Oil Presentation5 EuropeanElectricityMarketsStructureandTradingI JBower 2003

8/9/2019 Oil Presentation5 EuropeanElectricityMarketsStructureandTradingI JBower 2003

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European Electricity Markets Structure and TradingPhase I: Retail Competition and Crossborder Mergers

Modelling and Managing Competitive Electricity Markets

30 September 3 October 2003

John Bower


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Europe I 2John 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


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Four coordinated AC transmission grids linked by DC lines define market boundary.

TRANSMISSION SYSTEMS IN THE EUROPEAN ELECTRICITY MARKET

Source: UCTE


4/26Europe I 4John Bower


. 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 Continentalcountries of Western and Central Europe: Belgium (Elia SA/NV), Germany (Bewag AG, Energie BadenWrttemberg AG, E.On Netz GmbH, Hamburgische Electrizitts-Werke AG, RWE Net AG, VereinigteEnergiewerke AG), Spain (Red Elctrica de Espaa S.A., France (EdF Gestionnaire du Rseau de TransportdElectricit), Greece (Hellenic Transmission System Operator),Italy (Gestore della Rete di TransmissioneNazionale), Slovenia (Elektro Slovenija), Croatia (Hrvatska Elektroprivreda, FRJ, EP CG, Elektroprivreda CrneGore, Elektroprivreda Srbije), FYROM (Elektrostopastvo na Makedonija), Bosnia Herzegovina (Joint PowerCoordination Center), Luxembourg (Compagnie Grand Ducale d'Electricit du Luxembourg), Netherlands,TenneT bv),Austria (Tiroler Wasserkraftwerke AG, Verbund - Austrian Power Grid, Vorarlberger Kraftwerke

AG), Portugal (Rede Elctrica Nacional, S.A.), Switzerland (Aare-Tessin Ltd. for Electricity, BKW FMB EnergieAG / BKW FMB Energie S.A., Elektrizitts-Gesellschaft Laufenburg Grid AG/ Electricit de, Laufenbourg GridAG, S.A., Energie Ouest Suisse, Etrans Ltd., Nordostschweizerische Kraftwerke AG), Czech Republic (CEPS),

Hungary (Magyar Villamos Mvek Rt.), Poland (Polskie Sieci Elektroenergetyczne SA), Slovak Republic(Slovensk Elektrrne, a.s., Prenosova sstava)


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Market serves 460 million people with peak load of 400 GW using 2784TWh per year

EUROPEAN ELECTRICITY MARKET STATISTICS

Country Area Population

Installed

Generation

Capacity

Maximum

System Load

Total Net

Generation

Pump

Storage

Consumption

Total

Consumption Net Imports

km2 million MW MW GWh GWh GWh GWh

Austria 83900 8.10 13517 7728 54068 1986 50718 -1364Belgium 30500 10.20 14088 12291 80162 1639 82851 4328

Czech Republi 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 14172Hungary 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 -19023Poland 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 -7017Total 4026860 459.2 630935 439326 2850368 69151 2784305 3088


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SING

LE

ENERGY

MAR

KET


New EU Directives give all electric (gas) consumers right to choose supplier by 1 July 07

1985

SINGLEEUROPEAN

ACT

1990 1995 2000 2005

Transp-

arency

Directive

TransitDirective

MAIN EU LEGISLATION ON SINGLE MARKET FOR ENERGY

Electricity

Directive

Gas

Directive

30% 33% 100%Electricity Consumption

20%Gas Consumption 28%

Electricity

Directive

II

Gas

Directive

II

100%


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. with energy market liberalisation also being driven by economic / technical pressures

FORCES FOR CHANGE IN CROSS-BORDER ELECTRICITY TRADE

IN

EUROPEAN

ELECTRICITY

MARKET

EVOLUTION

DEREGULATI

ONR

I ONALCI O

TY

F

NATI

ELECT

MARKETS

INCREASED

EFFICIENCY AND

REDUCED SCALE

OF POWER

PLANT

CREASECD

SIZEOFD

TRANSMISSION

C

ABLES

INCR

EAS

PEED

SED

AND

REDU

CEDCO

ST

OFCO

MPUT

ING

DER F

EG

N

AU T

IO S ETL

ATION

O M

NAL

GA

AR

K

S


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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


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About 70% of electricity retail market volume is now eligible for supply competition and

PERCENTAGE OF ELECTRICITY CONSUMPTION ELIGIBLE TO CHOOSE SUPPLIER

Source: European Commission DG Energy and Transport

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fran

ce

Gree

ce

Den

mar

k

Irela

nd Italy

Por

tuga

l

B

elgi

umSp

ain

Luxem

bour

g

Nether

land

s

Aust

ria

Finl

and

Ger

man

y

Norw

ay

S

wede

n

Netco

nsumptionopen

tosupplycomp

etition

2002

2005


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. about 80% of gas retail market volume.

