Hybrid electricity markets. Laurens de Vries Delft University of Technology

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1 Hybrid electricity markets Laurens de Vries Delft University of Technology

2 Liberalization in Europe: a patchwork of market designs Markets differ in many ways from the textbook model of a competitive market, e.g.: public ownership incumbent retains (near) monopoly insufficient unbundling network access not equal After 10 years of EU liberalization policy, no convergence to a single market model. Why? How can the differences be explained? 1

3 Starting point: framework Williamson (New Institutional Economics) level Informal institutions, customs, traditions, norms, religion time constant (years) 10 2 to 10 3 Institutional environment: Formal rules of the game, esp. property 10 to 10 2 Governance: play of the game, esp. contracts 1to10 Resource allocation and employment (prices and quantities; incentive alignment) continuous 2

4 Applying the model to electricity Informal institutions Customs, traditions, norms, religion General: polity, judiciary, bureaucracy, competition law Formal institutions Sector-specific: Electricity laws and decrees, e.g.: degree of network unbundling regulation methodology capacity mechanism 3

5 Applying the model to electricity (2) Governance Sector regulator: regulations, codes etc. Inter-firm: spot market rules, industry standards & codes Within firms: contracts, market structure, horizontal/vertical integration, investments, private/public ownership Resource allocation and employment Operation and maintenance: plant network system 4

6 Main hypothesis Differences in the implementation of the European Union s liberalization directives can (partly) be explained from existing differences between the informal and formal institutions in member states. 5

7 Example: France values: political and economic independence politics: dirigist nuclear power + force de frappe state monopoly current situation state company: 85% market share limited unbundling 80% nuclear power 6

8 3 archetypical styles of socio-economic organization (1) Anglo-Saxon: survival of the fittest politics: the winner takes it all trust in competition labor relations confrontational Rhineland model: consensus culture proportional democracy mixed economy (competition, government control over some sectors, firms cooperate with each other and government) labor part of political process and industry governance 7

9 3 archetypical styles of socio-economic organization (2) Latin model dirigiste politics limited competition (monopolies with state ownership in many sectors) close relation between industry top and government, both adverse versus labor 8

10 Variables formal institutions Variable Why is it a useful indicator? Network regulation Capacity mechanism (if applicable) Competition policy The EU framework leaves room for variation between countries EU requirement is limited, much room for national policy; variations between capacity mechanisms may relate to different institutional conditions. EU requirement is limited, indicator of willingness to stimulate competition and new entry. Horizontal unbundling Strong indicator of willingness to create competition. 9

11 Variables informal institutions Variable Types of contracts: PX, OTC, long-term bilateral Public versus private ownership Why is it a useful indicator? Indicator of maturity and liquidity of market. Indicates government s desire to maintain some direct influence versus faith in markets. Other indicators not useful: not much investment needed to date, vertical integration is ubiquitous 10

12 Exogenous variables Physical size of the market Geographic density of demand in relation to network capacity Growth rate of demand in relation to financing options Industry structure Natural endowment with energy sources Policy history 11

13 Examples of hypotheses - formal institutions (1) Anglo-Saxon model: stricter unbundling, tighter network regulation. Ownership unbundling of the TSO is applied in Denmark, Finland, Italy, the Netherlands, Spain, Sweden, the UK, and Norway Capacity mechanisms: necessary in Anglo-Saxon model (to compensate for higher investment risk, due to strong competition) favored in other models as means of industry policy? 12

14 Examples of hypotheses - formal institutions (2) Competition policy national champions: EdF, Enel, Electrabel, Vattenfall, Dong E.On-Ruhrgas merger Horizontal unbundling Enel: forced divestment, (Electrabel: sale of VPPs) Division of the UK s Central Electricity Generating Board 13

15 Examples of hypotheses - governance In Anglo-Saxon model (in decentralized markets), competition leads to early development of power exchanges and other forms of trade facilitation. first power exchanges in NordPool, UK, NL, Germany Ownership: private in Anglo-Saxon model, public in Latin model (private in Rhineland model) privitization in UK, but also in Spain and Italy In Rhineland model: governance bottom-up Verbändevereinbarung 14

16 Conclusions Williamson s framework provides partial explanation Other factors have significant impact, e.g. presence of primary energy sources topology of network and demand growth rate of demand historical organisation of the sector market concentration at the outset of liberalization Division into three models of socio-economic organisation is artificial 15

17 Recommendations Instead of three categories, describe the informal institutions with multiple variables, e.g. attitude towards markets and competition strength of the state faith in government & regulatory agents etc. Adjust Williamson s framework: bottom-up feedback can be strong time constants can be much shorter 16