Electricity Market 2004

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2 Electricity Market 24

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4 Pag EVOLUTION OF THE ELECTRICITY MARKET IN 24 ELECTRICITY MARKET REGULATORY FRAMEWORK European Union Legislation on the Internal Market in Electricity Legal dispositions that regulate the electricity sector in Spain Regulatory development Electricity Market Activity Rules Energy planning Energy saving and efficiency in Spain The Kyoto Protocol White Paper on the Energy Sector and measures to promote productivity Functions of OMEL ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS Electricity market organisation Principles governing the electricity market in accordance with established regulations Market sequence and processes Daily and intraday markets System technical management processes Information flows Settlements Extrapeninsular electricity system Extension of deregulation to all consumers MARKET PARTICIPANTS The participation of agents in the market Representatives Producers Retailers Distributors External agents Qualified consumers Requirements for becoming a market participant Supply deregulation schedule Iberian Market agents ELECTRICITY TRADING IN 24 Trading in the electricity market Daily market Intraday market Technical operating processes of the system Final hourly price International electricity trading DEREGULATION AND ELECTRICITY MARKETS IN THE INTERNATIONAL CONTEXT Analysis made by the Association of Power Exchanges APEx Evolution and fourth report on the start-up of the internal electricity market The Florence Forum Intra-community exchanges, EuroPEX contributions to the solution of congestion within the European context Development of prices in the main organised spot markets in 24 Importance of the Spanish market in the European context The Iberian electricity market OMEL S RESOURCES AND TECHNOLOGY OMEL's human resources OMEL s information system Index Main modificactions in 24 OMEL s advanced technology and cooperation with other entities INFORMATION ON THE ELECTRICITY MARKET Information on the electricity market and its results OMEL's training activity

5 Evolution of the electricity market in 24

6 The Spanish electricity market now has over seven years experience of normal and effective operation, providing seven electricity trading sessions to market participants: the first and main daily market and six subsequent intraday, throughout 24 hours of each day.

7 1. EVOLUTION OF THE ELECTRICITY MARKET IN 24 Market settlements, collections and payments referring to final energy prices on the market for supplies and productions, representing the results of transactions in the daily and intraday markets and the technical operating processes of the system and metering data, have all been carried out in accordance with the Electricity Market Rules. Since February 1999, OMEL has also been providing market participants with a monthly billing service for energy purchased and sold on the market. This service was adapted in 23 to meet the requests of the special regime producers, with two ways of settlement, either by aggregate or individual seller, when the seller acts exclusively as the owner s representative in the presentation of bids or bilateral contract declarations. Notable progress has been made in the reception and incorporation of electricity production metering data. The metering data for producers are available on the day after the supply for over 97% of the cases. development of our market. It is fully incorporated in the existing Market Operating Rules and in the updated regulations applied by OMEL, which also publishes new annual and inter-annual data to complement the daily and monthly reports. Royal Decree Law 5/25 incorporates new rules of transparency and, in particular, the determination of relevant events in the formation of prices. When this Decree is fully developed, the information provided by the Company will be adapted to meet its requirements. It is also worth mentioning the work underway for the implementation of Royal Decree 1747/23, of December 19th 23, which completes the regulatory implementation of Electricity Sector Law 54/1997 and establishes an electricity model in the island and extra-peninsular systems that enables the development of activities in free competition; under this legislation, consumers are, for the first time, allowed to freely choose their suppliers in the same conditions as those enjoyed by consumers in the peninsular system. Amongst the most important milestones reached, in the scope of the European Union, Directive 23/54/EC came into effect. Regarding the Iberian Peninsula, the international agreement for the start up of the Iberian Electricity Market was signed. On a national level the work of the white paper started. Its conclusions will be made public on mid-25 and will serve as the basis to improve the production market. In terms of market evolution, this year was characterised by the incorporation into the market of new production capacity, both under the ordinary regime (3,665 MW) and the special regime (1,25 MW), the progress of the trading and representation activities undertaken on the market by small producers, which has resulted in a significant increase in the number of market agents, and by the continued convergence of the prices on our market with those of the main European markets. Moreover, progress has continued on updating the regulatory framework and in the adaptation of OMEL's activities to it. Thus, on March 26th 24, Royal Decree 436/24 was published in the Official State Gazette; this updates the legal and economic regime governing production under the special regime and aims to amend previous regulatory texts applicable to the sector, introducing specific transitory regimes in relation to remuneration under the special regime at the average electricity tariff and incorporating a new system of incentives and regulation for access to production under the special regime. The regulation of Royal Decree Law 6/2 that defines the information that the market and system operators must make available to the public in general, is also essential for the proper WHOLESALE ELECTRICITY PRICE: DAY AHEAD SPOT PRICE Source: European Commission 3 to 4 186

8 Royal Decree 2351/24, of December 23 rd, establishes a new procedure for the management of technical constraints situations in the electricity system. In the interest of compliance with this provision, a proposal was presented last February to the Ministry of Industry, Tourism and Commerce to modify the Electricity Market Rules. The proposal encompasses other additional adaptations and improvements related to the special regime and agents' access to the market. Within the institutional area, it is important to note that the Market Participants' Committee has operated normally and effectively, publishing all relevant information through OMEL's public website. In 24, 241,224 GWh of energy were traded on the market, for a value of 8,34 million euros, a rise of 5.5% in energy and 1.9% in economic value over the previous year. The final average weighted hourly price was c /kwh in 24, the lowest in the past five years, developing in an environment marked by the high prices of certain raw materials involved in electricity production, greater availability of reserve capacity and sustained growth of demand. These prices for electrical energy have followed the prices on the main organised European markets and decreased some 5% with respect to 23, in both terms of daily market prices and final prices. During this financial year, the prices on the organised European markets and OTC trading were in the neighbourhood of 3 /MWh, although the winter season changed the price trend in 25, in line with an increasing demand and in response to the upward trend of prices on the commodities markets and to the reduced amount of rainfall. Spain's participation in the convergence of European prices is the result of the fact that our market is fully open to trading for external agents from other countries, who have been taking part in Spain's increasing electricity production capacity since 1999, and to the continually more flexible response of the international exchanges to the price differences between the markets, always within the trading restrictions arising from the limitations of the physical interconnections. The open market situation for external agents is an additional integrating factor in the internal electricity market and gives the operation of our market characteristics that are useful in cooperation with other European markets and the development of the Iberian Electricity Market. In terms of the increase in production capacity in Spain, it is important to note the numerous combined cycle plants incorporated, which reached 8,5 MW in 24, contributing to 9% of the coverage of electricity demand. Forecasts indicate that at the end of 25 of the total combined cycle plants in operation (12, MW), 4% will be owned by new entries in the sector, with the subsequent positive effect that the entrance of new supply has on any market. On this point, it is worth noting that this policy of building combined cycle plants makes it necessary to collaborate with gas infrastructures and their supply, and the construction of new electricity infrastructures, as well as to ensure the availability of a sufficient reserve of raw materials for these electricity production units, as the price of natural gas, as in other European countries, is a significant factor in the formation of electricity market prices. With respect to the renewable energies, the effort undertaken this year to incorporate new facilities, particularly in wind power, has been outstanding. This type of energy, in addition to being environmentally friendly and therefore facilitate the compliance with the commitments made in terms of greenhouse gas emissions, also contributes substantially to the supply of electrical energy, providing coverage of 18% of the electricity demand in 24. The installed wind power currently is over 8,5 MW and more than 4% of this capacity participates in the organised market directly or through selling agents. 187

9 1. EVOLUTION OF THE ELECTRICITY MARKET IN 24 ANALYSIS OF THE PRICE IN THE ELECTRICITY MARKET c /kwh 12 Years 99 to Mar Final average price Average price of daily market Technical constraints + ancilliary services Capacity payment At the same time, cogeneration power participating in the market amounts to 1,669 MW, representing 28% of the total. 118 producers under the special regime entered the market as market participants; most were cogeneration and wind facilities presenting bids either directly or through selling agents, with an installed capacity of 4,938 MW. An additional 762 MW correspond to production facilities previously under the special regime, with power capacities exceeding 5 MW, who therefore must be treated as producers under the ordinary regime according to legislation currently in force. Some 85% of the electricity production participates in the market. The incorporation of new generation and producers into the market continues to stimulate competition and enables coverage of the FINAL PRICE EVOLUTION c /kwh Year 4 Increment 4: -4.3% Jan Feb Mar Apr May Jun Jul Aug Sep Oct NovDec Maximum price Average price Minimum price 188

10 requirements of the electricity demand, which showed a growth rate of 3.5% in the peninsular system in 24. From January 23 onwards, all consumers have become qualified consumers: there are now over 61,5 companies and 22.1 million domestic and commercial consumers. All of them may now choose to acquire the electricity under any of the forms of free trading through contracts with resellers, by going directly to the organised market or through bilateral contracts with producers. This opening up of the market places Spain within the group of 9 EU countries that have given all of their consumers free choice of supplier, going further than the situation envisaged in Directive 23/54/EC, which establishes full deregulation in 27 (DO 15/7/3). This right to choose was used in 24 by 42.1% of the total demand that opted for acquiring energy through free trading, reaching 1,349,372 supplies. Thus, electricity selling and trading activities have continued to grow and will be strengthened in the future as a result of consumers' free choice of supplier and improved conditions in international electricity trading. In terms of the evolution of our market, the participation of new agents has been notable. Although still with a small market share, this segment has an increasing importance with regards to both producers and sellers, giving rise to a gradual approximation of domestic consumers to the deregulated market. There are currently 153 companies authorised to participate on the market as sellers, 14 of which are external agents. The number of agents empowered to act as buyers totals 94, and there are now 63 resellers, the majority of which are non incumbents. In terms of international activities, mention must be made of OMEL's participation in APEx, the world market operators' association, and in its role as President of the aforementioned organisation, which held its ninth annual conference in Leipzig. Once again, this annual meeting enabled the organisation's members to exchange experiences and analyse relevant issues relating to different transactions, prices, relations with other market and system operators, governing bodies and the independence of the organised markets, the dissemination of information and conditions of competition in the organised markets. Within the context of the European Union, special mention must also be made of OMEL's participation in EuroPEX, the European Association of Market Operators, which, at the request of the European Commission, has developed a methodology of cooperation between European market operators to resolve international congestions based on implicit auction methods. This work has culminated in the presentation of a joint document, drafted by EuoPEX and the European Transmission System Operators organisation, ETSO at the Florence Forum last September. The document includes a method for the use of the commercial capacity determined by systems operators based on a simplified flow model, combined with market coupling to resolve congestions and define the prices on the organised European daily markets. This method encompasses the existence of bilateral contracts together with bids on the organised markets, as well as the combination of explicit auctions and future risk coverage for market price differences. Local cooperation projects between boundary market operators are also being developed based on these principles, for the more effective compliance with Regulation 1228/23. In this context, mention must also be made of the proposed adoption of the market coupling method presented in July 24 to the Spanish and French governments by OMEL, REE, Powernext and RTE. Organised spot markets have now become widespread throughout the European Union and their efficiency and liquidity is also considered to be important. In this context, the European Union is showing greater interest in regional markets as a means of fostering the evolution towards a more integrated European market. 189

11 1. EVOLUTION OF THE ELECTRICITY MARKET IN 24 PRODUCTION IN ORDINARY REGIME, SPECIAL REGIME AND IMPORT GWh 25, Years 98 to Mar 5 2, 15, 1, 5, Production 99/98 O.R.: 3.61% S.R.: 22.95% Imp.: 77.9% Total prod.: 7.71% 19,578 GWh Production /99 O.R.: 6.84% S.R.: 9.77% Imp.: 5.44% Total prod.: 7.15% 24,24 GWh Production 1/ O.R.: 4.26% S.R.: 13.66% Imp.: % Total prod.: 4.73% 213,855 GWh Production 2/1 O.R.:.97% S.R.: 15.94% Imp.: 28.12% Total prod.: 4.5% 222,58 GWh Production 3/2 O.R.: 5.69% S.R.: 14.8% Imp.: -1.82% Total prod.: 6.3% 236,519 GWh Production 4/3 O.R.: 5.21% S.R.: 1.35% Imp.: % Total prod.: 5.34% 247,472 GWh Prod. J-M5/J-M4 O.R.: 4.37% S.R.: 13.45% Imp.: % Total prod.: 7.55% 69,129 GWh Special regime Ordinary regime Import PENINSULAR DEMAND, EXPORT AND PUMPING CONSUMPTION GWh 25, Years 98 to Mar 5 2, 15, 1, 5, Demand 99/98 P.D.: 6.51% B.C.: 41.77% Exp.: 1.78% Total: 7.71% 19,578 GWh Demand /99 P.D.: 5.78% B.C.: 33.66% Exp.: 67.83% Total: 7.15% 24,24 GWh Demand 1/ P.D.: 5.45% B.C.: % Exp.: -4.73% Total : 4.73% 213,855 GWh Demand 2/1 P.D.: 2.71% B.C.: 68.53% Exp.: 6.1% Total: 4.5% 222,58 GWh Demand 3/2 P.D.: 6.28% B.C.: % Exp.: 69.58% Total : 6.3% 236,519 GWh Demand 4/3 P.D.: 3.82% B.C..: -6.21% Exp.: 6.63% Total: 5.34% 247,472 GWh Demand E-M5/E-M4 P.D.: 8.36% B.C.: % Exp.: -19.9% Total: 7.55% 69,129 GWh Demand Pumping consumption Export 19

12 On October 1st 24, a new international agreement was signed for the creation of the Iberian Electricity Market (Mibel), which sets out the general lines for the development of such market, based on a spot market managed by OMEL, on the basis of its current operation as a physical electricity market, and a futures market managed by the Portuguese Operador do Mercado Ibérico, OMIP. The agreement envisages that in the future the market will be managed by a single Iberian Market Operator (OMI), the result of the merger of OMEL and OMIP. Article 22 of Royal Decree Law 5/25 establishes the substantial modifications necessary in the electrical energy production market for the implementation of the Iberian Market in July 25. The full operation of the organised market managed by OMEL since its establishment and the adaptation of our activities to the latest information technologies available, to the deregulation process in contracting, and to the relationship with agents within the scope of information and training, has continued to improve making it a useful and efficient instrument for the development of competitive trading. 191

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15 Electricity market regulatory framework 2.1 European Union Legislation on the Internal Market in Electricity 2.2 Legal dispositions that regulate the electricity sector in Spain 2.3 Regulatory development 2.4 Electricity Market Activity Rules 2.5 Energy planning 2.6 Energy saving and efficiency in Spain 2.7 The Kyoto Protocol 2.8 White Paper on the Energy Sector and measures to promote productivity 2.9 Functions of OMEL

16 The legal provisions that affect the deregulation of the electricity sector and the creation and regulation of the electricity market, are based on Directive 96/92/EC concerning the common rules for the internal market in electricity and on the electricity protocol subscribed on 11 November The Electricity Sector Act 54/1997 is the regulatory basis for the creation and development of the electricity market and the rules governing the transposition of the aforementioned community directive to the Spanish legal system. Other subsequent legislation complements, reinforces and expands some aspects of the previous legislation.

17 2. ELECTRICITY MARKET REGULATORY FRAMEWORK 2.1 European Union Legislation on the Internal Market in Electricity Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity (Official Journal 3/1/97) The approval of Directive 96/92/EC on the Internal Market in Electricity, which provided the basis for the Electricity Sector Act, established basic rights including freedom to install production plants, freedom to choose suppliers even through international trade (at least for industrial consumers - up to an annual consumption of 9 GWh/year in line with a staggered schedule), and freedom of access to transmission and distribution systems to make this free trade possible. Like its fellow Member States, Spain has had to make a number of changes to its electricity regulations and introduce new guidelines for the business development of the industry. The Spanish Presidency of the European Union in the second half of 1995 was promoted the Directive on the Internal Market in Electricity, a project that the European Energy Council classified as being in its final negotiation phase. During the Italian Presidency that followed the common position on this Directive was formalised, and it was finally adopted in December Freedom to create installations and full competition in generating power, based on a regulated authorisation procedure, did not exclude the possibility of auctions motivated by the objectives of centralised planning or the figure of the single buyer, thus permitting the continued existence of state-owned energy monopolies operating as sole offerees to the end consumer. Although the concept of the single buyer was never actually applied in its original design, at the time it was considered by some countries to be the only way of maintaining the provision of certain public services. At the same time, the Directive only established certain precautionary measures concerning the independence of system operators conducting other electrical activities. These were seen at the time as sufficient guarantee of free access to the systems. Access to systems could be negotiated or regulated. The need for system operators to adopt an impartial approach and the poor results of certain electricity systems in which the negotiated system was adopted were decisive factors in raising the changes made in this area by the second Directive on the Internal Market in Electricity. As regards the deregulation of supply, the Directive laid down an annual consumption threshold of 9 GWh. Consumers using more than this amount were free to choose their supplier, a situation that undoubtedly led to discriminatory treatment of certain consumers in relation to others in those Member States where this threshold was not reduced to incorporate all consumers. Naturally, the lack of harmonisation in the opening up of the market in Europe has created a situation that is somewhat difficult to defend as regards the ultimate goal of creating an Internal Market in Electricity that benefits all European consumers. These precepts, set down as the minimum requirements to be incorporated by Member States into their liberalisation regulations, have given rise to a certain degree of diversity that is incompatible with the internal market. They have, however, also generated deregulation processes that are far more advanced than expected in 1996 in the majority of Member States, Spain among them. The Directive was transposed with publication of Act 54/1997 its requirements were met some time ahead than most other European countries, and far wider deregulation of the electricity supply was achieved than the minimum levels set out in the Directive. Directive 23/54/EC of the European Parliament and of the Council of June 26th 23 concerning common rules for the internal market in electricity repealing Directive 96/92/EC - Statements made with regard to decommissioning and waste management activities However, the European Commission deemed that this provision was not sufficient in itself to enable the internal market in electricity and gas to develop fully. As a consequence, Directive 23/54/EC of the European Parliament and of the Council of June 26th 23 concerning common rules for the internal market in electricity repealing Directive 96/92/EC - (OJ 15/7/3) was published in the Official Journal of the European Union on July 15th 23. Directive 23/55/EC of the European Parliament and of the Council of June 26th 23 concerning common rules for the internal market in natural gas repealing Directive 96/3/EC was published on the same day. 196

18 With the entry into force of Directive 23/54/EC, the most pressing issues arose out from the need to expand and broaden the electricity market. The most important aspects included the effective integration of small consumers in the deregulation scheme and the exercising of their right to change suppliers, the inadequacy of the interconnection infrastructures in relation to an increasingly free transaction culture, the problems generated by dominant position and its impact on the guarantee on free trade, and the need for coordination to ensure that supply security levels increase thus promoting trade. The second Directive sets forth a timetable for opening up the market to the demand side, as a result of which all Member States should have given their consumers the freedom to choose their supplier (Article 21) by 27. In addition to security of supply and environmental protection, Article 3 of Directive 23/54/EC concerning regulation of the public service and the protection of consumers also comprises requirements covering the provision of information to consumers and the protection of vulnerable customers. Consumer protection also extends to the safeguarding of their effective right to change suppliers, a right that Member States must guarantee by introducing the measures set out in Annex A, at least for domestic consumers. It has been decided to regulate third-party access to transmission and distribution systems, with their operators prohibited from any involvement in other electricity-related activities, particularly the buying and selling of electricity. With regard to energy generation the general procedure is one of authorisation (Article 6), and a tender process for the adjudication of new installations (Article 7) can only be instigated if the authorisation procedure does not lead to the incorporation of generating capacity. In order to apply the second EC Directive on the Internal Market in Electricity and Directive 23/55/EC concerning common rules for the Internal Market in Natural Gas, the European Commission's Directorate General for Energy and Transport has published eight interpretative notes, one of which refers to the security of supply. In the event of market failures this interpretative note proposes the application of demand management measures and exceptional measures concerning energy generation. The latter can only be applied following notification to the Commission and proving of the market failure, i.e. the lack of sufficient generating capacity. The other interpretative notes refer to the division in the management of distribution systems, practical measures for the opening up of markets to competition, public service obligations, exceptions to the system of third-party access to the system, security of the gas supply, and the role of regulators in adopting the new gas and electricity directives. Regulation 1228/23/EC of the European Parliament and of the Council of June 26th 23 concerning conditions of access to the network for cross-border exchanges in electricity (OJ 15/7/3) The second Directive on the internal market repealed the existing Directive on transits via large electricity networks, and was implemented at the same time as the approval of Regulation 1228/23/EC concerning conditions of access to the network for cross-border exchanges in electricity, which sets out the most efficient cross-border tarification and congestion management methods, allowing international transactions to occur in a similar way to national ones. The fundamental principles concerning the freedom of transactions applicable to international trade are as follows: Article 4 states that national network access charges must be transparent, take into account the need for network security, reflect 197

19 2. ELECTRICITY MARKET REGULATORY FRAMEWORK DIRECTIVE 23/54/EC ON THE INTERNAL ELECTRICITY MARKET Acceleration of the opening timetable: July 1st 24, all non-domestic consumers will be able to choose their supplier. July 1st 27, all consumers will be able to choose their supplier. A progress tracking and control procedure will be established for both the opening of the market and the application of public service conditions. Further legal separation. The basic elements are as follows: Of transmission system operators and distributors regarding activities that are not related to transmission and distribution. Functional separation of TSO and the DSO with views to ensuring their independence in the vertically integrated company. This independence must be legal, functional, and include decision-making activities that are not related to transmission and distribution. This, however, does not imply the separation of property in vertically integrated companies. In the case of distribution systems, systems that supply less than 1, customers or serve small, isolated systems may be exempt. This threshold is subject to review. Unbundled accounts will be kept for transmission and distribution activities. Clearly defined Public Service Obligations relating to supply and which do not affect European Union interests should be transparent, verifiable and non-discriminating. High level of protection for end users. Specifications that should at least include a supply contract. Obligation to inform consumers about modifications to the conditions of the contract. Receiving transparent information on prices, tariffs and general conditions that should be reasonable and transparent. There will be no charge for changing suppliers. Complaint procedures will be transparent, simple and hassle-free. Domestic consumers and, at the discretion of member states that consider it opportune, small companies, will also enjoy universal service. Demand management. Member states will apply the opportune measures to achieve the objectives of economic and social cohesion, the security of supply, and protection of the environment - which could include energy efficiency measures and demand management, in addition to measures to combat climatic change. Electricity suppliers must indicate in their bills and promotional material, the contribution of each energy source to the company's overall energy mix during the previous year, information sources on the impact of CO2 emissions and radioactive waste on the environment. If the electricity was subject to transaction in the markets, the cumulative figures issued by the body in question may be used. If it was obtained through import, the figures provided by the company during the previous year can be used. 198

20 REGULATION (EC) Nº 1228/23 REGARDING CONDITIONS OF SYSTEM ACCESS OR CROSS BORDER TRADE IN ELECTRICITY (EEE) Establishes reasonable regulations for cross border electricity trade, promoting competition in the internal market in electricity and taking into account the comparison of efficient system operators: Involves the establishment of a compensation mechanism for cross border electricity flows. Sets harmonised principles on cross border transmission tariffs. Congestion will be resolved in a non-discriminating manner and in keeping with the logic of the market. Sets harmonised principles for the allocation of available interconnection capacity between national transmission networks. The Commission, with the report of a Regulatory Committee, may adopt decisions on: The compensation amounts that must be paid, that must be paid periodically or at the end of the period, following the directives established by the regulation itself. The flows will be effectively measured. Directives relating to the compensation mechanism and its modification, including detailed information on the payment procedure. The directives will provide appropriate and efficient incentives that are harmonized at the European Union level. Directives relating to capacity allocation of available trade. Guarantees that the congestion management mechanisms evolve in compatibility with the objectives of the internal market. Establishment of common security and operations standards. It establishes the principles for information exchange and coordination between transmission system operators with the aim of guaranteeing system security in relation to congestion management. Establishes the conditions that must be met for establishing interconnectors, which, being exempt from fulfilling certain obligations of the Regulation and Directive (tolls, access, etc.), promote competition in electricity supply. The exemptions affect the following issues, among others: - Allocation of derived income. - The right to charge levies that are different to the access tariffs. - Exoneration from the obligation of free system access, established in art. 2 of the Directive. -The effective operation of the internal market and the efficiency of the regulated system. Exemption is granted by the national regulatory authorities that may impose conditions and approve or set regulations, management mechanisms and allocation of capacity. The owner of the interconnector should be a private individual or an legal entity independent, at least in legal form, of the system operators of the systems where the interconnector will be built. Notification of exemption will be communicated without delay to the Commission, along with all the necessary information. The Commission may request the cancellation or modification of the decision to grant an exemption. If the regulating authority does not obey this request, the Commission will make a final decision, upon receiving the report of the Advisory Committee. Investment will only be granted if the exemption is obtained. 199

21 2. ELECTRICITY MARKET REGULATORY FRAMEWORK ANNEX TO REGULATION (EC) Nº 1228/23 Directives on the management and allocation of transmission capacity available in interconnections between national systems: Congestion management methods will be dealt with according to the laws of the market. System operators or the member state will establish non-discriminating and transparent regulations. Differences between bids to the market and bilateral contracts will be reduced to a minimum. Long-term contracts: Priority capacity access rights cannot be allocated to contracts that infringe articles 81 and 82 of the Treaty. Existing long-term contracts will not have priority right at the time of renewal. Principles for managing congestion: Will be resolved using methods that are not contemplated in the contracts of the different power exchanges. The advantages of combining market splitting and other market-based mechanisms will be studied as soon as possible. Guidelines for explicit auctions: Action system should be defined in a way that all the available capacity will be offered to the market. Total interconection capacity will be offered in several auctions with different time horizon, for example yearly, monthly weekly, daily and intraday. In each of them will be offered a selected net capacity plus the capacity not assigned in previous auctions. The explicit auctions procedures will be defined in such way that will be possible to participate in all the daily sessions of the organized markets in the interested countries. All adopted auction procedures will permit send the market operators price signals depending of the electricity flow.. To mitigate related problems with dominant positions from one or other operator, auction mechanisms, should provide the posibility to limit the capacity that can buy or use a market operator in an auction. the actual costs incurred and must be applied in a non-discriminatory way. Under no circumstances can these charges be distance-related, and they must be applied regardless of the countries of origin and destination of the electricity. Paragraph 2 of the same article refers to the fact that Member States can provide incentives for companies to locate in their territory or apply mechanisms to guarantee that network access charges applied to consumers are the same throughout their territory. Article 5 requires that transmission system operators make public information concerning issues as important as their safety, operational and planning standards in addition to the transmission capacity of the interconnections including any available transmission capacity already reserved, and the scheme used in its calculation. A second area of regulation concerns the general principles of congestion management included in Article 6, which sets out that congestion must be addressed with non-discriminatory, market-based 2

22 solutions. In addition, the maximum capacity of the interconnections must be made available to market participants, and any allocated capacity not used must be reattributed to the market. The regulation thus enables the maximum number of viable transactions to be conducted and sets out to ensure that all available transmission capacity is used. As a result of the work conducted by the Florence Forum, the European Commission has created seven mini-fora to apply this regulation in the most effective manner and, where appropriate, to amend the guidelines contained in its annex. Other provisions July 15th 23 saw the publication of Decision 1229/23/EC of the European Parliament and of the Council laying down guidelines for trans-european energy networks and repealing Decision 1254/96/EC. Its aim is to promote the interconnection, interoperability and development of trans-european energy networks to reach an interconnection capacity of 1% between Member States. This Decision will probably be repealed during the course of 25 and replaced by the Decision of the European Parliament and the Council, currently in the draft phase, laying down certain guidelines for trans- European energy networks and repealing Decisions 96/391/EC and1229/23/ec. The regulatory order includes the following directives and decisions: Directive 22/91/EC of the European Parliament and of the Council of December 16th 22 on the energy performance of buildings. Directive 24/8/EC of the European Parliament and of the Council of February 11th 24 on the promotion of cogeneration based on a useful heat demand in the internal energy market and amending Directive 92/42/EEC, (OJ 21/2/4). Directive 23/96/EC of the Council of 27 October 23 restructuring the Community framework for the taxation of energy products and electricity (Text with EEA relevance), (OJ 31/1/3). Directive 23/92/EC of the Council of 27 October 23 amending Directive 77/388/EEC as regards the rules on the place of supply of gas and electricity, (OJ 11/1/3). As regards the security of supply in the event of growing demand for energy, the European Commission has reached the conclusion that a regulatory framework ensuring a general policy of transparency and non-discrimination compatible with the nature of a single competitive market must be created to reach the following objectives: The development of a market for energy services, the supply of energy-saving programmes, and improved efficiency in the use of energy. Improvement in conditions of access to the gas transmission network. Encouragement of the necessary investment in trans-european energy networks. With regard to this area the following communications and proposals have been issued: Communication of May 26th 23 on the development of energy policy for the Enlarged European Union, its neighbours and partner countries COM(23)262 final. Communication from the Commission to the European Parliament and the Council on energy infrastructure and security of supply COM (23)743 final, accompanied by the following proposals: Proposal for a Directive concerning measures to safeguard security of electricity supply and infrastructure investment COM (23)74. At this moment in time the Commission is of the opinion that a low level of interconnection only serves to fragment the market and represents an obstacle to competition. The existence of adequate interconnection capacity is crucial but is not sufficient in itself for effective competition. In the words of the Commission, "It is required that the system operator is prevented from withholding capacity to create artificial scarcity. In that respect, greater transparency of the capacity calculation and allocation procedure in the transmission system should be ensured." Proposal for a Regulation on conditions for access to the gas transmission network COM (23) 741. Decision of the Commission of November 11th 23 establishing the European Energy Regulators Group for Electricity and Gas (text with EEA relevance), (OJ 14/11/3). 21

23 2. ELECTRICITY MARKET REGULATORY FRAMEWORK DIRECTIVE PROPOSAL ON MEASURES TO SAFEGUARD THE SECURITY OF ELECTRICITY SUPPLY AND INVESTMENT IN INFRASTRUCTURE. COM(23)74 Investment decisions must respond to price signals. The nature of electricity can make prices volatile, and because security of supply is of public interest, member states should avoid an insecure climate. The events affecting markets in 22 and 23 have demonstrated some of the problems caused by insufficient investment. Power cuts in the EU and the USA highlighted the necessity for a clear operating standard on transmission networks and the need for improved and correct system maintenance. Objective. To guarantee the correct operation of the internal market in electricity, safeguarding the security in supply and guaranteeing the level of interconnection between member states. It establishes functions and responsibilities for market participants and, especially, for transmission system operators, which include among other regulations: Cross border cooperation in security of supply. Guaranteeing the continuity of supply. Use of electricity generated using renewable sources. Uninterrupted system operation in case of failure at a specific point. Permanent renovation of transmission and distribution networks. Transmission system operators must respect the minimum operating standards for security of supply. They must adopt network control measures for peak demand in real time. Member states may establish measures directed towards setting a market framework with a sufficient number of competitors who give the opportune investment and consumption signals. Member states will take into consideration in investments: Greater connection possibilities to electricity generated from renewable and co-generated sources. More opportunities for customers to exercise their right to choose a supplier. The need to guarantee universal service at reasonable prices. Should the transmission system operator delay in executing investment projects, the following measures may be taken: Imposing pecuniary sanctions on transmission system operators who delay their projects. Imposing a deadline by which date the system operator must have completed the work in question. Assigning the work to another contractor via tendering procedure. Member states will adopt sanction systems that are effective, proportional and serve as deterrents. 22

24 2.2 Legal dispositions that regulate the electricity sector in Spain Electricity Sector Act 54/1997, November 27th The Electricity Sector Act represented a deep change of the operation of the Spanish electricity system by declaring that electricity should be freely traded and establishing the organized electricity market as the economic basis for the deregulation of the sector. This resulted in the separation of the economic and technical management of the system, which were respectively entrusted to a market and system operator. The fundamental objective of the Electricity Law is stated in the preamble, as follows: "The basic objective of this Act is to state the regulation of the electricity sector, with the triple and traditional objective of essuring the supply, the quality of the said supply and guaranteeing it at the lowest possible cost, all of which are to be accomplished without neglecting the protection of the environment, an aspect which has acquired special importance in view of the characteristics of this industry". Further on in the text, the Law announces a progressive reduction of government involvement: "However, in contrast to previous regulations, this Law is founded on the conviction that guaranteeing the supply, quality and cost of electricity does not require more government intervention than that envisaged in the specific regulation itself. It is not considered necessary for the government to reserve for itself the exercise of any of the activities comprising the supply of electricity". "The unified operation of the domestic electricity system shall therefore cease to be a public service provided by the State through a State-owned corporation. The functions of the State shall be taken over by two private companies incorporated in accordance with mercantile legislation. These companies shall respectively be responsible for the economic and technical management of the system". The wording that follows explicitly states the deregulatory philosophy that shapes the reform and creation of the electric power market: "The deregulatory proposal of this Law is not limited to restricting the government's role in the electricity sector. Changes are introduced in the regulation of this industry through the appropriate vertical segmentation of the different activities required for supplying electricity. In the generation of electric power, the right to free installation is recognised, as is its operation under the principle of free competition. The activity retribution is based on a wholesale market". The principles of deregulation underlying the sector's reform and its new operational model are set out below: Freedom to establish new generating capacity. Supply from primary power sources for the production of electricity, negotiated on the basis of voluntary agreements. Establishment of a competitive electricity market. Progressive introduction of deregulation of supply contracts and of the market opening, a process that ended on 1 January 23. Regulated access by third parties to the transportation and distribution networks, qualified consumers and distributors. Freedom to establish retailing companies. Compatibility of deregulation measures with the promotion of renewable energies and of installations using waste materials, or cogeneration. Establishment of the transitory periods needed for producers and customers to make the transition to competition. Unbundling of deregulated activities (generating and retailing) and regulated activities. 23

25 2. ELECTRICITY MARKET REGULATORY FRAMEWORK Significant provisions of the Act in relation to creation and operation of the electricity market are as follows: Regulation of supply, establishing the basis for the operation of the system of electricity purchase and sale bids (article 11). Principles for the economic regime to serve as the basis for the remuneration of the participants in the sector. The market remunerates deregulated activities, while regulated activities are remunerated on the basis of administrative regulation criteria (article 16). Creation of the electricity production market, criteria for the dispatch of generating plants, which will be effected basically in accordance with economic precedence, declaration of the freedom of trading and the integration of the demand side into the organised market and the principles of communication of the bilateral contracts to the Market Operator (articles 23 and 24). Establishment of the bases for the economic and technical management of the electricity system, to be entrusted to a Market and a System Operator, respectively (article 32). Characteristics and functions of the Market Operator (article 33). The Law pays particular attention to retailers and final consumers, especially with regard to freedom of access to supply, to the market and to transmission grids, as well as to supply quality (article 44 and following). Law 34 of 7 October 1998 governing the hydrocarbons sector (Official State Gazette 8/1/98) The sole repelaing provision of this Law repeals articles 6, 7 and 8 of Law 54/1997 governing the electricity sector, which regulated the Spanish Electricity System Commission, and replaced them with the eleventh, twelfth and thirteenth additional provisions regulating the new National Energy Commission, which was assigned the same powers and functions in the electricity sector. The transition between these two commissions is regulated in the tenth and eleventh transitory provisions. Law 5 of 3 December 1998 implementing Tax, Administrative and Social Measures (Official State Gazette 31/12/98) Article 16 concerning the modification of the Electricity Sector Law 54 of 27 November 1997 amends the wording of section 1 of article 33 regarding the market operator, particularly with reference to the ownership of the company incorporated to carry out the functions of market operator. Article 17 also modifies the Law by establishing the framework for the possible securitisation of a portion of the costs of transition to the competition. The thirteenth transitory provision restores the powers and functions of the National Electricity System Commission until such time as the new National Energy Commission is duly formed. The thirtieth additional provision establishes conditions designed to facilitate the unbundling of regulated and unregulated activities. Royal Decree Law 6/1999 of 16 of April 1999 establishes urgent deregulation and competition measures (Official State Gazette 17/4/99) This Royal Decree Law establishes a series of measures in various sectors of the economy with the objective of achieving a positive impact on prices and the conditions of competition within the domestic economy. Insofar as they refer to the electricity sector, the measures implemented in this Royal Decree Law further deregulation by lowering the threshold to acquire the condition of qualified consumer. Accordingly, as of 1 July 2, all consumers supplied over networks with a nominal voltage exceeding 1, volts will be considered qualified consumers. Royal Decree Law 6/1999 also establishes an average reduction of 1.5% in tariffs in addition to the 2.5% reduction provided for in Royal Decree 2821/1998. The effect of this reduction is particularly significant for domestic consumers. Law 55 of 29 December 1999 establishing tax, administrative and social measures (Official State Gazette 31/12/99) Article 71 of this Law modifies certain provisions of Law 34/1998 relating to the Spanish Energy Commission. Also, additional provision 27 of the Law establishes certain conditions for public share holdings in the electricity sector. 24

26 Royal Decree Law 6/2 of 23 June on Urgent Measures for Intensifying Competition in Goods and Services Markets (Official State Gazette 24/6/) This Royal Decree Law is part of an important and broad package of measures aimed at deregulating different sectors of the Spanish economy. The provisions governing the electricity sector are contained in Chapter III of Heading I: Limitation on the increase in the production capacity of electricity business groups with market shares of more than 2% (3 years) or 4% (5 years). Treatment, for specific production installations under the special regime entitled to incentives, similar to the production units under the ordinary regime in terms of their participation in the market for unloading their electricity supply surpluses (those with an installed power of more than 5 MW, availing themselves of Royal Decree 2366/1994). Full deregulation of electricity supply starting from 1 January 23. To adapt the structure and prices of the access tariffs to the new deregulation framework, these were modified by Royal Decree 1164/21, as will be detailed subsequently. Simplification of the requirements governing the exercise of the condition of qualified consumer. Withdrawal of high voltage regulated tariffs on 1 January 27. Enable retailers to purchase energy from producers under the special regime and from external agents, and to trade through the organised market, enabling this energy to be incorporated through bids in the aforementioned market, or sold directly to qualified consumers. Starting from 23, retailers may also purchase electricity from any producer. Create the proper framework to enable large consumers to gradually obtain access to the market as qualified consumers and at prices that are competitive with their current tariffs, through the application to them of the access tariff for power scale 6. Reduction of the amount charged in terms of the capacity payment from.6912 /kwh to.488 /kwh, increasing the remuneration of producers under the special regime. A minimum of 48 hours of operation per year is also established for producers under the ordinary regime for their plants. Law 9/21, of 4 of June, which modifies the second transitory provision of the electricity sector Law 54/1997, of 27 of november, of the electricity sector, and several articles of Law 16/1989, of 17 of July of Defense of the Competition, and several articles of Law 46/1998, of 17 of December, concerning the introduction of the euro (Official State Gazette 5/6/1) As far as the electricity sector is concerned this act removes the posibility of securitization of the stranded costs included in the 5/1998 act. Electricity imports through other member countries of the EU are excluded and, in case that a production unit is sold, it states that the corresponding transmission rights of the stranded costs, be also transfered, maintaining the 6 ptas/kwh in such transmission. Law 36 of 11 November 23 governing economic reform measures (Official State Gazette 12/11/3) In order to promote the development of renewable energies, article 13 of this law establishes specific modifications to article 35 of Corporate Income Tax Law 43, of 27 December 1995, extending the eligibility for tax relief on investments made to acquire new equipment for exploiting these energies to all entities, thus eliminating the previous restriction on small companies. Moreover, in order to promote the use of solar energy for own consumption, article fourteen amends article 75 of Local Tax Administration Law 3 of 28 December 1998, establishing a Property Tax rebate for installations of systems used for the thermal and electric exploitation of solar energy production for consumption by home owners or tenants. Article twenty refers to forward contracting of electric energy. It establishes modifications to articles 16, 23, 24 and 33 of Electricity Sector Law 54/1997, eliminates article 26 of Royal Decree Law 6/2, of 23 June on Urgent Measures for Intensifying Competition in Goods and Services Markets, and introduces an additional provision - provision seventeen - to Law 54/1997, authorising the government to establish, by regulatory means, market mechanisms to promote forward contracting of electric power, and which would consist of a primary emission of a certain amount of electric power equivalent to constant power during a period not longer than one calendar year. 25

27 2. ELECTRICITY MARKET REGULATORY FRAMEWORK Contract of Adherence and Electricity Market Activity Rules Resolution of 5-IV-1 Resolution of 14-II-3 Order of 29-XII-97 Market Order of 17-XII-98 Capacity Payment Order of 14-VII-98 External Agents Order of 12-IV-99 Measurements R.D. 1164/21 Third Party Access R.D. 219/1997 R.D. 1435/22 R.D. 436/24 Market R.D. 218/1997 R.D. 1433/22 R.D. 385/22 Measurements Law 54/1997 R.D. Law 6/1999 R.D. Law 6/2 R.D. Law 5/25 Directive 23/54/EC Interior Market for Electricity 26

