European Market Desing and focus on Flow-Based Market Coupling

AGENDA 1. Introduction a. Electricity sector restructuring in Europe b. Electricity market design in Europe c. Transmission Capacity Allocation and Nomination 2. European target model in D-1 : Flow Based Market Coupling a. NTC market coupling b. Flow Based Capacity Calculation 3. European Market design for other Timeframes a. Long Term Transmission Rights b. Intraday c. Balancing d. Relieve remaining grid congestions 2 4. Nodal & Zonal market design

INTRODUCTION: ELECTRICITY SECTOR RESTRUCTURING IN EUROPE 3 DATE

Introduction: Electricity sector restructuring in Europe The motivations for restructuring in Europe First European Directive 96/92 of December 19 th, 1996: Creation of unbundled Transmission System Operators (TSOs) in charge of maintaining, operating and developing the transmission networks and allowing a non discriminatory third party access to these networks The choice of the model of operation and regulation belonged to each member state (harmonization of practices progressively introduced by the following directives) Eligibility to choose the supplier restricted to the large industrial consumers (eligibility has been extended to all consumers by 2007 by the European Directive 2003/54) 4 [The] establishment of the internal market in electricity is particularly important in order to increase efficiency in the production, transmission and distribution of this product, while reinforcing security of supply and the competitiveness of the European economy and respecting environmental protection.

Introduction: Electricity sector restructuring in Europe Unbundling of vertically integrated electricity utilities Power generation Transmission network Distribution network Power supply System operation and access to grid services Infrastructure ownership Competitive activity Natural monopoly Local monopoly Competitive activity 5

Introduction: Electricity sector restructuring in Europe Independent System Operator (ISO) model Power generation Transmission network Distribution network Power supply System operation and access to grid services Infrastructure ownership Natural monopoly Local monopoly 6

Introduction: Electricity sector restructuring in Europe Transmission System Operator (TSO) model Power generation Transmission network Distribution network Power supply System operation and access to grid services Infrastructure ownership Natural monopoly Local monopoly 7

Introduction: Electricity sector restructuring in Europe TSO / ISO : comparison Europe / USA Europe USA System operation Transmission infrastructure ownership Mostly TSOs with ownership unbundling ISOs with ownership unbundling Utilities with functional or legal unbundling 8

INTRODUCTION: ELECTRICITY MARKET DESIGN IN EUROPE 9 DATE

Market design & Congestion management Uniform market Zonal Market Nodal Market the interconnected network = 1 bidding zone (energy price is the same across the whole grid) All congestions on the grid are relieved by TSOs and are, at last, paid only by grid tariff The interconnected network is splitted in several bidding zones (energy price is the same across one bidding zone) Congestions are firstly limited by capacity allocation which limit energy exchanges between bidding zones, and remaining congestions are relieved by TSOs Each node of the grid = 1 bidding node (each node of the grid can have a different price) Congestions occuring in real time are relieved by TSOs

Introduction: Electricity market design in Europe Definitions for Europe The Control Area or Responsibility area is the grid area controlled by a single System Operator (SO). Control Area : related to the responsibility of activating reserves to maintain the balance in its area Responsibility area : related to the responsibility of managing congestions on the grid they operate, and to manage grid access issues => Usually one TSO per country in Europe The Bidding Zone is the largest geographical area within which Market Participants are able to exchange energy without Capacity Allocation (= limitation of their exchanges due to limited transfer capacity) In Europe the bidding zone generally corresponds to a country (e.g. France) or to a smaller zone (in Italy, Norway, and Sweden), or to a larger zone (Germany, Austria and Luxembourg constitutes a single bidding zone operated by 6 different TSOs). 11 c a b d

Introduction: Electricity market design in Europe The Market Design: an organization on top of the physical infrastructure Example of France In France, as in most European countries, the electricity market is portfolio based and not unit based (with the exception of balancing energy) Traders Suppliers Market Power Exchange Brokers Imports RTE Exportations Generators Transmission Distribution from 20kV to 220V Industrial sites Small industry from 400 kv to 63 kv Domestic consumers

Introduction: Electricity market design in Europe The Market Design Various timeframes, various stakes Long-term (several years) Forward (from year(s) ahead to day-ahead) Day-ahead Intraday Balancing / Ancillary Services Investments Risk hedging, seasonal planning,... Scheduling and transactions Forecast errors / flexibility Cost-efficient management close to real time 13

INTRODUCTION: ELECTRICITY MARKET DESIGN IN EUROPE TRANSMISSION CAPACITY ALLOCATION AND NOMINATION 14 DATE

Management of cross border exchanges Cross border capacities are limited due to the historical development of the interconnections. 3850 MW 2000 MW 3200 MW 1500 MW 2900 MW 1200 MW 3200 MW 1400 MW 2650 MW 4240 MW 220 MW 430 MW 500 MW

Management of cross border exchanges Different generation mix in each countries

Management of cross border exchanges Opening of the cross border exchange market was initially carried out through explicit auctions: Only the rights to use the transmission capacity was sell (and not the energy) In some countries, implicit auctions were made: Both the transmission capacity rigths and the energy.

