The power market design column -The man who saved the German power grid, but who puts system support balancing in a suspicious light

On March 5 this year, the?renowned?German weekly Der Spiegel published an?article?that every power market design aficionado should be aware of:?Der Mann, der Deutschlands Stromnetz rettete. The Man Who Saved Germany's Electricity Grid. The story is about major imbalances caused by market participants who deliberately did not close open positions on the market because they could expect that settlement against the imbalance price would be much cheaper. In short, speculation that put security of supply at risk. Der Spiegel made a juicy story out of it. A young engineer who managed to prevent a blackout and exposed irresponsible traders. Two companies have now been fined for market manipulation and the European regulator ACER also seems pleased with these fines. But is the story correct? What about the consequences for the EU power market? And why was the secret Dutch company X not fined by ACM, the Dutch regulator?

(This article is a translated and edited version of an article that was published earlier at?Energeia.)

The article in Der Spiegel describes how production and consumption in Germany became unbalanced on June 12, 2019. There was no clear reason and the gap between production and consumption remained large for several hours. By noon, the difference had risen to no less than 7463 MW. The normal amount of operating reserve of 3000 MW that was available to the German TSOs was therefore by no means sufficient.?

Der Spiegel introduces a young engineer who works at the control centre of Amprion, one of the four German TSOs. According to Der Spiegel, a total breakdown of the electricity supply system could be prevented thanks to the extraordinary effort of this young engineer in particular. He notes that Germany is still in an imbalance and that all reserves have already been deployed. He doesn’t hesitate, arranges support from neighboring countries and buys extra electricity on the intraday market. These transactions are anonymous and the price is high. Amprion pays over €150 per MWh for the first transactions, but the young hero perseveres and eventually buys power for a price of up to €1300 per MWh. Anything to save electricity supply because a blackout costs billions.

In the end, the system suddenly balances itself. But just as it is unclear what caused the hours-long imbalance, it is also unclear why the balance is being restored. However, the young engineer has a suspicion. In short, the blame is placed on the market, and in particular on those market parties that have a lot of wind production in their portfolio. Germany had to deal with a low-pressure area that lingered longer than expected, causing production from wind turbines to fall short of expectations. It was suspected that on June 12, these market participants preferred not to cover their deficit by buying at high prices on the market. They knew that their eventual imbalance would be settled with their TSO at a more favorable price. In short, speculation that jeopardized security of supply. And a nice story for Der Spiegel.

It may be clear that that day in June 2019 was not without consequences. The four TSOs published?a?report?and the regulator, Bundesnetzagentur, launched an investigation. Last year, Bundesnetzagentur?concluded?that five market parties had failed to fulfill their obligations. This concerns the obligations that the Balancing Responsible Parties (BRPs) have towards their TSO. The decision had no direct consequences for these five parties, but Statkraft, as the only one of the five, lodged a?complaint?with the court against the decision of Bundesnetzagentur. Statkraft is convinced that it has always balanced its portfolio in accordance with German and European rules. A ruling in this case has not yet been published.

Market manipulation is punishable?

At the same time, Bundesnetzagentur continued its investigation into whether the five might have engaged in market manipulation. Early October, the first?results?of that research came out. Energi Danmark and Optimax Energy were fined Euro 200,000 and Euro 175,000 respectively. Bundesnetzagentur argues that these parties had entered into transactions on the intraday market shortly before delivery without the intention of actually supplying that power. Bundesnetzagentur further argues that this has manipulated the market and thus constitutes a violation of REMIT (the European Regulation on the integrity and transparency of the wholesale energy market). The two companies can still appeal the fine decision to the court in Düsseldorf. The fines are not very high and so it could well be that the two decide to pay the fine. Still, that would be a pitty, because there is more at stake.?

Passive participation: crown jewel of Dutch market design

An important element of the design of the Dutch electricity market is the so-called?passief meeregelen?or passive participation. This means that balancing is not only a task of TenneT (the Dutch TSO), but that BRPs may deviate from their schedule with the aim of supporting the total system balance. The term “passive participation” is a bit strangely chosen. After all, the BRPs who do this are not passive at all, but rather active. It means that these parties do not actively offer their flexible capacity to TenneT, but use it themselves to support the system. This principle is also explained in a?position paper?from ACM, the Dutch regulator. ACM explains that the imbalance price is chosen in such a way that BRPs are rewarded if their imbalance reduces the system balance in that quarter of an hour. The way in which the imbalance price is determined makes it possible for BRPs that have a deficit and BRPs that have a surplus to “conclude implicit trade transactions via the TSO at the imbalance price”, according to ACM.

