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Congestion Management and Clearing –How can Exchanges and TSOs work together?
Dr.-Ing. Albert MoserDirector Business Development
European Energy Exchange AG, Leipzig
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Agenda
1. European Energy Exchange
2. Day-Ahead Congestion Management –Cooperation between Exchanges and TSOs
3. ClearingCooperation between Exchanges
4. Conclusion
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European Energy Exchange Products
Derivatives Market
Spot Market
Power DE, ATEU Emission Allowances
Exchange Trading & ClearingOTC Clearing
Exchange Trading & ClearingOTC Clearing
Power Futures DE, FRPower Options DE
European Carbon FuturesCoal Futures
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European Energy ExchangeTrading Participants
3
3
17
1
3
3
19
2
1 63
1
5
1
82
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Overall 138 participants from 17 countries122 Members at Spot Market63 Members at Derivatives Market98 Participants of OTC Clearing11 General Clearing Members
5 Brokers5 Market Makers6 TSO
as of 23.03.06
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European Energy Exchange Turnover Electricity Trading
119342 338
100985
86
517
20
6049
4
23 32
0
400
800
1200
2000 2001 2002 2003 2004 2005 2006
TWhSpot MarketDerivatives Market
projectionas of 31.3.2006
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European Energy ExchangeTurnover Emissions Trading
0
300.000
600.000
900.000
1.200.000
M rz05
Apr05
M ai05
Jun05
Jul05
Aug05
Sep05
Okt05
Nov05
Dez05
Jan06
Feb06
M rz06
tCO2Derivatives MarketSpot Market
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Agenda
1. European Energy Exchange
2. Day-Ahead Congestion Management –Cooperation between Exchanges and TSOs
3. ClearingCooperation between Exchanges
4. Conclusion
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Day-Ahead Congestion ManagementEvaluation of Explicit Auctions
Futures/forward marketsOTC trading and exchange tradingContinuous trading with continuous price transparencyFutures/forward market prices available for explicit auction
Explicit auctions and physical forward/futures provide efficientcross boarder trading
Spot marketsAlmost only exchange trading, e.g. in Germany 90%Auction trading with ex-post price transparencyOnly forecast of spot market prices available for explicit auction
Usage of capacity available limited to quality of spot price forecastIn theory, implicit auctions allow optimal usage of capacity available?
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Day-Ahead Congestion ManagementCurrent Discussion on Implicit Auctions
Implicit auctions have been used at Nord Pool for years- Single power exchange- Pure financial futures/forward market
Situation in continental Europe- Multiple power exchanges- Mainly physical futures/forward market
For continental Europe a hybrid model (explicit/implicit) is being discussed- Explicit auctions for allocation of yearly and monthly capacities- “Use-it-or-lose-it” principle for yearly and monthly capacities
and/or trading of secondary capacities- Implicit auctions for allocation of hourly capacities
For implicit auctions in continental Europe, a coordination between power exchanges and TSOs is necessary (Market Coupling)
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Day-Ahead Congestion ManagementCurrent Market Coupling Projects
Flow Based Market Coupling- Joined ETSO & EuroPEX task force- Special focus on technical model and load flow
BelPEX project- Pilot project- Special focus on a regional setup in Belgium, Netherlands and France- Special focus on creating a power exchange for Belgium
Study group with German regulator on Open Market Coupling- Joined study group of BNetzA, 4 German TSOs, EEX, VDN, VDEW, ViK
& EFET- Special focus on a comprehensive approach covering technical, organizational, regulatory and economic questions- Special focus on compliance with role of power exchanges and TSOs in different countriesProposal for a Market Coupling design,contribution to European discussion
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Day-Ahead Congestion ManagementProposal for Open Market Coupling
Introduction of an Auction Office- An auction offices acts as the central entity for TSOs and exchanges and
is in charge of all tasks that requires coordination, i.e. implicit and explicit allocation of capacity.- Auction office as a central entity has been proven with explicit auctions.- Functional and regulatory separation between allocation of capacities and matching of exchange spot markets.
Flow based allocation- Optimal usage of existing capacity
Joint matching of explicit and implicit auctions- Take advantage of load flow based allocation also for congested borders
with explicit auctions- Allow for parallel implicit and explicit auctions in markets with an illiquid exchange, in markets with an day-ahead auction of tertiary reserve by TSOs or in markets, where mandatory exchange membership is politically not wanted or legally not allowed.
