Competition Authority concludes Report on Wholesale Electricity Prices

The Competition Authority has concluded its Report on the formation of wholesale electricity prices in Portugal in the second half of 2007, a period that coincided with the first six months of the operation of the Mibel (Iberian Electricity Market) daily market. The commencement of the Iberian market has revealed price differences between the two markets, Portugal and Spain. In the period analysed, these differences reflected daily averages of over 23% in the Portuguese market. The analysis carried out in the report identified a wide range of factors that are calculated to have contributed to these disparities, from questions related to differences in generating costs and thermal power-plant downtimes, to questions related to the supply structure in the two countries. The information analysed leads to the conclusion that a higher level of competition may be obtained with the entry of competing third parties with natural gas-fired combined-cycle power stations. Against this background, the creation of the Mibel daily market, as a harmonised mechanism for price formation in the Iberian area, is an essential step towards establishing the benefits of entry for new competitors. The entry of new agents into power generation also depends on the total liberalisation of the market for the sale of electricity, in particular in terms of the progressive elimination of regulated tariffs for end-customers. The protection arising from regulated tariffs should only be guaranteed for the most vulnerable customers.

A further topic analysed in the report relates to the behaviour in the market of the Vendor of Last Resort (VLR), a function exercised by EDP Serviço Universal, with regard to the delivery to the market of the quantities demanded by its customers. The information resulting from the analysis carried out on the discrepancies between the programmed demand on the daily market and the actual demand by EDP Serviço Universal register systematic forecasting divergences. The persistence of the no-risk marketing model, which is characterised by the passing-on to the tariffs of all the financial discrepancies between the purchase costs forecast and the real ones, does not seem to create sufficient incentive for more demanding forecasts to be adopted. Accordingly, EDP Serviço Universal should be motivated to purchase power on the market at the best price, by limiting the discrepancies in the forecasting or suitably covering the price risk by means of more active participation in the forward market. It is pointed out that, in 2008, the congestion levels and price difference between the Portuguese and Spanish power systems are calculated to have abated in relation to the figures identified in the report, which, it will be remembered, analyses the behaviour of the market in the second half of 2007. Despite the fact that the price difference has narrowed, however, it is to be stressed that, as a whole, the changes in the cost structure noted in the course of 2008 do not alter the sense of the general conclusions of this document: the Portuguese power system will benefit significantly from the entry into service of the combined-cycle power stations for which licences have been issued to companies competing with EDP companies and from the effective liberalisation of the retail market.

The report – available from the Competition Authority’s site at www.concorrencia.pt – was compiled by the Competition Authority under its powers of supervision and in combination with the sectoral regulatory body ERSE (Regulatory Body for Energy Services).

(Nº: 9/2009)