28 Law 62 of 3 December 23, governing administrative tax and social order measures (Official State Gazette 31/12/3) Article 9.1 of this Law introduces the following modifications to Electricity Sector Law 54/1997: Article 9.1.b is modified after the incorporation of a second paragraph that reads as follows: b) Self-producers of electric power are all individuals or legal entities that produce electricity fundamentally for their own use. Selfproducers are considered to produce electricity for their own use it when such producer consumes at least 3% of the total electric power that it produces, if its installed power is less than 25 MW and at least 5% of its installed power is equal to or greater than 25 MW. In the case of self-producers of electric power using cogeneration facilities with high levels of energy efficiency as a method of producing electricity, the percentage of self-consumption referred to in the previous paragraph shall be 1%, regardless of their installed power capacity. Article 33.1 is modified by reducing to 5% the maximum direct or indirect participation of individuals or legal entities in the capital stock of the market operator (OMEL). The paragraph drafted in accordance with article 2.5 of Law 5, of 3 December 1998, is eliminated from article 33.1 of Electricity Sector Law 54/1997. This paragraph reads as follows: "In the event of the capital increase scenarios referred to in the previous paragraph, share subscriptions shall be executed at the higher of the following two values: five thousand pesetas or the theoretical value resulting from the company's last approved balance sheets". It is hereby established, through the introduction of additional provisions sixteen and seventeen, that late payment interest shall accrue in the event of default in payment of quotas by electricity system agents with specific destinations, or due to default in payments of settlements by the aforementioned agents. Transitory provision eighteen, relating to the market operator, is hereby added to Electricity Sector Law 54/1997, with the following text: Adaptation of the market operator. 1. Until 3 June 26, the maximum participation limit of 5 per cent of the capital stock, established in section 1 of article 33 of this Law, shall not apply to participations corresponding to other entities managing the electricity markets and subject to international commitments with Spain, and which may participate in up to 1 per cent of the capital stock. Until the aforementioned date, 4 per cent of this participation shall not compute for tax purposes in the case of individuals engaging in activities in the electricity sector established in section 1 of Article 33 of this Law. Moreover, until the abovementioned date, and after authorisation from the National Energy Commission, the market operator may participate in up to 1 per cent of the capital stock of other entities managing the electricity markets subject to international commitments with Spain. 2. Other shareholders with stakes in the market operator who, as at 31 December 23, exceeded the limits governing the maximum participation of 5 per cent of the capital stock established in section 1 of Article 33 of this Law, must adjust their stakeholdings to the aforementioned limit before 3 June As from 3 June 24, the company Operador del Mercado Ibérico de Energía-Polo Español Sociedad Anónima shall be entrusted with the execution of the functions entrusted to the market operator in this Law. Royal Decree Act 5/25 of March 11th concerning urgent reforms promoting productivity and the improvement of public trading (Official State Gazette 14/3/5) This Royal Decree Act forms part of a broad raft of measures designed to make the Spanish economy more dynamic, productive and competitive, and focuses on five different areas: antitrust, product and services markets, factor markets (mal en español), Research&Develpment&Innovation, and the quality and effectiveness of public finance, the regulatory framework and transparency. In addition to the Royal Decree Act these measures also encompass a draft bill regulating venture capital firms and their management companies, a draft reform bill promoting productivity, a draft tax reform bill to promote productivity and a Spanish Council of Ministers' Agreement on mandates for ministerial departments to promote productivity. The Royal Decree Act concerning urgent reforms to promote productivity contains measures relating to financial markets, energy markets, the environment and the improvement of public trading. The measures relating to the electricity sector can be summarised as follows: 27

29 2. ELECTRICITY MARKET REGULATORY FRAMEWORK Definition of a main operator The concept of Main Operator is modified in line with restrictions on cross-shareholding. Main Operators are those operators who hold the five largest shares of the energy market or industry (within the Iberian Electricity Market) and the telecommunications sector. The National Energy Commission and the Telecommunications Market Commission are responsible for the online publication of the list of main operators in their respective areas. Definition of a dominant operator The concept of Dominant Operators applies to the energy sector only. These are operators who hold a market share in excess of 1%. The National Energy Commission is responsible for the online publication of the list of dominant operators. Transparency of information in the electricity production market. The measures incorporate a series of obligations governing the provision of information on factors impacting on price formation in the market, the aim being to make this information more transparent. These include: Information impacting on price formation in the organised markets encompassed within the Iberian Electricity Market must be communicated. The system operator must publish forecasts for electricity demand, the net transmission capacity in the interconnections, and the situation with regard to dams used to produce hydroelectricity. The operator of the daily market must publish the results of the matching procedures, and the system operator the results of the operational processes within its competence. The Directorate General for Energy and Mining Policy shall specify the factors and information considered relevant to price formation in the market and the requirement to communicate them when they occur. The provision of extensive and consistent information on price formation based on objective classification criteria and shared by all actors will prevent distortions of competition and ensure the transparency of the price formation process. Rationalisation of costs in the electricity sector. The distribution of electricity is seen as constituting a natural monopoly and, as a result, certain articles relating to the distribution of electricity in Act 54/1997 have been amended to prevent cascade distribution and to bring about smaller average distribution costs for the system as a whole. In addition, to promote forward trading it is established that primary energy output shall be provided by electricity producers considered as dominant operators in the electricity sector. Creation of the Iberian Electricity Market (Mibel) A series of measures have been approved with a view to starting up the Iberian Electricity Market. These include: The recognition of permits issued by both countries and the creation of a single registry of entities and generating plants authorised to operate in the Iberian Electricity Market. The objective is to enable actors to operate directly in the markets irrespective of which country has awarded them their permit, thereby avoiding the duplication of administrative procedures. At the same time, all levels of government and all authorities are given access to comprehensive information on actors and installations. Regulatory control of representatives. Representatives shall be regulated according to the terms set out in the Iberian Electricity Market Agreement. Bilateral trading. As a result of the new trading opportunities opened up by the Iberian Electricity Market, in the case of bilateral contracts and for each of the energy programming periods the System Operator must be notified of the specific generating and consumption units covered by a bilateral contract. The System Operator must have access to this information before technical restrictions can be dealt with. Payment for technical management processes. It is thus established that it is the System Operator who must settle payments corresponding to guaranteed power, the settlement of deviations and additional services, in accordance with all the energy programmed in each hourly period for each generating unit or unit of energy consumption, and with the actual amount of energy generated or consumed. Expansion of trading and operating opportunities open to market actors. The entry into force of the Iberian Electricity Market means that all actors, including distributors, must be given the opportunity to buy and sell on the daily market, or the domestic market or to conduct intra-community or international trade in electricity by purchasing or, where appropriate, selling energy. All actors must also be allowed to engage in all kinds of contracts, including bilateral ones. 28

30 In this respect, distributors will be permitted to enter into bilateral contracts with physical delivery, although they must go to the market to purchase the energy needed by their customers at regulated rates, not covered by the aforementioned bilateral contracts. As regards the international electricity trade, it is established that operators deemed to be dominant in the electricity industry cannot purchase energy in other Community countries outside the Iberian Electricity Market or in third countries. Modification of the maximum shareholding limits in Red Eléctrica de España. Entities operating in the electricity industry can hold only a 1% stake in Red Eléctrica de España, except the state-owned holding company, Sociedad Estatal de Participaciones Industriales, which must hold a stake in the company of no less than 1%. The total amount of direct and indirect shares held by entities operating in the electricity industry must not exceed 4%. The shares must be adjusted before 1 January 28. Fund for financing activities envisaged in the General Radioactive Waste Plan. The sums set aside for funding the management of radioactive waste and spent fuel generated by nuclear plants, and their dismantling and closure shall be provided from 31 March 25 onwards by the owners of the nuclear plants at the time they were operational. Amendment of Act 1/25 of March 9th regulating the greenhouse gas emissions allowance trading scheme. The provisions of Article 1 of the European Community Decision of 27 December concerning the Spanish National Greenhouse Gas Emissions Allowance Allocation Plan have been fulfilled. The aim is to increase the amount of allowances available, specify the allocations for those installations that have not received any consignments, and prevent competition-related problems in the Community market, in view of the fact that the later these allocations are publicised the less opportunities they would have to plan their investments and gain access to competitive prices. Payment of "Stranded or CTC Costs" Exceptionally, in 24 payment by the National Energy Commission of "stranded" or "CTC costs" shall not be conducted in the final provisional payment but as part of the annual payment. In any case, this shall not be effected until January 1st 26. International Agreement on the constitution of an Iberian Electricity Market between the Kingdom of Spain and the Republic of Portugal (OSG 1/6/24) The Agreement creating the Iberian Electricity Market - a single market for both countries - was signed on January 2th 24. Its introduction was scheduled for April 22nd 24. However, a few months after the provisional application of the aforementioned Agreement, the Governments of both countries realised that the necessary reforms could not be implemented within the scheduled period, stressing the need for the Iberian Electricity Market to be compatible with the provisions set out in the second Community Directive concerning common rules for the internal market in electricity. As a consequence, Spain and Portugal decided to sign a new Agreement regulating the aforementioned aspects. The new Agreement was signed on October 1st 24. The Agreement follows the same lines as those adopted to date between the two countries and takes into account both Community regulations and the need to set a realistic deadline June 3th 25) for the Iberian Electricity Market to begin operating, once the necessary legislative issues have been dealt with in both countries. The Agreement encompasses a series of specific provisions that relate to the creation of an Iberian Market Operator (IMO), the 29

31 2. ELECTRICITY MARKET REGULATORY FRAMEWORK operation of the system, the types of electricity trading markets and the schemes governing them, in addition to the economic management of the interconnection between Spain and Portugal and tariffs. It also refers to the regulation, consultation, supervision and management mechanisms of the Iberian Electricity Market. A Regulatory Council will be set up and steps shall be taken to create the Market Agents' Committee. The Agreement also provides for the creation of the Mibel Technical and Economic Management Committee that will be responsible for overseeing the communication and flow of necessary information between the various operators. The administrative procedures applying to the issuing of permits, the registration of actors operating in the market, and to the guarantee of supply based on the principle of solidarity are also regulated. The possible breaches incurred by entities are also considered and the applicable penalties defined. The Agreement comes into effect on the date the final communication issued by Spain and Portugal confirming compliance with their domestic legal requirements is received. The Agreement signed in Lisbon on January 2th 24 and published on June 1st of that same year shall continue to be applied provisionally up until the date that the Agreement signed in October 24 comes into force. The Agreement is concluded for an initial period of two years, automatically renewable for equal periods of time except where one of the two parties gives a minimum of six months notice of their intention to terminate it. 2.3 Regulatory development In the little more than seven years that have elapsed since the above-mentioned legislation took effect until the date this document was prepared, there has been a great development of those regulations. Royal Decree 219 of 26 December 1997, which organises and regulates the electricity production market (Official State Gazette 27/12/97) The aim of this piece of secondary legislation is to develop the contents of Law 54/1997, with respect to those aspects that refer to the production market. Royal Decree 219/97 therefore constitutes the nucleus of the regulations governing the production market, as complemented by subsequent provisions with a more limited scope. Firstly, Royal Decree 219/97 establishes the basic structure for the production market: the daily market, the intraday market, ancillary services and physical bilateral contracts. The Royal Decree then provides a classification of the market participants and sets out the requirements for them to carry out activities in any of the segments forming the production market. After describing the way in which bids are presented and matched and results communicated, it sets out the general principles for the resolution of technical constraints, the provision of ancillary services, the intraday market and its final programming. All these matters are subject to subsequent detailed development. It mentions bilateral trading as an unorganised part of the market, detailing the existing modes and establishing the need for communicating such contracts to the Market Operator. A chapter is devoted to the settlement of transactions carried out in the electricity production market. This function is entrusted to the Market Operator. Article 27 completes and extends the set of functions assigned to the Market Operator by the Electricity Sector Law. These functions are described further on in this document, duly ordered and grouped. The Royal Decree also regulates the Market Participants Committee, the System Operator and, in particular, the basis for international exchanges with European Union member States and third countries. The First Additional Provision of the Royal Decree entrusts the functions of Market Operator to Compañia Operadora del Mercado Español de Electricidad. The Transitory Provisions establish certain temporary provisions relating to Administrative Registers, the intraday market, international exchanges already in effect prior to the enactment of the Electricity Sector Law and other matters. The Second Final Provision establishes the basic nature of the Royal Decree in accordance with terms 13 and 25 of article of the Spanish Constitution. This Royal Decree must be adopted in accordance with Royal Decree Act 5/25 of March 11th and with Royal Decree 2351/24 of December 23rd. 21

32 Royal Decree 2351/24 of December 23rd amending the procedure resolving technical constraints and other regulatory standards of the electricity market (OSG 24/12/4) The new procedure comprises the following: Submission of specific tenders: The first objective of the new procedure is to enable producers participating in the technical constraint resolution process to submit specific tenders to the system operator for this service. Tenders must be submitted in two separate phases: the technical constraint phase and the subsequent economic costing. As part of the first phase it is also established that the system operator shall specify modifications to the basic daily operating programme that are absolutely essential in complying with the safety criteria set out in the system operating procedures. Allocation of excess costs: Another objective is to allocate excess costs generated by the resolution of restrictions on all demand units in accordance with their final metered consumption, as is the case with other fixed system operating costs, instead of allocating them only to the demand units participating in the daily market. Finally, the system operator is granted powers to deal with technical restrictions settlement. Furthermore, certain amendments are made to Royal Decree 1955/2 of December 1st regulating transmission, distribution, marketing and supply activities and authorisation procedures for electricity plants, and Royal Decree 436/24 of March 12th establishing the methodology for updating and systematising the legal and financial system of the production of electricity under the special regime, summarising the provisions of both Royal Decrees. Royal Decree 1747 of 19 December 23, regulating the island and extrapeninsular electricity systems (Official State Gazette 29/12/3) This Royal Decree completes the reglamentary implementation of the Electricity Sector Law and establishes an electricity model in the island and extrapeninsular systems (SEIEs) enabling the development of activities in conditions of free competition, and for the first time making it truly viable for consumers to freely choose their supplier in conditions equivalent to those enjoyed by consumers on the peninsula. The Royal Decree contains integral regulations governing all electric power supply activities, encompassing electricity generation, transport, distribution and marketing, as well as the economic management corresponding to the market operator (OMEL) and technical management corresponding to the system operator for each of the electric systems in these territories, establishing existing specificities prompted by the isolation of the territories concerned; all aspects that are the same as those envisaged in the peninsular system are governed by the general regulations. In terms of generation, a variable costs dispatch/clearance system is created. Under this system, power plants will start operating on an economic merit order basis; this differs significantly from the peninsular market system. In order to promote installations with new generation capacity, a system is introduced for approving the new capacity to be installed based on the remuneration parameters of the activity, thus ensuring a acceptable return on the investments. In terms of marketing activities, the same requirements are established as those applicable in the peninsular system, with the exception of the guarantee accrediting economic capacity for resellers who decide to participate exclusively in the SEIES (Island and Extrapeninsular Electricity Systems); this is fixed in a smaller amount (12, euros) given the territorial scope in which this activity is carried out. Purchases by resellers, qualified consumers accessing the office directly and distributors are settled by the market operator. Consequently, the treatment given to these agents can therefore be similar to the treatment given to agents performing their activities in the peninsular system. Order of 29 December 1997 developing certain aspects of Royal Decree 219 of 26 December 1997 by which the electricity production market is organised and regulated (Official State Gazette 31/12/97) The Royal Decree 219/1997 developed the Electricity Sector Act with regard to certain matters relating to the formation of the market. The above-mentioned Ministerial Order subsequently establishes specific regulations for: Bid presentation. Remuneration and allocation of the capacity payment. 211

33 2. ELECTRICITY MARKET REGULATORY FRAMEWORK Treatment for bid matching and settlement purposes, of international agreements entered into by REE before the Electricity Sector Law entered into force Law. Order of 17 December 1998 amending the Order of 29 December 1997, which develops certain aspects of Royal Decree 219 of 26 December 1997, which organises and regulates the electricity production market (Official State Gazette 28/12/98) This Order modifies the Order of 29 December 1997 afore mentioned, which develops certain aspects of Royal Decree 219/1997, by reducing the capacity payment for qualified consumers and simplifying its application. Order 14 July 1998, which establishes the legal regime applicable to external agents in order to enable intra- EU and international power exchanges (Official State Gazette 23/7/98) Order 14 July 1998, which establishes the legal regime applicable to external agents, their registration in the Register and the following matters: Form of participation in the electricity production market. Remuneration of sales and payment of purchases, including tolls. Regulation of physical bilateral contracts. Participation in technical constraints, both in the Spanish electricity system and in international tie-lines. Royal Decree 218 of 26 December 1997, which approved the Rules Governing Power Consumption and Transit Measuring Points (Official State Gazette 3/12/97) This Royal Decree and the Ministerial Order of 12 April 1997, which sets out complementary technical instructions, regulate the operating conditions of the measurement system on the basis of which settlements for energy and related services will be made and the equipment forming a part of the system, from both an administrative and a technical standpoint. The Royal Decree basically stated the general characteristics of the equipment and the associated communications systems and protocols, as well as the treatment of information. The Ministerial Order sets out the principles in accordance with which boundaries between electricity activities and measurement points will be determined, as well as required technical aspects and conditions relating to equipment, transformers and metering apparatus, data transmission, principal and secondary concentrators, etc. Royal Decree 385 of 28 April 22, which modifies Royal Decree 218 of 26 December 1997, which approved the Rules Governing Power Consumption and Transit Measuring Points (Official State Gazette 14/5/2) This Royal Decree modifies the Royal Decree 218/1997 and envisages a new, but still unpublished, Ministerial Order, that will develop its content and modify the content of the Order dated 12 April Royal Decree 1433, of 27 December 22, which stablishes the metering requirements for low voltage consumers and electricity installations under Special Regime (Official State Gazette 31/12/2) This Decree completes the contents of the aforementioned Decrees (218/1997 and 385/22), facilitating full deregulation and making it possible for low voltage consumers who do not possess hourly meters to access the market. In section 3.8 of the following chapter, certain aspects of this Royal Decree will be analysed. Resolutions of 3 December 22, 26 December 23 and 28 December 24 from the Office of Energy and Mining Policy, which approves the applicable consumption profile and the calculation method regarding energy settlement for those type 4 and type 5 consumers who do not have an hourly meter (Official State Gazette 1/1/3, 3/12/3 and 3/12/4) In an annex it includes the initial profiles for each category of consumer in 23, 24 and 25 respectively. Resolution of 3 December 22 from the Office of Energy and Mining Policy, which approves the transitory procedure on the calculation of the applicable 212

34 access tariff in force, based on the measurement data taken from the existing equipment for the type 4 measuring point (Official State Gazette 1/1/3) Royal Decree 1164, of 26 October 21, which sets out access tariffs to the electricity transmission and distribution networks (Official State Gazette 8/11/1) Royal Decree 282, of 23 December 1998, which sets out access tariffs, and was superseded by Royal Decree 1164/21, set high voltage tariffs with a two-tier structure, consisting of a fixed part and a variable part in each of the six tariff periods into which the 876 hours per year can be divided. This structure made it possible to apply the access tariffs for large consumers; for low voltage consumers, the existing tariff structure was maintained. This Royal Decree sets out a simple structure to permit the application of access tariffs and, therefore, high voltage consumers whose consumption is less than 1 GWh can also claim the status of qualified consumer, a status that was acquired on 1 July 2. For low voltage consumers, who as of 1 January 23 will become qualified tariffs have been designed to suit their special nature. Royal Decree 1432, of 27 December 22, which sets out the approval or modification methodology for the average or reference electricity tariffs and modifies certain articles of Royal Decree 217, of 26 December 1997, which organizes and regulates the procedure for settling the costs of transmission, distribution and retailing, and permanent system costs, as well as costs of diversification and security of supply (Official State Gazette 31/12/2) As laid out in the Royal Decree, tariffs will increase at a rate below the forecasted inflation until 21, tending to decrease in the final years. The increases will never exceed the 2% inflation rate forecasted for the said period. This will benefit consumers by reducing rates in real terms relative to the evolution of prices. The average estimated increase for the current decade is 1.4%. When the application period ends for the new methodology, electricity tariffs will have fallen, in nominal terms, almost 1% below 1995 tariffs. The new methodology pretends to ensure macroeconomic stability, setting up a stable and predictable scenario for the electricity system, identifying its costs in a transparent, objective and non-discriminatory manner for consumers. Moreover, the new electricity system includes the nature of the essential and universal service, as defined by the European Union. At the same time this new system tries to provide a framework of predictability for the continuity of the investment processes already under way. The establishment of revising criteria related to circumstances beyond the control of market participants is the essential element of the new methodology, which ensures that the maximum limit of 2% is in line with macroeconomic stability. The variations used to calculate annual tariff increases or decreases, which will never exceed.6% over the 1.4% average, are set out in accordance with four variables: the evolution of demand; interest rates; the evolution of renewable energies and the prices of gas. It is forecasted that at the end of this period, a downward trend will result in comparison to the 1.4% average due to the evolution of system costs on income. Order ECO/2714/23 of 25 September, which implements Royal Decree 1432 of 27 December 22, in connection with the transfer and/or securitization of costs corresponding to imbalances in income obtained from activities regulated prior to 23 and the cost corresponding to revisions arising from extrapeninsular costs (Official State Gazette 3/1/3) 213

35 2. ELECTRICITY MARKET REGULATORY FRAMEWORK In the preceding Royal Decree (1432/22), a definition was provided of one of the cost components to be included in the calculation of the average or reference tariff; this was the cost corresponding to the imbalance of income obtained from activities regulated prior to 23 and the cost corresponding to revisions arising from extrapeninsular generation costs corresponding to the years 21 and 22. This order establishes the characteristics of the compensation rights for the two items indicated above; these rights will be recovered by their owners in subsequent years until 31 December 21. The annuity payment corresponding to each year, and in order to include it in the calculation of the corresponding tariff, is determined as the total annual constant quota payable for recovery on the aforementioned date, i.e. on 31 December 21, of the amount pending compensation as at 31 December in the previous year. The base value for the tariff imbalance, at 31 December 22, is provisionally established in the amount of 1,522,332.4 euros; the value corresponding to the revised extrapeninsular costs is calculated later. The applicable interest rate will be the three-month EURIBOR corresponding to the average price in November in the year prior to the year in which the tariff is to be calculated. The initial owners of these rights may totally or partially transfer the same to third parties, including the securitization funds corresponding to assets or entities with a similar function. Royal Decree 182 of 26 December 23, establishing the electricity tariff for 24 (Official State Gazette 27/12/3) In accordance with this Royal Decree, the electricity tariff will increase by 1.5% for domestic consumers and by 1.6% for industrial consumers in 24. The weighted average of regulated tariffs will increase by 1.54% with respect to 23, when the increase was 1.69 %. As regards the tariffs applicable to access to transport and distribution networks, these will be increased by 1.6%. Procedures have been made less restrictive for industrial consumers in terms of the authorisation of certain contract parameters relating to the application of the hourly electricity tariff and supplies with tariff complement determined on an hourly basis. A system is also established to foster more flexible application of interruptibility, in order for both the electricity system and consumers to benefit if this system must be applied. The prices for the rental of equipment remain unchanged with respect to the previous tariffs. As regards supply, connection and verification rights, these have been modified in accordance with the average variation in sale tariffs and have been increased by 1.54%. The prices of electricity sold from production installations under the special regime vary, depending on the system that they avail themselves of, as follows: Installations availing themselves of the new regime established in Royal Decree 2818, of 23 December 1998: their prices are maintained because a new method for fixing prices and premiums is about to be introduced that will make it easier to forecast their evolution. Installations availing themselves of Royal Decree 2366, of 9 December 1994: the tariffs are modified in accordance with the average variation in tariffs. Moreover, one item amounting to fifty million euros has been entered, which corresponds to the implementation of plans to improve the quality of the service under a co-financing system with the Autonomous Regional Communities and another item amounting to ten million euros corresponding to national programmes designed to provide demand management incentives for electricity companies, in collaboration with agents, to develop actions that improve the service rendered to users, and energy efficiency and saving. Royal Decree 2392/24 of 3 December establishing electricity tariffs for 25. (OSG 31/12/4) The Royal Decree provides for an average overall increase in tariffs of 1.71%, below the forecast rise in the inflation rate. The main features of the Royal Decree are as follows: Improved quality: A total of 8m will be set aside specifically to improve the quality of the electricity service in 25. This money will be introduced as a result of co-funding agreements signed with the autonomous regions and will be invested in distribution systems with a view to improving supply quality in areas where the service is inadequate. In 25 a total of 1m will also be invested in national demand management incentivisation schemes so that electricity companies, in conjunction with actors, can implement initiatives designed to improve energy saving and efficiency and the service they provide users. 214

36 Tariff calculation methodology: The methodology currently in force is used to provide objective and reliable estimates of variables impacting on price formation. The most important aspects of cost consideration taken into account are as follows: The cost of cleaner energy generation including the growth in production of installations under the special regime, which now represents 2.5% of the total energy supplied, an increase of 12.1% over 24 production levels. The possible impact on market prices caused by companies internalising the costs of the National CO2 Emissions Allocation Plan. The excess cost of remuneration outside the Iberian peninsula as a result of the new regulation specific to electricity systems on the islands and outwith the Iberian peninsula, set to culminate in the approval of the regulations scheduled for the first quarter of 25, and which will finally enable the effective deregulation of these systems in conditions equivalent to those in mainland Spain and Portugal. Tariffs for domestic consumers who have not exercised their right to change suppliers: Domestic tariffs rose by 1.74% in nominal terms. Low-voltage supply to industry and the service sector: Rates for low voltage supply to small industrial enterprises and the service sector have increased by 1.61% compared to 24. Tariffs for medium-sized and large enterprises have also risen in nominal terms by 1.61%. In addition, specific rates or rebates (hourly tariff or the interruptibility rebate) currently applying to large customers can now be applied to newly founded industries. Network access tariffs for consumers accessing the electricity market: Access charges for market consumers have risen by 1.71%. Moreover, reactive energy charges for non-domestic consumers have been reduced to more or less the same as those paid by tariff-paying consumers. Charges for capacity payment have been increased by 1.15% for the same purpose. Connection and meter rental charges: Prices for the rental of equipment remain unchanged, and connection, hook-up and checking charges have been amended in line with the average variation in sale tariffs, increasing by 1.71%. Special regime: Prices for electricity sold from production installations under the special regime vary as follows: Installations availing themselves of the regime established in Royal Decree 436/24: tariffs, prices and incentives are automatically updated in line with the average reference rate. Installations availing themselves of transitional provision 1 of Royal Decree 436/24, (Royal Decree 2366/1994 of December 9th): these prices are modified in line with the average variation in the tariffs with all rates being increased by 1.71%. Installations availing themselves of transitional provision 2 of Royal Decree 436/24, (Royal Decree 2818/1998 of December 23rd): these are amended in line with the average variation in the tariffs: 1.71%. In these cases the variation in the interest rate is also adapted in accordance with the variation in the EURIBOR over three months, with the November 24 rate being compared to the November 23 rate; the variation being.47%. The annual average variation of the fixed natural gas tariff for a typical consumer using 4 MT/year has been taken as the interannual variation in the gas price, the result being -5.11%. The annual average final hourly tariff in the production market for each group over the last twelve months has been calculated as the average of the monthly prices, each one weighted by the energy billed for under the special regime for each group. The estimated annual average final hourly tariff in the production market for 25 is.378/kwh. Royal Decree 217, of 26 December 1997, which sets out the organisation and regulation of the procedure for settling the costs of transmission, distribution and retailing according to established tariffs, the settlement of the permanent costs of the system and the cost of diversification and supply guarantee (Official State Gazette 27/12/97) The regulation and remuneration of the transmission and distribution activities are also dealt with in Royal Decree 2819 of 23 December 1998 (regulation of the transmission and distribution activities) and the Ministerial Order published on 14 June 1999 (remuneration of the distribution activity). This Ministerial Order establishes the remuneration of distributors for the former electricity sub-systems, as well as the basis for the remuneration of the distributors referred to in the eleventh transitory provision of the Electricity Sector Law and those incorporated subsequent to the effective date. The National Electricity System Commission circulars dated 17 February and 3 July 1998 also refer to this matter, and set out certain 215

37 2. ELECTRICITY MARKET REGULATORY FRAMEWORK detailed regulations for collections and revenues from charges established for specific purposes, as well as the collection of annual information regarding the settlement function for regulated costs and activities within the electricity system. Royal Decree 436, of 12 March 24, establishing the methodology for updating and systematising the legal and economic regime of reselling activity (Official State Gazette 27/3/4) The aim of this Royal Decree is to unify the regulations implementing Law 54/1997, which governs electric power production under the special regime, specifically in terms of the economic regime applicable to such installations. The Royal Decree defines a system that allows the installation owner to sell its production or surplus to a distributor and receive compensation in the form of a single regulated tariff for all the programming periods, and which is defined as a percentage of the average electricity tariff, or by selling its production or surpluses directly on the daily market, on the forward market or under a bilateral contract. In the case of bilateral contracts, the producer will receive the market price plus a bonus for participating in that market and a premium if the producer is entitled to receive the same for the specific installation in question. Through this provision it aims to make this system compatible with Directive 24/8/EC on cogeneration formats. The transitory provisions of this Royal Decree maintain the provisions established in Royal Decrees 2366/1994 and 2818/1998, mentioned previously; the term of the latter Royal Decree ends in 27. Royal Decree 2351, of 23 December 24, that modifies the procedure of resolution of technical constraints and other regulations of the electricity market, makes the following modifications to Royal Decree 436/24: To allow that the solar power plants can use in a limited form a support fuel when does not exist sufficient solar irradiation. To update the premiums of the co-generation facilities that use fueloil and waste so that it has a greater weight in its update of the gas price increment, to improve the operativity of the facilities in special regime. To increase, on the one hand, the premiums corresponding to the facilities types a.1 and a.2, of co-generation with fuel and in operation, to avoid its discrimination as opposed to the ones that use natural gas and, by another one, those of the group d.1, facilities of treatment and reduction of purines that are in operation, to make its yield possible. On the other hand, the period is postponed until the 1 of January of 26 so that the facilities of special regime do not begin to pay the cost of the deviations. Resolution of 25 February 23 of the General Directorate of Energy and Mining Policy, establishing deadlines for notification to the market operator of the surplus forecasts of specific installations under the special regime (Official State Gazette 13/3/3) This Resolution complements the provisions established in the preceding Royal Decree 841/22; it establishes that distributing companies must notify the Market Operator of the surplus forecasts for each programming period of which they have been informed by producers under the special regime included in article 1, sections 1 and 2, of the aforementioned Royal Decree 841/22. This information will be sent to the Market Operator before the end of the bid reception period of the corresponding daily market session and within the bid reception period of each of the sessions of the intraday market. Royal Decree 1955, of 1 December 2, which governs transmission, distribution, retailing and supply activities and the procedures for authorising electricity installations (Official State Gazette 27/12/) The aim of this Royal Decree is to develop the legal framework in which electricity sector activities must be developed, under the model established in Electricity Sector Law 54, of 27 November The planning of electricity transmission installations is regulated under Heading II of this Royal Decree; it takes into account the following objectives: Maintain an appropriate level of connection between production centres and points of supply. Guarantee consumers the security and quality of electricity supply at the lowest cost possible. Ensure compatibility with respect for the environment. Heading III develops the regulatory framework in which the distribution of electricity will be carried out. For this purpose, common 216

38 principles are established that guarantee their proper relationship with other electricity activities, determining the transit conditions of electricity through distribution networks, establishing sufficient equality among agents that perform these activities throughout the entire territory and establishing common conditions on an equal basis for all users of this energy. Criteria are also established for defining and delimiting the electricity transmission network. Heading IV establishes the conditions applicable to both generators and consumers for obtaining access to transmission and distribution networks, protecting the rest of consumer interests through the proper development and use of the transmission and distribution networks. Heading V refers to retailing operations, to the requirements for engaging in this activity and to qualified consumers. Heading VI focuses on electricity supply and its quality. The supply may be achieved through tariff-based supply contracts or by means of the free trading of energy and the corresponding network access contract, regulating the minimum requirement that these contracts must include. In terms of the quality of electricity supply, a series of representative level parameters are defined, which serve to establish suitable incentives and penalties applicable to electricity companies, in order to encourage the adequate quality levels. Heading VII introduces new aspects in terms of the regime governing the authorisation electricity installations, envisaging the possibility of authorising installations by means of a procedure that ensures concurrence. The procedures regulated under this Heading maintain the structure of those previously in force and established in Decree 2617, of 2 October 1966, which governs the authorisation of electricity installations, as well as in Decree 2619, of 2 October 1966, which implements the Regulations of Law 1, of 18 March 1966, which governs compulsory purchase and penalties in terms of electricity installations. Another aspect which required development, and which is covered under Heading VIII, concerns the different Registries established by Electricity Sector Law 54, of 27 November 1997, relating to electricity production installations, distributing and retailing activities and qualified consumers. Royal Decree 2351, of 23 December 24, modifies the procedure for solving technical constraints and other regulations of the electricity market, modifies article 17.2 of Royal Decree 1955/2 in order to obtain a greater flexibility in the distribution of the fixed annual amount for quality plans, in the Royal Decree that establishes the average or reference electricicity for each year, between the different kinds of zones urban, semiurban and rural. Royal Decree 1435, of 27 December 22, which regulates the basic conditions for contracts concerning energy acquisition and low voltage network access (Official State Gazette 31/12/2) The Royal Decree establishes basic measures to facilitate full deregulation of the electricity supply by 1 January 23. Specific criteria allows low voltage consumers to expedite the execution of contracts of access tariffs and energy acquisition, as well as changes in contract modes. In section 3.8 of the following chapter certain aspects of this Royal Decree will be analysed. Resolution on 3 December 22, from the Office of Energy and Mining Policy, which establishes the procedure on measuring estimates applicable to supplier changes (Official State Gazette 1/1/3) 217

39 2. ELECTRICITY MARKET REGULATORY FRAMEWORK This Resolution is a complementary regulation of the Royal Decree 1435/22 and both regulations make available the switching of supplier by consumers. Royal Decree 215, of 5 February 1999, which modifies Pension Scheme and Pension Fund Rules, Income Tax, Value Added Tax and other tax regulations (Official State Gazette 9/2/99) This legislation does not initially appear to be related to the electricity sector. Nevertheless, Article 3 contains the fifth additional provision to Royal Decree 242, of 18 December 1985, which establishes the obligation of companies and professionals to issue and deliver invoices. The additional provision refers exclusively to deliveries of electricity through the Market Operator. As a consequence the billing of purchase and sale transactions carried out through the organised market has been considerably simplified as OMEL now issues an invoice, on behalf of the market participants, for each seller (all sales made in the market) and an invoice for the purchaser (again for all purchases made). This avoids the need to cross the invoices of all sellers with all purchasers. Market information As regards the market, mention should be made of the regulation concerning the requesting of market information set out in the Directorate General for Energy's Resolution of July 14th 1998 regarding access to electricity market information in the possession of OMEL and Red Eléctrica de España, and in Circular 2/1999 of the National Electricity System Commission of February 16th. Article 28 of Royal Decree Act 6/2 of June 23rd concerning urgent measures to intensify competition in product and services markets relating to the publication of information by market and system operators, in its new draft contained in Royal Decree Act 5/25 of March 11th, should also be taken into account. The said article establishes that the market operator shall receive information from the entities defined in Article 9 of Act 54/1997 of November 27th that impacts on price formation in the organised markets within the Iberian Electricity Market, and is obliged to make this information immediately available online to all the participants in said market. Furthermore, the market operator must also publish the results of the matching procedures occurring within its jurisdiction. interconnections, information on the situation with regard to dams used to produce hydroelectricity as well as the results of the operational processes within its remit. The Ministry of Industry, Tourism and Trade's Directorate General for Energy and Mining Policy, at the suggestion of the National Energy Commission, will specify the factors and information considered relevant to price formation in the market as well as the procedure for communicating the same, and shall ensure that confidential information is not disclosed. These factors must be communicated to the Ministry of Industry, Tourism and Commerce and the National Energy Commission in the manner specified. Procedures for the technical operation of the system The procedures for the technical operation of the system approved to date are contained in the Resolutions of the State Secretariat, 3 July 1998, 28 December 1998, 25 February 1999, 24 July 1999, 1 March 2, 31 October 22 and 19 November 22, 12 February 24, 17 March 24, 2 July 24 and 11 February 25. These procedures refer to the following: Operation of the system. Forecast and coverage guarantee of demand. Operations programming. Technical management of international tie-lines. Calculation of transmission loses. Measures of operation in alert situations and emergency. Management of ancillary services. Operation of transmission network. Flow of technical information on the system. Valuation of the electrical measures. Universal codes for consumer border points. Safety and control equipment. For its part, the system operator shall publish on a regular basis forecasts for electricity demand, the net transmission capacity in the 218

40 2.4 Electricity Market Activity Rules Law 54/1997, Royal Decree 219/1997 and the Ministerial Orders of 29 December 1997, and 14 July 1998 mentioned above, establish the regulation and fundamental standards that are to govern the electricity production market; however, given its nature, this regulation is not sufficiently detailed for the daily operation of the market. In fact, in order to ensure the economic management aimed at the effective development of the market, both Law 54/1997 and Royal Decree 219/1997 stipulate that the Ministry of Economy must approved the rules and terms governing the operation and settlement of the production market, and to which the buyers and sellers in the market must expressly adhere by signing the corresponding contract of adherence. At the proposal of OMEL, the Market Activity Rules approved at the beginning of 1998 have undergone several modifications in order to reflect both adaptations to the new legislation that has been published and certain modifications to the initial draft that market experience has shown to be advisable. These Rules contain the procedures and general terms and conditions which are necessary for the effective development of the electricity production market, and specifically for the daily and intraday markets by the entities performing activities focused on the supply of electricity, and by qualified consumers, and, in particular, regarding: a) The definition, development and operation of the computer systems required to guarantee transparency in the transactions carried out in the electricity production market, which include: the submission of purchase and sale bids for electricity; the procedure for matching electricity purchase and sale bids in the daily and intraday markets; determining and providing the system operator with information regarding the results of matching the bids in the daily and intraday markets, and providing participants with information regarding their production and purchase units; determining and providing the system operator with the base daily operating schedule derived from matching in the daily market the bilateral contracts notified by the participants and the excess production of the self-producers; providing participants with information regarding their production and purchase units; and providing distributors with information regarding only their distribution network, aggregated for each of their electricity hubs defined and notified by the system operator. determining and providing the system operator with the final hourly schedule derived from each intraday market session; providing participants with information regarding their production and purchase units; and providing the distributors with information regarding only their distribution network, aggregated by each of their electricity hubs defined and notified by the system operator; determining and providing market participants and the system operator with the marginal price of electricity in the daily market and in the intraday sessions; determining the final prices of electricity and reporting them to the market participants and the system operator; the settlement and reporting of collections and payments which must be done in accordance with the final price of electricity; the procedure for calculating and accepting guarantees which must be given by purchasers in the electricity production market; publishing the aggregate supply and demand curves of the daily and intraday markets, with an explicit breakdown of each of the points included, as well as the modifications derived from the process of solving technical constraints, adding, in this case, the affected bilateral contracts; publishing commercial capacities and intra-community and international exchanges by border; publishing the results of power programs aggregated by participant and month in the electricity production market, one month after the last day of the month to which they refer; publishing monthly bids submitted by the participants in each of the daily and intraday markets, three months after the end of the month to which they refer; b) The terms of adherence to the Electricity Market Activity Rules. c) The procedure for revising the Market Activity Rules. The Rules in effect, with the exception of the modification referred to in the following paragraph, were approved by Resolution 5 April 21, from the State Secretariat of the Economy of Small and Medium Sized Businesses (State Official Gazette 2/4/1). 219

41 2. ELECTRICITY MARKET REGULATORY FRAMEWORK Resolution of February 14 was published by the State Secretariat of Energy, Industrial Development and Small and Medium Sized Businesses, which modifies Rule 23 of the Electricity Production Market (State Official Gazette 26/2/3), whose basic variations can be summarized as follows: Improving of the treatment of sellers and buyers concerning the valuation of energy bought and sold as regards the calculation of their payment obligations and, therefore, their guarantees and collection rights to be assigned. For both selling agents as well as buying agents the regulation of the guarantees associated with pending settlements that arise due to the lack of measurements. This circumstance requires that selling agents, which may be debtors in the market when unable to fulfill their production programs, as well as buying or external agents provides guarantees for planned deviations. For generators under ordinary and special regime, provision of a guarantee associated with the monthly collection, in the event that PLANNING PURSUIT Planning Executed Fulfillment Market 2 to 11 to degree access MW MW % % CCGT 14,8 8, Cogeneration 7,1 5, Wind power 13, 8, to 11 measurements are not available on the date of collection and payment. At the request of the CNE a complete review of the Market Operating Rules was conducted with the subsequent proposals being forwarded to the Ministry of Finance in January 23. resolution of technical restrictions and other regulatory standards pertaining to the electricity market, the Market Rules were reviewed and the amendments to the aforementioned Royal Decree 2351/24 incorporated along with certain specific adjustments relating to Royal Decree Act 6/2, Royal Decree 436/24, Royal Decree 1432/22 and Royal Decree 385/22 in addition to other improvements identified as desirable. The review proposal was submitted to the Ministry of Industry, Tourism and Trade on February 24th 25 for its approval. 2.5 Energy planning Article 4 of Electricity Sector Act 54/1997 sets out the general principles governing electricity planning, which shall be indicative except in the case of transmission installations. Chapter II of Title II (Articles 8 to 16) of Royal Decree 1955/2 on transmission, distribution, marketing and supply activities and authorisation procedures for electricity plants regulates the procedures for planning the electricity transmission network. Energy planning is mandatory for regulated activities (transmission and distribution) managing the basic infrastructures for energy development. This has clear impications in the market because it constitutes the market's physical support and guarantees free access to these networks. The planning phase represents an indicator for deregulated energy generation and is a decision-making tool at the service of government and sector companies. This type of planning encompasses the growth in demand and the need for coverage. The document "Planning of the Electricity and Gas Sectors: The Development of Transmission Networks ", published in October 22, details planning principles and objectives. The document provided for the updating of forecasts at least once every two years for the purposes of adjusting them in line with the demand identified and the emergence of new circumstances. The only update made to date is the addenda on energy supply in the Balearic Islands. According to available data energy generation planning has evolved as follows: As a result of the publication of the aforementioned Royal Decree 2351/24 of December 23rd amending the procedure for the 22

