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).

28 20 4. For price determination all the bids collected up to the predetermined closure time are arranged on a Merit Order sorted according to the price and aggregated to get a market demand and supply curve for every hour. A block bid must be matched for the entire or partially volume specified, and for all hours. If this is not possible, the block bid is rejected. 5. The clearing or matching price for every hour is settled after the demand and supply curve is aggregated and intersected. 6. The simple bid matching, presented on the figure below, ignores any complex conditions or grid constraints and results in an initial market Clearing Price. Price /MW Offer Curve Market Clearing Volume P* Market Clearing Price Demand Curve d Q* Quantity /MW Figure 4. Supply and Demand Curves 7. The non-existence of an intersection may trigger a second round of submitting bids. 8. There may be a surplus at the market clearing price resulting of the simple bid matching. In this case the volumes of bids with the market Clearing Price as limit are proportionally curtailed, or the algorithm selects the bids according to the time of order book entering (first come, first serve).

29 21 9. If all conditions are not satisfied the price solution is not valid. In this case one of the unfulfilled bids is eliminated and the price calculation is run again. This checking process is iterated until all the remaining bids can be fulfilled. 10. The traded volumes of the matched bids have also to be checked against the transmission grid capacities. If there are transmission constraints, the schedules have to be balanced either by only adjusting the trade volumes, by adjusting the trade volumes and rerunning the iterative bid matching, or by splitting the market in several areas. Sale Bids Simple Bid Matching Purchase Bids No Initial Solution Elimination of Unfulfilled bids Yes Complex bid conditions cheking (if applied) Valid Solution No Yes Optimisation Process Final Unconstrained Solution Solution No Transmission Constraints? Yes Balancing Schedule Figure 5. Structure of an Auction Algorithm Block bids Block bids is an aggregated bid for several consecutive hours with a fixed price and volume. This bidding singularity is due to the fact that some power plants are not that flexible on the start-up process and requires a ramp to achieve its optimal operation, so this kind of bids allows the participants to sell/buy electricity for a period of consecutive hours. The bidding process is the same as the single hour bid with some additional conditions like fill-or-kill option; this means that the whole

30 22 amount of energy has to be accepted. In some Power Exchanges the blocks are already specified like the French Power Exchange Powernext or the Nordic Nord Pool. 3.6 Behaviour of electricity spot prices Determining the Market price Most of the European Power Exchanges set energy prices based on the marginal price auction (or single price auction), this means that all generators are paid the market clearing price. The highest accepted supply bid is the one that determines the price. In the spot market, the participants specify how much electricity they wish to buy or sell at a given price. For each hour during the following day the participants bids are aggregated into supply and demand curves. The supply curve consists of the participants aggregated sales bids in terms of each technology s variable production cost, or the marginal cost which corresponds to the cost of increasing or producing one additional unit. The demand curve consists of the participants purchase bids also in terms of price and quantities. The combination of price and quantity where the supply and demand curves match determines the market clearing price. The figure below shows the principle for price formation on the spot market:

31 23 Variable cost ( MW/h) Depends on gas & coal price Demand (Buy) Supply (sell) CCGT Coal Wind Hydro Nuclear CCGT Coal Fuel oil & GT Quantity (MW) Source: own elaboration Figure 6. Supply curve construction The supply curve aggregates the bids on a merit order from the unit of production with the lowest marginal cost up to the marginal cost of the last unit of the production needed. This means that demand and supply meet at the lowest possible cost. Once we have described how the supply curve is shaped, it is essential to explain the factors influencing the variable cost bided. Fuel cost, carbon allowances cost and variable O&M represent the variable cost that comprises the sale bids. Apart from wind and water power the rest of technologies must rely on the cost of their fuel to operate. Fuel prices Fuel costs are a share of total generation costs and vary significantly among technologies. Wind has no fuel costs. For nuclear power, fuel costs represent a small component of nuclear power generation, between 8 and 11%. For CCGTs, fuel costs account for about 75% of total costs. A 50 % increase in uranium, gas and coal prices would increase nuclear generation costs by about 3%, coal costs by about 20% and CCGT costs by about 38% (IEA, 2006). Coal prices: The coal-fired power stations depend on buying coal for fuel; when coal becomes more expensive the cost of generating electricity from this fuel rises.

32 24 There is a price level on which burning coal to produce power becomes uneconomic and such level of activity may decline. Consequently, the supply will be reduced and boosts prices on the Power Exchange. In 2005, gas-fired generation contributed a lower share of the increasing power needs, because high gas prices provided strong incentives for an increase in coal-fired generation from existing plants. Gas prices: Nowadays gas-fired plants are becoming more popular in Europe due to a range of advantages. As with coal-fired capacity, these power stations depend on buying gas for fuel. Lower gas prices would improve the terms for such output, which in turn could increase electricity supply, and cut prices. Demand for gas in power generation in the OECD increased from 213 bcm in 1990 to 447 bcm in 2004; an annual average growth of 5.4% (Gas Market 2007). Considering that the price of natural gas tends to be volatile in some markets, this seems an important drawback for CCGTs. However, it must be remembered that where gas sets the electricity s marginal price, this volatility can be recovered from the market. In this case, of course, high gas prices directly translate into high electricity prices. High gas prices make other alternative technologies more competitive. Gas prices are typically indexed to crude and/or oil products such as Low Sulphur Fuel Oil, High Sulphur Fuel Oil, and gas oil; so gas price will increase: when the world crude-oil market tightens, when there are low inventories, when demand rises and refinery capacity meets its production, or when there are speculative facts about geopolitical situations, with a time lag which depends on the indexation mechanism included in the gas pricing formula. Carbon allowances prices: The European Emissions Trading Scheme (ETS) limits CO 2 emissions for some industrial sectors; since 2005 each country allocates its allowances to companies which are free to trade them within the EU. Carbon allowances (EUAs) and carbon credits (CER s) are traded as a commodity. Power stations with carbon emissions must buy EUAs or CERs to cover a possible shortage of such allowances.

33 25 If the price of EUAs or CERs is high, generating electricity from fuels such as coal and gas becomes more expensive, and the cost could rise. The price could increase by the amount of the EUAs and CERs, because these are input factors. Demand side also affects the electricity price on the spot market by moving the demand curve (from X o to X 1 ), as shown in the figure below: if the demand curve moves this will require that more expensive technologies operate to cover the demand. Variable cost ( MW/h) Demand (Buy) Xo X1 Supply (sell) Wind Hydro Nuclear CCGT Coal Fuel oil & GT Quantity (MW) Source: own elaboration Figure 7. Supply curve construction Some of the factors that affect the demand curve displacement are the following: Weather and temperature conditions Precipitation: The level of precipitation is significant for pricing on the Power Exchange. Plentiful rain and snow means more water to drive the turbines, which in turn boosts supply. An increase in precipitation alone will normally reduce electricity prices.

34 26 Temperature conditions Temperatures influence daily demand for power. Colder weather boosts demand, which can lead in turn to price increases. Electricity transmission Transmission capacity: Capacity shortages in the transmission network could increase prices if demand in one area exceeds supply. Lack of capacity means that power cannot be acquired from regions with a surplus. Seasonability Demand differs between seasons (winter/summer), days (weekdays/weekends), and hours (peak/off peak). This seasonal and day variation implies that some generators only run a couple of hours per year Level of economic activity General economic fluctuations such as booms and recessions also impact in the electricity consumption and, thereby, trading in power because power market is influenced by fluctuations in other raw materials and currency markets. Economic factors Generating capacity: Expanding generating capacity will increase the supply of electricity, which could reduce prices. Currency movements Most raw materials are priced in US dollars. A lower exchange rate for the dollar cuts the cost of coal, gas and other fuels to lower the price of electricity.

35 Risk Management in Spot Markets As we saw there are a number of factors which cause unexpected price and cost changes in competitive power markets. These factors can be classified in Short Term (seconds, up to the day) and Long Term. The business separation between Generation and Supply activities enforce the need to deal with some uncertainties that were no concern before when companies belong to the same power group. Important financial penalties can be incurred in liberalized markets by producers and consumers of energy if they diverge from agreed levels of production or consumption. The exact mechanism used to balance a network, which inevitably varies from market to market, may have an impact on the risk trading strategy. The need to predict consumer demand accurately and to meet contracted production targets in each trading interval becomes vital to the profitability of the organisation. Alternatively, the risk can sometimes be managed through the introduction of special contract types or conditions, such as interruptible contracts. The main causes of the price volatility are: Short term Operational risk (power generation failures) Forecasting risk (over costs associated to the Balancing Energy) Day Ahead Market Generation mix (changes in the marginal price as a result of the different technologies that participate on the Spot Market) Market demand peaks and valleys Congestion management Imports/Exports

36 28 Long term Costs and availability of fuel Environmental conditions (especially rain and weather) and environmental constraints Regulatory risk Forecasted demand Investment programs In addition to the problem of price and volume risk, utilities must actively manage other risks such as credit, legal and liquidity risk, among others. Some risks are measurable, and generally accepted techniques and models exist, while others are more an issue for the organisation to address accordingly to its own structure and processes. Whatever the case may be, an organisation which is trading in the electricity market must be aware of the risks they are facing and have strategies and processes to manage it. Additionally some utilities tend to speculate with future energy prices. This adds a considerable extra risk. Physical markets (in particular, the Spot Markets) are essential to control and minimize the short term price and the needs to provide the network balance, stability and reliability. In addition the Spot Market has as key role to provide price reference which is necessary to build Financial and OTC Markets. Energy futures prices and derivatives products for the power markets are based and are derived from in the Spot Market prices.

37 Power Exchanges Comparative On the next chapters it is presented four European Power Exchanges, the reason to select this markets is because one of them represents a different level of liquidity, competition, volume traded, etc, for instance, the Nord Pool is the pioneering, most successful and mature market across Europe, Omel was at the beginning a mandatory market and thus liquidity on this market was so high, Powernext is practically a residual market in France and Opcom is an incipient but straight forward market with opportunities to achieve an important role not only in the Romanian wholesale market but in the South East Europe region. First a brief description of the electricity sector of each country is presented then some spot market procedure insights and finally spot market price analysis. Power Exchange Participation Market Operator System Operator Traded Volume Nord Pool (1993) Voluntary Day-Ahead Balancing Market Hour-Ahead (adjustments) Real time market Around 40% OMEL (1998) Voluntary Day-Ahead Intraday (adjustment) System Operator Process (Technical Constraints, Ancillary services, real time) Around 95% OPCOM (2000) Voluntary since 2005 Day-Ahead Balancing Market Around 9% Powernext (2001) Voluntary Day-Ahead Day-Ahead Continuous Balancing Mechanism Around 10% Day-Ahead Intraday Table 2. Comparative Table of Power Exchanges

38 References Bajpai, P and Singh. S.N. Electricity Trading In Competitive Power Market: An Overview and Key Issues. International Conference on Power Systems. Kathmandu, Nepal 110 pp. Bogas, J; Fernandez, C; Ventosa, M. (2) Overview on Electricity Markets: International Experiences. Boisseleau, F. (2004). The Role of Power Exchanges for the Creation of a Single European Electricity Market: Market Design and Market Regulation. PhD Thesis, University of Paris IX Dauphine, Delft University Press. Cavallo, L. And Termini, V. (2007). Spot, Bilateral and Futures Trading in Electricity Markets. Implications for Stability. 34 pp. Flatabø, N.; Doorman, G.; Grande, O. ; Randen, H. ; and Wangensteen, I. (2003) Experience with the Nord Pool Design and Implementation, Member, IEEE. 7 pp. Helyette, G. (2002) Towards a European Market of Electricity: Spot and Derivatives Trading. Hogan, W. W. (1998). Competitive Electricity Market Design: A Wholesale Primer. December, John F. Kennedy School of Government, Harvard University.57pp. IEA (2001). Competition in Electricity Markets (2001). Head of Publications Service, OECD 2, rue André-Pascal, Paris cedex 16, France. Joskow, P. (2007). Lessons learned from electricity market liberalisation. University of MIT. 38 pp. Makkonen, S. and Lahdelma, R. (1999). Analysis of Power Pools in the Deregulated Energy Market through Simulation. Quarterly Review of European Electricity and Gas Prices. DG Energy and Transport. Issue 1-8. Reinhard, M., R. And Kaufmann, M. (2002). Power exchange spot market trading in Europe: theoretical considerations and empirical evidence. Stoft. S.( 2003) Power System Economics. IEEE Press. Piscataway, NJ, USA. Wolak, F. A. (2001). Market Design and Price Behaviour in Restructured Electricity Markets: An International Comparison, Department of Economics, Stanford University.

