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APEX 2003 CONFERENCE Cartagena de Indias – Colombia 14th – 15th October 2003 MARKETS EVOLUTION (I) “MARKET EVOLUTION AND ALTERNATIVES FORESEEN FOR THE.

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1 APEX 2003 CONFERENCE Cartagena de Indias – Colombia 14th – 15th October 2003 MARKETS EVOLUTION (I) “MARKET EVOLUTION AND ALTERNATIVES FORESEEN FOR THE SPANISH MARKET” Mª Luisa Huidobro President and CEO of OMEL

2 CONTENTS 1.RECENT EVOLUTION OF THE SPANISH MARKET. 2.FACING A GROWING NUMBER OF PARTICIPANTS. 3.NEW SESSION OF THE INTRADAY MARKET AND SOLUTION OF DOMESTIC CONGESTIONS. 4.FORWARDS. 5.NEW EUROPEAN REGULATIONS AND DEVELOPMENT OF THE MARKETS.  Increasing commercial capacity in the interconectors.  Coordinated market coupling.  Certification of green energy and energy free from CO 2 by power exchanges. 6.THE IBERIAN MARKET DEVELOPMENTS. 7.DEMAND SIDE MANAGEMENT AND DEREGULATION.

3 THE SPANISH ELECTRICITY MARKET  OMEL´s market offers to the participants the opportunity for trading electricity in seven sessions comprising the main session of the daily market, and the six subsequent sessions of the intraday or adjustment market covering the 24 hours of each day.  Settlements, collections and payments refer to the final energy prices, due to supplies and productions carried out, are the result of transactions in: ● The daily and intraday markets. ● Capacity payment. ● Technical operating processes of the system. ● Meter readings.  OMEL provides market participants with a monthly invoicing service for the electricity purchased and sold on the market, with the important advantage of a single bill for energy and ancillary services corresponding to their participation in the markets and in the system technical processes. The possibility for all consumers and producers to access the organized market, with simple schemes for participation and invoicing, constitutes an important factor regarding the integration of wholesale and retail transactions

4 ANCILLIARY SERVICES Viable Daily Schedule Matching Result Final Hourly Schedule Operative Hourly Schedule TECHNICAL CONSTRAINTS SOLUTION Domestic Bilateral Contracts OTHER TECHNICAL MANAGEMENT PROCESSES MARKET SEQUENCE Base Operating Schedule DAILY MARKET + International Bilateral Contracts 6 INTRADAY MARKETS MARKET OPERATORSYSTEM OPERATOR

5 1.RECENT EVOLUTION OF THE SPANISH MARKET.

6  Daily market started operations on January Intraday market started operations in April  Settlements of all markets and processes started on January  Economic volume traded in 2002: 9,250 million euros.  Energy traded: 208,000 GWh.  3,900,000 transactions where done last year.  94 companies act as purchasing agents on the market, 11 of them are external agents and 74 are independent resellers.  63 companies act as producers, 11 of them are external agents.  Domestic technical constraints are very reduced (around 3% of the daily energy).  The market price is a reference for many commercial transactions. MAIN FIGURES OF THE SPANISH MARKET

7 MARKET AGENTS

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9 POWER IS MORE THAN 50 MW AND POWER STATIONS UNDER THE SPECIAL REGIME MARKET ENERGY OF POWER STATIONS UNDER THE SPECIAL REGIME WHOSE NOMINAL POWER IS MORE THAN 50 MW AND POWER STATIONS UNDER THE SPECIAL REGIME

10 PURCHASES BY RETAILERS, QUALIFIED CONSUMERS AND EXTERNAL AGENTS

11 INFORMATION ON THE ELECTRICITY MARKET RESULTS AND TRANSPARENCY  Information provided immediately after market sessions. ● Results of the daily and intraday market. ● Aggregate demand and supply curves. ● Commercial capacities and international exchanges by border.  Information provided on a monthly basis. ● Result of the energy schedules aggregated by participants. ● Generation capacity reserve.  Information provided with a delay of three months. ● Bids submits by the participants in each of the daily and intraday markets Electronic mail: Public web site:

12 CHALLENGES FOR THE NEAR FUTURE  New production plants and new producers.  Development of forward supply in OMEL and other contracts appropriate for the good behaviour of the liberalisation process.  Efficient organisation regarding total supply deregulation in ● Small consumer right to change supplier. ● Contract security.  Increase of commercial capacity through the international interconnections. ● New investments: new lines and reinforcement of the existing transmission equipment. ● Access to the commercial capacity avoiding discrimination an pancaking in the single European market (implicit auctions).  Iberian market.

