UNIVERSIDAD PONTIFICIA COMILLAS ESCUELA TÉCNICA SUPERIOR DE INGENIERÍA (ICAI) MÁSTER OFICIAL EN EL SECTOR ELÉCTRICO TÉSIS DE MÁSTER DAY-AHEAD ELECTRICITY MARKET Proposals to adapt complex conditions in OMEL AUTOR: Néstor Sánchez María MADRID, Julio 2010 Autorizada la entrega de la tesis de master del alumno: Néstor Sánchez María EL DIRECTOR Pedro Sánchez Martín Fdo: ………………………… Fecha: ….. / ….. / …….. EL TUTOR Juan Bogas Gálvez Fdo: ………………………… Fecha: ….. / ….. / …….. Vº Bº del Coordinador de Tesis Michel Rivier Abbad Fdo: ………………………… Fecha: ….. / ….. / …….. ii “Things alter for the worse spontaneously, if they be not altered for the better designedly.” Francis Bacon iii ACKNOWLEDGEMENT There are many persons and institutions that have helped and supported me throughout the development of this master’s thesis. Now that it is finished, I would like to thank all of them: To my thesis directors, Juan Bogas Gálvez and Pedro Sánchez Martín, for the valuable time they have spent to guide me, the suggestions and ideas that have proved so helpful, and especially for the encouragement to research and to raise my understanding of the electricity market through their provocative thinking. To my thesis coordinator, Michel Rivier Abbad, for his undertaking to organize the timely schedule of all the stages of development and presentation, and especially for assigning me this exciting and enriching project. To ICAI-Comillas and OMEL, for providing an exceptional learning experience with first-class professionals and a remarkable environment at the heart of the electricity market. To the staff in OMEL, particularly Julio Hornos, Ramón Alburquerque, Santos Ortega, Carmina Pelaez, Loli Gutiérrez, Raúl García and all personnel on the 5th floor, who integrated me as one more person in the team and made my stay in the company a pleasure. Finally, and most importantly, to my family, for the constant and unconditional support, and all the time I have deprived you for a whole year and will surely compensate from now. iv Abstract There are a number of factors that make recommendable a revision of day-ahead market’s complex conditions at the Iberian Peninsula power exchange, namely integration of European electricity markets and downward pressure on market clearing prices by the large-scale penetration of wind energy. While the market design seems adequate and is not at the root of price disturbances experienced during the first part of 2010, this thesis comes up with several proposals that could soften those disturbances and at the same time pave the way for OMEL’s further cooperation with other power exchanges by limiting the differences among tradable products. The proposals are: • Removal of Indivisibility Condition • Removal of Scheduled Shutdown Condition • Adoption of Maximum Payment Condition • Adoption of Minimum Income Condition in time blocks • Adoption of Flexible Hourly Bid • Adoption of Continuous Day-Ahead Market While some of the proposals imply simple and easily quantifiable actions, others involve the introduction of substantial changes and therefore require an stage of temporary experimental use before deciding on their implementation. v Resumen Existen una serie de factores que hacen recomendable la revisión de condiciones complejas del mercado diario electricidad en la Península Ibérica, concretamente la integración de mercados europeos de electricidad y la presión que ejerce en la bajada de precios la introducción a gran escala de generación eólica. A pesar de que el diseño del mercado es adecuado y no es el origen de las perturbaciones de precio vividas en la primera parte de 2010, en esta tesis se proponen una serie de medidas que podrían reducir las perturbaciones y a la vez facilitar una mayor cooperación de OMEL con otros operadores de mercado europeos mediante la limitación de diferencias en los productos objeto de comercio en la plataforma de mercado. Las propuestas son: • Eliminación de la Condición de Indivisibilidad • Eliminación de la Condición de Parada Programada • Adopción de la Condición de Pago Máximo • Adopción de bloques temporales en la Condición de Ingresos Mínimos • Adopción de Oferta Horaria Flexible • Adopción de Mercado Diario Continuo Mientras algunas de las propuestas implican acciones simples y fácilmente cuantificables, otras requieren la introducción de cambios sustanciales y por tanto necesitan un fase de prueba experimental antes de decidir su implantación. vi TABLE OF CONTENTS 1 INTRODUCTION 1 2 ALTERNATIVES FOR