39 31 4 The Scandinavian Spot Market (Nord Pool)

40 32 4. The Scandinavian Spot Market (Nord Pool) 4.1 Scandinavian Electricity Sector Summary Norway Norway was the first of the Nordic countries to liberalize its electricity sector, in 1991 the 1990 Energy Act came into force. The main motivation for the electricity market reform was an increasing dissatisfaction with the performance of the sector in terms of economic efficiency in resource utilization. The most important elements of the reform were the desire to organize a Spot Market that incorporates the demand side 4. Before the liberalization process, the dominant state-owned and vertically integrated company Statkraft was split into two separate entities: Statkraft SF (Generating company) Statnett SF (Transmission company) The other vertically integrated power companies were separated into generating or trading divisions. The market liberalization was implemented without changes in ownership, neither of the companies were privatized, 85% of the electricity system was publicly owned by local, regional and state-owned companies. The prices were determined by the government and set different prices for different consumers, which created inefficiencies in the electricity market. The Norwegian electricity system is quite unique, because around 99% of the production is generated by hydropower. Production varies heavily from season to season depending on the rainfall. 4 From 1971 to 1990 an Occasional or Interruptible Spot Power Market exists, based on expected demand and supply schedules and the only participants were the generators.

41 33 The low cost of electric power in Norway and a growing economy led a steadily increase in electric consumption throughout the 1990s. Production, however, has not kept pace, as a result Norway is now a net importer of electricity. Population 4,6 million Area km 2. Electricity annual Consumption Individual Consumption Industry Natural Resources Electricity production Grouth Electricity production NORWAY 115 TWh KWh Paper and Chemical Aluminium smelting or Iron Alloy Fifth producer of hydro worldwide and first in Europe TWh TWh Hydropower 99% Other termal power 1% Table 3. Norway Specifications Sweden Sweden deregulated its electricity sector in 1996 according to the Electricity Act 1197:857, the main driver for restructuring was the increasing concern of market power, the aim to reduce electricity prices and increase productivity. Before deregulation the electricity sector was vertically integrated, consumers bought their power from the local electricity company, which either generated its own power or acquired it from another member of the industry s clubs 5. After the liberalization this vertical integration was split up into three segments: generation, transmission, and retail trade directed to individual customers including households. 5 The clubs were voluntary associations of companies that were in one way or another engaged in the production and/or distribution of electricity.

42 34 Both generation and retail trade were open into competition, while transmission remained regulated. The reason why transmission remained sheltered from competition was that it is three geographical levels (National, Regional and Local) that together formed a natural monopoly. One of the most remarkable parts of the Swedish reform was that Svenska, Sweden Transmission System Operator, bought half of the Norwegian electricity Spot Market form the Norwegian, known as the Nord Pool. Sweden has gained from the creation of Nord Pool, however, for the market in which Swedish generators compete is now usually twice as large as Sweden alone, and can be nearly three times large. At present, Sweden is a single price area within Nord Pool, even if there is congestion within the country s transmission system SWEDEN Population 9 million Area km 2 Electricity annual 145 TWh, Consumption Individual Consumption Fourth individual consumption worldwide Industry 30% consumption belong to Paper Industry Production mix Hydro and nuclear, small portion cogen and fuel Electricity Production Hydropower 46% Nuclear Power 45% Other termal Power 12% Table 4. Sweden Specifications Finland The Electricity Market Act (EMA) and the Point-access tariff of 1995 opened the Finnish electricity market to competition. A later modification of the law has, since autumn 1998, allowed all customers to choose a supplier freely with no additional cost.

43 35 Due to the use of consumption profiles, no specific electricity meters are needed for small customers. There are many reasons for restructuring the electricity industry in Finland. One is the worldwide trend towards liberalisation and the evidence of improved efficiency. The second was the deregulation of the electricity markets in other Nordic countries and the establishment of the common power pool, Nord Pool. And third, there has been a scheme for opening the European electricity markets, to which Finland wanted to be properly prepared. FINLAND Population 5,2 millions Area km 2 Electricity annual 85 TW Consumption Individual Consumption Similar to Sweden Industry 30% consumption belong to Paper Industry Electricity Production Nuclear Power 33% Other termal power 47% Table 5. Finland Specifications Denmark Denmark started to liberalize its electricity market in 1996 by introducing limited competition concerning to large customers (consumption over 100 GWh). In 1999 a New Electricity Supply Act was passed in the Parliament and at the same time the western part of the country became a separate price area within the competitive Nord Pool Power Exchange. Contrary to the other Nordic countries, the government does not own any electricity utilities, most of it are owned either by municipalities and customer co-operatives. Peak-load demand is usually satisfied by imported hydropower from Norway and Sweden. Denmark is interconnected by transmission lines to two different systems, from West to the Great Belt to the Continental Western Europe and from the East of the Great Belt to the other Nordic countries.

44 36 DENMARK Population 5,4 million Area km 2 Electricity annual 35 TWh Consumption Individual Consumption Tipical from an European country Production mix 85% Cogen the rest wind power Table 6. Denmark Specifications 4.2 The Nord Pool Spot Market Initially in 1993 this Power Exchange covered only the Norwegian market operating the first year a volume of 10.2 TWh. The Power Exchange changed its name to Nord Pool ASA when it became a common Norwegian-Swedish market in Svenska (Swedish TSO) brought the 50 % to Statnett (Norwegian TSO) which owns the other 50%. In 1998 the Market was extended to Finland and finally in 1999 the western part of Denmark joined the Pool. Nowadays the Nord Pool Group owns Nord Pool ASA which has the 20% of participation in the Nord Pool Spot, the rest 80% is owned by the four Nordic TSOs - Statnett SF, Svenska Kraftnätt, Fingrid and Energinet.dk with 20% each. At the end of 2005 Nord Pool Spot opened a price quotation in Germany. The Nordic Exchange area was expanded to include also a bidding area in Germany named KONTEK. Geographically, KONTEK gives access to the Vattenfall Europe Transmission control area.

45 37 Nord Pool ASA 20,0% Statnett SF 20,0% Energinet 20% Svens ka 20,0% Fingrid 20,0% Figure 8. Nord Pool Spot Shareholders Nord Pool is a non mandatory Power Exchange that organises approximately 40% 6 of the total trade of electricity in the Nordic market. The rest is organized on the basis of bilateral contracts. Any company wishing to trade in Nord Pool must first become a member. Membership is open to Generators, Distributors, Suppliers, Industrial Customers, Traders and Brokers. At present there are 131 Direct Participants, 172 Clearing Customers and 14 Trading and Clearing Representatives. National competition and regulatory authorities monitor the Nordic power market to ensure that it is sufficiently competitive. The competition authorities check that no form of price cooperation occurs and that no players secure excessive market power. The financial and energy regulators monitor compliance with licence terms, while Nord Pool provides direct surveillance of the marketplaces. The physical Nord Pool is divided into two areas: Elspot (Day-Ahead Market) Elbas (Hour-ahead), this market do not operates in Norway because Norway is mainly water based. That means that the base load profile is 6 Nord Pool manages Physical and Financial Markets.

46 38 very flat. The marginal cost for water is not very high and that is the reason why Statnett until now has rejected the elbas. Other services to maintain a secure and reliable power supply are handled through the Real-time Market and Ancillary services managed by each of the Nordic Transmission System Operators. Conditions for trading There are three participant categories on the Nord Pool Spot market: Direct participant: Participants that trades on their own behalf and is the responsible for the settlement. Trading & Clearing Representative: Participant who carries out Trading for a Clearing Customer account and risk. Clearing Customer: Make an agreement with a Trading & Clearing Representative to perform the trading on his behalf. Is the responsible entity for the settlement of their own trading done by the Trading & Clearing Representative. Every Participant has to post a cash collateral on a pledged bank account or a demand guarantee issued by the bank to Nord Pool. The member that wants to become a Nord Pool participant has to fulfil the following requirements: 1. The Participant must sign the Participant Agreement and the Clearing Customer the Customer Agreement. 2. Before the trading commencement, it is necessary that the Participant and the Clearing Customer established a deposit account or a nonpledged account and posted cash collateral on either accounts or present a guarantee document issued by a bank. 3. Sign a Balance Responsibility Agreement with the Transmission System Operator.

47 39 4. Comply with the following fees and payments Annual Fixed Fees Direct participants Trading & Clearing Representative Clearing Customers Variable Fee Elspot 0,03 /MWh Elspot (small participants)* 0,13 /MWh Elbas 0,08 /MWh Elbas Service Fee 500 /Month * Small participants can waive the annual fee and pay a higher variable. Table 7. Nord Pool Trading Fees 4.3 Regulator The regulatory and supervision authority for the Nord Pool Spot is the Norwegian Water Resources and Energy Directorate (NVE) which is subordinated to the Ministry of Petroleum and Energy. Nord Pool Spot hold a licence to operate and organized marketplace for trade physically delivered power contracts, under the Energy Act 2003 of Norway. NVE also allowed Nord Pool Spot to organise the physical exchange of power with neighbouring countries. The license requires that a market surveillance function is establish, The Rulebook for Nord Pool Spot regulates the obligations and rights of the market participants in trading and settlement, and constitutes the rules that the Spot Market participants have to comply. There are separate regulatory agencies in the four countries. Swedish Energy Agency (EI) Energy Market Authority (EMV) Danish Energy Regulatory Authority (DERA)

48 Elspot: Day ahead Elspot is a Day-ahead market on which electricity is traded on a daily basis for physical delivery for the following day. The bidding areas are consistent with the geographical area of each of the Transmission System Operators: Sweden, Finland and the German area KONTEK are each one bidding area. The grids in Jutland (Western Denmark) and Zealand (Eastern Denmark) are not physically connected giving two bidding areas in Denmark. The Norwegian grid is usually divided into two bidding areas. Elspot Key Features Hourly, Block and Flexible bidding contract (24 hours of the next day) Price mechanism to allocate transmission capacity Price grid congestion is included in the System Price Prices are determined for every hour Electronically trading system (EDIEL or EIWeb) Minimum contract duration is one (1) hour Minimum contract block is four (4) hours duration Minimum contract size is 0,1 MWh/h Trading currencies: NOK, SEK, DKK, EUR/MWh Bid: Sequence price/volume Purchases positive numbers, Sales negative numbers Ceiling and Floor price limit

49 41 There are different kinds of purchase and sales Bids: 1. Hourly Bid: Participants submit their bids (sale or purchase) covering all the 24 delivery hours. It could be price-dependent hourly bid or price-independent hourly bid. Price dependent bids: Nord Pool Spot make a linear interpolation of volumes between each adjacent pair of submitted price steps. Once the Elspot price for each hour is determined, a comparison with a participant's bid form for the day establishes the traded volume for that participant. Price Levels Price Hour MWh 50 MWh MWh -10MWh -30 MWh -30 MWh 4 Etc. Table 8. Price dependent schedule Price Independent bids: The participant will receive a schedule of deliveries equal to the specified volume for all hours, regardless of the price level within the range. Floor Price Ceiling Pirnce Hour Price MWh 60 MWh Table 9. Price Independent Schedule 2. Block Bid: Is an aggregated bid for several consecutive hours with a fixed price and volume. The Participant can choose the start and stop hour at a block but must consider at least four consecutive hours. The Block Bid gives the opportunity to set a Fill-or-Kill option for all the hours of the block. The maximum blocks bids per day are 15. This kind of bid is useful in cases where the cost of starting and stopping is high.

