The (In)Achievements of the EU Internal Energy Market(s)
The (In)Achievements of the EUInternal Energy Market(s)Jean-Michel Glachant(Florence School of Regulation)@ EEM13 / KTH in Stockholm29 May 2013
Agenda• (1st Part)Starting point: EU Internal Market Design for Gas• (2nd Part)Is EU Electricity Market Design bringing anotherdimension(s) ?• (3d Part)Need to revisit our EU Gas Target Model?
3Pillar 1Enable functioningwholesale marketsFlorence School Target ModelPillar 2Tightly connectthese marketsPillar 3Enable securesupply patternsCommon foundationsImprove market effectivenessby realizing economic pipeline investments1st Part - OVERVIEW OF THE FSR TARGET MODELFOR EUROPEAN GAS MARKET INTEGRATION
4EU Gas Architectures(To Enable FunctioningMarkets)• Two architecturesproposed by Florence School(1). Market Areas (= complete market fusion)• single price zone (entry/exit) + single balancing zonefrom import points to end-users• either structured as:*National (if “existing Wholesale markets” canfunction well alone); or**Multi-national (if cross-border cooperation requiredto get “functioning Wholesale markets” as 20 Bcm + 3different gas sources)
5EU Gas Architectures(To Enable FunctioningMarkets)(2). Trading Regions (Balancing arrangements are left apart)• a single price zone (entry/exit) for wholesale marketswith congestion-freeinterconnection• BUT balancing zones are left to several national end-user zones.
6To tightly connect the markets• Harmonisation of trading conditions (ETC)• They are measures to be implemented foremost inthe ENTSOG network codes in the areas of:– Capacity Allocation Mechanism– Congestion Management Procedure• open seasons, VP2VP-products, coordinated auctions for longerterm capacities, 1stC1stSfor the intra-day market, harmonizedcontract start dates, standards for secondary capacity trading…
7– Nomination and Balancing• common gas day, harmonized nomination schedules, limits onre-nomination, …– Tariffs• harmonized date for change of tariffs, structure methodology,inter-TSO compensations within large zonesTo tightly connect the markets
8COMMON FOUNDATIONS:Coherent Transportation Investments• Investments for market interconnections– Market based “open seasons” with pre-set evaluationcriteria– regulatory authority could add capacity needed forsecurity of supply or openness of markets (incl. for shortterm trade)• Investment within the markets (inside pricingzones), to be evaluated against congestion costs
Is this gas target model enough?• The ultimate European Union goal: a “unifiedenough” internal market– Hence a Gas target model– And a Electricity target model• But increase interactions between bothmarkets lead us (& me) to wonder…How much do these two markets designsinteract?
2nd Part: Increasing Gas /Electricity market interactions0%5%10%15%20%25%1990 1995 2000 2005 2010EU27/Share of electricity generatedby GFPP in total electricity generationSource: Author elaboration, data from Eurostat (accessed July 2012)
Increasing market interactionsEU27/Share of natural gas consumption used to generate electricitySource: Author elaboration, data from Eurostat (accessed July 2012)0%5%10%15%20%25%30%35%40%1990 1995 2000 2005 2010
Increasing market interactionsFlexibilitydimensionsNatural gasCoal NuclearOCGT CCGTStart-up time ++ ++ - --Start-up costs ++ + - --Ramp rate ++ + - -Minimumstablegeneration++ + - --Flexibility criteria for different power generation technologiesSource: IEA 2012Flexibility
Design of trade for gas and elec.• Both gas and electricity have strong time andspatial delivery specificities (no Dropbox!)– Different economic values for time and space• Design of trade might simplify the traded products– First simplifying the commodity (to be traded)• Simplifying the products being sold• Simplifying the products being bought– Then defining a set of services complementaryto the simplified trade (= the “ancillary services”)
Trade designsA BSimple Point-to-pointtimeA BPoint-to-point with timeflexibilityT=maxT=1A B1Simple Entry-Exit(without time flexibility)T=1B2B3BnB4timeA B1Entry-Exit with timeflexibilityT=maxT=1B2B3BnB4
