Electricity Markets:Balancing Mechanisms and Congestion Management

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Electricity Markets:

Balancing Mechanisms and Congestion Management Master Thesis Report

Mathilde Dupuy

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ABSTRACT

During the last few years, several European countries have opened their electricity markets. Power exchanges have been created, and market based rules have been settled to handle most of the existing mechanisms. The main goal is to improve the competition by increasing the number of actors. More and more coordination between the different European markets is now needed, and the trend is to go from juxtaposed regional markets to a unique European market. Indeed, in February 2006 was launched the Electricity Regional Initiative, where directives were given in order to foster market integration within several European countries. In this context, two main points have to be focused on: the settlement of market based rules for each mechanism and the integration of the different existing markets.

This master thesis is a part of a Research and Development project, and has been done at EDF Research & Development, in the department “Economie, Fonctionnement et Etudes des Systèmes Electriques”. It is divided in two parts.

The first part explains the main principles of the balancing mechanisms in Great- Britain and Germany, in order to see to which extend these mechanisms are “markets”. The study is a part of a larger project at EDF, resulting in a benchmark of the different European Balancing Markets.

The second part deals with a key to the integration of electricity markets: the

congestion management methods. Indeed, cross border congestions are a main hindrance to the elaboration of a European market, and new mechanisms are developed to allocate the cross border capacities. One of them is the Market Coupling, which is a way to maximize the market value. This thesis aims at giving a basic understanding of the method as it is carried out today between France, Belgium and the Netherlands through the Trilateral Market Coupling. In the frame of an Open Market Coupling including more countries, this thesis gives an introduction to two different approaches: the “commercial” approach and the “flow- based” approach. Simulations aim at stressing the main differences between the two methods.

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ACKNOWLEDGMENTS

Firstly, I would like to thank Jeremy Louyrette, who has accepted to be my supervisor at EDF. I would like to thank all the people with whom I had the occasion to work at EDF for their cooperation and for the great working environment they have provided to me.

This master thesis has allowed me to learn a lot on very interesting and challenging topics, and I am very grateful for that.

Besides, I would like to thank Lennart Söder and Mikael Amelin for reviewing my thesis and being my examiners.

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CONTENTS

Chapter I. Introduction ... 10

I.A. Background... 10

I.B. Thesis work: Scope and Contents ... 11

Chapter II. Balancing Markets: The examples of Great Britain and Germany ... 12

II.A. Background ... 12

II.A.1 The different actors ... 12

II.A.2 The main principles... 13

II.A.3 Aim of the study... 13

II.B. Balancing mechanism in Great-Britain... 15

I.A.1 Description of balancing services... 15

II.B.1.1. Frequency response ... 15

II.B.1.2. Reserve services ... 16

II.B.2 The Balancing Mechanism and the “market” aspect ... 17

II.B.2.1. How the market works... 18

II.B.2.2. Imbalance Settlement ... 21

II.C. Balancing mechanism in Germany ... 23

II.C.1 Description of the services ... 23

II.C.1.1. Primary control ... 23

II.C.1.2. Secondary control ... 23

II.C.1.3. Tertiary control: Minutenreserve ... 23

II.C.1.4. Time frame of control energy ... 24

II.C.2 The Balancing mechanism and the “market” aspect ... 25

II.C.2.1. How the market works... 25

II.C.2.2. Imbalance settlement ... 28

II.C.2.3. The particular case of wind power... 29

II.D. Conclusions... 30

Chapter III. Congestion Management: The Market Coupling Mechanism... 32

III.A. Background ... 32

III.B. Market Coupling: Analysis of the mechanism principles... 33

III.B.1 Some basic principles... 34

III.B.1.1. Aggregated supply and demand curves ... 34

III.B.1.2. Net exportation curves ... 35

III.B.1.3. Block offers ... 37

III.B.2 Trilateral Market Coupling: how does it work? ... 37

III.B.2.1. Overview of the mechanism as it is carried out today... 37

III.B.2.2. Algorithm of the coordination module: Coupling three markets... 39

III.C. Simulation of Market Coupling... 43

III.C.1 Simulation on three markets using a sequential algorithm... 43

III.C.1.1. Inputs and Outputs of the simulation... 43

III.C.1.2. Prices calculation... 44

III.C.1.3. Algorithm principles ... 44

III.C.1.4. Steps of the algorithm ... 45

III.C.1.5. Particularities of the model... 51

III.C.1.6. Conclusion regarding the sequential model ... 51

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III.C.2 Market Coupling as a system-wide optimisation problem ... 52

III.C.2.1. Definition of the parameters and variables... 52

III.C.2.2. Definition of the objective function ... 53

III.C.2.3. Formulation of the constraints... 55

III.C.2.4. Particularities of the simulation... 56

III.C.2.5. Calculation of the market prices and surplus... 57

III.C.3 Results of the simulation: Sequential model versus optimisation ... 58

III.C.4 Conclusions regarding the results ... 64

III.C.5 Perspectives ... 64

III.D. Towards an Open Market Coupling ... 66

III.D.1 Elaboration of the scenarios... 66

III.D.2 Result of the simulations... 67

III.E. Towards a flow-based market coupling ... 75

III.E.1 Formulation of the problem with the Power Transfer Distribution Factors ... 75

