ESCUELA TÉCNICA SUPERIOR DE INGENIERÍA (ICAI)
MASTER IN THE ELECTRIC POWER INDUSTRY
STUDY OF ELECTRICITY AND GAS
IMBALANCES FOR RETAILERS' RISK
REDUCTION AND PROFIT MAXIMIZATION
Author: Jose Alejandro Moyano de Llano
Supervisor: Pablo Martín Rubio
Jose Alejandro
Moyano de Llano
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ESCUELA TÉCNICA SUPERIOR DE INGENIERÍA (ICAI)
MASTER IN THE ELECTRIC POWER INDUSTRY
STUDY OF ELECTRICITY AND GAS
IMBALANCES FOR RETAILERS' RISK
REDUCTION AND PROFIT MAXIMIZATION
Author: Jose Alejandro Moyano de Llano
Supervisor: Pablo Martín Rubio
Jose Alejandro
Moyano de Llano
ST
UD
Y
OF
ELE
CT
R
ICI
TY
AND
GAS
IM
BALAN
CE
S
FO
R
R
ETAIL
ER
S'
R
ISK R
EDU
CTIO
N
AND
PR
OF
IT M
A
XI
M
IZAT
ABSTRACT
Due to increasing competition and margin reduction, gas and electricity retailing activities require a good understanding of costs to make the business profitable. One of these outflows is the imbalance cost, which comes from the deviation incurred when forecasting customers’ consumption.
Both gas and electricity systems have to be continuously balanced to ensure security and quality of supply, so markets are designed to incentivize agents to balance the system. This incentive is given by applying different prices to the imbalance of agents.
For example, electricity used to balance a portfolio is bought or sold at the same price as the day-ahead market price (implying no penalization) if the imbalance is in the opposite direction of the system imbalance. However, if imbalance is in the same direction as the system imbalance, the agent will be making system imbalance higher, so electricity to balance the position will be bought for a more expensive price than the day-ahead market price or sold cheaper than it.
Applying an imbalance strategy, having forced deviations when forecasting customers’ imbalance depending on imbalances’ prices, can be positive. In this study, savings can reach almost 0,05 €/MWh, so almost 10% of the imbalance cost is reduced. The strategy will depend on the forecast of another electrical variables that could affect imbalances, such as wind, price, demand or solar energy.
In the case of gas, the incentive is lower as Enagás, the Spanish system’s technical manager can exercise buys and sells in the free market as if it was an agent if he considers that it is necessary for keeping the system balanced. There is a purchase and a sell cost for imbalances that could be slightly increased if the GTS takes a balancing action. Thus, unlike electricity, every imbalance implies a penalty no matter its direction, but this penalization is typically lower than the ones seen in electricity markets.
Hence, a typical imbalance cost having a 20% hourly deviation when forecasting consumption could be between 0,01 and 0,02 €/MWh strategy, so savings would be lower, not even reaching half a cent per MWh. As a conclusion from this study it may be extracted that every taken strategy will imply an almost negligible saving.
The strategy developed will not depend on external variables but on indexes published by Enagás, such as the IDQ or DQA. When these indexes reach some values, the GTS has to compensate them by acting and making imbalance prices higher; then retailers have to react in the day-ahead market or in the intraday market modifying their buys to not be over penalized because of the imbalance.
INDEX
ABSTRACT ... 1
INDEX ... 3
INDEX: FIGURES ... 7
CHAPTER 1: INTRODUCTION ... 9
1.1. EVOLUTION OF ELECTRICITY AND GAS RETAIL BUSINESSES ... 11
1.2. FORMATION OF LIBERALIZED ELECTRICITY PRICES ... 12
1.3. FORMATION OF GAS PRICES ... 14
1.4. TOPIC FOCUS: CONCLUSION ... 14
CHAPTER 2: STATE OF THE ART ... 17
2.1. SPANISH ELECTRICITY SECTOR ... 19
2.1.1. THE LIBERALIZATION PROCESS OF THE ELECTRICITY SECTOR IN SPAIN ... 19
2.1.2. RENEWABLE ENERGY SOURCES INTEGRATION ... 20
2.1.3. THE IBERIAN ELECTRICITY MARKETS ... 22
2.1.3.1. MARKETS MANAGED BY OMIE ... 22
2.1.3.1.1. DAY AHEAD MARKET ... 23
2.1.3.1.2. INTRADAY MARKET ... 25
2.1.3.2. MARKETS MANAGED BY REE ... 26
2.1.3.2.1. SYSTEM ANCILLARY SERVICES ... 26
2.1.3.2.1.1. TECHNICAL CONSTRAINTS MANAGEMENT ... 28
2.1.3.2.1.2. BALANCING SERVICES ... 28
2.1.3.2.1.3. ADDITIONAL UPWARDS RESERVE POWER ... 29
2.2. SPANISH GAS SECTOR ... 32
2.2.2. EVOLUTION ... 33
2.2.3. MIBGAS: SPANISH GAS PLATFORM ... 34
2.2.3.1. HOW DOES MIBGAS WORK? ... 36
CHAPTER 3: STUDY OF ELECTRICITY IMBALANCES ... 39
3.1. VARIABLE ANALYSIS ... 41
3.1.1. DEMAND ... 42
3.1.2. DAY-AHEAD MARKET PRICE ... 43
3.1.3. FIRM GENERATION ... 44
3.1.4. WIND PRODUCTION ... 45
3.1.5. SOLAR PRODUCTION ... 46
3.1.6. TECHNICAL CONSTRAINTS OVER COST ... 47
3.1.7. UPWARDS AND DOWNWARDS POWER BECAUSE OF TECHNICAL CONSTRAINTS ... 49
3.1.8. SECONDARY BAND COST ... 50
3.1.9. UPWARDS POWER RESERVE OVER COST ... 51
3.1.10. TEMPERATURE ... 52
3.1.10.1. MADRID TEMPERATURE ... 53
3.1.10.2. BARCELONA TEMPERATURE ... 53
3.1.10.3. SEVILLE TEMPERATURE ... 54
3.1.1.1. BILBAO TEMPERATURE ... 54
3.1.1.2. AVERAGE SPANISH TEMPERATURE ... 55
3.1.2. TEMPERATURE VARIATIONS IN SPAIN ... 55
3.2. CORRELATION BETWEEN VARIABLES ... 56
3.3. CONCLUSION ... 58
3.4. ELECTRICITY IMBALANCES STUDY ... 60
3.4.2. SECOND METHODOLOGY ... 67
