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MARKET OPERATION IN THE GAS AND ELECTRICITY INDUSTRY

Ferenc J. Horváth, President Hungarian Energy Office II. Industrial Energy Forum Conference 2004 Novotel Budapest Centre, 26-27 May 2004. MARKET OPERATION IN THE GAS AND ELECTRICITY INDUSTRY. Market Opening and Market Activity in the Gas Market of EU. %. Member States. 100. 90. 80. 70.

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MARKET OPERATION IN THE GAS AND ELECTRICITY INDUSTRY

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  1. Ferenc J. Horváth, PresidentHungarian Energy OfficeII. Industrial Energy Forum Conference 2004Novotel Budapest Centre, 26-27 May 2004 MARKET OPERATION IN THE GAS AND ELECTRICITY INDUSTRY

  2. Market Opening and Market Activity in the Gas Market of EU % Member States 100 90 80 70 Market opening Active market 60 50 40 30 20 10 0 Denmark Netherlands Belgium Austria Ireland Portugal Finland Sweden Great Britain Germany Greece Italy France Spain

  3. NATURAL GAS PURCHASE IN THE LIBERALISED MARKET Cross- border Határon keresztüli Domestic Hazai Storages Tárolók production termelés trade kereskedelem Szervezett Organised Közüzemi Közüzemi Public utility natural gas földgáz nagykereskedő nagykereskedő wholesaler market piac System Rendszer - - irányító operator Közüzemi Gas Gáz Public utility Közüzemi Gáz Gáz szolgáltató supplier kereskedő trader szolgáltató kereskedő Public utility Eligible Feljogosított Közüzemi Feljogosított Közüzemi fogyasztók fogyasztók fogyasztók consumers consumers fogyasztók

  4. Transport Distribution Storage Cross-border Market player capacity X X X X Trader 1/ X X X Public Utility Wholesaler 1/ X Public utility Supplier 2/ X X X X Eligible Customer 3/ X X X System Operator 4/ X X X Producer 1/ to fulfil its supply obligations 2/ to the limit of its own consumption 3/ to ensure system balance 4/ to the limit of the gas produced by itself ACCESS RIGHTS

  5. a) Közüzemi piacon a) Közüzemi piacon a) In the public utility market b) In the competitive market tényérték fact value fact value balancing gas m m m /h /h /h m /h 3 3 3 3 nomination value óra 12 18 6 12 18 6 24 24 D + D + D + D D = n k r e D = Charge for natural gas take-out n Capacity charge (yearly) Gas charge according to nomination 3 HUF/MJ HUF/m /h D = Balancing energy fee k D = system-usage charges r D = other charges (eg. trader’s profit margin) e TO SUPPLY THE DAILY NEED FOR NATURAL GAS OF AN ELIGIBLE CONSUMER

  6. SUB-MISSION OF DAILY DEMANDAND NOMI-NATION Nomination Submission of demand System Operator - Gázfor Gas rások sources Transport licensee Public utility wholesaler Transport system Storage licensee Traders Storage system Eligible customers Distribution licensee Public utility suppliers Distr. system Captive and eligible customers Captive customers Natural energy flow Nomination of those entitled for access toward System Operator Submission of demand

  7. The official price regulationincludes: - transportation of natural gas (excluding transit), distribution and public utilitystorage,  - trade between the public utility wholesaler and the public utility supplier, and - natural gas sold for the public utility consumer. The official price must include: - return of justified investments - return of costs incurred by licenseesoperating efficiently, - and the profit necessary for permanent operation. PRICE DETERMINATION

  8. 1. Transportation rate system Transportation capacity fee Transportation turnover fee Public utility wholesaler Eligible consumers 3 3 3 HUF/m /day/year HUF/m /h/year HUF/m X X X 2. Distribution rate system Distribution Distribution Distribution Distribution Distribution capacity- System users flat rate standing standing turnover fee fee 3 HUF/MJ HUF/year HUF/MJ/h/year HUF/MJ HUF/m /h/year X Without a gas meter X X With a gas meter less than 20 m3/h . X X With a gas meter between 20-100 m3/h . 3 X X With a gas meter between 101 -500 m3/h X X With a gas meter above 500 m3/h 3. Storage rate system a) 3 3 Storage filling fee, HUF/m Storage withdrawal fee, HUF/m X X b) On the basis of storage mobile fee and storage peak fee OFFICIAL FEES OF SYSTEM USAGE FOR NATURAL GAS

