Presentation on theme: "ENERGY MARKET REFORM: Gas Transportation & Distribution Issues Presentation to GTE 2 nd Annual Conference by Gerald Doucet Secretary General, World Energy."— Presentation transcript:
ENERGY MARKET REFORM: Gas Transportation & Distribution Issues Presentation to GTE 2 nd Annual Conference by Gerald Doucet Secretary General, World Energy Council 23-24 September, 2004
THE BROAD CONTEXT Legal: property rights, gender equality, rule of law Social: education, health, social justice, pensions Infrastructures: energy, water, telecommunications Reforms are aimed at easing the evolution and adaptation of the institutions. Without reforms, economic development will stop.
THE CONTEXT Be clear on priorities: Balance public policies (security or environment), monopoly aspects, and competition at different stages. Be pragmatic: A blend of market and regulated features may bring real competition and deliver benefits similar to more complex designs. Be wary of risks: The simplest approach should be used that will achieve the desired benefits at minimum cost and risk. WECs three broad messages on market reforms
PUBLIC OR PRIVATE OWNERSHIP? Governance: a concept that covers integrity, labour & investment costs, quality of service, strategy & management, organisation, technology… Governance quality: experience shows it erodes progressively in the public-owned firms, generally starting with over-staffing and labour costs Investments: capital cost is often much higher for private firms especially if the regulation is not stable and foreseeable
THREATS Market power: exists because of the very nature of electricity and can only be avoided by less short- term competition (e.g. with annual auctions) Function unbundling: too much independance between transmission and supply creates the risk of under-optimisation Complexity: a pool system is complex/unreliable. Bilateral contract systems are less risky. « Single buyer » systems with annual auctions are even less.
TRADE-OFFS First trade-off: volatile prices and market power with risk on the long-term security or prices including the capacity costs? Second trade-off: a true spot wholesale market with no generator with more than 10% of capacities or a centrally set price? Third trade-off: the liberty of choice for all at any time or a security insured either by the LDC or by the « Single buyer »?
THE TOOL BOX Long-term contracts, Diversified portfolio, Price responses to reduce demand, Excess capacities of supply, e.g. DG. Large customers (industry, power plants, LDC) may either manage, or ask suppliers to manage, at a cost, their LT security thanks to:
MARKET POWER Too small price elasticities because only ~10%? of users receive true price signals Too few actors: large incumbent dominate the market with market shares >>10% Too small over-capacities in generation or in transmission (creation of niches) Too many markets (day-ahead, intra-day, capacity…): opportunities for cheating Loyal competition is often difficult to develop… Market power is not innocuous. It prevents the normal play of competition and may not always be contestable.
HOW TO SECURE SUPPLY? With long-term planning and costs for capacity: New capacities are awarded to the lowest bid and capacity costs are guaranteed, e.g. paid annually With insurances subscribed by the buyers: This additional revenue will make up for capacity costs and be part of the competitive game With ad hoc measures such as uplift/LOLP… which have no proven track record yet
NEEDED TRADE-OFFS First trade-off: cyclical prices & market power episodes versus capacity payments? Second trade-off: competitive wholesale market with many (> 10) actors versus single buyer? Third trade-off: security of supply versus freedom of supplier choice, e.g. for captive consumers? Electricity is not a true commodity because its users are mostly captive, and is not either a true market because of its monopolistic sectors
GAS-ELECTRICITY INTERFACE Natural gas price is set by the competition with petroleum in interruptible uses Electricity price is set in the marginal mid/peak plant using the most expensive fuels The most expensive fuel is gas or the petroleum product that gas substitutes at the margin Hence the convergence because the spot gas price makes the spot marginal electricity price