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Elia: facilitator in the free electricity market

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Central role for system operators in the liberalised electricity market

The basic rules governing operation of the electricity market are laid down in a European directive. The aim is to create a single liberalised market across the European Union. European energy policy has other focuses too, in particular, security of supply and climate policy. However, the electricity market presents some specific characteristics: the transmission of electricity is linked to the laws of physics, and electricity is unlike any other product, as it cannot be stocked and has to be generated at the moment of consumption. All of this makes organising an electricity market taking into account the various objectives a highly complex and particular task. Therefore, a number of basic principles were established on European level.

Unbundling Electricity is generated and sold according to free-market principles. In contrast, the transmission and distribution of electricity is a natural monopoly. For financial, technical and environmental reasons it doesn’t make sense to develop multiple networks alongside one another. This means that the networks must allow the market players to use them as a shared platform. Consequently, a clear distinction has to be made between production and sale on the one hand and system operation on the other.

System operators’ role Due to the natural monopoly and the fact that networks are shared platforms, system operators (both transmission and distribution system operators) have a unique role in the market. They therefore have to operate their system in an objective, transparent and nondiscriminatory way. There are strict regulations covering system operators to ensure this. In Belgium, Elia has been appointed by the federal government to operate the 380 kV to 150 kV networks; whereas the regions have appointed Elia respectively as distribution system operator ( Flanders), local transmission system operator ( Wallonia) and regional transmission system operator ( Brussels) for the 70 kV to 30 kV networks.

Regulation Independent regulators monitor the market’s operation, keeping a particular eye on system operators, in view of their central position in the market and the specific tasks they have been given by law.

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Elia

Elia Group is built up around Elia System Operator, which with its subsidiary Elia Asset forms a single economic entity operating under the name Elia. Elia System Operator is the holder of various licences: transmission system operator at Belgian federal level, local transmission system operator in Wallonia, regional transmission system operator in Brussels Capital Region and distribution system operator in Flanders. The Group also incorporates the engineering firm Bel Engineering, which manages in-house all high-voltage grid development and improvement projects, and Elia RE, the Group’s own reinsurance company. Elia has a 60% stake in Belpex (the Belgian power exchange with trilateral market coupling) as well as an indirect holding in the French power exchange Powernext (via HGRT, a holding company of transmission system operators). The Elia System Operator share is listed on the regulated market of Euronext Brussels. Elia applies strict rules on corporate governance, imposed on the system operator by the Electricity Act of 29 April 1999 and the Royal Decree of 3 May 1999 on the operation of the transmission system. Elia also complies with the general regulations of the Act on corporate governance of 2 August 2002. Elia also observes the Lippens Code, the Belgian corporate governance code for listed companies.

Shareholders’ structure as at 31.12.2006 Free float* 40%

Publi-T 30%

Electrabel 27,45%

Publipart 2,55%

Elia System Operator

Elia Asset 99,99% economical unit

HGRT 22,17%

Elia RE 100%

Bel Engineering 100%

Belpex 60%

* The Arco Group owns 4.3% of the Elia shares and has options on 1% of Elia shares. Elia employees hold 0.54% of Elia’s shares.

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Operation of the Belgian high-voltage grid As the transmission system operator for electricity in Belgium, Elia operates the highvoltage infrastructure and the grid, and transparently and objectively organises access to its network for all its users. Elia has three main tasks as system operator.

• Operator of the electrical system Elia organises access to the high-voltage grid for all grid users in a transparent and objective way and enables the transmission of electricity in Belgium, including all the services that this entails. Around the clock Elia monitors whether the grid is working properly, manages energy flows and controls the balance between production and consumption in the Belgian control area. Exchanges of energy with neighbouring countries, too, play an important role in ensuring the security, reliability and stability of electricity transmission.

• Infrastructure operator Elia is responsible for the maintenance and upkeep of the high-voltage facilities ( 30 kV to 380 kV): lines, cables, transformers, and so on. Elia extends and modernises the grid using the most advanced technology, according to the requirements of the electricity market.

