DK1: Change in frequency control reserve collapses prices.

On the 7th of September 2022, the DK1 and German LFC Areas were joined for FCR Capacity auctions. FCR is the frequency reserve that 'catches' the frequency if this drops or suddenly increases due to a disturbance in the grid. Other reseserves then get the time to be activated either automatically (aFRR) or manually (mFRR) to restore the frequency to within acceptable ranges.

There was good reason to have a closer look at the DK1 region (the mainland region, Jylland, which connects to Germany in the South). It is a region with a relatively small share in European demand and therefore also in FCR requirements. Also, the number of flexible assets is limited. When DK1 joined the common FCR auction on 17 January last year, it became clear quickly that the region had trouble finding competitively priced FCR capacity, even for its 'core demand' of only 6 MW.

As a result, the DK1 FCR price often decoupled from the cross border marginal price, the European common FCR price. In the last months the decoupling was nearly constant, with local FCR capacity prices often clearing at over 10 times the level of the joint auction. On 29 June the local Danish price even reached a level of € 805.69 per MW per Hour, vs € 15 for other countries in the join auction.

It has been clear that something would change for the DK1 region, although there had not been much publicity around it. On the 7th of September, the Danish DK1 region was joined to the German region. Danish FCR bids are still added to the common auction, but by adding the core demand of the region to Germany, the market can no longer decouple from European prices, unless the whole of Germany decouples.

The effect on local FCR price has been dramatic, it dropped from levels between € 300 and € 750 to the level of the joint auction, which finds itself at levels between € 15 and € 30. As FCR costs are likely to be recuperated through grid fees, this is good news to everyone in Denmark, except the parties that were offering the FCR until shortly.

For the German market, the additional volume increases demand slightly, but also affects its maximum import and export limits. German demand increases by 12 MW, whereas its cross border limits increase by 6 MW. As Germany has started decoupling from the common market occassionally at lower prices, this additional volume may make German local prices also slightly more robust, a total of 18 MW more German capacity can be selected from the common merit order list (CMOL), before the German market decouples.

The impact on German prices seems to be absent as we can observe from below chart, there is no visible change in volumes at lower prices, which implies that the Danish parties have not dropped their prices now that the region is joined to Germany.

The strong relationship between online flexible generation and FCR prices is also unchanged. Very low levels of fossil fuel generation ensure high opportunity costs for conventional assets to provide FCR, which causes a high capacity price on the FCR auction. We can see that specifically during weekends when renewables and low demand reduce the need for fossil fuels, those typically see higher prices than weekdays.

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