Electricity Markets Simon Watson

Overview UK as exemplar The state-owned Electricity Supply Industry The Electricity Pool Hedging Your Bets! Deregulation Other countries

The Central Electricity Generating Board CEGB owned wires, generation, meters, etc Central planning of power system Central dispatch of all plant in merit order State monopoly Little opportunity for independent generation or supply Very secure system

Privatisation ESI privatised in 1990 Generation and supply split National Grid – transmission and system operator + pump storage National Power, Powergen, Nuclear Electric Regional Electricity Companies Electricity Traded in a Power Pool

The Pool System Operator needs to meet demand half-hourly Day ahead forecast Generators offer into a power pool to generate certain volume for certain price 12:00 12:30 13:00 13:30

Generator Offers into Pool Offer Price (£/MWh) Volume (MWh) 1 (CCGT) 42.79 4000 2 (Coal) 58.39 2000 3 (Coal) 32.43 4 (Coal) 84.79 1000 5 (Nuclear) 00.00 6 (OCGT) 150.56 System Operator needs to procure 9000MWh in a half-hour period

System Marginal Price (SMP) 9000MWh Generator 2 £58.39/MWh SMP Generator 1 £42.79/MWh Generator 3 £32.43/MWh Generator 5 £00.00/MWh

Pool Prices Capacity credit (CC) payments for being available SMP+CC=Pool Purchase Price (PPP) PPP paid to all selected generators CC paid to those available but not selected Amended payments to constrained generators so they did not lose out Balancing costs added to PPP=Pool Selling Price (PSP) paid by suppliers

Ex-Post Prices This type of market price setting is termed ex-post Prices are set after delivery of the power

Typical Pool Prices (Nov ’99)

Hedging Your Bets PPP, PSP variable Large fluctuations in prices paid in each half-hour – say up to £0.25million for large supplier Risk Cash flow problems! Would be nice to pay a fixed price…

Contracts for Differences Pay PPP/PSP as normal Agree a contract with third party Fix a given volume at a given price If PPP/PSP above fixed price third party pays you the difference for the contracted volume If PPP/PSP below fixed price you pay third party the difference for the contracted volume Price effectively fixed

Effect of Hedging Agreed Strike Price Trader pays Supplier £(75-30)x20 Supplier pays Trader £(30-13)x13

Deregulation 1992 – 1MW customers can choose supplier 1994 – 100kW customers ditto 1999 – all customers ditto Independent generators Independent suppliers Supply, distribution, metering split Initially fragmentation of large generators More latterly consolidation – The Big Six

The Move to NETA/BETTA Rigging of Pool prices Freedom to contract bilaterally Drive down prices Third party traders Increase competition in wholesale market Introduced on 27th March 2001 New Electricity Trading Arrangements later extended to GB as British Electricity Transmission and Trading Arrangements

Buying and Selling under NETA Generators and suppliers notify future position to National Grid (NG) Allows NG to plan balancing of supply and demand Generator ‘self-dispatch’ Generators and suppliers must notify contracts before gate closure (1h ahead of delivery at present)

Physical Contracts Hedging contracts now physical contracts for power Difference between forecast and actual position ‘cashed-out’ at prices set within Balancing Market Generators and suppliers contract on different timescales

Ex-Ante Prices This type of market sets ex-ante prices Prices are set before actual delivery of power As the cost of balancing the system is not factored in, there is a requirement for an additional balancing market under this system

NETA/BETTA Wholesale Market Generators & suppliers contract to buy/sell power months ahead Closer to gate closure generators & suppliers ‘fine tune’ position Bilateral forward contracts Power exchanges Gate closure >t+month ~t+24h t+1h t+0 Balancing market System Operator uses balancing market to match supply & demand Contracted-actual position ‘cashed out’ using imbalance prices

System Buy and Sell Prices If generator produces more than contracted then is paid for surplus at System Sell Price If generator produces less than contracted then must pay for deficit at System Buy Price If supplier consumes less than contracted then is paid for surplus at System Sell Price If supplier consumes more than contracted then must pay for deficit at System Buy Price

Balancing Market Mechanism by which NG balances supply and demand NG instructs generators (and to lesser extent suppliers) to change output/demand to balance system NG selects generators/suppliers through bids/offers into Balancing Market

Bids and Offers Generator can bid to reduce output Generator can offer to increase output Supplier can bid to increase demand Supplier can offer to reduce demand Bids/offers ordered and selected as required (bit like Pool) Generators/suppliers pay as bid if selected Generators/suppliers are paid as offered if selected

Balancing Market – Imbalance Prices System Operator accepts bids/offers to balance supply/demand Generators make bids/offers to adjust output Suppliers make bids/offers to adjust demand Cost of bids sets System Sell Price Cost of offers sets System Buy Price Energy excesses paid SSP Energy deficits pay SBP System Sell Price < Average forward price System Buy Price > Average forward price

Example Imbalance Prices

Comparison With Power Exchange Prices

Online Prices

Imbalance Market Imbalance volume represents ~+/-3.5% of the average half-hourly demand for the GB grid APX Power UK power exchange represents ~6% of volume traded in GB grid N2Ex power exchange <5%(?)

Ancillary Services Additional markets through which system operator procures essentially services: Reserve services (fast response) Frequency response Reactive power System security, e.g. transmission constraint management, black start Capacity market

Other Countries – Nord Pool Sweden, Norway, Denmark, Finland Zonal tariffs to feed into/take off from grid Day ahead spot market Single or dual price settlement of imbalances

Day Ahead Spot Market

Australia (National Electricity Market) Day ahead spot market (compulsory) Prices set ex-post Generator offers are submitted every five minutes Average of five-minute marginal prices in a 30-minute period sets price Similar to former England and Wales pool

Pennsylvania-New Jersey-Maryland, USA (PJM) Bilateral trades Day ahead spot market for generators and suppliers Nodal pricing Real-time market for balancing with single price Similar to present GB electricity market

Summary Move from monopoly ‘single-buyer’ market to deregulated market Separation of supply, demand, transmission and distribution Energy traders Pool (ex-post prices) Day-ahead markets Bilateral trading (voluntary pool) – ex-ante prices Balancing markets