2/12/2020 FOOTER GOES HERE 1

MARKET ALTERNATIVES FOR CENTRAL ASIA

AND EXPECTED BENEFITS FROM REGIONAL

TRADE

ALMATY, KAZAKHSTANFEBRUARY 11-12, 2020

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SESSION 5 – INTERNATIONAL EXPERIENCES

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TABLE OF CONTENTS

• SOUTHERN AFRICA POWER POOL

• CENTRAL AMERICA

• EUROPEAN UNION

• NORTH AMERICA POOL

▪ Although there are a large number of countries that trade electricity

with their neighbors, there only a few organized regional electricity

markets that allow bilateral and centralized (short term) trading of

electricity. These market are described in this presentation.

▪ Additionally, there are several regional markets in process of (slow)

formation.

▪ These ongoing and successful markets are the international references

for CAREM, the market model alternatives proposed are, to some

extent, inspired by the markets described in this presentation

3

OBJECTIVES

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SOUTHERN AFRICA POWER POOL

• 12 SADC Member Countries

• 16 SAPP Members

• 280 Million people

• Installed Generation Capacity 62 GW

• Available Generation Capacity 47 GW, hydro in North and thermal in South

• Planned Generation 2015-19 is 23,585 MW

• Peak Demand - 55 GW

• Consumption - 400TWh

• 22 HV interconnections (29 single circuits)

• 9 (out of 12) countries interconnected

• 5.2 TWh of exports for the member states from April 2013 to March 2014 (3.6% of energy consumed in the Power Pool)

• The cumulative transfer capacity amounts to 7000 MW

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INTRODUCTION TO SAPP

SAPP KEY FACTS

DR CongoTanzania

ZambiaAngola Malawi

Zimbabwe

MozambiqueBotswanaNamibia

aSouth Afric Lesotho

Swaziland

CROSS BORDER LINKS AND AVAILABLE

TRANSMISSION CAPACITY

SAPP was created in 1995 with the following Objectives:

• To cooperate and coordinate in the planning and operation of the

electricity business in SADC

• Facilitate cross border electricity trading in SADC

• Promote regional cooperation in power projects development

(Generation and Transmission Infrastructure Development) –

economies of scale

• Increase Access to Electricity in Rural Areas

• Ensure that the region Attracts Investment for large energy intensive

electricity users (attractive tariff)

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SAPP MAIN OBJECTIVES

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SAPP MARKET DEVELOPMENT

EVOLUTION

10

▪ Bilateral contracts

INITIALLY

FIRST PHASE

▪ Bilateral contracts

▪ Short-Term Energy Market (STEM) - 2001

▪ Post STEM (Balancing Market) – 2002

▪ Day-ahead Market (DAM) – 2009

▪ Post Day Ahead Market (PDAM) - 2013

▪ Bilateral contracts

▪ Day-ahead Market (DAM)

▪ Forward Physical Market s (MA &WA)

▪ Intra Day Market

▪ Balancing Market – under development

▪ Financial Markets – under development

CURRENT PHASE

Market

evolu

tion

Participants can only trade directly on the SAPP market upon:

• Having been licensed or given permission by the host country to

undertake cross border trading

• Acceptance as a Market Participant by SAPP Executive Committee

• Being party to a TSO connected to a SAPP Control Area and having

arrangements for Balance Responsibility

• Signing the SAPP Market governance documents

• Have at least two trained Traders

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CONDITIONS TO TRADE IN THE SAPP - MTP

• Trading arrangements mutually agreed between bilateral parties

– Volumes and Prices are the key parameters

– Transmission path to be secured in advance

– Bilateral parties directly invoice and settle each other

• Can be firm or non firm

– Firm contracts; Generally not interruptible – hence there is

reliability premium

– Non firm contracts; Are interruptible with notice. If notice given,

no penalties

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BILATERAL TRADING IN SAPP – KEY FEATURES

• Market for secure, effective and non-discriminatory trade of electricity:

• Trading to be concluded daily for delivery next day

• Forward bidding up to 10 days

• Participants submit bids (purchase) & (sale) offers

• Closed market – only market operator and participant know the details of the bid / offer

