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Md Abu Fattah
OVERVIEW OF DAY-AHEAD AND IN-TRADAY ELECTRICITY MARKET
Master’s Thesis Faculty of Information
Technology and Communication Sciences
December 2020
i
ABSTRACT
Md Abu Fattah: Overview of day-ahead and intraday electricity market
Master of Science Thesis
Tampere University
Master degree program in Electrical Engineering
December 2020
Electricity is a commodity, which has many different attributes from other products because of its unique features. It needs a special infrastructure for production, transportation, and consumption. In this thesis, the electricity system is discussed in two subsystems. The flow of electricity hap-pens in the technical subsystem, and monetary value is discussed in the economic subsystem. Here is an attempt to do a comprehensive review of three different marketplaces: AEMO in Aus-tralia, CAISO in California, and Nord Pool in Nordic countries based on literature review and available public information. In these marketplaces, there is continuous or upcoming reform of the energy system, which can be strengthened by integrating different perspectives from current mar-kets. Characteristics for a successful electricity market are also proposed at the end of the thesis. Currently, CAISO has a centralized wholesale energy market, while Nord Pool and AEMO have also decentralized properties. The critical issue with the centralized CAISO market is that they don’t have intra-day pricing that can be updated continuously when the renewable generation changes. Whereas Nord Pool and AEMO with their decentralized intraday market, has the flexi-bility to adjust the price according to renewable energy production as close to real-time. This iterative intra-day trading can address the coordination problem related to wind and solar power generation. The downside is that there is a risk of network constrain, which can be improved by analysing the network in more detail. The limitation of this study is using only three marketplaces where in the future it can be extended to more marketplaces
Keywords: Electricity market, AEMO, CAISO, Nord Pool
The originality of this thesis has been checked using the Turnitin Originality Check service.
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PREFACE
This thesis couldn’t be complete without the help of my supervisor Professor Pertti Järventausta. I was in such a condition that I was almost losing my confidence, health, and time. The support, encouragement, and guidance that I received from Pertti was my light to a dark path of finishing the thesis. Also, my friends and family here in Finland and Bangladesh supported me a lot in this period. I wholeheartedly thank them for standing by my side in my hardship.
Tampere, 16 December 2020
Md Abu Fattah
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CONTENTS
1. INTRODUCTION .................................................................................................. 1
1.1 Objective and scope of the thesis......................................................... 2
1.2 Thesis structure ................................................................................... 2
2. GENERAL OVERVIEW OF ELECTRICITY SYSTEM ........................................... 4
2.1 Current electricity system ..................................................................... 4
2.2 Distributed generation .......................................................................... 6
2.3 Electricity storage ................................................................................. 8
2.4 Smart Grid and Demand Response ..................................................... 9
2.4.1 Definition of smart grid .................................................................. 9 2.4.2 Demand Response ..................................................................... 11
3. ELECTRICITY MARKET STRUCTURE .............................................................. 15
3.1 Economic subsystem ......................................................................... 15
3.2 Nordic Electricity market (Nord Pool) ................................................. 17
3.2.1 ELSPOT Day-ahead energy market ............................................ 20 3.2.2 Price calculation method ............................................................. 21 3.2.3 Intra-day energy market Elbas .................................................... 23 3.2.4 Regulation power market ............................................................ 25
3.3 Electricity market in California ............................................................ 25
3.3.1 Day-ahead market ...................................................................... 26 3.3.2 Ancillary Services ........................................................................ 28 3.3.3 Residual Unit Commitment ......................................................... 29 3.3.4 Market Power Mitigation .............................................................. 29 3.3.5 Real-Time Market (RTM) ............................................................ 30 3.3.6 Reliability .................................................................................... 31
3.4 The Australian Electricity Market ........................................................ 31
3.4.1 AEMO’s role in the NEM ............................................................. 32 3.4.2 Network service provider ............................................................. 33 3.4.3 Demand forecasting .................................................................... 33 3.4.4 Types of forecasts ....................................................................... 34 3.4.5 Projected assessment of system adequacy ................................ 34 3.4.6 Electricity spot market and physical processes ........................... 34 3.4.7 Submitting bid to supply .............................................................. 35 3.4.8 Submitting bids for demand ........................................................ 36 3.4.9 Central dispatch process ............................................................. 36 3.4.10 Ancillary Service ..................................................................... 37
4. SUMMARY AND CONCLUSION......................................................................... 41
4.1 Characteristics for a successful electricity market .............................. 45
4.2 Conclusion ......................................................................................... 46
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LIST OF SYMBOLS AND ABBREVIATIONS
GHG Greenhouse Gas Emission DG Distributed Generation DR Demand Response PV Photovoltaic DSO Distributed System Operators TSO Transmission System Operators ETP European Technology Platform AMR Automatic Meter Reading DSM Distributed System Management LSEs Load Serving Entities DAM Day-ahead market ISO Independent Service Operator RTM Real-Time Marker EIM Energy Imbalance Market AGC Automatic Generation Control DMS Demand Side Management System EMV Energy Market Authority Elbas Electricity Balance Adjustment Service RUC Residual Unit Commitment EMA Energy Market Authority VRE Variable Energy Resources CET Central European Time NEM National Electricity Market AEMC Australian Energy Market Commission AEMO Australian Energy Market Operator AER Australian Energy Regulator TNSP Transmission network service provider DNSP Distribution network service provider PASA Projected assessment of system adequacy MPC Market Price Cap AEST Australian Eastern Standard Time RUC Residual Unit Commitment
1
1. INTRODUCTION
Electrification was nominated by the National Academy of Engineering (2000), the most
significant engineering achievement. As per the International Energy Agency’s 2012 re-
port, only 0.05% of the developed country's population lives without electricity [1]. At
present, we are living in a period of the energy transition. Global warming due to indus-
trialization, deforestation, and fossil fuel burning, making us more concerned about the
earth’s environment. We are on the threshold where we cannot excessively strain the
valuable resources of our planet. In 2007 the European Council approved ambitious en-
ergy and climate change objectives for 2020 and 2030 [2]. As per the European Union's
commitment and other industrialized countries to cut the domestic greenhouse gas emis-
sion to 80% below 1990 levels by 2050, they are replacing large thermal generators that
burn fossil fuels with a competitive and sustainable electricity market based on renewa-
ble energy market [3]. The electrification challenges of the twenty-first century cannot be
fulfilled by the current electric power infrastructure [4] [5] [6] [7] [8] [9].
There is a visible global movement towards the increase of renewable power generation,
investments in the development and establishment of solar and wind power plants world-
wide [10]. This integration of renewable energies has raised the concept of Distributed
Generation (DG), which is defined as small scale electricity generation close to consum-
ers. There have been years of discussions among literature and researchers about the
benefits of this new generation form. The discussion points have been efficiency, flexi-
bility, and the interconnection between the old distribution system. Also, as small and
multiple systems, the emissions levels, investments for installation and maintenance,
and operation costs are also considered [11].
Traditionally in electricity networks, the balance of supply and demand has been
achieved by regulating power generators' output [12]. As the DG is more in common with
solar and wind power generation, the production side control is decreasing. For this rea-
son, the focus has been directed more towards the demand side, as we need a certain
level of flexibility in the system [13]. As new products services are entering the electricity
sectors, the companies should also be adaptive and prepared. The change in transmis-
sion and distribution networks, increase small-scale scattered power generation ex-
2
pected to change customer behavior. The customers are in the production and distribu-
tion chain because of their on-site generation and self-consumption. With the advance-
ment of distribution automation, the customers are introduced in the electricity chain,
which arises the concept of Demand Response. As consumers are not only consuming
electricity, they are also expected to produce electricity; in this context, a consumer be-
comes “prosumer” [11]
Since in the early 1990s, all around the world, the electricity markets have emerged. At
that time, the production can be characterized as oligopoly generators with very little
elasticity on the demand side with a complex administrative market mechanism. The
energy market is structured to help facilitate trade but also balance the system in real-
time. [14].
1.1 Objective and scope of the thesis
The goal of this thesis is to compare the different electrical market area. While compar-
ing, a target is also set to find out the particular ecosystem of the market. Comparison of
different market areas focus on day-ahead, intraday, real-time and ancillary market-
places.
1.2 Thesis structure
This master’s thesis focuses on the comparison of three different electricity market-
places. The work is structured as follows. Chapter 2 is an overview of the electricity sys-
tem where there is a discussion about the current electricity system, distributed genera-
tion smart grid, and demand response. The overall electricity system is subdivided into
two chapters. The economic subsystem is presented in chapter 3.
