Focus paper – Market Design Vision for 2030

Introduction

ENTSO-E is fully committed to complete the implementation of the 3^rd package and of the newly entered into force Clean Energy Package (CEP). We believe the CEP will accelerate the integration of European markets and further increase regional cooperation of TSOs, thereby bringing additional benefits to European consumers. Exposing more RES to wholesale price signals and facilitating participation of consumers and storage resources to all electricity markets will further improve liquidity and market efficiency.

A successful implementation of CEP requires strong contribution from TSOs, the most challenging task being to deliver increasing transmission capacity for allowing market parties to trade within and across bidding zones, while at the same time ensuring an efficient and secure system operation at all times. In order to achieve this, TSOs need to manage increasing uncertainties and complexity in shorter periods before real-time.

There is no shortage of challenges lying ahead, both during CEP implementation and beyond. Decarbonisation, digitalisation and greater decentralisation will transform the power system. Anticipating such longer-term challenges, ENTSO-E started assessing options for further improvements to the market design in the 2030 horizon and beyond, in particular focusing on better alignment of market operation to power system operation, as well as on better coordination of congestion management and balancing across the EU.

ENTSO-E is convinced that the main efforts should focus on the implementation of Network Codes and of the Clean Energy Package. At the same time, the profound changes in the way electricity is generated and consumed, as well as the foreseen developments of European power systems will trigger a debate on an enhanced market design for the 2030 time horizon.

ENTSO-E has focussed in particular on how short-term markets could ensure an efficient management of an increasing amount of congestions to cope with increasing and more volatile electricity flows, in the ultimate interests of consumers and all market parties. While this is only one of the many market design challenges, ENTSO-E believes that efficiently using the scarce transmission resources is a key one, where the TSOs play a fundamental role as market facilitators.

In addition to continued development of the grid infrastructure, so critical for efficiently accommodating variable and low carbon generation, our analysis shows that for Europe as a whole, several market design solutions exist, with various degrees of suitability for different market situations. Some of them could be integrated as evolutions of the current target market model with minimal implementation efforts, while others would require more fundamental changes with longer transitions. In any case, further in-depth analysis and discussions with stakeholders will be needed.

Improving markets to meet the 2030 challenges

Ongoing transformation of the power system, in particular increasing variable and unpredictable flows on all voltage levels, will require stepwise improvements of current models on both system operation and market design. In the current European debate, it is already acknowledged that today’s market design requires evolutions to efficiently meet the future challenges of the energy transition, as well as to accommodate new actors and new technologies. One such example is moving to shorter gate closure times paired with increasing intraday volumes traded shortly before real time.

These drivers require market design solutions that decrease the gap between market outcomes and the physical reality of the grid, so to ensure system security at all times in an efficient manner.

Against this background, ENTSO-E, representing 43 TSOs from 36 European countries, elaborated the market design vision for 2030 to address the identified challenges. This vision reflects the common views of ENTSO-E members on future market design, mainly focussed at solutions for congestion management, and on how to most efficiently and securely reconcile the market outcome with the physical system, for the ultimate benefit of all consumers. Other market design challenges, such as investment price signals and generation adequacy, or solutions through capacity mechanisms or further active power management at the TSO-DSO interface, are not discussed in this paper but are being addressed separately in other ENTSO-E work.

Addressing the challenges and reaping the opportunities provided by the ongoing power system transformation, such as emergence of new players, more renewable energy sources and more distributed generation, will require further market design improvements in addition to those already under implementation, as provided for by legal requirements of Network Codes and the CEP. Irrespective of the specific features to be implemented, market design solutions for 2030 and beyond will generally need to:

include stronger locational signals to incentivise that the dispatching of generation, consumption and storage is more in line with system costs and grid constraints;
increase the locational visibility of resources (at all voltage levels) for system operators in order to implement actions to solve congestions timely and efficiently.
enhance short-term markets to allow market participants to trade closer to real-time and in shorter time intervals, while ensuring the required time and means for TSOs to operate the system securely;

facilitate effective system operation and enhance system flexibilities to ensure an efficient use of the actual and future capabilities of the grid and of flexible resources.
ensure a closer coordination between TSOs and DSOs, to ensure that power flows, congestions, data, and market interactions with assets and consumers at distribution level are managed efficiently and effectively with a “one system approach”;
facilitate provision of new ancillary services, including non-frequency ancillary services, in line with the CEP Directive principles.

