lessons from electricity liberalisation in the us and elsewhere: perspectives for europe
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Lessons from electricity liberalisation in the US and elsewhere: perspectives for Europe. Richard Green Institute for Energy Research and Policy. Circumstances of this talk. - PowerPoint PPT PresentationTRANSCRIPT
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Lessons from electricity liberalisation in the US and elsewhere: perspectives for Europe
Richard Green
Institute for Energy Research and Policy
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Circumstances of this talk
• I gave this talk in place of one that Professor Paul Joskow of MIT had been scheduled to give, but was unable to, and adopted his title
• I have drawn heavily on his recent paper, “Markets for Power in the United States: An Interim Assessment”, Energy Journal 2006
• I have also benefited from talking with Paul and attending many of his presentations over the years
• Paul should not be held responsible in any way for my choice of material to extract, or my conclusions
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The Liberalisation Buffet
• Entry into generation
• Wholesale market with competition
• Transmission system independence
• Retail competition
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Electricity markets
• 1983 – a radical idea!
• 1988 – UK government policy
• 1978 – Chilean government policy
• 1996 – European Union policy
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Electricity in the US
• Large, diverse, industry
• Investor-owned utilities, State-regulated
• Municipal and Cooperative bodies
• Federal Power Authorities
• Federal Energy Regulatory Commission
• Power Pools
• After PURPA (1978): NUGs and IPPs
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US electricity markets
States with active restructuring, Feb 2003; EIA
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US electricity prices
Average residential rate, Jan 1998; EIA
12-14 c/kWh
10-12 c/kWh
8-10 c/kWh
6-8 c/kWh
4-6 c/kWh
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US electricity markets
States with active restructuring, Feb 2003; EIA
States with dots voted for John Kerry in 2004
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What has happened?
• Transmission:– Most utilities have tariffs for other users– Many Independent System Operators
• Retail markets:– Least popular measure, low switching rates
• Wholesale markets:– Half generation capacity is covered
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How did they get there?
• Transmission open access:– Pressure from FERC
• Orders 888, 889, 2000
• Retail competition: – State initiatives
• Wholesale markets:– State initiatives and evolution of Pools– FERC pressure beaten back
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Standard Market Design
• Bilateral trading for most power
• Centralised auction for real-time power
• “Bid-based, security-constrained, dispatch”
• Price at each node equals the marginal cost of meeting more load there
• Nodal price differences are the payment to transmit power (including bilateral deals)
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Where are there problems?
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Where are there problems?
• Transmission:– Congested system, insufficient investment,
“seams issues”
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An American Quilt
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Where are there problems?
• Transmission:– Congested system, insufficient investment,
“seams issues”
• Retail:– Customers don’t switch unless they save
• Need to allow competitors to make money
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Where might there be?
• Market power:– Mechanisms are in place to limit price spikes
• Generation capacity:– Lots of new entry around 2000– Lots of bankruptcies soon afterwards
• Capacity markets:– Designed to raise the “missing money”
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What about Europe?
• Large, diverse, industry
• Large multinational companies
• Small local companies
• Member State regulation– Some informal coordination
• European Commission
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Where have we got to?
• Legal unbundling
• Power markets in most Member States– FERC’s Standard Market Design is nowhere
to be seen– Balancing often done by incumbents
• Retail competition for all consumers coming very soon!
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Market power
• EU Sector inquiry: evidence of problems
• Wholesale markets concentrated– Most markets national in scope, not integrated
• Vertical foreclosure via integration
• Wholesale markets not transparent
• Users don’t trust complex price formation
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Market power remedies
• Change the structure?
• Change the rules? – Revenue Equivalence Theorem
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Monthly average prices, England & Wales
0
5
10
15
20
25
30
35
Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05
£/MWh
Actual pricesSimulated prices
Evans and Green, working paper, 2005
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Market power remedies
• Change the structure?
• Change the rules? – Revenue Equivalence Theorem
• Change the size of the market? ½ + ½ = ¼ + ¼
• Are the markets joining together anyway?
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Some prices move together
0
20
40
60
80
100
01/01/2004 01/07/2004 01/01/2005 01/07/2005 01/01/2006
€/MWhNetherlandsGermanyFrance
14-day moving averages. Source: Spectron
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Others stay apart
53 52
29
47
47
59
56
52
28
31
2005 prices for base load power, €/MWh
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Major power flows
Source: UCTE
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Major power flows and congestion
Source: UCTE
Congested 26-75% 76-99% 100%
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How to ease congestion?
• Build more lines?
• Make “minor” investments?
• Improve operating procedures?
• Integrate markets better?– Balancing regimes, nomination rules, timing
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Errors in Interconnector use
Imports to UK
Exportsfrom UK
English price minusFrench price
DG Competition, Energy Sector Inquiry, fig 64
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How to ease congestion?
• Build more lines?
• Make “minor” investments?
• Improve operating procedures?
• Integrate markets better?– Balancing regimes, nomination rules, timing
• Adopt trans-national markets?
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A last word
• “Electricity restructuring …is likely to involve both costs and benefits. If the restructuring is done right…the benefits … can significantly outweigh the costs. But the jury is still out on whether policymakers have the will to implement the necessary reforms effectively” (Joskow, 1997)
• “I believe that statement continues to be true today.” (Joskow, 2006)
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