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MÁSTER EN GESTIÓN TÉCNICA Y ECONÓMICA EN EL SECTOR ELÉCTRICO
TESIS DE MÁSTER
Role of the Physical Power Exchanges in
the Electricity Wholesale Market
AUTOR: CORALIA VERDUGO PENADOS
MADRID, 8 Octubre 2008
UNIVERSIDAD PONTIFICIA COMILLAS
ESCUELA TÉCNICA SUPERIOR DE INGENIERÍA (ICAI)
INSTITUTO DE POSTGRADO Y FORMACIÓN CONTINUA
Autorizada la entrega de la tesis al alumno:
Coralia Verdugo Penados
EL DIRECTOR DE LA TESIS
Tomás Gómez San Román
Fdo: Fecha: 8 /10/2008
Vº Bº del Tutor de la Tesis
Mariano Ventosa
Fdo: Fecha: 8/10/2008
iii
Summary
The electricity sector worldwide is undergoing a deep transformation from vertically
integrated utilities to unbundled companies that operates in a competitive market. The
liberalization era in Europe dated back in the 90´s and had an important impact in the
way the electricity is treaded. As a result of this transformation the Power Exchanges
appeared as a centralized entity in which the supply and demand meets creating a
competitive market based mechanism to procure the electricity. The main objective of
this thesis is to analyze the role of the Power Exchanges in the wholesale electricity
market, the advantages that this scheme represents and the key elements that are
necessary to achieve a successful market mechanism. First an introduction of the
liberalization process is presented follow by the main aspects and background of the
liberalization process in Europe and a description of how physical organized electricity
markets works. In the next chapters it is presented a description of four different
Power Exchanges in Europe, Nord Pool (Scandinavia), Omel (Spain), Opcom
(Romania) and Powernext (France). Finally some concluding reflexions about the
implementation of the Power Exchanges in the markets analyzed.
iv
Table of Contents
1. INTRODUCTION .............................................................................................................................. 2
1.1 Introduction......................................................................................................... 2
2. BACKGROUND: LIBERALIZATION OF THE EUROPEAN ELECTRICITY SECTOR ...... 8
2.1 Background: Liberalization of the European Electricity Sector................... 8
3. PHYSICAL ORGANIZED ELECTRICITY MARKETS ............................................................. 13
3.1 Electricity Trading ............................................................................................ 13
3.2 The Electricity Power Exchanges and Power Pools .................................... 15
3.3 Role of the Power Exchanges.......................................................................... 17
3.4 Spot Markets ..................................................................................................... 18
3.5 Trading on a Spot Market ............................................................................... 19
3.6 Behaviour of electricity spot prices................................................................ 22
3.7 Risk Management in Spot Markets................................................................ 27
3.8 Power Exchanges Comparative ..................................................................... 29
3.9 References .......................................................................................................... 30
4. THE SCANDINAVIAN SPOT MARKET (NORD POOL)....................................................... 32
4.1 Scandinavian Electricity Sector Summary .................................................... 32
4.2 The Nord Pool Spot Market ............................................................................ 36
4.3 Regulator ........................................................................................................... 39
4.4 Elspot: Day ahead............................................................................................. 40
4.5 Elbas: Hour-ahead ............................................................................................ 45
4.6 Real Time Market (System Operator Market) .............................................. 46
4.7 Nord Pool´s Financial Market ........................................................................ 47
4.8 References .......................................................................................................... 49
5. THE SPANISH SPOT MARKET ................................................................................................... 51
5.1 Spanish Electricity Sector Summary .............................................................. 51
5.2 The OMEL Spot Maket .................................................................................... 52
5.3 Regulator ........................................................................................................... 53
5.4 Daily Market ..................................................................................................... 53
5.5 Intra-day Market................................................................................................ 59
Table of Contents v
5.6 System Operator Process.................................................................................. 66
5.7 Iberian Market.................................................................................................... 67
5.8 References ........................................................................................................... 70
6. THE ROMANIAN SPOT MARKET (OPCOM).......................................................................... 72
6.1 Romanian Electricity Sector Summary.......................................................... 72
6.2 The OPCOM Spot Market ............................................................................... 73
6.3 Regulator ........................................................................................................... 76
6.4 Day Ahead Market (DAM) ............................................................................. 76
6.5 Balancing Market.............................................................................................. 79
6.6 References .......................................................................................................... 82
7. THE FRENCH SPOT MARKET (POWERNEXT) ....................................................................... 84
7.1 French Electricity Sector Summary............................................................... 84
7.2 The PowerNext Spot Market .......................................................................... 85
7.3 Regulators.......................................................................................................... 88
7.4 Day-ahead market ............................................................................................ 88
7.5 Balancing Mechanism (System Operator) .................................................... 94
7.6 Trilateral Market Coupling ............................................................................. 95
7.7 References .......................................................................................................... 97
8. KEY FEATURES OF THE ELECTRICITY SPOT MARKETS................................................... 99
9. FINAL REFLEXIONS..................................................................................................................... 103
10. DEFINITIONS AND ACRONYMS ............................................................................................ 109
11. BIBLIOGRAPHY ............................................................................................................................ 114
Table of Figures vi
Table of Figures
Figure 1. Wholesale and Retail Electricity Market................................................................................ 3
Figure 2. Electricity Trading Markets ................................................................................................... 14
Figure 3.. European Power Exchanges ................................................................................................. 16
Figure 4. Supply and Demand Curves ................................................................................................. 20
Figure 5. Structure of an Auction Algorithm....................................................................................... 21
Figure 6. Supply curve construction..................................................................................................... 23
Figure 7. Supply curve construction..................................................................................................... 25
Figure 8. Nord Pool Spot Shareholders................................................................................................ 37
Figure 9. Nord Pool Day-Ahead Spot Market Price/Volume History 1993- 1998 (prices
Norwegian Krone) ....................................................................................................................... 43
Figure 10. Nord Pool Day-Ahead Spot Market Price/Volume History (prices in EUROS) ......... 44
Figure 11. Sequence of operations in the Scandinavian markets...................................................... 47
Figure 12. Schedule Stop Condition...................................................................................................... 57
Figure 13. OMEL Daily Market Price/Volume History..................................................................... 58
Figure 14. OMEL Intraday Market Price/Volume History ............................................................... 62
Figure 15. OMEL Price Historic Volatility ........................................................................................... 64
Figure 16. Daily and Intradaily Timetable in OMEL.......................................................................... 65
Figure 17. Sequence Processes in the Spanish Market ....................................................................... 67
Figure 18. Iberian Market Results ......................................................................................................... 68
Figure 19. One and Two side Auction.................................................................................................. 73
Figure 20. OPCOM Daily market Results ............................................................................................ 79
Figure 21. Powernext Shareholders ...................................................................................................... 86
Figure 22. Powernext Day-Ahead timetable........................................................................................ 91
Figure 23. Powernext Day-Ahead Market Price/Volume History................................................... 92
Figure 24. Powernext Historically Price Volatility ............................................................................. 93
Figure 25. Comparison graphic of the prices in different Spot Markets........................................ 100
Tables vii
Tables
Table 1. European Power Exchanges.................................................................................................... 17
Table 2. Comparative Table of Power Exchanges............................................................................... 29
Table 3. Norway Specifications ............................................................................................................. 33
Table 4. Sweden Specifications.............................................................................................................. 34
Table 5. Finland Specifications .............................................................................................................. 35
Table 6. Denmark Specifications ........................................................................................................... 36
Table 7. Nord Pool Trading Fees........................................................................................................... 39
Table 8. Price dependent schedule........................................................................................................ 41
Table 9. Price Independent Schedule.................................................................................................... 41
Table 10. Nord Pool Day-Ahead Prices and volume.......................................................................... 44
Table 11. Timetable for Daily Market Sessions ................................................................................... 56
Table 12. OMEL Average Prices and Energy traded.......................................................................... 58
Table 13. Timetable for Intraday Sessions in OMEL .......................................................................... 60
Table 14. OMEL intraday average prices and energy traded............................................................ 63
Table 15. Volumes traded befote and alter MIBEL............................................................................. 69
Table 16. OPCOM Market Evolution.................................................................................................... 75
Table 17. Powernext Trading Fees ........................................................................................................ 87
Table 18. Powernext Default Offer Block Products ............................................................................ 89
Table 19. Powernext Day-Ahead prices and volumes........................................................................ 92
Table 20. Participants involved in the TLC.......................................................................................... 95
1
1Introduction
2
1. Introduction
1.1 Introduction
The objective of this Study is to provide an overview of the role and responsibilities
of the Power Exchanges in a competitive and liberalized electricity market in Europe.
These Power Exchanges differ country to country with respect to diverse market
design, regulatory framework and the background of the electricity industry.
Procedures and organisation of four Power Exchanges within Europe are presented.
The reform of the electricity sector in the European Union, according to the
provisions of European Directive 96/92/EC 1 and then replaced by the 2003/54/EC 2,
involved the unbundling of the activities of Generation, Trading and Supply from the
natural monopoly regulated activities such as Transmission and Distribution.
Competition in Generation, Supply and Trading must be able to take place without
barriers, while natural monopolies will be conceived as regulated activities.
The primary objectives of electricity market liberalization are the achievement of a
feasible competitive Wholesale market that provides market-based electricity prices to
consumers, guarantees the system security and the efficient utilization and availability
of the resources.
Wholesale competition is enhanced on the supply side, by participation of several
generation companies, and on the demand side by allowing customers to buy directly
or indirectly from generators trough customer choice.
In the next figure is represented schematically the Wholesale and Retail Electricity
Market, the stakeholders and the interaction between them.
1 Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning
Common Rules for the Internal Market in Electricity
2 Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning
Common Rules for the Internal Market in Electricity and repealing Directive 96/92/EC
3
Generation GenerationGeneration
Distributor
Supplier
Elegible Customer
Elegible Customer
Elegible Customer
Captive Customer
Ret
ail
Wh
ole
sale
OrganizedMarket
OTC
Figure 1. Wholesale and Retail Electricity Market
The liberalization formally outlines minimum regulatory functions and
competencies of national regulatory authorities. In particular the EU Electricity and
Gas Directives acknowledge that regulatory authorities have an important role on
ensuring the operation of an internal market of electricity. The Directives specifically
summarise their regulatory functions in general terms as:
• Non-discriminatory access to Networks
• Effective competition and the efficient functioning of the market
An important aspect of the liberalized framework is the development of facilities for
electricity trading among different market agents. Electricity can be traded physically
or financial, bilateral and nowadays in many Member States it is been traded through
organized electricity markets (Spot Markets organized in Power Exchanges) 3.
Before the liberalization, the electricity industry was organized in vertically
integrated utilities, usually monopolies that performed all the activities (generation,
transmission and supply). One of the meanings for such framework was the prominent
3 Spot in electricity markets refers to a specific price on an specific time horizon (generally short term)
4
economies of scale of the generation and the need for a centralized control and
dispatch for generation and transmission.
There are some characteristics of electricity which are particularly relevant when
designing the trading scheme, electricity can not be economically stored and it is
delivered to final consumers at the time it is being produced, this means that the
supply and demand must be in balance at any time. The consumption of electricity
varies with respect to the season, day of the week and hour of the day. The demand
side generally follows this consumption pattern that makes the forecast easiest to
predict.
The main goals of the Power Exchanges lies in facilitate the trade of electricity in a
short term and the promotion of information, competition, and liquidity. Power
Exchanges may also provide other benefits, such as easy access, low transaction costs,
neutral marketplace and price reference, safe counterpart and clearing, and settlement
service (OSCOGEN, 2002).
The Spot Markets are created to provide an organized wholesale transactional
environment where demand meets production at the lowest price (see section 3.6). Spot
Markets may be characterized with respect to the following aspects:
• Market participation (voluntary or mandatory)
Trading timing
• Traded products
• Bid and offer format
• Trading method and pricing criteria
• Settlement and clearing
• Congestion Management (in some countries the transmission
capacity allocation is managed in an implicit way in the Power
Exchange)
5
A new independent figure arise from this structure, the Market Operator, which is
the entity responsible for the management of the Organized Market (Spot Market)
assuring the competitiveness and performing monetary settlements for the
transactions. Governance of the Market is ensured by the Market Operator
complemented by the Energy Regulator appointed and acting on behalf of
Governments (either the Industry or the Finance Ministries).
The Spot Market is most often defined as a Day-ahead market where individual
prices and physical quantity transactions are determined one day in advance (D-1)
under a transparent and accepted set of trading arrangements for each of the 24 hours
of the following day (day D). Those markets are the key link between the price
convergence in the Financial and Bilateral arrangements.
The Spot Markets can be complemented with several Intra-Day sessions also known
as Hour-Ahead where each participant can adjust up to a point closer to real time their
open position, this way can diminish their risks of being out of balance and therefore
being obliged to pay imbalance prices, and in that order help to lower the balancing
load on grid operators.
The existence of a Power Exchange is fundamental for a well functioning of the
retail market since a liquid Power Exchange gives the suppliers the opportunity to
procure energy without the need to own production capacity. In short a Power
Exchange is a trading platform operating by a Day-ahead facilitating anonymous trade
in an hourly basis.
The System Operator plays an important role in the wholesale market because it
manages the services needed to maintain in real time the energy balance and network
stability for the entire system, using in some cases, market based mechanisms to
acquire it.
The Balancing Market is an organized market, carried out by the Transmission
System Operator (TSO), where players with dispatchable units and loads can make
balancing bids. With the balancing bids, participants offer regulation services, i.e. they
offer to increase or decrease their power production (or consumption) for a given hour
of operation.
6
The Balancing Market opens after the Spot Market closure. The submission of
balancing bids starts on the day-ahead (and can continue on the intra-day, depending
on the country).
The scope of this study is to describe the Power Exchanges and its mechanism. But,
because of the importance of the Balancing Market in maintaining the balance in the
system and its relation with the Power Exchanges, along this document will be
presented a general idea of the Balancing Market.
7
2Background: Liberalization of the
European Electricity Sector
8
2. Background: Liberalization of the European Electricity Sector
2.1 Background: Liberalization of the European Electricity Sector
During the 1990s significant changes occurred in the European Electricity Sector.
Electricity Industry had evolved from vertically integrated monopolies which covered
the entire electricity business chain: Generation, Transmission, Distribution and Retail
Supply, to unbundled companies separating the competitive activities (Generation and
Supply) from the natural monopolies (Transmission and Distribution). The access to
the network become regulated for the transmission and distribution companies,
progressively the clients are becoming eligible to chose their electricity supplier, new
institutions and organization had arisen and some companies became private own, all
of these changes and process is known as Liberalization.
In the traditional regulated structure companies usually state-own runs the
Generation, Transmission and Distribution, they also had the exclusiveness to supply
electricity to residential, commercial and industrial retail costumers who have no
choice to choose their electricity supplier.
The sector was characterized by having high construction and operating costs,
costly centralized dispatching usually driven by political decisions, limited or null
competition, slight innovation, risk-free investment and the regulator guarantee the
full recover of all the costs incurred, as a result retail prices were very high.
Discussions on Europe electricity liberalization began in 1992 but became a reality
when in 1996 an agreement was reached with the first and second Directive 96/92/EC
and 2003/54/EC, previously mentioned. These two Directives focus on the unbundling
of the industry and on a gradual opening of national markets promoting the
competition of the Electricity Sector.
The first European countries that liberalize were England & Wales and Norway in
1990, since then almost all European countries have liberalized their electricity markets
up to the present.
9
The overriding goals of the reform are the increase of competition and transparency,
deal with social environmental concerns, reduce prices, increase the cross- border
trade, improve the performance of existing systems and facilities, and invest in
Research & Development.
