Training on Regulation A webinar for the European Copper Institute Webinar 2: Market Design Dr. Konstantin Petrov / Dr. Da...
Agenda a)  Power pools 3.  Wholesale market models 2.  General market models b)  Markets with bilateral trade c)  Power ex...
1. Introduction Actors in the electricity market <ul><li>Producer (generator) </li></ul><ul><li>Trader  </li></ul><ul><li>...
1. Introduction Services in the electricity market <ul><li>Energy (commodity, MWh) </li></ul><ul><li>(Generation) capaciti...
2. General Market Models Vertically integrated company Customers Market Operator Trader Independent Power Producer Generat...
2. General Market Models Vertical unbundling Customers Generator Generator Generator Transmission System Operator Distribu...
2. General Market Models Unbundling Models <ul><li>Unbundling using ring-fencing rules setting requirements for:  </li></u...
2. General Market Models Advantages of full ownership unbundling <ul><li>Removes incentives to discriminate competing gene...
2. General Market Models Disadvantages of full ownership unbundling <ul><li>Efficiency loss in coordination of planning be...
2. General Market Models Single Buyer Customers Generator Generator Generator Transmission Distributor Distributor Distrib...
2. General Market Models Wholesale competition Customers Generator Generator Generator Transmission Customers Customers Sy...
2. General Market Models Retail competition Customers Generator Generator Generator Transmission Customers Customers Syste...
2. General Market Models International developments – wholesale power markets California (1998) Ontario  (1998) Texas  (20...
2. General Market Models International developments – retail competition End-users eligible to choose their supplier freel...
3. Wholesale Market Models Market timeline time real time Day-ahead  market Spot market Forward market Forward / Futures m...
3. Wholesale Market Models a) Power pools – general structure Customers Generation unit 1 Generation unit 2 Generation uni...
3. Wholesale Market Models a) Power pools – common features <ul><li>All electricity traded over pool (mandatory) </li></ul...
3. Wholesale Market Models a) Power pools – cost-based and price-based Price-based power pool Cost-based power pool <ul><l...
3. Wholesale Market Models Generator Generator Generator Transmission System Operation Supplier Supplier Distribution Dece...
3. Wholesale Market Models b)   Markets with bilateral trade – common features <ul><li>Generators, suppliers and large cus...
System Operator 3. Wholesale Market Models b)   Markets with bilateral trade – European Model  Generation Transport Load S...
3. Wholesale Market Models c) Power exchanges – common features <ul><li>Organised voluntary market in addition to bilatera...
3. Wholesale Market Models d)   Market, system and transmission operator Market operator (MO) System operator (SO) Transmi...
3. Wholesale Market Models d)   Market, system and transmission operator – international practice   TO SO MO TO SO MO TO S...
TSO Bidders for  balancing  services  Balancing Group Balancing energy used to settle physically the aggregated system imb...
Transmission Network Service  Distribution Network Service  System Services  Ancillary Services 4. Balancing Markets Ancil...
4. Balancing Markets Ancillary services – types  Active Reserve / Frequency Control  Voltage / Reactive Power Control Rest...
4. Balancing Markets Ancillary services – procurement Compulsory provision – –  (  ) Real-time market (  ) (  )   Pu...
4. Balancing Markets Ancillary services – remuneration  <ul><li>Remuneration at the marginal price </li></ul><ul><li>Payme...
End of Webinar 2 <ul><ul><ul><li>KEMA Consulting GmbH </li></ul></ul></ul><ul><ul><ul><li>Kurt-Schumacher-Str. 8, 53113 Bo...
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Electricity Markets Regulation - Lesson 2 - Market Design

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This section explains the main properties of different types of electricity markets exhibiting different level of competition and different forms of organisation.

• General market models : vertically integrated companies / single buyer / wholesale competition / retail competition

• Power pools : Price based / Cost based

• Markets with bilateral trade

• Balancing markets

• Power exchanges

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Transcript of "Electricity Markets Regulation - Lesson 2 - Market Design"

