Design of the energy spot market in the National Electricity Market

Short Course on Electricity Industry Restructuring © CEEM 2007

Design of the energy spot market National Electricity Market© CEEM 2007 1

© CEEM 2007

Design of the energy spot market in theNational Electricity Market

2Design of the energy spot market in the National Electricity Market © CEEM 2007

Electricity market modelsGross pool (eg NEM):– Spot market sets short-term (5 minute) operating

levels for dispatchable resources

– Temporal & location risk managed collectively:Ancillary services, spot market, PASA, SOO

Net pool (eg UK NETA):– Long term & location risk managed bilaterally

Network not modelled in trading arrangements

Capacity markets commonly used

– Short-term operational risk managed collectively:System operator given only one day’s notice ofbilateral trades - dispatches resources consistently




National Electricity Law: Overall objective

for the National Electricity Market (NEM)NEL Section 7:

– The national electricity market objective is to promote

efficient investment in, and efficient use of, electricity

services for the long term interests of consumers of

electricity with respect to price, quality, reliability and

security of supply of electricity and the reliability,

safety and security of the national electricity system

A difficulty with this objective:

– Ambiguity of the wording with respect to interpretationof terms & trade-offs between sub-objectives


Scope of the NEM

• Queensland• New South Wales & ACT• Victoria• South Australia• Tasmania (Basslink in 2006)

NEM regions are indicated,and their boundaries need notbe on state borders (e.g. tworegions in NSW)




Features of National Electricity Rules (NER)

NEM covers all participating states:

– A multi-region pool with intra-regional loss factors

– Ancillary services, spot market & projections

– Auctions of inter-regional settlement residues

– Operated by NEMMCO (owned by states)

Compulsory participants in NEM:

– All dispatchable generators & links > 30 MW

– Network service providers & retailers

Contestable consumers may buy from NEM


NER categories of generators

Either market, non-market or exempt

– Market implies participate in NEM spot market

Can then also sell ancillary services

– Non-market or exempt: sell to local retailer

Either scheduled or non scheduled:

– Scheduled implies centrally dispatched:

Must then participate in the NEM processes of bidding, pre-dispatch & PASA

Default category for generation projects > 30 MW

Not applied yet for “intermittent” generation, eg wind




Electricity industry structure in SE Australia

Gen 1

Gen 2

Gen X

GenerationSector:-

largegenerators

Gen 3

TransmissionSector

NSWVictoria

South Aust.Queensland& Tasmania

Electricity

Financial instrument& REC (emission) trading

Distributor 1

Distributor 2

Distributor Y

Distributionsector

Electricity

Multi-regionNational

Electricity(spot) Market

(NEM)

Intentionsoffers &

payments

Retailer Z

Retailer 2

Retailer 1

Retailsector

Intentionsbids &

payments

Tx network

pricing

Tx network

pricingNetworkaccess End-use

Equipment&

DistributedresourcesElectricity

End-usesector

Contestableend-users

FranchiseEnd-users

RetailMarkets

Embeddedgenerators


Spot market offers & bids

Generators, retailers & direct end-users:

– Price-quantity curve (sell or buy) for each half hour:

10 daily prices, quantities changeable until dispatch

– 5-minute demand forecast is bid at $10,000/MW (VoLL)

Dispatchable links between regions:

– Flow offer curve based on price difference

Bids & offers ranked to give dispatch stack:

– Considering loss factors & inter-tie constraints

– Operating levels are set for all dispatchable resources

– 5 minute price(s) set by marginal dispatchable resource:

Half-hourly averages are calculated in ‘real time’




Simplified generator offer for aparticular dispatch interval (NEMMCO, 2005)


Single node spot market (all offers & bids)

MW

$/MW

Aggregate demand curve DAggregategeneration

curve G

p

consumers’surplus

producers’surplus

‘local monopoly’price band

onemarginalprice ‘p’

VOLL & forecast if no demand bidding




Spot price formation - central dispatch

Maximise value of spot market trading, subject to:

