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
Chairman of ERRA
Moscow, Russia
April 1, 2010
Director of Hungarian Energy Office
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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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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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EU market: ~3000 TWh
ERRA market: ~2000 TWh
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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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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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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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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.
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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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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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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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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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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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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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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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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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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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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
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Russian
Annual Meeting
of Energy Regulators
regulatory
oversight
of cross-border issues.
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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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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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
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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)
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Generation
adequacy
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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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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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)
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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
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Regulatory tasks solving key problems III.
Challenge: Convincing politicians not to distort prices when the
wholesale market prices are high anyway
2004
2005
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2007
2008
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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 timeperiod 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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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
adjustment
System charge
Energy price
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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!
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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
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measure
could
beRegulators
a good solution!
Russian
Annual Meeting
of Energy
1 April, 2010, Moscow, Russia
Demand forecast (estimation)
Peter D. Thomson
Director, Sustainable Development Department
Europe and Central Asia Region
The World Bank
Lights Out?
The Outlook for Energy in
Eastern Europe and Central Asia
Average Annual GDP, Electricity Consumption, and Primary
Fuel Consumption Growth Rate in the CIS/CSE Region,
2005–30 (%)
Projected Generating Capacity Additions, Rehabilitations
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
GDP
Electricity Consumption
-50
-100
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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Phelix Baseload Year Futures (Cal-10) Prices
and trading volumes
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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
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Key objectives, problems and tasks of regulators
Thank you for your kind
attention!
www.erranet.org
chairman@erranet.org
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