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
Key issues in Global Electricity 3John Bower
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
Key issues in Global Electricity 4John Bower
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
Key issues in Global Electricity 5John Bower
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
Key issues in Global Electricity 6John Bower
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
Key issues in Global Electricity 7John Bower
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
Key issues in Global Electricity 8John Bower
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
Key issues in Global Electricity 9John Bower
Cross-border trade and regional electricity marketsInterconnections have always existed between national electricity systems…
TRANSMISSION SYSTEMS IN THE EUROPEAN ELECTRICITY MARKET
Source: UCTE
Key issues in Global Electricity 10John Bower
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
Key issues in Global Electricity 11John Bower
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
Key issues in Global Electricity 12John Bower
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
Key issues in Global Electricity 13John Bower
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
Key issues in Global Electricity 14John Bower
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
Key issues in Global Electricity 15John Bower
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 (%
)
Key issues in Global Electricity 16John Bower
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
Key issues in Global Electricity 17John Bower
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%
Key issues in Global Electricity 18John Bower
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
Key issues in Global Electricity 19John Bower
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
Key issues in Global Electricity 20John Bower
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
Key issues in Global Electricity 21John Bower
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
Key issues in Global Electricity 22John Bower
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
Key issues in Global Electricity 23John Bower
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
Key issues in Global Electricity 24John Bower
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 = Price k = Marginal Cost = 20 A = Constant = 50000 E=Elasticity = 50
Import Capacity Between Countries = 50000 Net Flow Between Countries = 0
P competitive= 20
Key issues in Global Electricity 25John Bower
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 = Price k = Marginal Cost = 20 A = Constant = 50000 E=Elasticity = 50
Import Capacity Between Countries = 1000 Net Flow Between Countries = 0
P competitive= 20
Key issues in Global Electricity 26John Bower
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
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