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In-Depth Review of the Investment Climate and Market Structure in the Energy Sector

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In-Depth Review of the Investment Climate and Market Structure in the Energy Sector Former Yugoslav Republic of MACEDONIA In-Depth Review of the Investment Climate and Market Structure in the Energy Sector 2006 Energy Charter Secretariat ENERGY CHARTER ENERGY NOTE TO THIS EDITION The In-depth Report on Investment Climate and Market Structure in the FYR of Macedonia (ICMS-29) has been prepared by the Energy Charter Secretariat in co- operation with the authorities of the Republic of the FYR of Macedonia. The Report has been examined by peers and their policy conclusions are included in this edition of the Report. In addition, the Secretariat has summarized its main findings regarding the Report in a note (ICMS-30) distributed to peers concurrently with the Report and included in this edition as well. Questions related to this document should be addressed to Mr. Boyko Nitzov at the Energy Charter Secretariat. 2 TABLE OF CONTENTS POLICY CONCUSIONS TO THE IN-DEPTH REPORT ON THE INVESTMENT CLIMATE AND MARKET STRUCTURE IN THE REPUBLIC OF MACEDONIA .............................................................................. 5 SUMMARY AND MAIN FINDINGS OF THE SECRETARIAT.................................. 7 I. Executive Summary............................................................................................... 11 II. Introduction ........................................................................................................... 12 II.1. Basic facts about Republic of Macedonia.................................................... 12 II.2. Political System............................................................................................ 14 II.3. Economy ...................................................................................................... 15 II.3.1. Macroeconomic Situation................................................................. 15 II.3.2. Foreign Direct Investment................................................................ 16 II.3.3. Privatisation...................................................................................... 22 II.3.4. Energy Policy................................................................................... 27 III. Legislative Framework for Foreign Investment in the Energy Sector .................. 35 III.1. Investment-related Laws and Regulations ................................................... 35 III.1.1. Overview .......................................................................................... 35 III.1.2. Selected Policy Areas....................................................................... 36 III.1.3. Exceptions to National Treatment.................................................... 54 III.1.4. Membership in International Organisations..................................... 54 III.2.1. Overview .......................................................................................... 54 III.2.2. The Law on Energy .......................................................................... 55 III.3.3. The New Law on Energy.................................................................. 59 III.2.4. The Law on Restructuring of ESM .................................................. 67 III.2.5. Other Important Regulations............................................................ 68 IV. Market Structure and Privatization........................................................................ 68 IV.1. Overview...................................................................................................... 68 IV.2. Oil and Gas................................................................................................... 69 IV.2.1. Upstream Activities.......................................................................... 69 IV.2.2. Oil and Gas Pipelines ....................................................................... 69 IV.2.3. Oil Refining, Storage, Distribution .................................................. 74 IV.2.4. Natural Gas Distribution and Utilization.......................................... 77 IV.3. Coal .............................................................................................................. 77 IV.4. Electricity ..................................................................................................... 78 IV.4.1. Power Sector Overview, Generation Capacity................................. 78 IV.4.2. Generation and Consumption........................................................... 79 IV.4.3. Electricity Transmission and Distribution Infrastructure................. 80 IV.4.4. Privatisation and Restructuring in the Power Sector........................ 84 IV.4.5. International Trade and Transit in Electricity .................................. 88 IV.5. Other Types of Energy (Wind, Biomass, Solar, Geothermal) ..................... 90 IV.6. District Heating ............................................................................................ 90 IV.7. Nuclear Power.............................................................................................. 91 LIST OF FIGURES Figure 1: Oil Pipeline Routes in Southeast Europe........................................................ 70 Figure 2: Current status of the gas transmission and distribution system of the Republic of Macedonia................................................................................... 72 3 Figure 3: Gas infrastructure development plans in the Republic of Macedonia............ 73 Figure 4: Power transmission and interconnection system............................................ 81 Figure 5: Electricity market model in Republic of Macedonia...................................... 87 Figure 6: Energy Community in SEE ............................................................................ 89 LIST OF TABLES Table 1: Key economic indicators (millions of Dollars unless otherwise indicated) ... 15 Table 2: Energy supply, demand, consumption, and CO2 emissions from fossil fuels ................................................................................................................ 16 Table 3: FDI in Macedonia ($ million)......................................................................... 19 Table 4 FDI inflows by sectors ($ million) ................................................................. 19 Table 5: FDI by country, 2000-2004 ($ million)*........................................................ 20 Table 6: Lignite mine resources and production. ......................................................... 27 Table 7: Undeveloped lignite resources........................................................................ 28 Table 8: Forms of business and corporate governance................................................. 36 Table 9: Most important provisions of corporate taxation in the Republic of Macedonia ...................................................................................................... 45 Table 10: Most important provisions of personal taxation in the Republic of Macedonia ...................................................................................................... 46 Table 11: Value added tax .............................................................................................. 47 Table 12: Major sources of CO2 emissions. ................................................................... 51 Table 13: Withholding Tax Rates under Double Tax Treaties of the Republic of Macedonia ...................................................................................................... 53 Table 14: Refining capacity by type of product at OKTA (2004).................................. 76 Table 15: Petroleum products demand in the Republic of Macedonia, 2004-2005. ...... 76 Table 16: Coal demand by sector (thousand tons).......................................................... 78 Table 17: Planned changes in capacity........................................................................... 79 Table 18: Electricity generation and consumption (in million kWh and TJ) ................. 80 Table 19: Electricity demand by sector (2006)............................................................... 80 Table 20: Main parameters of low voltage (distribution) power grid in the Republic of Macedonia .................................................................................................. 82 4 POLICY CONCUSIONS TO THE IN-DEPTH REPORT ON THE INVESTMENT CLIMATE AND MARKET STRUCTURE IN THE REPUBLIC OF MACEDONIA Documents ICMS-29,30, Meeting of the Investment Group in May 2006 The Charter Conference, Having regard to the Report from the Investment Group with respect to the In-depth Review on Investment Climate and Market Structure of the Republic of Macedonia (herein after “Macedonia”1) NOTED a) That the Review of Macedonia has shown great progress in many important areas in line with the Charter Conference’s policy conclusions adopted in 2000 to Document IC-2 (Investment Climate Report). The legal framework for foreign investors has been improved and there is now an established legal and regulatory basis for a competitive market structure in the energy sector, b) In particular: • Welcomed the emphasis of Macedonia’s energy policy on the adoption of EU’s aquis communautaire regarding restructuring and liberalisation, while assuring the attraction of foreign investors for new investments, and noted with appreciation that Macedonia is also a member of the Athens Process, which has led to the establishment of an energy community in Southeast Europe; • Encouraged the Macedonian authorities to make further efforts to add to and achieve
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