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					                       Russian Annual Meeting of Energy Regulators




               Comparison
  of key objectives, tasks and problems
     facing the EU and non-EU ERRA
        member energy regulators

            dr. Gábor Szörényi                        Moscow, Russia
            Chairman of ERRA                           April 1, 2010
Director of Hungarian Energy Office

                                                                                                1
 Russian Annual Meeting of Energy Regulators
                                                                     1 April, 2010, Moscow, Russia
      I would like to offer my sincere condolences to
      families of metro blast victims and to the Russian
      nation!

      I would like to express my deepest sympathy to
      people of Russian Federation!




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Russian Annual Meeting of Energy Regulator
                                              1 April, 2010, Moscow, Russia
Main topics

• Common objectives, tasks, problems
  identified in different regions with different
  emphasis
• Special effects of financial and economic
  crisis in the transient period of market
  building
• Demand and price forecast (estimation)

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Russian Annual Meeting of Energy Regulators
                                              1 April, 2010, Moscow, Russia
                                             EU market: ~3000 TWh




          ERRA market: ~2000 TWh


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Russian Annual Meeting of Energy Regulator
                                                       1 April, 2010, Moscow, Russia
Objectives I.

 The primary objective of European energy policy
  and legislation and consequently also of the
  national regulatory authorities (NRAs) is to
  promote a competitive, secure and
  environmentally sustainable internal market in
  electricity.
 ERRA has no energy policy because it is a
  professional organization for regulatory
  exchange and development.

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 Russian Annual Meeting of Energy Regulators
                                               1 April, 2010, Moscow, Russia
Objectives II.
 Key objectives:
       – Security of supply
       – Competitive market
       – Sustainability (climate change, environmental protection)

 A certain shifting of emphasis:
 • EU: A well-functioning internal energy market could solve security
   of supply issues in electricity (through right investment signals).
 • Non-EU ERRA: Security of supply has priority (with some state
   intervention; less belief in market solutions) + affordability (low
   end-user prices)
   There are countries targeting implementation of EU Directives
   (Energy Community Treaty Contracting Parties [SEE: Serbia, BiH,
   Croatia, Albania, Montenegro, Macedonia, UNMIK ], Treaty
   Observer countries [Ukraine, Moldova, Georgia and Turkey])
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 Russian Annual Meeting of Energy Regulators
                                                      1 April, 2010, Moscow, Russia
Problems: Concentrated Market
      – Concentrated (national) markets
         less chance for effective wholesale and retail
        competition
         solution: creation of regional markets (mitigation
        of market power), EU internal market
              Degree of concentration




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Russian Annual Meeting of Energy Regulators
                                              1 April, 2010, Moscow, Russia
Problems: Lack of Investment I
      – Lack of transparency on transmission access and
        generation.
      – Lack of adequate investment in energy infrastructure
        and generation
          predictable, transparent transmission pricing + incentive
         mechanisms needed
          energy efficiency measures + new renewable could be a
         solution partly
  The World Bank Report: „Lights out? The Outlook for
   Energy in Eastern Europe and Central Asia” highlights:
      „The total projected energy sector investment requirements for
        the region (30 countries) over the next 20-25 years are huge –
        about $3.3 trillion (1,1 – electricity) or some 3 percent of
        accumulated GDP over the period. ……. Cont.
                                                                                 8
Russian Annual Meeting of Energy Regulators
                                                      1 April, 2010, Moscow, Russia
Problems: Lack of Investment II


      „…..Although the public sector in these countries will clearly
         have to finance a portion of these investments, it will not have
         the capacity to meet the full investment needs. The countries
         in the region will therefore need to call on the financial depth
         and technical know-how of private sector investors and
         energy companies.”
       „ In order to attract these investors, countries will need to
         create enabling environments that provide secure ownership
         rights, are subject to the rule of law, foster transparency, and
         enable reasonable risk mitigation.”


