Engineering, Economics & Regulation of

the Electric Power Sector

ESD.934, 6.974

Session 12
Module D.3

Generation & wholesale markets

Wholesale market design

Prof. Ignacio J. Prez-Arriaga

Study material
Florence School of Regulation (FSR), Generation
wholesale markets
I.J. Prez-Arriaga, Grandmas inheritance theorem,
October 2005, in the economic journal 5 Das. <a
peculiar version of Coases theorem>

Independent System Operators in the USA: History,

lessons learned and prospects, Chapter 14 of
Electricity market reform, edited by F.P. Sioshansi,
2006

Material for this transparency has been borrowed from Bernard Tenenbaum, from FERC in the USA.

Readings
S. Stoft, T. Belden, C. Goldman, S. Pickle, Primer on
electricity futures and other derivatives, Lawrence
Berkeley National Laboratory, 1998. <excellent
tutorial>

P.R. Gribik, W.W. Hogan, S.L. Pope, Market-clearing

electricity prices and energy uplift, 2007. <clear
statement of the problem and conclusions; the math in the
middle is not easy to follow>

Retail & wholesale markets

Generator

Generator

Generator

Power Exchange

Wholesale
market
Supplier

Supplier

Distributor/
Retailer

Distributor/
Retailer

Qualified
consumer

Captive
consumer

Captive
consumer

Retail
market
Qualified
consumer

Typical products and services in

a wholesale market
Different products and services are
identified in a liberalised electricity market
Scheduled energy (in long-term contracts,
day-ahead, intra-day &/or balancing markets)

Frequency control
Primary reserve
Secondary reserve
Tertiary reserve
Reactive power for voltage regulation
Black-start capabilities
Generation capacity for long term
adequacy

Ancillary
Services

Sequence & possibilities of transactions

WHOLESALE ELECTRICITY MARKET

Bilateral
contracts

Physical
contracts

Organized
Forwards
& futures
markets

Day ahead
market

Intra-daily
markets

Management
of network
constraints

Ancillary
Services
Markets

Balancing
(deviations)
market

Financial
contracts

Individual agents

Market Operator (PEX)

System Operator

How to design a
wholesale market?
And why does it have to be designed?

Hierarchy of decisions in wholesale

market design
Structural & governance issues
Who are the players?
Organization issues
What are the possible transactions?
Implementation issues
What are the rules of the game?
This document uses material from Alberto Pototschnigs presentation on Electricity
wholesale markets at the Florence School of Regulation Training Course

Choices in wholesale market design

Structure & governance

List of topics:
Unbundling of activities
Horizontal concentration
Vertical integration
Risk allocation
Governance of market institutions
Role of competition authorities
A market within a wider market

The players & their environment

9

Issues on structure & governance

Vertical integration

Complete unbundling of generation/retailing from

network activities
Avoid consolidation of vertical integration
(generation & retail to captive consumers) via
opaque physical bilateral contracts
separation of activities
public auctions to allocate the contracts
mandatory purchase from the pool
Diagonal integration (gas & electricity)
10

Issues on structure & governance

Risk allocation

Rule: Improve efficiency by allocating to each

agent only the risk he may handle
Case examples
risk of retailers for captive consumers largely
depends on the mechanisms of pass-through of
the pool price
The case of Argentina: no risk for retailer no
incentive to establish hedging contracts
The case of California: distributor/retailer was exposed
to the full risk of market price volatility
Spain, The Netherlands: Use average purchasing cost
rather than individual purchase cost
11

Issues on structure & governance

Governance of market institutions

Basic issues
Independence of the market operator or power
exchange (public or private) versus complete
representation of the agents of the market, or
maybe a hybrid
Allow flexibility & promote initiative to improve the
rules (avoid deadlocks)
combine some self-governance with a
regulatory backstop
12

Market related institutions

Case examples of unbundling
Typical EU
Market operator is named Power Exchange & it can be a
public entity or privately owned establishing its own rules
Transmission System Operator: SO & transmission
ownership, mostly independent
Transmission services: Other companies besides the TSO
could provide these services, but it is not frequent

Typical US (under RTOs or ISOs)

