Europe’s electricity system is undergoing a profound change that concerns the power system as much as the power market, with a direct impact on transmission system operators’ (TSOs) responsibility to ensure a reliable and well-functioning power system and facilitate the market. As the power system evolves, the market design requires regular updates to incentivise behaviours in line with the needs of the power system but also to ensure that investment and dispatch incentives work well.
In this context, TSOs play a pivotal role: Their networks and their market setups connect all users and service providers into one system. TSOs thus need to contribute to the design and implementation of market rules supporting system needs and energy policy. Being regulated and unbundled, TSOs act individually and jointly through ENTSO-E in the interest of society at large.
Strengthening the integration of all demand and RES into the market price
ENTSO-E believes that the full implementation of market design changes exposing all demand and RES to price fluctuations, cost-reflective balancing prices and market-based hedging products minimises the need for capacity mechanisms and might in the long run make them redundant.
In the future world of smart grids, smart commerce and smart homes, billions of signals from customers on the value to them of electricity at particular times and for particular uses will in aggregate send investment signals for generation, storage and demand response capabilities
Price signal reflecting real cost of electricity
Market price signals should be strengthened to drive electricity usage, dispatch and investment. This requires unconstrained price formation in all markets (day-ahead, intraday and balancing) to reflect the real cost of electricity.
The updated market design must reveal system costs and the value of services delivering adequacy, flexibility and resilience. For this purpose, a market-based procurement of such services should be organised whenever possible, introducing new products and ensuring a level playing field among those delivering them: generation, demand-side measures or storage.
The need for cross-border procurement of these services will be defined by TSOs through assessments of the location and the extent of both the existing scarcities and the available resources. Cross-border trade of system services, whenever possible, should take place when it creates value, taking into account its effect on energy trading. The trading of energy and of system services across borders could for instance be achieved via ‘co-optimisation’ of both energy and system services (such as reserves). In fact, such co-optimised trading is already foreseen by ENTSO-E’s Electricity Balancing Network Code for reserve capacity. By 2019 at the latest, ENTSO-E will propose a methodology for ‘co-optimised capacity allocation’.
Develop risk hedging
The balancing responsibility exposes market participants to new financial risks. Therefore, the market will need to provide corresponding risk-hedging products like the intraday cap futures recently introduced by power exchanges. Hedging products should develop naturally as an outcome of a market in which all generators and suppliers are subject to balance responsibility; in which imbalance prices are reflective of full system costs; and in which finally market parties, including consumers, are incentivised to balance their position as early as possible.
Such hedging products value flexibility and translate it into a more predictable and ‘bankable’ revenue stream, compared to the underlying commodity. At the same time, these products will allow market participants to mitigate their financial risks and provide more stable investment incentives. As long as the risk-hedging products are not developed by the market, they may need to be centrally developed (e. g., regulators could place obligations on balancing responsible parties or suppliers to purchase a certain amount of such products; TSOs would need to be closely involved in the design and certification of such products).
ENTSO-E dedicated group on Working group dedicated RES and Market design
ENTSO-E’s Working Group Market Design & RES focuses on monitoring and proposing recommendations on market design (RES support mechanisms, balancing responsibility, priority dispatch, and co-operation mechanisms). The WG assesses to which extent market mechanisms (such as imbalance pricing, capacity mechanisms and flexibility markets) can contribute effectively to system adequacy, identifying best practices across Europe and drawing policy recommendations.
It aims to develop more insight on future technical issues (capacity, flexibility, ramping, inertia, reactive power etc.), the potential need for new system services – and their procurement approaches – deriving from the increasing penetration of variable RES-E.
For more information on long-term market design, please contact Marco Foresti