Energy Regulation:

1
Energy Regulation

• Theory and Policy in Canada and the European Union

2
Energy Regulation in Europe
European Union

• Electricity
• The European electricity market
• The European Electricity Directive
• Organization national electricity markets
• Germany
• France
• UK
• Scandinavia
• Natural gas and electricity Convergence

3
The European Electricity market
European Union

• Some Fundametals
• Electricity Statistics
• The European grid system
• Market structure

4
Average Energy Content
European Union
5
Total Primary Energy supply 1999 (mtoe)
European Union
Source OECD
6
Per capita electricity consumtion in kWh in 2000
European Union
Source VDEW
7
Electricity share of final energy consumption in
percent
European Union
8
Net electricity generation in MW, 2000
European Union
9
Contribution of source to electricity production
2001
European Union
Source eurelectric
10
Contribution of source to electricity production
2001
European Union
Source eurelectric
11
The European Electricity market
European Union
12
The European Electricity market
European Union
13
The European Electricity market
European Union
14
The European Electricity market
European Union
15
European Union
16
European Union
17
Electricity Im- and Export by country, 2000,
Billion kWh
European Union
18
European Transmission Systems
European Union

• UCTE (LUnion pour la Coordination du Transport
  de l Electricité)(CENTREL members associated
  by January 1, 1999)
• CDO-IPS (Central Dispatching Organization of the
  Interconnected Power Systems)
• NORDEL
• ATSOI, UKTSOA
• 1.7.1999 ETSO as head (Association of European
  Transmission System Operators )

19
Interconnected networks
Source EON
20
Major EU electricity operators
European Union

• Austria Wienstrom
• Belgium Electrabel
• Finland IVO
• France EdF
• Greece DEH
• Germany EnBW, E.ON, RWE
• Ireland ESB
• Italy Enel, Montedison

• Luxemburg Cegedel
• Netherlands Essent, SEP
• Portugal EdP
• Spain Endesa, Iberdrola
• Sweden Sydkraft, Vattenfall
• UK British Energy, Innogy, Powergen

21
Largest energy supplier in the EU (1999)
European Union
22
European electricity companies (2000)
European Union
Source RWE
23
Market shares () in total national generation
capacity, 1999/2000
European Union
24
Market share of energy exchange markets
European Union
In relation to total consumption
25
The European Electricity Directive

• The aim of the directive
• What are the results?

26
Opening of the market
European Union

• Directive 96/92/EC of the European Parliament and
  the Council of 19 December 1966 concerning common
  rules for the internal market in electricity
• Establishes common rules for the production,
  transmission and distribution of electricity.
• Member states lay down the rules for competitiopn
  and access to networks
• In line with the British and Scandinavian model

http//europa.eu.int/comm/energy/en/elec_single_ma
rket/index_en.html
27
Opening of the market
European Union

• Aim of the Directive
• Gradual opening of the electricity market
• Ensure discimination-free network access

http//europa.eu.int/comm/energy/en/elec_single_ma
rket/index_en.html
28
Opening the market
European Union

• Eligible customer
• Customer who will be able to purchase electricity
  from supplier of his choice
• All customers consuming more than 100 GWh
• Customer whose annual consumption is above a
  certain treshold
• That treshold is to be lowered gradually

29
Opening of the market
European Union

• February 1999
• Consumption treshold of 40 GWh p.a. (steel plant)
• Corresponding to a market opening of 26 of
  domestic consumption
• February 2000
• Consumption treshold of 20 GWh p.a.
• Corresponding to a market opening of 30

30
Opening of the market
European Union

• February 2003
• Consumption treshold of 9 GWh p.a. (3000
  households)
• Corresponding to a market opening of 33
• February 2006
• All customers?
• Decicion by the European Council and European
  Parliament nessesscary

31
Opening of the market
European Union

• Commission recommend a revision of the directive
  March 13, 2001
• Opening for all industrial costumers
• 1 Januar 2003
• Opening for all costumers
• 1 Januar 2005

32
Opening of the market
European Union

• Commission recommend a revision of the directive
  
• Abolition of negotiated TPA
• Obligation of member states to set up a national
  regulatory authority for the approval of network
  utilization fees
• A European regulator for trans border network
  access

33
Production/Generation
European Union

• Any producer should be able to build new
  generation facilities, on the basis of
• Authorization procedure
• Licence for building generation facilities
  subject to criteria laid down by the relevant
  member state (such as safety, securety, public
  grounf use, energy efficiency, environmental
  protection
• Tendering procedure
• The construction of new generation facilities
  depends on the need established by the Member
  State or a competent entity
• Member State implementation criteria objective,
  transparent, non-discriminatory

34
Production/Generation
European Union

• Tendering vs Authorization
• What are the impacts?

