Electricty Trading System Overview

Introduction

The Electricity Markets in various countries have been reformed over the last decade and is revolutionizing the way electricity is being viewed. The Electricity Market reforms have enabled the transition from vertically integrated private or public sector monopolies to where independent wholesale suppliers and consumers of electricity participate in competitive marketplaces.Chapter 3 of Power System Economics (Kirschen and Strbac) describes the basic principle of the market for Electrical Energy [1].

The aims of a competitive Electricity Market are to encourage private operator participation, and to promote competition between and efficiency of market players, in an effort to reduce the price of Electrical Energy. An open trading system is the most effective manner to achieve this by allowing bilateral trading of electrical energy between generators and consumers.

This application aims to provide a working model of an Electricity Trading System, to be used as a teaching aid to assist students in their understanding of the Electricity Market. The application also aims to provide an opportunity for multiple users with competing goals to interact in an effort to obtain a clearer understanding of the forces at play in a competitive electricity market.

Literature Review

 

Trade in Electrical Energy refers to a certain amount of megawatt-hours to be delivered over a specified period of time depending on the country or region where the market is located. In addition the price will vary from one period to another. Moreover, demand does not change to suit transitions in delivery periods.

Even though the Electricity Trading System assumes Electricity can be traded as a commodity, there are important differences between it and other commodities. The Electricity System is a physical system where demand must be balanced by supply on a second-by-second basis to prevent collapse of the system. Collapse of the system has a more profound effect than collapse of the market, in that the entire country or region can be without power for many hours. Another feature of the Electricity Market is that the electricity generated by one participant cannot be directed specifically to another participant and so pooling of all energy is a desirable consequence where economies of scale are possible. However breakdown of the system affects all participants not just the individual parties to a particular transaction. The Electricity Market also exhibits rapid cyclical variations in the cost and price of electricity due to the necessity for balancing supply and demand.

National Grid provides an overview of the Electricity Market Structure [2]. The British Electricity Supply operates in a commercial market with multiple participants trading the electricity consumed on a day-by day basis.

British Electricity Trading and Transmission Arrangements (BETTA)

Since April 2005, BETTA has been in effect in electricity supply system of Great Britain. Under BETTA, electricity is traded between market participants (i.e. generators, suppliers, traders and customers) for individual trading periods. Each trading period corresponds to a half hour period where electricity is delivered.

The market structure is described in Figure 2.1 below [2].

 

Figure 2.1: Overview of BETTA Market Structure

The market is comprised of a Forward/Futures Contract Market segment, a Short-term Bilateral Market, a Balancing Mechanism, and the Settlements process. Participation in the bilateral markets is optional, but participation in the Settlements process is mandatory.

Forwards and Futures Contracts Market

The Forwards and Futures Contracts Market represent the bulk and long term contracts entered into between generators and suppliers and make up the majority of electricity traded. This market provides the opportunity to enter into contracts for delivery or receipt on a specified date, of a given quantity of electricity, at an agreed price. Contracts are entered into up to 24 hours before real time but typically are agreed up to a year in advance.

Short-term Bilateral Markets (Exchange)

The Short-term Bilateral Markets are in the form of screen-based exchanges where the participants trade standardized blocks of electricity (in MWh) for the specified time interval. This gives seller (generators) and buyers (suppliers) an opportunity to fine tune their positions as real time is approached. Short-term Bilateral Markets come to an end at Gate Closure.

Gate Closure

Gate Closure is set at one hour ahead of the start of the delivery period and is the point where the market participants notify the System Operator of their trading positions. No further trading can occur after this point.

 

Balancing Mechanism

The Balancing Mechanism is operated by National Grid in its role as Great Britain System Operator. The Balancing Mechanism must ensure that supply and demand can be continuously matched in real time.

Within the Balancing Mechanism, participants can choose to increase supply (offers), or decrease demand (bids). As part of the balancing mechanism, the System Operator purchases offers and bids to match supply and demand, and to ensure the system is run within the required operational standards and limits.

As the market approaches the Balancing Stage, market participants provide information as to their net physical flows by 11:00am on the day before the trading interval. This Initial Physical Notification is continuously updated until Gate Closure at which time market participants provide their Final Physical Notifications.

