Industry Example: The European Market for Electricity

Transcription

1 Industry Example: The European Market for Electricity Professur für BWL, insb. Internationale Wirtschaft Folie 1

2 Agenda 1. Some theory 2. The National Markets for Electricity 3. EU Liberalization Policy 4. Conclusion Professur für BWL, insb. Internationale Wirtschaft Folie 2

3 Agenda 1. Some theory Professur für BWL, insb. Internationale Wirtschaft Folie 3

4 Normative vs. positive theory of regulation Normative theory: provides advice when to regulate Market failure in the case of a natural monopoly, external effects, public goods (non-rivalry, non-excludability) maximization of rents as policy objectives for state intervention BUT: theory does not always explain existing regulations Positive theory: explains the existence of regulations Market for regulation demand exists which politicians answer with a supply of regulations favouring an organized minority, or interest group Capture theory: bureaucrats are sooner or later captured by the industry they are supposed to monitor BUT: Does not explain deregulation Professur für BWL, insb. Internationale Wirtschaft Folie 4

5 Deregulation: further aspects to consider Deregulation as a result of changes within a system: Internal political forces change (BECKER, PELTZMAN) North: relative changes in prizes induce change due to demographic change, change in the stock of knowledge, and change in technology. Deregulation due to external forces: Market aspects (internationalisation of companies, location tournaments and the role of positive demonstration effect of deregulations taking place somewhere else in the world, financial crisis of public sector) Technological dimension (creating competition through new technology, e.g. telecommunication market, leading to pressure for political changes) Political environment (international agreements, e.g. WTO, EU) Professur für BWL, insb. Internationale Wirtschaft Folie 5

6 Agenda 2. The National Market for Electricity in the Member States Professur für BWL, insb. Internationale Wirtschaft Folie 6

7 Agenda 1. Some theory 2. The National Markets for Electricity 2.1. Why regulate the market for electricity? 2.2. Why deregulate the market for electricity? 2.3. Transitions in Network Industries 2.4. The European Electricity Market before Integration Efforts (until 1998) 3. EU Liberalization Policy 4. Conclusion Professur für BWL, insb. Internationale Wirtschaft Folie 7

8 2.1. Why Regulate the Market for Electricity? Network industry: Division of supply side into four parts: generation, transmission, distribution, supply Non-competitive segment: High-voltage transmission and local electricity distribution Natural monopoly Government intervention needed to prevent market failure Competitive segment: Electricity generation and supply How to combine potentially competitive industry segments with monopolistic ones? Professur für BWL, insb. Internationale Wirtschaft Folie 8

9 2.1. Why Regulate the Market for Electricity? Market Structure of Electricity Professur für BWL, insb. Internationale Wirtschaft Folie 9

10 2.2. Why Deregulate the Market for Electricity? Objectives of EU Energy policy electricity important part Create an internal market in the energy field Increase efficiency in production, transmission, distribution and supply of electricity Reduce prices for consumers and introduce higher standards of service By means of increased competition elimination of price differentials among countries and regions redistribution of existing monopoly rents Thereby reinforce security of supply and the competitiveness of the European economy.. and respect environmental protection Professur für BWL, insb. Internationale Wirtschaft Folie 10

11 2.3. Transitions in Network Industries From Vertically integrated monopolies Public investment Central control Least cost Regulated prices Economies of scale at the energy supply level Hands-on supervision To Unbundled competitive systems Private investment Decentralised market Least risk Market prices Economies of mass production of standardised, modular technologies (equipment manufacturing level) Arms-length regulation Professur für BWL, insb. Internationale Wirtschaft Folie 11

12 2.4. The European Electricity Market before Integration Efforts (until 1998) Segmented national markets Only voluntary exchange in cross-border relations National markets with specific historically grown structures: Different degrees of market openness Big differences among countries Example: Early liberalization in Britain, EdF in France, hundreds of electricity companies with nine big ones in Germany Professur für BWL, insb. Internationale Wirtschaft Folie 12

13 3. EU Liberalization Policy in the Electricity Market Professur für BWL, insb. Internationale Wirtschaft Folie 13

