Change is underway in Europe's electricity markets. They are being opened up, and the flow of electricity across the continent is becoming more and more important. Switzerland is also preparing to liberalise its electricity market. In addition to bringing chances, such change also harbours risks. At a workshop, jointly organised by the Centre for Energy Policy and Economics (CEPE), the Institute for Operations Research and the Institute for Electric Energy Transmission (IEE), experts from academia and the electricity industry debated the question of how best to manage this transition.

There is something special about trading energy: electricity cannot be stored, and demand for it is subject to strong fluctuation. At the same time, customers expect supplies of electricity, of consistent quality and in sufficient quantities, to be constantly at their disposal. The question therefore arises of how to set up liberalised markets so that the customer reaps the benefits of the positive effects of a market economy and the economically important supply of energy is still guaranteed. What is decisive, according to Hans-Jakob Lüthi, Professor of Operations Research at ETH Zurich, is that participants do not only see change as threatening but that they also perceive it as a chance. Companies in the electricity industry had to learn to cultivate a corresponding risk culture. Taking a calculated risk into account would become the decisive factor in future when it came to holding one's own in the market.

Urgent necessity for structural change

One critical phase in the deregulation of the markets is the transmission and distribution of electric power. A natural monopoly existed in this area, explained Massimo Filippini from the CEPE: from an economic point of view a single power grid operator would be the best solution. The situation in Switzerland–in this participants at the workshop widely agreed–was far from ideal from this point of view because of its numerous local grid operators. Filippini is convinced of the urgency here for structural change. This was, however, politically difficult to push through. On the one hand, voters were sceptical as to whether such a change would benefit them, and on the other, many municipalities subsidised other services via electricity distribution. An unfortunate intertwining existed, he said, between political control and electricity providers.

If Switzerland's electricity grid were really to be put into the hands of a single, economically independent company, two questions would arise: How could this entity be obliged to maintain the infrastructure adequately? And how can one ensure that–as a monopolist–it didn't simply cream off huge profits? For Filippini it's clear that this can only be achieved with clear legal rules and a strong, highly competent supervisory office.

Hydropower still attractive?

There are also open questions with regard to energy producers. Operators of power plants are asking themselves today whether it is worth investing in plants that take many years to recuperate outlay. In reality, today electricity companies already tend to prefer quickly built gas powered plants that amortised initial costs far sooner. Hydro-plants, on the other, had lost a lot of their attraction. When assessing such plants though, said Filippini, the calculations had to be precise. One had to take into account, for instance, that some hydro-plants were very good at producing variable quantities of power.

The transmission and distribution of electricity is a critical factor in the opening of markets (Picture: Atel). large

For an economy it is also important that sufficient production capacity is available to cover peak time consumption, as well as unexpected shortages. Supplying the necessary infrastructure, though, is not the aspect that producers find particularly interesting–on the contrary, a shortage of electricity could be very interesting from their point of view. Experts are therefore putting their heads together to come up with possible ways to solve the problem. One idea, for example, proposes the setting up of special capacity markets or obliging the grid operators to buy reserve capacities from the producers.

Gradual development

In all discussion of the liberalisation of electricity markets it is also important not to forget the physical reality of the production and distribution of electricity. Over the past 120 years, local grids have gradually grown in Europe and North America to become continental supply systems. This trend was powered, among other things, by developments in the construction of power plants, as Göran Andersson from the ETH Institute for Electric Energy Transmission explained. While the ideal size of a thermal plant was around 100 megawatts in 1930, in 1980 plants that produced 1 gigawatt were more efficient in producing the cheapest electricity.

The commissioning of such large plants, however, called for the expansion of high-voltage grids. This was the only means of selling the newly produced electricity. With the introduction of gas combination plants, the trend changed radically in the 1980s. The most economically viable plants had now returned to producing only between 100 and 200 megawatts.

Models for the continental market

Originally, cross-border grids had been built for technical reasons. Today they enabled the establishment of a common European market. Intense debate is underway at political levels to decide how the electricity market on the continent is to be regulated. Diverse systems could serve as role models, In the USA and New Zealand, for instance, providers are allowed to charge locally different prices within supra-regional networks; electricity prices therefore follow purely economic criteria. In the Scandinavian countries and Australia, on the other hand, regulation dictates that prices must be uniform. A third model is now being discussed for continental Europe. The basically independent markets are to be joined by means of special trading mechanisms.

Using model simulations, Thilo Krause, doctoral student at IEE, investigated which solution would be preferable from an economic point of view. In his calculations, the US model came off best. Nevertheless, he concluded, it was not possible to predict a priori which model was to be favoured in the individual case.