opening electricity industry to investors: an academic perspective
TRANSCRIPT
Medelec – EurelectricBrussels - 6 May 2015
Opening Electricity Industry to Investors: an academic perspective
Jean-Michel GlachantLoyola de Palacio Prof. & Director Florence School of Regulation
European University Institute (Florence)
Robert Schuman Centre for Advanced Studies Florence School of Regulation & Loyola de Palacio
Chair
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EU power market opening along 10 years of Barroso‘s Commissions
2
Day-ahead market
Intraday markets
Balancing market
Reserves/ ancillary services
markets
Explicit auctions for transmission
capacity
Implicit auctions
Market coupling
Market splitting
Capacity markets
Bilateral / OTC
Long term contracts
Flexibility market
Baseload product
Peak load product
Congestion management
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I will simplify around 4 blocks only …
3
Entry in generationAccess to
1 MW consumers
NO Entry in generation
Entry in generation
NO Access to grid
NO Access to consumers
Entry in generation
only IF
2- Monopoly +
LT fran. IPPs
Access to grid NO Access to consumers
1- Monopoly
Access to grid
3- Single Buyer + Wh. Market
4- Wh. Market + Eligible xMW
NO Access to grid
Long Term contract with
monopoly
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Model 1 (-)
Monopoly
Model 2 (+)
Franchised IPPs
Model 3 (++)
Single Buyer + WholesaleCompetition
Model 4 (+++)
Wholesale Comp.+ Eligible Consumers+ Retail S.B.
Power sector can become more like an open commodity industryBut:• More complexity, regulation, IT infrastructure, etc• AND More structural changes needed
Let’s simplify it a bit: 4 basic models of opening
4
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Introduction “Opening power industry to investors :
4 basic industry models with or without market”
1.(Model 1) No opening
2.(Model 2) Opening to “franchised” generation
3. (Model 3) Opening to generation competition
4. (Model 4) Opening to eligible (xMW)consumers
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Model (1) Monopoly(ies)
Generation
Transmission
Distribution/Retail
Consumers
Generation
Transmission
Distribution/Retail
Consumers
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Model 1: MonopolyDescription
• Full vertical integration– Some distribution companies may be unbundled
• Central planning of generation & network• Cost-of-service remuneration of each
vertically integrated utility regulated tariffs• Wholesale transactions
– between vertically integrated utilities – between a distributor & a vertically integrated utility
with wheeling transmission charges• Limited incentive regulation is possible• Social policy obligations
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Model 1: MonopolyComments
• Most risks are passed to consumers– mistakes in investment unit size &location,
demand forecast, techno. obsolescence, etc. • Abuse of social policy obligations (utility as tax
collector)– indigenous fuels, fuel diversity, nuclear moratoria,
electricity discounts, local taxes, etc.• Abuse of “Utility-sweeping”, regulatory lag &
“lack of funds”– No adequate tariffs & rate of return to utility>
Underinvestment & excessive operational costs• Pressure from cheaper potential new entrants
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Introduction “Opening power industry to investors :
4 basic industry models with or without market”
1.(Model 1) No opening
2.(Model 2) Opening to “franchised” generation
3. (Model 3) Opening to generation competition
4. (Model 4) Opening to eligible (xMW)consumers
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Model (2) Monopoly + “Franchised” Ipps
Generation
Transmission
Distribution/Retail
Consumers
IPP
IPP
IPP
IPP
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Model 2: Franchised IPPs• IPPs compete to get the “monopoly power” at generation stage
• “LT contracts” give them Franchise: “quasi vertical integration”
• Central planning of generation & network is kept by incumbent monopoly. Bad planning & bad contracting are major risks
• Limited Reform because wholesale transactions implemented by incumbent integrated Monopoly (but Chinese trick: price guaranteed; not volume dispatched)
• Costs of competitive bidding of IPP Franchise regulated tariffs (risks passed to consumers as in Monopoly model)
• Some incentive regulation is possible (performance based contract & profit sharing; etc. )
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Introduction “Opening power industry to investors :
4 basic industry models with or without market”
1.(Model 1) No opening
2.(Model 2) Opening to “franchised” generation
3. (Model 3) Opening to generation competition
4. (Model 4) Opening to eligible (xMW)consumers
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(Model (3) From <Monopoly + IPPs> to <Single Buyer + Wholesale Market >
IPP
Single Buyer
Distribution/Retailer
Consumer
IPP Divest.
