SOUTH EAST EUROPE WHOLESALE MARKET OPENING Final report April 2010

Transcription

1 SOUTH EAST EUROPE WHOLESALE MARKET OPENING Final report April 2010

2 ACKNOWLEDGEMENT The South East Europe Wholesale Market Opening technical assistance project (the Project) is co-financed by two multi-donor trust funds, ESMAP and PPIAF. The Energy Sector Management Assistance Program (ESMAP) is a global technical assistance program which helps build consensus and provides policy advice on sustainable energy development to governments of developing countries and economies in transition. For more information on the program see the website: The Public-Private Infrastructure Advisory Facility (PPIAF) is a multi-donor technical assistance facility aimed at helping developing countries to improve the quality of their infrastructure through private sector involvement. For more information on the facility see the website: The Word Bank is managing the Project as a part of its support to the development of the Energy Community. For information about the World Bank's energy sector activities see the website:

3 TERMINOLOGY The Consultant has used the following terminology throughout the report: (with reference to the United Nations Security Council Resolution 1244 for point 1 and 2): UNMIK when referring to the Contracting Party Kosovo when referring to the geographic territory Former Yugoslav Republic of Macedonia or FYR of Macedonia Local not national Contracting Party instead of country Jurisdictions when referring to both Contracting Parties, Bulgaria, and Romania DISCLAIMER Pöyry Management Consulting (Sweden) AB and Nord Pool Consulting AS retain all rights (including copyrights, brand rights, patent rights) related to the information in this report. Pöyry Management Consulting (Sweden) AB and Nord Pool Consulting AS do not permit partial quotes from the study report as this can lead to misleading conclusions. While Pöyry Management Consulting (Sweden) AB and Nord Pool Consulting AS considers that the information and opinions given in this work are sound, all parties must rely on their own skill and judgement when making use of it. Pöyry Management Consulting (Sweden) AB and Nord Pool Consulting AS does not make any representation or warranty, expressed or implied, as to the accuracy and completeness of the information contained in this report and assumes no responsibility for the accuracy or completeness of such information, Pöyry Management Consulting (Sweden) AB and Nord Pool Consulting AS will not assume any liability to anyone for any loss or damage arising out of the provision of this report. 2

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5 TABLE OF CONTENTS REPORT SUMMARY 10 SECTION I: HIGH LEVEL RECOMMENDED MARKED DESIGN SUMMARY OF RECOMMENDED MARKET DESIGN AND IMPLEMENTATION Prerequisites Choice between different Market Design Options Conceptual Market Design Business Processes Integration with Neighbouring Markets Transition phase: From regulated prices to market prices CAO Coordinated Auction Office VPP Auctions, Bilateral Auctions and Physical Forward Markets arranged by the Local Market Operators Gap Analysis Action Plans 36 SECTION II: BACKGROUND THE CURRENT STATE OF MARKET OPENING IN SEE REGIONAL ELECTRICITY MARKET Introduction Electricity generation and demand Regional trade in electricity Market structure, market opening and market model Prices and tariffs Current Balance Management in SEE Congestion management and cross-border capacity allocation Inter-TSO Compensation mechanism (ITC) EXPERIENCES FROM OTHER REGIONAL MARKETS Selected Local and regional markets Review of Regional Markets Conclusion 91 SECTION III: ANALYSIS POSSIBLE CAUSES FOR HIGH PRICES IN THE REGION RISKS AND OPPORTUNITIES FOR NON-HOUSEHOLD CUSTOMERS Key risks Opportunities BARRIERS TO MARKET OPENING 104 4

