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SOUTH EAST EUROPE

WHOLESALE MARKET OPENING


Final report
October 2009
FINAL DRAFT

SOUTH EAST EUROPE WHOLESALE MARKET OPENING

ACKNOWLEDGEMENT
The South East Europe Wholesale Market Opening technical assistance project (the
Project) is co-financed by two multi-donor trust funds, ESMAP and PPIAF.
The Energy Sector Management Assistance Program (ESMAP) is a global technical
assistance program which helps build consensus and provides policy advice on
sustainable energy development to governments of developing countries and economies in
transition. For more information on the program see the website: www.esmap.org
The Public-Private Infrastructure Advisory Facility (PPIAF) is a multi-donor technical
assistance facility aimed at helping developing countries improve the quality of their
infrastructure through private sector involvement. For more information on the facility see
the website: www.ppiaf.org
The Word Bank is managing the Project as a part of its support to the development of the
Energy Community. For information about the World Bank's energy sector activities see
the website: www.worldbank.org/energy

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TABLE OF CONTENTS
EXECUTIVE SUMMARY

SECTION I: HIGH LEVEL RECOMMENDED MARKED DESIGN

1.

SUMMARY OF RECOMMENDED MARKET DESIGN AND


IMPLEMENTATION

1.1

Prerequisites

1.2

High level recommended SEE Regional Power Market Design

12

1.3

High level SEE Regional Power Market business processes

12

1.4

CAO Coordinated Auction Office

15

1.5

Transition phase: From regulated prices to market prices

16

1.6

VPP auction

20

1.7

Action plan

20

SECTION II: BACKGROUND

25

2.

INTRODUCTION

26

2.1
2.2

The focus of the study


Designation of the Contracting Parties

26
27

2.3

Objective of a wholesale market reform

27

2.4

Regulatory framework

27

3.

4.

5.

THE REGIONAL ELECTRICITY MARKET

29

3.1

Introduction

29

3.2
3.3

Electricity generation and demand


Regional trade in electricity

29
38

3.4

Market structure, market opening and market model

43

3.5

Prices and tariffs

49

CURRENT REGIONAL MARKET OPERATIONS AND MECHANISMS

52

4.1

Current Balance Management in SEE

52

4.2
4.3

Congestion management and cross-border capacity allocation


Inter-TSO Compensation mechanism (ITC)

53
59

EXPERIENCES FROM OTHER REGIONAL MARKETS

60

5.1
5.2

Selected national and regional markets


Review of Regional Markets

60
68

5.3

Conclusion

71

SECTION III: ANALYSIS

73

6.

74

POSSIBLE CAUSES FOR HIGH PRICES IN THE REGION

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7.

8.

9.

10.

RISKS AND OPPORTUNITIES FOR NON-HOUSEHOLD CUSTOMERS

80

7.1

Key risks

80

7.2

Opportunities

81

BARRIERS TO MARKET OPENING

83

8.1

Prerequisites for market opening and current status

83

8.2

Barriers to market opening

89

8.3

Ways to overcome barriers to market opening

91

KEY PERFORMANCE INDICATORS

92

9.1

Prices, transparency and surveillance

93

9.2

Access to markets

94

9.3

Access to customers

95

9.4

Market structure and competition

96

9.5

Balance responsibility and balancing markets

97

9.6

Allocation of cross-border capacities

98

9.7
9.8

Network tariffs and grid access


Independent regulators and harmonization of regulations

99
100

SEE WHOLESALE MARKET OPENING REQUIREMENTS

101

10.1

Introduction

101

10.2

Balance Responsibility, Regulated Prices and Market Price

102

10.3

Generation and consumption balancing

102

10.4
10.5

Market Structure
Regional market key decisions

105
106

SECTION IV: MARKET DESIGN AND IMPLEMENTATION

111

11.

REGIONAL MARKET DESIGN

111

11.1

Introduction

111

11.2

Recommended Regional Market Design

112

11.3

Details in the SEE Regional Power Market design

121

11.4

Organization of the SEE Regional Power Market

143

12.

13.

TRANSITION PHASE: FROM REGULATED PRICES TO MARKET PRICES 154


12.1

Transition towards a unified SEE Regional Power Market

154

12.2

Regulated Price

154

12.3

Traditional Full Supply Contracts with Regulated Price

155

12.4

Supply Contracts and Balance Responsibility

156

12.5

Transition Period

157

12.6

Stepwise implementation challenges

161

ACTION PLAN

163

13.1

Required decisions

163

13.2

Project team(s)

163

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13.3

Implementation Plan

164

ANNEX A LIST OF INTERVIEWS AND MEETINGS

174

ANNEX B LIST OF REFERENCES

175

ANNEX C GLOSSARY

176

ANNEX D ACTION PLAN FILES

181

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EXECUTIVE SUMMARY
Pyry Energy Consulting and Nord Pool Consulting have been commissioned by the World
Bank to develop a study on Wholesale Market Opening for the electricity market in South
East Europe. The key outputs of the study are a Regional Market Design (RMD) and an
action plan for implementation.
The geographical focus of the report is the seven Contracting Parties to the Treaty that
established the Energy Community, i.e., Serbia, Croatia, Albania, Bosnia and Herzegovina,
FYR of Macedonia, Montenegro and Kosovo 1. However, the creation of a regional wholesale
electricity market may span a broader geographical scope than this.
The recommendations as set out in this report are founded on the decisions and
recommendations found in various European organizations like EU, EuroPEX, ERGEG,
ENTSO-E, and UCTE. A full reference for these documents is part of the Annex B List of
references found at the end of this document.
The Consultants recommendations are based on the following key elements and can be
summarized as:

The establishment of a flexible regional cooperation enabling competitive wholesale


trading of electricity between the involved participants in the SEE region is based on the
successful experiences from other European markets.

A regional market founded on a Day-Ahead Market with implicit auction and crossborder capacities allocated to the DAM

A step by step approach:


Serbia and Romania (Hungary) mandatory in phase I
Bulgaria, Croatia and Slovenia optional in phase I
Others to follow as soon as they comply with requirements;

Implementation of Balance responsibility for wholesale market participants;

Harmonisation of rules and regulations between the SEE Contracting Parties;

Generator Supplier unbundling, at least removal of traditional Full Supply Contracts


between Generators and Suppliers/Eligible Customers

Transparency of relevant market information and prices;

Equal market access to all;

Co-existence of bilateral and exchange trading;

The deadline for implementation of the complete SEE Regional Power Market is 2015.

To be able to meet this target, political willingness and support for the required changes and
commitment to the action plan(s) from all the stakeholders in the region are vital.
A prioritized task is to set up a market simulation environment for the SEE region to be able
to perform dry runs and various market trials.

The Republic of Kosovo became a member World Bank Group (and the IMF) on June
29, 2009 and is therefore named Kosovo throughout this document. Kosovo will
however remain UNMIK under the Treaty that established the Energy Community.

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Reading instruction
The report consists of four main sections as well as three annexes.
Section I (chapter 1) is a high level summary of the recommended market design and action
plan. These are the key recommendations from the Consultants and are based on the
presentation given at the ECRB meetings and workshop in Vienna in September 2009.
Section II (chapter 2-5) contains background information such as the foundation for the
project, the current situation in SEE and experiences from other regional electricity markets.
A reader with good insights to the region and the subject may want to skip this section.
Section III (chapter 6-10) contains analysis of the current situation, descriptions of different
possible solutions for a wholesale market in SEE and key performance indicators to monitor
the progress of the wholesale market opening.
Section IV (chapter 11-13) contains the market design recommended by the Consultant and
the action plan to implement the solution. This section provides more details regarding the
recommended market design and offers more details and insight to the high level summary
in section I.

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SECTION I: HIGH LEVEL RECOMMENDED MARKED DESIGN

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1.

SUMMARY OF RECOMMENDED MARKET DESIGN AND


IMPLEMENTATION

1.1

Prerequisites

The framework for the SEE Wholesale Market Opening is set by the EC Treaty, ref [3].
The recommended market design is based on the following basic requirements:
SEE, an integrated part of European Internal Energy Market
Technical operation of the SEE grid system spans 4 control areas within ENTSO-E. Trade
across national borders is currently based on bilateral contracts and explicit auctions. SEE
Wholesale Market Opening should streamline with European trends with price coupling
linking national and regional markets in order to enhance efficiency and transparency.
Regional approaches that choose incompatible solutions would obstruct the process of
creating an integrated pan-European power market (ref [2]).
National control, regional cooperation
The recommended market design aims at having national responsibility of all the trading
processes, procedures and trading platforms including the market opening process itself.
Regional cooperation and efficient cross-border utilisation will be secured through coupling of
national DAMs. TSOs must allocate cross border capacity to DAMs.
Controlled transition from regulated prices to open market
The process of abandoning regulated prices/tariffs is progressing at different speed
throughout the SEE region. The recommended design allows for national preferences with
respect to further development of this process. Schemes for vulnerable customer sustain.
Quick establishment of incentives to invest
Generator/supplier unbundling will secure DAM-liquidity and a reliable and trustworthy price
reference will soon be established. As soon as the reference price(s) for the SEE market is
established, investors will find it more favourable to come forward. Publishing SEE DAM
prices through EuroPEX daily info systems will be a strong indication of market integration.
Co-existence of bilateral trade and market operators
Until financial instruments are developed, market participants will need bilateral trade (mid.
term and long term contract) to supplement DAM trade to handle price risk.

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The following figures illustrate how the recommended design complies with current TSO
scheduling and ongoing efforts to co-ordinate power trade across Europe.
1. No change to ENTSO-Es Scheduling and Accounting when introducing DAM. DAM
will replace some bilateral contracts.

Figure 1

Information exchange for the scheduling process in the UCTE pyramid


(ref UCTE)

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2. Implicit auctioning fits with EuroPEX-ENTSO-Es preferred market coupling


mechanisms, ref [2].

Figure 2

European power market integration, ref. EuroPEX-ENTSO-E, Final


Report January 2009

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3. Existing PXs across Europe bring transparency and predictability to market


participants and investors. SEE countries will benefit from harmonization and
integration with these markets.

Figure 3

European spot prices, ref EuroPEX

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1.2

High level recommended SEE Regional Power Market Design

The Consultants recommendations are based on the following key elements and can be
summarized as:

The establishment of a flexible regional cooperation enabling competitive wholesale


trading of electricity between the involved participants in the SEE region is based on the
successful experiences from other European markets.

A regional market founded on a Day-Ahead Market with implicit auction and crossborder capacities allocated to the DAM

A step by step approach:


Serbia and Romania (Hungary) mandatory in phase I
Bulgaria, Croatia and Slovenia optional in phase I
Others to follow as soon as they comply with requirements;

Implementation of Balance responsibility for wholesale market participants;

Harmonisation of rules and regulations between the SEE Contracting Parties;

Generator Supplier unbundling, at least removal of traditional Full Supply Contracts


between Generators and Suppliers/Eligible Customers

Transparency of relevant market information and prices;

Equal market access to all;

Co-existence of bilateral and exchange trading;

1.3

High level SEE Regional Power Market business processes

The Consultant recommends a decentralized design.

Each Contracting Party (CP) has its own National Market Operator (NMO);

Each market participant has an agreement with his NMO;

All bidding, settlement, collateral and participant agreements are made between the
market participant and the NMO;

NMO will collect and validate all bids from its participants and creates one Net Export
Curve (NEC) combining all the bids from its market participants into one aggregated bid
curve (thereby anonymous) that is sent to the SEE Market Service Provider (SEESP)
acting on behalf of the Regional PX;

SEESP will collect NECs from all NMOs, and will get ATCs for all interconnections from
the CAO. Based on these data, SEESP will calculate a common price index for all areas
and price for all individual areas as well as the flow on each interconnection. These
values will be returned to the NMOs;

NMOs will have a service agreement with the SEESP for the price calculation as well as
with the CAO for the allocation of ATCs to be utilized for DAM;

Prices and volumes for each market participant are calculated by the NMOs.

This design is based on Price Market Coupling.

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The business process overview is illustrated in the following 2 figures and discussed in
details in chapter 11:

Figure 4

Business process overview

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The proposal is based on three (chronological) processes:


1.

ATC publication the publication of ATC from CAO (as representatives for the TSOs)
to the SEESP, the national market operators and the participants

2.

Bidding process the process where participants submit individual portfolio bids to
their NMOs, the NMOs create NEC curves and submit these to SEESP

3.

Results where SEESP calculates area prices and flows based on the received NECs
and ATCs, sends the results to the NMOs and then the NMOs check results and
calculate and send the individual results to the market participants.

Figure 5

High-level recommended solution National control regional


cooperation

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1.4

CAO Coordinated Auction Office

As described in chapter 4.2, when a well-functioning DAM for the whole region is in place, all
available transmission capacity should be made available for the implicit auction. This implies
that in the final solution, long-term transmission capacity auctions will not be needed. For the
SEE Regional Power Market the main function of the CAO is to provide correct transmission
capacities to the market independent of the market concept.
The following simplified diagram is an illustration of the co-existence of CAO and a SEE
Regional Power Market:
Figure 6

CAO functions in the Regional PX

Dedicating cross border capacity to the SEE Regional Power Market is an essential policy
decision in order to establish a Regional PX. The CAO will be responsible for determining
tradable cross border capacities, performing explicit auctions and providing the Regional PX
with daily capacities for the implicit auction. In this way the two concepts mutually support
each other.

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1.5

Transition phase: From regulated prices to market prices

Exposing eligible customers 100% to market prices from day one of the wholesale market
opening process will meet hindrance in most countries due to uncertain market prices and
their volatility. For this reason transitional schemes should be considered. The need for such
schemes will vary across the region, because each country has a different starting point.
Some countries have already taken steps to expose eligible customers to market prices. In
general a transition period with steadily decreasing contract volumes supplied at regulated
prices is recommended to gain acceptance among market participants. This solution is
illustrated in the figure below.
Figure 7

Transitional period market and regulated prices Eligible Consumers

Incentive contracts should be established prior to market opening as an offer to eligible


customers. This will give them the necessary predictability and they will respond to market
prices from day one. They can profit from reducing consumption during peak prices.
During the transition phase or in general from market opening - the challenge is to
establish sufficient volumes (liquidity) on the DAM. It is therefore important that the demand
side bid for volumes themselves.
Full Supply Contracts - meaning that the customer can consume whatever he likes and pays
contract (tariff) price anyhow - between Generators and customers are the greatest obstacle
to DAM liquidity. In this situation the Generator will give a net bid on the DAM and purchasing
volumes will be very low.
Full Supply Contracts between Public Suppliers and customers, on the other hand, can be
accepted as long as the Supplier purchases additional volumes on the market and
consequently pays market price for marginal volumes.

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Base load contracts between Generators and Public Suppliers to serve Tariff Customers will
bring remaining volumes from the demand side on the market.
The following figures illustrate how this design works.
Figure 8

Recommended transitional design per country

Bilateral trade will focus on mid- and long term agreements while DAM will offer market
participants an instrument to fine-tune their hourly supply/demand balance (contract
portfolio).
If incentives are necessary to motivate eligible customers to exercise their eligibility from day
one of market opening, base load contracts with Generators declining over time - can be a
solution, in line with the arrangement proposed for serve tariff customers.
In order to increase liquidity, TSOs should buy grid losses from DAM.

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A simple contract portfolio for a Public Supplier serving Tariff Customers is shown below.
Base load contract between Public Supplier and Generators (incumbents) and hourly
contracts from DAM filling the gap between the base load contract and estimated
consumption.
Pass-through mechanisms or hedging of market volumes are required to avoid setting Public
Supplier at risks.

Figure 9

Public Supplier with trading portfolio for Tariff Customers

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Traders, Eligible Customers and Suppliers will in general have a more complex contract
portfolio, established over time in order to minimize cost, but the principles are the same.
Hourly contracts from DAM fill the gap between contracted volumes and estimated load.
They trade into balance.
Deviations from expected load will be handled on the imbalance market or later when
implemented on the intraday market. The structure of such a contract portfolio is illustrated
below.

Figure 10

Trading portfolio for Eligible Consumers & Suppliers

Generators, Suppliers and Eligible Customers will in this way be exposed to market prices on
marginal volumes, increasing over time as volumes for eligible customers and tariff
customers are scaled down. These volumes, together with export/import volumes will give
DAM liquidity. Market prices will therefore be established from day one of market opening
with sufficient liquidity.

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1.6

VPP auction

VPP (Virtual Power Plant) is a mandatory auction of generation capacity in order to mitigate
incumbents dominant market position. The buyer gets a contract (base or peak) at auction
price, but the owner of the VPP operates the plant independently of how the buyer nominates
capacity from the plant.
The proposed market solution implies that incumbents serve tariff customers through a base
load contract with the public suppliers.
Such a contract reduces incumbents dominant market position in the same way as VPP
auctions. The only difference is that prices are set differently.
For this reason, the Consultant does not see the need for VPP auctions from day one of
market opening. VPP auctions might be considered later when downsizing of volumes for
tariff customers has strengthened incumbents potential dominant market position.

1.7

Action plan

1.7.1

Required decisions

Approval of the Ministerial Council to proceed with the SEE Wholesale market opening
process by establishing a SEE Regional Power Market based on a Day-ahead market in
line with the proposal from this Consultant Report.

TSOs to take the principle decision to dedicate all or part of ATCs to the SEE Regional
Power Market, increasing over time

All wholesale market participants to be Balancing Responsible Parties


But customers can buy this service from Suppliers & Traders
Incentives to Eligible Customers to exercise their eligibility

Unbundling of Generators and Suppliers.


Tariff Customers secured through separate contracts between Generators and
Suppliers
No Full Supply Contracts between Generators and Suppliers/Traders/EC

Downsizing of volumes based on regulated (low) tariffs to meet the open market

Establishment of an efficient market surveillance function

Basic harmonization of codes, rules and regulations among SEE countries

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1.7.2

Step by step approach

The Contracting Parties enter the wholesale market opening process from different starting
points. For this reason the required decisions (from 1.7.1) will be taken at different points in
time. To give the process momentum from the start, connection to an existing functioning
market is important.
Serbia is a natural hub in the region, in order of size, number of interconnections and by
location. At the same time Serbia is well prepared for a national DAM. Romania is already
operating a DAM and will provide access to market participants and liquidity from day one.
The Consultant suggests the following stepwise establishment of the SEE Regional Power
Market:
Figure 11

SEE Wholesale Market opening - Action plan

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Figure 12

1.7.3

SEE Wholesale Market opening Initial setup

Dry run

Dry run serves different purposes:

simulate a regional competitive market;

train market participants;

simulate different market setup scenarios.

Prior to market opening such exercises will prepare market participants and facilitate a
smooth market opening. The idea is to simulate a DAM through bids and offers from
Generators, Suppliers, Traders and Eligible Customers.
Cross border capacities and base load contracts to serve tariff customers have to be
allocated. In order to simulate the effect of power exchange with neighbouring countries,
existing bilateral contracts may be represented by price independent bids in the relevant
bidding areas (countries). The DAM simulator will calculate area prices and flows on
interconnections.
Training of market participants can go on until real market opening takes place and even
beyond to familiarize new market entrants. Simulations of future market development will be
ongoing activities.

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1.7.4

National and regional action plans

The Wholesale market opening process must have a regional foundation in line with two
similar projects already established, CAO and BETSEE. Support from national authorities is
mandatory. Unbundling of generation and supplier functions, cancellation of full supply
contracts between Generators and tariff customers, incentives to eligible customers and
dedication of cross border capacity to DAM all require top political attention and decisions.
An overview of the substance in national action plans is as follows: (The details are found in
chapter 13.3.4)
Figure 13 SEE Wholesale Market opening high level action plan overview

Balancing Mechanisms
Establishment of market council
Cross Border Capacity to DAM
Supplier Unbundling
Replacing Full Supply Contracts to TC with
Base Load Contracts to PS
Market Surveillance
National units
ECRB
Agreements
TSO-TSO
TSO-Regional PX
Regional PX-NMO
NMO - Market participants
Transparency
Procedures for reporting relevant market information
Publication of maintenance plans
Reporting on outages
Hydro power plant reservoir level
TSO reporting on
Total Consumption & Production (hourly)
Available & Metered exchange (cross border)
Start up of Financial Forward

Phase 1
2010
2010
2011
2011

Phase 3
2013
2012
2014
2014

2011

2014

2011

2013

2011

2012

2012

2015

These national plans may seem very ambitious. But judging from experience in Romania and
India, the Consultant concludes that they are realistic.
1.7.5

Action plans market participants

Generators, Suppliers, Traders and Eligible Customers all have to establish new operational
working routines in order to handle new market opportunities and challenges. Long and short
term power price variations call for hedging strategies. This will be core business for
Traders, Generators and Suppliers. Eligible Customers will choose different solutions. Big
industry could develop their own trading skill (figure below) while small enterprises could buy
portfolio management services including imbalance management - or stay at a market
based contract price (fixed or variable).

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Illustration of a big industrial customers possible organization of power sourcing after


establishment of a DAM:
Figure 14

Power sourcing on a liberalized market example for Industry

A condensed overview of new tasks for market participants is given below.


Figure 15

Action Plans for different types of Wholesale Market Participants

Generators and big Suppliers will need this competence in-house. Eligible Customers can
outsource power procurement, balancing and trading in different ways as discussed above.

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SECTION II: BACKGROUND

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2.

INTRODUCTION

The conflicts of the 1990s led to the disintegration of a unified energy system stretching from
the Adriatic to the Black and Aegean Seas, changing it from a single system into a patchwork
of systems. However, the separate entities still rely on each other for the smooth functioning
of their power supplies.
In 2005, the European Community and then nine Contracting Parties signed the Treaty
establishing the Energy Community of South East Europe. The Treaty aims at establishing
an internal market for network energy in the energy and is based on binding legal
commitments governed by a set of institutions. The Treaty extents and applies and
synchronized application of the EC acquis communautaire and thus ensures homogeneity
between the EC and the Contracting Parties.
The 11th Athens Forum Meeting requested the World Bank to develop a study on Wholesale
Market Opening in South East Europe for the benefit of all Contracting Parties to the Treaty
establishing the Energy Community. Pyry Energy Consulting and Nord Pool Consulting
were subsequently commissioned to develop the study.
The overall aim of the study is to develop a proposal for a Regional Market Design (RMD)
and an Action Plan (AP) for its implementation. The full project covers eight tasks:

Task 1: Review of the current state of market opening in SEE, ref chapter 3;

Task 2: Examine barriers to advancing market opening and liberalisation, ref chapter 8;

Task 3: Identify risks and opportunities posed by market opening in electricity supply to
non-household customers, ref chapter 7;

Task 4: Review lessons learned from other regional markets ref chapter 5;

Task 5: Define indicators to measure and monitor progress in opening the electricity
market in SEE, ref chapter 9;

Task 6: Developing the SEE Regional Power Market Design (RMD) and Action Plan for
Implementation, ref chapter 1 and 11;

Task 7: Workshops for non-household consumers and other market participants on


electricity market opening arranged in Vienna 17th of September 2009; and

Task 8: Implementation Support to be carried out after the acceptance of this report.

This report covers task 1 to 6.


A large number of reports have previously been developed covering these or closely related
issues. Within this project the project team is to interact closely with the regional institutions
and stakeholders in the development of a RMD and AP, rather than developing lengthy
reports. This report is thus focused on establishing the current situation and identifying key
issues for the future work.

2.1

The focus of the study

Currently there are seven Contracting Parties to the Treaty establishing the Energy
Community. These seven Contracting Parties are Albania, Bosnia and Herzegovina,
Croatia, Former Yugoslav Republic of Macedonia (FYR of Macedonia/FYROM), Montenegro,
Serbia and Kosovo. These seven entities are the prime beneficiaries of this study and its
prime focus, but also Bulgaria and Romania are partially covered.

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The relevant region for the creation of a regional electricity market in South East Europe is
however larger. In addition to the seven entities listed above; Austria, Bulgaria, Greece,
Hungary, Italy, Romania and Slovenia are important for a regional market. The relevant area
could be further extended to countries such as Turkey, Moldova, Ukraine and others.

2.2

Designation of the Contracting Parties

In the region there are disputes regarding the status and/or denomination of the Contracting
Parties in two cases. In this report we use the official designation of the Contracting Parties
according to the World Banks definitions. This should not be interpreted as reflecting any
position taken by Pyry Energy Consulting or Nord Pool Consulting.

2.3

Objective of a wholesale market reform

Under earlier assignments various options for regional market integration have been
developed. One question is whether or not a regional power exchange should be established
or whether there should be continued reliance on purely bilateral contracts. Furthermore, the
market model currently under development relies on explicit auctioning of cross-border
transmission capacities. An alternative option would be the use of implicit auctioning. This
would require a liquid market place under a market splitting approach, or market coupling
between several liquid markets.
According to the Terms of Reference for this study, these options should be reviewed, and
based on this review a Regional Market Design should be developed, taking into account the
possibility of a staged implementation. We thus foresee that the proposal developed under
this study will entail such a staged approach starting with simple arrangements and later
moving to more complex mechanisms. Furthermore, the Terms of Reference states that the
ongoing work on coordinated auctions and regional balancing mechanism seems to
represent a good base for wholesale market opening.
At this point the proposal for the long-run solution has not been finalized. Several objectives
could be considered with different levels of ambitions, such as:

coordinated interconnector allocations day-ahead;

coordinated interconnector allocations day-ahead with well developed national energy


markets

fully coordinated day-ahead wholesale scheduling using implicit auctions:


Market coupling, or
Joint market with market splitting; and

additional development, e.g., a completely seamless retail and wholesale market.

A common (seamless) retail market is not covered under this assignment, although the
organization and opening of retail markets is likely to affect the functionality of the wholesale
market.

2.4

Regulatory framework

The Contracting Parties to the Energy Community Treaty have legally binding commitments
to the creation of an internal market for network energy. The regional market provided for by
the Treaty is to be connected to the EC internal market. Through the Energy Community
Treaty the Contracting Parties are bound to implement the acquis communautaire on

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energy 2, the acquis communautaire on environment and also follow the principles laid out
in the acquis on competition insofar as it may affect the trade of network energy between the
Parties. According to the Treaty the Parties shall also implement the renewables Directive
2001/77/EC (promotion of electricity produced from renewable sources) and Directive
2003/30/EC (promotion of the use of biofuels or other renewable fuels for transport). 3
Under the Treaty the regulators are cooperating within the Energy Community Regulatory
Board (ECRB). The ECRB advises the Ministerial Council and Permanent High Level Group
(PHLG) on details of statutory, technical and regulatory rules and make recommendations in
the case of cross-border disputes between the regulators.

Directive 2003/54/EC of the European Parliament and of the Council of 26 June 20003
concerning common rules for the internal market in electricity, Directive 2003/55/EC of
the European Parliament and of the Council of 26 June 2003 concerning common rules
for the internal market in natural gas, Regulation 1228/2003/EC of the European
Parliament and of the Council of 26 June 2003 on conditions for access to the network
for cross-border exchanges in electricity.
The Treaty establishes that the Parties shall present a plan to implement the directives
within one year of the date of entry into force of the Treaty.

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3.

THE REGIONAL ELECTRICITY MARKET

3.1

Introduction

The following sections set out a quantitative summary of the regional electricity sector under
the following topics:

electricity generation and demand;

electricity imports and exports;

market structure and market model; and

prices and tariffs.

Pyry makes long range electricity and gas market price projections for the region as part of
its pan-European market modelling, designed for use by investors in project evaluation, and
updated quarterly. Data items with a source labelled "Pyry EurECa 4 analysis" are based on
this modelling work. No modelling work has been made explicitly for this project, but we have
drawn on results from other studies.
The statistical information in this section sets out a background which emphasises the need
for:

efficient dispatch and cross-border trading arrangements between the Parties and with
the surrounding countries;

increases in consumer tariffs to economically efficient levels, which will lead to a


reduction in inefficient patterns of electricity consumption,

improved levels of payment for electricity; and

very high levels of investment in generation and network infrastructure.

The necessary investment, reduction in inefficient consumption and improvements in the


efficiency of generation production can only realistically take place with a move to marketbased (marginal) wholesale pricing and regional coordination.

3.2

Electricity generation and demand

Small, but growing, national markets


Figure 16 shows that the size of the markets, in terms of final energy consumption, varies
widely, but also that most of the markets are small. The smallest market in energy terms is
Kosovo with a final electricity consumption of 3.2 TWh (2005), closely followed by Albania
and Montenegro. The largest is Serbia with a final electricity consumption of 25.6 TWh
(2005). Network losses 5 are generally quite large ranging from 14% in Croatia, up to 37% in
Kosovo, with an average of 23%. The electricity consumption is expected to grow rapidly
over the coming years, which implies significant requirements on new generation
investments.

4
5

EurECa is the name given to Pyrys pan-European electricity model.


Including transmission and distribution technical losses and commercial losses.

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Figure 16. Final electricity consumption and network losses (2005) and expected
consumption year 2015, TWh

70

70
63,7

60

60

50

50

40

40,5

37,5

30

40
30

5,4

6.6

22,1

20

2,0

13,2

25,6

4,9

14,4

22,8

10

10,2

ia
om
an
R

ia
ar
Bu
lg

Se
rb
ia

ro
at
ia

na

0
vi

an
d
ia

Bo
sn

2,2
7,7

H
er
ze
go

do
n

ia

o
FY
R

of
M
ac
e

ba
ni
Al

vo
Ko
so

7,1
1,2
3,2

10,4
1,4
6,2

9,5
5,5
1,1
1,3
3,8
3,6
M
on
te
ne
gr

10

20

Network losses, TWh


Final electricity consumption, TWh
Expected energy consumption (2015)

Source: Energy in the Western Balkans, IEA 2008; Eurostat; Pyry EurECa analysis

High energy intensities low energy efficiency


The economies in the region generally have high energy intensities. As is displayed in Figure
17 below, energy intensities are considerably higher than the average OECD level (IEA
(2008) 6. This is explained by the degraded state of energy infrastructure, high energy losses
in transformation, transmission and distribution and inefficiency in the end-use sector. The
high network losses shown in Figure 17 are an illustration of this.
Croatia has relatively high energy efficiency, but according to IEA (2008) the country still has
an energy savings potential of around 25% of the total primary energy supply. The region as
a whole could save 5 TWh annually by bringing losses down to the level of Croatia. At the
same time high energy prices and high energy consumption put a significant pressure on
household budgets, and it is estimated that 16% of the people are exposed to energy
poverty. It is reasonable to believe that the current high energy intensities/low energy
efficiency are likely to be affected by changes in prices that a market opening could result in
for some of the countries. Given the starting point, increased energy efficiency can also
mitigate the economic impact of possible increases in electricity prices.
Figure 17 does also display that the Parties have high carbon intensities compared to OECD
averages. Serbia has the highest level of carbon intensity (1.2) which corresponds to its high
dependency on coal and Albania the lowest (0.3) due to its high usage of hydropower
resources.

IEA (2008), Energy in the Western Balkan

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Figure 17. GDP per capita, electricity and carbon intensity, 2005

1,4
1,2

USD (PPP)

30 000

1,2

1,0

25 000

0,8
20 000
0,7

0,6

15 000

0,6
0,5

0,4
0,3 0,3

5 000

0,6
0,5

0,4

10 000

0,7

0,8

0,7

0,7

0,4 0,4
0,2

0,3

0,1
0

0,2

0,2

Bo
sn
ia

GDP PPP per capita

av
er
ag
e

ia
om
an
O

EC

ria
Bu
lg
a

Se
rb
ia

ia
M
on
te
ne
gr
o

do
n

vo
FY
R

of
M
ac
e

Ko
so

ro
at
ia

na
vi

H
er
ze
go

an
d

Al

ba
ni

kWh/GDP (USD, PPP); CO2 Mt/GDP (USD, PPP)

35 000

Electricity intensity

CO2 intensity

Source: Energy in the Western Balkans, 2008; CO2 emissions from fuel combustion 2008 ed, IEA, 2008

A mixed generation structure but with import dependency


The region is dependent on imported energy, primarily oil and natural gas. Several of the
countries are also heavily dependent on import of electricity. Lack of reliable electricity
supply is generally a serious problem in the region. IEA (2008) 7 mentions the erratic
electricity consumption pattern of the poorer parts of the population as a key factor for
concern. This is driven by the fact that fuel wood is used for heating needs by the poor, but
during the heating season electric heaters are often used when fuel wood demand spikes.
This then exacerbate seasonal and weather related peaks in electricity demand. Extreme
peaks can then cause black-outs or require rationing. The utilities are forced to maintain
considerable reserve requirements, which then reduce potentials for exports and revenues.
Low tariffs and payment discipline also limit the revenues.
The total electricity generation in the region 8 is a mix between conventional thermal
generation, hydro plants and nuclear power, as shown in Figure 18. Other renewable
sources, besides hydro, have played a very limited role so far.

