The Dutch Electricity/Heat sector in the battle between Economy, Environment and

Security of Supply in the liberalized European market

drs. ing. Teus van EckT.U. Berlin, 19 Jan. 2004,

Fac. Economics and Management

•Market situation•Economy•Environment•Security of supply•Regulation•Behavior of stakeholders

•Recommendations

Contents

Market situation

Conv. Gas ( 2100 )11%

HW CCGT ( 2308 )12%

Conv. Coal ( 3940 )20%

CHP ( 7628 )38%

CCGT ( 2079 )11% Peak ( 171 )

1%

Nuclear ( 449 )2%

Renewables ( 561 )3%

WI ( 424 )2%

Generating Capacity 19.660 MW (2001)

Generating Capacity Netherlands

The Dutch High Voltage Grid

The most important marketplayers

• Essent: 25% production capacity+ 30% grids +Supplier• Nuon: 21% production capacity + 30% grids + Supplier• Electrabel: 21% production capacity + Supplier• Eon: 9% production capacity + Supplier.• Eneco: 1% production capacity + 25%grids + Supplier• TenneT: T.S.O. + owner of the 150(partly)/220/380 kV

grids• Gasunion: Gassupplier and owner of the gastransportgrid.• APX: The Electricity Exchange, owned by TenneT

Other market parties

• Regulatory• Dte: The Dutch Regulator for gas and electricity.• The Ministry of Economic Affairs for the Energy

Strategy• The Ministry of Environment for permits• E.U Directives.

• NGO’s and interest groups as EnergieNed, VEMW, VNO/NCW, Cogen

Fuel situation

• Natural gas: Own resources + import from Norway and Russia and exporter/balancing supplier

• Coal: 100% import world market coal., perfect logistic harbor facilities

• Biomass: Partly imported by governmental incentive policy• 15% of electricity consumption is imported.• Nuclear is marginal

Facts

• Total electricity consumption is 110 TWh/yr.• ~15% is traded by the APX• Off Peak electricity price €15 - €20/MWh based on

marginal cost op coal fired power plants• Peak electricity price the last 2 years rising from €40 -

€60/MWh and strongly fluctuating.• Reserve capacity only a few % • Import/export capacity ~3500MW. • 100% unbundling of the grids• 01-07-2004 liberalisation completed

Dutch and E.U. Energy Policy

• Energy production and supply should be as clean as possible, as cheap as possible and with nearly 100% security of supply.

• The implementation will be done by the free market• But we have no clear common objectives and operational

strategy

The actual situation

Traders

DGO’s

Consumers

Producers Grid Operators

Regulators

Government

CHP / DH

“Economy”

The long en short term values???

Environment

Security of supply

The Balance

Reality T.V. Low pricesHigh earningsLow risksMarket power

The future of our

children

EnvironmentPoliticians

Free market

Dream versus RealityProsperity/Welfare?

Dream: No coal and nuclear and efficient gas CHP in the transition period to 100%

sustainability

Reality:Growing demand, gas CHP nearly in

bankruptcy and only 2% of total production is

renewables

Economy

Weekday Demand Curve Electricityin the Netherlands

0:00 5:00 10:00 15:00 20:00

100%

75

50

25

0

•Base Load

•Peak Load

Renewables

Heat Consumption Curves

6500

7000

7500

8000

8500

9000

9500

10000

10500

0 100 200 300 400 500 600

Power Output [MWe]

Hot W.

Coal

Stagg

Use of fuel CO2 CostpricekJ/kWh g/kWh baseload

€ct/kWhRenewables 0 0 2 - …..COGEN (gas) 5000 280 3,5 - 5CCGT 6700 375 3,5Coal unit 9000 830 3,5

Fuel Costs for different Power Units

Fuel cost CCGT, Hot windbox CCGT, Conventional Gas, Conventional Coal Gas commodity 3,2 €/GJ, Coal 1,7 €/GJ

0,0

10,0

20,0

30,0

40,0

0 1000 2000 3000 4000 5000 6000 7000 8000 9000

Operation time [h]

Fuel

cos

t [€/

MW

h]

CONV GAS

HW CCGTCCGT

CONV COAL

Consequences

• Gas CHP too expensive in night and weekend.• Environment is not an item.• Bad investment climate for CHP.• Bad investment climate for coal and nuclear by

uncertainty concerning future environmental regulation • Prices too low for renewables

The Netherlands: structural importer or exporter of electricity?In a European level playing field the Netherlands should be an

exporter because we have:• Strong position in sourcing and transport of natural gas• High experience in CHP and gas turbine technology• Sea harbor facilities for import of world market coal• Cooling water facilities• Strong connections with the European E-grid• Etc.

Environment

Availability of heat excluding industrial heat

100% fuel for electricityproduction

43% electricity

4% E grid losses

9% useful heat by CHP

44% is waste heat =13 billion m3 natural gas=

23,4Mton CO2

Waste heat % of power plants

• Lignite >60%• Coal fired > 55%• Conventional gas > 55%• Hot Windbox > 50%• CCGT > 45%• Incinerator > 70%• Nuclear > 60%

Priorities?

