IEFE Milan, May 13, 2013 Challenges in European Energy Policy: Transparency

Transcription

1 IEFE Milan, May 13, 2013 Challenges in European Energy Policy: Transparency Nils-Henrik M. von der Fehr

2 New Transparency Regulation Submission and publication of data (formerly FEDT) collection by TSOs of minimum common set of data on generation, transportation and consumption of electricity to be made available to market participants by ENTSO availability of such data is indispensable for market participants' ability to take efficient production, consumption and trading decisions (EU, 2013) Market integrity and transparency (REMIT) collection by ACER of information on transactions in wholesale markets ensure that consumers and other market participants can have confidence in the integrity of electricity and gas markets, that prices set on wholesale energy markets reflect a fair and competitive interplay between supply and demand, and that no profits can be drawn from market abuse (EU, 2011) May 13, 2013 von der Fehr: Transparency 2

3 Generation: Examples Unavailability (a) The planned unavailability of 100 MW or more of a generation unit including changes of 100 MW or more in the planned unavailability of that generation unit, expected to last for at least one market time unit up to three years ahead (b) Changes of 100 MW or more in actual availability of a generation unit, expected to last for at least one market time unit The information laid down in (a)... shall be published as soon as possible, but no later than one hour after the decision regarding the planned unavailability is made The information laid down in (b)... shall be published as soon as possible but no later than one hour after the change in actual availability Actual generation (a) output (MW) per market time unit and per generation unit of 100 MW or more installed generation capacity; (b) aggregated generation output per market time unit and per production type; actual or estimated wind and solar power generation (MW) in each bidding zone per market time unit (c) aggregated weekly average filling rate of all water reservoir and hydro storage plants (MWh) per bidding zone including the figure for the same week of the previous year the information laid down (a) shall be published five days after the operational period the information laid down in (b) and (c) shall be published no later than one hour after the operational period the information laid down in d) shall be published on the third working day following the week to which the information relates May 13, 2013 von der Fehr: Transparency 3

4 Transmission: Examples (a) the planned unavailability, including changes in the planned unavailability of interconnections and in the transmission grid that reduce cross zonal capacities between bidding zones by 100 MW or more during at least one market time (b) changes in the actual availability of interconnections and in the transmission grid that reduce cross zonal capacities between bidding zones by 100 MW or more during at least one market time unit (c) changes in the actual availability of off-shore grid infrastructure that reduce wind power feed-in by 100 MW or more during at least one market time unit The information laid down in point (a) shall be published as soon as possible, but no later than one hour after the decision regarding the planned unavailability is made. The information laid down in points (b) and (c) shall be published as soon as possible but no later than one hour after the change in actual availability. May 13, 2013 von der Fehr: Transparency 4

5 Trade: Examples Data collection Market participants... shall provide the Agency with a record of wholesale energy market transactions, including orders to trade. The information reported shall include the precise identification of the wholesale energy products bought and sold, the price and quantity agreed, the dates and times of execution, the parties to the transaction and the beneficiaries of the transaction and any other relevant information. Registration of market participants Market participants entering into transactions which are required to be reported to the Agency... shall register with the national regulatory authority in the Member State in which they are established or resident or, if they are not established or resident in the Union, in a Member State in which they are active. May 13, 2013 von der Fehr: Transparency 5

6 Summary More information not always better individual decision makers value information to the extent that it improves on the quality of their decisions; irrelevant information is of no value, and can indeed be detrimental to good decision making if it blurs or distorts relevant information requiring market participants to reveal private information may induce behaviour intended to conceal or distort this information transparency may facility behaviour that undermines competition and leads to a market outcome characterised by monopoly or (tacit) collusion collecting, processing and disseminating information is costly An efficiently functioning market does not rely on equal access to information; on the contrary, it provides the relevant information Information requirements differ fundamentally between types of agents eg. between market participants, system operators and regulators Providing relevant information to market participants versus avoiding that they manipulate or abuse such information Collection versus dissemination of information May 13, 2013 von der Fehr: Transparency 6

