market design for res integration

Market design for RES integration

Jean-Michel Glachant Director Florence School of Regulation

European University Institute (Florence, Italy)

www.florence-school.eu

Agenda

2

WHAT IS MARKET DESIGN FOR RES INTEGRATION ?

ENSURING LONG-TERM ADEQUACY

ENSURING SHORT-TERM FLEXIBILITY

1.

2.

3.


What is market design for RES integration ? Intermittent RES cannot be kept out of the market

The rapid development of intermittent RES in Europe has been possible thanks to:

• Support schemes often isolating RES from price risks (FIT/FIP)

• Priority of connection and dispatch

• Exemption of imbalance charges

But RES cannot be kept out of the market:

• Technical challenge: higher flexibility needs provided by a reduced number of dispatchable units

• Economic challenge: wholesale prices are increasingly disconnected from consumer bills and costs are rising => need for adequate price-signals to ensure efficiency

3


What is market design for RES integration ? RES integration into current markets is challenging

Intermittent RES feature :

• Variability (0-Marginal cost + Resource dependence)

• Low-predictability (forecasts significantly improving in the last hours)

• Site-specificity

Challenging market arrangements that have been designed to accommodate dispatchable thermal generation.

RES integration is an economic problem. Flexible resources are available but their value must be reflected in price-signals delivered by the market(s), in order to:

• Ensuring efficient flexible operations in the short-term

• Ensuring efficient investment in the long-term

• While achieving decarbonisation targets at the same time !

4


What is market design for RES integration ? The two paradigms for RES integration (1)

RES integration can be conceived as two paradigms:

• “Melting-pot” integration = Same rules for intermittent and dispatchable RES.

“Need to eliminate distorted market signals, and a new equilibrium will be achieved”:

− Improvement of maintenance planning

− More efficient system balancing

− Optimal site selection and technology combinations

− Incentives for innovation and better forecast

− Higher transparency

5


What is market design for RES integration ? The two paradigms for RES integration (2)

RES integration can be conceived as two paradigms:

• “Salad-bowl” integration =Rules adapted to the technical specificities of each technology

“Intermittent RES and dispatchable generators are fundamentally different”:

− High risks/low gains as RES are inflexible anyway (depending on resources availability, very little maintenance)

− Without dynamic prices contingent to the availability of the resources, the optimal energy mix cannot be decentralised (Ambec & Crampes, Chao)

− Incentives to incumbent owning both RES and dispatchable generators to use market power.

Two different paradigms with pros & cons BUT under both paradigms, market design will have to evolve to ensure short-term flexibility/ long-term adequacy

6


Ensuring short-term flexibility Evolutions of products exchanged: time

Exchanges are based on time definitions (e.g. hourly products)

Trade-off: simplicity and liquidity vs. cost-reflectivity

As residual load (=Demand-RES) variations get faster, temporal granularity must be refined to reflect the value of flexibility.

7


Ensuring short-term flexibility Evolutions of products exchanged: time (2)

8

BUT finer temporal granularity makes it more difficult to internalise “non-convexities” (Start-up costs…) :

• Internalising start-up costs in shorter time-units is costly (12 times more in a 5-min product than in an hourly product)

• Especially important as cycling and start-up costs are to increase with RES penetration.

• Complex bids is the current solution BUT:

− The number of consecutive block orders is to increase dramatically as time-units are reduced (300 different products per day with one-hour definitions, > 40.000 per day with 5-minute definitions)

− Complex bids work well when peak-periods can be easily identified (not the case with large-scale RES)


Ensuring short-term flexibility Evolutions of products exchanged: space

9

Transmission constraints occur within countries (e.g. Germany), not at the national borders.

Transmission constraints fluctuate with RES availability

To reflect reality, need for zones small enough (≈Nodal pricing) to be valid at all times

Geographic representation of nodal marginal prices Bar represents energy prices at nodal level: from €10/MWh in blue to €100/MWh in red (Source: CPI Smart power market project)

Exchanges are also based on space definitions


Ensuring short-term flexibility Evolutions of products exchanged: space (2)

10

Allocating transmission capacities based on NTCs will be even more costly when RES variability must be taken into account…

BUT Optimisation of flows across two systems with nodal pricing is challenging

Probably need to chose between FBMC and small zones/nodal

Increased coordination is required between neighbouring TSOs to exchange information: will cooperation (e.g. Coreso, TSC) be sufficient ? One European ISO ?

