Why & How the EU Regulates “Deregulated” Energy Markets?

Why & how the EU regulates

“deregulated” energy markets?

DG COMP – Brussels – 2nd December 2013

Jean-Michel Glachant Director Florence School of Regulation

European University Institute (Florence, Italy)

www.florence-school.eu

Regulating the deregulated…

1. Initial roadmap (1.0) Stephen Littlechild & UK: to deregulate

the market zone; to regulate its monopoly “gates & bridges”

2. Version (2.0) Bill Hogan & California: power traders cannot

self-organise their power markets

3. Version (3.0) Angela Merkel & Germany: EU CCGT target model

cannot swallow massive intermittent RES

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(1) Initial roadmap (1.0) Littlechild & the UK: Deregulate market zone; regulate its monopoly gates & bridges

White paper end 80’; Opening E&W Pool 1st April 1990

¤ Open entry in generation (production), trade (wholesale) and supply (retail)

¤ it opens doors for deregulated market

¤ new technology CCGT + cheap gas (“Dash for gas”) push actual entry

¤ Unbundling of grids as market’s “monopoly gates & bridges”

¤ Regulation to get “Third Party Access” to market and grid neutrality vis-à-vis the market forces

¤”Incentive regulation” to make grid regulation mimic market incentives

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(1) Initial roadmap (1.0) Cted

¤ Deregulated Market Zone

¤ Market rules dealt before market opening between ministry, generators and suppliers

¤ Market rules are not “public” but private arrangement between generators and suppliers; only market players can change these rules

¤ Hence hard to bypass market power of “generator coal duopoly” + “sleeping nuclear” > takes 10 years + market entire redesign

¤ Incentive Regulation for grids as market’s “monopoly gates & bridges”

¤ Congestion management not put “in the market” (it is grid affair)

¤ Hence market equilibrium with no grid feasibility; grid constraints treated apart after market equilibrium (“Uplift”) > Logical? Or Illogical?

¤ Incentive for congestion management (Cost past through > Performance Based Regulation – also means “risk sharing” between grid and its users)

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(2) Version (2.0) Bill Hogan & California: Power traders cannot self-organise their power markets

¤ OK cannot forget Market Power - and it is not only HHI (ownership structure of industry assets) it is mainly “supply power” (= effect on supply equilibrium of any unilateral capacity withdrawal)

¤ OK cannot forget Market Abuse and it is not market power but “market gaming” (hence see ENRON & FERC OMOI etc. - MIFID; REMIT)

¤ BUT “Something’s still missing”: (Bill Hogan) wholesale power market is “incomplete market” - (typically “Day Ahead”) Wholesale market traders:

1/ do not know if “market equilibrium” is feasible for the grid or not; Grid congestion not seen (foreseen) in decentralized market equilibrium (nobody knows enough to predict)

2/ do not know either if “market equilibrium” is “supply equilibrium” or not;

System adequacy (system balancing) cannot be predicted in decentralized day ahead market equilibrium (nobody knows enough to predict)

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(2) Version (2.0) Cted

¤ Whom is able to “complete” incompleteness of Day Ahead (or Intraday) wholesale market? Someone able to centralize all market + grid information… It is not a market player… but the damned grid monopoly acting as “System Operator”> SYSTEM OPERATOR is MARKET SUPER WIZARD

¤ System Operator completes incomplete markets only in its zone of operation > hence markets completeness (= actual implementation of market equilibrium) is “zoned” by nature (by System Operation organization)

¤To go from one market zone to the other = to jump from one system operation zone to the other

¤ Explicit jump (up to you decentralized market player to explicitly predict)

¤ Implicit jump (system operators to implicitly predict for the whole market)

¤ Market splitting (or) Market coupling (&) civil war between PXs for Intraday

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To conclude (1.0) and (2.0)

1/ In Power sector the Market Area cannot be entirely unbundled from the Grid Monopoly

• Feasibility of ex ante market equilibrium is constrained by actual Kirchhoff Laws for grid flows’.

• Adequacy of market equilibrium as actual system equilibrium is constrained by non-storability of power & high social cost of curtailment.

2/ the Wholesale Market (typically Day Ahead) is always half blind

• A whole sequence of markets needed to go step by step to full implementation of day ahead provisional equilibrium.

• This sequence is the “market design”:

// Inside a “market zone” – “system operation zone”//

Day Ahead > Congestion management > Intraday > Balancing

// Across market zones//

Market Splitting (or) Market Coupling (or) Explicit Auctioning

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Version (3.0) Angela Merkel & Germany

• Large-scale development of intermittent RES kept out of the market (priority dispatch, FIT or FIP) => Increasing gap between wholesale market prices & consumer bills

… but anyway the market has not been designed to host intermittent RES!

• RES are not flexible due to : “0” marginal cost + dependence on resource availability

Pricing at times of scarcity (Price-caps) & at times of abundance (negative prices) becomes key.

• Flexible back-up resources must get their return while running less hours (“residual demand” after RES priority dispatch / at lower prices ?).

Can scarcity pricing in an Energy-only market deliver an adequate return ? Are capacity remuneration mechanisms needed ?

Beware that Long-term adequacy/ Short-term flexibility do not match ! 8


Version (3.0) Angela Merkel & Germany. Cted

• Existing zones (time & space) must be revisited. Finer temporal and spatial granularity are needed as:

– Hourly products do not match the variations of RES production (leaving within-hour balancing responsibility to the TSOs) => new products 15 min, 5 min?

– National zones are not adequate boundaries

… and any adequate zone (> Nodal) cannot hold at all times

Trade-off between: 1/ Simplifications to increase market liquidity and ease cross-border exchanges and 2/ Cost-reflectivity

• The sequence of markets is impacted: as RES production is difficult to

forecast, more trade take place closer to production time.

Need to ensure price consistency across Day-ahead/ Intraday/ Balancing:

– Wholesale day-ahead markets vs. Reserves contracted by TSOs

– Transmission pricing consistency all along the sequence of markets

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www.florence-school.eu 10

Thank you for your attention Email contact: [email protected] Follow me on Twitter: @JMGlachant Read the Journal I am chief-editor of: EEEP “Economics of Energy and Environmental Policy”

My web site: http://www.florence-school.eu

mailto:[email protected]



Why & How the EU Regulates “Deregulated” Energy Markets?

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