Loop flows occur where electricity trading inside one bidding zone causes flows that have an impact on other zones.
Loop flows can result in the use of the neighbouring networks without bearing the costs for this use (i.e. free-riding).
The two basic assumptions linked to the zonal design are the absence of limitation to trading inside each bidding zone and the absence of influence of trading inside a zone on neighbouring zones. In reality however, trading inside one zone causes flows that have an impact on other zones (i.e. loop flows) and have a priority over cross-zonal trading. As loop flows are not controlled by capacity calculation and allocation, the TSOs can only control them by applying remedial actions.
While market participants in large zones benefit from high liquidity and competition and the same price over a large area, this can create loop flows in neighbouring bidding zones, which, if violating security limits, may result in increased redispatching costs in these zones and in the reduction of cross-zonal capacities on some borders. In particular, large bidding zones induce higher uncertainty in capacity calculation, which may result in higher reliability margins and reduction of cross-zonal capacity given to the market.
There are two possible approaches to tackle this problem. On the one hand, a proper bidding zone configuration may balance the potential discrimination between market participants in different zones through decreasing the amount of loop flows, via introducing limited capacity and congestion management mechanisms on the borders between zones. On the other hand, the amount of loop flows can also be reduced by investing in the network and improving the topology of the network.
ACER's Consultation document of 31 July 2013 'The influence of existing bidding zones on electricity markets' (PC_2013_E_04), p. 6
In the grid, the flows are distributed according to the paths of least resistance from source to sink, in effect, the scheduled flows can deviate substantially from the actual physical flows in the electricity grid. The current market solutions are only to a limited degree able to represent the physical realities of the power system (Loop flows – Final advice Prepared for The European Commission, THEMA Report 2013-36, October 2013, p. 1).
The Final advice Prepared for The European Commission of October 2013 defines all deviations between scheduled flows and physical flows as unscheduled flows.
In this regard, apart from the loop flows (i.e. unscheduled flows stemming from scheduled flows within a neighbouring bidding zone or control area), the transit flows are differentiated (meaning unscheduled flows stemming from a scheduled flow between two or more bidding zones or control areas).
Loop and transit flows are both unscheduled flows occurring in an external control area, or host area, i.e. areas not being part of the transaction.
Loop flows are significantly reducing the amount of cross-zonal capacities and have a negative impact on the functioning the market and cross-border trade and their volume should be therefore minimised.
Given the above circumstances, ACER Recommendation No 2/2016 of 11 November 2016 on the common capacity calculation and redispatching and countertrading cost sharing methodologies proposed a general principle that the capacity of the cross-zonal network elements considered in the common capacity calculation methodologies should not be reduced to accommodate loop flows.
Loop flows, along the unscheduled allocated flows, form together unscheduled flows.
However, according to the aforementioned ACER Recommendation of 11 November 2016, with the implementation of flow-based capacity calculation within appropriate capacity calculation regions (CCRs), the unscheduled allocated flows should gradually diminish and the loop flows would remain the main polluters.
Also Annual Report on the Results of Monitoring the Internal Electricity and Gas Markets in 2016 of October 2017 (ACER/CEER, p. 34) observes that, in theory, where flow based method applies, unscheduled allocated flows should disappear.
However, this is not yet seen in the Core (CWE) region for two reasons.
First, some exchanges scheduled on the Core (CWE) borders physically flow through borders outside the Core (CWE) region.
The opposite is also true, i.e. some exchanges scheduled on borders outside the Core (CWE) region physically flow through Core (CWE) borders.
Second, the methodology applied to estimate allocated flows (which are necessary to calculate unscheduled allocated flows) is still subject to improvements.
Article 14(7) 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)
Transmission system operators shall not limit the volume of interconnection capacity to be made available to other market participants in order to solve congestion inside their own control area or as a means of managing flows on a border between two control areas observed even without any transaction, i.e. flows over control areas caused by origin and destination within one control area.
Upon request by a transmission system operator, the relevant regulatory authority may grant a derogation from the first subparagraph where it is necessary for maintaining operational security or where it is beneficial to economic efficiency at Union level. Such a derogation, which may not relate to curtailment of already allocated capacities pursuant to paragraph 5, shall be limited in time, strictly limited to what is necessary, and avoid discrimination between internal and cross-zonal exchanges. Before granting a derogation, the relevant regulatory authority shall consult the regulatory authorities of other Member States forming part of an affected capacity calculation region. In case a regulatory authority disagrees with the proposed derogation, the Agency shall decide on the derogation pursuant to Article 6(8)(a) [recast of Regulation (EC) No 713/2009 as proposed by COM(2016) 863/2]. The justification and reasons for the derogation shall be published. Where a derogation is granted, the relevant transmission system operators shall develop and publish a methodology and projects that shall provide a long-term solution to the issue that the derogation seeks to address. The derogation shall expire when the time limit is reached or, once the solution is applied, whichever is earlier.
The so-called 'Winter Energy Package' envisions the rule that the transmission system operators (TSOs) must not limit the volume of interconnection capacity to be made available to other market participants in order to solve congestion inside their own control area or as a means of managing flows on a border between two control areas observed even without any transaction, i.e. flows over control areas caused by origin and destination within one control area.
Derogation from this principle may be granted in exceptional circumstances only (Article 14(7) 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) - see box).
However, in the policy statement of 15 March 2017 "Key Recommendations for the Clean Energy Package", ENTSO-E heavily criticised the European Commission's propositions, in particular, ENTSO-E said: "the requirements on TSOs capacity calculation to ignore internal congestions and loop flows and instead use costly remedial actions to increase cross-border capacity would lead to outcomes not reflecting the physical reality of European grids and significantly increase congestion management costs to be paid by end-consumers via transmission tariffs (Art. 14)."
In the document "Clean Energy Package: Promising market proposals, but some issues to be solved" of 15 March 2017, ENTSO-E expressed reservations regarding the fact that the European Commission's proposals in the said draft Regulation require no consideration of internal congestions nor loop flows within the capacity calculation process, and, in addition, they impose an obligation on TSOs to use preventive re-dispatch and countertrading to maximise available cross-border capacity.
"These provisions would oblige TSOs to ignore the physical flows that are an inherent part of the effective capacity calculation, increase the differences between the system reality on one side and the commercial exchanges on the other," ENTSO-E said.
According to the ENTSO-E the said draft provisions would lead to higher re-dispatch costs and risks related to possible unavailability or inexistence of necessary remedial actions to cope with congestions.