Design Options

Several market design options were analysed to identify solutions able to ensure the above six points. Solutions were assessed across a number of different variables, focussing in particular on short-term markets and congestion management. For instance, solutions can range from models with very large zones, based on current zonal market design, to models where congestions are priced within the wholesale electricity market with a fine locational granularity, or with longer or shorter time granularity of energy products traded (as Market Time Units (MTU) and Imbalance Settlement Periods (ISP) are expected to shorten to reflect the increased variability of new generation resources). Some of the existing models around the world are configured based on features at one end of the spectrum of possible solutions, while some are characterised by intermediate features between the 2 possible extremes (see Figure 6 below).

Figure 6: Examples of market design options¹² for short term markets and congestion management

¹² Any solution for short-term market and congestion management should be part of a holistic market design addressing all 2030 challenges, such as investment price signals and system adequacy

Innovative hybrid models combining features of different existing models can also be identified, for instance by having finer geographical granularity in market timeframes closer to real-time or by introducing more degrees of flexibility in the zonal market coupling. Other important dimensions which may differentiate chosen solutions for market design, like time granularity or treatment of ancillary services, are presented on the picture below.

The analysis carried out by ENTSOE and the discussions conducted with business experts and academics leads to the conclusion, that at his point in time ENTSO-E does not see a need for introducing new market design regulations, especially considering the recent approval of the CEP and the entailed implementation tasks. Nevertheless, further improvements will be needed – at least in some market time-frames – to make markets fit for purpose in 2030 and beyond. One of the purposes of this paper is to contribute to the discussion about such future improvements.

As countries face different challenges and have different policy priorities, such market design improvements could be designed depending on the specific associated implementation costs and benefits (economic, social, environmental). For instance, in countries with significant congestions, some TSOs are experiencing significant challenges that are exposing limitations of their current market design, particularly in the way congestion management is treated. Such countries might thus consider more sophisticated market design solutions, with higher degree of coordination between balancing and congestion management. Therefore, the future beyond 2030 where specific market design solutions efficiently coexist in Europe could be a realistic evolution that deserves careful attention and further analysis.

It will however be of utmost necessity to ensure that such evolutions fully preserve the benefits of the Internal Energy Market.

The main goal for Europe as a whole is to ensure an integrated and well-functioning Internal Energy Market (IEM), where efficient trade across bidding zones borders is a key feature. ENTSO-E is fully committed to realizing this goal and making sure that European consumers get maximum benefits from interconnected power system operation. There is no doubt that regardless of the specific market design features implemented locally by particular countries, the integrated European markets must seamlessly work together.

Recommendations

Although the Third Package, the Network Codes, and more recently the Clean Energy Package represent important steps forward for the transition to a low carbon electricity system with consumers at its centre, more challenges lie ahead to enable the full transition of the European power system. Considering the speed and complexity of this transition, the current market design may not be fully future-proof for 2030 and beyond, at least not in all market timeframes or in all European countries with their specific needs and challenges. The identified ways forward have different features and respond to different needs and priorities but they all share some fundamental general principles:

Better reflection of grid constraints in market operation and resulting price signals;
Increasing importance of close-to-real-time markets and products with shorter duration and smaller size, to adapt to decarbonisation, decentralisation and digitalisation, while enabling consumers’ participation;
Closer coordination between TSOs & DSOs to facilitate efficient and effective access to distributed flexibilities.

Our evaluation of different market design solutions clearly shows that no unique solution is optimal under all criteria: each has its own advantages and disadvantages. This leads to the following recommendations:

To enable the transition to a low carbon electricity system with consumers at its centre a radical market design change in the whole of Europe is neither necessary nor desirable at this stage;
The overall goal must be to foster an efficient Internal European Market, in line with the needs of European consumers and the capabilities of the European transmission and distribution grid, consistent with EU energy policy goals, and designed in close cooperation with relevant policymakers and stakeholders at national and European level.

The suitability of market design solutions may depend on national specificities (market, operations, grid, etc.) and may be impacted by specific national energy and climate policies. As challenges and levels of congestion vary from country to country, different fit-for-purpose solutions may be needed. It will however be of utmost necessity to ensure that such evolutions fully preserve the benefits of the internal energy market.
Any market design solution for short-term market and congestion management should be part of a holistic market design addressing all facets of the 2030 challenges, such as investment price signals and system adequacy, with the goal of a seamless European integration.

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