TODAY’S STUDY: POWER MARKETS FOR NEW ENERGY

The subject of power markets is complex. Introducing New Energy makes them far more complex. The study highlighted below is the first in a series about power markets in the EU, where integration of New Energy is more advanced than elsewhere. Step by step, the complex can be clarified.

In this entry, it is established that the best markets are fast, efficient, transparent and allow energy supplies, including New Energy sources, to fluctuate according to price signals. A closer look reveals a trend toward smarter transmission and market systems that allow for more competition between locally priced and traded energy supplies.

This is very good news for New Energy. It turns the previous disadvantage of variability into wide ranging periods of market advantage, such as when present summer peaking afternoon demand matches maximum solar supply and when high night winds will match future demand for the cheapest electric car battery charging.

These periodic market advantages will drive the growth of New Energy capacity and the development of transmission and market infrastructure until future mechanisms eliminate the disadvantages of New Energy variability entirely.

Europe’s Challenge: A Smart Power Market at the Centre of a Smart Grid
Karsten Neuhoff, January 2011 (Climate Policy Initiative)

Executive Summary

The CPI Smart Power Market analysis project, in support of the EU RE-Shaping project, addresses the question of how to achieve an effective power market design that supports the EU’s smart grid goals. The project includes this overview paper, three papers covering congestion management, wind integration, and quantification of the value of various market designs, as well as a Q&A document on the nodal pricing system.

click to enlarge

Key findings

Congestion Management in European Power Networks

By 2020, European member states plan to connect an additional 200 GW of wind and solar power to the transmission system on top of the 110 GW connected before 2010. The new flow patterns (both nationally and internationally) resulting from this connection highlight three weaknesses of the current system for managing congestion:

Inefficiencies within countries. Currently, gaming opportunities and inefficient dispatches occur, because the market does not properly communicate information on the value of generation at different locations.

Inefficiencies between countries. Cross-border transmission is treated separately from domestic dispatches, leading to incomplete information on required demand and generation and increasing system risk.

Inefficiencies in dynamic management. International transmission capacity is usually determined far ahead of real time, which constrains the ability of the EU power system to flexibly deliver power and ancillary services across Europe in response to short-term adjustments in generation and demand.

click to enlarge

With these inefficiencies in mind, we assess current and proposed congestion management approaches according to five criteria. The congestion management approaches applied within and between European countries do not satisfy these criteria. In contrast nodal pricing, a power market design that has become standard across most of the liberalised markets in the US over recent years, addresses all the requirements.

Balancing and Intraday Market Design: Options for Wind Integration
Though wind is a highly unpredictable source of energy, wind forecast uncertainty decreases from 15% to 4% in the last 24 hours before actual generation, and the grid, demand, and most generation assets can be adjusted within this timeframe. We identify six criteria that a power market design needs to satisfy to make full use of the technical flexibility of the system and short-term wind-forecasts. Power markets should:

Facilitate system-wide intraday adjustments to respond to improving wind forecasts;

Allow for the joint provision and adjustment of energy and balancing services;

Manage the joint provision of power across multiple hours;

Capture benefits from international integration of the power system;

Integrate demand side into intraday and balancing markets; and

Effectively monitor market power.

None of the power market designs applied across European countries meets all six criteria. Only a regime based on nodal pricing can address these requirements, support wind- integration at minimum system cost and allow for part-load operation of fossil power stations.

click to enlarge

Renewable Electric Energy Integration: Quantifying the Value of Design of Markets for International Transmission Capacity

Using the ENTSO-E database and three large-scale models for the European power system, the performance of a nodal pricing system is compared to an optimised zonal pricing approach which is an extension of systems currently in place in the EU:

The nodal pricing approach leads to an increase of up to 34% in international transfers between countries, depending on wind power penetration. This means that the existing network capacity can accommodate increasingly large volumes of intermittent energy sources.

Annual savings on system marginal costs under a nodal pricing structure range from €0.8 - €2.0 billion depending on the penetration of wind power, representing an average of 1.1% - 3.6% of operational costs, which is in line with empirical values from the USA.

Weighted marginal prices are cheaper under a nodal pricing regime in 60% to 75% of EU countries.

click to enlarge

Conclusion

Economists have frequently focused their analysis of power markets on day-ahead and long-term markets. Yet like some economists' advice to deregulate financial markets, analysis restricted to a narrow view of the whole system can easily result in misleading recommendations. When considering the broader goal of transition to a low-carbon power system, an integrated power market with locational marginal pricing is superior to the existing European model and to improvements such as market coupling and the incorporation of international loop flows, because it:

Shares information to enhance system stability;

Provides transparent information for the monitoring of and response to market power;

Makes efficient use of network by reducing system operation cost;

Makes efficient use of network by reducing network expansion requirements;

Makes efficient use of network by facilitating additional connection of renewables to the network; and

Creates transparent price signals to inform investment choices.

Ultimately, the benefits to various actors of a transition to an integrated power market system outweigh the disadvantages. Given the likely reluctance of various actors, however, this transition will require strong European leadership.