Lessons from electricity liberalisation in the US and elsewhere: perspectives for Europe

Richard Green

Institute for Energy Research and Policy

Circumstances of this talk

• I gave this talk in place of one that Professor Paul Joskow of MIT had been scheduled to give, but was unable to, and adopted his title

• I have drawn heavily on his recent paper, “Markets for Power in the United States: An Interim Assessment”, Energy Journal 2006

• I have also benefited from talking with Paul and attending many of his presentations over the years

• Paul should not be held responsible in any way for my choice of material to extract, or my conclusions

The Liberalisation Buffet

• Entry into generation

• Wholesale market with competition

• Transmission system independence

• Retail competition

Electricity markets

• 1983 – a radical idea!

• 1988 – UK government policy

• 1978 – Chilean government policy

• 1996 – European Union policy

Electricity in the US

• Large, diverse, industry

• Investor-owned utilities, State-regulated

• Municipal and Cooperative bodies

• Federal Power Authorities

• Federal Energy Regulatory Commission

• Power Pools

• After PURPA (1978): NUGs and IPPs

US electricity markets

States with active restructuring, Feb 2003; EIA

US electricity prices

Average residential rate, Jan 1998; EIA

12-14 c/kWh

10-12 c/kWh

8-10 c/kWh

6-8 c/kWh

4-6 c/kWh

US electricity markets

States with active restructuring, Feb 2003; EIA

States with dots voted for John Kerry in 2004

What has happened?

• Transmission:– Most utilities have tariffs for other users– Many Independent System Operators

• Retail markets:– Least popular measure, low switching rates

• Wholesale markets:– Half generation capacity is covered

How did they get there?

• Transmission open access:– Pressure from FERC

• Orders 888, 889, 2000

• Retail competition: – State initiatives

• Wholesale markets:– State initiatives and evolution of Pools– FERC pressure beaten back

Standard Market Design

• Bilateral trading for most power

• Centralised auction for real-time power

• “Bid-based, security-constrained, dispatch”

• Price at each node equals the marginal cost of meeting more load there

• Nodal price differences are the payment to transmit power (including bilateral deals)

Where are there problems?

Where are there problems?

• Transmission:– Congested system, insufficient investment,

“seams issues”

An American Quilt

Where are there problems?

• Transmission:– Congested system, insufficient investment,

“seams issues”

• Retail:– Customers don’t switch unless they save

• Need to allow competitors to make money

Where might there be?

• Market power:– Mechanisms are in place to limit price spikes

• Generation capacity:– Lots of new entry around 2000– Lots of bankruptcies soon afterwards

• Capacity markets:– Designed to raise the “missing money”

What about Europe?

• Large, diverse, industry

• Large multinational companies

• Small local companies

• Member State regulation– Some informal coordination

• European Commission

Where have we got to?

• Legal unbundling

• Power markets in most Member States– FERC’s Standard Market Design is nowhere

to be seen– Balancing often done by incumbents

• Retail competition for all consumers coming very soon!

Market power

• EU Sector inquiry: evidence of problems

• Wholesale markets concentrated– Most markets national in scope, not integrated

• Vertical foreclosure via integration

• Wholesale markets not transparent

• Users don’t trust complex price formation

Market power remedies

• Change the structure?

• Change the rules? – Revenue Equivalence Theorem

Monthly average prices, England & Wales

0

5

10

15

20

25

30

35

Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05

£/MWh

Actual pricesSimulated prices

Evans and Green, working paper, 2005

Market power remedies

• Change the structure?

• Change the rules? – Revenue Equivalence Theorem

• Change the size of the market? ½ + ½ = ¼ + ¼

• Are the markets joining together anyway?

Some prices move together

0

20

40

60

80

100

01/01/2004 01/07/2004 01/01/2005 01/07/2005 01/01/2006

€/MWhNetherlandsGermanyFrance

14-day moving averages. Source: Spectron

Others stay apart

53 52

29

47

47

59

56

52

28

31

2005 prices for base load power, €/MWh

Major power flows

Source: UCTE

Major power flows and congestion

Source: UCTE

Congested 26-75% 76-99% 100%

How to ease congestion?

• Build more lines?

• Make “minor” investments?

• Improve operating procedures?

• Integrate markets better?– Balancing regimes, nomination rules, timing

Errors in Interconnector use

Imports to UK

Exportsfrom UK

English price minusFrench price

DG Competition, Energy Sector Inquiry, fig 64

How to ease congestion?

• Build more lines?

• Make “minor” investments?

• Improve operating procedures?

• Integrate markets better?– Balancing regimes, nomination rules, timing

• Adopt trans-national markets?

A last word

• “Electricity restructuring …is likely to involve both costs and benefits. If the restructuring is done right…the benefits … can significantly outweigh the costs. But the jury is still out on whether policymakers have the will to implement the necessary reforms effectively” (Joskow, 1997)

• “I believe that statement continues to be true today.” (Joskow, 2006)