APEX CONFERENCE 2004

October 11th - 12th 2004. Leipzig

Session 1. Market Evolution. Main issues in Europe.

Main issues in the Spanish market and cooperation with neighbouring market operators.

Mª Luisa Huidobro

President & CEO of OMEL

CONTENT

1. Recent evolution of the Spanish energy market.

2. Spanish price convergence with other European organized markets.

3. Main factors influencing market prices.

4. Explicit auctions, market splitting and market coupling.

5. Improving the market structure and security of supply in electric systems.

6. The Iberian Market.

1. RECENT EVOLUTION OF THE SPANISH ENERGY MARKET.

Daily market started operations on January 1998. Intraday market started operations in April 1998.

Settlements of all markets and processes started on January 1998.

Economic volume traded in 2003: 8,185 million euros.

Energy traded: 228,571 GWh.

Installed generation in the market 56,333 MW.

5,769,532 transactions where done last year.

92 companies act as purchasing agents on the market, 12 of them are external agents and 78 are independent resellers.

86 companies act as producers, 12 of them are external agents.

Domestic technical constraints are very reduced, around 2,2% of the daily energy.

The market price is a reference for many commercial transactions.

MAIN FIGURES OF THE SPANISH MARKET

MARKET AGENTS

CANTABRICO IBERDROLA CANTABRICO IBERDROLA ENERGIA ELECTRICA DEL EBROELCOGAS ENDESA ELCOGAS ENDESA ELEC. CONQUENSE GENERACIÓNUNION FENOSA UNION FENOSA VIESGO GENERACION COGENERACIÓN LA LLORAL

SNIACE COGENERACION GAS NATURAL SDG STORA ENSOCOGENERACION PRAT SERVEIS AUX. SOT DE RUBIO NUEVA GENERADORA DEL SUR

ECOCARBURANTES ESPAÑOLES ENERNOVA AYAMONTE GEPESA

PUERTO REAL COGENERACION ENDESA CICLOS COMBINADOS ELECTRICA RIBERA EBRO

NUCLENOR REPSOL PETROLEO CERANOR

REPSOL QUIMICA GENFIBRE AZULIBER

SAICA COGENERACIÓN DE NAVIA FORSEAN

COGENERACIÓN DEL NOROESTE BAHÍA DE BIZCAIA CELULOSA DE ENERGÍA

INEUROPA SOLAL COGENERACIÓN A. I. E. FORANETO

ENERGÉTICA DE ROSELLÓ A.I.E. FUERZAS ELÉCTRICAS DE NAVARRA TORTOSA ENERGÍA

ERCROS INDUSTRIAL RUBIERA G. ENERGIA DE GUARARRANQUE

ENERGIA TERMOELECTRICA GARONA VERDA TRUCHAS DEL CINCA

COGENERADORA BURGALESA GENERACIÓN MAZAGÓN FORESTAL DEL ATLÁNTICO

INDUSTRIAS DEL TABLERO UNIÓN DE EMPRESAS MADERERAS CAILA Y PARES

BIOETANOL GALICIA INDUSTRIAS DEL ACETATO DE CELULOSA TARRAGONA POWER

ZABALGARBI ENERGY WORKS CARTAGENA ENERGÍA DEL XERTA

MOLINOS DEL EBRO EASA II SOGAMA

AVICU UTISA TABLEROS DEL MEDITERRANEO INCOGEN

CLP ENVIROGAS IDAE ECYR

SMURFIT NAVARRA ENCE F.M.C. FORET

U.F. ENERGIAS ESPECIALES TEC 94 IRISCROM ENERGIA

SALTOS DEL NANSA MADERAS MANUEL VILLAMOR HIDROELECTRICA DEL TRASVASE

SISTEMAS ENERGETICOS LA PLANA SIDERGAS ENERGIA MATEOS

BIOCULTIVOS NAVARRA

CANTABRICO ENDESA DISTRIBUCION VIESGO 1 CANTABRICOENDESA ENERGIAS DE ARAGON UNION FENOSA F. ELÉCTRICAS DE VALENCIAIBERDROLA IBERDROLA SAN FRANCISCO DE ASISUNION FENOSA ELEC. CONQUENSE DISTRIBUCION HIDROELECTRICA DEL GUADIELA