14 Agenda 1. Some theory 2. The National Markets for Electricity 3. EU Liberalization Policy 3.1. The Beginnings (1990) 3.2. Further Steps: Directive on the Internal Market in Electricity (96/92/EC) Directive on the Internal Market in Electricity (2003/54/EC) Regulation on Cross- Border Electricity Exchanges (1228/2003) 3.3. Economic Aspects of Liberalizing the European Electricity Market 3.4. Latest Developments 4. Conclusion Professur für BWL, insb. Internationale Wirtschaft Folie 14

15 3.1. The Beginnings (1990) Directive on price transparency (90/377/EG) Aim: Make electricity prices for industrial end-users more transparent Content: Member States must ensure that gas and electricity undertakings communicate their prices to the Statistical Office of the European Communities Directive on electricity transit (90/547/EG) Aim: Increase opportunities for transfers of electricity by facilitating the transit between high- voltage grids Content: Contracts for transit must be negotiated between the entities responsible for the grids concerned Conditions of transit must comply with the principle of free movement, without endangering security of supply and quality of service Professur für BWL, insb. Internationale Wirtschaft Folie 15

16 3.2. Further Steps Directive 96/92/EC Directive on the Internal Market in Electricity 96/92/ EC (to be effective in 1999) Aim: Establishing an internal market in electricity Ensuring the free movement of electricity Improving security of supply Improving the competitiveness of the European economy and the welfare of the European citizens Establishment of common rules for the generation, transmission, and distribution of electricity Professur für BWL, insb. Internationale Wirtschaft Folie 16

17 3.2 Directive 96/92/EC - Content Generation Authorization procedure: - Criteria are set up by the Member States and must be objective and non-discriminatory - Applications which are conform with the criteria should be authorized Tendering procedure: - Member States set up an inventory of the need for future generating capacity - Selection has to follow objective, transparent, and nondiscriminatory criteria - Independent authority shall carry out organisation, monitoring and control of the procedure Professur für BWL, insb. Internationale Wirtschaft Folie 17

18 Transmission 3.2 Directive 96/92/EC - Content Transport of electricity on the high-voltage systems Independent transmission system operator (TSO) has to ensure non-discrimination in system use between the incumbent and new entrants TSO is responsible for dispatching the generating installations in its area and for determining the use of interconnectors with other systems Criteria for the dispatching must be objective and nondiscriminatory (but: for environmental reasons priority can be given to electricity from renewables) Professur für BWL, insb. Internationale Wirtschaft Folie 18

19 Distribution 3.2 Directive 96/92/EC - Content Transport of electricity on the medium-voltage and low-voltage interconnected systems Independent distribution system operator (DSO) is responsible for maintaining a secure, reliable and efficient electricity distribution system in its area DSO must not discriminate between the system users Member States may impose on distribution companies a public service obligation Professur für BWL, insb. Internationale Wirtschaft Folie 19

20 Unbundling 3.2 Directive 96/92/EC - Content Aimed at avoiding discrimination, cross-subsidization and distortion of competition Integrated companies are obliged to unbundle their different business activities Different possibilities left to the Member States: Proprietary separation of the monopoly activities from the competitive ones: ownership Creation of different companies under a common holding: legal Accounting separation Professur für BWL, insb. Internationale Wirtschaft Folie 20

21 3.2 Directive 96/92/EC - Content Access to the network Negotiated Third Party Access Producers and consumers place supply contracts directly with each other Access and prices are negotiated with the operator Indicative prices must be published by the system operators Independent body for the settlement of disputes is to be established by the Member States Operator may refuse access in case of lack of capacity Professur für BWL, insb. Internationale Wirtschaft Folie 21

22 3.2 Directive 96/92/EC - Content Regulated Third Party Access Producer and consumer place supply contracts directly with each other Prices cannot be negotiated Eligible customers have a right of access on the basis of published tariffs Independent body for the settlement of disputes is to be established by the Member States Single Buyer Responsible of guaranteeing the supply of electricity to the single buyer, on the basis of supply contracts Publishes a non-discriminatory tariff for the use of the transmission and the distribution system Professur für BWL, insb. Internationale Wirtschaft Folie 22

23 3.2 Directive 96/92/EC - Content Market opening Happens gradually By Feb0 3: 33% market opening for customers with a consumption of > 9 GWh Member States are allowed to go for further, including complete liberalization At the latest from 1 July 2007, all Europeans to become eligible Professur für BWL, insb. Internationale Wirtschaft Folie 23