  9. SOME QUESTIONS ON THE MARKET OPENING IN THE GAS INDUSTRY (1) 1.To what degree is the market likely to be opened? - Legal market opening 70 % from 1 January 2004, 100 % from 1 July 2007 - The rate of the active market is 5-10 % in the first years according to international tendencies. 2.Is there enough cross-border capacity? 3.Are there any free gas sources in the neighbouring countries?

  10. SOME QUESTIONS ON THE MARKET OPENING IN THE GAS INDUSTRY (2) 1.Is it worth entering the market for eligible consumers? The estimated official charges to be added to the gas prices ( at price January 2004): - approx. 4,3 HUF/m3 transportation charge, - approx. 2,3 HUF/m3 storage charge - approx. 3,8 HUF/m3 distribution charge in case of consumers with capacity contract above 500 m3/h. Total officially regulated system-usage charge for eligible consumers with a capacity contract above 500 m3/h: 10,4 HUF/m3.

  11. SOME QUESTIONS ON MARKET OPENING IN THE GAS INDUSTRY (3) Gas average price to be reached (domestic and import): -domestic average price of the consumer group in question ( 44,4 HUF/m3) – system-usage charges ( 10,4 HUF/m3) = 34 HUF/m3threshold. - This equals to approximately 160 USD/thousand m3 import price (if 212 HUF/USD).

  12. Market Opening and Market Activity in the Electricity Market of EU Member States % 100 90 80 Market opening Active market 70 60 50 40 30 20 10 0 Denmark Netherlands Belgium Austria Ireland Portugal Finland Sweden Great Britain Germany Greece Italy France Spain

  13. Domestic production Import Network capacity auctions PUBLIC UTILITY SECTOR COMPETITIVE SECTOR Power plant capacity auctions Public utility wholesaler Traders Public utility suppliers Eligible consumers (who have entered the competitive sector) Public utility consumers switch Non-eligible consumers Eligible consumers who have chosen public utility Switch back THE HYBRID MARKET MODEL OF THE ELECTRICITY INDUSTRY

  14. Organised electricity - market - System - operator ELECTRICITY PURCHASE IN THE LIBERALISED MARKET Határon keresztüli Cross-border Termelés Generation Termelés Generation szállítás transmission közüzemi for public verseny for competitive - - célra utility market piacra Közüzemi Public utility Szervezett villamos - wholesaler nagykereskedő energia - piac Rendszer - irányító Közüzemi Public utility Electricity trader Villamos energia supplier szolgáltató kereskedő Eligible Feljogosított Public utility Közüzemi consumers fogyasztók fogyasztók consumers

  15. Rendszerirányító Erőművek Kereskedő (mérlegfelelős) Fogyasztók BALANCE CIRCLES IN THE BALANCED REGULATION Regulated Szabályozási area (zone) terület (zóna) System-operator Rendszerirányító Balancing Mérlegkör Balance Circle Mérlegkör Balance Circle Power Plant Erőművek Exchange Exchange Kereskedő (mérlegfelelős) Trader (balance circle responsible) Fogyasztók Consumers

  16. MARKET SHARE OF ELIGIBLE ELECTRICITY CONSUMERS (2003-2004) % 25,00 20,18 20,12 19,40 18,68 20,00 17,52 17,35 17,27 17,01 17,05 16,81 16,76 15,00 10,70 9,89 10,00 8,01 7,21 6,31 4,01 5,00 3,20 1,88 1,88 1,50 1,41 0,80 0,81 0,72 0,46 0,30 0,17 0,04 0,05 -3,36 0,00 July. May Oct. Jun Jan May Nov Apr Apr Dec Aug March March Feb Feb Sep -5,00 % Eligible consumers entering the market Total