After providing the electricity system background, there are three different market areas
with a detailed description presented in chapter 3. Chapter 4 summarizes these market
areas, compares, and draws conclusions. The findings outline the study as a whole and
aim to provide a concise round-up of the study's final results. It also includes both the
scientific contribution and the managerial ramifications of the research results and its
reliability and validity. Also, the last chapter offers several recommendations for more
analysis on market response and industry outlook.
The approach of the thesis is based mainly on a literature review. A particular focus was
put in the study on including useful references to the specific issues. Some of the draw-
3
backs to be addressed are the constant developments and changes in the circum-
stances. Not enough reading material was available and publications in a different lan-
guage was one of the biggest challenges.
4
2. GENERAL OVERVIEW OF ELECTRICITY SYS-
TEM
This chapter aims to discuss and provide a basis for the reader of the thesis. This chapter
mainly discusses the electricity system, including generation, distribution, and the mod-
ern day's phenomenon of electricity storage and demand response. The following chap-
ter will put light on the general matters related to electricity and the whole system.
2.1 Current electricity system
Electricity is one of the commodities from a large and heterogeneous group of assets.
Though electricity is labeled as a commodity, it differs in many other ways from other
commodities. The most important features of electricity that differ from other commodi-
ties are
1. Limitation in transportability
2. Non-storability
3. No lower bound
4. Short- and long-term pricing correlation,
5. Seasonality. [15]
The limitation of storability and transportability characteristics makes electricity and flow
commodity [16]. ‘Electricity system’ is the term used to describe the physical infrastruc-
ture that combines production, transport, and consumption. Delivery of electricity also
provides related services. We can divide the electricity system into two subsystems. The
first one is a technical subsystem that is centered across electricity production and trans-
mission. The second one is an economic subsystem where the services related to elec-
tricity and transmission are traded. Fig.1 shows a graphical representation of the electri-
cal system [17].
5
In this chapter, the technical subsystem is discussed. The economic subsystem is dis-
cussed in chapter 3. The electricity system is a highly complex structure because there
are rapid and sudden unexpected changes due to a fault in the transmission and distri-
bution lines. Variation in production, sudden load changes, weather, natural calamities
also make this system more complex. As we cannot store electricity on a large scale for
later use, we must deliver the electricity in an equal amount of the actual need in the right
place and time. The supply of electricity in every node of the transmission network is a
continuous process, and the balance of supply and demand must be equal in real-
time.[15] This dynamic equilibrium between supply and demand is carried out with fre-
quency, voltage, and current values [18]. The perfect balance is achieved by maintaining
a stable frequency, which is 50 Hz for Europe and most other countries around the world
except the United States of America (USA), where the voltage frequency is 60 Hz.
The main challenge for electric power operation is that we must consider the economic
feasibility of electricity storage at a large scale, which is not cost-conscious also the di-
verse generation cost because of the generation unit variant. This means we have to be
aware of the cost of building large storage, but different generation methods should be
accountable after the electricity generation. It must flow to the customer over the trans-
mission line. Another challenge in the Electricity system is the inelastic demand of the
customer. This occurrence happens because of the agreement difference between the
wholesale market and retailers. In most cases, the consumers are not accounted for the
Fig. 1 Basic electricity system framework [17]
6
real cost of a dependable electricity supply, and they do not get enough incentive to
adapt their electricity consumption at every moment. [11]
Around the world, most countries have a similar structure and configuration of the elec-
trical power system. The physical electricity infrastructure contains the technical subsys-
tem, which comprises power generation, grid, and load [19].
The grid consists of a nationwide transmission line, regional networks, and distribution
networks. The transmission and distribution networks are the interconnected systems
between the generation and the load. This is required because the generation and the
load generally have a great distance from each other. Due to environmental issues and
safety concerns, the power generation is centralized. The interconnection between gen-
eration, grid, transmission grid, distribution networks, and loads is done by substations
and transformers. The transmission voltage is kept higher for economic and safety rea-
sons. The energy loss is lower when the transmission voltage is higher. [20]
2.2 Distributed generation
The electric power source, which is located within the distribution network or at the cus-
tomer side of the network, can be defined as distributed generation [21]. But finally, it is
legally defined by the regulation of the electricity market where the distribution and trans-
mission networks are specified. In the legislation, anything that is not defined as a trans-
mission network can be considered as a distribution network. There is no specific rating
for distributed generation sources. The maximum generation rating depends on the var-
iable (e.g., voltage level) of the distribution network. This distributed generation can help
to minimize the transmission loss without upgrading the network infrastructure. Moreo-
ver, the microgrids have the ability to dispatch and manage local generation and de-
mand. Along with this, they can interact with the wholesale power market [22]. The de-
regulation of the power industry, its restructuring, transmission capacity constraints, and
environmental awareness issues are the main reason behind DG. Energy consumption
is increasing day-by-day and this increased demand will be fulfilled to use alternative
energy sources. These small-scale energy sources will mostly be renewable and pro-
duce low or zero carbon emissions. These DG units can be placed strategically in the
distribution network close to the load, which will also act as grid reinforcement. The DG
sources also reduce power losses, increase the load factor of the transmission and dis-
tribution system. Thus, DG units have the potential of enhancing system reliability, integ-
rity, and efficiency [23] [24] [25] These improvements can be made by choosing the
proper location for the DGs and control system. There are different types of distributed
7
generation units. Among these DG units, some ( e.g., combined heat and power gener-
ation) can instantly partake in wholesale markets. In contrast, others, like small-scale
residential photovoltaic (PV) units, can interreact with the power grid only as penetrations
increment. While there is a load surge, these PV units can act as an instant generation
as they don’t need any star-tup time.
There are some potentially negative impacts of DG’s on the distribution grid, which in-
cludes power fluctuations, increase in voltage, and accidental islanding. In Denmark,
fossil fuel is primarily used in the combined heat and power plants for both electricity and
low-temperature steam. The steam is then used for district heating. These fossil fuel-
powered plants are obliged to participate in wholesale power markets but not only in
wholesale markets. One-third of the plants also participate in real-time energy markets,
which are called regulated power markets. [22] The power market optimizes electricity
generation. When there is a competitive price in electricity, the combined heat and power
produce electricity, and the heat is its byproduct. The power generation price is reduced
in Denmark when there is significant wind power generation. Therefore, the combined
heat and power plants cease their electricity generation, but the thermal storage is kept
on maintaining the heating system.[26] The thermal storage complements the wind
power generation rather than compete.
As an example, the solar power generated by PV in residential areas is regulated in the
United States. This entity is controlled by the Load Serving Entities (LSEs) and residen-
tial tariffs. This residential PV has little interaction with the bulk power system. In many
jurisdictions, home PVs are valued according to the retail rate. The value is higher than
it is supposed to be in the wholesale markets. The PV price is regularly reducing, and
the impact will likely increase significantly in the wholesale electricity market. This new
PV generation has to be accommodated with a sustainable structure in the wholesale
power market. Without any curtailment, this PV would create a disincentive increase in
DG. An increased number of PV would also create a new protocol for interconnection
standards to provide reliable services. It will mirror the evaluation standard of wind power
generation as its penetration is increased. In Germany, there is already established
standard for low voltage grid-connected PV, even at the residential level [27]. There are
similarities between economic signals and system operator controls on the wholesale
power markets and distributed grid. This could collectively help integrate wholesale and
retail markets[28]. Creating a transparent pricing mechanism on the distribution grid will
8
create an economic opportunity for distributed energy resources and improve the oper-
ation of bulk the system with adjustable renewable energy [29].
2.3 Electricity storage
In a distributed generation, electricity storage is a resource that can act as a generator,
load, or alternative to transmission. This storage also provides significant flexibility for
the bulk power system. However, the storage (e.g., compressed air energy or pumped
hydro), which can be dispatched centrally, has some barriers to partake in the wholesale
electricity market. [22] There are necessities for a new approach to electricity storage
as the construction of large-scale pump storage is restricted to geographical nature.[30]
There are a wide variety of energy storage technologies available, and there is also dif-
ferent use for them. We can either directly store electricity in electrical energy form (e.g.
capacitors, battery) or indirectly by converting mechanical energy to potential energy
(e.g. pumped hydro storage, compressed air), mechanical energy to kinetic energy (e.g.
flywheel), or electrical energy to chemical energy (e.g. lead-acid battery, lithium-ion ac-
cumulator, redox-flow batteries, hydrogen storage). This indirectly stored energy must
be converted into electrical energy before utilization.[31] Fig. 1 provides an outline of
different electrical storage technologies.
