Report on Situation in the Energy Sector of Montenegro for 2016

T A B L E O F CO N T E N T S

INTRODUCTION ...... 5

1. ENERGY RESOURCES AND CAPACITIES ...... 8

1.1. ENERGY RESOURCES ...... 8 1.1.1. Hydro potential ...... 8 1.1.2. Coal ...... 9 1.1.3. Renewable energy sources ...... 12 1.1.3.1. Hydro energy ...... 13 1.1.3.2. Wind energy...... 19 1.1.3.3. Solar energy ...... 21 1.1.3.4. Biomass ...... 21 1.2. ENERFY CAPACITIES ...... 22 1.2.1. Generation capacities ...... 22 1.2.2. Transmission capacities ...... 26 1.2.3. Distribution capacities ...... 31 1.3. OIL AND GAS SECTOR ...... 33 1.3.1. Storage capacities ...... 33 1.3.2. Transport capacities ...... 34 1.3.3. Sales capacities ...... 35 1.3.4. Formation of strategic reserves of oil and/or petroleum products ...... 35

2. FINDINGS BY THE ENERGY UNDERTAKINGS' SUPERVISION ...... 38

2.1. ENERGY UNDERTAKINGS' SUPERVISION ...... 38 2.2. FINDINGS BY THE SYPERVISION RELATED TO THE ELECTRICITY SECTOR ...... 38 2.2.1. Contractual relations among energy undertakings ...... 38 2.2.2. Unbundling of property among CGES, CEDIS i EPCG ...... 39 2.2.3. Quality of electricity supply ...... 40 2.3. INDIVIDUAL FINDINGS BY THE ENERGY UNDERTAKINGS’ SUPERVISION ...... 40 2.3.1. Montenegrin Electricity Distribution System LLC Podgorican( CEDIS) ...... 41 2.3.2. Montenegrin Electricity Transmission System SC Podgorica (CGES) ...... 46 2.3.3. Electric Power Industry of Montenegro SC Niksic (EPCG) ...... 48 2.3.4. Montenegrin Electricity Market Operator (COTEE) ...... 49 2.4. ACTIVITIES IN THE AREA OF OIL AND GAS ...... 49

3. INVESTMENT IN THE ENERGY SECTOR ...... 52

3.1. MONTENEGRIN ELECTRICITY DISTRIBUTION SYSTEM...... 52 3.2. MONTENEGRIN ELECTRICITY TRANSMISSION SYSTEM SC PODGORICA ...... 55

4. FINANCIAL OPERATIONS OF ENERGY UNDERTAKINGS IN 2016 ...... 61

4.1. OPERATION OF THE MONTENEGRIN ELECTRICITY DISTRIBUTION SYSTEM LLC PODGORICA (CEDIS) ...... 61 4.2. OPERATION OF THE MONYENEGRIN ELECTRICITY TRANSMISSION SYSTEM SC PODGORICA (CGES) ...... 62 4.3. OPERATION OF THE MONTENEGRIN ELECTRICITY MARKET OPERATOR LLC PODGORICA (COTEE) ...... 65 4.4. OPERATION OF THE MONTENEGRO BONUS LLC CETINJE ...... 66 4.5. OPERATION OF JUGOPETROL AD PODGORICA ...... 68 4.6. OPERATION OF THE COAL MINE SC PLJEVLJA ...... 69 4.7. FINANCIAL OPERATION OF UNDERTAKINGS IN THE OIL AND GAS SECTOR ...... 69

5. CONDITIONS AND ACTIVITIES IN THE ELECTRICITY MARKET ...... 72

6. ELECTRICITY PRICES FOR CUSTOMERS CONNECTED TO THE DISTRIBUTION SYSTEM IN 2016 77

6.1. PRICES APPROVED BY CATEGORIES OF CUSTOMERS FOR 2016 ...... 77

6.2. THE VOLUME OF ELECTRICITY SALE TO CUSTOMERS CONNECTED TO THE DISTRIBUTION SYSTEM FOR THE PERIOD 2013-2016 ...... 77 6.2.1. Invoiced realization for electricity sold to customers connected to the distribution system for the period 2013 - 2016 ...... 78 6.2.2. Realised sales prices of electricity for end customers for the period 2013-2016 ...... 78 6.3. COMPARISON OF ELECTRICITY PRICES IN MONTENEGRO WITH PRICES IN THE EUROPEAN COUNTRIES IN 2016 ...... 79

7. THE AGENCY'S ACTIVITIES IN THE IMPLEMENTATION OF THE ENERGY LAW ...... 82

7.1. ENERGY LAW AND A ROLE OF THE ENERGY REGULATORY AGENCY IN ITS IMPLEMENTATION ...... 82 7.2. NORMATIVE ACTIVITIES ...... 84 7.3. CUSTOMER PROTECTION ...... 90

8. INTERNATIONAL ACTIVITIES IN THE ENERGY SECTOR ...... 94

8.1. ENERGY REGULATORY AGENCY ...... 94 8.2. ENERGY UNDERTAKINGS’ INTERNATIONAL ACTIVITIES ...... 95

SUMMARY ...... 98

Montenegro Energy Regulatory Agency

INTRODUCTION

The Energy Regulatory Agency (hereinafter: the Agency), has prepared a Report on situation in the Energy Sector of Montenegro for 2016 which, pursuant to Article 54, paragraph 1 of the Energy Law (''Official Gazette of Montenegro'', No 5/16), (hereinafter: the Law), shall be submitted to the Parliament of Montenegro for adoption no later than by 31 July of the current for the previous year.

The content of the report is compliant with Article 54, paragraph 2 of the Law, which stipulates that the Report on situation in the Energy Sector shall specifically contain information about the following:

1) energy resources and capacities; 2) findings from monitoring and control of energy undertakings; 3) investments in the energy sector with a special overview of the realization of investments in the transmission system; 4) financial operations of energy undertakings; 5) situation and activities on electricity and gas market; 6) measures taken by the Agency from its area of competences and achieved results; 7) progress in development of electricity and gas market.

The same Article prescribes that the report shall, every second year, also include information about all the measures taken in the previous two years for the purpose of fulfilling the duties related to public service, including customer protection and environmental protection and possible effects of those measures to competition in the national and international energy market, for the purpose of submitting it to the competent authority of the Energy Community, or the authority of the European Union after the accession of Montenegro to the EU.

Chapter 1 contains information on energy resources and capacities describing the main characteristics of all energy resources in Montenegro, showing primary resources (water resources, coal) and resources from renewable (small hydro power plants, wind energy potential, solar energy, biomass energy potential in the forestry, agriculture and solid municipal waste sector). The available energy production, transmission and distribution capacitates and those available in the oil and gas sector (storage, transport and sales ones) are presented.

Chapter 2 provides information on findings from monitoring and control of energy undertakings. Supervision over the operation of energy undertakings was carried out by a direct control, on the one hand, and through the regular operation of the Agency on the other hand, by carrying out an analysis of monthly, quarterly and annual reports and data that energy undertakings are required to submit to the Agency in line with their obligations under the license as licensees and at the request of the Agency. In addition to the electricity sector, the Agency also carries out its legal obligation in the oil and gas sector, where it primarily controls the implementation of regulations governing the following issues: quality control of petroleum products and gas, maintenance of measuring devices and fire protection equipment, environmental protection, qualification of persons handling danger- ous substances and financial operation of undertakings in terms of meeting the conditions set forth in the license.

Investments in the Energy Sector of Montenegro are presented in Chapter 3 and relate to the level of investments realised in the Montenegrin Electricity Distribution System LLC Podgorica (CEDIS) and Montenegrin Electricity Transmission System SC (CGES) Podgorica, compared to the investments plans approved by the Agency, while the results of financial operation of energy undertakings in 2016 are presented in Chapter 4, which also covers costs and revenues generated by these undertakings in 2016.

It is important to note that this Report does not include an analysis of the financial operation of El- ektroprivreda Crne Gore (EPCG) - Electric Power Industry of Montenegro SC Niksic, due to the fact that, despite several requirements from the Agency for the submission of financial statements

on the operations, EPCG did not submit the 2016 Annual Report by the time of drafting this report. In the notice No. 17/2121-2 of 11.07.2017, EPCG stated that, on July 2017, the Shareholders’ As- sembly passed decisions determining the opening balances for 2016, thus obtaining conditions for the work on the 2016 Annual Report.

Chapter 5 describes the conditions in the electricity market of Montenegro, the progress made in the field of legal regulation in this area, as well as market development.

Chapter 6 refers to electricity prices for customers connected to the distribution system in 2016, while Chapter 7 covers the activities of the Agency in the implementation of the law.

An overview of international activities in the field of energy for both, the Agency and energy undertakings, is provided in Chapter 8.

1. Energy Resources and Capacities

1. ENERGY RESOURCES AND CAPACITIES

1.1. Energy resources

The main energy resources used so far in Montenegro are water streams capacity and coal, and considerable attention is paid to the research and use of other energy resources, in the part of renewable (solar, wind, biomass, etc.), and activities on the exploration of hydrocarbons in the offshore zone of Montenegro have been intensified.

Montenegro has significant energy resources that could provide energy to cover the overall needs of Montenegrin consumption, and even to export surpluses. However, due to the insufficient utilization of these resources in the previous period, there was an energy deficit which was compensated by the import of electricity.

Utilisation of energy resources and capacities is one of the elements of the overall economic development of every country, because even in the situation when there is no deficit, the utilization of resources, or the increase of the amount of energy produced, with a high degree of development of cross-border transmission capacities, enables the placement of electricity surpluses to the regional markets and beyond. To that end, it is necessary to conduct activities related to the construction of new and revitalisation of existing production capacities, including capacity building for the production of energy from renewable.

In Montenegro, a number of projects are underway to implement the aforementioned activities, both in the use of water and coal resources, as well as the exploration of oil and gas reserves in the coastal zone.

In June 2016, the Parliament of Montenegro adopted the Decision on the Award of Concession Contract to Eni Montenegro B.V. Amsterdam Netherlands and Novatek Montenegro B.V. Amster- dam Netherlands for the production of hydrocarbons in the offshore of Montenegro, and in Decem- ber 2016 the Decision on the Award of Concession Contract to the company Energean Montene- gro Limited from Cyprus for the production of hydrocarbons in the offshore of Montenegro. On the basis of the above mentioned decisions, these companies have signed the contracts stipulating that the research phase will last 7 years in total, with two periods that will last 3 and 4 years.

1.1.1. Hydro potential

In spite of a small area of the territory, Montenegro has significant hydro potential that is valorised only to a smaller extent by the exploration of large and small water steams in energy production plants, whose overview is presented in Table 1.

Table 1. Theoretical and technical hydro potential in Montenegro

Theoretical potential Technical potential Main water streams: 9,8 TWh 1) Main water streams: 3,7 - 4,6 TWh 2) Smaller water streams: 0,8-1,0 Smaller water streams: 0,4 TWh TWh Total: 10,6 – 10,8 TWh Total: 4,1-5,0 TWh 1) Theoretical potential of the main water streams suitable for the construction pf large hydro power plants (taking in- to account the diversion of water from the river Tara into the river Moraca): Tara (2,255 TWh), Zeta (2,007 TWh), Moraca (up to Zete) (1,469 TWh), Lim (1,438 TWh), Piva (1,361 TWh), Cehotina (0,463 TWh), Mala River (0,452 TWh), Cijevna (0,283 TWh) and Ibar (0,118 TWh). 2) Technical potential of the mail water streams without diversion of water from the river Tara into the river Moraca.

Based on the data from the previous table it is evident that Montenegro has significant technically exploitable hydropower potential compared to the needs of Montenegrin consumption, which refers to the exploitation of the rivers Zeta, Piva, Tara, Moraca, Lim, Komarnica, Cehotina and Ibar and their tributaries, in the amount of 4,6 TWh per year, but the already constructed power plants (HPP Perucica and HPP Piva), utilised about 1.800 GWh, slightly more than 39% of the technical potential by using mainly hydro potential of the rivers Zeta and Piva.

In addition to the above mentioned potential that can be used for the construction of production plants with higher capacity, the Montenegrin territory contains also hydro power potential of small water streams, which are increasingly used in recent years for the construction of small hydro power plants.

In order to determine the hydro power potential on small rivers, significant hydrometric measurements were initiated in 2007. The measurements were conducted for the main tributes of larger rivers in Montenegro, and on that occasion the potential of 35 smaller rivers was tested at 40 loca- tions. Hydrometric measurements on the smallest water streams were initiated in 2010, particularly for water streams where the hydro potential would be used by the construction of small hydro power plants with installed capacity of up to 1 MW. For this purpose, a system of automatic hydrometric stations was installed. There is also a significant hydropower potential that is formed on the catchment areas of Montenegro, while the water streams and reservoirs are formed in border areas with neighbouring countries. For the utilization of these resources and the construction of facilities on water streams, it is necessary to reach an agreement on their use at the international level.

(Data source: Energy Development Strategy of Montenegro by 2030).

1.1.2. Coal

According to official data, Montenegro holds significant coal reserves, located in two separate geographic areas, in the vicinity of Pljevlja and Berane.

Pljevlja area covers three basins:

 Pljevlja basin (reservoirs: Potrlica, Kalusici, Grevo, Komini and Rabitlje) with gravitating small basins (reservoirs: Otilovici, Glisnica, Bakrenjace and Mataruge)  Ljuce-Sumanski basin (reservoirs: Sumani I and Ljuće I and II)  Maoce basin

Total reserves of coal in all circuits in the area of Pljevlja, according to the state as at 31.12.2016 (data source: Letter from the Coal Mine Pljevlja, Number 17/1495-2 of 24.05.2017) amount to 186.910.237 tons. The average energy value of the Pljevla coal varies between 5.572 kJ/kg in the Ljuće II basin and 13.663 kJ/kg in the Rabitlje basin, while in Maoce basin it amounts to 12.504 kJ/kg.

The level of exploration of coal reserves varies from reservoir to reservoir, and hence they are expressed as different types of reserve categories: A – proven coal reserves, B – explored coal reserves, and C1 – insufficiently explored coal reserves.

Table 2 provides an overview of the state of reserves and the average energy value of coal in the Pljevlja basin as at 31.12.2016:

Table 2. The state of coal reserves in the Pljevlja area, as at 31.12.2016

Aver. Reserve verifi- Participa- Overburden DTE coef. No. Basin/ reservoir Category Reserves (t) cation tion a+b (%) (m3) (kj/kg) overb. (m3/t) Pljevlja basin Potrlica A+B+C1 35.025.662 balance 49,96 139.922.301 10.697 3,99 balance Kalušići A+B+C1 15.047.143 97,32 46.627.374 7.957 3,10 1. balance Grevo C1 2.281.807 0 11.722.118 12.442 5,14 balance Komini C1 3.016.566 0 5.692.624 11.515 1,89 balance Rabitlje C1 5.358.361 0 36.014.256 13.663 6,72 TOTAL 60.729.539 239.978.673 3,95 Ljuće-Šumanski basin balance Šumani I A+B+C1 200.000 60 230.000 7.684 1,15 2. balance Ljuće II B+C1 1.056.085 61,21 500.000 5.572 0,47 balance Ljuće I B+C1 269.957 100 793.889 10.225 3,09 TOTAL 1.526.042 1.523.889 7.979 1,19 3. Glisnica B 1.701.343 balance 100 4.232.019 9.384 2,49 TOTAL CONCESSIONS 63.956.924 245.734.581 3,84 balance 4. Otilovići B+C1 3.421.000 99,50 11.887.300 10.510 3,47 balance 5. Bakrenjače A+B+C1 1.332.313 73,64 1.151.000 10.296 0,86 balance TOTAL 4.753.313 balance 13.038.300 2,74 TOTAL BALANCE 68.710.237 258.772.881 10.328 3,78 6. Mataruge C1 8.300.000 estimated 15.000.000 8.000 2 TOTAL ESTIMATED 8.300.000 15.000.000 8.000 2

TOTAL: ALL RESERVOIRS 77.010.237 273.772.881 9.991 7. Maoče B+C1 109.900.000 balance 82,98 497.500.000 12.504 4,53

Berane area is under-explored, and the estimated geological reserves of brown coal amount to about 158 mil. tons, but exploitation reserves, estimated by the IMC study on energy resources exploration during 2008, amount to a maximum of 17, 8 mil. tons (Data source: Energy Develop- ment Strategy of Montenegro by 2030).

The contract on the transfer of the contract on extension of the right to exploit and explore brown coal at the Petnjik reservoir, No 01-1699/1 of 04.07.2016, concluded between the Ministry of Economy as the concession grantor, the Brown Coal Mines DOO Podgorica, as the concession assignor, and the Berane Mines DOO, as the concession recipient, created the conditions to reac-

tivate the production in this mine, which amounted to about 6.000 tons per month in 2016 with tendency of further growth.

The activities on the revitalisation and production rehabilitation in the brown coal Mine, whose production system consists of Petnjik shaft and coal separation in Budimlja, have been conducted in the industrial zone of Rudes Berane in the previous period.

According to the data from the Berane Mines DOO, the Mine has a total of 145 employees with a planned increase in the number of employees in the following period. The work in the mine is conducted in three shifts and the production is generated at the level of 5.000 to 6.000 tons per month.

Table 3 shows the state of coal reserves in the Petnjik shaft located in the Berane area, as at 31.12.2016:

Table 3. The state of coal reserves in the Petnjik shaft located in the Berane area, as at 31.12.2016.

Total reserves pursuant to the Elaborate on Exploitation Exploitation Category reserves from the Concession contract losses reserves balance outbalance Total (%) A / / / / / B 1.440.912 735.268 2.176.180 30 1.008.638 C1 11.656.906 2.174.996 13.831.902 20 9.325.525 TOTAL 13.097.818 2.910.264 16.008.082 / 10.334.163 C2 / / 8.200.595 / / TOTAL 13.097.818 2.910.264 24.208.627 / /

1.1.3. Renewable energy sources

Having regard to the importance of renewable energy sources from the environmental and technical aspects, Montenegro has decided, in the strategic planning of energy development, to develop energy produced from renewable energy sources and to achieve the national target mapped out by Decision 2012/04/MC-EnC of 18 October 2012, adopted at the 10th Ministerial Council meeting of the Energy Community. By this Decision, Montenegro committed to achieve the national target that is a binding 33% target of energy from renewable sources in gross final energy consumption, as well as the obligation of Montenegro to implement Directive 2009/28/EC on the promotion of the use of energy from renewable energy sources in its legal system.

In order to fulfil the obligation, the Government of Montenegro adopted the Program for Develop- ment and Use of Renewable Energy, which sets out the national targets for the use of renewable energy sources, incentives, deadlines and the dynamics of its implementation.

According to the Energy law and the Energy Development Strategy of Montenegro by 2030, the Government of Montenegro adopted the National Action Plan for the use of energy from renewable sources by 2020, which defines dynamics of utilisation of energy from renewable sources, and the planned use of technologies required to meet the national target for the share of energy produced from renewable sources in gross final energy consumption.

The technologies, used for the production of electricity from renewable sources in smaller production plants, are still not economically competitive with conventional power plants, thus Montenegro uses a system of guaranteed purchase of produced electricity at so-called feed-in tariffs from privileged producers generating electricity from renewable energy sources and high-efficiency cogen- eration. In addition, the privileged producers are exempted from paying the balancing costs they cause.

1.1.3.1. Hydro energy

Montenegro has a significant gross hydro power potential on smaller water streams, which are estimated at around 800-1.000 GWh based on previous studies, while technically real usable is about 400 GWh. However, measurements at individual water streams indicate that this amount of energy is undervalued.

The Energy Development Strategy of Montenegro by 2030 envisaged the construction of a large number of small hydro power plants (hereinafter referred to as: sHPP) that would produce around 425 GWh of electricity per year until 2025.

In addition to the previously constructed small hydro power plants owned by EPCG and Zeta Ener- gy, which are connected to the distribution system, another nine small power plants have been constructed with installed capacity of 17.404 kW. These power plants are owned by DOO Hidroen- ergija Montenegro, DOO Synergy, DOO Igma Energy and DOO Kronor.

In 2016, the Agency defined the status of a privileged electricity producer for nine new sHPP, while in accordance with the Energy law; the temporary status of a privileged producer received 14 sHPP.

Out of nine newly constructed sHPP, one sHPP (sHPP Jezerstica) was put into operation in 2014, six were put into operation in 2015 (sHPP Bistrica, sHPP Orah, sHPP Rmus, sHPP Spaljevici 1, sHPP Vrelo, sHPP Bradavec), while two sHPP (sHPP Sekular and sHPP Jara) were finalised and put into operation during 2016.

As one of the preconditions for construction, the law envisages two ways of authorising the projects for the construction of small hydro power plants using renewable energy sources.

The first is a tender procedure that is conducted in accordance with the Law on Concessions. The tender procedure for awarding concessions may be initiated at the initiative of the competent authority or at the initiative of the person concerned. In addition to the tender procedure, the other way is a simplified procedure for the authorisation of energy facilities of small installed capacity up to 1 MW, defined by the Energy law, through the issuance of an energy permit. Based on the energy permit, a concession contract is concluded for the construction of sHPP without implementation of the public tendering procedure.

Below is an overview of the implementation of small hydro power plants construction structured according to the manner of authorisation:

 Implementation of the concession contracts concluded based on tender procedures conducted

In the previous period, six tendering procedures were conducted, and based on them 18 concession contracts were concluded.

The signed concession contracts provide for the construction of 37 sHPPs in the territory of Mon- tenegro. Total installed capacity of a sHPP, whose construction is envisaged by the signed contracts, is 83,206 MW, and the planned annual production is 268,552 GWh. Pursuant to activities implemented by certain concessionaires, out of the aforementioned 37 sHPPs, seven sHPP were constructed and started to produce electricity. The total installed capacity of the constructed sHPPs is 15, 8 MW, and the planned annual production is about 50 GWh.

The agreed deadlines have been exceeded for the following concession contract: the concession contract for the Crnja water stream signed with the concessionaire "Dekar" d.o.o. Podgorica; the concession contract for the construction of small hydro power plants on the Trepacka water stream

of the concessionaire, the consortium "Dekar – Hidro", whose members were "Dekar" d.o.o. Pod- gorica and "Hydro Energy" d.o.o. Podgorica; the concession contract for the Babinopoljska water stream signed with the concessionaire ''Kroling'' d.o.o, Danilovgrad and the concession contract for the Bistrica-tributary water stream Ljubovidje, signed with the consortium "Hydro Bistrica", whose members are "Synergy" d.o.o, Podgorica, "Vodni Zdroje a.s." Prag, "Triangle GC ING" Pec and "Gradnja" d.o.o, Bijelo Polje. The remaining concession contracts are being implemented in accordance with the dynamics set in the contracts.

 Implementation of the concession contracts concluded based on an energy permit

Pursuant to the provisions of the Energy Law, based on the energy permits approved, the decisions on provision of concessions are made and they are the basis for the conclusion of nine concession contracts for the construction of small hydro power plants, which plan to construct nine sHPPs, with the total installed capacity of 7,468 MW and the planned annual production of 27,624 GWh. Out of the aforementioned nine sHPP, two (sHPP „Bradavec“ with the installed capacity of 0,954 MW and the planned annual production of 3,823 GWh, and sHPP „Vrelo“ with the installed capacity of 0,615 MW and the planned annual production of 2,760 GWh) started electricity production. The remaining concession contracts are being realised in accordance with the dynamics set in the contracts.

Regarding the issuance of energy permit, in accordance with the legislation, in the period from 01.09.2014 until 28.01.2016 (when the new Energy law came into force), the Ministry received 52 applications for the construction of sHPPs on the basis of an energy permit.

Complying with the provisions of the Energy law, and in accordance with the Energy Development Strategy, the Action Plan for the implementation of the Energy Development Strategy and the Ac- tion Plan for the use of energy from renewable sources, the Government of Montenegro, at its session held on 02.02.2017, adopted the Annual Plan for submitting applications for issuing energy permits in 2017, which stipulates that in 2017 the application for issuing energy permits can be submitted only for the reconstruction of the existing energy facilities: sHPP „Glava Zete“ and sHPP „Slap Zete“.

Out of a total of 52 submitted applications for the construction of sHPP, 27 decisions on issuing an energy permit were made. Also, in the procedure for considering the submitted application, nine applications were rejected and nine applications were withdrawn.

The total installed capacity of sHPPs, for which the energy permits for the construction of sHPP were issued, is 12, 2 MW, and the total planned annual production is about 45 GWh. Out of 27 decisions made for the construction of sHPPs, for ten the Government has made decisions on granting a concession on the basis of which the contract will be concluded. Following the fulfilment of all conditions, based on six decisions out of ten, six concession contracts have been concluded so far: for the construction of sHPP “Bistrica” in the part of the Bistrica water stream, the Munici- pality of Kolasin with a company “BB Hidro” doo, Podgorica, for the constriction of sHPP “Seremet potok“ on the Seremetski stream, the Municipality of Andrijevica with the company „Nord Energy“ doo, Andrijevica, for the construction of sHPP „Paljevinska“ on the Paljevinska river water stream, the Municipality of Kolasin with the company „Viridi Progressum“ doo, Kolasin, for the construction of sHPP „Vinicka“ on the Vinicka river water stream, the Municipality of Berane with the company „Rudi Energy“ doo, Berane, for the construction of sHPP „Ljevak“ on the River (Ljevak) water stream with the company „Simes inženjering“ doo, Podgorica and for the construction of sHPP „Pecka“ on the Pecka river water stream with the company „Đekić“ doo, Podgorica. On the basis of two decisions (for the construction of small hydro power plants on the Ocka Gora and Jasičje water courses), due to failure to comply with the conditions, the contract was not signed and they were abolished.

Based on two concession decisions made by the Government in the previous period (for the construction of small hydropower plant on the water streams: Slatina, in the Municipality of Kolasin and

on the water supply Krkori, in the Municipality of Andrijevica) concession contracts will be concluded in the coming period.

So far, due to failure to comply with the obligations stipulated by the concession contract during the implementation of project, the Government of Montenegro unilaterally terminated three concession contracts, two with the company "Haider Extrem Energy" d.o.o Podgorica (water streams Bjelo- jevićka and Bistrica-Bijelo Polje) and one with a consortium "mHIDROMN"- Montenegro and Slo- venia (water stream Vrbnica). Also, three agreements on termination of the contracts with the company "Kroling" d.o.o Danilovgrad (water stream Tušina), "Bast MHE" d.o.o. Nikšić (water stream Zaslapnica) and "Energie Zotter Bau GmbH & Co. KG – Judenburg, Austrija" (water stream Grlja) were concluded too.

After the termination of the contract, water stream Vrbnica was announced on the third tender, and a concession was given for it by signing the concession contract on 23.04.2014.

The Government of Montenegro terminated the contract with the concessionaire "Haider Extrem Energy" d.o.o. Podgorica at the session held on 24.05.2013. Following that, the Government of Montenegro, at the session of 06.10.2016, made a decision on awarding the concession for the construction of a sHPP on Bjelojevićka and Bistrica-Bijelo Polje water streams. The concession contract was concluded on the basis of the decision on awarding the concession for the construction of sHPP on the water stream Bistrica.

Table 4 provides a description of data on individual small hydro power plants by water streams, with information on the responsible concessionaires, as well as the project implementation phase.

