European Electricity Markets Structure and Trading

Phase I: Retail Competition and Crossborder Mergers

Modelling and Managing Competitive Electricity Markets
30 September 3 October 2003
John Bower

Overview

European electricity market overview

The Directive and retail supply competition
Unresolved regulatory issues
BREAK
Transmission economics
Measuring market integration
Transmission pricing solutions
Case Study

John Bower

Europe I

European electricity market overview

Four coordinated AC transmission grids linked by DC lines define market boundary.
TRANSMISSION SYSTEMS IN THE EUROPEAN ELECTRICITY MARKET

Source: UCTE
John Bower

Europe I

European electricity market overview

. owned by 45 separate entities spread across 28 countries coordinated by ETSO
EUROPEAN TRANSMISSION SYSTEM OPERATORS (ETSO) MEMBERS

TSOI, the association of TSOs in Ireland:

Irish Republic (ESB), Northern Ireland, (NIE)

UKTSOA, the United Kingdom TSO association:

England & Wales (NGC), Scottish Power (S. Scotland), N. Scotland, (Scottish Hydro)

NORDEL, the Nordic TSOs:

Norway (Statnett), Sweden (Svenska Kraftnat), Finland (Fingrid), W. Denmark (Eltra), E. Denmark (Elkraft)

UCTE, the Union for the Co ordination of Transmission of Electricity, association of TSOs of the Continental
countries of Western and Central Europe: Belgium (Elia SA/NV), Germany (Bewag AG, Energie Baden
Wrttemberg AG, E.On Netz GmbH, Hamburgische Electrizitts-Werke AG, RWE Net AG, Vereinigte
Energiewerke AG), Spain (Red Elctrica de Espaa S.A., France (EdF Gestionnaire du Rseau de Transport
dElectricit), Greece (Hellenic Transmission System Operator),Italy (Gestore della Rete di Transmissione
Nazionale), Slovenia (Elektro Slovenija), Croatia (Hrvatska Elektroprivreda, FRJ, EP CG, Elektroprivreda Crne
Gore, Elektroprivreda Srbije), FYROM (Elektrostopastvo na Makedonija), Bosnia Herzegovina (Joint Power
Coordination Center), Luxembourg (Compagnie Grand Ducale d'Electricit du Luxembourg), Netherlands,
TenneT bv), Austria (Tiroler Wasserkraftwerke AG, Verbund - Austrian Power Grid, Vorarlberger Kraftwerke
AG), Portugal (Rede Elctrica Nacional, S.A.), Switzerland (Aare-Tessin Ltd. for Electricity, BKW FMB Energie
AG / BKW FMB Energie S.A., Elektrizitts-Gesellschaft Laufenburg Grid AG/ Electricit de, Laufenbourg Grid
AG, S.A., Energie Ouest Suisse, Etrans Ltd., Nordostschweizerische Kraftwerke AG), Czech Republic (CEPS),
Hungary (Magyar Villamos Mvek Rt.), Poland (Polskie Sieci Elektroenergetyczne SA), Slovak Republic
(Slovensk Elektrrne, a.s., Prenosova sstava)
John Bower

Europe I

European electricity market overview

Market serves 460 million people with peak load of 400 GW using 2784TWh per year
EUROPEAN ELECTRICITY MARKET STATISTICS
Country
Austria
Belgium
Czech Republic
Denmark
Finland
France
Germany
Great Britain
Hungary
Croatia
Greece
Ireland
Italy
Luxembourg
Netherlands
Norway
Poland
Portugal
Slovakia
Slovenia
Spain
Sweden
Switzerland
Total

John Bower

Area
km 2
83900
30500
78866
43000
338000
544000
357000
243300
93030
56538
132000
70300
301300
2600
41500
324000
120728
92400
48845
20253
504800
450000
50000
4026860

Installed
Generation
Population
Capacity
million
MW
8.10
10.20
10.30
5.30
5.20
58.60
82.00
59.00
10.10
4.70
10.50
3.70
57.60
0.40
15.60
4.50
38.60
9.90
5.40
2.00
39.70
8.90
8.90
459.2

