EG2220: Power Generation, Environment and Markets Adequacy challenge capacity markets

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1 EG2220: Power Generation, Environment and Markets Adequacy challenge capacity markets Lennart Söder Professor in Electric Power Systems, KTH Three challenges at large amount of variable renewables (solar/wind) C1: Handling of the continuous balance. C2: Low wind and solar power production and high power consumption. This issue is called capacity adequacy issue. C3: High wind and solar power production and low power consumption. Lennarts view: Solve C2 and C3 needed resources. Then probably there is enough resources to handle C1 Who will invest in peak power plants? (= the last plant used.) Who will invest in peak power plants? Lennart Söder Professor in Electric Power Systems The investment: must be profitable with assumption of perfect competition this means that (power price operation cost) > investment cost

2 Prices at Nord Pool Nordpool Monthly System price 2000-April-15, [SEK/MWh] Conclusion: Low operating costs many hours with price > cost many hours with possibility to cover investment costs High operation costs few operation hours few hours with possibility to cover investment costs Pricing during peak hours essential Series1 Use of gas turbine to cover peak power Assumed demand curve ( Sweden) In the following it will be assumed that the cost of a gas turbine (OCGT = Open Cycle Gas Turbine) is 300 SEK/kW, year 0,5 SEK/kWh the gas turbine is 100% reliable Perfect information and competition

3 Needed price for gas turbine to cover this load Needed price for OCGT (gas turbine) to cover this load Comment to needed price Relevant questions: If there are other solutions, e.g., volontary load reductions instead of gas turbines, then this should of course be used instead. If these technologies are competitive, then the needed power prices will be lower. A question is though the size of prepayment (=investment) needed for load reduction. How much capacity is needed in the system? I.e., what is a relevant reliability level? How high prices can be accepted? What is the price when there is capacity deficit?

4 Two installed capacity examples and corresponding reliability Two installed capacity examples and corresponding needed prices Conclusion from example If a maximum price is set then the market will only invest up to the corresponding reliability level If a higher reliability is needed then it is necessary to subsidize the capacity between the market investments and needed capacity (=R in previous figure) It is important that the market price is not lowered by the subsidized plants. Reliability requirement + maximum accepted price subsidized amount Combinations of accepted price and subsidized plants

5 Pricing at peak situations Pricing during capacity deficit Impossible situation The companies who are balance responsible for consumers are prepared to pay as much for purchase of power as the unbalance cost if they do not buy it. This means that the price on the regulating market during peak situations sets the limit. Actor Prod Wanted load A B C Total Capacity deficit Load reduction 10 MWh/actor Actor Prod + load Demand Balance reduction A B C TOT Pricing during demand reduction Load reduction can be seen as a last bid to the regulating market to set the balance between production and consumption. The price on the regulating market is set by the last accpeted bid. Therefor pricing of load reduction is essential The price of load reduction sets the interest of actors to pay for production to mitigate risk of capacity deficit Today (in Sweden) load reduction is not measured per actor

6 EG2220: Power Generation, Environment and Markets Adequacy challenge capacity markets Lennart Söder Professor in Electric Power Systems, KTH Concerning capacity markets To obtain a good system adequacy, a capacity market can be created. If there is no specific capacity market, then this is 1) Energy-Only Market There are different types of capacity markets including 2) Long-Term Contracts or Options for energy, 3) Payment Mechanisms for Capacity, 4) Quantity Requirements for Capacity, and 5) Demand Curves for Capacity 6) Strategic Reserves ( = Sweden = previously shown) About new nuclear power in UK - The UK Government and EDF Group have reached commercial agreement on the key terms of a proposed investment contract for the Hinkley Point C nuclear power station in Somerset. - The key terms include a Strike Price of /MWh fully indexed to the Consumer Price Index (= EUR = 1, SEK) -

