Presentation is loading. Please wait.

Presentation is loading. Please wait.

Implementing best practices in electricity sector evolution in Saudi Arabia Prepared by: A.J. Goulding November 6, 2006 Riyadh,

Similar presentations


Presentation on theme: "Implementing best practices in electricity sector evolution in Saudi Arabia Prepared by: A.J. Goulding November 6, 2006 Riyadh,"— Presentation transcript:

1 Implementing best practices in electricity sector evolution in Saudi Arabia Prepared by: A.J. Goulding November 6, 2006 Riyadh, Saudi Arabia

2 2 Key messages Restructuring will strengthen the Saudi electricity sector, and create a set of vibrant new entities Restructuring will strengthen the Saudi electricity sector, and create a set of vibrant new entities Saudi Arabia is able to learn from the experiences of other jurisdictions, and improve upon global best practice Saudi Arabia is able to learn from the experiences of other jurisdictions, and improve upon global best practice Tariff design process has been specifically designed to allow the maximum degree of flexibility in future market design Tariff design process has been specifically designed to allow the maximum degree of flexibility in future market design Whatever arrangements are decided upon, they must provide revenue sufficiency for efficient providers Whatever arrangements are decided upon, they must provide revenue sufficiency for efficient providers Overall structure should embody incentives for efficient production, transportation, and usage of electricity Overall structure should embody incentives for efficient production, transportation, and usage of electricity Suppressing tariffs in the short run inevitably leads to even more difficult policy choices in the long run Suppressing tariffs in the short run inevitably leads to even more difficult policy choices in the long run

3 3 Plan of presentation Best practices in electricity sector restructuring Creating an independent grid company Using a Principal Buyer to provide stability

4 4 Vertically integrated self regulated monopolies often starting point for restructuring Generation IPP contracting Retail Distribution Transmission Metering Billing and settlements Potentially competitive sector Network O&M VERTICALLY INTEGRATED MONOPOLY Vertically integrated quasi-self regulating monopolies were the starting point in many jurisdictions: Vertically integrated quasi-self regulating monopolies were the starting point in many jurisdictions: l Chile l Colombia l Hungary l Italy l Poland l Romania l Singapore l UK (England and Wales) l …many others… Often, internal transfer pricing not even established appropriately Often, internal transfer pricing not even established appropriately

5 5 Strong, independent institutions are at the heart of a successful restructuring process Key success factor checklist Competent regulator with clear mandate Competent regulator with clear mandate Phased in process of market opening Phased in process of market opening Multiple gencos created Multiple gencos created Contract cover stabilizes prices during transition Contract cover stabilizes prices during transition Policymakers able to ride out periods of price volatility Policymakers able to ride out periods of price volatility Performance based rates for monopoly elements Performance based rates for monopoly elements Attention to affiliate abuse issues Attention to affiliate abuse issues National Power PowerGen British Energy Central Electricity Generating Board Power Pool National Grid Office of Electricity Regulation Gencos Regional wire companies Case study: initial E&W structure evolved into Transmission Price discovery

6 6 Chile Saudi Arabia can draw upon twenty years of restructuring experience Alberta Australia UK 1994 Victoria electricity market established NSW electricity market established NEM begins operation NSW and Victoria full retail competition AER established Open access to grid established Offer established (regulator) Electricity sector unbundled NETA replaces power pool 1989 BETTA implemented Full retail competition Electricity Utilities Act – deregulation AEUB (regulator) created Retail competition introduced MSA created Power pool begins operation 1978 CNE (regulator) established New electricity law – sector unbundled Privatization process begins Last govt. – owned utility privatized CDEC (power pool) created 1996

7 7 Benefits of restructuring arise from several sources Innovation in product offerings and delivery Innovation in product offerings and delivery Reduced costs and prices of generation and supply Reduced costs and prices of generation and supply Improved resource utilization and allocation, through improved economic dispatch and generation planning (medium- and long-term) Improved resource utilization and allocation, through improved economic dispatch and generation planning (medium- and long-term) Reduced conflict of interests in the regulatory process Reduced conflict of interests in the regulatory process In Singapore, restructuring resulted in a more efficient use of fuel In 2000, oil accounted for 77% of generation In 2005 the more efficient natural gas accounted for 70% of generation output Resulted in a 5% increase in gross system efficiency After restructuring, the UK witnessed annual electricity sector productivity gains of 3.5%

