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Smart Grid > Lecture 3 – Electricity Markets: Models and Structure > Flashcards

Lecture 3 – Electricity Markets: Models and Structure Flashcards

1
Q

What are the types of market models?

A

Pool model
Exchange model

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2
Q

What are the properties of the pool model?

A

• Central market organization
• Central optimization
• Power Trading compulsory takes place in one market
• Generation, Transmission, Balancing is optimized simultaneously
• Generation side is predominantly active in the markets, Demand is forecasted but not active in the market
• Compulsory trading facilitates coordination between generation and transmission → Locational Marginal Pricing
• Markets for balancing power are also included in the pool
• Focus on short-term cost-optimal allocation of resources

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3
Q

What are the properties of the exchange model?

A

• Decentralized market organization
• Decentralized decisions
• Power Trading is voluntary and takes place in closely linked, interdependent but separated markets
• Trading is possible outside of the exchange
• Generators individually plan & optimize their generation schedules and coordinate themselves with TSOs
• Most countries have a central auction for hourly contracts and a reference price for each time slot
• Market prices influence decisions, especially in investments
• More than one exchange platform leads to competition, that allows for corrections of bad market design or inefficiencies
• If different markets are not adequately coupled, also inefficient allocations can occur because of the decentralized architecture

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4
Q

Advantages of pool model?

A
  • Pool Model is good if competition in the market is high
  • Demand cannot play an important role in price determination
  • Optimization problem deficits in reality can be kept to a reasonable minimum
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5
Q

Disadvantages of pool model?

A

• Possible wrong incentives through side payments for Long-term decisions → lack of new generation capacity
• Compulsory participation on one platform is suppressing competition of markets → no pressure to change for poorly designed platforms
• “Truth telling” is not incentive compatible for the parameters that influence the side payments for generators → private cost information is undisclosed
• Strategic behavior must be sanctioned by explicit mechanisms
• Optimization algorithms need high amount of information about relevant parameters and thus cause high information and control costs

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6
Q

Advantages of exchange model?

A
  • Simpler Implementation
  • Active Participation of Demand
  • Bad market design can be addressed by change to other market platform
  • If coordination of interdependent markets is not so important transaction costs are lower
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7
Q

Disadvantages of exchange model?

A
  • Bad coordination between interdependent markets can hamper market results and investment incentives
  • E.g. APX UK, where missing reference price leads to lower trade volumes and lower transparency in trading (no arbitrage possible)
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8
Q

Who are the market participants with inherent physical position?

A

Generators (sell) and retailers (procure)

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9
Q

Who are the market participants without inherent physical position?

A

Financial traders

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10
Q

What are the properties of trading at OTC?

A

• Trading directly between two parties
• Decentralized market without a central physical location
• Multiple prices for one good possible
• Risk that one contracting party does not fulfill its obligation

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11
Q

What are the properties of trading at Exchange?

A

• Standardized contracts
• Clearinghouse determines the clearing price
• Clearinghouse takes the counter party risk
• Only one price exists for one good at a given time

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12
Q

What are the places of trading?

A

OTC and Exchange

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13
Q

How is trading divided based on times of trading?

A

Derivatives market and spot market

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14
Q

What are the properties of derivatives market?

A

• E.g. forwards, futures, options
• Exchange of the goods after a predefined timespan (after contract formation)

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15
Q

What are the properties of spot market?

A

• Seller delivers the goods immediately
• Buyer pays “on the spot”
• Neither party can back out of the deal

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16
Q

Differences of spot market against futures market?

A

• Alternative, anonymous procurement & trade channel
• Prices are made transparent
• Serves as reference price
• Minimizes transaction costs by processing central
• Liquidity through standardization

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17
Q

Differences of futures market against spot market?

A

• Basics for risk management / investment security
• Increases market efficiency as arbitrage & speculation platform
• Serves as basis of valuation for vacant positions
• Clearing minimalizes default risk of opponents
• Futures market supports liquidity in spot trading

18
Q

What are the types of trading?

A

Financial market and physical market

19
Q

What are the properties of the financial market?

A

• Buyer and Seller agree that the price difference between stipulated price and future market price for a certain delivery will be balanced in cash
• Market participants hedge against risks
• Derivative markets can be designed for physical and financial fulfillment

20
Q

What are the properties of the physical market?

A

• Buyer and Seller agree to deliver and pay power at a future delivery period with certain amount, load profile and place of delivery for stipulated price
• Spot markets are always related with a physical fulfillment of the trade

21
Q

What are the load patterns?

