Evaluating the Economic Impact of Tertiary Reserve Exchanges Between Iberian TSO: Essay on European Energy Market Integration

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FACULDADE DE

ENGENHARIA DA

UNIVERSIDADE DO

PORTO

Evaluating the economic impact of

tertiary reserve exchanges between

Iberian TSO: Essay on European

Energy Market Integration

Manuel Fernando Moreira de Sá Cruz

Mestrado Integrado em Engenharia Eletrotécnica e de Computadores Supervisor: Prof. Doutor João Paulo da Silva Catalão

Second Supervisor: Engenheiro Pedro Miguel Simões Frade

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Resumo

Durante as últimas décadas, a União Europeia tem adotado inúmeras medidas para atingir os seus objetivos ambiciosos de garantir uma economia totalmente descarbonizada até 2050. Um dos prin-cipais focos deste processo tem sido fomentar a continuação do crescente investimento em fontes de energia renováveis (FER) pelos vários países Europeus. As FER acrescentam variabilidade no sistema elétrico, afetando o balanco contínuo da geração e consumo, logo, se não for endereçada de forma correta, esta variabilidade resultará no aumento dos custos de sistema e traduzir-se-á em preços mais elevados de energia para o consumidor final. O bem-estar social, a proteção ao consumidor e a pobreza energética são, também, tópicos altamente priorizados pela Comissão Europeia (CE), pelo que, nenhuma reforma de alto nível poderá acontecer na EU sem que seja completamente avaliado o seu impacto socioeconómico.

Entre outras, a cooperação entre Operadores de Sistema de Transmissão (TSO) Europeus, nomeadamente, a harmonização de mercados de regulação utilizando infraestruturas de trans-missão para trocas transfronteiriças de energia de regulação, pode ser uma das ferramentas mais importantes para combater a variabilidade da produção e consumo. Na última década, a Rede Europeia de Operadores de Sistema de Transmissão (ENTSO-E) tem sido responsável por im-pulsionar vários projetos de cooperação entre diferentes regiões na EU de maneira a analisar os seus benefícios e a exequibilidade da sua implementação alargada na Europa, utilizando o sistema interconectado de transmissão de energia Europeu. Um desses projetos é o Balancing Inter TSO (BALIT), que permite a troca de reserva terciária de energia entre países que partilham fronteira física.

O propósito desta tese é analisar especificamente, de um ponto de vista Português, a rentabil-idade do BALIT entre TSOs Ibéricos, a posteriori da sua implementação em junho de 2014. As trocas de energia terciária, afetam as quantidades e preços da energia mobilizada, tanto a subir como a descer, internamente. Consequentemente, este trabalho visa retratar fielmente o impacto do BALIT no mercado interno de energia terciária, de forma a estimar os lucros resultantes da sua implementação. Para o propósito, a informação providenciada publicamente pelo TSO Português (REN) foi analisada de maneira a identificar períodos em que ocorreram trocas de reserva entre Portugal e Espanha, e comparar os custos registados relativos à mobilização de energia terciária mobilizada internamente, com os custos equivalentes, num cenário em que o BALIT não tivesse sido implementado. Por outras palavras, um cenário no qual todas as necessidades de energia de reserva terciária tivessem sido supridas unicamente pela energia de produtores portugueses.

É esperado que os preços da reserva terciaria importada tenham sido significativamente in-feriores aos preços internos das ofertas terciárias de energia a subir e que os preços da reserva terciária exportada tenham sido superiores aos preços internos das ofertas de energia terciária a descer. Além disso, é esperado que a importação de energia terciária não tenha resultado num aumento significativo da reserva terciária a descer mobilizada internamente durante o período em questão e que, da mesma maneira, a exportação de energia não tenha aumentado significativa-mente a mobilização interna de reserva terciária a subir. Estas premissas são fundamentais para

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que estas trocas produzam reduções significativas nos custos de regulação do sistema relativos à procuração e ativação de energia terciária.

A estimação dos lucros foi automatizada com recurso ao MATLAB para processar a quanti-dade extensiva de dados registada durante os primeiros 3 anos da implementação do projeto (2015 a 2017), reunir a informação necessária e calcular os lucros de cada troca registada. Os resultados são analisados em diferentes escalas de tempo com o intuito de identificar os períodos mais lucra-tivos e formular hipóteses acerca dos diferentes fatores que impactaram o retorno das importações e exportações, enquanto é analisado o progresso do BALIT durante os anos em questão. No geral, os resultados apresentam um sucesso significativo desta implementação. As trocas na plataforma BALIT resultaram num lucro superior a 9 milhões de euros, composto por redução nos custos de regulação do sistema e na monetização de produção excedente de energia. As importações repre-sentaram 76% das transações, 84% dos lucros e permitiram uma redução média de 40% da energia terciária a subir mobilizada internamente.

Adicionalmente à rentabilidade do BALIT, este trabalho expande o seu estudo de trocas trans-fronteiriças de energia de regulação, analisando a rentabilidade hipotética de expandir as suas trocas de reserva terciária à França. Esta estimação foi obtida, analisando as ofertas de troca de reserva terciária submetidas pelo TSO Francês (RTE) durante os mesmos períodos (2015 a 2017) e identificando períodos em que estas trocas poderiam ter originado lucros adicionais resultantes da troca com a RTE. A informação relativa aos períodos identificados foi adicionada ao processo de estimação previamente mencionada, resultando no calculo da sua rentabilidade adicional para o sistema Português. A adição das ofertas francesas para o rol de ofertas de terciária resultou em 2 milhões de euros adicionais, 20% de aumento dos lucros.

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Abstract

During the last decades, the European Union (EU) has been adopting innumerous measures to achieve its ambitious goal towards a total decarbonized economy in 2050. One of the main focus of this quest has been fomenting the ongoing and increasing investment in renewable energy sources (RES) by the various European countries. RES add variability in the electric system, affecting the continuous balance of generation and demand, therefore, if not addressed correctly, this variability will increase system costs and translate in higher energy prices for the end consumer. Social well-being, consumer protection and energy poverty are also highly prioritized topics by the European Commission (EC) in the sense that no major reforms exist within the EU without their socio-economic impact being thoroughly evaluated.

Among others, the cooperation between European Transmission System Operators (TSO), namely, the harmonization of balancing markets and mechanisms utilizing transmission infrastruc-tures for cross border balancing, might be one of the most important tools in addressing load and generation variability. Over the past decade, the European Network of Transmission System Op-erators (ENTSO-E) has been responsible for jumpstarting several balancing cooperation projects within different EU regions so as to analyze their benefits and the feasibility of their EU-wide implementation utilizing the interconnected European transmission grid. One of such projects is the Balancing Inter-TSO (BALIT), which allows the exchange of tertiary energy reserves between bordering countries.

