1. 2 nd Workshop MFG, 2003-06-10, Bucharest The current status on the Market Design of the SEE REM and the way forward

2. 2 SEE Market Design: Brief History 2 nd Athens Process Forum in Rome: CEER presented a working paper on possible strategies for building the regional electricity market: Besides putting in place a minimum common set of basic rules, such as Regulator, TSO, unbundling, Cross-border trade, congestion management Define a Standard Market Design model for the regional market to establish a common trading and market arrangement in a wider area than a single-country. CEER argued about benefits from applying a standard market design in the early stages of the process, in terms of investment attraction, development of competition and market integration. does not meanall countries everything in common This does not mean either that all countries will have everything in common or that all national market arrangements will be the same in each country

3. 3 SEE Market Design: Current Status All participants of the Forum accepted the view of a Standard Market Design and mandated the EC to coordinate the market design in cooperation with regulators and the consultation of the MoU signatory parties. Thus, CEER WG is working on a proposal for a Standard Market Design for SEE. This proposal will provide the Regulators input for the discussions with the EC, ETSO, UCTE, the Countries and other stakeholders on the development of the SEE REM. CEER counts on Market Facilitation Group (SEETEC) to provide valuable support on all issues related to the implementation of the Market Design: Technical work of high value: Analysis and simulation, Experience from other markets Training for improving the skills of local market participants Final decisions will be made by the signatory parties (PHLG, Ministerial etc.). The next Forum will discuss the draft design.

4. 4 SEE Market Design: Two set of issues to harmonize First set of issues: minimum common requirements of the EC directive Independent institutions (Regulator, TSO, DSO) and unbundling Regulated third-party access Opening in terms of eligibility of customers Uniform network access, Cross Border Trade system, congestion management, transparency and interoperability Level playing field (state-aid, environment) Second set of issues (standard market design): needed for a regional common market licensing of market players balancing market mechanisms integrated wholesale markets implicit auction systems for transmission congestion uniform application of competition rules This is essential to obtain real market integration.

5. 5 SEE Market Design: The Principles Introduce the appropriate Trading and Market Arrangements for wholesale trading, scheduling, balancing, transmission use and ancillary services in order to: Develop efficient competition in the electricity market for the benefit of SEE consumers, subject to regulation and control of institutions operating at a country level Make a transparent and liquid market and network to allow any customer to access any generator or supplier in equal terms in the whole region Assure fair and open access to all new entrants (e.g. generators, suppliers) that would directly operate in a broad integrated market (and not in a fragmented one) Finally develop a REM which will be readily incorporated in the EU Internal Market.

6. 6 Which SEE Market Design for which Objectives? Among the different possible designs, select a market model that in particular for the SEE region will deliver the following: 1. Attract new investments, both in generation and transmission 2. Ensure smooth transition for the customers, the existing business and infrastructure: Avoiding jeopardizing the viability of existing national entities (e.g. distribution companies, old capital-intensive plants) and Maximizing acceptance for the social welfare of the consumers (affordability) Avoiding recourse to market distorting mechanisms (stranded cost recovery, excessive public service obligations fees, etc.) 3. Ensure compatibility and consistency between technical operation and the functioning of new financial/commercial mechanisms 4. Ensure, in the early stages, a critical volume and liquidity for the new wholesale market places so as to develop.

7. 7 SEE Market Design: The Approach Starting Point: Develop common market mechanisms across the region for Wholesale trading and Balancing Implementation: Allow Regional or national variation in market design to accommodate legitimate differences in local conditions, but Prevent the creation of market distortions due to regional/national variation, e.g. transportation costs Incorporate national functional institutions but set the framework for their efficient cooperation Dont focus on details but on flexible and adaptable rules Identify and retain efficient rules already existing

8. 8 Market Participants Producers Producers: Licensed generators. Suppliers Suppliers: SEE-Wide licensed Customers Customers Tariff regimes Tariff regimes Balancing Providers Balancing Providers Transmission Providers Transmission Providers

9. 9 Main Issues (1) 1. Single Price Zones: Geographical areas where real time electricity balancing operates rather free of serious or systematic transmission constraints Allows the formation of a single price clearing of transactions at real time within the Zone The definition is subject to agreement of the countries of the region after the thorough investigation of the technical constraints of the regional network Zones may change over time (as more transmission is built). The aim is the whole SEE region to become a Single Price Zone

10. 10 Main Issues (2) 2. Transmission Networks: full control and responsibility National TSOs retain full control and responsibility Third Party Access to all authorized regional market participants Regional Planning Expansion and Operation coordinated between TSOs Tariff Structure according to common principles allowing long-term transmission capacity adequacy 3. Combined Bilateral Contracts / Day Ahead Provide stability and flexibility to customer categories at a national and regional level Physical Delivery On a national or zonal/regional level or a combination of both

11. 11 Main Issues (3) 4. Balancing Regime Improve economic efficiency of the regional system Regional/ Zonal or National Market Based as long as sufficient mechanisms are in place to protect the final consumer from extremely high prices 5. Adequacy of Generation Capacity Encourage investment for generating capacity by clear recovery mechanism Through the Market Explicit Capacity Payments or tradable certificates Capacity Obligations

12. 12 Main Issues (4) 6. Fixed – Free Tariff Regime Temporary mechanism to allow smooth transition from existing regime to liberalized market Regulated price for Fixed tariff Regime, Protect consumer categories from price variation, but Provide consumers with the choice of their own risk management 7. Hydro Power Plants Important Role for the electricity market of the region: Large capacity in the region Connected to low energy prices Specific role in balancing and ancillary services Available to all end users

13. 13 Main Issues (5) 8. Power Exchange(s) Increase the liquidity, supplementary to the wholesale market Financial Products Hedging and Risk Management 9. Market Operation Zonal/Regional coordinated operation at least for the Day-Ahead market Harmonized Rules Monitoring 10. Institutional Issues Requires Agreement between the countries National bodies will be retained Where regional institutions are necessary, they will be created by agreement/consensus of the national bodies

14. 14 Conclusions The CEER WG is working on an SMD for the SEE region, along the lines described above with the active participation of all Regulatory Authorities of the region The country-specific circumstances are carefully investigated, including financial, social and operational aspects of national electricity markets The work of the Donors community is highly appreciated and taken into account Ongoing developments on a Pan-European and Regional level have to be addressed (new Directives, Strategy paper, PHLG decisions etc.) The outcome of this work will be circulated to all Forum participants and the EC The aim is to reach a common decision of all participants in the next Forum