7
8

IEA (2008), Energy in the Western Balkans


Also including Romania and Bulgaria

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Figure 18. Regional electricity generation by fuel 2008, %

0%

26%
30%

1%
2%

14%

27%

Hydro

Nuclear

Coal and Lignite

Gas

Oil

Mixed fossil fuels

Other renewables

Source: UCTE, OST

The generation structure is however very different in the different countries, see Figure 19.
Albania gets almost all of its domestic generation from hydro power, but is also to a high
degree import dependent. This is in particular the case in drought years. Other countries
such as Bosnia and Herzegovina, Croatia and Serbia also get a third or more of their
generation from hydro power. On the other extreme of the scale is Kosovo, which gets
almost all of its domestic generation from thermal plants (lignite) and which is also import
dependent. Many of the countries in the region are import dependent, and some of the
countries are heavily dependent on import of electricity.
The regional generation mix highlights the importance of trade and the potentially significant
benefits that can be achieved through improved regional trade. Hydro and thermal based
systems are excellent complements due to the regulation possibilities connected with hydro
(with storage), but also the increased security of supply that can be expected. The needs for
regional trade is furthermore emphasised by the clear import dependency of some of the
countries in the region.

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Figure 19. Country level electricity generation by fuel 2008, %

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%

Hydro

Nuclear

Fossil fuels

Ko
so
vo

a
om
an
i
R

of
M
ac
ed
on
ia

Other renewables

Se
rb
ia
.e
xc
l.

Bo
sn
ia

FY
R

M
on
te
ne
gr
o

Ko
so
vo

ro
at
ia
C

Bu
lg
ar
ia

in
a
H
er
ze
go
v

an
d

Al

ba
ni
a

0%

Net import

Source: UCTE, KOSTT, OST

Figure 20 shows the peak electricity load in 2008 and expected peak load in 2015 in
comparison to the generation capacities in 2008 and 2015 (expected), respectively. This
shows that in along with the growth in electricity consumption the peak demand will also
grow in most of the countries in the region.
The capacity margins vary considerable throughout the region. Some countries have very
small capacity margins, while others most notably Romania have a very substantial
capacity margin. A similar structure can also be expected to remain in the near future.

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Figure 20. Peak electricity load 2008 and 2015 (expected); Generation capacity 2008
and 2015

25.0
20.0

GW

15.0
10.0
5.0

Ro
m
an
ia

Bu
lg
ar
ia

Se
rb
ia

on
te
ne
gr
o
M

FY

of
M

ac
ed
on

ia

Ko
so
vo

Cr
oa
t ia

a
He
rz
eg
ov
in

Bo
sn
i

an
d

Al

ba
ni
a

0.0

Peak Electricity Consumption 2008 GW

Generation Capacity 2008 GW

Expected Peak Electricity Consumption 2015 GW

Expected Generation Capacity 2015 GW

Source: Pyry EurECa analysis, OST, KOSTT, UCTE

Table 1 below provides some summary comments on the demand and supply balance for
each of the nine original Contracting Parties.

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Table 1. Comments on demand and supply balance


Demand and supply
Albania

Bosnia and
Herzegovina

Bulgaria

Croatia

FYR of
Macedonia

Montenegro

Romania

Hydro dominated (approx.


98%).

Highly import dependent (2440% over the last years).

Load shedding required since


1997.

Approx. 60% thermal, 40%


hydro of domestic generation.

In recent years a surplus


country.

Approx. 7 % hydro, nuclear 35


% and conventional thermal
close to 60 %.

Net export amounted to 5.4


TWh of electricity in 2008.

Mix between thermal and


hydro generation.

Import dependent.

Approx. 75% thermal, 25%


hydro of domestic generation.

About 2.5 TWh import of 8.5


TWh consumption.

Approx. 60% hydro, 40%


thermal (lignite).

1/3 or more of supply


imported (in 2008 about 40%).

Almost 30 % hydro, 15 %
nuclear and 55 %
conventional thermal.

Net export amounted to 4.4


TWh of electricity in 2008.

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Comments

One river system generates


88% of the electricity. Import
dependent during droughts.

Consumption expected to
increase considerable over the
coming years and by 2014 be
higher than the domestic
generation.

Construction of a new nuclear


power plant possible.

Deficit is expected to grow in


the future to a level of
approximately 9.5 TWh by
2020.

Hydro and nuclear generation


reduced during droughts.

ELEM has sufficient generation


to cover the demand of EVN in
terms of energy, but not
sufficient capacity to meet
winter peak.

Of import of 2.5 TWh about 800


GWh is for tariff customers.

Considerable unused hydro


potential.

Significant unused hydro


potential.

RES-E is promoted through a


market based green certificate
system.

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SOUTH EAST EUROPE WHOLESALE MARKET OPENING

Demand and supply


Serbia

Kosovo

Approx. 75% thermal (mostly


coal) and 25% hydro.

Relatively well balance


between supply and demand.
Previous deficit turned into a
small surplus.

97% thermal (lignite).

Import dependent (number).

Load shedding applied.

Comments

Only 52% of the delivered


electricity billed and of this only
2/3 was collected.

Low availability of existing


plants.

High demand growth.

Source: Team analysis

The current generation capacity in the region is about 54 GW according to UCTE and Platts
data. However, taking the expected availability into account the firm capacity in the region
would be approximately 40 GW. 9 Figure 22 shows the hourly load in the region for the 3rd
Wednesday of each month during 2008. Based on this data the regional peak (in January)
was slightly below 30 GW, which is somewhat below the peaks reported in Figure 20.
Nevertheless, while the capacity margins are limited for some countries, on a regional level
there seems to be a substantial margin between the peak load and the installed generation
capacity.
In order to look further into the capacity margin an approximation has been done of the
regional generation capacity split into base load and peak load. As has been noted before
the regional capacity margin is rather substantial. This is evident in figures below. However,
some capacity is currently not producing or is used very sparsely due to the lack of
maintenance. Furthermore, a substantial part of the generation fleet will have to be replaced
in the future due to old age. The latter is especially true for old lignite capacity. Together with
an increasing demand for electricity, regional capacity margin should decrease in the future.
Figure 21 below suggests that even the base load generation should be close to sufficient to
cover also the peaks, provided that the capacity is available.

Pyry Energy Consulting analysis

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Figure 21. Regional generation capacity split on type of capacity, percent and GW

100%
PeakFossil; 5
90%
80%

PeakHydro; 12

70%
60%
50%
BaseloadFossil; 27

40%
30%
20%

BaseloadRenewables; 0
BaseloadNuclear; 3

10%
BaseloadHydro; 6
0%
BaseloadHydro

BaseloadNuclear

BaseloadRenewables

BaseloadFossil

PeakHydro

PeakFossil

Source: UCTE and Platts

Figure 22. Hourly load, 3d Wednesday in each month 2008


Kosovo
Serbia, excl. Kosovo
Albania
Romania
FYR of Macedonia
Montenegro
Croatia
Bulgaria
Bosnia and Herzegoviina

35 000

30 000

Hourly load, MW

25 000

20 000

15 000

10 000

5 000

0
January

February

March

April

May

June

July

August

September October

November December

Source: UCTE; KOSTT, OST. NOTE: For Albania data we only have data for January and July.

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Old coal and lignite fired plants in the region


There are 4 000 MW of coal and lignite fired plant in the region with an age of more than 30
years, see Figure 23. Old generation units and an increasing demand in the region will
require more generation capacity
Figure 23

Age distribution of Coal and Lignite fired plants

% of installed capacity

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%

rb
ia
Se

eg
ro
te
n
M
on

FY
R

O
M

ni
a
lb
a

iH
B

ro
at
ia

0%

Coal and Lignite before 1980

Coal and Lignite 1980-1989

Coal and Lignite 1990-1999

Coal and Lignite 2000-2005

Source: Platts

3.3

Regional trade in electricity

The former Yugoslavian transmission system was a 400 kV system spanning about 800 km
connected to the UCTE synchronous system. In 1991 it was split in two separate parts.
Croatia and the Federation of Bosnia and Herzegovina (within Bosnia and Herzegovina)
became part of the UCTE zone 1, while Republika Srpska (within Bosnia and Herzegovina),
Serbia, FYRO, Bulgaria, Romania and Greece formed UCTE zone 2. In October 2004 these
were again reconnected. The total interconnection capacity (net transfer capacity) in the
region was in beginning of 2007 about 5800 MW, which is about 35% of total peak demand
in the region.
The region in total is dependent on imported energy, primarily oil and natural gas. In general,
cross-border electricity exchanges in SEE are somewhat lower compared to other regions in
Europe. 10 However, the total trade flows between the countries included in Figure 24 was in

10

ECRB 2008 Market Development Report.

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2008 above 65 TWh. Looking only at the original contracting party 11 of the Energy Treaty
was in 2008 about 37 TWh. The total electricity consumption in the nine original contracting
parties was in 2008 about 177 TWh. 12 Thus, about 20 per cent of the regional electricity
consumption was subject to trade between these countries.
The main trading pattern in the region is a flow of electricity from the north to the south, as
illustrated in Figure 24). Import is mainly provided from Hungary, Romania and Bulgaria and
with Serbia being the main transit country.
Figure 24. Net electricity flows, 2008

Austria

Hungary

Romania

Slovenia
Croatia

BiH

Bulgaria

Serbia

Bulgaria
Italy

0-999
1000-1999

Kosovo
Montenegro

Macedonia
Albania

2000-2999

Greece

3000-4999
5000-

Source: UCTE, KOSTT


NOTE! Detailed data and explanatory note available in Table 2

11
12

The current seven contracting parties plus Bulgaria and Romania.


Source: UCTE

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Table 2. Electricity exchanges in South East Europe 2008, TWh


Importer
AL

AU

BA

BG

AL

GR

HR

0.8

BA

Exporter

KO

ME

0.2

1.1
0.2

0.7

HU
IT
0.2

ME

0.8

3.1

RS

2.4

SL

0.9
2.6

1.6

2.4

8.4

2.7

1.2
0.7
2.1

2.2
3.4

3.1

4.9

7.6 12.2

3.7

0.6

6.3

3.6

0.4

1.6

1.2

3.2

7.0
8.8

7.8
4.0

3.4

3.9

0.4

9.2

6.2

Source UCTE, KOSTT


NOTE! Separate data for Kosovo is not available from UCTE, but are included under the Serbian control area (EMS). We have
received data from KOSTT and deducted those flows from the flows for Serbia according to UCTE. All numbers are rounded to
the closest 0.1 TWh.

As Table 2 (and Figure 19) illustrates, there are some countries which are import dependent
to a very high degree:

Albania is a net importer (2.1 TWh) with large imports from mainly Greece, but also from
Montenegro and to some extent from Kosovo.

Croatia is a net importer (6.6 TWh) with large net imports from Serbia, Hungary and
Bosnia and Herzegovina. The country also has considerable trade with Slovenia (being
a net exporter to Slovenia).

Kosovo is a net importer (0.6 TWh) with large net imports from Serbia, but also net
export to Montenegro and FYR of Macedonia (transit trade).

Montenegro is a net importer (1.8 TWh) with large import mainly from Bosnia and
Herzegovina, but also from e.g. Kosovo. Montenegro has a relatively balanced trade (on
a yearly level) with Serbia, and is a net exporter to Albania.

FYR of Macedonia is a net importer (2.7 TWh) with large import mainly from/through
Kosovo, but also from Bulgaria. At the same time, FYR of Macedonia has a net export to
Greece.

Three countries are net exporters:

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1.8

4.7
1.6

5.7
8.8

2.7
0.1

0.1

RO

3.4

1.9
0.1

0.2
0

0.3
5.0

0.7

SUM

0.3

1.8

MK

SL

0.1

5.3

KO

0.3

0.7

RS
0.2

2.1

HR

RO

1.2

4.6
1.7

MK

1.4

2.7

BG

SUM

IT

AU

GR

HU

40

65.4

SOUTH EAST EUROPE WHOLESALE MARKET OPENING

Bosnia and Herzegovina exports mainly to Croatia and Montenegro, but has a net import
from Serbia.

Bulgaria exports to Greece, Serbia and FYR of Macedonia, but has a net import from
Serbia.

Romania exports to Serbia and Bulgaria, but also to Hungary.

Serbia has a relative balanced trade.


3.3.1

Trading licenses 13

Various licensing regimes can create barriers for traders to enter into the market.
Requirements for trading licenses exist (or are foreseen) in all participating countries in the
relevant region. The licensing regimes often require a registered seat in the country which
creates an additional burden for international traders.
The licenses are typically issued by the relevant regulatory authority, but in some case by the
ministry. The trading licenses typically cover wholesale trade, retail supply of eligible
customers, cross-border trade and transit, but there are differences. The licensing procedure
typically has to be conducted in the national language and relevant documents are in most
cases not available on the internet.
There are differences in the maximum time allowed for completing the licensing procedure
ranging from 30 days in several countries up to 180 days. In the case of Bosnia and
Herzegovina no limit is set. Furthermore there are variations in the licensing fees between
the countries, both in terms of structure and levels.

13

A survey on license requirements were made in 2008 and received answers from
Bosnia and Herzegovina, Croatia, Serbia, Greece, Slovenia, Austria, Hungary, FYR of
Macedonia and Cyprus. (Energy Community Regulatory Board, Licensing requirements
2008). This section builds on that report unless otherwise stated.

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Table 3. Summary of licensing requirements in different countries


Country

Trading license
required

The license
covers

Requirement of
registered
company in the
country

Reporting

Albania

YES

Wholesale
trade, crossborder trade,
transit

YES

Annual report

Bosnia and
Herzegovina

YES

Wholesale
trade, retail
supply to
eligible
customers,
cross-border
trade, transit

YES

Monthly reports
on physical
quantities of
traded energy

Croatia

YES

Wholesale
trade, crossborder trade,
transit

YES

Financial
reports

FYR of
Macedonia

YES

Wholesale
trade, retail
supply to
eligible
customers,
cross-border
trade, transit

YES

Monthly reports
on traded
quantities of
electricity and a
yearly general
report with
financial and
technical
information

Montenegro

Information
missing

Information
missing

Information
missing

Information
missing

Serbia

YES

Wholesale
trade, retail
supply to
eligible
customers,
cross-border
trade, transit

YES

Copy of
business plan
for each year,
annual balance
sheet and profit
and loss
account for
previous year

Kosovo

YES

Supply, trade

YES

Quarterly and
annual reporting

Source: Energy Community Regulatory Board (2008), Albanian Energy Regulatory Entity, ERO

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3.4

Market structure, market opening and market model

In most of the Parties there is one dominant, state-owned generator. There might be some
fringe competitors, but each national market can typically be characterised as being very
close to a monopoly (with the exception of Romania). As shown earlier, the national markets
are also small which limits the degree of competition that can be expected on each market in
isolation. Distribution and supply are typically also dominated by one company, although
there might be some small distributors. However, given that the consumers in most cases
either are not eligible or not interested in exercising their eligibility this is currently of little
importance. The limited interest in exercising eligibility seems to be explained by the fact that
most consumers would face higher prices on the open market than under regulated tariffs.
Given current regulated tariffs little switching can be expected unless customers are forced to
switch (or the regulated tariff is removed for eligible customers).

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Table 4. Degree of horizontal unbundling of state-owned company


Generation

Distribution and supply

Albania

KESH 99% market share.

In addition to KESH Distribution


three private companies share the
distribution of electricity in parts not
controlled by KESH.

Bosnia and
Herzegovina

Both electricity utilities in FBiH are heading to legal unbundling between


generation, distribution and supply.
Utility in RS has legally unbundled Generation from Distribution and
Supply.
Electricity utility of Brcko District still fully bundled legal entity.

Bulgaria

No ownership unbundling yet of


transmission.

NEK operates the transmission


system.

National electric utility (NEK, 100


% state owned) owns a large
number of generation plants.

DSO function unbundled.

Process of privatisation.
Croatia

HEP Generation about 80%


market share.

HEP distribution legally unbundled.

TPP Plomin (co-owned by HEP


and RWE).
NPP Krsko 50% HEP owned.
Industrial power plants.
Small renewable.
FYR of
Macedonia

ELEM dominant generator.


TPP Negotina separate company.

Distributor privatized (Austrian


EVN).

Small HPP owned by other


market players.
Montenegro

Functionally unbundled with four divisions (generation, transmission,


distribution and supply).
The state owned power company (EPCG) holds 100% of the production
capacity.

Romania

Ownership unbundling of
transmission and generation.
Generation predominantly state
owned but split into several
independent units.

Distribution unbundled and 5 out of


8 regional distribution companies
have been privatised.

Serbia

EPS 100% of generation.

Kosovo

Generation and distribution/supply integrated.

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Legally independent subsidiaries.


DSO function legally unbundled
from other operations.

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Source: Team analysis

Vertically unbundling has progressed somewhat during the last years. Albania, Croatia, FYR
of Macedonia, Serbia and Kosovo have legally unbundled TSO/MOs and Bosnia and
Herzegovina has ownership unbundled ISO and TRANSCO, while Montenegro has a
functionally unbundled TSO. However, in Croatia the HEP group is made up of multiple
companies covering production, transmission and distribution, i.e., the transmission
operations is part of the same group as the main generator. However, there is a separate
market operator owned by the Republic of Croatia.
The unbundling between generation and distribution (including supply) has however not
reached as far. In Albania KESH Distribution is unbundled and about to be privatized.
However, KESH Generation is obliged to sell to the wholesale public supplier at regulated
prices. In FYR of Macedonia the distributor is now owned by Austrian EVN, but also here the
dominant generator, ELEM, is required to sell at regulated prices. Among the remaining
Parties generation and distribution/supply are conducted within the same company or group
of companies that may be legally unbundled.

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Table 5. Degree of vertical unbundling

Albania

Transmission, system and


market operator

Generation and distribution

100% state owned legally


unbundled TSO.

KESH Distribution unbundled and


about to be privatized. Additional
distributors selling in non-KESH
areas.
KESH Generation obliged to sell to
the wholesale supplier.

Bosnia and
Herzegovina

Independent ISO and TRANSCO.

Both electricity utilities in FBiH are


heading to legal unbundling
between generation, distribution
and supply.
Utility in RS has legally unbundled
Generation from Distribution and
Supply.
Electricity utility of Brcko District still
fully bundled legal entity.

Bulgaria

100% state owned (by NEK)


legally unbundled TSO.

NEK operates a large number of


generation plants but privatization
underway.
Distribution unbundled and
provided by regional companies
(E.ON AG, EVN AG and CEZ a.s.).

Croatia

Legally unbundled transmission


company, but part of the HEP
group.

HEP a group with multiple affiliated


companies in the energy value
chain.

Market operator 100% state


owned (legally unbundled).
FYR of
Macedonia

100% state owned legally


unbundled transmission system
and market operator.

Distributor privatized (Austrian


EVN).

Montenegro

Functionally unbundled TSO.

Functionally unbundled with four


divisions (generation, transmission,
distribution and supply).

Romania

100 % state owned legally


unbundled TSO.

Partly unbundling of distribution

Serbia

100% state owned legally


unbundled TSO.

Generation and distribution/supply


integrated. Legally independent
subsidiaries. DSO function legally
unbundled from other operations.

Kosovo

100% state owned legally


unbundled TSO.

Generation and distribution/supply


integrated.

Main generator, ELEM, obliged to


sell at regulated prices.

Source: Pyry Energy Consulting team analysis

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Very few end-customers are active on the open market. Typically the regulated tariffs are
below the prices available on the open market and the incentives for exercising its eligibility
is thus often very limited.
Table 6 provides an overview of the current state of end-user market opening. Formally all
the seven contracting parties have opened their end-user markets. Albania, Bosnia and
Herzegovina, Montenegro and Serbia have formally all opened their markets for all nonhousehold customers. FYR of Macedonia and Kosovo have eligibility thresholds based on
connection levels, while Croatia has opened the market for all customers (in 2008).
In most cases, in spite of opening there has been no or limited market entry. In Croatia
eligibility is mandatory for high and medium sized customers, while in FYR of Macedonia
eligibility is mandatory for all customers above the stipulated threshold. Discussions to make
eligibility mandatory are ongoing also in other countries. In practice this implies that no
regulated tariff is available for the eligible customers, but that they have to rely on the market.
An important barrier to market opening is that supply and distribution have, in general, not
been unbundled. This can be expected to inhibit market entry, since new entrants may not
trust that they will be treated on an equal and fair basis with the distributors own supply
business.
Another important barrier the low regulated tariffs (see also section 3.5). A key conclusion
from IPA (2009) 14 was that there have been no new entrants and the incumbent has
retained 100% market share. This is because the regulated tariffs are below levels at which
new entrants would be able to enter the market to compete effectively and have even been
stated as being below the wholesale energy price which a new supplier would have to buy
energy at. It is clear that as long as there are regulated tariffs available below the cost for a
new entrant, effective market opening will be very difficult to achieve.

14

IPA Energy + Water Economics (2009), Study on Tariff Methodologies and Impact on
Prices and Energy Consumption Patterns in the Energy Community, March 2009

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Table 6. Degree of market opening

Albania

Eligibility threshold

Customers exercising eligibility

All non-household customers.

Currently only 1 customer.

Customers can apply to become


eligible. It has been proposed
that all customers on the 35 kV
level or above should
automatically become eligible.
Bosnia &
All non-household customers.
Herzegovina

They can stay under regulated tariffs and


so far no one executes his eligibility.

Bulgaria

All customers.

Large and medium sized industry.

Croatia

All customers.

Mandatory for high and medium sized


customers.

FYR of
Macedonia

Connected on 110 kV.

Mandatory for eligible customers.

Montenegro

All non-household customers.

Only one supplier. Traders access to


final customers is currently subject to
consideration.

Romania

All customers.

Mostly large and medium sized industry.

Serbia

All non-household customers


(47% formal market opening).

No one executes his eligibility.

Kosovo

Connected at 10 kV or above.

There are two declared eligible


customers

As of 1 January 2008 there are 8 eligible


customers (those connected to 110 kV or
above), which implies a market opening
of 34%.

Source: Energy Community Treaty Implementation presentation at 14th Athens Forum, DG TREN Report on progress in
creating the internal gas and electricity market, technical annex. Com(2009) 115, Pyry Energy Consulting and Nord Pool
Consulting team analysis

Several countries have market models with a wholesale public supplier. The wholesale public
supplier then often has priority access to the domestic generation which is ear-marked for
domestic consumption (tariff customers). This of course limits the amount of electricity that is
available for trade.

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Table 7. Nature of trading model


Albania

Market model based on bilateral contracts.

Wholesale and Retail supplier responsible for supply to tariff customers.

Bosnia &
Herzegovina

12 traders (incl. 3 Generators). They cannot sell to final tariff customers


who are supplied by their (3) wholesale Supplier. These Suppliers have
all in contracts with their respective Generator.

Bulgaria

Market model based on bilateral contracts.

Croatia

HEP supplies all tariff customers. Eligible customers can by from


Suppliers/Traders who have access to export/import

FYR of
Macedonia

New market rules under development. MEPSOs previous role as


wholesale supplier has been abolished.

Montenegro

56 Traders wait for access to final customers. Today only Trader/Trader


and cross border exchange

Romania

Established power exchange (OPCOM) with good liquidity.

Serbia

EPS-Trading serves tariff customers and potential eligible customers.


EPS-Trading has full supply contract with EPS-Generation.

37 traders have access to eligible customers and export/import.

Market model based on bilateral contracts.

KEK regulated wholesale supplier.

Kosovo
Source: Team analysis

3.5

Prices and tariffs

Low but varying retail tariffs


Figure 25 below shows that Albania has the highest retail tariffs for households and some of
the highest retail tariffs for Industrial and Commercial (I&C) customers in the presented
markets in South East Europe (SEE).
Bosnia and Herzegovina has the second highest retail tariffs for commercial customers, while
its retail tariffs for industrial users and households are around the mean of the regions
values.
Croatia has some of the highest retail tariffs for households, while its retail tariffs for Industrial
and Commercial (I&C) customers are around the median of the regions values.
FYR of Macedonia is offering some of the regions lowest retail tariffs to industrial customers
and households, while its tariffs for commercial users are closer to the median level for the
presented countries in South East Europe. From 1 November 2008 all tariffs were increased
with about 13%, which is valid until the end of 2008. A new tariff methodology is currently
under development. 15
Montenegro has the highest retail tariffs for commercial users in the presented markets in
South East Europe, while its retail tariffs for industrial customers are varying to some degree

15

Interview with ERC, December 2008

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closer to and above the mean of the regions values. Its retail tariffs for households are midranked from the countries listed herein.
Serbia is having some of the lowest retail tariffs in the region, right across the three
segments of industrial, commercial and household customers. It is thought that some of
these retail tariffs may not cover even the generation costs. This may be due to a number of
reasons, including the protection of so-called vulnerable costumers and some level of
support for energy intensive heavy industry.
A general feature across the region is that the commercial customers are typically paying
more than household customers. This can hardly be explained by differences in the cost
structure motivating such differences in tariffs.
Figure 25. Retail tariffs 2007, /MWh
180
160
140

/MWh

120
100
80
60
40
20

Albania

Bosnia and
Herzegovina

Bulgaria

Croatia

FYR of
Macedonia

Montenegro

Romania

Serbia

Industrial

Commercial

Households

Industrial

Commercial

Households

Industrial

Commercial

Households

Industrial

Commercial

Households

Industrial

Commercial

Households

Industrial

Commercial

Households

Industrial

Commercial

Households

Industrial

Commercial

Households

Industrial

Commercial

Households

Kosovo

Source: ECRB 2008 Market Development Report and Eurostat, Kosovo comment on report

In March 2009 a Study on Tariff Methodologies and Impact on Prices and Energy
Consumption Patterns in the Energy Community was published. (IPA, 2009). 16 The study
concludes that the overall average retail tariff varies considerably between the parties, as is
also showed by Figure 25. The study covered tariffs from 2005 to 2008 (2008 not available
for all parties), and showed that the tariffs generally have increased over the period and in
many cases significantly so.

16

The study was commissioned by the Energy Community

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According to the report no country (with the partial exception of Albania) used tariff based
methods to protect vulnerable customers. However, this seems hard to reconcile with the fact
that commercial customers in most cases are paying more than household customers.
Although, there might not be lower tariff targeted towards vulnerable customers, the tariffs
seems to be kept low in general.
The study also included a review of the cost coverage. This showed differences in the
allocation of costs between e.g. transmission and distribution, and also differences in how
the return on asset was calculated. The report specifically mentions that Serbia applies a 0%
weighted average cost of capital on transmission, in Kosovo the distribution and
transmission system are deemed to be past their useful economic lives and have no value
and in Montenegro it was recognised that the applied cost of capital for both transmission
and distribution is below the true cost of capital.
Errors in the rate of return for monopoly operations such as transmission and distribution
may not distort the functioning of the wholesale market, as long as the transmission and
distribution companies are able to fund the necessary investments, However, the report also
states that for the regulated generation tariffs as with rate of return for transmission tariffs,
the rate of return used may not reflect the full cost of capital of generation because of the
assumption that Government as shareholder may prefer to keep prices down rather that
obtain a full return on its equity. From a market development point of view this is highly
problematic since it will provide an important barrier for new entrants in generation in the
region.
One important conclusion from the above mentioned study is that Much of the variation in
overall tariff levels between the parties is driven by differences in generation costs and that
this is largely related to the type of generation. A well-functioning regional market can be
expected to change this situation, as the wholesale power price can be expected to converge
across the region. This would lead to a more efficient price formation, but is also expected to
lead to increased profits for the generators having the low cost generation possibilities.

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4.

CURRENT REGIONAL MARKET OPERATIONS AND


MECHANISMS

4.1

Current Balance Management in SEE

The level of real time automation and communication in many countries of SEE is still limited
(ETSO, Current State of Balance Management in South East Europe, June 2006). Some of
the obstacles are that changes to the output of individual generating units cannot be
auctioned without substantial manual intervention. Remote metering on some HV
transmission network points are not installed and modern SCADA systems are yet to be
implemented in some countries.
Balancing mechanisms are still not in place in all countries. This is the case for Serbia,
Montenegro and FYR of Macedonia. However, all three countries have market models (or
are implementing market models) which include balancing mechanisms/balancing markets.
In Bosnia and Herzegovina a balancing mechanisms is in place and it is one of the
responsibilities of the ISO. In Croatia the market operator settles unbalancing energy for
balance responsible parties. In Albania the TSO is responsible for the organization and
administration of electricity payment settlements among the market participants and manage
the imbalance settlements statement process. Also in Kosovo the TSO is responsible for
procuring system balance through the balancing mechanism.
South East Transmission System Operators (SETSO) are currently in the design stage of the
Regional Balance Mechanism (BETSEE RBM or BETSEE). The aim is to achieve a system
that facilitates: technical correctness, effectiveness, truthfulness, individual rationality, budget
balance and social welfare.
This initiative has to be seen in view of the fact that electricity markets in the SEE region are
still in the early stages of development. Market operations and their degree of openness
vary greatly, traded volumes are low (especially in the short term) and exchanges struggle
with low levels of liquidity.
In consideration of the challenging environment the approach was chosen to develop a
concept of the RBM that assumes minimal prerequisites regarding the existing market
structure.
In an Examination Paper (ETSO, Regional Balancing Mechanism BETSEE for South-East
Europe, April 2008) the SETSO Task Force simulated and analysed the potential
consequences for SEE countries where the RBM Design (dated Nov 2006) implemented in
the Region today (April 2008).
The examination paper concluded, under the premise that the RBM development in the SEE
Region was still and ongoing process and therefore subject to uncertainties that:
Depending on the availability of balancing resources there will be parties having benefits and
parties facing disadvantages in case of a country deciding to join the RBM.
The absence of a transparent balance energy price is a challenge for the RBM, short term
markets are underdeveloped and cross-border transfer prices for balancing can not be
accurately accessed, this could cause irregularities in the function of RBM.
It is expected that the RBM will have low liquidity as a direct result for the fact that the RBM
is designed by an imperfect mechanism. TSOs and market participants will face risks that
they are unable to fully manage due to lack of transparent information.

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Improvement to liquidity will not bee seen until the implementation or improvement of short
term trading (Day-ahead, intraday) markets and improvement in transparency in the market
participant activities in the participating countries.
Monitoring processes conducted by Regulators will be required in order to prevent
manipulations and to guarantee the necessary level of transparency in market participants
activities.

4.2

Congestion management and cross-border capacity allocation

The principles for Cross Border Congestion Management are described in the Regulation
(EC) 1228/2003. This regulation, through the Energy Community treaty, is also applicable in
the SEE countries.
One major task of the harmonization of SEE region is the establishment of a Coordinated
Auction Office (CAO). In the future, the office should provide mainly auctions on different
periodical bases and should organize a secondary market for physical transmission rights
(has still to be developed). The according action plan has been launched and the first steps
are already implemented. It is foreseen that the yearly Auction 2010 will be managed by the
CAO. 17 In December 2008 a Memorandum of Understanding (MoU) was signed in Tirana by
all the relevant TSOs expect for Bulgaria and Serbia. Bulgaria disagreed with respect to the
geographical scope and Serbias position was that the MoU should only be signed by TSOs
in charge of capacity allocation, i.e. KOSTT should not be among the signatories. It was then
also agreed that the future CAO should be located in Montenegro.
The CAO currently agreed to be established in Montenegro is an organization that will be set
up and owned by all (or some of) the SEE TSOs. There is currently a working group
established. 18
The basis for the CAO is:

Established and owned by TSOs

Facilitate regional congestion management

and the goals as defined in their action plan are:

Better utilization of existing cross border capacities without jeopardizing system security

Higher degree of market harmonization due to coordinated capacity allocation to the


SEE region

Simplicity in handling for market participants (one-stop-shop solution)

An important question for the design of the SEE Regional Power Market for the same region
is how the CAO and the regional PX can co-exist. There are several good reasons for seeing
this as two complementary initiatives that together can facilitate a better regional energy
market for the SEE region:

The CAO organisation is a good platform for the cooperation in the region;

To have a coordinated approach to transmission capacity allocation is vital for a wellfunctioning DAM;

17
18

CAO (2008), Action Plan for Establishing the SEE Coordinated Auction Office
Please refer to http://www.energycommunity.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/ELECTRICITY/Re
gional_Market/CAO for more information.

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The goal of a higher degree of transparency and equal access as defined for the CAO is
also an important basis for the SEE Regional Power Market;

It is a TSO task to define the available transmissions capacities for the market, and a
coordinated effort is welcome;

To the Regional PX, the method of calculation is not important as long as a portion of
the transmission capacities is left for the DAM.

For more information of the integration of CAO and the SEE Regional Power Market, see
chapter 11.2.4.
In July 2007, the SETSO TF conducted an analysis of the current situation of the applied
procedures for the transmission capacity allocation. 19 In the report it was concluded that
significant improvement to the allocation procedures can be noticed. A few areas however
fall still short of full compliance with the CM Guidelines. At present 50:50 capacity split is still
used, the objective however is to introduce joint auctions. Not all the data relating to auction
procedures and auction results, as well as commercial and physical flows are publicly
available.
A Regional Congestion Management Benchmark (ECRB, 2008) analysed the level of
compliance of the SEE with the Regulation in respect of Cross Border Congestion
Management and found that, while the basic principles of the Regulation has already been
implemented, currently all TSOs fall short of being in full compliance with Congestion
Management Guidelines.

19

Overview of transmission capacity allocation methods in SEE, Status June 2007

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Figure 26. Cross border capacity allocation schemes

Source: Energy Community Secretariat, Presentation on Energy Community Treaty Implementation given at the 14th Athens
Forum.

