18 January 2018, 13:55
On Monday 18 December 2017, Council of the European Union adopted the General Approach on four important pieces of new legislation which is to shape the electricity market for the next decade. After several hours of difficult negotiations that concluded several months of intensive works finalized under the lead of Estonian Presidency, Member States agreed on the compromise wording of the new market design legislation. Clean Package for all Europeans (CEP) will now be forwarded for further discussions in the forthcoming trilogue between the Council, Parliament and the European Commission.
While on many areas the CEP is a natural evolution and refinement of the existing legal framework, its distinctive feature is the focus on empowering consumers, who are put at the center of the new design. This is a very important development, reflecting the ongoing change of powers between the consumers and suppliers in the electricity business. Traditional dependence on incumbent utilities is fading away, undermining their business models. Smart meters rollout and distributed energy resources such as PV and storage, continuously improving their economies, allow for new choices for consumers. They will eventually become able to opt for alternative energy supply choices such as self-provision, energy communities, energy service companies, etc. Gradual phase out of renewable subsidies is also a much welcome development, because the current setup of comfortable business environment for RES where conventional generation is struggling for survival is not in line with contribution of these segments to security of supply and European welfare and level playing field being the prerequisite of competitive market. The ambitious renewable targets set by CEP will therefore need to be achieved based on market forces, putting more emphasis on research and technological development, as well as exploration of best technologies and locations for renewable resources.
Yet, there is one particular trend in CEP that is extremely worrying, threatening the feasibility and efficiency of the ambitious plans laid down in the legislative package. Namely, the capacity calculation provisions included in the article 14 of the Regulation on the internal market for electricity.
Cross-zonal capacity calculation in the focus of European market integration discussions
Capacity calculation has been recently put at the center of the market integration discussions. Regulation 2015/1222 establishing guidelines on capacity allocation and congestion management (CACM) has laid foundations for the target model for European electricity market and congestion management. It is founded on “cooper-plate” bidding zones characterized by unlimited trading opportunities within the zone and cross-zonal transfer capacities defining feasible market boundaries for trading between the zones. In this zonal market model, bidding zones definition and calculation of cross-zonal transfer capacities are the means of making the European transmission infrastructure available for trade, thus facilitating the efficient utilization of generation and transmission resources. In Europe, bidding zones are typically defined by national borders, with exception of the Scandinavian countries and Italy, which are split into several zones. Thus, apart from these exceptions one can hardly believe that under the current configuration, the existing bidding zones really represent “copper plates”. Although definition of these zones is to be regularly reviewed with potential splitting or merging of zones based on technical and economic criteria, feasibility of such exercise is yet to be proven.
Despite massive transmission investments realized in recent years in an attempt to keep up with renewable generation development, the level of cross-zonal capacities available for the market does not increase at the pace expected by European stakeholders and policy makers. TSOs are thus faced with criticism for “withholding transmission capacities” due to the alleged lack of coordination and transparency. It is against this background that the Council, in its final CEP revision from 18 December 2017, introduced provisions that in practice oblige TSOs to offer at least 75% of thermal capacities of interconnectors for cross-zonal trade. Surprisingly, this happens at the time when coordinated capacity calculation methodologies are currently being developed by European TSOs within the dedicated regional projects as required by CACM.
Controversial benchmark for cross-zonal capacity availability set by draft recast of Electricity Regulation
In the final Council proposal for the recast of Electricity Regulation, 75% of the remaining available margin on internal and cross border critical network elements to made available for cross border flows is to be the new cross-zonal capacity benchmark. The text adopted by the Council states that “minimum level of capacity that should be used in capacity calculation is proposed to be defined as percentage of the capacity of a critical network element after respecting operational security limits in contingency situation and taking account of the reliability margin. The capacity of the critical network elements should not take into account internal congestions or flows leaving and entering the same bidding zones without being scheduled”. Reading the above one can conclude that when calculating capacities TSOs shall ignore trading activity inside bidding zones and resulting power flows on the internal and cross-zonal transmission lines. As a result, new European legislation sets requirements which is clearly in contradiction with the zonal market model applied in Europe.
In the zonal market model, cross-zonal capacities are the means of expressing the boundaries for the market and cross-border trade that guarantee secure power system operation – in other words, the entity offering transportation means must offer only as much as can be physically realized without putting the interconnection in danger. If these boundaries are determined in an artificial manner or set to arbitrary target values (e.g. 75% of the thermal capacity), it means that cross-zonal capacity offered for trade can significantly exceed what is physically possible given the technical capabilities of the transmission grid. As a consequence, technically infeasible transfer capacities will make the market outcome infeasible with incorrect energy prices, forcing TSOs to employ special operational remedial measures such as costly re-dispatching of power plants1) in order to keep interconnected systems secure. Such special measures have been usually reserved for managing unexpected events, i.e. contingencies and forced outages or forecast errors, and are limited by nature. Large scale of re-dispatching will not only lead to increased costs for end-consumers (redispatching always brings additional costs which are socialized among grid users) but also may endanger system operation (re-dispatching resources are not unlimited). If generation capacity is used to perform ex-ante re-dispatching aiming to increase cross-zonal capacity, this generation capacity cannot be relied upon anymore in case real-time additional measures are necessary to ensure secure operation of European interconnections (e.g. if there is a sudden tripping of a generator or a transmission element), therefore threatening security of supply in Europe.