PERCENTAGE OF GAS CONSUMPTION ELIGIBLE TO CHOOSE SUPPLIER

Source: European Commission DG Energy & Transport

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Por

tuga

l

Fran

ce

Gree

ce

Den

mar

k

S

wede

n

B

elgi

um

Nether

land

s

Luxem

bour

g

Spai

n

Irela

nd Italy

Aust

ria

Finl

and

Ger

man

y

Netco

nsumptionopen

tosupplycompetition

2002

2005


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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


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Liberalisation means wholesale / retail markets replace government control and .

STRUCTURE OF A LIBERALISED ELECTRICTY MARKET

Generators

Transmission

Consumers

Suppliers

Distribution

RETAIL

MARKET

WHOLESALE

MARKET

Physical Electricity Flow

Contract Flow


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. with new entrants and increased efficiency reducing prices.

IMPACT OF LIBERALISATION IN ENGLAND & WALES 1990 - 2003

Oligopoly

RPI-X RPI-X

Generators

Transmission

Consumers0% / -17%

Suppliers

Distribution

RETAIL

MARKET

-14%

WHOLESALE

MARKET

Physical Electricity Flow

Competitive

MonopolyMonopoly

Contract Flow


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. but this outcome is not guaranteed and prices may rise instead.

ENGLAND & WALES ANNUAL ELECTRICITY PRICE HISTORY 1990 - 2003

Source: EIA

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

55.00

60.00

65.00

70.0075.00

80.00

85.00

90.00

95.00

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

Price

(/MWh)

Retail Price (Household) Retail Price (L. Industry) Wholesale Price

Coal Marginal Cost CCGT Marginal Cost


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National regulation is still required to create and maintain a competitive industry

SHARE OF COAL GENERATION CAPACITY IN ENGLAND & WALES

Source: EIA

0%

20%

40%

60%

80%

100%

Apr-9

0

Oct-9

0

Apr-9

1

Oct-9

1

Apr-9

2

Oct-9

2

Apr-9

3

Oct-9

3

Apr-9

4

Oct-9

4

Apr-9

5

Oct-9

5

Apr-9

6

Oct-9

6

Apr-97

Oct-9

7

Apr-9

8

Oct-9

8

Apr-9

9

Oct-9

9

Apr-0

0

Oct-0

0

Apr-0

1

Oct-0

1

ShareofCoalGen

erationCapacity

NationalPower

BEGL

InternationalPower

Innogy

AES

TXU/Eastern

EdF

AEP

Edison

PowerGen

ScottishPower

ALCAN


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. but many countries still pursue the national champion objective.

EU GENERATION CAPACITY CONCENTRATION RATIO (3 FIRM) 2001

SOURCE: European Commission, Company Accounts, OIES estimates

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Greece

France

Ireland

Belgium

Portugal

Italy

Spain

Sweden

Denmark

Finland

Austria

Netherlands

Germany

Norway

UK

ShareofTotalNetSupply(%)


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and vertical integration between concentrated generation sector and monopoly wires

Control Areas of the German Transmission

System Operators as at 1 Jan 2000

Control Areas of the German Transmission

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


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Cross-border mergers may now be preventing access to transmission / distribution .

EUROPEAN INVESTMENTS OF EDF (APR 2002)

5

6,18

9

1 7,8,15

10, 11, 13

2, 14

3, 16, 174

12

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%

6. Motor Colombus 20%

7. Edasz 29%

8. Demasz 50.0%

9. Ech 58%

10. London Elec. 100%11. SWEB 100%

12. EnBW 34%

13. Seaboard 100%

14. Hidrocantabrico 59%


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. creating interlocking relationships make regulation of network effects very complex

CORPORATE LINKS BETWEEN SWEDISH, GERMAN, UK MARKETS (APR 2002)

Sydkraft

Vattenfall

PowerGen

HEWBEWAG

VEAGEoN

E. Midlands

InnogyRWE

Thames

Water


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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 ??????


