INTERNATIONAL ENERGY AGENCY RUSSIAN ELECTRICITY REFORM Emerging challenges and opportunities INTERNATIONAL ENERGY AGENCY RUSSIAN ELECTRICITY REFORM Emerging challenges and opportunities page2-20x27b 14/03/05 9:40 Page 1 INTERNATIONAL ENERGY AGENCY The International Energy Agency (IEA) is an autonomous body which was established in November 1974 within the framework of the Organisation for Economic Co-operation and Development (OECD) to implement an international energy programme. It carries out a comprehensive programme of energy co-operation among twenty-six of the OECD’s thirty member countries. The basic aims of the IEA are: • to maintain and improve systems for coping with oil supply disruptions; • to promote rational energy policies in a global context through co-operative relations with non-member countries, industry and international organisations; • to operate a permanent information system on the international oil market; • to improve the world’s energy supply and demand structure by developing alternative energy sources and increasing the efficiency of energy use; • to assist in the integration of environmental and energy policies. The IEA member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, the Republic of Korea, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, the United States. The European Commission takes part in the work of the IEA. ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of thirty democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co- ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission takes part in the work of the OECD. © OECD/IEA, 2005 No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to: International Energy Agency (IEA), Head of Publications Service, 9 rue de la Fédération, 75739 Paris Cedex 15, France. page2-20x27b 14/03/05 9:40 Page 1 FOREWORD - 3 INTERNATIONAL ENERGY AGENCY The International Energy Agency (IEA) is an autonomous body which was established in November 1974 within the framework of the Organisation for Economic Co-operation and Development (OECD) to implement an international energy programme. FOREWORD It carries out a comprehensive programme of energy co-operation among twenty-six of the OECD’s thirty member countries. The basic aims of the IEA are: The Russian government has embarked on a highly ambitious program of electricity • to maintain and improve systems for coping with oil supply disruptions; reform. Russian policymakers have recognised that attracting timely and appropriate • to promote rational energy policies in a global context through co-operative relations with investment will remain a substantial and ongoing challenge, which can most effectively non-member countries, industry and international organisations; be addressed through the creation of efficient electricity markets operating in response • to operate a permanent information system on the international oil market; to genuine price signals, within a robust and predictable legal and regulatory • to improve the world’s energy supply and demand structure by developing alternative framework. Only such markets, in which competition is based on transparent prices that energy sources and increasing the efficiency of energy use; accurately reflect costs, can deliver the efficient, reliable and internationally competitive • to assist in the integration of environmental and energy policies. performance needed to meet the government’s economic targets in the longer term. Such markets can attract the new investment that the industry will need, especially The IEA member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, in order to ensure security of electricity supply beyond 2010. Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, the Republic of Korea, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, If it is to succeed, the reform program will have to create market structures, market rules Switzerland, Turkey, the United Kingdom, the United States. The European Commission takes part in the work of the IEA. and a regulatory framework that will foster the emergence of competitive wholesale and retail markets in electricity. As in the many IEA member countries having taken steps in electricity reform in the past, many challenges are to be expected over the course of the Russian reform process, both at the policy stage and during implementation. ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT This book does not attempt to address the many detailed issues that may arise but instead focuses on some aspects of the proposed reform that could have a key bearing The OECD is a unique forum where the governments of thirty democracies work together to on its ultimate success. address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments The book examines the proposed market structure and the importance of the diversity and concerns, such as corporate governance, the information economy and the challenges of of ownership as well as the strength of the inter-regional grid system to maintain an ageing population. The Organisation provides a setting where governments can compare healthy competition and guard against regional congestion problems which would policy experiences, seek answers to common problems, identify good practice and work to co- raise the possibility of regional monopolies forming and market power abuse. In this ordinate domestic and international policies. respect, Russia’s extremely costly experience in privatising its oil sector over the early The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, 1990s should provide a sharp reminder of the potential dangers of this process. A Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, key to the success of competitive markets in electricity and eventually other parts of Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Russia’s energy sector will be strong, well resourced, well informed, well-trained and Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. independent regulators that can rise to the challenge of establishing access to network The European Commission takes part in the work of the OECD. and other monopoly products and services on fair and reasonable terms for all market players. The IEA is concerned about the lack of resources and independence of the regulatory bodies in Russia, given the critical role these bodies will need to play to ensure against market power abuses in the face of powerful vested interests and dominant players such as Gazprom. The recognition by the Russian government that tariff rebalancing and especially © OECD/IEA, 2005 the removal of cross-subsidies is a necessary pre-condition for successful introduction No reproduction, copy, transmission or translation of this publication may be made of market reforms, is reassuring. Cost-reflectivity has been recognised as a principle without written permission. Applications should be sent to: objective of the reforms. The regime of vesting contracts now proposed for all users International Energy Agency (IEA), Head of Publications Service, provides a means for dealing with this critical issue while at the same time allowing 9 rue de la Fédération, 75739 Paris Cedex 15, France. competitive wholesale and retail markets to be progressively introduced over the 4 - FOREWORD remainder of the decade. The IEA commends the Russian Government’s plan to use this period to gradually raise regulated end-user tariffs to levels consistent with the delivered price of electricity sourced through the competitive wholesale and retail market. Such rebalancing would allow customer choice to be extended progressively through the life of the vesting arrangements and ultimately to all users at the end of the vesting contract period if desired. The recent public backlash against monetization of certain public services demonstrates the importance of getting this balance right. Although the proposal is likely to extend the transitional period, it has the potential to provide greater stability, certainty and public acceptance to the implementation process, which would help to enhance the likelihood of the reform being fully and successfully implemented. The IEA has been following