Long Term Transmission Rights Secondary Trading
Long Term Transmission Rights Secondary Trading in the European Union Internal Electricity Market encompasses the trading of Long Term Transmission Rights (LTTRs) through which a market participant is able to buy or sell LTTRs, which were initially allocated by the allocation platform(s), in practice the Single Allocation Platform (SAP).
Hence, LTTRs holders are entitled to transfer all or part of their LTTRs through secondary trading to other market participants according to the corresponding allocation rules.
Article 16(7) of the Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity stipulates that capacity "shall be freely tradable on a secondary basis, provided that the transmission system operator is informed sufficiently in advance. Where a transmission system operator refuses any secondary trade (transaction), this shall be clearly and transparently communicated and explained to all the market participants by that transmission system operator and notified to the regulatory authority".
Article 44 of the Network Code on Capacity Allocation
Transfer of long-term transmission rights
1. Long-term transmission rights holders shall be entitled to transfer all or part of their long-term transmission rights to other market participants in accordance with the harmonised allocation rules.
2. The rules on admissibility and a list of market participants registered with the single allocation platform and eligible to transfer long-term transmission rights shall be published on the single allocation platform.
3. Long-term transmission rights holders shall notify the transfer of long-term transmission rights, directly or indirectly through a third party, to the single allocation platform in accordance with the harmonised allocation rules.
4. Market participants acquiring those long-term transmission rights shall confirm, in accordance with the harmonised allocation rules, directly or indirectly through a third party, to the single allocation platform the notification sent by the previous long-term transmission rights holder.
According to the procedure envisioned in Article 44 of the Network Code on Forward Capacity Allocation (FCA) and Article 42(2) of the Harmonised Allocation Rules (HAR), LTTRs holders transferring their LTTRs through secondary trading must notify the SAP while the acquirer of the LTTRs must confirm to the allocation platforms the notification sent by the previous holder. The notification of the transfer must be delivered no later than at 12:00 p.m. on the second (2nd) day preceding the day of delivery.
The HAR stipulate, among others, firmness provisions as well as the compensation rules (i.e. the rules according to which each Transmission System Operator responsible for the bidding zone border where LTTRs have been allocated, compensates market participants for curtailing the LTTRs). The formal requirement for market participants before being entitled to participate in the auction(s) or perform secondary trading is to register with the SAP created according to the Forward Capacity Allocation Network Code and to meet all eligibility requirements under the corresponding allocation rules. The Forward Capacity Harmonised Allocation Rules envisage that the SAP is required to publish a list of registered participants eligible to transfer LTTRs. Article 43 of the HAR stipulates that “all rights and obligations resulting from the HAR” are transferred together with the LTTR. The only exception is the payment obligation of the original LTTR holder regarding the allocation of LTTR.
ACER's Q&As on REMIT
Are transfers of transport capacity between a market participant and an end user with a site which does not have the capacity to consume more than 600 GWh/year to be reported, although the gas delivery contracts themselves are not to be reported?
The Agency believes that usually for a consumption unit with a maximum technical capacity of less than 600 GWh/year a supply contract will normally be a contract with a single delivery point to the customer and without any transfer of transport capacity. The threshold refers to the supply of electricity contracts and not to the transportation contracts. If the transfer of transport capacity relates to a wholesale energy product it has to be reported pursuant to Article 3(1)(b)(i) and (ii) of Commission Implementing Regulation (EU) No 1348/2014.
Single Allocation Platform is intended to serve, moreover, as a contact center for market participants in order to perform the transfer of LTTRs. SAP provides a communication platform (the “notice board”), on which market participants are able to indicate to other market participants their interest to transfer or purchase LTTRs, which have been initially allocated by allocation platforms. It is noteworthy, in the light of the HAR (Article 44), the notice board serves as ancillary tool only and is not used for the purposes of evidencing contracts. The notice board only facilitates the exchange of information between the registered participants regarding their interest in buying and/or selling Long Term Transmission Rights. The HAR clearly states that “no agreements may be concluded via this notice board”. Moreover, any notices published via the notice board by the registered participants “shall not be considered as an evidence for a valid and effective contract for the transfer of Long Term Transmission Rights”.
ENTSO-E policy paper of December 2022 (EU's Electricity Forward Markets) confirms thatfor a market participant willing to buy LTTRs on a secondary market, the only option is to approach an existing LTTR holder and express your willingness to buy and arrange a transaction bilaterally. Although the JAO publishes the list of LTTR holders who won capacity at a long-term auction and additionally offers a notice board where LTTR holders can publish their willingness to sell and market participants can publish their interest in buying LTTRs, so far, this opportunity has been rarely used by market participants. According to the said ENTSO-E policy paper of December 2022, due to MiFID II limitations regarding the organisation of a secondary market, JAO cannot further facilitate the continuous trading of LTTRs on a secondary market without falling under financial regulation, which would result in additional reporting obligations for JAO as well as for market participants.
