Electricity Market Reform in Germany as an Insight to Japan s Future Reform

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1 Electricity Market Reform in Germany as an Insight to Japan s Future Reform PricewaterhouseCoopers AG

2 Germany s Utilities & Regulation group Who we are Consultancy services to energy and other utility companies since consultants Industries: electricity, gas, telecommunications, waste and water, public transportation Products: strategic consulting, organisational consulting (unbundling), pricing, regulation, regulatory management, benchmarking and efficiency Regulation: separation of accounts, third-party access, network tariffs, incentive regulation Main focus in energy consultancy services - Consultancy services along the whole supply chain - REGULIERUNGSDATENPOOL (benchmarking project with 450 German DSOs)

3 Klaus Gerdes Partner Relevant Experience Key experience: Regulation Network cost determination Regulatory due diligence Industry: Energy (electricity and gas) Utilities Telecommunication Short CV Klaus Gerdes is the Advisory Industry Leader for Energy and head of the Utilities & Regulation division of Finance & Regulation. He has more than 20 years of relevant experience working with energy and telecommunication companies as their trusted advisor. He has gained in-depth knowledge in the fields of product calculation (network infrastructure), regulatory management and the design and implementation of cost accounting tools. With the start-up of German energy regulation Klaus used his extensive regulatory know-how to serve various clients in the energy industry. Within, he is currently responsible for energy-related regulatory consultancy services in Germany and Europe. Relevant project experience Advisor to a EU gas major on: the future development of the North West European tarification systems several pipeline infrastructure projects and the developments of the regulatory regime on EU- and National level for several TSOs Advisor to 260 municipal utilities in Germany on regulatory management Lead advisor to a large German TSO on the calculation of the business case to be submitted to the German regulator Provided specialist advice to Deutsche Telekom AG on various regulatory and cost calculation projects Responsible for data pools of German DSOs for efficiency benchmarking (REGULIERUNGSDATENPOOL and Benchmarking transparency) Trainer on regulation for the Turkish regulatory authority

4 Jan-Frederik Zöckler Director Relevant Experience Key experience: Regulation Network cost determination Regulatory due diligence Network concessions Industry: Energy (electricity and gas) Utilities Short CV Jan Zöckler is Director in the Advisory team of. He is responsible for energy regulation in the Finance & Regulation practice in Germany. For more than nine years now, since regulated market access was introduced in Germany, he has supported energy companies in fulfilling the regulatory requirements. Jan focuses on incentive regulation and its impact on the organizational and legal unbundling of utilities. Jan has supported both DSO and TSO in negotiations with the German regulatory authorities. He is project leader and contact person for ACER, the Agency for the Cooperation of Energy Regulators in the European Union, and works on several assignments for BDEW, a German association for utilities. Relevant project experience Advisor to a German TSO: network tariff application, incentive regulation and negotiations with the regulator Advisor in the application of investment budgets Advisor to several DSOs in the network tariff approval Advisor to several German DSOs on forecasting under incentive regulation including an optimized investment plan Advisor to several DSO on all regulatory affairs Supporting data pools of German DSOs for efficiency benchmarking (REGULIERUNGSDATENPOOL and Benchmarking transparency) Speaker on conferences of German utilities associations Trainer on regulation for different TSOs and DSOs, a Chinese power producer and the Turkish regulatory authority Buy-Side Due Diligence on the sale of 50Hertz, Thyssengas, ENI/TENP

5 Agenda Page 1 History of market liberalisation 1 2 Status of the German electricity market Unbundling Network Regulation 13 3 Energiewende - Energy transition Energy transition goals Balancing of fluctuating supply Costs and challenges of the "Energy transition" 28 4 Selected Business Models (BM) 33