• Only promoting Renewables vs. the lowest level of fossil fuel consumption and emissions for the total energy demand?

• Energy savings vs. the fossil fuel use/emission level per unit electricity/heat?

• Clear physical CHP electricity definition vs. lowest level of fossil fuel consumption

The environmental ranking on base of CO2 emissions

Quality

RenewablesGood gas CHPCCGTBad gas CHPHot WindboxGood coal CHPModern coal unitsBad coal CHP

Ranking on base of operational results and not on design efficiency

COGEN Methodology

FuelReference Boiler

ReferenceE powerplant

CHP Part

CO2 or Fossil fuel free electricity

Fuel

FuelCO2

CO2CO2

E -COGEN

E - Powerplant

H H ref=

E = E CHP+E Grey

Cogeneration Separate Production E + H

Energy savings CHP

Investment Opportunities/Risks of CHP

• Opportunities: Energy/emissions savings, proven technology, grid cost savings

• Risks: Continuity of heat demand and or heat source, economy of scale, weak and uncertain position in electricity and fuel market, level playing field?, no structural financial valuation of environmental aspects

CHP Renewables wind and sun

Grey electricity

CO2 free ~25% 100% 0

Investment >€700/kW >€1000/kW >€650/kW

Security of supply

>95% <25% >95%

Market position

Uncertain Government supported

Strong position, gas price?

District Heating in The Netherlands

• Only 3% of the heat market• Big opportunities for energy savings but bad investment

climate (very unclear regulation)• For producers the electricity market is the first priority• The heat market is not a free market

Risks of District Heating

IncomeCosts

It is never in balance

>80% variable without influence

> 80% fixed costs

Heat Distribution

CHP

Back-up/peak

Storage

Grid ConsumerAlternative Consumer

F

F

E E E E

H

FHH

E= ElectricityF= FuelH= Heat

Energy savings for the total chain between +90% and –40%

Some figures

• 100 km by car –15 kg CO2

• 1 Dutch family with DH saves 1500 kg CO2/yr

• 1 Windmill of 1 MW saves 700 ton CO2/yr

• 1 MWth CHP saves 700 ton CO2/yr

Security of Supply

CHP (Security of Supply)Generation capacity and CHP contribution during max and average load

3350

1129

0

1444

0

1292

0

1354

0

1202

0

1424

2

1300

0

3350

560

3910

3910

7630

1129

0

1146

0

0

5.000

10.000

15.000

20.000

25.000

Supp

ly, D

eman

d [M

We]

Avr. Daily Load

Max. Daily Load

Gen 85% - H, RRV,UCTE

Gen 95% - H, RRV,UCTE

Gen 85% Available

Gen 95% Available

Other

CHP

Renewables

Import

23.000

15.200

18.550

CHP contribution approx. 3200 - 3500 MWe of

observed CHP capacity

Security of supply

• Technical, availability fuels, the environment• Separate electricity production results in

45-75% waste heat • Political risks• Distributed vs. centralized generation• Grid capacity and load flows

Regulation

Dutch Regulation

• MEP for renewables. A price guarantee for 10 years for different types of renewables.

• CO2 index for CHP• Energy tax exemption for District Heating• Different convenants between government and “industry”• Different Codes from the Dte• Consumers of green electricity have partly exemption of

energy tax. Export of tax money.

E.U and international Regulation

• There is no level playing field in the E.U.• Every country has its own fuel position and own

regulation• Big energy flows all over Europe are structural not

economical.• Kyoto. The Netherlands have a bad starting position,

but a lot of clean technology• The Netherlands is now in a bad position, their

interest is a real level playing field and a consequent energy policy

The unworkable Regulation for CHP

CHP / DH

Regulator

DGO’s

ConsumerOrganisations

Convenants between government/market parties

National support

Local Governments

E.U. directive CO2 trading

Fuel markets

Traders/producers

E.U. directive CHP

Behaviour of stakeholders

• Nobody is responsible for security of supply• Short term behavior• A natural urge to monopoly• No money for research• The market is too risky for new entrance• Many legal conflicts• Loans become expensive• Nobody has the long term overview• Short term money is leading

Recommandations

• Formulate a clear long term energy policy in a formulate balance between economy, environment and security of supply on base of the available alternatives

• Make that policy operational with a mix of the advantages of the utility and the free market.

•We will present our proposals mid 2004.

First impression of our Recommendations

• We define a number of possible market structures from 100% utility to 100% free market

• We define a number of possible scenario´s for the balance between economy, environment and security of supply

• We present the consequences, opportunities and risks of the different possible combinations of market structures and scenario´s including regulation and behavior of market parties

• The final choice is a political choice

Recommendation

Translate our smile in market power.Result: a structural, payable big smile.

Smile for the environment

Power of the market