'Balancing market' within the framework of the European Union Internal Electricty Market means the entirety of institutional, commercial and operational arrangements that establish market-based management of balancing (Commission Regulation (EU) 2017/2195 of 23 November 2017 establishing a guideline on electricity balancing, Article 2(2)).

 

Well-functioning: 

 

intraday electricity market and 

 

day-ahead electricity market;

 

act as a foundation for the balancing market, in which the role of Transmission System Operator (TSO) is to ensure that, considering the other markets’ results, demand and supply remain balanced by operating the system close to real time (ENTSO-E, Electricity balancing in Europe, an overview of European balancing market and electricity balancing guideline, November 2018).

 

Specifically, balancing market is the final platform, through which the TSOs settle any deviations remaining after the closure of intraday markets and after the determination of the final schedules.

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ACER Decision No 03/2022 of 25 February 2022 on the amendment to the methodology for pricing balancing energy and cross-zonal capacity used for the exchange of balancing energy or operating the imbalance netting process

ACER agrees with the TSOs that there are currently heterogeneous structures of the balancing markets in different Member States and understands that the connection of each TSO to the European platforms is a transitory process where market parties need time to adapt to the new market model and conditions.
However, once the integration and harmonisation of the balancing markets through the European platforms and other implementation steps are achieved, this historical heterogeneity will fade out.

 

Balancing market legal framework focuses on the following main areas:

 

- balance responsibility and the role of Balance Responsible Parties (BRPs),

 

- balancing service provision, and

 

- imbalance settlement.

 

In fact, there are two balancing markets, which implement the balancing mechanism:

 

- a balancing capacity market - where generators or a demand-side submit bids or offers to deliver balancing energy in real-time;

 

- a balancing energy market - where TSOs activate these contracts concluded in the balancing capacity market, which offer the least cost (and the required technical specifications), the participants in this market specify the price for the increase or decrease of electricity injection or withdrawal.

 

In the broader sense, the elements of the balancing market/mechanism can also be seen in such specific electricity markets as:

 

- the market for ancillary services (where the balancing mechanism is used for the procurement of reactive power or other non-frequency ancillary services, or

 

- electricity capacity markets.

 

The European target model for the balancing market includes design aspects – such as shorter products, closer to real-time gate closure time, shorter imbalance settlement period, single imbalance price linked to the balancing energy price – that mitigate the concerns of high volatility of prices (see ACER Decision No 03/2022 of 25 February 2022 on the amendment to the methodology for pricing balancing energy and cross-zonal capacity used for the exchange of balancing energy or operating the imbalance netting process).

The electricity balancing market is so important that legal provisions affecting its functioning are present in nearly all European Union network codes.

 

Nevertheless, the most relevant in this regard is the Network Code on Electricity Balancing (Commission Regulation (EU) 2017/2195 of 23 November 2017 establishing a guideline on electricity balancing - EBGL or NC EB).

 

The second most noteworthy legislative piece is the Network Code on System Operation (Commission Regulation (EU) 2017/1485 of 2 August 2017 establishing a guideline on electricity transmission system operation - SOGL) stipulating the types and sizing of reserves and the respective roles and responsibilities.

 

When it comes to balancing market designs the wide variety of models can be observed in Europe.

 

The balancing markets differ significantly from one EU country to another due to historical national specificities (generation portfolios, significant presence of internal congestions and level of interconnections with foreign markets).

 

The management of balancing markets has been historically entrusted to individual TSOs being the single entities with sufficient information on system frequency, national generation, consumption and network topology to efficiently balance the system.

 

In the era of the single EU Internal Electricity Market, the wide variety of balancing market designs existing in Europe is generally perceived as an important barrier for their integration and the cause of unnecessary complexities for cross-border trade (Commission Staff Working Document, Impact Assessment of 23 November 2017 {SWD(2017) 383 final}, p. 17).

 

The proper design of balancing markets is essential to enable efficient electricity price formation, in particular in the intra-day markets.

 

Intra-day prices should correlate well with imbalance prices, because the latter represent the prices that BRPs pay (or receive) for their residual imbalances.

 

This implies that all electricity, consumed or produced, should be covered by balancing responsibility, and that generation units from intermittent generation should not receive special treatment for imbalances.

 

Otherwise, renewable electricity generators will have no incentive to trade in the intra-day market (ACER/CEER Annual Report on the Results of Monitoring the Internal Electricity Markets in 2015, September 2016 (MMR 2015), p. 49).

