4 August 2011 JSS-MIC/BTV. Energinet.dk s ancillary services strategy. Doc. No /11 v1, Case No. 10/5553 1/33

Transcription

1 4 August 2011 JSS-MIC/BTV Energinet.dk s ancillary services strategy Doc. No /11 v1, Case No. 10/5553 1/33

2 Contents 1. Introduction and summary Framework conditions Legislation International agreements Stakeholders Development trends International trends National trends in the longer term Technological trends in the longer term Frequency-controlled reserves Frequency-controlled reserves today Strategy for frequency-controlled reserves Secondary reserves Secondary reserves today Secondary reserves strategy Manual reserves and regulating power Manual reserves and regulating power today Strategy for manual reserves and regulating power Properties required to maintain power system stability Properties required to maintain power system stability today Strategy for properties required to maintain power system stability Player involvement Involvement of players in drawing up the strategy Involvement of players in implementing the strategy Doc. No /11 v1, Case No. 10/5553 2/33

3 1. Introduction and summary As the party responsible for ensuring security of supply in the short and long term, Energinet.dk is dependent on having clear objectives with regard to ancillary services, for example; an area that is currently the subject of a great deal of attention and development both nationally and internationally. It has therefore proved necessary for Energinet.dk to clarify its strategy for achieving those objectives. The Danish Energy Regulatory Authority has therefore asked Energinet.dk to explain its ancillary services strategy. Publishing the strategy in this way is intended to help market players and other stakeholders to make their decisions on an informed basis and ensure that the players are also involved more in fleshing out the strategy. This memorandum presents Energinet.dk s ancillary services strategy. Overall, the main element in the ancillary services strategy is to gain access to the necessary control resources via larger markets where there is fair, effective competition, while ensuring greater sales opportunities for Danish suppliers. Increased internationalisation will be an important means of achieving this. Increased internationalisation of the ancillary services markets is a natural consequence of the energy markets becoming more internationalised in recent years, with the markets now extending across most of western Europe. This internationalisation of ancillary services will be a key element in order for Energinet.dk to meet its overall objectives given the framework conditions in which the enterprise operates. The strategy has been drawn up for the period , but also contains objectives for the period up to The overall objectives in the strategy are as follows: - Achieving common markets for frequency-controlled reserves in the synchronous areas. The specific objective is to become part of joint German cooperation on the procurement of primary reserves, and for Eastern Denmark s frequency-controlled reserves to be purchased on a common market for Swedish and Danish players. - Establishing larger markets for activating secondary reserves through cooperation with the German and Nordic TSOs. Initially, such cooperation will involve the avoidance of counter activation of reserves between neighbouring areas and subsequently the activation of Danish secondary reserves to cover imbalances in Germany. - Ensuring broader product definitions in the regulating power market enabling all available resources to participate. - Establishing an international regulating power market. Initially, the aim is to quickly start trading regulating power (ie existing national/regional products) across the border to Germany with a minimum of harmonisation. In the longer term, the aim is to have a common (harmonised) regulating power market on a par with the spot and intraday markets. - Sharing manual reserves over larger geographical areas (nationally and regionally). To begin with, Energinet.dk will analyse the possibility of for and Doc. No /11 v1, Case No. 10/5553 3/33

4 the potential in regarding Denmark as one single area and then look at the possibilities offered by sharing reserves internationally. - Integrating properties required to maintain power system stability into the power grid when economically viable. Tender rounds will generally be used to qualify the decision-making process. - Continuously involving players in strategy implementation and follow-up through player meetings, for example. The specific objectives and initiatives are described in the following chapters. Chapter 2 examines the framework conditions for ancillary services in the form of legislation and international agreements. Chapter 3 describes development trends of importance to the future power system based on a breakdown of international, national and technological trends. Chapters 4-7 describe Energinet.dk s strategic objectives broken down into the following four subareas: - Frequency-controlled reserves - Secondary reserves - Manual reserves and regulating power - Properties required to maintain power system stability. Chapter 8 deals with player involvement not only in connection with drawing up the strategy, but also when it comes to Energinet.dk s objective of involving players in implementation. 2. Framework conditions 2.1 Legislation Section 1 of the Danish Electricity Supply Act stipulates that "the country's electricity supply is to be organised and implemented in accordance with consideration for security of supply, the national economy, the environment and consumer protection. Within this objective, the Act is to ensure that consumers have access to inexpensive electricity and continue to have influence on the administration of the electricity sector s assets. The Act is "in particular to promote sustainable energy use, including through energy savings and the use of CHP (combined heat and power), as well as renewable and environmentally friendly energy sources, while also ensuring the efficient use of financial resources and creating competition in markets for generation and trade in electricity. As the transmission system operator (TSO), Energinet.dk is responsible for ensuring security of supply in Denmark and must in order to fulfil this duty among other things "maintain the technical quality and balance of the interconnected electricity-supply system. (Section 27a of the Danish Electricity Supply Act). As regards the purchase of ancillary services with a view to ensuring security of supply, the overall focus of Energinet.dk s strategy is on the following factors: Doc. No /11 v1, Case No. 10/5553 4/33

