Central Allocation Office: Empowering Cross-Border Capacity Trading

1. Advanced allocation starts with us! CAO - the CEE Allocation office CEE Capacity Congestion Management Project Tomaz Ostir – ICT Manager 23rd June 2010, Portoroz

2. Agenda • Development of the energy markets – the road to Coordinated Auctions • Central Allocation Office • Company – initiative and first steps • Team – multicultural & interdisciplinary • Work • New approach to crossborder capacity trading - FBA • Future development of crossborderacitivities

3. The road to coordinated auctions /1 • 1st Energy Directives: 19 Feb 1997„Internal Market in Electricity and Gas“ • Instant Opening: UK, FIN, SWE, DE • Slow Movers: AT, ESP, NL • Late Adopters: FRA, GR, IT

4. The road to coordinated auctions /2 • 2nd Energy Directives (26. June 2003) - „Accelaration Directive“ • 100 percent market opening by June 2007 • Harmonized transmission access system: Regulated Third Party Access • ERGEG • Unbundling Requirements: • Informational • Operational • Legal • by 2004(TSO)/ 2007(DSO)

5. The road to coordinated auctions /3 • 3rd Energy Directives (in progress) • EU Council: Full Ownership Unbundling / Independent System Op. • National Action Plans on Energy Poverty • Price Setting Formulas / Peak Load Reduction • Independent Energy Regulators / European Regulator (CEER) • Grid Integration / Grid Codes • Forming of a European Transmission Grid • Cross Border Integration • Investment Plans for Grid Infrastructure (Monitoring & Order) • Monitoring of Cross Border Trade / Energy Prices

6. CAO – Central Allocation Office Freising

7. CAO – Central Allocation Office (start) • CAO Central Allocation Office GmbH founded in July 2008 with registered office in Freising, Germany • First preparatory organization steps done by the first managing director by the end of 2008 • IT tender in 2008 closed by concluding the contract for the auction IT solution supply • In December 2008 signed Contract for Services between TSOs and CAO • Preparatory works to start the operation • Consultancy services • Work on the Technical Requirement Specification for the IT solution (TRS) - accepted on 7 April 2009 • FBA method implemented, NTC as a fall-back

8. CAO – Central Allocation Office (Team) • Experienced start-up team • CAO is doing necessary steps to be ready for the start • Goal fulfilled: trained team of people for dry-run in fall 2009 and for the start of operation • Number of employees since Jan 2010: 14 • Process oriented organization • CAO supported by TSOs workgroups dealing with market issues, FBA development and Scheduling issues • CAO manages to lead the main WGs now

9. CAO – Central Allocation Office (Work) • Explicit auctions in CEE with use of flow based capacity allocation – Maximum Flow • Yearly, Monthly and Daily allocation • Secondary market • CAO is responsible for capacity calculation based on delivered data (grid model, generation shift key, totals, saldo etc.) • CAO provide and operate auction system • CAO provide settlement services • Decentralized Scheduling in the CEE for now • Intraday trading responsibility of TSOs

10. NTC bilateral vs. FBA coordinated NTC bilateral TSO 1 Grid model ATC calculation Bilateral ATC Assessment Individual or Coordinated ATC auction(s) TSO 2 Grid model ATC calculation Bilateral ATC Assessment TSO n Grid model ATC calculation

11. NTC bilateral vs. FBA FBA TSO 1 Coordinated Flowbased auction(s) TSO 2 Grid model TSO n CAO TSOs identify and control only the critical grid elements

12. Consequences of FBA • One-stop shop for Market Participants • One IT for CEE • One auction for CEE • Virtual Borders – e.g. PSEO-ELES • The main intention of the Internal European Market establishment is to reach a higher social welfare • bid price and the bid amount for all allocated (accepted) bids + social welfare • Equivalent levels of network security

13. Maximum available exchange? • Control only critical elements! • Consider critical outages (N-1) • Estimate Available Maximum Flow (AMF)

14. “Flow decomposition” For each critical element: Available Maximum Flow (AMF) = Total maximum flow (TMF) - Natural flow (zero exchange flow) - Flow caused by already allocated/nominated capacity - Uncertain flows (reliability margins)

15. Concerns of market • Complexity of the FBA allocation method • Structure of the input data: AMF, PTDF matrix • volatile results / high sensitivity • Not enough capacity as a result of the FBA allocation • Short time for necessary adaptations – 6M required • All changes in one step – critical • Misunderstandings to be explained

16. Typical Misunderstandings • FBA will bring more capacity • FBA is only a system of most optimal calculation known ensuring max security of supply = it doesn't built any new lines • FBA will maximize from its nature allocated capacity on the most attractive directions • What is better: Market Coupling or FBA? • Such comparison does not have any sense • Market Coupling is only an implicit allocation method which still needs the capacities to be somehow calculated (NTC, FBA or we have to invent something new ;-)

17. Typical Misunderstandings II • FBA manipulates with the capacity among profiles, because depending on sensitivity of flows • FBA provides always a standardized optimal result taking into account technical constrains and attractiveness of a direction – i.e. market decides where more capacity will be allocated • This is bringing 100% transparency in comparison with NTC world, where TSOs decides

18. Typical Misunderstandings II: Example

19. Typical Misunderstandings III • Bids on one profile influence Auction price on other profile • As long as bids use the same constraint there must exist interrelation between the Auction Prices • Similar principles already apply today in case of so called Technical Profiles used in “5 TSOs” auctions

20. Typical Misunderstandings IV • Discriminatory approach towards different profiles through PTDF – negative PTDF coefficient = infinity prices • in example used for explanation of auction algorithm infinity price is used for the source-sink pair with negative PTDF on congested element • this only means that as long as the use of capacity is relieving congested element capacity will be allocated

21. CAO in operation for 2010 - Interim Phase • Dealing with challenges in the FBA implementation, TSOs discussed set-up for 2010 • Interim phase of capacity allocation in CEE started in parallel with the FBA project: • CAO introduced common registration point for capacity allocation in CEE • CAO took over the role of 5TSOs Auction Office • CAO is providing other coordinating support to the other auction offices in CEE • Until FBA is ready to launch

22. Approaching the start ... • The new Auction Rules basically consulted with market – now major changes expected • “Efficiency study” results to be available at the end of July 2010 • Next dry-run session planned for August – September • Start of the coordinated FBA procedure planned for October 2010 if no major problems appear • NTC long-term auctions expected to be also coordinated by CAO • Finalisation of the long-term FBA capacity calculation – expected in Q1 2011

23. What is happening elsewhere • Electricity Regional Initiative • Consensus across Europe • Flowbased – capacity calculation • LT - Harmonized auction rules • LT Harmonized IT interfaces • Day ahead allocation – market coupling model • Intraday – continuous intraday platform • Balancing market integration • Transparency

24. Other crossborder development - CASC – CWE • France • Belgium • Luxemburg • Germany (Amprion, EnBW, TPS) • Netherland • Coordinate NTC • Market Coupling - -> Implicit auction • Flow base ERGEG

25. Other crossborder development ERGEG ERGEG ERGEG

26. Advanced allocation starts with us! Thank you for your attention! Tomaz Ostir tomaz.ostir@central-ao.com www.central-ao.com