Obstacles to Trade and Compatibility of Market Rules in Southeast Europe

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1 Obstacles to Trade and Compatibility of Market Rules in Southeast Europe Findings/ Recommendations of SEETEC Final Draft Report Athens Forum June 22st, 2006 REM RP-I-0006

2 National wholesale markets Little free wholesale market activity except in Romania; Discos (suppliers) are not eligible or are integrated with generation; Romania: series of initial contracts between Gencos and suppliers for regulated market now down to 40% of total contracts; Important market design questions: how to initiate competition in generation and in supply? Initial contracts, role of wholesale supplier, virtual auctions 2

3 National wholesale markets (cont d) Retail market is more open in some countries (meaning discos are not eligible but large industrials are); Only Bulgaria and Romania have real retail opening; One consequence: no development of the supply business expertise remains in dispatch center/tso; Dispatch scheduling remains within TSO despite adoption of bilateral contract models (except B&H, Romania, maybe Serbia) 3

4 Most common market model (contracts) Export/ Import SY ST EM OPERA TOR MARKET OPERA TOR Wholesale supplier Regulated generators TS O ontract notif ication and physica l n omination egulated bala ncin g pr ices Direct customers connected to high v oltage Eligible customers Tr ader s Small Hydro/ CHP generation Tariff Customers Regulated suppliers Distribution Network Generators for the open market 4

5 Day ahead markets OPCOM in Romania and 4 exchanges in EC border countries (2 voluntary ones: Slovenia/Austria, 1 mandatory pool-greece, and 1 hybrid-italy); Low volumes for the voluntary exchanges but growing in Romania- 7% of total volume Difficult to participate for foreign participants Wide range of regional prices in day ahead markets Wide range as well of wholesale supply prices (regulated or open market) from 24 to 80 euro per MWh 5

6 Cross-border trading Most cross border trade are handled by traders contracts with utilities/tsos no imbalances; Most trading is based on base load products traded in band for day, weeks or months; Tendering procedures in place in many countries with sometimes complex procedures no optimization-expensive! Difficult to identify the risks what is the traders volume risk with absence of market rules? 6

7 Cross border trading When imports/exports are notified the same way as national bilateral contracts the supply function will become important (rules for imbalances) Current Situation is both good and bad for traders: Difficult to get access; But, inconsistencies between markets and price distortions create trading opportunities Likely to be major changes in near future (e.g Bulgaria export-import, privatisation, etc.) 7

8 Methodology for Analysis Four types of Issues Issues linked to EC Directives/Treaty Issues linked to EC Directives/Treaty identified as priority by Athens forum Issues linked to development of competition in generation/supply Issues Specific to SEE Obstacles for each Issue RECOMMENDATIONS Recommendation 1 : Recommendation 2: Recommendation 3: 1/I 1/I Recommendation 4: 2/II 2/II ACTION BY Entity responsible for implementation/support Output: e.g. new rules, new paper, training program, etc. Nat.Recommendations = Reg. Recommendations = Time frame Short ( I ) / Medium ( II ) Level of priority: 1 to 3 8

9 Issues linked to legislative compliance (Directives/Treaty) and prioritized by Athens Forum ITC Cross-border Capacity Allocation OBSTABLES - TSOs conflict of interest with ITC funds - Unfair treatment of SEE countries by ETSO fund Limited availability of interconnection capacity RECOMMENDATIONS - Abolition of import-export monopoly - No new AAC - AAC holders must pay average auction price - Rules for utilization of ITC revenues Merging of 2 funds 1/I Ensure TSO neutrality to Fund 1/I 1/I Joint-allocation across borders 2/II Flow-based Coord. Auctions 2/II ACTION BY ETSO: Merging of 2 funds; Regulators: Methodology for payment by participants Regulators/TSOs: Application of CM Guidelines; Development of national / regional rules Nat.Recommendations = Reg. Recommendations = Time frame Short ( I ) / Medium ( II ) Level of priority: 1 to 39

10 Plan outline 2 nd semester Cross Border Allocation Procedure Regulators/TSOs: Develop market based mechanism (joint auctions in each border, no new AAC, current AAC holders to pay auction price; abolition of import/export monopoly) Regulators/TSOs: Develop rules in Tariff Methodology for utilization of auction revenues Regulators/TSOs: Complete application of Congestion Management Guidelines and Flow-based Coordinated Auctions; creation of Auction Office and regional rules RRB/ECS: Supervise / Report ITC ETSO: Merging of two funds (if not possible, increase injection fee from ETSO countries into SEE) Regulators/TSOs: Develop rules in Tariff Methodologies for contribution of market participants to the ITC payments/credits (TSO must be neutral to the fund) 10

11 AAC issue (cont d) European Court of Justice decision; Long term contracts are valid but there should not be reserved long term allocation of interconnection rights France abolished all AACs on its borders Question: what to do in countries with deficit (large importers)? Should Wholesale suppliers be granted some AAC? 11