Imbalance Settlement

The electricity markets provide the opportunity for market participants to trade quantities of electricity at agreed prices. However the nature of electricity means that it is highly unlikely that the energy generated or consumed will match the quantities agreed in the markets. Central arrangements are hence required to meter the quantities of electricity produced and consumed by each participant, compare against the traded quantities, and provide financial settlement for the differences.

The financial settlement is a function of the average price of the offers and bids accepted during the Balancing Mechanism. Figure 2.2 shows an example where the metered energy output of a generator exceeds the contracted position [2].

 

Figure 2.2: Energy Imbalance - metered energy exceeds the contracted position

Elexon in their role in support of the Balancing Settlement Code have produced a number of information sheets that describe the operation of various elements of the British Electricity Trading and Transmission Arrangements. The overview of system sell and system buy prices describes the methods by which the cash out prices are arrived at [3].

 

Chapter 3 Power System Economics (Kirschen and Strbac) describes the requirement for a Managed Spot Market [1]. The Electricity Market is influenced by the following characteristics exhibited by the market participants:

Consumers forecast demand and purchase quantities of Electrical Energy to meet this forecast.

Generators schedule production from units for delivery at the time for the energy is sold.

Actual demand is never exactly as forecast.

Generators can be hit by unexpected events that curtail or shut down supply, and additional capacity may not always be brought onto the system in time due to delays in synchronization with the network.

The gaps between supply and demand must be bridged quickly and precisely to maintain the system integrity on a second-by-second basis. This balancing mechanism would be prohibitively expensive to operate on an open market basis and hence there is a requirement for a managed spot market. This managed spot market requires a third party to manage the transactions and its function is to match supply and demand by adjusting production by flexible generators and by curtailing demand of willing consumers.

To encourage efficient behavior, producers and consumers must pay the true cost of the electrical energy that is bought or sold in the spot market to restore the balance between supply and demand. The balancing of supply and demand at short notice requires ancillary services such as load following and frequency response, in addition to the provision of spinning reserve capacity. If the cost of producing these services is included in the spot price, sharp peaks in price will occur. In this situation, to reduce the risk of exposure to these high prices, companies that are forced to buy electricity at these prices will purchase more in the forward market, with the effect of driving up the price in these markets. To prevent this undesirable effect, ancillary services are normally covered by a combination of long term and short term contracts.

Chapter 4 of Power System Economics (Kirschen and Strbac) gives an overview of the benefits that the various market participants derive from the markets [1].

The demand for Electrical Energy exhibits low elasticity and can facilitate exercise of market power by producers. Small consumers have very little incentive to participate in the electricity market, preferring to pay the standard fixed tariff, or to reschedule some of their activities to off-peak periods if they are supplied with dual meters. Retailers of electricity are paid the standard tariff by their customers so they have an incentive to estimate the demand of their customers very closely and purchase energy to meet this demand in the forward market to reduce their exposure to the spot market. This can be difficult in a market where customers are switching operators as it becomes complicated to gather reliable statistical data on consumption that it requires to optimize its demand forecasts.

Generators in general will aim to supply quantities of electricity at which the marginal cost of production matches the price of electricity. However a generator with market power may want to limit or drive down the market price in order to increase or maintain market share, to discourage new entrants, or in response to a fear of an intervention by regulatory authorities. Some generators with a very low marginal cost may want to deliver energy at any cost. In the case of nuclear plants, the cost of shutdowns can be very expensive, and these generators will strive to maintain output at all times. In the case of hydro-electric plants, these generators can adjust production in line with when the price paid for electrical energy will be highest. Generators powered by Renewable sources such as wind and solar, are unpredictable and uncontrollable and will often sell at unfavourable prices. Pumped hydro plants will want to consume electricity at off-peak periods to be in a position to generate during the peak periods. To be economical, the price difference must cover the fact that only 75% of consumed power will be available for generation.

References

1. Daniel S. Kirschen, Goran Strbac, Fundamentals of Power System Economics, Wiley, 2006.

2. National Grid, May 2006, “Market Overview”.

3. Elexon, February 2004, “Overview of the Balancing and Settlement Code (BSC) Arrangements.