Energy storage types are also classified with their application and related power. They
are classified as [31]
a. A centralized storage power plant with a capacity of over 100 MW, are usually
pumped hydro or other technologies such as compressed air. These centralized
storage systems are connected to a high-voltage grid.
b. Massive decentralized battery systems have a power output of 1 to 100 MW.
These are usually lead-acid, nickel-cadmium, sodium-sulfur, redox-flow, and Li-
ion batteries, which are connected to the high-voltage or medium-voltage grid.
c. Short-time storage, which has a wide range of power outputs in the magnitude of
W to MW, but all have small capacities (kWh). The applied technologies are fly-
wheels and double-layer capacitors. Short-time storage is generally used in im-
proving power quality. For the integration of improved power quality in the low-
9
voltage grid, the local storage system can either be installed near to prosumers
or directly at the prosumer. [32]
2.4 Smart Grid and Demand Response
2.4.1 Definition of smart grid
Previously the distribution grid was described as a one-way system. Where,, the elec-
tricity only flows from the central generating station to the consumer. The electricity was
distributed to the consumers through transmission and distribution networks. Usually,
there is a contract between the consumer and energy producer where the consumer only
consumes electricity but does not produce energy. Consumers have variable loads which
are not controllable. The uncontrollability of consumers’ load makes significant financial
losses to the electricity suppliers, Distributed System Operators (DSO) and Transmission
System Operators (TSO). These financial losses can be minimized by smart grid
Fig. 2 Energy storage technologies. [27]
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utilization.[33][34][35] There are conflicts of interest between the distribution system
operators and retailers, which hinder the change from traditional to smart grid
change. There are not only economic issues but also environmental and social issues
to pursue a smart grid. Table 1 shows some key differences between the traditional elec-
tric power grid and the smart grid.
Table 1 Conventional grid and smart grid, and their differences [39]
Though the differences between the smart grid and the traditional grid are quite general,
the smart grid is defined variously in different countries. The general overview is that the
grid does not change much, but the components and new applications around it can
enhance the physical system's competence and sustainability. These can also provide
potential business cases for companies in the long term. There is an outline provided
by the European Technology Platform (ETP) on the smart grid as “ an electricity network
that can intelligently integrate the actions of all users connected to it, i.e., generators,
consumers and those that do both— in order to efficiently deliver sustainable, economic,
and secure electricity supplies” [36]. In fig 3, a general visual demonstration of the smart
grid is shown. In a general manner, the concept of the smart grid is: The smart grid is an
Conventional Grid Smart Grid
Large generating stations Distributed generation and renewable energy
sources
Centralized control Adaptable operation
Old one-way technology Two-way management of demand
Optimized for regional power adequacy Distributed generation close to consumers
Confounding regulatory and market
mechanisms
Cross-border exchange of electricity and grid
resources clear regulatory structure
11
improved electric transmission and distribution network which widely uses communica-
tion network, distributed computing, associated sensors and software comprising the
electric consumer side equipment. This will include facilities following smart grid oppor-
tunities like i. smart metering; ii. demand response; iii. distributed generation manage-
ment; iv. electrical storage management; v. thermal storage management; vi. transmis-
sion management; vii. power outage and restoration detection; viii. power quality man-
agement; ix. preventive maintenance improving the reliability, security, and efficiency of
the distribution grid; x. distribution automation and other facilities, equipment, or system
that is in conjunction with such a communication network.[37] There is always room for
improvement, which can be made by implementing a smart meter. With these smart me-
ters, DR can be utilized.
2.4.2 Demand Response
The deployment of automatic meter reading (AMR) and home energy management sys-
tem (HEMS) on the consumer side of the electrical system enables flexibility of electricity
supply and demand. This flexibility between supply and demand was recognized a long
time ago by many electricity system designers. [38] Managing capacity and demand are
not only a phenomenon in the energy sector. [39] There are some other places where
this term is used. But the DR is particularly related to the electricity sector. In short, DR
can be defined as the process of shifting load from crucial times to moments of lower
consumption. A wide range of actions is taken through smart meters at the customer
Fig. 3 Representation of the traditional grid (up) and smart grid (down). The blue line indicates the direction of physical electricity; the yellow line implies in-formation exchange [38] .
12
side. [40] For fulfilling the purpose of DR, the customers who are connected should be
able to respond according to the signal received by the energy provider. If we want to
take full advantage of DR, the smart meters need to be deployed at the customer side
[41]. By avoiding the construction of expensive peaking happening a few times in a year,
DR has the potential of lowering the wholesale market price [42][43]. The definition of
DR given by the U.S. Department of Energy is [43]:
“Changes in electric usage by end-use customers from their normal consumption
patterns in response to changes in the price of electricity over time, or to incentive pay-
ments designed to induce lower electricity use at times of high wholesale market prices
or when system reliability is jeopardized.”
In this emerging smart grid model, demand response has become one of the most critical
parameters. The price of electricity in demand response fluctuates throughout the day.
Figure 4 provides an indication of hourly energy use and prices. Looking at the picture,
one can see the electricity consumption increasing sharply from 3 am to 7 am. This is
the morning time peak consumption. After this peak consumption, both demand and the
price decreases gradually. At noon 12.00 pm, there is a demand spike, and it continues
till the evening at 6.00 pm. After the evening peak, the consumption started to fall, and
the price also fell gradually. From this graph, it is quite visible that the consumption and
price of electricity are proportionally related. The electric power system's efficiencyill be
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Fig. 4 Example of hourly consumption and electricity price in Finland on De-cember 23rd December 2019 (Data from Nord Pool Spot 2019)
13
better if the fluctuation in demand is small [44]. In fact, in the figure, price variation is
quite small
Typically, DR and its benefits can be achieved by changing customer behavior. At the
same time, tapping into their consumption behavior [45]. There are different interest val-
ues in consumption end. Some consumers are interested in electricity price reduction,
and others are interested in improving energy efficiency. All the actions that need the
attention of the consumer are not direct DR, but some are the result of it. For example,
energy efficiency can be achieved by the utilization of DR. We can see from real data
that the electricity price is in relation to demand; the greater the demand higher the
price[46]. The exponential increase in demand increases the generation to its maximum
capacity, thus increasing the electricity price [44]. Reducing the peak demand results in
a decrease in the cost of electricity generation and lower electricity price [47].
For actual demand shifting or reduction in demand, there are few effective ways. The
load adjustment level of instantaneous demand or total energy consumption can be al-
tered by tweaking consumption timing. Customers can change their energy consumption
behavior; for example, they can shift their household tasks from peak-hour electricity use
to off-peak hour. Heavy household machinery like dishwashers, washing machines can
be operated at night, which shifts the load to off-peak hours. Figure 5 represents a sim-
plistic result of DR. For industrial customers, this can be done differently without dimin-
ishing their productivity and rescheduling their activities [44]. Industrial users can reduce
instantaneous demand during a particular peak time period when the electricity prices
are high without changing regular usage during other periods . The industrial customers
can also reduce the total consumption by substituting their own DG with the demand
from the DSOs [48].
Demand-side management is used as a utility to reduce the peak electricity demand that
reduces energy prices. As the maximum production capability is not used, the lifetime
and system reliability improve, also lower the emissions [49]. The benefits are vast that
can be achieved by implementing Demand Side Management (DSM) System. But there
is an argument that today's wholesale prices are not feasible. The fast development of
technical infrastructure is necessary, and the ultimate target of DSM is to improve energy
efficiency and reliability in consumer end [49].
14
Fig. 5 A basic effect of demand response on electricity demand. The solid black line represents the demand curve, and the red dotted line represents the after ef-fect when demand response is taken into account [38]
15
3. ELECTRICITY MARKET STRUCTURE
In this chapter, there is a general discussion of the electricity market structure of different
countries. There is a detailed discussion of some marketplaces and their mechanism,
including the production of electricity and the steps of delivering electricity to the con-
sumers. The factors, their impact, and legislation are also discussed in this chapter.
3.1 Economic subsystem
The production and flow of electricity are discussed in the technical subsystem. The eco-
nomic subsystem includes the monetary value of the industry. As the power industries
become liberal, there are specific development happened in the power market. Usually,
power markets have three potential categories: product market, control reserve ex-
change, and balancing energy [50]. Table 2 describes some applicable entities related
to the electricity market according to the EU ruling. The wholesale electricity market is
designed to evolve according to short-term marginal cost as the optimal economic signal
for energy trading. In an open market, producers and retailers can agree to set up a
bilateral contract for supplying the electricity. This contract can be determined that only
Table 2 Definition of some applicable entities in electricity market. derived from EU's Ruling [57]
16
a small part of electricity demand will be traded in real time. Because the main forecasted
demand trading is done according to the wholesale market. In a monopoly market, there
is control between producer and distributor over the customers. The system operator is
solely operating its plants centrally to meet electricity demand, assigning the right unit at
the correct times in the non-liberalized market [51].
