Transcript Slide 1

Lessons from electricity liberalisation
in the US and elsewhere:
perspectives for Europe
Richard Green
Institute for Energy Research and Policy
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
The Liberalisation Buffet
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Entry into generation
Wholesale market with competition
Transmission system independence
Retail competition
Electricity markets
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1983 – a radical idea!
1988 – UK government policy
1978 – Chilean government policy
1996 – European Union policy
Electricity in the US
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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
US electricity markets
States with active restructuring, Feb 2003; EIA
US electricity prices
12-14 c/kWh
10-12 c/kWh
8-10 c/kWh
6-8 c/kWh
4-6 c/kWh
Average residential rate, Jan 1998; EIA
US electricity markets
States with active restructuring, Feb 2003; EIA
States with dots voted
for John Kerry in 2004
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
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
Standard Market Design
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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)
Where are there problems?
Where are there problems?
• Transmission:
– Congested system, insufficient investment,
“seams issues”
An American Quilt
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
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”
What about Europe?
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Large, diverse, industry
Large multinational companies
Small local companies
Member State regulation
– Some informal coordination
• European Commission
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!
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
Market power remedies
• Change the structure?
• Change the rules?
– Revenue Equivalence Theorem
Monthly average prices, England & Wales
£/MWh
35
30
Actual prices
Simulated prices
25
20
15
10
5
0
Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05
Evans and Green, working paper, 2005
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?
Some prices move together
€/MWh
100
Netherlands
Germany
France
80
60
40
20
0
01/01/2004
01/07/2004
01/01/2005
14-day moving averages. Source: Spectron
01/07/2005
01/01/2006
Others stay apart
29
53
52
47
47
59
56
28
31
52
2005 prices
for base load
power, €/MWh
Major power flows
Source: UCTE
Major power flows and congestion
Congested 26-75%
Source: UCTE
76-99%
100%
How to ease congestion?
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Build more lines?
Make “minor” investments?
Improve operating procedures?
Integrate markets better?
– Balancing regimes, nomination rules, timing
Errors in Interconnector use
Imports
to UK
English price minus
French price
Exports
from UK
DG Competition, Energy Sector Inquiry, fig 64
How to ease congestion?
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Build more lines?
Make “minor” investments?
Improve operating procedures?
Integrate markets better?
– Balancing regimes, nomination rules, timing
• Adopt trans-national markets?
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)