Market consolidation &
integration in network industries
Electricity Markets
Bert Willems
Department of Economics - Tilbur...
Overview

 Objective
Academic viewpoint on integration
of European electricity generation and transmission markets

 Thr...
Market integration

 In order to integrate the electricity market the Commission mainly
focused on transmission access
♦ ...
Market integration

 Very slow progress on allocation of cross-border capacity
♦ Florence Forum (1998-2012)  design by s...
Market integration

 Mini-fora  Set of regional markets

Acer, 2012
23 October 2013

Market Integration and Consolidatio...
3 EFFECTS

23 October 2013

Market Integration and Consolidation

6
Integration effect: 1. Prices converge

 Caused by transmission investments and market coupling
Price convergence NL-FR-D...
Extra Slide

Integration effect: 1. Prices converge

 Reason for inefficient use of transmission capacity before marketco...
Integration effect: 2. Arbitrage on cost differences

 Network transports energy from low cost to high cost area
= increa...
Integration effect: 3. Increase competition

 Transmission capacity has increased competition
 Example of Netherlands
♦ ...
Integration effect: 3. Increase competition

 Also horizontal market concentration within countries decreased
(especially...
Integration effect: 3. Increase competition

 But competition effects might be partially offset by vertical mergers
(elec...
3 PROBLEMS

23 October 2013

Market Integration and Consolidation

13
Problem 1:
Support schemes for renewable energy are national

 CO2 cap and trade mechanism is broken
♦ Prices are too low...
Problem 1:
Support schemes for renewable energy are national

 Huge benefits for allowing international trade in renewabl...
Problem 2:
Capacity markets are national

 Many existing power plants are not profitable
♦ Low demand due to economic cri...
Problem 2:
Capacity markets are national

 If capacity markets are implemented

♦ Clearly define the product (with specif...
Problem 3:
Transmission Investments

 Investments in one country has benefits/costs in other countries
♦ A good long-term...
Problem 3:
Transmission Investments

Extra Slide

ENTSO-E, 2012
23 October 2013

Market Integration and Consolidation

19
Summary

 Current situation: (international) competition & integration
Time Dimension

Investments

Contracts

Day-ahead
...
Upcoming SlideShare
Loading in …5
×

Market Consolidation and Integration in Network Industries: Electricity Markets

347 views

Published on

Academic viewpoint on integration of European electricity generation and transmission markets.

Presentation at CERRE Expert Group on 24 October 2013

Published in: Education, Technology, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
347
On SlideShare
0
From Embeds
0
Number of Embeds
7
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Market Consolidation and Integration in Network Industries: Electricity Markets

