The European Energy Market

christian.jacobsson@gmail.com, jonas.strojby@gmail.
com
European Energy market is dying.
Energy Companies are bleeding.
Why?
christian.jacobsson@gmail.com, jonas.strojby@gmail.com
Disclaimer
Everything shown, everything said, is our
own private view and understanding of
what is going on.
1. You are the owner of a gas plant!
At what price would you offer the generated power to the market?
2. How is the power spot price formed?
Simplified picture
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M
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h
Nuclear Lignite SteamCoal NatGas Oil
demand
supply
In reality
Why elastic demand?
Huge volume
at -3000 EUR
Why negative prices?
How it looks
Power can not be stored (efficiently and cheaply, yet)
existing markets
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d
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balancing
intraday day-ahead
12:00
forward
(days to several years)
3. You are the owner of a wind turbine!
At what price would you offer the generated power to the market?
4. How much wind & solar are there?
Production offered at -3000 EUR
Vol. at -3000
Geographical location
Germany
Other countries
In the future
One recent example
What happens if we get more and more hours with negative prices? Who pays?
Supply [MW] Spot price [EUR]
What are the costs
installed
capacity
realized
avg.prod.
costs
solar 15000 MW 1500 MW 50 bn
nuclear 1500 MW 1500 MW $5 bn
5. Forecasting wind & solar
Intraday prices: hour 17-18
Day-ahead price 72 EUR
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M
W
When measurements of
produced windpower
started to deviate from
the foreast by 2000-4000
MW, intraday prices
increased rapidly.
Highly volatile and
unpredictable
ECMWF and GFS
higher resolution
ECMWF
ECMWF (global)
25km
COSMO-7 (regional)
6.6km
COSMO-7
COSMO-2 (local)
2.2km
COSMO-2
Source: MeteoSwiss
6. Storing electric energy
for balancing purposes
Hydro pump storage:
* Hydrology takes over where
meteorology ends.
* Hydro power is a renewable like
wind and solar, but with a storage
capacity.
* What is the price of hydro power?
Spanish pump storage connected to wind park
the peak offpeak ratio
* Maximum efficiency 70-80%
* For hydro pump storage you typically need peak/offpeak bigger than 1.3 to 1.4
* Alpiq has around 3000 MW of installed flexible hydro capacity
Picture missing of
daily profile with a
lot of solar 7 mars
With more and more
storage possibilities,
the ratio will go towards
1 catch 22
peak hours [8 20)
offpeak [0 8) U [20 0)
batteries
1 MW battery in Zrich
95% efficiency
10000 lithium ion cells
240 MW planned
installation in Italy
by Terna
330 MW installed
worldwide 2011
7. Market Coupling
A method to connect two
or more power markets to
more efficiently use
available production
capacity and demand in a
bigger area
Prices and flows are
calculated as an
optimization problem,
minimizing production
costs, fulfilling the
demand, and obeying the
constraints.
Summary
Increased installed capacity of renewables leads to
collapsing day-ahead prices.
Marginal pricing is not able to handle large feed-in
volumes.
Increased balancing problems and volatility intraday de-
stabilizes the market.
Thermal plants out-of-the-money get liquidated and are
thus not available for balancing (in part replaced by
energy storage?)
Geographical location of renewables gives transmission
problems, congestions.
Increased integration of different european markets
amplifies and spreads the above issues.
Three scenarios for the future
1. Nodal market:
The market integration/competition stream
dominates: market becomes divided into smaller and
smaller connected areas.
2. Regulated market:
Regulation dominates: TSOs takes over, feed-in
tariffs and capacity remuneration replaces auctions.
3. Capitalist market:
Renewables stream dominates: the current marginal
pricing mechanism is abandoned and is replaced by
a forward based construction
11. Three scenarios for the future
1. Nodal market (Competition based model)
Dividing a large prize zone (e.g.
DE) into smaller coupled areas
will introduce a price diffence
governed by availble
interconnectors.
A nodal market is the extreme
of a market coupling with very
many markets connected like the
actual physical grid.
Nodal pricing uses marginal
pricing mechanism locally for
each node, taking imports into
account.
1. Nodal market (Competition based model)
Nodal markets
have prices calculated by TSOs through an optimization over all
bids within all nodes in the physical grid.
respect limits in transmission capacity.
reduce the balancing problem.
encourage optimal infrastructure investments.
Exists most notably in PJ M, Texas (both USA).
But
Day-ahead and forward markets becomes highly illiquid due to
minimal nodal markets.
Discourages investment into e.g. renewable energy in favorable
areas due to low prices.
2. Regulated market
Feed-in tariffs for all production: covers
average fixed and moving cost for different
production types.
Capacity remuneration: TSOs buy
production capacity to have on stand-by
for balancing purposes. Basically renting
the power plant.
Balancing handled by the TSOs. Highly
domestic/local model.
Price to consumer fixed by regulators.
2. Regulated market
The market is killed.
TSOs in full control.
Incentives for investments are artificial, based on
regulation.
All work towards a free pan-European
deregulated market is in vain.
3. Capitalist market
Since day-ahead market/marginal pricing is not working, why not get
rid of it?
Let hourly forward contracts be the fundamental contracts.
Rate forward contracts based on security of delivery (wind bad,
nuke/hydro good).
Balancing is still required.
A derivative market for insurance against delivery failure could be liquid.
(Production backed to avoid CDS-problems.)
This correponds to available stable capacity, CCGTs, batteries, stored
hydro e.g.
What about congestion?
Introduce price zones.
Localize forward contracts to price zones.
Introduce forward contracts for transmission rights between price zones.
In order to have guaranteed delivery to customers, either buy secure
contract (hydro) or volatile (wind) + insurance.
Wind and similar thus carry an extra cost, the cost of balancing more
in line with their true cost.
Either buy local power or imported power + transmission rights.
Some additional rules to avoid speculation is needed as well as
clearing house and possibly market making.
Works with global incentive schemes such as emission rights, tax on
nuclear etc.
Utilities would function very much like banks!
New incentives!
Marginal pricing no longer applies, i.e. the most
expensive fuel doesnt set the price for all others.
A forward contract can be priced based on return on
investment (ROI).
Since wind/solar carries more of their own actual cost,
expansion needs to be in line with that of balancing
plants.
Since wind/solar is grouped geographically, some
transmission rights will be expensive, some cheap,
encouraging new investments.
Flexible hydro becomes much more interesting to
own.
Conclusions
EU politicians worked hard to create a free liberalized energy
market in Europe.
At the same time they decided on the 20-20-20 targets.
The 20-20-20 targets gave rise to subsidiced power production
from wind and solar.
The very expensive but zero-cost offered wind and solar now distorts the day-ahead
power prices, and thereby the forward market.
Increased balancing problems due to unpredictable wind and solar power production
gives a very volatile intraday and balancing market, and brings new costs of
balancing and need of more transmission capacity.
Energy companies are suffering massively at the moment.
The power in the market is moving from the energy companies to the TSOs
Something has to change, fast
Switzerland has to make decisions (market coupling, capacity remuneration in
Germany, Italy) to enable its flexible hydro to be available as a battery for Germanys
and Italys wind and solar power production
We belive that the only way forward that saves the markets is to kill day-ahead, base
trading on forward contracts and introduce balancing and transmission into trading.
We also believe that the market, if constructed properly, will lead to a more efficient
market than regulation would.
But When storage capacity is big enough and cheap enough, the game is over.

The European Energy Market

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christian.jacobsson@gmail.com, jonas.strojby@gmail.

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