Market Design of an Energy Exchange:The case of Greece

1 Aristotle University of Thessaloniki, Department of Economics, Thessaloniki, Greece.

2 ESCP Europe Business School, Department of Finance, London, UK.

Filippos Ioannidis1, Kyriaki Kosmidou1, Kostas Andriosopoulos2, Georgia Makridou2

3rd AIEE Energy Symposium

Current and Future Challenges to Energy Security

December 10-12, 2018 - Bocconi University

Contents

1. Introduction

2. Literature Review

2.1 Power Exchanges

2.2 Market Design

2.3 Integration

3. The case of Greece

3.1 Recent Developments

3.2 Day-Ahead Market

3.3 Intraday Market

3.4 Forward Market

4. Conclusions

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• Objective: to investigate previous studies on the field of PXs, their market design and integration

• Secondly, the study presents the latest developments in the Greek energy sector, accompanied bythe formation of the three new markets that are going to be formed, during the next period (Day-ahead, Intraday and Forward)

• Since, the concept of market design fundamentals in Hellenic Energy Exchange is poorly investigatedby prior research…

• This paper discuss concepts such as market design and market structure, bidding system modelling,auction and order types of the imminent Power Exchange.

Literature Review Hellenic Energy Exchange

Power Exchange

Market Design

Integration

Day-Ahead

Intraday

Forward

Introduction(1/4)

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Introduction(2/4)

Given the ongoing couplingamong separate regions inEurope, in the next years weare likely to witness asignificant integration amongenergy markets.

Driven by the liberalization of theenergy market launched in the1990s, the EU through the ThirdEnergy Package seeks to unify theinternal market and achieve priceconvergence with all Europeaneconomies.

Most EU countries have successfullyinstituted PXs, through which cross-border transactions are conducted in atransparent and reliable manner,ensuring greater liquidity in the energymarket, and at the same time providinga competitive environment for thebenefit of the final consumers.

1990 2015 2030

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Introduction(3/4)

Currently, electronic auctions areconducted daily, where energyproducts such as electricity,natural gas, CO2 emissions andgreen certificates are traded inPXs all over Europe.

The major PXs in Europe, are thefollowing: Nordpool in Scandinavia,EPEX SPOT in Central Europe, EEX inGermany and OMIE in Spain andPortugal.

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Introduction(4/4)

In Greece the frameworkin energy market shapedradically in February of2017, when the MarketOperator (LAGIE) andAthens Stock Exchange(ATHEX), signed amemorandum ofcooperation, aiming toestablish the HellenicEnergy Exchange (HEE).

Mandatory Pool

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The design towardsthe development ofa single energymarket in Europe, isexplicitly directedby the EU throughvarious Directivesand Regulations

• Regulation (EC) 713/2009

• Directive2009/72/EC

• Regulation (EC)1227/2011

Regulation

(EC) 2015/1222

Regulation(EC) 1348/2014

Directive2014/65/EC

Literature Review(1/4) Power Exchanges

Morey, M., 2001. Power Market Auction Design: Rules and Lessons in Market Based Control for the New Electricity Industry. Prep. Edison Electr. Inst. 1–96.

Muermann, A., Shore, S.H., 2005. Spot market power and future market trading. Risk Manag. 1–36.

Kirschen and Strbac, 2004. Fundamentals of Power System Economics. John Wiley & Sons.

Stoft, S., 2002. Power System Economics: Designing Markets for Electricity. John Wiley & Sons.

Harris, C., 2013. Electricity Markets: Pricing, Structures and Economics, Electricity Markets: Pricing, Structures and Economics.

Mastro, M., 2013. Financial Derivative and Energy Market Valuation: Theory and Implementation in Matlab, John Wiley & Sons, INC.

Tesfatsion, L., 2009. Auction basics for wholesale power markets: Objectives and pricing rules. 2009 IEEE Power Energy Soc. Gen. Meet. PES ’09 1–9.

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Literature Review(2/4) Market Design

Biggar, D.R., Hesamzadeh, M.R., 2014. The Economics of Electricity Markets, IEEE Press Wiley.

Newbery, D., Strbac, G., Viehoff, I., 2016. The benefits of integrating European electricity markets. Energy Policy 94, 253–263.

Twomey, P., Green, R., Neuhoff, K., Newbery, D., 2005. A Review of the Monitoring of Market Power. Energy Lit. 11, 3–54.

