Mark Pearce National Grid Interconnectors Business National Grid House Warwick Technology Park Gallows Hill Warwick CV34 6DA 23 June 2006

Transcription

1 Mark Pearce National Grid Interconnectors Business National Grid House Warwick Technology Park Gallows Hill Warwick CV34 6DA 23 June 2006 Dear Mark, Re: Proposal for the implementation of revised use it or lose arrangements EDF Trading Limited (EDFT) welcomes the opportunity to contribute to the consultation on the implementation of revised Use It or Lose It arrangements across the France England interconnector (IFA). Our position remains in favor of increased flexibility and optionality in capacity allocation. We think that the implementation of a revised Use it or Lose it arrangement should only be considered an interim measure, pending the development of a liquid and effective secondary market. The current IFA access rules present a number of shortcomings, and addressing them will help better utilise capacity across the interconnector. We will be commenting on the Use It or Lose It mechanism, intraday trading, secondary trading, capacity firmness, and the current auction mechanism. Use It or Lose It While we might understand a TSO s need for binding declarations to maximise day-ahead auctioned capacity, we are strongly opposed to the TSO s ability to withdraw, at no cost, allocated capacity through the Use It or Lose It mechanism. With the French day-ahead power auction clearing at 10:15 (UK Time), any lost capacity through nominations done prior to the market clearing should be compensated at the day-ahead auction price through a Use It or Sell It mechanism. Indeed, it is impossible for users to make a decision on the exercise of their capacity options before the market clearing price is published. We are therefore in favour of Step 1- Option 1 in the consultation document. This will not only prevent the TSOs from selling the capacity twice, but will also incentivise market players to release more capacity, especially when the spreads are tight.

2 Intraday trading Following the day-ahead auction, the second stage of the nominations mechanism should again be subject to a Use It or Sell It mechanism rather than the Use It or Lose It proposed in the consultation document. Market participants should have the ability to make their capacity usage decisions at the intraday gate closure, and if binding nominations are required at the day ahead stage for the release of intraday capacity, it should be done through a Use it or Sell it mechanism. This should be done in parallel with an increase in the number of gate closures to at least 12, to better line up the interconnector with the French and UK markets. Figure 1 is a sketch of what we think is the interim optimal mechanism. Figure 1: EDFT s proposal for the implementation of revised Use It or Lose It arrangements Intraday transfer limit Intraday trading across IFA is currently experiencing very low liquidity. The intraday transfer limit, used on a regular basis by the TSOs to restrict the interconnector s capacity to values very close to the day-ahead Mid Channel Nominations (MCNs) is considerably reducing the intraday trading possibilities, and should be eliminated for trading to develop. So far in 2006 for example, the TSOs have on average restricted intraday trading to circa 1550 MW, well below the 4000MW limit. Figure 2 illustrates the daily average intraday restrictions (across all 6 gate closures) from 01 January 2006 to 10 June 2006.

3 We understand the technical limitations of the interconnector (such as ramp rates, transmission constraints in Southern England and Northern France, etc ), but believe that the TSOs have at their disposal a number of balancing tools to manage those constraints, including plant redispatching, system operator to system operator trades and National Grid s right to intervene in the market through its trading arm. Average trading window (MW) Theoretical trading window MW /01/ /01/ /01/ /01/ /01/ /02/ /02/ /02/ /02/ /03/ /03/ /03/ /03/ /04/ /04/ /04/ /04/ /04/ /05/ /05/ /05/ /05/ /06/2006 Figure 2: 2006 Daily average intraday trading windows (averages taken across all 6 gate closures) Secondary trading EDFT believes that secondary capacity trading is the way forward to tackle all congestion management operational issues. EDFT is in favour of long term primary capacity auctions, at timescales longer than the current year ahead products, and then the subsequent trade of capacity contracts between market players and even the TSOs (for congestion management purposes) on a secondary market.

4 Very low liquidity levels are currently observed on the secondary market across IFA. If liquidity is to be boosted, a number of modifications to the current secondary market mechanism will need to be introduced: - Secondary trading should be possible up to the intraday gates (whose number is to be better lined up with the UK and French markets as mentioned earlier), rather than the current D-2 deadline. - An appropriate IT platform should be put in place to notify traders of capacity contracts on offer, and to allow TSOs to confirm trade acceptances. We think that an efficient and liquid secondary market can ultimately replace all the short-term primary capacity auctions and eliminate the need for Use It or Lose It and Use It or Sell It mechanisms. Capacity firmness Reductions in IFA s capacity below the target availability should be compensated at the full market spread rather than the paid price. This will allow market players to hedge their transmission price exposure, and is essential for the good functioning of the market. Auction mechanism and auction rules While IFA lead the way in the introduction of market based mechanisms in cross-border capacity allocation, the view across the industry now is that capacity auctions should be performed using a pay as clear rather than a pay as bid mechanism. Although market participants might value capacity in different ways, all players should pay one price for a same product. Moreover, the current inefficient auction procedure (with no fixed deadlines and fixed results times), coupled with the intolerably slow Logica 256 Kbit Logica platform are forcing participants to commit considerable resources, on a daily basis, for the execution of what should be a straightforward process. Capacity auctions have now been introduced all over continental Europe, and IFA is now one of the very few European interconnectors with a pay as bid mechanism. Another major shortcoming of the current auction mechanism relates to the auctioned products. At the day-ahead stage, multiple hourly products should be auctioned instead of the current daily products. The current daily products restrict the flexibility of the auction, and force market participants to purchase unnecessary products when the spreads between France and Great Britain vary throughout the day.

5 We would like to thank you for the opportunity to provide input on this matter of utmost importance, and will be more than happy to further discuss the issues raised in this letter. Sincerely, Kamal Khoury EDF Trading Limited Cc Mr. Jean Pompee, RTE Mr. Robert Hull, Ofgem Ms. Cécile George, CRE