CANTABRICO AGRI ENERGIA COM. DE ELÉCTRICAS OVIEDO BP AMOCO GASENDESA ENERGIA ASTURALTER BASSOLS ENERGIA ELECTRA NORTE ENRON LERSA ELECTRA ENERGIA ENDESA ENERGIAIBERDROLA ELECTRABEL ESPAÑA ELYO GYMSA IBERICA ELECTRA DEL CARDENERSKS FACTOR ENERGIA GAS NATURAL C. GAS NATURAL ELECTRICIDADUNION FENOSA ESTABANELL Y PAHISA CANTABRICO ENERGIA H. DEL VALIRA GAS NATURAL SERVICIOS IBERDROLA NAVARRO GENERACION

HISPAELEC ENERGIA SALTEA COMERCIAL SEMPRA ENERGYRWE TRAIDING U. FENOSA GENERACION U. FENOSA MULTISERVICIOSSHELL ESPAÑA ELECTRICA DE CADIZ H. DEL CABRERAADURIZ ENERGIA CANAL ENERGIA COMERCIALIZACION NATURGASELECTRICA SOLLERENSE ENERCO CUELLAR ENERGIA ELECTRICA DEL EBROUNION ELECTRO INDUSTRIAL ELECTRA CALDENSE E. CE ENERGIANEXUS ENERGIA ANSELMO LEON EOSA ENERGIAGLOBAL TRES ENERGÍA ELÉCTRICA SEROSENSE ELEC. CONQUENSE COMERC.ELECTRICA VAQUER ICASA CEPSA GAS COMERCIALIZADORAEL PROGRESO ENERGIA EPRESA ENERGÍA SOREAVIESGO COMERCIALIZACIÓN EDP ENERGÍA IBÉRICA CYD ENERGIACANTABRICO GENERACION SNIACE ENERGÍA ELECTRICA CALLOSINAE. ALTO MIÑO COM. DE ENERGÍA EGL ESPAÑA COMERCIALIZADORA DEL CEGAROMERO ABREU HERMANOS CENTRICA ENERGIA DETISAE-COGENIA DITELCOM ENERGY VIESGO ENERGÍADIVERTA COMUNICACIONES Y TELEFONIA

ONE (Marruecos) AARE-TESSIN (Suiza) ELECTRABEL (Bélgica) EDF (Francia)ELECTRABEL (Bélgica) ENBW (Alemania) EDP (Portugal) ONE (Marruecos)REN (Portugal) REN (Portugal) ENEL (Italia) SONELGAZ (Argelia)

EGL (Suiza) E.ON (Alemania) ENEL TRADE S.P.A. (Italia)EDP GESTAO DA PRODUÇAO DE ENERGIA (Portugal) BARCLAYS BANK PLC (Reino Unido)

CELSA PRAXAIR PRODUCCIÓN ESPAÑA EL YATE SOC. COOP. ANDALUZA DURANGLOBAL STEEL WIRE JAMONES PESON JUAN JOSÉ MARTÍNEZ LÓPEZ FUNDICIONES MIGUEL ROS

TORTOSA ENERGÍA

03/10/2004

MARCH 1999 OCTOBER 2004PRODUCERS

RETAILERS

EXTERNAL AGENTS

QUALIFIED CONSUMMERS

PRODUCERS

DISTRIBUTION

RETAILERS

EXTERNAL AGENTS

QUALIFIED CONSUMMERS

DISTRIBUTION

INVESTMENT PROCESS

Planning 2002-2011 (MW)

Currently (MW) % In Market (%)

