European Electricity Sector Research Articles

Price formation in electricity forward markets and the relevance of systematic forecast errors

Since the liberalisation of the European electricity sector, forward and futures contracts have gained significant interest of market participants due to risk management reasons. For pricing of these contracts an important fact concerns the non-storability of electricity. In this case, according to economic theory, forward prices are related to the expected spot prices which are built on fundamental market expectations. In the following article the crucial impact parameters of forward electricity prices and the relationship between forward and future spot prices will be assessed by an empirical analysis of electricity prices at the European Energy Exchange and the Nord Pool Power Exchange. In fact, price formation in the considered markets is influenced by historic spot market prices yielding a biased forecasting power of long-term contracts. Although market and risk assessment measures of market participants and supply and demand shocks can partly explain the futures-spot bias inefficiencies in the analysed forward markets cannot be ruled out.

Challenges and opportunities of a post-Kyoto mitigation regime: a survey of the European electricity sector

This paper empirically shows how the uncertainty associated to the absence of a mitigation regime which follows the United Nations Framework Convention on Climate Change Kyoto Protocol (UN FCCC Kyoto Protocol) is affecting investments in abatement activities in the EU electricity sector and, thus, future emissions levels. Based on a survey of EU electric utilities, it identifies the most likely post-Kyoto scenarios considered by them and how they are coping with such uncertainty in their investment decisions. It is found that firms react differently to such uncertainty and adopt different strategies to cope with it, diversifying their emissions control activities. Although most companies foresee post-Kyoto compliance regimes with emissions trading systems, they differ in their perceptions of the form that a post-Kyoto regime could take and are, thus, positioning differently to face such regime. The particular features of each company and the country where they operate affect their perception of the uncertainties, their position regarding a possible post-Kyoto regime and their inclination to carry out mitigation activities. Complying with Kyoto (and, eventually, post-Kyoto) targets significantly influences the investment decisions of European electricity companies. Uncertainty about a post-Kyoto regime may already be affecting investments in mitigation activities in the electricity sector. Therefore, significant progress has to be made in the definition of a post-Kyoto regime. It is urgent to define and agree internationally the emissions reduction objectives and the mitigation instruments that will be accepted for compliance, ensuring continuity of the international emissions trading system foreseen in the Kyoto Protocol.

Electricity wholesale market prices in Europe: Convergence?

This paper tests the hypothesis that the ongoing restructuring process in the European electricity sector has led to a common European market for electricity. Based on a Principal Component Analysis (PCA) of wholesale electricity prices in 2002–2006, we reject the assumption of full market integration. For several pairs of countries, the weaker hypothesis of (bilateral) convergence is accepted based on unit root tests (KPSS and ADF) and a convergence test based on filtered pairwise price relations. This indicates that the efforts to develop a single European market for electricity were so far only partially successful. We show that the daily auction prices of scarce cross-border transmission capacities are insufficient to explain the persistence of international price differentials. Empirically, our findings confirm the insufficiency of explicit capacity auctions as stated in the theoretical literature.

Concentration in the European electricity industry: The internal market as solution?

This article offers an analysis of the present competitive and regulatory framework of the European electricity sector and the results achieved with the liberalisation process. Considering the reactions of incumbents to the liberalisation, the focus in this work is mainly on the problem of market concentration in the sector. The new trends toward the creation of “national champions” as well as recent mergers between gas suppliers and electricity producers raise serious concerns about abuses of market power and risk of future collusion. In particular, the strategic linkage of existing markets and the expansion into new ones are analyzed in the light of the multimarket contact theory. Considering investment in interconnection among Member States, the internal market issue is investigated as a solution to the “risks” coming from liberalisation.

Evaluation of electricity rates through characterization and forecasting of energy consumption

PurposeLiberalisation of the European electricity sector has allowed the industrial consumers to freely choose their electricity suppliers. Proliferation of different contract proposals for such supply means that all proposals need to be carefully evaluated for correct supplier renewal choice. The purpose of this paper is to propose a methodology for the evaluation of heterogeneous proposals of electricity supply that would help industrial consumers to be ready to face supply contractors.Design/methodology/approachThe method relies on a three‐stage analysis: characterisation of electricity consumption in the industrial process; demand forecasts based on energy drivers and consumption characterisation; and finally a detailed tariff analysis. The method is illustrated through a case study of a renewal contract of an Italian industrial plant with a 20 percent incidence of electrical energy cost on the final product. The investigation also includes a sensitivity analysis on combustible basket price and the distribution of daily working load.FindingsThe evaluation of 14 proposals for the case study was carried out and the best offer for the case study company was selected. However, the overall price variation is 4 percent among different proposals and the electrical energy price shows an increase of 12 percent compared with the previous year. This suggests limited effectiveness of the competitive market in the Italian context.Practical implicationsThe method can be considered as a practical guide for the electrical energy contract renewal process of any industrial consumer that would help minimize its cost.Originality/valueThe proposed method is based on an innovative investigation of the consumption characterisation of the industry based on energy drivers. This approach allows the industries to develop their own strategies for the contract renewal. The analysis presented here could be expanded to include more specific supply clauses for a more comprehensive analysis.