  1. 1. Training on Regulation A webinar for the European Copper Institute Webinar 2: Market Design Dr. Konstantin Petrov / Dr. Daniel Grote 2.11.2009
  2. 2. Agenda a) Power pools 3. Wholesale market models 2. General market models b) Markets with bilateral trade c) Power exchanges d) System, market and transmission function 1. Introduction 4. Balancing markets
  3. 3. 1. Introduction Actors in the electricity market <ul><li>Producer (generator) </li></ul><ul><li>Trader </li></ul><ul><li>Supplier (retailer, marketer, load-serving entity etc.) </li></ul><ul><li>Consumer </li></ul>Market participants Market facilitators <ul><li>Transmission System Operator </li></ul><ul><li>Market Operator </li></ul><ul><li>Distribution System Operator </li></ul>
  4. 4. 1. Introduction Services in the electricity market <ul><li>Energy (commodity, MWh) </li></ul><ul><li>(Generation) capacities (MW) </li></ul><ul><li>Transport capacities </li></ul><ul><li>System / Ancillary services </li></ul>
  5. 5. 2. General Market Models Vertically integrated company Customers Market Operator Trader Independent Power Producer Generation Transmission Distribution Supply All segments integrated within a single company (incumbent) System Operation
  6. 6. 2. General Market Models Vertical unbundling Customers Generator Generator Generator Transmission System Operator Distributor Distributor Distributor Customers Customers Market Operator Supplier Supplier Supplier Trader accounting functional legal ownership unbundling
  7. 7. 2. General Market Models Unbundling Models <ul><li>Unbundling using ring-fencing rules setting requirements for: </li></ul><ul><ul><li>Accounting separation </li></ul></ul><ul><ul><li>Functional separation </li></ul></ul><ul><ul><li>Company’s behaviour </li></ul></ul><ul><ul><li>May be extended towards legal separation. </li></ul></ul><ul><li>Full Ownership Unbundling </li></ul><ul><ul><li>New entity in charge of network and operation activities with separate ownership control </li></ul></ul><ul><li>Independent system operator (ISO) </li></ul><ul><ul><li>Sourcing out the SO functions under separate ownership </li></ul></ul>
  8. 8. 2. General Market Models Advantages of full ownership unbundling <ul><li>Removes incentives to discriminate competing generators / supply by: </li></ul><ul><ul><li>Limiting network capacities (e.g. transmission interconnection) </li></ul></ul><ul><ul><li>Postponing transmission investments which may cause congestions and fragment markets </li></ul></ul><ul><ul><li>Impeding physical connection to networks </li></ul></ul><ul><ul><li>Impeding access to information </li></ul></ul><ul><ul><li>Impeding customer switching </li></ul></ul><ul><li>Removes potential cross-subsidies between regulated network and competitive businesses </li></ul><ul><li>Prevents from charging excessive network tariffs </li></ul><ul><li>Increases transparency and efficiency of regulation </li></ul><ul><li>Strengthens competition </li></ul>
  9. 9. 2. General Market Models Disadvantages of full ownership unbundling <ul><li>Efficiency loss in coordination of planning between generation and transmission investments </li></ul><ul><li>Loss of synergies (e.g. shared services) and high transaction costs </li></ul><ul><li>Lower credit ratings for the unbundled companies and probably higher cost of capital </li></ul><ul><li>Increase of the complexity of regulatory framework </li></ul>
  10. 10. 2. General Market Models Single Buyer Customers Generator Generator Generator Transmission Distributor Distributor Distributor Customers Customers Single Buyer System Operation No access arrangements and direct trading between generators and distributors/suppliers Supplier Supplier Supplier Power Purchase Agreements Power Selling Agreements
  11. 11. 2. General Market Models Wholesale competition Customers Generator Generator Generator Transmission Customers Customers System Operation Supplier Supplier Supplier Distribution Wholesale market
  12. 12. 2. General Market Models Retail competition Customers Generator Generator Generator Transmission Customers Customers System Operation Supplier Supplier Supplier Distribution Retail market Wholesale market
  13. 13. 2. General Market Models International developments – wholesale power markets California (1998) Ontario (1998) Texas (2002) PJM (1998) Chile (1988) Argentina (1992) Brazil (1998) Australia ( 1997) New Zealand (1996) Japan ( 1995) South Korea ( 2001) Spain ( 1998) France ( 2001) Nordpool ( 1996) Italy ( 2004) Germany ( 2000) Poland ( 2000) Netherlands ( 1999) Ireland ( 1999) England-Wales ( 1990) Romania ( 2004) Austria ( 2001) Alberta (2001) India ( 2008) Philippines ( 2006) Singapore ( 2003)