35
Transportation
European Union

• Operators of electricity network have to provide
  third party access (TPA) to their network
• Transport of electricity on the high-voltage
  interconnected system
• Member States must designate an Transportation
  System Operator (TSO) to handle all technical
  issues with responsibility for this market

36
Distribution
European Union

• Operators of electricity network have to provide
  third party access (TPA) to their network
• Transport of electricity on the medium-voltage
  and low voltage distribution system
• Prices may be regulated
• Requirement to sell electricity to all private
  consumers to the same price

37
Access to the network 3 options
European Union

• Negotiated third-party access
• Electricity producers, suppliers and costumers
  negotiate on access to the network, setting
  transport prices and other conditions
• Regulated third-party access
• Price for the use of transportation and
  distribution systems is based on published prices
• Single buyer option
• Legal entity responsible for the unified
  management of the transportation system and/or
  for centralized electricity purchasing and selling

38
Unbundling and transparency of the accounts
European Union

• Entities having activities in different sectors
  (generation, transportation, distribution) must
  keep separate accounts for each of their
  activities
• Prohibiting cross-subsidization!

39
Source OXERA Report, 2001
40
European Union
Key Information shaded in grey has been verified
through responses received to the
project-specific questionnaire all other
information has been collated through desk
research. signifies that the feature of network
unbundling referred to has been implemented,
that it has not. Notes 1 For some of the
largest distribution system operators. 2 Greece
has adopted a law for the transposition of the
electricity directive but has an additional two
years in which to implement the legislation. 3
The small Luxembourg transmission network (eg,
only 91 km for Cegedel) is considered part of the
distribution network since it simply links RWE
and Electrabel to the distribution network in
Luxembourg. 4 Legal separation from generation
and retailing activities, but only accounting
separation from transmission/distribution
activities. 5 Business separation is due to be
introduced in August 2001. There will be a
requirement for public electricity suppliers
(PESs) to separate legal entities, for example in
terms of management, operations and
local. Sources OXERA, Elkraft System AMBA
(Denmark), Fingrid System Oy (Finland), DVG
(Germany), GRTN (Italy), Statnett SF (Norway),
Red Eléctrica de España (REE) (Spain), Svenska
Kraftnät
41
Transposition of the ED into national laws
European Union

• Deadline April 19, 1999

42
Measures Adopted By Member States in Implementing
Directives
European Union
15 In Italy smaller customers are able to group
demand in order to pass the thresholds. 16
Regulated for distribution networks, regulator
issues guidelines for negotiated access to
transmission 17 In Northern Ireland the
electricity market is only 35 open. Northern
Ireland and Scotland have management unbundling
only.
43
Market Development Indicators Switching Estimates
European Union
44
basic forms of wholesale trading arrangements
European Union

• power pools
• standardised power exchanges and
• OTC bilateral trading markets.
• Power pools are usually associated with the
  following operational features and market
  characteristics
• central despatch by the system operatorhence,
  the TSO often has formal control over the pool
  itself
• mandatory participation by generators and
  suppliers to ensure that a nondiscriminatory
  market is available for new generators or
  suppliers.

45
European power exchange
European Union
46
Power exchanges in Europe
European Union
47
Standardised wholesale markets in Europe
Source Oxera
48
Basic elements of wholesale markets
49
Basic elements of wholesale markets
50
European Union
51
Average half-yearly base-load prices in OTC
markets (/mWh)
European Union
52
European Union
53
Estimated level of Network Charges 2001
European Union
Source 1st benchmarking report on the
implementation of the internal electricity and
gas market Commission Staff Working Paper
SEC(2001)1957 of 03/12/2001
54
Grid usage fees 2001
European Union
55
Germany
Germany

• Some fundamentals
• Energy Policy
• Market Structure
• Liberalization
• Grid usage charges
• Companies

56
Some key numbers
Germany

• Consumption 14,200 peta-joule,
• population of 82 million,
• turnover of some 138 billion euros
• the largest consumer market in the European
  Union
• Energy consumption,however, has stagnated for
  several years.

57
Energy Availabilty and Use in 1999
Germany
58
Primary Energy consumption 2000
Germany
59
Primary Energy Consumption
Germany
60
Net electricity production in Germany 2001 TWh
Germany
3 1
7 9 23 27 30
61
Generation by type, 2000, in MW
Germany
baseload middle- and peakload
62
Lignite
Germany
World production 850 mill t in
1999 Germany 161Russia 83Turkey
67Greece 62...Canada 10
63
Hardcoal
Germany
World production 3 650 mill t in 1999 China 1
050USA 950India 300...Canada
62... Germany 40
64
Employees and production in the hard coal industry
Germany
65
Coal production costs and coal imports
Germany
Cost in EUR per ton, 2000
Coal consumption, 2000
German production
Import coal
27,5 mt
33,3 mt
66
Hardcoal consumption in Mt
Germany
Steel plants
Power plants
others
67
Residential space heating in Germany in
2000Total 37.0 million
Germany
68
Energy policy
Germany

• The most recent energy program for the Federal
  Republic of Germany, entitled "Energy Policy for
  the United Germany," dated back to the year 1991.
• The 1935 Energy Industry Act (last amended in
  1977), updated in 1998, provided for an immediate
  and full market opening without transitional
  arrangements or strandedinvestment provisions
• It incorporated the EU Council Directive
  concerning Common Rules for the Internal Market
  in Electricity into German law.
• For the gas sector, there was no express legal
  provision for negotiated network access in the
  Energy Industry Act comparable to that in the
  electricity sector.

