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28 Markets Combine

April 21, 2016
ENTSO-E lays out plans to integrate the world’s largest and most competitive electricity market.

Integrating and liberalizing 28 electricity markets is a task the European Union (EU) has been making progress on since the mid-1990s. In parallel, it has committed itself to the near-complete decarbonization of its power system by 2050. As Europe’s electricity backbone, the transmission system operators (TSOs) represented by the European Network of Transmission System Operators for Electricity (ENTSO-E) are at the center of this evolution.

In the countries served by the ENTSO-E members, there are five different synchronous areas that differentiate technical operations but not the integrated market. The challenge is getting greater as increased penetration of intermittent generation from renewable energy sources requires adjustments to system operations, system development and connection conditions, as well as wholesale and retail market rules. These issues are becoming particularly important as Europe’s security of energy supply is becoming the focus of attention.

Europe’s energy policy rests on three pillars: affordability, security of supply and sustainability. These pillars are interlinked. Integration of a high share of renewables affects electricity prices and the security of system operations.

Liberalized and Integrated

In principle, all consumers in the EU — household, commercial and industrial customers — can choose their electricity supplier freely and are able to switch suppliers within three weeks or less. The market is accessible to all suppliers, especially small and renewable energy producers. To achieve this, the transmission system and distribution networks provide open access to all consumers and producers. They are regulated, non-discriminatory natural monopolies; therefore, they are unbundled from suppliers and generators. Three successive EU Internal Energy Market legislative packages defined these principles in European binding laws.

To make this liberalized market work across all of Europe so customers in one country can choose to be supplied from generation in another country requires many detailed rules valid across Europe. At the heart of this market structure is the concept of a balance responsible party (BRP), which is a company that balances on an hourly or quarter-hourly basis the generation and the customer load it contractually includes, using electricity trading to cover any gaps.

The BRP may own generation and have direct customer contracts, may provide the balancing for several companies or may engage primarily in trading. At any time, it must be clear for all loads and generators to which BRP they belong. In addition, the TSOs and distribution system operators (DSOs) contract generation and demand response for system services (for example, frequency and voltage control to balance the overall system).

Because generation costs differ strongly across Europe — being very cheap in hydro-dominated areas when there is abundant rain, or in areas with much wind or solar power when there is wind or sunshine — customers and suppliers have strong incentives to trade electricity Europe-wide so they can meet the demand at the lowest cost.

The demand for traded electricity can exceed the capacity of the grid. This is why TSOs declare congested interfaces in their network and allocate the limited transmission capacity to those trades that create the highest economic value. This is handled with nondiscriminatory approaches for the different market times, forwards, day-ahead and intraday. For each market time, a consistent method for capacity allocation and congestion management is applied Europe-wide.

ENTSO-E member TSOs cover 34 countries and five synchronous areas.

Pan-European Rules

The EU’s third Internal Energy Market Package of 2009 established ENTSO-E and created a new way to legislate energy market details in Europe. ENTSO-E covers 34 countries — going beyond EU borders — representing 41 TSOs that serve 532 million people in Europe and operate 307,503 km (191,074 miles) of transmission lines. The net generation capacity on the grids account for 1,004 GW, comparable to the U.S. or Chinese grids. It represents one-fifth of the world’s total installed capacity.

The European network codes are sets of rules that become binding at the end of a process in which ENTSO-E drafts the law and consults with its stakeholders. The European Commission prioritizes the areas in which network codes need to be developed. European regulators, through the Agency for the Cooperation of Energy Regulators (ACER), define the policy framework guidelines the network codes must respect. The ENTSO-E draft is reviewed by ACER and the European Commission, and is submitted to a committee of EU member state representatives for adoption.

The eight codes are grouped into connection, operational and market codes. In December 2014, the first code was adopted when the 28 EU member states agreed on the regulation on capacity allocation and congestion management (CACM). The adoption should speed up that of the seven other codes ENTSO-E has delivered or is finalizing, all of which have already received an ACER recommendation for adoption.

In parallel, TSOs, regulators and power exchanges are working on early implementation projects of CACM to complete the integration of the European electricity market as fast as possible. A particularly relevant example is the markets of 17 European countries, representing 75% of the electricity demand, were coupled by mid-2014 in the day-ahead time frame, leading to a substantial savings for customers.

The European market integration target model.

Integration of Renewable Energy

The other fundamental axis for EU energy policy is decarbonization. The EU Energy Roadmap 2050 aims to reduce greenhouse-gas emissions by 80% to 95% below 1990 levels, implying 96% to 99% reduction within the power system. This requires massive increases in renewable energy. The European political momentum, national support schemes and significant decreases in generation costs have led to rapid increases in wind and solar generation. Non-hydro renewable energy sources (RES) account for 435 TWh, or 13%, of the total generation mix of ENTSO-E member TSOs; including hydro, RES accounts for 31%. To meet the EU targets, this should increase to 45% over the next 15 years and to 60% by 2050.

