Electricity Wholesale Markets findings - Europa
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TITRETITRELjubljana – 21 September 2016
The 5th Annual Market Monitoring Report Electricity Wholesale Markets findings
Marko Bregar Christophe Gence-Creux
Martin Godfried Rafael Muruais
Agenda
2
The Market Monitoring Report provides an in-depth year-on-year analysis of the remaining barriers to the well-functioning of the IEM and provides recommendations
Agenda
3
.Developments
.From physical to commercial CB capacity. Amount of CB capacity available to the market. Capacity calculation. Unscheduled flows
.Wholesale markets performance and use of the available cross-border capacity. Forward markets . Day-ahead (DA) markets. Intraday (ID) markets. Balancing markets.Conclusions
Content
Agenda
4
.Developments
.From physical to commercial CB capacity. Amount of CB capacity available to the market. Capacity calculation. Unscheduled flows
.Wholesale markets performance and use of the available cross-border capacity. Forward markets . DA markets. ID markets. Balancing markets.Conclusions
Content
Developments - 1
5
The decreasing trend of wholesale prices continued in 2015 although this trend seems to be ending in some markets partly due to demand increase in many markets – EU demand increased by 2.1% in 2015
Evolution of DA wholesale electricity prices in different European power exchanges – 2008–2015
(euros/MWh)
* Refer to 2008 prices.
Source: EMOS and Platts (2016). Note: For CZ and HU 2008 data are missing.
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30
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70
80
90
20
08
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2014
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2012
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NORDIC+ BALTIC
CZ DE/AT/LUX FR NL HU BE ES-PT IT GB
eu
ros/M
Wh
Developments - 2
6
Against ‘predictions’, the increasing frequency of overall low-price periods is not accompanied by an increased frequency of price spikes
Hourly DA prices in the Netherlands - December 2006, 2007, 2014 and 2015 (euros/MWh)
Wholesale DA price duration curve in France -2006, 2007, 2014 and 2015 (euros/MWh)
2006 - 2007 2014 - 2015
Source: EMOS and Platts (2016).
Developments - 2
7
Against ‘predictions’, the increasing frequency of overall low-price periods is not accompanied by an increased frequency of price spikes
Hourly DA prices in the Netherlands - December 2006, 2007, 2014 and 2015 (euros/MWh)
Wholesale DA price duration curve in France -2006, 2007, 2014 and 2015 (euros/MWh)
2006 - 2007 2014 - 2015
Source: EMOS and Platts (2016).
8
Why do we see low price levels?
i. Market failure (sometimes argued)
…or just
ii. Markets are reflecting fundamentals
Developments - 3
9
The report shows that markets are reflecting an excess of supply (e.g. overall margin in Europe is 13%, 2-3 times the standard), which explains the lack of price spikes
Evolution of the aggregated installed conventional generation capacity and aggregated energy demand
(indexed to 2005 = 100) and the frequency of price spikes (number of hours per year) in the Netherlands
and Belgium – 2007 to 2015
Developments - 4
Source: Eurostat, ENTSO-E (2016).
The Netherlands
80
85
90
95
100
105
110
115
120
125
130
0
20
40
60
80
100
120
140
160
180
2007 2008 2009 2010 2011 2012 2013 2014 2015
Ind
exe
d c
ap
acity
an
d d
em
an
d (2
00
7=
10
0)F
req
ue
ncy o
f p
rice
sp
ike
s (
nu
mb
er
of
ho
urs
)
Price Spikes Demand Installed conventional generation
Belgium
80
85
90
95
100
105
110
115
120
125
130
0
20
40
60
80
100
120
140
160
180
2007 2008 2009 2010 2011 2012 2013 2014 2015
Ind
exe
d c
ap
acity
an
d d
em
an
d (2
00
7=
10
0)
Fre
qu
en
cy o
f p
rice
sp
ike
s (
nu
mb
er
of
ho
urs
)
Price Spikes Demand Installed conventional generation
10
An increasing part of the costs for producing electricity are not recovered through wholesale market prices but through increasing charges to end-consumers to remunerate CMs*
Charges to end-consumers to fund capacity
payments and the costs associated with re-
dispatching actions and system operation in Spain
– 2008 to 2015 (euros/MWh)
Developments - 6
Spain
Source: CNMC (2016). * This is in addition to other increasing charges to cover redispatching costs, balancing reserves
and renewable energy resources.