6 Section 1 History of market liberalisation 1

7 Section 1 History of market liberalisation EU is pushing the internal energy market to enhance competition 1996/1998 First EU directives governing the internal energy market nd package of EU energy legislation ( acceleration directives ) rd EU energy package of legislation for the internal energy market Since 1996 the European energy market has seen various legislative measures adopted to enhance competition Major means for achieving competition: regulation of formerly monopolistic energy industries Core regulatory instruments: - Unbundling of monopolistic activities - Non-discriminatory network access - Regulation of network tariffs 3 rd energy package with many new rules, especially on unbundling 2

8 Section 1 History of market liberalisation Historical development in Germany Phase 1: till 1998 Utilities operated in a protected monopoly; no third-party access, no competition in generating and supply Phase 2: Loss of monopoly protection Unbundling of accounts between network (transmission, distribution) and competitive areas and third-party network access: basis for competition Phase 3: 2005-today Implementation of national regulatory agencies (e.g. BNetzA), ex-ante approval for network tariffs Implementation of sophisticated unbundling regulations 3

9 Section 1 History of market liberalisation Steady tendency towards a common European approach concerning regulatory environment In order to reach European energy goals (e.g. single European market and promotion of cross border transports) a common approach towards major energy issues can be noticed on European level Organizations and public authorities are bundled at European level - ENTSO-E & ENTSO-G (group of electricity & gas TSOs ) - ACER (agency for the cooperation of national regulatory authorities, NRAs) - EU-Commission Energy strategies and legislation are increasingly developed on European level, e.g. ACER has developed a list of projects of common interest (PCIs) 4

10 Section 2 Status of the German electricity market 5

11 Section 2 Status of the German electricity market The new energy market in Germany Still in transition Generation Competition, but regulated through EEG (Renewable Energy Act): fixed price electricity purchase Wholesale and Trading Competition, European Energy Exchange (EEX), OTC Regulation - Natural monopoly. Network tariffs and third-party access are regulated, incentive regulation for network tariffs (revenue-cap) Transmission and Distribution Supply Competition, possibility to choose and change electricity provider. Default supplier has to provide every household with basic tariff (not regulated) 6

12 Section 2 Status of the German electricity market Structure of the German electricity market Independent new suppliers (e.g. Naturstrom, TelDaFax) Local Major Local Regional E.ON, RWE, Vattenfall, EnBW e.g. EWE, MVV Municipal utilities Net electricity consumption of 522 TWh Electricity supply to end customers 237 TWh=45% 140 TWh = 27% 120 TWh=23% 25 TWh=5% Industry Private households Trade commerce, public institutions Others Quelle: BDEW, Bundesverband der Energie- und Wasserwirtschaft e.v.,

13 Section 2.1 Unbundling 8

14 Section 2.1 Unbundling Transmission system operator (TSO) electricity 4 relevant TSOs in Germany Control energy Volatility of the grid due to the imbalance between generated and used electric power Ensures supply through near-term power adjustment in power stations, which can be regulated (e.g. pumped storage hydro power station) Balancing group adjustment Country is separated into four balancing groups Recognize variations between feed-in/ sourced energy and actual demand Partial accounting of required control energy 9

15 Section 2.1 Unbundling Unbundling of TSOs Big impact on TSOs and German electricity market structure At TSO level, three approaches for implementing unbundling requirements are to be established: Integrated company stays network owner, but strict rules are applied Generation Integrated company stays network owner but has nearly no power over the networks Generation Integrated company separ ates the networks concerning ownership Generation Independent Transmission Operator (ITO) Independent Systems Operator (ISO) Full Ownership Un-bundling (FOU) Sales Sales Sales 10

16 Section 2.1 Unbundling Unbundling of DSOs Four different areas, two of them for every DSO Network operators provide access to their networks to third parties. This includes associated supply organizations and other network users. Suppliers/associated supply organizations deliver natural gas or electricity to end customers. German Energy Act EnWG (reflecting 3 rd energy package) Unbundling of accounts Separate accounts for network / supply Separate annual reports Aim: avoiding crosssubsidies Department unbundling Network operators may not pass on commercially sensitive information to other company departments. vertically integrated suppliers of all sizes Management unbundl. Clear assignment of personnel Operative independence Decision-making powers Legal unbundling Network operator as separate legal entity Separate corporate design de minimis-/ corporate-clause (more than customers) 11