6 6.1 Prerequisites for market opening and current status Barriers to market opening Ways to overcome barriers to market opening KEY PERFORMANCE INDICATORS Prices, transparency and surveillance Access to markets Access to customers Market structure and competition Balance responsibility and balancing markets Allocation of cross-border capacities Network tariffs and grid access Independent regulators and harmonization of regulations 122 SECTION IV: MARKET DESIGN AND IMPLEMENTATION SEE WHOLESALE MARKET OPENING, CONCEPTUAL DESIGN AND REQUIREMENTS Choice between different market designs Recommended Conceptual Design Transition Periods, local markets Establishment of the SEE Regional market SEE, an integrated part of the European Internal Power Market Requirements REGIONAL MARKET DESIGN Introduction General recommendations Roles and Responsibilities Grid Tariffs The relationship between a Regional PX and the Coordinated Auction Office (CAO) Details of the Day-ahead Market design Intraday Market VPP Auction Market Information Market Surveillance Inter-Regional Market Coupling Real-time Balancing Market Financial Market Organization of the SEE Regional Power Market Legal issues ACTION PLAN Introduction 184 5

7 10.2 Regional Action Plan Methodology to Establish Action Plans for Contracting parties, Bulgaria, and Romania Minimum Requirements Proposed General Decisions and Commitments Template for the Action Plans Action Plans for Contracting Parties, Bulgaria, and Romania Albania Bosnia and Herzegovina Croatia FYR of Macedonia Montenegro Serbia UNMIK Bulgaria Romania 224 ANNEX A LIST OF REFERENCES 228 ANNEX B GLOSSARY 230 6

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9 EXECUTIVE SUMMARY The 11th Athens Forum Meeting requested the World Bank to develop a study on Wholesale Market Opening in South East Europe for the benefit of all Contracting Parties to the Treaty establishing the Energy Community. Pöyry Management Consulting and Nord Pool Consulting were commissioned by the World Bank to develop a study on Wholesale Market Opening for the electricity market in South East Europe (SEE). The key outputs of the study are a Regional Market Design (RMD) and an action plan for its implementation. Based on the findings from carrying out the various tasks that were assigned, the Consultant recommends the following: 1. To secure liquidity and transparency in the initial operational phase of the wholesale market, local authorities need to support the implementation of SEE Day- Ahead Market (DAM) through the introduction of proper incentives for market participants. Experience from implementation of DAM projects in Europe indicates that the largest obstacles in the initial stage of operation are the lack of liquidity in the day-ahead market. 2. Carry out a staged implementation of a regional wholesale market with respect to both participating jurisdictions and to market functions Expanding the geographical scope of the regional wholesale market by gradually adding new jurisdictions, starting with a nucleus consisting of Romania, Serbia and Bulgaria Transition from 100% regulated prices to 100% market prices, exposing market participants to spot prices on marginal volumes from day one of market opening. Each jurisdiction decides at what speed the transition shall proceed. It is of high importance that demand side volumes are brought to the DAM. 3. Facilitate harmonisation of rules and regulations between the SEE Contracting Parties and relevant EU directives and regulations A common playing field is a prerequisite for all regional market activities. 4. Set a target completion date of January 1st 2012 for the start up of a SEE DAM market and a target date of Jan 1st 2015 for the full SEE electricity wholesale market opening including a financial forward electricity market. An ambitious plan is required to comply with the commitments made by signing the EC Treaty by all Contracting Parties including Bulgaria and Romania, 8

10 To achieve these target dates the following decisions by Ministries are recommended: Give incentives to eligible customers to trade at the DAM Base load contracts at favorable prices (current tariffs). Remaining volumes must be sourced from DAM Unbundling of supply and generation functions Generator Supplier unbundling, at least removal of traditional Full Supply Contracts between Generators and Suppliers/Eligible Customers Base load contracts between incumbent generators and suppliers to serve tariff customers. Remaining volumes to be sourced from the DAM To achieve these target dates the following decisions by TSOs/Regulators ought to be made: Cross border capacities should be allocated to DAM Balance responsibility for all wholesale market participants TSOs to purchase main grid losses at the DAM Local Market Operators to set up physical forward markets within their jurisdiction with local incumbents as market makers. Characteristics of the open and competitive SEE wholesale electricity market Enhanced investment climate in the SEE Region Merit order in generation and optimal use of cross border transmission capacities A market model which allows for a quick integration with neighboring CEE- and CWE countries through market coupling. Links to other neighboring countries can be handled like it is done today through explicit auctioning of cross border capacities. A flexible solution for the regional/local market operators, allowing each jurisdiction to decide which functions to be handled by the local market operator or to be outsourced to the regional entity Transparency of relevant market information and prices secured by a DAM in parallel with auctioning of bilateral contracts Equal market access to all Co-existence of bilateral and exchange trading 9