  1. 1. Market consolidation & integration in network industries Electricity Markets Bert Willems Department of Economics - Tilburg University CERRE Expert Workshop, Brussels, October 24, 2013 23 October 2013 1
  2. 2. Overview  Objective Academic viewpoint on integration of European electricity generation and transmission markets  Three positive effects ♦ Price convergence ♦ Cost reductions ♦ Increased competition  Three problem areas ♦ National support schemes for renewable energy ♦ National capacity markets ♦ Future investments in transmission 23 October 2013 Market Integration and Consolidation 2
  3. 3. Market integration  In order to integrate the electricity market the Commission mainly focused on transmission access ♦ Energy directives (1996-) imposed unbundling of transmission networks to ensure non-discriminatory network access  Commission relied on subsidiarity principle and directives  Practical implementation was left mainly to member states ♦ Goal ≠ full integration of markets as e.g. in PJM, USA • Harmonization of market rules / products traded • Single network operator • Price zones determined by congestion ♦ Some bottom-up harmonization (e.g. Nordic countries) 23 October 2013 Market Integration and Consolidation 3
  4. 4. Market integration  Very slow progress on allocation of cross-border capacity ♦ Florence Forum (1998-2012)  design by stakeholders ♦ Mini-fora (2004-2005)  regional cooperation ♦ Creation of ACER (2011)  Agency for cooperation of regulators  Progress nonetheless 1. Market-based allocations instead of rationing Firms can buy transmission capacity in auction Owners decide using capacity before electricity prices are known  Inefficient use of capacity (wrong direction, not at full capacity) 2. Market-coupling Regional power exchanges and network operator cooperate Arbitrage is ‘institutionalized’  Network is used more efficiently 23 October 2013 Market Integration and Consolidation 4
  5. 5. Market integration  Mini-fora  Set of regional markets Acer, 2012 23 October 2013 Market Integration and Consolidation 5
  6. 6. 3 EFFECTS 23 October 2013 Market Integration and Consolidation 6
  7. 7. Integration effect: 1. Prices converge  Caused by transmission investments and market coupling Price convergence NL-FR-DE Yearly averages €/MWh Price convergence NL-BE-FR Hourly price difference €/MWh 75 Netherlands France Germany 70 65 60 55 50 45 40 35 2005 2006 2007 2008 2009 2010 2011 Source: APX, 2010 Source: ACER, 2013  Spot market ≈ 1 price / region 23 October 2013 Market Integration and Consolidation 7
  8. 8. Extra Slide Integration effect: 1. Prices converge  Reason for inefficient use of transmission capacity before marketcoupling ♦ Badly designed markets (timing, uncertainty, information) ♦ Firms leave money on table • Mainly larger firms? Bunn, D., Zachmann, G., 2010. J Regul Econ • Lack of information does not explain all? Gebhardt, G., Hoeffler, F., 2013. Energy Journal 23 October 2013 Market Integration and Consolidation 8
  9. 9. Integration effect: 2. Arbitrage on cost differences  Network transports energy from low cost to high cost area = increase in total surplus  Reasons ♦ Different generation technologies (gas / coal / nuclear) ♦ Natural storage possibilities (hydro) ♦ Weather (heating, wind input, snow melting)  Short-term arbitrage benefits of full market coupling ♦ Relatively easy to estimate (price data available) ♦ 2.5bn-6bn EUR/year ♦ 60% of which is achieved already now Source: Booz & Company, et al. 2013. Report for EC. 23 October 2013 Market Integration and Consolidation 9
  10. 10. Integration effect: 3. Increase competition  Transmission capacity has increased competition  Example of Netherlands ♦ Import capacity grew from 3.9 GW (2006) to 5.6 GW (2011) ♦ Market coupling (2006) Reduced pivotality of firms (which is correlated with Lerner Index). Mulder, M., Schoonbeek, L., 2013. Energy Economics But, hard to pinpoint competition effect of integration econometrically (economic crisis, many changes in market)  Competition ♦ Increases production efficiency (Short Run) ♦ Gives better investment incentives (Long Run)  likely largest effect 23 October 2013 Market Integration and Consolidation 10
  11. 11. Integration effect: 3. Increase competition  Also horizontal market concentration within countries decreased (especially in Italy, Spain) 1/HHI (eq. # of equally sized firms) # firms, installed capacity >5% 12 12 11 11 France 10 France 10 9 9 Germany Germany 8 United Kingdom 4 8 United Kingdom 7 Italy 6 Spain 5 4 Belgium 3 3 Netherlands 2 2 1 1 7 6 5 Italy Spain Belgium Netherlands 0 0 2004 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Benchmarking reports 2004-2010, Energy markets in the European Union 2011 23 October 2013 Market Integration and Consolidation 11
