Training Module on Electricity Market Regulation - SESSION 2 - Market Design

Experience you can trust.
http://www.leonardo-energy.org/training-module-electricity-market-regulation-session-2
Training on Regulation
A webinar for the European Copper Institute
Webinar 2: Market Design
Dr. Konstantin Petrov / Dr. Daniel Grote
2.11.2009

2/11/2009 1
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

2/11/2009 2
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

2/11/2009 3
1. Introduction
Services in the electricity market
• Energy (commodity, MWh)
• (Generation) capacities (MW)
• Transport capacities
• System / Ancillary services

2/11/2009 4
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

2/11/2009 5
Vertical unbundling
CustomersGenerator
Generator
Generator
Transmission
System
Operator
Distributor
Distributor
Distributor
Customers
Customers
Market
Operator
Supplier
Supplier
Supplier
Trader
accounting
functional
legal
ownership
unbundling

2/11/2009 6
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

2/11/2009 7
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

2/11/2009 8
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

2/11/2009 9
Single Buyer
CustomersGenerator
Generator
Generator
Transmission
Distributor
Distributor
Distributor
Customers
Customers
Single Buyer
System
Operation
Power
Purchase
Agreements
Power
Selling
Agreements
No access arrangements and direct trading between generators
and distributors/suppliers
Supplier
Supplier
Supplier

2/11/2009 10
Wholesale competition
CustomersGenerator
Generator
Generator
Transmission
Customers
Customers
System
Operation
Supplier
Supplier
Supplier
Distribution
Wholesal
e market

2/11/2009 11
Retail competition
CustomersGenerator
Generator
Generator
Transmission
Customers
Customers
System
Operation
Supplier
Supplier
Supplier
Distribution
Retail
market
Wholesale
market

2/11/2009 12
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)

2/11/2009 13
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
1997 1999 2000 2003 2005 2007
Austria 0% 33% 100% 100% 100% 100%
Belgium 0% 35% 35% 52% 90% 100%
Denmark 0% 35% 90% 100% 100% 100%
Finland 40% 100% 100% 100% 100% 100%
France 0% 30% 30% 37% 70% 100%
Germany 0% 100% 100% 100% 100% 100%
Greece 0% 0% 30% 34% 62% 100%
Ireland 0% 0% 30% 56% 100% 100%
Italy 0% 45% 45% 70% 79% 100%
Luxembourg 0% 30% n/a 57% 84% 100%
Netherlands 0% 33% 33% 63% 100% 100%
Portugal 0% 30% 30% 45% 100% 100%
Spain 0% 54% 54% 100% 100% 100%
Sweden 40% 100% 100% 100% 100% 100%
UK 50% 100% 100% 100% 100% 100%
Norway 100% 100% 100% 100% 100% 100%
Estonia 12% n/a
Latvia 76% 100%
Lithuania 74% 100%
Poland 80% 100%
Czech Republic 74% 100%
Slovakia 79% 100%
Hungary 67% 100%
Slovenia 77% 100%
First introduction of retail competition

2/11/2009 14
3. Wholesale Market Models
Market timeline
time
real time
Day-ahead
market
Spot marketForward 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
balancin
g
Optimize
/ Correct
position
Close
positions /
Determine
productio
n
schedule

2/11/2009 15
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

2/11/2009 16
a) Power pools – common features
demand€/kWh
electricity
clearing
price
supply
offers for
individual
generating
units
price
base load
peak load
– 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

2/11/2009 17
a) Power pools – cost-based and price-based
Price-based power poolCost-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

2/11/2009 18
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

2/11/2009 19
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

2/11/2009 20
Generation Transport Load
Sellers
Sellers
Sellers
Sellers
Sellers
System
Operator
Buyers
Buyers
Buyers
Buyers
Buyers
Import Export
PX
Bilateral market
(OTC)
Balancing
market
Capacity
auction
b) Markets with bilateral trade – European Model

2/11/2009 21
c) Power exchanges – common features
demand€/kWh
electricity
market
price
supply
individual
offers
price individual
bids
– 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

2/11/2009 22
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

2/11/2009 23
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)

2/11/2009 24
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

2/11/2009 25
Transmission
Network
(TSO)
Distribution
Network
(DSO)
Consumers
connected to
transmission
Consumers
connected to
distribution
Producers
connected to
transmission
Producers
connected to
distribution Transmission Network
Service
Distribution Network
Service
System Services
Ancillary Services
Ancillary Services and System Services

2/11/2009 26
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

2/11/2009 27
Ancillary services – procurement
Frequency
containment
Frequency
restoration and
replacement of
reserves
Voltage /
reactive power
control
Restoration
services
Compulsory provision
Without
remuneration
 ()  
With remuneration  ()  
Direct agreement    
Public tender   () ()
Real-time market ()  – –

2/11/2009 28
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)
Typical elements of
remuneration
Capability Availability Utilisation
Holding Initialisation
Primary frequency control -  - -
Secondary frequency control -  () 
Tertiary reserves -  () 
Voltage control -  () 
Black start  () () ()

Experience you can trust.
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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