0
2
4
6
8
10
12
14
2008 2009 2010 2011 2012 2013 2014 2015
eu
ros/M
Wh
Capacity mechanisms+interruptibility
System operation (mainly balancing reserves procurement)
Redispatching
0
2
4
6
8
10
12
14
16
18
2008 2009 2010 2011 2012 2013 2014 2015euro
s/M
Wh
Italy
Aggregated costs of redispatching, balancing,
capacity payments charged to household
consumers in Italy – 2008 to 2015 (euros/MWh)
Developments - 5
Uncoordinated development of capacity mechanisms (CMs)
Source: NRAs (2016) and European Commission’s report on the sector inquiry into CMs (2016).
State of play – September 2016
Strategic reserves
(since 2004 ) - gradual phase-
out postponed to 2025
New Capacity Mechanism
under assessment by DG
COMP
(Capacity payments from
2006 to 2014)
Capacity payments (since
2008) – Tendering for capacity
considered but no plans
No CM (energy only market)
CM operational
Reliability options
(The date for the first
auction has not been set.
First delivery of contracted
capacity is expected in
2020)
Strategic reserve
(from 2016 on, for 2 years,
with possible extension
for 2 more years)
CM proposed/under consideration
Capacity requirements
(certification started 1 April
2015)
Capacity auction
(since 2014 - first delivery in
2018/19)
Capacity payments
(since 2007)
Considering reliability options
Capacity payments (Since
2010 partially suspended
between May 2011 and
December 2014)
Strategic reserves (since
2007)
Strategic reserves
(Envisaged in 2017)
Strategic reserves
(since 1 November 2014)
Strategic reserves
Tender
(since November 2013)
12
Developments - 7
National solutions tend to address a missing money problem but these uncoordinated policies are creating a vicious circle away from an efficient IEM design
Low wholesale electricity
prices
Lack of investments
and adequacy concerns
Perceived problem -Missingmoney
National solutions-e.g. CMs
• National markets are interdependent
• National measures impact also
adjacent markets
• How efficient and sustainable will
these measures be?
Better to act on a EU wide level
• Fully integration of the IEM
• Make markets work
• Better use of existing cross-border
capacities
=> see next slides…
Agenda
13
.Developments
.From physical to commercial CB capacity. Amount of CB capacity available to the market. Capacity calculation. Unscheduled flows
.Wholesale markets performance and use of the available cross-border capacity. Forward markets . DA markets. ID markets. Balancing markets.Conclusions
Content
Tradable capacity - 1
14
Despite investments in the transmission networks and some improvements in capacity calculation methods, the volume of tradable XB capacities has remained relatively limited
NTC averages of both directions on cross-zonal borders, aggregated per region –
2010–2015 (MW)
Source: Vulcanus, ENTSO-E, Joint Allocation Office (JAO) and Nord Pool Spot (2016).
Tradable capacity - 2
15
In Europe on average 84% of HVDC and only 28% of HVAC interconnector’s physical capacity is used for trading
Ratio between tradable capacities and aggregated thermal capacity of
interconnectors – 2015 (%, MW)
Source: Vulcanus, ENTSO-E YS&AR (2014), EW Template (2016), Nord Pool Spot, and ACER calculations.
Note: HVDC refers to high voltage direct current and HVAC refers to high voltage alternating current.
