DEPARTMENT OF ELECTRICAL ENERGY, METALS, MECHANICAL CONSTRUCTIONS & SYSTEMS

ELECTRICAL ENERGY LABORATORY (EELAB)

FINANCIAL ASPECTS OF THE

ELECTRIC POWER SYSTEM
Ing. Jens Baetens 1 April 2019
ELECTRICITY PRICING
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ELECTRICITY IN GENERAL
̶ Electricity is technically unique, complex, changing, …
̶ No end-product
TESLA battery Australia (100MW, 129MWh):
̶ No efficient grid scale storage https://electrek.co/2018/01/23/tesla-giant-
battery-australia-1-million/
‒ Reliable production and supply is crucial
̶ Large system (https://www.entsoe.eu/data/map/ )
‒ Active power balancing
‒ Reactive power: voltage control, power factor
‒ Metering and billing

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http://www.elia.be/en/grid-data/dashboard
ELECTRICITY IN GENERAL
̶ Society expectations
̶ Exceptional performance
̶ Take for granted
̶ Outages
̶ LOLE-criterium (loss of load expectation)
‒ Measure security of supply & set reliability standard
‒ Belgium (and most EU countries): <3h for normal operating system per year
̶ Effect on consumers
‒ Industrial: high cost
‒ Residential: inconvenience

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PRICING COMPONENTS
̶ Three main components
̶ Energy (commodity) https://www.vreg.be/nl/energiekost
‒ Actual production cost
̶ Grid costs https://www.vreg.be/nl/nettarieven
‒ Transmission grid costs
‒ Distribution grid costs
‒ Includes public service obligations
̶ Taxes and levies https://www.vreg.be/nl/heffingen
‒ 21% tax (between 4/2014 and 9/2015 only 6%)

Grid cost and tax evolution 2016-2017, tariefchecker.be

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PRICING COMPONENTS
̶ Large difference between industrial consumer levels
Study Deloitte on Minerva

Deloitte Benchmarking study electricity 2018

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PRICING COMPONENTS
̶ Even larger difference with residential and SMEs
̶ Average all-in tariff (commodity + grid costs + taxes) for 2018:
̶ Industrial baseload profile of 1000 GWh/y1: 5c€/kWh
̶ Industrial baseload profile of 100 GWh/y1: 6c€/kWh
̶ Standard SME profile of 50 MWh/y2: 21c€/kWh
̶ Standard household profile of 3.5 MWh/y2: 26.5c€/kWh
̶ Main cause
̶ Grid connection (voltage level, TSO vs DSO)
̶ Degressivity and ceiling of taxes and levies

Tariff for public service obligations for the financing of green certificates (Elia.be)

1 Deloitte Benchmarking study electricity 2018 8

2 CREG Prijs van elektriciteit in Belgïe (11/01/2019)
METERING
̶ Automatic meter reading (AMR, tele-read)
̶ For SMEs, industry
̶ Monthly meter reading (MMR)
̶ Yearly meter reading (YMR)

̶ From 1/7/2019: roll out of digital meter

̶ AMR for everyone
̶ Data exchange platform (Atrias) (?)

De Tijd (www.tijd.be) 9
ENERGY SOURCING OPTIONS
̶ Large industry
̶ Buy energy on the market themselves
̶ Quarter hourly imbalance settlement
̶ Invoice for grid costs, taxes, levies, …
OR
̶ Contract with energy supplier
‒ Indirect market access, time-of-use tariffs, …

̶ SMEs: energy supplier

̶ Time-of-use tariffs, fixed tariffs, …

̶ Residential: energy supplier

̶ Fixed tariff (yearly changing)
̶ Variable tariff (monthly changing)
̶ Day/night, Night only or Day only