• Market facilitator Due to its central and unique position in the electricity market, it is natural that Elia should play the role of market facilitator. Elia aims to make this role very much its own by organising services and mechanisms that ensure easy access to the grid for users, contribute to the liquidity of the electricity market and promote free competition between the market players. One mechanism that Elia uses is its operation of a trading hub where bilateral electricity exchanges can be made on a quarter-hourly basis.

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The Elia grid Elia’s high-voltage grid comprises about 8,400 km of overhead and underground high-voltage connecting lines and 800 high-voltage substations. The 380 kV-lines are the backbone of the Belgian and the European network, being used for cross-border energy exchanges. Amongst the facilities connected to the 380 kV-grid are the Doel and Tihange nuclear power stations and the Coo pumped-storage power station. Elia also has 220 kV interconnections. Elia’s networks with voltages ranging from 150 kV to 30 kV transmit electricity to the centres of consumption and to large industrial customers. Distribution system operators distribute medium and low-voltage energy (15 kV and below) to households and SMEs. Elia has a closely intermeshed grid, both for facilities of the same voltage and facilities at

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different voltages, making the structure of the grid similar to that of a spider’s web. This means that consumers can be supplied using several connections, providing them with a high level of supply security. Elia’s four control centres, or "dispatching centres" – the national centre in Linkerbeek and the three regional centres in Antwerp ( Merksem), Brussels and Namur – monitor and control the high-voltage grid around the clock. The national control centre operates the very high-voltage facilities ( 380 and 220 kV) and controls the overall balance between production and consumption in the Belgian control area; the regional centres monitor the 150 kV to 30 kV networks in their region.


Regulated operation

In view of the particular role that the system operator has in the electricity market, Euro pean, federal and regional legislation has put a strictly regulated framework in place to cover its activities. At European level, this framework is governed mainly by: • Directive 2003/ 54/ EC concerning common rules for the internal market in electricity (the directive replacing Directive 96 / 92/ EC); • Regulation 1228 /2003 on conditions for access to the network for cross-border exchanges of electricity. Within Belgium, pursuant to the special Act of 8 August 1980, competence for energy is shared by the federal and regional governments. The federal government is responsible for matters which cannot be divided up for technical and economic reasons and so have to be handled in unitary fashion at national level. For energy, this takes in large-scale infrastructure for transmission, production and storage, together with tariffs. Specifically, this comes down to the federal government being competent for the 380 kV to 150 kV transmission system, whilst the regions’ responsibilities include distribution and local transmission via networks with a maximum voltage of 70 kV, as well as renewable energy and rational use of energy.

Federal level At federal level, the main piece of legislation concerning the activities of the electricity market and the transmission system operator is the Electricity Act of 29 April 1999, which sets out the general principles covering production, distribution, appointment of a transmission system operator, transmission system operation and access, setting tariffs and the regulator. It has now been amended on a number of occasions. There are also a number of Royal Decrees that implement the Electricity Act. These concern: • operation of the transmission system; • tariff structure of the transmission system; • tariff structure of distribution systems; • the federal Grid Code; • establishment of mechanisms to promote renewal energy; • federal public service obligations; • organisation of an electricity exchange; • the load-shedding plan.

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Regional level At regional level, all three regions have transposed the European directive into their own legislation:

Flanders The Decree of 17 July 2000 governs the operation of the market in Flanders. It also sets up a support system for renewable energy. Flanders has one Grid Code for connection and access to the distribution systems. The regulator is VREG (the Flemish Electricity and Gas Regulatory Body). VREG’s tasks are set out by the Decree of 30 April 2004.

Wallonia In Wallonia the directive was transposed by the Decree of 12 April 2001. This legislation makes a distinction between distribution system operators and a local transmission system operator (Elia) for 30 70 kV networks. Wallonia has two Grid Codes: one for the local transmission system and the other for the distribution systems. The regulator is CWaPE (the Walloon Energy Commission).

Brussels-Capital Region In Brussels, the Ordinance of 19 July 2001 transposes the European Directive on the organisation of the electricity market. Brussels- Capital Region, too, makes a distinction between a distribution system operator and a regional transmission system operator (Elia). There is one Grid Code for operation of the regional transmission grid and another for the distribution system. The regulator is BRUGEL (Brussels Gas & Electricity).

