Electricity Markets Regulation - Lesson 2 - Market Design

Experience you can trust.http://www.leonardo-energy.org/training-module-electricity-market-regulation-session-2

Training on Regulation

A webinar for the European Copper Institute

Webinar 2: Market Design

Dr. Konstantin Petrov / Dr. Daniel Grote

2.11.2009

2/11/2009 2

http://www.leonardo-energy.org/training-module-electricity-market-regulation-session-2

Agenda

a) Power pools

3. Wholesale market models

2. General market models

b) Markets with bilateral trade

c) Power exchanges

d) System, market and transmission function

1. Introduction

4. Balancing markets

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1. Introduction

Actors in the electricity market

Producer (generator)

Trader

Supplier (retailer, marketer,

load-serving entity etc.)

Consumer

Market participants Market facilitators

Transmission System Operator

Market Operator

Distribution System Operator

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1. Introduction

Services in the electricity market

Energy (commodity, MWh)

(Generation) capacities (MW)

Transport capacities

System / Ancillary services

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2. General Market Models

Vertically integrated company

Customers

Market Operator TraderIndependent

Power Producer

Generation Transmission Distribution Supply

All segments integrated within a single company (incumbent)

System Operation

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Vertical unbundling

CustomersGenerator

Generator

Generator

Transmission

System

Operator

Distributor

Distributor

Distributor

Customers

Customers

Market

Operator

Supplier

Supplier

Supplier

Traderaccounting functional legal ownership

unbundling

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Unbundling Models

Unbundling using ring-fencing rules setting requirements for:

– Accounting separation

– Functional separation

– Company’s behaviour

– May be extended towards legal separation.

Full Ownership Unbundling

– New entity in charge of network and operation activities with separate

ownership control

Independent system operator (ISO)

– Sourcing out the SO functions under separate ownership

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Advantages of full ownership unbundling

Removes incentives to discriminate competing generators / supply by:

– Limiting network capacities (e.g. transmission interconnection)

– Postponing transmission investments which may cause congestions and

fragment markets

– Impeding physical connection to networks

– Impeding access to information

– Impeding customer switching

Removes potential cross-subsidies between regulated network and competitive

businesses

Prevents from charging excessive network tariffs

Increases transparency and efficiency of regulation

Strengthens competition

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Disadvantages of full ownership unbundling

Efficiency loss in coordination of planning between generation and

transmission investments

Loss of synergies (e.g. shared services) and high transaction costs

Lower credit ratings for the unbundled companies and probably higher cost

of capital

Increase of the complexity of regulatory framework

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Single Buyer

CustomersGenerator

Generator

Generator

Transmission

Distributor

Distributor

Distributor

Customers

Customers

Single Buyer

System

Operation

Power Purchase

Agreements

Power Selling

Agreements

No access arrangements and direct trading between generators and distributors/suppliers

Supplier

Supplier

Supplier

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Wholesale competition

CustomersGenerator

Generator

Generator

Transmission

Customers

Customers

System

Operation

Supplier

Supplier

Supplier

Distribution

Wholesale market

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Retail competition

CustomersGenerator

Generator

Generator

Transmission

Customers

Customers

System

Operation

Supplier

Supplier

Supplier

Distribution

Retail market

Wholesale market

2/11/2009 13



International developments – wholesale power markets

California (1998)

Ontario (1998)

Texas (2002)

PJM (1998)

Chile (1988)

Argentina (1992)

Brazil (1998)

Australia (1997)

New Zealand (1996)

Japan (1995)

South Korea (2001)

Spain (1998)

France (2001)

Nordpool (1996)

Italy (2004)

Germany (2000)

Poland (2000)

Netherlands (1999)

Ireland (1999)

England-Wales (1990)

Romania (2004)

Austria (2001)

Alberta (2001)

India (2008)

Philippines (2006)

Singapore (2003)

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International developments – retail competition