24 3.2 Directive 96/92/EC - Outcome Directive implementation through national plans: common approach but significant heterogeneity Problem: Successful creation of an environment allowing for access of new entrants BUT: no competitive environment as no reduction in the incumbent market shares As design of market organization rules has been less effective Effects on consumer s switching and on final prices in most countries rather limited Professur für BWL, insb. Internationale Wirtschaft Folie 24

25 3.2 Directive - Implementation by Member States (2002) Professur für BWL, insb. Internationale Wirtschaft Folie 25

26 3.2 Main Providers and their Market Shares in the National Markets (2003) Source: Benchmark Report, European Commission (2003) Professur für BWL, insb. Internationale Wirtschaft Folie 26

27 3.2 Directive 96/92/EC- Remaining Problems Permitted liberalization options too diverging in outcome Transmission capacities are not sufficient to create a single market Several markets exist with different prices Available interconnector capacity and cross border transmission pricing as key issues for the functioning of a real single market The implementation of the directive caused 15 liberalized but separated electricity markets Professur für BWL, insb. Internationale Wirtschaft Folie 27

28 3.2 Directive /54/EC Directive on the Internal Market in Electricity (2003/54/EC), to be effective from 07/04 onwards Key European legislation to establish the Internal Market Amendment to the former Directive Unbundling: minimum standard is the legal separation Third Party Access: negotiated access regime & single buyer has been abolished Each Member State has to establish a regulatory authority in charge for tariff review Monitoring of security of supply Mandatory electricity labeling for fuel mix and for some emission and waste data Professur für BWL, insb. Internationale Wirtschaft Folie 28

29 3.2 Regulation 1228/2003 Regulation on Cross-Border Electricity Exchanges (1228/2003) Aims at encouraging cross-border transactions Establishes common rules for the cross-border trade A regulatory committee will decide on guidelines on compensation of transit flows, on harmonisation of national transmission tariffs and on allocation of cross-border interconnection capacity Professur für BWL, insb. Internationale Wirtschaft Folie 29

30 3.2 Regulation 1228/2003 European Regulators Group Set up in 11/03 as an advisory group of independent national regulatory authorities to assist the Commission in consolidating the Internal Market for electricity and gas Tasks: Facilitate the completion of the internal energy market Help ensure a consistent application in all Member States Provide a transparent platform for co-operation between national regulatory authorities and between these authorities and the Commission Professur für BWL, insb. Internationale Wirtschaft Folie 30

31 3.2 Directive - Market Opening Basic Data (2005) Professur für BWL, insb. Internationale Wirtschaft Folie 31 Source: EC, Report 2005

32 3.3 Economic Aspects of Liberalizing the European Electricity Market Total market share of the biggest three producers (electricity) Source: EC (2005) Report on Progress in Creating the internal gas and electricity market Professur für BWL, insb. Internationale Wirtschaft Folie 32

33 3.3 Economic Aspects of Liberalizing the European Electricity Market Customer Response Customers switching providers in the electricity market. Source: EC (2005) Report on Progress in Creating the internal gas and electricity market Professur für BWL, insb. Internationale Wirtschaft Folie 33

34 3.3 Economic Aspects of Liberalizing the European Electricity Market Mergers and Acquisitions - Examples: Germany: Mergers of large power suppliers reduced competition 4 market leaders (RWE, Eon, Vattenfall and ENBW) (80% of plants capacity ) Eon tries to buyout the Spanish energy provider Endesa, Spanish competitor Gas Natural makes an offer as well Buyout is approved by European Commmision without condition Spanish governments passes law to favour a merger between Endesa and Gas Natural(both Spanish) which is not allowed by EC due to threat for competition Professur für BWL, insb. Internationale Wirtschaft Folie 34

35 3.3 Economic Aspects of Liberalizing the European Electricity Market France: EdF dominates the electricity market in France Very difficult for European providers to expand to France Italian Energy provider Enel is interested in buying out the French Energy Provider Suez Merger planned between Energy providers Suez and Gaz de France to prevent buyout by Italien Enel, establish second biggest Energy provider in Europe by merger Professur für BWL, insb. Internationale Wirtschaft Folie 35

36 3.3 Key Players: Top 12 European Power Companies (2005) Professur für BWL, insb. Internationale Wirtschaft Folie 36

