Energy Regulation and Investments in the Mediterranean Region, Challenges and Developments
Dr. Fabio Tambone Coordinatore Generale MEDREG (Mediterranean Energy Regulators) Responsabile relazioni esterne e internazionali, AEEGSI (Autorità per l’energia elettrica il gas e il sistema idrico).
The need for independent regulation for energy sector in the Mediterranean Basin
The Mediterranean Region has always been a key area for energy exchanges and supply, nevertheless political instability has often represented a relevant obstacle to promote market development and integration through a harmonized regulatory framework allowing long-term stability and sustainable investments.
To overcome these difficulties and achieve such demanding goals, MEDREG – Mediterranean Energy Regulators – advocates for the creation of a single regulator jointly supervising the electricity and the gas sectors. One of the objectives identified by the MEDREG Strategy 2020-2030 is in fact the settlement of “A sound of Institutional Regulatory Framework” which foresees an independent regulator with clear powers and competences in each Mediterranean Countries. Moreover, MEDREG carries out its activities through a well-tested internal cooperation process and external collaboration with energy stakeholders in the Mediterranean Basin with the objective to implement the conditions for the establishment of a future Mediterranean community of energy actors, based on a bottom-up approach.
Significant progress took place among the energy regulators of the Mediterranean basin during the last period. We provide below a list of some examples:
- The Algerian electricity regulator (CREG) successfully developed feed-in-tariffs (FIT) that guarantee to RES producers purchase tariffs for photovoltaic and wind facilities output.
- Egypt during 20 years started a substantial reform of its energy sector, including the establishment of a regulatory authority for the gas market in addition to its existing electricity regulatory authority (Egyptera) and the introduction of feed-in tariffs to boost electricity production from renewable energies. Recently has been also approved a new electricity law and EgyptERA started a twinning project (financially supported by the European Commission) with regulators of Greece (RAE) and Italy (AEEGSI).
- Morocco has been moving forward in the process for the setting-up of a regulatory authority for electricity and gas and the draft law reforming the energy sector has been presented to the national stakeholders and will be submitted to the Parliament as soon as an agreement is found between the government, the local administrations, the public operator and the main trade unions.
- The mission of the electricity regulator of Jordan was extended to all mineral resources and the Authority became the Electricity and Mineral resources Regulatory Commission (EMRC).
MEDREG considers that the necessary transition towards independent energy regulation should include a set of principles common to the whole region. MEDREG focused on the role these principles should play in the protection of consumers, by ensuring a minimum set of rights about clear information on contracts and bills, the efficient use of energy, the handling of complaint and setting up cooperation with consumer associations and civil society.
A coherent regulatory framework allows national regulatory authorities to obtain sufficient legal powers to implement coherent decision-making processes and ensure their governance mission through effective secondary legislation, market monitoring, and stakeholders’ decisions in the interest of the entire community. The term independence entails both the extent and the degree of the discretion and autonomy entrusted to regulatory bodies.
Regulators should be able to take autonomous decisions and have the capacity to enforce them, including financial and organizational independence: this autonomy depends on a number of important aspects:
- concrete independence of the regulatory board;
- nomination of the board should be performed by the highest level of political authority and among proved high skilled profiles;
- board members should adhere to a code of conduct aimed at reducing the influence from any private of public entity;
- competences of an independent regulator should also include monitoring the market avoiding any abuse of dominant positions, in particular to the detriment of consumers, as well as predatory and anti-competitive behavior. This competence is essential for the regulator to fulfill its duty as market watchdog. It includes enforcement powers as the ability to investigate and sanction network and market operators for failure to match existing regulation.
In order to proactively engage stakeholders, regulators should ensure that proper standards of transparency and accountability are met. Regulators should release information on the procedures in place, while protecting commercial sensitive data at the same time. Regulators should as well regularly publish information on their own organization, including management and financial indicators, in order to identify the outcomes and results of their action. This practice should encourage national regulatory agencies to adopt an effective organization for non-discriminatory recruitment and increasing internal staff mobility. Sufficient human and financial resources are pivotal to implement the regulator’s mission and are closely linked with the independence of the whole decision making process. MEDREG has been listing the minimal competences that an independent regulator should have, and started a voluntary peer-review process to assess the compliance of its member regulators to these competences. This exercise aims at providing Mediterranean regulators with a proper evaluation of their effectiveness and with suggestions on how to improve it.
Regulation and infrastructures
In order to provide the vision of Energy Regulators on the situation of Infrastructure investment in the Mediterranean region, MEDREG developed a report that maps current and projected interconnection infrastructures for electricity and gas and discussed the challenges to finance them properly in the absence of an harmonized regulatory framework. This report assesses the main barriers that represent an obstacle to efficiently using existing infrastructure and financing new projects.
In the first quarter of 2015, the report underwent a public consultation, which counted 37 responses. MEDREG held a workshop with the respondents in April 2015 in Sharm El-Sheikh and use the outcomes of the consultation and workshop to finalize the report, which is now out on the Association’s website (www.medreg-regulators.org) together with all consultation documents. The recommendations of the report include 8 main points:
- Establish competitive and reliable energy markets: the majority of existing electricity and gas infrastructures have been built so far for security of supply needs. Today, infrastructure investments are also driven by market forces and face regional competition. Public policy decisions are therefore decisive to foster and secure investments. In some MEDREG countries they are even more relevant than economic factors to develop their internal markets. Policy makers should devote considerable efforts to link investment plans to the progressive opening of their national markets.
