34th USAEE/IAEE Conference Implication of North American energy self-sufficiency Tulsa, Oklahoma, USA 2016, October 25 Are Deregulated Electricity Market and Climate Policy compatible? Lessons from overseas, from Europe to Japan Bianka Shoai Tehrani Systems Analysis Group, Research Institute of Innovative Technology for the Earth (RITE) Pascal Da Costa, Laboratoire Genie Industriel, CentraleSuplec, Universit Paris-Saclay Keigo Akimoto Systems Analysis Group, Research Institute of Innovative Technology for the Earth (RITE) Yasuhide Nakagami Systems Analysis Group, Research Institute of Innovative Technology for the Earth (RITE) 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 1 Introduction: objective of the study Market Liberalization
In the EU Climate Policy Electricity market liberalization pioneered by the United Kingdom in the 1980s EU-ETS in 2005, first Climate and Single liberalized European electricity Energy Package in 2008, NDC market in 1996 submitted to COP21 in 2015 Market Liberalization In Japan Electricity Market Reform from 1995 Full retail competition in April 2016 Climate Policy NDC submitted to COP21 17% reduction of electricity demand, at least 44% low carbon electricity in 2030 Paradox between objectives and achievements In 2010-2013, EU coal power generation and associated CO2 emissions rose by 5% due to shale gas revolution in the US
Objective of the study: analyse the articulation of electricity market liberalization and climate policy in the EU extract lessons for Japan To do so, we conducted a review of the literature and a series of semi-directive interviews with 8 experts from academia and electricity industry. 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 2 Outline Principles and Goals of electricity market reform and climate policy Liberalization and first policies for EU electricity market EU Climate Policy Towards a combined policy package Assessment of the situation in Europe Current state of policy implementation The root of the missing money problem Issues inherent to EC Institutional framework Policy recommendations Electricity market regulation: towards re-regulation Policy instruments: carbon floor price and market-friendly support schemes Tackling upcoming issues: investment and pricing for transmission and distribution
Lessons learned for the case of Japan Japanese liberalization context compared with EU context Climate Policy in Japan Applicable recommendations for Japan 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 3 Principles and Goals of electricity market reform and climate policy Liberalization and first policies for EU electricity market EU Climate Policy Towards a combined policy package 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 4 Theoretical movement for liberalization and first policies for EU electricity market Nationalization or Integrated model
Cost/Benefit Analysis Mass, Boiteux Economic theory Construction of European Union 1940 1945 2016, October 25 Questioning of natural monopolies Averch Jonhson Leibenstain, Buchanan, Stigitz, Peltzman Laffont Tirole Rome treaty 1960 Suez Crisis 1996 European Commission Directive on electricity
market Single European Act 1957 1950 1956 End of World War II Electricity market liberalization in UK (1980s) 1986 1970 1973 1980 1979 Oil peaks USAEE 2016, Tulsa, Oklahoma, USA 1990 2000 1997
Kyoto Protocol 5 EU Climate Policy 1990s 2005 Greenhouse gas emissions issues started to rise: proposal for a carbon and energy tax in 1992, eventually abandoned after a decade of negotiations EU-15 agreed upon 19% reduction over 1990-2012 period under the Kyoto Protocol Creation of the European Union Emissions Trading Scheme (EU-ETS) in 2005 2009 First Climate and Energy Package with targets for 2020: 20% GHG emissions reduction(compared to 1990 levels), 20% renewable energy share in primary energy mix, 20% energy efficiency improvement (compared to BAU). 2014 Second Climate and Energy Package with targets for 2030, consistent with NDC for COP21: 40% GHG emissions reductions (compared to 1990 levels), 27% renewable energy share in primary energy mix, 27% energy efficiency improvement (compared to BAU). 2015 Submission of NDC to COP21 (consistent with Second Climate and Energy Package) 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA
6 Towards a combined policy package Recent evolution towards a combined policy package 2014 EC Internal Market Progress Report February 2015, objective for 2019, the creation of an Energy Union Energy Union objectives Geopolitical objectives diversifying energy sources reducing import dependency of EU 2016, October 25 Climate objectives GHG reduction target: -40% in 2030 compared to 1990 levels (as in NDCs). renewable energy target (27%), improve energy efficiency reform the EU-ETS USAEE 2016, Tulsa, Oklahoma, USA Market integration and competition objectives
Investment in energy infrastructure: 647 million in Projects of Common interest 70% should be completed in 2020 Synergy with security of supply and reduce CO2 emissions 7 Assessment of the situation in Europe Current state of policy implementation The root of the missing money problem Issues inherent to EC Institutional framework 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 8 Current state of policy implementation: market liberalization (1/2): market Market integration Progress of market coupling Creation of: - Agency for the Cooperation of
Energy Regulators (ACER) - European Networks of Transmission Systems Operators (ENTSOs), 96% of TSOs compliant with EU standards Market structure No increase in cross-border infrastructure: interconnections deemed insufficient by EC EC target for interconnections: 15% of installed electricity capacity 2016, October 25 New entrants as a result of liberalization: Around 2005, mostly based on CCGT technology Out-of-market new entrants: based on renewable technologies and driven by FiT etc. New entrants of medium and small sizes bought by historical majors
