NWE day-ahead meeting, Copenhagen, 22/08/2012

1. Handling of grid losses of HVDC cables in NWE Market Coupling-EMCC proposal for compensation of grid losses – NWE day-ahead meeting, Copenhagen, 22/08/2012

2. Overview • Background • Grid losses • EMCC proposal - compensation of grid losses • Impact of loss functionality - prices, flows, grid usage • Recent developments • Discussion 2

3. Background (I) • Baltic Cable transmission capacity is implicitly allocated through EMCC in the ITVC. • Baltic Cable’s contract with EMCC: EMCC to implement minimum flow, maximum change,loss minimization by 1st Jan. 2011. • EI, BNetzA, EMCC, Baltic Cable started discussions on the issues end 2010/early 2011. • NE RI discussed losses issue during 2011 and drafted discussion paper (but not finalised?). • July 2012: Baltic Cable again approached EI and BNetzA as regards a loss functionality.

4. Background (II) • August 2011: Baltic Cable, BritNed and IFA submitted a paper to NWE TSOs on requirements. • According to cable owners, TSOs concluded • inclusion of losses increases welfare • should be dealt with by including the losses in the balancing constraint • approach already available in PCR algorithm. • TSOs indicated that regulatory approval will be needed before actual implementation. • March 2012: These cable owners (now including Moyle and EirGrid) approached Ofgem and BNetzA.

5. Grid losses • Grid losses are a physical reality of HVDC and AC grids. • HVDC losses can be directly attributed to commercial trades • TSOs/cable owners have to balance losses  incur cost • Commercial cable owners’ problem is this: • if they use cable like TSOs, loss is incurred during hours, where congestion rent is smaller than cost of grid loss • As these costs occur they are part of the overall welfare. • However, in current Market Coupling settings grid losses are not included in the social welfare optimization process. • Any functionality to cover grid losses could/should (?) be applied regardless of ownership type (TSO/cable owner). • Compatibility with EU Regulation 714/2009?

6. EMCC proposal (I) • 2011 Baltic Cable and NorNed asked EMCC to develop a grid loss compensation mechanism. • EMCC developed a concept which fulfils criteria of welfare optimisation and covering of losses. • The concept focuses on HVDC links NorNed, Kontek and Baltic Cable. • It can be introduced without changes to systems other than EMCC’s (no PX or TSO systems), unless interconnectors within Nordic. • Minimum flow constraint could be implemented.

7. EMCC proposal (II) • Physical losses are reflected in the coupling system by placing different volumes of buy and sell orders at NPS, EPEX and APX: • Qimp < Qexp (Import smaller than Export; Export not larger than max. ATC) • Qimp = Qexp x LF (LF = Loss factor; e.g. Kontek 2,5% losses: LF = 0,975) • Welfare optimization: • Pimp x Qimp = Pexp x Qexp • Pexp = LF x Pimp

8. EMCC proposal (III) • After Market Coupling process: • EMCC could e.g. split the bought volume into loss energy and flow energy. • Loss energy could be sent per separate schedule to balance group for TSO/cable owners purposes. • Cross-border flow sent per schedules as today. • EMCC could publish either import or export value on its website. • LF constraint could be configured for any interconnector. • LF could be used for AC links (e.g. DK1-GER) too.

9. EMCC proposal (IV) • Example: Losses: 5 %; ATC: 100 MW • Case 1: Result of Market Coupling without loss functionality • Market A: PA = 98 €/MWh; Market B: PB = 98 €/MWh • Congestion rent (CR) = 0 • Cost for losses (GL): 0,5 MWh x 98 €/MWh = 49 €/MWh • Net Income: NI = CR – GL = - 49 €/MWh • Case 2: Result of Market Coupling with loss functionality • Market A: PA = 100 €/MWh; Market B: PB = 95 €/MWh • Sell order Market A: 9,5 MWh • Buy order Market B: 100 MWh • Congestion rent (CR): 5 €/MWh x 9,5 MWh = 47,5 € • Cost for losses (GL): 0,5 MWh x 95 €/MWh = 47,5 € • Net income: NI = CR – GL = 0 Note: To get the full picture consumer and producer rentswould need to be calculated as well.

10. Impact of loss functionality (I) • Prices of coupled areas will • differ by LF, if line not fully used • differ by more than LF, if line fully used • be equal only if there is no flow on the line • Average price spreads will increase (slightly) • Flow on the interconnector with LF • starts, if price difference is larger than LF • be zero, if price spread is smaller than LF • will never lead to equal prices

11. Impact of loss functionality (II) • Algorithm prioritizes flows on interconnectors without or with small loss factors. • The system tends to shift from interconnectors with higher LF to those with lower LF. • Number of (small) adverse flows will decease • Single trader’s point of view • Situations can occur in which offers are implausibly rejected. • Change in social welfare distribution: • Shift of consumer and producer rent to congestion rent and grid losses.

12. Impact of loss functionality (III) • New intraday trading opportunities for cable owners • In case the market changes intraday (smaller price difference), inclusion of LF in day-ahead may open new trading opportunities intraday. • Cable owners can make extra profits intraday by countertrading actions, thereby also reducing grid losses and physical flows on the cable.

13. Recent developments (I) • EMCC commissioned scientific report (IAEW, RWTH), which recommends introduction of grid loss compensation factor. • EMCC has tested all systems and recommends introduction provided regulatory support. • No changes in PX systems necessary if only losses on NorNed, Kontek, and Baltic Cable are included. • Change in Sesam (NPS) necessary if losses between Nordic countries should be considered. • EMCC could introduce new system within short time period. • Baltic Cable aims to implement the loss functionality by 30 September 2012 • Deadline for Regulatory intervention set Aug. 31st

14. Recent developments (II) • ENTSO-E Algorithm Starting Point Assessment Report: • Losses requirement available in PCR but not operational • Flow ramping constraints available in PCR • Minimum stable flow not developed for COSMOS so far • LF need to be determined properly • In case, communication to the market is important!

15. Discussion • Open issues: • Is the proposal in line with EU Regulation 714/2009? • Should loss factors of AC interconnectors be included? • Is (EU-wide) coordination and/or harmonization useful or necessary? • Are there any frictions with other market segments (long-term, intraday)? • Any other thoughts?

16. Thank you for your attention! 16