Competence

Acts & Decrees

Electricity Act 1999

Regulators

General monitoring and setting tariffs Approval for all voltages

CREG Royal Decrees

TSO-DSO

Elia activities

Setting tariffs and approval

380 kV 150 kV

CWaPE (Wallonia)

70 kV 30 kV to 230 V

Federal 70 kV Regional Regional Decrees

General monitoring

VREG (Flanders) General monitoring

BRUGEL (Brussels) General monitoring

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Transmission (federal) Local transmission (Wallonia) Regional transmission (Brussels) Distribution (Flanders)


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Transparent and objective customer relations The strict regulatory framework in which Elia operates means that contracts fall in large part under various regulations. However, Elia wants to play a proactive role in its customer relations with a view to developing services and mechanisms that meet the requirements of the market and enable its customers to make the most effective use of the opportunities arising on the market.

Grid related contracts Every transmission of electricity through the Elia grid is subject to contractual arrangements. Under the grid codes, three contracts determine the main thrust of relations between Elia and its customers: • the connection contract; • the access contract; • the ARP (Access Responsible Party) contract. Elia submits the general terms and conditions to CREG, VREG and CWaPE. Once approved, they cannot be amended by the contractual parties.

Other contracts Every production unit that injects energy into the Elia grid or that may have an influence on the grid is bound by a CIPU contract (Coordination of the Injection of Production Units) between the producer concerned and Elia. Elia signs the following contracts for ancillary services: • provision of primary frequency control; • provision of secondary balance control; • provision of tertiary reserve production; • possibility of reducing or interrupting offtakes (tertiary reserve offtake); • black start; • voltage control.

Cooperation agreement with distribution system operators Electricity distribution system operators manage, maintain and develop the low-voltage networks (less than 1 kV) and the medium-voltage networks (voltages between 1 and 70 kV). Their tasks include extending distribution systems, servicing and maintaining the networks and enhancing their quality. The distribution system operators also monitor the energy flows on their networks around the clock and are responsible for metering end users at distribution voltages. They form the link between Elia as the transmission system operator and about 5.6 million end users who take electricity off the networks at distribution voltages. In view of the special partnership that exists between Elia and the distribution system operators, the contractual ties between them are governed by a cooperation agreement.

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A closer look at contracts

GU2 Contract for coordination of the injection of production unit GU2/ARP – Elia

~ Connection contract GU2 – Elia Acces contract AH (for GU2) – Elia ARP contract ARP-Elia

ARP Contract for ancillary services GU/ARP - Elia

Acces contract AH (for GU1) - Elia Connection contract GU1 - Elia

GU1

GU: Grid User ARP: Access Responsible Party/Balance Responsible party AH: Access Holder

Connection contract The connection contract sets out the respective rights and duties of Elia and the grid user (producer or consumer) related to the latter’s connection to the Elia grid. The contract features appropriate technical provisions covering the grid user’s facilities that are connected to the grid (such as voltage level, connection point, type of facility and protections). A connection contract covers the facilities connected to the Elia high-voltage grid. These may be facilities belonging to a producer or a highvoltage consumer. Connection tariffs are published on the Elia website; they apply to the establishment of new connection facilities and changes in existing connections and /or the use and maintenance of existing connection facilities.

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Access contract To gain access to the Elia grid (i.e. to be entitled to inject energy into or take it from the Elia grid) and be recognised as an access holder, the customer has to conclude an access contract. This stipulates the payment arrangements for use of the Elia grid. Access rights are granted for one or more access points. The access contract makes a distinction between access points for offtakes (taking energy from the grid), access points for injections (injecting energy into the grid), and access points for both offtakes and injections. The access contract includes arrangements covering power and energy exchanged with the grid at an access point. In the access contract an access responsible party (ARP, also known as balance responsible party) is designated for each access point. The ARP includes in its portfolio the energy injected into and /or taken off the grid at the access point and balance the total energy offtakes and injections in this portfolio on a quarter-hourly basis. The access contract can be signed by the grid user or any third party. The party signing the access contract is called the access holder.