Table 4. Description of data on individual small hydro power plants by water streams

No Water stream Concessionaire Municipality Project stage Investment value

I TENDER

I phase – research works, conceptual solutions for optimal use of water stream and determination of location and parameters of sHPP and the elaboration of preliminary feasibility study for the sHPP; II phase – preparation of the project documentation and obtaining building permit; III phase –construction of facilities and plants for sHPP and obtaining of water and operation permit and electricity generation license; IV phase – sHPP facilities exploitation, and V phase - transfer of facilities. The duration of each of the aforementioned phases is different depending on the contract, since one of the criteria for the evaluation of the bid in the tender procedure was the duration of the individual phases of the contract

III phase- 1 operation and 1 building permit were "Kroling" d.o.o. 1. Babinopoljska Plav obtained. The contract 7.523.321,00 Danilovgrad concerning the concession contract was concluded.

III phase- 2 operation permits and 3 building

permits were obtained. "Hidroenergija 2. Bistrica Berane By concluding the Annex 16.575.812,05 Montenegro" No. 3 to the Contract, on d.o.o. Berane 18.05.2016 the duration of the III phase was extended until 31.12.2017.

"Hidroenergija IV phase- 4 operation 3. Šekularska Montenegro" Berane 9.500.000,00 permits were obtained. d.o.o. Berane

III phase- 3 building permits were obtained. By "Dekar" d.o.o. concluding the Annex No. 4. Crnja Podgorica Kolašin 2 to the Contract, on 10.000.000,00 30.11.2015 the duration of the III phase was extended until 20.11.2016. II TENDER

I phase –preparation of the technical documentation - 12 months II phase- construction of facilities of sHPP III phase-Technical-economic use of the hydro-energy potential for electricity production in sHPP

II phase- on 24.02.2017, a building permit was "Normal Com- obtained, thus creating 5. Komarača pany" d.o.o. Plav conditions for the start of 5.300.000,00 Podgorica the II phase- the construction phase that will last 8 months

Konsortium III phase- 2 building per- "Dekar – Hidro" mits were obtained. By whose members concluding the Annex 2 6. Trepačka river are: "Dekar" Andrijevica 12.000.000,00 of the Contract, on d.o.o. Podgorica 31.08.2015 the III phase i "Hydro Energy" was extended until d.o.o. Podgorica 03.12.2016. II phase- started by obtaining the first building

permit on 12.05.2016 and Consortium lasts 24 months. The "Elektrotehna- contract on the transfer of Industriaimport – the rights and obligations Industriaimpex under the concession a.d whose contract for the construc- members are tion of sHPPs on the 7. Murinska river "Elektrotehna" Plav 3.501.749,00 Murinska river water d.o.o. Berane streams was signed on and. Indus- 23.03.2016, whereby a triaimpor– indus- share of the company triaimpex a.d „Radius“ doo Herceg Podgorica Novi is taken over by the

company „Industriaimport

– Industriaimpex a.d.”, Podgorica. III TENDER

I phase- preparation of the technical documentation, from the moment of adoption of planning documentation or other relevant act for issuing UTC with a term of 18 months II phase – construction of facilities of sHPP, with a term of 24 months III phase – technical-economic use of the hydro - energy potential for electricity production

I phase-started from 03.12.2016, when the Decision on the adoption of the location study (LS) „Plava Hydro for the construction of a Djurička river 8. Power“ d.o.o. Plav sHPP on the Djuricka 12.017.000,00 with tributes Ulcinj river water stream with tributes, entered into force, and will last 18 months. UTC were obtained on 26.01.2017.

II phase-building permit “Hidroenergija was obtained on 9. Kaludarska Montenegro” Berane 19.07.2016, thus the II 2.700.000,00 d.o.o. Berane phase started and will last 24 months.

I phase- started from 08.04.2017, when the Decision on the adoption of the location study (LS) 10. Vrbnica “MHE Vrbnica” Plužine for the construction of a 9.780.000,00 d.o.o. Podgorica sHPP on the Vrbnica river water stream, entered into force, and will last 18 months.

II phase-building permit was obtained on Bistrica-tribute „Hydro Bistrica“ 16.03.2015, thus the II 11. Bijelo Polje 6.900.000,00 Ljuboviđe d.o.o. Podgorica phase i.e. the construction phase started and will last 24 months.

IV TENDER INITIATED BASED ON SELFINITIATIVE

I phase- preparation of the technical documentation, from the moment of adoption of planning documentation with a term of 18 months II phase – construction of facilities of sHPP, with a term of 24 months III phase – technical-economic use of the hydro - energy potential for electricity production

II phase-first building permit obtained on 12.12.2016 for „Small Hydro sHPP„Kutska 2“, thus II Power Plant phase-construction 12. Kutska river Andrijevica 6.977.465,00 Kutska“ d.o.o. phase started and will Andrijevica last 24 months. On 29.12.2016, building permit was also obtained for sHPP„Kutska 1“. II phase- first building permit obtained on 12.12.2016 for sHPP „Mojanska 3“, thus II phase-construction „Small Hydro phase started and will Power Plant 13. Mojanska river Andrijevica last 24 months. On 9.273.000,00 Mojanska“ d.o.o. 22.12.2016, building Andrijevica permit was obtained for sHPP „Mojanska 2“ , while building permit for sHPP „Mojanska 1“ was obtained on 29.12.2016

V TENDER

Obtaining documentation “MHE Štitari- for the issuance of UTR 14. Štitarička ca”d.o.o. Podgo- Mojkovac 4.182.085,00 preceded by the issuance rica of LSL.

VI TENDER

Consortium Obtaining documentation 15. Bistrica “Bistrica Clean Bijelo Polje 11.990.000,00 for the issuance of UTR Energy”

Obtaining documentation Konzorcijum for the issuance of UTR 16. Lještanica “Hydro Lještani- Bijelo Polje 4.000.000,00 preceded by the issuance ca” of LSL.

Konzorcijum Obtaining the consent to 17. Bukovica Šavnik 8.316.925,00 “Hydra MNE” the proposal of LSL.

Konsortium Obtaining documentation 18. Bjelojevićka ”Hydro Bjelo- Mojkovac 4.462.000,00 for the issuance of UTR jevićka”

I phase – preparation of the technical documentation, with a term of 12 months following the date of issuing of urban-technical requirements(UTR); II phase – construction of facilities in a sHPP, with a term of 24 months until the completion; III phase – Techno-economic use of hydro potential for the energy generation with a term of 27 year.

Name of water stream No. Investor Municipality Project Phase Investment and energy facility

Vrelo - "Synergy" d.o.o. III phase- started to run by 1. Bijelo Polje 1.150.000 sHPP “Vrelo” Podgorica obtaining an operation permits on 14.05.2015. II phase- started to run by obtaining a building permit on 08.08.2013. The contract was annexed and thus the Raštak - 2. "Kol Energy" Kolašin construction phase was 1.200.000 mHE “Raštak” d.o.o. Kolašin extended up to 08.08.2017 on the account of the shortening III phase-exploitation phase.

Concessionaire applied for Raštak- sHPP 3. Kolašin obtaining urban-technical 1.900.000 “Raštak 2” "Kol Energy" requirements on 18.04.2017. d.o.o. Kolašin

Reževića II phase –started to run by River - “MEII” d.o.o, 4. Budva obtaining the building permit 1.025.000 sHPP “River Budva on 03.10.2016. Reževića”

II phase – started to run by Piševska river "Igma Grand" obtaining the building permit - sHPP 5. d.o.o. Andrijevi- Andrijevica on 05.07.2016. Concession- 1.480.000 “Piševska ca aire obtained the operation river” permit on 03.05.2017.

III phase – exploitation Bradavec- "Igma Grand" phase started to run by 6. sHPP Andrijevica 1.176.919 d.o.o. Andrijevi- obtaining the operation per- “Bradavec” ca mit on 30.09.2015

II phase- started to run by obtaining the building permit Ljeviška River on 03.09.2014. The contract - Morača "Dekar" d.o.o. was annexed and thus II 7. spring Kolašin 1.800.000 Podgorica phase was extended up to sHPP 03.09.2018 on the account “Ljeviška river” of the shortening III faze- exploitation phase. Bistrica - I phase – started to run on 8. sHPP “Bistri- “BB Hidro” d.o.o, Kolašin the day when the contract 1.874.920 ca” Podgorica was concluded, 28.11.2016. Šeremetski I phase – started to run on stream - sHPP “Nord Energy” 9. Andrijevica the day when the contract 1.214.050 “Šeremet d.o.o, Andrijevi- was concluded 06.02.2017 stream” ca “Simes inžen- I phase – started to run on River (Ljevak - 10 sHPP “Ljevak” jering” d.o.o, Mojkovac the day when the contract / Podgorica was concluded 13.03.2017. I phase – started to run on Vinicka river - “Rudi Energy” 11. Berane the day when the contract / sHPP “Vinicka” d.o.o, Berane was concluded 15.03.2017 Paljevinska “Viridi Progres- I phase – started to run on 12. river - sHPP sum” d.o.o, Kolašin the day when the contract / “Paljevinska Kolašin was concluded 15.03.2017 I phase – started to run on Pecka river - “Đekić” d.o.o, 13. Kolašin the day when the contract / sHPP “Pecka” Podgorica was concluded 04.04.2017

(Data source: Information on activities on the implementation of priority projects in the energy area – renewable energy sources delivered by the Ministry of Economy and the Energy Development Strategy of Montenegro by 2030)

1.1.3.2. Wind energy

In addition to hydro potential, wind potential represents a significant energy potential in Montene- gro. In order to evaluate the wind potential in Montenegro, since 2017 several studies have been conducted in order to identify areas with cost-effective wind potential.

Thus, in 2007, the consulting company CETMA conducted the Study “Renewable Energy Re- source Assessment of the Republic of Montenegro”, where the coastal areas and the Northern part of the Municipality of Niksic were recognised as the most interesting zones with technically exploitable wind potential. Taking into account only the areas with medium and high productivity of wind potential, it was estimated that the total gross capacity of wind power plants that could be installed is approximately 400 MW, while the technical wind potential is estimated at approximately 900 GWh/year. The study was followed by the study 'Wind map of Montenegro'' which was prepared in 2008 and the ''Wind Atlas of the Balkans’’ which was prepared in July 2014 with the aim to identify areas with exploitable winds and obtain information necessary to assess the conditions for connection of wind farms and environmental impact. Atlas has presented 200 maps that cover the territory of Montenegro, Albania, Kosovo, Macedonia and Serbia. In addition to the maps, Atlas also includes a time computer model with statistical methods which, by using historical data from the period 1951 until 2013, can be helpful in selecting an adequate location for the constriction of wind farms, as well as in selecting the characteristics of the plant.

In order to exploit the wind potential, two projects have been launched: the first at the Krnovo site and the second at the Možura site.

 Project at the Možura site

On 5 July 2010, Montenegro signed a contract on the lease of land and construction of the wind power plant at the Možura site with the consortium "Fersa & Čelebić", consisted of the "Fersa En- ergias Renovables" SA from Spain and "Čelebić" DOO from Podgorica, Montenegro. The contract provides for the construction of a wind power plant of installed capacity of 46 MW. The contract was changed by signing the Annex 1 to the contract of 03.12.2012.

In accordance with the provisions of Annex 1 to the contract, the investor has established a special dependent entity, or the company „Mozura Wind Park“DOO, which were transferred with all rights and obligations under the contract. After providing all the necessary documents, the Ministry of Sustainable Development and Tourism issued a building permit for the construction of the Možura wind farm on 15 December 2014.

Appreciating the request of the investor, and after fulfilling all the necessary conditions, the Gov- ernment of Montenegro has accepted the proposal of the contract on the transfer of the Lease Contract and it was conducted on 27.10.2015. By this contract, the company „Enemalta PLC" from Malta became a new leaser. Pursuant to the provisions of the contract, the deadline for completing the construction is 33 months starting from February 15, 2015, i.e. the deadline for the completion of the construction of the subject wind farm is 15.11.2017. At the given site, works on the construction of road infrastructure and the plateau necessary for the installation of wind farm facilities are currently being completed.

 Project at the Krnovo site

On August 5 2010, Montenegro signed a contract on the lease of land and the construction of the wind farm at the Krnovo site with the consortium „MHI-IVICOM Consulting GmbH“whose members were: "Mitsubishi Heavy Industries" (“MHI”) from Japan and “Ivicom Consulting" GmbH from Aus- tria. With this contract the state-owned land has been leased for the period of 20 years, with a possibility to extend it up to a maximum of 5 years, for the construction of a wind power plant with an installed capacity of 72 MW. The contract was amended through the conclusion of four annexes. The Annex No. 1 to the contract, concluded on 26.10.2012, changed the leader of the consortium so that the company „Akuo Energy SAS“joined the consortium instead of the company „MHI. Com- plying with the provision of the contract, the investor has transferred all the rights and obligations under the contract to the project company „Krnovo Green Energy“doo, while the members of the consortium have remained jointly and severally liable for the obligations of the project company under this contract.

In order to resolve property-right relations for the construction of Krnovo wind power plant (WPP), an expropriation procedure was conducted. Based on that, the Annex on expropriation was signed on 23 April 2014. The Annex No. 2 to the Contract was signed on 17 November 2014, and the An- nex No. 3 to the Contract was signed on 31 July 2015. Also, the direct contract was signed on 06 July 2015, in order to overcome the problems with the provision of additional financial resources. The Annex No. 4 of the contract was also signed on 16 June 2016. By the contract, it was determined that the facilities will be completed by 07 May 07 2017, at the latest when the investor is required to enable the launch of Krnovo WPP and accompanying facilities and infrastructure, and to connect it to the power system.

Krnovo WPP was put into trial operation in early May 2017, and entry into normal operation is expected in the second half of 2017.

(Data source: Information on activities on the implementation of priority projects in the field of energy – renewable energy sources submitted by the Ministry of Economy)

1.1.3.3. Solar energy

Montenegro has a large solar potential. With the real assumption that the average solar insolation in Montenegro is 1.450 kWh/m2 per year, a theoretical potential of solar radiation may be estimated at about 20 PWh a year. The digital maps of global solar radiation, which show the theoretical potential of solar radiation, or the available global solar radiation at the site in a certain period of time, are well represented on the territory of Montenegro. (Data source: The Energy Development Strat- egy of Montenegro by 2030)

According to the information related to activities on the implementation of priority projects in the field of energy-renewable energy source, provided by the Ministry of Economy, the Government of Montenegro adopted a set of by-laws that define the type and classification of plants that produce electricity derived from solar energy, as well as incentive measures and the amount of incentive fees. One of the conditions for obtaining the right to incentive measures for the production of electricity from solar power plants located on the surface of residential, commercial and/or infrastructure facilities is obtaining an energy permit. According to the issued energy permits, the installed capacity of solar power plants should amount to 6 MW, and the planned annual production should amount to 8,2 GWh. Still, none of the solar power plants, for which an energy permit has been issued, has been constructed.

1.1.3.4. Biomass

The biomass potential makes wood biomass, biomass from the agriculture sector and biomass from waste.

Wood biomass in Montenegro is solely used for heating purposes. According to the Energy Devel- opment Strategy, the consumption of firewood amounted to 723.911 m3 or 1.868 GWh. It is estimated that this level of consumption will be retained until 2020, after which it will be reduced by 2030. Consumption of other forms of wood biomass in 2011 is estimated at 204 GWh, and it is projected to grow to 330 GWh by 2030.

Montenegro has no production of agricultural crops for the purpose of obtaining energy. According to the European Bioenergy Study, the energy potential of biomass from agriculture can be estimated at 667 GWh per year. According to another estimate which is based on the application of the parameters from the neighbouring countries to Montenegro, the technical bio potential from agriculture would amount to around 492 GWh per year. Estimated potential of the plants and animals residue amounts to 57 GWh per year.

The technical potential of biomass from solid municipal waste is estimated at 197 GWh per year, and it is foreseen that it will increase to 280 GWh per year by 2030.

(Data source: Energy Development Strategy of Montenegro by 2030)

1.2. Energy capacities

1.2.1. Generation capacities

Generation capacities in Montenegro are as follows:

 Hydro power plants:  HPP „Perućica“, nominal capacity of 307 MW;  HPP „Piva“, nominal capacity of 342 MW;  Thermal power plant - TPP „Pljevlja“, nominal capacity of 218,5 MW;  Small hydro power plants:  Within EPCG: . „Podgor“,nominal capacity of 0,4 MW; . „River Crnojevića“, nominal capacity of 0,5 MW; . „River Mušovića“, nominal capacity of 1,3 MW; . „Šavnik“, nominal capacity of 0,2 MW, and . „Lijeva River“, nominal capacity of 0,05 MW;  Within DOO „Zeta Energy“: . „Glava Zete“, nominal capacity of 5,360 MW and . „Slap Zete“, nominal capacity of 1,2 MW;  Within DOO „Hidroenergija Montenegro“: . „Jezerštica“, nominal capacity of 0,844 MW; . „Bistrica“, nominal capacity of 5,600 MW; . „Rmuš“, nominal capacity of 0,474 MW; . „Orah“, nominal capacity of 0,954 MW; . „Spaljevići 1“, nominal capacity of 0,650 MW and . „Šekular“, nominal capacity of 1,665 MW;  Within DOO „Synergy“: „Vrelo“, nominal capacity of 0,615 MW;  Within DOO „Igma Energy“: „Bradavec“, nominal capacity of 0,954 MW;  Within DOO „Kronor“: „Jara“, nominal capacity of 4,568 MW;

The total nominal capacity of all power plants in the energy system of Montenegro is 892,834 MW, out of which hydro power plants capacity amounts to 674,334 MW (75,53%), and capacity of TPP Pljevlja is 218,5 MW (24,47%).

Basic energy – technical characteristics of the power plants are provided in the Table 5:

Table 5. Basic technical data on the power plants in the Energy System of Montenegro

Generation in the last three years Nominal Year of com- (MWh) No. Power plant capacity missioning (MW) 2014. 2015. 2016.

1. TPP ''Pljevlja'' 218,5 1982 1.322.062 1.411.614 1.216.150

2. HPP ''Piva'' 342 1976 679.338 631.040 792.461 3. HPP ''Perućica'' 307 1960-76 1.006.682 783.358 938.730 Small HPPs of 4. 2,45 1937-88 6.630 5.024 5.521 EPCG sHPP of Zeta Ener- 5. 6,56 1952-54 22.236 15.009 19.838 gy sHPP of Hidroener- 6. 10,187 2013-16 1.730 21.794 38.534 gija Montenegro 7. sHPP Synergy 0,615 2015 2.694 3.117 8. sHPP Igma Energy 0,954 2015 1.025 3.209 9. sHPP Kronor 4,568 5.828

(2. - 9.) Total HPP 673,984 1937-2015 1.716.616 1.459.944 1.807.238 TOTAL 892,834 3.038.678 2.871.558 3.023.388

The following diagram shows the share of installed capacity in power plants in Montenegro, as well as the share of installed capacity of individual produces from small hydro power plants in total capacity of the small hydro power plants:

Share of installed capacities of PPs in the total capacity

sHPP 2,84% TPP ''Pljevlja'' HPP ''Perućica'' 24,47% 34,38%

HPP ''Perućica''

HPP ''Piva''

HPP ''Piva'' TPP ''Pljevlja'' 38,30% sHPP

Share of installed capacities of individual producers in total capacity of sHPP sHPP Igma Energy 3,77% sHPP Synergy sHPP EPCG 2,43% sHPP 9,67% Hidroenergija Montenegro sHPP Kronor 40,21% 18,03% sHPP Hidroenergija Montenegro sHPP Zeta Energy

sHPP Kronor

sHPP EPCG

sHPP Zeta Energy sHPP Igma Energy 25,89% sHPP Synergy

The average annual production of electricity in power plants in Montenegro in the period 2008 – 2016, is around 3.100 GWh.

The table 6 shows data on generated annual production in the period 2008 – 2016:

Table 6. Generated production of electricity in the period 2008 – 2016

Production (GWh) Power plant 2008. 2009. 2010. 2011. 2012. 2013. 2014. 2015. 2016. TPP Pljevlja 1.155,40 616,5 1.271,70 1.452,30 1.245,07 1.311,42 1.322,06 1.411,61 1.216,15 HPP Perućica 878,2 1.099,60 1.434,90 629,8 808,55 1.333,96 1.006,68 783,36 938,73 HPP Piva 634,2 943,1 1.285,80 558,4 639,64 1.134,07 679,34 631,04 792,46 sHPP 19,1 19,9 28,9 15,7 21,86 30,63 30,6 45,55 76,05 Total 2.686,90 2.679,10 4.021,30 2.656,20 2.715,11 3.810,09 3.038,68 2.871,56 3.023,39 Average 3.055,81 (2008-2016)

The production of electricity in 2016 is higher than the production in 2015 by 5, 29%, but less than production in 2014 by 0, 50%. Compared to the average production in the period 2008 – 2015, the production in 2016 is lower by 1, 19%. The reason for these deviations in electricity production is the dependence on hydrological conditions at the year-level, due to the large share of hydro power plant capacity in the total capacity of production facilities (75, 52%).

The following diagrams show the percentage share of power plants in production for 2016 and the share of production in small hydro power plants by energy undertakings for 2016:

Share of production facilities in total production of electricity

sHPP 2,52% TPP Pljevlja HPP Perućica 40,22% 31,05%

HPP Perućica

HPP Piva

TPP Pljevlja HPP Piva 26,21% sHPP

Share of individual producers in total production from sHPP

Igma Energy Synergy EPCG 4,22% 4,10% 7,26% Kronor 7,66%

Hidroenergija Montenegro

Zeta Energy

Kronor

EPCG Hidroenergija Zeta Energy Montenegro Igma Energy 26,09% 50,67% Synergy

The following graph shows the production generated for the period 2008 – 2016:

Electricity production for the period 2008 - 2016.

1.600,00

1.400,00

1.200,00

1.000,00

800,00

600,00 TE Pljevlja 400,00 HE Perućica 200,00 HE Piva 0,00 2008 2009 2010 2011 2012 2013 2014 2015 2016 mHE

1.2.2. Transmission capacities

The transmission system consists of plants at 110 kV, transformers at 110/x kV/kV, overhead lines at 110 kV, as well as plants, transformers and lines of higher voltage levels.

According to the 2016 CGES’s Operating Statement, the transmission line network consists of:

 Five overhead lines of 400 kV, of total length of 283,3km;  Eight overhead lines of 220 kV, of total length of 337,4 km;  Thirty one overhead lines of 110 kV, of total length of 560,8 km;  Two underground cable lines of 110 kV, of total length of 7,3 km, and  Five overhead lines of 110 kV, operating at 35 kV voltages, of total length of 121, 2 km.

The table 7 provides an overview of the transmission lines owned by the transmission system operator, at voltage levels, with data on the length, as at 31.12.2016:

Table 7. An overview of transmission lines owned by CGES AD Podgorica, as at 31.12.2016

O V E R H E A D L I N E S Length to the No Type Total length MN border LINES 400kV km km 1 Podgorica 2 – Trebinje 61,4 89,4 2 Podgorica 2 - Ribarevine 84,7 84,7 3 Ribarevine – Peć 53,1 128,1 4 Ribarevine - Pljevlja 2 54,8 54,8 5 Podgorica - Albanija 29,3 156 TOTAL 283,3 464,8 LINES 220kV km km 1 Perućica - Trebinje 42,5 63,2 2 Podgorica 1 - Perućica 34,1 34,1 3 Podgorica 1 - Albanija 21 65,6 4 Podgorica 1 - Mojkovac 72,1 72,1 4 Mojkovac - Pljevlja 2 44,9 81,6

6 Piva - Pljevlja 264 49,8 49,8 7 Piva - Pljevlja 265 49,6 49,6 8 Piva - Lukavica (Buk Bijela) 23,4 25 TOTAL 337,4 441 LINES 110kV 1 Podgorica 2 - Virpazar 30 30 2 Virpazar - Bar 16,4 16,4 3 Podgorica 2 - Budva 36 36 4 Podgorica 1 - Podgorica 3 3,9 3,9 5 Podgorica 2 - Podgorica 4 3,5 3,5 6 Podgorica 1 - Podgorica 2,I 5,8 5,8 7 Podgorica 1 - Podgorica 2,II 5,9 5,9 8 Podgorica 2 - Podgorica 5 (KAP,I) 11,7 11,7 9 Podgorica 2 – KAP,II 8 8 10 Podgorica 2 - KAP,III 8,1 8,1 11 Bar - Budva 33,4 33,4 12 Bar - Ulcinj 23,7 23,7 13 Budva - Cetinje 11,5 11,5 14 Budva - Tivat 17,4 17,4 15 Podgorica 2 - Cetinje 31,7 31,7 16 Tivat - Herceg Novi 20,7 20,7 17 Herceg Novi - Trebinje 15,6 30,8 18 Perućica - Danilovgrad 17,1 17,1 19 Perućica - Nikšić 3 13,5 13,5 20 Podgorica - Danilovgrad 17,6 17,6 21 Podgorica – EVP Trebešica 36,1 36,1 22 EVP Trebešica - Andrijevica 30,8 30,8 23 Andrijevica - Berane 17,1 17,1 24 Berane - Ribarevine 21,1 21,1 25 Ribarevine - Mojkovac 14 14 26 Nikšić - Bileća 55,6 59,5 27 Pljevlja 1 – Pljevlja 2 2,8 2,8 28 T-otcjep - Vilusi 0,5 0,5 29 Tivat - Kotor 5,9 5,9 TOTAL 515,4 534,5 CABLES 110kV 1 Podgorica 3 - Podgorica 5 (cable 110kV) 3,6 3,6 2 Kličevo - Nikšić 3,7 3,7 TOTAL 7,3 7,3 DOUBLE 110 kV LINES km km 1 Perućica – Podgorica, lines II and III 32,6 32,6 2 Perućica - Nikšić 1 12,8 12,8 TOTAL 45,4 45,4 LINES 110(35)kV 1 Pljevlja 1 - Čajniče 20,8 25,8 2 Pljevlja 1 - Žabljak 38,5 38,5 3 Berane - Rožaje 24,1 24,1 4 Ribarevine - Nedakusi 8,6 8,6 5 Nikšič - Brezna 29,2 29,2 TOTAL 121,2 126,2 TOTAL AT ALL VOLTAGE LINES 1.310 1.619,2

Such structure and geographic disposition (deployment) ensures good connection of the Montene- grin electricity transmission system with neighbouring energy systems at the three voltage levels, as follows:

. With the Electric Power System of Serbia via two 220 kV overhead lines and one 110 kV overhead line; . With the Electric Power System of B&H via one 400 kV overhead line, two 220 kV overhead lines, two 110 kV overhead lines, as well as one 110 kV overhead line operating at 35 kV voltage level; . With the Electric Power System of Albania via one 400 kV overhead line and one 220 kV overhead line, and . With the Electric Power System of Kosovo via one 400 kV overhead line.

