Stakeholder Workshop INTRADAY CAPACITY PRICING INTRODUCTION AND OBJECTIVE OF THE WORKSHOP. Brussels, 22 February 2016

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1 INTRADAY CAPACITY PRICING INTRODUCTION AND OBJECTIVE OF THE WORKSHOP Stakeholder Workshop Brussels, 22 February 2016 Ritva Hirvonen, Convenor of WG Market Integration

2 Click Objective to of edit the Workshop Master title style Open informative discussion Facilitate understanding on concrete options Gather (initial) stakeholders views Progress towards consensus without ambition to be conclusive Feedback on ENTSO-E proposals Pros and Cons Constructive suggestions for improvement Identification of open issues to be further analysed Future outlook Anticipate implementation challenges, risks and possible solutions Outline future process and milestones (TSOs methodology drafting, input/feedback from PXs, NRAs, market parties; general stakeholder involvement) Page 2

3 Click to edit Master title style 1. Welcome, Introduction and Objective of the workshop 10h30-10h45 ENTSO-E 2. CACM Regulation and Intraday Capacity Pricing: legal requirements and implementation timelines 10h45-11h00 ENTSO-E 3. ENTSO-E preliminary assessment and recommendations on Intraday Capacity Pricing models 11h00-11h20 ENTSO-E Stakeholders views on Intraday Capacity Pricing o European Commission o ACER 4. o o Europex Eurelectric 11h20-13h00 All o EFET o EWEA Followed by open Q&A session Lunch 13h00-14h00 Implementation challenges: 5. o o XBID: Mark Pickles (TSO Project Manager) PCR: Jose-Javier Gonzalez (PCR Steering Committee chairman) 14h TSOs/PXs 6. Open discussion: implementation challenges and next steps 14h30 15h10 All 7. Conclusions 15h ENTSO-E Page 3

4 INTRADAY CAPACITY PRICING CACM REQUIREMENTS AND IMPLEMENTATION TIMELINE Stakeholder Workshop Brussels, 22 February 2016 Marco Foresti, Market Advisor

5 Click CACM Guideline: to edit Legal Master requirements title style Task description (55.3): by 24M after the entry into force all TSOs shall develop a proposal for a single methodology for pricing intraday cross-zonal capacity Specific Intraday Capacity Pricing Requirements (55.1 & 55.4): shall reflect market congestion and shall be based on actual orders No charges, such as imbalance fees or additional fees, shall be applied Other ID requirements: the CT algorithm shall (a) aim to maximise economic surplus; (e) be repeatable and scalable. discrimination shall be avoided when simultaneously allocating capacity implicitly and explicitly Page 5

6 Click CACM Guideline: to edit Legal Master requirements title style Other general requirements: ID capacity to be allocated implicitly Non discriminatory access to capacity Promotion of fair and orderly market and price formation Promoting effective competition in generation, trading, and supply of electricity Ensuring optimal use of the transmission infrastructure Additional relevant provisions: Complementary regional auctions (where deemed necessary) Explicit access to Intraday capacity (where allowed as an interim option) Page 6

7 Click to edit Master title style Fulfilment of CACM requirements: Intraday models with pricing of capacity CACM Requirement Continuous Implicit Pricing of capacity Model Continuous Trading Continuous Trading with Pricing* Pricing reflecting congestion & based on actual orders X X X Implicit Auctions X Hybrid model (CT + implicit auctions) * Currently known mechanism to price capacity during CT sessions depend on time, remaining capacity within a certain trading period, or probability of congestions (see reports from PMI and Baringa for Ofgem study ) Conclusion: Neither continuous trading nor implicit auctions can fulfil alone all CACM requirements. Recommendation is to develop Hybrid Models which includes both Implicit Auctions and Continuous Trading sessions. Page 7

8 Click to edit Master title style Development and implementation: indicative timeline CACM Entry into force Deadline for all TSOs to submit pan-european pricing methodology to all NRAs Q Q Q Q Q Q Q Q Q Q Q Q Q Q ENTSO-E preliminary analysis Stakeholders feedback and general model selection TSOs to draft pricing methodology Consultation, update, internal approvals All NRAs approval Implementation phase (TSOs & PXs) Page 8

