Our ref. CHS PCG/ERGEG Regional Initiatives Group, pcg@ergeg.org ERI Northern region bld@ks.dk Copenhagen, 30 October 2009 Feedback from Nordenergi on PCG target model and roadmap propositions Dear Madam/Sir, In Nordenergi we thank you for the opportunity to comment on the outcome of the Project Coordination Group (PCG). Our comments consist of three parts, general comments, the top priorities for the Nordic region and remarks on the six different topics, focusing on target model and road map. The remarks are divided into: 1. Forward market 2. Day-ahead market 3. Intra-day market 4. Balancing 5. Capacity calculation 6. Governance General comments Nordenergi is generally very positive towards the work presented. Even though the proposals are not totally clear in all cases, Nordenergi finds it to be a positive step towards a common European market with a stepwise integration of the markets to be finally realised by 2015. In Nordenergi we would like to stress that the end date 2015 is a very important goal to work towards. However, what can be implemented by 2015 must be in practise feasible already now due to lead times in system changes. In addition, Nordenergi strongly recommends that the integration between the Nordic region and Central Western European region could start within 18 months according to the model and the implementation to be completed. This is much earlier than in 2015 which is the overall time frame for a full implementation throughout Europe. In general for all regions, there is no need to wait for the whole target model and for all elements to be ready before going on with the recognised integration possibilities. The areas with a clear target model must go forward where ever it is possible.
Page 2 of 5 Nordenergi supports the overall goals in the target models: forward markets must be in place all over Europe, physical transmission rights must be reduced, introduction of financial transmission rights for futures/forwards, price coupling day-ahead, the integration of balancing markets and continuous trading with Elbas intraday. Furthermore, Nordenergi finds that more work is needed on governance. Comments on Northern region and the North Europe Region development The Nordic countries are quite advanced compared to the rest of Europe with respect to power markets. Therefore, the Nordic region meets the challenges earlier than several other parts of Europe. Within the Nordel market area Nordenergi has: Common day-ahead market splitting including liquid and efficient financial hedging opportunities. Common intra-day energy trading through Elbas (including automatic nomination). Common TSO-TSO balancing power trading with a common merit order list. All these market aspects are continuously improved. Nordenergi emphasises that it is important that these processes are not stalled or even reversed as a consequence of the PCG process. Our top priority is integration of the Nordic market with continental Europe partly carried out within the framework of the ERGEG Regional Initiative. Continental Europe is not only geographically close to the Nordic region but also other European regions which provides challenges that have to be addressed. At the moment the priorities regarding the development of the North European Region are as follows: Market coupling on the connections between the Nordic region and Northern Europe. Next step is to launch implicit auctioning and price coupling at all interconnectors between the Nordic area and the Central Western European area. Nord Pool price area Estlink needs to be in place 2010. Intraday trading is already well developed in most parts of the region. Polish introduction of intraday trading in the end of the year plays an important role. A next step is to introduce Elbas on the connections between Western Denmark and Germany, Sweden and Poland, Sweden and Germany, Estonia and Finland, Netherlands and Norway. Start up the integration of the Nordic, German and Polish balancing markets. Nordenergi recognizes the complexity of the tasks, the large amount of needed resources, and the needed discussions between market participants. Nevertheless, in Nordenergi we would like to push for a faster development in the Nordic region and Northern Europe in order to realise the goals earlier than 2015. In Nordenergi we would like to see the next step of the PCG roadmap to be translated into concrete regional activities, including the above issues of integration with the Central Western European region. Furthermore, Nordenergi advocates for involvement of market actors in the processes. Forward market The following comments on forward market are based on the consensus that all available capacities on cross border transmission lines should be handled by implicit auctioning with price coupling. This means that capacity reservation is no longer necessary, as all transmission capacity will be efficiently used on shorter time frames (than the forward market).