Independent System Operator (ISO) performs functions of
SO & Market Operator
Independent & it does not own transmission (nor generation or
distribution) assetts

Diversity of transmission owners

13

Issues on structure & governance

The role of competition authorities

Backstop to self-governance by market
institutions; possibility of improving rules
Make sure that market information is
facilitated to all interested parties on a non
discriminatory basis
Expert market surveillance
Market power abuse
investigation of specific complaints
14

Issues on structure & governance

Always remember

When structure is not conducive to

competition, the regulator & pool operator will
find themselves unsuccessfully chasing after
conduct. The solution is not a better rule, but
a change in structure(*)
(or a gradual introduction of competition, with rules that restrict
the freedom of the market agents & prevent market power
abuse)
(*) From Governance & regulation of power pools & system operators, Barker, J.,
Tenenbaum, B. & Woolf, F., World Bank, 1997.

15

Hierarchy of decisions in wholesale

market design
Structural & governance issues
Who are the players?
Organization issues
What are the possible transactions?
Implementation issues
What are the rules of the game?
16

Choices in wholesale market design

Organization

List of topics:
Elements of the wholesale market
Products & services
Mandatory pools, bilateral contracts & power exchanges
Short-term (spot) markets
Balancing market & provision of ancillary services

Major issues in organization

Role of demand / firmness of transactions / long-term security
of supply / hedging contracts / market power

The allowed transactions

17

Typical products and services in

a wholesale market (again)
Different products and services are
identified in a liberalised electricity market
Scheduled energy (in long-term contracts,
day-ahead, intra-day &/or balancing markets)

Frequency control
Primary reserve
Secondary reserve
Tertiary reserve
Reactive power for voltage regulation
Black-start capabilities
Generation capacity for long term
adequacy

Ancillary
Services

Energy trading opportunities

Bilateral Over-the-Counter (OTC) contracts
with free formats
Contracts in organized markets (Power
Exchanges, PXs)
Long-term contracts: physical or financial, with
different standardized formats
Day-Ahead organized markets (spot markets)
Intraday markets

SO-run markets for operating reserves &

network constraints
SO-run balancing markets

Sequence & possibilities of transactions

WHOLESALE ELECTRICITY MARKET

Bilateral
contracts

Physical
contracts

Organized
Forwards
& futures
markets

Day ahead
market

Intra-daily
markets

Management
of network
constraints

Ancillary
Services
Markets

Balancing
(deviations)
market

Financial
contracts

Individual agents

Market Operator (PEX)

System Operator

20

10

A wide diversity of market models

The mandatory pool model
Simple or complex bids
Audited costs or free bids
Optional financial contracts

The open trade model

Bilateral contracts that typically coexist (not in

the UK) with a PX offering an organized dayahead spot market & organized long-term
contracts of different formats
All models include the SO providing (with or
w/o ad hoc markets) operating reserves,

network constraint management & some

balancing mechanism

Commercial relationships in a typical

market configuration
Generator 1

Generator 2

PX Sales

Generator 3

Bilateral Contracts

PX

SO

PX Purchases

Supplier 1

Trader 2

Wholesaler 3

Supply Contracts

Final
Consumer 1

Final
Consumer 2

Final
Consumer 3

Final
Consumer 4

Final
Consumer 5

11

From commercial to physical (as

the market gets closer to real time)

Gate Closure is the deadline for trading electricity to

be delivered in a specified period
Gate Closure could be from one or more days to one
hour or less before delivery time
By Gate Closure, balanced (injections and withdrawals)
positions are declared (possibly through balance responsible
agents) to the relevant TSO for scheduling (the PX may
itself be a balance responsible agent)

At Gate Closure the TSO takes over the management

of electricity flows over the network
Deviations of actual injections/withdrawals from
positions attract imbalance charges and are settled
with the TSO

Physical relationships in a typical

market configuration
Generator 1

Generator 2

Generator 3

Connection, Use-of-System and

Balancing & Settlement Agreements

PX

SO

Balancing & Settlement Agreements

Supplier 1

Trader 2

Wholesaler 3

Connection and Use-of-System Agreements

Final
Consumer 1

Final
Consumer 2

Final
Consumer 3

Final
Consumer 4

Final
Consumer 5

12

Possible energy transactions

Markets

Spot

Forward

Physical

Bilateral

Bilateral

Organised

"Pool"

