Achieving a sound investment climate – the role of regulators

Boaz MoselleJoint-Chair, CEER Gas Working Group

Managing Director – Corporate StrategyOfgem

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Background

Infrastructure investment generally happens through: – Regulation (e.g. for onshore transmission networks); or– Competitive markets (e.g. for power stations).

Changing industry environment– Moving towards the new world– Increasing reliance on the market– Inevitable changes to the way investment is secured

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Regulation and Investment

Appropriate level of infrastructure is key for:– development of an internal energy market– Security of supply

It is also necessary but not sufficient for effective competition within the EU gas market– Also need transparent and non-discriminatory access

Promotion of investment and protection of regulated investment are core duties of the regulator– For example, Ofgem has a duty to ensure that licencees

can finance their duties and statutory obligations.

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Moving towards the ‘new world’

In the past, the European gas industry developed largely on the basis of national or regional monopolies, with investment often co-ordinated through planning rather than market-based means– Much was achieved!

Now however Europe faces new challenges and has committed to a new approach

In the new world:“full liberalisation…is the dominant prerequisite for the efficient use

of existing infrastructure and the development of new infrastructure. In these circumstances, a key focus should be on the ability of signals

emerging from trade to highlight the need for new investment”(CEER , March 2003)

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CEER infrastructure principles

CEER set out a number of principles for infrastructure investment:– Public authorities should encourage sufficient

investment to implement the internal energy market, facilitate competition and safeguard security of supply

– TSOs must manage networks in a way that ensures efficient use of infrastructure

– Public Authorities should establish transparent, non-discriminatory and standardised options for development of infrastructure and minimise regulatory risk as far as possible

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CEER infrastructure principles

– Public Authorities should enforce a minimum procedure or publication of TSOs’ infrastructure plans

– TSOs must be effectively unbundled to ensure no conflict of interest when making investment decisions and sufficient incentives for non-discriminatory 3rd party access

So…transparency (by all parties), market signals and minimisation of regulatory risk (i.e. ensuring stability) are key to efficient investment..

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Possible approaches

Applying the CEER principles gives three broad approaches:– Regulated reinforcement with regulated tariffs– Non-regulated reinforcement with regulated tariffs– Non-regulated reinforcement with non regulated tariffs –

“merchant line” approach

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Example: bringing new gas to GB

UKCS Forecast Decline

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Proposed new projects

Project Size (mcm/day) Start date

Isle of Grain LNG 12 (phase 1) Early 2005

Belgian interconnector compression

22 (phase 1)19 (phase 2)

Late 2005Late 2006

Dutch interconnector 23 2006/7

Ormen-Lange (Langeled) 70 2006/7

Exxon LNG 36 (phase 1) 2007/8

Petroplus LNG 16.5 Late 2007

Various storage 60 or more 2005–8

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Consultation

Transparency (by all parties) is key to stable framework and efficient investment– ERGEG formally established by Decision of the European

Commission. ERGEG consultation procedure approved. – Madrid Forum – key forum for consultation– Industry initiatives – e.g., UK offshore data release

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Conclusions

Investment in infrastructure is key to the development of effective competition in EU energy market

Investment must be efficient and respond to needs of market participants

Transparency, reduction of regulatory risk and increasing use of market based signals are key to achieving this aim

Market opening and the promotion of competition should not and need not undermine a sound investment climate for the European gas industry

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Promoting choice and value for all gas and electricity customers