Study on the Development of Best practice Recommendations for Imbalance Settlement. Electricity

Transcription

1 Study on the Development of Best practice Recommendations for Imbalance Settlement Electricity LDK Consultants Engineers and Planners S.A January This report was financed by the Energy Community.

2 Prepared for the Energy Community Secretariat Am Hof 4, 5 th floor A-1010 Vienna, Austria FINAL REPORT Study on Development of Best Practice Recommendations for Imbalance Settlement Submitted by LDK Consultants Off 21, Thivaidos str., GR Kifissia, Greece Tel.: / Fax: [email protected] / http: January 2013

3 Table of Contents List of Figures... 3 List of Tables Background to the Project Executive Summary Balancing Energy and Ancillary Services Terminology Balancing Energy Balancing Market Balancing Mechanism Recommendations Measuring of Ancillary Services and Balancing Energy Recommendations Pricing of Ancillary Services in a non-market based environment and Costs of Balancing Ancillary Services for Reserve Balancing Mechanisms or Balancing Markets Other Aspects RES Demand Side Cross Border Load Disconnection Implicit Balancing Combining the costs of Balancing Tools Recommendations Regulatory monitoring of Ancillary Services and balancing Recommendations Appropriate allocation of balancing costs Gross Model Net Model Imbalance Volume or Volumes LDK Consultants 2

4 7.4 The Imbalance Price Recommendations Monitoring of imbalance settlements Recommendations Imbalance and other financial clearings Complexity Risk Cashflow Recommendations Regulatory treatment of imbalance settlement surplus Recommendations Feasibility of implementing Regional Balancing Mechanisms and treatment of cross-border balancing energy Cross border capacity reservation Scope and Use of the TRM Contracted Reserves exchange Balancing Energy exchange Recommendations Improving cross border infrastructure for balancing Recommendations Conclusions Abbreviations Table Appendix A: List of Source Documents Appendix B: Organogram Appendix C: Balancing Definitions Appendix D: Questionnaire submitted to NRAs Appendix D: Responses Received List of Figures Figure 1: Relationship between Balancing Energy and Reserve (adapted from ENTSO-E) 8 Figure 2: Role of TSO in Balancing 10 LDK Consultants 3

5 Figure 3: Flow chart of FGB options 24 Figure 4: AS Procurement in ENTSO-E 25 Figure 5: Gross Model for Settlement 33 Figure 6: Net Model for Settlement 34 Figure 7: Relationship between Settlement Timescales and Credit Cover 40 List of Tables Table 1: Definition of Balancing Energy in the Energy Community 9 Table 2: Definition of Reserve categories (ENTSO- E Operational Handbook) 13 Table 3: Procurement of Reserve in Regional Markets 14 Table 4: Procurement of Reserve in Germany and Austria 15 Table 5: Reserves and Balancing Energy Exchange Mechanisms in Europe 52 Table 6: Use of Congestion Income 2008, ERGEG 55 LDK Consultants 4

6 1. Background to the Project The ECRB Assessment Report on Electricity Balancing Models 1 showed that balancing and reserve markets in the 8th Region 2 are still under development. Usually the incumbent company is responsible for ancillary services and balancing procurement. According to the Report, in most cases, imbalance settlement also lacks efficiency thus providing the wrong signals to balance responsible parties and balance energy providers. In light of this obstacle, the present project aims to identify best practice recommendations for the development of imbalance settlement mechanisms that will help Energy Community Contracting Parties to address existing inefficiencies in their markets and move towards regional integration. In doing so, the best practice recommendations to be developed should also take into account where the Energy Community stands with respect to the 3rd Energy Package implementation. With the decision by the Ministerial Council of the Energy Community Treaty on 6 October 2011 to adopt the 3rd Energy Package by 1 January 2015 the latest 3, the Energy Community Treaty Contracting Parties have effectively agreed to implement the energy market policy development framework established under the package. In the context of the 3 rd package, the Framework Guidelines developed by ACER and, based on those, the Network Codes developed by ENTSO-E are of key relevance for market design. Once finally legally binding, the Network Codes will set out the basis on which individual country codes, such as Grid Codes and Market Rules, should be drafted and/or updated. The Energy Community Ministerial Council acknowledged the importance of implementing the EU Network Codes also in the Energy Community 4. In the light of this, the content of the Framework Guidelines and Network Codes 5, where they exist, has heavily influenced the recommendations of the present study. In addition, on a matter of timing, further Framework Guidelines and Network Codes are due for publication. The contents of those documents may well supersede the recommendations made in this document unless Energy Community Contracting Parties actively engage with the drafting process and use the recommendations made here to inform their responses to the consultation exercises that are to come. 1 Electricity Balancing Models in the Energy Community - An Assessment Report, ECRB, March The 8th Region was established following a decision by the Ministerial Council of the Energy Community on 27 June 2008 with a view to implement a common procedure for electricity congestion management and transmission capacity allocation on regional level. The 8th Region groups together the Energy Community ( Contracting Parties (Albania, Bosnia & Herzegovina, Croatia, former Yugoslav Republic of Macedonia, Moldova, Montenegro, Serbia, UNMIK and Ukraine) and the neighbouring EU Member States Bulgaria, Greece, Italy (limited to its interconnections with Contracting Parties), Hungary, Romania and Slovenia. 3 D/2011/02/MC-EnC, 4 Article 27 and Article 28 D/2011/02/MC-EnC. 5 Appendix B demonstrates the interaction of the Framework Guidelines and the Network Codes and gives an indication of the level that each of these documents has reached to date. LDK Consultants 5

7 2. Executive Summary The Contracting Parties of the Energy Community face inefficient balancing markets and typically have only one provider of ancillary services within their countries. The present study aims at providing best practice solutions in imbalance settlement mechanisms. Necessarily, the present study thereby goes beyond the technical elements of system balancing but also puts focus on commercial balancing. There is considerable current activity on the subject of Balancing Market design, in particular by ACER and ENTSO-E, implementing the 3 rd Energy Package. The study was able to call on this, already extensive, body of literature to develop recommendations on the: Definitions of common terminology for ancillary services, balancing energy and related terms; Measurement of ancillary services and balancing energy; Pricing of ancillary services in a non-market environment and treatment of the costs of balancing; Appropriate allocation of balancing costs from both pre-contracted and un-contracted reserves as well as the use of implicit balancing; Settlement of energy imbalance and other financial clearings; Regulatory treatment of imbalance settlement surpluses and deficits; Regulatory monitoring of ancillary services and balancing; Monitoring of imbalance settlements; Feasibility of implementing regional balancing mechanisms; Improving cross border infrastructure for balancing; and the Treatment of cross border balancing energy. Investigations into the functioning of Contracting Parties markets in these areas as part of this study show that commercial approaches to many of these issues are yet to develop. Where these areas are beginning to develop, there is still significant variation in the approaches taken by Contracting Parties on to these issues, as the work of ECRB EWG has already shown. Each section of the report concludes with recommendations to be adopted by the Contracting Parties of the Energy Community which, when taken together, should further the development of a regional market for both wholesale energy and balancing services. Clearly, the ECRB still has a crucial role in monitoring and facilitating initiatives that promote the implementation of these recommendations and the development of harmonised market designs. 3. Balancing Energy and Ancillary Services Terminology Balancing energy is distinguished from reserves based on the following principles: Ahead of real time (i.e. before the gate closure time of the last market in which participants can trade energy), the TSOs secure access to power generation capacity for control purposes in their respective control areas. In its position paper on cross border balancing 6 ENTSO- E refers to this power generation capacity (in MW) as reserves. 6 Position Paper on Cross-Border Balancing, ENTSO-E, July LDK Consultants 6

8 The most common means of securing access to these reserves in the 8th Region is through Ancillary Service for Reserve contracts 7. Close to and in real time, energy is activated either from pre-contracted reserves or other available resources in order to maintain the balance between demand and supply within each TSO s control area. This delivered energy (in MWh) is referred to as Balancing Energy. During the course of our work, ACER consulted on a draft version of its Framework Guidelines on Electricity Balancing (FGB) and published a final version. Although there is expected to be only one Network Code based directly on the FGB, a number of other Network Codes are also relevant to this work, particularly those relating to the use of Reserves and to cross border capacity. In addition, the Framework Guidelines on System Operation have provided a significant input as the balancing model being pursued in Europe places the physical balancing role on the TSO. Based on the definitions contained in the FGB, Network Codes and a variety of other documents, we have produced a set of definitions presented in Appendix C of this report covering the activity of balancing and imbalance settlement. The results of the Ad-hoc team Operational Reserves (AhT OR) of ENTSO-E which is responsible for working out recommendations on the common pan-european approach regarding transparent and unified determination and sizing of operational reserves 8 was an additional resource. Finally, where a definition was not available, we have suggested one based on our experience. The FGB provide more detail on the classifications of reserve and these definitions have been included in the balancing terminology that forms Appendix C of this report. Over the next paragraphs we highlight and analyse the definitions of three particular terms; namely Balancing Energy, Balancing Market and Balancing Mechanism. Our work also addresses the definition issues related to cross border capacity reservation for balancing seeking to clarify the procedures currently utilised and propose common terms, taking also in to consideration the provisions of the 3 rd Energy Package (see Section 11). 3.1 Balancing Energy Energy (MWh) activated by TSOs to maintain the balance between injections and withdrawals (including losses). It refers to both automatically-activated and manually-activated balancing resources. The FGB clearly understand balancing energy as the energy that the TSO activates to restore the system to balance. Whilst in some cases the total volume of energy that the TSO activates will be numerically equal to the total energy imbalances of participants, this will not always be the case. 7 We note however, that market based mechanisms closer to or in to real time have been developed in other jurisdictions as a means of accessing reserves without creating market distortions. 8 The work of this ad hoc team is expected to provide input to the Network Code on Load-Frequency Control and Reserves to be prepared by ENTSO-E addressing the sizing, location and application of active power reserves, which can be offered from generation, storage or load, to ensure the proper demand- production balance and to maintain the nominal frequency of the network. LDK Consultants 7

9 Figure 1: Relationship between Balancing Energy and Reserve (adapted from ENTSO-E) Noting, in addition, that the FGB call for the real time pricing of implicit energy exchanges, it could be argued that the ENTSO-E Compensation Program 9 volumes used to repay the unintentional deviation of a system is also balancing energy, albeit deferred by up to a week. By not utilising reserve or activating other domestic sources of balancing energy, the TSO has implicitly activated balancing energy from its neighbours. The lack of a common definition of Balancing Energy in the Energy Community Contracting Parties has also been raised at the Electricity Working Group (EWG) meeting of the Energy Community Regulatory Board (ECRB) on 14 September 2011 and highlighted in the ECRB balancing assessment report 10 The lack of harmonisation on such a crucial term is a cause of concern. More importantly, with the publication of the final version of the FGB, there is a clear contradiction now between the definition of balancing energy envisaged in the European Model and that adopted in at least 5 Contracting Parties. It should be noted that this problem is not unique to the 8 th Region and is faced by a number of other European states as well for example Austria. 9 A mechanism used by ENTSO-E members to return energy received as unintentional deviations to neighbouring countries. Volumes of unintentional deviations are aggregated over a week by the Area Coordinator and then returned in a program of planned interconnector flows during similar periods in the following week. 10 Electricity Balancing Models in the Energy Community - An Assessment Report, ECRB, March 2012 LDK Consultants 8

10 AL Bosnia and Herzegovina HR FYR of Macedonia MD MN SRB KOSOVO* UA Energy bought or sold by the TSO to balance the whole system Imbalances of Individual Market Participants Activation of reserve is treated as Balancing Energy x x x x x x x - x 1y x x - 2y x x x x 3y x x x x x x Table 1: Definition of Balancing Energy in the Energy Community 11 The disparity of regional definitions of the term balancing energy also highlights a philosophical difference between the understanding of balancing under the European model and the one in the 8 th Region. While the European model understands the balancing role of the TSO in balancing the aggregated system, the understanding in the Energy Community often sees the TSO acting more as an agent of individual Balancing Responsible Parties (BRPs) who are balancing their own individual positions. Typically these BRPs are the incumbent electricity companies that predate the liberalisation process. These two approaches are shown diagrammatically in Figure 2: Role of TSO in Balancing. The TSO determines the net system position and optimises the use of its balancing tools i.e. contracted and uncontracted reserves, to activate a volume of energy to restore the aggregate system to balance. The TSO is unlikely to be aware, in real time, of the individual imbalance positions of the BRPs operating on its system as it will not have access to the contract positions of individual participants. As a result, except for the simplest systems, there is not a one to one relationship between TSO actions and the imbalance positions of individual BRPs. 11 Adapted from Assessment Report on Electricity Balancing Models in the Energy Community, ECRB, March 2012 * This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo declaration of independence LDK Consultants 9

11 3.2 Balancing Market Figure 2: Role of TSO in Balancing That part of the overall electricity market that provides Balancing Services. A Balancing Market consists generally of two important parts: Balancing Services procurement defines features of procurement processes, e.g. the way of bidding, constraints/requirements on the Balancing Market participants, way of payment to the bidders, constraints on the TSOs, who makes the merit order and how it is constructed, etc. Imbalance Settlement scheme allows costs borne by a TSO to be passed on to Balance Responsible Parties. The term balancing market was previously defined by ERGEG to cover all processes utilised by the TSO in procuring Balancing Energy or reserving capacity (from which Balancing Energy could be activated) and the energy imbalance settlement process. There are a number of problems with this seemingly simple definition: Firstly, imbalance settlement does not balance the system; it is simply an ex-post mechanism for defraying the costs of balancing and at the same time incentivising good contracting and short term planning behaviour on the part of Balance Responsible Parties. Secondly, it perpetuates the confusion between Balancing Energy and Energy Imbalance. Arguably therefore, imbalance settlement should be taken out of the LDK Consultants 10

12 definition of Balancing Market and seen simply as part of the wider trading arrangements rather than specifically part of the Balancing Market. This seems to be also the approach taken by ACER even though they do not provide an explicit definition for Balancing Market. 3.3 Balancing Mechanism A transparent market-based mechanism for the supply and purchase of electricity, needed in the framework of balancing requirements. There may be a number of different processes pursued by the TSO in order to ensure that he has sufficient resources to call upon to deliver Balancing Energy in real time. Under the European Model, chief amongst these will be a process in which BSPs without Ancillary Service Contracts for Reserve will bid to provide Balancing Energy in a short term process. In some national trading arrangements, this bidding process is explicitly termed a Balancing Mechanism. The distinction between a Balancing Mechanism and a Market is made because only the TSO can initiate a transaction in a Balancing Mechanism the process is essentially one sided and therefore not sufficiently like a true market. But if we were to enable bidders in the Balancing Mechanism to trade with each other as well as the TSO e.g. under the WMO model proposed for SEE or the On the Day Commodity Market (OCM) in the UK gas market, arguably this would constitute a Balancing Market under the ERGEG definition. This would mean that the Balancing Market could have a Balancing Market within it, which makes a nonsense of the definition. The final version of the FGB has also included the requirement that those BSPs that have successfully concluded Ancillary Service Contracts to provide reserve capacity (in particular manual Frequency Restoration Reserve (FRR) and Replacement Reserve (RR)) should bid the energy deliverable from that capacity into the Balancing Market, although by this we believe they mean the Balancing Mechanism rather than a system that manages pre-contracted reserves alone. 3.4 Recommendations Summarizing the above, best practice recommendations on balancing energy and ancillary services terminology include: Adopt common definitions as proposed in Appendix C Keep ACER and ENTSO-E developments under review for additional and changing definitions as Framework Guidelines and Network Codes evolve. 4. Measuring of Ancillary Services and Balancing Energy The FGB have made it clear that in order to promote liquidity in regional markets for Balancing Services, and hence reduce costs to end consumers, that they expect the Network Codes to define standardised Balancing Services products that take account of available balancing resources and that in particular reflect the technical capabilities of demand and LDK Consultants 11

13 renewable generation 12. In addition, this standardisation of Balancing Services enhances chances for Reserve and Balancing Energy exchange or sharing and can be seen as one step towards developing regional balancing arrangements (see Section 11). Best practice recommendations on this topic need to aim at achieving a common understanding among parties regarding product types, timescale definitions etc. in order to abolish barriers to the flow of Balancing Energy and the utilization of reserves across different control areas. Characteristics of balancing services, e.g. the minimum time for which the called product must be on-line, activation time, time to full activation and minimum offer size have to be at least compatible to enable participation of loads and generators from other control areas and to increase exchangeability or sharing. There is also a strong interaction with the regional Balancing Market and cross border transmission capacity topics developed in Section 11. As the ENTSO-E review of the contractual aspects of Ancillary Services in Europe 13 showed, Ancillary Service contracting arrangements display a bewildering variety of options regarding contracting arrangements, timescales, pricing, BSPs, funding arrangements etc. Unsurprisingly, there is also little consensus regarding the basic definitions of the services being procured and, as such, no common model for standardised products has yet emerged. The definitions of FCR, FRR and RR should allow us to differentiate on the basis of time to full activation and the duration of the service. However, in practice, the FGB and ENTSO-E definitions are actually quite high level with few specific requirements. Policy 2, Appendix 1 of the Operational Handbook (OH) discusses some general characteristics and provides guidance on the performance characteristics. It is expected that this will be more precisely defined following the FGB publication. The recent ENTSO-E report on Operational Reserves 14 has to some extent begun this process, although it too has only served to emphasis the wide variation in products currently existing in the ENTSO-E area. 12 A corresponding approach was also adopted under the Revised ERGEG Guidelines of Good Practice for Electricity Balancing Markets Integration, ERGEG 9 September 2009 and was also included in the final conclusions of ECRB s Assessment Report on Electricity Balancing Models in the Energy Community, ECRB EWG January Ancillary Services in Europe Contractual Aspects, July 2011 and this year s version titled Survey on Ancillary Services Procurement & Balancing Market Design, September 2012, both ENTSO-E. 14 Ad Hoc Team Operational Reserves Final Report, May 2012, ENTSO-E. LDK Consultants 12

14 Time to Full Activation Duration Ramp Rate Primary/FCR 30s 15 min Secondary/FRR 15 min (20s is lower end of the OH guidance) Tertiary/RR 15 min for directly activated Otherwise individual 15 min 2-4%/min hard coal hours 1-2%/min lignite %/s hydro Table 2: Definition of Reserve categories (ENTSO- E Operational Handbook) In order to create standardised products, it is possible that both FRR and RR may need to be broken down in to a number of separate categories such as occurs in Iceland, Ireland or the UK. For example we might expect to see fast and slow FRR products, possibly with the slow product further differentiated between directly activated and manually activated note that one of the significant changes signalled by FGB was that the current definition of secondary as being only automatically activated must change for the new definition of FRR to accommodate both automatic and manual activation. Similarly we may expect to see a variety of RR products differentiated both by time to activate, duration of service and mode of activation. Given the tone of the FGB, a further breakdown of provider type i.e. generation or demand may not be appropriate but the technical definitions will need to be drafted to allow participation by conventional generators, the demand side and intermittent generators such as RES. Note however, that the FGB recognise that services specific to local markets may still be used where their use does not create inefficiencies and distortions in national or cross-border markets. At present, FCR is largely ignored under the FGB with the document primarily focussing on the need to optimise the use of RR and FRR through the utilisation of Merit Orders and in particular Common Merit Orders. In more developed markets, tenders or regular mechanisms are used to reserve units to provide Primary Reserve with selection usually on the basis of the reservation price. The natural delivery of response from Primary Reserve means that it is necessarily delivered in parallel from all units in Frequency Response mode. In the short term, the practice of requiring FCR capability from all connected generators is likely to continue. In general, delivery of FCR is also not remunerated and results in a risk to FCR providers that is indirectly recovered from consumers. In the longer term, it is clear that a move to a mechanism that selects particular units to provide FCR on a periodic basis using some form of merit order based on capacity prices needs to be developed but in comparison to other tasks, this is probably a longer term aspiration. In the absence of more commercial mechanisms for procuring reserves within the Energy Community, we have reviewed the approach of countries neighbouring the Energy Community Contracting Parties namely Slovenia, Austria, Bulgaria, Romania, Greece and Italy (Main features summarised in Table 3: Procurement of Reserve in Regional Markets). LDK Consultants 13

15 Arrangements in these countries range from a bulk annual tender for Secondary and Tertiary Reserve 15 alone in Slovenia to a daily and sub daily bidding process for energy only to deliver Primary, Secondary and Tertiary Reserve in Italy. Type Frequency Availability Capacity/ Energy Providers Slovenia Tender Annual Annual / Gen Austria Market Weekly Weekday or / Gen/Demand weekend 4 Daily hour slots / Bulgaria Romania Auction Bilateral (+ BM for energy) Tender (+ BM for energy) N/A N/A / Gen/Demand Monthly 2 weekly Settlement Period Greece Pool Daily Settlement Period Italy Market (+BM) / / Gen Gen Daily 5 slots / Gen/Demand Table 3: Procurement of Reserve in Regional Markets In Slovenia, three tranches of Tertiary Reserve are being tendered for. The tranches are differentiated by the number of times that they can be expected to be called in a year. Bidders are expected to be generators. Selection of the winning bidders is by a merit order based on prospective total annual cost 16. In Italy, by contrast, the Market Operator GME operates a number of markets for energy products including a day ahead and intraday spot market for market participants. Alongside this spot market, a day ahead Dispatching Services Market (MSD) and 5 within day Balancing Markets (MB1-MB5) are operated. Bidders may only participate in the Balancing Markets if they have previously submitted bids to the MSD. Successful bidding in the MSD effectively creates reserve and the resulting call off in the MB delivers the Balancing Energy. One key provision for MB rebidding is that those bidders may adjust prices and available volumes. Prices may only be adjusted to a more advantageous one for the TSO i.e. Offer prices may only decrease and Bid prices may only increase. Note however that participation in the market is mandatory. 15 In the past both secondary and tertiary have been tendered for. Currently, the website of the TSO is only displaying tender documents for Tertiary Reserve for the current year. 16 Although we note that the algebra used in the tender document does not deliver the apparent intent of the words - and has not for some years. LDK Consultants 14

16 In both these markets, there is minimal specification of the products, which is at odds with the wording of the FGB. The Slovenian tender specifies a relatively large volume range that tenderers may offer and there is no specific range in the Italian mechanism. The Slovenian tender specifies that duration of delivery, in this year s case Tertiary, will be in excess of 16 hours. Similar tenders in 2010 did not specify the delivery period for Secondary Reserve although we can infer that they should be available for up to 15 minutes. The Austrian market, and slightly further afield the regulating market (Regelleistung) operated in Germany, the Netherlands and Switzerland fits more closely with the model espoused by the FGB. In these markets, power and energy bids are made in blocks on a periodic basis. Austria Primary Germany et al Secondary Tertiary Primary Secondary Frequency Characteristics Payment Weekly and 4 weekly Weekly Daily Weekly (reduced from monthly) Weekly (reduced from monthly) Peak, off-peak and weekend Min 5MW in 5MW increments 1 st block 10-50MW 2 nd block 25-50MW Min 1MW Min 5MW (reduced from 10 MW) in 1MW increments Tertiary Daily Min 5 MW (reduced from 10MW) Max indivisible bid 25MW PAB PAB PAB PAB PAB Table 4: Procurement of Reserve in Germany and Austria The timing of the European process makes precise recommendations for this element of the work very difficult. In particular, the Network Code on Balancing will be required to set out the principles for procuring balancing services. But in the mean time, we can make some qualitative statements. The model is driving towards an endpoint in which minimal volumes of reserve are block booked over extended periods essentially sterilising their use in the wholesale market or Balancing Mechanism. In this respect the style of operation of the Italian model is probably very close to the final model envisaged in the FGB. So a first step must be to reduce the volumes of reserve held for extended periods and to do this we must inject some shape into the purchasing behaviour of the TSO, for instance by breaking down some of the reserve requirement into seasonal or even monthly tranches. It is LDK Consultants 15

