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Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 1
© CEEM 2007
Design of the energy spot market in theNational Electricity Market
2Design of the energy spot market in the National Electricity Market © CEEM 2007
Electricity market modelsGross pool (eg NEM):– Spot market sets short-term (5 minute) operating
levels for dispatchable resources
– Temporal & location risk managed collectively:Ancillary services, spot market, PASA, SOO
Net pool (eg UK NETA):– Long term & location risk managed bilaterally
Network not modelled in trading arrangements
Capacity markets commonly used
– Short-term operational risk managed collectively:System operator given only one day’s notice ofbilateral trades - dispatches resources consistently
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 2
3Design of the energy spot market in the National Electricity Market © CEEM 2007
National Electricity Law: Overall objective
for the National Electricity Market (NEM)NEL Section 7:
– The national electricity market objective is to promote
efficient investment in, and efficient use of, electricity
services for the long term interests of consumers of
electricity with respect to price, quality, reliability and
security of supply of electricity and the reliability,
safety and security of the national electricity system
A difficulty with this objective:
– Ambiguity of the wording with respect to interpretationof terms & trade-offs between sub-objectives
4Design of the energy spot market in the National Electricity Market © CEEM 2007
Scope of the NEM
• Queensland• New South Wales & ACT• Victoria• South Australia• Tasmania (Basslink in 2006)
NEM regions are indicated,and their boundaries need notbe on state borders (e.g. tworegions in NSW)
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 3
5Design of the energy spot market in the National Electricity Market © CEEM 2007
Features of National Electricity Rules (NER)
NEM covers all participating states:
– A multi-region pool with intra-regional loss factors
– Ancillary services, spot market & projections
– Auctions of inter-regional settlement residues
– Operated by NEMMCO (owned by states)
Compulsory participants in NEM:
– All dispatchable generators & links > 30 MW
– Network service providers & retailers
Contestable consumers may buy from NEM
6Design of the energy spot market in the National Electricity Market © CEEM 2007
NER categories of generators
Either market, non-market or exempt
– Market implies participate in NEM spot market
Can then also sell ancillary services
– Non-market or exempt: sell to local retailer
Either scheduled or non scheduled:
– Scheduled implies centrally dispatched:
Must then participate in the NEM processes of bidding, pre-dispatch & PASA
Default category for generation projects > 30 MW
Not applied yet for “intermittent” generation, eg wind
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 4
7Design of the energy spot market in the National Electricity Market © CEEM 2007
Electricity industry structure in SE Australia
Gen 1
Gen 2
Gen X
GenerationSector:-
largegenerators
Gen 3
TransmissionSector
NSWVictoria
South Aust.Queensland& Tasmania
Electricity
Financial instrument& REC (emission) trading
Distributor 1
Distributor 2
Distributor Y
Distributionsector
Electricity
Multi-regionNational
Electricity(spot) Market
(NEM)
Intentionsoffers &
payments
Retailer Z
Retailer 2
Retailer 1
Retailsector
Intentionsbids &
payments
Tx network
pricing
Tx network
pricingNetworkaccess End-use
Equipment&
DistributedresourcesElectricity
End-usesector
Contestableend-users
FranchiseEnd-users
RetailMarkets
Embeddedgenerators
8Design of the energy spot market in the National Electricity Market © CEEM 2007
Spot market offers & bids
Generators, retailers & direct end-users:
– Price-quantity curve (sell or buy) for each half hour:
10 daily prices, quantities changeable until dispatch
– 5-minute demand forecast is bid at $10,000/MW (VoLL)
Dispatchable links between regions:
– Flow offer curve based on price difference
Bids & offers ranked to give dispatch stack:
– Considering loss factors & inter-tie constraints
– Operating levels are set for all dispatchable resources
– 5 minute price(s) set by marginal dispatchable resource:
Half-hourly averages are calculated in ‘real time’
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 5
9Design of the energy spot market in the National Electricity Market © CEEM 2007
Simplified generator offer for aparticular dispatch interval (NEMMCO, 2005)
10Design of the energy spot market in the National Electricity Market © CEEM 2007
Single node spot market (all offers & bids)
MW
$/MW
Aggregate demand curve DAggregategeneration
curve G
p
consumers’surplus
producers’surplus
‘local monopoly’price band
onemarginalprice ‘p’
VOLL & forecast if no demand bidding
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 6
11Design of the energy spot market in the National Electricity Market © CEEM 2007
Spot price formation - central dispatch
Maximise value of spot market trading, subject to:
– Dispatch offers & bids; ancillary service offers
– Constraints due to availability & commitment
– Non-scheduled load requirements in each region
– Power system security requirements
– Intra-regional network constraints & losses
– Inter-regional network constraints & losses
– Constraints consistent with registered bid & offer data
– Current levels of dispatch
– Ancillary service requirements
– Pro-rata loading of tied bid and/or offer data
– Minimising the impact of a direction or reserve contract dispatch
12Design of the energy spot market in the National Electricity Market © CEEM 2007