CHAPTER 4: STUDY OF GAS IMBALANCES ... 71
4.1. FIRST APPROACH TO THE STUDY ... 73
4.2. DAY-AHEAD OPTION: OPTIMUM STRATEGY ... 77
4.3. DAY-AHEAD OPTION: REAL STRATEGY ... 80
4.4. INTRADAY OPTION: OPTIMUM STRATEGY ... 87
4.5. INTRADAY OPTION: REAL STRATEGY ... 90
CHAPTER 5: RESULTS AND CONCLUSIONS ... 93
BIBLIOGRAPHY ... 99
DOCUMENTS ... 101
OTHER SOURCES ... 101
ANNEX I: ELECTRICITY IMBALANCES SAVINGS FOR DIFFERENT TURNING DIFFERENCES BETWEEN DIC AND UIC ... 103
ANNEX II: GAS STRATEGY: DAY-AHEAD OPTION ... 113
INDEX: FIGURES
FIGURE 1:MARKET SHARE OR LARGEST RETAILER IN SPAIN AND PORTUGAL.SOURCE:EUROSTAT. ... 11
FIGURE 2:CR3 VALUES FOR GAS AND ELECTRICITY IN EU COUNTRIES.SOURCE:ACER ... 12
FIGURE 3:COMPONENTS OF THE FINAL LIBERALIZED ELECTRICITY PRICE ... 13
FIGURE 4:RELATIONSHIP BETWEEN DEVIATIONS AND OVER COSTS ... 15
FIGURE 5:EVOLUTION OF R.E.S. SHARE IN THE SPANISH ELECTRICITY MARKET.SOURCE:RED ELÉCTRICA DE ESPAÑA ... 21
FIGURE 6:ENERGY SOLD BY BILATERAL CONTRACTS IN THE IBERIAN PENINSULA.SOURCE:MIBEL ... 23
FIGURE 7:COUNTRIES TAKING PART OF PCR.SOURCE:ENERGY SOLUTIONS ... 24
FIGURE 8:OMIEDAY AHEAD MARKET CLEARING MECHANISM.SOURCE:OMIE ... 25
FIGURE 9:ORGANIZATION OF INTRADAY MARKET IN SPAIN.SOURCE:MDPI ... 26
FIGURE 10:EXAMPLE OF THE OPERATION OF ANCILLARY SERVICES.SOURCE:REN ... 27
FIGURE 11:STAKEHOLDERS OF THE GAS SECTOR.SOURCE:ENAGÁS ... 32
FIGURE 12:TRADED VOLUMES IN MIBGAS AND SECONDARY MARKET IN SPAIN.SOURCE:MIBGAS ... 35
FIGURE 13:PRICES OF GAS IN EUROPEAN REGIONS IN JANUARY 2017.SOURCE:MIBGAS ... 36
FIGURE 14:MARKET AND USE OF GAS TRADED IN SPAIN IN MAY 2017.SOURCE:MIBGAS ... 37
FIGURE 15:AUCTION PROCEDURE IN MIBGAS.SOURCE:MIBGAS ... 37
FIGURE 16:DIFFERENT TYPES OF ACTIONS TAKEN IN EACH MARKET IN MIBGAS.SOURCE:MIBGAS ... 38
FIGURE 17:IMBALANCES' COSTS' EVOLUTION WITH DEMAND ... 43
FIGURE 18:IMBALANCES' COSTS' EVOLUTION WITH DAY AHEAD MARKET PRICE ... 44
FIGURE 19:IMBALANCES' COSTS' EVOLUTION WITH THERMAL GENERATION ... 45
FIGURE 20:IMBALANCES' COSTS' EVOLUTION WITH WIND PRODUCTION ... 46
FIGURE 21:IMBALANCES' COSTS' EVOLUTION WITH SOLAR PRODUCTION ... 47
FIGURE 22:IMBALANCES' COSTS' EVOLUTION WITH TECHNICAL CONSTRAINTS OVERCOST ... 48
FIGURE 23:IMBALANCES' COSTS' EVOLUTION WITH UPWARDS ENERGY REDISPATCHED BECAUSE OF TECHNICAL CONSTRAINTS RESOLUTION ... 49
FIGURE 24:IMBALANCES' COSTS' EVOLUTION WITH DOWNWARDS ENERGY REDISPATCHED BECAUSE OF TECHNICAL CONSTRAINTS RESOLUTION ... 50
FIGURE 25:IMBALANCES' COSTS' EVOLUTION WITH SECONDARY BAND OVER COSTS ... 51
FIGURE 26:IMBALANCES' COSTS' EVOLUTION WITH ADDITIONAL UPWARD RESERVE POWER OVER COST ... 52
FIGURE 27:IMBALANCES' COSTS' EVOLUTION WITH MADRID TEMPERATURE ... 53
FIGURE 28:IMBALANCES' COSTS EVOLUTION WITH BARCELONA TEMPERATURE ... 53
FIGURE 29:IMBALANCES' COSTS' EVOLUTION WITH SEVILLE TEMPERATURE ... 54
FIGURE 30:IMBALANCES' COSTS EVOLUTION WITH BILBAO TEMPERATURE ... 54
FIGURE 31.IMBALANCES' COSTS' EVOLUTION WITH AVERAGE SPANISH TEMPERATURE ... 55
FIGURE 32:IMBALANCES' COSTS' EVOLUTION WITH SPANISH TEMPERATURE VARIATIONS ... 56
FIGURE 33:CONSUMPTION PATTERN ... 62
FIGURE 34:EXAMPLE OF A POSSIBLE BAD CONSEQUENCES OF APPLYING AN IMBALANCES' STRATEGY ... 63
FIGURE 35:IMBALANCES' OVER COST DEPENDING ON FORCED DEVIATIONS ... 65
FIGURE 36:FIGURE 36:SAVINGS WHEN APPLYING EACH STRATEGY FOR 1 TO 6% ... 65
FIGURE 37:SAVINGS WHEN APPLYING 6% AND 7% DEVIATION STRATEGY WITH A 3€/MWH TURNING DIFFERENCE BETWEEN UIC AND DIC ... 67
FIGURE 38:GAS SYSTEM REAL-TIME BALANCE TRACING.SOURCE:ENAGÁS ... 74
FIGURE 39:ANNOUNCEMENT OF BALANCING ACTION TAKEN BY THE GTS.SOURCE:ENAGÁS ... 74
FIGURE 40:FORMATION OF GAS BALANCING PRICES. ... 75
FIGURE 41:CONSUMPTION PATTERN USED FOR GAS (MWH) ... 75
FIGURE 44:EVOLUTION OF DQA&IDQ AS WELL AS THE PRICES FOR THE BALANCING ACTIONS TAKEN BY ENAGÁS ... 81
FIGURE 45:EVOLUTION OF DQA&IDQ AS WELL AS THE EXTRA COST OF BUYING AND SELLING GAS AT IMBALANCES' PRICE . 82 FIGURE 46:CORRELATION COEFFICIENTS BETWEEN ENAGÁS BALANCING INDEXES AND VARIABLES USED FOR ELECTRICITY IMBALANCES' STUDY ... 83
FIGURE 47:IDQ COEFFICIENT (MWH) OF THE DAY BEFORE A BALANCING ACTION IS TAKEN ... 84
FIGURE 48:DQA COEFFICIENT (€/MWH) OF THE DAY BEFORE A BALANCING ACTION IS TAKEN ... 85
FIGURE 49:SAVINGS (€/MWH) WHEN APPLYING STRATEGY REGARDING IDQ ... 86
FIGURE 50:SAVINGS (€/MWH) WHEN APPLYING STRATEGY REGARDING DQA ... 87
FIGURE 51:PROCEDURE FOR INTRADAY OPTIMUM GAS STRATEGY ... 88
FIGURE 52:EXAMPLE OF A SITUATION IN WHICH INTRADAY OPTIMUM GAS STRATEGY IMPLY SAVINGS FOR THE RETAILER ... 88
FIGURE 53:EXAMPLE OF A SITUATION IN WHICH INTRADAY OPTIMUM GAS STRATEGY IMPLY ECONOMIC LOSSES FOR THE RETAILER ... 89
FIGURE 54:SAVINGS ACHIEVED WHEN APPLYING INTRADAY OPTIMUM GAS STRATEGY ... 89
FIGURE 55:SAVINGS DEPENDING ON % DEVIATED WHEN APPLYING INTRADAY REAL GAS STRATEGY ... 90
FIGURE 56:SAVINGS DEPENDING ON % DEVIATED WHEN APPLYING INTRADAY REAL GAS STRATEGY ... 91
FIGURE 57:SAVINGS WHEN HAVING % DEVIATIONS BECAUSE OF THE APPLICATION OF INTRADAY REAL GAS STRATEGY ... 91
FIGURE 58:CONSEQUENCES OF A WELL-TAKEN STRATEGY ... 95
FIGURE 59:OUTCOMES FROM ELECTRICITY IMBALANCES STUDY ... 96
FIGURE 60:OUTCOMES FROM GAS IMBALANCES' STUDY ... 98
