Master in Advanced Power Electrical Engineering
Introductory reflections on Energy and Economics
Ronnie Belmans Leonardo Meeus
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Economics and energy Childhood friends • Perfect competition – Ideal gas
No interaction (friction) between infinite number of Consumers and suppliers o Particles o
Explanatory models, strong hypotheses leading to maximum efficiency WALRAS: Market equilibrium o CARNOT: Reference cycle o
Realistic interactions: partial models o
Limited number of agents, strategic interactions, … –
o
More realistic systems –
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COURNOT, BERTRAND, HOTELLING VAN DER WAALS
Economics and energy Childhood friends
• Utility – Temperature
Immeasurable variables o o
Temperature: expansion of mercury or other motion Utility of goods: more = better but no unit
• Smith's Invisible Hand – Maxwell’s Concept
Mythical illustrative concepts o
Facilitate understanding
• Max PLANCK
«Physics because economics was too difficult »
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Master in Advanced Power Electrical Engineering Techno-economic aspects of power systems
Ronnie Belmans Leonardo Meeus
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Lesson 1: Liberalisation Karolien Verhaegen
• • • •
Historical introduction Authorities – Associations 2 Directives Reality show
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Network industries Telecom - Energy - Railway - Postal services
• Economical characteristics
Network externalities o
Natural monopolies o
Benefit determined by network as such and total number of users Not always efficient to have >1 network
Public interest o
Easy and affordable access for all citizens
• Many years legal or de facto monopolies © Copyright 2005
Changing times
• Mid 1970 increasing oil prices and inflation • A lot of state ownership and state intervention
Keynesian economic ideology
• Flourishing neo-liberal ideology
Chicago school: free trade
• Politics: Reagan and Thatcher
Privatization and liberalization
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Different networks • Telecom
Old technology: POT’s (Plain Old Telephone) ADSL Cable network Wireless (GSM)
• Postal services • Train • Sewers ⇒ No real source ⇒ Nothing produced ⇒ Interconnection between networks © Copyright 2005
Same network
• • • •
Electric energy Water Natural gas Petroleum
⇒ Different sources ⇒ Something is produced ⇒ Network access is key
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Restructuring Delivery of electric energy
• Competition in generation and retail/supply • Markets
GenCo
• Increased transaction costs
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GenCo
TransCo
GenCo REGULATED
DistCo
DistCo
DistCo
Retail
Retail
Retail
Pioneers
• New entrants in generation
1978 US Public Utility Regulatory Policy Act
• Development of wholesale markets and/or introduction of retail competition
1982 Chile -1991 Argentina -1993 Peru 1987 New Zealand – 1993/5 Australia (VIC/NSW) 1990 England&Wales 1991 Norway – 1996 Sweden 1998 California
• Not necessarily parallel developments ! © Copyright 2005
England and Wales
• Start of the pool 1990 • New Trading Arrangements (NET A) 1998
Trade bilateral or decentralized Seen as solution to high pool prices by Ofgem
• British Electricity Trading and Transmission Arrangements (BETTA)
Adding Scotland to arrangements for England and Wales
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Scandinavian market Norway
• Focus on establishing competition not on • • •
privatization 1990 Reform passed in parliament 1991 Introduction of retail competition 1993 Creation of spot market and TSO
Statnett (TSO) split from Statkraft (GenCo)
• 1995 Futures market • 1997 Full retail competition • (www.nve.no) © Copyright 2005
1st
common international marketplace
Nord Pool (1993) • All cross-border trade Scandinavia coordinated via Nord Pool
http://www.nordpool.org
• Norway • + Sweden (www.stem.se) and Finland (www.energiamarkkina virasto.fi) (1996)
• + Jutland Denmark (1999) • + Zealand Denmark (2000) (www.energitilsynet.dk)
• Volume traded is 30% of consumption © Copyright 2005
USA context • 3 synchronous areas HVDC interconnections • FERC http://www.ferc.gov/
Federal Energy Regulatory Commission
• NERC (1968) http://www.naero.org/
North American Electric Reliability Organization
• No federal legislation on liberalisation © Copyright 2005
Californian disaster Fig: Borenstein et al. (2002)
Result
Bankruptcy largest utility (PG&E) and CalPX
Very
uncertain situation
Intervention
by the
government At
Rolling blackouts
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the moment talks about re-regulating
Black outs
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USA patchwork • California 2001 mess and 2003 Black-outs
Questioned technical robustness market-based power systems Slowed down the process in the USA
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Info source: EIA 2003
Lesson 1 Liberalisation
• • • •
Historical introduction Authorities – Associations 2 Directives Reality show
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EU policy
• The EC treaties of Rome (1957) and Maastricht (1993)
Creation of the internal market Free movement people, goods, services & capital
• European Council Lisbon (2000)
Creation of the most competitive and dynamic economy in the world by 2010
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EU Policy making process Secondary EU law
• Commission (EC) exclusive right of initiative
Except monetary affairs: European Central Bank Can alter/retract proposal at any time EP and Council can request EC to submit proposal