Prospects of Renewable Energy Development in the European Electricity Sector: Results of the Simulation Tool Green-X

This paper presents the results of selected simulation runs based on the computer model Green-X. The results suggest that the most significant efficiency gains -measured in terms of premiums to support renewables - can be achieved by optimising national RESE support measures - between two thirds and three quarters of the overall cost reduction potential can be attributed to the optimisation of national support schemes. Further efficiency improvements at a considerably lower level (at about one quarter to one third of the overall cost reduction potential) are possible through an EU-wide harmonisation of support schemes provided that a common European power market exists. Regional coordination represents an essential step towards EU wide harmonisation; half the additional cost benefits of an EU-wide harmonisation can already be tapped through regional coordination compared to the nationally optimised schemes. If a harmonised policy is pursued, technology-specific support is superior to non-specific support with respect to cost minimisation.

Lock-in and change: Distributed generation in Denmark in a long-term perspective

There is a renewed attention for distributed generation (DG) in European electricity sectors, but implementing DG is often problematic. This article studies the current relative success of DG in Denmark. We take into account not only recent drivers of change such as energy policy and green activism, but also long-term stability and change in the electricity supply sector. In particular we analyse the lock-in on centralized electricity supply, that still frustrates DG development elsewhere. We discuss three successive national electricity regimes, analysing regime lock-in and change in terms of technologies, actors, institutions and the position of DG. Our analysis shows that Danish energy policy as well as innovative activity by key actors indeed were crucial to the recent DG revival in Denmark. On the other hand, our long-term perspective shows that Danish energy policy and actor strategies were tuned to specifically Danish opportunities and barriers created during earlier regimes. These include experience with wind turbines and CHP as well as urban municipal and rural cooperative involvement. Copying the Danish energy policy model to other countries, regardless of national specific opportunities and barriers, will therefore not guarantee a similar outcome.

05/00139 International climate change policy: triggering environmental reforms in the European electricity sector: Ringel, M. International Journal of Global Environmental Issues, 2003, 3, (3), 305–323

05/00139 International climate change policy: triggering environmental reforms in the European electricity sector: Ringel, M. International Journal of Global Environmental Issues, 2003, 3, (3), 305–323

The Opening of the European Electricity Market and Environmental Policy: Does the Degree of Competition Matter?

This paper studies the relevance of strategic trade effects in the environmental policy for the European electricity sector. The production, investment and trade of electricity are modelled for four European countries. Three market regimes are distinguished: perfect competition, price regulation and Cournot competition. The model is used to examine the effect of the degree of competition on the state of the environment and to study the strategic trade effects of unilateral environmental policies.

International climate change policy: triggering environmental reforms in the European electricity sector

International climate change policy has come to a relative standstill with most of the countries being discouraged by the high costs of actively pursued climate policy measures. However, climate change policy offers ancillary benefits for proactive stakeholders like the European Union, in addition to the main benefit of mitigating climate change. This article takes a closer look at ancillary benefits the EU hopes to retrieve from its active climate change policy in the field of energy policy. The analysis is limited to the electricity sector, in which the highest potentials for emission abatement can be expected. It shows that most reduction potentials can be realised by using win-win measures, supporting aims of both climate change and energy policies. Generalising this finding, this review points out that ancillary benefits should be emphasised more than before as an incentive for an actively pursued global environmental policy.

Between synthesis and emulation: EU policy transfer in the power sector

This article evaluates the institutional capacity of the EU for policy transfer. It identifies the variables shaping transfer processes and outcomes: the mode of decision employed; the veto-points at which the model may be thwarted or modified; and the institutionally embedded policy preferences against which the model is evaluated. Transfer outcomes are classified on a scale from mere influence , through synthesis , to emulation. The empirical part of the paper is based on research into the liberalization and re-regulation of the European electricity sector following a " first mover' initiative on the part of the UK. Unanimity requirements, it is argued, opened up veto opportunities for member states to modify the UK model in accordance with domestic policy preferences. At the same time, EU feedback effects modified domestic preferences. Thus whilst transfer outcomes fell short of emulation, the result was more than merely a synthesis of national approaches.