11 REPORT SUMMARY Introduction The main geographical focus of the report is the current seven Contracting Parties to the Treaty that established the Energy Community, i.e. Albania, Bosnia and Herzegovina, Croatia, FYR of Macedonia, Montenegro, Serbia and, UNMIK and also the former contracting parties Bulgaria and Romania. The Contracting Parties to the Energy Community Treaty have legally binding commitments to the creation of an internal market for network energy. The regional market provided for by the Treaty is to be connected to the EC internal market. Through the Energy Community Treaty, the Contracting Parties are bound to implement the acquis communautaire on energy 1, the acquis communautaire on environment and also follow the principles laid out in the acquis on competition insofar as it may affect the trade of network energy between the Parties. According to the Treaty the Parties shall also implement the renewables Directive 2001/77/EC (promotion of electricity produced from renewable sources) and Directive 2003/30/EC (promotion of the use of bio fuels or other renewable fuels for transport). 2 Under the Treaty the regulators are cooperating within the Energy Community Regulatory Board (ECRB). The ECRB advises the Ministerial Council and Permanent High Level Group (PHLG) on details of statutory, technical and regulatory rules and make recommendations in the case of cross-border disputes between the regulators. The electricity sector in South East Europe is characterized by small, but in many cases fast growing markets. The size of the markets in terms of final electricity consumption varies between 3.2 TWh (UNMIK) and 25.6 TWh (Serbia) in the seven contracting parties. The region exhibits a mixed generation structure with primarily conventional thermal - and hydro power plants. The seven Contracting Parties are in total import dependent, and some of them are suffering from severe shortages. The general flow of electricity in the region is from the north to the south. Bosnia and Herzegovina is the only contracting party among the seven that has a surplus and the region as a whole is an importer. Losses (commercial and technical) are in many cases very high and the economies in the region are generally characterized by high energy intensities/low energy efficiency. The Local markets are in most cases dominated by one (state-owned) generator that supplies at regulated rates to tariff customers. The regulated tariffs, although they might cover the current costs, are generally low and not sufficient to cover the cost of new investments. The tariffs do however vary considerable within the region. 1 2 Directive 2003/54/EC of the European Parliament and of the Council of 26 June concerning common rules for the internal market in electricity, Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas, Regulation 1228/2003/EC of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity. The Treaty establishes that the Parties shall present a plan to implement the directives within one year of the date of entry into force of the Treaty. 10

