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Electricity Markets in Europe: a changing landscape …

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  1. ElectricityMarkets in Europe:a changinglandscape… Johan Albrecht Faculty of Economics & Business Administration

  2. Someobservations…

  3. CCGT Tessenderlo;ultra-efficient (57%) butidle…

  4. Gas or coal-basedelectricity? Bron; IEA (2012)

  5. Whichregionpreferscoal?

  6. Energiewende; the bureaucrat’s climax • 4 500 different FIT (Justus Haucap, DICE) • extremely inefficient (35% of global PV capacity in Germany with limited solar hours / Spain 7%) • Cost for society: € 20 billion/yr • Redistribution N->S, poor -> rich • Bankruptcy wave among German PV companies • No structural job creation • German CO2 emissions on the rise despite Energiewende; an unconvenient truth

  7. Low-carbonelectricitylove story underserious stress… • March 2009, 61 CEO’s electricity companies (+70% of total EU power generation) signed a Declaration committing to action to achieve carbon-neutrality by 2050. • 2009 Power Choices study examining how this vision could be made reality • Eurelectric (2013): ‘Power Choices Reloaded: Europe's Lost Decade?’ : “European policy is not sending a clear signal. Instead it offers several conflicting and contradictory signals. For an investor it is almost impossible to identify a clear path through the regulatory jungle. In contrast to the coherent objective of the European internal energy market, we experience a variety of different and not very stable national policies for low-carbon….”

  8. Why do we have low-carbonpolicies?

  9. The fossil energy system made usveryrich, but alsomakesus…

  10. Fossil fuels 82% TPES, modern RES 1% (modern RES 0.1% in 1973) • Who made or designed the global energy system? • Problems: CO2, short-termallocative efficiency, pricevolatility (risk for inflation & recessions) • Market failure 1; no price on CO2 • No G8 & G20 agreement; toorisky, CO2price triggers onlymaturetechnologies • Marketfailure 2; € 544 billionfossil subsidies • Coal subsidies in EU; prolonged up to 2018

  11. CO2price in ETS (2005-2013): no penalty for coal

  12. Market failure 3; historicalunderinvestment in energy-related RD&D

  13. Source: IEA, ETP 2010

  14. Global R&D gap $ 40 - $ 90 bill/yr • WEO 2013: $ 544 billfossil subsidies (mainly non-OECD) • RES deployment subsidies of $ 101 billion per year (EU € 57 billion, of which € 20 billion in Germany); willexpand to $ 220 billionby 2035 • Policymakersavoidexplicitsignals (like carbon prices), preferhiddenmechanims, avoidtransparency • No carbon price-> Soviet-styleeconomic planning

  15. Europe: alone in G8/G20 • “Yes, we can!” : 20/20/20, Low-carbonEconomy, 2050 Roadmap, Energiewende,… • Without a price on CO2 (failure of ETS) • Without supporting energy R&D • Without post-2020 targets • National targets -> fragmentation • With energy cost disadvantage of + $ 130 billto US industry (WEO 2013)

  16. Dieter Helm (author of ‘The Carbon Crunch’, Oxford): ‘Europetookeverymeasureitcould to makeenergy more expensive’ – Europe: EC (targets) + MS (subsidies)

  17. Electricity markets; somebasics • Definingelectricitymarkets: introduction • Marketinstitutionsbefore and after the liberalisation • Electricity prices + pricecomposition • European recession and evolution of electricitydemand • Long-termchallenges

  18. Definingelectricitymarkets An introduction

  19. Definingelectricitymarkets/systems • Market: meeting place for buyers and sellers • Electricity; instantaneousbutalsointertemporalequilibriumbetweendemand (load) and supply (generation) • Electricity system is designed to follow a variableload – technologiesselectedbasedontheirloadfollowingability • Efficiency: market designs should support ‘optimal’ combination of generation and balancingtechnologies

  20. Even nuclear plants canfollow the load

  21. Seasonalload & peak variance; Texas (US)

  22. Total demand / finalconsumption Productionby generators, soldonfuture and intra-daymarkets Balancingcoordinatedby TSO/DSO

  23. System needs -> market designs TSO/DSO Suppliers (Generators)/ Generators as Investors Traders Ancillary services (managedby TSO/DSO): frequency & voltage control, spinning & standing reserve, black start capacity, remoteautomaticgenerationcontrol, grid loss compensation and emergencycontrolactions.

  24. System needs -> market design 2 • Market for ancillary services: TSO/DSO contractgenerators, large users -> fee for offeredcapacity services – « network costs » on yourinvoice • Intraday and forward‘energy-only’ markets: D&S of electricity on platforms – « electricitycost » on yourinvoice • Capacitymarkets: generatorsnegotiate/receiveincentives to invest, e.g. subsidy per installed MW CCGT capacity – « network costs » on yourinvoice (or not on yourinvoice – financedfromgeneral taxes) • Debate on capacitymarkets in Europe; ‘energy-only’ marketsapparently do not trigger sufficientinvestments in new capacity…

