Latvenergo's view on

functioning and developing

of Baltic balancing market

Guntis Lusis, Head of Trading

03–May–2016, Vilnius

2

700 MW

1000 MW

500 MW

Baltics increasingly integrated into European market

2006 2016

In 2016 total installed capacity of Baltic external interconnections exceed Baltic

peak demand.

Contents

• How big concern is balancing costs in electricity retail business?

• Formation and comparison of suppliers’ balancing costs among

markets with different imbalance pricing models.

• How electricity suppliers can limit risks associated with volatile

balancing costs?

• Importance of well functioning balancing market in consistent

imbalance price setting.

3

Balancing costs represent significant part in retail costs

• While net margin in electricity supply business is ~1%, imbalance costs

can fluctuate 0.5-2.5% of electricity costs.

4

26,2

26,8

43,9

1

Electricity tariff

Electricity

Taxes andlevies

Networkcosts

45%

28%

27%

2,5

41,4

1

Electricity

Wholesale price

Retail mark-up

94%

6%

1

0,5

1

1

Retail mark-up

Sales costs

Net margin

Balancingcosts

40%

20%

40%

Balancing costs are difficult to manage

• Balancing costs are highly

volatile, difficult to forecast and

practically impossible to hedge.

• Volatility mainly caused by

- Fundamental factors (capacity

availability, demand/supply, fuel

cost, etc.).

- Imperfections in balancing

market, regulatory or

administrative changes by

TSOs.

110%

130%

150%

170%

20

10

20

11

20

12

20

13

20

14

20

15

8760 hours rolling average TSO sell imbalance price / spot price in Lithuania

5

100%

110%

120%

130%

20

10

20

11

20

12

20

13

20

14

20

15

8760 hours rolling average TSO sell imbalance price / spot price in Finland

Balancing costs vary widely among different markets

• Different imbalance settlement

models result in different

imbalance costs.

• Major imbalance settlement model

design differences:

- balance responsibility

(exemptions);

- balancing cost base;

- Imbalance price determination

(marginal vs pay-as-bid);

- settlement model (e.g. single vs

dual portfolio, single price vs two

price).

6

0,05

0,09

0,52

0,27

0,00

0,10

0,20

0,30

0,40

0,50

0,60

Latvia Estonia Lithuania Finland

EUR

/MW

h

Balancing costs of the same syntheticretailer in Baltic states and Finland

Balancing costs

* Based on 2015 imbalance prices

Relation between sales volume and forecasting

accuracy

In retail business containing balancing costs is critical for

staying competitive

Relation between imbalance costs and forecasting accuracy

What market players can do to

contain imbalance cost risk?

• Increase forecasting accuracy.

• Transfer imbalance cost risk to

clients (via product pricing or

fixed-schedule deliveries).

• Increase sales portfolio (netting).

• Participation in balancing market

(e.g. production or demand side

management).

7

0%

2%

4%

6%

8%

10%

12%

0 1 2 3 4

Am

ou

nt

of

imb

alan

ce

en

erg

y fr

om

sal

es

Portfolio size (TWh/year)

-

0,2

0,4

0,6

0,8

1,0

1,2

0,0% 2,0% 4,0% 6,0% 8,0% 10,0% 12,0%

Imb

alan

ce c

ost

s (E

ur/

MW

h)

Amount of imbalance energy from sales

Different pricing models deliver different imbalance prices

0

20

40

60

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Latvia

SPOTLV TSO sell price TSO buy price

0

20

40

60

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Estonia

SPOTEE TSO sell price TSO buy price

0

20

40

60

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Lithuania

SPOTLT TSO sell price TSO buy price

0

20

40

60

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Finland

SPOTFI TSO sell price TSO buy price

8

Hourly day-ahead spot price and buy/sell imbalance price curves of average day in 2015

Different pricing models deliver different imbalance prices

[2]

9

Imbalance costs €/MWh of a modelled retailer depending on amount of imbalance in 2014