17 Section 2.1 Unbundling Distribution System Operator (DSO) electricity Nearly 1000 DSOs in Germany Energy Distribution Maintaining electricity grids in low and middle tension, partly higher tension Responsible for distribution to consumer Pay a concession levy to communities for using public space running their grid Characteristics They can belong to local or regional power supply companies (municipal utilities) or to a major energy company Some communities plan a rebuy of electricity and gas grid ( Remunicipalisation ) 12

18 Section 2.2 Network Regulation 13

19 Section 2.2 Network Regulation Within one regulatory period, the revenues of TSOs and DSOs depend significantly on the cost base Incentive regulation was introduced in 2009 Revenue cap determined for one regulatory period (five years) Costs of the base year determine the starting point for revenue cap (see below) Benchmarking of the DSOs and TSOs; inefficiencies to be decreased till the end of second regulatory period Adjustments of revenue cap within the regulatory period are limited (according to regulatory formula, see below) Base year for 2 nd regulatory period (from 2014 until 2018) is 2011 Power Base year 1. period Base year 2. period Base year 3. period st Period 2 nd Period 14

20 Section 2.2 Network Regulation The cost base reflects both expense-equivalent and imputed costs and revenues Network costs/ network revenue = + + Expenseequivalent costs Operating costs Cost of debt Other taxes + - Other revenue - Imputed costs Depreciation Amortisation of construction cost subsidies Return on equity + Trade tax The costs are determined in accordance with the requirements of the network tariff regulations The determination is based on the respective (audited) accounts for transmission or distribution The expense-equivalent operating costs include, inter alia, the costs for materials, personnel and third-party services Any other revenue from the network business (not network tariffs) is to be accounted for as a reduction of cost Some cost positions (e.g. sponsoring) are not accepted by the regulatory authority if it considers them to be not necessary for operation 15

21 EO Section 2.2 Network Regulation Revenue-cap Formula according to Appendix 1 ARegV Allocation factor Revenue cap t KA Consumer price index dnb, t Productivity factor VPI 0 Controllable costs (KA b ) Expansion factor Quality element VPIt KAvnb Vt KAb PF,0 ( 1 ),0 t EFt Qt ( VKt VK0) St Temporarily non-controllable costs (KA vnb ) Permanently non-controllable costs (KA dnb ) Volatile costs Regulatory account (starting in 2 nd period) Inefficient costs Efficient costs External costs Derived by benchmarking 16

22 Section 3 Energiewende - Energy transition 17

23 Section 3.1 Energy transition goals 18

24 Section 3.1 Energy transition goals Exit of Nuclear Power Generation in Germany In consequence of nuclear disaster in Japan On chancellor Angela Merkel announced an atom moratorium (for 3 months), although a year before a lifetime extension was decided. Shutdown 2011 Shutdown * On the German Federal Parliament and Federal Council passed a resolution to switch-off all nuclear power plants till Some nuclear power plants had been switched-off immediately. 19

25 Section 3.1 Energy transition goals Energy transition The changing of energy supply Goals: 2022: Latest German nuclear power plants switched off 2050: CO2 emission reduction about 80% - 90% (compared to 1990) Increase of renewable energy share in gross energy use up to 60% and in electricity consumption up to 80%. Reduction of primary energy consumption about 50% and electricity consumption about 25% (compared to 2008) Decrease in energy consumption in transport sector about 40% (compared to 2005) Doubling the annual rate of building refurbishment to 2% Prioritization of expansion of electricity grids and research on storage technologies. 20

