Risk Reduction for Energy Project Sponsors Through Synthetic, Revenue-Neutral Diversification
Financial institutions and insurance companies account for 96% of the activity in the $4.8 trillion credit derivatives market while corporations account for a mere 4%. This article makes a case for? synthetic, revenue-neutral diversification? as a method for energy firms to manage the credit risk in their long-term power-purchase agreements (PPAs). Synthetic, revenue-neutral diversification involves a firm buying insurance on assets in its portfolio and paying the associated insurance premium by simultaneously selling insurance to another firm, thus enabling it to avoid any cash expense. The primary objective of synthetic, revenue-neutral diversification is implicitly to change the firm?s asset portfolio and to increase diversification without reducing the firm?s revenues. In an example, two independent power producers use credit derivatives to diversify the geographic exposures of their PPA portfolios, thereby reducing their expected losses, improving their credit ratings, and lowering their cost of borrowing.
Power sector regulatory reform in transition economies: Progress and lessons learned
Regulatory reform in the power sector of most transition economies has progressed. Regulatory independence, however, is still limited with direct (statutory) and indirect political input influencing decision making. Further reform is required to secure power tariff increases and private sector participation. Both should improve sector performance, notwithstanding current market sentiment towards the sector and the region. This paper discusses the advances made in regulatory reform, with a focus on end user regulation rather than network access. It suggests that regulatory rules, enforceable in an independent forum such as international arbitration, should be written into contracts to ensure investor security. However, arbitration should not be seen as a substitute for strong government commitment to the reform process. Tariff mechanisms from western Europe or North America, if adopted into contracts, should also be adapted to reflect the specific characteristics of transition economies. For example, poor payments discipline and exchange rate risk are significant problems in CIS countries. Going forward, the challenge in all transition economies will be to strengthen regulatory independence and mechanism design. And, perhaps most importantly, implementation must be enhanced to improve sector performance.
Regulatory reform and market development in power sectors of transition economies: the case of Kazakhstan
Abstract Kazakhstan has been at the forefront of power sector reform in EBRD's countries of operations. Starting in 1996, a regulator was set up, the industry was partially unbundled, some distribution and generation companies were privatised, and the large user market was liberalised. A number of reform challenges remain however in the area of privatisation, regulation and competition. The paper proposes that the remaining distribution companies be privatised with a view to raising the level of cash collection. Before this takes place, the industry would benefit from regulatory changes, strengthening independence of the regulator and modifying regulatory rules to improve risk allocations and strengthen incentives. On competition, the paper proposes enhancing the present market arrangements by introducing a balancing pool, and re-balancing transmission tariffs to reflect location marginal costs. Implementation of the proposed changes should yield substantial welfare gains for Kazakhstan. The broad challenges in Kazakhstan are characteristic of those in the sector throughout the region.