The power market design column - balancing and the soft machine

The imbalance price is the basis for pricing in all segments of the electricity wholesale market. In order to speak of a single internal European electricity market, the determination of the imbalance price should therefore take place in the same way in all bidding zones. However, that does not happen. The principles of the imbalance market, on the other hand, are harmonised, but those principles are not always properly converted. TenneT Netherlands is a TSO that only reacts to imbalances in the system. But some other TSOs balance the system proactively. In other words, they deploy reserves in advance if they expect that the market will not balance supply and demand. Such different design choices stand in the way of the creation of an internal market.

(This column is based on an article that has been published in?Energeia.)

Proactive balancing is not allowed

The European rules lay down how TSOs must maintain the system balance. TSOs have to balance the system by procuring balancing services on the market. This concerns the following products: FCR (frequency containment reserve), FRR (frequency restoration reserve) - where a distinction is made between automatic and manual FRR (aFRR and mFRR) - and RR (replacement reserve).

It all starts with disturbances in the power balance that are reflected in a frequency deviation from 50 Hertz. First, FCR is activated, which restores the power balance in the entire synchronous area and stabilizes the frequency. FRR is then deployed in the country where the disruption occurred. The frequency goes back to 50 Hertz, the activated FCR becomes available again and the power balance is back in order in every country. Finally, the RR can be deployed to restore the activated FRR or support FRR activation.

For more details see EU Regulation 2017/1485, in particular articles 142, 143 and 144 and EU Regulation 2017/2195 article 14.

This process is often depicted by the TSOs in the following way (source: Electricity Balancing in Europe, ENTSO-E):

So the whole process is reactive by definition. The European rules clearly prescribe which reserve products the TSOs must purchase and how those reserves must be used. And according to those rules, there is absolutely no room for TSOs to deploy mFRR or RR proactively, i.e. in advance of an actual disturbance or system imbalance.

But pro-active balancing is being applied

However, RTE, the French TSO, prides itself on pro-actively balancing the system. This can be read in the?Balancing Report?2022 recently published by ENTSO-E, together with the?Market Report?2022. The Balancing Report describes the state of affairs of the integration of the balancing markets in Europe in 244 pages. On page 142, RTE explains that it manages the system in a central and proactive manner. “The French balancing market relies on a unit-based scheduling process, which gives the TSO very detailed forecast information about the status of the power system.” Elsewhere in the report, it is stated that some countries have implemented a proactive model using the three processes (aFRR, mFRR and RR) while other TSOs follow a reactive model, focusing on aFRR and mFRR only.

It is indeed the case that some TSOs do use RR and others (including Tennet) do not use RR. Tennet does not use RR, because it is assumed that the market (via the BRPs) is also continuously active to balance supply and demand. The market itself will then ensure that the activated FRR is released again. (Incidentally, this also means that the figure above is not correct, at least the reaction of the market is not depicted.) Other countries, such as France, have less confidence in the market and have contracted RR to restore FRR.

However, the use of RR does not seem relevant for whether or not to balance the system proactively. After all, it is also possible that a TSO only balances with aFRR and mFRR (and does not use RR), but still uses these products proactively.

The essence may lie in Article 144 of the aforementioned Regulation 2017/1485. It says here that RR should at least be used to restore activated FRR and support activation of FRR. RR can apparently be used for more purposes and some TSOs do so to anticipate problems in the market. However, such use of RR remains highly questionable. More general provisions (article 3 of EU Regulation 2019/943) say that price formation must take place freely and that TSOs must avoid actions that prevent price formation on the basis of demand and supply. And the proactive use of RR is such an action that gets in the way of market parties and thus interferes with free price formation.

Nevertheless, the regulators do not seem to have any problems with this practice of pro-actively balancing TSOs. This year, the European Commission has taken this a step further by introducing a new product in the proposals for the reform of the electricity market design, namely the peak shaving product. The TSOs could then use this product to smooth out peaks in demand. But if the TSOs do that, they will get in the way of the market. Balancing then only becomes more difficult and more expensive.

