Position Paper

Standard Market Design of the SE Europe Electricity Market

3rd Athens Process ForumSofia, 23-24 October 2003

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Background (1)

In the 2nd Athens Forum (March 2003), CEER presented two options for

the development of the Regional Energy Market in South East

Europe (SEE – REM):

1. Each country as develops its own market arrangements while

respecting a minimum set of common rules (e.g. EU Directives,

cross-border trade) as a first step; closer markets’ integration is

gradually pursued later;

2. A Standard Market Design model for the organization of the

electricity markets of the region is put in place directly and not

gradually, in parallel with the liberalization of trade of electricity

across borders;

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Background (2)

CEER considers the development of SEE REM along the second option to be more efficient and one that better ensures foreign investment, vital for the region;

Following Rome, the CEER WG SEEER pursued a strong brainstorming among its members, who cover all countries of the region.The EC and interested stakeholders were also invited and participated;

The WG presented and the CEER endorsed the Basic Principles for the Standard Market Design of the SEE REM, which constitute CEER’ input to this 3rd Forum;

The CEER WG has also developed an analytical Discussion Paper on options for the detailed rules of the SMD for SEE REM, with the view to set forward a dynamic platform for the intensive discussions we anticipate to take place over the next months with all stakeholders on the detailed Standard Market Design;

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Main Objectives for a SEE REM

Develop a competitive integrated energy market

Strengthen Security of Supply

Enhance Environmental Protection

Support economic growth in SEE countries

The SEE REM may link Western Consumers and Eastern Resources

Set up of a SEE Energy market place

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SEE Market Design: Two set of issues to harmonize First set of issues: minimum common requirements of the EC

directive and the Athens MoU• Independent institutions (Regulator, TSO, DSO) and unbundling• Regulated third-party access• Market opening in terms of customer eligibility• Rules for network access, Cross Border Trade system, congestion

management, transparency and interoperability• Level playing field (state-aid, environment)

Second set of issues (standard market design): essential for an effectively integrated regional market• licensing of market players• balancing market mechanisms• integrated wholesale markets• implicit auctions to resolve transmission congestion• uniform application of competition rules

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Main Objectives of the Standard Market Design in SEE

The market model forthe SEE region should deliver the following:

1. Attract new investments, both in generation and transmission

2. Ensure smooth transition for the customers and the existing undertakings

Avoid jeopardizing the viability of existing national entities (e.g. distribution companies),

Maximize social acceptance (consumer social welfare-affordability), and

Avoid recourse to market distorting mechanisms

3. Ensure compatibility and consistency between technical operation-new commercial arrangements-new financial mechanisms

4. Ensure, from early stages, a critical volume and sufficient liquidity for the new wholesale market places to develop.

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SEE Standard Market Design: The Approach Basic concept:

Develop regional wholesale market place and national balancing on harmonised principles

To ensure smooth transition: Allow flexibility for national market arrangements, to

accommodate legitimate differences in local conditions, but Prevent the creation of distortions due to the simultaneous

operation of national and regional markets Incorporate national functional institutions, but set the

framework for their efficient functioning and cooperation Identify and retain, already in place, efficient rules

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The proposed Basic Principles

For SMD

Market Participants

Operation of the SEE REM

Balancing and Ancillary services

Transitional Measures

Regulated Fixed Tariff Regime

Other

Additional provisions

Institutional and Legal Arrangements

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Market Participants (1)

CustomersCustomers Eligible

Free to choose their supplier

Some may opt for the fixed-tariff regime during transition

Act as self-suppliers if they wish

Not allowed to trade electricity

Non-eligible

Bound/covered by the fixed-tariff regime

To become eligible at a later stage

Supplied under transparent and non discriminatory

conditions (applicable to electricity purchases of the

supplying entity)

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Market Participants (2)

ProducersProducers: Licensed generators. May: Conclude bilateral contracts throughout SEE region (customers,

suppliers)

Offer generation capacity to Day-Ahead markets

Contract for future capacity availability services with suppliers

Contract for must-offer services with Regulated Suppliers

Contract for reserve/ancillary services with national TSOs

Participate to the real-time national balancing mechanism

Export electricity outside SEE region

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Market Participants (3)

SuppliersSuppliers:

SEE-wide licensed, according to creditworthiness criteria

They may: Carry out wholesale trading, retail supply, and interregional

trade

Supply customers under the free-tariff regimefree-tariff regime

Enter into bilateral contracts (physical and/or financial)

Purchase from the Regional Day Ahead Market

Participate in the national and/or regional real-time balancing

mechanism(s)

Subject to unbundling obligations from distribution/transmission

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Market Participants (4)

Transmission System Operators National entities who retain full control and responsibilityfull control and responsibility for the

operation of the national transmission networks and provide regulated third party access to system users

Have full responsibility for the balancing of the national system, the settlement of imbalances and the provision of ancillary services to all users

They can only trade and conclude contracts for the purposes of balancing, ancillary and reserve services

In the case of small neighbouring countries and subject to mutual agreement a TSO can operate over more than one country

Subject to unbundling obligations (from supply, distribution and generation)

Must cooperate at the regional level for the creation and during operation of the Regional Market Operator

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Market Participants (5)

South East Europe Market Operator(SEEMO) Regional entity, jointly established, under private law, by all

national TSOs of the SEE region;

Regulated operation;

Operates the regional DAM;

Collaborates with national TSOs for the linkages between the Day Ahead Market and real-time dispatching and balancing as operated by the national TSOs;

Responsible to carry out the financial settlement of wholesale transactions through the Day-Ahead Market between market participants;