26 Section 3.1 Energy transition goals Renewables generated around 23% of gross electricity in 2013 Gross electricity generation 2012: 617 billion kilowatt-hours Coal 19,7% Natural gas 10,5% 5,2% Fuel oil, pumped storage and other Renewables 7,9% Wind Nuclear phase out decision in 2011 reduced capacity instantly by 8.4 GW Renewables & coal (esp. lignite) fill nuclear gap 23,4% 6,8% Biomass Renewables (excluding hydro) reached 72 GW installed capacity 25,8% Lignite 15,4% Nuclear energy Sources: BDEW, AG Energiebilanzen, status: 01/2014 3,4% 4,5% 0,8% Water Photovoltaic Municipal waste Natural gas hardly profitable because of low utilisation rates, cheap coal, low carbon prices and high natural gas prices 21

27 Section 3.1 Energy transition goals Renewable Energy Act (EEG) Principle Regulated by EEG: Fixed price electricity purchase for 20 years Favoured feed-in of electricity generated be renewable energies Obligation to take and pay delivery Obligation to connect and expand the grid for TSO and DSO ct/kwh Development of EEG-Surcharge (Forecast) TSO: upper limit TSO: lower limit EEG-Surcharge Gap between expenses and revenues as a result of funding electricity generation out of renewable energies (RE) The marketing of RE is done by TSO s at the European Energy Exchange (if not direct marketed by producer) Reductions for businesses with high energy consumption because of competitiveness (international), but also evokes competitive distortion (national) EU state aid investigation as a result bottom limit was increased 22

28 Section 3.2 Balancing of fluctuating supply 23

29 Section 3.2 Balancing of fluctuating supply System integration & volatility of renewables as a major challenge Installed generation capacity in Germany (GW) Others 2.9 GW 200 Hydropower 4.9 GW Biomass 9.4 GW 69 Solar Energy 65.0 GW 100 Wind Offshore 28.0 GW Wind Onshore 64.5 GW Conventional capacity Source: BNetzA 2011; Research 2012 Renewable capacity EEG Reformation 24

30 Section 3.2 Balancing of fluctuating supply Development plan for the grid Developed by TSOs, controlled by BNetzA Due to renewable energy expansion much energy is volatile and not secured Before energy transition the most power stations were located in the South and near built-up areas These days the most wind turbines (on- and off-shore) are built-up in the North New power lines have to be built to transport the electricity to the South 25

31 Section 3.2 Balancing of fluctuating supply Problem-solving approach: Balancing of fluctuating supply and load driven residual demand Postulation: The further penetration of decentralized... renewable energy supply has to be balanced and synchronized grid extension highly flexible generation capacity storage demand side management Secured Back-up-Capacity and renewable generation have to be linked 26

32 Section 3.2 Balancing of fluctuating supply Conventional thermal generation capacity How much secured generation capacity will be needed? Secured Power Generation[GW] GW Demand: 83 GW of secured capacity 78 GW 71 GW 5 GW Gap 12 GW Gap Demand for additional secured capacity could be 12 GW until 2032 (5 GW until 2022) (Derived) Demand for Power Plants in 2032: 35 CCGTs (400 MW) or 13 Lignite Power Plants (1.000 MW) Source: BNetzA 2011, Dena 2010, Research 2012 Due to insecure market environment: Missing-Money Problem! Currently, there is no capacity mechanism in place Until 2017, BNetzA is allowed to prohibit the shut down of power plants (strategic reserve) 27

33 Section 3.3 Costs and challenges of the "Energy transition" 28

34 Section 3.3 Costs and challenges of the "Energy transition" Power price differentials for industrial customers in Germany between 2010 and 2013 Procurement cost for power in 2010 ( ct/kwh) Procurement cost for power in 2013 ( ct/kwh) ct/kwh Metering Electricity Tax CHP Surcharge EEG Surcharge Concession Fee Capacity Price (Grid) Grid Usage Charge Electricity Commodity Price ct/kwh Metering Electricity Tax Offshore Liability Surcharge 19 NEV Levy CHP Surcharge EEG Surcharge Concession Fee Capacity Price (Grid) Grid Usage Charge Electricity Commodity Price Source: Research Composition of power prices in Ct/kWh for an industrial customer with a demand of 15 GWh/Year and 5434 full load hours 29

