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Institut fr Elektrische Energiesysteme

Power System Economics

Lecture 3: Markets for electrical Energy


Dr. Pio Lombardi

LENA - Lehrstuhl Elektrische Netze und Alternative Elektroenergienquellen

Magdeburg, 25.10.2011

Agenda
Trading electricity Open electrical energy Market Bilateral trading Electricity pools Pools vs. bilateral trading Spot Market Balancing resources Managed spot market Interaction between managed spot market and other markets Settlement of process
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Trading electricity
The trading of electricity refers to a certain amount of MWh which has to be delivered over a period of time. It is typically set at an hour, half an hour, or quarter of an hour. The delivery time depends on the country or region where the market is located. The electricity price highly depends on the time of the day in which the electricity is delivered
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Trading electricity
The supply and demand generation and load- must to be balanced on second to second basis. If they are not balanced the power system collapses. The social and economic consequences of black out are extremely severe. The power system balance is a short run process that must to be achieved at any costs.
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Why a managed spot market?


consumers
Forecast their consumption for every market period (an hour, half an hour, a quarter of hour)

Real-time
The actual demand is never as forecasted. Sudden problems often happen, they may force a unit to shut down or reduce its capacity

Generators
Schedule the production of their units to deliver at the agreed time the energy they have sold. Objective function: minimize the generation costs

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Why a managed spot market?

The forecasting errors and unpredictable events introduce gap between generation and demand that must be bridged quickly to the system in balance. A managed spot market must supersede the open spot market. Its function is to match the residual load and generation by adjusting the production with flexible units and curtailing the demand of willing consumers. Generally this market is called Ancillary service market.

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Bilateral trading
It involves only two actors: buyer and seller without involvement of third party. Depending of the amount of time available and on the quantity to be traded, three different forms of bilateral contracts may be used: 1. Customized long-term contracts 2. Trading over the counter 3. Electronic trading A characteristic of these contracts is that the price is set independently by the parties involved. There is not an official price. The details of the negotiate are kept private
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Bilateral trading: Customized long term contracts


The terms of the contracts are flexible. They usually involve huge amount of energy (hundred or thousand of MWh) over long period of the time (several months several years). The cost associated to these contracts are very high which make them worthwhile only when the electricity traded is large.

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Bilateral contract: Trading over the counter


These contracts involve small amount of energy to be delivered according to a standard profile which defines how much energy should be delivered during different periods of the day and the week. The transaction costs are lower in comparison to the customized long term contract.

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Bilateral trading: electronic trading


The market participants enter anonymously their offers and bids directly in a computerized market. When a party enter a new bid the software that runs the exchange checks if there is a matching offer for the period of delivery of the bid. A deal is struck if the offer price is equal or higher than the bid price. All participants see the quantity and the price of the deal. If no match is found the bid is added to the bid list and will remain there until a match offer is found or the bid is withdrawn or it is lapsed because of the market closure.

This form of exchange is fast and cheap. Some minute before the market closure there is often flurry of trading activities
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Bilateral Trading: Example


Borduria Power generators

Assumptions
Marginal costs are constant over the trading period Because of high startup costs the Unit A and B are always on line Startup cost of unit C are negligible.
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Bilateral Trading: Example, cont.

June

570

Sometimes the Borduria Power buys with profit from the market

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Bilateral Trading: Example, cont.


On 11th from 14,00 to 15,00 June Borduria Power (BP) has sold 570 MWh, it has still 130 MW from unit B and 5 from unit C available during that hour. Since the MC of unit B are 13,00$/MWh, BP takes the offers O1, O2 and O3 before another competitor takes them. The unit C remains in standby since no offers has a price higher than his MC

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Bilateral Trading: Example, cont.


Shortly before the delivery of the power, a failure occurs to the unit B: it will able to produce no more than 80 MW. What to do? 1. To buy 50MWh at spot market? 2. To use the unit C to cover the demand? 3. To buy the power from the replacement power?

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Bilateral Trading: Example, cont.


BP takes the bids B8,B6 and B3 since the price is lower than the MC of unit C (17$/MWh).

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Electricity pool
Generating companies submit bids consisting of price/quantity pair. These bids are ranked in order of increasing price. The bids reflect the cost characteristic of the generation units (including marginal, start up and no load costs) Consumers submits offer specifying quantity and price. These offers are ranked in order of decreasing price. The market clearing equilibrium is identified from the meeting of demand and supply curves. All the bids submitted at price lower or equal the market clearing price are accepted, as well as all the offers submitted at price equal or higher than the market clearing price are accepted. The market clearing price represents the System Marginal Price (SMP). Generators are paid the SMP while the consumers pay the SMP for every MW-h consumed. The pool performs a unit commitment calculation which determines the production schedule and the price for an entire day divided in periods of half an hour or an hour.
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Electricity pool: Example


Offers and bids for a particular pool market for one hour trading.

