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ENERGY MARKET REFORM : Gas Transportation & Distribution Issues

ENERGY MARKET REFORM : Gas Transportation & Distribution Issues. Presentation to GTE 2 nd Annual Conference by Gerald Doucet Secretary General, World Energy Council 23-24 September, 2004. WORLD ENERGY COUNCIL www.worldenergy.org. OIL PRICE (2000 $). NA PRODUCTION. WHAT US PRODUCTION?.

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ENERGY MARKET REFORM : Gas Transportation & Distribution Issues

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  1. ENERGY MARKET REFORM: Gas Transportation & Distribution Issues Presentation to GTE 2nd Annual Conference by Gerald Doucet Secretary General, World Energy Council 23-24 September, 2004

  2. WORLD ENERGY COUNCIL www.worldenergy.org

  3. OIL PRICE (2000 $)

  4. NA PRODUCTION

  5. WHAT US PRODUCTION?

  6. UK GAS PRICE

  7. NO GROWTH WITHOUTELECTRICITY

  8. Drivers: Gas T&D

  9. THE BROAD CONTEXT Reforms are aimed at easing the evolution and adaptation of the institutions. Without reforms, economic development will stop. • Legal: property rights, gender equality, rule of law • Social: education, health, social justice, pensions • Infrastructures: energy, water, telecommunications

  10. THE CONTEXT WEC’s three broad messages on market reforms • Be clear on priorities:Balance public policies (security or environment), monopoly aspects, and competition at different stages. • Be pragmatic: A blend of market and regulated features may bring real competitionand deliver benefits similar to more complex designs. • Be wary of risks: The simplest approach should be used that will achieve the desired benefits at minimum cost and risk.

  11. PUBLIC OR PRIVATE OWNERSHIP? • Governance: a concept that covers integrity, labour & investment costs, quality of service, strategy & management, organisation, technology… • Governance quality: experience shows it erodes progressively in the public-owned firms, generally starting with over-staffing and labour costs • Investments: capital cost is often much higher for private firms especially if the regulation is not stable and foreseeable

  12. THREATS • Market power: exists because of the very nature of electricity and can only be avoided by less short-term competition (e.g. with annual auctions) • Function unbundling: too much independance between transmission and supply creates the risk of under-optimisation • Complexity: a pool system is complex/unreliable. Bilateral contract systems are less risky. « Single buyer » systems with annual auctions are even less.

  13. TRADE-OFFS • First trade-off: volatile prices and market power with risk on the long-term security or prices including the capacity costs? • Second trade-off: a true spot wholesale market with no generator with more than 10% of capacities or a centrally set price? • Third trade-off: the liberty of choice for all at any time or a security insured either by the LDC or by the « Single buyer »?

  14. THE US RETAIL SITUATION

  15. THE TOOL BOX Large customers (industry, power plants, LDC) may either manage, or ask suppliers to manage, at a cost, their LT security thanks to: • Long-term contracts, • Diversified portfolio, • Price responses to reduce demand, • Excess capacities of supply, e.g. “DG”.

  16. MARKET POWER Loyal competition is often difficult to develop… • Too small price elasticities because only ~10%? of users receive true price signals • Too few actors: large incumbent dominate the market with market shares >>10% • Too small over-capacities in generation or in transmission (creation of “niches”) • Too many markets (day-ahead, intra-day, capacity…): opportunities for cheating Market power is not innocuous. It prevents the normal play of competition and may not always be contestable.

  17. HOW TO SECURE SUPPLY? • With long-term planning and costs for capacity:New capacities are awarded to the lowest bid and capacity costs are guaranteed, e.g. paid annually • With “insurances” subscribed by the buyers: This additional revenue will make up for capacity costs and be part of the competitive game • With “ad hoc” measures such as uplift/LOLP… which have no proven track record yet

  18. NEEDED TRADE-OFFS Electricity is not a true “commodity” because its users are mostly captive, and is not either a true market because of its monopolistic sectors • First trade-off: cyclical prices & market power episodes versus capacity payments? • Second trade-off: competitive wholesale market with many (> 10) actors versus “single buyer”? • Third trade-off: security of supply versus freedom of supplier choice, e.g. for “captive” consumers?

  19. GAS-ELECTRICITY INTERFACE • Natural gas price is set by the competition with petroleum in interruptible uses • Electricity price is set in the marginal mid/peak plant using the most expensive fuels • The most expensive fuel is gas or the petroleum product that gas substitutes at the margin • Hence the convergence because the spot gas price makes the spot marginal electricity price

  20. OECD NATURAL GAS

  21. EMR: Some Conclusions for Gas T&D

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