The Dutch system is negatively affected by pro-actively balancing TSOs

Naturally, the question can be asked whether it is really that important to harmonize the approach used by the various TSOs in Europe for balancing. Why shouldn't reactive and proactive balancing TSOs coexist?

Problems arise because the imbalance markets are increasingly integrated. This mainly concerns the three central platforms - with the names Picasso, Mari and Terre - that must be used by all TSOs to procure the three balancing products mFRR, aFRR and RR. These platforms are the showpieces of the European integration of imbalance markets. The Terre platform will not be used by TenneT, because TenneT does not use RR. And the use of the other two platforms by Tennet has been postponed until July 2024.

In May, TenneT proposed an?amendment to the Dutch grid code to the Dutch regulator for the implementation of Picasso and Mari. In the explanatory notes to this proposal, Tennet discusses proactive and reactive strategies by the various TSOs. Tennet says that the demand for the mFRR product mainly comes from foreign TSOs that use the proactive approach. This in turn has adverse consequences for the availability of capacity on the interconnectors for the exchange of aFRR. Appendix 4 of the grid code amendment proposal discusses this complex issue in more detail, but the bottom line is that TenneT will not purchase the standard mFRR product (the Mari product). Instead, TenneT will continue with its own emergency power product, a special product (labeled as mFRRda), which only exists in the Netherlands and will therefore not be shared with other countries. Foreign parties cannot offer the emergency power product to TenneT from abroad. It is a disappointing outcome because in this way there is no real European, integrated imbalance market. Tennet's proposal is understandable. TenneT cannot therefore not really be blamed, but pro-actively balancing TSOs can be challenged.

System support balancing?

A lack of confidence in the functioning of the market has therefore led some TSOs to balance their system proactively. This lack of confidence is also the reason why some countries, including Germany, require that market parties (or rather, the BRPs, the balance responsible parties) may not deviate from their schedule with the aim of supporting the system balance.

The Netherlands allows market parties to support the system instead of strictly following their own, individual schedule. This is also in line with European rules. But other countries, such as Germany, have other ideas.

I did write a power market design?column?on the situation in Germany following incidents in June 2019. In 2020, Bundesnetzagentur concluded that five market parties had failed to fulfill their obligations as balance responsible parties (or BRPs). One of those companies, Statkraft, filed a complaint with the court against that decision of Bundesnetzagentur. Three years later, this case is still open.

The German TSOs seem, reluctantly, to take little steps towards the Dutch approach, whereby market parties are allowed to deviate from their schedule aiming to support the system. Since 2021, the German TSOs have been publishing a traffic light that indicates in three colors to what extent the system is in balance. A very rough indication. Earlier this year, the German TSOs started?publishing?an estimate of the imbalance price. But they do so no later than half an hour after the end of the quarter in question and that is much too late to be able to use it for system support balancing.

In the meantime it has also become clear that Germany does not want to move at all in the direction of the Dutch approach. On the contrary. An?amendment?to the German energy law has been proposed and according to the new text it is crystal clear that BRPs must adhere to their schedule.?For example, the explanation reads: “Die Unausgeglichenheit eines Bilanzkreises an sich indiziert einen Versto? gegen die Pflicht zur ausgeglichenen Bilanzkreisführung.” Or translated: The imbalance of a balancing group in itself indicates a breach of the duty to maintain a balanced as a balancing group.”

In fact, the European Commission should intervene here and point out to Germany that such provisions are contrary to European rules. After all, Article 17 of Regulation 2017/2195?reads: “In real time, each balance responsible party shall strive to be balanced or help the power system to be balanced.” There is therefore no obligation at all for a BRP to adhere to the individual schedule as closely as possible. A BRP may as well try to help balance the system.

