Electricity Market 2022 in Review

I like keeping a log of most relevant electricity market events. So here’s an excerpt with the main highlights from the most turbulent and challenging year since the oil crisis of the 1970s. Beyond the energy crisis, it was unprecedented in terms of generated policy and regulatory output on the EU and national levels and the amount of attention energy issues received from the general public. It is my hope that in 2023 we could use this momentum for good, for accelerating the expansion of renewables energies, storage options and – crucially – close the feedback loop between consumers and markets by offering demand-response-friendly tariffs!

·???????Update to the EU’s Taxonomy Regulation*:right before New Year’s Eve the European Commission proposed a delegated act, which includes gas and nuclear among “green” technologies aiming to spur investment in the two technologies. Among the list of conditions for gas to classify as green the proposal included such requirements as a low CO2 output. Several countries, Austria, Denmark, Luxemburg and Spain, opposed the proposal but the opposition did not manage to get a 72% majority to overturn it. In particular, Germany acted as a strong supporter of including gas seeing it as a necessary transition fuel and nuclear got a heavy backing from France. The proposal was adopted in March 2022 causing a backlash of environmental groups.

·???????Network Code on Cybersecurity (NCCS): ENTSO-E and EU DSO Entity finalized the NCCS in January, which would set “a European standard for the cybersecurity of cross-border electricity flows”. The Code is now pending ACER’s review.

·???????Skyrocketing gas prices: In March, for the first time, gas prices on the TTF hub reached eye-watering 200+€/MWh throwing both gas and electricity markets into turmoil and deepening uncertainty. The IEA issued a plan, featuring 10 steps to reduce Europe’s dependence on Russian gas while some countries like Germany and Austria (the latter imports 80% of its gas from Russia) were finding it extremely difficult to accomplish fast, prompting an emergency situation and the German chancellor appealing to the citizens to save every kWh.

·???????France has seen an extraordinary price spike of almost 3000€MWh on its day-ahead market for two morning hours of April 4th. Although France could have theoretically imported more from Germany (based on JAO data), the imports in fact did not increase, which prompted some to question the coupling of the market algorithm. The incident, however, was likely caused by a dynamic interaction between multiple neighboring bidding zones, which may temporarily limit flows to one of them. Some more analysis of the incident here.

·???????Questioning of electricity market design: around April 2022, the obscure “merit order principle” in the electricity market started circulating in the media and political circles. It was soon proclaimed the main culprit of the current energy crisis. What is in fact hiding behind this notion is the simple economic principle of intersecting supply and demand at an equilibrium price, which is paid or received by every market participant. ACER published its landmark Market Assessment Report in April highlighting the benefits of cross-border trade and, together with many experts from market operators, TSOs and academia, cautioning about an intervention into well-functioning markets.

Over the year, multiple proposals for market interventions/changes to market design have been made (and some adopted, see below). I’ve categorized most of them in this diagram based on the degrees of market intervention and complexity of implementation:

You can find the related discussion here.

·???????CACM 2.0: ACER launched a review of the CACM Guideline (CACM 2.0). It includes adjustments to the determination of capacity calculation regions (CCRs) and creates a new - highly contentious – role of a Market Coupling Operator to streamline communication among power exchanges, centralizing it over the MCO. The start of implementation is planned for July 2023. ACER’s workshop on CACM amendments can be found here.

·???????In May, the European Commission adopted its REPower EU plan to wean itself off Russian gas dependence. It encouraged expansion of rooftop PV and other distributed technologies, speeding up of the renewables permitting process and industry decarbonization while diversifying gas supplies, accelerating hydrogen infrastructure and storage. It further authorized state retail energy price interventions to shield consumers from extreme prices and provided guidance of taxing windfall profits. These have so far been implemented in Spain, Italy and the UK. The gas storage filling target was set at 90% by October 1st, 2022 (met by most countries before the deadline) and supported coordinated gas refilling.

Source: AGSI 2022

·???????Summer supply shortages: The real crisis hit in summer when gas supplies fell off the cliff, water levels in Central European rivers reached historical low impacting production from hydro, coal and already scarce nuclear. Supply shortages were aggravated by almost 2/3 of France’s 56 ageing nuclear reactors being on maintenance.

Source: Reuters/RTE

The gas volumes along most supply corridors either went down or stayed the same:

Source: ENTSO-G 2022

Massive price spikes prompted the Spanish and Portuguese governments to adopt a so-called “tope al gas”, also known as “the Iberian exception”, in mid-June. Gas producers thus are compensated through a special tax when gas prices exceed 40€/MWh. In the meantime, Austria decides to re-convert its power plant Mellach back to coal-fired operation. This same power plant had been shut down as the last coal-fired power plant in Austria just a year ago.

According to the Spanish sources, consumers managed to save around 17% of their electricity costs thanks to the measure whereas day-ahead market prices have been lower than in the neighboring countries:

What is less known outside of Spain is that the urgency to implement el tope al gas was caused in the country facing fewer gas supply issues as compared to Central Europe was the default electricity tariff (Precio Voluntario para el Peque?o Consumidor (PVPC)) pegged to the day-ahead market prices. During COVID times, it allowed Spanish consumers to save on energy but later exposed them to hourly price volatility and major price spikes during the crisis. The price limit will be progressively increased over the next year thus reducing the share of subsidized gas generation.

