Regional Flow-based allocations. State-of-play

Transcription

1 Page 1 of 15 Regional Flow-based allocations State-of-play March 2007 ETSO Final paper

2 Page 2 of 15 Contents 1. Introduction Flow-based allocations Status of flow-based allocations Implementation issues Transparency towards the market Economic signals to market participants and sharing of congestion income Regional Base Case Phase-shifting transformers Network representation Generation representation Definition of flow-gate capacity (F max ) Type of bids User firmness / netting What is maximized: market value, traded volume, Outlook References Appendix: a flow-based allocation example with 5 zones... 12

3 Page 3 of Introduction In April 2001, ETSO published a report entitled 'Coordinated Auctioning A market-based method for transmission capacity allocation in meshed networks' [1]. Together with EuroPEX, in September 2004, ETSO published a report 'Flow-based Market Coupling' [3]. Finally, in December 2005, following the request of the Florence Forum ETSO delivered the 'List of data TSOs need to pursue optimal use of the existing infrastructure' [5] and outlined a more refined flow-based transmission model. This paper revisits the flow-based allocation mechanism that was presented in these reports. Our focus is on the current status of the developments on flowbased allocation mechanisms and the still open questions. It intends to be used as a basis for the discussions between Regulators, TSOs and market participants before implementing these concepts at regional levels. The paper starts with a short and non-mathematical introduction to the flow-based allocation mechanism. 2. Flow-based allocations Electricity always flows from a source (generation of power plants) to a sink (load). The flow patterns in the grid result from all sources, all sinks and the grid topology at any moment in time. Simplified flow pattern information is available on line close to real time at Electricity transmission flows fan out across all available parallel paths in accordance with the laws of physics. This is illustrated in the next figure, in which all countries are balanced and only a 100 MW commercial exchange from Germany (DE, source) to France (FR, sink) is taking place and the resulting physical cross-border flows are shown. UA 1 RO BG 1 SI, HR, BA 1 RS, ME, MK AL GR The relatively large loop flows through the Netherlands and Belgium and through Switzerland, Italy and Austria in this example, underline that an only bilaterally arranged allocation (in this example Germany/France) of capacity ignores in a way the physics of the interconnected network. Therefore it is important to

4 Page 4 of 15 coordinate the allocation of cross-border capacity: in this way, the fact that commercial exchanges on one interconnection have an impact on all neighbouring interconnections is then taken into account during the allocation phase (see also ETSO report [2]). In the figure above each country is considered to be a single electrical node in the system, that is connected to neighbouring countries by a single cross-border transmission link as was proposed in the ETSO report [1] (in a later ETSO report [4], a more refined model is considered that allows multiple nodes per TSO or control area). The Power Transfer Distribution Factors (PTDF factors) describe what physical flow on a given interconnection would be provoked by a requested commercial exchange between two countries or two control areas (or hubs ). These two hubs do not necessarily need to be directly connected. Simply said, the PTDF factors translate a commercial transaction between two hubs into the expected physical flows over the entire network. The PTDF factors that correspond to the situation that is illustrated in the figure above, can be seen from the column on the right: the PTDF factor D-NL with regard to an exchange D-F is 27%, the PTDF D-F is 36% etc. Thus it can be easily derived for example, that a 100 MW commercial exchange from Germany to France results in a 27 MW flow from Germany to the Netherlands. Flow-based allocation is a supra-national approach: all bids for energy and/or cross-border capacity are optimised by a centralized entity that takes care of the actual allocation ('auction office'). In the current EU-context, these entities would most suitably cover one or more of the regions identified in the CM Guidelines [7]. In the flow-based allocation mechanism, the commercial transactions are no longer limited to the interconnections where they are reported, but they are converted into physical power flows by using a simplified representation of the network so that their impacts on third interconnections can be considered thus ensuring overall security. In this paper the term 'critical branches' will be used to indicate branches that are or can be restrictive in the cross-border allocation. This is a set of branches that contains at least all the tie lines in a region but can contain internal branches (i.e. within a control area) as well. Those critical branches are represented in the flowbased allocation mechanism by means of their PTDF factors, the maximum allowable flow (F max ) and an estimate of the flow that is already present prior to the allocation (F ref ). In the flow-based allocation mechanism, all regional commercial transactions are converted into physical power flows at the critical branches by using the PTDF factors. In the explicit flow-based allocation, the influence of all the cross-border commercial exchanges is summed on each critical branch and when the resulting physical flow is higher than what is available on a certain critical branch (i.e. the maximum allowed flow minus the flow that is already present prior to the allocation), the bid with the lowest offered price per MW of the flow on the congested critical branch is the first one to be reduced to prevent congestion. In essence, a set of bids is determined that gives the highest market value to the auctioned regional set of transfer capacities, under the given constraints.