CCGT 14.800 7.289 49,25% 100%

COGENERATION 7.100 5.781 81,42% 29%

WIND ENERGY 13.000 6.400 49,23% 3%

PLANNING EVOLUTION

MARKET ENERGY OF POWER STATIONS UNDER SPECIAL REGIMEAND POWER STATIONS UNDER ORDINARY REGIME WITH INCENTIVES

-200

0

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2.000

2.200

2.40010

/09/

2002

11/1

0/20

02

11/1

1/20

02

12/1

2/20

02

12/0

1/20

03

13/0

2/20

03

16/0

3/20

03

16/0

4/20

03

18/0

5/20

03

18/0

6/20

03

19/0

7/20

03

19/0

8/20

03

20/0

9/20

03

21/1

0/20

03

21/1

1/20

03

22/1

2/20

03

22/0

1/20

04

23/0

2/20

04

25/0

3/20

04

25/0

4/20

04

27/0

5/20

04

27/0

6/20

04

28/0

7/20

04

28/0

8/20

04

29/0

9/20

04

Date

EN

ER

GY

(M

Wh

)

-200

0

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2.000

2.200

2.400

PO

WE

R (

MW

)

Daily market (with technical constraints) Intraday market Installed power

0

300

600

900

1200

1500

1800

2100

2400

11/

01/

98

29/

03/

98

14/

06/

98

30/

08/

98

15/

11/

98

31/

01/

99

18/

04/

99

04/

07/

99

19/

09/

99

05/

12/

99

20/

02/

00

07/

05/

00

23/

07/

00

08/

10/

00

24/

12/

00

11/

03/

01

27/

05/

01

12/

08/

01

28/

10/

01

13/

01/

02

31/

03/

02

16/

06/

02

01/

09/

02

17/

11/

02

02/

02/

03

20/

04/

03

06/

07/

03

21/

09/

03

07/

12/

03

22/

02/

04

09/

05/

04

25/

07/

04

GWh/week

PURCHASES BY RESELLERS, QUALIFIED CONSUMERS AND EXTERNAL AGENTS

Period from 01/01/1998 to 03/10/2004

Energy at free prices (period): 344.216,6

GWhTotal energy purchased (period)(*): 1.199.584,8 GWh

Energy at free prices (last week): 1.781,5 GWh (44,04 %)Total energy purchased (last week): 4.045,5 GWh

* Excluding pumpig and self-producers Daily Intraday

1998 1999 2000 2001 2002 2003 2004 44,04 %

SPANISH DAILY MARKET RESULTS

January 1998 - 3 October 2004

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

01/0

1/98

01/0

4/98

01/0

7/98

01/1

0/98

01/0

1/99

01/0

4/99

01/0

7/99

01/1

0/99

01/0

1/00

01/0

4/00

01/0

7/00

01/1

0/00

01/0

1/01

01/0

4/01

01/0

7/01

01/1

0/01

01/0

1/02

01/0

4/02

01/0

7/02

01/1

0/02

01/0

1/03

01/0

4/03

01/0

7/03

01/1

0/03

01/0

1/04

01/0

4/04

01/0

7/04

01/1

0/04

Date

cEur/kWh

0

100.000

200.000

300.000

400.000

500.000

600.000

700.000

800.000

900.000

MWh

Maximum hourly price Weighted average price Minimum hourly price Daily energy

Weighted average price in the daily market Period Price 01/01/1998 03/10/2004 3,055 cEur/kWh

FINAL PRICE

0,0

1,0

2,0

3,0

4,0

5,0

6,0

1-10-03 1-11-03 1-12-03 1-1-04 1-2-04 1-3-04 1-4-04 1-5-04 1-6-04 1-7-04 1-8-04 1-9-04 1-10-04

Daily Market Price (DMP) Weighted Average Final Price (WAFP) Differences (WAFP - DMP)

cEur/kWh

DIFFERENCES BETWEEN WEIHGTED AVERAGE FINAL PRICEAND DAILY MARKET PRICE

OCTOBER 2003 - 3 OCTOBER 2004

CapacityPayment

ENERGY BY PRODUCTION TECHNOLOGY

Daily energy grouped by production technologyJanuary 1998 to 3 October 2004

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

750

800

850

01/0

1/98

01/0

4/98

01/0

7/98

01/1

0/98

01/0

1/99

01/0

4/99

01/0

7/99

01/1

0/99

01/0

1/00

01/0

4/00

01/0

7/00

01/1

0/00

01/0

1/01

01/0

4/01

01/0

7/01

01/1

0/01

01/0

1/02

01/0

4/02

01/0

7/02

01/1

0/02

01/0

1/03

01/0

4/03

01/0

7/03

01/1

0/03

01/0

1/04

01/0

4/04

01/0

7/04

01/1

0/04

Date

EN

ER

GY

(G

Wh

)