Tradable capacity - 3
16
Limitations of cross-zonal capacity
In general, physical cross-zonal capacity can be limited during the capacity
calculation process, beyond what is needed for the application of N-1
criterion and a reasonable level of reliability margin, for the following three
reasons to:
1. accommodate planned grid maintenance works during a certain
period;
2. accommodate flows resulting from internal exchanges (i.e.
Loop Flows) and flows resulting from non-coordinated capacity
allocation on other borders (i.e. Unscheduled Allocated Flows); and
3. relieve congestion inside a bidding zone (control area).
Empirically disentangling these reasons would require detailed data, which
are currently not available.
Tradable cross-border capacity
17
In more detail… a few examples
Ratio between tradable capacities and aggregated thermal capacity of interconnectors –
2015 (%, MW)
Source: Vulcanus, ENTSO-E YS&AR (2014), EW Template (2016), Nord Pool Spot, and ACER calculations.
Capacity calculation
18
Coordination in capacity calculation (CC) can be further improvedBilateral or partly coordinated CC method is applied on many borders, on
some borders, CC is not applied in a specific timeframe
Regional performance based on fulfilment of capacity calculations requirements
– 2014-2015 (%)
Source: Data provided by NRAs through the EW template (2016) and ACER calculations.
Unscheduled flows (UFs)
19
UFs increased in the three regions by 14%, in CEE by 25% Estimated loss of social welfare due to UFs increased to 1,137 million euro
Absolute aggregate sum of UFs for three regions and estimated welfare loss -
2011–2015 (TWh, euros)
Source: Vulcanus, EMOS, ENTSO-E (2015) and ACER calculations.
0
200
400
600
800
1,000
1,200
0
30
60
90
120
150
180
2011 2012 2013 2014 2015
Welfare
loss (
mill
ion e
uro
s)
TW
h
UFs CWE UFs CSE UFs CEE Total WL
Agenda
20
.Developments
.From physical to commercial CB capacity. Amount of CB capacity available to the market. Capacity calculation. Unscheduled flows
.Wholesale markets performance and use of the available cross-border capacity. Forward markets . DA markets. ID markets. Balancing markets.Conclusions
Content
DA IDLT BM
IEMUtilisation of the Transmission Network
21
Context and focus of the monitor for wholesale market integration
Efficiency
Capacity
Calculation
Capacity
Allocation
Germany Nordic France UK Italy Netherlands Spain
2014 2015
22
Forward markets are essential for market participants for example in retail competition. But liquidity in forward markets is still low in most countries
National forward markets - Liquidity
Churn factors in a selection of European forward markets – 2014 and 2015
High or moderate liquidity
(churn factor > 3)
Modest or low liquidity
(churn factor < 3)
Source: "European Power Trading 2016" report, © Prospex Research Ltd, March 2016. Note: for copy right reasons
the vertical axis numbering is not shown.
Churn
facto
r
23
Given the low liquidity in national markets access to efficiently priced cross-border hedging tools is key
Cross-border hedging tools
Analysis done on prices of cross-border hedging tools:
Consistency between price of the cross-border hedging tool (markets A to B) and the underlying market price differentials (A-B price spreads). Main indicators: Risk premia
» Large ‘negative’ risk premia: Decrease congestion rents (TRs) and increase network tariffs» Large ‘positive’ risk premia: May be a barrier for non-incumbent suppliers
Main findings:» TRs: Price formation of TRs is impacted by following factors, which will be partly
addressed with the upcoming Forward Capacity Allocation Guideline
• Lack of DA market coupling• Curtailments and weak firmness regimes• Unavailability (often called “maintenance”) periods• Other local issues (e.g. ‘green’ levies or ex-post ‘fees’)Italian borders recorded the largest ‘negative’ risk premia
» Financial markets (e.g. contract for differences, so-called EPADs in Nordic market)
• (Potentially) limited liquidity contributing to high risk premia in some BZs (e.g. DK_E)
24
Efficient use of CB capacity
Efficient use of interconnectors in the different timeframes in 2015
The use of cross-zonal capacity in the DA timeframe is close to optimal, but in the ID and balancing market timeframe it can be significantly improved
Source: ENTSO-E, NRAs, EMOS and Vulcanus (2016).
