Ludek HornCEZ, a. s., Trading, Front Office Head

AFEER Workshop „The Energy Market Coupling“Bucuresti, June 26th, 2013

Market Coupling from Market Participant´s Perspective

2

MARKET PARTICIPANTS HAVE DIFFERENT INTERESTS

c

End consumers want to cover their expected consumption for minimum price

Example of off-take diagram

Example of annual availability

Generators want to maximize income from utilization of availability

ImportExport

Traders match contradictory interests of consumers end producers by means of taking open positions

Trader 1 Trader 2

Generator 1 Generator 2

Consumer

Power Exchange

Power Exchanges and Broker Platforms have similar function as traders

HOW MARKET COUPLING COUPLES ALREADY COUPLED MARKETS?You already know…

Market Coupling combine demand and supply curves of spot exchanges of coupled markets.

Market Coupling is based on the implicit allocation of cross border capacities by TSO to spot exchanges

MW

€/MWh

MW

€/MWh

Cross Border Capacity

Merit Order trhu A Merit Order trhu B

WHAT MARKET COUPLING BRINGS IAnd what takes away…

Before…

TSO allocates cross border capacity to market participants in Day-1„for tomorrow“ in the auction

Market participant based on allocated cross border capacity performs export or import(scheduling…)

Market participants move power across borders

After...

TSO allocates the same cross border capacity to spot exchanges in Day-1„for tomorrow“

Spot exchanges based on bids and asks for electricity perform export or import (shipping…)

Spot exchanges move power across borders

Note: Market participants continue moving power cross border based on annual or monthly capacities

„Implicit“ allocation of cross border capacities „Explicit“ allocation of cross border capacities

WHAT MARKET COUPLING BRINGS IIAnd what takes away…

•Decrease of spot trader´s headache (but also elimination of cross border trading…)•Reduction of market participants operational risk

•Elimination of gaming potential of explicit allocation•Elimination of spot exchange gate closure sequence problem (having closure at the same time)•Harmonization of spot market rules

•Substantial increase of spot market liquidity (and thus to more robust price index)•Decrease of price spreads between coupled markets•Decrease of volatility of coupled markets•Power flows from the cheaper market to the mor expensive market (not all the time with FB)

5

Elimination of an explicit cross border capacity allocation leeds to:

Overall increase of market efficiency

DO NOT BELIEVE IN MARKET COUPLING MYTHS!There are 3 myths…

False, because Market Coupling does not come out of the blue – there is a cross border trading before market coupling. In case the cross border capacity is the same in both cases, the prices will be almost the same, just small change because of decreased price spread.

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True or false: Market Coupling increases price of electricity.

True or false: Market Coupling means the same price in coupled markets.

False, the same price in coupled markets is rather an exception than a rule. It happens usually when markets have similar power plant portfolio and/or very high cross border capacity.

True or false: TSOs lose their income from cross border capacity auctions.

False, TSOs´ income is the spread between electricity prices and is approximately the same as income from explicit auctions, just slightly decreased because of the spread decrease.

EFFET ON LIQUIDITYExample: CZ-SK Market Coupling

Efektivnější/intenzivnejší využití přeshraniční kapacityObecný nárůst obchodovaných objemůRelativní snížení cenového rozdílu mezi trhy

Apr May Jun Jul Aug Sep Oct Nov Dec

Market Coupling mezi CZ-DK launched on

Sep 1st, 2009

8

CEZ VIEV ON MC DEVELOPMENT IN CEE/SEE

CZ-SK-HU MC operational since September 11th, 2011

• good experience so far (higher liquidity, lower spreads)

• coupling calculated in PCS infrastructure (Cosmos) somewhere in Paris/Leipzig = NWE ready

• Poland and Romania recently expressed serious interest to join

• extension by PL and RO based on Cosmos or Euphemia

Final MC integration of CEE with NWE seems to get stuck

• blind insistence on the CEE NRA Joint Declaration (MC+FB at the same time)

• no progress in the project (TSOs waiting for NRAs decision)

• Austria yet to nominate NOME

• no clear leadership, no decisions (MoU not finalized)

• unwillingness even to discuss crucial issues

• timing dependent on NWE project progress

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FLOW BASED ALOCATION AND MARKET COUPLING

Current status:

1. FBA project in CEE is different from the CWE one and has not been proven feasible yet.

2. Problem with overlapping countries in different regions:

• One country cannot be at the same time in two different MC initiatives (splitting of liquidity and other inefficiencies) – i.e. GE/AT in CWE, PL in NPS, SI with IT

• NRAs treat borders in each region differently

It is not efficient and wise to create an independent CEE MC solution

Feasible and preferred solution:Add step by step CEE countries to the CWE ATC MCWait for Single Flow Based with CWE

THANK YOU FOR YOUR ATTENTION

ludek.horn@cez.cz

Usefull links:· http://www.casc.eu/en/Resource-center/NWEhttp://www.epexspot.com/en/market-coupling/documentation_nwehttp://apxgroup.com/services/market-coupling/nwe-price-coupling/http://belpex.be/index.php?id=109http://www.nordpoolspot.com/How-does-it-work/European-Integration/NWE/

QUESTION AND ANSWERS

BACK UP

12

Finding NEMO for DE-AT price zone

Option 1 „ As it is“ (but the same gate closure…)

EXAA Austrian Market EPEX Austrian Market EXAA German Market EPEX German Market

Virtual Hub Austria in Cosmos Virtual Hub Germany in Cosmos

Other AT borders with specific NTC

NT

C =

∞

NTC = ∞

NTC

= ∞

NTC

= ∞

NTC = ∞

Other DE borders with specific NTC

ELECTRICITY MARKET WORKS!But is distorted by subsidies for RES

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LigniteHard coal

RES

Nuclear

Available Capacity (GW)

Variable costs, €/MWh

Gas

Supported RES generation brings volatile and less predictable supply

The spot prices decline (not the final price for the consumer!) damages non-RES generation

One more negative impact – lower utilization

of non-RES generation

0 20 40 60 80 1000

25

75

50

100

Demand

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DESTRUCTING EFFECT OF RES ON WHOLESALE POWER PRICEMarket Concept Is Systematically Disrorted Due to Increasing Portion of Subsidies to RES

Impact of Growing Generation from RES on Wholesale Power Price