On Liberalised Energy Markets

Presentation for AmCham

Jerzy Majcher Ph. DPrincipal ConsultantWS Atkins Polska Warsaw 10 of May 2006

Topics to be covered during the presentation

1. Liberalised markets - basic conditions

2. The physical system (electricity)Networks (tarification)ProductionShort term prices (spot)

Contract markets

3. European Energy MarketsCompetition Electricity vs Natural Gas

4. Polish introduction of liberalisation principles

I

1. Basic Conditions for an open Market

Liberalisation - Questions to be answered

Objectives - why do we liberalise?Economic theory

To what extent is theory theory applicable to the electricity sector? What about gas?

Regulatory framework - Is this necessary?

I

The European Union

A prerequisite is competition-Implication EU Directive 55/2003

I

Liberalisation - Objectives in Norway (1991)

Economic efficiency - not privatisation

new investmentsutilisation of invested capital in the industry

--> networks

--> production

This has formed the basis for the regulatory framework.

Perfect Competition - Basic ConditionsMany independent buyers and sellers of each item.

Every player in the market should have complete knowledge about prices and other matters that may influence their actions.

The producers must produce homogenous products.

No transaction costs.

Possible to establish new business.

Every player in the market must act in a rational way.

Players in the Market BrokersMarket Makers

Industrial and other large customers

Distributors (suppliers/retailers)

Generators

Smaller consumers (households)

Traders

Similarity:Similarity:Transport via networks Transport via networks

Difference:Difference:Gas can be stored - electricity not Gas can be stored - electricity not Different gas qualities - electricity is a Different gas qualities - electricity is a homogenous product homogenous product A few number of enterprises control the gas A few number of enterprises control the gas (production) resources - many producers of (production) resources - many producers of electricityelectricityElectricity must be centraly balanced in every Electricity must be centraly balanced in every timetime

Is it possible to establish a competitive gas Is it possible to establish a competitive gas market? market? Perhaps - presupposing a satisfactory Perhaps - presupposing a satisfactory regulatory framework and a strong regulatory regulatory framework and a strong regulatory body. body.

Gas vs. Electricity

Structure of the German Gas Industry

national production import

transportcompanies

regionalsuppliers

householdscommercialindustrypower plants

municipalsuppliers

(5+X)Ruhrgas ca. 2/3

(40)

(700)

market sharefinal

customers30 %

35 %

35 %

number ofcompanies

20% 80%

Germany - Status the Gas market

In the theory 100% open since August 2000. In reality it is very difficult for new players to serve customers seeking new suppliers. Some suppliers (new entrants) have managed to get though.

Regulatory framework: Die Verbändevereinbarung (Gas). Does not provide the necessary regulatory framework from the traders/new entrants point of view.

Problem(s):

Market structure (dominant players), long delivery chains, Take or Pay contracts. Oil price dependency in contracts. No independent regulatory body.

The customers expect lower prices, but are facing rather high prices due to the oil price dependency in the supply contracts.

ca. 900 communalutilities;

Structure of the German Electricity Industry

Distribution

Generation

< 4 Verbund companies

ca. 70 regional utilities

80%11% 9%

36% 33%31%

Generators

Distribution

End Users

Transmission

(grid company)

= Physical energy flow = Financial agreements

Exchange

Spot

Contract

Regulator

ISO

Balancingpower

Structure of electricity sector

An open Market demandsPolitical acceptance

Separation between monopoly and competitive activities

Definition of players responsibilities, especially concerning system operation (SO)-

Definition of the Regulator’s role - that is a system of rules, guidelines and licences

What is Market Power?

One or more players can influence the prices

Can be perfectly legal, but abuse of market power would normally be considered as illegal

Access to Market InformationTo reduce market power - Equal access to public information for all players in the market is absolutely necessary. This should include: use of interconnectors (hourly flow), maintenance plans generators above a certain size, possible congestions etc.But, must be a balance between company secrets and the players need for informationUnbalanced access to information gives an inefficient and unfair market

Nord Pool offers access to a database with info.

The Norpool networkThe Norpool network::

observed physical bottlenecks

LPXEEX

= power exchanges

GAS Pipelines

Transport costs (tarification) Transport costs (tarification) Theory and ExperienceTheory and Experience

1.1. NTPA vs. RTPA. NTPA vs. RTPA.

2.2. TRANSACTION based vs. NON TRANSACTION TRANSACTION based vs. NON TRANSACTION based tariffs.based tariffs.

3.3. Cost reflective tariffs. What do we mean by this? Cost reflective tariffs. What do we mean by this?

4.4. Cost of transport (according to the theory) Cost of transport (according to the theory) = short term = short term value of marginal losses + cost of bottleneck. value of marginal losses + cost of bottleneck. Challenge: How to deal with the fixed costs.Challenge: How to deal with the fixed costs.

