> Energy, climate & environment - on 16/07/2008

“Solid market infrastructures are just as necessary as transmission systems so that Europe can be provided with a competitive, reliable and ecological energy”

Interview with Jean-François CONIL-LACOSTE, Powernext’s Chief Executive Officer.

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Question - Jean-François CONIL-LACOSTE, you are at the head of the electricity exchange Powernext, an electronic platform that enables several actors to exchange electricity. At a time when the prices of energy are more and more discussed, how would you describe the role of an energy exchange?

Answer - The exchange organizes two markets: the spot market and the futures market. The spot market facilitates the balancing of the electrical network by setting up a daily bid by hour slot, 365 days a year. Since electricity cannot be stocked, injections and withdrawals have to be constantly balanced. As a result, spot market members have to be able to exchange MWh under the best possible economic conditions until the very last moment. Transactions are usually made the day before the delivering. As for the futures market, it offers a dynamic tool to manage the risk to the supply within a timeframe going from one month up to three years—this is the function of the “continuous” futures market. The economical function of any kind of exchange is to organize the free confrontation of supply and demand so that a benchmark price can emerge from the largest and most transparent possible debate.

Question - A very little part of the electricity exchanged in France is actually exchanged on this regulated market. Today, between over-the-counter (OTC) exchanges, regulated prices and energy exchange, how is the electricity market structured in France?

Answer - Let’s look at the figures: the annual domestic consumption amounts to 480 TWh of which 10% to 15% need to be balanced. The “free” market, i.e. without any control over the prices, does not go above 130 TWh. Powernext processed about 50 TWh on its spot market and 80 TWh on its futures market. The energy exchange captures nearly all the spot exchanges and about 20% of the futures exchanges; the remaining 80% are traded on the OTC market. The French wholesale market is still a dwarf compared to the German wholesale market. Its German counterpart is 10 times bigger (4500TWh) mostly because it has been 100% opened for a longer time and without any control over the prices. However, the energy exchange proportionally plays a more significant role in France.

Question - The energy exchange is sometimes blamed when prices punctually soared. How would you explain those spikes? Are they economically justified or do they result from a market failure?

Answer - The “Commission de Régulation de l’Energie” (Energy Regulation Commission) published a report about the electricity price spikes of October and November 2007. Although it “did not identified any culpable individual behaviour”, it provides some suggestions to take more advantage of the hydraulic production display in terms of flexibility, and to improve the forecast production information. It also gives suggestions to improve the procedures encouraging additional offer on the energy exchange. Most of the price spikes indicate that the network is under pressure when the offer cannot meet the demand. Those situations also reveal the need to invest in new production assets or to lower our consumption. Price is an essential factor so that people can become aware of rarity and change their behaviour.

Question - In 2009, the coupling of the electricity spot markets will be extended to Germany and Luxembourg and Powernext is also about to merge with the German exchange EEX: you appear as Europe’s “star pupil”. As a professional how do you analyze the European energy strategy?

Answer - A united Europe of electricity cannot be created without a successful coupling project of Central and Western European (CWE) markets which represent more than the third of the European consumption. Regional initiatives have to give the priority to this founding project. The coupling strategy of the electrical markets is a pragmatic approach that has to remain gradual. It would be illogical to build Europe while maintaining all the national energy exchanges. The strengthening of the spot exchanges, coupling key actors to the transmission system operators, has to be considered with determination and a long-term vision. Solid market infrastructures are just as necessary as transmission systems so that Europe can be provided with a competitive, reliable and ecological energy.

Question - How far are we from the construction of a united Europe of electricity? Where does Powernext stand in this process?

Answer - We are in the middle of the ford. The technical aspects, in terms of algorithms or systems, are not the most difficult to solve. On the contrary, the principles of governance between the different countries and the transmission system operators on the one hand, and the energy exchanges on the other hand require diplomacy. The challenge is proportional to the number of partners. This is why we cannot multiply regional experiences and load the schedules. Those initiatives disperse rare resources and make the decision-making process dangerously complex and heavy even if it means blocking the whole process or loosing quality. As soon as 2003 Powernext bet on the “market coupling” and got involved in the first continental coupling between France, Belgium and the Netherlands. Today Powernext is taking a new step forward by merging its spot market with its German counterpart EEX’s spot market so that a Europe-wide energy exchange, also opened to other partners, can be created. First of all, our goal is to create a unique energy exchange within the CWE zone. The involvement and the support of a European diversified industrial shareholding, which would gather transmission system operators, producers and merchants, is essential for the success of this common ambition. Following the example of securities, it is essential that such an energy exchange can operate freely since it is looking for efficiency and profitability as an enterprise while facing competition from the brokers on the OTC market.

