Power games played by electricity generators

1
Power games played by electricity generators

• Strategic Positioning and Price Effects in the
  North European Power Game
• Presentation by Petter Longva in a seminar at
  The Norwegian School of Management 3 March 2005

2
Issues to be Discussed in the Presentation

• The Continental Power Markets
• Vision vs. Reality
• Fragmentation
• Barriers to entry
• Market Liquidity
• Attractiveness for Traders
• The German Power Market
• Abuse of Dominant Position
• The Fallacy of Self-Regulation
• Survival of Power Intensive Industries?
• The Nordic Power Market
• Security of Supply
• Sustainable Energy Policy?
• Survival of Power Intensive Industries?
• Energy Policy and Dynamics of Change

3
There is a Long Distance Between Vision and
Reality in the Continental Power Market
Continental

• Vision One pan-European market
• unrestricted power flow
• liquid wholesale trading
• dynamic investment climate
• Reality Separate national markets
• dysfunctional cross-border trading
• restricted competition
• barriers to entry

4
The Market is Fragmented through the Cross-border
Trading System
Continental

• Separate national markets
• dominated by national champions
• no real international competition
• Complexity and uncertainty
• risk of being unable to use capacity
• risk of imbalances in both countries
• Pricing games
• combined positions in grid and generation
• combined roles as system operator and market
  player

• Procedure for cross-border trading
• Buy cross-border capacity
• Estimate trading direction (hourly)
• Buy power in the export country
• Sell power in the import country

5
Barriers of Entry Sustain the Game for the
Incumbents
Continental

• Incumbents have ? diversified portfolios ? all
  load categories? flexibility ? setting prices?
  balancing income
• Strategic asset pricing
• incumbents buy to eliminate
• high prices
• Strategic power pricing
• power prices just below new entry (greenfield)
  cost
• price structures aimed at hurting new entrants
• high variability and uncertainty
• Asymmetric risk picture
• extra risk premium for non-portfolio investments

• New entrants have ? new power plants ? base
  load ? no flexibility? market risk exposure?
  balancing cost

6
The Development of Market Liquidity has Stagnated
Because of a Flawed Market Design
Continental

• The market is dominated by incumbents
• playing on size non-competitive pricing
• complexity favouring large portfolios
• national borders split the market
• unbundling still incomplete
• Market dominance barrier to entry
• risky for independent traders
• no independent generation investment
• Power logistics are dysfunctional
• inadequate balancing markets (or none)
• balancing de facto monopoly for incumbents
• no effective congestion management
• discriminatory imbalance payments

7
Attracting New Traders and Fresh Risk Capital is
Critical for Future of the Market
Continental

• Information transparency
• know and explain prices
• data for models and forecasting(generation,
  load, flow, events, etc.)
• Level playing field
• complete unbundling
• information transparency
• cash-settled balancing market
• market structure
• Trusted price reference
• remove manipulation opportunities
• fair and predictable day-ahead market(s)
• reasonable volatility

8
The German Price Sets the Reference for All the
European Markets
German

• In a competitive market, spot prices are equal to
  marginal cost, hour by hour
• In oligopoly markets, competition is weakest and
  pricing fails at peak times
• old plants are in the hands of incumbents
• bottlenecks split markets
• German power prices were well above marginal cost
  from September 2001

Prices and marginal cost for baseload in Germany
Source EWI, Köln
Spot prices
Marginal Cost
9
The German Market was Designed by the Incumbents
for Their Own Benefit
German

• "Weaknesses" secure the position
• system operators for previous concession areas
• defining available internal capacities
• moving internal bottlenecks to the border
• ownership of cross-border capacities
• organising and participating in cross-border
  auctions
• organising and participating in balancing markets
• vertical integration through minority ownerships
• would have been illegal in most other countries
• flexible supply contracts
• The new regulator is toothless
• focuses initially on grid cost, not the main
  issues
• the delaying tactics have succeeded once more

10
Continuation of Present Policy will Lead to
Closing Down of Heavy Industry in Germany
German

• Extremely high grid costs
• carry the subsidies of green power
• cash cow for German incumbents and municipalities
• Failed self-regulation
• implicit cartel
• mixed roles as market player and system operator
• market control through vertical integration
• Manufacturing suffers
• high power prices

11
In the Nordic Power Market, there is a Real
Danger of Weakened Security of Supply
Nordic

• The grid is not being developed according to
  growing needs
• demand growth
• increased international trade in an open market
• securing common pricing in larger areas
• too strong cost focus in grid regulation?
• Little new capacity except in Finland
• barriers to entry
• incumbents delay new capacity
• Reduced flexibility in capacity replacement
• wind power, unregulated hydro power, nuclear
  power, and combined heat and power
• strong focus on energy efficiency

12
The Nordic Power Market(s)A lot of Detailed
Policy, no Overall View
Nordic

• The political sphere is expanding
• detailed management of technology choices
• concessions and subsidies of all kinds
• complex certificates
• free GHG quotas
• The political establishment is hostile to growth
• concessions
• environmental procedures
• strong cost based regulation of grid development
• Do we have a robust and sustainable market?
• power prices that are development signals without
  jeopardising supply security in a dry year?
• are we able to develop market based systems for
  dry year reserves?

13
Continuation of Present Policy will Lead to
Closing Down of Heavy Industry in Norway
Nordic

• No will to strengthen the power balance
• restrictions on conventional power
• not enough green power
• Difficult to increase import capacity
• Cable to England was stopped
• limited scope for Statnett to do anything
• Manufacturing will suffer
• increased power prices
• failing supply quality (rationing?)
• increased cost for manufacturing industry

14
The European Power Markets are Going through a
Critical Phase

• What will the European Commission do?
• no strong impetus from the electricity directive
• processes take time
• European Parliament
• Comitology
• Florence Forum
• DG Comp has launched a general inquiry
• What will authorities i each country do?
• national priorities and national champions
• policy conflicts
• environment
• security of supply
• prices to manufacturing industries

15
Any Questions or Discussion Points?