Transmission and Retail Tariff
Benchmarking
Donald Hertzmark
International Resources Group
Highlights from Draft Report
Prepared in Cooperation with the CEER-SEE
Regulatory Working Group
Disclaimer: This is an USAID-supported report
and has not yet been approved by the CEER
Assembly
October 2006
Athens, Greece
Transmission Tariff Benchmarking
•
•
•
•
•
Formulated questionnaire in July 2005
Most responses completed by October 2005
Revised responses received in April 2006
Final Report completed
Findings:
–
–
–
–
Wide variations in status of transmission tariffs, less in type of tariff
Differential effects on efficiency
Most do not yet cover costs (but should within 3-4 years)
Most SEE electricity markets too small to take full advantage of
optimal transmission tariffs
Retail Tariff Benchmarking
• Retail tariffs part of initial questionnaire
• Findings:
– Wide variations in status of retail tariffs, as well as in type of
tariff
– Differential effects on efficiency
– Most do not yet cover costs (but should within 3-5 years)
– Small market size not as great an obstacle to efficiency as
with transmission tariffs
EU Transmission Pricing Guidelines
• Harmonize network access charges for generators
(the “G” component)
• Provide locational price signals for generation and
transmission
• Eliminate distance-based transmission tariffs and
charge for entry and exit
Brief Summary of the Transmission Tariff Findings
1. Transmission prices for ECSEE members ranges
from 1.37-5.7 €/MWh. This compares with a range
for EU members of 3-14 €/MWh
2. Trade and investment:
a. Optimal transmission tariffs, while desirable, are not
necessary to stimulate trade and investment
b. A “good enough” tariff that covers costs and sends the right
signals on congestion and location is an excellent starting
point
Impacts of Transmission Pricing Policies on Trade and Investment
Increased
Electricity
Trade
Low
Low
transmission
transmission
& generation
and
generation
tariffs
tariffs
Timeofofuse
use&
Time
and
Locational
Locational
differentials
Cost
Cost
& and
Asset
Asset
Tariffs
Tariffs
Reduced
Electricity
Investment
High
transmission
High transmission
low
& lowand
generation
charges
generation
charges
IV
I
III
II
Transmission
Transmission
tariffs
tariffs
notnot
costcost-reflective
reflective
Increased
Electricity
Investment
High
Reduced
Electricity
Trade
High
transmission
transmission
&
generation
and generation
tariffs
tariffs
Brief Summary of the Transmission Tariff Findings
(cont.)
3. Cost coverage in full is a feature of all of the
respondents that have successfully restructured
4. Many countries, including some EU members, use
some sort of cross-subsidy to protect certain classes
of electricity users
5. Where cross-subsidies are significant relative to the
overall tariff revenue, potentially beneficial effects of
separate tariffication of transmission are lost in the
noise of the transfer payments
Brief Summary of the Transmission Tariff Findings
(cont.)
6. Many respondents have started to feature more incentive
clauses for promoting improved efficiency
7. Most countries have either locational or temporal price
differentials and four of the seven ECSEE members have some
element of ancillary services tariffs
8. Successful tariffication of transmission and distribution can be
accomplished using the current capabilities of regulators
9. The respondents show significant differences in their progress
toward tariffs that meet the EU guidelines discussed above
Selected
Results,
Transmission
Selected Results of Transmission Pricing Survey: Prices and Incentives
Share of Network Costs
(%)
Price Signals (x =>xxx)
Time of
Day/Seasonal
Locational
x
x
N/A
Y
Country
Generator
Load
Albania
Does
Transmission
invoice
Include
System
Services?
Average
Value (€ per
MWh)
without
system
services
BosniaHerzegovina
0
100
xx
x
N/A
Y
Bulgaria
0
100
xxx
x
4.76
N
N/A
N/A
N/A
Y
UNMIK
FYROM
Romania
Turkey
x
x
N/A
N
50.3
49.7
xx
xxx
5.7
Y
50
50
x
xxx
3.63
N
x
xx
N/A
N
Other Respondents
Austria
Greece
27.4
77.6
x
xx
4.4
Y
Hungary
0
100
x
x
9.0
Y
Italy
35
65
xx
x
~12
N
Slovenia
0
100
xx
x
4.1
Y
Notes: System services generally include both losses and reactive power, as well as system operation
charges. Other A/S are not included. Some countries have not yet completed their transmission tariffs or
have not yet fully differentiated certain cost elements. Italy charges a fixed fee in addition to the G and L
charges. Most of the missing results for the SEE countries will be furnished early in 2006 as UNMIK,
Albania, Bosnia-Herzegovina and FYROM implement newly-designed transmission tariff systems. Where
A/S are included in the transmission tariff, they are sometimes denoted separately on the invoice, as in
Romania.
EU Retail Pricing Guidelines
•
•
•
•
Prices should not vary “too much” among neighboring countries
Small (“vulnerable”) consumers should be protected in terms of
both prices and service continuity
Countries should proceed as quickly as possible to full retail
market opening
There are two key criteria to market competitiveness
– Number of consumers changing suppliers
– Market share of top three suppliers
Brief Summary of the Retail Tariff Findings
• Prices vary significantly from one country to another
– 2:1 ratio of highest to lowest price within a given category is
common - is the cost differential this great?
