Is Europe’s energy market design fit for purpose?


Spoiler alert: yes, but with caveats, according to participants in Energy Markets Week 2021’s opening panel.

Although the target model, as set out in the 3rd Energy Package, was developed in a different earlier time, before for example, the emergence of the 2050 climate targets and the rapid transition to renewables, it is not yet fully implemented and remains a work in progress.

“We are continuously strengthening and updating the target model to achieve the decarbonisation objective,” said Mathieu Fransen, Policy Officer at the European Union Agency for the Cooperation of Energy Regulators (ACER), in the panel discussion.

As examples of ongoing developments, he cited improvements to the day ahead and intra-day markets, integration of balancing markets and review and redefinition of bidding zones “to better align the market with physics”.

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“Looking ahead we also are working on barriers to efficient price formation and barriers to new entrants and solutions,” he said.

He added that while this is a new task, it should allow ACER to challenge national obstacles and to promote best practices across the region.

The market design is key to the delivery of the energy transition and Europe’s is challenging in encompassing multiple countries with different energy mixes and conditions.

Hélène Robaye, Head of Regulation & Market Design at Engie, cited specific challenges around the forthcoming 70% capacity constraint for cross-zonal flows and the lack of clear guidelines for the procurement of flexibility services by system operators.

Christian Baer, Secretary General of the European energy exchange association Europex, added the 70% renewable energy target by 2030 as the “elephant in the room”.

“We need to continue implementing and then further developing the model but we also need to continue modernising and building more grids, otherwise we won’t reach those other targets,” said Baer.

New technologies and services

Looking ahead to how the market design can facilitate the entrance of new players and new technologies and services, Robaye highlighted the need for flexibility procurement by TSOs and DSOs via transparent public tendering and ensuring that balancing market procurements are market-based.

“For example, we welcome that France is switching the secondary reserve to a market-based process in place of the current obligation. Ensuring that procurements are market-based with a pricing mechanism is important to attract investment.”

Baer noted the further developments of the markets, particularly the intra-day market, but also the longer term storage markets, which is requiring new technologies for hydrogen, for example.

Watch on demand: Is the current market design fit for purpose?

“It is important to have a level playing field among the different carriers in terms of taxation and tariffs to ensure that the least cost solution can find its way to the market and ultimately the market will decide the most cost efficient way to integrate the system.”

Fransen felt that the existing market design should be able to accommodate these technologies are as it is not designed around a specific supply or demand.

“We think these developments should be able to be covered in the existing market design and there may be a case for lowering the level in creating or harmonising European rules but I think the debate is still open on the need for new or changed network codes.”

Role of DSOs

With the current framework primarily targetting the TSOs, the question arises on the issue of greater DSO involvement in the market and whether more detailed rules are needed for the DSOs.

Congestion in the DSO grid is very different from that of the TSOs as it is mainly around getting the cables in the ground and expanding the network, Fransen said.

“Challenges are access to the market and having connections and being able to use it with equal rights. I think more is needed on grid expansion than on procuring services to prevent those investments.”

Baer adds an important factor as flexibility markets and agrees on the need over the next years for significant grid expansion to support the growth of electric vehicles.

“There is quite some work ahead for the DSOs as they are generally a bit behind.”

Robaye also adds the need for the development of services and openness in sharing experiences from pilots.

“We see some pilots and would like to see these in all countries and openness in sharing experiences and reflections around remunerations and incentives for system operation.”

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