7 Background Sweden has a winter peak load which is not so common, since it requires low temperature in whole Sweden at the same time For this issue Sweden has a legislation concerning strategic. Originally 2000 MW was purchased for each winter in a tendering process with a certain share from consumption side. The current legislation states that this should be taken away until This winter 1500 MW was purshased There is a discussion concerning how to manage this in future, especially with larger amounts of wind power replacing dismantled nuclear power ( ) Reserves in Sweden Consumers accepted to reduce consumption Company Area MW AB Sandvik Materials Technology SE3 22 AV Reserveffekt AB 1 SE4 9 AV Reserveffekt AB 2 SE3 24 AV Reserveffekt AB 3 SE4 12 AV Reserveffekt AB 4 SE3 7 AV Reserveffekt AB 5 SE3 25 Göteborg Energi DinEl SE3 25 AB Vattenfall AB 1 SE3 50 Company Area MW Vattenfall AB 2 SE3 30 Ineos AB SE3 30 Rottneros Bruk AB SE3 27 Storaenso AB SE3, SE4 230 Holmens Bruk AB SE3 100 Modity Energy Trading AB SE3 17 Befesa Scandust AB SE4 18 Sum: 626 MW Swedish load peaks Basic set-up / assumption For peaks the most suitable production is OCGT. Other technologies (DSM) have to be more cost effective MWh / h LDC The last 500 MW was only used 1 yearr out of 20 Will the market take the risk to provide s which is only used some hours in one year out of 20? LS27 Required price to make OCGT profitable

8 High loads in Sweden , Details of needed prices for rarely used OCGT:s LDC Required price to make OCGT profitable Basic principles Basic set-up / assumption One can accept these high prices. Challenges include, e.g. strategic behaviour since producers may earn a large amount during these hour. Benefit of high prices is incentive for DSM. How to finance DSM if prices are never high? But still there is a limit, so what is the accepted LOLP? If these prices are not accepted, then rarely used units have to get a payment, no matter the production capacity market / strategic. LOLP, max price and amount of strongly related What is wind power impact on these issues? Accepted LOLP Accepted max price Required strategic

9 Different tests for Sweden Sweden isolated OCGT:s used for peaks Period used bacause of good wind data. First period: 50 wind sites 4 GW, second period: scaled real production to 4 GW. Four cases studied: Base case Change caused by 9 TWh wind power, Change caused by 9 TWh nuclear, with 2 units including simulated outages, p=90% Change caused by 9 TWh scaled real nuclear production, ( ) Different tests for Sweden - 1 LOLP = 1h in 5 years, max price 1,4 Euro/kWh Example Power/energy from studied alternativ Other market investment, Extra Market+ extra Reduced need of capacity = capacity value Only load With wind 4000 MW, MW power TWh With 2 nuclear station 1346 MW, 9 TWh MW Different tests for Sweden - 2 LOLP = 1h in 10 years, max price 3 Euro/kWh Different tests for Sweden - 3 LOLP = 1h in 5 years, max price 1,4 Euro/kWh Example Power/energy from studied alternativ Other market investment, Extra Market+ extra Reduced need of capacity = capacity value Only load With wind 4000 MW, MW power TWh With 2 nuclear station 1346 MW, 9 TWh MW Example Only load and Only load With nuclear Power/energy from studied alternativ Other market investment, Extra Market+ extra Reduced need of capacity = capacity value 9 TWh MW

10 Different tests for Sweden - 4 LOLP = 1h in 10 years, max price 3 Euro/kWh Example Only load and Only load With nuclear Power/energy from studied alternativ Other market investment, Extra Market+ extra Reduced need of capacity = capacity value 9 TWh MW Peak capacity responsibilities Norway: TSO-Statnet is responsible for enough capacity Finland: TSO-Fingrid is NOT responsible for enough capacity Sweden: TSO-Svenska Kraftnät is NOT responsible for enough capacity. But: up to 2000 MW Denmark: TSO-Energinet.dk is responsible for enough capacity Peak capacity responsibilities example 1 1. Assume that there is a capacity problem in South Sweden and Denmark exports 1000 MW to Sweden. 2. Assume that there is an outage in Denmark so they have to decrease consumption. 3. According to EU legislation nondiscrimination Denmark cannot prioritize Danish consumers before Swedish ones. 4. Does this has as a consequence that Denmark is also responsible for Sweden? Peak capacity responsibilities example There are discussions of capacity payments to a rather large volume in UK 2. Probably this then leads to comparatively low energy prices compared to a case with no cap. payments 3. Both Norway and Denmark plan new cables to UK. 4. Does this mean that Denmark and Norway can import and only pay the energy price?

