Electricity
markets I.
Tereza Stašáková
May 19, 2021
MEBn5012
Lecture outline
1. Introduction to electricity and energy systems
2. Introduction to electricity markets
3. EU legislative framework
4. Market design
Department of International Relations and European Studies
Electricity as a
commodity
Electricity is a specific type of commodity:
◦ It cannot be stored in large quantities in an
economically efficient manner.
◦ It flows through the path of least-resistance in line
within the laws of physics.
◦ Each unit is qualitatively identical (irrespective of the
source).
◦ Its transport is dependent on a fixed network.
◦ It is an essential service for the society.
◦ It is vulnerable.
Unique
characteristics
of the whole
energy system
◦ High capital cost
◦ Long payback period
◦ Economies of scale
◦ Necessity of long-term planning
◦ The bigger the system, the more robust and resilient
it is
◦ Highly regulated sector
All these characteristics of electricity and energy
systems have implications for the way electricity is
traded as well as the whole electricity market’s design.
What is the rationale
behind the electricity
market?
RELIABLE ELECTRICITY AT LEAST COST TO CONSUMERS
BALANCED SYSTEM AND WELL-DESIGNED ELECTRICITY MARKET
✓ Electricity must be generated at the same time as it is consumed
✓ Supply must meet demand
Source:
https://inis.iaea.org/collection/NCLCollectionStore/_Public/42/022/42
022239.pdf
Demand side and supply side
◦ Demand is determined by consumers’ behavior
BUT
◦ There are certain patterns to it.
What are they?
◦ Peak hours x off-peak hours
◦ Week x weekend
◦ Holidays
◦ Type of production
◦ On supply side there are various power
generators
◦ Balanced mix of power sources
◦ System services
◦ Ancillary services
◦ Base load x Peak load
◦ Fixed x variable cost
Transmission System Operator (TSO)
Source: https://oze.tzb-info.cz/akumulace-elektriny/19222-micropt-design-optimalni-
dimenzovani-hybridnich-energetickych-systemu-s-bateriovym-ulozistem
Demand side and supply side
◦ Demand is determined by consumers’ behavior
BUT
◦ There are certain patterns to it.
What could it be?
◦ Peak hours x off-peak hours
◦ Week x weekend
◦ Holidays
◦ Type of production
◦ Season
◦ On supply side there are various power
generators
◦ Balanced mix of power sources
◦ System services
◦ Ancillary services
◦ Base load x Peak load
◦ Fixed x variable cost
Transmission System Operator (TSO)
INTERESTING FACT
Power blackouts in the EU
Power blackout or
power outage is the
loss of the electrical
power network supply
to an end-user.
There are many
causes of power
failures in an
electricity network.
- faults at power stations,
- damage to electric
transmission lines,
substations or other parts of
the distribution system,
- a short circuit,
- cascading failure, etc.
Depending on its
magnitude a power
outage could have
serious consequences
- grid,
- safety of people,
- key infrastructure.
Extremely costly
→
https://www.blackout-
simulator.com/
ITALY
BLACKOUT
2003
• Onetree
• Cascadingeffect
• Impacting56millionpeople
• Causingaround€1.2billion
worthofdamage
What is the difference between the
wholesale and retail market?
RETAIL MARKET
◦ supply to the end-users
◦ regulated prices
◦ consisting of several tariff elements besides
the actual cost of electricity – e.g. market
operator, system services, renewables, and
cogeneration, distribution and transmission
◦ the role of a buyer and a seller usually does
not change
WHOLESALE MARKET
◦ Business to Business (B2B)
◦ end-users usually do not directly operate on
this type of market
◦ wholesale prices are not regulated
◦ energy-only prices reflecting short-run marginal
costs of generation as well as actual demand
and supply.
◦ take or pay principle
◦ the role of a buyer and a seller could change
Trading models
When?
◦ long-term vs. short term (day-ahead, intraday, balancing)
Where?
◦ domestic vs. cross-border (XB) trading
◦ XB can be based on implicit vs. explicit allocation of
capacity
How?