The purpose of this thesis is to specifically analyze, from a Portuguese point of view, the profitability of BALIT between Iberian TSOs, a posteriori of its implementation in June of 2014. Tertiary reserve exchanges affect the quantities and prices of upward and downward tertiary re-serve mobilized internally. Hence, this work aims to faithfully portray the impact of BALIT in the internal Portuguese tertiary energy market to estimate the profits resulting from its implementa-tion. For that purpose, the publicly available data, provided by the Portuguese TSO, was analyzed in order to identify periods during which reserve exchanges occurred between Portugal and Spain, and compare the registered costs of internal tertiary energy mobilization, with the equivalent costs under a scenario in which BALIT had not occurred. In other words, a scenario in which all tertiary reserve needs are supplied using only the Portuguese energy suppliers’ offers.

It is expected that the prices of tertiary reserve imports were significantly lower than the in-ternal tertiary upward reserve bids and prices of tertiary reserve exports were significantly higher than tertiary downward reserve bids. Furthermore, it is expected that the importation of energy has not significantly increased downward activated energy during the delivery period, and, likewise, that the exportation of energy has not resulted in significant increases in upward energy activated internally. These premises are fundamental for these exchanges to produce a significant drop in the system balancing costs related to procurement and activation of tertiary energy.

The estimation of the profits was automated utilizing MATLAB to process the extensive amounts of data registered during the first 3 full years of the project’s implementation (2015 to 2017), gather the needed information and ultimately compute the profitability of each exchange.

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The results are analyzed in different time spans with the aim of identifying the most lucrative periods and hypothesizing the different factors impacting the cost-effectiveness of imports and exports, whilst also analyzing the progression of BALIT during the years in question. Overall, the results display a significant success of this implementation. Exchanging in the BALIT platform resulted in overe9 million profit, comprised of the reduction in system balancing costs and mon-etization of surplus generation. Imports accounted for 76% of transactions, 84% of profits and allowed for an average reduction of 40% of internally mobilized tertiary energy.

In addition to the profitability of BALIT, this work expands its study of cross border balancing by analyzing the hypothetic profits resulting from broadening its tertiary reserve exchange system to France. The estimation was obtained, analyzing the cross-border tertiary energy exchange of-fers submitted by the French TSO (RTE) during those same periods (2015 to 2017) and tracking periods during which added profits would result from exchanging with RTE. The information re-garding those identified periods was added to the aforementioned computation of profits, resulting in additional profits for the Portuguese system. The addition of the French bids to the pool of tertiary reserve exchange offers resulted in upwards of an additionale2 million, a 20% increase in profits.

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Acknowledgments

Firstly, I would like to thank my supervisor Professor João Catalão and co-supervisor Engineer Pedro Frade for providing such an interesting subject, for their help and most of all incentive. I am grateful to all my friends and especially gratefull for all the friendships I aquired during my journey at FEUP. I would also like to thank and express my love to my Sister and Grandmother for their support, company and afection. Most of all, Mother and Father, to whom I dedicate this thesis, I would like to express my profound love, admiration and gratitude for all your efforts, for teaching me the value of hard and earnest work and for all the unconditional love.

Manuel Cruz

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“What is your friend: the things you know, or the things you don’t know. First of all, there’s a lot more things you don’t know. And second, the things you don’t know is the birthplace of all your new knowledge! So if you make the things you don’t know your friend, rather than the things you know, well then you’re always on a quest in a sense. You’re always looking for new information in the off chance that somebody who doesn’t agree with you will tell you something you couldn’t have figured out on your own! It’s a completely different way of looking at the world. It’s the antithesis of opinionated.”

Jordan B. Peterson

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4 Results and Discussions 47 4.1 Hourly Analysis . . . 47 4.1.1 Portuguese imports . . . 47 4.1.2 Portuguese exports . . . 49 4.2 Daily Analysis . . . 50 4.2.1 Portuguese imports . . . 50 4.2.2 Portuguese exports . . . 52 4.3 Trimestral Analysis . . . 54 4.3.1 Portuguese imports . . . 54 4.3.2 Portuguese exports . . . 56 4.4 Yearly Analysis . . . 56 4.4.1 Portuguese imports . . . 56 4.4.2 Portuguese exports . . . 58

4.5 Cross border balancing potential with France . . . 60

4.5.1 Portuguese imports . . . 60

4.5.2 Estimation of profits . . . 61

5 Conclusion and future work 63 5.1 Conclusion . . . 63

5.2 Future work . . . 64

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List of Figures

3.1 Effects of import on tertiary reserve. Favourable case. . . 38

3.2 Effects of import on tertiary reserve. Optimal case. . . 39

3.3 Effects of import on tertiary reserve. Unknown case. . . 39

3.4 Effects of export on tertiary reserve. Favourable case. . . 40

3.5 Effects of export on tertiary reserve. Unknown case. . . 41

4.1 Imports per market hour. Percentage of total imports possible. . . 47

4.2 Total profit per hour. . . 48

4.3 Profit per MW imported for each hour. . . 48

4.4 Exports per market hour. Percentage of total exports possible. . . 49

4.5 Profit per MW exported for each hour. . . 49

4.6 % of days and % of periods in which imports ocurred. . . 51

4.7 Average MW imported quantity per week day. . . 51

4.8 Average profit per MW imported. . . 52

4.9 % of days and % of periods in which exports ocurred. . . 52

4.10 % of days and % of periods in which exports ocurred. . . 53

4.11 Total number of imports per trimester. Percentage of total possible periods . . . . 54

4.12 Total profits per trimester. . . 55

4.13 Total exports per trimester. Percentage of total possible export periods. . . 56

4.14 Total, yearly, import quantities (f1) and profits (f2). . . 57

4.15 Total number of exports per year. Total profits per year. . . 58

4.16 Yearly average profit per MW exported. . . 59

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List of Tables

2.1 Intraday Sessions schedule . . . 13

2.2 Average spot (last intraday session) prices and tertiary reserve prices . . . 17

2.3 Percentage of day ahead market splitting. Number of market splitting periods with lower price. . . 23

2.4 Percentage of last intraday session market splitting. Number of market splitting periods with lower price. . . 23

2.5 Day ahead and last intra day session prices. . . 24

4.1 Tertiary reserve price and quantity variation from exports. . . 53

4.2 Spot, import and tertiary upwards reserve price comparison. . . 55

4.3 Yearly import profit and quantity. . . 57

4.4 Variation in upwards and downwards reserve activated internaly. . . 57

4.5 Import price and variation in tertiary reserve prices. . . 58

4.6 Total export quantity and quantity per export. . . 59

4.7 Decrease of downward reserve activation. . . 59

4.8 Average export price, total increase in upward reserve activation, average upward reserve price and estimated average increase in upward reserve price. . . 60

4.9 Number of identified French bids. . . 61

4.10 Yearly profits with French bids included. . . 62

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Abbreviation and Symbols

BALIT Balancing Inter-TSO CE Comissão Europeia CM Cost of Mobilization CZC Cross Zonal Capacity

D Day

D-1 Previous day

DSO Distribution System Operator EC European Commission ELFO++TM Electricity Forecasting Tool

ENTSO-E European Network of Transmission System Operators ERSE Entidade Reguladora dos Serviços Energéticos