35 Section 3.3 Costs and challenges of the "Energy transition" Prices of electricity for households and industry in comparison: Germany already at a disadvantage in comparison to other countries Industry ( ct/kwh) electricity consumption 500 MWh/a MWh/a , , , ,2 4.5 USA Chile Mexico NZ Japan Germany Norway Poland France Great Britan Italy Portugal Denmark Private household ( ct/kwh) electricity consumption kwh/a kwh/a ,3 14,5 7,1 18,1 21,6 26,5 1) USA Chile Mexico NZ Japan Germany Norway Poland France Great Britan Italy Portugal Denmark 1) BDO International Business Compass for Germany: 29,36 Cent in 2013 Source: BDEW/ IEA (2012) 30

36 Section 3.3 Costs and challenges of the "Energy transition" Horizontal Integration by re-constructing the unbundled former value chain via digital intelligence Supply/ Generation Flexibility of the power generation fleet Current Situation: Miss Match Energy System... needs a Smart Balancing and a Load Monitoring done by a so called Balancing Agent (new market role) Load flow will become bi-directional Demand/ Load Demand-Side- Management needs innovation into smart markets/smart energy systems/ smart solutions (needs digital intelligence) new service providers 31

37 Section 3.3 Costs and challenges of the "Energy transition" Key issues of the Renewable Energy Act (EEG) currently discussed in Germany Technology-dependent feed-in tariffs 1EURO Electricity prices for customers increase while exchange prices decrease Nuclear phase-out & devaluation of conventional power plants create capacity gap Investments in grids have to be smartly regulated and smart grids and smart markets evolved 32

38 Section 4 Selected Business Models (BM) 33

39 Section 4 Selected Business Models (BM) BM 1 The Aggregator / Marketer Examples: Clean Energy Sourcing, Energy2Market, Green Energy Desk How does it work? What skills are required? Small scale Grey power (Small scale) Renewables Sufficient expertise in retail / wholesale markets plus commodity trading Access to wholesale markets & commodity exchanges Sales & trading operation Aggregator / Marketer Is it profitable? Private Households Commodity exchange SMEs & Industry Yes, but first mover advantage is key. In DE >30 Cos operate in this market. Initially, the market particpants have been start-ups but corporates have followed or bought in. 34

40 Section 4 Selected Business Models (BM) BM 2 Project developer Examples: WPD, juwi, EnBW & Prokon How does it work? What skills are required? Wind farms Photovoltaic Other In-depth project management expertise Sufficient project financing capabilities Project structuring know how Sales operation (Strategic partners) Project developer Is it profitable? Private investors Co Utilities, Stadtwerke SMEs & Industry Yes, especially if first mover advantage can be achieved & brand be established. Experience in DE has been mixed. Some new entrants (Prokon) have gone out of business & failed big time. 35

41 Section 4 Selected Business Models (BM) BM 3 Gas & electricity wholesaler & retailer Examples: Teldafax & Goldgas How does it work? What skills are required? Exchange / OTC No supply portfolio No LTSCs Sufficient experience in retail markets, wholesale & commodity trading Access to wholesale markets & commodity exchanges Sales & trading operation G & E wholesaler / retailer Is it profitable? Private Households Co Wholesalers & Stadtwerke SMEs & Industry Yes, but only in the medium term and if first mover advantage can be achieved. Experience in DE has been mixed. Some new entrants (Teldafax, Goldgas) have failed in a spectacular way. 36

42 Thank you for your attention! May 2014 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft. All rights reserved. In this document, refers to PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, which is a member firm of PricewaterhouseCoopers International Limited (IL). Each member firm of IL is a separate and independent legal entity.