It's not all Ben Franklyn and ENRON is it?

October 21, 2009 8:56 AM

Tell me all you know about electricity markets.

I am looking to learn as much as possible about electricity markets (specifically the UK/Europe) for an interview that I have coming up. I understand the technical aspects of the job that I am going for but I am a bit unsure about some of the Political Economic Social Technological (PEST) factors that are having an effect on the industry at the moment and I would like to have greater insight. There seems to be a whole raft of information about the long-term energy supply issues that the world will face in the next 30-50 years but there is not so much on how that will impact on the next 6 months to 5 years.

What is the strategy for utilties at the moment? Are there any regulations on the horizon that will impact on these companies? Is there anything else that I should consider?


*It's anon because a few people at my current employment know my username here*

Thanks

posted by anonymous to work & money (11 comments total)

Potomac Economics is the independent market monitor for several major electric markets in the US. A good place to start is their annual state of the market reports for each of the monitored markets.

Feel free to contact me for specific questions.
posted by Pants! at 9:04 AM on October 21, 2009

This should be a good start.
posted by General Malaise at 9:15 AM on October 21, 2009

The Economist is a good, free and readily searchable source of information on this. For example have a look at this article on the UK's energy market policy and its effect on climate change in the current edition.
posted by rongorongo at 9:40 AM on October 21, 2009

This is an incredibly broad question. I've been in the electric business for 10 years but don't even know where to start to answer your question. Biggest thing in the US right now is the smart grid. Every utility out there is trying to get government funding to pursue a smart grid strategy.

What kind of job are you interviewing for, exactly?

Also, one link to check out is Public Utilities Fortnightly.
posted by charlesv at 9:45 AM on October 21, 2009

As charlesv says, you are being very broad, would you care to narrow it down? I will pick out some bits that come to mind and that I'm familiar with.

The general trend in European electricity in the last decade has been towards takeovers of small companies all across the continent by large multi-function utilities who are former (and often really current) national champions. E.g. RWE and E.on from Germany, EDF of France, Iberdrola of Spain, Vattenfall of Sweden, I forget the name of the Italian one, this is unlikely to stop any time soon. so much for the free market for energy. This has largely come about as some nations opened up full competition in their energy sector and allowed any company from overseas to buy in (e.g. UK) while others did the bare minimum in opening markets and didn't let overseas companies in so much. Some also provided additional support to their national champions by, for example, allowing them to clean out nuclear decommissioning accounts to invest in buying up other utilities. So far this appears to have been a successful tactic, however if EDF, RWE or Eon were to go tits up I imagine there would be some strong words in their respective home nations.

On the topic of Europe the Single Market for Energy has been a primary motivator for the direction of the electricity sectors across all EU Member States. There is a minimum level of regulation which does act to impose opening of markets (or reregulation of one wants a more accurate but not often used term) such that distribution, transmission, generation and supply have to be unbundled (i.e. run as separate companies). The UK is wide open, to the extent that this is relevant given the above and the ownership of many of the utility functions by the companies mentioned above. There is some evidence that privatisation did push down prices in the UK electricity sector between 1990 and 2000, though this was in the regulated monopolies rather than the competitive elements, the supply function of which turned out to be abusing their market power leading to a change in the UK market system in 2000 (from pool pricing to the British Electricity Transmission and Trading Arrangements - BETTA). I'm not sure what the current thinking is as regards whether the market is competitive or not now.

Climate wise, the EU agreed to a single target for CC emissions reductions under Kyoto, then split this into national targets for each member state. Most will not make their targets, but it has led to various policies being adopted. These include the EU Emissions Trading Scheme (EUETS). This works by each government giving out credits to its own companies each year, then if the company produces too much carbon it has to buy more, while if it takes action to get its emissions down it can sell the stuff it has saved. This creates a market for credits and provides financial incentive for companies ot improve their energy efficiency. I'm afraid i can't remember what the position is for energy companies within the ETS.

Renewables wise, each of the Member States (MS) has had a target for renewable electricity (RES-E) since 2001, but these weren't really compulsory, however, pretty much all MS have had some kind of policy in place to encourage RE deployment for a few years, which is good as earlier this year the new Renewables Directive built on a 2007 agreement to give all the MS a legally obligated target for 2020 which applies to all energy (i.e. not just electricity). These targets are pretty big and are likely to mean some significant energy sector impacts, the UK for example has a target of 15% of all energy to come from RE by 2020, a lot when you realise we currently get ~1.8% and have been growing by ~0.1% annually. The UK Government has opted for targets of 30% of all electricity to come from RE by 2020 (currently 5-6%), which is crazily high IMHO (as an RE policy lecturer/researcher). Ms which do not achieve their targets may well get taken to the European Court of Justice by the EC post 2020, though I think that we will have to wait and see what happens in the next decade before that becomes a serious option.