III.E.2 Data used in the model ... 76

III.E.3 Simulation on the scenarios... 79

III.F. The commercial approach versus the flow based approach ... 85

Chapter IV. Conclusions ... 86

IV.A. Main aspects of the study ... 86

IV.B. Perspectives ... 87

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FIGURES

Figure 1: Timescales of electricity markets ... 10

Figure 2: Timescales of the balancing services ... 17

Figure 3: Timescales of the British electricity market ... 18

Figure 4: Bid/Offer Data [5] ... 19

Figure 5: Representations of the bid/offer data ... 19

Figure 6:Bid/offer acceptance (BOA) [6] ... 20

Figure 7: Main Price calculation in case of a short system ... 22

Figure 8: Timescales of the different kinds of reserve [2] ... 24

Figure 9: The different timescales of the German market ... 25

Figure 10: Example of bid data [3] ... 26

Figure 11:Extract of tender results for downwards regulation for tertiary reserves (10.07.2007, 12:00-16:00) [16] ... 27

Figure 12:Extract of tender results for upwards regulation for tertiary reserves (10.07.2007, 00:00-4:00) [16] ... 28

Figure 13 : The different congestion management methods in Europe [26] ... 32

Figure 14: Coupling of two markets when there is no congestion... 35

Figure 15: Coupling of two markets when there is a congestion... 35

Figure 16: Construction of the Net Exportation Curve ... 36

Figure 17: Bilateral Coupling using the NECs... 36

Figure 18: Overview of different steps in the Market Coupling process [25] ... 38

Figure 19: First step of the TLC ... 39

Figure 20: Second step of the TLC, non-congested case ... 40

Figure 21: Second step of the TLC, non-congested case ... 40

Figure 22: TLC results, congested case... 41

Figure 23: TLC results, congested case... 41

Figure 24: TLC results, congested case... 42

Figure 25: System studied ... 43

Figure 26: Effect of an import or an export on the NEC ... 44

Figure 27: Coupling three markets with no constraints – incremental process ... 47

Figure 28: Coupling three markets with constraints – incremental process ... 49

Figure 29: Calculation of the consumers’ and producers’ surplus, ... 50

Figure 30: Effect of an import/export on the supply an demand curves ... 50

Figure 31: Definition of the parameters ... 52

Figure 32: Global surplus of the three markets aggregated, in case of no congestion ... 54

Figure 33: Definition of the variables... 56

Figure 34: Particularities with linear curves ... 56

Figure 35: Price and Volume indeterminations... 57

Figure 36: Results of the simulation, scenario 1 ... 59

Figure 37: Results of the simulation, scenario 2 ... 60

Figure 38: Results of the simulation, scenario 3 ... 61

Figure 39: Results of the simulation, scenario 4 ... 62

Figure 40: Results of the simulation, scenario 5 ... 63

Figure 41: Calculation of the surplus using the NECs ... 65

Figure 42: Increase of the surplus resulting from the coupling... 65

Figure 43: Results from the base scenario using the ATC model ... 67

Figure 44: Results from the scenario 1 using the ATC model ... 68

Figure 45: Results from the scenario 2 using the ATC model ... 69

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Figure 46: Results from the scenario 3 using the ATC model ... 70

Figure 47: Results from the scenario 4 using the ATC model ... 71

Figure 48: Results from the scenario 5 using the ATC model ... 72

Figure 49: Results from the scenario 6 using the ATC model ... 73

Figure 50 : Power flow distribution of a 1000 MW trnasport from Northern France to Italy 75 Figure 51:Results from the base scenario using the PTDF model ... 79

Figure 52: Comparison of the results from the base scenario... 80

Figure 53: Comparison of the results from the scenario 1 ... 81

Figure 54: Comparison of the results from the scenario 2 ... 81

Figure 55: Comparison of the results from the scenario 3 ... 82

Figure 56: Comparison of the results from the scenario 4 ... 82

Figure 57: Comparison of the results from the scenario 5 ... 83

Figure 58: Comparison of the results from the scenario 6 ... 84

Figure 59: Metered Imbalance ... 88

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TABLES

Table 1: The different actors ... 17

Table 2: Imbalance settlement prices... 22

Table 3: The different kinds of reserve in Germany... 24

Table 4: Main aspects of the British and German Balancing Markets... 31

Table 5: Results of the simulation, scenario 1 ... 59

Table 6: Results of the simulation, scenario 2 ... 60

Table 7: Results of the simulation, scenario 3 ... 61

Table 8: : Results of the simulation, scenario 4 ... 62

Table 9: Results of the simulation, scenario 5 ... 63

Table 10: Prices of the futures for the second semester 2008 ... 66

Table 11: Volumes on the spot market in 2006 ... 66

Table 12: Day-ahead market volumes ... 66

Table 13: ATC matrix (in MW) ... 67

Table 14: Average balances in MW ... 76

Table 15: Initial Balances in MW ... 77

Table 16: Data used for PTDF and T0 ... 77

Table 17 : Prices in €/MWh ... 79

Table 18: Physical power flows, Base scenario... 80

Table 19: Constraints on the pysical power flows ... 80

Table 20: Physical power flows and their limitations... 83

Table 21: Physical power flows and their limitations... 84

Table 22: Activation of minute reserve ... 88

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LIST OF ABREVIATIONS

• EDF: Electricité de France (main company of electricity production and distribution in France)

• RTE: Réseau de Transport d’Electricité (French TSO)

• TSO: Transmission System Operator

• UCTE: Union for the Coordination of Transmission of Electricity

• ETSO: Association of the European Transmission Operators

• CWE: Central Western Europe

• E&W: England and Wales

• TLC: Trilateral Market Coupling

• OMC: Open Market Coupling

• NEC: Net Exportation Curve

• NIC: Net Importation Curve

• ATC: Available Transfer Capacity

• NTC: Net Transfer Capacity

• PTDF: Power Transfer Distribution Factor

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Chapter I.