FIGURE 61:SAVINGS WHEN APPLYING GAS DAY-AHEAD OPTIMUM STRATEGY WITH A 0.2€/MWH TURNING DIFFERENCE . 115 FIGURE 62:SAVINGS WHEN APPLYING GAS DAY-AHEAD OPTIMUM STRATEGY WITH A 0.3€/MWH TURNING DIFFERENCE . 115 FIGURE 63:SAVINGS WHEN APPLYING GAS DAY-AHEAD OPTIMUM STRATEGY WITH A 0.4€/MWH TURNING DIFFERENCE . 116 FIGURE 64:SAVINGS WHEN APPLYING GAS DAY-AHEAD OPTIMUM STRATEGY WITH A 0.5€/MWH TURNING DIFFERENCE . 116 FIGURE 65:SAVINGS WHEN APPLYING GAS DAY-AHEAD OPTIMUM STRATEGY WITH A 0.6€/MWH TURNING DIFFERENCE . 117 FIGURE 66:SAVINGS WHEN APPLYING GAS DAY-AHEAD OPTIMUM STRATEGY WITH A 0.7€/MWH TURNING DIFFERENCE . 117 FIGURE 67:SAVINGS WHEN APPLYING GAS DAY-AHEAD OPTIMUM STRATEGY WITH A 0.8€/MWH TURNING DIFFERENCE . 118 FIGURE 68:SAVINGS WHEN APPLYING GAS DAY-AHEAD OPTIMUM STRATEGY WITH A 0.8€/MWH TURNING DIFFERENCE . 118 FIGURE 69:SAVINGS WHEN APPLYING GAS DAY-AHEAD OPTIMUM STRATEGY WITH A 0.9€/MWH TURNING DIFFERENCE . 118 FIGURE 70:SAVINGS WHEN APPLYING GAS DAY-AHEAD OPTIMUM STRATEGY WITH A 1€/MWH TURNING DIFFERENCE .... 119
FIGURE 71:SAVINGS WHEN APPLYING GAS INTRADAY REAL STRATEGY WITH A 0.2€/MWH TURNING DIFFERENCE ... 123
FIGURE 72:SAVINGS WHEN APPLYING GAS INTRADAY REAL STRATEGY WITH A 0.3€/MWH TURNING DIFFERENCE ... 123
FIGURE 73:SAVINGS WHEN APPLYING GAS INTRADAY REAL STRATEGY WITH A 0.4€/MWH TURNING DIFFERENCE ... 124
FIGURE 74:SAVINGS WHEN APPLYING GAS INTRADAY REAL STRATEGY WITH A 0.5€/MWH TURNING DIFFERENCE ... 124
FIGURE 75:SAVINGS WHEN APPLYING GAS INTRADAY REAL STRATEGY WITH A 0.6€/MWH TURNING DIFFERENCE ... 125
FIGURE 76:SAVINGS WHEN APPLYING GAS INTRADAY REAL STRATEGY WITH A 0.7€/MWH TURNING DIFFERENCE ... 125
FIGURE 77:SAVINGS WHEN APPLYING GAS INTRADAY REAL STRATEGY WITH A 0.8€/MWH TURNING DIFFERENCE ... 126
FIGURE 78:SAVINGS WHEN APPLYING GAS INTRADAY REAL STRATEGY WITH A 0.9€/MWH TURNING DIFFERENCE ... 126
Chapter 1:
INTRODUCTION
Since 2002, when retailing liberalization came into action in the electricity sector, competition has been increasing at a high pace. Regarding industrial sectors, the importance of margins for retailers have been decreasing year by year due to the aggressive behavior from all suppliers, offering even null retailing margins for some customers.
With reference to gas, although liberalization improvement is under way, competition looks to be less mature, so margins tend to be higher when related to economic income. However, the system’s trend show a decreasing margin in the next years so situation would be analogous to the current electricity sector situation.
Moreover, knowing that margins are very similar as they are close to zero, there is a need for differentiation and good service. Hence, as a way of differentiating giving the customer less uncertainty about their payments, it is an extended practice in the electricity and gas sector to charge the client the system imbalances, not their own imbalances. By sending these proposals, suppliers are incentivized to do a good consumption estimation when nominating.
This thesis tries to develop strategies to hedge risk and maximize profits when offering customers this kind of proposals.
1.1. EVOLUTION OF ELECTRICITY
AND GAS RETAIL BUSINESSES
Both for the gas and electricity sectors, retailing has evolved quickly from a simple activity to a very complex task due to an increasing level of competition. As an example, the following graph shows the retailing market share of the biggest electricity retailer in both Spain and Portugal, which show diminishing trends, specially for Spain:
Looking at the relationship of the concentrations of gas and electricity markets, it can be seen how in Spain gas markets show a higher CR3 (CR3 represents the concentration of the 3 largest companies in a market) than electricity markets because of being a younger model.
Figure 2: CR3 values for gas and electricity in EU countries. Source: ACER
Both electricity and gas retail sectors are evolving to a more competitive scheme in Spain. However, their degree of competition is different: while the electricity retail business faces a fierce competition, gas margins seem to be slightly higher, as gas retailers represent a lower amount of participants than in electricity retail sector.
1.2.
Formation
of
liberalized
electricity prices
The final electricity price entails a sum of concepts that come from various markets, processes, etc. When sending an offer to a client, all these concepts have to be taken into account. There are three main types of contracting modalities:
- Fixed Price: this is the classic proposal in which the retailer gives a price for the client so that he will pay that price for the electricity consumed, no matter which the actual market components are. Risks with these formulas are really high, so the margin for the retailer is bigger.
- Pass Through: in this offer, all the market components are forwarded to the client, who will pay for all the actual concepts. With this offer, the only risk for the retailer comes from the imbalances, so margins are very tight.
- Pass Pool: this type of offer represents a mix between the Fixed Price and the Pass Through offers. Pass Pool offers imply that only the OMIE component
regarding the Day Ahead Market Price is forwarded to the client, being the other components approximated by a fixed component.