5 - Focus on the national economy ensures that the social costs of maintaining security of supply at a given level are as low as possible - Efficiency in the provision of ancillary services through continuous optimisation of the procurement process ensures that electricity consumers receive the services necessary at the lowest possible price - Open, international markets for ancillary services promote competition, innovation, and access to foreign markets for Danish producers - Increasing volumes of renewable energy will change the need for and supply of ancillary services. These factors are, among other things, based on the legislative framework governing Energinet.dk. Section 28(3) of the Electricity Supply Act stipulates that Energinet.dk is to "cooperate with transmission system operators in other countries to establish mutual, equivalent principles for electricity supply as well as for grid tariffs, grid access, transit, market issues etc., co-ordination of interconnectors (including the handling of balance and capacity problems) and to enter into any joint system operation agreements necessary in order to ensure that the benefits of interconnected systems are exploited. Section 31 stipulates that "when carrying out its tasks Energinet.dk is to contribute to ensuring that the best possible conditions are established for competition in the markets for generation and trade in electricity. According to section 2 of the Act on Energinet.dk, Energinet.dk's objective is to "ensure the efficient operation and expansion of the main electricity and gas infrastructure and to ensure open, equal access for all users of the grids. 2.2 International agreements The requirements for ancillary services are regulated in the cooperation agreements that Energinet.dk has concluded with other TSOs. As Denmark is the only country in Europe to belong to two synchronous areas, the Continental synchronous area and the Nordic synchronous area, different requirements apply in Western Denmark (DK1) and Eastern Denmark (DK2), respectively. Western Denmark used to be a member of the UCTE (Union for the Coordination of Electricity Transmission) and therefore subject to the UCTE s current requirements. Denmark as a whole was historically part of Nordel, the Nordic cooperation on system operation, and both Eastern and Western Denmark are subject to the requirements described in the Nordic System Operation Agreement. Because of its simultaneous membership of the UCTE, Western Denmark is, however, exempt from some of the obligations with regard to automatic reserves. With effect from 2009, the European Network of Transmission System Operators for Electricity (ENTSO-E) was set up as part of the EU s liberalisation of the European power system. The new organisation took over all operational duties from the six existing TSO organisations, including the UCTE and Nordel. Doc. No /11 v1, Case No. 10/5553 5/33

6 2.2.1 Operation Handbook ENTSO-E RG Continental Europe s Operation Handbook - Policy 1 (Operation Handbook) describes the requirements to be met by the areas in the Continental synchronous area. The requirements differentiate between three types of reserve, primary, secondary and tertiary, the latter being manual, and the first two being automatic. According to the Operation Handbook for DK1, the HVDC connections between DK1 and the Nordic Synchronous System, Konti-Skan, Skagerrak and the Great Belt Power Link are regarded as either production or consumption units, depending on their operational status. Western Denmark is not an independent control area, but is a part of TenneT GmbH s control area under the bilateral agreement between Energinet.dk and TenneT GmbH. However, Western Denmark acts as if it were an independent control area in accordance with the aforementioned agreement, which describes Energinet.dk s obligations in relation to TenneT Nordic System Operation Agreement The requirements applying to the Nordic synchronous area are described in the Nordic System Operation Agreement of 2006, in which binding reserve requirements are described in operating regulations. A distinction is made between manual and automatic reserves in the Nordic region. Automatic reserves are divided into frequency-controlled normal operation reserves (FNR), frequency-controlled disturbance reserves (FDR) and voltage-controlled disturbance reserves (there are no requirements regarding the latter in Denmark). Manual reserves are divided into slow and fast reserves. No slow reserves are purchased in Western Denmark. HVDC connections are regarded as production capacity in the Nordic region. The TSOs for the individual HVDC cables are only responsible for restoring normal operation in their own subsystem following cable outages or the use of emergency power. In other words, TSOs do not have to hold reserves for export (downward regulation). Chapters 4-6 elaborate on the requirements for the individual types of reserves in both the Nordic and the European systems. 2.3 Stakeholders As is evident from the above, Energinet.dk cannot drive forward the development in all areas on its own as there are many other stakeholders. Implementation of the strategic objectives is dependent on international agreements and approval by the authorities. Development will therefore have to take the form of teamwork between the various stakeholders as illustrated in the figure below: Doc. No /11 v1, Case No. 10/5553 6/33

7 Authorities Danish Energy Agency Danish Energy Regulatory Authority Competition authorities Regulators in neighbouring countries TSOs (bilateral) Svenska Kraftnät Statnett TenneT Fingrid 50Hertz Energinet.dk ENTSO-E (multilateral) RG Nordic RG Continental Europe Danish players Figure 1: Energinet.dk stakeholders 3. Development trends The legislation mentioned in chapter 2 and international requirements are just one element in the framework conditions that govern Energinet.dk's work. Some development trends will also be of significance to the Danish power system. Development trends can be divided into three groups: - International - National - Technological. These topics are described in brief below. 3.1 International trends As mentioned earlier, Denmark is subject to European operational standards, and changes to these will therefore also have an impact on Danish conditions. The continued infrastructure expansion also significantly affects Danish conditions. Currently, three international trends in particular are expected to be of significance to Danish conditions: - Harmonisation of operational standards in ENTSO-E - The Nordic frequency analysis - Use of international connections. These three trends are described in brief below Harmonisation of operational standards in ENTSO-E In ENTSO-E, work is being done to harmonise the current system operation agreements concluded by the six former TSOs. The current system operation agreements will remain in force until this work is complete. Among other things, the work is aimed at establishing uniform definitions of reserves across the synchronous areas. The following types of reserves are being used for the time being: Doc. No /11 v1, Case No. 10/5553 7/33

