Regulatory aspects of wholesale market tendencies on national and regional electricity markets

1. Investment Conference Regulatory aspects of wholesale market tendencies on national and regional electricity markets dr. Gábor Szörényi Chairman of ERRA Budapest, April 22, 2008

2. Main topics: • Regional situation on the wholesale electricity markets • Continuous commonmonitoring and evaluation • Difference between cost based price regulation and market based price • Potential regulatory interactions • Support new generation and network investment dr. Gábor Szörényi

3. Some conditions of markets and regions • Substantial demand growth in each region (3-10%) • Existing generation capacity not always available • Some regions are highly hydro (weather) dependent • Low utilisation of existing generator capacities (reliability problems) • Long-lasting preparation and long-continued decisions on new generation investment • Physically, legally and administratively congested borders • Some national net export position • diminishing • turn to net import position dr. Gábor Szörényi

4. Regulatory monitoring Why did we start the common wholesale market monitoring? • Price signals (+~10EUR/MWh) • Capacity shortage in SEE • Increasing cross border flow to South • Security of Supply questions • Roundtable discussion (2007 December, Bucharest) → Published Common Position • Wholesale market monitoring network dr. Gábor Szörényi

5. Monitoring methods Data-collection and evaluation of national and regional wholesale markets: • 2003-2008 (2009) data • Simplified capacity data • Installed capacity • Capacity mix • Cross border capacity • General energy data • Domestic production • Export-import balance • Consumption • Tariff and price analysis Data collection and analysis every 6 months National and regional analysis Region ≠ group of ERRA members dr. Gábor Szörényi

6. ERGEG Regional Initiatives dr. Gábor Szörényi

7. The Regional Group of ERRA Members 4 Lithuania Estonia Latvia 2 Poland Montenegro Russian Federation UNMIK Kosovo Bosnia and Herzegovina Hungary Ukraine Croatia Romania Mongolia Bulgaria Serbia Armenia Kazakhstan Azerbaijan 1 Moldova Macedonia Georgia Kyrgyz Republic Albania Turkey Jordan 3 dr. Gábor Szörényi

8. Group 1. Energy balance Regional Consumption, Production and Trade balance dr. Gábor Szörényi

9. Group 1. Export-Import Balance ERRA Group 1.: Net export dr. Gábor Szörényi

10. Group 1. Installed Capacities Insufficient new generation capacity! dr. Gábor Szörényi

11. Installed Capacity Mix Installed capacity mix in 2007 dr. Gábor Szörényi

12. Group 1. Market situation Massive demand increase Capacity shortage, insufficient new generation investment Hydro dependence Low utilization factors (35-55%) Growing import dr. Gábor Szörényi

13. Reduced net export possibility Group 2. Export-import balance dr. Gábor Szörényi

14. Dynamic demand growth Group 3. Energy balance dr. Gábor Szörényi

15. Continuous demand increase Group 4. Energy and capacity balance New investment slowed down(Installed capacity) dr. Gábor Szörényi

16. Possible reasons for the capacity shortage situation The possible reasons for the general situation are the following: • Continuously increasing demand • Energy efficiency (energy conservation) programmes are hardly effective • Strict environmental protection requirements and administrative licensing procedures create difficulty for investors to build new power plants, new high voltage lines • Emerging market conditions (immature market rules) on the national markets and the slowly developing regional markets couldcreate risk elementswhich postpone investment • In some cases the lack of transparent rules could increase the risk of new generation investment dr. Gábor Szörényi

17. Market Based energy prices Identification and comparison of energy prices • Basic difference in price formation: • Cost based „regulated” end-user price for household consumers • Regulated network (system) tariffs • Market based (not regulated) energy prices →strongly influenced by the supply-demand balance • Taxes, levies • Substantial difference in structure and level of system charges → influencethe „only” energy prices (uncertainty of comparison) • No liquid wholesale markets, very rare PXs → no indicative, really market based energy prices (but signals!) dr. Gábor Szörényi

18. Price of electricity (only the energy component) paid by non-household consumers Energy („only”) prices EEX prices (2008) dr. Gábor Szörényi

19. Price Signals • Wholesale energy market prices in Central Europe → German Power Exchange (EEX) prices [base load price: 55-60 EUR/MWh; peak load price: 75-85 EUR/MWh („only” energy without system charge)] (balanced market with adequate installed/reserve capacity). • Going to the South-East some markets have capacity shortages. On „short positioned” markets the traders/suppliers/importers are „ready” to pay higher price for energy. • The price difference between the region with adequate resources and the regions with capacity shortage is reflected in the deficit and in the cross border capacity auction price. The difference could reach 20 EUR/MWh in 2008. • This price tendency has significant effect on end-user price and through this on the whole national economy! dr. Gábor Szörényi

20. Common Regulatory Position Common intention of ERRA regulators is: • To assist the development of national economy (with reasonable energy prices), • Not to disturb market tendencies, market forces, • To maintain good level of security of supply on national and regional markets, • To reduce market entry barriers and regulatory barriers to give more chance for new investment (generation, transmission) • To utilise more potential tools of demand response programmes dr. Gábor Szörényi

21. Potential regulatory actions • The dominant player(s) on the national market(s) could require special attention from the regulator (e.g. cost based pricing, ex ante rules supporting new entrants) and could require special authorisation of the regulators to be able to act in advance. • The regulators agree that special (non-avoidable, non market based) actions securing the supply on the national market(s) and trying to avoid drastic price increases on wholesale market should be proportional, transient and can not endanger the neighbouring markets. • Simplified, harmonized licensing procedures • Analysing the possibilities to give the adequate comfort for investors on new generation and transmission investment, • Analysing the possibilities to create more efficient support scheme for energy generated from renewable, waste and combined heat and electricity basis. dr. Gábor Szörényi

22. Regulatory aspects of wholesale market tendencies Thank you for your attention! www.erranet.org dr. Gábor Szörényi