In all these prices, the so-called P.O.S. concept (“Processes for the Operation of the System”) represents approximately 1 €/MWh. Inside this concept, there are many aspects to take into account:
- Power Factor Correction - Balancing energy Missing - Upwards Reserve
- Secondary Reserve - P.O. 14.6.
- Nomination UPG - Imbalances
- Hourly Imbalances Prices
- Imbalances Settlement Concept
The next figure shows the values of the concepts that currently are making up the final electricity price for year 2017 until June 12th:
As system imbalance will appear in customers’ bill while real costs will depend on real imbalances, every step made in the way of improving imbalances’ strategy would have as a consequence the reduction of the retailer’s costs and thus, an increase in their financial results.
1.3.
Formation of gas prices
Gas proposals have a lower risk than electricity proposals regarding imbalances due to the lower incentive to help the system to be balanced. As Enagás can participate in the market as if it was a market agent to compensate imbalances, the need for a change in agents’ behavior regarding nominations is not that important.
There are two main risks regarding imbalances for gas: the first of them comes from the quantity closed for the supply period when closing the deal with the customer. Every MWh not closed at deal price will have to be bought with another price. The second risks reside in differences when nominating in the day-ahead, that will be paid at imbalances’ price.
However, although gas imbalances’ costs imply low costs for the customer, risks are present in all gas proposals. Consumers do not pay for imbalances so these imbalances’ costs would be absorbed by the retailer.
1.4.
Topic focus: conclusion
When competition is fierce, every single detail has to be taken into account to have a positive position in the game. One of these details is the concept of imbalances, which plays an important role in the evolution of a retailer company.
As stated in the introductory part of the chapter, as a way of offering the customer a less risky proposal, the retailer could make the consumer pay for the system imbalances, not for their imbalances, so imbalances’ risk would appear in all types of electricity offers and retailers would have to make the best possible approximations to the client’s consumption to reduce their imbalances and not lose extra money.
All the imbalances below the system imbalance represent an extra margin for the retailer, while on the other side, every imbalance exceeding the system imbalance will have repercussions in losses for the company. This implies a high risk for the retailer, as its margins will have to take into account possible deviations with respect to the extra-cost produced by the system imbalance.
As stated before, the aim for the actors in the electricity system (both producers and retailers) is to help the system by being imbalanced in the other side than the system. If this happens, the deviation between the actual value and the forecasted value
will not be penalized, so for example a bad prediction of a client’s consumption is not penalized. Regarding the gas sector, the aim is to find in which hour it is profitable to buy less and in which hour, buy more than the consumption of the client. Thus, what should be avoided is the following situation:
Figure 4: Relationship between deviations and over costs
In the last graph, it can be seen that hours with higher deviation are the ones that do not have economic consequences, while from hours 14 to 18, deviation is low but losses for the retailer are important.
Despite this, what the retailer would want to do when predicting, is to forecast the customer’s consumption as accurately as it can be done. However, for risk allocation, if there are doubts about how the customer will consume, a risk allocation method would be to make a trend for the forecast depending on the direction in which the system may imbalance.
Thus, the final objective of the thesis is to find the strategy when forecasting a customer’s consumption, knowing when to have an imbalance upwards or downwards, as well as to know the potential impact on benefits of this strategy for a company retailing gas and electricity in Spain.
0 2 4 6 8 10 12
0 10 20 30 40 50 60 70 80 90
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Relationship between deviations and over costs
Chapter 2:
STATE OF THE
2.1.
SPANISH
ELECTRICITY
SECTOR
The aim of this chapter is to introduce the operation of the Iberian Electricity Market, focusing on the different markets and time frames used to operate the Spanish electricity sector in the most economically efficient way, while providing a good security of supply.
The functioning of markets has a direct impact on the results of a retailing company so, in order to know the components of the retailing price, a look would have to be done to all the different markets linked together in the electricity and gas sector.
2.1.1.
The liberalization process
of the electricity sector in
Spain
Over the last decade of the 20th century, the need for a more competitive power sector in order to control electricity-related costs rose in Spain. This was a key aspect in order to comply with the European Union’s strict requirements on cost control in order to join the Eurozone in the early ‘00s, so a great effort had to be made regarding this issue.
This requirement pushed Spain to make one of the most important decisions on electricity organization since the early development of the system: to follow other countries’ scheme and liberalize the electricity sector in 1998. This was a turning point in the power sector, as a change in the structure had an impact on all stakeholders of the sector: remuneration schemes, risk, responsibilities, operation… The new organization was like a start from scratch that had to be perfectly planned.
The process for the liberalization of the system started with the Electricity Sector Act 54/1997, which supported the application of the 96/92/EC Directive by the European Commission. These directives tried to bring competition to some branches of the system: the so-called “network businesses” would still be regulated to have a higher control on the utility of network investments. However, both retailing and generation businesses would suffer a dramatic change, increasing their risk but, if aligned with fair competition, having the chance to manage their assets and services for their own benefit.
One of the main issues that appeared when applying this new model was the cross-interests between businesses. As an example, a Transmission Operator could
developed link between consumption points and a plant of their own company. In order to solve this problem, a process of unbundling separated regulated activities from competitive ones, so companies could no more be vertically integrated and therefore, cross-interests would be reduced or even eliminated.
As a result, the transmission owner joined the system operator forming what is known as Transmission System Operator (TSO), role performed by Red Eléctrica de España. REE is an entity partially owned by the State, in charge of the activities of investing in the high voltage network and coordinating with the market operator.
Furthermore, a privatization process, parallel to the liberalization process, took place in order to promote competition: Endesa was completely privatized in 1996 although, as mentioned before, the transmission grid was owned by REE and thus, partially kept by the State.
Regarding supply activities, this business was totally opened in 2003, so every single customer could choose its supplier. The goal when liberalizing this activity was to reduce retailing margin and give the customer more competitive prices. Fourteen years later, margins have decreased substantially, especially for industries’ supply, which margin is almost zero.
As a conclusion, during the first two decades of the twenty-first century, competition has been maturing in all liberalized activities so the system is now an almost perfect gear assembly, whose imperfections are controlled by the National Regulatory Authority (CNMC) to ensure that this well-functioning of the sector keeps its way in the following years.
2.1.2.
Renewable Energy Sources
integration
In a world that keeps looking for solutions to reduce and finally avoid pollution an important issue for the development of the electricity sector was the integration of new green, clean and cheap energy sources. Not only could they represent a step forward regarding the solution of climate change, but also they would represent a cheaper electricity that could have as a consequence the reduction of wholesale prices. This is why, despite intermittency and lack of maturity as two drawbacks that the authorities had to deal with, the world started to see an increasing share of energy produced from renewable sources.
RES integration in the electric system has a major impact on the behavior of imbalances as the variability of solar and specially wind energy are the main drivers of these disequilibria between supply and demand. The evolution of these sources of electricity in Spain is shown as follows:
Figure 5: Evolution of R.E.S. share in the Spanish electricity market. Source: Red Eléctrica de España
Spain supported highly renewable energy sources as a way of producing cleaner and cheaper electricity. In 1998, a feed-in tariff (FiTs) RES support scheme was introduced in Spain.. With this type of remuneration, these generators were isolated from the market, as they would receive a constant market-independent price for each megawatt-hour of energy produced.
