Power Market Reforms in New Independent Countries

Transcription

1 IREX visiting scholar (Azerbaijan) Power Market Reforms in New Independent Countries

2 Executive Summary The energy sector of any society is the foundation on which other sectors depend. All activities rely on the successful and dependable delivery of energy, in whatever form. Access to electricity and other modern energy sources is necessary requirement for economic and social development. At the beginning of 1990-s 15 countries which were as the part of former Soviet Union announced about state independence. Each of these countries began their own way of creating new democratic society, market oriented and world-integrated economy. Successes here relied to implement a lot of structural and reform changes in all of fields of country s economy and most difficult issue here was the creating new energy system, because successes or failures in reforms implemented in power market can make huge positive or negative affects to whole economy. Looking to The Past Since the birth of the Soviet Union electricity in all former soviet countries has been seen as a part of the social infrastructure, similar to education. Therefore, electricity policy has been a key aspect of industrial and social development policy. During a long time the energy systems of all these countries were integrated to a single energy system, which was under state control and management. There were no competition in energy market or private production in this field. The positive factor was that until recent years in the post soviet space there was no region or areas without electricity. Lacks of electricity in some areas were covered by deliveries energy from different regions. 2

3 Energy independence initial issues The energy related problems in former soviet countries long time were existed after achieving their independence. There were vital negative issues related to shortage and faults in deliveries, debt for imported or exported electricity, lack of investments for modernization or repairing assets and others. The implementation of given and others collected in this branch of economy problems at thirst time required reconstructions of bilateral relations and changing them to contractual, agreement basic. Up to recent years there were existed a lot of problems connected with huge non-payment issues in the field of energy sale at an interstate level. The market economy challenges and integration to the world power market have forced on New Independent Countries(NIC) to reconsider the attitude to their own resources and began to prefer bilateral agreements on benefit conditions. Transition to market economy on its natural basic required also solution internal problems that were collected in the each country s energy market. The NIC has already gone in a new phase of the implementation energy related problems. Country s state non-payment issues after were replaced with the non-payment problems between local power market entities. New relations should are based not on subsidizes of energy expenses which were paid by the State quarterly or annually but on the principle of contractual bilateral relations, that means Pay before and Use. After their independence New Independent Countries a long time had huge energy related problems. However the decision of all the given problems could not be solved only on the basic of reconstructing, changing of business relations between generators, supplies and customers. Structural changes, reforms and also deregulation efforts in the energy fields were necessary. Reform efforts Since the mid-1990s, all industrialized, as well as developing countries have attempted significant electricity reform measures, and integration as well as globalization trends had the significant influence on acceleration of reforms in NIC. However despite of the importance of given process there are were existed some problems that had interference on successful realization of energy reforms. 3

4 During very long period almost free-of-charge electricity in former soviet countries have resulted in formation of the enormous attitude to the consumption of electricity. The residential, as well as industrial and commercial customers during long time could not apprehend real essence of consumption, that means: If used, you should to pay. Due to this day problems of non energy-payments, particular at a state level began to have constant character. Despite of the given obstacles the Market economy that is improved in these states made its business. The population and manufactures became more economical and more frugal in using electricity. Billion kilowatt-hours Electricity consumption in New Independent Countries, The Soviet electricity industry was managed by system through administrative Kazakhstan Azerbaijan regions and republics. This system provided a majority of its electric Belarus power to Soviet industry (62% in 1990, down from 67% in 1980, compared Estonia with 27% Georgia in the US) with the remainder distributed to transportation (11%), agriculture Armenia (11%), residential (10%), and other (including exports, 6%). With Kyrgyzstan the fixed costs of R&D and investment paid by the Soviet state and short-run Latvia average Lithuania costs paid by the consumer, in 1990 per capita Source: electricity EIA consumption Moldova was ,360 kwh (kilowatt-hours), similar to that in France, 5,360 kwh. Tajikistan Turkmenistan Ukraine Uzbekistan Energy systems management in new independent countries has many identical problems with the existing system and has proposed to restructure and deregulate this system to solve these issues properly. These problems are include: The lacks of flexibilities in regulation electricity tariffs, the difficulties of covering production costs and long-term investments with the existing revenues; The lack of the existing structure to attract investments to upgrade plants and equipments; The lack of corporative management expertise at all of energy systems; The lack of competition in the electricity generation and existing monopoly in this field. Key ingredient of an effective reform policy in NIC is institutional reforms. Institutional reforms have a big impact on the quality and effectiveness of regulation. 4