EUPHEMIA Pan-European Hybrid Electricity Market Integration Algorithm FCR Frequency Containment Reserve

FER Fontes de Energia Renováveis FRR Frequency Restoration Reserve

h Hour

h-1 Previous hour

HVDC High Voltage Direct Current

IGCC International Grid Control Cooperation K Plant outages

L Load

LFC Load-Frequency Control LL Lower Limit

MIBEL Mercado Ibérico de Electricidade MRC Multi Region Coupling

NG Number of Groups NPD New Price of Downwards NPU New Price of Upwards

NQND New Quantity of Needed Downwards NQNU New Quantity of Needed Upwards OMI Operador de Mercado Ibérico PB Primary Band

PCM Potential Cost of Mobilization PD Price of Downwards

PDBF Plano Diário Base de Funcionamento PDVP Plano Diário Viável Provisório PQE Price of Quantity of Export

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xvi ABBREVIATION AND SYMBOLS

PQI Price of Quantity of Import PTU Program Time Unit

PU Price of Upwards QD Quantity Downwards QE Quantity of Export QI Quantity of Import

QME Quantity of Mobilized Energy QND Quantity of Needed Downwards QNU Quantity of Needed Upwards QU Quantity Upwards

R Necessity of capacity adjustment REE Red Eléctrica de España

REN Redes Energéticas Nacionais RES Renewable Energy Sources ROCOF Rate of Change of Frequency RR Regulation Reserve

RTE Réseau de Transport d’Électricité RUQ Remaining Upward Quantity SB Secondary Band

SCADA Supervisory Control and Data Aquisition SEN Sistema Eléctrico Nacional

SP Spot Price

TEM Target Electricity Model

TERRE Trans European Replacement Reserves Exchange TSO Transmission System Operator

UL Upper Limit VE Value of Export VI Value of Import W Wind production XBID Cross Border Intra Day

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Chapter 1

Introduction

The present chapter is intended to provide the reader the motivation for the thesis at hand. It will provide an overview on the background and purpose along with the dissertation structure. Furthermore, a brief discription of the methodology used is presented and shall be expanded upon in a latter chapter.

1.1 Background

As our civilization progresses, electricity becomes a more precious commodity, increasingly play-ing a fundamental part on our lives. With the ongoplay-ing population growth and technological ad-vancement, the provision of affordable energy is becoming more and more a worldwide concern. Additionally, our industry’s excessive dependency on fossil fuels and the impact they have on climate change bring forth the growing need for renewable and environmentally friendly energy sources, to ensure our longevity as a species and the longevity of our world. In Europe, the Euro-pean Commission (EC) has imposed ambitious target on the share renewable energy sources have on overall energy generation for 2020, 2030 and 2050 [1,2,3].

Design, implementation, maintenance and upgrade of electric power systems are very complex and expensive processes that should be optimized whenever possible. The cost derived from these processes directly affects the end consumer, therefore, the entities responsible for the electric system are heavily regulated and expected to minimize expenses while providing energy.

One of the main challenges of an electric system is ensuring at all times the security and reli-ability of supply. It is of the utmost importance to balance generation and consumption to ensure that the consumer needs are met at all times and the system operates properly. Difficulty in balanc-ing arises from various aspects: the variability and unpredictability of load, failure or malfunction of grid components, technical limits of components, congestions and variability of Renewable En-ergy Sources (RES) generation. The Transmission System Operator (TSO), responsible for the global system management in an electric system, is the entity responsible (amongst other things) for maintaining the aforementioned balance and for that purpose has at its disposal a variety of

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2 Introduction

mechanisms mostly comprised of different types of energy reserves. Those mechanisms are of-ten called balancing reserves or ancillary services and ever since the decentralization of regional electricity markets, imposed by the EU, these reserves must be procured in unmonopolized and transparent markets.

RES, introduce several technical challenges to the grid such as voltage surges and uncertainty of generation. In fact, energy sources such as wind and solar, are entirely dependent on meteo-rological phenomena, the behavior of which appears to be quite impossible to predict with total accuracy. Hence, with the growing penetration of RES, most European electrical systems which relied for the most part on controllable and predictable energy sources, have seen the variability of their generation increase, possibly leading to more frequent and greater imbalances.

In turn, the increase in system instability results in a greater need of balancing reserves, by nature more expensive than the energy commercialized in normal markets and calls for a panoply of actions to keep management costs down, such as, restructuring the grid, changing protocols, re-forming markets, developing newer technologies (such as smart grids and energy storage systems) and increasing cooperation between countries through electricity market integration.

1.2 Motivation and purpose

The subject of implementation and success of day-ahead and intraday markets unification in Eu-rope has been amply studied and the benefits thoroughly registered. However, the coupling of balancing markets has been much slower within Europe due to a greater difficulty in harmonizing each country’s balancing mechanisms. For this reason, literature regarding cross border balancing and balancing market integration is very scarce and most of these studies were performed a priori of implementation, meaning they are mostly estimations based on simulations.

In the scope of studying market reforms and cooperation between countries by means of in-tegrating electricity markets, this thesis will focus specifically on computing the profits obtained from the coupling of tertiary reserve (often called replacement reserve) markets in the Iberian Peninsula. The profitability will be analyzed from the Portuguese perspective and utilizing real data from the first three full years (2015 to 2017) since its implementation in June of 2014.

For the moment, Portugal and Spain are only able to exchange reserves with bordering coun-tries (with whom they are physically coupled). This means, for example, that Portugal only has access to Spanish bids, while Spain is able to exchange additionally with France. Hence, as a second objective, this work aims to provide a broader analysis on the potential benefits for Portu-gal of extending this market to other European countries. This will be performed by taking into account the French regulation reserve bids and estimating the potential profits it would bring to the procurement of tertiary reserve in the Portuguese system.

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1.3 Methodology 3

1.3 Methodology

In order to assess the profits of the tertiary market coupling, from a Portuguese perspective, one of the two approaches could have been used:

• Comparison of the tertiary reserve prices in the years before implementation, with the ter-tiary reserve prices in the years after market coupling.

• Simulation of the tertiary reserve prices in the years after market coupling, without the Spanish bids. Later comparing simulated with real tertiary energy prices.

The first one would not be a good portrayal of the truth, since electricity consumption varies yearly, furthermore, uncontrollable phenomena may happen that drastically change the behavior of the prices in the electrical system like wind, draught, economical or fuel crisis and others. It would be harder to investigate whether the effects on price could be attributed to market coupling and to what point they could be so.

The latter was the method utilized in this thesis. Provided that the simulation faithfully por-trays reality, the computed prices will reflect the potential cost of tertiary reserves in the scenario of separated tertiary markets. By comparing those simulated costs with the real costs, we are able to assess the profits of exchanging replacement reserves with Spain. It can’t be denied that market merger will influence the Portuguese and Spanish bids, therefore, tertiary reserve prices will auto-matically suffer distortions, because increased competition may lead producers to lower prices. In other words, the Portuguese bid prices for 2015 onward, for example, might not truthfully portray (and may be lower than) the past prices. However, intuitively, the second approach appears to be a better method of gauging the success of the Iberian tertiary reserve market.

