Belpex and trilateral market coupling

(1)

Belpex Conference Day

12 January 2006

Belpex and Trilateral Market Coupling

Energy Exchanges and Transmission System Operators working together towards European Market Integration

(2)

12 January 2006 Conference Day 2

Belpex: the Belgian Spotmarket

Catherine VANDENBORRE, Belpex Chief Executive Officer

(3)

Overview

• Day-ahead Market

• Goals of the DAM

• Market model

• Product description

• Contracts

• Collateral calculation

• From 12 January to launch date

• Corporate & Legal Aspects

• Next developments

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Day-ahead Market

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• Provide consumers with a wider choice of electrical energy sources

• Enable the ARP’s to optimize their portfolio in terms of imbalance costs

• Reduce trade and credit risks for market players compared with the risks involved in concluding bilateral contracts

• Provide economic players with a transparent price benchmark

• Stimulate the opening of the electricity market

Goals of the DAM

(6)

DAM - Market Model

CLEARING Risk issues

& Financial settlement

€ debt (novation)

€ payment

€ claim (novation)

€ payment

Financial Institution

€ collateral

deposits € collateral

deposits

Central Counter Party

(CCP) APX

DELIVERY ownership (title

tracking) + delivery issues

MW

transfer nomination

ARP balancing obligation

nomination ARP balancing

obligation

Elia

Belpex Nominations Commissionnair

counter nominations (buy / sell)

Buying participants

TRADING (price &

volume setting issues)

Bidding

Belpex

Results

Bidding Results

Selling participants

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12 January 2006 Conference Day 7 Quantity (MWh)

DAM – Product description (1/4)

Order types :

• Limit orders :

• 1 hour (instrument)

• Max/min price, volume, hour

• Different price-quantity pairs

• Partial execution possible

9 € Price

Quantity (MWh)

180 MWh 60 MWh 160 MWh

53 €

24 €

Total quantity offered: 400 MWh

Player type Hour Quantity Price

Company B Sale 12 180 9

Price 40 € 32 €

18 €

120 MWh 80 MWh 180 MWh

Total quantity demanded: 380 MWh

Player type Hour Quantity Price

Company A Purchase 20 120 40

(8)

DAM – Product description (2/4)

Order types (con’d):

• Block orders :

• consecutive hours (instruments) during the same day

• “Fill or Kill”

• Maximum number and volume (liquidity)

Order characteristics :

• Firm commitment to purchase (Purchase Order) or sell (Sales Order)

• Min and max Order price (technical reason) : 0,01 to 3 000 €/MWh

Principles for system availability :

• Every calendar day

• From 00:30 to 24:00

Order entry :

• Entry for Instruments related to day D possible from D-14 until D-1 11:00 (=MCT for Orders related to day D Instruments)

(9)

Contract :

• Contract size : minimum 0,1 MWh

• Contracts are irrevocable; no validation phase

• Total Contract Price: Order volume multiplied by Market Clearing Price

Trading platform :

• Based on the electronic EuroLight™ system

• Front-end to back-end structure

• Graphical user interface for the purpose of trading

Security of transactions

DAM - Product description (3/4)

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Fees :

• Entrance Fee : € 12.500

• Membership Fee : € 25.000

• Variable operational Fee : € 0,14/MWh

• Fees for additional services

Fixing :

• 24 h prices

• Determine what blocks are accepted (heuristics)

Clearing and Settlement :

• CCP performs weekly Settlement

• CCP guarantees the financial security of the transactions

Delivery :

• “Double nomination” (Participant and Belpex) of net position to Elia (exchange transactions are considered as “hub trades”)

DAM - Product description (4/4)

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DAM - Contracts

Elia S.O.

