The future shape of the European balancing market is not an obvious choice, since the surveys highlighted the great diversity of arrangements throughout Europe in that regard.
Although the balancing can be perceived as a technical only market, its design in many respects will influence on economic decisions in many connected areas.
ENTSO-E (which represents European transmission system operators – TSOs) describes electricity balancing as the timeframe in which transmission system operators are single buyers and act to ensure that generation equals demand in real time (so says at least ENTSO-E website www.entsoe.eu).
The basic architecture for this important part of Internal Electricity Market is currently on the table as on 25 June 2012 lapsed the term for submitting comments regarding ACER’s draft Framework Guidelines on Electricity Balancing (Draft for consultation DFGEB-2012-E-004 published by ACER on 24 April 2012 - see: European Single Electricity Balancing Market - state of play), while on 22 June 2012 ENTSO-E published its response to the ACER’s position and on 18 September 2012 we have ACER’ Framework Guidelines final document (FG-2012-E-009).
The above documents evidenced a significant discrepancy in views between the European energy market regulator (ACER) and the transmission system operators (associated in ENTSO-E) on certain vital questions.
ENTSO-E perception of the definition and role of balancing
Among the thesis presented in the ENTSO-E document of 22 June 2012, worth to be underlined, is the discursive element regarding the very nature of the balancing and its role in the future Internal Electricity Market.
ENTSO-E stresses that the concept of “balancing” has 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 involves the design of incentives for the market to reduce imbalances. It further argues that well-designed imbalance charges are a corner-stone of efficient balancing markets, as well as a prerequisite for the well-functioning of the intraday and day-ahead markets.
ENTSO-E also presents a view, there is no such thing as a pan-European balancing market design in existence today, since the design of balancing schemes differs between Member States in almost all regards (e.g. what is balancing, the role of the transmission system operators, the role and incentives on market players, the cash-out mechanism etc.).
The observation that there is at present no experience with the target models proposed by ACER in the Framework Guidelines has leaned ENTSO-E towards highlighting a need to proceed with caution, to take these various factors into account and to draw on the learning effects that will result from concrete implementation projects.
Pan-European Common Merit Order
Exchanges of balancing energy pursuant to the ACER’s Framework Guidelines on Electricity Balancing of 18 September 2012 (FG-2012-E-009) are to be based on a TSO-TSO model with Common Merit Order (CMO) list.
Framework Guidelines describe this model as a one, in which TSOs share their balancing resources and optimise their activation in order to minimise the cost of balancing by gathering balancing bids and offers, that have been submitted by balance service providers in their control areas, into a common list and activate them according to the common merit order list taking into account technical constraints and operational security limits, including the availability of transmission capacities.
Access of balancing bids and offers to the common list and their activation is envisioned to be non-discriminatory, fair, objective and transparent. The Network Code on Electricity Balancing may allow for a different common merit order list at least for automatically, where relevant, and manually activated reserves. ACER mentions that an optimisation process may be used to allow for a concrete and efficient implementation, and the use of common merit order lists with different products and technical constraints.
Moreover, ACER’s Framework Guidelines on Electricity Balancing require the future Network Code on Electricity Balancing to foresee that “the activation of frequency restoration reserves (in particular when manually activated) and replacement reserves is coordinated in order to allow efficient utilisation and arbitrage between these balancing resources across markets.”
According to ACER, the Network Code on Electricity Balancing should require the harmonisation of the pricing method for balancing energy products, which is intended to give correct price signals and incentives to market participants.
The rules for defining, reviewing and changing the common pricing method pursuant to the ACER’s vision should be set forth in the Network Code on Electricity Balancing. Pursuant to the Framework Guidelines the initial proposal for such common pricing method is to be submitted to the ACER and all National Regulatory Authorities (NRAs) no later than one year after the entry into force of the Network Code.
The marginal pricing (pay-as-cleared) is perceived by ACER as a default mechanism for the said initial proposal, unless transmission system operators (TSOs) provide all NRAs with a detailed analysis demonstrating that a different pricing method is more efficient for EU-wide implementation.
However, in the context of the ACER-proposed European Common Merit Order, ENTSO-E in its document of 22 June 2012 draws the attention to the important differences between Frequency Restoration Reserves and Replacement Reserves.
The main purpose of the Frequency Restoration Reserves (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.
ENTSO-E underlines that the development of a European Common Merit Order is in that regard technically complicated and limited due to operational constraints.
In effect ENTSO-E poses a question, whether a pan-European Common Merit Order is a reasonable goal for automatic Frequency Restoration Reserves.
In contrast the Replacement Reserves (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.
In ENTSO-E opinion expressed in the above document of 22 June 2012 these differences should be properly reflected in the European Common Merit Order design.
It appears that the stance of ACER inherent in the Framework Guidelines does not share the ENTSO-E fears for no experience with target models and its recommendation to proceed with caution. It is possible that the politically-set tight deadlines for launching Internal Electricity Market could potentially play its role in this choice.
Other key issues
Among other requirements set by ACER in the Framework Guidelines, which seem particularly noteworthy, are:
1. The Network Code on Electricity Balancing should oblige TSOs to allow the participation of balancing resources to provide balancing energy, without having a contract for reserves, at least for resources that are used as Replacement Reserves and manually activated Frequency Restoration Reserves.
2. The Network Code on Electricity Balancing should foresee that the settlement rules between TSOs include financial compensation for balancing energy exchanged implicitly, in particular due to the netting of system imbalances and due to unintentional deviations (difference between the control area schedules and tie-line flows), based on the prices of balancing energy.
3. The Network Code on Electricity Balancing should prohibit any additional charge (except for losses in consistency with other timeframes, if approved by relevant NRAs) for the exchange of balancing energy for TSOs, which use the available transfer capacity after the intraday cross-border gate closure time. This rule should not prevent cost recovery for exempted interconnectors – if foreseen in their exemption – if they are used to facilitate the exchange of balancing energy, in consistency with other timeframes.
4. The Network Code on Electricity Balancing should require that the terms and conditions related to balancing allow for load entities (whether through aggregators or not) as well as generation units from renewable and intermittent energy sources to become Balance Service Providers.
5. The Network Code on Electricity Balancing should also allow for specific balancing energy and balancing reserve products, if the resources from standard products would not be sufficient to balance the system, and if this does not create significant inefficiencies and distortions in national or cross-border adjacent markets. In such cases, TSOs using these specific products should justify the existence of these products and seek the approval or fixing of the relevant NRAs.