European Electricity Markets Structure and Trading Phase I: Retail Competition and Crossborder Mergers
Modelling and Managing Competitive Electricity Markets 30 September – 3 October 2003 John Bower Overview
European electricity market overview
The Directive and retail supply competition
Unresolved regulatory issues
BREAK
Transmission economics
Measuring market integration
Transmission pricing solutions
Case Study
John Bower Europe I 2 European electricity market overview Four coordinated AC transmission grids linked by DC lines define market boundary….
TRANSMISSION SYSTEMS IN THE EUROPEAN ELECTRICITY MARKET
Source: UCTE
John Bower Europe I 3 European electricity market overview …. owned by 45 separate entities spread across 28 countries coordinated by ETSO
EUROPEAN TRANSMISSION SYSTEM OPERATORS (ETSO) MEMBERS
• TSOI, the association of TSOs in Ireland: Irish Republic (ESB), Northern Ireland, (NIE)
• UKTSOA, the United Kingdom TSO association: England & Wales (NGC), Scottish Power (S. Scotland), N. Scotland, (Scottish Hydro)
• NORDEL, the Nordic TSOs: Norway (Statnett), Sweden (Svenska Kraftnat), Finland (Fingrid), W. Denmark (Eltra), E. Denmark (Elkraft)
• UCTE, the Union for the Co ordination of Transmission of Electricity, association of TSOs of the Continental countries of Western and Central Europe: Belgium (Elia SA/NV), Germany (Bewag AG, Energie Baden Württemberg AG, E.On Netz GmbH, Hamburgische Electrizitäts-Werke AG, RWE Net AG, Vereinigte Energiewerke AG), Spain (Red Eléctrica de España S.A., France (EdF Gestionnaire du Réseau de Transport d´Electricité), Greece (Hellenic Transmission System Operator),Italy (Gestore della Rete di Transmissione Nazionale), Slovenia (Elektro Slovenija), Croatia (Hrvatska Elektroprivreda, FRJ, EP CG, Elektroprivreda Crne Gore, Elektroprivreda Srbije), FYROM (Elektrostopastvo na Makedonija), Bosnia –Herzegovina (Joint Power Coordination Center), Luxembourg (Compagnie Grand Ducale d'Electricité du Luxembourg), Netherlands, TenneT bv), Austria (Tiroler Wasserkraftwerke AG, Verbund - Austrian Power Grid, Vorarlberger Kraftwerke AG), Portugal (Rede Eléctrica Nacional, S.A.), Switzerland (Aare-Tessin Ltd. for Electricity, BKW FMB Energie AG / BKW FMB Energie S.A., Elektrizitäts-Gesellschaft Laufenburg Grid AG/ Electricité de, Laufenbourg Grid AG, S.A., Energie Ouest Suisse, Etrans Ltd., Nordostschweizerische Kraftwerke AG), Czech Republic (CEPS), Hungary (Magyar Villamos Müvek Rt.), Poland (Polskie Sieci Elektroenergetyczne SA), Slovak Republic (Slovenské Elektrárne, a.s., Prenosova sústava)
John Bower Europe I 4 European electricity market overview Market serves 460 million people with peak load of 400 GW using 2784TWh per year
EUROPEAN ELECTRICITY MARKET STATISTICS Installed Pump Generation Maximum Total Net Storage Total Country Area Population Capacity System Load Generation Consumption Consumption Net Imports km2 million MW MW GWh GWh GWh GWh Austria 83900 8.10 13517 7728 54068 1986 50718 -1364 Belgium 30500 10.20 14088 12291 80162 1639 82851 4328 Czech Republic 78866 10.30 13746 8744 67741 749 56974 -10018 Denmark 43000 5.30 12544 6284 34230 2148 32748 666 Finland 338000 5.20 16143 12700 67113 2901 76093 11881 France 544000 58.60 108291 66863 503998 6604 427471 -69923 Germany 357000 82.00 107769 74300 496588 5789 493953 3154 Great Britain 243300 59.00 69866 51000 359637 3497 370312 14172 Hungary 93030 10.10 7847 5543 32420 0 35858 3438 Croatia 56538 4.70 3601 2430 9829 18 13763 3952 Greece 132000 10.50 9401 7699 45208 585 44617 -6 Ireland 70300 3.70 4165 21634 449 21283 98 Italy 301300 57.60 65513 49019 262426 9177 297706 44457 Luxembourg 2600 0.40 0 888 1145 1022 5834 5711 Netherlands 41500 15.60 14210 12255 52910 0 71824 18914 Norway 324000 4.50 27622 20420 137000 10256 107721 -19023 Poland 120728 38.60 30135 21836 144681 2790 135517 -6374 Portugal 92400 9.90 9784 6022 37573 560 37949 936 Slovakia 48845 5.40 7832 4149 28718 392 25653 -2673 Slovenia 20253 2.00 2400 1698 12529 0 11180 -1349 Spain 504800 39.70 44921 32430 195372 4908 194905 4441 Sweden 450000 8.90 32934 26000 139994 11707 132974 4687 Switzerland 50000 8.90 14606 9027 65392 1974 56401 -7017 Total 4026860 459.2 630935 439326 2850368 69151 2784305 3088