8 8 Failures were a result of poor regulatory decisions, not of markets Flaw/Jurisdiction Insufficient number of generators created/UK, Ontario, Italy, France Insufficient number of generators created/UK, Ontario, Italy, France Prices to final consumers held below cost/California, Ontario, Maryland, Argentina Prices to final consumers held below cost/California, Ontario, Maryland, Argentina Transmission not independent/most of US, Germany Transmission not independent/most of US, Germany Failure to honor regulatory contracts/California, Argentina Failure to honor regulatory contracts/California, Argentina Cause of most accidents: over-power,over-power, over-brake, andover-brake, and over-steerover-steer Policymakers tend to forgot the first lessons from Drivers Ed 101

9 9 Plan of presentation Best practices in electricity sector restructuring Creating an independent grid company Using a Principal Buyer to provide stability

10 10 Independent grid companies are the norm in many well-designed jurisdictions Jurisdiction Setup date Entity Primary role Transmission owner & system operator UK Spain NED AUS BC Chile Michigan Italy Transmission owner Transmission owner & system operator Transmission owner

11 11 US shows the drawbacks of failing to force full separation of transmission and generation Some companies accused of deliberate underinvestment in grid so as to prevent access for competing generation Some companies accused of deliberate underinvestment in grid so as to prevent access for competing generation Preferential knowledge of planned expansion Preferential knowledge of planned expansion Risk that gridco may favor affiliated gencos for connections Risk that gridco may favor affiliated gencos for connections Constant suspicion that transmission capacity reservations rigged Constant suspicion that transmission capacity reservations rigged Substantial number of the transmission challenges have been in the Southeastern US

12 12 Newly formed gridcos may take on a variety of roles, including system operations Own and maintain existing transmission lines Own and maintain existing transmission lines Coordinate flows across the entire transmission system, including lines owned and maintained by others Coordinate flows across the entire transmission system, including lines owned and maintained by others Create 10 year generation and transmission system plans, updated annually and with major assumptions examined and revised every five years Create 10 year generation and transmission system plans, updated annually and with major assumptions examined and revised every five years Provide system access under non- discriminatory, transparent, and economically rational tariff Provide system access under non- discriminatory, transparent, and economically rational tariff Assist in implementing pilot market and ultimately spot market Assist in implementing pilot market and ultimately spot market Coordinate with Principal Buyer regarding solicitations for new generation and transmission Coordinate with Principal Buyer regarding solicitations for new generation and transmission Process for choosing new transmission providers: yr system plan approved by regulator 2. 2.RFP issued on BOOT basis for new corridors 3. 3.Technical and financial phases to bidding 4. 4.Bids consist of 40 year stream of payments 5. 5.Lowest NPV chosen 6. 6.Some performance standards apply 7. 7.No need to set efficient opex or choose cost of capital

13 13 Gridcos can be established in a one to two year period with careful planning Gridco creation process typically occurs in two major phases Gridco creation process typically occurs in two major phases l Phase I is the period when the new gridco is granted time for organizational purposes before it officially takes on transmission operations ~ 3 months – 1 year l Phase II is the period it takes the institution to become fully independent ~ 7 months – 2 years

14 14 Steps to setting up gridco are straightforward, and may coincide with start of wheeling tariff Create independent company Hire staff to operate system control room Physical separation of system control room Hire efficient number of staff from SEC Transfer assets and staff to gridco Identify transmission assets and their book value Process 1 Process 2 Step 1 Step 2 Step 3 Calculated as the transmission revenue requirement divided by available capacity Calculated as the transmission revenue requirement divided by available capacity Designed so that if all customers were to migrate to wheeling, the entire transmission revenue requirement would be recovered Designed so that if all customers were to migrate to wheeling, the entire transmission revenue requirement would be recovered Increase in wheeling revenue decreases transmission cost of captive load Increase in wheeling revenue decreases transmission cost of captive load Denominated in currency/MW-month and has peak/off-peak differentiation Denominated in currency/MW-month and has peak/off-peak differentiation Wheeling tariff Gridco setup