The Liberalization in short means the opening of the sector to competition. Could
involve all or some of the following aspects:
Restructuring
Vertical unbundling aim to separate the competitive activities such as,
Generation and Supply, from the regulated activities, Transmission and
Distribution. Legal, accounting, management or ownership separation is
required in order to prevent cross subsidy of activities. Vertical integration
between Generation and Supply (both competitive activities) is allowed
and it appears to have a strong commercial motivation.
Competition
• Wholesale competition: Retail companies and large consumers are
authorized to buy electricity directly from generators while the
distribution companies maintain local franchise over retail consumers
with regulated Third Access Party (TAP).
• Retail competition: The 2003 Directive requires that customers can
freely choose their power supplier according to the offerings that best
meet their needs. On July 1st 2004 for non-households followed by full
market opening to allow all household customers by July 1st 2007. The
electricity can be purchased to energy service companies (suppliers,
traders, retailers) or directly from generators.
Since mid 2007, household customers have also the right to choose
whether to go to the free market or stay in the regulated market being
supplied by distribution companies at regulated tariffs.
• The way electricity is contracted is not regulated by the Directive. Many
schemes or markets may exist and are already functioning in the
10
European Union, the most applied are Bilateral Contracts (Over the
Counter Market) and Power Exchanges or Power Pools (Organized
Market) based on bid prices, both markets are complementary.
Wholesale market and Retail competition allow new entrants into
generation and supply, improving quality of service, investment and
security of supply.
Regulation
In order to liberalize the Electricity Sector the regulatory design must
establish appropriate structural, institutional, and operational framework.
It is generally recognized that regulatory design and implementation
should take into consideration the specific characteristics of the sector in
question. The regulation must be a tailor-made scheme in order to avoid
problems at the time of implementation.
The experience had shown that regulatory design is essential for the
success of the Electricity Market. Successful reforms can improve the
efficiency of the sector offer lower prices and better quality of service. At
the same time, flawed regulatory design can undermine the benefits of
reforms.
The regulator needs to establish clear rules for the Wholesale market since
regulatory risk is one of the main problems when investment takes place.
The assignments of the regulatory authority include the advisement to the
government, arbitrage, fix the tariffs for the regulated activities, authorize
new facilities, supervise anti-competitive actions, promote competition
between competitive activities, and perform drafts for new regulation,
among others.
Privatization
Privatization is not a prerequisite for liberalization and not all of the
countries have adopted, for example Belgium and Germany were already
privatized before the liberalization, United Kingdom, Portugal and Spain
11
undergone an extensive privatization, partially privatization took place in
Italy and France chooses to keep state owned.
However there are significant evidence that privatization deliver benefits,
like improving productivity and quality service, maximize short-term
returns to shareholders, reduce the public costs, large effect on investments.
All these can be achieved when combined with effective restructuring,
competition and regulation.
The performance of liberalization can be measured in a number of ways, here
are presented some of them:
Electricity prices, the most important indicator. It is important to
mention that this indicator also depends on other factors such as fuel
markets prices, price convergence in national gas markets,
interconnection capacity, emissions allowances and trading, etc.
Price and tariff convergence
Customers change of supplier activity
Increase in productivity
Customer contract renegotiations with suppliers
Number of available suppliers and offers
Customer satisfaction
Barriers to new entrants
Barriers to customer change of supplier
Convergence of price zones
Convergence of prices in the Wholesale and Retail markets
12
3Physical Organized Electricity
Markets
13
3. Physical Organized Electricity Markets
3.1 Electricity Trading
Trading electricity consist of buying and selling electrical energy no matter who is
the supply and the demand side. Nowadays in the liberalized structure trading
constitutes the same approach but the consumers, more known as customers are free to
choose their supplier, furthermore to Change Supplier according to the provider that
best meet up their needs.
While the supplier can be differentiated regarding the size, technology, prices, etc.
electricity cannot be differentiated; all electrons are physically the same, in trading
jargon this is known as a “commodity”.
Already back in the eighties professor Shweppe suggests the following:
“There is a need for fundamental changes in the ways society views electric energy.
Electric energy must be treated as a commodity which can be bought, sold, and traded,
taking into account its time – and space – varying values and costs” (Shweppe, 1988).
In the liberalized era different markets have emerged to trade the electricity.
• Non Organized or Bilateral Trading: Also known as Over-the-Counter
(OTC), which means that the negotiations are carried out directly between
the parties involved, without a clearing house and where the contracts are
not regulated. On this market the electricity can be traded by means of
physical delivery or by using financial instruments (Forwards and Option
contracts).
• Organized Trading: As its name implies consist in a structured market
govern by Spot Markets and organized in Power Exchanges or Power
Pools. In the Organized Markets the trading procedures and the structural
conditions to operate are establish in the market rules. The Spot Market
prices represent an important reference for the financial and bilateral
trading in parallel markets.
14
On the figure below is represented the structure of the electricity trading markets.
Market
Bilateral (OTC) Organized
Physical Financial Physical Financial
ForwardSpot
Power Exchange or Pool
Figure 2. Electricity Trading Markets
All the contracts no matter if they where traded on an OTC or organized market, share
four characteristics:
Defined amount
Defined price
Defined location
Defined period
Physical Trading
Physical Trading means that the electricity traded is going to be produced and
delivered, in contrast to the financial trading that is main purpose is to hedge against
price volatility.
The timeframe of physical trading can differ depending on the necessities to balance
the supply and demand. The contracts can be long term, short or very short term.
15
3.2 Electricity Power Exchanges and Power Pools
The most evident result of the liberalization process of the electricity industry in
Europe is the development of electricity trading and the creation of electricity Power
Exchanges. After the liberalization process began, the European electricity industry
had undergone a considerable transformation led by a combination of technical
innovations, changes in the regulatory framework, political commitments, etc. that had
changed dramatically the Wholesale electricity market.
The trading of electricity exists since utilities companies were originally formed.
However, there are two main differences between trading electricity before the
liberalization process and nowadays, one is the organization or the scheme for trading
and the second is that consumers have the freedom to choose their supplier
encouraged by the separation between Generation and Transmission and the open to
competition of the Generation and Supply activities.
On a liberalized electricity market, the participants can act on two different markets.
Traditionally they can trade electricity bilaterally on the Over-the-Counter (OTC)
market, where the bulk of transactions is still being traded or in Organized Day-Ahead
Markets also called, Spot Markets.
There are two kinds of organized markets:
1. Power Pools
2. Power Exchanges
There are different approaches about the two models, according to (Steven Stoft
2002), Pools are associated with nodal pricing and Exchanges have been associated
with zonal prices, anyway the author implies that there are no theoretical reason for
this association.
On the other hand, (Boisseleau, 2000) explains the differences between the two
models by using two criteria: initiative and participation, this implies that the power
pools are the result of a public scheme and the participation is mandatory, this means
that all the energy must be traded on the pool. While the Power Exchanges are
encourage on a privately basis and the participation is voluntary.
16
Omel
Powernext
GME
Nordpool
BelpexOTE
APXTGE
Opcom
Bronzen
UKPX
EXXA
EEX
Omel
Powernext
GME
Nordpool
BelpexOTE
APXTGE
Opcom
Bronzen
UKPX
EXXA
EEX
Even though there is no a standard definition regarding the Power Pools and Power
Exchanges and for the purpose of this study I will use the second approach that also
points out that the players in Power Pools can only be generators and that a side
payment is one of the main aspects that differentiated from the Exchanges.
This means that the price on the pool is based on cost minimization and optimal
generation dispatch in contrast of matching the demand and the supply side of the
Power Exchanges.
One example of the pool system used in Europe was the first England and Wales
pool (1990-2001) and the fist years of the Romanian OPCOM pool (2000-2005).
According to the last description the Power Exchange model is currently the most
widespread system in Europe. The figure below shows the existing Power Exchanges
in the continent and the table below shows the starting date.
Figure 3. European Power Exchanges
17
Country Power Exchange Date
Austria EXXA 2002
Belgium Belpex 2005
Czech Republic OTE 2002
France Powernext 2001
Germany EEX 2000
Italy GME 2003
Netherlands APX 1999
Poland TGE 2000
Scandinavia Nord Pool 1993
Slovenia Borzen 2001
Spain Omel 1998
Romania Opcom 2000
UK UKPX 2001
Table 1. European Power Exchanges
3.3 Role of the Power Exchanges
The Power Exchanges play an essential role in the new structure of the electricity
industry, especially within the European wholesale Market which was until now
dominated by bilateral trade. All these Power Exchanges share the same goals. They
aim to facilitate electricity trade, foster competition, ensure transparency and become
recognized as a European marketplace. Finally, each Power Exchange aims to develop
liquidity and credibility of its price index.
Power Exchanges are considered marketplaces, lets remark the word marketplace, is
a third party which facilitate transactions between sellers and buyers, they are ruled by
its own trading rules and they guarantee the payment.
18
Facilitate trading: Power Exchanges make easy the short term trading because it
gathers all the stakeholders of the wholesale market in one single market.
Foster competition: By letting submit bids to generators, distributors, suppliers
and eligible consumers. Every participant specifies the desire quantity and the
price they are willing to pay/received.
Ensure transparency: The bids are anonymously, the driver for the price is
based on matching the supply and demand curves. The market clearing prices
are public.
Price index: Price in the Power Exchange is published on a daily basis and
represent a useful tool for benchmark the bilateral transactions.
Reduce credit risk: The counterpart for the transactions is the exchange’s
clearinghouse. The role of the clearinghouse is to guarantee the financial
regularity of the parties.
3.4 Spot Markets
Spot Markets are usually organized by Power Exchanges which provides short term
horizons for trading at least a Day-Ahead market. An Intra-Day Market also referred as
an Hour-Ahead or Adjustment Market is sometimes offered to get a more accurate
balance between demand and supply.
This market closes few hours before the actual physical delivery of the electricity.
Additionally, in order to balance power generation to load at any time during real-time
operations, System Operators use Balancing or Real-time market, where participants
can submit bids that specify the prices they require (offer) to increase/decrease their
generation, or decrease/increase their consumption for a specific volume in a short
period of time. Furthermore balancing services (also referred to as Ancillary Services)
are needed to support a reliable delivery of electric energy (e.g. transmission losses,
reactive power support, voltage control, among others) are sometimes also traded on
an exchange-based market.
19
3.5 Trading on a Spot Market
The European Power Exchanges usually provide an auction framework of bidding-
based trading for physical delivery during a particular hour of the next day. The usual
trading system is a daily double-side (generation and demand) auction for every hour
to match transactions at a single price. The product traded is an hourly spot contract
that specifies the size (MWh) and value (€MWh).
Type of bids
Hourly bids
Hourly bids are the more common type of bids and some information is required on
each bid, like: participant’s name, type of bid (sale or purchased), hour of the day,
quantity and price.
The bidding process is the following:
1. Market agents allowed to participate in the Power Exchange such as
(Generators, Distributors, Traders, Suppliers and in some markets
qualified Consumers) submit their bids, generally used electronic
systems, according to the deadlines specified on the Market Rules,
determining the quantity and the price (Block Bid) they are willing to
sell/buy. After receiving the bids a verification and validation
process is performed.
Each sale bid specifies the quantity and its minimum price at which
they seller is willing to supply the energy. On the other hand each
buy bid specifies the desired quantity and the maximum price at
which they are willing to buy.
2. In some Power Exchanges the participants can add to their bids
several conditions or complex bids.
3. The submitted bids are collected and the participants can only know
their own bids and cannot see others (anonymous bids).
20
4. For price determination all the bids collected up to the
predetermined closure time are arranged on a Merit Order sorted
according to the price and aggregated to get a market demand and
supply curve for every hour. A block bid must be matched for the
entire or partially volume specified, and for all hours. If this is not
possible, the block bid is rejected.
5. The clearing or matching price for every hour is settled after the
demand and supply curve is aggregated and intersected.
6. The simple bid matching, presented on the figure below, ignores any
complex conditions or grid constraints and results in an initial market
Clearing Price.
Q*
P*
Price€/MW
Quantity€/MW
Market ClearingVolume
Offer Curve
Demand Curved
Market ClearingPrice
Figure 4. Supply and Demand Curves
7. The non-existence of an intersection may trigger a second round of
submitting bids.
8. There may be a surplus at the market clearing price resulting of the
simple bid matching. In this case the volumes of bids with the market
Clearing Price as limit are proportionally curtailed, or the algorithm
selects the bids according to the time of order book entering (first
come, first serve).
21
9. If all conditions are not satisfied the price solution is not valid. In this
case one of the unfulfilled bids is eliminated and the price calculation
is run again. This checking process is iterated until all the remaining
bids can be fulfilled.
10. The traded volumes of the matched bids have also to be checked
against the transmission grid capacities. If there are transmission
constraints, the schedules have to be balanced either by only
adjusting the trade volumes, by adjusting the trade volumes and re-
running the iterative bid matching, or by splitting the market in
several areas.
Sale Bids
Purchase Bids
Simple Bid Matching
Initial Solution
Complex bid conditions cheking (if applied)
Valid Solution
Optimisation Process
Final Unconstrained Solution
Transmission Constraints?
Balancing ScheduleSolution
Elimination of Unfulfilled bids
Yes
Yes
Yes
No
No
No
Figure 5. Structure of an Auction Algorithm
Block bids
Block bids is an aggregated bid for several consecutive hours with a fixed price and
volume. This bidding singularity is due to the fact that some power plants are not
that flexible on the start-up process and requires a ramp to achieve its optimal
operation, so this kind of bids allows the participants to sell/buy electricity for a
period of consecutive hours. The bidding process is the same as the single hour bid
with some additional conditions like fill-or-kill option; this means that the whole
22
amount of energy has to be accepted. In some Power Exchanges the blocks are
already specified like the French Power Exchange Powernext or the Nordic Nord
Pool.
3.6 Behaviour of electricity spot prices
Determining the Market price
Most of the European Power Exchanges set energy prices based on the marginal
price auction (or single price auction), this means that all generators are paid the
market clearing price. The highest accepted supply bid is the one that determines the
price.
In the spot market, the participants specify how much electricity they wish to buy or
sell at a given price. For each hour during the following day the participants’ bids are
aggregated into supply and demand curves.
The supply curve consists of the participants’ aggregated sales bids in terms of each
technology’s variable production cost, or the marginal cost which corresponds to the
cost of increasing or producing one additional unit. The demand curve consists of the
participants’ purchase bids also in terms of price and quantities.
The combination of price and quantity where the supply and demand curves match
determines the market clearing price.
The figure below shows the principle for price formation on the spot market:
23
Hydro Nuclear CCGT
CCGT
Coal
Coal
Fuel oil &
GT
Wind
Quantity
(MW)
Variable cost
(€MW/h)
Supply
(sell)
Demand
(Buy)
Depends on gas
& coal price
Source: own elaboration
Figure 6. Supply curve construction
The supply curve aggregates the bids on a merit order from the unit of production
with the lowest marginal cost up to the marginal cost of the last unit of the production
needed. This means that demand and supply meet at the lowest possible cost.
Once we have described how the supply curve is shaped, it is essential to explain
the factors influencing the variable cost bided.
Fuel cost, carbon allowances cost and variable O&M represent the variable cost that
comprises the sale bids. Apart from wind and water power the rest of technologies
must rely on the cost of their fuel to operate.
Fuel prices
Fuel costs are a share of total generation costs and vary significantly among
technologies. Wind has no fuel costs. For nuclear power, fuel costs represent a small
component of nuclear power generation, between 8 and 11%. For CCGTs, fuel costs
account for about 75% of total costs. A 50 % increase in uranium, gas and coal prices
would increase nuclear generation costs by about 3%, coal costs by about 20% and
CCGT costs by about 38% (IEA, 2006).
