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APEX CONFERENCE 2004

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Title: APEX CONFERENCE 2004


1

APEX CONFERENCE 2004 October 11th - 12th 2004.
Leipzig
Session 1. Market Evolution. Main issues in
Europe. Main issues in the Spanish market and
cooperation with neighbouring market operators.
Mª Luisa Huidobro President CEO of OMEL
2
CONTENT
  • Recent evolution of the Spanish energy market.
  • Spanish price convergence with other European
    organized markets.
  • Main factors influencing market prices.
  • Explicit auctions, market splitting and market
    coupling.
  • Improving the market structure and security of
    supply in electric systems.
  • The Iberian Market.

3
  • RECENT EVOLUTION OF THE SPANISH ENERGY MARKET.

4
MAIN FIGURES OF THE SPANISH MARKET
  • Daily market started operations on January 1998.
    Intraday market started operations in April 1998.
  • Settlements of all markets and processes started
    on January 1998.
  • Economic volume traded in 2003 8,185 million
    euros.
  • Energy traded 228,571 GWh.
  • Installed generation in the market 56,333 MW.
  • 5,769,532 transactions where done last year.
  • 92 companies act as purchasing agents on the
    market, 12 of them are external agents and 78 are
    independent resellers.
  • 86 companies act as producers, 12 of them are
    external agents.
  • Domestic technical constraints are very reduced,
    around 2,2 of the daily energy.
  • The market price is a reference for many
    commercial transactions.

5
MARKET AGENTS
6
INVESTMENT PROCESS
PLANNING EVOLUTION
Planning 2002-2011
Currently
In Market ()
(MW)

(MW)
CCGT
14.800
7.289
49,25
100
COGENERATION
7.100
5.781
81,42
29
WIND ENERGY
13.000
6.400
49,23
3
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44,04
9
SPANISH DAILY MARKET RESULTS
10
FINAL PRICE
11
ENERGY BY PRODUCTION TECHNOLOGY
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15
  • SPANISH PRICE CONVERGENCE WITH OTHER EUROPEAN
    ORGANIZED MARKETS.

16
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17
COMMERCIAL CAPACITY
Source REE July 2004
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21
IMPORTS FROM PORTUGAL
22
EXPORTS TO PORTUGAL
23
IMPORTS FROM FRANCE
24
EXPORTS TO FRANCE
25
COMMERCIAL CAPACITY AND ENERGY TRADED
26
COMMERCIAL CAPACITY AND ENERGY TRADED
27
COMMERCIAL CAPACITY AND ENERGY TRADED
28
COMMERCIAL CAPACITY AND ENERGY TRADED
29
CAPACITY GENERATION RESERVE AND MARKET PRICES
  • In the Spanish Market it exists a high inverse
    correlation between market price evolution any
    generation capacity reserve evolution.
  • Organised market prices strongly depends on the
    relative scarcity of the commodity.
  • Demand for electricity also influences market
    prices.
  • Fuel prices have had a lower influence on
    electricity prices.
  • Looking at the evolution of the organised Market
    European prices, it seems that the capacity
    generation reserve has a greater influence on
    price levels and on price volatility than fuel
    prices.

30
RECENT EVOLUTION OF THE ELECTRICITY PRICES IN
SPAIN
  • Debate about the recent level and evolution of
    the Spanish electricity prices in the organized
    market. Daily market prices have followed an
    stable path despite of the increase of fuels
    prices (gas and coal).
  • Demand for electricity would have been higher if
  • Export commercial capacity have not been limited
    to 250 MW since April and
  • Lower prices under the above mentioned
    circumstances would not have been different,
    because
  • Capacity generation reserve is high because of
    the new combined cycle gas plants.
  • Spanish prices are in line with the prices of the
    European organized markets. If the Spanish prices
    would have been higher, import would have
    increase and if they have been lower, exports
    would have been higher.

31
INTERCONNECTION CAPACITY IN 2005 AACORDING TO THE
2003-2011 PLANNING
  • INTERCONNECTION FUTURE WINTER COMMERCIAL
    CAPACITY (MW)
  • With France 3,000 (Delayed)
  • With Portugal 1,200
  • With Morocco 900
  • Total 5,100
  • Source Spanish 2003-2011 Electricity and Gas
    network planning

32
  • MAIN FACTORS INFLUENCING MARKET PRICES.

