Reconcile markets and physics

Today’s current market design in Europe has been successful in enabling a vast increase of electricity exchanges across countries, stimulating competition and increasing liquidity in wholesale markets. However, several limitations start to be visible for various reasons: increasing loop flows, increasing redispatching costs to relieve congestions in the grid, limited information available on the electricity system flexibility and increasing investment uncertainty to ensure resource adequacy.

In addition, following structural trends will impact on the way the power system operates:

  • Massive technology changes induce the deployment of new energy resources that will complexify system operation;
  • The roles in the system are evolving, requiring the development of new rules to unleash the value they offer to the system, in particular active consumers;
  • The speed of upgrading the network is slower than necessary. For instance, it may not always match the pace of renewables development.

These aspects are closely intertwined. The aforementioned limitations will exacerbate towards 2030 unless efficient and secure system operation can rely on adequate market design that properly accounts for system physics and relevant technical constraints.

A comprehensive view on future system operation

The evolution of the electricity system presents challenges as well as opportunities for system operation. The organisation model suited to adapt to these changes is a system of systems that work as one (see ‘Towards a system of systems’). The following major drivers for future system operation were identified.

A high amount of the resources needed to operate the system are expected to be connected to distribution networks: generation, storage, smart grids and prosumers. Unlocking these ‘distributed flexibilities’ will require new operational tools and processes to improve their forecasting and visibility. It will also imply the development of new products in dialogue with market players as well as coordinated market processes and related data exchanges between various stakeholders. This will ensure an optimal use of these flexibilities for trading as well as for fulfilling grid and system needs.

Furthermore, the European network was designed to operate in alternating current (AC) but it will have to accommodate an increasing part of resources and appliances using direct current (DC). These require power electronics to convert and control the electricity flow. For instance, power inverters transform energy produced by PV panels and wind turbines from DC to AC to feed into the grid at a constant frequency despite variable solar and wind conditions. Converters are also used to convert electrical energy from high voltage alternating current to high-voltage direct current (HVDC), or vice versa, to transport electricity subsea or over long distances with minimal losses. Integrating these solutions into the system goes along with technological and operational challenges, requiring close coordination with relevant stakeholders.

Figrue 2

Figure 2: Transition towards a mixed AC/DC system

Bringing markets and physics closer together is a third driver, as the gap between market outcomes and the physical reality of the grid is widening. To bridge this gap and maintain security of supply, the main requirements for system operation are:

  • Ensuring availability of resources and their technical capability for system operation before real-time and after a contingency;
  • Efficient grid operation, including the ability to use cost-efficient measures to the largest extent possible;
  • Access to flexibilities at distribution level in coordination with Distribution System Operators (DSOs).

Responding to a more dynamic and complex system, operational processes and tools will evolve to face new operational challenges: preventing and managing threats in a context of greater dependency on cooperation with other parties and neighbours for management of those risks10, complex forecasting and integration of possible automation and decision support technologies (digitalisation). This evolution will be even more needed as the political drive for an integrated approach across energy sectors, so-called sector coupling, becomes stronger.

Future system operations will rely upon a system of systems that should work as one. They will ensure seamless integration of growing shares of decentralised resources and power electronics. They will allow for alignment with needs of all grid connected assets and be further coupled with other sectors. Innovation and cooperation will be key enablers.

10 A non-exhaustive list of which: natural hazards, cyber-attacks, terrorism etc.

Seamless integration of fit-for-purpose market design solutions

TSOs are committed to complete an efficient and well-functioning Internal Energy Market (IEM), where efficient trade across borders is a key feature that benefits all European consumers. The full implementation of the IEM and related Target Model is therefore the priority. But, as mentioned previously, the aforementioned drivers challenge today’s market design.

ENTSO-E started to identify and analyse several options for long-term evolution of market designs, ranging from evolutionary solutions to models requiring more fundamental changes (including innovative “hybrid” options). The aim was to look beyond existing design and planned implementation of CEP requirements to further improve market design in light of challenges emerging towards 2030 and beyond.

These market design options pursue the same goals: supporting system security, market efficiency, reliability and adequacy, while delivering adequate price signals and trading possibilities for all market players, including consumers, on all geographical scales as well as in all timeframes.

The market design options explored can vary across a combination of different parameters (see figure 6 in Focus Paper Market Design for 2030 on page 17), while sharing common fundamental principles:

  • a better reflection of grid constraints in market operation and resulting price signals;
  • an increasing importance of close-to-real-time markets and of products with shorter duration and smaller size, enabling participation of consumers and of new actors; and
  • a closer coordination between TSOs and DSOs to facilitate efficient and effective access to distributed flexibilities.

Based on our analysis, ENTSO-E concludes that a radical market design change in the whole of Europe is neither necessary nor desirable. Nevertheless, further improvements will be needed – at least in some market time-frames – to make markets fit for purpose in 2030 and beyond. As countries face different challenges and have different policy priorities, such market design improvements could be designed depending on the specific associated costs and implementation benefits (economic, social, environmental). Some countries might thus consider more sophisticated market design solutions or specific features, for instance with a higher degree of coordination between balancing and congestion management.

The introduction of any specific market design features should be preceded by thorough analysis and result from a close cooperation of policymakers, regulators and relevant stakeholders at both national and European level.

Whichever market design option is chosen, it should not only have benefits exceeding implementation costs, but ensure that the integrated European electricity markets seamlessly work together.

Fit-for-purpose market design solutions may be needed to further improve the current target model, allowing Europe as a whole to meet the 2030 challenges, which vary across countries and market timeframes. Any evolution should fully preserve the benefits of the internal energy market.


Vision on Market Design and System Operation towards 2030

  • Executive summary
  • Major trends reshaping the power sector
  • Reconcile markets and physics
  • Towards a system of systems
  • Focus paper – One System Vision for 2030
  • Focus paper – Market Design Vision for 2030