Archive for the ‘Deregulaton’ Tag

Recipe for disaster in action

The following is an interview of ECCO president, Dr. Alex Papalexopoulos, Ph.D. as conducted by Michael Kaitantzidi and was Posted by Euro2Day: 07:50 – 07/11/11

The Greek version is found in http://www.euro2day.gr/specials/interviews/133/articles/645955/Article.aspx

The regulated prices for electricity and the de-linking between wholesale and retail prices retail price create serious problems and distortions in the market and do not foster the development of the retail markets and the energy sector of the economy.

These views, based on experience from many energy markets around the world, were advocated in an interview from the euro2day by Dr. Alex Papalexopoulos an internationally known expert in the field of energy market design and power systems.

He stresses that in the past decade, although the market in Greece was liberalized, competition has not worked. Policy makers accepted the deregulation of energy markets as a “necessary evil”, instead of as a policy vehicle for development, investments and introducing efficiencies in the energy sector of the economy. Dr. Papalexopoulos views the current efforts and initiatives of the Government of instituting reforms in the energy sector as very positive, although, he noted, the time for completing these changes is very limited.

Dr. Papalexopoulos founded ECCO International, a consulting and software company headquartered in San Francisco, California, in 1998. ECCO International currently offers specialized consulting services to governments, energy producers and Transmission System Operators on energy market design and implementation, settlements, market analysis, system operations and transmission operations.
Prior to 1998, Dr. Papalexopoulos worked as a Director of the Electricity Restructuring Group at the Pacific Gas and Electric Company in California where he was a key designer of the market and business rules and a technical lead for the implementation of the first competitive market in California. Currently Dr. Alex Papalexopoulos is heavily involved in the design and implementation of several energy markets around the world.

He is frequently visiting Greece, while his company has taken the lead on several projects to reform the energy sector in Greece.

The full text of the interview below.

Euro2Day – 1. In Greece the last 10 years policy makers implemented a market model that has not led to the liberalization of the energy sector. The only result was that the monopoly became an even bigger dominant player. In your opinion what is the optimal market mode for Greece?

ANSWER:

Dr. Alex Papalexopoulos – Each country should follow its own energy market architecture that is consistent with its own political, commercial and operational constraints. The market in Greece is a physical market contrary to the most markets in Europe which are financial markets. Clearly our market is characterized by a dominant player, the PPC, with a vertically integrated structure. After more than 10 years of actual operation of the Greek energy market it is clear that the evolution of the liberalization is at a very critical juncture. Competition has not developed as expected and the government now is called to solve very difficult structural problems in a very short amount of time. During the liberalization process of the past decade policy makers failed to see the liberalization of the energy markets as an opportunity to modernize the energy sector in general and the PPC in particular and to improve conditions for operational efficiency and investments, but they accepted it defensively as a “necessary evil” and a consequence of our participation in the European Union. The political cost dominated the debate putting aside as secondary the critical issues of efficiency, costs and investments. The key problems are a) the structural problems of the wholesale market and the lack of a level playing field, b) the vertical structure of PPC, c) the decoupling of the wholesale and retail markets, d) the lack of CO2 pricing and e) the RAE’s weak role in the market monitoring and enforcement. I believe that the major initiatives the current policy makers are in the process of implementing, in the context of EU market directives, have the potential to address the current market problems. These initiatives include a ) the separation of the PPC transmission assets, b) the coupling of the wholesale and retail markets to ensure that the wholesale prices are reflected in the retail rates and allow PPC to compete in an open market without the burden of rate cross subsidies, c) the harmonization of the wholesale market with EU directives and the development of a financial market, and d) the enhancement of the RAE’s role in enforcing market compliance.

Euro2Day – 2. Τhe last 10 months, and after pressure from the EU, the Government in coordination with PPC, has recommended a system of energy swaps as a way to reduce the dominant position of PPC. Do you believe that such a measure could lead to the opening of the market and foster the introduction of new players in the market?

ANSWER:

Dr. Alex Papalexopoulos – Energy swaps is a key economic measure, that if properly implemented, can increase the number of players in the domestic energy market and consequently lead to a more liberalized market with increased liquidity for the benefits of the consumers. Energy swaps have been implemented successfully in other markets and have achieved the desired effects. They are clearly a viable and equivalent alternative to the physical divestiture of assets. The desirable feature of energy swaps in the context of divesture is that it allows the sale of partial or full capacity of an asset(s) for a given period of time while the ownership of the asset(s) remains with the PPC in the long term. Physical divestiture of assets represents a drastic measure that may permanently separate the owner from the asset. Given the current economic conditions, such permanent measures should be exercised with extreme care, or should be avoided. As such, energy swaps are preferable than more drastic measures, and can achieve, based on actual operational experience, the desired results.