A
  • long term supply (long term contract via OTC)
  • base load (contract via OTC or exchange)
  • peakload (contract via exchange usually)
  • rest of the gaps filled by hourly bids on supply side or demand side
22
Q

Properties of forwards?

A
  • Unconditional derivative
  • Bilateral contracts
  • Seller: Obligation to deliver a specified amount of an asset for a predefined price on a future date (short position)
  • Buyer: Obligation to buy this amount of the asset for the predefined price on the agreed future date (long position)
23
Q

Properties of futures?

A
  • Unconditional derivative
  • Same structure as forwards
  • Only participants with an account at a Clearinghouse of an exchange can deal with futures
  • Standardized contracts (quality, amount, notation, delivery date and location)
  • Commitment to buy or sell a base value at a certain time in future for a today set price
24
Q

Properties of options

A
  • Conditional derivative
  • Right to buy or sell on or till the last trading day a certain amount of a base value for a today set price. A corresponding premium has to be paid for the option
25
Q

How long back do different tradings take place?

A

OTC- year, months
Futures - (years) months, weeks
Day ahead - upto 14 days
Intraday - 1 day - 75 mins
Balancing - 60 min - 3 s

26
Q

When is intraday market vs day-ahead market used?

A

• Electricity is traded in Europe usually up to four years ahead of time – either bilaterally or exchange based
• Most short-term transactions are hosted at a day-ahead auction
• In Central Western Europe (CWE), continuous bilateral and exchange based trading is pursued until gate closure, typically 30 min before real time
• An intraday auction has been added to intraday trading in Germany

27
Q

What are the properties of call market?

A

▪ Call auction
▪ Bids collected until closing (e.g. 12:00 a.m. / noon)
▪ Market clearing price after freeze
▪ Closed order book
▪ Principle of highest executable volume
Examples:
▪ Individual hour and block contracts
▪ Day-ahead auction

28
Q

What are the properties of continuous trading?

A

▪ Continuous trading
▪ Immediate execution if possible
▪ Continuous price
▪ Open order book
▪ Principle of highest executable volume
Examples:
▪ Individual hour and block contracts
▪ Intraday trading

29
Q

What is the price determined at a call auction?

A
  • Uniform pricing mechanism
  • Market-clearing price = intersection of the aggregated demand and supply curves
    ➢Provides maximum trade volume
  • The price is either the highest supply bid or the lowest demand bid
30
Q

How is the price determined in continuous trading?

A

• Pay-as-bid mechanism
• Matching bids:
− matching according to price acceptance of bids of the opposite side
− incoming bids are checked against and matched with the bids in the order book according to price/time priority
• Precedence of bids:
− Bids with no price limit have precedence over bids with a price limit
− sale bids with a lower price limit take precedence over sale bids with a higher limit
− purchase bids with a higher price limit take precedence over bids with a lower limit
− In the event of bids having the same limit, time applies as the second criterion
➢ bids that were entered earlier have priority

31
Q

Definition of quoted spread?

A

• …the difference between Best ask and Best bid of an order book
Quoted spread = (Ask - Bid)/(2*Mid)

32
Q

What is the advantage of quoted spread?

A

easy to calculate

33
Q

What is the disadvantage of quoted spread?

A

usually only implicit transaction costs of small trades captured (varies temporally)

34
Q

Definition of Effective Spread?

A

Effective spread is the spread, which is actually paid by someone who trades with market orders.

Effective spread = D*((price - Mid)/ Mid) where D is 1 for buying indicator and -1 for selling indicator

35
Q

What is the advantage of effective spread?

A

Capture the actual, implicit transaction costs

36
Q

What is the disadvantage of effective spread?

A

Requires trading instructions for calculation. Heuristics are necessary to derive trading instructions from trading and quota data

37
Q

What are the types of bids at the spot market (spot trading - day ahead market)?

A

Hourly bids and block bids

38
Q

Describe hourly bids?

A

▪ Arrangement possible for every hour of a day
▪ To place/delete buying and selling orders up to 14 days in advance

39
Q

Describe block bids?

A

▪ Maximum over 24 h (complete baseload)
▪ Free definable amount of hour contracts for fulfillment, place able as block bid. It is possible to fulfill a complete block

40
Q

Properties of balancing or real-time market?

A

• Operates after the closure of the spot market
• Participants submit bids that specify the prices they require to increase their generation or decrease their consumption for a specific volume immediately
• Goal: To balance power generation to load at any time during real-time operations
• Real-time exchange works like a Walrasian auction
• Procedure:
− Announcement of a price
− Sellers and Buyers respond
➢If the market is not cleared→Announcement of new price

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