The electricity market in Germany: RegTP or

REGTP?

GERT BRUNEKREEFTTilburg Law and Economics Center

University of Tilburg, Netherlands

G.Brunekreeft@uvt.nl

http://www.uvt.nl/tilec/

SESSA/CMI

DAE/University of Cambridge/UK

July 2004

Overview

• Institutional background

• The road to rTPA and REGTP

• What happened?

• The margin squeeze

What can be expected next?

GB/TILEC/Jul04 2

• What can be expected next?

• Competition, concentration and unbundling

• New entry

• CO2 prices as a capacity element?

• Concluding remarks

Institutional background

• Energy Act 1998

• 100% end-user eligibility

• low degree of unbundling, while high degree of V.I.

• negotiated third party access (nTPA)

• Competition Law / Federal Cartel Office

GB/TILEC/Jul04 3

• Competition Law / Federal Cartel Office

• essential facilities doctrine (clause 19.4.4):

• access to networks

• non-discriminatory, and,

• fair and reasonable charges

• nTPA

• Association Agreements: VVI, VVII, VVII+

• soon VVIII?

Institutional background (cont’d)

• Cartel Office

• Review of network access, April 2001

• highly critical

• expresses concern about ex-post control

• Ministry of Economics

GB/TILEC/Jul04 4

• Monitoringreport: Aug. 2003

• prepares way to regulated-TPA

• nTPA in electricity “works”, but access charges very high

• nTPA in gas disaster

• Energy Act 2004:

• implementing the EU Directive 2003

• rTPA as from July 2004 plus REGTP

Institutional background (cont’d)

• Energy Act 2004

• Legal and management unbundling as minimally required by EU directive

• Regulated-TPA

GB/TILEC/Jul04 5

• Regulated-TPA

• ex-ante approval of the method to calculate charges (thus control of level is ex post)

• justified by existence of 900 network operators

• following cost principles as in VVII+

• basically RoR regulation (6.5%), but possibility for incentive regulation left open

What happened?

• VVI

• very bad

• VVII

• structure of network access (charges) good,

GB/TILEC/Jul04 6

• structure of network access (charges) good,

• level left to network owners

• VVII+

• following the 2001-Review of Cartel Office

• self-regulation of level of network charges

• allows comparison of network charges

What happened? - The margin squeeze

• Combination of

• vertically integrated firms

• i.e. network and competitive business

• unregulated network charges

leads to margin squeeze of competitive

GB/TILEC/Jul04 7

• leads to margin squeeze of competitive businesses

• Violation of level playing field

• Low competitive activity

• Low entry activity

• bad for investment

• bad for security of supply

What happened? - wholesale prices (EEX)

30.00

40.00

50.00

60.00

eu

ro

/MW

h Base

Peak

3-yr future base

GB/TILEC/Jul04 8

0.00

10.00

20.00

01

/07

/20

02

01

/09

/20

02

01

/11

/20

02

01

/01

/20

03

01

/03

/20

03

01

/05

/20

03

01

/07

/20

03

01

/09

/20

03

01

/11

/20

03

01

/01

/20

04

01

/03

/20

04

eu

ro

/MW

h

3-yr future base

3-yr future peak

Source: EEX

What happened? - End-user prices

14.00

15.00

16.00

17.00

euro

cent/

kW

h Dc w taxes

Dc w/o taxes

GB/TILEC/Jul04 9

9.00

10.00

11.00

12.00

13.00

Jul-9

8Ja

n-99

Jul-9

9Ja

n-00

Jul-0

0Ja

n-01

Jul-0

1Ja

n-02

Jul-0

2Ja

n-03

Jul-0

3

euro

cent/

kW

h

Dc w/o taxes

Dd w taxes

Dd w/o taxes

Source: Eurostat

What happened? - Network charges

3.00

4.00

5.00

6.00

7.00

LV profile

LV meter

MV

GB/TILEC/Jul04 10

0.00

1.00

2.00

3.00

Mar

-02

May

-02

Jul-

02

Sep

-02

Nov-0

2

Jan-0

3

Mar

-03

May

-03

Jul-

03

Sep

-03

Nov-0

3

Jan-0

4

MV

HV

Averaged for different consumer profiles according to VDN. Post-VVII+

Source: VDN, various years.