7 Overview 1. Relevant information and market efficiency information relevant for market participants economic decisions and hence market performance 2. Trust and market participation regulation to avoid market participants undermining market participation by manipulating information or exploiting informational advantages 3. Costs of collecting and disseminating information why requiring market participants to reveal private information on the one hand, and making such information public on the other, may undermine market performance May 13, 2013 von der Fehr: Transparency 7

8 1. Relevant Information and Market Efficiency Temporal demand and supply decisions Inter-temporal decisions Imperfect or missing markets Price formation and information aggregation System operation and information requirements May 13, 2013 von der Fehr: Transparency 8

9 Temporal Decisions Information on market conditions often irrelevant Example: wind generator on day-ahead market variable costs negligible wants to maximise output whenever price is positive profit maximising to set offer price at cost gain nothing from information about other participants Solar Run-of-river hydro Nuclear May 13, 2013 von der Fehr: Transparency 9

10 Temporal Decisions cont. Thermal non-negligible marginal cost quasi-fixed costs (start up, ramping etc.) If bids reflect cost structure no information about market conditions required If bids do not reflect cost structure eg. pure energy bids without block option need to tailor bids to optimise time of operation require information about (expected) prices short-term prices forecasted with high accuracy May 13, 2013 von der Fehr: Transparency 10

11 Intertemporal Decisions Hydro generators with storage capacity cost of output foregone future revenues expected future (short and long term) prices Maintenance, repair and upgrading of plants stop production when foregone earnings smallest price variation (cycles) Investment (and disinvestment), entry and exit expected (average) prices over planning horizon Information about future prices distinct daily, weekly and seasonal patterns future/forward markets May 13, 2013 von der Fehr: Transparency 11

12 Imperfect or Missing Markets In perfect markets, market participants require information about prices only Many electricity markets close to the ideal organised market exchanges wide variety of products high degree of liquidity Short-term price forecasting time of day, day of week, season external conditions, such as weather idiosyncratic events Long-term price forecasting forward/future markets May 13, 2013 von der Fehr: Transparency 12

13 Price Forecasting Forecasting model of how market fundamentals affect price established by examining historical data based on forecasts of fundamentals More detailed historical data may improve forecasting model quantification of uncertainty and risk forecasts, but only if variables can be forecasted Level playing field large players informational advantage about plans may be reduced by requiring publication of forecasts/plans plans subject to change May 13, 2013 von der Fehr: Transparency 13

14 Price Formation: Information Aggregation ERGEG (2010) insufficient transparency has adverse effects on market competition and price formation as not all the market actors have access to the same information and an unlevel playing field is created Through bids and offers market participants reveal information about underlying fundamentals and/or about beliefs concerning these at intersection of demand and supply, price determined by intermediate or average, as opposed to extreme, bids and offers overly optimistic and pessimistic bids and offers fall outside of the range that determines market price Better information improves market participants bids and offers, but price formation tends to correct for unsystematic variation at the level of individual market participants (caused, for example, by errors or misconceptions) an efficiently functioning market does not rely on equal access to information by all market participants; on the contrary, an efficiently functioning market provides the relevant information to participants May 13, 2013 von der Fehr: Transparency 14

15 System Operation Information requirements supply quality and security, i.e. physical balancing power flows and network capacities (metering and monitoring) plans of generators and consumers (outages) System operators versus market participants system operators operate on the basis of physical flows and technical constraints, not prices market participants make economic decisions and therefore need information about prices information collected by system operators should be made available to market when it can be expected to affect the decisions of market participants in a way that improves overall market performance, esp. major incidents but risk of abuse of market power (bottlenecks) May 13, 2013 von der Fehr: Transparency 15

