Market Power and Competition in the Spanish and Portuguese Electricity Markets

1. Market Power and Competition in the Spanish and Portuguese Electricity Markets ( ShahriyarNasirov* and AitorCiarreta) Presented by Shahriyar Nasirov ORKESTRA 34th IAEE International Conference June 22, 2011 Stockholm, Sweden

2. LITERATURE Borenstein, S., Bushnell, J., 1999, Newbery, D.M. (2001, 2002), Sheffrin, A. (2001), Vassilopoulos, P. (2003), Wolak, F. A. (2000, 2003), Chang, Y., (2007), Ciarreta, A., and Espinosa, M.P.,( 2010), Green, R., Newbery, D., (1991), Joskow, P., (2003)

3. Structure • Overview of Spanish and Portuguese Electricity Markets and joint Iberian Electricity Market • Traditional metrics ; Concentration Ratio (CR) and Herfindahl –Hirschman Index (HHI) • Other alternative metrics; • Peak demand and Capacity based Assessment: Supply Margin Assessment (SMA), Residual Supply Index (RSI) • Hourly Bid based Assessment: Pivotal Supply Index (PSI), and Residual Demand Elasticity (RDE) • Some regulatory measures affected to mitigate market power in Spain.

4. MARKETStructure • Spanish Pool: • Liberalization began after the passing of the electricity sector law in 1997, Ley del Sector Eléctrico 54/1997 • OMEL is the market operator and it is responsible for the economic management and bidding process. • Red Eléctrica de España (REE) directs most of the transmission network in Spain • Portuguese Pool: • The process of liberalisation started in the mid 1990s. • Portuguese electricity model is based on two different systems: the Public Electricity System (PES) and the Independent Electricity System (IES). • ERSE is the independent regulatory body. • MIBEL: • The integrated Portuguese–Spanish market, generally known as Iberian Electricity Market (MIBEL), was founded on 29 July 1998, and functioning since 2007, July. • Functions • The spot market is managed by OMEL- directed by Madrid • The term market is called Portuguese pool or OMIP – managed from Lisbon. It is based on the negotiation of contracts of a maximum of 1 year. • The bilateral contracts are private contracts that signed between market agents and their terms and conditions are freely determined by them.

5. Spanish Electricity Market

6. Portuguese Electricity Markets Source: REN; ERSE and own construction

7. Traditional Metrics • Traditional Metrics: : Concentration Ratio (CR) and Herfindahl –Hirschman Index (HHI) • CR m, is equal to the sum of the market shares or installed capacity shares - of the (strictly less than n) largest firms • HHI is the sum of the squared market shares for each firm competing in a given market The indicator Concentration ratio (CR) by German Federal Cartel was also used in the USA until 1982, when the Herfindahl- Hirschman Index (HHI) was introduced instead of CR. The Spanish antitrust authority frequently reports both in its merger cases.

8. CR & HHI Power Generation Market in Spain Source: CNE, company web pages and own calculations

9. CR & HHI Installed Capacity Market in Spain Source: CNE, company web pages and own calculations

10. CR & HHI Power Generation Market in Portugal Source: ERSE, company web pages and own calculations

11. Market Power Metrics Installed Capacity in Portugal Source: ERSE, company web pages and own calculations

12. Supply Margin Assessment (SMA) • SMA of a given generator k tests whether peak demand of a market is metby total generation after subtracting firm k’s generation. If any of the generator’s capacity is needed to meet peakdemand, then that generator has market power.

13. Supply Margin Assessment (SMA)

14. Residual Supply Index

15. Residual Supply Index • CAISO considers that the market will be competitive when RSI is significantly above 1 but usual at 1.2 or more (Sheffrin, 2001). Source: Own Construction

16. Residual Demand Elasticity • Whethera firm faces a highly elastic residual demand curve or not • advantage of this method: data availability for building residual demand curves. However, transmission constraints could be main limitations in building the residual demand curves. • We use OMEL data for 2004-2009 in Spanish and Portuguese markets • Data consists of hourlydemand and supplybidsforeachagents

17. Residual Demand Elasticity • Computing elasticities of residual demand • We choose a day that is representative of the average daily consumption for a given year. Consider the demand profile for 8th of April, 2009. We choose hour 6 and hour 22 as representative off-peak and peak hour respectively

18. Residual Demand Elasticity • Step 1: Build the Aggregate Demand schedule, , and Aggregate Supply schedule, , for each hour depending on whether bids are offered in separates markets (Spain and Portugal) or in joint market (MIBEL) due to existence or absence of congestions. • Because these are schedules, then the price coordinate does not coincide in general in both schedules. Thus, we calculate filled demand and filled supply schedules respectively. In this way, we have curves with the same number of price-quantity pairs.

19. Residual Demand Elasticity

20. Residual Demand Elasticity

21. Residual Demand Elasticity • Step 2: We take two firms, Endesa and Iberdrola in Spain and one firm, EDP in Portugal which owns the majority of generating capacities.Thus, we have three supply schedules: {SEN, SIB, SEDP}. • Step 3: For each generator, we find the supply of the rivals that is S-k denotes the aggregate supply of all the firms but k. Hence, we have {S-EN, S-IB, S-EDP}. • Step 4: Obtain the residual demands for each generator,

22. Residual Demand Elasticity Congestions in the network

23. Residual Demand Elasticity NO congestions in the network

24. Residual Demand Elasticity Step 5: Compute the arc-elasticity of residual demand for each generator at each hour:

25. Residual Demand Elasticity

26. Mitigation factors in Spanish Pool • adequate and sufficient capacity to meet peak demand • legal unbundling of transmission system • electricity trading, existence of a contract market. • We study capacity expansion and energy trading through forward contacts as main factors that improved the performance of wholesale electricity market in Spain by addressing the critical problem of market power.

27. Capacity Expansion • Concentration has been falling considerably in the last five years in the Spanish pool, mostly thanks to the growth in new entrants with CCGT and wind generation capacities

28. contact MARKET • From January 1998, the beginning of the liberalization process, until 2005, almost all wholesale electricity was traded in the day-ahead market • Forward contracting ( bilateral contracts) began in OMIP (Iberian Energy Market Operator) since July 2006 • Order ITC/400/2007-CESUR auctions. • Royal Decree 1634/2006- Endesa and Iberdrola hold a series of auctions offering virtual power plant (VPP) capacity.

29. contact MARKET

30. CONCLUSION • Metrics: there is a trend toward competition in the Spanish Pool. However, Portuguese market still remains highly concentration. • Mitigation Factors in Spanish Pool; Concentration has been falling considerably due to new entrants under CCGT and Wind capacity and development of Contract Market