Most of the participating parties introduced a market based allocation scheme, as shown in
Figure 26. The exceptions are Bosnia and Herzegovina were a pro rata allocation scheme is
still in use. On most borders the capacity is allocation of the capacity is split between the
countries, but in a few cases joint allocation of the capacity is made (only between one
contracting party and a non-contracting party/EU member).
The pricing method (congestion fee) differs across the region, as shown in Figure 27.
Naturally, on the Bosnia and Herzegovina borders there is no auction price since a pro rata
allocation scheme is used. However, also on the Albanian part of the borders between
Albania and Montenegro and Albania and Greece there is no auction price. The Albanian
capacity is mostly used to support import to its tariff customers. The Serbian 20, Montenegrin
and FYR of Macedonian TSOs apply pay-as-bid 21 for the capacities allocated. The remaining
countries use clearing price 22.
The differences in the allocation of capacity, as well as the differences in pricing
methodologies constitute one obstacle to trading. In particular non-market based allocation
results in different possibilities for different market actors to access the interconnectors. But
also the differences in pricing methodologies may constitute a barrier to trade.

20

This includes also the lines between Kosovo and neighbouring countries where
allocation is done by the Serbian TSO.
21
Each bidder pays according to his own bid.
22
Each bidder pays the same market clearing price
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Figure 27. Cross-border congestion fee pricing methods

Clearing price in
both directions
Clearing price
Pay-as-bid

SLO

RO
HR

Clearing price
no auction price
Pay-as-bid
no auction price

BiH

SRB
BG

Pay-as-bid in
both directions

MN
FYRof
Macedonia

AL

GR

Source: Energy Community Secretariat, Presentation on Energy Community Treaty Implementation given at the 14th Athens
Forum.

The EC guidelines specify that the allocation at an interconnection line shall be coordinated
and implemented using common allocation procedures by the involved TSOs. Although
market based allocation schemes are common, the TSOs typically allocate their share of the
interconnector capacity. None of the borders, with the exception of two in Croatia and FYR of
Macedonia fulfil the Congestion Management Guidelines. Coordinated capacity auctions are
performed only by a few participating parties.
In the South East Europe Market Monitoring project cross-border congestion is used as one
indicator of overall market conditions. The quarterly report for March 2008 - June 2008
(Potomac Economics, November 2008) studies 20 interconnectors. 23 Of these 20
interconnectors ten were categorised as inactive, meaning that there were little reservations
of capacity made and small or no physical flow. The inactive lines were the ones that tend to
be used for trade in the west-to-east direction. The remaining 10 were active, with both
significant reservations and physical flows. Four of them had physical flows roughly equal
what would be expected from transactions between the parties to the interconnector, while in
the other six the physical flows exceeded what would have been caused only by the two
counterparties, i.e. the flows would have been generated from other sources. For four

23

22 interconnectors should have been studied, but the necessary data was only
available for 20.

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interconnections the physical flow exceeded what would arise from regional AAC alone,
which would have been caused either by unofficial transactions or unexpected loop flows.
For these four interconnections the flows also exceeded the implied physical limit of the
interconnection.
The quality of data and the provision of information have not yet reached satisfactory levels.
Not one TSO can be identified for providing the level of information that is required by the
Congestion Management Guidelines.
Despite the fact that all TSOs in the SEE region provide access to web pages in English,
barriers for foreign traders and the development of an integrated electricity market do exist
as not all necessary information is made available in English.
Figure 28. Provision of information by TSOs

Source: ECRB, Regional Congestion Management Benchmark, 2008

The existence of Secondary Markets is a requirement according to Congestion Management


Guidelines. Secondary Markets have yet to be implemented as only few Secondary Markets
do currently exist. Some market rules in the SEE region do not allow for the formation of
Secondary Markets yet.

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Figure 29. Availability of Secondary Markets

Source: ECRB, Regional Congestion Management Benchmark, 2008

Regulation (EC) No 1228/2003 describes three options for the use of congestion
management revenues:

Guaranteeing the actual availability of the allocated capacity;

Network investments maintaining or increasing interconnection capacities;

As an income to be taken into account by regulatory authorities when approving the


methodology for calculating network tariffs, and/or in assessing whether tariffs should be
modified.

According to ECRB EWG Benchmarking Report for 20008 most of the countries in SEE
already have provisions concerning the use of the revenues in their legislation, and even
countries that do not have it in their legislation have implemented one of the three options.

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Table 8. Use of Congestion Management Revenues


Legal provisions

Actual use

Albania

<No information>

<No information>

Bosnia and Herzegovina

No provisions within its


legislation

Mainly used as an income to


be taken into account by
regulatory authorities

Croatia

Provisions included in
legislation

Used according to all three


options

FYR of Macedonia

Provisions included in the


legislation

Used according to all three


options

Montenegro

<No information>

<No information>

Serbia

Provisions included in the


legislation

Used as an income to be
taken into account by
regulatory authorities

Kosovo

Provisions included in the


legislation

Income deducted by the


Regulatory Authority from
the Cost base. Legal
framework also opens for
the other two options.

Source. ECRB, ECRB EWG Benchmarking report 2008

4.3

Inter-TSO Compensation mechanism (ITC)

A new voluntary agreement on Inter-TSO Compensation for transit for the years 2008 and
2009 was signed by 39 TSOs from 34 countries in October 2007 (ETSO, Report on InterTSO compensation mechanism, 2007). This agreement builds on the interim ITC Agreement
from 2007 whereupon the SEE region was fully integrated into the ITC mechanism of the rest
of Europe.
The following principles are to be followed for the ITC mechanism for the years 2008 -2009:

Allocation/compensation mechanism for infrastructure costs

Allocation/compensation mechanism of costs arising through cross border transit losses

Financing of the compensation fund and the treatment of ITC perimeter countries

Financial net results based on agreed principles for each ITC party

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5.

EXPERIENCES FROM OTHER REGIONAL MARKETS

The selected markets in this section are based upon the EC treaty [3], in the current market
development supported by EU as well as in the EuroPEX/ENTSO-E report of January 2009
[2].
The experiences are high level summaries to define some of the experiences from other
market developments in Europe. This chapter is based upon reports from the national
regulators and are expressing their view of their markets.

5.1

Selected national and regional markets

In this chapter we will briefly review the relative success of selected national markets. The
main purpose of the review is to rank the degree of market success within each and one of a
number of measurable parameters listed below.
The parameters will be ranked low, medium and high. The score low signifies that the market
element is weak; medium signifies that the market element clearly is present but that there
still is a way to go. High signifies that the market element is fully implemented.
The given scores are based on national reports submitted by the regulators in each
country 24. There is no unified template how to write these reports. Hence, the score given
should only serve as an indication for the particular country in question. In addition the
scores given are based on a qualitative and not quantitative manner and could therefore be
subject for discussion.
In the end of the chapter we will go through the various finalized and ongoing initiatives on
establishment of regional electricity markets.
For the national markets the parameters that will be used are as follows:
Establishment of a reference price for electricity
A clear reference price for the commodity electricity is necessary for transparency in the
market and for market efficiency. Score high is only given to well functioning markets where
a high share of produced electricity is settled with the reference price as commodity price.
Supply quality and security
Reliable delivery of power is of uttermost importance in any economy. That quality
requirements are specified and complied with is essential in order to minimize distortions to
the operation of the electricity market. Score high is given to markets where both quality and
security are meeting international standards for industrialized countries.
Wholesale market liquidity
In order to foster a competitive electricity market, energy suppliers, generators and large
scale consumers need access to a competitive energy wholesale market with sufficient
liquidity. Only markets where this is the case receive the score high.

24

All reports can be found on the ERGEG web site.


http://www.energyregulators.eu/portal/page/portal/EER_HOME/EER_PUBLICATIONS/
NATIONAL_REPORTS/National%20reporting%202008

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Transparency
Market transparency is crucial to establish an efficient electricity market. All participants
should have access to all relevant information regarding the electricity systems infrastructure
and operational conditions. All relevant market information should be available for all market
participants simultaneously. Electricity markets where this is the case will be given the score
high.
Market Surveillance
In a competitive electricity market an independent and efficient market surveillance function
should be present. Market surveillance is necessary to monitor the market to unveil abuse of
market power or market manipulation. Only markets where this function is taken well care of
and where appropriate actions can be taken to deal with abuse of market power or
manipulation of the market will score high.
Metering and main grid settlement
The settlement of imbalances requires a well organized Imbalance Management and an
appropriate meter value collection and processing system. The score high is given to
electricity markets where imbalance settlement is executed by the TSO and based on AMRsystems and appropriate imbalance prices.
Profiling and handling of not hourly metered consumers
In order to enable competition between supply companies not-hourly metered consumption
must be handled by the usage of profiles representing normal consumption during the day,
night and time of the year. Electricity markets with established profiling and change-ofsupplier procedures will receive the score high.
Wholesale market settlement
While settlement of energy trading takes place bilaterally or through organized markets the
imbalance settlement for a period of wholesale market participation is handled by the TSO.
The shorter settlement periods are and the more frequent the settlement takes place the
lower uncertainty regarding past periods financial obligations is. This also leads to lower
collateral needs. The score high is given to markets with monthly or more frequent imbalance
settlement.
Wholesale market access
The extent of competition in a liberalized market is dependent on the degree of access for
various participant groups as large and small end-users and generators, suppliers and
renewable energy producers. The score high will be given if all relevant participant groups
have access to the wholesale market at the same conditions and terms.
Demand Side Management (DSM)
Demand side management (DSM) entails actions that influence the quantity or patterns of
use of energy consumed by end users, such as actions targeting reduction of peak demand
during periods when energy-supply systems are constrained. Peak demand management
does not necessarily decrease total energy consumption but could be expected to reduce the
need for investments in networks and/or power plants. An electricity market with strong
incentives like contracts between TSO and large scale consumers and/or settlement of
consumers based on hourly values using reference prices reflecting the marginal costs of
generation will score high.

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Imbalance costs for wholesale market participants


The TSO is responsible for balancing the electricity system in real-time. An efficient
Balancing Mechanism and a cost-reflective imbalance settlement system receives a high
score.
Investment climate (investments signals, investment activity, investment focus,
investment incentives, investment signals)
This parameter regards to what extent incentives and procedures to encourage
maintenance, upgrading or construction of new production facilities or grid are in place. A
system that encourages investments all over the electricity value chain will be given the
score high.
Unbundling and regulation of grids and system operation (SO)
In liberalized electricity markets there will be various forms of unbundling of vertically
integrated companies which own grid, supply role and generation capacity. Only electricity
markets which have minimum an economical unbundling receive the score high. In line with
EU legislation, physically unbundling for distribution companies with less than 100 000
customers is not required to get this score.
Change of supplier
To foster competition, change of supplier should be the result of a simple self-explaining
administrative procedure and at no cost for consumers. Procedures applicable to involved
suppliers and grids should be well developed and organized. Information of all available
suppliers, with types of contracts and prices should be easily accessible to get the score
high.
Regional integration/cooperation
The end user market is normally national, but the extent of regional integration and
harmonization as price convergence, cross border capacity, exchange of balancing services
and market coupling creates a more competitive wholesale market and contributes to
security of supply. High cross border capacity is also important to reach the EU aim of
establishment of regional markets. The score high is given to countries which are integrated
or closely cooperate with neighbouring countries.

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Table 9. Selected national markets and their success


Features:

Romania

Germany

Austria

Italy

France

Netherlands

Ireland

UK

Sweden

Norway

Establishment
of a reference
price

medium

high

high

High

medium

high

medium

medium

high

high

Supply quality
and security

high

high

high

medium

high

high

medium

high

high

high

Wholesale
market
liquidity

medium

high

high

medium

low

high

high

medium

high

high

Transparency

low

medium

high

medium

medium

high

medium

medium

high

high

Market
surveillance

medium

high

medium

Low

medium

high

high

high

high

high

Metering and
main grid
settlement

medium

medium

medium

medium

medium

medium

high

high

high

high

Profiling and
handling of not
hourly metered
consumers

low

high

high

Low

low

high

medium

high

high

high

Wholesale
market
settlement

medium

medium

medium

medium

medium

medium

medium

high

high

high

Wholesale
market access

medium

high

high

medium

medium

high

medium

high

high

high

Participants
exposure to

medium

medium

medium

medium

low

high

medium

medium

high

high

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Features:

Romania

Germany

Austria

Italy

France

Netherlands

Ireland

UK

Sweden

Norway

Demand side
management

medium

high

high

High

medium

high

low

medium

high

high

Imbalance cost
for wholesale
market
participants

medium

medium

high

medium

medium

high

medium

low (high
prices)

high

high

Investment
climate

high

medium

high

High

medium

medium

high

high

medium

medium

Investment
incentive

medium

high

high

High

high

medium

high

high

medium

medium

unbundling

medium

low

medium

medium

low

medium

medium

high

high

high

Change of
supplier

low

medium

medium

medium

low

high

medium

high

high

high

Regional
integration

high

high

medium

High

high

high

medium

high

high

high

spot market
price

Note: All scores are based on reports to ERGEG submitted by the national regulators.

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Romania
Romania is the Eastern European country that has been most successful in establishing a
market. Romania has established a power exchange, OPCOM which is the largest PX in
the Eastern European area. Romania has fulfilled the EU requirements regarding
unbundling, an independent TSO, regulator and market operator. However, the
establishment of a fully competitive physically market requires that the content in the
parameters listed above get more sophisticated. The fact that around 50% of the
consumers are still part of the regulated market also hampers the development of the
market.
However, only 5.2 TWh was traded at the DAM at OPCOM in 2008. Although this makes
OPCOM an Eastern European champion the share is too small to make a real significance
in the big picture.
Germany
The German market is characterized by a generation structure where RWE and E.ON in
particular create an oligopoly that supplies large industrial customers and municipal
utilities. In this market competition is limited. Market information is voluntary and is not
based on regulated procedures, which again explains the medium score at the
transparency parameter. In the household end-user market competition exists but
procedures and grid access are complicated and costly. This fact explains that less than
4% changed supplier in 2007.
On the positive side, the trading volume at the Energy Exchange (EEX), in both the
physical and financial market is steadily increasing. In 2008 the traded volume at the spot
market increased to 154 TWh compared to 123.7 TWh in 2007. Supply quality and security
as well as regional integration are among the best in Europe. Also investment climate and
incentives for renewable Energy is at top in Europe.
Austria
In Austria most of the features that characterize a competitive market are in place, however
the volumes traded at the power exchange EXAA are still marginal and the households
tend to stick to their local supplier, and hence limit the competitive aspect of the market,
despite an effort by the regulator the last years to pave the way for an easy and
transparent way to change supplier.
Also in the case of unbundling the current requirement of legal unbundling combined with
lack of monitoring of integrated companies by the provincial governments in charge of this
process, only give a medium score on this parameter.
Regional integration with Germany is high, and due to the importance of this market the
score high is given despite lack of efficient integration with other neighbouring markets.
Italy
In Italy the regulated and commercial electricity market exist side by side. In the reported
electricity volumes the regulated market is still larger than the spot market operated by
GME, but the latter is catching up year by year. However, as the spot market is based on
mandatory participation it can not be compared to e.g. EEX of Germany or Nord Pool of the
Nordic countries when it comes to its successfulness. The regulated market and the
mandatory spot market affect most of the parameters listed in the table in a negative way;

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hence the medium score is often given. Only legally unbundling is required and explains
the reason for the medium score on this parameter.
Regarding supply quality and security the situation today is not as good as in many other
European countries. However, planed new generation capacity is 14,424 MW in the period
from 2007-2010. The interregional grid capacity is still critical in some regions and some
cities, but will be improved in the years to come. Number of minutes of interruptions per low
voltage client has fallen from 187 in year 2000 to 64 in 2006.
Italy has in 2008 launched a comprehensive renewable sources incentive scheme which
also contributes to the score on the investment parameters.
France
In the path towards a liberalized internal energy market in EU, France has traditionally
been anything but a forerunner in the process. Only the minimum requirements of the
various EU directives and regulations have been implemented in the national legislation.
Even though EDFs monopoly in the electricity sector has been broken, EDF still has a
dominant position in all areas in the electricity value chain, including the ownership of the
regulator CRE. This fact hampers the development of real competition in the French
market.
Another obstacle to competition is that regulated retail tariffs are retained alongside market
contracts through the tariff transitoire dajustement du march (TaRTAM). The
introduction and prolongation of TaRTAM has according to the regulator closed the large
business market as alternative suppliers to EDF hardly can match the regulated prices.
For small consumers like households there are little signs of competition one year after
deregulation. This can be explained by low regulated prices, which means there is not
much to gain by entering the free market. In addition only 1/3 of the consumers are aware
that such an opportunity exists. There is also a fee attached to the change of supplier
which hampers the competition.
For new investments in generation capacity TaRTAM could be an obstacle in the future.
However, a new ambitious programme to double the share of renewable sources is
adopted, and the production surplus is already high, so TaRTAM will not create a big
problem in the years to come.
The recent coupling of the French, Belgian and Dutch markets, and the coming extension
to the German and Luxembourg markets in 2009, means that the regional integration is
high.
The traded volume at the Powernext spot market was 44 TWh in 2007.
The Netherlands
The Netherlands has a highly developed electricity market and gets a high score on most
parameters directly relevant for a competitive market. However, the volumes traded at the
power exchange, APX, are still low, 21 TWh out of a total consumption on 112 TWh (2008),
but is increasing year by year.
The weakest parameters in the Dutch market are investment climate and incentives, where
it seems like that the Dutch focuses on import and regional integration to cover its normal
deficit on around 20% of total consumption.
Only legal unbundling are required which explains the medium score on this parameter.

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Ireland
The energy market in Ireland is a centrally dispatched or single price market. Compared to
the other European markets, which clearly separate the TSO and market operator function,
in a single price market the transmission and system operation costs are included in the
price for the energy delivered or produced. The single price market is also typically
constructed with focus on the generation side. The generators place bids for the plants
they wish to operate. The bid with the highest price necessary to meet demand sets the
pool price.
Organizing the market this way means that the competitive element clearly is present, but
lack of a reference price, weak demand side, limited wholesale market etc. means that in
most of the directly market based parameters it is hard to reach a higher score than
medium.
In 2007 the Single Electricity Market (SEM) for Ireland and Northern Ireland was
established. SEM consists of a gross pool market, into which all electricity generated or
imported onto the island must be sold. This was an important step for greater competition
in the electricity sector. In addition Spanish ENDESA has bought two power stations from
the dominant Irish power producer and grid owner ESB, and thereby reducing the
generation market share of the latter to 40%.
Ireland is in the process of launching a pilot smart meter project aiming at optimizing the
Irish electricity market. This explains the high score in the metering parameter.
UK
The same characteristics regarding a single price market in Ireland is also valid for UK.
However, the UK market is far more mature. Hence, the competitive aspect is higher. In
addition there exists a spot market run by the Dutch market operator APX. However, this
spot market only takes 1-2% of the totally traded volumes and plays little significance.
In addition, NASDAQ OMX and Nord Pool Spot have been chosen to establish a spot and
financial market in UK, which also includes, intra day market, a physical forward market
and a clearing function. The Spot market should be operative from Q2. 2009.
Norway and Sweden
Together with Denmark and Finland, Norway and Sweden constitute the most competitive
and liquid regional electricity market in the world. Maybe the single most important factor
behind the success of the Nordic Market is that all aspects, from regulation to market
operation in the electricity market chain in each of the four countries are fully market based.
This is not the case in many other European markets that strive to combine the old
regulated regime with a market regime. This fact is particularly important for Norway as
Nord Pool is located in Norway, and hence a subject for Norwegian legislation and
regulation.
However, looking at Norway and Sweden separately there are differences in the ways the
markets are organized. In e.g. congestion management Norway uses market splitting
which can result in 2-3 price areas for electricity within Norway in case of congestions. In
Sweden countertrade is used to secure that all customers get the same price within
Sweden. Currently work is ongoing that might result in the establishment of more price
areas in Sweden
Also when it comes to market power there are generators like Vattenfall of Sweden and
Statkraft of Norway that would have been too dominant if they had been operating within a

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strictly national market. However, in the integrated Nordic wholesale market these
companies market power is limited.

5.2

Review of Regional Markets

The establishment of regional markets normally is a step-by-step process where two or


more countries decide to cooperate to integrate a few or more functions in order to make
more efficient use of the cross-border capacity. Over time these functions can be
deepened and expanded to include new areas until, in the end, there is a true regional
market that at least complies with the following criteria.

Good conditions for power trading this is crucial as this is the very motor and driving
force behind the development of an integrated market. A well functioning regional
market pre-requires that the physical and financial market work and that there is trust
in the price formation. There should be reciprocity between the markets, a minimum
degree of harmonization and smoothly functioning routines for joint planning and
operation.

Balance mechanism and the settlement of imbalances The rules governing the
integrated regional market must be established also regarding to regional cooperation
in the balancing mechanism. Settlement procedures should be harmonized and based
on market prices.

Equal access to information all participants in the market should have equal access
to all relevant information, at the same time and at the same cost. This also includes
information about transmission facilities.

Market based solutions for congestion management- this is crucial to achieve an


efficient electricity market.

Investments in new transmission links if socio-economically justifiable, and to ensure


the dynamic development of the electricity regional market, the cross border capacity
among the countries involved should be sufficient.

Until now only the Nordic electricity market Nord Pool can be said to be close to fully
comply with the above mentioned requirements. However, also the Irish market, the Iberian
market (Spain and Portugal) and the TLC market (France, Belgium and the Netherlands)
can be said to be regional markets.
5.2.1

Present situation and initiatives

The Association of European Power exchanges (EuroPex) and European Transmission


System Operators (ETSO) have recently launched a report: Development and
Implementation of a Coordinated Model for Regional and Inter-Regional Congestion
Management
In the report the status and future plans for established regional markets and market
coupling projects are described. The report can be downloaded for free at:
http://www.europex.org/default.asp?kaj=news&id=277
The Nordic electricity Market Nord Pool
The Nordic electricity market Nord Pool became the first regional market in the world when
Sweden, and later Finland and Denmark joined the originally Norwegian power exchange
in the last half of the 1990ies. Nord Pool is Europes largest market place for physical and
financial power contracts. The Nord Pool market consist of a physical market which offers
intra day trading and various types of contracts for DAM, a financial market providing

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forward and futures contracts and in-house clearing of contracts. Nord Pool also offers
trade in European Emission Allowances EUAs and certified emission reductions (CER).
The success story of Nord Pool can be explained by many factors:

As already mentioned there was a political will in all the 4 countries to create a
liberalized and regional competitive energy market, even if the scepticism within the
electricity sector definitively was present.

The Energy mix used in the various Nordic countries is highly complementary. This
was a driving force to integrate the markets.

A close cooperation between the involved TSOs and their commitment to facilitate the
joint regional market was and is clearly the most important reason for the Nordic
success.

A nearly common language, culture, historical background, political system etc. made
integration much easier.

The long history of Nord Pool can to a large extent explain its relative success
compared to other power exchanges. It takes time to establish a viable market.

The TLC area and the continental European Power market


The so called TLC area consisting of France, Belgium and The Netherlands is the most
recent example of an emerging multi nation regional market.
In 2006 implicit auctions replaced the previous system of explicit auctions. The result of this
exercise has been convincing. The use of existing transmission capacity has been
optimized by approximately 60% and the prices in these 3 countries have also been
identical in around 60% of the time. (http://www.apxgroup.com/index.php?id=185).
Compared with the criteria above, The TLC countries have not gone into e.g. cross border
intraday trading and common balancing arrangements. The main purpose of the TLC
market is to harmonize the prices in the three countries involved by distributing electricity
from low price to high price area and more efficient use of the daily interconnection
capacity. However there are discussions regarding further development towards an
integrated market. France and Belgium have since 2007 been making intraday exchanges
using pro rata allocation. A similar project is in progress on the Dutch borders with
Germany and Belgium.
The TLC market will to a large extent be enlarged in the near future in the flow based
market coupling project with Germany which will contribute further to the EU aim of an
internal European Energy market. France and Germany are also in the process of
operating a common spot market (EPEX) which also includes Austria and Switzerland.
Market coupling between TLC-area, Germany and the Nordic Power market
Germany and Nord Pool have established European Market Coupling Company (EMCC) to
run implicit auctions covering the two interconnections between Northern Germany and
Denmark. The capacity is 373 MW and 379 MW at the two interconnections and can be
seen as a pilot project for further integration between the Nord Pool area and Germany.
The implicit auctions where launched in 2008 but closed down for further analysis due to
non optimal results regarding the utilization of capacity between the market areas
(http://www.marketcoupling.eu).
At the end of 2008 also the NorNed cable (700 MW) between the Netherlands and Norway
was put into commercial operation. For the moment the cable capacity is sold through
explicit auctioning, but the plan is to switch to implicit auctioning during 2009.

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Market coupling projects in other parts of Europe


Also in other parts of Europe the trend is that various states are in a process to couple their
electricity markets. Austria, Czech Republic, Germany, Hungary, Poland, Slovakia,
Slovenia are for the time being in a process evaluating the potential for market coupling in
the Central Eastern Europe region, and how to organize such a market coupling.
Hungary and Romania are in the final stage of coupling their markets together. This market
can be expanded by Bulgaria which has expressed interest in linking up with these two
countries as a part of the establishment of a national market.
The liberalization process in these countries is not as mature as in the western European
countries something that is also mirrored in the design of the electricity market coupling
projects. For the time being it appears like explicit auctions are the chosen alternative in
this part of Europe.
5.2.2

Lessons learned

In this section we will reflect upon some important issues that should be born in mind in
order to create an efficient regional market.
As a starting point the essential and most important requirement is that there is a strong
political will among the countries involved to create such a market. It is equally important
that the cooperative environment within and between the states involved are good and that
the politicians dare to take the necessary steps to create a regional market even though
the resistance from some parties can be high.
Benefit of a regional market
By looking at Nord Pool and other regional and national liberalized markets in Europe it is
fair to state that at least the following benefits have been achieved.
The use of the energy sources in the Nordic countries with hydro power in Norway,
combined hydropower and thermal power in Sweden and Finland, and thermal and wind
power in Denmark has been optimized.
Even though the proven balance in relative terms has been reduced compared to the
increase in consumption the security of supply has been maintained. In dry years a hydro
nation like Norway can be supplied with electricity from the other Nordic countries. In other
words the need for reserve capacity at national level has been reduced without
jeopardizing the security of supply.
However, the free market can also make it tempting for hydro producers to sell as much
electricity as possible in times where the price is high, without keeping a sufficient reservoir
reserve for dry years. This potential problem is in particular important to be aware of when
the market concentration is high.
In all the Nordic countries there is a major market actor that would have had too much
market power in a strictly national market. In the Nordic regional market there are enough
actors to secure competition.
Due to the competition among producers, distributors and retailers the electricity price to
end users has been kept at a low level given the generation reserves available.
In a liberalized market the price for electricity is a very rapid signal for the state of the
market. This is a clear benefit, but at the same time it is a political challenge to stick to the
market price mechanism in deficit situations.

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Organization and regulation of the market


Both in the establishment of national and regional markets a regulator with sufficient power
to secure that issues as cross subsidization between monopoly functions (ownership of
grid) and competitive functions (production and retailing) for vertically integrated companies
are avoided. A strong regulator is also necessary to deal with the complicated issues
regarding monopoly control as e.g. tariffication. At the same time the lesson learned is that
the role of the regulator should be clearly defined. A regulator that inappropriate interferes
in the daily tasks of the TSO or market operator is an obstacle for the optimal development
of the market.
In a regional market the TSOs which, from a technically point of view, best know how to
optimize the smooth functioning of the regional market should be a driving force and key
actor in the integration process. If the TSOs are not sufficiently involved it is much harder to
create a market.
It is a recurrent challenge in a regional market that the TSO move what is originally a
national bottleneck to the border and thereby disturb the regional market. This is owing to
the fact that the TSO in a pressed situation tends to put national interests in front of the
common regional interest. In order to secure that the various TSOs involved are pulling in
the same direction, also in pressed situation, their cooperation should be based on a
written contract where issues like this are treated.
An issue that concerns the organization of the market as such is that investors should be
assured that the market framework would remain stable for a long period of time. Stable
market conditions are necessary for the investors to calculate rate of return for their
investments under normal circumstances. A well developed financial forward market
facilitates such stability. For the same reason it is important that all issues regarding the
electricity market are transparent and easy accessible.
Organization of the Power Exchange
Experience shows that the market place itself will gain on competition from the bilateral
market. This competition secures that the market operator constantly will try to improve the
products offered to the market, improve the service, reduce the product prices etc.
In advanced markets the PX is counterpart in all contracts. This is a big advantage for the
risk management of the actors trading at the PX as their payment are secured and their
administrative burden eased. To provide this counterpart service a clearing house function
must be established in-house or outsourced to a bank or a financial institution.
The establishment of a financial market has also proven to be a clear advantage for the
well functioning of an electricity market and for the market participants. The traded volumes
at the financial market are normally many times higher than the trade at the DAM and
hence, important for the market liquidity.
As in all issues regarding a liberalized market, transparency and well established
information services are important in order to create trust in the marketplace and the price
formation.

5.3

Conclusion

The last years we have seen a development of power exchanges all over Europe. So far
the volumes traded at the PXes spot markets are, with exception of Nord Pool, relatively
small but the volumes are steadily increasing. In the eastern part of Europe the traded
volumes at each PX are, with the exception of OPCOM in Romania, less than 3 TWh. This

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means that the PXes, for the time being, only play a marginal role in the Eastern European
market.
So far it is in particular French/German EPEXSpot and Romanian OPCOM that stands out
as potential regional champions in respectively the Western and Eastern part of Europe,
while Nord Pool Spot is the dominant and sole operator in the Northern part of Europe.
All in all, the trend all over Europe, from south to north, from east to west is that former
national markets link themselves together. In EU there is an aim that regional markets
should be established as a sliding path or stepping stone towards a single European
Electricity Market. Current market coupling initiatives indicate that in the future national
markets will partly or fully be replaced by regional markets.
The recommended model for SEE is based upon experiences from these markets, and is
very close to the current TLC arrangements.
This is also supported by the current CWE (Central-West Europe) market framework.
In October 2009, OMEL, EPEXSpot and Nord Pool Spot signed an LOI where they state
their common interest for together enabling a cooperation based on a price market
coupling between these three big power exchanges.
The Consultants proposal is in-line with these initiatives and this would give the SEE
region a good position when the integration within Europe is ready to take its next steps.

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SECTION III: ANALYSIS

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6.

POSSIBLE CAUSES FOR HIGH PRICES IN THE REGION

Wholesale electricity prices in the region are seen as high. The lack of transparency in the
pricing makes it difficult to assess the actual price level. According to the ToR for this
project, prices go up to 100/MWh. It seems clear that the prices in the SEE region have
been affected by the lack of transmission and generation capacity. Model analysis 25
suggest that competitive prices in the region in the year 2008 would be in the range of 90100, but that the prices would be reduced in the future when new capacity (in generation
and transmission) is added. The modelled prices are broadly in line with new entry cost for
CCGT.
However, more efficient utilization of the existing transmission capacities and a generally
better functioning market is likely to contribute to improving the situation. The lack of wellfunctioning wholesale markets across the region is a contributing reason. Some of the
requirements frequently some or all of these are missing in SEE for an efficient
wholesale market are 26:

efficiently functioning and liquid spot market;

availability of an efficient balancing mechanism market;

support framework for market access;

good level of transparency;

well established roles/positions for all market players, including the TSO (as a provider
of efficient balancing services), producers and suppliers (using market mechanisms to
hedge risk), traders and brokers.

These criteria are generally not fulfilled, or at best partly fulfilled.


The data shown in section 3.2 shows that the capacity in the region should be sufficient to
cover the demand. At the same time the lack of generation capacity in the SEE region is
often highlighted as a significant reason for the high tariffs.
A significant proportion of the capacity is however in bad shape. Official plans call for
rehabilitation of approximately 11.5 GW of existing capacity to extend their operating life
and restore their efficiency and reliability. 27
IPA Energy + Water Economics (2009) have calculated what they refer to as the
generation as a percentage of the maximum that could have been produced using the
equation (MWh produced)/(MW capacity* 8760), which is shown in Figure 30. They note
that the countries that have a high level of generated units relative to capacity are those
with more thermal generation. However, this might in many cases not be a very relevant
comparison. Hydro systems are more often energy constrained rather than capacity
constrained, while thermal systems typically are capacity constrained. More interesting, for
countries with a high share of hydro there was a clear fall in this index in 2007, this was a
dry year in the region.

25

Pyry Energy Consulting, Market Report for South-East Europe (non-public report)
EFET: Obstacles to Electricity Trading in Central & South Eastern Europe.
27
Energy Community Investment Conference, Background information package,
August 2007

26

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Figure 30. Generation as share of theoretical capacity

Source: IPA Energy + Water Economics, 2009

The regional (for the nine original Contracting Parties) load factor for 2008 per technology
is displayed in Figure 31. The hydro plants in the region has an average load factor of less
than 30%, while the conventional thermal plants (fossil fuels) has an average load factor
slightly below 40%.
The hydro plants can be expected to produce close to the available energy, which is
determined by the inflow of water. In 2008 this resulted in a generation of 46 TWh out of a
total regional generation of close to 177 TWh.
The load factor of conventional thermal units is however quite low, which is likely to reflect
that the capacities in many cases are not fully available. The load factors do also vary
substantially between the different countries in the region.
The regional consumption was in the same year close to 178 TWh, which would result in a
net import need of below 1 TWh.