 

The aforementioned ACER/CEER Report of September 2016 refers also to the fact, with regard to balancing responsibility, renewable electricity generators are not treated in the same way as conventional generators in at least 15 EU Member States.

 

Furthermore, imbalance prices should be fully cost-reflective at any time, including times of scarcity.

 

Due to a combination of factors this is not always the case in electricity balancing markets.

 

The technical framework necessary for the development of cross-border balancing markets is based on provisions on load-frequency control (LFC) and reserves stipulated in the Network Code on System Operation.

 

According to the ACER's analysis, the large share of balancing capacity procurement costs in the overall costs of balancing in most of the balancing markets analysed and some inefficiencies of national balancing markets continued to dampen balancing energy prices (and imbalance charges), which may not always accurately reflect the value of flexibility in real time, particularly at times of scarcity.

 

Some countries are considering, or have recently introduced, measures to enable scarcity pricing in the balancing timeframe, e.g. Great Britain.

 

Moreover, the said ACER’s analysis confirms the presence of large disparities in balancing energy and balancing capacity prices, suggesting a considerable potential for further cross-border exchanges of balancing services in Europe.

 

Despite an increase in the exchanged amount of balancing capacity observed recently (e.g. following the go-live of the project for a common procurement of Frequency Containment Reserves that involves the German, Austrian, Dutch and Swiss TSOs), the overall cross-border exchange of balancing services continued to be limited in 2015 (MMR 2015, p. 51).

 

Commission Staff Working Document of 30 November 2016 ({COM(2016) 752 final} SWD(2016) 385 final, p. 40) argues that the maximum price in any forward market is constrained by the maximum prices charged in the balancing market, which functions as an implicit price cap for electricity prices in forward markets.

 

Some EU Member States already have no price caps in the balancing market, yet have not experienced prices reflecting the value of lost load (VoLL) even when there has been scarcity.

 

This can be the case when the balancing price, while not being subject to a cap, does not reflect the full cost of the services used to balance the market or the full cost of the unmet consumer demand (represented by VoLL).

 

Member States should therefore ensure that balancing market rules, even in the absence of an explicit price cap, do reflect the full costs of balancing and do not implicitly constrain electricity prices in forward markets.

 

The policies and measures related to the roll-out of cross-border balancing markets should be described in the national climate and energy plans, the EU Member States are required to prepare under Article 3 of the Regulation of the European Parliament and of the Council on the Governance of the Energy Union.

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ACER Decision No 03/2022 of 25 February 2022 on the amendment to the methodology for pricing balancing energy and cross-zonal capacity used for the exchange of balancing energy or operating the imbalance netting process

In general, ACER understands that efficient market functioning is based on free price formation on the basis of demand and supply. Article 10(1) of the Electricity Regulation explicitly states that there shall be no maximum nor minimum limit to the wholesale electricity price including balancing energy and imbalance prices, except for technical price limits if they are needed for the efficient functioning of the market. This reflects some of the key market operation principles, according to which market rules shall be formed on the basis of demand and supply, encourage free price formation and shall avoid actions which prevent price formation on the basis of demand and supply (Articles 3(a) and (b) of the Electricity Regulation).
In accordance with these provisions, efficient price formation occurs when bid prices are allowed to reflect underlying costs of the supply and the willingness to pay of demand and an optimal outcome is achieved when market prices are allowed to reflect marginal costs of electricity provision, including opportunity costs.
In balancing markets this is ensured through the application of the marginal pricing principle and a clear separation between procurement of balancing capacity and balancing energy.


Article 6 of the Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (recast) stipulates the following rules for balancing markets in the EU:

 

1. balancing markets should be organised in such a way as to:

- ensure effective non-discrimination between market participants taking account of the different technical needs of the electricity system and the different technical capabilities of generation sources, energy storage and demand response,

- ensure that services are defined in technologically neutral manner and are procured in a transparent, market-based manner,

- ensure non-discriminatory access to all market participants, individually or through aggregation, including for electricity generated from variable renewable energy sources, demand response and energy storage;

 

2. the price of balancing energy must not be pre-determined in contracts for balancing capacity;

 

3. balancing markets must ensure operational security whilst allowing for maximum use and efficient allocation of cross-zonal capacity across timeframes;

 

4. the settlement of balancing energy for standard balancing products and specific balancing products must be based on marginal pricing (pay-as-cleared) unless all regulatory authorities approve an alternative pricing method;

