On May 10, 2006, Jerzy Majcher, Ph.D., Principal Consultant at WS Atkins Polska, presented to AmCham on the dynamics of liberalised energy markets. The presentation examined key topics such as the basic conditions for liberalised markets, the electricity physical system, and short-term pricing mechanisms. It contrasted electricity and natural gas markets, highlighting the unique characteristics of each. Additionally, it explored the Polish energy market's liberalisation process, regulatory frameworks, and implications of competition. Insights into market structures and challenges for new entrants were also discussed, providing a comprehensive perspective on liberalising energy in Europe.
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Presentation for AmCham On Liberalised Energy Markets Jerzy Majcher Ph. D Principal ConsultantWS Atkins Polska Warsaw 10 of May 2006
Topics to be covered during the presentation • 1. Liberalised markets - basic conditions • 2. The physical system (electricity) • Networks (tarification) • Production • Short term prices (spot) • Contract markets • 3. European Energy Markets Competition Electricity vs Natural Gas • 4. Polish introduction of liberalisation principles
1. Basic Conditions for an open Market • Liberalisation - Questions to be answeredObjectives - why do we liberalise? • Economic theory • To what extent is theory theory applicable to the electricity sector? What about gas? • Regulatory framework - Is this necessary? • I
The European Union • I A prerequisite is competition- Implication EU Directive 55/2003
Liberalisation - Objectives in Norway (1991) • Economic efficiency - not privatisation • new investments • utilisation of invested capital in the industry • --> networks • --> production This has formed the basis for the regulatory framework. • I
Perfect Competition - Basic Conditions • Manyindependent buyers and sellers of each item. • Every player in the market should have complete knowledge about prices and other matters that may influence their actions. • The producers must produce homogenous products. • No transaction costs. • Possible to establish new business. • Every player in the market must act in a rational way.
Players in the MarketBrokers • Market Makers • Industrial and other large customers • Distributors (suppliers/retailers) • Generators • Smaller consumers (households) • Traders
Gas vs. Electricity Similarity:Transport via networks Difference:Gas can be stored - electricity not Different gas qualities - electricity is a homogenous product A few number of enterprises control the gas (production) resources - many producers of electricityElectricity must be centraly balanced in every timeIs it possible to establish a competitive gas market? Perhaps - presupposing a satisfactory regulatory framework and a strong regulatory body.
Structure of the German Gas Industry 20% 80% national import production number of market share companies final transport customers (5+X) companies 2 Ruhrgas ca . / 30 % 3 regional (40) suppliers 35 % municipal (700) suppliers 35 % industry commercial households power plants
Germany - Status the Gas market • In the theory 100% open since August 2000. In reality it is very difficult for new players to serve customers seeking new suppliers. Some suppliers (new entrants) have managed to get though. • Regulatory framework: Die Verbändevereinbarung (Gas). Does not provide the necessary regulatory framework from the traders/new entrants point of view. Problem(s): • Market structure (dominant players), long delivery chains, Take or Pay contracts. Oil price dependency in contracts. No independent regulatory body. • The customers expect lower prices, but are facing rather high prices due to the oil price dependency in the supply contracts.
Structure of the German Electricity Industry Generation 11% 9% 80% 4 < Verbund companies 70 ca . regional utilities 900 ca . communal utilities ; 31% 36% 33% Distribution
Regulator Structure of electricity sector Generators Transmission (grid company) Exchange Contract Spot Distribution End Users = Physical energy flow = Financial agreements
An open Market demands • Political acceptance • Separation between monopoly and competitive activities • Definition of players responsibilities, especially concerning system operation (SO)- • Definition of the Regulator’s role - that is a system of rules, guidelines and licences
What is Market Power? One or more players can influence the prices • Can be perfectly legal, but abuse of market power would normally be considered as illegal
Access to Market Information • To reduce market power - Equal access to public information for all players in the market is absolutely necessary. This should include: a use of interconnectors (hourly flow), maintenance plans generators above a certain size, possible congestions etc. • But, must be a balance between company secrets and the players need for information • Unbalanced access to information gives an inefficient and unfair market
Transport costs (tarification) Theory and Experience NTPA vs. RTPA. TRANSACTION based vs. NON TRANSACTION based tariffs. Cost reflective tariffs. What do we mean by this? Cost of transport (according to the theory) = short term value of marginal losses + cost of bottleneck. Challenge: How to deal with the fixed costs. Only a NON-transaction based tariff can facilitate trade and ensure liquid and competitive markets! Solution: Point - tariff / nodal price reflecting the short run marginal cost
The Point Tariff Principle Both consumers (exit/L) and generators (entry/G) must pay for the use of the network. The exit/entry fees refer to the point of connection. The fees give access to the whole (interconnected) network (electricity market). The exit/entry fees shall not be related to the contract path. Basis for billing is the physical energy flow measured at the point of connection. The exit/entry fees shall reflect the system load flow - that is marginal losses shall be included in the tariffs. Discrimination against customers is not allowed.
Transport of electricity - integrated systems Transit fee? Bottleneck Generator Generator Consumer Main grid (200-400 kV) country 1 Generator , Generator Consumer Consumer Regional network Regional network Lokal network Lokal network Lokal network Lokal network Consumer Consumer Consumer Consumer Load flow/energy flow, point of connection
Network Congestions (Bottleneck) . How do we solve the capacity problem? 1.Basically there are two different models: Counter purchase (actively using the power stations), or 2.Price differences between spot areas (Norwegian solution), called “market splitting”
Exchange with the Neighbouring Countries Stromaustausch Deutschlands mit den Nachbarländern 1999 in GWh Germany‘s interchange of electricity with neighbouring countries 1999 in GWh DK 99 639 S NL PL 17159 1953 L 4203 CZ 612 F 480 CH 5211 A Summe Importe: 40409 GWh Summe Exporte: 39444 GWh Sum of imports: 40409 GWh Sum of exports: 39444 GWh 9088
Factors that may influence Supply (Production) and Demand (Consumption) - 1 Production: • Maintenance periods • Failures (outages) • Water reservoirs, rivers • Fuel costs • Exports and imports Start and stop costs River temperature (cooling) etc.
Factors that may influence Supply (Production) and Demand (Consumption) - 2 Supply and demand: Demand: 1.Access to the networks (network availability) 2.Access costs 3.The market development the last days (prices) 4.Trading strategy • Time of day • Working days • Vacation/weekends • Trade conditions (economy) • Weather
Entwicklung der internationalen Energie- handelspreise * Weihnachten Anstieg Primärenergiepreise Sinkende Temperaturen Verlängerte Revision des KKW Grafenrheinfeld Kaltes Wetter in Deutschland Ostern Pfingsten Hohes Wasserangebot in Skandinavien * gleitender Durchschnitt (5 Tage)
Comparing different Systems Hydro power Thermal power Normally not significant changes from season to season Significant price changes from season to season Minor changes within 24 hours Significant changes within 24 hours
