Questions in Power Markets - Coursework Example

Q1. A. The present electri trading arrangements in Britain are based on rules as given in the Balancing and Settlement s (BSC). Stakeholdersin the electricity trading include customers, suppliers, generators and non-physical traders like banks. Electricity is traded in real-time after it is generated to fulfil demand needs and to be used in half hour periods, known as Settlement Periods (ELEXON, 2012). Suppliers approximate demand of electricity for the approaching half hour and convey the required load of electricity to the generators. A contract to supply the asked electricity is made an hour before the Settlement Period. This one-hour-in-advance arrangement for the provision of electricity functions as cut-off as after that time, no arrangement can be contracted to supply electricity; it is called as Gate Closure. Generators produce electricity as per the demanded capacity during the contracted half-hour for usage by the suppliers (ELEXON, 2012). Nevertheless, in the real-time of half-hour, possibility exists for suppliers estimating their electricity needs wrongly or failure on the part of generator to generate the settled electricity or a glitch could emerge in the transportation of electricity. It necessitates the actual time management for smooth functioning of the arrangement, which is played by the System Operator, the National Grid (ELEXON, 2012). Those generators having capacity to generate extra electricity other than the half-hour demand of the supplier can do so by making available the additional volume to the System Operator and fix a price they expect for the extra volume. Likewise, a Generator can decrease the volume of electricity generated and can fix a price for decreasing it. Likewise, suppliers not having any shortage of electricity can offer to decrease their demand to facilitate availability of extra electricity to the System Operator and can fix the price they expect for that. On the same length, suppliers can convey to the System Operator their demand for a pre-determined price. Such conversations between the stakeholders in technical terms are called Bids and Offers. An Offer is made to increase electricity generation or decrease demand for it while a Bid is made to decrease generation or increase demand (ELEXON, 2009). The System Operator manages supply and demand in each half an hour in real-time by accepting Bids or Offers conditional to an increase or decrease in electricity generation to fulfil demand. Later, metered volumes are measured for the half hour from Generators and Suppliers to be compared against their pre-determined volumes, which are matched for any Bids or Offers made. In case of any irregularity through over-usage by supplier, it must purchase the additional volume used or the generator also needs to purchase the reduced generation from the Grid to keep its promise to deliver the pre-settled level (ELEXON, 2012). The market for electricity trading has become competitive and focussed as operating through a safe and dependable system by forming near to real time equalising arrangements (OFGEM, 2002). The new arrangement ensures trading of electricity outside the NETA Balancing Mechanism wherein both generators and suppliers participate in bidding. It checks and controls the calculated use of prices. NETA supports only those generators and suppliers who assure satisfactory levels of before-time production or supply. The new arrangement expects elasticity in production/demand in short time from generators and suppliers (Tovey, n.d.). Q2. A. The current market arrangement with regard to prices under NETA is highly volatile, creating imbalances. Giving due consideration to the NETA for creating positive effect on the market, risks pertaining to imbalance mechanism, meant to boost stakeholders’ trading of the units, generated “normally” and additional units to resolve the in-equilibrium of the system, create risks to the generator in case all the units are not sold through the balancing mechanism. Likewise, suppliers also face the risk of not using the asked volume or facing the risk of reduced demand from consumers (Jullien et al., 2002). It can happen under NETA, as seen in the experiments with two discriminatory auctions that given the real-time and singular risk of imbalance, creates incentives for the generator, both to barter the greater chunk of their generation in the bilateral market and not to hike their prices when operating in the competitive equalising market. Generators in the NETA system are levied for any imbalance they separately create in the system and face the competing offers of the suppliers on the demand side both in the spot market and the balancing market. Actually, the generators face the risk of letting the incentives vanish by employing pricing or stocking strategies in the NETA environment. The same holds true for suppliers who face the risk of under-utilisation of the contracted volume of electricity (Jullien et al., 2002). Q3. (a) A. The web page at BM Reports provides information on System Warnings, specifying five types of system-related warnings to all parties. The heading ‘Peak Demand’ tells about two regular streams of demand data from National Demand (ND) and Transmission System Demand (TSD). It also tells about Demand Forecasts of the National Grid, as determined from the past record of metered production output for Great Britain. As they are based on TSD, they include transmission losses, station transformers load, pumped storage demand and interconnector demand. The landing web page provides comprehensive detail including charts, tables and graphs on system prices, demand for the next day and next 14-days and data on various mediums of power generation (BM Reports, 2012). Q3. (b) The information provided daily at the BM Reports can help players