15 15 Plan of presentation Best practices in electricity sector restructuring Creating an independent grid company Using a Principal Buyer to provide stability

16 16 Principal Buyers focus on sector stability and market development POSSIBLE PRINCIPAL BUYER KEY RESPONSIBILITIES Serve as counterparty to existing PPAs and new ECAs Procure new generation and transmission through competitive auction process until market is sufficiently robust Schedule power via gridco to meet captive load Purchase fuel necessary under ECAs Remarket capacity under contract consistent with the schedule for market opening Promote and implement demand response programs Be the recipient of any subsidies necessary to assure financial viability of the sector Principal Buyers often remain in existence longer than their creators intend, though sometimes their role becomes simply the management of residual contract obligations Principal Buyers we will hear about today: Ontario Power AuthorityOntario Power Authority Northern IrelandNorthern Ireland

17 17 Principal Buyer staffing may require unique skill sets Legal establishment Step 1 Obtain ECRA license Step 2 Staff hiring Establish credit arrangement Step 5 Creation of ECAs Establish flow of funds Step 6 Step 3 Principal Buyer staff will need to have a fundamental knowledge of economic and financial drivers of the electricity business Principal Buyer staff will need to have a fundamental knowledge of economic and financial drivers of the electricity business Staff background to be in finance/trading rather than engineering Staff background to be in finance/trading rather than engineering Contract administration and procurement experience will be crucial Contract administration and procurement experience will be crucial Step 4

18 18 Independence and strong credit are essential for a successful Principal Buyer In nascent markets with history of below cost tariffs, sovereign support may be necessary In nascent markets with history of below cost tariffs, sovereign support may be necessary Principal Buyer should still be subordinate to regulator, and operate in a transparent fashion Principal Buyer should still be subordinate to regulator, and operate in a transparent fashion l Procures according to plan developed by gridco and approved by regulator l Provided auction competitive contracts incorporated into rates l Non-contract operating costs subject to periodic scrutiny Government must resist temptation to bypass institutions once they are created Government must resist temptation to bypass institutions once they are created

19 19 Concluding remarks Properly done, restructuring can make Saudi Arabia a regional electricity hub, providing benefits in reliability and pricing Properly done, restructuring can make Saudi Arabia a regional electricity hub, providing benefits in reliability and pricing Revenue sufficiency is important component for long run success of restructuring agenda Revenue sufficiency is important component for long run success of restructuring agenda Stakeholder education and human resource development also essential Stakeholder education and human resource development also essential Biggest lesson from international experience is that big bang approach does not work; process must be deliberative but steady Biggest lesson from international experience is that big bang approach does not work; process must be deliberative but steady At the same time, the alternative of simply throwing more money into existing structure may also be suboptimal At the same time, the alternative of simply throwing more money into existing structure may also be suboptimal Over the near term, restructuring effort should not obscure focus on reserve margin and investment planning Over the near term, restructuring effort should not obscure focus on reserve margin and investment planning

20 Background on presenter

21 21 LEI provides global perspective on electricity sector restructuring President of LEI President of LEI Experience advising regulators worldwide, including Eastern Europe, North and South America, and Asia Experience advising regulators worldwide, including Eastern Europe, North and South America, and Asia Professor at Columbia University Professor at Columbia University Working with private equity funds investing in power sector assets Working with private equity funds investing in power sector assets Testified as expert before a number of legal and regulatory bodies Testified as expert before a number of legal and regulatory bodies A.J.Goulding A.J. Goulding Economic, financial and strategic advice to the energy and infrastructure industries Our Saudi partners at Al Hoshan and KFUPM have also made a large and valuable contribution to our team Firm is currently in midst of multimillion dollar engagement to design generation procurement process for state of Connecticut Firm is currently in midst of multimillion dollar engagement to design generation procurement process for state of Connecticut Performed Industry Structure Review in Alberta Performed Industry Structure Review in Alberta Australian counterpart and team member is former regulator Australian counterpart and team member is former regulator Firms power sector asset revenue projections have supported financings for billions of dollars of investment Firms power sector asset revenue projections have supported financings for billions of dollars of investment


Download ppt "Implementing best practices in electricity sector evolution in Saudi Arabia Prepared by: A.J. Goulding November 6, 2006 Riyadh,"

Similar presentations


Ads by Google