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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. CONTENT. Europex members Implicit auctions The benefit for trading

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

content
CONTENT
  • Europex members
  • Implicit auctions
  • The benefit for trading
  • The benefit for Europe
  • The decentralized market coupling model
  • Step by step approach
europex
EuroPEX

Backgrounds:

  • Looking after PX interests
  • EU policy
  • EuLocal taxation / policies

New lines:

  • Slow
  • Huge investment

Allocation of limited transmission capacity

Nord Pool

APX

APX UK

EEX

Powernext

Opcom

Borzen

GME

OMEL

some congested borders in europe
Some congested borders in Europe

Reasons:

  • National policies in the past
  • Fuel decisions
  • Local taxation / policies

New lines:

  • Slow, huge investment

Fragmented market!

  • Important: method of allocation of limited transmission capacity

Nord Pool

APX

APX UK

EEX

Powernext

Opcom

Borzen

GME

OMEL

cross border allocation methods
Cross-border allocation methods
  • (New lines)
  • Non-market based:
    • First come first serve
    • Pro rate curtailing
  • Market based:
    • Explicit autioning
    • Implicit auctioning , market splitting/coupling
  • Counterbuying, compensating re-dispatch
non market based methods
Non-market based methods
  • Stable when no congestion or non-competition
  • Unstable when there is a real value and full competition
  • First come first serve: fax run in the opening seconds
  • Pro rata: gaming for ever-bigger subscription volumes
market based methods
Market based methods
  • Attribute an economical value to the good being limitedly available: transmission capacity
  • Explicit auctioning:

Explicit auction transmission capacity

Cap. price

Maximum im/export

explicit auctioning
Explicit auctioning
  • Creates stability
  • 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
explicit auctions of transmission capacity
Explicit auctions of transmission capacity

Auction revenue

Explicit auction transmission capacity

Maximom

export

Spot market

Area A

Spot market

Area B

Price

Cap. price

?

Maximum im/export

Quantity

Quantity

Maximum

import

implicit auctioning market coupling full transparency in constraint management
Implicit auctioning (market coupling) Full transparency in constraint management

Area price difference

  • One-step process
  • No difference between auction price and area price difference
  • Stimulates liquidity in each area

Maximum

capacity

Price

Spot Market

Area A

Spot Market

Area B

Δ

Quantity

Quantity

Maximum

capacity

implicit auctioning market coupling full area integration when no constraint
Implicit auctioning (market coupling):Full area integration when no constraint

One price for both areas

  • Areas merge at that moment
  • Trade barriers completely gone
  • Liquidity shared

Allocated

capacity

Price

Spot Market

Area A

Spot Market

Area B

Quantity

Quantity

Allocated

capacity

the benefit for trading
The benefit for trading
  • One-step process, ease of access
  • Priority on interconnectors based on price
  • Interconnector schedules based on area price difference
  • Hedging instruments
  • All local players also play internationally
  • Encourages liquidity and transparency

……thereby mitigating market power abuse

the benefit for europe
The benefit for Europe
  • European market fragmented by constraints
  • Market coupling directly unifies markets whenever there is no constraint
  • So, for x % or the time, markets will be unified.
  • Then, by other methods (e.g. additional transmission capacity) this x% percentage can be raised gradually.
  • Contributes to the establishment of the internal European electricity market
decentralized model overview
Decentralized model: overview
  • Each exchange to receive its area-based bids
  • Exchanges exchanging bid – based information
  • Adapting exchange price in each area:
    • Unconstrained: prices equal
    • Constrained: prices are set with maximum im/export
  • Iteration process for blocks
  • Local scheduling and balancing
decentralised market coupling dmc 1
Decentralised Market Coupling (DMC) – 1 -
  • TSOs to publish available capacity and power transfer distribution factors (PTDFs)
  • Power exchanges (PXs) gather bids & offers in their area
  • Then calculate ‘net export curve’ showing impact of export (and import) volumes on hourly area price
  • PXs calculate optimal use of network across DMC region
  • Includes bilateral bids who pay (or counter-flows receive) price difference between areas
decentralised market coupling dmc 2
Decentralised Market Coupling (DMC) – 2 -
  • PXs repeat process to accommodate block bids (several iterations, or a sequential process in some regions)
  • PXs notify and settle all area commitments (including cross-border bilaterals)
  • Deviations handled by local area imbalance arrangements

More details: see Europex paper as submitted

influence of im exports on area prices more details see europex paper at www europex org
Influence of im/exports on area prices(more details: see Europex paper at www.europex.org)

area A

area B

Price

Price

demand

Isolated price

demand

supply

Isolated price

supply

Spot market volume

Spot market volume

features of decentralized market coupling
Features of Decentralized Market Coupling
  • Enables coupling of multiple areas together with efficient allowance for loop flows on meshed networks
  • Supports block bids and other local market requirements
  • Supports bilateral contracts and netting of counterflows
  • Requires only limited harmonization of market rules, and no change to local notification/imbalance arrangements
  • Provides open and fair market access with no additional barriers beyond existing local PX requirements
  • Transparent, rule based, auditable methodology
key points 1
Key Points (1)
  • All physical capacity and PTDFs to be made available in the day-ahead implicit auction
  • 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)
  • 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
key points 2
Key Points (2)
  • 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
  • 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
  • PXs will need to meet certain requirements - e.g., membership requirements, information publishing, audit, disputes procedures
step by step approach
Step by step approach

Implicit auctioning between exchanges: step by step process

  • 1. Bilateral pilots at several places in Europe
  • 2. Regional developments
  • 3. European integration

Manageable learning curve

summary
Summary
  • Directly a partial (x %) integration of markets
  • Local Players co-acting on European scale
  • Better liquidity and transparency
  • Mitigation of market power abuse
  • Step-by-step process, practical solution
  • Incremental learning curve
supplementary material
Supplementary material

Area A

Area B

Price

Price

PB

P*B

P*A

PA

Q*B

Import

Q*A

Export

Import

Export

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