Bidding Zones analysis – group project

Below my group project on Bidding zones for the EU Electricity ‎Network Codes course.

Do you think that the changes made by the Clean Energy Package to the bidding zone review procedure will lead to different results or create more challenges?

The newly-adopted Electricity Regulation (ER), article 14.1, states that “[…] Bidding zone borders shall be based on long-term, structural congestions in the transmission network. Bidding zones shall not contain such structural congestions unless they have no impact on neighbouring bidding zones […]”. EU TSOs and NRAs are mandated by the Capacity Allocation and Congestion Management Guideline (CACM GL) and ER to assess on a regular basis the existing bidding zones (BZ) configuration, and possibly initiate its review and reconfiguration.

A BZ review was voluntary under the CACM GL (article 32.1), but became compulsory under the ER (article 14.3). Under CACM GL, the review should include scenarios that take into account “likely” infrastructure developments within the following ten years (article 33.1), while the methodology required by the ER should be based on structural congestions that were not expected to be overcome (e.g. due to grid expansion) within three years (article 14.5). The ER obliged the TSOs to present a BZ methodology by October 2019 (article 14.5), and the all TSOs proposal was submitted on 7 October 2019. It includes one annex per region presenting the alternative BZ configurations that will be compared to the status-quo during the review.

According to the ER, the relevant regulatory authorities shall take a unanimous decision on the TSOs proposal by January 2020. If unanimity is not reached, ACER shall decide on the methodology and alternative BZ configurations, by April 2020 latest. Once the methodology has been decided, the TSOs of each region have one year to submit a proposal to amend or maintain the bidding zone configuration, based on the results of the review. The proposal comes on the table of the concerned NRAs for approval. If unanimity is not reached, the European Commission has the final say on maintaining or amending the current BZ configuration.

The puzzle is whether the TSOs’ methodology proposal is able to identify structural congestions. Via art. 16(8) ER, it can be interpreted that a Member State (MS) suffers from structural congestion if it doesn’t comply with the 70% minRAM clause. If this is the case, the MS has two options: establish a (multi)national action plan or amend its BZ. There are two BZ configuration principles. Firstly, the BZ should be constructed independent of political borders, but built around structural congestions. Secondly, the size of a BZ should be a fine balance between structural congestions and market liquidity and competitiveness.

The main opportunities and challenges arising from the changes introduced by the CEP are summarized below:

Opportunities:

  • The 70% minRAM clause of article 16(8) offers an opportunity for a willing TSO and a MS to change the configuration of a BZ.
  • Splitting BZs may be politically sensitive at the national level, so putting ACER and the European Commission in charge of final decisions may break local interests and put the interest of the EU market as a whole ahead of national interests.
  • A process for amending BZ is now relatively clearly defined, allowing MS the possibility to create and follow action plans. The clarification was important, as the first BZ review was not successful. Action plans offer MS more time, but multiple opportunities have been built into the procedure to revert from an action plan to deciding on a BZ reconfiguration.

Challenges:

  • At the center of the BZ review process lies the identification of a structural congestion. Thus, this should be the first step of the process. However, TSOs must already propose alternative BZ configurations, even if no methodology has been developed to identify structural congestions. In this context, it is not surprising that in the annex many TSOs argue that they don’t propose a BZ alternative because their country doesn’t suffer from structural congestion (see table in annex at the end of this paper). In this context, the whole process already stops at the first step.
  • The attempt to define structural congestion based on the 70% minRAM clause has also severe limitations. Differences in interpretation can be observed (not only across MS but also different stakeholders) and it is in the NRAs’ responsibility to check for compliance. Consequently, it doesn’t appear as an appropriate tool to pressure MS suffering from structural congestion to amend their BZ.
  • Additionally, it solely gives arguments for splits and not for mergers of BZs which could be beneficial from a market liquidity and competitiveness perspective. This is obvious from reading the annexes of the all TSOs proposal, where almost only arguments against or in favor of splits are listed.
  • As stated above, if the NRAs don’t come to an agreement concerning which BZ configurations should be evaluated, ACER will take the final decision. In relation with the complexity of the situation, in particular in the central EU region, questions can be raised concerning the competences, e.g. in simulation, needed for taking such decision. Any decision not well argued or missing consistency could be raised in court.

Conclusions

The BZ reconfiguration is a necessary step towards solving several present and future congestions, in addition to requesting TSOs to offer more capacity to the market. The ER, part of the Clean Energy Package, was a natural opportunity to develop such a plan. A rather clear and agreed methodology, follow-up steps and backup solutions are all foreseen in the ER.

However, there are a number of drawbacks, such as the bias towards splitting BZ in the BZ reconfiguration, instead of merging them as well. The procedure for identifying structural congestions is possibly flawed, as TSOs must propose alternative BZ configurations in parallel with developing a methodology that must be approved by regulators. In addition, connecting BZ configurations to the 70% clause with all of its limitations (diverse interpretations, in/sufficient data availability, etc.) and action plans does not contribute to its implementation, but it is watering down the process. Furthermore, leaving European institutions as ultimate decision-makers, might look as a solution but it remains to be seen if it will be fit for purpose due to the dominantly political nature of the process.

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