1. Moving away from the present fuel mix: regulatory tasks and dilemmas in supporting renewable electricity penetration Péter Kaderják Director, REKK Alternate member of the Board of Appeal, ACER World Forum on Energy Regulation V Québec, May 15, 2012

2. Coal is still here Global primary energy demand growth between 2000 and 2010 Major role played by power generation in non-OECD countries Source: IEA WEO 2011

3. Where do we go with the present fuel mix? 3 Source: Varró L., IEA, 2012

4. Is CCS deployment on track? Source: Varró L., IEA, 2012

5. To reach its projected contribution to the 450 ppm policy, 100 projects would need to be under construction at any time until 2035 And one year project time overrun wipes out 30% of NPV Nuclear: the dream that failed? (The Economist, March 2012) Source: Varró L., IEA, 2012

6. The rest of presentation Major RES-E regulatory principles and tasks Five RES-E related regulatory dilemmas Transparency and support level: which is the more important promoter of RES-E? 6

7. Questions The regulatory environment is decisive for RES-E investments and growth 3 recent studies by REKK ‣‚Principles of Regulation to promote the development of Renewable Energy Sources (RES)’, the Black Sea Regional Regulatory Initiative, with NARUC ‣‚Support Schemes for Electricity Produced from Renewable Energy Sources’ with ERRA ‣‚Clean Energy Finance Solutions: Central & Eastern Europe’, with Cambridge Programme for Sustainability Leadership What are the main regulatory principles, tasks and dilemmas with regard to RES-E regulation? What do we know about the impact of regulatory characteristics on RES-E penetration? 7

8. There are just a few general regulatory principles to follow Effectiveness – to meet policy objectives Cost efficiency – to provide least cost solutions for end customers Transparency, consistency, credibility - to promote a proper RES-E investment climate and prevent corruption A certain level of flexibility – to reserve regulatory ability to adjust support levels to changing technology costs Easy and inexpensive authorisation – to promote easy entry 8

9. Prominent RES-E related regulatory tasks Contributing to the design of RES-E support schemes (production price support or quota obligation schemes) Regulating grid access and integration for RES-E (balancing and settlement regime, grid connection rules, cost allocation rules for grid upgrade, remuneration for additional reserve needs, etc) Licensing and monitoring of the RES-E market RES-E certification Promoting cross-border cooperation in RES-E utilization 9

10. 1. Poor RES-E support design might create undesirable investment cycles Stress on support budget Excess demand for grid connection licenses Might prompt an unplanned change of regulation that undermines credibility 10 „Gold rush”: effectiveness without cost-efficiency Growth of installed PV capacities in the Czech Republic Source: REKK analysis

11. Smart design is needed: e.g. learning curves and adjustment of feed-in tariffs Total installed geo, MW Market price of electricity FIT 2 MC geothermal Q3Q3 FIT in period 1 FIT 1 Cost, prices t1t1 FIT 3 Q1Q1 FIT in period 3 t2t2 t3t3 Total installed wind MW MC wind Q3Q3 t1t1 Q1Q1 t2t2 t3t3 Total installed solar, MW MC solar Q3Q3 t1t1 Q1Q1 t2t2 t3t3 FIT in period 3 FIT in period 1 Transparency and flexibility: rate adjustment only for new projects

12. 2. Asymmetric incentives for RES-E generation versus network to be balanced RES-E generation: fast; sexy; simple incentives Network upgrade: slow; complicated; counter-incentives Queue management Integrated resource and network planning Sufficient incentives for transmission and distribution upgrade is key 12

13. 3. Licensing: how to make it simple and cheap? Limit on the time and cost of administrative procedures (e.g. Moldova) One-stop-shop licensing (e.g. Germany, Denmark) Reduced number of authorities involved in RES- E licensing (e.g. Georgia) ‣Reduction of corruption opportunities 13

14. 4. Electricity market integration process can boost RES-E Electricity market integration promotes RES-E growth ‣Better spatial distribution of weather-dependent RES- E production ‣Common pool of reserves and storage capacities RES-E should get a role when electricity market coupling rules are created Harmonized green certification regimes might promote cross border trade in RES-E and thus promote investment 14

15. 5. Regulatory governance, capacity building and policy feedback is needed The promotion of RES-E is a relatively new competence for energy regulators Considerable regulatory knowledge and human resources are still to be developed A requisite organizational solution can also help the Regulator meet the new expectations in this regard ‣RES certification, licensing and market monitoring Fast feedback of market information into the rulemaking process ‣Regular consultations with ministry and stakeholders 15

16. 6. Is transparency or support level the more important promoter of RES-E? 16 Survey results from ERRA

17. Hypotheses Hypothesis 1: Higher RES-E production support levels lead to higher RES-E penetration Hypothesis 2: Good regulatory practices, including transparent, consistent and flexible regulation are preconditions for a faster RES-E penetration 17

18. Production support levels, 2011 - German PV FIT level 2012 18

19. Typical pattern: RES-E capacity shares versus support level - wind 19

20. 20 RES-E capacity shares versus support level – solar PV

21. Indicators involved in regulatory characteristics analysis 21

22. Transparency Transparency Index RES-E Capacity growth 2007 - 2010 22

23. Integrated effects – Regression analysis 23

24. Lessons ‚Good regulation’ (transparency, consistency and easy entry) and healthy general investment environment are important pre-conditions to RES-E capacity growth No such a relationship can be detected between RES-E growth rate and the nominal level of support (FIT) The main regulatory message here is that countries aiming to increase their RES-E shares should as first step design their regulatory environment carefully, while the level of Feed-in tariff or premium is less determining in achieving higher RES-E penetration levels 24

25. THANK YOU FOR YOUR ATTENTION! pkaderjak@uni-corvinus.hu www.rekk.eu +36 1 482 7071 25