© OECD/IEA 2010 Russian Annual Meeting of Energy Regulators Moscow, 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

© OECD/IEA 2010 Electricity Demand Outlook – Average Annual Rates of Growth

© OECD/IEA 2010 World electricity generation by fuel in the Reference Scenario

© OECD/IEA 2010 Capacity additions by region, (WEO 2009 Reference Scenario)

© OECD/IEA 2010 Cumulative energy investments in Reference Scenario ( ) Just over half of all energy-investment needs to 2030 are needed in the power sector, mainly in non-OECD countries Biofuels $0.2 trillion 1% Upstream Refining Transport Shipping & ports Mining $5.9 trillion 23% $5.1 trillion 20% Electricity $13.7 trillion 53% Generation Transmission Distribution Upstream T&D LNG 52% 15% 33% 58% 9% 33% 79% 17% 4% 86% 14% Total investment = $25.6 trillion (in year-2008 dollars) Gas Oil Coal $0.7 trillion 3%

© OECD/IEA 2010 Projected cumulative investments ($ 2008) in the power sector –

© OECD/IEA 2010 Global asset investment needs in renewable and other generation sources Total annual investments in renewable power assets need to significantly ramp up in order to achieve the 450 policy scenario objectives Source: WEO 2009 * Including PV in buildings

© OECD/IEA 2010 Russia energy-related CO2 emissions abatement

© OECD/IEA 2010 Russia power generation capacity in the 450 scenario

© OECD/IEA 2010 Demand uncertainty: How strong will be the economic recovery?

© OECD/IEA 2010 Electricity supply trend – OECD Gas - Main contributor to the growth in OECD electricity generation

© OECD/IEA 2010 Main Conclusions: Median Case - Sensitivity to Cost of Financing No technology has a clear overall advantage globally or even regionally. LCOE 10% LCOE 5%

© OECD/IEA NuclearCoalCoal w. CCSGasWind Levelised Cost of Electricity, LCOE 5% and 10% ($/MWh) OECD 30 $/t CO2OECD 60 $/t CO2 Main Conclusions: Median Case - Sensitivity to CO2 cost LCOE 5% LCOE 10% 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.

© OECD/IEA 2010 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

© OECD/IEA 2010 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

© OECD/IEA 2010 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

© OECD/IEA 2010 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

© OECD/IEA 2010 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

© OECD/IEA 2010 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

© OECD/IEA 2010 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

© OECD/IEA 2010 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