Participants _Financial

Institution

CCP Belpex

Participation Agreement

Participation Agreement CSS

ARP

ARP Agreement

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DAM - Collateral calculation

Excess Collateral (net seller)

Bank guarantee Cash Collateral (Credit outstanding

on

CCP Cash Account)

Trading requirement: Collateral>Required Collateral

Variable Collateral (sum previous 28 days of trade)

Extra Collateral (if any) Inconsistency

Collateral (If activated)

Initial Collateral (fixed amount: 10k€)

Accrued Unrealized Settlement (net buyer) Accrued Unrealized

Settlement (net seller)

Required Collateral (net seller)

Collateral Excess

Collateral (net buyer)

Required Collateral (net buyer)

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From 12 January to launch date

Publication of the Market Rules on the

website

After publication

in Belgian Gazette

Start of Belpex User’s Group

March

Publication of the Market

procedures

15 March

Regulators approval of

TLC file

AA

Accession Procedure

A + 1 day

Legal &

operational sessions

From A to A + 2 months

End to end simulation

training

From A to A + 2 months

Belpex Go Live with TLC

A + 2 months, a realistic launch date could be Q3

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Corporate & Legal Aspects

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Belpex Corporate structure :

• Initiative by Elia in cooperation with APX and Powernext

• Belpex : Belgian company, created on the 7^th of July 2005

• Shareholders: Elia 60%, APX, Powernext, RTE and Tennet each 10%.

Belpex Legal framework :

• Exchange of physical energy blocks is not subject to law on financial derivatives markets

• 26 October 2005: Publication of Royal Decree

• Approval by Minister regarding License and Market Rules

Corporate & Legal Aspects

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Next developments

Current development :

• VPP activity running since January 1st 2006 (with Powernext)

Other products

:

• Futures

• Financial futures

Æ will be examined and may be introduced in due course

• Intraday market

- Part of the roadmap

- Will be addressed but a stable DAM framework is required

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Trilateral Market Coupling

Jean-François CONIL-LACOSTE, Powernext Chief Executive Officer

and

Bert DEN OUDEN,

APX Group Chief Executive Officer

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• What is market coupling and what are the benefits?

• Implementation of trilateral market coupling (‘TLC’) in France/Belgium/Netherlands

• From Trilateral to Multilateral

Overview

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What is Market Coupling and what are the

benefits?

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What is market coupling?

Spot market area A

Price

Quantity

Spot market area B

Quantity

imports

exports

Explicit auction of transmission

capacity

Maximum im/export

Explicit auction of transmission

capacity

Price/ Auction revenue

Daily explicit auction

?

Price difference /Auction revenue

Daily implicit auction (market coupling)

A way of linking separate day-ahead (auction-style) spot markets using cross-border transmission capacity

• “Implicit auction”: transmission capacity allocation is integrated with the energy market (“explicit auctions” sell capacity separately before)

• Similar to “market splitting” used in Scandinavia to link price areas

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Benefits of Market Coupling

• Removes risks of trading transmission and energy separately

• Less prone to market power abuse: transmission capacity cannot be hoarded, reserved or scheduled adversely

• All market participants benefit from cross-border capacity

• Enables netting of import / export schedules Æ more capacity

• Launching new spot markets – i.e., Belpex; encourages liquid, robust spot markets: indices and derivatives

Outcome:

• At times of constrained connection: all capacity used, 100%

use-it-or loose it, netting of flows Æ price differences are minimised; most efficient use of transmission capacity

• At times of no transportation constraint: markets converge totally

Æ Step towards one integrated European electricity market

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Spot market area A

Price

Quantity

Spot market area B

Quantity

imports

exports

Price difference /auction revenue

Market coupling: constrained situation (split)

Market coupling: unconstrained situation (coupled)

No constraint, no auction revenue

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Implementation of Trilateral Market Coupling

(‘TLC’) in France/Belgium/Netherlands

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Price

Quantity

Area X

supply demand

Price

Quantity

Area Y

demand

supply

import export

Decentralized market coupling mechanism

influence of im- and export on area prices

(25)

Decentralized market coupling: 2 countries

Area Prices

Imports Exports

Elasticity curves

• Depicting price influence of potential im/exports

• Each exchange produces hourly curves

• zero import price is based on area bids like today, price dependency curve is based on the same in

case of additional imports and exports

0

price of area X

Isolated price X Isolated price Y price of

area Y

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Situations: unconstrained/constrained

Area Prices

Flow YÆX Flow XÆ Y

Unconstrained case:

• Enough transmission capacity

• Price for both areas identical: enough

capacity to set price at intersection of curves Constrained case:

