Transcript MAE 1-Day Course (Market Arrangements for Electricity) for RWE

Irish Electricity Market Overview
& Procurement Opportunities
Peter Duffy
Enercomm International
Overview of Presentation
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Current electricity market
New electricity market
The Supply business & Suppliers in the market
Electricity Tariffs
Components of electricity prices & Price Increases
Supply Options & Scope for savings
Seeking the ‘best’ deal for your company
Suggested approaches
Longer-term options including multi-utility supply
Today’s Electricity Market
• Licenced generators sell bulk power to licenced suppliers
– These are termed ‘Bilateral Contracts’
– Shortfalls & surpluses are dealt with by Top-Up & Spill
• TSO dispatches conventional plant
– Wind generators (normally) self dispatch
– Wholesale settlement done by SSA
• Suppliers supply customers & issue bills
– Based on their tariffs & electricity usage (metering)
• Green suppliers must balance on an annual basis
– Green tracking done through settlement system by SSA
Ireland’s New Electricity Market
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Mandatory centralised pool (all* gens/suppliers)
Eirgrid will be the SMO (System & Market Op.)
LMP (locational marginal pricing /nodal pricing)
CER & SMO will determine the nodes to be used
SMO will dispatch energy & reserve together
Settlement at spot market prices for actual vol.s
– Generators will be paid LMP
– Suppliers will buy at Universal Price (ex.dispatchable)
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Gens & suppliers can hedge risks (CFDs/FTRs)
Supply Business with TU & Spill
Gen1
Sup1
Cus.1
Gen2
Sup2
Bilateral Contracts
Gen3
Cus.2
Sup3
Top-Up &
Spill
• All electricity traded bilaterally between Gens to Suppliers
• Shortfalls & Surpluses addressed through TU & Spill
Cus.3
Cus.4
Supply Business with Pool
SMO
Gen1
Sup1
Cus.1
Gen2
POOL
Gen3
Sup2
Cus.2
Sup3
Hedge
Cus.3
Cus.4
• All electricity traded through pool, not from Gen to Supplier
• Hedge is bilateral contract between Gen & Supplier
Suppliers in the Market
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Airtricity
Viridian Energy (Energia)
ESB Independent Energy (ESBIE)
Bord Gáis
CH Supply Ltd.
Bord Gáis - Cogen
ESB Customer Supply (ESB PES)
Electricity Tariffs
• Regulated tariffs
– Approved/published by the CER for ESB PES
– ESB PES cannot vary these
• Unregulated tariffs
– Driven by competition
– Independent suppliers can devise/develop their
own tariffs, and compete in the market
Regulated Tariff Categories
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Urban (Standard, Nightsaver and Group);
Domestic Rural (Standard, Nightsaver and Group);
Residential Business Premises;
Commercial and Industrial General Purpose
(Standard and Nightsaver);
Commercial and Industrial Maximum Demand (low
voltage);
* Maximum Demand (medium voltage);
* Maximum Demand (38kV);
* Maximum Demand (110 kV) – transmission;
Public Lighting
Unregulated Tariffs
• Come in all shapes & sizes
• Some simply track the equivalent PES tariff
– offer a percentage discount
• Some broadly track equivalent PES tariff
– May offer a flat winter/summer price element
– Result in majority savings achieved during winter
• Others are more sophisticated, numerous elements
– Can be quite opaque & difficult to compare
– Can deliver good savings
– More suitable to large & very large users
Components of Electricity Prices
• Essentially five compnents in the price:
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* Energy (generation & losses)
TUoS (Transmission Use-of-System Charge)
DUoS (Distribution Use-of-System Charge)
* Supplier’s margin
Levies (PSO & Capacity Margin)
• * Energy & Supplier’s margin are the
competitive elements
Approx. Break-down of Price
For Large Customers
Energy
Wires Charges
PSO
75%
23%
2%
Energy Cost: Supplier
Wires & PSO: Regulator
Basis for Price Increases
• Assume independent suppliers buying most of their
power from new independent generating plant
• BNE price reasonably represents capital/fuel costs