Introduction

I.A. Background

In 1989, England opened its market, and Sweden followed in 1995. The first international power pool, NordPool, was founded in the Scandinavian countries.

In the current context of opening energy markets, new objectives have become a priority.

The main goal is to allow a better competition, by increasing the number of actors. The trend is nowadays to abolish the situations of monopoly, and base the new mechanisms on a reduction of the overall costs. Market-based rules are laid down, in order to create a fair and non-discriminatory market for every mechanism.

Therefore, each country in Europe has developed their own energy market, and by a better coordination of these markets, the final goal is to integrate all of them in a unique European market. Hereby, it would not only ensure a better economical stability, but a better physical stability as well through a wider power system.

New methods are created for trading energy, planning production, keeping the balance between production and consumption and managing the energy transactions on cross border transmission lines. All of these activities are done on different timescales, corresponding to the general description below:

Time

Years, Months, Weeks Futures & Forward

Markets Bilateral Market

D-1 Spot Market

D Intraday

Market

Real Time Balancing

Market

Program redeclarations

• Bids & Offers Submission

• Initial Planning

• After the Gate closure:

Bids & Offers selection, Pricing

Real time energy balancing operated by the TSO

D+1

Imbalance Settlement Long term contracts

D+n

Figure 1: Timescales of electricity markets

On the Futures and Forwards market, long term contracts are decided: a certain amount of energy for a defined period of time and on an agreed price is contracted. A forward is a bilateral contract, whereas the future is contracted on an organized market and is a standardized product.

On the day-ahead spot market, the actors submit their bids and offers, and units submit their production planning before the gate closure. The time of the gate closure depends on the country. After closure of the bilateral market and the spot market, bids and offers are selected, and the spot price is set up, through a price clearing.

Then during the day, in the so-called intra-day market, generation programs can be re- declared and market players can modify existing bilateral contracts or create new ones.

Besides, in real time, the Transmission System Operator must keep the balance between production and consumption, through the balancing market. Finally, the imbalance metered between contractual and physical positions of actors is financially settled after the day of delivery.

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I.B. Thesis work: Scope and Contents

The thesis is divided in two parts: the first one focuses on the balancing mechanism, corresponding to the real time in the different timescales of the market. The second one presents a study of a congestion management method, the market coupling, which takes place in the day-ahead market, and will probably be adopted in the intra-day market as well.

The first part of the project consists of studying the balancing mechanisms in Germany and Great-Britain, based on literature. This was in fact a participation to a larger project, aiming at describing and analysing the different balancing mechanisms in Europe. This project has been carried out by EDF in order to have a benchmark of the different European balancing markets, focusing on the format of the bids and offers. Indeed, the orders submitted on the French balancing market are implicit, but they are to become explicit orders.

In this frame, two countries have been studied. Even if it does not give a general view upon the existing mechanisms in Europe, it was interesting to study in detail two countries, so that differences and likenesses could be pointed out. In this report, a summary of the study is given, in order to give concise information regarding the two mechanisms.

If the trend is to integrate the different markets in a unique one, an increasing part of energy transaction between the different European markets will be necessary and especially balancing energy. To fulfil these objectives, new congestion management methods are adopted, in order to make an optimal use of the cross border transmission lines.

Among them, the Market Coupling mechanism has been implemented in Central Western Europe. Trilateral Market Coupling was launched between France, Belgium and the Netherlands in November 2006. The mechanism is about to be extended to other border countries like Germany.

In this report, we will first study the theoretical approach of market coupling and how it is handled between France, Belgium and the Netherlands. Then, we will try to formulate the problem in different ways and simulate the mechanism using theoretical data.

Finally, a small study will explain the differences between a commercial approach and a flow-based approach.

In this frame, two models have been developed:

 The first one simulates the mechanism for three countries, and has been implemented using Excel and its programming language Visual Basic for Application. It calculates the final prices and energy transactions between the markets, starting with the net exportation curves of the isolated markets, and the cross-border transmission capacities.

 The second one is an optimisation under constraints using GAMS, and can be used with N markets. Two approaches have been implemented:

• The commercial approach, where transmission constraints take into account commercial limitations of the energy transactions.

• The flow-based approach, where transmission constraint takes into account physical limitations of the power flows.

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Chapter II.

Balancing Markets: the examples of Great Britain and Germany

II.A. Background

The main specificity of electric energy is that it cannot be stored. Moreover, in order to ensure the security of the electricity network, the balance between production and consumption must be kept all the time.

In the day-ahead market, supply and demand curves are submitted for each settlement period of the following day. According to these data, the balance between production and consumption is respected, since the energy price and the traded volume are defined by the intersection of the two curves. Nevertheless, these data are only forecasts, and the real time situation might be different. Indeed, the demand can vary compared to the forecast, and the production planning can fluctuate, in case of a problem in a power plant for example.

To handle those variations, a mechanism is needed to balance in real time the consumption and the production; it is the so-called balancing mechanism.

