SEEPEX Serbian Experience 04/12/2017 / Miloš Vučković

Today I will be presenting to you key facts about SEEPEX and their regional power exchange developments. I am coming from Karanović & Nikolić, regional legal practice, operating in the SEE region, with extensive experience in energy related legal work. Our regional Energy & Infrastructure Practice Group provides services to a number of clients throughout the region. 2

SEEPEX’s ID SEEPEX is SEE power exchange operating in Serbia. It is operated by SEEPEX a.d., joint stock company owned by EMS, the Serbian TSO (75%) and “EPEX SPOT” S.E., European power exchange (25%) The exchange started its work on the 17th of February 2016, although it was initially planned to commence with their operations in 2010. 3

Rules and Documents The operations of SEEPEX and its members, as well as trade at SEEPEX, are regulated by the SEEPEX Exchange Rules. These Rules comprise of the following: Operational Rules; Code of Conduct; Exchange Rules; and Trading Agreement. In addition to the Trading Agreement, the Members are also required to enter into a: Balance Agreement Clearing Agreement Operational Rules : main document of the exchange Code of Conduct : The SEEPEX Code of Conduct is part of the Market Rules of SEEPEX) ! 4

Purpose of SEEPEX The SEEPEX objective is to ensure a transparent and reliable wholesale price formation mechanism on the power market by matching supply and demand at a fair and transparent price and ensure that all transactions concluded at SEEPEX are finally delivered and paid. SEEPEX provides a market place where exchange members send their orders to buy or sell electricity in determined delivery areas. Its role consists in matching these orders in a transparent manner, according to public market rules which among others describe the priorities and algorithms used for the matching of orders. SEEPEX’s role is also to strengthen the confidence which the market and the public have in the markets of SEEPEX, its pricing mechanisms and the reference character of the exchange prices. *source: web page of SEEPEX 5

State and Regional Context SEEPEX in Serbia – the only license holder for management of an organised electricity market Serbia as the Balkan crossroad – 8 neighbouring countries Spot Market Development in the Region: the WB6 context Serbia is ahead of neighbouring countries according to the WB6 Electricity Monitoring Re SEEPEX is a holder of the only licence for management of an organised electricity market in Serbia, issued so far by the Serbian Energy Agency 6

SEEPEX Products and Trading Day ahead market Single Order as standard product Block order as a 2017 novelty No forwards at the moment Intra-day market is not realistic at this trading volume SEEPEX share on the wholesale market in 2016 between 1.29 – 3.96% 2016 trading in numbers: Base price MAX (day) 63,14 €/MWh Peak price MAX (day) 75,72 €/MWh Average price (month) 34,75 €/MWh Price MAX (hourly) 93,63 €/MWh Base volume MAX (day) 7177,0 MWh Base volume SUM (year) 533270,1 MWh Average monthly volume (year) 1676,95 MWh Volume MAX (hourly) 441,7 MWh Trading on SEEPEX is voluntary and no regulatory measures promoting liquidity have been taken. Standard product traded is Single order on the day ahead market. As of March 2017, SEEPEX introduced a flexible block order as a new product with a view to increase liquidity. Further measures to increase liquidity should be implemented, such as purchase of network losses, selling of electricity from renewable sources, further deregulation of retail prices and abandoning the licensing regime. Since the bloc order was introduced this year, SEEPEX is currently conducting a survey based on the results of this new product, which should set the direction for the future of this as well provide insight on introducing of new products in general. Wholesale market in 2016 was based mainly on trade between suppliers, having in mind that independent producers in Serbia don’t exist. Supplier activity mostly includes cross border trades (transit trough Serbia). During 2016, export on wholesale market for the needs of end customers in Serbia was bigger than the import, due to good hydrology and thermal power plant production. Percentage of wholesale trading on SEEPEX can be seen in the following table. SEEPEX key figures in 2016 *source: SEEPEX annual report 2016 7

SEEPEX Members  8 GEN-I SI RS MVM Partner Serbia d.o.o. Beograd CH Energy Financing Team AG DE Statkraft Markets GmbH Interenergo d.o.o. EMS A.D. Beograd JP Elektroprivreda Srbije Beograd Holding Slovenske Elektrarne d.o.o. RO Tinmar Energy SA BA ERS (Elektroprivreda Republike Srpske) CZ Alpiq Energy SE Petrol d.d. Ljubljana HR HEP d.d. DK Neas Energy A/S  8

