Handling of grid losses of HVDC cables in NWE Market Coupling - EMCC proposal for compensation of grid losses – NWE day-ahead meeting, Copenhagen, 22/08/2012

EMCC proposal - compensation of grid losses Overview Background Grid losses EMCC proposal - compensation of grid losses Impact of loss functionality - prices, flows, grid usage Recent developments Discussion 2

Background (I) Baltic Cable transmission capacity is implicitly allocated through EMCC in the ITVC. Baltic Cable’s contract with EMCC: EMCC to implement minimum flow, maximum change, loss minimization by 1st Jan. 2011. EI, BNetzA, EMCC, Baltic Cable started discussions on the issues end 2010/early 2011. NE RI discussed losses issue during 2011 and drafted discussion paper (but not finalised?). July 2012: Baltic Cable again approached EI and BNetzA as regards a loss functionality.

Background (II) August 2011: Baltic Cable, BritNed and IFA submitted a paper to NWE TSOs on requirements. According to cable owners, TSOs concluded inclusion of losses increases welfare should be dealt with by including the losses in the balancing constraint approach already available in PCR algorithm. TSOs indicated that regulatory approval will be needed before actual implementation. March 2012: These cable owners (now including Moyle and EirGrid) approached Ofgem and BNetzA.

Grid losses Grid losses are a physical reality of HVDC and AC grids. HVDC losses can be directly attributed to commercial trades TSOs/cable owners have to balance losses  incur cost Commercial cable owners’ problem is this: if they use cable like TSOs, loss is incurred during hours, where congestion rent is smaller than cost of grid loss As these costs occur they are part of the overall welfare. However, in current Market Coupling settings grid losses are not included in the social welfare optimization process. Any functionality to cover grid losses could/should (?) be applied regardless of ownership type (TSO/cable owner). Compatibility with EU Regulation 714/2009?

EMCC proposal (I) 2011 Baltic Cable and NorNed asked EMCC to develop a grid loss compensation mechanism. EMCC developed a concept which fulfils criteria of welfare optimisation and covering of losses. The concept focuses on HVDC links NorNed, Kontek and Baltic Cable. It can be introduced without changes to systems other than EMCC’s (no PX or TSO systems), unless interconnectors within Nordic. Minimum flow constraint could be implemented.

EMCC proposal (II) Physical losses are reflected in the coupling system by placing different volumes of buy and sell orders at NPS, EPEX and APX: Qimp < Qexp (Import smaller than Export; Export not larger than max. ATC) Qimp = Qexp x LF (LF = Loss factor; e.g. Kontek 2,5% losses: LF = 0,975) Welfare optimization: Pimp x Qimp = Pexp x Qexp Pexp = LF x Pimp

EMCC proposal (III) After Market Coupling process: EMCC could e.g. split the bought volume into loss energy and flow energy. Loss energy could be sent per separate schedule to balance group for TSO/cable owners purposes. Cross-border flow sent per schedules as today. EMCC could publish either import or export value on its website. LF constraint could be configured for any interconnector. LF could be used for AC links (e.g. DK1-GER) too.

EMCC proposal (IV) Example: Losses: 5 %; ATC: 100 MW Case 1: Result of Market Coupling without loss functionality Market A: PA = 98 €/MWh; Market B: PB = 98 €/MWh Congestion rent (CR) = 0 Cost for losses (GL): 0,5 MWh x 98 €/MWh = 49 €/MWh Net Income: NI = CR – GL = - 49 €/MWh Case 2: Result of Market Coupling with loss functionality Market A: PA = 100 €/MWh; Market B: PB = 95 €/MWh Sell order Market A: 9,5 MWh Buy order Market B: 100 MWh Congestion rent (CR): 5 €/MWh x 9,5 MWh = 47,5 € Cost for losses (GL): 0,5 MWh x 95 €/MWh = 47,5 € Net income: NI = CR – GL = 0 Note: To get the full picture consumer and producer rents would need to be calculated as well.

Impact of loss functionality (I) Prices of coupled areas will differ by LF, if line not fully used differ by more than LF, if line fully used be equal only if there is no flow on the line Average price spreads will increase (slightly) Flow on the interconnector with LF starts, if price difference is larger than LF be zero, if price spread is smaller than LF will never lead to equal prices

Impact of loss functionality (II) Algorithm prioritizes flows on interconnectors without or with small loss factors. The system tends to shift from interconnectors with higher LF to those with lower LF. Number of (small) adverse flows will decease Single trader’s point of view Situations can occur in which offers are implausibly rejected. Change in social welfare distribution: Shift of consumer and producer rent to congestion rent and grid losses.

Impact of loss functionality (III) New intraday trading opportunities for cable owners In case the market changes intraday (smaller price difference), inclusion of LF in day-ahead may open new trading opportunities intraday. Cable owners can make extra profits intraday by countertrading actions, thereby also reducing grid losses and physical flows on the cable.

Recent developments (I) EMCC commissioned scientific report (IAEW, RWTH), which recommends introduction of grid loss compensation factor. EMCC has tested all systems and recommends introduction provided regulatory support. No changes in PX systems necessary if only losses on NorNed, Kontek, and Baltic Cable are included. Change in Sesam (NPS) necessary if losses between Nordic countries should be considered. EMCC could introduce new system within short time period. Baltic Cable aims to implement the loss functionality by 30 September 2012 Deadline for Regulatory intervention set Aug. 31st

Recent developments (II) ENTSO-E Algorithm Starting Point Assessment Report: Losses requirement available in PCR but not operational Flow ramping constraints available in PCR Minimum stable flow not developed for COSMOS so far LF need to be determined properly In case, communication to the market is important!

Discussion Open issues: Is the proposal in line with EU Regulation 714/2009? Should loss factors of AC interconnectors be included? Is (EU-wide) coordination and/or harmonization useful or necessary? Are there any frictions with other market segments (long-term, intraday)? Any other thoughts?

Thank you for your attention! 16