Preparatory Activities for the Azerbaijan, Georgia, Turkey Regional Electricity Market
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ACTIVITY COMPLETION REPORT Preparatory Activities for the Azerbaijan, Georgia, Turkey Regional Electricity Market AZERBAIJAN: Legal, regulatory and market assessment regarding the export prospects towards the Turkish market (AHEF 121.AZ, & 122.GE) INOGATE Technical Secretariat and Integrated Programme in support of the Baku Initiative and the Eastern Partnership energy objectives Contract No 2011/278827 A project within the INOGATE Programme Implemented by: Ramboll Denmark A/S (lead partner) EIR Global sprl. The British Standards Institution LDK Consultants S.A. MVV decon GmbH ICF International Statistics Denmark Energy Institute Hrvoje Požar Document title Activity Completion Report “AZERBAIJAN: Legal, regulatory and market assessment regarding the export prospects towards the Turkish market” (AHEF 121.AZ, & 122.GE) Document status Final Name Date Prepared by 01/04/2016 Konstantinos Perrakis, Lila Vassilaki, Nikos Tourlis and Nikos Patsos Checked by 04/04/2016 Nikos Tsakalidis Adrian Twomey Approved by Peter Larsen 24/05/2016 This publication has been produced with the assistance of the European Union. The contents of this publication are the sole responsibility of the authors and can in no way be taken to reflect the views of the European Union. Table of Contents 1 PART 1 – EUROPEAN COMMISSION ................................................................................................ 1 1.1 Background ............................................................................................................................. 1 1.2 Essence of the Activity ............................................................................................................ 1 1.3 Key Findings ............................................................................................................................ 3 1.4 Ownership and Benefits of the Activity .................................................................................. 3 1.5 Recommendations .................................................................................................................. 4 1.6 Challenges Faced ..................................................................................................................... 5 1.7 Impact Matrix .......................................................................................................................... 6 2 PART 2 - BENEFICIARIES ................................................................................................................... 7 2.1 Executive Summary ................................................................................................................. 7 2.1.1 Objectives of the study, key findings and recommendations ......................................... 7 2.1.2 Methodology and outputs .............................................................................................. 8 2.1.3 Limitations and further work .......................................................................................... 9 2.1.4 Structure of the report .................................................................................................. 10 2.2 Electricity Markets ................................................................................................................ 11 2.2.1 Concepts in the new market structure ......................................................................... 11 2.2.2 The rationale of preserving networks as natural monopoly ......................................... 11 2.2.3 Unbundling .................................................................................................................... 12 2.2.3.1 Trading in wholesale electricity markets ................................................................ 13 2.2.3.2 Bilateral contracts ..................................................................................................... 13 2.2.3.3 Power Pools or Electricity pools ................................................................................ 13 2.2.3.4 Power exchanges ...................................................................................................... 15 2.2.3.5 Balancing markets ..................................................................................................... 18 2.2.3.6 Coordination of electricity markets .......................................................................... 18 2.2.3.7 Short Term Wholesale market models ..................................................................... 19 2.2.3.8 Determination of the wholesale price of electricity ................................................. 21 2.2.4 Electricity markets liberalization in the EU ................................................................... 22 2.2.4.1 Drivers of liberalisation and its evolution in the EU ................................................. 22 2.2.4.2 The latest step of harmonisation of the EU Internal Electricity Market by means of the 3rd Package......................................................................................................................... 24 2.2.4.3 Unbundling in the notion of the EU legislation ......................................................... 25 2.2.4.4 National Regulatory Authorities ............................................................................... 26 2.2.5 Agency for Cooperation of Energy Regulators .............................................................. 26 2.2.5.1 Cross-border cooperation ......................................................................................... 26 2.2.5.2 Summary for the 3rd EC Legislative Package for electricity ....................................... 27 2.3 Integration of national markets – the EU Internal Energy Market ........................................ 29 2.3.1 Regulation 1228/2003 and Directive 2003/54 .............................................................. 30 2.3.2 Regional Initiatives within the EU ................................................................................. 31 2.3.2.1 The 1st generation of EU regional initiatives: the 7 “mini-fora” .............................. 31 2.3.2.2 Independent initiatives within EU ............................................................................. 32 2.3.2.3 The ERGEG Regional Initiatives ................................................................................. 32 2.3.3 The 3rd Energy Package (2009) ..................................................................................... 36 2.3.4 The Target Model for the EU electricity market ........................................................... 36 2.4 The EU Legal and Regulatory Context in relation to TPA ...................................................... 42 2.4.1 Background ................................................................................................................... 42 2.4.2 The EU Acquis Communautaire on Electricity .............................................................. 42 2.4.3 Third Party Access (TPA) ............................................................................................... 43 2.4.4 The relationship between the notions of TPA and unbundling and their impact on cross border trading ...................................................................................................................... 45 2.4.5 Cross-Border Trading .................................................................................................... 47 2.4.5.1 A focus on Regulation 714/2009 provisions ............................................................. 47 2.4.5.2 Explicit and implicit capacity auction ....................................................................... 49 2.4.5.3 The New CACM Regulation ....................................................................................... 50 2.5 A Review of the Legal Framework of the Republic of Azerbaijan ......................................... 51 2.5.1 Main Legislative Acts on Electricity ............................................................................... 51 2.5.1.1 The Law on Natural Monopolies ............................................................................... 51 2.5.1.2 Law on Energy ........................................................................................................... 52 2.5.1.3 Law on electric and heat power stations .................................................................. 53 2.5.1.4 Law on energy resources .......................................................................................... 54 2.5.1.5 Law on power engineering ........................................................................................ 54 2.5.1.6 The State Programme on the Development of Fuel-Energetic Complex of Azerbaijan (2005-2015) ............................................................................................................................... 56 2.5.2 Azerenerji ...................................................................................................................... 57 2.5.3 Gaps and Deviations ..................................................................................................... 57 2.5.4 Energy Community ........................................................................................................ 58 2.6 Trading Opportunities through the AZ-GE-TR Corridor......................................................... 59 2.6.1 Introduction .................................................................................................................