17 a simple operational rule that less reserve is required in the summer when demand is lower than during the winter. Of course, in the short to medium term, it seems reasonable that some reserve may still be purchased on an annual basis. This delivers the FGB requirement that the Network Code should limit the duration of reserve products. If we are to look forward to a time when we can exchange, or share, reserves then we also need greater clarity on what services are being offered so that means we will need to separate out the Ancillary Services being provided by BSPs. This will be an important first step for those EnC Contracting Parties where Ancillary Services are provided as part of a bundled deal provided by the incumbent. An additional aspect to facilitating the development of Balancing Mechanisms requires that the market needs to understand the prices at which these services are available. In particular, the price of energy activated from reserves is a key parameter. In any case, prices will be required for the energy delivered by activating reserve because the FGB also are pressing for that component of Ancillary Services to be bid into a Balancing Mechanism. It will also be the basis for Imbalance Price formation (see Section 7 further issues for Balancing pricing and imbalance settlement pricing). In parallel with developing a methodology for what exactly is being purchased it is also important to set limits on the amounts of reserve pre-purchased through the use of a common calculation methodology agreed in advance. If all available capacity is either precontracted as reserve or sold in long term contracts to the incumbent, no resources will be available to new entrants to the market. Over-contracting reserve effectively creates a cross subsidy to the BSP, typically the incumbent. If Reserves are under-contracted and instead the system is balanced through Unintentional Deviation then the TSO/Contracting Party is free riding (receiving a cross subsidy) on the other regional TSOs; the expensive pre-contracted reserve of others is being repaid by base-load in the Compensation Program. Recent work by ENTSO-E 17 has described detailed methodologies for determining the volumes of reserve that are needed on the system. It is to be expected that the OH will be enhanced to define such a common methodology for determining how much reserve of the three basic types should held by each TSO. It is to be hoped that as Balancing Mechanisms develop, TSOs will feel more confident that not all reserve needs to be pre-purchased. As the Balancing Mechanism develops, some reserve will be provided, energy only, through the Balancing Mechanism. This will further limit the volume of reservation fees that will be paid for ultimately by consumers. There seems general consensus that the move to a more integrated balancing model will not be a big bang but instead will proceed in a stepwise fashion. One stepwise element will be the move first to some form of reserves exchange and then to a more mature reserves sharing model. Migration is also likely to start initially as bilateral exchange or sharing between neighbouring TSOs before moving to a more complex multilateral model. To facilitate the reserves exchange process, it will be necessary to split the services being provided into common blocks and publish the results of any procurement process. This allows neighbouring TSOs to understand if there is spare reserve capacity and decide whether to enter into negotiations with the Reserve Connecting TSO to exchange that reserve. As the Balancing Maps exercise has shown, there is little consensus on block size at the moment but as an initial proposal for discussion a suggested minimum block size of 10MW with a maximum single block of say 50MW seems appropriate for RR. Duration for the 17 Ad Hoc Team Operational Reserves, Final Report, May LDK Consultants 16

18 product would be in Settlement Periods worth of duration (the 16 hour delivery timescales in Slovenia seem excessive). An initial size recommendation for FRR would be in 5MW blocks. Monitoring is also a key component of any policy regarding reserves. To some extent monitoring the delivery of reserves is less critical than it might be if the issue of pricing is correctly addressed; specifically the interaction of pricing of Balancing Energy and the resultant Imbalance Price. So long as the Imbalance Price is less favourable than the Balancing Energy price, then to a large extent delivery will be policed by the BSPs. If a BSP loses money each time that it fails to deliver Balancing Energy then it will quickly learn to improve its performance. This might be the case if Balancing Energy was remunerated on a PAB basis but Imbalances were settled on a marginal basis. If the pricing methodologies do not deliver the appropriate incentive, then an additional settlement process termed a Nondelivery Rule will need to be established (See Section 10). Simple monitoring processes can also be instigated. A pre-qualification process can be instituted before a BSP may participate fully in reserve procurement arrangements. In such a pre-qualification process, the TSO may carry out tests in advance of full participation that demonstrates a BSP s ability to deliver Bids or Offers, respond to activation signals etc. The Pre-Qualification tests need to be agreed in advance and applicable to all participants. Ongoing participation may be dependent on periodic retesting. The TSO may also police the ongoing delivery of reserve by checking the operational metering from a selection of reserve providers on a daily basis. Where BSPs can be shown to be regularly failing to deliver reserve, then some or all the capacity fees may be forfeit. 4.1 Recommendations Summarizing the above, best practice recommendations for measuring balancing energy and ancillary services include: Separate out the reserve products being offered/ tendered for i.e. FCR, FRR and RR. Set clear limits on the volume of capacity being purchased based on an agreed common calculation method e.g. ENTSO-E methodology Separate the capacity being offered/tendered into blocks e.g. no more than 50MW in a block for RR and 5MW for FRR. Separate the timescales over which the products are required (e.g. annual and seasonal or possibly even monthly). Require prices for the reservation and utilisation energy portions 5. Pricing of Ancillary Services in a non-market based environment and Costs of Balancing Pricing of both Ancillary Services for reserves and other means of procuring Balancing Energy must allow for a fully balanced system that provides a secure supply to all final consumers. LDK Consultants 17

19 In general, beyond the public availability of a national Grid Code, there was little available documentation on commercial matters few states have separate Market Rules and, of those that do, this document is not available in other languages of the 8 th Region (or even English) or available on the website of the NRA or TSO. The form of any Ancillary Services Contract for Reserve is not published and, prices relevant to such contracts are also rarely available. As the pricing of reserve in almost all countries is still subject to regulatory approval 18, the prices for Secondary and Tertiary capacity are sometimes published as regulatory decrees or decisions. However, as the TSO is effectively acting as the agent of the BRPs activating their own reserves on their behalf, there may be no price for secondary energy e.g. Bosnia and Herzegovina. A single figure for the regulated cost of providing all AS for a year is published in Serbia and Croatia. There is no way of deconvoluting this figure to determine the energy price or review the appropriateness of the figure. As part of the project we issued a questionnaire 19 to seek further details regarding the terminology used by the TSOs and regulators in the region in order to establish whether there is a common and feasible terminology regarding Ancillary Services for reserves 20, Balancing Energy and related terms in all countries covered under this study. Responses 21 to the questionnaire were limited and of those responses received, the incumbent generator or generators are required to provide reserve to the TSO under some form of regulated arrangement. Most markets in Europe, excluding the 8 th Region, have some sort of commercial mechanism for procuring and activating RR even if, in some countries, participation in the process is mandatory. A similar approach is also taken for FRR. Mandatory bidding may be an obvious pre-condition for the 8 th Region in the short term given the perception of narrow generation margins. Mandatory bidding is not the same thing as regulated pricing. The European model is clearly trying to move the market to one where market participants manage their own commercial behaviour and the NRAs only intervene where a participant s behaviour harms customers or other market participants. Mandatory bidding is a good place to start. This puts the onus on participants to act in a responsible manner, for example to bid credible prices and not withhold volumes from the market, rather than on the NRA to control all aspects of the market. It sends a signal to participants, and potential investors, that, if they act responsibly, then they can make a business out of participating in the electricity market. However, one area that NRAs need to be mindful of is the bidding behaviour of participants with a controlling interest in the market or sections of the market. In these parts of the market it is possible for a participant to bid prices that cannot be undercut by a competitor or withhold critical volumes and force a TSO to accept bids on less economically efficient units. This is where monitoring will play a key role. A participant may still behave responsibly in such circumstances but monitoring will tell us if this is happening. 18 Although we note the moves in several countries; Serbia, Macedonia amongst them, to introduce public tenders for some reserve contracts in the coming years. 19 Attached as Appendix D of this Report. 20 The Terms of Reference of this project generally refer to ancillary services. As this is a study on best practice recommendations for Imbalance Settlement, we note here that wherever in this document we refer to ancillary services we mean ancillary services for reserves since these are both relevant and linked to imbalance settlement. 21 Attached as Appendix E of this Report. LDK Consultants 18

20 5.1 Ancillary Services for Reserve Markets for reserves are in the vast majority of European states capacity and energy markets sometime also described as reservation and utilisation, i.e. capacity availability and energy are remunerated separately. Under such schemes the TSO is pre-contracting and paying for the availability of reserves, while energy is remunerated upon utilization in real time. Several variations of this model are applied in the South East European (SEE) markets. Pricing of availability of reserves is usually based on fixed costs and can either reflect actual fixed costs of those specific units providing the services, or be based on the Best New Entrant (BNE) approach or can also be regulated. However the basis of that regulation has to come back to the recovery of reasonable fixed costs including an allowance for a reasonable rate of return on the assets being reserved i.e. a profit. Unless some allowance is made for a profit element, there is no incentive for market participants to invest in additional reservable capacity. There are two options for energy prices; either fix the energy price at the time that the contract is agreed or allow it to float depending on market conditions. The decision on whether a price can float or should be fixed is strongly dependent on how competitive the market is expected to be at the point of utilisation. The vast majority of European states dispatch individual units rather than on a portfolio basis and on this basis, reserve contracts are expected to be unit based at the utilisation stage. The concept of the collateralisation of reserve obligations recommended by the FGB is yet to take significant hold in Europe. This also makes ex-post regulation of pricing easier because identifying the fixed costs incurred is clearer. In order to encourage participation, reasonable cost recovery with some element of profit is required. This Cost Plus approach is utilised for instance in Bulgaria as described in the Ordinance On Regulating The Prices Of Electric Power issued by the Bulgarian energy regulator. Harmonising reserve procurement processes has the added bonus that it allows NRAs to use the results on a comparative basis. Extending the annual assessment report that the EWG composes to include an annual review of prices for Ancillary Services would support this form of comparison activity. This is a difficult activity for an outside agency to undertake given the current variation in the methods of setting and publicising these prices. Where pricing appears excessive, NRAs should use their powers to require a participant to justify those prices, for example requiring the relevant utility to disclose the costs involved in providing the Balancing Service. These costs can be compared with international comparator prices although this is a notoriously fraught activity. Another regional activity for NRAs to engage in may be to compose a standard information request for incumbent Balancing Service Providers regarding their cost structures. The results can be combined to derive regional benchmark figures for Balancing Service Provision. This issue is also discussed in section 6. Based on the principle of avoiding Ancillary Services pricing that distort the market and create an obstacle for the development of cross-border Balancing Markets, the recommendations will foster opportunities for TSOs in the 8 th Region to balance their systems more economically and efficiently by utilizing cross-border reserves, where possible (see Section 11). Market abuse by dominant players should be discouraged by efficient pricing and by eliminating any barriers to entry for new players, for example created by inefficient long term commitments for reserves procurement. LDK Consultants 19

21 5.2 Balancing Mechanisms or Balancing Markets Balancing Energy consists of both energy activated in real time under Ancillary Services (reserves) contracts and energy provided directly to a Balancing Market or Balancing Mechanism. Balancing Mechanism or Balancing Market products can be priced either only reflecting variable costs or reflecting both variable and fixed costs. In some cases other costs, such as the start-up costs, may also be explicitly taken into account although the recent Balancing Maps suggest that markets that do this are in the minority. Balancing is offered by Balancing Services Providers in the form of Bids for energy absorption from the system or Offers for energy injection into the system 22. This is one area in which the FGB are looking to increase competition. The final version of the FGB specifically requires that energy utilisation prices for pre-contracted reserve should be bid into the Balancing Mechanism, at least for manually activated reserves in the first instance. In this respect, it is clear that even if the TSO pre-contracts all the reserve that it expects to use, a Balancing Mechanism must still be set up in order that the TSO can activate the necessary resources in real time. By setting up a Balancing Mechanism, it provides a route to market for other market participants to offer unused capacity. This is what is meant by opening the Balancing Market. The FGB leave open the option for TSOs to place an obligation on all market participants to bid unused capacity into a Balancing Mechanism. With tight margins in the 8 th Region, requiring all generators over a threshold size and dispatchable load to bid their unused capacity to deliver Balancing Energy into the Balancing Mechanism seems an appropriate approach and this approach is foreseen by Section of the FGB Whether or not an obligation to bid all unused capacity into the Balancing Mechanism is adopted, the FGB do make clear that unused generation capacity and other balancing resources should be monitored and reported on by the TSO (See Section 6). The Balancing Mechanism design should be able to accommodate bids based on exchanged reserves from an early stage. As regional integration increases, the Balancing Mechanism design will need to be able to optimise the activation of local resources and shared resources. Another aspect of the FGB that interacts with this area is the requirement on the Network Codes to develop processes that optimise the activation of Balancing Energy from resources that are used as replacement reserves and manually activated frequency restoration reserves. Ultimately, the FGB requires that TSOs should also optimise their call on automatically activated FRR. A natural conclusion of this requirement is that parallel activation of all contracted reserves of a particular type without selecting the optimum dispatch approach must be phased out to be replaced by a Merit Order based approach. In order to understand the full cost of balancing, particularly when the choice is between energy from pre-contracted reserves and an energy-only bid in a Balancing Mechanism, some consideration of the reservation fee should be taken into account. As part of the TSO s obligations to optimise the activation of Balancing Energy described under the FGB, thought should be given to, for example, weighting the utilisation price by some portion of the 22 In market environments, bid prices are usually close to corresponding variable costs of the parties providing the services, since such units are already scheduled at the contracted level and thus fixed costs are already covered. Therefore, such units are willing to pay any price below their variable cost to reduce generation, a practice which creates extra profit for them. On the other hand, offer prices are usually based on the spot market price plus a premium reflecting missed revenues by not selling in the spot market. LDK Consultants 20

22 reservation fee in a process that has strong parallels with the requirement to include some element of the reservation costs in the imbalance price methodology (See Section 7.4). 5.3 Other Aspects RES Pricing of Ancillary Services and Balancing Energy also needs to reflect the increasing use of generation from Renewable Energy Sources (RES); there will be cases where wind generation could be utilized for system balancing and indeed the FGB now place an obligation on TSOs and NRAs to encourage the participation of RES Support for Renewable Energy products and prioritising their access to the market is enshrined in Directive 2009/28/EC 23. Typical support mechanisms in the current market for RES in Europe are feed in tariffs or premium feed in tariffs i.e. the generator receives a fixed price for each unit of electricity produced set to recover the large upfront costs of developing RES projects or alternatively a premium in addition to any income that can be derived from the wholesale market. In either case, the support scheme payment is dependent on generated units no generation, no payment, and no means of paying off the development costs. The scope for the delivery of Offers (See Balancing Definitions) from RES is limited, if the renewable energy source is available, the generator will almost certainly be generating in order to access the support scheme. However, downward regulation, in the form of Bids, should be available and, in emergency situations, must be deliverable. However, at what price? If the RES generator does not generate, then in general, it will forgo payment under the support scheme. To make good that financial flow, which will have been built into the financial modelling on which the project was based, a successful Bid must result in a payment to the generator. This is in contrast to a conventional generator who, all things being equal, might be expected to pay to be turned down as this would allow them to fulfil the terms of their bilateral contract whilst at the same time saving on fuel costs. Thus, it can be seen that Balancing Mechanisms must at the very least accommodate the ability for RES to bid negative Bid prices if RES are to be able to participate in the BM. This fact is already recognised by ENTSO-E who encourages the participation of RES in balancing through the ability to bid negative prices 24. There are clearly cases in which some conventional generators might also seek payment for an accepted Bid. Old, inflexible plant running baseload may find itself in the position that coming off the bars completely at short notice may lead to uncertainty on when it can return to service and hence affect its ability to deliver commercial commitments later in the day or even the following day, thus exposing itself to imbalance payments or penalties under the bilateral contract. In such circumstances negative bidding might also be seen as reasonable. The previous two relatively simple scenarios suggest that when establishing Balancing Mechanisms preventing negative bidding is unwise if full participation is to be ensured a requirement of the FGB. 23 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the Support of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC. 24 See pages 6-7 of the report Developing Balancing Systems To Facilitate The Achievement Of Renewable Energy Goals, ENTSO-E, November 2011 ( LDK Consultants 21

23 5.3.2 Demand Side In addition, there is an increasing drive to accommodate demand side products, as set out in the FGB, either alongside or in addition to generation based products. In a region traditionally perceived as short of generation capacity, encouraging Demand Side participation can only be of benefit to consumers seeking a more reliable supply. The success of the STOR product in the UK demonstrates the potential for demand side products. The STOR example also demonstrates the importance of allowing aggregators. With the exception of a small number of very large sites e.g. steel works, aluminium smelters, etc. individual sites with the potential to provide balancing services are often relatively small. Controlling large numbers of small providers can be complex and time consuming for TSOs. However, for professional aggregators prepared to take on the task of delivering small volumes of Balancing Energy, and making small payments in return, the task may not be as daunting 25. In addition the increasing discussion of Smart Metering and the imminent arrival in 8 th Region countries suggests that within a relatively short period the availability of demand side products will grow. At the very least, Balancing Mechanisms and Reserve purchasing schemes should be designed to allow for Demand Side participation either directly or via aggregators Cross Border A particular issue of cross border balancing is access to cross border transmission capacity and, as with the previous topic, there is a strong interaction with the regional Balancing Market and cross border transmission capacity topics developed in Section 11. The FGB make it clear that for short term balancing utilising cross border capacity, no further charge should be made for the use of the transmission capacity at that point. As all other markets have closed, it is in essence valueless. However, the FGB also leave open the option of reserving cross border capacity for the purposes of cross border balancing where its social welfare can be demonstrated (see Section 11.1). In such cases, it is clear that the additional transmission costs should be factored into the Bid and/or Offer prices. If it is not, then the TSO might select the economically inefficient bid selecting an apparently cheap long distance bid over a more expensive local one. The additional charge should be accounted for in the optimisation process that the FGB requires that TSOs develop to allow them to select bids efficiently Load Disconnection Although load disconnection should be generally avoided, there are cases in the 8th Region where - in the absence of sufficient local generation and access to cross-border capacity - load disconnection is utilized for balancing purposes in particular for the provision of tertiary reserve. The economically rational solution is that such load disconnection should be approached as any other form of balancing service, with the proviso that in general the true providers i.e. the domestic consumers, are unable to speak for themselves. But what financial value do domestic consumers place on their supply or, put a different way, what is the maximum price they are prepared to pay for their supply? A glib answer is surely their supply tariff. But there are a number of issues with this figure in most cases it 25 An analogous situation is that of Google and its use of micropayments for website advertising. LDK Consultants 22

24 represents an average figure (typically an annual or longer average), it includes suppliers costs and costs of delivery (more typically a figure of between 50-75% of the final price might constitute the commodity cost) and finally in most cases in the region the domestic tariff has been set by the regulator in the first place and not by the consumer expressing their preference in a competitive market. But clearly the tariff sets a minimum figure for the price of load disconnection. The perceived level of supply quality may affect the costs that customers incur when supply is interrupted. If supply quality is high, then customers take fewer precautions such as backup generators and the consequences of interruption can be more severe. If supply quality is low, then customers may not undertake high value activities so again the effects of interruption can be less than when quality is perceived to be high. Likewise perception of VoLL can vary through time with, for example, consumers prepared to pay more for a power supply in winter than in summer or more in the evening than during the night. To some extent these effects can be mitigated by providing warnings of interruption cf. the text messaging used following the generation problems in Cyprus. Generally, in well functioning systems higher quality supply goes hand in hand with a willingness to pay higher prices for the supply. But higher quality supply costs more to provide e.g. in pre-contracting reserve or otherwise incentivising a generation margin. When questioned directly on how much more they would pay for a more reliable supply, figures usually rise no higher than twice the current domestic tariff. Proxy methods for determining VoLL include determining the ratio of GDP to energy consumed as it sets an upper bound to the cost of interrupting power supplies. Studies based on proxy methods suggest VoLL figures typically 2 orders of magnitude higher than their domestic tariff. Similar figures have been determined by back calculation from costs incurred in national blackouts e.g. US in One, so called, revealed preference is the willingness of consumers to invest in backup generators and the necessary backup fuel supplies. Clearly a consumer will not run a backup generator for days but interruptions of several hours may be tolerated for higher value activities such as SMEs, hotels, restaurants etc. Standby generators cost are typically nearer an order of magnitude more than the domestic tariff. An alternative approach is to view VoLL not as a true representation of the value of lost load but more as a cap on Balancing Mechanism Offers (Supply interruption has the same effect as an increase in generation) designed to deter frivolous bidding and incentivise new build of balancing service capacity and the bidding of available capacity as we see in Section 7.4 the imbalance price should be based on the price of accepted Balancing Services. The risk that the Imbalance Price could rise to VoLL will incentivise all holders of balancing capacity to make it available. This is expected to deliver an incentive for investments in new generation and transmission and reduce the withholding of generation capacity for balancing purposes, which would secure supply to all customers Implicit Balancing The FGB require that financial account should be taken of the implicit balancing created by Unintentional Deviations. This approach will need to be developed as part of the move to regional balancing. The FGB describe a stepwise process (with timescales) set out in Figure 3: Flow chart of FGB options. LDK Consultants 23

25 Figure 3: Flow chart of FGB options A currently operational example of Step 1 that minimises the counteracting activation of Balancing Energy is the IGCC system operating in Germany, Netherlands, Denmark and Switzerland. As part of the mechanism, the implicit Balancing Energy that this activates is priced in accordance with a methodology that utilises the imbalance prices formed on either side of the interconnection. With all these options, there will be an impact on the Imbalance Price calculation (see Section 7.4). 5.4 Combining the costs of Balancing Tools In real time, the cost of balancing emerges from the methodology applied to the procurement of Balancing Energy. Where Balancing Markets or mechanisms exist, prices for balancing procurement are mainly set in accordance with two alternative options: marginal pricing: the entire amount of Balancing Energy during a period is cleared at a single price that expresses the marginal cost of energy in the system during that period; or pay-as-bid: the energy flow of each balance service provider is cleared in accordance with the provider s freely expressed price for the delivered energy. According to Guideline 11 of Revised ERGEG Guidelines of Good Practice for Electricity Balancing Markets Integration, harmonization of balancing services settlement is not a prerequisite for enhancing cross-border balancing. However, coexistence of different balancing services settlement schemes may complicate financial settlement of cross-border exchange of balancing services. Moreover, in the Conclusions of Electricity Balancing Models in the Energy Community An Assessment Report, the ECRB concluded that it would be possible to integrate the different balancing models used in the 8th Region although very different balancing models in individual countries would make integration of these markets more difficult. LDK Consultants 24

26 From the ENTSO-E Balancing Maps 26 Review of Ancillary Services in Europe, it is clear that at present, the predominant payment model for FRR and RR is Pay as Bid (PAB) for both capacity and energy activated. In the interests of progressing harmonisation it would seem that at least in the short to medium term that pursuing a PAB approach seems to the most appropriate. Replacement Reserve Capacity Settlement Rule Frequency Restoration (Automatic) Capacity Settlement Rule Legend - N/A Pay as Bid Marginal Pricing Regulated Price Legend - N/A Pay as Bid Marginal Pricing Regulated Price Legend - N/A Pay as Bid Marginal Pricing Regulated Price Hybrid Legend - N/A Pay as Bid Marginal Pricing Regulated Price Hybrid Replacement Reserve Energy Settlement Rule Frequency Restoration (Automatic) Energy Settlement Rule Figure 4: AS Procurement in ENTSO-E However, it is clear from an economic theory perspective that marginal pricing could be more appropriate at a Contracting Party level within liquid integrated Balancing Markets as 26 Previously titled Ancillary Services in Europe Contractual Aspects maintained by the WG AS. This year s version is titled Survey on Ancillary Services Procurement & Balancing Market Design, September 2012, ENTSO- E. LDK Consultants 25

27 suggested in Guideline 11 of the (ex) ERGEG revised Guidelines 27. Some countries have begun to use this approach, at least for activated energy, and it seems likely that in the long term, markets would be expected to adopt a marginal pricing rule for Balancing Energy and possibly capacity too. 5.5 Recommendations Summarizing the above, best practice recommendations for pricing ancillary services in the 8th Region include: Establish a Balancing Mechanism into which all RR and FRR activation should be bid. Mandatory participation by generators, suppliers and wholesale customers in any reserve tender and the Balancing Mechanism. Allow RES participation in Balancing Mechanism. Allow negative priced Bids in Balancing Mechanism. Allow Demand Side participation in the Balancing Mechanism directly and through aggregators. Set a Value of Lost Load value to reduce demand disconnection. Establish a methodology for the pricing of implicit balancing. PAB settlement for Reserve and Balancing Energy but with longer term aim of moving to marginal. 6. Regulatory monitoring of Ancillary Services and balancing As the Energy Community Contracting Parties have agreed to implement the Directive 2009/72/EC concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC [2009] OJ L211/55, the approach and recommendations under this topic shall build on the provisions of Article 37 of said Directive. Article 37, among others, provides that the national regulatory authorities (NRA) shall: carry out investigations into the functioning of the electricity markets; 27 Revised ERGEG Guidelines of Good Practice for Electricity Markets Integration, ERGEG, September LDK Consultants 26