Note: * ID and Balancing values are based on a selection of EU borders.
25
Currently 84% of all DA CB capacity is used in the right direction. The remainder 16% can be achieved with the extension of MC to all Europe
Percentage of available capacity (NTC) used in the ‘right direction’ in the presence of a
significant price differential, all EU electricity borders – 2010 (4Q)–2015 (%)
DA markets-progress of MC
DE-CWE (Nov 10)
HU- (CZ-SK)
Sept 12
All Baltic BZs (2010-2013)NWE (GB-
FR) Feb 14
IT-FR, IT-AT
(Feb 2015)
ES-FR May 14
RO (HU) Nov 14
Source: ENTSO-E, NRAs, Vulcanus (2016) and ACER calculations.
0%
10%
20%
30%
40%
50%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2015
0%
10%
20%
30%
40%
Jan
Ma
r
May
Jul
Sep
No
v
Jan
Mar
May
Jul
Sep
Nov
Jan
Mar
Ma
y
Jul
Sep
Nov
2013 2014 2015
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MC and FB MC continued to be contributing factors to price convergence
SWE evolution of DA price convergence –
2013 to 2015 (% of hours)
DA markets-price convergence
ES-FR coupled on
13 May 2014
Launch of FBMC on
21 May 2015
Source: EMOS, Platts and ACER calculations (2016).
CWE evolution of DA price convergence –
2015 (% of hours)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
ES PT IT GB DE/AT/LU CH BE NORDIC+ BALTIC
NL FR
2011 2012 2013 2014 2015
27
The increasing importance of ID markets is reflecting in growing liquidity in ID markets (mainly in the German and neighbouring markets)
ID traded volumes as a percentage of demand in a selection of markets – 2011 to 2015 (%)
ID markets– Liquidity
Source: Power exchanges and the CEER National Indicators Database (2016).
Following aspects contributed to increase liquidity in Germany in recent years
• Increasing the share of RES generation units subject to balancing responsibility (although 43% still remain exempted)
• Success of 15-minute products (including auctions) and its extension to CH and AT
• Measures to avoid that imbalance charges are set below DA-ID prices (although this does not ensure cost reflectivity fully)
28
Currently, ID prices are providing limited incentives to invest in flexible resources or to encourage demand response. The flattening of the ID curve is reflecting sufficient flexible capacity and…
Average ID hourly prices in Germany – 2007 and 2015 (euros/MWh)
ID Prices
Source: EPEX and ACER calculations (2016). Note: In 2007, there were market time units with no ID trades, hence
less observations are plotted.
0
20
40
60
80
100
120
140
14
29
85
71
28
51
71
32
14
12
56
92
99
73
42
53
85
34
28
14
70
95
13
75
56
55
99
36
42
16
84
97
27
77
70
58
13
38
56
18
98
994
17
98
45
10
273
10
701
11
129
11
557
11
985
12
413
12
841
13
269
13
697
14
125
14
553
14
981
15
409
15
837
euoro
s/M
Wh
0
20
40
60
80
100
120
140
0297
594
891
1188
1485
1782
2079
2376
2673
2970
3267
3564
3861
4158
4455
4752
5049
5346
5643
5940
6237
6534
6831
7128
7425
7722
8019
8316
8613
8910
9207
9504
9801
10098
10395
10692
10989
11286
11583
11880
12177
12474
12771
13068
13365
13662
13959
14256
14553
14850
15147
eu
ros/M
Wh
29
Balancing markets-Scarcity value
…this is also the consequence of limited incentives provided by imbalance charges, due the insufficiently applied cost-reflectivity
Great BritainBalancing energy prices are pay as bid and
the procurement of capacity sets (partly) the
price of balancing energy activation.