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Russian Annual Meeting of Energy Regulators
                                                       1 April, 2010, Moscow, Russia
Problems: Legislation


      – Implementation of legislation
           • EU: the implementation of current Directives and the
             „new” Third Internal Energy Market Package is essential 
             Infringement procedure against 25 Member States
           • Non-EU ERRA: lack of detailed secondary legislation in
             some cases + lack of harmonised cross border trading rules
              less intensive regional trade (compared with
             possibility/need)




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Russian Annual Meeting of Energy Regulators
                                                      1 April, 2010, Moscow, Russia
Problems: Market Integration
 – Market integration
       • EU: Regional Initiatives  harmonised, common rules in
         regions on; Congestion management (cross border capacity
         calculation and allocation rules, market coupling), Transparency
         (available data/information for market players), Integrating
         balancing market  increasing political engagement; MOU of
         eight Baltic Sea Member States + MoU of seven states: Central
         Eastern European Forum for Electricity Market Integration
          EU-wide coordinated congestion management
       • Non-EU ERRA: some regional agreements + Energy Community
         + regulatory efforts on cooperation and harmonisation of
         procedures, rules

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Russian Annual Meeting of Energy Regulators
                                                      1 April, 2010, Moscow, Russia
Problems : Price Trends I.
      – Price trends
           • Brent crude oil price peaked ~ 92€/bbl ($147) in July 2008
              went down as 27 €/bbl ($37) by the end of 2008
             (decrease of 70%)  then increased in 2009 despite weak
             demand (mid 2009 ~ 50%)
           • Oil price has a direct impact on gas wholesale price (link in
             long-term gas supply agreements)
           • Gas wholesale prices influence electricity wholesale prices
           • The financial and economic crisis resulted in a significant
             fall in the consumption of gas and electricity



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Russian Annual Meeting of Energy Regulators
                                                         1 April, 2010, Moscow, Russia
Problems : Price Trends II.
      – Price trends
           • The fall in oil prices and in energy demand was not entirely
             reflected in end-user gas and electricity prices (imperfect
             markets, learning process of end-users in risk
             management)
                                                       %Rate of change in
                                                       electricity prices for
                                                      industrial consumers
                                                     second half-year 2008 –
                                                       first half-year 2009

                                                      Customer Groups by
                                                      Consumption
                                                      IC: 0,5-2 GWh/year
                                                      ID: 2-20 GWh/year


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Russian Annual Meeting of Energy Regulators
                                                         1 April, 2010, Moscow, Russia
Problems : Price Trends III.
• EU: The EC sector inquiry (2007) report highlights the
  phenomena of regulated end-user prices acting as a market
  distortion, especially for industrial users
• Non-EU ERRA: Hybrid model (regulated end-user price in
  major part of retail market  indirect cap for the free
  market as well)




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Russian Annual Meeting of Energy Regulators
                                              1 April, 2010, Moscow, Russia
Problems : Price Trends IV.

• Regulated end-user price for industrial users is not speciality of
  emerging markets out of 29 16(13) EU members have end-user
  price control at household (non-household) consumers
• „Universal Service” (USP) with regulated/controlled/monitored
  prices could be an umbrella for customers
• At what stage of wholesale market building, should
  Governments/Regulators clear the way of market processes in
  pricing; market based energy price for the retail market?
• What are the indicators which ensure that the functioning
  wholesale competition shall „control” the energy prices (instead
  of the price-regulation of energy component)?


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Russian Annual Meeting of Energy Regulators
                                                    1 April, 2010, Moscow, Russia
Problems : Price Trends V.
Low wholesale (energy component only) prices in some ERRA
countries not allow private investment in generation
           Price of electricity (only the energy component) paid by non-household consumers



                                                                            EEX prices (2008)

                                                                            EEX prices (2010)




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Russian Annual Meeting of Energy Regulators
                                                                          1 April, 2010, Moscow, Russia
Problems: Independence
of network operators

    Decision making practice of network operators in network access
    independently from trading interest is essential for functioning markets

 EU: Out of 29 Member States 19 go beyond the present
    requirements of legal and functional TSO unbundling.
 First cross-border TSO: E.ON sold its high voltage transmission
    network to the Dutch state-owned TSO (TenneT).
    All Member States will have to adopt their legal framework to
    new unbundling requirements of Third Energy Package
    (ownership unbundled TSO, ITO, ISO)
 Non-EU ERRA: Missing detailed unbundling rules in most cases!