  17. FREE MARKET SOURCES • Yearly and short-time auctions • for cross-border (import) capacities • for domestic (virtual) power plant capacities • „Transitional capacity excesses” announced by the public utility wholesaler” • Domestic power plants generating for the free market • Balancing energy

  18. 2003 2004 July Nov May 1. Legal market opening 35 35 35 2. Licensed traders, pc 11 16 3. Registrated eligible consumers - number, pc 44 50 105 - site, pc 78 90 152 - share, % 17 20 20 4. Rate of active market, % 19 19 5. Capacity generated for the free market, MW 75 110 300 MARKET OPERATION IN THE ELECTRICITY INDUSTRY (1)

  19. 2003. II. half 2004. I. half. 6. Import capacities announced at auctions - for peaks, MW 240 - base, MW 360 450 7. Power plant capacity auctions - base, MW 85 55 - off-peak, MW 110 8. Switch-over costs, HUF/ kWh (0,1) 0,2 0,2 9. Traders’ sale average price, HUF/kWh 7,7 10. Public utility wholesale average price, HUF/kWh 11 MARKET OPERATION IN THE ELECTRICITY INDUSTRY (2)

  20. POWER PLANT CAPACITY AUCTIONS 2003. 2004. I. half II. half 1. Base - virtual capacity MW 85 55 - electricity GWh 375,4 240,2 - average price ° by long-term contract HUF/kWh 18,2 ° auction price HUF/kWh 8 9,5 2. Off-peak capacity - virtual capacity MW 110 85 25 - electricity GWh 258,6 199,8 58,8 - average price ° by long-term contract HUF/kWh ° auction price HUF/kWh 5,6 5,2 6,7

  21. GUARANTEED PURCHASES IN PPA, ACTUAL PURCHASE FROM POWER PLANTS, EXPECTED DEMANDS 60000 50000 40000 GWh 30000 20000 10000 0 1999. 2000. 2001. 2002. 2003. 2004. 2005. 2006. 2007. 2008. 2009. 2010. 2011. 2012. 2013. 2014. 2015. 2016. 2017. 2018. 2019. 2020. 2021. 2022. 2023. 2024. years guaranteed purchase GWh expected demand GWh actual purchase GWh

  22. SOME QUESTIONS ON MARKET OPENING (1) 1.    What size of electricity (domestic and import) demand is likely from the eligible consumers? -        Rate of active market 20 – 25 % in the first years -       In case 6 - 8 TWh free consumer choice 2.    Is there enough cross-border capacity? 3. Are there any power plant excess capacities in the neighbouring countries?

  23. SOME QUESTIONS ON MARKET OPENING (2) 1.Is it worth entering the market for eligible consumers? TThe estimated official charges to be added to the domestic power plant and import prices ( at price August 2004): -        approx. 0,6 HUF/kWh transmission charge, -        approx. 0,79 HUF/kWh system operation charge (operational, stranded costs, transmission losses and green charge total) -     approx. 0,68 HUF/kWh system-level service charge, -     approx. 0,46-2,75 HUF/kWh distribution charge in case of high and medium-voltage level consumers.

  24. SOME QUESTIONS ON MARKET OPENING (3) The Total officially regulated system usage fee for eligible consumers at high and medium voltage levels is: 2,5-4,8 HUF/kWh depending on the voltage level. Electricity average price (domestic and import) to be reached: -domestic average price for high-voltage consumers (12,7 HUF/kWh) – system usage fees (2,5 HUF/kWh) = 10,2 HUF/kWh price threshold, -domestic average price for medium-voltage consumers (16,6 HUF/kWh) – system usage fees (4,8 HUF/kWh) = 11,8 HUF/kWh price threshold.

  25. LATEST PROBLEMS REGARDINGELECTRICITY LOAD REGULATION - import is practically at base, - total capacity of gas motorsis 300 MW(1,4 MW/pc on average), high generation in the early hours of dawn, - total capacity of windpower plantsis 3,2 MW at present, a disposition to build announced is circa 200 MW;75-80 % demand fortraditionalpower plant reserves, - at dawn – between 2 and 6 –the load of Paks Nuclear Power Plant must often be decreased.