Special Regime to Distribution Special Regime to Market Nuclear

Imports Hydro Coal

Combined Cycle Fuel-Gas

MARKET PRICES AND GENERATION RESERVE (HYPOTHESIS 1)OCTOBER 2003 - OCTOBER 2004

0

2

4

6

8

10

12

14

16

18

20

01/1

0/03

13/1

0/03

25/1

0/03

06/1

1/03

19/1

1/03

01/1

2/03

13/1

2/03

26/1

2/03

07/0

1/04

19/0

1/04

01/0

2/04

13/0

2/04

25/0

2/04

09/0

3/04

21/0

3/04

03/0

4/04

15/0

4/04

27/0

4/04

10/0

5/04

22/0

5/04

03/0

6/04

16/0

6/04

28/0

6/04

10/0

7/04

23/0

7/04

04/0

8/04

16/0

8/04

29/0

8/04

10/0

9/04

22/0

9/04

Date

-25.000

-20.000

-15.000

-10.000

-5.000

0

5.000

10.000

15.000

20.000

25.000

Market price Generation reserve

Market price trend line Generation reserve trend line

Pri

ce (

cEu

ro/k

Wh

)

Ho

url

y E

ner

gy

(MW

h)

MARKET PRICES AND GENERATION RESERVE (HYPOTHESIS 2)OCTOBER 2003 - OCTOBER 2004

0

2

4

6

8

10

12

14

16

18

20

01/1

0/03

13/1

0/03

25/1

0/03

06/1

1/03

19/1

1/03

01/1

2/03

13/1

2/03

26/1

2/03

07/0

1/04

19/0

1/04

01/0

2/04

13/0

2/04

25/0

2/04

09/0

3/04

21/0

3/04

03/0

4/04

15/0

4/04

27/0

4/04

10/0

5/04

22/0

5/04

03/0

6/04

16/0

6/04

28/0

6/04

10/0

7/04

23/0

7/04

04/0

8/04

16/0

8/04

29/0

8/04

10/0

9/04

22/0

9/04

Date

-25.000

-20.000

-15.000

-10.000

-5.000

0

5.000

10.000

15.000

20.000

25.000

Market price Generation reserve

Market price trend line Generation reserve trend line

Pri

ce (

cEu

ro/k

Wh

)

Ho

url

y E

ner

gy

(MW

h)

MARKET PRICES AND GENERATION RESERVE (HYPOTHESIS 3)OCTOBER 2003 - OCTOBER 2004

0

2

4

6

8

10

12

14

16

18

20

01/1

0/03

13/1

0/03

25/1

0/03

06/1

1/03

19/1

1/03

01/1

2/03

13/1

2/03

26/1

2/03

07/0

1/04

19/0

1/04

01/0

2/04

13/0

2/04

25/0

2/04

09/0

3/04

21/0

3/04

03/0

4/04

15/0

4/04

27/0

4/04

10/0

5/04

22/0

5/04

03/0

6/04

16/0

6/04

28/0

6/04

10/0

7/04

23/0

7/04

04/0

8/04

16/0

8/04

29/0

8/04

10/0

9/04

22/0

9/04

Date

-25.000

-20.000

-15.000

-10.000

-5.000

0

5.000

10.000

15.000

20.000

25.000

Market price Generation reserve

Market price trend line Generation reserve trend line

Pri

ce (

cEu

ro/k

Wh

)

Ho

url

y E

ner

gy

(MW

h)

2. SPANISH PRICE CONVERGENCE WITH OTHER EUROPEAN ORGANIZED MARKETS.

COMMERCIAL CAPACITY

Source: REEJuly 2004

EUROPEX AVERAGE PRICES01/01/03 - 03/10/04

0

20

40

60

80

100

120

140

160

180

200

1-Jan 8-Feb 18-Mar 25-Apr 2-Jun 10-Jul 17-Aug 24-Sep 1-Nov 9-Dec 16-Jan 23-Feb 1-Apr 9-May 16-Jun 24-Jul 31-Aug

