Smeers - What can the US lean from the European experience...

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What can the US lean from the European experience in the construction of a real integrated electricity market? Yves Smeers * Harvard Electricity Policy Group, Washington D.C, September 2001 * Tractebel Professor of Energy Economics, Department of Mathematical Engineering and Center for Operations Research and Econometrics, UniversitØ catholique de Louvain, Belgium
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1 Et ainsi, ne pouvant faire que ce qui est juste soit fort, on a fait que ce qui est fort fût juste (Pascal, PensØes (1670)) 1. Introduction The invitation to participate in this panel reminded me of that student, back in High School, who had been asked, °what do you known about the battle of Waterloo?± He answered °nothing±, failed the exam but contested the decision. As he argued, he had been asked to indicate what he knew and this is exactly what he had done. °Nothing± may be a reasonable answer to the question °What lessons can we (the US) learn from the European experience± in the construction of an integrated electricity market. But only saying °nothing± does not justify crossing the Atlantic and a participation in a panel. Like the student of the story, I should say more during these 15 minutes. My answer will thus be °not much, but something±. This preliminary remark by no means implies that °not much± happened in Europe in terms of electricity restructuring. On the contrary, some European countries and particularly the UK and Norway were at the forefront of the movement. The whole story even started in the UK under the strong leadership of Mrs Thatcher. Restructuring also took place in Norway with less disruption. Europe was also innovative for integrating electricity markets. Nordpool, which progressively developed around Norway and now comprises the Nordic countries besides Iceland, operates very well. None of these movements was the result of an action of the European Union (EU). In contrast, progress has been slow in the °Internal Electricity market± (IEM), which the EU initiated. I gather from the description of the objectives of the panel that it is the IEM that is mostly of interest to this audience. I will therefore concentrate on that market with occasional references to Nordpool. It may be relevant to first try to relate this discussion to US concerns. FERC order 2000 and the creation of RTOs provide the opportunity to do so. On June 19 2001, FERC organized a technical conference on interregional coordination. At FERC²s request, PJM later submitted some comments arguing the necessity for FERC to induce a sufficiently harmonized market design in order to properly address the seam problem. On July 12, FERC issued several orders in relation
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2 to the creation of four RTOs in the US. Various statements were made on that occasion with regard to the opportunity of being more or less directive in the process of creating RTOs. In one case at least FERC was directive as it ordered the creation of a single North-Eastern RTO based on the PJM design. The advantage of adopting a common market paradigm, or at least a
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