In order to reduce distortion of market signals, this mechanism was substituted by a feed-in-premium support scheme (FiPs), so RES remuneration was dependent on the market as they were given a premium on top of the market price. Thus, market was also distorted as RES could offer their services at a lower price than their variable cost at least , allowed market integration of RES generators.
The situation peaked between 2004 and 2007, when a substantial amount of RES investments took place due to the attractive support scheme, especially for solar energy projects. These premiums given to RES, among other issues, had as a result a yearly tariff deficit in the Spanish electricity system..
In order to stop the increasing tariff deficit created in the last ten years, the Spanish developed a new scheme for the promotion of renewable electricity production. Royal Decree Law (RDL 9/20133), Law 24/20134, Royal Decree 413/2014 and the Ministerial Order IET/1045/2014 were developed in order to make the electricity system financially sustainable.
The new legislation was based on several main concepts:
- Reasonable profitability: RDL9/2013 stated that both existing and new installations would receive a premium thought to provide them a reasonable
profitability to be revised when the regulatory period ends after 6 years, which would be equal to the average pre-tax yield of Spanish 10-year bonds plus 300 basis points, so a 7,39% was set when coming into action in December 2013.
- Plant type and retributive parameters: This topic had a big influence in renewable plants. A standard plant was given as a benchmark to describe a plant, so based on expected prices and demand, this would determine their retributive parameters:
§ Remuneration for the plant investment (Rinv) § Remuneration for the plant operation (Ro) § Useful regulatory life
§ Minimum and maximum generation full-load hours § Functioning threshold
§ Annual expected lower and upper limits of the market price and the average annual market price.
- Auctions will be used to allocate support to new plants, using independent-from-production subsidies that would not distort markets.
2.1.3.
The
Iberian
Electricity
Markets
Having a complex electricity system requires a great combination of processes and markets to have a high level of security and efficiency. The final electricity dispatch is the result of many activities carried out by both the market operator and the system operator. While the market operator looks for economic efficiency optimization, the system operator not only takes into account economic aspects but also solves technical constraints and imbalances, resulting in a more expensive but feasible electricity dispatch.
2.1.3.1.
Markets managed by
OMIE
OMIE, the Spanish Electricity Market Operator, is the entity in charge of the purely economic dispatches of the system, which are later modified by the Spanish System Operator, Red Eléctrica de España, the entity in charge of the feasible dispatch of the units available in the system.
2.1.3.1.1.
Day Ahead Market
The Spanish wholesale market is divided into two parts:
- Day Ahead Market, which is the organized branch of the Spanish wholesale market organized by OMIE (Operador del Mercado Iberico Español), accounting for the majority of the physical production traded (184 TWh in 2016).
- The non-organized market (bilateral contracts) that accounts for more than 30% of the energy used for the Day Ahead Market. As bilateral contracts do not have to pass through OMIE, the agents operating in this market will have to communicate this to the System Operator who will update the expected demand.
In the following graph, the relationship between bilateral contracts energy and Day Ahead Market energy is shown:
Figure 6: Energy sold by bilateral contracts in the Iberian Peninsula. Source: MIBEL
The operation of the Day Ahead Market in Spain and Portugal (both managed jointly) stands on the concept of “marginal pricing”. The generators submit offers of their energy to OMIE for each hour of the next day.. These submissions will have to be made before the gate closure at 12:00 PM. After that, the market is cleared: the forecasted demand for every hour of the next day has to be filled with these offers, so that the first offers that will enter the market will be the cheapest ones (merit order). Once the demand is filled and the cutting point between supply and demand is reached, the rest of the offers, that is, the more expensive ones, are ignored.
Moreover, as interconnections with surrounding countries have to be taken into account, the same algorithm is used at the same time in those countries forming the Price Coupling Region: the name of this algorithm is “Euphemia”. In the case of Spain and Portugal, they will both be taken into account as a whole, so interconnection is allocated implicitly in the market cleared by OMIE.
Figure 7: Countries taking part of PCR. Source: Energy Solutions
European countries allow the submission of complex bids by market agents so the clearance of the market is not simple. First of all, the orange increasing line that can be seen in the following graph is created, which is the pure merit order curve without taking into account some complexities that may arise. Applying the efficient measurements regarding this complex bids, the red line is computed. Once this red line touches the orange decreasing line, the demand is filled and all generators are remunerated with the priced offered by the last generator entering the market, this means the price for which demand and supply are equal.
Figure 8: OMIE Day Ahead Market clearing mechanism. Source: OMIE
The output from the Day Ahead Market cleared by the Market Operator (called Programa Base de Funcionamiento: PBF) consists on the most economically optimum dispatch without taking into account the possible technical constraints that the system may face (line congestions, voltage dips, etc.)
As a conclusion, OMIE can come up with a non-feasible dispatch so there has to be an entity correcting these problems efficiently. After the Day Ahead Market is dispatched, the Spanish Transmission System Operator, Red Eléctrica de España, would carry out a Load Flow Analysis (LFA) to check the feasibility of the optimum dispatch. As this optimum dispatch is altered, the solutions imply a more expensive solution. This topic will be discussed in the section: System Adjustment Services.
2.1.3.1.2.
Intraday Market
Once the day-ahead market is cleared and network/supply constraints resulting from the PBF are resolved (see Section: System Ancillary Services by Red Eléctrica de España), agents will be able to adjust their schedules in the intraday markets to compensate for equipment failures and energy forecast errors, or to apply strategic modifications.
Hence, as delivery approaches, agents are able to estimate more accurately their production or demand. This is why six adjustment market sessions are held as a way of correcting possible deviations in day-ahead forecasts. This correction of the programs will be made by submitting bids for selling or purchasing energy closer to real time.
As it can be seen in the following figure, there are six intraday markets, each with its time frame, so that agents’ schedule can be submitted in the orange time range while the application time will be the blue line.
Figure 9: Organization of Intraday Market in Spain. Source: MDPI
In 2016, 28 TWh were dispatched in the Intraday Markets, that is, more than 15% of the energy moved in the Day Ahead Market. Therefore, it is proved that Intraday Markets play a significant role on the dispatch process. However, the increasing trend of markets to continuity makes this methodology slightly old: the aim of market operators is to eliminate this market model and create a continuous intraday market in Europe.
It is important to note that this intraday market follows the same pattern as the Day Ahead Market, being purely economic and based on marginal pricing. After each intraday market, another technical constraints resolution takes place, although most of the time dispatches resulting from intraday markets do not need to be re-dispatched.
2.1.3.2.
Markets managed by
REE
As stated later, besides the market operator OMIE, Red Eléctrica de España is needed to provide a optimum and technically feasible dispatch: thus, they manage Ancillary Services, imbalances management, etc. by means of new markets that are attached below:
2.1.3.2.1.
System Ancillary
Services
As stated in the previous sections, the theoretical output from OMIE markets (Day Ahead and Intraday markets) often need to me modified in order to get a feasible program. The Spanish System Operator, Red Eléctrica de España, manages different ancillary services in order to solve problems regarding technical constraints and security of supply, such as line overloads and congestions, voltage dips, etc. These adjustment
services are:
- Technical Constraints Resolution: correction of PBF, intraday output and real time.