• Price discovery

• Provides a neutral reference price

• Open and competitive market

• Provides platform to manage demand & supply fluctuations

• Gives price signals to policy makers

• Stable & Liquid market will give investor confidence

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DAM MAIN FEATURES

All Transmission equipment used for wheeling is identified in Country C

TRANSMISSION WHEELING IN SAPP

Country C

Country

A

100 MW

100 MW

Country B

Horizontal network of the country

SAPP agreed to the following Transmission Capacity Allocation Criteria:

• On the Trading Day, Firm Transactions (from bilateral and competitive

markets) will be given priority ahead of Non-Firm Transactions

• On the Delivery Day, Emergency Energy transactions will be given

priority ahead of all trades (bilateral contracts & competitive markets

trades)

• On the Delivery Day, Non-Firm bilateral transactions will be given

priority ahead of IDM

• Transmission capacity created through flows of earlier markets

(counter flows) will be utilized in the calculation of Available

Transmission Capacity (ATC) on the Trading Day for each of the

markets

TRANSMISSION CAPACITY ALLOCATION

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2012/2013 2013/2014 2014/2015 2015/2016 2016/2017 2017/2018

Total traded Energy Bilaterally traded energy

SOME NUMBERS

1 27 10 23 84

508

1,059 1,023

2,129

-

500

1,000

1,500

2,000

2,500

0.00

2.00

4.00

6.00

8.00

10.00

SAPP achievements in the area of electricity trading are:

• Allowed variable costs reduction. The large volume of matched but not traded energy during some years suggests important further potential savings.

• Minimized the impact of load shedding as a result of trading

• Provides trading opportunities that incentivize investment in generation and transmission in the region, also taking advantage of the synergies between generation mix potentials in different countries.

Besides

• Governance documents revised to accommodate other players in the SAPP and to allow for the creation of a competitive market

• Developed its own trading platform for the competitive markets

• Developed a mechanism to handle energy imbalances

• Provides a learning curve for other regional electricity markets

KEY ACHIEVEMENTS OF SAPP

• Political support is a necessary condition

– Critical especially with sovereign countries like in the SAPP. Inter-governmental agreements gave positive support to the launching of the SAPP. But the extent to which this support still exists is unclear, at least in some of the countries. For instance, the delay by the isolated members in developing interconnections clearly represents a (lack of) political decision.

• Design simple and effective Power Pool Governance and Operational Rules

– The simple but effective legal and institutional framework, based on the organization and responsibilities allocated to SAPP, has been a success factor for trade development.

– SAPP progressively developed regulations that work for trading, settlement, wheeling tariffs, disputes resolution, etc.

• Attract new players and focus on infrastructure planning

– The dominance of one market player and the Incapacity to attract new investors and develop alternative energy sources lead to the capacity crisis of 2014-2016.

– The absence of an adequate integrated transmission system to evacuate the power and trade it regionally was another key factor that limited the development of the regional mix.

• Transmission Capacity remuneration is key

– Clear and consistent rules on how to allocate and compensate network owners are required. Regional transmission projects may not necessarily be required by the respective countries where the lines would transit, but are needed mainly for regional transactions

• A fairly developed grid interconnections allowed starting trading immediately to the decision to create SAPP

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KEY LESSONS

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CENTRAL AMERICA

CENTRAL AMERICA MARKET

Regional Resources

•Hydro

•Geothermal

•RES

•No oil-gas-coal reserves

Six countries

• Guatemala

• El Salvador

• Honduras

• Nicaragua

• Costa Rica

• Panamá

Guatemala is connected to

Mexico

SIEPAC Project, key for the market, built a

220kV transmission system connecting the

6 countries

ELECTRICITY SECTOR ORGANIZATIONS

Distribution Trading Generation Transmission

Costa Rica No No No No IPP No

El Salvador Yes Yes All Yes Thermal (50%) No

Guatemala Yes Yes All Yes Thermal (60%) No

Honduras Partial No No No IPP (35%) No

Nicaragua Yes Yes All Yes Thermal (75%) No

Panama Yes Yes All Yes All No

Current Status

PrivateWholesale

MarketReforms

.