5 Page 5 of 15 In the implicit flow-based allocation, the influence of all price area imbalances is summed on each critical branch and when the resulting physical flow is higher than what is available on a certain critical branch (i.e. the maximum allowed flow minus the flow that is already present prior to the allocation), the energy bid/offer with the lowest offered price per MW of the flow on the congested critical branch is the first one to be reduced. In essence, a set of buying/selling bids is determined that gives the highest market value to the auctioned regional set of transfer capacities, under the given constraints. An additional criterion is needed in order to define a unique set amongst the infinity of possible sets of crossborder commercial exchanges translating the price area imbalances. This can be implemented as a linear program for which the simplified 'mathematical' description is given as follows: a) in the case of an explicit flow-based allocation: maximize: sum of (allocated bid price * quantity) (i.e. the market value) subject to: 0 allocated quantity bid quantity PTDF * allocated quantity (F max - F ref ) control variable: allocated quantity b) in the case of an implicit flow-based allocation: maximize: sum of matched (bid * quantity offers * quantity) (i.e. the market value) subject to: 0 allocated bids ; 0 allocated offers PTDF * price area imbalance (F max - F ref ) control variable: price area imbalance This optimisation problem can be solved by the application of linear programming techniques. One of the results of linear programming is the shadow price, i.e. the gain in the objective function (i.e. market value) when the maximum allowed flow would be 1 MW higher. Based on these shadow prices, the marginal settlement prices are computed. Even if the designation flow-based might have led to some confusion in the past, it is important to note that the explicit flow-based allocation procedure does not aim at reducing the differences between physical flows and commercial exchanges on a given critical branch, flow-gate or tie line between two member states under meshed network conditions. In the case of implicit flow-based allocation, the additional criterion needed in order to define a unique set of crossborder commercial exchanges translating the price area imbalances could be related to the difference between the cross-border commercial exchanges and the physical flows. Therefore, using a flow-based allocation might not necessarily reduce the difference between commercial exchanges and physical flows on tie lines between control areas. Instead it will provide the means to allocate capacity to those bids which value it the most in a given region while at the same time keeping the flow pattern of the given region within security limits for all participating TSOs.

6 Page 6 of Status of flow-based allocations At the moment, flow-based allocation is known not to be in operation yet in Europe. There is a dry-run proof-of-principle implementation in the region of Central Eastern Europe (CEE) and a dry-run of coordinated auctioning in the region of South Eastern Europe (SEE) (see also ETSO report [5]). In the Central- Western European (CWE) region a flow-based allocation mechanism is under development. Thorough test procedures, in the time frame of real operation, comprising different load flow models and real trade transactions are foreseen prior to actual implementation. The following figure shows the development path from NTC or ATC-based dayahead allocation towards the flow-based one. NTC (ATC) based Flow-based Explicit Implicit Coordinated First come/ First served Pro-rata Explicit Auctions Bilateral implicit Auctions Implicit Centralized Open-Market- Coupling* Multilateral (Scandinavia) Explicit Decentralizd Coordinated explicit auctions Implicit Decentralized Flow-based Market Coupling Bilateral (common) Administrative Coordinated (Cz, P, D, Sk) (NL, B, D) Dry-run in SEE-Region, development in CEE-Region Market based methods: Auctions * also non Flow-based methods imaginable

