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 2 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 3 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 4 EU Directives Commit Member Countries to Liberalisation EU commission predicts regional markets Source: EU Commission Source: EU Commission INTERNATIONAL ENERGY AGENCY 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 5 Australia and New Zealand Have Well Developed Markets National Electricity Market INTERNATIONAL ENERGY AGENCY 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 6 All IEA Member Countries are on the Path of Liberalisation zDifferent stages of development zThe direction is clear zNot experienced full business cycle yet INTERNATIONAL ENERGY AGENCY 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 7 Legal and Regulatory Framework zEffective unbundling zIndependent Transmission System Operator zStrong independent regulator zNon-discriminatory access to wires INTERNATIONAL ENERGY AGENCY 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 8 Unbundling is Key INTERNATIONAL ENERGY AGENCY 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 9 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 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 10 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 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 11 Do Markets Give Efficient Incentives For Investment? INTERNATIONAL ENERGY AGENCY 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 12 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 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 13 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 14 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 INTERNATIONAL ENERGY AGENCY 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 15 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 16 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 17 De c98 Fe b99 Ap r-9 9 Ju n9 Au 9 g99 O ct -9 De 9 c99 Fe b00 Ap r-0 0 Ju n0 Au 0 g00 O ct -0 De 0 c00 Fe b01 Ap r-0 1 Ju n0 Au 1 g01 O ct -0 De 1 c01 Fe b02 Ap r-0 2 Ju n0 Au 2 g02 O ct -0 De 2 c02 Fe b03 Ap r-0 3 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 18 De c98 Fe b99 Ap r-9 9 Ju n9 Au 9 g99 O ct -9 De 9 c99 Fe b00 Ap r-0 0 Ju n0 Au 0 g00 O ct -0 De 0 c00 Fe b01 Ap r-0 1 Ju n0 Au 1 g01 O ct -0 De 1 c01 Fe b02 Ap r-0 2 Ju n0 Au 2 g02 O ct -0 De 2 c02 Fe b03 Ap r-0 3 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 INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 19 Are Consumers at Risk? zReliability zPrice volatility zSupplier of last resort ⇒Freedom of choice and instruments to handle it is necessary and viable INTERNATIONAL ENERGY AGENCY 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 20 Competitive Markets Can Deliver Real Benefits zBenefits from competition ⇒Higher efficiency zBenefits from trade zBenefits from freedom to choose INTERNATIONAL ENERGY AGENCY 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 21 Japan INTERNATIONAL ENERGY AGENCY 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 22 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 30/11/2004 AGENCE INTERNATIONALE DE L’ENERGIE RIETI Policy Symposium, Japan, 15 December 2004 24 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 25 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 26