5.5. Only a NON-transaction based tariff can facilitate trade Only a NON-transaction based tariff can facilitate trade and ensure liquid and competitive markets!and ensure liquid and competitive markets!

6.6. Solution: Point - tariff / nodal price reflecting the short Solution: Point - tariff / nodal price reflecting the short run marginal costrun marginal cost

Optimal Transmission Pricing - Optimal Transmission Pricing - TheoryTheory

0

10

20

30

40

50

60

70

1 2 3 4 5 6 7 8 9 10 11

Price/cost

MW

Price / cost = short-run marginal cost

Covered by fixed element in the tariff

P1

P2

Average cost

Demand

Short-run marginal costsystem with surplus capacity

Long-run marginal cost

The Point Tariff PrincipleThe Point Tariff Principle

1.1. Both consumers (exit/L) and generators (entry/G) Both consumers (exit/L) and generators (entry/G) must pay for the use of the network. must pay for the use of the network.

2.2. The exit/entry fees refer to the point of connection. The exit/entry fees refer to the point of connection. The fees give access to the whole (interconnected) The fees give access to the whole (interconnected) network (electricity market).network (electricity market).

3.3. The exit/entry fees shall The exit/entry fees shall notnot be related to the contract be related to the contract path. Basis for billing is the physical energy flow path. Basis for billing is the physical energy flow measured at the point of connection. measured at the point of connection.

4.4. The exit/entry fees shall reflect the system load flow - The exit/entry fees shall reflect the system load flow - that is marginal losses shall be included in the tariffs. that is marginal losses shall be included in the tariffs.

5.5. Discrimination against customers is not allowed. Discrimination against customers is not allowed.

Transport of electricity - integrated systems

Generator Generator

Consumer

Generator, Generator

Consumer

Consumer

ConsumerConsumer Consumer

Consumer

Load flow/energy flow, point of connection

Main grid (200-400 kV) country 1

Lokal network Lokal network Lokal network Lokal network

Regional network Regional network

Generator

Consumer

Consumer Consumerr

Main grid (200-400 kV)country n

Regional network Lokal networkRegional network

BottleneckTransit fee?

Tariffication - Status 2001Tariffication - Status 2001

“Point” tariffs

introduced exit :

exit + entry :

TPA possible :

..Network Congestions Network Congestions

(Bottleneck)(Bottleneck)

How do we solve the capacity problem?How do we solve the capacity problem?

1.1.Basically there are two different models:Basically there are two different models:

Counter purchase (actively using the power stations), Counter purchase (actively using the power stations),

oror

2.2.Price differences between spot areas (Norwegian Price differences between spot areas (Norwegian

solution), called “market splitting”solution), called “market splitting”

Example: Spot prices Scandinavia Example: Spot prices Scandinavia 27.11.200127.11.2001 Stunde Oslo Kr.sand Bergen Tr.heim Tromsø Finland Sweden DK-West DK-East System

1 170.24 170.24 170.24 170.24 170.24 170.24 170.24 170.24 170.24 170.242 166.75 166.75 166.75 166.75 166.75 166.75 166.75 166.75 166.75 166.753 165.75 165.75 165.75 165.75 165.75 165.75 165.75 165.75 165.75 165.754 166.17 166.17 166.17 166.17 166.17 166.17 166.17 166.17 166.17 166.175 167.65 167.65 167.65 167.65 167.65 167.65 167.65 167.65 167.65 167.656 173.55 173.55 173.55 170.59 170.59 173.55 173.55 173.55 173.55 173.407 180.97 180.97 180.97 173.39 173.39 182.95 182.95 180.97 182.95 181.458 200.04 200.04 200.04 181.87 181.87 212.43 212.43 212.43 312.33 201.929 229.24 229.24 229.24 185.63 185.63 229.24 229.24 229.24 308.30 220.2910 203.28 203.28 203.28 192.54 192.54 203.28 203.28 203.28 203.28 204.0211 197.48 197.48 197.48 189.65 189.65 197.48 197.48 197.48 197.48 198.1612 193.48 193.48 193.48 193.48 193.48 193.48 193.48 193.48 193.48 194.3413 189.74 189.74 189.74 189.74 189.74 189.74 189.74 189.74 189.74 190.2314 189.15 189.15 189.15 189.15 189.15 189.15 189.15 189.15 189.15 189.6115 189.23 189.23 189.23 189.23 189.23 189.23 189.23 189.23 189.23 189.6816 189.78 189.78 189.78 189.50 189.50 190.42 190.42 189.78 190.42 190.5617 195.85 195.85 195.85 188.64 188.64 211.47 211.47 195.85 416.75 199.9318 200.65 200.65 200.65 187.12 187.12 201.13 201.13 200.65 432.19 200.8019 193.92 193.92 193.92 184.93 184.93 193.92 193.92 193.92 359.22 192.5420 188.10 188.10 188.10 184.17 184.17 188.10 188.10 188.10 188.10 187.4021 180.04 180.04 180.04 180.04 180.04 180.04 180.04 180.04 180.04 180.0422 178.16 178.16 178.16 178.16 178.16 178.16 178.16 178.16 178.16 178.1623 174.74 174.74 174.74 173.27 173.27 174.74 174.74 174.74 174.74 174.6724 169.06 169.06 169.06 169.06 169.06 169.06 169.06 169.06 169.06 169.06