- Additional Upward Reserve Power
- Secondary Control Band provided by generators - Tertiary reserve
Red Eléctrica de España is responsible for the reliability of the system as well as the security of supply, so after the Day Ahead Market is cleared, it must guarantee a feasible dispatch by reorganizing it efficiently, increasing generation for some plants and decreasing it for others while keeping stable the relation between generation and demand. An example of a contingency is shown by REN, the Portuguese System Operator.
2.1.3.2.1.1.
Technical
Constraints
Management
The Technical Constraints Market is a complex market consisting on two phases:- In the first phase, Red Eléctrica de España carries out a Power Flow Analysis (PFA) of the network by running a model representing the whole system taking into account the program of each plant from the PBF. Although the System Operator looks for the cheapest way of solving these issues, this is not a purely economic process; this means that also the utility of the option is taken into account. As an example, if an option is cheaper than another but it does not give REE enough confidence that the issue will be solved, the more expensive option will be the chosen one.
- In the second phase, a re-balance between supply and demand will be made after the possible deviations resulting from the operation of Phase 1 Technical Constraints Resolution, without resulting in another unfeasible dispatch.
This complex market is not cleared the same way as Day Ahead Market or Intraday Market are. Following a pay-as-bid methodology (if selected to produce, the remuneration for the generator will be equal to the submitted offer), REE should transform an economic dispatch into a physical dispatch.
First of all, the so-called PBF program resulting from the Day Ahead Market will be slightly modified so that all technical constraints making the dispatch unfeasible are cleared with the re-dispatch. Moreover, after OMIE clears an intraday market, the System Operator has to perform another Power Flow Analysis so that the final dispatch can be physical. Finally, in the real time, the System Operator has to have an updated view on how the system is performing so that if an unfeasibility occurs, the units are quickly re-dispatched to ensure a high security of supply.
2.1.3.2.1.2.
Balancing
Services
When there is already a resolution of the technical network constraints, Red Eléctrica de España will proceed to try to assure that the system reserves are enough for the system to be exploited in a safe way. This is why it holds many ancillary markets to be able to make generation and demand meet in real-time. These markets include the
secondary regulation market, which is a reserve market, as well as two energy markets: tertiary regulation and the so-called imbalances’ market.
2.1.3.2.1.3.
Additional
Upwards
Reserve Power
Spinning reserves are those available reserves which come from generators already connected to the electricity network. They are needed in a power system to be manipulated so that generation meets demand at all times. This Additional Upward Reserve Power, established in 2012, refers to this spinning reserve that typically thermal units offer for those moments in which extra capacity may be needed.Tertiary reserves have to be enough to have a reasonable confidence that the system will be operated comfortably. This available reserves are analyzed after technical constraints resolution is managed.
After analyzing the needed reserves taking into account the variability that the dispatch could have in the real time, the System Operator might consider that these reserves are enough or not for a comfortable real-time operation. If the System Operator feels it would not be enough with the currently available reserves to have a secure real-time operation, it will have to bring some new thermal units into the dispatch to increase the available spinning reserves.
When taking a new thermal unit into the dispatch, it will have to offer its minimum technical requirement in an intraday market to be connected to the grid, avoiding possible problems regarding ramps and start-ups. If the plant does not enter the intraday market, additional costs from the unnecessary re-dispatch will be allocated to the uncommitted unit.
2.1.3.2.1.4.
Secondary
Reserves
When sending an offer to the Day Ahead Market for each of the hours of day D+1, units attach their so-called “Secondary Band”, that is, a power range in which the plant can operate. For example, a plant could offer 300 MW ± 30 MW, meaning the plant can operate between 270 and 330 MW if the System Operator requires it, charging a cost for this additional service.
These reserves are chosen by a purely economic procedure, choosing the lowest capacity prices from the offers. In the end, marginal pricing will be applied, remunerating the plants with the marginal price for capacity reserve, no matter if its downwards or upwards.
2.1.3.2.1.5.
Imbalances
Market
Both generation and demand are constantly changing, so a real-time market is needed to offset these sudden variations on both sides. All generators, especially variable RES like wind or solar, can produce imbalances in the system for which they would be penalized. On the other side, when demand changes, this will translate in an over-cost for them. In order to incentivize demand participation for the reduction of imbalances, this penalization will be null if the deviation goes in the opposite direction that the system imbalance (helping the system is compensated by not penalizing).
How can this be organized? By setting an upwards imbalance price and a downwards imbalance price (dual pricing market). Then, the agent will have a different price whether it is long or short in the market.
This is how imbalances market works looking from the demand point of view:
- If the retailer is short and the system is long, the extra energy that the retailer would have to pay will be paid at the Day Ahead Market Price. That is, as the retailer’s imbalance is not in the same direction as the system’s imbalance, the retailer would be helping the system and thus, it would not be penalized.
- If the retailer is short and the system is also short, the extra energy that the retailer would have to pay will be paid at the downwards imbalance price. That is, as the retailer’s imbalance is in the same direction as the system imbalance, the retailer would be making the system’s imbalance worse so it would be penalized by paying for the extra energy downwards imbalance price, which is higher than the market price.
- If the retailer is long and the system is short, the extra energy that the retailer bought with relation to the client’s consumption, would be paid to the retailer at the Day Ahead Market Price. That is, as the retailer’s imbalance is not in the same direction as the system imbalance, the retailer would be helping the system and thus, it would not be penalized.
- In the last case, if the retailer is long and the system is also long, the extra energy that the retailer bought would have to be paid to the retailer at the upwards imbalance price. That is, as the retailer’s imbalance is in the same direction as the system imbalance, the retailer would be penalized by receiving for the extra energy the upwards
imbalance price, which is lower than the market price.
As a conclusion, the aim for the actors in the system (both producers and retailers) is to help the system by being imbalanced in the opposite direction than the system’s imbalance. If this happens, the deviation between the actual value and the forecasted value will not be penalized, so, for example, a bad prediction of a client’s consumption will not be penalized.
However, if the retailer’s imbalance is in the same direction as the system imbalance, it will result in a problem for the retailer, paying more / receiving less for the imbalance.
With all these markets, the final output is electricity with a good quality and security of supply, being supplied to final consumers in such a way that all agents of the system (from producers to retailers, operators and consumers) have an economic benefit.
2.2.
SPANISH GAS SECTOR
Over the first years of the twenty-first century the gas industry used to only depend on bilateral contracts with offers not going through a common market. Representing a big share of many industries financial statements, gas needed a platform to be traded in Spain, favoring interconnections between countries to mesh the network and look for a better price. This pushed the agents to build an organized market to make these objectives real.
2.2.1.
Organization
The stakeholders of the gas system are the following:
2.2.2.
Evolution
The Spanish gas sector is currently facing a sharp change: its activities are being restructured and its rules are being modified and adjusted to the ones defined by European regulations. In the last years, many legislative developments have taken place in this industry in order to enhance transparency in the system, improve competence and transmit efficient pricing signals both to suppliers and demand as well as allowing non-discriminatory access to the network.
The system first started to liberalize softly in 1998, just after the publication of the Law 34/98 (the so-called Hydrocarbons Law). Before this change, all the activities of the gas sector were acting as a regulated business, being controlled by public entities.