Coal prices: The coal-fired power stations depend on buying coal for fuel; when
coal becomes more expensive the cost of generating electricity from this fuel rises.
24
There is a price level on which burning coal to produce power becomes
uneconomic and such level of activity may decline. Consequently, the supply will
be reduced and boosts prices on the Power Exchange. In 2005, gas-fired generation
contributed a lower share of the increasing power needs, because high gas prices
provided strong incentives for an increase in coal-fired generation from existing
plants.
Gas prices: Nowadays gas-fired plants are becoming more “popular” in Europe
due to a range of advantages. As with coal-fired capacity, these power stations
depend on buying gas for fuel. Lower gas prices would improve the terms for such
output, which in turn could increase electricity supply, and cut prices. Demand for
gas in power generation in the OECD increased from 213 bcm in 1990 to 447 bcm in
2004; an annual average growth of 5.4% (Gas Market 2007).
Considering that the price of natural gas tends to be volatile in some markets, this
seems an important drawback for CCGTs. However, it must be remembered that
where gas sets the electricity’s marginal price, this volatility can be recovered from
the market. In this case, of course, high gas prices directly translate into high
electricity prices. High gas prices make other alternative technologies more
competitive.
Gas prices are typically indexed to crude and/or oil products such as Low Sulphur
Fuel Oil, High Sulphur Fuel Oil, and gas oil; so gas price will increase: when the
world crude-oil market tightens, when there are low inventories, when demand
rises and refinery capacity meets its production, or when there are speculative
facts about geopolitical situations, with a time lag which depends on the
indexation mechanism included in the gas pricing formula.
Carbon allowances prices: The European Emissions Trading Scheme (ETS)
limits CO2 emissions for some industrial sectors; since 2005 each country allocates
its allowances to companies which are free to trade them within the EU. Carbon
allowances (EUAs) and carbon credits (CER´s) are traded as a commodity. Power
stations with carbon emissions must buy EUAs or CERs to cover a possible
shortage of such allowances.
25
If the price of EUAs or CERs is high, generating electricity from fuels such as coal
and gas becomes more expensive, and the cost could rise. The price could increase
by the amount of the EUAs and CERs, because these are input factors.
Demand side also affects the electricity price on the spot market by moving the
demand curve (from Xo to X1), as shown in the figure below: if the demand curve
moves this will require that more expensive technologies operate to cover the demand.
Hydro Nuclear CCGT Coal Fuel oil &
GT
Wind
Quantity
(MW)
Variable cost
(€MW/h)
Supply
(sell)Demand
(Buy)
Xo X1
Source: own elaboration
Figure 7. Supply curve construction
Some of the factors that affect the demand curve displacement are the following:
Weather and temperature conditions
Precipitation: The level of precipitation is significant for pricing on the Power
Exchange. Plentiful rain and snow means more water to drive the turbines, which in
turn boosts supply. An increase in precipitation alone will normally reduce electricity
prices.
26
Temperature conditions
Temperatures influence daily demand for power. Colder weather boosts demand,
which can lead in turn to price increases.
Electricity transmission
Transmission capacity: Capacity shortages in the transmission network could
increase prices if demand in one area exceeds supply. Lack of capacity means that
power cannot be acquired from regions with a surplus.
Seasonability
Demand differs between seasons (winter/summer), days (weekdays/weekends),
and hours (peak/off peak). This seasonal and day variation implies that some
generators only run a couple of hours per year
Level of economic activity
General economic fluctuations such as booms and recessions also impact in the
electricity consumption and, thereby, trading in power because power market is
influenced by fluctuations in other raw materials and currency markets.
Economic factors
Generating capacity: Expanding generating capacity will increase the supply of
electricity, which could reduce prices.
Currency movements
Most raw materials are priced in US dollars. A lower exchange rate for the dollar
cuts the cost of coal, gas and other fuels to lower the price of electricity.
27
3.7 Risk Management in Spot Markets
As we saw there are a number of factors which cause unexpected price and cost
changes in competitive power markets. These factors can be classified in Short Term
(seconds, up to the day) and Long Term.
The business separation between Generation and Supply activities enforce the need
to deal with some uncertainties that were no concern before when companies belong to
the same power group.
Important financial penalties can be incurred in liberalized markets by producers
and consumers of energy if they diverge from agreed levels of production or
consumption.
The exact mechanism used to balance a network, which inevitably varies from
market to market, may have an impact on the risk trading strategy. The need to predict
consumer demand accurately and to meet contracted production targets in each
trading interval becomes vital to the profitability of the organisation.
Alternatively, the risk can sometimes be managed through the introduction of
special contract types or conditions, such as interruptible contracts.
The main causes of the price volatility are:
Short term
Operational risk (power generation failures)
Forecasting risk (over costs associated to the Balancing Energy)
Day Ahead Market
Generation mix (changes in the marginal price as a result of the
different technologies that participate on the Spot Market)
Market demand peaks and valleys
Congestion management
Imports/Exports
28
Long term
Costs and availability of fuel
Environmental conditions (especially rain and weather) and
environmental constraints
Regulatory risk
Forecasted demand
Investment programs
In addition to the problem of price and volume risk, utilities must actively manage
other risks such as credit, legal and liquidity risk, among others.
Some risks are measurable, and generally accepted techniques and models exist,
while others are more an issue for the organisation to address accordingly to its own
structure and processes. Whatever the case may be, an organisation which is trading in
the electricity market must be aware of the risks they are facing and have strategies
and processes to manage it.
Additionally some utilities tend to speculate with future energy prices. This adds a
considerable extra risk.
Physical markets (in particular, the Spot Markets) are essential to control and
minimize the short term price and the needs to provide the network balance, stability
and reliability.
In addition the Spot Market has as key role to provide price reference which is
necessary to build Financial and OTC Markets. Energy futures prices and derivatives
products for the power markets are based and are derived from in the Spot Market
prices.
29
3.8 Power Exchanges Comparative
On the next chapters it is presented four European Power Exchanges, the reason to
select this markets is because one of them represents a different level of liquidity,
competition, volume traded, etc, for instance, the Nord Pool is the pioneering, most
successful and mature market across Europe, Omel was at the beginning a mandatory
market and thus liquidity on this market was so high, Powernext is practically a
residual market in France and Opcom is an incipient but straight forward market with
opportunities to achieve an important role not only in the Romanian wholesale market
but in the South East Europe region.
First a brief description of the electricity sector of each country is presented then
some spot market procedure insights and finally spot market price analysis.
Power Exchange Participation Market Operator System Operator Traded Volume
Nord Pool (1993) Voluntary Day-Ahead
Balancing Market
Hour-Ahead
(adjustments)
Real time market Around 40%
OMEL (1998) Voluntary Day-Ahead
Intraday
(adjustment)
System Operator
Process
(Technical
Constraints,
Ancillary services,
real time)
Around 95%
OPCOM (2000) Voluntary since
2005
Day-Ahead Balancing Market Around 9%
Powernext (2001) Voluntary Day-Ahead
Day-Ahead
Continuous
Day-Ahead
Intraday
Balancing
Mechanism
Around 10%
Table 2. Comparative Table of Power Exchanges
30
3.9 References
Bajpai, P and Singh. S.N. Electricity Trading In Competitive Power Market: An Overview and Key Issues. International Conference on Power Systems. Kathmandu, Nepal 110 pp.
Bogas, J; Fernandez, C; Ventosa, M. (2) Overview on Electricity Markets: International Experiences.
Boisseleau, F. (2004). “The Role of Power Exchanges for the Creation of a Single European Electricity Market: Market Design and Market Regulation.” PhD Thesis, University of Paris IX Dauphine, Delft University Press.
Cavallo, L. And Termini, V. (2007). Spot, Bilateral and Futures Trading in Electricity Markets. Implications for Stability. 34 pp.
Flatabø, N.; Doorman, G.; Grande, O. ; Randen, H. ; and Wangensteen, I. (2003) Experience with the Nord Pool Design and Implementation, Member, IEEE. 7 pp.
Helyette, G. (2002) Towards a European Market of Electricity: Spot and Derivatives Trading.
Hogan, W. W. (1998). “Competitive Electricity Market Design: A Wholesale Primer.” December, John F. Kennedy School of Government, Harvard University.57pp.
IEA (2001). Competition in Electricity Markets (2001). Head of Publications Service, OECD 2, rue André-Pascal, 75775 Paris cedex 16, France.
Joskow, P. (2007). Lessons learned from electricity market liberalisation. University of MIT. 38 pp.
Makkonen, S. and Lahdelma, R. (1999). Analysis of Power Pools in the Deregulated Energy Market through Simulation.
Quarterly Review of European Electricity and Gas Prices. DG Energy and Transport. Issue 1-8.
Reinhard, M., R. And Kaufmann, M. (2002). Power exchange spot market trading in Europe: theoretical considerations and empirical evidence.
Stoft. S.( 2003) Power System Economics. IEEE Press. Piscataway, NJ, USA.
Wolak, F. A. (2001). “Market Design and Price Behaviour in Restructured Electricity Markets: An International Comparison”, Department of Economics, Stanford University.
31
4The Scandinavian Spot Market
(Nord Pool)
32
4. The Scandinavian Spot Market (Nord Pool)
4.1 Scandinavian Electricity Sector Summary
Norway
Norway was the first of the Nordic countries to liberalize its electricity sector, in
1991 the 1990 Energy Act came into force. The main motivation for the electricity
market reform was an increasing dissatisfaction with the performance of the sector in
terms of economic efficiency in resource utilization.
The most important elements of the reform were the desire to organize a Spot
Market that incorporates the demand side 4.
Before the liberalization process, the dominant state-owned and vertically
integrated company Statkraft was split into two separate entities:
• Statkraft SF (Generating company)
Statnett SF (Transmission company)
The other vertically integrated power companies were separated into generating or
trading divisions. The market liberalization was implemented without changes in
ownership, neither of the companies were privatized, 85% of the electricity system was
publicly owned by local, regional and state-owned companies. The prices were
determined by the government and set different prices for different consumers, which
created inefficiencies in the electricity market.
The Norwegian electricity system is quite unique, because around 99% of the
production is generated by hydropower. Production varies heavily from season to
season depending on the rainfall.
4 From 1971 to 1990 an Occasional or Interruptible Spot Power Market exists, based on expected
demand and supply schedules and the only participants were the generators.
33
The low cost of electric power in Norway and a growing economy led a steadily
increase in electric consumption throughout the 1990s. Production, however, has not
kept pace, as a result Norway is now a net importer of electricity.
Population 4,6 million
Area 325.000 km2.
Electricity annual Consumption
115 TWh
Individual Consumption 25.000 KWh
Industry Paper and Chemical Aluminium smelting or Iron Alloy
Natural Resources Fifth producer of hydro worldwide and first in Europe.
1996 – 67 TWh
2000 – 147 TWh
Hydropower 99%
Other termal power 1%
Electricity production Grouth
NORWAY
Electricity production
Table 3. Norway Specifications
Sweden
Sweden deregulated its electricity sector in 1996 according to the Electricity Act
1197:857, the main driver for restructuring was the increasing concern of market
power, the aim to reduce electricity prices and increase productivity.
Before deregulation the electricity sector was vertically integrated, consumers
bought their power from the local electricity company, which either generated its own
power or acquired it from another member of the industry’s clubs 5. After the
liberalization this vertical integration was split up into three segments: generation,
transmission, and retail trade directed to individual customers including households.
5 The clubs were voluntary associations of companies that were in one way or another engaged in the
production and/or distribution of electricity.
34
Both generation and retail trade were open into competition, while transmission
remained regulated.
The reason why transmission remained sheltered from competition was that it is
three geographical levels (National, Regional and Local) that together formed a natural
monopoly.
One of the most remarkable parts of the Swedish reform was that Svenska, Sweden
Transmission System Operator, bought half of the Norwegian electricity Spot Market
form the Norwegian, known as the Nord Pool.
Sweden has gained from the creation of Nord Pool, however, for the market in
which Swedish generators compete is now usually twice as large as Sweden alone, and
can be nearly three times large.
At present, Sweden is a single price area within Nord Pool, even if there is
congestion within the country’s transmission system
Population 9 million
Area 450.000 km2
Electricity annual Consumption
145 TWh,
Individual Consumption Fourth individual consumptionworldwide
Industry 30% consumption belong toPaper Industry
Production mix Hydro and nuclear, small portioncogen and fuel
Hydropower 46%Nuclear Power 45%
Other termal Power 12%
SWEDEN
Electricity Production
Table 4. Sweden Specifications
Finland
The Electricity Market Act (EMA) and the Point-access tariff of 1995 opened the
Finnish electricity market to competition. A later modification of the law has, since
autumn 1998, allowed all customers to choose a supplier freely with no additional cost.
35
Due to the use of consumption profiles, no specific electricity meters are needed for
small customers.
There are many reasons for restructuring the electricity industry in Finland. One is
the worldwide trend towards liberalisation and the evidence of improved efficiency.
The second was the deregulation of the electricity markets in other Nordic countries
and the establishment of the common power pool, Nord Pool. And third, there has
been a scheme for opening the European electricity markets, to which Finland wanted
to be properly prepared.
Population 5,2 millions
Area 338.000 km2
Electricity annual Consumption
85 TW
Individual Consumption Similar to Sweden
Industry 30% consumption belong toPaper Industry
Electricity Production Nuclear Power 33%
Other termal power 47%
FINLAND
Table 5. Finland Specifications
Denmark
Denmark started to liberalize its electricity market in 1996 by introducing limited
competition concerning to large customers (consumption over 100 GWh). In 1999 a
New Electricity Supply Act was passed in the Parliament and at the same time the
western part of the country became a separate price area within the competitive Nord
Pool Power Exchange.
Contrary to the other Nordic countries, the government does not own any electricity
utilities, most of it are owned either by municipalities and customer co-operatives.
Peak-load demand is usually satisfied by imported hydropower from Norway and
Sweden. Denmark is interconnected by transmission lines to two different systems,
from West to the Great Belt to the Continental Western Europe and from the East of the
Great Belt to the other Nordic countries.
36
Population 5,4 million
Area 43.000 km2
Electricity annual Consumption
35 TWh
Individual Consumption Tipical from an European country
Production mix 85% Cogen the rest wind power
DENMARK
Table 6. Denmark Specifications
4.2 The Nord Pool Spot Market
Initially in 1993 this Power Exchange covered only the
Norwegian market operating the first year a volume of
10.2 TWh. The Power Exchange changed its name to Nord
Pool ASA when it became a common Norwegian-Swedish
market in 1996. Svenska (Swedish TSO) brought the 50 %
to Statnett (Norwegian TSO) which owns the other 50%.
In 1998 the Market was extended to Finland and finally in
1999 the western part of Denmark joined the Pool.
Nowadays the Nord Pool Group owns Nord Pool ASA which has the 20% of
participation in the Nord Pool Spot, the rest 80% is owned by the four Nordic TSOs -
Statnett SF, Svenska Kraftnätt, Fingrid and Energinet.dk with 20% each.
At the end of 2005 Nord Pool Spot opened a price quotation in Germany. The
Nordic Exchange area was expanded to include also a bidding area in Germany named
KONTEK. Geographically, KONTEK gives access to the Vattenfall Europe
Transmission control area.
37
Statnett SF
20,0%
Svenska
20,0%
Fingrid 20,0%
E nerginet
20%
Nord Pool ASA
20,0%
Figure 8. Nord Pool Spot Shareholders
Nord Pool is a non mandatory Power Exchange that organises approximately 40%6
of the total trade of electricity in the Nordic market. The rest is organized on the basis
of bilateral contracts.