9 INTRADAY CAPACITY PRICING ENTSO-E PRELIMINARY ASSESSMENT AND RECOMMENDATIONS ON INTRADAY CAPACITY PRICING MODELS Stakeholder Workshop Brussels, 22 February 2016 Andre Estermann, Convenor of Day-Ahead and Intraday Coordination Group

10 Click to edit Master title style Benefits of Hybrid models in pricing intraday capacity Highest CACM compliance Efficient pricing of capacity through auctions Pooling of Liquidity Capacity allocation close to real time through Continuous trading mechanism Possible Use of XBID & PCR systems for optimal use of systems & resources Intermediate Auctions beneficial for smaller market participants Benefits of combining Implicit Auctions with continuous trading in Intraday supported by recent studies University of Duisburg-Essen (2014) Overall, the solution HYBRID 1 seems to provide an attractive combination of the advantages of both the auction-based and the continuous trading approach Out of 6 models assessed: Hybrid model ranked 2 nd for Efficiency, 3 rd for Compatibility, and 1 st for distributional effects DIW Berlin (2016) (K. Neuhoff, N. Ritter, A. Salah-Abou-El-Enien, P. Vassilopoulos) Assessment of the 3pm local auction for quarters at Epex Spot: Additional auction increases liquidity, leads to a higher market depth (the revelation of market participant s capacity/flexibility) and to a reduced price volatility Page 10

11 Click to edit Master title style Objectives and Evaluation Criteria CACM Compliance Implicit Continuous Pricing based on orders Prices reflecting market congestion Maximisation of economic surplus Ease of Implementation Simplicity Practical and feasible Cost-efficiency Reasonable time to market Efficient Capacity Pricing Fair and transparent price formation, no distortions Liquidity Assigns capacity to whom values the most Optimises use of available ID capacity Robust and future-proof Pan-Eu solution High performance and reliability Scalable Durability / forward looking / consistent with XBID evolution Consistency with all market timeframes and NC/GLs Efficient governance Fulfilment of market parties needs Capacity not priced if not scarce Possibility to adjust positions close to real time Pricing known at the time of matching Ease of use Transparency and Predictability Level playing field Accessibility for ALL market participants (small generators, RES, demand side) Prevention of gaming and market power Fairness Page 11

12 Click to edit Master title style How to design Hybrid Models with combination of CT and IAs Should capacity priced in continuous trading sessions? ENTSO-E recommendation No Rationale Including a pricing mechanism within the continuous trading sessions would negatively affect speed/cost of implementation and overall robustness of the pan-eu solution (XBID) Number of implicit auctions Should CT/IA cover tradable hours until end of day? Indicatively 3* CT: generally no IA: possibly** Compromise between sufficient frequency and implementation challenges. Number of auctions could be changed in the future based on experience and market parties needs Possible, but would imply interrupting CT session during auction organisation and processing of results, hence complicating implementation. Opening auction in D-1 should always cover hours until end of day D. For auctions within Day, both options are possible * To be discussed with PXs and dependent on intraday capacity recalculation processes ** See model 1 vs. model 2 Page 12

13 Click Hybrid model to edit 1: DRAFT Master Overview title style D h (ID)A1 D-1 (PCR) 18.00h (ID)A1 D+1 (PCR) A1 Tradeable hours 00:00-24:00 D A3 Tradeable hours 16:00 24:00 D 24:00h 16:00-24:00h D CT session 3 D-1 (XBID) 00:00-08:00h D CT session 1 (XBID) 16:00-24:00h D CT session 3 (XBID) * Timings, number of auctions, and GCTs are indicative. To be reviewed based on PXs and market parties feedback, possible regional specificities Page 13

14 Click Hybrid model to edit 2: DRAFT Master Overview title style D-1 18:00h (ID)A1 (PCR) 18.00h (ID)A1 D+1 (PCR) A1 Tradeable hours :00 00:00h 24:00h 16:00-24:00h D CT session 3 D-1 (XBID) 00:00-08:00h D CT session 1 (XBID) * Timings, number of auctions, and GCTs are indicative. To be reviewed based on PXs and market parties feedback, possible regional specificities 16:00-24:00h D CT session 3 (XBID) Page 14

