Attention energy wonks, the EU’s revised electricity regulation is going to change the electricity grid as we know it. Not just physically, but in terms of market policy: no forbearance with grid congestion and a clear commitment to cross-border trade. Justus Irmen takes an in-depth look.
The EU’s Energy Union has been one of the top priorities of the Juncker Commission and the negotiations on the next Multiannual Financial Framework indicate that climate and energy policy is also going to play a central role in the years to come.
As far as the electricity sector is concerned, a major challenge will be to physically link the national transmission grids, and to integrate the various markets into an integrated European energy market. With more and more renewable energy flowing in the electrical grids, it is important that it can move quickly where it needs to go. This is the goal of the revised Electricity Regulation, along with the other legislative acts of the Clean Energy Package.
Connecting Europe’s grid
As agreed in the governance regulation of the Clean Energy Package, Member states aim for an interconnectivity level of fifteen percent by 2030. That means a Member State’s total cross-border transmission capacity shall be equivalent to fifteen percent of the Member State’s respective generation capacity. Achieving a certain level of interconnectivity is necessary to alter the overall trade volumes across Europe and align complementary forms of electricity generation.
Next to the physical infrastructure, Europe needs an appropriate market design to set the rules for electricity trading. To properly take into account the physical networks constraints inherent to the European grid, the European electricity market has been organized in a zonal model. This means there is actually no single market area, but several bidding zones with an independent price formation on the respective spot markets.
A market coupling mechanism allows for cross-zonal trade transactions. Those bidding zones have typically been aligned with Member states’ borders, but due to the decentralization of power generation in recent years, the volume and direction of electricity flows is shifting, and so are the network constraints.
Europe’s new market design
Therefore, the European Commission reinforced its efforts to reconfigure the existing bidding zones so as to align them with the physical reality. In Article 14 of the revised electricity regulation it says that “bidding zone borders should be based on long-term and structural congestions in the transmission network”. Vice versa, this means that there should be no or only temporary congestions within the bidding zones.
With the new regulation, the pressure on Member States to resolve their congestion issues is high.
Article 14 (3) of the revised electricity regulation reinstates the bidding zone review process under which transmission system operators (TSOs) report on structural congestions and submit alternative configurations of their relevant bidding zone for approval to the respective National Regulatory Authority (NRA). The proposed configuration should be based on structural congestions that cannot be overcome within the next three years. The European NRAs then collectively take a unanimous vote on that proposal. If there is no unanimous decision by the NRAs, a decision is taken by ACER, the European regulatory authority. This arbitration function is a powerful tool granted to agency by the new ACER Regulation and is very likely to give European interest a higher say vis-à-vis national interests in many regards.
Now, if a structural congestion has been identified by the bidding zone review, Member states can either amend their bidding zone or develop an action plan. The former basically means splitting the relevant bidding zone. The latter refers to an option under Article 15 of the revised Electricity Regulation. Member states are allowed to develop an action plan which has to include a concrete timetable for the removal of the congestions within four years after their identification. Basically, the question is not if the European internal electricity market will be established but rather how fast and at which costs?
As the examples of Italy and Sweden shows, a bidding zone split might cut right through a Member State’s territory. And in fact, this Article 14 in combination with Article 16 has caused quite some political turmoil, because Member states who were always struggling with congestions in their territory are once more afraid of having to implement a bidding zone split, which from a political perspective is expected to be highly unpopular.
Big challenges ahead for system operation
Yet another provision is supposed to increase cross-zonal trade in the European Union. If temporary physical constraints within a biddings zone push electricity flows into neighbouring zones, these “loop flows” might reduce the transmission capacity available for cross-zonal trade. With the new regulation under Article 16 (8) of the Electricity Regulation, transmission system operators are obliged to make 70 percent of cross-border transmission capacity on interconnectors available to the market limiting the means to cope with such unintentional flows. The only way to escape an early entry of this fierce measure is to strive for an action plan. But this means Member States have to report a structural congestion in their territory first.
It is the very combination of the bidding zone review and the 70 percent rule that alters the need to deal with congestions in a bidding zone immediately. The room for manoeuvre for Member States facing a contingent bidding zone split seems to shrink. Meanwhile the difficulty for system operators to live up to those demands and to provide safe system operation at all time is increasing.
Is it fair to say that the CEP pushes for the internal electricity market using the sledgehammer? Clearly, the regulatory interventions that come along with the CEP are fierce. But the CEP is based on the assumption that the new market design will give more flexibility to the supply with renewable energy and ultimately support the European climate strategy.
It might be ungentle in pushing for those goals and in the attempt to create political pressure for achieving some if its legitimate objectives, the proposal might even be putting safe system operation at risk. But in view of the urgent need to tackle the challenges related to climate change, that push might in fact be needed.
Justus Irmen is a young professional currently working for 50Hertz Transmission GmbH, a German electricity transmission system operator. He holds a Master’s degree in Public Administration from the University of Twente and has formerly been Bluebook trainee at the DG Energy of the European Commission.
The article represents the personal opinion of the author and is neither reflecting the views of 50Hertz Transmission GmbH nor of the Heinrich Böll Foundation.