7 Page 7 of Implementation issues The following list of items is definitely not complete. It shows some of the issues that need attention in the discussion on flow-based allocation. - MARKET RELATED ISSUES Transparency towards the market In an NTC-based allocation mechanism, an Available Transmission Capacity (ATC) is given to the market, and the market actors send their bids for parts of this capacity to the allocation entity. In case of flow-based allocation, there is no such thing as an ATC between two control areas. What is available is the maximum allowable flow on certain branches (F max ) and an estimate of the flow that is already present at those branches prior to the allocation (F ref ). Although evolving from an NTC-based market coupling to flow-based market coupling is rather smooth for market participants (they are still buying energy from and selling energy to their local power exchanges), this is a completely different situation when evolving from NTC-based explicit auctions towards flow-based explicit auctions. In fact, the main challenge of flow-based allocation is to find the proper balance between safeguarding the network security on the one hand and facilitating the market, by providing a transparent allocation mechanism, on the other hand. For market participants it is important to have insight in how their bid competes with others and, in case that there bid was not allocated, why this is the case so that they can adjust their bidding behaviour accordingly. When a flow-based transmission model is used for regional capacity allocation purposes, the market will choose the most economically efficient cross-border trades by itself. The flow-based method will reveal, in a transparent way, the location of the limiting constraint. This facilitates an efficient investment foundation for the transmission infrastructures in the entire region. 4.2 Economic signals to market participants and sharing of congestion income Generally all bids in a coordinated flow-based allocation compete with each other. The allocation procedure is based on an optimisation algorithm, which is described in section 2. The optimum is generally found as an equilibrium of the amount of allocated capacity and the relevant bid prices while at the same time respecting the technical limits of all critical branches in the coordinated flow-based procedure. Market participants should be able, with the information as mentioned in section 4.1, to predict some results of the allocation. Market actors with commercial exchanges between two adjacent control areas with uncongested tie lines, can contribute to congestions somewhere else in the grid. One of the main advantages of flow-based allocation in a regional setting, is that this effect is taken into account during the allocation phase. In this way, low-priced bids between two control areas of which the interconnections are not congested have to compete with, amongst others, the high-priced bids between two control areas with congested interconnections, according to their contribution to the congestion.

8 Page 8 of Liabilities of TSOs and position of individual regulatory authorities In principle (given the physical laws of the system) any commercial transaction will use capacity on each interconnection of the interconnected system. Virtually, one could imagine that if a certain TSO offers 0 MW (or an unrealistically low capacity) on some interconnections in order to cope with congestions in its Control Area or on its interconnections, all additional transactions in the whole region and all capacities would be blocked simultaneously. Appropriate revenue distribution methods among TSOs and proper political, regulatory, and TSOcoordination should prevent such situations to occur. - TECHNICAL IMPLEMENTATION ISSUES Regional Base Case To calculate the flow-based parameters (PTDF, F max, F ref ) as accurately as possible, a common model of the grid, with predicted generation and load should be prepared. A part of the maximum allowed flow on the critical branches is already used (i.e. prior to the allocation) by so-called already-occupied flows that can consist of the following components: natural flows (cross-border physical flows that will always occur, even when there is no scheduled commercial exchanges between areas); flows that result from sources/sinks that are located in a single control area commercial exchanges resulting from firm nominations in previous auction rounds flows caused by exchanges between sources and sinks that are not located in the region that is participating in the flow-based allocation flows caused by exchanges between areas where the source is located in the region that is participating in the flow-based allocation whereas the sink is outside, and vice versa. The base case should be representative for the situation/day/time at which the actual allocation should take place. It is evident that there is a lot of uncertainty involved in creating such a base case. To quantify this uncertainty, a thorough testing should be applied. 4.5 Phase-shifting transformers Some of the phase shifters installed at his moment, or to be installed in the (near) future, are applied in interconnections. Phase-shifting transformers offer the possibility to control the active power flow through the interconnection in which it is installed. Naturally this has an impact on the flows in the vicinity of the phaseshifting transformer too. Therefore, the flow-based parameters (PTDF, F ref ) are influenced by the operation of phase shifters. In the 'classical' formulation of the flow-based allocation, the allocated quantity is the only control variable to optimise the market value. A limited range of tap positions of phase shifters could be used as an additional control variable.