The capacity market is not used in all electricity markets. It is usually used for long term
procurement of electricity provision by all the parties in the market. As the liberalization
of the Nordic electricity market, this is directed to differentiate between the economic and
technical subsystems. In the Nordic electricity market, the TSO and DSOs cannot par-
ticipate directly in the electricity trading market, but they function under natural domina-
tions' supervision. Figure 6 portrays both the physical and financial path of electricity.
The black line shows the physical path of electricity, and the yellow line shows the finan-
cial transaction that happens between different actors to exchange electricity. The eco-
nomic subsystem is also known as the “commodity subsystem,” including players who
are participating in the production, trade, and consumption of electricity and their sup-
portive activities [17].
If we overview the financial sense, the producer produces electricity and sells it in the
electricity market. There is a possibility to sell power straight to an energy retailer also
anyone ready to purchase electricity from the marketplace. There is an option for large
electricity consumers to buy electricity from the wholesale market. Fig 6 portraits that the
retailer can also be a producer. That mean retailer can both serve as producer and seller.
The consumers can finally buy their electricity from a retailer for some case producer.
The economy has control over the technical subsystem.
Fig. 6 Representation of money and electricity flow from producer to con-sumer. the black line indicates the path of electricity flow; the yellow line indicates the cash flow. [64]
17
3.2 Nordic Electricity market (Nord Pool)
Nordic countries, which include Denmark, Finland, Norway, and Sweden, have adopted
one common place to exchange their electricity. These Nordic countries share their en-
ergy with nationally independent TSOs. Also, the Nordic counties have opened their
electricity market for both electricity trading and production. Any parties which can fulfill
certain criteria can enter the energy market [52]. The directive 2009/72/EC confine the
definition of the liberalization market, meaning all consumers can freely choose their
supplier, and all suppliers can decide where they want to deliver to their customer. The
electricity market structure is almost the same, But the authorities in the Nordic countries
are different. Fig 7 is a representation of different actors that are participating in the elec-
tricity market in Finland. The liberalization of the electricity market in Nordic countries is
one of the most influential factors in companies’ business models. According to the act,
both TSOs and DSOs are not authorized to partake in the electricity market. Finland’s
Electricity market Act 588/2013 and in Chapter 12 specifies the “unbundling of opera-
tions.” Also, section 77 of the act forbids a TSO or DSO those are operating in the elec-
tricity market cannot bundle with other electricity exchange operations (e.g., electricity
supply). In this act, there are also prohibitions of the integration of a DSO and the TSO.
Fig. 7 Nordic Electricity market and their actors [64]
18
Moreover, the responsibility of DSO and TSO has been separated from the electricity
generation business. [36]
Because of the separation between Electricity system operation and trade operation, the
electricity consumers must have separate contracts. One contract for the electricity sys-
tem contract is made among a DSO and a consumer. The deal ensures electricity supply
through the grid. Another agreement is made between a supplier and a consumer, which
is an electricity sale contract. In many countries, the responsibility for electricity metering
is on DSOs [53]. The metering data is then provided to the electricity suppliers [54]. There
is one joint power exchange operation for the Nordic countries' suppliers: “Nord Pool
Spot.” It is the prominent electricity market in Europe[55]. The supplier’s trade-in for both
the day-ahead and intraday market. But the balancing of the power market is a monopoly
for the TSO[52]. Furthermore, the TSO can be a monopoly and a market member shown
in fig 7.
The operating laws and authorities for the Nord Pool Spot are defined by the Norwegian
authorities as this is a Norwegian registered company [55]. The governing authority is
the Norwegian Water Resource and Energy Directorate (NVE), and the control of phys-
ical power exchange with the neighboring country is on the Ministry of Petroleum and
Energy (ODE). But in the Nordic countries, they have other rules and regulations which
they operate under [56] for example, competition law [57]. There is a competition act in
Finland which defines and regulates the competition between TSOs and DSOs. As per
the Competition Act (948/2011) in Finland, the DSOs and TSOs cannot operate like en-
ergy suppliers as they have a monopoly position, though TSOs have some overlapping
roles both in energy suppliers and balancing markets. For example, in Finland, the earn-
ings and reasonableness of the TSOs are supervised by the Energy Market Authority
(EMA) [58]. The EMA also oversees the Finnish TSO company’s earnings: Fingrid Oy
and the concept is reasonable return [59]. Fingrid Oy works as a sole TSO in Finland
also has the responsibility for the construction of cross-border power lines and also im-
port and export electricity. This is done under the management of the Ministry of “Trade
and Industry” [60].
Noord Pool was originally started as a Norwegian power exchange as Norway has elec-
tricity generation from hydropower with changing water levels. Therefore, they needed a
market which can balance the seasonal differences in hydropower also the hourly and
seasonal variation in demand. There were two critical markets from the start; the day
19
head market (ELSPOT) and the balancing market (Regulating power), which is a real-
time market.
The day-ahead market ELSPOT was first launched as an enabler for the electricity pro-
ducers so that they can plan their production for the next day. But there is always a
balance requirement between supply and demand as the physical attributes of electricity.
This requirement introduces an additional market in real-time for balancing the supply
and demand, which is the regulating power market.
Sweden joined Nord Pool in 1996. They also have a large number of hydropower plants
in their overall power generation. This was the first binational power exchange in the
world with a common exchange spot. At the same time, Finland was also developing its
own power exchange, EL-EX.
Both the Nord Pool day-ahead and EL-EX had a similar operation method. But Finland
has one special market called Elbas (Electricity Balance Adjustment Service). This par-
ticular market was an intraday market that had the purpose of the market participants on
the EL-EX (day-ahead) market to tweak their physical market status until before the de-
livering hour. Svenska Kräftnett, the national TSO of Sweden, and Fingrid, the national
TSO of Finland, both collaborated with each other to implement the Elbas market. This
was the first bi-national electricity market between two countries, along with Nord Pool
and EL-EX.
The joining year of Finland in Nord Pool was 1998. Then Elbas became a separate mar-
ket for Sweden and Finland for electricity supply and demand balance adjustment in
1999 at Nord Pool. In 2000 Denmark joined Nord Pool. Four years later, Eastern Den-
mark joined the Elbas market in 2004. The Konark bidding area in Germany was opened
in 2005. Western Denmark joined the Elbas market in 2007, and finally, in 2009, Norway
joined the Elbas intraday market. The implementation of a negative price floor in the
Elspot market was also done in the same year.[61]
The original design plan for the Nord Pool market was only with a day-ahead and an
optional balancing market for flexibility of variable hydropower generation supply. Due to
a large share of variable energy resources (VRE), there was a need for power flexibility
between hours and shorter time spreads between the market closing and actual delivery.
The intraday market was intended to help the spot market as there was a large amount
of less flexible power generation, which was dependent on weather and other variables.
They had difficulties predicting their energy generation 12-36 hours before the Elspot
market. The large trading for electricity is done in the Elspot market, but the Elbas market
20
plays a vital role, which allows the adjustments in the bids. Figure 8 provides an outline
of the three markets, and in the following chapter, there will be details on these markets.
Fig. 8 Structure of the Nordic power market Nord pool [62]
Physical trade for Nord Pool is done in three different markets. These three different
markets have two different pricing mechanisms. The first market, which is a day ahead
market named Elspot, has uniform and marginal price. The Elbas market, which is a
continuous process all over the day, has a price set on a pay as bid. This regulating
power market has the pricing mechanism as the Elspot market, which is cleared at a
fixed clearing time before 15 minutes at a marginal fixed price for the next following hour.
Table 3 is an overview of the Nordic power market setup, and the following chapter will
discuss in detail these markets.
Table 3 Setup of the physical markets at Nord Pool. [62]
Markets Purpose Trade Price
Elspot Day-ahead production plan-ning
Cleared at 12 am before the trading day
Fixed price
Elbas Bid adjustments A continuous process over the day
Pay-as-bid
Regula-tion Power
Balancing the bids for fore-cast and actual trade
Real-time closing before 15 min of the trading
Uniform price
3.2.1 ELSPOT Day-ahead energy market
Elspot market is also referred to as the day-ahead energy market where the auction is
placed for the electricity of the next day. Here the electricity is exchanged for the Nordic,
Baltics, Central Western Europe, and UK [63]. The Elspot market is a physical market
along with Elbas and the regulating power market in the Nord Pool Spot [64]. Other than
this electricity market, there is also a financial market called Nasdaq. In the Elspot, which
is a day-ahead market, the electricity production companies submit their supply bids.
