Thomas Kieffer, COO at Joint Allocation Office
As Europe progresses toward a more sustainable and energy-secure future, the EU’s new proposals to accelerate grid interconnections are a pivotal part of the vision. These interconnections will help reduce reliance on gas imports, accelerate electrification and contribute to reaching the EU’s net zero goals. By connecting Europe’s electricity grids, surplus clean power can be shared with regions experiencing supply shortages, enhancing energy security across the continent.
However, simply expanding grid infrastructure is not enough to realise this vision. To enable Europe-wide market integration, Europe must create the right conditions that allow greater participation across the energy market. Removing barriers for energy producers, traders, and utilities of all sizes is essential to make cross-border electricity trading efficient and effective.
Renewable intermittency drives market volatility
Europe recently reached a major milestone as renewables produced more electricity than fossil fuels for the first time in the EU and the UK. Yet the accelerating transition to intermittent renewable power sources is also producing more volatile, regionally variable costs for cross-border transmission capacity.
Extreme fluctuations in renewable output drive sharp price differences between ‘bidding zones’, causing a build-up of congestion costs where demand exceeds interconnector capacity. Research also shows that renewable price volatility can spread across borders as markets become more integrated. These growing price variations and fluctuations are creating a more risky market landscape for cross-border power trading.
An unpredictable risk landscape
As renewable generation expands, variability is increasing and price distributions are widening across the continent. As energy price volatility increases, market participants increasingly need the ability to buy long-term transition capacity to help plan energy portfolios and hedge their risks.
Complex settlement processes, high transaction costs and large collateral requirements for cross-border capacity auctions also raise barriers to entry for smaller market participants. A lack of interoperable, transparent guarantees, credit limits and margin calls across different platforms create further confusion around collateral arrangements. Meanwhile, the fragmented IT systems and standards across markets further increase the cost and complexity of market integration.
Lowering the cost of mass market participation
Encouraging market participation among companies of all sizes supports greater integration of Europe’s energy resources to provide secure, sustainable power for all. This could be supported by lowering market entry barriers and reducing risks through long-term price certainty, interoperable IT systems and fair, transparent market rules.
For example, JAO provides mechanisms that allow market participants to buy cross-border transmission capacity at a set price up to a year ahead, bringing greater predictability and stability to increasingly volatile costs. Introducing different products and horizons, could further hedge long-term risks, balancing congestion costs between TSOs and market participants and de-risk cross-border capacity auctions.
Lowering cost and complexity is also vital to broaden access to Europe’s cross-border electricity markets. Collateral risks need to be recalibrated to real-world risk exposure, simplifying markets .
An open, equal and democratic marketplace
An open, equal marketplace is a prerequisite for mass participation and thus market liquidity. For example, harmonised allocation rules have now been implemented across 45 borders within a Single Allocation Platform, creating a trustworthy, transparent and fair marketplace. Ongoing regulatory engagement could ensure continued clarity around everything from allocation processes to handling of revenues and risks across timeframes.
Allocation rules and capacity calculation methodologies could also be adapted to evolving market needs in collaboration with transmission system operators, market operators, regulators, and market participants. This would ensure clarity for participants, while maintaining proportionate and prudential safeguards, creating an agile, transparent and democratic marketplace, responsive to evolving needs and drawing on collective input.
Democratising electricity markets
Europe is rapidly building the infrastructure for interconnected electricity grids. Yet integrating Europe’s energy resources ultimately depends on allowing all participants and companies to participate in cross-border electricity markets.
The EU is already making substantial progress with initiatives such as the Electricity Market Design Reform (EMDR) that aim to widen market participation and boost liquidity. Work is also underway on a new user-friendly, flexible cross-border transmission capacity marketplace for Europe designed for seamless scalability and third-party interoperability, further enabling mass market participation.
Yet achieving a truly integrated European energy market depends on broadening access to the market, ensuring everything from credit models and financial instruments to capacity-allocation methodologies are designed to enable mass participation.
