Professional Documents
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ACKNOWLEDGEMENT
The South East Europe Wholesale Market Opening technical assistance project (the
Project) is co-financed by two multi-donor trust funds, ESMAP and PPIAF.
The Energy Sector Management Assistance Program (ESMAP) is a global technical
assistance program which helps build consensus and provides policy advice on
sustainable energy development to governments of developing countries and economies in
transition. For more information on the program see the website: www.esmap.org
The Public-Private Infrastructure Advisory Facility (PPIAF) is a multi-donor technical
assistance facility aimed at helping developing countries improve the quality of their
infrastructure through private sector involvement. For more information on the facility see
the website: www.ppiaf.org
The Word Bank is managing the Project as a part of its support to the development of the
Energy Community. For information about the World Bank's energy sector activities see
the website: www.worldbank.org/energy
TABLE OF CONTENTS
EXECUTIVE SUMMARY
1.
1.1
Prerequisites
1.2
12
1.3
12
1.4
15
1.5
16
1.6
VPP auction
20
1.7
Action plan
20
25
2.
INTRODUCTION
26
2.1
2.2
26
27
2.3
27
2.4
Regulatory framework
27
3.
4.
5.
29
3.1
Introduction
29
3.2
3.3
29
38
3.4
43
3.5
49
52
4.1
52
4.2
4.3
53
59
60
5.1
5.2
60
68
5.3
Conclusion
71
73
6.
74
7.
8.
9.
10.
80
7.1
Key risks
80
7.2
Opportunities
81
83
8.1
83
8.2
89
8.3
91
92
9.1
93
9.2
Access to markets
94
9.3
Access to customers
95
9.4
96
9.5
97
9.6
98
9.7
9.8
99
100
101
10.1
Introduction
101
10.2
102
10.3
102
10.4
10.5
Market Structure
Regional market key decisions
105
106
111
11.
111
11.1
Introduction
111
11.2
112
11.3
121
11.4
143
12.
13.
154
12.2
Regulated Price
154
12.3
155
12.4
156
12.5
Transition Period
157
12.6
161
ACTION PLAN
163
13.1
Required decisions
163
13.2
Project team(s)
163
13.3
Implementation Plan
164
174
175
ANNEX C GLOSSARY
176
181
EXECUTIVE SUMMARY
Pyry Energy Consulting and Nord Pool Consulting have been commissioned by the World
Bank to develop a study on Wholesale Market Opening for the electricity market in South
East Europe. The key outputs of the study are a Regional Market Design (RMD) and an
action plan for implementation.
The geographical focus of the report is the seven Contracting Parties to the Treaty that
established the Energy Community, i.e., Serbia, Croatia, Albania, Bosnia and Herzegovina,
FYR of Macedonia, Montenegro and Kosovo 1. However, the creation of a regional wholesale
electricity market may span a broader geographical scope than this.
The recommendations as set out in this report are founded on the decisions and
recommendations found in various European organizations like EU, EuroPEX, ERGEG,
ENTSO-E, and UCTE. A full reference for these documents is part of the Annex B List of
references found at the end of this document.
The Consultants recommendations are based on the following key elements and can be
summarized as:
A regional market founded on a Day-Ahead Market with implicit auction and crossborder capacities allocated to the DAM
The deadline for implementation of the complete SEE Regional Power Market is 2015.
To be able to meet this target, political willingness and support for the required changes and
commitment to the action plan(s) from all the stakeholders in the region are vital.
A prioritized task is to set up a market simulation environment for the SEE region to be able
to perform dry runs and various market trials.
The Republic of Kosovo became a member World Bank Group (and the IMF) on June
29, 2009 and is therefore named Kosovo throughout this document. Kosovo will
however remain UNMIK under the Treaty that established the Energy Community.
Reading instruction
The report consists of four main sections as well as three annexes.
Section I (chapter 1) is a high level summary of the recommended market design and action
plan. These are the key recommendations from the Consultants and are based on the
presentation given at the ECRB meetings and workshop in Vienna in September 2009.
Section II (chapter 2-5) contains background information such as the foundation for the
project, the current situation in SEE and experiences from other regional electricity markets.
A reader with good insights to the region and the subject may want to skip this section.
Section III (chapter 6-10) contains analysis of the current situation, descriptions of different
possible solutions for a wholesale market in SEE and key performance indicators to monitor
the progress of the wholesale market opening.
Section IV (chapter 11-13) contains the market design recommended by the Consultant and
the action plan to implement the solution. This section provides more details regarding the
recommended market design and offers more details and insight to the high level summary
in section I.
1.
1.1
Prerequisites
The framework for the SEE Wholesale Market Opening is set by the EC Treaty, ref [3].
The recommended market design is based on the following basic requirements:
SEE, an integrated part of European Internal Energy Market
Technical operation of the SEE grid system spans 4 control areas within ENTSO-E. Trade
across national borders is currently based on bilateral contracts and explicit auctions. SEE
Wholesale Market Opening should streamline with European trends with price coupling
linking national and regional markets in order to enhance efficiency and transparency.
Regional approaches that choose incompatible solutions would obstruct the process of
creating an integrated pan-European power market (ref [2]).
National control, regional cooperation
The recommended market design aims at having national responsibility of all the trading
processes, procedures and trading platforms including the market opening process itself.
Regional cooperation and efficient cross-border utilisation will be secured through coupling of
national DAMs. TSOs must allocate cross border capacity to DAMs.
Controlled transition from regulated prices to open market
The process of abandoning regulated prices/tariffs is progressing at different speed
throughout the SEE region. The recommended design allows for national preferences with
respect to further development of this process. Schemes for vulnerable customer sustain.
Quick establishment of incentives to invest
Generator/supplier unbundling will secure DAM-liquidity and a reliable and trustworthy price
reference will soon be established. As soon as the reference price(s) for the SEE market is
established, investors will find it more favourable to come forward. Publishing SEE DAM
prices through EuroPEX daily info systems will be a strong indication of market integration.
Co-existence of bilateral trade and market operators
Until financial instruments are developed, market participants will need bilateral trade (mid.
term and long term contract) to supplement DAM trade to handle price risk.
The following figures illustrate how the recommended design complies with current TSO
scheduling and ongoing efforts to co-ordinate power trade across Europe.
1. No change to ENTSO-Es Scheduling and Accounting when introducing DAM. DAM
will replace some bilateral contracts.
Figure 1
Figure 2
10
Figure 3
11
1.2
The Consultants recommendations are based on the following key elements and can be
summarized as:
A regional market founded on a Day-Ahead Market with implicit auction and crossborder capacities allocated to the DAM
1.3
Each Contracting Party (CP) has its own National Market Operator (NMO);
All bidding, settlement, collateral and participant agreements are made between the
market participant and the NMO;
NMO will collect and validate all bids from its participants and creates one Net Export
Curve (NEC) combining all the bids from its market participants into one aggregated bid
curve (thereby anonymous) that is sent to the SEE Market Service Provider (SEESP)
acting on behalf of the Regional PX;
SEESP will collect NECs from all NMOs, and will get ATCs for all interconnections from
the CAO. Based on these data, SEESP will calculate a common price index for all areas
and price for all individual areas as well as the flow on each interconnection. These
values will be returned to the NMOs;
NMOs will have a service agreement with the SEESP for the price calculation as well as
with the CAO for the allocation of ATCs to be utilized for DAM;
Prices and volumes for each market participant are calculated by the NMOs.
12
The business process overview is illustrated in the following 2 figures and discussed in
details in chapter 11:
Figure 4
13
ATC publication the publication of ATC from CAO (as representatives for the TSOs)
to the SEESP, the national market operators and the participants
2.
Bidding process the process where participants submit individual portfolio bids to
their NMOs, the NMOs create NEC curves and submit these to SEESP
3.
Results where SEESP calculates area prices and flows based on the received NECs
and ATCs, sends the results to the NMOs and then the NMOs check results and
calculate and send the individual results to the market participants.
Figure 5
14
1.4
As described in chapter 4.2, when a well-functioning DAM for the whole region is in place, all
available transmission capacity should be made available for the implicit auction. This implies
that in the final solution, long-term transmission capacity auctions will not be needed. For the
SEE Regional Power Market the main function of the CAO is to provide correct transmission
capacities to the market independent of the market concept.
The following simplified diagram is an illustration of the co-existence of CAO and a SEE
Regional Power Market:
Figure 6
Dedicating cross border capacity to the SEE Regional Power Market is an essential policy
decision in order to establish a Regional PX. The CAO will be responsible for determining
tradable cross border capacities, performing explicit auctions and providing the Regional PX
with daily capacities for the implicit auction. In this way the two concepts mutually support
each other.
15
1.5
Exposing eligible customers 100% to market prices from day one of the wholesale market
opening process will meet hindrance in most countries due to uncertain market prices and
their volatility. For this reason transitional schemes should be considered. The need for such
schemes will vary across the region, because each country has a different starting point.
Some countries have already taken steps to expose eligible customers to market prices. In
general a transition period with steadily decreasing contract volumes supplied at regulated
prices is recommended to gain acceptance among market participants. This solution is
illustrated in the figure below.
Figure 7
16
Base load contracts between Generators and Public Suppliers to serve Tariff Customers will
bring remaining volumes from the demand side on the market.
The following figures illustrate how this design works.
Figure 8
Bilateral trade will focus on mid- and long term agreements while DAM will offer market
participants an instrument to fine-tune their hourly supply/demand balance (contract
portfolio).
If incentives are necessary to motivate eligible customers to exercise their eligibility from day
one of market opening, base load contracts with Generators declining over time - can be a
solution, in line with the arrangement proposed for serve tariff customers.
In order to increase liquidity, TSOs should buy grid losses from DAM.
17
A simple contract portfolio for a Public Supplier serving Tariff Customers is shown below.
Base load contract between Public Supplier and Generators (incumbents) and hourly
contracts from DAM filling the gap between the base load contract and estimated
consumption.
Pass-through mechanisms or hedging of market volumes are required to avoid setting Public
Supplier at risks.
Figure 9
18
Traders, Eligible Customers and Suppliers will in general have a more complex contract
portfolio, established over time in order to minimize cost, but the principles are the same.
Hourly contracts from DAM fill the gap between contracted volumes and estimated load.
They trade into balance.
Deviations from expected load will be handled on the imbalance market or later when
implemented on the intraday market. The structure of such a contract portfolio is illustrated
below.
Figure 10
Generators, Suppliers and Eligible Customers will in this way be exposed to market prices on
marginal volumes, increasing over time as volumes for eligible customers and tariff
customers are scaled down. These volumes, together with export/import volumes will give
DAM liquidity. Market prices will therefore be established from day one of market opening
with sufficient liquidity.
19
1.6
VPP auction
VPP (Virtual Power Plant) is a mandatory auction of generation capacity in order to mitigate
incumbents dominant market position. The buyer gets a contract (base or peak) at auction
price, but the owner of the VPP operates the plant independently of how the buyer nominates
capacity from the plant.
The proposed market solution implies that incumbents serve tariff customers through a base
load contract with the public suppliers.
Such a contract reduces incumbents dominant market position in the same way as VPP
auctions. The only difference is that prices are set differently.
For this reason, the Consultant does not see the need for VPP auctions from day one of
market opening. VPP auctions might be considered later when downsizing of volumes for
tariff customers has strengthened incumbents potential dominant market position.
1.7
Action plan
1.7.1
Required decisions
Approval of the Ministerial Council to proceed with the SEE Wholesale market opening
process by establishing a SEE Regional Power Market based on a Day-ahead market in
line with the proposal from this Consultant Report.
TSOs to take the principle decision to dedicate all or part of ATCs to the SEE Regional
Power Market, increasing over time
Downsizing of volumes based on regulated (low) tariffs to meet the open market
20
1.7.2
The Contracting Parties enter the wholesale market opening process from different starting
points. For this reason the required decisions (from 1.7.1) will be taken at different points in
time. To give the process momentum from the start, connection to an existing functioning
market is important.
Serbia is a natural hub in the region, in order of size, number of interconnections and by
location. At the same time Serbia is well prepared for a national DAM. Romania is already
operating a DAM and will provide access to market participants and liquidity from day one.
The Consultant suggests the following stepwise establishment of the SEE Regional Power
Market:
Figure 11
21
Figure 12
1.7.3
Dry run
Prior to market opening such exercises will prepare market participants and facilitate a
smooth market opening. The idea is to simulate a DAM through bids and offers from
Generators, Suppliers, Traders and Eligible Customers.
Cross border capacities and base load contracts to serve tariff customers have to be
allocated. In order to simulate the effect of power exchange with neighbouring countries,
existing bilateral contracts may be represented by price independent bids in the relevant
bidding areas (countries). The DAM simulator will calculate area prices and flows on
interconnections.
Training of market participants can go on until real market opening takes place and even
beyond to familiarize new market entrants. Simulations of future market development will be
ongoing activities.
22
1.7.4
The Wholesale market opening process must have a regional foundation in line with two
similar projects already established, CAO and BETSEE. Support from national authorities is
mandatory. Unbundling of generation and supplier functions, cancellation of full supply
contracts between Generators and tariff customers, incentives to eligible customers and
dedication of cross border capacity to DAM all require top political attention and decisions.
An overview of the substance in national action plans is as follows: (The details are found in
chapter 13.3.4)
Figure 13 SEE Wholesale Market opening high level action plan overview
Balancing Mechanisms
Establishment of market council
Cross Border Capacity to DAM
Supplier Unbundling
Replacing Full Supply Contracts to TC with
Base Load Contracts to PS
Market Surveillance
National units
ECRB
Agreements
TSO-TSO
TSO-Regional PX
Regional PX-NMO
NMO - Market participants
Transparency
Procedures for reporting relevant market information
Publication of maintenance plans
Reporting on outages
Hydro power plant reservoir level
TSO reporting on
Total Consumption & Production (hourly)
Available & Metered exchange (cross border)
Start up of Financial Forward
Phase 1
2010
2010
2011
2011
Phase 3
2013
2012
2014
2014
2011
2014
2011
2013
2011
2012
2012
2015
These national plans may seem very ambitious. But judging from experience in Romania and
India, the Consultant concludes that they are realistic.
1.7.5
Generators, Suppliers, Traders and Eligible Customers all have to establish new operational
working routines in order to handle new market opportunities and challenges. Long and short
term power price variations call for hedging strategies. This will be core business for
Traders, Generators and Suppliers. Eligible Customers will choose different solutions. Big
industry could develop their own trading skill (figure below) while small enterprises could buy
portfolio management services including imbalance management - or stay at a market
based contract price (fixed or variable).
23
Generators and big Suppliers will need this competence in-house. Eligible Customers can
outsource power procurement, balancing and trading in different ways as discussed above.
24
25
2.
INTRODUCTION
The conflicts of the 1990s led to the disintegration of a unified energy system stretching from
the Adriatic to the Black and Aegean Seas, changing it from a single system into a patchwork
of systems. However, the separate entities still rely on each other for the smooth functioning
of their power supplies.
In 2005, the European Community and then nine Contracting Parties signed the Treaty
establishing the Energy Community of South East Europe. The Treaty aims at establishing
an internal market for network energy in the energy and is based on binding legal
commitments governed by a set of institutions. The Treaty extents and applies and
synchronized application of the EC acquis communautaire and thus ensures homogeneity
between the EC and the Contracting Parties.
The 11th Athens Forum Meeting requested the World Bank to develop a study on Wholesale
Market Opening in South East Europe for the benefit of all Contracting Parties to the Treaty
establishing the Energy Community. Pyry Energy Consulting and Nord Pool Consulting
were subsequently commissioned to develop the study.
The overall aim of the study is to develop a proposal for a Regional Market Design (RMD)
and an Action Plan (AP) for its implementation. The full project covers eight tasks:
Task 1: Review of the current state of market opening in SEE, ref chapter 3;
Task 2: Examine barriers to advancing market opening and liberalisation, ref chapter 8;
Task 3: Identify risks and opportunities posed by market opening in electricity supply to
non-household customers, ref chapter 7;
Task 4: Review lessons learned from other regional markets ref chapter 5;
Task 5: Define indicators to measure and monitor progress in opening the electricity
market in SEE, ref chapter 9;
Task 6: Developing the SEE Regional Power Market Design (RMD) and Action Plan for
Implementation, ref chapter 1 and 11;
Task 8: Implementation Support to be carried out after the acceptance of this report.
2.1
Currently there are seven Contracting Parties to the Treaty establishing the Energy
Community. These seven Contracting Parties are Albania, Bosnia and Herzegovina,
Croatia, Former Yugoslav Republic of Macedonia (FYR of Macedonia/FYROM), Montenegro,
Serbia and Kosovo. These seven entities are the prime beneficiaries of this study and its
prime focus, but also Bulgaria and Romania are partially covered.
26
The relevant region for the creation of a regional electricity market in South East Europe is
however larger. In addition to the seven entities listed above; Austria, Bulgaria, Greece,
Hungary, Italy, Romania and Slovenia are important for a regional market. The relevant area
could be further extended to countries such as Turkey, Moldova, Ukraine and others.
2.2
In the region there are disputes regarding the status and/or denomination of the Contracting
Parties in two cases. In this report we use the official designation of the Contracting Parties
according to the World Banks definitions. This should not be interpreted as reflecting any
position taken by Pyry Energy Consulting or Nord Pool Consulting.
2.3
Under earlier assignments various options for regional market integration have been
developed. One question is whether or not a regional power exchange should be established
or whether there should be continued reliance on purely bilateral contracts. Furthermore, the
market model currently under development relies on explicit auctioning of cross-border
transmission capacities. An alternative option would be the use of implicit auctioning. This
would require a liquid market place under a market splitting approach, or market coupling
between several liquid markets.
According to the Terms of Reference for this study, these options should be reviewed, and
based on this review a Regional Market Design should be developed, taking into account the
possibility of a staged implementation. We thus foresee that the proposal developed under
this study will entail such a staged approach starting with simple arrangements and later
moving to more complex mechanisms. Furthermore, the Terms of Reference states that the
ongoing work on coordinated auctions and regional balancing mechanism seems to
represent a good base for wholesale market opening.
At this point the proposal for the long-run solution has not been finalized. Several objectives
could be considered with different levels of ambitions, such as:
A common (seamless) retail market is not covered under this assignment, although the
organization and opening of retail markets is likely to affect the functionality of the wholesale
market.
2.4
Regulatory framework
The Contracting Parties to the Energy Community Treaty have legally binding commitments
to the creation of an internal market for network energy. The regional market provided for by
the Treaty is to be connected to the EC internal market. Through the Energy Community
Treaty the Contracting Parties are bound to implement the acquis communautaire on
27
energy 2, the acquis communautaire on environment and also follow the principles laid out
in the acquis on competition insofar as it may affect the trade of network energy between the
Parties. According to the Treaty the Parties shall also implement the renewables Directive
2001/77/EC (promotion of electricity produced from renewable sources) and Directive
2003/30/EC (promotion of the use of biofuels or other renewable fuels for transport). 3
Under the Treaty the regulators are cooperating within the Energy Community Regulatory
Board (ECRB). The ECRB advises the Ministerial Council and Permanent High Level Group
(PHLG) on details of statutory, technical and regulatory rules and make recommendations in
the case of cross-border disputes between the regulators.
Directive 2003/54/EC of the European Parliament and of the Council of 26 June 20003
concerning common rules for the internal market in electricity, Directive 2003/55/EC of
the European Parliament and of the Council of 26 June 2003 concerning common rules
for the internal market in natural gas, Regulation 1228/2003/EC of the European
Parliament and of the Council of 26 June 2003 on conditions for access to the network
for cross-border exchanges in electricity.
The Treaty establishes that the Parties shall present a plan to implement the directives
within one year of the date of entry into force of the Treaty.
28
3.
3.1
Introduction
The following sections set out a quantitative summary of the regional electricity sector under
the following topics:
Pyry makes long range electricity and gas market price projections for the region as part of
its pan-European market modelling, designed for use by investors in project evaluation, and
updated quarterly. Data items with a source labelled "Pyry EurECa 4 analysis" are based on
this modelling work. No modelling work has been made explicitly for this project, but we have
drawn on results from other studies.
The statistical information in this section sets out a background which emphasises the need
for:
efficient dispatch and cross-border trading arrangements between the Parties and with
the surrounding countries;
3.2
4
5
29
Figure 16. Final electricity consumption and network losses (2005) and expected
consumption year 2015, TWh
70
70
63,7
60
60
50
50
40
40,5
37,5
30
40
30
5,4
6.6
22,1
20
2,0
13,2
25,6
4,9
14,4
22,8
10
10,2
ia
om
an
R
ia
ar
Bu
lg
Se
rb
ia
ro
at
ia
na
0
vi
an
d
ia
Bo
sn
2,2
7,7
H
er
ze
go
do
n
ia
o
FY
R
of
M
ac
e
ba
ni
Al
vo
Ko
so
7,1
1,2
3,2
10,4
1,4
6,2
9,5
5,5
1,1
1,3
3,8
3,6
M
on
te
ne
gr
10
20
Source: Energy in the Western Balkans, IEA 2008; Eurostat; Pyry EurECa analysis
30
Figure 17. GDP per capita, electricity and carbon intensity, 2005
1,4
1,2
USD (PPP)
30 000
1,2
1,0
25 000
0,8
20 000
0,7
0,6
15 000
0,6
0,5
0,4
0,3 0,3
5 000
0,6
0,5
0,4
10 000
0,7
0,8
0,7
0,7
0,4 0,4
0,2
0,3
0,1
0
0,2
0,2
Bo
sn
ia
av
er
ag
e
ia
om
an
O
EC
ria
Bu
lg
a
Se
rb
ia
ia
M
on
te
ne
gr
o
do
n
vo
FY
R
of
M
ac
e
Ko
so
ro
at
ia
na
vi
H
er
ze
go
an
d
Al
ba
ni
35 000
Electricity intensity
CO2 intensity
Source: Energy in the Western Balkans, 2008; CO2 emissions from fuel combustion 2008 ed, IEA, 2008
7
8
31
0%
26%
30%
1%
2%
14%
27%
Hydro
Nuclear
Gas
Oil
Other renewables
The generation structure is however very different in the different countries, see Figure 19.
Albania gets almost all of its domestic generation from hydro power, but is also to a high
degree import dependent. This is in particular the case in drought years. Other countries
such as Bosnia and Herzegovina, Croatia and Serbia also get a third or more of their
generation from hydro power. On the other extreme of the scale is Kosovo, which gets
almost all of its domestic generation from thermal plants (lignite) and which is also import
dependent. Many of the countries in the region are import dependent, and some of the
countries are heavily dependent on import of electricity.
The regional generation mix highlights the importance of trade and the potentially significant
benefits that can be achieved through improved regional trade. Hydro and thermal based
systems are excellent complements due to the regulation possibilities connected with hydro
(with storage), but also the increased security of supply that can be expected. The needs for
regional trade is furthermore emphasised by the clear import dependency of some of the
countries in the region.
