Why introducing implicit auctions in the Central South region?
Potential gains from improving allocation methods of day-ahead cross border capacity
Milan21 April 2008
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GME’s analysis focused on the Italian borders in order to:
identify the potential for efficiencies gains from the adoption of implicit
auctions instead of explicit auctions as a mean to allocate cross border
capacity at day-ahead stage;
give, where possible, a quantitative background to assessment of the
superiority of implicit auctions in short term trading, as stated by the first ETSO-
Europex JWG as well as EU documents (report on the 1228 cross-border
regulation);
give, where possible, a quantitative background to the evaluation of the
opportunity to adopt implicit auction mechanisms for each of the analyzed
borders
Aims of GME’s study
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Regulation (EC) 1228/03
Regulation (EC) n. 1228/2003 (art. 2):
Congestion management methods shall be market-based
capacity shall be allocated only by means of explicit (capacity) or implicit
(capacity and energy) auctions
Both methods may coexist on the same interconnection
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In the last years, several European institutions and associations expressed their
position regarding DA implicit auction as a mean for the allocation of cross border
capacity:
DG for competition
DG Energy and Transport
ERGEG
ETSO
EUROPEX
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European Commission DG for competition Energy sector inquiry, January 2007
“Although explicit auctioning is theoretically and with perfect foresight an efficient mechanism and it is in practice compatible with Regulation 1228/2003, it has efficiency deficits compared to implicit auctioning especially where intraday and balancing markets are illiquid. With implicit auctions results of trade are less likely to have economically irrational use of the interconnector capacity”
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European Commission DG Energy and Transport, Report on Regulation 1228/2003 on cross border trade in electricity, May 2007
“In the future, more capacity will be allocated through implicit auctions. The so-called market coupling method developed by ETSO and the association of European Power Exchanges (EuroPex) has, at the moment, the highest potential of truly integrating the European electricity market through implicit auctions at the day-ahead stage.”
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ERGEGCoherence and Convergence Report, July 2007:
“It is now widely recognized that for the day-ahead timeframe, implicit allocation methods are more efficient than explicit auctions and should be the target mechanism for all regions for the day-ahead timeframe”
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EUROPEX-ETSOInterim Report “Development and Implementation of a Coordinated Model for Regional and Inter-Regional Congestion Management”, April 2008:
“Implicit auctioning may be superior to explicit auctioning in allocating capacity even for immature energy markets, provided at least one of the coupled markets has a reasonable level of liquidity”
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GME has identified 4 areas in which potential for efficiencies gains may arise
from the adoption of implicit auction:
lower operational risks
lower trading risks/costs
impulse to the growth of the liquidity in local energy markets
netting of the flows and more efficient use of the capacity
Potential for efficiencies gains
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7.00
1. Nomination to Terna of yearly and monthly capacity rights
7.50
2. Publication by Terna of daily ATC and opening of day-ahead explicit auction
8.20
3. Gate closure of day-ahead explicit auction managed by Terna
8.30
4. Publication by Terna of results of day-ahead explicit auction
9.00
5. Gate closure of GME’s day-ahead energy market
Example: Time schedule of day-ahead auctions managed by Terna
Operational risks may arise because explicit auctions at day ahead stage require in a very tight timeframe:
TSOs and PXs to coordinate the functioning of the capacity market (managed by TSOs) and the energy
market (managed by PXs)
Operators to set up and send their bids/offers to the energy markets on the basis of the results of the
capacity auctions
7.00
1. Nomination to TSOs of yearly and monthly capacity rights
7.50
2. Publication by TSOs of daily ATC for implicit auction
8.20
3. Gate closure of day-ahead explicit auction
8.30
4. Publication of results of day-ahead explicit auction
5. Gate closure of involved day-ahead energy markets
Example: Indicative time schedule of day-ahead implicit auction
Lower operational risks
By integrating capacity and energy markets, DA implicit auctions reduce those risks
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With DA explicit auctions, since there are two different markets for the capacity and the energy:
Operators have to coordinate their capacity and energy positions. Therefore, their bidding
strategy must take into account the trading risk due to the separate trading of capacity and energy
Problem of asymmetry of information may be relevant, especially in presence of immature energy
markets that do not have a clear price signal
Operators have to bear the costs of participating to two different markets/platforms (guarantees,
IT,…)
By integrating capacity and energy markets, DA implicit auctions reduce, ceteris paribus, trading
risks and trading costs
Lower trading risks/costs
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Impulse to the growth of the liquidity in local energy markets
Experiences show that implicit auctions for the management of cross-border capacity can be
successfully launched even in presence of illiquid local energy markets if at least one of the coupled
market has an adequate level of liquidity.
The ratio is that by coupling, via an implicit auction mechanism, two local energy markets, the liquidity
of the immature market is going to increase since its participants may access to the liquidity of the
more mature market:
in 1998, Nord Pool, already operating in Norway and Sweden, was extended to Finland
in 2006, the Trilateral Market Coupling (TLC) between France, Belgium and Netherlands was
launched by launching, at the same time, the Belgian energy market
The development of local energy markets brings, indeed, benefits in terms of competition and
transparency
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Netting of the flows and more efficient use of the capacity
The superiority of DA implicit auction in allocating cross-border capacity, respect to DA explicit auction,
relies on two main features:
DA implicit auction allocates the cross-border capacity between two areas as a function of the price
differential of the prices in the area energy markets.
