The budgets of the SEVC or the FSA would need to increase significantly to compensate those at risk of poverty for a large increase in prices. At the upper bound simulated (a 70% price increase), the increase corresponds to EUR 128 million for the SEVC and EUR 190 million for FSA13. These are of the same order of magnitude as the required compensation estimated for a 70% price increase (EUR 132 million) and are significantly smaller than the income generated by the reform. While such a large increase may result is a loss of targeting efficiency, there is substantial margin for a programme expansion to carry out the necessary compensatory transfers.
Reducing the carbon intensity of electricity production and ensuring financial sustainability for the energy sector as a whole are top priorities for Serbia. Serbia is still heavily dependent on solid fossil fuels, which accounted for more than 62% of its electricity generation in 2022. Moving towards a larger share of low- to no-emission energy sources will require important investments.
The financing of the energy sector in Serbia 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, rethinking the role of energy subsidies and support measures, particularly during crises, could unlock crucial financial resources.
This section presents key policy recommendations for Serbia. It draws on the analysis presented in previous sections and on the results of broad-based consultations in Serbia. The results of a Peer-Learning Workshop, held in Belgrade in November 2024, are also presented an inform the policy orientations provided. As part of this workshop, specific priority policy actions were developed. They are highlighted in the relevant thematic areas and presented in Box 12.3.
A peer-learning process was an integral part of the Just Transition in the Western Balkans project, complementing the data collection and analytical work underpinning this report. As part of this process, a series of workshops were organised 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 “From Analysis to Action: Scenarios for Inclusive Energy Sector Finance Reform” took place in Belgrade in Serbia on 14 November 2024. It provided a dynamic space for collaborative analysis, resulting in a set of prioritised policy actions that build on the policy scenarios developed by the OECD as well as Serbia’s national strategies. The workshop was attended by 33 experts representing various societal perspectives, including government, civil society, academia and businesses in Serbia. Among others, representatives participated from: the Ministry of Mining and Energy of the Republic of Serbia; the Ministry of Labour, Employment, Veteran and Social Affairs of the Republic of Serbia; and the Energy Agency of the Republic of Serbia. In addition, representatives from key actors in the energy sector included: the state-owned power utility company, Elektrodistribucija Srbije (EPS); the transmission system operator, Elektromreža Srbije (EMS), the electricity distribution company, Elektrodistribucija Srbije (EDS); state-owned natural gas provider, Srbijagas; the underground coal mining company, JP PEU Resavica. In addition, representatives participated from: the Chamber of Commerce and Industry of Serbia; the Serbia Association of Employers. Finally, experts and representatives were present from academia and civil society within the areas of energy, 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 key strategies and plans governing the energy sector in Serbia. It then transitioned into a plenary session during which participants identified and prioritised the most pressing issues for a more inclusive and financially sustainable energy sector in Serbia. Participants grouped these issues into key themes and ranked them based on urgency and importance. For the most prioritised themes, participants developed concrete policy actions, with a strong focus on their implementation within Serbia’s political context related to production and investment, socio-economic issues, and policy and implementation (Table 12.8).
Outcome of Peer-Learning Workshop in Serbia
Source: OECD Peer-Learning workshop in Serbia.
Open up the electricity market in Serbia by continuing to converge toward market prices
Aligning energy prices with market rates can support the opening of Serbia’s electricity market, fostering competition and promoting a more diverse and resilient energy supply. Market-based electricity prices create price signals that encourage competition and drive improvements in the quality and variety of energy services. To transition toward a more open electricity market, Serbia should adopt a gradual approach to tariff increases while providing complementary support to citizens, such as promoting renewable energy communities (RECs) to empower local energy production (Box 12.3, Policy Action 1). Additionally, the government should ensure that electricity costs reflect actual production and supply expenses and thus aim to phase out cross-subsidies, which distort prices and undermine market efficiency.