The Montenegrin Transmission System (CGES) has 23 substations, for which data on the number of transformers and capacities are shown in the table 8:

Table 8. Data on substations owned by CGES as of 31.12.2016

Number of Capacity No SUBSTATION ∑ MVA transformers (MVA) 1 SS 400/220/110kV Pljevlja 2 3 925 (2x400+125) 925 2 SS 400/110kV Podgorica 2 2 600 (300+300) 600 3 SS 220/110/35kV Podgorica 1 4 426 (2x150+2x63) 426 4 SS 220/110/35kV Mojkovac 3 190 (150+2x20) 190 5 SS 110/35kV Niksić 4 229 (40+63+2x63) 229 6 SS 110/35kV Herceg Novi 2 80 (2x40) 80 7 SS 110/35KV Tivat 2 83 (20+63) 83 8 SS 110/35kV Budva 2 103 (40+63) 103 9 SS 110/35kV Bar 2 80 (40+40) 80 10 SS 110/35kV Ulcinj 2 51,5 (20+31,5) 51,5 11 SS 110/35kV Cetinje 2 51.5 (20+31,5) 51,5 12 SS 110/35kV Danilovgrad 1 20 20 13 SS 110/10kV Podgorica 3 2 71,5 (40+31,5) 71,5 14 SS 110/10kV Podgorica 4 2 80 (2x40) 80 15 SS 400/110/35kV Bijelo Polje 3 190 (150+2x20) 190 16 SS 110/35KV Berane 2 40 (2x20) 40 17 SS 110/35kV Pljevlja 1 2 60 (20+40) 60 18 SS 110/35kV Vilusi 1 10 10 19 SS 110/35kV Andrijevica 2 30 (10+20) 30 20 SS 110/35kV Virpazar 2 40 (20+20) 40 21 SS 110/10kV Podgorica 5 2 63 (31,5+31,5) 63 22 SS 110/10kV Kličevo 2 63 (31,5+31,5) 63 23 SS 110/35kV Kotor 2 40 (20+20) 40 T O T A L: 51 3.526,5

The transmission network is still radial structure at all three voltage levels, but the planned investments, which follow the project to construct a submarine electricity cable with Italy, will lead to the closure of the ring at 400 kV voltage level, and further contribute the stability and safety of the func-

tioning of the system, unloading the 110 kV system, which is predominately used to meet the needs of domestic customers, then will reduce losses in the transmission system, due to a work at a higher voltage level, but also facilitate exchange of electricity with the systems in the region due to a higher transmission power of the 400kV transmission line.

The aforementioned fact is reflected in the total transmitted energy for the needs of customers in Montenegro, in the amount of 3.120 GWh, and the total energy transmitted through the Montene- grin energy system, in the amount of 5.730 GWh. From these data, it is concluded that, in addition to satisfying the needs of domestic customers, the exchange of energy with the neighbouring systems and work in the interconnection is a significant activity of the transmission system operator.

The electricity delivery through the transmission system in 2016 was characterised by high reliability. 99,99% of the domestic demand for electricity was transferred, and in the same period there was no cancelation of cross-border transmission capacities due to the inaccessibility of neither interconnection transmission lines, nor serious failures on individual 220 and 400kV portions of the transmission system.

Operational management and running of the energy system of Montenegro is performed within the National Dispatching Centre (NDC), which has modern equipment for operation monitoring and system running in real time (SCADA - system with all necessary measurements and system of telecommunication connections with all facilities of energy system). NDC has a database containing data per hour on production and consumption of direct consumers and transmitted amount of electricity to the distribution system, as well as on exchange and transit of energy with the neighbouring systems. All measuring points on inter-system lines, power plants, delivery points for the distribution and direct consumers are equipped with devices for remote data transfer, which are automatically forwarded to the National Dispatching Centre.

The dominant flow of capacities in the South-eastern Europe region is in the directions: North- South and East-West. The construction of the submarine DC cable to Italy and its full exploitation that will follow after the construction of a new and strengthening the existing internal and interconnection links will lead to a change in the direction of transit across the territory of Montenegro. It was announced that in 2018 a part of the cable, with a transmission capacity of 500MW, will be put into trail work.

The following figure shows the transmission system diagram; with the facilities whose finalisation and commissioning are expected in the coming period:

1.2.3. Distribution capacities

The electricity distribution system consists of 35 kV plants, 35/x kV/kV transformers and 35 kV overhead lines, as well as plants, transformers and overhead lines of lower voltage level to the point where the users of the system are connected, whose main function is to supply final customers with energy that has entered in the distribution system from the transmission system, or from the power plants connected to the distribution system.

The legal unbundling of the electricity distribution activities, which were conducted within the framework of Elektroprivreda Crne Gore AD Nikšić – EPCG, was carried out in 2016. Pursuant to the provisions of the Energy law and the Law on Business Entities, on 23 June 2016, the Share- holders’ Assembly of EPCG adopted a decision on the establishment of a limited liability company LLC named “Montenegrin Electric Distribution System” Podgorica (CEDIS). Since 1 July 2016, CEDIS operates as a separate legal entity 100% owned by EPCG. On 24 November 2016, the Agency issued a license to CGES for the distribution of electricity.

Organisationally, CEDIS is divided in seven regions, which include:

. Region 1 – covers the territory of Niksic Distribution; . Region 2 – covers the territories of Podgorica and Cetinje Distributions; . Region 3 – covers the territory of Berane and Rožaje Distributions; . Region 4 – covers the territory of Budva, Bar and Ulcinj Distributions; . Region 5 – covers the territory of Kotor, Tivat and Herceg Novi;Distributions . Region 6 – covers the territory of Bijelo Polje, Mojkovac and Kolasin Distributions, and . Region 7 – covers the territory of Pljevlja and Zabljak Distributions.

In accordance with this division, the following tables show data on the length of lines in the distribution network (km), number and capacity of transformers (MVA) owned by the distribution system operator:

Table 9. The length of the distribution lines owned by CEDIS as at 31.12.2016

Length of the distribution lines as at 31.12.2016 (km)

NV KV NV KV NV KV Name DISTRIBUTION TOTAL 35kV 35 kV 10kV 10kV 0,4kV 0,4 kV REGION 1 NIKSIĆ 160,89 9,84 615,75 106,24 1.465,78 59,40 2.417,90 PODGORICA 138,60 16,26 495,34 391,80 2.227,93 281,80 3.551,73 REGION 2 CETINJE 82,30 5,12 206,09 45,49 614,54 51,13 1.004,67 BERANE 44,00 25,74 356,87 48,84 1.967,80 45,56 2.488,81 REGION 3 ROŽAJE 3,55 0,00 144,89 15,36 313,20 18,70 495,70 BUDVA 36,00 18,08 38,00 188,02 145,99 406,63 832,72 REGION 4 BAR 61,52 15,16 171,20 91,13 318,75 114,16 771,91 ULCINJ 31,50 0,46 138,14 42,50 252,78 83,24 548,62 KOTOR 53,80 0,20 118,04 112,58 258,52 101,07 644,21 REGION 5 TIVAT 8,10 12,29 22,84 82,19 0,00 108,67 234,09 HERCEG NOVI 20,32 3,84 89,32 125,76 220,50 311,06 770,80 BIJELO POLJE 53,52 1,92 306,11 78,97 1.134,06 27,98 1.602,56 REGION 6 KOLAŠIN 74,70 0,23 175,80 15,75 426,00 23,40 715,88 MOJKOVAC 0,00 0,00 85,57 19,92 278,45 23,75 407,69 PLJEVLJA 95,60 0,43 406,32 34,83 1.434,88 29,49 2.001,55 REGION 7 ŽABLJAK 42,30 0,90 243,90 30,56 564,41 39,74 921,81 TOTAL 906,70 110,47 3.614,17 1.429,94 11.623,59 1.725,78 19.410,64

Table 10. Number of substations owned by CEDIS as at 31.12.2016

Number of distribution substations as at 31.12.2016

SS SS SS SS SS SSS Name DISTRIBUTION TOTAL 110/10 kV 35/10 kV 35/6 kV 35/0,4 kV 10/0,4 kV 10/0,4 kV REGION 1 NIKSIĆ 0 10 1 3 259 345 618 PODGORICA 3 15 0 3 823 543 1.387 REGION 2 CETINJE 0 5 1 10 105 95 216 BERANE 0 6 1 0 125 204 336 REGION 3 ROŽAJE 0 2 0 0 40 106 148 BUDVA 0 7 1 1 179 20 208 REGION 4 BAR 0 11 1 4 173 97 286 ULCINJ 0 4 0 0 81 111 196 KOTOR 0 5 0 0 158 84 247 REGION 5 TIVAT 0 4 0 0 86 5 95 HERCEG NOVI 0 7 0 0 201 55 263 BIJELO POLJE 0 5 0 1 108 166 280 REGION 6 KOLAŠIN 0 3 0 5 32 117 157 MOJKOVAC 0 1 0 0 29 50 80 PLJEVLJA 0 8 3 2 80 211 304 REGION 7 ŽABLJAK 0 4 0 1 43 114 162 TOTAL 3 97 8 30 2.522 2.323 4.983

Table 11. Capacity of distribution transformers owned by CEDIS as at 31.12.2016

Capacity of distribution transformers (MVA) as at 31.12.2016

SS SS SS SS SS SSS Name DISTRIBUTION TOTAL 110/10 kV 35/10 kV 35/6 kV 35/0,4 kV 10/0,4 kV 10/0,4 kV REGION 1 NIKSIĆ 0,00 90,60 6,50 0,50 152,31 29,01 278,92 PODGORICA 214,50 159,73 0,00 0,40 643,49 66,19 1.084,31 REGION 2 CETINJE 0,00 46,50 5,00 8,25 58,61 6,89 125,25 BERANE 0,00 40,50 12,00 0,00 60,19 26,56 139,25 REGION 3 ROŽAJE 0,00 16,00 0,00 0,00 19,19 10,05 45,24 BUDVA 0,00 113,00 3,20 0,25 191,43 2,87 310,75 REGION 4 BAR 0,00 114,60 10,00 0,55 103,19 10,72 239,06 ULCINJ 0,00 36,00 0,00 0,00 45,87 13,78 95,65 KOTOR 0,00 46,50 0,00 0,00 94,27 9,33 150,10 REGION 5 TIVAT 0,00 34,50 0,00 0,00 48,70 0,50 83,70 HERCEG NOVI 0,00 74,10 0,00 0,00 145,41 5,96 225,47 BIJELO POLJE 0,00 33,00 0,00 1,00 61,70 16,99 112,69 REGION 6 KOLAŠIN 0,00 25,00 0,00 1,10 20,09 10,32 56,51 MOJKOVAC 0,00 8,00 0,00 0,00 16,17 5,15 29,32 PLJEVLJA 0,00 43,00 48,00 0,20 57,63 14,60 163,43 REGION 7 ŽABLJAK 0,00 12,50 0,00 1,60 21,19 9,97 45,26 TOTAL 214,50 893,53 84,70 13,85 1.739,44 238,89 3.184,91

In 2016, consumers connected to the distribution system were supplied with 2.510,3 GWh of electricity, which is 96, 2 GWh or 3, 69% less than in 2015. Compared to the amount of electricity planned to be delivered in accordance with the Energy Balance (2.472 GWh), the real consumption was higher by 38, 3 GWh or 1, 55%.

In the previous period, the distribution system was mainly designed to have substations at 35/10 kV and 10/0, 4 kV, while the transformations 35/0, 4 kV (rural, sparsely populated areas, in order to reduce losses) and 35/6 kV (industrial plants connected to the distribution system: water supply systems and mines,) could be found in certain parts. The development and concentration of consumption in urban areas lead to the disruption of the needs of distribution customers by the aforementioned levels of transformation, which is recently resolved by the construction of 110/10 kV substations. These substations, in addition to satisfying the increased needs of customers, increase the efficiency of the system and enable the reduction of losses, and represent the basis for the future development of the distribution system, especially in the territory of the capital and the coast of Montenegro.

1.3. Oil and gas sector

In 2016, a total number of 71 undertakings operated in the petroleum product market of Montene- gro, based on licenses issued by the Agency. Since the license is issued for each energy activity separately, undertakings have one or more licenses depending on the activity they perform. Also, there are a certain number of undertakings to whom licenses were issued under the previously applicable Energy Law, valid until the expiry of the period they were issued to. In accordance with the aforementioned, in 2015, 10 undertakings performed the sale and supply of petroleum products and/or gas with licenses issued under the previously applicable law, 19 undertakings performed the storage and distribution of petroleum products and/or gas, and 16 undertakings performed the commercial transport of petroleum products and/or gas. In accordance with the licenses issued under the Energy law applicable since the end of January 2016, 32 undertakings performed the wholesale trade of petroleum products, 28 undertakings performed retail trade of petroleum products, 14 undertakings performed the storage of petroleum products, 27 undertakings performed the transport of petroleum products by road transport means, 16 undertakings performed the wholesale of LPG, 14 undertaking performed the storage of LPG and 24 undertakings performed the supply of end users with LPG.

The largest company in the oil and gas sector of Montenegro is Jugopetrol AD Podgorica, whose majority owner is a Greek company Hellenic Petroleum. Besides Jugopetrol, out of larger companies, the following companies operate in the petroleum products market: Lukoil Crna Gora DOO Podgorica, whose majority owner is LUKOIL Russia, Ina Montenegro DOO Podgorica, whose majority owner is INA DD Croatia and Petrol Montenegro MNE DOO Podgorica, whose majority owner is PETROL DD Slovenia, as well as Pavgord DOO Kotor and Montenegro Bonus DOO Cetinje.

1.3.1. Storage capacities

At the end of 2016, the total licensed storage capacities used for storage of petroleum products and LPG amounted to 143.770 m³, which is by 200 m³ more than the capacities in 2015. Storage capacities in 2016 were increased for two newly built retail facilities.

Out of the total storage capacity, 125.582 m³ belongs to AD Jugopetrol Podgorica, while the remaining part of the storage capacity of 18.188 m³ is located at retail facilities – gas stations and yachting services of other licensees, which is graphically presented in the following picture:

Jugopetrol AD Podgorica Ostali licencirani subjekti

13%

87%

1.3.2. Transport capacities

At the end of 2016, the transport of petroleum products and LPG was performed by 34 licensed undertakings, which possessed a total of 126 transport means. Out of this number, AD Jugopetrol Podgorica possess 25 vehicles, while the remaining 101 vehicles are owned by other licensed undertakings.

Graphic review of transport capacities in the oil sector:

Jugopetrol AD Podgorica Ostali licencirani subjekti

20%

80%

1.3.3. Sale capacities

At the end of 2016, the sale of petroleum products was performed at 97 gas stations, 5 yachting services, 2 airline services and one installation. Jugopetrol has 45 facilities, out of which 39 gas stations, three yachting services (Budva, Kotor and Herceg Novi), two airline services (Podgorica and Tivat) and one installation in Bar, while the remaining 60 facilities are owned by other licensed undertakings.

During 2016, two newly built gas stations for the sale of petroleum products and LPG were put in operation, one owned by Jugopetrol AD Podgorica, in Bijelo Polje, and one owned by DOO Petrol Montenegro MNE Podgorica, in Podgorica.

The following graph shows sales capacities in the oil sector:

Jugopetrol AD Podgorica Ostali licencirani subjekti

43%

57%

1.3.4. The formation of strategic reserves of oil and/or petroleum products

European Council Directive No 2009/119/EC of 14 September 2009 imposed an obligation on Member States to maintain minimum stocks of crude oil and/or petroleum products. Mandatory stocks of oil and petroleum products are stocks which are used for security of oil and petroleum products supply in the event of threat to energy security of the country due to extraordinary circumstances.

In Decision of the Council No. 2008/03, the Energy Community imposed an obligation on members of the Energy Community to implement EU provisions which are also related to the issue of oil and or/petroleum products, while Article 1 of the Council Decision No. 2012/03 of the Energy Communi- ty proclaims that each Contracting Party to the Energy Community shall implement Council Di- rective 2009/119/EC not later than 1 January 2023. According to provisions of Directive, member states need to have oil stocks that correspond to 90 days of average daily net imports or 61 days of average daily inland consumption, whichever of the two quantities is greater.

Since Montenegro is in the EU pre-accession phase and also a signatory to the Treaty establishing the Energy Community, it needs to implement the European Union regulations on the security of supply of oil products, i.e. to maintain minimum stocks of crude oil and/or petroleum products.

In the part of establishing a legal framework for strategic reserves, the Ministry of Economy has implemented the necessary procedure for the preparation of the law on the supply of petroleum products in case of supply disruption. The preparation of the law was supported within the project “Developing Sustainable Energy Use” financed from the EU funds through the IPA 2011. The Min-

istry of Economy has conducted a public hearing on the draft law, where public authorities provided their opinion on the draft text of the law.

In addition, within the project "Optimal use of energy and natural resources", supported by the EU through the IPA 2012, the activity on the implementation of Directive 2009/119/EC has begun. It focuses on two main activities:

1. Support in the preparation of secondary legislation to fully align with the EU legal framework and to create the legal basis for the establishment of the Central Body for Strategic Oil Stocks; 2. Capacity building through the establishment of the Central Body in terms of control and management of oil stocks and financing the early stage of the work.

Completion of planned activities is expected in 2017 and 2018.

2. Findings by the Energy Undertakings’ Su- pervision

2. FINDINGS BY THE ENERGY UNDERTAKINGS’ SUPERVISION

In accordance with the authorisations given by the Law and the Rules on licenses for performance of energy activities, in 2016 the Agency supervised the activities of the following energy undertakings: Electric Power Industry of Montenegro SC Niksic (EPCG), Montenegrin Electric Transmission System AD Podgorica (CGES), Montenegrin Market Operator for electricity DOO Podgori- ca(COTEE), DOO Montenegro Bonus Cetinje, as well as the undertakings in the oil and gas sector. The control was done by analysing the monthly, quarterly and annual reports of the undertakings, and other documents and data submitted by the undertakings on their own initiative or at the request of the Agency, as well as by direct controls and insights into the documentation in the registered seats of the companies and facilities where licensed activities are performed.

2.1. Supervision of energy undertakings operation

The Agency carries out the control over the energy undertakings’ operation in accordance with the 2016 Work Plan, and based on the Control Programme adopted on the basis of the plan.

All licensed undertakings in the electricity sector were controlled, namely:

Electric Power Industry of Montenegro AD Niksic (EPCG), as a licensee for the activities: generation, supply and distribution of electricity until the establishment of CEDIS (July 2016), Montenegrin Electricity Transmission System AD Podgorica (CGES), as a licensee for electricity transmission, Montenegrin Electricity Distribution System DOO Podgorica(CEDIS), as a licensee for electricity distribution in the period since its establishment, Montenegro Bonus DOO Cetinje, as a licensee for electricity supply, Uniprom DOO Nikšić, as a licensee electricity supply, and Montenegrin Electricity Market Operator DOO Podgorica(COTEE), as a licensee for electricity market organization.

Nine controls were performed over the licensed undertakings. Out of that, six controls were with the distribution system operator (five controls with EPCG – FU DISTRIBUTION and one control with the Montenegrin electricity distribution system DOO Podgorica(CEDIS) after its formation as a separate legal entity) and three controls with the Montenegrin Electricity Marker Operator DOO Podgo- rica.

Indirectly, the control was carried out through continuous analysis of periodical and occasional reporting documents, which are to be submitted by energy undertakings to the Agency, and which referred to:

Compensation programs and plans; Import and export of electricity; Implementation of regulations on cross-border energy exchange, as well as the work and operation of undertakings that perform the auction allocation of cross-border capacity, and Investment plans implementation.

In 2016, the Agency controlled the operation of licensed undertakings in the field of oil and gas, regarding the fulfilment of the conditions prescribed in the licenses.

2.2. Findings from the supervision relating to the energy system as a whole

2.2.1. Contractual relations between energy undertakings

In accordance with the law, energy undertakings shall regulate their operation with other energy undertakings through contracts.

In 2016, energy undertaking entered into all contracts with each other for the purpose of legal functioning of the energy system.

At the end of 2016, there were a total of 367.886 electricity customers in Montenegro, out of which four were direct, 25 customers were connected to 35 kV voltage level, 526 customers were connected to 10 kV voltage level, 33.141 customers from the category other consumption were connected to 0,4 kV voltage level and 334.190 were householders.

In accordance with its legal obligation, EPCG – FU Supply signed contracts on electricity supply with customers directly connected to the transmission system: Railway Infrastructure of Montene- gro AD Podgorica and Toscelik Alloyed Engineering Steel DOO Niksic.

Out of the total number of customers connected to the distribution system (householders 334.190, other customers 33.692), 67.649 (18%) customers signed contracts on electricity supply with EPCG - FU Supply, as follows:

 out of a total of 25, nine customers at 35kV, which is 36%,  out of a total of 526, 259 customers at medium voltage level of 10 kV, which is 49%,  out of a total of 367.331, 67.381 customers at low voltage level of 0,4 kV, which is 18%, or out of that: out of a total of 334.190, 55.851 customers in the category householders, which is17%, out of a total of 33.141, 11.530 customers in the category other customers, which is 35%.

In 2016, 1.084 temporary supply contracts were signed.

As at 31.12.2016, in accordance with its legal obligations, DOO ''Montenegrin Electric Distribution System'' Podgorica has 37.666 signed connection contracts, out of which 20.808 connection contracts with new customers, while 16.858 connection contracts with existing customers. Also, 79 connection contracts were signed with customers whose capacity is contracted, in accordance with new methodologies.

2.2.2. Unbundling of assets among CGES, CEDIS and EPCG

Until the unbundling of the Transmission System Operator from the vertically integrated undertaking EPCG, and later on the formation of the Montenegrin Electricity Distribution system(CEDIS), all assets served for the performance of energy activities were owned by EPCG. The law defines the transmission and distribution systems, but not the unbundling points for these systems.

Given that substations owned by CGES contain also a part on the 35 or 10 kV side which belong to the distribution system and the points of delimitation in these facilities are not defined in the procedure for the formation of separate legal entities, it is necessary to identify them and to define mutual rights and obligations with the contract. A similar situation is with production facilities owned by EPCG which include facilities used for the transmission of electricity, or they are practically a part of the transmission system.

For this reason, the law stipulates that the transmission system operator and electricity producer, as well as the distribution system operator and the transmission system operator shall perform takeover of installations and equipment which are part of the transmission system and owned by EPCG, or the takeover of installations and equipment of the distribution system owned by CGES, according to the law, within 12 months following the day of entry into force of the law, and that mutual rights and obligations shall be regulated by a contract.

On June 2015, CGES and EPCG signed the contract on connection to the transmission system for: TPP Pljevlja, HPP Perućica and HPP Piva, all for a period of one year.

In 2016, CGES and CEDIS signed the contract on the connection of energy facilities of the distribution system to the transmission system, with a validity period until 31.12.2016. In this way, they would regulate mutual relations until the preparation of the necessary documentation, followed by the separation of infrastructure of two systems, in accordance with the law.

Those contracts which refer to the resolution of the issue of property separation between these entities are of temporary nature because, as determined through the supervision of the work of these entities, working groups formed of the representative of these entities did not finish the work on defining all the parameters necessary for the conclusion of the connection contract.

2.2.3. Quality of electricity supply

One of the overall objectives of the economic, and consequently the energy development of Mon- tenegro is to provide sufficient quantity of electricity, which enables a comfortable living of citizens and a smooth operation and development of business, while achieving the most favourable price and satisfactory level of services provided.

According to the provisions of the law, the Agency adopts the rules on the minimum quality required for delivery and supply of electricity, which shall regulate the minimum quality of services, continuity in supply, voltage quality and financial compensations, which the energy undertakings shall pay due to their failure to meet defined minimum quality of supply.

The 2010 Energy law did not contain the provisions on financial compensations of energy undertakings in the event of failure to meet the minimum quality standards, which has been notices as an obstacle in establishing a functional system for monitoring data on the quality of supply and supply of electricity, and its improvement over time.

The applicable law contains the relevant provisions, thereby creating the conditions for the formation of a system for monitoring the quality of the achieved level of supply and the supply of electricity. During 2016, the Agency determined the draft rules and put them on the public hearing, within the statutory deadline.

Also, during 2016, the transmission and distribution system operators, and the supplier were continuously controlled regarding the monitoring of the achieved level of quality of supply and supply of electricity, both through the analysis of reporting templates and control in the registered seat of the undertaking.

During 2016, the Montenegrin electricity transmission system regularly provided data on the number and duration of interruptions, the unavailability of the transmission system elements, the amount of undelivered electricity, and the system parameters. The data submitted are systema- tised in the Agency and will be used as the basis for establishing initial levels of the quality of electricity supply for the transmission system operator.

EPCG – FU DISTRIBUTION, and since its establishment DOO CEDIS Podgorica provided only a part of data envisaged by the forms (data on the number of connection consents issued, the number of connected customers and the number of responses to the notification of the malfunctioning of the measuring point), while data on the interruptions were not submitted on the prescribed forms. During 2016, several direct controls were carried out in the distribution system operator in order to establish a system for collection data on interruptions, and other data necessary for reporting on the parameters on the quality of electricity supply.

2.3. Individual findings from the supervision of energy undertakings

2.3.1. Montenegrin Electricity Distribution System DOO Podgorica (CEDIS)

Controls were carried out on the following topics: a) Implementation of the AMM project

Through the approval of investment plans, the Agency approved investments for the implementation of the project for the installation of new, modern meters with remote reading. For the first three- month period of regulation (2012 - 2015) the first phase of the project was approved, which implies the installation of 175.000 meters. The second phase of the project, which planed the installation of 80.000 meters, was approved in 2014, and implemented in 2015 and 2016. Given that the law obliged CEDIS to equip 85% of consumers by means of modern measurement system by 1 Janu- ary, 2019, CEDIS also planned the third phase of installation in order to fulfil this legal obligation.

In 2016, the control of this project was carried out within the supervision of realisation of investment plans, where it was found that the plans is realised with the planned dynamics, that the installation price per installation site is lower than estimated, and that during the replacement of the meter a significant reconstruction of the network was done.

Closing with 31.12.2016, a total of 263.069 new meters were installed. During the replacements, the meters were moved to the property limit, which, in addition to the reconstruction of the network, led to a reduction in the possibility of unauthorised use of electricity. New meters have the ability to communicate remotely, thus achieving more efficient and accurate reading, a higher degree and more reliable disconnection of disorderly customers, and therefore a higher collection, which exceeds 100% of the project, which means that the outstanding claims are also charged. During the implementation of this project, customer databases were edited, a monitoring of losses by trafo reons was enabled. The effects of installation of new meters are already visible, as the total losses in the distribution network in 2016 amounted to 404, 01 GWh and are lower than those in 2015 when they amounted to 445, 05 GWh, by 9, 22%. The losses in the previous period were considerable higher, for example in 2012, when the project for the installation of new meters started, losses were 541, 04 GWh. b) Interruptions in the distribution system for electricity

During 2016, the distribution system operator submitted monthly reports on the number and duration of planned and unplanned interruptions at 35, 10 and 0, 4 kV voltage levels.

At 35 kV voltage level there were 317 planed interruptions with a total duration of 791 hours, while unplanned interruptions occurred 1.062 times with a total duration of 2.632 hours.

At 10 kV voltage level there were 2.562 planed interruptions with a total duration of 5.210 hours, while there were 8.720 unplanned interruptions with a total duration of 19.343 hours.

At 0, 4 kV voltage level there were 3.074 planed interruptions with a total duration 10.200 hours, while unplanned interruptions occurred 14.914 times with a total duration of 40.747 hours.