End-users eligible to choose their supplier freely in %

Source: DG TREN data

UK since 1990

Norway since 1991

New Zealand since 1993

Australia since 1994

Finland since 1995

Sweden since 1996

USA since 1997/98

Germany since 1998

Japan since 2000

Canada since 2001/02

Switzerland since 2009

1997 1999 2000 2003 2005 2007

Austria 0% 33% 100% 100% 100% 100%

Belgium 0% 35% 35% 52% 90% 100%

Denmark 0% 35% 90% 100% 100% 100%

Finland 40% 100% 100% 100% 100% 100%

France 0% 30% 30% 37% 70% 100%

Germany 0% 100% 100% 100% 100% 100%

Greece 0% 0% 30% 34% 62% 100%

Ireland 0% 0% 30% 56% 100% 100%

Italy 0% 45% 45% 70% 79% 100%

Luxembourg 0% 30% n/a 57% 84% 100%

Netherlands 0% 33% 33% 63% 100% 100%

Portugal 0% 30% 30% 45% 100% 100%

Spain 0% 54% 54% 100% 100% 100%

Sweden 40% 100% 100% 100% 100% 100%

UK 50% 100% 100% 100% 100% 100%

Norway 100% 100% 100% 100% 100% 100%

Estonia 12% n/a

Latvia 76% 100%

Lithuania 74% 100%

Poland 80% 100%

Czech Republic 74% 100%

Slovakia 79% 100%

Hungary 67% 100%

Slovenia 77% 100%

First introduction of retail competition

2/11/2009 15


3. Wholesale Market Models

Market timeline

time

real time

Day-ahead market

Spot marketForward market

Forward / Futures market (x years to y days ahead)

Intra-day market

Real-time market

Ex-post trading

Ex-post trading

Hedge against price

volatility

Reduction of

imbalances

System / Energy

balancing

Optimize / Correct position

Close positions / Determine productio

n schedule

2/11/2009 16



a) Power pools – general structure

CustomersGeneration

unit 1

Generation

unit 2

Generation

unit 3

Transmission

Customers

Customers

Mandatory

Power Pool

System

Operation

Supplier

Supplier

Supplier

all suppliers must purchase their entire demand from the pool

all generators must sell their entire production to the pool

Optional: Bilateral contracts (physical) Contracts for Difference (financial)

DistributionCentralized scheduling, unit based

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a) Power pools – common features

demand€/kWh

electricity

clearing price

supply

offers for individual generating units

price

base load

peak load

– All electricity traded over pool (mandatory)

– Generators offer price-quantity pairs for the supply of electrical energy for each generating unit during a specific time interval

– Pool operator forecasts demand and dispatches generating units to meet the forecast demand (one-sided pool)

or

– Pool operator dispatches on the basis of a demand curve created from price-quantity bids made by buyers (two-sided pool)

– Final production schedule of all producers is centrally determined by the pool operator

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a) Power pools – cost-based and price-based

Price-based power poolCost-based power pool

– Generators submit offers for their individual units based on their willingness to offer

– Offers include start-up costs and minimum and maximum MW

– Pool operator ranks generating units based on offer prices

– Clearing price is determined by the most expensive bid offered which is needed to satisfy demand in each time interval

– Example: England and Wales (1990-2001)

– Generators submit offers for their individual units at their actual or estimated variable production costs

– Pool operator ranks generating units from least to most expensive production costs (merit order)

– Clearing price is determined by the short-run marginal costs (fuel, operating and maintenance costs) of the generating unit that clears the market

– Cost-based pools require regulatory audits of costs

– Example: Latin American wholesale markets

2/11/2009 19



Generator

Generator

Generator

TransmissionSystem

Operation

Supplier

Supplier

Distribution

Decentralized scheduling, company based

Customers

Customers

Large industrial customers

b) Markets with bilateral trade – general structure

Voluntary Power Exchange

2/11/2009 20



b) Markets with bilateral trade – common features

Generators, suppliers and large customers trade electricity bilaterally, conditions and prices

not public

Planned delivery and consumption schedules notified to system operator

Voluntary power exchanges (PX) for day-ahead and intra-day trading

Balancing markets to ensure energy balance in real-time

Costs of imbalances allocated to parties that caused the imbalances

Example: Continental Europe

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Generation Transport Load

Sellers

Sellers

Sellers

Sellers

Sellers

SystemOperator

Buyers

Buyers

Buyers

Buyers

Buyers

Import Export

PX Bilateral market(OTC)