Adopt a gradual approach to electricity tariff increases and provide complementary support for citizens
Price regulation in Serbia, particularly for small businesses, households and public lighting has generated substantial induced support for consumers while triggering an important opportunity cost for producers. The artificially low electricity prices diminish incentives for small consumers and households to invest in energy efficiency measures and renewable energy solutions (e.g. solar panels). Low tariffs also reduce revenue streams of the incumbent energy enterprise (EPS), limiting its capacity to fund essential projects (e.g. pumped hydro storage and solar power plants).
Serbia could consider a phased approach to deregulation. Initially, this could be done by removing price controls for eligible non-household customers that are currently served under regulated prices (entrepreneurs, micro and small enterprises)14 and for households with disproportionately high electricity usage. Subsequently, remaining households could be categorised based on consumption levels, gradually exposing higher-usage groups to market rates.
Serbia has committed to ensure that household tariffs cover the cost of electricity supply. As part of the agreed Reform Agenda for the EU Reform and Growth Facility for the Western Balkans, Serbia has committed to ensure that electricity price for households covers the cost of electricity supply (in accordance to the market determination of prices set in the EU Electricity Directive) (EC, 2024[53]). Analysis by the Energy Agency of the Republic of Serbia (AERS) notes that retail market development is limited by the large gap that exists between wholesale prices and approved regulated retail prices, which in turn justifies the need for price regulation (AERS, 2025[54]). In practice price intervention has taken place primarily through decision making in EPS. Ensuring arms-length pricing of electricity transfers between EPS’s production and supply arms and fully compensating EPS for public supply obligations could contribute to driving tariffs to fully cover costs.
Gradual price deregulation can be accompanied by complementary measures that can smooth the impact of price deregulation. Ensuring that the energy transition protects the most vulnerable members of society is essential, making targeted support measures crucial to mitigating its impacts. Investing in technological solutions, particularly the deployment of smart metering systems, can play an important role. Smart meters provide real-time data on energy consumption, enabling consumers to manage usage more effectively and utilities to reduce losses and improve billing accuracy. The European Investment Bank (EIB) recently support Serbia with a EUR 80 million loan to support installation of 400 000 advanced meters, aiming to reduce electricity losses and enhance consumption management (EIB, 2024[55]). Implementing advanced payment systems, including pre-paid and deferred payment options, can offer consumers greater flexibility and control over their energy expenses.
Removing cross-subsidies in the process will increase efficiency
Removing cross-subsidies in the electricity market is essential for a competitive and open market. Cross-subsidies, in which one group of consumers pays artificially high prices to offset lower prices for another group, distort market signals. In Serbia, cross-subsidies have averaged EUR 27 million in value over 2018-23, serving as a mechanism by which EPS maintain low household prices. Simulations show the removal of cross-subsidies delivering overall positive economic impacts as they allow shifting electricity to productive uses and lowering the relative price faced by SMEs still served under regulated prices.
Competition and arms-length management of SOEs are critical for an open market
Price deregulation should be carried out in parallel with measures to encourage competition in retail markets. The incumbent electricity utility (EPS) acts as both the universal service supplier (USS) and the supplier of last resort (SLR). It serves 99.9% of the open market and the entirety of the regulated market (AERS, 2024[10]). Its low regulated prices make it particularly difficult for alternative suppliers to offer services in retail markets. The number of market players serving end-customers fell significantly in recent years, from a high of 19 in 2017 to 3 as of 2023. Ending the cap on retail prices has had positive impacts on retail competition, according to the Energy Community (Energy Community Secretariat, 2023[56]).
For deregulation to contribute to market opening, Serbia’s incumbent energy firms will need to behave as market actors. In the past, the regulatory framework would have allowed for incumbents to reflect cost increases in tariffs, albeit with a delay. In practice, political considerations limited price increases, which were carried out only in a gradual manner when the fiscal cost of buttressing EPS and Srbijagas became prohibitive. EPS’s statute was transformed in 2023 to become a closed joint-stock company. This is in line with the ongoing reform of SOE management and governance being implemented in Serbia as per (among others) the adoption of a state ownership strategy and approval of the Law on SOE governance (OECD, 2024[57]). This could eventually transform the company into a market-oriented, profitable firm, which would also be beneficial for competition in the electricity sector.