ARP contract To physically be able to transmit electricity across the Elia grid, an access responsible party has to be designated for each offtake point and /or injection point.

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The ARP is responsible for the quarter-hourly balance between all the injections and offtakes made by the grid users for which it is the ARP. Any customer, supplier, producer or trader can sign an ARP contract. Only parties that have signed such a contract can be designated balance responsible party for a specific access point in an access contract. The ARP is responsible for submitting nominations. Nomination of transactions on the grid gives the customer an assurance that the other party, the supplier, will actually supply the energy. If this does not happen, the other party will have to pay an imbalance charge to Elia. Elia offers ARPs a number of ways of meeting their balance obligation. They can exchange electricity amongst themselves on the Belgian Hub (an electronic platform where electricity can be traded) on a day-ahead basis or on an intraday basis (on the day itself). The ARP can also purchase or sell energy on Belpex and nominate this transaction on the Hub. If, despite this, an imbalance does occur, Elia uses its balancing services to compensate.


Market players

There are three categories of market players that interact directly with Elia: the grid user, the access holder and the access responsible party (ARP). Different types of metering data are used for these different parties. A fourth market player, the supplier, does not come into direct contact with Elia and is not bound by a contract with Elia, but does receive metering data and other reports.

Grid user A grid user can take electricity off or inject it into the Elia grid. To do this, the user has to first connect its facilities to the grid. Connection to the Elia grid is governed by a connection contract agreed between the grid user and Elia.

Access holder Grid access involves the right to take energy from or inject it into the Elia grid. This is governed by an access contract agreed by the access holder and Elia. This contract entitles the access holder to use the grid and the ancillary services provided. The access holder is the party that signs the access contract. The access holder’s main obligations are: • to designate at least one ARP for each access point; • to designate at least one supplier for each access point; • to submit its subscriptions to Elia (annual or monthly forecasts of its injections and /or offtakes). Also, all bills resulting from application of the access tariffs (tariffs for using the grid, tariffs for ancillary services, and – if applicable – surcharges) are sent to the access holder.

Access responsible party (ARP) The ARP’s obligations are stipulated in the ARP contract. The access responsible party, or ARP, is responsible for quarter-hourly balance of the portfolio it manages. Its main tasks are: • to submit nominations (quarter-hourly loads for the following day) for its access points and provide Elia with forecasts; • to make imports and exports – for this, it has to reserve capacity on the interconnections via capacity auctions. These tasks can be carried out by one or more entities. An ARP contract must be signed with Elia for a party to be able to buy or sell energy on Belpex.

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Working for market facilitation

In its role of market facilitator, Elia provides services and tools to maximise grid access flexibility for grid users without, however, putting the safe operation of the grid at risk. Elia puts systems in place that promote smooth operation of the market and that offer its customers the means to make the best possible use of the opportunities on the liberalised energy market. Here are a number of our achievements up to now:

Interconnection capacity Interconnection upgrades Thanks to an ambitious investment programme, Elia has been able to considerably increase the transmission capacity at the borders with Belgium’s neighbours. Recent investments on upgrading interconnections include: • laying a second transmission line on the 380 kV interconnection between Avelgem and Avelin (late 2005); • operating the Chooz-Monceau line at 220 kV (previously 150 kV) and putting a phase shifter in place in Monceau. Elia is planning to make further upgrades, including putting two phase shifters in place in a new substation "Van Eyck" at Kinrooi and one in the Zandvliet substation. A second tie-line on the 220 kV interconnection between Aubange and Moulaine – in collaboration with the French system operator RTE – is also in the pipeline.

Objective border capacity allocation mechanisms As the capacity on the interconnections is limited, Elia – together with the system operators in neighbouring countries – is continually working to find the best ways of allocating the available capacity to the market players. This approach is based on economic mechanisms, is transparent and non-discriminatory and complies with European regulations. The available annual and monthly capacity at Belgium’s northern and southern borders is allocated to the market using an explicit auction system. Daily capacity is allocated by means of implicit auctions organised via the market coupling between the Belgian (Belpex), Dutch (APX) and French ( Powernext) markets. Since May 2007 there has also been the possibility of intraday trading at the French border.