From a country to another, the balancing mechanisms may be different, depending on the timescales of the market, the technical differences, the means of generation or the national rules. Nevertheless, the common trend in deregulated market is to build a market with the balancing mechanism, based on market rules.

Though differences between countries, some common principles define the general scope of the balancing mechanism, when it is based on market rules:

 Production plan and load forecast, which takes into account bilateral contracts, and bidding on the day-ahead spot market.

 Balancing generation and consumption in real-time by the means of re-declarations of generation planning and bidding on the short term balancing market, which is an intra- day market where bids are selected and activated in real time.

 Financial imbalance settlement between physical and contractual positions. It generally takes place the following day and spreads fairly the incomes and costs among the actors.

II.A.1 The different actors

 The balancing mechanism is carried out in real time by the Transmission System Operator, who is required to maintain the permanent balance between generation and demand.

 The units which are qualified can participate to the balancing market by submitting bids1 and offers2.

1 Downwards regulation order

2 Upwards regulation order

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 The Balance Responsible Entity, who is in charge of a balancing perimeter, is responsible for the financial settlement of imbalances within its perimeter. Every market player has to belong to a balancing perimeter and choose a balancing responsible.

II.A.2 The main principles

To handle real time deviations between injection and withdrawals in the electrical grid, the TSO dispose of three different kinds of reserve power, which can be used for upwards or downwards regulations:

 Primary Reserve

This kind of reserve is automatically activated. It is usually compulsory and never constitutes the object of a market. The cost of this control are recovered through the networks tariffs, based on the metered quantities of generators and consumers.

 Secondary Reserve (only for the UCTE network)

This kind of reserve is automatically activated in most cases. Depending on the country, it can be part of a balancing market. The aim of the reserve is to reconstitute the primary reserve when it has been used.

 Tertiary Reserve

This reserve is a complementary reserve, and is often the core of the balancing market. It is usually manually activated, and split into rapid reserve (available in less than 10-15 minutes) and cold reserve (available after a longer time). However, in some countries, the boundaries between secondary and tertiary reserve and between the two types of tertiary reserve are blurred.

According to the ETSO [9], three groups are identified having different services for frequency control:

 UCTE (Union for the Coordination of Transmission of Electricity), where the three kinds if services described above are available

 E&W (England and Wales), where the secondary control does not exist and is in fact a part of the primary control

 The Nordel (common power system of the Nordic countries), where the so-called

“Secondary Regulation” is referred to as tertiary control, since it is manually activated.

The object of balancing mechanism is mainly tertiary reserves, and sometimes secondary reserves as well. This can vary from a country to another.

II.A.3 Aim of the study

The aim of the first study is to analyse the balancing mechanisms in two countries, Great- Britain and Germany. This will allow us to see to which extent the mechanism can differ between two countries. In order to stress the important differences and define the changes to set up to reach a better harmonisation in Europe, it would be necessary to study the mechanisms in all the European countries. However, it is not the aim of this master thesis.

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This study has been carried out in a frame of a project, which aims at focusing on the format of the orders and the type of services they are related to.

Indeed, on balancing markets, there are two types of orders: offers for upwards regulation and bids for downwards regulation. The format of an order might be different from a country to another. In France, the current orders are implicit, which means that a producer must offer on the balancing market the available capacity remaining after the submission of its planning.

However, this situation might change, and let the actors submit explicit offers, with a chosen quantity and price.

Studying two countries will not give a general European scope of the situation, but it will nevertheless show important aspects of the balancing mechanisms, and point out some aspects that should be harmonised.

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II.B. Balancing mechanism in Great-Britain

National Grid Company (NGC) owns and manages the electricity transmission system in England and Wales (E&W). By supplying Balancing Services, it maintains the balance between injections and withdrawals on the grid. Therefore, it uses available reserves in order to keep the system frequent at 50 ± 0.5 Hz. The allowed deviation from the nominal frequency 50 Hz is higher than the one allowed by the UCTE, which is 50 ± 0.2 Hz. The British synchronous network has a lower inertia than the UCTE network, due to the nature of its generation power plant. Therefore, its network is more often prone to frequency deviation, and needs balancing power.

Since the Great Britain is not connected to the rest of Europe, the system services are carried out in a different way [1]. Secondary control does not exist in Great Britain.

We can distinguish three different types of balancing services [8]:

 Ancillary services, which are the system services procured by electricity producers.

There can be either mandatory or commercialised, and are detailed in the first section

 Offers and Bids, submitted to the Balancing Mechanism. These are commercial services offered by suppliers willing to increase or decrease the production in a Balancing Mechanism Unit (BMU). These services are detailed in the second section

 Other services, which are commercialised services. They are classified neither as ancillary services nor as balancing market offers and bids.

The actors of the British balancing mechanism are:

 The TSO National Grid Company

 The BMU, which are units signatories of the Balancing and Settlement Code

 Actors not registered as BMU in some cases

II.A.1 Description of balancing services II.B.1.1. Frequency response

Frequency response services are equivalent to the primary and secondary control in the UCTE zone. They are part of system services, but can be remunerated.[1,2]. Dynamic providers are in charge of handling changes second by second, whereas the non dynamic providers change their production only from a certain level of frequency deviation.