The following diagrams show the number and duration of interruptions in the electricity distribution system during 2016:

Number of interruptions in 2016

35 kV planned 35 kV unplanned 1% 4% 10 kV plannedd 8%

0,4 kV unplanned 10 kV unplanned 35 kV planned 49% 28% 35 kV unplanned

0,4 kV planned 10 kV planned 10% 10 kV unplanned 0,4 kV planned 0,4 kV unplanned

Duration of interruptions in 2016

35 kV planned 35 kV unplanned 1% 3% 10 kV planned 7%

10 kV unplanned 0,4 kV unplanned 24% 52%

35 kV planirani 0,4 kV planned 35 kV neplanirani 13% 10 kV planirani 10 kV neplanirani 0,4 kV planirani 0,4 kV neplanirani

c) Legal unbundling of Elektroprivreda Crne Gore AD Nikšić

The law stipulates that a vertically integrated undertaking that, on the date of entry into force of the law, carried out the electricity distribution activity shall, within three months following entry into force of the law, establish a new legal entity which is to continue carrying out activities of electricity distribution, and shall transfer to such new legal entity all rights and obligations arose until the day of establishment. This legal entity shall, from the date of its establishment, take over the activity of electricity distribution.

In 2016, in accordance with its legal powers, the Agency monitored the dynamics of implementation of the legal unbundling, and regularly reported the Ministry of Economy on the implementation of the supervision.

By the decision of the shareholders’ assembly of EPCG AD Niksic of June 2016, a limited liability company – „Montenegrin Electricity Distribution System“ Podgorica - DOO (CEDIS) was established. It shall perform the electricity distribution activity and have the registered seat in Podgorica.

In the following period, pursuant to the law, the Agency shall monitor the operation of Elektro- privreda Crne Gore AD Nikšić, inter alia, in relation to the independence of the newly established company i.e., fulfilment of legally stipulated conditions for independence. d) Losses in the distribution system for electricity

Total electricity losses in the distribution system in 2016 amounted to 404, 01 GWh, or 15, 62% of the total consumption of distribution consumers, while in 2015 they amounted to 445, 05 GWh, or 17, 07%. The losses in 2016 were lower than the losses in 2015 by 41, 04 GWh, which, calculated at the price determined to cover the losses in 2016 (37, 5709 €/MWh) is a decrease in costs on this basis for 1.541.909, 74 €. The total costs for purchasing electricity to cover the losses in the distribution system (404, 01 GWh) calculated at the price determined to cover the losses (37, 5709 €/MWh) amount to 15.179.019, 31 €. Out of this cost, 8.396.077, 26 € refers to the technical losses that are paid by end users, while 6.782.942, 05 € refers to the cost of losses exceeding the allowed ones.

It should be noted that cost for purchasing electricity to cover losses in the distribution system which exceed those defined by the Agency does not charge the tariffs for end users, i.e. the Agen- cy, when determining the allowed rate of losses, starts from the findings of the Study of losses related to technical losses.

For 2016, the cost of losses that charged customers, was calculated at a rate of 8,64% as contained in the Study on reduction of losses of power and energy in the electricity distribution system of Montenegro submitted by EPCG – FU Distribution, together with a request for the determining the RAR for 2016.

The introduction of the electricity consumption measurement by the „smart” meters system has contributed to a significant reduction in losses in the distribution system. The decrease in losses was due to the relocation of the measurement points to the border of ownership and enhanced control related to the detection of unauthorised consumption.

The following graphics show the losses in percentages and absolute values (GWh) in the distribution system in the period 2012 - 2016.

losses [%] 2012. godina 2013. godina 2014. godina 2015. godina 2016. godina

30,00

25,00

20,00

15,00

10,00

5,00

0,00 jan feb mar apr maj jun jul avg sep okt nov dec

[GWh] 2012. godina 2013. godina 2014. godina 2015. godina 2016. godina

90,00 80,00 70,00 60,00 50,00 40,00 30,00 20,00 10,00 0,00 jan feb mar apr maj jun jul avg sep okt nov dec

The following graphics show the trend of total losses, losses in the distribution and transmission systems in the period 2012 - 2016.

ukupno gubici distribucija gubici prenos 800,00 694,81 700,00 622,05 580,22 600,00 553,91 541,04 522,99 479,63 500,00 431,79 445,05 404,01

400,00 GWh 300,00

200,00 153,77 142,42 122,13 135,17 118,98 100,00

0,00 2012 2013 2014 2015 2016 godina

The table 12 shows the distribution losses by months in 2015 and 2016.

Table 12. The review of distribution losses by months in 2015 and 2016

Losses in the distribution system in 2016 month jan feb mar apr may June July Aug sep oct nov dec Total Energy invoiced to consumers at GWh 208 180 185 152 155 165 200 204 167 165 182 220 2.183 the distribution system Energy entered into GWh 259 220 225 177 181 188 233 233 189 194 218 271 2.587 the distribution system GWh 51 40 40 25 26 23 33 28 22 29 35 51 404 Losses % 19,56 18,12 17,74 14,21 14,54 12,28 14,31 12,21 11,52 15,13 16,29 18,70 15,62

Losses in the distribution system in 2015 month jan feb mar apr may june july aug sep oct nov dec Total Energy invoiced to consumers at GWh 208 187 189 162 149 159 206 210 167 156 168 201 2.161 the distribution system Energy entered into GWh 267 238 235 197 173 183 243 242 189 184 203 250 2.607 the distribution system GWh 59 51 46 36 24 24 37 32 23 28 35 49 445 Losses % 22,03 21,48 19,76 18,11 14,01 13,13 15,25 13,25 11,89 15,38 17,46 19,60 17,07

e) Control of measuring point

In 2016, CEDIS carried out 43.440 controls of measuring points in order to test the correctness of the measuring points. Based on the determination of the existence of unauthorised consumption, there were 429 suspensions in the supply of electricity. Out of that number, 139 customers fulfilled the condition for continuing to be supplied with electricity, so that they are again connected to the distribution system. f) Quality parameters of the distribution system operator

The Agency conducted several controls relate to the quality of electricity supply in the distribution system operator related to: establishing a system for collecting and submitting data on the quality of supply, keeping records of data necessary for determining the quality of electricity delivered, data on the number, duration and frequency of interruptions, creation of software for data collection and planning of the SCADA system and planned funds for this purpose.

The controls determined that:

CEDIS records data on interruptions with customers connected to 35kV, 10 kV and 0,4 kV voltage level; Within the system for recording data on interruptions, there has been an improvement in com- munications between the CEDIS services responsible for data collecting and monitoring interruptions in certain regions; The Distribution system operator works on the establishment of the regional centres for collecting data on interruptions; CEDIS takes activities on defining the terms of references for the selection of a consultant, who should prepare the tender documentation for the implementation of the SCADA system; Completion of the implementation of the SCADA system, which is used for monitoring and managing the electricity system and collecting data on the system, is possible at the earliest in 2020.

2.3.2. Montenegrin Electricity Transmission System AD Podgorica

Controls were carried out on the following topics:

a) Interruptions in the transmission system

The functioning of the electricity transmission system is inevitably followed by circumstances that lead to planned and unplanned interruption in the functioning of the system. Such situations are more difficult to avoid as much as possible by an adequate management of the system and its improvement and maintenance, but, besides, in certain outages of the elements of the system and the specific configurations of the network, there are interruptions in the supply of consumers.

Based on data provided by CGES in 2016, it was found that there were 194 interruptions in the transmission system. Out of that, 29 were planned and 165 unplanned interruptions (9 interruptions were due to emergency works, and 156 interruptions due to weather conditions).

Due to these interruptions, 633,372 MWh of electricity were not delivered, while the average interruption time in the transmission system amounted to 40, 87 minutes.

b) Losses in the electricity transmission system

In 2016, the losses in the transmission system amounted to 118,983 GWh or 2,03% calculated in relation to the total energy entered the transmission system (including transit), while the losses in the transmission system calculated in relation to the energy delivered for domestic consumption amounted to 108,125 GWh or 3,46%.

The decision on establishing the RAR of the transmission system operator for 2016 laid down the cost for purchase of electricity to cover the allowed losses in the transmission system by applying the loss rate of 3, 60%, while the realised loss rate in 2016 is 3, 46%, calculated with net consumption in the transmission system of 3.124,106 GWh. The cost of purchasing of electricity to cover the losses in the transmission system for domestic consumption (108,125 GWh) is calculated at the price determined for covering the losses (37, 5709 €/MWh) in the amount of 4.062.353, 56 €.

c) Implementation of compensation plans

CGES, the transmission system operator of the Republic of Serbia and the transmission system operator of the Republic of Macedonia constitute one control zone. In 2016, CGES provided data on the implementation of compensation plans within the specified control zones at a daily level. Analysing the data provided, it was determined that the total undesirable deviations during the whole 2016 were within the allowed deviations, which indicates the quality work of CGES within the interconnection.

d) Cross-border capacity allocation

The allocation of cross-border capacities is carried out in accordance with the capacity auction rules adopted by the system operators – the founders of the Coordinated Auction Office (SEE CAO). In accordance with these rules, the auctions are conducted at the borders with Bosnia and Herzegovina and Albania. The auction rules for cross-border capacities, adopted by CGES, regulate the allocation of capacities at the border with the Republic of Serbia.

The auction of cross-border capacities in 2016 were carried out at the annual, monthly and daily levels.

The following table shows data on revenues generated on this basis during 2016:

Auction Revenue (€)

Annual 1.695.911,94 Monthly 456.150,41 Daily 440.277,46 Intra-day -248.084,36 BALANCE 2.344.255,44

The revenue from auction of cross-border capacities, in the process of determining the regulatory allowed revenue of the transmission system operator, is treated as other revenues and is the amount to be deducted from the revenue transferred to the tariff for system users.

e) Certification of the transmission system operator

The law stipulates the procedure for certification of the transmission system operator and defines that it should be initiated by the transmission system operator, by the Agency acting in official capacity, or by the competent body of the Energy Community. It further stipulates that the Agency, within 12 months following the date of entry into force of the law, adopts the rules on certification, which, inter alia, prescribes the documentation on the basis of which the fulfilment of the conditions for issuing the certification is valued. Although the deadline for the adoption of this Act is January 2017, the Agency, taking into account the obligations of Montenegro arising from the signature of the Memorandum of understanding, the aim of which is the implementation of the so-called „soft measures “in the field of energy, determined these rules in July 2016 and thus created conditions for the transmission system operator to submit an application in timely manner.

Considering that this is a very significant activity introduced by the Third Energy Package and whose implementation is essential for achieving the cross-border electricity trade, the Agency has intensively cooperated with the transmission system operator in the preparation of documents for the application for a certificate.

At the moment of compiling this report, the Agency was in the process of reviewing the request of CGES for certification.

2.3.3. Elektroprivreda Crne Gore AD Niksic

Controls were conducted on the following topics:

a) Complaints to the supplier and suspension of electricity supply

Data on complaints submitted to the supplier in 2016 are shown in the table 13 as follows: by type, number and method of their solving

Table 13. Data on complaints submitted to the supplier in 2016

Resolved in Type of complaint unfounded favour of cus- Total tomers Amount of the bill 1204 641 1845 The bill-unread state 49 3953 4002 Non-delivery of the bill 0 3 3 Over-read state 233 961 1194 Payment reclamation 11 528 539 Notification of malfunctioning of the meter 443 61 504 Warning on suspension of electricity supply 19 60 79 Suspension of electricity supply 31 65 96 Non-connection 1 3 4

In order to collect claims arising from electricity bills, at the order of the supplier, there were 25.905 suspensions of electricity supply, which is 25, 54% less than in 2015.

b) Invoiced realization of electricity

During 2016, EPCG provided data on invoiced realization and achieved import and export of electricity on a monthly basis.

By analysing the submitted data on invoiced realization, it was determined that electricity consumption was 6, 3% lower than planned by the Energy balance for 2016. The consumption of direct consumers, which was 30, 81% lower than planned, affected the percentage of consumption achieved. Distribution customers achieved the consumption which was 3, 92% higher more energy than planned.

Within the distribution customers, the biggest deviation in consumption compared to the planned one was with customers with one-tariff measurement (householders by -32,37% and other by - 30,92%), while other categories of distribution customers achieved higher consumption than planned (the largest deviation was with 0,4 kV distribution customers with power measurement by 11,2%).

During 2016, EPCG exported 904.613 MWh of electricity at an average price of 41, 30 €/MWh, i.e. in the total amount of 37.367.634 €.

At the same period, EPCG imported 743.752 MWh of electricity at an average price of 36, 30 €/MWh, i.e. in the total amount of 27.009.347 €.

During 2016, EPCG, as a provider of ancillary services, generated revenue in the amount of 2.965.754, 53 €.

2.3.4. Montenegrin Electricity Market Operator

In 2016, the Agency supervised the work of the Montenegrin electricity market operator (COTEE) in relation to: calculation of energy and financial settlements of the balancing mechanism, calculation of electricity purchase from renewable sources, revenue and expenditures from the activities for which the Agency determine compensation, the method of calculating the quantitative deviation from the delivery and receipt timetables, as well as financial calculation and the manner of performing control over the financial settlement of deviations.

The controls determined that the balancing mechanism is carried out in accordance with the market rules, i.e. the suppliers and other balance responsible undertakings pay compensation to COTEE for quantitative deviations.

It was noted that within the application of the balance mechanism, i.e. after the payments made by the supplier, and transfer of the fund to CGES, there were unused funds on the COTEE`s account. Differences were made between data submitted for timetables of individual market participants and achieved values, i.e. there were excessive deviations compared to reported ones, which was the main reason for the imbalance, and on that basis the creation of surplus of fund.

In July 2016, the Agency made decision obliging COTEE to transfer the surplus of fund, which remained on the accounts of the company after all payments were made within the balance mechanism from 2015 – calculation of deviations and financial settlements of the participants in the electricity market, to the CGES`s account. In the process of determining the regulatory allowed revenue for the transmission system operator, these funds were treated as other revenue for the amount of which the revenue was reduced and transferred into the tariff for end users.

According to the procedure and conditions prescribed by the Market Rules, during 2016, COTEE signed several contracts on participation in the electricity market of Montenegro. At the end of 2016, there were a total of 48 participants, out of which 37 traders, 4 suppliers (EPCG, Montenegro Bonus, Uniprom and Uniprom – customer-self-supplier) and 6 producers (EPCG and five producers of electricity from sHPPs), and the transmission system operator that purchase electricity to cover its own losses, while EPCG appears as a producer, trader and supplier of energy.

2.4. Activities in the area of oil and gas

In 2016, the representatives of the Agency controlled the operation of the licensed undertakings in the area of oil and gas, regarding the fulfilment of conditions prescribed by the license for carrying out the activities, particularly with regard to the maintenance of measure devices and fire protection appliances, compliance with environmental protection regulations, and regulations related to quality control of petroleum products.

Controls were carried out at the registered seats of the companies and at gas stations, i.e. other facilities where licensed which related to the sale of petroleum products (retail and wholesale trade), storage and transport were performed.

During 2016, there were 65 controls: 23 controls at the registered seats of companies, 41 at the gas stations and one control at warehouse installations in Bar.

At the registered seats of companies the control was carried out regarding the following:

 Changes in relation to data submitted when applying for a license, i.e. following the day of the last control by representative of the Agency,  Checking the compliance with the obligation to do business only with licensed undertakings, and  Checking the method of performing petroleum products procurement and reviewing appro- priate supporting documentation, and documentation related to the transport means.

At the gas station and warehouse installations, the control included the operation of undertakings in relation to the obligations prescribed by the licenses, which relate to compliance with the law governing safety at work, environmental protection, fire protection, as well as the quality of petroleum products and periodic reviews of measuring devices and pressure vessels. In accordance with these obligations, the following documentation was analysed and reviewed:

 Certificates on professional exam for persons performing activities of technical management, maintenance, exploitation and handling of energy objects,  record of the control of the liquid fuels and/or LPG dispenser,  certificate of control of fire protection appliances,  delivery note based on which fuel and/or LPG was received, with a particular emphasis on compliance with the obligation to do business only with licensed undertakings,  certificate of quality of fuel and/or liquid petroleum gas,  reports on the testing of lightening and electrical installations, and  Tank volume table.

After the controls were conducted, the reports containing the assessment of the fulfilment of the conditions foreseen by the law and by-laws were prepared. During 2016, no irregularities were found in the work of the controlled undertakings.

3. Investments in the Energy Sector

3. INVESTMENTS IN THE ENERGY SECTOR

3.1. Montenegrin Electric Distribution System

Investment foreseen by the 2016 Plan, are classified by groups of fixed assets as follows:

1. Primary network (35 kV lines, 35/10 kV substation, 10 kV plants in SS 35/10 kV); 2. Secondary network (10 kV lines, 10/0,4 kV SS, 0,4 kV lines); 3. Measuring points (meters for new consumers and reconstruction of measure sites and meters replacement); 4. Other investments (neutral grounding and development of Oracle E-Business Suite software); 5. Other fix assets (vehicles, computer equipment, machines and tracks with crane and platform); 6. Purchase of land (land for the construction of buildings).

Total realized value of all investment plans for the period 01.01.- 31.12.2016 amounts to 23.033.097 €, out of which 1.948.028 € refers to investment plans approved for 2016, 13.314.935 € refers to investment projects approved for the period 2014 - 2015, 1.982.323 € refers to investment projects approved for the period 2012 – 2014, 89.667 € refers to investment projects approved for 2017, and 5.698.144 € refers to investment projects approved and realised in 2016.

Table 14. Overview of investments for 2016:

2016

No DESCRIPTION Plan Realization (€) (€) 1 2 3 1 Primary network 806.386 176.585 2 Secondary network 2.584.679 1.304.961 3 Measuring sites 336.134 198.281 4 Other investments 725.840 4.160 5 Other fix assets 436.973 264.041 6 Land purchase 50.000 0 I 2016 Investment Plan (1+2+3+4+5+6) 4.940.012 1.948.028 II Special decisions of RAE for 2014 and 2015 13.314.935 III Investment Plan for the period 2012-2014 1.982.323 IV 2017 Investment Plan 89.667 V Non-planned investments 5.698.144 TOTAL (I+II+III+IV+V) 23.033.097

The investment plan for the primary and secondary network was realised in a smaller amount due to a long duration of public procurement procedure, the lack of or non-existence of detailed urban plans and unresolved property-legal relations.

Investment in the primary network

The primary network includes: 10 kV plants in 110/10 kV SS, 35 kV lines, 35/10 kV SS and 10 kV plants in 35/10 kV SS. At the level of the primary network, the main tasks are the expansion of the network in order to meet growing demand and increase in security of supply, as well as bringing the plant into a state to meet technical standards. The planned investments in the primary network

mostly relate to the reconstruction of 110/10 kV and 35/10 kV substations with most of them using obsolete technologies with air-insulated classical medium-voltage cells, short-circuit switches and electro-mechanical relay protection. In addition, works were planned on the construction of 35 kV lines necessary in terms of more secure supply of customers and purchase of electricity produced from renewable.

The 2016 Investment plan foresees the investment in the primary network in the amount of 806.386 €, and by 31.12.2016 the amount of 176.585 € was realised.

Investment in primary network by facilities:

Reconstruction of 35/10 SS kV Novi Obod – In the substation 35/10kV Novi Obod, currently there are low oil switches located in the cells T1, T2 and Cetinje 4, type M-38-12-8, whose producer is Rade Končar, and in 35 kV SS Cetinje 3 is the switch Energoinvest, type HG 7/8C, while in the 10 kV plant are low oil switches of type Rade Končar 12-16-8. Switches are old over 30 years and a number of manipulations have been made on them. For this reason, it was necessary to replace four 35 kV and eight 10 kV switches with new vacuum switches that are much more reliable and technologically justified. Works on the mentioned investment have been completed and the investment was realised in 2016.

Reconstruction of 35/10 kV SS Šavnik – in the substation 35/10kV Šavnik, currently there are low oil switches of the producer Minel. Switches are over 30 years old, a number of manipulations have been made on them and they are in rather poor state according to the result of testing the voltage drop at the contacts of the switch. For this reason, it is necessary to replace four 10 kV switches with new vacuum switches which are more reliable and technologically justified. Works on these investments have been completed, and the investments was realised in 2016.

Reconstruction of 35/10 kV SS Čanj – In the substation 35/10kV Čanj, there are low oil switched produced by Rade Končar Type: 12-16-8. The switches are over 30 years old, a number of manipulations have been made on them and they are in rather poor state according to the result of testing the voltage drop at the contacts of the switch. For this reason, it is necessary to replace five 10 kV switches with new vacuum switches which are more reliable and technologically justified. Works on these investments have been completed, and the investments was realised in 2016.

Construction of 35/10 kV SS Novi Ulcinj – the existing 35/10kV 2x8MW SS Grad is overloaded as shown by the result of measuring the load. The increase in customers standard, and thus the increase of peak load, insufficient capacity in the transformation 35/10 kV, insufficient number of 10/0, 4 kV substations in this area, the construction of new housing units and the emergence of new consumers, which lead to the fact that the existing condition of the substation does not meet the needs of consumers for electricity. Taking all this into account, it was necessary to build a new 35/10kV SS Novi Ulcinj, which will meet necessary conditions both in the energy and in terms of requirements of the technical regulation. During 2016, the construction contract was concluded and the main project was completed. Completion is planned by the end of 2017.

Construction of 35 kV transmission line to fit 110/35 kV SS Brezna – The construction of a transmission line is necessary in order to be harmonised with the CGES Plan related to the construction of 400/110/35 kV SS Brezna and create the possibility to connect the Krnovo wind farm, i.e. connect the WF to 110 kV SS Brezna (connected to the future 110/x kV Kličevo) and to fit 35 kV network in 110/35 kV SS Brezna. The works on the abovementioned investment have been completed, and the investment was realised in 2016.

Installation of 8MVA transformer in 35/10 kV SS Velika plaža in Ulcinj – The existing SS 35/10kV 2x4MW Velika Plaža 2 is overloaded, as a result of the increase in consumer standards, and thus the increase of peak load. Insufficient capacity in the transformation 35/10 kV is partly caused by the construction of new housing units and the emergence of new consumers, which lead to the fact that the existing condition of the substation does not meet the needs of consumers for

electricity. Taking all this into account, it is necessary to replace a 4MVA transformer with a transformer of 8MVA in SS 35/10kV Velika Plaža, which will meet the needs both in the energy and in terms of requirements of the technical regulation. During 2016, a public invitation was announced. Decision on selection of the most favourable bidder is in progress. The completion of the work is planned for the end of 2017.

Installation of 4MVA transformer in 35/10 kV SS Čokrlije – in order to increase the capacity in 35/10 kV SS Čokrlije and to create the possibility to connect planned facilities for agricultural production in the area of the municipality of Bijelo Polje, it is necessary to install a power transformer of 4MVA. The works on this investment have been completed, i.e. the investment was realised in 2016.

Construction of 35 kV cell in 35/10 kV SS Baošići – In order to create the possibility to connect the planned 35 kV transmission lines in the Herceg Novi area, it is necessary to construct another cell of 35 kV in TS 35/10 kV SS Baošići. Following the construction of this extraction cell, and later the construction of 35 kV lines, the possibility is created for the reserve power supply of consuming area of 35/10 kV substations Kumbor, Baošići, Bijela and Klinci. During 2016, the tender procedure was prepared. The completion of works is planned for the end of 2017.

Construction of 35 kV TL Andrijevica – Gusinje – Substations 35/10kV Plav and 35/10kV Gusinje, i.e the area of the municipalities of Plav and Gusinje, are supplied radially through 35kV line from 110/35kV SS Andrijevica to 35/10kV SS Plav and 35/10kV SS Gusinje. Any failure on this line or maintenance works causes suspension of electricity supply. In order to provide two-way power supply to the Gusinje and Plava areas, a new 35kV line from the SS 110/35kV Andrijevica to SS 35/10kV Gusinje needs to be built. An additional reason for planning the construction of this transmission line is the fact that construction of a significant number of small hydro power plants is planned in the Plav and Andrijevica area. The construction of this transmission line creates the necessary conditions for connection of small hydro power plants, whose connection is expected at 35 kV voltage level. The realisation of the investment delays due to luck of spatial planning documents for the construction of this facility.

Construction of 35 kV cable line Jezerine – Lubnica – in the past period, several small hydro power plants were connected in the Berane area. In order to connect small power plants, investors have built 35 kV cable connections and facilities, and it is planned to connect the existing small power plant Jezerštica to 35 kV level. In the area under consideration, in the region of Bjelasica, the construction of winter tourist centres is planned (due to which the construction of SS 35/10 kV Jezerine is in the plan) and the construction of a significant infrastructure facility, the Klisura tunnel on the Lubnica – Jezerine road. The construction of the cable line 35 kV KB Jezerine – Lubnice is planned for several reasons: mutual backup supply for a part of consumption areas of Kolašin and Berane, creating opportunities for connecting tourist centres, creating opportunities for connecting the electrical equipment of the Klisura tunnel and increasing the safety of electricity delivery from the constructed and planned small power plants. The realisation of the investment delays due to luck of spatial planning documents for the construction of this facility and the construction of the tunnel and Jezerine-Lubnice road.

Investment in the secondary network

The 2016 Investment plant foresees the investments in the secondary network in the amount of 2.584.679 €, and the realised investments until 31.12.2016 amounted to 1.304.961 €.

Total planned investments in 2015 which relate to the investment projects in the secondary network are allocated by electric distributions based on the number of consumers, the rate of consumption growth, the length of the lines and the projects proposed by distributions, depending on their feasibility (resolution of property rights and investment-technical documentation). The planned investments in the secondary network mostly relate to the reconstruction of substations and 10 kV lines, since that in the previous period, particularly in 2014 and 2015 there were a large number of fail-

ures and power interruptions. In 2016, 179 investment projects were planned, out of which 39 relate to the construction or reconstruction of cable and overhead lines, and 140 to the construction or reconstruction of substations and other elements of the network (re-closers, switchgear).

The investment called "Measuring sites" is foreseen by the 2016 Investment in the amount of 336.134 €, out of which, as of 31.12.2016, the realisation amounted to 198.281 €.

"Other investments" include investments in neutral grounding and software application. In 2016, there were no investments in the neutral grounding, but contracts were signed for the realization of the investment and the realisation is expected in 2017. Concerning the investment in software application, the activity on the realisation of the investment – development of the Oracle E-Business Suite software is close to the end. The terms of references are prepared for this investment and, tender is expected to be launched.

The investments called “other fix assets", consist of several groups: vehicles, computers, and trucks with a crane and a basket. This investment is planned in the amount of 436.973 €, and is realised as of 31.12.2016 in the amount of 264.041 €.

The investment "purchase of land" is connected with investments in the primary and secondary network, and due to realisation problems in the primary and secondary network resulted from property-legal relations (land expropriation), there was no land purchase in 2016.

During 2016, besides planned investments for this year, the following investments were realised: approved by special RAE` decisions for 2014 and 2015, launched but not completed in 2012, launched but not completed in 2013, launched but not completed in 2014, approved for 2017 and investments not included in the investment plan. The total value of these investments for 2016 amounted to 21.085.069 €.

3.2. Montenegrin electricity transmission system AD Podgorica

All planned investment projects were processed in 2016. Below is the description of the investment project and activities, which were conducted in 2016.

Related infrastructure for construction of submarine cable Italy - Montenegro

The implementation of the High voltage Submarine Cable Project between Montenegro and Italy is a commitment from the Contract on Coordination of the Project for the Implementation of the High Voltage Submarine Cable between Montenegro and Italy and is necessary for connecting energy systems of Montenegro and Italy.

