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European electricity market: Improvement potential in market
structure and quality
Bert Den OudenCEO, APX Group
EPFSF Annual conference 15 May 2007
Page 2
APX Group:gas and electricity exchanges
NBP
APXUK
Bel-pex
APX
APX Gas NL (TTF) APX Power NL APX Gas UK (NBP) APX Power UK APX ZEE (Zeebrugge HUB) Market Coupling together with
other exchanges
ZEE
TTF
Page 3
Operations: 5 markets on line 4 service activities 206 gross memberships
Traded (2006): 178 TWh of energy € 5.3 billion of contracts 10% of UK gas demand 18% of NL power demand
Corporate: Anglo-Dutch management Positive financial results Shareholders TenneT (74.5%, Transmission System Operator
NL) and Gasunie (25.5%, Gas infrastructure company NL)
Overview of APX Group activities
Development of APX Group Membersper Market, 1999 to March 2007
21 31 36 36 38 40 41 48 51
27 34 36 36 4151 54
2739
4652 54 54 58
67 7058
911
1115
1920
0
100
200
1999 2000 2001 2002 2003 2004 2005 2006 2007
Nu
mb
er
of
Me
mb
ers
Power NLPower UKGas UKGas Zee Gas NL
www.apxgroup.com
Page 4
European electricity market
Achievements Free customers TSO tasks Efficiency of utilities Role of regulators
Shortfalls Volatile prices Low liquidity Transparancy issues Inefficient use of
transportation High level of
concentration Market power issues
Fragmented market ?
Page 5
Transport limitation
Integrated market
Some available solutions
Infrastructure Build more capacity….
and/or Make better use of
existing capacity! Market Coupling
Market organization Transparency Carbon market
regulation
Page 6
Market Coupling Netherlands-Belgium-France
RTE
Elia
TenneT
Before Fragmented 2-step operation 2 capacity auctions on each border 2 electricity spot markets
After One integrated system, 1-step operation Daily allocation of transmission
capacity between 3 countries Generating spot market prices 3 exchanges working together Political will Start: 22 November 2007
1. APX
Powernext
2. APX
Belpex
Powernext
APX
Belpex
Powernext
Page 7
Utilis a t io n % B e lg ia n-D utc h bo rde r10 - d ay mo ving ave rag e
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
10 Nov 10 Dec 9 Jan 8 Feb
Average border utilization
Full utilisation time
Achievements of market coupling:utilisation of transmission
market coupling 22 Nov 06
Upper graph: Average utilization as % of available
30 60% after MC
Lower graph: time-percentage of full usage
0 25% after MC
Page 8
Achievements of market coupling:price convergence
market coupling 22 Nov 06
Upper graph: APX
Lower graph: Powernext
Before MC: correlation, no convergence
After MC: strong convergence(>70% of time)
Some price differences remain
Daily average prices for TLC countries
0
20
40
60
80
100
120
Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07Date
Price (Euros/MWh)
PowernextBelpexAPX
Page 9
Achievements of market coupling: integration of price areas
Either prices will converge 100%, or prices diverge –but then the transmission capacity used for 100%
Better price index
Better efficiency and better economic results
Better basis for long-term contracts & investments
2%
6% 73%:“Copper plate”
100% of time
Old situation
Shown are the data for January 2007Percentages vary each month
19%
Page 10
Achievements of market coupling: Price difference Netherlands-France
68% ∆P=0Equal price
“copper plate”
8% ∆P < 1 €
4% ∆P < 1 €
51% ∆P 1..10€
19% ∆P 1..10€ 40% ∆P > 10 €
9% ∆P > 10 €
Before Market CouplingWinter 2006
After Market CouplingWinter 2007
∆P >10 €∆P 1-10 € ∆P <1 €
Equal price “copper plate”
Hourly price difference, €/MWh
Page 11
Price convergence simulation for coupling in “Pentalateral” region (NL-Be-Lux-Ger-Fr)
Results Historically
9% 9% 9%
56% 52% 58%
35% 38% 33%
Fr-Nl Fr-Ge Nl-Ge
68%54%
66%
3%
3%
2%
14%
19%12%
15%24% 19%
Fr-Nl Fr-Ge Nl-Ge
Simulated coupling
* by APX ** simple daily ATC capacities like used in the explicit auctions (not flow-based)
∆P >10 €∆P 1-10 € ∆P <1 €
Equal price “copper plate”
Hourly price difference, €/MWh
Page 12
Conclusions market coupling
Market Coupling is proven solution, yields:
– Better use of transmission capacity
– Im/exports always in right direction– Removal of im/export barriers– Prices converge when there is no
constraint: “copper plate”– More market parties, better liquidity,
reduction of market power in the bigger area
Creation of NW-European market European market
perspective
European copper plate is possible
Utilize existing transport capacity
Integrated market
Better index, better liquidity, reduced market power
Better basis for financial market and investments
Page 13
Market transparency Report EC competition highlights market information
Information on availability of power plants: scheduled maintenance and (non-scheduled) unavailability
May have high impact on (spot) market price derivatives
Information held by parties having generation assets
Transparency important for new entrants, financial market parties
Page 14
Transparency regarding price calculation on the spot markets
Supply curve offers
Demand curve bids price
Publication bids/offers (anonymous): important for index used for futures
APX web site example
Page 15
Publication of power plant availability
UK, Nordic (Regulated) Complete Accurate Compliance Sanctions
Continental Europe (Voluntary) Growth model Accuracy issues No strict compliance No sanctions
Compliance is needed for accuracy of data
Important role for regulator Important for financial
market and investments
RegulatedVoluntary
Page 16
Carbon trading and electricity price
Strong correlation between rising prices for CO2-allowances and rising electricity prices since the beginning of 2005*
The strong price increase in e.g. the German market during 2005 on can be explained exclusively by taking into account the effect of CO2*
* Source: VIK-Opinion on the Preliminary Findings of the Energy Sector Inquiry (VIK, April 2006)
After decrease of carbon price, power prices dropped too
Huge movements in carbon prices after publishing of carbon data
Uncertainties
Page 17
Needs of the carbon market
Achievements CO2-driven market Recognition Reductions
Shortfalls National bias Market distortions Contribution to power
price volatility Publication issues Political uncertainty
Lower liquidity in long-term contracts (forwards)
Effect on investments
Currently: carbon market not supervised by regulators (both financial and energy)
Needed: Harmonization Transparency rules Regulation Political stability
Role of regulators in carbon market needed
Important for long-term markets, investments
Page 18
Summary
Huge potential for structural improvement in the power market
Better use of existing infrastructure: market coupling European “copper plate” Better efficiency, better economic results Better market liquidity, better price index, reduction of market power
Transparency: compliant publication of generation availability Better role for financial parties and new entrants More liquid and reliable daily prices
Regulation of the carbon market Decrease of uncertainties Better liquidity in the forward markets
Effort in market structure / market quality
Better prices
Better efficiency
Economic results
Investment climate
Security of supply