Diapositiva 1

1
FORMATION AND FUNCTIONING OF THE CIS COMMON
ELECTRICITY MARKET
October 10, 2007
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• Presentation Contents
• General Concepts on Cross Border Electricity
  Markets
• Regional Markets in the World
• A phased approach to CIS Electricity Market
  Integration

The opinions expressed within this presentation
are of the Mercados team alone and they do not
necessarily reflect the opinion of any CIS
country.
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• General Concepts on Cross Border Electricity
  Markets
• Regional Markets in the World
• A phased approach to CIS Electricity Market
  Integration

4
Why Cross Border Electricity Markets?

• A regional electricity market typically enables
• To improve quality of service through mutual
  support during emergencies
• Alternatively to reduce the level of reserves
  necessary to achieve some level of service
  quality
• To reduce the cost to meet the load through
  energy trading
• To allow developing regional scale projects,
  which cannot be justified at countries level
• To optimize at regional level the use of primary
  resources
• To increase the competitiveness of markets
  through increasing the number of participants

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Fundamentals of Cross Border Markets

• Several products can be cross-border traded
• Bilaterally-traded energy, day-ahead-traded
  energy, support during emergencies, balancing
  services, regulation reserve, spinning reserve
• Each product entails different implementation
  requirements and also different benefit
• Golden rule The easiest to implement provide
  the most benefit (bilateral and day-ahead
  markets)
• Market integration implies some level of
  regulatory harmonization
• Higher level of integration requires higher
  harmonization of rules, structure and market key
  elements
• International experience shows that a large share
  of benefit is achievable with no or limited level
  of harmonization
• Basic criterion for Market Integration Benefits
  Costs

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Core concepts of Cross Border Markets

• Regional Electricity Market
• Set of agents involved in the electricity
  industry of a multinational geographical context
  (e.g. the CIS)
• The market also entails all the procedures and
  rules established for promoting and regulating
  trading between market participants of the
  incumbent countries.
• Regional Transmission Network
• Composed of those facilities of the overall
  transmission grid (set of transmission networks
  of all the involved countries) that are relevant
  to interstate electricity trading.
• For each particular element (line, transformer,
  etc.), this feature could be determined by
  checking its participation in energy
  transactions.
• In a fully integrated multinational electricity
  market, the Regional Transmission Network is to
  be centrally operated and planned.

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Products and Services in Cross Border Markets

• Products
• Energy traded through
• Trading Platform
• Bilateral contracts
• Day-ahead markets()
• Balancing markets()
• Ancillary services
• Long term reserves

• Supported by
• Transmission
• Congestion management
• Operation coordination
• Control of scheduled cross border flows
• Identification and settlement of deviations

Support during emergencies
() Classical opportunity trading, typical
between SO, today tends to day-ahead and
balancing markets
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Products in Cross Border Markets

• Physical Bilateral contracts
• Day ahead markets
• Balancing market
• Financial contracts
• Ancillary services market
• Long term reserves

• UCTE, USA, NordPool, SAPP, Central America, South
  America
• Participants of one market offer-bid in each
  other UCTE, USA
• Market Coupling Nord Pool, Central America,
  France-Belgium-Netherlands
• Between SO Colombia-Ecuador
• NordPool (partial)
• NordPool, several in UCTE, NYMEX
• Only through bilateral contracts
• No experiences of organized markets. Implemented
  through bilateral contracts (Reserve provider and
  TSO or between TSO).

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Bilateral Contracts and Forward Markets

• Bilateral (OTC)
• Physical most common and simple alternative for
  cross border trading. Obligation of seller to
  inject and the buyer to withdraw the committed
  capacity.
• Financial (requires a price reference and
  short-term markets in each country). Is a price
  risk hedging product.
• The seller compensates the buyer when spot price
  (SP) is greater than contract price (CP), the
  amount (SP-CP)PX
• The buyer compensates the seller when spot price
  is lower than contract price (CP), the amount
  (CP-SP)PX
• Long term contracts are normally linked to some
  structural price differential.

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Bilateral Contracts and Forward Markets

• Futures/options financial markets
• For price risk hedging, typically no physical
  delivery
• Includes credit risk management
• Standardized products, for instance base/peak
  energy
• Futures standardized forward contract (e.g. 1MW
  monthly base contract)
• Call option right (no obligation) to buy energy
  at a price (strike price). The holder of the
  option pays a option premium to the seller.
• Horizons from days to years
• Operates in overall competition with the
  bilateral market.

