How can power market design unlock flexibility? The role of auctions for Intraday Trading

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Marlene Shields
5 years ago
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1 CEPS Task Force Meeting: Creating a Market for Flexibility in the Electricity Sector How can power market design unlock flexibility? The role of auctions for Intraday Trading Brussels,

2 1 Power prices in an energy only market reward flexibility Demand, Production Price Expensive (more flexible units) Start-up costs Cheaper units Start-up costs Operating but not producing (part-load) Value of flexibility Time Functioning energy only markt essential for right incentives for flexiblity. 2 Source: Müsgens, F. and Neuhoff, K., 2006, Modelling Dynamic Constraints in Electricity Markets and the Costs of Uncertain Wind Output, Cambridge EPRG Working Paper, 05/14

3 2 Market design important for short term flexibility Coal, Gas, Nuclear Wind & solar Flexibility Hydro Hours before real time Require early start up Can & need to adjust close to real time Variety of capabilities % forecast error wind Deep intraday and balancing markets need to match the capability of generation and flexibility. 3Source: Neuhoff, K., Wolter, S., Schwenen, S., 2016, Power Markets with Renewables: New Perspectives for the European Target Model. Energy Journal 37. Data from de la Fuente, Red EléctricaKarsten Neuhoff

3 Intraday trading arrangements in European countries 1 Source:, Carlos Batlle, Gert Brunekreeft, Christos Vasilakos Konstantinidis, Christian Nabe,

4 3 Intraday trading arrangements in European countries 1 Source:, Carlos Batlle, Gert Brunekreeft, Christos Vasilakos Konstantinidis, Christian Nabe, Giorgia Oggioni, Pablo Rodilla, Sebastian Schwenen, Tomasz Siewierski, Goran Strbac (2015) Flexible Short-Term Power Trading: Gathering Experience in EU Countries

5 4 Introduction of intraday auctions increases liquidity Multiple intraday auctions requierd for realizing efficient liquidity Source: 5 Intraday Karsten Markets Neuhoff, for Power: Discretizing the Continuous Trading? (2016), Nolan Ritter, Aymen Salah-Abou-El-Enien, Philippe Vassilopoulos, DIW / Cambridge discussion paper

5 Intraday auction increases market depth Order book depth on the 15min continuous intraday market Aggregated supply and demand in early 2015 auctions Multiple intraday auctions requierd to ensure

6 5 Intraday auction increases market depth Order book depth on the 15min continuous intraday market Aggregated supply and demand in early 2015 auctions Multiple intraday auctions requierd to ensure market depth when required. Source: 6 Intraday Markets for Power: Discretizing the Continuous Trading? (2016), Nolan Ritter, Aymen Salah-Abou-El-Enien, Philippe Vassilopoulos, DIW / Cambridge discussion paper

7 6 Intraday auctions provide reference point for contracts to support flexibility Volume weighted price index for the cap futures Jan 2014 April 2015 (2,5 Mio. Trades) Hedging essential for flexibility options to stabilize revenues. 5% of the transactions exceed 86 /MWh basis risk. Continuous trading based index provides limited hedge and thus limited support for flexibility. Multiple intraday auctions requierd to provide reference price close enough to real time. Source: 7 Intraday Markets for Power: Discretizing the Continuous Trading? (2016), Nolan Ritter, Aymen Salah-Abou-El-Enien, Philippe Vassilopoulos, DIW / Cambridge discussion paper

allow all players to offer full flexibility Non discriminatory participation of small players and flexibility options Participants receive

8 7 What bidding formats for intraday auctions? Capability bids Energy price and option to define: start-up time start-up cost ramping rate min/max run-time Capability bids essential to allow all players to offer full flexibility Non discriminatory participation of small players and flexibility options Participants receive remunaration at full value to system 8 Source: Neuhoff, K., Wolter, S., Schwenen, S., 2016, Power Markets with Renewables: New Perspectives for the European Target Model. Energy Journal 37. Data from de la Fuente, Red EléctricaKarsten Neuhoff

9 8 Intraday auctions necessary for pricing and efficient us of cross zonal transmission capacity 1) Free allocating of T capacity in continuous trade unfair and inefficient gives scarcity value to traders not consumers inefficient use of scarce resource in flow based approach Efficient pricing of T capacity in continuous trade not really possible ex ante set price inhibits efficient trades / can violate T constraints ex post set price trading risk limits arbitrage Allocating intraday capacity with implicit auctions ENTSO e proposal 2) Builds on positive experience from day ahead implicit auctions Ensures efficient and flexible use of capacity made available Appropriate pricing zones increase security, flexibility and efficiency Multiple intraday auctions with capabiltiy based bids for security, efficiency and flexibility. 9 1) More details: Neuhoff, Karsten; Richstein, Joern; May, Nils (2016): Auctions for Intraday - Trading Impacts on efficient power markets and secure system operation, 9 th FPM Report 2) planatory%20note_for%20consultation.pdf

10 9 Integration of energyand reserve markets To accommodate for short term variations of production and demand, reserves are contracted in all power systems Provision of energy and reserves interact, e.g.: at high wind speeds more reserve requirements & more options to provide reserve Fossil generation can only provide fast flexibility when running (joint provision of energy and reserve) In Europe energy and reserves are separately procured, but inefficiencies increase as decisions move closer to real time Perspective: Intraday auctions can allow for joint procurement of energy and reserves. 10 More details: Neuhoff, Karsten; Richstein, Joern; May, Nils (2016) : A Blue Print for European Power Market Design, 8 th FPM Report

11 10 Align intraday and balancing Flexibility options require real time/balancing market Should be based on marginal clearing (demand side ) Risks in case of continuous intraday (inherent pay as bid) Shift of liquidity from intraday to balancing > inefficient Arbitrage/gaming between different clearing algorithms Importance to align (not only within Terre/Explore) but between time frames across EU to share flexiblity / generation adequacy Intraday auctions can provide basis to align intraday and balancing markets. 11 More details in Neuhoff, Karsten; Richstein, Jörn (2016): Coordinated Balancing of European Power System, 7 th FPM Report and 8 th FPM Report: A Blue Print for European Power Market Design

12 11 Conclusion Intraday auctions improve market depth, transmission use, and facilitate stable revenue streams for flexibility. Important design elements Capability based bidding formats unlocks flexibility Sufficient frequency (e.g. hourly) to realize full benefits Further important steps for flexibility Integration of energy and reserve markets Better representation of transmission in energy markets See Future Power Markets Platform for more: 12

13 DIW Berlin Deutsches Institut für Wirtschaftsforschung e.v. Mohrenstraße 58, Berlin

How can renewables support Europe?

Florence School of Regulation, Annual Climate Conference 2016 How can renewables support Europe? Karsten Neuhoff German Institute for Economic Research (DIW Berlin) Technical University Berlin 1 Moving