1. Regulatory aspects of wholesale market tendencies on national and regional electricity markets dr. Gábor Szörényi Chairman of ERRA Budapest, April 22, 2008 Investment Conference

2. dr. Gábor Szörényi Page 2 Budapest, April 22. 2008 Main topics: Regional situation on the wholesale electricity markets Continuous common monitoring and evaluation Difference between cost based price regulation and market based price Potential regulatory interactions Support new generation and network investment

3. dr. Gábor Szörényi Page 3 Budapest, April 22. 2008 Some conditions of markets and regions Substantial demand growth in each region (3-10%) Existing generation capacity not always available Some regions are highly hydro (weather) dependent Low utilisation of existing generator capacities (reliability problems) Long-lasting preparation and long-continued decisions on new generation investment Physically, legally and administratively congested borders Some national net export position diminishing turn to net import position

4. dr. Gábor Szörényi Page 4 Budapest, April 22. 2008 Regulatory monitoring Price signals (+~10EUR/MWh) Capacity shortage in SEE Increasing cross border flow to South Security of Supply questions Roundtable discussion (2007 December, Bucharest) → Published Common Position Wholesale market monitoring network Why did we start the common wholesale market monitoring?

5. dr. Gábor Szörényi Page 5 Budapest, April 22. 2008 Monitoring methods Data-collection and evaluation of national and regional wholesale markets: 2003-2008 (2009) data Simplified capacity data Installed capacity Capacity mix Cross border capacity General energy data Domestic production Export-import balance Consumption Tariff and price analysis Data collection and analysis every 6 months National and regional analysis Region ≠ group of ERRA members

6. dr. Gábor Szörényi Page 6 Budapest, April 22. 2008 ERGEG Regional Initiatives

7. dr. Gábor Szörényi Page 7 Budapest, April 22. 2008 The Regional Group of ERRA Members Moldova Latvia Lithuania Kyrgyz Republic Georgia Armenia Estonia Albania Kazakhstan Ukraine Poland Romania Hungary Bulgaria Russian Federation Croatia Azerbaijan Turkey Jordan Bosnia and Herzegovina Macedonia Montenegro Serbia UNMIK Kosovo 1 4 3 2 Mongolia

8. dr. Gábor Szörényi Page 8 Budapest, April 22. 2008 Group 1. Energy balance Regional Consumption, Production and Trade balance

9. dr. Gábor Szörényi Page 9 Budapest, April 22. 2008 Group 1. Export-Import Balance ERRA Group 1.: Net export

10. dr. Gábor Szörényi Page 10 Budapest, April 22. 2008 Group 1. Installed Capacities Insufficient new generation capacity!

11. dr. Gábor Szörényi Page 11 Budapest, April 22. 2008 Installed capacity mix in 2007 Installed Capacity Mix

12. dr. Gábor Szörényi Page 12 Budapest, April 22. 2008 Group 1. Market situation Massive demand increase Capacity shortage, insufficient new generation investment Hydro dependence Low utilization factors (35-55%) Growing import

13. dr. Gábor Szörényi Page 13 Budapest, April 22. 2008 Reduced net export possibility Group 2. Export-import balance

14. dr. Gábor Szörényi Page 14 Budapest, April 22. 2008 Dynamic demand growth Group 3. Energy balance

15. dr. Gábor Szörényi Page 15 Budapest, April 22. 2008 Continuous demand increase Group 4. Energy and capacity balance New investment slowed down (Installed capacity)

16. dr. Gábor Szörényi Page 16 Budapest, April 22. 2008 Possible reasons for the capacity shortage situation The possible reasons for the general situation are the following: Continuously increasing demand Energy efficiency (energy conservation) programmes are hardly effective Strict environmental protection requirements and administrative licensing procedures create difficulty for investors to build new power plants, new high voltage lines Emerging market conditions (immature market rules) on the national markets and the slowly developing regional markets could create risk elements which postpone investment In some cases the lack of transparent rules could increase the risk of new generation investment

17. dr. Gábor Szörényi Page 17 Budapest, April 22. 2008 Market Based energy prices Identification and comparison of energy prices Basic difference in price formation: Cost based „regulated” end-user price for household consumers Regulated network (system) tariffs Market based (not regulated) energy prices → strongly influenced by the supply-demand balance Taxes, levies Substantial difference in structure and level of system charges → influence the „only” energy prices (uncertainty of comparison) No liquid wholesale markets, very rare PXs → no indicative, really market based energy prices (but signals!)

18. dr. Gábor Szörényi Page 18 Budapest, April 22. 2008 Price of electricity (only the energy component) paid by non-household consumers EEX prices (2008) Energy („only”) prices

19. dr. Gábor Szörényi Page 19 Budapest, April 22. 2008 Wholesale energy market prices in Central Europe → German Power Exchange (EEX) prices [base load price: 55-60 EUR/MWh; peak load price: 75-85 EUR/MWh („only” energy without system charge)] (balanced market with adequate installed/reserve capacity). Going to the South-East some markets have capacity shortages. On „short positioned” markets the traders/suppliers/importers are „ready” to pay higher price for energy. The price difference between the region with adequate resources and the regions with capacity shortage is reflected in the deficit and in the cross border capacity auction price. The difference could reach 20 EUR/MWh in 2008. This price tendency has significant effect on end-user price and through this on the whole national economy! Price Signals

20. dr. Gábor Szörényi Page 20 Budapest, April 22. 2008 To assist the development of national economy (with reasonable energy prices), Not to disturb market tendencies, market forces, To maintain good level of security of supply on national and regional markets, To reduce market entry barriers and regulatory barriers to give more chance for new investment (generation, transmission) To utilise more potential tools of demand response programmes Common Regulatory Position Common intention of ERRA regulators is:

21. dr. Gábor Szörényi Page 21 Budapest, April 22. 2008 The dominant player(s) on the national market(s) could require special attention from the regulator (e.g. cost based pricing, ex ante rules supporting new entrants) and could require special authorisation of the regulators to be able to act in advance. The regulators agree that special (non-avoidable, non market based) actions securing the supply on the national market(s) and trying to avoid drastic price increases on wholesale market should be proportional, transient and can not endanger the neighbouring markets. Simplified, harmonized licensing procedures Analysing the possibilities to give the adequate comfort for investors on new generation and transmission investment, Analysing the possibilities to create more efficient support scheme for energy generated from renewable, waste and combined heat and electricity basis. Potential regulatory actions

22. dr. Gábor Szörényi Page 22 Budapest, April 22. 2008 Regulatory aspects of wholesale market tendencies Thank you for your attention! www.erranet.org