– Differentials between customer classes vary widely from
one country to another
• Generation costs not recovered in some tariffs
• Retail tariffs subsidized in many countries - both
generation & transmission/distribution
• Retail market opening starting for industry, not yet
common for commercial and residential
Industrial and Commercial Tariffs
C o u ntr
A lba
y
n ia
T ar i f f T ype
&
Desc
r i p t io n
Av er a g e Va
(Û / M W h )
T im e o f D ay
Di f fer e nt i al
I ndu
Cost + rate
of
ret u r n (pri
c e
discrimi
n at i o n b y
ow n ership
s ta t u s)
36 - 60
100
of
T ime
Seaso
B u lgaria
Cost + rate
ret u r n
of
In dustrial
O n ly
40
*
Croatia
Cost + rate
ret u r n
of
In dustrial
Commercial
&
54
77
UN
Cost + rate
ret u r n
of
Seaso
T ime
n a l and
of D a y
48 - 54
57 - 84
Cost + rate
ret u r n
of
Seaso
T ime
n a l and
of D a y
32
77
39 - 95
100
66
66
25
42
51
65
M onte
Roma
M
n e gro
n ia
rate
Cost + rate
ret u r n
Serbia
T u rke
Price Cap
Cost +
ret u r n
y
Prepared b
lice n s e es
Notes
: B u l garia
d oes
n
ma y apply
to u se ei t h er
pat t er n s o f u s e.
Prices
s u c h a charge
is u s e d.
u sers
f or i n d u strial
a n d
T ime
of
da
of
T ime
of
D a y
of
Seaso
y ret
a il
No
n al
y
&
65 - 79
Cost + rate
ret u r n
FYRO
D a y
Commer
69.9
Bos
n ia Herzego
v in a
MI K
of
n
s tri a l
l ues
c ia l
-1 7 0
o t h ave
a d ist i n ct c ommercial
tariff
a n d s u c h u s ers
i n d u stria
l or
resid
e n tial
tariff
bas
e d o n vol u me a n d
i n clude
c apac
i t y c h arges
for
ea c h c o u ntr y w h ere
Monte
n e gro
c h ar g es
a n c i llar y ser
v ic e s t o final
commercial
c a te go ries
as
reactive
p ower
c h ar g e.
Residential Tariffs
Countr y
A lb a n ia
Bo s ni a Herze gov in a
Bu lgaria
Croa tia
UN M IK
FYRO M
Rom a nia
M o n te n eg r o
Serbia
Tur k e y
Time of Da
Differential
y
Time o f D a y &
Sea s on
In du stria l O nl y
Time o f D a y
Sea s o n al a n d Tim e
of D a y
Sea s o n al a n d Tim e
of D a y
Time o f D a y
No
Sea s o n al
No
Av erage Values
(Û/M Wh)
Retail
77
57
51
74
70
37
69
58
33
53
Impacts of Tariff Structure on Efficiency & Investment
Increased
Efficiency
High Taxes &
Stranded Cost
Recovery Fees
Time of use &
Locational
differentials
Cost & Asset
Tariffs
Reduced
Electricity
Investment
IV
I
III
II
Retail
tariffs not
cost-reflective
Low generation
Cost recovery
Reduced
Efficiency
Increased
Electricity
Investment
Very high
Price level w/
Small differentials
Impacts of Transmission Pricing Policies on Trade
and Investment
•
Prices only have to be ”good-enough” to stimulate some trade
and investment - especially if significant transmission
investment is needed.
– A “good-enough” tariff will
1. Cover all costs of transmission, including new capacity
2. Provide “reasonable” signals regarding congestion and location of new
generation
3. Reflect energy policy priorities - renewables, cogeneration, etc.
A few years of “good-enough” can provide enough financial
strength to implement a more sophisticated tariff
Impacts of Transmission Pricing Policies on Trade
and Investment
•
•
Subsidizing your customers, especially if they are foreigners,
will not stimulate investment
Transmission and generation prices have asymmetric impact:
– Effective pricing system is necessary but not sufficient for good
outcomes,
– Inefficient pricing system is sufficient in itself to assure bad
outcomes
Incentive Structures - Transmission Tariffs
Transmission and Distribution Tariff Variations
Country
Albania
Austria
Bosnia-Herzegovina
Bulgaria
FYROM
Greece
Hungary
Italy
UNMIK
Romania
Slovenia
Turkey
Locational
No
Yes
No
No
No
Yes
No
No
No
Yes
No
Yes
Time of Use
Yes
No
Yes
No
Yes
No
No
Yes
Yes
Yes
No
No
Ancillary Services
Yes
No
Yes
No
No
Yes
Yes
Market
Yes
Yes
Yes
No
Note: virtually all countries distinguish between day and night for industrial tariffs, and for certain commercial and
even residential users. However, this table covers only time and locational differentials in the network tariff, not
in the energy commodity charge.
