ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY

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1 ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY Stephen Woodhouse 3 November 2015

2 AGENDA ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY To be covered in this session: What is flexibility? Reality and misconceptions What is the solution? Distortions which mean that flexibility is undervalued Why has it not been implemented? Perceptions of rules which block trading of flexibility Target Model 2.0? Energy Only Market 2.0? ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 2

DECARBONISATION IS TRANSFORMING ELECTRICITY MARKETS Decarbonisation of the electricity sector is central to Europe s plans to reduce carbon emissions, and this is set to be achieved through wind and

3 DECARBONISATION IS TRANSFORMING ELECTRICITY MARKETS Decarbonisation of the electricity sector is central to Europe s plans to reduce carbon emissions, and this is set to be achieved through wind and solar Decarbonisation of the power sector will come from weather variable generation with intermittent and less predictable generating patterns What is the impact on conventional thermal generation? Is there a need for smarter types of back-up capacity and new modes of operation? ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 3

4 Generation Output (GW) (GW) Generation Output (GW) (GW) Generation (GW) Output (GW) Generation Output (GW) (GW) INTERMITTENCY WILL BE A MAJOR CHALLENGE Weather-variable generation translates into both lower load factors and more uncertain operating patterns for conventional thermal capacity Traditional, low-renewables generation patterns (2010) Future generation patterns (2030) Intermittent generation Intermittent generation Nuclear Biomass Coal CHP CCGT Other renewables 70 Nuclear Demand Peaking Biomass plants Imports CCSCoal 60 CCGT Other renewables Demand Jan 04-Jan 07-Jan 10-Jan 13-Jan 16-Jan 19-Jan 01-Jan22-Jan 04-Jan25-Jan 07-Jan28-Jan 10-Jan 31-Jan 13-Jan 16-Jan 19 ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 4

5 NEED FOR FLEXIBILITY More within-day flexibility will be needed to manage the system and this can come from different sources (IC, storage, DSM and thermal generation) Hourly dispatch change, 2020 (GW) ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 5

CONVENTIONAL CAPACITY FACES NEW RISKS These increasing levels of weather variable generation across Europe give rise to

operation, face volume risks and greater reliance on scarcity pricing in future Brown-out & price spikes risks often

consumers can result in missing money Can I invest based on the spark spread?

6 CONVENTIONAL CAPACITY FACES NEW RISKS These increasing levels of weather variable generation across Europe give rise to both price and volume risk for conventional thermal capacity Thermal plants can no longer assume near-baseload operation, face volume risks and greater reliance on scarcity pricing in future Brown-out & price spikes risks often unacceptable from political and regulatory perspectives (even if economically sound) Market interventions to protect consumers can result in missing money Can I invest based on the spark spread? Is infrequent scarcity pricing a credible basis for investment? Do traded contracts allow both price and volume risk to be hedged? ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 6

ARE NATIONAL CAPACITY MARKETS THE ANSWER?

Internal Market for Electricity Centralised ROs Capacity auctions National CRMs are being introduced, each different in design, and with

? Energy markets are integrating, but capacity markets appear to be diverging Capacity obligations Centralised ROs Uncoordinated CRMs

7 ARE NATIONAL CAPACITY MARKETS THE ANSWER? The response is the development of nationally based CRMs which can distort their markets and are threatening the coherence of the Internal Market for Electricity Centralised ROs Capacity auctions National CRMs are being introduced, each different in design, and with no arrangements yet in place for crossborder participation?? Energy markets are integrating, but capacity markets appear to be diverging Capacity obligations Centralised ROs Uncoordinated CRMs risk distorting spot electricity prices, and may harm demand side response, cross-border trading and investment decisions Will national CRMs undermine the goal of the Internal Market for Electricity? If CRMs damp scarcity energy prices, will this lead to inefficiency? ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 7

8 AGENDA ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY To be covered in this session: What is flexibility? Reality and misconceptions What is the solution? Distortions which mean that flexibility is undervalued Why has it not been implemented? Perceptions of rules which block trading of flexibility Target Model 2.0? Energy Only Market 2.0? ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 8

9 National arrangements VALUING FLEXIBILITY THROUGH TRADING OPTIONS Trading Energy Options would enhance risk management and create the possibility to open the intraday and balancing markets to cross border trade Electricity market participants (in some markets) do not place true value on having access to flexible capability Need tools to allow buyers and sellers of flexibility to better manage price and volume risks in low-carbon future 1 2 Balance responsibility and full marginal balancing pricing* Facilitate trading of energy options No market-based mechanisms to allocate cross-zonal capacity between use of for energy and use for flexibility 3 Cross-border trading of energy options * Long-run marginal pricing, not just short-run marginal pricing, to include scarcity value, and / or marginal allocation of reserve holding fees ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 9

