Why & How the EU Regulates “Deregulated” Energy Markets?
Why & how the EU regulates
“deregulated” energy markets?
DG COMP – Brussels – 2nd December 2013
Director Florence School of Regulation
European University Institute (Florence, Italy)
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
(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
(1) Initial roadmap (1.0) Cted
¤ Deregulated Market Zone
¤ Market rules dealt before market opening between ministry, generators
¤ 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)
(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)
(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
To conclude (1.0) and (2.0)
1/ In Power sector the Market Area cannot be entirely unbundled from the
• 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
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
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 !
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
Thank you for your attention
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