Assessment of differences in market designs in the CS region

1. Assessment of differences in market designs in the CS region Milan18 July 2008

2. Background • In the 6th IG meeting PXs were asked to present an assessment of the differences in market designs. • The assessment is the second step of the action plan covering 2008 activities for the implementation of day-ahead implicit auction in the CS region. • The assessment summarizes the results of a survey based on questionnaires sent to TSOs and PXs of the CS region. • The following Countries provided an answer: Austria (EXAA and APG), France (PowerNext), Greece (HTSO), Italy (GME and Terna) and Slovenia (Borzen). • Additional information was collected through the PXs’ and TSOs’ websites or through direct contacts.

3. Background The questionnaire focused on the following features of the day-ahead energy markets operating in the CS region: Overview of trading arrangements Features of traded products Algorithms and matching rules Impact of the current Italian Market Splitting on the cross-border implicit auction project for the CS Region Timing Guarantee and settlement systems Governance, institutional and regulatory framework Monitoring and transparency rules Market liquidity

4. 1. Overview of trading arrangements • PXs exist in all Countries, except Switzerland where EEX organizes a day-ahead market for the Swissgrid balancing area • PXs operate markets with physical delivery in all Countries (orders may refer to a specific point of injection/withdrawal or to the control area of the relevant TSO) • During the design phase of market coupling, it could be investigated whether other differences not specifically addressed in the questionnaire could would have different impacts on the coupling project compared to impacts they already have on the results of explicit auctions: • Eventual modification of the arrangements for market participants to notify import-export schedules to TSO’s. • Impact of Market coupling to the contractual framework between PXs and TSOs (shipping agent, data flows, payments and guarantess, etc). • Consequences of coupling a pool-like market (e.g. IPEX) with an exchange-like market (e.g. Powernext, EEX, EXAA, etc.) • Impact of deviating national regulations on renewables, CO2 etc. (cross-subsidizing effects)

5. 2. Features of traded products • Traded products in the day ahead auction are not homogeneous across markets: • In Italy, Greece and Slovenia only hourly products • In Austria, France and Germany both hourly and block orders • The presence of block orders in case of Market Coupling implies: • either a mechanism based on iterations (as in Belpex); or • implementing of block constraints in the central solver algorithm; or • implement some form of volume coupling • Price and volume steps are rather uniform • some form of coordination of the format of the bids/offers sent off by PXs to the Central (coupling) office will be required for market coupling

6. 3. Algorithms and matching rules • There are substantial differences in the algorithms that might impact on the choice of the market coupling model: • the most relevant feature is the use of locational prices to implement the allocation of available domestic transmission capacity (IPEX and HTSO) • Price caps/bid limits/values of lost loads are quite diverse: • the lowest one is implemented in Greece (150 €/MWh) • the highest one is implemented in Austria, France and Italy (3.000 €/MWh) • For the efficient functioning of the market coupling, coordination on those values might be crucial in times of generation tightness.

7. 4. Impact of the current Italian Market Splitting on the cross-border implicit auction project for the CS Region • The Italian reference price for the market coupling is the price of the neighboring Italian zone to the border in which the coupling mechanism is implemented (North zone for France, Switzerland, Austria and Slovenia, Brindisi zone for Greece): • the same reference prices of the Italian market are actually considered for explicit auctions • One of the approaches to integrate the Italian market splitting in a regional market coupling could be the following: • the hypothetical NEC of IPEX would describe the relevant zonal prices with different quantities of import/export from/to the coupled market • the hypothetical NEC of IPEX would be calculated by considering the domestic congestions as from the market splitting algorithm

8. 5. Timing • Market coupling requires all involved Countries to synchronize at least in the following deadlines: • collection of demand and supply bids by all involved markets must end before the coupling algorithm is run • publication of domestic market outcome by each national PX must take place after the market coupling results are calculated • There is an heterogeneity both in terms of gate closure times and in terms of computation time: • a strong effort in the direction of the harmonization of timing is very likely to be necessary in order to proceed with the coupling of the day-ahead markets in the CS Region.

9. 6. Guarantee and settlement systems • Guarantees required to participate in the organized markets are similar in all Countries (generally a bank letter of credit and/or a cash deposit covering the countervalue of the outstanding debt). • Settlement times are very diverse. The greatest difference is between: • PowerNext: the working day after the trading day • IPEX: the 16th working day of the second month following the month of trading • In case PXs with different settlement timeframes are coupled, PXs and Regulators should address the issues of harmonizing those timeframes or, alternatively, covering the implied financial costs or allocating the extra revenues

10. 7. Governance, institutional and regulatory framework • Authorities involved in the control of day-ahead markets are, uniformly across Countries: • the energy regulatory authorities • the governments (through the Ministries or Directorates for Energy) • In France, the Financial Markets Authority (AMF) controls Powernext activities. However, since day-ahead products are defined as commodities, they do not fall under the scrutiny of the AMF. • In all Countries national PXs and TSOs interact closely in organizing the electricity markets.

11. 8. Monitoring and transparency rules • Market monitoring is generally a function carried out by the energy regulatory authorities, with the support of PXs • Publication of aggregated supply and demand curves, traded volumes and prices and others indices is a common practice

12. 9. Market liquidity • Market liquidity provides an indication of the amount of trades that occurs on the organized markets vs. bilateral trading. • Levels of liquidity of the markets are very different. • Market coupling could increase the liquidity of the involved markets.