– Dispatch offers & bids; ancillary service offers

– Constraints due to availability & commitment

– Non-scheduled load requirements in each region

– Power system security requirements

– Intra-regional network constraints & losses

– Inter-regional network constraints & losses

– Constraints consistent with registered bid & offer data

– Current levels of dispatch

– Ancillary service requirements

– Pro-rata loading of tied bid and/or offer data

– Minimising the impact of a direction or reserve contract dispatch


Region boundaries & inter-connectors

Regions boundaries selected so that:

– Transmission constraints are rare within a region

– Frequently-occurring constraints are placed on regionboundaries

Region boundaries to be reset as required:

– Whenever a constraint occurs > 50 hours/year

An unregulated inter-connector is allowed if:

– Dispatchable so that it can bid like a generator:

‘Directlink’ the first (operating since July 2000):

– 180 MW DC link between NSW & Queensland regions

– Now converted to regulated link




NEM regions(NEMMCO SOO, 2006)


16 region NEM model(NEMMCO SOO, 2004)

100025001500TAS

9001100200NSA

15022502100ADE

- 45050500RIV

50150100SESA

- 6500650POR

61007000900LV

- 49508005750MEL

31003900800SNY

- 500300800CAN

16501165010000NCEN

- 650150800NNS

- 290014504350SEQ

19502150200SWQ

225041501900CQ

- 4508001250NQ

Net Gen

(MW)

Gen Cap

(MW)

Pk Ld

(MW)

Node

load>gen




Tasmanian electricity & gas industries & Basslink(Govt. of Tasmania, 2003)

~1200 MW ~350 MW

Melbourne

Latrobe Valley

NorthernTasmania

SouthernTasmania

Basslink

Transmission:Transend

Distribution


Modelling regulated interconnectors& intra-region location

Regulated interconnector between 2 regions

– Modelled by a linearised marginal loss function:

A ‘dynamic’ network loss factor that depends on flow

Flow limits (security or thermal criteria)

Locational effects within regions

– Modelled by ‘static’ network loss factors (LFs)Annual average of estimated half-hour marginal losses for eachgenerator node & group of consumer nodes

– Intra-regional constraints not modelled but a‘constrained-on’ generator cannot set price




Effect of intra-regional network loss factorson spot market outcomes

ReferenceNode

(price pr)

Generator

Consumer

Qg, LFg

Qc, LFc

Generator produces Qg & is paid pr x LFg x Qg

Consumer consumes Qc & pays pr x LFc x Qc

Net income is given to network service provider(s)

Dispatch offer price = DOPg

Referred offer price = DOP/LFg

NationalMeteringIdentifierdetermineslocation & thus thenetwork loss factor that will be applied


Combining dynamic inter- regional & staticintra-regional loss factors (unconstrained link)

Region A Region B

A RRN B RRN

Assumeinter-regional

dynamic loss factor= 0.96, Region A wrt B

power

If 4 marginal generatorThen B RRP = 35.4

If B RRP = 35.4Then A RRP = 34.0

LF 1.05Bid 35 $/MWh»33.3 $/MWh (A)»34.7 $/MWh (B)

~ 1LF 1.05Bid 35 $/MWh»33.3 $/MWh (B)

~ 3

LF 0.98Bid 35 $/MWh»35.7 $/MWh (A)»37.1 $/MWh (B)

~ 2 LF 0.99Bid 35 $/MWh

»35.4 $/MWh (B)

~4




Supply-demand balance in theelectricity industry

Frequency is a measure of supply-demand balance:

– always varying due to fluctuations in power flows

Thermal

power stations

Other, eg

wind farms

Hydro

generators

Industrial

Commercial

Residential

Generator input power Load electrical power

plus network losses

+_


Managing supply-demand balance in NEM

Spot market forecasts &

derivative markets

Frequency controlancillary servicemarkets, period t

Security projections& FCAS

derivative markets

FCAS marketsfor period t+1

Spot marketfor period t

Spot marketfor period t+1

time

spotperiod t

spotperiod t+1

increasing uncertainty looking forward

Ancillary services& security

Energy markets




NEMMCO processes for managingsupply-demand balance

Power system reliability & security standards

NEMMCO Forecasts

of supply & demand

• 10 year (annual)

• 2 year (weekly)

• 1 week (hourly)