  14. 14. 2. General Market Models International developments – retail competition End-users eligible to choose their supplier freely in % Source: DG TREN data UK since 1990 Norway since 1991 New Zealand since 1993 Australia since 1994 Finland since 1995 Sweden since 1996 USA since 1997/98 Germany since 1998 Japan since 2000 Canada since 2001/02 Switzerland since 2009 First introduction of retail competition 100% 77%         Slovenia 100% 67%         Hungary 100% 79%         Slovakia 100% 74%         Czech Republic 100% 80%         Poland 100% 74%         Lithuania 100% 76%         Latvia n/a 12%         Estonia 100% 100% 100% 100% 100% 100% Norway 100% 100% 100% 100% 100% 50% UK 100% 100% 100% 100% 100% 40% Sweden 100% 100% 100% 54% 54% 0% Spain 100% 100% 45% 30% 30% 0% Portugal 100% 100% 63% 33% 33% 0% Netherlands 100% 84% 57% n/a 30% 0% Luxembourg 100% 79% 70% 45% 45% 0% Italy 100% 100% 56% 30% 0% 0% Ireland 100% 62% 34% 30% 0% 0% Greece 100% 100% 100% 100% 100% 0% Germany 100% 70% 37% 30% 30% 0% France 100% 100% 100% 100% 100% 40% Finland 100% 100% 100% 90% 35% 0% Denmark 100% 90% 52% 35% 35% 0% Belgium 100% 100% 100% 100% 33% 0% Austria 2007 2005 2003 2000 1999 1997  
  15. 15. 3. Wholesale Market Models Market timeline time real time Day-ahead market Spot market Forward market Forward / Futures market (x years to y days ahead) Intra-day market Real-time market Ex-post trading Ex-post trading Hedge against price volatility Reduction of imbalances System / Energy balancing Optimize / Correct position Close positions / Determine production schedule
  16. 16. 3. Wholesale Market Models a) Power pools – general structure Customers Generation unit 1 Generation unit 2 Generation unit 3 Transmission Customers Customers Mandatory Power Pool System Operation Supplier Supplier Supplier all suppliers must purchase their entire demand from the pool all generators must sell their entire production to the pool Optional: Bilateral contracts (physical) Contracts for Difference (financial) Distribution Centralized scheduling, unit based
  17. 17. 3. Wholesale Market Models a) Power pools – common features <ul><li>All electricity traded over pool (mandatory) </li></ul><ul><li>Generators offer price-quantity pairs for the supply of electrical energy for each generating unit during a specific time interval </li></ul><ul><li>Pool operator forecasts demand and dispatches generating units to meet the forecast demand (one-sided pool) </li></ul><ul><li>or </li></ul><ul><li>Pool operator dispatches on the basis of a demand curve created from price-quantity bids made by buyers (two-sided pool) </li></ul><ul><li>Final production schedule of all producers is centrally determined by the pool operator </li></ul>demand € /kWh electricity clearing price supply offers for individual generating units price base load peak load
  18. 18. 3. Wholesale Market Models a) Power pools – cost-based and price-based Price-based power pool Cost-based power pool <ul><li>Generators submit offers for their individual units based on their willingness to offer </li></ul><ul><li>Offers include start-up costs and minimum and maximum MW </li></ul><ul><li>Pool operator ranks generating units based on offer prices </li></ul><ul><li>Clearing price is determined by the most expensive bid offered which is needed to satisfy demand in each time interval </li></ul><ul><li>Example: England and Wales (1990-2001) </li></ul><ul><li>Generators submit offers for their individual units at their actual or estimated variable production costs </li></ul><ul><li>Pool operator ranks generating units from least to most expensive production costs (merit order) </li></ul><ul><li>Clearing price is determined by the short-run marginal costs (fuel, operating and maintenance costs) of the generating unit that clears the market </li></ul><ul><li>Cost-based pools require regulatory audits of costs </li></ul><ul><li>Example: Latin American wholesale markets </li></ul>
  19. 19. 3. Wholesale Market Models Generator Generator Generator Transmission System Operation Supplier Supplier Distribution Decentralized scheduling, company based Customers Customers Large industrial customers b) Markets with bilateral trade – general structure Voluntary Power Exchange
  20. 20. 3. Wholesale Market Models b) Markets with bilateral trade – common features <ul><li>Generators, suppliers and large customers trade electricity bilaterally, conditions and prices not public </li></ul><ul><li>Planned delivery and consumption schedules notified to system operator </li></ul><ul><li>Voluntary power exchanges (PX) for day-ahead and intra-day trading </li></ul><ul><li>Balancing markets to ensure energy balance in real-time </li></ul><ul><li>Costs of imbalances allocated to parties that caused the imbalances </li></ul><ul><li>Example: Continental Europe </li></ul>
  21. 21. System Operator 3. Wholesale Market Models b) Markets with bilateral trade – European Model Generation Transport Load Sellers Sellers Sellers Sellers Sellers Buyers Buyers Buyers Buyers Buyers Import Export PX Bilateral market (OTC) Balancing market Capacity auction
