ECONOMY

Power deregulation stalls

The planning and implementation of integrated energy programs and policies to the benefit of consumers can be achieved only under free market conditions and healthy competition. However, four years have passed since Law 2773 of 1999 introduced EU Directive 96/92 for the deregulation of the power market and nothing substantial has been done. Only the Public Power Corporation (PPC) has been 49 percent floated on the stock market and an amendment to the law aimed at attracting private investors to the industry was passed last year. Today, no one finds any real investment interest in power production. And the complete absence of such foreign investors proves that the planning attempted in Greece was not based on realistic considerations. For instance, despite the «long-term energy planning on a five- and 10-year basis» envisaged in the law, there was none. The result is that all efforts are piecemeal and the rules clearly deficient. Law 2773 is not responsible for the stagnation. The cause is that the government has not been willing to apply itself seriously to the significant peculiarities of the Greek electricity system. Let us see two of these. First, it is widely accepted that today’s electricity rates are distorted and have evolved historically through the PPC monopoly’s close relationship with the State, which for decades used it as a tool for economic, social and anti-inflationary policies. As a result, electricity rates today do not reflect real costs. Moreover, the structure of these tariffs is not appropriate for power pricing in a deregulated market. Secondly, two-thirds of Greece’s electric power is produced with lignite – a finite domestic energy resource. An integrated energy planning framework should have included a comparative valuation of lignite deposits in the long run; its consumption by the present generation without such a valuation is detrimental to the interests of future generations. But we have no long-term planning with clear targets, strategic orientations and specific action policies, such as the pricing of lignite, water and natural gas, and the analytical pricing of electricity consumption on the consumer’s meter. In other words, we have none of those economic tools that would have allowed a deregulated power market to function efficiently. Instead, the easy option was adopted, giving the impression that under Law 2773, the power market cannot be deregulated. Without putting 2773 to the test, the new law, 3175 of 2003, was passed, setting out the general principles of a new legal framework, which provides for the operation of a complex power market where producers have to offer hourly prices for the following day and trade capacity availability certificates. This law cannot be put into practice today, as operational and transaction codes and other complementary legislation have not been passed. Given the very general terms of 3175, the codes are not simple technical guides; they will actually define the market model and the way in which participants will be remunerated and obtain a return on their investment. This means that the codes must be formulated urgently, otherwise we run the risk of deregulation being annulled in practice from a scarcity of interested investors. I am under the impression that the structure of the codes proposed by the Regulatory Authority for Energy (RAE) is complex and refers to mature markets where many players with considerable experience are active, such as in California, New York, Australia and UK. Such a model introduces into the Greek market a significant risk element, which may reduce the attractiveness of investment in power production and have a negative impact on the prosperity of consumers. Furthermore, we should not ignore the possibility that a crisis in the energy sector could easily evolve into a financial crisis for the entire economy. In Greece today, there is only PPC with its extensive production base, while the new players waiting to enter the production domain are state-owned Hellenic Petroleum, two to three private firms and one mixed enterprise in which PPC has a 50 percent stake; their schemes are conditional on agreements regarding availability certificates. All this means that in the best of cases, the market will continue to be dominated by public enterprises, with PPC commanding 85-90 percent of productive capacity. Proposals Bolstering competition in a deregulated power market with a view to saving resources and making the country more competitive would need to take into account the following. First, long-term planning should be immediately instituted, including planning of the country’s energy requirements and the sector’s structure in terms of energy products, the optimal tapping of domestic energy resources at national level, the requisite investment in productive capacity, transportation and distribution, investment in less polluting forms of energy, the regional distribution of investment, links with neighboring grids, the development of cross-border power trade, environmental protection, etc. Second, immediate attention and emphasis should be given to the starting points for a secure and efficient deregulation of the market, the initial problems that must be solved and the time schedule for their solution, which would include the pricing of lignite, water and natural gas, pricing structures for power production and grid use, and pricing of all other services involved in the system. Third, the country’s power market should be opened by introducing a form of limited active competition, which, through the daily market, will be able to evolve into a fully competitive system in the wholesale market when the sector will be able to manage such competition. This would mainly require amendments to Law 3175, particularly a simplification of rules regarding the codes now being discussed. For instance, a simplified power market model was followed in Spain with particular success for five years before the adoption of the present complex model, which today represents the quintessence of the electricity market under fully competitive conditions. Fourth, a basic prerequisite of success of the deregulation procedure should be securing, from the start, the necessary conditions and concomitant behavior for all players without exception. Deregulation should be planned on the basis of clear principles of applied economics and not on theoretical techniques and principles. An important lesson from international experience is that to solve such serious problems, good intentions do not suffice. The use of creative accounting to meet the country’s commitments to EU directives in a purely bureaucratic fashion is, moreover, the riskiest of all options and impedes the realization of the required structural changes. (1) Prodromos Efthymoglou is professor of energy economics and international capital markets at the University of Piraeus.