Physical

Organised

Financial

Physical

Financial

Power Ex

25

Contracts
Objective: Protect market agents against
price uncertainty
Make revenue streams more predictable
Facilitate investment decisions

Practice: Dominant form of transaction

Physical vs. financial contracts
Either private (although at least quantities must be
declared in physical contracts) or through organized longterm markets
The spot market as an adjustment mechanism to solve
differences between contracted amounts & as a reference
for other transactions

26

13

The short-term
market

(spot, typically day-ahead)

In most market models there is a short-term (typically

day-ahead) market that provides the reference price for
the remaining transactions
Key issue is the potential for arbitraging between markets

Why such a diversity of auction formats?

Bids: simple, complex, continuous, iterative
Dispatch: self-committed, centralized, zoom
Network: single node, zonal, nodal

Trade-off in market design: simplicity & transparency

versus efficiency & avoidance of risk
27

Intraday markets
Intraday markets make it possible to adjust

(by adding new transactions, without modifying the

previous ones) the contracted positions in the

daily market

In case of occurrence of unexpected events

(generator failure, demand deviation)

In case of difficulty in following the schedule of

the daily program
Arbitrage between markets (although the regulator
may want to reduce it to a minimum)

28

14

Ancillary services
Use market mechanisms whenever possible
Typically mandatory: frequency response (primary
reserve)
Markets typically: secondary & tertiary reserves
Possible limited markets: reactive power, system
restoration

Wide diversity of contracting time horizons

Secondary & tertiary reserves:
separate prices for capacity & energy use
may provide resources for balancing market

29

Balancing market
The criticality & volume of this market may be
reduced with a zoom of short-term markets
The price could be related to the use of
secondary & tertiary reserves
Most powers markets rely much on it (UK)
while others basically avoid it (Spain, just a
penalty applied to deviations)
ISO may adopt emergency measures (e.g. ad
hoc markets) whenever considered necessary
30

15

Issues in market organization

Demand side bidding

Demand participation is a basic ingredient of the

second generation of power exchanges, but it is still
mostly passive
Incentives & mechanisms are needed so that
purchasers
estimate the demand correctly
buy as economically as possible
experience the uncertainty of the pool price and want to
hedge against it
have the means of hedging the risk of lack of supply, if
they so wish

31

Issues in market organization

Firmness of transactions
A series of markets converging to the real time,
each of them with firm transactions, seems to be
the currently preferred option
All accepted transactions are firm in quantity & price
Successive markets allow the agents to approximate
their buy/sell positions to their current best estimates
Same firmness rule applies in all (long-term, shortterm, real time) markets
The energy actually bought or sold by an agent in a given
period of time is composed of several transactions, each
one of them with its quantity & price
32

16

Issues in market organization

Long-term security of supply

The questions
Can system short-term marginal prices
remunerate the total costs of all plants?
Can consumers choose their level of reliability
of supply?

The proposed solutions

Leave it to the market
Regulated capacity payments
Capacity markets
Price risk-hedging contracts
33

Issues in market organization

Information disclosure

Market information must be accessible to all

interested parties without discrimination
Trade-off between
availability of complete market information
example: disclosure on the following day of all
accepted & non accepted bids

potential for collusion

34

17

Issues in market organization

Codes of good practice

Implicit (most frequent) or explicit (e.g. the

Single Electricity Market in Ireland) is a
central piece in the regulatory compact
Competition by itself is not a deterrent against
anticompetitive behavior is actual markets
A basic understanding of what is permissible
(legal) or not is necessary

35

Hierarchy of decisions in wholesale

market design
Structural & governance issues
Who are the players?
Organization issues
What are the possible transactions?
Implementation issues
What are the rules of the game?
36

18

Implementation
List of topics:
Short-term trading: Power exchanges & auction
design
Longer-term trading: Contract design
Ancillary services
Management of losses and congestions
Integration of wholesale markets

The rules
37

Power exchanges &

auction design

38

19

 ISO / RTO Council. All rights reserved.

