Building Efficient & Innovative Retail Electricity Markets Douglas Cooke Senior Counsellor Presentation to the IEA-Russian Market Council Conference Russian Energy Market: the Present and the Future Moscow, 5 December 2012

Presentation Outline Retail Market Structure Retail Market Arrangements Toward Cost-reflective End-user Pricing

Suppliers of Last Resort dominate electricity retail markets Regional Market Shares of SLR’s in 2010 Barents Arctic Ocean Sea Norway Sweden Laptev Sea Finland Baltic Sea Estonia Latvia Northwest SLR: 85% Lithuania Belarus Central SLR: 80% Urals SLR: 81% Ukraine Siberia SLR: 83% Volga SLR: 75% South SLR: 85% Lake Baikal Georgia Caspian Kazakhstan China Armenia Sea Km Azerbaijan Aral 400 800 Sea Mongolia Note: Urals figures are for 2009

Retail markets were very fragmented with high levels of concentration … Volga Federal District: 2007

… but levels of concentration are falling as independents build market share … Volga Federal District: 2010

… however, there is still a way to go to achieve a more competitive structure

Options to develop a more diversified & competitive retail market structure Facilitate the development of retail companies with a wider regional & national presence Identify & remove remaining policy, legal, regulatory & market barriers to new entry Consider reinstating auctions for Supplier of Last Resort services & franchises Build effective competition supervision to support competitive market development

Retail Market Arrangements

Key requirements for efficient & innovative retail markets include: Cost-reflective, time-of-use pricing Simple & efficient legal frameworks, market rules & processes

Simple & efficient legal frameworks, market rules & processes Contracts Metering Switching & Moving Settlement & Billing Retail Market

Key requirements for efficient & innovative retail markets include: Cost-reflective, time-of-use pricing Simple & efficient legal frameworks, market rules & processes Access to accurate & timely information

Access to accurate & timely information: Spanish example Customer Information Individual or entity name Location Default & arrears history Contract Terms & Conditions Product & tariff type Date last changed supplier Date last changed product Payment terms Consumption Information Usage over last 2 years Consumption profile Consumption class Technical Information Voltage Metering type Availability of power management systems

Key requirements for efficient & innovative retail markets include: Cost-reflective, time-of-use pricing Simple & efficient legal frameworks, market rules & processes Access to accurate & timely information Customer awareness & engagement

Customer awareness & engagement: Texas electric choice program example Website Home Page Electricity Basics Overview Links covering a range of issues Why Switch? Reasons Questions to Ask Yourself Switching Process Ways to Save Compare Offers Process Overview Step 1: Understand Choices Step 2: Questions to Ask Providers Step 3: Compare Offers Resources Publications Low Income Your Rights FAQ’s

Key requirements for efficient & innovative retail markets include: Cost-reflective, time-of-use pricing Simple & efficient legal frameworks, market rules & processes Access to accurate & timely information Customer awareness & engagement Enabling technologies

Enabling technologies strengthen real-time price responsiveness 30% higher response with technologies Source: Faruqui & Palmer 2011

Toward Cost-reflective End-user Pricing

Considerable progress has been made toward cost-reflective pricing … 40-50% increase 3x-4x increase … but further adjustment may be required to achieve the goal.

Timely & effective removal of subsidies requires an integrated approach … Price Growth 5% pa. $/kWh Lower cost-reflective price 50% P1 Cost Reduction 5% pa. P2 Halve Period 5 yrs 10 yrs Time … to lift end-user payments while reducing cost-reflective price levels.

An integrated approach to removing pricing subsidies could include: Increasing end-users prices consistent with capacity to pay Replacing cross-subsidies funded by electricity users with direct payments funded by government Improving sector efficiency to reduce the level of cost-reflective prices Competitive & innovative wholesale & retail markets Efficient network & system operation costs

End-User Price Controls: A Safety Net or Impediment to Efficient Pricing? Rationale for price controls: Limited price responsiveness (inelastic demand) Protection for low income, vulnerable consumers A ‘safety net’ while robust competition develops But experience suggests that price controls can be harmful once competition is effective Discourages innovative products & services Undermines new entry & competition Discourages end-use energy efficiency Favours wealthier consumers who use more (regressive) Distorts efficient market development & reduces overall benefits for consumers

Evidence suggests that residential users can & do respond to time-varying prices Source: Faruqui & Palmer 2011

… and that low-income households can benefit from real-time pricing products 65% with lower bills Source: Faruqui, Sergici & Palmer 2010

Some principles for managing end-user price controls: Retain price caps as a ‘safety net’ during the transition to robust retail competition Ensure price caps provide sufficient ‘headroom’ to facilitate unwinding of subsidies & development of competitive retail markets Longer-term – review need for end-user price caps, with a view to removing them where retail competition is sufficiently strong

Spaciba Contact details: E-mail: doug.cooke@iea.org Web: www.iea.org