Convergence of Gas and Electricity Market

7/31/2019 Convergence of Gas and Electricity Market

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CONVERGENCE OF GAS AND

ELECTRICITY MARKET


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UK MARKET STRUCTURE Most liberalized in the world. The electricity market is divided into:

the wholesale market(buy and sell)

transmission and distribution networks at national and regional levelsthe retail market, where suppliers sell to and bill customers.

Power plant funda
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DATA AND STATISTICS large proportion of UK electricity is produced in gas-fired power stations.
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CURRENT SCENARIO Electricity generated in the second quarter of 2012 fell by 0.5 per cent, from 84.9 TWh a year

earlier to 84.4 TWh. Renewablesshare increased from 9.0 per cent in the second quarter of 2011 to 9.6 per cent

in the second quarter of 2012. Nuclearsshare of generation fell from 22.6 per cent in the second quarter of 2011 to 21.9

percent in the second quarter of 2012.


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CURRENT SCENARIO Gass share of generation fell from 43.7 per cent in the second quarter of 2011 to 29.8

percent in the second quarter of 2012. Final consumption of electricity during the second quarter of 2012, at 73.9 TWh, was

provisionally 0.5 per cent higher than in the same period last year.


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INTRODUCTION:

Gas as most efficient fuel In power generation. Price of both commodities get linked. Two industries becoming one The energy company. New breed of co. lowest possible price. Can be sold both physically and commercially.


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FORCES OF CONVERGENCE

Supply chain convergence. Trading convergence. Spark spread


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SUPPLY CHAIN CONVERGENCE

Gasfield Gaspipeline

Gasreception

Gasdistribution

Power station

Electricitydistribution

Customers

coal

Gasindustry


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CLEAN COAL TECHNOLOGY

DIRECT Impact on gas technology. Coal gasified and fed into combined cycle gas turbine (CCGT).


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TRADING CONVERGENCE

Coal & Gas Wholesale price effect wholesale price of electricity. Disparities and flexibility in price of electricity. Coal fired plant not fitted with FGD (fuel gas desulphurization) environmental constraints. Full convergence :

Key issue : elec. Generator can sell gas at market opportunity cost.

Market price of gas gen. power

marginal priceof electricity in

market


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Price determination disparity- electricity day ahead. Massive price movement:

Switching to gas from power to gas market.

Particular situation relative new derivative. SPARK SPREAD. Difference between cost of fuel used and selling price of electricity. Lock in profits.

TRADING CONVERGENCE


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UNITED KINGDOM ELECTRICITY PRIVITISATION

Agenda

o Industry structure

o Pre-privatisation (up to 1990)

o The major problems

o A brief history

o The privatisation settlement (1990 -)

o After privatisation


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ELECTRICITY INDUSTRY INENGLAND

Central Electricity GeneratingBoard

12 Regional Electricity Board

Industry structure


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PRE-PRIVATIZATION (UP TO 1990)

Public ownership in the form of public corporations. Intention: strategic direction from government, operational matters

devolved to the corporations. In electricity, three systems:

England and Wales: one generation + transmission corporation plustwelve, regional, distribution + supply companies, each a monopoly in itsown area.

Scotland: two companies, regionally based (highlands, lowlands), fullyintegrated (generation + transmission + distribution + supply). Northern Ireland: one vertically integrated corporation.

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THE MAJOR PROBLEMS In general, weak incentives and poor performance, confirming

A.Smith monopoly is a great enemy of good management. Investment performance was particularly poor:

Relative to continental Europe, coal-fired stations took a lot longer, and costa lot more, to build, often due to ongoing design changes.

Ditto for nuclear stations, where non-standard designs were favoured. In relation to governance:

Political supervision went far beyond strategic matters (such as use of thesector to protect the UK coal industry) to much more specific interventionsin relation to pricing, investment, etc.

Political objectives were unstable (i.e. constantly changing) as politicalpriorities shifted from one year to the next.

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A BRIEF HISTORY

1990 - privatisation of the industry and competition ingeneration and supply >1MW

1994 competition in supply >100kW

1998 full competition in supply

2001 replacement of the Pool with the current tradingarrangements - bilateral contracts and imbalancesettlement


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THE PRIVATIZATION SETTLEMENT (1990 -) On 31 March 1990, a new industry structure was introduced into England and Wales Split the CEGB into 3 generating companies and a transmission company: National

Power, Powergen, Nuclear Electric and the National Grid Company (NGC). Fossil-fuelledpower stations were transferred to National Power and Powergen, the nuclear power stationswere transferred to Nuclear Electric, and the transmission system and the Dinorwig and

Ffestiniog pumped storage power stations in Wales were transferred to the NGC. Replaced the area boards with twelve regional electricity companies (RECs). The local

distribution systems were transferred to the RECs and each REC was obliged to supply onrequest all reasonable demands for electricity in its authorised area.

Established the electricity pool as the wholesale market mechanism through which electricity

was traded in England and Wales. Abolished the Electricity Council. Set up a series of regional consumer committees, the electricity consumers

committees, to replace the electricity consultative councils.


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NATIONAL POWER ANDPOWERGEN

Took over the fossil fuel station

NATIONAL GRIDTook over the high voltage

transmission system

NUCLEAR ELECTRICTook over the nuclear generator

The first step in commercialsing the electricity industry in England wasprivitisation in 1991. The CEGB became four companies.


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THE PRIVATISATION SETTLEMENT (1990 -) In Scotland, also on 31 March 1990, the SSEB and the Hydro-Electric Board were replaced

by ScottishPower and Scottish Hydro-Electric (the latter merged with Southern Electric in1998 to become Scottish and Southern Energy). In Scotland, vertical integration wasmaintained in the new structure. As in England and Wales, nuclear generation was assignedto a separate company, Scottish Nuclear, which became part of British Energy in 1996 (seeFigure 2).

. The 12 RECs in England and Wales, Powergen, National Power, Scottish Power and Scottish

Hydro-Electric were sold by public flotation on the stock market. On 11December 1990, the 12RECs were floated on the London Stock Exchange. This was followed, on 12 March 1991, bythe flotation of National Power and Powergen, with 60% of the shares of each sold. Thegovernment sold its remaining 40% of the shares of Powergen and National Power in March1995, retaining a special share. On 18 June 1991, Scottish Hydro-Electric and ScottishPower were floated. At this stage, the two nuclear companies, Nuclear Electric and Scottish Nuclear,remained in public ownership.


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AFTER PRIVITISATION

Projects on the stocks for new coal fired stations were cancelled and replaced with gas firedprojects.

Manpower was cut dramatically. Development of independent Power Producer.

New arrangement in form of CFDs. The gas market was being liberalized in a much more free market manner.

Convergence of Gas and Electricity Market

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