Also, the supplier places their demand bids, and all this electricity exchange happened
21
over the Nord Pool spot market [65]. The buyer side of this electricity market is electricity
retailers. They participate in demand bids. The large power plants are on the seller side;
they put their supply bids. All these happen prior to 24 hours before the delivery. There
are three types of bids for the elspot / day-ahead market: hourly bids, block bids, and
flexible hourly bids. These bids consist of price and volume.
There are different market members in Nord Pool’s day-ahead market, and they trade
power between themselves. The tradings are done in the day-ahead market, but the
power delivery is done on the Elbas market on the next day. The Nord Pool members
submit their purchase and/or sell size for the upcoming day’s each hour in €/MWh format.
This is done every day before 12:00 Central Europoan Time (CET). The hourly price is
calculated with the help of a pricing algorithm defined by the Nord pool. This pricing
algorithm has inputs, which are the local supply, demand, and transportability. This
makes different pricing regions. As an example, there are four price regions in Sweden
and only one in Finland. [66]
While making the placement of an order in the ESPOT market, all volumes are stated in
MWh. The acquisition amounts are designated as positive and selling volume as nega-
tive. The whole trading is based on four specific order types [67]
• Single hourly orders. The major share of the ELSPOT market trading is met cen-
tered on single hourly orders. The participant specifies the procure and/or sales
amount for every hour and can choose either price dependent or independent
price order.
• Block orders: The block order contains a specific size and price for a precise
number of uninterrupted hours within the same day. In Nord Pool markets, there
are four types of block orders: standard, profiled, restricted and linked. [67].
• Exclusive group: An exclusive group is a group of sells and/or buy a block, out of
which only one unit can be activated [68].
• Flexi order: A Flexi order is a block of order with the highest duration of 23 suc-
cessive hours. The interval may stretch from 00:00 to 24:00 for any duration.
3.2.2 Price calculation method
The deadline for submitting orders for customers ends at 12:00 CET. All the purchase
and sell orders are then accumulated into two graphs for every delivery hour. Among
22
those two accumulated curves, one of them is supply, and the other one is demand. Both
are drawn to per hour with the fixed bidding area. In this graph, all the block orders are
unidentified. Both the area and system prices are determined for each delivering hour.
The market area is divided into different bidding areas to prevent congestions in the grid.
The divided bidding areas have the possibility of being a balance, shortage, or surplus
of electricity. But the electricity will where the bidding price high because there is high
demand. There is a possibility of a different price if the transmission capacity is not suf-
ficient; there may occur congestion in the grid. If the full price convergence does not
happen to certain areas, it will lead to a different price in the same bidding area. On the
other hand, if the transmission system has the capability set by the TSO to flow power
between bidding areas, the prices will be identical in those different bidding areas. The
calculated area price is the amount paid to the producers, and consumer also pay the
same price
Fig. 9 Price Calculation [69]
To get an hourly system price, a plot is done for each hour's demand and supply every
hour for the next day. The system price can be determined from the plot where the supply
and demand curves intersect. Fig 10 shows a qualitative representation of the cumulative
supply and demand curves. The accumulated supply curve is shown in the chart with
various power generation systems. The thickness of the bars relates to the generation
volume of each generation. The darkened areas show the rise in the production ex-
penses of electricity triggered by emission budgets' price. The curve has various steps
because of the different prices of a specific generation. If the demand intersects the sup-
ply curve, for example, in the coal condensing part of the curve, then hydro, nuclear
23
power, combined heat and power (CHP), and coal condensing are used to meet the
electricity demand. In the system price calculation, the possible restrictions for the trans-
mission capacity between different Nordic countries' geographical areas are left out. This
means that the system's price is based on the supposedly infinite capacity between Nor-
way, Sweden, Finland, Denmark, Estonia, Latvia and Lithuania. That is why the system
price is often referred to as the "the un-constrained market-clearing price" that balances
sales and sales in the ex-change region.
3.2.3 Intra-day energy market Elbas
The supplement of the day-ahead market is the intra-day market, which is called Elbas.
The main purpose of this market is to maintain the required balance between demand
and supply [70]. The trading of electricity is continuous in the Elbas market one hour prior
to delivery. This last hour possibility of trading gives the participants adjust their demand
of supply offers between the Elspot and Elbas market [65]. This variation of change on
day-ahead and the intra-day market may occur because of some unavoidable circum-
stances like natural calamities, weather change, malfunction in the larger power plant.
Here Ebas plays a vital role in the markets by facilitating power exchange close to deliv-
ery time, which helps to keep the market balance [70]. In current days, the increase in
Fig. 10 Plot of system price [71]
24
renewable energy sources makes the grid more unpredictable and more volatile to
weather. Solar and wind power generation depends on the weather; the unpredictability
of supply and imbalance will increase a lot in the future. Thus, the intra-day market comes
into operation and offset the imbalance in the current time.
The transmission network is stable and balanced prior to delivery time is beneficial for
both the power system and market participants. Along with these, it also reduces the
power reserve and related costs. This market is a continuous market where trading of
electricity occurs around the clock prior to one hour and in some member countries right
until the delivery hour. The pricing of this market is based on a “first-come, first-serve”
basis. The intra-day market offers an option to balance the system with a balanced mar-
ket. This balancing market is necessary, and the TSOs of every market participating
nation are responsible. This balancing takes place automatically when necessary by the
TSOs [70].
Fig. 11 The market setup
25
3.2.4 Regulation power market
In the power market, regulating power or balancing the power market is a means to pre-
serve system balance amongst the production and consumption of electricity in actual
time for the Transmission System Operators of the Nord pool participating countries. The
balance of a power transmission system and its equipment can be determined by the
system frequency. The operator at TSOs can optimize and modify production or demand
according to the need of operational necessity. The ISOs have two types of participants
in the regulation market. Those are active and passive participants. Generation compa-
nies and consumers are active participants as they can actively influence the system on
TSO requests. They can regulate either their generation or consumption as per request
by the TSOs. Transmission System Operators have their own laws and criteria for being
a balancing party in the power system.
The power production companies, or the loads/consumers can submit their bids for bal-
ancing the power market. This bid depends on their regulating capacity. In Nord Pool,
every regulating provider can join the regulating power market, and it is open as per
regulation and service agreement. The capacity holders of electricity production can also
partake in the regulating power market. They need to sign an independent contract with
the TSO. Certain criteria need to be fulfilled by the capacity market, which is distinct from
TSOs. There are a minimum production volume and response time regulation. In the
Nord pool, the balancing bids must be submitted to the TSO at the latest of 30 minutes
before the operational hour. The least capacity for bidding placement is 10 MW, and it
should be operational after 10 minutes of request. So, to maintain the physical balance
of the system can be done by balance regulation, and the TSO consistently receives bids
from the producers at volume MW and price. These balance providers agree to increase
or decrease their production in 10 minutes to maintain the system balance [70]. The
balancing price is determined in agreement with the providers with maximum cost during
regulation up means purchasing electricity. For regulation down means shutting down
production determined by the lest expense means which one has the least cost to the
operation. Also, the balance service can sell this extra production [71].
3.3 Electricity market in California
The United States of America is a big country with 50 states. There the transition of
electricity varies by region, states, and authority. Different city (e.g. Austin, Texas, Los
26
Angeles, California, and Nashville Tennessee) have their own municipality. These mu-
nicipalities have their own utility facility, and they serve their customers through their own
utility facility. In rural areas, the utility like electricity is served by customer-owned coop-
eratives. These utility service facilities can be operated as regulated or deregulated. The
regulated electricity utility services are operated as monopolies that are vertically inte-
grated and have oversight from public utility commissions of the subsequent state. De-
regulated electricity utility markets can set the price for wholesale market operation with
some federal supervision. The regulatory body formulates the pricing mechanism of the
wholesale electricity and determines the productions of electricity in a certain time.
CAISO, abbreviation of California Independent System Operator and this is a non-profit
organization. They supervise the operation of California’s majority electric power system,
transmission line and electricity market generated and transmitted by its member utilities.
CAISO is one of the largest ISO in the world and only independent grid operator in west-
ern U.S.
