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European Electricity Regulation: where next?

European Electricity Regulation: where next?. Prof S C Littlechild UBS Warburg Conference, London 3 April 2001 . Outline. The Past Experience in UK electricity industry transmission, distribution, generation, Pooling and trading arrangements, retail supply, regulation The Present

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European Electricity Regulation: where next?

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  1. European Electricity Regulation: where next? Prof S C Littlechild UBS Warburg Conference, London 3 April 2001

  2. Outline • The Past • Experience in UK electricity industry • transmission, distribution, generation, Pooling and trading arrangements, retail supply, regulation • The Present • liberalisation in main European countries • The Future? • Proposed EU Directives • Conclusions

  3. Survey of Progress in Europe • Main source OXERA October 2000 • Energy Liberalisation Indicators in Europe • prepared for Govts of UK and Netherlands • Some SCL modifications • SCL simplified notation • X unsatisfactory, 1 satisfactory, - halfway • ? subjective or doubtful

  4. Transmission: UK • Initial UK Policy • separate transmission grid from generation • grid initially owned by distributors • duty to facilitate competition • use of system charges published & regulated • UK Experience • all factors important for successful competition • grid now independent and privately owned

  5. Transmission: EU • Aspect Fra Ger Ital Neth Spa • unbundling 1 1 1 1 1 • own’ship sepn X X -? - 1? • effectiveness -? -?? -? -? -? • foreign access X -? -? -? X?

  6. Distribution: UK • Initial UK policy • multiple companies, private ownership • separate accounts required • use of system charges published & regulated • efficiency incentives via RPI-X price controls • UK experience • legal and management separation now required • much restructuring linked to competition • price reviews: major cost cuts & reallocation

  7. Distribution: EU • Aspect Fra Ger Ital Neth Spa • multiple cos X 1 -? 1 - • legal sepn X X 1? 1 1 • pub tariffs 1 X 1 1 1 • price regln X X 1? ? X

  8. Generation: UK • UK policy & experience • 3 successor companies created - not enough • established wholesale market: Pool & contracts • new entry encouraged - important but takes time • interconnectors: open access tho’ small capacity • significant restructuring necessary & profitable • effective competition now largely achieved

  9. Generation: EU • Aspect Fra Ger Ital Neth Spa • concentration X X X 1 X • w’sale market X 1? 1? 1? 1? • new entry X - 1 1 X • i’conn access X X X X -

  10. Retail supply: UK • Initial UK policy • Market to open in phases 1990, 1994, 1998 • UK experience • Customer choice welcomed by all • 80% large users, 66% medium, 26%+ domestic • Much regulatory input for domestic (profiling, common IT, metering & meter reading, cost separation/allocation, common services, codes of service, complaints, transitional price caps)

  11. Retail supply: EU • Aspect Fra Ger Ital Neth Spa • mkt open Oct X 1 X X - • mkt open EU X 1 ? 1 1 • concentration X 1? X X X • new entry X 1 - - X • vert integn X X - - -

  12. Regulation: UK • Initial UK policy • independent regulators for each utility industry • duties: protect customers, promote competition • UK experience • effective in duties, very active in changing industry, independence retained • new govt policy to merge gas/electricity regulation, commissions instead of individuals, more duties to carry out govt social policy

  13. Regulatory influence • Aspect Fra Ger Ital Neth Spa • gov subsidies -? X? -? -? X? • social obligns X X? -? -? -? • regulatory independence X? -? 1 1? X

  14. Aggregate performance scores • Country % • Netherlands 64 • Italy 57 • Spain 46 • Germany 44 • France 15 • (For comparison, Norway 87, UK 93)

  15. Proposed EU Directive Mar 2001 • European Council Lisbon March 2000 voted to speed up gas & electricity liberalisation • Proposed Directive Mar 2001 concluded • objectives of internal market can be better pursued under full competition, so • rapid completion of internal market important • quantitative & qualitative proposals • regulation proposals • public service objectives • cross-border trade proposals

  16. Quantitative Proposal • all consumers must be free to choose their supplier, so as to achieve: • more efficiency, lower prices, more competitiveness, & better employment prospects for EU companies • lower energy bills for EU domestic consumers • level playing field between 15 member states

  17. Quantitative Proposal 2 • Timetable for ability to choose supplier • all non-domestic electricity by 1 Jan 2003 • all non-domestic gas by 1 Jan 2004 • all domestic electricity and gas by 1 Jan 2005 • said to take account of need for preparations eg billing and load profiling for domestic market • SCL comment: • “unlike the industrial and commercial sector”?? 1994 metering? Case for earlier non-domestic?

