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Using implicit auctions by power exchanges to manage cross-border congestions: Decentralized Market Coupling B. den Ouden, President of Europex APEx Annual Conference 2003 Cartagena de Indias, Colombia, 14 october 2003. CONTENT. Europex members Implicit auctions The benefit for trading

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  1. Using implicit auctions by power exchanges to manage cross-border congestions: Decentralized Market CouplingB. den Ouden, President of Europex APEx Annual Conference 2003 Cartagena de Indias, Colombia, 14 october 2003

  2. CONTENT • Europex members • Implicit auctions • The benefit for trading • The benefit for Europe • The decentralized market coupling model • Step by step approach

  3. EuroPEX Backgrounds: • Looking after PX interests • EU policy • EuLocal taxation / policies New lines: • Slow • Huge investment Allocation of limited transmission capacity Nord Pool APX APX UK EEX Powernext Opcom Borzen GME OMEL

  4. Some congested borders in Europe Reasons: • National policies in the past • Fuel decisions • Local taxation / policies New lines: • Slow, huge investment Fragmented market! • Important: method of allocation of limited transmission capacity Nord Pool APX APX UK EEX Powernext Opcom Borzen GME OMEL

  5. Cross-border allocation methods • (New lines) • Non-market based: • First come first serve • Pro rate curtailing • Market based: • Explicit autioning • Implicit auctioning , market splitting/coupling • Counterbuying, compensating re-dispatch

  6. Non-market based methods • Stable when no congestion or non-competition • Unstable when there is a real value and full competition • First come first serve: fax run in the opening seconds • Pro rata: gaming for ever-bigger subscription volumes

  7. Market based methods • Attribute an economical value to the good being limitedly available: transmission capacity • Explicit auctioning: Explicit auction transmission capacity Cap. price Maximum im/export

  8. Explicit auctioning • Creates stability • Drawbacks: • Risky • Suitable for bigger players • No contribution to liquidity on either side • No “netting” of im & exports • Creates a barrier even at times when there is no congestion! • Leads to a fragmented European market

  9. Explicit auctions of transmission capacity Auction revenue Explicit auction transmission capacity Maximom export Spot market Area A Spot market Area B Price Cap. price ? Maximum im/export Quantity Quantity Maximum import

  10. Implicit auctioning (market coupling) Full transparency in constraint management Area price difference • One-step process • No difference between auction price and area price difference • Stimulates liquidity in each area Maximum capacity Price Spot Market Area A Spot Market Area B Δ Quantity Quantity Maximum capacity

  11. Implicit auctioning (market coupling):Full area integration when no constraint One price for both areas • Areas merge at that moment • Trade barriers completely gone • Liquidity shared Allocated capacity Price Spot Market Area A Spot Market Area B Quantity Quantity Allocated capacity

  12. The benefit for trading • One-step process, ease of access • Priority on interconnectors based on price • Interconnector schedules based on area price difference • Hedging instruments • All local players also play internationally • Encourages liquidity and transparency ……thereby mitigating market power abuse

  13. The benefit for Europe • European market fragmented by constraints • Market coupling directly unifies markets whenever there is no constraint • So, for x % or the time, markets will be unified. • Then, by other methods (e.g. additional transmission capacity) this x% percentage can be raised gradually. • Contributes to the establishment of the internal European electricity market

  14. The decentralized model : objectives

  15. Decentralized model: overview • Each exchange to receive its area-based bids • Exchanges exchanging bid – based information • Adapting exchange price in each area: • Unconstrained: prices equal • Constrained: prices are set with maximum im/export • Iteration process for blocks • Local scheduling and balancing

  16. Decentralised Market Coupling (DMC) – 1 - • TSOs to publish available capacity and power transfer distribution factors (PTDFs) • Power exchanges (PXs) gather bids & offers in their area • Then calculate ‘net export curve’ showing impact of export (and import) volumes on hourly area price • PXs calculate optimal use of network across DMC region • Includes bilateral bids who pay (or counter-flows receive) price difference between areas

  17. Decentralised Market Coupling (DMC) – 2 - • PXs repeat process to accommodate block bids (several iterations, or a sequential process in some regions) • PXs notify and settle all area commitments (including cross-border bilaterals) • Deviations handled by local area imbalance arrangements More details: see Europex paper as submitted

  18. Influence of im/exports on area prices(more details: see Europex paper at www.europex.org) area A area B Price Price demand Isolated price demand supply Isolated price supply Spot market volume Spot market volume

  19. Features of Decentralized Market Coupling • Enables coupling of multiple areas together with efficient allowance for loop flows on meshed networks • Supports block bids and other local market requirements • Supports bilateral contracts and netting of counterflows • Requires only limited harmonization of market rules, and no change to local notification/imbalance arrangements • Provides open and fair market access with no additional barriers beyond existing local PX requirements • Transparent, rule based, auditable methodology

  20. Key Points (1) • All physical capacity and PTDFs to be made available in the day-ahead implicit auction • Physical capacity must be firm and published prior to PX bid submission to ensure orderly and efficient market • TSOs to make allowance for unplanned events/outages • Regulatory issue: maximize capacity (DMC can contribute to reducing TSOs’ exposure to loop flow uncertainty) • Optimize the use of the physical network and maximize liquidity (+reliable reference prices) • hedge forward price risk with financial products • phase out explicit auctions of physical transmission rights • handle adjustments in intra-day markets

  21. Key Points (2) • Owners of long-term capacity rights can, in effect, sell them by offering to schedule a counterflow. Historical long-term contracts could be converted into financial transmission rights • Rules and procedures will need defining for each ‘cluster’ of markets, plus some harmonization of market rules will be necessary - possibly could be overseen by a regional group comprising regulators, TSOs, PXs and participants • PXs will need to meet certain requirements - e.g., membership requirements, information publishing, audit, disputes procedures

  22. Step by step approach Implicit auctioning between exchanges: step by step process • 1. Bilateral pilots at several places in Europe • 2. Regional developments • 3. European integration Manageable learning curve

  23. Summary • Directly a partial (x %) integration of markets • Local Players co-acting on European scale • Better liquidity and transparency • Mitigation of market power abuse • Step-by-step process, practical solution • Incremental learning curve

  24. Supplementary material Area A Area B Price Price PB P*B P*A PA Q*B Import Q*A Export Import Export

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