1. Electricity Wholesale Markets: Designs for a low-carbon future
Richard Green
University of Birmingham

2. Wholesale markets What should we want from them? Two main designs:
US markets run by the system operator
European markets separated from the system
Challenges for the future
How do the designs measure up?
The fora in which bulk electricity and ancillary services are traded and hedged

3. Wholesale markets should:
Ensure efficient day-to-day operation
Signal the need for investments in generation
Promote efficient locational choices for them
Compensate (sufficiently) the owners of existing generation assets
Be as simple, transparent and stable as possible
Be politically implementable

4. Information, Prices and Markets
No-one can know everything
Prices summarise what you don’t know
In most markets, you see a price and respond on the basis of private information
In the US electricity markets, you give out your private information as a price

5. US (Standard) Market Design
New England, New York, PJM (running); California, Texas Nodal (imminent)
ISO-run voluntary markets for energy and ancillary services, jointly optimised
Set nodal prices day-ahead and real time
Capacity markets provide “missing money”
Hedge with FTRs and forward markets

6. The day-ahead markets
Traders either submit information on bilateral trades or volunteer bids/offers
ISO calculates bid-based, security-constrained, optimal dispatch and prices
Reserve and reliability unit commitment
Prices are nodal marginal costs
Financially firm on participants

7. Intra-day and real-time
Markets to adjust schedules
Voluntary bids and offers
Plant dispatched by ISO to meet load
Prices calculated based on this outcome
Real-time price charged/paid for difference between outcome and earlier trades

8. Geography
All participants moving power pay price difference between nodes to ISO
Financial Transmission Rights pay back these price differences (from ISO)
ISO can auction FTRs
Reliability must-run contracts for generators in load pockets

9. Capacity
The “Missing Money” Problem – super-peak prices consistently too low
System operator habits and bid caps
Capacity market fills the gap
Markets are becoming:
Elastic in demand
Forward looking
Geographical

10. Information, Prices and Markets
No-one can know everything
Prices summarise what you don’t know
In most markets, you see a price and respond on the basis of private information
In the US electricity markets, you give out your private information as a price
The European markets have more of a mix

11. Europe’s electricity markets
Nord Pool
BETTA
All-Island Market
EEX
Tri-lateral Market Coupling
Iberian Market

12. European Markets
Power Exchanges run markets for energy, mostly voluntary day-ahead auctions
Zonal prices with rising market coupling
Transmission companies acquire ancillary services, resolve constraints (usually by counter-trading) and balance in real time
No capacity markets (some payments)
Hedge in forward markets

13. The missing money?
Only Iberia and the All-Island Market have capacity payments
Will energy-only prices rise in capacity-constrained markets?
Do generators make their money across their portfolio?
Do integrated electricity firms need to make their money in generation?

14. Balancing and imbalances
System operator organises balancing trades for real time
Some markets cover more than one system operator (Nordic, Germany)
Some Operators set two imbalance prices
Incentive to be in balance?
Helpful imbalances may get spot market price

15. Assessment out of 5: Efficient operation 3 4 Signal investments 2 4
Europe US
Efficient operation
Signal investments
Promote location
Compensating assets
Simplicity
Politics

16. A low-carbon future EU Target of 20% renewable energy
TWh/year now 2020
Wind Power
Biomass generation
Renewable Electricity Poyry, 2008 report to BERR on costs of the 20% target

17. Implications for the system
Wind generates when the wind blows
CHP generates when heat is wanted
Net load more variable, less predictable
More short-term reserve needed
More generation capacity needed
(Some) more transmission needed

18. Implications for market design
Marginal cost of power becomes more volatile over space and time
Need to signal this
Need to hedge this
Capacity costs outweigh energy costs for a greater proportion of plants
Potentially more small participants

19. Private v. System Information
Prices summarise either system conditions or participants’ individual situations
A summary suppresses information
The more system conditions change, the more information the summary suppresses
This shifts the relative cost

20. More need for simplicity?
More small players build small plants?
Face market rules instead of feed-in tariffs?
Can intermediaries absorb complexity?
More need to hedge volatile prices?
Need a liquid and transparent marker price
PJM hub prices were used for forward trades of 3.4 times delivered volume in (Nord Pool traded and cleared 5.6 times)

21. More need for investment
Location may become more important
Stronger signals in energy prices
Rents from good locations increase
Cost of supporting renewables in bad locations rises
Reserve capacity needs to recover costs
Contracts with system operator
Market-wide system

22. Conclusion
The “European” market design is weaker than the “US” design in areas that are becoming more important as we adopt more low-carbon electricity generation
We should move to the more efficient design