|EU Internal Energy Market Network Codes - basic information|
The development and implementation of network codes and guidelines has been designed as an important step to be taken in order to fully integrate the European Union Internal Energy Market (IEM).
Network codes "are the building blocks of the IEM. They will provide Europe with a coherent, strong and efficient set of harmonised rules and requirements covering all important cross-border aspects of the electricity sector: connection requirements, the coordination of system operations and the completion of pan-European electricity markets" (ENTSO-E draft Work Programme 2015 through December 2016).
This action comes with parallel institutional work on the full implementation and enforcement of the Third Energy Package, the enhancement of investments in energy infrastructure, the collaboration within regional initiatives as well as the enforcement of competition and State aid rules.
The legally binding nature of network codes means that they can have a fundamental bearing on market participants' businesses.
Electricity Network Codes
Among electricity network codes in the EU Internal Energy Market the following ones deserve particular interest:
1. Network Code on System Operation – the instrument integrating earlier editions of three draft network codes: on the Operational Security, Operational Planning & Scheduling (NC OPS) and Load-Frequency Control & Reserves (NC LCFR),
Network codes complement each other and provide a single set of pan-European market rules covering all timeframes. The initial goal was to have these rules in place by 2014, but the work occurred more complex.
The classification of issues treated among CACM and the Network Code on System Operation is based on the following:
- the Network Code on System Operation covers topics related to the physical operation of the power system, where physical scenarios are hypothesised and physical risks are involved;
- CACM covers topics related to the operation of the electricity market and involves financial risks and risks involved with market scenarios while taking into account the physical risks described in the Network Code on System Operation.
The above classification evolved over time. An example is the Network Code on System Operation itself, which, before merging, was represented by three separate system operations draft network codes:
- on load-frequency control and reserves,
- on operational security, and
- on operational planning and scheduling.
Gas Network Codes
Important EU network codes in the gas market are:
1. CAM Network Code
- Commission Regulation (EU) 2017/459 of 16 March 2017 establishing a network code on capacity allocation mechanisms in gas transmission systems and repealing Regulation (EU) No 984/2013, OJ L 72, 17.3.2017, p. 1–28, standardises cross-border capacity products and their allocation via transparent auctions held on joined booking platforms,
- Commission Regulation (EU) No 984/2013 of 14 October 2013 establishing a Network Code on Capacity Allocation Mechanisms in Gas Transmission Systems and supplementing Regulation (EC) No 715/2009 of the European Parliament and of the Council (became applicable in 2015);
2. Network Code on Gas Balancing of Transmission Networks (Commission Regulation (EU) No 312/2014 of 26 March 2014 establishing the Network Code on Gas Balancing of Transmission Networks) establishes a set of market-based measures for balancing, where both the Transmission System Operator (TSO) and market participants are incentivised to buy and sell gas for balancing purposes on the spot markets.
This is subject to the publication by the TSO of reliable and updated data on the system's current and forecasted status and on the market participants' positions (became applicable in 2015);
3. The Congestion Management Procedure (CMP) Guidelines (Commission Decision of 24 August 2012 on amending Annex I to Regulation (EC) No 715/2009 of the European Parliament and of the Council on conditions for access to the natural gas transmission networks (2012/490/EU)) establish a set of measures in order to prevent and reduce contractual congestions at cross-border points in the EU (entered into application in 2013);
4. Interoperability Network Code - Commission Regulation (EU) 2015/703 of 30 April 2015 establishing a network code on interoperability and data exchange rules;
5. Security of Gas Supply Regulation (SoS) - Regulation (EU) No 994/2010 of the European Parliament and of the Council of 20 October 2010 concerning measures to safeguard security of gas supply and repealing Council Directive 2004/67/EC;
6. Tariffs Network Code - Commission Regulation (EU) 2017/460 of 16 March 2017 establishing a network code on harmonised transmission tariff structures for gas, OJ L 72, 17.3.2017, p. 29–56 (see here the ACER's website on the Tariffs Network Code).
Network codes development procedure
Legal set-up under the Third Energy Package
The key actors involved in the process for the network codes development are the Agency for the Cooperation of Energy Regulators ("ACER"), the European Network of Transmission System Operators ("ENTSOs") and the European Commission.
The process of establishing network codes is defined in Article 6 and 8 of the Regulation (EC) 714/2009 ("Electricity Regulation") and of the Regulation (EC) 715/2009 ("Gas Regulation").
The areas in which network codes can be developed are set out in Article 8(6) of the Electricity Regulation and the Gas Regulation.
The details for the procedure for developing network codes are as follows:
The European Commission, after consulting ACER, ENTSOs and the other relevant stakeholders, establishes an annual priority list identifying the areas to be included in the development of network codes.
The European Commission can then request ACER to submit to it within six months a non-binding framework guideline (framework guideline), setting out clear and objective principles, for the development of network codes relating to the areas identified in the priority list.
ENTSO then has twelve months to draft a network code taking into account the objective principles outlined in the non-binding framework guideline. ENTSO then submits the draft network code to ACER for its reasoned opinion.
ACER assesses then the network code to ensure it complies with the Framework Guideline (ACER has three months to provide its opinion) and makes a recommendation to the European Commission).
Assuming the European Commission agrees with the recommendation, the process of comitology begins to transform the network code into a regulation (see box).
The regulation is legally binding on all parties and has direct effect (i.e. it will not need to be transposed into national law).
Winter Energy Package amendments
Winter Energy Package proposed by the European Commission on 30 November 2016 makes multiple amendments to the above processes, see in particular:
- Article 67 of the Proposal for a Directive of the European Parliament and of the Council on the internal market for electricity (recast) on common rules for the internal market in electricity (recast), 30.11.2016, COM(2016) 864 final 2016/0380 (COD),
- Articles 54 - 58 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).