New entrants in foreign countries tend to return to their historical market EU market is still concentrated around historical operators USAEE 2016, Tulsa, Oklahoma, USA 9 Current state of policy implementation: market liberalization (2/2): prices Evolution of: the highest regional wholesale electricity prices in the EU the lowest regional wholesale electricity prices in the EU and the PEP Index Wholesale prices are falling 2008: 45-85 /MWh 2016: 20-45 /MWh Figure 1: The evolution of the lowest and the highest regional wholesale electricity prices in the EU and the Platts PanEuropean Power (PEP) Index  Source: EC Quarterly report on electricity market, 2016 (European Commission 2016; Platts 2016) Retail prices are rising Between 2008 and 2014, taxes have risen by 47%
Figure 2: Evolution of household price components and household price breakdown from 2008 to 2014, average EU figures Source: Eurelectric 2015, Power Statistics 2016, October 25 and Trends. USAEE 2016, Tulsa, Oklahoma, USA 10 Current state of policy implementation: climate policy 2020 target achievement results (targets: 20% - 20% - 20%) Emissions reductions Renewable energy (+) over-achieving (+) emissions reductions are expected to be 24% lower in 2020 compared to 1990 levels (-) however this is mainly due to economic
recession (-) low impact of EU ETS (+) achieving the target (-) although with high costs in support schemes 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA Energy efficiency (-) under-achieving in energy efficiency (-) 18-19% instead of 20% in 2020 11 The root of the missing money problem Impossible to phase out of support scheme Support schemes for renewables Impossible to invest in clean
energy Massive renewable investments Taxes (FiTs and other supports schemes) Less revenue for power companies Total overcapacity Rising retail prices Missing money Impossible to recover fixed costs Conventional power plants are not profitable 2016, October 25
Renewables bring wholesale price down* + Less demand for conventional power plants *in particular peak prices, usually a source of profit for base or semi-base plants Minor phenomenon for now but could potentially become more important Compromises the development of electric cars (second phase of decarbonization) Debatable: currently little elasticity of demand on the short term, but potential long-term effects Less demand: autoconsumption, curtailment 12 Issues inherent to EC Institutional framework
The main tools to build the internal energy market are networks and competition regulation lack of protection of interests of European industrial champions risk of overcapacity of the grid Sufficient interconnections for FranceGermany-Benelux area (wholesale price equalization) Connections to be reinforced: UK-Continent France-Italy France-Spain Source: ENTSOE, 2015 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 13 Policy recommendations Electricity market regulation: towards re-regulation Policy instruments: carbon floor price and market-friendly support schemes Tackling upcoming issues: investment and pricing for transport and distribution 2016, October 25
USAEE 2016, Tulsa, Oklahoma, USA 14 Electricity market regulation: towards reregulation Capacity mechanisms necessary to remunerate the guarantee of generation necessary for peak load investment transfer the price signal of wholesale market to retail consumers (industrial, residential) can be done via smart home system and demand response would mean to re-think the interface between wholesale and retail, for instance to replace it by a single buyer Centralized planning of capacity by the government is one option for example through tenders which would allow competition for the choice of the company for the particular investment so that the electricity mix is a state decision rather than the result of market price signals Long term arrangements are mostly banned by competition regulation allowing them in some form would allow revenue guarantee for companies as well as a hedge against price volatility for consumers
2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 15 Policy instruments: carbon floor price and market-friendly support schemes For emissions reductions For renewable integration A stability reserve will be implemented from 2019, allowing to freeze a certain proportion of allowance if needed A carbon floor price around 30 /tCO2 would allow to shift from coal to gas market-friendly renewable support such as Contract for Difference or Feed-in-Premium instead of Feed-in-Tariffs would allow to expose producers to market prices in order to prevent overcapacity, while still protecting them from to important variations Figure 6: Functioning of different renewable support schemes Source: FTI Intelligence 2015 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA
16 Tackling upcoming issues: investment and pricing for transmission and distribution Reinforcement of the grid Required by both market liberalization and renewable integration transmission capacity for large-scale wind capacity distribution grid for PV and small renewable investments Remuneration of fixed costs A benchmark of current pricing practices for distribution shows that fixed costs are not properly remunerated in most European countries need to reconsider pricing need to design incentives such as storage premium so that prosumers can contribute to grid support Need for alternative To adapt the system to customers new needs regulations for instance small-scale capacity mechanisms at city levels or neighborhood levels, managed by distribution operators rather than nation-wide capacity mechanisms managed by transportation operators 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA
17 Lessons learned for the case of Japan Japanese liberalization context compared with EU context Climate Policy in Japan Applicable recommendations for Japan 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 18 Japanese electricity market liberalization context (1/2) Historical overview of Japanese electricity sector: concentration and de-concentration movements 1929: 50% of electricity generation concentrated in the hands of 5 companies 1939: state-owned monopoly Nihon Hatsusoden Co regrouping power generation and transmission 1951: division of the monopoly into 9 companies 1972: 10 regional monopolies with the addition of Okinawa. For historical reasons, Japan into two frequencies zones: 60 Hz in the West 50 Hz in the East Local power is represented in power companies shareholding structure: 10% of Kansai EPCO is detained by