13517
14088
13746
12544
16143
108291
107769
69866
7847
3601
9401
4165
65513
0
14210
27622
30135
9784
7832
2400
44921
32934
14606
630935

Pump
Maximum
Total Net
Storage
Total
System Load Generation Consumption Consumption Net Imports
MW
GWh
GWh
GWh
GWh
7728
12291
8744
6284
12700
66863
74300
51000
5543
2430
7699
49019
888
12255
20420
21836
6022
4149
1698
32430
26000
9027
439326

Europe I

54068
80162
67741
34230
67113
503998
496588
359637
32420
9829
45208
21634
262426
1145
52910
137000
144681
37573
28718
12529
195372
139994
65392
2850368

1986
1639
749
2148
2901
6604
5789
3497
0
18
585
449
9177
1022
0
10256
2790
560
392
0
4908
11707
1974
69151

50718
82851
56974
32748
76093
427471
493953
370312
35858
13763
44617
21283
297706
5834
71824
107721
135517
37949
25653
11180
194905
132974
56401
2784305

-1364
4328
-10018
666
11881
-69923
3154
14172
3438
3952
-6
98
44457
5711
18914
-19023
-6374
936
-2673
-1349
4441
4687
-7017
3088

The Directive and retail supply competition

New EU Directives give all electric (gas) consumers right to choose supplier by 1 July 07
MAIN EU LEGISLATION ON SINGLE MARKET FOR ENERGY
Transparency
Directive

Directive

Directive

II
Electricity

Electricity

Directive

Directive

II

Gas Consumption

20%

Electricity Consumption
1985
John Bower

1990

1995

30%
2000

Europe I

SINGLE
ENERGY
MARKET

Transit
Directive

SINGLE
EUROPEAN
ACT

Gas

Gas

100%

28%
33%

100%
2005
6

The Directive and retail supply competition

. with energy market liberalisation also being driven by economic / technical pressures
FORCES FOR CHANGE IN CROSS-BORDER ELECTRICITY TRADE

DER
E GU
L
OF
NAT ATION
ION
AL
G
MAR AS
KET
S

IN
C
RE SPE REA
OF DU ED SE
CO CED AN D
D
M
PU CO
S
T
IN T
G

D
SE
EA DC N
CR F IO
IN ZE O ISS S
SI NSM LE
A AB
TR C

O
ION
LAT L
A
EGU
DER NATION ITY
IC
CTR
ELE RKETS
MA

EUROPEAN
ELECTRICITY
MARKET
EVOLUTION

INCREASED
EFFICIENCY AND
REDUCED SCALE
OF POWER
PLANT
John Bower

Europe I

The Directive and retail supply competition

The Directive guarantees competition in supply with transmission / distribution access.
KEY PROVISIONS OF THE ELECTRICITY DIRECTIVE

Unbundling of accounts
Prevents subsidisation and distortion of competition in vertically integrated firms

Competition in construction and operation of new plant

Authorisation procedure allows market to determine investment criteria
Tendering procedure allows central planner to determine when/where to build capacity

Open access to transmission (and distribution) networks

Independent Transmission System Operator (TSO) must be appointed
Tariffs for connection and carriage must be transparent and non-discriminatory
Reciprocity clause and system reliability issues allows countries to bar access

Right of consumers to choose their supplier

Increasing number of consumers should be authorised to choose their suppliers

John Bower

Europe I

The Directive and retail supply competition

About 70% of electricity retail market volume is now eligible for supply competition and
PERCENTAGE OF ELECTRICITY CONSUMPTION ELIGIBLE TO CHOOSE SUPPLIER
Net consumption open to supply competition

100%
90%
80%
70%
60%

2002
50%

2005
40%
30%
20%
10%

en
ed
Sw

N
or
w
ay

an
y

er

an
d
nl
Fi

ria
A

us
t

et

he

rla

nd

g
bo
ur

Sp
ai

Lu
xe

el

gi
u

al

ly

Po
rt
ug

Ita

nd
la
Ir e

k
m
ar

ce

D
en

G
re
e

Fr
an

ce

0%

Source: European Commission DG Energy and Transport

John Bower

Europe I

The Directive and retail supply competition

. about 80% of gas retail market volume.
PERCENTAGE OF GAS CONSUMPTION ELIGIBLE TO CHOOSE SUPPLIER
Net consumption open to supply competition

