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Bidding zone - a cornerstone of market-based electricity trading
European Union Electricity Market Glossary

 

 

 

Bidding zone is the largest geographical area within which market participants are able to exchange energy without capacity allocation (Article 2(3) of the Regulation 543/2013 of 14 June 2013 on submission and publication of data in electricity markets).

 

New

6 April 2018 - ENTSO-E published First Edition Bidding Zone Review, Final Report

Within bidding zone electricity market wholesale prices are uniform (ENTSO-E Annual Report 2015, p. 17). Market participants who wish to buy or sell electricity in another bidding zone have to take into account grid constraints. 

 

The key point is that in the single European Union electricity market electricity offerings within the bidding zone are possible without having to acquire transmission capacity to conclude electricity trades.

 

In other words, the conception of the “copper plate” applies within bidding zones only.

 

It is often underlined that bidding zones reflecting supply and demand distribution are prerequisite for reaching the full potential of capacity allocation methods, the flow based method including.

 

Article 13(2) of the European Commission Proposal of 30 November 3016 for a Regulation of the European Parliament and of the Council on the internal market for electricity (being the part of the Winter Energy Package) envisions the rule that each bidding zone should be equal to an imbalance price area.

 

bidding zone 

Zonal vs. nodal congestion management design

 

 

The legal approach to bidding zones in the EU Internal Electricity Market reflects the political decision of a zonal rather than a nodal market model (where wholesale electricity prices are determined by physical node on the network).

 

ACER's Consultation document: “The influence of existing bidding zones on electricity markets” (PC_2013_E_04, 31 July 2013, p. 5) describes in short the aforementioned different congestion management designs.

 

ACER firstly reminds that the zonal design defines limited geographical areas (zones), within which trading between generators and loads is unlimited.

 

However, to cope with operational security constraints of the network, trading between these areas is limited by transmission capacity based on capacity calculation and allocation process.

 

An extreme implementation of this approach would result in one large bidding zone (copper plate) without capacity allocation and where all operational constraints are tackled via remedial actions.

 

The nodal design, in turn, considers all trades between generators and loads as equal in terms of using the infrastructure.

 

While in nodal design the bid price and quantity of each generator and load is weighed against its influence on the physical network, in zonal design only the import or export of electricity in each bidding zone is weighed against its influence on the physical network.

 

In the zonal design, congestion management methods consist of preventive and of curative methods.

 

Preventive methods define ex-ante limitations to trade by calculating the cross zonal capacities and allocating them efficiently to market players so that they can decide on how to dispatch generators and loads.

 

Curative methods aim at modifying this initial dispatch when operational security is endangered with methods such as redispatching or countertrading.

 

These can also be classified as non-costly (e.g. topology switching, positioning the phase shifting transformers – PSTs) or costly (e.g. redispatching and countertrading).

 

The costs of undertaking costly remedial actions are often socialised on all consumers of a bidding zone through transmission tariffs.

 

In general, the larger the zone, the larger the proportion of congestions managed by redispatching; however, this also depends on the strength of the network within the zone.

 

In other words, the aggregation of nodes into zones may have a side effect on the quantity of remedial actions the Transmission System Operator (TSO) needs to apply in order to ensure operational security.

 

The European target model for the electricity market foresees a zonal approach implying the implementation of a mainly preventive way to tackle congestions between properly defined bidding zones by calculating and allocating cross-zonal capacities.

 

Remaining (mainly inside zones) congestions are to be managed by curative measures such as redispatching or countertrade.

 

 

Bidding Zones delineation and significance

 

 

According to the EU legal framework bidding zones should be defined in a manner to ensure efficient congestion management and overall market efficiency.

 

quote

Opinion of the Agency for the Cooperation of Energy Regulators No 9/2015 of 23 September 2015, p. 6

 

 

In Europe, wholesale electricity markets are structured in bidding zones, featuring equal prices within them. Within each bidding zone, any consumer is allowed to contract power with any generator without limitations and hence disregarding the physical reality of the transmission network. This simplification, which aims at facilitating trade within each bidding zone, is however often made at the expense of electricity trading between bidding zones. For the latter TSO's indeed apply capacity allocation methods, through which they, ex-ante and most of the time, limit the amount of available cross-zonal capacity (i.e. net transmission capacities NTCs) to ensure that physical flows, including inside zones, remain within the network operational security limits.

...