-10

0

10

20

-10

0%

-90

%

-80

%

-70

%

-60

%

-50

%

-40

%

-30

%

-20

%

-10

%

0%

10

%

20

%

30

%

40

%

50

%

60

%

70

%

80

%

90

%

10

0%

Imb

alan

ce c

ost

s

Imbalance amount

Lithuania

-10

0

10

20

-10

0%

-90

%

-80

%

-70

%

-60

%

-50

%

-40

%

-30

%

-20

%

-10

%

0%

10

%

20

%

30

%

40

%

50

%

60

%

70

%

80

%

90

%

10

0%

Imb

alan

ce c

ost

s

Imbalance amount

Latvia

-10

0

10

20

-10

0%

-90

%

-80

%

-70

%

-60

%

-50

%

-40

%

-30

%

-20

%

-10

%

0%

10

%

20

%

30

%

40

%

50

%

60

%

70

%

80

%

90

%

10

0%

Imb

alan

ce c

ost

s

Imbalance amount

Estonia

-10

0

10

20

-10

0%

-90

%

-80

%

-70

%

-60

%

-50

%

-40

%

-30

%

-20

%

-10

%

0%

10

%

20

%

30

%

40

%

50

%

60

%

70

%

80

%

90

%

10

0%

Imb

alan

ce c

ost

s

Imbalance amount

Finland

Different pricing models deliver different imbalance prices

[3]

10

Imbalance costs €/MWh of a modelled retailer depending on amount of imbalance in 2015

-10

0

10

20

-10

0%

-90

%

-80

%

-70

%

-60

%

-50

%

-40

%

-30

%

-20

%

-10

%

0%

10

%

20

%

30

%

40

%

50

%

60

%

70

%

80

%

90

%

10

0%

Imb

alan

ce c

ost

s

Imbalance amount

Latvia

-10

0

10

20

-10

0%

-90

%

-80

%

-70

%

-60

%

-50

%

-40

%

-30

%

-20

%

-10

%

0%

10

%

20

%

30

%

40

%

50

%

60

%

70

%

80

%

90

%

10

0%

Imb

alan

ce c

ost

s

Imbalance amount

Lithuania

-10

0

10

20

-10

0%

-90

%

-80

%

-70

%

-60

%

-50

%

-40

%

-30

%

-20

%

-10

%

0%

10

%

20

%

30

%

40

%

50

%

60

%

70

%

80

%

90

%

10

0%

Imb

alan

ce c

ost

s

Imbalance amount

Finland

-10

0

10

20

-10

0%

-90

%

-80

%

-70

%

-60

%

-50

%

-40

%

-30

%

-20

%

-10

%

0%

10

%

20

%

30

%

40

%

50

%

60

%

70

%

80

%

90

%

10

0%

Imb

alan

ce c

ost

s

Imbalance amount

Estonia

Well functioning balancing market is crucial for

proper imbalance pricing

11

Energy used for balancing Baltic system (2015)

* Source: Pöyry

Example: Balancing of Lithuanian power system on 02.09.2014

• ACE is a major part of the energy used for balancing the Baltic system

– Based on historic data (2015), local or other activations make up only

an average of 30% of activations (MWh) over the year while there is a

lot of flexibility in the region.

-120

-70

-20

30

80

-120

-70

-20

30

80

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Ba

lan

cin

g e

ne

rgy,

MW

Pri

ce

, EU

R/M

Wh

Example: Balancing of Lithunian power system on 02.09.2014

Regulation Up

Nord Pool Spot Lithuania price

Litgrid balancing electricity price

Imbalance of Lithuania

Key Messages

Formation of imbalance prices and balancing costs has significant

impact on functioning of electricity retail market.

Poorly developed, fragmented balancing market increase risks

associated with inconsistent and volatile balancing costs for suppliers.

Ideally, imbalance pricing model should facilitate «self-balancing» of the

power system - increase role of balance responsible parties in

balancing power system via decentralized decisions, and decrease the

role of centralized regulating activities by TSOs.

Availability of flexible capacity is not a problem; problem lies with

implementation of proper market design.

12

Thank you for your attention!

guntis.lusis@latvenergo.lv

http://www.latvenergo.lv

AS „Latvenergo”

Pulkveza Brieza iela 12, Riga, LV-1230, Latvia

Contact information

13