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Presentation for AmCham

Presentation for AmCham. O n Liberalised Energy Markets. Jerzy Majcher Ph. D Principal Consultant WS Atkins Polska Warsaw 10 of May 2006. Topics to be covered during the presentation. 1. Liberalised markets - basic conditions 2. The physical system (electricity)

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Presentation for AmCham

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  1. Presentation for AmCham On Liberalised Energy Markets Jerzy Majcher Ph. D Principal ConsultantWS Atkins Polska Warsaw 10 of May 2006

  2. 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

  3. 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

  4. The European Union • I A prerequisite is competition- Implication EU Directive 55/2003

  5. 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

  6. 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.

  7. Players in the MarketBrokers • Market Makers • Industrial and other large customers • Distributors (suppliers/retailers) • Generators • Smaller consumers (households) • Traders

  8. 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.

  9. 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

  10. 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.

  11. 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

  12. Regulator Structure of electricity sector Generators Transmission (grid company) Exchange Contract Spot Distribution End Users = Physical energy flow = Financial agreements

  13. 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

  14. 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

  15. 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

  16. Nord Pool offers access to a database with info.

  17. The Norpool network:

  18. LPX EEX = power exchanges observed physical bottlenecks

  19. GAS Pipelines Kilde:Eurogas

  20. 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

  21. Optimal Transmission Pricing - Theory

  22. 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.

  23. 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

  24. Tariffication - Status 2001 “Point” tariffs introduced exit : exit + entry : TPA possible :

  25. 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”

  26. Example: Spot prices Scandinavia 27.11.2001

  27. European Electricity Prices 8.08.2000 . Source: Heren Report Gielda Energii SA (average price)25,55

  28. 2.2 Production

  29. Electricity production and consumption, UCTE 1999 TWh/Jahr 600 Consumption 500 Production 400 300 200 100 0 B D E F GR I L NL A P CH

  30. Marginal production costs, Nordic countries 1997

  31. Sweden - Marginal Production Costs1997

  32. Finland - Marginal Production Costs 1997

  33. Denmark (Elsam) - Marginal Production Costs1997

  34. Germany - Load Profile (Consumption) GW

  35. Demand Electric Energy in Germany weekend

  36. 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

  37. 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.

  38. 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

  39. DM/MWh 90 80 70 60 50 40 30 20 10 0 1983 1984 1985 1986 1987 1988 1980 1981 1982 1989 1990 1991 1992 1993 1994 1995 1996 1997 Norway - Historic Spot Prices .

  40. 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)

  41. Spot Prices Norway 1997 (Hydro Power System)

  42. DM/MWh 50 45 40 35 30 25 20 15 10 5 0 24.jun 22.jun 23.jun 25.jun 26.jun 27.jun 28.jun Spot Prices UK 1997 (Thermal System)

  43. Spot Prices in Germany - Daily Average

  44. 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

  45. Organising the trade in spot, regulating and contract markets Price Hour

  46. Scandinavia

  47. Trade volume of energy on SPOT and Futures markets TWh 2002

  48. Price forecast 2005 – Futures market Base load Peak load

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