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“Fundamentals of Electricity Markets”.
An overview
Pierre Pinson
Technical University of Denmark.
DTU Electrical Engineering - Centre for Electric Power and Energymail: [email protected] - webpage: www.pierrepinson.com
(prio to) 29 January 2018
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Learning objectives
Through this lecture, additional readings and video links, it is aimed for the students tobe able to:
1 Have an overview of historical developments of electricity markets
2 Describe the various players and types of market organization
3 Describe the actual markets and their purpose
4 Discuss the new challenges with renewable energy in electricity markets
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The 2nd of January 2015
[source: Ingeniøren, 16 January 2015, article online]
Those interested may analyse what happened from Nord Pool map and data31761 - Renewables in Electricity Markets 3
The 2nd of September 2015
Looking at the “Power right now” page of Energinet on a given day...
On 2nd of September 2015, for the whole day, the power from central power stations was 0MW!31761 - Renewables in Electricity Markets 4
Outline
1 Historical perspective
2 Players and roles
3 Different types of market organization
4 The actual markets and their purpose
5 Open questions with renewables in electricity markets
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1 Historical perspective
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A historical perspective
1980s First ideas for liberalization of the electricity sector, and introduc-tion of electricity market concepts in Chile (the “Chicago boys”)
1990 UK privatizes the electricity supplied industry (Margaret Thatcher)- to be followed by other Commonwealth member countries
1991 Beginning of deregulation in Scandinavia... (to be further detailed)
1996 Deregulation in California2000-2001 California electricity crisis!
In short: shortage of electricity supply, rise in prices, multiple black-outs, state of emergency, bankruptcies, investigation on Enron’srole
[More on the California electricity crisis:
Sweeney JS (2002). The California electricity crisis: Lessons for the future. The Bridge 32(2):23–31 (pdf)Schwartz P (2012). California Energy Crisis. Energy, Society, and the Environment, Cal Poly, US (video - 12’00 mins)Friedman LS (2009). The long and the short of it: Californias electricity crisis. International Journal of Public Policy 4(1-2):4–31 (pdf, for those reallymotivated!) ]
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Closer to us... A history of Nord Pool
1991 Deregulation of the Norwegian electricity market1996 Norwegian-Swedish exchange called Nord Pool1998 Finland and Western Denmark step in2000 Eastern Denmark’s turn to join
2002 Nord Pool Spot established as a new and separate entity
2009 Market coupling between Scandinavia and Germany2009 Negative price floor accepted
2013 All Baltic countries have joined Nord Pool(Estonia-2010, Lithuania-2012, Latvia-2013)
[More on the history of Nord Pool: NASDAQ OMX - Our history]
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By the way - what is deregulation?
REGULATED DEREGULATED
Prices are all determined by the regula-tory/government bodies:
Prices are determined by “invisible hand”of the market
energy prices
transmission and distribution prices
Vertically integrated structure Horizontal restructuring
Cannot choose supplier Competition among a set of suppliers
[More on deregulation of electricity markets:
Karan MB, Kazdagli H (2011). The development of energy markets in Europe. In: Financial Aspects in Energy (Dorsman et al. – eds.), Springer (pdf)Joskow PL (2008). Lessons learned from electricity market liberalization. The Energy Journal 29(2):9-42 (pdf)Joskow PL et al. (2006). Regulation and deregulation of energy sectors. MIT video collection (video - ¿1h) ]
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2 Players and their role
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Who are we talking about?
Can you list all the actors...
involved in power system operations?
and that interact with the electricity market?
[For the case of Denmark, a description of the actors is available at:
http://www.energinet.dk/EN/El/Engrosmarked/Viden-om-engrosmarkedet/Sider/Roller.aspx]
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Who are we talking about?
Those who operate the power grid(s):
TSO - Transmission System Operator
The TSO operates the transmissionassets and is responsible for the powerbalance on the transmission system.For the example case of Denmark, itis Energinet.dk
Disco: Distribution company / Distribution System Operator (DSO)
The DSO operates the distribution grid, and often additionally acts as a retailer.Examples in Denmark include, e.g., DONG Energy, Syd Energi, SEAS-NV, etc.
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Who are we talking about?
Those who sell and buy:
Genco - Generating company
The Genco owns production assets (from single generator to a portfolio), whosegeneration is offered through the electricity market. Ex: DONG Energy, Vattenfall,etc.
Retailer
The Retailer buys electricity en gros from the wholesale electricity market, to thenbe sold to the end-consumers. Ex: DONG Energy, El-forbundet, etc.
Consumers (large and small)
Those eventually use the electricity for any purpose (from watching TV to heatingto industrial production processes). There is a difference between small and largeconsumers, since the latter ones may be allowed to directly participate in thewholesale electricity market.
[To be noted: DONG Energy is what we call an Electric Utility]
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Who are we talking about?
Those who rule and operate the “game”:
Regulator
The regulator is responsible for the market design and its specific rules. It alsomonitors the market in order to spot misbehavior in electricity markets (collusion,abuse of market power, etc.). Exs: The Danish Energy Regulatory Authority –DERA, CRE in France, Ofgem in the UK, etc.
The Market Operator
The Market Operator organizes and operates the market place. This may include thedefinition of bid products and bid forms, set up and maintenance of the tradingplatform, daily matching of supply and demand offers, etc. Ex: Nord Pool, APX,EEX, PowerNext, etc.
