The 70% requirement and non-discrimination between internal and cross-border trade
CREG - Commission for Electricity and Gas Regulation - Belgium
Belgian federal regulator for energy
This article is the first in a series of posts, dedicated to a number of concepts with high relevance in today's electricity or gas markets. Through this series, the CREG intends to provide some clarity in increasingly complex energy sector.
Today's topic: the 70% requirement and non-discrimination
What's the issue?
The Clean Energy Package (CEP) imposes an obligation on all European Transmission System Operators (TSOs) to foresee that at least 70% of the electricity transmission capacity is made available to the market for cross-border trade.
Today this 70% threshold is often not reached due to local congestions that prevent the cross-border transmission of electricity.
Depending on local agreements, temporary exemptions from this obligation, under the form of action plans or derogations, may be allowed under very specific circumstances.
This seemingly simple and straightforward obligation has, however, far-reaching consequences for all parties involved:
Why does it matter?
The deeper integration of European electricity markets is one of the main cornerstones to deliver on the goals of European energy policy: providing clean, secure and affordable energy to all EU citizens. One of the main obstacles to further integration is the availability of cross-border transmission capacity to transport electricity from low-priced regions with a net surplus of energy, to high-priced regions with a net deficit. Increasing cross-border capacities has a positive effect on cross-border competition, increases the security of supply and enhances the integration of renewable energy sources.
The rules for cross-border capacity calculation ("how much is available?") and allocation ("how is access granted to the market?") are governed through different European legislative instruments. Examples include the Electricity Regulation, Electricity Directive and Capacity Allocation and Congestion Management (CACM) Regulation.
Through the adoption and implementation of these legal instruments, significant progress has been made in recent years to couple and integrate markets. Nevertheless, these improvements mostly relate to the allocation of cross-zonal capacities through the implementation of big and ambitious market coupling projects (such as the Single Day-Ahead Coupling). According to the many NRAs, ACER and the European Commission, there is much room for improvement in maximizing cross-border capacities: an issue which the CEP seeks to address with the 70% requirement.
Essentially, the 70% requirement offers a simple solution to a complex problem: discrimination between internal and cross-zonal exchanges. As a general rule, it aims to ensure that transmission capacity is allocated fairly to exchanges of electricity, irrespective of whether these trades are local or have a cross-border dimension.
How does it work?
Non-discrimination
A fundamental principle of fair, competitive coupled electricity markets is that of non-discrimination: all market parties shall have equal access to the transmission network to exchange (buy or sell) electricity, regardless of whether they are entering into local or cross-zonal trades.
Confused? A simple analogy might help.
Similarly to the functioning of an electricity grid, road transport is a network problem which suffers from congestion. When driving a car between Ghent and Brussels, a driver is likely to face dense traffic. It does not make economic or technical sense to give priority to cars which are travelling between the two Belgian cities (within the region) over cars which continue their travels to other destinations (outside the region). Consequently, following the logic of an integrated and coupled European network of roads, drivers travelling from Amsterdam to Paris should be allowed equal access to Belgian highways.
This concept needs to be equally applied in electricity networks: the exchange of electricity between producers and consumers of electricity that are located in the same area (the so-called "bidding zone") cannot lead to a reduction of the possibility between producers and consumers in different zones to exchange their electricity. This may, however, require national actions to reduce the congestion risks.
For this reason, the 70% requirement forces TSOs to offer a minimum capacity to the cross-zonal market. As a result, market participants in all coupled bidding zones can, in a fair and non-discriminatory way, access the transmission capacity.
Loop flows
Loop flows are observed when trades within a single bidding zone flow through neighbouring bidding zone, because impedance or congestion within that bidding zone forces the electricity to follow alternative paths. Managing these loop flows is difficult, and often results in TSOs of neighbouring zones having to apply security margins or reduce cross-zonal capacities in order not to overload the network through the combined effect of loop flows and cross-border flows.
Coming back to the previous analogy, you can probably understand that Belgian drivers are not particularly happy about reserving certain highway lanes to allow for the unrestricted passage of German drivers travelling from Hamburg to Munich, if they feel like taking a little detour over the Belgian roads to avoid German traffic.
