How is the European electricity market structured?
Geographically structured in bidding zones.
What are Interconnectors? What indicates the capacity utilization rate of an interconnector?
Interconnectors
* Bidding Zones are linked with “interconnectors”
* If interconnector capacity is not fully used, prices equalize across zones (price convergence)
* If interconnectors are congested, prices diverge between zones
* Reverse is also true: if prices diverge, interconnectors must be congested
Defining market splitting
Splitting an existing zone into two or more zones
Who has what opinion about splitting the German market?
What problems would come along with it?
- The EU Commission is strongly in favor
- The German government is strongly against
Problems
* Distributional consequences: Southern industry would pay more
* Subsidy payments for Northern wind would increase, setback for merchant wind
* Determining the split is difficult and to some degree arbitrary
Does splitting zones only make sense if average prices differ from potential zone to potential zone?
Splitting a zone could even make sense if average prices are the same
* If hourly prices differ
Static, annual price signals could be derived from other instruments (say, grid fees)
* Dynamic, hourly signals are much harder to approximate
* Depend on current situation (demand / supply / congestion)
Low-carbon system needs local price signals: which signals are there on what levels?
Locational price signals
* Dispatch: storage, electrolysis, EVs
* Investment: wind, solar, electrolysis, hydrogen
Transmission grid
* Bidding zone split
Distribution grid
* Granular grid fees → Network Charges session
* DSOs are a real problem for the transition
How to link zonal markets?
+ how is trade between market zones organised? (+Two crucial questions)
With Market Coupling!
How is the trade between bidding zones organized?
* “Cross-border (XB) trade”
* Two crucial questions: capacity calculation and capacity allocation
Cross-border capacity allocation
* Who should be allowed to trade?
* Which market segmentis allowed to use the capacity?
* How is the capacity priced?
* Explicit vs. implicit market coupling
Cross-border capacity calculation
* How much import/ export can and should be allowed? (NTC vs. flow-based)
Cross-border capacity allocation
+2 forms of market coupling
Cross-border capacity allocation:
* Who should be allowed to trade?
* Which market segmentis allowed to use the capacity?
* How is the capacity priced?
* Explicit vs. implicit market coupling
1. Explicit market coupling
* Capacity is sold to market parties in dedicated (“explicit”) auctions – “book a slice of capacity”
* Compatible with OTC and PX, auctions and continuous trading
→ Inefficient trade (low-price to high-price zone), if parties have wrong expectations
2. Implicit market coupling
* Market parties do not explicitly trade internationally, but simply bid locally
* Exports / imports are determined by power exchanges simultaneously with matching demand and supply within a zone → Avoids inefficient trade
Cross-border capacity calculation
Cross-border capacity calculation:
* How much trade can and should be allowed? (NTC vs. flow-based)
1. Net transfer capacity (NTC)
* TSO pre-determine import/export capacity
* “Tomorrow’s DE-FR capacity: 5GW”
* Not trivial because of pre-loading of IC
2. Flow-based market coupling (FBMC)
* Import/export capacity is determined while accounting for the impact of trade on loading of all “critical network elements”
* These include, but are not limited to interconnectors
→ Increased trade opportunities
NTC-based market coupling (capacity calculation) -> How is the capacity assessed in practice?
NTC = net transfer capacity
Market clearing algorithm maximizes international welfare
* For given demand and supply curves
* Subject to fixed constraints (MW) on each zonal border
Terminology
* Available transfer capacity (ATC) for the day-ahead auction
* Net transfer capacity (NTC) available to all market stages (including financial markets)
(If) NTCs are determined by TSOs ahead of time: 2 Problems
- Problem 1: pre-loading of interconnectors (“loop flows” and other unscheduled flows)
- Problem 2: reducing load flow on internal lines by reducing NTC (“move congestion to the border”)
FBMC / Flow-based market coupling (3)
1. effects on other borders
“Merging zonal with nodal pricing”
* Represent grid constraints more realistically in the market clearing
- Allow more trade than NTC
Accounting for the effects on other ICs
* Exports from Germany to France impact not only the FR-DE interconnectors, but others, too
* Market-clearing algorithms accounts for these impacts
- Critical network elements:
* Not only interconnectors are considered as constraints
* But all critical network elements – those that are both heavily loaded and strongly affected by international trade - Generation shift keys (GSK):
* Where is a marginal generator (and load) located within the bidding zone?