28 monitor the level and effectiveness of competition at wholesale level; and monitor the level of transparency, including of wholesale prices, and ensuring compliance of electricity undertakings with transparency obligations. Regulatory authorities should investigate and monitor the operation of the wholesale market, a segment of which comprises of the operational reserves and balancing. Relevant markets are sensitive to market abuse either due to the absence of market liquidity or due to the technical characteristics of some systems that may allow some generators to exercise market power. NRAs in monitoring balancing operations should also take into account the regional perspective of such operations and therefore should always link corresponding actions with interconnections congestion management and use. CEER Monitoring Report 28 on transaction reporting and detecting market misconduct in wholesale energy markets, drew together examples of good practice from France, Spain, Italy and the Nordic market. The examples of good practice in Europe demonstrate that corresponding NRAs have put in place continuous market monitoring procedures based on data collection, data analysis and results reporting. The analysis performed by CEER in these monitoring practices as well as under the Pilot Project for an Energy Trade Data Reporting Scheme showed that: NRAs should be cautious when informing the market about investigations (surveillance outcomes to be published according to the REMIT provisions) when an NRA considers it has performed a reasonable level of in-house analysis, it should contact the involved market participants in a relevant manner, in order to request that they provide the NRA with information explaining their behaviour it is crucial that NRAs maintain confidentiality of collected data through appropriate technical (i.e. software access restrictions) and organisational measures (i.e. access to relevant data restricted only to NRA staff active in market monitoring) persons having access to confidential data covered by REMIT are bound by professional secrecy and can use these data only for their duties there is a preference for a central wholesale data reporting 29 system at EU level which would also eliminate duplication in cross-border reporting (as opposed to national reporting with subsequent aggregation of data on an EU level). However, CEER, recognising that in many cases there are national market specificities that may not be efficiently captured by a centralised data monitoring system, recommends NRAs to closely follow the central data reporting and where appropriate require and collect additional data and forward them to the central scheme 30. ERGEG Guidelines of Good Practise for Electricity Balancing Markets Integration suggested that NRAs should cooperate and share information and data in view of a more efficient market monitoring and surveillance. Specifically, under guideline 14, ERGEG indicates that those parties responsible for clearing and settlement in national markets (usually the TSOs and/or MOs) must apply procedures that will allow regulators to monitor precisely and jointly the integrated balancing operations. For this purpose, it is advisable that a common structure 28 CEER Monitoring Report On Transaction Reporting And Detecting Market Misconduct In Wholesale Energy Markets - Good Practice Examples From National Regulatory Authorities, CEER, December The term data reporting is meant to refer to data reporting by corresponding market participants and shall not be confused with the reporting to be made by NRAs on the monitoring results 30 See CEER Final Report Pilot Project for an Energy Trade data Reporting Scheme, May 2011, pages LDK Consultants 27

29 is applied among TSOs/MOs regarding data reporting. The information to be provided includes the detailed bids and offers made by BSPs (at least offered power, price, activation time, minimum and maximum time of use); and data on actually selected and then activated bids. Recent ACER Framework Guidelines on Electricity balancing define further the type of information to be published by the TSOs at least in English on a public web site: the terms and conditions related to reserves and balancing energy, including rules and tariffs; the information related to the requirement for becoming a BSP or a BRP; volumes and prices of procured reserves; volumes and prices of all balancing energy bids possibly in an aggregated and anonymous format; volumes and prices of activated balancing energy bids of the previous imbalance settlement period. Publication timing of above data shall be shortened to allow market participants to take this data into account. Furthermore, on an annual basis, ACER FG on Electricity Balancing require that the TSOs publish data regarding the: availability of balancing resources (reserves, availability distribution); total costs of balancing (balancing energy price distribution, activated balancing energy, procurement of reserves); quality of balancing (e.g. Area control error open loop, area control error, unintentional deviations); welfare gain due to cross-border exchanges of balancing energy and reserves. NRAs should closely monitor whether the TSOs (and, as the case may be, MOs as well) comply with above transparency requirements and shall also make use of corresponding coordinated data collection with a view to analysing and reporting on balancing energy and operational reserves performance. In the 8th Region, the role of NRAs in monitoring AS procurement and balancing is closely linked with monitoring of the dominant player s operations at the wholesale level. The policy aspects of wholesale market opening in the Energy Community define that unbundling and transparency come as a prerequisite for this function and any market monitoring measures should yield applicable results. Similarly, to what is the case for the European Union 31, we anticipate as beneficial for the 8th Region, that a monitoring process of the wholesale market (including reserves and balancing) is also conducted at a central level possibly managed by ECRB. The benefits from adopting a central monitoring process include: More efficient cross-border transactions surveillance 31 As wholesale energy markets in Europe are becoming increasingly transnational centralised monitoring providing for a holistic view of the markets is becoming essential in ensuring effective detection and deterrence of abusive market practices. In addition, a centralised data collection will help to avoid double reporting by market participants active in several markets. In this respect ACER has been assigned by REMIT Regulation to perform this centralised monitoring of the wholesale electricity and gas markets in Europe. LDK Consultants 28

30 Avoidance of data reporting duplication More efficient market abuse detection Harmonised and common practises in monitoring generation costs allowing therefore for a regional wholesale price determination Comparable results reporting allowing for more confidence for regional activation by market participants. We note here, that EC Regulation 1227/2011 (REMIT Regulation) has not been adopted by the EnC Contracting Parties. However, as REMIT introduces the framework for central monitoring of wholesale energy markets 32 in close cooperation with NRAs, it is strongly recommended that regulations similar to REMIT are also adopted in the Energy Community 33 in view of allowing detection of market abuse in the 8 th region under central data collection procedures. In terms of monitoring the operational reserves and balancing energy the NRAs in the 8 th Region should follow, under ECRB s management, a harmonised process for the monitoring of the total of the wholesale national markets on a three steps approach: harmonisation of data collection (which participants are required to submit data, what kind of data, where data should be submitted, when and under which format) harmonisation of data analysis (methodology in analysing data, price correlations, case analysis, data cross-checking, price indexes) harmonisation of data reporting (short, medium and annual reporting, harmonisation on which data to be published). The information and data format to be collected and submitted by the TSOs in the 8 th Region will be of extreme value for NRAs in monitoring balancing and operational reserves functions. However, as corresponding markets/mechanisms have not been efficiently developed in the area, it is expected that TSOs will face difficulties in collecting and submitting useful information. One of the major problems is expected to be the pricing of corresponding products since in many cases there is only one provider and full supply contracts apply. In such cases it is the NRAs that should closely monitor the accounting unbundling of the incumbent company with a view to precisely follow the generation costs and also monitor any possible market manipulation (and/or monopolistic behaviour). The NRAs, under ECRBs management, should collect comparable data regarding corresponding products, volumes and pricing. Monitoring in this respect requires that there is a common definition of the data to be submitted (commonly defined products) as well as a common methodology on how to access the procurement cost of such products in each system. Availability prices for operational reserves are usually regulated and separately defined however, the price of balancing energy, including energy from reserves activation, is in some cases bundled under the final regulated tariff to be paid to the dominant company. Best practise in this respect would require NRAs to apply actual costs verification process in view of calculating the SRMC for balancing procurement which requires full implementation of accounting unbundling. These costs can be compared with international comparator prices although this requires a robust analysis to justify whether figures could be considered comparable. NRAs in this 32 According to the Guidance on REMIT Regulation (2 nd edition) published by ACER, the wholesale energy market is meant to also include the balancing markets. 33 The Ministerial Council of the Energy Community has not adopted EC Regulation 714/2009 on the establishment of ACER. Therefore, if it is for provisions similar to those provided by REMIT to be adopted in the Energy Community, then it will be required to discuss first on which body could undertake corresponding role. LDK Consultants 29

31 respect should compose a standard information request for incumbent BSPs regarding their cost structures. The results can be combined to derive regional benchmark figures for Balancing Service Provision. For NRAs in the 8 th Region, another important challenge would be to efficiently monitor whether any withholding of capacity is performed which would result in prices manipulation. In this respect market participants should be required to provide information related to the capacity and use of their generation facilities 34. For the 8 th region it is proposed that declared availabilities should be centrally monitored against international indices about maintenance periods, forced outages and major damages of the types and technologies of the units in the area. It is clarified that the TSOs are responsible to technically verify the availability of generation units whereas the regulatory monitoring mainly focuses on capturing any irregular behaviour. Furthermore, NRAs could monitor the evolution of balancing and reserves procurement by applying the Hirschman Herfindahl Index (HHI) 35 specifically modified to account for shares related to reserves and balancing. ENTSO-E, in its Final Report on Operational Reserves establishes a series of harmonised technical indicators to monitor the quality and the standards of Operational Reserves. Although the target values may inevitably vary between different systems or control areas 36 the indicators to be monitored shall be defined and collected under a harmonised methodology to allow for a regional and central reporting process. In the 8 th Region, those TSOs being members of the ENTSO-E will adopt corresponding performance indicators and relevant reporting requirements. It is therefore, advisable that all Contracting Parties of the Energy Community should establish corresponding methodology in monitoring Operational Reserves in view of allowing a harmonised and central monitoring approach. In each system the corresponding NRA, along with all other quantity and pricing data that may require in view of monitoring the operation of the wholesale market, shall also require TSOs to submit, on a periodical basis, the values of operational reserves performance indicators as above discussed. Such data will allow the regulators to both follow the quality of operational reserves but also acquire a more detailed picture of the functioning of balancing, part of which comprises of operational reserves. We note at this point that as RES share in the energy mix of the national systems is increasing, corresponding balancing costs are expected to also increase. NRAs in the 8th Region, in accordance with what is also applied in EU level, should closely monitor corresponding operations (correlation of balancing and reserve volumes and pricing with RES penetration, correlation of timing and accuracy of RE generation forecasts with balancing costs). 34 At the EU level, a corresponding requirement is provided under REMIT which foresees relevant data to be both forwarded to ACER (central monitoring) and the NRAs. Furthermore, the Balancing Network Code (as explicitly requested by ACER FGB) gives the TSO the possibility to ask for corresponding information as well. 35 HHI is defined as the sum of the squares of the market shares of the 50 largest firms (or summed over all the firms if there are fewer than 50) within the industry, where the market shares are expressed as fractions. The result is proportional to the average market share, weighted by market share. As such, it can range from 0 to 1.0, moving from a significant number of many but smaller in share providers to a single monopolistic provider. Increases in the HHI generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite. 36 TSOs should maintain their Area Control Error inside a defined range corresponding to each control area. LDK Consultants 30

32 Finally, under the USAID SEE Market Monitoring project an automated system for market monitoring in the 8th Region is developed and upon finalization will be transferred to the ECS. Market monitoring under this project is performed in relation to: Cross-border Transmission capacity market and Regional generation supply. Currently the 8th Congestion Management Region Market Monitoring Guidelines are in a finalization stage and a set of seven indicators has been developed regarding monitoring of cross-border capacity allocation. Corresponding automated monitoring process of the regional energy supply has not been developed yet. This initiative is linked to NRAs monitoring of reserves and balancing procurement as it could provide useful data regarding the share of interconnections capacity utilized for cross-border energy trades towards the share of the remaining capacity which could be utilized for cross border balancing. Furthermore, we expect that market monitoring of regional generation supply will provide for useful wholesale reference prices that could be utilized as benchmark prices when national and/or regional balancing is monitored. Cross border exchange of reserves and balancing energy as discussed under Section 11 will require further monitoring procedures. A central process should be implemented in view of collecting and analyzing data related to: the quantities of energy being offered for balancing exchanges; the prices of bids/offers made available for cross-border balancing exchanges; the volume of unshared bids/offers related to the surplus made available for exchanges; the volume of reserves exchanged without reservation of corresponding cross-border capacity; the volume of cross-border transmission capacity that has been reserved for contracted reserves exchanges and its actual utilization; the duration of corresponding reservation; the price at which the cross-border capacity was reserved; ex-post benefits actually realized compared to the social welfare benefits claimed under corresponding study prepared to support the cross-border capacity reservation request. 6.1 Recommendations Summarizing the above, best practice recommendations for regulatory monitoring of ancillary services and balancing in the 8th Region include: Centralized and harmonised data collection, data analysis and results reporting under ECRB s management. Contracting Parties to the Energy Community to consider adopting regulations similar to the REMIT regulations in view of collecting, analyzing and publicizing data related to wholesale electricity markets operations. LDK Consultants 31

33 Establishment of technical (software access restrictions) and organisational (restricted NRAs staff) measures to maintain confidentiality of sensitive data that will be centrally collected. NRAs to closely follow whether TSOs/MOs apply the transparency requirements as set by ACER FGB and ENTSO-E corresponding Network Codes regarding balancing and operational reserves performance and require corresponding information (where applicable) to be submitted centrally, under ECRB management, to allow for joint and central monitoring by NRAs. Aggregation of such data should not be longer than hourly. Time lag in publishing corresponding data shall be harmonized with the final relevant provisions made under ENTSO-E Codes. Common definition of corresponding products is a pre-requisite for such a centralised monitoring process. NRAs to monitor the process for accounting unbundling by the incumbent company in view of calculating the SRMC for balancing procurement and perform comparisons with international prices. NRAs in this respect should compose a standard information request for incumbent BSPs regarding their cost structures. Central monitoring of declared availabilities based on comparisons with international statistical data about maintenance periods, forced outages and major damages of the types and technologies of the units in the area. Application of the HHI specifically modified to account for shares related to reserves and balancing. Data analysis of balancing and reserves procurement shall be also performed by NRAs on a national level in view of assessing and capturing of specialised information that is not reflected to the harmonised and central format of data collection. RES should be included in this central process for balancing and reserves monitoring. Central monitoring of cross border exchanges of reserves and balancing energy which at least will involve: quantities and prices of energy being offered for balancing exchanges; the volume of unshared bids/offers; the volume of reserves exchanged without reservation of cross-border capacity; the volume, duration and price of cross-border capacity reserved for contracted reserves exchanges and its actual utilization; ex-post benefits realized. 7. Appropriate allocation of balancing costs Balancing costs may be allocated either to all users or only to those market participants that were out of balance. A combination of the two approaches is also possible. LDK Consultants 32

34 7.1 Gross Model System balancing is the role of the TSO. Therefore, one school of thought holds that, in the first instance, the TSO should be charged with the net costs of reserving capacity and purchasing Balancing Energy whether through the Balancing Mechanism or any other mechanism. In practical terms the TSO would be liable for the net costs of the Balancing Mechanism. When deriving transmission charges, the transmission charge could be set to include a forecast of the costs of utilising the Balancing Mechanism (with any over or under recovery being dealt with in the normal way) or alternatively, a separate Balancing Services Charge could be made on a monthly basis, for example as currently occurs in Great Britain. As Grid Users benefit from access to a balanced system in the same way that they receive a benefit from access to a system with a stable voltage costs should be recovered from Grid Users in a uniform way i.e. that both generators and suppliers should pay a fair share of balancing costs through their transmission tariffs. This approach allows NRAs to implement incentive schemes that incentivise TSOs to manage and minimise controllable balancing costs e.g. by reducing pre-contracted reserve volumes and purchasing energy only through the Balancing mechanism. Individual Market Participants still need to pay for their energy imbalances. These can be viewed as the final trade that the participant failed to make in the wholesale market. The price for this proxy trade is the energy imbalance price and should be set so as to minimise volumes of energy imbalance. The FGB require that the price for that energy should be based on the prices of Bids and Offers accepted in the Balancing Mechanism. Figure 5: Gross Model for Settlement 7.2 Net Model The alternative approach is to view energy imbalance and balancing costs as two sides of the same coin. The expectation being that the costs of balancing should be cancelled out by the income from Imbalance Settlement. Interestingly, in practical markets the financial flows can often be in the opposite direction. One response to imbalance pricing, particularly in dual Imbalance Price mechanisms, is to enter the market long as a result imbalance settlement LDK Consultants 33

35 is a net flow to participants for their spill and the Balancing Mechanism is a net producer of revenue as the TSO typically turns down generators to account for the spill from BRPs. Balancing costs, particularly those for the energy component need to be recovered from those parties out of balance i.e. the BRPs. A purist approach would therefore load all the balancing costs; reservation and utilisation, onto BRPs. This would leave Transmission charges to recover network costs and the operating costs of the TSO and related bodies. A hybrid approach would recover reservation fees through transmission tariffs but energy costs from BRPs. Figure 6: Net Model for Settlement 7.3 Imbalance Volume or Volumes The allocation methodology should allocate balancing costs in a way that both fully reflects the costs of the corresponding balancing actions and also incentivises market participants to maintain a balanced position or help to restore the system balance according to the FGB. All participants, including RES, should be held responsible for imbalances. ENTSO-E suggests that RES units could join BRPs with complementary units, such as pumped storage units, or join big agents that could aggregate corresponding imbalances from several RES units 37. The aggregator approach has been quite successful in the UK. 37 See page 7 of the report Developing Balancing Systems To Facilitate The Achievement Of Renewable Energy Goals, ENTSO-E, November 2011 ( LDK Consultants 34

36 Charges for imbalanced parties are calculated by multiplying imbalance volumes by a corresponding imbalance price. Such prices are usually based on the prices of corresponding balancing actions and may, or may not, include the costs of Ancillary Services. Imbalance volumes and corresponding charges are defined and calculated per imbalance period 38. The FGB defines Imbalance volumes as the difference between measured and contracted generation and measured and contracted load respectively i.e. generation and loads are settled separately. Where a BRP carries on the activities of both a generator and a supplier, two imbalances must be calculated. In some states, contractual positions are based on a physical nominated position notified to the TSO ahead of time; the underlying assumption being that parties would not nominate anything other than the volume of contracts purchased. To ensure that an approach like this operates correctly, it is necessary to match the nominated positions of buyers and sellers. Interestingly, the FGB requires that BRPs should be obliged to provide balanced programs at the day ahead stage. 7.4 The Imbalance Price Different methodologies exist for imbalance price calculation often complementing the approach to Balancing Energy pricing. Marginal pricing is usually applied when marginal pricing for balancing providers is also chosen for remuneration of corresponding services. However when pay-as-bid is chosen for remuneration of balancing providers, then imbalance price(s) may be calculated as the average price. Averaging methodologies vary from weighted average of all bids and offers accepted during the same imbalance period (single price); to weighted average of bids and offers taken in each direction (two prices); weighted average of bids only taken into account or offers only taken into account in the direction of the system imbalance (one price); or Reverse and Main imbalance prices where the reverse is some form of proxy market price and the main price is the average of Balancing Energy costs in the direction of the system imbalance (two prices). Whilst appealing, in the sense that they appear to deliver strong incentives to balance, dual imbalance price methodologies have a number of serious drawbacks: Imbalance Prices based on accepted Bids and Offers are not distributed symmetrically about some notional market price based on the marginal fuel price. Bids are offered by running plant that, it can be assumed, have already recovered their fixed costs and as a result tend to be simply avoided variable costs. On the other hand, Offers are made by units hoping to further recover fixed costs and specialist units focussing on the Balancing Mechanism alone. As such, Offers tend to be skewed towards variable costs plus an element of fixed cost recovery. If Imbalance Prices are based on accepted Bids and Offers, as we believe they should be, this asymmetry tends to result in participants entering the balancing phase slightly over-contracted, or long. This has a knock on to the costs eventually borne by consumers. 38 Imbalance periods vary among national markets although the FGB recommend that to promote harmonization, the settlement period should be standardized to 30 minutes. A slightly curious approach as the Balancing Maps survey shows that most markets uses either 1 hour or 15 minutes with very few actually utilizing the 30 minute option. LDK Consultants 35

37 Secondly, by artificially separating the prices for long and short positions, greater risk is placed on trading counterparties when errors occur e.g. mis-nomination etc. Again this risk manifests itself as additional cost that flows through to consumers. Dual imbalance prices also tend to over or under recover even when the system is balanced adding to any problems experienced with surpluses (see Section 10). Based on the principle that BRPs should be able to easily assess the economic risk associated with balancing treatment, (ex) ERGEG 39 suggested in the General Considerations of the Guidelines that imbalance settlement shall be simple, transparent, easily understandable and justified. In the light of such a principle, a single price set by the accepted Offers or Bids in the direction of system imbalance seems most appropriate in the short term. Simple imbalance prices also have the virtue that they can be published quickly, often within minutes of the end of a Settlement Period. A longer term intention should be to move to a marginal price in the direction of system imbalance. Even such an apparently simple imbalance price brings with it its own set of issues. One particular issue with this formulation is that it is dependent on the determination of the direction of System Imbalance. Errors in this determination can lead to large swings in the Imbalance Price during the settlement process. A Non-delivery rule will also be required (see Section 10). Moving to a marginal price would negate the need for a Non-delivery Rule. Given the likely heavy reliance on balancing from pre-contracted reserves over the short to medium term, some thought should be given to the treatment of Balancing Energy from precontracted reserves activated through the Balancing Mechanism. These bids are likely to be almost entirely energy only. If these bids were to be used without amendment as the basis for an Imbalance Price then the Imbalance Price will not give the correct incentive to establish, and maintain, a balanced position. Indeed, it might encourage deliberate gaming why contract in the wholesale market at a combined energy/capacity figure when the alternative is to take imbalance at an energy only price? A technique that mirrors that suggested in Section 5.2 of weighting the energy price by the reservation fee should be considered. Sharing of the reservation fee across the contracted hours would be a simple weighting factor. For a more complex approach, the reservation fees can be profiled across the reservation period with a heavier weight being applied to periods of high demand and a lighter weighting applied to the periods of low demand thus mimicking the fluctuation of market prices with demand. Depending on the design of the Balancing Markets, Bids and Offers to the Balancing Market may be activated to tackle control area imbalances only or to tackle both control area imbalances and transmission constraints. In the latter case, it is advisable that Bids and Offers activated for constraints management be excluded from the imbalance price calculation 40. To ensure that settlement surpluses and deficits are not exacerbated, thought needs to be given to exactly who should pay for such actions. These recommendations do not necessarily enforce full harmonization of imbalance settlement rules as a prerequisite for cross-border balancing, but do take into account that imbalance settlement principles should not differ markedly among regional markets since this would affect parties behaviour and create obstacles in the creation of a regional market. In this respect imbalance settlement procedures should be harmonised as far as possible in order to avoid market distortion between national markets. 39 See Revised ERGEG Guidelines of Good Practice for Electricity Markets Integration, ERGEG 9 September This was also recommended by Revised ERGEG Guidelines of Good Practice for Electricity Markets Integration, ERGEG 9 September LDK Consultants 36

38 For any system out of balance, there may be a net surplus or deficit caused by the energy imbalance settlement process depending on the precise methodology for determining the Imbalance Price (for further discussion relating to surpluses, see Section 10) 7.5 Recommendations Summarizing the above, best practice recommendations for allocation of balancing costs in the 8th Region include: Gross model for energy imbalance settlement. Single Imbalance price. Average price of accepted bids in system imbalance direction but long term aim to move to a marginal price. Weight activated reserve bids by reservation fee. Remove Transmission constraint resolving bids and make the TSO pay for them. Non Delivery Rule for high price Offers and low price accepted Bids. RES to be exposed to imbalance settlement on an equal basis to other system users. 8. Monitoring of imbalance settlements As already mentioned in Section 6, NRAs are tasked with monitoring and investigation of the wholesale market operations. Monitoring of imbalances settlement is a further tool that NRAs should develop in view of monitoring the wholesale market as a total but also in view of monitoring balancing and operational reserves functions. In the context of imbalance settlement, NRAs should monitor the settlement of imbalances by the TSO or the MO (or both, depending on how the imbalances settlement scheme is designed) towards imbalances performed by BRPs during corresponding imbalance settlement period. For imbalance settlement monitoring we propose that the same recommendations apply regarding the process for data collection, analysis and results reporting as for monitoring of reserves and balancing (see Section 6) since both comprise part of the total wholesale market monitoring. However, in view of imbalances settlement, the centralised process will have to analyse an additional set of data in view of identifying any market constraints or misconduct. TSOs and/ or MOs should submit information related to: the imbalance price per imbalance settlement period; LDK Consultants 37