NGC maintains the system frequency through three separate balancing services:

 Mandatory Frequency Response

The service is compulsory and automatic, guaranteed by BMUs. The bids contain an availability fee (in £/h) and an energy fee (£/MWh). The aspect “market” is introduced thanks to a system which allows the participant to modify the prices on a monthly basis, in order to set a greater competition.

 Firm Frequency Response (FFR)

This service is commercialised by BMU or non-BMU actors, and act as a complement of the other sources of Frequency Response, through dynamic and non-dynamic reserves.

FFR is procured through a monthly tender; the submitted orders can be valid for a single month or several months. A provider submits several prices in its bid: an availability fee

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(in £/h), an energy fee (£/h) and fees related the nomination or the revision of the offer on a particular settlement period3 of the day.

 Frequency Control Demand Management (FCDM)

This service provides frequency response through interruption of the demand customers; it is a way for demand-side provider to access to the market. However, the service is conclude on a bilateral basis, and the remuneration is based on an availability fee (£/MWh).

II.B.1.2. Reserve services

The remaining services correspond more to the tertiary reserves of the UCTE. It contains the additional power sources which are available to NGC, and comprised synchronised and non-synchronised sources, with different response times. [3]

 Fast start

It is a non compulsory system ancillary service, commercialised by BMU units. It is provided by power plants which can start in a very short time (5-7 minutes), and is concluded through bilateral contracts.

The bids contain an availability fee (£/h), an energy fee (£/MWh) and a start-up payment (£/start).

 Fast reserve

The service is provided by BMU and non BMU, both from the production and demand sides. The aim is to rapidly handle the frequency deviations, in less than 2 minutes. The service is procured through a monthly tender. A provider submit several prices in its bid:

an availability fee (in £/h), an energy fee (£/MWh) and fees related the nomination or the revision of the offer on a particular settlement period of the day.

 Short Term Operating Reserve (STOR)

The service is provided by BUM and non BMU, both from the production and demand sides, with longer response time (240minutes).

The utilisation of this service is done through the balancing mechanism only for the BMU.

The bids contains an availability fee (£/h) and an energy fee (£/MWh).

 Demand management

The service provides reserve via a reduction of the demand. It is concluded through bilateral agreements; there is only an energy fee (£/MWh).

 BM start-up

The service is provided by BMU only, and allows NGC to use in the balancing mechanism additional units that would not otherwise have ran. The remuneration is based on a start-up payment and a hot standby payment (£/h) to cover the cost of sustaining a BMU in a state of readiness.

3 In the British system, the day is divided into 48 “windows”, or settlement period, of ½ hour each.

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Finally, this summary of the balancing services offers in Great Britain show the complexity of the system. The pictures below show the different timescales and actors involved in each type of service.

Demand Management

STOR

BM Start-up

Fast Start

Fast reserve Frequency Response

< 240 min

< 85 min

< 5 min

< 2 min

< 1 sec

T-24 h T

FCDM

< 2 sec

Time

Figure 2: Timescales of the balancing services

Services BMU participation Non-BMU Participation

Mandatory Frequency

response

Suppliers

Firm Frequency response Suppliers & Consumers Suppliers & Consumers

FCDM Consumers

Fast Reserve Suppliers & Consumers Suppliers & Consumers

Fast Start Suppliers

STOR Suppliers & Consumers Suppliers & Consumers

Demand Management Consumers

BM Start-up Suppliers

Table 1: The different actors

II.B.2 The Balancing Mechanism and the “market” aspect

In 2001, The New Electricity Trading Arrangement (NETA) is introduced and then extended to Scotland. The aim of this system is to allow a greater competition in the wholesale market, while ensuring the security of the system.[6]

The new arrangements include:

• Forwards and Futures markets

• A Balancing mechanism, by which the TSO can accept offers and bids to maintain the balance between production and consumption

• An imbalance settlement process, a financial settlement of the observed imbalances

Through the Balancing Mechanism, NGC can buy and sell energy close to real time, using the offers4 and bids5 submitted by the actors. The acceptance of a bid or an offer is managed by the Balancing and Settlement Company Elexon .

4 Upwards regulation

5 Downwards regulation

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NGC provides the balancing services through the balancing mechanisms or other means (bilateral contracts, specific tender for certain system services)[7].

The volumes and costs of balancing services concluded outside of the Balancing Mechanism are integrated afterwards in the calculation of the prices for the imbalance settlement.

II.B.2.1. How the market works

Only the bids and offers belong to the balancing mechanism, which will work on market based rules.

II.B.2.1.a. The different timescales

One of a feature of the British market is that there is a gate closure every half hour during the whole day. Indeed, for each settlement period, the gate closure is one hour before the beginning of this period. By this time, producers should have submitted their final production plan, called the Final Physical Notification, and the BMUs should have submitted their offers and bids as well.

Forward/Futures Markets Bilateral Market

Balancing Mechanism (on behalf of NGC)

Imbalance Settlement (on behalf of Elexon)

T –1h

Gate Closure

T T+1/2h

-Bilateral & Forward contracts -NGC contracts primary reserve and other reserve contracts

NGC accepts offers & bids for system energy balancing

Settlement of cash flows arising from the balancing process

-FPN Submission

-Bids & Offers Submission

Figure 3: Timescales of the British electricity market

II.B.2.1.b. Format of the Bids & Offers

Each order are under the form of a “Bid-Offer pair”, which means that the provider offers an interval of available capacity (a deviation from the FPN level) which can be used for upwards or downwards regulation, depending on the level of production. Therefore, for each submitted pair Bid/Offer, the unit defines a power level (number of MW, positive or negative); which represents a variation from the planned level of production.