We said “market areas& trading regions” (as EU gas pillar 1)...• What does it mean now?Prices different at each trade point(nodal approach)Price the same inside a trading zone(zonal approach)• Transmission allocation entersinto the market clearing• Transmission allocation does notenter into the market clearing• Need less transmission servicescomplementary to trade• Need more transmission servicescomplementary to trade• Lower price liquidity • Higher price liquidity
...the length of balancing periodis consequential tooPrices might differ at each time period(t)Price the same within several periods(n t)• Need less complementarytransmission services• Need more complementarytransmission services• Lower price liquidity • Higher price liquidity
Networks and flows bring interactionsbetween gas and power designsPipelinesElectrical linesElec. ConsumerGFPPGas supply pointsACB
They also bring interactionsbetween adjacent market designsFEDACB
A few examples...(1) the temporaldesignof gas & elec. trades
Zone AZone BVolatile powerpricesVolatile powerprices sent togas turbinesVolatility toolow to invest inpeaking gasturbinesWind powercreatesintermmitencyFlatter powerproduction andconsumptionFlatterpower pricesGas turbines askfor volatile gasconsumptionFlexibility costmakes the gasexpensiveFlatter gasconsumptionLow flexibility costmakes gas cheapExpensive gas is acounter-signal forinvestmentCheap gas is aninvestmentsignalGas systemPower system
SignalsZone A Zone BVolatile powerprices are signalsfor peaking gasturbinesVolatility too low toinvest in peakinggas turbinesExpensive gas is acounter-signal forinvestmentCheap gas is aninvestmentsignalGas systemPower systemMarkets should decide onthe trade-off......but this trade-off is alsoshaped by market rules
Missing signals– Assume that to increase market liquidity, wesocialize temporal flexibility– Network tariffs do not reflect flexibility costs• Signals coming from the gas system areweakened
SignalsZone A Zone BVolatile powerprices aresignals forpeaking CCGTsVolatility toolow to invest inpeaking CCGTsExpensive gas is acounter-signal forinvestmentCheap gasflexibility isinvestmentsignalGas systemPower systemSocialized daily gas balancing offering free temporal flexibility…might annihilate the locational signal for peaking units
A few examples...(2) the spatial designof gas & elec. trades
Zone AZone BIncentive for gasturbinesCounter-signalfor gas turbinesHigh powerpriceLow power priceExpensive gas is acounter-signal forinvestmentCheap gas is aninvestment signalGas systemPower systemNetworkCongestionSignals to removecongestion in powernetworkContractual CongestionArtificial high gaspriceArtificial low gaspriceSignals pro congestion inthe power network
SignalsZone A Zone BPower prices aresignals for CCGTsPrice too low toinvest in CCGTsExpensive gas is acounter-signal forinvestmentCheap gas is aninvestmentsignalGas systemPower systemThere is again a trade-off...But opposed to theplayers’ preferences
SignalsZone A Zone BPower prices aresignals for CCGTsPrice too low toinvest in CCGTsExpensive gas is acounter-signal forinvestmentCheap gas is aninvestmentsignalGas systemPower system... It is the Entry/Exit zoning for gaswhich lowers the locational signal
Pillar 1Enable functioningwholesale marketsMECOS ModelPillar 2Tightly connect thesemarketsPillar 3Enable secure supplypatternsCommonfoundationsImprovemarket effectivenessby realizingeconomicpipelineinvestmentsShort Term Interactions: Gasmarket design to coordinatewith power market designLong Term: Efficientinvestments constrainedbymarket designs
Conclusions• Basic design of trade (= defining spatial andtemporal characteristics of the commodities) is keyto efficiency and liquidity of markets• Coordination of transmission services and markettrading mechanisms is core of this key• Interactions gas / elec. Networks and Markets aretoo dense to ignore. They have to be taken intoaccount by the basic designs of trade >> redesignwelcome?
Further reading...• Vazquez, M. and M. Hallack, "Interaction betweengas and electricity market-based trading in theshort run“; "Short-term allocation of gas networksin the EU and gas-electricity input foreclosure”,both WPs on FSR website• On Gas Market Designs in the US, the EU andAustralia: special issue J. Makholm, L. Ruff,Vazquez-Hallack-Glachant in of EEEP “Economics ofEnergy and Environmental Policy” (Fall 2012).