Everything You Always Wanted to Know About Balancing Energy* - Part 2

In the previous post about balancing energy you may or may not have become familiar with the basic concepts. That was more focused on the theory and looked at things from the Transmission System Operators’ (TSOs) and the power plants’ perspective. In the following few paragraphs we’ll be looking into some practical concepts that are applicable to other market players (such as large consumers and energy suppliers/retailers) and also lead us closer to practice.There will be three markets (each with distinct rules and particularities) that I’ve chosen for the purposes of demonstrating how little details in the product design and settlement methodology can cause sizeable differences in balancing energy prices:

  • the Hungarian, because of its rather complicated, yet relatively transparent nature and high prices
  • the German, because of the high amount of renewables in its system and its trendsetter status in industry practice in the EU
  • the Australian, because of its very different design, low prices and low volumes of balancing energy.

I will shortly explain the difference between day ahead and intraday trading (bear with me ’till I get to that). I will also touch upon three practical concepts that are vital for understanding balancing energy markets: imbalance settlement periods, gate closures and lead times. There will also be a reference to each market in each concept explained.

Imbalance settlement periods

The cost of balancing energy has many components on the supply side, as for a given period, different types of products may be needed to keep the system in balance. A very important design element of the balancing market is the granularity or length of a period (also called, the imbalance settlement period) balancing energy is looked at and settled by TSO.

Although, currently there are different imbalance settlement periods used in the EU, there is a proposal 1)European Commission, Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the internal market for electricity, Brussels, 30.11.2016  for a unified approach to make that 15 minutes in all EU member states as of 2025. Both Hungary and Germany already settle imbalances  on a 15 minutes basis. Australia has an interesting system that includes a combination of 5 and a 30 minutes settlement periods. Because it is a rather complicated issue, I’ll address that in another blog post.

The reason why this is important, is because longer settlement periods mean that market players have more wiggle room in controlling and planning their schedules. Tighter settlement periods provide an incentive to strive for more accurate schedules and thus, create lesser need for using balancing energy via ancillary services.

Gate closures

The last time before a schedule may be modified plays a pivotal role balancing energy markets. That point in time is also called gate closure. In a net pool market, gate closure refers to a deadline until which schedules must be sent to the TSO by market participants. In a gross pool market2)See the first part of the series on balancing energy: http://wattler.eu/en/2017/01/balancing-huenergy-part-1/, gate closure means the last time a market player is able submit a valid bid to the pool for which it would be willing to sell or purchase electricity.

Most developed European competitive electricity markets have at least two separate set of gate closures: one for the so called day ahead trading and one for so called intraday trading. The difference between day ahead and intraday trading is pretty much like the difference between getting engaged and saying yes in front of a marriage celebrant or a priest. A commitment is made at the time of proposing to a loved one, all parties are serious about it, but that commitment is relatively far away from its delivery period, that is, the time when the marriage becomes a binding contract.

Similarly, a gate closure on the day ahead market is usually at least half a day away from the period when electricity is meant to be supplied or consumed. Considering that supply must meet balance instantaneously, those couple of hours may feel like an eternity. This concept may also be true for some couples who are engaged for a very long time without setting a date for a wedding.

Unending love.

Much like in a relationship while being engaged, a lot can change after the day ahead gate closure. More attractive market offers may present themselves, tempting the market player to enter into new trades (a pretty obvious analogy here).

Previously made mistakes in the forecast may get discovered,  generation or consumption related equipment may malfunction (just like the groom or the bride may exhibit not-so-attractive, deal-breaking traits as tension grows around the organisation of the wedding).

Unexpected weather events may create previously unforeseen drop or rise in demand, or an act of God, such as a lighting storm may temporarily rearrange market conditions (similarly, unexpected events may lead to the bride or groom deciding to call off the wedding).

An intraday gate closure (just like when you are asked whether you take someone to be your lawfully wedded wife or husband), is the last chance to change your mind. No backsies. At this point, you have the possibility to rethink your options, but it will cost you. (Imagine the implications of saying no at the altar, while pretty much everything has already been paid for the wedding.)

Trading on the intraday market may be a costly exercise, as your trading partners are well aware of the fact that you are in trouble and also those market have a lot less liquidity than the day ahead ones. However, it would cost you even more after the delivery period (and your marriage) started , if you decided not to change your mind, but really, you should have…

Too late.

Gate closures are much less harmonised across Europe than imbalance settlement periods. This is especially true for intraday gate closure, because day ahead gate closures do tend to be set in the early afternoon everywhere, including Australia.3)AEMO, Spot Market Operations Timetable, October, 2016 

Both in Hungary and Germany, the day ahead gate closure for domestic schedules is at 14:30. However, while the deadline for domestic intraday modifications is 60 minutes in Hungary,4)MAVIR, General information concerning the MEK System, Frequently Asked Questions it is only 15 minutes in Germany.5) TenneT, Nomination of Schedules in Germany using the ENTSO-E Scheduling System (ESS), 01.12.2010 There is no official intraday gate closure in Australia, however it is advised that market participants submit their bids to the pool at least 1 or 2 minutes before delivery.

Generally speaking, the tighter the gate closure, the more opportunities market players have to improve the accuracy of their schedules. In other words, lengthier gate closures are likely to lead to more balancing energy needed, while shorter ones mostly lead to better accuracy in planning, hence less need for balancing. No such analogy is observable for marriages, unfortunately.

Lead times

As mentioned above, intraday trading may be a costly exercise, and in many cases it is not an option for smaller market players, who’d need to have staff operating 24/7 and also sophisticated IT systems set up that can promptly respond to changes in schedule. It may also be difficult to negotiate bilateral contracts over such short notice. Intraday markets organised by power exchanges are aimed at solving the latter problem.

Conducting a trade on an exchange is relatively easy; it can be done by two clicks. However, depending on the market design, in some cases the TSO would still need to be informed separately about the trade made on the exchange. The last time those two clicks can be made on the exchange platform is called a lead time.

Lead times (if separated from the intraday gate closure) occur some time ahead of the intraday gate closure, to give time for the market participant for modifying his/her schedule. In Germany, the lead time6) EPEX products description is 30 minutes before delivery on the EPEX Intraday exchange, leaving 15 minutes for the market participant to send the modified schedule to the TSO. In Hungary, on the HUPX Intraday exchange, the lead time 7)HUPX Intraday process description is effectively two hours before delivery, because trades must be concluded 60 minutes before the intraday gate closure.

Armed with all this knowledge we should be able to proceed to the next post that will include (amongst other things) fancy charts and simple statistics about the Hungarian, German and Australian markets.

 

* but were too afraid to ask.

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