Each pair has a number, positive if the level is higher than the FPN, negative if it is lower. The minimum order is 1 MW, and each one contain an energy price for the offer and an energy price for the bid (£/MWh).

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An example is given below:

Figure 4: Bid/Offer Data [5]

Each BMU can submit 10 pairs; the level of MW must be constant on each settlement period [6]. The number of the pair increases with the proposed price.

To put it in a nutshell, the BMU offers an capacity interval, in which it can vary its production depending on the need. It cannot offer only an upwards regulation; or only a downwards regulation. The energy price depends on the level of the production compared to the FPN level.

For example, considering the former bid/offer data and a FPN at 200 MW, then:

- If NGC wants to increase the production with 50 MW, starting from the FPN at 200 MW, the energy price will be 30£/MWh

- If NGC needs afterwards a downward regulation of 80 MW, the BMU will pay 25£/MW between 250 MW and 200 MW (pair 1), and then 20£/MW (pair –1)

The process is shown in the picture below:

Price (€/MWh)

Puissance (MW) FPN

(200 MW) 10 20 30 40

Offer Price Bid Price

250 290 310 340

160 130

(-2) (-1)

(1) (2)

(3) (4)

Figure 5: Representations of the bid/offer data

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If three positive pairs have been used for upwards regulation, the TSO must use the bid part of those pairs before using a negative pair.

Furthermore, each BMU must submit a list of technical parameters with the order, to allow NGC to compare it with the available system services and make the best choice. [5]

Those information concern especially the dynamic parameters, the generator specificities, the limitation of injection and withdrawal at the network connection point…

Those parameters and the proposed prices are essential in the decision of using a bid/offer pair instead of another reserve service.

II.B.2.1.c. Bids and Offers selection

The selection takes place right after the gate closure, based upon technical and economical criteria.

Though the ancillary services are mainly considered as outside the Balancing Mechanism [8], there can be used in the following case:

- NGC considers there will not be sufficient bids and offers to ensure the security of the system

- NGC considers that they are an economical alternative to bids and offers - The technical parameters of the offers and bids do not fit the requirements The offers and bids, though explicit when they are submitted, are more implicit when they are selected. Indeed, NGC can choose the quantity, and can thus accept an pair bid/offer partly, as shown in the following example:

Figure 6: Bid/offer acceptance (BOA) [6]

The points A, B, C and D represent the accepted level, function of the time. The blue area represents the acceptance energy volume. The picture above is called a Bid offer Acceptance.

A BMU can reject it only for security or technical reasons.

II.B.2.1.d. Remuneration

The services are paid at the bid or offer price, and not the marginal price: it is a pay-as-bid system [6, 9]. It is important to notice that the capacity of the bids and offers are not paid for.

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II.B.2.2. Imbalance Settlement II.B.2.2.a. Imbalance definition

After each settlement period, the volume of the overall system energy imbalance is calculated, in order to see if the system is globally long or short. It is the net of all systems and energy balancing actions (including the ancillary services used outside of the balancing mechanism) taken by the TSO for the considered period. [6]

It is called the Net Imbalance Volume (NIV):

- If NIV<0, the system is long (NGC must sell energy) - If NIV>0, the system is short (NGC must buy energy)

Each BMU belongs to a Trading Unit, which is balance responsible. Therefore, a Trading Unit contains several BMUs, regrouping the production on one side and the consumption on the other. When the imbalance is calculated, only the imbalance of the whole Trading Unit is considered, and not each BMU separately. This allows a compensation effect between the different physical imbalances among the BMU.

Concerning the financial imbalance settlement, it is important to notice that the imbalance is separated in two parts. Indeed, each balance responsible has two energy accounts: one generation energy account and one production energy account.[10, 12]

Therefore, financially speaking, and there is no compensation between deviation registered on the production side and deviation registered on the consumption side.

For example, let us consider a system where the deviations metered (compare to the forecasts) are the following:

- An excess of 50 MWh in the production - An excess of 50 MWh in the consumption

The overall imbalance is equal to zero, but the balance responsible must pay for a deviation of 100 MWh.

II.B.2.2.b. Financial Settlement

For each settlement period of a day, two prices are calculated:

- SSP, the System Sell Price, paid to the Trading Units, in case of a long position

- SBP, the System Buy Price, paid by the Trading Units, in case of a short position

These prices take into account the volume and prices of the accepted bids and offers.

The costs from the use of other system services contracted outside the balancing mechanism appear also in the calculation, in the Balancing Services Adjustment Data (BSAD).

Indeed, for economical or technical reasons, NGC can use a balancing service outside the BM instead of an offer or bid, and then its cost appears in the imbalance settlement prices, through the BSAD. [6,14]

If the balancing service is provided by a BMU, the payment of the energy used is done via the BM, and the availability fee (payment for the capacity) is integrated to the BSAD.

The services included in the BSAD are a priori the following: STOR, fast reserve, BM Start- up. [13] NGC submits these data for each hour, the day before at 17:00 PM.

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The imbalance settlement is based on two prices:

 The main price, paid for the imbalance which are in the same direction as the Transmission Operator (ie the overall system): the referred balance responsible contributes to the system deviation

 The reverse price, paid for the imbalance which are in the opposite direction to the Transmission Operator : the referred balance responsible counters to the system deviation

Before 2006, the SBP and the SSP were respectively equal to the average price of the accepted offers and bids.

