Regulatory challenge of Russian energy sector reform

World Forum on Energy Regulation IVAthens, Greece

October 18 - 21, 2009

Regulatory challenge of Russian energy sector reform

Dominique Fache,

General director for Russia and CIS ENEL

Dominique Fache - World Forum on Energy Regulation IV - Athens, Greece - October 18-21, 2009

Enel: Global dimension¹

•22 countries\ four continents

•Total capacity of 82 863 MW

•259,7 TWh/year of electricity generated

•1 583 000 km of power lines

•32 650 km of gas pipelines

•52,4 million customers

•85 485 people

•1,6 million investors

•13,1 billion euros of EBITDA ¹Figures as of 30.09.2008

1


Russian energy sector structure

Capacity of RAO UES 67 GW

Capacity OGK 77 GW Capacity TGK 54 GW

OGK1OGK2OGK3OGK4OGK5OGK6

2


Enel: Presence in RussiaFirst Vertical Integration Built in Russian Energy Sector

Integration allows hedging the risks on huge liberalised market, primarily hedging gas supply risks for ENEL OGK-5

Supply Power generationUpstream gas

20% of SeverEnergiya

(50% - Gazprom, 30% - ENI)

55.9% of

ENEL OGK5

49.5% of RusEnergoSbyt

• Largest independent retail power company in Russia

• 35 TWh sold in 2008

• 25 regional offices and 7 branches

• Main supplier to Russian Railways (15 year long-term power supply contract).

o

• Gas fields in the north of Western Siberia

• Covering the demand of OGK-5’s gas-fired plants

Core asset of Enel’s vertical chain in Russia

3


Regulatory framework•Generation

•Transmission /•Dispatching

•Distribution •Retail

Thermal generation - full privatization almost completed

Nuclear and Hydro - State controlled

Grids state controlled

Dispatching separated from transmission and state controlled)

11 Distribution Companies (MRSK) possibly privatized in the future

~130 supply companies

Privatization of Guarantee Suppliers

Tariffs are regulated on cost plus basis

Planned gradual switching for RAB regulation

Tariffs are regulated on cost plus basis

Switching for RAB regulation in delay

Separate payments for energy and capacity

Energy: free market (DAM, BM)

Capacity: free market (short run since July 2008, long term is still pending)

Exchange for forward contracts of electricity and capacity (since Jan 2009)

4


FREE MARKET

REGULATIONS

It is very difficult to find a balance between the price

welcomed by customers and the payment “motivating”

producers for further investments.

5


Difficulties in taking

consolidated decisions ATS

FTSGENERATORS

NETWORKS SALES

MINENERGO

MARKET COUNCIL

COUNCIL OF ENERGY PRODUCERS

FAS

SYSTEM OPERATOR

MRSK FSK

CRISISENERGY COMMISSION

6


The importance of the Regulatory framework

Values

• Independence and autonomy of Regulator

• Consistency over time

• Transparency of market rules and procedures

• Predictability of evolution

Key Principles

• Market forces drive profitability and returns

• Regulated returns reflecting industry/country profile for mandated programs and natural monopolies

• Fair return on investments (especially mandatory investments)

• Legal reliability guaranteeing security of investments

Reliable regulatory framework = incentive for investors

7


Status of market reform

Market liberalization

17%

34%

60%

85%

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012 2018

Households still regulated

Gas prices

0%

10%

20%

30%

40%

50%

2008 2009 2010 2011 2012

MED May 2008 MED Jul 2009

8


Capacity market

Why should be capacity remuneration implemented?

supply adequancy

Short-run Capacity market

opened 2H 2008

investment incentives

Price predictability

Long-run Capacity Market

Market Rules still in discussion

First auctions for 2011 delivery

postponed from December 2009 (as

early planned) to September 2010*

* should be held by September 2010

9


Capacity market

• Short-run Capacity market opened 2H 2008

• Long-run capacity market model (rules still in discussion)

~

Year2010

2015 2015+N

КОМDelivery periodTime necessary to carry out new investments

4 years new – Nyears old – 1 year

• By September 2010 auction with delivery in 2011 will be carried out

• By November 2010 all transitional auctions with delivery 2012-2014

10


Collection problems

•Increasing debts vs generators

•Accumulated debts is around 34 bln. RUR (July 2008 – September 2009)

retail marketwholesale market

•Increasing non payments problem

•Accumulated debts is around 90 bln. RUR (July 2008 – September 2009)

Financial Guaratees

You can consume and not pay?

Telemetering

11


Tariff VS Intensity

0

20

40

60

80

100

120

140

160

180

200

€/MWh Intensity

Russia

France

Germany

UK

Italy

12


Smart technologies for the future

Smart Grids

• Integration and management of renewables

• Local energy dispatching

• Self-fixing grids

Electronic metering for electricity and gas

• 30 mln of electronic meters ALREADY installed in Italy

• Exploitation of remote management of gas meters

• Development of a multi-metering infrastructure

13


Enel Group: Key Priorities in Russia

Power and Gas Market

Opening

Long-run Capacity Market

Tariff Imbalances

Energy Market Cap

Collection Problems

Efficiency

14

Dominique Fache - World Forum on Energy Regulation IV - Athens, Greece - October 18-21, 2009 15

Regulatory challenge of Russian energy sector reform

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