The NetherlandsImbalance charges based on marginal
pricing and the procurement of
capacity does not set the energy price
Imbalance charges (short BRPs), DA and ID prices at times of ‘shortage’ (negative system imbalance)
in two European markets in 2015 (euros/MWh)
DA prices Imbalance charges (short BRPs) ID pricesDA prices Imbalance charges (short BRPs) ID pricesDA prices Imbalance charges (short BRPs) ID pricesImbalance prices (short BRPs)
Scarcity periods: Imbalance
charges below DA prices!!!!
Source: NRAs, EMOS, Platts (2016) and ACER calculations.
Relatively lower
incentives to balance in
the DA or ID markets
Relatively higher
incentives to balance in
the DA or ID markets
30
Balancing markets-Overall costs
…further balancing energy prices (hence imbalance charges) are often dampened by the procurement of capacity, which still represents the largest share of the overall costs of balancing
Overall costs of balancing (capacity and energy) and imbalance charges
over national electricity demand in a selection of European markets – 2015
(euros/MWh)
Source: Data provided by NRAs through the EW template (2016) and ACER calculations.
0
1
2
3
4
5
6
eu
ros/M
Wh
Energy (Capacity procurement costs-FCR) FCR procurement costs
31
Balancing markets-CB exchange
Exchanges of balancing services in the EU is still limited. The main exceptions are France (balancing energy), the increased exchange of FCR (reserves) and overall imbalance netting which is successfully applied across more than one third of EU borders
Cross-border exchange of balancing services: balancing services activated abroad as a
percentage of national needs – 2015 (%)
Balancing energy Imbalance nettingBalancing capacity
Source: Data provided by NRAs through the EW template (2016) and ACER calculations.
Agenda
32
.Developments
.From physical to commercial CB capacity. Amount of CB capacity available to the market. Capacity calculation. Unscheduled flows
.Wholesale markets performance and use of the available cross-border capacity. Forward markets . DA markets. ID markets. Balancing markets.Conclusions
Content
33
. In the Agency’s view the declining prices and the declining presence
of scarcity prices in most markets since 2008 are the the consequence
of a surplus of generation capacity, rather than a market failure.
. Simultaneously, a number of electricity system services (CMs,
redispatching or procurement of balancing capacity) are increasingly
remunerated outside the electricity wholesale price. This inhibits the
market to render a price that reflects the true value of the electricity
supplied.
. The relative low ratio between tradable capacity and thermal capacity
suggests that cross-border capacity is reduced beyond the N-1 criteria, in
order to address either internal congestions or unscheduled flows. This
leads to a potential loss of social welfare.
. Cross-zonal capacity calculation methods could be significantly
improved in terms of transparency, coordination and efficiency.
Conclusions
34
. Liquidity in forward markets is in general limited, which emphasises the
importance of efficient cross-border hedging tools. There is room for
improvement in the price formation of TRs and a need to further monitor
the liquidity of financial cross-border hedging tools. Both are crucial to
increase retail markets competition.
. The overall use of cross-zonal capacity in the DA timeframe is close to
optimal, but it can be significantly improved in the ID and balancing
market timeframe.
. There is a close interaction between liquidity in ID markets and the design
of balancing markets, in particular as regards the presence of exemptions for
balancing responsibility and the application of cost-reflectivity to imbalance
charges.
. There is a risk that a sub-optimal procurement of balancing capacity
inhibits balancing energy prices from reflecting the real-time conditions of the
system. This crucial to ensure that both generation and demand see the
benefits to respond to the immediate needs of the system.
Conclusions
35
Recommendations on wholesale electricity markets will bepublished for all Volumes* in the Main Document on 9November 2016
Recommendations
* That is, Electricity Wholesale Markets, Gas Wholesale Markets, Retail Markets and Consumer Empowerment and
Protection.
Thank you for your
attention
Thank you
for your attention
36
www.acer.europa.eu
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