Management of cross border exchanges Long-Term Auctions Day-ahead Auction Intraday Auction Operation Settlement Auction Definition Bidding Selection Nominations ATC / OC Calculation Auction Publication Capacity Rights Publication Secondary Market

Management of cross border exchanges Capacity Document Post capacity for offer Bid for capacity Capacity Document Capacity Trader Transfer Rights Bid Document Bid results Allocation results document Rights document ITR Rights for nomination Transmission Capacity Allocator Nomination Validator Rights document Rights possible for nomination Rights document Capacity Document Capacity allocated Nomination results Schedule Schedule Nominations SO Interconnection Trade Responsible

Management of cross border exchanges uc Tr a nsmission ca pa city a lloca tion pr ocess Esta blish of f er ed ca pa city Ca pa city coor dina tor (from Actors) Tr a nsmission ca pa city a lloca tor (from Actors) P a r ticipa te in explicit a uction Sy stem oper a tor (from Actors) Ca pa city tr a der (from Actors) M a r ket oper a tor (from Actors) P a r ticipa te in implicit a uction M a r ket inf or ma tion a ggr ega tor (from Actors)

Management of cross border exchanges Auction specificatio sd Est a blish of f er ed ca pa city Capacity trader Nomination validator Capacity coordinator System operator Transmission capacity allocator Market information aggregator Agree on NTC / ATC capacity (Capacity_MarketDocument) Capacity for resale (Rights_MarketDocument) NTC / ATC capacity and firm schedules (Capacity_MarketDocument) Already allocated capacity (Capacity_MarketDocument) Compute released capacity - UIOSI (use it or sell it), UIOLI (use it or lose it), etc. Total capacity for resale (Rights_MarketDocument) Calculate offered capacity() Agreed offered capacity (Capacity_MarketDocument) Prepare the auction specification() Publish auction specification (CapacityAuctionSpecification_MarketDocument) (from Actors) (from Actors) (from Actors) (from Actors) (from Actors) (from Actors)

Management of cross border exchanges Auction capacity sd Auction ca pa city Capacity trader Transmission capacity allocator Bid for capacity rights (Bid_MarketDocument) System operator Market information aggregator Nomination validator Provide allocation results (AllocationResult_MarketDocument) Allocate capacity() Provide all allocation results (TotalAllocationResult_MarketDocument) Publish auction results (Publication_MarketDocument) Provide the capacity rights allocated (Rights_MarketDocument) Provide AAC (Capacity_MarketDocument) (from Actors) (from Actors) (from Actors) (from Actors) (from Actors)

Management of cross border exchanges Transfer of rights and curtailment sd Tr a nsf er a nd cur t a il pr ocess Capacity trader Transmission capacity allocator System operator Capacity coordinator Transfer capacity rights (Rights_MarketDocument) Approve transfer (Rights_MarketDocument) Curtailment event (Capacity_MarketDocument) Curtailment of capacity (Capacity_MarketDocument) Curtailment (Rights_MarketDocument) (from Actors) (from Actors) (from Actors) (from Actors)

Management of cross border exchanges Nomination of capacity rights sd Scheduling using ca pa cit y r ight s System operator Nomination validator Rights that can be nominated (Rights_MarketDocument) Interconnection trade responsible Transmission capacity allocator Nominate schedule using capacity rights (IEC 62325-451-2 Schedule_MarketDocument) Validate nominations() Validated nominations (IEC 62325-451-2 Schedule_MarketDocument) Confirm schedules (IEC 62325-451-2 ConfirmationReport_MarketDocument) Confirmed nominated capacity (IEC 62325-451-2 Schedule_MarketDocument) (from Actors) (from Actors) (from Actors) (from Actors)