100%
90%
80%
70%
60%

2002
50%

2005
40%
30%
20%
10%

John Bower

Europe I

er
m
an
y
G

an
d
Fi
nl

A
us
tr
ia

Ita
ly

d
Ire
la
n

n
ai
Sp

er
la
n

um

N
et
h

el
gi
B

ds
Lu
xe
m
bo
ur
g

Source: European Commission DG Energy & Transport

Sw
ed
en

en
m
ar
k
D

G
re
ec
e

Fr
an
ce

Po
rt
ug
al

0%

10

Unresolved regulatory issues

In reality State and Federal policy objectives are interdependent and often in conflict
LIBERALISATION CONFLICTS

Security
Concern about dependence on other countries for generation capacity
Concern about dependence on other countries for generation fuels
Concern about dependence on other countries for gas / electricity transmission routes

Competition
Conflict between capital market and public service obligations
Access rights to transmission/ distribution and pricing of transmission
Increasing industry concentration through mergers and acquisitions

Environment
EUETS (CO2) and LCPD (NOx, SOX, particulate) costs versus lower prices
Renewables versus Combined Cycle Gas Turbines (CCGT)
NIMBY delays on approval of transmission routes / generation site licences

John Bower

Europe I

11

Unresolved regulatory issues

Liberalisation means wholesale / retail markets replace government control and .
STRUCTURE OF A LIBERALISED ELECTRICTY MARKET

Generators

Consumers

WHOLESALE
MARKET

Transmission
John Bower

Suppliers

RETAIL
MARKET
Contract Flow

Physical Electricity Flow

Europe I

Distribution
12

Unresolved regulatory issues

. with new entrants and increased efficiency reducing prices.
IMPACT OF LIBERALISATION IN ENGLAND & WALES 1990 - 2003

Oligopoly

Competitive
Generators

-14%

Monopoly

WHOLESALE
MARKET

RPI-X

Transmission
John Bower

0% / -17%

Suppliers

RETAIL
MARKET
Contract Flow

Physical Electricity Flow

Europe I

Consumers

Monopoly

RPI-X

Distribution
13

Unresolved regulatory issues

. but this outcome is not guaranteed and prices may rise instead.
ENGLAND & WALES ANNUAL ELECTRICITY PRICE HISTORY 1990 - 2003
95.00
90.00
85.00
80.00
75.00
70.00

Price (/MWh)

65.00
60.00
55.00
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
1990/91

1991/92

1992/93

1993/94

1994/95

1995/96

1996/97

1997/98

Retail Price (Household)

Retail Price (L. Industry)

Coal Marginal Cost

CCGT Marginal Cost

1998/99

1999/00

2000/01

2001/02

2002/03

Wholesale Price

Source: EIA
John Bower

Europe I

14

Unresolved regulatory issues

National regulation is still required to create and maintain a competitive industry
SHARE OF COAL GENERATION CAPACITY IN ENGLAND & WALES
National
Power
BEGL

100%

International
Power
Innogy

Share of Coal Generation Capacity

80%

AES
60%

TXU/Eastern
EdF
40%

AEP
Edison
20%

PowerGen
Scottish
Power
ALCAN

A
pr
-9
O 0
ct
-9
A 0
pr
-9
O 1
ct
-9
A 1
pr
-9
O 2
ct
-9
A 2
pr
-9
O 3
ct
-9
A 3
pr
-9
O 4
ct
-9
A 4
pr
-9
O 5
ct
-9
A 5
pr
-9
O 6
ct
-9
A 6
pr
-9
O 7
ct
-9
A 7
pr
-9
O 8
ct
-9
A 8
pr
-9
O 9
ct
-9
A 9
pr
-0
O 0
ct
-0
A 0
pr
-0
O 1
ct
-0
1

0%

Source: EIA

John Bower

Europe I

15

Unresolved regulatory issues

. but many countries still pursue the national champion objective.
EU GENERATION CAPACITY CONCENTRATION RATIO (3 FIRM) 2001
100%
90%