John Bower Europe I 5 The Directive and retail supply competition New EU Directives give all electric (gas) consumers right to choose supplier by 1 July 07
MAIN EU LEGISLATION ON SINGLE MARKET FOR ENERGY
Gas Transp- Gas arency Directive Directive Directive II MARKET ENERGY SINGLE Electricity Electricity SINGLE Transit Directive Directive Directive EUROPEAN II ACT
Gas Consumption 20% 28% 100%
Electricity Consumption 30% 33% 100%
1985 1990 1995 2000 2005
John Bower Europe I 6 The Directive and retail supply competition …. with energy market liberalisation also being driven by economic / technical pressures
FORCES FOR CHANGE IN CROSS-BORDER ELECTRICITY TRADE
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EUROPEAN D E ELECTRICITY R N
E O L E I N MARKET G A L T A M E U N T EVOLUTION S A C L LA O I I T A R T O U S T E R K N T A G A K I I E A O E G C N R T I L N R T F A S E Y O O M D F INCREASED EFFICIENCY AND REDUCED SCALE OF POWER PLANT
John Bower Europe I 7 The Directive and retail supply competition The Directive guarantees competition in supply with transmission / distribution access.
KEY PROVISIONS OF THE ELECTRICITY DIRECTIVE
• Unbundling of accounts – Prevents subsidisation and distortion of competition in vertically integrated firms
• Competition in construction and operation of new plant – Authorisation procedure allows market to determine investment criteria – Tendering procedure allows central planner to determine when/where to build capacity
• Open access to transmission (and distribution) networks – Independent Transmission System Operator (TSO) must be appointed – Tariffs for connection and carriage must be transparent and non-discriminatory – Reciprocity clause and system reliability issues allows countries to bar access
• Right of consumers to choose their supplier – Increasing number of consumers should be authorised to choose their suppliers
John Bower Europe I 8 The Directive and retail supply competition About 70% of electricity retail market volume is now eligible for supply competition and…
PERCENTAGE OF ELECTRICITY CONSUMPTION ELIGIBLE TO CHOOSE SUPPLIER 100%
90%
80%
70%
60% 2002 50% 2005 40%
30%
20%
10% Net consumption open to supply competition Net consumption open 0%
k s y ce m rg ia d ar ain u r n an eece Italy ugal iu st rway nm eland rt Sp bo land u inlan o Fr Gr e Ir o elg er A F N weden D P B Germa S xem Lu Neth Source: European Commission DG Energy and Transport
John Bower Europe I 9 The Directive and retail supply competition …. about 80% of gas retail market volume.
PERCENTAGE OF GAS CONSUMPTION ELIGIBLE TO CHOOSE SUPPLIER 100%
90%
80%
70%
60% 2002 50% 2005 40%
30%
20%
10% Net consumption open to supply competition Net consumption open
0%
l s a y a rk m ly ri n g a u nd ta nd u eece i nd la I a t lg Spain nl r France nm e rla bourg Ire i rma o Gr e Sweden m Aust F e P D B he e G x u Net L Source: European Commission DG Energy & Transport
John Bower Europe I 10 Unresolved regulatory issues In reality State and Federal policy objectives are interdependent and often in conflict
LIBERALISATION CONFLICTS • Security
– Concern about dependence on other countries for generation capacity – Concern about dependence on other countries for generation fuels – Concern about dependence on other countries for gas / electricity transmission routes
• Competition
– Conflict between capital market and public service obligations – Access rights to transmission/ distribution and pricing of transmission – Increasing industry concentration through mergers and acquisitions
• Environment
– EUETS (CO2) and LCPD (NOx, SOX, particulate) costs versus lower prices – Renewables versus Combined Cycle Gas Turbines (CCGT) – NIMBY delays on approval of transmission routes / generation site licences
John Bower Europe I 11 Unresolved regulatory issues Liberalisation means wholesale / retail markets replace government control and ….
STRUCTURE OF A LIBERALISED ELECTRICTY MARKET
Generators Consumers
WHOLESALE Suppliers RETAIL MARKET MARKET Contract Flow
Physical Electricity Flow Transmission Distribution
John Bower Europe I 12 Unresolved regulatory issues …. with new entrants and increased efficiency reducing prices….