8 - Frequency containment reserves (FCR) - a reserve that stabilises the frequency in the event of frequency deviations - Frequency restoration reserves (FRR) - an automatic or manual reserve that restores the frequency to 50 Hz - Replacement reserve - a manual reserve that releases the other two reserves. Energinet.dk expects common reserve definitions in ENTSO-E to be ready by summer 2012, with the quantitative requirements and market terms being known by the end of It is also expected that Energinet.dk s present reserve definitions can be accommodated within the common definitions that are being drawn up. In connection with this work, principles for cross-border trade in reserves are also being prepared The Nordic frequency analysis Frequency quality in the Nordic synchronous area has deteriorated in recent years. A review has therefore been initiated under Nordic auspices with the aim of analysing the reasons for the poor frequency quality and coming up with proposals for improving the situation, including a reassessment of the present requirements for ancillary services. Energinet.dk is involved in this work. The first stage of the work will focus on analysing and describing factors affecting frequency in the Nordic system with a view to better understanding the poor frequency quality. The next stage of the work will focus on proposing a specification and dimensioning for a (new) automatic reserve, including looking at the interaction between the other frequency and balancing activities. The outcome of the work remains uncertain, but the results may affect the requirements for automatic reserves, which could potentially change the present arrangements in the Nordic System Operation Agreement. The analysis is therefore part of Energinet.dk s framework conditions. An open player workshop will be held in September 2011 where the results of the work will be presented to stakeholders. Energinet.dk will also involve players in the course of its work to identify technical solutions, including canvassing input and presenting interim conclusions to players Use of international interconnectors One of the other international factors of great importance is the expansion of infrastructure, especially international interconnectors. A number of interconnectors are planned in addition to those already in existence. Specifically, work has been launched to reinforce the AC interconnector on the Jutland-German border and to construct a new HVDC connection across the Skagerrak, which is expected to be in operation by the end of In addition to the projects already in progress, a number of projects are being investigated, including Cobracable with 700 MW of capacity between the Netherlands and Jutland, Kriegers Flak with 600 MW in a cable grid between Doc. No /11 v1, Case No. 10/5553 8/33

9 Germany and Zealand, and a new 400 kv interconnector from Zealand to southern Sweden to replace the 132 kv Øresund cables, which are expected to have a limited residual life. Analyses of a further interconnector between Eastern and Western Denmark are also being prepared. Both existing and planned interconnectors are shown in Figure 2: Norway Skagerrak 4 Skagerrak 1,2&3 Existing interconnectors Being investigated Decided Konti-Skan 1&2 Sweden Kassø-Tjele DK1-DK2 Øresund The Great Belt Øresund 2 COBRAcable Kriegers Flak Kontek Germany Figure 2: Existing and planned interconnectors International interconnectors will be an important element in integrating the large volumes of renewable energy that are planned for the future. Betterdeveloped infrastructure will allow greater market integration as well as balancing and sharing of reserves over larger areas. Greater integration of the markets will mean increased opportunities for releasing capacity from international interconnectors to markets other than the spot market, eg regulating power and reserve capacity markets. The international interconnectors are not a goal in themselves, but a means of ensuring an efficient power system and market. Economics is the driving factor when Energinet.dk establishes new international interconnectors. Economic principles require resources to be exploited efficiently. The efficient exploitation of resources involves looking at all the potential uses of the technology. In the case of international interconnectors it is necessary to analyse on all the markets to which capacity could be released, including the spot and reserve capacity markets. Doc. No /11 v1, Case No. 10/5553 9/33

10 Energinet.dk will basically make all the capacity on the international interconnectors available to the markets. Transmission capacity must be allocated to the various marketplaces in such a way as to maximise the economic benefits, while maximum use must be made of the transmission capacities, but only as long as security of supply is not compromised or the infrastructure subjected to inappropriate wear and tear. That is why short-term overload capacity is not allocated to the spot or intraday markets. Releasing capacity to the spot market has largely been the optimum solution until now, but as Denmark becomes more integrated with the outside world, the optimum solution from an economic viewpoint will presumably be to utilise some capacity for other markets, including the reserve capacity markets. The reason for this is what is known as the declining marginal revenue of releasing capacity from international interconnectors to the spot market. If economic benefits could be derived from allocating transmission capacity to markets other than the spot and intraday markets eg a reserves market Energinet.dk would seek approval from the Danish Energy Regulatory Authority to reserve transmission capacity for such markets. Using the international interconnectors for the reserve capacity markets will presumably be the optimum solution in more cases in future because the greatest economic advantages of trading in the spot market have already been realised. Figure 3 illustrates the principle of dividing capacity between the reserves market and the spot market. Marginal revenue from capacity allocated to spot market Marginal revenue from capacity reserved for ancillary services Optimum allocation Capacity allocated to the spot market Capacity reserved for ancillary services Figure 3: Illustration of optimum use of interconnectors ENTSO-E is drafting proposals for simple, transparent principles for calculating the economics of reserving capacity for reserves on interconnectors. They are expected to accord with Energinet.dk s current principles as illustrated in the above figure. In future, Energinet.dk will ensure greater transparency with regard to the economic assessments that form the basis of investment decisions, thus also in connection with the establishment of international interconnectors. Doc. No /11 v1, Case No. 10/ /33