Since 2006, the calculation depends on the position of the system, and is more penalizing. Indeed, the main price is calculated based on the marginal 500 MWh of accepted offers and bids. For example, if the system is short, SBP is calculated as the volume weighted average of 500 MWh of the most expensive offers which have been used.

The defined volume (500 MWh here) is called the Price Average Reference Volume.

Price (€/MWh)

Price (€/MWh)

Volume of accepted

Offers

Volume of accepted

Offers

marginal 500 MWh Volume

weighted average price

Volume weighted average price

Figure 7: Main Price calculation in case of a short system

The reverse price is based on the volume weighted average of the purchase and sale done before the Gate Closure. It is the Market Index Data (MID), which is the price of the wholesale electricity in the short term market, related to the referred half hour. [6]

Finally, this system with two energy imbalance prices is an incentive for a better forecast of the production and demand. Indeed, a producer with a deviation from its planning can cannot make a benefit, but, on the contrary, often looses money.

Balance Resp.

Imbalance System

position long

long short

short

MID (SBP) (main price)

MID (SSP) (main price)

SSP (reverse price) SBP

(reverse price)

Table 2: Imbalance settlement prices

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II.C. Balancing mechanism in Germany

Germany is divided four zones, each one controlled by a different TSO: RWE, EnBW, E-ON and Vattenfall Europe Transmission6.

The TSOs are required to maintain the permanent balance between production and demand, and provide balancing energy to the balancing groups.

Verband der Netzbetreiber (VDN) is an independent association, founded in 2001, which represents the four TSOs. The Bundesnetzegentur (Federal Network Agency) is the common regulator for the German networks, and in particular the electricity network. [18]

Concerning the frequency regulation, the three main kinds of services are conformed to the definition of the UCTE:

- Primärregelung, which corresponds to the primary control - Sekundärregelung, which corresponds to the secondary control - Minutenreserve, which corresponds to a fast tertiary reserve

As a part of the UCTE Network, Germany must keep the frequency level at 50 ± 0.2 Hz.

Since 2001, the three kinds of services are procured through a competitive bidding, each service having its own market. All the balancing services are therefore commercialised and remunerated.[9] These markets appeared gradually: in February 2001 for RWE, in August 2001 for E-ON, in August 2002 for EnBW and in September 2002 for Vattenfall Europe Transmission.

On these markets, about 7 000 MW are contracted every day for upwards regulation, of which 3 000 MW of minute reserve, and about 5 500 MW for downwards regulation, of which 2 000 MW of minute reserve.

II.C.1 Description of the services II.C.1.1. Primary control

This service in provided by all synchronously connected power system inside the UCTE area. It is automatic, must be delivered within 30 seconds, and for an incident of less than 15 minutes.

II.C.1.2. Secondary control

This service is provided by the concerned TSO. It is semi-automatic, and must be delivered within 5 minutes, and for an incident which lasts between 30 seconds and 15 minutes.

II.C.1.3. Tertiary control: Minutenreserve

This service reconstitutes the secondary reserves and acts as a complement to the secondary control. The TSO uses this kind of reserve in case of a large imbalance between production and demand. The service is manually activated by the affected TSO; it must be provided within 15 minutes, and for an incident which lasts up to an hour. The duration of the settlement period in Germany, which is fifteen minutes, gives a special role to this kind of

6 RWE Transportnetz Strom GmbHNET, EnBW Transportnetze AG, EON Netz GmtH, Vattenfall Europe Transmission GmbH

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reserve. In case the TSO is not able to meet its needs in minute reserve, it must set up transactions with other TSOs to face the problem.

II.C.1.4. Time frame of control energy

According to the German market rules, the TSOs are responsible for supplying reserve energy during the first hour of the incident. Then it becomes the affected balance responsible who is in charge of the compensation via bilateral contracts.[15,21]

Figure 8: Timescales of the different kinds of reserve [2]

This last information might refer to another kind of reserve, the Stundenreserve, which is provided within an hour. This slower reserve depends upon the balance responsible, and is a way for the TSO to constitute a operating margin.[1]

In case of a major problem, the Stundenreserve is completed by the Notereserve, which is a special reserve contracted by the TSO on the market. If there is an emergency, the balance responsible can ask the TSO for this reserve.

Finally, the Kurtzeitreserve (primary, secondary and minute reserve) are the responsibility of the TSOs, whereas the Stundenreserve and the Noterserve depends upon the balance responsible.

The different reserves are summarized in the table hereafter:

Type of reserve Response time Who is responsible for the reserve ?

Primary control ≤ 30 secondes All the TSO (in the UCTE) Secondary control ≤ 5 minutes The TSO of the affected zone

Minutenreserve ≤15 minutes The TSO of the affected zone Stundenreserve ≤1 heure The balance responsible of the

affected balancing group Tertiary control

Notreserve variable The balance responsible of the affected balancing group

Table 3: The different kinds of reserve in Germany

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II.C.2 The Balancing mechanism and the “market” aspect

Procurement of primary, secondary and minute reserve is done through a tendering process. Therefore, we can speak of a balancing “market”. Each TSOs has its owns “reserve markets”. Primary and secondary reserves are based on a semi-annual tender, whereas minute reserve is based on a daily tender. Recently, a common platform has been set up for the minute reserve, so that the four TSOs can organise a common tender [16].