Date

Eur/MWh

APX NORDPOOL EEX POWERNEXT OMEL GME

APX: 660,3 368,8 637,4

POWERNEXT: 310,4

APX: 216,6 APX: 215

EUROPEX QUARTER AVERAGE PRICES01/01/00 - 5/10/04

0

10

20

30

40

50

60

70

80

1º Q

uar

ter

2º Q

uar

ter

3º Q

uar

ter

4º Q

uar

ter

1º Q

uar

ter

2º Q

uar

ter

3º Q

uar

ter

4º Q

uar

ter

1º Q

uar

ter

2º Q

uar

ter

3º Q

uar

ter

4º Q

uar

ter

1º Q

uar

ter

2º Q

uar

ter

3º Q

uar

ter

4º Q

uar

ter

1º Q

uar

ter

2º Q

uar

ter

3º Q

uar

ter

4º Q

uar

ter

Date

Eur/MWh

APX NORDPOOL EEX POWERNEXT OMEL GME

Year 2000 Year 2001 Year 2002 Year 2003 Year 2004

PRECIOS MEDIOS TRIMESTRALES EUROPEX01/10/03 - 5/10/04

0

10

20

30

40

50

60

70

80

4º T

rim

estr

e

1º T

rim

estr

e

2º T

rim

estr

e

3º T

rim

estr

e

4º T

rim

estr

e

Fecha

Eur/MWh

APX NORDPOOL EEX POWERNEXT OMEL GME

IMPORTS FROM PORTUGAL

IMPORTS FROM PORTUGALPERIOD FROM JANUARY 1998 TO SEPTEMBER 2004 (GWh)

0

50

100

150

200

250

300

350

400

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

Organized market Bilaterals

Year 1998 Year 2000Year 1999 Year 2001 Year 2002 Year 2003 Year 2004

EXPORTS TO PORTUGAL

EXPORTS TO PORTUGAL FROM JANUARY 1998 TO SEPTEMBER 2004 (GWh)

0

100

200

300

400

500

600

700

800

900

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

Organized Market Bilaterals

Year 1998 Year 2000Year 1999 Year 2001 Year 2002 Year 2003 Year 2004

IMPORTS FROM FRANCE

IMPORTS FROM FRANCEPERIOD FROM JANUARY 1998 TO SEPTEMBER 2004 (GWh)

0

100

200

300

400

500

600

700

800

900

1.000

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

Organized market Bilaterals

Year 1998 Year 2000Year 1999 Year 2001 Year 2002 Year 2003 Year 2004

EXPORTS TO FRANCE

EXPORTS TO FRANCE FROM JANUARY 1998 TO SEPTEMBER 2004 (GWh)

