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GOVERNANCE, REGULATION AND MARKET INTEGRATION IN EUROPE. SALVATORE ZECCHINI APEX Conference Sidney, October 13, 2008. Power exchanges in Europe (year 2008). Source: European Energy Exchange (EEX) and Powernext. European power markets restructuring process.
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GOVERNANCE, REGULATION AND MARKET INTEGRATION IN EUROPE SALVATORE ZECCHINI APEX Conference Sidney, October 13, 2008
Power exchanges in Europe (year 2008) Source: European Energy Exchange (EEX) and Powernext
Market integration benefits • Reduced costs -) lower transaction costs for importing and exporting electricity -) lower operational costs for system operators and market participants -) lower reliability costs associated to the need to procure reserves and other ancilliary services -) more efficient use of generation resources • Lower price volatility • Increased competition • Improved price signals for investment • Larger opportunities to invest in renewable energy as a result of broader market demand
Requirements for effective market integration • Horizontal integration of transmission and network operations • Vertical separation of functions • Non-discriminatory access to the grid • A well functioning and liquid wholesale market • Efficient allocation of scarse transmission capacity • Adequate investment in new capacity
Liberalization of European electricity markets Good1 Average2 Low3 Poor4 1Good: all indicators are satisfied 2Average: 3 indicators out of 4 are satisfied 3 Low: 2 indicators out of 4 are satisfied 4Poor: no more than 1 indicator out of 4 is satisfied
Electricity sector: transmission and distribution (year 2007)
Electricity Market: Cross border capacity across Europe (year 2006) Interconnection capacity (NTC) as a ratio to installed generation capacity Source: ERGEG 2007
Electricity consumption and cross-border exchanges in European regions (year 2005)
Power prices correlation (2007) Source: European Market Coupling Company (EMCC)
NRAs (National Regulatory Authorities) Powers • Independence from the government • Power to set grid access tariffs • Power to set reference retail prices • Power to control access to gas storage • Power to promote competition • Sanctioning powers • Definition of public service obligations and quality standards Source: GME elaboration on IERN data
Market design harmonization issues • Trading arrangements • Traded products • Algorithms and matching rules • Timing • Monitoring and transparency rules • Market liquidity • Guarantee and settlement system
European Power Markets: Liquidity and Volumes (2007) Source: Volumes from GME and Reuters data. Liquidity computed as a ratio on national consumption based on Nord Pool estimates for the Scandinavian market and UCTE (union for the co-ordination of transmission of electricity ) data for the other countries.
Ergeg Electricity Regional Initiatives Source: ERGEG; Annual Report, 2007.
Issues currently tackled across the electricity REMs • First focus on a few key issues to deliver results = work in progress = not tackled currently
Day Ahead transmission capacity allocation (June 2007) Source: ERGEG Monitoring Report – Compliance with Regulation 1228/2003, July 2007.
Status of existing Regional Markets The first Inter-regional Coupling
Market integration models • Unified Pan-European solution • Horizontal integration • Inter-regional Dome Coupling
Dome Coupling European / multiregional solution DOME COUPLING Regional solution REGION 1 REGION 2 REGION 3 REGION 4 E F G H I B D J k L M C Market areas A Market splitting Volume coupling Price coupling Source: Europex-ETSO interim report on inter-regional congestion management, April 2008.
The third package for internal energy markets: key proposals • Effective unbundling • Ownerhip unbundling • ISO (Independent System Operator) • Other solutions • Improved cooperation of TSOs to develop a European Network • Creation of a European Agency for Regulatory Cooperation (ACER) • Enhancement of national regulators powers
Conclusion: how to integrate national and regional markets • Pragmatic bottom-up approach -) institutions set up the general framework -) technicalities worked out by interested parties: TSOs, PXs and stakeholders • Expected result: progressive convergence of national interests • Dome coupling could represent a compromise solution granting -) enough flexibility and efficiency -) the possibility to extend integration beyond the current regional setting
Conclusion: which goals the internal European energy market should pursue? • To cover the whole of the EU and possibly other contiguous areas • To promote the efficient use of the European interconnected networks • To ensure security of supply • To provide transparent and competitive price formation mechanisms • To support the development of liquid and efficient markets in all areas • To extend to markets for natural gas