69
Energy Policy
Germany

• The eastern German electricity market was
  exempted from the liberalization measures by the
  so-called "lignite protection clause."
• There were no associations agreements to regulate
  negotiated network access for electricity and
  gas an initial version was available only for
  the electricity sector.
• The 1991 Act on Feeding Electricity from
  Renewable Energies into the Public Grid which
  sought to romote the production of electricity
  from renewable energy sources had to be adapted
  to the liberalized electricity market so that
  operators would again have planning security.
• EU approval for the current (1998) coal aids was
  lacking.

70
Energy Policy
Germany

• Full account had not been taken of the 1997 coal
  compromise in the federal budget.
• The results of energy research were not being
  translated into practice to an adequate extent.
• The energy statistics had not been prepared to
  take account of the liberalization of the energy
  market nor were they capable to reflecting in a
  sufficiently reliable manner important
  energy-policy areas such as co-generation and
  renewable energies.
• Adequate measures had not been taken to achieve
  the former government's climate protection goals
  namely, a 25 reduction of CO2 in the period 1990
  to 2005.

71
The focus of energy policy 1998 to 2002
Germany

• Ending the use of nuclear energy
• On June 11, 2001, the federal government and the
  operators of nuclear power plants signed the
  agreement that serves as a basis for the orderly
  termination of the use of nuclear power in
  Germany.
• reactor safety research and supervision by the
  nuclear energy authorities will continue to
  contribute in this area.

72
The focus of energy policy 1998 to 2002
Germany

• Renewable energies
• EU directive on the promotion of electricity from
  renewable energies in the internal market for
  electricity. For Germany, a doubling to 12.5 by
  the year 2010 is aimed, and for the EU as a whole
  to 22.
• The law on renewable sources on energy
  (Erneuerbare Energien Gesetz, EEG) requires grid
  operators to purchase electricity from renewable
  sources at fixed prices. Covering, wind,
  geothermal, photovoltaics, small hydro (below 5
  MW), biomass and certain forms of waste

73
The focus of energy policy 1998 to 2002
Germany

• Cogeneration or combined heat and power
  generation (CHP)Overall share of CHP is 6 but
  some municipal utilities have shares above 50-80
  of CHP.
• To protect the production of CHP plantsfrom the
  effects of the liberalization (decreasing market
  prices), the CHP protection law
  (KWK-Vorschaltgesetz) was adopted in March 2000.
  Requires grid operators to purchase electricity
  at fixed prices.
• The law will remain effective until 2004,
  insofar as a cogeneration development law does
  not become effective before that date.

74
The focus of energy policy 1998 to 2002
Germany

• Climate protection
• In October 2000 the German government adopted a
  climate protection program to achieve the
  national target of a 25 lowering of CO2
  emissions by 2005 from 1990 levels.
• On November 9, 2000 German industry and the
  federal government concluded a voluntary
  commitment agreement for climate protection. By
  2005, CO2 emissions are to be lowered by 28 and
  by 2012 the greenhouse gases named in the Kyoto
  Protocol are to be lowered by 35 (each relative
  to 1990 levels).
• With the eco tax, the German government has
  provided an incentive for the sparing use of
  energy and relieved labor as a factor of
  production.

75
National Eco Tax 1999 -2003
Germany
76
Germany until April 1998
Germany

• Electricity as natural monopoly
• German Anti-trust law (Gesetz gegen
  Wettbewerbsbeschränkungen) excludes electricity,
  gas and water suppliers
• Each electricity supplier is a regional
  monopolist
• No competition
• Demarcation contracts
• For max. 20 years
• Local concession resp. franchise fess(depending
  on number of residents in a community, the
  franchise territory)

77
Concession fees
Germany
78
Germany until April 1998
Germany

• All final customers must be connected to the
  electricity system
• Tariffs are supervised by legal authorities
  (municipalities, Bundesländer)
• Avoiding misuse to special-rate customers (mainly
  industrial customers) by legal authorities