Wilson, R., 2002. Architecture of Power Markets. Econometrica 70, 1299–1340.

Che, Y.-K., 1993. Design Competition Through Multidimensional Auctions. RAND J. Econ. 24, 668–680.

Ringler, P., Keles, D., Fichtner, W., 2017. How to benefit from a common European electricity market design. Energy Policy 101, 629–643.

Hogan, W.W., 2016. Virtual bidding and electricity market design. Electr. J. 29, 33–47.

Müsgens, F., Ockenfels, A., Peek, M., 2014. Economics and design of balancing power markets in Germany. Int. J. Electr. Power Energy Syst. 55, 392–401.

Ocker, F., Braun, S., Will, C., 2016. Design of European balancing power markets. Int. Conf. Eur. Energy Mark. EEM 2016–July.

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Sakellaris, K., 2011. SEE Regional Wholesale Market Design: Recommendations, Available Options and Implementation, in: European Energy Market.

Ringler, P., Keles, D., Fichtner, W., 2017. How to benefit from a common European electricity market design. Energy Policy 101, 629–643.

Green, R., 2001. Markets for Electricity in Europe. Oxford Rev. Econ. Policy 17, 329-345.

Jamasb, T., Pollitt, M., 2005. Electricity market reform in the European Union: review of progress towards liberalization and integration, Centre for Energy and Environmental Policy Research.

Beus, M., Pavić, I., Štritof, I., Capuder, T., Pandžić, H., 2018. Electricity Market Design in Croatia within the European Electricity Market—Recommendations for Further Development. Energies 11, 346

Biskas, P.N., Marneris, I.G., Chatzigiannis, D.I., Roumkos, C.G., Bakirtzis, A.G., Papalexopoulos, A., 2017. High-level design for the compliance of the Greek wholesale electricity market with the Target Model provisions in Europe. Electr. Power Syst. Res. 152, 323–341.

Literature Review(3/4) Integration

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Madlener, R., Kaufmann, M., 2002. Power exchange spot market trading in Europe: theoretical consideration and empirical evidence.

Flatabø, N., Doorman, G., Grande, O.S., Randen, H., Wangensteen, I., 2003. Experience with the Nord pool design and implementation. IEEE Trans. Power Syst. 18, 541–547.

Bichpuriya, Y.K., S. A. Soman, 2010. Electric Power Exchanges: A Review, 16th National Power Systems Conference.

Weber, C., 2010. Adequate intraday market design to enable the integration of wind energy into the European power systems. Energy Policy 38, 3155–3163.

Newbery, D.M., 1995. Power Markets and Market Power. Energy J. Volume16, 39–66.

Tanrisever, F., Derinkuyu, K., Jongen, G., 2015. Organization and functioning of liberalized electricity markets: An overview of the Dutch market. Renew. Sustain.Energy Rev. 51, 1363–1374

Literature Review(4/4) Country-Specific

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• Over the previous period, Greece has introducednumerous stages towards the liberalization andderegulation of wholesale electricity market

• The transition to the Target Market imposes theestablishment of a PX, accompanied with Day-Ahead, Intraday, Balancing and Forward markets

Commercial40%

Residential33%

Industrial24%

[ΟΝΟΜΑ ΚΑΤΗΓΟΡΙΑΣ] [ΠΟΣΟΣΤΟ]

CONSUMPTION ALLOCATION

coal

natural gas

hydro

oil

wind

solarbiofuels

and waste

ELECTRICITY GENERATION MIX

The case of Greece(1/2)

• Based on the latest available data providedby the International Energy Agency (2017),total electricity consumption in Greece isestimated to be 52.4 TWh, while totalelectricity generation is about 48.9 TWh

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• The electricity sector value chain is dominated by the vertically integrated state-owned electricitycompany Public Power Corporation (PPC)

• Consequently, PPC accounts for 75% of thermal electricity generation and for about 79% of the installedthermal generation capacity

• PPC’s share in the Day-Ahead market, which includes imports, hydro, and RES, was 53% in 2016

• PPC’s share in the retail market is currently 78% (88% 2017), although 17 suppliers are active in themarket, with the second-largest alternative supplier, reaching the level 5.1% (2.9% 2017) of totalmarket’s share

• However, as part of the economic adjustment program, the share of PPC is about to decrease to 50% bythe end of 2019, meaning that, radical changes are about to occur on the electricity sector

The case of Greece(2/2)

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Introduced Markets Structure (1/5)

HEE permits participants to submit different orders for the supply and demand of electricity fordifferent production levels and time intervals, and at the same time keeps a record of all OTC contracts.

