Russian Electricity Reform: Emerging Challenges and Opportunities

(London) — 11 April 2005

“The IEA is heartened by Russia’s progress to date in defining its electricity reform process and the Government’s reaffirmed commitment in late 2004,” said Claude Mandil, Executive Director of the International Energy Agency, today in London at Russian Economic Forum where the IEA launched its new study. “We consider the greatest challenges lie ahead in the many technical details that will need to be resolved to bring such a substantial reform to a successful conclusion. It is our hope that this book will provide objective guidance and encourage efforts to see reforms through to a successful conclusion.”

The new book “Russian Electricity Reform: Emerging Challenges and Opportunities” examines the proposed market structure and the strength of the inter-regional grid system to maintain healthy trade and competition, and to minimise the potential for market power abuse. “In this respect, Russia’s extremely costly experience in privatising its oil sector over the early 1990s should provide a sharp reminder of the potential dangers of this process,” Mr. Mandil added. Keys to the success of competitive markets in electricity and eventually other parts of Russia’s energy sector will be a truly independent grid operator and strong, well resourced, well informed, well-trained and independent regulators that can rise to the challenge of establishing access to network and other monopoly products and services on fair and reasonable terms for all market players.

Russian Electricity Reform: Emerging Challenges and Opportunities describes and assesses Russia’s progress to date and stresses how the reform program will have to create market structures, market rules and a regulatory framework that will foster the emergence of competitive wholesale and retail markets in electricity, if reforms are to succeed. The book commends the Russian government in its recognition that tariff rebalancing and especially the removal of cross-subsidies is a necessary pre-condition for successful introduction of market reforms. “The recent public backlash against monetization of certain public services demonstrates the importance of getting this balance right. Although recently proposed reforms are likely to extend the transitional period, they have the potential to provide greater stability, certainty and public acceptance to the implementation process. This should help to enhance the likelihood of the reform being fully and successfully implemented”, added Mr. Mandil.

Russian policymakers have recognised that attracting timely and appropriate investment will remain a substantial and ongoing challenge, which can most effectively be addressed through the creation of efficient, competitive electricity markets operating in response to cost-reflective price signals, within a robust and predictable legal and regulatory framework. Such markets can deliver the efficient, reliable and internationally competitive performance needed to meet the government’s economic targets in the longer term. They can also attract the new investment the industry will need, especially in order to ensure security of electricity supply beyond 2010. “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.” Mr. Mandil said.

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