• Limited transmission capacity

• Prices for areas differ:

set at max. im/exports;

congestion revenue 0

Area price X = Area price Y

Available transmission capacity

Area price Y Area price X

price of area X

price of area Y

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Decentralized market coupling: 3 countries

Trilateral Coupling: basic solving algorithm (example)

Highest isolated price Z Middle isolated price Y Lowest isolated price X Price

Exports Imports

Price

Exports Imports

Price

3 individual elasticity curves:

- Rank areas in order of price - Create combined elasticity curve of 2 areas

Example: elasticity curve of middle price market closest

to lowest price market

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Decentralized market coupling: 3 countries

Trilateral Coupling: basic solving algorithm (example)

Price

Flow into Z Flow out of Z

Price

Imports in area Z

Combined export curve from X+Y:

*unconstrained part (coupling)

*constrained part (splitting)

Flow into Y Flow out of Y

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Flow YÆZ Flow ZÆY

Price

Impo rt cur

ve Z

Combined export curve X + Y

Example, Scenario 1- No split between X+Y

Decentralized market coupling: 3 countries

Cases:

P_z P_X=P_Y

X+Y coupled on common price, Z split on separate price

P_X=P_Y=P_z

All areas coupled, X+Y+Z converging to one common price

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Flow YÆZ Flow ZÆY

Price

Impo rt cur

ve Z

Decentralized market coupling: 3 countries

Example, Scenario 2- Split between exporting countries

Combined export curve X + Y

Single export curve Y

Price of area X

Cases:

- X+Y coupled on common price, Z split on separate price

P_z

P_X=P_Y - All areas split on

own (adjusted) price

P_X≠ P_Y≠P_z

- Y+Z coupled on common price, X split on separate price

P_y=P_z P_x

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High Level Properties of Market Coupling

• Market prices are positive

• Flows balance overall

• Flow consistent with published ATC

• Power flows from low price area to high price area

• Maximize flow until prices across link converge (or ATC limit

reached)

• Respect participants’ order price and volume conditions (normal exchange rules)

Efficient use of the available transmission capacity

Possible to verify this every day

using publicly

available data

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F = B = NL F ≠ B = NL

Unconstrained

F = B ≠ NL F ≠ B ≠ NL

Constrained Belgian-

Dutch border

Unconstrained Constrained

Belgian-French border Border

Maximize flow until prices across link converge (or ATC limit

reached)

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Price increase southwards Lowest price

in Belgium

Price increase northwards Highest price

in Belgium

Power flows from low price area to high price area

30€

27€

28€

25€

27€

28€

27€

30€

28€

30€

27€

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Implementing a decentralised technical approach

Coordination Module

Schedule Bids

Portfolio allocator Block

selector Nec

creator

1 2

3a 3b

4

5 BELPEX

TSO

ATC

POWERNEXT APX

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• Harmonised deadline for order submission: 11:00am

• Target time to publish results: 11:30am (latest 11:45am)

11:00 Deadline for order submission ATCs

published

Initial Data sent by each Exchange to

the CM

Intermediary Results sent

to local Exchanges

systems

Order book closure and Initial

calculations

Iterative calculations

Final calculations

Consistency checks Results

ready

Results published

11:10 11:20 11:25 11:30

10:00

Market Coupling Daily Process

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Impact on Existing Exchange Arrangements

• Change to common market closing times ( 11:00 AM )

• Change to common technical price limits (0,01€ - 3000€/MWh)

• Participation agreements modified to reflect new matching mechanism

• That’s all. On each Exchange, unchanged trading platforms, unchanged products, unchanged clearing and settlement

arrangements, unchanged helpdesk, ….

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+500MW

FR-BE: 500MW BE-NL: 400MW

-100MW -400MW

28€ 30€ 35€

Implementing a decentralised contractual approach (1)

What are the transactions required to ensure:

• Delivery and payment of the cross-border transaction

• Order book balance in each market

• Collection and payment of the congestion revenues?

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500MW 100MW 400MW

500MW 400MW

Transactions:

• TSO/ market: Each TSO gives a permanent instruction to the Exchange operating in its system to execute a transaction at market price, with a volume determined by the Market

Coupling algorithm on the basis of the ATCs.