12 Other Issues linked to legislative compliance (Directives/Treaty) Access to national networks / Role of TSOs OBSTABLES Legal unbundling of TSOs but no development of new (market-related) business processes RECOMMENDATIONS TSOs to develop new business processes, e.g: - Scheduling (physical nomination-contract notification - Real bilateral contract model implementation - Planning: indicative generation plan/ mandatory transmission plan 1/I Publish key market information (follow guidelines for transparency ERGEG, EFET, Eurelectric) 1/I ACTION BY TSOs: new market rules, grid codes Nat.Recommendations = Reg. Recommendations = Time frame Short ( I ) / Medium ( II ) Level of priority: 1 to 12 3

13 Plan outline 2 nd semester Access to National Networks and the role of TSOs TSOs: Implement new market-related processes (scheduling of bilateral contracts, grid planning, etc.); publishing information for market participants RRB/ECS: Supervise / Report 13

14 Issues linked to Development of competition in generation/supply Market concentration / Vertical foreclosure OBSTABLES - Concentration of generation; - Small size of countries! - Almost non-existence of supply function RECOMMENDATIONS - Clear Statement on how to carry out initial market opening - Development of guidelines for market opening: Promotion of the supply function / role of Wholesale Supplier Measures to kick start competition (initial contracts; virtual capacity auctions, etc) Phased (gradual) approach 1/I FSR/ERRA: Training programs for Regulators 1/I ACTION BY EC: Statement on preferences for market opening Ad hoc group: Guidelines for market opening Regulators/ERRA: Implement training programs; adapt local regulations Nat.Recommendations = Reg. Recommendations = Time frame Short ( I ) / Medium ( II ) Level of priority: 1 to 143

15 Plan outline 2 nd semester Market Concentration and Vertical Foreclosure EC: State preference regarding alternatives for market opening and role of wholesale supplier Ad-hoc group Regulators/Market Operators: Develop guidelines for market opening (development of competition in generation /supply) March 2007 Regulators & FSR/ERRA: Develop training programme for Regulators November 2006 through March 2007 RRB/ECS: Supervise / Report 15

16 Issues linked to development of competition in generation/supply (cont.) Operability and harmonization of market rules OBSTABLES - Market rules not implemented (or only partially) in many jurisdictions - Many constraints and lack of harmonization in existing market rules Guidelines for market rules minimum requirements (e.g.): RECOMMENDATIONS all participants subject to market rules (imbalances); harmonize gate closure (afternoon ahead); minimum constraints to contracts; 2/I publishing of information; transitional rules for import-export tendering; procurement of AS and balancing energy only through TSO (eliminate bilateral settlement) Adaptation of guidelines to local market rules/grid codes 2/II ACTION BY Ad hoc group: Guidelines for market rules development Nat.Recommendations = Reg. Recommendations = Regulators: Adapt local regulations Time frame Short ( I ) / Medium ( II ) Level of priority: 1 to 16 3

17 Plan outline 2 nd semester Operability of Market Rules at National Level EC/Regulators/MOs: Confirm importance of implementation of Market Rules for transparency reasons November 2006 Ad-hoc group Regulators/Market Operators: Develop Guidelines for Market Rules Development (minimum national requirements) March

18 Issues specific to Southeast Europe reforms Tariff issues Other regional issues Licensing OBSTABLES Retail tariffs are often lower than wholesale prices Need to define role of regional market institutions and processes Cumbersome licensing procedures for national / regional trade RECOMMENDATIONS - Implementation of new tariff structures - Implementation of new ways to regulate suppliers purchases 1/I Address regional Issues: Role of Power Exchanges Coordinated Auctions ITC Regional Balancing Market; 2/II Definition of minimum level of compatibility between market rules Harmonization of trading/supplier concepts No need for trading licenseneed to be linked to BRPs 3/II ACTION BY Regulators/CEER: New tariff methodology Ad hoc group: Discussion paper on potential SEE regional institutions Regulators: harmonization of definition Nat.Recommendations = Reg. Recommendations = Time frame Short ( I ) / Medium ( II ) Level of priority: 1 to 18 3

19 Plan outline 2 nd semester Tariff issues Regulators/ERGEG: Action plan for tariff rationalisation; regulation of suppliers purchases Harmonisation/ Compatibility issues Ad-hoc group Regulators/Market Operators: Define minimum level of compatibility between national markets March 2007 Ad-hoc group Regulators/Market Operators: Develop Discussion Paper on Regional institutions October 2007 Licensing issues Regulators: Work on Harmonisation requirements 19

20 Recommendations 20

21 Recommendations Application of all congestion management guidelines; Short term- TSO to develop rapidly some market based mechanisms, such as explicit auctions - Encourage the two TSOs in each border to carry out joint auctions; No new AAC and old AAC should be phased out; Current holders of AAC should pay a congestion fee (eg. average auction price); Abolition of the import/export monopoly, where it still remains. Coordinated flow based auction process across whole region in medium term (and rules for usage of auction revenues) 21