3.3.1 Day-ahead market
Fig 12 shows the relation between the day-ahead and real-time markets (RTM). The day-
ahead market opens eight days before the trade date and closes at 10 am the day before.
The day-ahead market is made of three market process that runs sequentially. First, the
Independent Service Operator (ISO) runs a market power mitigation test. Bids that fail
Fig. 12 Sequence of Day-ahead market in CAISO [74]
27
the test are revised to a predetermined limit. These market power mitigation measures
are intended to provide the means through the ISO to mitigate the market effects of any
conduct that will substantially distort competitive outcomes in the ISO market while avoid-
ing unnecessary interference with competitive prices.
The second process is the integrated forward market (IFM), which establishes the gen-
erator needed to meet the bid in demand [72]. Market prices are set based on bids, and
lastly, the residual unit. The commitment process secures capacity from additional re-
sources to meet the forecasted demand for the next day. These processes are co-opti-
mized to produce a day ahead of schedule at the least cost while meeting the local reli-
ability need. The final step of the day-ahead market is to publish the market result at
approximately 1300. When the day-ahead market is published, this triggers the opening
of the real-time market. Bids are once again submitted along with base schedules from
the Energy Imbalance Market (EIM) participants. Market process run, bid cleared, and
dispatch orders sent and received. The market is then settled in the post-market process.
The graph in Fig. 13 here represents one hour in a day-ahead market. The scheduling
coordinator can submit different bid curves from each hour of the day.
All the economic bids and self-scheduling of both supply and demand are placed on a
curve. On Y-axis, we have bid prices, and on X-axis, we have MWs. This is a very sim-
plified graph. The green supply curve represents the supply bid lined up from the least
expensive to the most expensive. The blue line has all the demand bids showing what
demand is willing to pay. It is lined up for the most expensive to the least expensive. The
intersection of these two-line crossed represents the amount of supply and demand in
Fig. 13 Any hour market price calculation [74]
28
MW that will clear in the day-ahead market. By clearing the day-ahead market, it means
that the resources have enough generation to meet demand. The cheapest resources
tend to clear the market first, followed by the next cheapest option, and so forth until the
full demand is matched. When supply matches the demand, the market is cleared, and
the price of the last resource to offer in, becomes the wholesale price of the power. This
is the first step of the plan for the following day. Energy is needed to meet the demand,
but there is also a need for capacity available to backup the instantaneous energy need.
3.3.2 Ancillary Services
The day-ahead market also procures capacity or ancillary services to meet its reliability
requirements. Ancillary service also supports the transmission system's reliable opera-
tion. Ancillary services are procured in real-time. Regulation corrects for short-term
changes in electricity use that might affect the stability of the power system. These gen-
erators are under ISO control through automatic generation control (AGC), which allows
the ISO to move those resources every four seconds. Operation reserves are capacity
products designed to ensure reliability in the event of grid disturbance, for example, a
large generator going offline unexpectedly. The ISO have two types of these operating
reserves. Spinning reserve are synchronized to the grid and available to be
dispatched as energy within a ten-minute period. Originally it referred to increase the
torque applied to a turbine rotor, now other types of resources can meet this need for
example battery storage. For non-spinning reserve there are the ones that are not syn-
chronized to the grid but can be synchronized and available for dispatch within ten
minutes, such as fast start generators. The ISO has regulatory requirements on how
much of each of these services they need. [73]
29
3.3.3 Residual Unit Commitment
If the amount of energy that clears the market is less than what the ISO forecast, the
market will also analyze bids for residual unit commitment to cover this gap. Fig 14 rep-
resents a simple scenario where the total cleared demand and ISO forecast of actual
demand has a difference, then the residual unit commitment (RUC) is used to cover this
gap. In many cases, this need is fulfilled by supply that is already dedicated due to a
resource adequacy program that is part of California’s mandate, but other suppliers can
also offer to provide this amount of electricity production.
The RUC process is a method of ensuring the reliability of the grid. It also bridges the
gap between what is cleared for each hour in the day-ahead market compared to the
demand forecast for that hour. If a resource is awarded for capacity, scheduling coordi-
nators need to submit an energy bid in real-time. There may be a payment for the ca-
pacity in the day-ahead market, and if the ISO needs the energy in real-time, there will
be an additional payment at the real-time energy price.
3.3.4 Market Power Mitigation
When there are multiple resources available to serve load in an area, prices are compet-
itive, but if there is only one resource available to serve the load, this resource has the
ability to command the price, and this is called market power. For every hour in the day-
ahead market runs a test to see if any resource has the potential for market power. If the
potential for market power is determined, the resource’s bid will be mitigated to a more
Fig. 14 Simplified graph of Residual Unit Commitment [73]
30
reasonable price if required. Resource bid that is mitigated is reduced to a cost-based
bid.
3.3.5 Real-Time Market (RTM)
There are three main timelines in the real-time market (RTM). Bids from all market par-
ticipants and base schedules for Energy Imbalance Market (EIM) are submitted 75 min
before each trading hour in real-time. These bids are used in an hourly process for inter-
tied transactions, the 15-minute market, and the real-time dispatch, which occurs every
five minutes.
Fig. 15 Real-Time market structure [74]
The RTM fine-tunes the flow of electricity to follow fluctuations in supply and demand.
As the time near to the RTM occurs, the ISO looks at the updated forecast at least five
hours ago and begins committing resources as necessary from the time the DAM sched-
ules are posted to 75 minutes before the trade. The bids can be submitted for the RTM.
The ISO has an hour ahead scheduling process for scheduling energy and ancillary ser-
vices based on bids submitted by import. Internal resources will receive advisory sched-
ules for the next hour, and imports and exports will receive a financially binding commit-
ment in this hourly time frame. In the real-time unit commitment process or 15 minutes
market, the ISO makes final decisions on resource commitment to adjust the day ahead
schedule energy which is paid at the day ahead or real-time prices based on when the
resource receives its market award. Inputs to the RTM include the day ahead system
information, supplemental energy bids, outage information, and transmission line infor-
mation. The market result generates real-time dispatches ancillary service awards and
31
start-up or shut down instructions. In the five-minute time frame, the prices are sent, and
energy is dispatched. [72]
3.3.6 Reliability
The ISO is responsible for the constant and reliable flow of electricity for the health,
safety, and welfare of consumers. Maintaining reliability as a balancing act that requires
a lot of expertise and controlling many moving parts. The operator of ISO is responsible
for reliability of the grid by balancing supply and demand using various resource type.
Operators are in two control centers which are continuously connected in real time
through instant video conferencing capability. Both control rooms are operated 24/7. The
entire operation can be transferred between control rooms any time. There are multiple
redundances on all system providing one of the highest levels of dependability in com-
puter system operation. [72, 74]
3.4 The Australian Electricity Market
Australia has been one of the early and enthusiastic countries to adopt market-based
electricity and environmental regulation. In 1999 Australian National Electricity market
was established [75]. The Australian electricity sector has established National Electricity
Market (NEM) as an organization to established electricity transmission grid between
eastern and southern Australia states [76]. This creates a cross state wholesale electric-
ity market. Here producers sell electricity and retailers buy it to sell to customers. It is a
highly competitive market as there are 100 producers and retailers are participating. This
Fig. 16 Australian Electricity Market overview [79]
32
competitiveness creates an efficient way of maintaining modest electricity price. The
Australian Electricity Rules are established and maintained by the Australian Energy
Market Commission (AEMC). It is the authority to force the law in the states and regions
those who are participating in NEM. The policies are implemented by the Australian En-
ergy Regulator and the Australian Energy Market Operator (AEMO) also, performs eve-
ryday management of NEM.
There is a uniqueness in the governance of NEM. Every system and operations regard-
ing market regulation, policymaking is strictly distributed between the AEMO, AER (Aus-
tralian energy regulator) and AEMC (Australian Energy Market Commission) respec-
tively. This unique gross-pool energy market which has the mechanism of uniform auc-
tion system at the first price basis. The associated market has also delivered reliable
performance with required resource suitability for more than three decades, when there
were different technical and economic conditions.