0

50

100

150

200

250

300

350

400

450

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

nov

ene

mar

may ju

l

sep

Organized Market Bilaterals

Year 1998 Year 2000Year 1999 Year 2001 Year 2002 Year 2003 Year 2004

COMMERCIAL CAPACITY AND ENERGY TRADED

NTERCHANGE CAPACITY WITH PORTUGAL AND ENERGY MATCHED IN THE

MARKETS AND EXECUTED IN BILATEAL CONTRACTS

Period from September 2003 to 3 October 2004

-2000

-1500

-1000

-500

0

500

1000

1500

2000

01/0

9/20

0308

/09/

2003

15/0

9/20

0322

/09/

2003

29/0

9/20

0306

/10/

2003

13/1

0/20

0320

/10/

2003

26/1

0/20

0302

/11/

2003

09/1

1/20

0316

/11/

2003

23/1

1/20

0330

/11/

2003

07/1

2/20

0314

/12/

2003

21/1

2/20

0328

/12/

2003

04/0

1/20

0411

/01/

2004

18/0

1/20

0425

/01/

2004

01/0

2/20

0408

/02/

2004

15/0

2/20

0422

/02/

2004

29/0

2/20

0407

/03/

2004

14/0

3/20

0421

/03/

2004

29/0

3/20

0405

/04/

2004

12/0

4/20

0419

/04/

2004

26/0

4/20

0403

/05/

2004

10/0

5/20

0417

/05/

2004

24/0

5/20

0431

/05/

2004

07/0

6/20

0414

/06/

2004

21/0

6/20

0428

/06/

2004

05/0

7/20

0412

/07/

2004

19/0

7/20

0426

/07/

2004

02/0

8/20

0409

/08/

2004

16/0

8/20

0423

/08/

2004

30/0

8/20

0406

/09/

2004

13/0

9/20

0420

/09/

2004

27/0

9/20

04

Días

MW

h

Import capacity not used Export capacity not used Import Export

EXPORT

IMPORT

COMMERCIAL CAPACITY AND ENERGY TRADED

INTERCHANGE CAPACITY WITH PORTUGAL AND ENERGY MATCHED IN THE

MARKETS AND EXECUTED IN BILATEAL CONTRACTS

Period from September 2004 to 3 October 2004

-2000

-1500

-1000

-500

0

500

1000

1500

2000

01/0

9/20

04

08/0

9/20

04

15/0

9/20

04

22/0

9/20

04

29/0

9/20

04

Días

MW

h

Import capacity not used Export capacity not used Import Export

EXPORT

IMPORT

COMMERCIAL CAPACITY AND ENERGY TRADED

INTERCHANGE CAPACITY WITH FRANCE AND ENERGY MATCHED IN THE

MARKETS AND EXECUTED IN BILATEAL CONTRACTS

Period from September 2003 to 3 October 2004

-2000

-1500

-1000

-500

0

500

1000

1500

2000

01/0

9/20

0308

/09/

2003

15/0

9/20

0322

/09/

2003

29/0

9/20

0306

/10/

2003

13/1

0/20

0320

/10/

2003

26/1

0/20

0302

/11/

2003

09/1

1/20

0316

/11/

2003

23/1

1/20

0330

/11/

2003

07/1

2/20

0314

/12/

2003

21/1

2/20

0328

/12/

2003

04/0

1/20

0411

/01/

2004

18/0

1/20

0425

/01/

2004

01/0

2/20

0408

/02/

2004

15/0

2/20

0422

/02/

2004

29/0

2/20

0407

/03/

2004

14/0

3/20

0421

/03/

2004

29/0

3/20

0405

/04/

2004

12/0

4/20

0419

/04/

2004

26/0

4/20

0403

/05/

2004

10/0

5/20

0417

/05/

2004

24/0

5/20

0431

/05/

2004

07/0

6/20

0414

/06/

2004

21/0

6/20

0428

/06/

2004

05/0

7/20

0412

/07/

2004

19/0

7/20

0426

/07/

2004

02/0

8/20

0409

/08/

2004

16/0

8/20

0423

/08/

2004

30/0

8/20

0406

/09/

2004

13/0

9/20

0420

/09/

2004

27/0

9/20

04

Días

MW

h

Import capacity not used Export capacity not used Import Export

EXPORT

IMPORT

COMMERCIAL CAPACITY AND ENERGY TRADED

INTERCHANGE CAPACITY WITH FRANCE AND ENERGY MATCHED IN THE

MARKETS AND EXECUTED IN BILATEAL CONTRACTS

Period from September 2004 to 3 October 2004

-1500

-1000

-500

0

500

1000

1500

01/0

9/20

04

08/0

9/20

04

15/0

9/20

04

22/0

9/20

04

29/0

9/20

04

Días

MW

h

Import capacity not used Export capacity not used Import Export

EXPORT

IMPORT

CAPACITY GENERATION RESERVE AND MARKET PRICES

In the Spanish Market it exists a high inverse correlation between market price evolution any generation capacity reserve evolution.

Organised market prices strongly depends on the relative scarcity of the commodity.

Demand for electricity also influences market prices.

Fuel prices have had a lower influence on electricity prices.

Looking at the evolution of the organised Market European prices, it seems that the capacity generation reserve has a greater influence on price levels and on price volatility than fuel prices.