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Figure 31. Regional load factor per technology, 2008

100%
87%

90%
80%

Load factor

70%
60%
50%
38%

40%
30%

29%

20%
10%
0%
Hydro

Nuclear

Fossil fuels

Source: Own calculations based on data from UCTE, Platts and OST

In general there are however shortages and there are also large imbalances between
different parts of the region as displayed in Figure 18 and Figure 24. A Generation
Investment Study was prepared in 2004 and updated in 2006 (Final report January, 200).
According to this study the SEE power system as one fully interconnected network would
reduce the investment requirements and save approximately 3 billion (NPV) during the
period 2005-2020. This also points at the importance of efficiently used interconnectors.
Within the Market Monitoring Project substantial price differences between the Romanian
spot market prices and Austrian prices has been reported. 28 This indicates either a lack of
physical transmission capacities or that the capacities are not fully used. They also report
that on 7 paths (out of 21) the ATC was below 50 MW in at least one month studied, and in
13 paths it was below 100 MW. Their conclusion was that the wide availability of ATC
indicates that reserving capacity has not been a problem. However, more than one-half of
the paths indicated ATC of 100 MW or less during the period. It is unclear whether this
actually has reduced trade.
In the Market Monitoring Project quarterly for March 2008 June 2008 20 interconnectors
were studied, out of which 10 were inactive (little or no reservations and small or no
physical flows). These were mostly trade in the west-to-east direction. The other 10 had
both significant reservations and physical flows. For four interconnections the flows
exceeded the implied physical limits.

28

See Report on South East Europe Market Monitoring for the Period December 2006February 2007

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A network modelling analysis 29 showed that in a base case hydrological scenario for the
year 2010 most of the lines in the region are loaded less than 25% of their thermal limits.
Only seven out of 49 400kV and 220 kV was in this analysis loaded more than 50% of their
thermal ratings and only one more than 50%. However, other elements may be loaded
more (e.g. transformers in sub-stations and some internal lines).
There is thus a mixed picture, but the lines used for trade in main trading direction (southto-north) are used to a high degree and are in some cases very congested, which limits the
possibility of trade and increase prices (in deficit regions). Figure 32 shows the free
capacity on the different interconnectors. On some interconnectors the calculation results
in a significant negative number, which indicates errors in data. 30
Figure 32. Free capacity as % of max monthly capacity, 2008

BA
->
BA HR
->
BA ME
->
BG RS
->
BG GR
->
BG RO
->
G RS
R
->
G BG
R
->
G MK
R
->
H AL
R
->
H BA
R
->
H HU
U
->
H HR
U
->
M RO
E>
M BA
E>R
M
E- S
M >AL
K>
M GR
K>
R RS
O
->
R BG
O
->
R HU
O
->
R RS
S>
R BA
S>B
R
S- G
>
R ME
S>
R MK
S>R
R O
S>
AL AL
->
AL GR
->
M
AL E
->
R
S

150%
140%
130%
120%
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
-90%
-100%

January

February

March

April

May

June

July

August

September

October

November

December

Note: The graph shows the difference between the maximal monthly capacity (NTC*number of hours) and the actual total
monthly flow on different interconnectors (in each direction) as a percentage of the maximum available monthly capacity.
Source: Own calculations based on UCTE data

Due to the often cumbersome procedures to get access to the networks, most of the cross
border trade is currently carried out by traders acting as intermediaries between importing
and exporting countries. 31 As previously mentioned different principles for allocating

29

Generation Investment Study, Transmission network checking, draft report, March,


2005
30
A negative number implies that the flow in each hour (on average) is higher than the
NTC.
31
Energy Community Investment Conference, Background Information Package,
August 2007
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capacities are also currently used in the region. Significant capacities are directly allocated
to supply domestic customers in several countries, one country uses pro-rata allocation
and the other use different pricing methods for transmission capacities (pay-as-bid and
market clearing price). These difficulties are likely to lead to inefficient utilisation of the
capacities, which would also contribute to higher prices. At an interview with ELEM (FYR of
Macedonia) it was mentioned that 30% or more of the (import) price is due to capacity
payments for interconnectors. 32
The efficient use of interconnectors is e.g. demonstrated by the introduction of the market
coupling between France, Belgium and the Netherlands (Tri-Lateral Coupling TLC).
Figure 33 and Figure 34 show the price difference between France and Netherlands 1
month before and after the introduction of the market coupling. Figure 33 shows the daily
average price difference, while Figure 34 shows the average hourly price difference. Both
of these show a clear decrease in the price differences, and in particular a clear decrease
in the price difference during peaks. In particular Figure 34 shows that the price difference
in the afternoon/evening peak was reduced dramatically following the introduction of the
market coupling. This may be a reflection of reduced possibilities for exercising market
power following the market coupling. 33
Figure 33 . Price difference between France and Netherlands 1 month before and 1
month after introduction of market coupling

Daily average prices +/- 1 month TLC


120
100
FR

80

NL

60
40
20

32
33

21-dec

18-dec

15-dec

12-dec

09-dec

06-dec

03-dec

30-nov

27-nov

24-nov

21-nov

18-nov

15-nov

12-nov

09-nov

06-nov

03-nov

31-okt

28-okt

25-okt

22-okt

Interview with ELEM, December 2008


No detailed analysis has been made and we have no evidence that market power
was actually exercised.

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Figure 34. Average hourly price difference between France and Netherlands 1
month before and 1 month after the introduction of market coupling

Average hourly differens before - after TLC

100
80
Diff /MWh

NL-FR before

NL-FR after

60
40
20
0
0 1 2

3 4 5

6 7 8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

-20
24 hour day

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7.

RISKS AND OPPORTUNITIES FOR NON-HOUSEHOLD


CUSTOMERS

The risks and opportunities for non-household customers are likely to differ across the
region. Given that the main trading pattern currently is from the north to the south
competitive prices are likely to increase to the south in the region, but the degree of such
price differences would depend on the congestions in the region. Some parts of the region
also suffer from shortages and load shedding, while other parts have a surplus.
Furthermore, the current situation in terms of tariff differs. Montenegro for instance has
substantially higher tariffs than other countries in the region.

7.1

Key risks

The main risks for the customers are related to prices.


Risk of increased prices
There is a risk of price increases when moving from regulated tariffs. It is reasonable to
believe that competitive electricity prices in the region at least in the short run will be higher
than the currently regulated prices. This is only partially related to the creation of a regional
market, but more from the gradual phase-out of (implicitly) subsidised electricity prices.
Assuming that prices will become more and more market based over time, customers in
the southern part of the region, currently being the most dependent on imports, are likely to
have more to benefit from improved regional trade, compared to customers in export areas.
Risk of unfair competition
There is also a risk of even more pronounced price increases for eligible customers if
substantial parts of the market are kept on low regulated tariffs. If only part of the market is
being opened for competition while substantial part is kept on regulated tariffs for a
prolonged period of time it is likely that the prices for the customers on the open market
increase even more. If a substantial part of the demand is kept on relatively low regulated
tariffs these are less likely to respond and adapt their behaviour reducing the overall low
level of efficiency in the region.
Risk of market power
Each national market is currently very concentrated and a reasonable level of competition
is dependent on a successful regional integration. A successful regional integration,
coupled with effective surveillance from market operators and competition authorities a
reasonable level of competition could arise.
It is however not unlikely to expect that over time some consolidation in the market
structure would occur. Given that the main generators are currently state owned this is
however a decision that remains within the domain of the national governments.
Volatile prices
Experiences from other competitive electricity market show that the price volatility may be
high. This can be expected also to occur in a competitive market in this region. Market
participants need to apply methods to manage this short run price volatility, including
financial contracts as well as demand side response.

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Risk of limited real market access


With explicit auctioning market participants need to gain access to transmission capacity in
order to trade regionally. Some experience so far in the region is that there might be a
problem related to the availability of transmission capacity. In some of the interviews in this
project is has been suggested that there are cases where traders seems to have been
using their reserved capacity in a way that has blocked trade.
Even with more efficient allocation, experience shows that the utilization of the
transmission capacity is less efficient with explicit auctioning. This may lead to more
frequent bottlenecks and increase in prices.
The financial markets are not yet developed, which limits the possibilities for market
participants to hedge price risks. Particularly in a transition phase until such markets
have developed this may create difficulties.
If a day-ahead-market is unable to attract sufficient liquidity the possibilities for market
participants to trade will be limited.
Summary
A key risk for non-household customers is that electricity prices may increase in an open
market. This risk is particularly enhanced if only a few customers a faced with market
prices, while most remain on (low) regulated tariffs. Securing an efficient working market
and a high degree of competition is important to counter-act this.

7.2

Opportunities

A well functioning wholesale market in SEE will bring many opportunities to the
participants.
Real competition Access to a large base of suppliers
With the current market structure the (non-household) customers are essentially dependent
on the local supplier. This is further enhanced by the fact that the local (low cost)
generation is in many cases reserved for the local tariff customers. Market opening will
create opportunities for non-household customers to get access to a larger base of
suppliers. Currently non-household customers can formally become eligible in (almost all)
countries in the region, 34 and in a few it is mandatory for customers above the defined
threshold. The latter implies that those customers to not have access to a regulated tariff.
Access to new service offerings
As has been the case in more developed electricity markets this has led to a broader range
of services offered, providing the customers with new and better possibilities for contractual
arrangement, hedging etc. The market for hedging will develop when there is a trustworthy
spot price that can serve as basis for financial hedging contracts.

34

A few jurisdictions define the eligibility threshold on connection level, which means
that all non-household customers cannot become eligible in those jurisdictions.

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Possibility for demand side participation


Demand side bidding/participation may enable (non-household) customers to reduce the
cost of electricity by adapting the consumption to the actual prices. The surplus capacity
could be sold back to the market.
Investments in own generation
In an open market the customers may also invest in generation and thus hedge for price
variations and sell surplus to the market.
Higher electricity prices will increase new investments
It should also be noted that if price levels are below the cost of new investments, it will not
be possible to get new commercially driven investments, which may worsen the supplydemand balance. Increased security of supply will require both a more efficient use of the
existing system, but also new investments. The necessary investments can in practice only
be achieved if investors receive the required income. Particularly in the parts of the region
where load-shedding is common practice, customers are likely to benefit from increased
security of supply over time.
Better utilisation of generation and transmission capacities
In a well functioning wholesale market the utilisation of generation and transmission
capacities will be optimised and thus minimise cost for the buyer of electricity on the
market. Also a generator will benefit from the fact that his units will only run when it is
economically beneficial for the owner of the unit.

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8.

BARRIERS TO MARKET OPENING

8.1

Prerequisites for market opening and current status

The degree of competition in the market is generally low in the region with in most cases
one dominant generator in each country. Furthermore, it is common practice that this
generator is obliged to first-hand supply to the domestic tariff customers. This limits the
possibilities for trade and reduces or eliminates the incentives for eligible customers to
exercise their eligibility. In some countries no regulated tariff is offered to eligible
customers, which in effect means that those customers are the only one facing the
marginal cost of generation in the region.
As stated above (see section 3.4 and 3.5) there are some clear problems related both to
the regulated tariffs and to the market structure. Supply and distribution has generally not
been unbundled in the region, which creates an unequal playing field for the incumbent
supplier and a new entrant. There is a high risk that a new entrant fears that it will not be
treated in a fair and equal manner by the distribution company as it is competing with its
supply businesses. However, this is probably currently overshadowed by the fact that the
regulated tariffs mostly are at levels which makes it very difficult for new entrants to
profitable enter the end-user market. Even though both of these problems primarily relates
to the retail market and not the wholesale market, it puts limitations on the business models
that a new entrant also on the wholesale level can apply. A new wholesale entrant will then
have difficulties in securing its own customer base, but has to rely on selling to the
incumbents.
On the wholesale level there is no clear wholesale reference price established. This
reduces the possibility for efficient trade between parties, and is also likely to lead to less
efficient use of the system.
National generators in most SEE countries are obliged by law to continue to supply tariff
(captive) customers, as per the local energy legislation for Public Service Obligation (PSO).
Thus, they are allowed to request capacity from the TSOs for so-called Already Allocated
Capacity (AAC) for import purposes 35. In effect, part of the cross-border capacity is
reserved for fulfilling this PSO and restricts the availability of transmission capacities to
new entrants.
One of the main market imperfections is the lack of clear incentives to SEE TSOs to
support cross-border trade and invest more in integrating the regional markets. In this
respect an operational framework of Co-ordinated Flow-Based Explicit Auctions (CAO) is
being implemented for allocating interconnection capacity in the region.
This initiative has led to a dry-run simulation through 2006, with continuing work and
simulations in 2007, potentially increasing the appetite of traders to participate as well. One
important existing issue is the distribution and use of revenues from the CAO and the
ensuring effect on TSOs participation in this framework, the actual capacity that they
provide to the market and the corresponding benefits for the regional cross-border trade
and planned further market integration of the regional electricity systems 36.

35
36

ECRB EWG Draft on SEE Co-ordinated flow-based explicit auctions.


ECRB EWG Draft on SEE Co-ordinated flow-based explicit auctions.

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However, some of the incentives that may benefit TSOs in the area can cause higher
customer bills and lead to a market distortion. This is due to the fact that CAO-generated
income for grid operators is a windfall profit 37 since OPEX and CAPEX spending on the
countrys network is covered by regulated tariffs and the inter-TSO compensation
mechanism, unless the CAO-generated income is either used for investments or for
reducing the tariff according to the established guidelines.
In regions with liquid and efficient markets, the use of congestion revenues through either
investment to reduce congestion or to provide firm availability of capacity or lower tariffs
should lead to an improvement in welfare. Until the SEE markets are developed to this
level, it is important to prevent scenarios where TSOs are obtaining certain incentives to
retain congestion on their borders, especially given the fact that the framework for
allocation of transmission capacity is not completely market based yet.
During the 14th Athens Forum the Energy Community Secretariat gave a presentation
regarding the situation as of December 2008. The figure below is taken from that
presentation. As shown by this figure some legal provisions are missing in most of the
central areas for wholesale market opening in more or less all the countries. For three of
the key issues the situation is reported as being the following:

Market opening (in the figure below) refers to the opening of the market for final
customers. The summary above shows that only Croatia is fulfilling the requirements
of Directive 2003/54/EC in this respect. Several, such as FYR of Macedonia,
Montenegro and Kosovo have significant bottlenecks in this area, while the remaining
contracting parties only have some provisions available.

Also related to cross-border trade, none of the contracting parties fulfil all the
requirements. Croatia and Serbia are reported as only missing some provisions.

Congestion management is more advanced, although none of the contracting parties


fulfil all of the provisions.

37

ECRB EWG Draft on SEE Co-ordinated flow-based explicit auctions.

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Figure 35. State of play, December 2008

STATE OF PLAY (December 2008)


DIRECTIVE
2003/54/EC

Public Service
Obligation and
Customer
Protection

Monitoring
Security of
Supply

Technical
Rules

Unbundling
Provisions
and Access to
Account

Third Party
Access

New Generation
Authorisation
and Tendering

Market
Opening

Cross Border
Trade

Albania
BiH
Croatia
the Former Yugoslav
Republic of Macedonia

Montenegro
Serbia
UNMIK
Regional Perspective

REGULATION
(EC)
1228/2003

Inter-TSOs
Compensation
mechanism

Charges for C Congestion


access to the A Management
networks
P
method

Transpa
rency

Use of
Congestion
Income

New Interconnectors

Coordination
among
Regulatory
Authorities

Penalties

Albania
BiH
Croatia
the Former Yugoslav
Republic of Macedonia

Montenegro
Serbia
UNMIK
Regional Perspective

Bottlenecks

Some provisions are available

Some provisions are missing

All provisions are available

Source. Energy Community Secretariat, presentation given at the 14th Athens Forum

Independent of the market model eventually chosen some prerequisites have to be fulfilled,
possibly to a varying degree dependent on market model. Some important prerequisites
will be:

Wholesale reference price, transparency and liquidity

Secondary markets for energy and cross-border capacities

Competition in generation

Price penetration

Effective market opening

Independent regulators

Effective TSO unbundling

Effective DSO unbundling

Demand side participation/management

Imbalance cost/balance responsibility

Market based allocation of cross-border capacities

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Wholesale reference price, transparency and liquidity


Price reference is a basic prerequisite for power trade, power plant operation, consumer
behaviour and investment decisions. A minimum degree of liquidity is required to establish
confidence in the reference price and to reduce volatility. Most bilateral markets show
sufficient liquidity in long term products. For the SEE region the challenge is to create
liquidity in short term products.
Energy reference prices can be developed in different ways, but typically organized market
places with sufficient liquidity is important for a reliable reference price to be established.
With market models based on implicit auction (of cross-border capacities) the cross-border
flows will be determined by the prices established on organized market places. This is not
the case with market models based on explicit auctions. For such market models reference
prices are however required in order to secure the correct flows since the bids for crossborder allocation will be based on these prices.
Currently there are no liquid market places in the region and no generally known and
accepted reference price for electricity. However, there are active traders functioning as
mediators and these can be expected to have a reasonable good knowledge about the
relevant reference price.
Secondary markets for energy and cross-border capacities
Related to the establishment of trustworthy reference prices is the availability of liquid
secondary markets. This is also important to ensure efficient use of the system.
Currently there are no secondary markets for energy. According to the ECRB EWG
Benchmarking report (version 30 April, 2008) only Serbia and Kosovo offers the possibility
for secondary markets for capacities (and Kosovo does currently not control the crossborder capacities). Market rules may in some cases also have to be changed in order to
implement secondary markets for energy as well as cross-border capacities.
Competition in generation
Any well-functioning market requires a sufficient degree of competition in order to avoid
market power. With national energy markets this sufficient degree of competition would
have to be upheld in each (small) national market. For many of the small markets in the
SEE region it is unlikely that a sufficient number of generators can be established.
Regional integration to some degree dilutes market power, and thus reduces the
requirements on each national market.
With the exception of Bosnia and Herzegovina, all the national markets in the region are
dominated by one generator. There are in several countries additional market
participants/generators, but from a competition point of view the effect of these can be
expected to be very limited.
A well-integrated regional market could be expected to function reasonable well given the
number of generators that would be present. This of course requires that the markets can
be sufficiently integrated and that there is both sufficient interconnector capacities and that
these capacities are utilized in an efficient way. There are currently many active traders
that can provide some competition in the cross-border trade.

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Price penetration
In an efficient power market final consumers and generators react to market prices. Market
design aims at exposing a steadily increasing number of market participants to short and
long term marginal prices. Full supply contracts 38 and regulated prices are not compatible
with price penetration.
Currently the price penetration to end-users is limited in the region. The countries typically
have regulatory regimes in place that are supposed to be cost-reflective. The level of the
regulated tariffs varies widely within the region. The tariffs are however typically not
sufficient to cover the cost of new investments. The payment discipline is also in many
cases low.
Most of the customers in the region are not exposed to market prices. In some countries
(Croatia, FYROM and Montenegro) eligible customers are exposed to market prices.
Effective market opening
In order for a competitive wholesale market to emerge it is necessary that there are
customers available to supply.
Currently the customers are in most cases locked into their current supplier, either
through not being eligible to switch or not having any incentives to switch supplier. In all
cases the effective market opening is low and, with the exception of Croatia, FYROM and
Montenegro the de facto market opening is zero or close to zero with (almost) no
customers exercising their eligibility.
Independent regulators
Independent regulators equipped with the sufficient regulatory capacities are important in
any market setting. A more complex market design is however likely to put higher demand
on the regulator. In particular, regional integration may require cross-border regulatory
interventions.
All the countries in the region have formally independent regulators, although the
capacities of the regulators vary.
Effective TSO unbundling
All of the foreseen market models require neutrality of the system and market operator.
Most of the countries have established independent TSOs. The exceptions are Bosnia and
Herzegovina where an independent ISO is established, Croatia where an independent
market operator is established but the TSO is within the HEP Group and Montenegro
where this process has only begun.
Effective DSO unbundling
DSO unbundling most directly affects the retail level and is thus not an absolute
requirement. A well functioning retail market however supports and enhances the
functionality of the wholesale market. Demand side participation in energy markets can be

38

With full supply contracts we refer to a type of contract where the customer can offtake as much electricity as it wants and the customer has no cost for imbalances (the
customer has no reference consumption). This is sometimes also referred to as all
in contracts.

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prevented by discriminatory behaviour from a non-unbundled DSO. Many markets around


the world work reasonable well without a complete (e.g. ownership) vertical separation. It is
however important to make a proper ring-fencing of the DSO activities.
In FYROM distribution and supply has already been separated from generation and
privatized. Distribution and supply are however not separated. Several others are either in
the process of separating the distribution and supply activities or have already legally
separated these activities. In no case there is an effective separation between DSO and
supply activities.
Demand side participation/management
Participation in energy markets from the demand side generally improves the functionality
of the wholesale market. However, many energy markets are relatively well-functioning
without an active demand side. Demand side management is however likely to be
important e.g. in order to reduce load shedding and increase energy efficiency.
In the few countries were some customers are more directly exposed to market prices, the
demand side can be expected to be more responsive to market conditions.
Imbalance cost/balance responsibility
Competitive energy markets require that the responsibility for upholding balance is
allocated to the TSOs. However, each market participant is required to trade into balance.
Currently Bosnia and Herzegovina and Croatia have established systems for balance
responsibility.
Market based allocation of cross-border capacities
Independent of market model chosen the cross-border capacities should be allocated using
market based methods (implicit or explicit auctioning). Currently the allocation is basically
based on explicit auctioning in all countries except Bosnia and Herzegovina (Kosovo does
not control the capacities in/out of the area). It is however common that some capacities
are reserved for the supply to tariff customers. The allocation is furthermore mostly done
on a long-term basis and the availability of secondary markets is limited.
The pricing is also based on different methods, with some countries using pay-as-bid.
Summary assessment of the current situation
On some points the development has proceed relatively far:

All countries have established independent regulators, although they may in some
cases need to be strengthened. Looking at the regional perspectives the difficult
challenge of regional cooperation between regulators probably has to be further
developed, as is typically also the case in the rest of Europe.

All countries, except Montenegro, have also advanced relatively far in terms of TSO
unbundling.

Market-based allocation of cross-border capacities, through explicit auctioning, is also


the dominant method.

On other issues far less progress have been made:

There are generally no publically available and generally trusted reference prices for
energy.

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Although the possibility for secondary trading for cross-border capacities exist in a few
cases these are not liquid and well-functioning markets.

Long-term trade in electricity may function reasonable well, but no organized market
places for trade in electricity currently exist.

According to the Consultants understanding balance responsibility has only been


developed in a few cases. In most of the region the dominant generators are in
practice responsible for upholding the balance and provide ancillary services to the
system operator.

Although formal market opening (end user eligibility) is reasonable well progressed,
the actual market opening is in most cases non-existent or very limited.

Customers currently face market prices only to a very limited extent. This is particularly
the case regarding more short-term price signals.

Effective unbundling of DSOs has not progressed very far. Although in several cases
the distribution and supply have, in various ways, been separated from generation,
distribution and supply have not been separated from each other. This may be of less
urgency in terms of creating a regional wholesale market, but is of importance to
secure that customers get access to the electricity market.

8.2

Barriers to market opening

There are several potential barriers to advancing market opening and liberalisation. First of
all, the prerequisites for regional market opening discussed above are generally only
fulfilled to a limited degree.
Regulated rates to low
It is important to recognize that this is a poor region and that a relative high degree of the
population suffers from energy poverty. Based on consumer protection concerns it is
common to want to keep the cheap generation for the home market and offer this to the
consumers at low regulated rates. Although the regulated rates may cover the cost of the
existing system, those price levels are insufficient to cover the cost of new investments on
a commercial basis and generally below the prices on the open market. The perceived risk
of price increases can thus be considered to constitute an important barrier. Related to this
is also the concern that increases in the prices will have a negative impact on the industrial
development and the competitiveness of the local industries in the region.
This situation is however different in different countries. Montenegro for instance has
substantially higher tariffs than other countries in the region. It is possible that the
customers in Montenegro can gain from regional market integration. On the other hand, in
most countries the regulated tariffs are lower than what can be expected in the open
market at least in the short run.
It should be noted that if price levels are below the cost of new investments, it will not be
possible to get new commercially driven investments, which will worsen the supply-demand
balance.
With the current price regulation the interest of the eligible consumers to exercise their
eligibility is limited or non-existing. In a few countries the eligible consumers are forced out
on the open market. In order to create a well-functioning market opening it is necessary to
gradually increase the number of customers on the open market. This can either be done
by eliminating the option of regulated tariff for eligible customers, or by changes in the tariff
regulation.

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National markets too small


The national markets in the region are small. Unless a regional solution can be achieved
there is a risk for a fragmented market structure with negative consequences.
With national markets each market need competition in generation. Currently each market
is dominated by one dominant generator, with the exception of Bosnia and Herzegovina
with 3 dominant generators. It will be difficult to establish competition in all areas in the
SEE. It would require splitting the current dominant players. Most of these players,
national champions, are not large in a regional context and could even expand in a SEE
Regional Power Market.
Reduced costs and increased security of supply can be expected from a regional market
both in the short- and long run. The power systems in the region differ widely between
countries in terms of the generation mix. Typically it is very beneficial to integrate hydro
and thermal systems in order to exploit the different characteristics and the storage
possibilities in the hydro system. This will reduce generation costs. The hydro dominated
systems typically need to import during droughts and are thus dependent on a regional
solution. The more thermal dominated systems can on the other hand benefit from lower
generation costs when there is excess water.
In the long run the investment incentives are likely to improve. By interconnecting a larger
system a more stable price can be expected, which reduces the risk for the investors.
Furthermore, the current locked in markets limits the possibility of commercial profitable
investments. It is difficult for other market players than the regulated utilities that can
transfer new capacity into its rate base or IPPs with a supply agreement to a regulated
utility to make profitable investments.
Limited experience of electricity market operation
There is also relative little experience and knowledge about market operations in the
electricity sector in the region. There is currently:

No Power Exchange

No regional wholesale reference price

Limited secondary market for electricity cross-border capacities

Limited experience of Balance Responsibility

Limited/short experience in unbundled TSO

Some experience of independent regulator

Market participants need to understand and adapt to the concept of and competitive
electricity market. This will require gradual capacity building, and a gradual evolvement of
the market.
Mutual recognition and trust in parties
On a broad political level there are important political barriers related to the mutual
recognition of parties. This is typically issues that goes beyond the electricity market, but
have an impact on the possibilities of progress. Energy market integration is to a high
degree dependent on trust, since energy security is vital to any nation. In comparison, the
well advanced regional integration in the Nordic countries was based on a long history of
cooperation between the countries, which provided a solid foundation.

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The political barriers, both related to concerns for price increases and the mutual
recognition of parties and trust between nations is probably the most difficult to overcome.

8.3

Ways to overcome barriers to market opening

Increasing the degree of market price penetration to final customers. Abolition of full
supply contracts and regulated prices over time;

Increasing the incentives for final customers to exercise their eligibility;

Establishing reliable wholesale reference prices, probably through creating organized


market places with sufficient liquidity;

Establishing a regional SEE wholesale market will reduce the risk for a fragmented
market structure with negative consequences;

Increasing the level of competition (in generation). With a well-integrated market the
competition may work reasonable well, but it will require close surveillance from
market operators and competition authorities. Improvements in the utilization of crossborder capacities are also important;

Establishing systems for balance responsibility and creating incentives for market
participants to be in balance;

Establishing a secondary market for cross-border capacities (with an explicit


auctioning model) and securing sufficient liquidity in these markets;

The allocation of cross-border capacities also needs improvements in some cases.


With the ongoing work on coordinated auctioning, important improvements can be
expected;

The current and future wholesale participants need to be educated and trained in the
functioning of the new market and the roles and responsibilities of each market
participant.

At least, but probably most important, a political will to establish a SEE wholesale
market is vital for the success of the mission. Without a political commitment in each of
the contracting parties no well functioning market will be achieved.

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9.

KEY PERFORMANCE INDICATORS

The progress of the SEE wholesale market opening needs to be monitored. The EC
directives demand market opening and there are many areas that need to be developed.
Key Performance Indicators (KPI) is a tool in the monitoring. The KPIs will show the pace
of progress and make it possible to take measures, if the process is haltering.
The KPIs are suggested to be prepared by ECRB and the national regulators. They will
also be used by national ministries, the World Bank, TSOs, investors and others with an
interest in the development of the wholesale market in SEE.
It is also suggested that the KPIs are used on a regular basis, for examples quarterly and
annually. The KPIs need to be published in some sort of monitoring report and made
accessible for all interested parties, for example through the web page of ECRB.
From a qualitative perspective one can distinguish between two types of indicators. The
first one measures whether the necessary instruments are in place that can support the
desired development. The second type of indicators measures how well these instruments
functions. In this document we propose a number of KPIs that should measure both of
these aspects.
We have defined 50 KPIs to monitor the progress of the SEE wholesale market opening.
The KPIs have been grouped in the following areas:
Number of KPIs

Prices, transparency and surveillance

Access to markets

Access to customers

Market structure and competition

14

Balance responsibility and balancing market

Allocation of cross-border capacities

Network tariffs and grid access

Independent regulators and harmonisation of regulation

Some of the KPIs are the same as in the EC Report on Progress in Creating the Internal
Gas and Electricity Market 39. These KPIs probably needs to be monitored as a requirement
form the EC and it will thus not be any extra work for ECRB and the regulators.
The monitoring, as proposed in this report, needs to be coordinated with the ECRB
Marketing monitoring work stream by USAID/Potomac Economics. This project has so far
mainly concentrated on the allocation of cross-border capacities.
Most of the KPIs have been defined in the scale of 0 100%, where 100% indicates that
the goal for the KPI is fully achieved. Some KPIs used in other circumstances have other
scales, examples of this is HHI and C3. There are also some indicators that can not be fit

39

COM(2008) 192 final, Commission staff working document, Accompanying document


to the Report on Progress in Creating the Internal Gas and Electricity Market

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into the 0 100% scale, examples of this is Price correlation between price areas and
Number of balance responsible parties.

9.1

Prices, transparency and surveillance

Trustworthy market prices that reflect the underlying costs are key to a well functioning
market.
From a market design perspective it is important that prices reflect the relevant cost of
generation, i.e., that prices generally reflect the short run marginal cost, and that these
wholesale prices are pass-through and reflected in end-user prices. It is not possible to link
the success of a market design to a particular price development or price level since that is
dependent on the cost structure, need for investments etc. Prices may thus both increase
and decrease without any of that necessarily being a sign of a good or bad market design.
From a market design perspective it is more important to measure whether the prices are
competitive both on the wholesale market and in the retail market. Two KPIs are proposed
to capture this.
For the wholesale market the price mark-up above the short-run marginal cost (SRMC) is a
key indicator (Lerner index 40). The SRMC could possibly be calculated based on the last
thermal unit used in the country (standardized costs based on fuel prices and the efficiency
of the plant). However, the drawback of using the last unit actually used is that if inframarginal units are held back from generating the wholesale market prices could equal
SRMC (zero mark-up) in spite of market power. Thus, it is preferable to calculate the
SRMC based on an assumed availability of the power plants.
If the country is importing the SRMC for the country would equal the SRMC for the most
expensive import (i.e. the SRMC in the most expensive export country).
Furthermore, it is important that trustworthy price references are established. It is proposed
that this is measured in the short run through the correlation between the wholesale prices
and the end-user prices. In the long-run a trustworthy forward price reference should have
implications for new construction of power plants - if the forward prices are above the
LRMC of the most competitive plants investments should be triggered.
Transparent prices are also important for market participants. We propose to measure
price transparency through the existence of daily published prices. Trustworthy prices also
depend on a well-functioning, neutral and non-discriminatory price setting process. Market
surveillance is important to secure this.

40

The Lerner index is calculated as mark-up on SRMC (wholesale price-SRMC) divided


by the SRMC.

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Table 10. Key Performance Indicators - Prices


Indicator

Measure/scale

Comment

Wholesale price mark-up


Wholesale Lerner index

(Difference between wholesale


energy prices and system
SRMC)/system SRMC

Could be
measured for peak
and off-peak
respectively.

Retail price mark-up


Retail Lerner index

(Difference between end-user


energy prices and wholesale
prices)/Wholesale price

Per customer
group, excluding
network tariffs,
taxies and levies.

Trustworthy price reference


degree of spot price passthrough to end-users

Correlation between end-user


energy prices and wholesale
prices

Per customer
group, excluding
network tariffs,
taxies and levies.

Trustworthy price reference


New capacity build where
LRMC < forward price

Yes = 100%; No = 0%

Future KPI. Relies


on existence of
forward markets.

Price transparency
existence of daily published
prices

Yes = 100%; No = 0%

Establishment of market
surveillance

Yes =100%; No = 0%

Existence of regulated
(energy) prices

No = 100%, Yes = 0%

For each customer


group

Transparent market
information

No = 100%, Yes = 0%

Publication of all
information related
to the formation of
market prices.

9.2

Access to markets

For an effective market opening it is important that market participants have access to
market places where relevant products can be traded. Organized market places are the
most accessible type of market place. However, standardized trading contracts and
products can also facilitate trading in the absence of an organized market.
Market participants also have the need for hedging price risk. One possibility for hedging is
through bilateral (financial) contracts between e.g. a producer and a consumer. A market
place for trading financial products provides better liquidity and facilitates access to the
market.