32
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Hydro
Nuclear
Fossil fuels
Ko
so
vo
a
om
an
i
R
of
M
ac
ed
on
ia
Other renewables
Se
rb
ia
.e
xc
l.
Bo
sn
ia
FY
R
M
on
te
ne
gr
o
Ko
so
vo
ro
at
ia
C
Bu
lg
ar
ia
in
a
H
er
ze
go
v
an
d
Al
ba
ni
a
0%
Net import
Figure 20 shows the peak electricity load in 2008 and expected peak load in 2015 in
comparison to the generation capacities in 2008 and 2015 (expected), respectively. This
shows that in along with the growth in electricity consumption the peak demand will also
grow in most of the countries in the region.
The capacity margins vary considerable throughout the region. Some countries have very
small capacity margins, while others most notably Romania have a very substantial
capacity margin. A similar structure can also be expected to remain in the near future.
33
Figure 20. Peak electricity load 2008 and 2015 (expected); Generation capacity 2008
and 2015
25.0
20.0
GW
15.0
10.0
5.0
Ro
m
an
ia
Bu
lg
ar
ia
Se
rb
ia
on
te
ne
gr
o
M
FY
of
M
ac
ed
on
ia
Ko
so
vo
Cr
oa
t ia
a
He
rz
eg
ov
in
Bo
sn
i
an
d
Al
ba
ni
a
0.0
Table 1 below provides some summary comments on the demand and supply balance for
each of the nine original Contracting Parties.
34
Bosnia and
Herzegovina
Bulgaria
Croatia
FYR of
Macedonia
Montenegro
Romania
Import dependent.
Almost 30 % hydro, 15 %
nuclear and 55 %
conventional thermal.
Comments
Consumption expected to
increase considerable over the
coming years and by 2014 be
higher than the domestic
generation.
35
Kosovo
Comments
The current generation capacity in the region is about 54 GW according to UCTE and Platts
data. However, taking the expected availability into account the firm capacity in the region
would be approximately 40 GW. 9 Figure 22 shows the hourly load in the region for the 3rd
Wednesday of each month during 2008. Based on this data the regional peak (in January)
was slightly below 30 GW, which is somewhat below the peaks reported in Figure 20.
Nevertheless, while the capacity margins are limited for some countries, on a regional level
there seems to be a substantial margin between the peak load and the installed generation
capacity.
In order to look further into the capacity margin an approximation has been done of the
regional generation capacity split into base load and peak load. As has been noted before
the regional capacity margin is rather substantial. This is evident in figures below. However,
some capacity is currently not producing or is used very sparsely due to the lack of
maintenance. Furthermore, a substantial part of the generation fleet will have to be replaced
in the future due to old age. The latter is especially true for old lignite capacity. Together with
an increasing demand for electricity, regional capacity margin should decrease in the future.
Figure 21 below suggests that even the base load generation should be close to sufficient to
cover also the peaks, provided that the capacity is available.
36
Figure 21. Regional generation capacity split on type of capacity, percent and GW
100%
PeakFossil; 5
90%
80%
PeakHydro; 12
70%
60%
50%
BaseloadFossil; 27
40%
30%
20%
BaseloadRenewables; 0
BaseloadNuclear; 3
10%
BaseloadHydro; 6
0%
BaseloadHydro
BaseloadNuclear
BaseloadRenewables
BaseloadFossil
PeakHydro
PeakFossil
35 000
30 000
Hourly load, MW
25 000
20 000
15 000
10 000
5 000
0
January
February
March
April
May
June
July
August
September October
November December
Source: UCTE; KOSTT, OST. NOTE: For Albania data we only have data for January and July.
37
% of installed capacity
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
rb
ia
Se
eg
ro
te
n
M
on
FY
R
O
M
ni
a
lb
a
iH
B
ro
at
ia
0%
Source: Platts
3.3
The former Yugoslavian transmission system was a 400 kV system spanning about 800 km
connected to the UCTE synchronous system. In 1991 it was split in two separate parts.
Croatia and the Federation of Bosnia and Herzegovina (within Bosnia and Herzegovina)
became part of the UCTE zone 1, while Republika Srpska (within Bosnia and Herzegovina),
Serbia, FYRO, Bulgaria, Romania and Greece formed UCTE zone 2. In October 2004 these
were again reconnected. The total interconnection capacity (net transfer capacity) in the
region was in beginning of 2007 about 5800 MW, which is about 35% of total peak demand
in the region.
The region in total is dependent on imported energy, primarily oil and natural gas. In general,
cross-border electricity exchanges in SEE are somewhat lower compared to other regions in
Europe. 10 However, the total trade flows between the countries included in Figure 24 was in
10
38
2008 above 65 TWh. Looking only at the original contracting party 11 of the Energy Treaty
was in 2008 about 37 TWh. The total electricity consumption in the nine original contracting
parties was in 2008 about 177 TWh. 12 Thus, about 20 per cent of the regional electricity
consumption was subject to trade between these countries.
The main trading pattern in the region is a flow of electricity from the north to the south, as
illustrated in Figure 24). Import is mainly provided from Hungary, Romania and Bulgaria and
with Serbia being the main transit country.
Figure 24. Net electricity flows, 2008
Austria
Hungary
Romania
Slovenia
Croatia
BiH
Bulgaria
Serbia
Bulgaria
Italy
0-999
1000-1999
Kosovo
Montenegro
Macedonia
Albania
2000-2999
Greece
3000-4999
5000-
11
12
39
AU
BA
BG
AL
GR
HR
0.8
BA
Exporter
KO
ME
0.2
1.1
0.2
0.7
HU
IT
0.2
ME
0.8
3.1
RS
2.4
SL
0.9
2.6
1.6
2.4
8.4
2.7
1.2
0.7
2.1
2.2
3.4
3.1
4.9
7.6 12.2
3.7
0.6
6.3
3.6
0.4
1.6
1.2
3.2
7.0
8.8
7.8
4.0
3.4
3.9
0.4
9.2
6.2
As Table 2 (and Figure 19) illustrates, there are some countries which are import dependent
to a very high degree:
Albania is a net importer (2.1 TWh) with large imports from mainly Greece, but also from
Montenegro and to some extent from Kosovo.
Croatia is a net importer (6.6 TWh) with large net imports from Serbia, Hungary and
Bosnia and Herzegovina. The country also has considerable trade with Slovenia (being
a net exporter to Slovenia).
Kosovo is a net importer (0.6 TWh) with large net imports from Serbia, but also net
export to Montenegro and FYR of Macedonia (transit trade).
Montenegro is a net importer (1.8 TWh) with large import mainly from Bosnia and
Herzegovina, but also from e.g. Kosovo. Montenegro has a relatively balanced trade (on
a yearly level) with Serbia, and is a net exporter to Albania.
FYR of Macedonia is a net importer (2.7 TWh) with large import mainly from/through
Kosovo, but also from Bulgaria. At the same time, FYR of Macedonia has a net export to
Greece.
1.8
4.7
1.6
5.7
8.8
2.7
0.1
0.1
RO
3.4
1.9
0.1
0.2
0
0.3
5.0
0.7
SUM
0.3
1.8
MK
SL
0.1
5.3
KO
0.3
0.7
RS
0.2
2.1
HR
RO
1.2
4.6
1.7
MK
1.4
2.7
BG
SUM
IT
AU
GR
HU
40
65.4
Bosnia and Herzegovina exports mainly to Croatia and Montenegro, but has a net import
from Serbia.
Bulgaria exports to Greece, Serbia and FYR of Macedonia, but has a net import from
Serbia.
Trading licenses 13
Various licensing regimes can create barriers for traders to enter into the market.
Requirements for trading licenses exist (or are foreseen) in all participating countries in the
relevant region. The licensing regimes often require a registered seat in the country which
creates an additional burden for international traders.
The licenses are typically issued by the relevant regulatory authority, but in some case by the
ministry. The trading licenses typically cover wholesale trade, retail supply of eligible
customers, cross-border trade and transit, but there are differences. The licensing procedure
typically has to be conducted in the national language and relevant documents are in most
cases not available on the internet.
There are differences in the maximum time allowed for completing the licensing procedure
ranging from 30 days in several countries up to 180 days. In the case of Bosnia and
Herzegovina no limit is set. Furthermore there are variations in the licensing fees between
the countries, both in terms of structure and levels.
13
A survey on license requirements were made in 2008 and received answers from
Bosnia and Herzegovina, Croatia, Serbia, Greece, Slovenia, Austria, Hungary, FYR of
Macedonia and Cyprus. (Energy Community Regulatory Board, Licensing requirements
2008). This section builds on that report unless otherwise stated.
41
Trading license
required
The license
covers
Requirement of
registered
company in the
country
Reporting
Albania
YES
Wholesale
trade, crossborder trade,
transit
YES
Annual report
Bosnia and
Herzegovina
YES
Wholesale
trade, retail
supply to
eligible
customers,
cross-border
trade, transit
YES
Monthly reports
on physical
quantities of
traded energy
Croatia
YES
Wholesale
trade, crossborder trade,
transit
YES
Financial
reports
FYR of
Macedonia
YES
Wholesale
trade, retail
supply to
eligible
customers,
cross-border
trade, transit
YES
Monthly reports
on traded
quantities of
electricity and a
yearly general
report with
financial and
technical
information
Montenegro
Information
missing
Information
missing
Information
missing
Information
missing
Serbia
YES
Wholesale
trade, retail
supply to
eligible
customers,
cross-border
trade, transit
YES
Copy of
business plan
for each year,
annual balance
sheet and profit
and loss
account for
previous year
Kosovo
YES
Supply, trade
YES
Quarterly and
annual reporting
Source: Energy Community Regulatory Board (2008), Albanian Energy Regulatory Entity, ERO
42
3.4
In most of the Parties there is one dominant, state-owned generator. There might be some
fringe competitors, but each national market can typically be characterised as being very
close to a monopoly (with the exception of Romania). As shown earlier, the national markets
are also small which limits the degree of competition that can be expected on each market in
isolation. Distribution and supply are typically also dominated by one company, although
there might be some small distributors. However, given that the consumers in most cases
either are not eligible or not interested in exercising their eligibility this is currently of little
importance. The limited interest in exercising eligibility seems to be explained by the fact that
most consumers would face higher prices on the open market than under regulated tariffs.
Given current regulated tariffs little switching can be expected unless customers are forced to
switch (or the regulated tariff is removed for eligible customers).
43
Albania
Bosnia and
Herzegovina
Bulgaria
Process of privatisation.
Croatia
Romania
Ownership unbundling of
transmission and generation.
Generation predominantly state
owned but split into several
independent units.
Serbia
Kosovo
44
Vertically unbundling has progressed somewhat during the last years. Albania, Croatia, FYR
of Macedonia, Serbia and Kosovo have legally unbundled TSO/MOs and Bosnia and
Herzegovina has ownership unbundled ISO and TRANSCO, while Montenegro has a
functionally unbundled TSO. However, in Croatia the HEP group is made up of multiple
companies covering production, transmission and distribution, i.e., the transmission
operations is part of the same group as the main generator. However, there is a separate
market operator owned by the Republic of Croatia.
The unbundling between generation and distribution (including supply) has however not
reached as far. In Albania KESH Distribution is unbundled and about to be privatized.
However, KESH Generation is obliged to sell to the wholesale public supplier at regulated
prices. In FYR of Macedonia the distributor is now owned by Austrian EVN, but also here the
dominant generator, ELEM, is required to sell at regulated prices. Among the remaining
Parties generation and distribution/supply are conducted within the same company or group
of companies that may be legally unbundled.
45
Albania
Bosnia and
Herzegovina
Bulgaria
Croatia
Montenegro
Romania
Serbia
Kosovo
46
Very few end-customers are active on the open market. Typically the regulated tariffs are
below the prices available on the open market and the incentives for exercising its eligibility
is thus often very limited.
Table 6 provides an overview of the current state of end-user market opening. Formally all
the seven contracting parties have opened their end-user markets. Albania, Bosnia and
Herzegovina, Montenegro and Serbia have formally all opened their markets for all nonhousehold customers. FYR of Macedonia and Kosovo have eligibility thresholds based on
connection levels, while Croatia has opened the market for all customers (in 2008).
In most cases, in spite of opening there has been no or limited market entry. In Croatia
eligibility is mandatory for high and medium sized customers, while in FYR of Macedonia
eligibility is mandatory for all customers above the stipulated threshold. Discussions to make
eligibility mandatory are ongoing also in other countries. In practice this implies that no
regulated tariff is available for the eligible customers, but that they have to rely on the market.
An important barrier to market opening is that supply and distribution have, in general, not
been unbundled. This can be expected to inhibit market entry, since new entrants may not
trust that they will be treated on an equal and fair basis with the distributors own supply
business.
Another important barrier the low regulated tariffs (see also section 3.5). A key conclusion
from IPA (2009) 14 was that there have been no new entrants and the incumbent has
retained 100% market share. This is because the regulated tariffs are below levels at which
new entrants would be able to enter the market to compete effectively and have even been
stated as being below the wholesale energy price which a new supplier would have to buy
energy at. It is clear that as long as there are regulated tariffs available below the cost for a
new entrant, effective market opening will be very difficult to achieve.
14
IPA Energy + Water Economics (2009), Study on Tariff Methodologies and Impact on
Prices and Energy Consumption Patterns in the Energy Community, March 2009
47
Albania
Eligibility threshold
Bulgaria
All customers.
Croatia
All customers.
FYR of
Macedonia
Montenegro
Romania
All customers.
Serbia
Kosovo
Connected at 10 kV or above.
Source: Energy Community Treaty Implementation presentation at 14th Athens Forum, DG TREN Report on progress in
creating the internal gas and electricity market, technical annex. Com(2009) 115, Pyry Energy Consulting and Nord Pool
Consulting team analysis
Several countries have market models with a wholesale public supplier. The wholesale public
supplier then often has priority access to the domestic generation which is ear-marked for
domestic consumption (tariff customers). This of course limits the amount of electricity that is
available for trade.
48
Bosnia &
Herzegovina
Bulgaria
Croatia
FYR of
Macedonia
Montenegro
Romania
Serbia
Kosovo
Source: Team analysis
3.5
15
49
closer to and above the mean of the regions values. Its retail tariffs for households are midranked from the countries listed herein.
Serbia is having some of the lowest retail tariffs in the region, right across the three
segments of industrial, commercial and household customers. It is thought that some of
these retail tariffs may not cover even the generation costs. This may be due to a number of
reasons, including the protection of so-called vulnerable costumers and some level of
support for energy intensive heavy industry.
A general feature across the region is that the commercial customers are typically paying
more than household customers. This can hardly be explained by differences in the cost
structure motivating such differences in tariffs.
Figure 25. Retail tariffs 2007, /MWh
180
160
140
/MWh
120
100
80
60
40
20
Albania
Bosnia and
Herzegovina
Bulgaria
Croatia
FYR of
Macedonia
Montenegro
Romania
Serbia
Industrial
Commercial
Households
Industrial
Commercial
Households
Industrial
Commercial
Households
Industrial
Commercial
Households
Industrial
Commercial
Households
Industrial
Commercial
Households
Industrial
Commercial
Households
Industrial
Commercial
Households
Industrial
Commercial
Households
Kosovo
Source: ECRB 2008 Market Development Report and Eurostat, Kosovo comment on report
In March 2009 a Study on Tariff Methodologies and Impact on Prices and Energy
Consumption Patterns in the Energy Community was published. (IPA, 2009). 16 The study
concludes that the overall average retail tariff varies considerably between the parties, as is
also showed by Figure 25. The study covered tariffs from 2005 to 2008 (2008 not available
for all parties), and showed that the tariffs generally have increased over the period and in
many cases significantly so.
16
50
According to the report no country (with the partial exception of Albania) used tariff based
methods to protect vulnerable customers. However, this seems hard to reconcile with the fact
that commercial customers in most cases are paying more than household customers.
Although, there might not be lower tariff targeted towards vulnerable customers, the tariffs
seems to be kept low in general.
The study also included a review of the cost coverage. This showed differences in the
allocation of costs between e.g. transmission and distribution, and also differences in how
the return on asset was calculated. The report specifically mentions that Serbia applies a 0%
weighted average cost of capital on transmission, in Kosovo the distribution and
transmission system are deemed to be past their useful economic lives and have no value
and in Montenegro it was recognised that the applied cost of capital for both transmission
and distribution is below the true cost of capital.
Errors in the rate of return for monopoly operations such as transmission and distribution
may not distort the functioning of the wholesale market, as long as the transmission and
distribution companies are able to fund the necessary investments, However, the report also
states that for the regulated generation tariffs as with rate of return for transmission tariffs,
the rate of return used may not reflect the full cost of capital of generation because of the
assumption that Government as shareholder may prefer to keep prices down rather that
obtain a full return on its equity. From a market development point of view this is highly
problematic since it will provide an important barrier for new entrants in generation in the
region.
One important conclusion from the above mentioned study is that Much of the variation in
overall tariff levels between the parties is driven by differences in generation costs and that
this is largely related to the type of generation. A well-functioning regional market can be
expected to change this situation, as the wholesale power price can be expected to converge
across the region. This would lead to a more efficient price formation, but is also expected to
lead to increased profits for the generators having the low cost generation possibilities.
51
4.
4.1
The level of real time automation and communication in many countries of SEE is still limited
(ETSO, Current State of Balance Management in South East Europe, June 2006). Some of
the obstacles are that changes to the output of individual generating units cannot be
auctioned without substantial manual intervention. Remote metering on some HV
transmission network points are not installed and modern SCADA systems are yet to be
implemented in some countries.
Balancing mechanisms are still not in place in all countries. This is the case for Serbia,
Montenegro and FYR of Macedonia. However, all three countries have market models (or
are implementing market models) which include balancing mechanisms/balancing markets.
In Bosnia and Herzegovina a balancing mechanisms is in place and it is one of the
responsibilities of the ISO. In Croatia the market operator settles unbalancing energy for
balance responsible parties. In Albania the TSO is responsible for the organization and
administration of electricity payment settlements among the market participants and manage
the imbalance settlements statement process. Also in Kosovo the TSO is responsible for
procuring system balance through the balancing mechanism.
South East Transmission System Operators (SETSO) are currently in the design stage of the
Regional Balance Mechanism (BETSEE RBM or BETSEE). The aim is to achieve a system
that facilitates: technical correctness, effectiveness, truthfulness, individual rationality, budget
balance and social welfare.
This initiative has to be seen in view of the fact that electricity markets in the SEE region are
still in the early stages of development. Market operations and their degree of openness
vary greatly, traded volumes are low (especially in the short term) and exchanges struggle
with low levels of liquidity.
In consideration of the challenging environment the approach was chosen to develop a
concept of the RBM that assumes minimal prerequisites regarding the existing market
structure.
In an Examination Paper (ETSO, Regional Balancing Mechanism BETSEE for South-East
Europe, April 2008) the SETSO Task Force simulated and analysed the potential
consequences for SEE countries where the RBM Design (dated Nov 2006) implemented in
the Region today (April 2008).
The examination paper concluded, under the premise that the RBM development in the SEE
Region was still and ongoing process and therefore subject to uncertainties that:
Depending on the availability of balancing resources there will be parties having benefits and
parties facing disadvantages in case of a country deciding to join the RBM.
The absence of a transparent balance energy price is a challenge for the RBM, short term
markets are underdeveloped and cross-border transfer prices for balancing can not be
accurately accessed, this could cause irregularities in the function of RBM.
It is expected that the RBM will have low liquidity as a direct result for the fact that the RBM
is designed by an imperfect mechanism. TSOs and market participants will face risks that
they are unable to fully manage due to lack of transparent information.
52
Improvement to liquidity will not bee seen until the implementation or improvement of short
term trading (Day-ahead, intraday) markets and improvement in transparency in the market
participant activities in the participating countries.
Monitoring processes conducted by Regulators will be required in order to prevent
manipulations and to guarantee the necessary level of transparency in market participants
activities.
4.2
The principles for Cross Border Congestion Management are described in the Regulation
(EC) 1228/2003. This regulation, through the Energy Community treaty, is also applicable in
the SEE countries.
One major task of the harmonization of SEE region is the establishment of a Coordinated
Auction Office (CAO). In the future, the office should provide mainly auctions on different
periodical bases and should organize a secondary market for physical transmission rights
(has still to be developed). The according action plan has been launched and the first steps
are already implemented. It is foreseen that the yearly Auction 2010 will be managed by the
CAO. 17 In December 2008 a Memorandum of Understanding (MoU) was signed in Tirana by
all the relevant TSOs expect for Bulgaria and Serbia. Bulgaria disagreed with respect to the
geographical scope and Serbias position was that the MoU should only be signed by TSOs
in charge of capacity allocation, i.e. KOSTT should not be among the signatories. It was then
also agreed that the future CAO should be located in Montenegro.
The CAO currently agreed to be established in Montenegro is an organization that will be set
up and owned by all (or some of) the SEE TSOs. There is currently a working group
established. 18
The basis for the CAO is:
Better utilization of existing cross border capacities without jeopardizing system security
An important question for the design of the SEE Regional Power Market for the same region
is how the CAO and the regional PX can co-exist. There are several good reasons for seeing
this as two complementary initiatives that together can facilitate a better regional energy
market for the SEE region:
The CAO organisation is a good platform for the cooperation in the region;
To have a coordinated approach to transmission capacity allocation is vital for a wellfunctioning DAM;
17
18
CAO (2008), Action Plan for Establishing the SEE Coordinated Auction Office
Please refer to http://www.energycommunity.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/ELECTRICITY/Re
gional_Market/CAO for more information.
53
The goal of a higher degree of transparency and equal access as defined for the CAO is
also an important basis for the SEE Regional Power Market;
It is a TSO task to define the available transmissions capacities for the market, and a
coordinated effort is welcome;
To the Regional PX, the method of calculation is not important as long as a portion of
the transmission capacities is left for the DAM.
For more information of the integration of CAO and the SEE Regional Power Market, see
chapter 11.2.4.
In July 2007, the SETSO TF conducted an analysis of the current situation of the applied
procedures for the transmission capacity allocation. 19 In the report it was concluded that
significant improvement to the allocation procedures can be noticed. A few areas however
fall still short of full compliance with the CM Guidelines. At present 50:50 capacity split is still
used, the objective however is to introduce joint auctions. Not all the data relating to auction
procedures and auction results, as well as commercial and physical flows are publicly
available.
A Regional Congestion Management Benchmark (ECRB, 2008) analysed the level of
compliance of the SEE with the Regulation in respect of Cross Border Congestion
Management and found that, while the basic principles of the Regulation has already been
implemented, currently all TSOs fall short of being in full compliance with Congestion
Management Guidelines.
19
54
Source: Energy Community Secretariat, Presentation on Energy Community Treaty Implementation given at the 14th Athens
Forum.
Most of the participating parties introduced a market based allocation scheme, as shown in
Figure 26. The exceptions are Bosnia and Herzegovina were a pro rata allocation scheme is
still in use. On most borders the capacity is allocation of the capacity is split between the
countries, but in a few cases joint allocation of the capacity is made (only between one
contracting party and a non-contracting party/EU member).