Region boundaries & inter-connectors
Regions boundaries selected so that:
– Transmission constraints are rare within a region
– Frequently-occurring constraints are placed on regionboundaries
Region boundaries to be reset as required:
– Whenever a constraint occurs > 50 hours/year
An unregulated inter-connector is allowed if:
– Dispatchable so that it can bid like a generator:
‘Directlink’ the first (operating since July 2000):
– 180 MW DC link between NSW & Queensland regions
– Now converted to regulated link
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 7
13Design of the energy spot market in the National Electricity Market © CEEM 2007
NEM regions(NEMMCO SOO, 2006)
14Design of the energy spot market in the National Electricity Market © CEEM 2007
16 region NEM model(NEMMCO SOO, 2004)
100025001500TAS
9001100200NSA
15022502100ADE
- 45050500RIV
50150100SESA
- 6500650POR
61007000900LV
- 49508005750MEL
31003900800SNY
- 500300800CAN
16501165010000NCEN
- 650150800NNS
- 290014504350SEQ
19502150200SWQ
225041501900CQ
- 4508001250NQ
Net Gen
(MW)
Gen Cap
(MW)
Pk Ld
(MW)
Node
load>gen
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 8
15Design of the energy spot market in the National Electricity Market © CEEM 2007
Tasmanian electricity & gas industries & Basslink(Govt. of Tasmania, 2003)
~1200 MW ~350 MW
Melbourne
Latrobe Valley
NorthernTasmania
SouthernTasmania
Basslink
Transmission:Transend
Distribution
16Design of the energy spot market in the National Electricity Market © CEEM 2007
Modelling regulated interconnectors& intra-region location
Regulated interconnector between 2 regions
– Modelled by a linearised marginal loss function:
A ‘dynamic’ network loss factor that depends on flow
Flow limits (security or thermal criteria)
Locational effects within regions
– Modelled by ‘static’ network loss factors (LFs)Annual average of estimated half-hour marginal losses for eachgenerator node & group of consumer nodes
– Intra-regional constraints not modelled but a‘constrained-on’ generator cannot set price
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 9
17Design of the energy spot market in the National Electricity Market © CEEM 2007
Effect of intra-regional network loss factorson spot market outcomes
ReferenceNode
(price pr)
Generator
Consumer
Qg, LFg
Qc, LFc
Generator produces Qg & is paid pr x LFg x Qg
Consumer consumes Qc & pays pr x LFc x Qc
Net income is given to network service provider(s)
Dispatch offer price = DOPg
Referred offer price = DOP/LFg
NationalMeteringIdentifierdetermineslocation & thus thenetwork loss factor that will be applied
18Design of the energy spot market in the National Electricity Market © CEEM 2007
Combining dynamic inter- regional & staticintra-regional loss factors (unconstrained link)
Region A Region B
A RRN B RRN
Assumeinter-regional
dynamic loss factor= 0.96, Region A wrt B
power
If 4 marginal generatorThen B RRP = 35.4
If B RRP = 35.4Then A RRP = 34.0
LF 1.05Bid 35 $/MWh»33.3 $/MWh (A)»34.7 $/MWh (B)
~ 1LF 1.05Bid 35 $/MWh»33.3 $/MWh (B)
~ 3
LF 0.98Bid 35 $/MWh»35.7 $/MWh (A)»37.1 $/MWh (B)
~ 2 LF 0.99Bid 35 $/MWh
»35.4 $/MWh (B)
~4
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 10
19Design of the energy spot market in the National Electricity Market © CEEM 2007
Supply-demand balance in theelectricity industry
Frequency is a measure of supply-demand balance:
– always varying due to fluctuations in power flows
Thermal
power stations
Other, eg
wind farms
Hydro
generators
Industrial
Commercial
Residential
Generator input power Load electrical power
plus network losses
+_
20Design of the energy spot market in the National Electricity Market © CEEM 2007
Managing supply-demand balance in NEM
Spot market forecasts &
derivative markets
Frequency controlancillary servicemarkets, period t
Security projections& FCAS
derivative markets
FCAS marketsfor period t+1
Spot marketfor period t
Spot marketfor period t+1
time
spotperiod t
spotperiod t+1
increasing uncertainty looking forward
Ancillary services& security
Energy markets
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 11
21Design of the energy spot market in the National Electricity Market © CEEM 2007
NEMMCO processes for managingsupply-demand balance
Power system reliability & security standards
NEMMCO Forecasts
of supply & demand
• 10 year (annual)
• 2 year (weekly)
• 1 week (hourly)
• day-ahead spot price
& dispatch (5 min)
NEMMCO operation:
•Participant bid/offers
•Network data
•Demand forecast
•Reserve threshold
•Security constraints
•Reliability safety net
Spot
& FCAS
Markets
Derivative
Markets
22Design of the energy spot market in the National Electricity Market © CEEM 2007
NEM Pre-dispatch, Dispatch & AGC
Offer & constraintdatabase
Instructionsto
participants
Forecastsets of 5-minspot prices
Set of spot prices
for next 5 min
Pre-dispatch(24 hr projection)
Constrainedeconomic dispatch
(5 min load forecast)Security-based
operatingconstraints(NEMMCO)
Day-ahead offersfrom
participants
Continuouslyupdated offers
from participants
AGC(2 second cycle)
SCADA
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 12
23Design of the energy spot market in the National Electricity Market © CEEM 2007
Bidding & dispatch(source: NEMMCO)
Day -2 Day -1 Day 0 Day 1
Dispatch Day
Commitment
notices
Initial Offers/Bids 1230hrs
then re-bids until dispatch time
ST PASA
1400hrs
1st Pre-dispatch
1600hrs
Updated 3hrly
5-minute & 30-minute prices as set;
previous days data at 0800hrs
Capacity
Energy/RoC
24Design of the energy spot market in the National Electricity Market © CEEM 2007 24
NEM commercial & security processes
5 min predisp.