The reasoning supporting this opinion is, when simulating the procurement of regulation re-serves relying only on the Portuguese bids, granting that the prices are now distorted by the new market rules, if anything, the 2015 onward prices will be lower than past values. This means that, if, as expected, this thesis could prove this market merger to be profitable, it would underreport the benefits of such a move. That is to say that, if this work could prove this coupling to be ad-vantageous for the Portuguese system, the true benefits from it would be even higher than the ones reported in this work.

To accomplish the second objective of extending the market to France, the data regarding French replacement reserve bids was added to the pool of offers available to the Portuguese TSO. By analyzing the whole data, it was possible to identify the periods in which energy export price would be higher from Portugal to France or import price would be lower from France to Portugal. Those prices when later compared with the real business exchanges, provided the potential profit of extending replacement reserve exchange to France.

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4 Introduction

The data utilized for this study is publicly provided by the Portuguese (REN), Spanish (REE) and French (RTE) TSOs. A more detailed description on the methodology and the simulation of the provision of replacement reserves partaken by the Portuguese TSO shall be provided in a later chapter.

1.4 Structure

Going forward, this dissertation is divided in four more chapters. Chapter 2 will provide an overview on the literature related to this thesis. The main objective will be to frame Replace-ment Reserves within the electrical system, providing answers to questions such as: what they are, what is their purpose, who or what entity is responsible for managing it, what is their hierarchy within the system, along with other pertinent questions. To that purpose, it will begin by describ-ing the role of the Transmission System Operator (TSO) in the electrical system, what system stability is and why is there a need for replacement reserves in the system.

Next, will be presented an overview of electricity markets, how the energy reserves needed to ensure proper system operation are procured, how energy prices behave throughout the chain of commerce and what influences that behavior. Energy generation will afterward be briefly touched upon to explain limitations and differences between certain types of energy sources.

Later, and of utmost importance to this portrayal, the impact of coupling energy markets through-out Europe will be talked abthrough-out and its positive influence in energy pricing, providing a range of examples supported by the available literature. Lastly, a characterization of the Iberian Peninsula energy market will be provided, along with other specificities regarding the Portuguese and Span-ish electrical systems.

Whenever it proved impossible to describe any of the concepts generally, the Portuguese or Iberian context was utilized. In any case, before doing so, the proper caveats are made.

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Chapter 2

Literature review

This chapter provides the reader an overview on the operation and management of the electric system, in particular the European electric systems. It is intended to better frame the motivation behind this work and to support all the actions taken to faithfully portray the abovementioned scenario. Thus, it will begin with a brief description of some concepts in order to characterize the electric grids and its markets’ operation so as to ultimately convey the motivation and interest of this dissertation. Additionally, the available literature and studies regarding cross border balancing and regulation market harmonization will be revised.

2.1 Transmission System Operator

2.1.1 Functions

The electric Transmission System Operator (from now on mentioned as TSO) is the legal entity responsible for the management, maintenance and development of the high and extra-high voltage infrastructures for long-distance transmission (transmission system) in a control-area. Addition-ally, this entity is accountable for the connections, if existent, to contiguous control-areas, and partially responsible for ensuring the operational safety and reliability of the electrical grid, by meeting reasonable demands for the transmission of electricity, and ensuring the supply to re-gional distribution systems and their directly connected consumers.

2.1.2 Day ahead planning

All of the decisions pertaining the electrical grid are based on an array of time horizons ranging from years and months if taken from a developmental perspective to seconds if taken from a quality and security of exploration point of view. In that aspect, the management of the energy to be required throughout a particular day, is no exception.

The energy consumed in any instant, independently from all the automatic processes that led to (and made possible) it’s consumption, has been through a complex chain of planning and decision making, many of which perpetrated by the TSO.

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6 Literature review

The production of energy in any particular period has been planned ex-ante according to a forecast of demand, usually based on the control-area’s past consuming trends. The lion’s share of power consumed within a day results from a prior, scheduled energy trading which, in most systems, is had the day before in the often-called Day Ahead Market.

However, forecasted demand and real power needs rarely match, leading to imbalances be-tween production and demand. Hence, other types of trading take place in an intra-day basis in order to ensure that demand is met at all times. Furthermore, balancing mechanisms, some of which dependent on markets held ex ante, are put in place during the delivery hour for that same purpose.

All the mechanisms, energy markets and their time-horizons are further explained in the later chapters.

2.1.3 Power generation, static and transient stability

All the electrical energy of a power grid is provided by a system of synchronous generators in parallel. Stationary regime is the name given to a period during which the mechanical power provided by the primary mover of a generator is equal to its electrical power output and added electrical losses [4] .

As synchronous machines, the generators require synchronicity to properly function in par-allel, meaning they must be operating at the same nominal speed at which they we’re built to function.

When that equilibrium is disturbed, by a short circuit for example, the angular velocity of the generators’ rotor will oscillate from its reference value and depending on the amplitude of said oscillation it may lose its synchronicity with the electrical system, leading to its decoupling.

Consequently, there are static and transient stability phenomena associated to grid operation, mainly due to these characteristics of synchronous machines and exacerbated by long-distance power transmission systems and load profile variation (i.e. fluctuation in consumption).

Furthermore, as an induction machine, the synchronous generator’s physical rotor speed is directly proportional to the frequency of its output voltage [4] :

Frequency = Pair o f poles∗Velocity

60 (Hz) (2.1)

A synchronous generator, in steady state, providing a certain amount of power to a certain load, will see its velocity altered by variations in said load, as a result of being requested a dif-ferent amount of current (or power). If the power output of the machine doesn’t match the power requested, the machine’s speed will either increase or decrease in opposite direction of demand.

Despite it supporting small momentaneous variations in speed/frequency, any significant alter-ation creates a positive feedback, meaning the generator has the tendency to continue accelerating or deaccelerating possibly resulting in its malfunction. Therefore, either its power output must

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2.1 Transmission System Operator 7

match the power requested by the load or the requested power must return to a stable value, or, to put it differently, load has to vary.

Extrapolating from the functioning of a single generator, it is understandable how system load variation or, in other words, fluctuation in consumption, will affect the velocity of the generators connected to it, hence disturbing their operation. Therefore, fluctuations in consumption must be matched by power output, meaning the system must produce the requested amount of energy at all times in order to maintain stability. Any major mismatch in production and demand may lead to generator malfunction leading to its decoupling or, alternatively, automatic load disconnection from the grid.

Taking into account all these facts, the grid as an interconnected system must be operating at the same frequency (usually 50 or 60 Hz) and see its production and demand levels balanced at all time in order to ensure the safety and reliability of supply.

2.1.4 System Frequency Containment

Electric systems of alternated current function at constant frequency and voltage. These proper-ties must be continuously regulated and kept at all times within specific value ranges for proper operation. Voltage is a constant with a local character, mainly dependent on the transits of reactive power within the grid. Frequency, on the other hand, is a global constant, which requires a much tighter regulation, is intimately related with the balance between consumption and demand [4].