The pricing method (congestion fee) differs across the region, as shown in Figure 27.
Naturally, on the Bosnia and Herzegovina borders there is no auction price since a pro rata
allocation scheme is used. However, also on the Albanian part of the borders between
Albania and Montenegro and Albania and Greece there is no auction price. The Albanian
capacity is mostly used to support import to its tariff customers. The Serbian 20, Montenegrin
and FYR of Macedonian TSOs apply pay-as-bid 21 for the capacities allocated. The remaining
countries use clearing price 22.
The differences in the allocation of capacity, as well as the differences in pricing
methodologies constitute one obstacle to trading. In particular non-market based allocation
results in different possibilities for different market actors to access the interconnectors. But
also the differences in pricing methodologies may constitute a barrier to trade.
20
This includes also the lines between Kosovo and neighbouring countries where
allocation is done by the Serbian TSO.
21
Each bidder pays according to his own bid.
22
Each bidder pays the same market clearing price
PYRY ENERGY CONSULTING
NORD POOL CONSULTING
55
Clearing price in
both directions
Clearing price
Pay-as-bid
SLO
RO
HR
Clearing price
no auction price
Pay-as-bid
no auction price
BiH
SRB
BG
Pay-as-bid in
both directions
MN
FYRof
Macedonia
AL
GR
Source: Energy Community Secretariat, Presentation on Energy Community Treaty Implementation given at the 14th Athens
Forum.
The EC guidelines specify that the allocation at an interconnection line shall be coordinated
and implemented using common allocation procedures by the involved TSOs. Although
market based allocation schemes are common, the TSOs typically allocate their share of the
interconnector capacity. None of the borders, with the exception of two in Croatia and FYR of
Macedonia fulfil the Congestion Management Guidelines. Coordinated capacity auctions are
performed only by a few participating parties.
In the South East Europe Market Monitoring project cross-border congestion is used as one
indicator of overall market conditions. The quarterly report for March 2008 - June 2008
(Potomac Economics, November 2008) studies 20 interconnectors. 23 Of these 20
interconnectors ten were categorised as inactive, meaning that there were little reservations
of capacity made and small or no physical flow. The inactive lines were the ones that tend to
be used for trade in the west-to-east direction. The remaining 10 were active, with both
significant reservations and physical flows. Four of them had physical flows roughly equal
what would be expected from transactions between the parties to the interconnector, while in
the other six the physical flows exceeded what would have been caused only by the two
counterparties, i.e. the flows would have been generated from other sources. For four
23
22 interconnectors should have been studied, but the necessary data was only
available for 20.
56
interconnections the physical flow exceeded what would arise from regional AAC alone,
which would have been caused either by unofficial transactions or unexpected loop flows.
For these four interconnections the flows also exceeded the implied physical limit of the
interconnection.
The quality of data and the provision of information have not yet reached satisfactory levels.
Not one TSO can be identified for providing the level of information that is required by the
Congestion Management Guidelines.
Despite the fact that all TSOs in the SEE region provide access to web pages in English,
barriers for foreign traders and the development of an integrated electricity market do exist
as not all necessary information is made available in English.
Figure 28. Provision of information by TSOs
57
Regulation (EC) No 1228/2003 describes three options for the use of congestion
management revenues:
According to ECRB EWG Benchmarking Report for 20008 most of the countries in SEE
already have provisions concerning the use of the revenues in their legislation, and even
countries that do not have it in their legislation have implemented one of the three options.
58
Actual use
Albania
<No information>
<No information>
Croatia
Provisions included in
legislation
FYR of Macedonia
Montenegro
<No information>
<No information>
Serbia
Used as an income to be
taken into account by
regulatory authorities
Kosovo
4.3
A new voluntary agreement on Inter-TSO Compensation for transit for the years 2008 and
2009 was signed by 39 TSOs from 34 countries in October 2007 (ETSO, Report on InterTSO compensation mechanism, 2007). This agreement builds on the interim ITC Agreement
from 2007 whereupon the SEE region was fully integrated into the ITC mechanism of the rest
of Europe.
The following principles are to be followed for the ITC mechanism for the years 2008 -2009:
Financing of the compensation fund and the treatment of ITC perimeter countries
Financial net results based on agreed principles for each ITC party
59
5.
The selected markets in this section are based upon the EC treaty [3], in the current market
development supported by EU as well as in the EuroPEX/ENTSO-E report of January 2009
[2].
The experiences are high level summaries to define some of the experiences from other
market developments in Europe. This chapter is based upon reports from the national
regulators and are expressing their view of their markets.
5.1
In this chapter we will briefly review the relative success of selected national markets. The
main purpose of the review is to rank the degree of market success within each and one of a
number of measurable parameters listed below.
The parameters will be ranked low, medium and high. The score low signifies that the market
element is weak; medium signifies that the market element clearly is present but that there
still is a way to go. High signifies that the market element is fully implemented.
The given scores are based on national reports submitted by the regulators in each
country 24. There is no unified template how to write these reports. Hence, the score given
should only serve as an indication for the particular country in question. In addition the
scores given are based on a qualitative and not quantitative manner and could therefore be
subject for discussion.
In the end of the chapter we will go through the various finalized and ongoing initiatives on
establishment of regional electricity markets.
For the national markets the parameters that will be used are as follows:
Establishment of a reference price for electricity
A clear reference price for the commodity electricity is necessary for transparency in the
market and for market efficiency. Score high is only given to well functioning markets where
a high share of produced electricity is settled with the reference price as commodity price.
Supply quality and security
Reliable delivery of power is of uttermost importance in any economy. That quality
requirements are specified and complied with is essential in order to minimize distortions to
the operation of the electricity market. Score high is given to markets where both quality and
security are meeting international standards for industrialized countries.
Wholesale market liquidity
In order to foster a competitive electricity market, energy suppliers, generators and large
scale consumers need access to a competitive energy wholesale market with sufficient
liquidity. Only markets where this is the case receive the score high.
24
60
Transparency
Market transparency is crucial to establish an efficient electricity market. All participants
should have access to all relevant information regarding the electricity systems infrastructure
and operational conditions. All relevant market information should be available for all market
participants simultaneously. Electricity markets where this is the case will be given the score
high.
Market Surveillance
In a competitive electricity market an independent and efficient market surveillance function
should be present. Market surveillance is necessary to monitor the market to unveil abuse of
market power or market manipulation. Only markets where this function is taken well care of
and where appropriate actions can be taken to deal with abuse of market power or
manipulation of the market will score high.
Metering and main grid settlement
The settlement of imbalances requires a well organized Imbalance Management and an
appropriate meter value collection and processing system. The score high is given to
electricity markets where imbalance settlement is executed by the TSO and based on AMRsystems and appropriate imbalance prices.
Profiling and handling of not hourly metered consumers
In order to enable competition between supply companies not-hourly metered consumption
must be handled by the usage of profiles representing normal consumption during the day,
night and time of the year. Electricity markets with established profiling and change-ofsupplier procedures will receive the score high.
Wholesale market settlement
While settlement of energy trading takes place bilaterally or through organized markets the
imbalance settlement for a period of wholesale market participation is handled by the TSO.
The shorter settlement periods are and the more frequent the settlement takes place the
lower uncertainty regarding past periods financial obligations is. This also leads to lower
collateral needs. The score high is given to markets with monthly or more frequent imbalance
settlement.
Wholesale market access
The extent of competition in a liberalized market is dependent on the degree of access for
various participant groups as large and small end-users and generators, suppliers and
renewable energy producers. The score high will be given if all relevant participant groups
have access to the wholesale market at the same conditions and terms.
Demand Side Management (DSM)
Demand side management (DSM) entails actions that influence the quantity or patterns of
use of energy consumed by end users, such as actions targeting reduction of peak demand
during periods when energy-supply systems are constrained. Peak demand management
does not necessarily decrease total energy consumption but could be expected to reduce the
need for investments in networks and/or power plants. An electricity market with strong
incentives like contracts between TSO and large scale consumers and/or settlement of
consumers based on hourly values using reference prices reflecting the marginal costs of
generation will score high.
61
62
Romania
Germany
Austria
Italy
France
Netherlands
Ireland
UK
Sweden
Norway
Establishment
of a reference
price
medium
high
high
High
medium
high
medium
medium
high
high
Supply quality
and security
high
high
high
medium
high
high
medium
high
high
high
Wholesale
market
liquidity
medium
high
high
medium
low
high
high
medium
high
high
Transparency
low
medium
high
medium
medium
high
medium
medium
high
high
Market
surveillance
medium
high
medium
Low
medium
high
high
high
high
high
Metering and
main grid
settlement
medium
medium
medium
medium
medium
medium
high
high
high
high
Profiling and
handling of not
hourly metered
consumers
low
high
high
Low
low
high
medium
high
high
high
Wholesale
market
settlement
medium
medium
medium
medium
medium
medium
medium
high
high
high
Wholesale
market access
medium
high
high
medium
medium
high
medium
high
high
high
Participants
exposure to
medium
medium
medium
medium
low
high
medium
medium
high
high
63
Features:
Romania
Germany
Austria
Italy
France
Netherlands
Ireland
UK
Sweden
Norway
Demand side
management
medium
high
high
High
medium
high
low
medium
high
high
Imbalance cost
for wholesale
market
participants
medium
medium
high
medium
medium
high
medium
low (high
prices)
high
high
Investment
climate
high
medium
high
High
medium
medium
high
high
medium
medium
Investment
incentive
medium
high
high
High
high
medium
high
high
medium
medium
unbundling
medium
low
medium
medium
low
medium
medium
high
high
high
Change of
supplier
low
medium
medium
medium
low
high
medium
high
high
high
Regional
integration
high
high
medium
High
high
high
medium
high
high
high
spot market
price
Note: All scores are based on reports to ERGEG submitted by the national regulators.
64
Romania
Romania is the Eastern European country that has been most successful in establishing a
market. Romania has established a power exchange, OPCOM which is the largest PX in
the Eastern European area. Romania has fulfilled the EU requirements regarding
unbundling, an independent TSO, regulator and market operator. However, the
establishment of a fully competitive physically market requires that the content in the
parameters listed above get more sophisticated. The fact that around 50% of the
consumers are still part of the regulated market also hampers the development of the
market.
However, only 5.2 TWh was traded at the DAM at OPCOM in 2008. Although this makes
OPCOM an Eastern European champion the share is too small to make a real significance
in the big picture.
Germany
The German market is characterized by a generation structure where RWE and E.ON in
particular create an oligopoly that supplies large industrial customers and municipal
utilities. In this market competition is limited. Market information is voluntary and is not
based on regulated procedures, which again explains the medium score at the
transparency parameter. In the household end-user market competition exists but
procedures and grid access are complicated and costly. This fact explains that less than
4% changed supplier in 2007.
On the positive side, the trading volume at the Energy Exchange (EEX), in both the
physical and financial market is steadily increasing. In 2008 the traded volume at the spot
market increased to 154 TWh compared to 123.7 TWh in 2007. Supply quality and security
as well as regional integration are among the best in Europe. Also investment climate and
incentives for renewable Energy is at top in Europe.
Austria
In Austria most of the features that characterize a competitive market are in place, however
the volumes traded at the power exchange EXAA are still marginal and the households
tend to stick to their local supplier, and hence limit the competitive aspect of the market,
despite an effort by the regulator the last years to pave the way for an easy and
transparent way to change supplier.
Also in the case of unbundling the current requirement of legal unbundling combined with
lack of monitoring of integrated companies by the provincial governments in charge of this
process, only give a medium score on this parameter.
Regional integration with Germany is high, and due to the importance of this market the
score high is given despite lack of efficient integration with other neighbouring markets.
Italy
In Italy the regulated and commercial electricity market exist side by side. In the reported
electricity volumes the regulated market is still larger than the spot market operated by
GME, but the latter is catching up year by year. However, as the spot market is based on
mandatory participation it can not be compared to e.g. EEX of Germany or Nord Pool of the
Nordic countries when it comes to its successfulness. The regulated market and the
mandatory spot market affect most of the parameters listed in the table in a negative way;
65
hence the medium score is often given. Only legally unbundling is required and explains
the reason for the medium score on this parameter.
Regarding supply quality and security the situation today is not as good as in many other
European countries. However, planed new generation capacity is 14,424 MW in the period
from 2007-2010. The interregional grid capacity is still critical in some regions and some
cities, but will be improved in the years to come. Number of minutes of interruptions per low
voltage client has fallen from 187 in year 2000 to 64 in 2006.
Italy has in 2008 launched a comprehensive renewable sources incentive scheme which
also contributes to the score on the investment parameters.
France
In the path towards a liberalized internal energy market in EU, France has traditionally
been anything but a forerunner in the process. Only the minimum requirements of the
various EU directives and regulations have been implemented in the national legislation.
Even though EDFs monopoly in the electricity sector has been broken, EDF still has a
dominant position in all areas in the electricity value chain, including the ownership of the
regulator CRE. This fact hampers the development of real competition in the French
market.
Another obstacle to competition is that regulated retail tariffs are retained alongside market
contracts through the tariff transitoire dajustement du march (TaRTAM). The
introduction and prolongation of TaRTAM has according to the regulator closed the large
business market as alternative suppliers to EDF hardly can match the regulated prices.
For small consumers like households there are little signs of competition one year after
deregulation. This can be explained by low regulated prices, which means there is not
much to gain by entering the free market. In addition only 1/3 of the consumers are aware
that such an opportunity exists. There is also a fee attached to the change of supplier
which hampers the competition.
For new investments in generation capacity TaRTAM could be an obstacle in the future.
However, a new ambitious programme to double the share of renewable sources is
adopted, and the production surplus is already high, so TaRTAM will not create a big
problem in the years to come.
The recent coupling of the French, Belgian and Dutch markets, and the coming extension
to the German and Luxembourg markets in 2009, means that the regional integration is
high.
The traded volume at the Powernext spot market was 44 TWh in 2007.
The Netherlands
The Netherlands has a highly developed electricity market and gets a high score on most
parameters directly relevant for a competitive market. However, the volumes traded at the
power exchange, APX, are still low, 21 TWh out of a total consumption on 112 TWh (2008),
but is increasing year by year.
The weakest parameters in the Dutch market are investment climate and incentives, where
it seems like that the Dutch focuses on import and regional integration to cover its normal
deficit on around 20% of total consumption.
Only legal unbundling are required which explains the medium score on this parameter.
66
Ireland
The energy market in Ireland is a centrally dispatched or single price market. Compared to
the other European markets, which clearly separate the TSO and market operator function,
in a single price market the transmission and system operation costs are included in the
price for the energy delivered or produced. The single price market is also typically
constructed with focus on the generation side. The generators place bids for the plants
they wish to operate. The bid with the highest price necessary to meet demand sets the
pool price.
Organizing the market this way means that the competitive element clearly is present, but
lack of a reference price, weak demand side, limited wholesale market etc. means that in
most of the directly market based parameters it is hard to reach a higher score than
medium.
In 2007 the Single Electricity Market (SEM) for Ireland and Northern Ireland was
established. SEM consists of a gross pool market, into which all electricity generated or
imported onto the island must be sold. This was an important step for greater competition
in the electricity sector. In addition Spanish ENDESA has bought two power stations from
the dominant Irish power producer and grid owner ESB, and thereby reducing the
generation market share of the latter to 40%.
Ireland is in the process of launching a pilot smart meter project aiming at optimizing the
Irish electricity market. This explains the high score in the metering parameter.
UK
The same characteristics regarding a single price market in Ireland is also valid for UK.
However, the UK market is far more mature. Hence, the competitive aspect is higher. In
addition there exists a spot market run by the Dutch market operator APX. However, this
spot market only takes 1-2% of the totally traded volumes and plays little significance.
In addition, NASDAQ OMX and Nord Pool Spot have been chosen to establish a spot and
financial market in UK, which also includes, intra day market, a physical forward market
and a clearing function. The Spot market should be operative from Q2. 2009.
Norway and Sweden
Together with Denmark and Finland, Norway and Sweden constitute the most competitive
and liquid regional electricity market in the world. Maybe the single most important factor
behind the success of the Nordic Market is that all aspects, from regulation to market
operation in the electricity market chain in each of the four countries are fully market based.
This is not the case in many other European markets that strive to combine the old
regulated regime with a market regime. This fact is particularly important for Norway as
Nord Pool is located in Norway, and hence a subject for Norwegian legislation and
regulation.
However, looking at Norway and Sweden separately there are differences in the ways the
markets are organized. In e.g. congestion management Norway uses market splitting
which can result in 2-3 price areas for electricity within Norway in case of congestions. In
Sweden countertrade is used to secure that all customers get the same price within
Sweden. Currently work is ongoing that might result in the establishment of more price
areas in Sweden
Also when it comes to market power there are generators like Vattenfall of Sweden and
Statkraft of Norway that would have been too dominant if they had been operating within a
67
strictly national market. However, in the integrated Nordic wholesale market these
companies market power is limited.
5.2
Good conditions for power trading this is crucial as this is the very motor and driving
force behind the development of an integrated market. A well functioning regional
market pre-requires that the physical and financial market work and that there is trust
in the price formation. There should be reciprocity between the markets, a minimum
degree of harmonization and smoothly functioning routines for joint planning and
operation.
Balance mechanism and the settlement of imbalances The rules governing the
integrated regional market must be established also regarding to regional cooperation
in the balancing mechanism. Settlement procedures should be harmonized and based
on market prices.
Equal access to information all participants in the market should have equal access
to all relevant information, at the same time and at the same cost. This also includes
information about transmission facilities.
Until now only the Nordic electricity market Nord Pool can be said to be close to fully
comply with the above mentioned requirements. However, also the Irish market, the Iberian
market (Spain and Portugal) and the TLC market (France, Belgium and the Netherlands)
can be said to be regional markets.
5.2.1
68
forward and futures contracts and in-house clearing of contracts. Nord Pool also offers
trade in European Emission Allowances EUAs and certified emission reductions (CER).
The success story of Nord Pool can be explained by many factors:
As already mentioned there was a political will in all the 4 countries to create a
liberalized and regional competitive energy market, even if the scepticism within the
electricity sector definitively was present.
The Energy mix used in the various Nordic countries is highly complementary. This
was a driving force to integrate the markets.
A close cooperation between the involved TSOs and their commitment to facilitate the
joint regional market was and is clearly the most important reason for the Nordic
success.
A nearly common language, culture, historical background, political system etc. made
integration much easier.
The long history of Nord Pool can to a large extent explain its relative success
compared to other power exchanges. It takes time to establish a viable market.
69
Lessons learned
In this section we will reflect upon some important issues that should be born in mind in
order to create an efficient regional market.
As a starting point the essential and most important requirement is that there is a strong
political will among the countries involved to create such a market. It is equally important
that the cooperative environment within and between the states involved are good and that
the politicians dare to take the necessary steps to create a regional market even though
the resistance from some parties can be high.
Benefit of a regional market
By looking at Nord Pool and other regional and national liberalized markets in Europe it is
fair to state that at least the following benefits have been achieved.
The use of the energy sources in the Nordic countries with hydro power in Norway,
combined hydropower and thermal power in Sweden and Finland, and thermal and wind
power in Denmark has been optimized.
Even though the proven balance in relative terms has been reduced compared to the
increase in consumption the security of supply has been maintained. In dry years a hydro
nation like Norway can be supplied with electricity from the other Nordic countries. In other
words the need for reserve capacity at national level has been reduced without
jeopardizing the security of supply.
However, the free market can also make it tempting for hydro producers to sell as much
electricity as possible in times where the price is high, without keeping a sufficient reservoir
reserve for dry years. This potential problem is in particular important to be aware of when
the market concentration is high.
In all the Nordic countries there is a major market actor that would have had too much
market power in a strictly national market. In the Nordic regional market there are enough
actors to secure competition.
Due to the competition among producers, distributors and retailers the electricity price to
end users has been kept at a low level given the generation reserves available.
In a liberalized market the price for electricity is a very rapid signal for the state of the
market. This is a clear benefit, but at the same time it is a political challenge to stick to the
market price mechanism in deficit situations.
70
5.3
Conclusion
The last years we have seen a development of power exchanges all over Europe. So far
the volumes traded at the PXes spot markets are, with exception of Nord Pool, relatively
small but the volumes are steadily increasing. In the eastern part of Europe the traded
volumes at each PX are, with the exception of OPCOM in Romania, less than 3 TWh. This
71
means that the PXes, for the time being, only play a marginal role in the Eastern European
market.
So far it is in particular French/German EPEXSpot and Romanian OPCOM that stands out
as potential regional champions in respectively the Western and Eastern part of Europe,
while Nord Pool Spot is the dominant and sole operator in the Northern part of Europe.
All in all, the trend all over Europe, from south to north, from east to west is that former
national markets link themselves together. In EU there is an aim that regional markets
should be established as a sliding path or stepping stone towards a single European
Electricity Market. Current market coupling initiatives indicate that in the future national
markets will partly or fully be replaced by regional markets.
The recommended model for SEE is based upon experiences from these markets, and is
very close to the current TLC arrangements.
This is also supported by the current CWE (Central-West Europe) market framework.
In October 2009, OMEL, EPEXSpot and Nord Pool Spot signed an LOI where they state
their common interest for together enabling a cooperation based on a price market
coupling between these three big power exchanges.
The Consultants proposal is in-line with these initiatives and this would give the SEE
region a good position when the integration within Europe is ready to take its next steps.
72
73
6.
Wholesale electricity prices in the region are seen as high. The lack of transparency in the
pricing makes it difficult to assess the actual price level. According to the ToR for this
project, prices go up to 100/MWh. It seems clear that the prices in the SEE region have
been affected by the lack of transmission and generation capacity. Model analysis 25
suggest that competitive prices in the region in the year 2008 would be in the range of 90100, but that the prices would be reduced in the future when new capacity (in generation
and transmission) is added. The modelled prices are broadly in line with new entry cost for
CCGT.
However, more efficient utilization of the existing transmission capacities and a generally
better functioning market is likely to contribute to improving the situation. The lack of wellfunctioning wholesale markets across the region is a contributing reason. Some of the
requirements frequently some or all of these are missing in SEE for an efficient
wholesale market are 26:
well established roles/positions for all market players, including the TSO (as a provider
of efficient balancing services), producers and suppliers (using market mechanisms to
hedge risk), traders and brokers.
25
Pyry Energy Consulting, Market Report for South-East Europe (non-public report)
EFET: Obstacles to Electricity Trading in Central & South Eastern Europe.
27
Energy Community Investment Conference, Background information package,
August 2007
26
74
The regional (for the nine original Contracting Parties) load factor for 2008 per technology
is displayed in Figure 31. The hydro plants in the region has an average load factor of less
than 30%, while the conventional thermal plants (fossil fuels) has an average load factor
slightly below 40%.
The hydro plants can be expected to produce close to the available energy, which is
determined by the inflow of water. In 2008 this resulted in a generation of 46 TWh out of a
total regional generation of close to 177 TWh.
The load factor of conventional thermal units is however quite low, which is likely to reflect
that the capacities in many cases are not fully available. The load factors do also vary
substantially between the different countries in the region.