39 the imbalance costs faced by each market participant per imbalance settlement period; imbalance volumes per market participant and imbalance settlement period; RES imbalances volumes and corresponding costs; Surplus/deficit in imbalances settlement account; deviations from the merit order list to alleviate congestions internal to a control area. A key challenge for NRAs in the region when monitoring imbalance settlement under a centralised process mostly relates to whether a harmonized approach is introduced as to the definition of the imbalance settlement period. Under Section 9 we propose a harmonized settlement period of one hour with a planned move to a 30 minute settlement period, which, if implemented, will foster the above monitoring process. 8.1 Recommendations Summarizing the above, best practice recommendations for monitoring of imbalances settlement in the 8th Region include: Centralized and harmonised data collection, data analysis and data reporting under ECRB s management. Contracting Parties to the Energy Community Treaty to consider adopting REMIT regulation in view of collecting, analyzing and publicizing data related to imbalance settlement. Establishment of technical (software access restrictions) and organisational (restricted NRAs staff) measures to maintain confidentiality of sensitive data that will be centrally collected. NRAs to require TSOs and MOs to centrally submit data (under ECRB s management) related to the imbalance price per imbalance settlement period, the imbalance costs faced by each market participant, imbalance volumes per market participant and per imbalance settlement period, and the imbalance surplus/deficit in the imbalances settlement account per settlement period. Harmonisation of the imbalance settlement period is required. Data analysis of imbalances settlement shall be also performed by NRAs on a national level in view of assessing and capturing any specialised information that is not reflected to the harmonised and central format of data collection. RES should be included in the corresponding monitoring process. 9. Imbalance and other financial clearings In addition to the operational issues of balancing - such as maintaining and enhancing system security - the thrust of the work by ACER, ENTSO-E and ECRB is towards improving LDK Consultants 38

40 competition, reducing costs and facilitating the integration of renewable generation. To this end, the back end processes of financially settling Ancillary Service contracts for reserve, Balancing Mechanisms or markets, and energy imbalances, need to be as simple, transparent and low risk as possible. One significant difference for many markets in the 8th Region is the new FGB requirement that the Settlement Period should not exceed 30 minutes. Few markets in Europe actually use a 30 minute Settlement Period; broadly markets split into 15 minute and hourly markets. Moving to a shorter Settlement Period may prove a significant activity as software may need to be updated. Additionally, the Program Time Unit and Settlement Period need to be aligned. In general, SEE markets are currently hourly. A pragmatic approach would be to adopt the 1 hour Settlement Period as the regional standard with the expectation that it should move to 30 minutes in future. This planned move needs to be publicised in advance so that as new systems are purchased or implemented the technical capability to make that move should be built in. 9.1 Complexity Complex arrangements deter all but the largest players and there are a greater number of small companies in the renewable generation sector and nascent demand side management sector. From this perspective, the Net Model described above has simplicity to recommend it. In essence all the costs and revenues; reservation, activation, BM purchasing and sales, imbalance revenues are aggregated in the same accounting process and only the net result needs to be handled by the imbalance surplus mechanism (see Section 10). Conversely, it is quite opaque and without careful analysis it is difficult to tell, for instance, why a particular settlement period was more expensive than another. On the other hand, the Gross Model whilst initially complex and, in the early stages at least, composed of a number of counteracting cashflows (in a highly concentrated market, a BRP may end up paying imbalance charges on the same volume of energy that it has delivered, and been paid for, as a BSP) it is ultimately easier to understand where the major expenses arises. Examples of excessive costs arise for instance if too much reserve was pre-contracted or expensive peaking plant was called in the BM. By clearly identifying these areas, it is easier for NRAs to institute efficiency programmes on particular components of the mechanism. Where Balancing Costs are borne initially by the TSO at first sight, it may appear that the TSO is unduly financially exposed. This will be of particular concern where the TSO is a government body and as a result undercapitalised in comparison to a private institution. However, in this respect, timing is critical (see Section 9.3). 9.2 Risk The model that the FGB describes focuses on the pivotal role of the TSO. The model also contains within it a clear move towards imposing greater financial responsibility on participants. Consequently, bill payment takes on a more critical role parties can no longer rely on repaying debts in kind or self balancing. The flipside to this is that non-payment of bills becomes a more important component of the arrangement. Arrangements that significantly increase the volume of unpaid debts that must be shared across the remaining system users tend to deter new entrants and smaller players. We have seen instances in the region of participants in the electricity market settling bills LDK Consultants 39

41 very slowly if at all. There is a strong interaction between the cashflows in this process. An unpaid bill means that a BSP potentially goes unpaid reducing their incentive to make capacity available in a subsequent settlement period. Potentially, it even puts them out of business. Perhaps unpaid debts should simply be shared out amongst the users. Self-insurance is a well known concept. But when the national markets are dominated by a small number of large, ex-state enterprises, a share of their debts landing on a small new entrant may be more than they can withstand. This leaves some form of securitisation approach. Experience in other countries has shown that the only credible options for securing potential debts is through Credit Cover in the form of cash or bank guarantees, sometimes called Letters of Credit. Use of credit ratings and PCGs have ultimately been found wanting. More complex insurance schemes or models using credit pools have been suggested but none have succeeded. The industry arrangements should clearly set out how potential indebtedness should be calculated. Credit Cover may be required under more than one set of rules. The methodology, approved by the NRA, should attempt to be a reasonable assessment of potential indebtedness taking into account the participant s previous and current trading behaviour, the timing of settlement activities the longer it takes to run settlement, the greater the level of indebtedness the current levels of imbalance and balancing energy prices and represent an appropriate balance of risk between the party providing the cover and other market participants. If the methodology is overly complex, then it may become inefficient in its operation. In addition, as this is a forecasting process, there is a natural limitation on the accuracy that can be attributed to the methodology and an overly complex arrangement may simply lend the process a veneer of spurious accuracy. Figure 7: Relationship between Settlement Timescales and Credit Cover The methodology should set out how additional security cover should be provided when it becomes necessary, and excess security cover returned. Of particular importance will be the need to set out the consequences of not providing adequate security cover, for example what rights or privileges of participating in the arrangements will be withdrawn. LDK Consultants 40

42 9.3 Cashflow Arrangements that deliver a cashflow burden, for example by delaying final settlement for long periods, also tend to put off all but those parties with the largest financial reserves. Cashflows in these more financially based systems can be large although ultimately financial exposure to the central mechanisms is more manageable. Exposure to these cashflows can be mitigated by aligning the timing of settlement cashflows. This often has the added advantage that it minimises tax exposures. If Balancing Service Provision is settled on the same day that Imbalance settlement is performed, then many cashflows may cancel out. Managing banking arrangements to ensure that payments are taken before debts are repaid also helps to minimise exposure of the central counterparty. This is a specialist role and one reason to consider the separation of System Operation and Market Operation functions. Whilst the FGB are couched heavily in terms of the TSO, this is foreseen in the FGB when they use the phrase other responsible entity where relevant when discussing the process of imbalance settlement. In achieving this netting effect, the benefits gained are outweighed by cashflow issues if settlement is delayed in order to achieve it. As modern metering practices are adopted, consumer payments to suppliers are improving both in volume and timing and aiming for a Settlement date within the month following the month of delivery is not unrealistic with all financial flows complete with a fortnight of the settlement run. 9.4 Recommendations Summarizing the above, best practice recommendations for financial clearings include: Gross model for energy imbalance settlement. Credit Cover as LoCs or cash. Same day settlement of energy imbalance and BM settlement. 10. Regulatory treatment of imbalance settlement surplus Depending on the way the imbalance settlement scheme is designed, there may be a surplus (or deficit) associated with corresponding payments and charges made to BRPs. In view of avoiding market distortions this surplus (or deficit) should be kept as low as possible. Why do surpluses occur? Settlement appears very simple; for each party in imbalance there is a corresponding Balancing Energy purchase by the TSO. If these payments are matched up then there should be no surpluses. However, surpluses and deficits arise in many settlement arrangements. These largely arise due to mismatches in different elements of the settlement process. 1. Reservation fees are likely to be paid in many settlement periods without a corresponding requirement to activate energy. In a Gross or Hybrid Settlement Model, LDK Consultants 41

43 reservation fees will have been recovered through transmission charging. Any imbalance price methodology that weights the energy price using a proportion of reservation fees will in essence have double counted those reservation fees. 2. Different pricing methodologies utilised for the payment of Balancing Energy and Energy Imbalance will lead to deficits or surpluses. In particular, PAB in the Balancing Mechanism compared to marginal pricing in imbalance settlement will lead to a mismatch in funds. 3. Dual imbalance pricing schemes can also lead to over recovery from participants out of balance even in the simplistic case of a system fully balanced. It is highly unlikely that all participants will also be balanced so the buy-sell spread between imbalance prices charged to short and long participants will generate a revenue stream. 4. Even PAB or average price schemes may generate surpluses and deficits through rounding issues or where the methodology excludes certain balancing actions. 5. As mentioned above, tackling transmission constraints through Balancing Energy purchases will lead to a deficit unless the cost is settled directly by the TSO. 6. PAB in the Balancing Mechanism and Average pricing in imbalance settlement can create an incentive to under deliver on extremely priced accepted Balancing Mechanism bids. 7. Using the current Compensation Program approach to repaying Unintentional Deviations means that it can be pure chance whether a particular system imbalance is addressed by an explicit balancing action such as the dispatch of Tertiary Reserve or allowed to slip to next week s Compensation Program. Deciding on the mechanism to return the surplus depends on identifying the mechanism by which the surplus occurred. A simple test for the approach adopted is to check whether the approach is equally applicable to the treatment of a surplus or a deficit. In the first case above, it is clear that the over-recovery should be returned through a mechanism that mirrors participant transmission charging e.g. pro rata to metered consumption. It is Grid Users after all that have funded the balancing process through their payment of transmission charges. In cases 2-5, it appears that Parties in imbalance have largely funded the surplus. A simplistic response might be in that case to give it back to those parties that maintain a balanced position. In practical systems this effectively means few if any players, as the incidence of precise balance amongst physical players is rare indeed. A simple approach is therefore to refund in proportion to metered volumes for the settlement period in question. More complex formulations can be constructed that weight the share by how far a participant s portfolio deviates from good practice. Examination of operational data would be required to set precise targets but for instance, all other things being equal, a generator might expect to get within ± 2% of their nominated values, an I&C supplier to within ±5% and a domestic supplier may only realistically get to within ±10% given the difficulties of forecasting domestic demand. In case 6, a Non-Delivery Rule will remove the deficit. Where at the end of a Settlement Period a BSP is out of Balance, a short position will assumed to be, at least in part, due to the failure to deliver any Offers and a long position the failure to deliver any Bids. Where the Imbalance Price is less than the Accepted Offer price, or the Imbalance Price is greater than an Accepted Bid price, an additional penalty equal to the difference between the bid price and the Imbalance Price is required in such circumstances, which will recoup any Balancing Energy cashflows. LDK Consultants 42

44 The FGB have stated that implicit balancing should also be priced. Adopting such an approach would significantly address the surplus or deficit caused by the use of the Compensation Program in Case 7. We are proposing in Section 9 that settlement should be a monthly activity. Likewise, transmission charging is typically a monthly activity. On this basis, the most equitable approach, and one that minimises the size of the surplus or deficit, appears to be to operate the mechanism to return the surplus on a monthly basis Recommendations Summarizing the above, best practice recommendations for regulatory treatment of any imbalance settlement surplus include: Identify reason for potential surplus or deficit. Minimise surplus by adjusting mechanism. Return on same basis that surplus or deficit arises. Surpluses based on imbalance settlement should be returned pro rata to size, possibly weighted by a good behaviour measure. 11. Feasibility of implementing Regional Balancing Mechanisms and treatment of cross-border balancing energy The ECRB in its Regulatory Assessment Paper reviewing the former SETSO TF report on Regional Balancing Mechanism BETSEE for SEE, published on June 2010, concluded on 9 points that would make feasible the implementation of a Regional Balancing Mechanism (RBM) in the area. Those recommendations identified as a first pre-requisite the implementation of national balancing mechanisms (balancing rules) as well as the need for intra-day markets development in the area which, in view of allowing for cross-border balancing, should at least be harmonised regarding corresponding gate closure times. Crossborder capacity allocation procedures were also identified as needing harmonisation. In the 8th Region, cross-border capacity is allocated through explicit auctions though these are quite differently implemented among Parties. Recently, following the SEE CAO establishment a corresponding project Team was created to develop capacity allocation rules, auction revenue allocation procedures and tendering of the capacity auction IT, with the flow based approach remaining as the final concept to be implemented by SEE CAO. The recent Report by ECRB on Electricity Balancing Models in the Energy Community recommends that a regional balancing scheme should be established (throughout the 8 th Region or parts of it) in line with ERGEG Guidelines of Good Practice on Electricity Balancing Markets Integration. Furthermore, a Regional Action Plan (RAP) for Market Integration in the SEE has been developed jointly by ECRB and ENTSO-E. The RAP defines an indicative timetable for the various activities needed in view of market integration in the SEE, some of which are also pre-required for the creation of the RBM. LDK Consultants 43

45 In this report we do provide recommendations on the methodologies and approaches to be utilised in view of a functioning RBM for reserves and balancing energy exchanges in the area however, the impact of our recommendations on the timing milestones defined by RAP needs to be assessed in coordination with SEE TSOs. In this section we will discuss best practices in implementing a balancing scheme in the 8th Region considering the recommendations of ECRB as above expressed as well as the recent final ACER FG on Electricity Balancing with a view to identify whether there is scope for the regional balancing mechanism in the area to deviate, in the short run, from any of those guidelines. We underline however, that since best practise recommendations should by default allow for future integration of the 8th Region with the EU internal electricity market; our effort will be to promote the implementation of cross border balancing and reserves schemes that will allow minimum deviation from ACER FGB and corresponding ENTSO-E Network Codes for a short transitional period and only where we anticipate that this would result in considerable benefits for the area (e.g. faster creation and operation of corresponding regional schemes or simplified mechanisms that can later easily evolve in accordance with the ENTSO-E Network Code on Electricity Balancing) Cross border capacity reservation ACER in its FGB clearly defines that exchanges of reserves are possible only in situations where reservation of cross border capacity is not necessary or in cases where a cost-benefit analysis is performed proving that reservation of cross-border capacity for reserves exchange is associated with increased social welfare (analysis made on a case by case basis). In the 8th Region some Parties need to procure part of reserve capacity abroad to comply with the Operation Handbook (OH). Considering that interconnection capacities are usually congested in the area, there has been an obvious request from SEE TSOs to deviate from above ACER rule. However, a unified derogation for all SEE countries would seem unjustifiable considering that the above problem is not faced by all TSOs in the area. Instead, a case by case analysis is required to demonstrate the exact magnitude of the problem and define corresponding quantities and time horizons for which reservation of cross-border capacity is required to comply with the OH requirements. Such an analysis is likely to demonstrate an increase in social welfare given the build time for developing additional domestic reserves but should nevertheless be robust in presenting the internal absence of corresponding reserve resources as well as congestion on related interconnection lines. The exact type of reserve (size and technical characteristics), the time horizons for which is needed, the maximum cross border capacity to be reserved as well as statistical data on the interconnectors use during corresponding hours shall be part of this analysis which shall be approved by the corresponding NRAs and copied to ECRB. In view of avoiding distortions it is clarified that any such reservation of cross-border capacity should be made at a price 41. In contrast, the exchange of balancing energy by utilising the remaining crossborder capacity after the intra-day gate closure shall be made free of any charge (except for losses). Consideration is being given also to whether it would be appropriate for the TSOs to reserve some capacity at the interconnections or even use the TRM to facilitate cross-border balancing and therefore market opening considering that in most countries all balancing and AS are provided by one player. However, the reservation of cross-border capacity by the TSOs would mean that corresponding quantities are excluded from the wholesale market 41 The receiving TSO will have to factor this price into the bids/offers submitted by the BSP of the other control area in view of the corresponding contracted reserve activation. LDK Consultants 44

46 since energy exchanges would be constrained in that case. Such an option would create obstacles in further market opening (e.g. by constraining imports that could compete with the dominant player) and there is no apparent reason why enhancement of competition in balancing should be preferred over more competition in the bulk energy market. Excess energy transit through a country where interconnection lines are highly congested may be also seen as an obstacle for that country to take advantage of any cheaper crossborder balancing energy. However, whether there is scope for a TSO to reserve capacity at the interconnections (thus constraining corresponding transit flows) could be demonstrated only through a cost-benefit analysis of the possible benefits in that country, as well as in the wider area, in accordance with the above provisions set by ACER. It is clarified that if reservation of cross-border capacity is for some cases allowed following corresponding studies being approved by NRAs, then this cross-border capacity shall not be subject to any UIOLI or UIOSI principles as its utilization is to take place during the last segment of the market (i.e. there will be no subsequent market to release it). In this respect, reserve exchanges in the 8th Region should generally follow the ACER FGB and be possible only if there is residual cross-border capacity or if: a) there is increased social welfare associated with corresponding cross-border capacities reservation that can be supported by corresponding cost-benefit analysis under the principles set by ACER or b) there are insufficient domestic reserves for compliance with the OH reserve requirements and part of these requirements must be contracted abroad (this still needs a study to support the existence of congestion and calculate corresponding capacities but we expect that the cost-benefit analysis requested above is likely to readily demonstrate an improvement in the social welfare). We note at this point that the above proposed arrangement for cross-border reserves exchanging in the 8 th Region should not be confused with the ECRB 42 proposal for the submission of a request for adjusting the OH requirements to enable tertiary reserves contracting in wider areas than control areas as this is expected to bring substantial economic savings. This proposal by ECRB fits to the so called reserves sharing scheme which, according to ACER FGB should be allowed by the corresponding Network Code. Such a process allows TSOs to size their reserves and possibly procure them together in the most efficient manner. This process however, should be seen under the constraints imposed by availability of the corresponding interconnections capacity. Furthermore, according to ENTSO-E, sharing of reserves is a future step for the European markets as it will require substantial analysis before concluding on the new security levels and criteria. According to ACER s FGB the methodology for a cost-benefit analysis to support cross border capacity reservation shall: calculate expected costs and welfare loss on other electricity markets; calculate expected benefits and welfare gain on balancing market; assess the distribution of above among markets and TSOs; utilise, to the extent possible, market data; and consider the impacts on neighbouring markets. 42 ECRB report on Electricity Balancing Models in the Energy Community, March LDK Consultants 45

47 ENTSO-E has presented 43 an initial approach on demonstrating social welfare when allocating cross-border capacity for reserves based on the following three methods: Ex-ante allocations Capacity auctions (explicit or implicit co-optimization) Countertrading Under the first method, cross border capacity is reserved before and separately from any existing markets (explicitly through ITRs allocation). The second method requires that TSOs bid for long and/or short term ITRs along with other market players when the explicit procedure is in place, or in case of implicit auctions, the TSOs bid for cross-border capacities in the day ahead timeframe and compete with other players on whether the co-optimization algorithm will clear corresponding quantities. Finally, the third method foresees that TSOs on both sides of an interconnector utilize upwards and downward regulation in a direction counter to the congested flow so as to free-up cross-border capacity for specific type of reserve to be exchanged. The latter is a method applicable only to specific and limited cases. Between the first two methods the second requires less effort in proving social welfare increase since the market drivers (competition) have already been taken into account. Upon winning ITRs, TSOs contract reserves from BSPs of other control areas. This means that the TSOs will have to participate in the long-term auctions (so as to have at their disposal reserves sufficiently prior to real time). However, this method will require a common methodology harmonizing the principles under which TSOs will be allowed to price their bids in corresponding explicit auctions. The first method is simpler to implement however, requires much more effort to prove the benefit to social welfare as well as to calculate a price for the cross-border transmission capacity reservation since this will be made outside any market. For the 8th Region an extra difficulty occurs considering that there are no wholesale market prices available in the various areas to be utilized for proving corresponding social welfare. I.e. at least in the first years, assumptions on prices should be utilized for these purposes. For the 8 th Region it is therefore proposed that, on a case-by case basis, one out of the first two methods is used. We should note here that the World Bank/Poyry report on Wholesale Market Opening 44 did suggest that there was sufficient interconnection capacity in the region to support a regional market and cross border balancing without the need to undertake such reservation. One option to test this assertion would be to augment the interconnection capacity monitoring report being undertaken as part of the South East Europe Market Monitoring project to include reporting on the unused capacity on individual interconnections i.e. the difference between actual flows and the physical limits of the lines Scope and Use of the TRM TRM is introduced to allow TSOs to safely calculate ATC in each interconnection. The Operation Handbook defines it as a security margin to cover unintentional deviations, emergency exchanges and inaccuracies in data collection. However, until today there is no standard methodology regarding its calculation among TSOs. 43 ENTSO-E Position Paper on Cross border capacity allocation for the exchange of ancillary services, January South East Europe Wholesale Market Opening, Poyry - Nord Pool, December 2011 LDK Consultants 46

48 Recognizing this need ACER in its CAMC Guidelines clarifies that the corresponding CAMC Network Code should include an approach on how to assess required security margins, to be further approved by NRAs. The CAMC Network Code introduces a general approach under which corresponding calculation shall integrate a statistical analysis of historic data showing the deviation of power flows caused by unintentional deviations to maintain frequency and by uncertainties in calculations between the different timeframes. TSOs shall recalculate the size of the TRM day ahead and intra-day. In the 8th Region, TSOs calculate the TRM to handle the risks identified by the Operation Handbook but there is no harmonized methodology as to its calculation across the region. According to the reasons for which TRM is calculated, corresponding capacity is excluded from what is made available to the market (i.e. for scheduled cross-border energy exchanges). ACER s FGB in line with the provisions of Regulation 714/2009 clarify that for the purposes of frequency containment reserves exchange, the reliability margin could be utilized. There is no reference as to whether TSOs could utilize the TRM for FRR or for RR exchanges when there is no other available capacity. The Guidelines however clearly state that the TSOs should not be allowed to reserve cross border capacity for balancing except for cases where the social welfare is increased. The determination of the social welfare is required to be undertaken on a case by case basis whereas TRM calculation methodology is required to be carried out on a uniform basis. Moreover, discrimination between market participants and the TSOs should be avoided especially with regard to firmness of allocated transmission rights. In this respect, TRM is understood as not being allowed to be utilized by TSOs apart from close to real time for FCR exchange. The design of the RBM for South East Europe as was proposed by SETSO SG provided that no reservation of capacities for regional balancing would be required. Corresponding exchanges would take place only if there were remaining cross border capacity due to: residual not allocated not utilized netting and updated calculations. The above approach is consistent with the ACER Guidelines. In case though, a robust analysis (as per the ACER Guidelines) proves that such an option would add to the social welfare then TSOs should be allowed to reserve corresponding cross-border capacity, on top of the TRM, the calculation of which should be harmonized with ENTSO-E CACM Network Code. Specifically, TSOs, in view of participating in cross border balancing should utilize any remaining capacity after the day- ahead market is closed (and from that point onwards after each session of the intra-day is closed). The TSOs should recalculate the TRM and therefore the ATC both in the day-ahead and the intra-day timeframes. It is to be expected that TRM, when recalculated on an intra-day basis, would be relatively small as the uncertainty that TRM is intended to deal with will be correspondingly smaller. Intra-day ATC recalculation shall be at least as precise as in previous timeframes Contracted Reserves exchange Two models are envisaged by ACER as appropriate for exchange of contracted reserves: a) the bilateral reserve trading model: surpluses of reserves are exchanged between adjacent areas which have not implemented integration of reserves procurement procedures; or LDK Consultants 47

49 b) the multilateral reserve trading model: reserves are exchanged between two or more control areas under a common procurement process. For the 8th Region, best practice recommendation would be to start with the bilateral reserve trading model as it is the simpler option and requires reduced harmonization levels. Following that, proceed to the integrated multilateral reserve trading model as soon as possible (when harmonization of products and procedures has reached an appropriate level). It is noted here that the second model does not necessarily imply reserves sharing. However, a reserves sharing scheme is easily implemented under the integrated approach of the multilateral reserve trading model. It is clarified that contracted reserves exchange, via the bilateral trading model, involves a TSO and corresponding BSP(s) from another control area with whom the TSO contracts the availability of the service. The connecting TSO (the one located where the reserve resource is located) will be involved in the process first to verify that subject reserve comprises surplus and secondly in case the reserve is actually activated, the corresponding balancing energy will be exchanged under a TSO-TSO model. The procedures identified under Section 4 of this report regarding separation and classification of reserve types is expected to facilitate the process of cross border exchange of manually activated FRR and RR Balancing Energy exchange According to ACER FGB, the Network Code on Electricity Balancing shall provide for balancing energy to be exchanged under a TSO-TSO model with common merit order list, taking into account operational security limits and limitations in corresponding interconnections capacity. Under the TSO-TSO model with common merit order list, TSOs share 45 their balancing resources and optimise their activation in order to minimise the cost by gathering balancing bids and offers, that have been submitted by BSPs in their control areas, into a common list and activate them according to this common merit order list taking into account technical constraints and operational security limits, including the availability of transmission capacities. For the 8th Region, the TSO-TSO without common merit order list is proposed as a first step for the creation of a RBM. This model comprises a simplified version of the above model opted for by ACER. Under this approach TSOs exchange surpluses of balancing energy that is not required locally, provided that there is sufficient available cross border capacity to perform the exchange. The TSO-TSO model without a common merit order list is proposed because it requires less harmonisation processes and the implementation cost is relatively low and therefore it is expected to be implemented faster. We note though, that such an approach is not as transparent as the one that involves a common merit order list and it does not provide for the same level of optimisation in selecting bids. Therefore, it should only be implemented as a transitional step towards the implementation of the TSO-TSO with common merit order list. For the TSO-TSO model without common merit order list to be implemented in the 8th Region the following steps are required: development of a common platform to exchange surpluses of balancing energy; development of non-discriminatory, fair, objective and transparent common rules on bids and offers activation from this platform (all non-nominated capacity should be 45 TSOs are allowed not to share a certain amount of the most expensive balancing energy bids of their control area following approval by the relevant NRA. LDK Consultants 48