Arguably one of the TSO’s most significant roles on the grid is the responsibility of main-taining its area’s system frequency by means of continuously balancing generation and demand (power balancing). Balancing can be adequately defined as:

“All actions and processes, on all time lines, through which TSOs ensure, in a continuous way, to maintain the system frequency within a predefined stability range, and to comply with the amount of reserves needed per frequency containment pro-cess, frequency restoration process and reserve replacement process with respect to a required quality.” [5]

In a large-scale electric grid, with multiple control-areas and synchronized frequency, safety and reliability heavily depend on the continuous power balancing. These imbalances (distur-bances) are anticipated and mainly caused by deviations between expected and real power demand, yet they may also originate from unexpected events such as power plant outages, malfunction on one or more of the grid’s components or even limitations in said components. In the last few years, the increase in Renewable Electricity Source (RES) inputs in most countries’ energetic mix, has added yet another source of unpredictability resulting of deviations between predicted and real power generation.

To assure balancing in the grid, the TSO runs, and actively engages, in a Regulating Power Market (further explained in a later chapter) to exchange balancing energy reserves (Reserve Ca-pacity) with either producers or consumers in order to have at its disposal different balancing

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8 Literature review

services with varying characteristics, such as, activation procedure, response time, cost and di-rection. It becomes important to make the distinction between Reserve Capacity and Balancing Energy, respectively, one ensures the availability of regulating energy at any given horizon of time and the other is the actual energy activated in order to restore system balance in real-time. In other words, there is a significant difference between the acquisition/maintenance of energy reserves and the actual activation of that available energy to correct generation/demand imbalances. This distinction is vital, not only because these actions differ in price (reserving energy and actually using it produce different costs of operation) but additionally, this concept, helps to comprehend the different automatic and non-automatic responses that take place on the grid to the fluctuations in frequency, and ultimately, how TSO manages them.

2.1.5 Balancing mechanisms

Upon the existence of a disturbance, and dependent on its severity and duration, the system ex-periences a set of balancing mechanisms put in place in hierarchical order, until it is mitigated. That is to say until frequency nominal values are restored – Frequency Response. A frequency response, defined as the automatic corrective response provided for balancing load and generation [6], and also referred as Load-Frequency Control, is composed of three types of response: Iner-tial Frequency Response, Frequency Containment Response and Frequency Restoration Response. These actions lead to the activation of balancing energy and differ in the way they are activated (either automatically or manually), the time in which they take action (lead time) and the effect they have on maintaining proper system frequency. Thus, their associated reserves are different and separated with different characteristics of allocation and activation.

2.1.5.1 Inertial Frequency Response

The Inertial Frequency Response corresponds to the natural resistance of the large rotating masses of the generators coupled in the grid to variations in the load/generation balance. A change in the relationship of generated and consumed power (PG/PC) leads to a proportional variation of the

system’s frequency (df

dt 6= 0) with a Rate of Change of Frequency (ROCOF) [7]. Once ROCOF

differs from zero an immediate response by the grid’s coupled generators is felt. These will ac-celerate or deacac-celerate proportionally to the variation of the frequency from its nominal value, in other words, they will store or release kinetic energy. This response is very limited and only acts as a damper, meaning it only slows the deviation of the frequency, nevertheless it provides critical amounts of time in order for other balancing mechanisms to take place.

2.1.5.2 Frequency Containment

Unlike the previous, this automatic set of processes require energy activation from balancing re-serves. Specifically, energy reserved from the units coupled in the grid which are equipped with load-velocity regulators (droop control). Once system frequency starts deviating from standard value, the generators’ droop control automatically takes action on stabilizing system frequency, by

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2.1 Transmission System Operator 9

proportionally activating energy through the control of the admission valves of the groups which are both equipped with this technology and happen to be scaled in that particular time period. The sum of energy that the groups equipped with Primary Control are able to provide (upward or downward) is called primary reserve or Frequency Containment Reserve (FCR). If successful, this automatic action stops the deviation of system frequency, keeping it in a predefined stability range (for instance: 50Hz ± 200mHz), nevertheless it does not possess the capability to restore the control-area’s frequency to the stipulated value [4]. This response has to take place in seconds af-ter a disturbance, lasting usually at most thirty seconds, and its impact on mitigating disturbances is heavily and proportionally related to the ramp capabilities of the units which are providing the FCR.

2.1.5.3 Frequency Restoration

If the system has been, or it is predicted to be, affected for more than a preestablished amount of time, secondary control power is activated - Secondary Control. This activation, contrary to FC, occurs centrally from the electric system’s Management and Control Center. In other words, energy is automatically or non-automatically activated in order to relieve primary control, allow-ing it to resume its function of balancallow-ing the system frequency and restorallow-ing frequency levels to nominal values. Similarly, this process requires energy reserves activation - secondary reserves or Frequency Restoration Reserves (FRR), and as the name implies, these reserves are activated with the purpose of restoring system’s frequency to a stipulated optimal range. This response usually takes place within 30 seconds of a disturbance, lasting 15 minutes and, similarly to FCR, FRR’s ramp capabilities and amount affect the speed of which the frequency’s value is fully restored.

2.1.5.4 Tertiary Reserve

Both FCR and FRR are mostly dimensioned and expected to alleviate typical imbalances, conse-quently, the TSO manages a third reserve - Tertiary Reserve - that helps ensure stability in the less likely event of major imbalances, congestion problems or even chronic excess/shortage of energy throughout the day. If necessary it is used to replenish previous acting reserves after severe distur-bances, and contrasting with FCR and FRR, the energy activation is performed manually by the producers and commissioned by the TSO. It encompasses two types of reserve: tertiary production reserve and tertiary offtake reserve, which may be provided either by producers or large industrial consumers, respectively. When an agent is commissioned to provide tertiary production reserve, it must be prepared to fully inject the contractualized amount of energy in the grid within 15 min-utes if need be. On the other hand, an agent commissioned to provide tertiary reserve offtake is expected to reduce its energy consumption by the stipulated amount within the same time span.

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10 Literature review

2.2 Electricity Markets

2.2.1 Background

Traditionally, the electricity supply chain in most European countries was organized as a vertically integrated monopoly. The electric sector in most countries was characterized by a monopolistic concession in order to finance, build and explore the electric system. That is to say that the control over production, transmission, distribution and retail of energy was mostly detained by a limited number of entities, often the same private or state-owned company.

Following the pioneering actions of liberalization by England and in order to harmonize and liberalize the EU member’s internal energy markets, the European Parliament adopted measures to address energy market access, transparency, regulation, member interconnection and supply qual-ity. These measures were to facilitate more competitive and customer-focused electricity markets, guarantying the benefit of all its participants while protecting the rights of individual costumers.

The “Energy Act” instituted by England in 1983, led to, among other thing, the creation of an obligatory wholesale energy market (pool). In 1996 the Nordpool market was created, englobing the Norwegian and Sweden electric systems, later extending to the Finnish and Danish [4].