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Short Term (Opportunity)trading
Always market prices are different. Opportunity
trading takes advantage of this issue.
Benefits from cross border trading are only
limited by congestion, losses, or because prices
equalize in both countries
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Opportunity Trading

• Takes advantage of the prices (or marginal costs)
  differentials between interconnected countries
• The only condition to benefit is that prices
  differentials are greater than transactions costs
  (the only real cost are losses)
• Typical forms of opportunity cross border
  trading
• Transactions between SO (countries without
  markets)
• Participants of a country present offers in
  short-term markets of neighboring countries
  (UCTE, USA)
• Regional day-ahead (NordPool, Central America)

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Concepts about Day-ahead markets

• Common activities
• Market participants allowed to participate
  (licensed) present daily offers bids
• The MO processes the offer-bids and select the
  units that will supply the load, accept buying
  offers set the price.
• Accepted bids-offers turns obligations for the
  participants
• The SO introduces technical corrections to
  ensure system security
• The MO settles the transactions.
• Alternative designs obligations of participants
• Gross pool mandatory, all the energy must be
  traded in the DA, contracts are financial (for
  price hedging)
• Net Pool only are traded differences between
  physical contracts and actual generation-load

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Day-ahead markets

• Alternative designs spatial dimension
• Single price offers-bids are accepted regardless
  of the location and physical possibility to
  deliver the energy. The SO corrects the
  dispatch to relief congestion. Additional costs
  are pass through to consumers through a tariff
  up-lift
• Nodal pricing transmission constrains are taken
  into consideration during the clearing process.
  Nodal prices reflects the costs of consuming
  energy in each node taking into consideration
  transmission constrains and (in some cases)
  losses.
• Zonal pricing single price zones (SPZ) are
  defined. Congestion is only considered between
  SPZ.

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Cross-border Day-ahead markets

• Alternatives for cross border Day Ahead markets
• Participants of a country presents offers-bids in
  the Day Ahead of another (interconnected) country
  and vice versa. Offers-bids can be presented in
  the borders (i.e. regulatory seams are smoothed).
  Approach used in USA-UCTE
• The regional market each county has (or not) an
  internal market, but market participants-SO-utilit
  ies are allowed to offer-bid in a regional DA
  with its own rules. It is necessary a regional
  MO, regional congestions management and access
  charges. Used in Central America.
• The common market there is an unified Day-Ahead
  market. Offers-bids do not identify between
  internal-external transactions. Regional MO
  substitutes national MO. Used in NordPool.
• Market coupling close to common market, but
  bids-offers are differentiated between internal
  and cross-border. Unified clearing of cross
  border offers-bids. Used among France-Netherlands-
  Belgium.

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Balancing Markets Balance Management

• Different definitions and concepts. Substantial
  variation in the terminology used and the manner
  in which balancing services are organized
  throughout Europe and USA.
• ETSO Balance Management means the management
  processes and services associated with power
  system operation, which ensure quality and short
  term security of supply. In particular this
  presentation focuses on active power balancing
  and frequency control.
• ETSO grouped services into 3 types
• Frequency Control (automatically delivery)
• Reserves and Energy Balancing (manually
  instructed delivery)
• Other services (e.g. Reactive power, resolving
  congestion)

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Schematic sequencing of reserves
Instructed (manual, AGC) action of particular
generating sets linked to a control loop in a
control area, to move the overall system
deviation of the control area toward zero
Automatic reaction of the primary controller of
generating sets to a frequency deviation
Balancing based on merit order or reserves (fast,
tertiary,..)
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Difficulties for cross border balancing markets

• Regulatory pricing (single double marginal or
  pay as bid gate closure times settlement
  periods)
• Institutional SO would compete for using
  balancing resources, is necessary a regional SO,
  or at least a hierarchy
• Technical amount of non manageable renewable
  energy load shedding AGC ramps reaction time
  ..
• Economical allocation of transmission capacity
  to balancing activities, withdrawing it for
  energy trading
• The present trend is to control cross border
  flows to fulfill day-ahead or intraday schedules

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Market for Long Term Reserves

• There are two alternatives to manage regional
  reserves
• Through energy markets
• Bilateral option contracts (right to be supplied
  at a price)
• Day-ahead market (that optimizes on daily
  intervals the entire available capacity)
• Balancing market (that optimizes on real time
  basis the entire available capacity)
• Through organized reserves (capacity) markets
• SO agree on regional reserve need
• A reserves market is organized, where generators
  and loads offer capacity/curtail to fulfill
  reserve requirements
• This market must consider cross-border
  transmission capacity
• Theoretically possible, no international
  experience

