Electricity, market, regulation - Turin School of Local Regulation, 8 sept 2014

Electricity market regulation: lessons learnt (by me) – a 20 years journey…

Turin School of Regulation (8 September 2014) Jean-Michel Glachant - Director Florence School [& Marcelo Saguan - Microeconomix]

first step with markets

same for my first kid…

A great leap forward…

www.florence-school.eu

BUT: is this a “market”… or a regulatory frame?

5

Day-ahead market

Intraday markets

Balancing market

Reserves/ ancillary services

markets

Explicit auctions for transmission

capacity

Implicit auctions

Market coupling

Market splitting

Capacity markets

Bilateral / OTC

Long term contracts

Flexibility market

Baseload product

Peak load product

Congestion management


market “borders”… and regulatory frame…

6

Grid congestion

Power market

Black-Out

Externality

Grid access

Multilateral or OTC

Grid monopoly

CO2- GHG

Cross-border


Yes regulation framing a market order… Why? Big issues to be addressed within the market…

• In fact there is different products to market…

• To market at different time horizons: day-ahead, intraday, real time…

• How to integrate these different markets across countries? How does it work?

• Are the “final-final” resulting markets really European or still national?

7

“Final” electricity is a bundle of different products

A whole sequence of “horizon” markets

Integration of national markets

A European market?

NB: focus on wholesale market (retail market is out of scope of this lecture)


The “physics” of electricity (1)

• Electricity “cannot” economically be stored

• Electricity flows “cannot” be controlled & transmission lines should be operated under “safe flow” limits

– If not risk of “cascading failures” and black-out

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• Different cost & value of energy at different times Many products differentiated by the time of production & consumption

• Transmission capacity scarce resources Many products differentiated by the location where they are produced/consumed

Implications for electricity productS & related marketS


The “physics” of electricity (2)

• Power stations can fail suddenly

• Demand can vary sharply over time

• Most stations can only change output slowly and can take many hours to start up

• Demand and generation must match each other continuously

– If not risk of black-out

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• Gen.Flexibility scarce resource Many products differentiated by ability to change production/consumption at short notice

• Uncertainties Different market horizons to buy/sell the “same” product

• Strong actors coordination needed in real time important role of System Operator in real time

Implications for electricity productS & related marketS


Should power markets be better… by being regulated? (1)

• First : Electricity’s not a single homogeneous product as Coca Cola

– Differentiated by time horizon of generation/consumption

– Differentiated by location of generation/consumption

– Differentiated by flexibility to modify generation/consumption on short notice

• Second : Electricity’s not only energy (MWh): transmission & system flexibility components are needed

– Transmission capacity & system flexibility (MW of Power) are complementary scarce resources and should be priced for delivery

– Markets might put a price and a delivery priority order to these “invisible” components of electricity

10


Should power markets be better… by being regulated? (2)

• Third : Electricity trade positions (for energy, transmission, system flexibility) may be reviewed in successive markets until the time of delivery

– Electricity components (energy, transmission, flexibility) are physically delivered only in real time >> all the former exchanges are only “notional” (“virtual”)

– Markets function in a sequence of successive exchange “rounds” for the different electricity components

11


Sequence of successive markets

The reduced scope of “power markets” in a single zone of “system operation”

12

Short-term Energy markets

Short term Reserves/

flexibility markets

Delivery of the good

Time T-~24h T

Short term Transmission markets

Energy

Transmission

Flexibility Reserves

Real time / balancing

Mechanism (centralised by the SO)

Long-term Energy markets

Long-term Reserves/

flexibility markets

T-~months/years

Long-term Transmission markets

T-~3h

Electricity components

NB: markets for system flexibility are often called “reserves” because the SO reserves some flexible system resources (power station or demand response) to ensure enough system responsiveness (Up or Down) in real time

Power as Energy

Transmission capacity

Reserves as System

Flexibility

Scope


Several zones of market operation in EU

13

Intraday market

(energy B)

Balancing Mechanism

(energy B)

Intraday Markets

(energy A)

Balancing Mechanism

(energy A)

Country B

Country A

Day ahead Market

(energy B)

Day ahead Market

(energy A)

Day ahead Market

(transmission A-B)

Intraday market

(transmission A-B)

Interconnection capacity

Time

Space

Balancing mechanism

(transmission A-B)


How does the markets’ sequence “day-ahead> intraday> real time” work in a single country?

14

Intraday market

(energy B)

Balancing Mechanism

(energy B)

Intraday Markets

(energy A)

Balancing Mechanism

(energy A)

Country B

Country A

Day ahead Market

(energy B)

Day ahead Market

(energy A)

Day ahead Market

(transmission A-B)

Intraday market

(transmission A-B)


Time

Space

Balancing mechanism

(transmission A-B)


Events occur from day-ahead> (to) >real time: power station failure / demand forecast error

15

Po

we

r (M

W)

Po

we

r (M

W)

Produced power Sold quantity

Power station faliure

Imbalance

Imbalance Imbalance

-10000

-8000

-6000

-4000

-2000

0

2000

4000

40000

45000

50000

55000

60000

65000

70000

00

:30

02

:00

03

:30

05

:00

06

:30

08

:00

09

:30

11

:00

12

:30

14

:00

15

:30

17

:00

18

:30

20

:00

21

:30

23

:00

Fore

cast

err

or

[MW

]