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Table 11. Key Performance Indicators - Access to markets


Indicator

Measure/scale

Existence of spot market


power exchange(s) open for
all market participants

Yes = 100%, No = 0%

Volumes traded at spot


market power exchange(s)

Volume traded at spot market


exchange in GWh/Total
consumption in GWh (%)

Standardized forward
contracts/products defined

Yes = 100%; No = 0%

Forward market established

Yes =100%, No = 0%

Volumes traded at forward


markets

Volume traded at forward market


exchange in GWh/Total
consumption in GWh (%)

No restriction on market
access due to type of
market participant

Yes = 100%, No = 0%

9.3

Comment

Yearly numbers.

License systems
do not restrict
market
participation of
generators,
suppliers, or final
customers from
direct market
participation,
including the right
to import/export (if
relevant). 41

Access to customers

To measure the access to customers three indicators are proposed. The first indicator
measures the formal market opening, i.e., the share of consumption that has the legal right
to switch supplier. The second indicator measures the share of consumption that is actually
exercising the eligibility, and the third indicator the degree of supplier switching within one
year. These indicators combined show how accessible the final consumers are for a new
entrant into a market.

41

Import/export only is relevant with physical trade and explicit auctioning of


transmission capacities. Otherwise all volumes are bid into the local market.

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Table 12. Key Performance Indicators Access to customers


Indicator

Measure/scale

Comment

Formal market opening

Eligible consumption in
GWh/Total consumption in GWh
(%)

Number of eligible
consumers/Total number of
consumers (%)

The time line for


market opening is
determined by EC
regulation and the
Energy Treaty

Consumption exercising eligibility


in GWh/Total consumption in
GWh (%)

Number of consumers exercising


eligibility /Total number of
consumers (%)

Consumption switching supplier


within one year in GWh/Total
consumption in GWh) (%)

Number of consumers switching


supplier within one year/Total
number of consumers (%)

Actual market opening

Degree of supplier switching

9.4

Consumers that
have switch
suppliers or left
regulated tariffs.

Measures the
consumer
switching activity
within one year.

Market structure and competition

Electricity markets are generally vulnerable to market power and it is important to measure
that the market structure is such that competition is facilitated. A key issue is to define the
relevant market. It may be that neither national nor the full regional market is the relevant
market from a competition point of view, and also that the relevant market may vary from
time to time (due to changes in demand, available generation capacity and available
transmission capacity).
Under the section prices we have also proposed measures that try to capture the mark-up
above marginal cost, i.e., the actual competitiveness of the market.

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Table 13. Key Performance Indicators - Market structure


Indicator

Measure/scale

Comment

Price correlation between


price areas

Simple correlations between


wholesale market prices

Relies on the
availability of
prices

Share of time with price


differences

Share of time (%) with price


differences between price areas

Relies on the
availability of
prices

Market concentration,
Generation

HHI 42

All measured both


in MW and GWh

C3 43

Number of companies with more


than 5% market share

HHI

C3

Number of companies with more


than 5% market share

Functional and accounting:


Yes = 100%, No =0%

Legal: Yes = 100%, No = 0%

Ownership:
Yes =100%, No = 0%

Functional and accounting:


Yes = 100%, No =0%

Legal: Yes = 100%, No = 0%

Ownership:
Yes =100%, No = 0%

Market concentration,
Retail

Vertical unbundling of
generation from TSO

Vertical unbundling of
supply/retail from DSO

9.5

Measured in GWh

Measurement
should be based
on legal
requirements that
are enforced.

Measurement
should be based
on legal
requirements that
are enforced.

Balance responsibility and balancing markets

A functioning wholesale market is dependent on price dependent bids in order to create


liquidity. With the introduction of balance responsibility market participants will have to
trade into balance in advance.

42

HHI (Herfindahl-Hirshman Index) is calculated as sum of the square of the market shares
for all market participants: (market share)2
43
C3 (Concentration of 3 largest companies) is calculated as the sum of the market
shares for the three largest companies.
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Balancing markets allows the TSO to balance the system for deviations after gate closure
in the spot market at the lowest possible cost. In the SEE context a regional market is
preferable.
Table 14. Key Performance Indicator - Balance responsibility and balancing
markets
Indicator

Measure/scale

System for balance


responsibility established

Yes =100%, No = 0%

Full supply contracts


Generators and Suppliers,
and between Generators
and Eligible Consumers
abolished

Yes =100%, No = 0%

Balancing market
established

Yes =100%, No = 0%

National or
regional market

Regional balancing market


established covering more
than 1 country

Yes =100%, No = 0%

Yes if the country


is participating in
the regional market

Number of balance
responsible parties

9.6

Comment

Allocation of cross-border capacities

Cross-border capacities need to be allocated in a transparent and fair way and there are
requirements to use market based methods for allocation of cross-border capacities. There
are two methods for market based allocation: explicit auctioning and implicit auctioning.
The market design proposal developed in this study rests on the use of implicit auctioning.

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Table 15. Key Performance Indicators - Allocation of cross-border capacities


Indicator

Measure/scale

Comment

System for market based


allocation of cross-border
capacities established and
implemented

Yes = 100%, No = 0%

Either explicit or
implicit auctioning.
If different methods
are used at
different
interconnectors a
capacity weighted
average should be
used.

Share of capacity allocated


through market based
allocation mechanisms

Capacity allocated through


implicit auctioning/Total
transmission capacity (%)

Capacity allocated through


explicit auctioning/Total
transmission capacity (%)

Price differentials and flows

Share of flow in right direction


(from low price to high price
area), (%)

Price differentials and use of


capacity

Share of time with price


differentials between market
areas with unused transmission
capacities (%)

Price differentials * unused


transmission capacity

9.7

1-flows in wrong
direction

Network tariffs and grid access

It is possible to have different network tariff models within one market, although too large
differences may have negative impacts on e.g. the location of investments and dispatch.
This study does not focus on the details of the network tariff regimes. However, in order to
facilitate trade and participation on an open market distance independent point tariffs
(postage stamp) are proposed. Furthermore, non-discriminatory access to the grids is
essential for a functioning market.

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Indicator

Measure/scale

Establishment of distance
independent point tariff
(postage stamp)

Yes = 100%, No = 0%

Regulated (nondiscriminatory) third party


access to grids established

Yes = 100%, No = 0%

9.8

Comment

Independent regulators and harmonization of regulations

Independent regulators are important for the functionality of any electricity market. For a
regional market it is also important that a functioning regional cooperation between
regulators is established. It is however inherently difficult to measure harmonization,
expect for the case when full harmonization between all entities in a common market has
been reached.
Table 16. Key Performance Indicators - Independent regulators and harmonization
of regulations
Indicator

Measure/scale

Formal independence

Yes = 100%, No =0%

Financial independence

Yes =100%, No = 0%

Harmonized licensing
framework

Licensing framework meeting the


basic requirements of the market
design: Yes = 100%; No = 0%

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Comment

The regulator not


dependent on the
government for
funding

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10.

SEE WHOLESALE MARKET OPENING REQUIREMENTS

10.1

Introduction

The introduction of competition to electricity business is not a new topic.


Vertical and horizontal unbundling, national and regional, pooling and voluntary markets,
centralized and decentralized dispatch, regulated and market based pricing, ISO and TSO,
implicit and explicit transmission capacity auctions, auction based and continuous trade
based electricity markets, nodal and area-based pricing these are only some of the
expressions you will meet when trying to analyze what the different national authorities
have tried out.
The development and experience from especially other European markets show that some
main design principles are considered as the best way to proceed with the transitioning
process: a regional market design based on close cooperation between the involved
countries, competition, implicit auction of transmission capacity in case of congestions,
two-price market model, physical plus financial market and shortest possible settlement
periods.
The most obvious conclusion from all reform experiences is that a competitive electricity
industry is not implemented from one day to another. In market areas where authorities
and organizations have cooperated based on a willingness to focus on the functioning of
the required mechanisms through proper framework, correct assigning of responsibilities
and meaningful regulation the development has been positive and the electricity business
has carried out a successful transition from publicly run to competitive.
Although Europe and other parts of the world are converging to a unified definition of a
functioning electricity market design, there are still issues being discussed and alternative
solutions existing next to each other.
Crucial for design and implementation of an electricity market is a clear goal: the transition
from publicly run to competitive market solutions. The two main mechanisms clearly stated
as best suitable for this purpose are competition and regulation; not as a mix, but
competition for generation, supply and consumption on one hand and regulation for grids
and system operation on the other hand:

competition (generation, retail and consumption) in order to achieve cost efficiency and
maximum utilization of infrastructure

regulation of monopoly (grid and SO) functions in order to achieve cost efficiency and
a defined level of supply quality

The only place regulation shall affect competition is where the framework for and the
proper function of competition is created.
The solutions for the SEE market should be based on the experience from existing markets
with focus on utilizing the sum of the experiences from other markets.
In the following the most important requirements affecting SEE plus thereto belonging
instruments and constellations are discussed, which also result in the Consultants
recommendations for SEE.

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10.2

Balance Responsibility, Regulated Prices and Market Price

Contracts with regulated prices will always withdraw the contracted volume from the
wholesale market. A functioning wholesale market is dependent on price dependent bids in
order to create liquidity. Regulated price contracts will thus not harm the functioning of the
wholesale market if they represent price independent consumption volumes.
In SEE regulated price contracts exist as support to industry, business and households.
Business and households are typical price independent consumers, i.e. they are not able to
respond on short term price peaks. Thus maintaining the support of these two groups in a
transition period will not disturb the market. Important for the transition periods duration is
although that these two groups are able to respond on long term prices. They should thus
be given a timeline for eventual tariff price increases/corrections in order to facilitate their
preparations for eventually higher market costs during/after the transition period.
Industry, as the third group, will due to the introduction of balance responsibility be obliged
to trade into balance. This implies that they will have to purchase hourly contracts in
addition to (if existing) regulated price contracts. Regulated price contracts should only be
granted as base load for a longer period and based on the expected consumption (equal to
the principle of distribution of EU-CO2 allowances). The hourly contracts purchased
through their balance responsibility will introduce the industry to hourly prices in the
wholesale market and thus create incentives to respond on price peaks with demand
volume flexibility.
Generators will have contractual obligations related to regulated price contracts and other
bilateral contracts. The wholesale market will enable the generators to substitute their own
generation capacity with cheaper purchases in the wholesale market. Thus the generators
will appear in the market as price dependent buyers in addition to the price dependent sell
of their surplus capacity.
In the long run, regulated prices will have to be removed as SEE is integrated into the EU
and the conditions for the internal EU market for energy are applied. It is a political decision
how fast and to which degree the regulated prices shall be replaced with market prices, but
regulated prices needs to be removed by 31.12.2014 according to EU directives.

10.3

Generation and consumption balancing

10.3.1

Basic principles

The basic
consumers
consumers
consuming
generate it.

design principle is that the generators sell their generation capacity


purchase their consumption prior to operational hours. This implies
have to estimate their consumption and purchase it before they
it and generators have to estimate their generation volume before

and
that
start
they

In addition the generators, through a Real-time Balancing market, will be able to sell
additional generation capacity (increase/decrease) in real-time operation.
Assuming that consumers estimate their consumption correctly and purchase this from the
generators, the input for the real-time operation will be a planned balance between
generation and consumption. The load increase and decrease within the same hour is not
subject to day-ahead trading. Thus the average load per hour will be the traded volume.
This implies that only the average consumption per hour is equal to the average generation
per hour and additional instruments are required for TSOs to balance the system in realtime.

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10.3.2

Imbalance management through DAM trading

The TSO as responsible for security and quality of supply needs instruments enabling
him balance generation with consumption. Imbalances emerge from the consumers and
generators variation of load within the operational hour, from wrong estimates regarding
consumption and/or generation and unexpected incidents (generation, consumption and/or
grid failure).
There are two main issues important for a TSO which will lead to an acceptable preliminary
balance before the hour of operation starts:

The consumers need access to a liquid marketplace, which ensures that they always
will be able to purchase their estimated energy consumption. Vice versa the
generators need access to a liquid marketplace, which ensures that they always will be
able to sell their estimated energy generation.

The generators and consumers need an incentive to trade into balance, thus not
purchase more or less than they will consume or sell more or less than they will
generate.

The instruments supporting this are a day-ahead market for energy and a balance
responsibility by each wholesale market participant:

A day-ahead market (DAM) will provide the wholesale market participants with a
marketplace for energy where supply and demand meet to trade their sell and
purchase volumes.

Balance Responsibility (BR) provides the incentive for achieving a balance between
contracted and metered energy volume per settlement interval since prices for
imbalances are less favourable than prices for energy.

The participation in DAM requires a set of rules and procedures related to Balance
Responsibility. Balance Responsibility is an instrument used by the TSOs to ensure that
the consumers and generators have agreed upon energy contracts balancing generation
and consumption before real-time operation. Any participant generating more or less than
he has sold in advance or consuming more or less than he has purchased in advance will
have the deviation calculated as imbalance.
In Europe the shortest interval for calculation of imbalances is 15 minutes, the longest
hourly. For these intervals the imbalances between contracted and physically extracted or
injected energy are calculated. The calculation is related to the Balance Responsibles
deviation, where a Balance Responsible can represent his own consumption and/or
generation or a group of consumers and/or generators. The imbalance should be priced
with a price reflecting the costs the TSO had for achieving the real-time balance in the
settlement interval.
The Balancing Power Market will be the source for reserves used to balance prior and
during real-time operation and the Balancing Power Market will be the instrument pricing
imbalances. The reserves bid into the Balancing Power Market will also be used for
correcting imbalances resulting from incidents. Ancillary services will be the source for
reserves balancing other imbalance reasons.
A functioning Imbalance Management is dependent on an established Balance
Responsibility and an implemented Balancing Power Market or at least an acceptable (fair)
price for imbalances.
Balancing Responsibility further implies that traditional full-supply contracts are disabled by
the grid/market code. This can be achieved by a deadline for generation plan submission to

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the responsible TSO (i.e. day-ahead during early evening hours, thus allowing participant
to schedule and TSO to plan day-ahead operations. This will disable the generator from
following his customers load in real-time.
Investments and Market Prices
Investment decisions are based on a sufficient enough rate of return and an acceptable
investment risk. In competitive electricity business environments investment decisions
therefore are based on business plans reflecting expected market prices. These again
reflect factors such as expected market development, generation capacity, consumption
and interconnection capacity. Due to the uncertainty of these factors Risk Management
models and systems are required in order to provide the investment decision with proper
input.
This challenges Risk Management models and systems and leads to required prerequisites
in order to be functional:

They need to be able to adjust risks to market situation at all times

Market risks deriving from regulatory and political changes must be minimized or at
least calculable

Transparency regarding prices, demand, supply and transmission capacities is


obligatory

Credit risks must be calculable

The experience in Europe and elsewhere in the world shows that the required prerequisites
are only satisfied in an electricity business based on a stabile or foreseeable market
framework, a trusted and accepted reference price for energy and a functional and fair
electricity wholesale market:

It shows that especially long-term investments larger generation units, large scale
industry and interconnection capacity are dependent on a trusted price reference
coming from a DAM. Together with transparency regarding fundamental data
influencing the price (both historical and future) the estimation of future scenarios and
their probability becomes one of the most important investment terms. Typical
investments are increased efficiency in elder generation plants, higher utilization of
existing transmission capacity through technical improvements and when
environmental terms are included through subsidies increased generation capacity
coming from environmental friendly or friendlier generation.

Especially the small-scale consumers have shown to be able to invest in energy


efficiency when exposed to higher energy prices and/or expected higher prices in the
near future. These investments show a load effect already before the period with
expected high prices starts.

Short-term Demand Side Response (DSR) has become one of the most important
instruments for system operators to manage extreme peak load situations. E.g. largescale industry able to change their load profile within short notice has become an
important source for reserve capacity. This has been enabled through investments in
industrial process planning and coordination instruments.

Long-term DSR in addition to the one coming from the above mentioned small-scale
consumers has become an important factor for increased consumption efficiency.
This has been facilitated by improved technology and grid incentives.

The recommended regional market design will after implementation, produce the required
prerequisites and facilitate correct investments in generation, consumption and
transmission, which lead to increased efficiency, lower costs and higher system quality.

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10.4

Market Structure

It is vital that a market reform can add value to and support the whole electricity industry.
Both large and small companies on the generation and the consumption side should
benefit from the market reform and the framework set by the authorities. It must be
emphasized that only participation from all parties will give a reliable and trusted business
platform that can build liquidity. The services offered by a Regional PX must add value and
incentives to the individual participant.
The following objectives are essential in an electricity market reform:

To obtain market liquidity

To increase efficiency within the power industry

To achieve the required balance between power generation capacity and power
demand both in the short and long term

To reduce regional differences in electricity prices

For the smaller national SEE markets to meet these objectives, it is important that they are
integrated with the larger markets into one unified, liquid regional electricity market.
10.4.1

Requirements

The following are overall requirements for a market reform:

All participants trade on equal terms

Market transparency providing the same information at the same time to all
participants

A proven method for congestion management

Balancing market

Efficient market settlement and reporting

The following are other features that could be included:

Intraday

VPP (Virtual Power Plants) auction of generation capacity to increase competition in


the market

Comments to the above bullet points are as follow:

Participants trade on equal terms means a common book of rules and that all relevant
information as transparent market information and available transmission capacities
are available for all market participants at the same time

Congestion management is conducted by using an implicit auction which integrates


capacity allocation and energy trading in one calculation where flows on the
interconnections are determined.

In a transitional period it might be necessary to execute congestion management by


both implicit and explicit auctions. This can be facilitated by allocating a fixed
percentage of cross border capacities, e.g. 50%, to the SEE Regional Power Market
for implicit auction, and an equal part for monthly and yearly explicit auctions via the
CAO.

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An Intraday Market provides an opportunity for market participants to self-adjust the


balance close to real-time operations in order to reduce required balancing actions by
the TSOs.

A Balancing Market provides a vital tool for TSOs to adjust the balance in real time
operations

VPP auction is a tool to achieve more competition by offering trade of generator


capacity to the market from large generation units. It should be a requirement that The
SEE Regional Power Exchange offers such a trading service, as some of the
incumbent generators have such a dominant market share that it might not be reduced
sufficiently through integrating the national electricity markets into a competitive
regional market.

Settlement and reporting means flexibility in the reporting, settlement and billing
process to handle local requirements for balance responsible parties, TSOs, and
banks.

10.5

Regional market key decisions

10.5.1

Establishment of the initial SEE Regional market

The development of a regional market is dependent on the internal optimization potential


(exchange of energy (MWh/h) and capacity (MW)) and the interconnection capacity
between the different control areas participating in the internal optimization. The different
interconnections and the electricity balance in the control areas defined as parts of SEE as
well as the neighbouring control areas will determine the participation in a regional market.
Instead of predefining the member states of the SEE regional market it is recommended to
look for the predominant (not in political, but in market sense) control areas in the region,
which will be able to function as the founding building blocks for the evolving SEE regional
market.
These control areas should show a large enough cooperation potential. In addition they
should have sufficient interconnection capacity to secure a stabile and functional energy
market. The remaining countries in the region will draw advantage of joining this basic
market area. The other alternative for these countries is to remain as neighbouring markets
in the north, east and south of SEE regional market. The future will tell whether they then
join the SEE regional market or other neighbouring markets.
The Consultants recommendation is to focus on the establishment of the initial SEE
regional market including at least two or even three market areas.
A regional market demands for very close cooperation on interconnections and market
access to the interconnection capacity. The markets access to ATC is directly linked to the
success potential of the regional market and the reference price determination and
acceptance. When it comes to the interconnection between two neighbouring areas the
access to ATC will to a less degree interfere with the markets development potential. It
influences the reference prices of the two interconnected regional markets, but only a
wrong usage energy flow adverse to price signals or not transparent usage will be able
to harm the market success on both sides.
The two main solutions used to organize the exchange between neighbouring areas
either in a regional market or between neighbouring regional markets are implicit or
explicit auctioning of available transmission capacity (ATC) on the interconnections.

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Liquidity is a main keyword when looking at short-term trade. A day-ahead market will be
able to provide enough liquidity if the framework (eligibility of possible participants,
imbalance management, imbalance costs and settlement, transparency) supports this
function. A liquid DAM will then also be able to create confidence and trust in the
determined price and through that develop the reference price for energy in the market
area.
Although a DAM should not be dedicated a monopoly on day-ahead contracts it must be
recognized that bilateral trading meets technical boundaries when converging to less than
weekly ahead of operation liquidity decreases and prices due to increased operational
risks increase. This is the reason why DAM-trading is increasing from year to year in all
established DAMs with proper framework supporting the DAM development (e.g. Nord Pool
Spot, EEX, OPCOM, APX NL etc.).
Thus DAM trading should be supported when designing the framework for short-term
products. This implies that available import and export capacity for usage in implicit
auctioning, imbalance management and costs and wholesale market eligibility should be
designed to support DAM participation and liquidity. When it comes to the most important
difference between DAM and bilateral trading the way to organize trading differs: auction
based and continuous based trading:
10.5.2

Implicit or explicit auctioning of ATC

Implicit auctioning of congested transmission capacity between neighbouring areas results


in a price for each area leading to maximum utilization of ATC. Explicit auctioning is based
on already known prices on both sides of the congested line and results in a price for the
ATC and allocation to interested participants.
Implicit auctioning has been performed in the Nordic since establishment of international
trade in the Nordic market area, explicit auctioning has during the last decade increased as
congestion management instrument on interconnections between both national
neighbouring markets and regional market interconnections.
Experiences show that the implicit auctioning of capacity always results in correct electricity
exchange and maximum optimization of the involved areas. Explicit auctioning only can be
seen as an acceptable solution when the interconnection is between two mature markets
with well established reference prices and a high degree of transparency.
Due to the relatively small national markets in SEE the Consultants recommendation is to
focus on the implementation of implicit auctioning of ATC between the involved market
areas. This will definitely be necessary if the national markets intend to maintain the high
concentration of generation business, which in itself too a large degree conceals the
national prices. While explicit auctions are based on individually participating participants
and their bilateral trading, implicit auctions are a solution operated by organized market
places:
Electricity exchange between different market areas is a necessity when increased
efficiency and best possible utilization is required. Mostly grids are able to handle such
exchange sufficiently, but when included market areas show too large deficits/surpluses in
installed generation capacity or seasonal, daily or even hourly load changes are too high
existing grid capacity can reach its technical limit. This requires for electricity trading wellsuited cross-border transmission capacity management models.
In principle cross-border exchange shall utilize existing transmission capacity as much as
necessary and not more than technically possible. But here a question arises: What shall

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determine the need for capacity or to whom shall capacity be allocated? And what does
necessary utilization mean?
This issue is currently discussed in Europe and there are several important views and
arguments used in these discussions. Summarized one can say that there are two main
parties in the discussion: traders together with traditional participants and portfolio
managers.
While the traders and traditional participants focus on arbitrage or avoiding volume risk and
price risk through long-term bilateral contracts, the portfolio managers use risk
management systems and market instruments to manage risks. This means that traders
and traditional participants mainly focus on achieving the best possible price and a volume,
whereas the portfolio managers focus on adaptation to the reference price in their market
area(s).
This implies that traders and traditional participants require cross-border capacity for future
periods resulting in bilateral contracts between a generator and a consumer. Especially in
areas with energy deficit or areas with high marginal generation costs, the access to crossborder capacity has an essential meaning for many participants. Traders and traditional
participants support explicit auctioning of capacity.
Portfolio managers differ substantially from traders and traditional participants. Their focus
is portfolio optimization. They aim at

balancing as good as possible the physical with the contractual on a day-ahead basis
(volume) including price dependency as variable influencing their volume

hedging against the price risk long- and mid-term by using derivatives

trading for arbitrage by using derivatives and their knowledge about their market

Portfolio managers rely upon a correct usage of all cross-border capacity to other market
areas influencing the own market areas price. Thus they support implicit auctioning.
Competitive electricity business can be arranged both based on explicit and implicit
auctioning of interconnection capacity. The difference is the degree of optimization
achievable in each form and whether the mechanism competition is able to function
properly or not. SEE as regional market area requires investments and correct trading in
order to support the future development both economic and infrastructural.
We therefore recommend the implementation of implicit auctions. A strong argument
supporting implicit auctioning is that even the interconnection between the two most
competitive and mature power markets in the world, the Nordic and the German, is unable
to be utilized sufficiently through explicit auctioning thus implicit auctioning will replace
the explicit auctioning as soon as possible.
10.5.3

Bilateral trading

While some markets have concentrated on bilateral trading, others like Nord Pool started
by including an organized DAM as an instrument next to bilateral trading. Some few
markets even monopolized the market operation by creating a mandatory organized DAM
(e.g. Greece or Spain and the first UK pool).
The experience in this context supports economic theory in pricing, market liquidity and
flexibility: a regulated market solution (only bilateral or organized allowed) is not suitable as
solution, but a fair mix of both and strong competition between them creates products and
costs suitable for enabling the positive development of the business.

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It is important to highlight that the introduction of a DAM does not imply removal of bilateral
contracts. While bilateral contracts represent the more long-term spectre of electricity
contracts the DAM is better suitable for the short-term spectre.

10.5.4

Auction or continuous based trading

Continuous trading is preferred as trading form in many different markets. This trading
allows the trading of the same product during a period of time, thus the product can be
traded in the means of arbitrage or portfolio adjustment. When it comes to electricity
trading, especially short-term contracts including a physical responsibility for delivery,
auction based trading has developed to be the preferred trading form.
In auction based trading the participants describe their preferences (volumes related to all
possible prices) and submit this to the trading system. The trading system accumulates all
individual preferences and determines the reference price for the market. This price is
called reference price because it is the only price leading to a balance between supply and
demand. Auction based trading thus also concentrates all existing liquidity into one auction
trading session, which is the reason why it is the preferred trading form for electricity.
Electricity is one of the few commodities where participants need to balance their portfolio
through trading any failure in achieving a balance leads to higher costs due to the
imbalance settlement. Thus the trading form and market solution with highest liquidity
attracts participants.
The reference price has to be enabled as such by the framework. This leads to next issue:
integrated pricing or unbundled prices in regard to energy, capacity, transmission and
taxes/fees:
10.5.5

Grid access

Wholesale market participants need access to the grid. The access creates costs, both
fixed and variable. Cost recovery for the grid owner and system operator is therefore
essential for maintaining a high infrastructural standard.
Many different models for grid cost determination have been implemented, but only a few
facilitate electricity trading. The simplest model the point-of-connection tariff is based
on expected scenarios and the marginal costs in each point of connection for these
scenarios. This leads to a grid tariff, where the customer of the grid pays his share of the
fixed costs and his contribution to the marginal losses in the system, based on scenarios
and his point of connection to the system as a whole.
This tariff design enables the participant to trade with anyone in the system without having
to include distance or location of the counterpart in the evaluation of the energy price offer.
Negotiated third party access requires from the counterparts that additional costs from the
sinks grid become part of the price. This model is for the purchaser indifferent, but sellers
have an incentive to choose the cheapest sinks first. In addition the negotiation, although
mostly based on standardized contracts, creates additional administration costs.
Stamp tariffs can be said to be a simplified version of the point-of-connection tariff, but
when the counterparts are opposed to more than one stamp the tariff becomes distance
dependent and thus hostile to electricity trading.
The experience from existing electricity markets show that the point-of-connection tariff
facilitates electricity trading more than other applied models. Especially regional markets
as SEE need a grid cost recovery model where electricity contract counterparts are

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independent from their location in the grid. Thus the implementation of a point-ofconnection grid tariff model is highly recommended. Relatively small national market areas
and relatively strong market concentration in each national market area adds to the
necessity of a neutral grid cost recovery model.
10.5.6

Day-ahead trading co-existing with long and mid-term trading

Existing markets have in this question already clearly stated that day-ahead trading is the
preferred trading horizon. Day-ahead trading not only allows a suitable balancing of
commitments and available resources with contracts, but is also the preferred source for
determination of the reference price for energy. This allows the usage of derivatives for
Risk Management and the replacement of traditional long-term bilateral contracts with
physical delivery.
The traditional long-term contracts were developed as product for risk management of both
price risk and volume risk. After the implementation of day-ahead markets the experience
shows that participants experience a minimized volume risk due to liquid DAMs and price
risk is handled more efficiently in liquid derivates markets than in traditional inflexible
bilateral contracts. The trading horizon or risk management horizon is in todays
European electricity business reduced to some few years ahead. This is in line with other
businesses.
We recommend a day-ahead market solution for SEE, especially when considering that
electricity business in Europe has become pan-European and the involved companies are
seeking for markets with equal organization as the main or home markets (e.g. Nordic,
Germany, UK, France, Romania, Italy and Spain).
However, this does not exclude the use of bilateral contract in short, mid or long term. It is
vital for the market participants to have sufficient products to secure their business.

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SECTION IV: MARKET DESIGN AND IMPLEMENTATION


11.

REGIONAL MARKET DESIGN

11.1

Introduction

Enabling a liquid regional trade between the national SEE electricity markets will secure an
optimal use of the generation (merit order) and transmission resources.
One of the main functions of this regional market design is to provide a transparent dayahead reference price of electricity and to enhance the trade across the national borders.
The mix of generation resources in the SEE region, between thermal/nuclear and hydro,
can be utilized in a more efficient manner if an open regional market is offering day-ahead
hourly contracts with full price transparency. This will give both sellers and buyers the
opportunity to fine-tune their power portfolios, reducing imbalances and hence financial
risks in real-time operation. Establishing a trusted day-ahead price index to be used for
settlement of forward financial contracts will also be of benefit for investors in new
generation as well as being a hedging instrument for the market participants.
The day-ahead reference price can be published both for specific countries and for the
whole SEE-region. Alternatively, there can be specified one reference price only for the
SEE region complimented by CfDs (contract for difference) between this SEE reference
price and area prices in the region.
The proposed market model is dependent on support and commitment in the industry and
stable framework set by the authorities. It is the market participant by using the market
services that will build liquidity. This means that the SEE Regional Power Market must be
attractive to all participants by adding value, saving cost and thereby open for new
services. Market evolution is an important activity and this process must be based on local
and regional requirements.
Initially, the SEE Regional Power Market will be focused on physical markets as DAM and
balancing markets which are both very closely linked to TSOs system operations. Strong
involvements from TSOs in the SEE region are therefore seen as a precondition for the
success of a SEE Regional Power Market.
Securing financial viability of the SEE Regional Power Market is vital to attract the
necessary investments required to launch and operate the Regional PX.
The different obstacles for a successful market opening are defined in chapter 8.

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11.1.1

Definitions

In the description of the Consultants design following in this chapter, there are a set of
definitions that will be used throughout the chapter. The most important definitions are
listed here:
SEE Regional Power Market This is the implementation of the RMD for the SEE region.
NMO National Market Operator This is the local market operator for each
country/contracting party, that is the legal counterparty to all its stakeholders.
Regional PX This is the regional price setter for the common DAM. This is not a power
exchange as such, but the entity that performs the Day-ahead auction on behalf of the
NMOs based on an implicit auction. The proposal is that this is performed by a service
provider (SEESP). This entity constitutes a cooperation agreement between the involved
NMOs and should not be envisioned to be a large organisation, but a body constituting the
regional cooperation.
SEESP This is the service provider that is responsible for the tasks defined for the
Regional PX.
RMD Regional Market Design.

11.2

Recommended Regional Market Design

In the following sections, the recommendation for the RMD is set out. These
recommendations are founded on the requirements set out in the previous chapter and
based on the general design features defined further in this chapter.
11.2.1

General recommendations

The Consultants recommendations for RMD are pillared on four core elements:

1.

SEE, an integrated part of European Internal Energy Market

Technical operation of the SEE grid system constitutes 4 control areas within ENTSO-E.
Trade across national borders is currently based on bilateral agreements and explicit
auctions. SEE wholesale market opening should streamline with European trends with
price coupling linking national and regional markets in order to enhance efficiency and
transparency.
Regional approaches that choose incompatible solutions would obstruct the process of
creating an integrated pan-European power market.

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2.

Flexibility

The key element in the design of a SEE Regional Power Market is the use of flexibility in
choosing the level of cooperation between the regional service provider (SEESP) and the
NMO in each of the member countries. Depending on size and maturity of each national
market, the national market operation can be implemented on an organizational scale from
a branch office to a fully decentralized NMO.
In the implementation phase a decision must be made whether to buy facility management
services from an existing service provider in the region or to set up a new regional service
provider serving the NMOs in the SEE countries.

3.

Financial Viability

The only functions that is centralized in the RMD is performing the daily price calculation
for the DAM based on implicit auction of cross border capacities and supply/demand bids
for hourly day-ahead contracts. This will reduce required investments considerably and
secure a financially viable operation of a trading platform for the SEE Regional Power
Market.

4.

National Control

Over the last decade, many countries in Europe have chosen to implement a national
power exchange, which has resulted in low liquidity and high costs per unit traded.
The RMD recommended by the Consultant will secure a liquid DAM market in a regional
context while preserving national control in further development of domestic markets.
Main Characteristics recommended for the RMD:
1.
2.

Zonal pricing and implicit auction;


Trading platforms for:
Day-Ahead Market(DAM),
Balancing Market(BM),
Intra-Day Market(IDM),
Virtual Power Plant Auctions(VPPA),
Physical Forward Market(PFM), and
Financial Forward Market(FFM).