50 42 3. Linked Block Bids: This kind of bid allows to link up to three blocks together, the third bid is then dependent on acceptance of both preceding bids. This is useful when the cost of starting one generator depends if another generator is already in order or not. The blocks cannot link for sale and purchase. 4. Flexible hourly Bid (Only for sales): It is a bid with a fixed price and volume without any specification about the hour. The bid will be accepted in the hour with the highest price in the calculation. Elspot Timetable 1. At 10:00 the TSOs have had submitted their capacity allocation for Elspot contracts :00 is the deadline hour for receiving all the bids covering hourly contract for delivery the next day. The market closes; Elspot price calculations begin. 3. At 13:00 or 13:30 at the latest the price calculations are completed. The results are confirmed to the participants, to the TSOs and others responsible for power balance adjustments. Participants can file complaints about trades in the next 30 from the publication of the schedules :00 is the deadline for filing complaints, unless a delay of pricesetting beyond 13:30 has occurred. All Elspot contracts are binding between buyers, sellers, and Nord Pool Spot. The Nord Pool calculates the System Price using all the bids submitted by the participant in the four countries + KONTEK area. At first the grid capacities are not included in the calculation, this means that the System Price will correspond to the Price area of each Nordic country. If congestion is detected during the initial calculation, the markets are split into different price areas and repeat the price calculation in the two areas separately. The

51 43 price in one area will therefore be higher than in the other. Electricity will be then purchased in the low price area and sold in the high price area. The increased demand in the low price area will in turn raise the price in that area. Correspondingly, the price in the high price area will fall when the amount of available power increases. This process, known as Market Splitting, will continue until all the transmission capacity is fully utilized. Elspot Price Analysis The bar and line chart on figure 9 shows the evolution of the volume traded and the prices at Nord Pool Spot market in Norwegian Krone for the period In 1996 a significant increase of traded volume is evident since Sweden merged with the Norwegian Spot market, as same in 1998 when Finland joined as well. TWh Energy Price NOK/MW 300,0 250, , , , , ,0 Figure 9. Nord Pool Day-Ahead Spot Market Price/Volume History (prices Norwegian Krone) The heavily influence of hydraulic in Norway is the reason for the spike prices in 1994 and Those years where influenced by environmental causes (strong winters and low raining season). On figure and table 10 is presented the evolution of the volume traded since the beginning of the Nord Pool Spot and Spot prices since 1999, in EUROS. In 1999 and 2000 western Denmark and eastern Denmark respectively join the market. The most recent incorporation to the market was in 2005 when the German area KONTEK

52 44 adheres to the Nord Pool Spot Market. The table above shows the evolution in figures and the variation over the years. TWh Energy Price EUR/MWh Figure 10. Nord Pool Day-Ahead Spot Market Price/Volume History (prices in EUROS) Year Price NOK/MWh Volume TW/h ,3 10, ,7 14, , ,63 40, , ,35 56,3 Price /MWh ,46 75, ,8 96, ,1 111, ,91 124, , , , , Table 10. Nord Pool Day-Ahead Prices and volume

53 was a very dry year, the demand did not grew as much as other years, because of that the prices had an important rise from 26, 91 to 36,7 MW/h. The turnover for Monday 22 January 2007 was GWh. The volume traded at Nord Pool Spot now represents more than 70% of the Nordic consumption. 4.5 Elbas: Hour-ahead Elbas is an Electricity Adjustment Market that started in The Elbas Market is open at all times (continuous trading 24 hours a day). The traded products are onehour duration power contracts. The purpose of this market is to improve the physical balance. In the past, especially in Sweden and Finland, electricity distributors estimated their balance long time ahead. Forecasting the future is a very important and difficult task in these countries because most of its generation production is based on CHP (Combined Heat and Power), however, the consumption and production predictions do not always correspond to the situation in real time, but a prediction can get achieved as the actual delivery time approaches, therefore continuous trading near the delivery hour is extremely effective. The participants in the Elbas Market are power producers, distributors, suppliers, industries and brokers. Today the Elbas market runs in Finland, Sweden and Eastern Denmark. Elbas Key Features Contracts: one-hour physical power Minimum contract size is 1 MWh/h Prices in EUR/MWh Minimum bid price is 0,1 EUR Web based real-time trading system Block bids are accepted

54 46 Elbas Timetable 1. At 14:00 when the deadline for filing complaints on the Elspot market is closed, the hour-contracts for the next day are opened for trade in Elbas market. The trade for a specific hour contract is closed one hour before its delivery. 2. In eastern Denmark the hour-contracts for the next day are opened at 17:00. The trade for a specific hour contract is in eastern Denmark closed two hours before its delivery. 4.6 Real Time Market (System Operator Market) This market is managed by each of the TSOs involved, the objectives are to serve as a tool for the TSOs to balance the power at any time and to provide the imbalance price for the Participants. Balance is maintained separately in each participating country. 1. Participants submit their bids to the TSOs after the Elspot Market has closed. 2. TSOs sort the bids for each hour in priority order, according to price. 3. For upward regulation the TSOs picks from the list the unit with the lowest price. 4. For downward regulation the TSOs picks from the list the unit with the highest price. In Norway there is only one real-time price for each hour. The last unit called in each hour defines the price for that hour. In the rest of the Nordic countries two prices for each hour are defined, one for downward and one for upward regulation. In hours when there is no real-time regulation, the real-time price corresponds to the area Elspot price.

55 47 The aim of this market is to guarantee the balance of the system and to ensure that any participant does not make any profit from imbalances. Figure 11 present the sequence of the operation in the Scandinavian markets, Elspot, Elbas and real tieme market. Nor Pool Nordic TSOs Price Spot Price Elspot Elbas Real Time Market Supply MWh Demand Bid/Ask Downward Regulation Price Spot Upward Regulation MWh One-hour contract One-hour contract Bidding Priority Lists Piror to hour operation During hour operation Source: Nord Pool Figure 11. Sequence of operations in the Scandinavian markets 4.7 Nord Pool s Financial Market At present Nord Pool s financial market comprises of power derivatives (futures, forwards, contract for differences (CfD) and options) and electricity certificates. There is no physical delivery on these markets. Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell electricity at a specific time at a given price. Futures and Forwards There are some specific details in which these contracts differ: 1. Futures contracts are exchange-traded and, therefore, are standardized contracts. Forward contracts, on the other hand, are private agreements between two parties and are not as rigid in their stated terms and conditions. Because forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement. Futures contracts have

56 48 clearing houses that guarantee the transactions, which drastically lowers the probability of default to almost never. 2. The specific details concerning settlement and delivery are quite distinct. For forward contracts, settlement of the contract occurs at the end of the contract. Futures contracts are marked-to-market daily, which means that daily changes are settled day by day until the end of the contract. Furthermore, settlement for futures contracts can occur over a range of dates. Forward contracts, on the other hand, only have one settlement date. 3. Futures contracts are quite frequently employed by speculators, on the other hand, forward contracts are mostly used by hedgers that want to eliminate the volatility of the spot price. An important and particular service that the Nord Pool offers is that also clears the contracts traded in the bilateral financial markets that are registered for clearing. Financial markets represent an important tool for risk management, this method of hedging has replaced the traditional bilateral trade in physical delivery contracts. Futures and forwards contracts, options, CfDs, and electricity certificates are traded continuously, as in other advanced commodity markets. Nord Pool operates an electronic trading system, PowerCLICK Exchange, where exchange members can trade in the following ways: Electronically by using PowerCLICK Trade application installed in the traders premises. This can either be connected via fixed telecom lines or via a secure Virtual Private Network channel over Internet. Via telephone to the financial desk at Nord Pool, where orders are placed in the trading system on behalf of the member. The traded volume at Nord Pool s financial market has increased considerably since the first products were launched in The total volume of financial contracts traded at Nord Pool s financial market in 2003 was 545 TWh, trade in financial contracts is about five time s physical load.

57 References Andersson, M. and Thörnqvist. (2006). Liberalisation, privatisation and regulation in the Swedish electricity sector. Department of Work Science Göteborgs University, Sweden. Bergman, L. (2003). European Electricity Market Integration: The Nordic Experiences. Stockholm School of Economics, Sweden. Botterud, A., Bhattacharyya, B. and Ilic, M. (2001). Futures and spot prices an analysis of the Scandinavian electricity market. Discussion paper. Bye, T. and Hope, E. (2005). Deregulation of electricity markets. The Norwegian experience. Discussion Paper. Statistics Norway, research department. Damsgaard, N and Green, R. (2003). Regulatory Reform in the Swedish Electricity Industry Good or Bad?. Working Paper. Database of historical data from Nord Pool (continuously updated). Hjalmarsson, E. (2000). Nord Pool: A Power Market Without Market Power Working Papers in Economics. Göteborg University. Kopsakangas - Savolainen, M. (2002). A study on the deregulation of the Finnish electricity markets. Faculty of Economics and Industrial Management, University of Oulu, Finland. Mathias, K. (2007). Does Size matter? The Effect of Market Integration on Wholesale Prices in the Nordic Electricity Market. Master s Thesis in Economics. Stockholm School of Economics. Web sites: o o o o o Energinet web site: Fingrid web site: Nord pool web site : Pool.com Statnett web site: Statkraft web site:

58 50 5 The Spanish Spot Market (OMEL)