In the following years, most European countries successfully implemented these directives, mainly decentralizing production and retail, breaking the previously existing monopolies and in-centivizing more companies to provide these services, henceforth stimulating competitiveness. Moreover, these actions had a necessary positive feedback regarding grid efficiency and therefore, the reduction of operation costs, directly affecting end-consumer prices whilst allowing adequate profitability for producer and retailer businesses. Moreover, while transmission and distribution services remain monopolies (due to not being practicable the duplication of network infrastruc-tures), these services have been mostly separated and their ownership is oftentimes temporary and commissioned by means of an open public tender.

Even though this process has been developing during the last three decades, to this day, it has not been reached yet to a general consensus regarding what is the best electric sector structure [4].

2.2.2 Present-day design of the Electricity Market

Currently, the majority of electricity markets consist in a chain of wholesale and retail commerce of energy in which transactions may happen either bilaterally or in wholesale and retail markets.

Focusing on the design of deregulated European electricity markets, which are equal or at least similar in most European countries, there are five main participants in the energy commerce chain: • Energy Market Operators: Regulated entities, responsible for managing the transactions and exchanges in the spot and bilateral markets. They assure the transparency and proper functioning of these mechanisms and report all the resulting information to the TSO. • TSO: As the party responsible for the transmission system, this entity must be informed

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2.2 Electricity Markets 11

from a functional standpoint. This involves ensuring the safeguarding the technical limits of generation, transmission, distribution and control-area interconnection. Furthermore, it must guarantee balance between production and predicted demand. After the main markets have closed, the TSO must additionally procure the energy for all contingency mechanisms necessary to preserve security and reliability.

• Producers/Suppliers: Registered energy producers able to supply electrical power to the grid.

• Distribution system operator (DSO): Entity responsible for the distribution of energy to the final consumer, usually responsible for the low and medium voltage distribution systems. • Retailers: Specialized, registered participants fitted to buy, large quantities of energy from

producers in the wholesale markets and resell to end-consumers in the retail markets. • Consumers: Single or large groups of end-consumers who may participate in all kinds of

markets. Smaller consumers usually trade with retailers in the retail market, while large consumers may bid in the wholesale market or even exchange with producers bilaterally. 2.2.2.1 The Day-ahead Market

These markets are designed as pool (also called spot) markets and take place in the day before delivery. In the electric day-ahead pool market, all the participants are required to submit their bids into an exchange platform, with the quantity and price at which they are willing to sell or buy energy at every Program Time Unit (PTU) of the following day. PTU is the main time unit used for scheduling purposes in the balancing markets and is usually every hour or half-hour of the intended time horizon, which in this case is the 24 hours of the following day. Once the day-ahead market closes, meaning the period for submission has ended, the seller’s offers are sorted in an ascending order by price while buyer’s bids are sorted in descending order, respectively originating what are known as aggregated supply and demand curves. In normal circumstances, their overlap will result in an intersection, originating the spot (or market clearing) price and quantity. The spot quantity represents the sum of energy from the bids that have been cleared to take effect and the spot price is the cost at which every MWh will either be bought or sold. That is to say, every seller whose bid has been cleared will receive the spot price for every MWh proposed to provide and, likewise, every buyer whose bid has been cleared shall pay the spot price for every MWh proposed to consume.

After market closure, the Energy Market Operator prepares the following day’s production schedule with all the relevant information regarding the participants and communicates it to the TSO for analysis and approval.

Additionally, all bids that have not been cleared in market will not take effect, meaning that the demand needs not encompassed by market clearing must either be procured in other spot/bilateral markets or those bidders must be willing not to consume that energy. Furthermore, the aforemen-tioned need for contingency and unpredictability of demand lead to the necessity of procurement

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of balancing reserves. Consequently, a series of different markets take place every day, not only to ensure those reserves, but also to further stimulate competitiveness and economic efficiency.

2.2.2.2 Bilateral Market

In the bilateral market, end-consumers and producers exchange energy directly or by means of a broker. Both these parties decide the amount, price, time-horizon and delivery method, hence disposing of a panoply of different types of contracts. The TSO must be promptly informed of all the bilateral contracts settled.

2.2.3 Programming in the Portuguese electric system.

The day-ahead and bilateral markets are standard in virtually all European electric systems. How-ever, the processes that occur after the day-ahead market closure may differ from country to coun-try, hence only the Portuguese programming shall be further described and is sufficient to later frame the motivation of this thesis. Nevertheless, most of the concepts and time-lines about to be addressed are very similar to many other European countries’.

2.2.3.1 Technical Restrictions Resolution Market

In Portugal, after day ahead pool and bilateral trading, all the producers connected to the grid, pro-vided they are capable of dispatch, are required to bid in the Restriction Resolution and Balancing markets [8,9,10]. Restriction resolution occurs after the spot and bilateral bidding deadlines have ended, when the TSO analyses the markets results and makes any necessary alterations. Regard-less, this process is still a part of the day ahead planning.

After biding in the spot market and performing bilateral contracts, it is usual for producers to bid for the TSO’s process of restriction resolution. The producers offer to further increase their production levels receiving higher price per MWh than the spot price or offer to decrease production levels paying the system a lower price per MWh. These prices are often called short imbalance price and long imbalance price respectively.

Once spot and bilateral markets close, all the information regarding their outcomes is for-warded to the TSO, allowing it to elaborate and analyze the Daily Base Functioning Program (PDBF), consisting of a production schedule for each hour of the following day, containing infor-mation on energy quantities and which groups are to produce them at every PTU of the following day.

Upon analysis of the PDBF, whenever technical limits are exceeded or imbalances exist, the TSO is allowed to make the necessary alterations in the production schedules using the bids sub-mitted for the restriction resolution platform.

Subsequently, the TSO includes these changes to the PDBF and issues the Daily Viable Pro-visional Program (PDVP).

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2.2.3.2 Intraday Markets

After the process of restriction resolution is finished, a series of Intraday Markets occur throughout the previous and present day of delivery, enabling new bidding from consumers and producers, allowing them to better adjust their consumption and production schedules[9,10,11].

As explained before, the biding and scheduling of consumption and production is done hourly for the 24 hours of the following day, these are called PTU, market hours or periods. Since the system’s security and reliability depend so heavily on the energy market, these periods become useful to provide time reference for all processes occurring in the grid. In the Portuguese National Electrical System (SEN), the first market hour corresponds to 00:00-01:00 A.M., the second hour to 01:00-02:00 A.M., and so on.

At 12:00 AM the day-ahead market closes and soon after the PDVP for the next day is issued. After that moment, 6 Intraday Markets or market sessions are held at different market hours and encompass different time periods. Once a particular session starts, the interested parties have 45 minutes to bid for that specific time horizon. For instance, the first Intraday session is held on the previous day of the delivery at the 18th market hour. At 17:00 the participants have 45 minutes to submit bids regarding the last 3 hours of that day and the 24 hours of the day of delivery.