42 Addenda to the Planning document: Infrastructures for the power supply of the Balearic Islands On 5 December 23 the Council of Ministers approved the Addenda to the Planning Document of the Electricity and Gas Sectors in relation to the Power Supply Infrastructures of the Balearic Islands. The document "Planning of the electricity and gas sectors. Development of transport networks " reported the need, in the course of 23, for a detailed proposal of the optimum power supply solution for the Autonomous Regional Community of the Balearic Islands, incorporating the Balearic Islands-Peninsular Electricity System connection. The coverage of demand has been estimated under the premise that the Balearic Electricity System will be unified in 27 through the connection of the two Mallorca-Menorca and Ibiza-Formentera subsystems. The Peninsula-Balearic Islands interconnection will come into operation in 211, with the addition of 3 MW, and will be established through a monopolar link with the return line. The most viable option for connection with the Peninsula is established as the Vandellós 4 kv node. On the other side of Mallorca the future connection will be established through a 22 kv substation in Santa Ponsa, connected by underground cable. In line with the criteria established in the Planning of the Gas and Electricity Sectors, the unification of the Balearic Electricity System and the Peninsula-Mallorca Electricity Interconnection are classified as A- type Infrastructures, i.e. they are catalogued as infrastructures approved by the Binding Plan in its document of Energy saving and efficiency in Spain The strategy for energy saving and efficiency The Council of Ministers meeting held on November 28th 23 approved the Energy Saving and Efficiency Strategy for Spain (E4), the aim of which is to foster sustainable development through public funding aid compatible with the objective of achieving a balanced budget. From a methodological standpoint, the strategy has been based on the current economic, energy-related and environmental context and draws on the energy consumption forecasts of the base scenario, which have also served as a reference framework for the document "Planning of the Electricity and Gas Sectors" (the exception being that in this strategy the analysis period is extended until 212). The improvements arising from the measures envisaged in the Strategy give rise to the so-called efficiency scenario, designed to encompass the forecast development of energy consumption once the measures proposed in each of the sectors analysed have been implemented. The Strategy estimates a 7.2% reduction in energy intensity (energy consumption per product unit) and, as a result, energy savings for the years in question amounting to bn, equivalent to current crude oil imports in one year. These savings will be the result of both technological development and the measures adopted by government and production sectors to encourage energy saving. In turn, it aims to make this economic growth compatible with sustainable energy development, reducing CO2 emissions, promoting clean energies and fostering the diversification of energy sources. A fundamental aim of the Strategy is to contribute to the objectives of the Kyoto Protocol. Other instruments for achieving these objectives include the Renewable Energies Promotion Plan and the commitment to gas combined cycles in current network planning. The Strategy analyses the following sectors: industry (divided into eleven subsec- 221

43 2. ELECTRICITY MARKET REGULATORY FRAMEWORK tors), transport, building, household and office equipment, public services, energy transformation and agriculture and fisheries. It outlines the objectives set for each of these sectors, details the proposed measures and defines the instruments considered suitable, quantifying the energy costs and savings arising from them. The measures envisaged amount to overall investment of approximately 26.18bn for the entire period. Approximately 2.1bn of this total corresponds to public funding provided by the various levels of government. The remaining 24.98bn comes from private investment connected to the measures envisaged. The forecasts for improvement and savings potential in the energy sectors are given in the table on the previous page. In terms of the electricity market, it should be highlighted that apart from the specific measures for the different subsectors, the Strategy Document states that "the promotion of energy saving and efficiency is clearly reliant upon strengthening the energy markets, on making them as transparent as possible", and that one of the most positive measures for improving energy efficiency involves "bringing about the complete deregulation of electricity and gas supply, which will help send the price signal to consumers, enabling them to manage demand more efficiently". The electricity market provides suitable price signals, with much higher prices in peak hours of consumption than at other times. However, these signals may not be reaching domestic consumers and PYMEs correctly. The following observation, made at the end of section 4.1 of the chapter on "Household and Office Equipment" is therefore extremely interesting: "Lastly, it must be stressed that improved energy efficiency also depends on more effective participation of the demand side in the electricity market. In this sense, the implementation of demand management programmes targeted at the least flexible sectors in terms of energy prices is recommendable. This will improve price formation based on opportunities for shifting consumption to other hours and provide incentives for the purchase of more efficient equipment. This objective will facilitate the start-up of energy saving and efficiency plans and specific demand management programmes. In turn, these plans will enable consumers to participate in the modulation of the load curve - economically and environmentally advantageous for the whole system - by shifting consumption to low or off-peak hourly periods of demand in which there is a smaller burden on power plants that are less energy efficient." Directive 22/91/EC of the European Parliament and of the Council of December 16th 22 on the energy performance of buildings (OJ 4/1/3) The Directive on the energy performance of buildings, which Member States must incorporate into their domestic legislation before 26, provides for regulations on the construction of buildings throughout Europe that lead to a significant reduction in energy consumption, without higher additional costs, at the same time as increasing user comfort considerably. These measures form an essential part of the European Union's strategy to meet its obligations under the Kyoto Protocol. The main aspects of the aforementioned Directive are as follows: A common methodology for calculating the energy performance of a building that takes into account local climate conditions will be applied throughout the EU. Member States will lay down minimum standards on the energy performance of new buildings and existing large buildings that are subject to major renovation. A building certification system will make energy consumption levels much more visible for homeowners, tenants and users alike. Boilers and air-conditioning systems over a certain size will be inspected on a regular basis to check their energy performance and greenhouse gas emissions. The application of these measures will probably lead to savings of more than one fifth of current energy consumption between now and 21 in buildings targeted by the directive. As regards the transposition of the Directive to Spanish legislation, the draft versions of the Technical Building Code in the new Regulation on Heating Facilities in Buildings and the Building Energy Certification Regulations are nearing completion and must be approved before the end of 25. Proposal for a Directive of the European Parliament and of the Council on energy end-use efficiency and energy services (COM/23/739 final) In accordance with the Commission's proposal, which seeks to promote energy efficiency measures and develop the market for energy services, Member States are called upon to adopt the following: A general end-use savings target of 1% per year. This is 1% of the average amount of energy distributed or sold to final customers the previous five years. These savings will have to be registered from 222

44 the following sectors: households, agriculture, commercial and public sectors, transport and industry. All types of energy will be taken into account from electricity to natural gas to district heating and cooling, heating fuel, coal and lignite, forestry and agricultural energy products and transport fuels. A demand-side sectoral target. Member State public sectors would make a particular contribution to reaching this overall target as they would need to save at least 1.5% energy a year, notably thanks to energy efficient public trading. This savings would also contribute to the general yearly savings target of 1%. A supply-side obligation on the sale of energy services. Energy distributors and/or retail supply companies would have to integrate energy services into their distribution and sales of energy until a 5 % share of their customers has been covered. Alternatively, energy audits would be offered. Member States may reach their 1 percent annual target by establishing new measures or by measuring the continued impact of energy services and efficiency measures adopted beforehand. To help Member States achieve these targets and obligations and to make sure that progress can be monitored, the draft Directive sets up a harmonised framework through common definitions, tools and methodology. In this context, Member States are required to: have a system for the qualification, certification or accreditation of energy service providers, and to mutually recognise those certificates; amend or remove legislation that restricts the use of financial instruments for energy savings such as third party financing and energy performance contracting; remove incentives to increase the volume of transmitted energy and ensure that reasonable cost recovery can be allowed for in certain energy efficiency investments made by distribution companies in their customers' facilities; ensure the availability of independent and high-quality energy audit schemes; ensure that meters and systems measure actual energy consumption accurately and frequently; use energy efficiency funds targeted at subsidies, loans, securities and other types of funding to promote energy audits, the energy services market, improvements in metering and other energy efficiency measures. DIRECTIVE 23/87/EC ESTABLISHING A SCHEME FOR GREENHOUSE GAS EMISSION ALLOWANCE TRADING Emission allowances: From 1 January 25, owners of the activities encompassed that produce greenhouse gas emission related to such activity shall be required to hold an emission permit issued by the competent authorities to this effect. National Allocation Plan: Shall determine the total emission allowances foreseen for allocation for the period and the allocation procedure. It shall be based on objective, transparent criteria, and shall include a list of the installations encompassed by the Directive and the figures for the corresponding allowances. It shall also envisage allowances for new entrants. The Plan shall be published and reported to the Commission and Member States with eighteen months prior notice. Allocation method: It is established that for the three-year period beginning on 1 January 25, at least 95% of the allowances shall be allocated free of charge for at least, and for the five-year period beginning on 1 January 28, at least 9% of the allowances are free of charge. Agreements with third countries: Agreements may be entered into with third countries with emission allowance trade regimes provided such countries have ratified the Kyoto Protocol and in accordance with the stipulations set out in Article 2 of the Treaty. Registries: The Member States shall provide for the establishment and maintenance of a registry in order to ensure the accurate accounting of the issue, holding, transfer and cancellation of the emission allowances. Central Administrator: The Commission shall designate a Central Administrator, who shall maintain an independent transaction log recording the issue, transfer and cancellation of allowances. 223

45 2. ELECTRICITY MARKET REGULATORY FRAMEWORK 2.7 The Kyoto Protocol With regard to EU regulations, the progress made on environmental protection in line with the Kyoto Protocol should be highlighted. The Protocol impacts deeply on the electricity industry as it is a key sector among those listed in Annex I of Directive 23/87/EC of October 13th 23 establishing a scheme for greenhouse gas emission allowance trading within the Community. The most important aspects of Directive 23/87/EC and the principles governing its application, published by the Commission in COM (23) 83 final, are summarised below. In 24, the European Union finalised Directive 23/87/EC of October 13th 23 by adding two important provisions: Decision 28/24/EC of the European Parliament and of the Council of February 11th 24 concerning a mechanism for monitoring Community greenhouse gas emissions and for implementing the Kyoto Protocol. The aim of this Decision is to assess the progress made in complying with emissions-related commitments on sources and removals by sinks, and to implement the Kyoto Protocol in national programmes, gas inventories, national systems and registries of the Community and its Member States. Regulation 2216/24/EC of December 21st 24 for a standardised and secure system of registries pursuant to Directive 23/87/EC and Decision 28/24/EC. Regulation 2216/24 lays down general provisions, functional and technical specifications and operational and maintenance requirements concerning the standardised and secure registries system, consisting of registries in the form of standardised electronic databases containing common data elements, and the Community independent transaction log. It also provides for an efficient communication system between the Community independent transaction log and the UNFCCC independent transaction log. Guidance to assist Member States in the implementation of the criteria listed in Annex III of Directive 23/87/EC concerning the establishment of a scheme for greenhouse gas emission allowance trading in the Community and amending Council Directive 96/61EC, and on the circumstances under which force majeure is demonstrated (7/1/24). These regulations are necessary for the proper enlargement of the individual allocation of emission allowances that Member States have been implementing since 24 and the creation of the necessary registries to implement a scheme for greenhouse gas emission allowance trading. Directive 23/87/EC of October 13th was transposed by virtue of Act 1/25 of March 9th regulating the scheme for greenhouse gas emission allowance trading (OSG 1/3/25), previously published as Royal Decree Act 5/24 of August 27th. Its objective is to contribute to reducing emissions causing climate change in compliance with Spain's commitment to the Kyoto Protocol. The Royal Decree Act responds to the pressing need to comply with the EC Directive's implementation schedule which requires that installations falling within its remit have a greenhouse gas emissions permit before January 1st 25, and that the National Emission Allowance Registry is operational by October 1st 24. The emission allowance trading scheme shall initially apply to carbon dioxide emissions from installations conducting activities framed within the Directive such as: electricity generation, and the refining, production and processing of iron and steel, cement, lime, glass, tiles, paper and card. Chapter I provides for the creation of a cross-departmental committee to coordinate policies on climate change. The Committee will act as a national authority approving the clean development and joint implementation mechanisms detailed in the Kyoto Protocol. It will be made up of representatives from the Spanish president's Office of Finance and the Ministries of Foreign Affairs, the Treasury, Environment and Industry, and Commerce and Tourism, and will be chaired by the Environment Ministry's Secretary General for the Prevention of Pollution and Climate Change. Chapter II regulates the greenhouse gas emission permit scheme by virtue of which all installations falling within the remit of the Royal Decree Act must have a greenhouse gas emissions permit by January 1st 25, issued by the authority appointed by the autonomous government of the region in question. Chapter III details the scheme applicable to permits for the pooling of installations, establishing that installations devoted to the same activity must respond to the legal liability to surrender allowances jointly, provided that the impact of pooling on the internal market does not lead to distortions of competition. Chapter IV defines the nature and contents of the National Allocation Plan in addition to its approval procedure. 224

46 The National Allocation Plan is a central plank in the Community's emission allowance trading system. It constitutes the reference framework - effective only for each of the three- and five-year periods laid down in the Directive - in which the total number of emission allowances allocated in each period is specified along with the bases for the individual allocation of allowances to all installations prior to the international market coming into being. This market will be of vital importance to economic sectors such as industry and electricity. Chapter V outlines the emission allowance regulatory scheme, and defines it as the transferable subjective allowance that permits the holder to emit into the atmosphere one ton of carbon dioxide equivalent from an installation covered by this Royal Decree Act. Chapter VI regulates the information-related obligations of the installation owners, who are required to implement and maintain the greenhouse gas emissions monitoring system in accordance with the provisions set out on the emissions permit. They are also required to submit a report on the previous year's greenhouse gas emissions to the competent regional government authority before February28th. Chapter VII provides for the creation of the National Emissions Allowance Registry. All operations relating to the issue, holding, transmission, transfer, surrender, removal and cancellation of emission allowances must be recorded in this registry, which is used to ensure that auditing of these allowances is kept up to date at all times. This publicly accessible registry will be assigned to the Environment Ministry and will be overseen by the Central Administrator nominated by the European Commission. The Government and the autonomous regions will set up a "onestop shop" to allow installations to present joint applications for emission permits and emission allowances for future National Allocation Plans. All allowances to be allocated under the National Allocation Plan will be issued and registered in the State Government's holding account before February 28th of the first year in which each Plan is in force. The allowances corresponding to the operators of each installation in accordance with the temporary allocation set forth in the Plan will be transferred from the Registry to their account. Allowances allocated to new entrants will be transferred when the regional government in question records in the Registry that the new installation has begun operating. The holder can request the cancellation of allowances at any time. In all cases, at the end of the four-month period following the completion of the National Plan the emission allowances valid for that period automatically expire. The penalty scheme is outlined in chapter VIII and describes very serious, serious and minor infringements. Very serious infringements will be penalised with fines of up to 2m and the closure of the installation unless the operator remedies the problem. These fines will be imposed by regional governments except in those cases where the breach involves deliberate withholding of information required to allocate allowances or the failure to comply with the requirement to surrender emission allowances, in which cases fines will be imposed by the Spanish Council of Ministers. Installations exceeding their emission allowances, either allocated free of charge or purchased on the market, must pay 4 for each extra ton emitted in the period and 1 for each extra ton emitted in the period Royal Decree 1866/24 of September 6th approving the National Emission Allowance Allocation Plan (OSG 7/9/4) was subsequently published. The National Plan lays the foundations for the individual allocation of allowances to all installations prior to the European Market coming into operation on January 1st 25. In accordance with Annex I of the European Directive and the Royal Decree Act, in the emission allowance trading scheme will apply to CO2 emissions from installations conducting the following 225

47 2. ELECTRICITY MARKET REGULATORY FRAMEWORK activities: electricity generation, and the refining, production and processing of iron and steel, cement, lime, glass, tiles, paper and card. The target set by the government is for emissions in Spain to stabilise in at the average for the last three years in which official records were kept (2-22), with an additional increase of 3.5% in CO2 emissions in sectors affected by the Directive for new entrants. The additional work required to comply with Kyoto and the Directive must be carried out in At the end of this period emissions must not exceed 24% more than 199 levels. This percentage has been calculated by adding the Kyoto limit (15%) to the forecast for removals by sinks (a maximum of 2%) and the credits available on the international market (7%). For this purpose the National Emission Allowance Allocation Plan proposes sharing the workload in bringing about this reduction between the sectors listed in the Directive and those that are not (transport, housing, etc.) based on their corresponding share in the country's overall emissions - 4 and 6% respectively. As regards overall emissions in Spain, the target is an annual average of 4.7 million ton of CO2, a reduction of.2% on 22 levels (41.34 million ton of CO2/year). The National Allowance Allocation Plan also lays down the methodology for individual allocations to each installation, both for existing ones for new entrants joining the system in On December 27th 24, the European Commission's "college" of commissioners adopted the Decision approving the National Allocation Plan for Spain following its submission. An objection was raised, however, concerning the definition of combustion installation given in the Royal Decree Act, with the Spanish authorities urged to take the relevant steps to include all combustion plants with a rated thermal input of over 2 MW. Furthermore, the Commission's Decision states that "the National Allocation Plan can be amended if the amendment involves changing the allowances allocated to certain installations within the overall quota that must be allocated to the installations detailed in the Plan as a result of improved data quality." The Spanish Government subsequently made the requisite adjustments by publishing Royal Decree 6/25 of January 21st amending Royal Decree 1866/24 of September 6th approving the National Emission Allowance Allocation Plan (OSG 22/1/25), and conducted the definitive individualised allocation of emission allowances for installations covered by Royal Decree Act of August 27th 24 published in the Resolution of January 26th 25, of the Junior Ministry, stipulating the publication of the Agreement of the Spanish Council of Ministers of January 21st 25, approving the individual allocation of emission allowances to installations covered by Royal Decree Act 5/24 of August 27th regulating the greenhouse gas emissions allowance trading scheme (OSG 28/1/25). The main changes can be summarised as follows: Overall allocated amounts are maintained but the allocation to existing installations has been increased, an increase that is subtracted from an equivalent amount of new entrants reserves. The reasoning behind this is that new entrants reserves are considered sufficient to deal with any increases in capacity occurring during the period. Unbundling of industrial sector reserves is abolished, and three groups set up: one for public electricity generation, another for industrial sectors included in Annex I of Directive I, and a third for cogeneration plants and hybrid installations supplying sectors not included in Annex I. "Hybrid installations" with particular specifications are included. These are installations that partly operate as combined cycle plants generating electricity, and partly as cogeneration plants providing steam power to industrial facilities, and which began operating after the reference period. The allocation to electric power plants is amended and full allocation maintained. In response to the declarations made, figures relating to the demand for peninsular coal-fired and combined-cycle electricity used in the calculation have been brought into line with more realistic production levels. The historic emissions calculated in the applications submitted by the companies and the effect of desulphurisation installations on them have also been taken into account. As far as plants using waste as regular fuel are concerned, the characteristics of these fuels and their relation to the Directive on emission allowances have been studied in detail. It was found that these plants are not covered and as a result allowances have not been allocated to them. The total number of combined cycle plants set to begin operating in has also been assessed, as some installations categorised as being new were already operating in 24. This latest assessment revealed that a reserve of approximately 1 MT CO2/year could be sufficient for new entrants. Finally, in order to reduce the penalty produced by the formula used in the individual coal-plant distribution of the allowances allocated to all coal plants on the Iberian peninsula, a limit has been set at plants with higher specific emission factors, with the result that the minimum allocation can be no lower than 55% of historic emissions (2-22). 226

48 There has been an increase in the number of facilities included (957 as opposed to the 926 forecast provisionally). There are two main reasons behind this increase: Some facilities once categorised as new entrants are now considered as existing plants. A number of allowance allocation applications were overlooked in the preliminary allocation phase, either because they were submitted to the autonomous regional governments instead of central government or because of errors in handling the applications. Royal Decree Act 5/25 of March 11th provides for some amendments to Act 1/25 of March 9th concerning information on holding, transmission, control, updating and registration in the emission allowances registry. Furthermore, at the suggestion of the Ministers of the Treasury, Industry Commerce and Tourism, and the Environment, it entrusts the Government with amending the National Emission Allowance Allocation Plan in order to define the additional amount of allowances corresponding to installations with a rated thermal input of over 2 MW and not considered in the previous individual allocation phase, and which was the subject of the Decision adopted by the European Commission on December 27th last year regarding the National Allocation Plan for Spain, which demanded the inclusion of these installations. 2.8 White Paper on the Energy Sector and measures to promote productivity White Paper In October 24, the Ministry of Industry, Commerce and Tourism stated that after seven years in force certain aspects of Act 54/1997 regulating the generating of electricity in Spain generated doubts as to whether objectives on securing a quality supply at competitive prices were being met. With a view to initiating a participative process to generate reform proposals aimed at improving quality and the security of supply and promoting effective competition in the market, the Ministry began drafting a white paper on reform of the regulatory framework of the Spanish electricity generation industry, appointing José Ignacio Pérez Arriaga, a professor of electrical engineering, to oversee the process. The purpose of the White Paper is to analyse the electricity generation industry and to suggest proposals on a series of aspects related to security of supply, prices, how the market operates, and its impact on the environment. The main task involves meeting all the economic and social actors involved: Government, business operators, consumers' associations, institutions forming part of the electricity system, external actors and institutions, unions, and experts in the electricity industry. Following the analyses, the White Paper should put forward a series of proposals on the following areas: Meeting demand in the medium-term: planning the supply, coverage rate and the diversification of sources. Incentives for guaranteeing necessary power levels. Siting of new electric power plants; compatibility between energy, territorial and environmental criteria. Design of the transmission system: adaptation to supply and the efficiency of the system. Size and the management system of international connections. Level of effective competition: organisation of the industry and market operating rules. Reduction of barriers to new entrants. The price formation process: internalisation of environmental costs, competition transition charges in relation to initial objectives, effects of vertical integration. Organisation of the wholesale market: daily, forward, financial. Contribution of renewable energy sources to electricity generation: energy objectives, costs and promotional systems. Institutional framework for regulating and monitoring the generation market. In March 25, once the preliminary draft of the White Paper was completed, an open forum was organised to reveal the scope and the key aspects of the project in addition to the most representative viewpoints of the participants involved. The issues analysed and debated were divided into the following six areas: "Stranded costs". The energy model. The Iberian Electricity Market. 227

49 2. ELECTRICITY MARKET REGULATORY FRAMEWORK Horizontal mergers. Guarantee of supply. Tariffs and the retail market. The White Paper on the reform of the Spanish electricity generation industry's regulatory framework and its conclusions are scheduled for completion and publication in June 25. Measures to promote productivity The Spanish Council of Ministers meeting held on February 25th 25 approved the implementation of the plan to revitalise the economy, a plan comprising a broad range of economic reforms designed to increase productivity and employment and which will be introduced gradually throughout the term of office. The go-ahead was given to an initial package of a hundred measures comprising the preliminary drafts of a bill regulating venture capital firms and their management companies, of a reform bill promoting productivity, and of a tax reform bill promoting productivity, in addition to a Spanish Council of Ministers' agreement on mandates for ministerial departments to promote productivity, and a Royal Decree Act for urgent reforms to promote productivity and improve public trading, which was approved on March 11th as the aforementioned Royal Decree Act 5/25 (OSG 14/3/5). This revitalisation plan will be complemented by the business promotion scheme, tax reform, reform of the labour market - the result of dialogue with social actors - and the consolidation of budgetary stability. The revitalisation plan will see the Government operate in five specific areas: antitrust, product and services markets, factor markets, Research & Development & Innovation, and the quality and effectiveness of public finance, the regulatory framework and transparency. Irrespective of the above-mentioned measures in the foregoing Royal Decree Act, the mandates contained in the aforementioned Spanish Council of Ministers' agreement (Resolution of 1 April 25, of the Sub secretariat, which stipulates the publication of the Resolution of the Council of Ministers of 25 February 25, in which the mandates are established to set in motion the measures aimed at fuelling productivity, BOE 2/4/25) specify a timetable enabling the monitoring and assessment of the measures to be implemented in the coming months. Those relating to the electricity market are summarised below: Laying down of the requirement that guarantees must be submitted in order to process permits for the construction of generating plants: the process involves developers of new generating plants submitting a guarantee in conjunction with the permit application for the new installation. The guarantee will be returned when the plant permit is awarded. The aim is to prevent a large number of permit applications being received for new generating plants where the safety of the construction is in question. This uncertainty concerning the new capacity to be installed and its location is detrimental to forecasting the coverage of demand and network planning. Specification of the information distributors must provide with a view to setting up a more efficient remuneration system: the aim here is to obtain information that allows a method for calculating remunerations to be determined and to set the amount to be paid by each entity in line with the following criteria: costs pertaining to investment, operating and maintaining installations, the energy distributed, the model covering the distribution areas, incentives for supply quality and reducing losses, in addition to other costs vital to the provision of energy services. Improvement in the efficiency of renewable energies Creation of a working group charged with drafting a document on plants treating electricity produced by purines, in order to rationalise the distribution of non energy-related costs: The general scheme set out in Royal Decree 436/24 of March 12th establishes that the additional cost of promoting the energy savings provided by these types of electricity generation can only be supported by increasing electricity tariffs. This involves assessing how costs not strictly related to energy issues should be taken into consideration, such as environmental aspects or, where appropriate, the promotion of a certain type of livestock farm. Drafting of a regulated procedure for the establishment of electric power plants located within the territorial and maritime boundaries of Spain and Portugal: There are currently a number of offshore wind farm installation projects that cannot be implemented due to the lack of specific procedures. Nevertheless, offshore installations have tremendous latent potential for the development of renewable energies. Furthermore, unlike onshore wind farms, the advantage of these installations is that production is easier to forecast. It is highly likely, therefore, that they will be tendered on the production market, thereby increasing the number of bidders and enhancing market competitiveness. 228

50 Rationalisation of incentives for cogeneration plants with capacity of over 5 MW: The size of the installations is a factor taken into consideration when calculating incentives and bonuses installations and cogeneration plants. However, an automatic incentive equal to all installations has been set for plants with an instaled power capacity of over 5 MW, irrespective of the installation specifications. Consequently some installations may secure excessive profits while others only insufficient ones. The measure being proposed will look at this issue and the means of rationalising it. Specification of the limits imposed on dominant operators when acting as agents selling special-regime installations: This proposal rounds off regulation of the sector, improving transparency and reducing uncertainty for the owners of special regime installations. Measures designed to make changing supplier easier. The proposal is to harmonise trading on the free-market, regulated in a series of specific measures to allow customers to move from the regulated to the free market, strengthening competition in the process. The proposal specifically involves: The installation of power control equipment: Distributors will be required to install power control equipment for all consumers who do not have it. Reactive energy billing: Reactive energy billing in the regulated and deregulated systems is to be reviewed to remove any distorsions between the two. Obligation on the part of distributors to make information on the point of consumption available online to all customers including trading companies: The provision of more information to consumers on the energy they consume will allow trading companies to offer better services to them. Study of the electricity system costs attributable to each type of tariff and charge: The objective is to prevent cross-subsidies between different tariff groups and thus avoid the need for tariff arbitration, which hampers the changing of suppliers. Mandate to the National Energy Commission for it to propose, within a period of six months, a methodology for setting access charges that cover costs associated with network usage: The creation of such a methodology would ensure that the access charge effectively covers network usage costs. In turn this would lead to greater harmonisation between the free and regulated markets across a range of specific aspects, thus opening the way for customers to switch from the regulated to the deregulated market. Mandate to the National Energy Commission for it to put forward, within a period of one year, a proposal for updating and amending legislation regulating electricity metering: The objective is to adapt electricity metering regulations to the planned amendments to reduce uncertainty and make regulations easier for consumers and operators to understand. Mandates facilitating the start-up of the Iberian Electricity Market Amendment of the Ministerial Order regarding capacity payment, extending capacity payments to generating units entering into a bilateral contract: This measure seeks to balance out trading conditions in the regulated production market and bilateral trading, as few bilateral contracts have been signed to date due to the fact that the production units signing them are not entitled to receive capacity payment. The drafting by October 25 of a procedure overseeing crossborder exchanges in electricity within the scope of the Iberian Electricity Market and which must be objective, transparent and compatible with Regulation 1228/23/EC of June 26th concerning conditions of access to the network for cross-border exchanges in electricity, directly applicable in the Member States: Improved management of cross-border exchanges means they can be used more effectively and allows the optimisation of commercial transactions involving exchanges in electricity between both countries. This leads to competition in the market and, subsequently, the rationalisation of electricity sector costs. Extension of the high-voltage tariff until 21 (appears in the Draft Law on reforms to fuel productivity). The high-voltage supply tariff, originally due to be phased out in 27, shall be extended until January 1st 21 so as to permit a smoother transition of major consumers to the deregulated market. 2.9 Functions of OMEL The Electricity Sector Law 54, of 27 November 1997, and Royal Decree 219, of 26 December 1997, which govern the organisation and regulation of the electricity production market, entrust functions to Compañia Operadora del Mercado Español de Electricidad, S.A., which can be classified as follows: 229

51 2. ELECTRICITY MARKET REGULATORY FRAMEWORK a) Functions relating to the operation of the markets Assume the functions required to perform the economic management required in order to ensure the effective development of the electricity production market. Receive sale bids issued for each scheduling period by the owners of electricity production units, by retailers and by production aggregators representing special regime producers. Receive and accept power purchase bids and, where appropriated, any guarantees. Match sale and purchase bids. Provide the system operator with information regarding results of the matched bids in the daily and intraday markets, the scheduling of network access as a result of those matches, and the marginal power price; and notify participants of the information regarding their production and purchase units. Receive from the system operator any information regarding modifications made to matching due to technical constraints or exceptional situations in the transmission network or, where appropriate, the distribution network. Determine final energy prices for each scheduling period and report these prices to all the participants involved. Settle and report the payments and collections to be carried out in accordance with the final energy price resulting from the real operation of the production units, the availability of production units in each scheduling period and any other cost that may be determined in accordance with existing regulations. Receive information on producers who have contacted the system operator, in order to ensure that the latter confirms any incidents that may warrant an exemption from bidding. Define, develop and operate the computer systems required to guarantee the operation and transparency of transactions performed on the electricity production market. b) Functions relating to the island and extrapeninsular systems Receive from the system operator details of the hourly cost, hourly availability and hourly power generated by each group, as well as the hourly demands of distributors and consumer resellers, accordingly. The determination and publication of the final hourly price for generated electricity in each SEIE of power production and communication of the same to all the agents involved. The settlement and communication of payments and collections that must be made according to the final electricity price resulting from each system, the effective operation of the production units, the availability of production units in each programming period and other costs specified in applicable regulations. To inform publicly of the evolution of final generation prices in each SEIE with the frequency that is deemed appropriate. To manage the guarantees of agents involved in each SEIE for electricity purchases and sales in accordance with the provisions established in applicable regulations. c) Functions relating to additional information or information on other transactions that is required for scheduling purposes Receive information on production forecasts for each scheduling period from power producers operating under special regime. Receive information on production forecasts made by each production unit (when this includes more than one physical unit), corresponding to matched bids and supplies to be made in each of the system connection nodes, in order to meet accepted demands. d) Functions relating to information on other deregulated transactions Receive contract information from signers of physical bilateral contracts, with indications of the time periods in which the contracts will be performed. 23

52 Receive details of any contractual information from signers of other types of contracts, in accordance with existing regulations. e) Functions relating to Market Activity Rules and the Contract of Adherence Present the Electricity Market Activity Rules to the Ministry of Economy for approval. Submission of modifications to the Rules and of the Contract of Adherence for Ministerial approval. Require market participants to show their compliance with the rules governing their duties as market participants. f) Functions relating to information to be provided to market participants Regarding the results of the matching, providing participants with the information concerning their production and purchase units. Regarding the base daily operating schedule, providing participants with the information relative to their production and purchase units, and providing distributors with information concerning only their distribution network, aggregated for each of their electricity hubs defined and notified by the system operator. Regarding the final schedule derived from each intraday market session, providing participants with information relative to production and purchase units; an providing the distributors with information concerning only their distribution network, aggregated by each of their electricity hubs defined and notified by the system operator. Providing market participants with the marginal price of electricity in the daily market and in the intraday market sessions, as well as the final prices of electricity. Notifying the participants of the collections and payments that must be done in accordance with the final price of electricity. g) Functions relating to information given to third parties Publish the aggregate supply and demand curves of the daily and intraday markets, with an explicit breakdown of each of the points included, as well as the modifications derived from the process of solving technical constraints, adding, in this case, the affected bilateral contracts. Publish the commercial capacities and intra-community and international exchanges by border. Publish the results of the power programs aggregated by participant and month in the electricity production market, one month after the last day of the month to which they refer. Publish monthly the bids submitted by the participants in each of the daily and intraday markets, three months after the end of the month to which they refer. Publish information on market developments with the frequency required in each case. Publish, in domestic mass media, information that is deemed to be public and of general interest. h) Functions relating to the principles of independence, transparency and objectivity Adopt any measure and agreements that may be necessary in order to ensure effective compliance with the limitations on direct or indirect capital stock holdings in the Company, including via purchases of stock, obligatory for the affected party, of the capital stock that constitutes a breach of this legal requirement. Prepare and publish the market operator's code of conduct. Notify the competent authority of any behaviour exhibited by the market participants that may disrupt the proper operation of the market. Guarantee the confidentiality of any confidential information made available by market participants, in accordance with applicable regulations. 231

53 2. ELECTRICITY MARKET REGULATORY FRAMEWORK i) Functions relating to short and medium term forecasts Forecast, in the short and medium term and in co-ordination with the system operator, the use of production equipment, and particularly the use of hydroelectric reserves, in accordance with demand forecasts, the availability of power equipment and the different conditions of hydraulicity that may arise during the forecast period. j) Information envisaged in article 3.6 of Directive 23/54/EC on common rules for the internal electricity market The transposition of this Directive requires, in terms of the electricity negotiated through the organised market and importable through companies positioned outside the Community, the use of accumulated figures facilitated in the year, in the previous year, so that the factors indicate the contribution of each energy source to the global mix of fuels of the aforementioned amount of negotiated power. k) Amendments deriving from Royal Decree Act 5/25 Royal Decree Act 5/25 of March 11th concerning urgent reforms promoting productivity and the improvement of public trading introduces certain amendments to the functions of the market operator and the system operator, particularly with regard to the settlement of transactions conducted in some of the markets. Consequently, the list of functions provided will be subject to change from 25 onwards. 232

54 233

55 Electricity market organisation and characteristics 3.1 Electricity market organisation 3.2 Principles governing the electricity market in accordance with established regulations 3.3 Market sequence and processes 3.4 Daily and intraday markets 3.5 System technical management processes 3.6 Information flows 3.7 Settlements 3.8 Extrapeninsular electricity system 3.9 Extension of deregulation to all consumers

56 The basic principle governing the organisation of the electricity market is the freedom for producers, resellers, and consumers to contract their supplies, according to Law 54/1997, which incorporated to the Spanish legal system the first directive on the electricity internal market. In order to make the principle of contracting freedom viable and applicable, the abovementioned Law creates the electricity market and Royal Decree-Law 6/2 strengthens the deregulation process, coming fully into force on 1 January 23. It offers resellers the possibility of purchasing power from national producers and from producers from the European Union or third countries, as well as to sell it to other resellers or to the market itself, in addition to their original function in terms of purchasing electricity on the market and selling it to consumers. The aforementioned Royal Decree-Law sets out the market publicity and information regime to be applied by the market operator and the system operator.

57 3. ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS The regime established for forward contracting in RDL 6/2 has been replaced by the provisions established in Law 36/23, of 11 November, on economic reform measures, which envisages the establishment of market mechanisms to promote forward contracting, as well as contracting on the organised market. In turn, the International Iberian Market Convention complements and modifies this regulation. The Iberian electricity market envisages that this forward contracting will be performed in OMIP and incorporated in the organised market, managed by OMEL for Spain and Portugal. Mention must be made of Royal Decree 1747 of 19 December 23, which extends competition to the islands and extrapeninsular territories; the regime applicable to resellers, qualified consumers and distributors is similar to that adopted in the organised market, the reference for the settlements being the final price of the electric power production market. Finally, mention must be made to article 22 of the Royal Decree Law 5/25, on the creation of the Iberian Electricity Market, whose application and regulation is expected to enter into effect on July Its impact on how the production market will function can be significant. The characteristics and organisation of the electricity market, in its current operating mode, are described below: 3.1 Electricity market organisation The management of the Spanish Electricity System is entrusted to two independent but interactive entities, which are the Market Operator and the System Operator. The economic management of the electricity system is entirely entrusted to the Operador del Mercado Ibérico de Energía - Polo Español, S.A. (OMEL) until article 22 of Royal Decree 5/25 comes into effect. OMEL is responsible for managing the daily and intraday markets, finding solutions to technical constraints in collaboration with the system operator, obtaining the final energy price for each agent, and for the settlement and billing of all the markets and processes. The technical management of the electric supply is entrusted to the System Operator (Red Eléctrica de España, S.A), which is responsible for the system technical operation processes, in which competitive mechanisms should be used, as long as they are compatible with the security and the quality of supply. ECONOMIC AND TECHNICAL MANAGEMENT OF THE SPANISH SYSTEM ECONOMIC MANAGEMENT - MARKET OPERATOR TECHNICAL MANAGEMENT - SYSTEM OPERATOR Operation of the markets Communications derived from the market operations Market settlements and payments associated to market ancillary services and final prices Dissemination of public information Co-ordinacion with other international markets Promotion and development of the markets Co-operation with other entities in relation with demand coverage and forecast Notification to competence authorities of any participant behaviour that may disrupt the proper operation of the market Guarantee the technical balance of the network Proposal and application of a security criteria Guarantee the third party access to the transmission network Planning proposal of the transmission network Establishing requeriments for the system regulation Technical management of the ancillary services Demand forecasting Notification to competence authorities of any exceptional situation or emergency 236

58 The market participants are entities authorised to act directly in the electricity market as buyers and sellers of electricity. Those who may act as market participants include producers, distributors and retailers of electricity, qualified consumers of electricity and power companies or consumers residing in other countries. Producers, retailers, external agents and qualified consumers may enter the market as market participants or sign bilateral contracts, which must be declared to the market operator. Once these contracts have been declared, they are considered firm agreements and have the same rights and obligations as organised market transactions. In this way, the deregulation model in Spain is configured as a model that enables trading in an official organised market (forward supply, daily market and intraday market) to coexist with trading outside of it (bilateral contracts between producers, retailers and its qualified consumers including financial contracts). A key aim of the aforementioned organised market is to provide a trading system on equal terms for all, providing accurate price determination. Most transactions are carried out in the daily market. All available production units participate in this market as sellers of the part of power not linked to a bilateral contract, and retailers that have acquired power from external agents or from producers under the special regime. The purchasers in the daily market are the distributors, retailers and qualified consumers. External agents may also participate as buyers or sellers of electricity. Once the daily market session has finished, the system operator studies the technical viability of the operation schedule in order to guarantee the security and reliability of supply. If the schedule resulting from the daily market plus the bilateral contracts does not meet security requirements, the joint action of the market operator and the system operator solves such technical constraints by modifying the production units schedule. The intraday market currently holds six daily sessions over 24 hours, in which production unit owners, distributors, retailers and consumers authorised as market participants may participate as sale and purchase bidders, as well as external agents and owners of physical bilateral contracts. The object of the technical operation procedures is to ensure that energy is supplied under established conditions of quality and reliability, and that production and consumption are always balanced. The system operator controls these aspects through production unit bidding mechanisms, whenever possible. As a result of these transactions and processes, the market operator makes a settlement, i.e. the market operator determines the collection rights and payment obligations corresponding to each participant that has acted in the market, according to the final price assigned. The price of electricity at the point of supply to the qualified consumer comprises two elements: the final market price and the access tariff payable for the use of the transmission and distribution networks, as shown in the diagram. The Electricity Sector Law 54/1997 entrusted the Ministry of Industry, Tourism and Commerce with the approval of the Electricity Market Activity Rules and the Contract of Adherence to those rules, after examining the report of the National Energy Commission, and at the suggestion of the market operator. The role of the National Energy Commission is to ensure that activities are pursued in a regime of free competition. ELECTRICITY PRICE COMPONENTS Final market price Access tariffs Price of electricity at supply point Daily and intraday market prices Prices/cost of technical operation processes managed by the system operator Capacity payment Surcharges and taxes: Nuclear moratorium (3.54%), electricity tax (4.864%) and V.A.T. Power payment Energy payment Electricity tax (4.864%) and V.A.T. OMEL invoices the final market price Distributors invoices access tariff Voltage level Supply period Retailers invoice either energy only or energy and access tariffs When retailers contract the access tariffs they do it on behalf of consumers Collateral According to Rule 23 (BOE 14.IV.22) 237

59 3. ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS The Market Participants Committee, a private body that is composed by representatives of all the individuals that can participate in the market, the market operator and the system operator, supervises the market operation and provides advisory services to the market operator. 3.2 Principles governing the electricity market in accordance with established Regulations The electricity market must be managed in accordance with the principles of transparency, objectivity and independence and in compliance with the Electricity Sector Act and the regulations that developed the Act. Participation in the market is carried out using an electronic trading system capable of handling efficiently and transparently of a large number of electricity purchasers and sellers of electricity and a very high volume of transactions and resultant settlements Market characteristics Similarity to other markets. Español, S.A., with the occasional involvement of other institutions, ensure that all interested parties are informed of these regulations, as does the general public information system established by OMEL, via the Internet and the public media, as described later in this document. The Rules are the same for all participants, regardless of their volume of business or the nature of their activity, whether this be production, distribution, retailing or final consumption. The rights and obligations of all the market participants are stated in the Market Activity Rules and expressly accepted in the Contract of Adherence, leaving no room for any discretionary treatment of any party by the market operator. Matters related to bids submitted and the matching of these bids, and aspects related to economic rights arising in connection with bid matching, are regulated and detailed in the Rules; hence, all the actions of the Company and the market operator can be reproduced by the market participants. The Market Activity Rules envisage all possible contingencies in order to facilitate matching results and subsequent transactions under any circumstances. Even in force majeure events, emergency mechanisms are provided in order to conclude the processes. The electricity market is a regulated market similar to other organised markets. It guarantees the objectivity and transparency of transactions that are completed in the market. Public market SEQUENCE OF OPERATIONS IN THE ELECTRICITY MARKET DAILY MARKET International Bilateral C. MATCHED RESULTS This is a public market that can be accessed by the entities and individuals who meet the general terms and conditions established in the legislation and regulatory standards. These terms are applicable on equal basis to all participants. Participants' guarantee The participants' guarantee in the market is founded basically on the following points: The Market Activity Rules and, in general, all associated regulations are public and known to all participants and to those who wish to be participants. Moreover, electricity market courses organised by Operador del Mercado Ibérico de Energía - Polo Domestic Bilateral Contracts 6 INTRADAY MARKETS Technical Constraints Solution ANCILLARY SERVICES Real Time Processes BASE OPERATING SCHEDULE VIABLE DAILY SCHEDULE FINAL HOURLY SCHEDULE OPERATING HOURLY SCHEDULE MARKET OPERATOR SYSTEM OPERATOR SCHEDULES 238