  26. SANCTIONS INTRODUCED FOR GAS MOTORS FROM 1 JANUARY 2004 (1) • Operational requirements • - obligation to give a schedule and • - provision to keep a meter suitable for checking the schedule, • - obligation to keep emissions limits of pollutants prescribed in legal regulations • 2. Efficiency provisions • Degree of efficiency to be completed monthly was modified to 75%, maintaining the yearly 65% requirement.

  27. 3. Decrease of purchase price - The purchase pricefor gas motors, operated by natural gas for commercial trade, will decrease by 10 % after 31 December 2005. - The purchase price regarding gas motors purchased according to the 1. natural gas price categorywill decrease by circa 1 HUF/kWhdue to reduction of tariff 1 and 2. SANCTIONS INTRODUCED FOR GAS MOTORS FROM 1 JANUARY 2004 (2)

  28. Power plant unit Obligatory purchase Price increased by COP1 £ 6 MW + + 6 MW < for district heating + + £ not for district heating 50 MW + - for district heating + - 50 MW < not for district heating - - PURCHASE OBLIGATIONAND APPLICATION OFCOMPENSATION RELATED TO OBLIGATORY PURCHASE FOR CO-GENERATED ELECTRICITY 1 Compensation related to Obligatory Purchase

  29. ELECTRICITY TO BE PURCHASED OBLIGATORY IN 2003, GWh COP energy purchase, GWh 25,2 123,7 1 451,1 Waste Renewables Cogenerated COP payment, MillionHUF 665 26 173 416 7 972 Bio Wind Water Waste Cogenerated

  30. COMPARING THE ELECTRICITY MARKET REGULATION OF THE PRESENT HUNGARIAN LAWS AND THE EU (1) The Hungarian legal rules do not fully comply with the Directive 2003/54/EK in the key areas below (of which principal purpose is: establishment of an European market without boundaries): • The concept and definitions of the Electricity Act are insufficient, inconsistent or contrary to the Directive (e.g.: consumer, supply, system operators, divided generation) • The Hungarian ISO falls short of TSO defined in the Directive.

  31. COMPARING THE ELECTRICITY MARKET REGULATION OF THE PRESENT HUNGARIAN LAWS AND THE EU (2) (e.g.: TSO must check the operation, maintenance and development of the transmission network; no functional unbundling at DSO) • Regulation of the Electricity Act does not comply with the Directive regarding stranded costs (The Directive does not allow return of stranded costs; standpoint regarding this issue is required) • The Electricity Act does not prescribe the legal unbundling of public utility supplier from wholesaler’s network activities.

  32. COMPARING THE ELECTRICITY MARKET REGULATION OF THE PRESENT HUNGARIAN LAWS AND THE EU (3) ( The Directive ordains legal, functional and accounting unbundling of TSO from other activities. DSO must have functional and accounting unbundling, legal unbundling shall be completed until 1 July 2007.) • The operation of the public utility wholesaler and the public utility supplier does not fulfil the requirements of the Directive. (According to the Directive the public utility suppliers are qualified as eligible consumers and are not obliged to purchase from the public utility wholesaler.

  33. COMPARING THE ELECTRICITY MARKET REGULATION OF THE PRESENT HUNGARIAN LAWS AND THE EU (4) The size of public utility is much more limited than the present one and the public utility supplier selling at a regulated price must be selected by competitive means.) • The regulation of eligible consumers deviates considerably from the provisions of the Directive. (e.g.: The entrance into or back from the market in case of an eligible consumer is lengthy and the conditions of measurement shall be established by itself. According to the Directive the change must be simple, quick and inexpensive.

  34. COMPARING THE ELECTRICITY MARKET REGULATION OF THE PRESENT HUNGARIAN LAWS AND THE EU (5) The eligible consumers shall be provided with the same protective measures as the consumers in public utility supply enjoy. ) • The authority of HEO must be amended in order to be able to comply fully with the requirements of the Directive. (e.g.: HEO shall dispose of means to solve claims against the system operator, to settle disputes and to determine tariffs, regulations, mechanisms and methodologies with greater impact. )

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