Forward Hedging and Vertical Integration in Electricity Markets.

This paper analyzes the interactions between vertical integration and (wholesale) spot, forward and retail markets in risk management. We develop an equilibrium model that fits electricity markets well. We point out that vertical integration and forward hedging are two separate levers for demand and spot price risk diversification. We show that they are imperfect substitutes as to their impact on retail prices and agents’ utility because the asymmetry between upstream and downstream segments. While agents always use the forward market, vertical integration may not arise. In addition, in presence of highly risk averse downstream agents, vertical integration may be a better way to diversify risk than spot, forward and retail mar kets. We illustrate our analysis with data from the French electricity market.producers; hedging; forward; spot; vertical integration; retailers; electricity markets;

The gas chain: influence of its specificities on the liberalisation process. NBB Working Papers. No. 122, 16 November 2007

Like other network industries, the European gas supply industry has been liberalised, along the lines of what has been done in the United Kingdom and the United States, by opening up to competition the upstream and downstream segments of essential transmission infrastructure. The aim of this first working paper is to draw attention to some of the stakes in the liberalisation of the gas market whose functioning cannot disregard the network infrastructure required to bring this fuel to the consumer, a feature it shares with the electricity market. However, gas also has the specific feature of being a primary energy source that must be transported from its point of extraction. Consequently, opening the upstream supply segment of the market to competition is not so obvious in the European context, because, contrary to the examples of the North American and British gas markets, these supply channels are largely in the hands of external suppliers and thus fall outside the scope of EU legislation on the liberalisation and organisation of the internal market in gas. Competition on the downstream gas supply segment must also adapt to the constraints imposed by access to the grid infrastructure, which, in the case of gas in Europe, goes hand in hand with the constraint of dependence on external suppliers. Hence the opening to competition of upstream and downstream markets is not "synchronous", a discrepancy which can weaken the impact of liberalisation. Moreover, the separation of activities necessary for ensuring free competition in some segments of the market is coupled with major changes in the way the gas chain operates, with the appearance of new markets, new price mechanisms and new intermediaries. Starting out from a situation where gas supply was in the hands of vertically-integrated operators, the new regulatory framework that has been set up must, on the one hand, ensure that competitive forces can be given free rein, and, on the other hand, that free and fair competition helps the gas chain to operate coherently, at lower cost and in the interests of consumers, for whom the stakes are high as natural gas is an important input for many industrial manufacturing processes, even a "commodity" almost of basic necessity

The single European electricity market: A long road to convergence

In the context of a first Working Paper the authors argued that electricity has a number of characteristics that set it apart from other commodities. It was demonstrated that some of these characteristics might complicate the deregulation process. This paper analyses the ongoing deregulation process in the European electricity sector and attempts to establish whether these difficulties can more readily be solved at European level. It would appear that some problems, e.g. economies of scale in electricity generation, have less of an impact at European level than within smaller national markets. However, a number of difficulties have to be overcome before a unified European electricity market can become a reality. These include the limited interconnection capacities between Member States. The European Commission has taken steps to improve the situation, for example by offering financial support for investments and promoting the development of regional markets as an interim measure ultimately leading to a fully integrated market. Apart from the difficulties related to electricity generation and transmission there are also exogenous factors that influence the ongoing deregulation process, e.g. the implementation of the Kyoto protocol and the dramatic increases in primary fuel prices. This paper argues that a consistent, stable and uniform European regulatory framework must be put in place if the impact of these difficulties is to be minimised.Electricity deregulation

Cooperation in manure-based biogas production networks: An agent-based modeling approach