60 The collateral scheme system established in the Rules ensures the proper performance and economic effectiveness of the transaction for the benefit of all participants. The final price for each participant is determined on the basis of supplies and production actually achieved, i.e. incorporating measurements in settlements, which constitutes the essence of a physical market. 3.3 Market sequence and processes The aim of all the sessions held on the electricity production market on the day prior to the corresponding supply, is to determine the electricity transactions and the scheduling of the production units that are required to perform the transactions. In compliance with the Market Activity Rules and the system operating procedures, the operating scheme is as follows: The daily market, to which bids can be sent at any time within the limit set by the closing time of the bid reception period, publishes the results of the corresponding session before 11 a.m. The transactions derived from the daily market session, together with the bilateral contracts and the international contracts set up the base daily operating schedule. Once the daily market session has been held, any technical constraints that may have been derived from the daily market result are studied and solved. The process is completed before 2 p.m. On the basis of the provisional daily viable schedule, the system operator assigns, by means of an auction based on the marginal price, the secondary regulation reserve (increases and decreases) to the participating production units. The result, which is published prior to 4 p.m., is the viable daily schedule. At that point, the first of the intraday market sessions (currently six) start to take place. The results of each intraday session is the final hourly schedule. The physical balance in the network between electricity production and consumption, based on market results, is ensured at all times by the system operator through the utilisation of ancillary services. The sequence of market operations and the related timetable are shown on the chart. 3.4 Daily and intraday markets Both markets are based on the formation of a supply curve and a demand curve, that are created on the basis of sale and purchase bids, respectively. The intersection of these two curves, determines the market breakeven point and the matching result The daily market The purpose of the daily market, as an integral part of electricity power production market, is to handle electricity transactions for the following day through the presentation of electricity sale and purchase bids by market participants, guaranteeing supply. Submitting bids to the daily market can be done as follows: Owners of production units that are subject to the ordinary regime submit sales bids, as long as such units are available and their energy is not linked to a bilateral contract. External agents, retailers, and owners of production units subject to special regime, can also submit sale bids. Purchase bids are submitted by owners of purchase units, be they retailers, distributors, consumers or external agents. 239

61 3. ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS TIMETABLE FOR DAILY AND INTRADAY MARKET SESSIONS DAILY MARKET INTRADAY MARKET 1st SESSION 2nd SESSION 3rd SESSION 4th SESSION 5th SESSION 6th SESSION Session opening 16: 21: 1: 4: 8: 12: Internat. Bilateral contracts reception 1: Session closing 1: 17:45 21:45 1:45 4:45 8:45 12:45 Matching results 11: 18:3 22:3 2:3 5:3 9:3 13:3 Domestic bilat. Contracts reception 11: Special regime production from distributors 11: Base operational schedule publication (PBF) 11: Reception of breakdowns of production and demand inputs 12: 18:45 22:45 2:45 5:45 9:45 13:45 Constraints analysis 14: 19:2 23:1 3:1 6:1 1:1 14:1 Adjustments for contraints 14: Final daily viable schedule publication (PVD) 16: Adjustments for constraints and final hourly schedule (PHF) 19:35 23:2 3:2 6:2 1:2 14:2 Checkpoints to follow guarantees 1:3/16:45 18:15 22:15 2:15 5: 9:3 14: SCHEDULE HORIZON 24 hours 28 hours 24 hours 2 hours 17 hours 13 hours 9 hours Sale and purchase bids can be made using between 1 and 25 energy blocks in each hour, with power and prices offered in each block. In the case of sales, the bid price increases with the block number, and it decreases in case of purchases. The sale bids may be simple, or may include optional additional conditions. Simple bids are presented for each hourly period and production unit, indicating a price and an amount of energy. Complex bids are those which, fulfilling the simple bid requirements, also include some or all the technical or economic conditions. OMEL matches purchase and sale bids received prior to 1 a.m. each day, whereby the price in each hour will be equal to the price of the last block of the sale bid of the last production unit whose acceptance has been required in order to meet demand that has been matched. In order to incorporate bids made by external agents, the capacity of the international tie-lines required is distributed proportionally between bilateral contracts and the organised market. The matching result therefore includes bids that do not exceed the capacity of the tie-line assigned to market operations, in accordance with the principle of economic precedence (implicit auction). The matching result contains the marginal price and the hourly production and demand schedule established by OMEL on the basis of the matching procedure for power purchases and sales. The base daily operating schedule is obtained at 11 a.m., once the reports on the execution of all physical bilateral contracts have been obtained, together with information on production under the special regime that has not submitted bids to the market. Once the transactions deriving from physical bilateral contracts are incorporated into the basic working programme, these have the same rights and obligations as market transactions, allowing their holders to participate independently in the intraday markets and ancillary services. The basic working programme incorporates the elements that appear in the table on the following page Solution of technical constraints If the base operating schedule does not respect the maximum exchange capacity within the Spanish electricity system or the mandatory security requirements, the technical constraints solution procedure operates in the following manner: It modifies the base operating schedule by adding or removing the power required to resolve the technical problems. Afterwards, the market operator restores the balance between production and demand. The criteria for these operations is the economic precedence of the bids presented to the daily market. 24

62 The new regulation on technical restrictions, derived from Royal Decree 2351/24, which comes into effect in May 25, establishes that the modification of the basic programme will be carried out according to specific bids made by the producers for this purpose, and that the re-balance between supply and demand will also be restored according to these specific bids. Both of these processes will be managed by the system operator. Simple bids PURCHASE AND SALE BIDS SALES PURCHASE Unpriced bids The holders of bilateral contracts who have communicated the execution of their contracts for inclusion in the daily schedule. Bidders may participate in this market under the sole requirement that they respect previous commitments made with respect to the provision of ancillary services, and on the condition, in the case of purchasing units, that they have participated in the daily market or executed a physical bilateral contract, or they are authorized to take part as sellers in the daily market. Sale or purchase bids can be made by considering between 1 and 5 energy bocks or sections per hour, and in each of which the prices must be increasing for sale bids and decreasing for purchase bids. Upward supply curve Complex bids Indivisilibity Rigid demand curve Priced bids Downward demand curve DAILY MARKET SUPPLY AND DEMAND CURVES c /kwh Minimun income Load gradient Scheduled shutdown Does not include complex conditions Sale Bids The intraday market The intraday market is currently structured in six sessions. Several sale and/or purchase bids may be presented for each production or purchasing unit. The following market participants may submit bids in the different sessions of the intraday market: Daily marginal price Break-even point Price of the last production bid Purchase bids The owners of production units authorised to make bids in the daily market. Matched energy MWh The owners of purchasing units authorised to make bids in the daily market. Simple bids consist in a price and an amount of energy for each hour, and may also include optional additional conditions. These conditions may include the following: Load gradient. Minimum income or maximum payment. Complete acceptance in the matching process of the first block of the bid. 241

63 3. ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS BASE OPERANTING SCHEDULE INFORMATION The marginal price of electric power for each hourly programming period. Electric power by block that corresponds to each production unit whose sale bids has been matched, and the electric power by blocks that corresponds to each purchase unit whose bid has been matched. The merit order that corresponds to each block of the sale bids that have been matched. Electric power by block that corresponds to each production unit whose sale bids has not been matched. Electric power programmed by available production unit subject to the special regime, which is expected to be ceded to distributors. Power that is exchanged as a result of the execution of bilateral contracts between market participants. Power that is exchanged as a result of the execution of bilateral contracts between a market participant and someone who is not a participant. For such purposes, the following contracts or transactions can be included: Between a producer and a domestic customer who is not a market participant (physical bilateral). Between a producer and an external customer who is not a market participant (physical bilateral). Between one or more producers or external sellers and a resellers, and between them and one or more qualified customers. Productions scheduled for each production unit or facility and the supply that must be provided in each of the network connections nodes. TECHNICAL CONSTRAINTS c /kwh Pbi Demand Minimum number of consecutive hours with complete acceptance of the first block of the bid. Maximum matched energy. OMEL matches the purchase and sale bids so that the marginal price in each hour is equal to the price of the last sale bid block which had to be accepted in order to ensure that purchase bids were fully or partially met at a price equal to or exceeding the marginal price. Marginal Price Energy removed Er, to solve constraints Er Er MWh Energy assigned to solve constraints Er, at bid price If the system operator identifies a technical constraint that would prevent the final hourly schedule results, which are based on the application of intraday market matching, from being carried out for reasons of quality, security or reliability, it will resolve the situation by selecting and removing the new transactions that produce the constraint from the set of purchase and sale bids matched. The market operator maintains the power balance between purchases and sales by withdrawing power on the basis of the economic precedence of intraday market operations. As a final process, the market operator establishes the final hourly schedule, the components of which are listed in the following page. 242

64 3.5 System technical management processes INTRADAY MARKET SUPPLY AND DEMAND CURVES The system technical management processes are those that are required in order to guarantee the supply of electricity under the required conditions of quality, reliability and safety, through deviation management and ancillary services, which may be either mandatory or voluntary: c /kwh Price of the last matched selling bid Sale bids from the production units and sale bids for power acquired by distributors, consumers, retailers and external agents Mandatory ancillary services: primary regulation and voltage control (minimum requirement). Sale Bids Voluntary ancillary services: secondary regulation, non spinnning reserve, voltage control and black start service. INTRADAY SESSIONS Intraday marginal price Purchase bids from distributors, consumers, and retailers, and purchase bids for power previously sold by production units 28 hours Intraday 1 Purchase bids 24 hours Intraday 2 Matched energy MWh 2 hours 17 hours 13 hours 9 hours Intraday 3 Intraday 4 Intraday 5 Intraday 6 market and market participants, in order to guarantee the principles of transparency and competition. It is also essential that the market provide information, as long as it is not confidential, to the general public. Likewise, in the case of the electric market, it is essential to have adequate and properly regulated communication between the market operator and the system operator Timetable Whenever possible, these processes are managed by means of auctions of power and energy requirements requested by the system operator. The production units present bids, which are ordered in accordance with economic precedence, except for the complementary voltage control service, which is based on regulated prices. OMEL's information system, based on the applicable regulations and the Market Activity Rules, makes it possible, since market operations began, to count on a high degree of efficiency and security in OMEL's communications with market participants, the system operator, and the general public. Royal Decree Law 5/25 modifies Royal Decree Law 6/2 and after July 1 st, 25 testablishes that all information on the electricity market shall be transparent and published in the following way: The market operator: 3.6 Information flows In any organised market it is essential to structure and correctly manage information flows, which are set up between the entity managing the Shall immediately make the information affecting the setting of prices on the organised market public to all agents. Shall publicise the results of the matchings that occur within the scope of its competencies. 243

65 3. ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS INFORMATION REGARDING THE FINAL SCHEDULE FOR EACH INTRADAY MARKET SESSION (6 SESSIONS) The marginal price of electric power matched in each of the daily and intraday market sessions. Electric power in blocks corresponding to each production unit whose sale and purchase bids have been added as a result of a match, after they have been modified, if such were the case, to avoid technical restrictions. Energy associated to bilateral contracts. The amount of electric power demanded in each hourly programming period. The system operator: - Shall publish the forecast for the demand, the commercial capacities of the interconnectors, and the situation of the hydro-electric reservoirs. - Shall make public the results of the operation processes that fall within its competency. TECHNICAL MANAGEMENT PROCESSES AUCTION: ECONOMIC PRECEDENCE: The Directorate General of Energy and Mining Policy shall determine the facts and the information considered relevant for setting the prices on the market. In brief, the flow of information that is currently produced between the market operator, the system operator, the market agents, and the general public can be summarised as follows: Exchange of information between the market operator and the system operator The exchange of information between the market operator and the system operator is structured according to the following information: Communication by the system operator to the market operator of the following information: forecast demand, for complete months, published in the first half of the month prior to the month to which the forecast refers, situation of the transmission network, partial or total unavailability of electricity production units, interconnections capacity, any other information that may be established or that the system operator or the market operator believe is relevant. Communication by the market operator to the system operator regarding the base daily operating schedule and the economic precedence of the production units. Deviation management Secondary regulation Non spinning reserve Communication by the system operator to the market operator of the technical restrictions that affect daily and intraday market matching results. Price Requirement Price Non spinning reserve Communication by the market operator to the system operator of the economic re-tallying of the process of technical constraints that affect daily and intraday market matching results. Bids Bids Communication by the system operator to the market operator of the technical management processes and the measurement requirement to obtain the final energy price, and its inclusion in the settlements. Energy Communication by the system operator to the market operator of the measures corresponding to special regime productions that do not participate in the market, pursuant to the provisions established in sections 1.1 and 1.2 of Royal Decree 841/22. Power Power 244

66 SCHEDULES PUBLICATION Exchange of information between the market operator and market participants Buyers Sellers Energy & price ELECTRICITY MARKET Execution of international bilateral C. Energy Communication by market participants to the market operator regarding the elements included in the formal electricity supply contracts or bilateral contracts. Self producers Energy Production and consumption split Energy Reg. band bids MATCHED BIDS BASE OPERATING SCHEDULE Technical constraints analysis No ANCILLARY Yes Execution of domestic bilateral C. Energy Solution of technical constraints Communication to the market operators by the owners of the production units which negotiate the energy through bilateral contracts or through the forward market operator of the information necessary for this energy to be taken into account in determining the daily schedules and for the settlements that are the responsibility of the market operator. Communication by the distributors to the market operator regarding the scheduled production in each programming period by the self-producers and producers subject to the special regime, within the scope of their networks. Communication by the market participants whose bids have been matched, to the market operator regarding the scheduled productions for each physical production unit and the forecast supply at each of the connection nodes in the network. Power & price SERVICES VIABLE DAILY Communication by the market operator to each of the market participants of such information regarding daily base schedule and the final hourly schedule that correspond to their production or purchase units. Buyers Sellers Energy & price Production and consumption split Energy SCHEDULE INTRADAY MARKET Six sessions per day Technical constraints analysis No FINAL HOURLY SCHEDULE Yes Solution of technical constraints Communication by the market operator to the market participants regarding data that correspond solely to their distribution networks, aggregated for each of their nodes defined and notified by the system operator Communications by the market operator to the public and to market participants As a result of the requirements established in Royal Decree-Law 6/2, which are included in Market Activity Rules, OMEL publishes information regarding prices of the daily and intraday markets, exchanged power, aggregate supply and demand curves, the bids submitted by market participants, market shares, and final prices. Details on this information may be found in Chapter 8, section 1, of this document. Real time processes Energy & price OPERATING HOURLY SCHEDULE 245

67 3. ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS It also publishes the capacity reserve displayed by market offer curves, based on the following three hypotheses: First hypothesis: offer of all residual energy; Second hypothesis: offer of residual thermal power bid. Obtained by deducting the offers of unmatched hydraulic plants from the first hypothesis; Third hypothesis: offer of limit residual thermal power bid, deducing from the offer in the second hypothesis the offers of thermal plants mode at more than 9.15 c /kwh (half of the instrumental price), although the plants that resolved technical restrictions are incorporated. c) Regular reports on the evolution of the market and on settlements. OMEL provides the CNE, whenever requested by the latter, with a half-yearly report on market settlements. d) On a weekly basis, and whenever requested by the CNE, it provides the latter with information on the evolution of the market and the behaviour of the participants, in conformity with the criteria presented by OMEL for consideration by the CNE, as well as information on any anomalous situations observed by the market operator that goes against the market rules. 3.7 Settlements Communications of the market operator to the Spanish Energy Commission (CNE) Both the Spanish Energy Commission (CNE) and the Ministry of Industry, Tourism and Commerce have access to all information available on the databases of the market operator one day after the fact. Notwithstanding the foregoing, OMEL systematically provides the CNE with information that can be grouped into four sections: a) Information necessary for settlements of regulated activities performed by the CNE: Amount of energy purchases from each distributor valued according to the average final hourly price of all the distributors. Energy and average monthly sale price of production units that consume autochthonous coal. Average sale price of generating companies for their national production units. Amounts paid and collected as tariffs of the nuclear moratorium on invoices issued by the market operator with monthly settlement. Cost of deviations of special regime installations that do not make offers to the market as provided in articles 1, 11 and 12 of R.D. 841 of August 2, 22. b) Information on energy settlements made by OMEL. With each daily or monthly settlement, the market operator provides the CNE the hourly annotations and settlement summaries of all the market participants for each of their bid units and regulation zones. The settlement of the electricity production market is the process by which OMEL determines, on the basis of the final price for each market participant, the final amount to be paid by the buyers and to be collected by the sellers. Settlement also includes the notification of payment obligations and collection rights and the corresponding invoicing Determination of the final price OMEL calculates the final electricity price on an hourly basis that includes the following elements in its calculation: Daily market matching prices Cost or income for resulting from the process solving technical constraints Cost or income from the secondary regulation auction Intraday market matching price Cost or income from capacity payment Cost or income from the system technical operating processes required to regulate and compensate trading deviations. Surplus or deficit from the international contracts entered into by Red Eléctrica. OMEL makes the settlement by using information resulting from the matching processes in the daily and intraday markets, from the solution of technical constraints, and from the information that the system operator places at market operator's disposal in connection with processes for which it is responsible. 246

68 Thus, each market participant has a final hourly price that is a function of its participation in each of the markets and technical operation processes. In the case of bilateral contracts, the settlement made by the market operator does not include the sale-purchase of power that appears in the basic matching schedule, limiting the corresponding collection rights and payment obligations to those arising from the technical constraints, from participation in intraday markets and ancillary services and of deviations Capacity payment The costs for the capacity payment is a component of the final electricity price, the aim of which is to enable the final price to be identified as an accurate mid-term indicator for market participants, and to express the cost of guaranteeing supply to all consumers, pursuant to the Electricity Sector Law 54/1997. For buyers on the organised market, the capacity payment is equivalent to a minimum price that must be paid in specific periods. As explained later, this minimum price is variable for distributors who supply tariff consumers and is fixed, on a period basis, for retailers, market consumers and external participants. The total volume of collections and payments included in the regulations in force for this item is the amount resulting from applying.488 /kwh to the volume of electricity, expressed in electricity production bus bars, demanded in the organised production market by domestic final consumers. Collection by producers The electricity production units under the ordinary regime that are required to present bids in the production market are entitled to obtain remuneration due to capacity payment, provided that they prove a minimum of 48 hours of operation at full load or equivalent number of hours if they do not operate at full load. The assignment to the different production units is made in proportion to the product of the following factors: Availability coefficient. Equivalent power, which is a function of net installed capacity and the capacity limited by availability of raw materials. In the case of hydro-electric power stations, the latter term is a function of production in the last five calendar years. Up to the enforcement of Royal Decree 436/24 published on March, 12, in which the methodology for the systematization and update of the legal and economic regime applicable to the special regime activity, these units that were regulated by Royal Decree 841/2 that participated in the production market, received, as capacity payment,.915 c /kwh, for all injected energy. Also, according to the second additional provision of the above mentioned Royal Decree, the units with installed capacity over 5 MW and which were included in the transitory regime defined in the second section of the eight transitory provision of the 54/1997 Law, equally received.915 c /kwh. Since the enforcement of Royal Decree 436/24, special regime units are considered as ordinary regime units. Payments by buyers The capacity payment is proportional to the demand in power production bus bars of the different participants. To calculate the payments, these participants are divided into two groups: 247

69 3. ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS RETAILERS, QUALIFIED CONSUMERS AND EXTERNAL AGENTS CAPACITY PAYMENT First group: consumers, retailers for sale to consumers, and external agents. Season Tariff 2. A 2. NA Winter 3. A 3.1 A 2. A 2. NA Summer 3. A 3.1 A 1, 2 and 3 hourly tariff periods c /kwh The agents included in this group pay the capacity payment computed as the sum of the products of their demand on each hour multiplied by the unitary value of the capacity payment corresponding to the hour. The unitary value is a function of the tarification period defined on the corresponding network access tariff, being also a function of the number of periods (6, 3, 2 or 1). The attached table contains the unitary values of the capacity payments for retailers, consumers and external agents. Second group: distributors. January February March SEASON M to F Sat & Sun M to F Sat & Sun M to F Sat & Sun 6 hourly tariff periods c /kwh Participants in the second group, i.e. distributors, pay the same unit price every hour of the month. This price is calculated by dividing the total amount collected each month, once the payments made by individuals of the first group indicated are subtracted, by the demand in power production bus bars of the distributors. The total payment of these participants for capacity payment is calculated as the result of multiplying their monthly demand in power production bus bars by the average monthly unit price calculated as indicated in the previous paragraph. Since the total payment depends on the total payment made by the other individuals, its unit price may vary each month. April May M to F Sat & Sun M to F Sat & Sun Measurements and deviations June July August September October November December M to F Sat & Sun M to F Sat & Sun M to F Sat & Sun M to F Sat & Sun M to F Sat & Sun M to F Sat & Sun M to F Sat & Sun A specific characteristic of the Electricity Market is that the contracts and settlements are not definitive if the supply is not effectively produced and reflected in the corresponding meter, which should be able to send an hourly measurement in order to adapt to the markets mechanisms. This general standard applies to all except for resellers that contract with low-voltage consumers, that can use the profiles published in the month of December of each year to be used during the following year, according to the Resolution of the Directorate General of Energy and Mining Policy. The said profiles make it possible to convert the monthly measurements to hourly measurements. The market operator receives the measurement date from the main electricity measurement concentrator managed by the system operator, in order to determine the final hourly price for each participant and for settlement, in accordance with the following scheme: 248

70 Prevailing measurement requirements are as follows: Meter reading digitally encrypted and signed on the meter, for high voltage measuring equipment, optional on low voltage, except for those that directly participation the market or subscribe a bilateral contract with a producer. Readings are received individually without any type of manipulation at the main electricity measurement concentrator, except for qualified consumer points with consumption levels of less than 75 MWh/year contracting with a retailer, and which can be added. Secondary concentrators may exist, whose owners are distributors as the entities entrusted with transferring measurements from the meter to the main electricity measurement concentrator. Existence of secondary concentrators that may be owned by retailers. SETTLEMENT BANK ACCOUNT All costs arising in connection with the system technical management processes are charged to deviations, regardless of whether these are deficits or surpluses Monthly settlement procedure and time limits Each day the market operator provides the market participants with the provisional settlement corresponding to the period of the month that has elapsed. The monthly settlement is calculated at end of the period, resulting in the corresponding debit and credit notes. Each settlement and verification of settlement performed by the market operator, and the potential disputes by a market participant, where applicable, as well as the resolution by the market operator, must be accomplished within three days. These processes and time limits are common to daily and monthly settlement. DEBTORS 1: 15th of the month or prior business day CREDITORS 1:3 Collections and payments must be made on the last business day of the first fortnight of the month following the month to which the settlement corresponds. D 1 G 1 Collections and payments are carried out through a special bank account that is completely separate from its assets, opened by OMEL for this purpose on behalf of the market participants. D D D SETTLEMENT BANK ACCOUNT G G Invoicing Trading through the electricity market is deemed to be multilateral trading, whereby all sellers trade with all buyers. Consequently, each seller should issue separate invoices to all purchasers, allocating total production and sales to each purchase on a proportional basis. Nevertheless, this procedure would generate an inordinate number of invoices, some of which would be for very small amounts. Deviations are defined as differences between measured power and traded power, which is the difference between traded power and actual production or consumption. Where applicable, measured power includes losses through the transmission network. In order to resolve this problem, article 3 of Royal Decree 215, of 5 February 1999, amends Royal Decree 242, of 18 December 1985, which established the obligation of companies and professionals to issue and deliver invoices. Royal Decree 215/1999 therefore permits the documentation of power deliveries carried out through the market in the form of invoices issued by OMEL on behalf of power suppliers, who receive a copy while OMEL keeps the original. At the same time, OMEL issues invoices to electricity purchasers, who again receive the original while the market operator keeps a copy. 249

71 3. ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS MONTHLY SETTLEMENT The tax obligations of market participants in terms of the issuance of invoices are therefore considerably simplified. Monday Tuesday Wednesday Monday Tuesday Collections and payments day -3 weekdays Collections and payments date -2 weekdays Notification to bank of collections and Notification to bank of collections Collections and payments Thursday Facsimiles of the invoices issued to purchasers and sellers of energy are shown on the following pages. These characteristics of the settlement and billing processes, which incorporate all the agent transactions in the power production market, facilitate market participation for all types of agents and promote equal opportunities in contracting energy among producers, retailers and consumers. Monday Month end +3 weekdays Notification of charge and payment orders Wednesday Thursday Notification of collection rights and payment obligations Tuesday Claims Wednesday Thursday 25

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75 3. ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS 3.8 Extrapeninsular electricity system The extension of the deregulation of the electricity activities established in Electricity Sector Law 54/1997 to the extrapeninsular and island territories has been regulated by Royal Decree 1747, of 19 December 23, which, in addition to incorporating the principles of competency, third-party access to the network and freedom of consumers to choose their electricity supplier, takes into account the specific aspects of the territorial location of the system, in accordance with the provisions established in article 12 of the aforementioned Electricity Sector Law. The Royal Decree establishes a system for dispatching generated electricity based on the declaration of variable costs and on the regulation of fixed costs for producers. As regards the party requesting electricity, i.e. the consumers, resellers and distributors, they are treated in the same way, from a cost standpoint, as their counterparts on the peninsula; they are entitled to exercise their right to choose supplier and participate in the market by communicating the dispatching of generated electricity, the reference being the final price of power on the peninsular market. ELECTRIC MEASUREMENTS INFORMATION SYSTEM Presentation of sale and purchase schedules The issuance of sale and purchase schedules by the agents has different objetives to the presentation of bids to the market and will be performed at least once a day (similar to the system in the daily market) and will allow the composition of generation/consumption schedules in the corresponding territories Access to the final price of electric power The demand of each island and extrapeninsular system, i.e. demand by consumers, resellers, and distributors, has access to the final market price by attending the dispatch process. Consumers may also stablish bilateral contracts with resellers and producers Settlements paid by buyers The Market Operator will settle the final price paid by all buyers according to the final price payable by the same, taking into account the deviations estimated by the system operator. Settlements corresponding to distributors are carried out in the National Energy Commission by means of a system similar to that applicable to peninsular distributors. The applicable complementary regulation had not yet been published when this document was completed. AGENTS DATA READ RESPONSIBLE SYSTEM OPERATOR MARKET OPERATOR Settlements corresponding to generators SECONDARY CONCENTRATOR MAIN CONCENTRATOR SETTLEMENT The market operator must pay settlements to generators using the funds paid by buyers participating in the dispatching of generating units. Since the generation costs in the extrapeninsular and island systems do not normally coincide with the purchases of consumers valued at the final peninsular price, an imbalance exists between the price paid by buyers and the price collectable by generators based on their costs. In this way, the settlement performed by the market operator provides generators with funds that are normally insufficient. METER REGISTERS SECONDARY CONCENTRATOR Aggregated Meter Data In order to make up this difference, the National Energy Commission will pay generators the sum of the following items: The difference between the cost of energy purchased by distributors from generators valued at the final hourly generation price in each SEIE (island and extrapeninsular electricity system) and the cost of this energy valued at the average price on the peninsular system payable by all distributors. 254

76 The difference between the cost of energy purchased by resellers and consumers from generators, valued at the final hourly generation price in each SEIE, and the cost of this energy valued at the average price on the peninsular system payable by all resellers and consumers purchasing energy directly on the market. 3.9 Extension of deregulation to all consumers Since January 1 st, 23 full deregulation took place for the 21 million consumers who can operate directly in the electricity market or through any of the 67 resellers mentioned in section 4.3, this new option requires the establishment of procedures in terms of access contracts and power purchases, changes in methods of contracting and the termination or cancellation of these contracts. Moreover, in order for this strong contingent of mostly domestic consumers to operate in a market where prices are established on an hourly basis, measurement requirements had to be established that are compatible with the use of their right to choose a supplier and to apply hourly prices with the necessary speed, efficiency and economy of the chosen measuring system Basic conditions of energy purchase and low voltage network access contracts Royal Decree 1435, of 27 December 22, which sets out the basic contract terms for energy acquisition and low voltage network access, incorporates the following fundamental aspects: It establishes the specific terms and conditions governing the contracting of energy supplies on the part of low voltage consumers with resellers. It offers consumers the option of either managing the contract governing access to the networks with the corresponding distributor or entrusting the reseller that supplies power on their behalf with the task of contracting. It establishes the creation of computer databases that the distributors must keep accessible for their clients but at no cost to the latter, differentiating between supply point data accessible by all the players in the system and restricted data that can only be accessed by certain participants. The power control switch of the aforementioned databases mentioned in section o) must be installed in order to be able to access the market. SYSTEM AND PROCEDURE OF SETTLEMENTS IN THE OUT OF THE PENINSULA SYSTEM The CNE is the entity in charge to carry out the settlements to the carriers and distributors, that is to say, of the regulated activities. The CNE will settle to the generators in ordinary regime the difference between the cost that corresponds to them according to RD 1747/23 of extrapeninsular and really received of the settlements made by the operator of the market by the purchases of distributors, qualified drug dealers and consumers. The CNE will settle to the generators in special regime that participate in the economic office the difference between the cost that corresponds to them according to RD 841/22 and really received of the settlements made by the operator of the market by the purchases of distributors, drug dealers and valued qualified consumers to average final price of generation of the SEIE. The CNE will recognize the distributors the cost of their acquisitions valued to the price average hour end of set of the distributors in the peninsular market. If the difference between its settled net income and their costs of acquisition of energy including the acquisitions to the special regime, outside positive would be eliminated by the National Commission of Energy to the generators in ordinary regime for overcost of generation, that will later consider in the settlements of such. The market operator will send to the CNE the information needed for the calculation of the settlements that is defined in article 18 of Royal Decree 1747/

77 3. ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS MARKET AGENTS TRANSACTIONS Daily market sales Producer Retailer Self producer Special regimen External agents Bilateral contract Consumer Retailer External agent Distributor Daily market purchases Regulated tariff consumer In the intraday market all can be buyers and sellers 256

78 It standardises the procedures to follow in the event of termination or cancellation of the contracts and determines the deadlines for the changeover from supply tariff to access tariff and the periods for changing reseller. These deadlines are differentiated depending on whether or not actions are requested on the installations and according to the meter reading cycle and invoicing of supply. It determines the conditions, means of communications, deadlines and procedures for dealing with requests for contracting modifications by the distributors. It enables low voltage consumers to contract through the organised market and by means of bilateral contracts with producers. These powers mean that all the consumers have access to existing contracting possibilities for qualified high voltage consumers Low voltage measurement requirements of consumers Royal Decree 1433, of 27 December 22, which sets out measurement requirements for low voltage consumers and production plants under the Special Regime, completes the content of the aforementioned Decrees 218/1997 and 385/22, concerning measurement points, making full deregulation possible and facilitating market access to low voltage consumers that do not have hourly meters. Consequently, as from 1 January 23, settlements can be made using the meter measurements, in the case of hourly meters, or by means of the application of consumption profiles published in the Resolutions of the Directorate General of Energy and Mining Policy of 3 December 22 (Official State Gazette 1/1/3) for 23, 26 December 23 (Official State Gazette 3/12/3) for 24 and 28 December 24 (Official State Gazette 3/12/4) for 25. Both resolutions approve the initial consumption profiles for the respective years, together with the method for calculating energy settlements applicable to type 4 and type 5 consumers who do not have hourly consumption records. In turn, every month Red Eléctrica de España publishes the final profiles resulting from the application of the aforementioned method of calculation on its Internet web page. Royal Decree 1433/22 classifies low voltage consumers into two groups: Essentially domestic consumers contracting up to 15 kw of power (type 5 measurement points) who can maintain their current measuring equipment, or change to a period or even hourly measurement system, when their consumption habits make the investment in the required equipment worthwhile. For consumers of more than 15 kw (type 4 measurement points), generally small industry and retail; since these are larger consumptions, the options that they can choose are measurement in 6 periods or hourly measurement. The most noteworthy aspects of the Royal Decree are as follows: The application of the same measuring equipment requirements to all consumers, regardless of how they contract their electricity supply, on the free market or at the integrated tariff, whereby the decision to purchase or sell power at unrestricted prices through a reseller would not have any impact on the measuring equipment required by the consumer, although the number of hourly meters already installed is increasing. It offers consumers the possibility of installing measuring equipment that incorporates the recording of parameters relating to service quality, and which will help to improve supply quality. Full validity throughout Spain of model approvals, verification or any other control performed in accordance with Law 3/1985, in terms of metrology, and its implementing regulations, on the part of any administration or competent authority. This full validity will 257

79 3. ELECTRICITY MARKET ORGANISATION AND CHARACTERISTICS help to reduce equipment prices, avoid complications for manufacturers and installers, and lead to a better service to consumers. All electronic measuring equipment must offer a tele-reading option, enabling the rationalisation of readings and the automatic treatment of information on power consumption, with the obvious benefits for consumers. The installation and verification of meters is organised in competition, which will probably be extremely positive for the prices of these services. The extension of deregulation to all consumers following the implementation of the current legislation, and which is now a reality, represents a fundamental element for the short- and medium-term development of the market. Its full effectiveness will depend on factors linked to the possibility of choosing suppliers, price formation with growing importance in the market and stronger links between market wholesalers and retailers. The design characteristics of the market managed by OMEL contributes positively to this process and can be strengthened with the integration of long term supplies through bids to the market operator or by developing demand management in order to stimulate an efficient response to prices on the part of consumers. 258

80 259

81 Market participants 4.1 The participation of agents in the market 4.2 Representatives 4.3 Producers 4.4 Retailers 4.5 Distributors 4.6 External agents 4.7 Qualified consumers 4.8 Requirements for becoming a market participant 4.9 Supply deregulation schedule 4.1 Iberian Market agents

82 Market participants are entities authorised to act directly in the electric power market as buyers and sellers of electricity. In order to exercise the right to buy and sell energy on the market, participants must, in addition to complying with the requirement to record their data in the Administrative Registers, confirm their adherence to the Production Market Activity Rules by signing the corresponding Contract of Adherence.

83 4. MARKET PARTICIPANTS The following entities may be market participants: Electric power producers. Self-producers of electric power under special regime. Electric power distributors. Retailers. Qualified consumers, provided they exercise their right to purchase electricity on the market. External agents that deliver or take energy from or to other external systems. Agents acting on behalf of other agents in the Iberian Electricity Market or representatives. 4.1 The participation of agents in the market The Spanish electricity market is designed to facilitate access by participants as much as possible. Accordingly, the technical resources necessary to access the market avoid, as far as possible, obliging market participants to acquire specific products or special software. The only exception to this is the infrastructure associated with security procedures. All interested agents may access the market: producers, distributors, retailers, qualified consumers and external agents, as well representatives. All they need to have is simple, easy-to-use computer equipment comprising a personal computer and standard Internet access. Standardised and easy-to-use access methods are used. Agents may access the market through an Internet access, analogue modem (RTB), a digital telephone line (ISDN) or even through specifically dedicated lines, if they need to handle large volumes of transactions. lt is an electronic market, which incorporates all the advantages and facilities offered by Internet technology. The information system facilitates participants' transactions through real-time verification and validation processes, thereby practically eliminating the possibility of errors. All participants may make the verifications that they deem adequate. The system allows market participants to access market results and settlements that concern them. 4.2 Representatives Once the International Agreement signed on 1 October 24 enters into force, Royal Decree Law 5/25, described previously, will introduce the figure of the representative within the scope of the MIBEL (Iberian Electricity Market). This figure will be included as one of the agents carrying on electricity supply activities envisaged in Article 9 of Electricity Sector Law 54/1997. According to Article of the abovementioned Royal Decree Law, agents acting on behalf of other agents in the Iberian Electricity Market, pursuant to the regulations applicable to them, shall be treated as representatives for the purposes of their activity in the electricity markets forming the aforementioned Iberian electricity market and, consequently, they shall enjoy the status of "agents" by virtue of Article 9, mentioned above. They will accredit their status as representatives by presenting the corresponding notarial power of attorney. Agents acting as representatives may not simultaneously act on their account and for other entities. A representative is understood to act on its own account when it has a direct or indirect holding of more than 5 per cent of the capital of the company that it represents. 4.3 Producers Electricity production is an activity that is performed under free competition conditions. Legislation makes a distinction between two types of producers: producers under ordinary regime and producers under special regime. Administrative authorisation of production installations In order to engage in their activities, producers must obtain administrative authorisation for the production installations that they own. (Royal Decree 1955/2, of 1 December, which governs transmission, distribution, retailing and supply activities and procedures for the authorisation of electrical power installations). 262

84 Producers under special regime are required to obtain the same licenses for their installations as any other producers and must also apply for inclusion in any of the specific special regime modes currently regulated by Royal Decree 436/24, of 12 March, governing the production of electric power by installations fuelled by renewable energy sources, waste and cogeneration. PRODUCERS - 31 mar 5 ORDINARY REGIME Bahía de Bizkaia Electricidad, S.L. Elcogas Eléctrica de la Ribera del Ebro Endesa Generación, S.A. (*) Energía Eléctrica del Ebro Energy Works Cartagena, S.L. Fuerzas Eléctricas de Navarra Gas Natural SDG, S.A. Hidroeléctrica del Cantábrico (*) Hidroeléctrica Ibérica, S.A. Iberdrola Generación, S.A. (*) Nuclenor S.A. Nueva Generadora del Sur, S.A. Repsol Petróleo Repsol Química Serveis Auxiliars Sot de Rubió, S.L. Sniace Generación Tarragona Power, S.L Unión Fenosa Generación (*) Viesgo Generación, S.L. Zabalgarbi, S.A. SPECIAL REGIME Acciona Eólica de Galicia Alabe Cuadramón, S.A. Alabe-Leste, S.A. Alabe-Lomba, S.A. Alabe-Mareiro, S.A. Alabe-Nordes, S.A. Alabe-Refachón, S.A. Alabe-Soan, S.A. Avicu, S.A. Azuliber 1, S.L. Biocultivos de Navarra, S.L. Bioetanol Galicia S. A. Boreas Eólica, S.A. Boreas Eólica 2, S.A. Cailá y Parés. S.A. Celulosa de Energía, S.L. Celulosa de Asturias, S.A. Ceranor CLP Envirogas Cogeneración de Navia Cogeneración del Noroeste S. L. Cogeneración Echezarreta, A.I.E. Cogeneración Prat Cogeneración Tierra Atomizada, S.A. Cogeneración Tolosana, A.I.E. Colortex, S.A. Compañía de Explotaciones Energéticas, S.A. Compañía Energética del Tablero, S.A. Compañía Energética para el Tablero, S.A. Compañía Eólica Aragonesa, S.A. Corporación de Energía Hidroeléctrica de Navarra, S.A. Corporación Eólica de Zamora, S.A. Corporación Eólica de Barruelo Corporación Eólica de Manzanedo, S.L. Danta de Energías, S.A. Desarrollo de Energías Renovables de la Rioja, S.A. Desarrollo de Energías Renovables de Navarra Desarrollo Eólico del Ebro Desarrollo Eólico el Águila Desarrollos Eólicos Buenavista, S.A. Desarrollos Eólicos de Corme, S.A. Desarrollos Eólicos de Galicia, S.A. Desarrollos Eólicos de Lugo, S.A. Desarrollos Eólicos de Tarifa, S.A. Ecocarburantes Españoles Ecowind Energy, S.L. Elecdey Ascoy, S.A. Elecdey Carcelen Elyo Arrasate, A.I.E Endesa Cogeneración y Renovables (ECyR) Energética de Roselló, A.I.E. Energías Especiales Alcoholeras, S.A. Energías Especiales de Careón Energías Especiales de Castelo, S.A. Energías Especiales de Peña Armada, S.A. Energías Especiales del Bierzo Energías Especiales del Noroeste, S.A. Enernova Ayamonte Eólica Bosque Alto, S.A. Eólica de Sanabria, S.A. Eólica de Villanueva, S.L. Eólica del Moncayo, S.A. Eólicas de Euskadi, S.A. Eólicas de la Rioja, S.A. Eólicas Páramo de Poza, S.A. Ercros Industrial Explotaciones Eólicas Aldehuelas, S.L. Explotaciones Eólicas de Muel, S.L. Explotaciones Eólicas el Puerto, S.A. Explotaciones Eólicas Escucha Explotaciones Eólicas Plana de María, S.L. Explotaciones Eólicas Sierra de Utrera, S.L. FMC Foret, S.A. Foraneto, S.L. Forel, S.L. Forestal del Atlántico S.A. Forsean, S.L. Garona Verda S.C.P.A. Generación de Energía Renovable, S.A. Generación Eléctrica Peninsular, S.A. Genfibre Grupo Empresarial Ence, S.A. Hidroeléctrica del Trasvase, S.A. Hidroeléctrica Ibérica, S.L.U. Iberfruta, S.A. Ibereólica Lubian, S.A. IDAE Incogen, S.A. Industrias del Acetato de Celulosa, S.A. Industrias del Tablero S.A. Ineuropa de Cogeneración, S.A. IrisCrom Energía, S.A. Kao Corporation, S.A. K W Tarifa, S.A. La energía, S.A. y Servicios y Proyectos Avanzados, S.A. Maderas Manuel Villamor, S.L. Mateos, S.L. Minicentrales Dos, S.A. Molinos del Cidacos, S.A. Molinos del Ebro, S.A. Moyresa Molturación y Refino, S.A. Northeolic Pico Gallo Northeolic Sierra de Bodenaya, S.L. Papelera de Amaroz, S.A. Papelera del Oria, S.A. Parque Eólico Cinseiro, S.L. Parque Eólico La Unión, S.L. Parque Eólico Rio Gallego, S.L. Parque Eólico Santa Quiteria, S.L. Parques Eólicos del Cantábrico, S.A. Pinturas Cataforésicas, S.A. Producción de Energía de Xerta, S.L. Productos Celulósicos, S.A. Puerto Real Cogeneración Rubiera S.A. Forjados y Cubiertas Saltos del Arga, S.L. Sampol Ingeniería y Obras, S.A. Sidergas Energía, S.A.U. Sierra Selva, S.L. Sistemas Energéticos el Granado, S.A. Sistemas Energéticos La Plana, S.A. Sistemas Energéticos Opiñen, S.A.U. Sistemas Energéticos Sierra del Trigo, S.A. Sistemas Energéticos Valle del Sedano, S.A. Smurfit Navarra, S.A. Sociedad Anónima Industrias Celulosa Aragonesa Sogama, S.A. Solal Cogeneración, A.I.E. Solwindet Las Lomas, S.L. Stora Enso Barcelona, S.A. Tec94, S.A. Tortosa Energía Truchas del Cinca S.C.P.A. Unión de Empresas Madereras, S.A. Unión Fenosa Energías Especiales, S.A. Utisa Tableros del Mediterráneo, S.L. Vantexsa, S.A. 263