10 Fractino of prices less than x-value RESERVE PROCUREMENT CAN DAMPEN IMBALANCE (AND ID) PRICES For example, vontracted reserves acts as a cap on the within-day market price in GB and Ofgem now seeks to reflect reservation fees in imbalance prices 1 On average, hours of contracted reserve utilisation in GB are high compared to the low frequency of high energy prices > 300/MWh, Contracted reserves, which guarantee operating reserves, (STOR) are called ~50 to 100 hours per year Whilst day prices exceed 300/MWh for less than 2 hours per year on average 120% 100% 80% 60% 40% Typical range of reserve utilisation prices This indicates that the market may be utilising contracted reserves instead of purchasing energy from the intra-day market. 20% 0% STOR may thus be acting as a cap to the wholesale electricity price ~ 250/MWh APX-UK price ( /MWh) Source: Elexon, 2004 to present ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 10

11 ENERGY OPTIONS CAN HELP MANAGE PRICE & VOLUME RISK 2 Option contracts can be defined to suit needs Why buy an option? (Even with liquid near-term markets with cross-border access) Why sell an option? (Even with liquid near-term markets with cross-border access) manage exposure to increasingly volatile prices close to real-time Increasing price risk Projected 2030 wholesale electricity prices in NWE manage exposure to increasingly volatile prices close to real-time (possibly subject to intervention) act as an insurance against volume risk (i.e. the energy not being there when needed) Increasing volume risk Projected difference between day-ahead and out-turn (GB) provide an upfront revenue stream that reduces the risk of offering flexibility (i.e. not committing resource earlier) ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 11

12 OPTIMISATION ACROSS TIMEFRAMES IS A MAJOR ISSUE FOR FLEXIBILITY Commit resource now or hold it for later contingencies? 3 Overall welfare optimisation through market-based mechanisms Cross-zonal capacity Resources in Country A Forward market Day-ahead market Intraday market Balancing Resources in Country B Forward Day-ahead market Intraday market Balancing Resources can be generation, storage, cross-zonal transmission or demand-side ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 12

13 AGENDA ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY To be covered in this session: What is flexibility? Reality and misconceptions What is the solution? Distortions which mean that flexibility is undervalued Why has it not been implemented? Perceptions of rules which block trading of flexibility Target Model 2.0? Energy Only Market 2.0? ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 13

14 WHY HAVE MARKETS FOR FLEXIBILITY NOT EMERGED? Market circumstances and also regulatory factors affected the rise of flexibility need The market need for flexibility trading has traditionally been low Although RES curtailments occur in Germany, Spain, Denmark, Ireland Volume risk is a new concept which has not yet been fully priced (especially intraday) Flexibility is not yet scarce There are only limited incentives for players to balance RES often exempted from balance responsibility Flattened intraday and imbalance prices (Short Run Marginal Costs, TSO actions, non-marginal pricing Cross border opportunities for flexibility are very limited Capacity often fully used at day ahead stage, not available intraday Meanwhile, effort is spent developing capacity mechanisms Source: EURELECTRIC ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 14

15 AGENDA ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY To be covered in this session: What is flexibility? Reality and misconceptions What is the solution? Distortions which mean that flexibility is undervalued Why has it not been implemented? Perceptions of rules which block trading of flexibility Target Model 2.0? Energy Only Market 2.0? ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 15

16 CREATING THE ELECTRICITY TARGET MODEL 2.0 Adapting the European electricity target model to fit a world of flexibility Full cost imbalance pricing to cover LRMC not just SRMC Regional allocation of congestion revenue and re-dispatch costs Coordinated and transparent TSO protocols in emergency situations Co-optimisation of energy and reserve/ system services Target model 1.0 Coordinated security standards Recognition of energy options in the market arrangements Market based allocation of network capacity across timeframes Regional coordination of network planning and resource adequacy ADAPTING THE TARGET MODEL TO VALUE FLEXIBILITY 16

Interconnector participation in Capacity Remuneration Mechanisms

Interconnector participation in Capacity Remuneration Mechanisms A REPORT PREPARED FOR ENERGY NORWAY January 2014 Frontier Economics Ltd, London. January 2014 Frontier Economics i Interconnector participation