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WHAT ABOUT PV?
̶ Terugdraaiende teller system (“turning back meter”)
̶ Only for small installation (residential)
̶ Is only option with the Ferraris meter
̶ Yearly consumption = yearly production: 0 kWh = 0€?
‒ Production mainly in summer, consumption mainly in winter
‒ Use the grid as battery
‒ Prosumententarief (prosumer tariff)
‒ Fixed cost based on power of inverter
(~ 85 to 110 €/kWp)
̶ Implementation of digital meter
̶ Technically possible to differentiate between
grid takeoff and injection
̶ Still doubt on regulations & tariff structure

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DEREGULATION OF THE
ENERGY MARKET
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REASON
̶ Transformation of electric industry
̶ From: vertically integrated and heavily regulated
̶ To: disaggregated competitive market

̶ Promised to:
̶ Lower prices
̶ Customised services
̶ Efficient deployment of capital
̶ Risk transfer from consumers to investors
̶ Move decision making from regulatory proceedings to market
̶ Still maintain grid reliability!

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REASON
̶ Transformation of electric industry
̶ From: vertically integrated and heavily regulated
̶ To: disaggregated competitive market

̶ Step-wise:
̶ Electric grids were developed locally: power moved in predefined direction
̶ Merging and interconnection of local grids: well defined transfers in terms of
magnitude and timing
̶ Markets: power flows dictated by market economics. Any amount, in any
direction at any time

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REASON
̶ But: electricity is different than other markets
̶ Interconnected network (https://www.entsoe.eu/data/map/ )
‒ Operational capacity can be highly variable
‒ Electricity flows along path of least resistance (https://www.elia.be/en/grid-
data/interconnections/Loopflows)
‒ Bottlenecks
‒ Grid security and reliability criteria can limit network capacity
 Very different from pipelines, telecommunication, highways, etc.
- No storage (compare to gas, water, oil, …)
- Real-time balancing (with thousands of power plants, millions of consumers!)

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DEREGULATION ALTERS PRICING STRUCTURE
̶ Deregulation (liberalisering):
̶ Before: bundled rate structures = 1 package
(generation + transmission + distribution + supply cost)
= vertically integrated companies
̶ Now: cost of service study
three main components: customer, demand, energy
̶ Restructuring:
‒ Distribution prices: regulated, cost-based within allowed profit-limits
‒ Transmission prices: regulated, cost-of-service within allowed profit limits
‒ Generation & supply prices: demand-supply, market
 FACT: billing is more complex

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BEFORE DEREGULATION
̶ Production
̶ Electrabel (private sector)
̶ SPE (public sector)
̶ Transmission
̶ CPTE (=91% Electrabel + 9% SPE)
̶ Distribution: geographical monopoly
̶ Mixed municipal (gemengde intercommunale)
̶ Pure municipal

̶ Vertically integrated: 1 company for everything (production, transport, distribution, supply)

̶ If this electricity market would be opened up:
‒ Competitive distortion
‒ Thus: unbundling necessary

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MARKET PLAYERS
̶ Before regulation
̶ CPTE: production + transport
̶ DSO: transport (MV, LV) + supply
̶ Consumer
̶ After deregulation
̶ Producer
̶ Transmission system operator (TSO)
̶ Distribution system operator (DSO)
̶ Supplier
̶ Consumers

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MARKET PLAYER: PRODUCER
̶ Produces the electricity
̶ Can be the supplier (often the case)
̶ Competition between producers
̶ Objective, transparent, non-discriminatory

Thorntonbank, North Sea

Largest producers in Belgium (2019):

Nuclear site Doel, Belgium

http://www.elia.be/nl/grid-data/productie/productiepark
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MARKET PLAYER: TSO
̶ Used to be CPTE, now Elia since 2001
̶ Owns the infrastructure
̶ Independent, transparent, non-discriminatory
̶ Access of producers, suppliers, consumers
̶ Cost-causation based tariffs
̶ No monopoly profits
̶ Market facilitator
̶ Main tasks:
̶ Exploitation, maintenance
and development of the transmission grid (30kV to 380kV)
http://www.elia.be/en/projects/grid-projects
̶ Security of supply, balancing of the Belgian grid
http://www.elia.be/en/grid-data/dashboard