79
The old structure
Germany
80
Electricity supply by German producers
Germany
81
VEAG
Germany
82
The German electricity sector
Germany
Generation
Verbundunternehmenvertical integrated companies
Transport
Distribution
Local and regional supplier
Supply
83
Vertical structure of the German electricity
market
Germany
Generation
Trading
Transmission
Distribution
Industrials,retail customer
4 major utilities
80 regional utilities
800 municipal utilities
84
Germany
German electricity companies
Source Eon
85
The new structure
Germany
86
Negotiated Third Party Access
Germany

• Associations Agreement Electricity
• Verbändevereinbarung
• Verbändevereinbarung I (1998) replaced by
• Verbändeverinbarung II (2000) replaced by
• Verbändevereinbarung II plus (Dec. 2001)
• Electricity industry association (VDEW),
• Association of the energy and power industry
  (VIK), i.e. the industrial autoproducers and the
  big final industrial electricity consumers
• Federal industry association (BDI)
• Association of electricity network operator (VDN)
• Study group of regional energy suppliers (ARE)
• Association of public/municipal enterprises (VKU)

87
Verbändevereinbarung I
Germany

• In the first Verbändevereinbarung, valid
  until the end of 1999, transmission tariffs
  were transaction based, i.e. both producer
  and consumer had to be known for each
  individual transaction. The tariff was a
  combination of postage stamps for different
  voltage levels, and entailed a distance-related
  component if more than 100 km of the highest
  voltage level were used.
• This made the transmission tariff a hindrance
  for free trade.

88
Verbändevereinbarung II
Germany

• The second Verbändevereinbarung replaces the
  transaction model with a point of connection
  model, without distant component. It started
  on January 1, 2000, and was valid for two
  years. It should facilitate market
  operation, as the link between producers
  and consumers for each contract is no
  longer needed. A consumer can switch
  producers, without changing his connection
  contract. This will also enable working with a
  power exchange, like the EEX or European Energy
  Exchange, in Frankfurt, or the LPX in Leipzig.

89
Verbändevereinbarung II
Germany

• Germany is divided in eight control areas,
  defined by the eight Verbund companies. The areas
  controlled by VEAG, PreussenElektra, VEW
  Energie, HEW and BEWAG form the newly
  defined trade zone North (the light areas
  in figure III.1), whereas the areas
  controlled by EnBW, RWE Energie and Bayernwerk
  form the trade zone South. Within one control
  area, each trader, producer, consumer or other
  market player has the right to build a balance
  area, where his production and consumption are
  added to obtain the net balance.

90
Verbändevereinbarung II
Germany

• In addition, in case of transactions between a
  northern and a southern zone within Germany,
  which are defined in the agreement, as well as in
  case of international transactions an additional
  tariff of around 0,125 respectively 0,0625
  kW/h has to be paid, to cover additional costs
  caused by cross-zone and cross-border flows of
  electricity. However, the tariff is not raised,
  if it is shown that a cross-zone or cross-border
  transaction does not cause corresponding physical
  flows due to balancing against another flow in
  the opposite direction.
• But was not used!

91
Verbändevereinbarung II plus
Germany

• Dec. 2001, effective January 2002
• Based on the Verbändevereinbarung II, with
• Some simplifications (especially for final
  users)
• all-inclusive contractThe electricity supplier
  is entitled to conclude a use-of-system contract
  with the system operator on a real-time basis. In
  this case, a use-of-system contract need not be
  closed between the system operator and the
  individual customer.
• The two zone concept was abolished

92
Verbändevereinbarung II plus
Germany

• Pricing principles used to determine
  use-of-system charges
• Use-of-system charges shall be determined on the
  basis of calculated costs, treating the networks
  and the transformation separately.
• The basis for determining use-of-system charges
  is a transaction-independent point model. All
  system users contribute to the system costs
  through an annual use-of-system charge

93
Verbändevereinbarung II plus
Germany

• Comparison Market Scheme
• In order to obtain information about structurally
  comparable system operators, the three structural
  features are used for a first sorting at
  different voltage levels.

94
Verbändevereinbarung II plus
Germany

• Delimitation of structural categories

18 structural variants are obtained
95
Use-of-system charges
96
Use-of-system charges
97
Control Areas
All power plant in-feeds, customer withdrawals,
imports and exports of a supplier or trader are
netted out in each of the four large German
control areas schedules need not be registered
for feed-in and extraction but only for imports
and exports with other balancing groups.
98
Electricity exchange
99
E-ON Grid
Germany
100
Germany
Second Largest Power Producer in GermanyMerger
from Veba and VIAG in 2000
With more than EUR 93 billion in sales and
roughly 187,000 employees, E.ON is Germany's
third -largest industrial group. Formed by the
VEBA-VIAG merger, E.ON is a company with a clear
focus and premier positions in its core energy
business.
51
?
101
EON shares in regional electric utilities
Source EON
102
EON significant shares in regional gas markets
Source EON
103
EON international shareholdings and joint ventures
Source EON
104
EON international shareholdings
Source EON
105
Germany
Largest Power Producer in Germany
106
RWE Grid
Germany
107
EnBW
Germany
108
Regional electricity companies (ARE-members)
Germany
109
Average electricity Prices for industrial
customers
Germany
Prices without VAT and elecztricity tax. From
January 2001, prices included KWG and EEG fees.
2) Delivery only to distributors. 3) Former
area of Bayernwerk AG 4) Former area of
PreussenElektra AG 5) Merged with RWE
110
France