13 2.FACING A GROWING NUMBER OF PARTICIPANTS.

14 FACING A GROWING NUMBER OF PARTICIPANTS: PRODUCERS  Ordinary regime producers. ● 4,224.3 MW of gas combined cycle plants have recently incorporate to the market. ● During 2004 it is expected that 1,000 – 2,000 MW of additional capacity will be incorporated to the market. The new generation capacity is being installed by existing and new producers  Cogenerators. ● During 2003, 30 new producers have become members of the market. ● During 2004, it is expected new additional participants access the market.  Wind producers. ● Possible participation in the market. ● Intraday markets and a correct and flexible deviation management are imperative.

15 DAILY ENERGY by TECHNOLOGIES SEPTEMBER 2002 – AUGUST 2003 SPECIAL REGIME TO DISTRIBUTIONSPECIAL REGIME TO MARKET NUCLEARIMPORTS HYDROCOAL COMBINED CYCLEFUEL-GAS

16 FACING A GROWING NUMBER OF PARTICIPANTS: DEMAND SIDE OF THE MARKET  Retailers and traders. ● Non resident companies. ● Medium side retailers. ● Consumers with more than one point of consumption or subsidiaries.  Consumers. ● From first January 2003 all consumers are qualified in Spain. ● They can freely choose supplier. ● Remain in the regulated tariff ● Bilateral contract with a retailer ● Bilateral contract with a producers ● Participation in OMEL Tariff for the use of the network can be paid to the distributor directly by the consumer or the retailer can pay for it in the name of the consumer

17 3.NEW SESSION OF THE INTRADAY MARKET AND SOLUTION OF DOMESTIC CONGESTIONS.

18 NEW SESSION OF THE INTRADAY MARKET AND SOLUTION OF DOMESTIC CONGESTIONS (I)  New proposal for solving technical constraints. ● The system operator indicates the plants to be included/excluded in the viable program wich will be paid at bid price. ● Daily market price do no change. ● The net countertrading is negotiated in a new intraday market.  New intraday market at 2 p.m. ● All market agents can bid. ● S.O. designated plants will bid at instrumental price. The countertrading price is the result of a market open to the supply and demand sides of the market.

19 NEW SESSION OF THE INTRADAY MARKET AND SOLUTION OF DOMESTIC CONGESTIONS (II) Today's technical constraints solution Countertrading in a new intraday market

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21 4.FORWARDS.

22 ELECTRICITY FORWARD SUPPLY THROUGH THE SPANISH MARKET OPERATOR èAllows market participants, sellers and buyers, to hedge electricity price risk for a period of time. èIt simplifies market access for small consumers that do not want to participate in the market every day. èFor big consumers this another tool to manage price risk. èThis forward supply possibilities provide forward price signals useful for buyer and sellers.

23 FORWARD SUPPLY (I)  Forward supply up to a maximum period of one year  Forward supply up to a minimum of one day  The net physical contracted energy has to be desegregated in physical units to be integrated on the spot market (same as bilateral transactions)  Energy contracted will be divided as the delivery period approaches  What is contracted in the forward supply is physical energy (same as the spot market)

24 FORWARD SUPPLY(II)  Forward supply market participants. ● All current spot market participants, perhaps with the exception of distribution companies (tariff retailers).  Bids will be presented to the market operator.  Technical requirements identical to the spot market.  Energy bidding unit same as in the spot market.

25  Energy blocks tradable ● Base energy. All 24 hours of all days ● Working days peaks  Price formation ● Continuos trading ● Successive auctions  Physical delivery of next day net (open) positions FORWARD SUPPLY (III)

26 OMEL´S FORWARD PROTOTYPE (I)

27 OMEL´S FORWARD PROTOTYPE (II)

28 5.NEW EUROPEAN REGULATIONS AND DEVELOPMENT OF THE MARKETS.  Increasing commercial capacity in the interconectors.  Coordinated market coupling.  Certification of green energy and energy free from CO 2 by power exchanges.

