What has been happening on the wholesale markets in 2023?

A mix of post-energy-crisis recovery and funky market price events to learn from.

Overall, the markets have been slowly but surely recovering from the shocks of the energy crisis.

Already beginning of 2023, the gas market relaxed thanks to lower (especially industrial) demand, milder winter and healthy storage levels across the EU. This also eased the situation on the EU ETS market. Higher stability contributed to the downward trend for electricity market prices,?which was further strengthened by high solar and wind generation.

Electricity prices in Core region ranged between 0€/MWh and 200€/MWh 95% of the time. It is quite striking to see the difference between the clearing price distribution in 2023 vs. 2022 (thanks Iacopo Bertelli for excellent analysis, more in his post on market coupling results in Core here):?

What is also quite interesting is that 2 countries in Core were the best indicators of the Core mean price, Austria and Czechia:

Comparing to 2021, even though the price levels overall were much closer to pre-crisis levels, price volatility has been increasing – in particular during fall, while summer was marked by a number of extreme negative price events. In the Netherlands, in 5 hours of the year, negative prices went all the way down to -200€/MWh and lower.?

Speaking on negative prices...

?negative-price trend continued?across CWE in 2023. The major increase was witnessed in NL where they were registered during 316 hours (more than 4-fold increase as compared to 2021!). Prices of -500€/MWh and lower were reached in Austria, Hungary, Germany, Croatia, the Netherlands and Slovenia.?

Interestingly, now the trend is spreading to the Nordics. In August, the storm across the Nordics sent wind generation through the roof and the electricity prices into the negative area for a whole day, according to Montel.?The trend continued well into fall months with the highest number of negative price instances registered in Finland.

Forward markets back in the limelight

A noteworthy consequence of the energy crisis was also that forward electricity markets moved into the limelight. Back in the day (funny to write this), forward markets were a less significant part of the market actors‘ hedging strategies thanks to fairly low spreads between day-ahead and forward markets and fairly stable day-ahead market prices. This was turned up on its head during the crisis: the market players faced a double whammy of extreme DA prices and low forward-market liquidity. Against this backdrop, in February 2023, ACER made a number of proposals to improve electricity forward markets struggling from low liquidity beyond 1 year and beyond Germany and a high degree of fragmentation.?

As a result, ACER proposed to amend the Regulation of Forward Capacity Allocation (FCA) – something to watch out for in 2024.?

?In terms of available capacity for cross-border trade...

According to the latest analysis by ACER, the progress has been rather slow: only a handful of Member States achieved high shares of hours with XB exchanges above 70%. At the same time, as the graph below shows, that especially in DE, NL and AT the exchanges were below 50% most of all hours, which is attributed to constraints on CNECs (critical network elements with contingency) and frequent congestion events. ACER cites both “expedient grid reinforcement” and an “ambitious bidding zone review” to address situations in the areas affected by congestion and where the target would not be achieved in a cost-effective manner otherwise.

As a reminder, the 70% target will become mandatory in all Member States by 2026.

As I mentioned above, there were a number of funky price events in 2023. Here are 3 events that I found most memorable:

1)???? “Fat-finger error” in Finland: On November 23rd, Kinect Energy accidentally sold over 5GWh it didn’t have on the day-ahead market sending the price down to -500EUR/MWh for 10 hours on November 24th. The mistake was apparently caused by the faulty conversion from kWh to MWh.

What were the consequences?

In monetary terms, it lost the company about 50 million euros while Swedish and Finnish producers and sales companies lost about 100 million in total, according to Montel. On top of that, the same source cites major effects that that market result would have on the calculation of subsidies for that period as it greatly skews the monthly and quarterly averages.

In other terms, this event both caused a wave of criticism against Nordpool that did not prevent the bid from going through the auction or did not do a rerun. In fact, ?second auctions are not implemented in the Nordics, although it is also not entirely clear whether a second auction would have remedied the situation in time (see an interesting exchange between Priyanka Shinde and Nico Schoutteet ). The question is whether other, ex ante measures could be undertaken to prevent such events in the future.?

2)????? Dutch FCR market price of 77,777 EUR/MW: On November 2nd, the FCR market has witnessed a previously unheard-of marginal price of exactly 77,777 EUR/MW in the 4-hour block between 16:00 and 20:00. The affected TSO was TenneT Netherlands, whose market got decoupled from the FCR Cooperation. Notably, the cross-border marginal price in the same 4-hour block was about 18 EUR/MW whereas the second most expensive bid in the local Dutch market was slightly over 32 EUR/MW.

The consequences? The event prompted a lot of speculation of whether we are dealing with another “fat-finger” mistake (see above) or an instance of market manipulation and caught attention of the Dutch regulator ACM. I still remember similar events happening on the German and Spanish balancing markets a few years ago. It also opened up a discussion on how such extreme-price events can be averted in the future.

3)????? Austrian imbalance price of almost 9000 euro/MWh: On November 27th, the imbalance price reached over 9k during one MTU while the local aFRR balancing energy price scratching the 10,000 euro/MWh mark. The price spike was apparently caused by limited XB capacity between DE and AT and the necessity to award the most expensive local AT bids.

Such events won’t get less uncommon in the future. I think Markus Riegler from APG summarized it well, “the situation in question once again shows, how important the allocation of sufficient cross-zonal-capacity towards the balancing process is and will be in the future. Especially as allocation processes for day-ahead and intraday markets grow more sophisticated an efficient - and therefore leave less and less "leftover-capacity" for balancing markets.”

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This makes me think of methodology for the allocation of cross-border capacity for balancing capacity markets. In July, 2023, ACER reached several decisions linked to this subject. ?I will dwell upon it in the next installment of this Year in Review, where I’ll summarize the main developments on other markets.

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