12 A large number of reports have previously been developed covering these or closely related issues related to regional market integration. One key question has been, should a regional power exchange be established or should there be a continued reliance on purely bilateral contracts? Furthermore, the market model currently under development relies on explicit auctioning of cross-border transmission capacities. An alternative option would be the use of implicit auctioning. This would require a liquid market place under a market splitting approach, or market coupling between several liquid markets. According to the Terms of Reference for this study, these options should be reviewed, and based on this review a Regional Market Design should be developed, taking into account the possibility of a staged implementation. The study assignment included the following eight defined tasks: Task 1: Review of the current state of market opening in SEE Task 2: Examine barriers to advancing market opening and liberalisation Task 3: Identify risks and opportunities posed by market opening in electricity supply to non-household customers Task 4: Review lessons learned from other regional markets Task 5: Define indicators to measure and monitor progress in opening the electricity market in SEE Task 6: Developing the SEE Regional Market Design (RMD) and Action Plan for Implementation Task 7: Workshops for non-household consumers and other market participants on electricity market opening; and Task 8: Implementation Support Below, a high level summary is presented for the work covered under each of the assigned tasks. Task 1: Review of the current state of market opening in SEE The review of the current state of market opening in SEE conducted by the Consultant, has found that the market opening process has been initiated at local level within all the contracting parties, Bulgaria, and Romania. It has, however, in the various jurisdictions reached different levels of progress. For some crucial elements of the opening process, e.g. TSO unbundling and establishing a competent regulatory entity, the progress is very satisfactorily, while for other elements, e.g. competition and transparency, the development is only in its infancy. Lack of market price penetration to final customers is probably the most serious obstacle against establishing an efficient electricity sector. There are generally no publically available and generally trusted reference prices for electricity. Although the possibility for secondary trading of cross-border capacities exists in a few cases these are not liquid and wellfunctioning markets. Long-term trade in electricity may function reasonable well, but no organized market place for trade in electricity currently exists. The key findings made by the Consultant are used in establishing the design of the initial open wholesale electricity market in SEE 11

13 Task 2: Examine barriers to advancing market opening and liberalization The Consultant has identified several potential barriers to advancing market opening and liberalisation. Many important prerequisites for a regional market opening are only fulfilled to a limited degree. The Consultant has defined minimum requirements related to the following issues as a prerequisite to wholesale market opening. TSO Unbundling Supplier Unbundling Eligibility Balance Responsibility and Balancing Mechanisms Market Concentration Transparency Establishment of a Regional DAM Fulfilling these minimum requirements leads to a removal of identified barriers in each jurisdiction. Task 3: Identify Risks and Opportunities Posed by Market Opening in Electricity Supply to Non-Household Customers The Consultant has identified some key risks for non-household customers posed by market opening: Risk of increased prices: Risk of unfair competition Risk of market power Volatile prices Risk of limited real market access While there are risks that may arise which the customers need to be prepared for, there are also several opportunities arising from market opening: New investments and increased security of supply Access to a large base of suppliers New service offerings Demand side participation. Investments in own generation Improved utilisation of generation and transmission 12

14 Task 4: Review lessons learned from other regional markets The Consultant has reviewed the various market developments and lesson learned in local and regional markets in EU including the Nordic market. The most important lesson learned seems to be that there must be a strong political will among the countries involved to create an open electricity market. It seems equally important that the cooperative environment within and between the states involved are good and that the politicians dare to take the necessary steps to create a regional market even though the resistance from some parties can be high. Task 5: Define indicators to measure and monitor progress in opening the electricity market in SEE The Consultant has defined 50 Key Performance Indicators (KPIs) to monitor the progress of the SEE wholesale market opening. The KPIs will show the pace of progress and make it possible to take measures, if the process is haltering. Some of the indicators measure whether a necessary instrument that can support the desired development is in place or not, while other indicators measure how well these function. The KPIs have been grouped in the following areas: Prices, transparency and surveillance Access to markets Access to customers Market structure and competition Balance responsibility and balancing market Allocation of cross-border capacities Network tariffs and grid access Independent regulators and harmonisation of regulation Task 6: Developing the SEE Regional Market Design (RMD) and Action Plan for Implementation The main task of this study has been the development of the SEE Regional Market Design and Action Plan for Implementation. As a reference for this design the Consultant has chosen as benchmarks the successful implementation of competitive wholesale markets in Europe, which are mainly EPEX, Nord Pool, and TLC. A starting point has been the findings made by the Consultant regarding the current state of market opening in SEE (Task 1) and the barriers to advancing market opening and liberalization. (Task 2) These findings reveal major gaps between the current state and what is considered as minimum requirements to proceed with a market opening. 13

