Security of SupplyComments

P. CAPROS, RAE Greece

Outline

1. Definition

2. Two naïve approaches

3. Market-based solutions

4. Illustration

5. Security of supply: double edge

Definition

Security of Supply covers a broad range of issues Often confused with reliability or safety

Long-term security of supply, refers to: Minimise the risk of disruptiondisruption of service

due to lack of supply of power and/or gas and/or imports

Avoid excessive increase of energy prices due to anticipated disruption

Two naïve approaches

Market cannot deliver security of supply so we have to address an “externality” Impose last resort or similar public service

obligations and socialise the costs A central entity tenders capacity or incentivise

capacity building Let market free to deliver sufficient price

signals; true but is the market perfect? Other external costs, transaction costs,

asymmetric information, insufficient market integration, absence of risk management, barriers to entry, lack of variety in supply, etc. etc.

Market-based solutions

Set in place adequate market mechanisms, activity rules, varieties of supply

entities and transactions, sufficient market size, flexibility mechanisms

to accommodate risk so as to drive investment in the presence of high time leads, external costs, large capital

requirements, discrete solutions Key is to

close the gap between RiskRisk as perceived when investing in energy and RiskRisk as perceived by financial and corporate entities

Market size importance is underestimated More difficult: managing transition …

Illustration Greece: Small market in transition

Electricity and gas demand is anticipated to increase fast and existing supply capacity will not be sufficient after 3 years and beyond

The incumbent is reluctant to invest so as to improve balance sheet and also this is undesirable so as to leave room to competition

There is no competitive market experience Financial entities and new market entrants

consider that investing on a private basis is high risk ! Transition through a bottom-up driven market solution

seems impossible, and market liberalisation can be discredited

Security of Supply: double edge

Ensure sufficient investment through market-based solutions Must be top in the agenda of regulators Difficult to deliver because of the nature of energy industry

Packages of measures to manage the perception of risks (multiple markets with flexibility) and enlarge the market size (harmonisation)

Not addressing security of supply leaves the room to political power to control and so cancel free competition

In Fragmented markets of Europe, security of supply may lead to a regime of market sharing among national monopolies instead of competition in a single internal market