The regional consumption was in the same year close to 178 TWh, which would result in a
net import need of below 1 TWh.
75
100%
87%
90%
80%
Load factor
70%
60%
50%
38%
40%
30%
29%
20%
10%
0%
Hydro
Nuclear
Fossil fuels
Source: Own calculations based on data from UCTE, Platts and OST
In general there are however shortages and there are also large imbalances between
different parts of the region as displayed in Figure 18 and Figure 24. A Generation
Investment Study was prepared in 2004 and updated in 2006 (Final report January, 200).
According to this study the SEE power system as one fully interconnected network would
reduce the investment requirements and save approximately 3 billion (NPV) during the
period 2005-2020. This also points at the importance of efficiently used interconnectors.
Within the Market Monitoring Project substantial price differences between the Romanian
spot market prices and Austrian prices has been reported. 28 This indicates either a lack of
physical transmission capacities or that the capacities are not fully used. They also report
that on 7 paths (out of 21) the ATC was below 50 MW in at least one month studied, and in
13 paths it was below 100 MW. Their conclusion was that the wide availability of ATC
indicates that reserving capacity has not been a problem. However, more than one-half of
the paths indicated ATC of 100 MW or less during the period. It is unclear whether this
actually has reduced trade.
In the Market Monitoring Project quarterly for March 2008 June 2008 20 interconnectors
were studied, out of which 10 were inactive (little or no reservations and small or no
physical flows). These were mostly trade in the west-to-east direction. The other 10 had
both significant reservations and physical flows. For four interconnections the flows
exceeded the implied physical limits.
28
See Report on South East Europe Market Monitoring for the Period December 2006February 2007
76
A network modelling analysis 29 showed that in a base case hydrological scenario for the
year 2010 most of the lines in the region are loaded less than 25% of their thermal limits.
Only seven out of 49 400kV and 220 kV was in this analysis loaded more than 50% of their
thermal ratings and only one more than 50%. However, other elements may be loaded
more (e.g. transformers in sub-stations and some internal lines).
There is thus a mixed picture, but the lines used for trade in main trading direction (southto-north) are used to a high degree and are in some cases very congested, which limits the
possibility of trade and increase prices (in deficit regions). Figure 32 shows the free
capacity on the different interconnectors. On some interconnectors the calculation results
in a significant negative number, which indicates errors in data. 30
Figure 32. Free capacity as % of max monthly capacity, 2008
BA
->
BA HR
->
BA ME
->
BG RS
->
BG GR
->
BG RO
->
G RS
R
->
G BG
R
->
G MK
R
->
H AL
R
->
H BA
R
->
H HU
U
->
H HR
U
->
M RO
E>
M BA
E>R
M
E- S
M >AL
K>
M GR
K>
R RS
O
->
R BG
O
->
R HU
O
->
R RS
S>
R BA
S>B
R
S- G
>
R ME
S>
R MK
S>R
R O
S>
AL AL
->
AL GR
->
M
AL E
->
R
S
150%
140%
130%
120%
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
-90%
-100%
January
February
March
April
May
June
July
August
September
October
November
December
Note: The graph shows the difference between the maximal monthly capacity (NTC*number of hours) and the actual total
monthly flow on different interconnectors (in each direction) as a percentage of the maximum available monthly capacity.
Source: Own calculations based on UCTE data
Due to the often cumbersome procedures to get access to the networks, most of the cross
border trade is currently carried out by traders acting as intermediaries between importing
and exporting countries. 31 As previously mentioned different principles for allocating
29
77
capacities are also currently used in the region. Significant capacities are directly allocated
to supply domestic customers in several countries, one country uses pro-rata allocation
and the other use different pricing methods for transmission capacities (pay-as-bid and
market clearing price). These difficulties are likely to lead to inefficient utilisation of the
capacities, which would also contribute to higher prices. At an interview with ELEM (FYR of
Macedonia) it was mentioned that 30% or more of the (import) price is due to capacity
payments for interconnectors. 32
The efficient use of interconnectors is e.g. demonstrated by the introduction of the market
coupling between France, Belgium and the Netherlands (Tri-Lateral Coupling TLC).
Figure 33 and Figure 34 show the price difference between France and Netherlands 1
month before and after the introduction of the market coupling. Figure 33 shows the daily
average price difference, while Figure 34 shows the average hourly price difference. Both
of these show a clear decrease in the price differences, and in particular a clear decrease
in the price difference during peaks. In particular Figure 34 shows that the price difference
in the afternoon/evening peak was reduced dramatically following the introduction of the
market coupling. This may be a reflection of reduced possibilities for exercising market
power following the market coupling. 33
Figure 33 . Price difference between France and Netherlands 1 month before and 1
month after introduction of market coupling
80
NL
60
40
20
32
33
21-dec
18-dec
15-dec
12-dec
09-dec
06-dec
03-dec
30-nov
27-nov
24-nov
21-nov
18-nov
15-nov
12-nov
09-nov
06-nov
03-nov
31-okt
28-okt
25-okt
22-okt
78
Figure 34. Average hourly price difference between France and Netherlands 1
month before and 1 month after the introduction of market coupling
100
80
Diff /MWh
NL-FR before
NL-FR after
60
40
20
0
0 1 2
3 4 5
6 7 8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
-20
24 hour day
79
7.
The risks and opportunities for non-household customers are likely to differ across the
region. Given that the main trading pattern currently is from the north to the south
competitive prices are likely to increase to the south in the region, but the degree of such
price differences would depend on the congestions in the region. Some parts of the region
also suffer from shortages and load shedding, while other parts have a surplus.
Furthermore, the current situation in terms of tariff differs. Montenegro for instance has
substantially higher tariffs than other countries in the region.
7.1
Key risks
80
7.2
Opportunities
A well functioning wholesale market in SEE will bring many opportunities to the
participants.
Real competition Access to a large base of suppliers
With the current market structure the (non-household) customers are essentially dependent
on the local supplier. This is further enhanced by the fact that the local (low cost)
generation is in many cases reserved for the local tariff customers. Market opening will
create opportunities for non-household customers to get access to a larger base of
suppliers. Currently non-household customers can formally become eligible in (almost all)
countries in the region, 34 and in a few it is mandatory for customers above the defined
threshold. The latter implies that those customers to not have access to a regulated tariff.
Access to new service offerings
As has been the case in more developed electricity markets this has led to a broader range
of services offered, providing the customers with new and better possibilities for contractual
arrangement, hedging etc. The market for hedging will develop when there is a trustworthy
spot price that can serve as basis for financial hedging contracts.
34
A few jurisdictions define the eligibility threshold on connection level, which means
that all non-household customers cannot become eligible in those jurisdictions.
81
82
8.
8.1
The degree of competition in the market is generally low in the region with in most cases
one dominant generator in each country. Furthermore, it is common practice that this
generator is obliged to first-hand supply to the domestic tariff customers. This limits the
possibilities for trade and reduces or eliminates the incentives for eligible customers to
exercise their eligibility. In some countries no regulated tariff is offered to eligible
customers, which in effect means that those customers are the only one facing the
marginal cost of generation in the region.
As stated above (see section 3.4 and 3.5) there are some clear problems related both to
the regulated tariffs and to the market structure. Supply and distribution has generally not
been unbundled in the region, which creates an unequal playing field for the incumbent
supplier and a new entrant. There is a high risk that a new entrant fears that it will not be
treated in a fair and equal manner by the distribution company as it is competing with its
supply businesses. However, this is probably currently overshadowed by the fact that the
regulated tariffs mostly are at levels which makes it very difficult for new entrants to
profitable enter the end-user market. Even though both of these problems primarily relates
to the retail market and not the wholesale market, it puts limitations on the business models
that a new entrant also on the wholesale level can apply. A new wholesale entrant will then
have difficulties in securing its own customer base, but has to rely on selling to the
incumbents.
On the wholesale level there is no clear wholesale reference price established. This
reduces the possibility for efficient trade between parties, and is also likely to lead to less
efficient use of the system.
National generators in most SEE countries are obliged by law to continue to supply tariff
(captive) customers, as per the local energy legislation for Public Service Obligation (PSO).
Thus, they are allowed to request capacity from the TSOs for so-called Already Allocated
Capacity (AAC) for import purposes 35. In effect, part of the cross-border capacity is
reserved for fulfilling this PSO and restricts the availability of transmission capacities to
new entrants.
One of the main market imperfections is the lack of clear incentives to SEE TSOs to
support cross-border trade and invest more in integrating the regional markets. In this
respect an operational framework of Co-ordinated Flow-Based Explicit Auctions (CAO) is
being implemented for allocating interconnection capacity in the region.
This initiative has led to a dry-run simulation through 2006, with continuing work and
simulations in 2007, potentially increasing the appetite of traders to participate as well. One
important existing issue is the distribution and use of revenues from the CAO and the
ensuring effect on TSOs participation in this framework, the actual capacity that they
provide to the market and the corresponding benefits for the regional cross-border trade
and planned further market integration of the regional electricity systems 36.
35
36
83
However, some of the incentives that may benefit TSOs in the area can cause higher
customer bills and lead to a market distortion. This is due to the fact that CAO-generated
income for grid operators is a windfall profit 37 since OPEX and CAPEX spending on the
countrys network is covered by regulated tariffs and the inter-TSO compensation
mechanism, unless the CAO-generated income is either used for investments or for
reducing the tariff according to the established guidelines.
In regions with liquid and efficient markets, the use of congestion revenues through either
investment to reduce congestion or to provide firm availability of capacity or lower tariffs
should lead to an improvement in welfare. Until the SEE markets are developed to this
level, it is important to prevent scenarios where TSOs are obtaining certain incentives to
retain congestion on their borders, especially given the fact that the framework for
allocation of transmission capacity is not completely market based yet.
During the 14th Athens Forum the Energy Community Secretariat gave a presentation
regarding the situation as of December 2008. The figure below is taken from that
presentation. As shown by this figure some legal provisions are missing in most of the
central areas for wholesale market opening in more or less all the countries. For three of
the key issues the situation is reported as being the following:
Market opening (in the figure below) refers to the opening of the market for final
customers. The summary above shows that only Croatia is fulfilling the requirements
of Directive 2003/54/EC in this respect. Several, such as FYR of Macedonia,
Montenegro and Kosovo have significant bottlenecks in this area, while the remaining
contracting parties only have some provisions available.
Also related to cross-border trade, none of the contracting parties fulfil all the
requirements. Croatia and Serbia are reported as only missing some provisions.
37
84
Public Service
Obligation and
Customer
Protection
Monitoring
Security of
Supply
Technical
Rules
Unbundling
Provisions
and Access to
Account
Third Party
Access
New Generation
Authorisation
and Tendering
Market
Opening
Cross Border
Trade
Albania
BiH
Croatia
the Former Yugoslav
Republic of Macedonia
Montenegro
Serbia
UNMIK
Regional Perspective
REGULATION
(EC)
1228/2003
Inter-TSOs
Compensation
mechanism
Transpa
rency
Use of
Congestion
Income
New Interconnectors
Coordination
among
Regulatory
Authorities
Penalties
Albania
BiH
Croatia
the Former Yugoslav
Republic of Macedonia
Montenegro
Serbia
UNMIK
Regional Perspective
Bottlenecks
Source. Energy Community Secretariat, presentation given at the 14th Athens Forum
Independent of the market model eventually chosen some prerequisites have to be fulfilled,
possibly to a varying degree dependent on market model. Some important prerequisites
will be:
Competition in generation
Price penetration
Independent regulators
85
86
Price penetration
In an efficient power market final consumers and generators react to market prices. Market
design aims at exposing a steadily increasing number of market participants to short and
long term marginal prices. Full supply contracts 38 and regulated prices are not compatible
with price penetration.
Currently the price penetration to end-users is limited in the region. The countries typically
have regulatory regimes in place that are supposed to be cost-reflective. The level of the
regulated tariffs varies widely within the region. The tariffs are however typically not
sufficient to cover the cost of new investments. The payment discipline is also in many
cases low.
Most of the customers in the region are not exposed to market prices. In some countries
(Croatia, FYROM and Montenegro) eligible customers are exposed to market prices.
Effective market opening
In order for a competitive wholesale market to emerge it is necessary that there are
customers available to supply.
Currently the customers are in most cases locked into their current supplier, either
through not being eligible to switch or not having any incentives to switch supplier. In all
cases the effective market opening is low and, with the exception of Croatia, FYROM and
Montenegro the de facto market opening is zero or close to zero with (almost) no
customers exercising their eligibility.
Independent regulators
Independent regulators equipped with the sufficient regulatory capacities are important in
any market setting. A more complex market design is however likely to put higher demand
on the regulator. In particular, regional integration may require cross-border regulatory
interventions.
All the countries in the region have formally independent regulators, although the
capacities of the regulators vary.
Effective TSO unbundling
All of the foreseen market models require neutrality of the system and market operator.
Most of the countries have established independent TSOs. The exceptions are Bosnia and
Herzegovina where an independent ISO is established, Croatia where an independent
market operator is established but the TSO is within the HEP Group and Montenegro
where this process has only begun.
Effective DSO unbundling
DSO unbundling most directly affects the retail level and is thus not an absolute
requirement. A well functioning retail market however supports and enhances the
functionality of the wholesale market. Demand side participation in energy markets can be
38
With full supply contracts we refer to a type of contract where the customer can offtake as much electricity as it wants and the customer has no cost for imbalances (the
customer has no reference consumption). This is sometimes also referred to as all
in contracts.
87
All countries have established independent regulators, although they may in some
cases need to be strengthened. Looking at the regional perspectives the difficult
challenge of regional cooperation between regulators probably has to be further
developed, as is typically also the case in the rest of Europe.
All countries, except Montenegro, have also advanced relatively far in terms of TSO
unbundling.
There are generally no publically available and generally trusted reference prices for
energy.
88
Although the possibility for secondary trading for cross-border capacities exist in a few
cases these are not liquid and well-functioning markets.
Long-term trade in electricity may function reasonable well, but no organized market
places for trade in electricity currently exist.
Although formal market opening (end user eligibility) is reasonable well progressed,
the actual market opening is in most cases non-existent or very limited.
Customers currently face market prices only to a very limited extent. This is particularly
the case regarding more short-term price signals.
Effective unbundling of DSOs has not progressed very far. Although in several cases
the distribution and supply have, in various ways, been separated from generation,
distribution and supply have not been separated from each other. This may be of less
urgency in terms of creating a regional wholesale market, but is of importance to
secure that customers get access to the electricity market.
8.2
There are several potential barriers to advancing market opening and liberalisation. First of
all, the prerequisites for regional market opening discussed above are generally only
fulfilled to a limited degree.
Regulated rates to low
It is important to recognize that this is a poor region and that a relative high degree of the
population suffers from energy poverty. Based on consumer protection concerns it is
common to want to keep the cheap generation for the home market and offer this to the
consumers at low regulated rates. Although the regulated rates may cover the cost of the
existing system, those price levels are insufficient to cover the cost of new investments on
a commercial basis and generally below the prices on the open market. The perceived risk
of price increases can thus be considered to constitute an important barrier. Related to this
is also the concern that increases in the prices will have a negative impact on the industrial
development and the competitiveness of the local industries in the region.
This situation is however different in different countries. Montenegro for instance has
substantially higher tariffs than other countries in the region. It is possible that the
customers in Montenegro can gain from regional market integration. On the other hand, in
most countries the regulated tariffs are lower than what can be expected in the open
market at least in the short run.
It should be noted that if price levels are below the cost of new investments, it will not be
possible to get new commercially driven investments, which will worsen the supply-demand
balance.
With the current price regulation the interest of the eligible consumers to exercise their
eligibility is limited or non-existing. In a few countries the eligible consumers are forced out
on the open market. In order to create a well-functioning market opening it is necessary to
gradually increase the number of customers on the open market. This can either be done
by eliminating the option of regulated tariff for eligible customers, or by changes in the tariff
regulation.
89
No Power Exchange
Market participants need to understand and adapt to the concept of and competitive
electricity market. This will require gradual capacity building, and a gradual evolvement of
the market.
Mutual recognition and trust in parties
On a broad political level there are important political barriers related to the mutual
recognition of parties. This is typically issues that goes beyond the electricity market, but
have an impact on the possibilities of progress. Energy market integration is to a high
degree dependent on trust, since energy security is vital to any nation. In comparison, the
well advanced regional integration in the Nordic countries was based on a long history of
cooperation between the countries, which provided a solid foundation.
90
The political barriers, both related to concerns for price increases and the mutual
recognition of parties and trust between nations is probably the most difficult to overcome.
8.3
Increasing the degree of market price penetration to final customers. Abolition of full
supply contracts and regulated prices over time;
Establishing a regional SEE wholesale market will reduce the risk for a fragmented
market structure with negative consequences;
Increasing the level of competition (in generation). With a well-integrated market the
competition may work reasonable well, but it will require close surveillance from
market operators and competition authorities. Improvements in the utilization of crossborder capacities are also important;
Establishing systems for balance responsibility and creating incentives for market
participants to be in balance;
The current and future wholesale participants need to be educated and trained in the
functioning of the new market and the roles and responsibilities of each market
participant.
At least, but probably most important, a political will to establish a SEE wholesale
market is vital for the success of the mission. Without a political commitment in each of
the contracting parties no well functioning market will be achieved.
91
9.
The progress of the SEE wholesale market opening needs to be monitored. The EC
directives demand market opening and there are many areas that need to be developed.
Key Performance Indicators (KPI) is a tool in the monitoring. The KPIs will show the pace
of progress and make it possible to take measures, if the process is haltering.
The KPIs are suggested to be prepared by ECRB and the national regulators. They will
also be used by national ministries, the World Bank, TSOs, investors and others with an
interest in the development of the wholesale market in SEE.
It is also suggested that the KPIs are used on a regular basis, for examples quarterly and
annually. The KPIs need to be published in some sort of monitoring report and made
accessible for all interested parties, for example through the web page of ECRB.
From a qualitative perspective one can distinguish between two types of indicators. The
first one measures whether the necessary instruments are in place that can support the
desired development. The second type of indicators measures how well these instruments
functions. In this document we propose a number of KPIs that should measure both of
these aspects.
We have defined 50 KPIs to monitor the progress of the SEE wholesale market opening.
The KPIs have been grouped in the following areas:
Number of KPIs
Access to markets
Access to customers
14
Some of the KPIs are the same as in the EC Report on Progress in Creating the Internal
Gas and Electricity Market 39. These KPIs probably needs to be monitored as a requirement
form the EC and it will thus not be any extra work for ECRB and the regulators.
The monitoring, as proposed in this report, needs to be coordinated with the ECRB
Marketing monitoring work stream by USAID/Potomac Economics. This project has so far
mainly concentrated on the allocation of cross-border capacities.
Most of the KPIs have been defined in the scale of 0 100%, where 100% indicates that
the goal for the KPI is fully achieved. Some KPIs used in other circumstances have other
scales, examples of this is HHI and C3. There are also some indicators that can not be fit
39
92
into the 0 100% scale, examples of this is Price correlation between price areas and
Number of balance responsible parties.
9.1
Trustworthy market prices that reflect the underlying costs are key to a well functioning
market.
From a market design perspective it is important that prices reflect the relevant cost of
generation, i.e., that prices generally reflect the short run marginal cost, and that these
wholesale prices are pass-through and reflected in end-user prices. It is not possible to link
the success of a market design to a particular price development or price level since that is
dependent on the cost structure, need for investments etc. Prices may thus both increase
and decrease without any of that necessarily being a sign of a good or bad market design.
From a market design perspective it is more important to measure whether the prices are
competitive both on the wholesale market and in the retail market. Two KPIs are proposed
to capture this.
For the wholesale market the price mark-up above the short-run marginal cost (SRMC) is a
key indicator (Lerner index 40). The SRMC could possibly be calculated based on the last
thermal unit used in the country (standardized costs based on fuel prices and the efficiency
of the plant). However, the drawback of using the last unit actually used is that if inframarginal units are held back from generating the wholesale market prices could equal
SRMC (zero mark-up) in spite of market power. Thus, it is preferable to calculate the
SRMC based on an assumed availability of the power plants.
If the country is importing the SRMC for the country would equal the SRMC for the most
expensive import (i.e. the SRMC in the most expensive export country).
Furthermore, it is important that trustworthy price references are established. It is proposed
that this is measured in the short run through the correlation between the wholesale prices
and the end-user prices. In the long-run a trustworthy forward price reference should have
implications for new construction of power plants - if the forward prices are above the
LRMC of the most competitive plants investments should be triggered.
Transparent prices are also important for market participants. We propose to measure
price transparency through the existence of daily published prices. Trustworthy prices also
depend on a well-functioning, neutral and non-discriminatory price setting process. Market
surveillance is important to secure this.
40
93
Measure/scale
Comment
Could be
measured for peak
and off-peak
respectively.
Per customer
group, excluding
network tariffs,
taxies and levies.
Per customer
group, excluding
network tariffs,
taxies and levies.
Yes = 100%; No = 0%
Price transparency
existence of daily published
prices
Yes = 100%; No = 0%
Establishment of market
surveillance
Yes =100%; No = 0%
Existence of regulated
(energy) prices
No = 100%, Yes = 0%
Transparent market
information
No = 100%, Yes = 0%
Publication of all
information related
to the formation of
market prices.
9.2
Access to markets
For an effective market opening it is important that market participants have access to
market places where relevant products can be traded. Organized market places are the
most accessible type of market place. However, standardized trading contracts and
products can also facilitate trading in the absence of an organized market.
Market participants also have the need for hedging price risk. One possibility for hedging is
through bilateral (financial) contracts between e.g. a producer and a consumer. A market
place for trading financial products provides better liquidity and facilitates access to the
market.
94
Measure/scale
Yes = 100%, No = 0%
Standardized forward
contracts/products defined
Yes = 100%; No = 0%
Yes =100%, No = 0%
No restriction on market
access due to type of
market participant
Yes = 100%, No = 0%
9.3
Comment
Yearly numbers.
License systems
do not restrict
market
participation of
generators,
suppliers, or final
customers from
direct market
participation,
including the right
to import/export (if
relevant). 41
Access to customers
To measure the access to customers three indicators are proposed. The first indicator
measures the formal market opening, i.e., the share of consumption that has the legal right
to switch supplier. The second indicator measures the share of consumption that is actually
exercising the eligibility, and the third indicator the degree of supplier switching within one
year. These indicators combined show how accessible the final consumers are for a new
entrant into a market.
41
95
Measure/scale
Comment
Eligible consumption in
GWh/Total consumption in GWh
(%)
Number of eligible
consumers/Total number of
consumers (%)
9.4
Consumers that
have switch
suppliers or left
regulated tariffs.
Measures the
consumer
switching activity
within one year.
Electricity markets are generally vulnerable to market power and it is important to measure
that the market structure is such that competition is facilitated. A key issue is to define the
relevant market. It may be that neither national nor the full regional market is the relevant
market from a competition point of view, and also that the relevant market may vary from
time to time (due to changes in demand, available generation capacity and available
transmission capacity).
