Effects on a border with both AC and DC interconnectors

4.3.1. Qualitative analysis by examples

The analysis in 4.1 and 4.2 does not differentiate between AC and DC interconnectors and thus is valid for both kinds of interconnectors.

On a border with both AC and DC interconnectors, what would the effect of a loss functionality on the HVDC cable be on flows? And would there be any effects on prices, that are different from a purely HVDC connected border?

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For a border between two bidding zones with both AC and DC interconnectors the following tables apply before and after the inclusion of a loss factor where it is assumed that the DC interconnectors will get a loss factor applied and the AC interconnectors not. In the tables a loss factor for the DC interconnector of 2% is assumed. The tables show the loading factors for each kind of interconnector at different remaining relevant price differences.

Figure 11:

Loading factors before and after inclusion of a loss factor on a DC interconnection with a loss factor of 2% on a border with both AC and DC interconnections

Basically the total flow between the areas will reduce or remains equal and prices on the AC/DC border can still converge if the allocated flow on the border does not exceed the total AC capacity.

In the following example a border with only DC interconnectors is compared to a border with combined AC and DC interconnectors and it is assumed that a loss factor is applied on only the DC interconnectors.

The example assumes a pure DC border with two interconnectors and a loss factor of 1% and 2%

respectively. The loss factor of the DC interconnector on the AC/DC border is assumed to be 2%.

Figure 12:

Loading factors after inclusion of a loss factor on DC interconnections on an AC//DC border (left) compared to a purely DC border (right)

Generally prices on a border with a loss factor on all interconnectors can only converge to the lowest loss factor, unless convergence occurs by coincidence without flow. (Right table)

In case of a combined AC/DC border with a loss factor applied on only the DC interconnector the AC interconnector behaves as an interconnector with a loss factor of 0% applied. (Left table).

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4.3.2. Results from quantitative analysis

A border with both an AC and a DC interconnector can be seen as a particular case of loss factor merit order effects between an interconnector with losses included (here, the DC interconnector) and an interconnector with losses not included (here the AC interconnector). Such a configuration was observed between bidding zones Finland and Sweden during the first 10 months of simulations where the DC interconnector had a parallel route made of one or more AC interconnectors. This case can be generalized to a case with several parallel routes into a bidding zone where one route has an interconnector on the bidding zone border with a loss factor and the other route has an interconnector on the bidding zone border without a loss factor.

The following observations follow from the simulations:

• Flow decreases on the DC interconnector if losses are included; and increase on the AC interconnector;

• The AC interconnector is loaded before the DC interconnector; the DC interconnector is loaded only when the AC interconnector is congested;

• Prices still converge when the AC interconnector is not congested. This would not have been observed if the border would have been a purely DC interconnection and all DC interconnectors would have had a loss factor included;

In particular these effects have been observed from the simulations on the DE-DK1 and SE-FI borders. In case of DE-DK1 the increase of flows on the AC interconnector was prevented in run#2 because the harmonized loss factor on all DC interconnectors prevented any loss factor merit order effects on parallel routes into DE.

Table 7 shows the frequency of equal prices on cable ends for the different simulation runs (the basis for the frequency percentage is the total number of hours that the interconnector links the mentioned bidding areas, for each interconnector).

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Table 7: Frequency of price convergence at cable ends From this table the following observations can be derived:

• Generally speaking, as expected, the application of a loss factor on an interconnector prevents price convergence at both ends of the interconnector (e.g. IFA, BritNed); even when the interconnector is not congested, a price difference remains

• Including losses on Baltic only (in addition to IFA, BritNed – Runs#4 and #5) does not prevent price convergence between Germany and Sweden, since parallel routes without losses exist

• When losses are included on all DC interconnectors (Runs#2 and #3), price convergence between SE/SE3 and FI still remains possible in the majority of hours (52% in SE-FI / 67% in SE3/FI) because the northern route is not congested; every hour that price convergence occurs, the Fennoskan interconnector is not loaded at all¹⁵, as expected

• It rarely happens that price convergence occurs despite the application of loss factors (e.g. DE-DK2 in Run#3); this must be considered as due to coincidence instead of the effect of market convergence

4.3.3. Conclusions

The total flow on a border with both AC and DC interconnectors and a loss factor applied on only the DC interconnectors will reduce or remain equal. The magnitude of the change in flow will depend on the loss factors applied, the slope of the demand and supply curves, the interconnector capacities and the price differences.

Under certain conditions the AC interconnectors may take over flow from the DC interconnectors. This occurs when the relative remaining price differences are lower than the loss factors on the DC interconnectors and the AC interconnectors are not congested. The shift in flow (from DC to AC) may substantially influence the marginal operating costs of the impacted AC interconnectors and grid, for

15 This does not refer to physical flows but to algorithm outputs.

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example by increased exchange over alternative AC interconnectors and/or losses and dispatch costs induced in the AC grid. In this case, a loss factor on the AC interconnector may also need to be considered.

Generally area prices on each side of a border with loss factors on all the interconnectors for that border (e.g. a purely DC border with loss factors on all DC lines) can only converge to the lowest loss factor, unless convergence occurs by coincidence (no flow on the interconnectors but equal prices in the areas interconnected).

If the question is generalized to two parallel routes into a bidding zone with on one route an interconnector on the bidding zone border with a loss factor included and on the other route an interconnector on the bidding zone border without a loss factor included then a loss factor merit order effect occurs. The route with the lowest total loss factor takes over some flow from the route with a higher total loss factor (re-routing effect). This effect is countered if the total loss factor on both routes is equalized.

Specifically if one route has a DC interconnector with a loss factor included and the alternative route has at least one AC interconnector without a loss factor and if the alternative route also contains a DC interconnector and that DC interconnector has the same loss factor as the highest loss factor on the parallel route (e.g. through harmonisation of the applied loss factor), then re-routing effects do not occur but the overall exchange between the market areas will be reduced due to the loss factor applied on both routes.