Role of the Physical Power Exchanges in the Electricity Wholesale Market

Transcription

1 UNIVERSIDAD PONTIFICIA COMILLAS ESCUELA TÉCNICA SUPERIOR DE INGENIERÍA (ICAI) INSTITUTO DE POSTGRADO Y FORMACIÓN CONTINUA MÁSTER EN GESTIÓN TÉCNICA Y ECONÓMICA EN EL SECTOR ELÉCTRICO TESIS DE MÁSTER Role of the Physical Power Exchanges in the Electricity Wholesale Market AUTOR: CORALIA VERDUGO PENADOS MADRID, 8 Octubre 2008

2 Autorizada la entrega de la tesis al alumno: Coralia Verdugo Penados EL DIRECTOR DE LA TESIS Tomás Gómez San Román Fdo: Fecha: 8 /10/2008 Vº Bº del Tutor de la Tesis Mariano Ventosa Fdo: Fecha: 8/10/2008

3 iii Summary The electricity sector worldwide is undergoing a deep transformation from vertically integrated utilities to unbundled companies that operates in a competitive market. The liberalization era in Europe dated back in the 90 s and had an important impact in the way the electricity is treaded. As a result of this transformation the Power Exchanges appeared as a centralized entity in which the supply and demand meets creating a competitive market based mechanism to procure the electricity. The main objective of this thesis is to analyze the role of the Power Exchanges in the wholesale electricity market, the advantages that this scheme represents and the key elements that are necessary to achieve a successful market mechanism. First an introduction of the liberalization process is presented follow by the main aspects and background of the liberalization process in Europe and a description of how physical organized electricity markets works. In the next chapters it is presented a description of four different Power Exchanges in Europe, Nord Pool (Scandinavia), Omel (Spain), Opcom (Romania) and Powernext (France). Finally some concluding reflexions about the implementation of the Power Exchanges in the markets analyzed.

4 iv Table of Contents 1. INTRODUCTION Introduction BACKGROUND: LIBERALIZATION OF THE EUROPEAN ELECTRICITY SECTOR Background: Liberalization of the European Electricity Sector PHYSICAL ORGANIZED ELECTRICITY MARKETS Electricity Trading The Electricity Power Exchanges and Power Pools Role of the Power Exchanges Spot Markets Trading on a Spot Market Behaviour of electricity spot prices Risk Management in Spot Markets Power Exchanges Comparative References THE SCANDINAVIAN SPOT MARKET (NORD POOL) Scandinavian Electricity Sector Summary The Nord Pool Spot Market Regulator Elspot: Day ahead Elbas: Hour-ahead Real Time Market (System Operator Market) Nord Pool s Financial Market References THE SPANISH SPOT MARKET Spanish Electricity Sector Summary The OMEL Spot Maket Regulator Daily Market Intra-day Market... 59

5 Table of Contents v 5.6 System Operator Process Iberian Market References THE ROMANIAN SPOT MARKET (OPCOM) Romanian Electricity Sector Summary The OPCOM Spot Market Regulator Day Ahead Market (DAM) Balancing Market References THE FRENCH SPOT MARKET (POWERNEXT) French Electricity Sector Summary The PowerNext Spot Market Regulators Day-ahead market Balancing Mechanism (System Operator) Trilateral Market Coupling References KEY FEATURES OF THE ELECTRICITY SPOT MARKETS FINAL REFLEXIONS DEFINITIONS AND ACRONYMS BIBLIOGRAPHY

