Developments from balancing and capacity markets

Highlights from the balancing markets

This time around I will focus on PICASSO platform for the exchange of aFRR and the FCR market.

The year 2024 was marked by a wave of accessions to PICASSO now that the legal deadline for accession is almost at the TSOs’ doorstep. As a background note, only balancing energy activated in the event of system imbalance is procured over the international platforms. Balancing markets for capacity reservation remain national. PICASSO is operational since 2022 with its original members including the Czech, 4 German as well as the Austrian TSO.

In 2024, Energinet (DK), Tennet NL followed by Elia (BE) and SEPS (SK) acceded to the platform between October and November 2024. Based on the latest update of December, 2024, next round of accessions will follow from Greece, Finland, the Baltic States and France in Q1, Poland in Q2 while Portugal and Slovenia plan to join in Q4 2025. The Nordic countries, Sweden and Norway, have postponed their accession through a derogation in order to complete the implementation of the so-called Nordic Balancing Model (NBM) first. NBM is designed to, as a first step, create a roadmap for the balancing markt integration among the 3 Nordic TSOs.

Notably, Italian participation remained suspended since March 2024 following multiple incidents of “anomalous price events” registered since Terna’s accession. Italian participation was suspended by ARERA’s decision and prompted 2 Decisions by ACER in July, based on which:

1)??? Adjusted the activation function as well as the technical price limits;

2)??? TSOs obtained a possibility to use elastic demand as a means to limit exposure to price spikes on PICASSO.

Looking at aFRR energy prices, the trend from 2023 seems to continue into 2024 – although the price duration curve for over 90% of all data points became flatter this year. While most prices for upward regulation hover below 200€/MWh (on average), extremely high volatility is not new for aFRR markets: maximum prices habitually reached 10k€/MWh and at times 15k€/MWh for positive aFRR. The actual volatility based on the 4-second MTU (market time unit) resolution of PICASSO is even greater. These extreme price levels and volatility have been rather concerning for new or planned accessions, especially due to the maginal pricing rule applied to both PICASSO and MARI, based on the EBGL. This is in particular a cause of concern in those countries where aFRR directly affects imbalance prices for all market parties, such as the Netherlands and Belgium. On the positive side, access – especially for smaller bidding zones – to a larger pool of balancing resources should dampen aFRR (and by exension imbalance) prices. In fact, the volatility of imbalance prices in the Netherlands after its accession to PICASSO has dropped significantly, as reported by Timera.

An interesting trend that continued in 2024 is that downward regulation, so remuneration for producing less (or consuming more), has been getting increasingly important, which manifested itself in the prices for negative aFRR of a magnitude very similar to that of positive aFRR. A similar trend can be observed in the mFRR market.

What about FCR?

The interesting thing about the developments in the market for frequency containment reserve is that in 2024 the prices for FCR on average actually increased to hover slightly above 50€/MW with outliers in Belgium and Czechia that whitnessed the higher prices and degree of volatility and in France characterized by traditionally lower prices thanks to flexible nuclear. One of readings of these results is that – at least for now – FCR market saturation in most countries of the FCR Cooperation and growing availability of battery storage has not led to lower prices (or lower returns) and remains a highly interesting market for operators of assets with the fastest response time.

What about regional developments? Let’s take a look at the Nordics.

Speaking of the Nordic region, a few notable developents marked 2024, including technological diversification across products and the switch to marginal pricing for FCR-N in February 2024.?

The two main trends in the Nordic balancing markets include both the rapid growth of demand for balancing and the increased availability of such resources coming from a growing range of technologies, including demand response or variable renewables. For instance, in 2024, 30MW of solar generation were prequalified for downward FCR-D, according to Svenska krafn?t, where as demand response accounts for about 11% of prequalified upward FCR-D capacity and battery storage made an entry in the FCR-N market with 120MW or about 6% of prequalified capacity (in still very much hydro-dominated markets). Interestingly, wind generation in the Nordics is prequalified to provide all balancing products except for (symmetric) FCR-N. Another interesting observation is that a more diversified BSP landscape and the introduction of marginal pricing for FCR-N ultimately lead to lower average prices in 2024 as compared to the same period last year. Unlike FCR products the need for which is expected to remain rather stable in the next few years, the demand for aFRR and mFRR is likely to steeply increase, according to the Nordic TSOs whereas, so far, the number of prequalified BSPs there is considerably lower than in FCR markets. Finally, similar to their counterparts in Central Europe, there is a trend for growing volumes of downward regulation needed, which largely correlates with RES output in the region.

Growing relevance of capacity markets in the EU

The overall European perception of capacity markets (and other capacity remuneration mechanisms) experienced a major seismic shift. The experience from the energy crisis became a proverbial “nail in the coffin” of energy-only markets.

Even Germany that has long been the bulwark of energy-only markets, caved under the weight of concerns about future security of supply after nuclear and coal phaseout and limited gas availability. In September 2024, the German government proposed key points for a?Power Plant Security Act (Kraftwekssicherheitsgesetz (KWSG))? for cosultation. It outlines the tendering of 7 GW of gas power plants that can later be converted to 100% hydrogen operation, tenders for 0.5 GW of hydrogen-powered "sprint" plants, and 0.5 GW of long-term energy storage systems. In addition, it includes plans for a “preemptive” capacity market for an additional 5 GW of power plant capacity from 2028.

On the EU level, the rules related to the application for a national capacity market were somewhat relaxed (more on this in Part 1 of this post series) whereas, on the national level, multiple countries either decided to renew their existing capacity markets or introduce them in the (near) future. In addition, the latest update of the EU Electricity Regulation allowed for not one but two capacity-based products, 1) those in “traditional” capacity markets and 2) capacity-based non-fossil flexibility support schemes, which can either be integrated into an existing capacity market or be a standalone mechanism (more on this, in our Working Paper).

?Capacity-based remuneration is becoming available across most EU countries opening up a new revenue stream to a wide range of technologies

Yet even though the same suggests otherwise, the exact implementation of capacity markets in Europe is highly country-specific whereas a big question remains as to how exactly a capacity market can 1) ensure security of supply cost-efficiently and 2) encourage participation of and investment into a wider spectrum of technologies with diverse capabilities.

?We provide concrete ideas on how a capacity market can be designed in a way attractive for both stable but slower and faster and flexible assets in our upcoming report on the Polish capacity market design.

As a background, capacity markets are meant to solve a very specific problem, that of resource adequacy. In plain terms, it means that sufficient supply should be available to cover demand in situations of system stress. The existence of an adequacy problem (demonstrated by way of a National or European Resource Adequacy Aseessment (NRAA or ERAA)) is a legal prerequise for a formal application to the EC (as it falls under State Aid regulations).

Now, what is also happening is that the adequacy situation is deteriorating across the region post-2030, as was shown by the latest ERAA 2023. The major reason for that is a mismatch between the retirement, phaseout or mothballing of generation and the pace and volume of investments into new assets or life extensions of the exisitng ones.

It goes without saying that the developments discussed here but also in the previous post on wholesale markets have direct implications for generation and consumption assets as well as for future investments, something I will take a closer look at in the next post of this series.

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* Kudos to Chitransh Lot for the graph. Source of data: netztransparenz.de

** Source: Svenska krafn?t, 2024

*** Source: ENTSO-E ERAA23, 2024