11 3.2 National trends in the longer term At national level, the ongoing switchover to more sustainable energy and increased internationalisation have changed the production patterns of the conventional power stations. Some central power stations are being decommissioned, while some local CHP plants want to go over to heat production only and/or switch to renewable energy (RE) fuels, which offer less flexible power generation. Any possible changes in the current subsidy schemes for local CHP plants could affect the incentives for reinvesting in existing plants. The main currents in the national trends apart from this are Smart Grid and increased renewable energy expansion. Wind power in particular will increase from around 4,000 MW in 2010 to nearly 6,000 MW in 2020, equivalent to wind power going from constituting approximately 20-25% to approximately 40-45% of total Danish electricity consumption. As this change in production patterns progresses and internationalisation of the energy markets increases, it will be necessary to focus more on international issues. Internationalisation of ancillary services will be a natural step. In the long term, more technologies and suppliers are expected to contribute to stabilising the power system. Not all ancillary services can be provided internationally as some properties required to maintain power system stability need to be available locally. The need to source them from alternative suppliers will grow as central units are decommissioned, with the requirement for properties required to maintain power system stability also being affected by the increased expansion of international interconnectors. This will be described in chapter Technological trends in the longer term Technological development, including Smart Grid, is continuing in step with the switchover to more renewable energy. In the longer term, this technological development will presumably change the supplier portfolio and the requirement for ancillary services. How these elements could help to operate the system in the short term is not yet clear, however. A further uncertainty factor is how the development work to do with the integrated planning of the individual production and consumption technologies will be put into practice. There may be differences in the degree of central control that will be implemented in the planning. A player could, for example, combine his various minor resources to act as a large aggregate unit. At present, efforts are continuously being made to involve alternative suppliers of ancillary services, eg wind turbines and consumption units. Energinet.dk is supporting a number of research, development and demonstration projects through the ForskEL programme, for example. Strategy for individual ancillary services Energinet.dk s strategy for individual ancillary services is presented in the following chapters. Chapter 4 describes Energinet.dk s strategy for frequencycontrolled reserves, while secondary reserves are described in chapter 5, Doc. No /11 v1, Case No. 10/ /33

12 manual reserves in chapter 6 and properties required to maintain power system stability in chapter 7. The individual subsections describe the purpose of the services, Energinet.dk's current purchase of the services and the strategic objectives in the short (0-4 years) and long (5-10 years) term. The specific initiatives aimed at underpinning the strategic objectives are also described. 4. Frequency-controlled reserves This section describes Energinet.dk s strategy for frequency-controlled reserves. Frequency-controlled reserves consist of the primary reserve in Western Denmark and the frequency-controlled disturbance reserve (FDR) and frequency-controlled normal operation reserve (FNR) in Eastern Denmark. Energinet.dk s demand for frequency-controlled reserves is relatively limited and players point to the low volume in the markets as a barrier to an efficient market for these services. Moreover, Energinet.dk already purchases a small proportion of these reserves in Sweden, and the players want reciprocity so that they can sell their products abroad too. Larger markets are expected to contribute to better overall exploitation of the available resources and so bring economic benefits. Against this background, it is Energinet.dk s objective to create more integrated markets for frequency-controlled reserves, with the resources within the respective synchronous areas being given first priority. In practice this means neighbouring areas Germany in the case of Western Denmark and Sweden in the case of Eastern Denmark. Energinet.dk s long-term objective is to have common markets for frequency-controlled reserves across the synchronous areas. The next section gives a brief description of the purpose of frequency-controlled reserves and Energinet.dk s current purchasing. Then Energinet.dk s strategy in the area is examined and the specific initiatives described. 4.1 Frequency-controlled reserves today Frequency-controlled reserves stabilise the frequency at around 50 Hz in the event of frequency deviations. They are regulated automatically and supplied by production or consumption units reacting to grid frequency deviations by means of control equipment. Energinet.dk s three frequency-controlled reserves have different characteristics, which are described in the following table. Doc. No /11 v1, Case No. 10/ /33