Osaka City, about 50% of TEPCO by a Tokyo Municipal Entity. EPCOs are united through Federation of Electric Power Companies (FEPC) to negotiate with the government Source: METI, 2014 Historically, the Japanese electricity sector is more centralized than it seems 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 19 Japanese electricity market liberalization context (2/2) Current overview of Japanese electricity sector Creation of Organization for Cross-regional Coordination of Transmission Operators (OCCTO) in 2015: to develop the transmission and distribution systems for the cross-regional utilization of power sources to strengthen the nationwide capacity to adjust the electricity supply-demand balance in both ordinary and emergency situations Full retail competition from 2016, April 1rst 10 majors (former regional monopolies) can operate all over Japan Concern of majors regarding the reform: guarantee of revenue
Goals of the Japanese Electricity Market Reform Primary goal of Japanese Energy Reform (gas and electricity): growth and consumer benefit Goals of electricity market reform: ensuring stable supply by expanding scope of supply (whole country instead of region) cheap electricity prices through competition expanding choices for consumers and business opportunities Started in 1995, the liberalization process regained importance after the Fukushima disaster, as it made it necessary to reconsider electricity policy to deal with issues of energy mix choices and high energy prices Compared to Europe: goals are comparable, but the Japanese case presents far less complexity: One country, politically centralized (vs EU-28) The electricity sector is centralized and homogenous But also limits to expanding the scope of utilization of power sources: Only nationwide (island system) 2016, 2016, Oklahoma,zones USA October Limit to25cross-regional utilizationUSAEE
due to twoTulsa, frequencies 20 Climate Policy in Japan NDC target submitted to COP21 : 26% emission reduction by 2030 compared to 2013 levels (the emissions target in 2030 is 1.042 GtCO2eq.) Energy savings ; Low-carbon electricity mix ; support to renewable energies Compared to Europe: Source: METI, 2015 Centralized decision for electricity mix (re-regulation is pre-existing) High renewable support target: risk of overcapacity and related issues for EPCOs Capacity replacement issue: difficulty to invest in nuclear, but need for low-carbon capacity 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 21 Applicable Sorting out applicable recommendations for Japan: first thoughts 2016, October 25 Japan avoids European
complexity and its particular institutional framework and associated risks: reform implementation is easier in terms of regulation uniformity and use of integration tools. Re-regulation movement is preexisting in Japan the energy mix being decided by the government making the centralized planning recommendation less relevant for Japan than Europe. USAEE 2016, Tulsa, Oklahoma, USA Non-applicable Risk for overcapacity and related vicious circle resulting from renewable support and liberalization: probable and the main fear of power companies regarding electricity market reform Anticipating potential risks for electricity sector and Japanese economy, designing capacity mechanisms, rationalizing renewable are thus relevant recommendations.
22 Conclusion EU and Japan electricity market reforms take place within very different environments Japan has a chance to implement from the beginning the sofar identified solutions for smooth articulation between climate objectives and efficient liberalization: existing planning and control is likely to limit free market ups and downs and protect national electricity sector more than in the EU recommendations for fixed costs remuneration are thus an issue to tackle through capacity mechanisms or other solutions Further research Interviews with Japanese experts Exploration of other liberalization experiences: PJM in the US... 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 23 Thank you for your attention 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 24 Appendix
2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 25 List of affiliations of interviewees Institution name EDF Electricite de France RTE Reseau de transport delectricite Enedis (Former ERDF Electricit Rseau Distribution France) WEC World Energy Council CFE French Energy Council CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Montpellier I University LARSEN (Laboratoire dAnalyse conomique des Rseaux et des Systmes Energtiques), CIRED(Centre International de Recherche sur lEnvironnement et le Dveloppement), Paris CERNA (Centre for industrial economics), Mines, Paris 2016, October 25 Type Industry - French power utility Industry -French transmission utility Industry -French distribution utility Professional association - energy Professional association - energy Academic energy economics Academic climate and energy
Academic energy economics USAEE 2016, Tulsa, Oklahoma, USA 26 The Platts Pan-European Power (PEP) The Platts Pan-European Power (PEP) is a demand-weighted day-ahead baseload indice indicating price trends for Europes free electricity markets as a whole. The indice uses the mid-points of Platts assessments for the European power markets, giving each country a weighting according to demand. As spot trade has developed at a different pace in each European market, Platts has used demand weighting to replace traditional trade volume weightings to give a more representative price for the pan-European market (Platts 2016). 2016, October 25 USAEE 2016, Tulsa, Oklahoma, USA 27 Functioning of Contract for Difference, detailed graph Figure 7: Functioning of Contract for Difference, detailed graph Source: Government of UK 2015 2016, October 25
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