Głowacki Law Firm

Energy market
Technology-neutral approach adopted in the NC RfG
Saturday, 06 April 2013 15:21

 

The issue whether the generator is synchronously connected to the grid will be among the main criteria for differentiation of the legal status of power producers in the Internal Electricity Market.

Therefore specific requirements for non-synchronously connected Power Generating Modules (so-called Power Park Modules) are introduced.

 

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Energy transmission rights as financial instruments
Monday, 01 April 2013 18:33

 

Financial energy transmission rights could fall under the category of financial instruments but  transmission system operators assert they can benefit from the “incidental” activity exemption. Are they right?

 

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REMIT reporting standards and taxonomies take shape
Monday, 25 March 2013 23:19

 

Standards for the reporting framework as well as the taxonomy of wholesale energy market transactions are currently being decided under REMIT.

 

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Energy capacity markets
Tuesday, 19 March 2013 13:00

 

The European Commission's consultation from 15/11/2012 to 07/02/2013 on generation adequacy, capacity mechanisms and the internal market in electricity has sparked a discussion regarding the role of State aid rules in the multiple capacity designs flourishing in Europe.
 
 
The major European Commission requirements in that regard have been described in Capacity markets vs. Internal Electricity Market – will State aid weapon be used?.
 
 
On 15 February 2013 ACER issued an opinion on the need for and the design of the energy capacity markets (see ACER's opinion and particularly interesting figure 1 on page 8 thereof showing the current state of  implementation of capacity remuneration mechanisms (CRM) in the EU Member States (with further differentiation into capacity markets, capacity payments and strategic reserve)).
 
 
Summary of the intended UK capacity market
 
Pursuant to the DECC Capacity Market Strawman v11 June 2013 the final design and documentation of the UK capacity market will be subject of the consultation in October 2013. The UK government reserves that this may also lead to further changes to the design.
 
A capacity price in the future UK capacity market (£/MW-year) is discovered annually by a competitive auction(s). These auctions are intended to remunerate capacity at the rate required to make the electricity market sufficiently profitable to attract an adequate quantum of reliable capacity. Competition in these auctions should result in capacity payments being at the minimum level necessary to meet the pre-set reliability standard.

The auction will result in Capacity Providers ("CP") taking on Capacity Obligations ("CO") and receiving up-front payments to reimburse them for the energy market's 'missing money' component. The CO is a promise to deliver energy and/or demand reduction in periods of system stress. A system stress period ('Stress Period') is defined as a Settlement Period where voltage reduction or controlled load shedding occurs anywhere on the system for 15 continuous minutes or longer; excluding faults or deficiencies on the transmission or distribution systems.

The System Operator (SO) will issue a Capacity Market Warning ("CMW") which will serve as a 4 hour notice to CPs to make good on their CO. Should a CP fail to perform in the first settlement period after the elapse of the notice they will be required to pay a penalty on their deficit based on the VoLL minus the prevailing System Buy Price (as that term is defined in the Balancing and Settlement Code).

This penalty exposure will be subject to a portfolio-wide cap based on the product of a multiple of CONE and the de-rated capacity of the portfolio.

CPs who increase their delivery output at times of system stress, relative to their status immediately prior to the CMW, will be eligible for a payment at the penalty rate from the moment the CMW has been issued, providing at all times that the CPs are in compliance with the Grid Code and any obligations arising from the Balancing and Settlement Code and other relevant requirements. CPs who decrease their output, relative to their pre-warning status, will be penalised. This method of calculation will last until the first settlement period after the elapse of the warning.
 
 
The scale of the potential needs for efficient capacity markets is underlined by the fact that under the rules of some intended designs the participation in the pre-qualification process is mandatory for all licensed generation that is eligible to participate. Pursuant to architecture prepared by the UK Government this will be enabled via a license amendment implemented by Ofgem (mandatory pre-qualification, however, does not change that participation in the auction is voluntary).
 