IMPACT OF LIBERALISATION IN ENGLAND & WALES 1990 - 2003
Oligopoly
Competitive Generators -14% 0% / -17% Consumers
Monopoly WHOLESALE Suppliers RETAIL Monopoly RPI-X MARKET MARKET RPI-X Contract Flow
Physical Electricity Flow Transmission Distribution
John Bower Europe I 13 Unresolved regulatory issues …. but this outcome is not guaranteed and prices may rise instead.
ENGLAND & WALES ANNUAL ELECTRICITY PRICE HISTORY 1990 - 2003 95.00 90.00 85.00 80.00 75.00 70.00 65.00 60.00 55.00 50.00 45.00 40.00 Price (£/MWh) 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03
Retail Price (Household) Retail Price (L. Industry) Wholesale Price
Coal Marginal Cost CCGT Marginal Cost Source: EIA
John Bower Europe I 14 Unresolved regulatory issues National regulation is still required to create and maintain a competitive industry…
SHARE OF COAL GENERATION CAPACITY IN ENGLAND & WALES 100% National Power BEGL
International 80% Power Innogy
AES 60% TXU/Eastern
EdF 40% AEP
Edison Share of Coal Generation Capacity Share of Coal Generation 20% PowerGen
Scottish Power 0% ALCAN 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1 9 9 9 9 9 9 0 t-9 -9 t-9 -9 -9 t-9 r-0 t-0 ct- pr-9 c ct pr-9 c ct ct-9 ct ct-9 c ct- p c ct- Apr-9 O A O Apr- O A O Apr- O Apr-9 O Apr- O Apr-9 O Apr- O Apr-9 O A O Apr-0 O Source: EIA
John Bower Europe I 15 Unresolved regulatory issues …. but many countries still pursue the ‘national champion’ objective…. EU GENERATION CAPACITY CONCENTRATION RATIO (3 FIRM) 2001
100%
90%
80%
70% y (%)
uppl 60%
Net S 50%
40% are of Total
h 30% S
20%
10%
0% m UK ain and nds iu Italy a nl Sp rtugal France Ireland o Greece Austria Fi Norway Sweden Belg P Denmark Germany Netherl SOURCE: European Commission, Company Accounts, OIES estimates
John Bower Europe I 16 Unresolved regulatory issues … and vertical integration between concentrated generation sector and monopoly ‘wires’
Control Areas of the German Transmission Control Areas of the German Transmission System Operators as at 1 Jan 2000 System Operators as at 1 Jan 2001
Source: Source: DVG (Deutsche Verbundbesellschaft) http://www.dvg-heidelberg.de/extern/DVG/res.nsf/files/Regelzonen2001-GB.pdf/$file/Regelzonen2001-GB.pdf
John Bower Europe I 17 Unresolved regulatory issues Cross-border mergers may now be preventing access to transmission / distribution ….
EUROPEAN INVESTMENTS OF EDF (APR 2002)
1. Estag 25% 15. Bert 89% 2. Elcogas 29.1% 16. Italenergia 18% 3. ISE 30% 17. Montedison 97% 4. Pego 10% 18. ATEL 13% 5. Graningue 36% 5 6. Motor Colombus 20% 10, 11, 13 7. Edasz 29% 9 12 8. Demasz 50.0% 9. Ech 58% 1 7,8,15 6,18 10. London Elec. 100% 11. SWEB 100% 3, 16, 17 4 12. EnBW 34% 2, 14 13. Seaboard 100% 14. Hidrocantabrico 59%
John Bower Europe I 18 Unresolved regulatory issues …. creating interlocking relationships make regulation of network effects very complex
CORPORATE LINKS BETWEEN SWEDISH, GERMAN, UK MARKETS (APR 2002)
Vattenfall Sydkraft E. Midlands HEW BEWAG PowerGen EoN VEAG Innogy RWE Thames Water
John Bower Europe I 19 Unresolved regulatory issues All national governments want to intervene to set national energy policy….