The Dutch term “passive participation” is known in Belgium as “reactive balancing”.??But for the remainder of this article I will use the term “system support balancing”.?

The principle of?system support balancing?has a long history in the Netherlands. As early as 2004, TenneT and DTe (the predecessor of ACM) concluded in a?report?that system support balancing could be useful, but that all parties must then be well informed about the current system balance. This led to TenneT publishing the real-time delta signal. The principle of system support balancing was also included in European rules, namely in the EU?Regulation?on balancing. Undoubtedly employees of ACM and TenneT have played an important role here. Article 17 of this regulation describes the role of the BRPs: “each balance responsible party shall strive to be balanced or help the power system to be balanced”.?

System support balancing under fire by Bundesnetzagentur’s fine decision??

The decision of Bundesnetzagentur to fine market parties that entered into transactions shortly before delivery, without the intention to actually deliver those volumes, seems logical at first sight. But exactly the same happens with system support balancing: a BRP may decide not to close open positions and may therefore also enter into transactions without the intention to actually deliver. REMIT is a European Regulation that is applied in the single European power market. The way in which Bundesnetzagentur interprets and applies REMIT can therefore essentially not deviate from the way in which other EU regulators does this. The question is therefore whether Bundesnetzagentur's decision to impose a fine means that system support balancing is no longer allowed.

System support balancing is all about the correct determination of the imbalance price. If the imbalance price is correctly determined, speculating on a more favorable imbalance price goes hand in hand with supporting the system. Correct determination of the imbalance price gives BRPs the right incentives.?

In June 2019, those incentives in Germany were anything but correct. The basis for determining the imbalance price was the average price - instead of the marginal price - of the activated bids for balancing energy. In addition, the German imbalance market was not yet open to free bids, which means that only parties were allowed to offer balancing energy that had been pre-selected by the TSOs to keep balancing capacity available. Finally, the selection mechanism for balancing capacity was set up in such a way that the parties had an incentive to offer the balancing energy relatively cheaply. It is somewhat complex, but the result on June 12 in 2019 was simple: market participants had to deal with very high prices on the intraday market and were sure that settlement at the imbalance price would be much cheaper.?

In the meantime, the German rules for the imbalance price have been adjusted and the perverse incentives have practically disappeared. In addition, the German TSOs proceeded to the?publication?of the so-called?NRV Balance Ampel?last month. A kind of traffic light, in which green means that the system is well balanced, red means that the system imbalance is greater than 80% of the operating reserve and yellow means that the system imbalance is between 60 and 80% of the operating reserve. As early as 2004, TenneT in the Netherlands started publishing the system imbalance in real time. 17 years later, the German TSOs follow up with the publication of a traffic light, which gives a rough indication of the state of the system imbalance.?

At the same time, these adjustments in Germany were made half-heartedly and reluctantly. It is always pointed out that market parties remain obliged to adhere to their own schedule. There is no such thing as an invitation to support the system. In fact, it is said in Germany that the European rules allow two different approaches: either BRPs must balance their own position or BRPs must help balance the system, with Germany opting for the first option. But Germany does not have this choice at all. The aforementioned Article 17 of the Regulation on Balancing is clear. A BRP is good if it strives to help balance the system. Point.?

The question of whether system support balancing in the Netherlands is endangered by the decision of the Bundesnetzagentur is not easy to answer. Bundesnetzagentur emphasizes that system stability must not be compromised. This is normally not the case with system support balancing. Normally, because 100% certainty does not exist. The imbalance price is always determined ex post. So knowingly entering into open positions remains a form of speculation. Speculation, which, if the imbalance price is correctly determined, goes hand in hand with supporting the system balance. But it will never always turn out that way. This is not a problem for the European Regulation. Article 17, after all, speaks of “striving”. Helping to balance the system is therefore a best efforts obligation and not a result obligation. But at the same time, it is possible that the Bundesnetzagentur's interpretation of REMIT is much stricter and includes a ban on any kind of trade with no intention of actually delivering. The latter would mean that system support balancing is made impossible, because BRPs can then be directly accused of market manipulation.?