Share of Total Net Supply (%)

80%
70%
60%
50%
40%
30%
20%
10%

UK

Norway

Germany

Netherlands

Austria

Finland

Denmark

Sweden

Spain

Italy

Portugal

Belgium

Ireland

France

Greece

0%

SOURCE: European Commission, Company Accounts, OIES estimates

John Bower

Europe I

16

Unresolved regulatory issues

and vertical integration between concentrated generation sector and monopoly wires
Control Areas of the German Transmission
System Operators as at 1 Jan 2000

Control Areas of the German Transmission

System Operators as at 1 Jan 2001

Source: Source: DVG (Deutsche Verbundbesellschaft) http://www.dvg-heidelberg.de/extern/DVG/res.nsf/files/Regelzonen2001-GB.pdf/$file/Regelzonen2001-GB.pdf

John Bower

Europe I

17

Unresolved regulatory issues

Cross-border mergers may now be preventing access to transmission / distribution .
EUROPEAN INVESTMENTS OF EDF (APR 2002)
1. Estag 25%

15. Bert 89%

2. Elcogas 29.1%

16. Italenergia 18%

3. ISE 30%

17. Montedison 97%

4. Pego 10%

18. ATEL 13%

5. Graningue 36%
6. Motor Colombus 20%

5
10, 11, 13
12
6,18

9
1 7,8,15

7. Edasz 29%
8. Demasz 50.0%
9. Ech 58%
10. London Elec. 100%
11. SWEB 100%

3, 16, 17
2, 14

12. EnBW 34%

13. Seaboard 100%
14. Hidrocantabrico 59%

John Bower

Europe I

18

Unresolved regulatory issues

. creating interlocking relationships make regulation of network effects very complex
CORPORATE LINKS BETWEEN SWEDISH, GERMAN, UK MARKETS (APR 2002)

Vattenfall
Sydkraft
E. Midlands
PowerGen
Innogy

EoN

HEW
BEWAG
VEAG

RWE

Thames
Water

John Bower

Europe I

19

Unresolved regulatory issues

All national governments want to intervene to set national energy policy.
RECENT BRITISH ENERGY HEADLINES

28 Aug 02

British Energy drained by low prices-minister

01 Sep 02

British Energy ponders US sale

06 Sep 02

Nuclear firm British Energy begs for bailout

07 Sep 02

British Energy shares suspended as company warns of insolvency

08 Sep 02

Ministers offers 410 million loan to British Energy

09 Sep 02

British Energy falls almost 80 pct after LSE lifts trading curbs

26 Sep 02

Ministers extend loan to British Energy and increase it to 500

18 Sep 03

Government sets deadline on British Energy restructuring

22 Sep 03

Nuclear plants may get new lease of life

02 Oct 03

??????

John Bower

Europe I

20

Unresolved regulatory issues

usually under the guise of energy security
GENERATION TECHNOLOGY CAPACITY SHARE IN ENGLAND & WALES (Apr 1990 Mar 2004)

Capacity Share by Fuel and Generation Technology

100%

OCGT

90%

Oil

80%

Pump Store
70%

Small Coal
60%

Medium Coal

50%
40%

CCGT

30%

Large Coal

20%

Magnox

10%

AGR/PWR

0%
Oct-03

Apr-03

Oct-02

Apr-02

Oct-01

Apr-01

Oct-00

Apr-00

Oct-99

Apr-99

Europe I

Oct-98

Apr-98

Oct-97

Apr-97

Oct-96

Apr-96

Oct-95

Apr-95

Oct-94

Apr-94

Oct-93

Apr-93

Oct-92

Apr-92

Oct-91

Apr-91

Oct-90

Apr-90
John Bower

Hydro

21

Unresolved regulatory issues

but is in conflict with the environmental objectives of EUETS and LCPD
EU EMISSIONS TRADING SCHEME AND LARGE COMBUSTION PLANT DIRECTIVES