This content is excluded from our Creative Commons license.
.
For more information, see http://ocw.mit.edu/fairuse.

Typical functions of a Power

Exchange
Reception of bids
Elaboration of the merit order
Computation of the market price
Centralization and processing of measurement data
Economic settlement
Market supervision (support to regulator)
Proposal of modification of market rules
42

21

Characterization of Power
Exchanges
Market participation
Trading timing
Traded products / trading periods
Bid and offer format
Trading methods / pricing criteria

Market participation
Participation can be:
Compulsory - in a gross market (Pool)
Voluntary in a net market for surpluses & deficits
All PXs in the EU are voluntary
Participation may be compulsory for some types of
trading (e.g. inter-zonal trading in Nordic countries should be
effected through Nord Pool)

Some entities may be required to use PXs for part of the

energy they trade (e.g. the Single Buyer in Italy or a
prescribed % in OMEL for long-term contracts)

Participation is mandatory in ISOs & RTOs in the US

Diversity of roles for demand (load/LSE)

22

Timing of trading
PXs are generally centered around a Day-Ahead Market
(DAM), where electricity is traded the day before the day
of delivery
Longer-Term Markets are generally based on financial
products
Some PXs also provide Adjustment Markets for modifying
commitments deriving from the outcome of the DAM:
improving on suboptimal results of the DAM
reflecting new information (unplanned outages, ...)
Examples of Adjustment Markets:
NordPool: Elbas Market
Spain: six Intra-day Market sessions, each covering the
remaining delivery periods of the day of delivery
Italy: Adjustment Market immediately after the DAM
(participation limited to generators)
Germany: continuous trading

Bid and offer format (1 of 4)

Simple bids/offers:
Bids and offers consist of price-quantity pairs and are
submitted independently for each delivery period
The market equilibrium for a delivery period is
determined independently from the market
equilibrium for other delivery periods
Complex bids and offers:
Bids and offers specify constraints covering more
than one delivery period
The market equilibria for different delivery periods
are interrelated

23

Bid and offer format (2 of 4)

Simple bids/offers
Bid:
one or more quantity-price pairs, each specifying
the maximum price at which the participant is
willing to buy the corresponding quantity of
electricity
Offer:
one or more quantity-price pairs, each specifying
the minimum price at which the participant is
willing to sell the corresponding quantity of
electricity

Bid and offer format (3 of 4)

Complex bids/offers
Generators could bid:
Technical minima (minimum output)
Non-divisible blocks
Start-up costs
Ramp constraint
Minimum revenue requirement
Generators and load/LSE could bid:
Block bids/offers: bids/offers for a number of
consecutive delivery periods in a standard
format

24

Bid and offer format (4 of 4)

PROS and CONS of Simple and Complex Bids/Offers
Simple Bids/Offers:
Simpler and more transparent determination of the market
outcome
Offers only imperfectly reflect generators costs generators
bear some risk and market outcome may be suboptimal/
technical unfeasible
Subsequent (adjustment) markets may provide opportunities to
modify commitments arising from the outcome of simple-bids/
offers DAMs
Complex bids:
Offers may reflect actual costs more accurately reduced risk
for generators and optimal/feasible market outcome easier to
achieve
Computationally more complex and less transparent
determination of market outcome
Computation of the system marginal cost requires some adjustment to
reflect the impact of the start-up and no-load prices

Details

Auction-based trading with simple bids

Bids and offers for each delivery period are submitted by a
specified deadline
Merit orders are compiled:
Bids are ranked in descending price order
Offers are ranked in ascending price order
The (equilibrium) market outcome is defined by the
equilibrium market price (EP)
The EP is the price at which the cumulative quantity specified
in the merit order of bids is equal to the cumulative quantity
specified in the merit order of offers
Bids specifying a price not lower than the EP are accepted
Offers specifying a price not higher than the EP are accepted
Accepted bids and offers are valued at:
the EP (single-price auctions, this is the common
procedure)
the price specified in each bid/offer (discriminatory or
pay-as-bid auctions, rarely used)