Secure integration of RES is the key determinant for European TSOs. Fluctuating RES is challenging for the operation of systems where generation needs to meet demand every second. Generation is becoming more stochastic, weather-dependent and widely dispersed. More continental-scale power trading is needed to transport temporary regional surplus wind or solar generation to other parts of Europe with less wind or sunshine at that time, or to hydro storage reservoirs in the Alps or Scandinavia.

Partly because many of the solar and wind installations are owned by customers, European customers become more active electricity market participants. The need and the opportunities for flexible demand grow as Europe’s energy-efficiency and carbon-dioxide reduction policies support the electrification of transport with electric vehicles and heating with heat pumps. As distributed generation and demand response
become larger parts of the resource mix, the cooperation between TSOs and DSOs intensifies.

The European electricity network codes.

Planning the Future Grid

The uncertainties for Europe’s electricity system and market make long-term system planning particularly difficult:

• Will photovoltaic and wind energy become cost competitive?

• Will there be a global agreement on climate protection, and with what implied price for carbon dioxide?

• How big a difference will smart metering, dynamic pricing and demand response make for household customers?

• Will markets be allowed to allocate electricity supply to the highest value continent-wide, even when — for hours, days or weeks — there is a widespread shortage as a result of gas import problems, insufficient power plant investment or prolonged lack of sunshine and wind?

Along with the network codes, ENTSO-E’s main legal mandate from 2009’s third Internal Energy Market package are the biennial Ten-Year Network Development Plans (TYNDP). These involve hundreds of TSO and stakeholder experts as well as formalized multi-criteria cost-benefit analyses, as the 2013 EU infrastructure regulation makes ENTSO-E’s TYNDP the sole basis for selection of the projects of common interest, which can leverage EU grants and benefit from swifter permitting procedures.

The TYNDP 2014 defines system development to 2030 and uses four distinct, fully quantified visions of Europe’s electricity system and energy mix as the basis for analyzing 120 projects, requiring an investment of 150 billion euros and 50,000 km (31,069 miles) of new high-voltage infrastructure. This only represents a 1.5 euro (US$1.76) increase on the end-user’s bill, compared to a reduction of electricity bulk prices by 2 euros/MWh to 5 euros/MWh ($2.35/MWh to $5.88/MWh) because of the new lines (saving roughly twice as much as they cost).

The driver for 80% of TYNDP projects is RES integration. Most policy makers agree growing RES penetration will lead to frequent needs to transmit power from regions of temporary surpluses to other regions of temporary deficits. A strong grid is a prerequisite for growing amounts of renewable energy.

Technological Challenges

Fundamental changes in generation and demand will require new technologies. Heat pumps, water heaters, air conditioners and electric car chargers need to be smart grid-ready to avoid an inefficient, expensive duplication of distribution capacities so they contribute to system balancing. Storage will be essential in the European electricity system to maintain security of supply.

The TYNDP already includes large-scale storage facilities connected at the transmission level. However, there will be a need for fast small-scale storage. To meet these technological challenges, ENTSO-E issues European research and development roadmaps. These include six clusters ranging from grid architecture, integration of power technologies, new tools for network operation, market designs, asset management and collaboration between TSOs and DSOs.

Cooperation Is Key

ENTSO-E’s products are designed to be complementary to the research and development roadmap, the TYNDP and the network codes. All of them will play a role in achieving the EU energy policy targets. Their respective time periods and technical details interlink to develop infrastructure measures to respond to the challenges identified, first researching, then specifying and constructing the infrastructure or users’ capabilities, and then operating the system and integrated European market. The result of these deliverables will be a smarter infrastructure and smarter investments — along with continuous evolution and adaptation of the technical and regulatory framework as well as evolution of the market design — leading to a reliable, competitive and sustainable energy system.

General regions for various long-term transmission system projects from 2018 through 2030.

Uncertainties and Potential

All ENTSO-E work products are subject to extensive stakeholder consultation, which takes into account their views on the challenges and solutions. The challenges and uncertainties for Europe’s electricity system are enormous, but the potential for a secure and affordable electricity supply that contributes to energy efficiency and climate protection are equally enormous. This is what European lawmakers and TSOs are convinced of and what they are committed to delivering to European consumers.

Climate protection and the transition to renewable energy drive much of this agenda, but affordability, efficiency and security of supply must not suffer. The market, customer choice, European integration and smart grid innovation can provide the solution for this apparent contradiction, and ENTSO-E’s work products aim to turn these solutions into reality.

Konstantin Staschus ([email protected]) holds a Ph.D. in operations research from Virginia Tech. After nine years at Pacific Gas & Electric, Staschus held management positions in German utility associations, including six years as managing director of VDN, the association for over more than 400 German electricity T&D system operators. In 2009, he was appointed secretary-general of the European Network of Transmission System Operators for Electricity in Brussels.

Editor’s note: This article was adapted from a paper drafted in 2015 and represents data from 2015.

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