1. Electricity Markets
Simon Watson

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. Typical Pool Prices (Nov ’99)

11. 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…

12. 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

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

14. 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

15. 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

16. 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)

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. Example Imbalance Prices

25. Comparison With Power Exchange Prices

26. Online Prices

27. 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%(?)

28. 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

29. 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

30. Day Ahead Spot Market

31. 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

32. 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

33. 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