• BNE price for 2004, fuel = 61%, all other costs 39%
– Approx 6 to 4 ratio
• Assume fuel costs in 2005 increase 10% over 2004
– Then this should increase energy costs by 6%
• In last slide, energy is approx 75% of supply costs
– 10% increase in fuel costs  4.5% increase in elec. Costs
– 20% increase in fuel costs  9 % increase in elec. costs
What is Driving Price Increases
• Fuel
– To what extent have independent generators hedged their
fuel (gas) prices versus spot purchases
• Wires Charges
– CER reviewing the wires charging regime
– 4% increase in these would result in approx 1% increase
• PSO
– CER has published possible levy
– 50% increase in these would result in approx 1% increase
EU Emissions Trading
• On average the powergen sector has received 77% of
its CO2 permit requirements free
• Wholesale prices should reflect the full costs of CO2
• Intended to claw back all windfall gains
• Pass Through of Allowance Shortfall Cost in 2005
– Gens to submit quarterly reports to CER
• 100% Allowance
Recycling in 2006
Cost
Pass-Through
– Enabling legislation required to levy generators
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Impact of EU Emissions Trading
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Consider 2006
Assume 30 TWh total elec. & 16.5 Mtonne CO2
Assume €10/tonne CO2
23% shortfall  16.5 Mtonne CO2
Cost of 23% is €38m
Represents 0.127 cent/ kWh
BNE 2004 price is €4.79/kWh
Represents approx. 2.6% increase relative to BNE
Supply Options
Short & Medium Term
• Stay with or revert to PES on published tariffs
• Sign suply contract with independent supplier
– One or two-year contract or longer
– Fixed energy price with pass-through of reg. Charges
– Variable energy price with pass-through of reg. Charges
• Take out a supply licence (self supply)
– Must now negotiate with generator rather than supplier
– Greater admin costs, low economy of scale
– Difficult to cut a better deal or costs than supplier
1-year v. 2-year Contract Offer
• No advantage for wires charges & levies
– Cannot avoid them; will be included in both
• Advantage in 2-year contract if gas prices rise
– Possible advantage in production planning when energy
costs are largely fixed for two years
• Disadvantage in 2-year contract if gas prices fall
– It is hard to see energy prices falling significantly
• Ensure there is common understanding in applying
CER-approved increased charges for 2nd year
2-Year Contract
• Changes in both Wires’ charges and PSO levy will
be passed through
• In effect, approx 75% of the electricity price for
2004 is fixed at the 2003 price
– The remaining 25% (approx) subject to change
– Price clarity for the year & low risk
• Supplier takes the risk of fuel (gas) price increases
and other generation costs
– Makes sound economic sense in a price-rising market
Suggested Approach
• If large production facility seeks to fix its costs
over a longer rather than shorter period
– For example labour, input and energy costs
– Then 2-year contract offer is the better option
• This fixes approx 75% of electricity costs
• Enables better financial/production planning over 2-year
horizon
• If seeking to fix costs over a short period
– Then 1-year contract offers the better option
Seeking the ‘Best’ Deal
• Forecast demand for next two years based on
historical demand & future production plans
• Invite bids from independent suppliers
– both 1-year and 2-year bids
• Analyse bids against forecast
– Suppliers usually have their own bid format
– Is bid for forecasted (not supplier’s) profile?
– Check supply conditions, no hidden costs/surprises
• Seek last minute negotiations; can bring results
• Check that savings achieved during contract
Supply Options
Longer Term Considerations
• Is natural gas coming to your location?
• Is there scope for CHP or polygeneration
(electricity/heating/cooling)?
• Is there scope for autoproduction (on-site
generation)?; significant wires’ savings
• Stake in gen plant?; multinational supply?
• Possible savings through multi-utility supply?
– Electricity, gas and telecoms