3.4.1 AEMO’s role in the NEM
The primary responsibility of AEMO is to monitor the consumption of electricity and the
energy flow across the whole system. Everyday management also includes electricity
consumption monitoring, observing energy flow through the power system, adjusting
supply, and demand. If there is inadequate supply regarding demand, AEMO issues no-
tice to the market for a supplementary generation. AEMO also has the responsibility to
monitor and maintain adequate voltage and frequency for a stable and secure electricity
system. Also, the planning of power outage is done by them and ensures that the system
can adjust any subsequent loss of generation or transmission ability. NEM is controlled
by AEMO through two identical control centers. Both control centers can take over the
whole operation. AEMO has the authority to instruct the network service providers to cut
off the electricity supply momentarily if the consumption surpluses the production. AEMO
also operates the retail electricity market across NEM. These retail markets facilitate
33
competition among the retailers and opportunities for the customers to buy energy from
any supplier of their choice. [77, 78]
3.4.2 Network service provider
The distribution network under NEM is owned, operated, and controlled by the Network
Service Providers (NSPs). There are two types of network service provider in NEM
• Transmission network service providers (TNSPs). In each NEM region there is
one TNSP, which own the resources of transmission network
• Distribution network service providers (DNSPs). State wise some have multiple
and some state has only one DNSP. They own the distribution resources.
It is determined by the Australian Electricity Law that the network operators should be
regulated carefully by the AER. Network operators and owners cannot produce and sell
energy like any retailer. This limitation was set up so that the network owners cannot
create a monopoly in the market by exploiting their position. The management responsi-
bility of these networks is on AEMO.
3.4.3 Demand forecasting
The operation of NEM needs demand forecasting and AEMO conduct this responsibility.
There are a few varieties that AEMO uses to forecast the demand level for every five
minutes interval. This forecast helps to submit bid from the producers and thus AEMO
creates a schedule to guarantee the generation according to the forecast. In this sched-
ule, the producer which has the least production price goes to production first and then
the next expensive producer is scheduled to dispatch next till the fulfil of demand fore-
cast. This ensures a reliable operating state of the power system.
If the producer or the network has any deficiency, they must inform AEMO in advance to
maintain the balance between supply and demand. By this AEMO can inform market
34
participants to increase their generation to supply the shortfall. There are various fore-
casting tools to help the market participants which also improves overall competence of
the market.
3.4.4 Types of forecasts
1. Pre-dispatch forecasting is a short-term forecast to estimate the supply and
demand situation in the market. It is used for the forthcoming trading day to esti-
mate price and demand of electricity of the market. By this forecast it is also de-
termined that how much electricity is expected to be supplied between the states
and other regions. Usually, the producer and operator of the network inform
AEMO their production capacity and how much they can supply against the pre-
dispatch forecast. This information is collected from all the producers and deter-
mine the potential supply shortages and it is published. The market participants
can use this published information to re-bid their capacity that they can provide
to the market.
2. Five-minute matching of supply and demand is a dispatching schedule for the
generators to meet the supply with current demand for every five minutes. This
five-minute matching process helps the market participants to act on a dynamic
price as they wish to supply electricity to fulfill the demand.
3.4.5 Projected assessment of system adequacy
Projected assessment of system adequacy (PASA) is the projection of sufficiency of
generation on the predicted forecast. This is monitored by AEMO. They have one seven-
day forecast for real time and a two-year forecast for long term reserve management.
These forecasts are called short term and medium term PASA correspondingly. This is
used by both AEMO, generators and network operators to ensure that there is always
adequate supply and network operators can schedule their expansion, maintenance, and
outages.
3.4.6 Electricity spot market and physical processes
Electricity spot market is the place where the producers get paid for the amount of elec-
tricity they trade to the pool and the wholesale market and retail customers buy their
consumed electricity from the pool. The trading of all electricity in the pool happens ac-
cording to the spot price. There is a Market Price Cap (MPC) that sets the maximum spot
price and there is also a maximum bid price. By the National Electricity Rules AEMC is
35
required to revise the MPC every four year from 1 July 2012. This is done by applying
the information of consumer price index which is acquired from Australian Bureau of
statistics. There is also a set minimum spot price which is called Market floor price (MFP)
which is the minimum price for bidding. In 2019-20 MPC is 14,700 AUD/MWh and the
MFP is -1000 AUD/MWh. These prices are checked and set every 4 years by AEMC.
This electricity pool is allocated into several pre-defined regions. NEM’s electricity price
is defined on two categories.
1. Price offered by the producers for a particular volume at set that they can supply
2. Demand given at any time.
3.4.7 Submitting bid to supply
To ensure the electricity supply for AEMO’s system the producers which can be sched-
uled or semi-scheduled have to submit offers specifying how much electricity their gen-
erators are ready to supply for a particular price. This procedure is referred as bids or
bidding.
In a 24-hour time scale covers one trading day. The trading day start at 4.00 am to
4.00am Australian Eastern Standard Time (AEST). The generators can submit bids us-
ing up to 10 price ranges. They can also break up their capacity into one or more of those
price ranges. For next trading day the bids are submitted before 12.30 pm AEST. The
generators can rebid with proper reason after 12.30 pm AEST which can be up to 5
Fig. 17 Electricity market overview [79]
36
minutes before dispatch. Both the bids before and after 12.30 pm AEST for next trading
day are recorded in a pre-dispatch schedule. This schedule is a suggestive forecast of
price and dispatch for current and next trading day to a half-hourly plan and gets updated
every 30 minutes. The pre-dispatch schedule has the timetable in 5-minute resolution for
next hour.
3.4.8 Submitting bids for demand
In the market the customers who has price sensitivity or capability to modify demand,
submit a bid for their planned load to AEMO. This procedure is done every day. The
submitted bid shows their ability and how much electricity they are willing to buy from the
pool at a specific price. This bid is for each half-hour trading intermission of the following
trading day.
3.4.9 Central dispatch process
The central dispatch process is managed every five minutes by AEMO. The dispatch of
the generators is based on least-cost optimization of all the bids submitted by the pro-
ducers to supply and demand by the retailers. The scheduling is done by dispatching
least cost generation units, until it matches the AEMO’s forecasted demand at the end
of each interval of 30 minutes. The bids for supplying electricity by the generators are
set in ascending order. This is scheduled until it fulfills the total demand. The most ex-
pensive generators are scheduled only if the demand increases. This schedule demand
generation also depend on the network capacity and their limits. In conclusion, schedul-
ing the generation plant dispatch is based on economic or value order basis.
The scheduled dispatch instruction is then released to scheduled, semi-scheduled and
standby generation units. Also, the consumers are instructed to consume the scheduled
Fig. 18 A schedule for trading day in AEMO [79]
37
amount of load within the dispatch interval. Simultaneously, the ‘central dispatch process’
optimally determines, the amount of capacity reserve which is necessary based on the
bids from the ancillary service provider to manage the possible loss of generation units,
load, or transmission network components. Optimized results are used to identify the
dispatch price and ancillary maintenance price for each area.
The fluctuation of demand is recorded every five-minute cycle during the trading day,
according to this variation the electricity production also varies. In low demand, lowest
bids for electricity generation are in action. Increase in demand brings the generation
with higher electricity production bids. In this way AEMO provides a best possible or least
expensive solution for electricity supply to fulfil demand.
Fig. 19 Five-minute dispatch cycle [79]
3.4.10 Ancillary Service
Ancillary service was always a key feature for stable and reliable power system. It be-
came commercialized after the establishment of energy markets. In Australian national
Electricity Market these ancillary services are provided thorough AEMO. There is a long-
term deal between the ancillary service providers and AEMO as they are responsible for
38
reliable, safe, and secure power system. Services regarding to AEM ancillary system are
categorized as follows [79]
• Frequency Control Ancillary Service (FCAS), which is the only market based an-
cillary services with Eight frequency control market. The descriptions are given
bellow in Table
• Network Support and Control Ancillary Service (NSCAS), which is used to control
voltage at various nodes of the power system network. This helps conserving the
recommended standards of voltage level and maintain the physical constrain of
the network elements. These ancillary services are arranged by Network Service
Providers of by AEMO. These services are not part of the energy market.
• System Restart Ancillary Service (SRAS), which is not a part of the energy mar-
ket. When there is a complete or partial blackout, SRAS is enabled to restart the
power system.
Table 4 Market based ancillary services [79]
Ser-
vice
class
Service name Description
Regu-
lation
Raise regulation
(done by in-
creasing genera-
tion or reducing
load)
Constant adjustment of small frequency changes and time-
error improvement. The control action is executed from cen-
tral Automatic Generation Control (AGC) system. Service
providers have their set points constantly corrected by in-
creasing generation or lowering generation.
Lower regulation
(done by de-
crease genera-
tion or increase
load)
Contin-
gency
6-second raise
(fast raise)
Fast-acting reaction to fast frequency variations within the
first 6 seconds after a significant interruption; examples in-
clude governor response and underfrequency frequency
load shedding. 6-second lower
(fast lower)
60-second raise
(slow raise)
A slower-performing reaction to steady the frequency
changes within 60 seconds of a significant interruption.