Within the related infrastructure, the substation SS 400/110/35 kV “Lastva” with capacity of 2x300 MVA will be built, and the existing substation 400/220/110 kV “Pljevlja 2 will be expanded”. The 400 kV TL Lastva-Čevo Project means the construction of two transmission lines 2x400 kV and 400 kV with the length of around 35 km, which will connect SS “Lastva” to the EES of Montenegro, by its imbedding into the existing TL 400 kV Podgorica-Trebinje and connecting with SS TS Pljevlja, by the construction of a section of 400 kV Lastva-Pljevlja TL from Lastva Grbaljska to Čeva. The 400 kV TL Čevo-Pljevlja Project means the construction of a section of 400 kV transmission line from Čevo to Pljevalja with the length of around 115 km, of which a two-system line in the length of 40 km (400 + 110 kV) in on the section from Brezana to Kosanice. This project will close an internal Montenegrin ring and improve the reliability of the energy system.

For a part of the project relating to the substation Lastva, the construction and electrical-installation works were planned in the 400/110/35 kV SS Lastva for 2016. Within the existing substation 400/220/110 kV Pljevlja 2, after obtaining a construction permit, works will be conducted on the construction of a new 400 kV transmission line Lastva in order to connect the future transmission

line. In 2016, the development of the Main Project with all necessary elaborates was completed and submitted to the Ministry of Sustainable Development and Tourism for obtaining an updated construction permit. After acceptance testing, around 95% of the equipment was delivered. Con- struction works on GIS buildings (400kV and 110kV) were completed; the equipment was installed and tested. Works on access roads, cross-road and drainage channels have been completed. Works started on the drive-command building, doorman building and warehouse were launched. Works on the formation and protection of slopes around the substation and drainage system were continued. A large part of the substation grounding is installed. About 75% of all planned works were completed. A Construction permit was obtained for Pljevlja 2 SS, but the realisation was de- layed due to bad weather conditions.

For the part of the project related to the Lastva-Čevo overhead line, for 2016, the design and revision of the main project, construction and electric-installation works were planned. In 2016, the completion and revision of the main project was completed, with the exception of the last modifica- tion of the route in Pobore (the route was modified several times, the last time in August). Works were conducted to resolve property-legal relations, access was provided on about 75% of the routes. The delivery of equipment is completed in the scope of 60%; the rest of the equipment is in the production. The punching of access roads is almost completed on the part of the route on which access is provided. Works on the construction of the foundation are in progress, the installation of the pillars started, but the dynamics are extremely poor, so that the new expected completion date is January 2018. The implementation of the contract is followed by a series of problems and CGES makes efforts and takes all necessary measures to improve the contractor`s performance dynamics.

For the part of the project related to the Čevo-Pljevlja overhead line, for 2016, the completion of the design documentation, building and electrical-installation works were planned. In 2016, activities were conducted on the design and revision of the project documentation for: two-system pillars, single-system pillars, main project for two-system section of the overhead line, 110 kV cable project – connection for Brezna SS, and 110 kV connection Žabljak. After acceptance testing, about 50% of the equipment was delivered, including the complete conductor and OPGW, the Brezna connection cable and accompanying equipment, as well as a part of the suspension equipment, insulators ad pillars. Works on the part of the two-system section Brezna-Njegovuđa were carried out on the following: construction of access roads, excavation of foundation pit, concreting of foundation, installation and covering of grounders, installation of pillars. Around 8% of the total planned works were completed. The realisation of all planned activities is around 36%. Large-scale activities were undertaken to resolve property-legal relations, as well as to relocate the transmission line from the narrow zone of sanitary protection of water resources of the Diva water factory and to harmonise the final route. As the contractual deadline expired on 25.12.2016, in accordance with the general and special conditions of the contract, and with the approval of the EBRD, an amendment was signed, by which the contractual deadline is extended by 6 months. This is the period for which the transmission line route and the variation that will define the deadline for the completion of works are expected to be coordinated with the relevant institutions and interested parties.

Additional infrastructure for the construction of submarine cable Italy – Montenegro

The construction of the 400 kV transmission line Pljevlja 2-Višegrad and the 400 kV transmission lines Pljevlja 2-Bajina Bašta represent the implementation of projects related to the additional infrastructure for the construction of the submarine cable Italy – Montenegro, and it is necessary to enable a secure delivery of energy through submarine cable.

In the previous period, Electric Power Coordination Centre DOO Belgrade has developed the network study required to show which connection is more preferable for construction (with Serbia or with B&H). The study showed that 400 kV connections with Serbia are more preferable. This project will be funded from the European Commission grant, so that tender will not be announced in accordance with the law on public procurements. After signing the contract with KFW bank, the tender will be announced in accordance with their procedures. In 2016, the activities on the imple-

mentation of the project, which will be funded from the grant, were implemented. An application for the issuance of the Urban-Technical Conditions (UTU) was sent to the Ministry of Sustainable De- velopment and Tourism. It was rejected. A meeting was held in the Ministry of Sustainable Devel- opment and Tourism regarding the provision of conditions for obtaining the UTC, followed by the preparation of an application for the development of a planning document necessary for the construction of the 2x400 kV transmission line Pljevlja 2 - Bajina Bašta.

Other projects

In addition to the above projects concerning the associated additional infrastructure related to the construction of the submarine cable Italy -Montenegro, CGES investment plan included activities on the following projects:

Construction of 110/35 kV Luštica SS and its connection to the network SCADA for new dispatch centre with EMS system (including the evaluation of the N-1 security factor in EES in a real time) Construction of 110/10(20)kV Nikšić (Kličevo) SS and connection lines 110kV Construction of 110kV TL Virpazar-Ulcinj Reconstruction of Podgorica 2 SS (procurement, preparation of tender document and installation of 400/110 kV, 300 MVA transformers) Construction of 110/35/10kV Kotor (Škaljari) SS and 110kV DV Tivat-Kotor Emergency poles Revitalization of 110 kV TL (equipment replacement and reconstruction) Development, reconstruction, measurement and protection in SS 110/10 kV Podgorica 4 SS, providing two-way supply at 110 kV Expansion of 220/110/35kV SS Mojkovac and connection to 220kV TL Podgorica 1-Pljevlja 2 under the “entrance-exit” principle Integral information system OPS Revitalization of TS 110/35kV Nikšić SS (rehabilitation of concrete portals) Revitalization of 110 kV Budva - Podgorica 2 TL Other investments Reconstruction of 110 kV TL Lastva – Tivat - II phase Reconstruction of 110 kV TL Budva – Lastva Hardware and software for re-implementation of the financial management information system (FMIS) - Data Code Expansion of SCADA system with a module for observability of external systems Construction of 110/35 kV Zeta SS and 110kV TL Podgorica 5 - Zeta (Golubovci) Construction of 110 kV TL Vilusi - Herceg Novi Construction of 110 kV TL Lastva - Kotor Module for providing data in the Transparency platform r2 Reconstruction of protection system in the whole network Replacement of HV equipment in substations Construction TS 400/110/35 kV Brezna Replacement of transformer 30MVA in Nikšić SS Reconstruction of 400kV plant in Pljevlja 2 and Ribarevine SSs and installation of arrester in all TL fields in the transmission network and MT Relocation of 110 kV Nikšić - Bileća TL from Dragove Luke Other investments

Reconstruction of 110 kV TL Bar - Budva Upgrade of the telecommunication system Delivery and installation of OPGW cable on 110 Kličevo – Brezna TL and telecommunication equipment in Kličevo and Brezna SSs Relocation of a part of 400 kV Ribarevine-Peć TL Improvement of hardware and software in NDC SCADA system

The following table shows an overview of all projects with values achieved in 2016:

Table 15. Realization of investments in 2016

Realized in No. PROJECT 2016 (x1000 €) 1. Construction of 400 kV TL Lastva - Pljevlja (ČEVO-PLJEVLJA) 2. Construction of 400/110 kV SS Lastva 23.622 Diversion of 400kV TL Podgorica 2-Trebinje and entrance-exit to Lastva (Last- 3. va-Cevo) Construction of 110/35 kV SS Luštica and its connection to the transmission 4. 16 network SCADA for new dispatch centre with EMS system (including the evaluation of 5. 1.042 N-1 security factor in the EES in a real time) 6. Construction TS 110/10(20)kV Nikšić (Kličevo) and connection lines at 110kV 2.450 7. Construction 110kV DV Virpazar-Ulcinj 11 Reconstruction of TS Podgorica 2 SS(procurement, preparation of tender doc- 8. 4 ument and installation of 400/110 kV, 300 MVA transformer) 9. Construction of 110/35/10kV Kotor (Škaljari) SS and 110kV TL Tivat-Kotor 488 10. Emergency poles 575 11. Revitalization of 110 kV TL (equipment replacement and reconstruction) 192 12. Development, reconstruction, measurement and protection in SS 578 13. SS 110/10 kV Podgorica 4, providing two-way supply at 110 kV 323 Expansion of 220/110/35kV SS Mojkovac and connection to 220kV TL Podgo- 14. 245 rica 1-Pljevlja 2 under the “entrance-exit” principle

15. Integral information system OPS 0 16. Revitalization of SS 110/35kV Nikšić (rehabilitation of concrete portals) 121

17. Revitalization of TL 110 kV Budva - Podgorica 2 0 18. Other investments 173 19. Reconstruction of 110 kV TL Lastva – Tivat - II phase 22 20. Reconstruction of 110 kV TL Budva – Lastva 20 Hardware and software for re-implementation of the financial management 21. 20 information system (FMIS) - Data Code Expansion of SCADA system with a module for observability of the external 22. 33 system Construction of 400kV TL Pljevlja 2 - B. Basa and Construction 400 kV Pljevlja 23. 43 2 - Višegrad Construction of 110/35 kV Zeta SS and 110kV TL Podgorica 5 - Zeta (Golu- 24. 2 bovci) 25. Construction of 110 kV TL Vilusi - Herceg Novi 3 26. Construction of 110 kV TLV Lastva - Kotor 17 27. Module for providing data on the Transparency platform r2 3

28. Reconstruction of the protection system in the whole network 21 29. Replacement of HV equipment in substations 251 30. Construction of 400/110/35 kV Brezna SS 11 31. Replacement of 30MVA transformers in Nikšić SS 80 Reconstruction of 400kV plants in Pljevlja 2 SS and Ribarevine SS and instal- 32. 348 lation of arrester in all TL fields in the transmission network and MT 33. Relocation of 110 kV TL Niksic-Bileca from Dragove Luke 12 34. Reconstruction of 110 kV TL Bar - Budva 85 35. Upgrading of the telecommunication system 7 Delivery and installation of OPGW cable on TL 110 Kličevo – Brezna and tele- 36. 27 communication equipment in SS Kličevo and SS Brezna 37. Relocation of a part of 400 kV Ribarevine – Peć TL 0,6 38. Improving the hardware and software in NDC SCADA system 0,28 T O T A L 30.846 The financial realisation of the planned investments of CGES for 2016 amounted to 87 %.

This chapter does not present the realisation of investments in 2016 for Electric Power Industry of Montenegro AD Nikšić, because by the deadline for submitting the Proposal of the Report on the situation in the Energy Sector of Montenegro in 2016 to the Parliament of Montenegro, Electric Power Industry of Montenegro did not adopted the 2016 Business Report, the integral part of which is the information on the realisation of investment.

4. Financial Operation of Energy Un-

dertakings in 2016

4. FINANCIAL OPERATION OF ENERGY UNDERTAKINGS IN 2016

4.1. Operation of the Electric Distribution System DOO Podgorica

The Montenegrin Electric Distribution System DOO Podgorica (CEDIS) is an independent legal entity with the license for carrying out electricity distribution activity. The company CEDIS DOO Podgorica was established on the basis of the Decision on the establishment of limited liability company made by the EPCG`s Board of Directors, adopted by the shareholders’ assembly on 23 June, 2016. Since 1 July, 2016 the company has been operating independently. The company is 100% owned by EPCG, operates within the unique Montenegrin electricity system and handles electricity distribution activities.

In accordance with the aforementioned decision, and based on the monetary assets in the amount of 8.500.000€, and non-monetary assets in the amount of 269.601.754 €, the total value of the formation capital amounts to 278.101.754€.

Non-monetary assets include assets that are in function of performing the electricity distribution activities.

In addition to non-monetary assets, CEDIS’s assets increased for the value of assets transferred in the amount of 11.639.246 € as property in possession for which, at the date of formation of CEDIS, the founder have no proof of ownership, so that as such the property could not be transferred to the formation capital.

As at 31.12.2016, the company had 1.306 employees. a) Results of operation for the period 01.07 - 31.12.2016.

CEDIS DOO Podgorica, since its formation, i.e. in the period 01.07.-31.12.2016, generated operating revenue in the amount of € 43.219.790.

In the structure of revenues, 97% (€ 41.928.503) of total revenues, i.e. its major part are revenues from the use of the distribution capacity and revenues from an approved percentage of network losses.

Other revenues from the sale of goods and services, with other operating revenues amounted to 1.291.286€, and they are mostly from unauthorised consumption, connections and reconnection of distribution consumers and make 3% of the total operating revenues.

Total operating revenues for the reporting period amounted to 50.585.741 €.

Total operating expenditures include:

electricity purchase costs in the amount of €8.017.608, i.e. 15.8% of operating expenditures, Costs of raw and basic materials € 2.137.910 (4, 2%), Costs of salaries, fringe benefits and other personal expenses €13.665.641 (27, 0 %), Depreciation and provisions €23.463.371 (46,4%) and Other operating expenditures €3.301.211 with a share of 6, 5 % in operating expenditures. Negative business result derived from operating activities as a difference between operating revenues and expenditures amounted to 7.365.951 €. Negative financial net result of €8.401 is the dif-

ference between financial revenues (€1.637) and financial expenditures (€10.048), while negative net result from other activities amounted to €801.349.

The total negative operating result, after deferred tax expenses of the period amounting to €774.436 as at 31.12.2016, was € 8.950.147.

The company`s assets, as at 31.12.2016, amounted to 328.9 mil €, with a share of fixed assets of 80%, or 262 mil €.

Long-term liabilities and long-term provisions as at 31.12.2016 amounted to €27.7 mil, while short- term liabilities and short-term provisions as at 31.12.2016 amounted to € 31.3 mil.

Note: these are preliminary data because the 2016 financial statements have not yet been revised.

4.2. Operation of the Montenegrin Electricity Transmission System AD Podgorica

Montenegrin Electricity Transmission System (CGES) operates as an independent legal entity since 01.04.2009, after its unbundling from EPCG. The total number of share of the company, as at 31.12.2016, was 7.642. The State of Montenegro owns 55% of the shares, a strategic partner, Ital- ian transmission system operator Terna Rette Elettrica Nazionale SpA-Italija owns 22,09%, custo- dial account 12,38%, natural persons 7,56 %, funds and joint ventures 1,63%, and legal persons 1,34%.

Država 55,00%

Terna - Rete Elettrica Nazionale SpA, Italija 22,09% Zbirni kastodi račun 12,38%

Fizička lica 7,56%

Fondovi zajedničkog ulaganja 1,63% Pravna lica 1,34%

a) Result of operation in 2016

According to the report on operation for 2016, CGES generated total revenue in the amount of 30, 2 mil €, coming from: the use of transmission network in the amount of 17, 60 mil. €, capacity allocation in the amount of 2, 80 mil. €, compensation for losses in the transmission network in the amount of 5, 00 mil. €,

balancing and ancillary services for 3, 50 mil. €, other operating revenues in the amount of 1, 3 mil. €.

In the same period, CGES generated expenditures in the amount of 27, 50 mil €, coming from:

costs of employees in the amount of 6,0 mil. €, costs of material in the amount of 0,2 mil. €, costs of third parties services in the amount of 1,9 mil. €, costs of balancing and ancillary services 4,3 mil. €, costs of losses in the transmission network 5,3 mil. €, costs of depreciation and provisions 7,2 mil. €, other operating expenditures in the amount of 2,6 mil. €.

In 2016, CGES generated net financial costs in the amount of 0, 1 mil. €.

Pre-tax profit is 2, 70 mil. €, and post-tax profit is 2, 40 mil. €.

Table 16. Comparative review of the approved and generated costs in 2016

generated* approved difference No. EXPENDITURES (€) (€) (%)

1 2 ½ a. Controllable operating costs 8.574.795 7.034.998 21,89 1. Third party services 1.395.666 1.042.207 33,91 2. Spare parts and material 411.040 420.246 -2,19 Salaries, fringe benefits and other per- 3. 6.029.695 5.031.314 19,84 sonal expenses Current bank services, post and insur- 4. 325.371 333.261 -2,37 ance 5. Telecommunication costs 156.910 172.663 -9,12 6. Other controllable operating costs 256.113 35.306 625,40 b. Non-controlable operating costs 5.466.619 1.995.629 173,93 Property taxes, charges and fees in ac- 1. 454.397 599.732 -24,23 cordance with the law Provision of ancillary and system ser- 2. 4.255.098 798.604 432,82 vices 3. Costs from international contracts 183.102 436.476 -58,05 4. Environmental protection 30.657 42.000 -27,01 Other non-controllable operating costs in 5. 135.428 118.818 13,98 accordance with the law c. Depreciation 7.147.947 6.527.338 9,51 TOTAL 21.189.360 15.557.965 36,20

*generated values are from the 2016 Reporting forms, submitted by CGES to the Agency, and the approved values are from the Decision, No 12/2542-30 of 27.11.2015.

During 2016, CGES generated costs which exceeded the approved ones by 36, 20%. The most significant overspending was within the costs related to the ancillary and system services, which belong to the non-controllable costs and are subject to corrections. In addition, the overspendings are generated in the following categories: salaries and other personal earnings, third party services, other controllable operating costs and other non-controllable operating costs in accordance with the law. The most significant reduction was in the category international contracts, which are the subject of corrections. Reductions were also generated in the categories: spare parts and material, current bank services, past and insurance, telecommunication services, property taxes, charges and fees in accordance with the law, and environmental protection.

Table 17. Comparative review of approved and generated revenues for 2016

generated approved difference No. REVENUES (€) (€) %

1 2 1/2 Revenues from use of transmis- 1. 10.223.949 10.297.021 -0,71 sion network Revenues from losses in the 2. 4.386.245 4.310.025 1,77 transmission system 3. Other revenues 14.868.882 13.808.024 7,68 TOTAL 29.479.076 28.415.070 3,74

In 2016, CGES generated revenue that was higher than approved one by 3, 74%. Revenues from the use of transmission network were less than the approved ones, while revenues from losses in the transmission system and other revenues were higher than the approved. b) Changes in the Balance sheet

Total assets of the company as at 31.12.2016 amounted to 254, 3 mil. €, and compared to the Bal- ance sheet date for 2015, it increased by 10, 52%. Within the total assets, the fixed assets amounted to 198, 7 mil €, which was by 23, 5 mil €, or 13, 43% higher than in 2015.

In the structure of the fixed assets, a significant increase, compared to the previous year, was with real estate, plants and equipment (23, 7 million € or 13, 66 %).

Current assets amounted to 55, 6 mil. €, which was by 1, 29 % higher than in 2015. Within the current assets, inventories decreased by 3, 33%, receivables increased by 5, 19%, cash and cash equivalent decreased by 6, 98%, and value added tax and active accruals increased by 104, 52%.

The general liquidity ration decreased from 3, 20 in the previous year to 2, 14 in 2016. The current liquidity ratio decreased compared to 2015, when it was 1, 86, and it amounted to 1, 14.

Total liabilities of the company as at 31.12.2016 amounted to 254, 3 mil €. Compared to the balance sheet date for 2015, the liabilities increased by 10, 53%. The increase in liabilities was due to the increase in short-term liabilities of the company by 52, 34%, long-term liabilities by 36, 20%, while in the same time the company` capital increased by 1, 32% or by 2, 34 mil € compared to 2015 and amounted to 179, 0 mil. €.

The structure of liabilities or sources of funds in 2016 improved compared to 2015 when it was 77:23%. Equity capital amounts to 179, 0 mil. €, and it is higher than the borrowed capital which amounts to 75, 3 mil €. From the above it follows that the ration of the source of funds 70:30% in favour of equity.

The financial stability ration, expressed as the ratio of long-term source of financing as at 31.12.2016 amounts to 0,88, while it was 0,84 in 2015, i.e. in both years it is less than 1 which means that the requirements of long-term stability are met.

The long-term financial balance ration at the end of 2016 amounted to 1, 13 and was less than this ration in 2015 which amounted to 1, 19, i.e. per unit of long-term assets the company has 1, 19 units of long-term sources of financing. The long-term financial balance is not disturbed even though the indicator is lower than in the previous year. c) Auditor`s opinion on CGES` Financial Statements

The audit company KPMG has given a positive opinion on the financial statements of CGES, stat- ing that the financial statements are prepared in accordance with the Law on Accounting and Audit and presents fairly the financial position, operating result and cash flow of the company for the year ended on 31 December 2016.

The auditor drew attention to the fact that:

 the company has not registered its obligation towards EPCG concerning the engagement of the system reserves for receivables from EPCG in the period from January 1 to October 1, 2013, in the amount of € 8.133.14, as there is no legal or contractual basis for these obligations. Article 18 of the Budget Law for 2017 prescribes that revenues arising from the ownership and generated profit of state-owned companies in the field of energy may be used in 2017 to regulate mutual debtor-creditor relations between these entities and for new investments in these companies. Bearing in mind the cited legal norm, it can be expected that the Govern- ment of Montenegro will consider in detail the possibility of resolving this disputable issue, through legal mechanisms. The company and EPCG lead a lawsuit in this dispute before the commercial court of Montenegro.

 in accordance with the decision of the Energy Regulatory Agency on approving the fees and prices paid by electricity producers connected to the transmission system for the use of transmission capacity, No. 14/358-17 of 8.8.2014, the company invoiced to the Electricity Power In- dustry of Montenegro fees for engaging transmission capacity in the period from January 1, 2014 until July 31, 2015. The company forcedly collected the invoice from December 2014 so that receivables of the company on this basis amounted to €12.253.135 as at 31 December 2015. EPCG has refused to sign the contract on the use of transmission network for the needs of electricity producers and to pay any of the relevant invoices, so that proceedings are being conducted before the commercial court. With the letter No. 15/02-6 of 27 march 2015, the Agency has informed CGES that, although they believe that the respective decision was made in accordance with the Energy law, in the event that the Constitutional Court determines the il- legality of the provision of the Methodology on the basis of which the decision was made, the Agency would compensate this amount to the company through the mechanism of corrections. The collection of these claims before the commercial court in civil proceedings is expected by the end of 2017, unless there is some unforeseen circumstance. Those is confirmed by the judgement of the Commercial Court of Montenegro No. 1246-16 of 07.04.2017 that adopted the CGES` claims and obliged EPCG to CGES, on the basis of fee for engaging the transmission capacity for the Month July 2015, the main debt with the related interest.

4.3. Operation of the Montenegrin Electricity Market Operator DOO Podgorica a) Result of operation in 2016

According to the 2016 financial statements, the Montenegrin Electricity Market Operator (COTEE) generated total revenue in the amount of 527.441 €, coming from:

sales 484.649 €, other operating revenues 42.575 € Financial revenue 217 €.

Revenues from sale are revenues generated based on provision of services relating to the organisation and management of the electricity market in the amount of 366.420 € and revenues from the register of bilateral contracts of 118.229 €.

In the same period, COTEE generated expenditures in the amount of 488.932 €, as follows:

costs of material and energy 8.018 € costs of salaries, fringe benefits 349.961 €, costs of depreciation and provisions 50.203 € other operating expenditures 80.750 €.

Costs of salaries and fringe benefits include net salaries (196.907 €), taxes on salaries and fringe benefits (134.353 €), membership fees for the Board of directors (6.311 €), service contract (3.674 €), per diems (5.714 €) and other fees (3.000 €).

In 2016, COTEE generated pre-tax profit from regular activities in the amount of 38.509 €, i.e. post- tax profit in the amount of 35.043 €. b) Changes in the Balance sheet

Total assets of the company as at 31.12.2016 amounted to 2.874.825 €, and included fixed assets in the amount of 28.594 € and current assets in the amount of 2.846.231 €.

Total liabilities of the company as at 31.12.2016 amounted to 2.874.825 €, and included capital 462.072 € and short-term liabilities and provisions of 2.412.753 €.

In the letter No. C -62-7/17 of 04.07.2017, COTEE notified the Agency that the 2016 Audit Report has not yet been completed.

4.4. Operation of Montenegro Bonus DOO Cetinje a) Result of operation in 2016

According to the 2016 Financial Statements, Montenegro Bonus DOO Cetinje generated total revenue in the amount of 21.192.718 €, as follows:

revenue from sale 20.760.550 €, financial revenues 5.900 other operating revenues 426.268 €.

In the same period, it generated expenditures in the amount of 21.031.054 €, as follows:

purchase value of goods sold 19.229.310 €, costs of material 70.383 €, costs of salaries, fringe benefits 829.731 €, costs of depreciation and provisions 330.453 €. Financial expenditures 180.414 € and Other operating expenditures 390.763 €.

In 2016, Montenegro Bonus generated profit in the amount of 161.664 €.

b) Changes in the Balance Sheet

Total assets of the company as at 31.12.2016 amounted to 41.623.657 €, and include fixed assets in the amount of 19.149.997 € and current assets in the amount of 22.473.660 €.

Total liabilities of the company as at 31.12.2016 amounted to 41.623.657 €, and include capital in the amount of 19.722.246 €, long-term liabilities of 16.025 € and short-term liabilities of 21.885.386 €. c) Natural gas

At the end of 2013, the Government of Montenegro appointed Montenegro Bonus d.o.o. for the transmission system operator for natural gas, although gas infrastructure still does not exist in Mon- tenegro. Following the appointment, Montenegro Bonus implements numerous activities related to enabling gasification in Montenegro, and during 2015, the activities were implemented in two directions:

Creating the necessary preconditions for the implementation of the Ionian-Adriatic Gas Pipe- line Project, and Participation in the implementation of other projects that have as ultimate goal the gasification of Montenegro.

Creation of necessary preconditions for the implementation of the Ionian-Adriatic Gas Pipe- line Project

The Energy Development Strategy by 2030 clearly recognises natural gas as an important source of energy in line with Montenegro’s efforts to diversify its energy sources and use gas as a substitu- tion for other forms of energy. The Strategy envisaged, as the most rational option for the supply of Montenegro with gas, the connection to the Ionian – Adriatic Pipeline, and use of its own gas reserves from the Adriatic undersea area. The degree of certainty of these solutions depends on the implementation of the Ionian-Adriatic Gas Pipeline Project (IAP) which has been the subject of interests of our and the governments of the countries of the region for years, as well as from the dis- closure and confirmation of commercially exploitable coal reserves of gas based on exploratory works in the Montenegrin undersea area. In 2007, the Governments of Montenegro, Croatia and Albania signed a Ministerial Declaration on supporting the implementation of the IAP Project (later the declaration was signed by the Government of Bosnia and Herzegovina). Under the auspices of the Energy Community, the Intergovernmental Committee for Co-ordination and Support of Activi- ties on the IAP project was established in 2010, after which the Western Balkan Investment Framework (WBIF) approved the financing of a comprehensive feasibility study for the entire IAP Project.

