Stitching seams with different threads: the EU experience
Written by Ross Baldick
Due to the lack of large scale real-time markets, the evolution of the electricity industry in the EU is currently much less conducive to the integration of high levels of renewables than in the US. Recent and ongoing developments are in the right direction, but I will argue that the absence of a US-style real-time market will continue to hamper large-scale renewable integration.
Although my understanding of the European experience could be limited by the fact that I mostly focus my research on the US system, it is clear that electricity markets have been developed in the EU with a combination of day-ahead and intraday trading. In US parlance, European day-ahead and intraday trading is based on a “power exchange” model where intra-zonal transmission constraints are ignored. Moreover, this trading is conceptually separated from the balancing “market”, which is operated mostly at the country level by the relevant Transmission System Operator (TSO) and is aimed at dealing with what might be described as “technical” issues (intra-hour or intra-half hour balancing of short-term fluctuations of supply and demand, provision of contingency reserves, and handling of transmission constraints).
It is interesting to observe that such an arrangement has not been seen in the US after the California crisis, where this type of market design, together with other structural and design issues and particular circumstances, led to unacceptable outcomes in the early 2000s.
Actually, European balancing markets are not akin to the real-time markets developed in the US. Rather, they are a mechanism to deploy ancillary services such as frequency regulation, sometimes with an attempt to use merit order and typically assigning the costs to the entities deemed to be the cause of the need to deploy the ancillary service.
The finest temporal resolution of EU day-ahead and intraday markets varies from 15 to 60 minutes, with what I have referred to as ancillary services typically required to cope with supply-demand balance and contingencies that occur within these time intervals. This means that the ancillary services in the EU must cope with uncertainties over a longer duration between market adjustments than in the US. All else equal, this means that a greater quantity of such ancillary services is required in EU markets than in US markets. Consequently, the EU market structure poses greater difficulties for integrating large amounts of intermittent renewable resources (see Borggrefe and Neuhoff, 2011).
In short, the balancing market is not (as far as I can tell) the same as a US-style “real-time” spot market. On the contrary, the DA market, or the last intraday market, is viewed as the “final” market. Individual balancing market designs vary from country to country, but they have typically aimed at encouraging only limited trading after the DA and intraday markets’ closure. Crucially, transactions in existing intraday markets normally stop several hours before the actual delivery of energy, when the uncertainty about the future potential production from renewables is still relevant. This further complicates the integration of large amounts of intermittent renewables. A very positive sign is that recent rules for EU electricity markets are heading in the direction of later “gate closures” for intraday trading, towards being at most one hour before real-time.
As in the US, bilateral trading is possible between various entities in Europe too, and some power exchanges span seams between countries for day-ahead, and intraday trading. Additionally, “Price Coupling of Regions” has recently added day-ahead (and eventually intraday) pan-EU trading options through EUPHEMIA. Nevertheless, multi-country balancing markets or seams management are notably limited in the EU. In this context, a natural question is: why is there such a lack of coordination across wide geographical scales in European balancing markets? An obvious answer is the lack of consistently designed balancing markets, since each of them has been developed to provide balancing services for a specific country and reflects its historical characteristics.
The heterogeneity of balancing market designs presents difficulties for wide geographical scale balancing. Moreover, adjacent countries with different balancing models pose institutional barriers to consolidating EU TSOs, particularly given TSO responsibilities to individual countries. This is somewhat analogous to the situation with adjacent ISOs/RTOs in US. However, since the ISOs/RTOs in the US operate already at a large scale (of the order of 70 GW to over 150 GW peak load), and cover large geographical areas (on the order of the size of Western Europe), it might be argued that the additional benefits in the US of seams management and RT trading across seams is not hugely significant. It may also be true that sufficient geographical scale is inherent in the largest balancing regions in the EU, such as France. However, the lack of real-time markets in the EU prevents the realization of the full potential of such a large day-ahead or intraday trading area to average out short term variations in generation and demand. Although wide geographical scale balancing markets cannot provide all of the benefits of real-time markets, the good news in the medium term is that the EU is heading in the right direction in terms of harmonizing the balancing markets that will likely enable balancing over larger geographical scales. Moreover, the development of imbalance netting allows for shared utilization of balancing resources.
In both the US and the EU, bilateral contracting has always allowed trading across seams. However, the main effort to improve seams management in the US has focused on RT markets. In contrast, the EU version of centralized seams management focuses on day-ahead and eventually intraday trading, with some attention to balancing. It is hard to believe that the needs of electricity markets in the US and the EU are really so different that two polar opposite approaches to wide-scale coordination can both be optimal. The increasing amount of renewables, resulting in increasing uncertainties at the hourly and sub-hourly level, suggest that the greatest value would be in improving real-time coordination, not day-ahead or even intraday. Unfortunately, the various balancing market designs in the EU, and the fact that they are simply not real-time markets, make wide-scale balancing that utilizes all available resources difficult without significant redesign. This means that the inherent flexibility of transmission and dispatchable resources in the EU cannot currently be fully exploited for short time-scale variations in electricity generation and demand.
In conclusion, the threads used or proposed to bind the seams in the US and the EU are very different. In the US, there has been organic growth of the geographical scope of real-time markets with the elimination of many seams. In the EU, seams are being managed in the day-ahead and eventually intraday time-scale and with imbalance netting. As a general principle, renewable integration is facilitated by wide-scale, closer to real-time adjustment of dispatchable thermal and hydro generation. Current EU balancing markets are not as flexible in utilizing this dispatchability as are US real-time markets. EU markets currently even eschew the inherent flexibility of hydro resources and the utilization of continent-scale electrical interconnections because of the fractured rules for balancing and the lack of a true real-time market.
Despite a large and useful effort to develop day-ahead trading, I anticipate that the transition to a decarbonized electricity sector in Europe will require yet more market design changes including the development of coordinated real-time markets.
Acknowledgement: I would like to thank Nicolò Rossettò and Tim Schittekatte of the Florence School of Regulation for discussions and suggestions on this piece. All remaining errors and confusions are, of course, my responsibility alone.