6 Table of Figures vi Table of Figures Figure 1. Wholesale and Retail Electricity Market... 3 Figure 2. Electricity Trading Markets Figure 3.. European Power Exchanges Figure 4. Supply and Demand Curves Figure 5. Structure of an Auction Algorithm Figure 6. Supply curve construction Figure 7. Supply curve construction Figure 8. Nord Pool Spot Shareholders Figure 9. Nord Pool Day-Ahead Spot Market Price/Volume History (prices Norwegian Krone) Figure 10. Nord Pool Day-Ahead Spot Market Price/Volume History (prices in EUROS) Figure 11. Sequence of operations in the Scandinavian markets Figure 12. Schedule Stop Condition Figure 13. OMEL Daily Market Price/Volume History Figure 14. OMEL Intraday Market Price/Volume History Figure 15. OMEL Price Historic Volatility Figure 16. Daily and Intradaily Timetable in OMEL Figure 17. Sequence Processes in the Spanish Market Figure 18. Iberian Market Results Figure 19. One and Two side Auction Figure 20. OPCOM Daily market Results Figure 21. Powernext Shareholders Figure 22. Powernext Day-Ahead timetable...91 Figure 23. Powernext Day-Ahead Market Price/Volume History Figure 24. Powernext Historically Price Volatility Figure 25. Comparison graphic of the prices in different Spot Markets

7 Tables vii Tables Table 1. European Power Exchanges Table 2. Comparative Table of Power Exchanges Table 3. Norway Specifications Table 4. Sweden Specifications Table 5. Finland Specifications Table 6. Denmark Specifications Table 7. Nord Pool Trading Fees Table 8. Price dependent schedule Table 9. Price Independent Schedule Table 10. Nord Pool Day-Ahead Prices and volume Table 11. Timetable for Daily Market Sessions...56 Table 12. OMEL Average Prices and Energy traded Table 13. Timetable for Intraday Sessions in OMEL Table 14. OMEL intraday average prices and energy traded Table 15. Volumes traded befote and alter MIBEL Table 16. OPCOM Market Evolution Table 17. Powernext Trading Fees Table 18. Powernext Default Offer Block Products Table 19. Powernext Day-Ahead prices and volumes Table 20. Participants involved in the TLC... 95

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9 1 1 Introduction

10 2 1. Introduction 1.1 Introduction The objective of this Study is to provide an overview of the role and responsibilities of the Power Exchanges in a competitive and liberalized electricity market in Europe. These Power Exchanges differ country to country with respect to diverse market design, regulatory framework and the background of the electricity industry. Procedures and organisation of four Power Exchanges within Europe are presented. The reform of the electricity sector in the European Union, according to the provisions of European Directive 96/92/EC 1 and then replaced by the 2003/54/EC 2, involved the unbundling of the activities of Generation, Trading and Supply from the natural monopoly regulated activities such as Transmission and Distribution. Competition in Generation, Supply and Trading must be able to take place without barriers, while natural monopolies will be conceived as regulated activities. The primary objectives of electricity market liberalization are the achievement of a feasible competitive Wholesale market that provides market-based electricity prices to consumers, guarantees the system security and the efficient utilization and availability of the resources. Wholesale competition is enhanced on the supply side, by participation of several generation companies, and on the demand side by allowing customers to buy directly or indirectly from generators trough customer choice. In the next figure is represented schematically the Wholesale and Retail Electricity Market, the stakeholders and the interaction between them. 1 Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning Common Rules for the Internal Market in Electricity 2 Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning Common Rules for the Internal Market in Electricity and repealing Directive 96/92/EC

11 3 Generation Generation Generation Retail Wholesale Elegible Customer Distributor Captive Customer Organized Market OTC Elegible Customer Supplier Elegible Customer Figure 1. Wholesale and Retail Electricity Market The liberalization formally outlines minimum regulatory functions and competencies of national regulatory authorities. In particular the EU Electricity and Gas Directives acknowledge that regulatory authorities have an important role on ensuring the operation of an internal market of electricity. The Directives specifically summarise their regulatory functions in general terms as: Non-discriminatory access to Networks Effective competition and the efficient functioning of the market An important aspect of the liberalized framework is the development of facilities for electricity trading among different market agents. Electricity can be traded physically or financial, bilateral and nowadays in many Member States it is been traded through organized electricity markets (Spot Markets organized in Power Exchanges) 3. Before the liberalization, the electricity industry was organized in vertically integrated utilities, usually monopolies that performed all the activities (generation, transmission and supply). One of the meanings for such framework was the prominent 3 Spot in electricity markets refers to a specific price on an specific time horizon (generally short term)