RECENT BRITISH ENERGY HEADLINES
28 Aug 02 British Energy drained by low prices-minister
01 Sep 02 British Energy ponders US sale
06 Sep 02 Nuclear firm British Energy begs for bailout
07 Sep 02 British Energy shares suspended as company warns of insolvency
08 Sep 02 Ministers offers £410 million loan to British Energy
09 Sep 02 British Energy falls almost 80 pct after LSE lifts trading curbs
26 Sep 02 Ministers extend loan to British Energy and increase it to £500
18 Sep 03 Government sets deadline on British Energy restructuring
22 Sep 03 Nuclear plants may get new lease of life
02 Oct 03 ??????
John Bower Europe I 20 Unresolved regulatory issues … usually under the guise of energy security… GENERATION TECHNOLOGY CAPACITY SHARE IN ENGLAND & WALES (Apr 1990 – Mar 2004)
100% OCGT
90% Oil ogy 80% Pump Store 70% on Technol ti
a Small Coal 60% Medium Coal 50% and Gener
40% CCGT e by Fuel 30% Large Coal ty Shar 20% Magnox
Capaci 10% AGR/PWR
0% Apr Oct-99 Apr Oct-00 Apr Oct-01 Apr Oct-02 Apr Oct-03 Apr Oct-90 Apr Oct-91 Apr Oct-92 Apr Oct-93 Apr Oct-94 Apr Oct-95 Apr Oct-96 Apr Oct-97 Apr Oct-98 Hydro ------99 00 01 02 03 90 91 92 93 94 95 96 97 98
John Bower Europe I 21 Unresolved regulatory issues …but is in conflict with the environmental objectives of EUETS and LCPD…
EU EMISSIONS TRADING SCHEME AND LARGE COMBUSTION PLANT DIRECTIVES
Precursor Phase I Phase II EU 2003 – 2004 2005 – 2007 2008 – 2012 Emissions Trading National Plan CO2 only CO2 + other gases Scheme Formulation Allocation only Allocation + Auctions
Precursor Phase I Derogation Phase EU 2002 - 2003 2004 – 2007 2008 – 2015 Large Combustion National Plan SOx, NOx, dust SOx, NOx, dust Plant Directive Formulation ELV or NP ELV or 20k hr derogation
Source: EIA
John Bower Europe I 22 Unresolved regulatory issues …even the EU Renewables Directive 10% target by 2010 is really about energy security
EUROPEAN ELECTRICITY GENERATION OUTPUT 2000 900
800
700
600
500
400
300
200 Annual Generation Output (TWh) Annual Generation 100
0 a a a a a a m UK ijan aria iu and nds avi Italy a a dova bani Malta l lg nl Other Spain Latvi TFYR o Russia Turkey France Ireland Poland Greece Austria Croatia Iceland jikistan Fi thuani Al Norway Estoni Ukraine Belarus a, Georgi Sweden Belg Armenia Bu a Hungary Slovakia Portugal M Slovenia Romania Denmark Germany Li T Azerb Uzbekistan Yugosl Kyrgyzstan Kazakhstan Switzerland Netherl Turkmenistan Bosnia and HG Czech Republic acedoni M
Source: EIA Thermal Nuclear Hydro Geothermal and Other
John Bower Europe I 23 Unresolved regulatory issues Some EU industrial price fell initially but beginning to rise now and a wide range persists….
EU ELECTRICITY PRICES FOR INDUSTRIAL CONSUMERS (Ex Tax) AT 1 JANUARY 90
80
70
60
50
40
30 Price (Euro/MWh)
20
10
0
ia l ly K d e g k r in a n ce nd r t It U a den s tuga gium ee e rway rmany Spa ela r Au Ir Franc G Finland No Ge Por Bel Denma Sw Netherl Luxembour
Source: Eurostat 1997 2003
John Bower Europe I 24 Unresolved regulatory issues …. while household prices only fell a little overall and went up a lot in Scandinavia
EU ELECTRICITY PRICES FOR HOUSEHOLD CONSUMERS (Ex Tax) AT 1 JANUARY 160
140
120
100
80
60 Price (Euro/MWh)
40
20
0
l y ia n e n y al ny um tr UK a It a land de w m tuga lgi us ance Spai e eec e e Fr Ir A herland Gr Sw Nor Finland Ger Por B t Denmark Ne Luxembourg
Source: Eurostat 1997 2003
John Bower Europe I 25 Speaker
John Bower is a Senior Research Fellow at the Oxford Institute for Energy Studies which is an independent research charity affiliated to Oxford University and dedicated to advanced research in the social science aspects of energy. John joined OIES in November 2001 and his research interest is in the emergence and evolution of integrated cross-border electricity and gas markets. Specifically; the development of efficient pricing and investment mechanisms for energy, transmission capacity, and emissions. Before joining the OIES, John completed his PhD at Oxford Institute for Energy Studies London Business School and his previous career was 57 Woodstock Road in the commodity industry. His experience ranges from energy trading, at Marc Rich & Co, to risk Oxford OX2 6FA management consultancy, with Coopers & Lybrand, United Kingdom advising commodity traders, producers and processors in base metal, precious metal, ‘softs’ and energy markets. Immediately prior to his PhD he was Telephone: +44 (0)1865 889 125 Global Controller Metals/Commodities at Deutsche Morgan Grenfell. Facsimile: +44 (0)1865 310 527 Email: [email protected] URL: http://www.oxfordenergy.org
John Bower Europe I 26