What happened? - Network charges

• Some observations:

• esp. LV very high

• slightly decreasing LV, slightly increasing HV

• large variation among network operators

GB/TILEC/Jul04 11

• spread smaller since VVII+

• high prices go down, but low prices go up slightly (Growitsch/Wein, 2004)

• LV networks owned by big four charged lower prices than independent networks

• consistent with theory of regulatory threat

What happened? - The margin squeeze

1

VAT

Eco tax

EEX

Network charge

Retail

GB/TILEC/Jul04 12

• Mueller/Wienken (2003) calculate for Autumn 2002, that roughly 40% of dom. cust’s have lower than required minimal margin (i.e. sum of wholesale and retail).

0.00 5.00 10.00 15.00 20.00

ct/kWh

Retail

Source: own calculation

What happened? - The margin squeeze

• Observation:

• margins in wholesale and retail were very low,

• then retail margin restored somewhat (as end-user prices went up a bit and wholesale price stayed low),

GB/TILEC/Jul04 13

low),

• and meanwhile wholesale price goes up at expense of retail margin.

• New entry in generation almost none (except wind)

• Retail: Yello struggles; others (riva ares) gone

• cum. switching rate 2003: 4.3% of households

What’s next? rTPA and REGTP

• REGTP

• more than just a formality? Probably yes

• rTPA

• ex-post control of ex-ante method

• no regulatory gap (by mechanism)

GB/TILEC/Jul04 14

• no regulatory gap (by mechanism)

• hence typically cost-based regulation

• To be expected:

• network charges should go down

• competitive margins should increase

• V.I. will become a problem

• new entry?

Generation capacity and reserves

15.0

20.0

25.0

in G

W

reserves

N.A. cap

GB/TILEC/Jul04 15

Source: Brunekreeft/Twelemann, forthcoming

0.0

5.0

10.0

1995 1996 1997 1998 1999 2000 2001 2002

in G

W

free cap

sum of NA and free

Nuclear phase-out

15000

20000

25000

GB/TILEC/Jul04 16

0

5000

10000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

nuclear cap. (MW)

Source: Pfaffenberger & Hille, 2003.

Renewables

Renewables (% in TWh)

8

10

12

14

GB/TILEC/Jul04 17

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Brunekreeft/Twelemann, forthcoming

Generation capacity

• Still sufficient capacity,

• .. but decreasing

• security of supply is becoming an issue

• lower excess capacity

GB/TILEC/Jul04 18

• lower excess capacity

• reduction in competitive pressure

• new entry

• What happens with nuclear?

• Highly uncertain

• New renewables?

Investment

5000

6000

7000

8000

9000

Generation

T & D

total

GB/TILEC/Jul04 19

Source: Brunekreeft/Twelemann, forthcoming

0

1000

2000

3000

4000

1988

1990

1992

1994

1996

1998

2000

2002

total

total AB

total NB

In million euro

ETS NAP

• German National Allocation Plan

• Free allocation of CO2 rights

• incumbents & new entrants

• old: historic emission

GB/TILEC/Jul04 20

• old: historic emission

• new: benchmarking with upper and lower limit

• free CO2 rights increase variable costs for all,

• but lower capital costs, and thus entry price

• Thus, CO2 price mimics capacity element for new plant

ETS and new gas

40

45

50

55

60

65

Ele

ctri

city

pri

ce (

euro

/MW

h)

Scen. 1 free

Scen. 2 paid

Var. Cos t I

GB/TILEC/Jul04 21

Source: Brunekreeft/Twelemann, forthcoming

15

20

25

30

35

15

17

19

21

23

25

27

29

31

33

35

37

39

41

CO2 price (euro/TCO2)

Ele

ctri

city

pri

ce (

euro

/MW

h)

Var. Cos t I

net power price

Concluding remarks

• nTPA did not work

• rTPA likely

• to improve competition

• and to reduce prices

• however, now high G-concentration and vertical

GB/TILEC/Jul04 22

• however, now high G-concentration and vertical integration will become problem

• Regulation improves opportunities for necessary new investment

• ETS promotes competition (threat of new entry) and security of supply

• Institutional uncertainty should be reduced!