Meeting competitiveness of energy intensive industries

1
Meeting competitiveness of energy intensive
industries

• Hans ten Berge
• Chairman markets committee
• Brussels, 30 March 2006

2
Energy intensive industry
3
Exposure to volatile and short-term wholesale
prices

• General price instability
• Restrictions by regulators/ competition
  authorities
• Different fuel mixes per nation
• Limited cross boarder capacity
• Incremental price setting

4
Typical business cycle dynamics
Source ECON
5
Prices for energy intensive industry
Fundamentals

• Market dysfunctioning
• Price evolution since liberalisation
• End of cross-subsidies
• Increase of taxes levies
• CO2 policies
• Increase of fuel prices
• Market functioning?

6
Prices for energy intensive industry
Transparency problem

• Create improved transparency?
• DG COMP?

7
Prices for energy intensive industry Remedies

• Medium term
• Liquid regional wholesale markets
• Demand participation

8
EURELECTRIC road map towards a pan-European
market

• Objective
• Create a sufficiently harmonised market
  framework
• Means
• Use regional markets as an intermediary step, BUT
  care should be taken that they do not develop in
  different directions
• Use expansion of liquid wholesale as a driver for
  market integration

9
European regional markets
10
Expansion of wholesale markets

• Will enhance price convergence
• Will increase the number of market players
• Will alleviate concerns of market concentration
• Will stimulate liquidity on the trading markets
• Will stimulate the need for common rules on
  transparency
• Will reinforce trust in price formation and
  markets abilities to deliver

11
EURELECTRIC road map towards a pan-European
market

• Objective
• Create a sufficiently harmonised market
  framework
• Means
• Use regional markets as an intermediary step, BUT
  care should be taken that they do not develop in
  different directions
• Use expansion of liquid wholesale as a driver for
  market integration

12
European regional markets
13
Expansion of wholesale markets

• Will enhance price convergence
• Will increase the number of market players
• Will alleviate concerns of market concentration
• Will stimulate liquidity on the trading markets
• Will stimulate the need for common rules on
  transparency
• Will reinforce trust in price formation and
  markets abilities to deliver

14
Prices for energy intensive industry Remedies

• Short term to investigate
• Longer term contracts for energy intensive
  industry
• Competition based
• At regional level
• Compliance with competition law

15
Prices must lead to recovery of capital costs,
not just short-term marginal cost

• Prices must trigger investments (incl. nuclear,
  clean coal)
• Economic theory
• In longer term and on average, marginal costs
  (including all elements) must equal long-term
  development costs.
• Market approach more efficient than cost, but
  more volatile.

16
CO2 emissions trading
17
CO2 prices in wholesale electricity prices

• Inclusion of CO2 prices in wholesale electricity
  prices
• CO2 and electricity correlated to gas
• Estimates from 0.2 to 0.8

18
CO2 emissions trading - Remedies

• Medium-/Long-term
• A global not a European market
• Wider basis ? all gases, all sectors
• see above
• Short-term
• See above