  18. Qualitative proposals • certain approaches are more likely to bring about effective competition: • “Third party access based on published & non-discriminatory tariffs, and a high level of unbundling, are not only conducive but necessary to ensure effective competition” • effective market structures are “as or more important than level of market opening”

  19. Qualitative Proposals 2 • Unbundling: • transmission: must be functionally & legally separate subsidiary - that is, an independent Transmission System Operator (TSO) • distribution: legal separation by 2003, gas 2004 • further monitoring especially gas • 3rd party access • via published & regulated non-discrimin tariffs • extended to gas • applies to distribution as well as transmission

  20. Regulation proposal • Independent national regulation is pivotal • to secure non-discrim access to network • to fix or approve T&D tariffs • to act ex ante (competition authorities ex post) • major role cross-border trade & internal market • to bring continuity and transparency to market • EU states required to establish regulators to set/approve T&D tariffs & terms of access

  21. Public service objectives • These are fundamental and need to improve • ensure universal service in electricity • protect vulnerable customers eg disconnections • specify contract conditions, info., dispute settlement • supply at appropriate prices in peripheral areas • environmental protection • security of supply (maintenance & interconns) • TSOs may need to meet min. levels investment • states must monitor D&S and report annually • EU benchmarking exercise to ensure states maintain highest levels of public service • internalise external costs (EU promote energy/CO2 tax, rules on state aid, DSM, cogen, renewables )

  22. Cross-border trade • Cross border trade up to 8% but still modest • and supply from another state still difficult • transmission fees vary & allow “pancaking” • interconnector capacity needs increasing • allocation principles important: must not protect incumbents by long term contracts • harmonised EU framework necessary • on cross-border tariffs & allocation of capacity

  23. Cross border trade proposals • Main objective: • cost-reflective access charges; & not excessive transactions costs for cross-border operations • tariffs based on compensation for transit flows, with some harmonisation across EU • principles of capacity allocation defined • EU committees will implement regulation • but agreement not secured • Germany insisted on export charges

  24. Outcome: Stockholm Mar 2001 • France vetoed proposed directive • objected to full liberalisation, citing California • Germany objected to independent regulator • EU encouraged to tighten competition rules • so energy monopolies don’t get windfall profits at expense of open energy markets • EU invited to bring proposals for majority vote • but in practice issue deferred to mid/late 2002

  25. Conclusions • Significant progress over last few years, but • 4 main EU states only half way to UK • France has hardly started, rest in-between? • EU has far-reaching plans to make competition effective, halted temporarily, but • Pressures for change will continue for • separate transmission ownership, more separation distribution & supply, tighter price controls, more interconnectors & easier access, generation restructuring, faster market opening, more uniformity • Greater role for national and EU regulation

  26. Draft compensation principles • Compensation for transit flows • should reflect incremental costs to Transmission System Operators (TSOs) - to avoid windfalls benefits to central states • not charge individual exporters/importers • can’t identify causers, trades may cancel, not predictable, lower costs facilitate competition

  27. Draft harmonisation principles • Different generation charges distort market • need to harmonise ratio of charges to consumers & generators - mainly on consumers • can retain some generation charges for locational signals • charge levels can vary but principles identical • cost-reflective, transparent, non-discriminatory • not related to distance from generator to consumer

  28. Draft allocation of interconnector capacity • Capacity allocation to maintain competition • TSO information exchange for security • information about actual availability must regularly be made public to market parties • what solution gives efficient signals? • auctions plus coordinated redispatch presently most feasible in EU but Nordpool market splitting best and should be envisaged a.s.a.p.

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