Page 3 of 5 Nordenergi agrees that that forward markets must be introduced throughout Europe. In Nordenergi we do though have some doubts regarding the target model in general and the roadmap in particular. Nordenergi finds that the financial market possibilities need to be further investigated, especially because the use of PTRs (physical transmission rights) can hinder efficient use of transfer capacity in later time frames. As this is kept in mind, Nordenergi believes that efforts must be put on the use of FTRs (financial transmission rights). Furthermore, in Nordenergi we would like to stress that where implicit auctions are already in use, PTRs would be a step backwards, and, thus, should not be used under such circumstances. The present Nordic model with 100 percent day-ahead implicit auctions has proved to be well functioning and facilitates an efficient cross border competition. The Nordic model includes efficient financial hedging opportunities where CfDs (contract for differences) are used for hedging price differences between the common Nordic system price and the price areas due to congestions. In our view the main target must be to reduce the share of PTRs which, as mentioned, tends to make up a barrier for an efficient market. Furthermore, Nordenergi believes that it could be an advantage for all market participants if the different hedging possibilities could be analysed in closer detail. The analysis could with advantage include comparison of a model with 100 percent FTRs, and a model with 100 percent day-ahead implicit auctions including forward energy markets and CfD markets to find out whether these two kinds of models for financial hedging of physical day-ahead can work together. Day-ahead market Nordenergi supports the target model, including one common price area where the transmission lines are handled by implicit auctioning and price coupling, i.e. energy and capacity are handled together. Experience from the market coupling project on the border between Denmark and Germany clearly indicates that volume coupling contrary to price coupling causes large challenges. Furthermore, a finding is that energy and capacity needs to be handled in the same procedure. Nordenergi is aware that price coupling implies a need for one common algorithm, and that that it will be time consuming as well as challenging to develop such a common algorithm. Nordenergi finds therefore that there is a need for a separate roadmap for this single element. This map should also include how to tackle the important governance related issues. Nordenergi basically agrees with the roadmap which in mentioned order includes an agreement on target model, agreement on common governance principles, and gradual implementation in all regions. Nevertheless, Nordenergi wants to stress that as the gradual implementation takes as point of departures very different implementation levels in the different regions, it is important to continue progress towards the common target in all regions. In Nordenergi we would like to stress that harmonised gate closure generally is needed in market integration and should be a top priority regardless of target and roadmap. Harmonised gate closure is a prerequisite for integrating and coupling markets and should be considered as a key step to the development of the internal electricity market. Intra-day market The target is described as a two layer model one layer is an inter-regional cross border intra-day trading solution which handles the trading on the cross border transmission lines. The second layer
Page 4 of 5 handles trading within a region a layer which is optional. Consequently, focus is put on the integration between the regions and that within regions it does not have to follow the same solutions. Nordenergi supports this distinction and focus. Nordenergi believes however that the first layer will be easier achieved if the regions have the same solutions within the regions. Nordenergi supports the overall target for the development of the intra-day market to be based on implicit continuous trading, and that cross-border OTC (over-the-counter) offers must be included as any other bid/deal. In this solution trading of energy and capacity is handled in one step, and, therefore, there is no need for allocation via auctions an advantage for the market participants, for example, in connection with the aims of transparency and simplicity. Consequently, in Nordenergi we would like to call for attention to the Elbas intra-day solution which is used in the Nordic area. This is a well-tested solution which can easily be rolled out to more areas in Europe. Nordenergi supports the roadmap, but emphasises that a hybrid model combining implicit continuous trading and auctions must be an interim solution. The overall target must be continuous trading as this market is focused on covering the irregular balance needs of market actors. Balancing Nordenergi supports the target model Multilateral TSO-TSO mechanism with common merit order. Furthermore, Nordenergi in general supports the main principle on cross-border balancing as listed in the recent ERGEG guidelines of good practice on electricity balancing markets integration. This type of model is already implemented within the Nordic area, and in Nordenergi we would like to see it extended to include neighbouring regions as this will give a better use of the resources. Using a TSO-TSO approach as model for cross-border balancing is acceptable due to the very shortterm nature of the balancing market, and it leads to faster integration due to the fact that a lower level of harmonisation is needed from the start. However, Nordenergi wants to point out the need for increased transparency, as transparency is fundamental to achieve an efficient competition in a liberalised market. Nordenergi strongly advises that increased transparency and monitoring should be given priority. Especially as TSOs should be neutral bodies in balancing and reserve markets, it is very important that a high level of transparency of TSO actions is obtained. For example, if a TSO reduces capacity for the sake of system security, this has to be fully documented and transparent. Furthermore, market participants should have full access to the balancing market in order to compare the cost of imbalance, charged by the national TSO, to the balancing market price. Nordenergi agrees on a stepwise harmonisation approach. The roadmap should be worked out in closer detail, as it is difficult to see what the different stages contain to support that the systems must stepwise be able to handle more and more bids from participants in neighbouring regions. Capacity calculation Employment of a common flow based model seems very ambitious. If this target is employed it is important that the level of ambition does not slow down the entire process of better coordination of capacity calculations of TSOs. It should be analysed much more which additional benefits and costs each step towards this target will imply. And it should be analysed, if this level of ambition and coordination will also be beneficial for non meshed systems.
Page 5 of 5 The role of countertrade/redispatching before the hour of operation ( preventive ) should be further clarified, as the incentive structure to the TSOs of this compared to implicit auctions is quite different. Furthermore, an unbalanced use might result in suboptimal solutions, which also might not be very transparent. Governance The draft illustrates the challenges of reaching any target model conclusions on this issue at the present stage. Nordenergi urges to begin the work with presentation on realistic alternatives instead of trying to agree on formal governance models now. Nordenergi finds that the main barrier for market development in many EU countries is the lack of a well-functioning power exchange. Nordenergi suggests, as a further step, that every network customer in Europe should have access to a power exchange. A power exchange would have the features as agreed in the target model. In order to guarantee that a power exchange meets the target model, ACER should certify those power exchanges fulfilling the criteria. Governance needs to identify roadmap how to reach this goal soon in order to have target model in place 2015. Yours sincerely, Lars Aagaard, chairman of Nordenergi Danish Energy Association On behalf of: Eríkur Bogason, Federation of Icelandic Energy- and Waterworks Juha Naukkarinen, Finnish Energy Industries Kjell Jansson, Swedenergy Steinar Bysveen, Norwegian Electricity Industy Association