33
MAIN FACTORS INFLUENCING INTERNATIONAL TRADE (I)
  • Driven by relative price difference between
    organised markets.
  • Available commercial capacity
  • Always occupied in the right direction if the
    congestions are solved by implicit auctions or
    market coupling/splitting.
  • Non used when the price difference remains under
    other methods to solve congestions.
  • Level of other generation components of the final
    electricity price.
  • Deviation prices.
  • Capacity payments.
  • Ancillary services.
  • Charges derived from explicit auctions when they
    exist.
  • Barriers from regulation.
  • The principle use it or loose it alone is
    difficult to be applied in practice.
  • Characteristics and timing existing in the
    procedures to communicate transactions to the
    TSOs.
  • Level of charges derived from the tariffs for the
    use of the distribution and transport networks.

34
MARKET POWER AND CONGESTIONS.
  • Market power can be exercised easier when
    explicit auctions of the capacity are used. The
    value of the non used commercial capacity is
    higher than its value when it is totally used
    form the point of view of a significant number of
    market participants.
  • Implementing counter trading in the daily market.
    A generator with several units can get an extra
    payment for creating the congestion and for
    solving it.
  • Not applying or considering final electricity
    prices, which include ancillary services up to
    meter readings, could facilitate market power
    abuse at the side of the congested border where
    they are higher.
  • Implementing a unit commitment optimization
    method to solve domestic constraints.
  • Fixing reference costs caps for generation plants
    regarding technical constraints procedure instead
    of solving the problem will aggravate it, since
    it will only establish a set of minimum prices.
  • Virtual power plant auctions can maintain the
    market power of the owner of the physical
    generation plants and distort market prices (the
    minimum auction price will be the minimum price).

35
STATEMENT INCLUDED IN THE LAST FLORENCE FORUM
CONCLUSIONS
  • Director-General Lamoureux, whilst underlining
    the progress that proper implementation of the
    new package could potentially bring, pointed out
    the currently persisting limitations of the
    electricity market transposition of the new
    directives in Member States is insufficient
    market opening in Member States remain at the
    moment still rather asymmetrical since the
    market opening process started the degree of
    concentration in the industry has consistently
    increased and there is a clear risk that the
    public will assimilate recent price increases in
    electricity with this ongoing concentration
    process infrastructure development is still not
    satisfactory, despite the political objective of
    the European Council, agreed in Barcelona in
    2002, to have in each Member State an
    interconnection capacity of at least 10 of the
    generation capacity. In this context, the
    Commission envisages to make the integration of
    an electricity cable in railway or road tunnels a
    condition for co financing of projects
    comprising such tunnels under the transeuropean
    networks programme for transport.
  • www.europa.eu.int

36
  • EXPLICIT AUCTIONS, MARKET SPLITTING AND MARKET
    COUPLING

37
COMPARISON BETWEEN EXPLICIT AUCTIONS AND A
FINANCIAL MARKET TO HEDGE THE PRICE DIFFERENCE (I)
  • If there is a liquid spot energy market in the
    countries of origin and destination of an
    international physical bilateral contract, the
    international physical energy contract is just a
    price difference hedging.
  • If there are no liquid spot energy markets at
    either end, since the electricity can not be
    stored, and taking into account the structure of
    the present electricity business on the EU
    states, the liberalization progress will be very
    complicated
  • Explicitly auctioning the rights over an
    interconnection is equivalent to a financial
    hedge over the price difference between the two
    spot markets at both sides of the interconnection

38
COMPARISON BETWEEN EXPLICIT AUCTIONS AND A
FINANCIAL MARKET TO HEDGE THE PRICE DIFFERENCE
(II)
  • If the prerequisite of the existence of a liquid
    spot market at each side of the interconnection
    is not in place, assigning to an individual party
    the rights to use the interconnection will
    aggravate any existing market structure/power
    problem that prevented the liquid spot market
    price to be formed

39
ROLE OF THE REGIONAL MARKETS (I)
  • The Document of strategy of the European
    Commission presented in the Florence Forum
  • Emphasizes, in the first place, the role that can
    play the following regional markets
  • Iberian Peninsula, United Kingdom and Ireland,
    Northern countries, Italy, Western Europe, East
    Europe, Southeast Europe and Baltic Sea, as well
    as the importance that these market will be
    developed as a necessary step in the integration
    process.
  • Development of the international interchanges.
  • Improvement of the interconnections and reduction
    of the market concentration.
  • To facilitate the consumers choice and to obtain
    a universal service.

