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Why & How the EU Regulates “Deregulated” Energy Markets?

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A closed seminar on Electricity Market Design presented by Jean-Michel Glachant for DG COMP – Brussels – 2nd December 2013

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Why & How the EU Regulates “Deregulated” Energy Markets?

  1. 1. Why & how the EU regulates “deregulated” energy markets? DG COMP – Brussels – 2nd December 2013 Jean-Michel Glachant Director Florence School of Regulation European University Institute (Florence, Italy)
  2. 2. Regulating the deregulated… 1. Initial roadmap (1.0) Stephen Littlechild & UK: to deregulate the market zone; to regulate its monopoly “gates & bridges” 2. Version (2.0) Bill Hogan & California: power traders cannot self-organise their power markets 3. Version (3.0) Angela Merkel & Germany: EU CCGT target model cannot swallow massive intermittent RES www.florence-school.eu 2
  3. 3. (1) Initial roadmap (1.0) Littlechild & the UK: Deregulate market zone; regulate its monopoly gates & bridges White paper end 80’; Opening E&W Pool 1st April 1990 ¤ Open entry in generation (production), trade (wholesale) and supply (retail) ¤ it opens doors for deregulated market ¤ new technology CCGT + cheap gas (“Dash for gas”) push actual entry ¤ Unbundling of grids as market’s “monopoly gates & bridges” ¤ Regulation to get “Third Party Access” to market and grid neutrality vis-àvis the market forces ¤”Incentive regulation” to make grid regulation mimic market incentives www.florence-school.eu 3
  4. 4. (1) Initial roadmap (1.0) Cted ¤ Deregulated Market Zone ¤ Market rules dealt before market opening between ministry, generators and suppliers ¤ Market rules are not “public” but private arrangement between generators and suppliers; only market players can change these rules ¤ Hence hard to bypass market power of “generator coal duopoly” + “sleeping nuclear” > takes 10 years + market entire redesign ¤ Incentive Regulation for grids as market’s “monopoly gates & bridges” ¤ Congestion management not put “in the market” (it is grid affair) ¤ Hence market equilibrium with no grid feasibility; grid constraints treated apart after market equilibrium (“Uplift”) > Logical? Or Illogical? ¤ Incentive for congestion management (Cost past through > Performance Based Regulation – also means “risk sharing” between grid and its users) www.florence-school.eu 4
  5. 5. (2) Version (2.0) Bill Hogan & California: Power traders cannot self-organise their power markets ¤ OK cannot forget Market Power - and it is not only HHI (ownership structure of industry assets) it is mainly “supply power” (= effect on supply equilibrium of any unilateral capacity withdrawal) ¤ OK cannot forget Market Abuse and it is not market power but “market gaming” (hence see ENRON & FERC OMOI etc. - MIFID; REMIT) ¤ BUT “Something’s still missing”: (Bill Hogan) wholesale power market is “incomplete market” - (typically “Day Ahead”) Wholesale market traders: 1/ do not know if “market equilibrium” is feasible for the grid or not; Grid congestion not seen (foreseen) in decentralized market equilibrium (nobody knows enough to predict) 2/ do not know either if “market equilibrium” is “supply equilibrium” or not; System adequacy (system balancing) cannot be predicted in decentralized day ahead market equilibrium (nobody knows enough to predict) www.florence-school.eu 5
  6. 6. (2) Version (2.0) Cted ¤ Whom is able to “complete” incompleteness of Day Ahead (or Intraday) wholesale market? Someone able to centralize all market + grid information… It is not a market player… but the damned grid monopoly acting as “System Operator”> SYSTEM OPERATOR is MARKET SUPER WIZARD ¤ System Operator completes incomplete markets only in its zone of operation > hence markets completeness (= actual implementation of market equilibrium) is “zoned” by nature (by System Operation organization) ¤To go from one market zone to the other = to jump from one system operation zone to the other ¤ Explicit jump (up to you decentralized market player to explicitly predict) ¤ Implicit jump (system operators to implicitly predict for the whole market) ¤ Market splitting (or) Market coupling (&) civil war between PXs for Intraday www.florence-school.eu 6
  7. 7. To conclude (1.0) and (2.0) 1/ In Power sector the Market Area cannot be entirely unbundled from the Grid Monopoly • Feasibility of ex ante market equilibrium is constrained by actual Kirchhoff Laws for grid flows’. • Adequacy of market equilibrium as actual system equilibrium is constrained by non-storability of power & high social cost of curtailment. 2/ the Wholesale Market (typically Day Ahead) is always half blind • A whole sequence of markets needed to go step by step to full implementation of day ahead provisional equilibrium. • This sequence is the “market design”: // Inside a “market zone” – “system operation zone”// Day Ahead > Congestion management > Intraday > Balancing // Across market zones// Market Splitting (or) Market Coupling (or) Explicit Auctioning www.florence-school.eu 7
  8. 8. Version (3.0) Angela Merkel & Germany • Large-scale development of intermittent RES kept out of the market (priority dispatch, FIT or FIP) => Increasing gap between wholesale market prices & consumer bills … but anyway the market has not been designed to host intermittent RES! • RES are not flexible due to : “0” marginal cost + dependence on resource availability  Pricing at times of scarcity (Price-caps) & at times of abundance (negative prices) becomes key. • Flexible back-up resources must get their return while running less hours (“residual demand” after RES priority dispatch / at lower prices ?).  Can scarcity pricing in an Energy-only market deliver an adequate return ? Are capacity remuneration mechanisms needed ? Beware that Long-term adequacy/ Short-term flexibility do not match ! www.florence-school.eu 8
  9. 9. Version (3.0) Angela Merkel & Germany. Cted • Existing zones (time & space) must be revisited. Finer temporal and spatial granularity are needed as: – Hourly products do not match the variations of RES production (leaving within-hour balancing responsibility to the TSOs) => new products 15 min, 5 min? – National zones are not adequate boundaries … and any adequate zone (> Nodal) cannot hold at all times  Trade-off between: 1/ Simplifications to increase market liquidity and ease cross-border exchanges and 2/ Cost-reflectivity • The sequence of markets is impacted: as RES production is difficult to forecast, more trade take place closer to production time.  Need to ensure price consistency across Day-ahead/ Intraday/ Balancing: – Wholesale day-ahead markets vs. Reserves contracted by TSOs – Transmission pricing consistency all along the sequence of markets www.florence-school.eu 9
  10. 10. Thank you for your attention Email contact: jean-michel.glachant@eui.eu Follow me on Twitter: @JMGlachant Read the Journal I am chief-editor of: EEEP “Economics of Energy and Environmental Policy” My web site: http://www.florence-school.eu www.florence-school.eu 10

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