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 Russian Annual Meeting of Energy Regulators
                                                                 1 April, 2010, Moscow, Russia
Problems: Regulatory Power I.

EU: Different regulatory powers and competencies in Member States
   in some cases less chance to enforce compliance with EU rules.
  The Third Energy Package has detailed rules governing the duties
  and powers of regulators. National Regulatory Authorities (NRAs)
  should be authorized (empowered) – among others;
   – to make independent (autonomous), transparent decisions,
   – to promote competitive, secure and environmentally sustainable
     energy market,
   – to fix (set) or approve tariff or tariff-methodology for access to and use
     of transmission and distribution networks,
   – to ensure compliance of network operators with network access (TPA)
     rules (especially cross-border)
   – to enforce consumer protection measures
Agency for the Cooperation of Energy Regulators (ACER) will ensure
                                                                             18
  regulatory oversight of cross-border issues.
Russian Annual Meeting of Energy Regulators
                                                   1 April, 2010, Moscow, Russia
Problems: Regulatory Power II.

 Non-EU ERRA: Wide variety of regulatory competencies;
 • Fewer duties on promotion of competition,
 • Less power on enforce non-discriminative TSO/DSO
   operation (unbundling, TPA, congestion management)
 • Voluntary harmonisation of cross-border and licensing
   issues
 • Those countries targeting implementation of EU
   Directives (Energy Community Treaty : Contracting
   Parties and Treaty Observer countries) has common
     legal basis and should have adequate regulatory power


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Russian Annual Meeting of Energy Regulators
                                                1 April, 2010, Moscow, Russia
Problems: Customer Protection I.
 EU:
 • Retail markets are not liquid enough in most cases,
 • Existence of dominant incumbents especially in household
   customer- markets in some cases reduces the chance of
   customer choices
 • Difficult measurement of customer’ switching rate (no clear
   picture)
 • Demand for easier supplier switching
 • EU politicians force template bills and recommendation for good
   practice in billing,
 • Complaint handling procedure
 • Role of DSOs on smart metering/smart grid and energy efficiency

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 Russian Annual Meeting of Energy Regulators
                                                  1 April, 2010, Moscow, Russia
Problems: Customer Protection II.

 Non-EU ERRA:
 • There is some market opening for wholesale and retail
   customers underway, but very limited cases of
   functioning and liquid retail markets,
 • Market segment (hybrid model) with regulated /
   controlled (politically reduced) end-user prices limits
   (distorts) retail competition
 • Different complaint handling practice
 • Less interest (competence) on smart grid / smart
   metering / energy efficiency
                                                                         21
 Russian Annual Meeting of Energy Regulators
                                               1 April, 2010, Moscow, Russia
Problems: Security of Supply
A dispute between two companies (Gazprom and Naftogaz) led to an
   unprecedented crisis in the EU’s gas supply in January 2009.
• Countries with high gas dependency were in a serious, very fragile
   situation  restriction, contingency
• New national strategies;
     – Energy efficiency measures,
     – New sources (renewable, nuclear),
     – Different supply routes and gas sources,
     – New storage facilities
     – LNG
• Common EU position + new Regulation (preventive actions and
   preparations for crisis management + infrastructure standards) foreseen
   to be adopted in 2010
Network development plan (10 years)
                                                                                    22
Generation adequacy Regulators
 Russian Annual Meeting of Energy
                                                          1 April, 2010, Moscow, Russia
Regulatory tasks achieving objectives I.

 Orientation of NRAs supporting governments to achieve key objectives
 EU:
 • Regulators are required to promote competitive, secure and
   environmentally sustainable energy market
 • More focus on issues related to network access (new entrants,
   congestion managements, unbundling, incentive network/system
   pricing, compliance monitoring, transparency, consumer complaints as
   minimum condition for competition and free customer switching
   between suppliers  Preparation of EU-wide binding grid codes by
   ENTSO  regulatory requirement prescribed in Framework Guidelines
 • Less focus on licensing, end-user „energy only” pricing
 • New focus on consumer switching procedures, on smart grid/metering and on
   energy efficiency, renewable support
 • More focus on market monitoring and ex ante promotion of efficient
   competition
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 Russian Annual Meeting of Energy Regulators
                                                          1 April, 2010, Moscow, Russia
Regulatory tasks achieving objectives II.

