Rome , 11-15 November 2007

1. 20th WEC - Rome 2007 Rome, 11-15 November 2007 • Does energy sector reform • need reforming? THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD Goran Granic, PhD Energy Institute Hrvoje Pozar Zagreb, Croatia

2. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD EMPHASIS PUT ON… • Creation of the open energy market is a process • Aim: promotion of economic growth & competitiveness • Energy market: objective per se or only an instrument? • Situation: favourable when the reform was initiated • Two opposite standpoints now: • Fully functioning internal energy market will enable freedom of choice and solve the problems it is facing • Opening up the market does not bring anything new, except reduction of security of supply • Does energy sector reformneed reforming? Goran Granic, PhD

3. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD DISCUSSIONS CONDUCTED ON… • The course of the energy sector reforms in Europe • Objectives, achievements, issues, and dilemmas • Long term sustainability and security aspects of energy • Legislative changes relating to the energy market • Institutional framework changes due to EU enlargement • Responsibility chain: EU – State – Regulatory Authority – System Operator – Trader – Buyer • The chain is not closed up in case of disruptions and the market is not able to deliver a solution • Does energy sector reformneed reforming? Goran Granic, PhD

4. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD PROBLEMS EXHIBITED IN… • Common energy market to be created at EU level But, institutional relations between the MSs are not solved • Internal energy market promoted in multiple steps But, steps are not fully implemented and new ones are coming • EU neutral to ownership relations But, ownership issue results in negative effects on the market • The security of supply considered through Directives But, national approaches appeared due to lack of coordination • Energy surplus created an unrealistic market picture But, long term interests and open market rules not considered • Does energy sector reformneed reforming? Goran Granic, PhD

5. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD CHALLENGES RECOGNISED IN… • Monopolies appear in a new form as they are only redistributed due to legislative changes and privatisation • Integrations of energy companies (mergers & acquisitions) to be checked against competition acquis • Creation of energy mega-undertakings to be looked at • Upgrade of legal and functional unbundling to include the ownership one as well • Influence on further energy market development • Measures needed for institutional influence on further market development – social aspects to be included • Does energy sector reformneed reforming? Goran Granic, PhD

6. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD PRIORITIES DEFINED FOR… • Natural gas market: • TEN-E to make Europe less dependent on a single supplier • Priority gas pipelines of European character from the Caspian shelf and LNG facilities – storage to be added • Competing projects may in effect discourage one another • EU not only to identify potential corridors, but to provide institutional, organisational, financial, and political support • Market mechanisms only do not generate needed construction dynamics • Harmonisation needed in the rules of market play in EU (open the market), Russia (enable free investments) and transit countries (apply transit tariffs) • Does energy sector reformneed reforming? Goran Granic, PhD

7. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD PRIORITIES DEFINED FOR… • Electricity market: • Competition limited by generation & transmission infrastructure • Cross-border facilities still inadequate at many places and insufficient for purposes of the open market • Prioritised development of interconnections – bilateral and regional • Synchronisation of activities and harmonisation of legal, procedural, ownership and business aspects • For both, system operators and regulatory authorities • Electricity network interconnections to be a part of obligations • Does energy sector reformneed reforming? Goran Granic, PhD

8. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD SUGGESTIONS GIVEN TO… • Take active position of the state and/or EU in: • Energy transport and interconnections • Construction of energy production facilities • Institutionalise the security of supply • Avoid the ongoing privatisation to turn into an obstacle • Avoid replacing state monopoly by private mega one • Find a position for RES in the market (financial support and administrative obligatory targets) • Find a position for Kyoto Protocol and emission trading (position on the nuclear energy) • Does energy sector reformneed reforming? Goran Granic, PhD

9. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD CONCLUSIONS AND RECOMMENDATIONS • Key prerequisite: political agreement EU-Russia • Reciprocity between partners in obligations and opportunities • EU to open its market • Russia to allow exploration/production • Transit countries to apply ex-ante transit tariffs • Construction of electricity interconnectors • Currently left to interested countries/investors • Each country to take obligations to ensure transit capacities • EU to support priority projects by all necessary means • Does energy sector reformneed reforming? Goran Granic, PhD

10. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD CONCLUSIONS AND RECOMMENDATIONS • Construction of generation capacities abroad • Realistic estimation of security concerns for investments abroad • Obligation: each country to build on its territory certain minimum and obligatory part of electricity generation capacities • But also: each country to secure 100% reserve either on its own territory or through long term agreements from others • National governments to have a possibility to intervene if the capacity construction plans do not effectuate • The price of security to become a component in the electricity pricing (through necessary reserves on the territory) • Does energy sector reformneed reforming? Goran Granic, PhD

11. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD CONCLUSIONS AND RECOMMENDATIONS • Development of gas market and security of gas supply • Enforcement of security and quality of supply standards • Obligations: • to ensure a part of transit for unknown users • to connect gas systems with the neighbouring ones • to construct new supply routes • to develop sufficient storage capacities • The vulnerability assessment studies: • to become mandatory • to be the basis for measures at EU level • Does energy sector reformneed reforming? Goran Granic, PhD

12. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD CONCLUSIONS AND RECOMMENDATIONS • Prevention of market power and ownership concentration to avoid market monopolisation • Set out criteria for dominance prevention • But, take into account specifics of each country and EU as single market and administrative space • Implement Kyoto Protocol and enhance use of RES • Needed: single legal and financial framework is to be developed • Basis: derive from the value of energy and cost of environmental protection regardless of technology • But, always take into account the effects they generate • Does energy sector reformneed reforming? Goran Granic, PhD

13. THE ENERGY FUTURE IN AN INTERDEPENDENT WORLD CONCLUSIONS AND RECOMMENDATIONS • Explore and develop new technologies • A common European project • Synergic effort of all countries in scientific and financial terms • Does energy sector reformneed reforming? Goran Granic, PhD