m.sc. in engineering policy and management of technology

Energy Management and Policy

27/11/2004Energy Market Liberalisation

M.Sc. in Engineering Policy and Management of Technology

ENERGY MARKET LIBERALISATION

Prof. Manuel Heitor

[email protected]

Maria João Rodrigues

[email protected]



BASIC CONCEPTS

Electricity Functions

Energy Transportation

Generation End User Supply Transmission

Distribution

System Operation

COMPETITION NO COMPETITION

Low or limited economies of scale Economies of scale; technical constraints



BASIC CONCEPTSGENERATION

Electricity demand fluctuates in various time horizons (day, year, business cycle)

Electricity at present cannot be stored economically

Electricity can be seen as a commodity although pertaining special features

Generation capacity is then needed to cope with peak-demand, resulting in excess capacity in periods of lower demand

Reserve capacity may be required to cope with random demand fluctuations (e.g. of climatic nature) or generation shortfalls

A diversified portfolio of electricity generation technologies is needed to provide the different loads of electricity at least cost

Source: IEA, 2001

Generation accounts for about half of electricity cost and it does not present significant economies of scale at plant level



BASIC CONCEPTSEND USER SUPPLY

End user supply refers to the delivery of electricity to end users

Procurement of energy and transportation services

Metering and billing of consumption

There is na increasing number of end-user value-added services

Supplying differentiated services (e.g. green electricity, load profiling)

Supplying integrated, packed services (e.g. telecoms and gas)

Supplying differentiated reliability and quality (e.g. interruptible supply)

Suppliers to end-users perform two distinct functions

Brokers of energy, buying and selling and trying to make a profit while assuming the risks of price volatility and from adjusting patterns of

consumption profilesProviders of end-user services

Source: IEA, 2001



BASIC CONCEPTS

Transmission grids refer to high voltage transport

Transmission grids are interconnected both with distribution grids and with other international transmission grids (e.g. Portugal and Spain)

Transmission grids are shared by, and provide security of supply to, all end-users

TRANSPORT GRIDS

Distribution grids refer to medium and low voltage transport

Distribution grids carry electricity from the interconnected (transmission) grid to a specific group of end-users

Distribution grids are only shared by the ones connected to it and do not therefore provide broad security of supply

Source: IEA, 2001



BASIC CONCEPTSSYSTEM OPERATION

System operation refers to the co-ordination of transportation services to ensure that the system is at any time in electrical equilibrium

inflows and outflows of energy over the network are controlled and balanced

ancillary services needed to ensure technical reliability of the grid are secured

Interconnection and its associated benefits of security of supply, reliability and lower costs are only achievable under a centralised system operation

System operation can be unbundled from transmission assets ownership

Source: IEA, 2001



Hidden Drivers

DRIVERS

Country-Specific Factors

Economic Efficiency



DRIVERS

Signals of Innefficiency

Excess generation capacity (e.g. over 50%)

Unexplained national and international cost differentials

Persistent international electricity price differentials

Expected Benefits

Lower prices resulting from competition (downward pressure on profit margins and incentive to reduce costs)

Lower prices resulting from increased electricity trade (inter-system competition)

Savings in investment costs (better investment decisions that may result in reduced reserve margins)

Higher labour productivity

Development of new energy services

ECONOMIC EFFICIENCY

Source: IEA, 2001



DRIVERSCOUNTRY-SPECIFIC FACTORS

In the EU a key driver is the extension of the concept of internal market to the electricity sector

In the US a key factor is the significant gap between electricity costs and prices, especially in those states where prices are higher (e.g. California)

In Japan, the pressure for liberalisation came from high electricity prices and low generating capacity utilisation resulting from highly uneven load curves

In countries such the UK, Argentina and Chile market reform occured as part of wider privatisation programmes and economy reforms.

Source: IEA, 2001



DRIVERSHIDDEN DRIVERS

Current technological trends reinforce the advantages of introducing competition

In current conditions, economies of scale in generation are not significant

Under competition there is a trend for innovation and new product flourishment

New gas plants are efficient on a relatively small scale

Increasing economic globalisation encourages electricity reforms

In an open economy industries exposed to competition cannot afford to pay more for their inputs than their competitors

Globalisation fosters the emergence of international energy companies having the resources, willingness and dynamism to compete in newly

liberalised markets and to introduce new ideas

Successful liberalisation experiences elsewhere provide an impetus for liberalisation in other countries

Source: IEA, 2001



ENERGY POLICY KEYS ISSUES

How do the reform-driving economic-efficiency objectives cope with other energy policy objectives?

Security of supply objectives

Environmental Objectives

Social and/or Regional Energy-related Equity Objectives

How are questions of market distortion addressed?



REGULATORS KEYS ISSUES

Regulatory Independence

Regulatory bodies must be independent from the regulated

Regulatory bodies should be independent from government and political actors

To avoid conflicts of interest

To ensure stability of regulatory policies

To avoid the use of electricity policies to achieve general policy objectives (e.g. more revenues from taxation or lower inflaction from

reduced tariffs)To protect investors and utilities from short-term polical pressures

Especially important when there is public ownership of utilities

Competition law and bodies and its interface with regulation bodies

There is the need to articulate activity between these two kind of bodies

There are two main areas of intervention: mergers and acquisitions and subsidies

Source: IEA, 2001



REFERENCES & FURTHER READING

IEA (2001), Competition in Electricity Markets http://library.iea.org/dbtw-wpd/bookshop/add.aspx?id=17

IEA (2001b), Regulatory Reform in the Electricity Supply Industry: an overviewhttp://www.iea.org/about/reg_over.pdf

IEA (2001c), Electricity Market Reform: California and After. A fact Sheet from the International Energy Agencyhttp://www.iea.org/about/emr.pdf

IEA (1999), Electricity Market Reform – An IEA Handbookhttp://library.iea.org/dbtw-wpd/bookshop/add.aspx?id=99

IEA (2001), Regulatory Institutions in Liberalised Electricity Marketshttp://library.iea.org/dbtw-wpd/bookshop/add.aspx?id=15



REFERENCES & FURTHER READING II

UNEP and IEA (2002), Reforming Energy Subsidieshttp://www.iea.org/envissu/johannesburg/reforming.pdf

CNE e ERSE (2002), Modelo de Organização do Mercado Ibérico de Electricidadehttp://www.erse.pt/files/RegP249.pdf

ERSE (2002), Breve Comparação dos Sistemas Electricos de Espanha e Portugalhttp://www.erse.pt/files/RegP161.pdf

Jorge Vasconcelos (2003), O Mercado Europeu da Energia e a sua Regulação, II Fórum de Energia do Diário Económico, 24 Julho 2003, Lisboahttp://www.erse.pt/files/n60.pdf

m.sc. in engineering policy and management of technology

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