25

Details

Auction-based trading with simple bids

Merit Order of Bids

Merit Order of Offers

Merit Orders

Details

Auction-based trading with simple bids

EP
EP = Equilibrium Price
EQ = Equilibrium Quantity
Q
EQ

Market Equilibrium

26

Continuous bilateral trading

Bids and offers for a specified delivery period are
submitted at any time during the trading session
As soon as it is submitted, each bid/offer is matched, if
possible, with offers/bids already submitted for the
same delivery period and specifying compatible
quantities and prices
The execution price of a transaction is generally the
price specified in the bid/offer submitted earlier
If no match can be found, bids/offers are held and
shown in the trading book to be matched with offers/
bids submitted later in the same trading session

Comparison
PROs of trading methods/pricing criteria
Auction-based trading
Maximises value of transactions facilitates
efficient dispatching
Single equilibrium price reference
Allows integrated congestion management
Continuous bilateral trading
Analogous to financial markets trading
Participants can see the market before
trading

28

US competitive wholesale markets

Most US wholesale markets have a similar
structure
Locational marginal pricing (LMP): Prices vary by
location when transmission constraints bind & also
because of losses
Multi-settlement system: A day-ahead financial
market & a real-time physical system
Day-ahead (24 h) is based on complex bids & unit
commitment
Real time (5 min) is based on an optimal load flow

New England, New York, PJM, MISO, California

Texas is planning an LMP market
SPP has a locational imbalance market

US wholesale markets

Longer-term views

Transmission networks are planned at ISO

level & recently there are coordination efforts
at interconnection level
Some ISOs have set long-term resource
adequacy requirements for generation
New England & PJM have an auction-based forward
capacity market (4 years in advance)
New York has a demand-curve based monthly capacity
market

29

Contracts

59

Formats of contracts
Trading Method
Properties

Over-the-Counter

Power Exchange

Anonymity of
Trading

No

Yes

Counterparty

Bilateral

Central counterparty

Counterparty Risk

Yes, unless cleared

No

Trading Method

Continuous Trading

Either Continuous or
Central Auction

30

Formats of contracts
Contracts may be:
Customised (bilateral)
Respond to the requirements of
counterparties
Standardised (anonymous)
Standard features and clauses
Easier to negotiate
Easier to trade in a secondary market
Brokers may facilitate the conclusion of
bilateral contracts by matching counterparties
with compatible requirements

Delivery can be physical or financial

Physical

Financial

Entail physical and cash delivery on

expiry

Entail only cash delivery on expiry

The hub (delivery point) is the High

Voltage Grid or some node in it

Differences between an specified

index and the contractual price are
settled

Participants need a right to transport

the scheduled volume of power

The buyer pays the contractual price

and the seller pays the index

TSOs must approve the schedules of

all participants, to prevent constraints

Physical purchased/sold through

Spot or physical contract

A mechanism is put in place by the

TSOs for settlement and
management of the real time
imbalances

Exchange (or Pool) prices are

normally selected as index
Market liquidity is important to
provide a reliable index

31

Contracts for differences (CfDs)

The best known example of a risk hedging
instrument are the CfDs
Two way contract:

q amount of contracted energy

Pm spot price (pool price)
Pc contract price (strike price): the expected pool price
Option fee OF (risk premium), not needed in a CfD

<the table shows directly the amount received by each agent.>

63

Contracts for differences (CfDs)

Deviations & incentives

Viewpoint #1: Price Pc for contracted amount qc is

guaranteed, but deviations are priced at market price Pm

Effect of deviations (a generator):

contracted amount qc
produced amount qp
Revenue: qc x Pc + Pm x (qp - qc)
qp - qc subject to pool price risk
If the CfD is signed by a physical generator who makes
its production qp equal to the contracted amount qc,
then it is totally hedged (but a pure speculator with no
production is fully exposed to the CfD contract risk)

64

32

Contracts for differences (CfDs)

Deviations & incentives

Viewpoint #2: The implications of the CfD contract

qc x (Pc Pm) and the participation in the market (if
this is the case) with production qp at a price Pm are
examined separately

Final economic settlement (a generator):

contracted amount qc
produced amount qp
Revenue: qc x (Pc Pm) + qp x Pm
qp is totally exposed to pool price risk
The existence of the CfD contract should not
modify the behaviour of the generator in the spot
market