Distribution/Retailer
Consumer
IPP
Single Buyer
Distribution/Retailer
Consumer
IPP
Distribution/Retailer
Consumer
Owngeneration
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Model 3: Single BuyerDescription (1)
• Less vertical integration than model 1 & 2• Independent Power Producers (IPPs) compete to sell to the
single buyera/ Ex Ante competition (e.g. bids) in construction, operation & negotiation of contracts (PPAs) with the single buyerb/ Ex Ante & Ex Post competition: Single Buyer buy Wholesale Market with no LT contract with IPPs
• Is Single Buyer responsible for generation adequacy? LT contracts? Capacity Options?
• Some economic incentives with LT contracts–“availability” payments; indexation of variable costs
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Model 3: Single BuyerDescription (2)
• Cost-of-service, PPA contracts & social policy obligations regulated tariff
• Access to consumers: as in model 1. IPPs do not have retail access
• Single Buyer (via consumers’ tariffs) can take the generators’ risk in LT contracts
• Independence of the Single Buyer becomes a critical issue (Merit Order & economic dispatch of IPPs)
• The transmission grid becomes key implementation
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Model 3: Single BuyerDescription (3)
• Various degrees of competition on the generation side, while the purchasing agency can keep centralized strategic control (capacity adequacy & technology mix; merit order)
• But if Single Buyer controls it keeps typical drawbacks of centralized planning
• Risk of IPPs being made LT contracts is passed to consumers lower capital costs & easier to raise capital
• If LT contracts used it requires effective control of contracting & implementation is needed (corruption likely)
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Introduction “Opening power industry to investors :
4 basic industry models with or without market”
1.(Model 1) No opening
2.(Model 2) Opening to “franchised” generation
3. (Model 3) Opening to generation competition
4. (Model 4) Opening to eligible (xMW)consumers
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(Model 4) Wholesale Market +eligible consumers
Generator
Power Exchange
Supplier
Eligibleconsumer
Generator Generator
Distributor/Retailer
Captiveconsumer
Supplier Distributor/Retailer
Eligibleconsumer
Captiveconsumer
Wholesalemarket
Retailmarket
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Model 4: Wholesale competitionDescription (1)
• Free transactions between distributors & generators, thus sharing risks
• Distributors (now multiple purchasing agencies) maintain a monopoly over final consumers regulated tariffs
• Social policy obligations must be charged via regulated tariffs
• No central planning of generation, free entry • Generation stranded costs & benefits appear
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Model 4: Wholesale competitionDescription (2)
• Trading arrangements– open access & ancillary services system operator– organized markets (spot, derivatives) market
operator (not a single buyer, but an auctioneer)– bilateral wholesale contracts– IPPs may choose between contracts & the spot
market– regulated network access charges
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Model 4: Wholesale competitionComments
• IPPs may / may not be vertically integrated with distributors (risk of self dealing)
• Issues of market power are now relevant• Long term guarantee of supply is in principle left to the
market: will it work?• Strong incentive to efficiency in generation• Any pressure from consumers to arrive at retail
competition : depends level regulated tariffs
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Conclusion “Opening power industry to investors : 4 basic
industry models with or without market”
1. Choice of model depends appetite of public authorities for power reforms &
expectations from Power Opening (Capital flow? Technology renewal? Efficient
management? Stop energy subsidy? etc.)
2. Opening to “franchised” generation (Monopoly + Franchised IPPs) needs
limited reforms BUT all risks (volumes, technical options & contract formulas) for
consumers (except if Gov. breaches contract…)
3. Opening to generation competition (Single Buyer + Wholesale Market) more
reform needed & investment risks transferred to generators. BUT to get capacity
adequacy? Capacity incentives or not?
4. Opening to eligible (xMW)consumers (Wholesale Market + eligible Wh.
Consumers + single buyer retail) much more reform needed & risks are transferred
both to generators & eligible consumers while retail can stay “Single Buyer ”with
some “capacity incentives”?
Florence School offers you World First Online Course “Power Regulation”
•Course directed by Ignacio Pérez-Arriaga (from his own course @MIT)•20 weeks of flexible online training •Exclusive access to Pérez-Arriaga’s textbook Regulation of Power Sector•Direct interaction with a Faculty of leading experts •A Certificate of attendance (by FSR & by Comillas University)•Support from the whole FSR Online Community First edition oversubscribed (200 registered + 40 waiting list)Next term starts November 2015
http://florenceonlineschool.eui.eu/
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Thank you for your attentionEmail contact: [email protected]
Follow me on Twitter / already 7 575 tweets: @JMGlachant
Read the Academic Journal I am chief-editor of: EEEP “Economics of Energy & Environmental Policy”
My web site: http://www.florence-school.eu
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Annexes
5.(Annexe 1) In-depth Wholesale Market opening: a
sequence of markets
6.(Annexe 2) From national market to international
markets
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(Models 3 & 4) Electricity characteristics influencing trade
Non-storable “Immaterial” Energy1° Traded before delivery = trade price insurance
(= financial transaction)2° No “storable effect” on prices (as for gas)
(“spread” Summer / Winter) 3° Production and consumption in real time4° “Zero” tolerance of imbalances P-C + sensitivity to “network” constraints (congestion) 5° Collective equilibrium Total Prod= Total Cons
over one control area (zone under the control of a “TSO”)
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Electricity vs. Air Transport1° No plane can take off or land if it is not
completely full (of passengers)
2° To go from A to B, all planes should have to divide themselves to pass through AB but also through AC-CB.