One of the main successes of this regional market has been to allow countries with very

different organizations of their electricity sectors, to work together with minor

legal/regulatory harmonization

The six countries participate in the

regional market

EOR is the Regional System and Market Operator

that runs the 7th market

GU

Market

ES

Market

HO

SystemNI

Market

CR

System

PA

Market

THE CONCEPT OF THE SEVENTH MARKET

• The MER constitutes the seventh market, superimposed over the existent markets in the six countries.

• Agents (Market participants) of the six countries are allowed to participate of the MER

• Regional institutions

• CRIE (regulatory)

• EOR (SO&MA)

• Countries can preserve local regulations, with the changes necessary for compatibility with regional codes.

• Regional firm contracts, the basis for trading and expansion

• Spot market (DAM) for short term optimization and balancing

• Regional Wheeling tariffs, compatible with national transmission charges

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MAIN CHARACTERISTICS OF THE REGIONAL MARKET

• Regional grid (RTR): SIEPAC + existing connections between countries + national lines allocated to regional operation + regional expansions

• Expansion of the regional grid: planned and market based

• Nodal prices

• Firm and financial congestion rights allocated in auctions

• Market

• Bilateral contracts (firm contracts with firm rights have dispatch priority)

• Spot

• Day Ahead (non binding)

• Real time balance• Mutual support in emergencies

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MAIN CHARACTERISTICS OF THE REGIONAL MARKET

• National SO&MO dispatch national markets

• After national dispatches, MPs present bids to the MER,

• EOR clears the MER, and informs national SO&MO,

• National SO&MO adjust national dispatches to include regional

transactions

• National SO&MO takes responsibility to maintain the scheduled flows in

the interconnectors

• Deviations are settled by the EOR

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DAY AHEAD MARKET FUNCTIONING

• Political support is a necessary condition

• All the countries involved in the process of creation of the MER. Big

support (financial and technical) from the Interamerican Development

Bank)

• No need to modify internal regulations and organization, only

minor changes

• Design effective although not too simple. Power Pool Governance

and Operational Rules

• The effective institutional framework, based on the CRIE and EOR

has been a success factor for trade development.

• The implementation of the market rules was progressive, allowing MPs

and EOR to be aware of the advantages of an efficient design.

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KEY LESSONS

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EUROPEAN UNION

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THE EUROPEAN ELECTRICITY MARKET

Most of Europe Countries

interconnected and trading on

common rules

The EU is progressively

harmonizing its national and

regional electricity markets, to

form a single market that

benefits more than 500 million

people.

The absence of restrictions on

electricity trade between

European countries, except for

the availability of cross-border

capacity, allow the

development of the greatest

market in the world

• Electricity can be traded on different types of wholesale markets:

• In a power exchange or multilateral trading platform, market

participants submit generation and demand bids. The market is

cleared once per predefined time period and a single market price is

determined.

• In bilateral over-the-counter (OTC) trading, a generator and

consumer agree on a trade contract by directly interacting with each

other. OTC trading can take the market price published by the power

exchange as reference price.

• In organized over-the-counter (OTC) trading, market participants

submit generation and demand bids to a market platform which is

cleared continuously; one market player can bilaterally accept the bid

of another market player, resulting in different prices for each trade.

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ENERGY TRADING IN EUROPE

• Price Coupling of Regions (PCR) is the project of European Power

Exchanges to develop a single price coupling solution to calculate day-

ahead electricity prices across Europe respecting the capacity of the

relevant network elements on a day-ahead basis.

• A key component of PCR is the developing one common algorithm. The

common algorithm, called EUPHEMIA, calculates day-ahead

electricity prices across Europe, and allocates cross border transmission

capacity on a day-ahead basis.

• PCR is an important step towards a harmonized electricity market through

market coupling in Europe; seven European electricity exchanges

(APX-ENDEX, Belpex, EPEX SPOT, GME, Nord Pool Spot, OMIE and OTE)

developed the joint price coupling. The common goal of the power

exchanges is the best possible calculation of electricity prices and the

efficient utilization of cross-border allocations.