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Several suppliers for a single offtake point Fixed or flexible-band supply is an Elia service that allows a grid user that only takes electricity from a single access point to designate two or more energy suppliers and ARPs. This enables the user to spread the risks of imbalance across the various ARPs. The user can also assume the role of ARP for some of its consumption. This simple and secure Elia service enables the grid user to take full advantage of market opportunities by, for instance, purchasing electricity on Belpex, the Belgian power exchange, or leveraging competition between Belgian and foreign suppliers to the full.

Promoting opportunities for exchanges between ARPs Day-ahead and intraday Hub The Elia Hub was set up in October 2001 as an electronic platform that ARPs can use to make day-ahead and intraday energy exchanges and to bill those exchanges in their nominations. These are over-the-counter transactions between ARPs.

Belpex On the Belpex power exchange’s spot market, ARPs can trade energy for delivery the next day. The power exchange promotes the opening up of the Belgian electricity market and boosts the economic efficiency of the market players by bringing together demand with maximum added value and production at the lowest marginal costs.

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Serving the market

With the services it offers customers, Elia aims to make grid use, market mechanisms and energy management as simple and flexible as possible. In its role of market facilitator, Elia’s intention is to provides its customers with the most appropriate tools enabling them to leverage free-market competition and optimise their energy management. Elia’s services can be divided up into a number of general categories: • grid connection; • grid access; • balance management; • cross-border capacity allocation; • ancillary services; • metering; • information for the use of the market operators; • sustainable energy. Elia has produced a wide range of product sheets providing details of each of these products.

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Objective, transparent and regulated tariffs

Elia charges tariffs for its services. These are necessary so as to ensure the security and reliability of the high-voltage grid and the provision of an efficient service – for the market and the consumers. Tariffs mirror costs. In other words, tariffs are based on the actual costs incurred by Elia (and approved by the regulator, CREG) in offering its services and providing its infrastructure. Elia submits its proposed tariffs to CREG for approval. CREG then assesses the relevance of the costs specified in the proposed tariffs. The tariffs are non-discriminatory, objective and transparent.

Tariffs for four-year periods With the introduction of a new regulation mechanism, the tariffs for connection, grid use and ancillary services are now set for four years. The first period of application of these tariffs will run from 2008 to 2011. The new tariff system takes into account a "productivity improvement factor" which is to be achieved by Elia on the controllable costs, i.e. those costs over which the system operator has direct control (such as personnel expenses and purchases). It does not have to be applied to costs that the system operator itself cannot control (such as the purchase of ancillary services and financial costs).

Three major tariff categories The tariff structure differentiates three tariffs for Elia’s services: • connection; • grid use; - tariff for capacity subscription and additional capacity - tariff for system operation - tariff for maintaining and restoring ARPs’ individual balance • ancillary services. In addition, surcharges can be applied which Elia is required to collect on behalf of the authorities to fulfil public service obligations or other statutory requirements. By the Royal Decree the tariffs must also include a fair profit margin for Elia so that it can pay its shareholders for the capital they have had to invest to develop the grid. The fair profit margin is set in advance on the basis of the system operator’s regulated asset base, to which a legally defined "return factor" is applied. The regulated asset base develops year by year according to rules fixed by law (e.g. capital gains from new investments, capital losses from disposals, depreciation, etc.). Revenue on grid use tariffs constitutes Elia’s main source of income.

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Revenue from these services is used in the following ways: • income from tariffs for providing infrastructure (tariffs for capacity subscription and additional capacity) goes towards costs for maintaining and developing grid infrastructure; • income from tariffs for system operation covers the costs of monitoring and managing the energy flows on the grid and the facilities needed for these tasks; • income from tariffs for ancillary services covers the costs of obtaining and activating the services.

Forecast expenditure

Forecast revenue

Equipment purchases

Related activities

Purchases of ancillary services

Allocation of capacity at Belgium's northern and southern borders

Services and other goods Grid access tariffs Salaries, social security and pensions Depreciation and capital losses

Net financial charges

Income tax Imbalance Fair dividend for shareholders

Connections

Income not from tariffs Income to be generated by tariffs

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Who pays these tariffs? Customers are billed for tariffs in a transparent, objective and non-discriminatory manner.