As the ACER and CEER Draft Policy Paper of 1 June 2022 on the Further Development of the EU Electricity Forward Market observes, the secondary market for LTTRs has never developed and therefore it is not possible for market participants to use LTTRs to hedge accurately every cross-border trade.
According to the regulators, the secondary market for LTTRs could be improved by:
(i) more frequent auctions where also market participants could (re)sell their hedging products and
(ii) making products more compatible with financial products, such that they can be easily converted and transferred into financial products traded continuously on financial markets.
This would require that product obligations, timeframes, deliveries, etc. would be completely the same as for existing standard products traded at financial markets.
Also the ACER’s policy paper of 6 February 2023 on the further development of the EU electricity forward market observes that for LTTRs "no secondary market exists", where market participants could buy LTTRs at the time when they settle a new trade, which exposes their position. While the single allocation platform allows market participants to transfer the ownership of LTTRs anytime, this feature is very rarely used.
The above observations are supported by the European Commission (Staff Working Document of 14 March 2023 accompanying Proposal for a Regulation of the European Parliament and the Council amending Regulations (EU) 2019/943 and (EU) 2019/942 as well as Directives (EU) 2018/2001 and (EU) 2019/944 to improve the Union’s electricity market design, SWD(2023) 58 final), which adds that the length of transmission rights is inadequate, as they are mostly limited to one year ahead while hedging on the forward market usually takes place up to 3 years ahead. Beyond the 3-year timeframe, the direct interests of consumers and producers to hedge their operations diminishes significantly and what remains is the interest to hedge investments.
The statistical data on the LTTR's secondary trading can be found in the above ENTSO-E policy paper of December 2022, which explains that "the LTTR market displays a relatively high degree of concentration: the first 27 participants (12 % of the total) hold more than 75 % of the allocated volumes, and the first 11 (4.9 % of the total) hold more than 50 % of the market. Furthermore, secondary market for LTTRs appears to be stagnant as only 2 % of capacity allocated through monthly auction was re-sold by market participants”.
Harmonised allocation rules for long‐term transmission rights in accordance with Article 51 of Commission Regulation (EU) 2016/1719 of 26 September 2016 establishing a Guideline on Forward Capacity Allocation (Annex I to the ACER Decision 03/2017 - HAR)
Transfer of Long Term Transmission Rights
1. Long Term Transmission Right holder(s) may transfer some or all of their Long Term Transmission Rights to another Registered Participant once the Auction results in respect of those rights are final. Regardless of how the transfer was concluded, it shall be notified to the Allocation Platform following the process pursuant to Article 42 and via the Auction Tool according to a format specified on the Allocation Platform’s website.
2. The minimum volume of Long Term Transmission Rights that may be transferred shall be one (1) MW over one (1) hour.
Process of the transfer
1. The transferor shall send a notification, directly or indirectly through an authorised third party, of the transfer to the Allocation Platform via the Auction Tool with the following information:
(a) the EIC codes of the transferor and transferee;
(b) the time period of the transfer including the start and end dates and hours; and
(c) the volume (MW) of the transferred Long Term Transmission Right in whole MW(s) defined per hour.
2. The notification of the transfer shall be delivered to the Allocation Platform no later than at 12:00 p.m. on the second (2nd) day preceding the day of delivery.
3. In order to be able to transfer the Long Term Transmission Rights the following requirements shall be fulfilled:
(a) the transferor and transferee have a valid and effective Participation Agreement with the Allocation Platform at least for transfer of Long Term Transmission Rights; the transferor holds the concerned Long Term Transmission Rights at the time of the notification of the transfer;
(b) the transferor has fulfilled or secured its financial obligations pursuant to this Allocation Rules regardless whether the transferor transfers all or only part of its Long Term Transmission Rights and even in the case of multiple transfers among several Registered Participants; and
(c) the transferor has delivered the notification of the transfer before the deadline pursuant to paragraph 2 of this Article.
4. The Allocation Platform shall issue without undue delay an acknowledgement of receipt of the notification to the transferor. Where the notification fulfils the requirements pursuant to paragraph 3 of this Article the Allocation Platform shall inform the transferee about the notification of the transfer.
