2. SUMMARY OF THE IG DISCUSSION PAPER ON THE BALANCING IN THE BALTICS Aistija Zubaviciute, NCC Baltic Electricity Market Mini-Forum 23rd November 2006, Vilnius

3. 2 SOME DATA IN THE BALTIC ELECTRICITY MARKETS Consumption in 2005: EE – 7,5 TWh LV – 6,5 TWh LT – 8,4 TWh Generation companies >5% in 2005: EE – 1 LV – 1 LT – 3 Market opening in 2005: EE – 12% ( 2009 – 35%, 2013 – 100%) LV – 76% LT – 74% Independent suppliers in 2005: EE – 0 LV – 7 LT – 20

4. 3 LEGAL ACTS REGARDING BALANCING Country/ Legal acts ParliamentGovernmentRegulator EstoniaElectricity Market Act – July 2003 Grid Code – July 2003Methodology of calculation of the price of balancing energy – July 2003 LatviaElectricity Market Act – May 2005 Grid Code – 2000Methodology should be prepared till end of 2006 LithuaniaLaw on Electricity – July 2004 Grid Code – December 2001; Electricity Trading Rules – December 2002; Rules of Electricity Trading at Auction – April 2003 Methodology of regulation of the price of balancing energy – December 2002

5. 4 ESTONIA: Balance settlement means the settlement of electricity trades which have taken place during a specific hour LITHUANIA: Balancing electricity means electricity which is consumed/not consumed by customers or generated/not generated by producers in derogation from the quantities of electricity planned in the schedules drawn up adhering to the Electricity Trading Rules approved by the Government or a body authorised by it DEFINITIONS

6. 5 ESTONIA: TSO is responsible for national balance settlement settles balance power between TSO and balance providers settles balance power between TSO and other neighbouring countries the final settlement is ready during 3 months LATVIA: TSO is responsible for system balancing and ensuring operational stability in the transmission system performs balance settlement between TSO and those market parties having balancing agreement with TSO has an open delivery agreement with a neighbouring system LITHUANIA: TSO carries out the national balancing function by providing uniform, non-discriminatory and competitive conditions for all market participants settles balancing and regulation energy between TSO and other neighbouring countries organizes regulation energy and reserve capacity auctions BALTIC TSOs ROLE

7. 6 ESTONIA: Reference price of balance energy – the selling or purchase price with system open supplier Price of balance energy in system has to cover the following expenses of TSO: –any justified expenses incurred in the purchase of regulating capacity –any justified expenses incurred in connection with balance determination –any justified expenses incurred in connection with the purchase and sale of balancing energy –ensure justified profitability LATVIA: The methodology has not been officially elaborated yet LITHUANIA: Reference price of balance energy – the selling or purchase price with open balancing energy supplier or/and regulation energy auction price Balancing energy price is market based price PRICING

8. 7 PRICING FORMULAS Country/ Formula Purchasing from TSOSelling to TSOMeanings Estonia the selling or purchase price with system open supplier - Latvia Cbal+ = Cref * Ktime * Kbal+Cbal- = Cref * Ktime * Kbal- Cref – average market reference price [EUR/MWh]; Ktime – coefficient dependent from time period of the day (night, peak, off-peak): Off-peak K=1 – working days from 0700 to 0800, from 1000 to 1700 and from 2000 to 2300; Peak K=1,3 – working days from 0800 to 1000 and from 1700 to 2000; night K=0,7 – working days from 2300 to 0700, Saturdays, Sundays and holydays – whole 24 h; Kbal+ = 1,2 Kbal- = 0,8 Lithuania Cbal+ = Creg. up * Kbal+Cbal- = Creg. down * Kbal- Creg. up – hourly average regulation up price Creg. down – hourly average regulation down price Kbal+ = 1,2 Kbal- = 0,8

9. 8 EXAMPLES OF IMBALANCE PRICES Notes: Period 01.10.2006 – 31.12.2006 for Latvia; Period 01.09.2006 – 31.12.2006 for Lithuania (It could change till the end of year).

10. 9 ESTONIA: it should be discussed in the meeting LATVIA: no comments LITHUANIA: the method applied in the national market is based on the classical scheme used in the most countries of the Western Europe. there are possible some corrections on the imbalance coefficients in relation with the bilateral agreement between Russia and Lithuania ADVANTAGES&DISADVANTAGES

11. 10 Bilateral agreement between EE and LV >> LV and RU Bilateral agreement between LT and RU >> LT and RU (there is a contract between LT and LV, but not activated) Such system works quite well – are there any other options? - Yes PRESENT STATUS OF CONTRACTS

12. 11 1.No trading, except emergency – traditional model 2.Cross-border Reserve Pooling – has been used in Nordel 3.Cross-border Reserve Trading – open to reciprocity –Reserve capacity payment and the exclusive right to use the reserve (Germany) –Only based on energy payment (France) 4.Sharing of Reserve Capacity (no exclusive right to use their own share of the common reserve) – present model in Nordel MODELS DESCRIBED IN ETSO REPORT

13. 12 Models 2 and 4 imply some form of balancing mechanism integration and require product harmonization Models 2 and 3 may reduce long term reserve margins Model 4 enables full integration of balancing mechanisms (centralization) and may reduce reserve margin reguirements, however when applied over a vaster area may be restricted due to transmission bottlenecks CHARACTERISTICS OF TECHNICAL MODELS

14. 13 Challenges: –Product compatibility –Differences in price structure/incompatible product values –Differences in procurement position of TSOs Consequences of cross-border trade of Tertiary Reserves: –Change in procurement costs for TSOs –Potential decrease or reserve margins in the long term Prefered conditions: –Sufficient competition –Transparency A key element for an efficient market is right pricing of products, also needed a Balance Management Reference Model EVALUATION BY ETSO REPORT

15. 14 Improved bilateral contract market –All Baltic countries have a possibility to buy the balance energy from each other –A possibility to buy from other countries than the Baltic region –Coordinated balance towards other countries Common Baltic reserve and regulation power market OPTIONS?

16. 15 If Common Baltic reserve and regulation power market 1 stage –Setting main principles and procedures for RRPM –Princing concepts –The creation of Baltic Operational System (BOIS) –Disturbance (emergency) reserve market only 2 stage –Pricing concepts adaptation for regulation power market –The adjusting of BOIS for regulation power trade –Disturbance (emergency) reserve and regulation energy market –Balancing pricing WHAT IS NEEDED?

17. 16 THANK YOU! www.regula.lt