Connection tariffs Any grid user wanting to connect a facility to the Elia grid or change a connection is billed for the various connection tariffs.

Grid access tariffs Under the access contract, the holders of the access contract (access holders) are billed for grid access services, provision of infrastructure, system operation and ancillary services.

Tariffs for compensating imbalances Under the ARP contract, the access responsible party (ARP) is billed for these tariffs.

How are the tariffs worked out? By law, the system operator must submit a tariff proposal to CREG for each regulatory period. The proposal is based on the authorised total income, i.e. the total of all forecast costs arising from the tasks assigned to the system operator under the Electricity Act. The system operator must justify all the elements of this budget and charge them to different services (connection, grid use, ancillary services, etc.) and customer groups. If CREG rejects the proposal, the system operator must submit an amended proposal within thirty days. CREG can apply provisional tariffs until an agreement has been reached.

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Your partner in sustainable development

Support for sustainable development policy has an important place in Elia’s corporate strategy. There are three strands to Elia’s sustainable development actions. Elia purchases green certificates at a price set by the government and then puts them up for sale again to be purchased by market participants. Suppliers can buy them to meet their quota obligations. In its role of distribution system operator in Flanders, Elia is participating in the Flemish government’s RUE (Rational Use of Energy) Action Plan by supporting energy savings by the customers connected to its networks (70 kV and below). Elia designs the grid so that new production units can be connected. For example, Elia is planning to construct a new connection to the coast meaning that additional offshore wind farms can be connected to the grid. In its operation of the grid, too, Elia is anticipating the expansion of local production and the arrival of large wind farms by taking part in the Euro pean Wind Integration Study (EWIS ), a European system operators’ initiative looking at how large-scale wind farms can be integrated into the European system. Finally, Elia puts sustainable energy use first in its own projects and operational activities and organises staff awareness campaigns.

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Consultation and information

Elia wants to have an active dialogue with its customers and be open and transparent in informing them about its activities.

Key account manager In order to enable customers to find the most suitable energy solutions, Elia’s key account managers impartially supply them with useful information about the operation of the electricity market and the products and services that Elia can offer in this area. The key account manager is the single point of contact (SPOC) for all questions about how Elia works, the products and services offered by Elia and all the company’s activities and initiatives.

Users’ Group The Users’ Group is a consultative body for market players and their representatives to discuss issues with Elia and vice versa. The Group brings together representatives of employers’ organisations, large users (Essenscia), traders (EFET), producers ( FEBEG for conventional production, GABE for the cogeneration sector, and Edora / ODE Flanders for the renewable energy sector), suppliers ( FEBEG) and distribution system operators. A representative of the federal public service Economy and Energy is also part of the group. The Users’ Group can make recommendations to the relevant minister and /or regulator on the operation of the electricity market. For the federal government, this is a statutory power (Art. 405 of the Grid Code). The Group can decide to set up working groups in order to discuss specific technical matters. Specialist can also take part in the working groups. The working groups report directly to the users’ group.

Website The Elia website is Elia’s shop window for communicating with its stakeholders and the general public. The website is the central reference point for anyone wanting to find out Elia’s latest news and learn about how the grid and the electricity market work, with realtime data about the high-voltage grid and sections for the stakeholders: customers, suppliers, contractors, investors, jobseekers, etc.

Elia News In its monthly newsletter for customers and stakeholders Elia aims to provide regular information about developments in the company, the market and the regulatory framework and the most recent statistical market data.

Customer Day During the annual Customer Day, some important developments in the market’s operation, Elia’s services to its customers and other topics and issues of interest to the system operator’s customers are examined in greater depth. It is also an opportunity for Elia and its customers to engage in an open dialogue and exchange of ideas.

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Editor: Jacques Vandermeiren, Boulevard de l’Empereur 20, 1000 Brussels.


Boulevard de l’Empereur 20 B-1000 Brussels T+ F+

32(0)2 546 70 11 32(0)2 546 70 10 info@elia.be www.elia.be

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