The Nordic Power Market Zonal Pricing Jan Vidar Thoresen Managing Director Nord Pool Consulting AS

(C) 2005 - NordPool 1

The Nordic Power Market

Zonal Pricing

Jan Vidar ThoresenManaging Director Nord Pool Consulting AS


Content

• The development of a regional power market

• The spot market

• Zonal pricing

• Experiences


Development of a regional power market (1)- The Nordic power system

Combine power and heat production

Gas turbine

100 200 400 TWh

Condensing, Coal

Condensing, Oil

Hydro power (mean)Nuclear power

300Consumption

Productioncost

Hydro

Thermal


Development of a regional power market (2)

1991 2000

Development 1991 - 2000:• Stepwise development in the period• Harmonisation of procedures limited

to a minimum required to operate a common power market

• The balancing mechanism a responsibility of the TSOs and stepwise harmonised.

• No border transmission tariff.One PX - five national TSOs


Nord Pool Spot Market Financial Market: Futures, Forwards, Options (standardised)

Clearing services

Retail Market

Small-scale industryCommercial and service businesses

Households

OTC Markets

Bilateral Wholesale Market Financial Contracts Physical Contracts (tailor-made or standardised)

Large-scale industries

Generators &Grid owners

Trading & Clearing

Representatives

Retailers

Large-scale industries

Generators &Grid owners

Trading & Clearing

Representatives

Retailers




• Generation planning should be a responsibility of each generator. (Portfolio bidding and no central dispatch)

• A non-mandatory day-ahead spot market based on auction and self-dispatch. No curtailment of traded spot contracts.

• A real time markets that include central dispatch based on bids from consumers and generators.

• Harmonisation of procedures

• The balancing mechanism a responsibility of the TSOs.

• No border transmission tariff.


A Day-Ahead Spot Market where the price represents the electricity energy price.

A Real Time Market

Where the price represents the system’s capability to balance generation and consumption in real time. The Real Time Market is normally operated by the Transmission System Operators.

Two-market Concepts:

Single-market Concepts:One price only that represents the margin of real time centralised dispatched contracts.

Development of a regional power market (5) – Market concept


Participants at Nord Pool and at the TSOs

Nord PoolSpot Market Real Time MarketsDerivatives

Retailers

Generators

IndustryGrid owners

Representatives

Clearing customersEnd-users

Market Makers

GeneratorsEnd-users

All Participants’Imbalances

Nordic TSOs

Representatives

Generators

IndustryRetailers

Note: Demand side bidding in the real time market


The Spot Market (1)• Each of the national TSO-areas define the bid areas.

• Within each bid area participants can operate with one or more portfolios.

• Participants themselves optimise the use of own resources within in each bid area.

• The spot market is normally applied to balance resources to commitments to deliver.

• Day ahead congestion management is carried out between bid areas.

• The unconstrained MCP is the reference price for derivatives.


The Spot Market (2)- Bidding

Hour\Price: 0 100 101 150 151 200 201 300 301 500012

9 300 300 150 150 0 0 -100 -100 -300 -300

24

Bidding by fax or electronically!

ParticipantBid valid for:

Week nr.Elspot area Mon Tue Wed Thu Fri Sat Sun Week Corrected

Date: Time:

exam

ple

hour

9


The Spot Market (3)- Market Clearing Price

Mem. A, MW

Mem. B, MW

Mem. C, MW

SUM, Purchase

Price 0 900 50 100 101 150 151

20 020 0

200 20151

40 -400 -12020 0 -120

120 100 80 80 60 60 40 40 2020

SUM, Sale

6060 2040 40 20

SalePurchase

40 80 120

100

200

300

Price

MW

0 0 -40 -120 -120


The Spot Market (4)- Present situation

• Market share of spot market about 40 % of total generation/consumption

• Continuously increase in number of participants

• Demand side participation

• Price signals into the retail market

• Low imbalance costs and appropriate systems for consumption forecast decrease the need for an intra day market.


The Spot Market (5)- Handling of imbalances in real time

Bids in merit order for each hour

Downward

Upward

Spot price

Price

MW

TSO select the cheapest unit if generation has to be increased and the most expensive unit if generation has to be decreased.

The unit last called upon in each hour defines the real time price for the specifichour

By the end of each hour of operation a price is determined. This price is also the price of imbalances


• The TSOs cooperate in an “Inter-Nordic Transmission System Operator Agreement”.

• The balancing mechanisms include in total about 3-5 % of total generation.

• Demand side bidding in the real time markets and

markets for power reserves.

• Procedures for pricing of imbalances still different in the TSO areas

• Structure of transmission tariff harmonised. Generation and consumption carries about 50 % each of total transmission costs in the respective TSO-areas.

The Spot Market (6)- The Present balancing Mechanism


Zonal Pricing (1)- Day ahead congestion management

No congestionCongestion between Norway and Sweden

One price only : MCP Three prices: MCP, PL and PHPL < PH

Contractual flow

PL PH

MCP

MCP


• The TSO compensate for transmission constraints by “re-dispatching” the market in real-time using the Balancing Market.

• No change of the market cross/MCP on both sides of the bottleneck.

• The TSO procures upward regulation in deficit area and downwards regulation in surplus area at Balancing Market prices.- Note that demand side can contribute by increasing/decreasing load!

• Cost incurred by the TSO is passed on to the Grid owners and/or consumers as a Transmission Tariff

Zonal Pricing (2)- Counter trade in real time


Zonal Pricing (3)- Present situation

• No congestion and therefore only one price in the total market in about 50 % of the time. In the remaining 50% of the time there are congestion between two or more TSO-areas.

• Market concentration may not be appropriate in some situation with congestion.

• Due to day ahead congestion management there is a net income in settlement of spot contracts in all situations with congestion. The net income is distributed to TSOs based on a formula agreed on.


Single-market concepts:• Central dispatch of traded contracts• Complex price determination• Trade close to time of operation• Price determination claimed to be ”Not

understandable”• Low demand side participation• Not appropriate for participants to respond on prices

Experiences (1) – Market concept characteristica


Two-market concepts:• De-centralised dispatch of spot contracts• Centralised dispatch in Real Time Market• Simple and understandable price determination both

in spot market and real time market• Trade close to time of operation• Appropriate concept for participants to respond on

price signals

Experiences (2) – Market concept characteristica


Two-market conceptHigh activity in bilateral tradeOne spot exchange with high liquidityStrong support to the spot exchange by regulator, political level and TSOsThe spot price have developed to be The Reference PriceThe spot exchange is an important infrastructure companyLow imbalance costsFull retail competition

Experiences (3) – The Nordic Market


Generally high competition in the zones• Reliable reference prices – necessary for developing

a derivative marketEasy to understand the price setting• Demand side participation

Netting of imbalances in each zoneThe system operator defines the capacitiesSimplified trading system

Experiences (4) – Zonal pricing


Thank you very much foryour attention

Documents

The Nordic Power Market Zonal Pricing Jan Vidar Thoresen Managing Director Nord Pool Consulting AS