Any company wishing to trade in Nord Pool must first become a member.
Membership is open to Generators, Distributors, Suppliers, Industrial Customers,
Traders and Brokers. At present there are 131 Direct Participants, 172 Clearing
Customers and 14 Trading and Clearing Representatives.
National competition and regulatory authorities monitor the Nordic power market
to ensure that it is sufficiently competitive. The competition authorities check that no
form of price cooperation occurs and that no players secure excessive market power.
The financial and energy regulators monitor compliance with licence terms, while
Nord Pool provides direct surveillance of the marketplaces.
The physical Nord Pool is divided into two areas:
• Elspot (Day-Ahead Market)
• Elbas (Hour-ahead), this market do not operates in Norway because
Norway is mainly water based. That means that the base load profile is
6 Nord Pool manages Physical and Financial Markets.
38
very flat. The marginal cost for water is not very high and that is the
reason why Statnett until now has rejected the elbas.
Other services to maintain a secure and reliable power supply are handled through
the Real-time Market and Ancillary services managed by each of the Nordic
Transmission System Operators.
Conditions for trading
There are three participant categories on the Nord Pool Spot market:
• Direct participant: Participants that trades on their own behalf and is
the responsible for the settlement.
Trading & Clearing Representative: Participant who carries out
Trading for a Clearing Customer account and risk.
• Clearing Customer: Make an agreement with a Trading & Clearing
Representative to perform the trading on his behalf. Is the responsible
entity for the settlement of their own trading done by the Trading &
Clearing Representative.
Every Participant has to post a cash collateral on a pledged bank account or a
demand guarantee issued by the bank to Nord Pool.
The member that wants to become a Nord Pool participant has to fulfil the
following requirements:
1. The Participant must sign the Participant Agreement and the
Clearing Customer the Customer Agreement.
2. Before the trading commencement, it is necessary that the Participant
and the Clearing Customer established a deposit account or a non-
pledged account and posted cash collateral on either accounts or
present a guarantee document issued by a bank.
3. Sign a Balance Responsibility Agreement with the Transmission
System Operator.
39
4. Comply with the following fees and payments
Direct participants € 12.500
Trading & Clearing Representative € 12.500
Clearing Customers € 2.000
Elspot 0,03 €/MWh
Elspot (small participants)* 0,13 €/MWh
Elbas 0,08 €/MWh
Elbas Service Fee 500 €/Month
* Small participants can waive the annual fee and
pay a higher variable.
Annual Fixed Fees
Variable Fee
Table 7. Nord Pool Trading Fees
4.3 Regulator
The regulatory and supervision authority for the Nord Pool Spot is the Norwegian
Water Resources and Energy Directorate (NVE) which is subordinated to the Ministry
of Petroleum and Energy. Nord Pool Spot hold a licence to operate and organized
marketplace for trade physically delivered power contracts, under the Energy Act 2003
of Norway. NVE also allowed Nord Pool Spot to organise the physical exchange of
power with neighbouring countries.
The license requires that a market surveillance function is establish, The Rulebook
for Nord Pool Spot regulates the obligations and rights of the market participants in
trading and settlement, and constitutes the rules that the Spot Market participants have
to comply. There are separate regulatory agencies in the four countries.
Swedish Energy Agency (EI)
Energy Market Authority (EMV)
Danish Energy Regulatory Authority (DERA)
40
4.4 Elspot: Day ahead
Elspot is a Day-ahead market on which electricity is traded on a daily basis for
physical delivery for the following day.
The bidding areas are consistent with the geographical area of each of the
Transmission System Operators: Sweden, Finland and the German area KONTEK are
each one bidding area. The grids in Jutland (Western Denmark) and Zealand (Eastern
Denmark) are not physically connected giving two bidding areas in Denmark. The
Norwegian grid is usually divided into two bidding areas.
Elspot Key Features
• Hourly, Block and Flexible bidding contract (24 hours of the next
day)
• Price mechanism to allocate transmission capacity
• Price grid congestion is included in the System Price
• Prices are determined for every hour
• Electronically trading system (EDIEL or EIWeb)
• Minimum contract duration is one (1) hour
Minimum contract block is four (4) hours duration
• Minimum contract size is 0,1 MWh/h
• Trading currencies: NOK, SEK, DKK, EUR/MWh
• Bid: Sequence price/volume
• Purchases positive numbers, Sales negative numbers
• Ceiling and Floor price limit
41
There are different kinds of purchase and sales Bids:
1. Hourly Bid: Participants submit their bids (sale or purchase) covering
all the 24 delivery hours. It could be price-dependent hourly bid or
price-independent hourly bid.
• Price dependent bids: Nord Pool Spot make a linear interpolation of
volumes between each adjacent pair of submitted price steps. Once the
Elspot price for each hour is determined, a comparison with a
participant's bid form for the day establishes the traded volume for
that participant.
Price
Hour
1
2
3 50 MWh 50 MWh 0 0 -10 MWh -10MWh -30 MWh -30 MWh
4
Etc.
Price Levels22.1 30 30.1 20000 15 15.1 22
Table 8. Price dependent schedule
• Price Independent bids: The participant will receive a schedule of
deliveries equal to the specified volume for all hours, regardless of
the price level within the range.
Floor Price Ceiling Pirnce
0 2000
00-24 60 MWh 60 MWh
PriceHour
Table 9. Price Independent Schedule
2. Block Bid: Is an aggregated bid for several consecutive hours with a
fixed price and volume. The Participant can choose the start and stop
hour at a block but must consider at least four consecutive hours. The
Block Bid gives the opportunity to set a Fill-or-Kill option for all the
hours of the block. The maximum blocks bids per day are 15. This
kind of bid is useful in cases where the cost of starting and stopping is
high.
42
3. Linked Block Bids: This kind of bid allows to link up to three blocks
together, the third bid is then dependent on acceptance of both
preceding bids. This is useful when the cost of starting one generator
depends if another generator is already in order or not. The blocks
cannot link for sale and purchase.
4. Flexible hourly Bid (Only for sales): It is a bid with a fixed price and
volume without any specification about the hour. The bid will be
accepted in the hour with the highest price in the calculation.
Elspot Timetable
1. At 10:00 the TSOs have had submitted their capacity allocation for
Elspot contracts.
2. 12:00 is the deadline hour for receiving all the bids covering hourly
contract for delivery the next day. The market closes; Elspot price
calculations begin.
3. At 13:00 or 13:30 at the latest the price calculations are completed. The
results are confirmed to the participants, to the TSOs and others
responsible for power balance adjustments. Participants can file
complaints about trades in the next 30 from the publication of the
schedules.
4. 14:00 is the deadline for filing complaints, unless a delay of price-
setting beyond 13:30 has occurred. All Elspot contracts are binding
between buyers, sellers, and Nord Pool Spot.
The Nord Pool calculates the System Price using all the bids submitted by the
participant in the four countries + KONTEK area. At first the grid capacities are not
included in the calculation, this means that the System Price will correspond to the
Price area of each Nordic country.
If congestion is detected during the initial calculation, the markets are split into
different price areas and repeat the price calculation in the two areas separately. The
43
price in one area will therefore be higher than in the other. Electricity will be then
purchased in the low price area and sold in the high price area. The increased demand
in the low price area will in turn raise the price in that area. Correspondingly, the price
in the high price area will fall when the amount of available power increases. This
process, known as Market Splitting, will continue until all the transmission capacity is
fully utilized.
Elspot Price Analysis
The bar and line chart on figure 9 shows the evolution of the volume traded and the
prices at Nord Pool Spot market in Norwegian Krone for the period 1993-1998. In 1996
a significant increase of traded volume is evident since Sweden merged with the
Norwegian Spot market, as same in 1998 when Finland joined as well.
0
10
20
30
40
50
60
1993 1994 1995 1996 1997 1998
0,0
50,0
100,0
150,0
200,0
250,0
300,0E nergy
Price
NOK/MWTWh
Figure 9. Nord Pool Day-Ahead Spot Market Price/Volume History 1993- 1998 (prices Norwegian Krone)
• The heavily influence of hydraulic in Norway is the reason for the
spike prices in 1994 and 1996. Those years where influenced by
environmental causes (strong winters and low raining season).
On figure and table 10 is presented the evolution of the volume traded since the
beginning of the Nord Pool Spot and Spot prices since 1999, in EUROS. In 1999 and
2000 western Denmark and eastern Denmark respectively join the market. The most
recent incorporation to the market was in 2005 when the German area KONTEK
44
adheres to the Nord Pool Spot Market. The table above shows the evolution in figures
and the variation over the years.
0
50
100
150
200
250
300
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
0
10
20
30
40
50
60E nergy
Price
TWh EUR/MWh
Figure 10. Nord Pool Day-Ahead Spot Market Price/Volume History (prices in EUROS)
Table 10. Nord Pool Day-Ahead Prices and volume
Year
Price
NOK/MWh
Volume
TW/h
1993 80,3 10,02
1994 182,7 14,8
1995 117,67 20
1996 253,63 40,6
1997 135 43,6
1998 116,35 56,3
Price € /MWh
1999 13,46 75,4
2000 12,8 96,9
2001 23,1 111,9
2002 26,91 124,4
2003 36,7 119
2004 28,92 167
2005 29,33 176
2006 48,59 251
45
• 2003 was a very dry year, the demand did not grew as much as other
years, because of that the prices had an important rise from 26, 91 to
36,7 €MW/h.
• The turnover for Monday 22 January 2007 was 1003.5 GWh. The
volume traded at Nord Pool Spot now represents more than 70% of the
Nordic consumption.
4.5 Elbas: Hour-ahead
Elbas is an Electricity Adjustment Market that started in 1999. The Elbas Market is
open at all times (continuous trading 24 hours a day). The traded products are one-
hour duration power contracts. The purpose of this market is to improve the physical
balance.
In the past, especially in Sweden and Finland, electricity distributors estimated their
balance long time ahead. Forecasting the future is a very important and difficult task in
these countries because most of its generation production is based on CHP (Combined
Heat and Power), however, the consumption and production predictions do not
always correspond to the situation in real time, but a prediction can get achieved as the
actual delivery time approaches, therefore continuous trading near the delivery hour is
extremely effective.
The participants in the Elbas Market are power producers, distributors, suppliers,
industries and brokers. Today the Elbas market runs in Finland, Sweden and Eastern
Denmark.
Elbas Key Features
• Contracts: one-hour physical power
• Minimum contract size is 1 MWh/h
• Prices in EUR/MWh
• Minimum bid price is 0,1 EUR
• Web based real-time trading system
• Block bids are accepted
46
Elbas Timetable
1. At 14:00 when the deadline for filing complaints on the Elspot market
is closed, the hour-contracts for the next day are opened for trade in
Elbas market. The trade for a specific hour contract is closed one hour
before its delivery.
2. In eastern Denmark the hour-contracts for the next day are opened at
17:00. The trade for a specific hour contract is in eastern Denmark
closed two hours before its delivery.
4.6 Real Time Market (System Operator Market)
This market is managed by each of the TSOs involved, the objectives are to serve as
a tool for the TSOs to balance the power at any time and to provide the imbalance price
for the Participants. Balance is maintained separately in each participating country.
1. Participants submit their bids to the TSOs after the Elspot Market has
closed.
2. TSOs sort the bids for each hour in priority order, according to price.
3. For upward regulation the TSOs picks from the list the unit with the
lowest price.
4. For downward regulation the TSOs picks from the list the unit with
the highest price.
In Norway there is only one real-time price for each hour. The last unit
called in each hour defines the price for that hour.
In the rest of the Nordic countries two prices for each hour are defined,
one for downward and one for upward regulation.
In hours when there is no real-time regulation, the real-time price
corresponds to the area Elspot price.
47
The aim of this market is to guarantee the balance of the system and to
ensure that any participant does not make any profit from imbalances.
Figure 11 present the sequence of the operation in the Scandinavian
markets, Elspot, Elbas and real tieme market.
Spot Price
DemandSupplyPrice
MWh
Bid/Ask
Elspot Elbas Real Time Market
Price
MWh
One-hour contract One-hour contract Bidding Priority Lists
Piror to hour operation During hour operation
Nor Pool Nordic TSOs
Spot
DownwardRegulation
UpwardRegulation
Source: Nord Pool
Figure 11. Sequence of operations in the Scandinavian markets
4.7 Nord Pool´s Financial Market
At present Nord Pool’s financial market comprises of power derivatives (futures,
forwards, contract for differences (CfD) and options) and electricity certificates. There
is no physical delivery on these markets.
Fundamentally, forward and futures contracts have the same function: both types of
contracts allow people to buy or sell electricity at a specific time at a given price.
Futures and Forwards
There are some specific details in which these contracts differ:
1. Futures contracts are exchange-traded and, therefore, are standardized
contracts. Forward contracts, on the other hand, are private agreements
between two parties and are not as rigid in their stated terms and conditions.
Because forward contracts are private agreements, there is always a chance
that a party may default on its side of the agreement. Futures contracts have
48
clearing houses that guarantee the transactions, which drastically lowers the
probability of default to almost never.
2. The specific details concerning settlement and delivery are quite distinct. For
forward contracts, settlement of the contract occurs at the end of the
contract. Futures contracts are marked-to-market daily, which means that
daily changes are settled day by day until the end of the contract.
Furthermore, settlement for futures contracts can occur over a range of
dates. Forward contracts, on the other hand, only have one settlement date.
3. Futures contracts are quite frequently employed by speculators, on the other
hand, forward contracts are mostly used by hedgers that want to eliminate
the volatility of the spot price.
An important and particular service that the Nord Pool offers is that also clears the
contracts traded in the bilateral financial markets that are registered for clearing.
Financial markets represent an important tool for risk management, this method of
hedging has replaced the traditional bilateral trade in physical delivery contracts.
Futures and forwards contracts, options, CfDs, and electricity certificates are traded
continuously, as in other advanced commodity markets. Nord Pool operates an
electronic trading system, PowerCLICK Exchange, where exchange members can trade
in the following ways:
Electronically by using PowerCLICK Trade application installed in the
traders premises. This can either be connected via fixed telecom lines
or via a secure Virtual Private Network channel over Internet.
Via telephone to the financial desk at Nord Pool, where orders are
placed in the trading system on behalf of the member.
The traded volume at Nord Pool’s financial market has increased considerably since
the first products were launched in 1993. The total volume of financial contracts traded
at Nord Pool’s financial market in 2003 was 545 TWh, trade in financial contracts is
about five time’s physical load.
49
4.8 References
Andersson, M. and Thörnqvist. (2006). Liberalisation, privatisation and regulation in the Swedish electricity sector. Department of Work Science Göteborgs University, Sweden.
Bergman, L. (2003). European Electricity Market Integration: The Nordic Experiences. Stockholm School of Economics, Sweden.
Botterud, A., Bhattacharyya, B. and Ilic, M. (2001). Futures and spot prices – an analysis of the Scandinavian electricity market. Discussion paper.
Bye, T. and Hope, E. (2005). Deregulation of electricity markets. The Norwegian experience. Discussion Paper. Statistics Norway, research department.
Damsgaard, N and Green, R. (2003). Regulatory Reform in the Swedish Electricity Industry – Good or Bad?. Working Paper.
Database of historical data from Nord Pool (continuously updated).
Hjalmarsson, E. (2000). Nord Pool: A Power Market Without Market Power Working Papers in Economics. Göteborg University.
Kopsakangas - Savolainen, M. (2002). A study on the deregulation of the Finnish electricity markets. Faculty of Economics and Industrial Management, University of Oulu, Finland.