29 NEW EUROPEAN REGULATION  The Directive 2003/54/EC modifying Directive 96/92/EC on common rules for the internal market in electricity.  The Regulation 1228/2003 governing conditions for access to the network for cross-border exchanges in electricity.  The Decision 1229/2003/EC modifying 1254/96/EC that establishes a set of guidelines relating to trans-European energy sector networks.

30 NEW EUROPEAN REGULATION  The Decision 1229/2003/EC modifying 1254/96/EC that establishes a set of guidelines relating to trans-European energy sector networks. “ The aim of the proposal is to foster the interconnection, interoperability and development of trans-European energy networks in order to achieve a 10% interconnection capacity between Member States. The Barcelona European Council (March 2002) highlighted this objective as a priority for the achievement of electricity interconnection at the latest by 2005 in order to foster the effective and quick operation of the internal energy market”.

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32 INTERCONNECTION CAPACITY IN 2005 INTERCONNECTIONWINTER COMMERCIAL CAPACITY (MW) With France3,000 With Portugal1,200 With Morocco 900 Total5,100 Source: Electricity and Gas planning

33 INCREASING COMMERCIAL CAPACITY IN THE INTERCONECTORS  Is reinforcement of the interconnection capacity the only ultimate way to improve utilisation or deal with congestion? ● Yes, although, as seen in the past years, the possibility of making a better use of the existing equipment and some small improvements of the network can help the problem, but the ultimate solution is the construction of new lines.

34 NEW EUROPEAN REGULATION  The Directive 2003/54/EC modifying Directive 96/92/EC on common rules for the internal market in electricity. ● Acceleration of the market deregulation calendar: – 1 July 2004, all non-household customers may choose a supplier. – 1 July 2007, all customers may choose a supplier. ● Independence of transport and distribution management activities ● Public service obligations. ● Demand management.

35 NEW EUROPEAN REGULATION  The Regulation 1228/2003 governing conditions for access to the network for cross- border exchanges in electricity.  The Commission, with the report issued by the Regulation Committee, may adopt decisions on: ● Amounts of compensation payable, which shall be paid on a regular basis, when due, and in accordance with the directives established by the regulation. Flows will correspond to those actually measured. ● Directives relating to the compensation mechanism, and its modification, including detailed information on the payment procedure. ● Directives relating to the allocation of available commercial capacity ● It will ensure that the evolution of congestion management mechanism is compatible with the objectives of the Internal market.  It establishes the terms and conditions that must be complied in order to establish interconnectors that, being exempt from the compliance with certain obligations contained in the Regulation and the Directive (tolls, access, etc.), foster competition in electricity supply: ● Allocation of income arising from the use of the interconnector. ● Right to collect royalties for the us of the interconnector, which are different to regulated access tariffs. ● Exemption form the network access obligations established in Article 20. ● Compliance with the established methodology and tariffs

36 THE IMPLEMENTATION OF A MARKET-BASED MECHANISM  The French and Spanish mechanisms to solve congestions in the border between France and Spain are different: ● France: first come first served rule applied prior to real time (partially considering counter flows) ● Spain: market splitting/auction in case of real congestion (considering all counter flows) on the daily and intraday markets è Considering the existence of liquid power exchanges in both sides of the border, would a market-coupling mechanism be appropriate and feasible? ● It is the only solution compatible with correct working of the internal market. The solution to be implemented has also to allow for the existence of physical bilateral contracts. ● This border is the perfect candidate for a pilot project of the method, since the commercial capacity determination is one of the easiest and there are liquid power exchanges at both sides of the border.  What are the necessary conditions to allow regulatory changes to take place, in Spain and in France? What steps would be needed to implement a market based-mechanism? ● At least from the Spanish side the changes are minimal and can be handled at a relative low legislation level.

37 POWER EXCHANGE COOPERATION PROCESS

38 UNIVERSAL AND PUBLIC SERVICE OBLIGATIONS ACCORDING TO PROPOSAL AMENDING DIRECTIVES  Member States shall ensure that electricity suppliers specify in the bills and in all advertising and promotional materials made available to final customers: ● The percentage contribution of each energy source to the commercial fuel mix for the electricity supplied. ● The overall fuel mix of the supplier over the preceding year; ● The relative importance of each energy source with respect to the production of greenhouse gases. With respect to electricity obtained via an electricity exchange, the aggregate figures provided by the exchange over the preceding year may be used.

39 6.THE IBERIAN MARKET DEVELOPMENTS.