The main purpose of the IAP is to connect the existing and planned transmission systems for natural gas of the Republic of Croatia with the Trans- Adriatic Pipeline (TAP). The TAP is an 867 km long gas pipeline that will transfer natural gas from Azerbaijan with a 2,000 km long pipeline Trans Anatolia Natural Gas Pipeline (TANAP) to the border of Greece, via Albania and the Adriatic Sea to southern Italy and further towards Western Europe. The South Gas Corridor, which, along with TAP and TANAP, includes the South Caucasus Gas pipeline, is about 3.500 km long. Construction of TANAP will cost around $ 12 billion, and TAP over $5 billion. The IAP aims to establish a new natural gas supply channel from the Middle East and Caspian region, going north along the Adriatic coast. It is very important that the IAP will be two-way, so that the supply lines may be North-South, from the LNG terminals in Croatia, or from some other sources. Construction of gas pipeline will enable the gasification of Albania and Montenegro, southern Croatia and Bosnia and Herzegovina and provide diversified and reliable natural gas supply. The pipeline will be 511 km in length and will create the preconditions for creating a natural gas market in Albania, Montenegro, Bosnia and Herzegovina and Croatia at the level of around 5-7 bcm.

Participation in the implementation of other projects that have as ultimate goal the gasification of Montenegro

Along with the activities that have as ultimate goal the construction of the Ionian-Adriatic pipeline, in late 2014, the implementation of another project, which is of great importance for the gasification of

Montenegro started. The Project „Master Plan Gasification of Montenegro and identification of priority projects portfolio“, as well as the IAP Feasibility Study, with which it is very closely linked, are financed by the Western Balkans Investment Framework. The goals of the Master Plan are to review the current activities of the government, donors, the private sector and all others who have participated in planning the development of the gas sector in Montenegro. Among other things, the Master Plan deals with:

Existing legal regulation in the gas sector; Potentials of future private sector participation; Identification and resolving key obstacles to gas supply; Existing gas market development studies conducted by the Government of Montenegro, the Energy Community, the EU, the World bank and the recommendations and political decisions caused by them; Revision of current market conditions, including the existing and anticipating congestions. In- dustrial growth, energy production, transport, industry and householders sector are taken into consideration ; Existing investment framework for gas, energy and related sectors that will be affected by the development of gas market in Montenegro.

The final version of the Master plan gasification of Montenegro was submitted in November 2015. In 2016, the development of the Strategic Environmental Impact Assessment and recommendations for the inclusion of priority projects in the field of gas in detail spatial planning were conducted. The final meetings were held in December 2016, it remains to complete a public hearing on the Strategic Environmental and Social Impact Assessment in the first months of 2017.

4.5. Operation of Jugopetrol AD Podgorica a) Result of operation in 2016

According to the Financial Statement for 2016, Jugopetrol AD Podgorica generated total revenue in the amount of 117.428.102 € , as follows:

revenue from sales 115.715.158 €, other revenues from sales 257.890 €, financial revenues 234.280 €, and other revenues 1.220.774 €.

In the same period, expenditures were generated in the amount of 111.921.757 €, as follows:

purchase price of goods sold 93.544.435 €, costs of materials 557.862 €, costs of salaries, fringe benefits 3.662.250 €, costs of depreciation and provisions 2.538.095 €, other operating expenditures 8.464.554 €, financial expenditures 66.776 € and other expenditures 3.087.785 €.

In 2016, Jugopetrol generated pre-tax profit in the amount of 5.506.345 €, or net profit in the amount of 5.028.376 €. b) Changes in the Balance sheet

Total assets of the company as at 31.12.2016 amounted to 101.797.229 € and included fixed assets in the amount of 44.277.135 € and current assets in the amount of 57.520.094 €.

Total liabilities of the company as at 31.12.2016 amounted to 101.797.229 €, and included capital in the amount of 89.515.264 €, deferred tax liabilities of 57.601 €, long-term provisions and liabilities of 388.704 € and short-term provisions and liabilities of 11.835.660 €.

4.6. Operation of Cal Mine AD Pljevlja

Due to the significance of coal as a fuel for electricy production and the need to monitor the realisation of coal cost for the production in TPP Pljevlja, here are outlined the basic business indicators of the company.

The Agency has conducted financial analysis of the operation of the Coal Mine AD Pljevlja based on the financial statements for 2016, published on the website of the Securities Commission.

The Coal Mine is a joint-stock company with the following ownership structure: A2A S.p.A. 39, 49% of the shares, the State of Montenegro 31, 11% of the shares, natural persons 27, 23% and other shareholders 2, 17% of the shares.

In 2016, the Coal Mine AD Pljevlja generated total revenue in the amount of 39.633.217 €, which is by 28, 92% less than in 2015, and total expenditures in the amount of 35.105.126 €, which is by 29, 66% less than in 2015. Pre-tax profit amounted to 4.528.091 €, and post-tax profit amounted to 4.043.751 €.

The total value of the company`s assets as at 31.12.2016 amounted to 67.910.613 € and it was lower than the value in 2015 by 6, 85%.

Fixed assets amounted to 57.026.224 €, and compared to 2015 it was 7, 16% lower. The current assets amounted to 10.884.389 €, and compared to 2015 it was 4, 14% lower.

The total value of the company`s liabilities as at 31.12.2016 amounted to 67.910.613 €, and it is less than the value in 2015 by 6, 85%.

In the structure of the liabilities, equity capital amounts to 28.480.320 €, long-term liabilities amount to 12.312.883 €, deferred tax liabilities amount to 376.647 € and short-term liabilities amount to 26.740.763 €.

4.7. Financial operation of undertaking in the field of oil and gas

General conditions of the licenses prescribe that undertakings in the field of oil and gas are required to submit to the Agency a business report for the previous year by the end of June of the current year. The report should include technical, operational, administrative and financial aspect of the activity licensed.

Out of total 71 licensed undertakings, up to the preparation of this report, the following 50 undertakings submitted to the Agency a business report for 2016: Adriatic Marinas DOO Tivat, Albino DOO Podgorica, Alba Petrol DOO Podgorica, AP Petrol DOO Bijelo Polje, Avio Petrol DOO Podgorica, CMC AD Podgorica, Castellana DOO Podgorica, Čelebić Petrol Trade DOO Podgorica, ECO Booster DOO Podgorica, EC Autotrade DOO Podgorica, Elcom DOO Pljevlja, Eko Petrol DOO Danilovgrad, Euro Gas DOO Podgorica, Euro Petrol MN DOO Podgorica, Energogas DOO Podgo- rica, Hemosan DOO Bar, Humci DOO Cetinje, Ina Montenegro DOO Podgorica, Intours DOO Pod- gorica, IK Real DOO Podgorica, Jugopetrol AD Podgorica, Junčaj Petrol DOO Podgorica, Kalamper DOO Bar, Kips DOO Podgorica, Lukoil Montenegro DOO Podgroica, Mis Šped DOO Podgorica, Mercator MN DOO Podgorica, Montenegro Bonus DOO Cetinje, Montenegro Gas DOO Berane, Montenegro Lubricants DOO Kotor, Montenegro Petrol DOO Podgorica, Neksan DOO Nikšić, Novi Gas DOO Podgorica, NST DOO Bijelo Polje, Podgoricatrans DOO Podgorica, Petrol Montenegro MNE DOO Podgorica, Petrobart DOO Podgorica, Pištet B DOO Podgorica, Pigo Pet-

rol DOO Nikšić, Professional Development Group DOO Podgorica, Rapax DOO Nikšić, Samcomerc DOO Tivat, Senić Petrol DOO Podgorica, SMN Transporti DOO Kotor, SS Trans DOO Tivat, Timi DOO Podgorica, Tim Company DOO Pljevlja, Vjenniko Petrol DOO Nikšić, VV Trans DOO Podgorica and Zeta Petrol DOO Podgorica.

The analysis of the submitted reports for 2016, determined that out of aforementioned 50 undertakings, 44 achieved a positive financial result, and Adriatic Marinas DOO Tivat, Albino DOO Podgori- ca, ECO Booster DOO Podgorica, NST DOO Bijelo Polje, Petrobart DOO Podgorica and Timi DOO Podgorica achieved a negative financial result.

The largest supplier of petroleum products in the Montenegrin market is Jugopetrol AD Podgorica. According to the Business Report for 2016, Jugopetrol AD Podgorica achieved total sale of fuel in the amount of 268.689 m3, which is 1% more than in the previous year. Sales growth is the result of a higher volume of sale in the retail channels and sales to private gas stations. The retail sales volume is by 6% higher than in the previous year. The main reasons are as follows: lower fuel prices caused by oil price drop on world stock markets and increased demand of retail customers in Alba- nia due to lower prices in Montenegro.

The total generated revenue of Jugopetrol in 2016 amounted to 115.973.048 €, which is 15, 67% less than revenue achieved in the previous year. Reduced revenue was the result of the drop in crude oil price on the stock exchange in 2016 which is reflected in the prices of petroleum products in Montenegro. Total generated costs in 2016 amounted to 108.767.196 €, which is 17, 59% less than the costs in the previous year. In 2016, Jugopetrol generated pre-tax profit in the amount of 7.205.852 €, or net profit in the amount of 5.028.376 €.

According to notes from the business report for 2016, in the period 01.01 – 31.12.2016 Montenegro Bonus DOO Cetinje achieved profit from operation in the amount of 161.664 €.

Chapter 4 does not present data on the financial operation of Elektroprivrede Crna Gore AD Nikšić for 2016, because by the legal deadline for submitting the proposal of the report on the situation in the energy sector of Montenegro in 2016 to the Parliament of Montenegro, Elektroprivreda did not hold the shareholders` assembly, which verifies the financial statements of the company and business report.

5. Conditions and Activities in the Electricity Market

5. CONDITIONS AND ACTIVITIES IN THE ELECTRICITY MARKET

As a candidate country for accession to the EU, and as one of the signatories of the Treaty establishing the Energy Community, Montenegro has accepted the goal and obligation to organise and regulate the functioning of the energy sector on market principles, i.e. to introduce competition in the performance of energy activities and to constitute a completely opened market that will, through regional market coupling, potentially become a part of the single European market.

The electricity market means sales and purchase of electricity that can be carried out in an organised way, i.e. within the institution according to clearly defined rules, or on the basis of bilateral contracts signed by participants in the direct negotiation.

The Energy law prescribed the obligation to integrate the Montenegrin electricity market into the regional and European markets, and that the organisation, management, functioning and development of the market shall be carried out in a way that ensures secure supply, reliable and quality services at prices that reflect market price trend and/or result from transparent tender procedures. Complete opening of the electricity market is the basic assumption on which the planning of the development of the electricity sector is based in the Energy Development Strategy of Montenegro by 2030.

The creation of a stable market and regulatory framework is necessary for attracting investments in electricity generation, transmission and distribution network, all with the aim to create a secure, reliable and stable energy system that will enable continuous and high quality supply of electricity to all customers, which is the basis for the overall economic development. The legal and regulatory framework that governs the functioning of the market is:  Energy law, regulating the conditions and manner of performing of energy activities for the purpose of quality and secure supply of customers, in line with the objectives of the development of energy activities and the principles of competitiveness and level playing field for all entities in the market, and the manner of organising and managing the electricity and gas market. On the electricity market, an organised purchase and sales of electricity is carried out in all time frames, including purchase and sales on the day ahead and intraday market, based on the contract or directly on the organised market. The law prescribes that the market operator carries out the activity of organising and managing the electricity market, and the Agency carries out the control of the functioning of the market and specifies the measures necessary to eliminate the identified irregularities in its functioning.  Law on cross-border exchange of electricity and natural gas, regulating the conditions for accession to the transmission systems for cross-border exchange of electricity and natural gas, the way to ensure secure supply of gas and market transparency, in order to increase market competitiveness and establish a functional and transparent wholesale electricity and gas market, with a high level of security of supply.  Market rules which regulate the method of organising and functioning of the market, and they are defined by the market operator and submitted to the Agency for approval.  Rules for allocation of available transmission capacities on interconnection lines Control areas of Montenegro with neighbouring areas, which define the way of providing the cross- border transmission services.  Rules on customer switching for electricity, that regulate the rights and responsibilities of all entities included in the supplier switch process, as well as simple procedures that imply a shorter implementation time, at no cost to the end customer .  Methodology determining prices, deadlines and conditions for provision of ancillary services and balancing services for transmission system for electricity, that regulates the provision of services, type of service, cost allocation and the procedure for establishing prices

for the provision of ancillary service and balancing services necessary for a secure and stable functioning of the energy system.

With the entry into force of the Energy law on 28 January 2016, and the law on cross-border exchange of electricity, on 19 July 2016, the Third EU Energy Package was implemented in the primary legislation, which together with the harmonisation of secondary legislation, makes a legal and regulatory framework and represents a major step towards the revival of the market and strengthening the market orientation in the organisation and functioning of the energy sector.

The electricity market in Montenegro consists of wholesale and retail markets. The participants in the wholesale market are producers, traders, suppliers and customers-self-suppliers, as well as the transmission and distribution system operators when they buy energy to cover the losses in their systems, while the participant in the retail market are suppliers and end users (consumers at all voltage levels).

In 2016, there were 36 active traders in the wholesale market, while DOO Uniprom Niksic, as a customer-self-supplier provided energy for the needs of Aluminium Plant (KAP) Podgorica.

An important segment of the wholesale electricity market is the allocation of available transmission capacities on interconnections (inter-system lines), which takes place through auctions organised by the Southeast Europe Coordination Auction Office (SEE CAO) for several years in the area of South East Europe. Auctions include allocation of available capacities on the borders of all energy systems in the region, except on borders with Serbia that has not yet entered into an agreement with SEE CAO. During 2016, SEE CAO carried out annual, monthly and daily auctions of cross- border capacities on the borders of Montenegro with Bosnia and Herzegovina and Albania, while the allocation of transmission capacities on the border with Serbia was carried out through the auctions organised by CGES. The innovated Auction Rules, based on which SEE CAO organizes auctions, were approved by the Agency in September 2016, while the auction rules prepared by CGES, were approved in 2013.

The following picture presents the functional scheme of the electricity market of Montenegro in 2016 where energy and commercial flows are shown.

Legend: ----> Commercial costs - - -> energy flows

Figure 1: Functional scheme of the electricity market in Montenegro

In the same period, in addition to the existing suppliers EPCG and DOO Montenegro Bonus, three new licensed suppliers of end users (DOO Energia Gas and Power, DOO Uniprom and DOO Petrol Montenegro MNE) entered in the retail market. Although based on the data provided in the business plans submitted by new suppliers, their significant participation in the supply of Montenegrin consumers is not expected at the initial stage, their entrance in the market is a good signal and progress in the process of creating real competition in the supply, or the revival and strengthening of the retail electricity market.

In 2016, the unbundling of the distribution system operator from the vertically integrated energy undertaking (EPCG) and the formation of the separate legal entity the Montenegrin Electricity Dis- tribution System DOO (CEDIS) was finally completed, which is a very important factor for the emergence of new suppliers, i.e. for the revival and development of the retail market. Namely, the distribution system operator has a central logistic role in the functioning of the retail market, because apart from providing all the measurements and „supplying” the market participants with data on measured values, this operator prepares also so-called customer consumption profiles, which are necessary for suppliers. In September 2016, the Montenegrin Electricity Distribution System adopted the Decision on determining the standard consumption profiles for customers connected to the distribution system, which is an additional relief to all suppliers of electricity to end users connected to the distribution system. Based on standard consumption profiles, the supplier will be able to design more easily and accurately the amount of electricity necessary to meet its part of consumption.

The following figure presents a schematic review of the trade of electricity in Montenegro in 2016.

Figure 2: Trade of electricity in Montenegro in 2016

During 2016, all the customers connected to the distribution system had the right to be supplied with electricity at the prices defined by the Agency, while the customers connected to the transmis-

sion system (KAP, Steel company, Railways and TPP „Pljevlja“), were supplied in accordance with the contracts signed based on the market principles. Since the beginning of 2017, things have changed in the way that the supplier supplying householders and small customers is required to form the prices of electricity for these customers in the manner determined by the law upon the revival of the liquid market, while the price for all other customers is freely formed, i.e. based on the market principles. In December 2016, the Agency adopted the decision on determining the regulatory allowed revenue and prices for the use of the transmission and distribution systems for the regulatory period 2017-2019, but not for the supplier for whose operation the law does not provide for the determination of the regulatory allowed revenue. It is a positive signal for the entry of new suppliers and the development of competition in the Montenegrin market.

During 2016, the Agency participated in the activities related to the implementation of regional measures established at the Western Balkans Summit (WB6 – Western Balkans 6), held on 27 April 2015, in Vienna, and activities related to dedicated roadmaps agreed on 4 July 2016 at the Paris Summit. The regional measures include the establishment of national spot markets (power exchanges) and their connection, the formation of a regional balancing market and a regional coordinated allocation and capacity calculation, while the roadmaps refer to the integration of the West- ern Balkans with the internal EU market.

The coordination of all activities was organised by the Energy Community Secretariat. In order to implement the so-called “soft energy measures” in Montenegro, a working group was formed. This group, in addition to representatives of the Ministry of Economy (coordinator), Montenegrin Electric- ity Transmission System, Electric Power Industry of Montenegro and Montenegrin Electricity Mar- ket Operator, included also representatives of the Agency.

The Government of Montenegro, on 17 June 2016, following the recommendations from the information compiled by the working group in charge of monitoring the implementation of the so-called „soft measures” within the WB6 Initiative, adopted the conclusions which inter alia, define the obligations of COTEE, CGES and EPCG to conclude a contract on the establishment of the limited liability company with the task to establish a power exchange in Montenegro that will operate under the name MPX – Montenegro Power Exchange LLC, with the head- office in Podgorica. The drafts of the statute and the foundation contract have been prepared and submitted to the founders for suggestions. All this clearly address that concrete and operational steps are taken and that the opening of an organised competitive electricity market (power exchange) in Montenegro should be expected in the following period.

6. Electricity Prices for Customers connected to the Distribution System for the period 2013 - 2016

6. ELECTRICITY PRICES FOR CUSTOMERS CONNECTED TO THE DISTRIBUTION SYSTEM IN 2016

6.1. Prices defined by customer category for 2016

Electricity prices defined by the Agency`s decision from December 2015 were applied in 2016. The prices that were valid in 2016 are presented in the Table 24:

Table 18. Prices defined in 2016

Defined Prices in 2016 2016 c€/kWh 35 kV 5,3998 10 kV 7,3202 Distribution customers at 0,4kV whose power is measured 10,8870 Distribution customers at 0,4kV whose power is not measured, two-tariff 8,3755 measurements Distribution customers at 0,4kV whose power is not measured, tone-tariff 9,5660 measurements

6.2. Volume of electricity sale to customers connected to the distribution system in the period 2013-2016

Total volume of electricity sale to customers connected to the distribution system in the period 2013 – 2016 amounted to 8.411,15 GWh or the annual average is 2.102,79 GWh. In 2016, the volume of electricity sale to these customers amounted to 2.183,28 GWh, which is 80, 49 GWh or 3, 83% more compared to the average for the reporting period. The volume of electricity sale in 2016, compared to the average for the period 2013 – 2016, with the customers at:

 35kV increased by 2,21 GWh or 2,59%;  10 kV increased by 19,30 GWh or 6,24%;  0.4 kV whose power is measured increased by 12,40 GWh or 8,41%;  0.4 kV – other consumption increased by 20,41 GWh or 6,08%;  0.4 kV – householders with two-tariff measurements increased by 48,55 GWh or 4,21%;  0.4 kV - – householders with one-tariff measurements decreased 22,37 GWh or 30,71%.

Relevant data are presented in the following table:

Table 19. The volume of electricity sales to customers connected to the distribution system

1 2 3 4 5 6 Year 2013 2014 2015 2016 (1+2+3+4)/4 Volume of sales 2013 - 2016 Average Share Consumer/Period GWh GWh GWh GWh GWh % a. 35 kV 79,61 82,66 91,00 87,37 85,16 4,05

b. 10 kV 294,78 292,56 321,55 328,69 309,39 14,71 I.1. MV total (a+b) 374,39 375,22 412,55 416,06 394,55 18,76 c 0.4 kV I level-power is measured 139,04 138,05 152,98 159,89 147,49 7,01 d. 0.4 kV II level Other consumption 320,5 321,32 345,16 356,20 335,79 15,97 e. 0.4 kV Households, two-tariff 1.123,55 1.097,74 1.186,48 1.200,65 1.152,10 54,79 measurement f. 0.4 kV Households, one-tariff 93,04 83,55 64,32 50,47 72,85 3,46 measurement I.2. LV total (c+d+e+f) 1.676,13 1.640,66 1.748,93 1.767,22 1.708,23 81,24 TOTAL ED (I.1. + I.2.) 2.050,52 2.015,88 2.161,48 2.183,28 2.102,79 100,00

SOURCE: EPCG - FU Supply, Monthly Report

6.2.1. Invoiced realization for electricity sold to customers connected to the distribution system for the period 2013 - 2016

Total invoiced realization for electricity sold to customers connected to the distribution system in the period 2013 – 2016 amounted to 707, 05 mil. €, or annual average was 176, 76 mil. €. In 2016, the invoiced realization for electricity sold to these customers amounted to 184, 16 mil. €, which is by 7, 40 mil. € or 4,18% higher compared to the average in the reporting period. The invoiced realization for electricity sold in 2016, compared to the average for the period 2013 – 2016, with the customers at:

 35kV higher by 0,24 mil.€ or 5,12%;  10 kV higher by 2,01 mil.€ or 8,77%;  0.4 kV whose power is measured higher by 1,52 mil.€ or 9,54%;  0.4 kV – other consumption higher by 1,73 mil.€ or 6,36%;  0.4 kV – householders with two-tariff measurements higher by 4,40 mil.€ or 4,47%;  0.4 kV – householders with one-tariff measurements decreased by 2, 51 mil. € or 33,06%.

The table 26 shows total invoiced realization for electricity sold to distribution customers in the period 2013 – 2016.

Table 20. Review of the invoiced realization for electricity sold to customers connected to the distribution system in the period 2013 – 2016

1 2 3 4 5 6 Year 2013 2014 2015 2016 (1+2+3+4)/4 Invoiced realization 2013 - 2016 Average Share Customer/Period mil. € mil. € mil. € mil. € mil. € % a. 35 kV 4,41 4,53 4,92 4,94 4,70 2,66 b. 10 kV 21,55 21,67 23,60 24,96 22,94 12,98 I.1. MV total (a+b) 25,96 26,2 28,53 29,90 27,65 15,64 c 0.4 kV I level-power is not measured 14,65 15,2 16,47 17,47 15,95 9,02 d. 0.4 kV II level Other consumption 25,54 26,06 28,29 28,94 27,21 15,39 e. 0.4 kV Households 93,82 94,23 102,67 102,78 98,38 55,65 f. 0.4 kV Households, one-tariff measurement 9,52 8,78 6,97 5,08 7,59 4,29 I.2. LV total (c+d+e+f) 143,53 144,28 154,39 154,26 149,12 84,36 TOTAL ED (I.1. + I.2.) 169,49 170,48 182,92 184,16 176,76 100,00 SOURCE: EPCG – FU Supply, Monthly Report 6.2.2. Sales prices of electricity for final customers for the period 2013-2016

The price of electricity for final consumers connected to the distribution system in 2016 is higher by 0, 33% compared to the average price for the period 2013 - 2016.

The Table 27 shows relevant data on electricity sold to final customers in the period 2013 - 2016

Table 21. Electricity sold to final customers in the period 2013 - 2016 1 2 3 4 5

average Year 2013 2014 2015 2016 price

Selling price 2013 - 2016

Customer/Period €c/kWh €c/kWh €c/kWh €c/kWh €c/kWh a. 35 kV 5,54 5,48 5,41 5,66 5,52 b. 10 kV 7,31 7,41 7,34 7,59 7,41 I.1. Average MV (a, b) 6,94 6,98 6,91 7,19 7,01 c 0.4 kV I level-power is not measured 10,54 11,01 10,76 10,92 10,81 d. 0.4 kV II level Other consumption 7,97 8,11 8,20 8,12 8,10 e. 0.4 kV Households 8,35 8,58 8,65 8,56 8,54 f. 0.4 kV Households, one-tariff measure- 10,23 10,51 10,83 10,06 10,41 ment I.2. Prosječno LV (c,d,e,f) 8,56 8,79 8,83 8,73 8,73 AVERAGE ED (I.1, I.2.) 8,27 8,46 8,46 8,43 8,41 SOURCE: EPCG - FU Supply, Monthly Report

6.3. Comparison of electricity prices in Montenegro with prices in the European countries for 2016

According to the Eurostat Report published in May 2017, electricity price for households in the EU countries decreased by an average of 2,33% in the period between the second half of 2015 and the second half of 2016, while in the aforementioned period there was a decrease in electricity prices in Montenegro by 0,37%.

Changes in electricity prices ranged from a decrease of 14% in the Netherlands to an increase of 17% in Belgium.

In the period between the second half of 2015 and the second half of 2016, the largest increase in electricity price for households in national currency was recorded in Belgium 17%, Norway 13%, Sweden, Turkey 6% and Serbia 4%, etc. The largest decree was registered in the Netherlands 14%, on Cyprus 12%, Liechtenstein, Lithuania and Romania 6%. Prices in most Member States remained largely stable with a lower increase or decrease in prices of 1% to 3%, while in Slovenia, Albania, Great Britain, Croatia and Malta prices remained unchanged.

Expressed in Euros, the average prices of electricity for households in the second half of 2016 were lowest in Ukraine 3,2 €c/kWh, on Kosovo 5,9 €c/kWh, Serbia 6,5 and Macedonia 8,3, and the highest in Denmark 30,8, Germany 29,5, Belgium 27,5 and Portugal 23,6. The average price of electricity in the EU countries was 20,5 €c/kWh. The approved price of electricity for households with two-tariff meters in Montenegro amounted to 9, 97 €c/kWh, including all taxes and VAT (or 8, 38 €c/kWh, excluding VAT and taxes).

Ukrajina Kosovo Srbija Makedonija Albanija Bosna i Hercegovina Moldavija Bugarska Crna Gora Mađarska Litvanija Turska Rumunija Estonija Malta Hrvatska Poljska Češka Island Slovačka Finska Holandija Kipar Letonija Slovenija Norveška Lihtenštajn Luksemburg Francuska Grčka Velika Britanija Švedska Austrija EU-28 Euro area Španija Irska Italija Portugal Belgija Njemačka Danska

: 5 10 15 20 25 30 35

7. Activities of the Agency in the implementation of the Energy Law

7. ACTIVITIES OF THE AGENCY IN THE IMPLEMENTATION OF THE ENERGY LAW

7.1. Energy law and the role of the Agency in its implementation

The new Energy law entered into force at the end of 2016, and in view of innovations it has made and obligations it has set for all entities to which it refers, it is necessary to review both the reasons for its adoption and its content, particularly with respect to the obligations of all the entities to which it refers and whose activity it regulates. The law strengthened and expanded the role of the Agency and its influence in relation to energy undertakings it regulates. An additional reason for review of the Law is that 2016 is the year to which this report refers and the first year of implementation of the law.

Montenegro is a member of the Energy Community and a candidate for EU membership, which results in a number of commitments relating to the transposition and implementation of EU acquis communitaire within the set deadlines.