11 High load s in Sweden Selective capacity market TSO responsible to purchase up to 2000 MW of s for peak load situations. There is a bidding process where the cheapest offers are accepted. Pricing: The bids are placed on Nordpool spot. They are only used if all other bids are accepted. The Net Regulation Price should not be allowed to exceed 5,000 Euro/MWh. TSO can immediately impose a Disconnection Price in The event of Critical Power Shortage of SEK/MWh 2300 Euro/MWh Australia: Max price AUD 9000 Euro/MWh Reserves in Sweden Consumers accepted to reduce consumption Company Area MW Stora Enso AB Höganäs Sweden AB 4 25 Rottneros Bruk AB 3 27 Befesa Scandust AB 4 18 Vattenfall AB Göteborg Energi AB 3 25 AV Reserveffekt TOTAL 464 Summary of (some) Nordic market challenges Risk for prices so low so power plants cannot be financed Large amounts of renewables often very low prices But still other units are needed need of either (very) high prices or some kind of capacity payment mechanism. Large amount of transmission is one part solution, but perhaps also large amounts of solar/wind power on the other end? Idea to market solution to last unit There should be a (renewable) unit (biogas?) with MC as High operation cost (or bid price) essential Call it a market maker unit reduced need of cap. payment. If DSM is cheaper then it will be used instead As low LOLP as requested can be obtained (= size of unit)

12 Comments to Nordic market challenges How high costs should we allow to make market work : Costs for market-making plants Costs for new lines are needed to increase the number of participants and to decrease risk of use of market power Costs for IT solutions for consumer flexibility since this is essential to make the market work. Comments to Nordic market challenges How high costs should we allow to make market work : Costs for market-making plants Costs for new lines are needed to increase the number of participants and to decrease risk of use of market power Costs for IT solutions for consumer flexibility since this is essential to make the market work. (But what is the alternative?) Some Nordic Power System Challenges A. Pricing challenges B. High share of variable renewables C. Smart-grids: Consumer interaction D. Covering Peak load Discussion: 1. DSO role and responsibility 2. Information exchange TSO role and responsibility, access between hubs/information-exchange systems 3. Market rules for demand response 4. Market rules energy services 5. Market rules micro-production 6. Market rules for charging electrical vehicles 7. Unbundling Comments to some Nordic market challenges DSO role and responsibility - More distributed power production, - PV voltage control (rules or market?) - Supply voltage to feeding grid - Coordination with retailer concerning DSM - Grid planning? (if DG pays connection, then why plan?) 2. Information exchange TSO role and responsibility, access between hubs/information-exchange systems - DSO:s possibility to help TSO - Peak capacity: Market? Tender? Rely on neighbours?

13 Comments to some Nordic market challenges Market rules for demand response - Contract with DSO and/or retailer? - React on prices and/or externally controlled? - Time frame: minutes/hours - How long time in advance are one informed? 4. Market rules energy services - DSO:s possibility/responsibility to help TSO (Q-support) - DG ancillary services requires ICT technology Comments to some Nordic market challenges Market rules micro-production - How to handle voltage control at large scale? - React on prices and/or externally controlled? - Time frame: minutes/hours - 100% access to grid or less? (cheaper) 6. Market rules for charging electrical vehicles - Possibility to have same price everywhere? - Different price/taxes special meter? - Externally controllable? If so: How? Comments to some Nordic market challenges Unbundling etc - Not so rational if TSO should plan for all possible expansion of wind power - Off-shore grids - How much should Swedish grid-users pay for power transferred through Sweden? - More detailed DSO-regulation? - How to allow TSO:s to take risks for long-term investments? - How to make neighbor TSO:s to think about total social surplus Reserve slides Lennart Söder, KTH

14 What is a good market? - 1 What is a good market? - 2 Static allocation efficiency (=are available resources used as efficient as possible? E.g. in deficit situations) Management efficiency (= is the administrative organization efficient?) Plant operation efficiency (= is each plant operated in an efficient and reliable manner?) Production optimization (= correct merit order = is cheapest possible operation, including externalities, applied?) Transaction cost efficiency (= the amount of transactions costs, as measurements, spread of information and contracts) Dynamic investment efficiency (= are the correct investments done at the right time?) Risk management efficiency (= are risks and uncertainties handled in an efficient way?) System reliability (= is it on a correct level?)