15 The large gaps that exist today in most of the jurisdictions, confirm that the transition to an open wholesale market is a major step for the SEE region. A staged approach to a market opening, combined with certain incentives for eligible consumers and public suppliers to source from the open market to secure and promote market liquidity, is therefore an embedded part of the design In order to co-ordinate the wholesale market opening process in the region an action plan is developed. This plan comprises decisions/activities that must be fulfilled prior to market opening and is made jurisdiction specific. First the minimum requirements for establishment of a regional DAM are defined. The current status for all Contracting Parties plus Bulgaria and Romania is analysed against these minimum requirements. The difference (gap) between requirements and current situation forms the basis for each local action plan. A common feature seems to be that TSO unbundling and separation of grid tariffs are very well established in the region. Within Supplier/Generator unbundling, however, much work has to be done. Incumbents hold a much too strong grip on customers. Local authorities have to be engaged in creating incentives for customers and Suppliers to trade at organized market places, such as local DAMs. Task 7: Workshops for non-household consumers and other market participants on electricity market opening A workshop was organized in Vienna on September 16 th 2009 attended by SEE wholesale market participants including EFET representatives. The agenda was as follows: 1. Introduction/Welcoming Remarks 2. Barriers and Obstacles to Market Opening 3. Risk and Opportunities for Non-Household Consumers 4. Indicators and Monitoring 5. Regional Market Design 6. Action Plan 7. SEE Wholesale Market Participant perspective 8. Closing Remarks Task 8: Implementation Support This task depends on acceptance of proposed market design and implementation plan from all jurisdictions. 14

16 Reading instruction The report consists of four main sections as well as three annexes. Section I (chapter 1) is a high level summary of the recommended market design and action plan. These are the key recommendations from the Consultants and are based on the presentation given at the ECRB meetings and workshop in Vienna in September Section II (chapter 2-3) contains background information such as the foundation for the project, the current situation in SEE and experiences from other regional electricity markets. A reader with good insights to the region and the subject may want to skip this section. Section III (chapter 4-7) contains analysis of possible causes for high prices in the current SEE electricity markets, risk and opportunities for non-household customers in an open and competitive SEE regional electricity market,,and key performance indicators to monitor the progress of the wholesale market opening. Section IV (chapter 8-10) contains the market design recommended by the Consultant and the action plan to implement the solution. This section provides more details regarding the recommended market design and details and insight to the high level summary in section I. 15

17 SECTION I: HIGH LEVEL RECOMMENDED MARKED DESIGN 16

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19 1. SUMMARY OF RECOMMENDED MARKET DESIGN AND IMPLEMENTATION 1.1 Prerequisites The framework for the SEE Wholesale Market Opening is set by the Treaty Establishing the Energy Community ref [30] and the EC Treaty, ref [13]. The recommended market design is based on the following basic requirements: SEE, an integrated part of European Internal Energy Market Technical operation of the SEE grid system spans 4 control areas within ENTSO-E. Trade across local borders within SEE is currently based on bilateral contracts and explicit auctions. The proposed market design will bring no change to TSOs scheduling and and accounting. A day-ahead-market (DAM) will replace some bilateral contracts. It is recommended that the SEE Wholesale Market Opening should streamline with European trends with price coupling linking local and regional markets in order to enhance efficiency and transparency. Implicit auctioning fits with EuroPEX-ENTSO-E s preferred market coupling mechanisms, (ref chapter 0and [12]). Existing European Power Exchanges (PXs) bring transparency and predictability to market participants and investors across Europe. SEE countries will benefit from harmonization and integration with these markets. Regional approaches that choose incompatible solutions would obstruct the process of creating an integrated pan-european power market (ref: [12]). Local control, regional cooperation The recommended market design aims at having local responsibility of all the trading processes, procedures and trading platforms including the market opening process itself. Regional cooperation and efficient cross-border utilisation will be secured through coupling of local DAMs. TSOs must allocate cross border capacity to DAMs. Controlled transition from regulated prices to open market The process of abandoning regulated prices/tariffs is progressing at different speed throughout the SEE region. The recommended design allows for local preferences with respect to further development of this process. Schemes for vulnerable customer sustain. Quick establishment of incentives to invest Generator/supplier unbundling and a number of incentives for wholesale market participants to trade at DAM will secure DAM-liquidity. A liquid SEE market coupled to other European power markets with the same trading regimes will soon establish a reliable and trustworthy price reference for the region. As soon as the reference price(s) for the SEE market is established, investors will find it more favourable to come forward. Publishing SEE DAM prices through EuroPEX daily info systems will be a strong indication of market integration. 18

