Regulatory aspects of wholesale market tendencies on national and regional electricity markets
dr. Gábor Szörényi Chairman of ERRA
Budapest, April 22, 2008
Investment Conference
dr. Gábor Szörényi Page 2
Budapest, April 22. 2008
Main topics:
• Regional situation on the wholesale electricity markets
• Continuous common monitoring and evaluation
• Difference between cost based price regulation and market based price
• Potential regulatory interactions• Support new generation and network
investment
dr. Gábor Szörényi Page 3
Budapest, April 22. 2008
Some conditions of markets and regions
• Substantial demand growth in each region (3-10%)
• Existing generation capacity not always available• Some regions are highly hydro (weather) dependent• Low utilisation of existing generator capacities
(reliability problems)
• Long-lasting preparation and long-continued decisions on new generation investment
• Physically, legally and administratively congested borders
• Some national net export position• diminishing• turn to net import position
dr. Gábor Szörényi Page 4
Budapest, April 22. 2008
Regulatory monitoring
• Price signals (+~10EUR/MWh)• Capacity shortage in SEE• Increasing cross border flow to South• Security of Supply questions• Roundtable discussion (2007 December,
Bucharest) → Published Common Position• Wholesale market monitoring network
Why did we start the common wholesale market monitoring?
dr. Gábor Szörényi Page 5
Budapest, April 22. 2008
Monitoring methods
Data-collection and evaluation of national and regional wholesale markets:
• 2003-2008 (2009) data• Simplified capacity data
• Installed capacity• Capacity mix• Cross border capacity
• General energy data• Domestic production• Export-import balance• Consumption
• Tariff and price analysis
• Data collection and analysis every 6 months• National and regional analysis• Region ≠ group of ERRA members
dr. Gábor Szörényi Page 7
Budapest, April 22. 2008
The Regional Group of ERRA Members
Moldova
LatviaLithuania
Kyrgyz Republic
Georgia
Armenia
Estonia
Albania
Kazakhstan
Ukraine
Poland
Romania
Hungary
Bulgaria
Russian Federation
Croatia
Azerbaijan
Turkey
Jordan
Bosnia and Herzegovina
Macedonia
Montenegro
Serbia
UNMIK Kosovo
1
4
3
2
Mongolia
dr. Gábor Szörényi Page 8
Budapest, April 22. 2008
Group 1. Energy balance
-50
0
50
100
150
200
250
2003 2004 2005 2006 2007 - estimated 2008 - predicted
TWh
gross consumption net production balance of trade
Regional Consumption, Production and Trade balance
dr. Gábor Szörényi Page 9
Budapest, April 22. 2008
Group 1. Export-Import Balance
ERRA Group 1.: Net export
-20
-15
-10
-5
0
5
10
15
20
2003 2004 2005 2006 2007 -estimated
2008 -predicted
TWh
UNMIK K osovo
S erbia
R omania
Montenergro
Macedonia
Hungary
C roatia
B osnia andHerzegovinaB ulgaria
Albania
dr. Gábor Szörényi Page 10
Budapest, April 22. 2008
Group 1. Installed CapacitiesInsufficient new generation capacity!
dr. Gábor Szörényi Page 11
Budapest, April 22. 2008
Installed capacity mix in 2007
Installed Capacity Mix
dr. Gábor Szörényi Page 12
Budapest, April 22. 2008
Group 1. Market situation
• Massive demand increase
• Capacity shortage, insufficient new generation investment
• Hydro dependence
• Low utilization factors (35-55%)
• Growing import
dr. Gábor Szörényi Page 13
Budapest, April 22. 2008
Reduced net export possibilityGroup 2. Export-import balance
dr. Gábor Szörényi Page 14
Budapest, April 22. 2008
Dynamic demand growth
-50
0
50
100
150
200
250
300
2003 2004 2005 2006 2007 - estimated 2008 - predicted
TWh
gross consumption net production balance of trade
Group 3. Energy balance
dr. Gábor Szörényi Page 15
Budapest, April 22. 2008
Continuous demand increase
0
200
400
600
800
1 000
1 200
1 400
2003 2004 2005 2006 2007 - estimated 2008 - predicted
TWh
gross consumption net production balance of trade
Group 4. Energy and capacity balance
0
50 000
100 000
150 000
200 000
250 000
300 000
2006 2007 2008 - estimated 2009 - predicted
MW
Ukraine
R uss ianF ederation
Moldova
New investment slowed down(Installed capacity)
dr. Gábor Szörényi Page 16
Budapest, April 22. 2008
Possible reasons for the capacity shortage situation
The possible reasons for the general situation are the following:• Continuously increasing demand• Energy efficiency (energy conservation) programmes are
hardly effective• Strict environmental protection requirements and
administrative licensing procedures create difficulty for investors to build new power plants, new high voltage lines
• Emerging market conditions (immature market rules) on the national markets and the slowly developing regional markets could create risk elements which postpone investment
• In some cases the lack of transparent rules could increase the risk of new generation investment
dr. Gábor Szörényi Page 17
Budapest, April 22. 2008
Market Based energy prices
Identification and comparison of energy prices
• Basic difference in price formation:• Cost based „regulated” end-user price for household
consumers• Regulated network (system) tariffs• Market based (not regulated) energy prices → strongly
influenced by the supply-demand balance• Taxes, levies
• Substantial difference in structure and level of system charges → influence the „only” energy prices (uncertainty of comparison)
• No liquid wholesale markets, very rare PXs → no indicative, really market based energy prices (but signals!)
dr. Gábor Szörényi Page 18
Budapest, April 22. 2008
Price of electricity (only the energy component) paid by non-household consumers
EEX prices (2008)
Energy („only”) prices
dr. Gábor Szörényi Page 19
Budapest, April 22. 2008
• Wholesale energy market prices in Central Europe → German Power Exchange (EEX) prices [base load price: 55-60 EUR/MWh; peak load price: 75-85 EUR/MWh („only” energy without system charge)] (balanced market with adequate installed/reserve capacity).
• Going to the South-East some markets have capacity shortages. On „short positioned” markets the traders/suppliers/importers are „ready” to pay higher price for energy.
• The price difference between the region with adequate resources and the regions with capacity shortage is reflected in the deficit and in the cross border capacity auction price. The difference could reach 20 EUR/MWh in 2008.
• This price tendency has significant effect on end-user price and through this on the whole national economy!
Price Signals
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Budapest, April 22. 2008
• To assist the development of national economy (with reasonable energy prices),
• Not to disturb market tendencies, market forces,
• To maintain good level of security of supply on national and regional markets,
• To reduce market entry barriers and regulatory barriers to give more chance for new investment (generation, transmission)
• To utilise more potential tools of demand response programmes
Common Regulatory Position
Common intention of ERRA regulators is:
dr. Gábor Szörényi Page 21
Budapest, April 22. 2008
• The dominant player(s) on the national market(s) could require special attention from the regulator (e.g. cost based pricing, ex ante rules supporting new entrants) and could require special authorisation of the regulators to be able to act in advance.
• The regulators agree that special (non-avoidable, non market based) actions securing the supply on the national market(s) and trying to avoid drastic price increases on wholesale market should be proportional, transient and can not endanger the neighbouring markets.
• Simplified, harmonized licensing procedures• Analysing the possibilities to give the adequate comfort for
investors on new generation and transmission investment,• Analysing the possibilities to create more efficient support
scheme for energy generated from renewable, waste and combined heat and electricity basis.
Potential regulatory actions