• Overview
• EDF
• Implementation of the Electricity Directive

111
Overview
France

• France is the second largest electricity market
  in the EU with a net production of 516 TWh and a
  total consumption of 396 TWh

112
Electricité de France EDF
France

• 1946 nationalization of generation,
  transportation, distribution, import and export
  of electricity
• Creating of the state-owned Electricité de France
  as a monopolist(1999 92 market share of final
  customers)
• Excluding
• state owned companies (régies), the Compagnie
  Nationale du Rhône, and a few major producers,
  such as the Regional coal mining companies and
  the SNCF
• 176 municipal distribution companies (3 mill.
  People)

113
Recent acquisitation of EDF in Western Europe
France
114
Recent acquisitation of EDF in Western Europe
France
115
Implementation of the Electricity Directive in
France
France

• The Electricity Directive was to be applicable in
  France as of February 19, 1999. France and
  Luxemburg were the last EU countries to transpose
  the Electricity Directive. In France, the
  Electricity Directive was transposed by the Law
  of February 10, 2000 concerning the modernization
  and development of the public electricity service
  (the Law of Modernization). One year behind
  the EU Directive deadline!

116
Implementation of the Electricity Directive in
France
France

• Given the traditional principles in force in
  France, it is not surprising that public service
  obligations are at the heart of the Law of
  Modernization. The Law of Modernization defines
  three missions for the public electricity
  service
• balanced development of supply
• operation and development of transportation and
  distribution networks and
• supply to non-eligible customers and back-up
  supplies.

117
Implementation of the Electricity Directive in
France
France

• Charges resulting from these obligations will be
  totally compensated through a public service fund
  and an equalization fund, to which all producers,
  distributors and eligible customers importing
  their supply or purchasing electricity in the EU
  territory and some autoproducers will contribute.
  EDF will be the main beneficiary of these funds.
• It appears from the Law of Modernization that the
  trend in France is clearly to keep implementation
  of the Electricity Directive to a minimum, which
  means that the market opened to competition will
  not go beyond what is required by the Electricity
  Directive.

118
EDFs competitors on the French market are
France

• French multi-utilities services providers, which
  own or operate decentralized electricity
  generators
• Elyo (a Suez subsidiary), and
• Dalkia (a Vivendi Environnement subsidiary),
  which, however, entered into an alliance with EDF
  in the energy services sector in June 2000.
• Medium-sized French public energy producers
  which are currently in the process of being
  privatized
• Société Nationale dElectricité Thermique (SNET),
  which owns five power generators using coal
  (total generation capacity of 2,600 MW). In
  December 2000, Endesa purchased a 30 stake with
  the option to increase its shareholding up to 51.

119
EDFs competitors on the French market are
France

• Compagnie Nationale du Rhône (CNR), which owns 18
  dams on the Rhône river (total generation
  capacity of 3,000 MW). In 2000, a joint venture
  was formed between CNR (51) and Electrabel (49)
  to sell electricity produced by CNR and
  Electrabel to French eligible customers.
• Société Hydroélectrique du Midi (SHEM), which
  owns hydraulic power stations (total generation
  capacity of 800 MW), is a subsidiary of the
  National Railroad Company (SNCF). SNCF is
  currently trying to find an equity or a marketing
  partner.
• Foreign electricity producers/traders supplying
  electricity to French eligible customers from
  other countries through export/import (e.g., RWE,
  E.ON, Electrabel, Endesa, etc.).

120
Generation
France

• Authorization procedure
• Generation installations may be operated by any
  person duly authorized by the French Ministry of
  Energy. Existing generation installations, duly
  and properly established before the publication
  of the Law of Modernization, are deemed
  authorized.
• New generators are subject to a declaration to,
  or an authorization from, the French Ministry of
  Energy
• New generation installations with an installed
  power on one site of less than 4.5 MW are subject
  to a prior declaration to the Ministry of Energy.
• New generation installations with an installed
  power on one site of more than 4.5 MW are subject
  to an authorization by the Ministry of Energy.
• An authorization is also required for any
  pre-existing installationwhich increases its
  generation capacity by more than 10 or which
  changes its primary energy source.

