According to the Commission Regulation (EU) 2016/1719 of 26 September 2016 establishing a guideline on forward capacity allocation - FCA Regulation, Financial Transmission Rights Obligations are (along with Financial Transmission Rights Options) a sub-type of the broader category of Financial Transmission Right (FTR) and denote rights entitling the holder to receive or obliging the holder to pay a financial remuneration based on the day ahead allocation results between two bidding zones during a specified period of time in a specific direction.
The analogous definition of the Financial Transmission Right Obligation is used by Harmonised allocation rules for long‐term transmission rights as stipulated in the Annex to Decision of the Agency for the Cooperation of Energy Operators (ACER) No 03/2017 of 2 October 2017.
In case long term cross-zonal capacities are allocated implicitly via market coupling, the underlying products are by default Financial Transmission Rights Obligations (ACER and CEER, Draft Policy Paper on the Further Development of the EU Electricity Forward Market for Consultation, 1 June 2022, p. 23).
Interestingly, the ENTSO-E Policy Paper of December 2022 among potential options for further development of EU's electricity forward markets considers also the one where FTR Obligations would be the standard LTTRs, replacing FTR Options and Physical Transmission Rights (PTRs) at all European borders.
The features of this approach are described in the following:
- One of the characteristics of FTR Obligations is that those issued in opposite directions on the same bidding zone border can be netted out, in the sense that their payoffs during the delivery period are equal in absolute value and opposite in sign, and therefore they net themselves out.
This means that, as long as they are balanced in volumes, FTR Obligations can be issued in unlimited quantities in excess of the physical capacities available in either of the two directions between the corresponding bidding zones. If interest for FTR Obligations of opposing directions net each other, it is more efficient if this trade happens at the secondary market as price formation at actions needs a limited offer.
- FTR Obligations shall be offered at least for annual, quarterly and monthly delivery periods, for base load and peak load profiles. This is in line with the delivery periods typically traded in electricity (commodity) futures markets. Furthermore, yearly, monthly and quarterly products shall be issued in several auctions to ensure volume adequacy with the electricity forward market.
- A secondary market for FTR Obligations could be organised by entities other than the Transmission System Operators (TSOs) - e.g. financial exchanges or other organised marketplaces, based on continuous trading (the typical trading method for financial markets). Beyond the FTR Obligations issued by TSOs, additional FTR Obligations could be created in the secondary market by matching demand and supply, taking advantage of the netting properties of these instruments. Once issued, the FTRs Obligations allocated by the TSOs and those created in the secondary market would be indistinguishable. Moreover, if the FTR Obligations and the electricity futures were traded on the same platform, they could also be combined and recombined to match demand and supply of the different instruments, taking advantage of the equivalence of a combination of electricity futures and FTR Obligation. Furthermore, market participants only have to fulfil collateral requirements once.
- Introduction of minimum prices. For each auction, a minimum price shall be defined which guarantees a minimum FTR value. The unsold capacity could be offered to the next auction. TSOs are assured not to sell the capacity at an undervalued price.
- FTR Obligations allow for the creation of 'synthetic futures' which could be created via several methods. One method is by combing an electricity futures contract traded in a liquid electricity forward market with a FTR Obligation. Another method is by combing a standard electricity futures contract or CfD contract in adjacent bidding zone, dependent on current forward market structure. This would provide additional hedging opportunities in a bidding zone with a less liquid electricity forward market by linking it to an area with more liquidity.
- Once sufficient liquidity for the commodity forward products is also developed in former illiquid markets, the FTR Obligation price is determined simply by a non-arbitrage condition as the price difference between the futures products. The initial allocation of LTTRs via auctions might no longer be necessary, and TSOs might cease the allocation of long-term products via the auctions - retaining the "traditional' role of collecting the 'spot' congestion rent and passing it on to consumers.
The implementation of the proposed improvements would be subject to the investigations related to Long-Term Flow-Based Allocation.
Financial Transmission Rights Obligations are regulated in Articles 34 and 35 of the FCA Regulation - see box.
Financial transmission rights — obligations
1. Holders of FTRs - obligations shall be entitled to receive or obliged to pay the financial remuneration pursuant to Article 35.