9 Page 9 of Network representation In the original ETSO report [1], a control area is represented by a single node that is connected to neighbouring areas by a single cross-border transmission link. It is evident that this is only a rough approximation of the physical reality, and a more refined model is considered in [3, 4]. The translation of the grid in the representation that will be used during the flow-based allocation is a key issue for the TSOs. The grid representation must be such that the network security is guaranteed, even in the case of contingencies, but still results in a transparent mechanism for the market actors. Thorough testing should reveal for the TSOs whether a chosen grid representation in the flow-based allocation is sufficient to safeguard the network security. 4.7 Generation representation The exact distribution of generation within an area is not known exactly ex-ante. This means that TSOs or auction offices cannot know which power plant will be used to serve a requested capacity towards another area. This is one of the major sources of uncertainty when estimating and assessing future grid situations. 4.8 Definition of flow-gate capacity (F max ) This issue is closely related with the network representation that has been chosen (see section 4.6). In case that the network is represented as a single node that is connected to neighbouring areas by a single cross-border transmission link, according to [1], the maximum allowed flow between two price areas is referred to as border capacity (BC) or flow-gate capacity. Such a border capacity is an aggregated value and has no direct relationship with the physical capacity of a transmission line. The computation of the F max is an issue then. In that case the BC is the aggregated value of the cross-border flows when the maximum exchange between two neighbouring areas, taking the n-1 security into account, is applied. In case that a more refined model, that allows multiple nodes per TSO or control area, is implemented, the F max on the critical branches interconnecting those nodes can be made explicit therefore adding more accuracy and transparency to the system. 4.9 Type of bids In a market-coupling environment, bids for the purchase or sale of energy refer to the market participant s price area. In an explicit auction environment, in case of bilateral bids, the market participant specifies both the source and the sink. In case of a flow-based allocation mechanism, in a regional setting, it is even possible that market actors specify a source and sink in, electrically, non-neighbouring countries.

10 Page 10 of User firmness / netting Flow-based allocation meets better than the current NTC/ATC explicit auctions concept technical requirements for application of netting. This is illustrated in the figure hereunder. Exchange A=>C 400 Operational point of the reference case C Exchange A=>B A B constraints polyhedron NTC Implicit flow-based security domain Technical P rofile E xplicit flow -based In this figure, the security domain of the three-node network is indicated by the yellow area that is confined by the dashed lines. It is assumed that Exchange B=>C =0 in this graph. In addition, the borders of the security domain in case of NTC (green), Technical Profiles (purple, this is a coordinated NTC allocation mechanism), Explicit flow-based (dark blue) and Implicit flow-based (light blue) are indicated. A flow-based allocation mechanism maximizes the accessible part of the security domain, as the constraints are integrated in the allocation mechanism. In an implicit flow-based allocation mechanism, netting is an integral part of the allocation mechanism so that the full constraint polyhedron is accessible. An explicit flow-based auctioning mechanism, in which the allocation is based on optional capacity rights to be nominated later, is less efficient as not the complete security domain can be used. It has to be stated though that even with the flow-based allocation approach it might be that on occasion there is less capacity available for the market. In the Appendix an example of a flow-based allocation for 5 zones is shown What is maximized: market value, traded volume,... The driving force behind the establishment of the IEM is to reach a higher social welfare. As such, the most logical objective function is to maximize the market value during the flow-based allocation. While this seems to be rather straightforward in the case of the objective function for a regional day-ahead flowbased market coupling, further analysis could be needed in order to define the

11 Page 11 of 15 objective function of flow-based explicit auctions due to the fact that the products are basically options. In such flow-based explicit auctions, this can result in a situation where on several interconnections there is no allocated capacity at all as a result of the little value that the market gives to such capacity. This might not be acceptable in the initial phase and might be seen as a reduction of liquidity in that respective market. A means to remedy this effect in explicit auctions could be to introduce extra constraints to the optimisation problem so that a minimum quantity will always be allocated on every border as long as there are bids for this border; this, however, would lead to a reduction of the social welfare. Also other optimisation functions can be defined, e.g. an allocation mechanism that maximizes the total traded volume. But this would be questionable under welfare aspects driving the IEM objectives. 5. Outlook Flow-based allocation receives a lot of attention recently as it seems to be the best (known to date) answer to pursue optimal use of the existing congested transmission infrastructure. Regional initiatives have been started up to study the impact of it. This paper describes the current status of the developments on flowbased allocation mechanisms and highlights some of the still open questions. The studies and models currently investigated for CEE, CWE and SEE largely follow the considerations described in this paper. Further development and implementation results will be addressed in future papers on this subject. 6. References [ 1 ] ETSO, (June 2002), 'Co-ordinated Auctioning A market-based method for transmission capacity allocation in meshed networks', [2] ETSO, (April 2004), 'Cross-border electricity exchanges on meshed AC power systems' [3] ETSO-EuroPex, (September 2004), 'Flow-based Market Coupling' [4] ETSO, (December 2005), 'List of data TSOs need to pursue optimal use of the existing infrastructure' [5] ETSO, (May 2006), 'Dry-run coordinated auctions SEE region' [6] SETSO-SUDEL NACMPF SG, (June 2006), 'Flow-based coordinated auction dry-run in SEE-region', ETSO report for the 8 th Athens Forum [7] CM guidelines (Guidelines on the management and allocation of available transfer capacity of interconnections between national systems), available from:

