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

Mar 27, 2015

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

World Bank Framework for Energy Trade in South East

EuropeDavid Kennedy

World Bank

Page 2: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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

Page 3: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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

Page 4: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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)

Page 5: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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)

Page 6: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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

Page 7: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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 1st zone, Centrel• Eastern Europe???

Page 8: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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.)

Page 9: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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)

Page 10: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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

Page 11: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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

Page 12: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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.

Page 13: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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%)

Page 14: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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)

Page 15: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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.

Page 16: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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

Page 17: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

Gas market liberalization under the Athens Memorandum

• Athens Memorandum requires industry unbundling and development of regulatory framework

• Envisages phased market opening and increased gasification

Page 18: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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

Page 19: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

Gas price at Transport cost Low case Mid case High case Greece-Turkey border 80 120 160 + gas transport across Greece 15 17.50 20 + transport fees across Greece unknown Northern route Greece-Macedonia border 95 138 180 + gas transport to Negotino 1.95 97 139 182 + gas transport to Albanian branch 51.6 149 191 234 + gas transport from Negotino to Skopje

1.38 98 141 183

+ gas transport through Serbia 4.45 103 145 188 + gas transport to Bosnia & Herzegovina

+ costs for existing network

Italian route Greece-Albania border 95 138 180 + gas transport to Elbasan 3.98 91 142 184 + gas transport to Albanian branches 14.25 113 156 198 + gas transport from Elbasan to Skopje 4.07 103 160 188 + gas tranport from Skopje to NIS 4.45 108 164 193 + gas transport to Bosnia and Herzegovina

+ costs for existing network

Delivered gas prices in SEE under new pipelines

Page 20: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

Increased 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

Page 21: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

Country Industry organization Legislation for regulation and liberalization

Regulator

Albania Integrated No No Bosnia & Herzegovina

Integrated trader, transmission, supply company. Also a distribution company, another trader, and two small transmission cos.

No No

Bulgaria Integrated Yes Yes Croatia Separate transmission co.. Yes Yes Macedonia Integrated Yes No Romania Integrated Yes Yes Serbia Integrated No No Turkey Integrated trader and transmission

company, separate distribution companies.

Yes Yes

Gas sector reform in SEE

Page 22: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

Objectives:

• To assess the economics of increased SEE gasification based on pipelines linking Turkey with western Europe

• To consider the economics of increased SEE gasification through increased LNG imports

Gas study: terms of reference

Page 23: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

• provide gas demand forecasts

• provide pipeline cost estimates

• assess economics of new pipelines

• forecast SEE gas import and export prices

Gas study: scope of work

Page 24: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

• close cooperation of Ministries, regulators, gas companies

• selection of consultants starting October

• start work January 2005

Gas study: implementation

Page 25: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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

Page 26: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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

Page 27: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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

Page 28: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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

Page 29: World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.

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