Biogas production from manure has been proposed as a partial solution to energy and environmental concerns. However, manure markets face distortions caused by considerable unbalance between supply and demand and environmental regulations imposed for soil and water protection. Such market distortions influence the cooperation between animal farmers, biogas producers and arable land owners causing fluctuations in manure prices paid (or incurred) by animal farmers. This paper adopts an agent-based modeling approach to investigate the interactions between manure suppliers, i.e., animal farmers, and biogas producers in an industrial symbiosis case example consisting of 19 municipalities in the Overijssel region (eastern Netherlands). To find the manure price for successful cooperation schemes, we measure the impact of manure discharge cost, dimension and dispersion of animal farms, incentives provided by the government for bioenergy production, and the investment costs of biogas plants for different scales on the economic returns for both actor types and favorable market conditions. Findings show that manure exchange prices may vary between −3.33 €/t manure (i.e., animal farmer pays to biogas producer) and 7.03 €/t manure (i.e., biogas producer pays to animal farmer) and thanks to cooperation, actors can create a total economic value added between 3.73 €/t manure and 39.37 €/t manure. Hence, there are cases in which animal farmers can profitably be paid, but the presence of a supply surplus not met by demand provides an advantage to arable land owners and biogas producers in the price contracting phase in the current situation in the Netherlands

Restructuring Russia's Electricity Sector: Towards Effective Competition or Faux Liberalisation?

Russia in 2003 embarked on the restructuring of its electricity sector. The reform is intended to introduce competition into electricity production and supply, leaving dispatch, transmission and distribution as regulated natural monopolies with non-discriminatory third-party access to the networks. The ultimate aim of the reform is to create conditions that will encourage both investment in new capacity and greater efficiency of both production and consumption. The overall approach embodied in the reform is promising. However, there remains a serious risk that its aims could be subverted by special-interest lobbying during the lengthy implementation phase. If the reform is to succeed, the marketised segments of the sector must be characterised by real competition based on economically meaningful prices. There are two dangers here. The first is that private-sector interests will secure strategic holdings that allow them to exercise market power or even local monopoly power. The second is that, even after the wholesale market is liberalised, the state will retain considerable capacity to hold down electricity prices, if it so chooses, and it could do so in ways that unduly distort the signals the market is sending and deter the very investment that the reform is meant to attract

Regulation, competition, and liberalization

In many countries throughout the world, regulators are struggling to determine whether and how to introduce competition into regulated industries. This essay examines the complexities involved in the liberalization process. While stressing the importance of case-specific analyses, this essay distinguishes liberalization policies that generally are pro-competitive from corresponding anti-competitive liberalization policies

Liberalisation of network industries : Is the electricity sector an exception to the rule?

For quite a long time, network industries used to be regarded as (natural) monopolies. This was due to these industries having some special characteristics. Network externalities and economies of scale in particular justified the (natural) monopoly thesis. Recently, however, a trend towards deregulation of such industries has been observed. This trend started with the successful introduction of competition in the telecommunications sector. The main reason behind this success is that the economies of scale have disappeared as a result of emerging new technologies. The successful deregulation in telecommunications is in line with micro-economic theory, which predicts an increase in efficiency and lower prices when markets are opened up to competition. The success in the telecommunications sector is often used as an argument for opening up other network industries to competition as well. In this paper we analyse whether this reasoning can be transposed to the electricity sector. It is argued that the two sectors, electricity and telecommunications, are similar in that they are both network industries which used to be characterised by economies of scale, and that technological progress might have put an end to this scale effect. There are however certain differences. Firstly, technological progress on the supply side was accompanied by a strong growth in demand in the telecommunications sector. This demand side effect is absent in electricity. Moreover, due to physical characteristics, the electricity sector seems to be more complicated: in order to introduce competition in the sector, it has to be split up into subsectors (production, transmission, distribution and supply). Competition is introduced in production and supply, transmission and distribution remain monopolies. This splitting up creates a new kind of costs, the so-called transaction costs. The paper is centered around two issues: (a) are the basic assumptions behind the theoretical model of the perfectly free market met in the deregulated subsectors? and (b) do the transaction costs (partly) offset possible price decreases in competitive segments ? There is no hard evidence that the hypotheses behind the theoretical model are met in the electricity sector, and there are strong indications that these transaction costs might be substantial. Moreover, in addition to the deregulation process, the electricity sector is also subject to other changes such as the internalisation of externalities (see the Kyoto protocol) and the debate on nuclear energy. These elements could exert an upward pressure on prices. Since electricity is ubiquitous, the deregulation process should be closely monitored.Welfare economics; market structure and pricing; organizational behaviour, transaction costs, property rights, Electric Utilities, Telecommunications.