12 4 economies of scale of the generation and the need for a centralized control and dispatch for generation and transmission. There are some characteristics of electricity which are particularly relevant when designing the trading scheme, electricity can not be economically stored and it is delivered to final consumers at the time it is being produced, this means that the supply and demand must be in balance at any time. The consumption of electricity varies with respect to the season, day of the week and hour of the day. The demand side generally follows this consumption pattern that makes the forecast easiest to predict. The main goals of the Power Exchanges lies in facilitate the trade of electricity in a short term and the promotion of information, competition, and liquidity. Power Exchanges may also provide other benefits, such as easy access, low transaction costs, neutral marketplace and price reference, safe counterpart and clearing, and settlement service (OSCOGEN, 2002). The Spot Markets are created to provide an organized wholesale transactional environment where demand meets production at the lowest price (see section 3.6). Spot Markets may be characterized with respect to the following aspects: Market participation (voluntary or mandatory) Trading timing Traded products Bid and offer format Trading method and pricing criteria Settlement and clearing Congestion Management (in some countries the transmission capacity allocation is managed in an implicit way in the Power Exchange)

13 5 A new independent figure arise from this structure, the Market Operator, which is the entity responsible for the management of the Organized Market (Spot Market) assuring the competitiveness and performing monetary settlements for the transactions. Governance of the Market is ensured by the Market Operator complemented by the Energy Regulator appointed and acting on behalf of Governments (either the Industry or the Finance Ministries). The Spot Market is most often defined as a Day-ahead market where individual prices and physical quantity transactions are determined one day in advance (D-1) under a transparent and accepted set of trading arrangements for each of the 24 hours of the following day (day D). Those markets are the key link between the price convergence in the Financial and Bilateral arrangements. The Spot Markets can be complemented with several Intra-Day sessions also known as Hour-Ahead where each participant can adjust up to a point closer to real time their open position, this way can diminish their risks of being out of balance and therefore being obliged to pay imbalance prices, and in that order help to lower the balancing load on grid operators. The existence of a Power Exchange is fundamental for a well functioning of the retail market since a liquid Power Exchange gives the suppliers the opportunity to procure energy without the need to own production capacity. In short a Power Exchange is a trading platform operating by a Day-ahead facilitating anonymous trade in an hourly basis. The System Operator plays an important role in the wholesale market because it manages the services needed to maintain in real time the energy balance and network stability for the entire system, using in some cases, market based mechanisms to acquire it. The Balancing Market is an organized market, carried out by the Transmission System Operator (TSO), where players with dispatchable units and loads can make balancing bids. With the balancing bids, participants offer regulation services, i.e. they offer to increase or decrease their power production (or consumption) for a given hour of operation.

14 6 The Balancing Market opens after the Spot Market closure. The submission of balancing bids starts on the day-ahead (and can continue on the intra-day, depending on the country). The scope of this study is to describe the Power Exchanges and its mechanism. But, because of the importance of the Balancing Market in maintaining the balance in the system and its relation with the Power Exchanges, along this document will be presented a general idea of the Balancing Market.

15 7 2 Background: Liberalization of the European Electricity Sector

16 8 2. Background: Liberalization of the European Electricity Sector 2.1 Background: Liberalization of the European Electricity Sector During the 1990s significant changes occurred in the European Electricity Sector. Electricity Industry had evolved from vertically integrated monopolies which covered the entire electricity business chain: Generation, Transmission, Distribution and Retail Supply, to unbundled companies separating the competitive activities (Generation and Supply) from the natural monopolies (Transmission and Distribution). The access to the network become regulated for the transmission and distribution companies, progressively the clients are becoming eligible to chose their electricity supplier, new institutions and organization had arisen and some companies became private own, all of these changes and process is known as Liberalization. In the traditional regulated structure companies usually state-own runs the Generation, Transmission and Distribution, they also had the exclusiveness to supply electricity to residential, commercial and industrial retail costumers who have no choice to choose their electricity supplier. The sector was characterized by having high construction and operating costs, costly centralized dispatching usually driven by political decisions, limited or null competition, slight innovation, risk-free investment and the regulator guarantee the full recover of all the costs incurred, as a result retail prices were very high. Discussions on Europe electricity liberalization began in 1992 but became a reality when in 1996 an agreement was reached with the first and second Directive 96/92/EC and 2003/54/EC, previously mentioned. These two Directives focus on the unbundling of the industry and on a gradual opening of national markets promoting the competition of the Electricity Sector. The first European countries that liberalize were England & Wales and Norway in 1990, since then almost all European countries have liberalized their electricity markets up to the present.