Reducing the fiscal burden of the energy sector in Serbia
Current price regulation sustains an equilibrium that requires multiple transfers to energy sector firms. Any reform to open the market would allow for withdrawal of support from the electricity sector while generating the necessary liquidity to resolve recurring issues in the balance sheets of firms in the sector. To reduce the fiscal burden of the energy sector, Serbia should consider removing direct subsidies to actors in the energy sector while ensuring full transparency in providing public support to energy enterprises, including as mandated by state aid regulation.
Remove direct transfers to actors in the energy sector
Serbia should gradually phase out direct support to actors in unregulated segments of the energy sector. Removing support to coal mines and coal production, as well as to Srbijagas, would have a relatively small impact on aggregate output. Importantly, it could increase public revenues. Simulating the removal of transfers specified in Scenario 4 of this report results in a small economic contraction (0.02% of GDP). In turn, it generates EUR 51 million in direct savings for the public purse and leads to increases in energy prices that would generate a small net gain – just over EUR 10 million annually – in tax revenues.
Ensure full transparency in providing public support to energy enterprises
When financial support to the energy sector is required, it should be done in a transparent manner. During the energy crisis, Serbia provided substantial direct fiscal support of EUR 1.7 billion to Srbijagas and EPS: of this, EUR 1.4 billion was allocated to Srbijagas and EUR 296 million to EPS. While this support aimed to ensure their liquidity during the crisis, it would have been preferable to provide such support in a more transparent manner. The OECD Guidelines on Corporate Governance of State-Owned Enterprises recommends that governments disclose financial assistance provided to SOEs, including guarantees and subsidies, to maintain a level playing field and avoid market distortions. By adhering to these guidelines, governments can enhance the performance of public enterprises, ensure fair competition and uphold public trust (OECD, 2024[58]).
Addressing energy poverty and protecting vulnerable customers
Further efforts should be made to better operationalise support provided to the energy-poor in Serbia. Although price regulation has been used as a way to support people, including vulnerable segments of population, energy poverty remains a concern. On the basis of SILC 2020 and HBS 2019 data and applying the definition of energy vulnerable households from the Decree on energy vulnerable customers, some 15% of Serbian households are found to be energy vulnerable. To support the energy-poor, Serbia could design more effective targeting mechanisms. At the same time, it would be important to assess the distributional impact of block tariffs and identify how they interact with the targeted support mechanisms (Box 12.3, Policy Action 2). Fighting energy poverty through energy efficiency is another means of supporting the energy-poor, especially by reducing their energy bills (Box 12.3, Policy Action 3).
Ongoing reflection on energy poverty should aim to design more effective targeting mechanisms
Serbia has so far targeted households at risk of energy poverty through regulation on vulnerable consumers. Energy vulnerable consumers are identified based on their material conditions, the receipt of social assistance transfers (FSA, child allowance or increased caregiver allowance), or their health status. Regulations on vulnerable consumers play a double role. They establish rights to compensation in the form of reductions on energy bills, applicable to either gas or electricity (although the majority of eligible households claim the benefit for electricity bills). The regulation also translates into protections from disconnection, as per the EU Electricity Directive.
Serbia could make the targeting of energy vulnerable consumers less restrictive. Indeed, energy vulnerable consumers are targeted on the basis of both need and their resources. The tests for need are either health-based (e.g. use of electric devices necessary to maintain life or health) or means-tested, on the basis of receipt of social transfers. In addition, households are classified as energy vulnerable if they meet a resource test combining income and property tests. The property test means a sizeable proportion of the income-poor are not classified as energy vulnerable. Without the property test, close of 70% of those in income poverty would be classified as energy vulnerable.
