GOVERNANCE, REGULATION AND MARKET INTEGRATION IN EUROPE SALVATORE ZECCHINI APEX Conference Sidney, October 13, 2008

Power exchanges in Europe (year 2008) Source: European Energy Exchange (EEX) and Powernext

European power markets restructuring process EXCHANGESINTEGRATION DOMAINAIM Powernext - EEX Spot Markets Merger (50% - 50%) → end 2008 Increasing liquidity and reducing transaction costs Derivatives Market Merger (Powernext 20% - EEX 80%) → spring 2009 Integration of clearing and settlement services provided by ECC → 2009 APX - Endex APX acquisition of 90% of Endex equity Integration of spot and forward markets (power and gas) EEX - EurexTrading and IT platforms Development of synergies to lower transaction costs Nord Pool - OMX Trading, clearing and settlement systems Development of synergies to lower transaction costs Benelux, Germany and France TSOs (7 companies) New company (Casc – Cwe) to manage cross-border capacity Increase liquidity and competition on central European electricity markets EEX-Nord Pool- 2 German and 1 Danish TSO New company (EMCC) to manage cross-border capacity between Germany and Denmark Increase liquidity and competition in North and Central Europe

Main European power exchanges ownership structure ExchangeMajor shareholders Powernext (France) HRGT (52.8%) Holding owned by FR, NL and BE TSOs EDF (6.8%)Electrabel (6.7%)Gaz de France (6.7%) Nord Pool Spot (Scandinavian countries) Statnett SF (30%) Norway TSO Svenska Kraftnat (30%) Sweden TSO Fingrid Oyj (20%) Finland TSO Energinet.dk (20%) Denmark TSO APX BV (Netherlands) TenneT (71.82%) Dutch TSO Nederlandse Gasunie (25.5%) Dutch gas TSO Fluxys (2.68%) BELPEX (Belgium) Elia (60%) Belgium TSO Tennet (10%) Dutch TSO RTE (10%) French TSO Powernext (10%) French PX APX (10%) Dutch PX EEX (Germany)Eurex Zurich AG (34.73%) Landesbank Baden- Wuttemberg (22.64%) LVV Leipziger Versosgungs (7.38%) Freistaat Sachsen (4.51%) OMEL (Spain)OMIP (10%)BMEX (7.28%)BNP Paribas (7.28%) Abengoa (6.08%) GME (Italy)State Owned (100%)

Market integration benefits Reduced costs -) lower transaction costs for importing and exporting electricity -) lower operational costs for system operators and market participants -) lower reliability costs associated to the need to procure reserves and other ancilliary services -) more efficient use of generation resources Lower price volatility Increased competition Improved price signals for investment Larger opportunities to invest in renewable energy as a result of broader market demand

Requirements for effective market integration Horizontal integration of transmission and network operations Vertical separation of functions Non-discriminatory access to the grid A well functioning and liquid wholesale market Efficient allocation of scarse transmission capacity Adequate investment in new capacity

Competition and Liberalization Indicators 1) Indipendent TSO (no links with production and supply companies); - source: GME analysis of European Commission studies 2) Wholesale Markets Concentration Ratio (CR): market share of 3 biggest companies < 70% by capacity – source: European Commission; 3) Retail Markets Concentration Ratio (CR): market share of 3 biggest companies < 70% (households & small commercial customers) – source: European Commission; 4) Existence of spot and/or future markets – source: GME analysis of European Commission studies

Liberalization of European electricity markets Good 1 Average 2 Low 3 Poor 4 1 Good: all indicators are satisfied 2 Average: 3 indicators out of 4 are satisfied 3 Low: 2 indicators out of 4 are satisfied 4 Poor: no more than 1 indicator out of 4 is satisfied

Electricity sector: generation (year 2006)

Electricity sector: transmission and distribution (year 2007) Number of TSOs Number of ownership unbundled TSOs Number of DSOs Number of legally unbundled DSOs France Germany40877NA Greece1010 Ireland1010 Italy11169NA NL1199 Norway Portugal Spain11326 Sweden11175 United Kingdom1118 Source: Technical Annex to the Report on Progress in Creating the Internal Gas and Electricity Market, COM(2008) 192 final

Electricity Market: Cross border capacity across Europe (year 2006) Source: ERGEG 2007 Interconnection capacity (NTC) as a ratio to installed generation capacity

Electricity consumption and cross-border exchanges in European regions (year 2005)

Power prices correlation (2007) Source: European Market Coupling Company (EMCC) one price area > 90% correlation high correlation

 Power to control access to gas storage  Power to promote competition  Independence from the government NRAs (National Regulatory Authorities) Powers  Definition of public service obligations and quality standards  Sanctioning powers  Power to set reference retail prices  Power to set grid access tariffs Source: GME elaboration on IERN data

Market design harmonization issues Trading arrangements Traded products Algorithms and matching rules Timing Monitoring and transparency rules Market liquidity Guarantee and settlement system

European Power Markets: Liquidity and Volumes (2007) Source: Volumes from GME and Reuters data. Liquidity computed as a ratio on national consumption based on Nord Pool estimates for the Scandinavian market and UCTE (union for the co-ordination of transmission of electricity ) data for the other countries.

Ergeg Electricity Regional Initiatives Source: ERGEG; Annual Report, 2007.

Issues currently tackled across the electricity REMs  First focus on a few key issues to deliver results = work in progress = not tackled currently

Day Ahead transmission capacity allocation (June 2007) Source: ERGEG Monitoring Report – Compliance with Regulation 1228/2003, July 2007.

Status of existing Regional Markets The first Inter-regional Coupling

Market integration models Unified Pan-European solution Horizontal integration Inter-regional Dome Coupling

Dome Coupling DOME COUPLING European / multiregional solution Regional solution Market areas REGION 1REGION 2 REGION 3 REGION 4 C D EFGH I JLMkB A Price coupling Market splitting Volume coupling Source: Europex-ETSO interim report on inter-regional congestion management, April 2008.

The third package for internal energy markets: key proposals Effective unbundling –Ownerhip unbundling –ISO (Independent System Operator) –Other solutions Improved cooperation of TSOs to develop a European Network Creation of a European Agency for Regulatory Cooperation (ACER) Enhancement of national regulators powers

Conclusion: how to integrate national and regional markets Pragmatic bottom-up approach -) institutions set up the general framework -) technicalities worked out by interested parties: TSOs, PXs and stakeholders Expected result: progressive convergence of national interests Dome coupling could represent a compromise solution granting -) enough flexibility and efficiency -) the possibility to extend integration beyond the current regional setting

Conclusion: which goals the internal European energy market should pursue? To cover the whole of the EU and possibly other contiguous areas To promote the efficient use of the European interconnected networks To ensure security of supply To provide transparent and competitive price formation mechanisms To support the development of liquid and efficient markets in all areas To extend to markets for natural gas