Lessons from Liberalised
Electricity Markets
Noé van Hulst
Director, Long-Term Co-operation and Policy Analysis
RIETI Policy Symposium
Tokyo, 15 December 2004
INTERNATIONAL ENERGY AGENCY
30/11/2004
AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
1
Outline
zPolicy objectives
zExperiences with liberalised markets
zCritical factors in successful reform
zAre expectations met?
INTERNATIONAL ENERGY AGENCY
30/11/2004
AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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Policy Objectives in Liberalisation
zLower costs from higher efficiency
zFreedom of choice
zCost reflective prices
zHigh efficiency without jeopardising:
‹ Reliability
‹ Environment
INTERNATIONAL ENERGY AGENCY
30/11/2004
AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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North America: Slow but steady
evolution
Status of Restructuring
Electricity markets
Source: Energy Information Administration & Professor Paul Joskow
Source: US Department of Energy, February 2003
INTERNATIONAL ENERGY AGENCY
30/11/2004
AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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EU Directives Commit Member
Countries to Liberalisation
EU commission predicts regional markets
Source: EU Commission
Source: EU Commission
INTERNATIONAL ENERGY AGENCY
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AGENCE INTERNATIONALE DE L’ENERGIE
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Australia and New Zealand Have
Well Developed Markets
National Electricity Market
INTERNATIONAL ENERGY AGENCY
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AGENCE INTERNATIONALE DE L’ENERGIE
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All IEA Member Countries are on the
Path of Liberalisation
zDifferent stages of development
zThe direction is clear
zNot experienced full business cycle yet
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Legal and Regulatory Framework
zEffective unbundling
zIndependent Transmission System
Operator
zStrong independent regulator
zNon-discriminatory access to wires
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Unbundling is Key
INTERNATIONAL ENERGY AGENCY
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AGENCE INTERNATIONALE DE L’ENERGIE
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Effective Markets are Required to
Make it Work
z Relevant markets
are needed
z Prices are the glue
z Transparency is key
INTERNATIONAL ENERGY AGENCY
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AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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Regulators and Policy Makers have
Important Roles
z Clear market design
z Regulated tariffs in natural monopolies
z Management of incumbents’ market power
⇒BUT let market set prices in competitive
domain
⇒Electricity is volatile, so are prices
INTERNATIONAL ENERGY AGENCY
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AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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Do Markets Give Efficient Incentives
For Investment?
INTERNATIONAL ENERGY AGENCY
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AGENCE INTERNATIONALE DE L’ENERGIE
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Markets Can Deliver
Signals to Investment
z Markets with energy only
‹ Trend
in Europe & Australia
z Markets with capacity measures and price cap
‹ Trend
in North America
⇒So far energy only markets are OK
⇒Demand Response is important
INTERNATIONAL ENERGY AGENCY
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AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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Demand Response Makes Markets
Work Better
Inelastic
Demand
Price
Supply
Elastic
Demand
Inelastic Clearing Price
Lower prices
- higher efficiency
- less market
power
Avoid
Blackouts
Elastic Clearing Price
Quantitiy
INTERNATIONAL ENERGY AGENCY
30/11/2004
AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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Ontario Market
zGovernment opened market to all
consumers in May 2002
zTight market + hot summer =
wholesale price rises 30%
zNov 2002: Government capped retail
prices below cost until 2006 for
about 50% of the market
zConsumers effectively “borrowing”
to pay for their current consumption
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AGENCE INTERNATIONALE DE L’ENERGIE
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Ontario Prices
Well Above Cap Level
Weighted average weekly price (CAD/MWh)
140
120
100
80
60
Cap:
CAD 43/MWh
40
20
1
3
5
7
9
11
13
15
17
19
21
23
25
27
29
31
33
35
37
39
41
43
45
47
49
51
Week from 1 May 2002
weekly
INTERNATIONAL ENERGY AGENCY
30/11/2004
cumulative
AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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Consequences
z Government is caught in a trap
‹
Government “temporarily” intervenes to subsidise retail
prices well below entry price for new generation
⇓
‹
Higher demand and discouraged investment (political risk)
⇓
‹
Even higher wholesale prices
⇓
‹
Higher government subsidies and blackout risks
⇓
‹
Direct investment by government in new capacity
‹
Government trapped itself into paying for higher prices and
new supply!
INTERNATIONAL ENERGY AGENCY
30/11/2004
AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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Monthly average Spot market price (AUD/MWh)
South Australia – High Prices When
Market Opened
140
120
30/11/2004
100
80
60
40
20
0
INTERNATIONAL ENERGY AGENCY
AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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Monthly average Spot market price (AUD/MWh)
Led to 30% Capacity Increase
140
120
30/11/2004
80 MW
GT
180 MW
GT
100
100 MW
GT
80
60
40
20
500 MW
CCGT
0
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Are Consumers at Risk?
zReliability
zPrice volatility
zSupplier of last resort
⇒Freedom of choice and instruments
to handle it is necessary and viable
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Competitive Markets Can Deliver
Real Benefits
zBenefits from competition
⇒Higher efficiency
zBenefits from trade
zBenefits from freedom to choose
INTERNATIONAL ENERGY AGENCY
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AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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Japan
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AGENCE INTERNATIONALE DE L’ENERGIE
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Reform Path in Japan
1995
2000 ~
Law Amendment Law Amendment
Wholesale
Bidding System
Start
• IPP’s bidding
for electricity
Retail
Market
Start
Arrangement
For Regulatory
Framework
• Opening 26%
of retail
market
• Introduction of
transaction
based tariffs
• Split of policy making
and regulatory
activities
INTERNATIONAL ENERGY AGENCY
30/11/2004
2001~
2003 ➡
Law Amendment
Further Steps
for
Liberalization
• Retail market open;
- 40%(’04), 63%(’05),
review for full(’07)
• Establishment of
NSO, PX
• Introduction of postage
stamp system
• Information firewall
• Promotion of DPG
AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
23
IEA Recommendations
in Latest Country Review of Japan
zPromote pricing mechanisms
zEffective unbundling to ensure fair
and effective competition
zStrengthen the regulatory framework
zFoster cost effective strengthening
of inter-regional transmission grid
‹ Particularly
between the two frequency
areas
INTERNATIONAL ENERGY AGENCY
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Key Messages
zMarkets work with the appropriate
legal and regulatory framework
Important role for government!
‹ Institutional
set-up is critical
‹ Effective unbundling is required
zIncentives matter!
zMarkets do deliver long term benefits
INTERNATIONAL ENERGY AGENCY
30/11/2004
AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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ご清聴ありがとうございました。
INTERNATIONAL ENERGY AGENCY
30/11/2004
AGENCE INTERNATIONALE DE L’ENERGIE
RIETI Policy Symposium, Japan, 15 December 2004
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