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Slide 1
First Lecture: Part 2 Strategic Evolution of Competitive
Electricity Markets Derek W. Bunn London Business School
Slide 2
The globalisation of energy markets is having an effect on
price convergence Global Markets for Fuels: Oil, Coal, LNG Global
Energy Businesses replacing National Utilities International
Capital Markets and Multinational Investors Market Liberalisations
and Harmonisations Regional Interconnections But rather less than
we would expect
Slide 3
EU Industry Prices still show substantial disparity..
Slide 4
So, what do we now know about the evolution of power markets?
1.Dynamic Evolution Initial thoughts that global markets would be a
strong convergent driver have not been upheld: Local Factors,
Market Structure and Strategic Behaviour may be more
important.
Slide 5
Local Fundamentals: 1. Link to fuels UK Monthly Forward
Prices
Slide 6
Local Fundamentals: The Supply Stack Links Fuels to Prices The
Stack is produced from the Generators Offers to the market But
would the Generators offers be cost reflective?
Slide 7
Time Weighted Average Monthly Pool Prices 24 Average Price Cap
Notice the High Volatility During the Price-Cap Period.
Slide 8
The Increase in Price Volatility...
Slide 9
. was achieved through changing the supply function.
Slide 10
Local Fundamentals: 1. Link to Fuels 2. Supply and Demand
Balance
Slide 11
Sensitivity of Prices to Reserve Margin
Slide 12
Deregulation California Reserve Margin Declined Steadily.
Margin %
Slide 13
WSCC CAL Hourly wholesale power prices ( $/MWh ) And at a
critical point, spikes began to emerge
Slide 14
Local Fundamentals: Fundamental link to Fuels Reserve Margin
Market Structure and Conduct New Game
Slide 15
Changing Ownership of Coal (ie price-setting) Plant (Source:
John Bower)
Slide 16
The Growth of Vertical Reintegration
Slide 17
Residential Wholesale Vertical Integration Immunised against
Wholesale Price Full Retail Opening Price Index
Slide 18
Value moved to the Least Elastic part of the Supply Chain
Prices Paid for Residential Assets (/Domestic Customer)
Slide 19
With a Drop in Value of Generating Plant CCGT Resale Prices
/kW
Slide 20
Re-Concentration follows distress
Slide 21
90% of Retail now delivered by Top 6 Suppliers Source: Power UK
March 2005
Slide 22
65% of England and Wales Generation Produced by Top 6 Suppliers
Source: IPA Energy
Slide 23
Prices Moved Up
Slide 24
Large Generators Returned some Capacity
Slide 25
These Basic Divers Appear in Price Models Fundamental link to
Fuels Reserve Margin Market Structure and Conduct Eg. Monthly Price
Model (1990-2002) by Evans & Green Price (Lerner) = a + b1
Herfindahl + b2 Herfindahl2 + b3 Demand/Capacity + b4 Sept2000 (R2
= 67%) And their effects are Cyclical
Slide 26
What do we now know about the evolution of power markets?
1.Dynamic Evolution Initial thoughts that global markets for fuels
would be a strong convergent driver have not been upheld: Local
Factors, Market Structure and Strategic Behaviour may be
Pro-cyclical. 2.Value can migrate up and down the supply chain
Retail can capture value more effectively than wholesale
Slide 27
What do we now know about the evolution of power markets?
1.Dynamic Evolution Initial thoughts that global markets for fuels
would be a strong convergent driver have not been upheld: Local
Factors, Market Structure and Strategic Behaviour may be
pro-cyclical. 2.Value can migrate up and down the supply chain
Retail can capture value more effectively than wholesale
3.Governments are beginning to prefer imperfect markets A few
large, vertically integrated companies provide security and can be
managed.
Slide 28
. and many countries explicitly pursue the national champion
objective. EU GENERATION CAPACITY CONCENTRATION RATIO (3 FIRM)
2001
Slide 29
What do we now know about the evolution of power markets?
1.Dynamic Evolution Initial thoughts that global markets for fuels
would be a strong convergent driver have not been upheld: Local
Factors, Market Structure and Strategic Behaviour may be
pro-cyclical. 2.Value can migrate up and down the supply chain
Retail can capture value more effectively than wholesale
3.Governments are beginning to prefer imperfect markets A few
large, vertically integrated companies provide security and can be
managed. 4. Imperfect Markets will exhibit Dynamic Strategic
Behaviour Prices will not stabilise at marginal costs
Slide 30
Even after 7 years of daily evolution, the supply function was
not stable.
Slide 31
The following days continue to show dynamic learning and
gaming.
Slide 32
What do we now know about the evolution of power markets?
1.Dynamic Evolution Market Structure and Strategic Behaviour may be
Pro-cyclical. 2.Value can migrate up and down the supply chain
Retail can capture value more effectively than wholesale
3.Governments are beginning to prefer imperfect markets A few
large, vertically integrated companies provide security and can be
managed. 4. Imperfect Markets will exhibit Dynamic Strategic
Behaviour Prices will not stabilise at marginal costs 5. Regulatory
Risk is inevitable and substantial
Slide 33
Further Reading: Sally Hunt Making Competition Work in
Electricity (Wiley, 2002) Steven Stoft Power System Economics
(Wiley, 2002) Alexander Eydlund and Krzysztof Wolyniec Energy and
Power Risk Management (Wiley, 2003) Derek Bunn Modelling Prices in
Competitive Electricity Markets (Wiley 2004)