After the implementation of the Hydrocarbons Law, the Spanish gas system was liberalized and the bases of the new gas market in Spain were established. This law introduced a series of measures that aimed at the creation of a competitive and efficient internal gas market, guaranteeing the growth of the sector. Some of the changes were:
- The redistribution of the different competences of regulatory authorities.
- The creation of a regulation framework defining network accesses and functional unbundling of regulated activities (such as transmission, distribution, storage and regasification) from activities open to competition (such as provisioning and retailing) to guarantee an efficient group of processes. For example, retailing and regulated activities suffered a legal and accounting unbundling to guarantee good practices in this regard.
- The creation of the System’s Technical Manager as an independent figure from the main transmission owner. This entity will regulate the last resort supply and will create an office for supplier switching.
Two years later, the first shippers started to operate in Spain. Another important step on this liberalization was the authorization for domestic consumers to choose their supplier. This long liberalization process lasted until July 1st 2008 when distributors stopped supplying gas, which meant that the liberalization process was completed.
Regarding gas supplies, depending on annual consumptions, some consumers can decide whether they want to contract the Last Resort Tariff or a free supply. To ensure an efficient competence, the Supplier Switching Office (OCSUM) makes it easier for consumers to change their supplier.
2.2.3.
Mibgas:
Spanish
Gas
Platform
The Organized Gas Market (Mibgas) creation is spearheading the evolution of the gas sector in the Iberian Peninsula towards a perfect competence paradigm, having application in Spain and Portugal. According to Royal Decree 984/2015, MIBGAS “consists of short-term free and voluntary sale and purchase transactions of natural gas with physical delivery at the Virtual Balancing Point”. This market would make it easier for new suppliers to access, increase liquidity in the system and enforce the Peninsula’s interconnections with other countries, which would have a positive impact on security of supply and would have as a consequence a reduction of prices. Moreover, a reference price will be set in the Iberian market, as a first step towards an interconnected unique European market.
Some characteristics of the new Organized Market are the following:
- It allows gas trading at the Virtual Balancing Point (PVB from the Spanish acronym) defined as the hub or location from which it is deemed that the gas has entered into the transmission and distribution system, being thereafter freely exchangeable without any restriction. The MIBGAS trading platform is used for the purchase and sale of natural gas with physical delivery at PVB for Within-Day, Day-Ahead, Balance of Month and Month-Ahead products.
- It allows agents to have easy access to the market.
- It allows capacity to be purchased for gas entries and exits. -The time horizon of this market will be short.
-Every day has to end with a balanced position, so intraday imbalances management is made so that at the end of the day every agent is balanced. Enagás, the system’s technical manager (called GTS from the Spanish acronym) will participate as another agent taking balancing actions and thus playing an active role on gas balancing.
Hence, all the entities with the possibility of acting in this market are:
- Market Operator - Traders
- Direct consumers
- System’s Technical Manager (both Enagás – Spanish – and REN - Portuguese)
- Transmission companies - Distributors
- Corporación de Reservas Estratégicas de Productos Petrolíferos (CORES, entity in charge of the maintenance of strategic reserves of oil as well as the control of both oil and natural gas in Spain).
The penetration of this market is still very low. Despite rising to almost a 5% of the total negotiated gas in the Iberian peninsula, the rising of Mibgas prices in November, December and January due to lack of gas made this participation go back lower-than-3% levels.
The start of this fall is shown in the following graph, attached in the Mibgas Annual Report for 2016:
Figure 12: Traded volumes in Mibgas and Secondary Market in Spain. Source: Mibgas
By opening an organized platform, authorities want to make European prices converge, being a step closer to a centralized European gas market. However, there are many issues to be solved before this happens. The main problem is the interconnection between regions: many infrastructures are being put into place to enforce the European pipeline mesh but these pipelines can easily be congested if demand is high, typically for Winter period.
As an example, during January 2017 gas prices in Europe saw a big divergence due to the congestion of pipelines mainly from the north of France to the southern region of the Gallic country. As a consequence, after a huge gas demand due to extremely low temperatures and nuclear unavailability in France due to unexpected outages, the spread between PVB prices and TTF index rose up to almost 20 €/MWh, which show that PVB gas was twice the value of the TTF price.
Not only this problem affected the gas sector but also electricity prices, driven by the needed help of combined cycle gas turbines. As gas price skyrocketed, variable cost and consequently offers and market price went up drastically, reaching 100 €/MWh
The following figure shows gas prices in the different European gas regions, so the huge spread between PVB and TTF can be extracted:
Figure 13: Prices of gas in European regions in January 2017. Source: Mibgas
2.2.3.1.
How
does
Mibgas
work?
The Spanish Gas Market Operator provides a market platform on which the sector agents can have information about transactions being made in the market, trade a range of products and have a look at the results published by Mibgas.
Transactions being made in the market will need to have a sell and a buy part that should come together. That is why agents can exercise any of these positions as long as they maintain the structure, specify which product are they trading, its quantity, price…
Inside the gas market, there is a distinction between the primary and the secondary market. The primary market is the one where gas transactions take place between producers and demand traders. However, the secondary market is the one in which these transactions are made between traders and other suppliers, so this has the focus on regional long-term trading mechanisms.
Inside Mibgas there are four types of products being traded: intraday, day-ahead, balance of month and month-ahead.
- Intraday: session is opened from 9:35 AM to 9:00 PM. The product for the same day is traded.
- Day-Ahead: session is opened from 9:35 AM to 5:00 PM. In this session, the product for the next day is traded.
- Month Ahead: the product for the next month is traded.
Figure 14: Market and use of gas traded in Spain in May 2017. Source: Mibgas
These products are used via:
- Auction: it takes place between 8:30 and 9:30 AM. During this time, agents can submit their bids for purchasing or selling a product. When the auction closes, taking into account all the information from all bids, the price that will be applied to all offers is computed. Thus, marginal pricing also works in the Iberian gas market.
The next figure shows how bids are crossed with the demand for the clearance of the market by Mibgas:
Figure 15: Auction procedure in Mibgas. Source: Mibgas
- Continuous market: it is developed in different parts until 9:00 PM. Every offer that is submitted is studied with the existent offers for the other direction (buy-sell). Every market clearance implies a firm transaction, being computed, registered and liquidated on a weekly basis.
As a market agent looking for security of supply, Enagás participates by trading with:
- The acquisition of cushion gas for the underground storage of Yela. This can be traded as an intraday product, day-ahead product or even month ahead.
- The acquisitions of gas as a day-ahead or intraday product for the minimum fill level of the transmission grid
- The acquisition of operation gas in the day-ahead market for Enagás activities. - Balancing actions as day-ahead products, which will be analyzed in the gas
imbalances’ study.
The evolution of these products is shown below, both for the auction processes and the continuous market. From May 2016 a high increase in volume traded in auctions can be seen, although increase in continuous market is not that significant. From then, it can be extracted from the graph that the volume traded in auctions tend to be reasonably constant through the year; however, the continuous market see extremely different quantities traded in each month, reaching to almost 1 TWh in October 2016. Then, after balancing actions appeared in Mibgas, the operation in continuous markets stopped its increase, starting decreasing to a low 400 GWh traded in December 2016.
Chapter 3:
STUDY OF
ELECTRICITY
IMBALANCES
3.1.