59 51 5. The Spanish Spot Market 5.1 Spanish Electricity Sector Summary At the end of 1997 a new Electricity Law was established 54/1997 by the Spanish Regulatory Authorities, this regulatory framework crated a new legal and institutional structure for the Spanish Electricity Sector with the aim of guarantee the electricity supply to all customers under certain quality conditions at the minimum cost, and the opening of competition to all agents. Before the liberalization process, the supply of electricity was carried out by a conglomerate of privately owned vertically integrated utilities. Generation, Transmission and Distribution were owned and managed by the same utility over a certain area. Back in 1985 a public company was created with two roles, to own, plan, maintain and operate the high voltage transmission network, and to schedule all the Spanish generation plants through a cost optimization process. The new Law establishes the unbundling of the regulated activities from the non regulated activities. Transmission and Distribution as natural monopolies stayed regulated while Generation and Supply become able to act in full competition. One of the most relevant innovations introduced by the new regulatory framework was the creation on a Spot Market as a way to allocate production and determine wholesale prices where demand and offer met. Two privately own companies were established to operate the market one for the technical and the other for the economical management. System Operator (Red Eléctrica de España): Responsible for the system technical management processes which are required to guarantee the supply of electricity under conditions of quality, reliability and safety. Market Operator (Operador del Mercado Eléctrico): Responsible for the management of daily and intra-day markets and is also responsible for settlement and communication of payment

60 52 obligations, collection rights deriving from the energy contracted in the aforementioned daily and intra-day electricity production markets. 5.2 The OMEL Spot Market Market Description Since 1998, electricity is traded in a Spot Market and it is organized as a sequence of markets, the day-ahead market and six intra-day markets that operate close to real time, managed by the Market Operator. Most of the transactions are carried out on the day-ahead, this market is composed of 24 hourly markets that clear once a day. At the beginning of the market it was a mandatory market, nowadays is voluntary but all the available capacity that are no tied to a bilateral contract must be traded on the Spot Market. The intraday market is an adjustment market, and gives the opportunity to the agents to adjust the previous market results. Conditions for trading 1. Have granted the condition of Market Agent. 2. Sign the application of adherence to the Functioning Market Rules. 3. Present to the Market Operator a collateral (cash deposit, endorsement, debit authorization) to cover the economic duties. At present there are 25 producers, around 500 special regime producers, 22 external agents, 11 distribution agents, 61 retail agents and 7 qualified consumers that participate in the Spanish Spot Market.

61 Regulator The National Energy Commission (CNE) is the regulatory body for the Spanish energy sector, is attached to the Ministry of Industry, Tourism and Commerce. The CNE acts as a consultative body on energy matters to the Central State Administration and the Governments in the Autonomous Regions it also ensures that agents acting in energy markets comply with the principles of free competition when carrying on their activity. 5.4 Daily Market The purpose of the daily (day-ahead) market is to handle electricity transaction for the following day through the submission of sale and purchase bids by market participants. All available production units that are not bound by physical bilateral contracts are obliged to present bids for the daily market, exceptions are made for: Units with installed capacity of less than 50 MW Production units with installed capacity of more than 1 MW may provide bids for any period only when they deem appropriate. Self-producers and producers under special regime are also not obligated to declare surplus power to the market. Buyers on the electrical power market are: Distributors: They purchase the electricity to supply consumers under regulated tariff regime. Resellers: They purchase electricity to sell it to other resellers or to Qualified Consumers. Qualified Consumers: At the beginning for a consumer to be considered qualified he must have an annual consumption above certain limit. This limit decrease with time and nowadays all consumers are considered qualified and may purchase electricity directly on the Spot Market through a reseller or by signing a bilateral contract with a producer.

62 54 External agents who are authorized to participate in the market as seller or buyer. OMEL Daily Key Features Bids can be made between 1 25 energy blocks on each hour. Electricity sale bids may be simple or incorporate complex conditions. The following documents or files are generated during the daily process: Daily Matched Schedule (PBC) 7 : Demand and generation schedule given on an hourly basis, prepared by the MO on the basis of the balancing or matching energy sell and buy bids submitted by the market agents. Base Daily Schedule (PBF): PBC + the individualized schedules of physical bilateral contract whose execution has been communicated and the energy delivered forecasts for special regime production that does not submits to the production market, communicated by the distribution agents responsible for managing those energy deliveries. Provisional viable daily schedule (PVP): Schedule given on an hourly basis, prepared by the System Operator and incorporating any modifications made to the PBF in order to solve technical constraints identified for security reasons and to subsequently rebalance generation and demand. Daily Timetable 1. Between 8:30 and 10:00, on the day D-1, all the bids for the following day must be presented by the Market Agents (MA) to the Market Operator. The market is organized on an hourly basis so the bids and the energy assigned will be in hourly energy blocks.

63 55 2. One hour before the closure of the submission period, the System Operator make available to the MA and MO the information on demand forecasts and the interchange capacity for the following day. 3. Once the daily market session has finished and before 11:00, the Market Operator generates the Daily Matched Schedule (PBC) and sends it to the System Operator, this corresponds to the following day and the merit order of energy buy and sell submitted to this market. 4. From 11 to 11:30 the System Operator receives the bids for the process to solve technical constraints. 5. Before 12:00, taking into account the schedule resulting from the daily market plus the bilateral contracts and the special regime, the System Operator modifies the production units schedule and obtained the Base Daily Schedule (PBF). The Base Daily Schedule includes the Marginal Price for each hour, generation by each Production Unit and demand by each Purchase Unit. 6. The System Operator studies the technical viability of the operation schedule. If the Base Daily Schedule does not comply with safety and reliability requirements, the System Operator modifies the PBF, incorporating or removing the production necessary to resolve technical problems obtaining the Provisional Viable Daily Schedule (PVP) before 14:00. 7 Corresponds to the acronym in Spanish.

64 56 The activities and schedule are summarized on the table below. Daily Market Schedule Session Opening 8:30 International bilateral contracts reception 10:00 Session closing 10:00 Matching results 11:00 Domestic bilateral contracts reception 11:00 Daily Matched Schedule (PBC) 11:00 Reception of breakdowns of production and demand inputs 12:00 Base Daily Schedule (PBF) 12:00 Adjustments for constraints analysis 14:00 Provisional Viable Daily Schedule (PVP) 14:00 Table 11. Timetable for Daily Market Sessions Types of Bids 1. Simple Bids: Indicates price and volume 2. Complex Bids: In compliance with simple bid requirements, also include one or more technical (Load gradients, Indivisibility and Schedule Stop) or economic conditions (Minimum income). Load gradients: Establishes the maximum difference between the starting hourly power and final hourly power of the production unit to be established, limiting maximum

65 57 matchable power by matching the previous hour and the following hour, in order to avoid sudden changes in the production units that latter are unable to follow from a technical standpoint. Indivisibility: Enables a minimum operating value to be fixed in the first block of each hour. Scheduled Stop: Enables Production Units that have been withdrawn from the matching process because they fail to comply the stipulated minimum income condition to carry out a scheduled stop for a maximum period of three (3) hours. The first slot of three hours will be accepted as simple bids with the condition that the energy offered in bids must drop in each hour. MW/h 120 Day Ahead 100 Offer Day Hours Figure 12. Schedule Stop Condition Economic Condition Minimum income: Enables bids to be presented in all hours do not participate in the daily clearing result if the total production obtained by it in the day does not exceed an income level above an established amount. The minimum income has a fixed (Cent Euro) and a variable term (Cent KWh) according to every KWh cleared.

66 58 Daily Market Price Analysis On the next graphic and table is presented the volumes and prices of energy traded on the daily market since the beginning of the Spot Market. GWh Energy Price /MWh Figure 13. OMEL Daily Market Price/Volume History Average Price MW Energy GWh Year , , , , , , , , , Source: Omel Table 12. OMEL Average Prices and Energy traded Since the beginning of the market, the traded volumes have had an annual growth of 5,4% as shown in table the price of sale bids and the matching result were sensitive not only to the evolution of electricity demand, but also to conditions of

67 59 hydraulicity and hydraulic producible in the period from January to December. During the year 2001, and coinciding with the continuous low temperatures that affected Spain and other European countries, historically high figure were reached for maximum system scheduled capacity and power, including production under the special regime. In 2002 the Special Regime entered the market as market participants. The amount of energy traded in 2005 is influenced by both economic activity and a seasonal component, which prompts significant fluctuations in trading, with the consequent effect on the financial volume of trading. A very significant decrease has been produced in the energy traded in the daily markets in This decrease was because of the following: o 59,162 GWh were negotiated through bilateral contracts which suppose a 22.3% of the energy traded in the year. o After the entry into force the Royal Decree Law 3/2006 there was a significant decrease of energy resulting from the matching process in the daily market. 5.5 Intra-day Market The intra-day Market is an integral part of the electricity power market, the purpose is to adjust the Provisional Viable Daily Schedule (PVP). Once there is a technically Viable Daily Schedule published, the Market Operator starts to run six sessions of the Intra-day market, to provide a market on which Participants can negotiate and adjust they positions. The intra-day is a voluntary market where no agent has the obligation to participate. The only condition is that distribution companies, resellers, qualified consumers and

68 60 external agents, should have participated in the corresponding session of the previous daily market or the agents that have executed a physical bilateral contract. Once the System Operator has all the information on the matched energy it has to under take a security analysis in order to identify any possible technical constraint resulting from the matching of bids in each intra-day. The intra-day market is currently structured into six sessions with the following hourly distribution sessions: Session Session Session Session Session Session Session 16:00 21:00 1:00 (D) 4:00 8:00 12:00 Opening (D-1) (D-1) (D) (D) (D) Session Closing Publication (PHF) 17:45 21:45 1:45 4:45 8:45 12:45 19:35 23:20 3:20 6:20 10:20 14:20 Schedule horizon Hours Hours Hours Hours Hours Hours Hourly Periods Table 13. Timetable for Intraday Sessions in OMEL OMEL Intra-Day Key Features Electricity sale and purchase bids may incorporate Simple and complex bids The following document or files is generated during the intra-day process: Final hourly Schedule (PHF): The scheduling established by the System Operator after each one of the successive sessions in the

69 61 intraday market on the basis of the matched energy sell and buy bids submitted in each session for each scheduling period. It also takes into account the withdrawal from this schedule of any bids giving rise to technical constraints and any other additional bids needed for the subsequent rebalancing of production and demand as well as the production and consumption schedules established previously. More than one bid can be done per production or purchasing unit in one hour. Electricity purchase and sale bids may be simple or incorporate complex conditions. Simple bids consists in a price and an amount of energy for each hour, complex conditions include the following: Load Gradient Minimum income or maximum payment Complete acceptance in the matching process of the first block of the bid. Minimum number of consecutive hours with complete acceptance of the first block of the bid. Maximum matched energy The matching process and results for the intra-day market is presented as follows: Intra-Day Market Timetable 1. The participants submit their bids according to the session schedule. 2. The Market Operator cleared the purchase and sale bids by means of the simple or complex method. 3. The System Operator resolves technical restrictions. Selecting withdrawal of all bids which resolve the restrictions identified and those other additional bids necessary to restore balance between production and demand. In order to select a bid, it will use the economic order sent by the Market Operator.