For historical reasons, the bidding zones' boundaries mostly correspond to the borders between EU Member States, even though some Member States (e.g. Italy and Sweden) are split into several bidding zones. 

 

Therefore national borders are not a key driver for the delineation of bidding zones in the EU Internal Electricity Market, although some are defined in this way (for example France, the Netherlands, Poland, etc.).

 

Examples of bidding zones, which are larger than national borders, are Austria, Germany and Luxembourg and the Single Electricity Market for the island of Ireland (note, however, that according to the Opinion of the Agency for the Cooperation of Energy Regulators No 9/2015 of 23 September 2015, and the Decision of the Agency for the Cooperation of Energy Regulators No 06/2016 of 17 November 2016 on the electricity transmission system operators’ proposal for the determination of capacity calculation regions, the implementation of a capacity allocation procedure on the DE-AT border is required).

 

Some countries like Italy, Denmark, Norway or Sweden apply several bidding zones within their territory.

  

Article 13(1) of the aforementioned Proposal for a Regulation of the European Parliament and of the Council on the internal market for electricity of 30 November 2016 stipulates that bidding zone borders must be based on "long-term, structural congestions in the transmission network and bidding zones must not contain such congestions".

 

According to the said draft Regulation, the configuration of bidding zones in the European Union must be designed in such a way as to "maximise economic efficiency and cross-border trading opportunities while maintaining security of supply."

 

The EU regulations envision bidding zones can be modified by splitting, merging or adjusting the bidding zone borders.

 

The important element of the legal framework is that bidding zones must be identical for all market timeframes.

 

The bidding zone definition refers to the 'capacity allocation' which means the attribution of cross zonal capacity, where the latter, in turn, denotes the capability of the interconnected system to accommodate energy transfer between bidding zones.

 

ACER Recommendation No 2/2016 of 14 November 2016 on the common capacity calculation and redispatching and countertrading cost sharing methodologies underlines congestion problems are addressed with capacity allocation (p. 5).

 

This implies that geographical areas within which market participants are able to exchange energy without capacity allocation, i.e. bidding zones, should be configured in such a way that:

 

- congestion appears only on the borders between bidding zones and there is no congestion inside bidding zone,

 

- internal exchanges inside bidding zones do not create loop flows through other bidding zones (creating congestion in those bidding zones and reducing the capacity between zones).

 

Cross zonal capacity can be expressed either as a coordinated net transmission capacity value or flow based parameters, and takes into account operational security constraints - see definitions, in particular, in:

 

- Regulation establishing a Guideline on Capacity Allocation and Congestion Management - CACM Regulation (Regulation on market coupling),

 

- Commission Regulation 543/2013 of 14 June 2013 on submission and publication of data in electricity markets.

 

The CACM Regulation requires that the price coupling algorithm must simultaneously produce for each bidding zone and for each market time unit at least:


(a) a single clearing price in EUR/MWh (Article 39(2)(a) of the CACM Regulation),


(b) a single net position (Article 39(2)(b) of the CACM Regulation).

 

Recital 11 of the Regulation establishing a Guideline on Capacity Allocation and Congestion Management - CACM Regulation (Regulation on market coupling)

 

Bidding zones reflecting supply and demand distribution are a cornerstone of market-based electricity trading and are a prerequisite for reaching the full potential of capacity allocation methods including the flow based method. Bidding zones therefore should be defined in a manner to ensure efficient congestion management and overall market efficiency. Bidding zones can be subsequently modified by splitting, merging or adjusting the zone borders. The bidding zones should be identical for all market time-frames. The review process of bidding zone configurations provided for in this Regulation will play an important role in the identification of structural bottlenecks and will allow for more efficient bidding zone delineation.

 


Bidding zones are also inherently linked with Physical Transmission Rights which are defined as a rights whose holder is entitled to physically transfer a certain volume of electricity in a certain period of time between two bidding zones in a specific direction.

 

Bidding zones will be consistent across different market timeframes and will be relatively stable across time, while reflecting changing network conditions.

 

It is noteworthy, the bidding zones' configuration (detailed provisions thereon stipulated in Articles 32 - 34 of the CACM Regulation) may have impacts on investments in generation and consumption.

 

In case the review process leads to a bidding zones' new configuration, some generators may be called to participate to the capacity allocation and congestion management process with previously unforeseen costs and risks.

 

Each generation and load unit must belong to only one bidding zone for each market time unit.