* In practice, rough approximations may be used (e.g., even distribution across the bidding zone)
The Clean Energy Package 70% rule
Rule: Every lines needs to keep 70% of capacity available for international trade
Cross-border capacity can be adjusted to relief within-zone congestion, e.g.
* Strong wind generation in Norther Germany → internal grid congestion
* Strong wind generation in Denmark→low spot price in Denmark→exports to Germany
* → Reducing the import capacity at the DK-DE border reduces line overload inside Germany
What are drivers of network congestion today? (4)
- Expansion of wind power (huge capacity installed because of low number of FLH)
- Fading effects of regional monopolies (integrated utilities invested in local supply)
- International market integration (increase in imports and exports)
- Yet to come: new consumers (E-mobility, heat pumps)
Redispatch:
- definition
- how it works
Definition of redispatch
“The rescheduling of generation and controllable demand by TSO(s) within a bidding zone, in order to relieve congestion on certain network elements.”
How redispatch works
* Reduce generation in oversupplied region (“before/upstream the constraint”)
* Increase generation in undersupplied region (“behind/downstream the constraint”)
* Hence, redispatch is locational in nature → load flow sensitivities
Redispatch vs. balancing
- Redispatch does not affect the system-wide demand-supply balance – this is done through balancing services
- In fact, most European TSOs handle redispatch and balancing as an integrated process and use the same resources for both
To whom and through what law is redispatch in GER applicable?
- Redispatch for conventional plants
- Einspeisemanagement (EinsMan) for plants under support scheme (RE curtailment)
Mandatory redispatch with cost-based compensation
How does it work? (4)
- Congestion management is ordered by TSO or DSO
- Power plants are legally obliged participate (mandatory)
- Plant owners are compensated for costs and forgone profits (economically indifferent)
- We want to avoid any incentives to provoke or prevent being redispatch
network reserve
- (comprehensive) definition
- what is needed
- TSOs can contract power stations scheduled for mothballing or decommission, already mothballed plants, or plants
outside Germany for a grid reserve to be used as capacity available for upward redispatch - German plants are compensated for the costs of reactivating plants and keeping them operational
- Power plants outside Germany are contracted on a voluntary basis and are compensated according to bilateral agreements
- Downward redispatch is not a problem (there is always sufficient capacity to turn down)
- Upward redispatch is a problem (Lack of capacity to ramp up)
Effect of splitting zones on redispatch costs
Splitting zones reduces redispatch costs
* Smaller zone mean less congestion …
* … hence less redispatch
Splitting zones creates congestion income for TSOs
* Trade volumes x price spread
* This income can be used to reduce grid fees further
Voluntary markets for redispatch
- the idea
- desired effect
The idea:
* System operators buy upward / downward redispatch
* Generators, consumers, storage owners can participate – voluntarily
* They are compensated based on bids for activation
* These markets must be (near) nodal in spatial granularity
Desired effect: Redispatch markets…
* … incentivize consumers and decentralized assets to participate
* … turn networks into smart grids – coordinate everything from heating to batteries
* ..help avoiding expensive and complicated grid expansion
* … save zonal European wholesale markets
Redispatch markets: A mechanism … (5)
… to avoid/relief congestion in the distribution and/or transmission grid
… through redispatching generation / loads / storage
… with voluntary participation
… with compensation based on bids
… for delivery of energy (rather than availability or capacity)
Problems of market-based redispatch (2)
Locational market power
* Some generators/loads are much more effective at solving any given congestion than all others
* Usual problems of market power: inflated prices at cost of rate payers
Strategic bidding
* Repercussions (=Auswirkungens) on the zonal electricity market
* This is different from market power! (but mutually enforcing)
Strategic bidding with market-based redispatch
Two-stage market
* First stage: zonal spot market
* Second stage: locational redispatch market
Generators in the oversupplied region
* Anticipate they will be paid for ramping down – if they are available (i.e., producing)
* Bid below variable cost in spot to be eligible for downward redispatch
Generators in the scarcity region
* Anticipate they will be paid for ramping up – if they are available (i.e., not producing)
* Bid above variable cost (“withhold capacity”)
Generators have an incentive for strategic bidding
* This has a number of problematic consequence, e.g. it aggravates congestion