Many actors participate to the tender, even small ones via pooling systems. Due to an important cooperation between the TSOs, a supplier can provide control power to any zone;

since 2004, even the suppliers from the Austrian control zones TWAG and VKW can participate in the minute reserve market.

A pre-qualification process is performed by the TSOs, based on technical and dynamical criteria.

Since 2005, several changes occurred in order to improve the cooperation among the TSOs and decrease the need of balancing energy. Among them, the most important are the creation of a common regulator and a common tender for minute reserve. A common tender for primary and secondary reserve should be organized soon.

II.C.2.1. How the market works II.C.2.1.a. The different timescales

The time frame of the market, available for all the zones, is described in the following picture:

Time Primary reserve market

Secondary reserve market

Minute reserve market

Spot market Programs submission

Programs rectifications Wind reserve market

D-1 D

Forward market Intra-day market

Every 6 months

Every month

10:00

12:00 14:30

15:30

Figure 9: The different timescales of the German market

The offered minute reserve should be submitted by 10:00 AM the day before, Two hours before the gate closure of the spot market. At 11:00 the selection of the reserve minute offers is published. The balancing group managers submit their programs to the TSO at 2:30 PM the day before. Concerning the intra-day modifications of the generation program, they can happen for each settlement period (15 minutes), with an advance warning 45 minutes before.

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II.C.2.1.b. Format of the bids and offers

 Primary and Secondary reserves

All the plants with a capacity of 100 MW or more must participate to the primary control, but they are paid for that.

The offers are available for six months and the providers give the following information:

- Offered capacity (MW), which can be used for upwards or downwards regulation - Price for the capacity (€/MW)

- The energy is not paid

Concerning the secondary control, the offers for upwards regulations and the bids for downwards regulations are separated. The participation is not compulsory. The following information is given:

- Upwards or downwards regulation - Offered capacity (MW)

- Price for the capacity (€/MW)

- Price for the energy actually used (€/MWh)

 Minute reserve

The tender is common to the four TSOs, which is a progress towards the integration of the four zones. However, the qualification process is done with the TSO of the zone where the offer is submitted.

The format of the offers and bids is the following:

- Upwards or downwards regulation

- Duration of the offer: the day is divided into six periods of four consecutive hours (starting from midnight). Therefore, an offer must be available for at least one block of four hours.

- Offered capacity (MW), it should be at least 15 MW - Price for the capacity (€/MW)

- Price for the energy actually used (€/MWh)

- The zone where the unit is located (Anschlussregelzone) Example:

Product Name Capacity Price [€/MW]

Energy

Price [€/MWh]

Offered

Capacity [MW] Zone

NEG_00_04 55,400 0,000 50 EON

Figure 10: Example of bid data [3]

The offers seem to be explicit regarding the amount of MW given; it is interesting to notice that the capacity is remunerated, for all services.

Before the changes occurred in 2006 , the minimal quantity to offer was 30 MW; the decreasing of this amount allows a better competition, since more offers are now submitted.

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II.C.2.1.c. Bids and offers selection

Once the technical and dynamical criteria respected, the selection is done based on economical criteria.

Regarding the primary control, the offers are ordered by ascending capacity price, and a forecast of the need defines the last accepted offer.

Regarding the secondary control, the merit order is done with the same method, but when two capacity prices are equal, the energy price is considered. The orders are then sorted out by ascending energy prices for upwards regulation, and descending energy prices for downwards regulation. [19, 22]

Regarding the minute reserve, the TSOs select a certain quantity of offers and bids after their submission, the day before. In order to guarantee the system security, a minimal amount is required in each zone. This amount is called Kernanteile (core portion); it represents between 1 and 15% of the total contracted amount, and is not constant. It does not seem to affect the competition between the offers from different zones.

The merit order is done the same way as for secondary reserve.

This merit order for tertiary reserves, listing the offers and bids, and the result of the selection is published on Internet:

Product Name Capacity Price[€/MW]

Energy

Price [€/MWh]

Offered

Capacity [MW] Zone Acceptance [ja/nein]

NEG_12_16 0,670 5,000 20 RWE ja NEG_12_16 0,672 5,000 15 RWE ja NEG_12_16 0,674 5,000 15 RWE ja

… …

NEG_12_16 0,770 2,000 15 EON ja NEG_12_16 0,780 0,000 15 Vattenfall ja NEG_12_16 0,780 0,000 50 ENBW ja NEG_12_16 0,780 0,000 46 RWE ja NEG_12_16 0,790 0,000 15 Vattenfall ja NEG_12_16 0,790 0,000 15 Vattenfall ja NEG_12_16 0,790 0,000 50 ENBW ja NEG_12_16 0,800 0,000 100 ENBW ja NEG_12_16 0,800 0,000 15 Vattenfall ja NEG_12_16 0,800 2,000 15 EON ja NEG_12_16 0,810 0,000 15 Vattenfall ja NEG_12_16 0,810 0,000 50 ENBW ja NEG_12_16 0,810 0,000 15 Vattenfall ja NEG_12_16 0,820 0,000 50 ENBW ja NEG_12_16 0,820 0,000 15 Vattenfall nein NEG_12_16 0,820 0,000 15 Vattenfall nein

Figure 11: Extract of tender results for downwards regulation for tertiary reserves (10.07.2007, 12:00-16:00) [16]

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