 

The bidding zones' determination is a complex and prolonged process. First practical examples of the bidding zones' reconfiguration show it is also a controversial one. 

 

On 15 May 2017, national regulatory authorities of Germany and Austria informed about their bilateral agreement on common framework for congestion management at the border between Austria and Germany, as a follow up to the earlier ACER's Decision.

 

According to the joint statement published by German and Austrian authorities, congestion management scheme for the exchange of electricity at the border between Austria and Germany is to be introduced as from 1 October 2018.

 

The currently unlimited trade capacities on the German-Austrian electricity market should amount to at least 4.9 GW and be offered to market participants as long-term capacity.

 

Additionally, the day-ahead capacity allocation at the Austrian-German border is to be integrated in the existing Central Western European flow-based capacity calculation and allocation process.

 

EFET Press release 110/17 of 12 May 2017 "The implementation of the German-Austrian bidding zone split should be transparent and not before 1 January 2019" argued that enacting a split in the middle of the year "would effectively nullify calendar (yearly) contracts that have already been exchanged for 2018, and force market participants to re-arrange their hedging strategies for 2018 at short notice".

 

Further implications of the said bidding zone reconfiguration, in particular with respect to electricity trading in the forward and intra-day perspectives, were set out in the EFET statement of 11 May 2017 on the implementation of the BNetzA decision requesting TSOs to allocate cross-border transmission capacity at the German-Austrian border.

 

Also the V4 Transmission system operators (ČEPS, MAVIR, PSE, SEPS) and TRANSELECTRICA "are deeply concerned by nontransparent developments around the implementation of congestion management at the Austrian-German border" (Press release of the V4 Transmission system operators (ČEPS, MAVIR, PSE, SEPS) and TRANSELECTRICA are deeply concerned by nontransparent developments around the implementation of congestion management at the Austrian-German border).

 

ČEPS, MAVIR, PSE, SEPS and TRANSELECTRICA said in the above document: "we are confronted with at least 4.9 GW of guaranteed long-term capacity between Germany and Austria, without any technical justification and explanation of its impact on the capacities on other Core CCR bidding zone borders and secure system operation including the need for remedial actions and congestion income distribution".

 

 

Bidding Zones configuration

 

 

The CACM Regulation provides a framework that allows bidding zone configuration to adapt to the evolution of physical congestion (ACER/CEER Annual Report on the Results of Monitoring the Internal Electricity Market in 2015, September 2016, p. 18).

 

However, this requires the consensus of the TSOs, the EU Member States and National Regulatory Authorities (NRAs) on methods and proposals to amend the bidding zone configuration.

 

Provisions on Bidding Zones configuration are stipulated in Articles 32 and 33 of the CACM.

 

European Commission's Final Report of 30 November 2016 of the Sector Inquiry on Capacity Mechanisms ({SWD(2016) 385 final}, COM(2016) 752 final) found that inefficiently defined bidding zones create distortions both within a country and across borders, and concluded that an appropriate definition of bidding zones is likely to be the most efficient way to avoid the need for costly re-dispatching.

 

Commission Staff Working Document, Accompanying the document Report from the Commission, Interim Report of the Sector Inquiry on Capacity Mechanisms ({C(2016) 2107 final}, 13.4.2016 SWD(2016) 119 final) argues the bidding zones defined based on transmission constraints can allow zonal electricity prices to provide more accurate signals for the efficient location of generation capacity and electricity demand.

 

Given the price formed in each zone reflects the overall demand/supply balance in the zone, ideally, for electricity prices to appropriately signal local scarcity, the market area or bidding zone needs to reflect the technical limits of the transmission system.

 

Therefore, the price in a very large zone may not indicate with sufficient precision where additional generation capacity is most needed and transmission constraints may cause inefficient plants to run instead of more efficient ones.

 

On such occasions TSOs are forced to revert to re-dispatching measures in order to ensure system balance and minimize loop flows, leading to significant costs for consumers and possible market distortions.

 

Another area where bidding zones' configuration is particularly important are European resource adequacy assessments.

 

These estimations cover the overall adequacy of the electricity system to supply current and projected demands for electricity for a ten-year period from the date of that assessment (in a yearly resolution), and, according to Article 19(4)(a) of the said draft Regulation of 30 November 2016, are to be carried out on a bidding zone level.