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Benefits from Cross Border Trading
Typical settlement in USA-EU
Bilateral- day ahead 85-90
Balancing 5-10
Ancillary S 4-6
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Seamless cross border bilateral contracts
B
A
Country B single price, nodal access charges,
physical contracts, losses part of access
charges Country A nodal price, postage stamp
access charges financial contracts
LA
Generator GB of B enters in a bilateral contract
with a load LA of A by 100MW
NA
?
GB

• In market B, GB declares a bilateral contract,
  with delivery node in the A-B border. The
  contract is included in the day-ahead schedule by
  Bs MO-SO. GB pays access charges for the
  transaction according with internal regulation.
• LA offers 100MW in the border node NA, at zero
  price. As MO-SO considers the importation as a
  generator in the border. LA pays difference of
  nodal prices between NA and its node. LA pays
  internal access charges (pankaking).

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How to connect Day-Ahead markets with different
design?
A LMP
B SPA
A considers injection/withdrawals as
generators/loads in the border node, priced at
the import/export price B considers
exports/imports as internal load/generation
A each border node has an injection/withdrawal
and a price (the price of the energy
imported/exported) B the imports are considered
as internal generation and exports as internal
loads
A LMP
B SPA
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Two key Issues for Cross Border Markets

• Congestion management, which deals with
• Allocation of (usually scarce) cross border
  transmission capacity
• Parallel flows
• Essential for cross border trading, because as
  soon as bilateral/DA trading becomes liquid,
  cross border capacity turns fully utilized
• Identification and Settlement of Deviations
• The set of daily cross border transactions among
  all the participants of the market origin flows
  in cross border links
• Members of the market must agree how to measure
  deviations form scheduled flows
• Deviations from schedules (that means from agreed
  transactions) must be measured and settled.

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Congestion Management

• Typically, cross border transmission capacity is
  low in relation to countries internal loads,
  therefore it becomes necessary rules for
  allocating this capacity to transactions.
• Commercial vs physical flows

In this case physical and commercial flows
coincides
Commercial transaction originates physical
flows
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Transmission Rights

• Physical Transmission Rights (PTRs) the owner of
  a PTR for X MW is entitled to inject X MW in a
  (fixed) node i and to withdraw the same power
  in other node j. Have several types
• Absolute.
• Use-it-or-lose-it
• Use-it-or-sell-it
• Financial Transmission Rights (FTRs) the holder
  of a FTR for X MW between nodes (zones) i and
  j is entitled to receive the power X times the
  difference of nodal (zonal) prices between both
  nodes.
• Physical implementation
• Flowgates
• Point-to-point

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Transmission Rights Allocation Methods

• First come first served
• Proportional
• Priority of use
• Market splitting
• Explicit auctions to allocate transmission rights
• Implicit auctions
• Explicit (long-term) implicit (short-term)
  auctions

Inefficient

Efficient
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Efficient Congestion Management Methods

• Explicit auctions, where the available
  interconnection capacity is allocated to the
  agents who submit the highest bids in an auction
• On flowgates
• Point to point
• Implicit Capacity Allocation
• Implicit auctions, where the available
  interconnection capacity is allocated to allow
  access to an organised electricity market by
  agents located on the other side of a congested
  interconnection, whose bids and offers are
  accepted. In this sense, the capacity is allocate
  implicitly on the basis of the energy market
  results
• Market splitting, where the available capacity is
  used to support trading between different areas
  of the same organised electricity market. In this
  sense, the capacity is not allocated to
  individual agents.

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Transmission Rights Allocated on a Flowgate
A
B

• Typical case in cross border trading
• TSOs agree on the available capacity between A
  and B
• ETSO methodology NTC
• This available capacity is allocated through
  auctions

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Point to Point Transmission Rights
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Transmission model for implicit auctions
Single price area
Bottleneck
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• General Concepts on Cross Border Electricity
  Markets
• Regional Markets in the World
• A phased approach to CIS Electricity Market
  Integration

32
Cross Border Markets in the World
CIS
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South America
Colombia Ecuador Peru Venezuela Intensive
opportunity trading

• Argentina-Brazil-Paraguay-Uruguay
• PPAs
• Bi-national Hydro Plants
• Marginal spot trading

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North America

• Al countries connected.
• USA and Canada states forms pools
• Each pool has its own rules (like a country,
  intensive inter-pool exchanges through
• Bilateral contracts
• A member of a pool presents offers in others

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USA-Canada Pools
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Europe - Nordel

• Probably the most sophisticated regional market
• NordPool offers
• Intra-day, continuous-trading physical market
  (Elbas),
• Markets for electricity-based financial
  derivatives contracts (Eltermin).
• Day-ahead, auction-based physical market
  (Elspot)
• Clearing of OTC
• Market splitting joint clearing of all national
  markets taking in consideration the capacity of
  links. When congestion arises, the market is
  split in several prices zones.