Under the section prices we have also proposed measures that try to capture the mark-up
above marginal cost, i.e., the actual competitiveness of the market.
96
Measure/scale
Comment
Relies on the
availability of
prices
Relies on the
availability of
prices
Market concentration,
Generation
HHI 42
C3 43
HHI
C3
Ownership:
Yes =100%, No = 0%
Ownership:
Yes =100%, No = 0%
Market concentration,
Retail
Vertical unbundling of
generation from TSO
Vertical unbundling of
supply/retail from DSO
9.5
Measured in GWh
Measurement
should be based
on legal
requirements that
are enforced.
Measurement
should be based
on legal
requirements that
are enforced.
42
HHI (Herfindahl-Hirshman Index) is calculated as sum of the square of the market shares
for all market participants: (market share)2
43
C3 (Concentration of 3 largest companies) is calculated as the sum of the market
shares for the three largest companies.
PYRY ENERGY CONSULTING
NORD POOL CONSULTING
97
Balancing markets allows the TSO to balance the system for deviations after gate closure
in the spot market at the lowest possible cost. In the SEE context a regional market is
preferable.
Table 14. Key Performance Indicator - Balance responsibility and balancing
markets
Indicator
Measure/scale
Yes =100%, No = 0%
Yes =100%, No = 0%
Balancing market
established
Yes =100%, No = 0%
National or
regional market
Yes =100%, No = 0%
Number of balance
responsible parties
9.6
Comment
Cross-border capacities need to be allocated in a transparent and fair way and there are
requirements to use market based methods for allocation of cross-border capacities. There
are two methods for market based allocation: explicit auctioning and implicit auctioning.
The market design proposal developed in this study rests on the use of implicit auctioning.
98
Measure/scale
Comment
Yes = 100%, No = 0%
Either explicit or
implicit auctioning.
If different methods
are used at
different
interconnectors a
capacity weighted
average should be
used.
9.7
1-flows in wrong
direction
It is possible to have different network tariff models within one market, although too large
differences may have negative impacts on e.g. the location of investments and dispatch.
This study does not focus on the details of the network tariff regimes. However, in order to
facilitate trade and participation on an open market distance independent point tariffs
(postage stamp) are proposed. Furthermore, non-discriminatory access to the grids is
essential for a functioning market.
99
Indicator
Measure/scale
Establishment of distance
independent point tariff
(postage stamp)
Yes = 100%, No = 0%
Yes = 100%, No = 0%
9.8
Comment
Independent regulators are important for the functionality of any electricity market. For a
regional market it is also important that a functioning regional cooperation between
regulators is established. It is however inherently difficult to measure harmonization,
expect for the case when full harmonization between all entities in a common market has
been reached.
Table 16. Key Performance Indicators - Independent regulators and harmonization
of regulations
Indicator
Measure/scale
Formal independence
Financial independence
Yes =100%, No = 0%
Harmonized licensing
framework
Comment
100
10.
10.1
Introduction
competition (generation, retail and consumption) in order to achieve cost efficiency and
maximum utilization of infrastructure
regulation of monopoly (grid and SO) functions in order to achieve cost efficiency and
a defined level of supply quality
The only place regulation shall affect competition is where the framework for and the
proper function of competition is created.
The solutions for the SEE market should be based on the experience from existing markets
with focus on utilizing the sum of the experiences from other markets.
In the following the most important requirements affecting SEE plus thereto belonging
instruments and constellations are discussed, which also result in the Consultants
recommendations for SEE.
101
10.2
Contracts with regulated prices will always withdraw the contracted volume from the
wholesale market. A functioning wholesale market is dependent on price dependent bids in
order to create liquidity. Regulated price contracts will thus not harm the functioning of the
wholesale market if they represent price independent consumption volumes.
In SEE regulated price contracts exist as support to industry, business and households.
Business and households are typical price independent consumers, i.e. they are not able to
respond on short term price peaks. Thus maintaining the support of these two groups in a
transition period will not disturb the market. Important for the transition periods duration is
although that these two groups are able to respond on long term prices. They should thus
be given a timeline for eventual tariff price increases/corrections in order to facilitate their
preparations for eventually higher market costs during/after the transition period.
Industry, as the third group, will due to the introduction of balance responsibility be obliged
to trade into balance. This implies that they will have to purchase hourly contracts in
addition to (if existing) regulated price contracts. Regulated price contracts should only be
granted as base load for a longer period and based on the expected consumption (equal to
the principle of distribution of EU-CO2 allowances). The hourly contracts purchased
through their balance responsibility will introduce the industry to hourly prices in the
wholesale market and thus create incentives to respond on price peaks with demand
volume flexibility.
Generators will have contractual obligations related to regulated price contracts and other
bilateral contracts. The wholesale market will enable the generators to substitute their own
generation capacity with cheaper purchases in the wholesale market. Thus the generators
will appear in the market as price dependent buyers in addition to the price dependent sell
of their surplus capacity.
In the long run, regulated prices will have to be removed as SEE is integrated into the EU
and the conditions for the internal EU market for energy are applied. It is a political decision
how fast and to which degree the regulated prices shall be replaced with market prices, but
regulated prices needs to be removed by 31.12.2014 according to EU directives.
10.3
10.3.1
Basic principles
The basic
consumers
consumers
consuming
generate it.
and
that
start
they
In addition the generators, through a Real-time Balancing market, will be able to sell
additional generation capacity (increase/decrease) in real-time operation.
Assuming that consumers estimate their consumption correctly and purchase this from the
generators, the input for the real-time operation will be a planned balance between
generation and consumption. The load increase and decrease within the same hour is not
subject to day-ahead trading. Thus the average load per hour will be the traded volume.
This implies that only the average consumption per hour is equal to the average generation
per hour and additional instruments are required for TSOs to balance the system in realtime.
102
10.3.2
The TSO as responsible for security and quality of supply needs instruments enabling
him balance generation with consumption. Imbalances emerge from the consumers and
generators variation of load within the operational hour, from wrong estimates regarding
consumption and/or generation and unexpected incidents (generation, consumption and/or
grid failure).
There are two main issues important for a TSO which will lead to an acceptable preliminary
balance before the hour of operation starts:
The consumers need access to a liquid marketplace, which ensures that they always
will be able to purchase their estimated energy consumption. Vice versa the
generators need access to a liquid marketplace, which ensures that they always will be
able to sell their estimated energy generation.
The generators and consumers need an incentive to trade into balance, thus not
purchase more or less than they will consume or sell more or less than they will
generate.
The instruments supporting this are a day-ahead market for energy and a balance
responsibility by each wholesale market participant:
A day-ahead market (DAM) will provide the wholesale market participants with a
marketplace for energy where supply and demand meet to trade their sell and
purchase volumes.
Balance Responsibility (BR) provides the incentive for achieving a balance between
contracted and metered energy volume per settlement interval since prices for
imbalances are less favourable than prices for energy.
The participation in DAM requires a set of rules and procedures related to Balance
Responsibility. Balance Responsibility is an instrument used by the TSOs to ensure that
the consumers and generators have agreed upon energy contracts balancing generation
and consumption before real-time operation. Any participant generating more or less than
he has sold in advance or consuming more or less than he has purchased in advance will
have the deviation calculated as imbalance.
In Europe the shortest interval for calculation of imbalances is 15 minutes, the longest
hourly. For these intervals the imbalances between contracted and physically extracted or
injected energy are calculated. The calculation is related to the Balance Responsibles
deviation, where a Balance Responsible can represent his own consumption and/or
generation or a group of consumers and/or generators. The imbalance should be priced
with a price reflecting the costs the TSO had for achieving the real-time balance in the
settlement interval.
The Balancing Power Market will be the source for reserves used to balance prior and
during real-time operation and the Balancing Power Market will be the instrument pricing
imbalances. The reserves bid into the Balancing Power Market will also be used for
correcting imbalances resulting from incidents. Ancillary services will be the source for
reserves balancing other imbalance reasons.
A functioning Imbalance Management is dependent on an established Balance
Responsibility and an implemented Balancing Power Market or at least an acceptable (fair)
price for imbalances.
Balancing Responsibility further implies that traditional full-supply contracts are disabled by
the grid/market code. This can be achieved by a deadline for generation plan submission to
103
the responsible TSO (i.e. day-ahead during early evening hours, thus allowing participant
to schedule and TSO to plan day-ahead operations. This will disable the generator from
following his customers load in real-time.
Investments and Market Prices
Investment decisions are based on a sufficient enough rate of return and an acceptable
investment risk. In competitive electricity business environments investment decisions
therefore are based on business plans reflecting expected market prices. These again
reflect factors such as expected market development, generation capacity, consumption
and interconnection capacity. Due to the uncertainty of these factors Risk Management
models and systems are required in order to provide the investment decision with proper
input.
This challenges Risk Management models and systems and leads to required prerequisites
in order to be functional:
Market risks deriving from regulatory and political changes must be minimized or at
least calculable
The experience in Europe and elsewhere in the world shows that the required prerequisites
are only satisfied in an electricity business based on a stabile or foreseeable market
framework, a trusted and accepted reference price for energy and a functional and fair
electricity wholesale market:
It shows that especially long-term investments larger generation units, large scale
industry and interconnection capacity are dependent on a trusted price reference
coming from a DAM. Together with transparency regarding fundamental data
influencing the price (both historical and future) the estimation of future scenarios and
their probability becomes one of the most important investment terms. Typical
investments are increased efficiency in elder generation plants, higher utilization of
existing transmission capacity through technical improvements and when
environmental terms are included through subsidies increased generation capacity
coming from environmental friendly or friendlier generation.
Short-term Demand Side Response (DSR) has become one of the most important
instruments for system operators to manage extreme peak load situations. E.g. largescale industry able to change their load profile within short notice has become an
important source for reserve capacity. This has been enabled through investments in
industrial process planning and coordination instruments.
Long-term DSR in addition to the one coming from the above mentioned small-scale
consumers has become an important factor for increased consumption efficiency.
This has been facilitated by improved technology and grid incentives.
The recommended regional market design will after implementation, produce the required
prerequisites and facilitate correct investments in generation, consumption and
transmission, which lead to increased efficiency, lower costs and higher system quality.
104
10.4
Market Structure
It is vital that a market reform can add value to and support the whole electricity industry.
Both large and small companies on the generation and the consumption side should
benefit from the market reform and the framework set by the authorities. It must be
emphasized that only participation from all parties will give a reliable and trusted business
platform that can build liquidity. The services offered by a Regional PX must add value and
incentives to the individual participant.
The following objectives are essential in an electricity market reform:
To achieve the required balance between power generation capacity and power
demand both in the short and long term
For the smaller national SEE markets to meet these objectives, it is important that they are
integrated with the larger markets into one unified, liquid regional electricity market.
10.4.1
Requirements
Market transparency providing the same information at the same time to all
participants
Balancing market
Intraday
Participants trade on equal terms means a common book of rules and that all relevant
information as transparent market information and available transmission capacities
are available for all market participants at the same time
105
A Balancing Market provides a vital tool for TSOs to adjust the balance in real time
operations
Settlement and reporting means flexibility in the reporting, settlement and billing
process to handle local requirements for balance responsible parties, TSOs, and
banks.
10.5
10.5.1
106
Liquidity is a main keyword when looking at short-term trade. A day-ahead market will be
able to provide enough liquidity if the framework (eligibility of possible participants,
imbalance management, imbalance costs and settlement, transparency) supports this
function. A liquid DAM will then also be able to create confidence and trust in the
determined price and through that develop the reference price for energy in the market
area.
Although a DAM should not be dedicated a monopoly on day-ahead contracts it must be
recognized that bilateral trading meets technical boundaries when converging to less than
weekly ahead of operation liquidity decreases and prices due to increased operational
risks increase. This is the reason why DAM-trading is increasing from year to year in all
established DAMs with proper framework supporting the DAM development (e.g. Nord Pool
Spot, EEX, OPCOM, APX NL etc.).
Thus DAM trading should be supported when designing the framework for short-term
products. This implies that available import and export capacity for usage in implicit
auctioning, imbalance management and costs and wholesale market eligibility should be
designed to support DAM participation and liquidity. When it comes to the most important
difference between DAM and bilateral trading the way to organize trading differs: auction
based and continuous based trading:
10.5.2
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determine the need for capacity or to whom shall capacity be allocated? And what does
necessary utilization mean?
This issue is currently discussed in Europe and there are several important views and
arguments used in these discussions. Summarized one can say that there are two main
parties in the discussion: traders together with traditional participants and portfolio
managers.
While the traders and traditional participants focus on arbitrage or avoiding volume risk and
price risk through long-term bilateral contracts, the portfolio managers use risk
management systems and market instruments to manage risks. This means that traders
and traditional participants mainly focus on achieving the best possible price and a volume,
whereas the portfolio managers focus on adaptation to the reference price in their market
area(s).
This implies that traders and traditional participants require cross-border capacity for future
periods resulting in bilateral contracts between a generator and a consumer. Especially in
areas with energy deficit or areas with high marginal generation costs, the access to crossborder capacity has an essential meaning for many participants. Traders and traditional
participants support explicit auctioning of capacity.
Portfolio managers differ substantially from traders and traditional participants. Their focus
is portfolio optimization. They aim at
balancing as good as possible the physical with the contractual on a day-ahead basis
(volume) including price dependency as variable influencing their volume
hedging against the price risk long- and mid-term by using derivatives
trading for arbitrage by using derivatives and their knowledge about their market
Portfolio managers rely upon a correct usage of all cross-border capacity to other market
areas influencing the own market areas price. Thus they support implicit auctioning.
Competitive electricity business can be arranged both based on explicit and implicit
auctioning of interconnection capacity. The difference is the degree of optimization
achievable in each form and whether the mechanism competition is able to function
properly or not. SEE as regional market area requires investments and correct trading in
order to support the future development both economic and infrastructural.
We therefore recommend the implementation of implicit auctions. A strong argument
supporting implicit auctioning is that even the interconnection between the two most
competitive and mature power markets in the world, the Nordic and the German, is unable
to be utilized sufficiently through explicit auctioning thus implicit auctioning will replace
the explicit auctioning as soon as possible.
10.5.3
Bilateral trading
While some markets have concentrated on bilateral trading, others like Nord Pool started
by including an organized DAM as an instrument next to bilateral trading. Some few
markets even monopolized the market operation by creating a mandatory organized DAM
(e.g. Greece or Spain and the first UK pool).
The experience in this context supports economic theory in pricing, market liquidity and
flexibility: a regulated market solution (only bilateral or organized allowed) is not suitable as
solution, but a fair mix of both and strong competition between them creates products and
costs suitable for enabling the positive development of the business.
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It is important to highlight that the introduction of a DAM does not imply removal of bilateral
contracts. While bilateral contracts represent the more long-term spectre of electricity
contracts the DAM is better suitable for the short-term spectre.
10.5.4
Continuous trading is preferred as trading form in many different markets. This trading
allows the trading of the same product during a period of time, thus the product can be
traded in the means of arbitrage or portfolio adjustment. When it comes to electricity
trading, especially short-term contracts including a physical responsibility for delivery,
auction based trading has developed to be the preferred trading form.
In auction based trading the participants describe their preferences (volumes related to all
possible prices) and submit this to the trading system. The trading system accumulates all
individual preferences and determines the reference price for the market. This price is
called reference price because it is the only price leading to a balance between supply and
demand. Auction based trading thus also concentrates all existing liquidity into one auction
trading session, which is the reason why it is the preferred trading form for electricity.
Electricity is one of the few commodities where participants need to balance their portfolio
through trading any failure in achieving a balance leads to higher costs due to the
imbalance settlement. Thus the trading form and market solution with highest liquidity
attracts participants.
The reference price has to be enabled as such by the framework. This leads to next issue:
integrated pricing or unbundled prices in regard to energy, capacity, transmission and
taxes/fees:
10.5.5
Grid access
Wholesale market participants need access to the grid. The access creates costs, both
fixed and variable. Cost recovery for the grid owner and system operator is therefore
essential for maintaining a high infrastructural standard.
Many different models for grid cost determination have been implemented, but only a few
facilitate electricity trading. The simplest model the point-of-connection tariff is based
on expected scenarios and the marginal costs in each point of connection for these
scenarios. This leads to a grid tariff, where the customer of the grid pays his share of the
fixed costs and his contribution to the marginal losses in the system, based on scenarios
and his point of connection to the system as a whole.
This tariff design enables the participant to trade with anyone in the system without having
to include distance or location of the counterpart in the evaluation of the energy price offer.
Negotiated third party access requires from the counterparts that additional costs from the
sinks grid become part of the price. This model is for the purchaser indifferent, but sellers
have an incentive to choose the cheapest sinks first. In addition the negotiation, although
mostly based on standardized contracts, creates additional administration costs.
Stamp tariffs can be said to be a simplified version of the point-of-connection tariff, but
when the counterparts are opposed to more than one stamp the tariff becomes distance
dependent and thus hostile to electricity trading.
The experience from existing electricity markets show that the point-of-connection tariff
facilitates electricity trading more than other applied models. Especially regional markets
as SEE need a grid cost recovery model where electricity contract counterparts are
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independent from their location in the grid. Thus the implementation of a point-ofconnection grid tariff model is highly recommended. Relatively small national market areas
and relatively strong market concentration in each national market area adds to the
necessity of a neutral grid cost recovery model.
10.5.6
Existing markets have in this question already clearly stated that day-ahead trading is the
preferred trading horizon. Day-ahead trading not only allows a suitable balancing of
commitments and available resources with contracts, but is also the preferred source for
determination of the reference price for energy. This allows the usage of derivatives for
Risk Management and the replacement of traditional long-term bilateral contracts with
physical delivery.
The traditional long-term contracts were developed as product for risk management of both
price risk and volume risk. After the implementation of day-ahead markets the experience
shows that participants experience a minimized volume risk due to liquid DAMs and price
risk is handled more efficiently in liquid derivates markets than in traditional inflexible
bilateral contracts. The trading horizon or risk management horizon is in todays
European electricity business reduced to some few years ahead. This is in line with other
businesses.
We recommend a day-ahead market solution for SEE, especially when considering that
electricity business in Europe has become pan-European and the involved companies are
seeking for markets with equal organization as the main or home markets (e.g. Nordic,
Germany, UK, France, Romania, Italy and Spain).
However, this does not exclude the use of bilateral contract in short, mid or long term. It is
vital for the market participants to have sufficient products to secure their business.
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11.1
Introduction
Enabling a liquid regional trade between the national SEE electricity markets will secure an
optimal use of the generation (merit order) and transmission resources.
One of the main functions of this regional market design is to provide a transparent dayahead reference price of electricity and to enhance the trade across the national borders.
The mix of generation resources in the SEE region, between thermal/nuclear and hydro,
can be utilized in a more efficient manner if an open regional market is offering day-ahead
hourly contracts with full price transparency. This will give both sellers and buyers the
opportunity to fine-tune their power portfolios, reducing imbalances and hence financial
risks in real-time operation. Establishing a trusted day-ahead price index to be used for
settlement of forward financial contracts will also be of benefit for investors in new
generation as well as being a hedging instrument for the market participants.
The day-ahead reference price can be published both for specific countries and for the
whole SEE-region. Alternatively, there can be specified one reference price only for the
SEE region complimented by CfDs (contract for difference) between this SEE reference
price and area prices in the region.
The proposed market model is dependent on support and commitment in the industry and
stable framework set by the authorities. It is the market participant by using the market
services that will build liquidity. This means that the SEE Regional Power Market must be
attractive to all participants by adding value, saving cost and thereby open for new
services. Market evolution is an important activity and this process must be based on local
and regional requirements.
Initially, the SEE Regional Power Market will be focused on physical markets as DAM and
balancing markets which are both very closely linked to TSOs system operations. Strong
involvements from TSOs in the SEE region are therefore seen as a precondition for the
success of a SEE Regional Power Market.
Securing financial viability of the SEE Regional Power Market is vital to attract the
necessary investments required to launch and operate the Regional PX.
The different obstacles for a successful market opening are defined in chapter 8.
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11.1.1
Definitions
In the description of the Consultants design following in this chapter, there are a set of
definitions that will be used throughout the chapter. The most important definitions are
listed here:
SEE Regional Power Market This is the implementation of the RMD for the SEE region.
NMO National Market Operator This is the local market operator for each
country/contracting party, that is the legal counterparty to all its stakeholders.
Regional PX This is the regional price setter for the common DAM. This is not a power
exchange as such, but the entity that performs the Day-ahead auction on behalf of the
NMOs based on an implicit auction. The proposal is that this is performed by a service
provider (SEESP). This entity constitutes a cooperation agreement between the involved
NMOs and should not be envisioned to be a large organisation, but a body constituting the
regional cooperation.
SEESP This is the service provider that is responsible for the tasks defined for the
Regional PX.
RMD Regional Market Design.
11.2
In the following sections, the recommendation for the RMD is set out. These
recommendations are founded on the requirements set out in the previous chapter and
based on the general design features defined further in this chapter.
11.2.1
General recommendations
The Consultants recommendations for RMD are pillared on four core elements:
1.
Technical operation of the SEE grid system constitutes 4 control areas within ENTSO-E.
Trade across national borders is currently based on bilateral agreements and explicit
auctions. SEE wholesale market opening should streamline with European trends with
price coupling linking national and regional markets in order to enhance efficiency and
transparency.
Regional approaches that choose incompatible solutions would obstruct the process of
creating an integrated pan-European power market.
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2.
Flexibility
The key element in the design of a SEE Regional Power Market is the use of flexibility in
choosing the level of cooperation between the regional service provider (SEESP) and the
NMO in each of the member countries. Depending on size and maturity of each national
market, the national market operation can be implemented on an organizational scale from
a branch office to a fully decentralized NMO.
In the implementation phase a decision must be made whether to buy facility management
services from an existing service provider in the region or to set up a new regional service
provider serving the NMOs in the SEE countries.
3.
Financial Viability
The only functions that is centralized in the RMD is performing the daily price calculation
for the DAM based on implicit auction of cross border capacities and supply/demand bids
for hourly day-ahead contracts. This will reduce required investments considerably and
secure a financially viable operation of a trading platform for the SEE Regional Power
Market.
4.
National Control
Over the last decade, many countries in Europe have chosen to implement a national
power exchange, which has resulted in low liquidity and high costs per unit traded.
The RMD recommended by the Consultant will secure a liquid DAM market in a regional
context while preserving national control in further development of domestic markets.
Main Characteristics recommended for the RMD:
1.
2.
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3.
Ownership in the first 3-5 years of operation is exclusively for the SEE TSOs
In the first few years of operations after the implementation of a regional platform, the trade
of physical products will be the focal point. These mostly short term products, especially
day-ahead, cross-border capacities for DAM and balancing power, are crucial for the
TSOs management of security supply issues. It is therefore strongly recommended that
the TSOs have an exclusive ownership to the regional service provider and that each TSO
owns the national market operator.
In the case, services are bought from an existing provider; the TSOs must be the contract
counterpart either directly or via its national market operator.