The executive summary of the intended capacity mechanisms laid down in ELECTRICITY MARKET REFORM: CAPACITY MARKET – DETAILED DESIGN PROPOSALS Presented to Parliament by the Secretary of State for Energy and Climate Change by Command of Her Majesty, June 2013 describes the relevant milestones of the UK electricity market reform in the following way:
 
The UK Government will run the first capacity market auction in 2014 for delivery of capacity from the winter of 2018/19.
 
The capacity market is designed to cost effectively bring forward the amount of capacity needed to ensure security of electricity supply. It will do this by correcting market failures and providing a predictable revenue stream to capacity providers. The level of revenue will be set through a competitive auction process and in return for payment successful providers must commit to deliver energy when needed or they will face penalties. The capacity market can be described in five operational stages:
 
a. Amount of capacity: Ministers decide the amount of capacity for which capacity agreements are to be auctioned based on analysis from the system operator on the amount needed to meet an enduring reliability standard.
 
b. Eligibility and auction:
• The capacity market will be technology neutral and all existing and new forms of capacity will be eligible to participate, except for capacity supported by Contracts for Difference, small scale Feed in Tariffs or the Renewables Obligation, and interconnected capacity.
• Demand side response (DSR) capacity will be eligible, and will be supported by transitional arrangements to develop the capability of the sector.
• Government has amended the Energy Bill so that projects that deliver permanent reductions in electricity demand (EDR) could also participate in the capacity market.
• Eligible capacity providers will offer capacity in a pre-qualification process run by the system operator.
• Pre-qualified capacity will enter competitive central pay as clear auctions also run by the system operator. There will be an initial auction four years ahead of delivery, and a further year-ahead auction
• Successful bidders will be awarded 'capacity agreements', which provide a steady payment for capacity in return for a commitment to deliver energy when required in the delivery year, or face a penalty linked to the value of lost load.
• Existing plants will by default have access to a one year capacity agreement. Existing plants requiring major refurbishment may have access to agreements with a term of up to three years, and longer agreements are expected to be available for new plants.

c. Secondary market:
• Between auction and delivery and in the delivery year, participants will be able to hedge their position through secondary trading.
 
d. Delivery:
• Capacity providers will receive payment for capacity in the delivery year.
• In return, they will be obliged to deliver energy in periods of system stress and will be financially penalised (following the publication of a capacity market warning) if they do not deliver in stress periods.
 
e. Payment:
• The costs of capacity agreements will be met by suppliers based on their market share.
• Payments will flow from suppliers, via a settlement body, to providers of capacity.
• Where penalties are applied to capacity providers, the funds will flow from them, via the settlement body, to suppliers.
• The upfront costs of capacity are expected to be offset by reductions in the wholesale electricity price.
 
Under the UK projected rules the right to exit the capacity market has been also envisioned. It may take place if the underlying electricity market develops sufficiently, particularly through development of greater market liquidity, an active demand side, and more interconnection. The need for a capacity market will also be reviewed every five years.
 

The System Operator will undertake several roles including providing advice on the level of capacity to auction, administering the auction and issuing capacity agreements.

A panel of technical experts will provide independent scrutiny of the system operator's advice on the level of capacity to auction. Ofgem will be responsible for governance of technical capacity market rules after the first auction has taken place and will continue to regulate the system operator and enforce the rules and competition law within the capacity market.

 

Settlement agent for the UK capacity  market

 

The intention to designate Elexon Ltd. as the capacity market settlement agent has been also announced. Elexon will be responsible for:

- The collection and administration of market and participant data relevant to the capacity market
- Calculating and administering payments due to capacity market participants,
- Calculating and administering charges due from capacity market participants,
- Calculating and administering penalties due from capacity market participants,
- Invoicing, collection and payment of the sums owing or due,
- Calculating and enforcing credit requirements where they are due,
- Administration of the governance of the capacity market,
- Collection and administration of bid bonds.

 

Secondary trading under the UK capacity market

Capacity obligations may be physically traded at any time from a year ahead of the delivery year provided sufficient notice is given to the system operator. The system operator's consent to these trades must be obtained and this will require an assessment by the system operator of the receiving party's eligibility and pre-qualification.
 
