The severe turmoil that some countries experienced during the financial crisis has slowed down liberalisation of energy markets in East European, says Gabor Szorenyi, chairman of the energy regulators regional association for central and Eastern Europe. But the road to liberalisation must continue, he adds, despite legitimate concerns regarding energy poverty in those countries.
Gabor Szorenyi is chairman of ERRA, the Energy Regulators Regional Association for Central and Eastern Europe.
He was speaking to EURACTIV ahead of the World Forum on Energy Regulation (WFERIV) in Athens on 18-21 October.
Last year, the EU completed its third energy liberalisation package, which foresees more powers for national regulators. What will be the impact of this new regulation on ERRA members that are not in the European Union, such as Russia, Turkey and Ukraine, for example?
ERRA is a voluntary association of energy regulators, so there are no obligatory policies for our member organisations. Since the membership of ERRA is very diverse in terms of geographical location and economic development, we can distinguish three types of ERRA members which are out of the EU region.
First, we have members such as the South-East European countries which are signatories of the Energy Community Treaty. For them, the EU’s third energy liberalisation package and its implications will be handled within the scope of work of the Treaty.
Then there are four ERRA members – Moldova, Georgia, Ukraine and Turkey – that will participate in the Treaty as observers. These countries accept the implementation of the EU directives. The three most problematic implications of the third package for most of these countries will be the following: unbundling, consumer protection and the sustainability objectives.
Finally, other ERRA members such as the Central Asian republics and other Eurasian countries are aware of the general objectives of the new package but there are no direct implications for these countries. There are a handful of affiliate members from Asia, the Middle East and the US which follow the EU energy legislation as observers during our meetings.
What will be the implications for these countries then?
For Turkey, although it is not a member of the European Union yet, the energy legislation of this country is in conformity with the EU’s legislation to a great extent. Besides, some provisions are in line already with those of the third Energy Package such as the gas release programme and ownership unbundling of the Turkish pipeline company BOTAS.
In addition to gas unbundling, distribution privatisation activities are going on in Turkey’s electricity sector. Albeit not radical, some alignments or amendments to the secondary legislation may become necessary over time. We hope that these amendments would be completed before negotiations start on the energy chapter of Turkey’s accession to the EU.
In the case of Ukraine, one of the key issues is the strengthening of regulatory power. We are happy to see that Ukraine agreed to join UCTE [the Union for the Coordination of Transmission of Electricity] and is in the process of the necessary preparations for the physical joining. In general, it can be stated that the third package confirms all the work that Ukraine has already undertaken towards the integration of its energy system with Europe.
For external energy suppliers such as Russia, the third package changes the rules for doing business with the EU and certainly it affects relevant Russian companies. Given the very complex nature and long-term effect of the third energy package on the Russia-EU energy relationship, it is natural that it is being carefully studied by all interested Russian parties both at business and state levels. However, it is clear that we have to adjust our thinking to the new realities. To a certain extent, it will positively affect the security of energy supplies involved. I believe that the energy regulators and their relevant associations have a constructive role to play in this process.
Energy regulators today sometimes have to balance conflicting interests (security and reliability of supply, affordability, climate change, etc.) with reliance on markets. What mechanisms are currently foreseen to address this issue?
This is a balancing act and one that regulators, the regulated and policymakers worldwide will be addressing at the World Forum on Energy Regulation (WFERIV) in Athens.
Reconciling the promotion of competitive markets and affordability for customers, especially the vulnerable ones, lies at the core of regulators’ tasks, which are further complicated by security of supply and environmental issues.
Then of course there is the climate change challenge, which is not just highly topical but which is a real issue for energy regulators. The regulators’ contributions to tackling climate change are many such as regulatory and legal stability which is needed to attract appropriate large-scale and long-term investment in networks, adequate incentives to meet the EU’s sustainability and security of supply objectives, or market monitoring and transparency.
Besides the promotion of competition, it is important to highlight that we do not promote this by all means among our members. Some of our members have small markets or insufficient technical conditions, and the impediments of regional market creation do not allow the establishment of effective wholesale markets.
At the same time, among the requirements of the third package, we consider the one on power poverty and vulnerable customers very important in the case of emerging markets. The aspects of affordability are especially important for our members.
Are new rules necessary in your view to deal with these challenges?
Our members have different approaches to certain topics depending on the maturity of the local market, geographical location and country attitude.
In the case of affordability, all our members agree that especially in case of low income and vulnerable customers, there should be specific mechanisms introduced which would allow this consumer group to pay their energy bills. There are members where the regulation is not defined yet, thus they apply consumer protection through consumer prices for all of the household customers.
In terms of security of supply, our members have very different positions depending on whether they are net exporters or net importers, especially in the case of gas. However, there is one thing that the two groups of member countries agree upon. They agree that the establishment of regional markets, strong network connection between the national markets and harmonised regulatory environment increases the security of supply for the consumers of our markets.
How can universal service obligations be made compatible with liberalised markets?
The concept of universal service exists in all member countries under different names and the content is not necessarily in conformity with the format and conditions of the EU directive.
In the past few years, some of those national markets – where there has been a temporary lack of capacity, increasing oil prices and where the financial crisis resulted in significantly increased wholesale market prices – decided to define the concept of universal service in a broader sense.
These governments tend to broaden the scope of universal service, thus decreasing the ratio of the free market segment. This tendency may reverse on the way to market building, and as a result of decreasing consumption caused by the crisis, and due to the relatively low oil prices.