EU
Emissions
Trading
Scheme

EU
Large
Combustion
Plant Directive

Precursor

Phase I

Phase II

2003 2004

2005 2007

2008 2012

National Plan

CO2 only

CO2 + other gases

Formulation

Allocation only

Allocation + Auctions

Precursor

Phase I

Derogation Phase

2002 - 2003

2004 2007

2008 2015

National Plan

SOx, NOx, dust

SOx, NOx, dust

Formulation

ELV or NP

ELV or 20k hr derogation

Source: EIA
John Bower

Europe I

22

Russia

Source: EIA

John Bower

Thermal

Nuclear

Europe I

Hydro
Iceland

Albania

Tajikistan

Norway

Other

Switzerland

Kyrgyzstan

Latvia

Georgia

Malta

Lithuania

Armenia

Moldova

Slovenia

Croatia

Sweden

Bosnia and HG

Macedonia, TFYR

Estonia

Slovakia

Turkmenistan

Austria

Azerbaijan

Bulgaria

Yugoslavia

Hungary

Ireland

Finland

Belarus

Denmark

Portugal

Romania

Belgium

Uzbekistan

Kazakhstan

Greece

France

Czech Republic

900

Netherlands

Ukraine

Turkey

Spain

Poland

Italy

UK

Germany

Annual Generation Output (TWh)

Unresolved regulatory issues

even the EU Renewables Directive 10% target by 2010 is really about energy security
EUROPEAN ELECTRICITY GENERATION OUTPUT 2000

800

700

600

500

400

300

200

100

Geothermal and Other

23

Unresolved regulatory issues

Some EU industrial price fell initially but beginning to rise now and a wide range persists.
EU ELECTRICITY PRICES FOR INDUSTRIAL CONSUMERS (Ex Tax) AT 1 JANUARY
90
80

Price (Euro/MWh)

70
60
50
40
30
20
10

Source: Eurostat
John Bower

1997
Europe I

ay
or
w
N

Fi
nl
an
d
Sw
ed
en

G
re
ec
e
N
et
he
rla
nd
Lu
xe
m
bo
ur
g
D
en
m
ar
k

Fr
an
ce

Ire
la
nd

um
B
el
gi

U
K

Ita
ly

ai
n
Sp

rt
ug
al

Po

us
tr
ia
A

G
er
m

an

2003
24

Unresolved regulatory issues

. while household prices only fell a little overall and went up a lot in Scandinavia
EU ELECTRICITY PRICES FOR HOUSEHOLD CONSUMERS (Ex Tax) AT 1 JANUARY
160
140

Price (Euro/MWh)

120
100
80
60
40
20

Source: Eurostat
John Bower

k
ar
m
en

Fi
nl
an
d

ay
N

or
w

n
ed
e
Sw

re
ec
e
G

la
nd
Ire

K
et
he
rla
nd

Sp
ai
n

an
ce
Fr

tr
ia
A
us

um
Lu
xe
m
bo
ur
g

B
el
gi

rt
ug
al
Po

an
y
er
m

Ita
ly

1997
Europe I

2003
25

Speaker
John Bower is a Senior Research Fellow at the
Oxford Institute for Energy Studies which is an
independent research charity affiliated to Oxford
University and dedicated to advanced research in the
social science aspects of energy. John joined OIES in
November 2001 and his research interest is in the
emergence and evolution of integrated cross-border
electricity and gas markets. Specifically; the
development of efficient pricing and investment
mechanisms for energy, transmission capacity, and
emissions.
Oxford Institute for Energy Studies

Before joining the OIES, John completed his PhD at

London Business School and his previous career was
in the commodity industry. His experience ranges
from energy trading, at Marc Rich & Co, to risk
management consultancy, with Coopers & Lybrand,
advising commodity traders, producers and
processors in base metal, precious metal, softs and
energy markets. Immediately prior to his PhD he was
Global Controller Metals/Commodities at Deutsche
Morgan Grenfell.

57 Woodstock Road
Oxford OX2 6FA
United Kingdom
Telephone: +44 (0)1865 889 125
Facsimile: +44 (0)1865 310 527
Email: john.bower@oxfordenergy.org
URL: http://www.oxfordenergy.org

John Bower

Europe I

26