Fundamentals of Electricity Markets

An overview
Pierre Pinson

Technical University of Denmark

.

DTU Electrical Engineering - Centre for Electric Power and Energy

mail: [email protected] - webpage: www.pierrepinson.com

2 February 2015

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Learning objectives

Through this lecture, additional readings and video links, it is aimed for the students to
be able to:

Have an overview of historical developments of electricity markets

Describe the various players and types of market organization

Describe the actual markets and their purpose

Discuss the new challenges with renewable energy in electricity markets

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The 2nd of January 2015

[source: Ingeniren, 16 January 2015, article online]

Link to Nord Pool map and data

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Outline

Historical perspective

Players and roles

Different types of market organization

The actual markets and their purpose

Final open questions

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Historical perspective

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A historical perspective
1980s

First ideas for liberalization of the electricity sector, and introduction of electricity market concepts in Chile (the Chicago boys)

1990

UK privatizes the electricity supplyed industry (Margaret Tatcher)

- to be followed by other Commonwealth member countries

1991

Beginning of deregulation in Scandinavia... (to be further detailed)

1996
2000-2001

Deregulation in California
California electricity crisis!
In short: shortage of electricity supply, rise in prices, multiple blackouts, state of emergency, bankruptcies, investigation on Enrons
role

[More on the California electricity crisis:

Sweeney JS (2002). The California electricity crisis: Lessons for the future. The Bridge 32(2):2331 (pdf)
Schwartz P (2012). California Energy Crisis. Energy, Society, and the Environment, Cal Poly, US (video - 1200 mins)
Friedman LS (2009). The long and the short of it: Californias electricity crisis. International Journal of Public Policy 4(1-2):431 (pdf, for those really
motivated!) ]
And also... Lecture 8 by Tue V. Jensen!
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Closer to us... A history of Nord Pool

1991
1996
1998
2000

Deregulation of the Norwegian electricity market

Norwegian-Swedish exchange called Nord Pool
Finland and Western Denmark step in
Eastern Denmarks turn to join

2002

Nord Pool Spot established as a new and separate entity

2009
2009

Market coupling between Scandinavia and Germany

Negative price floor accepted

2013

All baltic countries have joined Nord Pool

(Estonia-2010, Lithuania-2012, Latvia-2013)

[More on the history of Nord Pool: NASDAQ OMX - Our history]

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By the way - what is deregulation?

REGULATED

DEREGULATED

Prices are all determined by the regulatory/government bodies:

Prices are determined by invisible hand

of the market

energy prices
transmission and distribution prices

Vertically integrated structure

Horizontal restructuring

Cannot choose supplier

Competition among a set of suppliers

[More on deregulation of electricity markets:

Karan MB, Kazdagli H (2011). The development of energy markets in Europe. In: Financial Aspects in Energy (Dorsman et al. eds.), Springer (pdf)
Joskow PL (2008). Lessons learned from electricity market liberalization. The Energy Journal 29(2):9-42 (pdf)
Joskow PL et al. (2006). Regulation and deregulation of energy sectors. MIT video collection (video - 1h) ]
And for the renewables-related aspects... Lecture 4 by Lena Kitzing!
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Players and their role

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Who are we talking about?

Can you list all the actors...

involved in power system operations?
and that interact with the electricity market?

[For the case of Denmark, a description of the actors is available at:

http://www.energinet.dk/EN/El/Engrosmarked/Viden-om-engrosmarkedet/Sider/Roller.aspx]

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Who are we talking about?

Those who operate the power grid(s):

TSO - Transmission System Operator

The TSO operates the transmission
assets and is responsible for the power
balance on the transmission system.
For the exmaple case of Denmark, it
is Energinet.dk

Disco: Distribution company / Disribution System Operator (DSO)

The DSO operates the distribution grid, and often additionally acts as a retailer.
Examples in Denmark include, e.g., DONG Energy, Syd Energi, SEAS-NV, etc.

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Who are we talking about?

