Balancing capacity markets are in place to make up for lost opportunities of Balancing Service Providers in the day-ahead market and intraday market.
In turn, balancing energy bidding with a short gate closure time are to ensure that these bids only include the marginal cost of providing balancing energy and only include opportunity cost for the balancing market.
In the recent report the EU energy market watchdog ACER highlighted four areas relevant for enhanced EU electricity market integration: meeting the minimum 70% cross-zonal capacity target by 2025 (thus enhancing electricity trade between Member States); rolling out flow-based market coupling in the Core and Nordic regions as soon as possible; integrating national balancing markets; and reviewing the current EU bidding zones to improve locational price signals.
The EU-wide integration of national balancing markets seems particularly challenging as this electricity market segment appeared so far exceptionally fragmented in terms of relevant market rules. And the two fundamentally different (but fully legitimate in the view of the European legislation) electricity market design models (self-dispatch and central-dispatch) are not the only problem for that.
“ACER agrees with the TSOs that there are currently heterogeneous structures of the balancing markets in different Member States and understands that the connection of each TSO to the European platforms is a transitory process where market parties need time to adapt to the new market model and conditions.
However, once the integration and harmonisation of the balancing markets through the European platforms and other implementation steps are achieved, this historical heterogeneity will fade out,” said the European Agency in its recent Decision No 03/2022 of 25 February 2022 on the amendment to the methodology for pricing balancing energy and cross-zonal capacity used for the exchange of balancing energy or operating the imbalance netting process.
Highly-stressed EU electricity markets exhibit extreme volatility recently, and balancing markets have a particular role to play in these circumstances.
In the EU regulator’s view, the balancing energy prices should have a signalling effect that incentivises both Balancing Service Provider (BSPs) and Balance Responsible Parties (BRPs) to adjust their behaviours as a response to market conditions.
This is reflected in the balancing settlement principles - in particular, pursuant to the EU Electricity Balancing Regulation, the imbalance settlement must provide incentives to BRPs to be in balance or help the system to restore its balance.
The terms and conditions related to electricity balancing require that each balancing energy bid from a Balancing Service Provider is assigned to one or more Balance Responsible Parties - note, however, not all BRPs in all EU Member States are also BSPs, BRPs which are not BSPs are therefore exposed to high risks without being able to benefit from high balancing energy prices at the same time.
In particular, German regulator, BNetzA, raised concerns that the protection of BRPs against high prices is essential for the efficient functioning of the market.
According to BNetzA, BRPs will pass on high imbalance settlement prices to their customers or, in case that this is not possible, will go bankrupt. This particularly affects BRPs with a volatile portfolio, which by nature cannot be forecasted as accurately as conventional portfolios.
If these BRPs were not protected from excessively high imbalance settlement prices, there would be a risk of substantially increasing the cost of renewable energy, which would impede the efforts of the EU to promote renewable energy sources.
In turn, Spanish CNMC argued that, in scarcity situations, whether the scarcity is real, forced by BSPs or caused by errors, balancing markets are likely to be inefficient because BRPs are not flexible and cannot participate in the price formation, which is determined solely by the bids of BSPs. In these circumstances, BSPs are not given the incentive to submit cost-efficient bids but see the possibility of maximizing their profits.
Hence, in these circumstances it seems that BRPs are in a position to safeguard their room for manoeuvre via contractual terms with their clients. A variety of mechanisms can be used to introduce the necessary flexibility and divert the imminent course to insolvency in this volatile market.
We must come to terms with volatility on the electricity market in the current market design.
It has been unequivocally underlined by the ACER in above Decision No 03/2022 of 25 February 2022, which in Recital 61 reads:
“In general, ACER understands that efficient market functioning is based on free price formation on the basis of demand and supply. Article 10(1) of the Electricity Regulation explicitly states that there shall be no maximum nor minimum limit to the wholesale electricity price including balancing energy and imbalance prices, except for technical price limits if they are needed for the efficient functioning of the market. This reflects some of the key market operation principles, according to which market rules shall be formed on the basis of demand and supply, encourage free price formation and shall avoid actions which prevent price formation on the basis of demand and supply (Articles 3(a) and (b) of the Electricity Regulation).
In accordance with these provisions, efficient price formation occurs when bid prices are allowed to reflect underlying costs of the supply and the willingness to pay of demand and an optimal outcome is achieved when market prices are allowed to reflect marginal costs of electricity provision, including opportunity costs.
In balancing markets this is ensured through the application of the marginal pricing principle and a clear separation between procurement of balancing capacity and balancing energy”.
ACER further explains in the consultation document to the above ACER Decision No 03/2022 of 25 February 2022 that balancing capacity markets are in place to make up for lost opportunities of Balancing Service Providers in the day-ahead market and intraday market.
In turn, balancing energy bidding with a short gate closure time are to ensure that these bids only include the marginal cost of providing balancing energy and only include opportunity cost for the balancing market (notably imbalance settlement).
This regulatory clarification has been given as an answer to the stakeholder’s (Uniper SE) remark that “bidding for balancing services replaces a marketing opportunity in the intraday market with an uncertain revenue position in the balancing markets.
With a call probability of 1% (which reflects an essential part of the merit order in 2020 in Germany), a plant operator must quote about 100 times the price of the price in the intraday market to cover opportunity costs”.
Unavoidably, when included in the ACER’s priority agenda, the EU balancing markets are heading towards greater harmonisation and this will force every electricity market participant to adapt to the new market model and conditions.