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MARKET PLAYER: BRP
̶ Balancing of the Belgian grid: responsibility partly shifted to
Balance Responsible Parties (BRP)
̶ Often referred to as Access Responsible Party (ARP)
̶ “Evenwichtsverantwoordelijke”

̶ BRP can be a producer, large industrial consumer, energy supplier, aggregator, etc.
http://publications.elia.be/upload/List_Arp.html

̶ BRP needs to keep balance between injected and consumed power in its portfolio
̶ Makes nomination (prediction) towards Elia of production and injection
‒ Quarter hourly
‒ Day-ahead before 14h
̶ If BRP does not suffice, pays/gets the imbalance price to/from Elia

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Want to know more details? Knowledge-hub:
https://www.next-kraftwerke.be/nl/weten/ https://www.next-kraftwerke.be/nl/weten/brps/ 22
MARKET PLAYER: DSO
̶ Medium- and low voltage (<70kV)
̶ Monopoly
̶ Owner of the distribution grid
̶ Exploitation, maintenance & development
̶ Public service obligation
̶ Social: budget meter
̶ Universal: right of connection
̶ Ecological: promote rational energy usage etc.

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MARKET PLAYER: DSO

Overview municipals
http://www.synergrid.be/index.cfm?Pag
eID=16823&language_code=NED# 24
MARKET PLAYER: SUPPLIER
̶ Supplies what he buys or produces
̶ Competition
̶ Labelling obligation (energy mix)
̶ Bills the consumers https://mijngroenestroom.be/#ranking

Also producers! 25
REGULATOR
̶ Belgium: 2 levels
̶ CREG: “Commission de Régulation de l’électricité et du Gaz” (federal)
‒ Main tasks: check transparency and competition, TSO tariffs, electricity
production, nuclear energy, etc.

̶ VREG: “Vlaamse Regulator van de Elektriciteit- en Gasmarkt” (Flemish)

‒ Main tasks: define technical rules, DSO tariffs, DSO follow-up, market
monitoring, advise policy makers, inform people, GSC, etc.
https://vtest.vreg.be/

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GREEN ENERGY CERTIFICATS (GECS)
̶ System to ensure that supplier supplies a minimum share of electricity
generated from renewables (= guaranty of origin)
̶ Producers of renewable energy receive GECs (=GSC)
‒ Amount of kWh to produce for 1 GEC is dependent on the “bandingfactor”
‒ https://www.energiesparen.be/bandingfactor-GSC
̶ Supplier must hand in a specific amount of GECs to VREG each year
‒ Either produce renewable energy themselves
‒ Or buy GECs

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AGGREGATOR
̶ Fairly new market player
̶ Pools many consumers and/or producers together
̶ Creates opportunities for smaller players
‒ Small wind, PV, Demand Side Response (DSR), etc.
̶ So called “Virtual Power Plant”
̶ Solution for the increasing number of decentralised production units

Need very basic explanation?:

https://www.next-kraftwerke.com/virtual-
power-plant-vpp-simulation/?lang=nl

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ELECTRICITY MARKETS
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ELECTRICITY MARKETS: OVERVIEW

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POWER EXCHANGES: TIMING

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CAPACITY MARKET
̶ Security of supply
̶ Ensure there is enough electricity generating capacity

̶ Nuclear phase out

̶ Fear for scarcity and blackouts
̶ Discussion on necessity of new gas power plants
̶ Not economically feasible
‒ Incentivise via subsidies
= capacity market

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POWER EXCHANGES
̶ Buy and sell power anonymously
̶ Standardised products https://www.epexspot.com/

̶ Timings, volumes, blocks, etc. all pre-defined

̶ Supply & demand (like a stock exchange)

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FUTURES
̶ Buy or sell electricity up to 3 years in advance
̶ Ensure a fixed price
̶ Only 10% is trades in the future market (ref. 2012)
̶ Often used as reference for bilateral contracts
̶ Each day another price