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EinzelstundengeboteKombinationsgeboteEinzelstundengebote
Kombinationsgebote
Day-Ahead Congestion ManagementOpen Market Coupling
PowerExchanges
AggregatedOrder Book
Auction Office
Maximum CapacitiesLoad Flow
EinzelstundengeboteKombinationsgeboteEinzelstundengebote
KombinationsgeboteTSOs
EinzelstundengeboteKombinationsgeboteEinzelstundengebote
KombinationsgeboteTradersHourly OrdersBlock Orders
Explicit Capacity Bids
Additional Purchase and SaleOrders
CapacityAllocated
Settlement
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Day-Ahead Congestion ManagementRole of the Auction Office
Legal entity owned by stake holders, e.g. TSOs and/or exchangesExchange memberOwner of cross border flowUser of capacity
Service providerOrganisational structure
Collect capacity bids from traders and order books from exchangesAllocation of capacity to traders and exchangesSettlement of exchange trades, scheduling of cross border flowsSettlement of capacity usage with traders, exchanges and TSOs
Collect capacity bids from tradersAllocation of capacity to tradersSettlement of capacity usage with traders and TSOs
Tasks
Open Market CouplingExplicit auction
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Day-Ahead Congestion Management Next Steps
Open issues- Legal questions regarding the role and regulation of
the auction office and regarding the legal set up of the auction office
- Detailed model of load flow and order books- Economic advantage of (open) market coupling over
explicit auction
3 studies by external experts regarding legal, technical and economic questions
Discussion of results
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Agenda
1. European Energy Exchange
2. Day-Ahead Congestion Management –Cooperation between Exchanges and TSOs
3. ClearingCooperation between Exchanges
4. Conclusion
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ClearingKey Success Factors for Power Exchange
Key success factors for exchange power trading- Simple market access, ideally single access to all markets- Central counterparty clearing house,
ideally single clearing house exploiting all inter-market netting and cross-margining possibilities
- Low transaction fees, ideally through high transaction volumes
In the long term mergers, competition and co-operation for creating regional exchanges rather than having national power exchanges
Cooperation also crucial to EEX for its long-term strategy- Sharing a single energy clearing house
(Minimum level of cooperation in order to cope with competition and future consolidation)
- Sharing a single exchange IT infrastructure(The smaller the market, the higher the benefit from cooperation)
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25
30
35
40
45
50
55
ClearingNetting & Cross Margining
International trading participants push EEX to exploit high potential for netting and cross margining in Europe
Price Baseload Cal 06 [€/MWh]
ScandinaviaGermany
France
Netherlands
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ClearingSharing a Single Energy Clearing House
EEX
BrokerGFI, ICAP, Prebon,
Spectron, TFS
OtherExchange
EnergyClearingHouse
ExchangeTransactions
OTC Transactions
Already excellent cooperation with brokers for joined clearing of EEX and OTC trades (German Power, French Power, EU Emission Allowances, Coal, …).
EEX is splitting up exchange and clearing business for better cooperation with other exchanges.
Cooperation with other exchanges: sharing a single clearing house
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ClearingOpen Clearing Structure
EEX AG
Non-Clearing Member(NCM)
Company affiliatedNon-Clearing Member
(NCM)
Client Client Client Client
Direct Clearing Member(DCM)
General Clearing Member(GCM)
EEX clearing structure is open to any bank providing clearing services to trading participants
Local banks from CEE countries may join clearing structure
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ClearingRisk Management
Central counterparty clearing house- High credit worthiness due to banks acting as clearing members- Deposit of margins for open positions
Mark-to-Market- Close-out of positions possible, because all positions are evaluated based
on daily updated settlement prices- Immediate realization of profits and losses rather than during the future
delivery
Cascading- Netting of collaterals for remaining delivery obligations possible- Close-out of remaining delivery obligations of long term contracts possible
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Benefits for trading- Trading volumes can grow since the clearing house has a better
credit worthiness and position limits of counterparts can be exploited more effectively.- Exchange access is possible without having to negotiate bilateral contracts with all counterparties (e.g. EFET standard).
Benefits for risk management- Counterparty risks can be transferred to the clearing house and
thus credit risks are significantly reduced.- Netting of positions within the clearing house.
Benefits for back-office- established, highly efficient and automated standard processes
ClearingBenefits
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Agenda
1. European Energy Exchange
2. Day-Ahead Congestion Management –Cooperation between Exchanges and TSOs
3. ClearingCooperation between Exchanges
4. Conclusion
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Conclusions
Cooperation between spot exchanges and TSOs in the area of day-ahead congestion management can provide an optimal use of capacity.
Clearing can support the development of the electricity markets.
Cooperation between exchanges in the area of clearing can provide a sustainable strategy in the upcoming consolidation process among exchanges.
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Agenda
Backup
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Day-Ahead Congestion ManagementExplicit Auctions at German/Danish-Border
0
500
1.000
1.500
2.000
2.500
-300 -200 -100 0 100 200 300Difference in spot price
between EEX und Nord Pool (DK West) [€/MWh]
Capacity not used [MW]towards the country with the higher spot price
source:www.eltra.dk, 1.1.-31.7.2005
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Day-Ahead Congestion Management Technical Model for Open Market Coupling
Input- Exchange order books-Maximum capacities- Linear load flow- Explicit capacity bids
Objective-
Subject to- Energy balance for each market area- Linear load flow-Maximum capacities- Block orders
Result- Capacity used = additional purchase and sales orders-Capacity allocated to explicit capacity bids- Expected market area prices
⎟⎠
⎞⎜⎝
⎛⎟⎠⎞⎜
⎝⎛ +−∑ ∑ ∑ ∑∑
= =→
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1 1,,,
maxt
n
MAtMAMAtMAtMA dsCapacityBiPurchaseSale
ji
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Day-Ahead Congestion Management Principle for Allocation
€/MWh
P
MWh
S
€/MWh
P
MWh
S
Maximum Capacity
Exchange AOrder Book AMarket Area A
Exchange BOrder Book BMarket Area B
Transmission
LegendP Purchase OrdersS Sale Orders
Capacity Used = Additional Purchase and Sale OrderSpot Price Movement
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Exchange A
Day-Ahead Congestion Management Principle for Settlement
Exchange BCongestion
1000 MW
40 €/MWh 30 €/MWh
Sale of 1.000 MWh1.000 MWh x 40 €/MWh = 40.000 €
Revenues for TSOs: 1.000 MWh x (40-30) €/MWh = 10.000 €
Purchase of 1.000 MWh1.000 MWh x 30 €/MWh = 30.000 €
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0
2
4
6
8
10
0 250 500 750 1000 1250 1500Annual Transaction Volume [TWh/a]
EEX
IT C
osts
[Cen
t/MW
h]
Sharing a single IT SystemDerivatives Trading & Clearing System
2001
2002
2003, 2004 2005EEX Fees
EEX Analysis:Less expensive IT systems available, but for less reliability and security
EEX results for different years
Assumptions:Costs of current EEX IT infrastructure