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3.

Ownership in the first 3-5 years of operation is exclusively for the SEE TSOs

In the first few years of operations after the implementation of a regional platform, the trade
of physical products will be the focal point. These mostly short term products, especially
day-ahead, cross-border capacities for DAM and balancing power, are crucial for the
TSOs management of security supply issues. It is therefore strongly recommended that
the TSOs have an exclusive ownership to the regional service provider and that each TSO
owns the national market operator.
In the case, services are bought from an existing provider; the TSOs must be the contract
counterpart either directly or via its national market operator.
At a later stage when the launch of financial electricity contracts takes place, it may be
advantageous to introduce additional owners in the regional service provider, e.g. banks
and other financial institutions
4.

All TSOs participate from day one in the implementation of the competitive regional
market

This follows from 3) above. Ownership and full commitment by TSOs from day one, is the
single most important prerequisite for enabling the establishment of a well functioning
competitive electricity market in the SEE region.
Recommended Market Model for SEE
The recommended market model for the SEE Regional Power Market is the DAM concept
as discussed in this report.
In DAM hourly power contracts are traded daily for physical delivery the next day 24-hour
period. DAM handles bids for purchase and sale of power contracts of one hour duration in
the defined bidding areas in the region. The price is determined as the balance between
the bids and offers from all market participants at the intersection point between the
accumulated market supply and demand curves.
The market model supports cross border trade by integrating capacity allocation and
energy trading in an implicit auction. Thereby the market model set a framework adding
services to both the TSOs and the market participants in the region. By using a regional
market design with these features all parties can operate an hourly portfolio more efficiently
and doing this with less resources and costs. With one active trading period a day the
whole portfolio for the next 24 hours will be determined. This will be an efficient tool for the
participants to balance their individual portfolio and hence manage risk.
It means that the buyers and the sellers in the SEE Regional Power Market benefit
automatically from cross border exchange without the need to explicitly buy the required
transmission capacity. Advantages of this mechanism are to maximize the total economic
surplus of all participants and adjust prices across the national borders.
Compared to explicit auction of transmission capacities, the market model with implicit
auction offers advantages to the participants and is recognized as the best platform for
building liquidity in a regional market.
The participants trading will generate a common regional physical market for the countries
involved and will define a common market clearing price (MCP).

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The MCP (system price index) can be used as a reference for medium and long-term
physical and financial electricity contracts. The trade of such contracts should be offered to
the market participants by the SEE Regional Power Market when confidence is established
in the price formation of such an index.
Overview of business processes
The Consultants proposal is founded on the following:

Each Contracting Party (CP) has its own National Market Operator (NMO);

Each market participant has an agreement with his NMO;

All bidding, settlement, collateral and participant agreements are made between the
market participant and the NMO;

NMO will collect and validate all bids from its participants and creates one Net Export
Curve (NEC) combining all the bids from its market participants into one aggregated
bid curve (thereby anonymous) that is sent to the SEE Market Service Provider
(SEESP) acting on behalf of the Regional PX;

SEESP will collect NECs from all NMOs, and will get ATCs for all interconnections
from the CAO. Based on these data, SEESP will calculate a common price index for all
areas and price for all individual areas as well as the flow on each interconnection.
These values will be returned to the NMOs;

NMOs will have a service agreement with the SEESP for the price calculation as well
as with the CAO for the allocation of ATCs to be utilized for DAM;

Prices and volumes for each market participant are calculated by the NMOs.

This design is based on Price Market Coupling as defined in chapter 11.3.10.

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Business processes
The business process overview is defined as set out in the figure below:

Figure 36

SEE Regional Power Market business processes

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SEE Regional Power Market overview


The proposal is based on three main (chronological) processes as indicated in the figure
below:
1.

ATC the publication of ATC from CAO (as representatives for the TSOs) to the
regional service provider, the national market operators and the participants.

2.

Bidding process the process where participants submit individual portfolio bids to its
NMOs, the NMOs creates NEC curves and submit to the SEESP.

3.

Results where the SEESP calculates area prices and flows based on the NECs and
ATC received, send the results to the NMOs and then the NMOs checks results and
calculate and send the individual results to the market participants.

Figure 37

SEE Regional Power Market National control regional cooperation

In the following sections as part of this chapter, the details regarding this proposal are
discussed.

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11.2.2

Roles and Responsibilities

For the operation of a restructured power market, the following two key organizations
should work very closely together.
They are identified as:

The TSO

Market operator

These two organizations along with:

Power industry regulators;

Market participants (power generators, power consumers, traders);

DSOs

will have clearly defined roles and responsibilities.


TSO
As a monopoly the grid owners performance and business processes must be monitored
by the regulatory bodies.

TSOs responsibilities as owner of the transmission grid are:

Determine rules and requirements for supply quality and security

Provide routines to maintain short term power reserves

Propose transmission tariffs for the main grid

Manage real time operations and handle unpredictable imbalances and unexpected
events

Cooperate with TSOs of interconnected grids

Manage transmission capacity on the neighbouring interconnections for the SEE


Regional PX

Manage imbalance settlement and billing

Build, operate and maintain the grid within its defined area

Collect and report metered values

Purchase electricity to cover grid losses

The TSOs play a very important role in deregulated power markets. The TSOs
responsibility to operate, maintain the reliability and quality of the power supply will always
set the daily framework for the market operations.
National Market Operator - Regional PX - DAM
A license or cooperation agreement to operate the Regional PX under the framework set
by the regulators of participating countries should be issued by the regulator in the country
where the Regional PX will be located based on the agreement between the TSOs and
Regulators in the participating countries.

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The Regional PX will operate as a common market place for the whole SEE region and
provide services to the NMOs, TSOs and to the market participants, such as generators,
consumers and trading companies.
The core responsibilities are:

Operate a Day Ahead Market for the participating NMOs based on an implicit auction
and the market splitting principle. In the future it could also provide services for other
related power markets

Provide reference price(s) for energy for the financial electricity market

Use the price mechanisms to alleviate grid congestion through optimal use of available
transmission capacity

Act as a reliable counterpart

Report to TSOs, NMOs, participants and to the public required information and data

A power exchange will always facilitate trade, the transparent handling of price sensitive
information, support market competition and build market liquidity.
Regulator
Regulators determine guidelines and bylaws for the regulation of monopolies within the
power market.
Regarding the SEE Regional Power Market, normally this will cover issues such as inter
alia:

Market design and market rules

Harmonisation, definition and approval of guidelines for


power system operation
metering
grid tariffs
etc

Monitoring grid owners and NMOs costs and profits

Provide incentives for eligible customers to exercise eligibility.

Responsibility of Market Monitoring and Market Surveillance both on a national and


regional level

Regulator authorities responsibility for guidelines, standards and regulations of the national
power system and the power market remains unchanged.
The SEE regulators will play a vital role in preparing and deciding the regional guidelines
for the SEE Regional Power Market.
Incumbent producer
Large dominant producers will be important participants in a regional market. They will
normally secure their position and further develop their competitive ability inter regionally.
An important prerequisite is full competition with respect to allocation procedures of crossborder capacities so that both incumbent and new entrants in generation have equal
access to transmission.

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Market Participants
Market Participants are legal entities that operate in the wholesale and/or retail markets.
They can play multiple roles consisting of one or a combination of the following: generator,
consumer, trader, or retailer.
DSOs
The DSOs will be responsible for measurement within each DSOs distribution area.
Metering values for wholesale market participants connected to the DSOs grid have to be
sent to the TSO for balance settlement.
11.2.3

Grid Tariffs

The preferred grid tariff system to facilitate bilateral trade or trade on a power exchange
should be characterized by principles that treat all participants on equal terms.
Most important features will be:

Market participants should know the transmission costs at their grid connection point
by a tariff set by the grid owner or system operator.

No bilateral negotiations and agreements should be required.

Transmission cost should not be dependent on location of a trade counterpart.

Grid tariffs across the region should be compared and to some extent harmonized to avoid
distortions in the markets. Of special concern is, if the variable cost varies both between
countries and how these variable costs are allocated to consumers and producers.
The variable cost element in transmission tariffs should be added to the marginal cost for
generation when a supplier/generator is setting up their supply bid to a day-ahead market.
Similarly for a demand bid the variable transmission cost element should be subtracted in
the calculation of bid price.
In some cases the system operators/TSOs are using the variable cost element as a
locational signal. When transiting to a regional market these locational signals should be
harmonized to avoid sub-optimalization.
Another example is environmental fees that might be placed either on the consumer or
producer side in different countries. To avoid market distortion this should also be
harmonized among member countries.

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11.2.4

CAO Coordinated Auction Office

As described in this report, in the final solution when a well-functioning DAM for the whole
region is in place, the best solution is that all available transmission capacity is left for the
implicit auction (like in the Nordic region) and that in the final solution, long-term
transmission capacity auctions will not be needed. However, the main function of the CAO
is to provide correct transmission capacities to the market that will be true for any market
concept.
As an illustration of the co-existence of CAO and a Regional PX, the following simplified
diagram can illustrate this:
Figure 38

Co-existence of CAO and a Regional PX

Dedicating cross border capacity to the DAM is an essential policy decision in order to
establish a Regional PX. The CAO will be responsible for determining tradable cross
border capacities, performing explicit auctions and providing the PX with daily capacities
for the implicit auction. In this way the two concepts mutually support each other.

11.3

Details in the SEE Regional Power Market design

The market design for the SEE Regional Power Market is based on the constant evolution
in the power market development in Europe. This has proven to be a competitive market
environment where TSOs, the power exchanges, and different kinds of market participants
(traders, suppliers, generators etc) have worked together to establish efficient and liquid
market places.
The key underlying concept is a physical day-ahead trading and market organization,
where the market operations are carried out the day before the traded physical contracts
are delivered
This trading method is referred to as the Day-Ahead Market (DAM) auction trading. The
price mechanism in the DAM adjusts the flow of power across the interconnectors between
the bidding areas to the available transmission capacity given by the system operators.

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The DAM provides a neutral reference price for the wholesale and retail markets and for
power derivatives trading.
The market is based on portfolio bidding covering products for single bid, block bid and
flexible bid. The total geographical regional market can be divided into bidding areas
determined by predicted transmission constraints in the meshed electrical grid.
Features of the market concept

Bids submitted from the participants for purchase and sale as price volume pair with
linear interpolation between the price points in the price calculation.

FBATC (Flow-based Available Transmission Capacity), must be provided by the TSO


in each country in cooperation with the CAO (Coordinated Auction Office) to be
established in Montenegro, ref previous chapter.

Cross Border Trade, facilitated by day-ahead implicit auction and longer term explicit
auctions.

Congestion Management, integrated in the price calculation.

Balance Responsible Party, agreement to control the participants balance within each
bidding area defined by the TSOs.

Reporting and Settlement can be handled centrally or locally.

Inter-Coupling or Market Coupling, coupling with another regional or national market


by the exchange of Net Export Curves.

11.3.1

Legal and Formal Requirements

The participants in the region will be given access to the SEE Regional Power Market
through formal agreements including an acceptance of the book of rules, as well as
technical access to the market systems through a technical interface provided by the
NMOs for the national DAMs.
All participants who meet the legal and formal requirements set by the NMOs and the TSO
can access the DAM. The formal requirements will be such as agreements with the TSO
for establishing a trading HUB and collection of meter values in the area.
As far as the DAM is concerned, the participants will have to accept the book of rules, sign
the participant agreement and to document an approved bank account with the required
collateral.
Trading on the DAM will also require that the market participants have a balancing
agreement with the respective transmission system operator or through a balance
responsible party for each bidding area the participants are actively buying/selling. Such an
agreement will regulate the compensation requested for having an unbalance in the realtime operation by each balancing party.

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11.3.2

Business Processes

The market model will be managed by the Regional PX operating the centralized tasks for
the SEE Regional Power Market. In each national DAM, a branch office or an already
established national market could support the Regional PX by performing tasks i.e. training
national participants, marketing, collecting bids, and settlement of trade.
The business process in the figure below is an example with defined local operations. A
regional exchange should include the flexibility in business processes and in the ITInfrastructure to facilitate various degrees of local operations. This can be required due to
local legislation, local bank infrastructure and requirements from the local TSO.
Figure 39

Business process example

Local Settlement Service/Bank: The business solution proposed is opening for local
clearing and bank services both for a branch office and for a national DAM. It is important
that both the business process and the IT-Infrastructure are flexible in this respect to
handle local legislation and currency.
Local Market Operation: Local market operations include handling of all functions that will
integrate directly with the participants, TSO and local authorities. It is vital that these
functions are facilitated by the SEE Regional Power Market due to different languages,
currencies and local legislations.
Regional Market Operation: Regional market operations cover all the common operations
required to build the Regional PX, market liquidity and establishment of market framework
for further business development. The regional operation could deliver services to branch
offices and/or national DAMs after individual agreements.

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The SEE Regional Power Market operation and business processes are based on an
agreed harmonized market framework.
11.3.3

TSO and Balance Responsible Party

The TSO and the Balance Responsible Party are integrating with the Regional PX through
the NMOs. The TSO is submitting the available transmission capacity (flow-based) and is
receiving the flow and participants schedules, both individual values as well as aggregated
values. The TSO will use these values for planning the daily hour by hour operation.
11.3.4

Day-ahead market - DAM

Market Harmonization Parameters


The following market harmonization features are required to facilitate the market model.
With a centralized solution these features will be harmonized automatically in the
configuration of the market model. With a decentralized or partly decentralized solution
these features have to be agreed.

Operational Time zone for the DAM

Timeline for the required market operations

Rules for handling daylight saving time

Gate closure

Master currency

Upper and Lower price limit for bidding (these are technical limits not regulatory price
ceilings/floors)

Allocation of transmission capacity for the interconnections made available to the SEE
Regional Power Market

Timeline
Below is an example of the timeline for the DAM operations:

Market opening time all business days

- 08:00 to 16:00

CAO publishing the transmission capacity for the market

- 09:30

Market gate closure

- 12:00

NMOs creates NEC curves for each area

- 12:00

NMO submits NEC curves to SEESP

- 12:05

Market price (and flow) calculation time

- 12:05

Market result distribution time from SEESP to NMOs/CAO (flow)

- 12:15 to 12:20

Market result calculation time (NMO creates participant results)

- 12:20 to 12:30

Market result distribution time from NMOs to participants

- 12:30 to 12:45

Market dispute time

- 12:45 to 13:15

Balance Responsible reports

- 13:30

TSO reports

- 13:30

Market data transfer to settlement

- 14:00

Delivery start for day-ahead contracts for hour 1

- 24:00

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Implicit auction

In theory the liquidity and number of participants that takes part in explicit auctions can
be similar to the number of participants in implicit auctions. However, participants in
DAM represent both the demand side and supply side and are experienced to include
far more participants than an explicit auction. This is important for price determination.

Explicit auction involve mainly medium and long term capacity rights. The
administrative challenges to utilize the capacity also on short term can be too
complicated. Therefore maximum utilization of available capacity on interconnection
can not be achieved without involvement of implicit auction.

Implicit auction include netting of trade contracts. It is the netted contact volume that
decides on congestion not the gross volumes.

Implicit auction will always lead to contractual flows in direction towards high price
area. Negative impact of bilateral contracts in the opposite direction is reduced through
increased capacity in the correct direction.

Implicit auction will reduce the need for wheeling of bilateral contracts through different
control areas. Without implicit auction the number of international bilateral contracts
may be very large and involve a considerable volume of data to be exchanged
between control areas. Bilateral contracts should as far as possible be financial only.

Implicit auction is flexible and can easily take care of capacity not used by the
participants:
The principle of use it or loose it - The power exchange can take over not used
capacity with no compensation paid to the holder of the right and apply the
capacity in implicit auction.
The principle of use it or get paid for it - The power exchange can take over the
capacity and amply this in implicit auction. The holder of the capacity is paid a
share of the capacity income in case the capacity rights were in direction towards
a deficit area. If the direction of the rights is in the opposite direction there will be
no payment.

Areas
In the market model the regional market will initially be configured with the defined network
topology as fixed bidding areas.
An area in the market model can be a whole country or a part of a country. This means that
a country can be split in two or several bidding areas if permanent grid constraints require
this. All participants are connected to a trading HUB that is uniquely part of one area.
Products
The following products are normally defined in a DAM:

Single bid

Block bid (future)

Flexible bid (future)

In a second phase of the SEE Regional Power Market development, the trade in forward
products should be offered. This can be physical contracts initially, and at later stage
financial contracts using the SEE Regional Power Market DAM MCP as reference price.

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Bidding process
Bids are not related to any specific physical resource. All bids are related to a defined
bidding area by a defined trading hub. All bids have the same priority. This is known as
portfolio bidding.
The single bid must be monotonously increasing. Each price must be higher than the
previous price. The first bid price must be equal to the minimum price limit, and the last bid
price must be equal to the maximum price limit.
The block bid for sale or purchase shall contain the same quantity for several hours. The
sale bid will contain a price that indicates that if the average market price over the period
(block) is lower than this level, the bid is not accepted. The purchase bid will contain a price
that indicates the maximum price the purchaser is willing to pay. If the average market
price in the period (block) is higher than this price, the bid is not accepted.
The flexible bid is relevant in potential peak-load hours, where power shortages cause high
prices. Flexible bids are available for power sales only. Flexible bids consist of a price and
a volume; hour is not specified in the bid. The price indicates the lowest sell price, and if
any hourly market price exceeds the bid price, the flexible bid will be accepted in the hour
with highest price.
ATC allocated to the SEE Regional Power Market
This information shall be provided by the TSO for each interconnection. In the current
framework, this will probably be granted through the CAO. The ATC made available to the
SEE Regional Power Market for implicit auction will be specified for each direction between
the bidding areas.
Features of the implicit auction:

Participants in DAM represent both the demand side and supply side.

Maximum utilization of available capacity on interconnections can only be achieved by


using implicit auction.

Implicit auction include netting of trade contracts. It is the netted contract volume that
determines whether the transmission capacity is fully utilized, not the gross volumes.

Implicit auction will always lead to contractual flows in direction towards high price
area.

Negative impact of bilateral contracts in the opposite direction is reduced through


increased capacity in the correct direction.

The principle of use it or loose it may be applied. This means that capacity rights not
used should be given to the day-ahead market.

Price determination
All the accepted bids are used in the price calculation. The price calculation will follow
directly after the market gate closing time.
All the market parameters and the bids for each of the 24 hours determine the market
clearing price, the area prices, total sale and purchase volumes and each participant's
schedules.

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Linear interpolation
Between the discrete price/quantity points submitted by the participants, the bids will be
interpreted as piecewise linear curves. Therefore such a curve will define the bid quantity
for all prices within the price interval allowed in the auction.
An example of a bid illustrating the linear interpolation is shown below:
Figure 40

Example of bid with linear interpolation

System price
All bids will be added to an accumulated curve for purchase and for sale. The intersection
of these curves will define the equilibrium price where the purchase and sale balance. This
price is the unconstrained Market Clearing Price (MCP) and will be the official reference
price for all traded contracts in the auction in case of no congestion. The MCP will be
calculated for each hour and also published as an un-weighted average price for the 24
hours day-ahead market.
Area price
If the transmission capacity between bid areas for the DAM contracts is not sufficient,
congestion management in the implicit auction will be performed in the defined meshed
network. If congestion is detected between any areas, the price calculation will continue
and compute local prices to relieve detected congestions.

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Market reporting
When the price calculation has been conducted, the SEE Regional Power Market operator
publishes the results.
The market model extracts the necessary participant information (electronic address, etc)
and transmits the prices, the total sale and purchase volumes, and the schedules to the
participants.
The prices and the individual schedules will be published to the participants. The general
prices and market turnover is public, while the individual schedules only are sent to the
individual participant.
Participants traded schedules will be accumulated by the NMO per Balance Responsible
Party and reported to the Balance Responsible Party and to the TSOs. The Balance
Responsible Party and the TSOs will get the individual and the accumulated values. Each
participant will get his own schedule only.
The TSOs will also get an exchange report for the flow on each interconnection
Settlement
The market model will include a settlement process. The settlement process will read the
participants schedules, prices and configuration data and perform a central settlement
calculation. Based on this calculation the model will open for a decentralized reporting,
billing and credit checking process.
The primary tasks of the settlement process are:

Calculate amounts to be transferred between the NMO and the members, including all
trades, fees and VAT.

Calculate security requirements.

Generate and distribute settlement details and invoices that specify in detail the
volumes, amounts and fees of each member.

Generate result files to be used for clearing services.

Store information from the settlement process for archiving and auditing requirements.

Interface to a bank.

The market model will keep all required settlement data for audit trail and as long as
required for storing of financial data.
The Settlement process will be performed by the NMOs.
Billing
A separate billing interface for the actual invoices of the trades will have to be set up by the
NMOs.

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Collaterals
An important task in every market setup where the market is a central counterpart to all
trades is to have an efficient and transparent collateral management in place. Based on
which party that will be the legal, financial counterpart as well as the timeline for settlement
and billing, a regime for this must be set up. This shall be based on a set of generic
requirements:

Credit Cover is collateral required to be posted as a guarantee against a Participants


Credit Risk in the DAM.

In the event of a payment default, this Credit Cover can be utilised by the NMO to
satisfy the Participants outstanding financial obligations in the DAM.

A Participant may meet its Credit Cover requirements by posting a combination of


types of collateral accepted by the NMO.

In the event of the failure of a Participant to pay an invoice in full, Posted Credit Cover
will need to be accessible in a timely manner such that the NMO can meet all payment
obligations of the market.

The actual rules for calculation of the required credit cover shall be created for each
NMO in such manner that the market is not exposed to any unnecessary risk.

Country specific setup


There are a set of country specific parameters that needs to be supported. Many of them
concerns the financial transactions as defined above. Some of these country specific
parameters are, inter alia:

Language support in all interfaces (both user interfaces, user guides, reports and
technical interfaces)

Banking interfaces to the local banking partner(s)

Adaptation of local collateral management regimes

Management of local currencies if not a master currency will be used

These parameters will be part of the local operations, at least in the initial phase, and
needs to be set up according to the needs of each individual area.
11.3.5

Renewable Energy

RES Directive 2009/28/EC promote renewable energy within Europe. Priority access and
guaranteed access for any electricity production will influence market prices independent of
market organization.
In a market based system renewable electricity is integrated into the spot market through
owners daily nomination and this production is thus guaranteed access to the grid.
If the prioritized volumes are guaranteed and bought at fixed prices by the TSO on a
purchase obligation bases, and handled bilaterally outside the DAM, demand nominations
at the DAM will be reduces correspondingly. Equal sales and demand volumes are
withdrawn from the DAM and the market intersection remains unchanged.
Over time, as renewable incentives work, prioritized production inevitably will influence
investments in more expensive generation and market prices will come down if new
capacity exceeds increased consumption..

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11.3.6

Intraday Market

An intraday market is a continuous trade system where participants may place orders/ bids
on purchase and sale of spot contracts continuously throughout the opening period each
day. A trade agreement is made whenever two participants meet on price. Unlike an
auction trade where all trades are based on the same price, trades in a continuous trade
system are based on different prices for each trade. The official price is in most cases
based on an average price of the last traded volumes before the DAM closes down.
When the DAM closes there is a lengthy time span (24 hours the day of delivery + the
hours between the time for price fixing and 24: 00 the trading day), when participants no
longer can improve their physical electricity balance. An Intraday Market is an after market
to the DAM that enables actors to refine their wholesale power portfolios up to a point
closer to real time.
For Hydro power producers which variable costs for increasing or reducing their output is
limited a intra day market is not as critical as it is for e.g. combined heat and power plants
which face high variable costs.
The product characteristic of an Intraday Market is quite simple. For each and every hour
of the day there is one power hour contract quoted. Minimum contract size is 1 MWh/h.
The Intraday Market trading System automatically control the cross-border capacity, which
is given when the deadline for filing complaints on the DAM has elapsed and the cross
border capacity that is left after DAM is known. Using an example from Nord Pool, if there
is no capacity from Finland to Sweden the participants in the Swedish and the Eastern
Danish market area cannot see the sale bids placed by participants in the Finnish market
area in their Intraday market price information window. If the bids are inside the given cross
border capacity the different market areas are treated as one.
An Intraday Market provides a service to market participants to adjust their balance before
the operational hour. This will reduce the balancing actions to be carried out by the system
operator in real time.
Intraday market can be used to re-balance a portfolio:

If there is an deviation between predicted forecasts and current loads.

If there is a technical event causing an imbalance after the Day Ahead Market is
closed.

To avoid paying a high penalty for having an imbalance in the real time balancing
market.

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11.3.7

VPP Auction

When purchasing a Virtual Power Plant (VPP) capacity, the buyer has a right, but not an
obligation to purchase power at a fixed price. The company that buys VPP capacity obtains
the right to deliver power as if the company owned a power plant. The power plant is virtual
because the producer company still owns the plant and is responsible for the actual power
supply.
The purchase of VPP capacity represents a supplement to the purchase of power on
power exchanges or from OTC suppliers.
The VPP capacity is sold for predetermined periods at an "option price". The option price is
set in an auction prior to the period. For each hourly period in which the option is exercised,
a pre-determined fixed "energy price" is paid for the actual quantity of power sold. The total
payment for the use of the virtual power plant thus consists of an option price plus and an
energy price.
The VPP auction will reduce the dominance of large incumbents and open up the power
market for increased competition.
Cancellation of Full Supply contracts and introduction of ordinary contracts between
Generators (incumbents) and Public Suppliers and Eligible Customers in the transitional
period as described in 10.2 - has the same effect on market concentration as VPP. Both
solutions reduce incumbents dominant market position. A VPP gives the buyer capacity
based on a negotiated price while a transitional contract gives the buyer a capacity at a
price determined by national authorities. These prices have to be low in the transitional
phase in order to encourage Eligible Cusotmers to exercise their eligibility. They will not
switch unless the mixed sourcing market and transitional contract gives lower price
than tariff prices.

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11.3.8

Market Information

All relevant market information must be available to all market participants at the same time
The SEE Regional Power Market in cooperation with system operators, NMOs, generators
and other power industry associated companies, collects and distributes price sensitive
market information based on the following principles:

The information comprises data from events that can influence prices.

The information shall be aggregated and be presented in a way for everybody to read
and understand. For the SEE Regional Power Market this might mean that distribution
of market information must be published in both the chosen official business language
and also the local language.

The information must be distributed at the same time and with same method to all
participants.

Energy markets are complex because of the inherent interaction of physically traded
commodities, highly technical fundamentals and financial contracts. In order to succeed in
the market, market actors need access to accurate and reliable market information. Hence,
To provide comprehensive market data service (MDS) of high quality is an important task
for the market operator and for the TSO. Examples on market information could be:

Real time feed - Real-time access to prices and operational data in the power and
emissions markets including Urgent Market Messages (UMM).

FTP statistical database - Historical database which contains information from the
market operator and TSOs.

Reports - Various weekly reports containing operational and physical market data.

Mobile market data (SMS/WAP) - Get daily spot price update via SMS text-messaging
or WAP.

11.3.9

Market Surveillance

To build a trust in the market model and in the SEE Regional Power Market and to develop
a good functioning power market in terms of size, liquidity and transparency, the
participants must have confidence in the markets price mechanism, its integrity and the
market information transparency
Market surveillance has an important role in establishing and maintaining this confidence
and integrity by having a strong and visible presence in the market.
Market surveillance continuously monitors the market conduct of trading participants, and
investigates possible breaches of the trading rules or applicable laws.
The SEE Regional Power Market will be under the jurisdiction of the country of location.
Market surveillance issues reported to the national authorities of location should therefore
be discussed in the ECRB where regulators from all member countries are participating.

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11.3.10 Inter-Regional Market Coupling


The market model, market management and the IT-Infrastructure should facilitate an InterRegional market coupling to utilize the transmission capacity between neighbouring
regional exchanges.
The following figure describes the concept.
Figure 41

Inter-Regional Market Coupling

Business Process and Harmonization for Inter-regional Operation


Market coupling is a method for integrating electricity markets in different areas. With
market coupling the daily cross-border transmission capacity between the various areas is
not explicitly auctioned among the market parties, but is implicitly made available via
energy transactions on the power exchanges on either side of the border (hence the term
implicit auction).
It means that the buyers and sellers on a power exchange benefit automatically from crossborder exchanges without the need to explicitly acquire the corresponding transmission
capacity.
The main purpose of this mechanism is to maximize the total economic surplus of all
participants: cheaper electricity generation in one country can meet demand and reduce
prices in another country. Prices will equalize across adjacent countries where there is
sufficient transmission capacity. Coupling more than one exchange also leads to a more
efficient use of the daily capacity of the interconnections.

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The market coupling is designed to enable different power exchanges to be coupled in a


manner that requires them to make minimal changes to their market rules. For the
members of the individual power exchanges, bidding methodologies remain practically
unchanged. The involved Power Exchanges continue to exist as legally separate markets,
with their own clearing and settlement arrangements.
This method is successfully used and planned used between various markets in Europe.
The business process for inter regional market coupling is based on exchange of bids
defined as Net Export Curves (NEC) and the individual block bids.
The following market harmonization rules are required to facilitate the inter-regional market
coupling.

Choice of time zone

Rules for handling daylight saving time

Gate closure

Master currency

Upper and Lower price limit for bidding

Decimals represented in transmission capacity and flows on the interconnections

Any deviation from these rules can create price differences in the market result.
Market coupling models
There are two main types of market coupling implemented:

Price coupling

Volume coupling

The business processes are almost the same. The main difference is that in price coupling,
it is the central market coupling service provider who calculates both prices and flows, and
the national market operators will use this price to create the schedules for their
participants.
In volume coupling, it is only the flow on the interconnections between the areas that are
sent to the NMOs, and a local price calculation will be performed by each NMO.
TLC (Netherlands, Belgium and France) is an example of a price market coupling solution.
The recommended design for SEE is very close to the current TLC market.
EMCC (between Denmark and Germany) is an example of a volume market coupling.
The price coupling is considered the best solution as this ensures the best economical
result for all parties. In volume coupling, there is a risk of discrepancies as there is a
possibility of getting different results based on the local price calculations performed by
each NMO than a central calculation. The experience from EMCC has proven this fact.

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Net Export Curve (NEC) definition


A general definition of the NEC for hour h is that it gives the potential net export of a market
Q(h), based on hourly orders, as a function of an imposed MCP(h), i.e. the difference
between total hourly sales and total hourly purchases at that price. The figure below shows
a stylised representation of how the NEC is derived from aggregate purchase and sales
curves.
Figure 42

Generation of NEC an visual example

11.3.11 Real-time Balancing Market


The System Operator is responsible for balancing the supply and demand in real-time, by
keeping the frequency within acceptable deviation from the set point of 50Hz. In order to
manage the balancing, the System Operator will call upon various ancillary services offered
by the market participants. These ancillary services are made available to the system
operator by either contractual obligations or through organized markets for these services.
Initially, only tertiary response will be procured in an organized market. Tertiary response
services are balancing services that the system operator can use to rebalance the system
from 5 minutes ahead and up to the end of the day. This market is called the Real-Time
Balancing Market (RTBM).
Primary and secondary response services are initially made available to the system
operator through long-term contracts. However, in the future organized markets may be set
up for these services.
The Real Time Balancing system solution shall allow for market solutions for procurement
of additional ancillary services apart from RTBM.

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Participation in the RTBM


The RTBM shall in principle be available for all market participants including demand side
assets - that comply with the rules for the market. The requirements for participation in the
RTBM shall include, but not be limited to:

Balancing services shall be associated with physical facilities for generation or


consumption of electricity.

The facilities shall be properly metered.

The facility operator shall react and comply with the dispatch instructions submitted by
central dispatcher by either automated dispatch or manual dispatch as specified later
in this document.

System Operation
The principles of operation of the system by the System Operator are:

The System Operator may prepare total system load forecast on a daily basis or
receive load forecasts from DSOs or from Balance Responsible players.

The System Operator will receive the market participants balanced schedules from
DAM schedules.

The System Operator will receive all import/export schedules.

The System Operator will receive notifications of physical bilateral contract schedules
from the market participants.

The System Operator will operate the RTBM for balancing services.

The System Operator will have contracts for access to all other required ancillary
services.

In real-time, the System Operator will monitor the system frequency. In case of
deviation from set point, the system operator will use primary and secondary reserves
to rebalance the system. If this is not sufficient, and in order to free primary and
secondary reserves, the System Operator will start dispatching balancing power from
the RTBM to balance the market.

The System Operator is responsible for ensuring that the total capacity reserve at any
time is within the limits defined in the system operation procedures.

Bid structure
The System Operator operates the RTBM the purpose of which is to create a stack of
generation and demand side offers to increase or decrease their energy to the market as
the System Operator sees necessary to balance the market in real-time.
The Real-Time Balancing Market is open each day after the DAM is closed and the DAM
prices and schedules have been published to the market participants. The market
participants will at that time know their energy schedules for each facility for the next day,
and can determine the balancing power available to be offered to the RTBM.

