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Electricity, market, regulation - Turin School of Local Regulation, 8 sept 2014

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Jean-Michel Glachant's Lecture at the 2014 Edition of the International Summer School on regulation of local public services in Turin

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Electricity, market, regulation - Turin School of Local Regulation, 8 sept 2014

  1. 1. Electricity market regulation: lessons learnt (by me) – a 20 years journey… Turin School of Regulation (8 September 2014) Jean-Michel Glachant - Director Florence School [& Marcelo Saguan - Microeconomix]
  2. 2. first step with markets
  3. 3. same for my first kid…
  4. 4. A great leap forward…
  5. 5. www.florence-school.eu BUT: is this a “market”… or a regulatory frame? 5 Day-ahead market Intraday markets Balancing market Reserves/ ancillary services markets Explicit auctions for transmission capacity Implicit auctions Market coupling Market splitting Capacity markets Bilateral / OTC Long term contracts Flexibility market Baseload product Peak load product Congestion management
  6. 6. www.florence-school.eu market “borders”… and regulatory frame… 6 Grid congestion Power market Black-Out Externality Grid access Multilateral or OTC Grid monopoly CO2- GHG Cross-border
  7. 7. www.florence-school.eu Yes regulation framing a market order… Why? Big issues to be addressed within the market… •In fact there is different products to market… •To market at different time horizons: day-ahead, intraday, real time… •How to integrate these different markets across countries? How does it work? •Are the “final-final” resulting markets really European or still national? 7 “Final” electricity is a bundle of different products A whole sequence of “horizon” markets Integration of national markets A European market? NB: focus on wholesale market (retail market is out of scope of this lecture)
  8. 8. www.florence-school.eu The “physics” of electricity (1) •Electricity “cannot” economically be stored •Electricity flows “cannot” be controlled & transmission lines should be operated under “safe flow” limits –If not risk of “cascading failures” and black-out 8 •Different cost & value of energy at different times  Many products differentiated by the time of production & consumption •Transmission capacity scarce resources  Many products differentiated by the location where they are produced/consumed Implications for electricity productS & related marketS
  9. 9. www.florence-school.eu The “physics” of electricity (2) •Power stations can fail suddenly •Demand can vary sharply over time •Most stations can only change output slowly and can take many hours to start up •Demand and generation must match each other continuously –If not  risk of black-out 9 •Gen.Flexibility scarce resource  Many products differentiated by ability to change production/consumption at short notice •Uncertainties  Different market horizons to buy/sell the “same” product •Strong actors coordination needed in real time  important role of System Operator in real time Implications for electricity productS & related marketS
  10. 10. www.florence-school.eu Should power markets be better… by being regulated? (1) •First : Electricity’s not a single homogeneous product as Coca Cola –Differentiated by time horizon of generation/consumption –Differentiated by location of generation/consumption –Differentiated by flexibility to modify generation/consumption on short notice •Second : Electricity’s not only energy (MWh): transmission & system flexibility components are needed –Transmission capacity & system flexibility (MW of Power) are complementary scarce resources and should be priced for delivery –Markets might put a price and a delivery priority order to these “invisible” components of electricity 10
  11. 11. www.florence-school.eu Should power markets be better… by being regulated? (2) •Third : Electricity trade positions (for energy, transmission, system flexibility) may be reviewed in successive markets until the time of delivery –Electricity components (energy, transmission, flexibility) are physically delivered only in real time >> all the former exchanges are only “notional” (“virtual”) –Markets function in a sequence of successive exchange “rounds” for the different electricity components 11
  12. 12. www.florence-school.eu Sequence of successive markets The reduced scope of “power markets” in a single zone of “system operation” 12 Short-term Energy markets Short term Reserves/ flexibility markets Delivery of the good Time T-~24h T Short term Transmission markets Energy Transmission Flexibility Reserves Real time / balancing Mechanism (centralised by the SO) Long-term Energy markets Long-term Reserves/ flexibility markets T-~months/years Long-term Transmission markets T-~3h Electricity components NB: markets for system flexibility are often called “reserves” because the SO reserves some flexible system resources (power station or demand response) to ensure enough system responsiveness (Up or Down) in real time Power as Energy Transmission capacity Reserves as System Flexibility Scope
  13. 13. www.florence-school.eu Several zones of market operation in EU 13 Intraday market (energy B) Balancing Mechanism (energy B) Intraday Markets (energy A) Balancing Mechanism (energy A) Country B Country A Day ahead Market (energy B) Day ahead Market (energy A) Day ahead Market (transmission A-B) Intraday market (transmission A-B) Interconnection capacity Time Space Balancing mechanism (transmission A-B)
  14. 14. www.florence-school.eu How does the markets’ sequence “day-ahead> intraday> real time” work in a single country? 14 Intraday market (energy B) Balancing Mechanism (energy B) Intraday Markets (energy A) Balancing Mechanism (energy A) Country B Country A Day ahead Market (energy B) Day ahead Market (energy A) Day ahead Market (transmission A-B) Intraday market (transmission A-B) Interconnection capacity Time Space Balancing mechanism (transmission A-B)