ELECTRICITY MARKET DESIGN 4 2.1 STRUCTURAL DESIGN 5 2.1.1. Pool Model 5 2.1.2. Exchange Model 6 2.2 SPOT DAM DESIGN 9 2.2.1. Auction Trading 9 2.2.2. Continuous Trading 9 2.3 PRICING DESIGN 10 2.3.1. Uniform Price (Market Clearing Price) 10 2.3.2. Pay-as-Bid 11 2.4 NON-CONVEXITIES TREATMENT 12 2.4.1. Combinatorial Auction with Linear Prices 12 2.4.2. Cost-Reflective Bid with Non-Linear Prices 13 3 INTEGRATION OF EUROPEAN ELECTRICITY MARKETS 14 3.1 TOWARDS A SINGLE ENERGY MARKET 15 3.2 DAY-AHEAD MARKET (DAM) IN OMEL 20 3.2.1 Bids with “complex conditions” 21 3.2.2 Matching algorithm 23 3.2.3 Current market situation 26 3.3 DAM IN OTHER POWER EXCHANGES IN EUROPE 33 3.3.1 DAM products 34 3.3.2 Functional analysis of widely-used products 35 3.4 CRITICAL REVIEW: DEALING WITH NON-CONVEXITIES 38 3.4.1 MIC (Minimum Income Condition) vs. Block Bids 38 3.4.2 Load Gradient (ramp constraints) vs. Linked Block Bids 42 3.4.3 Auction-only DAM vs. Auction&Continuous DAM 43 4 PROPOSALS TO ADAPT COMPLEX CONDITIONS IN OMEL 48 4.1 REMOVAL OF CURRENT CONDITIONS 49 4.1.1 Removal of Indivisibility Condition 49 4.1.2 Removal of Scheduled Shutdown Condition 50 4.2 ADOPTION OF NEW CONDITIONS AND DAM PRODUCTS 50 4.2.1 Adoption of Flexible Hourly Bid 50 4.2.2 Adoption of Maximum Payment Condition 51 4.2.3 Adoption of Minimum Income Condition in PX-defined Time Blocks 52 vii 4.2.4 Adoption of Continuous Day-Ahead Platform 53 5 TESTING MARKET RESULTS UNDER PROPOSED CHANGES 57 5.1 REMOVAL OF UNSUITABLE CONDITIONS 59 5.1.1 Removal of Scheduled Shutdown Condition 59 5.1.2 Removal of Indivisibility Condition 62 5.2 ADOPTION OF NEW CONDITIONS AND DAM PRODUCTS 64 5.2.1 Adoption of Flexible Hourly Bid (FHB) 64 5.2.2 Adoption of other conditions and products 65 6 CONCLUSIONS 66 7 BIBLIOGRAPHY 70 ANNEXES 73 A DAM PRODUCTS AND RULES IN EUROPEAN POWER EXCHANGES 74 B ELECTRICITY GENERATION BY FUEL: COUNTRY ANALYSIS 86 C CONTINUOUS DAM IMPLEMENTATION IN DIFFERENT PX 92 1 INTRODUCTION 1 Introduction 1 Introduction 2 In the European energy market, a large part of the energy is traded in long-term contracts, while only a comparatively small part is traded day-ahead in the spot market auctions. Nonetheless, it is sensible to concentrate the economic analysis on pricing at the spot market. This is due to the fact that the prices in all upstream and downstream electricity markets reflect the expected spot market prices and, hence, actual spot prices determine the cost of electricity even in the long run. This is, the hourly clearing price in the day ahead market is of central importance for the prices on all other electricity markets, such as derivatives, OTC and sales agreements with final customers. As a result of this, the exchange price inevitably constitutes the point of reference even for trading off the exchange. So, if any problem in the market rules affects day-ahead pricing, then the effect can be multiplied in other markets. The nature of “complex conditions” that can be used for bids in OMEL’s Day-Ahead Market (DAM), differs widely from the available tools in the most relevant power exchanges in Europe, even if both of them try to serve the same purpose: provide flexibility to thermal generation technologies that are intrinsically not flexible to operate. However, the electricity market is experiencing a trend towards European integration. The development of actual regional markets has been consolidated in many cases, such as Nord Pool and MIBEL, or has reached a high degree of coordination, such as TLC (France, Netherlands, Belgium) under price coupling. Current projects are starting to build cross-regional links that could be defined as the seeds of a future single European market. The most ambitious project is the development of a common day- ahead market algorithm covering a large part of Europe under a price coupling approach. So far, the exchange operators participating in the project, named Price Coupling of Regions, are OMEL (Spain, Portugal), Nordpool (Norway, Sweden, Denmark, Finland), EPEX (France, Germany, Switzerland, Austria), APX (Netherlands, UK), BelPEX (Belgium), and GME (Italy), therefore covering over 70% of the European market. Besides, European regions that pursue a large share of generation from wind sources, such as Spain, Denmark, Germany, or the UK recently, are starting to feel some unintended effects in the price and dispatch that the day-ahead market yields. This consequence is sometimes extreme in Spain, where CCGT bidders need to make use of