Impacts of Retail Pricing Policies on Trade and
Investment
• Dribbling and passing (cost recovery with reasonable
differentials) goes far to promote both efficiency and
investment - fancy tariff structures are secondary to
basic cost recovery with reasonable fairness
• High fees will encourage efficiency (low use) but
discourage investment in new capacity
• Effort made to unbundle systems must be matched
with efforts
– to improve information flow through metering and operations
analysis, and
– to implement tariffs based on this information.
Retail Tariff Benchmarking - Impacts on Trade &
Investment
• Many tariffs kept below full cost recovery
• Difficult to generate investment in sector with
low tariffs
– Investors are wary of situations requiring
subsidies
– Problem of competition with legacy plants countries subsidize consumption to keep plants
running - reduces overall efficiency of power
sector
Retail Tariff Benchmarking - Impacts on Trade &
Investment
• Insufficient distinction between & among
customer categories
• Increased trade helps to force retail tariff
rationalization - c.f. Hungary & Slovenia
Retail Tariff Benchmarking - EU Members
• Neighboring EU members (except Italy) have
household tariffs in €80-100/MWh range
– Italy charges €160/MWh
• Industrial tariffs for large users cluster in €4055/MWh range
– Smaller industrial users show far more variation €55-95/MWh
• Wide range of variation for commercial users
- €60-140/MWh
Retail Tariff Benchmarking - Collections
• Results vary significantly among countries
and within customer categories
– Household collections range from 73% (Albania)
to 94-96% Bosnia-Herzegovina & Serbia
– Industrial collections vary widely as well, ranging
from 73% (FYROM) to 98% (Albania)
• EU respondents to questionnaire generally
showed collections >95% for all categories
Retail Tariff Benchmarking - Special Tariffs
• Government entities pay lower rates in
Bosnia-Herzegovina, higher in FYROM, and
the same everywhere else
• Some protection for low income households Romania, Turkey only
– If this is accurate, then some low income
consumers face hardship from electricity bills
Retail Tariff Benchmarking - Taxes and Levies
• VAT is levied universally
• Some countries levy fees for
–
–
–
–
–
Stranded costs
Public broadcasting
Municipalities
Market operation
Renewables
Retail Tariff Benchmarking - Impacts on Low
Income Consumers
• Specific subsidies to low income consumers
uncommon
– Not needed due to overall subsidization of retail
customers
• Lower income levels in SEE countries make full cost
tariffs more burdensome than in EU
• Electricity use per household varies far less than
does income per household within region and
between SEE countries and EU members
Retail Tariff Benchmarking - Next Steps
• Write up report on findings
• Institutionalize process in TWG
• Improve quality of reporting
Country
Transmission Tariff
Distribution Tariff
Other Fees, Subsidies
Albania
Combination of price and
revenue cap
N/A
Losses, capacity
reservation
BosniaHerzegovina
Cost + rate of return
N/A
Losses
Bulgaria
Cost + rate of return
Cost + rate of return with
revenue cap
Losses
UNMIK
N/A
N/A
Subsidies to public
broadcasting
FYROM
Revenue cap structure
Price cap structure with
performance incentives
Subsidies to some
industries
With performance incentives
Montenegro
Price Cap method Ğ based on definitions of covered cost
categories in tariff calculation. No distinct transmission or
distribution tariff. Distinct segment tariffs to be introduced in
2007.
Losses, system operation,
transmission capacity
charge
Romania
Revenue cap structure
Price cap structure
Losses, ancillary services,
limited subsidies to those
using less than 1000
kWh/yr.
Turkey
Revenue cap structure
Revenue cap
structure
Losses, ancillary services,
Òenergy fundÓ
47.8% Opex
3.5% Capex
42.5% Stranded Cost
6.1% ROI
Status of Tariff Working Group Members
Tariff Promotes Efficiency
Slovenia
Slovenia &
and
Hungary
Hungary
FYROM
FYROM
Italy
Italy
Romania
Romania
<=== Tariff Less Complete
UNMIK
UNMIK
BosniaBosniaHerzegovina
Albania
Albania Herzegovina
Turkey
Turkey
Bulgaria
Bulgaria
Tariff More Complete ===>
No reports from Croatia and
Serbia-Montenegro
Tariff Retards Efficiency
Greece
Greece
Regulatory Tradeoffs: Complexity v. Ease of Regulation
Tariff Promotes
Efficiency
Slovenia
Slovenia
Hungary
Hungary
Romania
Romania
Italy
Italy
<=== Tariff Less Complex
BosniaBosniaHerzegovina
Herzegovina
UNMIK
UNMIK
Bulgaria
Bulgaria
Tariff More Complex ===>
Albania
Albania
Turkey Greece
Greece
Turkey
FYROM
FYROM
No reports from Croatia and
Serbia-Montenegro
Tariff Retards Efficiency
Next Steps
• Circulate final transmission and retail tariff report
• Institutionalize benchmarking data collection and
reporting
• Improve use of pricing information in system planning