Fundamentals of Electricity Markets

“Fundamentals of Electricity Markets” . An overview Pierre Pinson Technical University of Denmark . DTU Electrical Engineering - Centre for Electri...
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“Fundamentals of Electricity Markets” .

An overview Pierre Pinson

Technical University of Denmark .

DTU Electrical Engineering - Centre for Electric Power and Energy mail: [email protected] - webpage: www.pierrepinson.com

1 February 2016

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Learning objectives

Through this lecture, additional readings and video links, it is aimed for the students to be able to:

1

Have an overview of historical developments of electricity markets

2

Describe the various players and types of market organization

3

Describe the actual markets and their purpose

4

Discuss the new challenges with renewable energy in electricity markets

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The 2nd of January 2015

[source: Ingeniøren, 16 January 2015, article online]

Those interested may analyse what hapened from Nord Pool map and data 31761 - Renewables in Electricity Markets

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The 2nd of September 2015 Looking at the “Power right now” page of Energinet from yesterday afternoon...

On 2nd of September 2015, for the whole day, the power from central power stations was 0 MW! 31761 - Renewables in Electricity Markets

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Outline

1

Historical perspective

2

Players and roles

3

Different types of market organization

4

The actual markets and their purpose

5

Open questions with renewables in electricity markets

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1

Historical perspective

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A historical perspective

1980s

First ideas for liberalization of the electricity sector, and introduction of electricity market concepts in Chile (the “Chicago boys”)

1990

UK privatizes the electricity supplyed industry (Margaret Tatcher) - to be followed by other Commonwealth member countries

1991

Beginning of deregulation in Scandinavia... (to be further detailed)

1996 2000-2001

Deregulation in California California electricity crisis! In short: shortage of electricity supply, rise in prices, multiple blackouts, state of emergency, bankruptcies, investigation on Enron’s role

[More on the California electricity crisis: Sweeney JS (2002). The California electricity crisis: Lessons for the future. The Bridge 32(2):23–31 (pdf) Schwartz P (2012). California Energy Crisis. Energy, Society, and the Environment, Cal Poly, US (video - 12’00 mins) Friedman LS (2009). The long and the short of it: Californias electricity crisis. International Journal of Public Policy 4(1-2):4–31 (pdf, for those really motivated!) ]

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Closer to us... A history of Nord Pool

1991 1996 1998 2000

Deregulation of the Norwegian electricity market Norwegian-Swedish exchange called Nord Pool Finland and Western Denmark step in Eastern Denmark’s turn to join

2002

Nord Pool Spot established as a new and separate entity

2009 2009

Market coupling between Scandinavia and Germany Negative price floor accepted

2013

All baltic countries have joined Nord Pool (Estonia-2010, Lithuania-2012, Latvia-2013)

[More on the history of Nord Pool: NASDAQ OMX - Our history]

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By the way - what is deregulation?

REGULATED

DEREGULATED

Prices are all determined by the regulatory/government bodies:

Prices are determined by “invisible hand” of the market

energy prices transmission and distribution prices

Vertically integrated structure

Horizontal restructuring

Cannot choose supplier

Competition among a set of suppliers

[More on deregulation of electricity markets: Karan MB, Kazdagli H (2011). The development of energy markets in Europe. In: Financial Aspects in Energy (Dorsman et al. – eds.), Springer (pdf) Joskow PL (2008). Lessons learned from electricity market liberalization. The Energy Journal 29(2):9-42 (pdf) Joskow PL et al. (2006). Regulation and deregulation of energy sectors. MIT video collection (video - ¿1h) ]

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2

Players and their role

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Who are we talking about?

Can you list all the actors... involved in power system operations? and that interact with the electricity market?

[For the case of Denmark, a description of the actors is available at: http://www.energinet.dk/EN/El/Engrosmarked/Viden-om-engrosmarkedet/Sider/Roller.aspx]

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Who are we talking about?

Those who operate the power grid(s):

TSO - Transmission System Operator The TSO operates the transmission assets and is responsible for the power balance on the transmission system. For the exmaple case of Denmark, it is Energinet.dk

Disco: Distribution company / Disribution System Operator (DSO) The DSO operates the distribution grid, and often additionally acts as a retailer. Examples in Denmark include, e.g., DONG Energy, Syd Energi, SEAS-NV, etc.

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Who are we talking about?