65

Vesting contracts
Established at privatisation or restructuring
Usually an obligation imposed by the regulator

Make transition easier and less risky

Regulated price, which may be different from market
conditions
Example: Transitory protection of high cost domestic fuel

Reduce incentives for pool price manipulation

Since price manipulations can only affect the revenues for
the non-contracted output

Reduced over time to increase room for the market

For the market of contracts, since the spot market is not
affected
66

33

Bilateral Contracts: the EFET* Example

General Agreement (GA) governing Individual Contracts
(ICs)
GA customisation through the Election Sheet (ES)
IC could be:

Fixed price
Floating price
Call Option
Put Option

ICs confirmed through a Confirmation of Individual

Contract (CIC)
Cross Border Annex (jurisdiction and taxation issues)
This is the model contract proposed by the European Federation of Energy
Traders (EFET), widely used in the EU

Content of EFET General Agreement (1)

1 Subject of Agreement
GA governs all transactions between the parties
Pre-existing contracts are considered as IC under the GA (*)
2 Definitions and Construction
ES prevails over GA
CIC prevails over GA and ES
3 Concluding and Confirming Individual Contracts
ICs can be concluded in any form of communication (incl.
orally)
ICs which are not concluded in writing can be confirmed in
writing
4 Primary Obligations for Delivery and Acceptance of Electricity
5 Primary Obligations for Options

34

Content of EFET General Agreement (2)

6 Delivery, Measurement, Transmission and Risk
Delivery according to the Schedule specified in the ICs
Seller bears the risk to the Delivery Point; buyer bears the
risk from the Delivery Point
7 Non-Performance Due to Force Majeure
8 Remedies for Failure to Deliver and Accept
10 Term and Termination Rights
GA terminates at Expiration Date (if specified) or with 30-day
notice
Early termination for Material reasons (non performance,
cross-default) and Automatic Termination in case of
insolvency of one of the parties
11 Calculation of the Termination Amount
12 Limitation of Liability

Content of EFET General Agreement (3)

13 Invoicing and Payment

14 VAT and Taxes
15 Floating Prices and Fallback Procedure for Market Disruption
16 Guarantees and Credit Support
18 Provision of Financial Statements and Tangible Net Worth
19 Assignment
Assignment of rights and obligations to a third party subject
to written agreement of the counterparty
Consent not required in the case of affiliates (*)
20 Confidentiality
21 Representations and Warranties
22 Governing Law and Arbitration
23 Miscellaneous

35

Organized forward & futures markets

Financial (derivatives) trading (1)

Prices in wholesale electricity markets vary from
trading period to trading period, as a result of demand
supply interaction and transmission capacity
Participants are exposed to the risk resulting from the
variability of revenues/costs from selling/buying
electricity
As in financial markets, electricity derivative
instruments provide risk hedging
71

Organized forward & futures markets

Financial (derivatives) trading (2)

Non tradable contracts
CfDs are difficult to trade
Adapted to parties requirements, non standard
Non centrally settled, each party bears default risks

Tradable contracts
Standard terms, non adapted to parties requirements
Centrally settled, when traded through organized market
Favour trading liquidity

72

36

Organized forward & futures markets

Financial (derivatives) trading (3)

Purely financial transactions
do not need to close in a physical shorter-term market
allow the participation of agents without physical assets that
are backing the transaction improve liquidity

Organized long or medium-term markets will only

develop if the underlying market price is reliable
Types of instruments:
Forwards
Futures
Options
73

Organized forward & futures markets

Financial (derivatives) trading (4)

Forward contracts commit the buyer to purchase
and the seller to deliver a specified quantity of
electricity at a specified time in the future, at a predetermined price (delivery price)
Future contracts are standardised forwards contracts
traded in organised and regulated exchanges
Option contracts give the buyer the right, but not
the obligation, to purchase (call options) or to deliver
(put options) a specified quantity of electricity at a
specified time in the future, at a pre-determined price
(strike price)
74

37

Detail:

Call & put options

Call option
A right to buy at a given price
The option seller compensates the option buyer if
pool price is higher than strike