In that context, HEE is assigned with various liabilities such as

i. the daily operation of the markets

ii. the smooth function and maintenance of the transaction system

iii. support the settlement of physical delivery

iv. retain statistics and comparative data

v. supervise the wholesale market and finally

vi. cooperate with the national TSO and Clearing House

Regarding the basic characteristics of the introduced PX, standardization, transparency, low transactioncost and elimination of counterparty risk are some of the features accompanied with its function.

In contrast to the existing mandatory pool, the new PX is anticipated to provide a fair, secure andregular transaction process.

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Introduced Markets Structure(2/5)

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• PX’s operation and OTC contracts function in acomplementary way, numerous of differencesexist between them.

• Namely, the dynamic two-sided OTC contractsare available only to a limited number ofparticipants, and since their supervision andregulation is problematic, both participantsencounter high levels of counterparty risk

• On the other side, the existence of a ClearingHouse in the function of HEE, eliminates anychances of counterparty risk

• Yet, the interaction of prices on the twomarkets is highly correlated, since the pricesformed in any PX function as a benchmark orreference price for the prices shaped in thecorresponding OTC market

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Introduced Markets Structure(3/5)

• Definition: A PX is competitive wholesaletrading facility, designed for energycommodities. Its is a central electronicauction platform, that stands amongst buyersand sellers.

• Market place where different forms of energyand energy-based financial products aretraded based on standardized characteristics,quality and transaction terms.

• The foremost role: to match the supply anddemand (to determine a public market-clearing price).

• Electricity is considered as the core market,since the rest of energy products enter theplatform, after the market reaches a certainlevel of development.

Introduced Markets Structure(4/5)

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Introduced Markets Structure(5/5)

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• The Clearing House is a legal entity that is planned to be established followed by the formation of HEE,and undertakes the responsibilities of clearing, settlement and transaction coverage

• Given that participants are required to maintain margin accounts, Clearing House is interposed amongcounterparties to guarantee financial reliability

• It adopts the role of buyer vis-à-vis each seller and seller vis-à-vis each buyer. The foremost responsibilityof a Clearing House is to keep a record and archive all transactions

• According to EMIR, the Clearing House manages the settlement fund, which covers the likelihood ofdefault of any market participant

• From this perspective, HEE is expected to act as a central risk-taking and risk-management platform forall market participants, enabling them to diversify their variable costs and pricing policy

The Markets

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Registered participants are obliged topay fees for the trading servicesprovided by the HEE. The overall feescomprise the following components:

a) Annual fee, separately for eachmarket (Day-Ahead, Intraday andForward). This componentrepresents the cost of tradingservices for the participation in themarkets, and it is a fixed amount peryear

b) Membership fee which is separatefor all markets

c) Transactions fee, for each MWhtraded, both bought and sold, byeach registered participant

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• The Forward market refers to agreements between two participants for buying or selling a specificquantity of electricity at a specific price, on a specified future date.

• The elements included in such a contract are standardized and comprise of:

The underlying title

The delivery date

The contract size

• The settlement price of the Forward contracts is not recorded in the transaction system.

• The products available in the Forward market are timely separated into:

Base (24 hours),

Peak (8:00-20:00)

Off-peak (20:00-8:00)

Monthly contract Peak: [31 days*12 hours=372 MWh]

Quarterly Base contract: [31 days*3 months*24 hours=1584 MWh]

Forward Market(1/3)

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A supplier participating in the Forward market may pre-determine "today" the price and the agreedquantity that it is required to deliver according to the agreed contract, which in terms of the HEE function,are designed to be:

Monthly standardized contracts

Quarterly standardized contracts

Yearly standardized contracts

Forward Market(2/3)

Execution and time requirements:

Good for Day

Good till Canceled

Good till date

Immediate or Cancel

Fill or Kill, All or None

Stop Order

Forward electricity contracts, will be traded in a Continuous Transaction, while the trading hours will last from 10:30 EET to 15:30 EET on each trading day.