Hopefully it doesn't get that far. The advantages of system support balancing are well known in the Netherlands. As a result, TenneT's residual task of balancing the system is eased, so that TenneT also has to contract less balancing capacity. Recent?scientific work?in Germany confirms these insights. It is crucial that Germany will see the imbalance price as the basis for efficient balancing by the market, with BRPs also being allowed to take positions in real-time to balance supply and demand. And that doesn't just apply to Germany. The discussion has yet to be conducted in many EU Member States and it would be ideal if ACER took the lead in this.

What about Company X?

On September 3, ACM took a remarkable?decision. It decided not to fine a company whose name has not been disclosed. So, company X. In this case, it is gas and not electricity. But just like in the German case against Energi Danmark and Optimax, it is about an investigation into market manipulation under REMIT. And again, the point is that a company had bought gas without withdrawing it, at least not directly. The case is from July 2018 and it concerns gas that was purchased from GTS (the Dutch gas TSO) in the form of TTF Next-Hour products. At that time, Company X's position was long and the system as a whole was also in surplus. So, it wasn’t that X's open position contributed to reducing the imbalance of the system, on the contrary, company X has a significant share in that system imbalance. GTS wants to sell to improve the system balance. X buys that gas from GTS but does not withdraw it within the hour in question. Thus, the imbalance of X continues to increase, and the total imbalance of the system does not decrease. Like the young engineer from Amprion, GTS continues to trade. GTS sells TTF Next Hour products and receives ever lower prices. It is again X who buys from GTS and apparently this game repeats itself several times.?

ACM judges that X's behavior is contrary to the behavior that may be expected. ACM also writes that this behavior can be regarded as prohibited market manipulation, because by allowing the surplus to accumulate, the price fell. Nevertheless, ACM decides not to impose a fine. The explanation is brief, but it is clear that ACM has set the bar very high for itself. ACM has not been able to establish with certainty that company X has brought or kept the price at an artificially low level.?

Bundesnetzagentur did not fuss about whether the price was kept at an artificial level by Energi Danmark and Optimax. The simple fact that a BRP sold electricity without supplying it was enough. Undoubtedly, the fact that Germany had a very large deficit at that time weighed heavily. However, the question is whether this is relevant for REMIT. Manipulating prices is punishable, regardless of whether there is a threat to the security of supply at that time. Should Energi Danmark or Optimax consider appealing against Bundesnetzagentur's fine decision, they should consider engaging the same lawyer who assisted Company X.

And what about the TSOs??

In the discussion about balancing and the problems that arose in Germany in June 2019, it is striking that only the market parties were under fire. No one seems to question whether the TSOs have handled the situation correctly.?

The first question is whether the TSOs had to, or even, were allowed to take additional measures to maintain the balance after the full operating reserve had already been deployed. It seems obvious that this question must be answered in the affirmative. Yet, it isn’t that obvious. EU rules prescribe that in normal circumstances a TSO may only balance by deploying operating reserves. The idea is that the BRPs also do their job. Actions from the market then lead to the deployed reserve being released again. TSOs are only allowed to take extra measures if there is a situation other than the normal operating state. The question is whether there was an emergency state on that 12th of June. After all, the grid frequency fluctuated nicely around 50 Hertz that day. Nothing special. This also means that the full primary reserve (or Frequency Containment Reserve) was always available. So, if some major production resources had suddenly tripped on that 12th June, the frequency would not have dropped and no automatic load shedding would have taken place. It could of course be the case that on that 12th June there were also excessively high transport flows, for example on the interconnectors. But the aforementioned report of the four TSOs does not mention this. In addition, the TSOs could have tackled those overloads by means of redispatch.?

Of course there was a lot going on, but the report of the TSOs does not make it clear that there was actually a problem with security of supply. What is certain is that Germany leaned on the rest of Europe for several hours. Annoying, and the surplus of electricity that was imported must be financially settled with the other TSOs in Europe, but that is not necessarily an acute problem.?

Secondly, the question is whether the right additional measures have been taken. There are doubts about buying electricity on the intraday market, in particular. The young engineer from Der Spiegel's story was annoyed that the transactions he concluded did not seem to be delivered. But likewise the question can be asked how Amprion could be sure that the electricity would also be taken. An intraday transaction is an administrative act. If need arises, it is better to take measures that have a direct physical impact, such as an instruction to change production. As far as is known, TenneT in the Netherlands, but also Elia in Belgium, will never enter into transactions on the intraday market to balance the system.?

