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In this section we present recommendations on an energy market (i.e. electricity, gas) basis made in the context of this study.

4.2.1 Recommendations for electricity tariffs

Regarding tariffs for electricity generation, transmission and distribution activities could be carried out with the following priorities:

 Preparation of an up-to-date inventory of assets to establish the RAB;

 Asset re-evaluation on a replacement-cost basis and introduction of an appropriate depreciation mechanism to incentivise reasonable investment. Implementation of appropriate methods for ensuring a fair return on assets.

 Benchmarking of operating costs against comparable units.

 Privatisation of transmission enterprises and introduction of incentive tariffs.

 Ideally, electricity distribution should be legally unbundled from customer supply to enable, in the long term, some level of competition on the end-customer level. If legal unbundling is not practicable then at least functional and accounting unbundling should be introduced.

 For end-user tariffs, the following actions should be considered:

o Design of cost-to-serve models for end-customers, used to more accurately allocate costs so that the amount of subsidy per customer class can be quantified.

o Any necessary increase in tariff should be carefully implemented, with due regard to affordability issues for vulnerable customers.

o To facilitate this, affordability studies should be undertaken, where relevant, to devise methods of mitigating the impact of tariff increases when they are introduced, and of cushioning vulnerable customers from the shock.

INOGATE could provide assistance on many of the above activities.

Some PCs such as Armenia, Georgia, Moldova and Kazakhstan have already asked for specific support in the process of implementing this study. However, in other cases such as Belarus, Kyrgyzstan, Tajikistan and Turkmenistan, it would be probably more effective to undertake a full tariff study with detailed recommendations for reform, rather than providing a fragmented approach through the AHEF mechanism.

4.2.2 Recommendations for natural gas tariffs

In most PCs gas market development and sector unbundling are still in the very early stages, or have not begun. Accordingly, tariff related assistance would be most useful at a later stage.

Unsurprisingly, gas tariffs are higher in those PCs that import a large proportion of their gas supply when compared to those with indigenous supplies. The exception is Ukraine where two-thirds of its gas supply is imported at reportedly the highest price in Europe, but end-user tariffs are among the lowest. In all cases, consideration should be given to unbundling distribution and introducing incentive-based tariffs, since in a competitive market gas distribution represents 15% to 20% of a customer’s bill.

In most of the PCs there is little information on gas metering systems. It is recommended that a study be undertaken on the metering systems used, in the expectation that changes could result in lower gas consumption and increased energy efficiency.

AZ14 contains elements very specific to gas, including metering and conversion of metered volumes to energy for tariff purposes. It also considers the establishment of strategic reserves through gas storage, which if adopted will require amendments to the gas transmission element of the tariff.

Bibliography

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http://www.encharter.org/fileadmin/user_upload/Publications/Kazakhstan_ICMS_2013_ENG.pdf Energy Charter Secretariat (ECS) (2013) In-Depth Review of the Energy Efficiency Policy of Azerbaijan: http://www.encharter.org/fileadmin/user_upload/Publications/Azerbaijan_EE_2013_ENG.pdf Energy Charter Secretariat 2013), In-Depth Review of the Energy Efficiency Policy of for the Republic of Belarus: http://belgium.mfa.gov.by/docs/belarus_ee_2013_eng.pdf

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https://www.entsoe.eu/fileadmin/user_upload/_library/Market/Transmission_Tariffs/Synthesis_ 2013_FINAL_04072013.pdf

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http://www.inogate.org/documents/INOGATE_Status_Report_EN.pdf

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http://www.regula.lt/en/Pages/default.aspx National Energy Commission (CNE), Spain, website: http://www.cne.es/cne/home2_english.jsp?id_nodo=3 National Energy Commission, Spain: www.cne.es

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World Bank (2013), Republic of Armenia: Power Sector Tariff Study, WB Report ACS4845, World Bank, Washington, D.C.

Eastern Europe Regional Coordination Office

Kudryavska street 26/28 04053 Kiev, Ukraine Tel: +380 44 230 2754 Fax: +380 44 230 2753

Sustainable Energy Team Office

House of Justice - 4th floor Z. Gamsakhurdia Sanapiro street 2 0105 Tbilisi, Georgia

Tel: +995 322 180048

Caucasus Regional Coordination Office

Georgian Oil &Gas Corporation - 4th floor, room 402 Kakheti Highway 21

0190 Tbilisi, Georgia Tel: + 995 32 2 24 40 50 Fax: +995 32 2 24 40 50

Brussels Project Office/Energy Statistics Team

Silversquare Europe Square de Meeûs 35 1000 Brussels, Belgium Tel: +32 261 31 520 Tel: +32 261 31 521 E-mail: [email protected] Visit us on www.inogate.org