13 Primary reserve in Western Denmark Frequency-controlled disturbance reserve (FDR) in Eastern Denmark Frequency-controlled normal operation reserve (FNR) in Eastern Denmark Volume in synchronous area The total volume in Continental Europe is +/- 3,000 MW. Energinet.dk s share is determined by production in Western Denmark relative to total production in ENTSO-E RG Continental Europe and fixed once a year. The total volume in the Nordic region is the largest dimensioning fault in the Nordic region (approx. 1,400 MW) less self-regulation of 200 MW and is allocated relative to the dimensioning faults of the individual areas. Volume is determined on a weekly basis. The total volume in the Nordic region is +/- 600 MW. Energinet.dk s share is determined by consumption in Eastern Denmark relative to consumption in ENTSO-E RG Nordic as a whole and fixed once a year. Energinet.dk share in /- 27 MW Approx. 160 MW, 75 MW of which is on the Konti-Skan interconnector between Jutland and Sweden. Of the remainder, one third (approx. 30 MW) can be purchased outside Eastern Denmark while 50 MW is on the KONTEK interconnector between Zealand and Germany. +/- 23 MW, one third of which (7 MW) is purchased outside Eastern Denmark. Product specifications Regulation must be supplied at a frequency deviation of up to +/- 200 MHz relative to the reference frequency of 50 Hz. This will normally mean in the Hz range. A deadband of +/- 20 MHz is permitted. The reserve must as a minimum be supplied linearly and be fully activated within 30 seconds in the event of a frequency deviation of +/- 200 MHz. FDR is activated at 49.9 Hz and must be fully regulated at 49.5 Hz. At least 50% of the reserve must be ramped up after 5 seconds, and the reserve must be fully activated after 30 seconds. The reserve must be fully activated at a frequency deviation of up to +/- 100 MHz relative to the reference frequency of 50 Hz. The reserve must as a minimum be supplied linearly and be fully activated after 150 seconds. It must be possible to maintain regulation continuously. Energinet.dk has been purchasing frequency-controlled reserves at daily auctions since September Up- and downward regulation reserves are purchased separately, with five auctions being held every day for the upcoming day of operation. FDR is an upward regulation reserve only, so this reserve has only one auction. The auctions are held on the afternoon before the day of operation, ie after the spot market has closed. For the purposes of the auction, the 24-hour period is divided into six equally-sized blocks of four hours each (00-04, 04-08, 08-12, 12-16, and 20-24). The price of the reserves is fixed according to the marginal price principle, with all accepted bids being priced the same, which is equivalent to the highest bid accepted. Deliveries of energy from frequency-controlled reserves do not receive a separate energy payment, but are settled as ordinary imbalances at the balance price. Doc. No /11 v1, Case No. 10/ /33

14 Under the Nordic System Operation Agreement up to one third of FNR and FDR can be placed outside the TSO's own area. Depending on its assessment of where the reserve will be cheapest, Energinet.dk purchases +/- 7 MW of FNR and approximately 30 MW of FDR in Sweden, Norway or Eastern Denmark (in addition to the domestic purchases described above). A further 75 MW of FDR is on the Konti-Skan interconnector, while 50 MW of FDR is on the KONTEK interconnector. Energinet.dk has reciprocal agreements on the provision (in kind) of emergency power between the Nordic region and Continental Europe, on which the delivery of FDR on the interconnectors is based. In the future, Energinet.dk s requirement for frequency-controlled reserves will continue to be dictated by international requirements in ENTSO-E, and we expect that requirement to remain at the present level. As mentioned in chapter 3, two pieces of work are proceeding at international level the Nordic frequency analysis and the harmonisation of operational standards in ENTSO-E that could alter the technical requirements for frequency-controlled reserves. Although Energinet.dk expects the demand for these services to remain at the present level, demand for primary reserve and FDR is expected to decline in the future: - An agreement has been signed with Statnett for the delivery of +/- 10 MW of primary reserves in connection with the establishment of the Skagerrak 4 interconnector to Norway. This consists of small energy deliveries only and does not require capacity to be reserved on the interconnector. This means that Energinet.dk s demand for primary reserves will be reduced by 10 MW when Skagerrak 4 is put into operation. - Demand for FDR in Eastern Denmark will decline if the reserve can be placed on the Great Belt Power Link see initiative 3 below. - Energinet.dk expects demand for FNR to remain at its present level in the future depending on whether the results of the Nordic frequency analysis affect the product specifications and the requirement for the service. 4.2 Strategy for frequency-controlled reserves In the short term (0-4 years) Energinet.dk s objective is to create larger markets for frequency-controlled reserves within the respective synchronous areas to which Eastern and Western Denmark belong. In the long term (5-10 years), the objective is to establish common markets for frequency-controlled reserves across the synchronous areas. Energinet.dk s short-term prioritisation of integrating the markets within the synchronous areas and not across Denmark between two synchronous areas must be seen in the light of the potential offered by the existing Danish markets for frequency-controlled reserves and the following considerations: - There will not be a Danish market for FDR in the future since the reserve can be supplied more efficiently by the Great Belt Power Link without capacity reservation, see initiative 3. - The exchange of FNR over the Great Belt Power Link (or HVDC interconnectors in general) requires capacity to be reserved on the interconnector as FNR activation sometimes involves long-term energy Doc. No /11 v1, Case No. 10/ /33