  12. 12. Integration effect: 3. Increase competition  But competition effects might be partially offset by vertical mergers (electricity & gas) and international mergers Number of mergers International Large EU energy mergers  Important vertical effects National  ♦ ♦ ♦ ♦ EDP/ENI/GDP (P/I) 2004 E.ON/MOL (D/H) 2005 DONG/ELSAM/E2(DK) 2006 GDF/Suez (F/B) 2006 Mainly horizontal effects ♦ RWE/Essent (D/NL) 2009 ♦ Vattenfall/Nuon (S/NL) 2009 ♦ EDF/Segebel(F/B) 2009 Petz, M. 2012 (PhD thesis). Federico, G., 2011. J of Comp. L&E  Economic assessment of consolidation strategies requires evaluation of economies of scope & scale 23 October 2013 Market Integration and Consolidation 12
  13. 13. 3 PROBLEMS 23 October 2013 Market Integration and Consolidation 13
  14. 14. Problem 1: Support schemes for renewable energy are national  CO2 cap and trade mechanism is broken ♦ Prices are too low and unpredictable ♦ No incentives for renewable energy / energy savings ♦ Coal-fired power plants are cheaper than gas  National renewable energy support schemes ♦ Feed-in tariffs or certificate systems ♦ Large role of government • Risk taken up by government • Technology specific • Priority access for renewable energy: sometimes hidden subsidies ♦ Large fraction of production does no longer participate in market ♦ No trade of support schemes across borders by firms 23 October 2013 Market Integration and Consolidation 14
  15. 15. Problem 1: Support schemes for renewable energy are national  Huge benefits for allowing international trade in renewable energy support schemes ♦ 40%-70% savings Fürsch, M. et al. 2010, Aune at al. 2012 ♦ 15-30 bn €/yr Booz & Company, et al. 2013  We could also rely more on Cap-and-trade system ♦ Increase government revenue with 43 bn€/yr Tasios, N. 2013 + own estimate  But results have been criticized Ragwitz, et.al.,2011 (Re-shaping) ♦ ♦ ♦ ♦ Non-economic barriers Learning by doing requires technology specificity Directive 2009/28/EC already allows trade among member states Redistributive aspects (rents for producers)  Harmonization & coordination on EU level might be necessary ♦ Use right instrument for each externality ♦ E.g. Learning by doing is international  International instrument 23 October 2013 Market Integration and Consolidation 15
  16. 16. Problem 2: Capacity markets are national  Many existing power plants are not profitable ♦ Low demand due to economic crisis ♦ Too low CO2 prices (gas-fired power plants close) ♦ Additional supply by renewable energy  Governments use capacity markets to support firms, ensure sufficient flexible generation ♦ Often national in scope (only national generation / different products) ♦ Distorting investment decisions (long term) ♦ Distorts trade patterns ♦ Might create hold-up problems (waiting for subsidies)  Long run cost of national security targets 3-7.5 bn/yr (Booz & Company, et al. 2013 ) 23 October 2013 Market Integration and Consolidation 16
  17. 17. Problem 2: Capacity markets are national  If capacity markets are implemented ♦ Clearly define the product (with specified obligations for bidders) ♦ Allow international trade ♦ Combination of financial and physical incentives  Harmonization necessary at EU-level ♦ Minimal requirements? ♦ Standardization of products? ♦ Cooperation on transmission capacity? 23 October 2013 Market Integration and Consolidation 17
  18. 18. Problem 3: Transmission Investments  Investments in one country has benefits/costs in other countries ♦ A good long-term compensation scheme does not exist ♦ Investment needs = 5 bn €/yr (ENTSO-E, 2012, Development plan) ♦ If only 50% invested: total system cost increase 3-5 bn €/yr (Booz & Company, et al. 2013 ) ♦ High return  Coordination of transmission and generation investment is a problem ♦ Future investments will be situated further from demand centers (e.g. renewable energy)  Requires closer cooperation of network operators and power exchanges and further integration ♦ Long run benefit of full market integration 12.5-40 bn€/yr (Booz & Company, et al. 2013 )  Long term financial transmission rights & more price regions 23 October 2013 Market Integration and Consolidation 18
  19. 19. Problem 3: Transmission Investments Extra Slide ENTSO-E, 2012 23 October 2013 Market Integration and Consolidation 19
  20. 20. Summary  Current situation: (international) competition & integration Time Dimension Investments Contracts Day-ahead market Balancing & Reserve markets RES • Technology specific subsidies • Connection guarantee National Feed-InTariffs No participation No participation NonRES • Policy uncertainty transmission • Wrong CO2 price • Technology specific capacity markets? National capacity market + Private contracts Market Coupling Still national, but changing Regional  Pan European 20

×