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Market Operation (1)

1. Commercial Level Bilateral Contracts with physical delivery

SEE regional wholesale Day-Ahead Market (DAM)

2. Physical Level (real-time balancing) National real-time balancing arrangements, operated by national

TSOs

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Market Operation (2)

Bilateral Contracts with physical deliveryBilateral Contracts with physical delivery

Provide stability to generators and consumers

Protect consumer interests

Freely concluded between producers and suppliers or eligible

customers

Subject to non discriminatory procedures for reservation of

capacity through congested interconnectors

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Market Operation (3)

SEE regional wholesale Day-Ahead Market (DAM)SEE regional wholesale Day-Ahead Market (DAM)

Voluntary Pool operated by SEEMO to:

Establish wholesale transactions for the following day;

Establish market clearing price on the basis of SMP;

Electricity flows between countries will participate to DAM price

formation;

Special provisions (e.g. must-offer and must-buy obligations) will

be in place, in order to ensure the liquidity of regional DAM;

Market splitting (at the level of a country) will be applied in case

of inter-connectors congestion; other options (e.g. coordinated

auctions) will also be considered

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Balancing and Ancillary Services A SEE-wide market-based balancing mechanism is not feasible

in the initial stages of the SEE REM. It is a long-term perspective.

However, the proposed SMD allows for flexibility: national balancing markets can easily be incorporated into the regional market concept.

Balancing mechanisms exist on a national level, under the responsibility of the national TSOs who are responsible for all actions to ensure system balancing: Enter into bilateral contracts (national, regional) for balancing and

ancillary services; Exchange power with other regional TSOs on real-time; Use the Regional Availability List prepared by SEEMO, as

necessary; Balancing pricing: initially on a national level, later on a regional

one; flexibility about the arrangements; Imbalances pricing should discourage market actors from using

the balancing mechanisms for trading purposes;

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The need for transitional measures

High differences in retail prices among the SEE countries (up to 50%

standard deviation);

This creates the opportunity for trade but,

Raises an affordability issue:

Why prices differ? (e.g. hidden subsidies, different cost

structures of primary energy, lack of adequate rate of return

on capital?)

Whatever the reasons, we must explicitly address this issue in the

SMD, in order to manage smooth transition

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Regulated Fixed-Tariff (RFT) Regime (1)Regulated Fixed-Tariff (RFT) Regime (1)

Transitory mechanism (e.g up to the end of 2010) Transitory mechanism (e.g up to the end of 2010) to allow smooth to allow smooth transition from existing regime to liberalized market and protect transition from existing regime to liberalized market and protect consumers from price spikes:consumers from price spikes: All non-eligible customers will belong to the national RFT; Eligible customers will have the right of choice, as long as the

region-wide harmonized rules allows them to; The national RFT will be supplied by Regulated Suppliers (RS):

Licensed at a national basis; Subject to regulation, with capacity obligations for the supply

of their own customers; Constrained to follow transparent and non-discriminatory

procedures for the conclusion of bilateral contracts; Regulation will ensure financial viability of RS and the

corresponding producers

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Regulated Fixed-Tariff (RFT) Regime (2)Regulated Fixed-Tariff (RFT) Regime (2)

Each country of the region will define its own transitional path and

also be responsible for the national resources and arrangements

that best suit national conditions;

However, regional harmonization of these paths shall be necessary:

Principles for the definition of consumer groups entitled to

participate in such a regime;

Maximum size of the national RFT regime;

Measures to avoid market distortion from the existence of RFT

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Additional provisions

Adequacy of generation capacity: SMD should ensure adequacy of generation capacity. Capacity Availability Contracts (CAC) or capacity obligations on suppliers is the most efficient way

Financial hedging:Supplementary to DAMFacilitating competitionThere may be one or more Power Exchanges

Existing long-term contracts have to be carefully addressed (Role in RFT regime in each country, magnitude, duration, impact on infrastructure congestion)

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Institutional framework

At a National level:

National Regulatory Authorities and Transmission

System Operators retain their existing form and capacity

At a Regional level: SEEMO is established by national TSOs, operating under

the SEE Market Operation Code and is subject to regulatory

supervision Technical Management Committee consisting of the

TSOs ensures co-ordination of transmission systems and

inter-TSO cooperation on interconnections and balancing Market Regulation Committee established by the

Regulators to monitor the operation of the SEE REM

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Legal Framework

Major agreements on a regional level:

Basic concepts of the SMD to be included into the next MoU:

The establishment of the SEE Market Operator

The establishment of the Market Regulatory Committee

The establishment of the Technical Management

Committee (or an equivalent structure of the TSOs)

The concept of the Regulated Tariff Regime

The principles (listed before) about market organization

and monitoring

Later legally binding agreements involving the governments in

order to provide the political support which is necessary

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Conclusions Principles on SMD to form the basis for the SEE REM CEER invites SEE governments to implement such principles CEER invites EC to initiate and coordinate :

1. The process for the implementation of the SMD in the SEE region and the development of a corresponding Action Plan;

2. The preparation a binding legal agreement for the countries of the region for the SEE REM on the lines described above;

3. The timely completion of reconnection works and provide the technical assistance necessary to identify future infrastructure constraints under a competitive SEE market;

4. Identify the conflicts that may arise in the implementation of the SMD by the national reform process already under way;

CEER invites the Forum to endorse the SMD principles and commits itself to collaborate with all relevant stakeholders and particularly with EC, ETSO, UCTE and Donors for the successfullis joint effort

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THANK YOU FOR YOUR ATTENTION