Transcript Implicit Auction

Why introducing implicit auctions in the
Central South region?
Potential gains from improving allocation
methods of day-ahead cross border capacity
Milan
21 April 2008
Aims of GME’s study
GME’s analysis focused on the Italian borders in order to:
 identify the potential for efficiencies gains from the adoption of implicit
auctions instead of explicit auctions as a mean to allocate cross border
capacity at day-ahead stage;
 give, where possible, a quantitative background to assessment of the
superiority of implicit auctions in short term trading, as stated by the first ETSOEuropex JWG as well as EU documents (report on the 1228 cross-border
regulation);
 give, where possible, a quantitative background to the evaluation of the
opportunity to adopt implicit auction mechanisms for each of the analyzed
borders
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Regulation (EC) 1228/03
Regulation (EC) n. 1228/2003 (art. 2):
 Congestion management methods shall be market-based
 capacity shall be allocated only by means of explicit (capacity) or implicit
(capacity and energy) auctions
 Both methods may coexist on the same interconnection
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In the last years, several European institutions and associations expressed their
position regarding DA implicit auction as a mean for the allocation of cross border
capacity:
 DG for competition
 DG Energy and Transport
 ERGEG
 ETSO
 EUROPEX
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European Commission
DG for competition Energy sector inquiry, January 2007
“Although explicit auctioning is theoretically and with perfect foresight
an efficient mechanism and it is in practice compatible with Regulation
1228/2003, it has efficiency deficits compared to implicit auctioning
especially where intraday and balancing markets are illiquid. With implicit
auctions results of trade are less likely to have economically irrational use
of the interconnector capacity”
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European Commission
DG Energy and Transport, Report on Regulation 1228/2003 on cross
border trade in electricity, May 2007
“In the future, more capacity will be allocated through implicit auctions.
The so-called market coupling method developed by ETSO and the
association of European Power Exchanges (EuroPex) has, at the
moment, the highest potential of truly integrating the European
electricity market through implicit auctions at the day-ahead stage.”
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ERGEG
Coherence and Convergence Report, July 2007:
“It is now widely recognized that for the day-ahead timeframe, implicit
allocation methods are more efficient than explicit auctions and
should be the target mechanism for all regions for the day-ahead
timeframe”
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EUROPEX-ETSO
Interim Report “Development and Implementation of a Coordinated Model
for Regional and Inter-Regional Congestion Management”, April 2008:
“Implicit auctioning may be superior to explicit auctioning in
allocating capacity even for immature energy markets, provided at
least one of the coupled markets has a reasonable level of liquidity”
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Potential for efficiencies gains
GME has identified 4 areas in which potential for efficiencies gains may arise
from the adoption of implicit auction:
 lower operational risks
 lower trading risks/costs
 impulse to the growth of the liquidity in local energy markets
 netting of the flows and more efficient use of the capacity
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Lower operational risks
Example: Time schedule of day-ahead auctions managed by Terna
7.00
7.50
2. Publication by
Terna of daily ATC
and opening of dayahead explicit
auction
1. Nomination to
Terna of yearly and
monthly capacity
rights
8.20
3. Gate closure of
day-ahead explicit
auction managed by
Terna
8.30
9.00
4. Publication by
Terna of results of
day-ahead explicit
auction
5. Gate closure of
GME’s day-ahead
energy market
Operational risks may arise because explicit auctions at day ahead stage require in a very tight timeframe:
 TSOs and PXs to coordinate the functioning of the capacity market (managed by TSOs) and the energy
market (managed by PXs)
 Operators to set up and send their bids/offers to the energy markets on the basis of the results of the
capacity auctions
Example: Indicative time schedule of day-ahead implicit auction
7.00
1. Nomination to
TSOs of yearly and
monthly capacity
rights
7.50
2. Publication by
TSOs of daily ATC
for implicit auction
8.20
3. Gate closure of
day-ahead explicit
auction
8.30
4. Publication of
results of day-ahead
explicit auction
5. Gate closure of
involved day-ahead
energy markets
By integrating capacity and energy markets, DA implicit auctions reduce those risks
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Lower trading risks/costs
With DA explicit auctions, since there are two different markets for the capacity and the energy:
 Operators have to coordinate their capacity and energy positions. Therefore, their bidding strategy
must take into account the trading risk due to the separate trading of capacity and energy
 Problem of asymmetry of information may be relevant, especially in presence of immature energy
markets that do not have a clear price signal
 Operators have to bear the costs of participating to two different markets/platforms (guarantees,
IT,…)
By integrating capacity and energy markets, DA implicit auctions reduce, ceteris paribus, trading
risks and trading costs
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Impulse to the growth of the liquidity in local energy markets
Experiences show that implicit auctions for the management of cross-border capacity can be
successfully launched even in presence of illiquid local energy markets if at least one of the coupled
market has an adequate level of liquidity.
The ratio is that by coupling, via an implicit auction mechanism, two local energy markets, the liquidity
of the immature market is going to increase since its participants may access to the liquidity of the
more mature market:
 in 1998, Nord Pool, already operating in Norway and Sweden, was extended to Finland
 in 2006, the Trilateral Market Coupling (TLC) between France, Belgium and Netherlands was
launched by launching, at the same time, the Belgian energy market
The development of local energy markets brings, indeed, benefits in terms of competition and
transparency
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Netting of the flows and more efficient use of the capacity
The superiority of DA implicit auction in allocating cross-border capacity, respect to DA explicit auction, relies
on two main features:
 DA implicit auction allocates the cross-border capacity between two areas as a function of the price
differential of the prices in the area energy markets.