The UK's key mechanism for encouraging RES-E is the Renewables Obligation, a competitive mechanism which uses green certificates to reward RE generators for each unit they produce, then sets a minimum annual obligation on supply companies for buying certificates, thus creating a market for RES-E generation separate from the market for its electricity. This provides quite a lot of subsidy, too much of which is sucked up by supply companies abusing their market power, and is a fascinating example of a market based instrument being less efficient than a non-market mechanism. The UK seems to have at last seen the light on these competitive quota mechanisms and the new mechanisms being introduced for microgen and for renewable heat will use a bonus mechanism instead (see also tariff mechanism).

There are other problems with RE that have come up in the last decade, most electricity delivery is based on centralised generation and current regulation tends to favour it over decentralised, which means the bits where RE is poor get penalised (i.e. intermittency - fair enough really) but the bits where it is good (i.e. line losses as it is closer to the consumer) don't get rewarded.

Big issues to come: Transmission! Basically we don't have enough big wires. It is going to cost billions to mitigate this, firstly just top keep things going but especially to add lots of GW of wind and some other RES-E. With lots of our wind potential being in Scotland (and out of the way Scotland too) and many of our consumers being further south, someone is going to have to pony up to connect the sites to the grid, and thus the consumer. This someone is likely to be either the consumer of the taxpayer, the question is how to do it so we don't have huge amounts of spare wire costing a fortune but not connecting anything OR so we have wind turbines but not enough capacity to get their output to the consumer.

One other minor-ish thing, whereas when the UK privatised its electricity sector was regulated purely on the basis of making things cheaper, in recent years there has been an increased emphasis on social and environmental obligations, there will be more on this o the OFGEM website.
posted by biffa at 1:45 PM on October 21, 2009 [2 favorites]

Excellent info from biffa. However, I thought our renewables were at around 10% of total supply by end of the year.

Also, I understand smart metering is a big trend across Europe.
posted by Lleyam at 2:09 PM on October 21, 2009

There will be various sources for this, but the first that comes to mind is the UK RE strategy document published over the summer. Linked here. If you look on page 8 it gives a figure of 5.5% ‘today’ for the amount of electricity that comes from renewables as a fraction of final electricity consumption. Page 10 suggests that the overall figure (i.e. renewables out of total energy consumption) is 2.25% which I think is a bit higher than the most recent Digest of UK Energy Statistics (DUKES) has it, and I am mildly suspicious that some figures in there have been ’made over’ to avoid people questioning how they will achieve some of the ludicrous expansion rates that the RE Strategy suggests. (e.g. I would argue the 1000% increase in 10 years they suggest for RES-H may have to be closer to 2000%. They also suggest a figure of about 500% increase over 10 years for RES-E and for renewable transport fuels.
posted by biffa at 2:38 PM on October 21, 2009

The Midwest Independent System Operator runs the electricity market for part of the US and Canada with about 40 million residents. They have a particularly good Web site with lots of real-time information about current market activity. For example, you can look at this report (PDF) for yesterday, and see that the market cleared 1.5 TWh with an average price of $29.05 / MWh. But from this map (requires SVG) I can tell that prices are around $25 right now (probably just because most businesses have closed for the day). They also post a ton of data on where new lines and generators are being constructed, electricity futures prices, etc.

Might not be relevant, but it is all I know.
posted by miyabo at 3:28 PM on October 21, 2009

I did more with American electricity markets, but the salient point about European power is how much is produced by gas fired power plants - coal is too dirty, nuclear is politically unfeasible, and wind is unreliable. Most of the gas comes from Russia or the North Sea, with more and more being shipped in by way of LNG terminals.

Russian gas comes in through the Ukraine. You will recall the history of disruptions to these pipelines. One of the key issues is that Russia would like to stop shipping its gas through the Ukraine by opening the Nord Stream pipeline (there is also planned pipelines in the Caspian with South Stream and a few others, too).
posted by milkrate at 6:21 PM on October 21, 2009

Check out the European Union Renewable Energy Road Map (PDF) for some political perspective. The EU has set up the so-called 20-20-20 goal, which is to reduce greenhouse gasses by 20%, improve efficiency by 20% and increase renewables by 20%, all by 2020. Smart metering is expected to play a big role in this, I believe there has been a recent Directive setting a goal for smart meter installation quotas.
posted by Dr Dracator at 11:13 PM on October 21, 2009

European power is how much is produced by gas fired power plants - coal is too dirty, nuclear is politically unfeasible, and wind is unreliable.

There has been a big shift to gas in the last 2 decades in Europe, primarily as its the cheapest option for new capacity, coal is dirty but is still a big fraction of elec gen. nuclear is politically unfeasible but it is also expensive to build, to operate and to decommission. Wind's problem is not really unrelability, but cost, its costs a lot up front and the pay off is longer term, nevertheless wind has expanded very rapidly, something like 20%+ annually over the last decade, the probem being that it started small.

Most of the gas comes from Russia or the North Sea, with more and more being shipped in by way of LNG terminals.

Russia gets a lot of emhapsis but there is actually a pretty diverse set of suppliers. In the UK its nearly all indigenous gas supply (though the fraction is falling), pushed up with imports from Norway, Trinidad and Tobago and Algeria and 'others'. The balance is different as you go east.
posted by biffa at 5:35 AM on October 22, 2009