The early legal initiatives for competitive restructuring of the Albania Power System (APS) started in 2000 by the adoption of the Power Sector Policy Statement in 2002 followed by the enactment of the Law on Regulation of the Electricity Sector in 2003 which laid out the fundamentals of the sector reform.

Later on, in 2008, the Albania Market Model (AMM) was shaped by a market model framework approved by the government. As of mid 2011, the regulator, ERE, has already determined tariff methodologies for regulated (i.e., generation, transmission and distribution) segments of the sector and issued bylaws with regard to market rules and procedures.

Regarding the wholesale activity within the Albanian Market Model, KESH Gen is given a mission to supply energy for captive customers and operate in a way to financially mitigate the hydrological risk inherent in the Albanian supply portfolio. Based on the AMM, KESH Gen is also obligated to provide Ancillary Services to the transmission system operator, TSO and sell its remaining generation to the WPS at tariff determined by the regulator ERE.

KESH also acts as the Wholesale Public Supplier (WPS), who is the default energy supplier for all tariff customers in Albania and fulfils this function via the energy purchases from KESH Gen, Vlora TPP and IPPs –small hydro plants that signed Power Purchase Agreements (PPA) with the WPS– at regulated tariff. As the public entity responsible for supply security in Albania, the WPS buys energy either from the internal market –mainly from KESH Gen– or through imports when generation by KESH Gen is not adequate. Currently, the energy provided for captive customers represent almost all (99.9 percent) of the transactions in the market.

TSO, a state owned company, is responsible both for operating, maintaining and developing the transmission grid and for fulfilling the Market Operator functions. Ancillary Services are provided by KESH without a market mechanism.

The recently privatized distribution segment of the sector is served by CEZ, a private company, holding both the license as Retail Public Supplier (RPS) and Distribution System Operator (DSO) per Share Purchase Agreement that went into effect in 2009.3 The RPS has the exclusive right to provide energy to all tariff customers and purchases most of its energy needs from the WPS at regulated tariff.

In the Albanian Market Model, currently KESH Gen owns nearly 1,432 MW of hydro generating capacity with an additional 97 MW of (oil–fired) thermal capacity through the subsidiary of Vlora Thermal Power Plant, expected to be commissioned in 2011.9 Considering an additional 25 MW of installed hydro capacity owned by small IPPs with PPAs with KESH Gen, therefore this company virtually owns almost all of the installed capacity in the market. In terms of supply portfolio, hydro generation capacity constitutes approximately 94 percent of the total installed capacity 10 and, in average hydrological conditions, is the source of 99 percent of the total domestic generation. In 2010, the net total domestic generation was nearly 7,700GWh. In the last 10 years Albania`s hydro generation varied between 2,821 GWh in to 7,675 GWh depending on the hydrology. Such complete dependence on hydro capacity creates a need for imports during dry years and, as such, Albania was a net importer of electricity in most of the years between 2001 and 2010.