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Europe: Picture of a Stalled Competitive Model

Fortnightly Magazine - February 2005

lower than in continental Europe.

Likewise, prices in the Netherlands still are affected by relatively tighter supply-demand fundamentals and the country's constrained import ability, and thus differ substantially from its Nordic and continental neighbors. As would be expected, the Netherlands' average baseload price in 2003 was substantially higher than seen on the other exchanges at Û46.47/MWh.

In addition, there are markets for products other than just energy. For example, there is a market for generation capacity in Belgium, France, and Ireland. These Virtual Power Plant Auctions (VPPs) were first mandated in France by the European Commission in exchange for the acceptance of Electricité de France's (EdF) acquisition of Energie Baden Württemberg (EnBW) in 2001. A purchaser of a VPP contract obtains a right, but not an obligation, to the output of virtual capacity, which entitles the contract holder to issue dispatch instructions and receive electricity output on the following day for delivery on the high-voltage grid. Though the capacity is not associated with any particular generation unit operated by EdF, it does have certain traits that mimic baseload or peaking generation characteristics. EdF is obliged to auction off 6,000 MW of capacity (6 percent of EdF's total installed capacity) for five years to any operator wishing to procure electricity produced in France. Likewise, in Belgium in 2003, Electrabel started to auction off 1,200 MW of capacity to open up its generation sector to more competition. In Ireland, ESB is auctioning off 400 MW of virtual capacity to open its generation sector.

Meanwhile, another market exists in Europe for interconnection capacity between countries. While some capacity is reserved on the basis of "priority lists," such as between France and Belgium, Germany, and Spain, there are also public auctions of capacity, such as on the interconnector between the UK and France. In the case of the latter, capacity is allocated based on the price bid. This approach also is used in the Netherlands, which has very congested import capacity and auctions its capacity to and from Germany and Belgium in annual, monthly, and daily auctions. Likewise, there are also auctions between Germany and Denmark's border, and between Germany and the Czech Republic's border. The price of interconnector capacity usually is determined as a differential between the average or expected market price in the two countries, and, as such, is higher in the direction of cheaper electricity to more expensively priced electricity and vice versa. As an illustration, in the 2003 auction for annual capacity rights between Germany and the Netherlands, 356 MW of capacity was auctioned between Tennet and the RWE network in Germany for an average price per megawatt of Û59,130 to the Netherlands and Û920 to Germany. 4

Finally, there are markets for real-time balancing energy in the UK and Scandinavia. Germany and Austria are establishing real-time balancing markets. Other ancillary services are usually procured on a bilateral basis, though increasingly accomplished through a competitive tender process.

European Transmission: Truly Independent?

Following the EU directives, almost all European countries have created fully independent grid operators that, even if owned by the incumbent