Jean-Michel Glachant's Lecture at the 2014 Edition of the International Summer School on regulation of local public services in Turin

1. Electricity market regulation:
lessons learnt (by me)
– a 20 years journey…
Turin School of Regulation (8 September 2014)
Jean-Michel Glachant - Director Florence School
[& Marcelo Saguan - Microeconomix]

2. first step with markets

3. same for my first kid…

4. A great leap forward…

5. www.florence-school.eu
BUT: is this a “market”… or a regulatory frame?
5
Day-ahead market
Intraday markets
Balancing market
Reserves/ ancillary services markets
Explicit auctions for transmission capacity
Implicit auctions
Market coupling
Market splitting
Capacity markets
Bilateral / OTC
Long term contracts
Flexibility market
Baseload product
Peak load product
Congestion management

6. www.florence-school.eu
market “borders”… and regulatory frame…
6
Grid congestion
Power market
Black-Out
Externality
Grid access
Multilateral
or OTC
Grid monopoly
CO2- GHG
Cross-border

7. www.florence-school.eu
Yes regulation framing a market order… Why? Big issues to be addressed within the market…
•In fact there is different products to market…
•To market at different time horizons: day-ahead, intraday, real time…
•How to integrate these different markets across countries? How does it work?
•Are the “final-final” resulting markets really European or still national?
7
“Final” electricity is a bundle of different products
A whole sequence of “horizon” markets
Integration of national markets
A European market?
NB: focus on wholesale market (retail market is out of scope of this lecture)

8. www.florence-school.eu
The “physics” of electricity (1)
•Electricity “cannot” economically be stored
•Electricity flows “cannot” be controlled & transmission lines should be operated under “safe flow” limits
–If not risk of “cascading failures” and black-out
8
•Different cost & value of energy at different times  Many products differentiated by the time of production & consumption
•Transmission capacity scarce resources  Many products differentiated by the location where they are produced/consumed
Implications for electricity productS & related marketS

9. www.florence-school.eu
The “physics” of electricity (2)
•Power stations can fail suddenly
•Demand can vary sharply over time
•Most stations can only change output slowly and can take many hours to start up
•Demand and generation must match each other continuously
–If not  risk of black-out
9
•Gen.Flexibility scarce resource  Many products differentiated by ability to change production/consumption at short notice
•Uncertainties  Different market horizons to buy/sell the “same” product
•Strong actors coordination needed in real time  important role of System Operator in real time
Implications for electricity productS & related marketS

10. www.florence-school.eu
Should power markets be better… by being regulated? (1)
•First : Electricity’s not a single homogeneous product as Coca Cola
–Differentiated by time horizon of generation/consumption
–Differentiated by location of generation/consumption
–Differentiated by flexibility to modify generation/consumption on short notice
•Second : Electricity’s not only energy (MWh): transmission & system flexibility components are needed
–Transmission capacity & system flexibility (MW of Power) are complementary scarce resources and should be priced for delivery
–Markets might put a price and a delivery priority order to these “invisible” components of electricity
10

11. www.florence-school.eu
Should power markets be better… by being regulated? (2)
•Third : Electricity trade positions (for energy, transmission, system flexibility) may be reviewed in successive markets until the time of delivery
–Electricity components (energy, transmission, flexibility) are physically delivered only in real time >> all the former exchanges are only “notional” (“virtual”)
–Markets function in a sequence of successive exchange “rounds” for the different electricity components
11

12. www.florence-school.eu
Sequence of successive markets
The reduced scope of “power markets” in a single zone of “system operation”
12
Short-term Energy markets
Short term
Reserves/
flexibility markets
Delivery of the good
Time
T-~24h
T
Short term Transmission markets
Energy
Transmission
Flexibility Reserves
Real time /
balancing
Mechanism
(centralised
by the SO)
Long-term Energy markets
Long-term
Reserves/
flexibility markets
T-~months/years
Long-term Transmission markets
T-~3h
Electricity components
NB: markets for system flexibility are often called “reserves” because the SO reserves some flexible system resources (power station or demand response) to ensure enough system responsiveness (Up or Down) in real time
Power as Energy
Transmission
capacity
Reserves as
System
Flexibility
Scope

13. www.florence-school.eu
Several zones of market operation in EU
13
Intraday
market
(energy B)
Balancing Mechanism (energy B)
Intraday
Markets
(energy A)
Balancing
Mechanism
(energy A)
Country B
Country A
Day ahead
Market
(energy B)
Day ahead
Market
(energy A)
Day ahead
Market
(transmission A-B)
Intraday market (transmission A-B)
Interconnection
capacity
Time
Space
Balancing
mechanism
(transmission A-B)

14. www.florence-school.eu
How does the markets’ sequence “day-ahead> intraday> real time” work in a single country?
14
Intraday
market
(energy B)
Balancing
Mechanism
(energy B)
Intraday
Markets
(energy A)
Balancing Mechanism (energy A)
Country B
Country A
Day ahead
Market
(energy B)
Day ahead
Market
(energy A)
Day ahead
Market
(transmission A-B)
Intraday
market
(transmission A-B)
Interconnection
capacity
Time
Space
Balancing
mechanism
(transmission A-B)

15. www.florence-school.eu
Events occur from day-ahead> (to) >real time: power station failure / demand forecast error
15
Power (MW)
Power (MW)
Produced power
Sold quantity
Power station faliure
Imbalance
Imbalance
Imbalance
-10000
-8000
-6000
-4000
-2000
0
2000
4000
40000
45000
50000
55000
60000
65000
70000
00:30
02:00
03:30
05:00
06:30
08:00
09:30
11:00
12:30
14:00
15:30
17:00
18:30
20:00
21:30
23:00
Forecast error [MW]
Load [MW]
France (RTE) - 03/11/2009
DA forecast error
Load realisation
DA forecast