Mathias, K. (2007). Does Size matter? The Effect of Market Integration on Wholesale Prices in the Nordic Electricity Market. Master’s Thesis in Economics. Stockholm School of Economics.
Web sites:
o Energinet web site: www.energinet.dk
o Fingrid web site: www.fingrid.fi
o Nord pool web site : www.Nord Pool.com
o Statnett web site: www.statnett.no
o Statkraft web site: www.statkraft.com
50
5The Spanish Spot Market
(OMEL)
51
5. The Spanish Spot Market
5.1 Spanish Electricity Sector Summary
At the end of 1997 a new Electricity Law was established 54/1997 by the Spanish
Regulatory Authorities, this regulatory framework crated a new legal and institutional
structure for the Spanish Electricity Sector with the aim of guarantee the electricity
supply to all customers under certain quality conditions at the minimum cost, and the
opening of competition to all agents.
Before the liberalization process, the supply of electricity was carried out by a
conglomerate of privately owned vertically integrated utilities. Generation,
Transmission and Distribution were owned and managed by the same utility over a
certain area. Back in 1985 a public company was created with two roles, to own, plan,
maintain and operate the high voltage transmission network, and to schedule all the
Spanish generation plants through a cost optimization process.
The new Law establishes the unbundling of the regulated activities from the non
regulated activities. Transmission and Distribution as natural monopolies stayed
regulated while Generation and Supply become able to act in full competition.
One of the most relevant innovations introduced by the new regulatory framework
was the creation on a Spot Market as a way to allocate production and determine
wholesale prices where demand and offer met.
Two privately own companies were established to operate the market one for the
technical and the other for the economical management.
• System Operator (Red Eléctrica de España): Responsible for the
system technical management processes which are required to
guarantee the supply of electricity under conditions of quality,
reliability and safety.
• Market Operator (Operador del Mercado Eléctrico): Responsible for
the management of daily and intra-day markets and is also
responsible for settlement and communication of payment
52
obligations, collection rights deriving from the energy contracted in
the aforementioned daily and intra-day electricity production
markets.
5.2 The OMEL Spot Market
Market Description
Since 1998, electricity is traded in a Spot Market and it is organized as a sequence of
markets, the day-ahead market and six intra-day markets that operate close to real
time, managed by the Market Operator.
Most of the transactions are carried out on the day-ahead, this market is composed
of 24 hourly markets that clear once a day. At the beginning of the market it was a
mandatory market, nowadays is voluntary but all the available capacity that are no
tied to a bilateral contract must be traded on the Spot Market.
The intraday market is an adjustment market, and gives the opportunity to the
agents to adjust the previous market results.
Conditions for trading
1. Have granted the condition of Market Agent.
2. Sign the application of adherence to the Functioning Market Rules.
3. Present to the Market Operator a collateral (cash deposit, endorsement, debit authorization) to cover the economic duties.
At present there are 25 producers, around 500 special regime producers, 22 external
agents, 11 distribution agents, 61 retail agents and 7 qualified consumers that
participate in the Spanish Spot Market.
53
5.3 Regulator
The National Energy Commission (CNE) is the regulatory body for the Spanish
energy sector, is attached to the Ministry of Industry, Tourism and Commerce. The
CNE acts as a consultative body on energy matters to the Central State Administration
and the Governments in the Autonomous Regions it also ensures that agents acting in
energy markets comply with the principles of free competition when carrying on their
activity.
5.4 Daily Market
The purpose of the daily (day-ahead) market is to handle electricity transaction for
the following day through the submission of sale and purchase bids by market
participants. All available production units that are not bound by physical bilateral
contracts are obliged to present bids for the daily market, exceptions are made for:
• Units with installed capacity of less than 50 MW
• Production units with installed capacity of more than 1 MW may
provide bids for any period only when they deem appropriate.
• Self-producers and producers under special regime are also not
obligated to declare surplus power to the market.
Buyers on the electrical power market are:
• Distributors: They purchase the electricity to supply consumers under
regulated tariff regime.
• Resellers: They purchase electricity to sell it to other resellers or to
Qualified Consumers.
• Qualified Consumers: At the beginning for a consumer to be
considered “qualified” he must have an annual consumption above
certain limit. This limit decrease with time and nowadays all
consumers are considered qualified and may purchase electricity
directly on the Spot Market through a reseller or by signing a bilateral
contract with a producer.
54
• External agents who are authorized to participate in the market as
seller or buyer.
OMEL Daily Key Features
• Bids can be made between 1 – 25 energy blocks on each hour.
• Electricity sale bids may be simple or incorporate complex conditions.
The following documents or files are generated during the daily process:
• Daily Matched Schedule (PBC) 7: Demand and generation schedule
given on an hourly basis, prepared by the MO on the basis of the
balancing or matching energy sell and buy bids submitted by the
market agents.
• Base Daily Schedule (PBF): PBC + the individualized schedules of
physical bilateral contract whose execution has been communicated
and the energy delivered forecasts for special regime production that
does not submits to the production market, communicated by the
distribution agents responsible for managing those energy deliveries.
• Provisional viable daily schedule (PVP): Schedule given on an hourly
basis, prepared by the System Operator and incorporating any
modifications made to the PBF in order to solve technical constraints
identified for security reasons and to subsequently rebalance
generation and demand.
Daily Timetable
1. Between 8:30 and 10:00, on the day D-1, all the bids for the following
day must be presented by the Market Agents (MA) to the Market
Operator. The market is organized on an hourly basis so the bids and
the energy assigned will be in hourly energy blocks.
55
2. One hour before the closure of the submission period, the System
Operator make available to the MA and MO the information on
demand forecasts and the interchange capacity for the following day.
3. Once the daily market session has finished and before 11:00, the
Market Operator generates the Daily Matched Schedule (PBC) and
sends it to the System Operator, this corresponds to the following day
and the merit order of energy buy and sell submitted to this market.
4. From 11 to 11:30 the System Operator receives the bids for the process
to solve technical constraints.
5. Before 12:00, taking into account the schedule resulting from the daily
market plus the bilateral contracts and the special regime, the System
Operator modifies the production units schedule and obtained the
Base Daily Schedule (PBF).
The Base Daily Schedule includes the Marginal Price for each hour,
generation by each Production Unit and demand by each Purchase
Unit.
6. The System Operator studies the technical viability of the operation
schedule. If the Base Daily Schedule does not comply with safety and
reliability requirements, the System Operator modifies the PBF,
incorporating or removing the production necessary to resolve
technical problems obtaining the Provisional Viable Daily Schedule
(PVP) before 14:00.
7 Corresponds to the acronym in Spanish.
56
The activities and schedule are summarized on the table below.
Daily Market Schedule
Session Opening 8:30
International bilateral contracts reception 10:00
Session closing 10:00
Matching results 11:00
Domestic bilateral contracts reception 11:00
Daily Matched Schedule (PBC) 11:00
Reception of breakdowns of production and demand inputs 12:00
Base Daily Schedule (PBF) 12:00
Adjustments for constraints analysis 14:00
Provisional Viable Daily Schedule (PVP) 14:00
Table 11. Timetable for Daily Market Sessions
Types of Bids
1. Simple Bids: Indicates price and volume
2. Complex Bids: In compliance with simple bid requirements, also
include one or more technical (Load gradients, Indivisibility and
Schedule Stop) or economic conditions (Minimum income).
Load gradients: Establishes the maximum difference between
the starting hourly power and final hourly power of the
production unit to be established, limiting maximum
57
matchable power by matching the previous hour and the
following hour, in order to avoid sudden changes in the
production units that latter are unable to follow from a
technical standpoint.
Indivisibility: Enables a minimum operating value to be fixed
in the first block of each hour.
Scheduled Stop: Enables Production Units that have been
withdrawn from the matching process because they fail to
comply the stipulated minimum income condition to carry
out a scheduled stop for a maximum period of three (3) hours.
The first slot of three hours will be accepted as simple bids
with the condition that the energy offered in bids must drop
in each hour.
120
100
80
60
40
20
23 24 1 2 3 4
Offer Day
Day AheadMW/h
Hours
Figure 12. Schedule Stop Condition
Economic Condition
• Minimum income: Enables bids to be presented in all hours do not
participate in the daily clearing result if the total production obtained
by it in the day does not exceed an income level above an established
amount. The minimum income has a fixed (Cent Euro) and a variable
term (Cent KWh) according to every KWh cleared.
58
Daily Market Price Analysis
On the next graphic and table is presented the volumes and prices of energy traded
on the daily market since the beginning of the Spot Market.
0
50.000
100.000
150.000
200.000
250.000
1998 1999 2000 2001 2002 2003 2004 2005 2006
0
10
20
30
40
50
60E nergy
Price
GWh €/MWh
Figure 13. OMEL Daily Market Price/Volume History
Year
Average Price
€MWEnergy GWh
1998 25,06 154.456
1999 25,94 162.764
2000 30,57 171.556
2001 30,13 177.363
2002 37,4 184.602
2003 28,96 198.046
2004 27,94 201.773
2005 53,68 223.290
2006 50,53 117.811
Source: Omel
Table 12. OMEL Average Prices and Energy traded
• Since the beginning of the market, the traded volumes have had an
annual growth of 5,4% as shown in table 12.
• 1999 the price of sale bids and the matching result were sensitive not
only to the evolution of electricity demand, but also to conditions of
59
hydraulicity and hydraulic producible in the period from January to
December.
• During the year 2001, and coinciding with the continuous low
temperatures that affected Spain and other European countries,
historically high figure were reached for maximum system scheduled
capacity and power, including production under the special regime.
• In 2002 the Special Regime entered the market as market participants.
• The amount of energy traded in 2005 is influenced by both economic
activity and a seasonal component, which prompts significant
fluctuations in trading, with the consequent effect on the financial
volume of trading.
• A very significant decrease has been produced in the energy traded in
the daily markets in 2006. This decrease was because of the following:
o 59,162 GWh were negotiated through bilateral contracts which
suppose a 22.3% of the energy traded in the year.
o After the entry into force the Royal Decree Law 3/2006 there was
a significant decrease of energy resulting from the matching
process in the daily market.
5.5 Intra-day Market
The intra-day Market is an integral part of the electricity power market, the purpose
is to adjust the Provisional Viable Daily Schedule (PVP).
Once there is a technically Viable Daily Schedule published, the Market Operator
starts to run six sessions of the Intra-day market, to provide a market on which
Participants can negotiate and adjust they positions.
The intra-day is a voluntary market where no agent has the obligation to participate.
The only condition is that distribution companies, resellers, qualified consumers and
60
external agents, should have participated in the corresponding session of the previous
daily market or the agents that have executed a physical bilateral contract.
Once the System Operator has all the information on the matched energy it has to
under take a security analysis in order to identify any possible technical constraint
resulting from the matching of bids in each intra-day.
The intra-day market is currently structured into six sessions with the following
hourly distribution sessions:
Session
1
Session
2
Session
3
Session
4
Session
5
Session
6
Session
Opening
16:00
(D-1)
21:00
(D-1)
1:00 (D) 4:00
(D)
8:00
(D)
12:00
(D)
Session
Closing
17:45 21:45 1:45 4:45 8:45 12:45
Publication
(PHF)
19:35 23:20 3:20 6:20 10:20 14:20
Schedule
horizon
28
Hours
24
Hours
20
Hours
17
Hours
13
Hours
9
Hours
Hourly
Periods
21-24 1-24 5-24 8-24 12-24 16-24
Table 13. Timetable for Intraday Sessions in OMEL
OMEL Intra-Day Key Features
• Electricity sale and purchase bids may incorporate Simple and
complex bids
The following document or files is generated during the intra-day process:
• Final hourly Schedule (PHF): The scheduling established by the
System Operator after each one of the successive sessions in the
61
intraday market on the basis of the matched energy sell and buy bids
submitted in each session for each scheduling period. It also takes
into account the withdrawal from this schedule of any bids giving
rise to technical constraints and any other additional bids needed for
the subsequent rebalancing of production and demand as well as the
production and consumption schedules established previously.
• More than one bid can be done per production or purchasing unit in
one hour.
Electricity purchase and sale bids may be simple or incorporate complex conditions.
Simple bids consists in a price and an amount of energy for each hour, complex
conditions include the following:
• Load Gradient
• Minimum income or maximum payment
• Complete acceptance in the matching process of the first block of the
bid.
• Minimum number of consecutive hours with complete acceptance of
the first block of the bid.
• Maximum matched energy
The matching process and results for the intra-day market is presented as follows:
Intra-Day Market Timetable
1. The participants submit their bids according to the session schedule.
2. The Market Operator cleared the purchase and sale bids by means of
the simple or complex method.
3. The System Operator resolves technical restrictions. Selecting
withdrawal of all bids which resolve the restrictions identified and
those other additional bids necessary to restore balance between
production and demand. In order to select a bid, it will use the
economic order sent by the Market Operator.
62
4. The Final Hourly Schedule (PHF) is obtained. The System Operator
publishes the PHF at least 15 min in advance of the start of the
implementation time horizon of the corresponding session.
5. The price in each hourly schedule will be equal to the price of the last
block of the sale bid of the last production unit whose acceptance has
been required in order to meet either partially or totally, the purchase
bids at a price equal to, or greater than, the Marginal Price.
The bid structure and the matching processes of the hour ahead market are similar
to the daily process except for the fact that the solution will be added to the previous
market results, and that some of the complex conditions, like gradients for example,
need to be applied over the complete schedule (previous market plus the current hour
ahead result). Each bid in the hour ahead market could be divided in up to 5 hourly
blocks and, as already indicated; any agent could present as many bids as he wants for
the same unit, mixing selling and purchasing bids
On the next graphic is presented the volumes and prices of energy traded on the
Intra-day market since the beginning of the Spot Market and on the table is represented
the figures that supports the graphic.
0
5.000
10.000
15.000
20.000
25.000
30.000
1998 1999 2000 2001 2002 2003 2004 2005 2006
0
10
20
30
40
50
60E nergy
Price
GWh €/MWh
Figure 14. OMEL Intraday Market Price/Volume History
63
Year
Average Price
€MWEnergy GWh
1998 19,91 3.876
1999 24,79 8.744
2000 31,09 11.487
2001 29,65 14.808
2002 37,3 12.651
2003 28,75 17.758
2004 28,68 24.928
2005 55,01 20.488
2006 49,8 21.169
Source: OMEL
Table 14. OMEL intraday average prices and energy traded
• In 1999 the trading by Production Units in this market was greater
than trading by Purchasing Units.
• The energy traded in the intraday market in 1999 represented a 5.4%
of the volume negotiated in the daily market
• In 2004 the volume of energy traded on the intraday was 40,4% more
than the previous year descending in volume traded in 2005 18%.
• Purchase units in this market are scarce, particularly in the case of
distributors, whose weight is preponderant in the overall number of
purchase units. This is because they are unable to obtain the cost of
the deviations in a useful amount of time, and also because it is hard
to forecast demand.
64
On the next graphic is presented the historic volatility of the final prices 8 of
electricity on the Spot Market.
0
10,
20,
30,
40,
50,
60,
70,
80,
90,
ene-
98
jun-
98
feb-
99
ago-
99
mar
-00
sep-
00
may
-01
oct-0
1
abr-0
2
nov-02
jun-
03
ene-
04
jul-0
4
feb-
05
sep-
05
ene-
06
may
-06
€MWhHistoric Volatility 360 %
Figure 15. OMEL Price Historic Volatility
Figure 16 summarizes on a schematically way the timetable for the daily and intra-
daily markets.
8 Final Prices include: Daily and Intra daily price, Technical constraints, System Operating Process
source: OMEL and Power Guarantee cost.