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PRICE COUPLING OF REGIONS

The integration of the EU electricity market also involves balancing energy and ancillary services

• Key aspects involve: common gate closure, common settlement period (15 min), marginal pricing rule, contracts for procurement of capacity should not pre-determine energy prices, use of established methodologies for the allocation of cross-zonal capacity for the exchange of balancing capacity and the sharing of reserves, common rules for re-dispatching and countertrading cost sharing, separate procurement of upward balancing capacity and downward balancing capacity

• Common platforms are being developed for the exchange of balancing and ancillary services between TSOs:

• The IGCC platform for imbalance netting

• The TERRE platform for the exchange of replacement reserve

• The MARI platform for the exchange of Manually activated reserves

• The PICASSO platform for the exchange of automatically activated reserves

• The common platform for the procurement and exchange of frequency containment reserves

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BALANCING MARKET AND ANCILLARY SERVICES

• Method: based on measured flows, demand and estimated losses. TSOs

that host transits are paid by TSOs that generate them. Compensation

based on agreed “cost values” for infrastructure (LRAIC) and losses

(same as national values)

• Rationale: fully non transactional method

• It is a compromise between different positions and approaches to cost

calculation

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WHEELING CHARGES (ITC)

COMPENSATION

FOR

LOSSES

COMPENSATION

FOR

INFRASTRUCTURE

CONTRIBUTIONS

BY PERIMETER

COUNTRIES

CONTRIBUTIONS

BY ITC TSOS

RL and Cp are calculated on a yearly basis

Ri = 100 Meuro, Cp = 0.6 EUR/MWh (in 2018)

CITC = RL + Ri - Cp

RL

Ri

CP

CITC

ITC – THE FINANCIAL BALANCE

• The market is divided into bidding zones and is based on the assumption that

trading opportunities within those zones are unlimited (i.e. no congestion).

Trade between bidding zones is limited by the level of cross-border capacity.

That creates constraints on how much trade is technically feasible.

• TSOs need to anticipate uncoordinated flows and take measures to keep the

power system secure, by limiting the potential for cross-border trade. TSOs

also have to reschedule the output from power generation plants when the

market demand cannot be supplied due to grid limitations. Uncertainty about

cross-border capacity calculations (ATC) as a result.

• This treatment of cross-zonal trade, versus trade within bidding zones, is now

of particular interest to European regulators and policymakers. The zonal

market design, implicitly prioritizes internal trade over cross-border trade.

Review on how cross-border capacity is calculated, setting the limit on trade

between zones, could change the way Europe’s entire zonal market is

organized.

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ENERGY TRADING IN EUROPE

ISSUES

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NORTH AMERICA POOLS

At the highest level, the

network covering 48 states is

comprised of three major

interconnections functioning

predominantly independently

of one another with limited

exchanges of power between

them.

A country wide regulator

(FERC) for interstates energy

trading.

34

THE POWER SECTOR IN THE US

• States form Power Pools Managed by ISO/RTO

• Each of the ISOs/RTOs operates organized energy markets, such as day-aheador real-time (balancing) markets.

• A number of the ISOs/RTOs also operate organized capacity markets.

• The design of each of those markets is undertaken by each particular ISO/RTO,following some general criteria established in the Standard Market Design,issued by FERC. The common feature is that each auction for an applicableproduct (energy, capacity or certain ancillary services) is designed to produce amarket clearing price that is paid to all sellers that clear in the auction.

• Concerning transmission, RTOs

– provide non-discriminatory access to transmission lines to sellers andpurchasers of electricity and eliminate rate “pancaking” (charging multipletransmission fees for one transaction)

– coordinate regional planning for new transmission lines.

(*) ‘ISO’ is used for coverage of one state while ‘RTO’ for a multi-state region

POWER SECTOR ORGANIZATION AND POWER POOLS

The U.S. market for electricity is

trifurcated:

1. More than half the country is

served by competitive markets

(run by ISOs/RTOs) covering

~60% of electricity traded in the

country

2. Almost half is served by state-

regulated, vertically integrated

utilities controlling generation

and transmission.