Source: Potomac Economics, 2012 State Market report for the New York ISO markets


Ensuring short-term flexibility Evolutions of products exchanged: prices

11

No rationale for different price-caps in a market with a high share of RES (as they are to reflect VOLL)

BUT price-caps are more important when a higher share of generators’ revenue is made at times of scarcity: need to ensure that the value of flexibility is not bounded.

No rationale to limits to negative prices as these prices are needed to reflect the value of flexibility at times of abundance (Spain: 400 hours with price = 0 in 2013; no incentive for RES to curtail generation)

Distortions have been observed due to different price-floors (e.g. Denmark/Germany).

Price range in wholesale markets (€/MWh)


Ensuring short-term flexibility The rising importance of balancing marketS

12

Forecast errors of RES production improve significantly when getting closer to real-time

The balancing marketS (Intraday + Real-time) will gain in importance.

The products exchanged in each of these markets are substitutes.

Important to ensure the consistency all across the sequence of markets (E.g. identical locational definition, no penalty for imbalances)

Liquidity gets lower as more products are put into place. Trade-off illustrated by intraday markets design in Spain vs. Germany

− Discrete auctions (Spanish model) to enhance liquidity…

− BUT difficult to find a set of gates suiting all the participants! Opportunities might be lost compared to continuous markets (Germany)

Can joint-optimisation of energy and balancing services be achieved in a sophisticated set of markets without a single optimisation program?


Ensuring short-term flexibility Coordination with gas markets

13

Gas storage+GFPP can be a substitute to electricity storage; gas transmission+GFPP can be a substitute to GFPP+Electricity transmission.

Need to make sure that the price-signals are not distorted by market arrangements (zones, balancing time-period)

It does not mean that definitions in gas and electricity should be aligned, as both flows have different physical properties!

As gas-fired power plants (GFPP) are to provide the required flexibility in power systems, the value of flexibility should be reflected in gas markets.


Ensuring long-term adequacy Is an energy-only market sufficient ?

14

In theory… YES! A new equilibrium should be found, and very high prices at times of scarcity should allow generators to cover their fixed costs.

BUT existing power plants sell at lower prices for a smaller number of running hours.

Source: Matthes et al. (2012)

Is it temporary ? Overcapacity due to lower demand / RES development

Is it structural? Due to high share of intermittent RES with zero marginal cost.

Generation costs and electricity prices in Germany


Ensuring long-term adequacy Design of CRM in a context of RES integration

15

The rationale for a capacity remuneration mechanism:

• Lack of demand-response and price-caps limiting scarcity rents

+ Also lack of supply-response as the share of RES increase

• Political uncertainty (RES subsidies, frozen retail prices…)

BUT what is needed is not “capacity”, it is the ability of generators to deliver energy when and where needed:

• Peaks occur at times of low RES and/or high demand

• Congestion patterns also variable

An adequate CRM design should respect the same temporal and locational granularity as the energy market, which will increase complexity.

Current designs of CRM are still relatively short-term and will not solve the issue of political uncertainty. Can we ensure adequacy without some form of long-term contracts ?


Ensuring long-term adequacy Long-term signals for grid development

16

Locational signals are important due to:

• Strong site-specificity and trade-off connection costs/ generation profits

• Variability making gold-plating very expensive

Need to connect new generators and enforce the existing grid: 80% of the bottlenecks identified in the TYNDP are due to intermittent RES.

It is difficult for TSOs to:

• Anticipate RES development as time constraints are very different (>10 years for a 400 kV line)

• Finance the required investments at times of low demand growth

BUT establishing accurate long-term signals (e.g. deep costs) for grid users is quite difficult, especially with a significant share of variable RES.

Can short-term locational signals be sufficient ?


To conclude… A few open questions

1. Time granularity: finer to reflect the value of flexibility or broader to internalise non-convex generation costs easily ?

2. Space granularity: smaller zones (Nodes) vs. FBMC ? Which level of coordination between neighbouring zones ?

3. Can participants handle a sophisticated set of markets ? Are pool-type arrangements required ?

4. Can we ensure long-term adequacy in an energy-only market without some form of long-term contracts ?

5. Can locational signals be only short-term ?

17

www.florence-school.eu 18

Thank you for your attention Email contact: [email protected] Follow me on Twitter: @JMGlachant Read the Journal I am chief-editor of: EEEP “Economics of Energy and Environmental Policy”

My web site: http://www.florence-school.eu

mailto:[email protected]



market design for res integration

Education