65
89
1011
1213
1415
1617
1819
2021
2223
241
23
45
67
89
1011
1213
1415
1617
1819
2021
2223
24
D-1
D
Via
ble
Dai
ly
Sch
edu
le
Bas
e D
aily
Op
erat
ing
Sch
edu
le
1st
Intr
aday
2 In
trad
ay
3 In
trad
ay
4 I
ntr
aday
5 In
trad
ay6
In
trad
ay
28
H M
ark
et
24
H M
ark
et
20
H M
ark
et
17 H
Mar
ket
13 H
Mar
ket
9 H
Mar
ket
8:30
-10
:00
Bid
Su
bm
issi
on
Fin
al D
aily
V
iab
le
Sch
edu
le
Figure 16. Daily and Intradaily Timetable in OMEL
66
5.6 System Operator Process
This Market is managed by the TSO, it includes the solution of technical constraints,
the procurement of Ancillary Services and the management of real time operations.
1. The System Operator establishes the Secondary reserve requirement
for each one of the hours for the next day and publishes to the
participants before 14:00.
2. The System Operator opens the bid receipt process at 14:00 and closes
at 15:30.
3. At 16:00 publishes the results of the Secondary reserve for each
period of the following day.
4. At 21:00 publishes the tertiary reserve requirements
5. Before 22:00 the participants submit their bids for tertiary reserve
both to upward and to downward. (This offer is mandatory for all the
available energy on each unit).
If any incident occurs where there is an imbalance between generation and
consumption, in the real time, primary and secondary reserves are immediately
activated automatically to correct the imbalance with the consequent loss of reserve.
Whenever the secondary reserve is reduced below the desirable level for security
reasons, the System Operator requires the use of tertiary reserve, already procured, to
regenerate secondary reserve.
Figure 17 shows the sequence of processes in the Spanish electricity market.
67
System Operator ScheduleMarket Operator
Forward Tradingwith physical
delivery (OMIP)+
Daily Market
6 Intraday Markets
International BilateralContracts
Daily Matched Scedule (PBC)
Domestic BilateralContracts
Base Daily Schedule(PBF)
Technical ConstraintsSolution
Ancillary ServicesViable Daily Schedule
(PVP)
Other technical processes
Final Houry Intra-DaySchedule (PHF)
Real-time processReal-time
Schedule(PHO)
Figure 17. Sequence Processes in the Spanish Market
5.7 Iberian Market
In 1998, the Spanish and Portuguese Public Administrations began conversations
and studies to progressively eliminate obstacles for the creation of the Iberian
Electricity Market (MIBEL) for the benefit of their consumers, encourage competition in
generation and trading and to allow open and equal access to all the market
participants.
Anticipating the creation of the Internal Electricity Market in Europe, the
Portuguese and Spanish markets signed in 2001 a Cooperation Protocol in order to
develop the MIBEL.
In this market, electric companies from Spain and Portugal will compete to establish
clients in both countries that on the whole add more than 30 million potential
customers (53 million users) who will contract for energy service with the company
that offers the best prices. This change in the Iberian Market will establish an important
precedent for the European Union.
The MIBEL started its operations on July 2006 with the Financial Market regarding
the energy from Portugal and Spain and in July 2007 the Spot Market was introduced
in Portugal. From that date the prices in the two countries are the same, if there is no
68
transmission congestion between borders. At present this market has two market
operators:
• OMEL (Spanish Market Operator): Spot market, which includes daily
and intra-daily markets, it is managed by the current market operator
of the Spain.
• OMIP (Portuguese Futures Market Operator): Future market, which it
is managed from Portugal. This market does not require physical
delivery, allowing the possibility of exclusive financial settlements.
It is foreseen at latest 2008 OMEL and OMIP merges into a single market operator
(OMI).
Spot market agents can be producers, self-producers, external agents (non resident
entities status), traders, qualified representatives and consumers. With entry into effect
of the International Agreement signed in Santiago de Compostela, on October 1st. 2004,
the authorised entities in Portugal can act on the spot market benefiting from an
automatic recognition, no longer being considered external agents.
System Operation: the System Operators of both parties are responsible for the
system technical management in order to guarantee the continuity and security of the
electrical supply, through the management of the system adjustment services.
Figure 18. Iberian Market Results
MWh
0,0
0,50
1,00
1,50
2,00
2,50
3,00
3,50
4,00
4,50
5,00
5,50
6,00
Prices in Spain
Prices in Portugal
July 07 August 07
69
Figure 18 illustrates the evolution of prices in the MIBEL market for the first two
months of operation. In the following table is presented a comparison of the volumes
traded before and after the MIBEL started.
Month Volume Traded GWh
May 2007 15.941
June 2007 15.862
July 2007 22.202
August 2007 19.990
Source : Omel
Table 15. Volumes traded before and alter MIBEL
70
5.8 References
Gonzalez. JJ and Basagoiti, P. (2002). Spanish Power Exchange Market and Information System Design concepts and operating experience. Working paper Madrid, Spain.
OMEL Annual Report 2006
OMEL Market Rules
Web sites:
o OMEL web site: www.omel.es
o OMIP web site: www.omip.pt
71
6The Romanian Spot Market
(OPCOM)
72
6. The Romanian Spot Market (OPCOM)
6.1 Romanian Electricity Sector Summary
During 1998-2000 the Romanian power sector was restructured. In 1998 was set-up
the first Government Decision no. 365/98 which establishes the unbundling of the
vertically integrated power company RENEL into separate companies.
• National Company Nuclearelectrica
• Autonomous Regie of Nuclear Activity
• National Electricity Company (CONEL) and three subsidiaries
o S.C Termoelectrica S.A – Electricity and heat generation
o S.C Hidroelectrica S.A – Hydro electricity Generation
o S.C Electrica S.A – Electricity distribution and supply
In 1998 the National Electricity and Heat Authority (ANRE) was created as a public
institution responsible for the set up and implementation of a regulatory framework
for the electricity sector and market operation.
In 2000 the company CONEL was splitted into the following independent fully
state-owned companies according to the Government Decision no. 627/2000.
• S.C. Termoelectrica S.A.
• S.C. Hidroelectrica S.A.
• S.C. Electrica S.A.
• C.N.Transelectrica S.A (System Operator)
o S.C. OPCOM S.A (Market Operator)
With the creation of the subsidiary OPCOM, the day-ahead market started its
operations. New trading rules were developed in 2003 / 04 and a Commercial Code of
the Wholesale Electricity Market was adopted in 2004.
73
Price
Quantity
Load Forecast
SMP
Price
Quantity
MCP
The structure of the wholesale electricity market is divided in two segments, the
regulated market and the competitive market. The regulated market is dedicated to the
electricity traded under regulated contract basis and the competitive market the
electricity is traded through bilateral contracts or on the Spot Market.
6.2 The OPCOM Spot Market
In 2000 the Power Market Commercial Operator (OPCOM) was set up to manage
the Day-ahead Market (DAM).
Evolution of the Spot Market
In 2005 some changes were introduced on the day-ahead market.
One of the most important changes introduced is the two sided day-ahead
voluntary auction (e.g. based on both demand and supply side bids). Before 2005 the
Market Operator aggregates the sell offers, elaborates the load forecast and obtain the
System Market Price (SMP), now the Market Operator aggregates the sell and buy
offers and obtain the Market Clearance Price (MCP) (see figure 19).
Figure 19. One and Two side Auction
Other innovation is the operation of a Balancing Market, the introduction of a
centralized market for Bilateral Contracts and Green Certificates.
74
Bilateral Contracts Market
• This is a centralized market for bilateral trade where electricity is
traded based on physical deliverable energy. Opcom acts as the
market administrator and its role is to ensure a transparent and non-
discriminatory framework. The trade results are materialized into
contracts conclusion, complying entirely with the provisions of the
framework contract subject to auctioning process.
Green Certificate Market
• A Green Certificate Market is a parallel market from the Day-Ahead
Market in which the Green Certificates9 are traded. The suppliers are
obliged to buy a fix quota, established by the Authority Regulator, of
electricity that comes from a renewable source. The Producers
receives for each MWh of electricity delivered into the network one
Green Certificate, which is sold on the Green Certificates Market. This
mechanism promotes the production of electricity from “Clean”
energies because represents an additional income for the renewable
producers.
9 A Green Certificate is a document which proves that a specific quantity (MWh) of electricity was
produced from a renewable energy source.
75
On the following table are presented the main features of the new Trading Platform
introduced in 2005.
Table 16. OPCOM Market Evolution
Conditions for trading
The registration and participation on the OPCOM day-ahead market is allowed to
any legal person who is licensed by the Regulatory Authority (ANRE) as producer
and/or supplier of electricity.
The following documentation is required to become a participant:
• Licence from the Romanian Energy Regulatory Authority for
Electricity Producers and Suppliers
• Registration as Balance Responsible Party with TSO or to transfer the
balance responsibility to a BRP that has been registered
• Letter of intention to OPCOM
• Sign the day-ahead market Accession Agreement
Former Trading Platform
(Before 2005)
New Trading Platform
(From 2005)
Mandatory Day-Ahead Voluntary Day-ahead, Balancing Market in
real-time
Ancillary services were purchased at
regulated prices
Ancillary services are purchased trough
market mechanisms
One side auction Two side auction
Centralized scheduling Self-scheduling
The imbalances were no penalized The imbalances are penalized
e-mail communications Web based technology communications
76
• Deposit financial collateral and pay an access tariff to participate on
the DAM
• USB Token identification key and installed software Active Card.
Today there are 98 participants that operate on the day-ahead market.
6.3 Regulator
The Romanian Energy Regulatory Authority (ANRE) is the responsible entity for
the creation and implementation of the regulatory system. ANRE issued on 2003 the
Commercial Code of the Wholesale Electricity Market for the administration of the
Romanian wholesale electricity market, also in 2003 the Electricity Law No. 318 was
settled.
6.4 Day Ahead Market (DAM)
The objective of the DAM market is to match the sell and the purchase offers
together on a transparent and non-discriminatory manner. The Romanian market has
two trading zones, one is the National Trading Zone which corresponds to the part of
the national power system and the Border Trading Zone which is the neighbouring
countries around.
The reason of this classification is because the congestion can only occur in the lines
connecting Romania with its borders. The participants submit offers for each interval
of the day separately for each trading zone.
According to the current regulation OPCOM performs the settlement for the day-
ahead market, Balancing Market and Balance Responsible Parties Imbalances.
Producers and auto-producers, suppliers and network operators are authorized to
trade on the Spot Market. Eligible consumers are only allowed to trade via bilateral
contracts.
77
OPCOM Key Features
• The trading interval is one hour.
• Each offer may contain up to 25 Block bids.
• For each Trading Zone, a DAM participant may submit only one
purchase offer and one sale offer for each trading interval.
• The purchase offers and sale offers cannot be combined into one offer.
• The price scale has a minimum and maximum price limit.
• Simple offers.
• Electronically trading system.
• All the transactions are in Romanian currency.
Day Ahead Market Timetable
1. At 7:00 on the D-1 the starts the opening session for the submission of
bids.
2. At 8:00 the TSO submit to the Market Operator the Available Transfer
Capacity
3. The deadline for submit the orders is at 11:00 on the D-1.
4. 15 Min after the submission of an offer, the Market Operator will send
a confirmation receipt of the offer to the DAM participant.
5. At 12:00, the Marker Operator calculates and publishes the Market
Clearing Price (MCP) for each trading interval and submits the
trading confirmation to the Participants.
6. The Participant can present their objections to the Market Operator
related to the content of the trading confirmation at 12:30.
78
7. At 13:30 Opcom establishes and submits Physical Notifications to the
Balance Responsible Parties.
8. At 14:00 the Balance Responsible Parties submit the Physical
Notification to the TSO
9. At 15:00 the TSO verifies and approves the Physical Notification.
After the receipt and the validation of the offers, the Market operator will determine
for each trading interval the demand and supply aggregated curves:
• The aggregated supply curve will be determined by aggregating all
the price-quantity pairs of the validated sell offers into a sole curve.
The price – quantity pairs will be ranked by increasing prices.
• The aggregated demand curve will be determined by aggregating all
price-quantity pairs of the validated buy offers into a sole curve. The
price – quantity pairs will be ranked by decreasing prices.
• The intersection point between the demand and supply curves
represents the equilibrium where the demand and the supply will be
in balance and determines the Market Clearing Price for the National
trading Zone.
All the relevant information will be communicated to the DAM participants referred
to the traded concluded in the Day Ahead Market. Based on trade confirmations
corresponding to the trading day, the Market Operator will establish the Physical
Notification corresponding to the DAM transactions and will send them to the Balance
Responsible Parties designated by the DAM Participants. According to the Commercial
Code provisions, by signing the DAM Agreement, starting with the registering
moment as DAM participant, the trades concluded in Day Ahead Market are firm
commercial commitments.
Both the Balance Responsible Parties and the Market Operator have to submit to the
TSO the trades concluded, in order to be taken into consideration when calculate the
net contractual position of the Balance Responsible Party. In order to connect to the
trading system, the DAM participant has to use a unique USB Token identification key,
79
together with the client installed software Active Card. The DAM participants can
obtain and use the USB Token after signed the DAM Agreement with the Market
Operator.
In the next graphic is presented the spot prices in the Romanian daily market after
the implementation of the new trading platform in 2005
0
5
10
15
20
25
3035
40
45
50
55
60
65
70
jun
-05
jul-
05
ago-
05
sep
-05
oct-
05
nov
-05
dic
-05
Jan
-06
feb
-06
mar
-06
abr-
06
may
-
jun
-06
jul-
06
ago-
06
sep
-06
oct-
06
nov
-06
dic
-06
ene-
07
feb
-07
mar
-07
abr-
07
may
-
jun
-07
jul-
07
ago-
07
Price
€/MWh
Source: OPCOM
Figure 20. OPCOM Daily market Results
The spot price often reflects not only the result of the cost variation of the fuel type,
but also the outcome of meeting the demand and supply volumes.
6.5 Balancing Market
The Balancing Market is managed by the Balancing Market Operator, established
within the Transmission System Operator (Transelectrica). His task is to ensure that the
security is maintained by buying and selling energy at the Balancing Market. The
Balancing Market is mandatory to licensed producers that operated dispatchable units,
qualified producers to provide Ancillary Services and to licensed consumers that
operates dispatchable loads (Balancing Market Participants).
80
The Balancing Market in Romania is the most particular Balancing Market in
Europe. First the bidding for fast, slow and Secondary regulation are tender all
together in the daily offer, it exist another tender for the slow tertiary regulation called
standing offer. Second the rules require that the participants make only one offer with
several price-quantity pairs for the entire capacity of the generation unit, this kind of
bids is called multi-block bids.
The Balancing Market Participants have the obligation to offer all their production
capacities and dispatchable loads available after the daily schedule.
The Balance Market Operator, established within Transelectrica, is the entity
responsible for the registration, collection and verification of the offers from the
Balancing Market Participants.
There are three products in this market.
• Secondary Regulation
• Fast Tertiary Regulation
• Slow Tertiary regulation
Balancing Market Key Features
• Daily Offer of maximum 10 pairs price- quantity
• The settlement is performed by OPCOM
• Partial or total acceptance of the offers
Balancing Market Timetable
1. At 16:30 the TSO checks and approves the Physical Notification. The
Balancing Market starts after the approval of the Physical
Notifications for the Delivery Day.
2. At 17:00 the TSO publishes: the aggregated schedule for planned
production; consumption corresponding Physical Notifications of
81
Suppliers and demand forecast performed by TSO, respectively;
exports and imports. The Balancing Market Closing Time.
3. The Balancing Market Operator confirms the validation offer to the
Balancing Market Participant not later than 18:30.