70 62 4. The Final Hourly Schedule (PHF) is obtained. The System Operator publishes the PHF at least 15 min in advance of the start of the implementation time horizon of the corresponding session. 5. The price in each hourly schedule will be equal to the price of the last block of the sale bid of the last production unit whose acceptance has been required in order to meet either partially or totally, the purchase bids at a price equal to, or greater than, the Marginal Price. The bid structure and the matching processes of the hour ahead market are similar to the daily process except for the fact that the solution will be added to the previous market results, and that some of the complex conditions, like gradients for example, need to be applied over the complete schedule (previous market plus the current hour ahead result). Each bid in the hour ahead market could be divided in up to 5 hourly blocks and, as already indicated; any agent could present as many bids as he wants for the same unit, mixing selling and purchasing bids On the next graphic is presented the volumes and prices of energy traded on the Intra-day market since the beginning of the Spot Market and on the table is represented the figures that supports the graphic. GWh Energy Price /MWh Figure 14. OMEL Intraday Market Price/Volume History

71 63 Average Price MW Energy GWh Year , , , , , , , , , Source: OMEL Table 14. OMEL intraday average prices and energy traded In 1999 the trading by Production Units in this market was greater than trading by Purchasing Units. The energy traded in the intraday market in 1999 represented a 5.4% of the volume negotiated in the daily market In 2004 the volume of energy traded on the intraday was 40,4% more than the previous year descending in volume traded in %. Purchase units in this market are scarce, particularly in the case of distributors, whose weight is preponderant in the overall number of purchase units. This is because they are unable to obtain the cost of the deviations in a useful amount of time, and also because it is hard to forecast demand.

72 64 On the next graphic is presented the historic volatility of the final prices 8 of electricity on the Spot Market. MWh 90, 80, 70, 60, 50, Historic Volatility 360 % 40, 30, 20, 10, 0 Figure 15. OMEL Price Historic Volatility ene-98 jun-98 feb-99 ago-99 mar-00 sep-00 may-01 oct-01 abr-02 nov-02 jun-03 ene-04 jul-04 feb-05 sep-05 ene-06 may-06 Figure 16 summarizes on a schematically way the timetable for the daily and intradaily markets. 8 Final Prices include: Daily and Intra daily price, Technical constraints, System Operating Process source: OMEL and Power Guarantee cost.

73 65 D-1 D Base Daily Operating Schedule 2 Intraday 3 Intraday 5 Intraday 6 Intraday :30-10:00 Bid Submission 1st Intraday Viable Daily Schedule Final Daily Viable Schedule 4 Intraday 28 H Market 24 H Market 20 H Market 17 H Market 13 H Market 9 H Market Figure 16. Daily and Intradaily Timetable in OMEL

74 System Operator Process This Market is managed by the TSO, it includes the solution of technical constraints, the procurement of Ancillary Services and the management of real time operations. 1. The System Operator establishes the Secondary reserve requirement for each one of the hours for the next day and publishes to the participants before 14: The System Operator opens the bid receipt process at 14:00 and closes at 15: At 16:00 publishes the results of the Secondary reserve for each period of the following day. 4. At 21:00 publishes the tertiary reserve requirements 5. Before 22:00 the participants submit their bids for tertiary reserve both to upward and to downward. (This offer is mandatory for all the available energy on each unit). If any incident occurs where there is an imbalance between generation and consumption, in the real time, primary and secondary reserves are immediately activated automatically to correct the imbalance with the consequent loss of reserve. Whenever the secondary reserve is reduced below the desirable level for security reasons, the System Operator requires the use of tertiary reserve, already procured, to regenerate secondary reserve. Figure 17 shows the sequence of processes in the Spanish electricity market.

75 67 Daily Market Forward Trading with physical delivery (OMIP) + International Bilateral Contracts Daily Matched Scedule (PBC) Domestic Bilateral Contracts Base Daily Schedule (PBF) 6 Intraday Markets Technical Constraints Solution Ancillary Services Other technical processes Viable Daily Schedule (PVP) Final Houry Intra-Day Schedule (PHF) Market Operator Real-time process System Operator Real-time Schedule(PHO) Schedule Figure 17. Sequence Processes in the Spanish Market 5.7 Iberian Market In 1998, the Spanish and Portuguese Public Administrations began conversations and studies to progressively eliminate obstacles for the creation of the Iberian Electricity Market (MIBEL) for the benefit of their consumers, encourage competition in generation and trading and to allow open and equal access to all the market participants. Anticipating the creation of the Internal Electricity Market in Europe, the Portuguese and Spanish markets signed in 2001 a Cooperation Protocol in order to develop the MIBEL. In this market, electric companies from Spain and Portugal will compete to establish clients in both countries that on the whole add more than 30 million potential customers (53 million users) who will contract for energy service with the company that offers the best prices. This change in the Iberian Market will establish an important precedent for the European Union. The MIBEL started its operations on July 2006 with the Financial Market regarding the energy from Portugal and Spain and in July 2007 the Spot Market was introduced in Portugal. From that date the prices in the two countries are the same, if there is no

76 68 transmission congestion between borders. At present this market has two market operators: OMEL (Spanish Market Operator): Spot market, which includes daily and intra-daily markets, it is managed by the current market operator of the Spain. OMIP (Portuguese Futures Market Operator): Future market, which it is managed from Portugal. This market does not require physical delivery, allowing the possibility of exclusive financial settlements. It is foreseen at latest 2008 OMEL and OMIP merges into a single market operator (OMI). Spot market agents can be producers, self-producers, external agents (non resident entities status), traders, qualified representatives and consumers. With entry into effect of the International Agreement signed in Santiago de Compostela, on October 1st. 2004, the authorised entities in Portugal can act on the spot market benefiting from an automatic recognition, no longer being considered external agents. System Operation: the System Operators of both parties are responsible for the system technical management in order to guarantee the continuity and security of the electrical supply, through the management of the system adjustment services. MWh 6,00 5,50 5,00 4,50 4,00 3,50 3,00 2,50 2,00 1,50 1,00 0,50 0,0 Prices in Spain Prices in Portugal July 07 August 07 Figure 18. Iberian Market Results

77 69 Figure 18 illustrates the evolution of prices in the MIBEL market for the first two months of operation. In the following table is presented a comparison of the volumes traded before and after the MIBEL started. Month Volume Traded GWh May June July August Source : Omel Table 15. Volumes traded before and alter MIBEL

78 References Gonzalez. JJ and Basagoiti, P. (2002). Spanish Power Exchange Market and Information System Design concepts and operating experience. Working paper Madrid, Spain. OMEL Annual Report 2006 OMEL Market Rules Web sites: o o OMEL web site: OMIP web site:

79 71 6 The Romanian Spot Market (OPCOM)

80 72 6. The Romanian Spot Market (OPCOM) 6.1 Romanian Electricity Sector Summary During the Romanian power sector was restructured. In 1998 was set-up the first Government Decision no. 365/98 which establishes the unbundling of the vertically integrated power company RENEL into separate companies. National Company Nuclearelectrica Autonomous Regie of Nuclear Activity National Electricity Company (CONEL) and three subsidiaries o S.C Termoelectrica S.A Electricity and heat generation o S.C Hidroelectrica S.A Hydro electricity Generation o S.C Electrica S.A Electricity distribution and supply In 1998 the National Electricity and Heat Authority (ANRE) was created as a public institution responsible for the set up and implementation of a regulatory framework for the electricity sector and market operation. In 2000 the company CONEL was splitted into the following independent fully state-owned companies according to the Government Decision no. 627/2000. S.C. Termoelectrica S.A. S.C. Hidroelectrica S.A. S.C. Electrica S.A. C.N.Transelectrica S.A (System Operator) o S.C. OPCOM S.A (Market Operator) With the creation of the subsidiary OPCOM, the day-ahead market started its operations. New trading rules were developed in 2003 / 04 and a Commercial Code of the Wholesale Electricity Market was adopted in 2004.

81 73 The structure of the wholesale electricity market is divided in two segments, the regulated market and the competitive market. The regulated market is dedicated to the electricity traded under regulated contract basis and the competitive market the electricity is traded through bilateral contracts or on the Spot Market. 6.2 The OPCOM Spot Market In 2000 the Power Market Commercial Operator (OPCOM) was set up to manage the Day-ahead Market (DAM). Evolution of the Spot Market In 2005 some changes were introduced on the day-ahead market. One of the most important changes introduced is the two sided day-ahead voluntary auction (e.g. based on both demand and supply side bids). Before 2005 the Market Operator aggregates the sell offers, elaborates the load forecast and obtain the System Market Price (SMP), now the Market Operator aggregates the sell and buy offers and obtain the Market Clearance Price (MCP) (see figure 19). Price MCP Price Load Forecast SMP Quantity Quantity Figure 19. One and Two side Auction Other innovation is the operation of a Balancing Market, the introduction of a centralized market for Bilateral Contracts and Green Certificates.

82 74 Bilateral Contracts Market This is a centralized market for bilateral trade where electricity is traded based on physical deliverable energy. Opcom acts as the market administrator and its role is to ensure a transparent and nondiscriminatory framework. The trade results are materialized into contracts conclusion, complying entirely with the provisions of the framework contract subject to auctioning process. Green Certificate Market A Green Certificate Market is a parallel market from the Day-Ahead Market in which the Green Certificates 9 are traded. The suppliers are obliged to buy a fix quota, established by the Authority Regulator, of electricity that comes from a renewable source. The Producers receives for each MWh of electricity delivered into the network one Green Certificate, which is sold on the Green Certificates Market. This mechanism promotes the production of electricity from Clean energies because represents an additional income for the renewable producers. 9 A Green Certificate is a document which proves that a specific quantity (MWh) of electricity was produced from a renewable energy source.

83 75 On the following table are presented the main features of the new Trading Platform introduced in Former Trading Platform (Before 2005) Mandatory Day-Ahead Ancillary services were purchased at regulated prices One side auction Centralized scheduling The imbalances were no penalized communications New Trading Platform (From 2005) Voluntary Day-ahead, Balancing Market in real-time Ancillary services are purchased trough market mechanisms Two side auction Self-scheduling The imbalances are penalized Web based technology communications Table 16. OPCOM Market Evolution Conditions for trading The registration and participation on the OPCOM day-ahead market is allowed to any legal person who is licensed by the Regulatory Authority (ANRE) as producer and/or supplier of electricity. The following documentation is required to become a participant: Licence from the Romanian Energy Regulatory Authority for Electricity Producers and Suppliers Registration as Balance Responsible Party with TSO or to transfer the balance responsibility to a BRP that has been registered Letter of intention to OPCOM Sign the day-ahead market Accession Agreement

84 76 Deposit financial collateral and pay an access tariff to participate on the DAM USB Token identification key and installed software Active Card. Today there are 98 participants that operate on the day-ahead market. 6.3 Regulator The Romanian Energy Regulatory Authority (ANRE) is the responsible entity for the creation and implementation of the regulatory system. ANRE issued on 2003 the Commercial Code of the Wholesale Electricity Market for the administration of the Romanian wholesale electricity market, also in 2003 the Electricity Law No. 318 was settled. 6.4 Day Ahead Market (DAM) The objective of the DAM market is to match the sell and the purchase offers together on a transparent and non-discriminatory manner. The Romanian market has two trading zones, one is the National Trading Zone which corresponds to the part of the national power system and the Border Trading Zone which is the neighbouring countries around. The reason of this classification is because the congestion can only occur in the lines connecting Romania with its borders. The participants submit offers for each interval of the day separately for each trading zone. According to the current regulation OPCOM performs the settlement for the day- ahead market, Balancing Market and Balance Responsible Parties Imbalances. Producers and auto-producers, suppliers and network operators are authorized to trade on the Spot Market. Eligible consumers are only allowed to trade via bilateral contracts.