 Non-EU ERRA:
 • In most cases there are no clear distinction between
   responsibilities on different time-horizons promoting
   competition;
       – Ex ante: NRAs (through approving network codes, market operation
         rules)
       – Ex post: behaviour-analysis and anti-trust actions
 • Generally less effort on transparent network access (congestion
   management) rules and practice. [As part of the Energy
   Community market development: one significant activity is the
   cross-border transmission market monitoring work being done in
   Southeast Europe.]
 • Less effort regarding Climate Change related energy issues
   (renewable support schemes, energy efficiency, smart grid /
   smart meter, end-user involvement in system regulation)

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 Russian Annual Meeting of Energy Regulators
                                                        1 April, 2010, Moscow, Russia
Regulatory tasks solving key problems I.

 Concentrated national markets  regulatory task: mitigation of market power
 EU:
 • Regional Initiatives
 • Target Model  Consultation process: harmonisation among regions targeting
   common EU internal market
 • AHAG: European cross-border capacity calculation concept based on a
   common grid model and flow based calculation, target model for intraday
   trade, governance framework for day-ahead market coupling
 Non-EU ERRA:
 • Voluntary cooperation of harmonisation  regional market building
 • Significant Market Power concept (ex ante obligations)
 • Very slow process
 • If there is a threat of capacity shortage and/or security of supply problems
   politicians may become concerned and often interact in a way, which does not
   support competition and regional market building (support national
   champion, priority at borders, artificial barriers at borders)               25
 Russian Annual Meeting of Energy Regulators
                                                              1 April, 2010, Moscow, Russia
Regulatory tasks solving key problems II.
 Regulatory challenge: Convincing politicians to avoid maintaining or re-creating
 isolated, relatively small national markets instead of establishing regional market
 conditions. The lack of regional market and the national administrative measures
 discourage new private investments, especially large scale new generation
 investment.
 Regulated end-user pricing system could distort competition!
 Dilemma/Hesitation:
 • At what stage of wholesale market building, should Governments / Regulators
    give way to market processes in pricing; market based energy prices for the
    retail market?
 • What are the indicators which „ensure” that the functioning wholesale
    competition shall „control” the energy prices (instead of the price-regulation
    of energy component)?
     Challenge: Convincing politicians not to „create” a more robust USP
        umbrella and not to focus on household customers only, but to respond to
        industrial users as well
                                                                                         26
 Russian Annual Meeting of Energy Regulators
                                                               1 April, 2010, Moscow, Russia
Regulatory tasks solving key problems III.

 Challenge: Convincing politicians not to distort prices when the
  wholesale market prices are high anyway

                       2004             2005   2006   2007   2008




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 Russian Annual Meeting of Energy Regulators
                                                             1 April, 2010, Moscow, Russia
Regulatory tasks solving key problems IV.

 Lack of adequate investment in energy infrastructure (especially
    cross border network) and in generation (causing potential
    security of supply problems if demand grows again) during time-
    period which characterised by economic & financial crisis, and
    when wholesale market prices are low
 Situation:
 • Demand reduction
 • New foreseen financial policy of banks at present and in future
    [higher (regulatory) risk sensitivity in emerging markets, shorter
    lending periods, higher equity requirements]
 • Reduced market based whole pricing creates grace period for
    regulators

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 Russian Annual Meeting of Energy Regulators
                                                      1 April, 2010, Moscow, Russia
Regulatory tasks solving key problems V.

