1 IG Meeting Milan, 18 th July 2008 Cost of Firmness of Capacity.

1

IG Meeting

Milan, 18 th July 2008

Cost of Firmness of Capacity

2

Context

ARs 2008 – Management of curtailments

Financial Firmness

Physical firmness

Comparison Financial vs Physical Firmness

Conclusion

Agenda

3

Regulators are in the opinion that the criteria applied to compensate the PTR holder in case of curtailment do not reflect the real costs and consequently there is a lack of any solid economic rationale.

–TSOs have not the right incentive to reduce the curtailments to the minimum;–The risks left on market players imposes extra costs to the system.

At the end of 2007, the Regulators proposed the implementation of a market spread compensation scheme for the Italian-French and Italian-Austrian Interconnections considering the liquidity of the respective electricity spot market

Alternative on Italian-French Interconnection (IFI) at the end of 2007: firm product - This possibility has not been put in place due to short time for implementation

TSOs have been asked by Regulators to perform a study comparing financial vs physical firmness

On the Spanish border, the Regulators ask informally also to work on spread compensation with caps

Context

4

Context


Financial Firmness

Physical firmness


Conclusion

Agenda

5

Real Time reductions– After binding nominations for periodic PTRs (07:00 a.m. D-1 on all borders)

or sending of capacity usage rights (04:00 PM in D-2 working days) on IFI in case of curtailments TSOs guarantee the realisation of Exchange Schedules.

Scheduled Reductions– Only long term PTRs can be reduced (Daily PTRs are firm) before binding

nominations or sending of capacity usage rights on IFI – In case of scheduled reduction, the PTR Holder is compensated at 110% of

the price paid for the capacity on France-Italian Interconnection (IFI) direction France Italy or reimbursed on all other borders and for the direction Italy France

– The PTRs curtailment for network security reasons is allowed up to 35 Equivalent Days (840 hours). Beyond that limit the assigned capacity rights are guaranteed even in case of physical interconnection capacity reduction.

Auction Rules 2008 – Management of Curtailments

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In case of real time reductions TSOs guarantee the realisation of Exchange Schedules.

These measures usually consist of redispatching activities and result in extra costs at TSO level.

In this case TSO activity is equivalent to guarantee firm capacity as it is transparent for Market players.

Curtailments for real time reductions

This extra costs at TSO level should be compensated by auction income according to EU-

Regulation 1228/2003

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To reduce the risk of curtailments, TSOs anticipate as much as possible the scheduling of maintenance periods of the interconnections to include them in the Products to be auctioned. The allocation of Yearly and Monthly PTRs are defined taking into account scheduled outages of interconnection lines defined:

on December of previous year for Yearly products and before monthly auctions for Monthly products.

In this way curtailments applied to Yearly and Monthly PTRs (before binding nominations/sending of capacity usage rights) are only due to unforeseen outages on the interconnections.

Curtailments for scheduled reductions

TSOs just curtail in case of absolute need and curtailments cannot be higher than 840 hours

Beyond 840 hours, PTRs are firm

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(*) Curtailments have not been applied because Yearly and Monthly PTRs have been assigned taking into account scheduled outages of interconnection lines defined:

•on December of previous year for yearly products and/or •before monthly auctions for monthly products.

(**) Curtailments have been applied for NTC reductions due to unforeseen outages of interconnection lines

Big curtailments applied for scheduled NTC reduction due to unforeseen outages on the interconnections.

Scheduled reductions north Italian interconnection Year 2008

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Context


Financial Firmness

Physical firmness


Conclusion

Agenda

10

NOT FOR PUBLICATION

NOT FOR PUBLICATION

• In order to manage the financial risk due to spread compensations, Regulators have proposed to associate a cap on spread compensation mechanism• Several types of cap were proposed :

– Cap on duration : X hours

– Cap on curtailments : X MW

– Cap on spread : +/- X €/MWh

– Cap on global amount : X MW/period

Financial Firmness – Regulator’s proposal on Spain-France Interconnection

X hNo compensation

Spread compensation

X MWNo compensation

Spread compensation

h1 h2 h3 h4 …

Spread used for compensation

Spread between exchanges

X €/MW.h

M€

Period to consider

Spreadcompensation

No compensation

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Type of CAP Market players TSOs

Price difference (spread)

Can be anticipated : MP may influence the spread if no cap

No leverage action possible if no cap

Duration (h) Difficult to anticipate Leverage action possible

Depth (MW) Difficult to anticipate Leverage action possible

Total amount (€)Can be anticipated : MP

may influence the spread to increase the

total Amount

No leverage action possible if no cap

Financial Firmness – Regulator’s proposal on Spain-France Interconnection

Cap on duration and depth have been rejected by all the Parties during SWE SG meeting