Serbia should continue building on work initiated to define and tackle energy poverty. A multi-stakeholder National Coalition for the Reduction of Energy Poverty was set up in 2021 and adopted a definition of energy poverty as a “situation where households do not have sufficient capabilities to provide the required amount of energy needed to cover basic needs and lead to a healthy and dignified life”. The Energy Law reform in 2024 adopted a legal definition of energy poverty as “a condition in which a household lacks access to basic energy services that provide basic levels and a decent standard of living and health, including adequate heating, hot water, cooling, lighting and energy to power household appliances, caused by a combination of factors such as: affordability, insufficient disposable income, high energy costs, poor energy efficiency of housing units and social status”. The definition clearly spans situations that go beyond implementing the regulation for protection of energy-vulnerable customers as currently defined. The definition expands on previous work by explicitly including the role of energy efficiency of housing and of heating and cooking equipment. In the future, it should also include considerations related to the energy sources used and their impact for example on indoor air pollution. The law tasks the Ministry of Energy with the tasks of assessing the number of households in energy poverty. Developing an operational definition of energy poverty will require significant efforts that account for the variety of situations faced by households in Serbia.
Assess the distributional impacts of block tariffs and identify how they interact with targeted support
Block tariffs are being used in Serbia to keep electricity prices low for households while increasing prices for those who consume the most. Block tariffs were introduced in electricity in Serbia in 2001. A three-tier system provides low prices for those consuming less than 350 kWh per month (/mo). The rate increases 1.5 times for those consuming between 350 and 1 600 kWh/mo and is multiplied by 3 for those consuming over 1 600 kWh/mo. Price changes have been applied homogeneously across tariff blocks in the past years.
Block tariffs are a practical, if imperfect, policy instrument to target support. To the extent that 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. This 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[59]). Recent adoption of the social card law has increased database interoperability in targeting systems for social protection. Including administrative information on energy consumption could serve as a basis for more accurate targeting of support.
Fighting energy poverty through energy efficiency
Serbia could strengthen the incentives for energy efficiency targeted towards energy-poor. Energy efficiency improvements help reduce energy consumption, leading to lower energy bills and a more sustainable energy system.
A critical first step is to develop the database of low-income and energy-poor households. This can be achieved within ongoing efforts by state and local institutions, focusing on optimising data collection (Box 12.3, Policy Action 7). Field surveys or focus groups could be used to collect such data. Improved data would allow policy makers to identify specific needs within different communities, whether related to food preparation, electricity consumption, or opportunities for energy production. This would help to ensure tailored support that addresses each group’s unique challenges. In this context, local pilot projects could be launched, following the examples of previous successful energy efficiency support programmes, then rolled out at the national level.
Effective implementation of such policies will require co-ordinated effort among state and local institutions. Involvement of stakeholders at the local level, including local governments, organisations and residents, is important to identifying the energy-poor more accurately – and then acquiring knowledge of their needs. This can help in the design and implementation of targeted solutions that are both effective and relevant. Local governments and organisations can serve as intermediaries between households and national authorities, the latter of which should support local communities with public resources and in identifying international sources of funding.
Strengthen implementation of policies related to the energy transition
Effective implementation is critical to achieving a successful green energy transition, as it ensures that ambitious policies and targets translate into tangible results. Engaging in social dialogue and building the management capacities of energy SOEs can be important levers for facilitating implementation.
Support coal regions by engaging in social dialogue on a just energy transition
To ensure adequate public support for a just energy transition in Serbia’s coal regions, there is a need for constructive social dialogue that involves different stakeholders at different levels. Social dialogue would contribute to building consensus on key policies and measures relevant for energy transition among diverse sectors. This requires that public policy decisions are transparent and that all key stakeholders are involved, including national government, municipalities, NGOs, energy and mining companies, coal communities and regions, trade unions and others (Box 12.3, Policy Action 4). This could be done in the form of regular in-person meetings, which could be held several times per year and cover topics included in key national strategic documents. Such meetings could be facilitated by the Ministry of Mining and Energy and hosted by local governments.
