1. DRAFT Discussion Paper on the Options for the Transition Phase of the ECSEE Regional Energy Market Donors meeting Vienna, 13 July 2004

2. 22 Background  In the 4 th Athens Forum (June 2004), following the discussion during the PHLG and the Donors’ meeting, CEER presented some initial ideas on the options for the regional market arrangements during the transitional phase of ECSEE, with the view to further elaborate on these ideas and present something more concrete in the Donors’ meeting in Vienna (today).  The ideas presented herein are still under elaboration, since there was no sufficient time for detailed discussions inside the SEEER WG of CEER.  Further input on the transitional phase and other issues related to the Treaty will be presented by CEER in the forthcoming months.

3. 33 Transitional phase for ECSEE  The period between present time and December 2007  Important issues:  Draft Treaty and relevant discussions  National reforms (Institutional reforms, market arrangements)  Compatibility between national and regional arrangements  First concrete steps towards free electricity trading:  SEE CBT  TPA regime (unbundling, rules)  Compatibility of reforms and harmonization of the process 2008: An operational SEE IEM, along the lines of EU IEM

4. 44 Handling Transition (1)  Short-term steps - Prerequisites (June 2005)  North-South reconnection  Establishment of national Regulators and TSOs  Transparent TPA  Unbundling  Tariffs  Eligible customers  CBT (now!)  Capacity allocation and congestion management (including interconnectors)  Removal of restrictions for imports and exports  Mutual recognition of suppliers

5. 55 Handling Transition (2)  Regional trading will be launched with bilateral contracts between suppliers and consumers within the SEE region  Bilateral contracts combined with CBT, TPA and transparent capacity allocation and congestion management rules represent the very first –minimum- basis for electricity trading under the liberalized market regime; but this is not a regional market!  Care should be given to long term contracts (PPAs, impacts on competition). Long term capacity availability arrangements could be considered (EBRD initiative and the corresponding Task Force);  National wholesale markets (day ahead markets) are already emerging (e.g. Romania, Slovenia, Greece, Italy, etc.); They offer valuable experience and should be used as an example

6. 66 Handling Transition (3)  In parallel with reforms on a national basis, reforms on a regional basis will also be brought about. The regional dimension will be safeguarded by the development of Regional Market Institutions: Policy making and monitoring:  Ministerial Council and PHLG  Commission Policy implementation and technical operation of the market:  Market Regulatory Board;  Regional Trading Centre;  Technical Institution for balancing coordination;  Energy Information Centre

7. 77 SEE Regional Institutions (1) SEE Regional Market Regulatory Board:  Establishment (Tirana Declaration) welcomed (end 2004);  Competencies to be defined following the experience in EU, the specificities of the SEE region and the negotiating mandate;  CEER is forwarding an accompanying note on the matter for discussion purposes; the elaboration has started and will continue;  The competencies should be included (or sufficiently outlined) in the Treaty.

8. 88 SEE Regional Institutions (2) SEE Regional Trading Centre (within 2005):  A central SEE trading centre, based on the infrastructure and experience already existing in the region (Borzen and Opcom), established by these and with the participation of every national market operator (or TSO with such role) with functions similar to a regional Power Exchange;  Participants: regional generators, traders or brokers and eligible customers;  Trading through the Centre completely voluntary;

9. 99 SEE Regional Institutions (3) SEE Regional Trading Centre (continued):  Initially, products offered will be simple:  OTC bilateral contracts for bulk electricity at various time sessions;  Standard tradable contracts (products) for multiregional exchanges (futures);  At a later stage (depending on maturity and regional progress):  Voluntary Day Ahead market for physical deliveries in the region; hourly bids and offers; continuous price publication;  Will act as a clearing house, performing accounting and settling of transactions;  It will be the counterparty for each transaction;  It will provide and require financial guarantees to participants (initially supported by the Donors, e.g. EBRD proposal)

10. 10 SEE Regional Institutions (4) SEE Regional Trading Centre (continued):  In collaboration with the Technical Institution (below) will develop the procedures for the physical deliveries of the transactions concluded; however, the participants will be responsible for the provision of the physical path (capacity allocation in the interconnectors and the national grids);  It will participate to the development of the regional DAM market rules and will become the future regional market operator (2008 onwards);  At a later stage it will expand to offer other products too (gas, real time balancing products, financial products, etc.);  Its establishment can be regarded as a valuable tool, independent from the successful evolution of ECSEE; It can be a self sustained Institution and its liquidity will increase with time; When the ECSEE operates the market rules will safeguard and facilitate such liquidity.

11. 11 SEE Regional Institutions (5) Technical Institution for the Inter-TSO balancing and ancillary services coordination:  The provision of balancing and ancillary services (real time function) will be proven an important element of the ECSEE;  On a national basis, this task is assigned to the national TSO (experience shows that this can be a profitable service both to the TSO and the market participants);  On a regional basis, under various national and regional wholesale regimes and various national real-time balancing schemes (market based or administrative), this task has to be strongly coordinated among the national TSOs of the region, especially since a real-time regional market is not achievable in the foreseeable future;  This will be the main task of the regional Technical Institution.

12. 12 SEE Regional Institutions (6) Technical Institution for the Inter-TSO balancing and ancillary services coordination (continued):  Its task will initially be to develop a mechanism for the accounting and the settlement of the real time balancing and ancillary services’ provision actions between the national TSOs;  At a later stage, this Institution, established jointly by the national TSOs, will act as the provider, if and when necessary, of the balancing and ancillary services’ energy at a regional level, in a totally transparent, regulated and non-discriminatory manner;  For this purpose, it may conclude contracts with generators and suppliers, buy energy from a national market or perform swaps with national TSOs in a way linked to the CBT;  During the transitional phase the Institution will develop this mechanism under the evolving regional circumstances.

13. 13 SEE Regional Institutions (7) Regional Energy Information Centre:  A platform for the collection and processing of all kinds of energy data for ECSEE, including analysis and reporting;  The centralized provision of such services is of paramount importance for the decision making process; The lack of such services is more than evident at present time;  Tasks for electricity, oil and gas in SEE will include: Collection of data (physical flows, prices, capacities, etc.); Long and medium term forecasts (generation, transmission, etc.); Analyses and decision support for other Institutions; Linked with international organizations of the kind (IEA, etc.(; Publication and reporting; Offer, on a fee, services to regional stakeholders; Workshops and training.

14. 14 SEE Regional Institutions: Operation  Independence;  Self-development of internal rules and personnel recruiting;  Rules (set at high level) for their protection from external intervention;  Proper definition of their relation to other regional Institutions;  Hosting countries should provide initial administrative support, but will no longer interfere with their day-to-day operation;  The financial support by Donors is very important, especially during the period following their establishment;  For some, their existence could be foreseen in the Treaty.

15. 15 Conclusions  The transitional phase for the development of ECSEE should be based on harmonized national market reforms and the collateral establishment of regional Institutions, from the early stages, assigned with tasks of regional interest and coordination of actions at a regional level;  The CEER WG SEEER invites all stakeholders to contribute to this task and commits itself to further collaborate with all along the lines presented so far.  However, the ultimate goal for ECSEE (2008) should be the integrated operation of this market, under a single market design;  To this end, reference is again made to the need for coordination of actions.