RECENT EVOLUTION OF THE ELECTRICITY PRICES IN SPAIN

Debate about the recent level and evolution of the Spanish electricity prices in the organized market. Daily market prices have followed an stable path despite of the increase of fuels prices (gas and coal).

Demand for electricity would have been higher if: Export commercial capacity have not been limited to 250 MW since April

and

Lower prices under the above mentioned circumstances would not have been different, because:

Capacity generation reserve is high because of the new combined cycle gas plants.

Spanish prices are in line with the prices of the European organized markets. If the Spanish prices would have been higher, import would have increase and if they have been lower, exports would have been higher.

INTERCONNECTION CAPACITY IN 2005 AACORDING TO THE 2003-2011 PLANNING

INTERCONNECTION FUTURE WINTER COMMERCIAL CAPACITY (MW)

With France 3,000 (Delayed)

With Portugal 1,200

With Morocco 900

Total 5,100

Source: Spanish 2003-2011 Electricity and Gas network planning

3. MAIN FACTORS INFLUENCING MARKET PRICES.

MAIN FACTORS INFLUENCING INTERNATIONAL TRADE (I)

Driven by relative price difference between organised markets. Available commercial capacity

Always occupied in the right direction if the congestions are solved by implicit auctions or market coupling/splitting.

Non used when the price difference remains under other methods to solve congestions.

Level of other generation components of the final electricity price. Deviation prices. Capacity payments. Ancillary services. Charges derived from explicit auctions when they exist.

Barriers from regulation. The principle “use it or loose it” alone is difficult to be applied in

practice. Characteristics and timing existing in the procedures to communicate

transactions to the TSOs. Level of charges derived from the tariffs for the use of the

distribution and transport networks.

MARKET POWER AND CONGESTIONS.

Market power can be exercised easier when explicit auctions of the capacity are used. The value of the non used commercial capacity is higher than its value when it is totally used form the point of view of a significant number of market participants.

Implementing counter trading in the daily market. A generator with several units can get an extra payment for creating the congestion and for solving it.

Not applying or considering final electricity prices, which include ancillary services up to meter readings, could facilitate market power abuse at the side of the congested border where they are higher.

Implementing a unit commitment optimization method to solve domestic constraints.

Fixing reference costs caps for generation plants regarding technical constraints procedure instead of solving the problem will aggravate it, since it will only establish a set of minimum prices.

Virtual power plant auctions can maintain the market power of the owner of the physical generation plants and distort market prices (the minimum auction price will be the minimum price).

STATEMENT INCLUDED IN THE LAST FLORENCE FORUM CONCLUSIONS

“Director-General Lamoureux, whilst underlining the progress that proper implementation of the new package could potentially bring, pointed out the currently persisting limitations of the electricity market: transposition of the new directives in Member States is insufficient; market opening in Member States remain at the moment still rather asymmetrical; since the market opening process started the degree of concentration in the industry has consistently increased and there is a clear risk that the public will assimilate recent price increases in electricity with this ongoing concentration process; infrastructure development is still not satisfactory, despite the political objective of the European Council, agreed in Barcelona in 2002, to have in each Member State an interconnection capacity of at least 10% of the generation capacity. In this context, the Commission envisages to make the integration of an electricity cable in railway or road tunnels a condition for co financing of projects comprising such tunnels under the transeuropean networks programme for transport.”

www.europa.eu.int

4. EXPLICIT AUCTIONS, MARKET SPLITTING AND MARKET COUPLING

COMPARISON BETWEEN EXPLICIT AUCTIONS AND A FINANCIAL MARKET TO HEDGE THE PRICE DIFFERENCE (I)

If there is a liquid spot energy market in the countries of origin and destination of an international physical bilateral contract, the international physical energy contract is just a price difference hedging.