 

 

Results of the first edition of the bidding zone review process - March 2018

 

 

In its letter dated 21 December 2016 ACER has initiated the first edition of the bidding zone review process, specifying Central Europe (Austria, Belgium, the Czech Republic, Denmark, France, Germany, Hungary, Italy (North), Luxembourg, the Netherlands, Poland, Slovakia and Slovenia) as the relevant region.

 

The process began with the publication by the ENTSO-E of the document “First Edition of the Bidding Zone Review, Draft Version for Public Consultation”, lasted 15 months and ended on 21 March 2018 (First Edition Bidding Zone Review, Final Report, March 2018).

 

In the said Final Report of March 2018 ENTSO-E concluded that:

 

“[...] the evaluation presented in this First Edition of the Bidding Zone Review does not provide sufficient evidence for a modification of or for maintaining of the current bidding zone configuration. Hence, the participating TSOs recommend that, given the lack of clear evidence, the current bidding zone delimitation be maintained.

This recommendation should in no way be interpreted as an endorsement of or an objection against the pending split of the German/Luxembourgian and Austrian bidding zones, where TSOs respect all relevant regulatory decisions, e. g. the decision of the Agency for the Cooperation of Energy Regulators no 06/2016 of 17 November 2016 on the electricity transmission system operators’ proposal for the determination of capacity calculation regions and the requests of the regulatory authorities of Germany and Austria” (p. 13).

 

The results of the first bidding zone review have been criticised by some stakeholders.


In particular, EFET in its response of 9 March 2018 said:


“While we understand the political difficultly that a recommendation to delineate bidding zones borders without regard for Member States borders may face at a regulatory and political level, we believe it is not the role of ENTSO-E to care for such concerns. Rather, ENTSO-E is expected to deliver a technical analysis with hopefully a strong recommendation for a bidding zones delineation expected to maximise welfare at European level. Hence, we were very disappointed to see ENTSO-E abandon the model-based scenarios partly for concerns related to the reliability of the modelling, but also partly for judging the results as politically unrealistic. Concerning the expert-based scenarios, we expressed our disappointment from the start of the project on the imbalance between the splitting and the merging scenarios [...].”


In the above document EFET also expressed bitter complaints as to the organisation and the transparency of the whole process.

 

 

 

 

 

Bidding zones for purposes of forward capacity allocation

 

 

It is noteworthy, the bidding zones determined pursuant to CACM apply also to long term capacity calculation and forward capacity allocation timeframes (see Article 27(1) of the Network Code on Forward Capacity Allocation (FCA)).

 

Where bidding zone border(s) no longer exist, holders of Long Term Transmission Rights on those Bidding Zone Border(s) will be entitled to reimbursement based on the initial price paid for the Long Term Transmission Rights.

 

The forward capacity allocation will enable long term cross zonal trade and provide market participants with long term cross zonal hedging opportunities against congestion costs and day ahead congestion pricing, compatible with bidding zone delimitation.

 

 

Article 8
 of the 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)

 

Forward markets

 

1. In line with regulation (EU) 2016/1719, transmission system operators shall issue long-term transmission rights or have equivalent measures in place to allow for market participants, in particular owners of generation facilities using renewable energies, to hedge price risks across bidding zone borders.

 

2. Long-term transmission rights shall be allocated in a transparent, market based and non-discriminatory manner through a single allocation platform. Long-term transmission rights shall be firm and be transferable between market participants.

 

3. Subject to compliance with treaty rules on competition, market operators shall be free to develop forward hedging products including for the long-term to provide market participants, in particular owners of generation facilities using renewable energies, with appropriate possibilities to hedge financial risks from price fluctuations. Member States shall not restrict such hedging activity to trades within a Member State or bidding zone.

 

 

 

 

Electricity exchanges inside and between bidding zones

 

 

ACER/CEER Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2014 (of November 2015) analysed complexities involved with the electricity exchanges inside and between bidding zones (p. 161, 162).

 

quote

Commission Staff Working Document, Accompanying the document Report from the Commission, Interim Report of the Sector Inquiry on Capacity Mechanisms {C(2016) 2107 final}, 13.4.2016 SWD(2016) 119 final, p. 133

 

Bidding zones in the European Union are being 'coupled', in line with the target model. Market coupling aims to ensure the interconnectors that link bidding zones are used most efficiently to send power between markets to where demand is greatest.

