The England and Wales pool-based wholesale electricity market was ground-breaking when it was introduced. Since its introduction, other countries have introduced wholesale electricity markets based on power pools, bilateral forwards and futures markets and balancing markets.
Broadly speaking, the wholesale price of electricity can be set in advance (ex ante), in real time or after the event (ex post). Ex ante prices can typically be set at the day-ahead stage.
Clearly, it is not possible to know exactly what a generator will produce or a consumer demand ahead of time and such markets with ex ante prices normally require some kind of balancing market to settle the differences between actual and projected positions. The system operator calls upon bids and offers within the balancing market to balance the system and prices in such markets are set ex post as they reflect the actual cost of balancing the system. Ex post markets reflect the actual cost of operating a system and thus require no secondary balancing market. Normally, a system operator will publish indicative day-ahead prices so that market players can adjust their position to maximize revenue/minimize cost.
Sweden, Norway, Finland and parts of Denmark trade wholesale electricity through the Nord Pool. The Nord Pool operates a day-ahead spot market, a forwards market and a futures market. Most electricity is traded through bilateral contracts and trading in the Nord Pool is voluntary. Market participants submit bids and offers to the spot market (taking into account bilateral contract commitments) for each hour of the day ahead. The Nord Pool set ex ante prices from the intersection of the aggregate supply and demand curves. An example of this is shown in Figure 7.15.
This figure shows a typical set of supply and demand curves. As prices increase demand will tend to go down as consumers cannot or will not pay the higher prices. On the other hand, an ever-larger number of generators are able to provide power as the price they receive increases, thus making it attractive for more expensive generation to run. In this example, the equilibrium point is reached at around 310 units of power, setting a spot market price of around 40 units.
By 13:30 on the day ahead, market participants have to confirm their bids and offers, which then become firm. The system operators in the participating countries operate balancing markets where generators and suppliers can submit bids and offers to adjust their output. An ex post balancing market price is then set for each hour by the marginal bid or offer used. Any imbalances are then settled for each participant at this price.
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Figure 7.15 Representative supply and demand curves for the Nord Pool
Between 1994 and 1997, in the state of Victoria the VicPool market used to operate. This was very similar to the England and Wales pool. The system operator set ex post system marginal prices for each half-hour respectively. Generation and demand side bids and offers on a rolling seven-day cycle could be submitted. Participants could alter their bids and offers up to a day ahead based on indicative prices released by the system operator. The VicPool, like the England and Wales pool, was a mandatory market. Australia now has a mandatory National Electricity Market (NEM). Under this market generators and suppliers submit bids and offers a day ahead. The market operator NEMMCO then runs a scheduling program to calculate the ex ante system marginal price five minutes ahead of time for the next five minutes. Deviations from the projected schedule are met by ancillary services. The effective trading period is a half-hour and settlement prices are calculated as the time-weighted average of the five minutes over the half-hour.
An optional spot market (NZEM) with ex post pricing is operated in New Zealand. Participants submit bids and offers at the day-ahead stage. Forecast prices are issued at 15:00 on the day ahead. Participants can re-bid prices and volumes up to two hours ahead of dispatch. Bilateral contracts must be notified to the system operator and any deviations are settled at prices emerging from the NZEM. The majority of participants trade through the NZEM.
Generators and large consumers have the option of participating in a spot market. In addition, they can enter into bilateral contracts. Suppliers to smaller consumers buy electricity at regulated seasonal prices or directly from generators under bilateral contracts. Seasonal prices are set by the government every six months based on spot prices. The spot market determines hourly ex ante prices for the day ahead. The prices can be modified up to an hour ahead if there are significant changes to the supply/demand balance. Generators bid in their fuel costs every six months subject to a price cap. Hydro generators determine the value of water every six months. The market operator CAMMESA calculates marginal generation costs using predefined algorithms and the bid fuel/water prices.
California operates an optional power exchange (PX) to set ex ante prices for the day ahead. Generators and suppliers submit day- ahead bids and offers based on an iterative auction where the participants can revise their bids and offers up to five times. After each iteration the PX publishes indicative prices and whether or not participants' bids have been accepted. The PX submits the final day-ahead schedule to the independent system operator (ISO). At the same time participants who have not participated in the PX, either because they have entered into bilateral contracts or have traded on different power exchanges, submit their positions to the ISO through scheduling coordinators (SCs). Revised schedules can be submitted up to an hour ahead of real time. Balancing is carried out by the ISO via a balancing market based on hour-ahead adjustment bids. An ex post balancing price is then set to settle participants ' imbalances.
Within the EU, initially Norway, Sweden, Finland and the UK liberalized their electricity markets to promote competition and lower prices. In 1996, the European Commission issued a directive for other EU countries gradually to liberalize their electricity markets. As a result, other EU countries have started a programme of liberalization, though some are more advanced than others.
A couple of European Union countries are adopting the so-called single-buyer model (SBM). Under this market mechanism, all power producers sell their output to a single buyer (SB). The SB is also the sole authority allowed to sell electricity to consumers. Producers tender for long term Power Purchase Agreements (PPAs) with the SB. This mechanism is favoured by France and Greece. Other EU countries are introducing market systems with a combination of power pools, power exchanges, bilateral trading and balancing markets.
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