 DA implicit auction enable the netting of the flows in opposite direction
Therefore, the outcomes of a DA implicit auction ensure that:
 the net cross-border schedules go always from the low price area towards the high price area
 the congestion revenue calculated on the basis of price differential is the “true” congestion revenue, unlike
with explicit auctions where, as it may turn out, there can be a congestion revenue even if there is no
congestion
DA Implicit auctions:
are compatible with explicit auction for the allocation of longer term capacity rights (weekly, monthly, yearly
products)
are compatible both with a “flow-based” capacity model (PTDF/BC) and with ATC/NTC framework as well
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DA implicit auction and long term explicit auction
Import from B to A
Import from A to B
NTCBA
NTCAB
PB
Net Export CurveA
PA* = PB*
Net Export CurveB
PA
ATCBA
ATCBA
Capacity allocated with explicit auctions of long-term products and nominated
Commercial schedule resulting from DA implicit auction
Net cross border schedule
Price
Price
DAMA
DAMB
PB
PA*
PB*
PA
Energy
Energy
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Quantitative background
GME analyzed on the border between Italy and those countries with a liquid index of hourly day-ahead energy prices:
 France (PowerNext)
 Austria (EXAA)
 Switzerland (EEX-CH)
For Italy, the price of northern zone of IPEX was considered.
Inefficiencies in cross border schedules in 2007 is calculated as the “estimated value of the unused cross-border
capacity”1:
(NTCL H – FLOWL  H) * (PrH – PrL), where:
NTCLH is the hourly NTC, published by TSOs in the Auction Rules, in the direction from the lower area price to the higher
area price. NTC values have been reduced accordingly to the notices of curtailment published on Terna web-site, during
2007.
FLOW L  H is the hourly day-ahead net scheduled flow published by ETSOVista.
PrH and PRL are, respectively, the hourly prices, respectively, in the higher and lower area price.
1The
concept of “estimated value of unused cross-border capacity” was adopted in the Energy sector inquiry (January 2007), by the DG for
competition for calculating the inefficiency on the Dutch-German, French-UK and French-Spanish borders (see DG Competition Energy Sector
Inquiry, par. II.3.5.3, January 2007)
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Estimated value of the unused cross-border capacity
The “estimated value of the unused cross-border capacity” represents only a proxy of the
inefficient use of the cross-border capacity that could be reduced by adopting DA implicit
auction. It relies on the following assumptions:
 demand and supply curves in the neighboring
NTCA  B
PA - PB
NTCB  A
markets are, respectively, flat and rigid, i.e. prices
Estimated value
of the unused
cross-border
capacity
would not change if cross-border schedules change
FlowA  B
FlowB  A
 liquidity of neighboring markets would not
change (increase) in case of coupling
 bidding behavior of the operators would not change in case of coupling
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Cross-border schedules
In 2007, cross border schedules on the Italian border
with France, Austria and Switzerland were:
 45 TWh
 14% of the energy sold on IPEX (incl. OTC)
 33% of the energy sold on the Northern zone of IPEX
(incl. OTC)
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Prices
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Cross-border schedules
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Price difference vs cross-border schedules
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Price difference vs cross-border schedules
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Price difference vs cross-border schedules
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Price difference vs cross-border schedules
2007: prices in Northern zone of IPEX
2007: net cross-border schedules
 91% of the hours: higher than PowerNext prices
 99.6% of the hours: import from France
 82% of the hours: higher than EEX-CH prices
 99.6% of the hours: import from Switzerland
 93% of the hours: higher than EXAA prices
 100% of the hours: import from Austria
…operators expected Italian prices to be
always higher!
Italian prices are higher most of the times,
but….
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“Adverse” schedules and prices in 2007
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“Adverse” schedules and prices in 2007
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Estimated value of the unused cross-border capacity
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Prices
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Estimated value of the unused cross-border capacity and prices
In the last quarter of 2007 we find more than
80% of the estimated value of unused
capacity
In the last quarter of 2007 price difference
changed sign more frequently!
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Conclusions and final remarks
The analysis of the Italian, French and Swiss cross border schedules and prices highlights
that:
 when the sign of price difference does not change (i.e. Italian prices are higher), the
estimated value of unused capacity is negligible
 when the sign of the price difference changes more frequently (prices converge), the
estimated value of unused capacity sharply arises!
Is day-ahead implicit auction the solution?
Other aspects should be evaluated:
 presence of overlapping countries raises coordination issues with coupling project in
other relevant region (CWE, CEE)
 evolution of prices
 cost/benefit analysis of introducing implicit auction
 introduction of intraday trading could reduce the inefficiencies arising from DA explicit
auction
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Conclusions and final remarks
Analyzing the schedules on the Slovenian-Italian and Greece-Italian borders during 2007, it
should be underlined that:
 in 77% of the hours Italy imported from Slovenia
 in 28% of the hours Italy imported from Greece
The direction of the flows between Italy and Slovenia and Italy and Greece changes more
frequently than on the other Italian borders!
Assuming that frequent changes in the direction of cross-border flows imply frequent
changes in price differences, then efficiency gains by implementing implicit auctions may be
considerable.
Moreover, great benefits could be gained in term of impulse to the growth of liquidity in less
mature markets
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Thank You for Your attention!
Gestore del Mercato Elettrico SpA
Viale Maresciallo Pilsudski, 92 - 00197 Roma
tel. + 39 06 8012.1 fax +39 06 8012 4524
www.mercatoelettrico.org
[email protected]
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