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27 June 2002 – Graham Shuttleworth, Director, NERA. Main Lessons from the Electricity Markets of England & Wales, Norway and Spain. The study of England & Wales, Norway and Spain shows some features are inevitable, some not. Our study considers some common suggestions: “No compulsory pool”

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27 june 2002 graham shuttleworth director nera

27 June 2002 – Graham Shuttleworth, Director, NERA

Main Lessons from the Electricity Markets of England & Wales, Norway and Spain


The study of england wales norway and spain shows some features are inevitable some not
The study of England & Wales, Norway and Spain shows some features are inevitable, some not

  • Our study considers some common suggestions:

    • “No compulsory pool”

    • “Allow bilateral contracts”

    • “Pay generators the prices they bid”

    • “Abolish capacity payments”

    • “Create liquid markets”

  • We found that some of these suggestions are impossible to implement




Every competitive electricity market must have a compulsory mechanism for pricing imbalances
Every competitive electricity market must have a but not necessarily day-ahead tradescompulsory mechanism for pricing imbalances

Network

110 MWh

120 MWh

120 MWh

10 MWh

Market Operator

10 MWh



A gross pool allows bilateral contracts but treats all physical flows as if they were imbalances
A “gross” pool purchases (a “net pool”)allows bilateral contracts, but treats all physical flows as if they were imbalances


Both “gross” and “net” pools purchases (a “net pool”)

allow bilateral contracts,

but must have a compulsory system for settling imbalances.


In norway and spain and e w until 2001 the central market sets market clearing prices

Market purchases (a “net pool”)

Clearing

Price

1

2

3

4

5

6

7

8

In Norway and Spain (and E&W until 2001), the central market sets market-clearing prices

Price

€/MWh


Pay as bid markets do not produce systematically lower prices except as mistakes

Pay-as-Bid purchases (a “net pool”)

Price(s)

1

2

3

4

5

6

7

8

“Pay-as-bid” markets do not produce systematically lower prices (except as mistakes)

Price

€/MWh


The dual pricing of imbalances e w from 2001 penalises new entrants generators and retailers

Reward for surplus is very low purchases (a “net pool”)

Penalty for deficit is very high

The dual pricing of imbalances (E&W from 2001) penalises new entrants (generators and retailers)

Volume

(MWh)

Contract sales

Hours

NB: England and Wales = thermal system, no day-ahead central despatch

Norway – hydro system; Spain – Day-ahead market


In competitive markets, all prices settle around the “market-clearing level”

Setting dual prices for imbalances harms small companies

= new entrants


Generators must recover the cost of capacity in market prices or by other means 1 hydro
Generators must recover the cost of capacity in market prices or by other means (1 – Hydro)


Generators must recover the cost of capacity in market prices or by other means 2 thermal

Illustrative smoothing effect of a “LOLP.VOLL” system prices or by other means (1 – Hydro)

Generators must recover the cost of capacity in market prices or by other means (2 - thermal)


Electricity market designers can choose how to recover the costs of capacity:

  • Price spikes

  • Capacity payments

  • Capacity (contract) obligations


Norway splits its market into areas each with a different price

Prices in Ore/kWh costs of capacity:

/

Norway “splits” its market into “areas”, each with a different price

10

11

12

13

13

14

15

16

100 MW

Area Price = 12

Area Price = 15

@ 3


Most markets including england wales spain have one price with counter trades

.. costs of capacity:

Prices in Ore/kWh

@15

@13

@2

Holding

Account

Most markets (including England & Wales, Spain) have one price with “counter-trades”

  • NB: Spain uses the market price (14) for the counter-sale (instead of 13), but this policy has caused generators to distort offer prices and despatch

10

11

12

13

13

14

15

16

Price = 14

Counter-trade


Varying prices by region is more efficient in the short term,

but it requires the tolerance of local politicians and investors


Some elements of electricity markets are inevitable some are matters of choice
Some elements of electricity markets are inevitable, some are matters of choice

  • Inevitable elements:

    • A compulsory mechanism for pricing imbalances

    • Use of bilateral contracts to hedge prices

    • All prices tend towards the market-clearing level

  • Matters of choice

    • Centralise day-ahead markets for security of supply?

    • Set one market price for imbalances, or two penalties?

    • Pay for capacity in price spikes or more predictably?

    • Split the market or arrange counter-trades?


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