Balancing market

Capacity auction


b) Markets with bilateral trade – European Model

2/11/2009 22



c) Power exchanges – common features

demand€/kWh

electricity

market price

supply

individual offers

price individual bids

– Organised voluntary market in addition to bilateral trading

– Generators submit individual price-quantity offers for the supply of electrical energy for different production levels and time intervals

– Suppliers, traders, large industrial users submit individual bids for different production levels and time intervals

– Most expensive bid offered which is needed to satisfy demand in each time interval determines the market price

– System operator takes measures to match actual demand and supply

– Costs for system balancing levied onto all network users

Advantages: standardization, reduction of credit risk, increased liquidity, low

transaction costs, commonly accepted price reference

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d) Market, system and transmission operator

Market operator (MO) System operator (SO) Transmission operator (TO)

– Operate and/or facilitate the market

– Registration of market participants

– Receive bids/offers from market participants

– Market clearing

– Settlement and invoicing

– Operate or coordinate the system, ensure reliability and security

– Real-time dispatch to balance supply and demand

– Manage ancillary services to maintain system reliability

– Manage congestion

– Plan, construct, maintain and own transmission lines

2/11/2009 24



d) Market, system and transmission operator – international practice

TO

SO

MO

TO

SO

MO

TO

SO

MO

TO

SO

MO

NGC (GB, 1990-2001)

ISA (Colombia)

TenneT, APX (Netherlands)

Stattnet, Nordpool (Norway)

NENMCO (Australia)

CAMMESA (Argentina)

PJM (USA)

TO, CallSO, PXs (California)

ONS-MAE (Brazil)

2/11/2009 25


TSOBidders for balancing services

Balancing Group

Balancing energy used to settle physically the aggregated system

imbalance

MWh

MWh

MWh

MWh

Settlement of imbalances (ex-post)

Balancing and imbalances

Electricity markets distinguish between balancing energy and imbalance:

– Reserve / balancing energy: It reflects the definitions used by UCTE (primary, secondary, tertiary reserves)

– Imbalance: a new term used to characterise the imbalances for the respecting balancing party

This classification is widely used in Europe

4. Balancing Markets

2/11/2009 26


Transmission Network

(TSO)

Distribution Network

(DSO)

Consumers connected to transmission

Consumers connected to distribution

Producers connected to transmission

Producers connected to distribution Transmission Network

Service

Distribution Network Service

System Services

Ancillary Services


Ancillary Services and System Services

2/11/2009 27



Ancillary services – types

Active Reserve / Frequency Control

Voltage / Reactive Power Control

Restoration Services (Black Start Capability)

Frequency containment

Frequency restoration

Replacement of reserves

Services to balance supply and demand in the event of a

sudden and unexpected loss of generation unit or transmission line or an unexpected increase

in demand

e.g. primary control, available in 5-30 seconds

e.g. secondary control, available in no more than

5 minutese.g. tertiary control,

available in usually more than 15 minutes

Services to go from shutdown to operating condition, and start

delivering power without assistance from power system

Services to maintain a specific voltage level and to generate or

absorb reactive power

2/11/2009 28



Ancillary services – procurement

Frequency containment

Frequency restoration and replacement of

reserves

Voltage / reactive power

control

Restoration services

Compulsory provision

Without remuneration

()

With remuneration ()

Direct agreement

Public tender () ()

Real-time market () – –

2/11/2009 29



Ancillary services – remuneration

Remuneration at the marginal price

Payment of the offered price (‘pay-as-bid’)

Use of indexed prices

Fixed price (e.g. cost-based pricing / regulated tariffs)

Typical elements of remuneration

Capability Availability Utilisation

Holding Initialisation

Primary frequency control - - -

Secondary frequency control - ()

Tertiary reserves - ()

Voltage control - ()

Black start () () ()

Experience you can trust.http://www.leonardo-energy.org/training-module-electricity-market-regulation-session-2

End of Webinar 2

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Tel. +49 (228) 44 690 00Fax +49 (228) 44 690 99

Dr. Konstantin Petrov

Managing Consultant

Mobil +49 173 515 1946 E-mail: [email protected]

Technology

Electricity Markets Regulation - Lesson 2 - Market Design