85 77 OPCOM Key Features The trading interval is one hour. Each offer may contain up to 25 Block bids. For each Trading Zone, a DAM participant may submit only one purchase offer and one sale offer for each trading interval. The purchase offers and sale offers cannot be combined into one offer. The price scale has a minimum and maximum price limit. Simple offers. Electronically trading system. All the transactions are in Romanian currency. Day Ahead Market Timetable 1. At 7:00 on the D-1 the starts the opening session for the submission of bids. 2. At 8:00 the TSO submit to the Market Operator the Available Transfer Capacity 3. The deadline for submit the orders is at 11:00 on the D Min after the submission of an offer, the Market Operator will send a confirmation receipt of the offer to the DAM participant. 5. At 12:00, the Marker Operator calculates and publishes the Market Clearing Price (MCP) for each trading interval and submits the trading confirmation to the Participants. 6. The Participant can present their objections to the Market Operator related to the content of the trading confirmation at 12:30.

86 78 7. At 13:30 Opcom establishes and submits Physical Notifications to the Balance Responsible Parties. 8. At 14:00 the Balance Responsible Parties submit the Physical Notification to the TSO 9. At 15:00 the TSO verifies and approves the Physical Notification. After the receipt and the validation of the offers, the Market operator will determine for each trading interval the demand and supply aggregated curves: The aggregated supply curve will be determined by aggregating all the price-quantity pairs of the validated sell offers into a sole curve. The price quantity pairs will be ranked by increasing prices. The aggregated demand curve will be determined by aggregating all price-quantity pairs of the validated buy offers into a sole curve. The price quantity pairs will be ranked by decreasing prices. The intersection point between the demand and supply curves represents the equilibrium where the demand and the supply will be in balance and determines the Market Clearing Price for the National trading Zone. All the relevant information will be communicated to the DAM participants referred to the traded concluded in the Day Ahead Market. Based on trade confirmations corresponding to the trading day, the Market Operator will establish the Physical Notification corresponding to the DAM transactions and will send them to the Balance Responsible Parties designated by the DAM Participants. According to the Commercial Code provisions, by signing the DAM Agreement, starting with the registering moment as DAM participant, the trades concluded in Day Ahead Market are firm commercial commitments. Both the Balance Responsible Parties and the Market Operator have to submit to the TSO the trades concluded, in order to be taken into consideration when calculate the net contractual position of the Balance Responsible Party. In order to connect to the trading system, the DAM participant has to use a unique USB Token identification key,

87 79 together with the client installed software Active Card. The DAM participants can obtain and use the USB Token after signed the DAM Agreement with the Market Operator. In the next graphic is presented the spot prices in the Romanian daily market after the implementation of the new trading platform in 2005 /MWh Price jun-05 jul-05 ago-05 sep-05 oct-05 nov-05 dic-05 Jan-06 feb-06 mar-06 abr-06 mayjun-06 jul-06 ago-06 sep-06 oct-06 nov-06 dic-06 ene-07 feb-07 mar-07 abr-07 mayjun-07 jul-07 ago-07 Source: OPCOM Figure 20. OPCOM Daily market Results The spot price often reflects not only the result of the cost variation of the fuel type, but also the outcome of meeting the demand and supply volumes. 6.5 Balancing Market The Balancing Market is managed by the Balancing Market Operator, established within the Transmission System Operator (Transelectrica). His task is to ensure that the security is maintained by buying and selling energy at the Balancing Market. The Balancing Market is mandatory to licensed producers that operated dispatchable units, qualified producers to provide Ancillary Services and to licensed consumers that operates dispatchable loads (Balancing Market Participants).

88 80 The Balancing Market in Romania is the most particular Balancing Market in Europe. First the bidding for fast, slow and Secondary regulation are tender all together in the daily offer, it exist another tender for the slow tertiary regulation called standing offer. Second the rules require that the participants make only one offer with several price-quantity pairs for the entire capacity of the generation unit, this kind of bids is called multi-block bids. The Balancing Market Participants have the obligation to offer all their production capacities and dispatchable loads available after the daily schedule. The Balance Market Operator, established within Transelectrica, is the entity responsible for the registration, collection and verification of the offers from the Balancing Market Participants. There are three products in this market. Secondary Regulation Fast Tertiary Regulation Slow Tertiary regulation Balancing Market Key Features Daily Offer of maximum 10 pairs price- quantity The settlement is performed by OPCOM Partial or total acceptance of the offers Balancing Market Timetable 1. At 16:30 the TSO checks and approves the Physical Notification. The Balancing Market starts after the approval of the Physical Notifications for the Delivery Day. 2. At 17:00 the TSO publishes: the aggregated schedule for planned production; consumption corresponding Physical Notifications of

89 81 Suppliers and demand forecast performed by TSO, respectively; exports and imports. The Balancing Market Closing Time. 3. The Balancing Market Operator confirms the validation offer to the Balancing Market Participant not later than 18: At 19:00 the BMO transmit the Validated Daily Offer to the settlement Administrator. 5. On the delivery day (D) the selection of offers take place according to the system needs. Each dispatch interval (1 hour) is split into four 15 min intervals which are again divided into three 5 minute balancing intervals. The first 5 minute interval is for the Secondary regulation the next interval for the Fast Tertiary and the third for the Slow Tertiary.

90 References Budulan, P. (2003). Paper accepted for presentation at 2003 IEEE Bologna Power Tech Conference, June 23-26, Bologna, Italy. Electricity Market Development in Romania. Caracasian, L. Overview regarding the Romanian electricity sector regulatory framework development. Romanian Electricity and Heat Regulatory Authority ANRE. Bucharest, Romania. Constantinescu, J. (2003). Romanian Electricity Sector Reform, Market Opening and Challenges. Kennedy, D. (2006). World Bank Framework for Development of a Power Market in South East Europe. Energy and Mining Sector Board Discussion Paper. Paper No. 15, World Bank. Liciu, N. Power sector privatization in Romania. Proceedings of the Power Sector Privatization in Central and Eastern Europe and Eurasia Conference. OPCOM Annual Report 2005, 2006 Web sites: o o o ANRE web site: OPCOM web site: Transelectrica web site: Wolak, F. ( 2000). Report on Electricity Industry Restructuring in Romania. Department of Economics Stanford University.

91 83 7 The French Spot Market (Powernext)

92 84 7. The French Spot Market (Powernext) 7.1 French Electricity Sector Summary The French Law was adopted in 2000 with the aim for achieving the following primary goals: Energy independence and security of supply Protection of the environment Energy at a low cost for households and industries Many people attribute the late start of the liberalization process in France to different and divided opinions of the electricity sector in previous administrations. France adopted only the minimum of the obligations defined by the EU electricity and gas directives which was unable to move on privatization issues, and unbundling of activities in this industry. France is the second largest electricity market in Europe, just behind Germany. The French electricity market is dominated by Electricité de France (EdF), which is mostly publicly owned (87,3%). EdF was the last major state-run electricity monopolist in the EU, while most of France s neighbours have privatized their electricity companies. The delay to partially privatize their legal structure was mainly because this process go along with several complex issues, including pension reform, accounting transparency, and potential large long-term investments in the nuclear power sector. At present France Electricity Law is in compliance with the EU Electricity Directives vision, in addition to the implementation for the full opening of the market to all consumers, non-discriminatory access to the grids has been guaranteed by the independence of EdF from the TSO, pricing has been regulated for the usage of the transmission and distribution grids, an authorization system has been instituted for electricity production sites, and the French Electricity Regulation Commission (CRE) has been created.

93 85 Nowadays France is the second larges electricity market, consumer and generator in the European Union behind Germany. It is considered among the largest exporters, in 2005 exports 11,43 % of the electricity generated. 7.2 The PowerNext Spot Market The establishment of the Power Exchange took place in 2001 with the creation of Powernext Day-Ahead Market, this market offers hourly contracts with physical delivery the day after trading within the French hub. The physical delivery of the traded electricity is the responsibility of the Transmission System Operator. Powernext declares to the TSO on a daily basis the volume traded by its members. In order to facilitate the clearing and settlement transactions, Powernext joint forces with LCH.Clearnet which act as central counterparty for financial commitments. Each member has to have a cash guarantee deposit, this deposit is adjusted on a daily basis, according to the purchase average of the five preceding days. LCH.Clearnet works with the Bank of France for the settlement process. Powernext manages different energetic markets: 1. Powernext Day-Ahead, Continuous and Intraday market: are short term markets that operate every day. 2. Powernext Futures: provides electricity price risk hedging and arbitrage strategy at medium term with a liquid market offering 3 years of maturities. 3. Powernext Carbon: provides a preferred risk management tool for European companies committed to the process of greenhouse gas emissions reduction, and compelled to match their actual CO2 emissions with CO2 allowances according to the European Directive. 4. Powernext Balancing GRTgaz: allow the Transmission System Operator GRTgaz to progressively cover its daily balancing needs through a market based mechanism. The prices of the transactions

94 86 will serve gradually to valorise the daily imbalances of the shippers on the 4 balancing zones managed by GRTgaz. Also provide weather indices in order to provide a tool for risk management. Powernext shareholders 10 are among the major actors of electricity and financial markets around Europe. The detail is presented on the figure below. HGRT 17, 0% NYSE E uronext 34,0% Endesa 5,0% Enel 5,0% Atel 5,0% Total 6,8% BNP Paribas 6, 8% SG 6, 8% Electrabel 6,8% EdF 6,8% Figure 21. Powernext Shareholders Powernext market is ruled by France Financial and Electricity Acts. The Electricity Act regulates the legal capacity of French players as well as their scope of intervention, the Finance Act regulates the matching orders and transaction security. 10 Nyse Euronext: Merger between Power Exchanges. BNP Paribas: Banking Group. EdF, Electrabel, Enel, Endesa: Energy companies TOTAL: Oil Company. SG: Energy tradet. Atel: Service provider. HGRT: Holding TSO.

95 87 Conditions for Trading To become a member of Powernext the new participant must submit a Membership Application that includes the following: Trading Agreement Clearing Agreement Balance Responsibility Contract signed with RTE or and Agreement with a third party s balance perimeter Agreement between the bank and the participant Receipt of the registration to the Ministry in charge of energy Companies complementary documentation At present there are 63 members on the Day-Ahead Auction and 32 on the Dayahead Continuous and Intraday. In order to operate on the Day-Ahead markets, Powernext apply the subsequent tariffs: Option 1 Option 2 Fixed Fees Entrance Fee Annual Fee Variable Fees Execution Fee 0,06 /MWh 0,09 /MWh Registration Fee 0,01 /MWh 0,01 /MWh Clearing Fee 0,01 /MWh 0,01 /MWh Table 17. Powernext Trading Fees

96 Regulators The Autorité des Marchés Financiers (AMF) is the body in charged of the regulation and on the monitoring of both regulated and OTC markets. It supervises the compliance of investment service providers with the proper working rules. Supervise the compliance of the transactions performed on a regulated exchange. The Electricity Regulation Commission (CRE) has two main duties concerned of the access rights to the public electricity transmission and distribution grid and the electricity market regulation. Powernext is obliged to submit information in relation to the Day-Ahead contracts to AMF and CRE in order to detect some irregular market behaviour. 7.4 Day-ahead market Powernext Day-Ahead Auction consists in an organized, anonymous marketplace for trading standard contracts for the physical delivery for the next day of electricity within the French electricity grid. It concentrates market liquidity with hourly products. The price resulting from the auction is considered as a price reference to other electricity markets. The Market is accessible to producers (French and foreign), suppliers, industrial consumers, financial institutions and traders. On July 2007 Powernext launched two segments for trading as a complementary for the daily auction: Powernext Day- Ahead Continuous Powernext Day-Ahead Intraday The interface for this segment consist on a continuous trading system which operates with screens which are available at all times and enables the visualization of the whole market in a worksheet format that can easily be modified by the participant.