..

European Electricity Prices 8.08.2000

Source: Heren Report

Gielda Energii SA (average price) 25,55

Installed production capacity i Nordic countries 1995

0

5000

10000

15000

20000

25000

30000

35000

Norway Sweden Denmark Finland

Wind

Gasturb.

Back-pres.

Oil/coal-fired

Nuclear

Hydro

MW

2.2 2.2 ProductionProduction

0

100

200

300

400

500

600

B D E F GR I L NL A P CH

Consumption

Production

TWh/Jahr

Electricity production and consumption, UCTE 1999

2.2 Production

Principle for price calculation- Short term prices

Price

Balance

Supply Demand

Marginal production costs, Nordic countries Marginal production costs, Nordic countries 19971997

05

101520253035404550

50 100

150

200

250

300

350

400

Øre/kWh

TWh/year

Hydro NuclearCoal fired

Oil fired

Gas turbines

Consumption

Sweden - Marginal Production Costs1997Sweden - Marginal Production Costs1997

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180

Possible production per year - TWh

øre/kWh

Hydro power

NuclearCHP Industry

CHP District heating

Oil fired

Gas turbines

Max hydro prod. : 79 TWhMin. hydro prod. : 52 TWh

Finland - Marginal Production Costs 1997Finland - Marginal Production Costs 1997

0

10

20

30

40

50

60

0 10 20 30 40 50 60 70 80 90 100

Possible production per year- TWh

øre/kWh

Hydro Nuclear

CHP IndustryCHP District heating

Oil fired

Gas turbinesMax. hydro prod. : 10,1 TWhMin. hydro prod. : 15,9 TWh

Denmark (Elsam) - Marginal Production Denmark (Elsam) - Marginal Production Costs1997Costs1997

0

5

10

15

20

25

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28

Possible production per year - TWh

øre/kWh

Coal base load1

Coalbase load 2

Coal medium load

CHP District heating

Coal base load 3

Oil fired

Germany - Load Profile (Consumption)Germany - Load Profile (Consumption)

30

40

50

60

70

80

0 4 8 12 16 20 24 h

Dezember 1999August 1999

GW

Demand Electric Energy in GermanyDemand Electric Energy in Germany

-

10

20

30

40

50

60

70

80

90

Di 04.12.01 Mi 05.12.01 Do 06.12.01 Fr 07.12.01 Sa 08.12.01 So 09.12.01 Mo 10.12.01

Prognose Ist-Zahlen

weekend

Exchange with the Neighbouring Countries

SDK

PL

CZ

ACH

F

L

NL

99

1953

612

5211

9088

480

4203

17159

639Stromaustausch Deutschlands mit den Nachbarländern 1999 in GWh

Germany‘s interchange of electricity with

neighbouring countries 1999 in

GWh

Summe Importe: 40409 GWh

Summe Exporte: 39444 GWh

Sum of imports: 40409 GWh

Sum of exports: 39444 GWh

Factors that may influence Supply Factors that may influence Supply (Production) and Demand (Consumption) - 1(Production) and Demand (Consumption) - 1

1. Maintenance periods2. Failures (outages)3. Water reservoirs, rivers4. Fuel costs5. Exports and imports

1. Start and stop costs2. River temperature (cooling)3. etc.

Production:Production:

Factors that may influence Supply Factors that may influence Supply (Production) and Demand (Consumption) - 2(Production) and Demand (Consumption) - 2

1. Time of day2. Working days3. Vacation/weekends4. Trade conditions

(economy)5. Weather

Demand:Demand:

1.Access to the networks (network availability)

2.Access costs3.The market development

the last days (prices)4.Trading strategy

Supply and demandSupply and demand::

..

