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Peter Styles, Board Member Electricity Committee ChairmanPeter.Styles@EFET.org
SVSE Lichtenstejn Palace Conference 2007Prague, 12/09/2007
The Past and Future of European Energy Trading from the point of view of EFET
Peter Styles Prague 2007
European Federation of Energy Traders
1
Peter Styles Prague 2007 2
The Past and Future of European Energy Trading
Liberalisation of European
electricity markets did not cause high
prices…
Peter Styles Prague 2007 3
Bullet point
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End-user prices in Western Europe (1995-2004)(Source: Kema Consulting study for Eurelectric 2006)
Peter Styles Prague 2007 4
Industry power prices in Austria 1970-2001
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Peter Styles Prague 2007 5
Liberalisation of European electricity markets did not cause high prices
…though remaining monopoly elements and free allocation of carbon allowances do
not help!
The Past and Future of European Energy Trading
Peter Styles Prague 2007 6
Prices for industry in Eastern Europe (1985-2003)
Peter Styles Prague 2007 7
Influence of different factors on the German wholesale power price
(Source: Technical University Dresden)
Peter Styles Prague 2007 8
German wholesale power price versus marginal costs on one day in April 2004
(Source: Technical University Dresden)
Peter Styles Prague 2007 9
There is no way back from
free markets,
except to central planning
The Past and Future of European Energy Trading
Peter Styles Prague 2007 10
LV distribution
Illustration of electricity market wholesale function
Demand
management
I&C
Local powerCustomer
choice
Residential
Hub
Independent
network operators
HV transmission
Electricity interconnectors
Market prices at trading hubsCompeting producers (including ancillary services) Competing suppliers
Peter Styles Prague 2007 11
Ingredients for successful liberalisation (1)
Privatisation and liberalisation
Relationship between the government-owner and government as
“sponsor” of regulator
Commitment to developing competition versus financial benefits to
government-owner?
Timing, order?
Unbundling
Ownership, management?
Balancing and other services for competitors ?
Peter Styles Prague 2007 12
Ingredients for successful liberalisation (2)
Liberalisation on the supply-side?
Divestiture of generating capacity by dominant incumbent may be
necessary for competition to start
Auctioning of virtual power plants or long term contracts is possible
second best
Cross border trade is an important source of liquidity
Integration of neighbouring markets helps competition
Non discriminatory access to cross-border capacity is a challenge
Peter Styles Prague 2007 13
Ingredients for successful liberalisation (3)
Avoid hidden cross-subsidies
Bad experience with stranded costs and legacy contracts
Subsidies may be designed to not distort the market
Regulators must communicate with market participants
It is impossible for a regulator to anticipate and understand all effects
of its intervention or non-intervention; market participants are creative
Benefit of experience of regulators in earlier liberalised territories
Peter Styles Prague 2007 14
The Past and Future of European Energy Trading
Policymakers’ interference in
market operation already
causes distortions
Distortions of most concern to traders April 2007
Price caps or regulated tariffs imposed by national governments or regulators (power andgas) 76% of respondents have indicated it as a serious distortion
Price caps or regulated tariffs imposed by national governments or regulators (power andgas) 76% of respondents have indicated it as a serious distortion
National failures to implement EU Directives (power, emissions and gas) 73%National failures to implement EU Directives (power, emissions and gas) 73%
Improper or insufficient or non-firm allocation of transmission capacity (power and gas) 73%
Improper or insufficient or non-firm allocation of transmission capacity (power and gas) 73%
Mergers and protection of national champions 73%Mergers and protection of national champions 73%
Lack of transparency about the use of infrastructure (power and gas)Lack of transparency about the use of infrastructure (power and gas) 65%65%Lack of transparency about the use of infrastructure (power and gas)Lack of transparency about the use of infrastructure (power and gas) 65%65%
Uncertainty about CO2 emissions and allocation of allowances 61.5%Uncertainty about CO2 emissions and allocation of allowances 61.5%
Peter Styles
Access to transmission and storage (gas) 57.5%Access to transmission and storage (gas) 57.5%
Ineffective or insufficient unbundling 57.5%Ineffective or insufficient unbundling 57.5%