37 3.3 Key Players -Presence of largest companies in selected individual member states Source: EC, Report 2005 Professur für BWL, insb. Internationale Wirtschaft Folie 37

38 3.3 Price Development - Wholesale prices have lately been strongly increasing, but converging in some regional markets (e.g. Nordic) - but only small amounts are traded normally: longer term fixed price contracts between generators and suppliers - Prices for industrial end users, which include network costs and a retail supply margin, have not converged - For larger end-users, prices converge across EU price range: 40-55/MWh - Moderate industrial users: price range 40-80/MWh - Small commercial group: price range /MWh - Prices for priv. consumers, which include network costs and a retail supply margin, have even less converged - Price reductions achieved by some countries (Austria: industrial, Italy: private) Professur für BWL, insb. Internationale Wirtschaft Folie 38

39 3.3 Price Development - Electricity (Industrial consumers) 0,1 0,09 0,08 0,07 0,06 0,05 0,04 0,03 0,02 0,01 0 Average electricity prices for industrial consumers in /kwh (VAT and energy tax excluded) Belgien Deutschland Griechenland Spanien Frankreich Irland Italien Luxemburg Ungarn Malta Niederlande Portugal Finnland Schweden UK Norwegen Source: Eurostat Professur für BWL, insb. Internationale Wirtschaft Folie 39

40 3.3 Price Development - Electricity (Domestic Consumers) 0,18 0,16 0,14 0,12 0,1 0,08 0,06 0,04 0,02 0 Average electricity prices for private consumers in /kwh (VAT and energy tax excluded) Belgien Deutschland Griechenland Spanien Frankreich Irland Italien Luxemburg Niederlande Portugal Finnland Schweden UK Norwegen Source: Eurostat Professur für BWL, insb. Internationale Wirtschaft Folie 40

41 3.3 Missing electricity links and price differences in internal market Source: EC (2005) Report on Progress in Creating the internal gas and electricity market, whole sale Professur für BWL, insb. Internationale Wirtschaft Folie 41

42 3.4. Latest developments Directive 2005/89/EC Directive on the security of electricity supply and infrastructure investment Proposal follows the power cuts in Italy in 2003 Set up an internal framework within which member-states will define general policies on the security of electricity supply compatible with the requirements of a competitive single market for electricity Aims Safeguarding the security of electricity supply Ensure the proper functioning of the EU s internal market for electricity Investment in transportation networks Establish ability to cope with growing demand Professur für BWL, insb. Internationale Wirtschaft Folie 42

43 4. Conclusions and Future Perspectives Professur für BWL, insb. Internationale Wirtschaft Folie 43

44 Agenda 1. Some theory 2. The National Markets for Electricity 3. EU Liberalization Policy 4. Conclusion 4.1. Remaining Problems 4.2. Future Perspectives Professur für BWL, insb. Internationale Wirtschaft Folie 44

45 4.1 Remaining Problems Existing infrastructure for cross border exchange is not utilized to its maximum possible extent/ congestion at border Market structure: markets are still dominated by one or two companies, insufficient degree of price transparency Companies are not fully unbundled Long term purchase arrangements still exist Professur für BWL, insb. Internationale Wirtschaft Folie 45

46 4.2. Future Perspectives Effects of the amendments of the regulatory framework remain uncertain An ongoing process of M&As in Europe will lead to a small group of dominant players issue of concentration is the most important obstacle to the development of more vigorous competition Development of interconnection among markets regional markets are only in their infancy, EU integrated market? Development of energy market consistent with the Community`s sustainablility objectives Growing demand needs more investment in generation Professur für BWL, insb. Internationale Wirtschaft Folie 46

47 4.2 April 06: EU Commission takes legal action on 17 member countries! Countries: Austria, Belgium, the Czech Republic, Germany, Estonia, Spain, Finland, France, Greece, Ireland, Italy, Lithuania, Latvia, Poland, Sweden, Slovakia and the United Kingdom will be receiving letters of formal notice Spain and Luxembourg to the Court of Justice for failure to send it their national implementing measures. Issue price discrimination to the benefit of historical customers; lack of legal unbundling & managerial separation between electricity and gas TSO & DSOs preferential access to networks for historical customers lack of free choice of supplier insufficient independence/ competence granted to national regulators, in particular to set tariffs for network access Professur für BWL, insb. Internationale Wirtschaft Folie 47