At a later stage when the launch of financial electricity contracts takes place, it may be
advantageous to introduce additional owners in the regional service provider, e.g. banks
and other financial institutions
4.
All TSOs participate from day one in the implementation of the competitive regional
market
This follows from 3) above. Ownership and full commitment by TSOs from day one, is the
single most important prerequisite for enabling the establishment of a well functioning
competitive electricity market in the SEE region.
Recommended Market Model for SEE
The recommended market model for the SEE Regional Power Market is the DAM concept
as discussed in this report.
In DAM hourly power contracts are traded daily for physical delivery the next day 24-hour
period. DAM handles bids for purchase and sale of power contracts of one hour duration in
the defined bidding areas in the region. The price is determined as the balance between
the bids and offers from all market participants at the intersection point between the
accumulated market supply and demand curves.
The market model supports cross border trade by integrating capacity allocation and
energy trading in an implicit auction. Thereby the market model set a framework adding
services to both the TSOs and the market participants in the region. By using a regional
market design with these features all parties can operate an hourly portfolio more efficiently
and doing this with less resources and costs. With one active trading period a day the
whole portfolio for the next 24 hours will be determined. This will be an efficient tool for the
participants to balance their individual portfolio and hence manage risk.
It means that the buyers and the sellers in the SEE Regional Power Market benefit
automatically from cross border exchange without the need to explicitly buy the required
transmission capacity. Advantages of this mechanism are to maximize the total economic
surplus of all participants and adjust prices across the national borders.
Compared to explicit auction of transmission capacities, the market model with implicit
auction offers advantages to the participants and is recognized as the best platform for
building liquidity in a regional market.
The participants trading will generate a common regional physical market for the countries
involved and will define a common market clearing price (MCP).
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The MCP (system price index) can be used as a reference for medium and long-term
physical and financial electricity contracts. The trade of such contracts should be offered to
the market participants by the SEE Regional Power Market when confidence is established
in the price formation of such an index.
Overview of business processes
The Consultants proposal is founded on the following:
Each Contracting Party (CP) has its own National Market Operator (NMO);
All bidding, settlement, collateral and participant agreements are made between the
market participant and the NMO;
NMO will collect and validate all bids from its participants and creates one Net Export
Curve (NEC) combining all the bids from its market participants into one aggregated
bid curve (thereby anonymous) that is sent to the SEE Market Service Provider
(SEESP) acting on behalf of the Regional PX;
SEESP will collect NECs from all NMOs, and will get ATCs for all interconnections
from the CAO. Based on these data, SEESP will calculate a common price index for all
areas and price for all individual areas as well as the flow on each interconnection.
These values will be returned to the NMOs;
NMOs will have a service agreement with the SEESP for the price calculation as well
as with the CAO for the allocation of ATCs to be utilized for DAM;
Prices and volumes for each market participant are calculated by the NMOs.
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Business processes
The business process overview is defined as set out in the figure below:
Figure 36
116
ATC the publication of ATC from CAO (as representatives for the TSOs) to the
regional service provider, the national market operators and the participants.
2.
Bidding process the process where participants submit individual portfolio bids to its
NMOs, the NMOs creates NEC curves and submit to the SEESP.
3.
Results where the SEESP calculates area prices and flows based on the NECs and
ATC received, send the results to the NMOs and then the NMOs checks results and
calculate and send the individual results to the market participants.
Figure 37
In the following sections as part of this chapter, the details regarding this proposal are
discussed.
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11.2.2
For the operation of a restructured power market, the following two key organizations
should work very closely together.
They are identified as:
The TSO
Market operator
DSOs
Manage real time operations and handle unpredictable imbalances and unexpected
events
Build, operate and maintain the grid within its defined area
The TSOs play a very important role in deregulated power markets. The TSOs
responsibility to operate, maintain the reliability and quality of the power supply will always
set the daily framework for the market operations.
National Market Operator - Regional PX - DAM
A license or cooperation agreement to operate the Regional PX under the framework set
by the regulators of participating countries should be issued by the regulator in the country
where the Regional PX will be located based on the agreement between the TSOs and
Regulators in the participating countries.
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The Regional PX will operate as a common market place for the whole SEE region and
provide services to the NMOs, TSOs and to the market participants, such as generators,
consumers and trading companies.
The core responsibilities are:
Operate a Day Ahead Market for the participating NMOs based on an implicit auction
and the market splitting principle. In the future it could also provide services for other
related power markets
Provide reference price(s) for energy for the financial electricity market
Use the price mechanisms to alleviate grid congestion through optimal use of available
transmission capacity
Report to TSOs, NMOs, participants and to the public required information and data
A power exchange will always facilitate trade, the transparent handling of price sensitive
information, support market competition and build market liquidity.
Regulator
Regulators determine guidelines and bylaws for the regulation of monopolies within the
power market.
Regarding the SEE Regional Power Market, normally this will cover issues such as inter
alia:
Regulator authorities responsibility for guidelines, standards and regulations of the national
power system and the power market remains unchanged.
The SEE regulators will play a vital role in preparing and deciding the regional guidelines
for the SEE Regional Power Market.
Incumbent producer
Large dominant producers will be important participants in a regional market. They will
normally secure their position and further develop their competitive ability inter regionally.
An important prerequisite is full competition with respect to allocation procedures of crossborder capacities so that both incumbent and new entrants in generation have equal
access to transmission.
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Market Participants
Market Participants are legal entities that operate in the wholesale and/or retail markets.
They can play multiple roles consisting of one or a combination of the following: generator,
consumer, trader, or retailer.
DSOs
The DSOs will be responsible for measurement within each DSOs distribution area.
Metering values for wholesale market participants connected to the DSOs grid have to be
sent to the TSO for balance settlement.
11.2.3
Grid Tariffs
The preferred grid tariff system to facilitate bilateral trade or trade on a power exchange
should be characterized by principles that treat all participants on equal terms.
Most important features will be:
Market participants should know the transmission costs at their grid connection point
by a tariff set by the grid owner or system operator.
Grid tariffs across the region should be compared and to some extent harmonized to avoid
distortions in the markets. Of special concern is, if the variable cost varies both between
countries and how these variable costs are allocated to consumers and producers.
The variable cost element in transmission tariffs should be added to the marginal cost for
generation when a supplier/generator is setting up their supply bid to a day-ahead market.
Similarly for a demand bid the variable transmission cost element should be subtracted in
the calculation of bid price.
In some cases the system operators/TSOs are using the variable cost element as a
locational signal. When transiting to a regional market these locational signals should be
harmonized to avoid sub-optimalization.
Another example is environmental fees that might be placed either on the consumer or
producer side in different countries. To avoid market distortion this should also be
harmonized among member countries.
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11.2.4
As described in this report, in the final solution when a well-functioning DAM for the whole
region is in place, the best solution is that all available transmission capacity is left for the
implicit auction (like in the Nordic region) and that in the final solution, long-term
transmission capacity auctions will not be needed. However, the main function of the CAO
is to provide correct transmission capacities to the market that will be true for any market
concept.
As an illustration of the co-existence of CAO and a Regional PX, the following simplified
diagram can illustrate this:
Figure 38
Dedicating cross border capacity to the DAM is an essential policy decision in order to
establish a Regional PX. The CAO will be responsible for determining tradable cross
border capacities, performing explicit auctions and providing the PX with daily capacities
for the implicit auction. In this way the two concepts mutually support each other.
11.3
The market design for the SEE Regional Power Market is based on the constant evolution
in the power market development in Europe. This has proven to be a competitive market
environment where TSOs, the power exchanges, and different kinds of market participants
(traders, suppliers, generators etc) have worked together to establish efficient and liquid
market places.
The key underlying concept is a physical day-ahead trading and market organization,
where the market operations are carried out the day before the traded physical contracts
are delivered
This trading method is referred to as the Day-Ahead Market (DAM) auction trading. The
price mechanism in the DAM adjusts the flow of power across the interconnectors between
the bidding areas to the available transmission capacity given by the system operators.
121
The DAM provides a neutral reference price for the wholesale and retail markets and for
power derivatives trading.
The market is based on portfolio bidding covering products for single bid, block bid and
flexible bid. The total geographical regional market can be divided into bidding areas
determined by predicted transmission constraints in the meshed electrical grid.
Features of the market concept
Bids submitted from the participants for purchase and sale as price volume pair with
linear interpolation between the price points in the price calculation.
Cross Border Trade, facilitated by day-ahead implicit auction and longer term explicit
auctions.
Balance Responsible Party, agreement to control the participants balance within each
bidding area defined by the TSOs.
11.3.1
The participants in the region will be given access to the SEE Regional Power Market
through formal agreements including an acceptance of the book of rules, as well as
technical access to the market systems through a technical interface provided by the
NMOs for the national DAMs.
All participants who meet the legal and formal requirements set by the NMOs and the TSO
can access the DAM. The formal requirements will be such as agreements with the TSO
for establishing a trading HUB and collection of meter values in the area.
As far as the DAM is concerned, the participants will have to accept the book of rules, sign
the participant agreement and to document an approved bank account with the required
collateral.
Trading on the DAM will also require that the market participants have a balancing
agreement with the respective transmission system operator or through a balance
responsible party for each bidding area the participants are actively buying/selling. Such an
agreement will regulate the compensation requested for having an unbalance in the realtime operation by each balancing party.
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11.3.2
Business Processes
The market model will be managed by the Regional PX operating the centralized tasks for
the SEE Regional Power Market. In each national DAM, a branch office or an already
established national market could support the Regional PX by performing tasks i.e. training
national participants, marketing, collecting bids, and settlement of trade.
The business process in the figure below is an example with defined local operations. A
regional exchange should include the flexibility in business processes and in the ITInfrastructure to facilitate various degrees of local operations. This can be required due to
local legislation, local bank infrastructure and requirements from the local TSO.
Figure 39
Local Settlement Service/Bank: The business solution proposed is opening for local
clearing and bank services both for a branch office and for a national DAM. It is important
that both the business process and the IT-Infrastructure are flexible in this respect to
handle local legislation and currency.
Local Market Operation: Local market operations include handling of all functions that will
integrate directly with the participants, TSO and local authorities. It is vital that these
functions are facilitated by the SEE Regional Power Market due to different languages,
currencies and local legislations.
Regional Market Operation: Regional market operations cover all the common operations
required to build the Regional PX, market liquidity and establishment of market framework
for further business development. The regional operation could deliver services to branch
offices and/or national DAMs after individual agreements.
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The SEE Regional Power Market operation and business processes are based on an
agreed harmonized market framework.
11.3.3
The TSO and the Balance Responsible Party are integrating with the Regional PX through
the NMOs. The TSO is submitting the available transmission capacity (flow-based) and is
receiving the flow and participants schedules, both individual values as well as aggregated
values. The TSO will use these values for planning the daily hour by hour operation.
11.3.4
Gate closure
Master currency
Upper and Lower price limit for bidding (these are technical limits not regulatory price
ceilings/floors)
Allocation of transmission capacity for the interconnections made available to the SEE
Regional Power Market
Timeline
Below is an example of the timeline for the DAM operations:
- 08:00 to 16:00
- 09:30
- 12:00
- 12:00
- 12:05
- 12:05
- 12:15 to 12:20
- 12:20 to 12:30
- 12:30 to 12:45
- 12:45 to 13:15
- 13:30
TSO reports
- 13:30
- 14:00
- 24:00
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Implicit auction
In theory the liquidity and number of participants that takes part in explicit auctions can
be similar to the number of participants in implicit auctions. However, participants in
DAM represent both the demand side and supply side and are experienced to include
far more participants than an explicit auction. This is important for price determination.
Explicit auction involve mainly medium and long term capacity rights. The
administrative challenges to utilize the capacity also on short term can be too
complicated. Therefore maximum utilization of available capacity on interconnection
can not be achieved without involvement of implicit auction.
Implicit auction include netting of trade contracts. It is the netted contact volume that
decides on congestion not the gross volumes.
Implicit auction will always lead to contractual flows in direction towards high price
area. Negative impact of bilateral contracts in the opposite direction is reduced through
increased capacity in the correct direction.
Implicit auction will reduce the need for wheeling of bilateral contracts through different
control areas. Without implicit auction the number of international bilateral contracts
may be very large and involve a considerable volume of data to be exchanged
between control areas. Bilateral contracts should as far as possible be financial only.
Implicit auction is flexible and can easily take care of capacity not used by the
participants:
The principle of use it or loose it - The power exchange can take over not used
capacity with no compensation paid to the holder of the right and apply the
capacity in implicit auction.
The principle of use it or get paid for it - The power exchange can take over the
capacity and amply this in implicit auction. The holder of the capacity is paid a
share of the capacity income in case the capacity rights were in direction towards
a deficit area. If the direction of the rights is in the opposite direction there will be
no payment.
Areas
In the market model the regional market will initially be configured with the defined network
topology as fixed bidding areas.
An area in the market model can be a whole country or a part of a country. This means that
a country can be split in two or several bidding areas if permanent grid constraints require
this. All participants are connected to a trading HUB that is uniquely part of one area.
Products
The following products are normally defined in a DAM:
Single bid
In a second phase of the SEE Regional Power Market development, the trade in forward
products should be offered. This can be physical contracts initially, and at later stage
financial contracts using the SEE Regional Power Market DAM MCP as reference price.
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Bidding process
Bids are not related to any specific physical resource. All bids are related to a defined
bidding area by a defined trading hub. All bids have the same priority. This is known as
portfolio bidding.
The single bid must be monotonously increasing. Each price must be higher than the
previous price. The first bid price must be equal to the minimum price limit, and the last bid
price must be equal to the maximum price limit.
The block bid for sale or purchase shall contain the same quantity for several hours. The
sale bid will contain a price that indicates that if the average market price over the period
(block) is lower than this level, the bid is not accepted. The purchase bid will contain a price
that indicates the maximum price the purchaser is willing to pay. If the average market
price in the period (block) is higher than this price, the bid is not accepted.
The flexible bid is relevant in potential peak-load hours, where power shortages cause high
prices. Flexible bids are available for power sales only. Flexible bids consist of a price and
a volume; hour is not specified in the bid. The price indicates the lowest sell price, and if
any hourly market price exceeds the bid price, the flexible bid will be accepted in the hour
with highest price.
ATC allocated to the SEE Regional Power Market
This information shall be provided by the TSO for each interconnection. In the current
framework, this will probably be granted through the CAO. The ATC made available to the
SEE Regional Power Market for implicit auction will be specified for each direction between
the bidding areas.
Features of the implicit auction:
Participants in DAM represent both the demand side and supply side.
Implicit auction include netting of trade contracts. It is the netted contract volume that
determines whether the transmission capacity is fully utilized, not the gross volumes.
Implicit auction will always lead to contractual flows in direction towards high price
area.
The principle of use it or loose it may be applied. This means that capacity rights not
used should be given to the day-ahead market.
Price determination
All the accepted bids are used in the price calculation. The price calculation will follow
directly after the market gate closing time.
All the market parameters and the bids for each of the 24 hours determine the market
clearing price, the area prices, total sale and purchase volumes and each participant's
schedules.
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Linear interpolation
Between the discrete price/quantity points submitted by the participants, the bids will be
interpreted as piecewise linear curves. Therefore such a curve will define the bid quantity
for all prices within the price interval allowed in the auction.
An example of a bid illustrating the linear interpolation is shown below:
Figure 40
System price
All bids will be added to an accumulated curve for purchase and for sale. The intersection
of these curves will define the equilibrium price where the purchase and sale balance. This
price is the unconstrained Market Clearing Price (MCP) and will be the official reference
price for all traded contracts in the auction in case of no congestion. The MCP will be
calculated for each hour and also published as an un-weighted average price for the 24
hours day-ahead market.
Area price
If the transmission capacity between bid areas for the DAM contracts is not sufficient,
congestion management in the implicit auction will be performed in the defined meshed
network. If congestion is detected between any areas, the price calculation will continue
and compute local prices to relieve detected congestions.
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Market reporting
When the price calculation has been conducted, the SEE Regional Power Market operator
publishes the results.
The market model extracts the necessary participant information (electronic address, etc)
and transmits the prices, the total sale and purchase volumes, and the schedules to the
participants.
The prices and the individual schedules will be published to the participants. The general
prices and market turnover is public, while the individual schedules only are sent to the
individual participant.
Participants traded schedules will be accumulated by the NMO per Balance Responsible
Party and reported to the Balance Responsible Party and to the TSOs. The Balance
Responsible Party and the TSOs will get the individual and the accumulated values. Each
participant will get his own schedule only.
The TSOs will also get an exchange report for the flow on each interconnection
Settlement
The market model will include a settlement process. The settlement process will read the
participants schedules, prices and configuration data and perform a central settlement
calculation. Based on this calculation the model will open for a decentralized reporting,
billing and credit checking process.
The primary tasks of the settlement process are:
Calculate amounts to be transferred between the NMO and the members, including all
trades, fees and VAT.
Generate and distribute settlement details and invoices that specify in detail the
volumes, amounts and fees of each member.
Store information from the settlement process for archiving and auditing requirements.
Interface to a bank.
The market model will keep all required settlement data for audit trail and as long as
required for storing of financial data.
The Settlement process will be performed by the NMOs.
Billing
A separate billing interface for the actual invoices of the trades will have to be set up by the
NMOs.
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Collaterals
An important task in every market setup where the market is a central counterpart to all
trades is to have an efficient and transparent collateral management in place. Based on
which party that will be the legal, financial counterpart as well as the timeline for settlement
and billing, a regime for this must be set up. This shall be based on a set of generic
requirements:
In the event of a payment default, this Credit Cover can be utilised by the NMO to
satisfy the Participants outstanding financial obligations in the DAM.
In the event of the failure of a Participant to pay an invoice in full, Posted Credit Cover
will need to be accessible in a timely manner such that the NMO can meet all payment
obligations of the market.
The actual rules for calculation of the required credit cover shall be created for each
NMO in such manner that the market is not exposed to any unnecessary risk.
Language support in all interfaces (both user interfaces, user guides, reports and
technical interfaces)
These parameters will be part of the local operations, at least in the initial phase, and
needs to be set up according to the needs of each individual area.
11.3.5
Renewable Energy
RES Directive 2009/28/EC promote renewable energy within Europe. Priority access and
guaranteed access for any electricity production will influence market prices independent of
market organization.
In a market based system renewable electricity is integrated into the spot market through
owners daily nomination and this production is thus guaranteed access to the grid.
If the prioritized volumes are guaranteed and bought at fixed prices by the TSO on a
purchase obligation bases, and handled bilaterally outside the DAM, demand nominations
at the DAM will be reduces correspondingly. Equal sales and demand volumes are
withdrawn from the DAM and the market intersection remains unchanged.
Over time, as renewable incentives work, prioritized production inevitably will influence
investments in more expensive generation and market prices will come down if new
capacity exceeds increased consumption..
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11.3.6
Intraday Market
An intraday market is a continuous trade system where participants may place orders/ bids
on purchase and sale of spot contracts continuously throughout the opening period each
day. A trade agreement is made whenever two participants meet on price. Unlike an
auction trade where all trades are based on the same price, trades in a continuous trade
system are based on different prices for each trade. The official price is in most cases
based on an average price of the last traded volumes before the DAM closes down.
When the DAM closes there is a lengthy time span (24 hours the day of delivery + the
hours between the time for price fixing and 24: 00 the trading day), when participants no
longer can improve their physical electricity balance. An Intraday Market is an after market
to the DAM that enables actors to refine their wholesale power portfolios up to a point
closer to real time.
For Hydro power producers which variable costs for increasing or reducing their output is
limited a intra day market is not as critical as it is for e.g. combined heat and power plants
which face high variable costs.
The product characteristic of an Intraday Market is quite simple. For each and every hour
of the day there is one power hour contract quoted. Minimum contract size is 1 MWh/h.
The Intraday Market trading System automatically control the cross-border capacity, which
is given when the deadline for filing complaints on the DAM has elapsed and the cross
border capacity that is left after DAM is known. Using an example from Nord Pool, if there
is no capacity from Finland to Sweden the participants in the Swedish and the Eastern
Danish market area cannot see the sale bids placed by participants in the Finnish market
area in their Intraday market price information window. If the bids are inside the given cross
border capacity the different market areas are treated as one.
An Intraday Market provides a service to market participants to adjust their balance before
the operational hour. This will reduce the balancing actions to be carried out by the system
operator in real time.
Intraday market can be used to re-balance a portfolio:
If there is a technical event causing an imbalance after the Day Ahead Market is
closed.
To avoid paying a high penalty for having an imbalance in the real time balancing
market.
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11.3.7
VPP Auction
When purchasing a Virtual Power Plant (VPP) capacity, the buyer has a right, but not an
obligation to purchase power at a fixed price. The company that buys VPP capacity obtains
the right to deliver power as if the company owned a power plant. The power plant is virtual
because the producer company still owns the plant and is responsible for the actual power
supply.
The purchase of VPP capacity represents a supplement to the purchase of power on
power exchanges or from OTC suppliers.
The VPP capacity is sold for predetermined periods at an "option price". The option price is
set in an auction prior to the period. For each hourly period in which the option is exercised,
a pre-determined fixed "energy price" is paid for the actual quantity of power sold. The total
payment for the use of the virtual power plant thus consists of an option price plus and an
energy price.
The VPP auction will reduce the dominance of large incumbents and open up the power
market for increased competition.
Cancellation of Full Supply contracts and introduction of ordinary contracts between
Generators (incumbents) and Public Suppliers and Eligible Customers in the transitional
period as described in 10.2 - has the same effect on market concentration as VPP. Both
solutions reduce incumbents dominant market position. A VPP gives the buyer capacity
based on a negotiated price while a transitional contract gives the buyer a capacity at a
price determined by national authorities. These prices have to be low in the transitional
phase in order to encourage Eligible Cusotmers to exercise their eligibility. They will not
switch unless the mixed sourcing market and transitional contract gives lower price
than tariff prices.
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11.3.8
Market Information
All relevant market information must be available to all market participants at the same time
The SEE Regional Power Market in cooperation with system operators, NMOs, generators
and other power industry associated companies, collects and distributes price sensitive
market information based on the following principles:
The information comprises data from events that can influence prices.
The information shall be aggregated and be presented in a way for everybody to read
and understand. For the SEE Regional Power Market this might mean that distribution
of market information must be published in both the chosen official business language
and also the local language.
The information must be distributed at the same time and with same method to all
participants.
Energy markets are complex because of the inherent interaction of physically traded
commodities, highly technical fundamentals and financial contracts. In order to succeed in
the market, market actors need access to accurate and reliable market information. Hence,
To provide comprehensive market data service (MDS) of high quality is an important task
for the market operator and for the TSO. Examples on market information could be:
Real time feed - Real-time access to prices and operational data in the power and
emissions markets including Urgent Market Messages (UMM).
FTP statistical database - Historical database which contains information from the
market operator and TSOs.
Reports - Various weekly reports containing operational and physical market data.
Mobile market data (SMS/WAP) - Get daily spot price update via SMS text-messaging
or WAP.
