Transcript No Slide Title

Implementing best practices in electricity
sector evolution in Saudi Arabia
Prepared by:
A.J. Goulding
[email protected]
November 6, 2006
Riyadh, Saudi Arabia
Key messages
 Restructuring will strengthen the Saudi electricity sector, and
create a set of vibrant new entities
 Saudi Arabia is able to learn from the experiences of other
jurisdictions, and improve upon global best practice
 Tariff design process has been specifically designed to allow the
maximum degree of flexibility in future market design
 Whatever arrangements are decided upon, they must provide
revenue sufficiency for efficient providers
 Overall structure should embody incentives for efficient
production, transportation, and usage of electricity
 Suppressing tariffs in the short run inevitably leads to even
more difficult policy choices in the long run
2
Plan of presentation
Best practices in electricity sector restructuring
Creating an independent grid company
Using a Principal Buyer to provide stability
3
Vertically integrated self regulated monopolies
often starting point for restructuring
VERTICALLY INTEGRATED MONOPOLY
Generation
Potentially competitive sector
IPP
contracting
Transmission
Network O&M
Distribution
Retail
Metering
Billing and settlements
 Vertically integrated quasi-self
regulating monopolies were the
starting point in many jurisdictions:

Chile

Colombia

Hungary

Italy

Poland

Romania

Singapore

UK (England and Wales)

…many others…
 Often, internal transfer pricing not
even established appropriately
4
Strong, independent institutions are at the heart
of a successful restructuring process
Key success factor checklist
Case study: initial E&W structure
Central Electricity
Generating Board
 Competent regulator with clear
mandate
 Phased in process of market
opening
 Multiple gencos created
 Contract cover stabilizes prices
during transition
 Policymakers able to ride out
periods of price volatility
 Performance based rates for
monopoly elements
 Attention to affiliate abuse issues
evolved into
Office of Electricity Regulation
Gencos
National
Power
PowerGen
British
Energy
Regional wire
companies
Transmission
1
7
National
Grid
2
8
3
9
Power
Pool
4
10
Price
discovery
5
11
6
12
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Saudi Arabia can draw upon twenty years of
restructuring experience
Offer established
(regulator)
Open access to
grid
established
UK
Electricity sector
unbundled
1983
1989
Victoria
electricity
market
established
Australia
New electricity
law – sector
unbundled
1978
1982
NSW electricity
market
established
NEM begins
operation
1996
CDEC (power
pool) created
NETA replaces
power pool
BETTA
implemented
2001
2005
NSW and
Victoria full
retail
competition
1998
Privatization
process begins
1986
Electricity
Utilities Act –
deregulation
Alberta
1998
1994
CNE (regulator)
established
Chile
Full retail
competition
AER
established
2002
2004
Last govt. –
owned utility
privatized
1998
AEUB
(regulator)
created
Power pool
begins
operation
1995
1996
Retail
competition
introduced
2001
MSA created
2003
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Benefits of restructuring arise from several
sources
 Innovation in product offerings
and delivery
 Reduced costs and prices of
generation and supply
 Improved resource utilization
and allocation, through
improved economic dispatch
and generation planning
(medium- and long-term)
 Reduced conflict of interests in
the regulatory process
In Singapore, restructuring
resulted in a more efficient
use of fuel
 In 2000, oil accounted for 77%
of generation
 In 2005 the more efficient
natural gas accounted for 70%
of generation output
 Resulted in a 5% increase in
gross system efficiency
After restructuring, the UK
witnessed annual electricity
sector productivity gains of
3.5%
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Failures were a result of poor regulatory
decisions, not of markets
Flaw/Jurisdiction
 Insufficient number of
generators created/UK,
Ontario, Italy, France
 Prices to final consumers
held below cost/California,
Ontario, Maryland,
Argentina
 Transmission not
independent/most of US,
Germany
 Failure to honor regulatory
contracts/California,
Argentina
Cause of most
accidents:
• over-power,
• over-brake, and
• over-steer
Policymakers tend to
forgot the first lessons
from Driver’s Ed 101
8
Plan of presentation
Best practices in electricity sector restructuring
Creating an independent grid company
Using a Principal Buyer to provide stability
9
Independent grid companies are the norm in
many well-designed jurisdictions
Jurisdiction
Entity
Setup date
Primary role
UK
1990
Transmission owner & system operator
Spain
1997
Transmission owner & system operator
NED
1998
Transmission owner & system operator
AUS
1996
Transmission owner
BC
2003
Transmission owner & system operator
Chile
1993
Transmission owner
Michigan
2002
Transmission owner
Italy
1999
Transmission owner & system operator
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US shows the drawbacks of failing to force full
separation of transmission and generation
 Some companies accused of
deliberate underinvestment
in grid so as to prevent
access for competing
generation
 Preferential knowledge of
planned expansion
 Risk that gridco may favor
affiliated gencos for
connections
 Constant suspicion that
transmission capacity
reservations rigged
Substantial number of the
transmission challenges have
been in the Southeastern US
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Newly formed gridcos may take on a variety of
roles, including system operations
 Own and maintain existing transmission
lines
 Coordinate flows across the entire
transmission system, including lines
owned and maintained by others
 Create 10 year generation and
transmission system plans, updated
annually and with major assumptions
examined and revised every five years
 Provide system access under nondiscriminatory, transparent, and
economically rational tariff
 Assist in implementing pilot market and
ultimately spot market
 Coordinate with Principal Buyer regarding
solicitations for new generation and
transmission
Process for choosing new
transmission providers:
1. 10 yr system plan
approved by regulator
2. RFP issued on BOOT
basis for new corridors
3. Technical and financial
phases to bidding
4. Bids consist of 40 year
stream of payments
5. Lowest NPV chosen
6. Some performance
standards apply
7. No need to set efficient
opex or choose cost of
capital
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Gridcos can be established in a one to two year
period with careful planning
Company Jurisdiction
Circuit
No. of
miles Employees
Evolution
Time to
Time to
Ownership
operations independence
BCTC
British
Columbia,
Canada
11,558
325
Carved out of
BC Hydro
3 months
2 years
State owned
METC
Michigan,
US
5,400
75
Acquired from
CMS Energy
7 months
7 months
Privately
owned
ElectraNet
South
Australia
3,728
135
Carved out of
ETSA Corp
-
2 years
Privately
owned
RTE
France
62,137
8,300
-
5 years
State owned
Czech
 ČEPS
Gridco creation
process
2,763
Republic
Carved out of
EDF
Carved
out ofin
typically
occurs
427
ČEZ
two
major phases
1 year
6 years
State owned