Those who sell and buy:

Genco - Generating company
The Genco owns production assets (from single generator to a portfolio), whose
generation is offered through the electricity market. Ex: DONG Energy, Vattenfall,
etc.
Retailer
The Retailer buys electricity en gros from the wholesale electricity market, to then
be sold to the end-consumers. Ex: DONG Energy, El-forbundet, etc.
Consumers (large and small)
Those eventually use the electricity for any purpose (from watching TV to heating
to industrial production processes). There is a difference between small and large
consumers, since the latter ones may be allowed to directly participate in the
wholesale electricity market.
[To be noted: DONG Energy is what we call an Electric Utility]
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Who are we talking about?

Those who rule and operate the game:

Regulator
The regulator is responsible for the market design and its specific rules. It also
monitors the market in order to spot misbehaviour in electricity markets (collusion,
abuse of market power, etc.). Exs: The Danish Energy Regulatory Authority
DERA, CRE in France, Ofgem in the UK, etc.
The Market Operator
The Market Operator organizes and operates the market place. This may include the
definition of bid products and bid forms, set up and maintenance of the trading
platform, daily matching of supply and demand offers, etc. Ex: Nord Pool, APX,
EEX, PowerNext, etc.

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Different types of market organization

Please also read

D. Kirschen, G. Strbac (2004). Fundamentals of Power System Economics, Chapter 1.

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Organization: Monopoly

[source: Kirschen and Strbac (2004). Fundamentals of Power System Economics]

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Organization: Purchasing agent

[source: Kirschen and Strbac (2004). Fundamentals of Power System Economics]

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Organization: Wholesale market

[source: Kirschen and Strbac (2004). Fundamentals of Power System Economics]

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Organization: Retail market

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It is only about ENERGY

In the markets we will be analysing, it is all about ENERGY!
[Note: A power system engineer would say it is all about power since one actually aim at delivering/consuming
a certain level of power over a market time unit]

In a more general manner, one may also consider:

Capacity markets: Auctions for the system operator to ensure that sufficient
generation capacity is present for reliable system operation in future years and at
competitive prices
Ancillary services, i.e., any type of service that supports power system operations,
and directly bought by the system operator, e.g.
Primary reserves
Secondary reserves, LFC (Load Frequency Control)
Black-start capability
Manual reserves (also called tertiary)
Short-circuit power, reactive reserves and voltage control

To be touched a little bit with Tiago Soares through Lecture 6...

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The actual markets and their purpose

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Electricity as a special commodity

Why is electricity so special?

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Electricity as a special commodity

Why is electricity so special?

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Electricity as a special commodity

Why is electricity so special?

There must always be a balance between generation and consumption

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Electricity as a special commodity

Why is electricity so special?

There must always be a balance between generation and consumption

Transportation and distribution is performed on a power network, with its specific

physical rules

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Electricity as a special commodity

Why is electricity so special?

There must always be a balance between generation and consumption

Transportation and distribution is performed on a power network, with its specific

physical rules

Storage is uneconomical (as of today)

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Electricity as a special commodity

Why is electricity so special?

There must always be a balance between generation and consumption

Transportation and distribution is performed on a power network, with its specific

physical rules

Storage is uneconomical (as of today)

A large part of the electric demand is of must-serve nature (residential, hospitals,

etc.)

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Electricity as a special commodity

Why is electricity so special?

There must always be a balance between generation and consumption

Transportation and distribution is performed on a power network, with its specific

physical rules

Storage is uneconomical (as of today)

A large part of the electric demand is of must-serve nature (residential, hospitals,

etc.)

The final consumers cannot really differentiate the origin of the product (as well as
its quality and nature)

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The importance of the network

This is a simplified grid for the first synchronous zone of the Europan Transmission
Network (app. 1500 lines only)... The real one has more than 32.000 lines!
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The importance of FLOWS on the network

[courtesy of Tue V. Jensen, DTU Elektro]

The same grid with power flowing as a function of renewable energy generation and
electric power consumption, in a future renewable-based power system....
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Markets and their purpose

Futures markets:
It consists in financial contracts with time horizon up to six years (with daily, weekly,
monthly, quarterly and annual contracts). They are used for price hedging and risk
management. Ex: Nasdaq OMX Commodities for Scandinavia

