Electricity Wholesale Markets findings - Europa

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


.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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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

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40

60

80

100

120

140

160

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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

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85

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105

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2007 2008 2009 2010 2011 2012 2013 2014 2015

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exe

d c

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acity

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d d

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qu

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cy o

f p

rice

sp

ike

s (

nu

mb

er

of

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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.

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2008 2009 2010 2011 2012 2013 2014 2015

eu

ros/M

Wh

Capacity mechanisms+interruptibility

System operation (mainly balancing reserves procurement)

Redispatching

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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)

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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



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).


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.


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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

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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)

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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.

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2011 2012 2013 2014 2015

Welfare

loss (

mill

ion e

uro

s)

TW

h

UFs CWE UFs CSE UFs CEE Total WL

Agenda

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.Developments



Content

DA IDLT BM

IEMUtilisation of the Transmission Network

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Context and focus of the monitor for wholesale market integration

Efficiency

Capacity

Calculation

Capacity

Allocation

Germany Nordic France UK Italy Netherlands Spain

2014 2015

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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

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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)

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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.

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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

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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

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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)

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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.

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273

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701

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129

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697

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125

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553

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981

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409

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837

euoro

s/M

Wh

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40

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100

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140

0297

594

891

1188

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2673

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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

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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)


0

1

2

3

4

5

6

eu

ros/M

Wh

Energy (Capacity procurement costs-FCR) FCR procurement costs

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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


Agenda

32

.Developments



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

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. 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

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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

http://www.acer.europa.eu/

Electricity Wholesale Markets findings - Europa

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