• day-ahead spot price

& dispatch (5 min)

NEMMCO operation:

•Participant bid/offers

•Network data

•Demand forecast

•Reserve threshold

•Security constraints

•Reliability safety net

Spot

& FCAS

Markets

Derivative

Markets


NEM Pre-dispatch, Dispatch & AGC

Offer & constraintdatabase

Instructionsto

participants

Forecastsets of 5-minspot prices

Set of spot prices

for next 5 min

Pre-dispatch(24 hr projection)

Constrainedeconomic dispatch

(5 min load forecast)Security-based

operatingconstraints(NEMMCO)

Day-ahead offersfrom

participants

Continuouslyupdated offers

from participants

AGC(2 second cycle)

SCADA




Bidding & dispatch(source: NEMMCO)

Day -2 Day -1 Day 0 Day 1

Dispatch Day

Commitment

notices

Initial Offers/Bids 1230hrs

then re-bids until dispatch time

ST PASA

1400hrs

1st Pre-dispatch

1600hrs

Updated 3hrly

5-minute & 30-minute prices as set;

previous days data at 0800hrs

Capacity

Energy/RoC

24Design of the energy spot market in the National Electricity Market © CEEM 2007 24

NEM commercial & security processes

5 min predisp.

30 min predispatch

5 minnow 1 hour

5 min

disp.

40 hours

5 min dispatch &

pricing

(4 sec AGC, online

security processes)

1 hr ahead, 5 min res.

5 min update

Short Term (ST) PASA

upto 40 hr ahead, 30

min res. 30 min

update

8 days

1 wk ahead, 30 min

res., 2 hr update

Medium Term (MT) PASA

Statement of

Opportunities

upto 2 yr ahead, 1 day

(MD) res., 1 wk

update

10 yr ahead, 1 yr

update

2 years

time

Source: NEMMCO; S Thorncraft

(PASA: Projected Assessment of System Adequacy)




PASA & reserve contracts

PASA

•Energyconstraints•Demandforecasts•Networkcapacity

Registration ofavailable capacities

Day-ahead Offers & bids

Pre-dispatchthen

dispatch

Invitation to provide more capacity

Purchase of more capacity

NEMMCO

Expectedinadequacy

Purchased capacity offered to market at price that would have otherwise applied (usually VOLL)Available

capacity

SettlementsPayment for purchased capacity

(long term expected USE < 0.002%)


Derivative trading in support of NEM

Trading in swap (CFD) & cap (call option) contracts:

– Bilateral trading

– Over-the-counter instruments

– Exchange-traded CFDs (swaps)

Inter-regional hedges:

– Specialised form of financial instrument:

to manage regional price difference risks

funded by interconnector settlement residues

– NEMMCO inter-regional settlement residue auctions:

Commenced in 1999




Key issues:• Price discovery• Aggregate volume• Liquidity & depth of trading• Little end-user participation

Derivative trading in the NEM(Bach Consulting & SIRCA, Report for NEMMCO, 2002)


Key derivative markets

Forward contracts (futures) (~$6 billion pa)

– Expected spot price for a defined load shape & period(eg constant MW for one year)

– Either OTC or exchange traded

Call options

Renewable energy certificates

– Available to qualifying generators

– Increasing to 9,500 GWH pa at 2010 then constant to2020 (~$200 million pa)




Relationship between wholesalegas & electricity markets

Market design simpler for gas than electricity:

– Gas macro-molecular; electricity sub-molecular

– Flows on pipelines individually controllable but not ontransmission lines

– Intermediate storage in “linepack”, not in electricalnetworks

Gas network linepack is a shared resource:

– Gas market design should be a “pool” not physicalbilateral trading if linepack constraining:

It does when gas is used for electricity generation


Gas wholesale trading in Australia

Victoria (~8 hours linepac):

– Pool day-spot market with bilateral physical trading

– Pool market does not set sub-day prices

– are derivative markets adequate?

Other states (several days linepack)

– Bilateral physical trading

Status of gas wholesale trading:

– inadequate to support use of gas for peak electricitygeneration




Many of our publications are available at:

www.ceem.unsw.edu.au

Design of the energy spot market in the National Electricity Market

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