85 4. MARKET PARTICIPANTS Administrative Registration of production installations Legislation currently in force establishes the Administrative Register for Electrical Power Generating Units, which is located at the Ministry of Industry, Tourism and Commerce. All authorised electrical power generating installations, the conditions of the aforementioned installation and in particular the installed capacity of the power unit, must be registered in this Register. Installations covered by the special regime and those of external agents selling electrical power must also be recorded in this Register. For this purpose, this Register is structured into the following Sections: a) Section One: Electrical Power Generating Units under ordinary regime. b) Section Two: Electrical Power Generating Units under special regime. c) Section Three: External Agents. The registration of producers consists of an initial registration phase and a final registration phase, except in the case of installations with a capacity of less than 1 MW and which must only comply with the initial registration stage. Participation of producers in the market and trading Producers may participate in the market provided that their installed capacity is greater than 1 MW. Producers whose installed capacity is greater than 5 MW will participate in the market, and must present bids to the market, provided that their production is not linked to a bilateral contract. In any case, producers will be able to participate in the intraday market even if all their production is committed in a bilateral contract. Producers may also incorporate power from external sources under the same terms and conditions as external agents. Producers under the special regime with installed powers below 5 MW may sell their surplus electricity or, if the case may be, their production to distributors or participate in the production market by presenting bids to the market operator. For installations with installed powers below 5 MW availing themselves of Royal Decree 2366/1994, the sale price to distributors will be the price established by the Administration; this price is updated by the annual Royal Decrees on Tariffs each year. For installations availing themselves of Royal Decree 2818/1998, the sale price will be the average final hourly price of the production market, complemented in this case by a premium or bonus, which is also established by the Administration and updated annually. Since the entrance into effect of Royal Decree 436/24, of 12 March, which establishes the methodology for updating and systematisation of the legal and economic regime for production of electrical energy under the special regime, the installations classified under Royal Decree 2818/1998 during the aforementioned transitory period, shall cede their production or any surplus thereof to the associated distribution company. In accordance with the aforementioned Royal Decree 436/24, producers of electrical energy under the special regime with power of over 1 MW and under 5 MW may voluntarily present bids to the power exchange for the surplus energy loaded into the system for each programming period, either directly or through a selling agent. Market agents may act as selling agents. However, the foremost operators in the electricity sector, or legal entities participated in by any of them, may only act as selling agents for the special regime production plants under their ownership. Likewise, owners of production plants under the ordinary regime, and legal entities participated in by them, may only act as selling agents on behalf of the production plants to which they hold ownership. Installations with power of over 5 MW that were previously contemplated under the special regime are exempt from this stipulation. Moreover, it establishes that the installations included under the special regime may only incorporate their surplus electrical energy into the network, except those installation that use renewable, nonconsumable energies, biomass or any other type of bio-fuel as their primary energy source, which may incorporate all the electricity they produce into the network. Surplus electrical energy is considered to be that resulting from the momentary remainders in electrical energy exchanged between the installation and the network, through its border points. Furthermore, the economic regime establishes that: Installation owners who opt for selling their production or surplus electricity to the distributor shall receive remuneration in the form of a regulated price only for those programming periods, defined as a percentage of the average electricity price or the regulated 264

86 reference price set out in Royal Decree 1432/22, of 27 December. Installation owners who choose to sell their production or surplus freely on the market, through the system of bids managed by the power exchange, the system of bilateral or futures contracts, or a combination the above, shall receive remuneration for the energy sold at the organised market price or the freely negotiated price, supplemented by an incentive for market participation and a premium, if the installation in question is entitled for it. This incentive and supplementary premium is generically defined as a percentage of the average or reference price for electricity. Royal Decree 1747 of 19 December 23, establishes the participation of producing agents under both the ordinary and special regimes, in the extrapeninsular and island territories, through a variable cost optimisation model. Producers participating in the Spanish market and new planned investment projects The participating producers listed in the OMEL agents' directory are shown in the above mentioned table: Following the creation of the electricity market, a favourable climate has been created for the installation of new generating units, particularly combined cycle gas and wind power plants. The working document published by the Ministry of Economy in October 22 entitled "Planning and Development of Gas and Electricity Transport Networks " states that between 22 and 211, a capacity of 14,8 MW will be installed in combined cycle plants. In addition, there is expected to be a substantial increase in the special regime, up to 26, MW of installed capacity. In 24, 3,865 MW of combined cycles came on line, corresponding to the groups of Tarragona Power (381 MW), Campo de Gibraltar 1 and 2 (8 MW), Santurce (4 MW), Arcos 1 and 2 (77 MW), Arrubal 1 and 2 (76 MW) and Palos de la Frontera 1 and 2 (754 MW), to add to the 4,4 that came on line in the previous two years. 4.4 Retailers The retailing of electricity is an activity that appeared with Law 54/1997 and, like electricity power production, is exercised in free competition. Administrative authorisation In order to engage in this activity, retailing companies must obtain the corresponding administrative authorisation; the relevant procedure is explained in Heading 5 of Royal Decree 1955, of 1 December 2, mentioned earlier. Essential requirements are, registration with the Mercantile Register, as well as compliance with the legal, technical and economic terms and in the way stipulated in the above mentioned Royal Decree. Like the producers and self-producers, retailers may act as production aggregators in order to group sale bids from special regime plants. Instaled capacity under the special regime (mainly wind power) increased in 24 by 2, MW. As a result, total installed capacity under the special regime reached almost 16, MW (31 December 24), of which almost half corresponds to wind power. 265

87 4. MARKET PARTICIPANTS Retailing agents in the Spanish market The retailing agents that appear in the OMEL agents' directory are listed in the above mentioned figure. RETAILERS - 31 mar 5 Aduriz Energía, S.L.U. Agri-Energía, S.A. Bassols Energía Comercial, S.L. BP Gas España, S.A. C Y D Energía, S.A. Canal Energía Comercialización, S.L. Céntrica Energía Generación, S.L.U. Cepsa Gas Comercializadora, S.A. Comercializadora de Eléctricas Oviedo, S.L. Comercializadora del Cega, S.L. Comercializadora Eléctrica de Cádiz, S.A. Comercializadora Lersa, S.L. Derivados Energéticos para el Transporte y la Industria, S.A. Desarrollos Eólicos, S.A. Diverta Comunicaciones y Telefonía, S.L. Edp Energía Ibérica El Progreso Energía, S.L. Electra Alto Miño Comercializadora de Energía, S.L. Electra Caldense Energía, S.A. Electra del Cardener Energía, S.A. Electra Energía, S.A. Electra Norte 1997, S.A. Electrabel España, S.A. Eléctrica Serosense, S.L. Eléctrica Sollerense, S.A. Eléctrica Vaquer Energía, S.A. Electrocomercial Centelles, S.L. Elektrizitats Gesellschaft Laufenburg España, S.L. Elyo Gymsa Ibérica, S.A. Endesa Cogeneración y Renovables, S.A. Endesa Energía, S.A. (*) Enerco Cuéllar, S.L. Energía Eléctrica del Ebro, S.A. Epresa Energía, S.A.U. Estabanell y Pahisa Mercator, S.A. Factor Energía, S.A. Gas Natural Comercializadora, S.A. Gas Natural Electricidad SDG, S.A. Gas Natural Servicios SDG, S.A. Global3 Energia Comercializadora, S.L.U. Hidrocantábrico Energía, S.A. (*) Hidroeléctrica del Cabrera Comercialización, S.L. Hidroeléctrica del Valira, S.L. Hispaelec Energía, S.A. Iberdrola, S.A. (*) Iberdrola Generación, S.A. (*) Inmobiliaria de Construcciones y Arriendos, S.A. La Unión Electro Industrial S.L.U. Naturgas Comercializadora, S.A. Navarro Generación, S.A. Nexus Energía Romero Abreu Hermanos, S.L. Rwe Trading Gmbh, Sucursal en España Saltea Comercial, S.L. Sempra Energy Europe España, S.L. Shell España, S.A. Sniace Energía, S.L. Sociedad Comercializadora de Energía, S.A. Unión Fenosa Generación, S.A. (*) Unión Fenosa Comercial, S.L. Viesgo Energía, S.L. Viesgo Generación, S.L. Wind to Market, S.A. 266

88 Resellers operating exclusively in extrapeninsular and island territories pursuant to Royal Decree 1747/23 must present a minimum guarantee of 12, euros to the market operator. These resellers, together with those that decide to extend their activity to the SEIEs (island and extrapeninsular electricity systems), may operate in a similar manner to that of already established agents by applying the final electricity production market price to their purchases. Distribution activities are performed by companies under a regulated regime; its aim is the transport of electrical power from the transmission grids to the points of consumption, as well as the tariffbased sale of electricity to consumers and to distributors that are supplied under the D tariff system, pursuant to transitory Provision 11 of Law 54/1997. This electricity must be purchased in the production market and, in accordance with current regulations, from producers under special regime, except those under the D tariff system that purchase from other distributors. Administrative Register for Distributors, Retailers and Qualified Consumers Electricity Sector Law 54/1997 establishes, in addition to the register described for production installations, the Administrative Register for Distributors, Retailers and Qualified Consumers, which is located at the Ministry of Industry, Tourism and Commerce. This Register is structured in the following four sections: a) Section One: Distributing companies. b) Section Two: Retailing companies. c) Section Three: Qualified consumers. d) Section Four: External agents. The registration procedure for retailers, just as for distributors, consists of an initial registration phase and a final registration phase. Authorisation of distribution installations Distributors must obtain authorisation for their distribution installations in accordance with the same legislation applicable to producers (Royal Decree 1955/2, of 1 December, which governs transmission, distribution, retailing and supply activities and procedures for the authorisation of electrical power installations). For this purpose, applicants must accredit compliance with certain legal, technical and economic conditions. Registration in the Administrative Register Distributors must register in Section One of the Administrative Register for Distributors, Retailers and Qualified Consumers. The registration procedure is similar to the one described briefly for retailers and consists of an initial phase and a final phase. Participation of retailers in the market and trading Previously, retailing companies could only obtain their electricity power sale needs by purchasing on the organised markets and they sold electricity exclusively to qualified consumers and foreign buyers. However, Royal Decree-Law 6/2 now allows them to purchase electricity on the production market, directly from foreign agents or national producers. This power may not only be sold to qualified consumers, but also to other retailers or bid into the existing daily and intraday markets. 4.5 Distributors Participation of distributors in the market and trading Distributors participate in the electricity market in order to purchase the electrical power that they require in order to sell it to consumers at the regulated tariff, as well as to the distributors availing themselves to transitory provision 11 of Law 54/1997, and who are connected to their distribution grid. In the case of distributors from extrapeninsular and island territories, Royal Decree 1747/23 establishes that such distributors must be treated in the same manner as distributors operating in the peninsular system; their purchases must be valued by the market operator at the final electricity production market price. Royal Decree Law 5/25, of March11, empowers the Ministry of Industry, Tourism and Commerce to regulate the participation of distributors in bilateral contracting systems with physical delivery, as 267

89 4. MARKET PARTICIPANTS well as the mechanisms promoting efficient commercial management by these distributors. Consequently, the obligation to participate in the market is restricted to the part of energy required to supply their customers at a tariff not covered by a bilateral contract. Distributors participating in the Spanish market The participating distributors listed in the OMEL agents' directory appear on the figure below. 4.6 External Agents External agents were also established by Law 54/1997. Their specific regulations consist in the Order of 14 July 1998, which establishes the legal regime applicable to external agents for performing intra-eu and international exchanges of electric power (Official State Gazette 23/7/98). There are two types of external agents: buyers and sellers; of course, the same entity may engage in both types of operations. Administrative authorisation of external agents This activity is subject to prior administrative authorisation by the General Directorate of Energy Policy and Mines. Applicants for authorisation must be authorised in their country of origin or residence to purchase or sell electricity. If the applicant is a resident of a community country, the application may only be rejected if in their country of origin or residence the equivalent entities, and qualified consumers in particular, do not enjoy the same trading capacity. DISTRIBUTORS - 31 mar 5 Electra de Viesgo Distribución S.L. Eléctrica Conquense Distribución Endesa Distribución Eléctrica S.L. Energías de Aragón I Fuerzas Eléctricas de Valencia, S.A. Hidrocantábrico Distribución Eléctrica Hidroeléctrica del Guadiela I Iberdrola Distribución Eléctrica Sociedad Cooperativa Limitada Benéfica de Consumo de Electricidad 'San Francisco de Asís' Solanar Distribuidora Eléctrica S.L. Unión Fenosa Distribución 268

90 Registration in the Administrative Registers Only one type of registration is applicable to external agents. The application is presented to the Directorate General of Energy Policy and Mines of the Ministry of Industry, Tourism and Commerce, accompanied by the initial administrative authorisation granted by the aforementioned Directorate General, as well as the certificate accrediting the adherence to the rules and conditions governing operation and settlement on the production market in the contract referred to in Article 4 of Royal Decree 219/1997. Seller external agents shall register in the Third Section of the Administrative Register for Generating Units and purchaser external agents shall register in the Fourth Section of the Administrative Register for Distributors, Retailers and Qualified Consumers. Participation of external agents in the market and trading External agents may participate in the organised market, purchasing or selling electricity, depending on their nature. They may also enter into bilateral contracts with national producers, retailers, national qualified consumers, or other external agents. The integration of energy from these operations in the production market takes place, as established in Article 34 of Royal Decree 219/1997, without any discrimination vis a vis market participants residing in Spain. In turn, agents who reside in Spain may also perform electricity exchange operations with other countries, although they must obtain prior individual authorisation for such operations from the Ministry of Industry, Tourism and Commerce, in the same conditions as external agents. External agents that operate on the Spanish market The external agents listed in the OMEL agents' directory are as follows: EXTERNAL AGENTS - 31 mar 5 Aare-Tessin Ltd. for Electricity Accord Energy Limited Barclays Bank PLC E.on Sales & Trading, Gmbh EDP Energía, S.A. EDP Gestao de Produçao de Energia,S.A. Electrabel Electricité de France Elektrizitats-Gesellschaft Laufenburg AG EnBW Trading GMBH Enel Trade S.p.A. Office National de L'Electricite Rede Electrica Nacional Sonelgaz 269

91 4. MARKET PARTICIPANTS 4.7 Qualified consumers Consumers can continue buying electricity at a regulated tariff, if they decide to do so, can purchase freely electricity, either purchasing directly in the market, through a retailer, or signing a bilateral contract with a producer or an external agent. In extrapeninsular territories consumers may purchase energy at tariff in the conditions established for the peninsular system for authorised resellers in each SEIE, or directly through dispatches. The power purchases will be settled by market operators at the final electricity production market price. Registration in the Administrative Register Consumers intending to purchase electric power on the organised production market or in extrapeninsular or island system dispatches for their own consumption must register in section three of the Administrative Register of Distributors, Resellers and Qualified Consumers. However, consumers wishing to purchase from resellers or through bilateral contracts are not required to complete this registration formality. The registration procedure will consist of an initial registration phase and a final registration phase. Qualified consumer agents The qualified consumer agents that appear in the OMEL agents' directory are listed below. QUALIFIED CONSUMERS - 31 mar 5 Cementos La Unión, S.A. Durán Sociedad Agraria de Transformación 9623 Juan José Martínez López, S.A. Praxair Castellbisbal Praxair Olaberría Tortosa Energía, S.A. 27

92 QUOTA BY AGENT AT THE END OF LAST INTRADAY MARKET % PRODUCERS RETAILERS, CONSUMERS AND EXTERNAL AGENTS Mar Endesa Generación Iberdrola Generación Régimen Especial Unión Fenosa Generación Hidroelectrica del Cantabrico G. Viesgo Generación Nueva Generadora del Sur Gas Natural Sdg Red Eléctrica de España Tarragona Power Bahia de Bizkaia Electricidad Eléctrica de la Ribera del Ebro Hidroelectrica Iberica Elcogas Energía Hidroeléctrica Navarra Generación Eléctrica Peninsular Iberdrola Generación Electricité de France Rede Electrica Nacional Industrias Celulosa Aragonesa Endesa Cogeneración Renovables Repsol Química Sniace Cogeneracion Repsol Petróleo Energy Works Cartagena Endesa Energía Molinos del Ebro Sogama Celulosa Energía Cogeneración Prat Compañía Eólica Aragonesa Others (quotas <,1%) Iberdrola Comercializadora Endesa Energía Unión Fenosa Comercial Gas Natural Electricidad Hidrocantábrico Energía Endesa Generación Rede Electrica Nacional Edp Gestão da Produção Energia Viesgo Energia Iberdrola Generación Edp Energia Iberica Hispaelec Energía Office National de L'electricité Centrica Energia Nexus Energía Viesgo Comercializacion Cyd Energía Factor Energia Detisa Electricité de France Elektrizitats-Gesellshaft Laufenburg Saltea Comercial Barclays Bank plc Others DISTRIBUTORS Endesa Distribución Iberdrola Distribución Régimen especial Unión Fenosa Distribución Hidrocantabrico Distribución Electra de Viesgo Distribución Energías de Aragón I Others EXPORTS IMPORTS Endesa Generación Rede Electrica Nacional Edp Gestão da Produção Energia Iberdrola Generación Edp Energia Iberica Endesa Energía Office National de L'electricité Unión Fenosa Comercial Electricité de France Elektrizitats-Gesellshaft Laufenburg Red Eléctrica de España Barclays Bank Plc Hidroelectrica del Cantabrico G. Accord Energy Limited Unión Fenosa Generación Others Red Eléctrica de España Iberdrola Generación Electricité de France Eede Electrica Nacional Endesa Generación Electrabel Centrica Energia Hidrocantabrico Energía Unión Fenosa Generación Elektrizitats-Gesellshaft Laufenburg Unión Fenosa Comercializadora Barclays Bank Plc Office National de L'electricité Hidroelectrica del Cantabrico G. Edp Energia Iberica Sempra Energy Europe España Accord Energy Limited 271

93 4. MARKET PARTICIPANTS 4.8 Requirements for becoming a market participant Article 4 of Royal Decree 219/1997, of 26 December, which organises and regulates the electric power production market, stipulates that, in order to achieve the status of market participant, the applicant must register with one of the Administrative Registers created by Law 54/1997, adhere with the rules and conditions governing the operation and settlement of the market, and arrange guarantees in order to cover economic obligations arising in connection with their participation in the market. Of course, agents must also fulfill other series of technical terms and conditions, including most notably, having the appropriate metering equipment. Compliance with the Market Activity Rules Article 4 of Royal Decree 219/1997 establishes the following terms and conditions as the second requirement for becoming a market participant: "To have expressly pledged adherence to the terms and rules governing operations and settlements in the power production market by signing the corresponding contract of adherence, which will be unique, and the Ministry of Industry, Tourism and Commerce shall approve it after receiving the corresponding report from the National Energy Commission". This is a contract that binds both the market participant who wishes to confirm adherence, and the Market Operating Company accepting such adherence. The condition, applicable to all participants, of adhering to the Market Activity Rules constitutes a guarantee of security and objectivity for the whole body of participants operating in the market. Guarantees Market participants are also required to provide the market operator with sufficient guarantees in order to cover any economic obligations that may arise from their participation on the electricity market. Failure to provide this guarantee will prevent the participant from participating in the electricity market. The guarantees are issued in favour of OMEL, in accordance with Rule 23 of the Market Activity Rules, in one of the following ways: By means of a cash deposit in the bank designated by the market operator for this purpose. Through a bond or deposit issued in favour of OMEL by a bank, savings institution or credit co-operative. CONTRACT OF ADHERENCE Unique standard format approved by State Secretariat Resolution, together with the rules. Signed by the market operator and the market participant. Express compromise of the market participants to fulfill: Activity and settlement market rules. Regulations applicable to the market. Software and documentation associated to SIOM. Adherence to future modifications of the above mentioned rules. Includes: Annex I. List of affiliated and participated companies. Annex II. List of owned production units or other represented units for presenting bids. 272

94 Through an irrevocable authorisation to use one or more lines of credit subscribed by the purchaser of the electricity up to the maximum amount of the payment obligations undertaken during the period to be settled. Through the assignment of production market collection rights, pending payment, to purchasers by the seller. This requirement ensures the liquidity of the electricity power production market and provides financial guarantees for all participants. Metering equipment Market participants must have adequate metering equipment in order to participate in the market, as stipulated in Royal Decree 218/1997, of 26 December, which approves the Rules governing Electricity Consumption and Transit Metering Points; these are also stipulated in Royal Decree 385/22, of 28 April, which modifies Royal Decree 218/1997, of 26 December, and in Royal Decree 1433/22, of 27 December, which establishes the low voltage metering requirements for consumers and power plants under special regime. In accordance with the abovementioned regulation, metering points are classified according to five types. Their fundamental characteristics are summarised below: Type 1. These metering points include: All power units with an annual interchange of electricity equivalent to 5 GWh or more. Border metering points with customers, with an annual interchange of electricity equivalent to 5 GWh or more or contracted electricity of 1 MW or higher. Border generation points, with annual interchange of electricity equivalent to 5 GWh or more or apparent nominal power of 12 MVA or higher. Type 1 metering points must be hourly, equipped with communications and have direct connections with the main concentrator or through a secondary concentrator. Type 2: These metering points include: Border points with customers with contracted electricity equivalent to 45 GWh or more. Generation border points with apparent nominal power equivalent to 1,8 GWh or more. Points in other borders with annual interchange of electricity equivalent to 75 MWh or more. Like type 1 metering points, they must be hourly and must be equipped with communications and have direct connections with the main concentrator or through a secondary concentrator. Type 3: These metering points include the remaining points provided that meters are installed at a voltage level equal to or greater than 1kV and that they are not type 1 or 2 points. It is not mandatory for them to have communications but they must be directly connected to a secondary concentrator and an hourly meter readings. Type 4: These metering points include: Any border point belonging to consumers with more than 15 kw in contracted electricity and power stations under the special regimewhose nominal installed capacity exceeds 15 kw and which are metered at low voltage, i.e. below 1 kw including high voltage supplies metered at low voltage (without voltage transformers). 273

95 4. MARKET PARTICIPANTS This metering equipment will come with six active power recorders that correspond to periods of hourly discrimination. By adding the data from these registers, the data corresponding to the three periods of the access tariff are obtained. The hourly meter is optional for these points. Type 5: These metering points include: Any border metering point belonging to consumers with more than 15 kw in contracted electrcity and power stations under the special regime whose nominal power is equal to or less than 15 kw and which are metered at low voltage, i.e. at less than 1 kw including high voltage supplies measured at low voltage (without voltage transformers) The hourly meter for these points is optional. Market Activity Rule establishers the possibility of making final settlement for those participants who have adequate metering equipment, even when it has not been possible to complete the settlement for all the participants due to the lack of information with respect to certain meters. 4.9 Supply deregulation schedule The Law authorised the Government to modify the established limits if market conditions justified such a modification. The Government availed itself of this authorisation by bringing forward substantially the deregulation schedule established in Article 1.3 of Royal Decree 282/1998 of 23 December (Official State Gazette 3/12/98), which establishes the tariffs for access to the grids; hence, from 1/4/99 the qualification limit was reduced to 3 GWh/year; from 1/7/99, to 2 GWh/year; and from 1/1/99, to 1 GWh/year. Pursuant to Royal Decree-Law 6/1999, from 1 July 2, qualified consumers are deemed to be consumers whose nominal supply voltage is greater than 1 volts. Lastly, Article 19.1 of Royal Decree-Law 6/2 stipulates that from 1 January 23, all consumers of electrical power will be treated as qualified consumers and that on 1 January 27, the high voltage regulated tariffs will disappear. Consequently, since 1 January 23 electricity supply has been fully deregulated. OMEL's organisation and information systems have been adapted accordingly in order to render services that the abovementioned deregulation process requires in terms of information, free selection and access to the market in the different forms of trading required in this process. When Law 54/1997 came into force, consumers with annual volumes of consumption of more than 15 GWh were considered qualified. This also included owners of railway transport installations, including the metropolitan railway. Pursuant to this Law, as from 1 January 2 qualified consumers will be those who consume more than 9 GWh per year. As from 1 January 22, the limit will be reduced to 5 GWh; and from 1 January 24, to 1 GWh. Nevertheless, from 27 all consumers of electrical power will be treated as qualified consumers. 4.1 Iberian market agents In accordance with Article 14 of the International agreement for establishing an Iberian electricity market, signed between the Kingdom of Spain and the Republic of Portugal on 1 October 24, the recognition in either of the States shall automatically authorise an agent to operate in the other state. For this purpose, the aforementioned article contains provisions stipulating that the administrative procedures to be fulfilled with respect to the authorisation and registration of agents in order to engage in the different activities in Spain and Portugal must be harmonized on a reciprocity basis. 274

96 275

97 Electricity trading in Trading in the electricity market 5.2 Daily market 5.3 Intraday market 5.4 Technical operating processes of the system 5.5 Final hourly price 5.6 International electricity trading

98 During 24, the seventh year of the electricity market's operations, all the markets and processes continued to be fully operational, as shown by the volume of energy traded, the financial volume of transactions, the increasing development of the intraday market, the increase in transactions resulting from contracts entered at free prices, as well as the consolidation of the activity of the external agents and the power producers under the special regime in the market.

99 5. ELECTRICITY TRADING IN 24 TOTAL TRADED VOLUME IN THE PRODUCTION MARKET M Years 98 to 4 Increase 4: 1.9% 1,2 1, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg , Trading in the electricity market TOTAL TRADED ENERGY IN THE PRODUCTION MARKET GWh 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Years 98 to 4 Increase 4: 5.5% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg 15,1513,293 13,747 13,87 12,94 13,71 15,643 15,438 14,47 13,641 14,138 16,35 14,274 16,13514,59 14,537 13,243 13,844 14,38 16,267 14,779 14,996 14,517 15,365 16,852 14,959 17,74615,222 15,79 14,671 14,987 16,79 16,593 15,97 16,413 15,686 16,64 17,133 16,78 18,72716,13 17,153 14,44 15,556 16,847 17,813 17,542 16,532 16,542 17,475 18,45916,93 18,59916,89 16,913 16,178 16,21 16,983 18,327 17,313 17,234 17,664 17,413 18,974 17,324 2,39118,815 18,42 16,28 17,299 19,168 2,591 19,822 18,694 19,58 19,136 2,97 19,48 2,71919,83 2,921 17,949 18,346 2,28 21,919 2,216 2,19 19,55 2,243 21,511 2,12 The energy produced for the overall electricity market in 24 totalled 241,224 GWh, representing a total net trading value of 8,34 million euros, increase of 5.5% and 1.9% more, compared to the previous year, respectively. The amount of energy traded in the year is influenced by both economic activity and a seasonal component, which prompts significant fluctuations in trading, with the consequent effect on the financial volume of trading. Monthly averages of 2,12 GWh and around 695 million euros were traded in the production market. Market trading is structured in hourly periods, which give rise to significant variations on prices and energy volume over the 24 hours of each day, producing peaks, valleys and flats, as well as different trading behaviour on holidays and weekends with respect to other days. The number of transactions recorded for all processes in the production market in terms of settlements in the year 24 amounted to a monthly average of 486,887 transactions and a daily average of 16,7 transactions. 278

100 DAILY ENERGY TRADED GWh 8 Years 98 to Mar Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Attending to the markets and technical operation processes that integrate the power production market, the energy traded in each of them and its percentage respect to the total energy traded were as follows: TRADED ENERGY GWh % Years 98 to 4 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Daily market Tech. constraints Intraday market SO processes Daily market Tech. constraints Intraday market SO processes , , , , ,62 198,46 21,773 1,632 2,154 3,656 3,882 2,49 4,49 5,951 3,876 8,744 11,487 14,88 12,657 17,87 24,988 11,328 5,843 6,231 7,95 8,22 8,38 8,

101 5. ELECTRICITY TRADING IN 24 The economic traded volumes by markets and processes in the production market are as follows: ECONOMIC VOLUME M % Years 98 to 4 8, 7, 6, 5, 4, , 2, 3,96 4,35 5,461 5,587 7,178 5,992 5, ,198 1, , 1 Daily markett. constraints I. market SO processes S. reserve C. payment Daily market T. constraints I. market SO processes S. reserve C. payment The traded energy figures referred to in the preceding paragraphs do not coincide with net energy, mainly because both consumption and production increases and decreases are traded on the intraday market and in the technical operating process of the system. In turn, and with reference to trading arising from production and net consumption, the energy and economic figures are as follows: NET ENERGY GWh NET ECONOMIC VOLUME M Years 98 to 4 2, 8, 18, 16, 14, 12, 1, 8, 6, 4, 2, 154, , , , ,62 198,46 21,773 1,585 3,693 4,193 5,31 3,147 5,486 11, Daily market Technical constraints Intraday market SO processes , 6, 5, 4, 3, 2, 1, 3,96 4,35 5,461 5,587 7,178 5,992 5, ,199 1, Daily market T. constraints I. market SO processes S. reserve C. payment 28

102 Noteworthy trading issues corresponding to production and purchasing units are as follows: With the exception of producers trading under the special regime and of a small amount of energy sold under bilateral contracts, the energy traded in the market was generated by the conventional production plants, amounting to approximately 86% of the total electricity production. We have added the energy traded in the international exchanges to total electricity production. From September 22 until March 25, special regime entered the market as market participants, presenting bids either directly or through a production aggregator with a capacity of more than 5,2 MW. Additionaly have been added to the market 762 MW that correspond to producers greater than 5 MW in the ordinary regime proceeding from Royal Decree 2366/1994 that because of its technology have premium. Electricity consumption corresponding to distributors, retailers and qualified consumers was supplied in the market, with the exception of the part of distributor demand covered by the surplus from producers operating under the special regime. In addition to this, selfproducers' own consumption must also be taken into account. The analysis of energy traded either directly or indirectly through the market by retailers, qualified consumers and external buyer agents, and therefore excluding from total consumption the energy contracted by distributors for sale to customers at regulated tariffs and energy from pumping stations, is significant. Since the beginning of the market, the evolution of energy consumption at free prices is represented on the following page. MARKET SHARE OF SPECIAL AND ORDINARY REGIME UNITS WITH PREMIUM MWh *Including units bigger than 5 MW previously in R.D. 2366/ Sep 2 to 31 Mar 5 MW 6, 5, 4, 3, 2, 1, , 5, 4, 3, 2, 1, Daily market (with constraints) Intraday market Installed power 281

103 5. ELECTRICITY TRADING IN 24 PURCHASES BY RETAILERS, CONSUMERS AND EXTERNAL AGENTS GWh/week Years 98 to Mar 27 th 5 2, 1,8 1,6 1,4 1,2 1, Daily + bilaterals Intraday *Excluding pumping storage consumption and selfproducers Energy at free prices: 37,454 GWh Total energy at free prices: 1, GWh Energy at free prices (last week): 1,423 GWh (45.6%) Total energy purchased (last week): 3,544 GWh 5.2 Daily market The daily market has functioned normally since January 1 st, Market matching has been carried out every day after the corresponding daily market session in which marginal prices have been set for each hour, and energy has been matched every hour for each production and purchase unit. Sales bids in the daily market that must be made by generators by production unit, as long as there are no commitments derived from bilateral contracts, may be set for an amount and a price independent for each hour, or may additionally include complex conditions (indivisibility, load gradients, minimum income, and scheduled stop). Most of the thermal power bids have included complex conditions, but, the number of bids from production units that include minimum income have been notably reduced. The bids from hydro units and some thermal units have incorporated complex conditions. Purchase bids in the daily market cannot include complex conditions. The main features during the year were as follows: Purchase bids made by distribution companies follow a rigid demand pattern i.e. in accordance with the established instrumental price, although ever since April 1998, the market rules permit all purchasing units to make price bids. The owners of pumping stations, retailers and qualified consumers who are active in the market usually make bids at prices other than the instrumental price. The weighted average monthly price in the daily market in the year 24 ranged from a high of c /kwh in December to a low of c /kwh in April. For 42.1% of the market sessions, the difference between the maximum and minimum prices fluctuated between 1 and 2 c /kwh. Nevertheless, during periods of low prices, the difference between maximum and minimum prices was considerably lower. The average price for the period was c /kwh and the weighted average price c /kwh, decreases of 3.5% and 5.%, respectively from the previous year. 282

104 AVERAGE DAILY MARKET PRICE WEIGHTED AVERAGE DAILY MARKET PRICE c /kwh 6 Years 98 to 4 Increase 4: -3.6% c /kwh 6 Years 98 to 4 Increase 4: -5.% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg ENERGY AND PRICES OF THE DAILY MARKET c /kwh Daily market weighted average price: c /kwh Years 98 to Mar 5 GWh Daily energy Maximum price Average price Minimum price 283

105 5. ELECTRICITY TRADING IN 24 DAILY MARKET TRADING M Years 98 to 4 Increase 4: -3,2% The volume of trading in the daily market in 24 increased to 5,8 M, and 21,773 GWh, representing a decrease of 3.2% and an increase of 1.9%, respectively, with respect to the previous year. Maximum energy matched in the daily market reached highs in the summer in July and the yearly maximum in March, evolving continuously in the intermediate months. The maximum power peak for 24 was 37,724 MW and was reached at 9 p.m. on March 2 nd ; in summer, the peak of 36,619 MW was reached at 2 p.m. on June 3 th. The winter maximum for the volume of energy demanded in transmission was achieved in December with 21,11 GWh, while the key summer figure was the 2,616 GWh for July Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg , DAILY MARKET ENERGY Purchases in the daily market by retailers and qualified consumers in the daily market in 24 have been 71,682 GWh representing 35.5% in energy, with respect to the total energy acquired in the daily market and 3.% in terms of economic volume. Purchases by external agents in the daily market totalled 6,12 GWh in 24, representing 3.% in energy, with respect the total energy acquired in the daily market. During the year 24, contracting of international exchanges not managed by REE in the daily market totalled 12,322 GWh, to which must be added a total of 925 GWh from bilateral contracts. GWh 18, 16, Years 98 to 4 Increase 4: 1.9% Bids and matching results were sensitive not only to the evolution of electricity demand, but also to conditions of hydraulicity and producible hydraulic in , 12, 1, 8, 6, 4, 2, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg ,812,445 12,875 11,86911,814 12,466 13,664 12,425 13,163 12,61912,86 14,455 12,871 14,7913,413 13,236 12,85 12,747 13,224 14,331 13,133 13,67 13,253 13,923 15,97 13,564 15,65813,969 14,459 13,297 13,348 14,233 14,75 13,869 14,25 13,968 14,832 14,964 14,296 16,34214,29 14,856 12,924 13,97 14,726 15,318 14,67 14,26 14,511 15,173 16,458 14,78 17,1614,85 14,93 14,331 14,668 15,6 16,397 14,939 15,64 15,592 15,457 16,335 15,383 17,34316,34 16,118 14,372 15,13 16,63918, 17,54 16,513 16,688 16,56 17,227 16,54 17,51716,928 18,324 16,44 16,336 16,929 17,451 16,251 16,255 15,872 16,537 17,329 16,814 In the last seven years, production by technologies derived from trading by production unit owners in the daily market is represented on the following page. The number of hours that each technology has established as "marginal price", grouping data on a weekly basis since the beginning of the production market, is shown in the chart named prices setting technology. The influence of technical constraints on the market since January 1 st 1998, has passed through different levels, as shown in the chart on the following chart named technical constriants daily energy. During the summer, there is a significant increase in the amount of energy used for solving technical constraints; in August 1998 was a 3.4% of the corresponding to the daily market, in July 1999 it accounted for 4.8%, 3.5% in July 2, 3.87% in August 21, 2.41% in August 22, 2.84% in June 23, and 5.52% in July 24. In the winter months it also increased, but to a lesser extent except in 284

106 DAILY ENERGY BY TECHNOLOGIES GWh 9 Years 98 to Mar S.R. distributor S.R. market Nuclear Import Hydro Coal Fuel Combined cycle DAILY ENERGY BY TECHNOLOGIES % Years 98 to S.R. distributor S.R. market Nuclear Import Hydro Coal Fuel Combined cycle

107 5. ELECTRICITY TRADING IN 24 PRICE SETTING TECHNOLOGY TECHNICAL CONSTRAINTS DAILY ENERGY Hours/week to Mar 5 GWh 5 Years 98 to Mar Thermal External agent Imports Pumping consumption Hydro Special reg. Pumping Daily energy Fortnightly trend TECHNICAL CONSTRAINTS PROCESSES 98 to 4 ENERGY GWh MONETARY VOLUME M TOTAL COST M UNIT COST c /kwh AVERAGE PRICE c /kwh Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total 1,632 2,154 3,656 3,882 2,49 4,49 5,

108 January 23 that was 3.23%. In December 24, it accounted for just 3.9% of energy traded on the daily market and a 2.9% for all the year 24. Analysis of the electricity production reserve margin in the daily market NON MATCHED ENERGY BIDS - HYPOTHESIS 1 GWh 45 4 Sep 98 to Mar 5 The electricity production reserve margin can be evaluated on the daily market by determining all sale bids presented by producers that have not been matched, since it constitutes surplus energy available over demand for matched electricity. The consideration of the reserve margin is an essential factor for correct price formation. The consideration of unmatched energy offered in bids as the reserve margin depends on the type of technology used and on the possibility of using the aforementioned energy on a permanent basis. The following analyses consider three hypotheses relating to the evaluation of the electricity production reserve or residual offer considering non matched bids, simultaneously indicating available production and aggregate demand. Aggregate demand is deemed to refer to total matched energy, and residual offer are deemed to refer to the difference between available production bids and matched production bids in each hourly slot Available production Aggregated demand Non matched bids NON MATCHED ENERGY BIDS - HYPOTHESIS 2 NON MATCHED ENERGY BIDS - HYPOTHESIS 3 GWh Sep 98 to Mar 5 GWh Sep 98 to Mar Available production Aggregated demand Non matched bids Available production Aggregated demand Non matched bids 287

109 5. ELECTRICITY TRADING IN 24 Hypothesis 1: bids relating to total residual power, in which available electricity production is considered to be total power offered in each hourly slot in the period September March 25. MARKET PRICE AND NON MATCHED BIDS - HYPOTHESIS 2 c /kwh Sep 98 to Mar 5 GWh Hypothesis 2: bids relating to thermal and international residual energy, in which total bids relating to energy produced from hydraulic plants is deducted from the available electricity power production considered in hypothesis 1 for each hour in the period September 1998-March 25, without treating surplus hydraulic hourly energy as a permanent reserve. Consequently, this is a conservative hypothesis, particularly in cases in which hydroelectric producible is high or medium. Hypothesis 3: thermal and international residual bid limit, in which energy offered over 9.15 c /kwh, conventional figure that corresponds to half of the instrumental price, considered in hypothesis 2 is rejected except the energy that has been assigned in the daily market, for each hour in the period September March The analysis of the evolution of the reserve margin jointly with the analysis of price evolution is a relevant factor indicative of price sensitivity in situations of either abundant or scarce production when there is excess of matched production. In the daily market there is a high inverse correlation between the electricity power production Market price Tendency line Non matched bids Tendency line MARKET PRICE AND NON MATCHED BIDS - HYPOTHESIS 2 c /kwh Sep 98 to Mar 5 GWh 2 MARKET PRICE AND NON MATCHED BIDS - HYPOTHESIS 3 c /kwh Sep 98 to Mar 5 GWh Market price Tendency line Non matched bids Tendency line Market price Tendency line Non matched bids Tendency line 288

