David Newbery, DAE Cambridge MIT Energy and Environment Policy - - PowerPoint PPT Presentation

David Newbery, DAE Cambridge MIT Energy and Environment Policy Workshop

www.econ.cam.ac.uk/dae/research/regulate.htm

1

• coal privatised on franchise contracts
• franchise due to end “1998”
• coal faces gloomy future
• coal-friendly Labour party elected
• electricity prices, profits stubbornly high

Oct 1997 Minister requests RETA to correct bias against flexible coal

2

Generation in England and Wales by fuel type

TWh

1990 1992 1994 1996 1998 2000 50 100 150 200 250 300 350 Nuclear Coal

• ther steam

CCGT hydro+other imports

3

Coal production and use

generation use

20 40 60 80 100 120

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 est million tonnes netimports deepmined

• pencast

generation use

4

Generation in England and Wales

50 100 150 200 250 300

89/90 90/1 91/2 92/3 93/4 94/5 95/6 96/7 97/8 98/9 99/00 00/01 f'cast

TWh PSB / Mission PG NP Mis'n AES Eastern IPP Import NE Magnox

5

British Domestic electricity prices net of taxes

7 8 9 10 11 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 p/kWh 2000 prices

Edinburgh London

6

• generators have market power
• capacity payments are unnatural
• biased against coal
• generators get PPP regardless of bid
• constraint payments unsatisfactory
• no demand side
• unsatisfactory governance structure

7

• Pool complexity amplifies market power
• ending guaranteed PPP will encourage

competition

• commodity markets a suitable model
• end Pool end PSA change governance

8

• Pool replaced by voluntary markets
• self-dispatch, physical contracts
• SO trades in balancing market to stabilise
• pay-bid in BM, different buy, sell prices

costly to be out of balance

9

Balancing Mechanism

time

T - 24 hours T - 3½ hours Gate Closure T=0 Traded period Up to several years ahead

Spot Market Financial Markets

Options/Swaps Other Financial Instruments

Forward Markets

Bulk OTC Trading Standardised Products PX Trades

10

• Efficiency gains are small and easily lost

– Newbery and Pollitt estimate restructuring CEGB lowered costs by 6%

• Transaction costs may be large

– Electricity: like cocoa or financial services? – Financial services charge 25% of income – Offer estimated restructuring costs at £700+ = 1.5% of PPP

11

• “The Pool is too transparent and

discourages bilateral bargaining”

• “Making balancing market a poor guide to

SMP will encourage contracting”

• “If there is no market of last resort then

must-run stations have to accept lower bids”

12

• 90% of electricity contracted - what was

wrong with Pool contracting?

• A penal and opaque BM may encourage

contracts but raise transaction costs

• advantages incumbents and deters entry

more likely to raise costs and prices because long-run prices set by entry cost

13

• destroying Pool will create new risks

more vertical integration make entry more difficult allow total capacity to be controlled to tighten market and raise prices

14

• The root problem is lack of competition
• If this is resolved the Pool may work better
• Pool replacement may then be unnecessary,

costly and counterproductive

– it will accelerate vertical integration – it will raise transaction costs and hence prices – it will deter entry and allow prices to rise

15

• Competition intensified

– Jul 99 Edison Mission buys 4GW $472/kW – raises load factor from 25% to 40+ % SMP falls 20-30% year-on-year – Oct 01 Edison Mission sells at $190/kW

• Interconnector raises UK gas prices

– CCGT now at margin – more dispersed ownership more competition

16

Ofgem’s evidence on effect of NETA

Annual baseload EFA prices

17 18 19 20 21 22 23 24 25 1- A ug- 99 1- Sep- 99 1- O ct - 99 1- Nov- 99 1- D ec- 99 1- Jan- 00 1- Feb- 00 1- M ar- 00 1- A pr- 00 1- M ay- 00 1- Jun- 00 1- Jul- 00 1- A ug- 00 1- Sep- 00 1- Oct - 00 1- N

• v- 00

1- Dec- 00 1- Jan- 01 1- Feb- 01 1- M ar- 01 1- A pr- 01 1- M ay- 01 1- Jun- 01 1- Jul- 01

£/MWh Apr '00 April '01 April '01 SCH 5 ON April '01 GTMA

NETA Design Finalised Go Live Delayed NETA Go Live Post NETA,

• nly GTMA

contracts

17

• The outbreak of post divestiture competition

by Edison Mission?

• Baseload supplied by inflexible nuclear
• Delays in ‘Go-live’ cause contract

unwinding? Key question: what caused price decline?

18

• discriminatory auctions discourage collusion
• penal imbalances encourage OTC contracts

fiercer competition, chiselling

• BM charges those who cause imbalance

better cost allocation and control

19

• revenue equivalence theorem

with risk of inefficient dispatch

– supported by lab experiments

• BM discourages efficient financial contracts
• BM charges are not cost-reflective
• BM charges company not system imbalance

excessive self-balancing

20

• more competitive trading
• more scope for demand side
• forward curves facilitate efficient entry
• sharper cost incentives to manage risk

lower prices for all customers

21

• OTC forward baseload prices fall 6% y-o-y
• forward peak prices fall 21% y-o-y
• markets evolving nicely
• Balancing Market 1.5% oversupplied
• BM volatile but only 3% of trade
• BM price spread narrowing

“Real and substantial benefits for consumers”

