Legal Framework, Investment Opportunities and Technical Innovation in the Electricity Sector Security of Supply through competitive markets: Design of the regulatory and economic environment for infrastructure development Dr. Evangelos Lekatsas Chairman of the Board of Directors, HTSO Athens, October 23 rd 2009 HTSO 1

2 Reliability of Supply "the degree to which the performance of the elements of the technical system results in power being delivered to consumers within accepted standards and in the amount desired SecurityAdequacy

3 Security vs Adequacy Security: The ability of the System to withstand disturbances Protection devices Security constrained dispatch Ancillary services (voltage control, AGC, spinning reserves etc.) NOTE: Security is centrally managed but the resources can be procured competitively through ancillary service markets or long term contracts (Public good)

4 Security vs Adequacy (continued) Adequacy: The ability of the System to meet the aggregate power & energy requirements of all consumers at all times Ability to meet demand on longer time scale basis Non storability of power Long lead time for capacity expansion NOTE: Adequacy provision is nothing more than insurance against shortages

Generation Adequacy (I) Energy only markets: Consumers and suppliers interact through unrestricted energy spot markets. Market energy prices provide price signals and compensation for capacity investment. Technology mix and generation capacity are determined by entry and exit of suppliers and by customer choice of desired price risk. Energy only markets result in extreme spike prices. As a remedy to this Capacity Markets have been introduced to avoid price volatility. The purpose of these markets is to ensure that there is sufficient capacity in the System to cover peak demand and at the same time avoid price volatility.

Generation Adequacy (II) Installed Capacity (Icap) Obligation markets : In an ICap market Installed Capacity Obligations are set for Load Representatives (or Suppliers, or Load Serving Entities= LSEs).Suppliers are obliged to secure contracts with producers sufficient to meet their expected load for one year, plus a security excess that reflects a prescribed Capacity Margin. Producers in order to enter into Agreements with Suppliers are obliged to have sufficient capacity by issuing, for each MW, annual Capacity Availability Certificates (CACs) when commissioning new generating capacity. This method does not provide any signal to the Consumers.

Generation Adequacy (III) Capacitive Charge To incentivize investment in new power plants and availability Generators receive, in addition to SMP, a Capacity Charge (CC) based on availability, as expressed by the calculated Loss Of Load Probability (LOLP), and the Value of Lost Load (VLL). P=SMP + CC = SMP+LOLP*{VLL-SMP} This method was initially applied in UK. It is not a market but a mechanism. It was abandoned when it was proved that some generators could artificially increase LOLP by withdrawing some of their units.

The Value of Lost Load VLL = 5000 /MWh 8 HTSO

9 Load Variations: Summer January ,0k

10 Load Curve: Oct 1 st 2006 –Sept 30 th 2007 Peak Detail in next slide

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(/year) (/MWh) f c =fixed cost in /MW-year v c =variable cost in /MWh Q= installed capacity in MW E= annual energy generation in MWh/year b= energy market price in /MWh r= capacity payments price in /MW-year Recovery of Fixed and Variable Generation Costs 12 HTSO

(/year) (/MWh) f c =56000 /MW-year v c =112 /MWh Q= 1000 MW E= 7300 MWh b= 7783 /MWh > VLL=5000 /MWh Decision= Curtail Peak 1000MW !!!!! Recovery of Fixed and Variable Generation Costs ( Case I: Energy only Market, r =0) 13 HTSO

(/year) (/MWh) f c =56000 /MW-year v c =112 /MWh Q= 1000 MW E= 7300 MWh r=35000 /MW-year b= 2989 /MWh < VLL=5000 /MWh Value b of energy is still unacceptable (high) Introduce a CAP such that b< CAP Recovery of Fixed and Variable Generation Costs ( Case II: Energy + Capacity Market, r 0) 14 HTSO

(/year) (/MWh) f c =56000 /MW-year v c =112 /MWh Q= 1000 MW E= 7300 MWh CAP= 150 /MWh r> /MW-year b< CAP=150 /MWh Recovery of Fixed and Variable Generation Costs ( Case III: Capped Energy + Capacity Market) 15 HTSO

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18 Right shift of the Supply Curve due to increase of NPB / MWh CAP L, System Load, MW MW Supply Curve Demand Curve SMP 0 NPD = Non Priced Demand SMP 1 NPB ο NPB 1 L0L0 L1L1 With L 1 >L 0 SMP 1 <SMP 0 Non Priced Bids (NPB) Mandatory Hydro ~1800MW RES ~ 300MW Technical Min ~3000MW Imports ~ 700MW TOTAL= 5800MW

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22 EPILOGUE The market expresses the will of human beings to meet at the point of equilibrium of supply with demand by maximizing the, so called, Social Surplus. But the will of human beings, especially when expressed in terms of conflicting economic interests, may lead the power system to risky levels of operation. Indeed, following the liberalisation over the past 2 decades, some power systems have been pushed towards their stability limits in order to maximize profit in energy trading, thus endangering the operation of the power system. It is very important to understand that power systems must operate within safe physical limits and with adequate reserves in order to maintain high standards of supply. This creates a cost we must not forget!

Acknowledgments I would like to thank my colleagues in HTSO for their valuable discussions in preparing this presentation THANK YOU FOR YOUR ATTENTION 23 HTSO