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Context


Financial Firmness

Physical firmness


Conclusion

Agenda

13

Allocation Products 2008 - from France to Italy

0

500

1000

1500

2000

2500

3000

Mon

day

Tues

day

Wed

nesd

ay

Thur

sday

Frid

ay

Sat

urda

y

Sun

day

Mon

day

Tues

day

Wed

nesd

ay

Thur

sday

Frid

ay

Sat

urda

y

Sun

day

Winter August Summer

YearlyBase

YearlyBase No August

MonthlyBase

MonthlyPeak

Daily

YB = 1000 MW

YBNA = 800 MW

MB = 735 MW

MB = 382 MW

MP = 115 MW

MP = 218 MW

Physical Firmness products must be characterised as follows : PTR without any curtailment during all the year Firm product limited to a certain amount of the available NTC (to be

defined) Lower priority in case of curtailment

Physical Firmness - IT/FR interconnection

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Context


Financial Firmness

Physical firmness


Conclusion

Agenda

15

Comparison Financial vs Physical FirmnessComparison of costs beard by TSOs for scheduled NTC reductions(*) due to the Venaus-Villarodin Outage occurred in June 2008 (700 MW for 144 h) based on the following hypothesis:Financial product

Application of market spread compensation for the entire period on whole capacity curtailedPhysical product

1.000 MW assigned as firm and lower priority in case of NTC reductions 110% criteria is applied in case of curtailments on residual capacity

110% [K€]

Firmness

Financial Product [K€]

Physical Product [k€] Costs for Firm

Product[Redispatching

costs]

Costs of curtailments on

residual capacity (110%)

1 500 600 0 900110 %: costs of curtailments according to ARs 2008Physical product: NTC reduction has not an impact on firm product No redispatching costs to keep it firm. Curtailment applied to the residual capacity (110% criteria)

The example is not significant. In those days market spread between Powernext and Ipex was very small

(*) Capacity guaranteed from the 31st of May (when the outage occurred) till the 2nd of June. TSOs performed counter measures (up to 700MW) for around 22.000 MWh

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Spread IPEX vs PowernextWinter (Oct 2007 – April 2008)

-150

-100

-50

0

50

100

150

october november december january february march april

months

PU

N -

PNX

[€]

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Spread IPEX vs PowernextSummer (July - Sept 2007, May – June 2008)

-100

-50

0

50

100

150

200

july 2007 august 2007 september 2007 may 2008 june 2008

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Spread IPEX vs PowernextAugust 2007

0

20

40

60

80

100

120

140

160

August

PUN

- P

NX

[€]

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Comparison Financial vs Physical Firmness Comparison based on the following hypothesis: • NTC reduction for the same amount and duration of the one we had in June 2008 (700

MW, 144 h) • 110%: computed using average auction prices of last 12 months (Jul ‘07-Jun ‘08) • Firm product (1000 MW firm and lower priority of curtailments in case of NTC reduction,

110% on residual capacity) • Financial product: market spread computed using average market spread between Italy

and France PXs of the last 12 months (Jul ‘07- Jun ‘08)

Period 110% [K€]

Firmness

Financial Product [K€]

Physical Product [k€]

Costs for Firm Product

[Redispatching costs]

Costs of curtailments on

residual capacity (110%)

Winter peak 1 169 1 710 0 1 104Winter off-peak 547 1 274 0 436Summer peak 1 659 2 972 0 1 890 Summer off-peak 805 2 842 0 865

• Financial firm product: high and not easily manageable risk. Cap is needed.

• Physical firm product: small difference with 110% criteria currently applied – of course it depends on the amount of the firm product, the higher it is, the higher is the risk

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Context


Financial Firmness

Physical firmness


Conclusion

Agenda

21

ConclusionIs there a real need to apply such compensation scheme?

• Firmness for events that occur after nominations (or sending of usage capacity authorization) is already guaranteed with redispatching activities.

• For unforeseen events that occur before nominations (or sending of usage capacity authorization):

– There are few reductions and they are due to unplanned events.– Risk transferred to TSOs who already ensure an efficient usage of interconnection. Moreover

TSOs have no leverage to manage the risk.– Long Term products already have a degree of firmness - are firm after for curtailments higher

than 840 hours.– Financial firmness :

- High risks for TSOs (Compensation can significantly exceed the auction income). Cap is needed but it makes it difficult for market players to evaluate the right value to build their bids for the auctions.

- Compensation at full market price spread reallocates the curtailment risk from traders to end consumers. Some traders already reduce the risk with appropriate hedging : many delivery contracts between Traders and consumers on the interconnections can be reduced with an early warning .

- Curtailment risk is a market category and the costs of hedging it should be minimized through competition between traders, rather than by socializing them through network tariffs.

– Physical firmness:

- The risk depends on the amount of the firm product, the higher it is, the higher is the risk. Moreover on IFI, curtailments are quite volatile and depend on the asset concerned by the outage

• The end consumers of importing countries will bear the cost ...

1 IG Meeting Milan, 18 th July 2008 Cost of Firmness of Capacity.

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Transcript of 1 IG Meeting Milan, 18 th July 2008 Cost of Firmness of Capacity.