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1. Prices in general
20
Growth in labour productivity in the electricity
sector has been hugeLabour productivity growth
(/a)
Source DG Enterprise publication EU
productivity and competitiveness an industry
perspective. Can Europe resume the catching up
process?
21
Consumer satisfaction of residential customers
is high
Source Evaluation of the Performance of Network
Industries Providing Services of General
Economic Interest, 2005 report (SEC(2005) 1781),
based on Special Eurobarometer, December 2004
22
Price evolution Household customers (before
taxes)
Price evolution for households using the EUROSTAT
EU-15 indicator in nominal and real terms
without taxes (1995-2005) (based on KEMA Report)
23
Price evolution Household customers (all
taxes included)
Price evolution for households using the EUROSTAT
EU-15 indicator in nominal and real terms all
taxes included (1995-2005) (KEMA Report)
24
Price evolution Industrial customers (before
taxes)
Price evolution for industrial users using a
weighted average (1995-2005) Industrial users
24 GWh, without taxes (based on KEMA report)
25
Price evolution Industrial customers (without
VAT)
Price evolution for industrial users using a
weighted average (1995-2005) Industrial users
24 GWh, without VAT, other taxes included (KEMA
report)
26
Evolution of taxes for households
Evolution of prices and share of taxes (incl.
VAT) for households (3,500 kWh, 1995-2005) (KEMA
Report)Note Based on EUROSTAT aggregated
indicator for EU 15 absolute values shown in
nominal terms based on EUROSTAT
27
Evolution of taxes for industry
Evolution of prices and share of taxes (excl.
VAT) for industrial users (24 GWh, 1995-2005)
(KEMA Report)Note Based on weighted average
absolute values shown in nominal terms based on
EUROSTAT
28
Evolution of coal and oil prices
Evolution of oil and coal prices (1995-2005)
(KEMA report)
29
Comparison end-user electricity price
indicesEurope-US (residential)
EU Household users (3500 kWh), nominal price
before taxes in Source based on
EURELECTRIC-KEMA report Review of European
Electricity Prices, November 2005 US
Residential users, nominal price in US- Source
Energy Information Administration
(www.eia.doe.gov)
30
Comparison end-user electricity price
indicesEurope-US (industry)
EU Industrial user (24 GWH), nominal price
before taxes in Source based on
EURELECTRIC-KEMA report Review of European
Electricity Prices, November 2005 US
Industrial users, nominal price in US- Source
Energy Information Administration
(www.eia.doe.gov)
31
Comparison Steel, Aluminium and Copper Price
Indices
32
Comparison of selected chemical price indices
33
Evolution of average revenue
EURELECTRIC Report Financial Performance of the
Electricity Industry Post-Liberalisation, based
on EURPROG
34
Total returns (dividend payments included) for
electricity supply companies (1997-2004)
EURELECTRIC Report Financial Performance of the
Electricity Industry Post-Liberalisation, based
on DJ Euro Stoxx Total Market Index
35
Total return indexes A comparison between
capital-intensive sectors (1997-2004)
EURELECTRIC Report Financial Performance of the
Electricity Industry Post-Liberalisation (2006)
36
2. Market development
37

• IEA Report
• Lessons from Liberalised Electricity Markets
• Electricity market liberalisation is not an
  event. It is a long process that requires strong
  and sustained political commitment, extensive and
  detailed preparation, and continuous development
  to allow for necessary improvements while
  sustaining on-going investment.

38

• Multi-factor approach to competition
• in electricity markets
• The process of creating a well-functioning
  European electricity market is not completed but
  has considerably advanced and is ongoing
• The process was initiated by regulation but now
  market actors are a key driving force to progress
• Successful market building is a process based on
  progress on multi-factors, not on reaching
  ideal conditions for one or a few criteria.

39
Development of electricity generation in the
EU25
Source VGB Figures and Facts about Electricity
Generation 2004
40
Energy Supply Investment in the EU, 2003-2030
1 800 billion dollars
Electricity investment needs will be the largest
and will have to be done in an uncertain market
framework
41

Prerequisites for a European wholesale market

• Liquid day-ahead and forward markets and open
  balancing and intra-day markets with trustworthy
  prices
• Sufficient number of market participants in the
  day-ahead and forward markets on both demand and
  supply side
• Transparent access to common sets of market
  information
• Set of sufficiently harmonized market frameworks
  to allow cross-border trading on all markets
• Coordinated and market-based mechanisms to manage
  congestion
• Develop interconnection where economically
  feasible
• Solid co-operation between Regulators, TSOs and
  power exchanges

42

Road Map to a European Electricity Market
parallel approach
Integration at European level
Pan-European market
2007-12
Coordination between regions
2005-10
Development within regions
2005-09
Continued liberalisation of national markets
2005-07
43

Continued liberalisation of national markets (by
2007) I
44

Continued liberalisation of national markets (by
2007) II
45

Developments within regions (by 2009) I
46

Developments within regions (by 2009) II
47

Developments within regions (by 2009) III
48

Co-ordination between regions (by 2010) I
49

Co-ordination between regions (by 2010) II
50

Integration on European level (by 2012) I

• Final goal create as large price areas as
  possible in Europe and ultimately if possible
  one single price area

51

Integration on European level (by 2012) II