In October 2011, the Ministerial Council of the Energy Community adopted the decision by which the members of the Energy Community are required to implement the Third EU Energy Package: Directive 2009/72/EZ on the electricity market; Directive 2009/73/EZ on the natural gas market; Regulation (EC) No. 714/2009 on conditions for access to the network for cross-border exchange in electricity; Regulation (EC) No. 715/2009 on conditions for access to the natural gas transmission systems. In October 2012, the Ministerial Council of the Energy Community adopted the decision which obliges the members of the Energy Community to implement: Directive 2009/119/EZ on obligations to maintain minimum stocks of crude oil and/or petroleum products and Directive 2009/28/EZ on the use of energy from renewable sources.

These acts were implemented through the adoption of the Energy law and the Law on the Use of Transmission Systems for Cross-border Exchange in Electricity and Natural Gas.

The implementation of the Third EU Energy Package have been carried out in a way that ensures full alignment of Montenegrin legislation with the EU legislation in the electricity and gas sectors, through the adoption of these two laws, which, together with harmonisation and adoption of by- laws, constitutes a legal – regulatory framework and is a condition for revival of the electricity market.

In order to achieve the defined goals, the Agency has been given wide powers, both in terms of determining general acts that regulate the functioning of the electricity market and activities of energy undertakings, approving general acts adopted by energy undertakings, and in terms of exten- sive powers in the supervision of energy undertakings ‘operation in the energy sector.

In particular, the following innovations should be highlighted:

 The law defines the content of the methodology for determining regulatory allowed revenue of the system operator, in order to enable incentive investments and develop these systems.

 It is stipulated that the development of the transmission and distribution systems is based on the ten-year development plans updated by energy undertakings on an annual basis (for TSO) and on five-year basis (for DSO). Three-year investment plans are an integral part of the development plan and are updated by the undertaking on an annual basis. The Agency`s competences to approve and control the implementation of the plans and the obligation to define adequate rules in this regard are specified.

 The system operator shall define three-year programs for purchase of infrastructure used by several users of the system, which is owned by another person, by types of assets and location, in compliance with the schedule for connection to the system and nclude the infrastructure into development or investment plan.

 The supply as a market activity is no longer regulated by the Agency.

Since the beginning of 2017, the supplier that supplies householders and small customers, until the liquid market is brought to existence, shall form the price of electricity for these customers in the manner defined by the transitional provisions of the law. Based on the increase in the price of electricity, prices for end users cannot be increased above the weighted electricity price generated in the previous year and the futures for the next year at the referent power exchange, that will be nominated by the Agency, and at most up to 7% in 2017 and 6% in 2018 and 2019. The electricity price for all other customers is freely formed, i.e. based on market principles. Accordingly, in De- cember 2016, the Agency adopted the decision on determining the regulatory allowed revenue and prices for the use of transmission and distribution system for the regulatory period 2017-2019, but not for the supplier, which is a positive signal for the entry of new suppliers and the development of competition in the market.

. Electricity supply to end users in Montenegro may also be provided by a supplier who has a registered seat in a EU member state or is a member of the Energy Community based on a license issued by the Agency, and on the basis of evidence on fulfilment of the conditions for do- ing business in the country in which it is register.

. The supplier of last resort and vulnerable customers is introduced. It shall supply electricity or gas to: 1) householders and small size customers which are not included in the category of householders connected to 0,4 kV electricity distribution system or gas distribution system, which are not responsible for losing the supplier or a contract on supply; 2) householders and small size customers that have chosen to be supplied by the supplier of last resort and vulnerable customers; 3) vulnerable customers, at prices determined based on the Agency`s methodology.

It is stipulated that this supplier is determined based on the procedure of public bidding, for the period of three calendar years. It was defined that the Government regulation defines the procedure of public bidding, the conditions for participation in the tender, the content of tender documents, and criteria for evaluation of bids.

. A new model of the distribution system was introduced – a closed distribution system for electricity, that transposed the Directive 2009/72/EC which stipulates that the closed distribution system is justified in cases where the optimal efficiency of integrated energy supply is required, which requires specific operational standards, as well as in case when the system is primarily used by the owner and related entities, in which case the distribution system operator should be allowed to be excluded from the obligations that would constitute an administrative burden due to the specific nature of the relationship between the distribution system operator and users of the system. Through this system, electricity is distributed in a geographically limited area, con- sisting of installations, lines and transformers from the point of connection to the transmission or distribution system to the point of connection of users of this system, as well as installations, telecommunication and information equipment and other infrastructure necessary for its functioning. The introduction of this distribution system model was necessary, considering that Monte- negro has a large number of potential systems (shopping centres, tourist complexes, etc.) that could acquire the status of closed distribution system.

. The applicant for connection of new capacity or for increase in connection power of the existing capacity is obliged to pay the connection fee, which consists of a portion for creating connection to the system and portion for creating technical conditions in the system.

. It has been defined that, due to technical constraints, it is not possible to connect the user’s facility to the system, and in case that the development plan does not foresee the construction of the necessary infrastructure or it is planned for a later period, the system operator will, excep- tionally, grant the investor the opportunity to build at his own cost the infrastructure necessary for connecting its facility to the system, which will be handed over to the competent system operator in accordance with the provisions of the law. The system operator will grant such consent in case that the investor facility is built as an obligation from a confirmed international agreement, when the investor building is built within the project for which the concession was issued, or when, in the opinion of the Government, the construction of an investor facility is of importance for the development of the state. The acquisition of the constructed infrastructure by the competent system operator is carried out on the basis of the purchase contract concluded with the investor, which determines the amount of compensation to be paid to the investor for the purpose of purchasing the infrastructure.

. A novelty is the issuance of the certificate on independence of the transmission system operator. The certification shall verify whether all the conditions for the independence of the transmission system operator have been fulfilled, both from the aspect of the activity in accordance with the issued license and in relation to third countries, in particular to confirm that its operation may not be influenced by any undertaking that simultaneously has an influence on other energy undertakings (producers, suppliers, distribution system operators).

. The Agency has so far dealt with the issues of the quality of electricity supply, but only by adopting the law, the conditions are gained for this issue to get better treatment. The Agency has been authorised to introduce financial compensations in order to effectively monitor the application of quality standards, which would sanction the failure to meet the minimum quality by energy undertakings.

7.2. Normative activity

In accordance with the powers of the law, the Agency adopted the following acts:

 Methodology setting regulatory allowed revenue and charge for operation of electricity market operator (''Official Gazette of MN'', No 41/16); This methodology governs the conditions, method and procedure for determining the regulatory allowed revenue and charges for operation of the market operator, the method of calculating charge and allocation of charge to payers. Due to the specific nature of the activity performed by the market operator in relation to other energy activities in accordance with the law, the methodology prescribes that the “cost plus” regulation is applied for determining regulatory allowed revenue for a one-year period, instead of the “incentive method” applied by the transmission and distribution systems. It is stipulated that operating costs are defined on the basis of financial plan, work plan, and other documents submitted by the market operator together with the application, and that in determining revenue for the next period, in the event of failure to comply with the work plan and deviations of the costs of the defined, these deviations are taken into account.

 Rules for drafting and monitoring of implementation of the ten-year development plans on transmission electricity system (''Official Gazette MN'', No 43/16) The aforementioned rules define the manner and process of making, content, method and procedure for approval, the procedure for conducting public hearings, as well as the method of monitoring the implementation of ten-year development plans of the electricity transmission system. The rules stipulate that the system operator shall define the plan based on direct and continuous monitoring of the operation of the system and the perception of the trend of needs, as well as data and information received from all relevant entities. The aim of the plan is a detail

view of the state of the transmission system in Montenegro, based on which the guidelines for its development and necessary investments are determined.

 Rules for drafting and monitoring of implementation of the ten-year development plans on distribution electricity system (''Official Gazette MN'', No 43/16) The aforementioned rules define the manner and process of making, content, method and procedure for approval, the procedure for conducting public hearings, as well as the method of monitoring the implementation of ten-year development plans of the electricity distribution system. The rules stipulate that the system operator shall define the plan based on direct and continuous monitoring of the operation of the system and the perception of the trend of needs, as well as data and information received from all relevant entities. It also stipulates that the plan shall be based on the existing and planned distributed production and system load and contain measures that guarantee the ability of the system capability to meet the needs for electricity transfer and security of supply. The goal of the plan is a detail view of the state of the distribu- teon system in Montenegro, based on which the guidelines for its development and necessary investments are determined.  Methodology determining regulatory allowed revenue and prices for the use of the transmission system for electricity (''Official Gazette of MN'', No 43/16 and 61/16) and Methodology determining regulatory allowed revenue and prices for the use of the distribution system for electricity (''Official Gazette of MN'', No 43/16 and 83/16)

The aforementioned methodologies define the conditions, method and procedure for determining regulatory allowed revenue and prices of the transmission and distribution systems, the allocation of regulatory allowed revenue to system users, the elements for calculation and method of calculating of the price at which services of the transmission and distribution systems for electricity are paid. The objective of the methodology for transmission and the methodology for distribution is to establish a balance between the interests of the system operator and users of the system, i.e. customers, as well as ensuring the sustainability and safe operation of the system with minimal costs. Changes in the regulatory framework will contribute to the achievement of the stated objective. The following are the most significant:

Introduction of a "Hybrid Regulatory Method” instead of "revenue cap"

In determining the regulatory allowed revenue, a "hybrid regulatory method" is used. This method allows the division of the risk of changing the energy values between the operator and system users through the application of alfa (α) parameters. That change was made in order to mitigate the impact of change in energy values (in this case power) in such a way that the risk of this change is shared between the system operator and users of the system.

Changing the method of determining operating costs that can be affected (changing the method of determining the efficiency factor X and introduction the parameters Zj and Zs)

The determination of these costs based on the analysis of required costs was replaced with the determination based on the formulas in which the baseline are the costs for the year of submission of the application (if the costs incurred in the previous periods are higher than the determined) or the average costs (if the costs incurred in the previous period are less than the determined). This change was made in order to encourage an operator to increase its efficiency and reduce operating costs.

It is stipulated that the operating costs that may be affected are determined based on the costs for the year of submission of the application, if the costs incurred in the previous period are higher than those determined, or based on the average costs if the costs incurred in the

previous year are lower than those determined. This basis is adjusted for the efficiency factor and the inflation rate. A new method of determining the efficiency factor (X), which consists of two elements, X1 – the measure of inefficiency and X2 – measure of efficiency achieved with the application of new technologies, is prescribed. The measure of inefficiency (X1) is calculated based on the ratio of costs incurred and determined for the previous regulatory period, by with a regulated entity is stimulated to influence the reduction of the efficiency factor for the following regulatory period by increasing its efficiency.

In addition, it is possible to adjust costs that may be affected for the parameters Zj and Zs, which present the changes in these costs (increase or decrease in absolute amount), which were due to circumstances that the entity cannot control (for example amendments to the law, increase in the tax rate, introduction of new technologies, the impact of the implementation of development projects approved by the Agency, force majeure). A one-time change in operating costs that may be affected (Zj) implies a change the occurred in the current regulatory period or in the last year of the previous regulatory period, and that will not have an impact on the following period (for example a force majeure). A permanent change in these costs (Zs) is the change occurred during the current regulatory period or in the last year of the previous period, which will continue in the following period (for example the change in the income tax rate, the introduction of new technologies, the impact of the implementation of development projects approved by the Agency). The Agency defines the amount of the parameters Zs and Zj on the basis of data and explanations submitted along with the application of the operator, and their aim is to ensure that the costs incurred due to circumstances beyond the control of the entities are covered and do not endanger the sustainability of the operation of the entity.

Change in the method of determining the value of investments for the regulatory year

The determination of the value of investments for the regulatory year has been changed, in the way that the regulatory asset base includes the value of assets under construction at the end of the year proceeding the year of the application and half of the value of the approved investments for the regulatory year.

The threshold for making adjustments based on the implementation of investment, which amounts to 75% of the planned investment value, has changed. When making adjustments based on the implementation of investment to a smaller extent than planned, it is envisaged to apply a rate equal to a half the interest rate at which the last Montenegrin government bond was issued, as compensation to customers for the use of more approved return on assets based on the investments planned by the system operator.

The possibility of excluding investments from the basis for calculating the return on assets is prescribed, if the investment of the operator is solely or predominantly related to the implementation of projects planned based on the confirmed international agreements, infrastructure or other project, and these projects are not implemented. It is also prescribed that the amount of total return on assets determined during the period of implementation of the investment, taking into account the adjustments made, may not be higher than the amount of the return that would have been achieved if the investment was completed within the planed deadline contained in the investment plan in which this investment was approved for the first time, unless a force majeure is the reason for the delay in the implementation of the investment. In that way, the prices paid by the end users are affected only by those investments that carefully planned and necessary for the functioning of the system.

The aim of amending the regulatory framework in terms of treating the investment is to encourage entities to objectively plan investments, taking into account all limiting factors that may affect possible delays in their implementation, as well as limiting the impact of investment on prices paid by customers.

Changing the allocation of costs that are transposed into tariffs

It is prescribed that the allocation of costs that are transposed into tariffs is carried out based on the contracted power. When determining the regulatory framework, the Agency takes equally into account the interests of customers and the interests of the system operator. It is in the interest of customers to set up a regulatory framework that enable the provision of sufficient amount of electricity necessary for the life, work and functioning of companies and supply on a secure, safe, reliable and quality manner. In order to achieve all that, it is necessary to provide conditions for the modernisation, maintenance and development of the energy system which, in accordance with the law, is an obligation of the system operator.

The energy system id developed by the system operators on the basis of needs and demands of customers. System operators are required to invest in the development of the energy infrastructure in order to meet the needs of customers and maintain the infrastructure that would enable customers to have permanent availability of required capacity and electricity. On the other hand, customers are required to pay for this availability of the system.

The prescribed allocation allows for better optimisation of the system, more secure provision of regulatory revenue and more rational demands of the users of the energy system. This ap- proach implies that the prices at which customers pay for the use of the system depend on the deviations in the generated power compared to the power which, according to their needs, will be agreed with the system operators. Since it is in the interest of customers to sat- isfy their needs at the lowest possible costs, the prescribed allocation stimulate them to ap- proach more responsible and rational to the assessment and planning of their needs. This is particularly important due to the specificity and complexity of the energy infrastructure, which may not be adjusted in a simple and quick manner to changes in customers’ demands, without the need for major works and huge costs. Carefully measured customer’s needs, defined through contracts, have multiple positive effects, such as: better and more efficient system management by the operator; better planning of system development; avoiding unnecessary investments in infrastructure and the creation higher maintenance costs of this infrastructure (which directly affect the reduction of the regulatory allowed revenue and pr5ices on that basis); availability of consumptions profile for all customers (which affect the development of the market and competition).

 Methodology determining prices, deadlines and conditions for provision of ancillary and balancing services for transmission system for electricity (''Official gazette of MN'', No 44/16)

The methodology regulates the method of determining the prices, deadlines and conditions for provision of ancillary and balancing services for transmission system for electricity, as well as the subject of the methodology, purpose, principles on which the methodology is based, types of services – ancillary and balancing services, service provider and service procurement plan are defined, services for which the fee is not paid, services for which the fee is paid, the ability of the operator to deviate from this methodology in the event of unforeseen circumstances, the method of applying for pricing for ancillary and balancing services, the content of the application, the consideration of the application, the publication of the report on the analysis of the documents, the consideration of the report, opinion and comments submitted by interested parties, the manner of decision making and publication of the decision, the start and duration of the regulatory period, deadline for submitting the application for pricing for ancillary and balancing services.

 Methodology determining method on providing of funds for Agency’s operation (''Official gazette of MN'', No 44/16)

Methodology regulates the method of determining the fees paid by undertakings that hold licenses for carrying out energy activities and undertakings that have the status of a closed distribution system, such as: license fee, status determination fee, annual fee for using the status.

The amount of individual license fees for regulated activities in the electricity sector is calculated on the bases of the unit fee for the regulated activities and based on the income of the license holder for the regulated activity. Fees for the use of licenses for carrying activities in the oil and gas sector are calculated according to the number of licensed means of transport, per m3 of storage capacity and per unit of tradable petroleum products and liquefied petroleum gas.

 Rules for determining the status of a closed distribution system for electricity (''Official gazette of MN'', No 48/16)

A closed distribution system is a new institute envisaged by the law. The rules regulate the conditions for determining the status, evidences submitted in support of the application and identify- ing the operator, the obligation of the distribution system operator, the obligation to pay fee for the use of the system by the user, the method of controlling the formation of fees conducted by the Agency, as well as the obligations of the Agency in the event of a complaint by the user of the system on the manner of determining the fee for the use of the system, the obligation to pay the fee for obtaining and using the status paid to the Agency by the system operator.

 Regulatory chart of accounts (''Official gazette of MN'', No 48/16)

The regulatory chart of accounts introduce specific accounts enabling easier calculation of the total justified operating costs, depreciation and return on assets, as well as the differences in relation to approved and generated revenue and cost , as prescribed by the methodologies determining regulatory allowed revenue and prices.

 Rules for setting of differences between justified and actual revenues and determined costs between licensed distribution system operators (''Official gazette of MN'', No 50/16)

The rules regulate the settlement differences between justified and actual revenues and determined costs between licensed distribution system operators arising from the obligation to apply uniform prices for the use of the distribution system, in all distribution system in Mon- tenegro.

 Rules on licenses for performance of energy activities (''Official gazette MN'', No. 50/16)

The rules govern the content of the form for submission of application for license issuance, evidence supporting the application, contents of the decision on issuance of the license, contents and appearance of the license as well as deadline for development of the license, a manner in which a control of fulfilment of conditions set by a license shall be carried out, manner in which exchange of information between energy undertakings shall take place, and method of payment of license fees and contents of register of licenses. These rules are the harmonisation of the existing with the provisions of the new law. The novelty is a shorter duration of the period to which a license is issued, the issuance of a license to a supplier having its registered seat in a member state of the European Union or a member of the Energy Community, as well as a decision that an entity formed by unbundling from the vertically integrated undertaking, that continues to perform an energy activity on the same facilities, devices, installations or plants, with the application for issuance of the license, does not require the submission of technical documentation, which refers to the facilities in which the activity in question is carried out.

 Rules on switching the supplier of end users for electricity (''Official gazette of MN'', No. 50/16)

These rules regulate the conditions and procedure for switching the supplier of end users for electricity, as well as the rights and obligations, deadlines for the operation of the transmission or distribution system operator and the supplier in the process of switching the supplier, respec-

tively regulating the obligations and powers of the participants in the retail electricity market, in the process of swathing the supplier.

The right to switch the electricity supplier is one of the rights guaranteed by the law to all electricity customers, as a condition for the development of the retail electricity market, which is open to all electricity customers since 01.01.2015.

Considering that the market has been opened for eligible customers in Montenegro as of Janu- ary 1, 2009, in accordance with obligations laid down in the energy law from 2010, on the basis of which the rules on conditions and procedure for switching the supplier of eligible customers for electricity were adopted, these rules are the harmonisation of the existing with the provisions of the new law and expand the obligation to all electricity customers, i.e. to the most numerous category householders.

A novelty in relation to the existing act is the introduction of an obligation for the system operator to prepare a data exchange platform– electronic form that is defined and provided by the system operator, through which the data on the calculated metering point and customer are exchanged electronically between the new supplier, system operator and the previous supplier. Also, the system operator has the obligation to confirm to the new supplier the compliance of customer data and accounting metering point, by the notification through data exchange platform.

 Rules on certificates for the system operator (''Official gazette of MN'', No. 50/16)

These rules shall specify in more details the procedure for the certification of the electricity or gas transmission system operator, the content of the certification application, the documents attached to the application, the content of the decision on certification, the possibility of withdrawing the certification and initiating a new procedure in cases where there is a change in the data based o which a certificate has been issued.

 Rules on general conditions for electricity supply (''Official gazette MN'', No. 70/16).

General conditions regulate: conditions for electricity supply; the rights and obligations of customers and suppliers; conditions and manner of reading, calculation and payment of consumed electricity; customers’ right to be informed, without additional costs, of actual electricity consumption and costs for the purpose of monitoring its own consumption; procedure upon complaint of a customer related to calculation of consumed electricity; conditions for suspension and limitation of electricity supply; conditions and procedure of conclusion of the supply contract; manner of amending data from the contract; manner on informing customers about prices and charges, standard deadlines and conditions in terms of access and services; manner of informing customers about changes of prices and charges prior to their implementation; conditions of supply by the supplier of last resort and vulnerable customers; conditions of supply of temporary facilities; manner and conditions of cessation and termination of contract on supply; Customers’ right to receive a final calculation after each switch of electricity supplier not later than 30 days following the switch to another supplier.

General rules are adopted by the Agency for the first time, and the electricity supplier, the supplier of last resort and vulnerable customers, the closed distribution system operator are required to apply when supplying customer within a closed system, and competent network operators.

 The Rules on conditions for award of permits on the basis of which producers and suppliers of electricity may supply final customers through a direct line (''Official gazette MN'', No. 78/16)

These rules determine the conditions and procedure for award of permits on the basis of which electricity producers and suppliers may supply final customers through a direct line. The

goal that is to be achieved by these rules is to protect electricity customers that will be supplied through a direct line from a possible arbitrariness of the direct line owner, by awarding the permit and prescribing the conditions that are to be fulfilled by the direct line owner. The rules stipulate that a customer may be supplied through a direct line in case that, due to lack of capacity, there is no possibility of supplying it through the transmission or distribution system.

 Methodology setting prices for use of transmission or distribution system for electricity which shall be paid by users of a direct line when the direct line is connected to the transmission or distribution system (''Official Gazette of MN'', No 78/16)

This methodology shall prescribe the method of determining the prices for use of transmission or distribution system for electricity which shall be paid by users of a direct line when the direct line is connected to the transmission or distribution system. The need to build a direct line is formed in case of refusal of access to the system due to lack of capacity, with the contracting parties being obliged to provide conditions for the producer or supplier, at pre-defined prices and conditions, to supply, through the direct line, each eligible customers within their territories. The owner of a direct line determines the access prices for a direct line by the methodology it adopts, whereby the price for the use of direct line must be based on costs related to the management and maintenance of direct line, the actual level of depreciation and the value of the assets and return on assets.

 Rules for functioning of the supplier of the last resort and vulnerable customers (''Official Ga- zette of MN'', No 83/16)

These rules shall regulate the operation of the supplier of the last resort and vulnerable customers.

 Methodology setting prices which the suppler of last resort and vulnerable customers shall apply (''Official Gazette of MN'', No 83/16)

This methodology shall regulate the method of setting the prices of electricity used by the supplier of the last resort and vulnerable customers, as well as the method of setting the temporary prices that will be applied in case when the supplier is not selected in the public tender procedure, prescribed by the law, and the method of setting the prices to be applied in the period up to the first selection of the supplier of the last resort and vulnerable customers, in accordance with the law.

The aim of this act is to determine more closely the method of setting the prices of electricity applied by this supplier, and to determine more closely the rights and obligations of the supplier of the last resort, in order to ensure continuity of supply.

 Rules for resolution of dispute by applying rules of arbitrage (''Official Gazette of MN'', No 83/16).

These rules shall govern the procedure for resolving disputes between energy undertakings or between energy undertakings and users of their services on matters arising from their contractual relations, regulated in accordance with the law.

7.3. Consumer protection

The Consumer Protection Law regulates the protection of consumers’ rights (natural persons) in purchasing and other forms of product exchange in the market (protection of economic interests,

legal protection, information and education, consumer associations to protect their interests and other issues of importance for consumer protection).

The legal framework for the protection of the rights of final customers for electricity is provided in the Energy law, which prescribes that the public interest, in terms of ensuring sufficient quantities of energy that are required for life and work of citizens and for operation and development of business undertakings and their supply in a secure, safe, reliable and quality manner, is achieved, inter alia, by the performance of energy activities in accordance with the principles of protection of final customers for electricity.

In addition to the basic rights of customers regarding the right to connect to the network, selection and change of supplier, access to data for their consumption, elimination of technical and other disruptions in supply of electricity, the law also prescribes measures to protect vulnerable customers who need health and social care, which includes:

 Prohibition of suspension of electricity supply to householders with disabled persons, persons with special needs or persons of poor health condition, who may be exposed to a threat to life or health as a result of limitation or suspension of energy supply;  Prohibition of suspension of electricity supply to householders with persons who need social care as determined by the state authority competent for social care affairs, from the beginning of October until the end of April, regardless of potential outstanding obligations on the basis of consumed electricity.

In addition to the aforementioned measures for the protection of vulnerable customer, the law prescribes that the Government will adopt regulations governing the criteria for defining customers belonging to the category of vulnerable customers, amount or level of subvention and a limit of monthly electricity consumption for which the right to a subsidy can be acquired. The deadline for adopting this regulation is one year after the entry into force of the law. However, this regulation was not adopted within the prescribed deadline, so that regulations that were in force until the new energy law entered into force were applied during 2016.

In accordance with the Programme and Instruction for the procedure and method of implementation of the Programme for subvention of electricity bills, prepared by the Ministry of Labour and Social Affairs, the groups of consumers that have the right to subventions are defined. The Deci- sion of the Government of 21.04.2016, allowed the subvention of bills for electricity consumed by the most vulnerable categories of citizens in 2016, based on the model which was applied in 2015, i.e. for the bill up to 60 € a customer obtain a discount of 40 %, and for the bill over 60 Euro, the amount will be reduced by 24 €. According to data submitted to the Agency by Elektroprivreda Crne Gore AD Niksic – FU Supply, the number of customer having the right to be supplied during 2016 amounted to around 20.000.

The law stipulates the objectives of the Agency in conducting its competences, including the provision of benefits for end customers and to protection of their position through the effective functioning of the market and promotion of competition. The regulatory framework, defined by the Agency in accordance with its legal authorisations, is based on ensuring the balance of interests between customers and energy entities. In late 2016, the Agency adopted the decision on determining the regulatory allowed revenue and prices for the use of transmission and distribution system for the regulatory period 2017-2019, but not for the supplier. This is a positive signal for the entry of new suppliers and development of competition in the market, which ultimately leads to the protection of customers from the dominate position of the supplier.

The law and by-laws adopted based on this law, enable administrative and legal protection of customers when deciding upon the request for access to the electricity system, as well as when connecting the facilities and in case of suspension of electricity supply.

In 2016, pursuant to the competences defined by the Energy law, the Agency, in the procedure for consumers’ complaints, evaluated the legality of the operation of the electricity distribution system operator when issuing a decision on the consent to connect the facility to the distribution system and rejecting the application for connection consent. The Agency also, in the procedure for consumers’ complaints against the suspension of electricity supply in case when the customer fails to fulfil the obligations under the contract, i.e. electricity bill, evaluates the legality of the procedure. During 2016, in the procedure for complaints against the calculation of electricity in cases of unauthorised consumption, initiated under the previous law, the Agency evaluated the legality of the operation of the electricity distribution system operator related to the level of the calculation, i.e. the correct application of the methodology for calculating and charging of unauthorised electricity in each case.

Provisions of the law that relate to the protection of end users are implemented through by-laws:

 General conditions for electricity supply,  Rules on switching the supplier of final customers,  Rules for functioning of the supplier of last resort and vulnerable customers,  Methodology setting prices which the supplier of the last resort and vulnerable customers shall apply.

8. International activities in the area of energy

8. INTERNATIONAL AVTIVITIES IN THE AREA OF ENERGY

8.1. Energy Regulatory Agency

By supporting objectives laid down in the Third Energy Package to create a safe, competitive and sustainable regional energy market management policy aimed at ensuring reliable energy supply to all customers, the Agency continuously cooperate with European regulators to develop a coherent regulatory framework for cross-border trade, competition and investments.