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3 Different types of market organization
Please also read
D. Kirschen, G. Strbac (2004). Fundamentals of Power System Economics, Chapter 1.
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Organization: Monopoly
[source: Kirschen and Strbac (2004). Fundamentals of Power System Economics]
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Organization: Purchasing agent
[source: Kirschen and Strbac (2004). Fundamentals of Power System Economics]
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Organization: Wholesale market
[source: Kirschen and Strbac (2004). Fundamentals of Power System Economics]
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Organization: Retail market
[source: Kirschen and Strbac (2004). Fundamentals of Power System Economics]31761 - Renewables in Electricity Markets 19
4 The actual markets and their purpose
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Electricity as a “special” commodity
Why is electricity so special?
1 There must always be a balance between generation and consumption
2 Transportation and distribution is performed on a power network, with its specificphysical rules
3 Storage is uneconomical (as of today)
4 A large part of the electric demand is of must-serve nature (residential, hospitals,etc.)
5 The final consumers cannot really differentiate the origin of the product (as well asits quality and nature)
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The European picture
[source: www. etrmsystems. com ]
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Exciting time: The “Internal Energy Market”
Grid operators and power exchanges from 14 EU MemberStates plus Norway inaugurated on 4 February 2014 a pilotproject for joint electricity trading, so-called day-ahead marketcoupling
Overall objectives:
harmonize European electricity markets and strengthen competitionimprove liquidity, transparency and efficiency in the power markets across Europesocial welfare optimization
In practice:
flow-based coupling of day-ahead marketsstandardization of (also new) products for intra-day markets and new matchingalgorithmstarget model for balancing? co-existence with new intra-day solutions?
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The importance of the network
This is a simplified grid for the first synchronous zone of the European TransmissionNetwork (app. 1500 lines only)... The real one has more than 32.000 lines!
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The importance of FLOWS on the network
[courtesy of Tue V. Jensen, DTU Elektro]
The same grid with power flowing as a function of renewable energy generation andelectric power consumption, in a future renewable-based power system....
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Different types of markets
Markets
Capacity
Energy
Ancillaryervices
Capacity: for the system operator to
ensure that sufficient generation
capacity is present for reliable system
operation in future years and at
competitive prices
Energy: central place for the optimal
scheduling and settlement of energy
exchanges
Ancillary service: any type of service
that supports power system operations,
directly bought by the system operator,
e.g.
Primary reservesSecondary reservesTertiary reserves (also called manual)Black-start capability, short-circuitpower, reactive reserves and voltagecontrol
Most of our focus will be on energy and ancillary services!
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Energy markets and their purpose
Day-ahead
Futures
Intra-day
Balancing
Futures markets: financial contracts with
time horizon up to six years - used for price
hedging and risk management.
Ex: Nasdaq OMX Commodities for Scandinavia
Day-ahead: seen today as the central
instrument for everyday matching of
electricity supplies and offers.
Ex: Nord Pool Elspot for Scandinavia
Intra-day: continuous trading platform,
between day-ahead and balancing, allowing
to correct original schedules (e.g., in case
of plant outages or changes in wind power
generation).
Ex: Nord Pool Elbas for Scandinavia
Balancing: close to real-time operation,
for the system operator to ensure power
system balance.
Ex: Energinet.dk in Denmark
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Parallel between energy and ancillary services
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5 Open questions with renewables in electricity markets
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Renewables providing system services in a market environment
Should renewables (and demand) pay for the power fluctuations they induce?
What is an optimal market design (and offering strategies) if renewables are toprovide system services?
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Reveal the true cost of uncertainty
The narrative fallacy: Do we really believe we can offer renewables deterministicallywith lead times of 12-36 hours ahead?
Why not adapting market designs to reveal and accommodate the true cost ofrenewables’ uncertainty?
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A few important questions
Can we continuously integrate more renewable energy generation intosuch electricity markets?
Are they fundamental changes to consider?
How can we (i.e., engineers, scientists, young and motivated people)contribute to that?
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Thanks for your attention! - Contact: [email protected] - web: pierrepinson.com
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For you to do...
Over the first 2 weeks of the course (i.e., before 15th of February)
Readings (related to Lecture 0):
D. Kirschen, G. Strbac (2004). Fundamentals of Power System Economics, Chapter 1: “Introduction”
J.M. Morales et al. (2014). Integrating Renewables in Electricity Markets, Chapter 1: “Introduction”
R. Schleicher-Tappeser (2012) How renewables will change electricity markets in the next five years.Energy Policy 48: 64–75 (pdf)
Readings also related to Lecture 1:
D. Kirschen, G. Strbac (2004). Fundamentals of Power System Economics, Chapter 2: “Basic conceptsfrom economics” (especially for those who did not attend 42003 - Energy Economics, Markets andPolicies)
D.R. Biggar, M.R. Hesamzadeh (2014). The Economics of Electricity Markets, Chapter 4: “Efficientshort-term operation of an electricity industry with no network constraints” (pdf)
T. Boomsma, P. Meibom, N. Juul (20??). Mathematical programming models for energy system analysis:An introduction. From 42002 - Modelling and Analysis fo Energy Systems using Operations Research.
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