16 2. Trust and Market Participation Insider trading and market manipulation Market abuse Fairness Efficiency Relevant information for regulation Monitoring and investigation May 13, 2013 von der Fehr: Transparency 16

17 Definition of Market Abuse... insider trading and market manipulation, which constitute market abuse use or attempted use of inside information to trade either on one's own account or on the account of a third party should be clearly prohibited... Information regarding the market participant's own plans and strategies for trading should not be considered as inside information. Manipulation on wholesale energy markets involves actions undertaken by persons that artificially cause prices to be at a level not justified by market forces of supply and demand, including actual availability of production, storage or transportation capacity, and demand. Forms of market manipulation include placing and withdrawal of false orders; spreading of false or misleading information or rumours through the media, including the internet, or by any other means; deliberately providing false information to undertakings which provide price assessments or market reports with the effect of misleading market participants acting on the basis of those price assessments or market reports; and deliberately making it appear that the availability of electricity generation capacity or natural gas availability, or the availability of transmission capacity is other than the capacity which is actually technically available where such information affects or is likely to affect the price of wholesale energy products. Examples of market manipulation and attempts to manipulate the market include conduct by a person, or persons acting in collaboration, to secure a decisive position over the supply of, or demand for, a wholesale energy product which has, or could have, the effect of fixing, directly or indirectly, prices or creating other unfair trading conditions; and the offering, buying or selling of wholesale energy products with the purpose, intention or effect of misleading market participants acting on the basis of reference prices. May 13, 2013 von der Fehr: Transparency 17

18 Aim of Regulation It is important to ensure that consumers and other market participants can have confidence in the integrity of electricity and gas markets, that prices set on wholesale energy markets reflect a fair and competitive interplay between supply and demand, and that no profits can be drawn from market abuse. May 13, 2013 von der Fehr: Transparency 18

19 Fairness Insider trading and market manipulation shifts gains between market participants May be deemed unfair prices do not reflect fundamentals profits obtained by unacceptable means But such redistribution does not in itself represent an efficiency concern at least as long as it does not affect which trades are undertaken May 13, 2013 von der Fehr: Transparency 19

20 Efficiency Risk of being lured into less profitable, or even loss-making, trades Reduces willingness to participate and trade in the relevant market place so market places have incentive for self-regulation cf. stock exchanges, NordPool Costs too little trade migration to other (less efficient) market places other costly measures to circumvent markets, such as vertical integration, excessive risk taking May 13, 2013 von der Fehr: Transparency 20

21 Relevance Concentrated markets large buyers or sellers cf. market power Thin markets few potential trading partners cf. market power Direct matching OTC continuous trade (cf. intraday) Unprofessional/inexperienced players Speculative trade May 13, 2013 von der Fehr: Transparency 21

22 Intervention Ex ante intervention establishing market places fostering market participation vertical separation rules on information disclosure Ex post intervention penalties for not disclosing relevant information penalties for disseminating false information penalties for profiting from informational advantage (natural or constructed) But: is intervention really required?... May 13, 2013 von der Fehr: Transparency 22

23 Monitoring and Investigation Tasks continual market surveillance in-depth investigation of specific incidents Market surveillance indices of market performance (price, capacity availability, trade volumes) more detailed information (change in ownership, plant closure, trade) Complete oversight cannot be achieved insufficient information and processing capability runs counter to whole idea of market reform concentrate on detecting serious cases of abuse awareness of monitoring may deter blatant abuse difficult to detect subtle instances, even with considerable information In-depth investigation when potential case of irregular behaviour detected exact details of the information required will depend on case cannot be determined in advance or according to a general formula May 13, 2013 von der Fehr: Transparency 23

24 3. Costs of Information Administrative costs Incentives to gather information Information distortion Information overload Market power Tacit collusion May 13, 2013 von der Fehr: Transparency 24