A third possible point of criticism is the limited transparency applied by the German TSOs. The figure below from the TSO's report shows which measures were taken on June 12, and on two other - slightly less critical - days in June.

Green is the deployment of the operating reserve and blue presents the other measures such as buying electricity on the intraday market. On those days themselves, nothing was published in real-time about these actions. Those market parties that provided reserves to the TSOs were able to infer something about the instructions they received for the use of their reserves. At some point, the use of reserve (green) decreased. Because nothing further was published about other measures (blue), these parties could have concluded that the imbalance in the system was relaxing again. That would have been a wrong conclusion.?

Finally, it remains uncertain what the imbalance in the German system really was. The above figure with the?Systembilanzungleichgewicht?seems clear. On June 12, just before noon, almost 8,000 MW was reached. But the report explains that this parameter is the sum of all the measures taken. One of those measures related to trade transactions, so these are agreed volumes but not measured volumes. So the more Amprion bought, the higher the reported system imbalance. That's strange. The system imbalance can be easily determined by measuring the exchange on all interconnectors and the frequency. That measured imbalance does not change if Amprion buys more or less.?

These critical questions about the actions of the TSOs can be viewed separately from the investigation into possible market manipulation by BRPs. But even then, it is important to also describe the role of the TSOs. The criteria defining when to transition from normal operating state to alarm or emergency state deserve attention. But in particular the question whether TSOs are allowed to buy on the intraday market in special states must be answered.?

How would a “June 12 situation” in the Netherlands have looked like?

It seems certain that a situation like the one that happened in Germany in June 2019 would have caused far fewer problems in the Netherlands. It is of course also quite possible that, for example due to unexpected lower production from wind farms, TenneT will have to pull out all the stops to keep the Dutch zone in balance. BRPs would immediately see that there is a deficit, and then also know that if they themselves have a deficit, they are likely to be confronted with high imbalance prices. Leaning on the system is then asking for a high financial bill. As far as possible, these parties will try to cover their shortfalls on the intraday market. When the delivery quarter has arrived, the intraday market is closed. Parties with a deficit, without own reserve, can’t do nothing more then. But BRPs, or their customers, who do have some in reserve will simply ramp up additional production capacity or reduce demand. They deliberately go long and they count on being paid an attractive imbalance price for that imbalance. At the same time, they support the system balance. Finally, TenneT may issue an additional warning to inform BRPs that there is a major system imbalance.?

The German approach can also work in theory, provided each BRP is able to manage its own balance. That is not very efficient. In addition, it is a mission impossible for many BRPs to properly determine what their own individual imbalance actually is. A portfolio can easily consist of hundreds of small production assets, not to mention the imbalance of a supplier to many thousands of consumers. To determine the system balance, it is sufficient to measure the frequency and the exchange on all interconnectors. That's a lot easier. Finally, of course, something can also go wrong with system support balancing. There is no infallible system. But the Dutch approach scores better than the German approach, both in terms of costs and security of supply.

In conclusion: a European definition of balancing is also necessary for an unambiguous application of REMIT?

The situation of June 12, 2019 in Germany was?gefundenes Fressen?for the media. The article in Der Spiegel was not the only article that talked about how speculation by market participants would have endangered electricity supply. The German TSOs themselves have not mentioned a possible blackout, but have also made little or no effort to nuance the exaggerated stories in the media.?

The story in Germany is not over yet. The outcome in the case of Statkraft versus Bundesnetzagentur may lead to new developments. Energi Danmark and Optimax Energy could also appeal. Yet the chances of a successful appeal seem small. They have two options. First, they could try to show that their speculation was also intended to support the German system balance. That seems like a difficult argument. Second, they could try to show that their speculation has not raised the price to an artificial level. But that too is like sailing against a heavy wind.?

The discussion about what constitutes an artificial price is interesting. But more importantly, there is a discussion about what balancing in the European electricity market should look like. What is the role of the BRPs? Is system support balancing allowed in all EU Member States? But also, what exactly is the role of the TSOs and what does the interaction look like between measures by TSOs and actions by BRPs? The European energy market requires an unambiguous interpretation and application of REMIT. This is only possible if there is also an unambiguous definition of balancing. It would be good if ACER takes up that challenge.

This is my 31st column on power market design issues. The earlier columns covered the following topics:?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

[email protected]