1. Technology for demand side management and demand side bidding for grid companies. Stig Fretheim 15. Mai 2003

2. HS - Date: 2002-06-05 - Page: 2 Hydro Energy Oslo Introduction The paper describes different aspects of market and technology development in the Norwegian power market, essential questions the paper answers are Why is it necessary to have a Regulating Capacity Option Market (RKOM)? Why is it not efficient to solve these issues through the Nordic power pool? How should this market operate with regards to short and long- term contracts? What technologies are available to participate in this market? How can a grid company use this technology to operate the grid more efficient, and use new business opportunities? How the cost of implementation and the risk of changes to regulations or market rules would affect DSM Strategy?

3. HS - Date: 2002-06-05 - Page: 3 Hydro Energy Oslo Twelve years with deregulation The Norwegian electricity marked was deregulated in 1991 with a new energy act from the parliament. Separation Of Power Distribution And Generation Large Reduction In The Energy Price Choice of supplier for domestic customers1996 Regulation Of The Grid RPI-X formula 1997 Penalties For Power Interruptions 2001 Restructuring Number of employees have been reduced from 19,000 to 12,000 Power producing companies have been reduced form 150 to 70 The numbers of grid companies are reduced from 200 to 120 Transmission prices has gone down the quality has gone up The deregulation in Norway has been a success so far.

4. HS - Date: 2002-06-05 - Page: 4 Hydro Energy Oslo Nordpool and the system operator The roles of system operator and the new pool were also separated and defined. Norway and Sweden established the pool first, and Finland and Denmark followed later. Nordpool deals with all the financial agreements, long-term and short-term contracts, forward, future and option products. Statnett as the system operator (TSO) is responsible for the physical power balance. Statnett uses the Regulating Capacity Market RCM to solve unbalance in real time. This is done because Nordpools spot market Elspot, that closes 12 hours before the next day, cannot foresee that it might occur forecasting errors and grid limitations. Statnett as the system operator is responsible for both the short therm power balance, and from 2002 also the balance between production and demand on long term.

5. HS - Date: 2002-06-05 - Page: 5 Hydro Energy Oslo Nordpool and the system operator The power that is available during winter peak loads in the Norwegian power system is approximately 23 000 MW. Figure 1 illustrates that the registered maximum load is increasing, and that it is approaching the maximum available capacity.

6. HS - Date: 2002-06-05 - Page: 6 Hydro Energy Oslo What Is Needed For Investments In New Capacity? In a normal year only the peak hours in winter will get a high energy price in the Elspot market. New capacity will only be profitable these few hours, and it is not certain that these hours occur every year, because it might be a mild winter with few peaks. Therefore there are no producers that will take the risk on putting up new peak production capacity if they cannot forecast the price in elspot. It is the same problem for consumers. Why should industrial consumers invest in more flexible consumption and sell capacity if they cannot calculate the price?

7. HS - Date: 2002-06-05 - Page: 7 Hydro Energy Oslo What Is Needed For Investments In New Capacity?

8. HS - Date: 2002-06-05 - Page: 8 Hydro Energy Oslo Market conditions for the RCOM The most important participants in RCOM are large hydropower producers and power intensive industries. However there are a large potential for smaller commercial customers. The problem is that very few of these customers have 25 MW to offer. It is allowed to aggregate several loads within a certain area to get 25 MW. Due to possible bottlenecks in the transmission grid, Statnett has decided to divide the country into three regions, A, B and C.

9. HS - Date: 2002-06-05 - Page: 9 Hydro Energy Oslo Market conditions for the RCOM Grid/geographic regions for the placement of reserve capacity.

10. HS - Date: 2002-06-05 - Page: 10 Hydro Energy Oslo Market conditions for the RCOM Reserve capacity shall be made available from 6 a.m. to 10 p.m. from Monday through Friday on business days. Minimum volume required to submit an offer: 25 MW Availability of the reserve capacity: Must be possible to activate the reserve capacity within 15 minutes. Full activation of the reserve capacity for at least 1 hour without interruption must be possible. Full activation of the reserve capacity for at least 10 hours per week must be possible. During weeks when public holidays fall between Monday and Friday, this requirement will be reduced correspondingly.

11. HS - Date: 2002-06-05 - Page: 11 Hydro Energy Oslo Grid Companies Incentives For DSM Aggregator within their region. Grid companies advantage are clear, they have the: Responsible for the metering systems, SCADA systems in continually operation Local grid limitations, due to capacity limitations or maintenance Risk of outages that can be solved by load management Responsible for the tariffs People with competence in electrical installation Profit on sale of disconnect able load in the RCM

12. HS - Date: 2002-06-05 - Page: 12 Hydro Energy Oslo Project to develop a tool for this market A project with several grid companies has developed a suitable tool to handle many customers that can disconnect load in peak periods. This technology is based on Internet and SMS technology, and has proven to be very efficient. The developer of this program is the Norwegian company Elink that got the Norwegian research and development price in 2002 for the project. It is possible to sort the customers on criteria like: Grid topology What kind of load Size of the load

13. HS - Date: 2002-06-05 - Page: 13 Hydro Energy Oslo

14. HS - Date: 2002-06-05 - Page: 14 Hydro Energy Oslo Risk-based operation of the grid If one line falls out and it results in one hour interruption each year for all the customers: Saved penalty for Industrial customers: 120.000 kW*50kr/kWh*1 h= 6,00 MNOK/y Saved penalty for domestic customers: 80.000 kW*4kr/kWh*1 h= 0,32 MNOK /y Total Penalty saved= 6,32 MNOK/y Istad Nett has solved the problem through risk-based operation of the grid by means of the LeKey program to disconnect the customers in peak load, and if there is a high risk of interruptions. To get the customers to disconnect they agreed to pay a lower tariff. Istad Nett could also offer some of these loads on the RCOM to the system operator and get an extra profit on the investment. The project has been very profitable for Istad Nett.

15. HS - Date: 2002-06-05 - Page: 15 Hydro Energy Oslo Conclusion Long-term option markets on new capacity, are the natural extension of a deregulated power market when the market reaches capacity limits. The reason for this is not only economical issues, but also political. To think that the market will fix everything is just like focusing on your nose while you are running fast forward. Statnett have informed the participants that the option market may be a long-term market, but it is important to get a short-term market going first, so the system operator can get the long-term options for a lower price.

16. HS - Date: 2002-06-05 - Page: 16 Hydro Energy Oslo Conclusion The way to get a new market work is to get liquidity in the market and as many participants as possible in the market place. To do this it is necessary to have effective software and communication tools. The Norwegian software program Le Key has been developed. The program is based on the market need for grid companies. By using the program the operator can satisfy the needs of handling the market place, local grid limitations, and customer dialogs. The program is in operation in 10 Norwegian grid companies and has proven to be very efficient.

17. HS - Date: 2002-06-05 - Page: 17 Hydro Energy Oslo How the cost of implementation and the risk of changes to regulations or market rules would affect DSM Strategy? Cost of implementation is defined from the customers size. The price are typically 5.000 – 10.000 Euro/MW RKOM market have been 10 Mill Euro/y Penalties for interruption 100 Mill Euro/y Postponed grid reinforcements ???? Changes to regulations? The de- and re regulated market will not be pulled back. The only change i regulation is participation of smaller consumers, and hourly metering for smaller customers that makes the market larger. However it is important that the grid companies demand open standards.