1. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 1 How to integrate and utilize wind energy in a liberalized electricity market Anders Plejdrup Houmøller CEO BlueLime Consulting ðWith the Danish and the Nordic electricity market as a case: üHow to use the market to optimize the value of wind energy. üHow to secure the energy flows towards the high price areas. üHow does wind energy affect the market price for electricity? ðWind turbines as providers of regulating energy and/or regulating capacity?

2. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 2 The Nordic electricity market: Denmark, Norway, Sweden and Finland. ðDenmark, Norway, Sweden and Finland have liberalised our electricity markets and we have established a common electricity exchange called Nord Pool Spot. ðDenmark, Norway, Sweden and Finland: about 25 mill. people. ðElectricity consumption 2008: 396 TWh. üThird biggest electricity market in the European Economic Area EEA. üEEA = European Union + Norway + Island + Liecht.). ðAnnual turnover at whole-sale market about $ 18 billion.

3. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 3 Transmission Grid (above 110 kV) Producer 1Producer 2 Producer N... The electricity Market: Transportation System Transmission System Operator (TSO)... End Users... Distribution Grid (below 110 kV) Local Grid Operators (the grid part of the former distribution companies)

4. Copyright BlueLime Consulting © July 30, 2010 4 Retail Market Whole Sale Market The electricity Market: Trading System... Retailer 1 Retailer M... End Users Producer 1Producer 2 Producer N... A retailer may be the commercial part of a former distribution company

5. Copyright BlueLime Consulting © July 30, 2010 5 Nordic Commercial and Non-commercial Players Power stations and transmission grid Distribution companies: local grid and retail Before liberalisation After liberalisation Non-commercial monopolies Commercial players TSO: transmission grid and security of supply Local grid operators Producers, retailers, traders, brokers Unbundling

6. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 6 The electricity market Producers End users 60 Hz The Transmission System Operator (TSO) operates the high voltage grid and is responsible for the state’s security of supply.

7. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 7 Concepts and units PowerW (Watt) EnergyWh (Watt-hour) The amount (for example, during an hour) Capacity ConceptUnitWater analogy W (Watt) The ability to change a flow 60 W Energy consumed during an hour: 60 W * 1h = 60 Wh Flow: How much energy per second? The amount (for example, during an hour) Explanation The ability to change a flow Flow: How much water is passing by per second?

8. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 8 The Nordic market for regulating energy Example for an hour where the production is getting too big P R The producer has sold 200 MWh to the retailer. Price: 34 EUR/MWh TSO Sell 200 MWh to producer. Price: 30 EUR/MWh Result for TSO: The prod. decreases Producer: Buy at a price of 30 EUR/MWh and sell at a price of 34 EUR/MWh Note: a producer will provide down regulating (ie, buy back energy), if he can buy at a price lower than his marginal production cost

9. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 9 All producers in question gets this price Offers and bids on the Nordic market for regulating energy EUR/MWh MWh Sell reg. energy to TSO Buy reg. energy from TSO Spot price at electricity exchange during this hour During this hour, the TSO had to buy this amount of regulating energy

10. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 10 Nordic regulating energy ðThe players at the market for regulating energy are paid the marginal price ü“The last player’s” price sets the price for all.

11. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 11 Danish regulating energy options - 1 ðHow can the TSO ensure that he actually has bids and offers availed on the market for regulation energy? ðAnswer in Denmark and Norway: The TSO buys regulation energy options. ðIn Denmark, most of these options are bought day-ahead (during the morning the day before the operating day). ðExamples for the regulation energy market: üA producer who has sold the TSO an up regulating energy option of 20 MW must place an offer of 20 MWh on the market. üA producer who has sold the TSO a down regulation energy option of 10 MW must place a bid of 10 MWh on the market. MWh EUR/MWh Offers Bids

12. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 12 Danish regulating energy options - 2 ðAll players may send bids and offers to the TSO’s market for regulating energy. ðHowever those who have sold regulation energy options to the TSO must send bids and/or offers. ðThe TSO buys capacity, when he buys the options üThe options are bought day-ahead. ðLater, the TSO trades energy, if he needs to buy or sell during the hour of operation in order to maintain the security of supply. MWh EUR/MWh Offers Bids

13. Copyright BlueLime Consulting © July 30, 2010 13 Primary reserve (25 MW) 30 sec.15 min. Reserves bought by the TSO Western Denmark as a case ðWestern Denmark üEnerginet.dk is the Danish TSO. üConsumption about 21 TWh/year. üMore than 25% of the electricity produced comes from wind. üMin. load about 1,150 MW. Max. load about 3,600 MW. üWind turbines about 2,730 MW (!). Secondary reserve (90 MW) Order + 15 min.Order Manually activated regulating reserve (often 540 MW up) MW Time Anders Plejdrup Houmøller

14. Copyright BlueLime Consulting © A Nordic market for regulating energy and national markets for regulating capacity ðTogether, the four Nordic TSOs operate a Nordic market for regulating energy üCovering Denmark, Sweden, Finland and Norway. ðIn addition, each TSO operate a national market for regulating capacity. July 30, 2010Anders Plejdrup Houmøller 14

15. Copyright BlueLime Consulting © Danish regulating energy And Danish balancing energy ðNote: for the producers of “green” energy, there is no special requirement to have own regulating capacity üFor every day, the Danish TSO will day-ahead buy the regulating capacity estimated necessary in order to maintain the security of supply. ðBy the way, at the outset, the same equal treatment is used for balancing energy: as a producer, if you deviate from your production plan, you have to trade balancing energy with the Danish TSO üThe same system applies whether you are a standard producer or a “green” producer. üHowever: for many “green” producers, the TSO has an obligation to handle the forecasting, the trading and the balancing energy. July 30, 2010Anders Plejdrup Houmøller 15