50 made available for either national or regional balancing, first come-first served principle, initially pay as bid, later move to marginal payments); harmonisation in pricing of bids and offers so that bids/offers to the national balancing mechanism can easily be forwarded to the common platform; harmonisation among TSOs of the process for updating ATC and TRM in the interconnections; harmonisation of interconnections capacity allocation methodologies under the SEE CAO rules (for intra-day allocation of cross-border capacity the pro-rata approach is proposed); harmonisation and coherency of balancing mechanisms and intra-day sessions gate closure times (the ENTSO-E RG SEE to develop regional detailed and harmonised rules and procedures for intraday markets operation); sharing of close to real time forecasts on generation, load, reserve requirements, system constraints and weather conditions; harmonisation of non-delivery and imbalances settlement to avoid distortions 46 determination of a harmonised methodology for applying financial compensation between TSOs for balancing energy exchanged due to imbalances netting or due to unintentional deviations 47. Under this platform RR and manually activated FRR could be exchanged. Manually activated FRR exchange for imbalances netting (minimisation of TSOs counteracting 48 reserve activations) is expected to reduce the need for automatically activated energy which will then be available to face an increased penetration of RES. It is clarified that non-pre contracted balancing resources should also be included in this platform. The discussion under this topic and corresponding recommendations have been made for the total of the 8th Region except for Ukraine and Moldova 49, as we believe that the best practise involves the creation of a liquid and efficient regional balancing mechanism where as many as possible control areas participate. Such a RBM will be then relatively easy to be integrated into corresponding EU mechanisms. Considering that currently Moldova is balancing its system mostly through imports from Ukraine, it seems there is scope for Ukraine and Moldova to consider developing a subregional balancing scheme applying to the extent possible the recommendations made in this topic. However, if Moldova finally opts to synchronise with ENTSO-E through Romania (without waiting for the total of Ukraine to be also synchronised or being synchronised through 46 Although this is not an absolute pre-requisite, non-harmonized imbalance settlements will distort the market and provide for inefficient signals. 47 This is also a request under ACER FGB regarding the so called balancing energy exchanged implicitly. 48 Minimizing counteracting activation of balancing energy (imbalance netting) should take into account first whether there is cross border capacity to exchange corresponding balancing and secondly whether such an exchange would be economically efficient in total. As imbalance netting affects the system flows in real time, ad hoc rules should be approved by corresponding NRAs in view of avoiding system stability problems. 49 Ukraine and Moldova are in a different situation from the rest of the Contracting Parties, as, with the exception of a smaller part of Ukraine, the countries are synchronised with UPS/IPS (Russia). LDK Consultants 49

51 Romania and Western Ukraine 50 ) then Moldova will be dependent for balancing energy from both Ukrainian Burshtyn area and Romania. Since the latter is an EU Member State, balancing energy should be exchanged under corresponding ACER and ENTSO-E rules. Table 5: Reserves and Balancing Energy Exchange Mechanisms in Europe below summarises the basic characteristic of three reserves and balancing exchanging Mechanisms in Europe Recommendations In summary, best practice recommendations for cross border exchanges of reserves and balancing energy in the 8th Region include: Reservation of cross border transmission capacity for reserves exchanging to be possible only if it is associated with social benefit (including for OH compliance purposes). Reservation of cross-border capacity for reserves exchanging should be made at a price (the receiving TSO to factor this price into the bids/offers submitted by the BSP of the other control area). Cost-benefit analysis for the calculation of the social welfare increase should be based on ex-ante calculations initially utilising assumptions for the wholesale prices in the area. Alternatively the cost-benefit analysis could be based on the capacity auctions methodology proposed by ENTSO-E. In case reservation of cross-border capacity for reserves exchanging is approved then this shall not be subject to UIOLI or UIOSI. TRM should be utilized by TSOs close to real time only for FCR exchange. TSOs in the 8th Region to commonly develop a detailed methodology on TRM calculation based on the principles and approach set by ENTSO-E CACM Network Code. Corresponding methodology should allow for TRM and ATC recalculation on a day-ahead and intra-day basis and shall be approved by ECRB. For the exchange of reserves the bilateral reserve trading model is proposed with the aim to move to the multilateral reserve trading model as harmonisation process develops. For the exchange of balancing energy the TSO-TSO without common merit order list is proposed as a transitional step towards the implementation of the TSO-TSO with common merit order list (first come- first served). 50 According to the South East Market Opening Study, Moldova is suggested to explore alternative routes for a faster synchronisation with ENTSO-E (see pg237). LDK Consultants 50

52 The exchange of balancing energy by utilisation of any remaining cross-border capacity after the intra-day gate closure shall be made free of any charge. Development of a common platform to exchange surpluses of balancing energy (without common merit order list). Development of non-discriminatory, fair, objective and transparent common rules on bids and offers activation from this platform (all non-nominated capacity should be made available for either national or regional balancing). Harmonisation in pricing of bids and offers so that bids/offers to the national balancing mechanism can easily be forwarded to the common platform. Harmonisation among TSOs of the process for updating ATC and TRM in the interconnections. Harmonisation of interconnections capacity allocation methodologies under the SEE CAO rules (for intra-day allocation of cross-border capacity the pro-rata approach is proposed). Harmonisation and coherency of balancing mechanisms and intra-day sessions gate closure times (the ENTSO-E RG SEE to develop regional detailed and harmonised rules and procedures for intraday markets operation). Sharing of close to real time forecasts on generation, load, reserve requirements, system constraints and weather conditions. Harmonisation of non-delivery and imbalances settlement to avoid distortions 51. Determination of a harmonised methodology for applying financial compensation between TSOs for balancing energy exchanged due to imbalances netting or due to unintentional deviations. It is clarified that non-pre contracted balancing resources should be also included in this platform. 51 Although this is not an absolute pre-requisite, non-harmonized imbalance settlements will distort the market and provide for not efficient signals. LDK Consultants 51

53 Table 5: Reserves and Balancing Energy Exchange Mechanisms in Europe Mechanism BALIT (Balancing Inter TSO) NOIS IGCC (International Grid Control Cooperation) Model applied Multilateral TSO-TSO exchange of balancing energy Balancing energy exchanges through a CMO list Common procurement process for reserves Activation through a TSO- TSO CMO Countries involved UK and France Nordic Countries All German TSOs extended to include the Danish, Dutch and Swiss TSOs Basic Characteristics Each TSO keeps its own reserves (MW) Each TSO keeps its own procurement mechanism Next to real time, if a TSO has unused balancing energy (surpluses), it bids it into the other TSO s mechanism As exchanges are done next to real time no reservation of interconnection capacity is needed (only remaining ATC is used) Inter TSO emergency arrangements remain Each TSO has its own procedures for contracting availability of reserves There is a common Intra-day market (ELBAS) Common platform for bids/offers activation under a common merit order list, marginal price determined for the whole region paid to all BSPs Exchanges possible only if available cross border capacity exists In case of congestion the market splits and there are more than one marginal prices calculated Implicit auctions for cross border capacity through Elspot and ELBAS markets Common reserves procurement procedure via an internet platform Sharing of reserves across control areas Activation from a common MOL Uniform imbalance price (re BAP) 52 No reservation of cross-border capacity, exchanges possible only if there is available cross-border capacity after the intra-day gate closure Basic products exchanged Submission at H+ε for delivery at [H+1;H+2] (ε = 10min), Activation: Between H+ε and H+30, 24 gate closures per day (1 per hour), Blocks of 50 MW throughout the delivery period, Both upwards and downwards All Balancing energy including non-pre contracted resources Minute reserve, secondary control, primary control 53 Minute reserve: daily procurement process, 4hour slices both upwards and downwards, blocks of minimum 5 MW, up to 25MW can be designated indivisible Secondary control, primary control: weekly procurement 52 It is clarified that rebap although called as uniform balancing price is the price at which deviations are cleared 53 While secondary control power is activated automatically and used continuously, minute reserve is activated manually in a fifteen-minute pattern to support and/or replace secondary control power. LDK Consultants 52

54 12. Improving cross border infrastructure for balancing Market integration, including cross-border balancing, requires solutions which allow congestion on networks to be identified and effectively managed. Congestion occurs when electricity is unable to flow where there is a need for it, because there are either contractual (all available capacity has been reserved) or physical (e.g. not enough capacity) obstacles to this flow. The first issue is addressed through appropriate and efficient rules for cross-border capacity allocation while the second is addressed through identification of the most appropriate investments. The Energy Community has already identified a requirement for all Contracting Parties to develop a regional strategic power development plan 54. The Framework Guidelines on Congestion Management and Capacity Allocation for Electricity and the Network Code that relates to it deal primarily with the commercial aspects, in particular through the simple Use It Or Sell It principle linked to Physical Transmission Rights the only credible option until the market develops significantly. Regulation (EC) No 714/ , and Congestion Management Guidelines from the Annex to the Electricity Regulation (the CM Guidelines ) set out the principle that the income derived from Congestion Management on interconnections should be redistributed to pre-specified uses according to a methodology established by the TSO and approved by the NRA. Article 16(6) of the Regulation requires that Congestion Income be used for: Guaranteeing the availability of all allocated capacity and/or Maintaining or increasing interconnection capacities through network investments, in particular new interconnectors. Only if these investments are not available may the income be used to reduce tariffs. The CM Guidelines suggest further that when used for investment to maintain or increase interconnection capacity that it shall preferably be assigned to specific predefined projects which contribute to relieving the existing associated congestion and that the income should be rapidly reinvested in a relevant project although it may be held on account until required. Income not allocated to these specific purposes would constitute regulated income and as such represent no benefit to the TSO whereas increasing interconnection capacity or increasing interconnection availability would serve to increase revenue from asset based or flow based charges respectively. Guaranteeing the availability of interconnection capacity is expected to be delivered by the TSO undertaking such market style mechanisms as counter-trading. However, in the absence of harmonised market arrangements on either side of an interconnection, this option is severely limited in much of Europe. It is also clear that the issue of holding such income on account represents a financial problem for TSOs. 54 Infrastructure Investments in the Energy Community, a report by ECS on priority projects and next steps, ECS, July Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003 LDK Consultants 53

55 Significant tax liabilities are likely to be incurred on what is effectively a corporate profit. It is unsurprising that, as can be seen from Table 5: Use of Congestion Income 2008, ERGEG, many countries have opted to use Congestion Income to reduce transmission tariffs. Anecdotally, this behaviour has continued. Interestingly, the equivalent Gas Directive (2009/73/EC) includes a specific requirement on TSOs to invest in interconnection capacity (Article 13(2)) but this requirement is missing in the Electricity Directive. NRAs are required to publish a report detailing how congestion income is being used. In the past, ERGEG collated these annual reports (under the previous electricity regulation) and it is anticipated that ACER will shortly recommence this monitoring role. The last report by ERGEG was produced in 2010 with figures from the year Of the approximately 2bn of Congestion Income collected, distribution was along the following lines: Use of Use of Congestion Ensure Capacity Invest in New Lines Tariff Reduction Income Austria 11 % 71 % 18 % Belgium 100 % Bulgaria 66 % 34 % Czech Republic 65 % 21% 14 % Denmark 32 % 68 % Finland 100 % France 100 % Germany 71 % 29 % Greece 100 % Hungary 100 % Italy 100 % Netherlands Norway 100 % Poland 57 % 43 % Portugal 100 % Romania 100 % Slovakia 50 % 50 % Slovenia Spain Sweden 0 % 53 % 47 % 1 % 99 % United Kingdom 54 % 46 % 80 % 20 % 56 Electricity Regulation (EC) 1228/2003 Compliance Monitoring Third Report, ERGEG, Ref: E10-ENM-04-15, 7 December 2010 LDK Consultants 54

56 Table 6: Use of Congestion Income 2008, ERGEG The current version of the Network Code on Congestion Management and Capacity Allocation is designed to complement the CM Guidelines and requires that all System Operators should develop a common methodology for the redistribution of Congestion Incomes (i.e. revenue from Capacity Allocation at the Day Ahead). One of the objectives under the Network Code is to facilitate the development of the pan-european Interconnected System for Electricity. At this stage no further detail is available. Thus, all we can say at this stage is that it is permissible and preferred that Congestion Income be used for reinvestment. Projects should be: earmarked ahead of the congestion income being generated; ideally associated with those interconnections/borders generating the Congestion Income; and coordinated with the regional strategic power development plan. Note that Congestion Income is distinct from general allocation revenue which under normal circumstances in Europe is treated as regulated income that offsets transmission charges on the basis that the interconnections are, in general, funded out of the allowed revenue of the TSO. In contrast to such interconnection projects in Continental Europe, auction revenue for the Anglo French Interconnector between Great Britain and France is returned to the licensee to recover capital and operational expenditure. As such Congestion Income is viewed as a return on investment. In effect the licensed interconnection is treated as a merchant project. However, Ofgem (the GB regulator) believes that options for merchant interconnection are dwindling as opportunities to seek exemptions from parts of the EU regulations relating to new Interconnections are reducing. Additional sources of revenue for investing in new interconnections are of course the ITC income. Changes to the ITC mechanism are currently being consulted on by ACER 57. Note however that the ACER study suggests that the portion of the new investment funded from Congestion Income would not constitute a cost for recompense under the ITC mechanism i.e. there should be no double counting of investment costs. Investments funded or part funded by Congestion Income would necessarily be in addition to investments classed as Projects of Common Interest (PCI) under the Energy Infrastructure Package (EIP) 58, which are expected to be funded from transmission tariffs in the countries benefitting from the PCI Recommendations Summarizing the above, best practice recommendations for improving cross-border infrastructure of balancing energy exchange in the 8th Region include: 57 Review of the ITC annual cross-border infrastructure compensation sum, ACER, Oct Proposal for a Regulation of the European Parliament and of the Council on guidelines for trans- European energy infrastructure and repealing Decision No 1364/2006/EC COM(2011) 658 final, Brussels, Oct LDK Consultants 55

57 TSOs to establish infrastructure projects for reinvestment of congestion income prior to income occurring. Require annual report on the use of Congestion Income from TSO. 13. Conclusions As the ECRB EWG annual Assessment Report notes, Balancing Markets in the 8 th Region are still in the development phase. By virtue of their small sizes balancing in these countries is potentially more difficult and more expensive than in larger countries. It is to be expected that creating a regional market for wholesale energy and balancing services would significantly improve this situation. Each of the sections of this report concludes with recommendations for best practice in various aspects of Balancing Market design. By implementing these best practice recommendations, Balancing Market design in the countries of each Contracting Party will be improved and harmonised, making the longer term aim of establishing a regional market a credible goal. There are recommendations for the: Definitions of common terminology for ancillary services, balancing energy and related terms; Measurement of ancillary services and balancing energy; Pricing of ancillary services in a non-market environment and treatment of the costs of balancing; Appropriate allocation of balancing costs from both pre-contracted and uncontracted reserves as well as the use of implicit balancing; Settlement of energy imbalance and other financial clearings; Regulatory treatment of imbalance settlement surpluses and deficits; Regulatory monitoring of ancillary services and balancing; Monitoring of imbalance settlements; Feasibility of implementing regional balancing mechanisms; Improving cross border infrastructure for balancing; and the Treatment of cross border balancing energy. Clearly, the ECRB still has a crucial role in monitoring and facilitating initiatives that further the implementation of these recommendations and the development of harmonised market designs. LDK Consultants 56

58 Abbreviations Table AC ACER ACE OL AhT OR AHROR ATC BETSEE BiH BM BNE BRP BSP CAO CACM CEER CMO list DC ECRB ECRB EWG ECS EIP ENTSO-E ERGEG FCR FGB FGSO FRR GDP GGP GME HHI Alternating Current Agency for the Cooperation of Energy Regulators Open Loop Area Control Error Ad hoc Team Operational Reserves Ad Hoc Report on Operational Reserves Available Transmission Capacity Balancing Energy Tool for South Eastern Europe Bosnia i Herzegovina Balancing Mechanism Best New Entrant Balance Responsible Party Balance Service Provider Coordinated Auction Office Capacity Congestion Management Council of European Energy Regulators Common Merit Order List Direct Current Energy Community Regulatory Board Energy Community Regulatory Board Electricity Working Group Energy Community Secretariat Energy Infrastructure Package European Network of Transmission System Operators for Electricity European Regulators Group for Electricity and Gas Frequency Containment Reserve Framework Guidelines on Electricity Balancing Framework Guidelines on System Operation Frequency Restoration Reserve Gross domestic Product Guidelines of Good Practice for Electricity Balancing Markets Integration Italian Market Operator (Gestore Mercati Energetici) Hirschman Herfindahl Index LDK Consultants 57

59 IGCC ITC ITR LFC MO MSD NRA OCM OH OR PAB PCG PCI RBM REMIT RES RG CE RG SEE RR SA SEE SETSO TF SETSO SG SMEs SRMC TF2 TRM TSO UIOLI UIOSI USAID WMO VoLL International Grid Control Cooperation Inter-TSO Compensation Interconnection Transmission Right Load Frequency Control Market Operator Dispatching Services Market National Regulatory Authority On the day Commodity Market Operational Handbook Operational Reserves Pay as Bid Parent Company Guarantee Projects of Common Interest Regional Balancing Market Regulation 1227/2011 for Energy Market Integrity and Transparency Renewable Energy Sources Regional Group Continental Europe Regional Group South East Europe Replacement Reserve Synchronous Area South East Europe South Eastern Europe Transmission System Operators Task Force South Eastern Europe Transmission System Operators Sub Group Small Medium Enterprises Short Run Marginal Cost Task Force 2 of the EWG Transmission Reliability Margin Transmission System Operator Use It Or Lose It Use It Or Sell It U.S. Agency for International Development Wholesale Market Opening Value of Lost Load LDK Consultants 58

60 Appendix A: List of Source Documents Available on the ENTSO-E website 1. Optimizing The Use Of Balancing Resources In Europe: On The Way To A European Wide Development Of Cross Border Balancing Exchanges, ENTSO- E, March Capacity Remuneration Mechanisms, ENTSO-E communication paper, May Network Code on Capacity Allocation and Congestion management ENTSO-E public consultation draft, March How A Mid Term Target Model For Balancing Energy Can Deliver Efficiency Benefits And Stimulate Future Integration, ENTSO-E position paper, January Cross Border Capacity Allocation For The Exchange Of Reserves, ENTSO-E position paper, January Creating Competitive Pan-European Energy Markets Which Ensure Appropriate Adequacy And Efficiently Integrate Renewable Energy, ENTSO-E principles paper, December Developing balancing systems to facilitate the achievement of renewable energy goals, ENTSO-E position paper, November Regional Action Plan for Market Integration in South East Europe, ENTSO-E, September ENTSO-E Response to EC Public consultation on ERGEG Advice on Comitology Guidelines on Fundamental Electricity Data Transparency, September Ancillary Services in Europe Contractual aspects, ENTSO-E paper, July ENTSO-E Operation Handbook 12. Cross Border Balancing, ENTSO-E position paper July 2011 Available from the ECS website 13. Policy Aspects of Wholesale Market Opening in the Energy Community, ECS discussion paper, September South East Europe Wholesale Market Opening, Poyry - Nord Pool, December Ancillary Services in Europe Contractual Aspects, a report by ENTSO-E, July Survey on Ancillary Services Procurement & Balancing Market Design, a report by ENTSO-E, September Ad Hoc Team Operational Reserves, Final Report, May Available from the ECRB website 18. ECRB Work Program 2012, ECRB website. LDK Consultants 59

61 19. Assessment Report on Electricity Balancing Models in the Energy Community, ECRB, March Regional Balancing Mechanism BETSEE for South East Europe. Regulatory Assessment Paper reviewing (Previous-) SETSO TF Examination Paper, ECRB, June Infrastructure Investments in the Energy Community, a report by ECS on priority projects and next steps, ECS, July Available from the Official Journal of the European Union 22. Regulation 1227/2011 on wholesale energy market integrity and transparency [2011] OJ L326/1 23. Directive 2009/72/EC of the European parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC [2009] OJ L211/ Regulation 714/2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003 [2003] OJ L211/ 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 [2003] OJ L 176/37 Available from the CEER website 26. CEER Monitoring Report On Transaction Reporting And Detecting Market Misconduct In Wholesale Energy Markets - Good Practice Examples From National Regulatory Authorities, CEER, December Draft Comitology Guidelines on Fundamental Electricity Data Transparency, ERGEG consultation paper, September Regulatory Aspects of the Integration of Wind Generation in European Electricity Markets, CEER Conclusions Paper, July Revised ERGEG Guidelines of Good Practice for Electricity Balancing Markets Integration, ERGEG, September Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the Support of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC 31. Proposal for a Regulation of the European Parliament and of the Council on guidelines for trans-european energy infrastructure and repealing Decision No 1364/2006/EC COM(2011) 658 final, Brussels, Oct Available from the ACER website 32. Framework Guidelines on Electricity Balancing, ACER final draft, September Initial Impact Assessment Framework Guidelines on Electricity Balancing, ACER draft, April Framework Guidelines on System Operation, ACER draft for consultation, July 2011 LDK Consultants 60

62 35. Electricity Regulation (EC) 1228/2003 Compliance Monitoring Third Report, ERGEG, Ref: E10-ENM-04-15, 7 December Review of the ITC annual cross-border infrastructure compensation sum, ACER, Oct 2012 LDK Consultants 61

63 Appendix B: Organogram LDK Consultants 62

64 Appendix C: Balancing Definitions Key to Source Documents ACER Framework Guidelines on Electricity Balancing = FGB TF2 Glossary = TF2 Additional definitions created in this work = New Ad Hoc Report on OR = ROR ACER Framework Guidelines on System Operation = FGSO ERGEG Guidelines of Good Practice for Electricity Balancing Markets Integration = GGP 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 and Directive 2009/72/EC of the European parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC = EC Term Abbreviation Definition Source Activation Delay Of FCR Activation Signal The time delay between the occurrence of frequency deviations bigger than the activation deviation of FCR and the start of activation of FCR. The signal from the TSO to a BSP to begin activation of Operational Reserves. The signal may be provided automatically, for example as part of the LFC, or manually as part of the optimisation process used by a TSO efficiently chose between pre-contracted reserves provided through Ancillary Service Contracts or uncontracted reserves bid into the Balancing Mechanism. ROR New Activation Time The minimum notice needed by a Balancing Market participant to deliver the power of its balancing offer. It refers to elapsed time between automatic activation signal or manual order emission and beginning of energy delivery. It does not include ramping. GGP Alert Operating An operating state of the power system which entails that all demand is met FGSO LDK Consultants 63

65 Term Abbreviation Definition Source State and that the frequency, voltage and load flows are within the defined technically permitted limits/thresholds, but not all reserve margins requirements are fulfilled and disturbances (unplanned outages) could lead to further deterioration of system state. In this operating state, the power system is stable and all operational reserves (transmission capacities and remedial actions) are mobilised. There is no specific time frame for the system to return from this operating state to normal operating state. Ancillary Services Services necessary to support transmission of electric power between generation and load, maintaining a satisfactory level of operational security and with a satisfactory quality of supply. FGSO The main elements of Ancillary Services include active and reactive power reserves for balancing power and voltage control. Active power reserves include automatically and manually activated reserves and are used to achieve instantaneous physical balance between generation and demand. Further elements of Ancillary Services may include black-start, inertial response, trip to houseload, spinning reserve and islanding capability. In the liberalised market, many Ancillary Services are contracted by TSOs from selected grid users that qualify for providing these services. Area Error Control ACE The Area Control Error is the instantaneous difference between the actual and the reference value for the power interchange of a control area, taking into account the effect of the frequency bias for that control area according to the network power frequency characteristic of that control area, and of the overall frequency deviation. ROR Automatically- Activated Balancing resources which are triggered GGP LDK Consultants 64