4. At 19:00 the BMO transmit the Validated Daily Offer to the settlement
Administrator.
5. On the delivery day (D) the selection of offers take place according to
the system needs. Each dispatch interval (1 hour) is split into four 15
min intervals which are again divided into three 5 minute balancing
intervals. The first 5 minute interval is for the Secondary regulation
the next interval for the Fast Tertiary and the third for the Slow
Tertiary.
82
6.6 References
Budulan, P. (2003). Paper accepted for presentation at 2003 IEEE Bologna Power Tech Conference, June 23-26, Bologna, Italy. Electricity Market Development in Romania.
Caracasian, L. Overview regarding the Romanian electricity sector regulatory framework development. Romanian Electricity and Heat Regulatory Authority – ANRE. Bucharest, Romania.
Constantinescu, J. (2003). Romanian Electricity Sector Reform, Market Opening and Challenges.
Kennedy, D. (2006). World Bank Framework for Development of a Power Market in South East Europe. Energy and Mining Sector Board Discussion Paper. Paper No. 15, World Bank.
Liciu, N. Power sector privatization in Romania. Proceedings of the Power Sector Privatization in Central and Eastern Europe and Eurasia Conference.
OPCOM Annual Report 2005, 2006
Web sites:
o ANRE web site: www.anre.ro
o OPCOM web site: www.opcom.ro
o Transelectrica web site: www.transelectrica.ro
Wolak, F. ( 2000). Report on Electricity Industry Restructuring in Romania. Department of Economics Stanford University.
83
7The French Spot Market
(Powernext)
84
7. The French Spot Market (Powernext)
7.1 French Electricity Sector Summary
The French Law was adopted in 2000 with the aim for achieving the following
primary goals:
• Energy independence and security of supply
• Protection of the environment
• Energy at a low cost for households and industries
Many people attribute the late start of the liberalization process in France to
different and divided opinions of the electricity sector in previous administrations.
France adopted only the minimum of the obligations defined by the EU electricity and
gas directives which was unable to move on privatization issues, and unbundling of
activities in this industry.
France is the second largest electricity market in Europe, just behind Germany. The
French electricity market is dominated by Electricité de France (EdF), which is mostly
publicly owned (87,3%). EdF was the last major state-run electricity monopolist in the
EU, while most of France’s neighbours have privatized their electricity companies.
The delay to partially privatize their legal structure was mainly because this process
go along with several complex issues, including pension reform, accounting
transparency, and potential large long-term investments in the nuclear power sector.
At present France Electricity Law is in compliance with the EU Electricity Directives
vision, in addition to the implementation for the full opening of the market to all
consumers, non-discriminatory access to the grids has been guaranteed by the
independence of EdF from the TSO, pricing has been regulated for the usage of the
transmission and distribution grids, an authorization system has been instituted for
electricity production sites, and the French Electricity Regulation Commission (CRE)
has been created.
85
Nowadays France is the second larges electricity market, consumer and generator in
the European Union behind Germany. It is considered among the largest exporters, in
2005 exports 11,43 % of the electricity generated.
7.2 The PowerNext Spot Market
The establishment of the Power Exchange took place in 2001 with the creation of
Powernext Day-Ahead Market, this market offers hourly contracts with physical
delivery the day after trading within the French hub.
The physical delivery of the traded electricity is the responsibility of the
Transmission System Operator. Powernext declares to the TSO on a daily basis the
volume traded by its members.
In order to facilitate the clearing and settlement transactions, Powernext joint forces
with LCH.Clearnet which act as central counterparty for financial commitments. Each
member has to have a cash guarantee deposit, this deposit is adjusted on a daily basis,
according to the purchase average of the five preceding days. LCH.Clearnet works
with the Bank of France for the settlement process.
Powernext manages different energetic markets:
1. Powernext Day-Ahead, Continuous and Intraday market: are short
term markets that operate every day.
2. Powernext Futures: provides electricity price risk hedging and
arbitrage strategy at medium term with a liquid market offering 3
years of maturities.
3. Powernext Carbon: provides a preferred risk management tool for
European companies committed to the process of greenhouse gas
emissions reduction, and compelled to match their actual CO2
emissions with CO2 allowances according to the European Directive.
4. Powernext Balancing GRTgaz: allow the Transmission System
Operator GRTgaz to progressively cover its daily balancing needs
through a market based mechanism. The prices of the transactions
86
will serve gradually to valorise the daily imbalances of the shippers
on the 4 balancing zones managed by GRTgaz.
Also provide weather indices in order to provide a tool for risk management.
Powernext shareholders 10 are among the major actors of electricity and financial
markets around Europe. The detail is presented on the figure below.
HGRT 17,0%NYSE E uronext 34,0%
BNP Paribas 6,8%
E dF 6,8%E lectrabel 6,8%
SG 6,8%
Total 6,8%
Atel 5,0%
E nel 5,0%
E ndesa 5,0%
Figure 21. Powernext Shareholders
Powernext market is ruled by France Financial and Electricity Acts. The Electricity
Act regulates the legal capacity of French players as well as their scope of intervention,
the Finance Act regulates the matching orders and transaction security.
10 Nyse Euronext: Merger between Power Exchanges. BNP Paribas: Banking Group. EdF, Electrabel,
Enel, Endesa: Energy companies TOTAL: Oil Company. SG: Energy tradet. Atel: Service provider.
HGRT: Holding TSO.
87
Option 1 Option 2
Entrance Fee € 25.000 € 10.000
Annual Fee € 30.000 € 25.000
Execution Fee 0,06 €/MWh 0,09 €/MWh
Registration Fee 0,01 €/MWh 0,01 €/MWh
Clearing Fee 0,01 €/MWh 0,01 €/MWh
Fixed Fees
Variable Fees
Conditions for Trading
To become a member of Powernext the new participant must submit a Membership
Application that includes the following:
• Trading Agreement
• Clearing Agreement
• Balance Responsibility Contract signed with RTE or and Agreement
with a third party’s balance perimeter
• Agreement between the bank and the participant
• Receipt of the registration to the Ministry in charge of energy
• Companies complementary documentation
At present there are 63 members on the Day-Ahead Auction and 32 on the Day-
ahead Continuous and Intraday.
In order to operate on the Day-Ahead markets, Powernext apply the subsequent
tariffs:
Table 17. Powernext Trading Fees
88
7.3 Regulators
The Autorité des Marchés Financiers (AMF) is the body in charged of the regulation
and on the monitoring of both regulated and OTC markets. It supervises the
compliance of investment service providers with the proper working rules. Supervise
the compliance of the transactions performed on a regulated exchange.
The Electricity Regulation Commission (CRE) has two main duties concerned of the
access rights to the public electricity transmission and distribution grid and the
electricity market regulation.
Powernext is obliged to submit information in relation to the Day-Ahead contracts
to AMF and CRE in order to detect some irregular market behaviour.
7.4 Day-ahead market
Powernext Day-Ahead Auction consists in an organized, anonymous
marketplace for trading standard contracts for the physical delivery for the next day of
electricity within the French electricity grid. It concentrates market liquidity with
hourly products. The price resulting from the auction is considered as a price reference
to other electricity markets.
The Market is accessible to producers (French and foreign), suppliers, industrial
consumers, financial institutions and traders.
On July 2007 Powernext launched two segments for trading as a complementary for
the daily auction:
Powernext Day- Ahead Continuous
Powernext Day-Ahead Intraday
The interface for this segment consist on a continuous trading system which
operates with screens which are available at all times and enables the visualization of
the whole market in a worksheet format that can easily be modified by the participant.
89
Block Bid
Hours 1-4
Hours 5-8
Hours 9- 12
Hours
13-16
Hours 17-
20
Hours
21-24
Block Bid
Baseload
1to24
Peakload
9 to 20
Hours
1-6
Hours
1-8
Hours
9-16
These new segments are open to trading 7 days a week.
Day-Ahead Auction
The electricity is traded Electricity traded on the trading day D-1 for delivery the
following day in 24 hourly intervals. The auction takes place at 11:00, 7 days a week
(non-business days included).
Two types of bids can be submitted in this market.
1. Simple Bids: Consist in an order form containing up to 256
price/quantity combinations for the 24 one-hourly periods of the
following day.
2. Block Bids: Participants have the possibility to submit Block Orders
that link a minimum of continuous four hours of the day. Block bids
are necessarily price-limited as only a single price (between 0.01 and
3000 €) can be entered per block. Each trading day, the participants
are allowed to submit 8 block bids per portfolio and per block type.
Only 3 portfolios per participant are allowed to submit block bids.
The maximum quantity allowed is fixed at 100 MW per block. By
default, the offered block products are:
Table 18. Powernext Default Offer Block Products
90
Day-Ahead Continuous and Day-Ahead Intraday
The trading segment for the Day-Ahead Continuous is open every day from 7:30
to11:30 for trading Blocks deliverable the following day. The standardized blocks are
the same blocks presented on table 11.
The trading segment for the Day-Ahead Intraday is open every day from 7:30 to
23:00 for trading Individual Hours and Blocks to be delivered on the same day and on
the following day. The participant can trade the standardized Blocks, table 11, or on
user-defined blocks linking at least 2 consecutive hours.
Different types of bids can be submitted on these two markets:
1. Limit Order: Specify a quantity and a limit price. This bids remains
on the Order Book 11 until they have been executed or until the
trader cancel them. They can be entered during or outside of the
trading hours. Limit orders can be executed:
a. Fill-or-Kill, orders are executed for the entire quantity
only and remain in the Order Book until they are filled.
b. Fully-or-Partially, orders can be partially matched with
opposite orders for smaller quantities, in which case the
unexecuted quantity remains in the order book.
c. Iceberg, the participant specify an initial quantity and a
hidden quantity with a price set at the beginning,
however this price can be changed by the participant as
the trading proceeds.
2. Market-to-Limit Order: Are intended to be executed immediately
against the best opposite order or a fraction of it. This kind of bid
triggers a trade for the specified quantity as soon as it is entered. Only
can be entered during the trading session.
11 Order Book is a consolidation of Orders placed in the trading system.
91
3. Must-be-filled Orders: These kinds of orders do not specify a limit
price. Volumes for such orders must be smaller than o equal to the
total volume of opposite orders. It triggers a trade for the full
specified quantity as soon as it is entered, where necessary by
matching it against more than one opposite orders. The Fill-or-Kill
condition is taken into account. Orders can be entered only during the
trading session
Submitted orders do not mention any validity date and remain in the Order Book
until they are executed, withheld or cancelled.
Day-Ahead Auction Timetable
1. Market Participants can enter, modify or cancel orders in the system
during the pre-auction period, which begins of Wednesday of the
previous week at 17:00 and ends at 11:00 on the trading day (D-1).
2. After receiving all the bids, the orders are aggregated per hour. The
algorithm determines the Market Clearing Price (MCP) and the
Market Clearing Volume (MCV). At approximately 11:15 the results
are informed to the participants.
3. After the auction results are validated at 11:30, Powernext nominates
to the TSO the net hourly volume traded by each participant. (see
figure 22).
Deadline to submitt the bids
Begin the submittion of offers
17:00
W-1
11:00
Publication of the results
Pre-Auction Period
D-1
11: 15
Wednesday
11: 30
Nomination to the TSO
Figure 22. Powernext Day-Ahead timetable
92
Daily market price analysis
On the figure below is presented the evolution of volumes and prices since the
beginning of Powernext and the table shows the figures that supports the graphic.
0
5.000
10.000
15.000
20.000
25.000
30.000
2001 2002 2003 2004 2005 2006 2007
0,00
10,00
20,00
30,00
40,00
50,00
60,00E nergy
Price
€/MWhGWh
Figure 23. Powernext Day-Ahead Market Price/Volume History
Source: Powernext
Table 19. Powernext Day-Ahead prices and volumes
The spot prices vary depending on the season. On Powernext the
record was set up on December 19th 2001 when in H19 the price was
Year
Average
Price Euro
MWh
Energy
GWh
2001 38,70 24
2002 21,19 2.623
2003 29,23 7.482
2004 28,13 14.180
2005 46,67 19.670
2006 49,29 29.600
2007 29,71 26.992
93
traded at € 400.00 MW/h. The lowest record price was on June 2nd
2002, the average price dropped to € 6,631 MW/h.
• The year 2003 was the hottest and dry year since 1950.
• On average, 2006 was much warmer than usual, ranking as the
second-hottest year since 1950 (after 2003). In terms of precipitation,
the overall situation improved following the large shortfall recorded
in recent years. The winter period was cooler that the ten-year
average. March recorded heavy precipitation. After spring, France
experienced another heat wave in July as temperatures soared in the
last three weeks of the month.
• On Powernext Day-Ahead, prices correctly followed changing
weather conditions.
• Price volatility 12 , shown on figure 24, on Powernext is high, since the
market opened volatility on baseload prices has been running at
nearly 900%, at it is shown on figure 24.
0,00
10,00
20,00
30,00
40,00
50,00
60,00
70,00
80,00
90,00
nov-01
jul-0
2
feb-
03
ago-
03
mar
-04
sep-
04
abr-0
5
nov-05
may
-06
nov-06
jun-
07
€MWh
Historic Volatility around 900 %
Figure 24. Powernext Historically Price Volatility
12 Historically Volatility reflects the price fluctuation. It is measured by the annualised Standard
Deviation of the daily changes in the prices.
94
7.5 Balancing Mechanism (System Operator)
France does not have any “Reserve Market”. The Balancing Market is only used to
trade Tertiary reserve. Primary and Secondary control are offered with the generation
schedules.
In France does not exist the term Slow and Fast Tertiary, instead they used this
terminology:
• Supplemental Fast Reserve
• Decremental Reserve
• Reserve at Peak
• Delayed Reserve
In 2003 the Balancing Mechanism was introduced by Réseau de Transport de
Electricité (RTE), French TSO, the role of this system is to re-establish the balance
between supply and demand.
The power network is constantly affected by a range of unforeseen factors that can
disrupt the balance between the supply and demand for electricity. These are mainly
compensated for by automatic control systems, which are installed directly at
generating facilities. However, some such unforeseen factors can be major (e.g. the
sudden shutting down of a generating facility). It obtains this reserve by calling upon
generators and consumers connected to the network to modify their operating
schedule at short notice.
The TSO obtains the reserve by calling the market participants to submit offers for
upward and downward. RTE selects these offers according to their price and the
technical restrictions indicated by the players concerned.
It works according to market rules, and helps to guarantee the security of the power
system.
95
7.6 Trilateral Market Coupling
In November 2006 the Power Exchanges of France, Belgium and the Netherlands
decided to couple in a decentralized manner their Day-ahead Market through their
national Power Exchanges in collaboration with the Transmission System Operators.
This coupling is called Market Coupling and consists in a simultaneous allocation of
energy and interconnection capacity. On table 20 is presented the countries with their
respective Power Exchanges and system operators.
Table 20. Participants involved in the TLC
Market Coupling is an implicit auction where the trading of electricity and the
allocation of capacity are merged into a single operation optimizing cross-border trade
and stimulating liquidity in the involved markets.
The three Power Exchanges continue to exist as separate markets with their own
trading platform, contracts and clearing, minimal changes where made to their local
market arrangements to meet the demands for the Trilateral Market Coupling 13 . The
Order Book of the coupled markets is pooled, so the market offering the lowest price
can export electricity to the market where the price is highest. If the cross-border
transmission capacity is sufficient the prices in the markets converge, if not the prices
are different.
Trilateral market coupling has already had a clear positive impact. There has been
strong price convergence across the three coupled day-ahead markets, with a single
13 Market coupling between three countries.
Country Power Exchange TSO
France Powernext RTE
Belgium Belpex Elia
Netherlands APX Tennet
96
price the large majority of the time (and separation in to 3 price areas being very
occasional). The trend seems to be that convergence is increasing.
