Ancillary service in the electricity market can be easily misunderstood as the capacity mechanism, notwithstanding the fact the legal effects from the State aid treatment point of view, are entirely divergent.
The terms "ancillary services" in the electricity market on the one hand, and the "capacity mechanism" on the other hand, are mutually exclusive in the EU Internal Electricity Market.
Article 2(2)(u) of the Proposal for a Regulation of the European Parliament and of the Council on the internal market for electricity (recast), 30.11.2016, COM(2016) 861 final 2016/0379 (COD) (included in the so-called "Winter Energy Package") contains a definition of the "capacity mechanism", where it means "an administrative measure to ensure the achievement of the desired level of security of supply by remunerating resources for their availability not including measures relating to ancillary services."
In turn, the term "ancillary service" is already defined in existing EU uniform electricity market legislative package - Directive 2009/72/EC defines ancillary service as "a service necessary for the operation of a transmission or distribution system".
The aforementioned draft Regulation of 30.11.2016 additionally clarified that the ancillary services do not include congestion management.
Typical ancillary services are procured by Transmission System Operators (TSOs) to ensure the management of the system and divide into:
- frequency ancillary services (balancing of the system), and
- non-frequency ancillary services (voltage control and black-start capability).
The EU Network Code on System Operation in Title 5 underlines the TSO's responsibility for the proper contracting of the ancillary services and for their dimensioning.
The question may arise whether capacity mechanisms and ancillary services are equally vulnerable to potential State aid compliance problems.
Another important issue involved is the precise delineation between the scope of the two respective instruments.
Commission Staff Working Document of 30.11.2016 Accompanying the document Report from the Commission Final Report of the Sector Inquiry on Capacity Mechanisms {COM(2016) 752 final} SWD(2016) 385 final (p. 52, 53) gives in that regard interesting clues - as follows:
"A particular area in which there may be debate about what constitutes a capacity mechanism and what requires State aid approval is in the specification and procurement of ancillary services.
Where such ancillary services are procured independently by TSOs, and where in particular the determination of the precise volumes and types of services to be procured is left to the TSOs without Government involvement, there will be a strong indication that the purchase of such services does not involve State aid and that those services are therefore not covered by this inquiry.
Such indication will be strengthened when procurement of such services is performed in a transparent, competitive and non-discriminatory way, thereby excluding undue advantages.
Another element to distinguish ancillary services from capacity mechanisms is the use and purpose of the services: when they are used in small volumes relative to the overall level of capacity in the market and only to provide short term corrections to enable system security, they will more likely be considered ancillary services.
However, where ancillary services appear to be contracted at the request of governments and/or are used to ensure capacity is available to balance the system over longer periods, they can have the same effect as capacity mechanisms.
Such measures may merit attention from the Commission and require State aid approval."
Everything's clear? I'm afraid, not entirely...
I'm not entirely convinced that in every case the subtle differentiation between ancillary services and the capacity mechanisms will not be blurred.
"Small volumes", "short term corrections" are all very subjective descriptions.
"Contracted at the request of governments" - this determinant, in turn, may occur difficult to credibly ascertain in practice, for example, where, irrespective of the volatile political agenda, the TSO keeps going to implement its own grid security plans, for which it is ultimately responsible.
Multiple disputes in that regard between the European Commission on the one hand, and the TSOs and ancillary services' providers (as the final beneficiaries of the potentially unlawful State aid) on the other hand, can be easily expected.
Apart from the above, ancillary services are a source of increasing concern of Transmission System Operators also with respect to other regulatory aspects.
An acute disagreement between the TSOs and the European Commission has already arisen as regards restrictions for TSOs to control or own assets providing ancillary services.
The current European Commission proposals, as set out in the Winter Energy Package aim to prevent TSOs from owning and/or controlling, directly or indirectly, assets that provide ancillary services.
Exceptions for non-frequency ancillary services (steady state voltage control, inertia, fast reactive current injection, black-start capability) would be theoretically possible but only after a long and costly process.
TSOs in common stance presented by the ENTSO-E argue that:
- Already today, to fulfil their responsibility to maintain grid stability, TSOs own or operate facilities which de facto provide ancillary services, either as main purpose or as a by-product of their operations, without any negative impact on the market.
These facilities include for instance compensating devices, reactors, HVDC cables, capacitors, transformers, or even power lines, all of which are essential elements of the transmission grid.
- As things stand, preventing the ownership and control of such facilities by TSOs will create an extremely burdensome process with no tangible consumer benefits.
The effect of these proposals would be to constrain TSOs ability to operate the grid, to ensure security of supply, to connect grid users and would ultimately increase system costs.
Moreover, it would create a lack of coordination between maintenance and system operation to the detriment of the overall efficiency of the grid.
ENTSO-E concludes that legislative proposals of the Winter Energy Package are in that regard disproportionate, lead to risks for the operational security and, finally bring no benefits to consumers.
All the above reasoning evokes evident parallels with the case of the misapplication of the State aid rules rules to the ancillary services.
Without ancillary services there is no stable grid operation and a reflection comes to mind that undermining legal certainty necessary for the provision of such services inevitably increases regulatory risk - which is always factored in consumers' prices.