in taking intelligent decisions regarding purchase and sale of electricity volumes at competitive rates from the market. Suppliers can purchase power for the short term by getting insight from the data and information provided on the website. They can update their agreements according to the half-hour needs very easily. The information helps in updating the Balancing Mechanism that starts with the Gate Closure (1 hour before real time), in which the National Grid Company (NGC), as System Operator (SO), admits offers of and bids for electricity to achieve equilibrium in the transmission system. It helps in the initiation of the Settlement Process on agreed Balancing Mechanism offers and bids. The system Operator can recoup the cost of equalising the system and levies participants whose agreed standings do not correlate with their metered amounts of electricity (Menezes, 2012). The website information helps all participants in the balancing act, including generators, suppliers, traders, electricity companies and NGC variously such as generators can enter into bilateral agreements for generating more or less power during the generation and trading procedure. The same holds true for supplier for buying more or less power by entering into bilateral agreements irrespective of the customers’ real consumption. Traders also tread on the same lines in the matter of power purchase through the balancing mechanism for electricity companies and traders by making offers to sell and purchase power by increasing production or reducing consumption. It can help participants in presenting bids from the system – “imbalance cash-out” (Menezes, 2012). These ‘imbalance’ or ‘cash-out’ prices are used to determine the variation between agreed production and actual consumption in a given half-hour period (ELEXON, n.d.). Q4. A. The market follows the cash-out regime, which causes unappealing dual balance prices in the high bracket. Others have favoured the dual balance prices for those producers generating electricity away from the agreement, thereby shifting the cost on the system operator. Actually, these costs should be levied to the generators to deter them from producing not-required volumes. Actual cost of it cannot be zero in any case. Assuming this way by adhering to a single cash-out price can not be justified (Hesmondhalgh, 2003). There remains the challenge of bearing market cost, which should be borne by the participants on the other side of the system imbalance, as determined through short-term power trading in the forward and spot market. If a generator produces additional power than stated in the agreement, it should pay the market-attached cost to the system in case there is more than aggregate power relatively to its demand at the closure (Hesmondhalgh, 2003). The present NETA set up provides scope of clashes between generators and retailers. The approval for the changes is taken from the regulator (Ofgem). The market needs to reconcile to the wholesale electricity trading arrangements under NETA as it was previously accustomed to the Pool arrangements (Hesmondhalgh, 2003). Further, benefits for the small generators are shrinking because of additional operational and trading costs to the extent of £100,000 each year on small operators (Ilex Energy Consulting, 2002). Q5. A. The future seems to be full of positive expectations from the new electricity trading settings. Electricity has become commoditised like any other saleable product. The change has been successful in providing actual benefits to the customers and helping power generators and suppliers to cover their risks better. The insight of NETA provides a road map of learning to the power companies and policy planners in view of the future of the wholesale electricity trading arrangements (Hesmondhalgh, 2003). References BM Reports. (2012). ELEXON: NETA. [Online]. Available from: http://www.bmreports.com/bsp/ [Accessed 9 August 2012]. ELEXON. (2009). Electricity trading arrangements: a beginners Guide. [Online]. Available from: http://www.elexon.co.uk [Accessed 9 August 2012]. ELEXON. (2012). Electricity trading arrangements: a beginners Guide. [Online]. Available from: http://www.elexon.co.uk/wp-content/uploads/2012/03/electricity_trading_arrangements_beginners_guide_v2.0.pdf [Accessed 9 August 2012]. ELEXON. (n.d.). Imbalance pricing. [Online]. Available from: http://www.elexon.co.uk/reference/credit-pricing/imbalance-pricing/ [Accessed 9 August 2012]. Hesmondhalgh, S. (2003). Is NETA the blueprint for wholesale electricity trading arrangements of the future? IEEE Transactions on Power Systems, 18 (2), pp. 548-554. Ilex Energy Consulting. (2002). An objective assessment of the impact of NETA on small generators. [Online] Available from: http://www.poyry.co.uk/sites/www.poyry.uk/files/ImpactOfNETAOnCHP.pdf [Accessed 9 August 2012]. Jullien, C., Robin, S., & Staropoli, C. (2002). The re-reform of the England and Wales wholesale electricity market: an experimental investigation of the efficiency of two alternative market designs. [Online]. Available from: http://grenoble-em.academia.edu/CelineJullien/Papers/409175/The_Re-Reform_of_The_England_and_Wales_Wholesale_Electricity_Market_An_Experimental_Investigation_of_the_Efficiency_of_Two_Alternative_Market_Designs Menezes, L.M. (2011-12). Power markets, from SMM 712, Session 5. Available from: Blackboard. OFGEM. (2002). The review of the first year of NETA. OFGEM: A Review Document, 1. [Online] Available from: http://www.ofgem.gov.uk/Markets/ad/Documents1/The%20review%20of%20the%20first%20year%20of%20NETA%20A%20review%20document%20Vol%201.pdf [Accessed 9 August 2012]. Tovey, N.K. (n.d.). The changing face of the electricity markets in the UK. University of East Anglia, UK. [Online]. Available from: www.uea.ac.uk/~e680/cred/neta/NKTovey_Moscow.doc [Accessed 9 August 2012]. Read More