|Firmness of allocated cross-zonal capacity|
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The analysis of firmness of allocated cross-zonal capacity can be perceived as a starting point and an input for developing electricity trading modelling tools as well as a solid foundation of advanced business models in the European Union Internal Electricity Market.
The said problem is reflected in the entire spectrum of the network codes governing electricity trading in the European markets, in particular - depending on the respective market time-frame:
Article 2(44) of the CACM defines firmness as "a guarantee that cross-zonal capacity rights will remain unchanged and that a compensation is paid if they are nevertheless changed".
The point in time delineating the respective compensation regimes is the day-ahead firmness deadline:
- long-term transmission rights curtailed before the day-ahead firmness deadline are reimbursed or compensated by the Transmission System Operators (TSOs) to the long-term transmission rights holders in accordance with the FCA,
- CACM establishes a day-ahead firmness deadline and a related compensation regime for long-term transmission rights curtailed after such deadline.
What is the scale of the issue? Is this something that deserves worrying? ENTSO-E indicated (Supporting Document for the Network Code on Electricity Balancing of 23 December 2013) that capacities between bidding zones are variable, but are generally of the order of a few GW.
Hence, under market spread compensation, for a 3000MW curtailment and with a €3000 price spread, TSOs would be obliged to pay out €9million per hour.
It shows that the costs of market spread compensation can be considerable and have the ability to reach magnitudes of the order of €millions per hour, if the curtailment lasted a few hours/days/weeks/months.
This, however, also evidences the scale of the potential market participants' risk on occasion where the compensation is capped.
Firmness of allocated cross-zonal capacity curtailed prior to the day-ahead firmness deadline
FCA established the following main points of the legal framework for the firmness of allocated cross-zonal capacity curtailed prior to the day-ahead firmness deadline:
Firmness of allocated cross-zonal capacity curtailed after the day-ahead firmness deadline
If the allocated cross-zonal capacity is curtailed by the TSO after the day-ahead firmness deadline, the account of the two perspectives should be taken, depending on the market timeframe.
- firmness of intraday capacity,
- firmness of day-ahead capacity.
As regards the former timeframe the rules are simple and clear - the intraday capacity is firm as soon as it is allocated.
With respect to the firmness of day-ahead capacity the CACM stipulates that:
- prior to the day-ahead firmness deadline, each coordinated capacity calculator may adjust cross-zonal capacity and allocation constraints provided to relevant Nominated Electricity Market Operators (NEMOs),
- after the day-ahead firmness deadline, all cross-zonal capacity and allocation constraints are firm for day-ahead capacity allocation "unless the requirements of Article 46(2) are met, in which case cross-zonal capacity and allocation constraints shall be firm as soon as they are submitted to relevant NEMOs".
Pursuant to the said Article 46 if a coordinated capacity calculator is unable to provide for cross-zonal capacity and allocation constraints one hour prior to the day-ahead market gate closure time, that coordinated capacity calculator is required to notify the relevant NEMOs and these NEMOs must immediately publish a notice for market participants (see the full content of the Article 46 of the CACM in the box).
Compensation rules in the event of force majeure or emergency with respect to day-ahead market timeframe are more complicated than the FCA's set-up.
If allocated capacity is curtailed because of force majeure or an emergency situation invoked by a TSO, the TSO is required to reimburse or provide compensation for the period of force majeure or the emergency situation, in accordance with the following requirements:
Evolution of the legal framework
The problem of the firmness regimes on bidding zone borders across Europe was the subject of the discrepancy between ACER (the EU Agency gathering the European energy market regulators) and ENTSO-E (representing the TSOs’ views):
1. ACER's preference was for transmission system operators (TSOs) to reimburse the day-ahead market spread, instead of the price paid at auction;
2. ENTSO-E argued that the day ahead market spread is unknown at the time of the cross-zonal capacity allocation and can be many times greater than the initial price paid at auction.