Put option
A right to sell at a given price
The option seller compensates the option buyer if
pool price is lower than strike price

Similar to one-side contracts for differences

(CfD = buy a call and sell a put)
75

Bilateral contracts without a daily spot

market
The NETA (New Electricity Trading Agreement) in
England & Wales started in March 2001
bilateral transactions are matched at a mutually
agreeable price, both using over-the-counter &
organized future markets
any mismatches between the contracted amounts
and the actual ones must be solved in a balancing
market that opens only 1 hour before real time

76

38

Trading and delivery

Trading results in long/short positions
Long (physical) positions assign the right/
obligation to withdraw power from the grid
Short (physical) positions assign the right/
obligation to inject power into the grid
Long and short (physical) positions resulting
from trading should be balanced (injections
= withdrawals) in each delivery period

Traded volumes of electricity derivatives

may well exceed physical consumption

* - No PX-trading of derivatives. ^ - Data on OTC Brokered volumes not available

39

Ancillary services

79

Ancillary Services
Primary (Frequency) Control maintenance of the balance
between generation and demand using turbine speed
generators
Secondary (Load-Frequency) Control centralised
automatic function to regulate the generation in a control
area in order to:
maintain exchanges with other control areas at the
programmed levels
return the frequency to its set value in case of a (major)
frequency deviation, thus restoring primary control reserve

Tertiary Control automatic or manual change of working

point of generators (mainly by re-scheduling) to restore an
adequate secondary control reserve
Black-start Capability the ability of a generating unit to
start operating and delivering power without assistance
from the electric system
Reactive Power inject or withdraw reactive power to
keep system voltage within prescribed levels at specific
nodes

40

Trading Mechanisms
Provision of ancillary services is managed by the

System Operator (SO)

Ancillary services can be:
Provided directly by the SO (e.g. Voltage control
through capacitors)
Supplied by grid users according to licence
conditions (e.g. Primary reserve)
Procured by the SO through long-term contracts
(e.g. Black start capability)
Procured by the SO through dedicated markets (e.g.
Secondary reserve)
Ancillary services are public goods (they cannot be
provided selectively to grid users)

Example
Operating reserves in Spain
Mandatory services
Primary reserves
Minimum reactive power support (no explicit remuneration
to transmission facilities)

Market mechanisms for voluntary services

Secondary and tertiary reserves
Contracts for system restoration
Contracts for extra reactive power support
82

41

Example
Operating reserves in Spain
Secondary reserves
Required bands (MW up & down) are specified for each hour
by the System Operator after the daily market closes
Generators may bid prices ($/kW) & bands (kW) to go up &
down
Selected bands are paid the resulting marginal price ($/kW)
& the cost is charged to consumers as an uplift
All energy used in secondary regulation is paid the price ($/
kWh) of energy of tertiary reserves & the cost is charged to
the agents (generators or consumers) who use secondary
reserves (deviations between scheduled and real energy,
both generators and consumers)
83

Example
Operating reserves in Spain
Tertiary reserves
After the daily market closes, any capable agent may bid
blocks of energy & prices ($/kWh) to go up & down
The System Operator establishes an economic priority list and
uses the bids if needed
All used bids (& only them) in a given hour are paid the price
of the last used bid in that hour ($/kWh)
The cost is charged to the agents (generators or consumers)
who use tertiary reserves (deviations between scheduled and
real energy, both generators and consumers)
84

42

Network effects

85

Typical functions of a system operator

Assessment of ancillary services requirements
Procurement of ancillary services.
Elaboration of the final dispatch
network constraint management
account for physical contracts

Operation of the transmission network

Transmission expansion planning from the entire
systems viewpoint
86

43

Typical transmission functions

Network expansion planning (from the transmission
companys viewpoint)

Network construction
Maintenance planning (in coordination with the SO)
Maintenance of transmission facilities
Direct operation of transmission facilities

87

A very specific case

Locally constrained-on generators

When generation must be constrained-on because of
a network constraint, there is typically very little
room for competition (typically just one company can
solve the problem)

Preferred: Regulated remuneration or contracts

(difficult to cover all possibilities)