15 deliveries. This is not the case with FNR exchange via AC interconnectors (eg with Sweden), however. Fairly generous safety margins (Transmission Reliability Margin) are built into AC interconnectors because the exchanges on AC interconnectors cannot be controlled in the same way as on HVDC interconnectors. In Energinet.dk's opinion, the initiatives directed at the German and Swedish markets will give Danish players and Energinet.dk access to large markets and are the first step towards even greater market integration between the synchronous areas. The initiatives and activities intended to underpin the strategic objectives are examined below: Strategic initiatives in the short term 0-4 years Initiative 1: Joint purchasing of primary reserves with German TSOs. Energinet.dk s objective is to become part of joint German cooperation to purchase primary reserves. The four German TSOs (50Hertz, Amprion, EnBW and TenneT) joined forces in December 2007 to purchase primary reserves. They use monthly calls for tender to purchase approximately +/ MW of primary reserves via a common trading platform, ie regelleistung.net. The technical requirements for primary reserves in Germany, like those in Western Denmark, are based on the ENTSO-E requirements. As in Denmark, suppliers must also go through prequalification, in which technical characteristics are documented, before they can submit bids to the market. In summer 2012, the four German TSOs will start to use weekly calls for tender, and it is expected that the Swiss TSO - Swissgrid - will also be partly included in the cooperation. The weekly call for tenders will be structured according to the following principles: - Up- and downward regulation reserves are purchased together (symmetrically) - The minimum bid is 1 MW. The individual players can pool bids under 1 MW - The reserve is settled according to the pay-as-bid principle - Energy production is settled at the balance price upon activation - The total German/Swiss primary reserve requirement is +/ MW. TenneT GmbH expects the four German TSOs to start purchasing primary reserves on a daily basis within a period of about two years. This is also what the German regulator wants. The initiative will promote competition and ensure reciprocity, as it will give both Danish players and Energinet.dk access to a large international market. If a common market with the four German TSOs is based on weekly auctions, it will mean the loss of some of the flexibility which Energinet.dk introduced with daily auctions in September Compared with a Western Danish auction model in which up- and downward regulation reserves are purchased separately Doc. No /11 v1, Case No. 10/ /33

16 in four-hour blocks and the minimum bid is 0.3 MW, the West Danish supply would all other things being equal, decline in the event of a switch to the German model in which up- and downward regulation reserves are purchased collectively on a weekly basis. In the event of a weekly market Energinet.dk does not expect the decline in supply to be very substantial in practice. With weekly purchasing the supplier will keep capacity out of the spot market and can in certain situations offer more capacity than is the case with daily auctions where the capacity may have already been sold on the spot market. However, this requires the balanceresponsible party for production to be able to pool and distribute the capacity it has available over a week, as some plants/suppliers cannot make capacity available over a whole week themselves. Energinet.dk still believes that daily asymmetrical purchasing is the way to obtain the most reserves possible and will work to move any Danish/German cooperation in that direction. In the coming period Energinet.dk will therefore work to ensure that such a common market design is realised as soon as possible. Cooperation with the four German TSOs would ensure more efficient procurement of primary reserves and give players the opportunity to submit bids to a much larger market with total demand of MW. Together with the German TSO TenneT GmbH, Energinet.dk is currently investigating Danish participation in the German primary reserves market and expects the time scale for setting up a common market to be at least 18 months. Energinet.dk is aiming for a common market to be set up at the same time when the switch to a daily market takes place. Initiative 2: Joint purchasing of FNR and FDR with Svenska Kraftnät Energinet.dk s objective is to purchase frequency-controlled reserves together with Svenska Kraftnät on a market in which players in Eastern Denmark can participate, initially by giving Danish suppliers the opportunity to participate in the Swedish market for frequency-controlled reserves (FDR and FNR). At the same time, Energinet.dk expects to stop purchasing FDR in Eastern Denmark (see initiative 3 below). Svenska Kraftnät used to purchase a mixed product of FNR and FDR (called 'regulerstyrka'), but from 1 April 2011, the company will start to purchase FNR and FDR separately. Purchasing is structured according to the following principles: - Bids must be submitted by 3 pm two days before the day of operation and by 8 pm one day before the day of operation - FNR up- and downward regulation reserves are purchased together (symmetrically) - The reserve is settled according to the pay-as-bid principle - Energy payment is made upon activation Doc. No /11 v1, Case No. 10/ /33