11.3.9
Market Surveillance
To build a trust in the market model and in the SEE Regional Power Market and to develop
a good functioning power market in terms of size, liquidity and transparency, the
participants must have confidence in the markets price mechanism, its integrity and the
market information transparency
Market surveillance has an important role in establishing and maintaining this confidence
and integrity by having a strong and visible presence in the market.
Market surveillance continuously monitors the market conduct of trading participants, and
investigates possible breaches of the trading rules or applicable laws.
The SEE Regional Power Market will be under the jurisdiction of the country of location.
Market surveillance issues reported to the national authorities of location should therefore
be discussed in the ECRB where regulators from all member countries are participating.
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Gate closure
Master currency
Any deviation from these rules can create price differences in the market result.
Market coupling models
There are two main types of market coupling implemented:
Price coupling
Volume coupling
The business processes are almost the same. The main difference is that in price coupling,
it is the central market coupling service provider who calculates both prices and flows, and
the national market operators will use this price to create the schedules for their
participants.
In volume coupling, it is only the flow on the interconnections between the areas that are
sent to the NMOs, and a local price calculation will be performed by each NMO.
TLC (Netherlands, Belgium and France) is an example of a price market coupling solution.
The recommended design for SEE is very close to the current TLC market.
EMCC (between Denmark and Germany) is an example of a volume market coupling.
The price coupling is considered the best solution as this ensures the best economical
result for all parties. In volume coupling, there is a risk of discrepancies as there is a
possibility of getting different results based on the local price calculations performed by
each NMO than a central calculation. The experience from EMCC has proven this fact.
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The facility operator shall react and comply with the dispatch instructions submitted by
central dispatcher by either automated dispatch or manual dispatch as specified later
in this document.
System Operation
The principles of operation of the system by the System Operator are:
The System Operator may prepare total system load forecast on a daily basis or
receive load forecasts from DSOs or from Balance Responsible players.
The System Operator will receive the market participants balanced schedules from
DAM schedules.
The System Operator will receive notifications of physical bilateral contract schedules
from the market participants.
The System Operator will operate the RTBM for balancing services.
The System Operator will have contracts for access to all other required ancillary
services.
In real-time, the System Operator will monitor the system frequency. In case of
deviation from set point, the system operator will use primary and secondary reserves
to rebalance the system. If this is not sufficient, and in order to free primary and
secondary reserves, the System Operator will start dispatching balancing power from
the RTBM to balance the market.
The System Operator is responsible for ensuring that the total capacity reserve at any
time is within the limits defined in the system operation procedures.
Bid structure
The System Operator operates the RTBM the purpose of which is to create a stack of
generation and demand side offers to increase or decrease their energy to the market as
the System Operator sees necessary to balance the market in real-time.
The Real-Time Balancing Market is open each day after the DAM is closed and the DAM
prices and schedules have been published to the market participants. The market
participants will at that time know their energy schedules for each facility for the next day,
and can determine the balancing power available to be offered to the RTBM.
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The market participants (generation and demand side) submit an upward regulation offer
(price/MW and volume in MW) and a downward regulation offer for each physical facility 44
and for each hour of the following day. The upward and downward offers may have
different prices per unit.
The offer prices are related to the spot-price; in other words a decrement price reflects the
price reduction relative to the spot price a participant is willing to reduce his generation for;
and the increment price an participant is willing to increment his generation for (similar for
load). See illustration below.
Figure 43
Price
Upward
Spot price
Downward
MW
The offers for increments and decrements of generation and load are submitted to the
System Operator though the RTBM Bid Tool.
The bids are arranged in merit order of price.
The RTBM participants will, as part of their registration process, submit information about
the physical properties of the assets such as ramp rates, run times, no-run costs etc.
The System Operator will use an automated dispatch optimization tool or a decision
support tool to dispatch the assets it needs for real-time balancing. The automated
dispatch optimization tool will use a computerized algorithm that will find the optimal
selection of regulation dispatches whereas the decision support tool will provide to the
human operator sufficient information (like the bid stack and asset parameters) in order to
make the optimal selection of regulation dispatches.
44
Note that the offers to the BM is facility oriented as opposed to the portfolio oriented DAM. This implies that the market
participants shall also register operational and cost related facility data to the System operator.
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In hours with only upward regulation the real time price is equal to the highest offer
called to dispatch.
In hours with only downward regulation the real time price is equal to the lowest offer
called to dispatch.
In hours with both upward and downward regulation the predominant direction of the
regulation defines if it is upward or downward.
If there is no regulation within the hour the real time price is equal to the spot price.
Pricing of imbalances is based on real time prices. The upward regulation price is
equal to the highest offered price called to dispatch and the downward regulation price
is equal to the lowest offered price called to dispatch.
There are two prices, one for upward and one for downward regulation for each hour.
In hours with only downward regulation the upward regulation price is defined to be the
spot price (or any other reference price if there is no spot market implemented).
In hours with only upward regulation the downward regulation price is defined to be the
spot price.
If no regulation within the hour both upward and downward real time prices are equal
to the spot price.
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Imbalances may be positive or negative. Positive imbalance means actual resources are
more than the commitments for the specific hour. Negative imbalance means that actual
resources are less than commitments for the specific hour.
Cost of imbalance in markets with one real time price:
The participants are credited and debited based on the same Real-Time Price.
Negative imbalances are charged for and positive imbalances are credited.
Imbalances may represent a profit or a loss. This method is simple and the risk for
losses is assumed to be sufficient financial incentive for market participants to
carefully balance their schedules.
Costs of imbalances in markets with two real time prices:
The general rule is that participants are for both positive and negative imbalances
credited and debited for the less favorable of the two prices. However, if the
imbalances is helping the system i.e. in the same direction as the total system
requires, the participant is charged and credited based on the spot price. This
means the participant has no losses or profit on the imbalances compared to trade
in perfect balance in the spot market. This model for pricing of imbalances and
implies a stronger financial incentive to operate with balanced schedules and are
implemented in most of the restructured markets.
In principle, the market participants shall be encouraged by the real-time imbalance
penalties to minimize the imbalances they impose onto the system. They will mainly use
the Day-Ahead market to trade themselves into balance, and will be more cautious in their
real-time facility operations if they are aware of the imbalance penalties.
On the other hand, if the imbalance penalties are severe, some participants, especially
smaller auto-generators, renewables with uncontrollable generation and demand side may
not be willing to take the risk of the severe penalties of imbalances, and will redraw from
the market and become self-scheduled participants.
The RTBM system solution shall support a Real-Time Pricing mechanism that gives the
market participants the right incentive to avoid imposing imbalances in the real-time
market, but not impose so strict penalties for imbalances that it discourages the market
participants from participating in the market.
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140
Long-term bilateral contracts which today represents the bulk of the wholesale market
is subject to regulated and/or contracted prices and do not represent much uncertainty
(volatility).
Short-term trading; through bilateral contracts and in near future, through DAM;
represents much higher volatility, since these prices are not to (or should not) be
regulated and are typically derived from the equilibrium between supply and demand
at any moment of time 46. Both available supply and demand will vary significantly over
time and thus introduce high volatility.
The focus in this chapter is on the short-term wholesale market and the prices derived from
that market. As mentioned before, it is expected that even if there are concurrent bilateral
and PX short-term markets, the prices in those markets should be closely correlated. We
shall therefore refer to the short-term hourly price as the Market Clearing Price (MCP),
representing the price that is derived from the equilibrium between supply and demand in
the short-term markets.
The purpose of an SEE Electricity Derivatives Market shall therefore be to provide an
instrument or tool to hedge (i.e. offset risk) against the MCP price volatility derived
from the PX and short-term bilateral markets.
The most effective and common arrangement for handling price risk in electricity spot
markets is electricity derivatives contracts markets.
The term derivative is used in the context of commodities trading as a financial product
(contract) that derives its value (i.e. its payoff) from the price of an underlying commodity.
In this context, the derivatives in the SEE market will derive their values from the PXs
Market Clearing Price.
45
46
It must be expected that traders will take positions in both the bilateral and PX short-term markets and look for best
trading opportunities in both. This will lead to convergence of prices in these markets.
Actually the supply/demand equilibrium for each trading interval one day ahead (or longer for bilateral contracts).
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In the chapter for the Regional market design the topics of market splitting and zonal prices
has been presented. That means that there typically will be several and potentially very
different clearing prices in the various SEE countries. Ideally one may develop different
electricity derivatives contract for each of these countries, but that may dilute the liquidity
and increase the complexity of the SEE derivatives market and should at least initially be
avoided. We therefore assume a single reference price that typically is the so-called
unconstrained market clearing price (UMCP) for the entire SEE market.
It is important to not confuse physical forwards contracts with financial derivatives
contracts.
Financial derivatives contracts, on the other hand, do not imply physical delivery of the
commodity, but rather a cash exchange based on the price/cost of the underlying
commodity. The term delivery and delivery period for a financial derivative is
therefore somehow misleading, as it refers to the delivery of the underlying commodity
and not the derivative itself (unless one want to think of delivery of cash over the
settlement period).
A physical forward is therefore a guarantee for delivery of the commodity, while a financial
Forward does not guarantee the physical commodity, but rather a guarantee on the price
for the commodity whichever way the buyer obtains the commodity. This difference is
important with respect to e.g. scheduling and Clearing.
One woking assumption is that most participants in the SEE electricity supply and
distribution industry are risk averse in the sense they will prefer some degree of price
security and are willing to pay a (small) premium to avoid high volatility.
The Consultants therefore assume that as the SEE electricity market becomes more
competitive and efficient, one must expect:
increase in price uncertainty to short term electricity trading, which will introduce
financial risk for the market participants
It is important to keep in mind the discussions provided in this report are mostly relevant in
a scenario with an operating PX similar to the model proposed by the Consultants.
Derivatives will enable the SEE Regional Power Market participants to manage the price
risk, which is the second largest risk in electricity business. They will be able to hedge
against price risks as far as needed into the future. Along with derivatives the third largest
risk the counterpart risk becomes manageable through the establishment of a clearing
solution. Clearing services will reduce this risk to a minimum and allow the participants to
concentrate on efficiency which again results in cost reduction and optimized resource
usage.
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11.4
11.4.1
The SEE Regional Power Market organization must have flexibility and a structure to
facilitate cooperation across national borders. The SEE Regional Power Market will be the
body for development of the regional market concept. This requires an organization of the
market places that is able to include in the business process national features and
requirements adapted and harmonized to the regional concept. It is vital that regional
agreements related to ownership, legal framework, localization and harmonization issues
are developed in close cooperation between all the parties involved.
Figure 44
11.4.2
Ownership: In the first phase of the SEE Regional Power Market establishment it is vital
that the TSOs in the region play an active part. The SEE Regional Power Market business
processes will provide services for the TSOs and the TSOs will define framework for the
exchange. The interest for both parties can best be executed by the TSOs taking an
ownership of the implementation of the SEE Regional Power Market. This should be an
option for all the TSOs in the region.
Ownership should also be open for NMOs in the region to ensure that framework for the
SEE Regional Power Market is supported by all parties.
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Strategic Partner: In the starting phase it will be recommended that an experienced market
operator with competence regarding the market concept, market operation and market ITInfrastructure is playing an active part in the process. It will shorten the time to market to
have this support from an experienced partner.
SEE Service Provider: The service provider can deliver IT-Infrastructure and other services
as distributing market information, training and technical IT-Infrastructure development in
the region. It will be an advantage for the regional market development that this provider is
located in the region. This will build competence and know how in the region and set a
good platform for market evolution and development.
Coordinated Auction Office (CAO): Allocation of capacity for the exchange can be provided
by an Auction Office as an entity running and coordinating services for the TSOs in the
area. Please refer to previous chapter on CAO.
11.4.3
Ownership
The SEE Regional Power Marked should be organized in a flexible manner, which means
that participating countries can choose the degree of decentralization from a branch office
to a more decentralized link with the regional entity.
The question could be raised if a branch office establishment in each participating national
market is necessary. As an example the expanding regional reach of the German power
exchange EEX (now part of EPEXSpot) could be used, where this exchange offers DAM
services to both Austria and Switzerland without a local presence represented by a branch
office or a similar service.
This is, however, an exchange operation that does not offer a market coupling or market
splitting implicit auction of border capacities. The Austrian electricity market is fully
integrated in the German bidding area, and no area price for Austria is ever quoted. In the
case of Switzerland a totally separated DAM operation and a separate price (Swissix) is
quoted on an hourly basis, operated by EEX as a separate instance.
In the Nordic market, Nord Pool Spot AS has established a subsidiary both in Finland and
Sweden and a branch office operation in Denmark to take care of various activities linked
to each national market.
For the trilateral market coupling between France, Belgium and the Netherlands each
national market is being served by the national power exchanges Powernext, BelPex and
APX respectively.
Another example is the regional operation for the Iberian electricity market. The operation
of the market has been divided between Portugal and Spain. A regional day-ahead market
with implicit auction/market splitting is operated by Spain, while the trade in electricity
derivatives is executed from Portugal. This ensures a local presence in both countries.
The SEE national markets are characterized by:
Different languages
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Providing all relevant market information in the national languages securing full
transparency
Figure 45
The flexibility with respect to participation in the regional exchange is illustrated in the
figure above.
Centralized Market Operations
In this alternative no national organization may be required. All communication on market
issues will be between the regional power exchange and national market participants. It is
assumed that national authorities and the regional power exchange in most cases will
prefer to establish a small unit (a branch office) to take care of marketing, communication
with local authorities and general distribution of information.
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For all participants the cash flow will be between the participants accounts and an account
owned by the regional power exchange.
This solution is not recommended for the SEE region at least in the short term.
Partly De-centralized Market Operations
Partly de-centralization can include de-centralization of all tasks that can be characterized
as service tasks and tasks that do not require any activities during holydays or stand-by
arrangements.
The main tasks that remain as centralized operations are spot price calculations, operation
of the trade system, and operation of the settlement system.
Also in this system all cash flow will be between the participants accounts and an account
owned by the regional power exchange.
The present Nord Pool Model may be characterized as a light partially de-centralized
model.
De-centralized Market Operations
In de-centralized market operations the participants will communicate with the national
power exchange in all daily operations. Monitoring of bids, control of trade notification, risk
management and financial settlement of physical contracts will be carried out by the
national power exchange.
The NMOs must operate on all calendar days and have stand by arrangements.
The cash flow in the settlement will in this case probably be between the participants
accounts and an account owned by the national power exchange in cooperation with a
local bank.
There will be an additional settlement between the national power exchange and the
regional power exchange that involve the net trade surplus/deficit between the national
power exchange and the remaining part of the regional market. Hence in a de-centralized
operation the risk management (calculation of collaterals, invoicing, settlement etc.) can be
carried out separately for each country.
Regarding ownership it must be underlined that the SEE Regional Power Market will in its
first mode of operation be covering only the physical short-term markets. This will be very
closely linked to the TSOs real-time market operation.
It will be an advantage for the market development that the TSOs play an active part in
setting the required framework. It is therefore recommended that the TSOs can execute
this both by a direct ownership in the exchange and also as an active member on the
board.
There may be national markets that only require a small office dealing with market
operations to maintain the required minimum communication with the national market
participants. This alternative is referred to as centralized operation.
It is assumed that most national market will require some activities allocated to the national
level. This alternative is referred to as partly de-centralized operations.
In the fully de-centralized operation all activities that are possible to de-centralize are
moved to the national power exchange.
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It is at this stage assumed that most of the national markets within the SEE region will
operate as decentralized markets. The national markets will in this alternative to a large
extent operate as an independent national power exchange and interface the SEE
Regional Power Market only in issues necessary to form one common regional market.
This alternative is referred to as de-centralized operations.
There are just one task that must be carried out on regional level:
Monitoring bid collections and validation of bids for both DAM and ID
Training of participants
Exit of participants
11.4.4
The establishment of the SEE Regional Power Market requires support from the national
authorities in each country.
The following items are of crucial importance in this context:
Details regarding operational procedures for the NMOs as well as the SEE Regional
Power Market should be handled in close cooperation with the ECRB, the national
regulators and wholesale market participants, and not regulated in the Energy Act.
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11.4.5
Legal Infrastructure
With reference to the illustration above, the main agreements for market operation are:
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Time line for all settlement activities of spot contracts and requirements regarding
security amounts and accepted collateral types.
The above rules are often included in one agreement and referred to as Accession
Agreement, Participation Agreement or The Rule Book for Spot.
The SEE Regional Power Market National PX Agreements
These agreements will vary depending on the degree of integration. In the most decentralized alternative the agreement will include nearly all issues related to trade and
financial settlement:
Careful specification of the share of responsibility between the SEE Regional Power
Market and the NMO.
Full de-centralization will require a financial settlement between the NMOs and the SEE
Regional Power Market. Rules for this settlement have to be defined in the agreement:
The only process that will be fully centralized in all forms for integration is the process of
price determination, calculation of trade schedules and distribution of neutral market
information.
The Regional PX TSOs Agreement and the NMO-TSO Agreement
The two agreements will cover much the same issues and may be replaced with one
agreement between the parties: the SEE Regional Power Market, National PX, TSOs.
The agreements regulate all mutual responsibilities and information flow between the SEE
Regional Power Market and the respective TSOs. One identical agreement towards all
interconnected TSOs is to be preferred. However, there will probably be required to
diversify on some issues. This can be made in attachments for each TSO concerned
incorporated in the agreement. Only one agreement with attachments for each TSO makes
a transparent agreement where diversified rules are easy detected for all.
For all TSOs the agreement must include:
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The SEE Regional Power Market should serve as a platform for collection and distribution
of relevant neutral market information. TSOs are important sources for such information.
The agreement must include the parties commitments in distribution of information.
Principles for collection and distribution of information
TSOs must consider traded DAM contracts as firm contracts that cannot be changed or
curtailed after the trade is terminated. This means that contracts that is not delivered in the
internal national market is handled as imbalances by TSOs. Non-delivery caused by default
on interconnections is managed by the TSOs involved in their respective balancing
mechanisms.
Management of imbalances caused by default in trade operations made at the SEE
Regional Power Market.
Market Coupling Agreement
The SEE Regional Power Market will interface other independent regional or national
market in the same manner as for instance between the EEX and Nord Pool through
EMCC.
11.4.6
Market Operation
Market operation is the daily operations and routines to determine the DAM and settle the
market result. This includes interaction with all participants, balance responsible parties,
TSOs, clearing services and banks. When the market is closing its operation on a trading
day all the power and economical transactions have to be settled.
Agreements and detailed daily routines have to be specified and settled.
It will be the SEE Regional Power Market that will define the main body of the book of
rules, daily routines and agree this with the system operators holding the different roles in
the market area and the local variations will be maintained by the NMOs.
Even with a decentralized solution, the SEE Regional Power Market must set up the same
framework for operation. Some of the regulatory issues will be handled locally by the NMO.
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11.4.7
TSOs will have a role initially clearing new participants for trade in the DAM concerning
meter values, agreement with a Balance Responsible Party and signing of necessary legal
documents.
The interface to the TSOs will for the daily operation include the following tasks:
In the SEE region it will be set up a CAO (Coordinated Auction Office) in Montenegro,
which intends to offer transfer capacities on national borders explicitly and according to
a flow-based method.
Facilitation of SEE Regional Power Market operations requires that the TSOs give
some or all of the border capacity to the SEE Regional Power Market. The split of
border capacity between the CAO and the SEE Regional Power Market should
therefore be part of the interface arrangement with each TSO.
The SEE Regional Power Market delivering data for flow on the interconnections.
The exchange of data will normally be based on xml-files and structured according to
the ETSO standard.
11.4.8
This is the final settling of all the trades in the DAM. The settlement with calculation of the
traded amounts and fees is a daily operation, while invoicing and billing should be open for
configuration for a certain period.
To reduce requirements for collaterals, invoicing both for power and fees should be done
on all open banking days.
Settlement and billing is a central operation calculating all the settlement data, while
reporting, invoicing and credit checking can be a central or local operation.
Invoicing and billing require an electronic interface to the bank infrastructure sending a file
with all billing instructions and receiving from the bank a file with the account balance.
Centralized Market Operations
For this solution all settlement operations, bank interfaces and credit checking is done
centrally. The regional exchange must either set up an interface to a central bank that can
handle all account transactions for all currencies or set up an interface to all local banks
operating with participants accounts in the market area. This requires that the exchange
centrally holds all detailed information concerning the different local bank procedures.
Decentralized Market Operations
Basically this will include the same set of functions, but each branch office/NMO will
normally handle the local bank interface either directly or using a local clearing house.
This is the recommended solution.
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11.4.9
Full transparency is a required part of the market reform whatever market design is
chosen.
The number of participants at the power exchange, and traded volumes, can only grow if
existing and potential members feel secure that all relevant market information is given to
all participants at the same time and to the same cost.
As a minimum, real time access for all participants to prices, operational data, and grid
maintenance information in the power market must be provided. In markets where hydro
power constitutes a significant share in the energy mix, reservoir data should be provided.
To further increase the transparency, frequent reports containing operational and physical
market data as well as a statistical database could be developed.
To secure that relevant market information is provided to the market participants at the
same time a system for short term information release must be developed. The information
published in such a system is based on information provided by the system operators and
the participants in each participating country to the SEE Regional Power Market.
All aspects regarding disclosure of information should in the case of the TSOs be regulated
by a unified publication agreement between the various TSOs and the SEE Regional
Power Market, the NMOs, and in the case of the market participants in the rulebook(s) for
trading.
To reach all participants the information tool should be available as a Web based system of
the SEE Regional Power Market with an interface for entering information and viewing
information and data. All information must be displayed at least in English, but preferably
also in the local language of the country from where the information is originated.
The rule book must address routines for information disclosure in the market.
The information disclosure procedures must be addressed and harmonized in each local
NMOs rule book.
152
153
12.
12.1
The principles and key factors that will influence the development of a liquid and common,
unified and deregulated power market should be based on a common understanding in the
industry for a need to reform the existing electricity market and its trading regulations
nationally and regionally.
This means that a new framework has to be set by the energy authorities in the region
where the following issues are considered:
The national Energy legislation must support or at least not impede the formation of a
pan-regional competitive power market.
The grid should be recognized as a monopoly and unbundled from the generation
environment.
The large dominant national generation companies should be given the opportunity to
expand into regional operation enabling them to meet challenges in a new competitive
region-wide power market.
12.2
Regulated Price
This is often a sensitive issue, especially in emerging economies. History shows that in
many countries authorities and politicians try to keep electricity costs low through crosssubsidies although the development of the electricity business needs correct price signals
and investments:
An often used alternative is to introduce a partly exposure to market prices, i.e. some
selected consumer groups are exposed to market prices while others are supplied
using regulated prices.
Regulated prices can be kept low through subsidizing the expensive units through the
cheaper units, e.g. through calculating an average cost of all involved units.
In some places the electricity price is kept low through securing supply of selected
consumer groups with the cheapest national units.
The overall challenge is to replace the regulated price with the market price and to fulfill the
mandatory EU compliance. The political dilemma regarding issues like vulnerable customer
protection and price predictability for industrial consumers visualizes this challenge.
