GOVERNANCE, REGULATION AND MARKET INTEGRATION IN EUROPE

SALVATORE ZECCHINI

APEX ConferenceSidney, October 13, 2008

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2Power exchanges in Europe (year 2008)

Source: European Energy Exchange (EEX) and Powernext

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3European power markets restructuring process

EXCHANGES INTEGRATION DOMAIN AIM

Powernext - EEX

Spot Markets Merger (50% - 50%) → end 2008

Increasing liquidity and reducing transaction costs

Derivatives Market Merger (Powernext 20% - EEX 80%) → spring 2009

Integration of clearing and settlement services provided by ECC → 2009

APX - EndexAPX acquisition of 90% of Endex equity

Integration of spot and forward markets (power and gas)

EEX - Eurex Trading and IT platforms Development of synergies to lower transaction costs

Nord Pool - OMXTrading, clearing and settlement systems

Development of synergies to lower transaction costs

Benelux, Germany and France TSOs (7 companies)

New company (Casc – Cwe) to manage cross-border capacity

Increase liquidity and competition on central European electricity markets

EEX-Nord Pool- 2 German and 1 Danish TSO

New company (EMCC) to manage cross-border capacity between Germany and Denmark

Increase liquidity and competition in North and Central Europe

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4Main European power exchanges ownership structure

Exchange Major shareholders

Powernext(France)

HRGT (52.8%)Holding owned by FR, NL and BE TSOs

EDF (6.8%) Electrabel (6.7%) Gaz de France (6.7%)

Nord Pool Spot(Scandinaviancountries)

Statnett SF (30%)Norway TSO

Svenska Kraftnat (30%) Sweden TSO

Fingrid Oyj (20%) Finland TSO

Energinet.dk (20%) Denmark TSO

APX BV(Netherlands)

TenneT (71.82%) Dutch TSO

Nederlandse Gasunie (25.5%) Dutch gas TSO

Fluxys (2.68%)  

BELPEX (Belgium)

Elia (60%) Belgium TSO

Tennet (10%) Dutch TSORTE (10%) French TSO

Powernext (10%) French PXAPX (10%) Dutch PX

EEX (Germany) Eurex Zurich AG (34.73%)

Landesbank Baden- Wuttemberg (22.64%)

LVV Leipziger Versosgungs (7.38%)

Freistaat Sachsen (4.51%)

OMEL (Spain) OMIP (10%) BMEX (7.28%) BNP Paribas (7.28%)

Abengoa (6.08%)

GME (Italy) State Owned (100%)

     

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5Market integration benefits

• Reduced costs-) lower transaction costs for importing and exporting electricity-) lower operational costs for system operators and market participants -) lower reliability costs associated to the need to procure reserves and other ancilliary services-) more efficient use of generation resources

• Lower price volatility

• Increased competition

• Improved price signals for investment

• Larger opportunities to invest in renewable energy as a result of broader market demand

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6Requirements for effective market integration

• Horizontal integration of transmission and network operations

• Vertical separation of functions

• Non-discriminatory access to the grid

• A well functioning and liquid wholesale market

• Efficient allocation of scarse transmission capacity

• Adequate investment in new capacity

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7Competition and Liberalization Indicators

1) Indipendent TSO (no links with production and supply companies); - source: GME analysis of European Commission studies

2) Wholesale Markets Concentration Ratio (CR): market share of 3 biggest companies < 70% by capacity – source: European Commission;

3) Retail Markets Concentration Ratio (CR): market share of 3 biggest companies < 70% (households & small commercial customers) – source: European Commission;

4) Existence of spot and/or future markets – source: GME analysis of European Commission studies

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8 Liberalization of European electricity markets

Good1

Average2

Low3

Poor4

1 Good: all indicators are satisfied2 Average: 3 indicators out of 4 are satisfied3 Low: 2 indicators out of 4 are satisfied4 Poor: no more than 1 indicator out of 4 is satisfied

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9Electricity sector: generation (year 2006)

France 89% 1Germany 28% 5Italy 35% 5Spain 31% 4UK 22% 6Source: Eurostat; European Commission

# of companies with a market share > 5%

Market share of the largest generatorCountry

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10Electricity sector: transmission and distribution (year 2007)

Number of

TSOs

Number of ownership unbundled

TSOs

Number of DSOs

Number of legally

unbundled DSOs

France 1 0 147 4

Germany 4 0 877 NA

Greece 1 0 1 0

Ireland 1 0 1 0

Italy 1 1 169 NA

NL 1 1 9 9

Norway 1 1 155 50

Portugal 3 1 13 11

Spain 1 1 326 326

Sweden 1 1 175 175

United Kingdom 1 1 18 18

Source: Technical Annex to the Report on Progress in Creating the Internal Gas and Electricity Market, COM(2008) 192 final