40 ADVANTAGES OF THE IBERIAN MARKET  Opportunities for market agents ● Only the differences in Regulation and the scarce interconnection capacity justify segmenting the markets ● Global market ● Prices formed in a better way ● Substantial increment in the commercial transactions  Development of an organized market ● It is convenient to organize a market that allows the participation of all sizes of agents in the same conditions of transparency and objectivity ● The current characteristics of the market that OMEL runs today allows it, with the necessary harmonization changes, to be identified as a solution for the Iberian market ● The addition of forward physical contracting possibilities in the organized market will increase it’s efficiency

41 CONVERGENCE HYPOTHESIS  Market opening ● Approximation between real and theoretical opening of the markets ● Scheduled day for total consumption liberalization  Commercial capacity increase ● With the existing interconnections ● New interconnections already in the building process  Liberalization rules ● Capacity to access the production and retailing activities in equivalent conditions in both countries ● Independence of the liberalized economic manager of the electric system (Market Operator) from the system Operator  Stranded cost solution and CAES Some progress in Portuguese regulation regarding deregulation retailing activities and CAES

42 INTEGRATED MARKET PRINCIPLES  The development of an integrated market could be structured in the following way: ● Deeper technical coordination of the system Operation of the two systems closer to being managed as a single system, preserving each system operator responsibilities over it’s own network security ● Freedom of all agents to access the market, together with the freedom to sign bilateral contracts

43 TECHNICAL ISSUES TO CONSIDER FACING ORGANIZED MARKET  Forwards: physical delivery and cash delivery.  Congestion in the border and market splitting.  Influence of the harmonization. ● Ancillary services ● Capacity payment ● Tariffs for the use of the network ● CAE´s and bilateral contracts.  Steps for markets integration.

44 7.DEMAND SIDE MANAGEMENT AND DEREGULATION.

45 DEMAND SIDE MANAGEMENT? Objective:  Consumption decrease in pick hours.  Increase of consumption in valley hours Consequences:  Reduction of the demand for capacity  Bigger supplies of generation capacity in pick hours  Production cost decreases  Price decreases  Environmental protection advantages - + t E

46 RELATIONS BETWEEN MARKET PRICES AND ENERGIES

47 6.436 MW (32,5%) 3,236 c€ (120%)

48 5.508 MW (30,2%) 2,593 c€ (145,9%) RELATIONS BETWEEN MARKET PRICES AND ENERGIES

49 8.436 MW (50,9%) 4,533 c€ (258,0%) RELATIONS BETWEEN MARKET PRICES AND ENERGIES

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52 TYPES OF DEMAND RESPONSE PROGRAMS (I)  Price based load management programs. Consumers react to the electricity price signal. They move the consumption from the high price hours to the low price ones.  Mandatory curtailable Load Programs. Consumers mandatorily reduce or interrupt their consumption when there is an emergency situation. For such service, they have a reduced price for electricity.  Voluntary curtailable Load Programs. Consumers voluntarily reduce or interrupt their consumption when they receive a signal, normally, from the SO. For such service, they have a reduced price for electricity, normally higher than the former one.

53 TYPES OF DEMAND RESPONSE PROGRAMS (II) è Demand biding/ Buyback markets Consumers present bids to the market operator or to their corresponding retailers to reduce their consumption for a particular price. If the bid is assigned, the consumer must reduce its consumption and it is remunerated accordingly. èDirect Load Control Programs The SO or the utility directly control the consumer power supply. In case of emergency, they interrupt it. For such service, they have a reduced price for electricity.

54 BARRIERS TO IMPLEMENTATION OF DEMAND RESPONSE PROGRAMS  Communications  Metering equipment  Programs design  Application procedures INSTITUTIONAL BARRIERS  Regulatory risk.  Lack of long term commitment which hinders consumers decisions and necessary investments  Existing competitive tariffs independent of the particular consumption profile. OBSTACLES

55 ROLE OF POWER EXCHANGES èPromotion of consumers participation in daily, intraday and ancillary services markets è Where consumers may continuously present bids to modify their consumption, being ready to reduce it in case of interesting prices. èOrganization of Demand biding/ Buyback markets Introduction of specific buyback markets where consumers may present bids to reduce their consumption in case of need. èProvision of Real-time Pricing Signals The MO provides continuous (ideally real-time) price signals. Consumers connected to the MO system may automatically react in case of interesting prices.


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