If there are no liquid spot energy markets at either end, since the electricity can not be stored, and taking into account the structure of the present electricity business on the EU states, the liberalization progress will be very complicated

Explicitly auctioning the rights over an interconnection is equivalent to a financial hedge over the price difference between the two spot markets at both sides of the interconnection

COMPARISON BETWEEN EXPLICIT AUCTIONS AND A FINANCIAL MARKET TO HEDGE THE PRICE DIFFERENCE (II)

If the prerequisite of the existence of a liquid spot market at each side of the interconnection is not in place, assigning to an individual party the rights to use the interconnection will aggravate any existing market structure/power problem that prevented the liquid spot market price to be formed

ROLE OF THE REGIONAL MARKETS (I)

The Document of strategy of the European Commission presented in the Florence Forum

Emphasizes, in the first place, the role that can play the following regional markets:

Iberian Peninsula, United Kingdom and Ireland, Northern countries, Italy, Western Europe, East Europe, Southeast Europe and Baltic Sea, as well as the importance that these market will be developed as a necessary step in the integration process.

Development of the international interchanges.

Improvement of the interconnections and reduction of the market concentration.

To facilitate the consumers choice and to obtain a universal service.

COOPERATION BETWEEN ORGANIZED MARKETS

Why a methodology of cooperation between interconnected organized market ? Maximum price convergence between all cooperating markets in case of

congestions The energy flows from the low price area to the high price area

Maximum use of the bottleneck capacity

Equal price if there are no congestions

Enlarge the relevant market and therefore decreases the market power of the regional participants

Is the only way to apply the “use it or lose it rule” of the physical rights over the interconnection capacities

Allows market bids and bilateral trades to compete under the same conditions

Makes clear that, when liquid markets exist, explicit auctions of the capacity are pure financial hedging tools.

5. IMPROVING THE MARKET STRUCTURE AND SECURITY OF SUPPLY IN ELECTRIC SYSTEMS

FACTORS THAT IMPROVE THE MARKET STRUCTURE FROM THE DEMAND SIDE

Demand flexibility and efficient response to prices by consumers.

The procedures for consumer protection regarding information and guarantee to the exercise of a right to change supplier.

A link must be created between wholesale transactions and retail transactions. It requires: The existence of prices formed on liquid public organised markets The accessibility to all forms of contracting to all consumers, even

to the organized market (since it avoids the practice of excessive retails margins in commercialization).

Effective conditions for non-discrimination to any type of suppliers or retailers in the market including the access to the international trades.

Total guarantee of access to the transportation and distribution networks and effective right to change of supplier for consumers.

FACTORS THAT IMPROVE THE MARKET STRUCTURE FROM THE PRODUCTION SIDE

The elimination of entrance barriers for the access to the production activity: Administrative or similar authorizations.

Access to the networks.

Existence of organized markets liquid and open to the participation of any producer.

Progressively that the producer faces a flexible demand.

The competition from the international trade: Imports prevent excessive prices.

The possibility of exporting at a competitive market price stimulates the investment process in the mid term.

A forward market accessible to any type of producer can facilitate the entry to the market of these agents.

6. THE IBERIAN MARKET.

TOWARDS THE IBERIAN MARKET (I)

Memorandum of understanding for the electricity between Spain and Portugal (July 1998).

Removed of obstacles to electricity trade REN become external agent of the Spanish market Spanish electricity companies can sell electricity in Portugal Coordination between REE and REN as system operators In march 1999 a joined document is released

The Iberian market protocol (November 2001). Guarantee of access to the OMI and to the interconnections in conditions of

equality and freedom of contracting.• The OMI must open its capital to the participation of Spanish and Portuguese

companies.• Performances of the OMI of strict impartiality. Amplification of the interconnections.

• Line Alqueba-Balboa (2004).• Line Cartelle-Lindoso (2006). • Reinforcement of the interconnection of the Douro.• Increase of the transit capacity of the line Cedillo-Oriol.

Harmonized technical procedures to operate the system.

TOWARDS THE IBERIAN MARKET (II)

Conclusions of the Valencia Summit (April 2002) Spot market in Spain. Forward market in Portugal.

Memorandum of Understanding signed in the Figueira da Foz Summit (November 2003).

Principles for the Iberian Markets. International agreements to be subscribed on January 2004. Shareholding exchange between OMEL and OMIP of 10% of this

respective social capital.

International Agreement on the Iberian Market (January 2004) revised in October 2004

First step: Spot Market in Spain and Forward in Portugal (July 2005) Both markets are integrated in 2007 Regulation harmonization including tariffs structure