How to do intraday capacity pricing in a continuous trade environment? 10 October 2011 NRA-TSO-PX meeting (Informal minutes, made during workshop, of the discussions from birds eyes view down to practical details) Draft for factual comments, suggestions on overlaps welcome. 1

Contents Objectives Complications Implications 2

Objectives (1) 1.One European Integrated Market; 2.Efficient allocation of capacity, leading to consumer welfare; 3.More competition; 4.Capacity is a means to cross borders: not about the theory, but actual market outcomes.; 5.Target model should include capacity pricing mechanism that reflects congestion. Focus on if and how capacity should be priced, for now not system constraints or requirements. NB: The above items concern design of intraday capacity pricing in continuous trade environment. 3

Objectives (2) 6.Topic of welfare: dont underestimate the difficulty of a comparison between day-ahead and intraday (see point 13 under complications). 7.Find a capacity pricing scheme: a rule must exist (having for free is a possibility). And the well functioning in a continuous market. 8.Coherent design between day-ahead, intraday and balancing market: that would lead to a more efficient arbitrage. 9.Practical implementation of capacity pricing - How? 10.Provide the right incentives in terms of generation, consumption and capacity building. 11.Not only willingness to pay for the capacity, but also an investment signal. 12.Parameters for capacity pricing need to be coherent with objectives of the allocation mechanism. NB: The above items concern design of intraday capacity pricing in continuous trade environment. 4

Complications (1) 1.Capacity pricing designing a system of continuous trading is challenging. They are not a priori easily compatible (but doable, as it seems based on discussion). 2.Is capacity pricing and the extraction of congestion rents necessary for efficient allocation? – Certain form of ranking is necessary for efficient allocation. 3.Timing of decision making? Should that be shifted to real time? 4.Will capacity pricing lead to more efficient allocation; evaluate efficiency of allocation now vs. efficiency with capacity pricing. Coherent design between markets. 5.Risk: maximising congestion revenues? – Design should be transparent so there is no perception that TSOs act in gaming behaviour. 6.How big are the problems of congestion currently? And how big will the problem of scarce capacity be in the future? Or the problem of efficient allocation in the future? NB: The above items concern design of intraday capacity pricing in continuous trade environment. 5

Complications (2) 7.There is no time in intraday to compute linear prices the same way as is done in day-ahead. – What about suspending the intraday markets for 10 minutes? Is this a possibility? But what do you gain? A better representation of value? But what are the gains and impacts when compared to market efficiency? 8.How to set the price of the capacity remains central question, in whatever allocation system. Regulatory decisions are needed about parameters and criteria. 9.How to address a question TSOs should be paid for capacity just once? 7.Congestion, no congestion: it is not black and white. Workshop showed difficulty to exhaustively define all situations of congestion (so far). Common terminology needs to be used. "Cross-spread" and "bottleneck income" mean eg same. 8.Keep the projection of physical reality in line with the constructed reality in the market, ie provide for design which fits the actual market operations. 9.What is congestion in terms of market design? Criteria are important when discussing pricing of capacity. NB: The above items concern design of intraday capacity pricing in continuous trade environment. 6

Complications (3) 13.Social welfare criteria (from day ahead) is hard to use as benchmark in continuous market: social welfare is hidden. 14.With (future introduction of) flow-based: welfare impacts increases may not be zero! – Different opinions on impact of flow-based on intraday markets capacity congestion… 15.Objective function for capacity pricing mechanism? 16.How to define and measure capacity allocation efficiency? 17.What are the expected amounts of intraday congestion cases? How much (new) capacity will TSOs (be able) to offer in intraday? 18.How to build cost/benefit analysis for intraday capacity pricing? – Currently intraday is a very small (1%) market. Bu this is potentially to change due to inter alia renewables drive. 19.How to involve market participants in the evaluation of impact of the mechanism? NB: The above items concern design of intraday capacity pricing in continuous trade environment. 7

Implications which were named regarding ongoing 2012 implementation 1.For efficiency: un-segment block and hourly orders (which means pull-together) 2.A more sophisticated algorithm (to deal with capacity pricing issues) is necessary. 3.Explicit access transition: right now no implications… 4.Implications for pricing algorithm to be worked out, based on discussions? NB: The above items concern design of intraday capacity pricing in continuous trade environment. 8