Uncertainty in energy-economic modelling of the electrical power sector

The purpose of the present paper is to investigate what significance, if any, inclusion of uncertainties has for the conclusions of the modelling and analysis, i.e., whether the policy recommendations implicit in the results of the analysis depend on the inclusion or not of uncertainties. We do this within the context of a model of the Northern European electricity sector. The paper considers uncertainties about future states of nature. More specifically, we consider the inflow of water into a hydropower production system, where the states of nature are represented by a “dry”, a “normal” and a “wet” year. The problems may be formulated as non-linear optimisation models where the objective function basically consists of the expected value of the sum of consumers', producers', and authorities' surplus. The models take into account that there are losses in the transmission and distribution of electricity, and that the consumers pay an energy tax on their use of electricity. The consumers are divided into two groups, households and industry. Also, complementarity formulations are used, as these are shown to be more adequate for certain aspects, in particular where risk aversion within a liberalised market context is modelled. For each of eight Northern European countries, the basic results of the models are the installation of new production capacities, the production on old and new production capacities, the electricity prices, and the interchange between the countries. The investment in new production capacity is represented by a single value for each country, while the productions differ in that they depend on natural phenomena, which we refer to as the state of nature and represent by stochastic variables. It was found that in this context it was relatively easy to include stochastic elements in the model. Second, complementarity formulations are preferable to optimisation based modelling for some problem types. Third, results of the stochastic model have natural interpretations, also compared to one or several versions of a deterministic model. And fourth, we have seen that the quantitative results, and hence the implied policy recommendations, may differ significantly from those of deterministic models. We therefore conclude that increased attention should be given to the inclusion of stochastic elements into the modelling of energy systems.

Environmental Dumping, Transboundary Pollution and Asymmetric Information. Some Insights for the Environmental Regulation of the European Electricity

In this paper we extend a model by A. Ulph (1997) on the relationship between free trade agreements, environmental regulation and trade under imperfect competition. Ulph's model focused on the effectiveness of harmonisation policies against ecological dumping. It turned out that harmonised policies are rarely optimal under perfect information, but some rationale for them is granted when asymmetric information between the Commission and national governments is considered. This paper analyses two extensions of that model: transboundary pollution and the inclusion of consumer's surplus. Our interest in these issues rests in their importance for the environmental regulation of the European electricity sector, where imperfect competition can be expected to prevail even after the opening of the Single Market. Allowing for consumers' surplus has a very limited impact on Ulph's conclusions, but considering transboundary pollution has important consequences. Under perfect information, it makes harmonisation a much more attractive option. Under asymmetric information, it affects the governments' incentives to misreport, making them stronger and changing the kind of report the Commission should be wary of, it calls for a much less differentiated treatment of the countries, and makes delegating the regulatory power to the Commission a more attractive option than acting non co-operatively.

98/00264 Computable equilibrium models and the restructuring of the European electricity and gas markets

More regulation, not less, is temporarily necessary, if effective competition is to be established in network industries. This paradox places new requirements on computable models: they should provide realistic descriptions of technologies but also of market and institutions. Industrial economics and computation of economic equilibrium can help achieve this dual requirement. The paper discusses their potential in the context of the deregulation of the European gas and electricity sectors. Some key elements of the European legislative process are first presented in order to point to the diversity of institutions that can emerge and to the need to model institutions. Perfect competition equilibrium models although institutionally poor are argued to be useful for ex post analysis. Applications of the standard Cournot and Bertrand paradigms in ex ante analysis of gas and electricity markets are reviewed next. Models combining market power and externalities are then discussed with reference to electricity restructuring. Finally multistage equilibrium models are introduced in the context of investment in gas and electricity. Computation remarks conclude the paper.

Computable Equilibrium Models and the Restructuring of the European Electricity and Gas Markets

More regulation, not less, is temporarily necessary, if effective, competition is to be established in network industries. This paradox places new requirements on computable models: they should provide realistic descriptions of technologies but also of markets and institutions. Industrial economics and computation of economic equilibrium can help achieve this dual requirement. This paper discusses their potential in the context of the deregulation of the European gas and electricity sectors. Some key elements of the European legislative process are first presented in order to point out the diversity of institutions that can emerge and to highlight the need to model institutions. Perfect competition equilibrium models although institutionally poor are argued to be useful for ex post analysis. Applications of the standard Cournot and' Bertrand paradigms in ex ante analysis of gas and electricity markets are reviewed next. Models combining market power and externalities are then discussed with reference to electricity restructuring. Finally multistage equilibrium models are introduced in the context of investment in gas and electricity. Computation remarks conclude the paper.