DA implicit auction enable the netting of the flows in opposite direction
Therefore, the outcomes of a DA implicit auction ensure that:
the net cross-border schedules go always from the low price area towards the high price area
the congestion revenue calculated on the basis of price differential is the “true” congestion revenue,
unlike with explicit auctions where, as it may turn out, there can be a congestion revenue even if there is no
congestion
DA Implicit auctions:
are compatible with explicit auction for the allocation of longer term capacity rights (weekly, monthly,
yearly products)
are compatible both with a “flow-based” capacity model (PTDF/BC) and with ATC/NTC framework as well
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PB
Price DAMB
Energy
DA implicit auction and long term explicit auction
Import from B to A Import from A to BNTCBA NTCAB
PA
PriceDAMA
Energy
Net Export CurveA
Capacity allocated with explicit auctions of long-term products and nominated
Net cross border schedule
PA
PB
Commercial schedule resulting from DA implicit auction
PA* = PB*
PB*PA*
Net Export CurveB
ATCBA ATCBA
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Quantitative background
GME analyzed on the border between Italy and those countries with a liquid index of hourly day-ahead energy prices:
France (PowerNext)
Austria (EXAA)
Switzerland (EEX-CH)
For Italy, the price of northern zone of IPEX was considered.
Inefficiencies in cross border schedules in 2007 is calculated as the “estimated value of the unused cross-border
capacity”1:
(NTCL H – FLOWL H) * (PrH – PrL), where:
NTCLH is the hourly NTC, published by TSOs in the Auction Rules, in the direction from the lower area price to the higher
area price. NTC values have been reduced accordingly to the notices of curtailment published on Terna web-site, during
2007.
FLOWL H is the hourly day-ahead net scheduled flow published by ETSOVista.
PrH and PRL are, respectively, the hourly prices, respectively, in the higher and lower area price.
1The concept of “estimated value of unused cross-border capacity” was adopted in the Energy sector inquiry (January 2007), by the DG for competition for calculating the inefficiency on the Dutch-German, French-UK and French-Spanish borders (see DG Competition Energy Sector Inquiry, par. II.3.5.3, January 2007)
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The “estimated value of the unused cross-border capacity” represents only a proxy of the
inefficient use of the cross-border capacity that could be reduced by adopting DA implicit
auction. It relies on the following assumptions:
demand and supply curves in the neighboring
markets are, respectively, flat and rigid, i.e. prices
would not change if cross-border schedules change
liquidity of neighboring markets would not
change (increase) in case of coupling
bidding behavior of the operators would not change in case of coupling
Estimated value of the unused cross-border capacity
PA - PB
FlowB AFlowA B
NTCA B NTCB A
Estimated value of the unused cross-border capacity
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In 2007, cross border schedules on the Italian border with France, Austria and Switzerland were:
45 TWh
14% of the energy sold on IPEX (incl. OTC)
33% of the energy sold on the Northern zone of IPEX (incl. OTC)
Cross-border schedules
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Prices
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Cross-border schedules
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Price difference vs cross-border schedules
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Price difference vs cross-border schedules
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Price difference vs cross-border schedules
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2007: prices in Northern zone of IPEX 2007: net cross-border schedules
Italian prices are higher most of the times, but….
…operators expected Italian prices to be always higher!
Price difference vs cross-border schedules
91% of the hours: higher than PowerNext prices
99.6% of the hours: import from France
82% of the hours: higher than EEX-CH prices 99.6% of the hours: import from Switzerland
93% of the hours: higher than EXAA prices 100% of the hours: import from Austria
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“Adverse” schedules and prices in 2007
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“Adverse” schedules and prices in 2007
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Estimated value of the unused cross-border capacity
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Prices
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In the last quarter of 2007 we find more than 80% of the estimated value of unused capacity
In the last quarter of 2007 price difference changed sign more frequently!
Estimated value of the unused cross-border capacity and prices
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The analysis of the Italian, French and Swiss cross border schedules and prices highlights that:
when the sign of price difference does not change (i.e. Italian prices are higher), the estimated value of unused capacity is negligible
when the sign of the price difference changes more frequently (prices converge), the estimated value of unused capacity sharply arises!
Is day-ahead implicit auction the solution?
Other aspects should be evaluated:
presence of overlapping countries raises coordination issues with coupling project in other relevant region (CWE, CEE)
evolution of prices
cost/benefit analysis of introducing implicit auction
introduction of intraday trading could reduce the inefficiencies arising from DA explicit auction
Conclusions and final remarks
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Analyzing the schedules on the Slovenian-Italian and Greece-Italian borders during 2007, it should be underlined that:
in 77% of the hours Italy imported from Slovenia
in 28% of the hours Italy imported from Greece
The direction of the flows between Italy and Slovenia and Italy and Greece changes more frequently than on the other Italian borders!
Assuming that frequent changes in the direction of cross-border flows imply frequent changes in price differences, then efficiency gains by implementing implicit auctions may be considerable.
Moreover, great benefits could be gained in term of impulse to the growth of liquidity in less mature markets
Conclusions and final remarks
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Thank You for Your attention!
Gestore del Mercato Elettrico SpAViale Maresciallo Pilsudski, 92 - 00197 Roma
tel. + 39 06 8012.1 fax +39 06 8012 4524 www.mercatoelettrico.org [email protected]