97 89 These new segments are open to trading 7 days a week. Day-Ahead Auction The electricity is traded Electricity traded on the trading day D-1 for delivery the following day in 24 hourly intervals. The auction takes place at 11:00, 7 days a week (non-business days included). Two types of bids can be submitted in this market. 1. Simple Bids: Consist in an order form containing up to 256 price/quantity combinations for the 24 one-hourly periods of the following day. 2. Block Bids: Participants have the possibility to submit Block Orders that link a minimum of continuous four hours of the day. Block bids are necessarily price-limited as only a single price (between 0.01 and 3000 ) can be entered per block. Each trading day, the participants are allowed to submit 8 block bids per portfolio and per block type. Only 3 portfolios per participant are allowed to submit block bids. The maximum quantity allowed is fixed at 100 MW per block. By default, the offered block products are: Block Bid Hours 1-4 Hours 5-8 Hours 9-12 Hours Hours Hours Block Bid Baseload 1to24 Peakload 9 to 20 Hours 1-6 Hours 1-8 Hours 9-16 Table 18. Powernext Default Offer Block Products

98 90 Day-Ahead Continuous and Day-Ahead Intraday The trading segment for the Day-Ahead Continuous is open every day from 7:30 to11:30 for trading Blocks deliverable the following day. The standardized blocks are the same blocks presented on table 11. The trading segment for the Day-Ahead Intraday is open every day from 7:30 to 23:00 for trading Individual Hours and Blocks to be delivered on the same day and on the following day. The participant can trade the standardized Blocks, table 11, or on user-defined blocks linking at least 2 consecutive hours. Different types of bids can be submitted on these two markets: 1. Limit Order: Specify a quantity and a limit price. This bids remains on the Order Book 11 until they have been executed or until the trader cancel them. They can be entered during or outside of the trading hours. Limit orders can be executed: a. Fill-or-Kill, orders are executed for the entire quantity only and remain in the Order Book until they are filled. b. Fully-or-Partially, orders can be partially matched with opposite orders for smaller quantities, in which case the unexecuted quantity remains in the order book. c. Iceberg, the participant specify an initial quantity and a hidden quantity with a price set at the beginning, however this price can be changed by the participant as the trading proceeds. 2. Market-to-Limit Order: Are intended to be executed immediately against the best opposite order or a fraction of it. This kind of bid triggers a trade for the specified quantity as soon as it is entered. Only can be entered during the trading session. 11 Order Book is a consolidation of Orders placed in the trading system.

99 91 3. Must-be-filled Orders: These kinds of orders do not specify a limit price. Volumes for such orders must be smaller than o equal to the total volume of opposite orders. It triggers a trade for the full specified quantity as soon as it is entered, where necessary by matching it against more than one opposite orders. The Fill-or-Kill condition is taken into account. Orders can be entered only during the trading session Submitted orders do not mention any validity date and remain in the Order Book until they are executed, withheld or cancelled. Day-Ahead Auction Timetable 1. Market Participants can enter, modify or cancel orders in the system during the pre-auction period, which begins of Wednesday of the previous week at 17:00 and ends at 11:00 on the trading day (D-1). 2. After receiving all the bids, the orders are aggregated per hour. The algorithm determines the Market Clearing Price (MCP) and the Market Clearing Volume (MCV). At approximately 11:15 the results are informed to the participants. 3. After the auction results are validated at 11:30, Powernext nominates to the TSO the net hourly volume traded by each participant. (see figure 22). W-1 Wednesday 17:00 11:00 Deadline to submitt the bids 11: 15 11: 30 Nomination to the TSO Pre-Auction Period D-1 Begin the submittion of offers Publication of the results Figure 22. Powernext Day-Ahead timetable

100 92 Daily market price analysis On the figure below is presented the evolution of volumes and prices since the beginning of Powernext and the table shows the figures that supports the graphic. GWh Energy Price /MWh 60,00 50, , , , , ,00 Figure 23. Powernext Day-Ahead Market Price/Volume History Average Year Price Euro MWh Energy GWh , , , , , , , Source: Powernext Table 19. Powernext Day-Ahead prices and volumes The spot prices vary depending on the season. On Powernext the record was set up on December 19th 2001 when in H19 the price was

101 93 traded at MW/h. The lowest record price was on June 2nd 2002, the average price dropped to 6,631 MW/h. The year 2003 was the hottest and dry year since On average, 2006 was much warmer than usual, ranking as the second-hottest year since 1950 (after 2003). In terms of precipitation, the overall situation improved following the large shortfall recorded in recent years. The winter period was cooler that the ten-year average. March recorded heavy precipitation. After spring, France experienced another heat wave in July as temperatures soared in the last three weeks of the month. On Powernext Day-Ahead, prices correctly followed changing weather conditions. Price volatility 12, shown on figure 24, on Powernext is high, since the market opened volatility on baseload prices has been running at nearly 900%, at it is shown on figure 24. MWh 90,00 80,00 Historic Volatility around 900 % 70,00 60,00 50,00 40,00 30,00 20,00 10,00 0,00 nov-01 jul-02 feb-03 ago-03 mar-04 sep-04 abr-05 nov-05 may-06 nov-06 jun-07 Figure 24. Powernext Historically Price Volatility 12 Historically Volatility reflects the price fluctuation. It is measured by the annualised Standard Deviation of the daily changes in the prices.

102 Balancing Mechanism (System Operator) France does not have any Reserve Market. The Balancing Market is only used to trade Tertiary reserve. Primary and Secondary control are offered with the generation schedules. In France does not exist the term Slow and Fast Tertiary, instead they used this terminology: Supplemental Fast Reserve Decremental Reserve Reserve at Peak Delayed Reserve In 2003 the Balancing Mechanism was introduced by Réseau de Transport de Electricité (RTE), French TSO, the role of this system is to re-establish the balance between supply and demand. The power network is constantly affected by a range of unforeseen factors that can disrupt the balance between the supply and demand for electricity. These are mainly compensated for by automatic control systems, which are installed directly at generating facilities. However, some such unforeseen factors can be major (e.g. the sudden shutting down of a generating facility). It obtains this reserve by calling upon generators and consumers connected to the network to modify their operating schedule at short notice. The TSO obtains the reserve by calling the market participants to submit offers for upward and downward. RTE selects these offers according to their price and the technical restrictions indicated by the players concerned. It works according to market rules, and helps to guarantee the security of the power system.

103 Trilateral Market Coupling In November 2006 the Power Exchanges of France, Belgium and the Netherlands decided to couple in a decentralized manner their Day-ahead Market through their national Power Exchanges in collaboration with the Transmission System Operators. This coupling is called Market Coupling and consists in a simultaneous allocation of energy and interconnection capacity. On table 20 is presented the countries with their respective Power Exchanges and system operators. Country Power Exchange TSO France Powernext RTE Belgium Belpex Elia Netherlands APX Tennet Table 20. Participants involved in the TLC Market Coupling is an implicit auction where the trading of electricity and the allocation of capacity are merged into a single operation optimizing cross-border trade and stimulating liquidity in the involved markets. The three Power Exchanges continue to exist as separate markets with their own trading platform, contracts and clearing, minimal changes where made to their local market arrangements to meet the demands for the Trilateral Market Coupling 13. The Order Book of the coupled markets is pooled, so the market offering the lowest price can export electricity to the market where the price is highest. If the cross-border transmission capacity is sufficient the prices in the markets converge, if not the prices are different. Trilateral market coupling has already had a clear positive impact. There has been strong price convergence across the three coupled day-ahead markets, with a single 13 Market coupling between three countries.

104 96 price the large majority of the time (and separation in to 3 price areas being very occasional). The trend seems to be that convergence is increasing.

105 References CRE Annual report Finon, D. (2001). The Destabilisation of the French Electricity Supply Industry Nascent competition in an open environment. Institut D économie et de Politique de l énergie, France. Finon, D. (2001). Introducing Competition in the French Electricity Supply Industry: The Destabilisation of a Public Hierarchy in an Open Institutional Environment. Massachusetts Institute of Technology Center for Energy and Environmental Policy Research. CMI Working Paper 21. Finon, D. (2001). Reforms in the French power system: from weak contestability to effective competition?, Energy Policy, n.29. Powernext Annual report Web sites: o o o o o APX web site : Belpex web site: CRE web site: EdF web site Powernext web site:

106 98 8 Key features of the Electricity Spot Markets

107 99 8. Key Features of the Electricity Spot Markets The introduction of competition in the wholesale and retail electricity markets has been a key element for the development of new trading platforms such as the Spot Markets. A number of questions come up when designing a Spot Market and that have to be properly addressed in order to achieve a successful trading mechanism; for example the type of bids (simple and complex), the auction process (one side, two side), determination of the clearing price (Marginal Price, Pay-as-bid), single market or separate markets for Balancing Energy, etc. The Spot Markets where created to achieve several objectives, one of the most important goal is to facilitate the trade and promote competition among the participants creating the necessary liquidity that create confidence among the participants. Conceived as a neural and independent place, the Spot Market must guarantee a risk free counterpart and an effective electricity trade. In order to promote the participation (when not mandatory) it is essential that the members find the exchange useful, convenient and reliable (the payment and the delivery). Market surveillance is an important task for the well functioning of the market and to prevent the abuse of dominant position. The monitoring activities are performed in some countries by a specialised surveillance department within the company or it is carry out by the regulatory authority. Nowadays the European wholesale market is mainly based on bilateral trading and on voluntary Spot Markets. Voluntary Spot Markets had increased volumes but in many markets the volume still remains limited. Some countries of the European Union have established or have under development a Power Exchange type market. It is relevant to notice that compared with national consumption, the trading volumes on the European Power Exchanges are still in some degree low, with some exceptions. Despite the development of this market, most of the wholesale electricity trade still takes place through direct OTC Markets or through intermediaries.

