Assuming Framework Guidelines become binding law, and the fact intermittent generation as the PV or wind sources have very low variable costs, it is probable in the future Single Electricity Market baseload fossil-fueled generation like coal and gas will gradually be squeezed out from providing balancing services.
Investment outlays engaged in these sources will probably be recovered over longer periods due to contained periods of operation of these units on the electricity balancing market. In such a situation it appears more and more questionable, whether the investors decide to engage in new sources of fossil-fuel generation.
ENTSO-E however engages in a dispute with the European energy regulator ACER over the content of the Framework Guidelines.
In the pathway for achieving the European Single Electricity Market the Framework Guidelines on Electricity Balancing (Draft for consultation DFGEB-2012-E-004 published by ACER on 24 April 2012 (Framework Guidelines)) have quite fundamental significance. The Electricity Balancing Network Code(s) will take precedence over relevant national frameworks (legislation, regulation, codes, standards, etc.) for cross-border and market integration issues. In fact Framework Guidelines should be thoroughly in every passage examined by the energy companies’ appropriate risk departments since consequences of proposals contained therein are far-reaching and for sure have potential for changing the status quo on the European energy market.
Framework Guidelines on Electricity Balancing are drafted by ACER for the purpose of preparing by the ENTSO-E of the Electricity Balancing Network Code. They, however, prejudge the range of substantial parameters.
Take for instance point 3.2.2 ‘Cross-border exchanges of balancing energy’. The Framework Guidelines state that the Electricity Balancing Network Code(s) should set all necessary features to facilitate the development of cross-border exchanges of balancing energy and stipulate that these are made possible on every border.
This ought to be done in three steps - the first being TSOs (Transmission System Operator) coordinating the netting of imbalances between adjacent control areas, taking into account cross-border capacities, the second and third one relating respectively to replacement reserves and frequency restoration reserves (the said notions defined in the Framework Guidelines).
Frequency containment reserves – operating reserves necessary for constant containment of frequency deviations (fluctuations) from nominal value in order to constantly maintain the power balance in the whole synchronously interconnected system. Activation of these reserves results in a restored power balance at a frequency deviating from nominal value. This category typically includes operating reserves with the activation time up to 30 seconds. Operating reserves of this category are usually activated automatically and locally.
Frequency restoration reserves (FRR) – operating reserves used to restore frequency to the nominal value and power balance to the scheduled value after sudden system imbalance occurrence. This category includes operating reserves with an activation time typically up to 15 minutes (depending on the specific requirements of the synchronous area). Operating reserves of this category are typically activated centrally and can be activated automatically or manually.
Replacement Reserves (RR) – operating reserves used to restore the required level of operating reserves to be prepared for a further system imbalance. This category includes operating reserves with activation time from 15 minutes up to hours.
Framework Guidelines require the Electricity Balancing Network Code(s) to define that exchanges of balancing energy are be based on a TSO-TSO model with common merit order (CMO) list. In this model, TSOs share their balancing resources and optimise their activation in order to minimise the cost of balancing by gathering in a common list balancing bids and offers that are available in their control areas and activate them according to the common merit order list subject to technical constraints, including the availability of transmission capacities.
Furthermore, it is envisioned that three years after its entry into force at the latest, a TSO-TSO model with common merit order list and margins is implemented for the exchange of balancing energy from resources that are used as replacement reserves.
Framework Guidelines allow the Electricity Balancing Network Code(s) to foresee that, in this model, TSOs may decide not to share a certain amount of the most expensive balancing bids (referred as “margins”) gathered in their control area in the common merit order list.
According to the Framework Guidelines, the Electricity Balancing Network Code(s) should specify the principles of the methodology to evaluate the amount of unshared bids and take into account the requirements from the Network Codes on Load-Frequency Control and Reserves and on Operational Security.
Any free-riding behaviour from participating TSOs sccording to ACER's stance should be avoided. Reciprocal and efficient sharing and activation of balancing resources must be allowed. The methodology should also take into account the availability of the bids from the common merit order list.
According to Framework Guidelines the Electricity Balancing Network Code should foresee that, seven years after its entry into force at the latest, a European-wide TSO-TSO model with common merit order list and without margins for the activation of balancing energy from replacement reserves is established, unless a cost-benefit analysis is performed and demonstrates that it does not deliver positive net benefits for the overall system.
Moreover, the Electricity Balancing Network Code(s) must provide that the pricing method of the balancing energy products is harmonised and ensure an economically efficient dispatch of generation and an efficient use of demand response and balancing resources. It is proposed that the method will be based on marginal pricing (pay-as-cleared).
Taking these rules into account the thesis presented at the beginning claiming the squeezing out of baseload generation from providing balancing services seems to be justified. Investment outlays engaged in these sources will probably be recovered over longer periods due to contained periods of operation of these units on the electricity balancing market. In such a situation it appears more and more questionable, whether the investors decide to engage in new sources of fossil-fuel generation. Anyway, Framework Guidelines appear to be another, maybe decisive, regulatory step containing potential further development of coal-fired generation.