Euro2Day – 3. In a previous presentation you presented in Athens in 2008, you characterized as a “recipe for disaster” the de-linking of the retail market prices from the wholesale prices. We recognize that this model is not optimal. However, with this model PPC continued to make profits, with the exception of a period of very high oil prices, while the Greek consumer continued to enjoy low prices. How do you explain this phenomenon? Is it another case of Greek peculiarity?

ANSWER:

Dr. Alex Papalexopoulos – Indeed, international experience gives strong credence to the claim that the decoupling of the wholesale from the retail markets is a recipe for disaster in the long term. In Greece, as we discussed above, the wholesale market was liberalized (even with its “special” market rules and its structural problems), whereas retail rates were fully regulated. This decoupling does not allow the wholesale prices to be reflected in the retail rates, a volatile condition that puts PPC at risk. Such regulated prices should be the exception and not the rule in a competitive environment. Regulated prices for all customers, not only for the household customers, might prevent competitive energy markets to develop. Furthermore, they inhibit in a very serious manner the development of demand response, a very crucial market product that has proven to have substantial benefits for the customers and the environment. Under the current structure, PPC continued to have profits because the retail market has not developed, condition that cannot continue forever. As other suppliers enter the market, they can take advantage of the PPC’s rate cross-subsidies, which some of the them are below costs, to lure the best customers away from PPC. Such a condition is very undesirable because it does not allow PPC to compete fairly. Under this condition, the operational risk of PPC can increase substantially with adverse impact not only for PPC but for the entire market. The reason is that, based on what we have observed from actual operational energy markets, if market conditions substantially weaken the dominant player, the entire energy market suffers.

Euro2Day – 4. One of the arguments that has been used by some against the liberalization of the energy markets is that it will increase the prices for the consumer. Do you agree?

ANSWER:

Dr. Alex Papalexopoulos – This is not true. International experience has shown that the opening of the energy markets worldwide and assuming that a market is working properly, leads to better services and products and more options for the customers at reduced costs in the long term. At times, the prices may go higher in the short term, as they may reflect a transition to a competitive environment with less subsidies and structural problems. But in the long term, the prices will stabilize to competitive levels. Further, competitive markets allow private investments to improve the infrastructure and the generation mix; such investments are not forthcoming by the governments under current tied budgets but are so essential to secure generation supply, improve the infrastructure and implement policies for the betterment of the environment. These capital intensive investments are executed at the risk of the investors in a liberalized market and not the ratepayers which is the case in a fully-regulated regime.

Euro2Day – 5. Over the last several years, the role of Renewable Energy Sources in the energy mix of many countries has increased. In Greece, as in other countries, we have instituted a system of subsidies (feed in tariffs) as a way of promoting RES in the system. Do you share the belief, which is also currently been advocated in the EU, that the high feed in tariffs should be revised downwards so that the consumer is not unfairly dis-advantaged. In addition, we have the issue that the cost of the RES investments, including solar investments, continually are being reduced. How can we reconcile, in your opinion, the viability of the RES investments which were made in a period of high investment costs with the lower market prices which are expected in the near future.

ANSWER:

Dr. Alex Papalexopoulos – The feed in tariff system has been a successful way in global markets to allow the Renewable Energy Source (RES) industry to get established and compete with the conventional fossil fuel industries. The level of the tariffs depends on the specific circumstances, political realities and commercial constraints of each country. Obviously, the higher the level, the greater the incentive for higher investments in RES resources. At the same time, the higher the rate level, the higher the costs that are borne by the consumers. Further, as the level of RES penetration increases, the operational and the integration problems with the grid increase. Therefore, the integration costs increase as well. I believe that it is essential to allow high feed in tariffs initially to ensure the RES investment are profitable and competitive with respect to conventional fossil fuel resources. This is especially important, when the costs of CO2 and other emissions is not included in the costs of conventional fossil fuel based plants in clearing the wholesale energy markets. This is an important way to levelize the playing field. Therefore, high feed in tariffs are critical for the RES industry as it competes with incumbent fossil fuels at a time when it is lowering its own costs and while trying to reach scale.

As the market conditions mature, I believe, the feed in tariffs should be reduced appropriately. Excessive feed in tariffs may create bubbles and market distortions that will increase consumers costs. In the long run the incumbency advantages of fossil fuels will dissipate as new competitors of the RES industry reach scale and costs are reduced. So it makes sense to gradually reduce the tariffs. I believe that wind and solar will be able to compete on cost in the future, but asking them to do so right out of the starting gate is not only unfair, but counterproductive. Till these conditions materialize, we need urgently to embrace ways to incent renewable energy.