108 100 Organized and OTC (bilateral trading) markets are totally complementary. Both are vital for traders seeking to balance their portfolios of the day-ahead commitments. International experience shows that a reliable Spot price is used by the financial markets (futures and forwards) as a reference. In some countries the Power Exchanges also handles bottlenecks in the grid and allocate the transmission capacity in a market base way. The system makes sure that the power flows the right way on the congestion, toward the high price area or zone. Furthermore the system secure that for every hour of operation, all the capacity is utilized. Electricity prices are influenced by a variety of factors: primary energy prices (oil, gas and coal), weather and hydrological conditions, import and export possibilities and the new tradable CO 2 certificates. The latter, in particular, have caused electricity prices on the European energy exchanges to sky-rocket in some periods during year At the beginning of 2005, the trading price was 6 per ton of CO 2, and around the middle of the year it reached a peak of 30. Figure 25 shows the annual average evolution of Spot prices in the four Markets studied. Depending on the country or region, electricity prices could differ significantly or converge according to binding elements previously mentioned. MW/h 60,00 50,00 40,00 30,00 20,00 10,00 Powernext Opcom Omel Nord Pool 0, Figure 25. Comparison graphic of the prices in different Spot Markets

109 101 During 2001 the prices in Powernext where higher than in other markets, because of a cold weather that hits Europe especially in France and Germany. OMEL and Nord Pool maintain a similar pattern during , but in 2003 the prices in the Nord Pool suffer an increase due to a dry year, since the Scandinavian countries are very dependable on water, a lack of rain means that hydroelectric generation is replaced by others sources available sometimes more expensive. The average base load prices on the French Market for the period were 23,21 MWh the prices varies sharply depending on the season. The price fall in June of 2002 when the price in the Spot Market dropped to MWh 6.63, the lowest level since the exchanged open prices practically converge in the three markets. In Powernext the prices all around the year were less volatile, price peaks were less frequent and lower than in 2003, this was due to the climatic conditions were closer to normal with a mild winter and a summer far from the heat wave temperatures registered the previous year. In 2005 a climate of heavy tension on the price of energy commodities, main fuels of electricity production in Europe, mostly because of the political context in the Middle East, but also because of the bad weather conditions over the gulf of Mexico and the increasing concerns over the availability of fossil energy in a context of sustained demand and global warming. In Spain a severe drought happened in 2005.The hydrological situation was critical that year, and more electricity had to be produced by coal, gas, and oil power plants. Additionally, demand rose to over 10% during the summer months due to the heat and the growing economy. As a result the Spot and futures prices increased. Regarding the Romania Spot Market, It seems that the monthly volume traded on spot in 2005 was higher than 5% from the internal consumption, meaning acceptable market liquidity, taking into account that starting with 1st July 2005 this market has become voluntary. There is a direct influence of the weather conditions on the evolution of spot price. The presence of the Spot Markets has contributed significantly to the high level of trade activity and will probably prove to be an important element in the emerging competitive national and in a further stage a regional market.

110 102 9 Final Reflexions

111 Final Reflexions The point of the thesis is to stress out the importance and benefits that a centralized power exchange can hold, even though there is no reason why only this model should prevail for electricity trading. It seems that both structures the decentralized and centralized are not mutually exclusive but complementary. Well chosen market design could improve market efficiency in areas where decentralized bilateral trading practices prevail. Empirical evidence supports the premise that changing the market organization from bilateral to power exchanged market based can carry much more advantages, but this statement has to be sustained considering the regulation framework on each market. The same market design could work on one market and fail in other; this is because there are some differences between each country regulation, the wholesale structure, level of unbundling and opening, etc. For instance, the four markets studied on this work, present disparities in traded volumes, success, liquidity and others although the basis of the Power Exchanges (type of bids, price setting, payments, etc) are more less the same. At its beginnings the Spanish Power Exchange was a voluntary market in practice but bilateral trade was discouraged due to the lack of capacity payment, this is one of the reasons for the elevated market shared and liquidity that prevails on this market. In France Powernext still plays a modest role, one of reasons is because the electric power sector is based mainly on nuclear power, which accounted approximately 78% of production, the nuclear production is traded on a bilateral basis. The market structure is characterized by a small number of participants the dominant position held by EDF in the power market remains an obstacle to liquidity. As the regard of market concentration and vertical integration, auctioning Virtual Power Plants (VPP) was implemented in 2001 as tool to provide liquidity in the market which consists on an option that represents the cost

112 104 structure of a power plant, the process is performed via auction and the product is available capacity. The long established trading market Nord Pool accounts a confident market and have increased liquidity every time a new country had join the market, one peculiarity of this market is that implicitly with the bids it is managed the transmission capacity trough zonal prices calculated by Nord Pool. Over the last years Romania electricity sector is joining the EU, the architecture of Romania s electricity sector is largely in line with EU requirements and the liberalization electricity market has been a remarkable success so far and is the only country in the region that have a day-ahead market. The transaction volumes on exchanges in Europe therefore remain very limited, except for Nord Pool and Spain. Most of the exchanges continue to be on the Over-thecounter market. The Directives utter the main principles to develop market competition but leaves each country with the freedom to decide how to organize their market. If one of the motivations to promote competition is the creation of a single market, some general trading guidelines are essential for the success of the market liberalization. In bilateral trading markets, participants information are difficult to monitor and examine, making the relative efficiency of decentralized versus organized markets difficult to establish outside the field. The organized market created price transparency that did not exist with decentralized, bilateral trading. I find that these changes enabled the organized market to direct production to the most efficient available resources, realizing greater gains from trade than occurred under the bilateral trading system. Industry participants in regions where bilateral trading prevails commonly argue that the cost of adopting an organized market would exceed the benefit of it, but an organized market design might reduce inefficiencies that exist in an unstructured decentralized market, allowing participants to realize gains from trade that would not otherwise be achieved. However, organized markets are costly to design and implement, but once the market matures the gains participating on it are worth it

113 105 because it improves the efficiency of trade. The value of shifting the site of trade out of a decentralized bilateral system and into an organized market is ultimately an empirical matter. Buyers and sellers on the Power Exchanges can interconnect to a large number of other participants elsewhere and this brings an increase in production by low-cost sellers that joined the organized market, displacing higher-cost production. This possibility relates to our understanding of how the organized market improved efficiency. The organized market is a more efficient place than decentralized bilateral trade, resulting in increased production by low-cost firms that joined the organized market. However as we noted above there are costs to implement a system of market organization, but these costs can be compared to the efficiency gains reported above, providing a better assessment of the net benefits of expanding the organized market design, and in some markets this cost represent one-time expense. For suppliers that are not marginal the Power Exchanges represents an attractive way for selling the energy because the clearing price is set on a marginal basis, this means that all the suppliers are paid the same price, the marginal price. We can say that some drawbacks for the bilateral trade may imply some discrimination if some consumers have no access to contracts, the price is less transparent and it is more difficult to supervise oligopolistic behaviour. Of course this market model presents some advantages as well, for both parties the flexibility is wider and the customers have the right to choose its supplier. Certainly the case for working on an organized market is strongest when there is vigorous competition and really good optimization. The case for OTC is strongest when tight coordination in forward markets is less important than good scheduling decisions by each participant. Power Exchanges allows competition by providing prices for each single hour reflecting the dynamic aspects of competition, in contrast to purely bilateral trading the organized markets facilitate the work of monitoring by aggregating a large amount of information about participant behaviour and providing details data on the evolution of supply and demand.

114 106 Power Exchanges and bilateral trading can operate together; the evidence is the existing structure in wholesale markets in Europe. The reason to support the organized Power Exchanges is because it represents one of the keystones for the creation of an internal electricity market across Europe, even though the Directives do not establish any guidelines for this matter Power Exchanges have been develop at national level, the problem is that in presence of different designs will be more difficult to integrate the markets into a single one. The role of Power Exchanges towards to achieve an European market is essential, some regional markets have emerged and have confirmed their success (Nord Pool, Mibel and trilateral market between France, Belgium and Netherlands). Advantages of the organized markets In addition to providing a centralized place where all trades are conducted, exchanges such as these also play the key role of acting as the counterparty to all trades. The fact that the exchange acts as a support on the traders back for financial reasons is one of their key advantages as this removes counterparty risk, or the chance that the person who you are trading with will default on their obligations relating to the trade. There are some advantages for the traders as all trades flow through one central place, the price in a certain hour is always the same regardless of the size or sophistication of the traders. This in theory should create a more level playing field which can be an advantage to the smaller and less sophisticated trader. Finally, because all participants that makes offers in the Power Exchanges must be members and register with the exchange, there is greater regulatory oversight which can make exchange traded markets a much safer place for participants to trade. The downside that is often mentioned about exchange markets is the cost. As the participants who trade on the exchange must meet regulatory requirements to do so, this makes it more costly for them to offer power products, a cost that is inevitably passed along to the end user. Though all the above mentioned elements are significant for market creation, a liquid, efficient and complete marketplace is the key element for market growth. A

115 107 liquid market ensures single price for the power sold at the same time and the same place. Advantages of the OTC markets Over-The-Counter means that there is no centralized place where trades meet, instead the market is made up of all the participants in the market trading among themselves. The biggest advantage of the OTC markets is that because there is no centralized exchange and little regulation, you have heavy competition between different providers to attract the most traders and trading volume to their firm. As there is no centralized exchange the parties can make whatever price they want, and the features of execution varies from contract to contract even though the same product is been traded. While the lack of regulation can be seen as an advantage in the above sense it can also be seen as a disadvantage, as the low barriers to entry and lack of heavy oversight also make it easier to operate in a dishonest or fraudulent way. Lastly, as there is no centralized exchange parties are exposed to default form the counterpart.

116 Definitions and Acronyms

117 Definitions and Acronyms Area Prices Whenever there are grid congestions, the area is divided into two or more price areas, each of these prices are referred to as area prices Balance Responsible Party Licensed Party registered by the Transmission System Operator as Balance Responsible Party a Balance Responsible Party may also assume balancing responsibility for other Licensed Parties Block Bid Aggregated bid for several hours with a fixed price and volume BOM Balancing Market Operator CER Certified Emissions Reduction CfD Contract for Differences CHP Combined Heat Power Clearing Price The resultant price when matching the supply and demand curves DAM Day Ahead Market Day D Delivery day Day D-1 The day before the delivery. Trading Day Deregulation The process by which governments remove, reduce, or simplify restrictions on activities and individuals with the goal of encouraging the efficient operation of markets. EDIEL or EIWeb Elspot electronically trading system

118 110 EUAs Governance Governance refers to how decisions are made and implemented within an organization Historic Volatility Reflects the price fluctuation. It is measured by the annualised Standard Deviation of the daily changes in the prices. MA Market Agents Marginal Price Price of the last accepted block of a sell offer that is necessary to meet the demand that has been cleared. MCV Market Clearing Volume Merit Order The way offers (sale & purchase) are arranged on a list Fill-or-Kill Orders for which the participant wants to buy or sell only exactly requested amount MIBEL Iberian Market MO Market Operator MPC Market Clearing Price NORD POOL Scandinavian Market Operator OMEL Spanish Market Operator OECD Organization for economic co-operation and development

119 111 OPCOM Romanian Market Operator OTC Over the Counter Physical Notification A document that establishes the operation schedule for the net production, exchanges and consumption of electricity in the network. POWERNEXT French Market Operator Production Unit Thermal generating set, pumping station, hydro-electric power station wind generators, which unload their electricity for the same node of the network. Purchased Unit Group of network connection nodes through which the buyer presents bids to purchase electricity. Red Eléctica (REE) Spanish Transmission System Operator Réseau de Transport French Transmission System Operator d`électricité (RTE) Self Producers Individual or legally entities that produce electricity fundamentally for their own use SO System Operator Special Regime Self producers and electric power producers that their source of energy is renewable Statnett Norwegian Transmission System Operator Svenska Swedish Transmission System Operator

120 112 System Price Unconstrained market clearing price Transelectrica Romanian Transmission System Operator TSO Transmission System Operator Validated Daily Offer Offer validated by the Market Operator or by the Balancing Market Operator. EU European Union KONTEK Name of the Elspot bidding area encompassing the Vattenfall Europe Transmission Control Area in Germany. VPP Virtual Power Plant

121 Bibliography

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