Load

[M

W]

France (RTE) - 03/11/2009

DA forecast error Load realisation DA forecast


Temps réel

A sequence… of energy market positionS adjustements… through timely step

16

Gat

e c

losu

re

Balancing and imbalance settlement

day-ahead market

Intraday markets

T-~24h T-~3h

SP2 SP2

SP3 SP2 SP1

SP2

Contractual position / Nomination

SP1 SP3 SP1 SP3

SP1 SP3

Vo

lum

e (M

Wh

)

Settlement periods Settlement periods

Settlement periods

Vo

lum

e (M

Wh

)

Vo

lum

e (M

Wh

)

Settlement periods

Positive imbalance

Imbalance (ex. net buyer)

Production / Consumption

metering

Negative imbalance

Transactions between market players (with or without market intermediaries)

Transactions with the SO (balancing bid/offers & insuring

imbalance settlement)

Time


Day-ahead markets organized as “Power Exchanges” (multilateral trade)

17


Intraday markets (organized -or not) • The intraday markets can be used:

– Purchase/sale of quantities that have not been executed during the Day Ahead market

– Unplanned maintenance after the DA market

– Flexible tool to trade closer to real time

– Arbitrage with neighboring countries

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Real-time markets: always organized by the “System Operator” (to “balancing” the whole energy system) Imbalance settlement pricing rule: one or two prices?

0

20

40

60

80

100

120

Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Imb

ala

nce p

rice [

€/M

Wh

]

0

10

20

30

40

50

60

Dif

f. i

mb

ala

nce p

rices [

€/M

Wh

]

Diff. imbalance prices BE Negative imbalance price BE Positive imbalance price BE

e.g. Belgian positive versus negative imbalance prices


What does mean “coupling”countries’markets? What do we do? Look at “Day Ahead” horizon…

20

Intraday market

(energy B)

Balancing Mechanism

(energy B)

Intraday Markets

(energy A)

Balancing Mechanism

(energy A)

Country B

Country A

Day ahead Market

(energy B)

Day ahead Market

(energy A)

Day ahead Market

(transmission A-B)

Intraday market

(transmission A-B)


Time

Space

Balancing mechanism

(transmission A-B)


What’s outcome from coupling market zones?

• Outcome from coupling market zones

– Efficient use of Gen. resources (energy cost; system flex.)

– Uncorrelated demands

– Uncorrelated renewables

Also >> Security of supply

Also <</>>Market power

21

Day ahead Market

(energy B)

Day ahead Market

(energy A)

Day ahead Market

(transmission A-B)

Country B

Country A


Illustration of market coupling outcome

• Outcome from coupling market zones

– Efficient use of resources

– Uncorrelated demand

– Uncorrelated renewables

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Source: Menager

(2002)


But… actual countries’ market coupling is limited by transmission capacity availability…

• We may have to split the EU into several market zones

– when transmission capacity reaches security limit (i.e. there is a congestion)

• Transmission becomes a “too” scarce resource

• Hence a coordinated method of cross-border congestion management helps to operate softly coupling & decoupling of power market zones

23


Alternative regulation for coupling & decoupling EU power markets

• Explicit grid auctioning

– Separate markets for energy & cross border transmission capacity

– Coordination of these two markets depends on individual ability of market players

• Implicit grid auctioning (market coupling or splitting)

– “Smart” coordination of market borders done by single central algorithm

24

Day-ahead Market

(energy B)

Day-ahead Market

(energy A)

Day-ahead Market

(transmission A-B)

Country B

Country A

Day-ahead Market

(energy A + B)

Single Matching Algorithm takes into

account l imited capacity A-B

Explicit auctions

Implicit auctions


-Perfect- coupling… and decoupling

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Country B

Country A Energy Price Difference (A – B)

0 Price A > Price B Price B > Price A

Use of the cross-border capacity

From A to B

From B to A


Reality of explicit auctioning for crossing borders between France & Spain)

26

Country B

Country A


Reality of implicit auctioning for crossing borders between France & Belgium

27

Country B

Country A


Generalising this to a regulatory frame for European internal electricity market

• A single European market? Or a coupling of national markets?

28

Intraday market

(energy B)

Balancing Mechanism

(energy B)

Intraday Markets

(energy A)

Balancing Mechanism

(energy A)

Country B

Country A

Day ahead Market

(energy B)

Day ahead Market

(energy A)

Day ahead Market

(transmission A-B)

Intraday market

(transmission A-B)


Balancing mechanism

(transmission A-B)


EU market Integration at Day Ahead horizon

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Hourly day ahead price convergence by region (source: ACER, 2013)


EU market Integration at Intra-Day horizon

30


EU market Integration at real time horizon

31


To conclude: is the EU Internal Market regulation «au menu» or «à la carte»?

www.florence-school.eu 33

Thank you for your attention Email contact: [email protected] Follow me on Twitter: @JMGlachant Read the Journal I am chief-editor of: EEEP “Economics of Energy & Environmental Policy”

My web site: http://www.florence-school.eu

Education

Electricity, market, regulation - Turin School of Local Regulation, 8 sept 2014