- Promote deeper harmonization of national regulatory frameworks: the absence of a regulatory level playing field between the Northern and Southern shore of the Mediterranean is particularly negative for investments, as different sets of rules exist in the various Mediterranean sub-regions. In the absence of a formal commitment among Mediterranean policy makers, all stakeholders have to voluntarily engage now to establish deeper legal harmonization. Stronger cooperation between EU, Middle East and North African countries is also a precondition to establish a regional energy market with a sound investment climate. The Euro-Mediterranean Platforms on Electricity, Gas and Renewable Energy Sources and Energy Efficiency should strongly promote the establishment of a set of common rules to support a fair and reliable framework for energy investments.
- Increase the use of existing interconnections in the Southern shore: in spite of the existence of several South-South Mediterranean interconnections, electricity trade among these countries has remained modest. The average level of use is not more than one third of the total capacity. This can be mainly attributed to the political and economic barriers at national and regional levels. In several cases, technical issues also add to the problem. Integrated resource planning is therefore essential at the national as well as at the regional level to review, understand, and provide input to the planning decisions of the interconnection projects. For an integrated resource planning process to be effective, it should include both a meaningful stakeholder process and a proper oversight from an engaged regulator. A proper assessment of the existing situation would help designing a consistent methodology to evaluate energy infrastructure investments and take adequate planning decisions.
- Evaluate the economic benefits of new cross-border infrastructure projects: the potential increase of investment volumes will create strong needs for political consensus and investment bankability, thus requiring the definition of an appropriate regulatory framework. The case of the European Union clearly shows this is the way ahead to maintain and reinforce investments. Developing sound methodologies for CBA (Cross Border Allocation) will help improving the investment climate in the region. The economic assessment shall also take into account security of supply and social considerations. An effective way to ensure risk-adjusted returns to investors could also be through “priority premiums”, which compensate the additional risk and complexity of new projects.
- Enhance cooperation between regulators and TSOs: the dialogue and technical coordination between regulators and TSOs, both at national and regional level, is becoming pivotal to build an effective and efficient regional energy market. It contributes to the transparency and stability of the regulatory and economic frameworks, which is essential for attracting investments in the Mediterranean basin. MEDREG recognizes the central role of TSOs in identifying investment needs and assessing infrastructure projects. It is advisable that TSOs regularly provide data to regulators and are responsible for drafting investment plans, which are then subject to regulatory review. MEDREG believes that the regular and transparent exchange of information and know-how among regulators and TSOs could synergize the efforts for cooperation in the Mediterranean. The 2013 cooperation agreement between MEDREG and Med-TSO and the 2014 Memorandum of Understanding signed with Med-TSO and the EC to implement the Euro-Mediterranean Platform on Electricity are positive steps towards this direction.
- Design a Ten-Year Network Development Plan for the Mediterranean region: the assessment of overall costs and benefits deriving from infrastructure investments (in particular new ones) is a complex task and needs very careful consideration. In the medium term the improvement of the use of existing infrastructures and the definition of common rules regarding new ones. In the medium to long term, it could be beneficial for the region to develop a Mediterranean TYNDP (Ten-Year Network Development Plan) based on a sound methodology developed by TSOs and assessed by regulators.
- Identify projects of Mediterranean common interest: considering the European experience regarding the PCIs (Project of Common Interest) and following the example of the Energy Community, MEDREG could also consider a list of infrastructure projects that are of interest for the whole region. The selection process should be transparent and non-discriminatory, and involve international financial institutions active in the region such as the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB). According to the data on electricity and gas flow analyzed in MEDREG’s report and the responses to the its public consultation, under the current forecasts for demand and given their known technical specifications, some projects seem particularly relevant for the energy development of the MENA region.
- Support technology innovation to improve the condition of vulnerable consumers: the great and growing level of investment involving renewable energy sources is dramatically changing electricity markets. During the last twenty years, Southern Mediterranean countries have elaborated different institutional schemes with the aim to promote the usage of renewable energy sources (RES). While every country has developed its own approach, most of them have raised the bar of their objectives concerning generation and development of RES. Almost all the countries have passed or are discussing legislation regulating the sector. However, incentive measures tend to be limited and only a few of these regulations foresee the use of feed-in tariffs as a means of support. In most cases, the use of authorization procedures or tax exemptions is preferred. Distributed generation could represent an important chapter that links greater investment in RES to the reduction of fuel poverty and the creation of better conditions for vulnerable consumers. Technology innovation is also key to improve specific national aspects of Mediterranean energy markets concerning consumers, such as technical safety, quality of service and provision of transparent and complete information to the benefit of household consumers.
Energy markets in the Mediterranean region need more independent regulators and, at the same time, closer cooperation among the most relevant and different regional and national energy actors: regulators, governments, producers, transmission system operators, investors and consumersMEDREG regularly cooperates with the main stakeholders of the region MedTSO (Transmission systems operators), UFM – Union for Mediterranean (Governments), PAM – Parliamentary Assembly of Mediterranean (Parliaments), OME – Observatoire Méditerranéen de l’Energie, RES4MED (energy companies), other Institutions RECREE, MEDENER, etc.
Bottom up approach and technical-institutional cooperation are key factors of a successful and effective integration of energy market in the Mediterranean Region.
For more information on MEDREG and to download the report visit www.medreg-regulators.org