5. In the event that the acknowledgement is not sent by the Allocation Platform, the concerned notification shall be deemed not to have been submitted.
6. The notification of transfer shall be confirmed by the transferee within four (4) hours upon receiving the transfer information from the Allocation Platform and no later than at 12:00 p.m. the second (2nd) day preceding the day of delivery.
7. In the event that the transferee does not confirm the transfer by the deadline pursuant to paragraph 6, the Allocation Platform shall automatically cancel the process of the transfer notification.
8. The Allocation Platform shall then issue without undue delay to the transferor and the transferee a second acknowledgement via the Auction Tool stating either:
(a) that the transfer notification has been accepted and is effective; or
(b) that the transfer notification has been rejected including the reason(s).
9. If for any technical reason the acknowledgement is not sent by the Allocation Platform, the concerned transfer is deemed not to have been submitted.
10. The Transferor shall not be entitled to withdraw the transfer notification once the transferee has accepted it. The transferee may initiate another transfer to transfer the Long Term Transmission Rights further.
11. In the event of Auction Tool failure, a fallback procedure pursuant to Chapter 8 shall apply. If the process of the transfer notification cannot be completed in accordance with this Article due to an IT system and/or fallback procedure failure, Registered Participants shall not be entitled to claim any financial compensation from the Allocation Platform.
Legal consequences of the transfer
All rights and obligations resulting from these Allocation Rules, with exception of the payment obligation of the original Long Term Transmission Right holder regarding the allocation of Long Term Transmission Right pursuant to Article 62(1), shall be transferred together with the Long Term Transmission Right.
1. The notice board shall facilitate only the exchange of information between the Registered Participants regarding their interest in buying and/or selling Long Term Transmission Rights. No agreements may be concluded via this notice board. Use of the notice board is free of charge.
2. Any notices published via the notice board by the Registered Participants shall not be considered as an evidence for a valid and effective contract for the transfer of Long Term Transmission Rights.
3. The Allocation Platform shall not be held liable for the accuracy and completeness of the information published by a Registered Participant on the notice board.
4. The Allocation Platform may delete from the notice board any information it considers not relevant for the purpose of the notice board. In case of such a deletion, the Allocation Platform shall provide the reasons for the deletion to the respective Registered Participant.
The aforementioned ACER’s policy paper of 6 February 2023 on the further development of the EU electricity forward market also analyses the possible solutions to the stalemate in the secondary market. In case of LTTRs, the secondary market could be organised as today where SAP only allows the transfer of LTTRs to another holder, but does not organise a platform for secondary trading. On the other hand, secondary market could also be organised by SAP by providing a platform for continuous trading of LTTRs combined with the allocation of leftover cross-zonal capacities. In case of CfDs, secondary market would be organised by power exchanges in form of continuous-based market coupling with leftover capacities. In case LTTR auctions are performed once each day, the need for secondary trading may be questioned, and would depend on the interest of market participants. Continuous access implies the allocation of leftover capacities without capacity pricing. Such a solution is feasible in case the timing between two consecutive auctions is rather short as this ensures that market fundamentals have not changed significantly and that the leftover capacities still have a zero or very low value. However in case auctions are organised only once a week, the market fundamentals can significantly change during the period between two auctions and the certainty that leftover cross-zonal capacities still have a zero value diminishes significantly. Therefore, ACER considers that continuous access with allocation of cross-zonal capacity is feasible only in case of more frequent (i.e. daily) auctions.
Return of long term transmission rights
Another option available to the long term transmission rights holders is to return their long term transmission rights to the relevant TSO through the Single Allocation Platform for subsequent forward capacity allocation. LTTRs’ holders willing to return their rights must notify the Single Allocation Platform and must observe the procedure stipulated in the HAR. Long term transmission rights holders who return their long term transmission rights are remunerated by the relevant TSO through the Single Allocation Platform and such remuneration will be equal on the price resulting from the auction where the long term transmission rights were reallocated (Article 43 of the FCA Regulation). Detailed rules for the return of the LTTRs are stipulated in Articles 38 - 40 of the HAR.
The aforementioned ENTSO-E policy paper of December 2022 mentions that, although the option of returning of LTTRs to a subsequent auction is used by some LTTR holders, many market participants prefer to benefit from the LTTR remuneration based on the day-ahead market spread, especially considering the negative risk premium currently paid for LTTRs. In addition, most bidding zone borders only offer a single auction per month to return their annual LTTRs. The returned LTTR are offered in addition to the capacity offered by the TSOs. During the monthly auctions between 2019 and 2021, only 2% of the offered capacity stemmed from returned yearly LTTRs.