Day-ahead (forward):
Maybe the most important market, where everyday supply and offer meet for every time
unit over the following day. Ex: Nord Pool Elspot for Scandinavia

Intra-day (adjustement):
It consists in a continuous trading platform, between day-ahead and balancing, allowing to
correct after new information is revealed (like plant outages or changes in wind power
generation). Ex: Nord Pool Elbas for Scandinavia (and further)

Balancing (regulation):
A market close to real-time operation, where the system operator is the main buyer/seller
(depending upon situation) of energy to ensure power system balance during operation. It
also acts as a penalization mechanism for those not respecting their supply/offer contracts.
Ex: Energinet.dk in Western and Eastern Denmark
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The timeline

You will hear enough about it in the coming lectures...

Just remember that:

our focus is on OPERATIONS (i.e. from day-ahead to balancing market)
for planning and regulation aspects, take the course 42003 (again, possibly), or
ask for special courses
if interested in futures markets, then you must be interested in financial
engineering... We have good friends in DTU Management Engineering running
courses on that topic

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The European picture

[source: Nord Pool A/S]

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Exciting time: The Internal Energy Market

Grid operators and power exchanges from 14 EU Member

States plus Norway inaugurated on 4 February 2014 a pilot
project for joint electricity trading, so-called day-ahead market
coupling

Overall objectives:
harmonize European electricity markets and strengthen competition
improve liquidity, transparency and efficiency in the power markets across Europe
social welfare optimisation

In practice:
flow-based coupling of day-ahead markets
standardization of (also new) products for intra-day markets and new matching
algorithms
target model for balancing? co-existence with new intra-day solutions?
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Final open questions

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Renewables providing system services in a market environment

Should renewables (and demand) pay for the power fluctuations they induce?
What is an optimal market design (and offering strategies) if renewables are to
provide system services?
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Reveal the true cost of uncertainty

The narrative fallacy: Do we really believe we can offer renewables deterministically

with lead times of 12-36 hours ahead?
Why not adapting market designs to reveal and accommodate the true cost of
renewables uncertainty?

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A few important (final) questions

Can we continuously integrate more renewable energy generation into

such electricity markets?

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A few important (final) questions

Can we continuously integrate more renewable energy generation into

such electricity markets?

Are they fundamental changes to consider?

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A few important (final) questions

Can we continuously integrate more renewable energy generation into

such electricity markets?

Are they fundamental changes to consider?

How can we (i.e., engineers, scientists, young and motivated people)

contribute to that?

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A few important (final) questions

Can we continuously integrate more renewable energy generation into

such electricity markets?

Are they fundamental changes to consider?

How can we (i.e., engineers, scientists, young and motivated people)

contribute to that?

Unfortunately, these are research problems than cannot be covered in this course...
except for the sneak preview lectures on 11 May 2015
Besides, if you are interested, do not hesitate to ask!
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Questions / discussion

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Thanks for your attention! - Contact: [email protected] - web: pierrepinson.com

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For you to do...

Either this afternoon, or before the next session on Monday 9 February 2015
Readings:
D. Kirschen, G. Strbac (2004). Fundamentals of Power System Economics, Chapter 1: Introduction
J.M. Morales et al. (2014). Integrating Renewables in Electricity Markets, Chapter 1: Introduction
R. Schleicher-Tappeser (2012) How renewables will change electricity markets in the next five years.
Energy Policy 48: 6475 (pdf)

Homework (suggested exercise):

Focus on one country (could be Denmark, or your country of origin)
Investigate and determine the context of power system operation (i.e., who are the actors? is that a
liberalized market? can customer choose their electricity providers? how are renewables considered in this
mechanism? etc.)
Find and analyse literature about the integration of renewables in such environment

Extra readings (if you want to prepare for next session):

D. Kirschen, G. Strbac (2004). Fundamentals of Power System Economics, Chapter 2: Basic concepts
from economics (especially for those who did not attend 42003 - Energy Economics, Markets and
Policies)
T. Boomsma, P. Meibom, N. Juul (20??). Mathematical programming models for energy system analysis:
An introduction. From 42002 - Modelling and Analysis fo Energy Systems using Operations Research.
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