17 - Purchasing takes place on an hourly basis, but with the option of making block bids - Svenska Kraftnät s requirement is approximately 260 MW of FDR and +/- 400 MW of FNR. Owing to differences between the East Danish and Swedish purchasing models, some challenges will have to be resolved before a combined Danish/Swedish market can become a reality; in particular the fact that Energinet.dk purchases FNR asymmetrically, while Svenska Kraftnät purchases it symmetrically and at two auctions over two days. Energinet.dk will seek to resolve these challenges in dialogue with the players in Eastern Denmark. Energinet.dk is focusing on giving players the opportunity to sell their products in the Swedish market instead of waiting for full harmonisation. Before joint Danish/Swedish purchasing of frequency-controlled reserves can be realised, Nordic agreement is needed on sharing reserves between areas to a greater extent than the current rules permit. As things stand, one third of the reserves can be purchased outside the TSOs own area, but with joint purchasing it will be possible for more/all of the reserve to be located outside the TSO's own area. In the first place, cooperation with Svenska Kraftnät would bring greater sales opportunities for Danish players and thus the desired reciprocity that the FNR and FDR market currently lacks. In the longer term, if/when the reserves are purchased together with Svenska Kraftnät, Energinet.dk will also be guaranteed more efficient procurement of FNR. Energinet.dk will involve the players in Eastern Denmark at an early stage of the process concerning settlement, technical requirements, etc. Initiative 3: An end to purchasing FDR at daily auctions Energinet.dk will investigate the possibility of bringing the purchasing of FDR at daily auctions to an end in Eastern Denmark and delivering the reserve via the Great Belt Power Link s short-term overload capacity instead. In recent years, Energinet.dk has purchased between 0 and 16 MW of FDR in Eastern Denmark, depending on the dimensioning faults in the Nordic system. The initiative will guarantee Energinet.dk more efficient procurement of the reserve. Energinet.dk will achieve a saving equivalent to the cost of purchasing the reserve at the East Danish auction less the possible costs of establishing control mechanisms on the Great Belt Power Link. Energinet.dk expects this objective to be realised within a few months, but will endeavour to coordinate the timing, with players in Eastern Denmark being giving the opportunity to sell FDR to Svenska Kraftnät (initiative 2) so as to maintain their sales opportunities Strategic initiatives in the long term 5-10 years In the long term, Energinet.dk s objective is to have common markets for frequency-controlled reserves across the synchronous areas as a natural Doc. No /11 v1, Case No. 10/ /33

18 extension of the integration within the synchronous areas and the coming harmonisation of the operational standards in ENTSO-E, see chapter 3. At a Nordic level Energinet.dk will take the initiative to assess the possibilities for a common Nordic ancillary services market. The establishment of more integrated markets in the Nordic region is a precondition for creating a common North European market for frequency-controlled reserves with, for example, Germany in the long term. Energinet.dk s long-term objective must be realised in collaboration with the other TSOs. Potentially, however, this will create a much larger market for frequency services to the benefit of both TSOs and producers. 5. Secondary reserves This chapter describes Energinet.dk s strategy for secondary reserves, ie Load Frequency Control (LFC). Energinet.dk s objective is to create larger markets for the activation of secondary reserves through increased cooperation with both the German and Nordic TSOs. The automatic avoidance of counter activation of reserves across larger areas is an important element in this. Energinet.dk s long-term objective is to establish common international capacity markets for LFC. The next section briefly describes the purpose of LFC in Western Denmark and Energinet.dk s current purchasing. This is followed by a description of the future trends and general framework and conditions for LFC. Subsequently, Energinet.dk s strategy and the individual initiatives are outlined. 5.1 Secondary reserves today LFC is currently only used in Western Denmark, its purpose being to release the primary reserve and restore the frequency to Hz in the event of outages. It is also used to handle unforeseen imbalances so that the planned exchange between TenneT GmbH and Western Denmark goes according to plan to the extent possible. LFC regulation must start not later than 30 seconds after activation and be fully activated as soon as possible, but within 15 minutes at most. Energinet.dk s requirement for LFC is fixed on the basis of the requirements in the Operation Handbook, which stipulates a minimum requirement for capacity availability. This minimum purchase is sufficient in Western Denmark as Energinet.dk uses operational planning to a large extent. This makes it possible for Energinet.dk s control centre to forecast the majority of imbalances that occur, enabling the activation of the slower manual reserves. Energinet.dk therefore purchases around 90 MW of LFC on a monthly basis, which is calculated on the basis of maximum consumption in the relevant month. Reserve capacity is purchased in the form of a combined, symmetrical up- and downward regulation reserve and settled using the pay-as-bid method. Doc. No /11 v1, Case No. 10/ /33

19 The LFC reserve is activated on a pro rata basis and settled at a price fixed by Energinet.dk: - Upward regulation reserves: Settled per MWh at the DK1 Elspot price + DKK 100/MWh, but not less than the balance price for upward regulation. - Downward regulation reserves: Settled per MWh at the DK1 Elspot price - DKK 100/MWh, but not more than the balance price for downward regulation. Only players having sold LFC capacity can be activated. Energinet.dk expects LFC activation to decline in the future: The avoidance of counter activation on an interconnector results in a permitted deviation on the interconnector, with LFC activation being reduced accordingly. Energinet.dk has signed an agreement with TenneT on the automatic avoidance of automatic counter activation of reserves across the Jutland-German border. The agreement is awaiting official approval and is expected to reduce LFC activation by 50% when it comes into force. In the future, Energinet.dk s requirement for LFC capacity will also be dictated by international requirements in ENTSO-E and/or TenneT. Energinet.dk expects a slight increase in the requirement for LFC reserves, since the minimum requirement is based on maximum consumption, which is expected to rise. In connection with the establishment of the Skagerrak 4 interconnector, an agreement has been signed with Statnett for the delivery of +/- 100 MW of LFC with a matching 100 MW reservation. Because of the agreement, LFC capacity will not be purchased to cover the demand in Western Denmark for five years onwards from 2014/15. The agreement has been procedure-approved by the Danish Energy Regulatory Authority, though its approval has a fixed duration of one year, after which Energinet.dk must quantify the social benefit of the reservation, including that the benefit lives up to the Energinet.dk's expectations. In the event of an outage of Skagerrak 4, the reservation can be allocated to one of the other Skagerrak interconnectors if - in light of the market situation in Western Denmark - this is the most appropriate way for the market to procure the reserve. Depending on the specific situation, Energinet.dk will also consider other market measures, such as the use of countertrade. The economic effects of the various measures will provide the criteria for alternative procurement of the reserve. The expected costs of the alternative procurement of the reserves in Western Denmark will form a natural part of Energinet.dk s considerations. 5.2 Secondary reserves strategy In the short term (0-4 years), Energinet.dk s objective will be to create relatively large markets for the activation of secondary reserves, while simultaneously working to reduce LFC activation by avoiding counter activation of reserves over large areas. In the short term, Energinet.dk will continue the current monthly calls for tender for LFC reserves. The dialogue with the players in connection with the Doc. No /11 v1, Case No. 10/ /33

