The power market design column – When the grid is restricting the market

On 11 June the Dutch Court ruled against the market and in favor of the Dutch system operators and Dutch regulatory authority ACM. The case was about congestion management and the most important contested topic was the application of the so-called market restrictions. A market restriction can be activated by the TSO or a DSO for a part of the grid after having performed redispatch to manage an expected congestion. The idea is that in such case the system operator doesn’t want to be surprised by changes that would again aggravate that same congestion. A market restriction means that all market participants in a certain area of the grid are not allowed to deviate from their transmission forecast in the direction that causes congestion. And the crucial aspect is that such restrictions are not compensated.

The idea of these market restrictions may seem sound. Grid congestion is becoming an ever increasing problem and congestion or redispatch costs are increasing. The possibility that a congestion can re-occur close to real-time, after redispatching was performed, is indeed annoying. Apparently, these considerations impressed the court. And it seems that the court was not convinced by the counter arguments that were presented by the market participants. Maybe the court had the impression that those market participants were only after the money.

Still, the instrument of market restriction makes no sense. It doesn’t work, it is even harmful for the operational security of the grid, it distorts the market, it is discriminatory, it places wrong incentives to system operators and market participants and thus it increases costs for consumers. And there are much better alternatives.

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What was the appeal about?

In 2023 ACM, the Dutch regulatory authority, decided to amend the Grid Code in order to improve the rules for congestion management. Several changes were made. The most important change is that system operators can no longer simply deny requests for transmission capacity (either by a new grid user of by an existing grid user that wants to increase its contracted transmission capacity) if such request would cause congestion. Dutch DSOs were often rejecting such request, even if the resulting congestion would only emerge in a limited number of hours..The main argument of the DSOs was that they did not have sufficient access to flexible capacity to perform congestion management.

The amended Grid Code made clear that such a rejection would only be allowed if the congestion, caused by facilitating the request, would be too severe. And a financial and technical limit were introduced to measure the severeness of the congestion. At the same time, the Grid Code was changed to clarify that participation in congestion management by grid users can be mandatory. These amendments were applauded by the market. And it was thus certainly not the reason for the appeal.

But the amendment of the Grid Code contained many other elements as well, and one of them was related to the market restrictions. The instrument of market restrictions existed already in the previous Grid Code, but the regulator ruled that market restrictions would never result in a financial compensation to the affected grid users. And exactly that element triggered the appeal that was issued by Energie-Nederland, the association of the energy industry.

What is wrong with the market restrictions? They do not work

There are many issues with the functioning of the market restrictions. Firstly, it is often impossible to follow the restrictions. Grid users are obliged to submit a transmission forecast. But a forecast is a forecast. If a wind or PV-plant gets new weather forecasts a few hours before delivery, it may well be that it has to produce less than originally expected. If however, that part of the grid faces a congestion caused by high offtake and little infeed, and if the system operator did already perform congestion management (e.g. by ordering a gas plant to increase generation), then the wind or PV plant would not be allowed to produce less than forecasted before. It is clear that such restriction is absurd. The plant will produce less, no matter how many restrictions the system operator will issue. A similar example can be shown for an industrial consumer that is forced to consume less than original planned.

What is wrong with the market restrictions? Bad for operational security

These examples also show that the market restriction is not helpful for operational security of the grid. The Grid Code stipulates that, in case of a market restriction, a change of the transmission forecast - in the direction that is unfavorable for the grid - will not be accepted. But this actually means that the system operator would close its eyes for reality.

What is wrong with the market restrictions? Flexibility is penalized

Another problem of the market restrictions is that flexibility is penalized. The market does not stop at the day-ahead stage. The intraday market and the balancing time frame are (increasingly) important in order to match demand and supply in the most efficient way. Let’s take the example of a 10 MW storage facility or battery. This battery will have difficulties to provide a relevant transmission forecast at the day-ahead stage. It is only looking for opportunities to charge and to feed in based on price volatility in the intraday market. The best transmission forecast would be that it will operate in a range of 10 MW to minus 10 MW. But the rules require one value. And therefore the transmission forecast could be zero MW for all hours of the next day.

However, if then the system operator issues a market restriction, the battery would suddenly no longer be allowed to charge (in case of an offtake congestion) or to produce (in case of a feed-in congestion). In either case, all business opportunities are gone down the drain. This outcome is particularly painful, as the system does need more flexible capacity in order to balance weather dependent generation.

What is wrong with the market restrictions? They are discriminatory

One problem of the market restriction instrument is that it is a generic measure. It applies to all grid users that are located in that part of the grid that is confronted with a market restriction. Let’s take an example with a grid area with feed-in congestion and two power plants. Both power plants have a maximum capacity of 200 MW and plan to produce 150 MW. Both power plants are flexible and would like to increase their generation if opportunities arise for example at the intraday market.

They participate in congestion management and have offered to reduce their capacity. The system operator expects a feed-in congestion and performs redispatch. One of the two power plants is redispatched with 50 MW to 100 MW. This means that the power plant actually buys 50 MWh (for one hour) from the system operator. Redispatch is however not just an energy transaction. The power plant is also restricted to 100 MW. It may no longer sell electricity at the intraday market and increase its generation. (There is also a 2nd action by the system operator; he instructs another plant at the other side of the congestion to increase its output with 50 MW.)

The redispatched power plant is financially compensated. The price could be negative in case of a gas fired power plant, as he has less fuel costs. In other words, the power plants pays the system operator. But, the power plant will also be compensated for being restricted. He looses the opportunity to make extra revenues in the intraday market if intraday prices go up.

Its competitor, however, that was not activated for redispatch, is confronted with the market restriction. He also can no longer increase its output, if opportunities arise, but he is not compensated.