The market sessions and their period distribution are as follows [12]: Table 2.1: Intraday Sessions schedule

Session 1 Session 2 Session 3 Session 4 Session 5 Session 6 Opening 17:00 21:00 01:00 04:00 08:00 12:00 Closing 18:45 21:45 01:45 04:45 08:45 12:45 Programing

Horizon 22 (D-1)-24 (D) 1-24 (D) 5-24 (D) 8-24 (D) 12-24 (D) 16-24 (D)

Every market hour has a last session in which “Gate Closure” occurs, for instance, session 2 of the intraday market is the last possible market available for participants to adjust their production or consumption for hours 1, 2,3 and 4 of the delivery day. This means that pertaining to those periods, the producers (and consumers) cannot alter their schedule anymore, and any further ad-justments are performed by the TSO who is now in control of the system during those PTUs and until the next day’s spot market.

2.2.3.3 Frequency Restoration Reserve Market

Maintaining system stability means balancing production and demand in real-time, therefore, pre-dicted vs real demand variability or other disturbances often lead to the real-time activation of energy. As a result, it is the TSO’s responsibility to procure the sufficient reserves to provide these balancing mechanisms. For this reason, a Balancing Market is held for the Frequency Restoration and Tertiary Reserves.

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FRR, often called secondary reserves or secondary regulation band, is the range of variation in MW of produced power, upwards or downwards, that the grid’s secondary regulation mechanism is able to provide in 5 minutes. In other words, it represents how much production can increase or decrease in 5 minutes to resolve imbalances and restore system frequency. Only the groups equipped to provide secondary regulation may bid in the Secondary Regulation Band Market. In the day ahead planning, the TSO defines the proper amount of secondary reserve for each market hour of the next day, while the agents capable of providing this service submit their bids. These are placed ine/MW and should be differentiated in their direction, i.e. increasing production (up-wards) or decreasing production (down(up-wards). The submitting period takes place in the previous day between 18:00h and 18:45h. As soon as this market closes, the TSO activates the necessary secondary band bids for all market hours of the delivery day, choosing from least to most costly to the system. Once contractualized, these offers are considered firm, in other words, the Market Agents responsible for the activated bids are henceforth bound to ensure the proposed secondary regulation band [8,9,10].

2.2.3.4 Tertiary Reserve Market

The Portuguese Energy Services Regulating Entity (ERSE), stipulates that in order to partake in a proper exploration of the SEN from an economical stand point as well as guarantying continuous supply and operating safety, it is necessary for the TSO to maintain a third active power reserve to balance demand in the eventuality of primary and secondary reserve depletion after major or chronic disturbances. The tertiary reserve may also be called regulation reserve.

Immediately after the report of the Secondary Regulation Market results, all the grid’s produc-ers must bid in the Regulation Reserve Market for every period of the day of delivery, under the following conditions [9]:

• Producers not scheduled to produce, must bid all the energy their groups are capable to produce as upward regulation energy.

• Producers scheduled to produce must bid all the remaining energy their groups are still capable to produce as upward regulation energy. Furthermore, they must bid all the energy they are scheduled to produce as downward energy. In other words, the groups scheduled to produce must bid how much they are willing to pay the system to decrease their production levels, in case it is necessary.

2.2.4 Market prices, consumer tariff and exploration costs

In the day-ahead spot market the consumers (mainly retailers) submit bids based on predictions from past consumption behavior, in turn, the producers bid energy based on their cost of produc-ing and profit expectations. As explained previously, this will originate the aggregated supply and demand, their intersection dictates the cleared quantity and spot-price and any offer beyond intersection is without effect.

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Any major differences between demand and production in the PDBF are corrected by the TSO in the Technical Restriction Resolution resulting in one or both of the following situations:

• In a period where demand exceeds production, the TSO must activate Restriction Resolution bids submitted by producers. Usually the energy bid in these markets correspond to higher levels of power production, hence higher production costs and therefore higher bidding price. In other words, upward Restriction Resolution energy is paid at a higher price than the spot-price, leading to a higher final tariff for the end-consumer.

• In a period where demand falls behind production, the TSO must also activate Resolution bids submitted by producers. However, the bids activated will be for downward energy. In these contracts, the producer agrees to pay a long imbalance price for every MWh of not produced energy. This bidding price is lower than the previously agreed spot price, meaning that whichever amount the producer is required to stop producing is going to be paid by consumers at spot price and then reimbursed by producers at a lower price. That is to say that consumers will end up paying the difference between long imbalance and spot price for a certain quantity of not produced and not necessary MWh.

Therefore, it is of the consumer’s best interest to ensure acquisition of accurate quantities of energy in the day-ahead and bilateral markets. Also, in the supplier’s case, its best interest is to successfully exchange a minimum energy amount in both markets. This is due to the fact that these power plants possess large fixed costs, due to the large investment and maintenance costs of such facilities. Moreover, the variable cost of most conventional thermal and hydro plants follows a quadratic function meaning the cost per MWh is higher at the low and high tiers of power production. Bidding a smaller amount of energy means one of two things:

• If the bidding price is low, the producers bid remains competitive in the market but the resulting remuneration may not result in profit or even cover fixed and variable production costs.

• If the bidding price is high, the producers bid isn’t competitive meaning it is very likely not going to be cleared in spot market or bilaterally contracted. Leaving most of energy to be negotiated in the Restriction and Balancing Markets is a poor financial decision due to the risk posed by the unpredictability of demand fluctuation and market competitiveness. These facts force both suppliers and consumers to make reasonable bids in the markets, pro-moting competitiveness, therefore maximizing social welfare. Social welfare is the area between the demand and supply aggregated curves and represents the sum of two values:

• How much more the consumers were willing to pay for the consumption of the cleared market quantity.

• How much less the producers were willing to receive for the production of the cleared market quantity.

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Moreover, the intraday market sessions also prove to be useful mechanisms in minimizing un-necessary increases in tariff for end-consumers and over profiting from producers. This is because consumption predictions are much more accurate the closer they are to the delivery period.

Apart from these markets, the consumers can’t influence their final tariff any more (except by respecting predicted demand). From here on, any additional costs in the exploration of the electrical grid originate from the TSO’s task of maintaining security and reliability of supply. These costs will heavily depend on the resources available for that purpose and the decisions made.

Primary and secondary energy reserves are paid in MW and account for small amounts of energy. They provide for the random and impossible to predict fluctuations in energy and their quantities are stipulated by ERSE (usually a small percentage of the period’s scheduled produc-tion). Therefore, the optimization of procurement and subsequent activation is not an easy task. Moreover, their impact on the overall costs the system incurs is minimal when compared to other processes.

All the Ordinary Regime* groups scheduled to produce in the PDVP are required to offer to lower all their production levels, if needed, at any period. This is done by means of bidding in the tertiary market as downward energy, and as explained before, means the producer offers to pay the system long imbalance price to lower production levels. Concurrently, all the groups either scheduled to produce or not, providing they are able, are required to offer to produce all their remaining capacity, or in other words, to bid all their remaining capacity as upwards tertiary energy.

