Minimal cross-zonal capacities for trade proposed by the latest draft of Electricity Regulation will lead to a fictitious wholesale market outcome, argues PSE.
PSE is the state-owned transmission system operator in Poland.
If market prices are to guide long-term transmission and generation developments and facilitate short-term European energy market operation, detaching markets from physics is not the right way.
While on many areas the CEP is a natural evolution and refinement of the existing legal framework, its distinctive feature is the focus on empowering consumers. They will become able to opt for alternative energy supply choices such as self-provision, energy communities, energy service companies, etc. However, the direction taken on capacity calculation and the provisions included in the article 14 of the regulation on the internal market for electricity are of great concern.
Cross-zonal capacity calculation in the focus of European market integration discussions
Despite massive transmission investments realized in recent years in an attempt to keep up with renewable generation development, the level of cross-zonal capacities available for the market does not increase at the pace expected by European stakeholders and policy makers. TSOs are thus faced with criticism for “withholding transmission capacities” due to the alleged lack of coordination and transparency. Ambitious provisions on minimal capacities are seen as a means to exercise pressure on TSOs to improve operational practices.
Controversial benchmark for minimal cross-zonal capacity challenges the EU zonal market model
75% of the remaining available margin on internal and cross border critical network elements to made available for cross border flows is to be the new cross-zonal capacity benchmark. Reading the proposal one can conclude that when calculating capacities TSOs shall ignore trading activity inside bidding zones and resulting power flows on the internal and cross-zonal transmission lines. As a result, new European legislation sets requirements which is clearly in contradiction with the zonal market model applied in Europe.
In the zonal market model, cross-zonal capacities are the means of expressing the boundaries for the market and cross-border trade that guarantee secure power system operation – in other words, the entity offering transportation means must offer only as much as can be physically realized without putting the interconnection in danger. If these boundaries are determined in an artificial manner or set to arbitrary target values, it means that cross-zonal capacity offered for trade can significantly exceed what is physically possible given the technical capabilities of the transmission grid. As a consequence, technically infeasible transfer capacities will make the market outcome infeasible with incorrect energy prices, forcing TSOs to employ special operational remedial measures such as costly re-dispatching of power plants in order to keep interconnected systems secure. Such special measures have been usually reserved for managing unexpected events, i.e. contingencies and forced outages or forecast errors, and are limited by nature. Large scale of re-dispatching will not only lead to increased costs for end-consumers (redispatching always brings additional costs which are socialized among grid users) but also may endanger system operation (re-dispatching resources are by definition limited).
Worrying detachment of market and system operations
Today’s European wholesale market already considers the physical reality of the power system constraints only in a very simplified manner, resulting in frequent need for corrective measure implemented by TSOs to make the market schedules technically feasible. Obliging TSOs to completely neglect the intra zonal transactions when calculating cross-zonal capacities available for wholesale electricity trade will push the European wholesale electricity market into more redispatch actions, leading to further detachment of market and system operations. Although on paper, high cross-zonal capacities will facilitate stronger market integration and the wholesale market prices calculated based on these artificial capacities will be characterized by better price convergence, such market outcome will only be theoretical as market-based generation dispatch (the choice of power plants to cover the demand for electricity) and cross-zonal trades established on the basis of such wholesale market design will have very little to do with the actual generation dispatch and cross-zonal exchanges (the one instructed by TSOs to ensure secure operation). Immediately after the closure of such day ahead market, or even before that, TSOs would need to implement a lot of corrective measures by adjusting the dispatch of generation units throughout Europe. Major increase of corrective remedial measures, if at all technically manageable by TSOs in the short time period between market closure and real-time, will lead to increased costs to be shared by all TSOs, passed on national grid users, and might lead to negative implications for secure system operation in situations when resources necessary for redispatch are exhausted. These risks are certainly not theoretical, as already now some European TSOs are experiencing such cases under the current market set up.
Cross-zonal capacity calculation in zonal markets has inherent limitations
Improving the capacity calculation process, aiming at better utilization of the existing grid infrastructure and maximizing cross-border trading opportunities is a high priority task for TSOs and NRAs. However, any potential improvements to that process must be considered from the perspective of the currently applied zonal market model in Europe, as well as the need to maintain secure system operation. In that context, it would be very beneficial for CEP to set general requirements for the capacity calculation process, while leaving the details to be elaborated during research and design activities of TSOs supervised by NRAs and ACER. Fixing arbitrary, artificial percentages for benchmark cross-zonal transfer capacities in EU law should be avoided, as it will most probably lead to the outcomes contrary to what was intended by the European policymakers.
Zonal market reality has inherent implications on the capacity calculation process, requiring adequate treatment of intra zonal and cross-zonal transactions. If these implications are not acceptable for policy makers and market participants, zonal market model should be reconsidered and potentially replaced with a market setup which avoids such discrepancies, i.e. locational market as applied in United State.