Key Issues in Global Electricity RPI-X Generators Transmission 5 - 15% Consumers Suppliers...

Key Issues in Global Electricity

Oxford Energy Seminar

10 September 2002

Dr John Bower

Key issues in Global Electricity 2John Bower

Overview

National electricity market liberalisation

Cross-border trade and regional electricity markets

Unresolved issues

A feasible solution


National electricity market liberalisationLiberalisation 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


National electricity market liberalisation…. in theory new entrants and increased efficiency should reduce consumer prices….

IMPACT OF LIBERALISATION IN ENGLAND & WALES 1990 - 2002

Oligopoly

RPI-X RPI-X

Generators

Transmission

Consumers5 - 15%

Suppliers

Distribution

RETAIL MARKET

0 - 5%

WHOLESALE MARKET

Physical Electricity Flow

Competitive

MonopolyMonopoly

Contract Flow


National electricity market liberalisation…. but this outcome is not guaranteed and prices may rise instead.

EUROPEAN ELECTRICITY MARKET GENERATION CAPACITY MIX

Source: EIA

£0.00

£5.00

£10.00

£15.00

£20.00

£25.00

£30.00

£35.00

£40.00

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02

Pric

e (£

/MW

h)

Retail Price (L. Industry) NETA Total Price UKPX RPDPool PSP Pool PPP Pool SMPCoal Marginal Cost CCGT Marginal Cost


National electricity market liberalisationIn reality 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-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

Shar

e of

Coa

l Gen

erat

ion

Cap

acity

NationalPowerBEGL

InternationalPowerInnogy

AES

TXU/Eastern

EdF

AEP

Edison

PowerGen

ScottishPowerALCAN


National electricity market liberalisation…. and governments will always want to intervene to set national energy policy

RECENT BRITISH ENERGY HEADLINES

28 Aug 02 British Energy drained by low prices-minister

1 Sep 02 British Energy ponders US sale

6 Sep 02 Nuclear firm British Energy begs for bailout

7 Sep 02 British Energy shares suspended as company warns of insolvency

8 Sep 02 Ministers offer guarantees to British Energy

9 Sep 02 British Energy falls almost 80 pct after LSE lifts trading curbs


Cross-border trade and regional electricity marketsNew regional electricity markets are being created by economic / technical pressures….

FORCES FOR CHANGE IN CROSS-BORDER ELECTRICITY TRADE

IN

GLOBALELECTRICITY

MARKET

DEREGULATI

ONRI O

NALCI OTY

F

NATI

ELECTM

ARKETS

INCREASEDEFFICIENCY ANDREDUCED SCALE

OF POWERPLANT

CREASECD

SIZE OF D

TRANSMISSION

CABLES

INCREASPE

ED

SED AND

REDUCED COST

OF COMPUTING

DERE AT

IAR

GU ON

KE

LATI

ON

OF

NAL

GAS

MTS


Cross-border trade and regional electricity marketsInterconnections have always existed between national electricity systems…

TRANSMISSION SYSTEMS IN THE EUROPEAN ELECTRICITY MARKET

Source: UCTE


Cross-border trade and regional electricity markets…. but as wholesale spot / forward markets emerge so should cross-border trade

GEOGRAPHIC COVERAGE OF EUROPEAN ELECTRICTY EXCHANGES

Baltic Pool

Greece Pool

Italy Pool

EEX/LPX

PowerNext

NETA

APX

NordPool

Poland Pool

EXAA

KEY

Proposed

Active Trading

Spain Pool

Iberia Pool

BETTA

Eire Pool


Cross-border trade and regional electricity markets…. and increase market efficiency by increasing competition between national generators

UCTE PHYSICAL ELECTRICITY FLOWS (MWh) IN 2000

Source: UCTE


Cross-border trade and regional electricity marketsAs a result EU industrial price fell 24.4% 1997 – 2001 but 180% range persists….

EU DWA ELECTRICITY PRICES FOR INDUSTRIAL CONSUMERS

Source: Eurostat

0

25

50

75

100

125

150N

orw

ay

Swed

en

Finl

and

Fran

ce

Spai

n

Luxe

mbo

urg

Gre

ece

Den

mar

k

Ger

man

y

Port

ugal

Irela

nd UK

Net

herla

nds

Bel

gium Ita

ly

Aus

tria

Pric

e (E

uro/

MW

h)

1997

2001


Cross-border trade and regional electricity markets…. but household price only fell 10.1% 1997 - 2001 but still 160% range persists

EU DWA ELECTRICITY PRICES FOR HOUSEHOLD CONSUMERS

Source: Eurostat

0

25

50

75

100

125

150

Swed

en

Nor

way

Finl

and

Den

mar

k

Gre

ece

Fran

ce

Spai

n

Net

herla

nds

UK

Aus

tria

Irela

nd

Port

ugal

Ger

man

y

Italy

Bel

gium

Luxe

mbo

urg

Pric

e (E

uro/

MW

h)

1997

2001


Unresolved issuesState and Federal policy objectives are interdependent and often in conflict

LIBERALISATION CONFLICTS

Competition

• Profit motive of capital market versus public service obligations• Open access rights to transmission / distribution versus monopoly ownership• Competitive industry structure versus creation of national champions

Security

• Indigenous generation versus low cost imports• Generation fuel self sufficiency versus low cost imports• Managed bilateral trade versus reliance on transit routes through third countries

Environment

• Lower prices versus higher environmental taxes • Lowest cost technology (CCGT) versus renewables and nuclear• Regional benefit of cross-border transmission lines versus impact on local area