  25. European electricitymarket patchwork in 2013

  26. Marketinstitutionsbefore and after the liberalisation

  27. Let’s go back to 1980s • Electricitylandscapewithheavilyregulatedverticallyintegratedcompanies (national/regional/local monopolies) • Regulation: security of supply(gridstability, flexibility, balancing), investment cycle (followexpecteddemand), final prices(« cost-plus » system) & (global) profit margin • Verticallyintegrated: generation, transmission, local distribution, security of supply – internal optimisation of activities and investmentdecisions; single business model to optimizecomplete value chain, e.g. generationstrategyconsiderscapacity of transmission grid and ability to balance underextremecircumstances • Utilities sellenergy services, including system reliability and system adequacy, all priced per MWhfinallyconsumed • Cross-subsidies atretaillevel to offerlowerprices to industry

  28. Verticallyintegratedcompanies • Prices; depending on investment cycles, technologicalchoices, industrialpolicy (cross-subsidies), geography, … • Differentelectricitypricescandistortfree competition & isn’t life tooeasy for big utilities withguaranteed profit margins?? • To assessdesirability of this model, you have to askwhetherelectricityisjust a commodity or provides a social service withexternalbenefits • ‘Old’ invoiceatretaillevel : electr + network costs + taxes • EC: electricityis a commodity -> liberalize to increasecompetition -> market model = energy-onlymarket (EOM)

  29. Economic life in 1980s • Utilities and national planning organisations projectexpecteddemand (ST, MT & Long Term) and propose necessaryinvestments (generation + network) • Governmentsapproveinvestment plans and eliminatemarketuncertainty (technicaluncertaintyremains) • Afterinvestments come on-line: periodwithovercapacity (esp. withnuclear, lesswithsmallergas-powered plants) followed by tightermarkets as economygrows (explainsinvestmentwaves) • Closedmarketswithregulatedprices to recover capital costs; pricesmainlyfollow capital cost (see French case) : depreciatedassets (after 15 to 20 yrs) lead to lowerretailprices • Once depreciated, oldassetsremainoperationalatlowcost (marginal) and de facto competewith new or plannedgenerationassets • EU today: manyassets date frombefore 1970!

  30. « Cost-Plus » & investment cycle (FR);pricefollowsinvestm cycle

  31. Age distribution of existing power plants Ageing infrastructure is the challenge in many OECD countries, whereas emerging economies have to cope with a growing demand for electricity.

  32. The liberalisation and marketintegrationproject • Directive 96/92/EC concerning common rules of the internal market in electricity (the First Electricity Directive) and Directive 98/30/EC on common rules for the internal market in natural gas (the First Gas Directive) • 2002: national and international electricity and gas trading platforms, e.g EEX.com • 2003: Second Energy Package (SEP) • 2005: EC inquiry about functioning of internal market • 2009: Third Energy Package (TEP) for the electricity and gas markets : stringent unbundling rules , new agency to coordinate the actions of the national regulatory authorities (NRAs), the formation of ‘European Network of Transmission System Operators’ for electricity and gas • TEP completed by the end of 2014??

  33. The landscape in 2014 • Generationonly // generation and supply (withtrading) // tradingonly // distribution (DSO) // transmission (TSO) • Regulation: security of supply, plus newpolicytargets (climatepolicy GHG-20% by 2020, 20% RES-quota by 2020) • TSOs (togetherwithDSOs) ensuresecurity of supply, but cannot influence generationchoicese.g. more weather-basedgenerationdemands more efforts in terms of balancing and back-up -> costs/risks are externalized • Electricitygenerationcompanyonlysellselectricity as a commodity and does not consider system behavior • Eachcompany has only one activity (no cross-subsidies) in a much more uncertainenvironment (and targets 15% ROI)

  34. The landscape in 2014 (2) • No price, investment cycle and profit regulationanymore(forbidden in theory, stillexistingatretaillevel in many MS) • Life time of electricity (system) assetsisstill 30 to 50 years – cantheseinvestmentsbetriggered in free and unpredictablemarkets?? • In all MS, youcanbuyshares of publiclylistedcompanies (e.g. Belgian TSO Elia didbuyGerman TSO 50 Hertz), youcanset-upyourownenergycompany (lowestfinancialbarrier for tradingcompaniestargettingindustrialconsumers)

  35. Whoisretailingbefore/afterliberalization? Retail clients (households & companies) DomesticGenerator(s)/ Producer(s) Before Afterliberalization DomesticGenerators/ Traders Tradingplatforms (ahead, intraday) Suppliers/ retailers ForeignGenerators/ Traders e.g. Belgiantradingcompany - withoutgenerationassets - buys electricity on Dutch and Germanwholesalemarkets to sell to Belgian and French industrialcompanies

  36. Electricity prices +pricecomposition

  37. Wholesaleprices 2005-2010 (CWE)

  38. Retailelectricityinvoicetoday • Retailinvoice = electricity + network + taxes (as itwasbefore the liberalisation)

  39. Electricity prices in 2013 Source; Eurostat (2014). 81/2014

  40. EU-15 retailprices for households, 1998-2011

  41. Lowerprices for industrialconsumers

  42. Risingretailprices in Germany…

  43. … conceal flat commodityprices but strongincrease of electricity taxes

  44. Invoice in Germany: 35% commodity + 25% network costs + 40% taxes