Impact of Energy on Stability and Economic Development in the

Region

Remarks to Black Sea Energy Conference

Bucharest, April 3, 2006

Dr. Robert F. Ichord, Jr.Chief, Energy and InfrastructureBureau for Europe and Eurasia

US Agency for International Development

Washington, D.C. 20523

Headline Theme of Energy Security

• Global, Regional and National Dimensions; Black Sea region is significant in terms of the intersection of these dimensions.

• Cooperation is vital among countries committed to free market principles to overcome disruptions and supply constraints;

• Diversification of Supplies and Reduction in Import Dependence are important approaches to enhancing energy security;

• Commercial decisions must drive process since options may not always be feasible or economically justified, especially in the short and medium term;

• Governments and regulators play critical role in establishing transparent regulatory and commercial law frameworks for these ventures;

• Countries in their energy strategies need to consider industrial competitiveness as well as environmental, social and other factors;

• Improvement of Customer Service is important objective

EU Gas Imports, Import Capacity and Projected Imports

T E N-Energy- I n v e s t: Study on Energy Infrastructure Costs and Investments between 1996 and 2013 (medium-term) and further to 2023 (long-term) on the Trans-European Energy Network and its Connection to Neighbouring RegionsCESI, ITT, ME, RAMBØLLOctober 2005

Improved Customer Service

• Fundamental to the reform and design of national and regional energy markets is the impact on the consumer

• Price is a critical factor but quality of service is increasingly important in today’s electronic societies

• Modernization of energy systems to meet the needs of consumers in various sectors of the economy is a significant challenge for countries of the Black Sea Region.

• Development of larger markets and harmonized regulatory frameworks can stimulate investment and trade benefits.

• Focus on three important ingredients to improving customer service: affordability, reliability, and transparency

---------------------------Affordability------------------------------

• Competition

• Economic Efficiency

• Social Responsibility

• Competition based on market forces may help improve the affordability of energy services. US and European experience has shown the competitive model for network industries can benefit consumers.

• Improved economic efficiency of the energy companies can reduce costs of production, transport and delivery to consumers. Benefits from a regional trading and dispatching system that can utilize the diversify of sources in an economically efficient manner

• Higher oil and gas prices in the region, while promoting greater end-use efficiency, are putting strains on industries, municipalities and government systems to help vulnerable and low income groups

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16.00

Cents/kWh

Bulgaria Georgia Hungary Moldova Poland Romania Russia Turkey Ukraine

Source: ERRA

Trends of the Residential Electricity Tariff for Selected Countries (Q2-US Cents/kWh)

2000

2003

2005

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Cents/kWh

Bulgaria Georgia Hungary Moldova Poland Romania Russia Turkey Ukraine

Source: ERRA

Trends of the Non-Residential Electricity Tariff for Selected Countries (Q2-US Cents/kWh)

2000

2003

2005

2003 kWh Electricity consumption/capita vs. GDP/capita US$

Hungary

Russia

Moldova

GeorgiaUkraine

BulgariaRomaniaTurkey

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1000

2000

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6000

0 1000 2000 3000 4000 5000 6000 7000

Electricity Consuption/capita

GD

P/c

ap

ita

(U

S$

)

Source: ERRA Statistics Data

----------------------------- Reliability------------------------------

• Security of Supply

• Technical Efficiency

• Environmental Sustainability

• Close relationship between reliability and security of supply. Blackouts in Europe and US in last several years has galvanized concern over security of large integrated systems and the critical tele-information systems on which they depend. Regional grids can be strengthened to facilitate reliability through better frequency control and enhanced ancillary services management.

• Reducing transmission and distribution system losses and improved technical efficiency is also a priority for the Black Sea region. Reliability requires investment and the existence of management and financial systems that can properly procure and implement the modernization programs. Privatization as well as IFI financing is critical to improving managerial capacity as well as mobilizing needed investments.

• Environmental factors can affect reliability. The variation in the availability of hydro resources is important in the Black Sea region. This variability can have a significant impact on costs of generation and requirements for imports in a number of countries. The advancement in nuclear safety is also significant in ensuring good capacity utilization of these major base-load units.

----------------------------Transparency---------------------------

• Corporate Governance

• Accountability

• Regulatory Effectiveness

• Improved financial management and release of information to public and markets on energy company operations.

• Increased openness of Government, Regulators and utilities to consumers. Procedures adopted for public hearings, reporting, licensing and penalties, and dispute resolution.

• Enhanced role for competent and independent energy regulators to protect public interest and ensure financially sound energy utilities.

USAID Regional Activities

• Energy Regulators Regional Association (ERRA): development of competent regulators and staff and exchange of information and best practices. (US National Association of Utility Commissioners (NARUC) in collaboration with CEER)

• Support to Energy Community for Southeast Europe (ECSEE): Assistance for regulatory development and implementation of Energy Community Regulatory Board, market design and monitoring, transmission planning, and energy efficiency and affordability.

• Black Sea Regional Electricity Transmission Planning Project: regional utility collaboration, chaired by Transelectrica, to develop regional analyses of transmission system development potentials and investment priorities to increase reliability and facilitate expanded trade and power exchange. ( US Energy Association in collaboration with donors, IFIs and BSEC.)

• Urban Heating and Affordability Review and Investment Strategy (Alliance to Save Energy in collaboration with UNECE and IEA)

• Proposal to Congress in FY07 Budget for New Regional Energy Security Project

Black Sea Region Existing Interconnection Lines

Azerbaijan

Enguri

Centralna

Donbas

N Voronzeska

PeremogaShahti

500 kV

Romania

Russia

Ukraine

Moldavia

Greece

Hungary

Bulgaria

Macedonia

Serbia

Slovakia

Georgia

Turkey

IraqSyria

Iran

Armenia

.

.

.

Black Sea

Poland

Belarus

Varna

Isaccea

Pivdenukrainska

Zakhidnoukrainska

Albertirsa

Hmelnicka

Rzeszow North Ukrainskya

Kurskaya

750 kV

Vulcanesti

Mukachevo

Rosiori

V Kapushani

Sajoszeged

Tintareni

Kozloduy

Maritsa East Hamitabat

Babaeski

Blagoevgrad

Thessaloniki

Dobrudja

Sandorfalva

Sofia w.Nis

DjerdapP. de Fier

Arad

Halep

Birecik

Kesek

PS3KhoyHakkari

400 kV

RabnitaUsatovCERS Moldova

Arciz

Dnestrovska

BaltiKotovsk

N Odeskaya

Gardabani

Alaverdi

Mazir

Chernobil

Gomelj

Chernigov

ShostkaKurskaya

Sumi Pivnichna

Pivdena

Shebekino

Losevo

Belgorod

ZmievskaValujki

Novocherskaya

330 kV

Hopa

Batumi

GumriKars

Bzibi

Psou

Isalnita

T15AmrosivkaKisavardaTiszaloek

Mukachevo

220 kV

D.Beyazit

Bazargan

Igdir Babek

150 kV

L E G E N D :

TalashkinoVitebsk

RoslavlKrichev

SmolenskayaBeloruskaya