◦ organized (power exchange)
◦ auction
◦ continuous trading
◦ bilateral (OTC, broker)
◦ *Based on the specific trading model and corresponding
timeframe – different types of products
Long-term Day-ahead Intraday Balancing
Domestic
- Bilateral
- PX
Type of trading
Year/Month GCT 12:00 D-1 D Real-time
Timeline
Cross-border
- Explicit auctions
Domestic
- Bilateral
- PX
Cross-border
- Implicit – market coupling
- Explicit auctions
Balancing energy
- Bilateral or via PX
Availability
- bilateral contracts with
providers
XB balancing
- EU platforms
Domestic
- Bilateral
- PX
Cross-border
- Implicit – market coupling
- Explicit auctions
Time-frame
Hedging Price benchmark Optimalisation of position Power balance
Purpose
Market actors
Different roles – same vision
Architects of the market
▪ EU Institutions
▪ Member States
▪ ACER
▪ National regulatory authorities (NRAs)
Builders and managers
▪ TSOs, DSOs
▪ ENTSO-E
▪ NEMOs
▪ NEMO Committee
▪ Common governance structures
Players a.k.a Market
participants
▪ Individual generators/large consumers
▪ Traders and suppliers
▪ Unions and associations
INTERESTING FACT
A Day in the Life of an International
Trader
◦ 6:50 Start of trading on OTC platforms TFS, GFI, 42Fin
◦ 7:30 Start of trading at TGE
◦ 8:00 Start of entering daily trades on OTE and OKTE
◦ 8:30 Publication of daily CBC at CAO
◦ 9:00 End of entering CBC daily orders with CAO
◦ 9:00 Start of trading on PXE, EEX
◦ 9:30 Publication of results of daily CBC auctions at CAO
◦ 10:30 Publication of the results of daily trades on TGE
◦ 11:00 End of day trading on OTE, PXE and OKTE
◦ 11:40 Publication of daily trading results on OTE and OKTE
◦ 13:30 Completion in IS TSO
◦ 13:40 Publication of whether the nomination for crossborder
scheduling was successful
◦ 14:30 Completion of corrections of nominations in IS TSO
in case of discrepancy of nominations for cross-border
transmissions
◦ 15:30 Start of intraday trading. A specific hour of intraday
trading can be closed 2 hours before the start of the given
trading hour
◦ 16:00 End of trading on PSE
◦ 16:30 Termination of trading at TGE
◦ 17:00 End of trading on OTC (brokerage) platforms TFS,
GFI, 42Fin
◦ 17:30 End of trading on EEX
EU legislative framework
First legislative package 1996
Second legislative package 2003
Third legislative package 2009
Fourth legislative package 2016 → Clean Energy Package for all Europeans
Network codes
EU legislative framework
First legislative package 1996
Second legislative package 2003
Third legislative package 2009
Fourth legislative package 2016 → Clean Energy Package for all Europeans
Network codes
Clean Energy Package for all Europeans
◦ Regulation (EU) 2019/943 on the internal market for electricity
◦ It revises the rules and principles of the internal EU electricity market to ensure it is well-functioning, competitive, and undistorted.
◦ It also supports the decarbonisation of the EU’s energy sector and the removal of barriers to cross-border trade in electricity.
◦ Mainly contains rules on the wholesale market and network operation
◦ Directive (EU) 2019/944 on common rules for the internal market for electricity
◦ It outlines rules for the generation, transmission, distribution, supply, and storage of electricity, together with consumer protection
aspects, aiming to create integrated competitive, consumer-centred, flexible, fair, and transparent electricity markets in the EU.
◦ Among other things, it contains rules on retail markets for electricity
◦ Market model:
◦ Market based prices of electricity
◦ Inclusion of new technologies
◦ Stronger position of a consumer, definition of an active consumer
EU legislative framework
First legislative package 1996
Second legislative package 2003
Third legislative package 2009
Fourth legislative package 2016 → Clean Energy Package for all Europeans
Network codes
Network Codes
Network codes are a set of rules drafted by ENTSO-E, with guidance from the Agency for the Cooperation of
Energy Regulators (ACER), to facilitate the harmonisation, integration and efficiency of the European
electricity market.
