For regulators, the creation of trading exchanges can offer the chance to build a truly open and competitive market, guided by a global knowledge base of the successes and failures of other exchanges in other industries around the world [3]. It is interesting that the Financial Services Authority (FSA) will regulate energy trading in the UK, rather than the industry regulator (OFGEM), a trend that will continue in Europe.
Energy exchanges enable the development of the wholesale business. In addition to the trading of physical quantities, ‘future’ markets are created making extensive use of financial products. Many exchanges offer multi-energy (i.e. electricity, gas, and
oil) services, sometimes extending to other commodities as diverse as metal, pulp, and paper.
The number and nature of players will evolve as the electricity market continues to open and the liquidity of exchanges increases. It is foreseeable that electricity trading will occur increasingly over the Internet in the coming years. Some projections anticipate that, by the year 2004, approximately 11 per cent of total electricity and about 25 per cent of natural gas sold in the US will be sold online.
There is a lot to be gained for all parties through these new markets. But it can be a complex process, and companies should evaluate participation in a trading exchange against the current market trends, the drivers in energy markets and the broader developments in financial and commodity trading.
Such considerations are unlikely to lessen the pace at which trading exchanges in the energy sector are growing. Instead, market forces, technology, and legislation will shape the new exchange landscape, creating an environment in which competition increases rapidly and consolidation occurs. It is vital that this moulding influence is allowed to continue, as for a market to successfully move to a deregulated mode, the basics such as maintaining an adequate balance of regional supply and demand must be established.
Across the world, competition in energy markets has driven the development of wholesale energy trading. There is an enormous variety in the speed and willingness of markets to deregulate, from country to country, and even from state to state. Many countries already have fully competitive and mature markets while other countries still do not plan to deregulate their gas and electricity industries.
The US is the most important market for electricity trade; this market and its development will be explained in Section 11.2.1, and then the UK and other markets will be discussed in Sections 11.2.2–11.2.5.
11.2.1
Electricity trading in the US
During the past decade or so, and particularly since 1992, the growth of electricity marketing, particularly in the US has been phenomenal [1]. The year 1978 saw the passage of the Public Utilities Regulatory Policy Act (PURPA), which opened the power-generation sector to new players, mostly independent power producers (IPPs). For IPPs to prosper and succeed they needed access to the national transmission network in order to deliver their product to large consumers. This was provided for in the Energy Policy Act of 1992, and was supported by two significant orders, in 1996, in which the US Federal Energy Regulatory Commission (FERC) spelt out the modalities for implementations on how an open access transmission system would work in practice. More specific orders were issued in 1999 and 2001 encouraging and calling for the creation of regional transmission organisations (RTOs). Such major milestones in the development of the liberalised US electricity markets are summarised in Table 11.1.
In North America, the electricity market is deregulating at a variable pace. In the US, each state moves forward independently from the others. California, which is further along the process, has experienced significant difficulties (see Section 11.2.4)
Table 11.1 Electricity milestones: major laws with significant impact on US electricity markets
1935 Federal Power Act
Created the FERC and established principles for regulating wholesale electricity pricing.
1978 Public Utility, Regulatory Policy Act (PRUPA)
Allowed independent power producers (IPPs) to flourish.
1992 Energy Policy Act (EP Act)
Introduced the premise of a non-discriminatory open access transmission network.
1996 FERC Orders 888 and 889
Spelt out FERC’s long-standing policy on how an open access transmission system would work in practice; Order 889 spelt out the details of the Open Access Same-Time Information System (OASIS).
1999 FERC Order 2000
Encourages the establishment of regional transmission organisations (RTOs).
Source: Energy Informer (July 2001), Reference [1].
that have influenced the pace of deregulation in other states. For example, states such as Oregon, Nevada and Arizona have put the decision to deregulate on hold. Some Canadian provinces are taking a comparable path to deregulation.
11.2.2
UK electricity market trading
In England and Wales [2] before privatisation began, the electricity industry was a classic, vertically integrated, government-owned monopoly, seen at that time as the best way to provide a secure electricity supply. Consumers had no choice of supplier and had to buy electricity from their local regional electricity company (REC), so that price competition was not possible.
The UK is one of the pioneer countries in developing a free market electricity trad- ing system. On 27th March 2001, New Electricity Trading Arrangements (NETA) for England and Wales were launched. The stated objectives of NETA are to benefit electricity consumers through lower electricity prices resulting from the efficiency of market economics. Promotion of competition in power generation and electric- ity supply, in order to use market forces to drive consumer costs down, was, and remains, a key objective of actions to liberalise and ‘deregulate’ electricity markets in the UK.
In England and Wales, the electricity market was progressively opened to com- petition in generation and supply over a period of 10 years, with retail competition for the smallest consumers completing full market liberalisation in 1998. A regu- latory body, the Office of Gas and Electricity Markets (OFGEM), oversees market operations, licensing, competition, and actively seeks to make changes to benefit con- sumers and bring their costs down while promoting competition between players in the electricity market. Sweeping away old thinking has led to electricity being regarded
as a tradable commodity and revolutionised the business environment bringing new market participants, new business opportunities and rapid change.
Initially market reform involved creating an Electricity Pool for England and Wales with a single wholesale electricity price. Producers sold to the Pool and licensed suppliers purchased electricity from the Pool. Pool participants were able to negotiate bilateral contracts. However, the Pool performances did not allow the development of full competition. The UK White Paper on Energy Policy and the Utilities Act 2000 incorporated proposals for trading arrangements similar to those in commodity markets and energy markets elsewhere. NETA provided new structure and rates for England and Wales electricity market. Under NETA there were major developments in which electricity is bought and sold, with major competition in generation and supply, with a wide range of new players competing in the liberalised energy market as detailed in Figure 11.1.
NETA aims to develop a marketplace in which buyers and sellers can participate through a variety of contracts and agreements within the framework set by NETA. The transactions taking place within the NETA market are electricity price–quantity transactions on a half-hourly basis.
Market players include generators producing electricity, suppliers who buy elec- tricity to sell on to groups of consumers, traders and marketers who do not own
NETA