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Europe - UCTE

• Objective to ensure the coordination and
  co-operation for the safe and reliable operation
  of the interconnected electricity systems.
• Mainly bilateral trading
• Participants of a market can present offers in
  short term markets of another one
• Congestion managements to trade, members must
  get cross border transmission capacity
• Comprises several regions

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UCTE Regions
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UCTE Congestion Management
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South African Power Pool

• SAPP allows two products
• PPA
• Short term market (STEM)
• PPAs have priority for use of transmission
  capacity
• A more efficient day-ahead market is being
  designed.
• Two zones North, with important hydro and South,
  mainly thermal

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Progressive Formation of Cross Border Markets

• International experience show that cross border
  markets had an progressive integration of
  countries.
• Experience gained with initial countries
  simplified the integration of new countries.
• For instance
• NordPool Norway-Sweden ? NS Finland ? NSF
  Denmark
• Central America
• 
  Guatemala El Salvador
• PanamaCosta Rica ? PCRNicaragua ?
  PCRNHonduras

G-ES-P-CR-N-H
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• General Concepts on Cross Border Electricity
  Markets
• Regional Markets in the World
• A phased approach to CIS Electricity Market
  Integration

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CIS Electricity Market

• The CIS countries have agreed that the creation
  of the Common CIS electrical energy market shall
  be aimed at the improvement of the quality of
  service and security of customers.
• They also foresee the implementation of CIS
  electricity market in a phased manner, so as to
  ensure the possibility of a gradual adjustment in
  the CIS countries economies to the market
  conditions as well as a secure energy supply.
• Therefore the CIS power market does not exist
  yet, as a real market, although steps are being
  taken to establish this market.
• A series of agreements exist that establishes the
  creation of a regional market based on the
  principles of equal rights, fair competition and
  mutual benefits,
• Little additional progress has been made so far
  in the establishment of a formal market.

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CIS Space
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History

• On February 14th, 1992, the CIS member states
  signed the Agreement on Coordination of
  Interstate Actions in the Field of Electric Power
  Industry of the Commonwealth of Independent
  States. This agreement created the CIS
  Electricity Council and its working body, the
  Executive Committee.
• The active actions of CIS Electric Power Council
  member states promoted the stability of the
  situation and began the restoration of CIS states
  interconnected power system that was formally
  broken apart in 1998-1999 although some parts
  were already working independently.
• In June 2000 the parallel operation of Russian
  UPS and the National Power System of Kazakhstan
  was restored. In September 2000 the power systems
  of Kyrgyzstan, Tajikistan, Turkmenistan,
  Uzbekistan were connected as the Central Asian
  interconnected power system, and then with the
  National Power System of Kazakhstan.
• In August 2001 the Ukrainian and Moldavian power
  systems joined to the now interconnected power
  system of CIS states. Thus, the power systems of
  11 out of 12 countries are working now in
  parallel as one Interconnected Power System of
  Commonwealth of Independent States

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Initial Conditions for a CIS Electricity Market
(I)

• Three countries with competitive markets
• Kazakhstan net pool with several participants.
  Single price. All participants allowed to
  import-export energy
• Russia gross pool with nodal prices. Presently
  only InterRao allowed to import-export.
• Ukraine moving to a net pool.
• Rest of CIS countries with non competitive power
  sectors. In general no plans to move to multiple
  sellers-buyers competitive markets
• Existing cross border transmission infrastructure
  that would allow regional trading

But, good news! There is enough cross border
transmission capacity. Lack of transmission
capacity is the only real obstacle to cross
border trading.
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Initial Conditions for a CIS Electricity Market
(II)

• Significant regulatory differences, that
  introduces seams and some obstacles
• Diversity of physical conditions and primary
  resources , which implies good opportunities for
  trading
• Possibility to start trading through bilateral
  contracts with no or only minor changes
• Common market requires relevant regulatory
  changes
• Real chance to obtain enhanced reliability, more
  efficient utilization of generating capacities
  and lower environmental impact with a CIS energy
  market