Phase I is the period when the new gridco is granted time for organizational
purposes before it officially takes on transmission operations
~ 3 months – 1 year

Phase II is the period it takes the institution to become fully independent
~ 7 months – 2 years
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Steps to setting up gridco are straightforward,
and may coincide with start of wheeling tariff
Gridco setup
Process 1
Step
1
Process 2
Create
independent
company
Identify
transmission
assets and their
book value
Hire staff to
operate system
Step control room
2
Hire efficient
number of staff
from SEC
Physical separation
of system control
room
Step
3
Transfer assets
and staff to
gridco
Wheeling tariff
 Calculated as the transmission revenue requirement divided by
available capacity
 Designed so that if all customers were to migrate to wheeling, the entire
transmission revenue requirement would be recovered
 Increase in wheeling revenue decreases transmission cost of captive
load
 Denominated in currency/MW-month and has peak/off-peak
differentiation
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Plan of presentation
Best practices in electricity sector restructuring
Creating an independent grid company
Using a Principal Buyer to provide stability
15
Principal Buyers focus on sector stability and
market development
POSSIBLE PRINCIPAL BUYER KEY RESPONSIBILITIES
 Serve as counterparty to existing PPAs and new ECAs
 Procure new generation and transmission through competitive auction
process until market is sufficiently robust
 Schedule power via gridco to meet captive load
 Purchase fuel necessary under ECAs
 Remarket capacity under contract consistent with the schedule for market
opening
 Promote and implement demand response programs
 Be the recipient of any subsidies necessary to assure financial viability of
the sector
Principal Buyers we will
hear about today:
• Ontario Power Authority
• Northern Ireland
Principal Buyers often remain in existence
longer than their creators intend, though
sometimes their role becomes simply the
management of residual contract obligations
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Principal Buyer staffing may require unique skill
sets
Step
1
Step
2
Legal establishment
Step
4
Creation of ECAs
Step
3
Obtain ECRA
license
Step
5
Establish credit
arrangement
Staff hiring
Step
6
Establish flow of
funds
 Principal Buyer staff will need to have a fundamental knowledge of
economic and financial drivers of the electricity business
 Staff background to be in finance/trading rather than engineering
 Contract administration and procurement experience will be crucial
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Independence and strong credit are essential for
a successful Principal Buyer
 In nascent markets with history of below cost tariffs,
sovereign support may be necessary
 Principal Buyer should still be subordinate to regulator,
and operate in a transparent fashion

Procures according to plan developed by gridco and approved by
regulator

Provided auction competitive contracts incorporated into rates

Non-contract operating costs subject to periodic scrutiny
 Government must resist temptation to bypass institutions
once they are created
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Concluding remarks
 Properly done, restructuring can make Saudi Arabia a regional
electricity hub, providing benefits in reliability and pricing
 Revenue sufficiency is important component for long run
success of restructuring agenda
 Stakeholder education and human resource development also
essential
 Biggest lesson from international experience is that “big bang”
approach does not work; process must be deliberative but
steady
 At the same time, the alternative of simply throwing more money
into existing structure may also be suboptimal
 Over the near term, restructuring effort should not obscure
focus on reserve margin and investment planning
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Background on presenter
LEI provides global perspective on electricity
sector restructuring
A.J. Goulding
 President of LEI
 Experience advising regulators
worldwide, including Eastern
Europe, North and South
America, and Asia
 Professor at Columbia
University
 Working with private equity
funds investing in power sector
assets
 Testified as expert before a
number of legal and regulatory
bodies
Our Saudi partners at Al Hoshan and
KFUPM have also made a large and
valuable contribution to our team
Economic, financial and strategic
advice to the energy and
infrastructure industries
 Firm is currently in midst of
multimillion dollar engagement
to design generation
procurement process for state
of Connecticut
 Performed Industry Structure
Review in Alberta
 Australian counterpart and team
member is former regulator
 Firm’s power sector asset
revenue projections have
supported financings for
billions of dollars of investment
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