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Electricity pool: Example, cont.


The SMP is set to 16$/MWh and the traded amount of electricity is 450 MW

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Pools vs bilateral trading


1.Pools are often created on the basis of a cooperation agreement among various utilities. 2.Pools provide a centralized form of system management, sometimes they assume the responsibility for operating the transmission systems 3.Difficulty to distinguish between the various functions 4.Small and medium consumer have little incentive to take an active parte in the electricity market 5.Pools provide a mechanism to reduce the scheduling risk faced by generators and then the costs of producing electricity 6.The rules of the pools may ensure that the utilities recover the costs of start up and no-load costs.

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Spot market balancing resources


The managed spot market is a mechanism used by the system operators to maintain the system in balance. The energy used to balance the system is freely offered by the participants at the price they choose. The bids and offers are selected by the system operator rather than through bilateral trades

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Spot market balancing resources


The SO takes action when the consumed/supplied electricity differ from the predicted one. In a competitive market all the participants willing to provide these adjustments may participate to the balancing resources market. Balancing services (ancillary services) are offered by the participant to the SO after the closure of the open energy market. Generating units if have still capacity can submit bids to increase their output or they can pay to reduce their output. Consumers can offer to reduce their consume or to increase it if they find the price of electricity attractive for their purposes. SO can purchase these resources on long term basis. The suppliers are then paid a fixed price (option fee) to keep available some generation capacity.

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Spot market balancing resources


Minute reserve in Germany on 06.10.2011

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Spot Market primary reserve price in Germany

Source: Dr. Mller (50hertz) SOS Konferenz 2011 Power System Economics 23

Power price (/MW)

Spot Market positive secondary reserve price in Germany

Source: Dr. Mller (50hertz) SOS Konferenz 2011 Power System Economics 24

Power price (/MW)

Spot Market negative secondary reserve price in Germany

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Power price (/MW)


Source: Dr. Mller (50hertz) SOS Konferenz 2011 25

Spot Market minute reserve price in Germany

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Power price (/MW)


Source: Dr. Mller (50hertz) SOS Konferenz 2011 26

Gate Closure
How much time should elapse between the gate closure and real time generation? Generators and retailers They prefer a short interval in order to reduce the exposure risk

System Operators

Longer intervals for optimally plant their balance resources. Es. Coal power plants need several hours to be on line
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Operation of managed spot market


Long if the system generates more than it consumes. Short if the system consumes more than it produces.

At gate closure producers and consumers inform the SO on their contractual positions. The SO combines these with its forecasts. If the system is unbalanced the SO the resources to balance it.
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Interaction between spot managed market and other markets


If spot price tends to be low

Retailer will tend to be short since they can buy electricity at lower price at spot market

Lower energy traded in the forward markets-> lower forward market price

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Settlement of the process


If the amount delivered is lesser than that delivered If the amount consumed is lesser than that delivered

The buyer is entitled to withheld part of the payment

The sellers is entitled to an additional payment

The SO buys the replacement energy on spot market


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The SO sells the excess on spot market


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Settlement of the process


The money paid by the SO to replace the energy is often higher than the money earned when it sells energy to the spot market

The parties responsible for the imbalance have to pay the costs for this balancing activities

Determine the net position of each participants => each generator has to report to the settlement system the amount of the net contracted energy included the energy traded in spot market This amount is subtracted from amount of energy it actually produces If the difference is positive the generator has sold the excess to the System, if the difference is negative the generator is treated as it has bought the difference from the system
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Settlement of the process


The process is similar for the consumers. The imbalances are charged at spot price. If the market is competitive the price reflects the marginal costs to produce these services

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Settlement of the process, example 1


Power plant portfolio, generation capacity and marginal costs 580 MWh sold through bilateral contract. Still 50 MWh !!

Which strategy to increase the profit??


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Settlement of the process, example 1


In competitive markets the price reflects the marginal costs, BUT the markets are not perfectly competitive!!!!

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Settlement of the process, example 2


The SO requires 40 MWh and pays 17,50$/MWh The unit B has a problem and produces only 10 MWh, the Genco has to buy 70 MWh Spot price 18,25 $/MWh

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Settlement of the process, example

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Thank you for your attention

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