Unresolved issuesPersistent differences in national prices are due to generator market power…

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%

Gre

ece

Fran

ce

Irela

nd

Bel

gium

Port

ugal

Italy

Spai

n

Swed

en

Den

mar

k

Finl

and

Aus

tria

Net

herla

nds

Ger

man

y

Nor

way UK

Shar

e of

Tot

al N

et S

uppl

y (%

)


Unresolved issues…. 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


Unresolved issues…. plus cross-border mergers may be preventing access to transmission / distribution

EUROPEAN INVESTMENTS OF EDF (APR 2002)

5

6,18

9

1 7,8,15

10, 11, 13

2, 143, 16, 17

4

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%


Unresolved issuesInterlocking relationships make regulation of network effects very complex

CORPORATE LINKS BETWEEN SWEDISH, GERMAN, UK MARKETS (APR 2002)

Sydkraft

Vattenfall

PowerGen

HEW BEWAG VEAGEoN

E. Midlands

InnogyRWE

Thames Water


Unresolved issuesCommission believes import / export flows restricted by lack of transmission capacity….

IMPORTS AS PERCENTAGE OF NET ELECTRICITY CONSUMPTION IN 2000

Source: All data for 2001 except Eire which is for 2000 and from UCTE Memo 2001 (www.ucte.org) or Eurostat Energy Monthly Statistics 05:2002

-100%

-75%

-50%

-25%

0%

25%

50%

75%

100%

Slov

enia

Luxe

mbo

urg

Cro

atia

Switz

erla

nd

Slov

akia

Aus

tria

Hun

gary

Cze

ch R

epub

lic

Den

mar

k

JIEL

Bel

gium

Net

herla

nds

Swed

en

Port

ugal

Ger

man

y

Fran

ce

Italy

Finl

and

Nor

way

Pola

nd

Gre

ece

Spai

n

UK

Eire

UC

TE T

otal

NO

RD

EL T

otal

EU T

otal

Impo

rts

(+) a

nd E

xpor

ts (-

) / C

onsu

mpt

ion

Import Export


Unresolved issues… and proposes 20% funding 7 electricity (5 gas) cross-border transmission axes ….

TENS INTERCONNECTOR PROJECTS OF COMMON INTEREST

Power line

Gas pipeline

LNG terminal

Gas storage


Unresolved issues…and a 10% target for renewables by 2010 to cut emissions and increase security….

EUROPEAN ELECTRICITY MARKET GENERATION CAPACITY MIX 2000

Source: EIA

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Norway

Switzerl

and

Croati

aAustr

iaSwed

enPortu

galSlove

niaSlova

kiaSpain

Greece Ita

lyFran

ceFinlan

dPolan

d

Czech

Rep

ublicIre

land

German

yGrea

t Brit

ainBelg

iumHungary

Netherl

ands

Denmark

Luxembourg

Hydro Geothermal and Other Nuclear Thermal


Unresolved issues… but competitive markets prefer low cost fuels increasingly from non-EU countries

GENERATION TECHNOLOGY CAPACITY SHARE IN ENGLAND & WALES

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

Cap

acity

Sha

re b

y Fu

el a

nd G

ener

atio

n Te

chno

logy

OCGT

Oil

Pump Store

Small Coal

Medium Coal

Large Coal

CCGT

Nuclear Magnox

NuclearAGR/PWR

Hydro


A feasible solutionPre-liberalisation most countries had monopoly ESI and competitive imports were banned

REGULATED MONOPOLIES

N = 1

N = 1N = 1

N = 1N = 1N = 1N = 1N = 1

N = 1N = 1N = 1

N = 1N = 1N = 1

N = 1

P = Price k = Marginal Cost = 20 A = Constant = 50000 E=Elasticity = 50

Import Capacity Between Countries = 1000 Net Flow Between Countries = 0

Pmonopoly= A/2E + k/2 = 50000/(2*50) + (20/2) = 510 Pregulated = 50


A feasible solutionPublic funding of cross-border transmission capacity build may increase competition….

COMPETING MONOPOLIES

N = 1

N = 1N = 1

N = 1N = 1N = 1N = 1N = 1

N = 1N = 1N = 1

N = 1N = 1N = 1

N = 1



P competitive= 20


A feasible solution…. but this would not be necessary if dominant firms were broken up first

COMPETITIVE MARKET

N = 15

N = 15N = 15

N = 15N = 15N = 15N = 15N = 15

N = 15N = 15N = 15

N = 15N = 15N = 15

N = 15



P competitive= 20


Speaker

John Bower is Senior Research Fellow at the Oxford Institute for Energy Studies. His research interest is in the emergence and evolution of cross-border electricity and gas markets. Specifically; the development of efficient pricing and investment mechanisms for transmission capacity, integration of energy markets, and energy price / credit risk management.

John’s previous career was in the commodity industry and 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. Before joining the PhD programme he was Global Controller Metals/Commodities at Deutsche Morgan Grenfell.

John completed his PhD at London Business School in 2000. He also has an MBA from London Business School and an MA in Biochemistry from Oxford University.

Oxford Institute for Energy Studies

57 Woodstock Road

Oxford OX2 6FA

United Kingdom

Telephone: +44 (0)1865 311 377

Facsimile: +44 (0)1865 310 527

Email: [email protected]

URL: http://www.oxfordenergy.org

Key Issues in Global Electricity RPI-X Generators Transmission 5 - 15% Consumers Suppliers...

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