1. World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank

2. Main themes of presentation Potential benefits of energy trade The Athens Memorandum and the SEE REM SEE REM and implementation risks / mitigation measures: how to unlock benefits for SEE countries Power and gas, environment, coal

3. Main messages The World Bank supports proposed power market opening for some large consumers at the end of 2005 There are outstanding issues relating to market design (keep it simple!) Very large investments required in power generation, transmission and distribution

4. Main messages (cont.) There are outstanding questions over the economics / pace of SEE gasification (should be taken into account when discussing gas investment / reform) Environmental compliance costs are potentially very high (legislation should reflect finance / affordability constraints) Coal industry stranded costs are potentially significant (restructure coal industry now)

5. Benefits of trade Sharing of reserve capacity (two countries share one reserve power station, rather than two countries each with a reserve station) Heterogeneous resources (hydro in one country used to supply regional peak demand, rather than use of hydro to supply base demand in isolated system) Non coincidental peak (sharing of capacity between countries to meet peak demand)

6. Current power trade in SEE 9% of total SEE demand (14,000 GWh exports) 14% if trade with Greece and Turkey is included Main exporters: Bosnia and Herzegovina, Bulgaria and Romania Other countries: net importers

7. Trade going forward Hydro capacity in Albania, Bosnia and Herzegovina, Montenegro Thermal capacity in Bulgaria, Turkey Thermal potential Kosovo Capacity deficit in Macedonia, Montenegro Summer peak in Greece UCTE 1 st zone, Centrel Eastern Europe???

8. Mechanisms for trade National trade (agreements between utilities, negotiated or tendered, third parties) Non household competition (large consumers can shop around in the regional market) Full wholesale competition (distribution companies are eligible consumers) Moving from one to next can yield benefits if certain conditions are fulfilled (e.g. relating to industry structure, regulation, etc.)

9. Mechanisms for trade Bilateral contracts and third party access Day ahead trading (e.g. power pools) Real time balancing (market versus non market mechanisms) Moving from one to next can yield benefits if certain conditions are fulfilled (e.g. relating to institutional capacity, protection of residential consumers)

10. SEE trade mechanism Current national trade Going forward, need to adopt mechanism fitting to the institutional context Conditions will be in place by end 2005 to support non household competition on the basis of bilateral contracts and third party access Day ahead trading, market based real time balancing further in the future

11. The Athens Memorandum Reform steps to support phased market opening Industry unbundling, development of regulatory framework, market design Non household liberalization from 2005, on basis of bilateral contracts EC, IFIs, donors working together to fulfill this objective

12. Standard Market design World Bank supports bilateral contracts model, with phased market opening Much work to do here for successful implementation (e.g. development of commercial code, establishment of market surveillance mechanisms) Need to develop investment support mechanism, and framework for protection of residential consumers Establish set of day ahead markets over time Further in the future, a regional day ahead market Focus of work now should not be day ahead market.

13. Pre conditions for non household competition: effective tariffs Tariffs typically cover operating costs Will have to increase over time as investments are required Low residential to industrial tariff ratio in Bosnia, Bulgaria, Croatia, Romania and Turkey, suggests need to increase residential tariffs. Affordability is a problem for poor groups, and no safety net in Macedonia, Montenegro, and Turkey Payments discipline is a widespread problem (average collections 85%, distribution losses in excess of 10%)

14. Other pre conditions for non household competition Regulation: independent regulators set up in most countries (or will shortly be set up). Limited progress on development of secondary legislation (tariff methodologies, grid codes) Industry unbundling: most countries are at the planning stage (with the exception of Bulgaria, Romania and Turkey)

15. Overview of Power Market Liberalization The World Bank believes that, given the progress to date, and the outstanding challenges, market opening in a phased manner on the basis of bilateral contracts would be feasible from 2005.

16. Technical requirements to support market liberalization Need for adequate generation capacity, transmission capacity (quantity and quality), and large user meters WB study: 4.5 GW capacity required to meet incremental demand to 2010 plus rehabilitation of same order Need for new interconnections Investments in excess of $20 billion

17. Gas market liberalization under the Athens Memorandum Athens Memorandum requires industry unbundling and development of regulatory framework Envisages phased market opening and increased gasification

18. Increased Gasification in SEE Lower import price would support increased gasification Opportunities for import of Caspian gas Greece-Turkey pipeline (extending to Italy, or North) Limited impact on gas price in SEE in medium term

19. Increases gasification in SEE (cont.) At current gas price Opportunities for increased residential gasification, particularly over time Maybe CCGT to meet incremental power demand Slow pace of gasification Particularly given institutional challenges

20. Environmental aspects of the SEE REM Athens Memorandum refers to Bulk Power Directive Application of Directive would require widespread investment to reduce Sulfur and Nitrogen emissions Associated cost of the order $5 billion Variant on Bulk Power Directive more appropriate for SEE

21. SEE REM impact on the SEE coal industry Coal sector inefficient Competition in power is likely to drive out inefficiency Potential loss of 100,000 jobs in SEE mining sector Tackle problem now to avoid disruption upon liberalization Social programs, retraining of miners, commercialization of viable mines

22. Overview: near term challenges for SEE REM implementation Institutional reform to support non household competition in the power sector (regulatory reform, industry restructuring,m market design) Elaboration of investments in the power sector Elaboration of economics of SEE gasification, and compliance with environmental standards Coal industry restructuring and commercialization

23. The World Bank contribution: Policy Support Power sector: reforms to support non household liberalization by 2005 Gas sector: institutional reform for select countries, development of framework for investments in gas distribution Coal industry restructuring

24. The World Bank Contribution: Investment Finance Power sector investment study Facility for investments in power sector to support power market development (Adaptable Programmatic Loan) Gas sector investment study Facility for investments to support gas market development