66 Term Abbreviation Definition Source Reserve without any manual intervention. In Energy Community countries this includes the former Balancing Services of Primary and Secondary Reserves. New Balance Responsible Party BRP A market participant, or its chosen representative, responsible for the financial settlement of its imbalances. FGB New Balance Service Provider BSP A market participant providing balancing services to one or more TSOs within one or more control area(s). FGB GGP A BSP may be a producer or a consumer. Balancing All actions and processes through which TSOs ensure that the total electricity withdrawals (including losses) are equaled by the total injections in a continuous way, in order to maintain the system frequency within a predefined stability range. FGB FGSO Balancing Energy Energy (MWh) activated by TSOs to maintain the balance between injections and withdrawals (including losses). It refers to both automatically-activated and manually-activated balancing resources. FGB FGSO New TF2 Sometimes called Control Energy. Balancing Group A group of electricity market participants for which Imbalance Settlement is determined in aggregate. New Balancing Market That part of the overall electricity market that provides Balancing Services. A Balancing Market consists generally of two important parts: GGP New Balancing Services procurement defines features of procurement processes, e.g. the way of bidding, constraints/requirements on the Balancing Market participants, way of payment to the bidders, constraints on the TSOs, who makes the merit order and how it is constructed, etc. Imbalance Settlement scheme allows costs borne by a TSO to be passed on to Balance Responsible LDK Consultants 65

67 Term Abbreviation Definition Source Parties. ** Where Balancing Markets are actually operating, Imbalance Settlement does not form part of the BM but rather is seen as part of the broader trading arrangements/balancing regime that incentivises individual BRPs to nominate and deliver balanced schedules. Balancing Mechanism Balancing Mechanism Settlement Balancing Period Balancing Reserves Balancing Services A transparent market-based mechanism for the supply and purchase of electricity, needed in the framework of balancing requirements. The process of paying BSPs for the Balancing Energy that they have provided to the system or removed from the system as the result of receiving an Activation Signal from the TSO. Typically this activity will be performed in conjunction with Imbalance Settlement but the two activities may be performed separately. See Program Time Unit Power capacities (MW) available for TSOs to balance the system in real time. These capacities can be contracted by the TSO with an associated payment for their availability and/or be made available without payment. Technically, Reserves can be either automatically or manually activated. See also Operational Reserves. Balancing Reserves or Balancing Energy provided to a TSO by a BSP. The 3rd Energy Package requires TSOs to promote the integration of reserve markets and balancing. EC New New FGB New FGB New TF2 Bid/bid A statement, made in a Balancing Mechanism, expressing the willingness of a Balancing Services Provider to withdraw Balancing Energy from the network if New LDK Consultants 66

68 Term Abbreviation Definition Source requested to do so by the TSO. The Bid will usually state a maximum price for the activated energy and, either in the Bid itself or in related bidding parameters, specify minimum and maximum volumes of energy that can be withdrawn. For a generator, an accepted Bid is intended to result in generation below the previously scheduled level. For controllable load, an accepted Bid is intended to result in consumption above the previously scheduled level. [Full delivery of a Bid should not affect a BRPs imbalance position.] This term also refers (when written in normal case) to both Bids and Offers in the Balancing Mechanism. Bidding Zone Revised to: the largest geographical area within which market participants are able to exchange energy without capacity allocation. FGB Blackout A state of the power system characterised by partial or total absence of voltage in the transmission power system with consequences abroad and triggering TSOs restoration plans. A Blackout can be partial (if a part of the system is affected) or total (if the whole system has collapsed). From this state, restoration is undertaken with stepwise reenergising and resynchronising of the power system. FGSO Control Area Control Block Controllable A coherent part of the interconnected system, operating at the common synchronous frequency, and operated by a single TSO responsible for Load- Frequency-Control for physical loads and generation units connected to it. The composition of one or more Control Areas working together to ensure the Load Frequency Control. Load whose active power can be varied according to the synchronous area or TSO FGB TF2 ROR ROR LDK Consultants 67

69 Term Abbreviation Definition Source Load needs during normal operation. Load- Shedding is not included. Critical Operating State Cross-Border (Transmission) Capacity Cross-Border Balancing An operating state of the power system entailing that the system security constraints are violated, there are no measures left and any further disturbance (e.g. unplanned outage) can lead to a system breakdown or blackout. Furthermore, automatic load shedding might have been applied to some degree and further loss of generation or parts of network may occur. A capacity to transfer energy from one congestion management Bidding Zone to another. Reservation of Cross-Border Transmission Capacity indicates (a portion of) available Cross-Border Capacity, which is reserved for cross-border exchange of Balancing Services and thus is not accessible to market participants for cross-border energy trade. Exchanges of Balancing Energy and/or Operational Reserves between control areas and/or between bidding zones. FGSO FGB FGB New Cross-border Exchange Reserves of A TSO ( Reserve Receiving TSO ) gets access to operational reserves connected to another grid within the responsibility of another TSO ( Reserve Connecting TSO ) to perform its individual load frequency control. Cross-border Exchange of Reserves means that those Reserves are no longer available for use by the Reserve Connecting TSO. ROR Cross-border Sharing Reserves of Reserve sharing is a TSO-TSO agreement that allows TSO under certain conditions to share part of their reserves between each other i.e. for selection from a Common Merit Order list. TSOs can take shared reserves, made available to them, into account in order to meet individual reserve requirements. ROR Day-Ahead Market timeframes occurring in D-1. FGB LDK Consultants 68

70 Term Abbreviation Definition Source Revised to: market timeframes where commercial transactions are executed one day ahead of the day of delivery of traded products. Demand Response Dimensioning Incident Changes in electric usage by end-use consumers from their normal load patterns in response to changes in electricity prices and/or incentive payments designed to adjust electricity usage, or in response to the acceptance of the consumer s bid, including through aggregation. The maximum expected instantaneous power deviation due to an incident in a control area relevant for the dimensioning of the Operational Reserves. FGB ROR Distribution System Operator DSO See System Operators FGSO Electrical Time Deviation Time discrepancy between synchronous time and UTC. ROR Energy Imbalance See Imbalance New FCR Controller Decentralized / locally installed control equipment for a provider of FCR to control the active power output of the generator/load. ROR In the case of synchronous generators it controls the valves of the turbine based on the speed of the generator Frequency Containment Reserves FCR Operating reserves necessary for constant containment of frequency deviations (fluctuations) from nominal value in order to constantly maintain the power balance in the whole synchronously interconnected system. FGB New Activation of these reserves results in a restored power balance at a frequency deviating from nominal value. This category typically includes operating reserves with the activation time up to 30 seconds. Operating reserves of this category are usually activated LDK Consultants 69

71 Term Abbreviation Definition Source automatically and locally. This category of reserves was previously described as Primary Control Reserves. Frequency Control Control scheme created to maintain balance between generation and demand, and to contain a Frequency Deviation following a dimensioning incident in the Synchronous Area. New Previously described as Primary Control. Frequency Deviation Deviation of frequency from the nominal frequency. It can be negative or positive. ROR Frequency Restoration Reserves FRR Operational Reserves used to restore frequency to the nominal value and power balance to the scheduled value after sudden system imbalance occurrence. FGB New This category includes Operational Reserves with an activation time typically up to 15 minutes (depending on the specific requirements of the synchronous area). Operational Reserves of this category are typically activated centrally. These Reserves can be activated automatically or manually in contrast to the category of reserves previously called Secondary Reserves, which only covered Automatically-Activated Reserves. FRR Delay Time The period of time between the Activation Signal from TSO and the commencement of FRR delivery. ROR New Full Activation Time Of FCR Time period between the occurrence of the reference incident (idealized stepshaped) and the corresponding full activation of the FCR. ROR Full Activation Time Of FRR Time period between the Activation Signal and the corresponding full activation of the FRR. ROR New Gate Time Closure Deadline for the participation to a given market or mechanism. FGB New Gate Closure Time for the Balancing Mechanism or Market may differ from that LDK Consultants 70

72 Term Abbreviation Definition Source for the Day-Ahead Market or Intra-Day Market Generating Unit Grid Users A generating unit is an indivisible set of installations which can generate electrical energy. The generating unit may for example be a thermal power unit, a singleshaft combined-cycle plant, a single machine of a hydro-electric power plant, a wind turbine, a fuel cell stack, or a solar module. If there are more than one generating units within a power generating facility that cannot be operated independently from each other than each of the combinations of these units shall be considered as one generating unit All users connected to the transmission or distribution grids. ROR FGSO Imbalance Deviation between generation, consumption and market deals in all timeframes of a BRP within a given Imbalance Settlement Period. Market deals include sales and purchases on organised markets, including the Balancing Market, or between BRPs notified to the body responsible for performing settlement. FGB New Imbalance Settlement A financial settlement mechanism aiming at charging or paying BRPs for their imbalances that a TSO is required to establish under the rules for the charging of system users of their networks for energy imbalance as required under Directive 2003/54/EC. Typically, the mechanism may also aim at recovering the costs of balancing. The general objective of imbalance settlement in national Balancing Mechanisms is to ensure that BRPs support the system s balance in an efficient way and incentivise market participants in keeping and/or helping to FGB New LDK Consultants 71

73 Term Abbreviation Definition Source restore the system balance. Imbalance Settlement Period Insensitivity Range Interconnection Interconnection Capacity Interconnection Gate Closure Intra-day Load Frequency Control Time units used for computing BRPs imbalances. To be consistent with Program Time Unit. The tolerance for active power frequency contribution from a FCR provider to deliver FCR. A line (circuit) or a set of lines (circuits) between two control areas or between two different synchronous areas. An interconnection between two Control Areas can be an AC or a DC one, whereas an interconnection between two synchronous areas can only be a DC one or a back-to-back converter station. Transmission capacity of Interconnections between control areas. The time up to which a market participant can nominate the amount of Interconnection Capacity they will use. Market timeframe beginning after the Day- Ahead Gate Closure Time and ending at the Intra-day Gate Closure Time. LFC Control scheme created to maintain balance between generation and demand, to restore the frequency to its set point value in the synchronous area and, depending on the control structure in the synchronous area, to maintain the exchange power to its reference value. Usually measured by the quality of frequency i.e. how close the System Frequency is to the Nominal Frequency. Previously described as Secondary Control in which only Automatically-activated reserves were utilised. FGB ROR FGSO TF2 GGP FGB ROR FGSO New Load Shedding Load shedding is the undesired disconnection of load from the synchronous area, usually performed ROR New LDK Consultants 72

74 Term Abbreviation Definition Source automatically in emergency situations. Manually- Activated Reserve Maximum Electrical Time Deviation Maximum Frequency Deviation Maximum Steady-State Merit Order List Nominal Frequency Normal Operating State Balancing Services which are triggered by human (manual) intervention. In Energy Community countries reserves previously described as tertiary reserves belong to this group. The maximum deviation of the system time (the time integral of the system frequency) from the astronomical time (UCT), agreed by TSOs of the synchronous area. Maximum expected instantaneous frequency deviation after the occurrence of a Reference Incident assuming predefined system conditions. Maximum expected frequency deviation at which the frequency deviation frequency oscillation after the occurrence of a Reference Incident stabilizes assuming predefined system conditions. A list of all valid balancing bids in the Balancing Market submitted by BSPs and sorted in order of their bid prices Hz. Outside exceptional periods for the correction of deviations recorded between electrical clocks following system frequency and astronomical (UTC) time, the set-point or scheduled frequency coincides with the nominal frequency. The rated value of the frequency for which all equipment connected to the electrical network is designed. An operating state of the electric power system entailing that all generation and load are in balance, requirements on Ancillary Services and framework conditions are met. Moreover in the normal operating state frequency, voltage and load flows are within their predefined and allowed technical limits and reserve margins are TF2 ROR ROR ROR FGB FGSO ROR FGSO LDK Consultants 73

75 Term Abbreviation Definition Source sufficient. N-x (Criterion) The N-x criterion is the rule according to which the elements remaining in operation after x failures of network elements (such as transmission line, transformer or generating unit, or in certain instances a bus-bar) must be capable of accommodating the change of flows in the network caused by that x number of failures. ROR Offer A statement, made in a Balancing Mechanism, expressing the willingness of a Balancing Services Provider to provide Balancing Energy to the network if requested to do so by the TSO. The Offer will usually state a minimum price for the activated energy and, either in the Offer itself or in related bidding parameters, specify minimum and maximum volumes of energy that can be provided. For a generator, an accepted Offer is intended to result in generation above the previously scheduled level. For controllable load, an accepted Offer is intended to result in consumption below the previously scheduled level. [Full delivery of an Offer should not affect a BRPs imbalance position.] New Open Area Error Loop Control ACE OL An indicator of the total imbalance, and is the sum of the ACE for that Control Area and the activated reserves. ROR Operating State Operational Planning And Scheduling The conditions of electric power system in real-time and are characterised by the degree of fulfilment of operational security criteria. There are three operating states (normal, alert and critical). When the power system is returning from alert or critical operating state, it is in restoration. Activities and tasks which are conducted prior to real-time operation. These activities include preparation of FGSO FGSO LDK Consultants 74

76 Term Abbreviation Definition Source schedules for exchanges of power across control area borders and planning within control areas, transmission capacity calculations, preparation of re-dispatch measures where applicable, coordination of protection settings, planned outages topology/configuration changes. (maintenance) and any necessary grid Operational Reserves OR Active power reserves located in the generation units or loads to maintain balance between generation and demand and restore the frequency to its set point value in the synchronous system. ROR Operational Reserves are classified as Frequency Containment Reserves, Frequency Restoration Reserves and Replacement Reserves. Operational Security A measure of the electric power system operational parameters against the defined normal operating conditions and of the electric power system capability to return to the normal operating state as soon as possible. Security limits define the acceptable operating boundaries (thermal, voltage and stability limits). FGSO Program Unit Time Time units used for scheduling and programs. FGB Reference Incident The maximum expected instantaneous power deviation due to an incident in the synchronous area for which the dynamic behaviour of the system is designed. ROR Relevant Regulators National regulatory authorities supervising TSOs on either side of interconnections. GGP Replacement Reserves RR Operational Reserves used to restore the required level of Operational Reserves to be prepared for a further system imbalance. FGB New This category includes Operational Reserves with activation time from 15 minutes up to hours. This category of reserves was previously described as Tertiary Control Reserves. LDK Consultants 75

77 Term Abbreviation Definition Source Reservation Of Cross-Border Transmission Capacity Reserve Connecting TSO Reserve Providing Unit Reserve Receiving TSO Reserve Transiting TSO Restoration Security Analysis Security Control A portion of available Cross-Border Capacity which is reserved for crossborder exchange of Balancing Reserves and thus is not accessible to market participants for cross-border energy trade. The TSO responsible for the area where the reserve providing unit is located. A single entity (including a generating unit, controllable load or Interconnection) that provides Operational Reserves. The TSO responsible for the area which is physically receiving the operational reserves from outside its responsibility area. Any TSO through which the cross-border exchange reserves between a reserve connecting TSO and a reserve receiving TSO might flow. A transition from the alert and critical operating states to the normal operating state. During restoration after a major disturbance or supply interruption, demand is re-connected at a pace which the restored network and generation resources can accommodate. Analysis to determine the operational security ex ante or during the real-time operation. Security analyses include e.g. contingency analyses, which compute the impact of unplanned outages on operational security, according to relevant security criteria, using load-flow algorithm, voltage stability analyses (steady state or transients), etc. Control actions aiming to maintain the power system in the normal operating state or as close as possible to the normal operating state, contributing to the maintenance of the operational security. In the event of security FGB ROR ROR ROR ROR FGSO FGSO FGSO LDK Consultants 76

78 Term Abbreviation Definition Source degradation, it aims at returning the system as close, fast and efficiently as possible to the normal operating state. Security Criteria Requirements and framework for the electric power system security control. FGSO Self-Regulation Of Load Load decrease expected in case of a frequency drop of 1 Hz ROR Set Point A target value for any parameter typically used in control schemes. ROR Settlement Period See Imbalance Settlement Period New Synchronous Area SA An interconnected electric power system, characterised by a common operating frequency and implemented as a set of synchronously interconnected transmission networks (control areas) FGSO System Frequency The frequency in a Synchronous Area. AHROR System Operation All activities for operating an electric power system, including security, control and quality in terms of relevant technical standards, principles and procedures, but also the synchronous operation of interconnected power systems. FGSO System Operator The Transmission System Operator (TSO) and the Distribution System Operator (DSO), in their roles and responsibilities to implement and enforce the relevant network code(s) and operate, maintain and develop the relevant system. FGSO TF2 This term refers also (when written in normal case) to the operating staff at the control room, e.g. control engineers and shift leaders. System Constant Time Time constant of the dynamic response of the synchronous system assuming it behaved as a first order filter after the occurrence of a generation-load imbalance. AHROR LDK Consultants 77

79 Term Abbreviation Definition Source Time To Full Activation The elapsed time between Activation Signal and energy delivery at targeted power during a bid s delivery time scale. It includes Activation Time and ramping. GGP Time Restore Frequency To Maximum expected time after the occurrence of a reference incident in which the frequency is restored inside the standard frequency range. AHROR Tolerance Range For FCR Activation Frequency deviation at which the FCR activation is triggered at the latest. AHROR Transmission Reliability Margin TRM New Transient Stability Transmission Capacity Calculation The ability of an electric system to maintain synchronism between its parts when subjected to a disturbance of specified severity and to regain a state of equilibrium following that disturbance. The determination of the Cross-Border Capacity available to the market, based upon the electrical and physical realities of the network. AHROR FGSO Transmission System Operator TSO see System Operator FGSO Unintentional Deviation The difference between the actual energy exchange that has taken place in a given time interval and the scheduled energy exchange, without taking into account the effect of the frequency bias. It is mathematically equal to the integration of New LDK Consultants 78

80 Term Abbreviation Definition Source ACE over the Settlement Period. Adapted from the ENTSO-E Handbook. The difference between the control area schedules and tie-line flows. LDK Consultants 79

81 Appendix D: Questionnaire submitted to NRAs LDK Consultants has been retained by the Energy Community Secretariat to undertake a project on behalf of the Energy Community Regulatory Board (ECRB) entitled Development of Best Practice Recommendations for Imbalance Settlement. As part of that project we are seeking to identify the current approach and terminology used by Energy Community Contracting Parties when balancing their electricity systems. To enable us to do this we are asking TSOs and NRAs a number of questions relating to the use of balancing tools in the South East Europe Region. Broadly, three categories of reserve are identified by SEE TSOs; Primary Reserve or Frequency Containment Reserve (FCR), Secondary Reserve or Frequency Restoration Reserve (FRR) and Tertiary Reserve or Replacement Reserve (RR). Questions 1 11 relate to all three categories of reserve. So for instance for Q1, please provide details of the contractual arrangements for securing Primary Reserve, Secondary Reserve and Tertiary Reserve. If more than one mechanism is used to procure services for a category of reserve, for example both through an Ancillary Service or System Service and through a Balancing Mechanism (BM), please give details for each mechanism separately. Thank you for taking the time to answers these questions. If you have information or documentation that you believe would further assist us in understanding the issues raised by this questionnaire, or you wish to discuss the questions in more detail, please contact either Duncan Jack ([email protected]) or Katerina Karali ([email protected]). Q1. Describe the form of any contractual arrangement to provide each category of Reserve. For example, is this an Ancillary Service/ System Service or provided through a BM? Does the contract specify Availability and Utilisation prices or a single price? What is the duration of the contract? Over what period is the service to be delivered? Q2. What is the pricing process set out in any contractual arrangement described in Q1? For example, are the contracts Pay as Bid, Marginally priced, are prices set by the NRA, is some other form of price discovery mechanism described? Q3. For each category of reserve what is the procurement process? For example is reserve provision mandatory, provided by bilateral negotiation or is there an organised Market e.g. Tender, Balancing Mechanism. LDK Consultants 80

82 Q4. From whom is each category of reserve procured? For example, are reserves procured from all users, Incumbents, Dominant Parties, Generators or Loads? Q5. Is the same product procured from each type of Balancing Service Provider? Q6. What is the activation process for each category of reserve? Is the activation an instruction sent directly from the TSO or is it in the form of a BM Bid/Offer acceptance? Is activation automatic, for example via AGC, or manual? Q7. How is the delivery of Balancing Energy from each category of reserve monitored? Q8. Describe the payment process to the Balancing Services Provider for any fixed fee element of the contract, for example for the Availability fee if applicable. Q9. Describe the payment process to the Balancing Services Provider for the Balancing Energy delivered by the activation of any contract for reserve. Q10. If the system does not balance in each Settlement Period, an inadvertent exchange will occur with neighbouring countries. Describe how the TSO arranges for the energy to be returned. For example, for ENTSO-E members, the Compensation Program process is used, but for non ENTSOE members what are the timings for returning inadvertent energy exchanges? Does the TSO arrange for the necessary energy from Balancing Services Providers or adjust the nominated positions of BRPs? Q11. Describe the cost recovery process for each element of the balancing services costs. For example is a specific charge made or does it form part of an amalgamated network charge? Are all users charged or a sub category e.g. generators or loads? Are fixed and variable costs recovered in different ways? Are costs from pre-contracted services recovered in a different way to BM services? The following question only relates to Tertiary Reserve. Q12. How does the TSO choose, in an economically efficient manner, whether to activate an AS Contract for Reserve or utilise a BM Offer or Bid? In certain circumstances, the activation of Tertiary Reserve or a BM Bid or Offer would have the same effect in terms of balancing the system. If the suggested definition of FRR is adopted, then the same may also be true for the manual activation of FRR. System Services LDK Consultants 81

83 The following data request is specific to the TSOs or NRAs of Albania, Moldova, Serbia and Ukraine. Because an English language translation of your Grid Code in not readily available, please provide English language definitions of the following categories or provide a translation of your Grid Code. Operational Reserves (OR) Replacement Reserves (RR) Load Frequency Control (LFC) Balance Responsible Party (BRP) Balancing Balancing Energy Reserves Balancing Services Primary Reserve and Primary Control Secondary Reserve and Secondary Control Tertiary Reserve and Tertiary Control Automatic Generation Control (AGC) Ancillary Services System Services Thank you for taking the time to provide this data. If you have information or documentation that you believe would further assist us in understanding these issues, or you wish to discuss the request in more detail, please contact either Duncan Jack ([email protected]) or Katerina Karali ([email protected]). LDK Consultants 82

84 Serbia Appendix D: Responses Received (Responses have been formatted for presentational purposes but otherwise are presented as received). Q1. Describe the form of any contractual arrangement to provide each category of Reserve. Many members responded to similar questions in a 2010 questionnaire and responses were used to compile Table 2 of the Balancing Assessment Report. We are repeating the question in order to gain up to date data and to complete the table for those countries that did not previously respond. So, for example, is this category of reserve pre-contracted or provided through a day ahead or on the day mechanism? Further to the information in Table 3 of the Balancing Assessment Report please indicate both the periods over which reserve is available and the duration of the contract in those cases where a service is pre-contracted JP EMS as the Serbian TSO has annual contract for provision of the System Services with JP EPS as the Balance Service provider which acts on behalf of all generators connected to the transmission network. This contract covers primary, secondary and tertiary reserve, as well as voltage regulation, black start and island operation. This contract is valid for a calendar year. Amount of each of the reserves and their availability is defined in the contract. Q2. What is the pricing process set out in any contractual arrangement described in Q1? For example, are the contracts Pay as Bid, Marginally priced, are prices set by the NRA, is some other form of price discovery mechanism described? This question seeks very similar data to that used to produced Table 5 of the Balancing Assessment Report but we are interested to understand the pricing mechanism for all components of the contract, for example any availability component, and not just the activated energy component. The price for all System Services is set by NRA. The total price for all System Services is defined as a lump sum. Q3. For each category of reserve describe the procurement process. In those cases where reserve provision is mandatory, how is the corresponding requirement (by category) allocated to the various units when there are many providers capable of providing the same service? Where reserve provision is delivered through bilateral negotiation or some other market mechanism please describe the process. Provision of reserve is mandatory and there is only one provider of the services (JP EPS). The method how requirements are allocated to the LDK Consultants 83

