1. EuroPEX Using implicit auctions by power exchanges to manage cross-border congestions: Decentralized Market Coupling B. den Ouden, President of Europex APEx Annual Conference 2003 Cartagena de Indias, Colombia, 14 october 2003

2. Pagina 2 EuroPEX CONTENT n Europex members n Implicit auctions n The benefit for trading n The benefit for Europe n The decentralized market coupling model n Step by step approach

3. Pagina 3 EuroPEX APX UK Powernext OMEL Borzen GME Nord Pool EEX APX Opcom EuroPEX Backgrounds: n Looking after PX interests n EU policy n EuLocal taxation / policies New lines: n Slow n Huge investment Allocation of limited transmission capacity Allocation of limited transmission capacity

4. Pagina 4 EuroPEX APX UK Powernext OMEL Borzen GME Nord Pool EEX APX Opcom Some congested borders in Europe Reasons: n National policies in the past n Fuel decisions n Local taxation / policies New lines: n Slow, huge investment Fragmented market! n Important: method of allocation of limited transmission capacity

5. Pagina 5 EuroPEX Cross-border allocation methods n (New lines) n Non-market based: –First come first serve –Pro rate curtailing n Market based: –Explicit autioning –Implicit auctioning, market splitting/coupling n Counterbuying, compensating re-dispatch

6. Pagina 6 EuroPEX Non-market based methods n Stable when no congestion or non-competition n Unstable when there is a real value and full competition n First come first serve: fax run in the opening seconds n Pro rata: gaming for ever-bigger subscription volumes

7. Pagina 7 EuroPEX Market based methods n Attribute an economical value to the good being limitedly available: transmission capacity n Explicit auctioning: Explicit auction transmission capacity Maximum im/export Cap. price

8. Pagina 8 EuroPEX Explicit auctioning n Creates stability n Drawbacks: –Risky –Suitable for bigger players –No contribution to liquidity on either side –No “netting” of im & exports –Creates a barrier even at times when there is no congestion! –Leads to a fragmented European market

9. Pagina 9 EuroPEX Spot market Area A Price Quantity Spot market Area B Quantity ? Explicit auction transmission capacity Maximum im/export Cap. price Explicit auctions of transmission capacity Maximum import Maximom export Auction revenue

10. Pagina 10 EuroPEX Spot Market Area A Quantity Spot Market Area B Quantity Area price difference Implicit auctioning (market coupling) Full transparency in constraint management Maximum capacity Maximum capacity Δ Price n One-step process n No difference between auction price and area price difference n Stimulates liquidity in each area

11. Pagina 11 EuroPEX Spot Market Area A Price Quantity Spot Market Area B Quantity One price for both areas Allocated capacity Allocated capacity Implicit auctioning (market coupling): Full area integration when no constraint n Areas merge at that moment n Trade barriers completely gone n Liquidity shared

12. Pagina 12 EuroPEX The benefit for trading n One-step process, ease of access n Priority on interconnectors based on price n Interconnector schedules based on area price difference n Hedging instruments n All local players also play internationally n Encourages liquidity and transparency ……thereby mitigating market power abuse

13. Pagina 13 EuroPEX The benefit for Europe n European market fragmented by constraints n Market coupling directly unifies markets whenever there is no constraint n So, for x % or the time, markets will be unified. n Then, by other methods (e.g. additional transmission capacity) this x% percentage can be raised gradually. n Contributes to the establishment of the internal European electricity market

14. Pagina 14 EuroPEX The decentralized model : objectives

15. Pagina 15 EuroPEX Decentralized model: overview n Each exchange to receive its area-based bids n Exchanges exchanging bid – based information n Adapting exchange price in each area: –Unconstrained: prices equal –Constrained: prices are set with maximum im/export n Iteration process for blocks n Local scheduling and balancing

16. Pagina 16 EuroPEX Decentralised Market Coupling (DMC) – 1 - n TSOs to publish available capacity and power transfer distribution factors (PTDFs) n Power exchanges (PXs) gather bids & offers in their area n Power exchanges (PXs) gather bids & offers in their area n Then calculate ‘net export curve’ showing impact of export (and import) volumes on hourly area price n PXs calculate optimal use of network across DMC region n Includes bilateral bids who pay (or counter-flows receive) price difference between areas

17. Pagina 17 EuroPEX Decentralised Market Coupling (DMC) – 2 - n PXs repeat process to accommodate block bids (several iterations, or a sequential process in some regions) n PXs notify and settle all area commitments (including cross-border bilaterals) n Deviations handled by local area imbalance arrangements More details: see Europex paper as submitted

18. Pagina 18 EuroPEX Influence of im/exports on area prices (more details: see Europex paper at www.europex.org) Price Spot market volume Isolated price area A demand Price Spot market volume Isolated price area B supply demand

19. Pagina 19 EuroPEX Features of Decentralized Market Coupling n Enables coupling of multiple areas together with efficient allowance for loop flows on meshed networks n Supports block bids and other local market requirements n Supports bilateral contracts and netting of counterflows n Requires only limited harmonization of market rules, and no change to local notification/imbalance arrangements n Provides open and fair market access with no additional barriers beyond existing local PX requirements n Transparent, rule based, auditable methodology

20. Pagina 20 EuroPEX Key Points (1) n All physical capacity and PTDFs to be made available in the day-ahead implicit auction n Physical capacity must be firm and published prior to PX bid submission to ensure orderly and efficient market –TSOs to make allowance for unplanned events/outages –Regulatory issue: maximize capacity (DMC can contribute to reducing TSOs’ exposure to loop flow uncertainty) n Optimize the use of the physical network and maximize liquidity (+reliable reference prices) –hedge forward price risk with financial products –phase out explicit auctions of physical transmission rights –handle adjustments in intra-day markets

21. Pagina 21 EuroPEX Key Points (2) n Owners of long-term capacity rights can, in effect, sell them by offering to schedule a counterflow. Historical long-term contracts could be converted into financial transmission rights n Rules and procedures will need defining for each ‘cluster’ of markets, plus some harmonization of market rules will be necessary - possibly could be overseen by a regional group comprising regulators, TSOs, PXs and participants n PXs will need to meet certain requirements - e.g., membership requirements, information publishing, audit, disputes procedures

22. Pagina 22 EuroPEX Step by step approach Implicit auctioning between exchanges: step by step process n 1. Bilateral pilots at several places in Europe n 2. Regional developments n 3. European integration Manageable learning curve Manageable learning curve

23. Pagina 23 EuroPEX Summary n Directly a partial (x %) integration of markets n Local Players co-acting on European scale n Better liquidity and transparency n Mitigation of market power abuse n Step-by-step process, practical solution n Incremental learning curve

24. Pagina 24 EuroPEX Supplementary material Price PAPA Area A Price PBPB Area B P* A Export P* B Q* B ImportQ* A ExportImport