 

Most of Europe is now coupled day ahead with implicit allocation of cross-border transmission capacity. This means that prices and interconnector flows are jointly determined in a single step, for each hour of the following day. This is established through the matching of bids and offers across the power exchange/s operating in Europe. Roughly characterised, the prices for each hour in neighbouring markets are then compared, and the capacity of interconnectors is used to allow power offered in the lower priced zone to be matched with bids in the higher priced zone until either the prices in the two zones converge, or all available interconnection capacity is exhausted.

 

The CACM Regulation, which came into force in mid-August 2015, obliges each Member State to develop market coupling rules for day-ahead markets as well as intraday markets...

 

This price-matching process creates flow schedules for the interconnectors in real time.

 

The said Report firstly refers to the fact that in Europe wholesale electricity markets are structured in bidding zones featuring equal prices within each of them.

 

Within each bidding zone, any consumer is allowed to contract electricity with any generator without limitations, hence disregarding any possible physical limitation of the transmission network to transport the exchanged energy.

 

However, this simplifcation, which aims at facilitating trade within limited geographical areas is often made at the expense of electricity trading between bidding zones.

 

Because TSOs cannot limit exchanges within bidding zones, the only way for them to ensure operational security is to limit exchanges between them.

 

For the latter, TSOs indeed apply capacity calculation and allocation, by which they ex-ante limit the amount of available cross-zonal capacity to ensure that physical ows on the network inside and between zones remain within the operational security limits.
In capacity calculation, TSOs forecast the ows caused by exchanges inside zones.

 

The remaining available capacity of the network elements are then offered to the market for cross-zonal trade.

 

Therefore, exchanges inside zones cause ows on network elements that are prioritised over ows from cross-zonal exchanges.

 

This prioritisation and discrimination is inherent in the zonal market design.

 

However, Regulation (EC) No 714/2009, and in particular the CACM Regulation, require that capacity calculation and allocation should not result in undue discrimination between internal and cross-zonal exchanges. This is also underlined by the so-called Winter Energy Package of December 2016 (see box).

 

The question of undue discrimination essentially translates into how the capacity of the network elements (either internal or interconnectors) are allocated to internal and cross-zonal exchanges.

 

Two typical examples of discrimination between internal and cross-zonal exchanges are particularly considered:

quote

 

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) (so-called Winter Energy Package)

 

 

Article 6
(2)(h)


Day-ahead and intraday markets shall [...] make no distinction between trades made within a bidding zone and across bidding zones.

 

Recital 14


To efficiently steer necessary investments, prices also need to provide signals where electricity is most needed. In a zonal electricity system, correct locational signals require a coherent, objective and reliable determination of bidding zones via a transparent process. In order to ensure efficient operation and planning of the Union electricity network and to provide effective price signals for new generation capacity, demand response or transmission infrastructure, bidding zones should reflect structural congestion. In particular, cross-zonal capacity should not be reduced in order to resolve internal congestion.

 

 

a) When cross-zonal capacity is limited by the capacity of interconnectors and the capacity of those interconnectors is reduced not only for the application of N-1 criteria and a reasonable level of reliability margin, but also to accommodate ows resulting from internal exchanges (i.e. loop ows, loop flows) and ows resulting from non-coordinated capacity allocation on other borders (i.e. Unscheduled Allocated Flows (UAFs)); and


b) When cross-zonal capacity is limited by the capacity of internal network elements and when the capacity of those internal network elements is disproportionally allocated for internal exchanges and very little capacity is allocated to cross-zonal exchanges. According to Point 1.7 of the Annex I to Regulation (EC) No 714/2009 such a situation may be tolerated only as a temporary solution.

 

ACER/CEER Annual Report on the Results of Monitoring the Internal Electricity Markets in 2015, September 2016 also refers to the aforementioned reasoning (p. 21).

 

In the said Report of September 2016 ACER argues that, in general, physical cross-zonal capacity can be limited during the capacity calculation process, beyond what is needed for the application of N-1 criterion and a reasonable level of reliability margin, for the following three reasons:

 

- to accommodate planned grid maintenance works during a certain period;

 

- to accommodate flows resulting from internal exchanges (i.e. loop flows) and flows resulting from non-coordinated capacity allocation on other borders (i.e. Unscheduled Allocated Flows (UAFs)); and

 

- to relieve congestion inside a bidding zone (control area).

 

Inevitably, the bidding zones’ delineation along with the cross-zonal capacity modelling will remain among the hottest topics of the EU electricity market discussions.

 

 



Last Updated on Saturday, 21 April 2018 20:35
 

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