5 Reformed markets require regulators to perform new tasks, such as ensuring open access to the electricity network, protecting the ability of consumers to choose their supplier and enforcing antitrust laws. For the promotion to competition in power market and creating the sustainable liberalized energy market at first is necessary to break the monopoly that exists in energy system of NIC. It is very important to separate the monopolistic activities (for example, transmission) from generation and retail distribution by creating several competitive generating companies and competitive (inter-regional) distribution companies from existing generation assets. The power market reforms in NIC is the long process that depends on implementing several actions: Reorganization of energy systems; Unbundling of electricity assets through divestiture; Creation of independent system operators, regional trading organizations; Creation of a competitive market for electricity; Vertical separation of ownership of certain electricity assets in order to promote competition in generation; Privatization of electricity assets through sale or public auctions, or the create corporatetive asset managements; Open access to the grid; Deregulation of electricity prices; Opening up of domestic electricity assets to foreign investment; Retail competition; Restructuring of energy providers as a transmission and services provider. While regulator s objectives differ across countries and sectors, their primary objective is to protect the short-run and long run interests of consumers by promoting economic efficiency of energy sector. The best way to achieve economic efficiency is to encourage competition. Economic efficiency of natural monopoly requires proper regulation. Large monopoly companies are able to charge the lowest prices, driving rivals from the market. The role of regulation is to encourage enough investment to meet customer demand and to compensate investors with a reasonable rate of return. There are several ways of accomplishing regulatory goals in the electric power industry. Two basic regulatory forms are Rate-of-Return (ROR) regulation that requires the regulator to actively monitor the electric utility and Performance-Based Regulation (PBR) ROR regulation requires exchange of information between the regulator and the electric utility. PBR involves mechanisms that attempt to reduce the regulation by allowing utilities to keep profits from efficient operation. PBR or incentive regulation is a form of electric utility regulation that strengthens the financial incentives to lower rates, to lower costs, or to 5

6 improve non-price performance relative to traditional rate-of-return or cost-plus-profit regulation. The restructuring of power generation systems and power market reforms is the last stage of the market reforms commonly implemented in all of new independent countries. There are being implemented several structural changes in the power sector. But most of these reforms at first time particularly carried out the goal to deregulate and restructure main country s transmission, distribution and network systems (Table 2). Level of increasing in electricity supply depends also how well deregulation and restructuring reforms has been implemented in electricity generation sector, how competition does exist in this side of power market economy. Existing and growing competition in electricity generation reduces its injurious monopoly impacts on the rest parts of market economy, gives opportunities to reduce energy prices and finally to create favorable market conditions for the development non-energy sector of country s economy. Most important during power market reforms is creating equal possibilities for the new private energy generation companies. Power market reforms in NIC rely of definition of primarily types of electricity generation and fuel use for the future trends. The primary type generation in NIC is thermal. Russia is leading in the using all types of electricity generation. Net Electricity Generation by Type, 2000(Billion Kilowatt-hours). Country Thermal Hydro Nuclear Geothermal and Other Azerbaijan Belarus Estonia Armenia Georgia Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Total Russia Tajikistan Turkmenistan Ukraine Uzbekistan Source: US Energy Information Administration,

7 New Independed Countries accounted for more than one-third of natural gas use for electricity generation worldwide in 1999, and natural gas provided 51 1 percent of energy used for electricity generation market in the NIC. Electricity markets of the future are expected to rely increasingly on natural-gas-fired generation. Throughout the world, as industrialized nations are intent on using combined-cycle gas turbines, which generally are cheaper to construct and more efficient to operate than other fossil fuel. Huge hydro and other renewable resources give enable also for development of these types of electricity generations. The table below showed the tendencies of stabilization and then the growing in the hydro type electricity generation in NIC. Net Hydroelectric Power Generation (Btu), Quadrillon Btu Source: EIA Uzbekistan Ukraine Tajikistan Armenia Moldova Lithuania Latvia Kyrgyzstan Kazakhstan Georgia Azerbaijan Investment requirements Power market reforms, as itself impossible without implementing required investment policy with the gain to increase the electricity generation. Investment requirements in new developing countries fall broadly in categories below: Additional generation capacity; Extension of the electricity grid in urban areas; Mini grids in medium-sized settlements; Decentralized installations providing thermal, mechanical and electric power in rural areas; Maintenance and upgrading of existing infrastructure. 1 US Energy Information Administration / International Energy Outlook