110 reserve margin and the price of the afore mentioned energy, as shown below with respect to the above mentioned hypothesis and the coinciding periods. 5.3 Intraday market The intraday market started operations on 1 April During the first three months, trading was performed in two sessions. Between July 1998 and 15 September 1998, the market held four sessions, and five from the latter date until 8 March 1999, when a sixth session was added. The market has operated every day in all sessions. The characteristics of bids can be described as follows: Trading by production units in this market has been substantially greater than trading by purchasing units. The market has adequately resolved failures prompted by the unavailability of production units and infeasibilities arising from energy assignment processes prior to the intraday market. The number of bids is very high; however, there are fewer matched bids. In this market, however, more than one bid may be made per production or purchasing unit. The average monthly price in the intraday market in 24 was of c /kwh and the weighted average price c /kwh, decrease of.2% and an increase of 5.5% respectively, considering previous year. In December there was an increase in the weighted average price compared to the previous month, rising to c /kwh. The spread between maximum and minimum prices was generally higher than that observed in the daily market, and certain periods of considerable volatility arose. On the basis of a study of daily spreads between the maximum and minimum, at.5% of the days the difference was less than 1 c /kwh, while on 34.2% of days it was between 2 and 3 c /kwh and on 53.% of days the spread exceeded 3 c /kwh. Purchase units are still scarce, particularly in the case of distributors, whose weight is preponderant in the overall number of purchase units. This may be because they are unable to obtain the cost of the deviations in a useful amount of time, and also because it is hard to forecast demand. AVERAGE INTRADAY MARKET PRICE WEIGHTED AVERAGE INTRADAY MARKET PRICE c /kwh 7 Years 98 to 4 Increase 4: -.2% c /kwh 7 Years 98 to 4 Increase 4: 5.4% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg

111 5. ELECTRICITY TRADING IN 24 ENERGY TRADED IN THE INTRADAY MARKET GWh 3, Years 98 to 4 Increase 4: 4.2% 2,5 2, 1,5 1, 5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg , , , ,255 1,88 1, ,138 1,44 1,616 1,451 1,317 1, , ,133 1, ,8 1,128 1,128 1,191 1,171 1,67 1,391 1,54 1,628 1,678 1,455 1,56 1,191 1,325 1,521 1,231 1,272 1,341 1,61 2,459 1,484 2,81 1,993 1,648 1,12 1,257 1,752 2,686 2,332 2,45 2,473 2,462 2,748 2,77 ECONOMIC VOLUME OF TRADING IN THE INTRADAY MARKET M 1 Years 98 to 4 Increase 4: 47.7% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg

112 PRICES IN THE INTRADAY MARKET PURCHASE/SALE IN THE INTRADAY MARKET Weighted average price: 3.11 c /kwh Total volume traded: 3,132 M 98 to Mar 5 GWh 98 to Mar 5 c /kwh M Sale Purchase Average price Volume traded Purchasing unit Pumping unit Production unit The daily trading and energy volume in the intraday market have followed a gradual upward trend, with an average trading volume in 24 of 748 M and 24,956 GWh, 47.8% and 4.2% increase, respectively, than in the previous year. The energy traded on the intraday market in 24 was around 12.4% of the energy and 47.8% of the economic volume negotiated on the daily market. The energy traded by retailers and qualified consumers accounted for 18.7% of electricity traded during the year in this market and 55.8% of the energy traded by purchasing units, increasing continually since the creation of the intraday market. 5.4 Technical operating processes of the system During 24, the technical operating processes managed by the system operator, deviation management and ancillary services required the trading of an average monthly regulating band of 1,234 MW, and average monthly energy of 79 GWh. The economic value of these services was 131 M for the band and 276 M in order to cover energy required to control deviations and ancillary services. The cost of these services for the consumer have been 263 M. However, as shown in the figures, the deviations of the different processes and in each month were significant. The volume of energy required for the technical operation of the system stands at 4.% of all contracted energy on the production market. This volume of energy corresponds to the difference between the hourly programmes resulting from the trading on different market sessions and the real-time supply and demand of energy, i.e. are the necessary energies to guarantee balanced supply and demand flows in each programming period. The volume of deviated energy is significant although this involves quantities that are within the margins of error in the demand forecasts. The energy required in the technical operating processes for the year 24 was 8,512 GWh and 273 M, an increase of 2.5% in energy and 12.7% in economic volume than in the previous year. 291

113 5. ELECTRICITY TRADING IN 24 The average price of the energy sold for the year 24 in all the technical operating processes was c /kwh, lower than 4.96 c /kwh for the previous year. This average price for the energies bought again to the system was c /kwh in the year 23, lower than c /kwh in the year 24. The share of these processes on the weighted average final hourly price, including regulation cost and technical constrains cost is.226 c /kwh for the year 24, a 1.3% decrease over 23. FIXED COST OF THE SECONDARY REGULATION ANCILLARY SERVICE 98 to 4 BAND POWER MW MONETARY VOLUME M AVERAGE UNIT COST c /kwh WEIGHTED AVERAGE PRICE c /kwh Jan Feb Mar Apr ,5 7,6 6, 15,3 7,8 2,2 1,1 1,1 4,7 3,3 5,5 4,9 16,8 14,3 18,9 2,9 16, 8,7 5,4 6,9 12, 12,1 12,3 8,1 8,7 4,3 4,1 2,6,55,52,29,12,92,68,49 1,98,895,52 1,813 1,897 1,333,938,62,16,23,98,59,72,25 1,194,28,396 1,69 1,158 1,452,492,47,8,37,124,36,74,22,814,134,66 2,45,661 1,371,5,125,9,36,22,47,55,16 2,165,131,587,331,861,948,295 May , 1, 2,2 2,1 14,2 7,5 3,,148,8,16,14,95,48,18 2,4,128,258,231 1,664,847,334 Jun Jul ,9 19,9 1,3,9 1,7 1,6 3,9 5,5 16,4 28,3 16,5 16, 6, 8,7,78,1,12,26,15,95,34 1,39,158,25,447 1,957 1,895,674,142,6,11,34,17,86,45 2,594,18,19,619 3,241 1,78,937 Aug ,3 1,7 2, 6,7 32,5 18, 13,9,278,13,14,43,214,11,78 4,686,25,229,745 3,82 2,58 1,544 Sep ,7 2,3 5,3 7,2 28,6 16,2 24,1,43,17,36,49,185,96,136,88,29,633,832 3,62 1,914 2,769 Oct ,4 2,4 6,1 6,8 25, 2,8 21,5,26,17,42,46,159,123,126,424,285,695,752 3,4 2,356 2,41 Nov Dec ,4 27,9 2,8 4, 5,4 14,5 4,9 15,2 1, 15,2 16,8 11,9 18,1 16,3,63,19,36,31,64,1,11 1,36,329,618,548 1,22 1,924 2,51,189,27,94,89,93,67,87 3,414,437 1,619 1,753 1,73 1,287 1,737 Total ,8 28,7 57,3 15,2 27,2 168,4 131,4,15,17,32,58,11,83,61 1,849,286,55,987 2,75 1,595 1,225 COST OF THE ENERGY USED IN THE TECHNICAL OPERATING PROCESSES 98 to 4 ENERGY GWh MONETARY VOLUME M TOTAL COST M AVERAGE UNIT COST c /kwh AVERAGE PRICE TO INCREASE c /kwh AVERAGE PRICE TO DECREASE c /kwh Jan ,8 21,4 21,2 7,1 75, 22,1 15,3 11,6 16,4 7,7 11,6 42,7 17,9 8,2,57,79,35,57,175,88,38 3,723 5,228 4,294 3,716 13,74 5,542 4,83,73,62 1,436,465 2,961,686 1,579 Feb Mar Apr ,1 1,7 13,5 8,6 1,9 9,1 1,7 23, 12,1 7,3 7,6 8,5 16,9 24,9 23,8 16,7 15,6 13,5 21,5 11,3 15,8 5,3 4,6 6,1 7,6 5,2 6,1 5,9 1, 6, 7,5 7,5 4,6 5,9 8,9 7, 9,3 9, 5,9 6,6 9,8 6,2,27,4,26,42,25,47,33 3,682 3,815 4,326 3,857 4,918 4,164 4,15,78,87 1,63,543 2,29 1,199 1,67,19,28,49,38,4,43,46 3,535 3,634 6,94 4,73 4,338 4,17 4,782 1,19 1,165 2,28,558 2,12,927 2,35,32,33,3,27,25,32,32 3,56 3,274 4,81 3,112 4,721 2,739 3,437,855,97 1,587,983 1,955 1,11 1,628 May ,1 11,1 13,4 15,4 19,4 24,7 18,2 2,8 5,9 5,9 6,4 7,5 11,4 6,2,14,28,31,31,29,6,31 2,751 3,42 4,9 4,45 5,76 4,627 3,567,646 1,25 1,165 1,246 2,54 1,35 1,726 Jun Jul , 1,8 9,5 15,8 13,2 11,4 19,1 45,5 19,9 31,2 33,6 35,7 28,9 3,2 4, 4,9 3,1 5,1 6,8 5,1 8, 7,5 25,8 16, 14,7 16,5,22,17,33,37,112,68,8 2,72 3,72 4,56 5,146 9,79 6,49 5,421,626 1,42 1,195 1,79 2,236 1,727 1,568 1,9 17,8,18,24,24,33,61,46,78 3,651 3,514 3,897 4,846 7,163 5,477 5,767,82 1,25 1,685 1,791 2,298 2,62 1,169 Aug ,6 1,3 19,9 23,6 23,8 26,1 29,8 1,9 5,9 8,5 1,9 19,2 14,3 15,9,58,28,41,56,89,64,78 3,75 3,328 4,22 4,677 5,52 6,299 5,421,465,969 1,45 1,533 1,29 1,949 1,483 Sep Oct ,2 13,4 11, 8,5 29,2 28,3 23,4 32,6 24,7 17,8 23,6 26,1 18,8 21,9 7,8 7,4 5,1 4,3 12,2 13,2 9,6 9,8 16,4 11,4 1, 12,2,37,24,54,46,68,47,52 3,72 3,816 5,648 5,819 6,226 5,55 5,65,664 1,248 1,877 2,132 1,758 2,16 1,611 11,1 1,8,33,2,69,48,44,55,52 4,259 3,613 6,374 5,835 5,26 4,848 4,951,741 1,137 2,231 2,232 1,486 1,653 1,489 Nov ,1 14,7 21,8 3, 22,8 1,3 21,4 9,8 4,2 1,1 14,2 13, 7, 9,1,42,21,5,7,47,33,39 5,333 3,411 5,874 5,91 4,799 3,383 4,661,742 1,98 1,589 1,919 1,538 1,243 1,577 Dec ,9 11,4 14,7 16,6 13,8 14,9 24,2 22, 7,7 11,1 66,5 11,8 8,4 12,2,99,36,52,38,51,4,55 7,55 3,459 4,39 13,36 3,823 3,567 4,895,646,99,535 2,818,639 1,252 1,82 Total ,3 142,2 218,8 293,3 347,2 244,6 275,7 97,2 76,4 12,5 164,1 185,6 13, 131,6,39,32,41,69,65,52,51 4,129 3,691 4,881 6,542 6,541 4,96 4,844,696 1,27 1,479 1,336 1,678 1,335 1,

114 5.5 Final hourly prices The value of energy traded on the electricity market depends on the transactions carried out by each participant in the different markets and processes, the costs incurred in solving deviations, and on the application of collections and payments derived from the capacity payment. This value constitutes a basic reference in the electricity market and is known as the final price. It is calculated on an hourly basis for each participant as a result of settlement Capacity payment In 1998, the capacity payment was calculated in accordance with the Order of 29 December 1997, which developed certain regulations established in Royal Decree 219/1997. The above-mentioned Order was modified by the Order of 17 December This has given rise to two important changes. Qualified consumers, retailers and external agents are now provided with prior information on the capacity payment applicable to each hour. Distributors pay a single hourly price for each month. Article 1 of Royal Decree 266/1999, which established the tariff for 2, stipulates that the value of.7813 c /kwh that was applied in the calculation of the monthly amount collectible for capacity payments would be reduced to.6912 c /kwh as from 1 January 2. Royal Decree-Law 6/2 of 23 June, reduced this value to.488 c /kwh as from 1 July 2, and also modified the collection and payment criteria with respect to the capacity payment, although its application is subject to subsequent regulatory developments. The consumers, retailers and external agents have a capacity payment lower than the distributors. The average capacity payment variation cost for retailers, qualified consumers and external agents was as follows: it reached a maximum of.295 c /kwh in November 24, reaching c /kwh in August. Distributors have an average price between a minimum of.568 c /kwh in January 24 and a maximum reached in August of.774 c /kwh. Capacity payment for production units depends on the availability of generating plant. Also, the allocation of amounts differs for thermal and hydroelectric power stations. Special regime production units that participate in the organised market received a capacity payment of.915 c /kwh for the energy produced until March 27, 24. Since the above mentioned moment its collection is the same to the ordinary production regime Deviations from the final schedule Deviations from the final schedule in each programming period is the difference between final schedule and meter measure in power station unit bus bars. CAPACITY PAYMENT 98 to 4 MONETARY VOLUME AVERAGE UNIT COST c /kwh M WHOLE MARKET FREE MARKET DISTRIBUTORS UNIT INCOME c /kwh Jan 121,3 11,7 17,4 74,3 79,4 8, 8,,886,741,662,454,458,45,448,322,289,296,294,297,278,98,82,88,552,561,548,568,45,412,394,27,38,278,25 Feb Mar 111,1 11,6 1,7 13,4 93,6 97,4 66,6 68,8 68,1 69,5 76,1 74,6 79,5 82,9,95,751,663,787,759,66,459,458,453,456,456,452,451,446,317,292,292,118,117,114,3,34,289,113,111,121,918,797,821,834,863,916,561,565,669,655,547,658,569,464,441,68,398,426,374,272,382,27,298,294,286,27,27,271 Apr May Jun 83,2 82,4 95,2 93,4 97,5 11,9 88,1 91,5 95,2 6,6 67,1 7,1 67,2 67,4 7,2 66,4 71, 78,8 7,4 74,4 79,3,684,76,654,679,753,651,75,758,655,46,455,466,451,463,452,451,434,45,441,453,444 1,291,112,13,111 1,336,1,12,11 1,148,15,13,16,119,116,113,13,11,12,99,11,17,699,693,759,94,98,921,939,932,945,666,671,682,75,689,699,672,69,669,76,337,398,737,32,396,733,377,422,357,245,366,258,379,282,289,246,282,254,297,294,252,268,28 Jul 19,3 111,5 69,2 72,9 75,1 84,3 86,1,782,757,459,461,452,453,445 1,222,116,18,119,122,12,117,797,946,64,678,69,673,718,418,442,267,28,299,281,282 Aug Sep Oct 75,4 99,3 92,7 1,1 12, 99,8 65,4 67,4 65,9 7,3 67,3 68,1 67,1 69,6 69,9 8,2 76, 75,7 78,8 79,7 75,4,593,749,456,754,736,46,719,735,461,458,443,455,45,458,445,449,441,451,449,449,441,643,,5,6,749,16,13,11,78,19,116,121,3,1,,14,16,16,12,117,19,61,766,729,946,661,968,654,991,651,699,714,69,69,683,69,685,691,694,774,292,398,738,42,415,753,366,395,251,271,282,276,265,284,259,264,28,262,262,263,258,278,258 Nov Dec 112,9 19, 115,5 113,9 69,8 69,2 72,2 78,4 69,9 72,4 75,8 8,1 81,2 84,5,85,752,46,783,748,447,462,446,458,443,453,452,454,451,886,33,293,297 1,19,288,262,267,278,293,295,257,288,28,866,83,926,56,912,562,563,571,556,563,567,558,581,455,426,577,45,426,279,295,257,39,265,26,243,261,28,271 Total ,1 836,7 845,9 919,2 952,1,766,75,557,459,451,452,445,843,16,157,159,158,161,157,781,97,755,637,645,636,674,394,416,321,276,281,269,

115 5. ELECTRICITY TRADING IN 24 During 24 no new complete final measurements have been received of any month, thus disabling final settlements to be made after April 22. Measurement data also provides information to all market participants on deviations and its unit cost. Based on an analysis of deviations in actual consumption and production values as compared to the contracted schedule, the weighted average value of deviations expressed as a percentage of traded power was 2.9% in 1998, 3.6% in 1999, 6.1% in 2, 6.4% in 21 and 5.1% in the first 3 months of 22. The average value on deviations of generators compared to traded energy was 1.7% in 1998, 1.3% in 1999, 1.% in 2,.8% in 21 and.9% in the first 3 months of 22. In general, generator deviations have remained low in percentage terms (around 1.% of total traded energy), except in January and February 1998, when deviations were exceptionally high due to the immaturity of the market. The deviations percentage for distributors were 4.1% in 1998, 5.2% in 1999, 5.6% in 2, 6.3% in 21 and 6.1% in the first 3 months of 22. The deviations of retailers, qualified consumers and external agents were the highest. The average percentage deviation from the power traded on the market was 9.5% in 1998, reaching 11.7% in 1999, 6.4% in 2, 6.1% in 21 and 4.8% in the first 3 months of 22. However, the absolute deviation to date logically differs from that for the first months of the year as the volume of trading has increased considerably. The percentage deviation with respect to traded power remains high, with a maximum of 59.7% in July 1998 and a minimum of 4.1% in February 2. The following charts show the total absolute value and percentage deviation compared to the contracted schedule for each activity. Usually, the monthly weighted average of the additional cost of measured deviations is lower than.6 c /kwh. However, there have been exceptions, particularly in December 1998, and immediately afterwards in January 1999, March, September and October 2, November and December 21 and January 22. In some cases, the total additional cost due to deviations was particularly high. For the months for which final measurements are not yet available, since April 22, total overcosts payable for measured deviations were lower than in the previous year. The prices in June 22 were significantly high. ADDITIONAL COST PER DEVIATION 98 to Mar 2 c /kwh Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg % 5% 1% 9% 5% 1% 9% 5% 1% 1 2 9% 5% 1% 9% 5% 1%,6,321 1,4,68,671 2,332,52,51 1,365,97,572 1,652,32 1,92 8,55,45,295 1,27,32,335 1,149,47,415 1,21,46,416 1,383,1,264 1,22,73,31,9 -,22,277,885,82,568 2,25,49,384 1,196,29,329 1,41,45,41 1,274 -,1,413 1,183,24,36 1,26,4,179,685,22,225,936,23,39 1,51,43,33 1,18,8,262 1,5 -,78,216,893 -,3,194,599,35,334,992,3,246 1,47 -,6,413 1,198 -,24,197,84,21,246,797 -,13,226 1,81,58,86 2,4,37,452 1,151,63,46 1,364,9,395 1,321,7,696 1,475,55,449 1,333,68,755 2,71,18,446 1,56,12,63 1,938,61,374 1,25,77,698 2,795,13,465 1,581 -,42,469 1,51 -,11,32 1,39,33,497 1,957,13,46 2,375,891,127 4,1,26,458 1,357,39,5 1,694,127 1,835 11,36,36,436 1,52,14,358 1,163,47,445 1,64,18,3891,667,17,416 3,26 294

116 MEASURED GENERATION DEVIATIONS GWh Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec % Years 98 to Mar 2 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec MEASURED DISTRIBUTION DEVIATIONS GWh Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec % Years 98 to Mar 2 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec MEASURED DEVIATIONS OF RETAILERS, CONSUMERS AND EXTERNAL AGENTS GWh Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec % Years 98 to Mar 2 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 295

117 5. ELECTRICITY TRADING IN 24 The statistical distribution of the additional unit cost payable in terms of deviations is shown in the following graph in percentage terms for the total cases arising from January 1998 to March 22, in which the additional cost has taken place in a given interval. The graph also shows cases of negative additional costs, albeit on limited occasions, as well as values exceeding 3 c /kwh. The most likely value is around.4 c /kwh. The table two pages ago shows the distribution of additional unit costs for each month. The first column shows the value exceeded in 9% of cases, the second the average value and the third the value exceeded in only 1% of cases. ADDITIONAL COST OF MEASURED DEVIATIONS % Hours to Mar >6 c /kwh AVERAGE ADDITIONAL COST MEASURED DEVIATIONS ADDITIONAL COST OF MEASURED DEVIATIONS c /kwh 5 98 to Mar 2 M 6 98 to Dec 4 Increase 4: -9.6% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

118 5.5.3 Measures of power production units During the year 24, measures were received from April to December 22, although some from the retailers have relation with an appeal presented before the Nationtal Energy Commission (CNE). The shipment of the measures during the mont of April and onwards were affected by the Royal Decree 385/22 in which it settles down that the one in charge of the reading is the distributor. Implementing the required computer systems for the reception, process and shipment of the measures has supposed an interruption in the shipment of the measurements that it has had the consequence that the measures of April to December of 22 have been received after March of 24. The 26 of February of 23 rule 23 of the Spanish Market Activity Rules were published in the BOE, on granting of guarantees to the market operator. This rule improved the method of evaluation of the guarantees that the agents must render to the market operator, giving a more stable and safe estimation and with a smaller cost for the agents. Between the introduced changes are: That the cession of the collection rights can only be considered instrument valid if the corresponding measures have been sent. That the generator that does not have the measurement that justifies its sale, to be able to receive the day of collections and payments, it will have to present extraordinary guarantees by the energy sold and not endorsed with the measurement. This has allowed that the measures of the generation are received on the following day, almost in its totality. However, the process can be improved so that in the short term the market operator can have the totality of these measures, with firm character, and incorporate them to the settlements. To such aim the corresponding proceedings are being made. Also, the procedure studies at the present time which allows the same improvement with the consumption data Settlement of the special regime that participates in the market The publication of Royal Decree 436/24, that stimulated the participation in the market of the special regime, directly or through a selling agent, forced the modification of the application settlement. EVOLUTION OF THE FINAL PRICE c /kwh Years 98 to Mar Maximum price Average price Minimum price 297

119 5. ELECTRICITY TRADING IN 24 AVERAGE FINAL HOURLY PRICE c /kwh 7 Years 98 to 4 Increase 4: -3.6% 8 WEIGHTED AVERAGE FINAL HOURLY PRICE c /kwh 7 Years 98 to 4 Increase 4: -4.3% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg TRADING AT THE FINAL HOURLY PRICE ENERGY AT THE FINAL HOURLY PRICE M 1,2 Years 98 to 4 Increase 4:.5% GWh 2, Years 98 to 4 Increase 4: 5.% 1, 18, 16, 8 14, 12, 6 1, 4 8, 6, 2 4, 2, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg , Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg 13,69312,276 12,792 12,167 12,129 12,696 13,97812,71113,165 12,894 13,282 14,7413,43 14,92713,536 13,634 12,299 12,944 13,442 14,73413,36713,863 13,581 14,51 15,32513,847 16,22914,16 14,75 13,463 14,52 14,548 15,5914,33514,641 14,283 15,164 15,47214,675 16,3714,496 15,17 13,172 14,418 15,133 15,82415,37314,792 14,87 15,639 17,1415,197 17,3314,862 15,264 14,767 14,942 15,542 16,6915,14215,449 15,699 15,677 16,3515,636 17,76416,712 16,518 14,73 15,788 17,39 18,63417,85616,873 16,859 16,727 17,66216,959 17,86417,576 18,598 16,23 16,873 17,871 19,34317,86517,737 17,91 17,981 18,74917,

120 The selling agent presents before the market operator the supplies of the holders of the facilities to which he is representing. With object to facilitate this participation it made possible the outside associate one or two forms of settlement to the election of the holders of the facilities: Directly, to the holder of the installation. To the selling agent who participated in the market. In the year 24 44% of the energy of the special regime with possibility of accedding to the market has done it Final hourly price, energy and pertinent trading The value of energy traded in the electricity market depends, for each buyer or seller, on the transactions carried out and the application of the capacity payment and the additional cost of deviations. On this basis, the average final hourly price of energy in the electricit production market can be calculated. Significant matters regarding the functioning of the production market, in addition to those referred to above, are as follows: The total volume of energy traded in the different sessions of the production market reached 213,778 GWh maximum in July, followed by the months of December and March 24, in that order. The economic volume of trading reached 7,622 M. The high value was reached in December 24, followed by the months of September and November. Settlement processes have been carried out in accordance with the terms established in the Market Rules, with the co-operation of the system operator. The existing delays in the reception of measurements to the market operator, should be significantly reduced. There has been a significant development of the retailing activity and of free price contracting by qualified consumers. Accordingly, the market participation of both retailers and qualified consumers in the market is growing at a fast pace arising to 1,349,372 supplies at the end of 24. Final monthly traded price totals fell from September 24 (4.289 c /kwh), to April (2.882 c /kwh). Monthly total energy amounts goes from maximum in July with 19,343 GWh to a minimum in April with 16,23 GWh. The final average price for 24 differs for each participant. It has therefore been calculated on the basis of the following assumptions: It has been calculated as the purchase price of electricity in the production market, taking into consideration all payments and collections made by purchasers, including capacity payments at the rates established by prevailing regulations in each period. COMPONENTS OF THE FINAL HOURLY PRICE 98 to 4 DAILY MARKET c /kwh TECHNICAL CONSTRAINTS c /kwh SPINNING RESERVE c /kwh INTRADAY MARKET c /kwh TECHNICAL OPERATION c /kwh CAPACITY PAYMENT c /kwh Jan Feb 2,721 2,394 3,233 2,184 6,494 2,16 2,482,9,24,85,187,11,158,1,68,52,29,11,92,65,46, 2,419 2,927 3,55 2,45 3,912 2,638 2,471,2,11,25,152,21,148,72,79,16,23,98,58,7,23, -,3 -,11 -,3-,21 -,5,1,46,79,23,63,97,127,44,886,741,662,454,458,45,448 -,8 -,8 -,6-,4,6,6,24,4 -,7,58,18,78,45,95,751,663,459,458,456,452 Mar 2,572 2,96 3,754 1,825 3,524 2,519 3,32,5,3,9,122,43,4,5,62,8,37,123,35,71,21, -,14 -,1 -,5-,4 -,1,9,7,25,13,62,31,81,38,787,759,66,453,456,451,446 Apr 2,64 2,679 3,27 2,84 3,929 2,21 2,352,,2,12,67,54,37,28,15,9,36,22,46,53,16-,2 -,14 -,24 -,3-,5 -,1,4,18,39,9,46,22,76,48,684,76,654,46,455,451,434 May 2,271 2,638 2,437 2,731 3,972 2,547 2,441,7,8,59,73,29,81,28,127,8,16,14,94,46,18-,5 -,6 -,8 -,6-,1,11,3,15,43,3,36,39,15,43,679,753,651,466,451,45,441 Jun Jul 2,268 2,628 2,633 3,685 4,24 3,85 2,813,42,37,189,141,59,131,19,69,9,12,25,12,89,33-,8 -,4 -,8 -,16-,11 -,3,14,28,27,29,2,12,77,12,75,758,655,463,452,453,444 2,651 2,667 2,954 3,63 4,72 3,879 2,819,63,19,198,159,39,95,23,124,6,11,34,164,81,45-,6 -,7 -,12 -,15-,14 -,4,17,18,28,7,19,3,45,85,782,757,459,461,452,453,445 Aug 2,785 2,495 2,764 2,991 3,184 3,956 2,698,67,13,185,27,97,11,195,23,13,13,43,28,94,77-,3 -,6 -,5 -,7-,13 -,8,13,47,33,29,46,76,6,86,593,749,456,458,443,449,441 Sep Oct 2,466 2,727 3,871 3,791 3,774 3,914 3,59,63,59,187,11,8,74,122,43,17,36,48,182,9,135-,4 -,11,8 -,12-,1,4,21,42,32,19,24,57,57,52,754,736,46,455,45,451,449 2,528 2,51 3,987 4,47 3,518 3,531 3,76,9,15,84,44,1,84,19,26,17,42,45,155,116,125-,11 -,16,3,1 -,5,3,26,32,25,22,47,45,57,64,719,735,461,458,445,449,441 Nov 2,892 2,777 3,668 3,646 2,912 2,659 3,226,6,5,17,87,75,87,113,63,19,35,31,62,95,1-,18 -,13,1, -,7 -,3,26,35,22,28,61,55,56,47,85,752,46,462,446,453,452 Dec Avrg 2,522 2,693 2,182 4,892 2,23 2,256 3,556,18,79,151,13,81,15,12,188,26,92,88,89,64,86-,3 -,8 -,1 -,16-,5 -,1,17,13,39,58,277,88,67,51,783,748,447,458,443,454,451 2,564 2,672 3,183 3,15 3,889 3,26 2,874,25,43,114,113,57,97,16,1,17,32,57,18,78,61-,5 -,9 -,1 -,1-,13 -,4,2,35,36,23,75,63,77,59,766,75,557,459,451,452,

121 5. ELECTRICITY TRADING IN 24 FINAL HOURLY PRICE FOR CONSUMERS. RETAILERS & EXTERNAL AGENTS FINAL HOURLY PRICE FOR DISTRIBUTORS AND REE CONTRACTS c /kwh Years 98 to 4 Increase 4: -5.5% c /kwh Years 98 to 4 Increase 4: -2.7% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg Additional costs of energy for secondary and tertiary regulation have been taken into consideration in this price. Once the final measurements are determined, these additional costs are charged to participants incurring deviations on a proportional basis. In accordance with the final measurement data for the period April 21-March 22, the additional cost in connection with deviations for the last 12 months settled has varied a few cents to over 32 c /kwh. The average value is c /kwh Components of the final hourly price The components of the average final hourly price for the production market as a whole are shown in the table on the page before. On average, the final price includes the following: The daily market price, which represents approximately 8.6% of the final price. The cost incurred in solving technical constraints and technical operating processes, which represent around 6.4% of the final price. The price of the intraday market, which represents.6% of the final price. The capacity payment, which on average represented 12.5% of the final price. The breakdown of the final price shown in the table of the following page represents the final price for retailers, consumers and external agents and has been obtained on the basis of the assumptions referred to above, except that payments, collections and power acquired by these agents have been taken into consideration. On average the final price for retailers and qualified consumers comprises the following: The daily market price, which represents around 86.9% of the final price. The costs incurred in resolving technical constraints and technical operating processes, which account for approximately 6.8% of the final price. The price of the intraday market, which represents 1.6% of the final price. 3

122 FINAL HOURLY PRICE WHOLE MARKET c /kwh Year 4 FINAL HOURLY PRICES RETAILERS, CONSUMERS AND EXTERNAL AGENTS c /kwh Year % 3.4% 3.% % 3.7% 3.1% % % %.2 1.6%.52 Capacity payment Technical operation Technical constraints Daily market Intraday market Capacity payment Technical operation Technical constraints Daily market Intraday market COMPONENTS OF THE FINAL HOURLY PRICE FOR RETAILERS, CONSUMERS AND EXTERNAL AGENTS 4 c /kwh DAILY MARKET TECHNICAL CONSTRAINTS SPINNING RESERVE INTRADAY MARKET TECHNICAL OPERATION CAPACITY PAYMENT FINAL HOURLY PRICE Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov De c Avrg

123 5. ELECTRICITY TRADING IN 24 The capacity payment, which on average accounts for 4.8% of the final price. The final price for distributors has been obtained on the basis of the assumptions described above, except that payments, collections and energy for distributors have been taken into consideration. The components of the final hourly price for distributors and REE export contracts are as follows: FINAL HOURLY PRICE FOR DISTRIBUTORS AND REE CONTRACTS c /kwh Year % 3.7% 2.9% The average daily market price, which accounts for around 75.7% of the final price. The costs incurred in solving technical constraints and technical operating processes, including surplus/deficit of the contacts referred in transitory provision 9th of Law 54/1997, which account for approximately 6.6% of the final price. 75.7% The average intraday market price, which accounts for.2% of the final price..2%.7 Capacity payment Technical operation Technical constraints Daily market Intraday market COMPONENTS OF THE FINAL HOURLY PRICE FOR DISTRIBUTORS AND REE CONTRACTS 4 c /kwh DAILY MARKET TECHNICAL CONSTRAINTS SPINNING RESERVE INTRADAY MARKET TECHNICAL OPERATION CAPACITY PAYMENT FINAL HOURLY PRICE Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg

124 The capacity payment, which on average accounts for 17.5% of the final price. 5.6 International electricity trading International electricity exchanges are regulated by the Order of 14 July 1998, which establishes the legal regime applicable to external agents for the purposes of intra-eu and international exchanges of electric energy. Prior to the publication of this Order, the only exchanges were the result of the contracts entered into by Red Eléctrica de España, S.A., referred to in the ninth transitory provision of Law 54/1997 and the sixth transitory provision of Royal Decree 219/1997, of 26 December, and which organises and regulates the electricity market. Section nine of the aforementioned Order of 14 July 1998 requires the system operator to publish the maximum capacity for import and export transactions with neighbouring countries at least one week in advance for each programming period, less the capacity reserved for support exchanges. Accordingly, this information has been made available to the market participants since 18 May 1999, thereby making it possible to attach a value to each of the tielines and commence commercial exchanges in the electricity production market. ECONOMIC VOLUME OF EXPORTS ECONOMIC VOLUME OF IMPORTS M to Mar 5 Increase 4: 35.% M 4 98 to Mar 5 Increase 4: -3.% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg

125 5. ELECTRICITY TRADING IN Volume of international exchanges The following graph shows the energy traded on the different markets in terms of imports and exports since the commencement of the production market. The following charts show monthly figures for imports and exports of energy traded in the daily and intraday markets, including the contracts signed by REE, energy traded under bilateral contracts and power withdrawn from the system in order to resolve technical constraints and in real-time technical operating processes. Imports, as a percentage of the volume of energy production in the market as a whole, vary between 2.53% and 6.68%. The averages for 1998 were 2.94%, 4.85%, for 1999 and 2, 4.6% for 21, 4.62% for 22, 3.74% for 23 and 3.35% for 24. In the month of November 24, 46.6% of imports under the aforementioned contracts entered into by Red Eléctrica de España (REE). TOTAL ENERGY IMPORTS AND EXPORTS GWh 1,4 1,2 1, Years 98 to Mar Imports Exports IMPORTS EXPORTS GWh Years 98 to Mar 5 Increase 4: -5.6% GWh 1,4 Years 98 to Mar 5 Increase 4: 51.6% 1, 1,2 8 1, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg ,3 1, , , , 1, ,

126 Exports represent between.9% and 7.6% of total monthly demand for energy in the market. The averages were.78% for 1998, 1.53% for 1999, 2.47% for 2, 2.26% for 21, 2.16% for 22, 3.27% for 23 and 4.69% for 24. The financial volume of imports and exports traded in the electricity production market is shown in the following graph. The financial volumes shown above do not include energy exchanges under bilateral contracts. Energy imports and exports carried out under the contracts made by REE have been valued at the corresponding market or associated process price. The financial volume of imports accounts for between 2.34% and 6.24% of total market turnover. On average, the percentage was 2.79% in 1998, 4.72% in 1999, 4.45% in 2, 3.37% in 21, 3.64% in 22, 2.86% in 23 and 2.72% in 24. The financial volume of exports has accounted between.1% and 7.3% of total market monthly turnover. The average annual percentages were.43% for 1998, 1.38% for 1999, 1.62% for 2, 1.83% for 21, 1.57% for 22, 2.71% for 23 and 3.59% fon Balance of international exchanges International exchanges have produced a net exporting balance. Exchanges have been carried out in 24 with Portugal, France, Andorra and Morocco, as follows: Imports from Portugal totalled 976,1 MWh and exports 7,574,52 MWh. Imports over the border with France totalled 7,84,568 MWh and exports to France reached 1,862,2 MWh. Imports to Morocco totalled 6,48 MWh and exports amounted to 1,587,336 MWh. Exports to Andorra were 293,615 MWh. No imports were made. In 24, imports decreased except those from Portugal. Exports grew, except to Andorra. Financial flows resulting from these operations are not comparable as information on the prices at which energy is exchanged under TOTAL ECONOMIC VOLUME OF IMPORTS AND EXPORTS M Years 98 to Mar BALANCE OF INTERNACIONAL EXCHANGES GWh to Mar 5 Increase 4: -4.3% Imports Exports Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg

127 5. ELECTRICITY TRADING IN 24 bilateral contracts is not known. Nevertheless, taking into account that bilateral contracts do not represent a significant volume, the total economic value of energy exchanges is shown below, excluding such contracts and the contracts subscribed by REE, referred in Ninth Transitory Provision of Law 54/1997, have been valued at marked price or corresponding process. The following table shows the level of occupation of capacity up to 31 March 25. The free capacity has been calculated taking into consideration the final value of commercial exchange capacity before the daily and intraday markets Level of occupation of commercial exchange capacity Since 18 May 1999, the system operator has published the commercial capacity in each hourly slot available for each of the international tie lines of the Spanish electricity system. This commercial capacity is used both by market participants carrying out trades through bids sent to the market operator and by participants executing physical bilateral contracts. The capacity value is used both in the matching process and in the solution of technical constraints, in order to obtain a result for the markets that respects the maximum capacity with each of the neighbouring electricity systems. CAPACITIES AND ENERGY INTERCHANGE 18 May 99 to Mar 5 MWh Portugal France Morocco Commercial Export Capacity Free Export Capacity Export Import ECONOMIC VOLUME OF THE BALANCE OF INTERNATIONAL EXCHANGES M to Mar 5 Increase 4: -679.% Free Import Capacity Commercial Import Capacity , Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg

128 37

129 Liberalisation of electricity in an international context 6.1 Analysis made by the Association of Power Exchanges APEx 6.2 Evolution and fourth report on the start-up of the internal electricity market 6.3 The Florence Forum 6.4 Intra-community exchanges, EuroPEX contributions to the solution of congestion within the European context 6.5 Development of prices in the main organised spot markets in Importance of the Spanish market in the European context 6.7 The Iberian electricity market

130 The liberalisation of electricity systems is being carried out on the basis of boosting competition in production and retail activities, providing free system access to producers, retailers, distributors and customers, and the progressive advance towards freedom of trade.