97
7.7 References
CRE Annual report
Finon, D. (2001). The Destabilisation of the French Electricity Supply Industry Nascent competition in an open environment. Institut D’économie et de Politique de l’énergie, France.
Finon, D. (2001). Introducing Competition in the French Electricity Supply Industry: The Destabilisation of a Public Hierarchy in an Open Institutional Environment. Massachusetts Institute of Technology Center for Energy and Environmental Policy Research. CMI Working Paper 21.
Finon, D. (2001). Reforms in the French power system: from weak contestability to effective competition?, Energy Policy, n.29.
Powernext Annual report
Web sites:
o APX web site : www.apxgroup.com
o Belpex web site: www.belpex.be
o CRE web site: www.cre.fr
o EdF web site www.edf.fr
o Powernext web site: www.powernext.fr
98
8Key features of the Electricity
Spot Markets
99
8. Key Features of the Electricity Spot Markets
The introduction of competition in the wholesale and retail electricity markets
has been a key element for the development of new trading platforms such as the Spot
Markets. A number of questions come up when designing a Spot Market and that have
to be properly addressed in order to achieve a successful trading mechanism; for
example the type of bids (simple and complex), the auction process (one side, two
side), determination of the clearing price (Marginal Price, Pay-as-bid), single market or
separate markets for Balancing Energy, etc.
The Spot Markets where created to achieve several objectives, one of the most
important goal is to facilitate the trade and promote competition among the
participants creating the necessary liquidity that create confidence among the
participants. Conceived as a neural and independent place, the Spot Market must
guarantee a risk free counterpart and an effective electricity trade.
In order to promote the participation (when not mandatory) it is essential that the
members find the exchange useful, convenient and reliable (the payment and the
delivery).
Market surveillance is an important task for the well functioning of the market and
to prevent the abuse of dominant position. The monitoring activities are performed in
some countries by a specialised surveillance department within the company or it is
carry out by the regulatory authority.
Nowadays the European wholesale market is mainly based on bilateral trading and
on voluntary Spot Markets. Voluntary Spot Markets had increased volumes but in
many markets the volume still remains limited. Some countries of the European Union
have established or have under development a Power Exchange type market. It is
relevant to notice that compared with national consumption, the trading volumes on
the European Power Exchanges are still in some degree low, with some exceptions.
Despite the development of this market, most of the wholesale electricity trade still
takes place through direct OTC Markets or through intermediaries.
100
0,00
10,00
20,00
30,00
40,00
50,00
60,00
2001 2002 2003 2004 2005 2006
Powernext
Opcom
Omel
Nord Pool
€MW/h
Organized and OTC (bilateral trading) markets are totally complementary. Both are
vital for traders seeking to balance their portfolios of the day-ahead commitments.
International experience shows that a reliable Spot price is used by the financial
markets (futures and forwards) as a reference.
In some countries the Power Exchanges also handles bottlenecks in the grid and
allocate the transmission capacity in a market base way. The system makes sure that
the power flows the right way on the congestion, toward the high price area or zone.
Furthermore the system secure that for every hour of operation, all the capacity is
utilized.
Electricity prices are influenced by a variety of factors: primary energy prices (oil,
gas and coal), weather and hydrological conditions, import and export possibilities and
the new tradable CO2 certificates. The latter, in particular, have caused electricity prices
on the European energy exchanges to sky-rocket in some periods during year 2005. At
the beginning of 2005, the trading price was €6 per ton of CO2, and around the middle
of the year it reached a peak of € 30.
Figure 25 shows the annual average evolution of Spot prices in the four Markets
studied. Depending on the country or region, electricity prices could differ
significantly or converge according to binding elements previously mentioned.
Figure 25. Comparison graphic of the prices in different Spot Markets
101
During 2001 the prices in Powernext where higher than in other markets,
because of a cold weather that hits Europe especially in France and Germany. OMEL
and Nord Pool maintain a similar pattern during 2001-2002, but in 2003 the prices in
the Nord Pool suffer an increase due to a dry year, since the Scandinavian countries are
very dependable on water, a lack of rain means that hydroelectric generation is
replaced by others sources available sometimes more expensive.
The average base load prices on the French Market for the period 2001-2002 were
23,21 €MWh the prices varies sharply depending on the season. The price fall in June of
2002 when the price in the Spot Market dropped to €MWh 6.63, the lowest level since
the exchanged open.
2003-2004 prices practically converge in the three markets. In Powernext the prices
all around the year were less volatile, price peaks were less frequent and lower than in
2003, this was due to the climatic conditions were closer to normal with a mild winter
and a summer far from the heat wave temperatures registered the previous year.
In 2005 a climate of heavy tension on the price of energy commodities, main fuels of
electricity production in Europe, mostly because of the political context in the Middle
East, but also because of the bad weather conditions over the gulf of Mexico and the
increasing concerns over the availability of fossil energy in a context of sustained
demand and global warming.
In Spain a severe drought happened in 2005.The hydrological situation was critical
that year, and more electricity had to be produced by coal, gas, and oil power plants.
Additionally, demand rose to over 10% during the summer months due to the heat and
the growing economy. As a result the Spot and futures prices increased.
Regarding the Romania Spot Market, It seems that the monthly volume traded on
spot in 2005 was higher than 5% from the internal consumption, meaning acceptable
market liquidity, taking into account that starting with 1st July 2005 this market has
become voluntary. There is a direct influence of the weather conditions on the
evolution of spot price.
The presence of the Spot Markets has contributed significantly to the high level of
trade activity and will probably prove to be an important element in the emerging
competitive national and in a further stage a regional market.
102
9Final Reflexions
103
9. Final Reflexions
The point of the thesis is to stress out the importance and benefits that a centralized
power exchange can hold, even though there is no reason why only this model should
prevail for electricity trading. It seems that both structures the decentralized and
centralized are not mutually exclusive but complementary.
Well chosen market design could improve market efficiency in areas where
decentralized bilateral trading practices prevail. Empirical evidence supports the
premise that changing the market organization from bilateral to power exchanged
market based can carry much more advantages, but this statement has to be sustained
considering the regulation framework on each market. The same market design could
work on one market and fail in other; this is because there are some differences
between each country regulation, the wholesale structure, level of unbundling and
opening, etc.
For instance, the four markets studied on this work, present disparities in traded
volumes, success, liquidity and others although the basis of the Power Exchanges (type
of bids, price setting, payments, etc) are more less the same.
At its beginnings the Spanish Power Exchange was a “voluntary” market in
practice but bilateral trade was discouraged due to the lack of capacity
payment, this is one of the reasons for the elevated market shared and liquidity
that prevails on this market.
In France Powernext still plays a modest role, one of reasons is because the
electric power sector is based mainly on nuclear power, which accounted
approximately 78% of production, the nuclear production is traded on a
bilateral basis. The market structure is characterized by a small number of
participants the dominant position held by EDF in the power market remains
an obstacle to liquidity.
As the regard of market concentration and vertical integration, auctioning
Virtual Power Plants (VPP) was implemented in 2001 as tool to provide
liquidity in the market which consists on an option that represents the cost
104
structure of a power plant, the process is performed via auction and the product
is available capacity.
The long established trading market Nord Pool accounts a confident market
and have increased liquidity every time a new country had join the market, one
peculiarity of this market is that implicitly with the bids it is managed the
transmission capacity trough zonal prices calculated by Nord Pool.
Over the last years Romania electricity sector is joining the EU, the architecture
of Romania’s electricity sector is largely in line with EU requirements and the
liberalization electricity market has been a remarkable success so far and is the
only country in the region that have a day-ahead market.
The transaction volumes on exchanges in Europe therefore remain very limited,
except for Nord Pool and Spain. Most of the exchanges continue to be on the Over-the-
counter market.
The Directives utter the main principles to develop market competition but leaves
each country with the freedom to decide how to organize their market. If one of the
motivations to promote competition is the creation of a single market, some general
trading guidelines are essential for the success of the market liberalization.
In bilateral trading markets, participants’ information are difficult to monitor and
examine, making the relative efficiency of decentralized versus organized markets
difficult to establish outside the field. The organized market created price transparency
that did not exist with decentralized, bilateral trading. I find that these changes enabled
the organized market to direct production to the most efficient available resources,
realizing greater gains from trade than occurred under the bilateral trading system.
Industry participants in regions where bilateral trading prevails commonly argue
that the cost of adopting an organized market would exceed the benefit of it, but an
organized market design might reduce inefficiencies that exist in an unstructured
decentralized market, allowing participants to realize gains from trade that would not
otherwise be achieved. However, organized markets are costly to design and
implement, but once the market matures the gains participating on it are worth it
105
because it improves the efficiency of trade. The value of shifting the site of trade out of
a decentralized bilateral system and into an organized market is ultimately an
empirical matter.
Buyers and sellers on the Power Exchanges can “interconnect” to a large number of
other participants elsewhere and this brings an increase in production by low-cost
sellers that joined the organized market, displacing higher-cost production. This
possibility relates to our understanding of how the organized market improved
efficiency.
The organized market is a more efficient place than decentralized bilateral trade,
resulting in increased production by low-cost firms that joined the organized market.
However as we noted above there are costs to implement a system of market
organization, but these costs can be compared to the efficiency gains reported above,
providing a better assessment of the net benefits of expanding the organized market
design, and in some markets this cost represent one-time expense.
For suppliers that are not marginal the Power Exchanges represents an attractive
way for selling the energy because the clearing price is set on a marginal basis, this
means that all the suppliers are paid the same price, the marginal price.
We can say that some drawbacks for the bilateral trade may imply some
discrimination if some consumers have no access to contracts, the price is less
transparent and it is more difficult to supervise oligopolistic behaviour. Of course this
market model presents some advantages as well, for both parties the flexibility is wider
and the customers have the right to choose its supplier.
Certainly the case for working on an organized market is strongest when there is
vigorous competition and really good optimization. The case for OTC is strongest
when tight coordination in forward markets is less important than good scheduling
decisions by each participant.
Power Exchanges allows competition by providing prices for each single hour
reflecting the dynamic aspects of competition, in contrast to purely bilateral trading the
organized markets facilitate the work of monitoring by aggregating a large amount of
information about participant behaviour and providing details data on the evolution of
supply and demand.
106
Power Exchanges and bilateral trading can operate together; the evidence is the
existing structure in wholesale markets in Europe. The reason to support the organized
Power Exchanges is because it represents one of the keystones for the creation of an
internal electricity market across Europe, even though the Directives do not establish
any guidelines for this matter Power Exchanges have been develop at national level,
the problem is that in presence of different designs will be more difficult to integrate
the markets into a single one.
The role of Power Exchanges towards to achieve an European market is essential,
some regional markets have emerged and have confirmed their success (Nord Pool,
Mibel and trilateral market between France, Belgium and Netherlands).
Advantages of the organized markets
In addition to providing a centralized place where all trades are conducted,
exchanges such as these also play the key role of acting as the counterparty to all
trades. The fact that the exchange acts as a support on the traders back for financial
reasons is one of their key advantages as this removes counterparty risk, or the chance
that the person who you are trading with will default on their obligations relating to
the trade.
There are some advantages for the traders as all trades flow through one central
place, the price in a certain hour is always the same regardless of the size or
sophistication of the traders. This in theory should create a more level playing field
which can be an advantage to the smaller and less sophisticated trader.
Finally, because all participants that makes offers in the Power Exchanges must be
members and register with the exchange, there is greater regulatory oversight which
can make exchange traded markets a much safer place for participants to trade.
The downside that is often mentioned about exchange markets is the cost. As the
participants who trade on the exchange must meet regulatory requirements to do so,
this makes it more costly for them to offer power products, a cost that is inevitably
passed along to the end user.
Though all the above mentioned elements are significant for market creation, a
liquid, efficient and complete marketplace is the key element for market growth. A
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liquid market ensures single price for the power sold at the same time and the same
place.
Advantages of the OTC markets
Over-The-Counter means that there is no centralized place where trades meet,
instead the market is made up of all the participants in the market trading among
themselves.
The biggest advantage of the OTC markets is that because there is no centralized
exchange and little regulation, you have heavy competition between different
providers to attract the most traders and trading volume to their firm.
As there is no centralized exchange the parties can make whatever price they want,
and the features of execution varies from contract to contract even though the same
product is been traded.
While the lack of regulation can be seen as an advantage in the above sense it can
also be seen as a disadvantage, as the low barriers to entry and lack of heavy oversight
also make it easier to operate in a dishonest or fraudulent way.
Lastly, as there is no centralized exchange parties are exposed to default form the
counterpart.
108
10Definitions and Acronyms
109
10. Definitions and Acronyms
Area Prices Whenever there are grid congestions, the
area is divided into two or more price
areas, each of these prices are referred to
as area prices
Balance Responsible Party Licensed Party registered by the
Transmission System Operator as Balance
Responsible Party a Balance Responsible
Party may also assume balancing
responsibility for other Licensed Parties
Block Bid Aggregated bid for several hours with a
fixed price and volume
BOM Balancing Market Operator
CER Certified Emissions Reduction
CfD Contract for Differences
CHP Combined Heat Power
Clearing Price The resultant price when matching the
supply and demand curves
DAM Day Ahead Market
Day D Delivery day
Day D-1 The day before the delivery. Trading Day
Deregulation The process by which governments
remove, reduce, or simplify restrictions on
activities and individuals with the goal of
encouraging the efficient operation of
markets.
EDIEL or EIWeb Elspot electronically trading system
110
EUAs
Governance Governance refers to how decisions are
made and implemented within an
organization
Historic Volatility Reflects the price fluctuation. It is
measured by the annualised Standard
Deviation of the daily changes in the
prices.
MA Market Agents
Marginal Price Price of the last accepted block of a sell
offer that is necessary to meet the demand
that has been cleared.
MCV Market Clearing Volume
Merit Order The way offers (sale & purchase) are
arranged on a list
Fill-or-Kill Orders for which the participant wants to
buy or sell only exactly requested amount
MIBEL Iberian Market
MO Market Operator
MPC Market Clearing Price
NORD POOL Scandinavian Market Operator
OMEL Spanish Market Operator
OECD Organization for economic co-operation
and development
111
OPCOM Romanian Market Operator
OTC Over the Counter
Physical Notification A document that establishes the operation
schedule for the net production, exchanges
and consumption of electricity in the
network.
POWERNEXT French Market Operator
Production Unit Thermal generating set, pumping station,
hydro-electric power station wind
generators, which unload their electricity
for the same node of the network.
Purchased Unit Group of network connection nodes
through which the buyer presents bids to
purchase electricity.
Red Eléctica (REE) Spanish Transmission System Operator
Réseau de Transport French Transmission System Operator
d`électricité (RTE)
Self Producers Individual or legally entities that produce
electricity fundamentally for their own use
SO System Operator
Special Regime Self producers and electric power
producers that their source of energy is
renewable
Statnett Norwegian Transmission System Operator
Svenska Swedish Transmission System Operator
112
System Price Unconstrained market clearing price
Transelectrica Romanian Transmission System Operator
TSO Transmission System Operator
Validated Daily Offer Offer validated by the Market Operator or
by the Balancing Market Operator.
EU European Union
KONTEK Name of the Elspot bidding area
encompassing the Vattenfall Europe
Transmission Control Area in Germany.
VPP Virtual Power Plant
113
11Bibliography
114
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ANRE web site: www.anre.ro
APX web site: www.apxgroup.com
Belpex web site: www.belpex.be
CRE web site: www.cre.fr
EdF web site www.edf.fr
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Omel web site www.omel.es
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