20 preparation of the strategy has made it clear that there is no potential for establishing an hourly market, as had previously been put to the players. This is because Energinet.dk is unable for the time being to guarantee a fixed deadline for a cross-border LFC market from 2015 (when Skagerrak 4 is put into operation). Energinet.dk does not therefore expect to change its purchasing of LFC before SK4 comes online. If the external circumstances change significantly, for example if the German market concept is modified or the Nordic frequency analysis results in Nordic LFC, Energinet.dk will reassess its short-term strategy. Energinet.dk s long-term objective is the establishment of international markets for secondary reserves, for both capacity and activation. Energinet.dk has defined a number of initiatives that should achieve the aforementioned objectives. They are described below Strategic initiatives in the short term (0-4 years) Initiative 1: Larger markets for activation of secondary reserves Energinet.dk s objective is to create larger markets for the activation of secondary reserves through increased cooperation with the German and, if a Nordic LFC is established, Nordic TSOs. Energinet.dk is also working to reduce LFC activation by avoiding counter activation of reserves over larger areas, which will eliminate any unnecessary counter activation of the LFC reserve between the areas. Germany uses a different dimensioning criterion and purchases a much larger proportion of LFC than Denmark, with this being necessary because they do not use the same detailed operational planning. As in Western Denmark, the technical requirements are essentially based on the requirements of the Operation Handbook, though some are stricter. As in Denmark, suppliers must go through a prequalification procedure during which technical characteristics are documented before they can submit bids to the market. The LFC reserve is purchased on a monthly basis using the pay-as-bid method. There are plans to switch to a weekly basis, but still using pay as bid. The bid price for the reserve (together with any grid restrictions) determines whether a bidder is successful. The activation price is fixed at the same time as bids are submitted to the reserve market, ie the player fixes his activation price nearly two months before the hour of operation and it applies for the whole month. The German TSOs are currently activating reserved capacity only. The activation requirement is five minutes and follows an internal TSO merit order list, taking account of grid restrictions, etc. Activations are settled in accordance with the pay-as-bid method. The four German TSOs have entered into cooperation on secondary reserves and their activation, the so-called Grid Control Cooperation (GCC). The cooperation consists of four modules, which are being introduced successively. Neighbouring areas (outside Germany) are also being successively incorporated Doc. No /11 v1, Case No. 10/ /33

21 into the arrangement. The purpose of the cooperation is to maintain the same level of security of supply more efficiently by increasing trade and market integration. The main elements of the cooperation are as follows: - Automatic avoidance of counter activation of reserves, reducing LFC activation - Joint dimensioning and purchasing of secondary and tertiary reserves, reducing the amount of the reserve. The resulting saving is divided between the four German TSOs - Common merit order list, which ensures that the cheapest bids are activated first. In general, the German TSOs want to gradually incorporate interested neighbouring areas in the arrangement on the terms laid down by the GCC cooperation. The main barriers for Energinet.dk are as follows: - Denmark and Germany have different activation requirements. Germany requires 5-minute delivery of the LFC reserve, for example, whereas Energinet.dk s current requirement is 15 minutes. Energinet.dk does not want to change its activation time because it has no wish to exclude current players from the market and because the international requirement is 15 minutes. - Only reserved capacity is activated, which, together with monthly purchasing, means that only a limited number of suppliers in Western Denmark if any could participate as it would require capacity to be reserved on the interconnector between Western Denmark and TenneT s area. - The current German rules do not permit the activation of non-reserved capacity. Energinet.dk is discussing with TenneT the possibility of activating LFC bids across the Jutland-German border, which, in Energinet.dk s opinion, is the first step towards establishing a larger market for the activation of secondary reserves. It is Energinet.dk s intention that TenneT should basically be able to activate voluntary bids from Western Denmark for which no capacity payment has been made. Energinet.dk will work to change the current German rules so that it becomes possible for Danish players to be activated by TenneT. The reservation of LFC capacity in neighbouring areas will require the reservation of transmission capacity. Energinet.dk will assess the economics of this in connection with the expansion of transmission capacity between Western Denmark and Germany; the LFC capacity reservation has not been planned with the current transmission capacity. Energinet.dk is striving to ensure that activation is performed by the TSO which holds system responsibility for the area in which the plant is located; ie Energinet.dk activates the Danish players even if it does so on behalf of TenneT. Energinet.dk does not therefore consider the different activation time requirements to be a major problem. Doc. No /11 v1, Case No. 10/ /33