Electricity: Beyond Parer: The role of transmission in the NEM - PowerPoint PPT Presentation

Electricity: Beyond Parer: The role of transmission in the NEM David Newbery, Cambridge University ACCC Regulation, Industry Structure and Market Power Conference, 1 Aug 2003 http://www.econ.cam.ac.uk/electricity

Transmission constraints in Europe 2 Source: Towards a Reliable European Energy Market, Presentation by B. den Ouden, APX, January 2001

Interconnector value • what are interconnectors worth? • When are merchant interconnectors suitable? • How should access be regulated? – Existing inter-TSO interconnectors – Merchant interconnectors 3

Germ an-Dutch interconnector auction value - 4 week average 500 450 400 Euros/MW/day (sum of hours) 350 300 250 annual average centred 200 150 100 50 0 Mar-01 Apr-01 May-01 Oct-01 Dec-01 Mar-02 Apr-02 May-02 Jan-01 Feb-01 Jun-01 Jul-01 Aug-01 Sep-01 Nov-01 Jan-02 Feb-02 Jun-02 4

Arbitrage profits (less 1 SD) per hour, six-montly averages 20 jan-Jun'01 Jul-Dec '01 Jan-Jun '02 15 Euro/MWh 10 5 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 5 Hour

Eur/MW/day 1000 1500 2000 2500 3000 500 0 4-Jun-01 4-Jul-01 UK-NL Interconnector daily revenues - moving averages 4-Aug-01 4-Sep-01 4-Oct-01 4-Nov-01 4-Dec-01 4-Jan-02 4-Feb-02 4-Mar-02 4-Apr-02 4-May-02 4-Jun-02 Total monthly MA Import weekly MA Export weekly MA 4-Jul-02 4-Aug-02 4-Sep-02 4-Oct-02 4-Nov-02 4-Dec-02 4-Jan-03 4-Feb-03 6

Interconnector values • German-Dutch auction values: • average of hourly auction values = 30,000-40,000 Euro/MW/yr • spot prices differences are larger • UK-NL absolute spot price differences = 120,000-140,000 Euro/MW/yr • interconnection can be profitable 7

Interconnector auctions • Must have market-based access to scarce interconnectors ⇒ auctions attractive, but how design? • oligopolists amplify market power if they secure import capacity ⇒ legacy import contracts bad idea ⇒ efficient arbitrage desirable ⇒ pay-as-bid bad idea - deters arbitrage 8

Dutch-German interconnector • single-price auction � • no netting � • APX and LPX/EEX for pricing • legacy contracts � • Germany vertically integrated � • cap on incumbent imports � • arbitrage improving � • 2 separate auctions not integrated with PX � 9

Merchant interconnectors: problems • economies of scale • market power • pre-emption of other interconnectors • impact on network - externalities • regulatory risk raises WACC 10

Economies of scale in interconnectors 3,500 3,000 LRAC (Euro/MW/mile) 2,500 2,000 1,500 1,000 500 MW 0 0 500 1,000 1,500 2,000 2,500 3,000 11

Merchant interconnectors: benefits Controllable DC link between jurisdictions: – can take speculative risk – which might be hard for regulators to justify • Addressing regulatory concerns: – option on regulation after N years – initial tender for capacity demand – deep connection charge or CBA test? – use-it-or-lose it daily auctions? 12

Market splitting or integrated auctions? • Major EU debate on cross-border trade • Options being promoted: – integrated auctions – market integration or splitting as in Nordpool • Market integration : SO clears spot and T together ⇒ increases demand elasticity ⇒ mitigates market power 13

K Separate markets, unconstrained T (complete information, no uncertainty) local demand K K total demand p 1 p 2 D 1 +D 2 p i = 2(b 1 + b 2 ) Q Q D 1 p 2 = D 2 -K +K Cournot choice p 1 = = 2b 1 2b 2 K= b 1 D 2 -b 2 D 1 Traders arbitrage b 1 +b 2 s t K K,q i p i e k r a m e submit bid to results from submit bids to results of energy t a r a p transmission transmission energy spot spot markets e s auction auction published markets published 14

K Integrated markets, unconstrained T local demand p total demand p 1 p 2 K K Q Q Q +D 2 -q 2 D 1 -q 1 Inverse demand: p 1 = b 1 + b 2 D 1 +D 2 Cournot choice: p i = 3 (b 1 +b 2 ) SO allocates K g q i K,p i n i c i r p submit bids to SO determines nodal l a p p d q q o energy spot markets prices and dispatch 15 n

K Benefit of integration, if T unconstrained “ importing elasticity” Separate markets local demand K K total demand p 1 p 2 D 1 +D 2 p i = 2(b 1 + b 1 ) Q Q Integrated markets - # generators p D 1 +D 1 p i = 3(b 1 +b 2 ) Q Theorem 1: Integration increases Q and decreases P. 16

Case study: Integrate Benelux • Problem : Electrabel 98% Be, 25% of NL • Proposition : If original equilibrium unconstrained profit maximising then market integration lowers prices in both markets • But if Electrabel restrains its market power more before integration than after, prices could rise (in NL, possibly also in Be) • Might this precipitate restructuring? – VPP, exchange gencos across countries? 17

Integrating two markets? Dutch cannot T uncon- p Integrated < p separated sell in Belgium strained (or Belgium = prices capped Generators can at Dutch level) p Integrated = p separated sell everywhere p Integrated = p separated,netting T per- manently Market power at constrained p B , sep, no net >p Integrated >p N,sep, no net importing node B Competitive importing p sep, no net = p sep,netting node Strategy Integrated markets provide incentive to resolve determines constraint - resulting in higher outputs constraint 18

Cost-benefit of mitigating market power • demand elasticities low ⇒ total surplus gain may be small • but other benefits could be large: – avoid excessive generation investment • like England – avoid regulatory inefficiencies • like California But hard to formalise this to be lawyer-proof 19

Electricity: Beyond Parer: The role of transmission in the NEM David Newbery, Cambridge University ACCC Regulation, Industry Structure and Market Power Conference, 1 Aug 2003 http://www.econ.cam.ac.uk/electricity