8 The basic share of investments in the electricity sector falls to investments connected with reconstruction and modernization of the given enterprises. Alongside with the promotion in increasing of electricity supply also important to increase of attracting Greenfield investments to this sector for the creating new generation companies. Here it is also necessary to consider the importance of portfolio investments to the electricity generation companies. The growing share of these types of investments depends at first on successful developments in stock markets, which are low at this time in NIC. Conclusions Successful reforms in the energy related fields have grade importance for the future development of country s economy. Transformation from the planned, socialist type energy system to the modern, market oriented system is ailing and very difficult process. This process is very important and all New Independent Countries must pass it in time. The road of energy reforms should to be based not on the experiments or several structural changes that can be implemented in energy systems. It can to be based on the way that passed all countries where these reforms had grade successes, like industrial (US, UK) or developing countries (China, Brazil, India) or others. This process is continuing and most of NIC has grade successes in implementing power market reforms and these countries in close future will complete desirable energy reforms. org; References 1.US Energy Information Administration / International Energy Outlook 2002; 2. International Energy Agency. Market reform regulatory institutions in liberalized markets; 3. International Energy Agency. Electricity reforms. Power generation costs and investments; 4.UK The Office of Gas and Electricity Markets (OFGEM), creating a single electricity market for Great Britain. 8

9 Table 2. Power market reforms in New Independent Countries, Country Institutional approaches Power market reforms accomplishments Azerbaijan Belarus Estonia Armenia Georgia Kazakhstan Kyrgyzstan Latvia Lithuania State power company was transformed into a state-owned, closed, joint-stock company; As a condition of the privatization terms the government stipulated that NRG Energy must ensure that the Estonian energy market becomes part of the European energy market. The national grid was divided into several regional grids and then was given to foreign and private investors to long-term management. Was implemented several projects to restore and add new capacity to Azerbaijan's power sector The government has attempted efforts to reduce consumption further by implementing incremental price increases; The steps towards privatization were taken with the establishment of the joint-stock company comprising Estonia's two smaller oil shale-fired power plants. Parliament passed a law allowing for the sale of the country's Implementing additional reforms, including possibly unifying the electricity transmission and distribution networks, while keeping distribution grids into one, before proceeding with another privatization power generation under government control. tender for the distribution networks. With support from the World Bank and the EBRD, most of Georgia's hydro and thermal generation units have been restructured as joint-stock companies; Georgian Ministry for the Management of State Property is proceeding with privatization of energy distribution companies. Kazakhstanenergo was divested of its power generation facilities by creating independent generating companies Kazakhstan Electricity Grid Operating Company (KEGOC). Restructuring of energy system to the several joint-stock companies in the different regions of the country; Splitting off the company's distribution networks The reorganization guided by the EU with regard to energy market liberalization. Lithuania's Ministry of Economy and the Lietuvos Energija Board of Directors approved the main guidelines for the restructuring of the company. The Lithuanian parliament passed a law on the company's Plans to build new hydroelectric plants; Trying to reform and privatize state energy and power company Has privatized all of its power plants; The sale of regional electricity distribution companies has proceeded more slowly, and the majority of the distribution networks have not yet been privatized. KEGOC has granted management rights to several private companies. Using credits of international development banks to build substations, the power lines, to rehabilitate/reconstruct heat and power grids and heat, power plant. Large, so-called "qualified" electric power consumers already can choose alternative suppliers, and actual liberalization of Latvia's electric power market could take place by 2007 The Vilnius Power Station became independent of Lietuvos Energija According to the approved restructuring plan Lietuvos Energija (largest electric power company in Lithuania). Is to be split into five companies, including separate generation, transmission and distribution companies.

10 Moldova Russia Tajikistan Turkmenistan Ukraine Uzbekistan restructuring, paving the way for privatization of Lithuania's electricity industry Union Fenosa purchased three of Moldova's regional energy distribution networks, including the network supplying; Government approved a blueprint for electricity sector restructuring. The restructuring plan will break the UES monopoly into separate generation and distribution units, then split up the generation assets further; Government approved Energy Policy which will define energy sector trends for the future development. Efforts to modernize its power infrastructure by attracting foreign investment to the sector. The country is trying to increase its power-generating capacity and to reconstruct its energy grids. The several regional energy companies (oblenerhos) partially privatized and then sold stakes in another regional distribution companies. Government has developed a plan to increase the country's electricgenerating capacity by attracting foreign capital and loans to systems and stations in different cities, as well as to modernize the electric Attemptions for attracting foreign investment to revamp electric power reconstruct and upgrade a number of Uzbek power plants. power grid in Tashkent. Source: US Energy Information Administration ( 10