A certain "natural level" of loop flows cannot be avoided, as the laws of physics imply that electricity follows the path of least resistance. Nevertheless, excessive loop flows which are the result of structural congestion in a certain bidding zone, may constitute a valid reason for a temporary, targeted reduction below the 70% requirement.
Structural congestion, derogations and action plans
There are several ways for TSOs to comply with the CEP targets. When structural or residual congestion impedes the ability of a TSO to make 70% of its transmission capacity available, it can:
If, after exhausting these options, (structural) congestion is still observed, a bidding zone reconfiguration needs to be investigated. Put simply, the borders between bidding zones should be located where the structural congestion is observed. That way, the capacity calculation processes ensure that there is no undue discrimination between internal and cross-border exchanges.
Compliance monitoring
Where action plans are implemented, TSOs need to demonstrate that they reach the minimum capacities set out in their linear trajectories. This assessment is submitted to the relevant NRAs and ACER, and can - if negative - form the basis for the initiation of a bidding zone review procedure.
Where derogations are approved as a temporary measure, NRAs are responsible for monitoring the compliance of its TSO with the 70% requirement and the minimum values laid out in the approved derogation.
What role does the CREG play?
In Belgium
At the time of this writing, the CREG has approved, for the years 2020, 2021 and (recently) 2022, a derogation request from the 70% requirement. Even though the regulation allows to grant a European TSO a temporary derogation in a broad range of circumstances, Elia has requested this derogation to cover only one specific situation: the inability of Elia to accommodate 70% when facing loop flows from other bidding zones above a certain threshold.
After careful and diligent examination of the proposed methodology for setting a new minimum target under these circumstances, the CREG is of the opinion that these circumstances form a valid basis for temporarily reducing the capacities below the 70% threshold.
In addition to the approval of the derogation request, the CREG periodically analyses the compliance of Elia. In 2020, Elia met the minimum thresholds (combined 70% requirement with loop flow derogation) during 81,3% of all hours or on 99,2% of all observed network elements (internal or cross-border). Even though these numbers are encouraging, it is important to note that the impact of the excessive loop flows is enormous and this significantly impacts the ability of Elia to provide 70% of its transmission capacity under all circumstances.
While today these loop flows have a big impact, the CREG anticipates that this impact will reduce in the coming years. The implementation of action plans in neighbouring countries and the linear trajectory towards 70% compliance in 2026 is expected to reduce the loop flows sufficiently below the acceptable threshold.
The detailed monitoring of these data allows the CREG to gain further insight into the problems which Elia faces when calculating and allocating cross-border transmission capacity. These results are very important in assessing where room for improvement exists.
In Europe
In a coupled, integrated market, the efforts of one TSO and one NRA are strongly impacted by, and are impacting, those of others. The CACM Regulation foresees that capacity calculation is coordinated on a regional level. This regional scope is, for Belgium, defined by the Core region (comprised of Austria, Belgium, Croatia, Czechia, France, Germany, Hungary, Netherlands, Poland, Romania, Slovakia and Slovenia). Hence, coordination between the TSOs and NRAs of this region is crucial for a proper functioning of the capacity calculation and allocation processes.
The CREG is a very active member of European working groups and task forces, under the ACER structure. Within these fora, the CREG has traditionally been a strong advocate for increased cooperation between TSOs, NRAs and ACER. The key areas in which improvement should be sought, according to the CREG, are:
Want to learn more?
The CREG has published several decisions on Elia's derogation requests and one study describing the national compliance assessment:
Meanwhile, ACER has issued several reports to monitor the progress of all European TSOs towards the fulfilment of the 70% requirement:
More information on the impact of loop flows on the Belgian transmission network may be found in the CREG's annual Monitoring Report, notably section 5.5. (link)
The legal provisions for the 70% requirement, action plans and derogations are laid down in articles 14, 15 and 16 of Regulation (EU) 2019/943 ("The Electricity Regulation", link).