12 Page 12 of Appendix: a flow-based allocation example with 5 zones A small example with five price areas (being part of a larger interconnected system that is not shown here for easy reference) and seven critical branches is used to demonstrate the working principle of the flow-based mechanism. Figure 1 shows the network topology and the (F max - F ref )-values of the critical branches. Figure 1 Network topology and the critical branches The PTDF matrix of our example is shown hereunder. Branch B_D is out of service and is therefore not part of the PTDF matrix. The rows specify the source and the sink of the commercial exchange, while in the columns the critical branches are represented. For example, a commercial exchange of 100 MW from zone A to zone C causes a flow of 31.1 MW on the line A_B, 31.7 MW on line A_D and so on: A_B A_D B_C B_E C_E D_E A - C B - D C - B E - B Table 1 - PTDF matrix with netting

13 Page 13 of 15 The following bids are submitted to simulate the auction mechanism: # Submission :40: :41: :45:55 Bid Source Sink Bid volume [MW] Bid Price [ /MW] Bid Price [ /MWh] B D , C B , E B , A C , :49:03 Table 2 - List of submitted bids The flow-based capacity allocation algorithm (in this example only rights without obligations are taken into consideration; i.e. options) accepts the following bids with the input data as described in Table 2 above: Bid # Bid Source Sink Bid volume [MW] Accepted volume [MW] Accepted volume [%] Bid Price [ /MW] 1 B D , C B , Market Clearing Price [ /MW] 3 E B , , A C , , , Table 3 - List of accepted bids without netting After clearing, the only congested critical branch is C_E in reverse direction. The bid with the lowest offered price per MW flow on branch C_E (in reverse direction) is bid 3. Therefore bid 3 is the first one to be reduced: only MW, of the requested 200 MW, is accepted. Bids 1, 2 and 4 are fully accepted.

14 Page 14 of 15 In Table 4 - the critical branches and their flows are shown. # Critical branch Forward Flow [MW] F max - F ref [MW] Shadow price [ /MW] Reverse Flow [MW] F max - F ref [MW] Shadow price [ /MW] 1 A B A D B C B D B E C E , D E Table 4 - Resulting flows on the critical branches without netting Figure 2 - Critical branches and their flows without netting Table 4 and Figure 2 clearly show that the critical branch C_E is congested in reverse direction, i.e. in the direction from zone E to zone C. The corresponding value of that congestion (shadow price) is 4, Euro per MW. Every bid that contributes to the congestion of line C_E in reverse direction, i.e. which has a positive PTDF for E_C, is charged (see table 3).

15 Page 15 of 15 The market clearing price is the marginal price for the capacity of the congested critical branch, i.e. the price of the last (fully or partly) accepted bid, which causes a congestion. Due to the interdependence of the physical power flows in a meshed network the calculation of the marginal price is a non-trivial problem. The charges of the accepted bids, that contribute to the congestion of a transmission line, are determined in respect of the sensitivity (PTDF) of the bids to the congestion. When a flow-based coordinated mechanism is implemented that handles rights with obligation (i.e. the holders are obliged to fulfil their deliveries), the market clearing prices can also be negative. A negative price of a bid indicates that the bid relieves the congestion and that the market participant offering this bid is therefore rewarded. Figure 3 - Critical branches and their flows without netting