16. www.florence-school.eu
Temps réel
A sequence… of energy market positionS adjustements… through timely step
16
Gate closure
Balancing and
imbalance settlement
day-ahead market
Intraday
markets
T-~24h
T-~3h
SP2
SP2
SP3
SP2
SP1
SP2
Contractual position /
Nomination
SP1
SP3
SP1
SP3
SP1
SP3
Volume (MWh)
Settlement periods
Settlement periods
Settlement periods
Volume (MWh)
Volume (MWh)
Settlement periods
Positive imbalance
Imbalance
(ex. net buyer)
Production / Consumption metering
Negative imbalance
Transactions between market players
(with or without market intermediaries)
Transactions with the SO
(balancing bid/offers & insuring
imbalance settlement)
Time

17. www.florence-school.eu
Day-ahead markets organized as “Power Exchanges” (multilateral trade)
17

18. www.florence-school.eu
Intraday markets (organized -or not)
•The intraday markets can be used:
–Purchase/sale of quantities that have not been executed during the Day Ahead market
–Unplanned maintenance after the DA market
–Flexible tool to trade closer to real time
–Arbitrage with neighboring countries
18

19. www.florence-school.eu
Real-time markets: always organized by the “System
Operator” (to “balancing” the whole energy system)
Imbalance settlement pricing rule: one or two prices?
0
20
40
60
80
100
120
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Imbalance price [€/MWh]
0
10
20
30
40
50
60
Diff. imbalance prices [€/MWh]
Diff. imbalance prices BE Negative imbalance price BE Positive imbalance price BE
e.g. Belgian positive versus negative
imbalance prices

20. www.florence-school.eu
What does mean “coupling”countries’markets? What do we do? Look at “Day Ahead” horizon…
20
Intraday
market
(energy B)
Balancing
Mechanism
(energy B)
Intraday
Markets
(energy A)
Balancing
Mechanism
(energy A)
Country B
Country A
Day ahead
Market
(energy B)
Day ahead
Market
(energy A)
Day ahead
Market
(transmission A-B)
Intraday
market
(transmission A-B)
Interconnection
capacity
Time
Space
Balancing
mechanism
(transmission A-B)

21. www.florence-school.eu
What’s outcome from coupling market zones?
•Outcome from coupling market zones
–Efficient use of Gen. resources (energy cost; system flex.)
–Uncorrelated demands
–Uncorrelated renewables
Also >> Security of supply
Also <</>>Market power
21
Day ahead
Market
(energy B)
Day ahead
Market
(energy A)
Day ahead
Market
(transmission A-B)
Country B
Country A

22. www.florence-school.eu
Illustration of market coupling outcome
•Outcome from coupling market zones
–Efficient use of resources
–Uncorrelated demand
–Uncorrelated renewables
22
Source: Menager (2002)

23. www.florence-school.eu
But… actual countries’ market coupling is limited by transmission capacity availability…
•We may have to split the EU into several market zones
–when transmission capacity reaches security limit (i.e. there is a congestion)
•Transmission becomes a “too” scarce resource
•Hence a coordinated method of cross-border congestion management helps to operate softly coupling & decoupling of power market zones
23

24. www.florence-school.eu
Alternative regulation for coupling & decoupling EU power markets
•Explicit grid auctioning
–Separate markets for energy & cross border transmission capacity
–Coordination of these two markets depends on individual ability of market players
•Implicit grid auctioning (market coupling or splitting)
–“Smart” coordination of market borders done by single central algorithm
24
Day-ahead Market (energy B)
Day-ahead
Market
(energy A)
Day-ahead
Market
(transmission A-B)
Country B
Country A
Day-ahead
Market
(energy A + B)
Single Matching
Algorithm
takes into
account limited
capacity A-B
Explicit auctions
Implicit auctions

25. www.florence-school.eu
-Perfect- coupling… and decoupling
25
Country B
Country A
Energy Price Difference (A – B)
0
Price A > Price B
Price B > Price A
Use of the cross- border capacity
From A to B
From B to A

26. www.florence-school.eu
Reality of explicit auctioning for crossing borders between France & Spain)
26
Country B
Country A

27. www.florence-school.eu
Reality of implicit auctioning for crossing borders between France & Belgium
27
Country B
Country A

28. www.florence-school.eu
Generalising this to a regulatory frame for European internal electricity market
•A single European market? Or a coupling of national markets?
28
Intraday
market
(energy B)
Balancing
Mechanism
(energy B)
Intraday
Markets
(energy A)
Balancing
Mechanism
(energy A)
Country B
Country A
Day ahead Market (energy B)
Day ahead
Market
(energy A)
Day ahead
Market
(transmission A-B)
Intraday
market
(transmission A-B)
Interconnection
capacity
Balancing
mechanism
(transmission A-B)

29. www.florence-school.eu
EU market Integration at Day Ahead horizon
29
Hourly day ahead price convergence by region (source: ACER, 2013)

30. www.florence-school.eu
EU market Integration at Intra-Day horizon
30

31. www.florence-school.eu
EU market Integration at real time horizon
31

32. www.florence-school.eu
To conclude: is the EU Internal Market regulation «au menu» or «à la carte»?

33. www.florence-school.eu
33
Thank you for your attention
Email contact: jean-michel.glachant@eui.eu
Follow me on Twitter: @JMGlachant
Read the Journal I am chief-editor of: EEEP
“Economics of Energy & Environmental Policy”
My web site: http://www.florence-school.eu