Question - What is your opinion about the European common regulation? The Commission is asking for a clearer separation between the gas and electricity transmission system operators and distribution or production activities. However it does not require that the state-owned enterprises completely hand over their activity as transmission system operators. Is it enough?

Answer - My personal opinion is that the debate over unbundling should be considered as an outdated debate regarding electricity. As for gas, the situation is more complex; we’ll have to take more time. Economically speaking, the network activity is a solid and reliable infrastructure activity but it also is a justified long-term investment although with lower profitability compared to the activities of other big international groups listed on the stock-exchange. Funds dedicated to infrastructures, insurance companies or institutions such as the “Caisse des dépôts” in France could easily replace the current producers as shareholders. The situation would be the same for everybody in Europe and it would have the virtue of being clear and favouring trust... Moreover, if production techniques evolve in this way too, it could make it easier to set up decentralized sources of energy in the future. But there are many measures that can be taken to foster competition: the gradual disappearing of regulated prices and coupling the markets for example.

Question - You said that the development of the electricity market was undermined by a game of conflicting constraints between national industrial competitiveness and the consumers asking for the lowest possible price on one hand, and the demand for security of supply and the investment needs which imply a fairly high price on the other hand. You said only “the political sphere could solve these antagonisms by fixing gradual, realistic and clear goal in the long and very long run”. What do you mean by that and what are you expectations from the French and European political leaders?

Answer - Fixing a constraint in terms of environment is also the job of the politicians! The stricter it is the more expensive is the ton of CO2 and the higher is its impact on the MWh price. Where to find the good equilibrium? How can we avoid creating inequalities between countries or continents? Long-term rules (post-Kyoto) that are known by everyone and established within the framework of international agreements are essential. Then we let the markets establish the prices and play their role as they organize the sincere and transparent supply-demand confrontation even it means that we have to create domestic compensation mechanisms for the most vulnerable consumers.

Question - The issue of the European energy mix is not settled: what could be the proportion of renewable energies? What about the technological headways in the clean coal field? How can we fight against the increasing dependence of the European supplies? What would be the role of nuclear energy? What are the consequences of these questions on your activities?

Answer - Nuclear energy cannot meet the demand of the whole continent by itself. It is then compulsory to use diversified sources of production. The share of renewable energies is supposed to increase up to 20% in 2020, which is quite ambitious considering that the ratio is of 7% today. These orientations are political decisions. The more visible they are in the long run the better will be the functioning of the market which is just a legally adapted tool to manage the risk to the energy supply.

Question - The fight over prices has been declared in European and the correlation between French and German prices causes a lot of ink to flow. How can we justify this harmonization of the prices whereas production costs are so heterogeneous?

Answer - Within a free market, the best offer determines the prices. The cheapest sources of production are called first (run-of-river generating station) until the most fuel-consuming station has to be called. The last station to be called—it is then said to be “marginal”—fixes the price. But nuclear energy is not sufficient to meet CWE demand so that we regularly have to use the German thermal generating stations. It explains German and French converging prices. In theory this would enable to increase the “nuclear annuity” but most of nuclear production is sold at yellow and green regulated prices (half the price of the market). The State, as a shareholder, could then redistribute this supplement to the most vulnerable consumers, without irritating Brussels and letting the market do its job on sound bases.

Question - As an energy exchange of electricity volumes, Powernet stands between the European networks and plays a role in the balancing of the volumes. What are the progresses to be made to increase the interoperability between the different transmission systems?

Answer - Coupling the markets naturally leads to a better coordination and cooperation between the transmission system operators. We are beyond simple solidarity between neighbouring networks. We now have a bigger ambition: to build a united market, which also means harmonizing the procedures, defining an algorithm for central coupling and common rules of governance…

Question - The issue of energy supplies is also essential for Europe. It concerns Powernext since it is closely related to the security of the transmission systems. It is said that importations cover 50% of today European needs in terms of energy and that, at that constant rate, they will represent 70% by 2030. Which measures can be taken to reduce, or at least to limit, the vulnerability of the European Union?

Answer - Russia respectively provides 50% and 20% of the European Union’s gas and oil, which represents 75% of its exportation revenues. The European Union imports nearly 15% of its gas and its oil from Africa. Interdependence is a reality. The discussions over climate change and renewable energies have to be an opportunity for a new debate between the European Union, Russia, and Northern Africa. This debate should be based on principles such as solidarity, mid and long term shared vision about supply and demand, industrial partnerships in new fields. The unification of the European electricity and gas markets, a better management and fluidity of the interconnections as well as energy efficiency have to be the other pillars of the European energy policy.

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Interview led on Jun, 24th 2008.

Download below the interview in PDF (2 pages).

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