• Council
Central legislative organ o
Adopts / amends / rejects EC proposal
Unanimity required to deviate from EC proposal
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o
EC has to accept Council’s amendments
EU Policy making process Secondary EU law
• European Parliament (EP)
Role depends on legal basis in Treaty o o o
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Cooperation: EP can amend but not decide Co-decision: EP and Council decide together …
European Commission Legislative documents
• Green paper
Discussion paper o
Published to launch EU-wide consultation process Interested parties invited to give opinion o
Range of ideas on specific policy area
Organizations and individuals
Can provide impetus for subsequent legislation Current consultations: www.europa.eu.int/yourvoice
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European Commission Legislative documents
• White paper
Official set of proposals for action in a policy area Can (but not always) follow on a green paper o
More specific
Vehicle for development of new legislation o
Can result in Proposal for Council and/or EP
• Green and white papers are soft law
Not binding but great moral value
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EU Binding acts
• Regulation
Directly applicable in all Member States (MS) o
No need for implementation measures
Often very detailed
• Directive
Prescriptions bind MS, but free to choose means o
Need for implementation at national level
No obligations for individuals but for governments
• Decision
Binding for persons addressed
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EU Non-binding acts
• Guidelines, communications, opinions, recommendations, declarations, resolutions, conclusions.
Soft law Often used by ECJ/CFI while interpreting EC law
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European power grid and the EU Synchronous areas (UCTE, Nordel &co) Voluntary TSO cooperation « Keeping the lights on »
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Voluntary Associations Lobby-Study • Industry Eurelectric
http://www.eurelectric.org
• Transmission system operators
http://www.etso-net.org
• Regulators
Europex
http://www.europex.org
• Energy traders
IFIEC
http://www.ifieceurope.org
• Power exchanges
CEER
http://www.ceer-eu.org
• (large) Consumers
ETSO
http://www.efet.org
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EFET
European Commission (EC) http://europa.eu.int/comm/energy
• DGTREN (Directorate for TRansport and ENergy)
Developing and implementing European policies in the energy and transport field.
• Florence meeting
2/year in Rome, started in 1998 in Florence Member states, Eurelectric, CEER, ETSO &co Discussing the creation of internal electricity market.
• ERGEG (new! 2003)
Co-operation national regulatory authorities and Commission
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Lesson 1 Liberalisation
• • • •
Historical introduction Authorities – Associations 2 Directives Reality show
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Internal Electricity Market (IEM) patchwork • Top down
Constrained by « subsidiarity principle » Constrained by non-consensus among academics on best market design (SESSA project: www.sessa.eu.org)
• Initially too much freedom and long term deadlines
1st Directive 96/92/EC
• Recently less freedom and shorter term deadlines:
2nd Directive 2003/54/EC
• Interacting/conflicting with other policies • Too much, sufficient or not enough? © Copyright 2005
EC and Industrial Organization
• Number of companies (+) & market shares (-)
Competitive generation and retail markets
Customers households
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1st Directive
2nd Directive
2013
2007 all
EC and Industrial Organization
• Market size (+)
Increased and local market rules harmonized
Cross-Border 1st Directive 2nd Directive Trade Contractual Not explicit
• (+) Florence meeting/forum (2002)
Inter-TSO compensation mechanism ETSO to avoid pancaking of tariffs for cross-border trade
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EC and Industrial Organization • Market size (+) : mini-fora 2004-2005 Internal Electricity Market: Regional Initiatives Æ EU Coordinated market based mechanisms for cross-border trade
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EC and Industrial Organization
• Entry barriers (-)
Free entry to generation and supply 1st Directive 2nd Directive
Access to the grid
Regulated TPA Negotiated TPA Single Buyer
• Germany was only one to use n-TPA • Italy had implemented « single buyer » © Copyright 2005
Regulated TPA
EC and Industrial Organization
• Regulation of natural monopoly networks
Incentive based and independent
Unbundling System operators authorities
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1st Directive 2nd Directive Accounts Legal Vague Explicit on and duties
Lesson 1 Liberalisation
• • • •
Historical introduction Authorities – Associations 2 Directives Reality show
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Reality show National legislation • 2nd Directive
Most MS missed transposition deadline of 1 July 2004 “Minimalist” approach in implementing the Directives Needs to be re-considered o “Spirit of Directives should be pursued, not only their letter” o
2005: six Member States were taken to the European Court of Justice for failing to fully apply the Directive o
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Belgium, Germany, Greece, Latvia, Luxembourg and Spain
Reality show Regulator How independent are they? • Independent agency
Yes, except The Netherlands and Norway: section of government ministry or agency
• Who appointed them for how long?