The gas chain : influence of its specificities on the liberalisation process

Like other network industries, the European gas supply industry has been liberalised, along the lines of what has been done in the United Kingdom and the United States, by opening up to competition the upstream and downstream segments of essential transmission infrastructure. The aim of this first working paper is to draw attention to some of the stakes in the liberalisation of the gas market whose functioning cannot disregard the network infrastructure required to bring this fuel to the consumer, a feature it shares with the electricity market. However, gas also has the specific feature of being a primary energy source that must be transported from its point of extraction. Consequently, opening the upstream supply segment of the market to competition is not so obvious in the European context, because, contrary to the examples of the North American and British gas markets, these supply channels are largely in the hands of external suppliers and thus fall outside the scope of EU legislation on the liberalisation and organisation of the internal market in gas. Competition on the downstream gas supply segment must also adapt to the constraints imposed by access to the grid infrastructure, which, in the case of gas in Europe, goes hand in hand with the constraint of dependence on external suppliers. Hence the opening to competition of upstream and downstream markets is not "synchronous", a discrepancy which can weaken the impact of liberalisation. Moreover, the separation of activities necessary for ensuring free competition in some segments of the market is coupled with major changes in the way the gas chain operates, with the appearance of new markets, new price mechanisms and new intermediaries. Starting out from a situation where gas supply was in the hands of vertically-integrated operators, the new regulatory framework that has been set up must, on the one hand, ensure that competitive forces can be given free rein, and, on the other hand, that free and fair competition helps the gas chain to operate coherently, at lower cost and in the interests of consumers, for whom the stakes are high as natural gas is an important input for many industrial manufacturing processes, even a "commodity" almost of basic necessity.network industries, gas industry, gas utility, liberalisation, regulation, deregulation, market structure, European gas supply, oligopoly, OPEG

Methodology Of Assessing Investment Attractiveness Of Ukrainian Gas Producers

The development of a methodology for assessing investment attractiveness of businesses of Ukrainian gas production industry that is presented in the form of a generalized algorithm reflects the conceptual model of research. The scope of research is methodological approaches to assessing investment attractiveness of businesses. The purpose of this study is to recommend methodology for assessing the investment attractiveness of Ukrainian gas producers. The methodology for assessing investment attractiveness of gas producers can be used to determine the investment attractiveness of an individual business, evaluate financial position in the course of privatization and development of measures for rehabilitation or liquidation of a business, as well as to carry out a financial analysis at the initiative of both the business itself and investors who consider investment in production. The paper assesses performance of the leading gas producers in accordance with the individual life cycle stages of the business. The authors propose management measures to ramp up natural gas production in Ukraine. The amount of investment in the gas production industry required to achieve the estimated gas production figures has been assessed and the overriding priorities for the development of Ukrainian gas production industry have been established

The Need for Transparency in Commodity and Commodity Derivatives Markets. ECMI Research Report No. 3, 15 December 2008

This paper argues that transparency-boosting measures specifically tailored to commodity and commodity derivatives markets are much needed. In particular, encouraging the creation of a clearing infrastructure for OTC commodity and commodity derivatives markets would be desirable. Moreover, EU regulators should consider setting up a new, more effective market abuse regime aimed at preventing manipulation in both the physical and financial commodities markets. Finally, in cooperation with the G20, EU authorities should consider the creation of an International Commodity Agency to increase transparency and restore confidence in international physical markets for commodities. The paper is structured as follows: Section 2 briefly discusses the fundamentals of commodity spot and futures markets. Section 3 presents both physical commodity markets and commodity derivative markets in their usual breakdown categories: agriculture, metals and energy. Section 4 discusses the regulations in the EU and the US concerning commodity derivatives. Section 5 advances certain policy proposals and the last section draws the conclusions