17 9 The overriding goals of the reform are the increase of competition and transparency, deal with social environmental concerns, reduce prices, increase the cross- border trade, improve the performance of existing systems and facilities, and invest in Research & Development. The Liberalization in short means the opening of the sector to competition. Could involve all or some of the following aspects: Restructuring Vertical unbundling aim to separate the competitive activities such as, Generation and Supply, from the regulated activities, Transmission and Distribution. Legal, accounting, management or ownership separation is required in order to prevent cross subsidy of activities. Vertical integration between Generation and Supply (both competitive activities) is allowed and it appears to have a strong commercial motivation. Competition Wholesale competition: Retail companies and large consumers are authorized to buy electricity directly from generators while the distribution companies maintain local franchise over retail consumers with regulated Third Access Party (TAP). Retail competition: The 2003 Directive requires that customers can freely choose their power supplier according to the offerings that best meet their needs. On July 1 st 2004 for non-households followed by full market opening to allow all household customers by July 1 st The electricity can be purchased to energy service companies (suppliers, traders, retailers) or directly from generators. Since mid 2007, household customers have also the right to choose whether to go to the free market or stay in the regulated market being supplied by distribution companies at regulated tariffs. The way electricity is contracted is not regulated by the Directive. Many schemes or markets may exist and are already functioning in the

18 10 European Union, the most applied are Bilateral Contracts (Over the Counter Market) and Power Exchanges or Power Pools (Organized Market) based on bid prices, both markets are complementary. Wholesale market and Retail competition allow new entrants into generation and supply, improving quality of service, investment and security of supply. Regulation In order to liberalize the Electricity Sector the regulatory design must establish appropriate structural, institutional, and operational framework. It is generally recognized that regulatory design and implementation should take into consideration the specific characteristics of the sector in question. The regulation must be a tailor-made scheme in order to avoid problems at the time of implementation. The experience had shown that regulatory design is essential for the success of the Electricity Market. Successful reforms can improve the efficiency of the sector offer lower prices and better quality of service. At the same time, flawed regulatory design can undermine the benefits of reforms. The regulator needs to establish clear rules for the Wholesale market since regulatory risk is one of the main problems when investment takes place. The assignments of the regulatory authority include the advisement to the government, arbitrage, fix the tariffs for the regulated activities, authorize new facilities, supervise anti-competitive actions, promote competition between competitive activities, and perform drafts for new regulation, among others. Privatization Privatization is not a prerequisite for liberalization and not all of the countries have adopted, for example Belgium and Germany were already privatized before the liberalization, United Kingdom, Portugal and Spain

19 11 undergone an extensive privatization, partially privatization took place in Italy and France chooses to keep state owned. However there are significant evidence that privatization deliver benefits, like improving productivity and quality service, maximize short-term returns to shareholders, reduce the public costs, large effect on investments. All these can be achieved when combined with effective restructuring, competition and regulation. The performance of liberalization can be measured in a number of ways, here are presented some of them: Electricity prices, the most important indicator. It is important to mention that this indicator also depends on other factors such as fuel markets prices, price convergence in national gas markets, interconnection capacity, emissions allowances and trading, etc. Price and tariff convergence Customers change of supplier activity Increase in productivity Customer contract renegotiations with suppliers Number of available suppliers and offers Customer satisfaction Barriers to new entrants Barriers to customer change of supplier Convergence of price zones Convergence of prices in the Wholesale and Retail markets