22

OTC winter baseload pre and post NETA

Winter Baseload year on year 2000/01

19.50 20.00 20.50 21.00 21.50 22.00 22.50 23.00 27 Mar 29 Mar 2 Apr 4 Apr 6 Apr 10 Apr 12 Apr 16 Apr 18 Apr 20 Apr 24 Apr 26 Apr 1 May 3 May 7 May 9 May 11 May 15 May 17 May 21 May 23 May 25 May 30 May 1 Jun 5 Jun 7 Jun 11 Jun 13 Jun 15 Jun 19 Jun 21 Jun 25 Jun 27 Jun £/MWh Winter '01 Baseload Winter '00 Baseload

23

Gross and net BM balances

• 6,000
• 4,000
• 2,000

2,000 4,000 6,000 8,000 27/03/01 03/04/01 10/04/01 17/04/01 24/04/01 01/05/01 08/05/01 15/05/01 22/05/01 S ettlem ent D ate MW

N et A verage D aily Im balance A verage D aily N egative Im balance A verage D aily P

• sitive Im

balance

24

Average daily system buy and sell prices

Average Daily SSP and SBP since NE TA

• 50

50 100 150 200 27-Mar 3-Apr 10-Apr 17-Apr 24-Apr 1-May 8-May 15-May 22-May 29-May 5-Jun 12-Jun 19-Jun 26-Jun £/MWh Average SSP (£/MWh) Average SBP (£/MWh) Linear (Average SBP (£/MWh)) Linear (Average SSP (£/MWh))

25

Daily costs of NGC’s balancing actions

Indicative Daily Cost of Balancing Actions

• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 27/03/01 03/04/01 10/04/01 17/04/01 24/04/01 01/05/01 08/05/01 15/05/01 22/05/01 29/05/01 05/06/01 12/06/01 19/06/01 26/06/01 £(m) Value Bids Value Offers Net Cost of Actions

St Fergus Gas Terminal Sruck by Lightning

26

Spread in average BM prices

Balancing prices weekday Sep-Oct 2001

10 20 30 40 50 60 70

0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 half-hour starting

£/MWh

SBP SSP

27

Daily maximum BM SBP

Balancing Market weekday daily Maximum SBP 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

27-Mar-01 2-Apr-01 8-Apr-01 14-Apr-01 20-Apr-01 26-Apr-01 2-May-01 8-May-01 14-May-01 20-May-01 26-May-01 1-Jun-01 7-Jun-01 13-Jun-01 19-Jun-01 25-Jun-01 1-Jul-01 7-Jul-01 13-Jul-01 19-Jul-01 25-Jul-01 31-Jul-01 6-Aug-01 12-Aug-01 18-Aug-01 24-Aug-01 30-Aug-01 5-Sep-01 11-Sep-01 17-Sep-01 23-Sep-01 29-Sep-01 5-Oct-01 11-Oct-01 17-Oct-01 23-Oct-01 29-Oct-01 4-Nov-01 10-Nov-01 £/MWh peak SSP

28

Weekday HH average spot price

UKPX and APX weekday average prices

10 15 20 25 30 02/04/01 09/04/01 16/04/01 23/04/01 30/04/01 07/05/01 14/05/01 21/05/01 28/05/01 04/06/01 11/06/01 18/06/01 25/06/01 02/07/01 09/07/01 16/07/01 23/07/01 30/07/01 06/08/01 13/08/01 20/08/01 27/08/01 03/09/01 10/09/01 17/09/01 24/09/01 01/10/01 08/10/01 15/10/01 22/10/01 29/10/01 05/11/01 12/11/01 19/11/01 26/11/01 03/12/01 £/MWh UKPX av APX av weekly UKPX moving average

29

• Market fundamentals drive prices down
• Oct 01 contract round 2% up y-o-y
• BM volatility/spreadPX prices OTC prices
• BM SBP unpredictable, can be very high
• mistakes very costly
• incentive not to balance but go long
• fear minimise risks

30

• Hard to get quotes for contracts <2GWh/yr
• tariff includes BM premium ~ 5%
• penalty if profile differs from historical
• hard for demand side to bid, lost DSB 15%
• higher management costs

higher delivered electricity prices

31

Very large user electricity prices

0.5 1 1.5 2 2.5 3 3.5 4 4.5 1990 1992 1994 1996 1998 2000

p/kWh 2001 prices

electricity co al co s t gas co s t elec-co al - FFL

32

• power exports from CHP down 61%
• small genco costs up 16%
• wind power can be charged for selling

– BM imbalance exceeds energy value

• self-insure with own spinning reserve

– loss of system multiplexing

• Demand forecasting decentralised

– system accuracy ~5%, individual > 15%

33

• BM over-rewards flexibility

keep old plant available (oil, coal) excess capacity keeps prices low?

• Rules can be changed, still learning
• but rule changes costly
• prices are lower - but why?

34

• costly to implement: $1+ billion and rising
• trading personnel up 400%
• all supply businesses vertically integrated
• penal imbalance encourages self-insurance

– more spinning reserve – more plant output variation higher operation and maintenance costs

35

“RETA rests on unsubstantiated claims, inappropriate analogies, and unquestioned criticisms” (DN Oct 1998)

• NETA benefits large vertically-integrated (G+S)

companies with smart traders

• overproduction and excess reserves costly
• self-dispatch - feasible under Pool, now obligatory
• Not clear that NETA countervails market power

David Newbery, DAE Cambridge MIT Energy and Environment Policy Workshop

www.econ.cam.ac.uk/dae/research/regulate.htm