60-second lower
(slow lower)
39
Ser-
vice
class
Service name Description
5-minute raise
(delayed raise)
Reaction to restore the system to a normal frequency oper-
ating band within 5-minutes of a large disturbance. For ex-
ample, rapid unit unloading or loading. 5-minute lower
(delayed lower)
The fig 20 gives an illustration for the response to the generation outage and the ancillary
service. There is a certain difference between service enablement and delivery. Service
enablement means the capacity that could be available for the delivery or the consump-
tion of energy that is reserved for delivery if necessary. The delivery is the physical facility
of the service. NEM measures the system condition every five minutes and the total
enablement is set according to the Frequency Control Ancillary Service (FCAS) require-
ments.
Fig. 20 Conceptual FCAS raise contingency response to a unit outage [80]
Network Support and Control Ancillary Services (NSCAS) and System restart ancillary
services (SRAS) payments are managed under long-term contract between AEMO and
ancillary service providers. The payment for NSCAS is recovered only from market cus-
tomers, although SRAS payment is recovered both from generators and customers
equally.
The outcomes from the spot market are the input for a computerized control system.
Which is connected to the grid. Fig 21 demonstrate the high-level relations among the
following activities and their responsibility in handling changes in supply and demand.
[81]
40
• electricity spot market — this is the long-term solution for power imbalance. It’s
time scale has long standing solution with an estimated model of the power man-
ufacturing and an grants for the provision of Frequency Control Auxiliary System;
• computerized control and generation system — this is related to a very shot and
important timescale within seconds to minutes to resolve the imbalance in the
power system. This uses the resources of enabling regulation raise and lower.
• distributed control actions — this resolves the imbalances which arises for a very
short period using the contingency ancillary services.
Fig. 21 Interaction among electricity spot market and control system [81]
41
4. SUMMARY AND CONCLUSION
This chapter summaries market areas described in the previous chapter, compares them
shortly, and draws the conclusion. From Table 5, some significant characteristics and
features came to light.
Table 5 Comparative characteristics and features of the different electricity mar-kets.
Electricity
market
Characteristics and features
Nord Pool A centralized market for exchanging electricity for multiple countries
promoting competition. Most seamless exchange of electricity be-
tween areas. Well-organized interchange of power. They assure open,
transparent, and harmonized supply of electricity. Managing extreme
circumstances by emphasizing performance and efficiency.
California There is no clear regional boundary in CAISO, making it very hard to
find the limitation of physical resources. When the producers are plac-
ing a bid with their resources in a different market, there is a possibility
of a scheduling conflict with the supply commitment. There is manda-
tory bidding, which is done in a central dispatch pool. This market is
not transparent, and the producers who have long term contract hold
domination. There is no marketplace for new producers as the long-
term contract holders use their own plants.
They offer a competitive marketplace and encourage quality produc-
tion. Transmission -pricing signals improve the quality of the transmis-
sion. Owners of the producing units are accountable for the committed
units, and they are penalized if they create congestion.
Australia The Australian Energy Market Operator (AEMO) is owned by the Aus-
tralian government (60 % ownership) and the market participants (40
% ownership). They have the authority to operate the spot market,
42
handle ancillary service, and commence market forecast. Australian
Energy Market Commission (AEMC) is the authority to enforce and
establish the rules and regulations. But the market is self-regulated.
The policies are implemented by the Australian Energy Regulator
(AER) and AEMO; also, they perform day-to-day management of
NEM.
There is a uniqueness in the governance of NEM. Every system and
operation regarding market regulation and policymaking is strictly dis-
tributed between the AEMO, AER, and AEMC, respectively, which
makes it different from other markets.
The presence of a spot market allows competition. Due to the market’s
simplicity, the market participants have trust in it. AEMO has a practi-
cal approach to decentralized unit commitment, active market trading,
and effective commercial risk management.
There is not enough competition in network service and distributed
resources—less attention to reducing market power due to less pro-
ducers in a specific region and building market power.
The failure of effective self-regulation is not adding small producers to
AEMO and AEMC committee. Ignoring the peripheral monitoring be-
tween states and the boundary between ancillary service and spot
markets makes the power market week.
43
Table 6 represents a short comparison in the day ahead market observed in the three
market regions. The day ahead market it has the trading span of 24 hour and the clearing
price is set one day advance.
Table 6 Day-ahead market parameter comparison
Electricity market Trading span Min Bid size Floor price Price cap
AEMO 24h D 1 MW $300/MWh $300/MWh
CAISO 24h D - / $1000/MWh
Nord Pool 24h D - €500/MWh € 3000/MWh
The intraday and real-time market shows difference approach in different marketplaces.
Table 7 shows some parameters for comparison. The differences are on gate closure
and the bid span.
Table 7 Intraday market parameter comparison
Electricity Market Gate closure Opening Smallest bid span
AEMO 5 min prior to
delivery
After day ahead
price published
5 min
CAISO 75 min before
the trade
After day ahead
price published
1 hour
Nord Pool 1 hour before
delivery
After day ahead
price published
1 hour
In Nord Pool, the TSO is the owner and the operator of the network, and it is a separate
body from the marketplace. In CAISO, they has same role as market operator and sys-
tem operator, which is distinct from the ownership of the transmission network.
44
This is worth of emphasizing that in the two approaches, there is a difference between
financial period of trading, which is something that happens before real-time, and the
physical operation of the network. In Figure 22, we can see a sequence of the power
market. The forward markets starts a few years before real-time. The day-ahead market
plays a key role in Nord Pool and AEMO. Typically one hour before real-time in most
markets, the system operator gets control of the system. At this point, the balancing
mechanism process can be run to balance market players' position and the system. To
fully fill this process, several auxiliary services (i.e., primary, secondary, tertiary reserves)
are taken into account to ensure the system is balanced in real-time at every point in the
network.
Fig. 22 A sequence of Market
Figure 23 shows two different approaches. Blue represents transactions occurring
among market participants. The orange color represents the transactions concluded be-
tween market participants and the system operator TSO in Nord Pool. It is quite clear,
that in Nord Pool there are number of principles which are quite different from the CAISO
and AEMO. In Nord Pool, there is decentralized properties, but in CAISO they have cen-
tralized dispatch. The second thing that is clear is that the main market in Nord Pool and
AEMO is the day-ahead market, and there is a concept of balance responsible parties,
which is decentralized. So, the specific difference between Nord Pool and CAISO is ba-
sically two approaches. The first thing in CAISO is that, there are typically two settlement
system; day ahead and real-time with a centralized dispatch. These provides a relatively
high consistency of process and possibility of arbitrage between real-time and the day
ahead. In contrast, in Nord Pool there is main market which is the day-ahead market.
There is a residual role for balancing, which is done by the balancing mechanism by the
TSO. As generations are moving towards a system with lot of renewables, it will be es-
sential to ensure that the trade is as close as possible to real time. In that sense the US
45
approach and some of recent developments with co-optimization of reserve and energy
market is quite interesting and probably something to learn for the European side.
4.1 Characteristics for a successful electricity market
Based on chapter 3 and tables 5, 6 and 7 we can make a summary of characteristics
for a successful electricity market design as follows.
• For new transmission line development, there should be guidelines and regulations.
• A distinct and independent regulatory board should be created.
• There should be a separate institution and regulatory rules for engagement and effi-
cient access to the transmission line.
• By regulation, a cap on the highest electricity bid price should be set, and evaluation
should be done after a particular time.
• Focusing on decentralization with the help of private incentives can include more re-
newable generation.
• Availability of competitive retail market
• Need a particular institution that effectively drives customer engagement to encour-
age customers to adapt to wholesale price fluctuations.
• While expanding the transmission and generation network, it should be considered
that it does not constrain the market with the incorporation of renewable energy
sources.
Fig. 23 Figure Difference in Market design EU and US
46
4.2 Conclusion
Among these three marketplaces, the most dynamic and modern electricity system is
Nord Pool. They are continually developing and renewing to the latest technology and
business principles. Electricity markets worldwide share the same goal, so both produc-
ers and customers can dispatch and buy electricity at a fair price. But these marketplaces
have their own way. Generally speaking, the business characteristics which should be
closely evaluated in prospective ventures include 5 minutes of bids, the co-optimization
of power and balance facilities, a day in the market as a redeployment of unit engage-
ment, a higher degree of deregulation, better-adjusted tenders to various market players,
etc.
47
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