Russian Annual Meeting of Energy Regulators Moscow, 1-2 April 2010

1. RussianAnnual Meeting of Energy RegulatorsMoscow, 1-2 April 2010 Investment in the power sector and regulatory challenges and practices: An IEA Perspective Mr. Didier HOUSSIN Director, Energy Markets and Security International Energy Agency

2. Electricity Demand Outlook – Average Annual Rates of Growth 2007-2030

3. World electricity generation by fuel in the Reference Scenario

4. Capacity additions by region, 2008-2030 (WEO 2009 Reference Scenario)

5. Cumulative energy investments in Reference Scenario (2008-2030) Total investment = $25.6 trillion (in year-2008 dollars) Transport Shipping & ports 4% 14% Refining Coal $0.7 trillion 3% 17% Biofuels $0.2 trillion 1% Oil Mining 86% Upstream 79% $5.9 trillion 23% Gas $5.1 trillion Electricity $13.7 trillion 53% 20% 15% Transmission 9% LNG 33% Distribution T&D 33% Generation 52% 58% Upstream Just over half of all energy-investment needs to 2030 are needed in the power sector, mainly in non-OECD countries

6. Projected cumulative investments ($ 2008) in the power sector – 2008-2030

7. Global asset investment needs in renewable and other generation sources Source: WEO 2009 * Including PV in buildings Total annual investments in renewable power assets need to significantly ramp upin order to achieve the 450 policy scenario objectives

8. Russia energy-related CO2 emissions abatement

9. Russia power generation capacity in the 450 scenario

10. Demand uncertainty: How strong will be the economic recovery?

11. Electricity supply trend – OECD Gas - Main contributor to the 2000-08 growth in OECD electricity generation

12. Main Conclusions: Median Case- Sensitivity to Cost of Financing LCOE 10% LCOE 5% No technology has a clear overall advantage globally or even regionally.

13. Main Conclusions: Median Case - Sensitivity to CO2 cost 160 OECD 30 $/t CO2 OECD 60 $/t CO2 140 LCOE 10% 120 100 LCOE 5% Levelised Cost of Electricity, LCOE 5% and 10% ($/MWh) 80 60 40 20 0 Nuclear Coal Coal w. CCS Gas Wind To bolster competitiveness of low-carbon technologies such as nuclear, renewables and CCS, we need strong government action to lower the cost of financing and a significant CO2 price signal to be internalised in power markets.

14. Fundamental changes in electricity markets … Electricity supply Increasing share of renewable electricity More distributed and variable generation, often remotely located Increased need to deploy low-CO2 emitting generation technologies, with higher costs … Transmission is key to renewable development Structural changes in demand Technology deployment and customer pricing expected to foster demand responses Demand in some countries becoming “peakier” due to air-conditioning loads Residential expected to grow faster than industrial demand Electricity networks need to cope with larger fluctuations in both supply and demand Transmission should be seen as part of the solution Smart grids seen as tool to manage increasingly more complex power systems

15. Establishing frameworks for competitive electricity markets • Unbundling • Competitive generation/wholesale markets • Truly independent system operation • Retail competition • Independent energy regulator • Transparent market rules enabling fair, open and non-discriminatory access to all market players • Clarity, stability and predictability in regulatory approaches • Regulator should be seen as a market facilitator • Need for regulators and have adequate competencies and resources • Importance of market monitoring and oversight

16. Generation – Importance of cost reflective prices • Cost reflective prices are: • Pre-condition for successful introduction of market reforms • Corner stone of efficient market response • Essential for efficient and timely operational and investment decisions in competitive electricity markets • In Russia, considerable progress has been made to make electricity tariffs more cost reflective and to remove cross subsidies • Government keeping to its plan to raise domestic natural gas prices • But, considerable challenge remains • Tariff levels remain relatively low by international standards and compared to the returns that are needed to attract new investment • Tariff levels remain relatively low to stimulate energy efficiency

17. Generation – Ensuring market efficiency and adequate investments • Refrain from price caps and market interventions • Energy–only markets (e.g. Canada, Australia) have delivered good investments • Capacity measures should be last resorts • Promote competition through • Transparent market rules enabling fair, open and non-discriminatory access to all market players • Reducing the dominant role of incumbent utilities • Eliminate barriers to market entry to facilitate IPPs • Mitigate risks of market power through market monitoring and oversight • Putting a price on CO2 guides investments towards cleaner generation options

18. Transmission – Achieving transmission adequacy • Transmission has generally lagged growth of generation and demand in IEA countries • Large integration of renewable require more network investments, including smart grids, and increased flexibility of power systems • Markets need coordinated generation and transmission planning • Regulatory approval process should be streamlined to avoid costly delays while allowing for early public participation • Cost recovery may be facilitated by incentive rates of return • Incentive rates of return make may be necessary to enable higher risks projects • Regulatory harmonisation is essential for regional markets and cross-border investments

19. Consumer protection • Retail competition protects and brings the benefits to the consumer through competitive prices, customer choice and innovation • Demand response to price adds real resources to the system • Transparent prices improve framework for energy efficiency • Issue of fuel poverty/vulnerable consumers would be better addressed by social programs - not by cross –subsidization nor regulated prices

20. Key messages (1) • Electricity market reform has delivered benefits to liberalised markets • Effective competition requires independent system operation and transparency • Cost reflective prices provide fair signals for investment choice and consumer response • Markets need an improved framework to empower consumers to participate • Need institutional arrangements for market monitoring and coordinated planning • No “one-size-fits-all” market model

21. Key Messages (2) • Huge investment needs in the power sector for the coming years • De-carbonisation of electricity generation is essential to the transition to a sustainable energy future • Investments face challenges associated with uncertainty in demand, climate change targets and energy security • No technology has a clear overall advantage globally or even regionally • For energy security and climate change mitigation, investment in low carbon technologies is key • CCS, renewables, nuclear and energy efficiency must all be embraced • The regulator plays a key role in ensuring timely, sufficient and cost effective investments in generation and transmission • Better regulation requires coordinated planning, co-operation and harmonisation