The types of orders

Market Order

Limit Order

Linked Order

Iceberg Order

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• The Forward market structure involves the registration of bilateral OTCcontracts with physical delivery obligation, at HEE’s platform

• In case of bilateral trading, all Forward contract specifications included in abilateral OTC contract are at the sole discretion of the two participantsinvolved, apart from those affected by power mitigation rules, as decided byRAE

• Standard year contracts and standard quarter contracts are designed to befurther fragmented through the cascading mechanism

• Standard year contracts cascade into corresponding standard quartercontracts, spanning the same delivery period as the standard year contract,on the expiry day.

• Standard quarter contracts cascade into corresponding standard monthcontracts.

• However, standard month contracts are not subject to any further splitting

• The price of the cascaded contracts equals the final settlement price of theoriginal contract on its expiry day.

Year Contract

Quart

er

Month

ly

Forward Market(3/3)

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Day-Ahead Market• Day-Ahead market refers to wholesale transactions in each D-1 calendar day, where

electricity supply contracts are auctioned for each market time unit (1 hour) of physical delivery in day D

• The delivery day (D) consists of twenty-four purchased time units, starting at 01:00 Easter Europe Time (EET) on calendar day D and ending at 01:00 EET on the next calendar day D+1

Orders of Buy or Sell

Matching Checking of Capital Requirements and

Confirming Availability

Auction Outcome

Confirmation PlanningSimple Linear

Linear piecewise Orders

Block Orders

Gate opening is at 10:30 (D-1) andlast for 150 minutes, since Gateclosure time is at 13:00 (D-1)

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Intraday market concerns wholesale trading on each calendar day D, where contracts are traded in:

Local Intraday Auctions (1-hour, 24 market time units) Complementary Intraday Auctions (1-hour, 24 market time units) Continuous Intraday Trading (30 minutes, 48 market time units)

Each market time unit of the physical delivery in day D starts at 01:00 EET on calendar D and ends at 01:00 EET on the next calendar day D+1.

Intraday Market(1/3)

• According to RAE’s Decision 67/2017, the implementation ofthe Intraday market in HEE will take place in two phases

• During the first phase, three Local Intraday Auctions will beimplemented within Greece, according to the number andtiming of the corresponding Local and ComplementaryRegional Intraday Auctions of the second phase

• The design of the Greek Intraday market will be adapted toimplement pan-European Continuous Intraday Tradingthrough the already agreed Intraday solution, incombination with one Local Intraday Auction and twoSupplementary Regional Intraday Auctions

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Intraday Market(2/3)

Type of Orders Hourly Orders Half-hourly Orders Predefined Block Orders User Defined Block Orders Limit Orders Linked Orders Iceberg Orders

Order Execution Restrictions None Fill or Kill Immediate or Cancel All or Nothing:

Validity restrictions: Good for session Good till date

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Intraday Market(3/3)

• Continuous Intraday Trading, is the procedureallowing transactions in which orders may beexecuted as soon as they are placed in theframe of the Intraday market

• The single intraday coupling is based on acontinuous matching process of sell orders andbuy orders

• The orders with the highest buying price andthe lowest selling price get served first, givenalso that the Cross Zonal Capacity constraintsare respected in case the orders are submittedin separate Bidding Zones

• The price limit of the sell order must be equalto or below that of the buy order, namely theintersection of the two order execution rangesmay not be empty

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Conclusions(1/2)This study outlined the theoretical perspective of a Power Exchange, which was separated intothree discrete subjects.

(i) the broad concept of PXs

(ii) their market design

(iii) their imminent integration towards a single European energy market.

Next, driven by the formation of HEE, the second objective of this paper was to outline its marketdesign and structure.

We examined concepts such as:

• bidding system modelling

• auction mechanisms

• order types

Additionally, we provide a comprehensive overview of the recent developments in the Greekwholesale market structure, accompanied by a careful investigation in terms of Day-Ahead,Intraday and Forward markets function

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Conclusions(2/2)

• The HEE is anticipated to act as a central risk-taking and risk-management platform for allmarket participants (encourage competition, guarantee transparency and enhanceliquidity)

• This study will be of interest to policy makers and regulators, as understanding themechanism of PXs is essential for the development of appropriate policies and could assistthe further integration of the internal European energy market (South-Eastern Europeanelectricity markets)

• Future research on this topic should be directed towards the incorporation of other energycommodities, such as the natural gas, into the Hellenic Energy Exchange, and towards theempirical investigation of the potential advantages that are expected to emerge fromregional market coupling

3rd AIEE Energy Symposium

Current and Future Challenges to Energy Security

December 10-12, 2018 - Bocconi University

Thank you for your attention!!!