A model of the European electricity market What can we learn from a geographical expansion to EU20

1. A model of the European electricity market � What can we learn from a geographical expansion to EU20? Wietze LISEa and Benjamin F. HOBBSb a ECN Policy Studies, Energy research Centre of the Netherlands, Amsterdam b Department of Geography and Environmental Engineering, Johns Hopkins University, Baltimore, USA

2. 2 27-9-2012 Outline Objective and introduction Description of the COMPETES (COmprehensive Market Power in Electricity Transmission and Energy Simulator) model Solution properties Lagrangian optimality formulation Results � in terms of prices Conclusions

3. 3 27-9-2012 1. Objective and introduction Objective: study economic effects of the liberalisation of the European electricity market in 20 countries. ?Presentation of the extension of the game theoretic market modelling tool COMPETES to 20 countries Research questions: What is the impact of an extension to 20 countries on the formation of market prices? What are the effects on prices under different market structures depending on the ability of firms to exercise market power?

4. 2. Description of the COMPETES model

5. 5 27-9-2012 2. Description of the COMPETES model The COMPETES model version 2.0 is a simplified version of Hobbs et al (2004a,b), which had multiple nodes per country; there is generally no congestion within the national networks� COMPETES 2.0 covers 20 countries, namely: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, UK/England & Wales. Calculates the optimal outcome under perfect and strategic competition and various conjectures. Consumers in COMPETES are price sensitive. The model is static: uses short run variable costs.

6. 6 27-9-2012 2. Description of COMPETES model COMPETES model contains of 7531 power plants (acquired from http://www.platts.com/, the database on World Energy Power Plants), with data on capacity, production technology, owner. Availability, efficiency, CO2 emissions, fuel costs are collected from other sources (EU20 uniform). Firms can own power plants in various countries and thus have active cross-border ownership relations. The year has 12 demand periods: super peak, peak, shoulder, off peak; winter, summer, midseason (http://www.ucte.org/, http://www.nordpool.com/, http://www.bmreports.com).

7. 7 27-9-2012 2. Description of COMPETES model Consumer demand is met under perfect competition, which results into market clearing prices and by assuming a price elasticity in that point, completes the affine consumer demand curve. Trade among the twenty countries is delimited by inter-connector transmission capacity (derived from data at http://www.etso-net.org/). Net transmission losses are ignored.

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9. 9 27-9-2012 Market structure - Transmission operator

10. 10 27-9-2012 Market structure - Arbitrageur

11. 11 27-9-2012 2.1 Solution properties Complementarity formulation Direct solution of equilibrium conditions Solves large models (thousands of variables) Methodology Derive the first-order conditions for each player Formulate market clearing conditions Solve resulting system of conditions

12. Demonstration of COMPETES

13. 13 27-9-2012 2.2 Lagrangian optimality formulation

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16. 3. Results

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18. 18 27-9-2012 3. Results � prices Perfect and strategic competition is considered. Perfect competition leads to near uniform prices in 14 countries, except for CH, NW, PL, SI, PT, AT. Highest prices in BE, DE, ES, IT, UK. The prices are substantially lower here, due to: High share of (non-exporting) competitive fringe. Cheap generation technologies: hydro, nuclear & coal. Strategic competition leads to different prices The price is decreasing in 2 countries: SE<FI. The price differences are due to: Ability to exercise market power. Demand �scarcity� and accessibility of the market.

19. 19 27-9-2012 4. Conclusions In a liberalised EU20 market the prices largely tend to converge towards each other, once the market is driven by perfect competition. The effect of market power is that prices diverge again, where the prices increase in most markets and decrease in some. The biggest price responses are found in countries where the number of firms is low. However, due to the interlinkages among the markets, the price responses in the near monopoly markets are still relatively low. Similar price increases are found in geographically adjoint regions.

20. The end Lise@ecn.nl

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22. 22 27-9-2012 3. Results � prices Perfect and strategic competition is considered. Perfect competition leads to near uniform prices in 16 countries, except for CH, NW, PL, SI. The prices are much lower here, due to: High share of (non-exporting) competitive fringe. Cheap generation technologies: hydro, nuclear & coal. Strategic competition leads to different prices: BE>UK>IT>DE>LU>FR>NL>HN>ES. The price is decreasing in 3 countries: CH<AT<SI. The price differences are due to: Ability to exercise market power. Demand �scarcity� and accessibility of the market.

23. 23 27-9-2012 4. Conclusions In a liberalised EU20 market the prices largely tend to converge towards each other, once the market is driven by perfect competition. The effect of market power is that prices diverge again, where the prices increase in most markets and decrease in some. The biggest price responses are found in countries where the number of firms is low. However, due to the interlinkages among the markets, the price responses in the near monopoly markets are still relatively low. Similar price increases are found in geographically adjoint regions.