Parties eligible to take on additional obligations include:
• Plant that was unsuccessful in the capacity market auction; and
• New plant that had commissioned early
• Capacity that had not participated in the auction or opted out but that has subsequently been verified by the system operator as providing eligible physical capacity (for instance new demand side services (DSR) or a de-mothballed plant).
 
Plant that has taken on obligations, opted out or that had declared they would be retiring will not be eligible to take on additional capacity obligations. Plant that has opted out will be able to opt back into subsequent auctions - in which case the system operator will increase demand in that auction accordingly.
 
Where parties have traded obligations, the capacity payment goes directly to the plant taking on the obligation and the liability in an event is calculated according to the performance of the party taking on the obligation.
 
The penalties that apply to a new plant that fails to commission (i.e. the loss of the admin fee and the reduction in payment/contract length) will apply to new build even if they physically trade out of their position in the secondary market.
 
Providers that have acquired capacity obligation pursuant to the auction will not be permitted to take on further physical obligations (even outside of times of peak demand) though they will be able to hedge their position financially in private markets.
 
The system operator will develop an IT System which will serve as a registry for all capacity obligations and can be capable of becoming a platform for financial trading.
 
Capacity market's MiFID/EMIR treatment under UK rules

The above-mentioned DECC Capacity Market Strawman brings once more crucial remark when it comes to trading environment of the new capacity market, i.e. that the capacity instruments will most likely not be a financial instrument for the purposes of the Markets in Financial Instruments Directive (2004/39/EC)("MiFID"). Accordingly such instruments would also not be within scope of European Market Infrastructure Regulation (EMIR). UK government also believes that the intended capacity instruments will not fall under the proposed MiFID II new definitions of the multilateral trading facility and  the organised trading facility.
 
 
 
 
Importance of the Network Code Requirements for Generators for the low-carbon investment strategies
Wednesday, 30 January 2013 21:41

 

The Draft Network Code Requirements for Grid Connection Applicable to all Generators (NC RfG) being the first EU action on addressing how generators should be equipped in the Internal Electricity Market contains 53 requirements of which 44 are of mandatory nature.

It is a regulatory issue whether the costs of meeting these requirements should be allocated to ancillary services and collected via grid tariffs or internalised in market prices for electricity.

 

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Internal Electricity Market - balancing arrangements at the crossroads
Monday, 10 December 2012 23:16

 

The future shape of the European balancing market is not an obvious choice, since the surveys highlighted the great diversity of arrangements throughout Europe in that regard.

Although the balancing can be perceived as a technical only market, its design in many respects will influence on economic decisions in many connected areas.

 

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Main points of ACER’s 2nd Edition of Guidance on REMIT
Monday, 26 November 2012 00:00

 

The company internal documentation and procedures on definitions of roles and responsibilities in the organisation (e.g. responsibilities for the REMIT requirements (centralised vs. decentralised), internal vs. external reporting lines, internal vs. external interfaces, provision of resources: human/technical IT Systems) resources), as well as the identification/assessment of concrete compliance risks will inevitable be in the first place the subject of the detailed scrutiny and examination of the relevant authorities in case of any suspected REMIT non-compliance.

 

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Capacity markets vs. Internal Electricity Market – will State aid weapon be used?
Friday, 23 November 2012 14:20

 

Capacity mechanisms attempt to ensure that electricity undertakings (often suppliers) assume the responsibility to provide or pay for generation capacity which they would not otherwise do, or at least not to the same extent, considering only their own commercial interests. According to the European Commission’s stance it is possible that such a mechanism constitutes a public service obligation and involve State aid. The above notwithstanding, UK prepares for capacity auctions from 2014 for delivery of capacity in the winter of 2018/19, if needed.

 

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Connection agreements considered a reportable fundamental data item under the REMIT Regulation
Saturday, 20 October 2012 17:59

 

Classifying connection agreements as REMIT fundamental data item is not obvious and does not follow literally from the regulatory language. However, if such classification is correct, the electricity generators should immediately include such data in their REMIT reports.

