Electricity Markets Regulation - Lesson 2 - Market Design

Training on Regulation A webinar for the European Copper Institute Webinar 2: Market Design Dr. Konstantin Petrov / Dr. Daniel Grote 2.11.2009

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

1. Introduction Actors in the electricity market
Producer (generator)
Trader
Supplier (retailer, marketer, load-serving entity etc.)
Consumer
Market participants Market facilitators
Transmission System Operator
Market Operator
Distribution System Operator

1. Introduction Services in the electricity market
Energy (commodity, MWh)
(Generation) capacities (MW)
Transport capacities
System / Ancillary services

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

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

2. General Market Models Unbundling Models
Unbundling using ring-fencing rules setting requirements for:
Accounting separation
Functional separation
Company’s behaviour
May be extended towards legal separation.
Full Ownership Unbundling
New entity in charge of network and operation activities with separate ownership control
Independent system operator (ISO)
Sourcing out the SO functions under separate ownership

2. General Market Models Advantages of full ownership unbundling
Removes incentives to discriminate competing generators / supply by:
Limiting network capacities (e.g. transmission interconnection)
Postponing transmission investments which may cause congestions and fragment markets
Impeding physical connection to networks
Impeding access to information
Impeding customer switching
Removes potential cross-subsidies between regulated network and competitive businesses
Prevents from charging excessive network tariffs
Increases transparency and efficiency of regulation
Strengthens competition

2. General Market Models Disadvantages of full ownership unbundling
Efficiency loss in coordination of planning between generation and transmission investments
Loss of synergies (e.g. shared services) and high transaction costs
Lower credit ratings for the unbundled companies and probably higher cost of capital
Increase of the complexity of regulatory framework

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

2. General Market Models Wholesale competition Customers Generator Generator Generator Transmission Customers Customers System Operation Supplier Supplier Supplier Distribution Wholesale market

2. General Market Models Retail competition Customers Generator Generator Generator Transmission Customers Customers System Operation Supplier Supplier Supplier Distribution Retail market Wholesale market

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)

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

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

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

3. Wholesale Market Models a) Power pools – common features
All electricity traded over pool (mandatory)
Generators offer price-quantity pairs for the supply of electrical energy for each generating unit during a specific time interval
Pool operator forecasts demand and dispatches generating units to meet the forecast demand (one-sided pool)
or
Pool operator dispatches on the basis of a demand curve created from price-quantity bids made by buyers (two-sided pool)
Final production schedule of all producers is centrally determined by the pool operator
demand € /kWh electricity clearing price supply offers for individual generating units price base load peak load

3. Wholesale Market Models a) Power pools – cost-based and price-based Price-based power pool Cost-based power pool
Generators submit offers for their individual units based on their willingness to offer
Offers include start-up costs and minimum and maximum MW
Pool operator ranks generating units based on offer prices
Clearing price is determined by the most expensive bid offered which is needed to satisfy demand in each time interval
Example: England and Wales (1990-2001)
Generators submit offers for their individual units at their actual or estimated variable production costs
Pool operator ranks generating units from least to most expensive production costs (merit order)
Clearing price is determined by the short-run marginal costs (fuel, operating and maintenance costs) of the generating unit that clears the market
Cost-based pools require regulatory audits of costs
Example: Latin American wholesale markets

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

3. Wholesale Market Models b) Markets with bilateral trade – common features
Generators, suppliers and large customers trade electricity bilaterally, conditions and prices not public
Planned delivery and consumption schedules notified to system operator
Voluntary power exchanges (PX) for day-ahead and intra-day trading
Balancing markets to ensure energy balance in real-time
Costs of imbalances allocated to parties that caused the imbalances
Example: Continental Europe

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

3. Wholesale Market Models c) Power exchanges – common features
Organised voluntary market in addition to bilateral trading
Generators submit individual price-quantity offers for the supply of electrical energy for different production levels and time intervals
Suppliers, traders, large industrial users submit individual bids for different production levels and time intervals
Most expensive bid offered which is needed to satisfy demand in each time interval determines the market price
System operator takes measures to match actual demand and supply
Costs for system balancing levied onto all network users
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

3. Wholesale Market Models d) Market, system and transmission operator Market operator (MO) System operator (SO) Transmission operator (TO)
Operate and/or facilitate the market
Registration of market participants
Receive bids/offers from market participants
Market clearing
Settlement and invoicing
Operate or coordinate the system, ensure reliability and security
Real-time dispatch to balance supply and demand
Manage ancillary services to maintain system reliability
Manage congestion
Plan, construct, maintain and own transmission lines

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)

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
Electricity markets distinguish between balancing energy and imbalance:
Reserve / balancing energy: It reflects the definitions used by UCTE (primary, secondary, tertiary reserves)
Imbalance: a new term used to characterise the imbalances for the respecting balancing party
This classification is widely used in Europe
4. Balancing Markets

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

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

4. Balancing Markets Ancillary services – procurement Compulsory provision – –  (  ) Real-time market (  ) (  )   Public tender     Direct agreement   (  ) 
With remuneration
  (  ) 
Without remuneration
Restoration services Voltage / reactive power control Frequency restoration and replacement of reserves Frequency containment

4. Balancing Markets Ancillary services – remuneration
Remuneration at the marginal price
Payment of the offered price (‘pay-as-bid’)
Use of indexed prices
Fixed price (e.g. cost-based pricing / regulated tariffs)
(  ) (  ) (  )  Black start  (  )  - Voltage control  (  )  - Tertiary reserves  (  )  - Secondary frequency control - -  - Primary frequency control Initialisation Holding Utilisation Availability Capability Typical elements of remuneration

End of Webinar 2
KEMA Consulting GmbH
Kurt-Schumacher-Str. 8, 53113 Bonn
Tel. +49 (228) 44 690 00 Fax +49 (228) 44 690 99
Dr. Konstantin Petrov
Managing Consultant
Mobil +49 173 515 1946 E-mail: konstantin.petrov@kema.com

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Electricity Markets Regulation - Lesson 2 - Market Design

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