Management of cross border exchanges Implicit auction sd Implicit a uct ion Trade responsible party Market operator System operator Market information aggregator Offer submission () Matching sells and buys() Cross border exchanges (ImplicitAuctionResult_MarketDocument) Results acknowledgement ((IEC 62325-451-1 Acknowledgement_MarketDocument)) Verify results() Publish trade results() Publish results (Publication_MarketDocument) (from Actors) (from Actors) (from Actors) (from Actors)

2 : THE EUROPEAN TARGET MODEL FOR D-1 A : ATC/NTC MARKET COUPLING 26 DATE

Organization of D-1 timeframe in european zonal market Capacity Calculation D-1 allocation : Market Coupling Determination of generation schedules Handling of remaining grid congestions TSO Power Exchanges Generator Companies TSO Determination of transfer capacity among Bidding Zones NTC or Flow Based Organized D-1 market ( «spot» price) Optimize the exchanges between Bidding Zones (maximize market welfare). Bidding is usually portfolio based Each Generator company optimizes its own generation assets («self dispatch») All detailed data available perform reliable security analysis to manage possible remaining congestions

Day ahead market coupling : ATC/NTC based or Flow based The Day-Ahead Price Coupling solution allows an optimal matching of buy and sell orders at the scale of the coupled areas, taking simultaneously into account the transmission capabilities of electricity networks It ensures an economically optimal usage of cross-border transmission capacities and it consequently improves the price convergence between the coupled market areas. The Flow-based approach allows a more accurate modelling of the technical limits of transmission networks to import/export, taking into account the interdependency of cross-border exchanges It increases the cross-border exchange capabilities by reducing the margins while improving grid security through more accurate assumptions and reinforced coordination among the TSOs.

Meaning of NTC / ATC transfer capacities ATC / NTC approach : representation of cross zonal capacities for the Bidding Zone A A C B A A B ATC / NTC approach : does not reflect toward the market the interdependency of transfer capability between Bidding Zone borders C A

Principle of Market Coupling : isolated markets P ( / MWh) Bidding Zone A P ( / MWh) Bidding Zone B Buy Buy P B P A Sell Sell Q A Q (MWh) Q B Q (MWh) Price of isolated Bidding Zone B > Price of isolated Bidding Zone A Economic efficiency to export from A to B

Principle of Market Coupling : not congested case P ( / MWh) Bidding Zone A P ( / MWh) Bidding Zone B Buy Buy * Buy P B Export P A* P A* = P B* P A Import Sell Sell Sell * Q A Q A* Q Q (MWh) B* Q B Q (MWh) If the cross zonal capacity (= ATC/NTC) from A to B is high enough, prices of market A and B are identical 32

Principle of Market Coupling : congested case P ( / MWh) Bidding Zone A P ( / MWh) Bidding Zone B Buy Buy* P B Buy P B* P P A* P A Sell Sell Sell * Q A Q A* Q (MWh) Q B Q B* Q (MWh) If the cross zonal capability from A to B is limited and not sufficient, a price difference between market will still exist 33

Process of Market Coupling Bidding Zone A Bidding Zone B Bidding Zone C Bidding Zone D Each PX active on a Bidding Zone sent its order book TSOs coordinate to provide cross zonal capacities among Bidding Zones (ATC / NTC) TSO 1 TSO 2 TSO 3 Market coupling : operated by a single algorithm (Power Exchange) TSO 4 Provide for each Bidding zone, and for each hour : the import / export energy the Marginal Clearing Price

Market Design Market Coupling Historical implementation of the day-ahead market coupling 2006 Trilateral Market coupling (TLC) 3 Bidding Zones 35

Market Design Market Coupling Historical implementation of the day-ahead market coupling 2006 2010 CWE market coupling + Interim Tight Volume Coupling 15 Bidding Zones 36

Market Design Market Coupling Historical implementation of the day-ahead market coupling 2006 2010 Q1 2014 NWE price market coupling 22 Bidding Zones 37

Market Design Market Coupling Historical implementation of the day-ahead market coupling 2006 2010 Q1 2014 Q2 2014 NWE + SWE price market coupling 24 Bidding Zones 38

Market Design Market Coupling Historical implementation of the day-ahead market coupling 2006 2010 Q1 2014 Q2 2014 Q1 2015 NWE + SWE + Italian borders price market coupling 31 Bidding Zones 39

Market Design Market Coupling Prices overlook for 20 market areas (2014) CWE SWE /MWh 60% of the year, the whole market zone (20 bidding zones) reaches less than 6 price areas. Nevertheless, 60% of the year, the overall price spread was over 30 /MWh 40

