Bosnia and Herzegovina (BiH) Regulatory and Energy Assistance Project (REAP)

The project is implemented by Advanced Engineering Associates International, Inc. as the USAID contractor. In the Republika Srpska (RS) entity, surplus electricity is sold by the Electric Power Company (EP) via tender according to the Procurement Law. The proceeds of the sales are considered regulated and credited by the regulator against the EP revenue requirement. However, neither the EP nor the government has direct access to the profit made in surplus sales after deduction of the cost of production. In 2005-2006, the amount of surplus was 1425 GWh, with the regulator crediting approximately 59,850,000 EUR to the revenue requirement. An alternative approach to addressing the issue of surplus electricity sales is to create an unregulated trader. This can be done under one of two structures, with the proceeds of the trader's sales not being utilized by the regulator as regulated funds. Instead, the proceeds can be targeted and utilized for other purposes, such as a vulnerable customer program, construction of more capacity to sell on the market, or other EP or government legitimate activities. Two options for creating an unregulated trader are being considered: Option 1, where the trader is owned by the EP, and Option 2, where the trader is owned by the government. Both options involve creating a holding company that can engage in unregulated trading activities. However, several challenges need to be addressed before these options can be implemented, including the need for a fully open and transparent market, the lack of implementation of the Action Plan, the Transco Law, and the ISO Law, and the need for a consensual market design. Without the credit of the profit from the surplus sale to the revenue requirement, it could be argued that tariffs will go up. However, the costs of generation for any quantity that is sold as surplus should not be paid for by tariff customers. Additionally, the Procurement Law hampers electricity trading due to the required time to buy or sell, and the licensing regime must be streamlined and made appropriate for the market. Capacity building is also a critical aspect of the REAP project. Traders need to be given incentives to optimize the price for their products, and capacity in trading must be developed. There is little capacity in BiH for trading, other than competitors and personnel in the stock market. Financial products can be developed to hedge risk, and capacity can be built during the time the market is being opened, perhaps by contracting with a trader who will build capacity in exchange for a percentage of the proceeds.