Those who sell and buy: Genco - Generating company The Genco owns production assets (from single generator to a portfolio), whose generation is offered through the electricity market. Ex: DONG Energy, Vattenfall, etc. Retailer The Retailer buys electricity en gros from the wholesale electricity market, to then be sold to the end-consumers. Ex: DONG Energy, El-forbundet, etc. Consumers (large and small) Those eventually use the electricity for any purpose (from watching TV to heating to industrial production processes). There is a difference between small and large consumers, since the latter ones may be allowed to directly participate in the wholesale electricity market. [To be noted: DONG Energy is what we call an Electric Utility] 31761 - Renewables in Electricity Markets

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Who are we talking about?

Those who rule and operate the “game”: Regulator The regulator is responsible for the market design and its specific rules. It also monitors the market in order to spot misbehaviour in electricity markets (collusion, abuse of market power, etc.). Exs: The Danish Energy Regulatory Authority – DERA, CRE in France, Ofgem in the UK, etc. The Market Operator The Market Operator organizes and operates the market place. This may include the definition of bid products and bid forms, set up and maintenance of the trading platform, daily matching of supply and demand offers, etc. Ex: Nord Pool, APX, EEX, PowerNext, etc.

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3

Different types of market organization

Please also read D. Kirschen, G. Strbac (2004). Fundamentals of Power System Economics, Chapter 1.

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Organization: Monopoly

[source: Kirschen and Strbac (2004). Fundamentals of Power System Economics] 31761 - Renewables in Electricity Markets

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Organization: Purchasing agent

[source: Kirschen and Strbac (2004). Fundamentals of Power System Economics]

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Organization: Wholesale market

[source: Kirschen and Strbac (2004). Fundamentals of Power System Economics]

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Organization: Retail market

[source: Kirschen and Strbac (2004). Fundamentals of Power System Economics] 31761 - Renewables in Electricity Markets

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4

The actual markets and their purpose

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Electricity as a “special” commodity

Why is electricity so special?

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Electricity as a “special” commodity

Why is electricity so special?

1

There must always be a balance between generation and consumption

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Electricity as a “special” commodity

Why is electricity so special?

1

There must always be a balance between generation and consumption

2

Transportation and distribution is performed on a power network, with its specific physical rules

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Electricity as a “special” commodity

Why is electricity so special?

1

There must always be a balance between generation and consumption

2

Transportation and distribution is performed on a power network, with its specific physical rules

3

Storage is uneconomical (as of today)

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Electricity as a “special” commodity

Why is electricity so special?

1

There must always be a balance between generation and consumption

2

Transportation and distribution is performed on a power network, with its specific physical rules

3

Storage is uneconomical (as of today)

4

A large part of the electric demand is of must-serve nature (residential, hospitals, etc.)

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Electricity as a “special” commodity

Why is electricity so special?

1

There must always be a balance between generation and consumption

2

Transportation and distribution is performed on a power network, with its specific physical rules

3

Storage is uneconomical (as of today)

4

A large part of the electric demand is of must-serve nature (residential, hospitals, etc.)

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The final consumers cannot really differentiate the origin of the product (as well as its quality and nature)

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The European picture

[source: Nord Pool A/S] 31761 - Renewables in Electricity Markets

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Exciting time: The “Internal Energy Market”

Grid operators and power exchanges from 14 EU Member States plus Norway inaugurated on 4 February 2014 a pilot project for joint electricity trading, so-called day-ahead market coupling

Overall objectives: harmonize European electricity markets and strengthen competition improve liquidity, transparency and efficiency in the power markets across Europe social welfare optimisation

In practice: flow-based coupling of day-ahead markets standardization of (also new) products for intra-day markets and new matching algorithms target model for balancing? co-existence with new intra-day solutions? 31761 - Renewables in Electricity Markets

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The importance of the network

This is a simplified grid for the first synchronous zone of the Europan Transmission Network (app. 1500 lines only)... The real one has more than 32.000 lines! 31761 - Renewables in Electricity Markets

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The importance of FLOWS on the network

[courtesy of Tue V. Jensen, DTU Elektro]

The same grid with power flowing as a function of renewable energy generation and electric power consumption, in a future renewable-based power system.... 31761 - Renewables in Electricity Markets

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Different types of markets Capacity: for the system operator to ensure that sufficient generation capacity is present for reliable system operation in future years and at competitive prices

Capacity

Energy: central place for the optimal

Markets

Ancillary ervices

scheduling and settlement of energy exchanges

Ancillary service: any type of service that supports power system operations, directly bought by the system operator, e.g.