25 Administrative Costs Collecting, processing and publishing information market participants regulators Total administrative costs on businesses from information obligations from various sorts of regulations typically estimated at around 3 % of GDP "Reporting obligations should be kept to a minimum and not create unnecessary costs or administrative burdens for market participants. EU, 2010 easier said than done tendency to require more information, rather than less (to be on the safe side ) reporting often in different formats from standard practice May 13, 2013 von der Fehr: Transparency 25

26 Incentives to Gather Information Agents will only collect, validate and analyse information when benefit from being better informed outweighs cost If required to make private information publicly available, incentive to gather information may be reduced For example generators have incentive to improve forecast of prices and further responsiveness to prices information about capacity availability, planned outages, water storage levels and production patterns may reveal price forecasts and operational procedures others may copy it and hence reduce or eliminate gains from improved behaviour May 13, 2013 von der Fehr: Transparency 26

27 Information Distortion Private information may be valuable to others, but making it public may undermine profitability incentive not to make such information generally available if forced to do so, incentive to distort it Distortion by delaying, under-reporting or misreporting regulatory authorities may reduce problem, but difficult to eliminate it for example: planned unavailability or forecasts of capacity long ahead Indirect distortion, by changing behaviour affect values of the indicators that are to be reported for example: shift output between generating units to conceal behavioural patterns Incentive strongest when information most valuable to others when requiring information to be revealed may seem most obvious when information of little or no value to others, little or no incentive to resist its publication May 13, 2013 von der Fehr: Transparency 27

28 Information Overload Large amounts of information require large processing capability more information not useful without necessary processing capability more detailed information may blur overall picture Example: water reservoirs in the Nordic market to make use of information about storage levels in individual reservoirs for price forecasting would require information about inflow into each reservoir over the relevant period requires very detailed hydrological knowledge, as well as considerable processing capability, to determine how individual reservoirs contribute to overall supply conditions may be more useful to have information about water storage at level corresponding to areas of similar hydrological conditions and base forecasts on overall or average inflow to these areas Access to information may be improved by making it available in a form that facilitates its use not necessarily in most detailed and basic form particularly important for smaller players May 13, 2013 von der Fehr: Transparency 28

29 Market Power More detailed information about market conditions may facilitate the exercise of market power Example: transmission capacity that is sometimes congested in periods of excess capacity, local generators face competition from neighbouring areas; in periods of congestion, local monopoly power if generators know beforehand whether or not transmission capacity will be congested, they may tailor price to market conditions if generators do not know, they will have to price less aggressively, especially if they are cautious or risk-averse That market participants are willing to incur costs to obtain information not necessarily a sign that such information is valuable from an overall perspective May 13, 2013 von der Fehr: Transparency 29

30 Tacit Collusion Transparency affect ability and incentive of market participants to coordinate Tacit collusion aggressive price strategy unprofitable if competitors respond quickly more timely and accurate information about behaviour of individual market participants likely to reduce incentives for competing on price Examples of mandated (price) information disclosure Danish concrete (Albæk, Møllgaard and Overgaard, 1998) US railroad freight rates (Fuller, Ruppel and Bessler, 1990) Electricity markets conducive to tacit collusion frequent interaction Detailed information most problematic High frequency data and data disaggregated across markets helps detect deviations and draw inferences about demand and thus sustain collusion. (O Donoghue and Padilla, 2006) May 13, 2013 von der Fehr: Transparency 30

31 Conclusion More information not necessarily better! Difficult to see why information at the level of individual market participants should be made publicly available warranted for system operation and market surveillance, but not for rational and competitive behaviour by market participants information overload, incentives to distort information, market power Difficult to see the necessity of making information about actual operations immediately available vital for systems operations (not for market surveillance), but not for rational decisions of market participants may facilitate coordination and collusion Information about future supply and demand conditions valuable for forecasting prices suffice to provide such information with delay and in aggregated form Merit of market monitoring creating trust in markets unlikely to reveal all instances of abuse (incl. market power) but regulators need investigative powers May 13, 2013 von der Fehr: Transparency 31