Market Design Market Coupling Prices overlook for 20 market areas (2014) CWE SWE Market coupling increases the market efficiency of the interconnection use but does not increase the capacity domain of cross-border trades 41 The latter point is subject to improved capacity calculation methodologies (Flow Based)

CWE FLOW-BASED MARKET COUPLING 42 DATE

CWE Flow-Based Market Coupling Flow-Based vs ATC CWE ATC market coupling The constraining domain under the ATC market coupling methodology does not represent the physical constraints of the electricity network. For instance, there is no impact of an exchange from France to Belgium on the capacity between France and Germany. BE>NL BE FR>BE FR NL NL>DE DE>FR DE 45

CWE Flow-Based Market Coupling Cross Zonal capacities with a Available Transfer Capacity (ATC) approach: A C with a Flow-based approach: A C B A A B B A A B 46 C A C A

Market Design Market Coupling Principle The aim of market coupling is to implicitly allocate cross-border capacities by optimising the social welfare of all areas. objective function: maximise Day-Ahead Market Welfare (DAMW) control variables: Commercial Exchanges subject to constraints: (ATC) A zones : Net export position A Com.Exch B zones Net export positionz 0 zones Z zones : -ATC B A ComExch A B ATC A B A,B. A B 47

Market Design Market Coupling Principle The aim of market coupling is to implicitly allocate cross-border capacities by optimising the social welfare of all areas. objective function: maximise Day-Ahead Market Welfare (DAMW) control variables: Net export position subject to constraints: (FB) Z zones Z zones Net export position Z PTDF Z, l Net export positionz RAM 0 l 48

CWE Flow-Based Market Coupling Flow-Based vs ATC CWE FB market coupling CWE project (CWE TSOs + PXs) and NRAs agreed on common agreed timeline for Go-live of Flow Based Market Coupling TSOs D-2 operational process: 19 th May Trading day: 20 th May Delivery day: 21 st May 49

19 Feb 19 Mar 19 Apr 19 May 19 Jun 19 Jul 19 Aug 19 Sep 19 Oct 19 Nov 19 Dec Results of the CWE parallel run 5M 4M 3M Increase Change of the in welfare daily welfare compared in to M ATC Welfare = buyers and sellers surpluses plus congestion revenue FB-ATC: simulated welfare increase between flowbased and current practice 2M INF-ATC FB-ATC INF-ATC: potential for welfare increase assuming infinite grid capacities 1M 0M -1M +85 M of welfare increase under FB compared to ATC in 2014 for the CWE area 50

CWE Flow-Based Market Coupling Case-study : external parallel run Overview of the CWE FB market coupling simulation in 2014 Overall price spread ( /MWh) As expected, Flow-Based gives more freedom for market exchanges and decreases market congestion 51 The prices in the most expensive market areas (BE & NL) decrease and the prices of the cheapest increase (FR & DE).

CWE Flow-Based Market Coupling Case-study : external parallel run Example: 28/05/2014 hour1 MC clearing net positions BE (MW) ATC domain Market coupling net positions NL (MW) ATC MC clearing FB MC clearing Flow-Based domain The ATC domain is not fully included in the FB domain but Flow-Based gives much more capacity in the BE + NL imports direction. 52

CWE Flow-Based Market Coupling Case-study : external parallel run Example: 28/05/2014 hour1 MC clearing net positions ATC domain NL (MW) DE (MW) Market coupling net positions ATC MC clearing FB MC clearing Flow-Based gives much more capacity in the German exports direction. Flow-Based domain As a consequence, the Belgian price highly decreases. 53

How TSOs do coordinate in a Flow Based Capacity calculation? Flow-based requires a stronger TSO coordination! Yesterday: Tomorrow: Local grid forecast Local grid forecast Local grid forecast Local grid forecast Local calculations Local calculations Pan-European common grid model Local ATCs Local ATCs Regional calculation Coordinated ATCs after matching Local validation Local validation Coordination function: min(x,y) Coordinated set of flow-based parameters Coordination function relies on TSO joint ventures!