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The market participants (generation and demand side) submit an upward regulation offer
(price/MW and volume in MW) and a downward regulation offer for each physical facility 44
and for each hour of the following day. The upward and downward offers may have
different prices per unit.
The offer prices are related to the spot-price; in other words a decrement price reflects the
price reduction relative to the spot price a participant is willing to reduce his generation for;
and the increment price an participant is willing to increment his generation for (similar for
load). See illustration below.
Figure 43

Bids at Real-Time Balancing Market

Price
Upward

Spot price
Downward

MW
The offers for increments and decrements of generation and load are submitted to the
System Operator though the RTBM Bid Tool.
The bids are arranged in merit order of price.
The RTBM participants will, as part of their registration process, submit information about
the physical properties of the assets such as ramp rates, run times, no-run costs etc.
The System Operator will use an automated dispatch optimization tool or a decision
support tool to dispatch the assets it needs for real-time balancing. The automated
dispatch optimization tool will use a computerized algorithm that will find the optimal
selection of regulation dispatches whereas the decision support tool will provide to the
human operator sufficient information (like the bid stack and asset parameters) in order to
make the optimal selection of regulation dispatches.

44

Note that the offers to the BM is facility oriented as opposed to the portfolio oriented DAM. This implies that the market
participants shall also register operational and cost related facility data to the System operator.

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Real-Time Market pricing methodologies


Real-Time market pricing can be calculated in a number of ways, and the various markets
worldwide have different methodologies. Two examples are presented below:
The single-price method:
In the single-price method only one real time price is defined for each hour. The price is
defined as follows:

In hours with only upward regulation the real time price is equal to the highest offer
called to dispatch.

In hours with only downward regulation the real time price is equal to the lowest offer
called to dispatch.

In hours with both upward and downward regulation the predominant direction of the
regulation defines if it is upward or downward.

If there is no regulation within the hour the real time price is equal to the spot price.

The two-price method:

Pricing of imbalances is based on real time prices. The upward regulation price is
equal to the highest offered price called to dispatch and the downward regulation price
is equal to the lowest offered price called to dispatch.

There are two prices, one for upward and one for downward regulation for each hour.

In hours with only downward regulation the upward regulation price is defined to be the
spot price (or any other reference price if there is no spot market implemented).

In hours with only upward regulation the downward regulation price is defined to be the
spot price.

If no regulation within the hour both upward and downward real time prices are equal
to the spot price.

Pricing and Calculation of Imbalances


When metered data are processed imbalances are calculated. The imbalance for an hour
is the difference between contracted schedules and actual metered volumes.
If the System Operator can manage to rebalance the system within an hour using the
primary and secondary ancillary services, the System Operator will not need to dispatch
any resources from the RTBM. The Real-Time Price will then be set equal to the DayAhead spot price, and there will be no imbalance settlement for the market participants.
There is, however, a cost of using these primary and secondary resources incurred by the
System Operator, and recovery of this cost will be socialized through the System Operation
Tariff.
If the System Operator needs to call upon the RTBM resources to balance the market, the
Real-Time price(s) will be calculated as the marginal price(s) of the RTBM.

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Imbalances may be positive or negative. Positive imbalance means actual resources are
more than the commitments for the specific hour. Negative imbalance means that actual
resources are less than commitments for the specific hour.
Cost of imbalance in markets with one real time price:
The participants are credited and debited based on the same Real-Time Price.
Negative imbalances are charged for and positive imbalances are credited.
Imbalances may represent a profit or a loss. This method is simple and the risk for
losses is assumed to be sufficient financial incentive for market participants to
carefully balance their schedules.
Costs of imbalances in markets with two real time prices:
The general rule is that participants are for both positive and negative imbalances
credited and debited for the less favorable of the two prices. However, if the
imbalances is helping the system i.e. in the same direction as the total system
requires, the participant is charged and credited based on the spot price. This
means the participant has no losses or profit on the imbalances compared to trade
in perfect balance in the spot market. This model for pricing of imbalances and
implies a stronger financial incentive to operate with balanced schedules and are
implemented in most of the restructured markets.
In principle, the market participants shall be encouraged by the real-time imbalance
penalties to minimize the imbalances they impose onto the system. They will mainly use
the Day-Ahead market to trade themselves into balance, and will be more cautious in their
real-time facility operations if they are aware of the imbalance penalties.
On the other hand, if the imbalance penalties are severe, some participants, especially
smaller auto-generators, renewables with uncontrollable generation and demand side may
not be willing to take the risk of the severe penalties of imbalances, and will redraw from
the market and become self-scheduled participants.
The RTBM system solution shall support a Real-Time Pricing mechanism that gives the
market participants the right incentive to avoid imposing imbalances in the real-time
market, but not impose so strict penalties for imbalances that it discourages the market
participants from participating in the market.

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Capacity Reserve market


There are set predetermined minimum requirements for capacity reserves in SEE. These
requirements may change over time and location and shall be system parameter in the
Balancing Mechanism.
The total aggregated stack of offers to the RTBM is in effect the available Capacity
Reserve market, since the stack represents the total capacity that the market participants
makes available to the system at any time.
However, it is likely that the total stack of RTBM offers does not fulfill the minimum reserve
requirements. The reason is that market participants has not direct incentives for holding
capacity back from the energy markets (Day-Ahead and bilateral) in order to offer them into
the RTBM. The offers to the RTBM will be for extra top-up energy that is not fuel efficient,
and these offers will typically drive the Real-Time prices up. On the demand side, there is
no direct incentive for the consumer to enter stand-by offers to reduce load.
In order to encourage suppliers and demand to offer sufficient capacity into the RTBM,
incentive arrangements such as a capacity availability payment have to be put in place.
This capacity reserve payment can be structured several ways. Two structures are
presented below as examples:
1. A regulated availability payment price. The System Operator will set the regulated price
to a level that ensures sufficient incentives for participating in the RTBM, and will adjust
the price at a regular interval.
2. A market determined availability payment price. In this case, market participants will
submit bids for their willingness to offer capacity into the RTBM. The System Operator
will pick the cheapest bids until the capacity reserve requirement is met. The availability
payment price is set to the equal to the last bid accepted. This selection process could
be on an hourly basis, or for longer terms for example weekly or monthly.
The RTBM system solution shall support a capacity availability payment arrangement,
which provides incentives for ensuring a sufficient capacity reserve.

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11.3.12 Financial Market


One of the inherent and unavoidable features of any physical electricity market design are
unpredictable and volatile prices. Introduction of a regional physical day-ahead market will
presumably lead to increased volatility in both the DAM and also in the short-term bilateral
market, since market participants is expected to arbitrage 45 between these two markets. In
this report, the focus is on this combined wholesale market and the short-term wholesale
prices emerging from those.
It is at this stage important to note that wholesale electricity is traded through various
methods and at various price determinations in SEE:

Long-term bilateral contracts which today represents the bulk of the wholesale market
is subject to regulated and/or contracted prices and do not represent much uncertainty
(volatility).

Short-term trading; through bilateral contracts and in near future, through DAM;
represents much higher volatility, since these prices are not to (or should not) be
regulated and are typically derived from the equilibrium between supply and demand
at any moment of time 46. Both available supply and demand will vary significantly over
time and thus introduce high volatility.

Real-time trading. In this context real-time trading is represented by the balancing


mechanism, where real-time imbalances are in effect sold and procured by market
participants using a balancing power market and also the connected imbalance
pricing.

The focus in this chapter is on the short-term wholesale market and the prices derived from
that market. As mentioned before, it is expected that even if there are concurrent bilateral
and PX short-term markets, the prices in those markets should be closely correlated. We
shall therefore refer to the short-term hourly price as the Market Clearing Price (MCP),
representing the price that is derived from the equilibrium between supply and demand in
the short-term markets.
The purpose of an SEE Electricity Derivatives Market shall therefore be to provide an
instrument or tool to hedge (i.e. offset risk) against the MCP price volatility derived
from the PX and short-term bilateral markets.
The most effective and common arrangement for handling price risk in electricity spot
markets is electricity derivatives contracts markets.
The term derivative is used in the context of commodities trading as a financial product
(contract) that derives its value (i.e. its payoff) from the price of an underlying commodity.
In this context, the derivatives in the SEE market will derive their values from the PXs
Market Clearing Price.

45

46

It must be expected that traders will take positions in both the bilateral and PX short-term markets and look for best
trading opportunities in both. This will lead to convergence of prices in these markets.
Actually the supply/demand equilibrium for each trading interval one day ahead (or longer for bilateral contracts).

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In the chapter for the Regional market design the topics of market splitting and zonal prices
has been presented. That means that there typically will be several and potentially very
different clearing prices in the various SEE countries. Ideally one may develop different
electricity derivatives contract for each of these countries, but that may dilute the liquidity
and increase the complexity of the SEE derivatives market and should at least initially be
avoided. We therefore assume a single reference price that typically is the so-called
unconstrained market clearing price (UMCP) for the entire SEE market.
It is important to not confuse physical forwards contracts with financial derivatives
contracts.

Physical forwards contracts are simply agreements of a future delivery of some


commodity (e.g. electricity) at volume, price and delivery terms agreed in advance. As
the name indicates, this implies obligation of delivery of the commodity. All long-term
and short-term bilateral contracts traded in SEE and other places can be regarded
physical forward contracts. Day-ahead market contracts as stipulated in the PX model
proposed by the Consultants should also in this context be regarded as physical
forwards (one day ahead).

Financial derivatives contracts, on the other hand, do not imply physical delivery of the
commodity, but rather a cash exchange based on the price/cost of the underlying
commodity. The term delivery and delivery period for a financial derivative is
therefore somehow misleading, as it refers to the delivery of the underlying commodity
and not the derivative itself (unless one want to think of delivery of cash over the
settlement period).

A physical forward is therefore a guarantee for delivery of the commodity, while a financial
Forward does not guarantee the physical commodity, but rather a guarantee on the price
for the commodity whichever way the buyer obtains the commodity. This difference is
important with respect to e.g. scheduling and Clearing.
One woking assumption is that most participants in the SEE electricity supply and
distribution industry are risk averse in the sense they will prefer some degree of price
security and are willing to pay a (small) premium to avoid high volatility.
The Consultants therefore assume that as the SEE electricity market becomes more
competitive and efficient, one must expect:

increase in price uncertainty to short term electricity trading, which will introduce
financial risk for the market participants

increased requirement for financial instruments to handle these risks, and

increased requirement for a derivative market in SEE.

It is important to keep in mind the discussions provided in this report are mostly relevant in
a scenario with an operating PX similar to the model proposed by the Consultants.
Derivatives will enable the SEE Regional Power Market participants to manage the price
risk, which is the second largest risk in electricity business. They will be able to hedge
against price risks as far as needed into the future. Along with derivatives the third largest
risk the counterpart risk becomes manageable through the establishment of a clearing
solution. Clearing services will reduce this risk to a minimum and allow the participants to
concentrate on efficiency which again results in cost reduction and optimized resource
usage.

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11.4

Organization of the SEE Regional Power Market

11.4.1

The Power Exchange Concept

The SEE Regional Power Market organization must have flexibility and a structure to
facilitate cooperation across national borders. The SEE Regional Power Market will be the
body for development of the regional market concept. This requires an organization of the
market places that is able to include in the business process national features and
requirements adapted and harmonized to the regional concept. It is vital that regional
agreements related to ownership, legal framework, localization and harmonization issues
are developed in close cooperation between all the parties involved.
Figure 44

11.4.2

Power Exchange Concept

Organization and Supporting Roles

Ownership: In the first phase of the SEE Regional Power Market establishment it is vital
that the TSOs in the region play an active part. The SEE Regional Power Market business
processes will provide services for the TSOs and the TSOs will define framework for the
exchange. The interest for both parties can best be executed by the TSOs taking an
ownership of the implementation of the SEE Regional Power Market. This should be an
option for all the TSOs in the region.
Ownership should also be open for NMOs in the region to ensure that framework for the
SEE Regional Power Market is supported by all parties.

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Strategic Partner: In the starting phase it will be recommended that an experienced market
operator with competence regarding the market concept, market operation and market ITInfrastructure is playing an active part in the process. It will shorten the time to market to
have this support from an experienced partner.
SEE Service Provider: The service provider can deliver IT-Infrastructure and other services
as distributing market information, training and technical IT-Infrastructure development in
the region. It will be an advantage for the regional market development that this provider is
located in the region. This will build competence and know how in the region and set a
good platform for market evolution and development.
Coordinated Auction Office (CAO): Allocation of capacity for the exchange can be provided
by an Auction Office as an entity running and coordinating services for the TSOs in the
area. Please refer to previous chapter on CAO.
11.4.3

Ownership

The SEE Regional Power Marked should be organized in a flexible manner, which means
that participating countries can choose the degree of decentralization from a branch office
to a more decentralized link with the regional entity.
The question could be raised if a branch office establishment in each participating national
market is necessary. As an example the expanding regional reach of the German power
exchange EEX (now part of EPEXSpot) could be used, where this exchange offers DAM
services to both Austria and Switzerland without a local presence represented by a branch
office or a similar service.
This is, however, an exchange operation that does not offer a market coupling or market
splitting implicit auction of border capacities. The Austrian electricity market is fully
integrated in the German bidding area, and no area price for Austria is ever quoted. In the
case of Switzerland a totally separated DAM operation and a separate price (Swissix) is
quoted on an hourly basis, operated by EEX as a separate instance.
In the Nordic market, Nord Pool Spot AS has established a subsidiary both in Finland and
Sweden and a branch office operation in Denmark to take care of various activities linked
to each national market.
For the trilateral market coupling between France, Belgium and the Netherlands each
national market is being served by the national power exchanges Powernext, BelPex and
APX respectively.
Another example is the regional operation for the Iberian electricity market. The operation
of the market has been divided between Portugal and Spain. A regional day-ahead market
with implicit auction/market splitting is operated by Spain, while the trade in electricity
derivatives is executed from Portugal. This ensures a local presence in both countries.
The SEE national markets are characterized by:

Local regulatory framework to hold and operate a license

Different languages

Different degrees of maturity with reference to market development

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It is therefore strongly recommended by the Consultant to at least initially have a


decentralized solution where at least a branch office is established in each national market
performing as a minimum the following services:

Customer support in the bidding process

Arrange required training seminars in the national language

Sales and marketing of power exchange services

Settlement of DA contracts in cooperation with local banks

Providing all relevant market information in the national languages securing full
transparency
Figure 45

Regional Power Market

The flexibility with respect to participation in the regional exchange is illustrated in the
figure above.
Centralized Market Operations
In this alternative no national organization may be required. All communication on market
issues will be between the regional power exchange and national market participants. It is
assumed that national authorities and the regional power exchange in most cases will
prefer to establish a small unit (a branch office) to take care of marketing, communication
with local authorities and general distribution of information.

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For all participants the cash flow will be between the participants accounts and an account
owned by the regional power exchange.
This solution is not recommended for the SEE region at least in the short term.
Partly De-centralized Market Operations
Partly de-centralization can include de-centralization of all tasks that can be characterized
as service tasks and tasks that do not require any activities during holydays or stand-by
arrangements.
The main tasks that remain as centralized operations are spot price calculations, operation
of the trade system, and operation of the settlement system.
Also in this system all cash flow will be between the participants accounts and an account
owned by the regional power exchange.
The present Nord Pool Model may be characterized as a light partially de-centralized
model.
De-centralized Market Operations
In de-centralized market operations the participants will communicate with the national
power exchange in all daily operations. Monitoring of bids, control of trade notification, risk
management and financial settlement of physical contracts will be carried out by the
national power exchange.
The NMOs must operate on all calendar days and have stand by arrangements.
The cash flow in the settlement will in this case probably be between the participants
accounts and an account owned by the national power exchange in cooperation with a
local bank.
There will be an additional settlement between the national power exchange and the
regional power exchange that involve the net trade surplus/deficit between the national
power exchange and the remaining part of the regional market. Hence in a de-centralized
operation the risk management (calculation of collaterals, invoicing, settlement etc.) can be
carried out separately for each country.
Regarding ownership it must be underlined that the SEE Regional Power Market will in its
first mode of operation be covering only the physical short-term markets. This will be very
closely linked to the TSOs real-time market operation.
It will be an advantage for the market development that the TSOs play an active part in
setting the required framework. It is therefore recommended that the TSOs can execute
this both by a direct ownership in the exchange and also as an active member on the
board.
There may be national markets that only require a small office dealing with market
operations to maintain the required minimum communication with the national market
participants. This alternative is referred to as centralized operation.
It is assumed that most national market will require some activities allocated to the national
level. This alternative is referred to as partly de-centralized operations.
In the fully de-centralized operation all activities that are possible to de-centralize are
moved to the national power exchange.

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It is at this stage assumed that most of the national markets within the SEE region will
operate as decentralized markets. The national markets will in this alternative to a large
extent operate as an independent national power exchange and interface the SEE
Regional Power Market only in issues necessary to form one common regional market.
This alternative is referred to as de-centralized operations.
There are just one task that must be carried out on regional level:

Operation of the trade system: Calculation of unconstrained regional market clearing


price and area prices in case of congestion and calculation of trade schedules for all
regional participants.

Tasks that can be de-centralized are mainly:

Marketing on national levels

Support and service to national participants

Monitoring bid collections and validation of bids for both DAM and ID

Dispute Management for trade notifications

Financial settlement of traded contracts and risk management (collaterals)

Training of participants

Entry of new participants

Exit of participants

11.4.4

The Energy Act

The establishment of the SEE Regional Power Market requires support from the national
authorities in each country.
The following items are of crucial importance in this context:

Unbundling of transmission and supply/generation.

Full transparency requirements regarding essential market data.

Allocation of all or part of the cross-border capacities to the Regional PX.

Details regarding operational procedures for the NMOs as well as the SEE Regional
Power Market should be handled in close cooperation with the ECRB, the national
regulators and wholesale market participants, and not regulated in the Energy Act.

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11.4.5

Legal infrastructure required agreements

The figure below is displaying the required legal infrastructure.


The legal infrastructure will be harmonized and equal for all market participants, as
illustrated in the figure below:
Figure 46

Legal Infrastructure

With reference to the illustration above, the main agreements for market operation are:

Participation Agreement between participant and NMO

The SEE Regional Power Market - National PX Agreements

The SEE Regional Power Market TSO Agreement

NMOs -TSOs Agreement

The Participation Agreement


All market participants within SEE Regional Power Market area shall trade on equal terms.
If there are minor differences in the rules between the national markets these differences
must be transparent and included in attachments to the regional spot rules.
However, the participant agreement is signed between the NMO and the market
participants in its jurisdiction.

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The agreement includes:

All detailed activities related to bidding, price determination, verification of trade


schedules, and submission of trade schedules to TSOs.

Commitments by the parties related to collections and distribution of neutral market


information.

Time line for all settlement activities of spot contracts and requirements regarding
security amounts and accepted collateral types.

The above rules are often included in one agreement and referred to as Accession
Agreement, Participation Agreement or The Rule Book for Spot.
The SEE Regional Power Market National PX Agreements
These agreements will vary depending on the degree of integration. In the most decentralized alternative the agreement will include nearly all issues related to trade and
financial settlement:

Careful specification of the share of responsibility between the SEE Regional Power
Market and the NMO.

Full de-centralization will require a financial settlement between the NMOs and the SEE
Regional Power Market. Rules for this settlement have to be defined in the agreement:

Format for bid-data

Procedures and timeline for submission of bid-data

The only process that will be fully centralized in all forms for integration is the process of
price determination, calculation of trade schedules and distribution of neutral market
information.
The Regional PX TSOs Agreement and the NMO-TSO Agreement
The two agreements will cover much the same issues and may be replaced with one
agreement between the parties: the SEE Regional Power Market, National PX, TSOs.
The agreements regulate all mutual responsibilities and information flow between the SEE
Regional Power Market and the respective TSOs. One identical agreement towards all
interconnected TSOs is to be preferred. However, there will probably be required to
diversify on some issues. This can be made in attachments for each TSO concerned
incorporated in the agreement. Only one agreement with attachments for each TSO makes
a transparent agreement where diversified rules are easy detected for all.
For all TSOs the agreement must include:

Daily reports to the Regional PX/NMOs on allocation of capacity on interconnections to


be used for implicit auction. In the first phase of operation of the SEE Regional Power
Market, only a part of the available capacity might be given to the exchanges for
implicit auction, the remainder part might be offered on monthly and yearly capacity
contracts for explicit auctioning.

Reports to the TSOs on traded spot contracts.

Acceptance of the principle of self dispatch of traded spot contracts.

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The SEE Regional Power Market should serve as a platform for collection and distribution
of relevant neutral market information. TSOs are important sources for such information.
The agreement must include the parties commitments in distribution of information.
Principles for collection and distribution of information
TSOs must consider traded DAM contracts as firm contracts that cannot be changed or
curtailed after the trade is terminated. This means that contracts that is not delivered in the
internal national market is handled as imbalances by TSOs. Non-delivery caused by default
on interconnections is managed by the TSOs involved in their respective balancing
mechanisms.
Management of imbalances caused by default in trade operations made at the SEE
Regional Power Market.
Market Coupling Agreement
The SEE Regional Power Market will interface other independent regional or national
market in the same manner as for instance between the EEX and Nord Pool through
EMCC.
11.4.6

Market Operation

Market operation is the daily operations and routines to determine the DAM and settle the
market result. This includes interaction with all participants, balance responsible parties,
TSOs, clearing services and banks. When the market is closing its operation on a trading
day all the power and economical transactions have to be settled.
Agreements and detailed daily routines have to be specified and settled.
It will be the SEE Regional Power Market that will define the main body of the book of
rules, daily routines and agree this with the system operators holding the different roles in
the market area and the local variations will be maintained by the NMOs.
Even with a decentralized solution, the SEE Regional Power Market must set up the same
framework for operation. Some of the regulatory issues will be handled locally by the NMO.

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11.4.7

Interface to the TSOs

TSOs will have a role initially clearing new participants for trade in the DAM concerning
meter values, agreement with a Balance Responsible Party and signing of necessary legal
documents.
The interface to the TSOs will for the daily operation include the following tasks:

The TSOs submitting available capacity on the interconnections to the power


exchange.

In the SEE region it will be set up a CAO (Coordinated Auction Office) in Montenegro,
which intends to offer transfer capacities on national borders explicitly and according to
a flow-based method.

Facilitation of SEE Regional Power Market operations requires that the TSOs give
some or all of the border capacity to the SEE Regional Power Market. The split of
border capacity between the CAO and the SEE Regional Power Market should
therefore be part of the interface arrangement with each TSO.

The SEE Regional Power Market delivering data for flow on the interconnections.

The participants traded schedules.

The exchange of data will normally be based on xml-files and structured according to
the ETSO standard.

11.4.8

Settlement and Billing

This is the final settling of all the trades in the DAM. The settlement with calculation of the
traded amounts and fees is a daily operation, while invoicing and billing should be open for
configuration for a certain period.
To reduce requirements for collaterals, invoicing both for power and fees should be done
on all open banking days.
Settlement and billing is a central operation calculating all the settlement data, while
reporting, invoicing and credit checking can be a central or local operation.
Invoicing and billing require an electronic interface to the bank infrastructure sending a file
with all billing instructions and receiving from the bank a file with the account balance.
Centralized Market Operations
For this solution all settlement operations, bank interfaces and credit checking is done
centrally. The regional exchange must either set up an interface to a central bank that can
handle all account transactions for all currencies or set up an interface to all local banks
operating with participants accounts in the market area. This requires that the exchange
centrally holds all detailed information concerning the different local bank procedures.
Decentralized Market Operations
Basically this will include the same set of functions, but each branch office/NMO will
normally handle the local bank interface either directly or using a local clearing house.
This is the recommended solution.

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11.4.9

Transparency of relevant Market Data

Full transparency is a required part of the market reform whatever market design is
chosen.
The number of participants at the power exchange, and traded volumes, can only grow if
existing and potential members feel secure that all relevant market information is given to
all participants at the same time and to the same cost.
As a minimum, real time access for all participants to prices, operational data, and grid
maintenance information in the power market must be provided. In markets where hydro
power constitutes a significant share in the energy mix, reservoir data should be provided.
To further increase the transparency, frequent reports containing operational and physical
market data as well as a statistical database could be developed.
To secure that relevant market information is provided to the market participants at the
same time a system for short term information release must be developed. The information
published in such a system is based on information provided by the system operators and
the participants in each participating country to the SEE Regional Power Market.
All aspects regarding disclosure of information should in the case of the TSOs be regulated
by a unified publication agreement between the various TSOs and the SEE Regional
Power Market, the NMOs, and in the case of the market participants in the rulebook(s) for
trading.
To reach all participants the information tool should be available as a Web based system of
the SEE Regional Power Market with an interface for entering information and viewing
information and data. All information must be displayed at least in English, but preferably
also in the local language of the country from where the information is originated.
The rule book must address routines for information disclosure in the market.
The information disclosure procedures must be addressed and harmonized in each local
NMOs rule book.

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11.4.10 Market Surveillance


The market surveillance function will in principle be identical independent on choice of
market design. Basically this is a centralized function operated by the Regional PX in a
separate department, reporting not only to the top management of the exchange, but also
to regulatory authorities in each of the member countries. The latter might require
harmonization across the region and full compliance with EU directives related to market
conduct.
To support the proposed market model for the DAM and to develop a well functioning
exchange in terms of size, liquidity and transparency, the participants must have
confidence in the markets price mechanism, its integrity and the market information
transparency.
Market surveillance has an important role in establishing and maintaining this confidence
and integrity by having a strong and visible presence in the market. Market surveillance
continuously monitors the market conduct of trading participants, and investigates possible
breaches of the trading rules or applicable laws.
The function will be operated as a separated entity connected to the SEE Regional Power
Market. ECRB could be used for this purpose. The objectives will be to establish the
department with the required rules, procedures and most importantly; sufficient authority
given by the regulators in each of the countries allowing a well-functioning market
surveillance role.
In addition, a local surveillance of the local NMOs must be in place. Also for this alternative
the surveillance function will be managed by the national regulator with the same reporting
requirements as for the centralized alternative.
The main tasks of the market surveillance will be to monitor nominations of each market
participant and detect possible changes in bid patterns. Market surveillance must have
access to nominations and check that market participants do not withhold market sensitive
information. Handling of black outs, load shedding, force majeure etc. are regarded as
operational issues and not subject to ordinary market surveillance issues.
11.4.11 Trade System
As previously discussed it will be vital for a Regional PX to implement a day-ahead system
that in the first phase must facilitate the basic needs and have the features to adapt to
future business requirements by use of configuration and system parameters. Proven
technology, system modularity, parameterization and low costs is key factors that should
be considered for a modern day-ahead market IT-System.
For both a branch office and a decentralized solution the trading system must hold the
same functions, but implementation and functionality may differ for the two solutions.
This is an implementation were all data processing is done centrally, but includes functions
that open up so NMOs or branch offices can handle interfaces to the participants, balance
responsible parties, TSOs, clearing houses and local banks.

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12.

TRANSITION PHASE: FROM REGULATED PRICES TO


MARKET PRICES

12.1

Transition towards a unified SEE Regional Power Market

The principles and key factors that will influence the development of a liquid and common,
unified and deregulated power market should be based on a common understanding in the
industry for a need to reform the existing electricity market and its trading regulations
nationally and regionally.
This means that a new framework has to be set by the energy authorities in the region
where the following issues are considered:

The national Energy legislation must support or at least not impede the formation of a
pan-regional competitive power market.

The grid should be recognized as a monopoly and unbundled from the generation
environment.

The large dominant national generation companies should be given the opportunity to
expand into regional operation enabling them to meet challenges in a new competitive
region-wide power market.

12.2

Regulated Price

This is often a sensitive issue, especially in emerging economies. History shows that in
many countries authorities and politicians try to keep electricity costs low through crosssubsidies although the development of the electricity business needs correct price signals
and investments:

An often used alternative is to introduce a partly exposure to market prices, i.e. some
selected consumer groups are exposed to market prices while others are supplied
using regulated prices.

Sometimes the above chosen alternative is modified by allowing selected consumer


groups exposed to market prices a limited access to volumes with regulated price
(=cheaper) energy.

Regulated prices can be kept low through subsidizing the expensive units through the
cheaper units, e.g. through calculating an average cost of all involved units.

In some places the electricity price is kept low through securing supply of selected
consumer groups with the cheapest national units.

The overall challenge is to replace the regulated price with the market price and to fulfill the
mandatory EU compliance. The political dilemma regarding issues like vulnerable customer
protection and price predictability for industrial consumers visualizes this challenge.
When looking at the electricity value chain it seems inevitable to pass on the correct costs
and to introduce competition to all reasonable levels of the value chain. This is the only
possibility to create an environment which leads to increased efficiency and reduced costs,
which again results in correct investments, further optimization of the electricity supply and
consumption and increased security of supply.

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It is also crucial to understand the difference between regulated and market price:

Regulated price is initially calculated as cost recovery price for generation,


transmission, system operation, distribution, supply and investment costs.

Authorities, e.g. the electricity regulator, often choose to substitute selected consumer
groups by deciding lower prices than actual costs for them and substituting this by
higher prices than costs for other consumer groups. In some cases the electricity
business did not have to collect for future investments or maintenance, thus there
was/is a need for additional capital from authorities when maintenance or expansion
projects become a need.

A market price resulting from marginal pricing in the market reflects the same
fundamental cost components as in a regulated price regime.

Also in a market price based regime selected consumer groups can be substituted
through favourable grid tariffs and taxes and fees. In Europe it is also known that
selected industries are supplied at a special price through state-owned generation.

12.3

Traditional Full Supply Contracts with Regulated Price

Traditional full supply contracts constitute an obstacle in any development towards a


competitive wholesale power market. Full supply contracts expose the consumer only to
the regulated price regardless of how much and when he consumes energy. He has no
incentive to respond to market prices. In a region facing power supply deficit, consumers
price elasticity and demand response should be challenged.
Traditional full supply contracts mainly contain four details:

Delivery period (t0 tn) as settlement period

Installed capacity as maximum load (MW)

Accumulated energy withdrawal during the delivery period (MWh) as settlement


volume

Regulated energy price (/MWh) as settlement price

Competitive wholesale power markets are dependent on participation of consumption in


the price determination, thus the inclusion of their response to prices. In addition it must be
secured that both consumers and generators achieve a sufficient balance through energy
trading and not through real-time operation. The main incentives are:

Balance Responsibility someone has to purchase consumption in advance and


someone has to be economically responsible for deviations between the purchased
and metered consumption in the process of imbalance settlement.

Settlement unit is MWh/h this means that imbalance settlement is performed for
each hour during the settlement period and not for accumulated energy
generation/consumption throughout a period of time longer than one hour. This implies
that contracts are also related to hourly values per hour.

Replacing traditional full supply contracts with standard fixed MW and GWh contracts and
at the same time making Suppliers and Eligible Consumers Balance Responsible Parties
are the first steps to be taken towards a successful wholesale market opening.

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12.4

Supply Contracts and Balance Responsibility

In competitive wholesale power markets the introduction of obligatory Balance


Responsibility forces eligible wholesale market participants to balance each hour of
generation respective consumption with either DAM or bilateral contracts. This introduces
three further details to supply contracts, which have replaced the former traditional full
supply contracts: imbalance per hour, price for imbalance and balance responsible party.
In the electricity value chain the Balance Responsibility changes the traditional business as
follows:

The generator can no longer follow his customers load due to the requirement having
to balance his generation with contracts. The previous cost calculation with average
generation costs for a longer period of time is replaced by hourly generation costs plus
costs for imbalances. Normally a competitive wholesale power market will lead to
generation costs being replaced by wholesale market price.

Thus the generator will sell his estimated generation at market price which with
precise estimates will result in only minor imbalance costs. Alternatively the generator
will schedule generation as a result of price dependent bid results from short-term
markets like DAM or Intraday also in this case a minimum imbalance potential.

The supplier will have to take on responsibility for balancing his customers. A good
consumption estimate will allow the supplier to purchase energy at market price and
minimize imbalance costs. In any case the supplier will be invoiced for occurred hourly
imbalances. This implies that his customers will have to accept that the supplier
estimates their consumption as good as he can and passes on any imbalance costs
due to wrong estimates. Or they take on the estimation themselves and thus have
direct influence on the estimates quality.
A consumer can then choose whether he wants to be balance responsible or join the
suppliers balancing group. Irrespectively of which case is chosen they have in
common that the customers either see two different prices, one for energy and one for
imbalances, or one price, which is higher than the market price due to the inclusion of
the suppliers imbalance risk.

The consumer will if hourly metered and defined as eligible consumer also be
defined as balance responsible. If not hourly metered his supplier will be balance
responsible for him. The hourly metered consumers will be able to choose a full supply
contract thus make the supplier balance responsible or declare themselves as
wholesale market participants, thus estimate their needed energy and purchase it
themselves. They can purchase the energy from any counterpart in the wholesale
market. In the latter case they are balance responsible and can choose either to be the
direct counterpart in the imbalance settlement or join a balancing group, where one
dedicated counterpart performs the imbalance settlement with the TSO and distributes
the imbalance costs between the balancing groups members.

In any case the hourly metered consumers are exposed to hourly energy costs and this
creates a strong incentive to perform demand side response.