85 Serbia various units is defined in the System Services contract and its annexes. Q4. From whom is each category of reserve procured? For example, are reserves by category procured from all users, Incumbents, Dominant Parties, Generators or Loads? This question seeks to get greater clarity regarding reserve provision by category than that provided by Table 4 of the Balancing Assessment Report. For example we would expect that only generators would provide Primary Control/FCR but what categories of reserve might be provided by end consumers or electricity suppliers? Primary reserve is provided by all generating units. Secondary reserve is provided by 4 hydro power plants. Tertiary reserve is provided by all generating and pumping units. Q5. Is the same product procured from each type of Balancing Service Provider? There is only one Balance Service Provider (JP EPS). Q6. What is the activation process for each category of reserve? Is the activation of the balancing energy an instruction sent directly from the TSO under the terms of an Ancillary Service contract or is it in the form of a BM Bid/Offer acceptance? Is activation automatic, for example via AGC, or manual? Activation of primary and secondary reserve is automatic. Activation of tertiary reserve is done through manual instruction sent by TSO under the terms of the System Services contract. TSO activates tertiary reserve based on the merit order list sent by Balance Service Provider. Q7. How is the delivery of Balancing Energy from each category of reserve monitored? Activation of the primary reserve is monitored only in cases of significant frequency changes by analysing response of all generating units. Activation of the secondary reserve is regularly monitored and the results are compiled in monthly regulation report. Activation of the tertiary reserve is regularly recorded and it is compiled in monthly regulation report. Q8. Describe the payment process to the Balancing Services Provider for any fixed fee element of the contract, for example for the Availability fee if applicable. LDK Consultants 84

86 Serbia All system services are paid as a lump sum in 12 monthly instalments. Q9. Describe the payment process to the Balancing Services Provider for the Balancing Energy delivered by the activation of any contract for reserve. Balancing energy is not paid separately. The costs are covered through a lump sum in System Services contract. Q10. Describe the cost recovery process for each element of the balancing services costs. This question seeks additional information to that provided for Table 6 of the recent Balancing Assessment Report. Specifically: Are reserve costs recovered through the Transmission Tariff or some other charge? Are all users charged or a sub category e.g. generators or loads? Are fixed and variable costs recovered in different ways? Are costs from pre-contracted services recovered in a different way to BM services? System Services costs are covered through the Transmission Tariff which is applied to all network users. The following questions currently only relate to Tertiary Reserve. Q11. If the system does not balance in each Settlement Period, an inadvertent exchange will occur with neighbouring countries. Describe how the TSO arranges for the energy to be returned. For example, for ENTSO-E members, the Compensation Program process is used, but for non ENTSOE members what are the timings for returning inadvertent energy exchanges? Does the TSO arrange for the necessary energy from Balancing Services Providers or adjust the nominated positions of BRPs? Returning of inadvertent energy exchanges is done according to the rules of ENTSO-E applied in the Continental Europe interconnection. Procurement or delivery of necessary energy in this case is covered through System Services contract between TSO and Balancing Services Provider. LDK Consultants 85

87 Serbia Q12. How does the TSO choose, in an economically efficient manner, whether to activate an AS Contract for Reserve or utilise a BM Offer or Bid? In certain circumstances, the activation of an Ancillary Services Contract for Tertiary Reserve or the acceptance of a BM Bid or Offer could have the same effect in terms of balancing the system. If the suggested definition of FRR is adopted, then the same may also be true for the manual activation of FRR. Activation is done based on a merit order list provided by Balancing Services Provider. LDK Consultants 86

88 Balancing definitions in Serbia Operational Reserves (OR) Replacement Reserves (RR) Load Frequency Control (LFC) Balance Responsible Party (BRP) Balancing Balancing Energy Reserves Balancing Services Primary Reserve and Primary Control Secondary Reserve and Secondary Control Tertiary Reserve and Tertiary Control Automatic Generation Control (AGC) Ancillary Services System Services DEFINITIONS AND ARTICLES FROM THE TRANSMISSION GRID CODE: DEFINITIONS: АУТОМАТСКА РЕГУЛАЦИЈА ПРОИЗВОДЊЕ (AGC) Процес аутоматског управљања производњом (активном снагом) регулационих електрана, тако да се фреквенција и сума снаге размене електричне енергије са суседним електроенергетским системима одрже што је могуће ближе планираним вредностима. AUTOMATIC GENERATION CONTROL - AGC Process of automatic control of generation (active power) in regulating power plants in order to maintain frequency and power exchange total with neighbouring power systems as close as possible to the planned values БАЛАНСИРАЊЕ ЕЛЕКТРОЕНЕРГЕТСКОГ СИСТЕМА Процес ангажовања секундарне и терцијарне резерве у циљу одржавања суме снаге размене са суседним електроенергетским системима на планираној вредности. BALANCING OF POWER SYSTEM Process of activating secondary and tertiary reserve in order to maintain power exchange total with neighbouring power systems as close as possible to the planned values. ОПСЕГ ПРИМАРНЕ РЕГУЛАЦИЈЕ Опсег подешења снаге примарне регулације у оквиру којег примарни регулатори могу да обезбеде аутоматску регулацију у оба смера, као одговор на одступање фреквенције. PRIMARY CONTROL RANGE - Primary control setting range within which primary controllers may ensure bi-directional automatic control in response to frequency deviations. ОПСЕГ СЕКУНДАРНЕ РЕГУЛАЦИЈЕ Опсег подешења снаге на секундарном регулатору у оквиру којег секундарна регулација може радити аутоматски у одређеном времену, у оба смера од радне тачке снаге секундарне регулације. LDK Consultants 87

89 Balancing definitions in Serbia SECONDARY CONTROL RANGE - Secondary control setting range within which the secondary controller may function automatically within definite time interval, in both directions from the work point of secondary control power. ПРИМАРНА РЕГУЛАЦИЈА Регулација која одржава баланс између производње и потрошње у мрежи помоћу турбинског регулатора брзине. Примарна регулација је аутоматска децентрализована функција регулатора турбине којом се подешава излазна снага генераторске јединице као последица одступања фреквенције у синхроној области. Примарна регулација требало би да се, што је могуће равномерније, распореди на јединице које су у погону у синхроној области. PRIMARY CONTROL - Control that reflects balance between generation and demand in the system by means of the turbine speed governor. Primary control means an automatic decentralized turbine governor function used to adjust generator unit output power as a result of frequency deviation in the synchronous zone. Primary control should be distributed among units in operation in the synchronous zone as uniformly as possible. ПРИМАРНИ (ТУРБИНСКИ) РЕГУЛАТОР Децентрализовани, локално инсталисани регулациони уређај за регулисање вентила турбине на основу брзине обртања генератора. PRIMARY CONTROLLER - Decentralized, locally installed regulating device on the set used to control the turbine valve on the basis of generator speed. РЕЗЕРВА ПРИМАРНЕ РЕГУЛАЦИЈЕ Део опсега примарне регулације мерен од радне тачке пре поремећаја до максималног износа снаге примарне регулације. Може бити позитивна и негативна. PRIMARY CONTROL RESERVE - The part of the primary control range measured from the work point before disturbance up to the maximum primary control power. It is either positive or negative. РЕЗЕРВА СЕКУНДАРНЕ РЕГУЛАЦИЈЕ Део опсега секундарне регулације између радне тачке и максималне, односно минималне вредности (позитивна, односно негативна резерва). SECONDARY CONTROL RESERVE - The part of secondary control between the work point and the maximum/minimum value (positive/negative reserve). РЕЗЕРВА ТЕРЦИЈАРНЕ РЕГУЛАЦИЈЕ (15-МИНУТНА РЕЗЕРВА) Снага која се може активирати аутоматски или ручно под терцијарном регулацијом, у циљу обезбеђења адекватне резерве секундарне регулације. Ова резерва мора се користити на такав начин да допринесе поновном успостављању опсега секундарне регулације када је то потребно. Поновно успостављање адекватног опсега секундарне регулације се мора извршити у року од 15 минута. TERTIARY CONTROL RESERVE (15-MINUTE RESERVE) - The power that can be activated either automatically or manually under tertiary control with a view to obtaining adequate secondary control reserve (margin). This reserve has to be used in such a way as to contribute to the restoration of secondary control range when LDK Consultants 88

90 Balancing definitions in Serbia needed. Restoration of the secondary control range shall be activated within 15 minutes range. СЕКУНДАРНА РЕГУЛАЦИЈА Централизована аутоматска функција која регулише производњу у регулационој области у оквиру резерве секундарне регулације у циљу: - одржавања својих прекограничних токова снага у складу са програмом размене са свим осталим регулационим областима (и ради корекције губитака капацитета у регулационој области погођеној губитком производње) и истовремено, - поновног успостављања фреквенције на њену подешену вредност у случају одступања фреквенције коју је узроковала регулациона област (нарочито у случају већег одступања фреквенције коју је узроковала регулациона област, након испада веће производне јединице) ради ослобађања капацитета ангажованог од стране примарне регулације (ради поновног успостављања резерве примарне регулације). Секундарна регулација се реализује ангажовањем одабраних агрегата у електранама које су опремљене и обухваћене овом врстом регулације. SECONDARY CONTROL Centralized automatic function controlling the generation in the control area within the secondary control reserve with a view to: - maintaining cross border load flows in compliance with exchange programs with all other control areas ( and for correction of capacity losses in control areas affected by loss of generation ), and concurrently, - restoring the frequency to its preset value in case of frequency deviation caused by the control area (especially in the case of significant frequency deviation caused by the control area after outage of a major generator unit), in order to make available the capacity committed by the primary control (in order to restore primary control reserve). Secondary control is applied to selected generating sets in power stations included in this type of control. СЕКУНДАРНИ РЕГУЛАТОР Јединствена централизована опрема оператора преносног система у свакој регулационој области која подржава рад секундарне регулације. SECONDARY CONTROLLER - The coherent centralized equipment of TSO in each control area supporting the operation of the secondary control. СИСТЕМСКЕ УСЛУГЕ Услуге које пружају поједини корисници преносног система, како би оператор преносног система имао могућности да обезбеди све услове за нормалан рад електроенергетског система. SYSTEM SERVICES Services rendered by particular transmission system users enabling the transmission system operator to ensure all conditions for the normal electric power system operation. LDK Consultants 89

91 Balancing definitions in Serbia ОДГОВОРНА СТРАНА Правно лице које у име једног или више корисника преносног система преузима одговарајуће обавезе ових корисника (првенствено везане за поступак предаје дневних планова рада) на основу одговарајућег уговора закљученог са ЈП ЕМС. Одговорна страна може подносити ЈП ЕМС планове производње, односно планове размене, односно планове размене електричне енергије. Одговорна страна доставља дневни план рада ЈП ЕМС и прихвата поруку о пријему и формалној провери плана, извештај о евентуалној неправилности у плану и потврду о прихватању плана од стране ЈП ЕМС. RESPONSIBLE PARTY Legal person who on behalf of one or more transmission system users take certain obligations of these users (particularly related to the procedure of submission of daily schedules) based on appropriate contract concluded with JP EMS. Reposnsible party can submit production schedule and/or consumption schedules and/or power exchange schedules. Responsible party submits daily schedule to JP EMS and accepts acknowledgment report, anomaly report and confirmation on daily schedule acceptance by JP EMS. ARTICLES: Члан Системске услуге обезбеђују неопходне предуслове за нормалан рад електроенергетског система, односно брз повратак у нормалан или бар сигуран рад након настанка поремећаја. Системске услуге намењене су свим корисницима преносног система. Члан Под системским услугама подразумевају се: - примарна регулација; - секундарна регулација; - терцијарна регулација; - регулација напона; - покривање техничких губитака у преносној мрежи; - учешће у поновном успостављању електроенергетског система након распада. Article System services shall provide all preconditions required for a normal power system operation and fast restoration of normal operation, or at least secure operation after disturbances. The system services are designed for all network users. Article The system services comprise: - primary control; - secondary control; - tertiary control; - voltage control; - covering of technical losses in the transmission network; - system restoration management after blackout situations; DEFINITIONS AND ARTICLES FROM THE MARKET RULES (under preparation, from the Market Rules First Draft, not approved yet by NRA): DEFINITIONS: LDK Consultants 90

92 Balancing definitions in Serbia БАЛАНСНА ГРУПА Виртуелна област која може примити, односно из које се може предати електрична енергија, а која служи за потребе обрачуна и финансијског поравнања с аспекта балансне одговорности. Обухвата скуп места примопредаје електричне енергије на преносном, односно дистрибутивном систему, као и пријем и предају енергије по основу блокова прекограничне и интерне размене електричне енергије појединих учесника на тржишту. BALANCE GROUP Virtual area which may receive electric energy, i.e. from which electric energy may be delivered, and which serves for needs of accounting and financial settlement from the aspect of balance responsibility. It covers a set of energy takeover/delivery points in transmission and distribution system, as well as receipt and taking over of energy on the basis of blocks of cross-border and internal electricity exchange of particular market participants. БАЛАНСНО ОДГОВОРНА СТРАНА Учесник на тржишту електричне енергије који је балансно одговоран за одступања једне балансне групе у тржишној области Србије и који је закључио уговор о балансној одговорности са оператором преносног система. BALANCE RESPONSIBLE PARTY Electricity market participant which is balance responsible for deviations of a balance group within the market region of Serbia and which concluded a contract on balance responsibility with transmission system operator. ARTICLES: ARTICLE Балансна одговорност учесника на тржишту електричне енергије, за сваки обрачунски интервал је обавеза: - да обезбеди баланс производње, потрошње и блокова прекограничне и интерне размене електричне енергије; - да преузме финансијску одговорност према оператору преносног система за сва одступања везано за реализовану производњу, реализовану потрошњу и прихваћене блокове прекограничне и интерне размене електричне енергије. ARTICLE Balance responsibility of electricity market participants for each accounting interval is an obligation: -To provide balance of generation, consumption and blocks of cross-border and internal electricity exchange; -To assume financial responsibility toward transmission system operator for all deviations connected to realised generation, realised consumption and accepted blocks of cross-border and internal electricity exchange. DEFINITIONS FROM THE ENERGY LAW: Системске услуге - услуге које су неопходне за обезбеђивање сигурног, поузданог и стабилног рада енергетског система; LDK Consultants 91

93 Balancing definitions in Serbia System services services necessary to secure safe, reliable and stable operation of an energy system; Balance responsibility on electricity market is the obligation of market participants to balance production, consumption and contracted buying/selling of electrical energy in the period for which balance deviations are determined and to assume financial responsibility for the imbalances. Балансна одговорност на тржишту електричне енергије је обавеза учесника на тржишту да уравнотеже производњу, потрошњу и уговорену куповину и продају електричне енергије у периоду за који се утврђује балансно одступање и преузму финансијску одговорност за одступања; LDK Consultants 92

94 Former Yugoslav Republic of Macedonia Q1. Describe the form of any contractual arrangement to provide each category of Reserve. Many members responded to similar questions in a 2010 questionnaire and responses were used to compile Table 2 of the Balancing Assessment Report. We are repeating the question in order to gain up to date data and to complete the table for those countries that did not previously respond. So, for example, is this category of reserve pre-contracted or provided through a day ahead or on the day mechanism? Further to the information in Table 3 of the Balancing Assessment Report please indicate both the periods over which reserve is available and the duration of the contract in those cases where a service is pre-contracted 1. by the , the electricity generator whose license also includes the obligation on public service provision provide ancillary services, operational reserve and balancing energy to the transmission system operator, within the limitations and possibilities of its generation units, under prices approved and published by the Energy Regulatory Commission (primary, secondary and part of tertiary reserve). For the rest of needed tertiary reserve, TSO organized tendering procedure. Yearly contracts 2. from , TSO will organize tendering procedure for secondary and tertiary reserveyearly contracts Yearly contracts Q2. What is the pricing process set out in any contractual arrangement described in Q1? For example, are the contracts Pay as Bid, Marginally priced, are prices set by the NRA, is some other form of price discovery mechanism described? 1. by the , the electricity generator whose license also includes the obligation on public service provision provide ancillary services, operational reserve and balancing energy to the transmission system operator, within the limitations and possibilities of its generation units, under prices approved and published by the Energy Regulatory Commission (primary, secondary and part of tertiary reserve). For the rest of needed tertiary reserve, TSO organized tendering procedure. LDK Consultants 93

95 Former Yugoslav Republic of Macedonia 2. From , offered prices from tendering procedures (merit order list, starting with bottom price) This question seeks very similar data to that used to produced Table 5 of the Balancing Assessment Report but we are interested to understand the pricing mechanism for all components of the contract, for example any availability component, and not just the activated energy component. Q3. For each category of reserve describe the procurement process. In those cases where reserve provision is mandatory, how is the corresponding requirement (by category) allocated to the various units when there are many providers capable of providing the same service? 1. by the , the electricity generator whose license also includes the obligation on public service provision provide ancillary services, operational reserve and balancing energy to the transmission system operator, within the limitations and possibilities of its generation units, under prices approved and published by the Energy Regulatory Commission (primary, secondary and part of tertiary reserve). For the rest of needed tertiary reserve, TSO organized tendering procedure (merit order list, starting with bottom price). 2. From , offered prices from tendering procedures (merit order list, starting with bottom price) Where reserve provision is delivered through bilateral negotiation or some other market mechanism please describe the process. Q4. From whom is each category of reserve procured? For example, are reserves by category procured from all users, Incumbents, Dominant Parties, Generators or Loads? 1. Primary reserve (the electricity generator whose license also includes the obligation on public service provision) 2. Secondary reserve (by the the electricity generator whose license also includes the obligation on public service provision, from generators 3. Tertiary reserve (by the the electricity generator whose license also includes the obligation on public service provision or others, from generators and loads This question seeks to get greater clarity regarding reserve provision by category than that provided by Table 4 of the Balancing Assessment Report. For example we would expect that only generators would provide Primary Control/FCR but what categories of reserve might be provided by end consumers or electricity suppliers? LDK Consultants 94

96 Former Yugoslav Republic of Macedonia Q5. Is the same product procured from each type of Balancing Service Provider? Yes, the same product is procured from each type of Balancing Service Provider Q6. What is the activation process for each category of reserve? Activation of the balancing energy is by instruction sent by the TSO. Secondary reserve is activate via AGC, tertiary reserve by request, taking in consideration prices of activation from the tendering procedure Is the activation of the balancing energy an instruction sent directly from the TSO under the terms of an Ancillary Service contract or is it in the form of a BM Bid/Offer acceptance? Is activation automatic, for example via AGC, or manual? Q7. How is the delivery of Balancing Energy from each category of reserve monitored? Responsibility by TSO, monitored by ERC (hourly, daily reports) Q8. Describe the payment process to the Balancing Services Provider for any fixed fee element of the contract, for example for the Availability fee if applicable. Through Transmission tariff Q9. Describe the payment process to the Balancing Services Provider for the Balancing Energy delivered by the activation of any contract for reserve. TSO pay to balancing service provider for activation of reserve in accordance with approved price by ERC or tendering price. TSO transfer cost for for activation of reserve to balancing responsible parties which are responsible for the imbalances Q10. Describe the cost recovery process for each element of the balancing services costs. This question seeks additional information to that provided for Table 6 of the recent Balancing Assessment Report. Specifically: Are reserve costs recovered through the Transmission Tariff or some other charge? Costs for reserve are recovered through the Transmission Tariff. TSO transfer cost for for activation of reserve to balancing responsible parties which are responsible for the imbalancesare all users charged or a sub category e.g. generators or loads? loads Are fixed and variable costs recovered in different ways? LDK Consultants 95

97 Former Yugoslav Republic of Macedonia Unclear question (what is understanding of fixed and variable costs) Are costs from pre-contracted services recovered in a different way to BM services? Unclear question The following questions currently only relate to Tertiary Reserve. Q11. If the system does not balance in each Settlement Period, an inadvertent exchange will occur with neighbouring countries. Describe how the TSO arranges for the energy to be returned. MEPSO (Macedonian TSO) is ENTSO-E member. For example, for ENTSO-E members, the Compensation Program process is used, but for non ENTSOE members what are the timings for returning inadvertent energy exchanges? Does the TSO arrange for the necessary energy from Balancing Services Providers or adjust the nominated positions of BRPs? TSO arrange for the necessary energy from Balancing Services Providers Q12. How does the TSO choose, in an economically efficient manner, whether to activate an AS Contract for Reserve or utilise a BM Offer or Bid? In certain circumstances, the activation of an Ancillary Services Contract for Tertiary Reserve or the acceptance of a BM Bid or Offer could have the same effect in terms of balancing the system. If the suggested definition of FRR is adopted, then the same may also be true for the manual activation of FRR. 1. by the , the electricity generator whose license also includes the obligation on public service provision provide ancillary services, operational reserve and balancing energy to the transmission system operator, within the limitations and possibilities of its generation units, under prices approved and published by the Energy Regulatory Commission (primary, secondary and part of tertiary reserve). For the rest of needed tertiary reserve, TSO organized tendering procedure (merit order list, starting with bottom price). 2. From , offered prices from tendering procedures (merit order list, starting with bottom price) LDK Consultants 96

98 Additional Balancing Former Yugoslav Republic of Macedonia 1. In Q8 you state that the BSP, who I understand is currently the Generator with the Public Service Obligation, is recompensed for the fixed element of its reserve costs through the Transmission Tariff. Could you provide further detail of this process? For example, does the Generator with the PSO receive a specific refund as part of the transmission tariff or is it charged at a reduced rate because it is assumed that it will be providing reserve? Clarification: Energy Regulatory Commission of the Republic of Macedonia in yearly price decisions for electricity generator with PSO approves and revenues from ancillary services which TSO is oblige to cover to electricity generator with PSO. Costs for ancillary services of TSO, ERC recognizes in yearly price decision for transmission tariff (fixed costs). Yearly revenue of electricity generator with PSO is consisting from two parts: revenues from electricity for tariff consumers (small consumers and households) and revenues from ancillary services for the TSO. 2. In Q9 and Q10 you state that the TSO transfers the cost for the activation of reserve to the BRP responsible for the imbalance. Can you provide more details of this process? For example, how is a specific reserve activation linked to an individual BRP? How are the costs of the reserve activation identified? Clarification: Fixed costs for reserve are included in transmission tariff (using the same understanding, the costs of holding a generating unit ready to provide reserve that do not vary whether the unit is called or not are termed fixed costs). TSO pay to balancing service provider for activation of reserve in accordance with approved price by ERC or tendering price (from 1 st January, 2015). TSO penalize the BRP which generate imbalances, under: the price for imbalance settlement approved by ERC (until the 31 st December, 2014). the average price for activation of reserves in accordance with prices for activation of reserve from tendering procedure (from 1st January, 2015). The model of penalization is part of market rules. There is no link between specific reserve activation and BRP 3. You said that the questions on fixed and variable costs were unclear. The costs of providing reserve are often taken to fall into two categories. The costs of holding a generating unit ready to provide reserve that do not vary whether the unit is called or not are termed fixed costs - these cover items such as manpower, maintenance, profit. Variable costs are only incurred when the unit is activated and are mostly the fuel costs. On the basis that a tender is to be organised in 2015, has there been any discussion about how the transmission tariff will change to accommodate the possibility that other participants may be providing reserve? LDK Consultants 97

99 Additional Balancing Former Yugoslav Republic of Macedonia Clarification: All market participants who fulfill technical criteria s prescribed by TSO can participate to tendering procedure. It is logic, Macedonian generation units to secure primary and secondary reserve. 4. Fixed costs are incurred whether a unit is activated or not and in some jurisdictions, these costs are covered by a reservation fee paid by the TSO. The TSO can reduce his costs by targeting reserve provision on the hours when it is needed rather than all hours of the year or by selecting units with a lower reservation fee. Some jurisdictions see this as a general cost on the industry, a bit like an insurance premium, and share it across the industry in the transmission tariff. Others seek to target these fees on those BRPs that are out of balance during the relevant period. Similarly variable costs can be covered by an exercise fee or utilisation fee paid by the TSO when the TSO calls the unit. The TSO can reduce his costs by selecting the units with the lowest utilisation costs. Better still the TSO could call a unit already running to deliver a bilateral contract with a supplier and that had spare capacity. No reservation fee would have been required as the fixed costs should already have been recovered from the commercial contract. Based on that short discussion on the nature of fixed and variable costs, are there any parts of the Macedonian arrangements that recognise this separation of costs and treat them in different ways for the BSP,TSO or BRP? Clarification: Fixed costs for reserve are included in transmission tariff (using the same understanding the costs of holding a generating unit ready to provide reserve that do not vary whether the unit is called or not are termed fixed costs). TSO pay to balancing service provider for activation of reserve in accordance with approved price by ERC or tendering price (from 1st January, 2015). TSO penalize the BRP which generate imbalances, under the average price for activation of reserves in accordance with prices for activation of reserve from tendering procedure. The model of penalization is part of market rules. LDK Consultants 98

