Legal Framework, Investment Opportunities and Technical Innovation in the Electricity Sector

Security of Supply through competitive markets:

Design of the regulatory and economic environment for infrastructure development

 Dr. Evangelos Lekatsas

Chairman of the Board of Directors, HTSO Athens, October 23rd 2009

 HTSO

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Reliability of Supply

"the degree to whichthe performance of the elements of the technical

system results in power being delivered to consumers within

accepted standards and in the amount desired”

Security Adequacy

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Security vs AdequacySecurity: The ability of the System to withstand disturbances

• Protection devices• Security constrained dispatch• Ancillary services (voltage control, AGC, spinning

reserves etc.)

NOTE: Security is centrally managed but the resourcescan be procured competitively through ancillary service markets or long term contracts (Public good)

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Security vs Adequacy (continued)

Adequacy: The ability of the System to meet the aggregate power & energy requirements of all consumers at all times

• Ability to meet demand on longer time scale basis• Non storability of power• Long lead time for capacity expansion

NOTE: Adequacy provision is nothing more than insurance against shortages

Generation Adequacy (I)• Energy only markets:

Consumers and suppliers interact through unrestricted energy spot markets. Market energy prices provide price signals and compensation for capacity investment. Technology mix and generation capacity are determined by entry and exit of suppliers and by customer choice of desired price risk. Energy only markets result in extreme spike prices. As a remedy to this Capacity Markets have been introduced to avoid price volatility. The purpose of these markets is to ensure that there is sufficient capacity in the System to cover peak demand and at the same time avoid price volatility.

Generation Adequacy (II)• Installed Capacity (Icap) Obligation markets :

In an ICap market Installed Capacity Obligations are set for Load Representatives (or Suppliers, or Load Serving Entities= LSEs) .Suppliers are obliged to secure contracts with producers sufficient to meet their expected load for one year, plus a security excess that reflects a prescribed Capacity Margin. Producers in order to enter into Agreements with Suppliers are obliged to have sufficient capacity by issuing, for each MW, annual Capacity Availability Certificates (CACs) when commissioning new generating capacity. This method does not provide any signal to the Consumers.

Generation Adequacy (III)

• Capacitive Charge

To incentivize investment in new power plants and availability Generators receive, in addition to SMP, a Capacity Charge (CC) based on availability, as expressed by the calculated Loss Of Load Probability (LOLP), and the Value of Lost Load (VLL).

P=SMP + CC = SMP+LOLP*{VLL-SMP}

This method was initially applied in UK. It is not a market but a mechanism. It was abandoned when it was proved that some generators could artificially increase LOLP by withdrawing some of their units.

MWh/year million 55

Euros/year milion 275000

Ε

GDPVLL

Total

The Value of Lost Load

VLL = 5000 €/MWh

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HTSO

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Load Variations: Summer 2007- January 2009

10,0k

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Σχ. 1α: Ετήσια Καμπύλη Διαρκείας Φορτίου (περιόδου 1.10.2006 -30.9.2007)

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 8000 8500 9000

Ώρες

Φορ

τίο

σε M

W

Λεπτομέρεια Αιχμής στα Σχ. 1β και 1γ

Load Curve: Oct 1st 2006 –Sept 30th 2007

Peak Detail in next slide

LOAD DURATION CURVE (period 1.10.2006 -30.9.2007)

Peak Details above 10000MW

9800

9900

10000

10100

10200

10300

10400

10500

10600

10700

10800

10900

11000

0 10 20 30 40 50

Hours

LO

AD

in

M

W

7300MWh/year To supply the 1000MW of the peak an investment of 1000MW*400000 €/MW

=400 million € which amounts to 56 million €/yearor to 56000000/7300 =7671 €/MWhAdding the fuel cost of an open cycleGas Turbine 112 €/MWh we obtain a total cost of the peak MWh equal to

b=7783 €/MWh

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Q*r E*bR revenue annual Total

E*v+Q*f=C cost annual Total cc

cc v+EQ

*r)-(f=b CR

(€/year)

(€/MWh)

fc=fixed cost in €/MW-yearvc=variable cost in €/MWhQ= installed capacity in MWE= annual energy generation in MWh/yearb= energy market price in €/MWh r= capacity payments price in €/MW-year

Recovery of Fixed and Variable Generation Costs

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HTSO

R E*b E*v+Q*f=C cc

cc v+EQ

*f=b

(€/year)

(€/MWh)

fc=56000 €/MW-yearvc=112 €/MWhQ= 1000 MWE= 7300 MWh

b= 7783 €/MWh > VLL=5000 €/MWh

Decision= Curtail Peak 1000MW !!!!!

