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Power Market Fundamentals

Íngrid Munné-Collado Pol Olivella-Rosell and Andreas Sumper

CITCEA-UPC, Universitat Politècnica de Catalunya, Barcelona, Spain

1.1 Introduction

The overall goal of the electricity market is to provide electricity efficiently and, at the same time, to meet the demand of the consumers. Nowadays, electricity markets are based on competition but also contain regulated agents. However, times are changing, and the traditional electricity grid is evolving from a very centralized and unidirectional flow to a bidirectional flow, thanks to distributed energy resources (s) that are being installed along the distribution grid. Furthermore, one should also take into account the current energy policies that are focused on the decarbonization of the power sector [1]. According to the International Energy Agency (), European electricity consumption is projected to increase at an average annual rate of 1.4% up to 2030 and the share of renewables in Europe's electricity generation will double from 13% now to 26% in 2030. The European Energy roadmap 20501 aims to reduce greenhouse gases emissions and hence to reduce and mitigate climate change by integrating distributed and renewable energy resources.

This leads to new challenges that are currently being faced by the electricity sector. Technical challenges have arisen in the system operation, such as grid capacity, the intermittent behaviour of DERs, and grid congestion. Novel technologies such as smart meters and information and communication tools (s) facilitate the transition towards smart grids. Furthermore, the costs of renewable energy technologies have declined steadily due to technological advances, an increase in the environmental concern of customers and legislators, and the regulation that has enabled different players to emerge in the electricity market, such as retailers and energy service providers. New business models are being discussed and developed to enhance the integration of DERs into distribution grids and provide services to smart grid stakeholders by empowering prosumers. As a result of this, local energy communities () are being defined to provide solutions for prosumer involvement in this new energy paradigm. These topics are defined and further discussed in Chapter 2.

It is well known that power systems are complex structures composed of an enormous number of different installations, economic actors, and, in smaller numbers, system operators. The traditional approach of power systems is based on large power generators that cover the demand. In this approach, for steadily increasing consumption, large power generation is installed, mainly nuclear, coal, natural, and hydro. To guarantee the reliability of such a system, a meshed transmission grid at high voltage is installed, where the generators feed in. Underlying this transmission system, the distribution grid has the function of conducting the power flow in lower voltage levels to consumers in medium and low voltage. The described power flow is mainly unidirectional from the generators to the consumers connected in medium and low voltage. Such a system is easy to control as most of the players (customers) are passive and only a few actors (generators, system operators) allow a central coordinated control of the system, having well-defined interfaces. The traditional power system cannot cope with the increasing amount of DERs, and the traditional grid evolves to a smart one. It is worth noting that the transmission grid and the distribution grid are considered natural monopolies, due to their high infrastructural costs and impacts, and this is discussed further in Section 1.2.

A smart grid is an electricity network that can intelligently integrate the actions of all users connected to it - generators, consumers, and prosumers - to efficiently deliver sustainable, economic, and secure electricity supplies. A smart grid uses sensing, embedded processing, and digital communications as ICT tools to enable the electricity grid to be observable, measured, and visualized, as well as controllable, automated (able to adapt and self-heal), and fully integrated, which means that it is fully interoperable with existing systems and has the capacity to incorporate a diverse set of energy sources.

A prominent actor in modern power systems is the prosumer, a common consumer who becomes active to help personally improve or design the goods and services of the marketplace, transforming it and their role as consumers [2]. The strategic integration of prosumers into the electricity system is a challenge. Nowadays prosumers are acting outside the boundaries of traditional electricity companies because they supply energy to the grid. Hence, ordinary approaches to regulating their behaviour prove to be insufficient. The aggregated potential of flexibility makes the prosumer role important for energy systems with high and increasing shares of fluctuating renewable energy sources. To involve different prosumer segments, utilities and policy need to develop novel strategies. These new actors enable the emergence of new business models and smart grid key agents to integrate these new services provided by and to prosumers. Local electricity markets and micro electricity markets are the two main business models described along this book.

Electricity is a good that is traded in electricity markets, described as a very important zone in the smart grid plane. Markets are a way of organizing the distribution of commodities efficiently when conditions enhance perfect competition between actors. However, electricity is not a simple commodity. Nowadays large amounts of storage are not installed along the electricity grid. There is no possibility to store electricity on a large scale, and therefore it is necessary to use flexibility in the power system to keep the balance between production and consumption. Therefore, the technical differences of the commodity 'electricity' compared to other energy sources like natural gas and oil, have a profound effect on the organization and rules of electricity markets. Taking into account all these considerations, this good has to be produced when it has to be consumed, which leads to additional complexity in the market structure. To ensure reliable and continuous delivery of significant amounts of electricity, the system needs bulk generation plants, redundant transmission, distribution grids, and different control and monitoring functions to keep the system power flow technically feasible.

On top of this, the introduction of competition to the electricity supply has been accompanied by the privatization of utilities in most western countries. A market is a mechanism for matching the supply and demand for a commodity by finding an equilibrium price. Markets can be organized in different ways; each type is complementary to the others and therefore combined, and they are described in Section 1.4, considering spot markets, forward and future markets, and balancing markets.

For a secure and reliable operation of the power system, certain services, called ancillary services, have to be provided. These services maintain the quality of the supply in an acceptable range by regulating the frequency, providing spinning reserve or power to compensate imbalances. Typically, these tasks are performed by very flexible generation plants. Also, the transmission system operator () could ask to modify generator schedules for security reasons to handle overloading of power lines or transformers. All these commercial transactions have to be settled between all participants and market types as well as the ancillary services. This process is very complex for the electricity system and for that reason the settlement system for electricity markets is typically centralized.

Regulatory bodies define and implement all the principles or rules used to control any activity related to the power system. Regulation aims to prevent inefficient results being reached if people were allowed to interact freely [3]. Regulation has been a key agent in electricity markets and power systems. It seeks to protect consumers from the market power by preventing monopolies and oligopolies from setting high prices or providing low-quality services. On the other hand, regulation also protects investors from the state by avoiding the settlement of supply tariffs that would increase the investment payback. To enable this transition towards smart grids and decentralized power systems and electricity markets, regulation is still a key factor in creating a well-defined regulatory framework to develop these new business models. Regarding this, the regulatory framework must provide a safe environment for prosumers in the smart grid era.

In this chapter the reader will navigate through the basic concepts of power markets in Section 1.2 , starting with their evolution from monopolies to the current liberalization. Then the differences between bilateral and auctions are explained, and the basis of the trading procedure is defined, covering clearing and settlement stages. Going deeper into auction knowledge, which is used in electricity markets, Section 1.3 deals with the different mechanisms for auctions, combining not only theoretical aspects but also examples to help the reader's understanding. Section 1.4 details the current market schemes in electricity markets for energy trading. Lastly, some references...