  22. 22. 3. Wholesale Market Models c) Power exchanges – common features <ul><li>Organised voluntary market in addition to bilateral trading </li></ul><ul><li>Generators submit individual price-quantity offers for the supply of electrical energy for different production levels and time intervals </li></ul><ul><li>Suppliers, traders, large industrial users submit individual bids for different production levels and time intervals </li></ul><ul><li>Most expensive bid offered which is needed to satisfy demand in each time interval determines the market price </li></ul><ul><li>System operator takes measures to match actual demand and supply </li></ul><ul><li>Costs for system balancing levied onto all network users </li></ul>Advantages: standardization, reduction of credit risk, increased liquidity, low transaction costs, commonly accepted price reference demand € /kWh electricity market price supply individual offers price individual bids
  23. 23. 3. Wholesale Market Models d) Market, system and transmission operator Market operator (MO) System operator (SO) Transmission operator (TO) <ul><li>Operate and/or facilitate the market </li></ul><ul><li>Registration of market participants </li></ul><ul><li>Receive bids/offers from market participants </li></ul><ul><li>Market clearing </li></ul><ul><li>Settlement and invoicing </li></ul><ul><li>Operate or coordinate the system, ensure reliability and security </li></ul><ul><li>Real-time dispatch to balance supply and demand </li></ul><ul><li>Manage ancillary services to maintain system reliability </li></ul><ul><li>Manage congestion </li></ul><ul><li>Plan, construct, maintain and own transmission lines </li></ul>
  24. 24. 3. Wholesale Market Models d) Market, system and transmission operator – international practice TO SO MO TO SO MO TO SO MO TO SO MO NGC (GB, 1990-2001) ISA (Colombia) TenneT, APX (Netherlands) Stattnet, Nordpool (Norway) NENMCO (Australia) CAMMESA (Argentina) PJM (USA) TO, CallSO , PXs (California) ONS-MAE (Brazil)
  25. 25. TSO Bidders for balancing services Balancing Group Balancing energy used to settle physically the aggregated system imbalance MWh MWh MWh MWh Settlement of imbalances (ex-post) Balancing and imbalances <ul><li>Electricity markets distinguish between balancing energy and imbalance: </li></ul><ul><ul><li>Reserve / balancing energy: It reflects the definitions used by UCTE (primary, secondary, tertiary reserves) </li></ul></ul><ul><ul><li>Imbalance: a new term used to characterise the imbalances for the respecting balancing party </li></ul></ul><ul><li>This classification is widely used in Europe </li></ul>4. Balancing Markets
  26. 26. Transmission Network Service Distribution Network Service System Services Ancillary Services 4. Balancing Markets Ancillary Services and System Services Transmission Network (TSO) Distribution Network (DSO) Consumers connected to transmission Consumers connected to distribution Producers connected to transmission Producers connected to distribution
  27. 27. 4. Balancing Markets Ancillary services – types Active Reserve / Frequency Control Voltage / Reactive Power Control Restoration Services (Black Start Capability) Frequency containment Frequency restoration Replacement of reserves Services to balance supply and demand in the event of a sudden and unexpected loss of generation unit or transmission line or an unexpected increase in demand e.g. primary control, available in 5-30 seconds e.g. secondary control, available in no more than 5 minutes e.g. tertiary control, available in usually more than 15 minutes Services to go from shutdown to operating condition, and start delivering power without assistance from power system Services to maintain a specific voltage level and to generate or absorb reactive power
  28. 28. 4. Balancing Markets Ancillary services – procurement Compulsory provision – –  (  ) Real-time market (  ) (  )   Public tender     Direct agreement   (  )  <ul><ul><li>With remuneration </li></ul></ul>  (  )  <ul><ul><li>Without remuneration </li></ul></ul>Restoration services Voltage / reactive power control Frequency restoration and replacement of reserves Frequency containment
  29. 29. 4. Balancing Markets Ancillary services – remuneration <ul><li>Remuneration at the marginal price </li></ul><ul><li>Payment of the offered price (‘pay-as-bid’) </li></ul><ul><li>Use of indexed prices </li></ul><ul><li>Fixed price (e.g. cost-based pricing / regulated tariffs) </li></ul>(  ) (  ) (  )  Black start  (  )  - Voltage control  (  )  - Tertiary reserves  (  )  - Secondary frequency control - -  - Primary frequency control Initialisation Holding Utilisation Availability Capability Typical elements of remuneration
  30. 30. End of Webinar 2 <ul><ul><ul><li>KEMA Consulting GmbH </li></ul></ul></ul><ul><ul><ul><li>Kurt-Schumacher-Str. 8, 53113 Bonn </li></ul></ul></ul><ul><ul><ul><li>Tel. +49 (228) 44 690 00 Fax +49 (228) 44 690 99 </li></ul></ul></ul><ul><ul><ul><li>Dr. Konstantin Petrov </li></ul></ul></ul><ul><ul><ul><li>Managing Consultant </li></ul></ul></ul><ul><ul><ul><li>Mobil +49 173 515 1946 E-mail: konstantin.petrov@kema.com </li></ul></ul></ul>
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