Market Index Definition Statement Review 2011 ISG Recommendations

Transcription

1 188/10 Market Index Definition Statement Review 2011 ISG Recommendations Meeting Name BSC Panel Meeting Date 13 October 2011 Purpose of paper Summary For Decision We have carried out the annual review of the Market Index Definition Statement (MIDS) as required by the BSC. After considering the analysis, the ISG sought industry views on possible changes to the product and timeband weightings. In light of consultation responses received, the ISG are recommending two changes be made to the MIDS; the introduction of a new product and the removal of the later timebands from the weightings. The Panel is asked to note the ISG recommendations and make its final decision on the changes to the MIDS. 1. Summary 1.1 The Market Index Definition Statement (MIDS) defines the way the Market Index Price (MIP) used to determine the reverse Energy Imbalance Price is calculated. The MIP is a volume weighted average of qualifying trades made on the power exchanges; the MIDS defines which trades qualify. We review the MIDS annually, as required by the BSC. 1.2 We carried out the analysis on the underlying data used to calculate the reverse price in line with the MIDS, examining the products traded and timebands used in the calculation. The initial review showed that the current weightings and timebands remain suitable. 1.3 In April this year, a new power exchange, N2EX went live and its operator - NasdaqOMX Stockholm AB (NOMX) - began submitting Market Index Base Data. The volume traded on the weighted products and timebands on the new exchange in the review period was low, and therefore had little impact on the calculation of the Reverse Imbalance Price. However, following the introduction of the new power exchange, large volumes are being traded on a product that is not currently contained within the MIDS; the Day Ahead Auction product (Product A). 1.4 As a result of this change, the ISG sought industry views on the suitability of Product A for inclusion in the calculation of the Reverse Price. The ISG also sought views on the possible inclusion of the Overnight Product (Product O), or removal of timebands 7 and 8 from the weightings, so only trades made within 12 hours (rather than 20 hours) of Gate Closure would be included in the calculation. 1.5 We received three responses to the consultation and presented these to the ISG in September. The ISG paper and consultation responses are provided as Attachment A. 188/10: MIDS 2011 Review Version 1.0 Page 1 of 4 ELEXON 2011

2 188/10 2. Consultation Process and ISG Discussion 2.1 The three consultation responses represented 15 BSC Parties, covering Suppliers, Generators, Traders and a power exchange. 2.2 Two respondents commented on the current Individual Liquidity Threshold, and agreed that it remained suitable. 2.3 All three respondents felt that no other currently traded products should be included in the weightings for the Reverse price calculation, with which the ISG agreed. However, one respondent stated that a new 1 hour block product would begin being traded with APX in Quarter 4 this year. The principles of the MIDS state that equivalent products should carry the same weightings across all MIDPs. As there is currently a 1 hour block product included in the MIDS with a weighting of 1 for N2EX, the ISG agreed that a change to the MIDS needs to be progressed so that the APX 1 hour product is also included. 2.4 The ISG also agreed that the Day Ahead Auction product should be included in the Relevant Products section of the MIDS, but with a weighting of Two respondents commented on the timeband weightings. One believed that they should remain unchanged, and one felt that timebands 7 and 8 should be removed from the weightings. The ISG agreed that this was a good option, as it draws a clearer distinction between the short-term products that are traded closer to Gate Closure and the longer duration ones and those that are traded well in advance, such as Product A. Also, the ISG noted that altering the weightings of these timebands would not have a detrimental impact on liquidity, and only a minimal impact on the Reverse price. 2.6 Therefore the ISG recommended a second change be raised to remove these timebands from the weightings. 2.7 The ISG also considered a known issue with the MIDS, whereby fractional weightings should not be applied where there is more than one MIDP. As there is currently no real appetite for the use of fractional weightings and in light of the ongoing Ofgem Cash-out Pricing Review, the ISG felt that it was not appropriate to pursue a solution to the issue at this time. 3. Significant Code Review 3.1 At the time of the meeting, the ISG expressed some concern over the timing of such changes in light of the Significant Codes Review to be carried out by Ofgem, and the potential of that to introduce changes to the reverse price calculation. The ISG was mindful that it did not wish to recommend changes to the MIDS, which would require some cost and effort to implement, if these changes were to be superseded straightaway by more drastic changes raised as a result of the work by Ofgem. Therefore the ISG requested ELEXON contact Ofgem before making the recommendations to the Panel. 3.2 Therefore the ISG requested ELEXON contact Ofgem request assurance that such impacts were unlikely, and made its recommendations subject to such confirmation. 188/10: MIDS 2011 Review Version 1.0 Page 2 of 4 ELEXON 2011