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12.5

Transition Period

Exposing eligible customers 100% to market prices from day one of the wholesale market
opening process will meet hindrance in most countries due to uncertain market prices and
their volatility. For this reason transitional schemes should be considered. The need for
such schemes will vary across the region, because each country has different starting
points.
Some countries have already taken steps to expose eligible customers to market prices. In
general a transition period with steadily decreasing contract volumes supplied with
regulated prices is recommended to gain acceptance among market participants.
The following two figures illustrate how this downsizing can work without jeopardizing
incentives for wholesale market participants to expose themselves to the market and to
enable them to respond to market prices.
Figure 47

Transition Period: Market and Regulated Prices Eligible Consumer and


Supplier

Suppliers and Eligible Customers will through this design - be supplied with a contract at
regulated price from their former full supply contractors. The contract volume will be lower
than their consumption. This will incentivise new generation since DAM will make market
prices transparent from day1 and marginal consumption has to be bought at these prices.
Incumbents will have no reason to exercise dumping. In a deficit market they can always
sell the volumes that are not linked to tariff customers at market prices.
Such contracts should be signed prior to market opening in order to provide predictability to
the suppliers and eligible consumers. Suppliers will thus also be able to show tariff prices
to their customers covering future periods of the transition period if parameters t1, t2, t3 are
announced. Suppliers and eligible consumers will thus have to purchase the difference
between expected consumption volume and regulated price contract volume in the
wholesale market.

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It is also recommended to allow consumers to be able to resell the volumes contracted at


regulated price. This will enable the consumers to respond on price peaks (demand side
response) and will provide the TSO with potential reserves for peak load hours. This is a
good solution for the Generators as well. Without resale possibility the customer will
operate normally even during extreme peaks and his Generator has to use expensive
resources (own production or purchased power) to maintain contractual supply.
Figure 48

Transition Period: Market and Regulated Prices; Generator

Generators will at t1 have capacity available for the wholesale market since full supply
contracts will be abolished and volumes sold at regulated prices are below the generation
capacities. They will have incentives to develop new projects and upgrade old capacity and
to sell it in the wholesale market. Reservation of import capacity to secure public supply
obligations will be redundant.
In general it is recommended to replace any existing traditional full supply contracts as
soon as possible with preferably base load contracts. These contracts can have the
regulated price as basis. Base load means that the load profile of the consumer has to be
filled up with market price based contracts. The consumer will thus need access to the
wholesale market or an additional contract with a supplier in order to be able to balance his
expected consumption with contracts. During the transition period the base load contracts
volume with regulated price has to decrease to zero and thus his exposure to market prices
will increase to 100%:

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Figure 49

Level of Regulated Price?

The control parameters (t1, t2, t3 and the level of the regulated price) should be decided by
national authorities. Regional consensus is not required. This approach leaves national
authorities with full control over the transition period and allows a steadily increasing
exposure to market prices. Customers will be motivated to adapt to market prices and
prices penetrate from day one.

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The figure below illustrates how Supplier (S) and Eligible Customer (EC) will approach the
market through increasing volumes (red) over time, building demand side at the DAM from
day one1. There is deliberately drawn no arrow from Generator (G) to S and EC for the
free volumes in order to stress that this demand should be bought on the open market.
The contract between Generator and Supplier to serve tariff customers should be base
load.
This mechanism buying parts of the volumes for tariff customers at market prices
exposes S to risks. In order to eliminate this risk, S must be allowed to adjust (up and
down) the tariff price once or twice a year if market prices develop quite different from
expectations when tariff were fixed. This is depending on Regulatory approval.
Another way to mitigate Ss price/volume risks is to make a settlement between G and S.
With this solution the TC will not be part of the compensation scheme. The Generator will
have the same economic result as if he had a Full Supply commitment. He now offers
volumes exceeding the base load contract to the DAM and S buys TCs variable load on
the DAM.

Figure 50

Transition Period: Market and Regulated Prices; Customers


increasingly exposed to market prices from day 1

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Lack of unbundling of supply and production activities within incumbents makes it possible
for them to offer favourable prices to their own customers and thus obstruct market
opening. Generators will not offer free volumes below market price, but their owner might
have different priorities. If Suppliers and Eligible Customers continue to stay captured for a
long time and volumes do not appear on the DAM, a couple of remedies might be
considered:

Discourage S and EC from buying free market volumes from their own Generator.
Other Generators, traders and sourcing on PX should represent their procurement
options.

Give EC a higher contractual coverage at tariff prices than the Suppliers. In this way
they will prefer to exercise their eligibility in order to reduce cost. Liquidity in the
wholesale market will improve.

KPIs developed under chapter 9 will support the authorities in deciding if such market
interventions are required.
In the SEE region a Public Procurement Law (PPL) requires that public companies issue
tenders when intending to purchase electricity. The Law shall secure that public interest
are protected. Questions have been raised if the PPL prevents suppliers from participating
in organized markets like a Day-ahead market (DAM). Daily purchase bids submitted to a
DAM and the resulting procurement of energy is to be considered a public tender process,
thus participation of suppliers must be enabled.
DAM and implicit auctions allow supply and demand to set market prices each hour in
every price area (when grid congestions prevent equal prices) and thus secure correct
prices in addition to setting the correct cost for congestion. Market prices will penetrate
across the SEE region, bringing transparency (prices and flows) and trustworthy price
references to all market participants from day one of the market opening.

12.6

Stepwise implementation challenges

Establishing the SEE Regional Power Market will bring substantial benefits to each of the
participating countries. This is partly because implicit auctions will improve cross border
trade and partly because transparent (area) prices improve generator scheduling.
If some countries hesitate to participate on the DAM, the countries themselves and as well
the region as a whole will miss an opportunity to enhance efficiency in the power sector.

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For the country itself this means that

Cross border trade will still be based on explicit auctions.


Experience from the Germany - Western Denmark interconnection and from the
operation of NorNed, the cable connecting Norway and Holland, gives clear indications
of advantages with implicit auctions. Approximately 25 % of the hours the energy flows
in the wrong direction.. The Danish TSO, Energinet.dk, has made the following
estimate of the socio-economic loss when the trading capacity of the German-Western
Border is not used as it should (either the energy flows in the right direction, but there
is unused capacity, or there are adverse flows:
2004 : EUR 16,6 mill.
2005 : EUR 30,3 mill
Five first months of 2006: EUR 10.1.
This shows how difficult it is to predict flows on interconnectors even when the link
connects efficient, transparent markets.

the national market will still lack trustworthy price references and transparency. This
will discourage investments in generation capacity.

the country will not take part in the general power market development in the region
that will be facilitated by cooperation through the Regional PX.

The Contracting Parties are committed through Athens Forum to enhance their efforts to
establish a regional wholesale market. In this work the TSOs are the facilitators. The most
important contribution the TSOs can provide to establish a SEE Regional Power Market is
to allocate as much cross border capacity as possible to the daily implicit auction. As much
as possible refers to the fact that market participants are familiar with explicit auctions and
will ask for this trading instrument for a while. When financial forward contracts gain
confidence, the demand for explicit auctions will decline.
In order to encourage hesitating countries to trade on the DAM from day one, TSOs should
have the authority to use the initial capacity split factor as an instrument.

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13.

ACTION PLAN

Based on the descriptions in the previous chapter, it is the Consultants clear


recommendation that SEE has to merge to a regional electricity market producing a SEE
regional reference price for energy.

13.1

Required decisions

There are a set of key decisions to be made to achieve the desired goals:

Approval of the Ministerial Council to proceed with the SEE Wholesale market opening
process by establishing a SEE Regional Power Market based on a Day-ahead market
in line with the proposal from this Consultant Report.

TSOs to take the principal decision to dedicate all or part of ATCs to the Regional PX,
increasing over time

All wholesale market participants to be Balancing Responsible Parties


But customers can buy this service from Suppliers & Traders
Incentives to Eligible Customers to exercise their eligibility

Unbundling of Generators and Suppliers.


Tariff Customers secured through separate contracts between Generators and
Suppliers
No Full Supply Contracts between Generators and Suppliers/Traders/EC

Downsizing of volumes based on regulated (low) tariffs to meet the open market 100% by 2015

Establishment of an efficient market surveillance function

To be developed over time:


Harmonization of rules and regulations among SEE countries
Transparency and equal market access to everybody

13.2

Project team(s)

The regional and competitive SEE Regional Power Market requires a project team
including a project manager. A Steering committee consisting of the relevant stakeholders
in the SEE Region must be established. The Consultants proposal is that PHLG/MC can
act as the steering committee for the implementation project.
The Consultants proposal is that the project is established in line with the other
implementation projects (CAO and BETSEE) run by the Energy Community.

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13.3

Implementation Plan

The implementation plan shows the different project activities arranged in a master time
schedule with expected duration and dependencies.
Please refer to the attached project plan in Annex D.
Attached is a Gantt Diagram that outlines project activities for the SEE Regional Power
Market with duration from October 23rd 2009 to December 31st 2014.
In this Gantt Diagram, the Consultant has estimated duration of activities, based on
experience from participation in similar projects

The project is divided into four main sections:


1.

Review of final report and acceptance of recommended market design.

2.

Project Establishment

3.

Regional activities to coordinate the opening of the SEE Regional Power Market

4.

National activities for each country

In the following sections, the various elements of this plan are discussed.

13.3.1

Review of final report and acceptance of recommended market design

The draft final report will be submitted October the 20th 2009 and it is a prerequisite for the
implementation projects start up as indicated in this Gantt Diagram that acceptance of the
recommended market design can take place at the PHLG and MC meetings in December
2009. This is based on a rapid review process leading up to the Athens Forum in ultimo
November and the PHLG and MC meetings in December.
The implementation project for the establishment of the SEE Regional Power Market can
be initiated in the beginning of January 2010, given that an acceptance is obtained for the
recommended market design at the PHLG/MC meetings in December 2009.

13.3.2

Project Establishment

Organisation
After selecting and appointing a project manager (PM), the PM will in close cooperation
with representatives from all stakeholders in the region establish a detailed project and
budget plan for the SEE Regional Power Market project. The Consultants recommendation
is that the project will be based on already existing bodies as part of EC to act as steering
committee to this project.

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Detailed Project/Budget Plan


It is also of utmost importance that during this period commitment for financing of the
project is obtained, at least for the first phase.
It is important that when the PM in close cooperation with stakeholders, sets up the
detailed project plan and budget, the differing maturity is fully reflected in estimates for
duration and required resources for each task of each national project plan.

Approval and kick-off


A formal approval of the project plan and financing should be made at the highest level in
the Energy Community, and the goal should be that this decision is taken at the PHLG/MC
meeting in spring/early summer 2010.
Following such an approval, the PM should staff the project with required members from all
contracting parties and stakeholders based on the current EC framework.
A one-day kick-off meeting will then be held, marking the start up of the main project
activities.

13.3.3

Regional activities

The recommended regional market design is based on a concept which entails regional
cooperation among all participating countries, but national control regarding the transitional
activities for accomplishing a wholesale market opening, ref chapter 1, 11 and 12.
The Regional Activities section contains therefore the necessary coordinating activities for
establishing guidelines and the necessary harmonization of market design and market
codes to secure an efficient operation of the SEE Regional Power Market.
In addition, regional agreements between TSOs and between the SEE Regional Service
Provider and national market operators, procurement of required regional infrastructure for
market operations, and coordination of dry-run and market trials are included in this
section.
Below is a complete list of tasks for the Regional Activities with comments:
Status Reporting to PHLG - bi-annually July and December
It is strongly recommended that the PM reports to the highest authorities within the
community on a bi-annual basis. This is indicated in the Gantt Diagram with a status
meeting in July and December every year from 2010 to 2014.

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Establish SEE Regional Power Market frameworks

Customize ERGEG's Guidelines on Good Practice on Electricity Balancing Markets


Integration

Customize ERGEG's Guidelines on Good Practice on Information Management and


Transparency

Establish SEE Guidelines for Market Monitoring/Market Surveillance and


Transparency procedures

Necessary Harmonization of National Market Design and National Market Codes

Establish guidelines for SEE stakeholder agreements

All of these activities are based on utilizing already existing guidelines/codes and adapting
them to the local requirement of the SEE region. ERGEG among other European bodies
have developed a series of guidelines that should be adapted and agreed by the
stakeholders in the region.
In addition, required harmonization of the national market design and market codes must
be done. This will normally be a stepwise process where the mandatory harmonization is
done for phase one. These will inter alia include: Gate closure time, time zone, master
currency, currency management (if different currencies will be allowed), timeline for
operation, market surveillance.
A basic principle is that for the regional level, the recommendation is to focus on guidelines
rather than legal text to avoid problems with governing law etc.

Approvals of guidelines and harmonization

Approval of SEE guidelines

Approval of necessary harmonization for phase 1

Approval of necessary harmonization for phase 2

These are just covering the important milestones for approval of the various guidelines.

Legal

Agreements between SEE TSOs

Agreement SEESP - SEE National Market Operators

EU regulation on ITC scheme can be used as a starting point for the agreement between
TSOs.
Of course, the most important and vital agreement is the operational agreement for the
Service Provider that will operate the price coupling.

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Procurement/Installations/Testing
This covers the procurement and operational readiness process for the central price
coupling software. A general procurement process is found under this headline in the
project based on real experience from similar procurement processes for other markets.
Trials and Operations DAM

DryRun SEE Regional Power Market - DAM - all countries

Market Trial (SEE Regional Power Market - Phase 1)

Go Live SEE Regional Power Market (DAM) (Phase 1)

Market Trial (SEE Regional Power Market - Phase 1.5)

Go Live SEE Regional Power Market (DAM) (Phase 1.5)

Market Trial (SEE Regional Power Market - Phase 2)

Go Live SEE Regional Power Market (DAM) (Phase 2)

This section covers the important go-live milestones as well as the various market trial
periods that will be common for the region.
Both a Dry Run for DAM and market trials are essential before any of the markets can go
live. The difference between a Dry Run and a Market Trial is that a Market Trial is
performed as the final live testing of the whole process of market operation including all
relevant market operators (both the NMOs as well as the SEESP), the relevant TSOs, all
market participants and the banks. This can be seen as a market readiness test testing
both the functional readiness (all business processes are in place and all stakeholders can
operate its functions) and a technical readiness (all systems and interfaces are working in a
timely manner).
A Dry Run is more a testing environment where it is possible to test different market
conditions. For a Dry Run, all stakeholders are not needed, neither is a full technical
environment. Typical test performed in this environment is how to add new bidding areas,
introduction of new interconnectors or other changes in the market framework.

Financial Forward Electricity Market

Detailed Specification for SEE Regional Financial Electricity Market

Procurement/Installation/Testing of HW/SW and services for SEE Regional Financial


Electricity Market

Market Trial for SEE Regional Financial Electricity Market

Go Live Regional SEE Financial Electricity Market

Further Introduction of financial trading products

A financial forward electricity market has to be designed and implemented region-wide


after the start-up of the national day-ahead markets as well as the Regional SEE Power
Market. Hence these activities are allocated to this section as such a forward market will be
operated by the SEESP. It will have to be a gradual development introducing financial
contracts with reference prices linked to the staged introduction of day-ahead markets.

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Overview of the Acceptance, establishment and regional activities

The detailed plans for both the regional and national level is found in Annex D.

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13.3.4

National action plans

As part of the overall plan, each Contracting Party is required to create a national action
plan. These plans will have the same content with regards to the tasks that is required for
the SEE Wholesale market opening process, but the required detailed tasks and work
effort will be different per Contracting Party.
13.3.4.1 Staged approach
The Consultant has proposed a staged approach to establish the SEE Regional Power
Market based upon an assessment of the current situation as outlined in chapter 8,
Barriers to market opening. This chapter includes an overview (fig. 33) of state of play,
December 2008. (Energy Community Secretariat, presentation given at the 14th Athens
Forum).
It is beyond the scope of this study to give a detailed recommendation how to organize
national activities. Such plans can only be established in close cooperation with national
authorities/stakeholders.
The crucial prerequisites to establish a DAM are:

A system to handle imbalances

Hourly metering

Generator/TSO unbundling and point of connection grid tariff

Generator/Supplier unbundling or at least cancellation of full supply contracts between


Generators and end consumers

Cross border capacity to DAM

Bulgaria, Croatia, Romania, Serbia and Slovenia have systems in place or are about to
fulfil the first 3 requirements. In all 5 countries Generator/Supplier unbundling and cross
border capacity allocation to DAM need further preparations.
Technically, a Regional PX with all these 5 countries participating from day one is possible.
The consultant recommends however to split the start up in two parts, first linking Serbia
with Romania and thereby gaining momentum from the presence of an operational DAM.
This staged approach is based on the following:
Stage 1 mandatory Contracting Parties:

Romania is already operational with a liquid Day-ahead market well aligned with the
requirements set out in this design. Romania will provide liquidity to the SEE Regional
Power Market from Day one with more than 100 participants already active.

Serbia is the central country with regards to interconnectors in the region. Without
Serbia, it will prove hard to create a regional market. Serbia is also among the
countries that are in the forefront in the region. Serbia has also been running a project
for establishment of a national market in parallel with this project.

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Stage 1 candidate Contracting Parties (in Gantt -stage 1.5)

Croatia. Based on the country visits, it is the Consultants view that Croatia is the
country that has done most of the required tasks to be able to join a regional market.
However, the political willingness to join has not been clear,

Bulgaria. Bulgaria is under heavy pressure by EU to create a competitive electricity


market.

Slovenia. Slovenia has already a PX (Borzen/Southpool) and thereby would be a clear


candidate. However, they are dependent on Croatia to be able to join the SEE
Regional Power Market as long as their only connection to the other SEE countries is
through Croatia

Stage 2 Contracting Parties

The consultant has not sufficient information to rank Albania, Bosnia & Herzegovina,
FYROM, Montenegro and Kosovo in the process of completing the SEE wholesale
market opening. This has to be addressed through detailed studies involving national
authorities/stakeholders. However, any of these countries can step up and become a
candidate to start earlier if the political willingness to make the required decisions is in
place.

13.3.5

National Activities

The final solution will cover an open wholesale market involving 10 countries, which today
have reached different levels of maturity.
It is therefore established in the action plan a staged approach, see above. This is reflected
in the Gantt Diagram with different start-up dates for each group of countries defined as
mandatory (Romania and Serbia), candidates (Bulgaria, Croatia, Slovenia) and thirdly
remaining countries.
The project structure for each country is identical, but start-up, duration and required
resources for each activity will be different.
With reference to the national action plans for contracting parties that were set up in
November 2006, the Consultant recommends that the project structure used for this project
is similar to this, with focus on the following key areas:
Legal

Agreement National TSO - NMO

Agreement NMO - National Market Participant

Agreement NMO - SEESP

Appoint National Market Council

The main agreements will be between the TSO and the NMO, and the National market
Operator and the National Market Participants. These agreements will be worded using the
guidelines established at regional level.

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In addition the establishment of a national market council is included under the National
Market Structure. This council will work in close cooperation with national stakeholders and
the NMO to decide which trading products would be introduced via the new market place
and the timing of such introductions.
Market Structure

Unbundling TSO/Generation

Unbundling Supply/Generation

Balancing Responsible Parties/Balancing Mechanism

Unbundling of TSOs/Generation and unbundling of Supply/Generation are the key


elements in introducing a market structure supporting a competitive wholesale market. In
most of the participating countries the formal activity regarding unbundling
TSOs/Generation is already completed and the latter regarding unbundling
supply/generation is already started in all countries through mandatory orders with respect
to eligibility of large consumers or consumers connected to high voltage grids.
Supply/generation unbundling to serve tariff customers is an essential part of the proposed
market design in order to bring liquidity to the DAM. This process has not started yet in any
Contracting country.

Wholesale Market

National Market Design

National Market Rules including metering and exchange procedures

Establish Procedures for Transparency

Establish Procedures for Market Monitoring/Market Surveillance

Licensing

Procurement/Installation/Testing of HW/SW and services for NMO

Market Trial

Go Live national and regional day-ahead market

Key tasks under this summary activity are the creation of the essential building blocks for
the national wholesale market.
The national market design will in the first step contain a DAM solution, a possibility for
trading bilateral contracts as well as a regime for management of imbalances.
This will consist of national market codes/rules and the implementation of full transparency
followed by efficient market monitoring and market surveillance functions adapting the
regional guidelines, but applying national details. The market rules, procedures and
licensing will be subjects to the national legislation.
The procurement of the NMOs systems and/or services are based upon normal
procurement processes and the timeframe for this are taken from other relevant reference
projects. The NMOs will have various options for buying systems and services (some might
have systems in place already that only needs small adaptations).

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Tariff Reform

TPA point of connection tariffs

Hourly metering

A prerequisite for the efficient operation of the wholesale market is the establishment of
point of connection transmission tariffs and full third party access.
Hourly metering is also a prerequisite for market start-up. To the Consultants knowledge,
this is in place for wholesale market participants in all Contracting Parties, but it needs to
be verified.
Market Integration

Availability of interconnection capacity (CAO) and allocation to DAM

Successful market integration requires close cooperation between the SEESP, the NMOs
and the CAO. Key task will be to agree on procedures between TSOs and CAO to
calculate every day the available cross border capacity which the SEESP will use in an
implicit auction to facilitate regional trade.

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ANNEX A LIST OF INTERVIEWS AND MEETINGS


Country

Institution

Date

Albania

ERE (regulator)

11 December, 2008

Albania

OST (TSO)

11 December, 2008

Bosnia and
Herzegovina

Ministry of Foreign Trade and Economic


Relations

3 February, 2009

Bosnia and
Herzegovina

Regulatory Commission for Electricity in the


Federation of Bosnia and Herzegovina

2 February, 2009

Bosnia and
Herzegovina

EnREG, EU, Emerging Markets Group

3 February, 2009

Bosnia and
Herzegovina

Electricity Transmission Company BiH


(Elektroprijenos BiH)

2 February, 2009

Bosnia and
Herzegovina

Elektroprivreda Hrvatske Zajednice Herceg


Bosne

3 February, 2009

Bosnia and
Herzegovina

JP Elektroprivreda BiH

3 February, 2009

Bosnia and
Herzegovina

State Electricity Regulatory Commission

2 February, 2009

Bosnia and
Herzegovina

ISO in BiH

2 February, 2009

Bosnia and
Herzegovina

Regulatory Commission for Electricity of


Republic of Srpska

2 February, 2009

Croatia

HEP Transmission System Operator of


Croatia

26 January, 2009

Croatia

Croatian Energy Regulatory Agency

26 January, 2009

Croatia

HROTE Croatian Energy Market Operator

26 January, 2009

Croatia

Ministry of Economy, Labour and


Entrepreneurship

26 January, 2009

FYROM

Energy Regulatory Commission

9 December, 2008

FYROM

MEPSO

10 December, 2008

FYROM

Ministry of Economy

9 December, 2008

FYROM

ELEM

10 December, 2008

Montenegro

Ministry for Economic Development

4 February, 2009

Montenegro

Elektroprivreda Crne Gore

4 February, 2009

Montenegro

Energy Regulatory Agency

4 February, 2009

Serbia

EPS Electric Power Industry of Serbia

28 January, 2009

Serbia

EMS (Transmission System and Market


Operator)

28 January, 2009

Serbia

Ministry of Mining and Energy

29 January, 2009

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Serbia

AERS

29 January, 2009

Kosovo

ERO

9 December, 2009

Kosovo

KOSTT

9 December, 2009

ANNEX B LIST OF REFERENCES


1.

ERGEG 2008; Regional Initiatives Annual Report

2.

Europex/ETSO 2008: Development and Implementation of a coordinated Model for


Regional and Inter Regional Congestion Management (draft version interim report)

3.

EU Treaty 2008: Consolidated version article 101-106 of 09.05.2008

4.

COM (2007) 528: Proposal for amendment to directive 2003/54/EC concerning


common rules for the internal market in electricity.

5.

COM (2007) 531: Proposal for amendments to regulation 2003/1228/EC on


conditions for access to the network for cross-border exchanges in electricity.

6.

COM (2007) 530: Proposal for regulation establishing the EU agency for the
cooperation of National Energy Regulators.

7.

COM (2006) 841: Communication; prospects for the internal gas and electricity
market.

8.

COM (2004) 39: Markets in Financial Instruments (MiFID)

9.

ETSO: Overview of transmission tariffs in Europe: Synthesis 2007

10.

Mr. Johannes Kindler, Chairman of ERGEG FIS WG) may 2 2008: Regulators view
of the role of power exchanges

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ANNEX C GLOSSARY
Acronym/Abbreviation
AAC

Definition
Already Allocated Capacity

AMR

Automatic Meter Reading

API

Application Programmers Interface to be used for


developing systems for importing or exporting data.

Area Price

Is the price per hour calculated for bidding areas defined by


TSOs, when transmission constraints are likely to occur
towards other bidding areas,

ATC

Available Transmission Capacity

ATS

The After Trade System

Available Transfer Capacity


(ATC)

Is the part of the Net Transfer Capacity (NTC; see below)


that remains available, after each phase of the allocation
procedure, for further commercial activity.

Bidding area

A geographically limited part of the HV-grid in which market


bids are placed and in which a single market price can be
determined per time unit.

Bidding Currency

The currency used in a participants bid; it will be converted


to master currency.

Bilateral trading

Direct trading between individual market parties, without


involvement of Brokers or a Power Exchange.

BI

Business Intelligence concept / blueprint

Block Bid

Bid addressing pre-defined series of hours and limited


volume.

BM

Balancing Market, same as RTBM

Border Capacity (BC) model

Model for the capacity determination and allocation using a


simplified flow based network representation where each
control area is described by a single node.

BR

Balance Responsible

C3

Concentration of 3 largest companies. C3 is calculated as


the sum of the market shares for the three largest
companies.

CAO

Coordination Auction Office

Contractual flow on
Individual Interconnector

The Day Ahead exchange between two neighbouring areas.

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Acronym/Abbreviation
Control area
(Reference: UCTE Operation
Handbook)

Definition
A CONTROL AREA is a coherent part of the UCTE
INTERCONNECTED SYSTEM (usually coincident with
the territory of a company, a country or a geographical area,
physically demarcated by the position of points for
measurement of the interchanged power and energy to the
remaining interconnected network), operated by a single
TSO, with physical loads and controllable generation units
connected within the CONTROL AREA. A CONTROL AREA
may be a coherent part of a CONTROL BLOCK that has its
own subordinate control in the hierarchy of SECONDARY
CONTROL.

Counter Part

The entity buying all from sellers, selling all to buyers.

Critical Branches (CB) model

Flow based model for the capacity determination and


allocation using a detailed transmission model and including
an explicit treatment of security constrained scenarios by
introducing critical branches, the network elements which
could become overloaded as more energy is exchanged
between the hubs of a region.

DAM

Day-ahead market. See Day-ahead market.

Day ahead market

Market conducted a day before delivery day/hour, operated


by power exchanges, based on sealed bid double auction
and market (equilibrium) price principles.

Delivery Day (D)

The day for which the schedules traded on D-1 is delivered

DMS

The Data Management System.

Dome Coupling

An overarching coupling system that coordinates two


or more underlying coupling systems and/or markets, using
volume coupling (see volume coupling).

DSO

Distribution System Operator

DSM

Demand Side Management

EC

Eligible Customers

Energy derivatives

Financial contracts for forward (possibly long term) delivery


periods that derive their value from an underlying reference
price, such as a spot price or the difference between spot
prices in two different market (bidding) areas or between a
regional reference price and a market (bidding) area price.

Explicit auction of rights

An auctioning system where (normally) TSOs sell cross


border capacity rights with differing maturity for nomination
ahead of operation day/hour, and those auctions are
independent of energy trading in the respective areas on
each side of the border.

FBATC

Flow-based Available Transmission Capacity

FFM

Financial Forward Market

Flexible Bid

1 hour sale bid for the hour with the highest price within the
day-ahead auction

Forward market

Market that operates the buying and selling of energy


related products, physical or financial, with maturity dates
longer than a day, typically monthly, quarterly, and yearly.

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Acronym/Abbreviation
Full Supply Contract

Definition
Full Supply Contracts is meaning that the customer can
consume whatever he likes and pays contract (tariff) price
anyhow - between Generators and customers are the
greatest obstacle to DAM liquidity.

Generator

Gate Closure

The time from which bids are no longer accepted for the
next delivery day. This might differ from the TSO gate
closure.

HHI

Herfindahl-Hirshman Index. HHHI is calculated as sum of


the square of the market shares for all market participants:
(market share)2

Hour

Hour 1 means Time from 00 to 01, Hour * means time from


23 to 00.

Hourly Bid

One hourly interval bid.

Hub

(See bidding area).

HW/SW

Hardware/Sotware

IDM

Intra Day Market

Implicit Auction

Combines the sale of energy and utilization of cross border


capacity in one process, thus establishes prices in each
involved Bidding Area and planned flows between all areas.

Intraday market

A market offering trading for the current day and after


closing of the day-ahead market also for the following day.
There are auction based intraday markets, similar to the day
ahead market, or continuous energy trading including cross
border bids

ISO

Independent System Operator

ITC

Inter-TSO Compensation mechanism

KPI

Key Performance Indicator

Loose volume coupling

The volume coupler uses partially indicative bid/offer


information and might not fully replicate the local matching
rules.

Market Coupling

Is the process of joining market areas managed by different


power exchanges with the purpose of determining dayahead volumes of exchange by implicit auctioning between
the market areas, and in the case of Price Coupling (see
below) also prices, based on an algorithm that utilizes
bid/offer information acquired from each market and cross
border capacities.

Master Currency

The currency for which the price calculation is done

Market splitting

Is the process of determining day-ahead volumes of


exchange by implicit auctioning, with splitting up the bidding
areas managed by one power exchange into two or more
price areas, while utilizing the available capacity between
the congested areas

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Acronym/Abbreviation
MCP

Definition
Market Clearing Price is price per hour calculated for the
bids in defined areas

NEC

Net Export Curve

Net Exchange

Difference between purchases and sales for an area

Net Transfer Capacity (NTC)

Possible exchange program between market (bidding)


areas, compatible with the operational security standards
applicable in each area

NMO

National Market Operator This is the local market operator


for each country/contracting party, that is the legal
counterparty to all its stakeholders

Organic process

(See horizontal process)

OTC (Over-the-counter)

Trade between market participants via a broker, without


involvement of a power exchanges.

PFM

Physical Forward Market

PHLG/MC

Permanent High Level Group/Ministerial Council bodies in


the Energy Community.

PPL

Public Procurement Law

PM

Project Manager

Price Area

A geographic area, consisting of one or more Bidding Areas,


which has a common price in a given time period. Thus in
case of several Bidding Areas forming a Price Area it
reflects that no congestion exist between those Bidding
Areas.

Price calculation

The matching of bids and offers.

Price coupling

A coupling system, which in one step establishes both prices


and volumes for each coupled market, and where all
bids/offers from all market.
(bidding) areas are considered in an anonymous manner in
the coupling system. Market splitting is a form of price
coupling, where all bids/offers; pricing per bidding area and
settlement is handled by one power exchange. A price
coupling system can be placed in a unique legal entity or
can be a unique system that is shared by the local power
exchanges.

PTC

The Participant Client System.

PSO

Public Service Obligation

PTC

The Participant Client System.

PX

Power Exchange

RBM

Regional Balancing Market

RMD

Regional Marked Design

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Acronym/Abbreviation
Region

Definition
ERGEG Region: one of the seven Regions originally defined
in the Congestion Management Guidelines 2006/770/EC.
Market region: cluster of market (bidding) areas that share a
unique price coupling system, which generates both prices
and volumes.

Regional PX

This is the regional price setter for the common DAM. This is
not a power exchange as such, but the entity that performs
the Day-ahead auction on behalf of the NMOs based on an
implicit auction. The proposal is that this is performed by a
service provider (SEESP). This entity constitutes a
cooperation agreement between the involved NMOs and
should not be envisioned to be a large organisation, but a
body constituting the regional cooperation.

RTBM

Real Time Balancing Market

Supplier

SLA

Service Level Agreement.

SRMC

Short-run marginal cost

SO

System Operator

SEE Regional Power Market

This is the implementation of the RMD for the SEE region.

SEESP

This is the service provider that is responsible for the tasks


defined for the Regional PX in the SEE region.

TC

Tariff Customer

TLC

Tri-lateral Coupling, Electricity market area of France,


Belgium and the Netherlands

Trading Day (D -1)

The day the DAM auction price is calculated for the next
Delivery Day (D)

TSO

Transmission System Operator.

Tight volume coupling

The volume coupler replicates the local matching rules and


uses more precise bid/offer information than in the loose
volume coupling case.

Volume coupling

A coupling system that partly or fully replicates the matching


rules of each coupled market and utilizes indicative or actual
anonymous bid/offer information. The algorithm determines
the volume of exchanges between the underlying
regions/markets. The local power exchanges utilize the
generated cross-border volumes to locally determine their
bidding area(s) prices and volumes.

VPP

Virtual Power Plant

VPPA

Virtual Power Plant Auction

UMCP

Unconstraint Market Clearing Price

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ANNEX D ACTION PLAN FILES


The action plan Gantt-diagram is attached as a separate fMS Project file called
SEE Regional Power Market - Action plan v2.0.mpp.
In addition, a Powerpoint presentation called SEE Regional Power Market - Action plan
v2.0.ppt has also been created with screenshots from the same plan for those who dont
have MS Project installed.

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Pyry is a global consulting and engineering firm focusing on


the energy, forest industry and infrastructure & environment
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million and it employs 8000 experts.
Nord Pool Consulting is a professional consulting firm and
specialist in the deregulated power industry. It provides
strategic and management consulting services within the
electricity business world-wide. Nord Pool Consulting was
established in September 1998, and is owned by NASDAQ
OMX Commodities.