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Regions or countries suffering most from distortionsRegions or countries suffering most from distortions
0 5 10 15
France
Germany
Italy
Iberia
Switzerland
CEE/SEE
Europe
Emissions Trading
Wholesale gas
Wholesale electricity
1. Completing the internal market and market integration, including harmonized and uniform regulatory framework in EU (14)
2. Unbundling, formation of an Independent Transmission Operator(6)
3. Development of gas markets, improving access to the gas infrastructures, changing business practices (4)
4. Merger control and preventing the anti-competitive behaviour (4)
5. Improving cross border trading: Increasing transmission capacity allocation, reduction of bottlenecks, common procedures (3)
6. Transparency (e.g. unused/used transportation capacity) (3)
Desired priorities for EU energy policy
Styles, Oprea
Peter Styles Prague 2007 18
The Past and Future of European Energy Trading
Traders play a vital role in optimising
use of infrastructure and enabling
retail competition
Peter Styles Prague 2007 19
Development of cross-border trading
Cross-border trading existed before liberalisation but in a
discriminatory, non-transparent manner
NTC measure of cross-border transmission capacity outdated and
overly restrictive
No real firmness in allocation of transmission capacity
Non-market-based allocation mechanisms persist
Tension between advocates of market coupling and proponents of
physical OTC market flexibility
No financial transmission rights yet
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Cross border trading timeline
Yearly explicit auction
Monthly explicit auction
Daily implicit auction (deadline for exchange and clearing)
Continuous Cross Border intra-day
Hourly H-1 intra-day deadline
M-n M-1 D-2 D-1 D
t
D-1 deadline for internal nominations (TSO gateclosure)
Deadline for title transfer of rights (closure of SCRM)
Secondary Capacity Rights Market
LT cross border nominations
Deadline D-1 for use of the rights (UIOSI)
May 2006
Peter Styles Prague 2007 21
Contrast between commercial and physical views of wholesale power supply (1)
Operator's view (the “physical” dimension)
Balancing the system
Controlling the flows
Maintaining security (guaranteed?)
Trader's view (the “commercial” dimension)
System is a market place with trading flexibility
Potential restrictions should be transparent
Relationship between flows and commercial contracts
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Contrast between commercial and physical views of wholesale power supply (2)
“Border flows” do not coincide with “border commercial
exchanges” (known to traders as “nominations”)
Renewable power subsidies distort capacity allocation
Load and generation schedules needed for accurate
prediction of commercial trading capacities
Schedules are fixed after end of all trades (within hubs and
between them)
In order to trade between hubs, traders need to know the
commercially available capacities ...
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Actualflows
Congestionmanagement
Capacityallocation
Must be consistent security
standards
Allocatemore
Increasedrebalancing
AllocateLess
Reducedrebalancing
Volume allocated is a commercial - not a technical - decision
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The Past and Future of European Energy Trading
Traders play a vital role in optimising use of
infrastructure and competition
…and the way forward must include a
secondary market in transmission
capacity rights
Peter Styles Prague 2007 25
Use it
Daily
Monthly/QuarterlyIntraday market20082010 2009 AnnualC
apac
ity
H-15mins
Time
Annual capacity sale harmonised with energy market
Use or sell term capacity to the
market
Options tradable in secondary market
Obligations tradable in
intraday market
H+30mins
Intra-daymarket starts
H
Multi-Annual
H
D-1 explicit allocation
Capacity used OTC
Capacity allocation at D-1:Explicit auctions only
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Current usual practice
100%
66%
33%
1 Y allocation
M + Q allocations
365*24h daily Allocations remaining 33% + seasonal variation
22 % yearly
44% multi year
“Wished” realistic practice
M + Q allocations per year for about 22 %66%
100%
44%
88%
Multi-year and yearly auctions held for proportional shares at different times in year; e.g. 4 auctions of 11% multi-year capacity and 4 auctions of 5.5 % yearly capacity,multi-year products and also Y+1, Y+2, Y+3, .. to be offered separately.
365*24h daily allocations per year 12% + seasonal variations
Seasonal expected commercially available capacity
Peter Styles Prague 2007 27
The Past and Future of European Energy Trading
European Federation of Energy Traders
Tel: +31 (0)20 5207970Email: secretariat@efet.org
www.efet.org