20 12 3 Physical Organized Electricity Markets

21 13 3. Physical Organized Electricity Markets 3.1 Electricity Trading Trading electricity consist of buying and selling electrical energy no matter who is the supply and the demand side. Nowadays in the liberalized structure trading constitutes the same approach but the consumers, more known as customers are free to choose their supplier, furthermore to Change Supplier according to the provider that best meet up their needs. While the supplier can be differentiated regarding the size, technology, prices, etc. electricity cannot be differentiated; all electrons are physically the same, in trading jargon this is known as a commodity. Already back in the eighties professor Shweppe suggests the following: There is a need for fundamental changes in the ways society views electric energy. Electric energy must be treated as a commodity which can be bought, sold, and traded, taking into account its time and space varying values and costs (Shweppe, 1988). In the liberalized era different markets have emerged to trade the electricity. Non Organized or Bilateral Trading: Also known as Over-the-Counter (OTC), which means that the negotiations are carried out directly between the parties involved, without a clearing house and where the contracts are not regulated. On this market the electricity can be traded by means of physical delivery or by using financial instruments (Forwards and Option contracts). Organized Trading: As its name implies consist in a structured market govern by Spot Markets and organized in Power Exchanges or Power Pools. In the Organized Markets the trading procedures and the structural conditions to operate are establish in the market rules. The Spot Market prices represent an important reference for the financial and bilateral trading in parallel markets.

22 14 On the figure below is represented the structure of the electricity trading markets. Market Bilateral (OTC) Organized Physical Financial Physical Financial Spot Forward Power Exchange or Pool Figure 2. Electricity Trading Markets All the contracts no matter if they where traded on an OTC or organized market, share four characteristics: Defined amount Defined price Defined location Defined period Physical Trading Physical Trading means that the electricity traded is going to be produced and delivered, in contrast to the financial trading that is main purpose is to hedge against price volatility. The timeframe of physical trading can differ depending on the necessities to balance the supply and demand. The contracts can be long term, short or very short term.

23 Electricity Power Exchanges and Power Pools The most evident result of the liberalization process of the electricity industry in Europe is the development of electricity trading and the creation of electricity Power Exchanges. After the liberalization process began, the European electricity industry had undergone a considerable transformation led by a combination of technical innovations, changes in the regulatory framework, political commitments, etc. that had changed dramatically the Wholesale electricity market. The trading of electricity exists since utilities companies were originally formed. However, there are two main differences between trading electricity before the liberalization process and nowadays, one is the organization or the scheme for trading and the second is that consumers have the freedom to choose their supplier encouraged by the separation between Generation and Transmission and the open to competition of the Generation and Supply activities. On a liberalized electricity market, the participants can act on two different markets. Traditionally they can trade electricity bilaterally on the Over-the-Counter (OTC) market, where the bulk of transactions is still being traded or in Organized Day-Ahead Markets also called, Spot Markets. There are two kinds of organized markets: 1. Power Pools 2. Power Exchanges There are different approaches about the two models, according to (Steven Stoft 2002), Pools are associated with nodal pricing and Exchanges have been associated with zonal prices, anyway the author implies that there are no theoretical reason for this association. On the other hand, (Boisseleau, 2000) explains the differences between the two models by using two criteria: initiative and participation, this implies that the power pools are the result of a public scheme and the participation is mandatory, this means that all the energy must be traded on the pool. While the Power Exchanges are encourage on a privately basis and the participation is voluntary.