15 Click to edit Master title style Other key design features of Hybrid models for ID capacity pricing Timing of auctions: Possible solution of 3 Auctions E.g. D-1 18h, D: 6h30, 14h30, - Issues to be considered: Liquidity; Timing of TSOs/PX operational processes; Implementation costs and performances; Ease of access for all participants; Potential gaps between sequences of IA and CT (publication of IA results and opening of CT) Gate Closure Time: 1h before real time (min. CACM GL requirement) Open issues still to be investigated Alignment of capacity recalculation (dependent on CC methodology under development) and relation with auctions timings Possible need to split capacities in tranches between IAs/CTs to avoid unavailability in subsequent session/s? Negative prices and treatment of losses? Integration vs. separation of products (e.g. block bids)? How to avoid gaming/hoarding? Page 15

16 Click to edit Master title style Thank you for your attention

17 ANNEX: Assessment of Hybrid models options

18 Hybrid Models: design questions Key features to combine IA and CT: 1. Do intermediate* auctions cover hours until the end of the day? 2. Does CT cover hours until the end of the day? 3. Is CT priced (e.g. dynamic pricing, price scale, etc.)? *it is assumed the opening auction always covers hours until the EOD

19 High level assessment of possible Hybrid Models against capacity pricing criteria: summary table Model/ Criteria Implementation Efficient capacity pricing Robust Pan-EU solution + + / / - Degree of CACM compliance / / / / + Market parties needs Level playing field / / Conclusion: Options 4, 5, 6 and 7 not advantageous. Options 1 and are clearly 2 the most preferable

20 High level assessment of possible Hybrid Models against capacity pricing criteria: Conclusions Conclusions: Options 1 and 2 are clearly the most preferable ones as they do not have any drawback and are the most advantageous in terms of technical robustness of the Pan-European solution, and of implementation challenges (time, costs, complexity); they are also balanced in addressing market parties needs and ensuring fairness and level playing field. Options 3 and 8 have some advantages but also drawbacks, especially in terms of implementation complexity and robustness. Options 4, 5, 6 and 7 are clearly not advantageous as the complexities and limitations outweigh some limited positive aspects.

21 Hybrid Model 1: Overview Key design features No within-day Auction till end of EoD (i.e. overlap) No Continuous Trading till EoD (i.e. 3 trading windows ) Capacity is not priced in Continuous Trading (i.e. pricing only in A1 to A3) Other design features 3 Auctions (incl. cross-matching of products & losses) 1 entire day D 2 within-day Each Auction session lasts app. 15min. Auctions by use of PCR and CT by use of XBID/DBAG Different GCTs (< 1h) can be accommodated in all Auctions (90 min. lead team with parallel opening of CT) CT by XBID/DBAG: no pricing of remaining capacity parallel implicit and explicit capacity access (at least in the interim period)

22 Hybrid Model 1: DRAFT Overview* D h (ID)A1 D-1 (PCR) 18.00h (ID)A1 D+1 (PCR) A1 Tradeable hours 00:00-24:00 D A3 Tradeable hours 16:00 24:00 D 24:00h 16:00-24:00h D CT session 3 D-1 (XBID) 08:00-16:00h D CT session 1 (XBID) 16:00-24:00h D CT session 3 (XBID) * Timings, number of auctions, and GCTs are indicative. To be reviewed based on PXs and market parties feedback, possible regional specificities

23 Hybrid Model 1: Pros and Cons Pros Pooling of Liquidity & Order types in (intermediate) Auctions Use of XBID & PCR systems for optimal use of systems & resources No (additional) performance constraints on XBID Intermediate Auctions are beneficial for smaller market participants (e.g. resources, market power) No double pricing of within day x-border capacities due to use of intermediate Auction (i.e. A2 and A3) Cons No genuine ID CT pricing scheme Free x-border capacities in CT sessions CT limited to a sub set of hours which can be negotiated

