Update on electricity market Baltic Mini Forum 1 October, 2010

On July 13, 2009 the third legislative package consisting of three Regulations and two Directives was adopted:  Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators  Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003  Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No 1775/2005  Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC  Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC By March 3, 2011 respective legal acts in the Member States shall come into force. The creation of a fully operational internal energy market 2

 The Directive 2009/72/EC aims to: Separate production and supply from transmission networks; Greater market transparency on network operation and supply; More effective national regulators; Promote cross-border collaboration and investments. Energy Law Tentatively following legal acts must be amended to transpose the directive: Energy Law; Electricity Market Law; Regulations regarding use and trade of electricity. Electricity Directive 2009/72/EC 3

There are three possible options for the separation of production and supply from transmission networks:  full ownership unbundling Each undertaking which owns a transmission system acts as a transmission system operator.  independent system operator (ISO) This option enables the vertically integrated undertaking to retain transmission system ownership, but there is a strong restriction - a body designated by the Member State and outside of the vertically integrated undertaking takes over the transmission system operator (TSO) responsibilities.  independent transmission operator (ITO). Within the ITO option the TSO remains within the integrated company and the transmission assets remain on its balance sheet. Additional regulatory conditions are imposed to guarantee the independence of the ITO from the vertically integrated undertaking. The creation of a fully operational internal energy market Unbundling of transmission systems and transmission system operators 4

 Draft concept on unbundling model of transmission system operator is prepared.  The objective of Concept is to choose the appropriate, properly functioning transmission system operator’s (TSO) ownership unbundling option by analysing all pros and cons of three possible options. The main criteria analysed in Concept are: continuity of the functions of TSO; compliance with Article 20 1 of Energy Law stating “being a national economy object of State importance, the stock company Latvenergo shall not be privatised. All stocks of the stock company Latvenergo are the property of the State, and they are not to be privatised or alienated”; the least impact on Latvenergo, state’s budget and electricity tariffs. Actions concerning implementation of Directive 2009/72/EC 5

 Introduction of NPS is challenged by lack of “market operator” definition and clear regulation of its activities in legislation;  Subsidized renewable energy producers can not enter the market without losing subsidies.  Common position and trading principles towards non EEA third countries BEMIP Main issues: 6

 Amendments to Electricity Market Law: Market Operator, its definition, status, functions and obligations; Bidding area, implicit/explicit auctions; Cooperation between TSO and Market Operator; Obligations of power exchange participants.  Draft RES Law Mandatory procurement from small producers (under 2 MW installed capacity in total) or a premium for power producer in possession of any installed capacity.  Non-reciprocity compensation A decision which implies common understanding of security of supply in the region BEMIP Main actions: 7

 Prime Ministers of the Baltic States signed a Joint Statement on September 24, The Prime Ministers agreed to continue work, according to the BEMIP objectives, on the creation of a fully functioning electricity market in the Baltic States and its integration within the Nord Pool Spot Price Area during Baltic Council of Ministers 8

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