It ends with a curse, by making it worse

The recently published?Balancing Report?2022 extensively reports on the integration of the European balancing markets. There is a lot of attention for the European platforms Mari and Picasso. In the Netherlands TenneT must use these platforms next year for exchanging balancing energy with TSOs abroad. But despite those platforms, the actual integration will be limited, because TenneT will mainly work with the emergency power product instead of the standardized mFRR product. TenneT is forced to do this because otherwise it would be too bothered by foreign TSOs that balance their systems proactively. This is striking because the European rules do not allow pro-active balancing at all. The products FCR, FRR and possibly RR may only be used after a disturbance of the frequency.

There is also no harmonization with regard to the role and duties of the BRPs. In Germany, for example, legislation is being proposed that explicitly stipulates that BRPs must balance their own, individual position. However, that is an impermissible restriction of the freedom that BRPs have under European rules. This problem is not mentioned at all in the Balancing Report.

This problem is also not addressed at all in the ongoing discussion about adjusting the European electricity market design. And the same applies to pro-actively balancing TSOs.

One of the experts in the design and operation of balancing markets is Frank Nobel. In 2016 he obtained his PhD on this subject and the title of his?dissertation?was: “On balancing market design”. He has worked for Tennet and its predecessor Sep since 1988 and did retire this summer. His farewell was celebrated in June with a mini-symposium “The Future of Balancing Markets”, organized by CIGRE. In his presentation at the mini-symposium he showed that reactive TSOs, such as TenneT, are at least as effective as proactive TSOs, but with significantly less use of balancing energy. I asked him why many TSOs stick to pro-active balancing? He gave his personal opinion:

“System changes are always scary. That was also the case for Tennet Nederland on January 1, 2001, when the central optimization of large-scale production was abandoned and the current market design for the wholesale market was introduced. After almost a quarter of a century it still functions well, without substantial adjustments and without the need for limits on prices for imbalance or balancing energy, as elsewhere in Europe.

I cannot speak for other TSOs, but my conviction was and is that the total creativity of market parties with regard to balancing is greater than that of TSO and regulator. Simply because more people are active in the market, quite apart from the intrinsic commercial motivation of market parties. A simple and robust market design without perverse incentives for market parties and TSOs, and sufficient transport capacity is of course necessary.

On the other hand, every TSO is the first to be approached directly in case of blackouts by the public, regulators and politicians. That does not make it easier or more attractive for TSOs to let go of the feeling of having to and wanting to be in control. You can also see this in the effort it takes TSOs to no longer base imbalance pricing on the basis of the costs of the TSO, but on prices from the market.”

Frank Nobel compared this European dynamic to a soft machine. Soft because it is not a steel machine but a paper machine. But it is a machine because it cannot be stopped. Soft Machine is also a band from the sixties. Frank Nobel concluded his presentation at the symposium with the (slightly modified) words of one of the songs of this band:

It begins with a blessing,

it ends with a curse

Making 'like' easy

by making it worse.

This is my 37th?column on power market design issues. The earlier columns covered the following topics:?monitoring reliability,?EU power market reform,?EU market interventions,?review of the CACM Regulation,?market myths and price formation,?system support balancing,?Blackouts,?the importance of ACER,?Flexibility and foisonnement,?reliability and load shedding,?regulation of congestion income,?dynamic network tariffs,?energy communities,?scarcity pricing,?the Florence Forum,?active system management,?network planning & sector coupling,?off-shore assets,?intraday capacity hoarding and pricing,?interconnectors,?international comparison of market designs,?cross-border capacity calculation,?flexibility,?cross-border capacity,?electric time and unintended exchanges,?EU Network Codes,?price formation and zero marginal cost generation,?simplicity in the Clean Energy Package,?smart grids,?storage,?auto-generation,?balancing,?VoLL,?demand side response,?interconnectors?and the?Economist on market design.

Disclaimer: The views as expressed in this column do not necessarily reflect the views of Energie-Nederland

Paul Giesbertz