121
Access to the electricity network
France

• Independent producers and suppliers will be able
  to use EDFs transportation network, for which
  they will have to pay a fee to EDF. EDF is in
  fact the sole administrator of the public
  electricity transport network through Réseau de
  Transport délectricité (RTE).
• RTE must ensure transparent and
  non-discriminatory access to the network.
• RTE plays an important part in ensuring that
  supply matches demand

122
Access to the electricity network
France

• Distribution
• The current organization remains unchanged at the
  distribution level. EDF acting as a distribution
  network manager, and the nonnationalized
  distributors will continue to be the sole
  authorized distributors.

123
Price for transportation and distribution
France

• Tariffs for transportation/distribution are
  uniform for all network users. The general
  principles applicable to the prices for
  electricity transportation and distribution were
  specified in the Decree of April 26, 2001.
  According to such decree, the prices must be
  calculated on the
• basis of all costs incurred by the network
  managers.
• On May 31, 2001, the CRE submitted to the
  Ministry of Energy ist proposal for a definitive
  list of prices. The CRE proposed a post stamp
  tariff independent of the distance between the
  producer/supplier and the customer, which would
  be based on the electricity flows voltage,
  duration and period of use.

124
Unbundling
France

• In order to avoid any discrimination,
  cross-subsidization or distortion of competition,
  EDF, Compagnie Nationale du Rhône and the
  nonnationalized distributors must keep separate
  accounts for generation, transportation and
  distribution activities. Similarly, companies in
  the electricity sector that also have activities
  outside this sector must keep separate accounts.

125
United Kingdom

• The energy policy
• The Pool
• NETA

126
British Electricity Act, 1989
UK

• England and Wales
• The state owned monopolist Central Electricity
  Generating Board (CEGB) splitted into 3 private
  companies
• PowerGen, National Power, Nuclear Electric (later
  splitted in the (now) private British Energy and
  the state owned Magnox Electric)
• and the National Grid Company (NGC) as the
  Independent System Operator (ISO)
• Privatization of the 12 Regional Electricity
  Companies (REC), regional monopoly in
  distribution (1998 TPA)

127
British Electricity Act, 1989
UK

• Four divided activities of electricity supply
• Generation
• Transmission
• Distribution
• Supply
• Transmission and Distribution recognised as
  natural monopoly regulated by the Office of
  Electricity Regulation (OFFER, later OFGEM)

128
Market share 1990/1991
UK
129
The Electricity Pool of England and Wales (the
Pool)
UK

• All generators (including those from Europe via
  the interconnector, EDF or from Scotland) selling
  electricity only via a Pool Electricity Pool of
  England and Wales
• Suppliers and sellers must hold a licence
• Construction of generation capacity is based on
  an authorisation procedure
• The Pool is an agreement among its participants
  concerning bidding rules, market clearance and
  settlement
• OFGEM (Office of Gas and Electricity Markets) as
  regulation authority (ex-OFFER)

130
The Electricity Pool
UK

• Pricing
• The Pool provided a mechanism for setting a
  single wholesale price and for centrally
  despatching generation to meet demand.
• Generators offer electricity amount and price
• Price for each half hour is calculated on a
  merit order base, CEGB (Central Electricity
  Generating Board) ranked power stations in a cost
  based merit order and centrally despatched
  plant according to the merit order, to meet its
  forecast of national demand and to overcome
  transmission constraints.

131
The Electricity Pool
UK

• Pricing
• Mandatory for licensed generators to join the
  Pool by signing the Pooling and Settlement
  Agreement (PSA) and to sell the vast majority of
  their electricity output into the Pool and
  similarly for licensed suppliers to join the Pool
  and to purchase all their supplies out of the
  Pool to meet the demand of their customers.

132
The Electricity Pool
UK

• Pricing
• NGC, on behalf of the Pool, provided an estimate
  of national demand
• required generators each day to provide offers
  specifying the price at which they were prepared
  to sell their electricity
• ranked the offers in ascending order to meet its
  estimated demand
• and determined the Pool price at the highest
  accepted offer price (i.e. System Marginal
  Price).

133
The Electricity Pool
UK

• Pricing
• Plus a capacity payment intended to reward
  capacity availability in the and also to provide
  longer-term investment signals and incentives,
  was then calculated and added to the price,
• depending on the amount and mix of generation
  capacity declared available relative to forecast
  demand.
• As SO, NGC despatched plant to balance demand,
  taking account of any constraints on the system.
• In general, the role of demand in the Pool was
  very limited since a centralised forecast of
  demand was used for scheduling purposes.
• However, up to 30 of the largest consumers bid
  into the Pool in competition to generators (they
  were known as demand-side bidders).