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https://my.elexys.be/MarketInformation/IceEndexPowerBE.aspx
DAY AHEAD MARKET (DAM)
̶ Still often referred to “Belpex”
̶ Hourly blocks
̶ Starts at 12h the day before
̶ Prices known at 14h day before
̶ Min. price = -500€/MWh, max. price = 3000€/MWh
̶ Certain predefined blocks
̶ Example: “sun-peak covering hours” = 11h to 16h
̶ Across the border: within limits of physical interconnections
̶ Thus possible to have different prices in different markets
̶ Implicit allocation of cross-zonal border capacity

https://www.epexspot.com/en/product-info/auction/belgium 35
DAY AHEAD MARKET (DAM)
̶ In practice:
̶ Seller introduces bid: e.g. 100 MW @ 50 euro/MWh for hour 15
̶ Buyer introduces bid: e.g. 90 MW @ 60 euro/MWh for hour 17
̶ Etc.

̶ Aggregation of bids and offers: create demand/supply curve

̶ Fixing: intersection

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DAY AHEAD MARKET: DEMAND SUPPLY CURVE
1 chart for each hour

Demand supply curve

= merit order

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DAY AHEAD MARKET: DEMAND SUPPLY CURVE

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MERIT ORDER EFFECT OF RENEWABLES
̶ Renewables
̶ Grid priority access
̶ Lowest marginal production price
̶ Nuclear
̶ Inflexible
̶ CCGT
̶ Last in merit order (most expensive to run)

 Result: CCGTs push out of the market for many hours, especially when increasing
penetration of renewable energy.
No incentives for investment in new CCGTs

Presentation CREG on Minerva

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DAY AHEAD MARKET: PATTERN

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DAY AHEAD MARKET: PATTERN

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INTRADAY MARKET
̶ No single price (unlike DAM)
̶ Real time continuous buying/selling
̶ Up to 5 min before delivery
̶ Starts @ 14h day ahead
(when DAM is closed)
̶ Like a stock market: bid, ask
̶ First-come, first-served principle

https://www.youtube.com/watch?v=6CNwiOwEjPY&t=1390s
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OTC
̶ Bilateral contract between two parties
̶ “Transaction between counter-parties not conducted across an exchange”
‒ Still sometimes over the phone! But mostly over internet platform
̶ In theory: any price is possible
̶ In practice: often market price taken as reference
̶ Custom made products possible
̶ Good for almost 80% of traded electricity
̶ Futures in OTC = “forwards”

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RESERVES MARKET
̶ Ancillary services supplied to TSO (Elia in BE)
̶ Used to keep the electricity grid in balance

̶ Balancing mechanism
̶ Inertia
(= R0)
̶ Primary reserve
(= R1 = Frequency Containment Reserve = FCR)
̶ Secondary reserve
(= R2 = automated Frequency Restoration Reserve = aFRR)
̶ Tertiary reserve
(= R3 = manual Frequency Restoration Reserve = mFRR)

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BALANCING MECHANISM: INERTIA
̶ Rotating inertia in system
̶ Also called “R0”
̶ Inertia determines susceptibility of grid to higher frequency fluctuations
̶ Inherently available in system: large spinning turbines (gas, coal, nuclear,…)
‒ More renewables integration: no longer taken for granted

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BALANCING MECHANISM: R1, R2, R3

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BALANCING MECHANISM: R1, R2, R3

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ANCILLARY SERVICES: PRIMARY RESERVE
̶ Based on frequency
̶ Activated simultaneously in synchronous zone
̶ ENTSO-E: 3000 MW, Belgium (Elia): 81 MW (2018)
̶ Continuously available
̶ Timing:
̶ 50% activation within 15 seconds
̶ 100% activation within 30 seconds
̶ Hold for minimum 15 minutes

ENTSO-E: European Network of Transmission System Operators 48

ANCILLARY SERVICES: PRIMARY RESERVE
̶ Products in BE
̶ Symmetric FCR 200 mHz
̶ Symmetric FCR 100 mHz
̶ Asymmetric FCR downwards
̶ Asymmetric FCR upwards