3 188/ ELEXON has since had a conversation with Ofgem, who have confirmed that the outcome of the review is not due for at least another 12 months, and therefore the ISG s recommendations can be carried forward. 4. Next Steps 4.1 If the Panel agrees with the ISG recommendations, ELEXON will raise Change Proposals to incorporate the changes into the MIDS. The ISG has recommended that the changes to the products and to the timebands be raised as separate Change Proposals. 4.2 The inclusion of the new APX Product is required to meet the principles of the MIDS. A second Change Proposal would be raised to change the weighting of timebands 7 and Once the Change Proposals have been progressed, and assuming the ISG approves them, then they will need to be passed to Ofgem for its final approval before they can come into effect in the calculation of Market Index Data and hence the reverse price. 5. Next MIDS Review 5.1 We plan to carry out the next review of the MIDS for the August 2012 ISG meeting and October 2012 Panel meeting. 6. Recommendations 6.1 We invite you to: a) NOTE the contents of this paper; b) NOTE the ISG s recommendations; c) INSTRUCT ELEXON to raise a Change Proposal to introduce the new APX 1 Hour Block product into the MIDS with a weighting of 1 and the Day Ahead Auction product with a weighting of 0 ; and d) INSTRUCT ELEXON to raise a second Change Proposal to be progressed concurrently to change the weightings of timebands 7 and 8 to 0. Attachments: Attachment A ISG128/02 Market Index Definition Statement Review Consultation Responses 188/10: MIDS 2011 Review Version 1.0 Page 3 of 4 ELEXON 2011

4 188/10 For more information, please contact: Ian Scougal Market Analyst /10: MIDS 2011 Review Version 1.0 Page 4 of 4 ELEXON 2011

5 Market Index Definition Statement Review Consultation Responses Meeting Name Imbalance Settlement Group (ISG) Meeting Date 27 September 2011 Purpose of paper Summary For Decision Following the last ISG meeting, we issued the Market Index Definition Statement review paper for industry consultation. Here we present the three responses received and ask the ISG to make its final recommendations to the BSC Panel on whether or not any changes are required to the MIDS. 1. Introduction 1.1 The Market Index Definition Statement (MIDS) defines the process by which a power exchange calculates Market Index Data (MID). MID consists of a half-hourly price and volume, which is used to calculate the reverse imbalance price; the aim being that this price reflects the price of wholesale electricity in the short-term market for Great Britain. 1.2 The MIDS defines the process by which the Market Index Volume and Market Index Price are calculated, and sets a threshold liquidity volume under which defaults are applied. It also sets out the traded products and timebands which should be included in the calculations, and the weightings that are applied to those products. 1.3 The MIDS is reviewed annually and the analysis that formed part of this review was presented to the ISG in August (ISG127/04). 1.4 In April 2011, a new Market Index Data Provider (MIDP) went live; NasdaqOMX Stockholm AB (NOMX) began operating the N2EX power exchange. The introduction of the new MIDP has seen a large increase in trading on the Day Ahead Auction product, which is not currently included in the MIDS. As a result, the ISG requested that industry opinion be sought on the possible inclusion of the Auction product, as well as the Overnight product or changing the timeband weightings before the Committee makes its final recommendation to the BSC Panel. 1.5 The consultation paper is included as Attachment A. 2. Consultation Responses 2.1 The consultation posed three questions, as per the table below. We received three responses, representing 15 BSC Parties, covering Suppliers, Generators, Traders and a power exchange. Page 1 of 5 ELEXON 2011

6 Question Yes No No Comment Do you agree that the Individual Liquidity Threshold (ILT) should remain at 25MWh? Do you believe any changes should be made to the products that currently have a weighting of 1 in the MIDS? Do you believe any changes should be made to the timebands that currently have a weighting of 1 in the MIDS? On the subject of the ILT, the two respondents who commented felt that the value should remain at 25MWh. One stated it continues to provide a reasonable compromise between conflicting requirements to minimise the number of periods in which a default price is set and to minimise the number of periods in which a single or very small number of trades set the reverse price. 2.3 When asked if any additional products should be included, all three respondents said no. One felt that day ahead products were not suitable for inclusion in the calculation of Imbalance Prices, as they can be unrepresentative of market conditions close to Gate Closure. Another felt that the current products are more representative of short notice trades, which is the main aim of the reverse price calculation. The third respondent said that it was too soon to take a full view on whether trading on the new power exchange (N2EX) is truly reflective of the market position and trend, as the exchange had not been in operation long, and that only a limited number of Trading Parties were using it. They also felt that the Overnight product should be excluded due to its flattening impact on the price. 2.4 On the subject of timebands, of the two respondents who stated an opinion, one suggested they should remain unchanged as they provide sufficient liquidity for the calculation. The other respondent felt that timebands 7 and 8 should be weighted to zero, and thus removed from the calculation. This is because it would have no significant impact on liquidity, and would also make a clearer distinction between short notice trades and those made further away from gate Closure, and would remove the question of whether the day ahead auction product should be included. 2.5 One respondent made an additional comment that the new 1 hour block product, that is going live on the APX exchange in Quarter , should be included. 2.6 The full responses are included as Attachment B. 3. Areas for ISG consideration New APX 1 Hour Block Product 3.1 When N2EX went live in April, a 1 hour block product was offered on the exchange. This was included in the new version of the MIDS with a 1 weighting, as it matches the characteristics of the currently weighted products; i.e. it is traded within day and is of a similar duration. At the time APX did not offer Page 2 of 5 ELEXON 2011

