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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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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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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
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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 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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European electricity market overview
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
The Directive and retail supply competition
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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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
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 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
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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
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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The Directive and retail supply competition
. 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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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
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Unresolved regulatory issues
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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Unresolved regulatory issues
. 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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Unresolved regulatory issues
. 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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Unresolved regulatory issues
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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Unresolved regulatory issues
. 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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Unresolved regulatory issues
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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Unresolved regulatory issues
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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Unresolved regulatory issues
. 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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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 ??????
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Unresolved regulatory issues
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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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
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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Unresolved regulatory issues
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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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
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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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
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