1. Energy Management and Policy 27/11/2004Energy Market Liberalisation M.Sc. in Engineering Policy and Management of Technology ENERGY MARKET LIBERALISATION Prof. Manuel Heitor mheitor@ist.utl.pt Maria João Rodrigues mjrodrigues@dem.ist.utl.pt

2. Energy Management and Policy 27/11/2004Energy Market Liberalisation BASIC CONCEPTS Electricity Functions EnergyTransportation GenerationEnd User SupplyTransmissionDistributionSystem Operation COMPETITION NO COMPETITION Low or limited economies of scaleEconomies of scale; technical constraints

3. Energy Management and Policy 27/11/2004Energy Market Liberalisation BASIC CONCEPTS GENERATION Electricity demand fluctuates in various time horizons (day, year, business cycle) Electricity at present cannot be stored economically Electricity can be seen as a commodity although pertaining special features Generation capacity is then needed to cope with peak-demand, resulting in excess capacity in periods of lower demand Reserve capacity may be required to cope with random demand fluctuations (e.g. of climatic nature) or generation shortfalls A diversified portfolio of electricity generation technologies is needed to provide the different loads of electricity at least cost Source: IEA, 2001 Generation accounts for about half of electricity cost and it does not present significant economies of scale at plant level

4. Energy Management and Policy 27/11/2004Energy Market Liberalisation BASIC CONCEPTS END USER SUPPLY End user supply refers to the delivery of electricity to end users Procurement of energy and transportation services Metering and billing of consumption There is na increasing number of end-user value-added services Supplying differentiated services (e.g. green electricity, load profiling) Supplying integrated, packed services (e.g. telecoms and gas) Supplying differentiated reliability and quality (e.g. interruptible supply) Suppliers to end-users perform two distinct functions Brokers of energy, buying and selling and trying to make a profit while assuming the risks of price volatility and from adjusting patterns of consumption profiles Providers of end-user services Source: IEA, 2001

5. Energy Management and Policy 27/11/2004Energy Market Liberalisation BASIC CONCEPTS Transmission grids refer to high voltage transport Transmission grids are interconnected both with distribution grids and with other international transmission grids (e.g. Portugal and Spain) Transmission grids are shared by, and provide security of supply to, all end-users TRANSPORT GRIDS Distribution grids refer to medium and low voltage transport Distribution grids carry electricity from the interconnected (transmission) grid to a specific group of end-users Distribution grids are only shared by the ones connected to it and do not therefore provide broad security of supply Source: IEA, 2001

6. Energy Management and Policy 27/11/2004Energy Market Liberalisation BASIC CONCEPTS SYSTEM OPERATION System operation refers to the co-ordination of transportation services to ensure that the system is at any time in electrical equilibrium inflows and outflows of energy over the network are controlled and balanced ancillary services needed to ensure technical reliability of the grid are secured Interconnection and its associated benefits of security of supply, reliability and lower costs are only achievable under a centralised system operation System operation can be unbundled from transmission assets ownership Source: IEA, 2001

7. Energy Management and Policy 27/11/2004Energy Market Liberalisation Hidden Drivers DRIVERS Country-Specific Factors Economic Efficiency

8. Energy Management and Policy 27/11/2004Energy Market Liberalisation DRIVERS Signals of Innefficiency Excess generation capacity (e.g. over 50%) Unexplained national and international cost differentials Persistent international electricity price differentials Expected Benefits Lower prices resulting from competition (downward pressure on profit margins and incentive to reduce costs) Lower prices resulting from increased electricity trade (inter-system competition) Savings in investment costs (better investment decisions that may result in reduced reserve margins) Higher labour productivity Development of new energy services ECONOMIC EFFICIENCY Source: IEA, 2001

9. Energy Management and Policy 27/11/2004Energy Market Liberalisation DRIVERS COUNTRY-SPECIFIC FACTORS In the EU a key driver is the extension of the concept of internal market to the electricity sector In the US a key factor is the significant gap between electricity costs and prices, especially in those states where prices are higher (e.g. California) In Japan, the pressure for liberalisation came from high electricity prices and low generating capacity utilisation resulting from highly uneven load curves In countries such the UK, Argentina and Chile market reform occured as part of wider privatisation programmes and economy reforms. Source: IEA, 2001

10. Energy Management and Policy 27/11/2004Energy Market Liberalisation DRIVERS HIDDEN DRIVERS Current technological trends reinforce the advantages of introducing competition In current conditions, economies of scale in generation are not significant Under competition there is a trend for innovation and new product flourishment New gas plants are efficient on a relatively small scale Increasing economic globalisation encourages electricity reforms In an open economy industries exposed to competition cannot afford to pay more for their inputs than their competitors Globalisation fosters the emergence of international energy companies having the resources, willingness and dynamism to compete in newly liberalised markets and to introduce new ideas Successful liberalisation experiences elsewhere provide an impetus for liberalisation in other countries Source: IEA, 2001

11. Energy Management and Policy 27/11/2004Energy Market Liberalisation ENERGY POLICY KEYS ISSUES How do the reform-driving economic-efficiency objectives cope with other energy policy objectives? Security of supply objectives Environmental Objectives Social and/or Regional Energy-related Equity Objectives How are questions of market distortion addressed?

12. Energy Management and Policy 27/11/2004Energy Market Liberalisation REGULATORS KEYS ISSUES Regulatory Independence Regulatory bodies must be independent from the regulated Regulatory bodies should be independent from government and political actors To avoid conflicts of interest To ensure stability of regulatory policies To avoid the use of electricity policies to achieve general policy objectives (e.g. more revenues from taxation or lower inflaction from reduced tariffs) To protect investors and utilities from short-term polical pressures Especially important when there is public ownership of utilities Competition law and bodies and its interface with regulation bodies There is the need to articulate activity between these two kind of bodies There are two main areas of intervention: mergers and acquisitions and subsidies Source: IEA, 2001

13. Energy Management and Policy 27/11/2004Energy Market Liberalisation REFERENCES & FURTHER READING IEA (2001), Competition in Electricity Markets http://library.iea.org/dbtw-wpd/bookshop/add.aspx?id=17 IEA (2001b), Regulatory Reform in the Electricity Supply Industry: an overview http://www.iea.org/about/reg_over.pdf IEA (2001c), Electricity Market Reform: California and After. A fact Sheet from the International Energy Agency http://www.iea.org/about/emr.pdf IEA (1999), Electricity Market Reform – An IEA Handbook http://library.iea.org/dbtw-wpd/bookshop/add.aspx?id=99 IEA (2001), Regulatory Institutions in Liberalised Electricity Markets http://library.iea.org/dbtw-wpd/bookshop/add.aspx?id=15

14. Energy Management and Policy 27/11/2004Energy Market Liberalisation REFERENCES & FURTHER READING II UNEP and IEA (2002), Reforming Energy Subsidies http://www.iea.org/envissu/johannesburg/reforming.pdf CNE e ERSE (2002), Modelo de Organização do Mercado Ibérico de Electricidade http://www.erse.pt/files/RegP249.pdf ERSE (2002), Breve Comparação dos Sistemas Electricos de Espanha e Portugal http://www.erse.pt/files/RegP161.pdf Jorge Vasconcelos (2003), O Mercado Europeu da Energia e a sua Regulação, II Fórum de Energia do Diário Económico, 24 Julho 2003, Lisboa http://www.erse.pt/files/n60.pdf