VARIABLE ANALYSIS
In this chapter, some variables will be studied to know which ones should be taken into account for the imbalances analysis. These will be the inputs over which the study will be built, so this choice is a key for obtaining an accurate and reliable output from this thesis.
Before coming into detail with the variable analysis, a clearer explanation of the meaning of upwards system imbalance and downwards system imbalance should be made. System imbalances resolution come from the need of making demand and generation meet in the real time: when generation is higher than demand, generation has to be lower, so the system would have a downwards imbalance. On the other side, when demand is higher than generation close to real time, the imbalance would be upwards.
The electricity system is designed so that it incentivizes agents to look for a balanced system. Thus, agents do not have any imbalance cost if their deviation helps the system (when the agents’ deviation goes in the opposite direction of the system imbalance).
The concept of upwards and downwards system imbalance is the opposite for production and for retailing. The reason why this happens is the fact that a raise in retailers’ nomination imply a higher demand so it pushes the system to have an upwards imbalance, while a raise in generators’ production will push the system to a downwards imbalance.
- Upwards System Imbalance comes when the generators must sell more than its actual program. This comes when:
o Generation is lower than expected
o Demand is higher than expected.
- Downwards System Imbalance comes when the generators must sell less than its actual program. This comes when:
o Generation is higher than expected
o Demand is lower than expected.
From this variable analysis, four inputs will be taken into account for the final imbalances’ costs study. The followed criteria for choosing the most accurate variables for the study will be:
- Explicability: how much do variables affect imbalances’ costs? Are they a main driver of these costs or is it just a coincidence?
- Explained spread between Upwards and Downwards Imbalances Costs. Is this spread significant?
- Simplicity of variable forecasting. It would not be a good strategy trying to forecast a difficult concept by forecasting another difficult concept. Simple variables will be taken into account; as an example, wind values could be forecasted with “Meteologica”, prices from the Day Ahead Market could be
known from 12:42 of day D-1… However, simplicity could be a requirement not taken into account if the rest of the two criteria give good outputs. Thus, if there is a difficult-to-forecast variable that could explain almost all the imbalances, this variable will be taken into account.
When trying to forecast imbalances’ costs, the first thing to do will be to know the sources of these imbalances. These imbalances come from an inequality between supply and demand in real time that can be produced because of:
- Intermittent generation: wind energy production will be studied as an explanatory variable for imbalances’ costs. In addition, solar energy, less intermittent but still intermittent, will be analyzed. On the other side, firm generation will be studied to know its inverse correlation with system imbalances. Hydro will be also analyzed as a factor that could affect imbalances. - Variations in demand: This demand will be studied so that it can give a hint on how imbalances are going to work in the system. Moreover, as temperatures are factors that affect demand, they will be studied. Historical data from AEMET will be taken for meteorological stations in Madrid, Barcelona, Seville and Bilbao. The average of them will be taken as the average temperature in Spain. As the imbalances are produced by unexpected high variations on temperature, the de/increment of temperature will be analyzed as another variable.
- Variables that could represent a joint variation of supply and demand: for example, the Day Ahead Market Price, Technical Constraints resolution, Upwards Power Reserve,… could affect imbalances by showing a change on demand, supply or both.
3.1.1.
Demand
A first approach will be made for all variables to have a rough idea on the effect they produce on imbalances. First of all, it has to be said that demand variations clearly affect imbalances. As an introductory approach, it could be stated that as demand grows, demand forecasts would be lower than actual demand as there are more thermal plants that can give upwards reserve, thus the system will tend to have an upwards imbalance, so as a conclusion, Upwards imbalance cost should definitely rise.
On the other side, when demand rises, Downwards imbalance cost should decrease, as system will have normally upwards imbalance, which means Downwards imbalance cost equal to zero.
When looking at the graph, it can be stated that the previous assumptions are proven right. It can be seen that from a very low demand to a demand equal to 30 GW, Upwards imbalance cost increases and Downwards imbalance cost decreases. As low demands usually imply a higher share of the demand covered by wind, it may be inferred from the graph that wind forecasts tend to be lower than actual wind power as not many thermal units are started to offset this increasing ramp, so imbalances tend to be downwards.
However, there is an issue to be taken into account: for a demand higher than 32.000 MW, trends change significantly: Upwards imbalance cost decreases while Downwards imbalance cost increases. A conclusion can be extracted from this issue: as demand increases, firm generation represents a higher share of this demand, while intermittent generation like wind amount to a lower percentage of the total demand. Thus, there is not a problem to have an upwards imbalance because the available capacity for offsetting this issue is more than enough.
3.1.2.
Day-ahead market price
By making a first approach to the influence of the Day Ahead Market Price on imbalances, it must be stated that this variable is correlated with demand. This means that for a higher demand, prices should be higher, and vice versa. However, price should be taken into account as it is also correlated with the generator point of view: in hours with low prices, there would presumably be a high amount of wind and a very low power coming from coal plants or combined cycle power plants. This means that for a lower price, variability is higher. Not being many thermal plants on, the System Operator would overestimate the demand. Thus, Downwards imbalance cost would skyrocket while Upwards imbalance cost would be very low, almost close to zero.
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On the other side, for high demands, available thermal capacity would be bigger and hence, the System Operator will tend to underestimate the demand, so upwards imbalance cost will rise.
After studying the previous graph, a conclusion must be taken from the left side (very low price area), as there is a huge spread between Upwards imbalance cost and Downwards imbalance cost. As stated previously, for huge wind levels, there are not many thermal units on, so wind forecasts tend to be higher than actual values for wind production as there is not much reserve to use upwards. Then, imbalances tend to be downwards, so this makes the Downwards imbalance cost almost 8 times bigger than the Upwards imbalance cost.
From then on, there is a range of prices in which there is not much correlation between imbalances costs and these prices, so some complementary variables will be needed to explain imbalances’ costs in this range.
Finally, for very high prices a lot of combined cycles are on, so there is plenty of energy reserved for solving upwards imbalances. As a consequence, the System Operator will tend to underestimate demand, so Upwards imbalance cost will be higher than Downwards imbalance costs.
3.1.3.
Firm generation
Firm generation could be an important player that may affect imbalances’ direction. As stated in the “Demand” analysis, if firm generation represents a higher share of the demand, intermittent generation like wind would amount to a lower percentage of the total demand. Thus, it may be inferred that for a higher firm
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generation, there will not be an excessive amount of wind generation and as a consequence, wind will be overestimated and Downwards Imbalance should be higher.
It can be inferred from the graph that variation on firm generation does not imply a change in the strategy to make between downwards and upwards imbalances. Thus, firm generation does not explain imbalances’ costs, so this variable will not be taken into account in the study.
The reason behind this randomness could be the fact that thermal generation could explain imbalances only when related to wind. As an example, if there is high firm generation but there is no wind, there is no incentive for the System Operator for taking a very short position.
3.1.4.
Wind production
In the previous pages there are numerous mentions to wind production and its effects in imbalances’ cost. This comes as a result of the high variability that wind gives to forecasts. Thus, this variable is the most influential on imbalances.
Conclusions from previous graphs showed the following results:
- For low wind values, there is no incentive for Red Eléctrica de España to take a position on demand.
- For normal levels of wind production, the System Operator tends to overestimate wind production so Downwards imbalance cost tends to be lower.
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