"Nouvelle Loi de l Organisation du Marche de l électricité": Implications for the French Retail Market

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1 "Nouvelle Loi de l Organisation du Marche de l électricité": Implications for the French Retail Market Anna Creti 1 J erôme Pouyet 2 Maria Eugenia Sanin 3 1 U. Paris Ouest, Ecole Polytechnique 2 PSE and Ecole Polytechnique 3 U. Montpellier and Ecole Polytechnique vember 19th 2010

2 Law NOME: the context The French Nouvelle Organisation du Marché de l Electricité", or NOME law, makes available 100TWh of low cost electricity generation from nuclear plants owned by the incumbent operator to downstream French market retailers. 25% of EdF nuclear production. Measure operational in 2011 until Withdrowal rights to pe paid at a regulated price. The main objective of such a reform is to enhance competition for price-sensitive industrial customers, and in the perspective of a growing market, also for residential customers. Gradual removal of the end users regulated tari s, reaching complete price liberalization in 2016.

3 Law NOME: another French Paradox? Crampes et al. (2009), Finon (2010), Leveque (2010), Leveque and Saguan (2010): detailed analysis of the NOME law We provide a rst attempt to model the impact of the NOME law on retail competition, in a fully liberalized market does NOME result in a lower retail price or redistribute the "nuclear rent" from the incumbent to its competitors? Albeit speci c to the French electricity market, our analysis sheds light on the debate about: the extent of retail competition in electricity markets (Green, 2003; Von der Fehr and Hansen 2009); horizontal divestiture or capacity release programmes (Weigt et al., 2009) as market power mitigation measures.

4 Main results Whether pro-competitive e ects arise depends not only on the amount of the preassigned rights, but also on the proportion of competitors market share involved in the redistribution. If the redistribution rule depends on the actual rms relative market shares, a strategic pro-competitive e ect arises no matter the redistributed quantity; This might not be always the case if retailers considers the redistribution as xed by the law. A cession price above the marginal cost of low cost generation hinders the pro-competitive e ect of the law. Allowing the incumnet a rst-mover advantage ampli es the impact of the redistribution.

5 OUTLINE Modelling Framework under di erent redistribution rules. Results on pro-competitive e ects of the NOME law under di erent assumptions on strategic behavior and implementation details. Work in progress: calibration of the model and empirical analysis, joint with C. Chaton, CABREE-U of Alberta.

6 Modelling framework Inverse demand given by p(.), with p 0 (.) < 0 and p 00 (.) < 0 Two retailers A and B compete à la Cournot, A being more e cient in terms of marginal (constant) production costs c A : A vertically integrated with a generator bene tting from nuclear production; B vertically integrated with a non-nuclear electricity generator or it buys electricity from the wholesale market. The choice of a quantity competition model relies on results from Bushnell et al. (2008) s and Mansur (2007) is a natural modelling assumption as we study the impact of the redistribution of low cost production, Benchmark result Cournot competition: the most e cient rm serves a larger share of the market.

7 Redistributing low cost electricity Setting inspired by Dixit (1980). We assume that NOME reassigns an amount of incumbent s low-cost electricity to its rival B at a cost w = c A. The amount of NOME s reassigned capacity being chosen by the regulator, the incumbent A does not act strategically on it.

8 Redistribution rule Redistributed capacity is a xed quantity K N = αk :"exogenous redistribution", redistributed capacity depends on the generator s portfolio of consumers in the year preceding NOME law implementation. Π B = Π A = [p(q) c A ] q A + (w c A )αk. ( [p(q) ca ] q B if q B αk; [p(q) c B ] q B + (c B c A )αk if q B > αk.

9 Redistributed capacity depends on the retailers market share K N = q B q A +q B K : "endogenous redistribution", NOME law foresees an ex-post veri cation to ensure that the reassigned capacity is aligned to retailer s portfolio. Π A = [p(q) c A ] q A + (w c A )αk. 8 < [p(q) c A ] q B if q B K q A ; Π B = q :[p(q) c B ] q B + (c B c A ) B K if q B > K q A. q B + q A

10 Exogenous Redistribution Marginal cost of B Market equilibrium

11 Endogenous redistribution Marginal Cost of B Market Equilibrium

12 Main results: price decrease Exogenous rule: redistributing a large amount allows both rms to produce at the most e cient technology! welfare improving! If reassigned capacity is small, back to the benchmark equilibrium by xing the less e cient s production level, NOME s capacity redistribution determines the market outcome even if it increases production as compared to the benchmark Endogenous rule: marginal cost of less e cient rm increases with e cient rm s production if redistributed capacity is large: both rms to produce at the most e cient technology! welfare improving! if the redistributed capacity is small: the less e cient rm produces more than in the benchmark! welfare improving!

13 Main results: nuclear rent transfer K N large: pro t of the e cient rm decreases, pro t of the competitor increases. K N small: Exogenous rule: the less e cient rm receives lump-sum subsidy, proportional to the reassigned capacity by a factor equal to the di erence in marginal costs Endogenous rule: the less e cient rm receives a subsidy, proportional to the reassigned capacity by a factor equal to the di erence in marginal costs AND decreasing in the production of the most e cient rm.

14 Extensions Cession price w > c A. When the most e cient rm is allowed to x a cession price higher than its marginal cost, whatever the level of redistributed K, In the exogenous redistribution case, A s production increases whereas B s production decreases w.r.t. w = c A. In the endogenous case, A s production increases whereas B s production decreases w.r.t. w = c A. Stackelberg leadership Under endogenous redistribution rule, with small capacity given to the follower, the "e ciency gain" is fully internalized by the leader the leader produces as in the benchmark, while the follower market share increases by an amount equal to the e ciency gain perfect transferability of the e ciency gain into a price reduction.

15 EMPIRICAL ANALYSIS Available information: Load curves forecast (residential+industrial consumers) for 2015 (source RTE); Production capacity in 2015, for 4 vertically integrated rms (source: fournisseur électricité). Actual fuel costs (source: Ministry of Industry) Limit to the analysis the actual retail market strongly impacted by the regulated tari s: unrealiable estimate of demand; generation mix; capacity constraints: how much rms will buy in the wholesale market?

16 Modelling strategy Demand: from load curves, a linear hourly seasonal adjusted demand is calibrated. Supply: fuel costs weighted for the installed capacity; sensitivity analysis to simulate a cost increase due to additional sourcing. Preliminary results presented at the average annual demand

17 Linear inverse demand function (in MWh) Marginal Costs p = (q A + q B + q C + q D ) c A = 11.1; c B = ; c C = c D = 43.7 Capacity constraint (in GW) K A = 68.6; K B = 1.6; K C = 3.6; K D = 1

18 Illustration of the exogenous redistribution rule: p Q Market share Benchmark M A = 78.2; M B = 14.1; M C = 4.5; M D = 3.5 Nome M A = 50.2; M B = 23.6; M C = 12.3; M D = 13.9 Equilibrium "along the constaint", with a pro-competitive e ect