While it is mandatory for groups to bid all their scheduled production as downward energy, the prices they are willing to pay for lowering production is at their discretion. It may or may not be in the producer’s best interest to lower their production levels, this is mainly due to the group’s generation cost function and its impact on overall profits. Therefore, they may be willing to pay more or less depending on scheduled production levels and the quantity of the bid’s downwards energy. As enterprises, producers seek the most profit, meaning downwards bidding price is almost always lower then spot price. On the other hand, tertiary upwards bidding in the market is less competitive and less of a gamble since usually at that point the producers are already in a favorable position profit wise. Adding to that, as producers get closer to maximum capacity, their variable production costs increase exponentially. For all those reasons, and contrary to downwards pricing, the upwards energy bidding prices are often higher than spot price.

For illustration, using the data provided by Redes Energéticas Nacionais (REN - the Por-tuguese TSO), these are the average values of Spot price, Tertiary downwards and Tertiary up-wards bidding prices for every market hour of 2017 (these values vary similarly with the data from the years 2015 and 2016 as well):

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Table 2.2: Average spot (last intraday session) prices and tertiary reserve prices

Hour Spot (e) Tert_Up (e) Tert_Down (e)

1 51,06 62,62 30,66 2 48,00 58,59 27,16 3 45,99 56,34 26,10 4 44,88 55,06 23,54 5 44,94 54,88 25,31 6 45,30 56,27 24,48 7 47,97 57,93 28,13 8 52,26 60,56 30,20 9 53,56 61,98 32,66 10 55,22 63,27 34,12 11 55,51 57,89 33,12 12 55,10 61,87 30,19 13 54,88 61,47 29,13 14 54,75 61,25 30,18 15 53,50 61,11 30,90 16 52,61 60,41 29,18 17 52,04 57,70 28,47 18 53,16 60,97 29,98 19 55,20 61,80 31,43 20 56,71 63,47 32,34 21 57,86 66,75 32,68 22 58,07 63,71 35,83 23 55,33 64,85 33,26 24 51,41 63,55 29,00

While the TSO (in this case REN) is responsible for the decisions regarding tertiary reserve management, all the costs deriving from it fall on the consumer’s energy tariffs. As an unbiased and heavily regulated third party, REN must ensure that those costs are kept to minimum while providing at the same time proper tertiary regulation. This highly depends from REN’s efficient decision making and the amount of available tertiary energy supply sources.

2.2.5 Impact of renewables on system costs

Europe’s on-going efforts for achieving a carbon free energy system is posing great challenges to European TSO’s. As the most promising substitutes of the conventional power producing plants, wind and solar generated power are getting increasingly popular as sources of ecological and emission free energy. High penetration of solar and wind generation, directly affect power sys-tems either by increasing the number of congestions, influencing market prices or leading to a greater need for balancing resources. For renewables to be suitable alternatives to controllable

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carbon-based power producing plants, there is a need to address the variable nature of their pro-duction by reforming system operation protocols. As explained previously, changes occur from day-ahead planed schedules and real-time operation. These changes are related to errors in demand prediction, and nowadays even more related to deviations from planned renewable energy produc-tion. Schedule adjustments are performed until delivery in the intraday and finally in the balancing markets, albeit, for better economic efficiency most of these adjustments should originate from the cheaper intraday market bids as opposed to the more flexible and expensive balancing resources. In conventional European systems, various updates are done throughout the day, based on more accurate weather forecasts and extrapolation of grid results from the immediate past, regarding among others foreseen load (L), plant outages (K) and wind production (W). Based on those fore-casts, the players are economically incentivized to trade on intraday markets, leaving minimal necessity of balancing resources.

The necessity of capacity adjustment R can be calculated, based on the deviation between real-time and forecasted values of the 3 biggest causers of variability (load, plant outages and wind), in the following manner [13]:

R = N−1(α) q

(σ [L − LF]2+ σ [K − KF]2+ σ [W −WF]2 (2.2)

N − Inverse of standard normal distribution α − Reliability level

L, K and W − Load, outage and wind values F − Forecasted

The fluctuation patterns in demand remain the same and plant outages are discrete events with a fixed probability related to overall installed power, the short-term necessity for adjustments related to conventional deviations is constant. On the other hand, for large wind power capacities, the wind forecast error will severely impact the value of σ [W −WF]2. Moreover, the error of wind

forecast varies linearly and proportionally with installed wind capacity, meaning that R which is proportional to the sum of the 3 errors will vary asymptotically, converging to the wind forecast error [13].

Furthermore, the correlation between wind error and total error may also be computed:

ρw,t ot al = Cov[W −WF,∆t ot al] σ [W − WF]σ [∆t ot al] = Var[W −WF] σ [W − WF]σ [∆t ot al] =σ [W − WF] σ [∆t ot al] (2.3)

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2.3 Portuguese Energy Production 19

Since wind error is part of total error and it varies proportionally with installed wind power capacity, it is possible to assess that the correlation between wind and total error will increase with wind power capacity [13].

This means that the overall costs to the system from adjustment will increase with installed wind power capacity, since the need for adjustment is also proportional to the amount of fore-cast error. As aforementioned, wind forefore-cast error diminishes the closer it is from the period in question:

“As might be expected the hour-ahead forecasts have much higher kurtosis val-ues than those made at the day-ahead timescale. This would be expected from the reduction in uncertainty that occurs between making a forecast in the day-ahead time frame, versus a single hour ahead.” [14]

Proving that to address variation with greater quantities of installed wind capacity, systems must provide further and better intraday solutions in order not to increase exploration costs. Other-wise, the system’s dependency on balancing reserves may increase significantly, having carryover effects both to consumer and producer’s overall social benefit.

Some of the currently utilized mechanisms, more specifically, the mechanisms currently uti-lized in the Iberian energy system, similar to many European countries will be discussed in a later chapter. Furthermore, also to be discussed in this paper, will be the impact of EU’s goals (towards a unified European Energy Market) on the integration of Renewable Energy Sources.

2.3 Portuguese Energy Production

Energy production in Portugal is legally categorized as ordinary or special regime. The ordinary regime term applies to the production of energy resorting to traditional non-renewable fossil fuel sources and big hydroelectric production centers. Special regime production, as the name implies, categorizes all the energy production activities abiding by different legislations and includes en-ergy production resorting to alternative fuel sources, smaller micro-producers or power production without grid injection.

2.3.1 Ordinary regime production

Currently, ordinary regime energy in Portugal originates from hydroelectric, pumped-storage hy-droelectric or thermal plants. Although the dependency on fossil fuel sourced energy production has been steadily declining in the past 3 decades, in 2017 they still accounted for roughly 58% of total energy produced [15].

Ordinary regime producers are, for now, the only ones capable of providing balancing services. This is related to the fact that fossil fuel sourced energy is much more reliable in comparison to alternatively sourced energy due to weather unpredictability and variability and the lack of efficient energy storing technologies. Additionally, hydroelectric and pump-storage plants have the ability