  SEEPEX Members Who can be a SEEPEX member? Foreign companies allowed / however a wholesale license for non domestic companies is a precondition Domestic companies need either a wholesale licence, supply licence or a licence for electricity production Endusers (industrial), TSO and DSO allowed to participate as well Balance agreement with TSO as a condition Members can trade on behalf of third parties Market maker and the role of EPS   Companies that are certified with valid licence from AERS could participate on Organized electricity Market, no matter if they are domestic or foreign ones. Non domestic companies need to own wholesale licence, while domestic need to carry one of following: wholesale licence, supply licence or licence for electricity production. Apart from them , end user could participate as well , where he will purchasing electricity for his own needs (industrial users), as well as trasnsmission and distribution system operators, who have opportunity to purchase electricity for the purpose of covering grid losses. As third-party trading is permitted on SEEPEX, members also trade on behalf of smaller companies EPS cannot be the Market Maker / no price – no methodology for calculation of the production price 9

Clearing European Commodity Clearing AG (ECC) ECC steps between the buyer and seller, assuming counterparty risk ECC performs all activities encompassing the daily balancing of profit and losses, the daily calculation of collateral requirements and the final physical and financial settlement ECC relies on infrastructure of international banks operating as Clearing Members Companies that trade on SEEPEX markets must be admitted as Non-Clearing Members and/or Clearing-Members by ECC. The role of KELER CCP All products traded on SEEPEX are cleared and settled by the European Commodity Clearing AG (ECC). ECC is a privately owned stocked corporation under the laws of Germany with registered offices in Leipzig. In its role as a central counterparty ECC steps between the buyer and seller and assumes the counterparty risk. In the event of a default, ECC guarantees payment and delivery of the transactions. More precisely, ECC performs all activities encompassing the daily balancing of profit and losses, the daily calculation of collateral requirements and final physical and financial settlement. The clearing process of ECC relies on an infrastructure of international banks operating as Clearing Members. Companies that wish to trade on the SEEPEX market have to be admitted as Non-Clearing Members and/or Clearing-Members by ECC. 10

SEEPEX’s Development to Date SEEPEX against the conservative regulations in Serbia, reservations of state agencies  Legal and operational issues successfully resolved: VAT & Customs  Extensive cooperation with Ministries, Customs administration and Tax authority in Serbia The first two years / legal and operational obstacles Successfully resolved problems so far: - Imports VAT, tax issues in general - Customs regulations, custom reporting issues simplified for members - FX problems that SEEPEX resolved – foreign currency trading enabled - Issues related to bankruptcy – ad hoc solutions to protect members – 72h period for settling obligations in case of bankruptcy - Clearing banks - Antagonism of other state agencies, bureaucracy SEEPEX as a success story – trading platform established and successfully functioning against the odds and conservative, underdeveloped regulatory and institutional environment 11

Obstacles for Further Growth Size of Serbian market Need for volume increase New products: forwards, block transactions New members 12

SEEPEX and the Market Coupling 4MMC Coupling process – what is the problem? Coupling initiatives with Montenegro, Bulgaria Obligations under the WB 6 Initiative Cooperation with neighbouring countries and the broader European context - implementation of a road map for regional day-ahead market integration in Western Balkans. There was no progress made towards coupling the Serbian day-ahead market with the markets of Hungary, Czech Republic, Slovakia and Romania (known as 4MMC), for which SEEPEX expressed interest in a letter of intent sent to 4 MMC together with the Serbian regulatory authority and the transmission system operator. Activities on coupling with 4MMC as well as with Montenegro, Albania and Italy are part of the implementation of a road map for regional day-ahead market integration in Western Balkans. Source WB6 Electricity Monitoring Report Energy Community Secretariat October 2017 + consider if mentioning the problem with Czech regulator/ministry, from the perspective of the broader European context… 13

Conclusions for the Future The role of EPS on the local market - 98% market share No suppliers on the exchange Need for further, structural change of the market Alternative approaches such as virtual PP (France) or regulatory measures (Scandinavia) Full liberalisation + growth of SEEPEX = increase of competition and consumer benefits Promising novelties: Croatian HEP to supply two Serbian cities for public lightning The potential of further regional development 2018 14

Thank you