 

5. market participants must be allowed to bid as close to real time as possible, and balancing energy gate closure times shall not be before the intraday cross-zonal gate closure time (TSOs applying a central dispatching model may establish additional rules);


6. the imbalances are to be settled at a price that reflects the real-time value of energy;

 

7. the dimensioning of reserve capacity must be performed by TSOs and be facilitated at regional level;

 

8. the procurement of balancing capacity:

- shall be performed by the TSOs,
- may be facilitated at a regional level,
- reservation of cross-border capacity to that end may be limited,
- shall be market-based and organised in such a way as to be non-discriminatory between market participants in the prequalification process in accordance with Article 40(4) of Directive (EU) 2019/944 whether market participants participate individually or through aggregation,
- be based on a primary market unless and to the extent that the regulatory authority has provided for a derogation to allow the use of other forms of market-based procurement on the grounds of a lack of competition in the market for balancing services (derogations from the obligation to base the procurement of balancing capacity on use of primary markets shall be reviewed every three years),
- the procurement of upward balancing capacity and downward balancing capacity shall be carried out separately, unless the regulatory authority approves a derogation from this principle on the basis that this would result in higher economic efficiency as demonstrated by an evaluation performed by the transmission system operator,
- contracts for balancing capacity shall not be concluded more than one day before the provision of the balancing capacity and the contracting period shall be no longer than one day, unless and to the extent that the regulatory authority has approved the earlier contracting or longer contracting periods to ensure the security of supply or to improve economic efficiency,
- where a derogation is granted, for at least 40 % of the standard balancing products and a minimum of 30 % of all products used for balancing capacity, contracts for the balancing capacity shall be concluded for no more than one day before the provision of the balancing capacity and the contracting period shall be no longer than one day,
- the contracting of the remaining part of the balancing capacity shall be performed for a maximum of one month in advance of the provision of balancing capacity and shall have a maximum contractual period of one month,
- at the request of the TSO, the regulatory authority may decide to extend the contractual period of the remaining part of balancing capacity referred to above to a maximum period of twelve months provided that such a decision is limited in time, and the positive effects in terms of lowering of costs for final customers exceed the negative impacts on the market,
- from 1 January 2026 contract periods shall not be longer than six months,
- by 1 January 2028, regulatory authorities shall report to the Commission and ACER on the share of the total capacity covered by contracts with a duration or a procurement period of longer than one day.

 

9. TSOs or their delegated operators shall publish, as close to real time as possible but with a delay after delivery of no more than 30 minutes, the current system balance of their scheduling areas, the estimated imbalance prices and the estimated balancing energy prices,


10. TSOs may, where standard balancing products are not sufficient to ensure operational security or where some balancing resources cannot participate in the balancing market through standard balancing products, propose, and the regulatory authorities may approve, specific derogations for specific balancing products which are activated locally without exchanging them with other transmission system operators.

 

It is noteworthy that according to Article 10 of Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (recast)
“there shall be neither a maximum nor a minimum limit to the wholesale electricity price. This provision shall apply, inter alia, to bidding and clearing in all timeframes and shall include balancing energy and imbalance prices, without prejudice to the technical price limits which may be applied in the balancing timeframe and in the day-ahead and intraday timeframes in accordance with paragraph 2”.

 

In accordance with Article 10(2) of the Electricity Regulation, “NEMOs may apply harmonised limits on maximum and minimum clearing prices for day-ahead and intraday timeframes. Those limits shall be sufficiently high so as not to unnecessarily restrict trade, shall be harmonised for the internal market and shall take into account the maximum value of lost load”.

 

The limits in day-ahead and intraday market need to increase in case they are expected to be reached to ensure that there is no limit to free price formation.

 

ACER considers that a similar mechanism should also be designed in the balancing timeframe.

 

Finally, the issue may arise, whether there is in fact a real market in balancing timeframe. Some market participants (for example EDF) doubt that arguing that the customers are not able to react to balancing energy prices as they are settled too close to the real time (see public consultations documents to ACER Decision No 03/2022 of 25 February 2022 on the amendment to the methodology for pricing balancing energy and cross-zonal capacity used for the exchange of balancing energy or operating the imbalance netting process, Annex II).

However, the ACER disagrees with such a view and refers to the fact that “ in accordance with Article 44 of the EBGL, BRPs should be incentivised to be in balance or help the system to restore its balance”.
 

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