Building management capacities of energy state-owned enterprises
Considering their weight in electricity production, enhancing skills and management capacities of SOEs in the energy sector is essential for the energy transition. In Serbia, close to 90% of electricity is produced by the incumbent EPS. Effective leadership within EPS can contribute to efficient resource utilisation, improve operational performance, and ensure successful implementation of sustainable energy initiatives (Box 12.3, Policy Action 5). Competent management is also essential to navigate the complexities of market dynamics, regulatory compliance and technological advancements. The OECD emphasises the significance of robust corporate governance in SOEs. The OECD Guidelines on Corporate Governance of State-Owned Enterprises provide concrete advice to help governments better manage their responsibilities as company owners (OECD, 2024[58]). Recent reforms to SOE policy in Serbia can pave the way to changes in corporate governance and the quality of management in key SOEs in the energy sector (OECD, 2024[57]). Corporatisation of public enterprises, as carried out in EPS in 2023, is an important step that can boost operational performance. The quality of performance contracts and the role of the state as a shareholder will be critical in capitalising on the improved framework.
Enabling participation of businesses and households in the energy transition
Enabling the participation of businesses and households in the energy transition is essential for achieving a resilient and inclusive energy system. Their involvement can accelerate the shift to renewable energy and improvements in energy efficiency. By empowering both businesses and households to generate, consume and store renewable energy, economies can reduce dependence on fossil fuels, lower GHG emissions and enhance energy security.
Create a more conducive environment for businesses to contribute to decarbonisation
To promote greater sustainability among enterprises, Serbia should establish comprehensive institutional and financial frameworks that incentivise the use of renewable energy and improve energy efficiency. Introducing dedicated financing mechanisms (e.g. green loans, grants, and tax incentives) can help companies transition to cleaner energy sources and adopt energy efficient technologies (Box 12.3, Policy Action 6). Subsidised energy audits, particularly for SMEs, can identify cost-effective measures to reduce energy consumption and emissions. Simplifying and streamlining administrative procedures for energy buyers, construction permits and guarantees of origin will accelerate deployment of renewable energy projects and ensure transparent certification of green energy. Additionally, promoting best practices through knowledge-sharing platforms and industry networks can encourage private actors to adopt innovative business models, such as RECs. To fully leverage the support provided, it is important to strengthen the capacity of energy enterprises through knowledge transfer, targeted support for SMEs and collaboration with industry associations. Additionally, chambers of commerce and employer associations play a critical role in raising awareness, providing training and advocating for regulatory changes that promote sustainability.
Support households to implement energy efficiency and use renewable energy sources
Expanding the range of support programmes for energy efficiency and raising awareness about existing support measures can help households participate in the energy transition by investing in energy efficiency in their homes. Increasing public awareness and educating citizens on the benefits of energy efficiency and renewable energy sources is essential to drive demand for energy-saving measures. Existing programmes in Serbia require a 10% co-payment, which may exclude those at risk of energy poverty who are also income-poor. Tailored programmes could support vulnerable customers with larger grant components and be the object of targeted outreach for energy-vulnerable households. Establishing sustainable financing mechanisms (e.g. subsidies, grants and low-interest loans) can help reduce upfront costs, particularly for low-income households. Specific interventions can also be developed to complement existing programmes and overcome implementation obstacles, such as the legalisation or regularisation of home ownership or the need to establish a legal connection.
Such measures require a robust regulatory framework and building capacities among relevant institutions. A good regulatory framework should include clear certification systems for energy efficiency improvements. Clear standards for energy efficiency certification in buildings are important to assess and measure progress and savings linked to energy efficiency investments. Finally, building the capacity of relevant institutions is essential to ensure effective implementation and oversight. This includes training staff, streamlining administrative procedures and developing digital platforms that provide information and funding opportunities. Finally, application processes should be more accessible to all households.