Cooperation takes place through participation in the work of international institutions whose member is the Agency, as well as by following significant events in the energy sector through the at- tendance at meetings where the experience of regulators and market participants is presented, and in general, by following the development of a legal framework at the European level and beyond.

The Agency is a member of the Energy Community and the Mediterranean Energy Regulators As- sociation for electricity and gas (MedReg), and an observer in the Council of European Energy Regulators (CEER) and the Association of Issuing Bodies (AIB).

Energy Community - EC

The greatest engagement of the Agency in 2016 was in the work of the Energy Community, as an organisation established by the Treaty establishing the Energy Community signed in 2005, with the aim to establish a stable regulatory and market framework in the Southeast Europe in the next ten years.

Initially signed, the Treaty establishing the Energy Community was extended until 2026, on the proposal of the EU institutions and the Permanent High Level Group.

Montenegro, as one of the signatories to the Treaty establishing the Energy Community, has committed to implement the objectives of the Community, and the Agency actively participates in the work of the Regulatory Board, one of the Community’s institutions, in addition to the Ministerial Council and the Permanent High Level Group. The Regulatory Board creates a legal framework for all participants in the market for electricity and gas, harmonised across the region, with the aim to establish a competitive market, set high standards for consumer protection, and enable investment. The Energy Community Regulatory Board is chaired by a member of the Board of the Agency for the fourth consecutive year.

In 2016, moving towards the realization of the set objectives, the Regulatory Board, through the work of working groups (in which the Agency’s representatives are continuously involved) that were established with the task to prepare documents that are adopted by this body, issued a set of reports describing in detail a legal structure in the member states of the electricity and gas wholesale and retail markets, barriers to the entry of new suppliers to these markets, functioning of the balancing market, and provided an opinion on the decision of the Albanian regulator on certification of the transmission system operator for electricity.

The Regulatory Board operates in continuous cooperation with the Agency for the Cooperation of Energy Regulators (ACER), in particular through the permanent participation of the representatives of the body at the meetings of the Regulatory Board and sharing information on the work of ACER, and with the Council of European Energy Regulators, which further contributes to the harmonisation of positions and exchange of knowledge and experience with regulators from the European Union.

In addition, the Energy Community provided consultancy support in the development and harmonisation of the draft law on transmission systems for cross-border exchange in electricity and natural gas, with the Third Energy Package legislation, which was adopted on 28 June 2016.

The obligation of the Energy Community Secretariat is, inter alia, to present each year to the Par- liament of a member state the Annual Implementation Report (progress achieved and open issues). The Director of the Secretary presented the conclusions of this report in the part related to the energy sector of Montenegro to the Board for Economy, Finance and Budget of the Parliament of Montenegro and at the meeting with the representatives of the Ministry of economy, which was attended by a representative of the Agency.

Mediterranean Energy Regulators - MEDREG

The Mediterranean Energy Regulators Association (MEDREG) was established in 2007 with the aim to improve a transparent, stable and harmonised regulatory framework in the countries of the Northern, Southern and Easter coast of the Mediterranean basin.

The main goal of this association is to promote clear and harmonised legal and regulatory frame- works within the member states to enable secure infrastructure investment and accelerate market integration. This association continuously provided, through the work of working groups, exchange of experience and knowledge, analysis of national legislations, and also presented situations through reports and made recommendations for specific area. This association organises specialised trainings in the areas that are significant for the work of the regulators, which are attended by representatives of the Agency.

During the analysed period, the most attention was devoted to the analysis of the situation in the segment of protection of vulnerable customers and how to evaluate investment projects and plans.

In addition to the activities in the aforementioned organisations, the Agency, as an observer, was involved in the work of the Council of European Energy Regulators, through the analysis of documents prepared by this body, in order to follow developments in the European regulatory scene and be ready to actively participate in the future cooperate with regulators from the EU countries.

European integrations

The Agency, through its representatives in working groups for the preparation of negotiations on the accession of Montenegro to the European Union for the area of acquis communautaire relating to the following negotiation chapters: Chapter 8 – Competition Policy, Chapter 15 – Energy, Chap- ter 21 – Trans-European networks and Chapter 28 – Consumer and health protection, followed the activities in the area of engagement of the country.

Out of aforementioned chapters, in the reporting period, the Agency actively participated in the work of the group in charge of the energy sector which was tasked to develop an Annex to the Eu- ropean Union Progress Report for Montenegro for the period 01.10. 2015 – 01.04.2016, and 01.04 – 01.10.2016. In addition to these activities, in December 2016, within the same group, the negotiation positions was amended by bylaws drafted after the entry into force of the new Energy law, and future activities in this field were highlighted.

8.2. International activities of the energy undertakings

Eclectic Power Industry of Montenegro AD Niksic

On 17 August 2016, EPCG obtained the license for wholesale market on the territory of Serbia (EMS) and thus obtained the possibility to directly participate in auctions for cross-border transmis-

sion capacities, on the borders of EMS control zone of (so far this activity was performed through EPCG DOO Belgrade or intermediary).

EPCG has launched an initiative to obtain the status of a balancing responsible party with EMS (status was granted on 20.12.2016) and with this status EPCG has the opportunity to trade on the wholesale market within the Republic of Serbia. In this way, EPCG has been enabled to establish cooperation with trading companies which have no interest in trading within the borders of Monte- negro.

During 2016, the procedure for the registration on the power exchange in Serbia (SEEPEX) was initiated, in order to enable EPCG to be a direct participant of the exchange (currently trading is carried out through an intermediary with a defined intermediary fee). It is expected that EPCG will be registered by the end of 2017.

Montenegrin Electricity Distribution System DOO Podgorica

DOO CEDIS is a member of the Southeast Europe Distribution System Operator Security of Supply Working Group – SEE DSO SoS WG. The working group started to work on 16 July 2016, with the aim to assist and support regional DSOs in the part relating to the distribution system maintenance and management through: regional cooperation, peer-to-peer interaction with each other and U.S counterparts, joint analytical review and solution of issues and problems of relevance for DSOs. Primary issues of importance are: development plans, benchmarking, renewable energy source integration, natural disaster response, asset management, AMM, automated distribution management systems, DSO restructuring. Currently, the most important activities of the group are the development plans of the DSO (review of the plans already made, software requirements, the potential involvement of the Institute Hrvoje Požar) and the Loss Reduction Strategy – Network Efficien- cy Study (drafting of terms of reference for the study).

Montenegrin Electricity Transmission System AD Podgorica

CGES cooperates with the European Transmission System Operators within the European Net- work of Transmission system Operators – ENTSO-E. CGES participates in the work of the Assem- bly, Committee, groups and task forces, thus contributing to the achievement of the objectives to promote and facilitate the establishment and functioning of the regional and internal EU electricity market, cross-border trade, and ensuring optimal management of the coordinated work and adequate technical development of the European transmission system. During 2016, through active participation in the work of the Assembly, System Operation Committee, Development Committee, Market Commute, and regional groups and task forces within the committees, CGES participated in the activities referred to: improvement of European standards for the functioning of the system, development of common communication system and network for data exchange for operational planning and security analysis, the platform for harmonisation of schedules and reports on exchanges of interconnection transmission lines, the harmonisation of individual chapter of the Oper- ative Manual with network codes, the preparation of documents providing the implementation of a new ENTSO E standard for exchange of models and higher quality of data being exchanged, then preparing and adopting the ten-year network development plan, the formation of a group to monitors the implementation of network codes at the national level, the daily publication of market transparent data, etc.

During 2016, within the Market Committee and the Southeast Europe Regional Group, CGES sig- nificantly participated in the following activities: network code for capacity allocation and congestion management (CACM), network code for forward capacity allocation, draft network code for system balancing, timetable for the implementation of CACM Regulation, harmonised auction rules for SEE CAO. The implementation of this network codes should enable the integration of the Montenegrin electricity market into the single EU electricity market, while the deadlines for implementation will be defined by the Decisions of the Ministerial Council of the Energy Community. Through the

Southeast Europe Regional Group, CGES participated in the work on harmonised auction rules to ensure the harmonisation of the work of the transmission system operator with EU regulations.

As one of the founders of the ENTSO-E organization, which now has 43 members from 36 Euro- pean countries, CGES strives to implement declared goals of the organisation in Montenegro, while at the level of the association it participates in decision making process and applies common in- struments for the work of European interconnection to ensure coordination in normal and extraordinary conditions.

As for the so-called Berlin initiative and active participation of CGES within the WB6 Task Force, in April 2016, transmission system operators for electricity, national regulators and ministries of economy/energy of Montenegro, Albania, B&H, Macedonia, Serbia and Kosovo signed the Memoran- dum of Understanding and thus agreed on the principles of cooperation and activities aimed at developing the regional electricity market. In this way, they committed themselves to implement "soft measures” as a precondition for the development of the regional electricity market. The regional priorities refer to: the establishment of an organised day-ahead market and the establishment of a regional balancing mechanism. With the remaining five transmission operators, CGES actively participated in the implementation of "soft measures" within the WB6 working group through the Steer- ing Committee for day-ahead market integration and the Steering Committee for cross-border balancing.

CGES administers and manages ENTSO-E control area of Montenegro, which is part of the SMM control block, which also includes the control areas of Serbia and Macedonia. The coordination of the SMM block is performed by the transmission system operator of Serbia – EMS, in the cooperation with CGES and the Macedonian transmission system operator MEPSO.

Within the Association of the Mediterranean Transmission System Operators – Med TSO, CGES cooperates with the transmission system operators of the Mediterranean countries. This association was established with the aim to promote the coordination among the Med-TSO Countries of their National Transmission Network Development Plans and of their Power System operation, and CGES, as one of the founders of the association, which has 20 members form 18 countries of the Mediterranean, strives to contribute to achieving the declared goal, decision-making and the work of the association.

CGES participate in the development of network studies on network extension and the preparation of development plans, data delivery, analysis of documents, to enable compliance of documents being prepared at the level of this institution.

SUMMARY

According to its form and contents, the Report on situation in the Energy Sector for the year 2016 was prepared in the manner prescribed by the Energy Law, which is in force since January 2016.

This Report contains an overview of energy resources and capacitates in the field of electricity and coal, findings by the energy undertaking’s supervision, the realization of investments in regulated activities in the energy sector, the financial operations of energy undertakings and conditions and activities in the electricity market. The review of electricity prices that were in use in 2016 is also presented, as well as the review of prices in the EU countries and the region. Particular attention was paid to the participation of energy undertakings in international organisations and related working groups.

The main energy resources that have so far been used are the power of watercourses and coal, while lately considerable attention is paid to the researches and use of other energy resources, particularly renewable ( solar, wind, biomass,etc.).

Montenegro has a large technically usable hydropower potential relating to the use of the rivers Zeta, Piva, Tara, Moraca, Lim, Komarnica, Cehotina and Ibar and their tributes, in the amount of 4,6 TWh per year, but around 1.800 GWh, or slightly more than 39% of the technical potential was used in the so far built power plants (HPP Perućica and HPP Piva), using mainly hydro potential of the rivers Zeta and Pive.

A number of projects are being implemented in Montenegro with respect to aforementioned acti- vates, both in the area of utilisation of water and coal resources, as well as activities in the exploration of oil and gas reserves in the coastal zone.

In June 2016, the Parliament of Montenegro adopted the Decision on the Award of Concession Contract to Eni Montenegro B.V. Amsterdam Netherlands and Novatek Montenegro B.V. Amster- dam Netherlands for the production of hydrocarbons in the offshore of Montenegro, and in Decem- ber 2016 the Decision on the Award of Concession Contract to the company Energean Montenegro Limited from Cyprus for the production of hydrocarbons in the offshore of Montenegro. On the basis of the above mentioned decisions, these companies have signed the contracts stipulating that the research phase will last 7 years in total, with two periods that will last 3 and 4 years.

In addition to the mentioned potential that can be used for the construction of large capacity production plants, on the territory of Montenegro there is also a hydro potential of small water streams, that are increasingly used in recent years for the construction of small hydro power plants.

Due to the ecological and technological aspects, renewable energy sources have become the most influential element in strategic planning of energy development, both in the world and in Montene- gro.

Decision 2012/04/MC-EnC of 18 October 2012, adopted at the 10th Energy Community Ministerial Council meeting, stipulates the obligation of Montenegro to implement Directive 2009/28/EC on the promotion of the use of energy from renewable sources in its legislative system, and the obligation to achieve the national target which envisages that the share of renewable energy in Montenegro in total gross final energy consumption reaches a level of 33%.

In order to fulfil its obligations, the Government of Montenegro adopted a Programme for the development and use of renewable energy sources that sets out the national targets for using renewable energy sources, incentive measures, deadlines and dynamics for its implementation.

Pursuant to the Energy law and the Energy Development Strategy of Montenegro by 2030, the Government of Montenegro adopted the National Action Plan for the Use of Renewable Energy by 2020, which defines the way of utilisation of renewable energy sources, and the planned use of technologies necessary to meet the national target for the share of energy produced from renewable sources in total final energy consumption.

In addition to the old small hydro power plants owned by EPCG and Zeta Energy, which are connected to the distribution system, a total of nine small hydropower plants with installed capacity of 17,404 MW were built by the end of 2016. They are owned by DOO Hidroenergija Montenegro, DOO Synergy, DOO Igma Energy and DOO Kronor.

The Energy Regulatory Agency has defined the status of a privileged electricity producer for these nine sHPP, while according to the Energy law, 14 sHPP received the temporary status of a privileged producer by the end of 2016.

The construction of the WF Krnovo with capacity of 72 MW has been completed. Currently, it is in the phase of functional parameters testing, and its commissioning is expected soon.

Having in mind the number of concession contracts signed (for 46 sHPP with total planned installed capacity of 91 MW) and energy permits issued (for 27 sHPP with total planned installed capacity of 12 MW), it is noted that there is an increasing interest in the construction of small power plants in Montenegro in the following period.

The report also provides an overview of coal reserves in two basins, Pljevlja and Berane.

Total coal reserves in all circuits in the area of Pljevalja, as at 31.12.2016 (Data source: Letter from the Coal Mine Pljevlja, No 17/1495-2 of 24.05.2017) amount to 186.910.237 tons. The average energy value of Pljevla coal varies between 5.572 kJ/kg in the Ljuće II basin to 13.663 kJ/kg in the Rabitlje basin, while in the Maoce basin it amounts to 12.504 kJ/kg.

The Berane area has not been sufficiently explored, and it is estimated that brown coal geological reserves amount to about 158 mil. tons, but the exploitation reserves, estimated by the IMC Study on energy resources in 2008, amount to a maximum of 17,8 mil. tons (Data source: Energy Devel- opment Strategy of Montenegro by 2030).

The contract on the transfer of the contract on extension of the right to exploit and explore brown coal at the Petnjik reservoir, No 01-1699/1 of 04.07.2016, concluded between the Ministry of Econ- omy as the concession grantor, the Brown Coal Mines DOO Podgorica, as the concession assign- or, and the Berane Mines DOO, as the concession recipient, created the conditions to reactivate the production in this mine, which amounted to about 6.000 tons per month in 2016 with tendency of further growth.

The report provides an overview of all transmission and distribution capacities in Montenegro.

Delivering electricity through the transmission system in 2016 was characterised by high reliability, 99,99% of the domestic demand for electricity was transferred, and in the same period there were no cancellation of cross-border transmission capacities due to inaccessibility of interconnection transmission lines, nor serious damages on individual 220 and 400kV portions of the transmission system.

The dominant flow of capacities in the Southeastern Europe region is in the directions: North- South and East-West. The construction of the submarine DC cable to Italy and its full exploitation, that will follow after the construction of a new and strengthening the existing internal and interconnection links, will lead to a change in the direction of transit across the territory of Montenegro. It

was announced that in 2018 a part of the cable, with a transmission capacity of 500MW, will be put into trail work.

The distribution system for electricity consists of 35 kV plants, 35/x kV/kV transformers and 35 kV overhead lines, as well as plants, transformers and overhead lines of lower voltage level to the point where the users of the system are connected, whose main function is to supply final customers with energy that has entered in the distribution system from the transmission system, or from the power plants connected to the distribution system.

During 2016, the distribution system operator was unbundled from the vertically integrated undertaking (Elektroprivreda Crne Gore AD Niksic - EPCG) and that created the basic preconditions for the revival of the retail electricity market.

In 2016, customers connected to the distribution system were supplied with 2.510,3 GWh of electricity, which is by 96,2 GWh or 3,69% less than during 2015. Compared to the amounts of electricity for delivery to distribution customers planned by the Energy Balance (2.472 GWh), the consumption was higher by 38,3 GWh or 1,55% .

In the oil and gas sector, the Agency, in accordance with the law, issues licenses and monitors the operation of energy undertakings carrying out oil transport by means of transport, wholesale in petroleum products, retail trade in petroleum products, and storage of oil and petroleum products. Within the gas sector, the licenses for trade and transport of liquefied petroleum gas (LPG) have been issued for time being.

In 2016, the total of 71 undertakings operated in the Montenegrin petroleum product market based on the licenses issued by the Agency.

At the end of 2016, total licensed storage capacities used for storing petroleum products and LPG amounted to 143.770 m³, which is by 200 m³ more compared to the utilisation of capacities in 2015. Storage capacities in 2016 were increased by two newly built retail facilities.

At the end of 2016, 34 licensed undertakings, which had a total of 126 transport vehicles, performed the activity of transport of petroleum products and LPG. Out of that number of means of transport, AD Jugopetrol Podgorica has 25 vehicles, while the remaining 101 vehicles are owned by other licensed undertakings.

The segment of the control of the work work and operation of energy undertakings has been separately reviewed. It includes the legal unbundling of distribution system operator, the conclusion of contracts between energy undertakings, the electricity market development and organisation, the willingness of energy undertakings to establish a system for data collection and processing related to fulfilment of the minimum quality supply, the realisation of investment plans, particularly in terms of their influences on the reduction of losses in the distribution system.

Losses in the distribution system were reduced by the installation of “smart“ meters, by moving the metering points to the property boundary and more frequent controls to detect unauthorised consumption. They were reduced from 541,04GWh in 2012 to 404,01GWh in 2016, which is a decrease of 25,3%. “Smart“ meters have a technical ability to save abuse attempts in terms of unauthorised use of electricity and to send data to the memory centres, and enable full insight into the list of events. In this way, the identification of unauthorised consumption of electricity is facilitated and the commercial losses of electricity are dominantly reduced.

During 2016, control of the fulfilment of the conditions from the licenses by the undertakings in the oil sector was performed. No significant irregularities were recorded.

The report gives a special overview of the implementation of the investment plans of network operators, Montenegrin Transmission System Operator AD Podgorica (CGES) and Montenegrin Elec-

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tricity Distribution System Ltd Podgorica (CEDIS). It is noted that the investment in the transmission system operator are being implemented with satisfactory dynamics, except for the projects called „related infrastructures“ whose implementation is re-planned due to delays in the implementation of submarine cable which also has an impact on the implementation of related infrastructure in Montenegro.

The financial realisation of the investments for CGES is 87% for 2016.

The percentage of implementation of the investment plan for CEDIS for 2016 is 37, 76%. Invest- ments in the primary network amounted to 12, 38%, in the secondary network amounted to 50, 25%. Investments in AMR and metering points amounted to 58, 99%. Other investments amounted to 0, 57%, and investments in other fixed assets amounted 60, 43%. The highest percentage of implementation was with AMM project. As at 31.12.2016, a total of 263.069 new meters were installed, which is 72% of the total number of electricity customers in Montenegro. During the replacement, the meters have been moved to the property boundary, which, in addition to the reconstruction of the network, has reduced the possibilities for unauthorised use of energy. The new meters have the possibility for remote communication, resulting in a more efficient and accurate reading, a higher degree and more reliable disconnection of irregular customers, and thus a higher collection that exceeds 100% of the project, which means that outstanding claims are also charged. During the implementation of the project, the customer databases have been edited, and the monitoring of losses by transformers was enabled. The effects of the installation of new meters are already visible, as the total losses in the distribution system in 2016, amounting to 404,01 GWh are lower than the losses in 2015, when they were 445,05 GWh, by 9,22%. Losses in the previous period were considerable higher, so that as an example we can take the year 2012, i.e. the year when the project on the installation of new meters started, and when the losses amounted to 541,04 GWh.

It should be noted that the Energy law prescribes the obligation for the distribution system to equip at least 85% of electricity consumers with modern means of measurement by 01 January 2019.

A separate chapter of the Report deals with the financial operation of the following energy undertakings: CGES, CEDIS, Market Operator, Montenegro bonus and Coal Mine Pljevlja, as well as operation of the undertakings in the field of oil and gas.

It should be noted that the report does not contain the analysis of the operation of EPCG for the reasons mentioned in the introductory part of the report.

According to preliminary data from the annual report, for the period 01.07.-31.12.2016, CEDIS generated total operating revenue in the amount of 43.219.790 €, and total operating expenditures in the amount of 50.585.741 €. Negative operating result comes from operating activities as a difference between operating revenue and expenditures amounted to 7.365.951 €.

According to the financial report for 2016, CGES generated total revenue in the amount of 30, 2 mil €. In the same period, CGES generated expenditures in the amount of 27,50 mil €, it generated pre-tax profit in the amount of 2,70 mil €. Post-tax profit of CGES amounted to 2, 40 mil. €.

According to the financial statements for 2016, COTEE generated total revenue in the amount of 527.441 €, and total expenditures in the amount of 488.932 €, or it generated pre-tax profit from regular activities in the amount of 38.509 €.

In 2016, the Coal mine AD Pljevlja generated total revenue in the amount of 39.633.217 €, which is by 28,92% less than in 2015, total expenditures in the amount of 35.105.126 €, which is by 29,66% less than in 2015. Pre-tax profit amounts to 4.528.091 € while post-tax profit is 4.043.751 €.

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Out of the total 71 licensed undertakings in the oil and gas sector, until the preparation of this report, annual reports for 2016 were submitted by 50 undertakings, out of which 44 undertakings had a positive financial result, while six of them had a negative financial result.

With the entry into force of the Energy law, on 28th January 2016, and the Law on cross-border exchange of electricity, on 19th July 2016, the primary legislation implemented the Third EU Ener- gy Package, and by-laws were adopted, thus completing the legal-regulatory framework and creating all the preconditions for market opening and strengthening market orientation in the organisation and functioning of the energy sector.

The electricity market in Montenegro consists of the wholesale and retail markets. The participants in the wholesale market are producers, traders, supplier and customers- self suppliers, as well as the transmission system operator and distributions system operator when they buy energy to cover losses in their systems, while participants in the retail market are suppliers and final customers (consumers at all voltage levels).

In 2016, 36 active traders participated in the wholesale electricity market, while DOO Uniprom Nikšić, as a customer- self-supplier provided energy for the needs of the Aluminium Plant Podgori- ca.

An important segment of the wholesale electricity market is the allocation of available transmission capacity on the interconnections (inter-system lines), which takes place through auctions that are organised by the South East Europe Coordinated Auction Office (SEE CAO) in the Southeast Eu- rope region for several years. Auctions are the allocation of available capacities on the borders of all energy systems in the region, except on the borders with Serbia that has not yet signed the accession contract to the SEE CAO. During 2016, the SEE CAO carried out annual, monthly and daily auctions of cross-border capacities on the borders of Montenegro with Bosnia and Herzegovina and Albania, while the allocation of the transmission capacity on the border with Serbia was carried out through the auctions organised by CGES. Innovated auction rules, based on which the SEE CAO organised auctions, were approved by the Agency in September 2016, while the auction rules which are applied by CGES, and harmonised with the Energy Law, were approved in June 2017.

In the same period, in addition to the existing suppliers EPCG and DOO Montenegro Bonus, three new licensed suppliers of final customers (DOO Energia Gas and Power, DOO Uniprom and DOO Petrol Montenegro MNE) appeared in the retail market. Although, based on the data provided in the submitted business plans of new suppliers, their significant participation in the supply of Monte- negrin consumers is not expected in the initial phase, their very appearance in the market is a good sign and progress in the process of creating the real competition in the supply, i.e. the revival and strengthening of the retail electricity market.

In 2016, the unbundling of the distribution system operator from the vertically integrated energy undertaking (EPCG) and the formation of a separate legal entity DOO Montenegrin Electric Distri- bution System (CEDIS) was finally completed, which is a very important condition for the emergence of new suppliers, i.e. for the revival and development of the retail market.

The chapter relating to the Agency’s activities provides an overview of the solutions laid down in the Energy law, which implemented the Third EU Energy Package, and bylaws adopted by the Agency in accordance with the authorisations referred to in the law, as well as legal solutions and activities of the Agency in the field of consumer protection.

The special part of the report deals with international activities of the Agency and energy undertakings: EPCG, CEDIS and COTEE.

The Agency actively participates in the work of the Energy Community Regulatory Board (ECRB), which is charged by the president of the Board of the Agency since the end of 2013. ECRB consists of three specialised working groups, for electricity, gas and consumer protection, in which the

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Agency has its representatives. The Agency is an active participant in the work of MEDREG within which it attends the General Assembly meetings, as well as the work of the working groups in which it also has its representatives. As an observer, the Agency follows the work of CEER and AIB.

EPCG’s international activities were focused on the creation of conditions for participation in the regional electricity markets. To this end, they have obtained a license for wholesale market on the territory of Serbia as a condition for participation in auctions for cross-border transmission capacities on the borders of the control area of Serbia.

The Electric Network of Serbia has provided the status of balancing responsible party which allowed trading in the wholesale market of the Republic of Serbia and cooperation with trading companies that trade in the market of the Republic of Serbia.

During 2016, the procedure for registration in the power exchange in Serbia – SEEPEX was initiated, so that EPCG could be a direct participant in the exchange.

DOO CEDIS achieved international cooperation through membership in the Southeast Europe Dis- tribution System Operator Security of Supply Working Group – SEE DSO SoS WG, which was formed to assist and support regional DSOs in the part relating to the maintenance and management of the distribution system through regional cooperation.

CGES cooperates with European Transmission System Operators within the European Network of Transmission System Operators – ENTSO-E. As a significant activity during 2016 within the Market Committee and Regional Group of Southeast Europe, CGES participated in activities that related to: the network code for capacity allocation and congestion management (CACM), forward capacity allocation (FCA), draft network code for system balancing, timetable for the implementation of CACM regulative, harmonised auction rules for SEE CAO.

Regarding the so-called Berlin Initiative and active participation of CGES in the WB6 Work Force in 2016, the electricity transmission system operators, national regulators and ministries of economy/energy of Montenegro, Albania, B&H, Serbia and Kosovo signed the Memorandum of Under- standing and thus agreed principles of cooperation and activities with the aim to develop a regional electricity market. In this way, they committed to implement so-called “soft measures” as a precondition for the development of a regional electricity market. The regional priorities refer to: the establishment of an organised day-ahead market and regional balancing mechanism. CGES and other five transmission operators within the WB6 Working Group actively participated in the implementation of „soft measures” through the Steering Committee for day-ahead integration and the Steering Committee for cross-border balancing.

In addition to the aforementioned activities, CGES also achieved international cooperation as part of the SMM control block, which includes the control areas of Montenegro, Serbia and Macedonia, as well as through the participation in the work of the Mediterranean Transmission System Opera- tors Association – Med TSO.

Number: 17/2388-3

Podgorica, 26. July 2017.

The President of the Board of the Agency

Branislav Prelevic

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