The EU Green Deal envisions more integrated, interconnected and digitalised grids to enable large-scale renewable integration and reduce price volatility. A panel of industry experts recently highlighted the need for recognition of electricity networks as critical infrastructure and increased financing of new grid infrastructure to accelerate grid integration.
Yet infrastructure funding is not the only challenge. Achieving the EU Green Deal vision will also involve market design shifts to help integrate diverse markets and bring stability to a more volatile renewable energy landscape. This will entail everything from more synchronised, scalable IT systems and integrated price formation to new market methodologies and harmonised rules, processes and products built around widening market participation.
Here is an overview of some of the changes that Transmission System Operators (TSOs) and electricity market participants will need to help implement.
1. Integrating short-and long-term markets across borders
The growth of more sustainable but weather-dependent generation creates a need for more flexible electricity markets to match increasingly fluctuating supply. Strengthening day-ahead and intraday markets, where cross-border grid capacity is auctioned a day ahead or within the same day, would help continuously match volatile supply with demand across borders. For example, strengthening the existing intraday market model would accelerate integration of renewable energy into Europe’s grids, by allowing energy generators and traders to adjust their market positions close to real-time renewable fluctuations.
Yet these evolutions will require deeper integration of intraday and day-ahead markets across borders to help Europe adapt to a more volatile energy landscape. This would help market participants optimise portfolios in real-time and manage short-term risks.
Integrated intraday and day-ahead markets should also be complemented by more integrated forward markets that enable transmission capacity rights to be traded across longer time frames to reduce long-term risks. For example, today JAO sells transmission capacity up to a year ahead, allowing market participants to plan energy portfolios and hedge their risks. Yet ACER highlights the need for hedging opportunities beyond a two year time frame to spur more long-term energy investment.
2. New methodologies for integrated markets
Despite growing renewable penetration, ACER consistently reports that slow implementation of methodologies for forward and intraday markets is still impeding integration. Day-ahead and intraday methodologies are currently delayed in several cases.
For example, ACER case studies have shown that the rollout of flow-based capacity allocation, where cross-border capacity is allocated according to the physical constraints of the network, could significantly improve market efficiency. Yet full implementation of intraday flow-based allocation across Europe remains delayed. Similarly, new methodologies for forward markets would also help market participants hedge against long-term risks, unlocking more renewable energy investment.
Accelerating implementation of these market methodologies would widen market participation and enable more efficient allocation of capacity across borders and timescales.
3. Interoperable IT systems that scale with market growth
The European Commission explicitly links the Green Deal to digitalised energy markets and TSO’s IT systems will need to be adapted to rapidly growing trading volumes across longer and shorter time frames. As market integration accelerates, IT systems will need to be able to handle growing transactions and more frequent recalculations. Operations and IT systems will also need to be harmonised across Europe to enable cross-border coordination.
For example, JAO is creating a fast, flexible scalable auction platform, that will adapt to market shifts and scale with growing demand from more transactions, auction products and market borders. This will help relieve the operational burdens on TSOs. Further changes will be needed to create more scalable, synchronised operations and IT systems across Europe.
4. Streamlining and standardising rules, products and processes
A truly integrated European electricity market must also be open to all. Lowering barriers to entry for energy generators, traders and utilities of all sizes would accelerate the integration of Europe’s energy resources to offer secure, sustainable power for Europe.
TSOs can help by harmonising processes and creating more consistent market access rules and products across borders, lowering entry costs for participants. For example, more standardised cross-border collateral requirements would allow market participants in all countries to plan cash and credit efficiently. Recalibrating collateral requirements to real-world risk exposure would also help smaller participants to enter the market.
Similarly, simplifying settlements would further lower barriers to entry for smaller firms. For example, JAO is streamlining transactions by enabling payments offsetting within Capacity Calculation Regions for Congestion Income Distribution, the distribution of extra revenues arising from grid constraints. This means that the amount of Congestion Income Distribution that is payable is offset against the amount received, reducing the size and frequency of payments.
Looking ahead
The media has focused heavily on the investment in new grid infrastructure needed to create interconnected grids. Yet achieving the EU Green Deal vision of an integrated market will also require a similarly major effort to create more interconnected markets.
Interoperable, scalable IT systems, more integrated markets, new market methodologies and harmonised products, processes and rules will be fundamental to realising this ambition. This could help create a truly integrated, open and equal European energy market that encourages participation from companies of all sizes.