20 Co-existence of bilateral trade and market operators Until financial instruments are developed, market participants will need bilateral trade (midand long term contracts) to supplement DAM trade to handle price risk Further development of bilateral markets will be driven by market participants as a response to DAM opening. Auctioning of bilateral contracts rather than or supplementing negotiations should, however be considered to increase transparency in mid- and long term markets. 1.2 Choice between different Market Design Options Choosing a specific reference market model as the key building block for a competitive wholesale SEE electricity market design, is probably the most crucial decision in the project as this will influence many other factors, such as cost of implementation, liquidity in the market place, and in the end it might decide whether the new regional market will be a success or not, measured in broader terms. To assist in this choice, the Consultant has used a classical decision matrix, with criteria, options (four alternative models), weights for criteria (0 100), and ratings (0 10). The four alternative models that have been assessed are: The European Model (Euro Model) PJM (Pennsylvania, Jersey, Maryland) Bilateral Classic (existing market model for SEE) Bilateral Auction (auction of contracts instead of negotiations) The following criteria are used: 1. Security of Supply 2. Enhancing Investment Climate 3. EU Mainstream 4. Efficient Utilization of Transmission Grids and Generation 5. Market Price Reference 6. Integration of Renewables 7. Transparency 8. Implementation Costs Criteria 1-4 are the primary ones given a weight of 100, while criteria 5-8 are secondary and given a weight of 60. Each of the models is evaluated against the chosen criteria. 19

21 The following arguments are used for giving variable scores on how these models match the criteria: Security of Supply: Security of Supply is a focal point independent of the model chosen for the wholesale market. It has to be assumed that the necessary measures are taken by the TSOs to maintain the required level for security of supply whichever solution is implemented. Hence the rating is set to 10 (maximum) for all the options. Enhancing Investment Climate The Euro Model and PJM are given a high score, while the bilateral models are given a low score. Investors in generation will also seek a location/market that will offer effective hedging instruments, which will be an effective tool to mitigate the financial risk to an acceptable level. Hedging instrument can range from long term bilateral contracts to liquid financial electricity contracts, where the latter might be the preferred option as it offers a much larger flexibility in adjusting positions in a portfolio The reason for giving a score of 10 and 8 to the two former models respectively is that the Euro model is in line with the rest of Europe, and will offer especially European investors an alternative to investment in Western Europe. Bilateral market models are given a low score as they offer market places with less transparency and less liquidity, which represent a higher risk scenario to investors EU Mainstream The Euro Model is linked to the trends and development of the European electricity market and given the high score of 10. Efficient Utilization of Transmission grids and Generation The Euro model and PJM get the high score of 8 since both models provide a merit order use of generation and high utilization of transmission capacities. PJM provides more accurate locational signals through Locational Marginal Pricing (nodal pricing). Market Price References The Euro model gets the highest score of 10 as this design provides for the use of zonal rather then nodal market price references. Integration of Renewables Large scale integration of renewables is an increasing challenge to any market model worldwide. Different models are however likely to cope with the challenge of renewable and intermittent generation differently. In a future with large amount of renewable and intermittent generation the requirements on the system to handle large fluctuations in output and use of the grid will increase. The PJM model combines an independent system operator with nodal prices with integrated markets for capacity and ancillary services. This may be a model that is better in handling large amount of renewable generation compared with the Euro model with national or zonal prices and a less strong link between spot markets and transmission companies (see e.g. ref [22]). With this background we have given the PJM model a score of 7, the Euro model a score of 5 and the two bilateral models a score of 3. 20