Den Hague 10/10/11 Yves Langer

1. Capacity pricing workshop Den Hague10/10/11 Yves Langer

2. Context and prerequisites In the day-ahead timeframe, electricity is auctioned together with XB capacity which is auctioned implicitly. Its price equals the price difference between the adjacent markets In the intraday timeframe – where trading takes place on a continuous basis – no single price applies to all transactions. Therefore, extracting the value of the XB capacity is less obvious The question at stake is: how should the ID XB capacity be priced? To be efficient, any ID XB capacity pricing scheme should: Be (highly) compatible with the continuous trading design Be transparent in its design and its implementation Not segment order types => requires some elements of the enduring solution (i.e. COSMIX-like approach)

3. What are the objectives at stake? To be able to define the most suitable intraday XB capacity pricing scheme, stakeholders should first agree on the objectives pursued with such a design Then, the possible designs to price XB capacity should be assessed against these objectives Examples of objectives are ensure that ID capacity is allocated to the most profitable trades ensure consistency between the different timeframes (notably in order to run an orderly market and avoid liquidity leakages due to incoherencies between the different timeframes) provide the right investments incentives in terms of generation, consumption and capacity building ensure that the maximum of capacity is allocated in the most efficient and least costly manner, while guaranteeing a certain level of security of supply Avoid gaming possibilities (or perceptions thereof) from all stakeholders … “THE” key question

4. Terminology proposal Aggressor In continuous market under paid-as-bid scheme, the participant who performed the last action on the platform which triggered a deal is called the aggressor Surplus In continuous market under paid-as-bid scheme, the remaining money of a deal after all matched orders are paid the price of the bids is called the surplus. The surplus - which is by construction non-negative (otherwise there is no deal) and maximum (see best price rule) - is allocated to the aggressor • Best price rule • Any continuous trading platform guarantees that the aggressor receives the best possible price for its deal. This is called the best price rule • Consequently – if they result in a trade – the two following actions should provide the same prices • Point-and-click any order of 100 MW (i.e. the most profitable order or another one) • Submit an order of 100 MW at a very hig/low price (i.e. automatching) • Bottleneck income • In the specific context of IDXB, the surplus generated by an increase of the available capacity after recalculation is called the bottleneck income (i.e. yellow surface) euro Additional capa (congestion) Additional capa (no congestion) NL offer BE offer NL curves BE curves NL demand BE demand MW

5. Cases where capacity has value Congested There is no capacity It is a scarce resource It has a value… but there is nothing to price Congestion relieved by netting Capacity is freed up This becomes a non-scarce resource It has no value No congestion (with or without capacity recalculation) There is remaining capacity It is not (yet) a scarce resource It has no value (for the moment) Congestion relieved by capacity recalculation (+ opening of XB markets) Capacity is freed up It is (was?) a scarce resource It has a positive value as it allows new profitable trades Congestion is created/exacerbated by capacity recalculation (decrease) Necessity to “rebuy” capacity It has become a scarce resource It has a positive value as profitable trades are no longer allowed => The next slides list the 3 non-exclusive design categories (+ implementation options) to capture the value of XB capacity,

6. Category A: Allocation of the bottleneck income At any moment, capacity must be allocated to the most profitable trades. This is done by (implicitly or explicitly) maximizing the surplus and traded volume after a change in capacity or order book. In case of increase of capacity after recalculation, this surplus - called “bottleneck income” – has to be allocated in some way: Option A1: All bottleneck income goes to TSOsIf TSOs are considered as “regular participants”, then they are the aggressors – i.e. their last actions of offering more capacity triggered the deal – and could collect all the bottleneck income Option A2: All bottleneck income goes to the marketIn case capacity is set to be free (current practice), then the bottleneck income has to return to the market. Several arbitrary methods might be considered, for example (non-exhaustive list): Matched Order with the oldest timestamp (current ELBAS rule) Apportioned so that all orders are matched at a single price (current ComXserv practice is at the middle of the remaining spread. NB: this is hardly compatible with blocks) Apportioned based on matched volumes (i.e. provides an equal premium in €/MWh for all matched orders) …. Option A3: Bottleneck income is share between the market and the TSOsSeveral arbitrary rule might be considered. NB: A repartition between buyers, sellers and TSOs similar to the day-ahead implicit auction mechanism, where all trades in each market clear at the same price and where the congestion revenue is the product of the price differences and the allocated capacities seem the most attractive one. However, this is hardly compatible with the continuous paid-as-bid principle, especially in the presence of blocks (complexity, different algorithms, pricing rule) and should therefore be discarded.

7. Category B: Price of offered capacity In a paid-as-cleared auction (i.e. day-ahead scheme), economical theory suggests that orders should follow the marginal costs. Therefore, capacity is offered at a minimum price of zero (= marginal cost) but can result in a positive price in case of congestion. Notwithstanding the discussion above (i.e. Category A), there is no economical evidence that either energy or capacity should be offered at their marginal costs in a paid-as-bid scheme. Let us therefore investigate the theoretical possibility of offering capacity at a positive price. At which price should capacity be offered?Several options might be proposed, where price is either fixed or varies over time, as for example (non-exhaustive) Option B0: Capacity is always offered at a zero price Option B1: Capacity is offered at the day-ahead price of capacity Option B2: Capacity is offered at a price linked to the implicit, explicit or fictive cost of the capacity and the calculation thereof (e.g. flow-related charges of Britned) Option B3: a price varying overtime (depending on remaining time until GCT, remaining XB capacity, …).

8. Category C: rebuy of capacity After capacity recalculation, TSOs might identify that too much capacity has been allocated on a firm and obligatory basis, and that the security of the system might be endangered In that case, TSOs typically use specific means to restore the system security. Some of these means (such as a change in the grid topology) are free, while others (such as inter-TSO redispatch) have a positive cost for TSOs TSOs may also consider using the IDXB solution to “rebuy” (i.e. by performing a counter-trade) the capacity that has been oversold Such a fully market-based method might be seen as a complimentary mean to restore system security, to be used by TSOs in case this solution is cheaper than others

9. Description of current approaches

10. Example of possible IDXB capacity pricing price P? t0release of capacity t? time