Example: synthetic frequency profile test

for 100 mHz product
= simulation of extreme situation

= 30 minutes test

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ANCILLARY SERVICES: PRIMARY RESERVE
̶ Fixed remuneration (bilateral agreement with Elia)
̶ Weekly tendering
Euro/MW/h
Example: weighted averaged historical prices (2017) of 100mHz product

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ANCILLARY SERVICES: SECONDARY RESERVE
̶ Automatically activated (signal from Elia dispatching centre)
̶ Activated simultaneously in TSO area
̶ Belgium (Elia): 139 MW both up- and downwards (2018)
̶ Timing:
̶ Follow Elia control signal
within 15% band
̶ Provide selected volume
within 7,5 minutes

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ANCILLARY SERVICES: SECONDARY RESERVE
̶ Products
̶ R2 upwards Weekly tendering + day ahead bidding
̶ R2 downwards = standby + activation remuneration

̶ Free bids (up and down) Day ahead bidding

= only activation remuneration

̶ Pay-as-bid activation remuneration

̶ R2 up/down: cap on maximum bidprice
̶ Free bids: no cap on maximum bidprice

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ANCILLARY SERVICES: TERTIARY RESERVE
̶ “Manually activated”  receive signal from Elia
̶ Products: R3 flex & R3 standard
̶ Monthly tendering
̶ Standby + activation remuneration
̶ Both for producers or consumers
ANCILLARY SERVICES: CHANGES
̶ In the past (and coming) years: lots of changes!
̶ Why?
‒ Comply with European regulation
‒ Harmonise products
‒ Source on European level
‒ Make product technology neutral
‒ Increase competition

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BALANCING
̶ Basic principle of balancing
̶ BRPs are responsible for their own balancing
̶ Elia will only react when the BRP did not react
̶ It should always be cheaper for a BRP to react by its own

̶ System imbalance (SI): difference between production and consumption on grid

̶ Net Regulation Volume (NRV): volume of reserves activated by Elia to counter the
SI

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BALANCING
̶ BRP must be balanced
̶ All injections = all Offtakes (on quarter hourly base)
̶ Injection
‒ Import, purchase, generation
̶ Offtakes
‒ Export, sell, offtakes for clients, losses
̶ Once all metering is known, TSO calculates imbalance
̶ BRP is then invoiced based on imbalance tariff
̶ Financial stream can go both ways:
̶ TSO pays BRP in case of too much energy (being “long”, POS price)
̶ BRP pays TSO in case of too less energy (being “short”, NEG price)

http://www.elia.be/nl/grid-data/dashboard

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BALANCING
̶ Imbalance price
̶ Belgium (Elia): Single pricing strategy
‒ Same price for BRP who is short (NEG) or long (POS)
up to imbalance of 140 MW
‒ Alpha, beta in case of large imbalance (POS ≠ NEG)

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BALANCING

MDP: Marginal Decremental Price

Lowest downwards activation price

MIP: Marginal Incremental Price

Highest upwards activation price

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BALANCING
̶ Imbalance tariff is incentive to avoid imbalances
̶ By good forecasting
̶ By participating in imbalance markets
̶ By using own flexibility http://www.elia.be/en/grid-data
/power-generation/wind-power
‒ Implicit valorisation of flexibility

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NEGATIVE ELECTRICITY PRICES
̶ Being paid to consume electricity!
̶ How possible?
̶ Oversupply of electricity
‒ Subsidies for produces “green electricity” per MWh
‒ Cost of shutting down and restarting power plant
̶ Mostly on intraday or imbalance market
̶ Close to real-time
̶ Occurs more frequent on DAM
̶ Way to incentivise electrical flexibility

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MARKET COUPLING

http://www.jao.eu/main
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Jens Baetens
PhD researcher

DEPARTMENT OF ELECTRICAL ENERGY, Ghent University

METALS, MECHANICAL CONSTRUCTIONS & SYSTEMS @ugent
ELECTRICAL ENERGY LABORATORY (EELAB) Ghent University

E j.baetens@ugent.be
T +32 9 264 57 00

www.ugent.be