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11Electricity Market: Cross border capacity across Europe (year 2006)

Source: ERGEG 2007

Interconnection capacity (NTC) as a ratio to

installed generation capacity

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12Electricity consumption and cross-border exchanges in European

regions (year 2005)

Source: Report on the experience gained in the application of the Regulation (EC) No 1228/2003 "Regulation on Cross-Border Exchanges in Electricity", COM (2007) 250 final

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13Power prices correlation (2007)

Source: European Market Coupling Company (EMCC)

one price area

> 90% correlation

high correlation

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14

Power to control access to gas storage

Power to promote competition

Independence from the government

NRAs (National Regulatory Authorities) Powers

Definition of public service obligations and quality standards

Sanctioning powers

Power to set reference retail prices

Power to set grid access tariffs

Source: GME elaboration on IERN data

Enforcement Power

Recommendation Power

No Power

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15Market design harmonization issues

• Trading arrangements

• Traded products

• Algorithms and matching rules

• Timing

• Monitoring and transparency rules

• Market liquidity

• Guarantee and settlement system

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16 European Power Markets: Liquidity and Volumes (2007)

117

44

21

291

221

195

17,9%

9,2%

20,9%

68,9%

75,6%

65,8%

0

50

100

150

200

250

300

Nord Pool GME OMEL EEX Powernext APX NL

0%

10%

20%

30%

40%

50%

60%

70%

80%

Volumes (TWh, left scale) Liquidity (%, right scale)

Source: Volumes from GME and Reuters data. Liquidity computed as a ratio on national consumption based on Nord Pool estimates for the Scandinavian market and UCTE (union for the co-ordination of transmission of electricity ) data for the other countries.

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17Ergeg Electricity Regional Initiatives

Source: ERGEG; Annual Report, 2007.

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18

Issues currently tackled across the electricity REMs

First focus on a few key issues to deliver results

= work in progress

= not tackled currently

REM Congestion Mgt. Transparency Balancing

Baltic Not relevant

Northern

Central-South

Central-East

South-West

Central-West

FUI

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19Day Ahead transmission capacity allocation (June 2007)

Source: ERGEG Monitoring Report – Compliance with Regulation 1228/2003, July 2007.

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20Status of existing Regional Markets

Regions/ Markets Current Status Spectrum Type of Market

Coupling

Nordic Operational Intraregional price

setting Market splitting

Spain – Portugal Operational Intraregional price

setting Market splitting

FR-BE_NE Operational Intraregional price

setting Market coupling

Nordic-Germany (EMCC)

Planned Q3 2008 Inter- regional flow

setting Market coupling

FR-BE-NE-DE (CWE)

Planned Q1 2009 Intraregional price

setting Market coupling

Center Eastern Europe

Operational Intraregional Coordinated explicit

auctions

The first Inter-regional Coupling

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21Market integration models

• Unified Pan-European solution

• Horizontal integration

• Inter-regional Dome Coupling

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22Dome Coupling

DOME COUPLINGEuropean /multiregional solution

Regional solution

Market areas

REGION 1 REGION 2 REGION 3 REGION 4

C D

E F G H I

J L MkBA

Price coupling

Market splitting

Volumecoupling

Source: Europex-ETSO interim report on inter-regional congestion management, April 2008.

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23The third package for internal energy markets: key proposals

• Effective unbundling– Ownerhip unbundling– ISO (Independent System Operator)– Other solutions

• Improved cooperation of TSOs to develop a European Network

• Creation of a European Agency for Regulatory Cooperation (ACER)

• Enhancement of national regulators powers

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24Conclusion: how to integrate national and regional markets

• Pragmatic bottom-up approach

-) institutions set up the general framework

-) technicalities worked out by interested parties: TSOs, PXs and

stakeholders

• Expected result: progressive convergence of national interests

• Dome coupling could represent a compromise solution granting

-) enough flexibility and efficiency

-) the possibility to extend integration beyond the current regional

setting

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25 Conclusion: which goals the internal European energy market should pursue?

• To cover the whole of the EU and possibly other contiguous areas

• To promote the efficient use of the European interconnected networks

• To ensure security of supply

• To provide transparent and competitive price formation mechanisms

• To support the development of liquid and efficient markets in all areas

• To extend to markets for natural gas