Most by government or 1-2 ministers for 4-7 years Italy min 7 year
• Who pays them?
Fee levied on regulated tariff o
Except France and Norway: state budget
• Where can they work after their term finishes?
No restriction for FR, IT, PT, ES
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Reality show Regulator How accountable are they ? • Option to appeal for their decisions? • Not elected • Adequacy of resources • Atractivity of the job • Staff turn-over
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Reality show Unbundling • Unbundling
Minimum
TSO
Property o Legal o
Not enough o
Management Accounting
• Belgium vs. Finland?
30% vs. 50% owned by GenCo’s
Info source: EU Jan 2005 © Copyright 2005
DSO
Reality show National market concentration 100%
Gen Cap Top 1
90%
Gen Cap Top 3
80%
Import Cap%Gen cap
70% 60% 50% 40% 30%
European council:
20% 10%
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Scand
UK
Neth
Germany
Spain
Austria
Italy
Portugal
Ireland
France
Belgium
Greece
0%
Import cap 10% Gen cap by 2005 Info source: EU Jan 2005
Reality show European market concentration 7 big brothers oligopoly Will EU market building go faster than industry consolidation? Source: Eurelectric 2004
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Reality show retail market shares vs switching Industrial consumers (>1GW/year) 70%
Italy
Ireland
60%
UK
Switching
50%
Norway
Sweden
40%
Austria
30%
Luxembourg Belgium
Spain
20%
France
10%
Portugal
Greece
0% 0%
20%
40%
60%
80%
100%
top 3 market share
Source: EC 2005 report
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Low switching and high concentration
Reality show System adequacy Europe
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Reality show UCTE system adequacy forecast
2010-2011 2010-2011
Source: UCTE Jan 2005 © Copyright 2005
Reality show System adequacy Supporting measures NO Market based Belgium, Netherlands, Germany, Denmark, Finland, UK
YES (planned) Incentives e.g. capacity payment
Austria, Ireland, Spain, Italy, Sweden, Norway, France
Obligation TSO/ retail suppliers
(Belgium, Netherlands)
Tender
Ireland, Greece
Info source: EU jan 2005 © Copyright 2005
Reality show System adequacy • Rely on import
Overall UCTE shortage forecasted
• Build new plants by 2010, in 2006
Gasturbine
STEG
Wind
Coal
Nuclear
Capacity 50 540 200 470 1000 [MW] Lead time 1,5 2 2 5 (Lead time: From order time to operation, without 6 [Years]
getting permissions) © Copyright 2005
Reality show
• Public service obligations
Public interest o
Easy and affordable access for all citizens
Sustainable energy o o o
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Kyoto agreement parallel with liberalization experiment Post Kyoto Green electricity
Reality show Public interest
• General obligation to supply all customers (1)
No (a-priori) discrimination
• Solutions offered to vulnerable customers
Pre-payment meter (2), social welfare system (3)
• Social tariffs (4) • Universal Service: ‘Supplier of last resort’ (5)
For customers that cannot pay their bill Most countries = DSO o
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Except The Netherlands, UK and Finland = Supplier/DSO
Reality show Public intrest Number of measures implemented out of 5 5 4 3 2 1
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Source: EC 2005 report
Belgium
France
Ireland
UK
Spain
Portugal
Italy
Germany
Finland
Sweden
Denmark
Netherlands
Austria
0
Reality show Conflicting policies
• Different policies initiate flows in the grid
System adequacy Market facilitation Connecting renewables (wind)
• Energy policy is national and may conflict •
with neighboring countries Import from outside EU may become important (primary energy, but also electric energy)
1 grid expansion = 1 policy, not 3 © Copyright 2005
Reality show Conflicting policies Internationally • Countries tend to rely on import
We do not need nuclear…. we import electric energy
• Screw your neighbors and install a wind park
Green policy neighboring country causes transits Reducing grid potential for domestic policies
• CO2 measured at the power plant
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Lesson 1 Conclusions
• Unbundling: a reality • Legislation: not clear
Still changing National implementations differ seriously Conflicting with other EU and national legislative actions Regulator policies differ Final consumer benefit is unclear
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