• TSO/ TSO: Cross-border transactions between TSOs to close positions and share congestion revenues

Implementing a decentralised contractual approach (2)

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Implementing a decentralised contractual approach (3)

• One multilateral arrangement

o Principles, objectives of market coupling

o Roles and responsibilities, main flows

o Contractual scheme and governance structure

• Arrangements between Exchanges

o Provide algorithms and systems

o Operate Market Coupling

• Arrangements between TSOs

o Calculate and Publish Capacity

o Ship the Cross-Border Flow

o Share congestion revenues

o Ensure firmness

• Local arrangements TSO-Exchange

o “Participation” of the TSO on the Exchange

o Provide/ receive ATCs

o Issue/ accept Results

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• Steering Committee, comprising all TSOs and Exchanges, oversees project and resolves key framework issues

• APX and Powernext jointly developed the algorithm, audited by external experts

• Systems now being tested, contracts close to finalisation

• Decentralisation as a working principle

o Comparative advantages are used

o Variety of local arrangements are supported

o Horizontal cooperation between Exchanges, between TSOs, between regulators + vertical cooperation between those is strengthened

o Robust grounds are created for other areas of cooperation/harmonisation

TLC Project Process

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From Trilateral to Multilateral

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• TLC parties committed to

facilitating the addition of further areas to TLC approach, open to any other new partners (Italy, Iberian peninsula, UK/ireland, Central Europe, Eastern Europe)

• Regional Markets approach as foreseen by European

Regulatory Forum

Geographic extensions (1/2)

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Geographic extensions (2/2)

• NorNed

o Nord Pool Spot, APX TenneT, Statnett committed to market coupling over NorNed cable (2007) – regulators’ decision

o Need to integrate: NorNed with market coupling NL-B-F (TLC) Prototype developed of possible NorNed/TLC solution, also supporting multiple markets

• Spanish-French border

o Ministerial Order published on 31/12/2005 based on the proposal of CNE and CRE at the Iberian mini-forum.

o Phase 1: coordinated explicit auctions

o Phase 2: coordinated explicit auctions + UIOLI + coordinated Market Coupling (capacity: at most 15% + UIOLI).

o Phase 3: coordinated explicit auctions + UIOSI + coordinated Market Coupling (capacity split to be determined)

o Proposal for Phase 1 to be submitted by the end of January

o Proposal for Phase 2 to be submitted 6 months after Phase 1 is in place

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Towards an Open & Multilateral Market Coupling

• First step: implementation of the TLC:

o Easiest to make quick progress in small pilot groups

o Reasonable uniformity of approach and objectives between the parties: ‘coalition of the willing’

o TLC regulated via TSOs

• Extending to more countries; synergy explicit – implicit Open model in three ways:

o Open to market participants, re-trading their transmission capacity for optional day value

o Open to synergy between explicit (forward) and implicit (daily) auctions

o Open to other exchanges / price areas (geographical extension) With common governance (all exchanges, all TSO’s)

• From TLC to MLC

(45)

Management of Interconnection Capacities

On behalf of RTE – ELIA - TenneT

Frank VANDENBERGHE,

Manager Customers & Market ELIA

45

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Overview

• Interconnection Capacities: current situation

• Daily Market Process

• Roadmap by Regulators CRE-CREG-DTE

• Further steps

46

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Interconnection Capacities:

current situation

47

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TSO Roles and Responsabilities in the TLC

• TSOs determine the available daily capacities for market coupling and provide them to the Power Exchanges

• Power Exchanges provide market results (market prices and flows between hubs) that comply with a certain list of criteria (respect of ATC, “no congestion – no price difference”…)

• TSOs participate in the exchanges for the global cross border flow and manage the energy imports or exports.

• TSOs share the congestion income and support the costs of the coupling algorithm

• TSOs manage the firmness of cross border capacities.