3. The rest, a much smaller portion,

consists of government-owned

and customer-owned utilities.

There is no single national

electricity wholesale market in

the US.

ISOs and RTOs

• The PJM Interconnection

operates a competitive

wholesale electricity market

and manages the reliability

of its transmission grid.

• PJM provides open access to

the transmission and

performs long-term planning.

In managing the grid, PJM

centrally dispatches

generation and

coordinates the movement

of wholesale electricity in all

or part of 13 states

• PJM’s markets include

energy (day-ahead and real-

time), capacity and ancillary

services.

EXAMPLE – PJM

MARKETS IN PJMEnergy market Ancillary Services market

◼ The Energy Market consists of Day-Ahead and Real-

Time markets:

◼ The Day-Ahead Market is a forward market in

which hourly Locational Marginal Prices (LMPs)

are calculated for the next operating day based

on generation offers, and demand bids.

◼ The Real-Time Market is a spot market in

which current LMPs are calculated at five-

minute intervals based on actual grid operating

conditions

◼ PJM operates two markets for ancillary services –

regulation and synchronized reserve:

◼ Regulation service is corresponding to

secondary regulation

◼ Synchronized reserve is corresponding to

tertiary regulation

(Forward) Capacity Market Financial Transmission Rights market

◼ The main elements of the capacity market are

procurement of capacity three years before it is

needed through a competitive auction to:

◼ Provide locational pricing for capacity to

reflect limitations on the transmission system

and to account for the differing need for

capacity in various areas of PJM

◼ Define a variable resource requirement to

help set the price for capacity

◼ PJM operates a market for financial transmission

rights (FTRs) to assist market participants in hedging

price risk when delivering energy on the grid

◼ The FTRs provide a hedging mechanism that gives all

market participants the ability to gain price certainty

when delivering energy across PJM

• The energy market consists of:

• Day-ahead Market

• develop day-ahead schedule using least-cost security constrained unit commitmentand security constrained economic dispatch programs that simultaneously optimizeenergy and reserves

• calculate hourly LMPs for next Operating Day using generation offers, demand bids,and bilateral transaction schedules

• Real-time Energy Market

• calculate 5 minute LMPs based on actual operating conditions as described by the PJMState Estimator

• actual financial settlement performed on hourly prices (hourly integrated LMP)

THE ENERGY MARKET

• The energy market (both Day Ahead and Real Time) performs security-constrained unit commitment based on generation offers, demand bids, and bilateral contract schedules submitted by participants

• Unit schedules to satisfy:

• Fixed demand bids

• Cleared price-sensitive demand bids

• Cleared decrement bids of transmission customers

• PJM Reserve objectives

• Goal is to minimize total production cost

• Start-up costs

• No-Load costs

• Hourly Production costs

CO-OPTIMIZATION OF ENERGY AND

ANCILLARY SERVICES

• PJM operates a market for financial transmission rights (FTRs) to assist marketparticipants in hedging price risk when delivering energy on the grid.

• FTRs are financial instruments that entitle the holder to a stream of revenues (orcharges) based on the hourly energy-price differences across a transmission path inthe Day-Ahead Market.

• The FTRs provide a hedging mechanism that gives all market participants the abilityto gain price certainty when delivering energy across PJM.

• Market participants can obtain FTRs in four ways:

• They can bid for them in PJM’s long-term auction, in which FTRs are availablefor periods from one to three years.

• They can bid for them in PJM’s annual auction, in which FTRs for the entiretransmission capability of the system are available.

• They can bid for them in the monthly auctions at which leftover FTRs are sold.

• They can buy them in the secondary market in a transaction with anothermarket participant.

FINANCIAL TRANSMISSION RIGHTS

(FTR) MARKET

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CENTRAL ASIA REGIONAL ELECTRICITY MARKET

CHIEF OF PARTY ARMEN ARZUMANYAN

INFO.CAREM@TETRATECH.COM

WWW.PTFCAR.ORG/CAREM