134
Merit order pricing and clearing mechanism
UK
PriceCt/kWh
demand
supply
SMPSystem Marginal Price
ProductionkW
135
The Pool in England and Wales
UK
National Power
Power GEN
British Energy
Magnox
EDF, Scottish Prod, IPPs
Producer
National Grid Company
Broker
RECs
Customer
Final Consumer
136
Problems
UK

• Price setting was complex
• capacity payments were not working as intended,
• bids and Pool prices had not reflected costs.
• National Power PowerGen
• Approx. 40 market share, mainly coal plants
• Typical middle last, determing the SMP for a lot
  of days
• 1994 OFGEM
• both have to sell capacities of 6 GE
• Price cap 2.55 p/kWh
• Market power and strategic tendering

137
12 month moving average Pool prices
UK
Pool prices remained around 25/MWh throughout
the period of its operation. These prices were
well above new entry cost levels, which most
commentators estimated to be in the range of
17-20/MWh at a 90 load factor.
138
Utilities Act 2000
UK

• Review of the electricity trading arrangements in
  October 1997, published in July 1998
• The Electricity Act 1998 (The Electricity Act)
• Finally

139
Utilities Act 2000
UK

• Review of the electricity trading arrangements in
  October 1997, published in July 1998
• Resulting in the abolishing of the Pool system
• Introducing a new market structure (New
  Electricity Trading arrangements NETA)
• Similar to the Scandinavian model

140
NETA New Electricity Trading Arrangements
UK

• Trading arrangements are based on bilateral
  trading between generators, suppliers, traders
  and customers.
• They operate as far as possible like other
  commodity markets whilst, at the same time,
  making provision for the electricity system to be
  kept in physical balance at all times to maintain
  security and quality of supplies.
• They include forward and futures markets, which
  are evolving in response to the requirement of
  participants, that allow contracts for
  electricity to be struck up to several years
  ahead

141
NETA New Electricity Trading Arrangements
UK

• short-term power exchanges, also evolving in
  response to the requirements of participants,
  which give participants the opportunity to fine
  tune their contract positions a Balancing
  Mechanism, which opens at Gate Closure10 (3 and a
  half hours before real time, since 2 July 2002
  only 1 hour), in which the NGC, as SO, accepts
  offers of and bids for electricity to enable it
  to balance the transmission system (NGC may also
  contract ahead for balancing services)
• and a settlement process for charging
  participants whose contracted positions do not
  match their metered volumes of electricity, for
  the settlement of accepted Balancing Mechanism
  offers and bids, and for recovering the SOs
  costs of balancing the system.

142
Utility Act 2000
UK

• NGC is the sole possessor of an Electricity
  Transmission Licence in England and Wales,

143
NETA New Electricity Trading Arrangements
UK
144
NETA Growth in reported over the counter power
trades over the first year of NETA
UK
GW

• Over the counter

180 160 140 120 100 80 60 40 20 0
Apr Mar Jun Jul Aug Sep
Oct Nov Dec Jan Feb Mar
2000/01
2001/02
Over-the-Counter (OTC) transactions are typically
conducted bilaterally between parties (using
telephone, computer) or using brokers, bringing
two parties together in return for a brokerage
fee.
145
NETA Spot prices
UK
Over-the-Counter (OTC) transactions are typically
conducted bilaterally between parties (using
telephone, computer) or using brokers, bringing
two parties together in return for a brokerage
fee.
146
PPP and UKPX price duration curves
UK
147
Demand generation volumes by company 2001/2
UK
148
Balancing agreement
UK

• NGC operates a balancing mechanism to achieve
  production and demand balancing on a balanced on
  a second-by-second basis.
• About 2 per cent of electricity demand is bought
  and sold by NGC in this mechanism.

149
Balancing agreement
UK

• The Balancing and Settlement rules were
  incorporated into the Balancing and Settlement
  Code (BSC).
• The BSC ascribes a number of administrative
  functions to a company called the BSC Co. The
  role of the BSC Co is fulfilled by ELEXON, and
  ELEXON has no functions other than those ascribed
  to it under the BSC. In particular, it is
  responsible for contracting with service
  providers (known as BSC Agents) who provide and
  operate the computer and other central systems
  needed for settlement under the BSC.

150
The balancing Mechanism
UK

• Bids and offers can be submitted to the Balancing
  Mechanism by BSC Parties (Balancing and
  Settlement Code),1 although they are not
  obliged to do so. A bid or offer specifies the
  price that the BSC Party wishes to be paid (or is
  willing to pay) to move away from their FPN and
  the volume by which they are prepared to move.
• Bids and offers apply to individual half-hour
  settlement periods so BSC Parties can vary the
  bids and offers they submit (price and volume)
  across the course of a day as well as between
  days. 1 This, therefore, includes for example
  generators, suppliers and customers.