CWE Flow-Based Market Coupling Conclusions After two years of external parallel run, Flow-Based has shown its potential to: bring more coordination between TSOs increase the market opportunities increase the CWE market integration smooth stressed periods The next steps remain challenging: design a Flow-Based methodology for the intraday capacity calculation 55 extend the Flow-Based Market Coupling to other market areas : obligation set within a EU Regulation (CACM Regulation)

EUROPEAN MARKET DESIGN FOR OTHER TIMEFRAMES 56 DATE

Forward (1/2) Objective Provide Risk hedging means to market participant (cover against the volatility of spot prices), at the lower possible cost Target model: Within Bidding Zone : Market places provide means to exchanges Forward / Future product between market participant Between Bidding Zone, for most part of Europe : TSOs allocate Yearly and Monthly Transmission Rights : they are option product, which give the right to receive the spot price difference on the Bidding Zone border, if positive (else : 0). These products are distributed through auctions. Status: Already in operation for several years Ongoing project to harmonize auction rules among borders, and to establish a single european market place to operate the primary market (auctions), the secondary market, and market participant relation (invoicing,...) 57

Forward (2/2) Auctions (primary market) are : - Closed - at one round FR > DE Yearly 2014 58

Intraday Objective Facilitate intraday trading in the context of growing intermittent generation Target model: Implicit cross-border capacity allocation through the coupling of continuous intraday markets (allowing continuous trading within and between market hubs, taking into account cross-border transmission capacities) Status: 2 target-model-like solutions implemented (DE-FR-CH-AT and Nordic-NL-BE); less compliant solutions on most of the other borders. Ongoing project for the design of a unique extendable solution TSOs and Power Exchanges are confronted to several technical and organisational difficulties along the path to but the target is clear 59

Balancing and Ancillary services Objective: to ensure continuous balance of demand and supply at the lowest possible cost to customers 60 A greater integration, coordination and harmonization of electricity balancing rules in Europe is expected to increase cross-border trading of balancing and ancillary services products and consequently to reduce costs and increase security of supply Means: Top-down: Electricity Balancing Network Code Bottom-up: several pilot projects at regional level in order to prove the feasibility of the target model Challenges: Higher gap between the target model and existing initiatives Large differences between national models Higher interference with security of supply matters

Relieve remaining grid congestions For congestion on grid elements no or hardly influenced by exchanges between Bidding Zones : The only mean for TSOs is to perform redipatch. Means vary depending the country (contract with generators, regulated price,...) In France : legal obligation for generators to provide all the flexibility in the balancing market, which is nodal based. Though activation for balancing purpose uses a zonal pricing, these bids are also used for redispatch within France, based on a nodal pricing when activated. For congestion on grid elements highly influenced by exchanges between Bidding Zones, TSOs have 2 specific additional means : Perform countrading : energy exchange in opposite direction compared to commercial exchanges (without knowing the location of the activated unit in the Bidding Zone) Perform XB redispatch : the location of the activated unit is known 61

NODAL & ZONAL MARKET DESIGN 62 DATE

Nodal versus zonal Each market design has pro / con regarding : Optimization of the generation dispatch to tackle grid congestions Maximize the transfer capability of the grid to support commercial energy exchanges Competition / market power Efficiency of Long term signals for investment in grid and generation Optimization of maintenance of grid assets (TSO vs ISO) Both market design have their place in the future, depending the context : US : structurally congested network : nodal is used EU : Structurally very strong network & willingness to build an EU wide integrated market : zonal market is used 63

CONCLUSION 64 DATE

Conclusion Europe : willingness to build a EU wide integrated energy market, initiated and supported by political initiative. The european design allows : a separation between the complexity of the operation of a grid (within a SO, but also between SO), and the representation given to the market (Bidding Zone) To reach a high economic efficiency, including in congestion management Flow Based Market Coupling is a very important achievement in the European market design as it is the main / reference market 65

CWE Flow-Based Market Coupling Thank you for your attention! 66

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Introduction: Electricity sector restructuring in Europe TSO / ISO : scope of activities Management of transmission assets (only TSOs) Operation and maintenance of existing transmission assets Development and funding of new transmission assets Management of the power system (TSOs and ISOs) Operation of the power system, including real-time balance of supply and demand, management of the power flows on the grid and security of supply Operation of a real-time electricity market or a settlement mechanism for the imbalances Management of the access to the grid (TSOs and ISOs) Ensuring non-discriminatory access to the transmission grid, to cross-border transmission capacities, to the balancing and to other power system services Contracting with grid users 68

DA France price Minus DA Germany price ( /MWh) Exemple of price convergence thanks to the market coupling 250 200 Before Market Coupling After Market Coupling 150 100 50 0-50 -4000-2000 0 2000 4000 69 IEC TC 57 WG 16; 20/05/2015 DA Market Net Imports to France from Germany (MW)