131 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT Most of these experiences are characterised by the establishment of entities that act as market operators on day ahead markets and intraday markets that later on incorporate forward contraits and, in more advanced cases, the implementation of financial futures markets. These types of markets exist not only in the European Union, but also in the more advanced Eastern European countries, America, Eastern Asia, Australia and New Zealand, as well as projects in the southern Mediterranean (Maghreb). Other Asian countries are also in the process of preparing deregulation projects along the same lines. The creation of electricity markets managed by independent power exchanges, a common denominator of almost all electric system deregulation experiences, responds to the need to guarantee free trade and correct price formation. The objective is to guarantee access to energy trade under equal conditions to the largest possible number of participants. Year 24 and first months of 25 were characterised by continuity in the expansion of organised markets, where trading in the main markets continues to grow both in Europe and America. Progress has also been made in terms of the number of market participants, with small and medium-sized producers and resellers starting up in several markets. At the same time, trading in Europe has already started in the Italian market, with the incorporation of demand since December 31st 24, with 3 agents. This progressive path towards the expansion of organised markets is taking place in an environment where consumers have an increased capacity to choose supplier. On this point, the second European Union directive for the internal market in electricity deserves a special mention, as it establishes a timetable with a deadline of July 1st 27, when all European consumers will be considered as qualified consumers. In this sense, while there are still large differences in regulations and liberalization models, significant reference is made to procedures that guarantee consumers freedom of choice and, closely related to this, to the importance given by experts and regulators to the information and resources that should be made available to consumers so that they can contract and have access to the public prices of organised markets; advanced communications and electronic meters. The programs for demand response to prices are considered essential by these institutions and experts for promoting rational energy consumption which, in addition, contributes to the security of electricity supply, and constitutes a significant factor for increasing price elasticity in the demand for electricity, with a possible contribution to resolving problems that could arise from market power on the side of the supplier. This development is at the base of the requirements for liquidity requested by many companies from spot electricity markets, both to facilitate the trading for a larger number of agents at correctly formed prices, and to develop spot trading operations and risk coverage in organised electricity markets based on this liquidity and prices. The inter-relationship that exists between interconnected electric systems was a fundamental question throughout 24. In the first place, because the blackouts in supply in23 in the United States and Canada, and on the other side of the Atlantic in Italy, Sweden and the United Kingdom, gave rise to the analysis and intervention of political bodies and regulators. These activities, especially in Europe, have highlighted the need to direct attention to other areas that are considered essential, such as the system security and their ability to interoperate, in addition to having sufficient gas and electrical energy resources in the mid and longterm, once supply is liberalised in many countries and undergoing the deregulation process in others. Work is therefore being carried out in various directions; improving technical management and ensuring supply for a growing demand in a safe, sustainable and competitive manner and developing the ways that lead to the single market, endeavouring the support for the creation of regional markets on the one hand, and to increase infrastructures on the other, to ensure true market mechanisms to resolve the congestions that arises in the still limited interconnection capacities between States or groups of Member States. This inter-relationship among electric systems, in security of supply scenarios, has served as a basis for emphasising in experts and regulators' analysis the benefits derived from expanding international interconnections, the formation of regional markets, and boosting cooperation between neighbouring power exchanges, especially in resolving structural congestion in networks, or the need for enabling flexible and free-flowing transactions in the field of supranational integration of markets, which is the case of the European internal market. Finally, electricity and the environment has also become a significant concern. In this sense, a noteworthy initiative is the adoption of EU Directive 24/11/EC, which amends Directive 23/87/EC, establishing a scheme for greenhouse gas emission allowance trading within the EU to contribute to comply the agreements commitments of the Kyoto Protocol (DO. 13/11/4), which entered into effect on February 16th

132 The publication on August 28th 24 of Royal Decree Law 5/24, which regulates the greenhouse gas emission allowance trading scheme and Regulation 2216/24 of the European Commission laying the basis for a standardised and secured system of registries in keeping with the said Directive, as well as individual allotment of emission rights to individual facilities, which is currently underway in all the EU Member states, has opened the door for the organised markets to effectively incorporate this product into their business. 6.1 Analysis made by the Association of Power Exchanges APEx Taking into account the development and experience of organised markets, the following factors are considered to be the most relevant: Development of liquid spot markets whose prices are relevant signals, as requested by both EU authorities and companies, which demand open and competitive markets without excessive intervention. Cooperation among interconnected markets, which facilitates an increase in volume and types of trading operations. Variety in trading is important, either in spot or long-term contracts, as it enables risk coverage and justifies financial investment and consumption decisions. Progress towards the total liberalisation of all consumers, which in order to be effective requires a close link between the wholesale and retail markets. This link between supply and demand, with appropriate management of the latter, may result in the reduction of demand peaks, improving the security of supply and avoiding extreme prices, to the benefit of consumers and favouring a more efficient use of the entire electrical energy supply. Reinforcement of transmission infrastructures and elimination of contraints in networks, affecting both the interconnection between electric systems and internal to the systems, which in many cases occur in international exchanges. Another key point is a more efficient technical management and cooperation among network system operators. Integration and linking of environmental measures with transparent market activity and emissions trade. Pertinent factors analysed by the Association of Power Exchanges APEx Since 1998, OMEL has been participating in successive international conferences that take place on the occasion of the Association general assemblies. From the beginning of OMEL's involvement in the association, conferences have been held in Pasadena (California) in 1998, in Madrid in October 1999, Kananaskis (Alberta-Canada) in 2, in Noordwijk (Holland) in 21, in Singapore in 22, Cartagena (Colombia) in 23 and Leipzig (Germany) in 24. All the conferences address relevant and current topics, highlighting in particular the following: Experiences in the development of the different markets managed by members of the Association. Evolution of transactions and different types of contracts in the electricity markets: adjustment markets, spot transactions, longterm supply, swaps, futures and options and settlement of OTC contracts. Price volatilities in organised markets. Aspects concerning metering and settlements in organised markets. 311

133 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT APEx MEMBERS Administrador del Mercado Mayorista Guatemala APX B.V. Netherlands APX Power Ltd. United Kingdom Borzen d.o.o. Slovenia CAMMESA Argentina EEX Germany ELEXON Ltd. United Kingdom Energy Market Authority Singapore Energy Market Company Pte Ltd Singapore ESB National Grid Ireland ETESA Panama IPE United Kingdom ISA Colombia Independent System Operator of California United States Korea Power Exchange Republic of Korea National Grid Company Limited United Kingdom NEMMCO Australia NordPool Norway Operador del Mercado Ibérico de Energía - Polo Español Spain Operador del Mercado Ibérico de Energía - Polo Português Portugal OPCOM Romania Operator thru Elektrinou a.s. Czech Republic PJM Interconnection United States Polish Power Exchange Poland Power Pool of Alberta Canada PowerEx Ltd. United Kingdom Powernext SA France The Marketplace Company (M-Co) New Zealand Transpower NZ Ltd New Zealand Unidad de Transacciones, S.A. El Salvador Relationships between market and system operators. Relationships with market supervisory entities, with special reference to American markets. Forums on markets in different continents. Developments in Central and Eastern Europe. Government bodies and the neutrality and independence of organised markets. Communication by market operators of information to market participants and the public in general. Cooperation between power exchanges. Key trends that shape the future of the markets. The effects of problems arising from the exercise of market power in organised markets and analysis by surveillance committees established for this purpose, with special reference to American markets. European Union experience in the treatment of congestion management and access tariffs and the possible application of this experience to other interconnected areas such as the South American markets. The latest Conference in Leipzig was attended by 85 representatives of the foremost power exchanges in Europe (Nordpool, OMEL, APX, UKPX, GME, EEX?), Canada (Alberta), the United States (JPM), South America (Cammesa, ISA) and Asia (Singapore, KPX), new members (Ireland, Portugal, Macedonia, Poland and Rumania) as well as market administrators from Latin America (El Salvador, Guatemala), and representatives of institutions such as the European Commission and the International Energy Agency. OMEL, which currently acts as President of APEx, chaired the Conference, the meetings of the Board of Directors and the Association's General Assembly, all of which took place during the Conference. The main topics discussed at the Association's 9th Annual Conference held in Leipzig on October 11th and 12th were the following: Markets evolution. Main issues in Europe, America, Asia and Oceania. Retail competition, demand response programs and the role of power exchanges. Regional Markets and international trading. Risk coverage in electricity markets and liquidity of the same. The speeches given on the first topic "Markets evolution. Main issues in Europe, America, Asia and Oceania", were divided into the following sections: 312

134 Europe The evolution of the European markets was presented by market representatives from Slovenia, the Czech Republic, Spain, France and Ireland. All the speakers set out the status of their markets, both in structure and operation, as well as the key concerns and outlook for the future. All the markets discussed have witnessed a growth in the number of agents and trading volume, the trend toward the organisation of regional markets, and the need to find the most efficient possible means to resolve congestions in the interconnections, in the negotiations underway between affected Market and System Operators within the framework of the Florence Forum and the Mini- Forums that have been arranged for the first months of 25. America The American continent developments were presented by the representative of PJM (US), who explained the status of the markets in the different areas of the United States, and the representative from Argentina, who discussed this development in Argentina, Bolivia Brazil, Chile, Paraguay and Uruguay. In the case of the United States, the representative presented a summary of the various markets existing in the different areas of the country and Canada, in which the market model used in PJM is now the trend. The key characteristics of this model are: Generation and transport network in competitive terms as deregulated activities. System and Market Operator combined in a single entity that is not allowed to hold assets in electricity relaited activities. The producers and purchasers make bids in the nodes defined by the System Operator, and the nodal prices remunerate the transmission activity. Provided the specific node passes the test for inexistent market power, each nodal price is reached through an optimisation algorithm. In those nodes where this is market power of an agent, regulated prices are applied, replacing the bids presented by the producers. Capacity payment is currently under analysis, as the issue of new production has not yet been resolved. The trend at present appears to be that the presentation of bids by agents for installing capacity should be at the sites they deem appropriate, and that a linear programming algorithm, with a pre-determined reserve objective and a priori restrictions to encourage the installation of facilities in particular areas, resolves capacity payments for each of the parties bidding on the construction of the facilities. Given that the network is competitive, when investors wish to build a new production unit, they are also responsible for the reinforcements necessary to inject the energy into the network, if the need arises, at their own expense, but retaining property. The status of the markets in the various South American countries is currently going through less evolved processes, with very different solutions that are rarely interrelated. In particular, the Argentinean market is operating practically under government intervention. Asia and Oceania The status of the markets in Asia and Oceania was presented by the representative from Singapore, who offered a brief summary of the situation in China, Japan, the Philippines, Indonesia, Australia and New Zealand. Given the enormous geographical extension and the uniqueness of the systems, evolution is less homogeneous. While the markets in Australia, New Zealand and Singapore are quite developed, having been in operation for some years, in the rest of the countries the markets have been set up recently, without the incorporation of demand (Korea) or have established future dates for their liberalisation, such as 25 (the Philippines), or 28 (Japan). 313

135 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT The second topic, "Retail competition, demand response programs and the role of power exchanges", included three presentations. The first was offered by a representative of OFGEM in the United Kingdom, who explained that prices for domestic consumers were regulated to encourage their entrance into the market (shelter prices higher than market prices). Additionally, measures have been taken to protect vulnerable consumers, including simplifying the change of supplier in final consumers. The OFGEM representative presented the problems arising in the exercise of market power in the "pool", due to the concentration of ownership of the means production existing at that time. The United Kingdom did not encourage the existence of "national champions", and as a consequence, many electrical companies are currently held by French or German companies which, after the re-organisation, now hold a 16% individual maximum market share in production. However, it was not possible to prevent a majority share of reselling in the domestic and non-domestic markets from being in the hands of six companies, which created dominant position problems in acquisition. In the opinion of OFGEM, the factors most influencing prices are: Wholesale contract prices. Emissions prices The influence of surcharges on renewable energies Inflation and the increase in corporate management costs OFGEM maintains strict surveillance over the relationship between reseller costs and sale prices to domestic consumers. In conclusion, the OFGEM representative indicated that retail competition is reasonable in the United Kingdom, that the regulator must always maintain strict surveillance, and that the deregulation process has been underway for 15 years, with permanent support from the authorities. A very interesting presentation, given by a representative of the International Energy Agency dealt with demand management. The representative discussed the elements of demand management programmes linked to market prices, the different demand management programmes in regulated and liberalised environments, and how the latter, instead of regulated prices, is based on concepts such as: Hourly prices linked to market prices. Participation of demand in ancillary or system services. Active participation of demand in payments for congestion. The possibility of that it constitutes a subsidy to mitigate market power. In his opinion, flexible demand is what makes the markets function. In periods of very high prices, and particularly of abrupt price changes, the elasticity of demand may have a decisive influence on prices. He mentioned the case of California, where a 5% reduction in demand could have reduced wholesale prices on the market by 5%, and the case of the American mid-west, where a 1% reduction in retail consumer demand would have reduced price peaks by 6%. He highlighted the importance of demand response programs based on real market prices, including prices in the adjustment market in real time. He remarked that hourly meters are essential, that prices must be public and transparent and that the contract cost of these programs is low, as they are based on new technologies. The third presentation, given by a representative of DGTREN, dealt with the essential points of the new Directive 23/54/EC and Regulation (EC) no. 1228/23. He emphasized that the issues that most concern the Commission are cross-border electricity exchanges, the level of interconnection and market power, the security of supply and price volatility, and the need to comply with environmental objectives. He discussed the regional markets and the regional focus the European Commission would like to apply to specific solutions to problems, such as the means to achieve the internal energy market as soon as possible. The third topic, "Regional markets and international electricity trade" encompassed three presentations, from representatives from the United Kingdom and Holland. 314

136 The primary obstacle to attaining a more effective union between the markets in England, Wales and Scotland was the joint technical operation of the markets. OFGEM is looking for full integration of systems operation as the fundamental basis on which to reach the proper operation of the integrated market. The Dutch representative offered a presentation regarding the mechanism for market coupling developed by EuroPEX, which was the basis of the study presented by EuroPEX and ETSO (European Transmission System Operators) at the last Florence Forum. The fourth topic, "Managing risk in electricity markets and market liquidity", also encompassed three presentations from the representatives from Germany, the United Kingdom and Norway. The German representative presented the market status, the growing evolution of trading volumes in the futures market (open positions are currently 12 TWh and 4.2 billion ) and the greater significance the spot market price is acquiring with reference to: The authorities and regulations Bilateral contracts The derivatives market OTC contracting The second presentation, by a representative of ELEXON from the United Kingdom dealt with collaterals, where to cover the risks arising from the cost of deviations, explicit guarantees are required from the agents in the form of cash payment or credit lines only, with no other type of compensation amongst groups of companies accepted. The aforementioned guarantees are required both from purchasers and producers, given that all agents may incur in deviations. The final presentation on this topic was given by the representative of NORDPOOL ASA of Norway. He reported that the spot market volume was currently some 4% of demand in the Scandinavian countries and that it had increased somewhat due to the presentation of gross bids (without compensating purchases and sales). After the APEx Conference, on October 12th and 13th, an Industrial Conference entitled "Liberalisation of the Energy Markets: Examples of good practises" was also held in Leipzig. Various presentations were given, and the Conference was attended by the foremost companies and institutions in the European and American energy sector. OMEL participated extensively in both conferences, contributing to the subjects and discussions, and many of the participants showed interest in OMEL's experience in market operation, particularly in topics such as the intraday markets, management of international congestions and power guarantees. The next conference will be held in 25, and is scheduled for 3th October - 1st November in Orlando (US). The entity responsible for its organisation is the largest power exchange in the world (PJM). 315

137 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT 6.2 Evolution and fourth report on the start-up of the internal electricity market This annual report, published on January 5th 25, is issued by the European Commission in accordance with Article 28 of Directive 23/54/EC. The report first indicates that on October 13th 24, warning letters were sent to 18 Member States, notifying them that they had not yet incorporated the regulations of the aforementioned Directive into their national legislation. On March 16th 25, the European Commission sent Member States Germany, Greece, Spain, Belgium, Estonia, Ireland, Lithuania, Latvia, Sweden, Luxembourg the report issued due to the failure to transpose the Directive into national law. As general matters, the report indicates the following: With respect to trading in competitive conditions, Directive 96/92/EC has not been sufficient, given that fewer than 5% of consumers have changed supplier in the Member States, and that many of them are unsatisfied with the range of services that are offered to them. The report considers that only the Scandinavian countries and the United Kingdom have removed the obstacles to competition. In the majority of the cases, the consumers who have changed supplier have not had access to suppliers from other countries, reflecting the lack of integration of the markets and insufficient interconnection infrastructures. In general, foreign suppliers have less than a 2% market share. As highlighted in previous reports, the electricity and gas markets are dominated, in the majority of the countries, by one or two companies, and there is rarely sufficient commercial capacity for cross-border trading. On the other hand, many of the electricity markets in the new Member States are characterised by very longterm electricity contracts, which means that the field of action for the competition is much less than what may be shown by market shares. Additionally, the development of liquid wholesale markets is an essential goal, as this would allow participants, including the new Member States, to purchase and sell electricity freely. The interconnection between Member States is an important potential element in increasing competition. Furthermore, the application of Regulation (EC) Nº 1228/23 should also give rise to more progress. Coordination to solve the congestion in the borders through the "market coupling" proposed by the participants at the Florence Forum would significantly boost liquidity and access by participants to international markets. Although much work has been done on third party access to the network and cross-border management, the independence of network managers continues to be a fundamental issue. In this area, the Commission considers that managers of distribution networks should separate their activities from supply activities, with a view to guaranteeing prices that reflect costs and to the elimination of all types of entry barriers. To this effect, the influence of the regulatory authorities is essential in ensuring nondiscrimination, both in prices and physical access to the network. Finally, the report highlights the existence of regulated prices for the final consumer operating in parallel to long-term purchase contracts, which may obstruct the progress of the internal market. Except in Italy, the year 24 saw a convergence of wholesale prices at around 3 /MWh both in bilateral contracts and markets The report forecasts significant increases for 25, to over 3 /MWh, partially due to the response to the increase in primary energy source prices on the world markets. However, the prices to final consumers, which also include network costs and a margin for retail supply, have not shown this same trend. These retail prices show a high degree of dispersion amongst consumers and those set by other Member States. EUROPEAN UNION ELECTRICITY MARKET OPENING % Source: European Union United Kingdom Sweeden Germany Finland Denmark Spain Austria Holland Portugal Luxemburg Belgium Ireland Italy France Greece Estonia Latvia Poland Czech Rep. Slovakia Hungary Slovenia

138 ELECTRICITY DIRECTIVE APPLICATION Market opening % Total demand TWh Basic Basic unbundling model unbundling model TSO DSO Role regulator competition law Network access tariffs Number of suppliers Germany 1 5 Legal Account Planned Over average 1,5 7 Austria 1 55 Legal Legal Advisory Over average Belgium 9 6 Legal Legal Advisory Over average Denmark 1 33 Legal Legal Limited Average 69 4 Spain 1 21 Ownership Legal Advisory Average 7 8 Finland 1 8 Ownership Account Limited Average 7 4 France Legal Management Concurrent powers Average Greece Legal None Limited Over average 1 1 Ireland Legal Management Advisory Average 9 9 Italy Ownership Legal Advisory Over average Luxemburg 57 3 Management Management Over average 12 N.A. Netherlands 1 1 Ownership Legal Concurrent powers Average 37 8 Portugal 1 42 Ownership Account Advisory Average 4 8 Sweeden Ownership Legal Advisory Average U. Kingdom Ownership Legal Concurrent powers Average 8 4 Stonia 1 1 Legal Legal Limited 17 1 Latwia 76 4 Account Account Concurrent powers 24 1 Lithuania Legal Legal 21 8 Poland 52 5 Legal Account Advisory Czech Rep Legal Account Limited Slovakia Legal Management Limited Hungary Legal Account Advisory Slovenia 75 1 Legal Account Advisory Cyprus 35 1 Management None Limited 1 1 Malta Advisory 1 1 Source: European Commission 4 Top 3 producers by capacity % FUNCTIONS OF THE EUROPEAN MARKET OPERATORS 4 Europex STARTUP DATE COMPANY SPOT MARKET FORWARD MARKET ZONAL PRICES ADJUSTMENT MARKET members (Futures) Northern C. 1/1993 NORDPOOL** Yes Yes Yes Yes Spain 1/1998 OMEL Yes No No Yes Netherlands 5/1999 APX (Netherlands) Yes No No Yes Germany 6/2 EEX** Yes Yes Yes No U.K. - UKPX 6/2 UKPX* Yes No No No Romania 8/2 OPCOM Yes No No No France 11/21 POWERNEXT** Yes Yes No No Slovenia 1/22 BORZEN Yes No No No Italy 4/24 GME Yes Yes Yes No Poland 6/2 GIELDA ENERGII Yes No No No Czech Rep. 1/22 OTE Yes No No Yes Source: Self elaboration * Unvaluable turnover ** CO 2 market project 317

139 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT The study concludes that the problem of concentration is currently the single most important obstacle to the development of a greater level of competition, which makes consumers lose their faith in the market. The independence of network managers and a greater level of interconnection are considered essential in this issue. Without the necessary investments to this end, the possibility of counteracting the power of the historical operators is severely limited. Moreover, the report considers that more energetic use of the competition policy at a national level, greater transparency in participants' behaviour and more cooperation between national authorities and the European Commission could also give rise to significant improvements in this sphere. With regards to supply, the report states that the situation in the European Union is satisfactory, mentioning the cases of Spain and Italy, where the situation has improved substantially with the start-up of the new production capacity. However, the Scandinavian countries continue to show a relatively difficult picture. The development of interconnections is also necessary in various other cases, given that the European Union is still far from the goal set at the Barcelona summit, whereby interconnections were to reach 1% of the instaled capacity in every European country in 25. In relation to public service obligations and consumer protection, taking into account that all users will be qualified consumers as of July 1st 27, the report sees the need to maintain at least the same level of reliability and quality as currently exist, whether consumers choose to change suppliers or not. On this point, it is the regulatory authorities that are responsible for guaranteeing the availability of sufficient information on prices and services. The European Commission is particularly concerned about the public service obligations not distorting competition and that suppliers are given equal access. The possible distorting effect of regulated prices for the final consumer may be significant. In reference to environmental issues, the report indicates that more incentives must be undertaken in support of renewable energies, the reduction of greenhouse gas emissions and demand management. It highlights that in 23 over 7, MW of renewable energy capacity was put into operation, as well as new high-efficiency co-generation, primarily in Germany and Spain. It also remarks that many Member States continue to support these kind of energies through tax incentives. On May 1st 24, eight Central and Eastern European countries, plus Cyprus and Malta, all joined the European Union, an event of historical significance. This event has given rise to a general review of all the national procedures in these new Member States related to the internal electricity market, to incorporate the advances in unbundling of accounts and third-party access to the network. Both are fundamental issues for the development of a competitive market, and refer both to physical access to the network and to the allocation of the associated costs. The proposal in the Directive regarding energy efficiency in final use and energy services sets out a methodology for establishing the costs of these services and for the legal and operational unbundling of distributors and transporters. The already numerous group of Member States that have power exchanges will be joined in the upcoming years by other new State. That is to say, this is the trend in operational format developed in the majority of the countries that have deregulated or plan to deregulate their electricity sector. The entrance of the ten new Member States will require to adapt the trans-europe network (TEN) to the particular situation of these countries and to finance projects of common interest to the extended Union. The review of the direction to be taken by the TEN includes the projects needed to allow the new Member States to enter the internal gas and electricity market. Many of the projects that connect other countries to the enlarged European Union receive financing from the trans-european network. But, given the speed with which the European gas and electricity market is being created, the final list of projects to receive financing in the near future must now be drawn up. In addition to reviewing the orientation to include projects of common interest to the candidate countries, a similar focus must be applied to other non-eu countries. The Commission's Communication on the energy policy and countries bordering the EU dealt with this need and proposed including specific measures and projects in the TEN orientation. The gradual creation of a true European gas and electricity market, which will encompass over 35 countries with a population of more than 6 million inhabitants, must be a clear medium-term European Union goal. This market will be based on a foundation of common regulations on deregulation of the market, environmental protection and security. 318

140 RELATION BETWEEN COMERCIAL CAPACITY AND INSTALLED POWER TRANSEUROPEAN ELECTRICITY NETWORKS UNTIL 213 % Year 4 MW Source: European Comission EL1 France - Belgium - Netherlands - Germany 2,5 EL2 Italy & France border, Austria, Slovenia & Switzerland 4, 2.9 EL3 France - Spain - Portugal 3, 4.6 EL4 Greece - Balcan countries - UCTE system 2, EL5 United Kingdom - Continental Europe & South Europe 2, EL6 Ireland - United Kingdom EL7 Denmark - Germany - Baltic sea ring 3, EL8 Germany - Poland - Czech Rep. - Slovakia - Austria - Hungary -Slovenia 3, 7.5 Sources: European Commission and self elaboration EL9 Mediterranean countries - Mediterranean electric ring 3, Total 23, INTERCONNECTION CAPACITY RELATION BETWEEN COMERCIAL CAPACITY AND INSTALLED POWER % 65 Years 1 to 5 Source: European Commission % 12 Sources: ETSO, Nordel, NGC y ESBNG Und. Kingdom Sweeden Germany Finland Denmark Spain Austria Holland Belgium Ireland Italy Portugal France Greece Latvia Luxemburg Slovenia Estonia Lithuania Denmark Hungary Slovakia Sweeden Belgium Austria Netherlands Czech Rep. EU Norway Finland France Greece Germany Poland Portugal Italy Ireland Spain U. Kingdom

141 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT 6.3 The Florence Forum On September 16th and 17th 24, the eleventh meeting of the Florence forum took place in Rome, with the attendance of representatives of the regulatory authorities from the European Union Member States and representatives of the candidate countries. The topics discussed were: Competitive and sustainable electricity market. Bordering countries: Switzerland and the energy market in southwestern Europe. Application of the new cross-border regulations: Draft of directives. Security of supply and Directive on infrastructures. European reliability standards. The most important basic topics set out by Mr. Lamoureux, Director General of DGTREN and by Mr. Turmes, member of the European Parliament, were as follows: Mr. Lamoureux: Market liberalisation continues to be asymmetrical. The degree of concentration in the industry is increasing. The development of infrastructures is not yet satisfactory, as it still falls below the 1% established by the European Council in Barcelona in 22. The Commission is contemplating the possibility of including electrical cables in railway tunnels and motorways as a requirement for co-financing these projects. Mr. Turmes: The true underlying cause of congestions and market concentration. Measures such as the separation of electricity businesses and improved congestion management are necessary. With regards to the possible creation of an energy market in southwestern Europe, he emphasised the possibility of designing a standard market for the entire region, and specifically, of promoting the development of a Maghreb electricity market based on the same principles existing in the European Union. The implementation of Regulation (EC) Nº 1228/23 gave rise to interesting discussions on the draft of the Directives presented by the Commission regarding congestion management, which endeavours to supplement those already set out in the Regulations. The draft rules refer in detail to general provisions established in the Regulations with respect to: Methods used to manage congestion. Coordination between TSOs Maximisation of available capacity, and Transparency through the publication of relevant information on transmission and production, provisions for commercial interconnections and handling the revenues arising from congestions. This part of the forum included the presentation of the documents containing the conclusions reached in the work done by EuroPEx and ETSO since the previous session of the Forum. This work includes a proposal for the solution of congestion at international interconnections, based on market coupling studied by EuroPEx, together with the European network flow study analysed by ETSO. The Forum requested that both organisations continue with the work, developing it further on the basis of extending research in technical, contractual and regulatory issues. Horizontal subjects common to all areas of the European Union were also identified, such as the issue of market power. It was agreed that this subject would be studied in depth by the entities interested in establishing collaboration with the Commission, ETSO, EuroPEX and other relevant market agents, who will present their report at the new Forum, scheduled for spring/summer 25. With a view to tackling the specific way to apply the Directives, it was agreed to create various Mini-Forums for the different regions of the EU, convened jointly by the Commission, CEER and ERGEG, with the attendance of representatives from the TSOs involved, EuroPEX and, when appropriate, the market agents. The Forum dealt also with the question of the mechanism for compensation between TSOs; the Commission considers that a further development in this matter is needed before agreeing on a definitive long-term methodology. 32

142 Two important issues were then discussed: Security of supply and the Directive on infrastructure. European reliability regulations. With regards to the security of supply and the Directive on infrastructures, the Commission reported on the progress made in discussions within the Council and the Parliament, and emphasized the need for greater coordination of the investments in interconnections. Eurelectric believes that the establishment of an operational market is a fundamental requirement prior to ensuring the security of supply, a concept that the ETSO had also viewed as a key factor in relation to investments. EuroPEX supported the request from the Commission to establish regulations on the authorisation for investments in interconnections and, in general, a stable investment climate that stresses the importance of the long-term and futures markets as a clear investment indicator. On the topic of European reliability rules, the Commission informed of a study to be presented in the near future that analyses the current reliability rules and national and multilateral security. The study will determine the need and scope of the obligatory rules on security and reliability in the whole of the European Union. THE MINI FORA Benelux France, Belgium, Netherlands, Luxemburg and Germany Brussels Nordic countries Norway, Sweeden, Finland, Denmark, Germany and Poland Helsinki Iberian Peninsula Spain, Portugal and France Madrid Italy France, Italy, Switzerland, Austria, Greece and Slovenia Milan Central & Eastern Europe Germany, Poland, Czech Republic, Slovakia, Austria, Hungary and Slovenia Wien Baltic countries Estonia, Latvia and Lithuania Riga UK & Ireland United Kingdom, France and Ireland London

143 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT 6.4. Intra-community exchanges, EuroPEX contributions to the solution of congestion within the European context The constitution of EuroPEX as a legal, non-profit organisation was formalised on April 26th 22 in Brussels. The founding members of the organisation were the Operador del Mercado Ibérico de Energía - Polo Español (Spain), NordPool (Norway, Sweden, Finland and Denmark), European Energy Exchange (Germany), Powernext (France), Amsterdam Power Exchange Spot Market (Holland), Gestore del Mercato Elettrico (Italy) and Borzen Organizator Trga Z Elektricno Energijo (Slovenia). Later, new members such as power exchanges Operátor Trhu s Elektrinou, a.s. (Czech Republic), European Energy Derivatives N.V. (Holland) and Towarowa Gielda Energii SA (Poland) also joined the association. The basic goals of EuroPEX are the promotion of intra-community exchanges and free trading in the scope of the internal market, which have been recognised by the Florence Forum. The Forum requested the presentation of specific proposals in the area of cross-border trading and particularly for the solution of congestions at international interconnections based on market methods. In response to this request, on July 8th and 9th 23 EuroPEX presented in the Florence Forum a comprehensive study on the methodology for congestion solution based on a coordination of markets (DMC). The study was well received by the European Commission and the Florence Forum, which asked EuroPEX to continue with the study in collaboration with the association of European systems operators, ETSO. The work done by EuroPEX and ETSO culminated in a joint document presented to the 11th regulatory Florence Forum held in Rome on September 16th and 17th 24. The Forum decided it was appropriate to enlarge on the study with a view to resolving the technical, contractual and regulatory issues necessary for the implementation of the proposal, as well as taking into consideration in its Appendix Regulation 1228/23 and the underway analysis in the European Commission regarding the rules. The joint proposal, entitled "Flow Based Market Coupling ", FMC, provides a mechanism for the management of congestions and the cross-border integration of the interconnected European electricity markets. It consists of the formation of regional prices on the organised markets for each European electricity system. The proposal envisages both energy bids on intraday markets and bids for transmission capacity from those participants who wish to enter into cross-border bilateral contracts. The previous studies by ETSO "coordinated management of congestions" and by EuroPEX "descentralised market coupling" were consistent and complementary in the majority of their elements. Specifically, both organisations agree that the mechanisms used to solve congestions based on market procedures should be applied to all the borders where such application is possible, and should be coordinated to take into account the interdependence of the physical electricity flows between the various electricity systems. The key innovation put forward in the proposed method is the combination of market coupling and the network model based on physical flows. The FMC model reaches a balance between efficient management of cross-border electricity congestions, efficient energy markets and practical feasibility. It provides the means to maximise inter-regional transmission capacity without jeopardising system security, whilst also upgrading the efficiency of the market by increasing its size, consolidating facilitating access to all operators. ETSO and EuroPEX believe that this convergence on cross-border management of congestion solves the needs of the markets and the operation of the systems. The study, as indicated in the provisional report presented, is not yet fully complete, and ETSO and EuroPEX agreed that it should be reviewed and extended acting upon the comments made. The proposal could be considered under the European Union Comitology procedure and should also take into account projects that are local in scope. When tackling the question of border congestions, it is important to differentiate the various time horizons involved in electricity trading, given that all of them have their particular influence. ETSO and EuroPEX agreed that the daily horizon is basic in the solution of congestions, as this is when all forms of cross-border energy trading should converge to solve the congestion in a manner compatible with the European Regulations. Energy trading over longer periods than day-ahead Market participants expressed the need to have available the crossborder energy trading possibilities that allow them to hedge their costs long term and to provide them with the option to execute their transactions, if they decide so, on the day prior to the supply. 322

144 Two non-exclusive alternatives were proposed to provide them with the aforementioned possibilities: The long term auction of the option to use the cross-border capacity, with the commitment to decide to exercise such option on the day before the supply. Should it not be used, the agreed upon costs has to be paid (explicit capacity auctions). A risk coverage market on the price difference between the system where they wish to produce the energy and the system where item wish to consume it. Regulation (EC) no. 1228/23 establishes as basic premises that all market participants should be provided with the maximum commercial capacity available, and when the option of using of the capacity is attributed previously and not exercised, it should be made available to the market in useful time. Under these premises, the maximum use of commercial capacity requires the adoption of an implicit auction method in the daily market time and, if appropriate, in the intraday markets. The two possible methods of long term hedging (explicit auctions and financial coverage of the difference in prices between markets) are practically equivalent, provided that there are liquid daily markets in the two systems (in the market where the seller wishes to sell the energy and in the market where the buyer wishes to purchase it). Should a liquid market not exist in one of the two systems, risk coverage of the price difference does not guarantee the possibility of producing or consuming the energy (depending on the system that does not have a liquid market). The situation thus created by this lock of liquidity will be so complex, from the viewpoint of possibilities to abuse the dominant positions that exist in the majority of the European countries, that in our opinion, the sale of options for long term use of cross-border capacity should not be done at all, as the mechanism, which is the liquid daily market, that ensures the full use of the interconnection when economic indicators call for it, is lacking. Energy trading at the time of the daily market The option proposed is market coupling based on the physical network flows (Flow based Market Coupling or FMC). Prior to opening the daily markets in the different systems, the proposal envisages a declaration phase for holders of trading capacity use options (explicit auction). This phase would thus provide the information regarding the capacity available for the FMC mechanism in both importer and exporter directions. It is important to note that the sum of the import and export capacities will always equal the maximum capacity available, and the exercise of the options will only represent a movement of capacities from importer to exporter, or vice versa. The maximum trading capacity is determined in coordination by the network managers in the countries involved using a simplified model of forecasted flows through the interconnections and influences on the loads of these flows. The goal of this the values of matrix is to resolve the various markets in coordination, taking into account the effects of the transactions in the different systems and the different interconnections. Based on this information, the European market operators should receive, on closure of the markets, bids for trading on the organised market, together with bids for the market price differences from those participants that want to execute a bilateral contracts who choose to seek coverage of the congestion price risk in manners other than through the acquisition of capacity options in long term explicit auctions. Each market operator sets out an international exchange curve for its borders that should be shared in order to select the transactions that are compatible with the trading capacity defined by the physical flow based network model established by the network operators. If all the transactions matched by the markets are, in effect, possible, an equal price is created on the coupled organised markets and thus, there will be less congestion. If some of the transactions are not feasible, those that are necessary will be rejected according to the implicit auction model, thereby obtaining different regional prices under the condition of maximum use of the previously defined trading capacity. Energy trading at the time of intraday market In general, the proposal does not envisage the reserve of any capacity for intraday horizons, limiting the intraday markets, or similar processes, through market coupling to complete the use of the surplus capacities from the daily market. 323

145 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT Operation in real time For the period directly prior to real time, where there are no pending intraday or equivalent mechanisms to solve the problems, or commercial capacities have varied to make them incompatible with the allocated transactions, the proposal contemplates the adoption of "counter trading" methods, individually or in coordination, in each electricity system. Our opinion, however, is that each system should act separately to solve the problems it may have in real time and not solve them border by border. Key pending issues: The application of this method is simple in the case of two antennaconnected systems, as there is no re-circulation of physical flows. In this regard, it is important to mention that in July 24 RTE, REE, POWERNEXT and OMEL presented the competent French and Spanish authorities with specific proposals done on the adoption of this system on the French-Spanish border. In meshed systems, as is the case in Central Europe, the part of the FMC mechanism that ensures that flows in the different borders, resulting from the market transactions and options on cross-border capacities exercised, is compatible with the physical reality of the networks should be fully operative. In the cases where there are congestions, the so-called "congestion revenues" will be created, defined as the product of the net energy that crosses each border multiplied by the price difference between the adjacent markets. The determination of the distribution of such revenues and their final destination is left by EuroPEX and ETSO to the criteria of the regulators, although Regulation (EC) 1228/23 clearly defines the three options for the use of such funds. Issues of implementation and practises that require agreement between the market and system operators involved must be resolved on the basis of the relevant regulatory directives either at European level or at the level of the affected market and system operators. Given the link between the Mini-Forums held on the occasion of the 11th Florence Forum, the proposed modification of the rules set out in Regulation (EC) 1228/23 and the implementation of the "Flow based market coupling (FMC)"method, EuroPEX has sent a document to the European Commission in answer to the primary problems posed by the application of the FMC, which can be summarised as follows: Whether market coupling is achievable in the near term, or should be seen as an eventual goal; It should be recognised that practical and efficient multi-national day-ahead implicit auctions have existed for several years (for example, in the Nordic region via market splitting). Furthermore, some local projects are well advanced building the systems and commercial/regulatory structures to enable market coupling, and these could be ready for operation in the very short term. How the various initiatives being launched can all be achieved, given that some countries are potentially being impacted simultaneously by more than one coordination mechanism project (the various projects are listed in a table at the end of this point); The problems associated to the practical implementation of overlapping initiatives need to be addressed through a viable approach; in the meantime interim solutions could be explored that move in the direction of the final goal. Therefore, it is important to ensure the compatibility of the interim solutions. How these various initiatives can eventually converge to provide a Europe-wide solution; It was clear from attending all the fora that a number of different approaches are being taken in the various regions. While these initiatives by themselves are positive, their diversity may make it difficult to eventually converge towards a single pan European market. The emerging pattern seems to be as follows: a. Market coupling between the markets along the western seaboard of Europe - from Norway to the Iberian Peninsula. Both PXs and TSOs are heavily involved in the process. Because the coupling involves a linear sequence of markets, there is no immediate need for a flow-based transmission model. b. Coordinated explicit auctions in Central Eastern Europe. The TSOs are driving the process here. This may eventually evolve into a flow-based approach and may also eventually lead to dayahead implicit auctions. c. Italy is implementing different solutions. d. Germany is acting as the central link across Europe, based on explicit auctions (strongly supported by the German TSOs) in the monthly and annual horizon and further development of the explicit auctions to practically implicit auctions in the day-ahead horizon. Whether there is sufficient liquidity in all of the PX markets to provide an efficient cross-border mechanism (where, for example, 324

146 the cross-border flows are greater than the current volumes matched on the PX); The first point to make is that PX matched volumes are not the only relevant indicator: one should also look at the depth of market interest (resilience) and the size of the OTC/bilateral market that is linked to PX prices (via arbitrage). Day-ahead market coupling is more effective than day-ahead explicit auctions because, in generating horizontal liquidity, it can help enable the emergence of efficient energy markets where these do not currently exist (which is presumably the aim of the internal electricity market). Rather than liquidity being a prerequisite it should be seen as a goal. Whether a decentralised coupling process is too complex - for example, due to the iterative algorithm, the dispersed operational responsibility, and the lack of a central, regulated organisation; A more centralised approach may be better if the decentralised approach proves incapable of resolving more complex situations (and is certainly not ruled out). However, this has not been shown to be the case so far (work to date in the various local projects shows a decentralised model is feasible), and there may be a range of alternative solutions - for example, a combination of decentralised and centralised processes still in general accordance with the principles and processes presented in the EuroPEx-ETSO FMC model. Furthermore, a more centralised approach may have its own limitations when investigated further. If the TSOs have unsold capacity after the day-ahead market, or new capacity becomes available, it is necessary to have solutions for intraday congestion management. The PXs stand ready, as for the day ahead, to provide solutions that are highly compatible with the local energy markets. How to solve cross border congestions after the day-ahead markets are managed - i.e., intraday; 325

147 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT COORDINATER CONGESTION MANAGEMENT INITIATIVES BELPEX France-Spain NorNed Central Eastern Europe Germany-Austria Kontek Iberia Region France, Belgium, The Netherlands France, Spain Norway, The Netherlands Austria, Germany, Poland, Czech Republic, Hungary, Slovakia, Slovenia. Austria-Germany Germany, Denmark Spain, Portugal Parties TSOs, PXs TSOs, PXs PXs, TSOs, TSOs (not PXs) TSOs PXs, TSOs OMEL (SPOT market), Capacity provided by TSOs Network model Congestion Not flow-based (radial region) Not flow-based (radial region) Not flow-based (HVDC) Yes None Not flow-based (HVDC) Not flow-based Management mechanism Forward allocation of PTRs Day-ahead market coupling (no pricedifference bids) Three steps agreed by both regulators (France and Spain): S1: Forward explicit auctions + a mechanism to apply the use it or lose it S2: Forward explicit auctions + day-ahead market coupling (capacity ceiling) S3: removal of capacity ceiling and the possibility to select use it or sell it 1% day-ahead market coupling (no forward physical rights Coordinated - building on existing approach betwen Poland, Germany and Czech Republic.. Explicit auctions (forward and dayahead) A cooperation cross border trade mechanish including market coupling Day-ahead market coupling of all the at that stage available free capacity Market Splitting (under discussion) Foreseen launch date Q4 25 S1: mid-25 S2: 26 Q1 28 Jan 26 April 1 st of 25 TBD June 3, 25. Status Ongoing project Proposal by regulators, yet to be officially approved and published by France and Spain. Cable project approved and underway Commitments made to regulators re: coupling Project between TSOs Operating Working Group Pending final established detailed between PXs regulations in both (NPS & EEX) and countries. TSOs (EKS & VET) since a year. In the mini-fora Northern Europe it was agreed that the Danish regulator will help initiate furher discussion on MC. 326

148 6.5 Development of prices in the main organised spot markets in 24 The following presents the evolution of prices in a collection of organised markets since 1999 until December 31st 24, where the main relevance is the relative evolution of the prices in question. There may be discrepancies in price level comparisons due to the different treatment of some final price components such as losses, deviations and the existence or inexistence of the explicit concept of capacity payments. To analyse the evolution in other non-european electricity markets, we have chosen the markets of Alberta in Canada, PJM in the United States, and NEMMCO in Australia. The PJM market in the United States, with one of the highest trading volumes, 337,934 GWh in 24, produced a 12% higher average price over the previous year. Prices fluctuated in the bracket of /MWh, with a minimum in March and a maximum in January and the highest months of demand being in July and August. Prices in the Australian market decreased 29% to 32 /MWh with a maximum of 48 /MWh in the month of October and a minimum of 22 /MWh in the month of March. The months of maximum demand are July and August, which coincide with winter in the southern hemisphere. Prices in the market of Alberta fell 13% compared to the previous year, up to 56 /MWh, with a maximum of 69 /MWh in the month of May and a minimum of 43 /MWh in the month of March. Peak demand was reached in the month of December. With regards the evolution of prices, we can observe a convergence in hourly prices in the most important European, American and Australian markets. Development and convergence trend of the prices in Europe The convergence of prices on the organised European markets that started in 23 and has continued happening the major part of 24 marks a notable contrast to the formation of prices in previous periods. In reference to the evolution of the European markets, in 24 it is important to highlight, firstly, that there was a greater trend toward convergence of prices on all the markets in the bracket of /MWh. Holland lies at the higher end, France, Spain, NordPool and Germany were positioned at 29 /MWh and Slovenia at 3 /MWh. The moderate temperatures recorded all over Europe in 24 made for stable behaviour of the demand, with the subsequent stability in prices. The 4 /MWh reached in Holland in October was notable, whilst other maximums were within the /MWh band. All the minimums were within the MWh band. This same situation is not being repeated during the first months of 25. With a view to showing this evolution clearly, the average quarterly prices for the markets in Spain, the Scandinavian countries, Holland, Germany, France and Italy have been selected and presented in a graph. The analysis of average quarterly prices in the 2-24 period reflects on one hand, the episodes of scarce reserves in production capacity existing on various European markets for short periods (not always coincidental) and, on the other, the evolution toward greater stability followed by European prices since the end of 23. In OMEL, the main period of relative shortfall occurred since the end of 21 to the third quarter of 22, when a series of new combined cycle production facilities started operations. In NordPool, it was the winter of 22-23, and to a much lesser degree, the last quarter of 23, when prices showed the greatest fluctuation, due to the high demand that gave rise to significant electricity high prices. 327

149 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT PRICES AND DEMAND - NORDPOOL/ELSPOT PRICES AND DEMAND - POWERNEXT IN FRANCE /MWh 8 Years 99 to 4 Increase 4: -21.9% /MWh 5 Years 1 to 4 Increase 4: -5.4% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg GWh 15, 1, 5, GWh 1,4 1,2 1, PRICES AND DEMAND - EEX IN GERMANY PRICES AND DEMAND - APX IN THE NETHERLANDS /MWh 4 Years to 4 Increase 4: -2.3% /MWh 14 Years 99 to 4 Increase 4: -3.9% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg GWh GWh 6, 5, 4, 3, 2, 1, ,6 1,4 1,2 1,