◦ Network codes/guidelines cover three areas of the electric power sector:
◦ Grid and demand connection
◦ System operation
◦ Market and trading
◦ Market and trading Network Codes
◦ Commission Regulation (EU) 2015/1222 establishing a guideline on capacity allocation and congestion management
(CACM) - effective from 14 August 2015
◦ Commission Regulation (EU) 2016/1719 establishing a guideline on forward capacity allocation (FCA) - effective from
17 October 2016
◦ Commission Regulation (EU) 2017/2195 establishing a guideline on electricity balancing (GLEB) - effective from 18
December 2017
◦ 22.2.2021 - Regulation amending the Electricity Guidelines
Electricity market design
◦ Electricity markets are designed markets
◦ Designed in a regulatory process
◦ Began as a monopoly utility → shifted to a power pool → final
step spot markets
◦ Good electricity market design is important → improvement over
time
How has electricity trading changed?
Centralized generation of electricity
production transmission distribution consumption
Cash flow
Power flow
Liberalized electricity sector
production transmission distribution consumption
Cash flow
Power flow
your production
trader
How has electricity trading changed?
AND WHAT
WOULD IT
LOOKS LIKE
IF IT WAS
NOT
SIMPLIFIED?
Electricity market design
◦ Electricity markets are designed markets
◦ Designed in a regulatory process
◦ Began as a monopoly utility → shifted to a power pool → final
step spot markets
◦ Good electricity market design is important → improvement over
time
◦ Still, electricity market design is far from static as the ongoing
transformation of the electricity industry brings new challenges:
◦ Expansion of RES
◦ Demand response
◦ Distributed generation
◦ Smart homes
◦ Battery storage
New "Market
Design" and
retail
markets
allows:
Better integration of renewables in markets
Better wholesale market arrangements
Facilitate demand response
Ensure adequacy of systems (including capacity)
Closer cooperation of TSOs
Increased level of governance (ENTSOs)
Increased regulatory powers (ACER)
INTERESTING FACT
Solar power and the impact of a solar
eclipse on the electricity markets in
Germany
◦ Date – 20.3.2015, sunny day
◦ The installed capacity of photovoltaics in Germany – 39 000 MW
◦ Last solar eclipse like that – 1999
◦ In 75 minutes the power decreased by 50 %
◦ 2 674 MW fall and 4 111 MW rise in solar PV
→Four biggest German TSOs made a capacity reserve of 3 800 MW.
→According to 50Hertz, the total cost was around 3,5 million euros and the
preparation for this moment took them almost a year.
Source: https://www.cleanenergywire.org/factsheets/volatile-predictable-
forecasting-renewable-power-generation
REShaping Europe's electricity market
design
◦ Major question?
How to adjust to a large share of variable renewable energy sources?
◦ And many others…
Where to get the flexibility from?
How to modify regulations so the system is fair?
How to adjust the market design?
What do you think?
QUESTIONS ?
Thank you for your attention
Contact:
Mgr. Tereza Stašáková
stasakova.t@gmail.com
Sources:
◦ Cramton, P. (2017). Electricity market design. Oxford Review of Economic Policy, Volume 33, Number 4, 2017, pp. 589–
612.
◦ De Vries, L. J., & Verzijlbergh, R. A. (2018). How renewable energy is reshaping Europe’s electricity market design.
Economics of Energy & Environmental Policy, 7(2), 31-49.
◦ European Commission. Clean energy for all Europeans package. Retrieved from:
https://ec.europa.eu/energy/topics/energy-strategy/clean-energy-all-europeans_en
◦ Eur-lex. Retrieved from: https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32017R2195
◦ Eur-lex. Retrieved from: https://eur-lex.europa.eu/legal-
content/EN/TXT/?qid=1588680150117&uri=CELEX:32015R1222
◦ Eur-lex. Retrieved from: https://eur-lex.europa.eu/legal-
content/EN/TXT/?qid=1588680189399&uri=CELEX:32016R1719
◦ Pollitt, M. G. (2019). The European single market in electricity: an economic assessment. Review of Industrial
Organization, 55(1), 63-87.
◦ Svenska Kraftnät (n.d.). The Swedish Electricity Market and the Role of Svenska Kraftnät. Retrieved from:
https://inis.iaea.org/collection/NCLCollectionStore/_Public/42/022/42022239.pdf
◦ Wettengel, J. (2016). Volatile but predictable: Forecasting renewable power generation. Clean Energy Wir. Retrieved from:
https://www.cleanenergywire.org/factsheets/volatile-predictable-forecasting-renewable-power-generation