Download Energy Market Reform - Gas Infrastructure Europe

ENERGY MARKET REFORM:
Gas Transportation & Distribution Issues
Presentation to
GTE 2nd Annual Conference
by
Gerald Doucet
Secretary General, World Energy Council
23-24 September, 2004
WORLD ENERGY COUNCIL
www.worldenergy.org
OIL PRICE (2000 $)
NA PRODUCTION
WHAT US
PRODUCTION?
UK GAS PRICE
NO GROWTH WITHOUT
ELECTRICITY
REGIONAL ELECTRICITY TRENDS 1971-2002
TWh
5000
4000
US & Canada
Four breaks in the linearity of the trends:
- US & Canada post 1996: productivity?
- W. Europe vs. AF-M E: de-location?
- FSU/CEE post 1989: black economy?
- China post 1978: GDP to be revised?
West. Europe
3000
2000
Japan,
Aust-NZ
FSU-CEE
source: BP
China
Developing
Asia
Af-ME
L. A.
1000
China
GDP PPP in G$ 2000
Latin
Am erica
0
0
2000
Africa-ME
4000
6000
8000
10000
12000
Drivers: Gas T&D
THE BROAD CONTEXT
Reforms are aimed at easing the evolution
and adaptation of the institutions. Without
reforms, economic development will stop.
• Legal: property rights, gender equality, rule of law
• Social: education, health, social justice, pensions
• Infrastructures: energy, water, telecommunications
THE CONTEXT
WEC’s three broad messages on market reforms
• Be clear on priorities: Balance public policies
(security or environment), monopoly aspects,
and competition at different stages.
• Be pragmatic: A blend of market and regulated
features may bring real competition and deliver
benefits similar to more complex designs.
• Be wary of risks: The simplest approach should
be used that will achieve the desired benefits at
minimum cost and risk.
PUBLIC OR PRIVATE
OWNERSHIP?
• Governance: a concept that covers integrity, labour
& investment costs, quality of service, strategy &
management, organisation, technology…
• Governance quality: experience shows it erodes
progressively in the public-owned firms, generally
starting with over-staffing and labour costs
• Investments: capital cost is often much higher for
private firms especially if the regulation is not stable
and foreseeable
THREATS
• Market power: exists because of the very nature
of electricity and can only be avoided by less shortterm competition (e.g. with annual auctions)
• Function unbundling: too much independance
between transmission and supply creates the risk of
under-optimisation
• Complexity: a pool system is complex/unreliable.
Bilateral contract systems are less risky. « Single
buyer » systems with annual auctions are even less.
TRADE-OFFS
• First trade-off: volatile prices and market power
with risk on the long-term security or prices
including the capacity costs?
• Second trade-off: a true spot wholesale market with
no generator with more than 10% of capacities or a
centrally set price?
• Third trade-off: the liberty of choice for all at any
time or a security insured either by the LDC or by
the « Single buyer »?
THE US RETAIL
SITUATION
THE TOOL BOX
Large customers (industry, power plants, LDC)
may either manage, or ask suppliers to manage,
at a cost, their LT security thanks to:
•
•
•
•
Long-term contracts,
Diversified portfolio,
Price responses to reduce demand,
Excess capacities of supply, e.g. “DG”.
MARKET POWER
Loyal competition is often difficult to develop…
• Too small price elasticities because only
~10%? of users receive true price signals
• Too few actors: large incumbent dominate
the market with market shares >>10%
• Too small over-capacities in generation or
in transmission (creation of “niches”)
• Too many markets (day-ahead, intra-day,
capacity…): opportunities for cheating
Market power is
not innocuous.
It prevents the
normal play of
competition and
may not always
be contestable.
HOW TO SECURE
SUPPLY?
• With long-term planning and costs for capacity:
New capacities are awarded to the lowest bid and
capacity costs are guaranteed, e.g. paid annually
• With “insurances” subscribed by the buyers:
This additional revenue will make up for capacity
costs and be part of the competitive game
• With “ad hoc” measures such as uplift/LOLP…
which have no proven track record yet
NEEDED TRADE-OFFS
Electricity is not a true “commodity” because
its users are mostly captive, and is not either a
true market because of its monopolistic sectors
• First trade-off: cyclical prices & market power
episodes versus capacity payments?
• Second trade-off: competitive wholesale market
with many (> 10) actors versus “single buyer”?
• Third trade-off: security of supply versus freedom
of supplier choice, e.g. for “captive” consumers?
GAS-ELECTRICITY
INTERFACE
• Natural gas price is set by the competition with
petroleum in interruptible uses
• Electricity price is set in the marginal mid/peak
plant using the most expensive fuels
• The most expensive fuel is gas or the petroleum
product that gas substitutes at the margin
• Hence the convergence because the spot gas
price makes the spot marginal electricity price
OECD NATURAL GAS
GAS FOR HOUSEHOLDS VERSUS GAS FOR INDUSTRY
Spain
Household
subsidise
industry
Japan
Netherlands
United Kingdom
France
Canada
Ireland
United States
Switzerland
Hungary
Industry
subsidise
household
Czech Republic
Turkey
Finland
Greece
0
0,5
1
1,5
2
2,5
3
3,5
4
EMR: Some Conclusions for
Gas T&D