30 min predispatch
5 minnow 1 hour
5 min
disp.
40 hours
5 min dispatch &
pricing
(4 sec AGC, online
security processes)
1 hr ahead, 5 min res.
5 min update
Short Term (ST) PASA
upto 40 hr ahead, 30
min res. 30 min
update
8 days
1 wk ahead, 30 min
res., 2 hr update
Medium Term (MT) PASA
Statement of
Opportunities
upto 2 yr ahead, 1 day
(MD) res., 1 wk
update
10 yr ahead, 1 yr
update
2 years
time
Source: NEMMCO; S Thorncraft
(PASA: Projected Assessment of System Adequacy)
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 13
25Design of the energy spot market in the National Electricity Market © CEEM 2007
PASA & reserve contracts
PASA
•Energyconstraints•Demandforecasts•Networkcapacity
Registration ofavailable capacities
Day-ahead Offers & bids
Pre-dispatchthen
dispatch
Invitation to provide more capacity
Purchase of more capacity
NEMMCO
Expectedinadequacy
Purchased capacity offered to market at price that would have otherwise applied (usually VOLL)Available
capacity
SettlementsPayment for purchased capacity
(long term expected USE < 0.002%)
26Design of the energy spot market in the National Electricity Market © CEEM 2007
Derivative trading in support of NEM
Trading in swap (CFD) & cap (call option) contracts:
– Bilateral trading
– Over-the-counter instruments
– Exchange-traded CFDs (swaps)
Inter-regional hedges:
– Specialised form of financial instrument:
to manage regional price difference risks
funded by interconnector settlement residues
– NEMMCO inter-regional settlement residue auctions:
Commenced in 1999
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 14
27Design of the energy spot market in the National Electricity Market © CEEM 2007
Key issues:• Price discovery• Aggregate volume• Liquidity & depth of trading• Little end-user participation
Derivative trading in the NEM(Bach Consulting & SIRCA, Report for NEMMCO, 2002)
28Design of the energy spot market in the National Electricity Market © CEEM 2007
Key derivative markets
Forward contracts (futures) (~$6 billion pa)
– Expected spot price for a defined load shape & period(eg constant MW for one year)
– Either OTC or exchange traded
Call options
Renewable energy certificates
– Available to qualifying generators
– Increasing to 9,500 GWH pa at 2010 then constant to2020 (~$200 million pa)
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 15
29Design of the energy spot market in the National Electricity Market © CEEM 2007
Relationship between wholesalegas & electricity markets
Market design simpler for gas than electricity:
– Gas macro-molecular; electricity sub-molecular
– Flows on pipelines individually controllable but not ontransmission lines
– Intermediate storage in “linepack”, not in electricalnetworks
Gas network linepack is a shared resource:
– Gas market design should be a “pool” not physicalbilateral trading if linepack constraining:
It does when gas is used for electricity generation
30Design of the energy spot market in the National Electricity Market © CEEM 2007
Gas wholesale trading in Australia
Victoria (~8 hours linepac):
– Pool day-spot market with bilateral physical trading
– Pool market does not set sub-day prices
– are derivative markets adequate?
Other states (several days linepack)
– Bilateral physical trading
Status of gas wholesale trading:
– inadequate to support use of gas for peak electricitygeneration
Short Course on Electricity Industry Restructuring © CEEM 2007
Design of the energy spot market National Electricity Market© CEEM 2007 16
31Design of the energy spot market in the National Electricity Market © CEEM 2007
Many of our publications are available at:
www.ceem.unsw.edu.au
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