In the meantime, extreme supply stress, market uncertainty, tight forward markets and sky-high margin calls led to serious liquidity issues among even the biggest energy companies. In July, France announced full nationalization of EDF while Germany bailed out Uniper in September.

·???????CO2 prices stably high, higher volatility: Interestingly, throughout the crisis, the prices of EU ETS have remained between 70 and 100 €/ton CO2 (with a few outlier periods around 60€/MWh). Similar to commodity prices, the bandwidth of price volatility has increased substantially:

Source: trading-economics 2022

·???????Inframarginal revenue cap: In an effort to relieve cash-strapped governments and especially consumers “Council Regulation on an emergency intervention to address high energy prices” was adopted on Oct 6. The Regulation is in effect for all MSs from December 1, 2022 till end of 2023 and covers 3 major interventions:

1. Revenue cap on inframarginal technologies
2. Agreement on demand reduction targets of 5% (mandatory in peak hours) to 10% (voluntary)
3. Solidarity tax levied on fossil fuel companies (on profits that are 20% higher than average taxable profits since 2018)

The inframarginal cap does not directly alter the market price but affects the revenues of such technologies as variable RES, nuclear and brown coal while, for instance, excluding hydro generation.?It still leaves a lot of room for national adaptations to account for national circumstances. For instance, it may or may not be applied to intermediaries or to selected technologies (e.g. CHPs).

·???????Bidding zone review: ACER provided a selection of 15 bidding zone configurations to be included in the BZR as well as the specific methodology. Four configurations foresee Germany being split in 2 to 4 bidding zones, other ones would split France in 3 zones and the Netherlands or Northern Italy in two zones. TSOs are expected to provide results of the evaluation are expected in August 2023 and should include 22 indicators, such as market efficiency and system security. Importantly, these results are a recommendation to the Member States and not an imperative.?

Source: ACER 11-2022, Annex I

·???????RES permitting: In November, the European Commission proposed a new emergency regulation to speed up the permitting of renewables as projects of “overriding public interest”. So far, it can take a decade for a plant to complete all permitting-granting procedures. Following the framework, the permitting for small-scale solar (+storage) should not exceed 1 month and 3 months for heat pumps. Repowering projects are also simplified, especially there where it is below 15% of the total installed capacity.

·???????PICASSO & MARI balancing energy platforms: the biggest highlight from the balancing markets was the successful go-live of PICASSO (aFRR) and MARI (mFRR) platforms. Their implementation has already demonstrated positive welfare gains, particularly for smaller countries benefitting for access to a wider flexibility pool. The total welfare gain of PICASSO in Q3 2022 alone was estimated by the TSOs at 200-340Mio € thanks to the international exchanges.?This experience demonstrates how much more can be achieved once other TSOs join the balancing platforms. The benefits of course can only be reaped if sufficient transfer capacity is available for the exchanges.

?Source: ENTSO-E

So far, PICASSO is used by the 4 German TSOs, the Austrian APG and the Czech CEPS. Terna, RTE and Elia intend to join in 2023. The German and Czech TSOs have already acceded to MARI while the Austrian and Belgian TSO are expected to do so in 2023.

·???????Framework Guideline on Demand Response (FG DR): Following a stakeholder consultation, ACER published its FG DR, which crucially covers not only load but also distributed generation and storage. It is expected to create a common terminology and requirements for DR participation, align rules for aggregators, prequalification processes for ancillary services and other measures to lift market participation barriers in electricity wholesale markets.

·???????Gas price cap: After multiple negotiation rounds, the EU has adopted a gas price cap aka “market correction mechanism” seeing gas prices plummet in the aftermath. Some details:

-???????The cap kicks in once the TTF front month derivative price reaches 180€/MWh while the LNG reference price exceeds 145€/MWh +35€/MWh during 3 days in a row.

-???????Applied to TTF futures contracts for at least 20 days (i.e. OTC trading is excluded as a “safety valve” to mitigate security of supply issues)

-???????Lifted if the bidding limit goes below 180€/MWh for at least 3 days.

-???????Linked to the global LNG prices in a bid to avoid diverting LNG supply to Asia

The cap will be in force from February 15, 2023 and will stay in effect for a year.

It remains to be seen the extent by which the security of supply, demand levels, whether is would really relieve consumers or whether trading will move from TTF to the UK gas trading hub, NBP.

?Source: Watt-Logic

·???????Storage permitting: The EU has acknowledged the value of flexibility from energy storage by fast-track the permitting process for this technology in line with an amendment to REPowerEU. It covers “hybrid power plants that combine different renewable energy sources, heat pumps, energy storage, including power and thermal facilities”.

·???????The biggest highlight of the end of the year was a respite in gas and electricity prices thanks to high output from renewables, milder end-of-year weather and energy saving measures. The day-ahead electricity market prices went down to an average of 40€/MWh around Christmas from about 200€/MWh the week before.?

*original Regulation was approved in December 2021 and including green technologies such as solar, wind and hydro power.