NWE Cross Border Intraday APX and Belpex’s views on XBID enduring solutions (Brussels 29/07/2010)

1. NWE Cross Border Intraday APX and Belpex’s views on XBID enduring solutions (Brussels 29/07/2010)

2. ELBAS compatibility with the target model • ELBAS as a market model • Excellent basis for the target model, as most of its features are at the root of the target model (e.g. continuous trading and implicit capacity allocation, real-time direct TSO control) • Nevertheless, some changes could be performed in order to further improve the market model, such as: • Allocation of capacity surplus in case of increase (decrease?) of capacity • Enhanced treatment of block orders (automatic cross-matching of block and hourly products) • Introduction of more sophisticated orders to replace OTC needs • ELBAS as an IT System • Excellent basis for the target model, as it exists, builds over 10 years of experience in XBID, and is accepted (and asked for) by the market • May necessitate technical changes/improvements in order to fully cope with the target market model design, once established

3. Improvement 1: reassessment of capacity “Automatic matching can be performed when additional capacity becomes available” (AHAG) • This must mean that merit order (i.e. economic signals) determines which orders are cleared • This may mean different implementation choices • Capacity offered at no price: remaining money after paid-as-bid goes to oldest timestamp (i.e. pure FCFS) • Risk of mouse frenzy (i.e. competition for oldest timestamp) • Risk of liquidity leakage (if capacity systematically cheaper in ID) • Capacity offered at no price: remaining money after paid-as-bid apportioned based on matched volumes • Rule is rather arbitrary but provides an equal discount per MWh to all trades (i.e. fairness) • Capacity offered at any price: TSOs collect the remaining money after paid-as-bid • Risk of liquidity leakage • TSO receive revenues though there is no congestion • Capacity offered at a given minimum price • Risk of (perception of) TSO gaming • Capacity offered at day-ahead price • Risk of under-allocation of capacity (too high pricing) • Price difference and a congestion revenue “à la day-ahead” • This acutally means (explicitly or implciitly) auctioning the capacity because paid-as-bid prevents to set unique prices in a bidding area => Risk of overkill solution. • Other? • With regard to the target model, APX and Belpex strongly support rule 1, and weakly prefers rule 2b (to be determined by AHAG) • Rule 1 requires all economic information to be collected in a single system: compatible with one-to-one (as agreed in AHAG) or many-to-one models (i.e. not compatible with one-to-many approaches)

4. Improvement 2: sophisticated blocks orders “Block orders would be matched following 3 options: • Block bids exclusively matched with block bids • In addition to matching of block bids with block bids, block bids can be matched with a succession of hourly bids and block bids • Market parties can introduce block bids and choose whether they are matched according to 1) or 2) above” (AHAG) With regard to the target model, APX and Belpex believes that • Finding and matching all feasible trades (i.e. cross-matching between all kind of products, option 2) is an essential feature of an efficient market model. This implies that all information is gathered in a single system (i.e. not compatible with a one-to-many approach) • Block orders should be enhanced in order to provide more flexibility to traders and to take better into account physical and economical constraints (e.g. to cope with startup or outage of production plants, …) • More advanced matching algorithms have to be developed for this purpose

5. Improvement 3: information display “Market parties shall have continuously real time information on: • All bids of all participating local order book ID platforms to the extent these bids can be matched using the available cross-border capacity. • Updated available trading capacities between all price/delivery areas in a transparent and direct way.” (AHAG) • More sophisticated block orders and full cross-matching of products imply additional needs in terms of information to be displayed on the trading platforms. • In particular, it is essential for the traders to know how far his order is from the best opposite matchable orders (i.e. this may imply several counterparties in several markets) • Such sophisticated calculations should be provided in real-time to traders, and are hardly compatible with a one-to-many model, as all information on the best counterparty is not directly available => Belpex is currently prototyping a trading platform algorithm with features addressing improvements 1, 2 and 3