The fact that Electricity Balancing Network Codes take precedence over relevant national frameworks implicates the latter must accordingly be adapted, to the extent necessary, to ensure proper implementation.
The standards and requirements of the Electricity Balancing Network Code(s) will apply after the expiration of a transitory period to be determined in the Electricity Balancing Network Code(s). The transitory period has not yet been determined which shall be done in consultation with relevant stakeholders. Transitory period will not, however, exceed three years starting on the day of publication of the relevant the Electricity Balancing Network Code(s) in the Official Journal of the European Union.
Issue that shouldn’t be omitted is that pursuant to Framework Guidelines Electricity Balancing Network Code(s) will be granted retroactive force - after the expiration of the transitory period, the standards and requirements of the Electricity Balancing Network Code(s) will also apply to agreements related to electricity balancing that were concluded between Transmission System Operators (TSO) and relevant grid users (such as Balance Responsible Party (BRP) and Balance Service Provider (BSP)) before the day of publication of the relevant Electricity Balancing Network Code(s) in the Official Journal of the European Union and/or until the expiration of the transitory period.
It may be, however, questionable, whether there exist in this case such important and higher-ranking reasons justifying the infringement by the Electricity Balancing Network Code(s) of the rule of protection of reasonable reliance of the parties to the commercial agreement entered into before the day of publication of the Code. It may be guessed that the implementation of the Single Electricity Market is given the highest priority on the European political agenda and that’s the rationale for breaking in that regard the need for safeguarding the certainty of law.
TSOs which would be unable to implement some provisions of the Electricity Balancing Network Code within the timeframe required may apply for derogation.
Derogations may be allowed only for a maximum period of 2 years and for specific provisions of the Electricity Balancing Network Code(s). Pursuant to Framework Guidelines the Electricity Balancing Network Code(s) should expressly identify provisions for which a derogation may be granted, and ENTSO-E shall provide detailed justifications with regard to all these instances. According to Framework Guidelines the Electricity Balancing Network Code(s) should describe the process and criteria to apply for derogation.
The authority competent for granting derogations will be the National Regulatory Authority (NRA). It may have practical importance in certain situations that during the derogation application process, the concerned TSO is deemed as compliant.
Framework Guidelines envision that the decision of the NRA shall be notified to ACER and published at their web page. ACER shall also monitor the granting of derogations.
Although the issue is not specifically addressed in the Framework Guidelines, it may be assumed that potential appeal procedure regarding the NRA’s decision on refusing derogation will be carried out pursuant to national procedures and subject to requirements applying to challenging other decisions of NRA.
Requirements for Balance Responsible Parties (BRP) and Balance Service Providers (BSP)
The Electricity Balancing Network Code(s) will include also requirements for BSPs and BRPs. It is significant, the terms and conditions for balancing markets must allow for load entities (whether through aggregators or not) as well as generation units from renewable and intermittent energy sources to become BSPs. These terms and conditions, including the underlying requirements, will, in particular, be set in order to facilitate the participation of demand response, renewable and intermittent energy sources in the balancing markets.
Criticism from ENTSO-E
The said Framework Guidelines have, however, met strong criticism from ENTSO-E (European Network of Transmission System Operators for Electricity) which, without any doubt, is the key participant when it comes to electricity balancing and its voice in any case mustn’t be underestimated.
In the document ‘ENTSO-E Response ACER Draft Framework Guidelines on Electricity Balancing’ of 22 June 2012 the said organisation expressed an opinion that Framework Guidelines on Electricity Balancing:
- Should not define imbalance settlement as a mechanism aiming primarily at cost-recovery. The definition should be more general and/or highlight primarily the objective to “ensure that Balance Responsible Parties support the system balance in an efficient way and incentivise market participants in keeping and/or helping to restore the system balance”.
- Should not stipulate that imbalance prices “reflect the costs of balancing the system in real-time” – which, according to ENTSO-E, is ambiguous. The said organisation expressed an opinion that It should not be excluded that the imbalance price could need to be higher than such costs, for the sake of incentives.
- Should not impose that the costs of balancing energy exchanged implicitly is necessarily covered by including the price of such exchanges in the imbalance price, but leave sufficient flexibility for other options.
- Should leave some flexibility for the definition of imbalance volumes.
ENTSO-E voiced the opinion that the requirement to “include the costs of balancing energy exchanged implicitly” (i.e. from imbalance netting and from the settlement of unintentional deviations) could be too restrictive.
ENTSO-E stressed, there was no such thing as a pan-European balancing market design in existence today. The design of balancing schemes differs between Member States in almost all regards (e.g. what is balancing, the role of the TSO, the role and incentives on market players, the cash-out mechanism etc.). The issue, which rises particularly strong concerns on the part of ENTSO-E there is no experience with the target models proposed by the Framework Guidelines.