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← 1. As regulated tariffs in Serbia include grid charges, HUPX average day-ahead prices are augmented by prevailing average grid (transmission and distribution) charges to serve as reference prices.
← 2. Based on the information from Ministry of Mining and Energy of Serbia from 1 January 2020 to 31 December 2023, 26 privileged electricity producers terminated contracts with the guaranteed electricity supplier. Of those 26, 2 contracts were terminated due to liquidation, 2 due to bankruptcy, and the remaining 22 were terminated by privileged producers themselves.
← 3. In early November 2021, a gas pipeline accident in Bulgaria disrupted natural gas supplies to Serbia. To maintain uninterrupted service for households and industry, JP Srbijagas Novi Sad imported emergency gas from Hungary, incurring additional expenses. These imports continued into December at stock market prices and required prepayment. Due to insufficient liquidity, JP Srbijagas sought and received short-term, interest-free loans from the Ministry of Finance, approved by government conclusions in December 2021 (Srbijagas, 2021[62]).
← 4. Liquidity support was also provided through loans from international financial institutions, which are classified as credit support in the Inventory of Subsidies and Support Measures for the Western Balkans.
← 5. Includes support for vulnerable groups between 2018-22. Data for 2023 was not available at the time of writing of this report.
← 6. These include four publicly guaranteed loans: EUR 70 million for constructing a gas pipeline from Bulgaria to Hungary and neighbouring economies; EUR 20 million for the second phase of the distribution pipeline connecting Aleksandrovac-Brus-Kopaonik-Raška-Novi Pazar-Tutin; EUR 20 million from two commercial banks; and EUR 70 million dedicated to gas pipeline infrastructure development.
← 7. These include five publicly guaranteed loans: EUR 40 million to boost gas pipeline transportation capacity; EUR 28 million for the Leskovac-Vranje distribution pipeline; EUR 66 million for gasification and distribution pipeline construction; EUR 75 million for the Kolubara district’s gasification and construction of the Belgrade-Valjevo-Loznica distribution pipeline; and a EUR 200 million guarantee involving six commercial banks.
← 8. Progressivity is measured by the Kakwani index. This index measures the degree of concentration of a transfer against the degree of inequality of the income distribution before the transfer. Positive numbers indicate that a transfer is progressive; negative numbers indicate that it is regressive. A transfer would have Kakwani index of zero if it were proportional to income.
← 9. This category corresponds to clients for whom supplied power is below 14.49 kW for a single phase connection and for whom reactive energy is not measured (AERS, 2022[60]).
← 10. The maximum approved income for the guaranteed supplier in Serbia is subject to a profit margin capped at 2% of approved income (which includes operational costs and the profit margin itself). To follow the methodology applied across the region in this report, the margin for the calculation of market-consistent prices is calculated on the basis of procurement and network costs. Operating costs, depreciation and profit for the guaranteed supplier averaged 7.9% during the period 2018-23 and therefore the margin is set at 8% for the analysis.
← 11. The increase in tariffs is assumed to apply to variable charges in electricity consumption only. Electricity bills in Serbia also include a standing charge, as well as a TV licence charge, which are assumed to be kept fixed when electricity charges increase.
← 12. The simulation corresponds to the case where the model is calibrated with 0% of regulated electricity in the manufacturing sector.
← 13. The reference budgets for FSA and SEVC do not necessarily correspond to official figures. The FSA budget is estimated consistently with microdata from SILC, and is therefore likely to be underestimated. The SEVC budget is simulated according to programme rules and may be overestimated if take-up is less than perfect.
← 14. Following the amendments to the Energy Law adopted in 2024, eligible non-household customers are those fitting the criteria for classification as micro and small enterprises determined in the Law on Accounting (Republic of Serbia, 2024[61]).