ENTSO-E also raised fundamental questions about whether a pan-European Common Merit Order (CMO) was a reasonable goal for automatic Frequency Restoration Reserve (FRR).
It observed that the efficiency of balancing markets could be enhanced either:
- By reducing the price of activation requests by TSO for balancing purposes, or
- By reducing balancing needs (the volume of residual imbalances to be resolved by TSOs.
While cross border exchanges act on the first driver, the second effect depends on incentives and is therefore closely related to imbalance charges and the development of liquid intraday markets.
ENTSO-E emphasised, among others, that:
- well-designed imbalance charges were a corner-stone of efficient balancing markets, as well as a prerequisite for the well-functioning of the intraday and day-ahead markets,
- the concept of “balancing” had a larger scope than “all actions and processes through which TSOs ensure that the total electricity withdrawals are equalled by the total injections in a continuous way” and also involved the design of incentives for the market to reduce imbalances,
Another issue underlined by ENTSO-E, which in its opinion was somewhat neglected by the ACER in its Framework Guidelines, was the inherent difference between FRR and Replacement Reserve (RR). According to ENTSO-E the main purpose of the FRR is the short term (within minutes) offsetting of contingencies and imbalances caused by the volatility of the system in case of the absence of market reaction; i.e. imbalances inside the settlement time frame. The development of a Common Merit Order (CMO) is in that regard technically complicated and limited due to operational constraints.
In contrast the RR aims at the balancing of persistent imbalances (> 15 minutes) caused by the forecast errors (market, renewable) or incidents in case of the absence of market reaction and is by nature much more appropriate for European Market Integration (CMO).
Apart from the above ambiguities, there is no doubt, the Framework Guidelines are a game-changer in the European Single Electricity Market.