 

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What can be expected in 2013 as regards legislative developments in the energy market
Thursday, 16 August 2012 06:13

 

2014 has been politically set as a target for the completion of the European internal market for electricity and gas. It is useful to know the schedule for adopting the main network codes in that regard.

 

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Reporting for non-standardised wholesale energy market contracts under REMIT framework pursuant to ACER guidelines
Wednesday, 08 August 2012 06:52

 

Reporting for non-standardised wholesale energy market contracts under REMIT Regulation will not be an easy task for market participants.

 

Given the non-standardised contracts are to be reported to ACER directly by market participants (and not by trading venues), the former are allowed more time for contract verification against reporting schedule. The one-month period seems to be sufficient for such an assessment even when it comes to complex and complicated contracts. Moreover, mandatory submitting to the ACER the pdf file of the entire contract enables additional examination of the contract by ACER services.

 

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European Single Electricity Balancing Market - state of play
Monday, 25 June 2012 06:57

 

Assuming Framework Guidelines become binding law, and the fact intermittent generation as the PV or wind sources have very low variable costs, it is probable in the future Single Electricity Market baseload fossil-fueled generation like coal and gas will gradually be squeezed out from providing balancing services.

Investment outlays engaged in these sources will probably be recovered over longer periods due to contained periods of operation of these units on the electricity balancing market. In such a situation it appears more and more questionable, whether the investors decide to engage in new sources of fossil-fuel generation.

ENTSO-E however engages in a dispute with the European energy regulator ACER over the content of the Framework Guidelines.

 

Last Updated on Sunday, 05 August 2012 13:33
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Registration for REMIT – requirement to reveal corporate structures
Saturday, 28 April 2012 16:52

 

As market participants will not be allowed to trade until they are registered, it may potentially represent a barrier to trade in the internal energy market.

Registration will not be a one-off event, but rather an ongoing requirement due to obligation to keep information provided up-to-date. From the practical point of view it is therefore necessary to establish within corporate structures of market participants arrangements ensuring that new requirements will be properly and timely discharged.

It should be noted that market participants are under obligation to register even if they are located outside the European Union.

 

Another issue of potential significance for the wider market is the commercial exploitation for data contained in the part of the register publicly revealed by ACER.

 

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100 MW outages as REMIT inside information
Tuesday, 24 April 2012 16:44

 

Somebody my ask why exactly 100 MW (and above) outage is treated as inside information under REMIT Regulation and what is the legal basis for such determination...

 

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Power exchanges – uniform EU regulation desirable
Saturday, 21 April 2012 14:13

 

1. Are there in any Member State any energy exchanges which do not qualify as regulated markets or MTF as defined by MiFID (for instance act under specific national legislation divergent from financial markets regulations)?

2. Do the energy exchanges referred to under point 1 trade in physically settled commodity (electricity) forwards?

3. Are transactions mentioned in points 1 and 2 captured by MiFID?

 

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Contentious collateral in EMIR draft technical standards
Monday, 16 April 2012 06:15

 

It seems that there is no agreement between European Supervisory Authorities and non-financial market participants as regards draft Technical Standards on risk mitigation techniques for OTC derivatives not cleared by a CCP under the Regulation on OTC derivatives, CCPs and Trade Repositories (the draft RTS).

 

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Rumours in the practical application for REMIT – interlinkages with the emissions market
Wednesday, 11 April 2012 06:39

 

There are grounds for applying certain regulatory guidance elaborated under financial instruments’ market abuse regime to wholesale energy products regulated by the REMIT Regulation. The best practice for the treatment of rumours seems to be good example.

 

These points might also be of relevance for emitters of greenhouse gases, considering interdependencies between electricity and carbon price curves and the future potential covering of emissions allowances by the financial instruments legislation.

 

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Transitional provisions and derogations in the ENTSO-E Draft Network Code for Grid Connections of Generators – issues that must not be overlooked
Thursday, 22 March 2012 19:08

 

An existing generating unit which is not compliant with a provision of the Network Code should apply for derogation within 12 months from the day the requirement, of which it is not compliant with, becomes applicable.

 

The network operator will have the right to refuse the operation of the generating unit, if the 12 months period terminates without an application for derogation.

 

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