7 such a product, but will do so from Q4 of this year. Principle e) of the MIDS weightings states that The same weightings must be applied to equivalent qualifying products and timebands across all Market Index Data Providers. 3.2 Therefore, a change (Change Proposal (CP)) will have to be raised to the MIDS to include the APX 1 hour block product, and it will need to be set with the same weighting as for the N2EX product, both should be 1. Timebands 7 & One of the respondents recommended reducing the number of weighted timebands so that 7 and 8 are no longer included, meaning only trades made within 12 hours of Gate Closure were included in the calculation. As pointed out in the consultation response, removing these timebands from the weightings would draw a clearer line between the shorter term products traded closer to Gate Closure and the rest. In timebands 1-6, 80% of the total traded volume is on the currently weighted products, as opposed to only 40% in timebands The consultation document highlights that the impact on removing these timebands would be low, affecting less than 10% of Settlement Periods between 5 April 2011 and 31 July Expanding this to the whole review period gives similar results. Table 1: Price impact of removing timebands 7 and 8 from the weightings 3.5 No additional Settlement Periods would have defaulted due to insufficient liquidity. Similarly, there is no detrimental impact on the number of trades that the Market Index Price would be set on (graph 3 in the consultation document), with no Settlement Periods being set on a single trade, and no additional Settlement Periods being set on small numbers of trades. 3.6 In previous reviews we have highlighted that it would be possible to remove the weightings from the later timebands and not have a detrimental impact on liquidity, but that there has previously been no significant benefit in removing them, as it would have required a change, but would not have had any real impact on the calculation of the reverse price. However, as a change will need to be raised to include Page 3 of 5 ELEXON 2011

8 the new APX 1 hour block product, ELEXON believes that this would now be a good opportunity for the weightings to be removed from timebands 7 and 8 at the same time and proposes a change be made. Day Ahead Auction Product 3.7 No comments have been made to alter the weightings of the products contained within the MIDS, or to include additional products in the weightings. The Day Ahead Auction product is not currently listed in the MIDS as a relevant product. As significant volumes are being traded on this product, and a Change will need to be raised to include the APX 1 hour product, this may be an opportunity to update the MIDS to include the day ahead auction product, but set it with a 0 weighting. Therefore, ELEXON proposes that a change be made to the MIDS. Fractional Weightings 3.8 An issue has previously been raised with the ISG 1 about the use of fractional weightings with more than one MIDP. Currently, if fractional weightings were applied to trade volumes, the Market Index Price would be different if the trades were made across two MIDPs, than if the same set of Trades were made on one exchange only. This is due to the Market Index Volume that is submitted by each MIDP, and is used to derive the volume weighted average of the two Market Index Prices to give the reverse price for the market, not taking into account the weightings. 3.9 The most simple way to correct this issue would be to change the MIDS so that the declared Traded Volume is calculated using the weightings, rather than the total traded volume on weighted products Although there is no current suggestion that fractional weightings are required, ELEXON believes there is benefit in having the ability to do so, this would allow more variation to the importance of product/timeband combinations to be rated in the calculation of MIP, and in turn, the Energy Imbalance Reverse Price were trading patterns to change significantly Previously, updating the MIDS to allow this has been discounted as there has been no real case for change. However, as a CP will be raised to include the above changes, we feel that this is an opportunity to include this improvement at the same time Any changes to the products and weightings in the MIDS should not incur any additional costs from the MIDPs. Changing the calculation of the MIV may incur other costs due to more extensive system changes, although at the time of writing this is not certain. An update will be provided at the meeting. 4. Next Steps 4.1 On the basis of the analysis presented last month, and the consultation responses, the ISG is asked to make its final recommendation to the BSC Panel. We will present this to the Panel at its October meeting for decision. 1 ISG105/04 Market Index Definition Statement - Comments Raised on Liquidity Thresholds and Weightings Page 4 of 5 ELEXON 2011

9 5. Recommendations The ISG is invited to; a) NOTE the consultation responses; and b) RECOMMEND to the BSC Panel that a Change Proposal be raised to change the Market Index Definition Statement to: INCLUDE the new 1 hour block product offered by APX with a weighting of 1 ; CHANGE the weighting of timebands 7 and 8 to 0 ; INCLUDE the Day Ahead Auction Product with a weighting of 0 ; and CORRECT the issue with fractional weightings. Attachments: Attachment A MIDS consultation paper Attachment B Consolidated consultation responses. For more information, please contact: Ian Scougal, Market Analyst Ian.scougal@elexon.co.uk Page 5 of 5 ELEXON 2011