a WEBINAR / Вебинар a a Potential Regulatory Incentives for Adequate Price Signals Supporting Energy Investments (Generation and Network) Will the present market model and the regulatory practice deliver adequate price signals for future investments and for flexible system operation of the energy industry? dr. Gábor Szörényi 16 April 2013 General Secretary of ERRA
Main topics • Present obstacles and foreseen international tendencies in wholesale market conditions • Specific wholesale market structures and conditions in the market building process – relevant in most of the ERRA countries • Special effects of the financial and economic crisis in the transient period of market building (hindering investments) + possible regulatory interactions • Some result from the ERRA wholesale market monitoring system • Case study on market integration – as part of the solution (indicative price signals) 2
Market conditions hindering efficient market operation Key problems on national and regional wholesale markets: – Concentrated national markets – Lack of investment (both generation and network) – Security of Supply (gas supply dependency, national/ regional capacity shortage) – Lack of supportive legislative framework – Slow process in market integration – Price trends, end-user price regulation – Lack of real independence of network operators – Limited regulatory power and regulatory incentives 3
Some additional circumstances can hinder efficient wholesale competition Present and foreseen tendencies which can hinder competition: – Renewable with increasing ratio could be exempted from wholesale competition (feed-in tariff system) – CHP generators (under the new energy efficiency regulation) could be preferred (must run) (similar to the power-desalination co-generation plants) – New nuclear units (if any) foreseen to be invested under long term PPAs – Part of flexible gas fired units taking part in system regulation (compensating weather dependent renewable generation) contracted by system operators – Possible new Capacity Remuneration Mechanism (CRM) → Shrinking wholesale (day-ahead) markets (?) → Newly invented Central Purchasing Agent (SB) (?) → New Market Design (?) ( instead of the „commodity only” market) 4
General tendencies influencing wholesale market prices German wind (Source: Formaet) (Source: Red Electrica Espania) 5
Prague, Power Exchange Central Europe Daily FORWARD CURVE CZ PXE ( € /MWh) 6 6
Why the current market prices do not provide incentives for generation investment? • After the economic crises, when the demand market normally pushes up the commodity prices, the increasing proportions of the renewable, that have lower variable costs, could significantly change the price movement (either slow down the price increase or even decrease). The effect of these changes cannot be kept within the country borders, especially with the priority dispatch of renewable (at cross-border networks as well). • Effects of the market price should be analyzed in two different aspects: (1) What( ’s ) are the effects of the present market prices to the • operation of the existing generator units and effects on the • (2) planned new capacities (in line with the predicted future market prices and foreseen risk elements and risk levels) 7
How the current market prices and the increasing renewable ration could determine the operation of the power plants? ad (1) -The high proportion of low variable cost renewable generators (wind, solar) in Europe supersedes (squeezes out) the traditional power plants in most of the cases. - If only marginal costs are bid into the market a peaking unit will never recover its fixed costs (because of its cost structure)! -The hard-to-predict and variable operation of renewable generators Cost structure of Power Plants forces the system operators to use the flexible power plants with relatively low utilization level for system balancing purposes. -These effects result in the so-called “ missing money ” problem. This phenomenon itself, without any further measure, does not guarantee that these flexible generation units remain in operation for long term. 8
Phelix Baseload Year Futures (Cal-13) Prices and trading volumes 2008 2009 2010 2011 2012 9
Why the current market prices do not provide incentives for generation investment? ad (2) - The present market prices influence decisions on new power plant investments but other circumstances could effect the outcome of the decision much more, such as: investors’ trust in the integrated energy market ; the new financial environment; the stability of climate change and energy policies ; and the possibility of low level of the market prices of the electricity for long run . Based on the current market environment and the occurring future structural changes (substantial ratio of intermittent renewable), I believe that the price indications and the hardly manageable risk elements do not stimulate power plant investment at a required level. In addition, these factors do not ensure the sustainable operation of balancing capacities that are necessary to system control. 10
Some of the potential measures reducing the negative effects of market distortions? - What additional steps, if any, should be taken at national and regional level to ensure that present market rules fully contribute to ensuring generation adequacy and security of supply? Apart from the hardly predictable production of weather-dependent (intermittent) renewable in every second (in the peak hours as well) the secure and necessary generation adequacy and system flexibility can be improved by the following mechanisms: − The adverse impact of weather-dependent (intermittent) renewable on the operation of electricity system and market must be reduced (e.g. electricity storage; ensure the daily market price forecast for renewable [RES integration into the market through day ahead nominations]) − The futures markets need to be developed (strengthen price indications for investors and risk mitigation [develop forward markets]) 11
Some of the potential measures reducing the negative effects of market distortions? Potential regulatory measures ( cont. ): - Improving the overall investment environment (continuous forecast of the security of supply and flexibility; simplified licensing procedure; disclosure/publication of the potential power plant sites with network connection possibilities) - More support for demand side involvement into the system balancing (that can be mobilized the most quickly – huge potential!) - Supporting the demand side energy efficiency measures with incentive network tariff system (e.g. decoupled rate) - Network development through incentive tariffs - Transparent access rules to reach existing cross border capacities (for system regulation the flexible generators are important!) . 12
Regulatory position regarding the implementation of any CRM - First best solution: Market signal based investment - Second best solution: Adverse impact of intermittent renewable on system operation and on market must be reduced + other market distortions should be eliminated + general investment environment should be improved + more involvement of demand side - If the best solutions do not work, some capacity mechanism could be necessary - Each national market structure and capacity/system flexibility situation is different: no single, unified best solution but regional harmonization is necessary, otherwise the cross-border trade could be endangered! - The preparation of adequate and less distorting mechanism could require years! Some countries prepare it in advance. 13
ERRA Members - Map 34 member V oluntary regulators association of national energy 1700 trained regulators participants Objectives : 80 trained - I mprove regulation Commission - S trengthen ers R egulators with 4 training exchange of Videos information, training, and research 4 textbooks - H armonized regulatory S everal framework issue - S table investment papers, climate case studies 14
Market Conditions in ERRA countries (1) Specific wholesale market structures and conditions during the market building process – relevant in most of the ERRA cases: - Concentrated national markets: the incumbent wholesaler still has dominant position (in some cases with state preference) - Special circumstances which slow down or hinder new investments: - during the long lasting market building process the regulatory risk and merchant risk is relatively high [no liquid wholesale market with predictable prices, the financial institutions ask for risk sharing and risk mitigation ], - the (affordability led) regulated end-user prices [could have an effect on wholesale and generation prices, which do not „allow” adequate return on new investment] , - the RAB and the RoR calculated by the Regulator do not always cover the cost [relatively high risk elements and high cost of financing] of network development, - lack of harmonized capacity allocations rules and harmonized regulatory frameworks in most cases [hindering cross border network investments] 15
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