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Other Import/Export products on the interconnections

• Joint allocation mechanism (RTE – ELIA) :

- Specific Rules (IFB Rules)

- Joint ELIA-RTE auctions in both directions

- Products : yearly, monthly and daily physical capacity rights

- Daily explicit auctions will be replaced by Daily Implicit allocation through Market Coupling

• Joint allocation mechanism TSO Auction BV

*

(ELIA, TenneT,

RWE and E.on Netz ):

- Specific Rules and Regulations - Joint auctions in both directions

- Products: yearly, monthly and daily physical capacity rights, Resell and Transfer of the monthly and yearly physical capacity rights

- Daily explicit auctions between Elia and TenneT will be replaced by Daily Implicit allocation through Market Coupling

* TSO Auction BV is an independent private limited company

49

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Aspects of current explicit day-ahead allocation

Explicit auctioning involves sequential decision steps to :

• Produce or trade

• Evaluate, bid for and obtain capacity

To be made by different parties and for each border separately

=> uncertainties, risks, inefficiencies Consequences :

• Low usage rate of day-ahead capacity:

- limited use for parties without generation portfolio

- no netting possible due to optional character of products

• For n borders, pancaking effect:

- low probability to obtain multi-border capacity in an efficient way

Results from day-ahead auction F-B border 6-11 January 2006:

• Average capacity usage rate: F=>B: 23,40% B=>F: 11,20%

• Average price F=> B: 0,00667€/MWh, B=>F: 0,00271€/MWh

50

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Daily Market Process

51

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8:00 GCT yearly/monthly

capacity nomination Elia/TenneT GCT base

VPP declaration

Belgium

ATC published

Market Closing

Time

GCT introduction

hub nominations

Elia/TenneT

10:00 11:00 13:00 14:00

7:30

Deadline publication

market results

11:30

GCT peak VPP declaration

Belgium

12:00

Final GCT nominations

ELIA

Inconsistency solving GCT y/m

capacity nomination

RTE

8:15 16:00

Hub nominations

RTE

11:00

Deadline for order submission

Initial Data sent by each Exchange to

the CM

Intermediary Results sent to local Exchanges

systems

Order book closure &

Initial calculations Iterative

calculations Final calculations Consistency checks Results

ready Results published

11:10 11:20 11:25 11:30

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The Regulators’ Roadmap

53

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“CRE, CREG and DTE fully support the integration of

energy and transmission markets near the real time and agree that the instrument of trilateral Day Ahead Market Coupling (DAMC) could bring benefits compared to day- ahead explicit auction.”

Regulators request 4 issues to be addressed by operators:

• Well-functioning of the algorithm (including fallback arrangement)

• Potential of extension of the DAMC framework

• Absence of discriminatory treatment between programs nominated by DAMC or by explicit auction

• Operational cost efficiency for the implementation of DAMC

The Regulators’ roadmap

54

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Roadmap: Extension to NorNed and other areas

• Nord Pool Spot and TLC partners committed to implement market coupling over NorNed (2007) – Regulators’ decision December 04.

• TLC parties committed to facilitating the addition of further areas to TLC, no exclusivity

• Extensions beyond NorNed might need adapted coupling arrangement, possibly based on flow-based

transmission model

55

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Further steps

56

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Transmission Rights

• 2006 issue of Roadmap: facilitate secondary capacity trading

o Yearly / monthly capacity can be re-traded for market value

o Ideally, all non-scheduled transmission capacity to be recycled by the market parties into the daily implicit auction, for day value

• Synergy between explicit – implicit auction, open participation

• Possible future development: Financial Transmission Rights (FTR)

o Limiting (or avoiding) the carving up of capacity in yr/m/d

o To be introduced under regulatory control

o Introduction will be in function of market demand

o Appropriate risk-sharing and regulatory incentives needed

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F low-based transmission model

Single price area

Interconnector

• Physical electrical flow paths taken into account

• Real network capacities and flows modeled as areas

linked by interconnectors

• Maximises use of transmission capacity

• In principle: no limits of extension to other interconnected areas, e.g. Germany

but

• Meshing jeopardizes

the carving up explicit/implicit Î Need for FTRs ?

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Towards an Open & Multilateral Market Coupling

Possible features of future Open and Multilateral Market Coupling :

•

Extension to more countries / more exchanges

• Secondary trading of forward (yearly/monthly) capacity, creating synergy between implicit & explicit auction and openness to market parties

• Flow-based transmission model, common TSO governance

• Financial products for Transmission Rights (FTR)

• Integration with intra-day market

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Questions?

60