Embracing Flexibility: Quo Vadis European Power Market Design?

Embracing Flexibility: Quo Vadis European Power Market Design?

Electricity is poised to gradually play a bigger role in the transport and building sectors but in order for Europe to reach its climate change targets, the electricity will need to be sourced from more low carbon sources and especially from variable renewable sources.

The two ongoing trends – the electrification of sectors and the need to integrate electricity from variable renewables – mean that there will be more need for flexibility in the electricity sector. This can be done by the flexibilization of consumption side and the storage, a better cross-border interconnectivity, the integration of different sectors and the more intensive use of the existing networks.

An efficient EU-wide market integration is the principal and most cost-effective source of flexibility, whereby the biggest potential remains in the intraday and balancing markets. The harmonization of market designs is also needed for this integration since the current integration approach attempts to build bridges between diverse national markets. The existing target model, which is based on continuous trading, should be swiftly implemented.

In order to make a greater market integration happen, the EU Commission should focus on harmonizing national short-term and balancing market designs. This should be done by enabling swift implementation of existing provisions such as continuous trading in the intraday market. Harmonization should start at the regional level and the European Commission, member states and power exchanges and transmission system operators should continue to pursue pan-European market coupling of day-ahead markets, especially connecting with Central and Eastern Europe.

To pursue flexibility, design elements should include, among others, balancing energy auctions, which are open to pre-qualified market participants and marginal balancing energy and imbalance pricing. Meanwhile, the EU should also enable real-time disclosure of the system imbalance and imbalance price, making it possible to implicitly balance by balancing responsible parties, as well as EU-wide, harmonized intraday auctions, long and medium-term balancing capacity auctions only where justified on cost-efficiency grounds, to name most important design elements.

Grid reinforcement is the second most urgent goal towards building improved capacity allocation and bidding zone revision. Cross-zonal price differences and costs for congestion management should be earmarked as priorities. There is also a trade-off between grid reinforcement and easing congestion by increasing local flexible generation or consumption resources. However, the major obstacle to grid reinforcement is public acceptance by citizens who are affected by the construction of new lines. The key recommendations in this area therefore include the optimization of capacity allocation to the ID, the efficient balancing of the markets and, last, but not the least, the minimization of the costs for congestion management.

‘Improving the Market for Flexibility in the Electricity Sector’ – Task Force Report by Jacques de Jong and Team – Centre for European Policy Studies.
(The Task Force Report can be downloaded here)