2.The implementation of FTRs - obligations shall be subject to the application of day-ahead price coupling according to Articles 38 to 50 of Regulation (EU) 2015/1222.
Principles for long-term transmission rights remuneration
1. The relevant TSOs performing the allocation of transmission rights on a bidding zone border through the single allocation platform shall remunerate the long-term transmission rights holders in case the price difference is positive in the direction of the long-term transmission rights.
2. The holders of FTRs - obligations shall remunerate the relevant TSOs through the single allocation platform allocating transmission rights on a bidding zone border in case the price difference is negative in the direction of the FTRs - obligations.
3. The remuneration of long-term transmission rights in paragraphs 1 and 2 shall comply with the following principles:
(a) where the cross-zonal capacity is allocated through implicit allocation or another method resulting from a fallback situation in the day-ahead time frame, the remuneration of long-term transmission rights shall be equal to the market spread;
(b) where the cross-zonal capacity is allocated through explicit auction in the day-ahead time frame, the remuneration of long-term transmission rights shall be equal to the clearing price of the daily auction.
4. In case allocation constraints on interconnections between bidding zones have been included in the day-ahead capacity allocation process in accordance with Article 23(3) of Regulation (EU) 2015/1222, they may be taken into account for the calculation of the remuneration of long-term transmission rights pursuant to paragraph 3.
The application of financial market regulation to TSOs
The aforementioned ENTSO-E policy paper of December 2022 also analyses the scope of applicability of the financial market legal regime to TSOs issuance of FTRs. Under financial market regulation, and in particular Section C, point (5), in Annex I to the Directive 2014/65/EU35 (MIFIDII) FTRs are classified as financial instruments and, therefore, their trading is subject to the provisions in the same Directive, in Regulation (EU) No 648/2012 (EMIR) and in Regulation (EU) No 600/2014 (MIFIR).
However, Article 2(1)(n) of MIFID II provides that the same Directive does not apply to 'transmission system operators as defined in Article 2(4) of Directive 2009/72/EC or Article 2(4) of Directive 2009/73/EC when carrying out their tasks under those Directives, under Regulation (EC) No 714/2009, under Regulation (EC) No 715/2009 or under network codes or guidelines adopted pursuant to those Regulations, any persons acting as service providers on their behalf to carry out their task under those legislative acts or under network codes or guidelines adopted pursuant to those Regulations, and any operator or administrator of an energy balancing mechanism, pipeline network or system to keep in balance the supplies and uses of energy when carrying out such tasks. That exemption shall apply to persons engaged in the activities set out in this point only where they perform investment activities or provide investment services relating to commodity derivatives in order to carry out those activities. That exemption shall not apply with regard to the operation of a secondary market, including a platform for secondary trading in financial transmission rights.
To assess whether this exemption applies to the issuing and primary allocation of FTR Obligation by TSOs, the following conditions should be verified:
- the issuing and primary allocation of FTR Obligation can be considered as activities carried out by TSOs under the energy sector legislation. In this respect, it is to be noted that the FCA Regulation, in Article 30(1), mandates 'TSOs on a bidding zone border […] to issue long-term transmission rights unless the competent regulatory authorities of the bidding zone border have adopted coordinated decisions not to issue long-term transmission rights on the bidding zone border'. The issuing of LTTRs, including FTR Obligations, is therefore among the statutory tasks of TSOs (unless otherwise directed by their national regulators); and
- the issuing and allocation of LTTRs, including FTR Obligations, does not constitute ‘the operation of a secondary market, or of a platform for secondary trading'. In this respect, although MIFID II does not contain a definition of secondary markets, all trading venues defined in that Directive have the common feature of being 'multilateral systems', bringing together 'multiple third-party buying and selling interests' in financial instruments.
The opportunity of netting FTR Obligations issued on the same market-area border for the same delivery period, but in opposite directions, does not affect nor change the one-to-many nature of the auctions for the primary allocation of these FTRs. Therefore, on the basis of the considerations presented above, ENTSO-E concludes that the role of the TSOs envisaged in issuing and allocating LTTRs is not subject to the financial market regulation. The same applies if TSOs assign this role to a JAO. Instead, if TSOs were to trade FTRs in secondary markets, they would engage in trading activities within the scope of the financial market regulation and would be subject to the provisions of such regulation.