Energy

Primary reserves Secondary reserves Tertiary reserves (also called manual) Black-start capability, short-circuit power, reactive reserves and voltage control

Most of our focus will be on energy and ancillary services! 31761 - Renewables in Electricity Markets

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Energy markets and their purpose Futures markets: financial contracts with time horizon up to six years - used for price hedging and risk management. Ex: Nasdaq OMX Commodities for Scandinavia

Futures Day-ahead: seen today as the central instrument for everyday matching of electricity supplies and offers. Ex: Nord Pool Elspot for Scandinavia

Day-ahead

Balancing

Intra-day: continuous trading platform, between day-ahead and balancing, allowing to correct original schedules (e.g., in case of plant outages or changes in wind power generation).

Intra-day

Ex: Nord Pool Elbas for Scandinavia

Balancing: close to real-time operation, for the system operator to ensure power system balance. Ex: Energinet.dk in Denmark 31761 - Renewables in Electricity Markets

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Parallel between energy and ancillary services

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Open questions with renewables in electricity markets

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Renewables providing system services in a market environment

Should renewables (and demand) pay for the power fluctuations they induce? What is an optimal market design (and offering strategies) if renewables are to provide system services? 31761 - Renewables in Electricity Markets

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Reveal the true cost of uncertainty

The narrative fallacy: Do we really believe we can offer renewables deterministically with lead times of 12-36 hours ahead? Why not adapting market designs to reveal and accommodate the true cost of renewables’ uncertainty?

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A few important (final) questions

Can we continuously integrate more renewable energy generation into such electricity markets?

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A few important (final) questions

Can we continuously integrate more renewable energy generation into such electricity markets?

Are they fundamental changes to consider?

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A few important (final) questions

Can we continuously integrate more renewable energy generation into such electricity markets?

Are they fundamental changes to consider?

How can we (i.e., engineers, scientists, young and motivated people) contribute to that?

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A few important (final) questions

Can we continuously integrate more renewable energy generation into such electricity markets?

Are they fundamental changes to consider?

How can we (i.e., engineers, scientists, young and motivated people) contribute to that?

Unfortunately, these are research problems than cannot be covered in this course... except maybe for the “sneak preview” lectures on 9 May 2016 Besides, if you are interested, do not hesitate to ask! 31761 - Renewables in Electricity Markets

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Questions / discussion

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Thanks for your attention! - Contact: [email protected] - web: pierrepinson.com

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For you to do... (1)

Either this afternoon, or before the next session on Monday 8 February 2016 Readings (related to this introduction day): D. Kirschen, G. Strbac (2004). Fundamentals of Power System Economics, Chapter 1: “Introduction” J.M. Morales et al. (2014). Integrating Renewables in Electricity Markets, Chapter 1: “Introduction” R. Schleicher-Tappeser (2012) How renewables will change electricity markets in the next five years. Energy Policy 48: 64–75 (pdf)

Readings to prepare for Lecture 2: D. Kirschen, G. Strbac (2004). Fundamentals of Power System Economics, Chapter 2: “Basic concepts from economics” (especially for those who did not attend 42003 - Energy Economics, Markets and Policies) D.R. Biggar, M.R. Hesamzadeh (2014). The Economics of Electricity Markets, Chapter 4: “Efficient short-term operation of an electricity industry with no network constraints” (pdf) T. Boomsma, P. Meibom, N. Juul (20??). Mathematical programming models for energy system analysis: An introduction. From 42002 - Modelling and Analysis fo Energy Systems using Operations Research.

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For you to do... (2)

Either this afternoon, or before the next session on Monday 8 February 2016 Homework (suggested exercise, individually or as a group): Focus on one country (cannot be Denmark!, choose a country or use your country of origin for those who are not Danish) Investigate and determine the context of power system operation, i.e.,

who are the actors of the power system (producers, network operator, etc.)? is there a liberalized electricity market? what is the installed capacity for each renewable energy source (e.g., wind, solar)? what are future objectives in terms of renewable energy deployment? how are they accounted for in the electricity market and operation of power system? how is renewable energy generation remunerated (flat price, market price, premium, etc.)? Summarize these aspects within 1 page Send to [email protected] before next session on 8.2.2016

Those with a correct and interesting description of a country setup will have a 20% bonus on the grade of their worst assigment! 31761 - Renewables in Electricity Markets

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