151
Shares (by volume) of accepted bids and offers by
fuel type
UK
152
NGCs balancing costs over the first year of NETA
operation
UK
153
Electricty Markets
UK

• England and Wales
• Regulated TPA, common price setting mechanism
  (pool),100 market opening
• Scotland
• 2 vertically integrated electricity companies,
  suply to teh England/Wales pool via
  interconnector, 100 market opening
• Northern Ireland
• no connection to Great Britain, 30 market
  opening

154
Electricity Generation
UK

• Bevor 1990 7 power producers
• National Power (coal and oil)
• Powergen (coal and oil)
• ScottishPower (fossil fuel)
• Scottish Hydro Electric (Hydro)
• Nuclear Electric (nuclear in England and Wales)
• Scottisch Nuclear Electric
• Northern Ireland Electricity
• National Grid (2 pumping stations)
• Today 42 major power producers

155
Electricity Generation
UK

• England and Wales
• Major Electricity generators
• Innogy, former national part of National Power,
  npower. in July 2002 RWE completed the
  acquisition of Inogy
• PowerGen, in July 2002 E.ON AG completed the
  acquisition of Powergen
• British Energy, former Nuclear Electric/Scottish
  Nuclear, mostly nuclear power plants
• Scotland
• ScottishPower
• Scottish and Southern Energy
• Northern Ireland

156
Transmission and distribution network
UK

• Transmission is organised by
• National Grid Company in England and Wales, a
  privately owned company, also owner of the high
  voltage network
• ScottishPower and Scottish and Southern Energy
  in Scotland, two vertical integrated companies
• Northern Ireland Electricity in Northern Ireland,
  a public company

157
National Grid
UK
Owns and operates the network of high voltage 400
and 275 kV transmission lines and substations in
England and Wales, connecting large-scale
generation and local distribution
networks. Controls the system to balance
generation with demand and maintain security and
quality of electricity supply.
158
National Grid
UK
159
Third Party Access
UK

• Regulated
• Transmission and distribution tariffs set by
  OFGEM (Office of Gas and Electricity Markets) an
  OFREG) Office for the Regulation of electricity
  and Gas) in Northern Ireland
• Tariffs are published and based on a price
  control formula
• Distribution networks are owned and managed by 12
  Public Electricity Suppliers (PES or REC)

160
Scandinavia

• Norway
• Sweden
• The Scandinavian Pool

161
Norway
Scandinavia

• Starting point Norway 1991 Energy Act
• Electricity generation

Source Royal Ministry of Petroleum and Energy
(2000)
162
Norway 340 Electricity companies by activities
Scandinavia
Grid managemantand operation
54
22
Generation
84
57
24
28
Trading
71
Source Royal Ministry of Petroleum and Energy
(2000)
163
Norway Transportation and Distribution
Scandinavia

• High voltage national grid (gt132 kV)mostly
  ownwed by the state owned Stattnet SF. 40
  regional companies leased their network to
  Stattnet.
• High voltage regional grid (22 132 kV)40-50
  regional (mosty public) vertical integrated
  companies
• distribution network (lt 22 kV)200 local
  (municipal) utilities (av 500 costumers)

164
Norway Opening the grid
Scandinavia

• Account unbundling
• Phase I (1992 1996)
• Rate-of-Return regulationto avoid monopoly rent
  (interest rate of a government loan 1 risk
  premium)
• Increase market dynamic
• Increase Transparency

165
Norway Opening the grid
Scandinavia

• Phase II (1997 2001)
• Revenue cap regulationto stimulate cost
  efficiency
• Phase III (2001 2006)
• Revenue cap regulationto stimulate cost
  efficiency
• Stimulating Investments to avoid supply
  interruptions (quality assurance). It is not an
  actual problem!!!
• Optimizing the system

166
Sweden
Scandinavia

• Liberalisation begin in 1996 by Electricity
  Diective
• Electricity Act 1998 (only minor additions,
  publication of tariffs, abolishing metering
  requirements for small customers)

167
Sweden
Scandinavia

• 300 electricity generation companies
• But 8 companies producing 90 of electricity
  (even regional grid owners)Vattenfall (state
  owned) 50 of capacitySydkraft (was owned by
  municipalities and various power companies,
  including the German VEAG (which is now a 100
  subsidiary of Vattenfall!) and Norwegian
  Statkraft) 25 of capacitySince May, 2001,
  Sydkraft is a subsidiary of the German energy
  company E.ON Energie AG.

168
Sweden Access to transmission and distribution
network
Scandinavia

• Regulated third party access
• System operator is obliged to connect all who
  wish to be connected
• Main power grid is owned by (state owned) Svenska
  Kraftnet
• Unbundling
• Management unbundling net operators are not
  allowed t generate or trade electricity
• Unbundling of accounts
• The Network authority is the general regulator
• Postage stamp principle is applied

169
Structure of the electricity market in Sweden and
Norway
Scandinavia
Stattkraft
Vattenfall
Local producer
Sydkraft
IPPs
OTC-Market
Nord PoolSattnet/Svenska Kraftnet
IPO Sattnet/Svenska Kraftnet
Broker
Local distributors
Traders
Final use
170
Nord Pool prices /kWh
Scandinavia