 Potential regulatory actions:
 -    „Real” evaluation of network asset ( depreciation and cost of capital could
      increase among network costs  network charge↑)
 -    Shorter amortisation period of network elements
 -    Network charge adjustment during pricing period (activated new investment
      elements could be accepted)
 -    Accepted return could be adjusted to new economic situation (Returns on
      Government bonds + risk premium)
 -    Higher accepted rate of return for new cross-border investment
 -    Exemption from general TPA rules
                                                 End-user tariff
       Network charge increase has less
       influence on end-user tariff during low
       energy price time-period  time for                           System charge
       adjustment
                                                                   Energy price


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 Russian Annual Meeting of Energy Regulators
                                                                   1 April, 2010, Moscow, Russia
Regulatory tasks solving key problems VI.

 After the crisis, if the demand will grow again capacity shortage
                       problem could be serious!
 • Avoid distortion of all prices (especially wholesale market price)
 • Lack of indicative price on national markets → supporting the concept
   of regional Power Exchanges
 • Active Regulatory (and Government) energy efficiency and energy
   saving and other Demand Respond programs, incentives could have a
   major role in capacity balance → e.g.: special tariff element (decoupled
   rates)
 • Hopefully the economic crisis will end soon and the Demand Respond
   programs + distributed generation (renewable and combined heat and
   power) could „keep” the capacity balance
                         Stable, non-discriminative, predictable,
                        transparent regulatory system is the key!
                                                                                        30
 Russian Annual Meeting of Energy Regulators
                                                              1 April, 2010, Moscow, Russia
Demand and price forecast (estimation)

 The energy demand forecast became very complex during crisis.
 The key unpredictable components determining electricity demand
 in medium term:
 • The length of economic/financial crisis
 • The new equilibrium where the financial market will be stabilized
    [new conditions financing industry (end-users) and energy
    projects]
 • The new level of demand stabilized after economic crisis
 • The effect of energy efficiency measures (based on initiatives of
    governments and/or market incentives)
 • Price elasticity
  The key message for governments / regulators wishing to
  avoid capacity shortage problems  the energy efficiency
  measure could be a good solution!
 Russian Annual Meeting of Energy Regulators
                                                                        31
                                              1 April, 2010, Moscow, Russia
Demand forecast (estimation)

 Peter D. Thomson                                                        Lights Out?
 Director, Sustainable Development Department
 Europe and Central Asia Region                                          The Outlook for Energy in
 The World Bank                                                          Eastern Europe and Central Asia

  Average Annual GDP, Electricity Consumption, and Primary
  Fuel Consumption Growth Rate in the CIS/CSE Region,                Projected Generating Capacity Additions, Rehabilitations
  2005–30 (%)                                                        and Retirements in CIS/CSE region 2005-20 (GW)
    6.0%
                                                                         250
    5.0%
                                                                         200
    4.0%
                                                                         150
    3.0%
                                                                         100
    2.0%
                                                                          50
    1.0%
                                                                           0
    0.0%
           2001-05    2006-10    2011-15         2016-20   2021-30
                                                                         -50

                                GDP                                     -100
                                Electricity Consumption                        2006-10        2011-15       2016-20      2021-25    2026-30
                                Primary Fuel Consumption
                                                                                  Additions             Rehabilitation      Retirements
               Source: World Bank staff calculations.
                                                                     Source: World Bank staff
                                                                     calculations


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 Russian Annual Meeting of Energy Regulators
                                                                                                                    1 April, 2010, Moscow, Russia
Phelix Baseload Year Futures (Cal-10) Prices
and trading volumes




                                                                         33
 Russian Annual Meeting of Energy Regulators
                                               1 April, 2010, Moscow, Russia
Futures prices for 2011

                                              Phelix Baseload Year Futures
                                               (Cal-11) Prices and trading
                                                  volumes from 2005




    Phelix Baseload Year
      Futures (Cal-11)
     Prices and trading
       volumes since
          17.03.09



                                                                                   34
Russian Annual Meeting of Energy Regulators
                                                         1 April, 2010, Moscow, Russia
Key objectives, problems and tasks of regulators




               Thank you for your kind
                     attention!

                           www.erranet.org
                        chairman@erranet.org

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 Russian Annual Meeting of Energy Regulator
                                              1 April, 2010, Moscow, Russia

				
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