Further detachment of market and system operations
Capacity calculation provisions of CEP lead to further detachment of market and system operations. While today’s European wholesale market already considers the physical reality of the power system constraints only in a very simplified manner, resulting in frequent need for corrective measure implemented by TSOs to make the market schedules technically feasible, obliging TSOs to completely neglect the intra zonal transactions when calculating cross-zonal capacities available for wholesale electricity trade will push the European wholesale electricity market in more redispatch actions thus deepening inefficiencies and growing security risks. Although on paper, high cross-zonal capacities will facilitate stronger market integration and the wholesale market prices calculated based on these artificial capacities will be characterized by better price convergence, such market outcome will be theoretical as market-based generation dispatch (the choice of power plants to cover the demand for electricity) and cross-zonal trades established on the basis of such wholesale market design will have little to do with the actual generation dispatch and cross-zonal exchanges. Immediately after the closure of such day ahead market, or even before that, TSOs would need to implement a lot of corrective measures by adjusting the dispatch of generation units throughout Europe. Major increase of corrective remedial measures, if at all technically manageable by TSOs in the short time period between market closure and real-time, will lead to increased costs to be shared by all TSOs, passed on national grid users, and might lead to negative implications for secure system operation in situations when resources necessary for redispatch are exhausted. These risks are certainly not theoretical, as already now some European TSOs are experiencing such cases under the current market set up. The fundamental importance of electricity in modern society and inherent physical features of this commodity imply that frequent operation of interconnected European power system on the boundaries of its security gives rise to risks with potentially major, difficult to foresee consequences.
Cross-zonal capacity calculation in zonal markets has inherent limitations
Cross-zonal transfer capacities are determined by the physical realities of the interconnected power system. In meshed grids, such as in Continental Europe, loading of all lines, domestic ones or interconnectors, is influenced by both cross-zonal and domestic (intra zonal) trade. Loopflows, or as draft Electricity Regulation puts it: “power flows leaving and re-entering the given bidding zone without being scheduled”, are an inherent physical feature of AC meshed grids under zonal market model, and must be recognized in the capacity calculation methodology. While loopflows can indeed be considered as an externality of the zonal market design, since ideal bidding zones should be characterized by low loopflows, they cannot be simply ignored during capacity calculation. Loopflows artificially ignored during cross-zonal capacity calculation will appear in the grid during real time operation leading to the need for corrective redispatching measures. Hence, the discussion should be directed towards “how” to take this zonal market reality into account to strike the right balance between treatment of intra zonal and cross-zonal transactions. Since the interdependencies between intra zonal and cross-zonal flows will be the highest in highly meshed Continental grid and lower in radially connected grids, there are different answers to that questions in various regions of Europe. It is therefore best if the work towards better capacity calculation is performed on the regional level by TSOs and NRAs supervised by ACER, based technical evidence on how ambitious the capacity targets could be without detrimental effect on secure system operation and excessive costs of redispatching measures.
Improving the capacity calculation process, aiming at better utilization of the existing grid infrastructure and maximizing cross-border trading opportunities is a high priority task. However, any potential improvements to that process must be considered from the perspective of the currently applied zonal market model in Europe, as well as the need to maintain secure system operation. The consequences of market simplifications are difficult to estimate, but may easily eat up any welfare gains achieved by better but artificial market integration. Existing legal framework, such as Regulation 2015/1222, already lay solid foundations for establishing detailed capacity calculation methodologies, allowing for the much needed flexibility for TSOs and NRAs to propose effective improvements. Hence, any additional provisions in the Clean Energy Package should rather focus on setting general requirements for the capacity calculation process, leaving the details to be elaborated during research and design activities of TSOs supervised by NRAs and ACER. Fixing arbitrary, artificial percentages for benchmark cross-zonal transfer capacities in EU law should be avoided, as it will most probably lead to the outcomes contrary to what was intended by the European policymakers.
1) Re-dispatching of power plants means rescheduling (modification) of their power output on request of TSO in order to obtain a generation pattern allowing to keep the grid within secure state. Redispatching modifies the generation output resulting from the levels decided by generation facility owners following the market outcome. Redispatching in practice leads to a reduction of generation in some power plants that are “in-the-market” (thus cheaper ones) and corresponding increase of generation in power plants that are “out-of-the-market” (thus more expensive ones). It is thus possible, that some power plants are started up and requested by TSOs to generate electricity even though they were “outperformed” in the wholesale market by cheaper units. While performing redispatching, TSOs takes over the trading obligations of the affected market participants, and thus redispatching does not affect their positions on the balancing market. Since the net financial result of redispatching is a cost for TSO, it is defined by CACM as “costly remedial measure”.