INTERNATIONAL ACADEMIC SYMPOSIUM
ENERGY SUSTAINABILITY AND COMPETITIVE MARKETS Parc Científic de Barcelona. Auditorium Barcelona, January 29, 2013
Organising institutions:
CHAIR OF ENERGY SUSTAINABILITY AT THE UB
Sponsor:
Maria Callejón: That last series of results is particularly interesting because it reflects what Spanish researchers have been learning about the factors affecting contracts in the pool and about bilateral contracts in general. Yesterday you and I were discussing certain very critical positions that people in the field are taking about the way the pool is working (positions I do not share). The source of the discontent isn’t entirely clear but one proposal is that all contracts should be bilateral. Now I’d argue that this is the worst way to go forwards: we have no research to indicate this should be done but it’s evident that if we make the bilateral model our only contracting system, we won’t have chosen the most competitive model out there for matching supply and demand. Montero: Yes. From what I’ve seen in the Chilean market I don’t think it’s clear that the bilateral market model is going to help you because in Chile it’s doing exactly the opposite and generating less rather than more competition. There’s one difference, though, because you’re comparing this to a power pool that is a spot market pool, while here I’m also comparing with long-term contracts being signed. In both cases these are long-term contracts: one is just between generators and big buyers in bilateral negotiations, and the other is taking place with these large auctions in which you have all the suppliers coming but that’s also about long-term contracts. So we aren’t comparing long-term contracts from bilateral trading with the short-term outcomes of the power pool. I don’t know how those two compare. Here it’s more like comparing the competition of long-term contracts in two different contexts: in auctions, where it’s more centralized, and in bilateral trading. But I agree with you: I don’t think it’s clear that an exclusively bilateral trading environment would increase competition. It could be tried, of course, but maybe you’d end up having to undo the work and it’s not clear that competition would improve. Ignacio Pérez-Arriaga: Thank you, Juan Pablo, for this very detailed presentation. What I’d like to ask is, how long should a long-term contract be? Because when contracts are signed for shorter time periods you get some coupling between the spot market and the result of the auction or long-term contract, while when the period goes up to three or five or ten years, the coupling disappears. Have you studied this coupling effect in terms of contact length? Montero: I don’t think it has a serious effect on the static result. Even if you’re fully contracted with just one-year contracts, every time you come to the spot market you’re going to be fully contracted and you’ll be able to compete very aggressively. Where collusion is concerned, it’s a very different story. There you want long-term contracts and the longer they are, the less able you’ll be to sustain this collusive agreement. So I think it makes a difference in that sense. We’re not talking about hedging; we’re talking pure strategic reasons and market power. So if you’re living in a static world, one- and two-year contracts work equally well but if you think it may be possible to sustain this collusive agreement, you want them to be longer. How much longer? Five or ten years, perhaps. Longer than one year, certainly. Miguel Lasheras: Thank you, Professor, for your presentation, which was very clear. It was also very honest because the conclusions you draw are relative rather than strong conclusions. I’d just like to ask two questions about your research on Chilean auctions v bilateral trading. First, how were retailing rates related to these prices in the world of bilateral contracts and then in the auction model? (I’m assuming that in the former they were related to some kind of average 1
or to what the regulator asked for, while in the latter it was the auction price.) And second, do bilateral negotiation and the auction model continue to co-exist? What I mean is, are both kinds of contracting still practised or has one taken over from the other?
Montero: In the past, in order to set the prices for the residential sector — for all the regulated consumers, who had these regulated tariffs — the regulator used the average of the contract prices. That’s why these data were very confidential. In other words, they would average the bills from all the buyers and long-term contracts and then get the price for that period. The regulator also had a model which basically computed the price that the residential consumers should be paying. And if that price fell below these contract prices, you created a band and the price to model had to be between this band. So if it’s lower you go up, and if it’s higher you go down. So basically these contract prices give you the range of prices that the regulated consumers should be paying. And 60% of consumption is from these regulated consumers. That’s why we believe that these data were very well produced and generated (despite a certain number of mistakes): because they were used to set prices for the residential sector. With regard to the second question, now all the distribution companies had to procure all their energy through these auctions and that’s the currently used price for the residential consumers: the clearing price at the auctions combined with the previous systems. So now you have to somehow balance the old system in which you calculated the prices with the auction system. And at some point in the future, only the auction clearing prices will be used to set the prices for the residential sector. That said, the bilateral trading market will continue to operate between the large buyers and the suppliers, as it does in the mining sectors (or with hospital institutions, for example, which get their own contracts). But now you still have the auction run by the distribution companies. That’s basically the way it works. Monica Giulietti: About the question discussed earlier, I was wondering whether the move from bilateral contracting to auctions has been detected at the level of market structures. I ask because when trading moved from the pool system to bilateral contracting in the UK, our research suggested that there was consolidation and vertical integration and that generating companies could earn their margin between the wholesale prices and the retail. So in the UK competition in the wholesale market became slightly fiercer but it was still possible for generators to earn a profit by exploiting their ability to affect retail margins. From what you’ve just told us, this doesn’t seem to be feasible in the Chilean market, but has there been any other change in market structure? Montero: No there hasn’t and you’re absolutely right: the UK is different. In Chile we haven’t seen this vertical integration so far and it’s not allowed, so I don’t know what will happen in the future. We have distribution companies, which are local monopolies; we don’t have a retail sector where a large number of retailers can sell power to different consumers and where you can actually choose your retailer. And although in the long run that may happen, for the moment it means we can’t implement the vertical integration you’re describing. And no, we haven’t seen any changes in the market structure and in the last ten years we’ve had the same generators. There hasn’t been much entry into the market during this period, either; just these two competing in different environments and with different rules, as it were. 2
CÀTEDRA DE SOSTENIBILITAT ENERGÈTICA DE LA UB CÁTEDRA DE SOSTENIBILIDAD ENERGÉTICA DE LA UB CHAIR OF ENERGY SUSTAINABILITY AT THE UB
