Lessons from electricity liberalisation in the US and elsewhere: perspectives for Europe Richard Green Institute for Energy Research and Policy

Circumstances of this talk I gave this talk in place of one that Professor Paul Joskow of MIT had been scheduled to give, but was unable to, and adopted his title I have drawn heavily on his recent paper, “Markets for Power in the United States: An Interim Assessment”, Energy Journal 2006 I have also benefited from talking with Paul and attending many of his presentations over the years Paul should not be held responsible in any way for my choice of material to extract, or my conclusions

The Liberalisation Buffet Entry into generation Wholesale market with competition Transmission system independence Retail competition

Electricity markets 1983 – a radical idea! 1988 – UK government policy 1978 – Chilean government policy 1996 – European Union policy

Electricity in the US Large, diverse, industry Investor-owned utilities, State-regulated Municipal and Cooperative bodies Federal Power Authorities Federal Energy Regulatory Commission Power Pools After PURPA (1978): NUGs and IPPs

US electricity markets States with active restructuring, Feb 2003; EIA

US electricity prices Average residential rate, Jan 1998; EIA c/kWh c/kWh 8-10 c/kWh 6-8 c/kWh 4-6 c/kWh

US electricity markets States with active restructuring, Feb 2003; EIA States with dots voted for John Kerry in 2004

What has happened? Transmission: –Most utilities have tariffs for other users –Many Independent System Operators Retail markets: –Least popular measure, low switching rates Wholesale markets: –Half generation capacity is covered

How did they get there? Transmission open access: –Pressure from FERC Orders 888, 889, 2000 Retail competition: –State initiatives Wholesale markets: –State initiatives and evolution of Pools –FERC pressure beaten back

Standard Market Design Bilateral trading for most power Centralised auction for real-time power “Bid-based, security-constrained, dispatch” Price at each node equals the marginal cost of meeting more load there Nodal price differences are the payment to transmit power (including bilateral deals)

Where are there problems?

Transmission: –Congested system, insufficient investment, “seams issues”

An American Quilt

Where are there problems? Transmission: –Congested system, insufficient investment, “seams issues” Retail: –Customers don’t switch unless they save Need to allow competitors to make money

Where might there be? Market power: –Mechanisms are in place to limit price spikes Generation capacity: –Lots of new entry around 2000 –Lots of bankruptcies soon afterwards Capacity markets: –Designed to raise the “missing money”

What about Europe? Large, diverse, industry Large multinational companies Small local companies Member State regulation –Some informal coordination European Commission

Where have we got to? Legal unbundling Power markets in most Member States –FERC’s Standard Market Design is nowhere to be seen –Balancing often done by incumbents Retail competition for all consumers coming very soon!

Market power EU Sector inquiry: evidence of problems Wholesale markets concentrated –Most markets national in scope, not integrated Vertical foreclosure via integration Wholesale markets not transparent Users don’t trust complex price formation

Market power remedies Change the structure? Change the rules? –Revenue Equivalence Theorem

Monthly average prices, England & Wales Evans and Green, working paper, 2005

Market power remedies Change the structure? Change the rules? –Revenue Equivalence Theorem Change the size of the market? ½ + ½ = ¼ + ¼ Are the markets joining together anyway?

Some prices move together 14-day moving averages. Source: Spectron

Others stay apart prices for base load power, €/MWh

Major power flows Source: UCTE

Major power flows and congestion Source: UCTE Congested 26-75% 76-99% 100%

How to ease congestion? Build more lines? Make “minor” investments? Improve operating procedures? Integrate markets better? –Balancing regimes, nomination rules, timing

Errors in Interconnector use Imports to UK Exports from UK English price minus French price DG Competition, Energy Sector Inquiry, fig 64

How to ease congestion? Build more lines? Make “minor” investments? Improve operating procedures? Integrate markets better? –Balancing regimes, nomination rules, timing Adopt trans-national markets?

A last word “Electricity restructuring …is likely to involve both costs and benefits. If the restructuring is done right…the benefits … can significantly outweigh the costs. But the jury is still out on whether policymakers have the will to implement the necessary reforms effectively” (Joskow, 1997) “I believe that statement continues to be true today.” (Joskow, 2006)