Competitive Electricity Market

1.1 Introduction
Revolution process of ESI :

Competition Restructuring Privatization Regulation

Objectives of the revolution :

i. To enhance efficiency

ii. To promote competition in order to lower the cost

iii. To increase customer choice

iv. To assemble private investment

v. To merge public finances

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Objectives are achieved through the introduction of competition which is
2
supported by regulation and encouragement of private participation.

An international approach for the design of the legal, regulatory and institutional

sector framework. It includes :

i. Privatization and restructuring of state-owned energy utilities

ii. Separation of regulatory and operational function, the creation of a proper

regulatory framework, and the establishment of an independent regulator to

protect consumer interests and promote competition

iii. Vertical unbundling of the electricity industry into generation,

 transmission,distribution and trade (services)

1.2 Traditional Electricity Market

Vertically integrated electric supply industry monopolized the way they control,

sold and distributed electricity to customers. In this monopoly, each utility

managed three main components of the system which are generation, transmission

and distribution.

Advantages :

 Single and simpler management

 Simpler system operation

 Reduced operation costs, since a large centralized repair and maintenance

 Better utilization of equipments

 Less accidents

 Cheaper production, due to Principle of “Economy of Scale”

In this vertically integrated monopoly, a regional dispatch power pool is created

to coordinate the operation and planning of generation and transmission among

their members in order to improve efficiency & reliability and reduce costs.
 Vertically-Bundled Structure

Electricity traditionally generated, transmitted

Generation System
and sold by single Vertical-Bundled (Monopoly

Transmission System
Structured) company, called “Electric Utility”.

Distribution System

Wholesale Level

Customer

1.3 Deregulated Electricity Market

Vertically integrated monopoly no longer available in certain countries.

Government prompts to create open market that is more transparent and efficient

in order to attract capital investment from those eager to capitalize on the potential

growth of the electricity industry.

Problems in Natural Monopoly (Vertical bundled)

1. No incentives to reduce cost, since there is no competition

2. Over-employment

3. Loss of professional enthusiasm and indifference to customer problems

4. Increase in system losses and illicit utilization

**Main reason for regulating natural monopoly:

A monopoly has always a significant power of driving up prices since it has the

market power and the right of setting its own tariff. Thus, the prices, tariff and

investment plans are all regulated for the interest of the public, by an independent

body called “Regulator”.

Vertical Unbundling

Is separation of services traditionally provided by a single utility into functionally

independent parts.

In vertical unbundling, the utilities requires to :

1) Carry out each component of these services physically and functionally by an

independent company

2) Ensure that the price of each service accurately reflects the cost of that service,

with some margin for profit

3) Not to make any cross-subsidy in the tariff and expenditures among these

companies
 Vertical Unbundling

Traditional Vertical-Bundled model is split (unbundled) into four functional layers

which are Generation, Transmission, Distribution and Trading Layer.

Utility has been composed into two main parts:

Deregulated Those layers carrying out :

(Competitive
market) “Electricity trading” Generation System

Transmission System
Monopoly Those layers carrying out :
Regulated
(by regulator) “Electricity services” Distribution System

Wholesale Level
Customer

Main purpose of vertical unbundling:

To separate the regulated and deregulated layer from each other.

Regulation vs Deregulation

Deregulation Regulation

To liberate the prices in the generation To impose “cap” called “revenue

and trading layers. cap”on the tariff in the Transmission

and Distribution Layers regularly, usually

These prices are calculated with once in a year by the regulator.

respected to fuel, investment and other

cost determined by investment

characteristics of the plant.

Market vs Monopoly

Market (Service) Monopoly

Is a competitive-based trading Is a non-competitive environment,

environment, where two or more players where a single player acts in that region

act on cost based (marginal) prices. for providing transmission and/or

Eg. Generation and Trading layer are distribution service activities.

markets.

Payment between Regulated and Deregulated Layers

For members of deregulated layer,

- Receive services (trans and dist services) from members of regulated layer.

- Make payments for the electricity services (trans/ dist services) from members of

regulated layers.

Major Objectives of Deregulation

1. To eliminate drawbacks of natural monopolies by :

 creating a competitive environment in the generation, trading layers where

market power cannot be exercised.

 Creating a professional environment, where staff have professional

enthusiasm and strong interest in customer problems as well as the

interests of the company.

2. To establish a competition-based (unregulated) pricing environment (market)

for the generation and trading sectors

3. To regulate all expenditures, investments and hence tariffs of the transmission

and distribution layers on the behalf of the interests of the public by an

independent body, “Regulator”

4. To reduce the system losses and illicit utilization

5. To follow the modern technological developments and equipment

6. To establish a cost-based (regulated) tariff structure for the transmission,

distribution and retail activities.

7. To reduce the over-employment by imposing the cost-based tariff structure

and regulation on tariff.

Establishment of competition based market environment for generation,

transmission, distribution and retail services where;

 Cheap, reliable, high-quality, pollution-free energy is provided.

 Customers above a certain level of consumption, classified as “eligible”are

given the right of choosing their suppliers.

Stages of Deregulation Programs

 Development of the legal framework for deregulation

 Establishment of an Independent Energy Regulatory Authority

 Unbundling of the activities and accounts of the resulting companies

 Implementation of a cost-based tariff for transmission and distribution services

 Development and implementation of market management (balancing and

settlement) software, related hardware and infrastructure

 Reduction of the dominance of the public owned monopolies by privatization

Results of Deregulation Programs

1. Increase in foreign and national private sector investment and trade

2. Improvement in

- service efficiency

- service quality

- system availability & reliability

3. Reduction in

- financial burden resulting from energy investment on public accounts

- environmental pollution

- energy prices

- system losses and illicit utilization

4. Political support and determination

5. Development of the legal and institutional framework

6. Establishment an Independent Regulated Authority (EMRA)

7. Design of market structure

8. Enlightening the market participants about the rules and developments

regularly and by correct information

9. Social remedies needed for the implementation of the deregulation program

10. Unbundling of the activities and accounts

11. Designing the regulations, not as a supervisor but as a participant

12. Restructuring of the generation and distribution companies

13. Development and implementation of market management (balancing and

settlement) software, related hardware and infrastructure

14. Development of a market governance mechanism

15. Implementation of a cost-based tariff for transmission and distribution services

16. Establishing an effective market structure for Eastern-Westrn Energy Trading

Corridor (Between Middle East, Caspian Sea and Europe)

17. Finalizing the privatization program

1.4 International Electricity Market
Market Opening

Market Opening Index is defined as

CEC
MO 
OC
Where

MO = market opening index

CEC = total annual consumption of Eligible Customer

OC = overall annual consumption

Market Opening Schedule in EU

The greater the opening, the greater the price reduction.

Effective Loss