3° If a plane breaks over a flight, all the other planes should have to take instantaneously all its passengers (following 1°) or… all the other planes break suddenly.
(Models 3&4) Electricity characteristics influencing trade (cont.)
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(Model 3&4) Wholesale market proxies
Electricity and the sequence of markets1° Electricity good = “system” good =
Energy + Transmission (congestion)
+ Capacity (reserves)
2° Sequence of (at least) four markets =
Day-ahead Energy Market (D-1)
+ Transmission Market (or congestion pricing)
+ (short-term and long-term) capacity/reserves markets
+ Combination of 3 in real time Balancing
3° = All electricity market design is ‘’complex’’
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(Models 3&4) Wholesale market architecture
• Electricity = Energy (Day-ahead and intraday)
+ Congestion pricing
+ Reserves (and Generation Capacity mechanisms)
+ Real Time Balancing
Intraday markets Balancing Market
Congestion pricing
Day-ahead market
TimeDelivery
Generation capacity mechanisms
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(Model 3&4) Day-ahead market design
• Options :– Centralization (organized: Pool & PX) vs.
Decentralization (bilateral/OTC)
• Differences :– Available Information– Liquidity– Speed for finding a market equilibrium– Flexibility of decision and actions
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Commercial (or “Financial”) Relationshipsin Liberalised Electricity Markets
Generator 3Generator 2Generator 1
Supplier 1 Trader 2 Wholesaler 3
PX TSO
Final Consumer
1
Final Consumer
2
Final Consumer
4
Final Consumer
3
Final Consumer
5
PX Sales
PX Purchases
Bilateral Contracts
Supply Contracts
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Bilateral Over-the-Counter (OTC)vs. Power Exchange Trading
Properties
Trading Method
Over-the-Counter Power Exchange
Anonymity of Trading
No Yes
Counterparty Bilateral Central Counterparty
Counterparty Risk
Yes, unless Cleared
No
Trading Method Continuous Trading
Typically Central Auction
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• Bilateral contracts may be:• Customised
• Respond to the requirements of the counterparties
• Reduce basis risk …• But requirements of the counterparties
may not always be compatible• Standardised
• Standard features and clauses• Easier to negotiate• Easier to trade in a secondary market
• Brokers may facilitate the conclusion of bilateral contracts by matching counterparties with compatible requirements
Bilateral trading
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• Efficient, merit-order dispatch according to offers submitted to the PX.
• Separation between generation and supply, the two potentially-competitive activities in the electricity sector, which, in many countries, are still characterised by (vertically-integrated) dominant players.
• Greater transparency in price setting. Prices reflect market conditions and thus vary hour by hour. PX prices are published daily and provide a reliable reference.
Power Exchange - System Level Benefits
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• Easier entry into the market by new players. Non-discriminatory access to wholesale power. New entrants in the generation business may sell power at fair prices. New entrants in the supply business may buy wholesale power at fair prices.
• Increased security of supply (IF… & only if!)Promotion of generation capacity availability and load management at peak times. – More accurate price signals on the relationship
between demand and supply.
