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1 Session 22 Module K Regional electricity markets Case example: EU Internal Electricity Market Prof. Ignacio J. Pérez-Arriaga Engineering, Economics & Regulation of the Electric Power Sector ESD.934, 6.974 Readings (1 of 2)  T. Jamasb & M. Pollitt, “Electricity Market Reform in the European Union: Review of Progress toward Liberalization & Integration”, CEEPR Working Paper 05-003, 2005  J. Sierra & I. Pérez-Arriaga, “Energy Policy in the European Union”, IEEE Power & Energy Magazine, Sep/Oct 2009  ETSO & EuroPEX, “Development & implementation of a coordinated model for regional and inter-regional congestion management ”, April 20082 Readings (2 of 2)  Florence School of Regulation, “A study on the Inter-TSO compensation mechanism”, research paper, Oct. 2005  Slide presentation of Project SIEPAC & design of the Central American Electricity Market  The World Bank, “Building Regional Power Pools: A Toolkit” <Should anyone propose a toolkit to design regional markets in developing countries and use NordPool as an example?> 4 The EU Internal Electricity Market (IEM) Objectives & challenges  The objective  An operating Internal Electricity Market (IEM) where electric energy is delivered at the lowest cost that is compatible with a satisfactory quality of supply & environmental sustainability  The challenge  How to implement it, taking the initial existing situation as the starting point3 5 Specific issues in regional electricity markets 6 Markets integration An international trend  Regional markets integrating several national markets are becoming a common practice all over the world  Economic efficiency and security of supply  Relevant international experiences:  European Union (IEM, including NORDEL, MIBEL, SEM), ISO/RTO markets in the US (after Standard Market Design), Central America (MER), South America (MERCOSUR and the Andean market), Australia, South Africa, Mekong, Nile, etc.4 7 Market integration benefits  Higher efficiency and (hopefully) lower environmental costs– Efficient and environmental friendly generation replaces less efficient generation  Increase power system security: larger systems are more robust against system contingencies if control areas are well coordinated  Increase security of supply: primary energy sources are more diversified  Increase competition in generation and supply  Wholesale market (increase size of the relevant market)  Retail market (higher possibilities to choose supplier) 8 Regional institutions and regulation  Political willingness and compromise among governments  Legislation at the top level: Treaties, Directives,…  Creation of Regional Institutions or Associations: Energy Regulators, Transmission System Operators (TSO), Power Exchanges (PX),…  Regulatory principles for regional integration  Transparent and non discriminatory regulation  Competition as market driver  Free energy exchanges using transmission interconnections  Free third party access to networks  Harmonization of national regulations to meet regional agreements and legislation5 9 Key elements in the design a regional market  Long process with continuous political support  Key issues with several maturity stages:  Development of regional market legislation and harmonization of national legislations  Creation of regional market institutions  Development of required interconnection capacities  Market mechanisms to reserve interconnection capacity and joint congestion management procedures  Transmission cross-border tariffs  Single market paradigm: the outcome of the regional regulation should approach as much as possible a sound regulation for a single system of regional dimension 10 Objectives for a regional electricity market  A market really encompassing the entire region  A truly competitive market in electricity & gas  For energy, capacity, ancillary services & retail markets  Efficient free entry & investment  Efficient cross-border trading  Acceptable security of supply  Efficient & non-discriminatory electricity prices that foster regional competitiveness  The regional market as a key component of a sustainable energy model for the region6 11 Design of a regional electricity market Regulatory challenges (1)  Market structures suitable for competition  Insufficient interconnection / Horizontal concentration / Vertical integration / Diagonal integration / Incomplete market opening / Barriers to entry & to switching supplier  Adequate guarantee of supply in primary energy sources & generation investment  Adequate rules to share the common transmission network  Investment, access & pricing issues  Efficient & non-discriminatory electricity tariffs & prices all over the region 12 Design of a regional electricity market Regulatory challenges (2)  Sustainability of the energy model   Radical support of renewable energy sources  Efficient financial mechanisms  Incorporation of a large volume of intermittent & non-controllable energy sources in system operation  Aggressive policy of energy saving & efficiency  A minimum level of harmonization  Previous items / CO2 emissions trading / market rules for cross-border trade / promotion of renewables / balancing mechanisms / market information / other7 13  Any feasible implementation scheme cannot ignore two critical facts  In the medium term (at least) there is a limit to harmonization: for instance, the EU IEM encompasses 27 countries with different regulations & pace of liberalization, with several functioning PEXs, etc.  the laws of physics in system operation Design of a regional electricity market Regulatory challenges (3) But let’s start from the beginning… The struggle to establish a EU energy policy8 Some basic data & trends  Evolution & current trends (1990 to 2030)  Liquid fuels (38% in 2000): absolute growth, slight reduction in %. Transport is key  Natural gas (23% in 2000): absolute & % growth  Solid fuels (18% in 2000): absolute & % reduction; possible change  Nuclear (14% in 2000): absolute & % reduction. Debate  Renewables (6% in 2000): strong absolute & % growth  CO2 emissions: trend to increase after 2010  Energy


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MIT ESD 934 - Regional electricity markets

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