The instrument is also discriminating between grid users in different parts of the grid. Take the example of two batteries that started operations 10 years ago, when there were no major congestions. The 1st system operator did invest in time and still has little or no congestions. The battery in that grid is never confronted with market restrictions However, the 2nd system operator was late investing in grid expansion. The 2nd battery is regularly confronted with market restrictions and is outcompeted.

What is wrong with the market restrictions? Wrong incentives

You can imagine that power plants that are located in a grid area that is likely to be congested because of high feed in, would be incentivized to submit (too) high transmission forecasts. In that case, they would not be affected by a possible announcement of a market restriction. Obviously, such behavior is not compliant with the rules. But it is also difficult to prevent. In any case, it is obvious that such behavior is neither helpful for the system operators nor for the market as a whole.

But there are also wrong incentives on the system operators. They may be triggered to executive less redispatching actions and rely more heavily on market restrictions, the latter being without the need to financially compensate market participants. In general, one can say that as system operators have the legal duty to provide transmission capacity, they should also carry the financial consequences for not being able to perform that task. If an operator is confronted with all costs related to its task, he will have the proper basis to make the best choices in managing the grid, for example in planning maintenance.

What was the root cause of the dispute?

If one sees all these downsides of the market restriction instrument and its negative impact on the market, one wonders why the regulator (but also the system operators) did not agree with the views as expressed by Energie-Nederland.

One reason could be that the role of transmission forecast was not well understood. The objective of the transmission forecasts is to help the system operators in assessing whether congestions could occur. That is fine, and indeed a plant operator knows best what its plant is going to do. At the same time, a forecast must remain a forecast. If the system operator changes the forecast into a commitment, the system operator is fooling himself and actually penalizing the grid user for helping him.

Another misunderstanding is that a system operator can solve a congestion at the day-ahead stage. If a system operator performs redispatch he does not solve the congestion. He takes measures to decrease the likelihood that congestions will actually occur. These measures are based on assumptions and expectations. But these expectations may not materialize. In reality the actual problem will turn out to be more or less severe. The system operators have to deal with these uncertainties. A difficult and challenge task, indeed, but it makes no sense to shift this task to others. And as a system operator cannot solve a congestion at the day-ahead stage, it is also unreasonable to claim that a grid user is causing the congestion to re-occur if he wants and has to deviate from its transmission forecast. It remains the same congestion, and the grid user is informing the system operator that it original assumptions were not fully correct.

What are the alternatives?

Fortunately, there are good alternatives for the market restrictions, namely performing redispatch and/or capacity restrictions closer to real time. Such measures would apply only to those grid users that can provide such congestion services close to real time, and financial compensation of these grid users can (and must) be arranged for.

At the same time, it can help to improve the quality of the transmission forecasts. One idea would be not ask a for a single value per hour, but to ask for a capacity range with probabilities.

What about the EU regulations?

The ruling of the Dutch court is also of relevance for other countries. In particular it is about the interpretation of? Article 13 of EU Regulation 2019/943. In this regulation “redispatching” is defined as follows:

• ‘redispatching’ means a measure, including curtailment, that is activated by one or more transmission system operators or distribution system operators by altering the generation, load pattern, or both, in order to change physical flows in the electricity system and relieve a physical congestion or otherwise ensure system security;

Energie-Nederland claimed that a capacity restriction (curtailment) is part of this definition and that redispatching as defined in the Regulation is not limited to an action where a system operator is ordering two grid users at both sides of the congestion to change their expected pattern. The regulator however is of the opinion that a capacity restriction, which is imposed before opening of the day-ahead market, but also a market restriction, do not fall under this definition of redispatching. And the Dutch court confirmed that view. It also means that the regulator claims that the EU Regulation does not require that a one-sided capacity restriction is financially compensated. It would be at the discretion of the Member State to decide that a capacity restriction and a market restriction shall or shall not be financially compensated.

The view of the regulator (and the court) is strongly impacted by the words “in order to change physical flows” in the definition. The regulator says that only a two-sided redispatch is changing flows and a capacity restriction and a market restriction would not. But that distinction is a flawed, as physical flows are not actually changing as soon as a two-sided redispatching action is applied. A two-sided redispatching action is meant to avoid a flow to materialize that is undesirable for the grid. In that respect, there is no fundamental difference with a capacity or market restriction. And in addition, even if one would make this distinction, the definition ends with the words “or otherwise ensure system security”. It is obvious that a capacity restriction is meant to ensure system security and should fall under the broad EU definition of redispatch. That conclusion is supported by Article 3 (Principles regarding the operation of electricity markets) of the EU Regulation. That article starts as follows:

• Member States, regulatory authorities, transmission system operators, distribution system operators, market operators and delegated operators shall ensure that electricity markets are operated in accordance with the following principles: (a) prices shall be formed on the basis of demand and supply; (b) market rules shall encourage free price formation and shall avoid actions which prevent price formation on the basis of demand and supply; …

If a system operator would be allowed to restrict the market without compensation, then it hinders free formation of prices on the basis of demand and supply.

Conclusion: do not copy but learn

The decision of the Dutch Court is a remarkable decision. Apart form the legal considerations, it seems obvious that market restrictions will not work in practice. Sooner or later, the Dutch system operators, market participants and regulator will find this out. Either the instrument remains available in the toolbox of the system operators, but will not be used, or a new change of the Grid Code will be initiated.

The topic will be relevant in many other Member States and one should not copy the Dutch approach, but learn from it. It is crucial that system operators and market participants invest time in understanding how congestion management can work without unnecessary restricting the market. It also seems necessary that such discussion takes place before a new EU Grid Code on Demand Response will be finalized.

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This is my 38th column on power market design issues. The earlier columns covered the following topics: balancing, 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.

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Paul Giesbertz

[email protected]

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