Also: Pay-as-bid, under regulators surveillance &

subject to competition law
88

44

The general situation

Management of losses & congestions

Option A: nodal (or zonal) prices

automatic solution to losses & constrained-off
generators
more complex auction algorithm

Option B: single node

loss & congestion signals are sent separately
loss factors modify payments in settlement
auction is followed by congestion management
no economic rights for constrained-off generators
89

Congestion
Congestion occurs when the available transmission
capacity is not sufficient to satisfy the demand for
transmission services (e.g., from commercial
transactions)
Therefore, congestion depends:
on the demand for transmission services
on the available transmission capacity
Liberalisation has increased and made more explicit
the demand for transmission services
Congestion may occur:
within a control area
between control areas (cross-border)
--

45

Approaches to congestion management

Basic approaches:
Ex-post adjustment of market outcome
Redispatching
Counter-trading
Ex-ante congestion management
Explicit allocation of (physical) transmission capacity
rights (PTRs)
Implicit allocation of transmission rights (and energy
positions):
Implicit Auction
Market Splitting
Market Coupling (market splitting between
different PXs)

Congestion management (1)

Ex-post adjustment of market outcome
Redispatching
Counter-trading

Ex-ante congestion management

Explicit allocation of (physical) transmission rights
(FTR)
Implicit allocation of transmission rights
Implicit Auction
Market Splitting
Market Coupling (market splitting between different PXs)

92

46

Congestion management (2)

Explicit allocation of (physical) transmission rights (PTR)
Market-based allocation:
Auctions
PTR are allocated to the highest bidders in the auction, up to the
available transmission capacity
the price each assignee pays for the allocated PTR depends on the
auction design (single price, discriminatory auction, )

Non market-based allocation:

First-come-first-served
PTR are assigned according to the chronological order of requests

Pro rata allocation

PTR are assigned proportionally to the amount requested, up to the
available transmission capacity
93

Congestion management (3)

Implicit allocation of transmission capacity
This happens when available transmission capacity
is used to allow:
Access to an organised WEM by participants located
on the other side of a congested interconnector
(implicit auction)
Trading between two areas of an organised WEM
separated by a congested interconnector (market
splitting)
94

47

From National to Regional or EU-wide

markets in the EU
Historically, the European grid has been developed
mainly to serve national markets
... at a time when national markets were typically
served by vertically-integrated monopolists
... which had little incentive to integrate markets,
except for security and stability purposes
Therefore, regional market integration requires:
Harmonisation of rules
Expansion of cross-border capacity
Efficient management of existing capacity

Congestion management in Europe

Most cross-border congestion in the EU is managed
though explicit auctions (EU Regulation n. 1228/2003
requires market-based solutions), except:
NordPool: market Splitting between Norway,
Sweden, Finland, Denmark East and Denmark West
Trilateral Market Coupling between France, Belgium
and the Netherlands
Mibel: market splitting between Portugal and Spain
Market Splitting in the Irish Single Electricity Market
Market Coupling (EMCC) between Germany and
Denmark West (AC link) and between Germany and
Denmark East (Kontek DC link)

48

From RIs to a true EU IEM

The magnitude of the challenge is worth noticing:
coordinated congestion management at EU-wide level
7 Regional Initiatives (RIs) were created to remove barriers
to trade & achieve a high level of harmonization just among
neighboring countries
with the expectation of integrating the RIs into a single EU
IEM later
The success has been limited so far & the progress very slow
However, major advances have been recently made under
the initiative of the Power Exchanges themselves see xxx
Progress towards a seamless operation among ISOs in the
US has been very slow. Recent coordination efforts in
transmission planning are encouraging
99

Tasks being addressed by the RIs

Coordinated transmission capacity calculation & utilization of a
common network model
Towards a regional single auction platform, with harmonized
rules, IT interface & products for medium & long-term
allocation
Towards a market coupling model for the day-ahead timeframe
Towards an intra-day mechanism, possible based on
continuous trading
Integration of balancing markets
Integration of transparency requirements

50

MIT OpenCourseWare
http://ocw.mit.edu

ESD.934 / 6.695 / 15.032J / ESD.162 / 6.974 Engineering, Economics and

Regulation of the Electric Power Sector
Spring 2010

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