Recovery of Fixed and Variable Generation Costs ( Case I: Energy only Market, r =0)

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HTSO

E*b E*v+Q*f=C cc

cc v+EQ

*r)-(f=b

(€/year)

(€/MWh)

fc=56000 €/MW-yearvc=112 €/MWhQ= 1000 MWE= 7300 MWhr=35000 €/MW-year

b= 2989 €/MWh < VLL=5000 €/MWh

Value b of energy is still unacceptable (high)Introduce a CAP such that b< CAP

Recovery of Fixed and Variable Generation Costs ( Case II: Energy + Capacity Market, r ≠ 0)

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HTSO

E*b E*v+Q*f=C cc

CAPv+EQ

*r)-(f=b cc

(€/year)

(€/MWh)

fc=56000 €/MW-yearvc=112 €/MWhQ= 1000 MWE= 7300 MWhCAP= 150 €/MWh

r>50941.8 €/MW-yearb< CAP=150 €/MWh

Recovery of Fixed and Variable Generation Costs ( Case III: Capped Energy + Capacity Market)

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HTSO

LOAD DURATION CURVE (period 1.10.2006 -30.9.2007)Peak Details above 9000MW

8500

9000

9500

10000

10500

11000

0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300

Hours

Lo

ad i

n M

W

133110MWh/έτοςA similar calculation for the zone  of 1000 MW between 9000 and 10000 MWTaking into account that the annual energy now is 133110 MWh/year  gives

56 εκ.€/year/133110MWh/year=420,7€/MWh

Adding the fuel cost, 112€/MWh, we concludethat the total cost in this lower peak zone is

b=532,7 €/MWh

7300MWh/year

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DAY AHEAD SOLUTION

MWh

€/MWh

CAP

System Load

TOTAL OFFER FUNCTION

TOTAL DEMAND FUNCTION

SMP

Non-Priced Offers

Inelastic Load

Consumer Surplus

Producer Surplus

Total Offer and Demand Curves CrossingHTSO

18        Right shift of the Supply Curve due to increase of NPB 

€/MWh

CAP

L, System Load, MWMW

Supply Curve

Demand Curve

SMP0

NPD = Non Priced Demand

SMP1

NPBο

NPB1L0 L1

With  L1>L0                   SMP1<SMP0

Non Priced Bids (NPB)• Mandatory  Hydro     ~1800MW• RES  ~  300MW• Technical  Min            ~3000MW• Imports                        ~  700MW TOTAL=                            5800MW

19Cross Subsidization between Generating Units of the same Producer

€/MWh

CAP

L, System Load in MW

SMP

Variable Cost Recovery

Fixed Cost Recovery+Profit

Α Β

Cross Subsidy to Β

20Bids including capacity component

€/MWh

CAP

L, System Load in MW

SMP

Variable Cost Recovery

Fixed Cost Recovery+Profit

Α Β

Cross Subsidy to Β

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b1,Q1

LmLkLΔ

WHOLESALEMARKET

min Σ(bj.Qj)

ΣQj-ΣLj=0

b2,Q2 bn,Qnbn+1,Qn+1 bm,Qm…

Imports

Exports

RETAILMARKET

Suppliers

Gen/tors

End Users

SMP*{ΣQj-ΣLj}=0

Tariffs

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EPILOGUE

The market expresses the will of human beings to meet at the point of equilibrium of supply with demand by maximizing the, so called, Social Surplus. But the will of human beings, especially when expressed in terms of conflicting economic interests, may lead the power system to risky levels of operation. Indeed, following the liberalisation over the past 2 decades, some power systems have been pushed towards their stability limits in order to maximize profit in energy trading, thus endangering the operation of the power system. It is very important to understand that power systems must operate within safe physical limits and with adequate reserves in order to maintain high standards of supply. This creates a cost we must not forget!

Acknowledgments

I would like to thank my colleagues in HTSO for their valuable discussions in preparing this

presentation

THANK YOU FOR YOUR ATTENTION

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HTSO