the past and future of european energy trading

Peter Styles, Board Member Electricity Committee [email protected]

SVSE Lichtenstejn Palace Conference 2007Prague, 12/09/2007

The Past and Future of European Energy Trading from the point of view of EFET

Peter Styles Prague 2007

European Federation of Energy Traders

1

Peter Styles Prague 2007 2

The Past and Future of European Energy Trading

Liberalisation of European

electricity markets did not cause high

prices…


Bullet point

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End-user prices in Western Europe (1995-2004)(Source: Kema Consulting study for Eurelectric 2006)


Industry power prices in Austria 1970-2001

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Liberalisation of European electricity markets did not cause high prices

…though remaining monopoly elements and free allocation of carbon allowances do

not help!



Prices for industry in Eastern Europe (1985-2003)


Influence of different factors on the German wholesale power price

(Source: Technical University Dresden)


German wholesale power price versus marginal costs on one day in April 2004

(Source: Technical University Dresden)


There is no way back from

free markets,

except to central planning



LV distribution

Illustration of electricity market wholesale function

Demand

management

I&C

Local powerCustomer

choice

Residential

Hub

Independent

network operators

HV transmission

Electricity interconnectors

Market prices at trading hubsCompeting producers (including ancillary services) Competing suppliers


Ingredients for successful liberalisation (1)

Privatisation and liberalisation

Relationship between the government-owner and government as

“sponsor” of regulator

Commitment to developing competition versus financial benefits to

government-owner?

Timing, order?

Unbundling

Ownership, management?

Balancing and other services for competitors ?



Liberalisation on the supply-side?

Divestiture of generating capacity by dominant incumbent may be

necessary for competition to start

Auctioning of virtual power plants or long term contracts is possible

second best

Cross border trade is an important source of liquidity

Integration of neighbouring markets helps competition

Non discriminatory access to cross-border capacity is a challenge



Avoid hidden cross-subsidies

Bad experience with stranded costs and legacy contracts

Subsidies may be designed to not distort the market

Regulators must communicate with market participants

It is impossible for a regulator to anticipate and understand all effects

of its intervention or non-intervention; market participants are creative

Benefit of experience of regulators in earlier liberalised territories



Policymakers’ interference in

market operation already

causes distortions

Distortions of most concern to traders April 2007

Price caps or regulated tariffs imposed by national governments or regulators (power andgas) 76% of respondents have indicated it as a serious distortion

Price caps or regulated tariffs imposed by national governments or regulators (power andgas) 76% of respondents have indicated it as a serious distortion

National failures to implement EU Directives (power, emissions and gas) 73%National failures to implement EU Directives (power, emissions and gas) 73%

Improper or insufficient or non-firm allocation of transmission capacity (power and gas) 73%

Improper or insufficient or non-firm allocation of transmission capacity (power and gas) 73%

Mergers and protection of national champions 73%Mergers and protection of national champions 73%

Lack of transparency about the use of infrastructure (power and gas)Lack of transparency about the use of infrastructure (power and gas) 65%65%Lack of transparency about the use of infrastructure (power and gas)Lack of transparency about the use of infrastructure (power and gas) 65%65%

Uncertainty about CO2 emissions and allocation of allowances 61.5%Uncertainty about CO2 emissions and allocation of allowances 61.5%

Peter Styles

Access to transmission and storage (gas) 57.5%Access to transmission and storage (gas) 57.5%

Ineffective or insufficient unbundling 57.5%Ineffective or insufficient unbundling 57.5%


Regions or countries suffering most from distortionsRegions or countries suffering most from distortions

0 5 10 15

France

Germany

Italy

Iberia

Switzerland

CEE/SEE

Europe

Emissions Trading

Wholesale gas

Wholesale electricity

1. Completing the internal market and market integration, including harmonized and uniform regulatory framework in EU (14)

2. Unbundling, formation of an Independent Transmission Operator(6)

3. Development of gas markets, improving access to the gas infrastructures, changing business practices (4)

4. Merger control and preventing the anti-competitive behaviour (4)

5. Improving cross border trading: Increasing transmission capacity allocation, reduction of bottlenecks, common procedures (3)

6. Transparency (e.g. unused/used transportation capacity) (3)

Desired priorities for EU energy policy

Styles, Oprea



Traders play a vital role in optimising

use of infrastructure and enabling

retail competition


Development of cross-border trading

Cross-border trading existed before liberalisation but in a

discriminatory, non-transparent manner

NTC measure of cross-border transmission capacity outdated and

overly restrictive

No real firmness in allocation of transmission capacity

Non-market-based allocation mechanisms persist

Tension between advocates of market coupling and proponents of

physical OTC market flexibility

No financial transmission rights yet


Cross border trading timeline

Yearly explicit auction

Monthly explicit auction

Daily implicit auction (deadline for exchange and clearing)

Continuous Cross Border intra-day

Hourly H-1 intra-day deadline

M-n M-1 D-2 D-1 D

t

D-1 deadline for internal nominations (TSO gateclosure)

Deadline for title transfer of rights (closure of SCRM)

Secondary Capacity Rights Market

LT cross border nominations

Deadline D-1 for use of the rights (UIOSI)

May 2006


Contrast between commercial and physical views of wholesale power supply (1)

Operator's view (the “physical” dimension)

Balancing the system

Controlling the flows

Maintaining security (guaranteed?)

Trader's view (the “commercial” dimension)

System is a market place with trading flexibility

Potential restrictions should be transparent

Relationship between flows and commercial contracts


Contrast between commercial and physical views of wholesale power supply (2)

“Border flows” do not coincide with “border commercial

exchanges” (known to traders as “nominations”)

Renewable power subsidies distort capacity allocation

Load and generation schedules needed for accurate

prediction of commercial trading capacities

Schedules are fixed after end of all trades (within hubs and

between them)

In order to trade between hubs, traders need to know the

commercially available capacities ...


Actualflows

Congestionmanagement

Capacityallocation

Must be consistent security

standards

Allocatemore

Increasedrebalancing

AllocateLess

Reducedrebalancing

Volume allocated is a commercial - not a technical - decision



Traders play a vital role in optimising use of

infrastructure and competition

…and the way forward must include a

secondary market in transmission

capacity rights


Use it

Daily

Monthly/QuarterlyIntraday market20082010 2009 AnnualC

apac

ity

H-15mins

Time

Annual capacity sale harmonised with energy market

Use or sell term capacity to the

market

Options tradable in secondary market

Obligations tradable in

intraday market

H+30mins

Intra-daymarket starts

H

Multi-Annual

H

D-1 explicit allocation

Capacity used OTC

Capacity allocation at D-1:Explicit auctions only


Current usual practice

100%

66%

33%

1 Y allocation

M + Q allocations

365*24h daily Allocations remaining 33% + seasonal variation

22 % yearly

44% multi year

“Wished” realistic practice

M + Q allocations per year for about 22 %66%

100%

44%

88%

Multi-year and yearly auctions held for proportional shares at different times in year; e.g. 4 auctions of 11% multi-year capacity and 4 auctions of 5.5 % yearly capacity,multi-year products and also Y+1, Y+2, Y+3, .. to be offered separately.

365*24h daily allocations per year 12% + seasonal variations

Seasonal expected commercially available capacity



European Federation of Energy Traders

Tel: +31 (0)20 5207970Email: [email protected]

www.efet.org

the past and future of european energy trading

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