When looking at the electricity value chain it seems inevitable to pass on the correct costs
and to introduce competition to all reasonable levels of the value chain. This is the only
possibility to create an environment which leads to increased efficiency and reduced costs,
which again results in correct investments, further optimization of the electricity supply and
consumption and increased security of supply.
154
It is also crucial to understand the difference between regulated and market price:
Authorities, e.g. the electricity regulator, often choose to substitute selected consumer
groups by deciding lower prices than actual costs for them and substituting this by
higher prices than costs for other consumer groups. In some cases the electricity
business did not have to collect for future investments or maintenance, thus there
was/is a need for additional capital from authorities when maintenance or expansion
projects become a need.
A market price resulting from marginal pricing in the market reflects the same
fundamental cost components as in a regulated price regime.
Also in a market price based regime selected consumer groups can be substituted
through favourable grid tariffs and taxes and fees. In Europe it is also known that
selected industries are supplied at a special price through state-owned generation.
12.3
Settlement unit is MWh/h this means that imbalance settlement is performed for
each hour during the settlement period and not for accumulated energy
generation/consumption throughout a period of time longer than one hour. This implies
that contracts are also related to hourly values per hour.
Replacing traditional full supply contracts with standard fixed MW and GWh contracts and
at the same time making Suppliers and Eligible Consumers Balance Responsible Parties
are the first steps to be taken towards a successful wholesale market opening.
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12.4
The generator can no longer follow his customers load due to the requirement having
to balance his generation with contracts. The previous cost calculation with average
generation costs for a longer period of time is replaced by hourly generation costs plus
costs for imbalances. Normally a competitive wholesale power market will lead to
generation costs being replaced by wholesale market price.
Thus the generator will sell his estimated generation at market price which with
precise estimates will result in only minor imbalance costs. Alternatively the generator
will schedule generation as a result of price dependent bid results from short-term
markets like DAM or Intraday also in this case a minimum imbalance potential.
The supplier will have to take on responsibility for balancing his customers. A good
consumption estimate will allow the supplier to purchase energy at market price and
minimize imbalance costs. In any case the supplier will be invoiced for occurred hourly
imbalances. This implies that his customers will have to accept that the supplier
estimates their consumption as good as he can and passes on any imbalance costs
due to wrong estimates. Or they take on the estimation themselves and thus have
direct influence on the estimates quality.
A consumer can then choose whether he wants to be balance responsible or join the
suppliers balancing group. Irrespectively of which case is chosen they have in
common that the customers either see two different prices, one for energy and one for
imbalances, or one price, which is higher than the market price due to the inclusion of
the suppliers imbalance risk.
The consumer will if hourly metered and defined as eligible consumer also be
defined as balance responsible. If not hourly metered his supplier will be balance
responsible for him. The hourly metered consumers will be able to choose a full supply
contract thus make the supplier balance responsible or declare themselves as
wholesale market participants, thus estimate their needed energy and purchase it
themselves. They can purchase the energy from any counterpart in the wholesale
market. In the latter case they are balance responsible and can choose either to be the
direct counterpart in the imbalance settlement or join a balancing group, where one
dedicated counterpart performs the imbalance settlement with the TSO and distributes
the imbalance costs between the balancing groups members.
In any case the hourly metered consumers are exposed to hourly energy costs and this
creates a strong incentive to perform demand side response.
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12.5
Transition Period
Exposing eligible customers 100% to market prices from day one of the wholesale market
opening process will meet hindrance in most countries due to uncertain market prices and
their volatility. For this reason transitional schemes should be considered. The need for
such schemes will vary across the region, because each country has different starting
points.
Some countries have already taken steps to expose eligible customers to market prices. In
general a transition period with steadily decreasing contract volumes supplied with
regulated prices is recommended to gain acceptance among market participants.
The following two figures illustrate how this downsizing can work without jeopardizing
incentives for wholesale market participants to expose themselves to the market and to
enable them to respond to market prices.
Figure 47
Suppliers and Eligible Customers will through this design - be supplied with a contract at
regulated price from their former full supply contractors. The contract volume will be lower
than their consumption. This will incentivise new generation since DAM will make market
prices transparent from day1 and marginal consumption has to be bought at these prices.
Incumbents will have no reason to exercise dumping. In a deficit market they can always
sell the volumes that are not linked to tariff customers at market prices.
Such contracts should be signed prior to market opening in order to provide predictability to
the suppliers and eligible consumers. Suppliers will thus also be able to show tariff prices
to their customers covering future periods of the transition period if parameters t1, t2, t3 are
announced. Suppliers and eligible consumers will thus have to purchase the difference
between expected consumption volume and regulated price contract volume in the
wholesale market.
157
Generators will at t1 have capacity available for the wholesale market since full supply
contracts will be abolished and volumes sold at regulated prices are below the generation
capacities. They will have incentives to develop new projects and upgrade old capacity and
to sell it in the wholesale market. Reservation of import capacity to secure public supply
obligations will be redundant.
In general it is recommended to replace any existing traditional full supply contracts as
soon as possible with preferably base load contracts. These contracts can have the
regulated price as basis. Base load means that the load profile of the consumer has to be
filled up with market price based contracts. The consumer will thus need access to the
wholesale market or an additional contract with a supplier in order to be able to balance his
expected consumption with contracts. During the transition period the base load contracts
volume with regulated price has to decrease to zero and thus his exposure to market prices
will increase to 100%:
158
Figure 49
The control parameters (t1, t2, t3 and the level of the regulated price) should be decided by
national authorities. Regional consensus is not required. This approach leaves national
authorities with full control over the transition period and allows a steadily increasing
exposure to market prices. Customers will be motivated to adapt to market prices and
prices penetrate from day one.
159
The figure below illustrates how Supplier (S) and Eligible Customer (EC) will approach the
market through increasing volumes (red) over time, building demand side at the DAM from
day one1. There is deliberately drawn no arrow from Generator (G) to S and EC for the
free volumes in order to stress that this demand should be bought on the open market.
The contract between Generator and Supplier to serve tariff customers should be base
load.
This mechanism buying parts of the volumes for tariff customers at market prices
exposes S to risks. In order to eliminate this risk, S must be allowed to adjust (up and
down) the tariff price once or twice a year if market prices develop quite different from
expectations when tariff were fixed. This is depending on Regulatory approval.
Another way to mitigate Ss price/volume risks is to make a settlement between G and S.
With this solution the TC will not be part of the compensation scheme. The Generator will
have the same economic result as if he had a Full Supply commitment. He now offers
volumes exceeding the base load contract to the DAM and S buys TCs variable load on
the DAM.
Figure 50
160
Lack of unbundling of supply and production activities within incumbents makes it possible
for them to offer favourable prices to their own customers and thus obstruct market
opening. Generators will not offer free volumes below market price, but their owner might
have different priorities. If Suppliers and Eligible Customers continue to stay captured for a
long time and volumes do not appear on the DAM, a couple of remedies might be
considered:
Discourage S and EC from buying free market volumes from their own Generator.
Other Generators, traders and sourcing on PX should represent their procurement
options.
Give EC a higher contractual coverage at tariff prices than the Suppliers. In this way
they will prefer to exercise their eligibility in order to reduce cost. Liquidity in the
wholesale market will improve.
KPIs developed under chapter 9 will support the authorities in deciding if such market
interventions are required.
In the SEE region a Public Procurement Law (PPL) requires that public companies issue
tenders when intending to purchase electricity. The Law shall secure that public interest
are protected. Questions have been raised if the PPL prevents suppliers from participating
in organized markets like a Day-ahead market (DAM). Daily purchase bids submitted to a
DAM and the resulting procurement of energy is to be considered a public tender process,
thus participation of suppliers must be enabled.
DAM and implicit auctions allow supply and demand to set market prices each hour in
every price area (when grid congestions prevent equal prices) and thus secure correct
prices in addition to setting the correct cost for congestion. Market prices will penetrate
across the SEE region, bringing transparency (prices and flows) and trustworthy price
references to all market participants from day one of the market opening.
12.6
Establishing the SEE Regional Power Market will bring substantial benefits to each of the
participating countries. This is partly because implicit auctions will improve cross border
trade and partly because transparent (area) prices improve generator scheduling.
If some countries hesitate to participate on the DAM, the countries themselves and as well
the region as a whole will miss an opportunity to enhance efficiency in the power sector.
161
the national market will still lack trustworthy price references and transparency. This
will discourage investments in generation capacity.
the country will not take part in the general power market development in the region
that will be facilitated by cooperation through the Regional PX.
The Contracting Parties are committed through Athens Forum to enhance their efforts to
establish a regional wholesale market. In this work the TSOs are the facilitators. The most
important contribution the TSOs can provide to establish a SEE Regional Power Market is
to allocate as much cross border capacity as possible to the daily implicit auction. As much
as possible refers to the fact that market participants are familiar with explicit auctions and
will ask for this trading instrument for a while. When financial forward contracts gain
confidence, the demand for explicit auctions will decline.
In order to encourage hesitating countries to trade on the DAM from day one, TSOs should
have the authority to use the initial capacity split factor as an instrument.
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13.
ACTION PLAN
13.1
Required decisions
There are a set of key decisions to be made to achieve the desired goals:
Approval of the Ministerial Council to proceed with the SEE Wholesale market opening
process by establishing a SEE Regional Power Market based on a Day-ahead market
in line with the proposal from this Consultant Report.
TSOs to take the principal decision to dedicate all or part of ATCs to the Regional PX,
increasing over time
Downsizing of volumes based on regulated (low) tariffs to meet the open market 100% by 2015
13.2
Project team(s)
The regional and competitive SEE Regional Power Market requires a project team
including a project manager. A Steering committee consisting of the relevant stakeholders
in the SEE Region must be established. The Consultants proposal is that PHLG/MC can
act as the steering committee for the implementation project.
The Consultants proposal is that the project is established in line with the other
implementation projects (CAO and BETSEE) run by the Energy Community.
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13.3
Implementation Plan
The implementation plan shows the different project activities arranged in a master time
schedule with expected duration and dependencies.
Please refer to the attached project plan in Annex D.
Attached is a Gantt Diagram that outlines project activities for the SEE Regional Power
Market with duration from October 23rd 2009 to December 31st 2014.
In this Gantt Diagram, the Consultant has estimated duration of activities, based on
experience from participation in similar projects
2.
Project Establishment
3.
Regional activities to coordinate the opening of the SEE Regional Power Market
4.
In the following sections, the various elements of this plan are discussed.
13.3.1
The draft final report will be submitted October the 20th 2009 and it is a prerequisite for the
implementation projects start up as indicated in this Gantt Diagram that acceptance of the
recommended market design can take place at the PHLG and MC meetings in December
2009. This is based on a rapid review process leading up to the Athens Forum in ultimo
November and the PHLG and MC meetings in December.
The implementation project for the establishment of the SEE Regional Power Market can
be initiated in the beginning of January 2010, given that an acceptance is obtained for the
recommended market design at the PHLG/MC meetings in December 2009.
13.3.2
Project Establishment
Organisation
After selecting and appointing a project manager (PM), the PM will in close cooperation
with representatives from all stakeholders in the region establish a detailed project and
budget plan for the SEE Regional Power Market project. The Consultants recommendation
is that the project will be based on already existing bodies as part of EC to act as steering
committee to this project.
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13.3.3
Regional activities
The recommended regional market design is based on a concept which entails regional
cooperation among all participating countries, but national control regarding the transitional
activities for accomplishing a wholesale market opening, ref chapter 1, 11 and 12.
The Regional Activities section contains therefore the necessary coordinating activities for
establishing guidelines and the necessary harmonization of market design and market
codes to secure an efficient operation of the SEE Regional Power Market.
In addition, regional agreements between TSOs and between the SEE Regional Service
Provider and national market operators, procurement of required regional infrastructure for
market operations, and coordination of dry-run and market trials are included in this
section.
Below is a complete list of tasks for the Regional Activities with comments:
Status Reporting to PHLG - bi-annually July and December
It is strongly recommended that the PM reports to the highest authorities within the
community on a bi-annual basis. This is indicated in the Gantt Diagram with a status
meeting in July and December every year from 2010 to 2014.
165
All of these activities are based on utilizing already existing guidelines/codes and adapting
them to the local requirement of the SEE region. ERGEG among other European bodies
have developed a series of guidelines that should be adapted and agreed by the
stakeholders in the region.
In addition, required harmonization of the national market design and market codes must
be done. This will normally be a stepwise process where the mandatory harmonization is
done for phase one. These will inter alia include: Gate closure time, time zone, master
currency, currency management (if different currencies will be allowed), timeline for
operation, market surveillance.
A basic principle is that for the regional level, the recommendation is to focus on guidelines
rather than legal text to avoid problems with governing law etc.
These are just covering the important milestones for approval of the various guidelines.
Legal
EU regulation on ITC scheme can be used as a starting point for the agreement between
TSOs.
Of course, the most important and vital agreement is the operational agreement for the
Service Provider that will operate the price coupling.
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Procurement/Installations/Testing
This covers the procurement and operational readiness process for the central price
coupling software. A general procurement process is found under this headline in the
project based on real experience from similar procurement processes for other markets.
Trials and Operations DAM
This section covers the important go-live milestones as well as the various market trial
periods that will be common for the region.
Both a Dry Run for DAM and market trials are essential before any of the markets can go
live. The difference between a Dry Run and a Market Trial is that a Market Trial is
performed as the final live testing of the whole process of market operation including all
relevant market operators (both the NMOs as well as the SEESP), the relevant TSOs, all
market participants and the banks. This can be seen as a market readiness test testing
both the functional readiness (all business processes are in place and all stakeholders can
operate its functions) and a technical readiness (all systems and interfaces are working in a
timely manner).
A Dry Run is more a testing environment where it is possible to test different market
conditions. For a Dry Run, all stakeholders are not needed, neither is a full technical
environment. Typical test performed in this environment is how to add new bidding areas,
introduction of new interconnectors or other changes in the market framework.
167
The detailed plans for both the regional and national level is found in Annex D.
168
13.3.4
As part of the overall plan, each Contracting Party is required to create a national action
plan. These plans will have the same content with regards to the tasks that is required for
the SEE Wholesale market opening process, but the required detailed tasks and work
effort will be different per Contracting Party.
13.3.4.1 Staged approach
The Consultant has proposed a staged approach to establish the SEE Regional Power
Market based upon an assessment of the current situation as outlined in chapter 8,
Barriers to market opening. This chapter includes an overview (fig. 33) of state of play,
December 2008. (Energy Community Secretariat, presentation given at the 14th Athens
Forum).
It is beyond the scope of this study to give a detailed recommendation how to organize
national activities. Such plans can only be established in close cooperation with national
authorities/stakeholders.
The crucial prerequisites to establish a DAM are:
Hourly metering
Bulgaria, Croatia, Romania, Serbia and Slovenia have systems in place or are about to
fulfil the first 3 requirements. In all 5 countries Generator/Supplier unbundling and cross
border capacity allocation to DAM need further preparations.
Technically, a Regional PX with all these 5 countries participating from day one is possible.
The consultant recommends however to split the start up in two parts, first linking Serbia
with Romania and thereby gaining momentum from the presence of an operational DAM.
This staged approach is based on the following:
Stage 1 mandatory Contracting Parties:
Romania is already operational with a liquid Day-ahead market well aligned with the
requirements set out in this design. Romania will provide liquidity to the SEE Regional
Power Market from Day one with more than 100 participants already active.
Serbia is the central country with regards to interconnectors in the region. Without
Serbia, it will prove hard to create a regional market. Serbia is also among the
countries that are in the forefront in the region. Serbia has also been running a project
for establishment of a national market in parallel with this project.
169
Croatia. Based on the country visits, it is the Consultants view that Croatia is the
country that has done most of the required tasks to be able to join a regional market.
However, the political willingness to join has not been clear,
The consultant has not sufficient information to rank Albania, Bosnia & Herzegovina,
FYROM, Montenegro and Kosovo in the process of completing the SEE wholesale
market opening. This has to be addressed through detailed studies involving national
authorities/stakeholders. However, any of these countries can step up and become a
candidate to start earlier if the political willingness to make the required decisions is in
place.
13.3.5
National Activities
The final solution will cover an open wholesale market involving 10 countries, which today
have reached different levels of maturity.
It is therefore established in the action plan a staged approach, see above. This is reflected
in the Gantt Diagram with different start-up dates for each group of countries defined as
mandatory (Romania and Serbia), candidates (Bulgaria, Croatia, Slovenia) and thirdly
remaining countries.
The project structure for each country is identical, but start-up, duration and required
resources for each activity will be different.
With reference to the national action plans for contracting parties that were set up in
November 2006, the Consultant recommends that the project structure used for this project
is similar to this, with focus on the following key areas:
Legal
The main agreements will be between the TSO and the NMO, and the National market
Operator and the National Market Participants. These agreements will be worded using the
guidelines established at regional level.
170
In addition the establishment of a national market council is included under the National
Market Structure. This council will work in close cooperation with national stakeholders and
the NMO to decide which trading products would be introduced via the new market place
and the timing of such introductions.
Market Structure
Unbundling TSO/Generation
Unbundling Supply/Generation
Wholesale Market
Licensing
Market Trial
Key tasks under this summary activity are the creation of the essential building blocks for
the national wholesale market.
The national market design will in the first step contain a DAM solution, a possibility for
trading bilateral contracts as well as a regime for management of imbalances.
This will consist of national market codes/rules and the implementation of full transparency
followed by efficient market monitoring and market surveillance functions adapting the
regional guidelines, but applying national details. The market rules, procedures and
licensing will be subjects to the national legislation.
The procurement of the NMOs systems and/or services are based upon normal
procurement processes and the timeframe for this are taken from other relevant reference
projects. The NMOs will have various options for buying systems and services (some might
have systems in place already that only needs small adaptations).
171
Tariff Reform
Hourly metering
A prerequisite for the efficient operation of the wholesale market is the establishment of
point of connection transmission tariffs and full third party access.
Hourly metering is also a prerequisite for market start-up. To the Consultants knowledge,
this is in place for wholesale market participants in all Contracting Parties, but it needs to
be verified.
Market Integration
Successful market integration requires close cooperation between the SEESP, the NMOs
and the CAO. Key task will be to agree on procedures between TSOs and CAO to
calculate every day the available cross border capacity which the SEESP will use in an
implicit auction to facilitate regional trade.
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173
Institution
Date
Albania
ERE (regulator)
11 December, 2008
Albania
OST (TSO)
11 December, 2008
Bosnia and
Herzegovina
3 February, 2009
Bosnia and
Herzegovina
2 February, 2009
Bosnia and
Herzegovina
3 February, 2009
Bosnia and
Herzegovina
2 February, 2009
Bosnia and
Herzegovina
3 February, 2009
Bosnia and
Herzegovina
JP Elektroprivreda BiH
3 February, 2009
Bosnia and
Herzegovina
2 February, 2009
Bosnia and
Herzegovina
ISO in BiH
2 February, 2009
Bosnia and
Herzegovina
2 February, 2009
Croatia
26 January, 2009
Croatia
26 January, 2009
Croatia
26 January, 2009
Croatia
26 January, 2009
FYROM
9 December, 2008
FYROM
MEPSO
10 December, 2008
FYROM
Ministry of Economy
9 December, 2008
FYROM
ELEM
10 December, 2008
Montenegro
4 February, 2009
Montenegro
4 February, 2009
Montenegro
4 February, 2009
Serbia
28 January, 2009
Serbia
28 January, 2009
Serbia
29 January, 2009
174
Serbia
AERS
29 January, 2009
Kosovo
ERO
9 December, 2009
Kosovo
KOSTT
9 December, 2009
2.
3.
4.
5.
6.
COM (2007) 530: Proposal for regulation establishing the EU agency for the
cooperation of National Energy Regulators.
7.
COM (2006) 841: Communication; prospects for the internal gas and electricity
market.
8.
9.
10.
Mr. Johannes Kindler, Chairman of ERGEG FIS WG) may 2 2008: Regulators view
of the role of power exchanges
175
ANNEX C GLOSSARY
Acronym/Abbreviation
AAC
Definition
Already Allocated Capacity
AMR
API
Area Price
ATC
ATS
Bidding area
Bidding Currency
Bilateral trading
BI
Block Bid
BM
BR
Balance Responsible
C3
CAO
Contractual flow on
Individual Interconnector
176
Acronym/Abbreviation
Control area
(Reference: UCTE Operation
Handbook)
Definition
A CONTROL AREA is a coherent part of the UCTE
INTERCONNECTED SYSTEM (usually coincident with
the territory of a company, a country or a geographical area,
physically demarcated by the position of points for
measurement of the interchanged power and energy to the
remaining interconnected network), operated by a single
TSO, with physical loads and controllable generation units
connected within the CONTROL AREA. A CONTROL AREA
may be a coherent part of a CONTROL BLOCK that has its
own subordinate control in the hierarchy of SECONDARY
CONTROL.
Counter Part
DAM
DMS
Dome Coupling
DSO
DSM
EC
Eligible Customers
Energy derivatives
FBATC
FFM
Flexible Bid
1 hour sale bid for the hour with the highest price within the
day-ahead auction
Forward market
177
Acronym/Abbreviation
Full Supply Contract
Definition
Full Supply Contracts is meaning that the customer can
consume whatever he likes and pays contract (tariff) price
anyhow - between Generators and customers are the
greatest obstacle to DAM liquidity.
Generator
Gate Closure
The time from which bids are no longer accepted for the
next delivery day. This might differ from the TSO gate
closure.
HHI
Hour
Hourly Bid
Hub
HW/SW
Hardware/Sotware
IDM
Implicit Auction
Intraday market
ISO
ITC
KPI
Market Coupling
Master Currency
Market splitting
178
Acronym/Abbreviation
MCP
Definition
Market Clearing Price is price per hour calculated for the
bids in defined areas
NEC
Net Exchange
NMO
Organic process
OTC (Over-the-counter)
PFM
PHLG/MC
PPL
PM
Project Manager
Price Area
Price calculation
Price coupling
PTC
PSO
PTC
PX
Power Exchange
RBM
RMD
179
Acronym/Abbreviation
Region
Definition
ERGEG Region: one of the seven Regions originally defined
in the Congestion Management Guidelines 2006/770/EC.
Market region: cluster of market (bidding) areas that share a
unique price coupling system, which generates both prices
and volumes.
Regional PX
This is the regional price setter for the common DAM. This is
not a power exchange as such, but the entity that performs
the Day-ahead auction on behalf of the NMOs based on an
implicit auction. The proposal is that this is performed by a
service provider (SEESP). This entity constitutes a
cooperation agreement between the involved NMOs and
should not be envisioned to be a large organisation, but a
body constituting the regional cooperation.
RTBM
Supplier
SLA
SRMC
SO
System Operator
SEESP
TC
Tariff Customer
TLC
The day the DAM auction price is calculated for the next
Delivery Day (D)
TSO
Volume coupling
VPP
VPPA
UMCP
180
181
182