16. Copyright BlueLime Consulting © 16 Wind turbines as providers of regulating energy? ðNaturally, when it’s producing, a remote controlled wind turbine is very well suited to provide down regulating üHowever, a producer will only buy back energy, if the purchase price is below his marginal production costs! üHence, a wind turbine owner will only buy back energy, if the whole-sale electricity price has turned negative (or just slightly over zero). üHowever, this is precisely the situation we often face, when the wind turbine production is high. üConclusion: on a windy day, when the security of supply is threatened by over-production, the wind turbines can be used to solve the problem Provided the market system and the subsidy system are designed the right way. ðAfter having down regulated, a wind turbine is producing below it’s potential üHence, it’s now very well suited to provide up regulation, if this should be needed… July 30, 2010Anders Plejdrup Houmøller

17. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 17 Wind turbines as suppliers of regulating capacity? ðIf you are a player with enough wind turbines in your portfolio, you may offer the TSO down regulating capacity day-ahead.

18. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 18 Nord Pool Spot The Nordic electricity exchange ðNord Pool Spot is an exchange, where the players can trade electrical energy day-ahead and intra- day. ðElspot is Nord Pool Spot’s day-ahead auction market. ðElbas is Nord Pool Spot’s intra-day market. ðTurn-over in 2009: üElspot285 TWh üElbas 2 TWh ðMore than 70% of the electricity consumed in the Nordic area is traded with Nord Pool Spot’s day- ahead auction market Elspot.

19. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 19 Nord Pool Spot The four Nordic TSOs are the owners Nord Pool Spot AS Fingrid Energi- net.dk 30% 20% Statnett Svenska Kraftnät

20. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 20 The Elspot market The exchange’s day-ahead market for electrical energy ðThis is where electrical energy is traded day-ahead. ðBids and offers must be sent to Nord Pool Spot’s headquarters in Oslo at the latest 12 o’clock the day before the day of operation (gate closure time is 12 o’clock). ðAt 12 o’clock Nord Pool Spot’s computer start working: By matching the bids and the offers for every hour of operation the following day, the computer calculates a spot price for each hour of the following day. ðNormally, the prices for the following day are published around 1 p.m. (ie, it’s day-ahead prices).

21. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 21 Calculation of the day-ahead price Example for one hour EUR/MWh MWh max. price min. price day- ahead price Supply 2pm – 3pm In a ”normal” auction, only the buyers submit bids. However, in this system, both the buyers and the sellers submit bids. Therefore, this is way of calculating prices is called a double auction. As we are trading energy for tomorrow, this way of trading is called day-ahead auction trading. Demand 2pm – 3pm

22. Copyright BlueLime Consulting © July 30, 2010 22 System Price Tuesday, Feb. 23 rd, 2010 Time of day Average: 13.4 US cent/kWh US cent/kWh 0 2 4 6 8 10 12 14 16 18 1357911131517192123

23. Copyright BlueLime Consulting © Denmark: wind power and the liberalised market How to cope with a market and subsided energy? July 30, 2010Anders Plejdrup Houmøller 23 TSO Buy at price set politically Elspot: power exchange’s day- ahead market Sell at market price Cover loss via an extra grid fee (PSO) Result: financially, this wind energy enters the market as price-taking sales offers The Danish case: when you have a liquid power exchange this is easy!

24. Copyright BlueLime Consulting © Denmark: wind power and the liberalised market – 2 July 30, 2010Anders Plejdrup Houmøller 24 TSO Buy at price set politically Elspot: power exchange’s day- ahead market Sell at market price Result: financially, this wind energy enters the market as sale offers at the exchange with offer prices a bit higher than zero Turbine owners trading themselves (in practice, they outsource the trading to commercial players)

25. Copyright BlueLime Consulting © Denmark: daily operation How to sell the wind energy ðEvery morning, each of the commercial players having wind turbines in their portfolio – and the TSO üFor each hour of the next day: make a forecast of the energy produced by “their” wind turbines during this hour. üThis energy is offered for sale at the exchange The TSO will sell “his” wind energy at any price (even at negative prices). Each of the commercial players will sell at a price slightly higher than zero (if they are selling on behalf of remote- controlled wind turbines). ðFor a seller: when the forecast turns out to be wrong, the seller must trade balancing energy with the TSO üApplies to TSO also: he’ll trade balancing energy with himself on same conditions as the commercial players. üProvides transparency: what is the TSO’s costs for handling “his” wind energy? July 30, 2010Anders Plejdrup Houmøller 25

26. Copyright BlueLime Consulting © July 30, 2010Anders Plejdrup Houmøller 26 Price volatility Which contribution from which factor? ðIn the Nordic area, the weather has a huge impact on the prices for electricity üDemand: Cold/mild winters have a huge impact on the demand In the Nordic area, air conditioning is not important, so we don’t have this summer effect… üSupply: The hydro situation creates huge quarterly/monthly variations So do the prices for fossil fuels (not a weather effect). üIn Denmark, the wind turbines create huge hourly variations (but not big variations on quarterly/monthly basis) In Denmark, about 20% of the electricity is produced by wind turbine.

27. Copyright BlueLime Consulting © Thank you for your attention! July 30, 2010Anders Plejdrup Houmøller 27 Anders Plejdrup Houmøller CEO BlueLime Consulting E-mail ah@bluelime.dkah@bluelime.dk Tel.: +45 28 11 23 00