  15. 15. www.florence-school.eu Events occur from day-ahead> (to) >real time: power station failure / demand forecast error 15 Power (MW) Power (MW) Produced power Sold quantity Power station faliure Imbalance Imbalance Imbalance -10000 -8000 -6000 -4000 -2000 0 2000 4000 40000 45000 50000 55000 60000 65000 70000 00:30 02:00 03:30 05:00 06:30 08:00 09:30 11:00 12:30 14:00 15:30 17:00 18:30 20:00 21:30 23:00 Forecast error [MW] Load [MW] France (RTE) - 03/11/2009 DA forecast error Load realisation DA forecast
  16. 16. www.florence-school.eu Temps réel A sequence… of energy market positionS adjustements… through timely step 16 Gate closure Balancing and imbalance settlement day-ahead market Intraday markets T-~24h T-~3h SP2 SP2 SP3 SP2 SP1 SP2 Contractual position / Nomination SP1 SP3 SP1 SP3 SP1 SP3 Volume (MWh) Settlement periods Settlement periods Settlement periods Volume (MWh) Volume (MWh) Settlement periods Positive imbalance Imbalance (ex. net buyer) Production / Consumption metering Negative imbalance Transactions between market players (with or without market intermediaries) Transactions with the SO (balancing bid/offers & insuring imbalance settlement) Time
  17. 17. www.florence-school.eu Day-ahead markets organized as “Power Exchanges” (multilateral trade) 17
  18. 18. www.florence-school.eu Intraday markets (organized -or not) •The intraday markets can be used: –Purchase/sale of quantities that have not been executed during the Day Ahead market –Unplanned maintenance after the DA market –Flexible tool to trade closer to real time –Arbitrage with neighboring countries 18
  19. 19. www.florence-school.eu Real-time markets: always organized by the “System Operator” (to “balancing” the whole energy system) Imbalance settlement pricing rule: one or two prices? 0 20 40 60 80 100 120 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Imbalance price [€/MWh] 0 10 20 30 40 50 60 Diff. imbalance prices [€/MWh] Diff. imbalance prices BE Negative imbalance price BE Positive imbalance price BE e.g. Belgian positive versus negative imbalance prices
  20. 20. www.florence-school.eu What does mean “coupling”countries’markets? What do we do? Look at “Day Ahead” horizon… 20 Intraday market (energy B) Balancing Mechanism (energy B) Intraday Markets (energy A) Balancing Mechanism (energy A) Country B Country A Day ahead Market (energy B) Day ahead Market (energy A) Day ahead Market (transmission A-B) Intraday market (transmission A-B) Interconnection capacity Time Space Balancing mechanism (transmission A-B)
  21. 21. www.florence-school.eu What’s outcome from coupling market zones? •Outcome from coupling market zones –Efficient use of Gen. resources (energy cost; system flex.) –Uncorrelated demands –Uncorrelated renewables Also >> Security of supply Also <</>>Market power 21 Day ahead Market (energy B) Day ahead Market (energy A) Day ahead Market (transmission A-B) Country B Country A
  22. 22. www.florence-school.eu Illustration of market coupling outcome •Outcome from coupling market zones –Efficient use of resources –Uncorrelated demand –Uncorrelated renewables 22 Source: Menager (2002)
  23. 23. www.florence-school.eu But… actual countries’ market coupling is limited by transmission capacity availability… •We may have to split the EU into several market zones –when transmission capacity reaches security limit (i.e. there is a congestion) •Transmission becomes a “too” scarce resource •Hence a coordinated method of cross-border congestion management helps to operate softly coupling & decoupling of power market zones 23
  24. 24. www.florence-school.eu Alternative regulation for coupling & decoupling EU power markets •Explicit grid auctioning –Separate markets for energy & cross border transmission capacity –Coordination of these two markets depends on individual ability of market players •Implicit grid auctioning (market coupling or splitting) –“Smart” coordination of market borders done by single central algorithm 24 Day-ahead Market (energy B) Day-ahead Market (energy A) Day-ahead Market (transmission A-B) Country B Country A Day-ahead Market (energy A + B) Single Matching Algorithm takes into account limited capacity A-B Explicit auctions Implicit auctions
  25. 25. www.florence-school.eu -Perfect- coupling… and decoupling 25 Country B Country A Energy Price Difference (A – B) 0 Price A > Price B Price B > Price A Use of the cross- border capacity From A to B From B to A
  26. 26. www.florence-school.eu Reality of explicit auctioning for crossing borders between France & Spain) 26 Country B Country A
  27. 27. www.florence-school.eu Reality of implicit auctioning for crossing borders between France & Belgium 27 Country B Country A
  28. 28. www.florence-school.eu Generalising this to a regulatory frame for European internal electricity market •A single European market? Or a coupling of national markets? 28 Intraday market (energy B) Balancing Mechanism (energy B) Intraday Markets (energy A) Balancing Mechanism (energy A) Country B Country A Day ahead Market (energy B) Day ahead Market (energy A) Day ahead Market (transmission A-B) Intraday market (transmission A-B) Interconnection capacity Balancing mechanism (transmission A-B)
  29. 29. www.florence-school.eu EU market Integration at Day Ahead horizon 29 Hourly day ahead price convergence by region (source: ACER, 2013)
  30. 30. www.florence-school.eu EU market Integration at Intra-Day horizon 30
  31. 31. www.florence-school.eu EU market Integration at real time horizon 31
  32. 32. www.florence-school.eu To conclude: is the EU Internal Market regulation «au menu» or «à la carte»?
  33. 33. www.florence-school.eu 33 Thank you for your attention Email contact: jean-michel.glachant@eui.eu Follow me on Twitter: @JMGlachant Read the Journal I am chief-editor of: EEEP “Economics of Energy & Environmental Policy” My web site: http://www.florence-school.eu

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