24 16 Even though there is no a standard definition regarding the Power Pools and Power Exchanges and for the purpose of this study I will use the second approach that also points out that the players in Power Pools can only be generators and that a side payment is one of the main aspects that differentiated from the Exchanges. This means that the price on the pool is based on cost minimization and optimal generation dispatch in contrast of matching the demand and the supply side of the Power Exchanges. One example of the pool system used in Europe was the first England and Wales pool ( ) and the fist years of the Romanian OPCOM pool ( ). According to the last description the Power Exchange model is currently the most widespread system in Europe. The figure below shows the existing Power Exchanges in the continent and the table below shows the starting date. Nordpool UKPX APX Belpex Powernext TGE EEX OTE EXXA GME Bronzen Opcom Omel Figure 3. European Power Exchanges

25 17 Country Power Exchange Date Austria EXXA 2002 Belgium Belpex 2005 Czech Republic OTE 2002 France Powernext 2001 Germany EEX 2000 Italy GME 2003 Netherlands APX 1999 Poland TGE 2000 Scandinavia Nord Pool 1993 Slovenia Borzen 2001 Spain Omel 1998 Romania Opcom 2000 UK UKPX 2001 Table 1. European Power Exchanges 3.3 Role of the Power Exchanges The Power Exchanges play an essential role in the new structure of the electricity industry, especially within the European wholesale Market which was until now dominated by bilateral trade. All these Power Exchanges share the same goals. They aim to facilitate electricity trade, foster competition, ensure transparency and become recognized as a European marketplace. Finally, each Power Exchange aims to develop liquidity and credibility of its price index. Power Exchanges are considered marketplaces, lets remark the word marketplace, is a third party which facilitate transactions between sellers and buyers, they are ruled by its own trading rules and they guarantee the payment.

26 18 Facilitate trading: Power Exchanges make easy the short term trading because it gathers all the stakeholders of the wholesale market in one single market. Foster competition: By letting submit bids to generators, distributors, suppliers and eligible consumers. Every participant specifies the desire quantity and the price they are willing to pay/received. Ensure transparency: The bids are anonymously, the driver for the price is based on matching the supply and demand curves. The market clearing prices are public. Price index: Price in the Power Exchange is published on a daily basis and represent a useful tool for benchmark the bilateral transactions. Reduce credit risk: The counterpart for the transactions is the exchange s clearinghouse. The role of the clearinghouse is to guarantee the financial regularity of the parties. 3.4 Spot Markets Spot Markets are usually organized by Power Exchanges which provides short term horizons for trading at least a Day-Ahead market. An Intra-Day Market also referred as an Hour-Ahead or Adjustment Market is sometimes offered to get a more accurate balance between demand and supply. This market closes few hours before the actual physical delivery of the electricity. Additionally, in order to balance power generation to load at any time during real-time operations, System Operators use Balancing or Real-time market, where participants can submit bids that specify the prices they require (offer) to increase/decrease their generation, or decrease/increase their consumption for a specific volume in a short period of time. Furthermore balancing services (also referred to as Ancillary Services) are needed to support a reliable delivery of electric energy (e.g. transmission losses, reactive power support, voltage control, among others) are sometimes also traded on an exchange-based market.

27 Trading on a Spot Market The European Power Exchanges usually provide an auction framework of biddingbased trading for physical delivery during a particular hour of the next day. The usual trading system is a daily double-side (generation and demand) auction for every hour to match transactions at a single price. The product traded is an hourly spot contract that specifies the size (MWh) and value ( MWh). Type of bids Hourly bids Hourly bids are the more common type of bids and some information is required on each bid, like: participant s name, type of bid (sale or purchased), hour of the day, quantity and price. The bidding process is the following: 1. Market agents allowed to participate in the Power Exchange such as (Generators, Distributors, Traders, Suppliers and in some markets qualified Consumers) submit their bids, generally used electronic systems, according to the deadlines specified on the Market Rules, determining the quantity and the price (Block Bid) they are willing to sell/buy. After receiving the bids a verification and validation process is performed. Each sale bid specifies the quantity and its minimum price at which they seller is willing to supply the energy. On the other hand each buy bid specifies the desired quantity and the maximum price at which they are willing to buy. 2. In some Power Exchanges the participants can add to their bids several conditions or complex bids. 3. The submitted bids are collected and the participants can only know their own bids and cannot see others (anonymous bids).