0

10

20

30

40

50

60

70

80

90

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

DM/MWh

Norway - Historic Spot PricesNorway - Historic Spot Prices

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

90,0

Liefe

rtag

Mi,

31.0

3.99

Fr, 2

3.04

.99

So, 1

6.05

.99

Di, 0

8.06

.99

Do, 0

1.07

.99

Sa, 2

4.07

.99

Mo,

16.

08.9

9

Mi,

08.0

9.99

Fr, 0

1.10

.99

So, 2

4.10

.99

Di, 1

6.11

.99

Do, 0

9.12

.99

Sa. 0

1. Ja

n

Mo.

24.

Jan

Mi.

16. F

eb

Fr. 1

0. M

rz

So. 0

2. A

pr

Di. 2

5. A

pr

Do. 1

8. M

ai

Sa. 1

0. Ju

n

Mo.

03.

Jul

Mi.

26. J

ul

Fr. 1

8. A

ug

So. 1

0. S

ep

Di. 0

3. O

kt

Do. 2

6. O

kt

Sa. 1

8. N

ov

Mo.

11.

Dez

Mi.

03. J

an

DM/MWh

Cepi Base (ab 1.1.2001: GPI Base) Cepi Peak (ab 1.1.2001 GPI Peak)

SWEP Nordpool

*

* gleitender Durchschnitt (5 Tage)

OsternPfingsten

Hohes Wasserangebot in Skandinavien

Kaltes Wetter in Deutschland

Verlängerte Revision des KKW Grafenrheinfeld

Anstieg Primärenergiepreise

Sinkende Temperaturen

Weihnachten

Entwicklung der internationalen Energie-handelspreise

Spotpreise 1997 (Einstündige) Nord Pool (Norwegen/Schweden)

0

5

10

15

20

25

30

35

40

45

50

22.j

un

23.j

un

24.j

un

25.j

un

26.j

un

27.j

un

28.j

un

DM/MWh

Spot Prices Norway 1997 (Hydro Power Spot Prices Norway 1997 (Hydro Power System)System)

0

5

10

15

20

25

30

35

40

45

50

22.j

un

23.j

un

24.j

un

25.j

un

26.j

un

27.j

un

28.j

un

DM/MWh

Spot Prices UK 1997 (Thermal System)Spot Prices UK 1997 (Thermal System)

Spot Prices in Germany - Daily AverageSpot Prices in Germany - Daily Average

LPX-BASE

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

15.06.00 15.08.00 15.10.00 15.12.00 15.02.01 15.04.01 15.06.01 15.08.01 15.10.01 15.12.01 15.02.02 15.04.02

Eu

ro/M

Wh

Comparing different SystemsComparing different Systems

Hydro power Thermal power

Significant price changes from season to season

Normally not significant changes from season to season

Minor changes within 24 hours

Significant changes within 24 hours

Metered

0

2

4

6

8

10

12

1 5 9 13 17 21

Spot trade

Bilateral trade

Sale to System Operator

Purchase from System Operator

Organising the trade in spot, regulating and contract markets

Price

Hour

Scandinavia

Trade volume of energy on SPOT and Futures markets

0

10

20

30

40

50

60

Styczeń Marzec Maj Lipiec Wrzesień

FUTURES

SPOT

2002

TWh

Prices EEX 14.06.04r

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

lata

lata

EU

RO

/MW

h

Pasmo

szczyt

2005 2006 2007 2008 2009 2010

Price forecast 2005 – Futures marketBase loadPeak load

2006 2007 2008 2009 2010

CO2 Raported Volumes & Values, 2004-2005 2004 2005 Mt Eur-Million Mt Eur,Million

EU ETS-Total OTC+Exchange Bilateral

17 9,7 7,3

127 N/A N/A

362 262 100

7 218 5 400 1 818

CDM 60 188 397 1 984 CDM (2nd) 0 0 4 50 JI 9 27 28 96 Other 7,9 34 7,8 52 Total 94 377 799 9 401 Source: Point Carbon

ETS market- in EU

Price changes after ETS implementation in EU

SPOT Electricity Prices Going Up ….(Eur/MWh)

Market 2004 2005 Change in SPOT Price

%Change

Germany (EEX)

28,5 46,0 17,5 61,4

Nordic (NordPool)