24 Hybrid Model 2: Overview Key design features Initial Auction A1 in D-1 covering the 24h in D Further Auctions in D covering the hours till the end of the day Continuous Trading sessions to be performed in the period between two consecutive auctions Each continuous trading session opens after the publication of the auction results and covers the hours not traded in the forthcoming auction Other design features No pricing of the capacity allocated through Continuous trading mechanism Capacity allocation close to real time through Continuous trading mechanism No need to stop the Continuous trading allocation mechanism (auction and CT sessions can be performed in parallel as they cover different set of hours) ID Auctions managed by PCR CT managed by XBID/DBAG

25 Hybrid Model 2: DRAFT Overview* D-1 18:00h (ID)A1 (PCR) 18.00h (ID)A1 D+1 (PCR) A1 Tradeable hours :00 00:00h 24:00h 16:00-24:00h D CT session 3 D-1 (XBID) 08:00-16:00h D CT session 1 (XBID) 16:00-24:00h D CT session 3 (XBID) * Timings, number of auctions, and GCTs are indicative. To be reviewed based on PXs and market parties feedback, possible regional specificities

26 Hybrid Model 2: Pros and Cons Pros Efficient pricing of capacity through auctions Pooling of Liquidity Capacity allocation close to real time through Continuous trading mechanism Use of XBID & PCR systems for optimal use of systems & resources Intermediate Auctions beneficial for smaller market participants (e.g. resources, market power) Cons No ID CT pricing scheme CT limited to a sub set of hours which can be negotiated

27 Hybrid Model 3: Overview Key Design Features Variation of Model 2 with 1 single CT session covering hours until the end of the day (but suspended during execution of the intraday auctions and processing of results) Pros Same as for Model 2 Capacity allocation covering all hours until the end of day through Continuous trading mechanism Cons Same as for Model 2 Need to stop CT during auction

28 Hybrid Model 3: Systems Timings, number of auctions, and GCTs are indicative D-1 18:00h (ID)A1 (PCR) A1 Tradeable hours 19:30 D-1-24:00 D 24:00h 00:00 24:00h CT session (XBID) 18:00h (ID)A1 (PCR)

29 Hybrid Model 8: Variation of model 2 with the inclusion of a mechanisms of pricing of capacity in the CT sessions, dependent on time (dynamic CT pricing) Pros Avoids free allocation of capacity (if not scarce) Cons Complexity and implementation time/costs, especially considering ongoing implementation of XBID CT pricing not fully based on orders (time dependent) and may not reflect congestion potential performance issues of pricing formula under constrained liquidity environment

30 Option 8A: congestion forecast during trading session Price depends on the flow of interconnection and increases when flow increases: price = (probability of congestion) x (reference price characterizing general level of scarcity of capacity) Problems to be solved, e.g. capacity priced although interconnection is not congested at the end of trading session how to calculate probability of congestion and reference price trading occurs in opposite direction compared to priced capacity simultaneously matched orders Not recommended for CT pricing as criteria set in legislation are not met

31 Option 8B: Price scaling with move to zero price Price falls if intraday trades are counter to preceding auction outcome, set to zero with net flow 'deadband' and starts to rise to reflect congestion on other direction If additional capacity comes available within a day it may be released at DA spread price on FCFS basis Max prices are set based on previous DA spreads To avoid unused capacity problem at gate closure is to reduce gradually prices to zero before gate closure Problems to be solved e.g. price profile for different amount of available capacity, ex-ante estimates not reflect actual situation move to zero price may be incentive to market participants to trade nearer gate closure capacity priced although interconnection is not congested at the end of trading session simultaneously matched orders Not recommended for CT pricing as criteria set in legislation are not met

32 Option 8C: Dynamic pricing Make the change in price from each tranche to the next one a dynamic parameter, rather than pre-determining this Changes try to mimic auction to occur at the point of allocation: First tranche priced as at most recent auction If no matching occurs, price start to move zero Fundamentals shift -> leads to steps up in pricing of subsequent tranche Problems to be solved e.g. complex solution function determining step sizes for dynamic pricing Maybe combined with Dutch auction: the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined reserve price (the seller's minimum acceptable price) is reached. The winning participant pays the last announced price. complex, but might meet best the criteria set in legislation