PX- System Level Benefits Ct
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• Market-place where electricity is available at market prices
• Greater flexibility in generation and consumption strategies (revision of scheduled generation or consumption close to real time)
• Guaranteed payment of electricity through a central counterparty and guarantee requirements
PX- Participants Level Benefits
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• Trading results in long/short positions
*Long positions assign the right/obligation to withdraw power from the grid
*Short positions assign the right/obligation to inject power into the grid
*Long and short position resulting from trading should be balanced (injections = withdrawals) in each delivery period
Trading of promises and commodity delivery (1)
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• “Gate Closure” is the deadline for trading electricity to be delivered in a specified period
• Gate Closure could be from one or more days to one hour or less before delivery time
• By Gate Closure, balanced (injections and withdrawal) positions are declared (possibly through balance responsible agents) to the relevant TSO (scheduling). (The PX may itself be a balance responsible agent)
Trading and commodity delivery (2)
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• At Gate Closure the TSO takes over the management of electricity flows over the network
• Deviations of actual injections/withdrawals from positions attract imbalance changes and are settled with the TSO (balancing charges)
Trading and commodity delivery (3)
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Balancing & Settlement Agreements
Physical (or “Technical” or “Electrical”) Relationships in Liberalised Electricity Markets
Generator 3Generator 2Generator 1
Supplier 1 Trader 2 Wholesaler 3
PX TSO
Final Consumer
1
Final Consumer
2
Final Consumer
4
Final Consumer
3
Final Consumer
5
Connection, Use-of-System and Balancing & Settlement
Agreements
Connection and Use-of-System Agreements
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(5) Design of Balancing -Real Time-
• Options :– Balancing Market vs. Mechanism– Single vs dual imbalance prices (penalties)
• Issues :– System security vs. market efficiency– Centralized vs. Decentralized balancing– Market Power– Reflectiveness & Cost allocation problem– Impact of distorsions (Incumbent vs. New entrants)
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(5) – Design of transmission markets (or congestion pricing)
• Design of internalisation of “network” externalities = energy market + economic model of network constraints
• Economic models of network in energy markets– Zonal model (EU: Nord Pool)– Nodal model (USA: PJM)
• «Optimal» economic model of the network ?– Zonal for “zonable” networks– Nodal for “non-zonable” networks
• Market vs. Control by TSO• Zonal for “non-zonable” networks• Trade-off between energy market functioning
(liquidity) vs. ‘Gaming’ & inefficiencies• Putting incentives on the TSO for optimal control
(e.g. UK)
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Real
Netw
ork
Netw
ork
econ
om
ic
mod
el
Netw
ork
P
hysic
al
fun
cti
on
ing
Mark
et
Desig
n
Internalisation of all network
effects
((nodalnodal))
Internalisation of more
important network effets
(zonal(zonal))
market does not internalise
network
Design of internalisation of network in energy markets: several proxies
Netw
ork
man
ag
em
en
t Mark
et s
olu
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Internalisation of network constraints by the energy market : when?
• Uncertainties in the measure of network effects– E.g. : Maximal transmission capacity between two
zones depends on … actual network flows
• Internalisation of the network before real time without re-internalization in real time– Maximal capacity in real-time becomes the minimal
capacity defined « ex ante » – The market adds new constraints and does not
maximize the potential benefits from trade
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(5) RESERVESa/ Short-term Reserves’ markets
• Why?– Short-term reserves are “available capacity” then
“public goods” (they cannot be provided selectively to individual grid users)
– They are provided trough TSOs’ procurement rules • Resources for the provision of reserves can be:
– Supplied by grid users according to license conditions (e.g. Primary reserve: instantaneously)
– Procured by the TSO through long-term contracts (e.g. Secondary reserve: each 5 to 15 minutes)
– Procured by the TSO through dedicated markets (e.g. Tertiary reserve: 15 minutes to half-daily schedule)
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(5) b/ Long term Generation capacity mechanisms
• Why? From short term to long term capacity offer– Right level of generation capacity? Through
markets? Investing in base to peak units?– Missing money
• Price cap• Risk• Market power
• Options of capacity procurement design– Capacity payments– Capacity markets– Etc.
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Annexes
5.(Annexe 1) In-depth Wholesale Market opening: a
sequence of markets
6.(Annexe 2) From national market to international
markets
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(6) From National to Regional markets
• Historically, grids have been developed mainly to serve national markets
• ... At a time when national markets were typically served by vertically-integrated monopolists
• ... Which had little incentive to integrate neighbouring markets, except for security and stability purposes
• Therefore, regional market integration requires:• Harmonisation of rules• Expansion of cross-border capacity• Efficient management of existing capacity
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Cross-border Congestion Management (1)
• Congestion occurs when the available transmission capacity is not sufficient to satisfy the demand for transmission services (e.g., from commercial transactions)
• Therefore, congestion depends:• on the demand for transmission services• on the available transmission capacity
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• Liberalization has increased and made more explicit the demand for transmission services
• Congestion may occur:• within a control area• between control areas (cross-border)
• For ex. First EC rules (e.g. Regulation n. 1228/2003) only apply to cross-border congestion
Cross-border Congestion Management (2)
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Approaches to congestion management
Basic approaches:• Ex-post market adjustment to
congestion• Redispatching• Counter-trading
• Ex-ante congestion management• Explicit allocation of (physical) transmission
capacity rights (PTRs)• Implicit allocation of transmission rights
(based on energy positions): • Implicit Auction• Market Splitting• Market Coupling (market splitting among
several PXs instead of single PX)
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Congestion Management in Europe
• Market splitting was dominant in:• NordPool: between national control
areas and between Norwegian zones• Italy GME: between different
geographical areas (for generators only)• In other EU markets, congestion within a
control area was managed through redispatching
• Flow-based Market Coupling has been proposed by ETSO – Europex to solve cross-border congestion & became EU Target Model
Thank you for your attention to Annexes !