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usually under the guise of energy security

GENERATION TECHNOLOGY CAPACITY SHARE IN ENGLAND & WALES (Apr 1990 Mar 2004)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Apr-90

Oct-90

Apr-91

Oct-91

Apr-92

Oct-92

Apr-93

Oct-93

Apr-94

Oct-94

Apr-95

Oct-95

Apr-96

Oct-96

Apr-97

Oct-97

Apr-98

Oct-98

Apr-99

Oct-99

Apr-00

Oct-00

Apr-01

Oct-01

Apr-02

Oct-02

Apr-03

Oct-03

Capacity

SharebyFuelandGenerationTechnology

OCGT

Oil

Pump Store

Small Coal

Medium Coal

CCGT

Large Coal

Magnox

AGR/PWR

Hydro


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but is in conflict with the environmental objectives of EUETS and LCPD

EU EMISSIONS TRADING SCHEME AND LARGE COMBUSTION PLANT DIRECTIVES

Precursor

2003 2004National Plan

Formulation

Phase I

2005 2007CO2 only

Allocation only

Phase II

2008 2012CO2 + other gases

Allocation + Auctions

EU

EmissionsTradingScheme

Phase I

2004 2007

SOx, NOx, dust

ELV or NP

Derogation Phase

2008 2015

SOx, NOx, dust

ELV or 20k hr derogation

Precursor

2002 - 2003

National Plan

Formulation

EU

LargeCombustion

Plant Directive

Source: EIA


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even the EU Renewables Directive 10% target by 2010 is really about energy security

EUROPEAN ELECTRICITY GENERATION OUTPUT 2000

Source: EIA

0

100

200

300

400

500

600

700

800

900

Russia

Germany

UK

Italy

Poland

Spain

Turkey

Ukraine

Netherlands

CzechRepublic

France

Greece

Kazakhstan

Uzbekistan

Belgium

Romania

Portugal

Denmark

Belarus

Finland

Ireland

Hungary

Yugoslavia

Bulgaria

Azerbaijan

Austria

Turkmenistan

Slovakia

Estonia

Macedonia,TFYR

BosniaandHG

Sweden

Croatia

Slovenia

Moldova

Armenia

Lithuania

Malta

Georgia

Latvia

Kyrgyzstan

Switzerland

Other

Norway

Tajikistan

Albania

Iceland

AnnualGenerationOutput(TWh)

Thermal Nuclear Hydro Geothermal and Other


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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

Source: Eurostat

0

10

20

30

40

50

60

70

80

90

Germ

any

Aust

ria

Portu

gal

Spai

nIta

ly UK

Belg

ium

Irela

nd

Fran

ce

Gree

ce

Neth

erla

nd

Luxe

mbo

urg

Denm

ark

Finl

and

Swed

en

Norw

ay

Price(Euro/MWh)

1997 2003

U l d l i


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. 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

Source: Eurostat

0

20

40

60

80

100

120

140

160

Italy

Germ

any

Portu

gal

Belg

ium

Luxe

mbo

urg

Aust

ria

Fran

ce

Spai

nUK

Neth

erla

nd

Irela

nd

Gree

ce

Swed

en

Norw

ay

Finl

and

Denm

ark

Price(

Euro/MWh)

1997 2003

S k


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Speaker

John Bower is a Senior Research Fellow at theOxford 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 atLondon Business School and his previous career was

in the commodity industry. His experience ranges

from energy trading, at Marc Rich & Co, to risk

management consultancy, with Coopers & Lybrand,

advising commodity traders, producers and

processors in base metal, precious metal, softs and

energy markets. Immediately prior to his PhD he was

Global Controller Metals/Commodities at Deutsche

Morgan Grenfell.

Oxford Institute for Energy Studies

57 Woodstock Road

Oxford OX2 6FA

United Kingdom

Telephone: +44 (0)1865 889 125

Facsimile: +44 (0)1865 310 527

Email: [email protected]

URL: http://www.oxfordenergy.org

Oil Presentation5 EuropeanElectricityMarketsStructureandTradingI JBower 2003

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