ERRA pays special attention to the importance of international best practices in recognising vulnerable customers and their support. The chairmen’s meeting to be held in November this year will again visit this topic as a continuation of previous discussions among our chairmen. At the same time we hope to get to know the best practices of power poverty and vulnerable customers support during the WFER conference in Athens.
Successive gas crises between Ukraine and Russia have revealed weaknesses in international cooperation on gas transit issues and exposed the lack of independence of regulators, which are ultimately controlled by their governments. With hindsight, what is your assessment of these crises?
The January 2009 gas dispute has happened in a very complex situation, where the unfortunate combination of different elements made the situation even more serious:
- The existing multilateral and bilateral legal arrangements failed to prevent and resolve gas transit conflict;
- extreme cold weather conditions in several counties increased the gas demand (especially household related demand);
- a not fully transparent, complex and complicated contractual and payment situation between Ukraine and Russia regarding gas transit and gas delivery, and;
- some EU members are highly dependent on imports of Russian gas and on the Ukrainian transit system.
The voluntary implementation of Third Party Access (TPA) rules in non-EU countries – especially in Ukraine – together with the strengthening of the statutory power of regulators, including setting the detailed rules of TPA regime combined with monitoring and enforcement of these rules, could be a solution for preventing future similar disputes.
Moving towards more compatibility of energy market rules will certainly introduce more predictability in the gas supply flows.
In light of this, isn’t the EU misguided in its policy to secure more independence of regulators from the state when its trading partners regard energy as a political commodity?
No, the EU is not misguided in the route that it has taken in the third package of energy legislation because it provides for a basic set of powers for all national regulators in Europe and strengthens their independence.
Regulatory independence is now accepted in Europe. In Central and Eastern Europe and in most Eurasian countries, we have for a long time fought for market liberalisation and independent regulation. We should not turn our back on this process of independent regulation and market liberalisation now.
However among our ERRA members, there are countries and markets where the proper functioning of competitive wholesale and retail markets needs several additional years to complete.
What role can energy regulators play in the fight against climate change?
Substantial development of renewables requires electricity grids to be reinforced. The most direct way national regulators help in the fight against climate change is by encouraging network companies to upgrade grids and by modernising grid design and operation by using intelligent ‘smart’ technologies. Those will help reach the climate target through connection of distributed generators, such as renewables, and assists the customers with information, which helps them with efficient use of energy. Tools that some energy regulators use include financial incentives in their regulatory price/revenue controls of the network operators.
A further area where regulators play an important role in the fight against climate change is in energy efficiency. For example, the regulator can help promote energy efficiency measures, both by designing tariff structures and frameworks that reward network operators and suppliers for their efforts, and also in raising consumer awareness.
Indeed, regulators from around the world committed, at the G8 country summit in May in Rome, to preparing a report on best regulatory practice on promoting energy efficiency. We will discuss those regulatory issues during our global conference, WFER IV in October, and how energy regulators worldwide can play an important role in the fight against climate change.
The steady rise in the production of renewable energy in Western Europe is creating strains for some grid operators in countries such as the Czech Republic, for example, which has to deal with sudden rises in wind energy coming from Germany. What are ERRA’s recommendations to deal with this problem?
Among ERRA members the wind power is not so widespread until now. However, Turkey will face similar problems soon. In spite of the relative small ratio of renewable – especially wind – in most of our member countries, ERRA regulators are discussing these issues already and are trying to find the best way for solving the technical problems of renewable penetration such as grids or systems.
The third energy package and its EU-wide ten year network development plan, as well as the emphasis on greater regional cooperation, could also solve this type of problem in the medium term.
New EU rules want to give fairer access to networks for renewables over conventional sources of energy. Should they be given priority access in your view or should access be blocked in some cases?
Priority access was a controversial aspect of the political negotiations on the climate change package. As the issue of priority access is central to our role as regulators, during the course of the negotiations the European Energy Regulators brought to the attention of the lawmakers the implications of this measure in terms of system balance, security of supply and consequent grid investment needs and costs to consumers.
In particular it could act to discourage investment in non-renewable forms of generation. This would drive up prices and raise concerns about the availability of sufficient reserve generation (often from thermal plants) to provide back-up for intermittent renewables in order to avoid blackouts and preserve the integrity of the system.
We therefore welcomed the end result of the negotiations which was to grant a certain degree of flexibility by subjecting priority access to certain conditions related to the maintenance of the reliability and safety of the grid based on transparent and non discriminatory criteria.
The EU insisted on investment reciprocity in its third energy liberalisation package – the so-called ‘Gazprom clause’. What do you expect will be the consequences of this?
We understand and accept the energy policymaking power of national governments of non-EU ERRA members. However we are sure that security of energy production, transit and consuming countries is best assured when their interests are balanced. Energy inter-dependence is not just a slogan. It is a reality for all participants of the energy supply chain.
Major energy suppliers who are serving some of the EU wholesale markets and who are interested in participating in the retail markets as well will find a way of continuous cooperation. This can be done in a way that could be beneficial to both sides – suppliers and customers – and at the same time could adjust their business to the requirements of the third energy package. And this is possible.
In addition, there are major steps forward in energy-sector restructuring and competitive market development in some countries. For example the Russian wholesale electricity market model has some very sophisticated elements targeting effective competition and actual unbundling.