It provides for the streamlining of the development procedure by clarifying that the ACER has the right to revise draft electricity network codes before submitting them to the Commission (and not only to give an opinion as before - see Recital 41 of the said Proposal).
What's more important, the Winter Energy Package provides for the adoption of network codes and guidelines by the European Commission as delegated acts - an idea that sparked some opposition (see for example EFET commentary on the Clean Energy Package for All Europeans, 20 April 2017, 20 April 2017, p. 18).
Target model for the EU Internal Electricity Market
When talking about the Internal Electricity Market target model different timeframes must be considered.
Supporting document to the ENTSO-E Draft Network Code on Forward Capacity Allocation of 28 March 2013 provides in that regard the following comments.
For day ahead and intraday timeframes flow based approach or coordinated NTC (net transmission capacities) Capacity Calculation are allowable by the target model.
However, for the Forward Capacity Allocation timeframe, which refers to timeframes prior to day-ahead (e.g. monthly, quarterly, yearly, multi-yearly periods), the coordinated NTC approach is preferable, although the flow based approach is acceptable provided there is evidence that it can deliver higher efficiency.
Regarding the forward market, the target model generally prescribes that transmission capacity should be allocated in explicit auctions via Physical Transmission Rights (PTRs) with the use-it-or-sell-it (uiosi) principle or via Financial Transmission Rights (FTRs).
The target model for the day ahead market is based on implicit auctions, which means that cross-zonal capacity is allocated implicitly with the matching of the most competitive energy bids and offers. This process is commonly known as Market Coupling. More in detail, it was agreed that the target model should be based on a single price coupling EU algorithm.
In the intraday market, where market participants trade energy to adjust their positions after the day-ahead market phase and before the balancing market, the target model also prescribes implicit allocation of capacity. However, unlike the day-ahead market, this should be based on continuous trading rather than auctions. Reliable pricing of scarce capacity complements the target model, while regional auctions can be implemented where appropriate.
In respect of the balancing market, while the long term solution foresees a TSO-TSO model with a Common Merit Order (CMO) list, its features and interim models were initially part of the ongoing discussions around the Framework Guidelines on Balancing, published by ACER on 20 September 2012.
ACER/CEER Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2014, November 2015 (p. 148) concludes that the target model for the EU electricity market is intended to remove the remaining cross-border barriers to market integration, as it envisages:
(i) a single day-ahead market coupling with implicit auctions of cross-border capacity, which should replace explicit auctions;
(ii) a single intra-day market coupling with continuous implicit allocation of cross-border capacity;
(iii) a single European platform for allocating long-term transmission rights;
(iv) a flow-based capacity allocation method in highly meshed networks; and
As regards short-term markets, efficient, liquid and integrated balancing and intra-day will facilitate the integration in the system of energy produced from renewable energy sources, and liquidity could be strengthened by increasingly exposing these generators to the same commitment and balancing responsibilities as conventional ones.
Legal efects of adoption of European Electricity and Gas Network Codes
As was said above, European Electricity and Gas Network Codes apply directly to all addressees and, as regulations, apply directly to the EU Member States without being transposed into national laws or regulatory frameworks.
Another significant fact is European regulations in the legal hierarchy of laws take precedence over the EU Member State's domestic law.
It means that if a domestic law is incompatible with a European Electricity or Gas Network Code, it is the European law which takes precedence.
The EU Member State that does not comply with a European regulation can face infraction proceedings, which involve substantial fines.
Each network code sets a series of rights and obligations on various market players; most often Transmission System Operators (TSOs). In many cases, network codes also require actions to be taken or parameters to be specified in order to implement that code.
For example, the connection codes require about 40 provisions to be set at national level (essentially more detailed specifications of subjects that could not be specified within the code itself) to be developed.
The EU network codes implementing provisions to be set at national level can be categorised considering their mandatory/non-mandatory and exhaustive/non-exhaustive character.
Mutual interdependences between these mandatory/non-mandatory and exhaustive/non-exhaustive requirements can be depicted in the graph (source: www.entsoe.eu).
Each EU Member States and other country, which implements connection network codes can make a decision whether to introduce a non-mandatory requirement either in general on national level or as a site-specific choice.
Such a leeway is not granted when it comes to mandatory requirements, which must be applied in all EU Members States and other countries, which implement connection network codes.
Exhaustive requirements need no further national specifications (e.g. parameters) for its entire application.
In turn, non-exhaustive requirements are those for which the European level network codes do not contain all the information or parameters necessary to apply the requirements immediately and need further national specifications for its entire application in general on national level or as a site-specific choice.
These requirements are typically described in the CNC as "TSO / relevant system operator shall define" or "defined by / determined by / in coordination with the TSO / relevant TSO".
Some of them need a choice at national level, but wider sharing and in some cases collaboration on the criteria can be necessary (see: Making non-mandatory requirements at European level mandatory at national level, ENTSO-E Guidance document for national implementation for network codes on grid connection, Draft for consultation 1 July - 15 August 2016, 30 June 2016, and Parameters of Non-exhaustive requirements, ENTSO-E Guidance document for national implementation for network codes on grid connection, Draft for consultation 1 July -15 August 2016, 22 June 2016).
Proposal for a Directive of the European Parliament and of the Council on the internal market for electricity (recast) on common rules for the internal market in electricity (recast), 30.11.2016, COM(2016) 864 final 2016/0380 (COD), Article 67
|Last Updated on Thursday, 16 November 2017 12:10|