4th PRS Western Balkans Forum, Athens, June 27

1. Regional co-operation in the energy sector: Perspectives for the Western Balkans and the European Union Prof. Michael Caramanis Chairman of RAE 4th PRS Western Balkans Forum, Athens, June 27

2. Recent developments in the EU Energy Sector • 1. 2007 EU Commission initiatives : Strategic Energy Review, Internal Market Report, Final Sectoral Competition Report on Energy Markets, reveal major number of problems : • ■ Volatile - non-transparent prices • ■ Electricity and gas Markets Fragmented • ■ New Infrastructure Investments Required • ■ Emissions Trading Policy Impacts Electricity Prices • 2. New Legislation Proposals expected, Fall 2007 • 3. 18.06.2007 : European Parliament votes on Commission's Internal Market Report, supporting full liberalization

3. Main Points/Conclusions of SE Europe Capacity Adequacy Studies • Reliance on Imports is Essential for Meeting short term • (2007-2010) Needs • Most Countries currently Marginal or Deficient with the Exception of short term Export Capacity in: • Italy (5% reserves in 2002 => 20% in 2006) deficiency (as much as 7GW) is expected to return by 2015 • Central UCTE currently ~9GW of export capacity, but marginal adequacy after 2015. 12-15GW additions required. • Romania, Bulgaria export capacity expected to decline by 2010. Needed Generation (50 GW by 2015) and Network Infrastructure Investments are technically feasible BUT Capital availability will have to be Market Induced!

4. Key aspects of EU energy policy (i) : The EU concept of energy market liberalization • (a) Market Liberalization/Opening to Third Parties • (b) Unbundling of Competitive (Production and Supply) and Non-Competitive (Transportation and Distribution) Sectors • (c) Energy Market Liberalization in the EU : A two step process • -First Step to Ensure Third Party Access : Enabling new entry to the market through unbundling of activities • - Second Step to Ensure Competition: Third Party Entry NOT synonymous to Competition. Development of a truly competitive environment is necessary

5. Key aspects of EU energy policy (ii) : Third Party Access - Unbundling - Demand Opening • (1) Third Party Access: Non Discriminatory and Cost Reflective Prices for Network Access as well as for Whole Sale Energy Market Transactions. • (2) Unbundling : Notion and Implications • ■ Effective unbundling of Network Operators (ISOs) from potentially competitive sectors (Production and Supply). • ■ Unbundling and the role of ISOs in the Operation and Expansion of Integrated European Grid. ISO incentives to improve development and operation of the network (e.g. Cross Border Trade Congestion Auctions) • ■ Without Ownership or at least Legal Unbundling ISOs subjected to perverse incentives relative to TPA (entry of independent Producers, Suppliers and CBT). • (3) Open Demand Side to competition (Eligible Customers)

6. Pillars of Energy Market Reform : Privatization, Restructuring and Liberalization • ■ Market-Based Privatization is Superior to Power Purchase Agreement (PPA)-Based Privatization: Complementarily between Competition (Efficiency Enhancing Liberalization) and Privatization • ■ Privatization without Restructuring (i.e., Efficient Market Creation) does not support Reform that brings benefits to Consumers through: Private Infrastructure Investment, Security of Supply Improvements and Lower Costs • ■ Energy Sector Market Restructuring must be viewed in the context of Long Term Societal Benefits

7. Broad Aspects of EU Energy Policy : Energy Security, Efficiency, Affordability, and the Environment • 1. Public Service Obligations to address Affordability Issues: Social Tariffs made available but with minimal market distortions (e.g., recover deficit efficiently, develop bill collection discipline) • 2. Sustainable, Competitive and Secure Energy Supply can be achieved only through Open and Competitive Energy Markets • 3. Targets for Renewable Energy and Energy Conservation • ■ Contribution of renewable energy from 6% to 12% by 2010. • ■ Share of green electricity from 14% to 21% by 2010. • ■ Biofuel share in transportation 5.75% by 2010. • ■Technology Efficiency Gains to Reduce EU Energy Consumption by 20% by 2020.

8. South East Europe Energy Community: Legal Framework The ECSEE Treaty signed on October 2005 has: • Transposed the EU aquis communnautaire on Energy, Environment, Renewable Energy Sources and Competition to SEE countries • Established a framework for harmonization of EU and SEE country practices, and under specific circumstances, has gone beyond the EU aquis • Introduced New Institutional Framework in ECSEE • Started the process for the Integration of the SEE Energy Market into the EU- Internal Energy Market

9. EU Legal Environment • Directives 54/03/EC and 55/03/EC • Regulation 1228/03 on access to the electricity networks • Regulation on access to the gas networks (2005) • Directives on Security of Supply • Development of Regional Markets -- Electricity and Gas -- as an Interim Step towards the establishment of an IEM • Promotion of aquis communnautaire Implementation (Benchmarking, Sector inquiry 18/6/2007) • Increasing Dependence of EU on Energy Imports, (Electricity and Primarily Natural Gas) and Diversification

10. Regional Cooperation in the energy sector in Europe : The Case of SEE • 1. External Energy Relations : Intrinsic component of EU Energy Strategy, the cornerstone of EU policy for: • Stimulating economic growth in the road to full membership, and • Enhancing Diversification and Security of Energy Supply • 2. EU Expanding its Energy Market to Include Neighbors • 3. SEE Regional Energy Market : Significant progress toward Regional Energy Market through Trade and Infrastructure Enhancements in the Western Balkans

11. Energy Community : An opportunity for regional co-operation in SEE • 1. Energy Community: The largest integrated regional market for electricity and gas in the world • 2. Objectives: • ■ Creation of Unified Regulatory and Market Framework capable of Attracting Investment in the energy sector • ■ Enhancement of Security of Supply and Environmental protection • ■ Development of Competition by Broadening Geographic Scale • 3. General Implications: Energy Community, a milestone for Regional Development and Poverty Reduction, is key enabler of Transition from Regional Cooperation to Regional Integration

12. The Challenges… • We are facing a “cosmogony” in the energy sector both in the EU and –most importantly- the SEE • Investments will play a key role • The three pillars remain intact: • Security of Supply • Competition • Protection of the Consumers and the Environment • Social and Economic Stability for SEE countries must remain a Major Consideration • Need to Establish sound, stable and forward looking regulatory framework

13. The Challenges (cont.) … • Implementation of EU Directive and Regulation Provisions: • Market Opening • Establishment of TSOs • Implementation of Unbundling • Establishment of Independent Regulators • Implementation of appropriate TPA regimes • Transparency • Cross Border Trade • Past Timetable Targets Often Exceeded

14. The Challenges (cont.) … • Implementation of Directive Provisions is a necessary Big Step Forward. But is it sufficient? • Additional important issues remain to be addressed in ECSEE: • Affordability: Rate Shock Mitigation while ensuring Bill Collection Discipline • Regional Compatibility of National Reforms • Harmonization of Market Rules • Harmonization of Investment Support Mechanisms • ECSEE includes both EU and non-EU countries • Political Support (governmental and societal) is Key

15. Thank you very much for your attention !