22 Recommendations The EC must request urgent action from ETSO in working out a solution on the issues raised by SETSO. If the two funds are not merged for 2007, the injection fee should increase in order to keep the SEE mechanism alive for another year. The regulators must issue specific directives regarding the methodology to be followed by TSOs for invoicing or crediting market participants in relation with net revenues/costs from the ITC mechanism; 22

23 Recommendations Despite their establishment as independent entities, TSOs lack the business processes which are critical in providing system access to the participants, such as scheduling and system planning. Through the requirements of the Grid Codes, TSOs must be required to develop and implement such processes in an essential way; TSOs must be required to provide key market information to participants. 23

24 Recommendations The EC should state its preference regarding the approach to the initial market opening and the gradual development of a competitive market in generation and supply; Ad hoc group of regulators and MOs to identify the priorities and prepare guidelines for gradual market opening, focusing especially on: Effective measures to kick start competition (initial contracts, virtual capacity auctions, favorable top up prices, etc.) Methods to promote the supply function in the presence of Wholesale Suppliers (=single buyers) for the regulated market. 24

25 Recommendations Guidelines for the development of market rules must be drafted, defining the minimum necessary provisions in the national market rules, e.g.: Market rules binding for all participants; Gate closure should be afternoon ahead as a minimum; There should be minimal constraints to bilateral contracting; The market rules should describe the details of ex ante and ex post information to be made available to market participants; Transitional rules for energy import-export tendering as required by national procurement laws should be improved and linked to market rules; 25

26 Recommendations Tariffs have to be rationalized, in order to reflect true costs (and mechanisms may have to be devised, so as to protect vulnerable consumers, without distorting the market) Rationalization of tariffs should be done in accordance with country specific plans, considering specific conditions in each country. Support must be provided to regulators for developing future ways to regulate suppliers purchases. 26

27 Recommendations The role of the various institutions potentially needed for the SEE regional market (i.e. Regional Regulatory Board, Auction Office, regional balancing, etc.) as well as the role and complementarities of Power Exchanges, must be discussed among the Regulators and Market Operators. A Discussion paper on the potential regional institutions should be prepared; The guidelines for development of market rules should define the minimum level of compatibility between the different national market rules. 27

28 Recommendations It is necessary for the regulators to harmonize the concept of traders and suppliers across each national legislation and rules, with a view to facilitate trading, as well as the administration and operation of the market. 28

29 Outline of Plan Cross-Border Allocation Procedure 2nd semester Regulators/TSOs: Develop market-based mechanism (joint auctions in each border, no new AAC, current AAC holders to pay auction price; abolition of import/export monopoly) Regulators/TSOs: Develop rules in Tariff Methodology for utilization of auction revenues Regulators/TSOs: Complete application of Congestion Management Guidelines and Flow-based Coordinated Auctions; Creation of Auction Office and regional rules RRB/ECS: Supervise / Report ITC ETSO: Merging of two funds (if not possible, increase injection fee from ETSO countries into SEE) Regulators/TSOs: Develop rules in Tariff Methodologies for contribution of market participants to the ITC payments/credits (TSO must be neutral to fund) Access to National Networks and the role of TSOs TSOs: Implement new market-related processes (scheduling of bilateral contracts, grid planing, etc.); Publishing information for market participants RRB/ECS: Supervise / Report Action by Ad-hoc group Regulators/Mkt Operators EC ECS Regulators/TSOs Regulators & FSR/ERRA ETSO TSOs Other 29

30 Market Concentration and Vertical Foreclosure Outline of Plan EC: State preference regarding alternatives for market opening and role of wholesale supplier Ad-hoc group regulators/mkt Operators: Develop guidelines for market opening (development of competiton in generation/supply) - March 2007 Regulators & FSR/ERRA: Develop training program for Regulators - November 2006 thru March 2007 RRB/ECS: Supervise / Report Operability of Market Rules at national level EC/Regulators/MOs: Confirm importance of implementation of Market Rules for transparency reasons - November 2006 Ad-hoc group Regulators/Mkt Operators: Develop guidelines for Market Rules development (minimum national requirements) - March 2007 Tariff Issues Regulators/ERGEG: Action plan for tariff rationalization; regulation of suppliers' purchases Harmonization /Compatibility Issues Ad-hoc group Regulators/Mkt Operators: Define minimum level of compatibility between national markets - March 2007 Ad-hoc group Regulators/Mkt Operators: Develop Discussion Paper on Regional institutions - October 2007 Licensing Issues Regulators: Work on Harmonization requirements Action by Ad-hoc group Regulators/Mkt Operators EC ECS Regulators/TSOs Regulators & FSR/ERRA ETSO TSOs Other 30

South East Europe Electricity Market options paper

EUROPEAN COMMISSION DIRECTORATE-GENERAL FOR ENERGY AND TRANSPORT DIRECTORATE C - Conventional Energies Electricity & Gas Brussels, 5 December 2005 DG TREN/C2/MS South East Europe Electricity Market options