THE IBERIAN ELECTRICITY MARKET - MIBEL: AN EXAMPLE OF REGIONAL INTEGRATION BEFORE THE EUROPEAN SINGLE MARKET

José María Marín-Quemada Chairman CNMC

Foro Latinoamericano de Competencia Montevideo, 17 de septiembre de 2014

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Electricity accounts for around 25% of total energy consumption in the European Union. Gas accounts for another 25%.

Integration of electricity and gas markets is a keystone in the process of

European integration.

Integration of electricity and gas markets deliver undeniable benefits:

more choice and flexibility to consumers,

more competitive pricing,

more liquid and transparent wholesale prices,

more secure supplies.

Several regional markets in

Europe before 2014

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The Iberian Electricity Market (so called MIBEL), including Portugal and Spain, has been one of the earliest and most prominent European regional initiatives

of electricity markets.

Towards an European Single

Market in 2014

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DIRECTIVE 2009/72/EC, OF 13 JULY 2009, CONCERNING COMMON RULES FOR THE

INTERNAL MARKET IN ELECTRICITY Article 6 (Promotion of regional cooperation): “1. Member States as well as the regulatory authorities shall cooperate with each other for the purpose of integrating their national markets at one or more regional levels, as a first step towards the creation of a fully liberalised internal market. (…)”.

The EU Internal Market Directive inspired in 2009 in existing regional market integration initiatives such as Mibel as an intermediate step to the creation of a full EU internal electricity market.

MIBEL is fully operational since 2007.

MIBEL was the “natural”

approach as a regional initiative

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Spain is very low connected to Europe “electrical island”.

Interconnection capacity with France represents 3% of power installed capacity.

European Commission claims that 10% minimum is required.

Ratio Interconnection capacity/ installed power capacity

3%

Some key figures about the

Iberian Electricity Market

MIBEL

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Interconnection capacity Spain- Portugal accounts for 30% of Portuguese peak demand.

Spain;

Annual Demand 246 GWh

Peak Hourly Demand 42 GW

Installed power capacity 100 GW

Number of Consumers 27 Million

Portugal:

Annual demand 49 GWh

Peak Hourly Demand 10 GW

Installed power capacity 17 GW

Number of consumers 6 Million

1000MW

2700 MW

900MW

MIBEL key pillars

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Single market in the Iberian Peninsula.

Same market rules.

Single market operators for both spot and future markets.

Coordinated management of interconnection capacity.

Coordinated supervision, market monitoring, and improvements in regulation.

MIBEL: Role of Agents

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Regulatory Council: Coordinated wholesale market monitoring, proposal of improvements in regulations to national governments.

OMIE: Spanish power exchange

MIBEL Management of day-ahead and intraday bidding systems.

OMIP: Portuguese power exchange

MIBEL derivatives exchange jointly with OMIClear (Clearing House and Central Counterparty of operations). Cross-Border Congestion Management explicit auctions Spain-Portugal.

Spanish and Portuguese TSOs (REN, Red Electrica Nacional, y REE, Red Eléctrica de España): Coordinated management of interconnections and Technical management of each National Electricity system.

Spot market: management of the

Spain-Portugal interconnection with

market splitting

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The Iberian system as a whole is treated as a single

market:

If at a certain hour of the day the capacity of the

interconnection is such that it permits the flow of the

electricity traded by the agents, the price of electricity

for that hour will be the same for Spain and Portugal

Coupled Market

If, on the other hand, the interconnection is fully

occupied, the price-setting algorithm (EUPHEMIA) is

run separately so that there is a price difference

between the two countries Market Splitting

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012 2013 2014

Same price in both zones Diferent price

Spot market: Almost fully

integrated market

More than 90% of hours have the same price in Spain and Portugal in the last few years.

Capacity interconnection has grown from 1.000 MW in 2007 to 2.800 MW in 2014 (around 30% of peak demand).

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Derivatives markets in MIBEL:

coming a mature market

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Volume traded in derivative markets is more than 1.5 times demand

OMIP: OMIP: OMIP: Portuguese power exchange OTC: Over the Counter

Benefits from MIBEL

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A more competitive integrated energy market.

Social welfare maximization.

Market splitting mechanism guarantees the more efficient use of interconnection.

Similar marginal technology in Portugal and Spain after investment in Combined Cycle Gas plants replaced inefficient and expensive oil plants.

Enhance Environmental Protection because cleaner plants are dispatched.

It has motivated a harmonized regulation in some other issues in addition to market rules as participation of renewable energy in the market.

Since may 2014, MIBEL is included

in a Day-Ahead Multi-Regional

Coupling

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Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2012- ACER/CEER

The Price Coupling of Regions (PCR) is an initiative taken by seven European electricity markets, with the aim being to develop a market coupling system that calculates electricity prices throughout Europe and allows the short-term allocation of cross-border capacity in the markets.

This development is crucial for the EU’s goal of introducing a harmonized European electricity market.

An integrated European electricity market is expected to increase liquidity, efficiency and social wellbeing

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5/2/14 - 13/5/14 Same hourly price

% hours with same price

8% 14%

37%

0% 1%

0%

92%

53%

0%

International Market Prices:

Before full coupling with MIBEL

Before the application of the common European market coupling mechanism, Spain and Portugal had their market coupled 92% of the hours (above any other European border).

There was no hour in the year in which Spain was coupled with France

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14/5/14 – 31/8/14 Same hourly price

7% 31%

53%

0% 1%

3%

98%

53%

0%

% hours with same price

International Market Prices:

After full coupling with MIBEL

After the application of the common European market coupling mechanism, Spain and Portugal have their market coupled 98% of the hours.

Interconnection with France is optimized, though still having very small effect on integration (3% of hours of the year with same price).

THANK YOU

www.cnmc.es presidencia@cnmc.es