100 Bosnia and Herzegovina Q1. Describe the form of any contractual arrangement to provide each category of Reserve. Many members responded to similar questions in a 2010 questionnaire and responses were used to compile Table 2 of the Balancing Assessment Report. We are repeating the question in order to gain up to date data and to complete the table for those countries that did not previously respond. So, for example, is this category of reserve pre-contracted or provided through a day ahead or on the day mechanism? Further to the information in Table 3 of the Balancing Assessment Report please indicate both the periods over which reserve is available and the duration of the contract in those cases where a service is pre-contracted Ancillary service (reserve) providers and quantities are pre-defined on annual basis by decision of the regulator. So, according to the decision, reserve providers are obliged (mandatory) to respond to the ISO instruction. Q2. What is the pricing process set out in any contractual arrangement described in Q1? For example, are the contracts Pay as Bid, Marginally priced, are prices set by the NRA, is some other form of price discovery mechanism described? This question seeks very similar data to that used to produced Table 5 of the Balancing Assessment Report but we are interested to understand the pricing mechanism for all components of the contract, for example any availability component, and not just the activated energy component. Prices are set by the decision of regulator. The price of reserve capacity (availability component) as well as the price of the energy (activated reserve - energy component) is set by the decision of regulator. Q3. For each category of reserve describe the procurement process. In those cases where reserve provision is mandatory, how is the corresponding requirement (by category) allocated to the various units when there are many providers capable of providing the same service? Where reserve provision is delivered through bilateral negotiation or some other market mechanism please describe the process. Primary reserve provision is mandatory for all generators without remuneration. Secondary and tertiary reserve provision is also mandatory and providers and quantities are defined by the decision of regulator. Allocation to the various units (service providers) is also performed by regulator and defined within the same decision. Allocation is mainly based on least-cost approach (considered generation costs are the same as those used for determining non-eligible customers end-user tariffs). LDK Consultants 99

101 Bosnia and Herzegovina Q4. From whom is each category of reserve procured? For example, are reserves by category procured from all users, Incumbents, Dominant Parties, Generators or Loads? This question seeks to get greater clarity regarding reserve provision by category than that provided by Table 4 of the Balancing Assessment Report. For example we would expect that only generators would provide Primary Control/FCR but what categories of reserve might be provided by end consumers or electricity suppliers? All reserves (each of three types) are provided by Incumbents generators (there are 3 incumbent companies). At the moment there are no other reserve providers. Q5. Is the same product procured from each type of Balancing Service Provider? Yes. Q6. What is the activation process for each category of reserve? Is the activation of the balancing energy an instruction sent directly from the TSO under the terms of an Ancillary Service contract or is it in the form of a BM Bid/Offer acceptance? Is activation automatic, for example via AGC, or manual? According to the obligation set by regulators decision and the predefined Procedures on provision of the Ancillary Services, an instruction is sent directly from the ISO. Secondary reserve activation is performed via AGC, while tertiary reserve is manually activated upon ISO instruction. Q7. How is the delivery of Balancing Energy from each category of reserve monitored? Physical delivery of Balancing Energy is observed by ISO (monthly reports are sent to the regulator and to the providers of services) and monitoring of the whole process is performed by regulator. Q8. Describe the payment process to the Balancing Services Provider for any fixed fee element of the contract, for example for the Availability fee if applicable. Ancillary service tariffs (tariffs for the reserve capacity to be paid to generators) are set on a yearly basis by the decision of the Regulator (SERC). Every month ISO makes settlement and calculates amounts to be paid to the reserve providers by Balancing Responsible Parties. Eligible customers connected directly to the transmission network pay a separate tariff for ancillary services (tariffs for the reserve capacity) to Balancing Responsible Parties. All non-eligible customers LDK Consultants 100

102 Bosnia and Herzegovina (end users) are charged for ancillary services too, because these ancillary services rates (costs) are included in distribution network tariffs. Q9. Describe the payment process to the Balancing Services Provider for the Balancing Energy delivered by the activation of any contract for reserve. Tariffs for the tertiary reserve energy (to be paid to generators) are set on a yearly basis by the decision of the Regulator (SERC). Every month ISO makes settlement and calculates amounts to be paid to the reserve providers by Balancing Responsible Parties. Eligible customers directly connected to the transmission network conclude an Agreement on balancing responsibilities with Balancing Responsible Party, which defines their internal liabilities related to their imbalances. Q10. Describe the cost recovery process for each element of the balancing services costs. This question seeks additional information to that provided for Table 6 of the recent Balancing Assessment Report. Specifically: Are reserve costs recovered through the Transmission Tariff or some other charge? There are Ancillary service tariffs set on a yearly basis by the decision of the Regulator (SERC). Are all users charged or a sub category e.g. generators or loads? Only customer (load) category is charged with ancillary service tariffs. Are fixed and variable costs recovered in different ways? Yes. Fix costs are charged through tariff component for reserve capacity and variable costs through energy component. Are costs from pre-contracted services recovered in a different way to BM services? N/A The following questions currently only relate to Tertiary Reserve. Q11. If the system does not balance in each Settlement Period, an inadvertent exchange will occur with neighbouring countries. Describe how the TSO arranges for the energy to be returned. For example, for ENTSO-E members, the Compensation Program process is used, but for non ENTSOE members what are the timings for returning inadvertent energy exchanges? Does the TSO arrange for the necessary energy from Balancing Services Providers or adjust the nominated positions of BRPs? ISO, as ENTSO-E member, uses the Compensation Program process and adjusts the nominated positions of BRPs. LDK Consultants 101

103 Bosnia and Herzegovina Q12. How does the TSO choose, in an economically efficient manner, whether to activate an AS Contract for Reserve or utilise a BM Offer or Bid? In certain circumstances, the activation of an Ancillary Services Contract for Tertiary Reserve or the acceptance of a BM Bid or Offer could have the same effect in terms of balancing the system. If the suggested definition of FRR is adopted, then the same may also be true for the manual activation of FRR. At the moment, there is no utilisation of a BM Bid or Offer, so there is no possibility to choose between these two concepts. For any further information please consult regulator s Decision on Ancillary Services (link). LDK Consultants 102

104 Ukraine Q1. Describe the form of any contractual arrangement to provide each category of Reserve. None of the reserve categories is contracted. Reserve of primary regulation is provided as non-normative, i.e. primary regulation is provided, but its value depending on the frequency deviation is impossible to calculate due to inconsistency of basic primary regulation parameters to normative requirements (statism, high-speed performance, sensitivity). Secondary regulation is provided only by one HPP Dniprovska HPP-1. Besides, currently there is no contract for providing this service. Tertiary regulation is paid as payment for readiness. Payment is calculated according to the current Wholesale market rules and does not depend on the offered reserve volumes. Q2. What is the pricing process set out in any contractual arrangement described in Q1? Not applicable. Q3. For each category of reserve describe the procurement process. Q4. From whom is each category of reserve procured? Physically primary reserve is provided by NPPs, TPPs and some CHPs. Secondary reserve is provided only by one HPP ( Dniprovska HPP-1 ). Tertiary reserve is provided only by TPPs. Q5. Is the same product procured from each type of Balancing Service Provider? Q6. What is the activation process for each category of reserve? For primary reserve is an independent response of units on frequency changes in accordance with sensitivity and statism of the energy unit. For secondary reserve response on primary controller signal installed at central control panel. For tertiary regulation dispatcher command to each energy unit separately. Q7. How is the delivery of Balancing Energy from each category of reserve monitored? Estimated only electricity produced or underproduced when tertiary reserve is activated in accordance with current Wholesale electricity market rules and it is paid as payment for overproduction or underproduction. Both payments compensate only the additional costs from reduced efficiency of energy unit without any return. LDK Consultants 103

105 Ukraine Q8. Describe the payment process to the Balancing Services Provider for any fixed fee element of the contract, for example for the Availability fee if applicable. Not applicable Q9. Describe the payment process to the Balancing Services Provider for the Balancing Energy delivered by the activation of any contract for reserve. The units for balancing are chosen from the list of TPPs taking into account the order of start up/shut down and order of up-load/download of the units, which are made up by Market operator (SE Energorynok ). The next day after the day of supply SE Energorynok calculates the payments for those units which took part in balancing basing on their offers on the day-ahead market and the marginal price on the day-ahead market for selling electricity to Market operator on the day before the day of supply. Financial settlements as well are taking place between generation and market operator. Q10. Describe the cost recovery process for each element of the balancing services costs. All the balancing services are paid through wholesale electricity price which is calculated by the market operator SE Energorynok. Q11. If the system does not balance in each Settlement Period, an inadvertent exchange will occur with neighbouring countries. Describe how the TSO arranges for the energy to be returned. If the energy system is not balanced in any moment of time, an unplanned exchange with neighbouring system operator (Russia) occur. Unscheduled volumes are tried to be compensated by reverse flow in respective tariff zones (night, semi-peak, peak). If within the settlement month it couldn t be done, the settlements are made with money at the tariffs approved by NERC and fixed in the contract between Russian cross-border flows operator and Ukrainian market operator. Q12. How does the TSO choose, in an economically efficient manner, whether to activate an AS Contract for Reserve or utilise a BM Offer or Bid? There is no contract for reserve or ancillary services. LDK Consultants 104

106 Ukraine Definitions of some terms according to Ukrainian legal framework Operational Reserves (OR) in Ukraine - rotating reserves. Rotating capacity reserve of Integrated Energy System (IES) (region/ regulation unit)) the difference between total maximum allowed (in terms of possible continued allowed overload of equipment, existing capacity constraints and stability maintenance) active capacity of generating units connected to electricity network of IES (region/ regulation unit) and total active capacity which is generated in them, in the determined moment of time. Replacement Reserves (RR) not applicable Load Frequency Control (LFC) not applicable Balance Responsible Party (BRP) not applicable Balancing not applicable Balancing Energy not applicable Balancing Services not applicable Primary Reserve the maximum value of primary control capacity as part of nominal capacity, which power station generating set (region/regulation unit/synchronous area/integration of energy systems) could generate in case of increase (reserve on upload) or decrease (reserve on download) of frequency. Primary reserve is used in case of frequency deviation and restores during its return to the nominal value. Primary control the process of active capacity change of generating units, generating sets and power stations as a whole under the influence of reaction of automatic control system of turbines, boilers, reactors, active capacity group control systems of HPPs, as well as regulatory effect of load caused by the frequency change in IES (synchronous area/integration of energy systems) as a result of capacity imbalance in IES (region/regulation unit/synchronous area/integration of energy systems) aimed at reducing this change, ending with the establishment of quasistatic capacity balance with a new frequency. Value and sign of quasistatic frequency deviation depends on value and sign of capacity imbalance. General actions of primary control of IES (region/regulation unit) can be assessed by calculation of equivalent statism in IES (region/regulation unit) as a result of statism of all generating units (generating sets) and regulatory effect (autoregulation) of IES (region/regulation unit) total load. Through joint actions of integrated energy undertakings the system of primary control ensures operational reliability of IES (regions/regulation units/synchronous areas/ integration of energy systems). Secondary Reserve the value of maximum possible capacity change of generating unit (generating set), power plant, IES (region/regulation unit) usually under the influence of SACFC (system of automatic capacity and frequency control) and/or by command of System Operator/energy system dispatcher for upload or download (respectively reserve for upload and download). LDK Consultants 105

107 Ukraine Secondary Control the process of active capacity change of specially assigned power plants to compensate the capacity imbalance occurred, eliminate the overload of interconnections, restore the frequency and agreed external overflows, and restore the primary reserves used during primary control. Secondary control is usually carried out by centralized SACFC. Tertiary Reserve the value of maximum possible capacity change of generating units (generating sets), power stations of tertiary control in IES (region/regulation unit) during the tertiary control for upload (reserve for upload) and download (reserve for download). Tertiary reserves for upload also include consumers-regulators and electricity suppliers to/from IES (region/regulation unit), which are respectively ready to reduce (increase) consumed capacity in accordance to the command of System Operator/energy system dispatcher or SACFC. Tertiary Control operative or automatic capacity change (working points) of specially assigned generating units (generating sets), power stations of tertiary control and consumers-regulators (mainly by changing load schedules) to restore the secondary reserve to the extent of its exhaustion as well as for operative adjustment of regime in other purposes. The deviations from planned schedule, at first transferred to power plants of primary and then secondary control, are periodically transferred to all generating units (generating sets), power stations of tertiary control. Automatic Generation Control (AGC) (in Ukraine - system of automatic capacity and frequency control (SACFC). Central controller of SACFC) software and technical equipment designed to calculate and transmit automatic controlling tasks to generating objects which are involved in centralized automatic secondary control of region/regulation unit and to calculate the errors of control. Central controller of SACFC should have its own system of collecting and transmitting of information and to operate independently of the operatively-informational complex (OIС) or can be a part of integrated package SCADA/AGC/EMS where receiving/transmitting of operative information is ensured by OIС. Ancillary Services not applicable System Services - (in Ukraine this term is used only to identify the services which is provided by System Operator) LDK Consultants 106

108 Kosovo* *This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo declaration of independence ERO: General remark: The Kosovo generation/supply do not meet demand. For balancing and maintained stability of the power system is often used load reduction. The Kosovo generation around 97 % are obtained from Lignite Thermo Power Plant (non flexible) and the rest from the Hydro PP. Currently TSO of Kosovo (KOSTT) does not procure energy for Ancillary Services. Kosovo TSO, due to the technical limitations is not an Independent Control Area and is not member of ENTSO-E, but with Macedonia, Montenegro is part of the Serbian Control Block (ENTSO-e). Serbian TSO is not recognising TSO Kosovo and is interfering in the KOSTT activities without any contract and permitions. (Dispute settlement procedure initiated at EnC SEE against Serbia, for non-compliance with Regulation (EC) 1228/2003). Conclusion in the most of the questions the answers are not applicable (N/A), since there is not any contractual agreement in place for ancillary services. Q1. Describe the form of any contractual arrangement to provide each category of Reserve. Many members responded to similar questions in a 2010 questionnaire and responses were used to compile Table 2 of the Balancing Assessment Report. We are repeating the question in order to gain up to date data and to complete the table for those countries that did not previously respond. So, for example, is this category of reserve pre-contracted or provided through a day ahead or on the day mechanism? Further to the information in Table 3 of the Balancing Assessment Report please indicate both the periods over which reserve is available and the duration of the contract in those cases where a service is pre-contracted Primary reserve is mandatory for all generators. Secondary reserve: Currently there isn t any contract in place. Tertiary reserve actually is not provided. Load reductions are in place. Q2. What is the pricing process set out in any contractual arrangement described in Q1? For example, are the contracts Pay as Bid, Marginally priced, are prices set by the NRA, is some other form of price discovery mechanism described? This question seeks very similar data to that used to produced Table 5 of the Balancing Assessment Report but we are interested to understand the pricing mechanism for all components of the contract, for example any availability component, and not just the activated energy component. ERO: LDK Consultants 107

109 Kosovo* *This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo declaration of independence Currently not applicable any contractual arrangement. Q3. For each category of reserve describe the procurement process. In those cases where reserve provision is mandatory, how is the corresponding requirement (by category) allocated to the various units when there are many providers capable of providing the same service? Where reserve provision is delivered through bilateral negotiation or some other market mechanism please describe the process. ERO: Primary reserve is mandatory, and generators are not compensated for this service. Secondary reserve actually is not provided. Tertiary reserve actually is not provided. * In the near future secondary and tertiary reserve is expected to be provided for power system of Kosovo through the agreements. The pricing will be based on tendering/bilateral negotiation. Q4. From whom is each category of reserve procured? For example, are reserves by category procured from all users, Incumbents, Dominant Parties, Generators or Loads? This question seeks to get greater clarity regarding reserve provision by category than that provided by Table 4 of the Balancing Assessment Report. For example we would expect that only generators would provide Primary Control/FCR but what categories of reserve might be provided by end consumers or electricity suppliers? ERO: Primary reserve is mandatory for all generators. Secondary reserve actually is not provided. *In the near future is expected to be provided from Kosovo public generators and from KESH Albanian (KESH-Korporata Energjetike e Shqipërisë), based on the agreement of the 1/03/2010, but not in place due to the ongoing infrastructure works. Tertiary reserve actually is not provided. Q5. Is the same product procured from each type of Balancing Service Provider? ERO: N/A Q6. What is the activation process for each category of reserve? LDK Consultants 108

110 Kosovo* *This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo declaration of independence Is the activation of the balancing energy an instruction sent directly from the TSO under the terms of an Ancillary Service contract or is it in the form of a BM Bid/Offer acceptance? Is activation automatic, for example via AGC, or manual? ERO: Primary reserve: is automatically. Secondary reserve not provided. * It should be through centralised instructions from the national dispatch centre -TSO. Tertiary reserve: N/A Q7. How is the delivery of Balancing Energy from each category of reserve monitored? ERO: Not monitored -since is not in place. *The monitoring of category of reserves is defined by Grid Code. Q8. Describe the payment process to the Balancing Services Provider for any fixed fee element of the contract, for example for the Availability fee if applicable. ERO: Currently is not applicable. Q9. Describe the payment process to the Balancing Services Provider for the Balancing Energy delivered by the activation of any contract for reserve. ERO: N/A. Q10. Describe the cost recovery process for each element of the balancing services costs. This question seeks additional information to that provided for Table 6 of the recent Balancing Assessment Report. Specifically: Are reserve costs recovered through the Transmission Tariff or some other charge? Are all users charged or a sub category e.g. generators or loads? Are fixed and variable costs recovered in different ways? LDK Consultants 109

111 Kosovo* *This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo declaration of independence Are costs from pre-contracted services recovered in a different way to BM services? The following questions currently only relate to Tertiary Reserve. ERO: Currently is not applicable. Q11. If the system does not balance in each Settlement Period, an inadvertent exchange will occur with neighbouring countries. Describe how the TSO arranges for the energy to be returned. For example, for ENTSO-E members, the Compensation Program process is used, but for non ENTSOE members what are the timings for returning inadvertent energy exchanges? Does the TSO arrange for the necessary energy from Balancing Services Providers or adjust the nominated positions of BRPs? ERO: It is regulated week after, through the compensation program between TSOs. Q12. How does the TSO choose, in an economically efficient manner, whether to activate an AS Contract for Reserve or utilise a BM Offer or Bid? In certain circumstances, the activation of an Ancillary Services Contract for Tertiary Reserve or the acceptance of a BM Bid or Offer could have the same effect in terms of balancing the system. If the suggested definition of FRR is adopted, then the same may also be true for the manual activation of FRR. ERO: Not applicable. LDK Consultants 110

112 Montenegro General remarks - comments: the way and conditions for prividing services/procuring ancillary and sysem services and balancing services in the Montenegrin Energy System are set by the Methodology for setting prices and conditions for proving ancillary and system service and market rules issued by RAE in march 2012, or approved in July According to the agreement between EPCG, the owner of all power plants connected to transmission system in Montenegro, and CGES, as a transmission system operator, the provision of/purchase of ancillary and system services is carried out experimentaly, or in accordance with the Methodology, but without payments Q1. Describe the form of any contractual arrangement to provide each category of Reserve. Many members responded to similar questions in a 2010 questionnaire and responses were used to compile Table 2 of the Balancing Assessment Report. We are repeating the question in order to gain up to date data and to complete the table for those countries that did not previously respond. So, for example, is this category of reserve pre-contracted or provided through a day ahead or on the day mechanism? Further to the information in Table 3 of the Balancing Assessment Report please indicate both the periods over which reserve is available and the duration of the contract in those cases where a service is pre-contracted Provision of primary reserve (frequency primary regulation) is the obligation for all generators connected to the transmission system, pursuant to the Rules for transmission system operations (Grid Code) and there is no fee for provision of this service. Secondary reserve is mainly provided from domestic resources, where in the period when in Montenegro there is no enough available capacity, this service of the TSO can be provided from resources out of Montenegro, by signing contracts following tender procedure. Due to lack of capacity, tertian reserve is provided from domestic resources (compulsory part, it is about 50% of the reserve) and resources of Montenegro, and is done in a way similar to the one in the secondary reserve. Q2. What is the pricing process set out in any contractual arrangement described in Q1? For example, are the contracts Pay as Bid, Marginally priced, are prices set by the NRA, is some other form of price discovery mechanism described? This question seeks very similar data to that used to produced Table 5 of the Balancing Assessment Report but we are interested to understand the pricing mechanism for all components of the contract, for example any availability component, and not just the activated energy component. As noted before, there is no fee for provision of primary reserve. LDK Consultants 111

113 Montenegro For provision of secondary regulation from domestic resources only a fee for capacity reserve is paid, while there is no fee for the secondary reserve. The price of secondary reserve is set based on the fixed generators costs. If the secondary regulation is provided from resources out of Energy System of Montenegro, the payments are done according to contracts, where there is a possibility for payment both capacity and energy. In the provision of tertiary reserve from domestic reserves, the price for reserve availability is calculated as 20% of the price for capacity for the secondary reserve, while the price of energy is set by contract and it can not be higher than twice the price of energy purchased from import in that period. Q3. For each category of reserve describe the procurement process. In those cases where reserve provision is mandatory, how is the corresponding requirement (by category) allocated to the various units when there are many providers capable of providing the same service? Where reserve provision is delivered through bilateral negotiation or some other market mechanism please describe the process. Reserve allocation is done in accordance with available power, or according to the level of share of individual resources in the whole capacity. Q4. From whom is each category of reserve procured? For example, are reserves by category procured from all users, Incumbents, Dominant Parties, Generators or Loads? This question seeks to get greater clarity regarding reserve provision by category than that provided by Table 4 of the Balancing Assessment Report. For example we would expect that only generators would provide Primary Control/FCR but what categories of reserve might be provided by end consumers or electricity suppliers? In Montenegro there is still only one electricity generator whose faculties are linked to the transmission system so that there is no dilemma about the choice of a service provider. Q5. Is the same product procured from each type of Balancing Service Provider? Yes, such possibility is predicted. Q6. What is the activation process for each category of reserve? Is the activation of the balancing energy an instruction sent directly from the TSO under the terms of an Ancillary Service contract or is it in the form of a BM Bid/Offer acceptance? Is activation automatic, for example via AGC, or manual? LDK Consultants 112

114 Montenegro The primary and secondary regulation activation is automatic, while tertiary regulation is activated manually, or by TSO s order. Q7. How is the delivery of Balancing Energy from each category of reserve monitored? According to data by measuring performed permanently by TSO and DSO. Q8. Describe the payment process to the Balancing Services Provider for any fixed fee element of the contract, for example for the Availability fee if applicable. The calculation and invoicing for services provided have been done monthly. Service providers provide TSO with the invoice for a service provided based on the reports on the settlement agreed with the TSO. Q9. Describe the payment process to the Balancing Services Provider for the Balancing Energy delivered by the activation of any contract for reserve. Not answered. Q10. Describe the cost recovery process for each element of the balancing services costs. This question seeks additional information to that provided for Table 6 of the recent Balancing Assessment Report. Specifically: Are reserve costs recovered through the Transmission Tariff or some other charge? Are all users charged or a sub category e.g. generators or loads? Are fixed and variable costs recovered in different ways? Are costs from pre-contracted services recovered in a different way to BM services? The Secondary reserve cost, as well as costs for tertiary reserve availability which is obligation for all domestic generators, is integral part of the price for use of transmission system paid by all customers in Montenegro. Tertiary reserve provision cost for reserve provided from aboard is paid by electricity generators in Montenegro. LDK Consultants 113

115 Montenegro We are not sure that we have understood the question completely but if you mean the service costs used prior to signing the contracts then the repay is that they are paid in the same way as balancing mechanism services. Q11. If the system does not balance in each Settlement Period, an inadvertent exchange will occur with neighbouring countries. Describe how the TSO arranges for the energy to be returned. For example, for ENTSO-E members, the Compensation Program process is used, but for non ENTSOE members what are the timings for returning inadvertent energy exchanges? Does the TSO arrange for the necessary energy from Balancing Services Providers or adjust the nominated positions of BRPs? Montenegrin TSO is a member of ENTSO-E and operates in accordance with their rules. Both possibilities exist. Q12. How does the TSO choose, in an economically efficient manner, whether to activate an AS Contract for Reserve or utilise a BM Offer or Bid? In certain circumstances, the activation of an Ancillary Services Contract for Tertiary Reserve or the acceptance of a BM Bid or Offer could have the same effect in terms of balancing the system. If the suggested definition of FRR is adopted, then the same may also be true for the manual activation of FRR. In accordance with the Energy System stability work interests and economic criteria. LDK Consultants 114