28,9 29,3 0,4 1,4

Spain (Omel) 27,9 53,6 25,7 92,1

The Netherlandes (APX)

31,6 52,4 20,8 65,8

Austria (EXAA)

28,1 46,7 18,6 66,1

France (Powernext)

28,7 46,6 17,9 58,2

Average 29,0 45,7 16,8 57,6

Source: Point Carbon, The numbers for Spain and Netherlandes are taken from Montel

Retail prices on Germany Market –household Retail prices on Germany Market –household with consumption 3500kWh/y –Monthly feewith consumption 3500kWh/y –Monthly fee

0

5

10

15

20

25

30

35

40

45

50

1998 1999 2000 2001 2002 2003

Podatki i opłaty

Wytwarzanie, przesył i rozdział

49,95Eu

37,6Eu

25,05

40,63Eu

49,93Eu

20,18

29,75

Opłata za energetykę odnawialnąEnergię w skojarzeniuPodatkiKoncesjeOpłatyVAT

ok.0%

+63%

-21%

Mini-Forums/Regions

Central Eastern Europe

Co-ordinated auctions in region CEE

Separated Auctions

2004 2005 2006

Co-ordinated auctions

TF SoS 3 TSOsCEE Mini-ForumTF CA, TF CCF

5 TSOs 8 TSOs ?

2007

LPXEEX LPXLPX

Trans-granicznepołączeniaelektroenergetyczne wEuropie

Interconnections of power systems in Europe with other systems

8760

t[ h ]

Za łożenia: - roczny koszt 1 M W m ocy osiągalne j 200 tys. zł - średn i koszt zm ienny energ ii elektryczne j w prowadzonej do sieci 70 zł/MW h - zapotrzebow anie pokrywane przez jednakowe jednostki wytwórcze pracujące z rocznym czasem wykorzystania m ocy osiągalnej

E [M W h]P [M W -h]

750050004500300015001000750

0

24 000D - Zapotrzebowanie pokrywane przez jednostki wytwórcze o średnim czasie wykorzystania m ocy osiągalne j około 750 h/rok

C - Zapotrzebowanie pokrywane przez jednostki wytwórcze o średnim czasie wykorzystania m ocy osiągalne j około 1 500 h/rok

B - Zapotrzebowanie pokrywane przez jednostki wytwórcze o średnim czasie wykorzystania m ocy osiągalne j około 4 500 h/rok

A - Zapotrzebowanie pokrywane przez jednostki wytwórcze o średnim czasie wykorzystania m ocy osiągalne j około 7 500 h/rok

D

C

B

A

A: K = ( 200 000 / 7 500 ) + 70 97 zł / M W h

B: K = ( 200 000 / 4 500 ) + 70 114.5 zł / M W h

C: K = ( 200 000 / 1 500 ) + 70 203 zł / MW h

D: K = ( 200 000 / 750 ) + 70 337 zł / MW h

CA

CA

CA

CA

II STREFAszczyt popołudniowy

I STR EFAszczyt przedpołudniowy

III STREFApozostałe godziny

LZ LZX, XI, XII, I, II, III

Zim a (Z)IV, V, VI,V II, V III, IX

Lato (L)

Structure of tariff – sezonal, zone prices

Prognoza cen w Polsce

0,0

20,0

40,0

60,0

80,0

100,0

120,0

140,0

160,0

180,0

200,0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Lata

zł/M

Wh

2005 2010 2020

Ceny nowych jednostek wytwórczych

Ceny wynikające z krótkookresowych kosztów krańcowych

Prognoza cen rynkowych

Price forecast in Poland, withought import and ETS influence

How will be customers structure after liberalisation?

Full liberalisation on 1 july 2007 !!!

•14,2M additional customers legitimated to TPA

•4,7 M households with demand less than 1000kWh/y•How many balancing groups will be set up? Whot kinde of relationships will they establish with distributors? Will it be complementary activity or sharp competition?

•How to assure on-time measures of energy? Will be set up a new group of – Measurement Operator?

•How to cover on-time measurement costs, or how to improve demand forecast?

Hase the liberalisation process meet objectives in Europe?•Is it more safety? What about black outs?

•Is it more efficiet sector? Benefits are consumed by fiscal (tax) systems.

•Is energy cheaper for end users?

Thank you for your attention

AmCham

Jerzy Majcher Ph. DPrincipal ConsultantWS Atkins PolskaJerzy.Majcher@atkinsglobal.plMobile:+48(0)607-461-270 Warsaw 10 of May 2006