A relevant part of benefits can be achieved with
limited regulatory changes and with the reference
of international experience.
A phased approach would allow to obtain rapidly
benefits, while countries introduces the
regulatory changes that would allow maximize
benefits.
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Towards fluent cross border trading

• A highly integrated common market model would
  require relevant (and time consuming) regulatory
  changes in CIS countries.
• A phased approach would enable to obtain short
  terms benefits with no or minimum regulatory
  changes.
• Initially only secondary adjustments are
  necessary. As far as benefits from cross border
  trading are evident, there will arise incentives
  for entering in deeper regulatory changes.
• Major regulatory changes can be progressively
  made after initial stages with the target to
  capture in the long term 100 of benefits
• Several seams were identified, they diminishes
  the efficiency, but do not impede cross border
  trading

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A Possible Evolution of the Cross Border Market
Progressive harmonization of power sectors ?
Physical contracts
PX
Contracts
Financial contracts Standard
products PX
Common Day-ahead
Cross participation in the borders
Day-ahead
Control of cross border flows- settlement of
deviations
Market for Balancing
Mk balancing resources
Balance Management
Contracts for ancillary services
Ancillary S Mk Standard
agreement for support during emergencies
Ancillary Services
Explicit Auctions on Flowgates Point to
point transmission rights
Congestion Management
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Stages of the Integration Process

• Bilateral trading MP bids/offers in
  national/international markets
• Transition from limited licensed import/export
  agents scenario to free cross-border trade
• Joint congestion management (auctions).
  Previously committed capacity not auctioned
  (parallel operation)
• Inter-TSO compensation for transits
• Support during emergencies
• Settlement of deviations

• Bilateral trading MP bids/offers in
  national/international markets
• Transition from limited licensed import/export
  agents scenario to free cross-border trade
• Joint congestion management (auctions).
  Previously committed capacity not auctioned
  (parallel operation)
• Inter-TSO compensation for transits
• Support during emergencies
• Settlement of deviations

• Bilateral trading MP bids/offers in
  national/international markets
• Transition from limited licensed import/export
  agents scenario to free cross-border trade
• Joint congestion management (auctions).
  Previously committed capacity not auctioned
  (parallel operation)
• Inter-TSO compensation for transits
• Support during emergencies
• Settlement of deviations

• Bilateral trading MP bids/offers in
  national/international markets
• Transition from limited licensed import/export
  agents scenario to free cross-border trade
• Joint congestion management (auctions).
  Previously committed capacity not auctioned
  (parallel operation)
• Inter-TSO compensation for transits
• Support during emergencies
• Settlement of deviations

Stage 1 Coordinated country-to-country Trading
(UCTE)
Stage 1 Coordinated country-to-country Trading
(UCTE)

• Bilateral Common day-ahead/bal. market for
  cross border
• Regional day-ahead market structure Single
  regional market, coordinated national markets, or
  coexistence of regional and national markets
• Common congestion management mechanism
• Common access charges
• MP are mutually accepted
• Balancing-ancillary services market/agreements
• Organized market for financial contracts

• Bilateral Common day-ahead/bal. market for
  cross border
• Regional day-ahead market structure Single
  regional market, coordinated national markets, or
  coexistence of regional and national markets
• Common congestion management mechanism
• Common access charges
• MP are mutually accepted
• Balancing-ancillary services market/agreements
• Organized market for financial contracts

• Bilateral Common day-ahead/bal. market for
  cross border
• Regional day-ahead market structure Single
  regional market, coordinated national markets, or
  coexistence of regional and national markets
• Common congestion management mechanism
• Common access charges
• MP are mutually accepted
• Balancing-ancillary services market/agreements
• Organized market for financial contracts

• Bilateral Common day-ahead/bal. market for
  cross border
• Regional day-ahead market structure Single
  regional market, coordinated national markets, or
  coexistence of regional and national markets
• Common congestion management mechanism
• Common access charges
• MP are mutually accepted
• Balancing-ancillary services market/agreements
• Organized market for financial contracts

Stage 2 Regional Market (Nordel-CA)
Stage 2 Regional Market (Nordel-CA)
Stage 2 Regional Market (Nordel-CA)
Stage 3 Unified Market

• Single regional unified market for all
  participants of every country

Stage 3 Unified Market

• Single regional unified market for all
  participants of every country

Stage 3 Unified Market

• Single regional unified market for all
  participants of every country

Stage 3 Unified Market

• Single regional unified market for all
  participants of every country

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A Possible Road Map for Market Integration (I)
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A Possible Road Map for Market Integration (II)
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A Possible Road Map for Market Integration (III)
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Thanks very much
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Questions?