ENTSO-E argued, moreover, that the divergent position between ENTSO-E and ACER was due to a fundamental different perspective on the type of product TSOs offer to market parties: ACER conception that TSOs offer a financial hedge between bidding zones, and TSOs approach viewing capacity product reflecting the capability of the transmission network to transfer energy with the associated risks.
Consequently, according to the TSOs stance, to the extent that the market spread exceeds the initial price paid at auction, the TSO has to cover the costs from elsewhere, be it congestion income from the current or other timeframes (congestion income being the TSO revenue derived from selling cross zonal capacity products) or from network tariffs (see: Supporting Document for the Network Code on Electricity Balancing of 23 December 2013).
TSOs believed that the risks should be shared between those using the interconnections and TSOs, whereas ACER believed that all the risk should be borne by TSOs.
Different types of market spread compensation are cited (after the ENTSO-E) in the box.
It is noteworthy, Option A (firmness based on initial price paid) was the most common compensation arrangement across Europe.
This was part of ENTSO-E's original position.
However responding to stakeholder and ACER feedback, ENTSO-E has moved away from this position and has provided a compromise solution.
Capped compensation variants set out by ENTSO-E are categorised into two families denoted as Option B1 and Option B2.
The final TSOs' proposition was a mixture of Options B1 and B2.
It centered on the long term firmness deadline, which was the nomination deadline for physical transmission rights or between 19 and 2 hours before day-ahead market gate closure for financial transmission rights.
For curtailments between the auction and the long term firmness deadline, compensation, according to the ENTSO-E proposition, capped at the long term transmission rights' congestion income.
For curtailments between the long term firmness deadline and the day-ahead firmness deadline, compensation was proposed to be capped at the total monthly congestion income.
Where the compensation cap is hit, priority in compensation payments would be given to curtailments occurring between the long term firmness deadline and the day-ahead firmness deadline.
This, according to the TSOs analysis, should increase the level of firmness market participants see the closer they get to real time and reflect the shorter time they have to react.
ENTSO-E argued that under normal and severe system conditions ENTSO-E's proposal would give market parties a financial hedge for most curtailments and only in very exceptional circumstances would this be capped to avoid an excessive impact on end users via network tariffs.
In all other cases, the risk would not be shared with market parties and would be born entirely by TSOs.
This proposal, in the ENTSO-E view, was balanced in terms of risk sharing and introduced the incentives for market participants to support system security, hence it had been finally submitted to ACER.
The problem was appreciated by the industry and, consequently, more approaches were developed.
EURELECTRIC in the document "Main issues with ENTSO-E Draft Allocation Rules for Forward Capacity Allocation (version of 03/12/2014) expressed the view that long-term transmission rights "should be financially firm ahead of nomination deadline and physically firm afterwards as is currently the case on many borders. Therefore there should be no provisions for financial firmness after day-ahead firmness deadline".
The problem has been finally resolved in the aforementioned provisions of the FCA and CACM.
Winter Energy Package of November 2016
When it comes to the so-called Winter Energy Package of November 2016, Proposal for a Regulation of the European Parliament and of the Council on the internal market for electricity (recast) (30.11.2016, COM(2016) 861 final 2016/0379 (COD)) refers to the firmness of the allocated capacity in Article 14(2) and 14(10).
The former stipulates that transaction curtailment procedures may only be used "in emergency situations where the transmission system operator must act in an expeditious manner and re-dispatching or countertrading is not possible."
Any such procedure must be applied in a non-discriminatory manner.
The draft Regulation contains, moreover, the clear provision that "[e]xcept in cases of force majeure, market participants who have been allocated capacity shall be compensated for any curtailment."
Article 14(10) of the said Proposal gives further clues how the compensation at issue should be calculated.
According to this provision, if a transmission system operator does not fulfil its obligation, it shall be liable to compensate the market participant for the loss of capacity rights.
Consequential losses shall not be taken into account for that purpose.
The key concepts and methods for the determination of liabilities that accrue upon failure to honour obligations shall be set out in advance in respect of the financial consequences, and shall be subject to review by the relevant national regulatory authority or authorities.
|Last Updated on Sunday, 08 July 2018 10:03|