40
COOPERATION BETWEEN ORGANIZED MARKETS
  • Why a methodology of cooperation between
    interconnected organized market ?
  • Maximum price convergence between all cooperating
    markets in case of congestions
  • The energy flows from the low price area to the
    high price area
  • Maximum use of the bottleneck capacity
  • Equal price if there are no congestions
  • Enlarge the relevant market and therefore
    decreases the market power of the regional
    participants
  • Is the only way to apply the use it or lose it
    rule of the physical rights over the
    interconnection capacities
  • Allows market bids and bilateral trades to
    compete under the same conditions
  • Makes clear that, when liquid markets exist,
    explicit auctions of the capacity are pure
    financial hedging tools.

41
  • IMPROVING THE MARKET STRUCTURE AND SECURITY OF
    SUPPLY IN ELECTRIC SYSTEMS

42
FACTORS THAT IMPROVE THE MARKET STRUCTURE FROM
THE DEMAND SIDE
  • Demand flexibility and efficient response to
    prices by consumers.
  • The procedures for consumer protection regarding
    information and guarantee to the exercise of a
    right to change supplier.
  • A link must be created between wholesale
    transactions and retail transactions. It
    requires
  • The existence of prices formed on liquid public
    organised markets
  • The accessibility to all forms of contracting to
    all consumers, even to the organized market
    (since it avoids the practice of excessive
    retails margins in commercialization).
  • Effective conditions for non-discrimination to
    any type of suppliers or retailers in the market
    including the access to the international trades.
  • Total guarantee of access to the transportation
    and distribution networks and effective right to
    change of supplier for consumers.

43
FACTORS THAT IMPROVE THE MARKET STRUCTURE FROM
THE PRODUCTION SIDE
  • The elimination of entrance barriers for the
    access to the production activity
  • Administrative or similar authorizations.
  • Access to the networks.
  • Existence of organized markets liquid and open to
    the participation of any producer.
  • Progressively that the producer faces a flexible
    demand.
  • The competition from the international trade
  • Imports prevent excessive prices.
  • The possibility of exporting at a competitive
    market price stimulates the investment process in
    the mid term.
  • A forward market accessible to any type of
    producer can facilitate the entry to the market
    of these agents.

44
  • THE IBERIAN MARKET.

45
TOWARDS THE IBERIAN MARKET (I)
  • Memorandum of understanding for the electricity
    between Spain and Portugal (July 1998).
  • Removed of obstacles to electricity trade
  • REN become external agent of the Spanish market
  • Spanish electricity companies can sell
    electricity in Portugal
  • Coordination between REE and REN as system
    operators
  • In march 1999 a joined document is released
  • The Iberian market protocol (November 2001).
  • Guarantee of access to the OMI and to the
    interconnections in conditions of equality and
    freedom of contracting.
  • The OMI must open its capital to the
    participation of Spanish and Portuguese
    companies.
  • Performances of the OMI of strict impartiality.
  • Amplification of the interconnections.
  • Line Alqueba-Balboa (2004).
  • Line Cartelle-Lindoso (2006).
  • Reinforcement of the interconnection of the
    Douro.
  • Increase of the transit capacity of the line
    Cedillo-Oriol.
  • Harmonized technical procedures to operate the
    system.

46
TOWARDS THE IBERIAN MARKET (II)
  • Conclusions of the Valencia Summit (April 2002)
  • Spot market in Spain.
  • Forward market in Portugal.
  • Memorandum of Understanding signed in the
    Figueira da Foz Summit (November 2003).
  • Principles for the Iberian Markets.
  • International agreements to be subscribed on
    January 2004.
  • Shareholding exchange between OMEL and OMIP of
    10 of this respective social capital.
  • International Agreement on the Iberian Market
    (January 2004) revised in October 2004
  • First step Spot Market in Spain and Forward in
    Portugal (July 2005)
  • Both markets are integrated in 2007
  • Regulation harmonization including tariffs
    structure
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