150 PRICES AND DEMAND - BORZEN IN SLOVENIA PRICES AND DEMAND - NEMMCO IN VICTORIA (AUSTRALIA) /MWh 6 Years 2 to 4 Increase 4: -19.2% $AUS/MWh 14 Years 99 to 4 Increase 4: 29.3% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg GWh GWh 3,5 3, 2,5 2, 1,5 1, 5, , 8, 7, 6, PRICES AND DEMAND - PJM IN THE UNITED STATES $USA/MWh Years 99 to 4 Increase 4: 12.4% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg PRICES AND DEMAND - ALBERTA IN CANADA $CAN/MWh Years 99 to 4 Increase 4: -2.3% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avrg GWh GWh 32, 3, 28, 26, 24, 22, 2, 18, ,2 5,6 5, 4,4 3,

151 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT ELECTRICITY PRICE EVOLUTION IN THE INTERNATIONAL MARKETS /MWh Year to better corrected if the networks had allowed the transmission of production within the internal market from systems with a high reserve capacity, to the systems with a low reserve capacity. Furthermore, the segmentation of the internal European market due to a lack of interconnections exacerbates the problems arising from the dominant position of the electric companies on the domestic markets. In 24, the progress of investment processes and the evolution of electricity demand allowed intra-community electricity trading to start a clear trend toward convergence of prices on the organised European markets, only partially altered in December 24 - February 25, due to the influence on demand of the weather conditions existing in the European countries in the winter months. This is reflected on following table, which shows the evolution of quarterly prices for this period Importance of the Spanish market in the European context NordPool EEX PJM OMEL The Spanish market's international exchanges, although high, are still very limited due, to the low interconnection capacity, especially with the north of Europe. With respect to the Central European markets, price fluctuations were greater in the second and third quarters of 23, when high local demand during the summer season caused heavy use of the total production capacity in various areas where interconnection was inadequate. All these episodes reveal that electricity prices are highly sensitive to the relative shortfall in the supply. These episodes could have been The development of the Spanish market, which is an interesting market for the main electricity companies in the European Union, will not be able to realize its full potential if this situation, practically of isolation, is not modified in the short to medium-term. The integration of international exchanges in the market occurs in an efficient manner and is a consequence of market participants making transactions that originate in the organised market or from bilateral contracts or electricity transits. 33

152 EUROPEX QUARTER AVERAGE PRICES /MWh 7 Years to Mar APX NordPool EEX Powernext OMEL GME EUROPEX AVERAGE PRICES /MWh 14 Nov 4 to Mar Nov Dec Jan Feb Mar APX NordPool EEX Powernext OMEL GME Borzen 331

153 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT Bearing in mind the size of the Spanish and Iberian market, commercial capacity with the north of Europe should be near 2% of the peak demand, which positions us at the European Union average. The document "Planning of the Electricity and Gas Sectors. Development of Transmission Networks " confirms the advantages of a technical, economic, environmental and strategic nature that justify the necessary interconnection of the Spanish electricity system with external systems. The estimated commercial interconnection capacity for the Spanish Peninsula system in the year 25, taking as complete the reinforcements to the transmission network within the time horizon in question, is: Interconnection with France: the interconnection with France is the most interesting objective because it constitutes the main means by which the principle of free trade can be achieved, in addition to ensuring the quality and security of the Spanish system. Interconnection with Portugal: planned activities that are, moreover, reflected in the agreements of the 19th Spanish-Portuguese summit held on November 7th 23, are as follows: The Alqueva-Balboa line, operational since December 24. The first circuit of the Cartelle-Lindoso line is in operation since the first quarter of 24. The second circuit of the Cartelle-Lindoso line and reinforcements in the Duero corridor will be operational in the year 26. Reinforcement of the Tajo corridor is in an advanced state. The new interconnection in the South is also in an advanced state. International trade in the Spanish market at present An examination of the Spanish Peninsular electric system indicates the following in relation to electricity exchanges: With Portugal, import and export operations are common. The relative size of the Portuguese electricity system in relation to the entire Spanish system makes the commercial capacity for exchange relative to Portugal's peak demand, which is 8%, significant in trading terms. The level of commercial capacity for exchanges in the organised market derived from bilateral contracts is shown in the graph on the following page. In the case of the Spanish - French border, the available commercial capacity with the rest of Europe is currently between 1, 1,4 MW on the importer direction and 25 7 MW on the exporter direction. If this is compared to the maximum demand peak of the Spanish system, 43,378 MW on January 27 25, this capacity is very scarce. This leads to a situation close to trading isolation with the rest of Europe. However, trade has evolved without incident, based on the evolution of prices on the Spanish market. The level of commercial capacity for exchanges in the organised market derived from bilateral contracts is shown on the corresponding graph. Concerning trade through the interconnection with Morocco, attention must focus on the existence of a predominant exporter flow, together with the appearance of electricity imports to Spain. 6.7 The Iberian electricity market The Iberian Electricity Market is a regional market integrated within the concept of a single European market. Conceptually it responds to the efficiency that could be derived for the Portuguese electricity system from the integration of the large companies on its market into a substantially larger one, with proven operational experience. At the same time, the Iberian Market offers the Spanish electricity market a potential enlargement by 2%. Background The creation of Mibel culminated the cooperation process commenced in the Memorandum of Understanding signed on July 29th 1998 by the Portuguese Minister of the Economy and the Spanish Minister of Industry and Energy, for cooperation in the area of electrical energy, which enabled the commencement of exchanges with Portugal through the participation of Portuguese agents on the Spanish market. This process continued with the cooperation Protocol between the Spanish and Portuguese Governments for the creation of the Iberian Electricity Market, signed in Madrid on November 14th 21, as well as the Memorandum of Understanding signed in Figueria da Foz on November 8th 23, within the framework of the 19th Portuguese- Spanish Summit, in which the Parties, represented by the corresponding Ministers, fixed certain bases and the calendar for the creation of the Iberian Electricity Market. 332

154 INTERCHANGE CAPACITY WITH FRANCE AND ENERGY MATCHED IN THE MARKETS AND EXECUTED IN BILATERAL CONTRACTS MWh 1,4 1,2 1, , -1,2-1, Years Oct 1 to Mar 5 5 INTERCHANGE CAPACITY WITH PORTUGAL AND ENERGY MATCHED IN THE MARKETS AND EXECUTED IN BILATERAL CONTRACTS MWh 1,8 1,6 1,4 1,2 1, , -1,2-1,4-1,6-1, Years Oct 1 to Mar 5 5 INTERCHANGE CAPACITY WITH MOROCCO AND ENERGY MATCHED IN THE MARKETS AND EXECUTED IN BILATERAL CONTRACTS MWh 4 Years Oct 1 to Mar Import capacity not used Import Export capacity not used Export 5 333

155 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT IMPORTS FROM FRANCE GWh Years 98 to Mar 5 1, REE-EDF Contract Organised market Bilaterals EXPORTS TO FRANCE GWh Years 98 to Mar Organised market Bilaterals 334

156 EXPECTED INTERCONNECTION CAPACITY MWh France 3, Portugal 1,2 Morocco 9 INTERCONNECTION CAPACITY IN WINTER Total 5,1 Growth in exchanges between the two countries Subsequent to the 1998 Memorandum, a process of proximity commenced, comprised of the elimination of obstacles to increase the exchanges between Spain and Portugal, the registration of REN in the Administrative registry as an external agent in Spain, the opening up of the Portuguese market to Spanish electricity companies and the establishment of coordination between the network managers in both countries. The 21 Protocol envisaged the extension of the interconnections through the Alqueba-Lisbon line (24), the Cartelle-Lindoso line (26), the reinforcement of the Duero interconnection and an increase in transmission capacity in the Cedillo-Oriol line. The following graphs show the growing volume of energy exchanges between Portugal and Spain, particularly significant in exporter direction to Portugal, which led to 14% of the energy consumed in Portugal in 24 originating in international supply. Integration of the market operators in Spain and Portugal Year 25 On 2th January 24 the Agreement creating the Iberian Electricity Market - Mibel - was signed in Lisbon, commencing the creation of a single market for both countries. This Agreement established the beginning of operations in 24, and allocated the daily and intraday market management to OMEL and the management of the futures market to OMIP. In addition, it stipulated a 1% shareholding exchange between OMEL and OMIP, which was accomplished in 24. Furthermore, it established the creation of an Iberian Market Operator - OMI - which would be the result of the merger of the management companies of each national Operator, the Operador del Mercado Ibérico Portugués (OMIP) and the Operador del Mercado Español de Electricidad (OMEL) no later than April 2th 26. International Agreement establishing the creation of an Iberian Electrical Energy Market, between the Kingdom of Spain and the Republic of Portugal However, eight months after the provisional application of the Agreement signed on January 2th 24, the Governments of both countries realised that the necessary reforms could not be implemented within the scheduled period, stressing the need for the Iberian Electricity Market to be compatible with the provisions set out in Directive 23/54/EC, of the European Parliament and Council, of June 26th 23, concerning common rules for the internal market in electricity. As a consequence, Spain and Portugal decided to sign a new Agreement regulating the aforementioned aspects. The new Agreement was signed on October 1st 24 in Santiago de Compostela. The Agreement follows the same lines as those adopted to date between the two countries and takes into account both Community regulations and the need to set a realistic deadline (June 3th 25) for the Iberian Electricity Market to begin operations, once the necessary legislative issues have been dealt with in both countries. The Agreement sets out several specific provisions that may be summarised as follows: Participants: To the effects of the activities of the Mibel, this term encompasses all participants in the electricity markets in both countries. In addition to producers, external agents, distributors, resellers and consumers, regulated resellers or last resort suppliers will also be participants in the Iberian Electricity Market, in the terms set out in Directive 23/54/EC of the European Parliament and Council, concerning common rules for the internal market in electricity, in addition to the agents acting on behalf of the Mibel participants, agents negotiating financial instruments on the Mibel markets and all others so defined by the Parties. Creation of an Iberian Market Operator: The Iberian Market Operator (OMI) will undertake the functions of the Operador del Mercado Ibérico Polo Portugués (OMIP) and the Operador del Mercado Ibérico Polo Español (OMEL). During the initial phase, OMIP will act as the governing body for the futures market, and OMEL will take the same role in the daily market. Before two years from the Mibel's entrance into operation have elapsed, OMIP and OMEL must merge to constitute a single operator, the Iberian Market Operator (OMI). 335

157 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT IMPORTS FROM PORTUGAL EXPORTS TO PORTUGAL GWh Years 98 to Mar 5 GWh Years 98 to Mar Organized market Bilaterals Organized market Bilaterals System Operation: the System Operators of both Parties are responsible for the system technical management in order to guarantee the continuity and security of the electrical supply, through the management of the system adjustment services. Electrical energy trading markets in the Mibel: The organised Mibel markets and its settlement system shall be as follows: a) Futures markets, including transactions for blocks of energy to be delivered after the next day from the date of trading, settled both by physical delivery and by differentials. b) Daily markets, to encompass transactions for blocks of energy and delivery the day after trading, settled necessarily by physical delivery. c) Intraday market: with settlement necessarily by physical delivery. The non-organised markets are comprised of bilateral contracts amongst the market participants that may be settled either through physical delivery or price differences. Economic management of the interconnection between Spain and Portugal: The Parties will agree upon mechanisms to allocate the interconnection capacity between the Spanish and Portuguese systems. Tariffs: Their price structure will tend toward harmonisation, based on the principles of additivity, transparency, uniformity and must reflect the real costs incurred in the supply of electrical energy, as well as taking as references the Mibel market prices. Supervision: The Mibel supervisory bodies will be the National Energy Commission (CNE) and the National Securities Market Commission (CNMV) in Spain and the Energy Services Regulatory Body (ERSE) and the Securities Market Commission (CMVM) in Portugal. Regulatory Council: Regulatory Council is composed of representatives from the National Energy Commission (CNE), the Energy Services Regulatory Body (ERSE), the National Securities Market Commission (CNMV) and the Securities Market Commission (CMVM). Market Agents' Committee: The governing companies may create Market Agents' Committees for their respective markets, as consultative bodies. Technical and Economic Management Committee: A Mibel Technical and Economic Management Committee will be created, comprised of the systems and market operators, to suitably manage communication and the flow of information necessary between the 336

158 various operators, as well as to facilitate issues relating to the daily performance of their duties. Administrative procedures for the authorisation and registry of agents: The administrative procedures for the authorisation and registration of agents for the exercise of the various activities in Spain and Portugal must be harmonised on the basis of reciprocity. Recognition by one of the Parties will automatically accredit the agent to act in the other. DIMENSION AND MARKET OPENING Demand Installed power Peak demand (2/3) Market opening Year 4 Source: REE Y REN 233,54 GWh 66,784 MW 37,724 MW 1% Guarantee of supply: When the guarantee of electricity supply is in question within the Mibel territory, each Party will adopt those measures necessary to guarantee the energy supply, without affecting its commitment to act in line with the principle of solidarity. The Agreement, now pending ratification, will enter into effect on the date of reception of the last notification in which Spain and Portugal communicate their compliance with the domestic legal requirements to this effect. Until the date of entrance into effect of the present Agreement, the previous Agreement will continue to be applied provisionally. The Agreement was concluded for an initial period of two years, automatically renewable for equal periods of time except where one of the two parties gives a minimum of six months notice of their intention to terminate it. Positive effects of the Mibel The starting of the Iberian Market offers a number of potential advantages, some of which are indicated below: Greater market efficiency due to its increased size and the liquidity it can reach. Participation of all the actors under non-discriminatory conditions. Contribution to generation investment processes. Easing the deregulatory process on the demand side. Incentives for coordination between network managers. Demand Installed power Peak demand (9/12) Market opening Progress in the harmonisation of charges for network use. 45,5 GWh 9,893 MW 8,246 MW 1% In this respect, Decree Law 192/24, of August 17th, issued by the Portuguese Ministry of the Economy, is worth mentioning. Article 2 of the Decree Law establishes the total eligibility of low-voltage consumers, and Communication 1/25, issued by the ERSE, contains all the regulatory changes needed to allow the opening up of the electricity market to low-voltage consumers. However, certain issues still remain that could, at least partially, obstruct the attainment of the expected advantages. Differing tax systems, independent technical management on both sides of the border, the existence of "stranded" or Competition Transition Charges (CTC) in Spain and contractual equilibrium maintenance cost in Portugal (CMEC) and the manner in which interconnection management is handled, are only some of the matters which, regardless of the market mechanisms, may give rise to conditions that impair the Mibel's operation as a single market. 337

159 6. LIBERALISATION OF ELECTRICITY IN AN INTERNATIONAL CONTEXT COMMERCIAL CAPACITY MW Winter 3 to ,4 1,8 Finland 1,3 Russia 95 1, Norway 3,5 3,35 Sweeden Denmark 49 1,7 46 1,3 Portugal 85 1, Spain Ireland 33 1, 1,4 United Kingdom 2, 2, France 2,35 2,4 Belgium 2,75 2,25 3,2 Holland 4,7 3,5 Switzerland 2,65 5,6 2,55 3,8 3, Germany 4, 3, 2,8 8 1, ,4 1, Italy ,1 2, 2,3 7 Czech R Austria Slovenia 1, 1, ,5 Croatia 8 1,65 6 1,94 Poland Slovakia 65 4 Bosnia Hungary , Serbia -Mont ,1 1,55 1, Romania 1,2 96 Bulgaria 1,24 78 Albani Morocco 5 5 Greece Source: ETSO and self elaboration 338

160 Price formation and solution of border congestions It is evident that the smooth operation of the Mibel as a single electricity market depends on the interconnection capacity between Spain and Portugal reaching a minimum which, in the document "Planning of the Electricity and Gas Sectors. Development of Transmission Networks ", is estimated to be 1,2 MW. As of March 25, the commercial capacity published by the system operator was between 75 and 1,5 MW in the Spain - Portugal direction, and between 6 and 8 MW in the Portugal - Spain direction, obviously lower that the level considered necessary and which has not increased significantly as a result of the enlargement of the interconnections put into operation at the end of 24. Under these circumstances, and while the commercial interconnection capacity published by the systems operators is not increased, it is inevitable that there will be border congestions. The method to be chosen to resolve such congestions is considered of the utmost importance. Amongst the methods studied by the operators is the so-called "Market Splitting", which, according to the studies carried out, allows the resolution of congestions in a non-discriminatory manner for the agents involved, and furthermore mitigates the problems associated to a possible dominant position. Moreover, it implies no extra cost, take into account in a fair manner bilateral contracts and determines the area costs on both sides of the congestion in accordance with the situation. This method is similar to the one used by NordPool for the management of congestions in the interconnections among Norway, Sweden, Finland and Denmark, but allowing cross-border bilateral contract. The design of a system to resolve congestions that combines the Market Splitting procedure at the Portuguese border with the Market Coupling method at the French border could offer a solution that is compatible with the criteria of the European Union pursuing an internal energy market, of which the Iberian Electricity Market will be a part. 339

161 OMEL's technical resources and technology 7.1 OMEL's human resources 7.2 OMEL s information system 7.3 Main modificactions in OMEL s advanced technology and cooperation with other entities

162 The implementation and operation of the electricity market by OMEL, which has now been in full operation in all processes and functions for seven years, is based on the organisation of human and technological resources, which have been combined with a high degree of effectiveness.

163 7. OMEL S TECHNICAL RESOURCES AND TECHNOLOGY 7.1 OMEL's human resources DISTRIBUTION OF EMPLOYEES BY PROFESSIONAL CATEGORY OMEL's organic and functional structure is designed to foster teamwork, which is the Company's key working approach. In this way, despite the fact that each person and unit in the Company has specific responsibilities, functions and objectives, all collaborate in the achievement of the company's overall objectives, ensuring a broader field of vision and greater efficiency in the performance of their tasks. % Year 4 OMEL's team has demonstrated a high degree of professional skills, both with regard to the innovative information technology applicable to electronic markets in general and in the operation of electricity markets. 4 3 This professionalism has been revealed in the design and management of the electricity markets, the relationships with market participants and entities interested in participating in it, as well as its market regulation proposals, internal and external training and during its collaboration in the development of electricity markets in other countries OMEL's strategic policy is based on continuous training, at the same time fostering innovative attitudes, based on cooperation and the integration of efforts and the development of personal skills, aimed at incorporating state-of-the-art technologies into the Company's assets. At the end of 24 the Company's workforce numbered 53 persons. On 31 December, the average age of the workforce was 4. The Company is structured as a simple organisation geared towards the achievement of its objectives with the overall participation of all the employees. The large number of qualified personnel with university degrees, especially senior staff (62%), and junior college degrees (19%) is typical of organised markets based on advanced information systems. Administrative personnel account for 19% of the total workforce. In the field of occupational safety and health, the outstanding feature of the year 24 was the continuation of the safety and occupational risk prevention measures with the corresponding training plans implemented in the previous year. High level degree Medium level degree 7.2 OMEL's information system The operation of the markets and the performance of settlements are basic functions of OMEL. They are supported on the market operator's information system (SIOM), which constitutes an electronic trading market on which all transactions are carried out. The main functions performed by SIOM are as follows: Clerical Receiving sale and purchase bids. This function includes a series of verification procedures aimed at helping participants to make errorfree bids. Matching bids and obtaining marginal prices for each hour in the daily and intraday markets. Receiving information relating to the execution of bilateral contracts. Performing technical constraint solution processes in cooperation with the system operator. Performing energy market settlements and invoicing to participants. 342

164 SIOM: SPANISH ELECTRICITY MARKET OPERATOR INFORMATION SYSTEM Market clearing Settlement Billing Bank Reports Daily Market Matching Process Intraday Market Matching Process Congestion Economic Balance Post-Matching Analisys Tools Daily Market Settlements Ancillary Services Settlements Intraday Market Settlements Deviations Automatic Reports Sending Billing Module Guaranttees Payments & Collections INVOICE Billing PC Reports Edition Module Generation Module Design Module Publication Operating Management Tools Bids Tracer System State Loaded Information Access Matching Simulation Modules Matching PC Fees & taxes Settlement PC Sending Automatic Reports Reports PC Capacity Payment Accounts Management Database SIOM Web MonitoringAdministration Equipment State Participants Administration HTML Pages DB Interface Mail server Performance Module Surveillance Configuration Data Administration Master File General Configuration Tables Matching Results Tables Participants Tables Web Servers Access Control Validation FTP Server Alarms Profiles Administration Reports Tables Settlements Tables Bilateral Contracts Tables PKI Security Administration PC SIOM Web Load Module Generation Bids/Offers Tables Master File Tables Metering Data Tables SIOM MA Settlements & Billing Download Desktop PC Validation Module Metering Data Acquisition Bids/Offers for Daily Market Logs Audits Bids/Offers for Intraday Market Card Reader Bilateral Contracts System Operator Communication management Communications Claims Management Laptop Computer System Operator IS SO Server SO Server SO FTP Server Queries & Reports 343

165 7. OMEL S TECHNICAL RESOURCES AND TECHNOLOGY Providing market participants with the necessary information on market results and settlements. Managing information exchanges between OMEL and market participants, including the electronic treatment of eventual market claims. Maintenance of information related to participants required by the market and the electronic management of the changes associated to it. Exchanging with the system operator information required to run the production market and settlements processes. Analysis of existing information and generation of reports. Automatic generation and distribution of public reports, mainly through the market public web site. Design principles. The SIOM system design enables market participants with a wide range of different needs and requirements to participate on the market. It facilitates access to a large number of small participants who basically require straightforward access and may not have highly developed computing skills at the same time. The system is also suitable for satisfing the needs of participants who carry out a significant volume of transactions and therefore have other concerns and requirements. The adopted solution, based on the use of Internet technology, enables a large number of participants to enter and operate in the market in a short time span. The design of the participant's equipment is simple, robust and reliable, using only standard PC software. It is also practically maintenance free. SIOM has a star configuration, redundant in all its equipment in order to cover single equipment faults. All market transactions are recorded in a central database. The following table summarises the SIOM system design requirements and the solutions adopted in each case. In order to ensure that communications between participants and SIOM do not hinder access to market participants, the SIOM system has been designed to be accessible through four types of alternative communications channels: Basic analog telephone line (PTN). Integrated services digital network (ISDN). DESIGN REQUIREMENTS REQUIREMENTS Unlimited number of participants Minimum requirements for participants Universal access Controlled security Expandable Single-fault tolerance Automatic access from aplications Interchange format standardization SOLUTIONS Internet technology A PC with an Internet browser Use of available technologies BTN ISDN Internet Dedicated line SSL, personal certificates, digital signature Scalable architecture Equipment and applications redundancy Access allowed trough Web Services Gradual implantation of XML 344

166 Internet network. Dedicated lines. Participants may use any of the above communication channels or a combination of them, according to their specific needs. All the elements that configure communications infraestructure sustain a single fault in any of its components, since they are all duplicated for automatic switchover in case of breakdown. In order to comply with the stringent security requirements of an electronic market, electronic signature techniques, which are now common in Internet e-commerce applications, are used. These are based on: Personalised smart cards for each participant containing the cerfificates. Control of different access levels through the certificates issued by OMEL. The use of the https secure communications protocol, in accordance with the standard Secure Sockets Layer (SSL). In order to make the system more secure, OMEL has assumed the function of market certification authority. Consequently, the Company manages participants' electronic identification certificates used both for accessing the market and for system operating processes. The following figure describes the modular architecture of the SIOM system. The names and functions of the modules are as follows: Data base Main kernel of the system, the whole information associated to the daily operation in the electricity market is stored on it, including the actions carried out by the agents, received information, prices, market results and, in summary, the information generated, received and exchanged with the rest of the entities (agents and system operator, mainly). SIOM-Web: Main module for the services of external access provided by the market. Endowed with special mechanisms of redundancy, it processes all the requests of information and uploads of external information and, communicating with the database, it provides the associated information to the presentation layer. SIOM-Agents This module handles participant-omel communications. It enables bid sending and validation and downloading of session matching and settlements results by the participants. Several operating screens from this system are shown below. Matching: This module matches participants' bids in the daily and intraday markets and generates the marginal prices for each hour, the matched power, and the economic precedence order of the bids. Settlements: This module generates the account annotations for all transactions in the production market, including processes managed by OMEL and those managed by the System Operator. The module also sets the power traded in each process by each participant and the final hourly price. Finally, as a function of the overall transactions produced by all agents, acquisition and selling final prices for the different categories of participants are obtained. Invoicing: In charge of managing the processes of invoicing, collections and payments carried out between the company and the market participants. Generation of an unique bill for each participant incorporating all its transactions in the market, including the overcosts associated to ancillary services. Equally, it takes charge of the execution of the management of the several kinds of guarantees provided by each agent in the market and of their daily control. The IT System continuosly publishes the guarantees state for each participant, allowing them to maintain a complete control over them. 345

167 7. OMEL S TECHNICAL RESOURCES AND TECHNOLOGY 346

168 External interfaces: This module handles communications with external entities, particularly the system operator. Exchanged information includes data required for management processes shared by OMEL and the System Operator, market results that are required for the technical operation of the system, and the results of processes managed by the System Operator that are required for financial settlement. Reports: Generation and publication of the information associated to the market including the tools used for editing reports, distributing and automatic publication of them. Management: This module enables OMEL personnel to perform the tasks involved in the operation maintenance and continuous monitoring of the different equipments of the system and of their basic software and applications. Additionaly, this module includes also all the management tools existing in the application, including facilities of performance analysis and predictive maintenance of the system. 7.3 Main modifications in 24 Within the scope of the technological development in the system structures of the market operator, 24 was a year marked by, on the one hand, the continued consolidation of the systems and communications infrastructure and, on the other hand, the implementation of new functions and services for the market trading system. CONFIGURATION OF THE EMERGENCY SYSTEM Main Office USERS TRAINING DEVELOPMENT DATABASE NETWORK BD1_LS NAS1_LS OPERATION/SETTLEMENT DATABASE NAS NETWORK NAS FILERS NAS2_LS BD2_LS STORAGE SERVER SINC NETWORK GEO NETWORK 1 Mbps Emergency Office SIOME DATABASE NETWORK SIOME NAS NETWORK OPERATIONS NAS FILERS MW PW MW PW WEB1_LS WEB NETWORK WEB2_LS 1 Mbps SIOME LD NETWORK Load Balancing SIOME WEB NETWORK Load Balancing ACCESS NETWORK SIOME ACCESS NETWORK 347

169 7. OMEL S TECHNICAL RESOURCES AND TECHNOLOGY During this year 24, both the main system and the emergency system remained operative at all times. There was no need to use the emergency system except in the regular operativity tests that were performed with market agents. In 24, significant improvements were made to the company's computer infrastructures in both the main system (SIOM) and the emergency system (SIOME). These improvements has produced a system with the necessary processing functions and capacities required for the new needs arising from the continuous growth in the number of active participants in the market and the new challenges associated to the widening of the markets, like the Iberian Market, the extension of the buyers choices an the market prices to the extrapeninsular system, or potential collaborations with other European market operators. The SIOM2 System From the point of view of the infrastructures for accessing the electricity market, year 24 is especially relevant for the implantantion during this year of a new trading system denominated SIOM2. This system, which maintains completely the functionality provided by the previous system SIOM, includes a series of new functionalities that allow the participants, to develop computer applications that communicate directly with the market information system. This way, all the processes associated to the active participation in the electricity market (sending bids, consultations, downloading information, etc.) can be automated and be integrated with the agent s applications, reducing the possibility of errors and improving the management of the associated market information. In order to obtain this functionality, web services technology has been used. Main services for sending and accessing the information provided by the market participants have been implemented and published. Following the industries process of standardization, XML has been chosen as the interchange information format. XML is currently used in the Internet world as the base of most B2B applications. In order to facilitate the market participants the use of these new technologies, a series of software modules developed and proven by OMEL are provided to the agents that can serve as the base of their applications (client module). The provision of these modules includes the delivery of the associated source code, the documentation and the support for its use in the fastest and most efficient way. During this year, this new functionalities have been put into operation, initially in parallel with the previous system, to facilitate participants their adaptation to the new system. The behaviour of the new system has been completely successful, being at the moment of publication of this report the only system for accessing the market in substitution of the previous one. In order to facilitate the introduction of these new technologies in the facilities of the participants, OMEL provides a series of developments and interfaces for programming (APIs) that can be used in the participant s applications accessing the market. The agents have seen thus simplified, in case of wanting to use these new functionalities, their utilization and subsequent automatization of their processes. Other significant developments Aside from the developments of the new functionalities included in SIOM2, during 24 important modifications have been introduced in the company s information system. It is worth highlighting the following: The improvement in the operating and communications infrastructure of the SIOM system, providing new features and information processing capacities to respond to the increasing demands of the market. The implantation of a new Storage Area Network (SAN) which integrates all the information associated to the different databases of the market IT system and the diferent auxiliary system, improving its performance an faciliting its management. The development of new settlement procedures in change of the generation and publishing of electronic bills, allowing participants to stop using the paper bills. Significant improvements in the collaterals management and publishing application, facilitating participants with new posibilities for continous access to the collateral s state of each participant has he performs its market transactions. The updating of System security systems, providing SIOM and SIOME with more advanced security mechanisms following the state of the art in this field. In this area, it is worth mentioning the external security audit produced, which has confirmed the high security level applied in the company. The continuous improvement of market, settlements and invoicing processes, providing the required in funtionality to response to the 348

170 significant increase in the number of agents and operations and particularly the new treatment given to producers under the special regime in their participation in the market. The on-going improvement of the public information server of the company (public web site), which during the year incorporated new functions and presented new information and new access facilities to market results. In addition to all these important improvements to the daily operation of the market, in 24 progress was made in the development of new integrated solutions, that expected to be put in operation in 25, will respond to the new needs of the market and agents in the near future. As the first of these solutions, it is worth mentioning the analysis, design and implementation of a series of modifications necessary to the beginning of the Iberian Market operation, anticipated initially to April of 24, although later delayed. From the end of 23 and for the first months of 24 important modifications in the application were introduced to adaptation it to the new necessities associated to this market, including the necessary communications with the Portuguese, market operator OMIP and the system operator REN, as well as the modifications in the market processes and the maching process to consider the transactions of the Portuguese participants. Within this last points it is specially important the development of a new matching and formation of the price process for the Mibel considering the bids made in both countries and the limitation of the capacity of the interconnection. In order to obtain adequate price, this system uses the mechanism of market splitting recommended by the European Union, allowing bilateral contracts the presentation of prices to compete with the market bids in the use the limited interconnection capacity. Also, throughout the year 24 the required adaptations and new functionalities necessary for the associated processes of settlements in the extra-peninsular systems were introduced. At the end of 24, the system is ready to perform these functions in the moment at which the operation of these extra-peninsular systems is regulated. Additionally, and within the company strategy of collaboration and active participation in the opinion forums promoted by the European Union, and as a result of the order made by the Florence forum to the EuroPEX organization, there have continued the works to provide market solutions to the congestions in the Spain-France interconnection. In this sense, it has continued the collaboration with the market operator of this country, Powernext and with the respective system operators, in the definition and implementation of a mechanism of market coupling proposed by the organization of European market operators EuroPEX and the system operators ETSO for the implementation of market mechanisms in the management of the interconnections. Fruit of this collaboration is the development of a totally operative application that allows the implantation of this mechanism in the Spanish-French border and the studies in course to allow its generalization to the entire European network. This application has been developed internally by OMEL allowing the execution of the matching process and formation of price in the Spanish market in iteration with the French market, interchanging the information between both markets by means of the technology of web services. 7.4 OMEL s advanced technology and cooperation with other entitites At the same time, the on-going support to maintenance, and acquisition of knowledge and technology applied to the dynamic adaptation of our information system has transformed SIOM technology into an ideal instrument for the development of our market; and also for being used as a base in other recently-created organised electricity markets. OMEL's technology, which had already been exported to the Dutch market APX-Netherlands and to Portugal's trading system, was 349

171 7. OMEL S TECHNICAL RESOURCES AND TECHNOLOGY successfully implemented at the end of 21 in the electricity market of the Czech Republic. During 24, the company continued collaborating with the Czech electricity market operator, carrying out the necessary improvements and modifications to the system in order to improve its performance and adapt it to the needs of the electricity market in that country. Apart from this action, in 24 OMEL continued to develop its cooperation activities with other markets and institutions in countries in the process of deregulating their markets. Between these actions, it is worth highlighting the continuation of the consultancy projects to support the operation of the electricity market in Georgia; the companies Iberinco and IPA have collaborated in this project. In 24 the conflictive political situation in this country made it extremely difficult to continue with the project. Despite this, the previously established objectives were achieved and decisive support was provided to the market operator in this country; it is expected that the project may continue during 25. Additionally, during 24 it has continued the OMEL s interest in the development of applications and models to facilitate introduction of demand side management processes at the consumers facilities. Within these efforts, it is specially important the joint project of demand management that is being made with Telvent, which, hopefully will already have its results available throughout 25. OMEL technological assets include numerous price forming developments based on implicit auctions corresponding to the one currently applicable in the market, as well as market splitting and market coupling mechanisms. Both procedures may be potentially used to deal with congestion on the Spanish-Portuguese and Spanish- French interconnection lines. Finally, the information system technology developed during the last two years must also stand out to allow the market management of continuous auctions applicable to the forward energy markets and to other potential markets different from the daily and intraday markets, as well as the settlement processes, invoicing and associated guarantees. This technology has been exhaustive proven for the operation of a forwards market, but it is also prepared for its use when it is considered opportune. The developments obtained and tests made as well as the results demonstrated the capacity of Internet as a support of this kind of markets, being able to serve as a base of future new functionalities to incorporate in the electricity market or on other energy markets related. 35

172 351

173 Information on the electricity market 8.1 Information on the electricity market and its results 8.2 OMEL's training activity

174 The Electricity Sector Law and its implementing regulations entrust the market operator with the task of providing information on the results and operations of the sector that is relevant to both agents participating in the market and third parties interested on its evolution.

175 8. INFORMATION ON THE ELECTRICITY MARKET 354

176 This function, which is characteristic of institutions managing organised trading or financial markets, becomes particularly relevant in the processes of creating and consolidating these markets. OMEL, aware of the importance of these activities for the development of the electricity market, has introduced a specific strategy that integrates this as a basic and intrinsic function of the Company. In conformity with the latest recommendations for the promotion of corporate security and transparency, OMEL publishes information about the Company and its management bodies on its Web page. The most noteworthy information is as follows: I. Functions of the Company II. Corporate Statutes. III. Company Code of Conduct, which must be adhered to by all the members of the Board of Administration, as well as the Company's directors and employees. IV. Organic structure of the Company, including the composition and identity of the members of its Board of Directors. V. Regulations applicable to the Company and to the electricity sector. VI. Information on functions, structure, composition, system of rotating appointments to the posts of Chairman, Deputy Chairman and Secretary and the International Operating Regulations of the Market Agents Committee. VII. Directory of Market Agents. VIII. Monthly reports on the evolution of the electricity market since December IX. The Company's Annual Reports since 1998, together with independent auditors' reports and details of the Company's shareholder structure. 8.1 Information on the electricity market and its results Since the market started operations, OMEL has provided information on a regular basis in connection with the characteristics and functioning of the electricity market and its results through press releases, diffusion through conferences organised by institutions interested in the electricity sector, the publication of articles in specialist Spanish and foreign magazines and journals and several training courses about the electricity market. OMEL considers that Internet is currently the most efficient media for broadcasting both real-time and historical information in a quick and accessible manner. Accordingly, key information on the Company and the organised electricity market has been published on Internet. The information provided by OMEL is updated on an ongoing basis and is published in English as well as in Spanish. OMEL publishes the results of the daily and intraday markets, including the volume of energy and prices resulting from the transactions in those markets, immediately after the corresponding market sessions. It also publishes information about the other market processes, such as the results of settlements, information on the resolution of technical constraints and the results of the technical operating processes managed by the system operator, an integral part of the final electricity price for whose calculation is OMEL s responsability and that others components are also published together with a list of all its components, including deviations over the meter readings, when they are incorporated in the settlements. 355

177 8. INFORMATION ON THE ELECTRICITY MARKET Additionally to the publication of the hourly final prices for each kind of agent, the average market final prices for purposes of what is laid down in the Royal Decree 436/24 Second Temporary Disposition calculated in accordance with the calculation method of the temporary economic regime stemmed from the Royal Decree 2818/1998, applicable to power production units in the special regime are also published. Royal Decree-Law 6/2 established the basic principles governing confidential information and information that must be made available to the general public in the electric power production market, in connection with both the market operator and the system operator. Pursuant to the provisions established in the abovementioned Royal Decree-Law, the following information is also made available to the general public: The market operator must publish the aggregate demand and supply curves of the daily and intraday markets, with an explicit breakdown of each of the points included, as well as the modifications derived from the process of solving technical constraints, adding, in this case, the bilateral contracts affected. The market operator must publish the interconnections commercial capacities as well as the international exchanges on each border. The market operator must publish on a monthly basis the results of the energy schedules aggregated by participant and month in the electric power production market, one month after the last day of the month to which they refer. These results are published for all the markets by type of participant, producer, retailer and distributor, as well as for imports and exports through the interconnections. The market operator must publish, on a monthly basis, the bids submitted by the participants in each of the daily and intraday markets three months after the end of the month to which they refer. The majority of the indicated data, depending on their nature, are published in four different scopes: daily, monthly, annual and interannual, what results very helpful to establish comparisons. OMEL also uses Internet to publish, and update on a regular basis, basic legislation governing the electricity market and information on training courses offered by the Company, and which include most notably an interactive Internet based course. It is also worth mentioning that the Company also publishes monthly and yearly reports on the situation of the organised electricity market. In a scope of international cooperation, OMEL collaborates with the European Association of Power Exchanges, Europex. This Association publishes on a daily base and automatically in its web page: http: // the average daily prices updated, in rolling monthly and rolling year by periods of the associated power exchanges, APEX (Holland), NordPool (Scandinavian countries), EEX (Germany), Powernext (France) and Borzen (Slovenia) as well as OMEL (Spain). Also OMEL collaborates in the Web page published by the World Association of Power Exchanges, APEX: http: // 8.2 OMEL's training activity In 24 OMEL continued to develop its training activity, as it considers to be crucial for the proper development of the electricity market, it complementing the more extensive work of providing adequate information and support to market agents and entities interested on it. Market operations. Introdution to the market. TRAINING COURSES Course for using the access facilities to the electricity market through computer applications. Basic Market Concepts. Training for Specific Interested. Interactive Course on Internet. Master level degree courses on the Electricity Sector in collaboration with several Universities, institutions, consultancy and business schools. 356

178 Fifteen courses were imparted in 24, and collaborated in ten Master encompassed the company's own courses as well as those organised in collaboration with other entities and institutions, including the University Carlos III, the Pontifical University of Comillas, the Spanish Energy Club, the Industrial Organisation School, the Institute of Higher Energy Studies (Repsol YPF) and the Lawyer s Office Cremades & Calvo Sotelo. These courses were attended by 536 students. Among the courses imparted in 24, two were adapted to the requirements of the islands and extrapeninsular systems. On the other hand, the topics and contents were adapted to the new regulation especially to the Royal Decree 436/24 of the special regime and other related provisions. The entities attending the courses may be classified as follows: Electricity companies 1% Retailers and consumers 21% External agents 12% Small distributors 2% Self-producers 41% Public Administration 1% Consultants and other companies 13% Mention must also be made of OMEL's interactive Internet course; in 24, this course was visited by 825 users. OMEL management staff have continued the dissemination of information know of the electricity market, participating in seminars, conferences and international congresses, where they have given 31 conferences on different aspects of the markets and their operation. OMEL has continued to promote the quality and objectivity of its teaching activities and the different published documents. These publications have been prepared by the Company's employees, or by electricity company experts, specialised institutions or consumer representatives. Many of the courses contain practical operation on the market. For that OMEL has developed a training system that works identically to the main SIOM system, where market operations can be simulated so that the students can pretend they are buyers or sellers and obtain results in the different markets, present queries and present claims as if they were market agents. OMEL continually adapts its training system to the new requirements of parties interested in participating in the market, with special focus on the market deregulation aspects mentioned previously. Regarding this, during 25 the company continues to offer training services that may be requested by interested parties, programming and adapting the courses contents to the needs that the company observes and/or is asked to provide, including the following: Practical course on the Spanish Electricity Market, aimed at professionals and companies interested in receiving practical training on the functioning of the market. Duration: 8 fi hours. Course on the Spanish Electricity Market, aimed at company professionals, Entities and Associations interested in receiving a broad insight into the functioning of the Spanish electricity market. Duration: 25 hours. The course is distributed in three days with morning and afternoon sessions. This course has been adapted to the producers of special regime (cogenerators and wind producers), that are accesing to the market. Course on the Spanish Electricity Market, given in English and identical to the course described above. Scheduled to be imparted once a year, according to demand. Interactive Internet course (new design). 357

179 8. INFORMATION ON THE ELECTRICITY MARKET A new course has been designed named "Course for using the access facilities to the electricity market through computer applications, directed to market participants interested in knowing in detail the new provided facilities for accessing the electricity market through automatic computer applications. The course is usefull not only for entities interested in developing specific aplications that use them, but also for entities interested in acquiring the information for its potencial future use, the course includes practical sessions with examples related to all topics, communication exercises with the market and practical execution of concrete operations for presenting bids, obtaining matching results and settlements through SIOM (Market Operator Information System) in an automatic way. Courses on the electricity market are also offered upon request in both Spain and abroad, either in Spanish or in English. These courses can be designed for external agents, corporate employees or entities interested in the functioning of the Spanish market or because they see this market as a potential model for their own countries. In these courses imparted on request, OMEL adapts to the specific needs of applicants in terms of both the duration and content of the courses. STATISTICAL REPORT CD

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181 Diseño: ROJO. Taller de Diseño Preimpresión: Rapygraf, S.L. Impresión: Gráficas Marte, S.A. Fotos: José Javier González, Raúl Santamaría, José Barceló, David Martínez, Juan Martí y Banco de Imagen

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