The evolving electricity markets schemes

Background and context

The electricity markets are the instruments expected to drive efficient resource allocations in the power system sector. Their role and functioning are being continuously shaped by several factors including policy objectives, technological innovation and social behaviours.

The electricity system stakeholders are striving to keep up with the innovation pace and anticipate the infrastructure and market arrangements fit for the perspective electricity delivery solutions and services.

Legislators and regulators are confronted with the challenging task of conceiving the most effective actions to steer the electricity sector transition for the citizens’ benefit.

The demand for electricity within Europe’s internal market prompted the introduction of a radical project that triggered significant challenges following the passage of the Single European Act of 1986, a piece of legislation that advocated an EU internal electricity market by 1992.

Three subsequent EU Energy Packages, introduced in 1996, 2003, and 2009, have contributed to the creation of a single, competitive European market.

In 2015, the EU issued the Energy Union strategy and the ensuing Clean Energy Package (put forward by the European Commission in 2016) showed the EU institutions' latest efforts to reform the electricity markets by combining competitiveness, sustainability and security policies.

As consequence of Russia’s aggression to Ukraine, the European Union has adopted a series of sanctions with a key impact on the energy sector. The EU also adopted its REPowerEU plan in 2022, where it outlines measures to phase out Russian fossil fuel imports, increase security of energy supply and support the green transition.

The European Union across 2022 is facing a sharp spike in energy prices. In response, the Commission adopted a Communication on “Tackling rising energy prices: a toolbox for action and support” to enact and support appropriate measures to mitigate the impact of the current energy price rises and help Europe's people and businesses, while further strengthening resilience against future shocks.

Our role

Against this background, we are conducting several research activities, in support of the Energy Union and the Clean Energy Package, including the following:

Evaluation and monitoring of the generation adequacy and capacity mechanisms in the transitioning electricity systems and markets.

Adequacy monitoring and anomalies detection in the wholesale electricity market (in the context of the Regulation on wholesale energy market integrity and transparency).

Identification of the market and regulatory factors influencing smart grid investment in Europe.

Analysis of regulatory determinants of transmission system unbundling choices.

Comparative assessment of the nodal and zonal market schemes for the future electricity systems and markets.

Discussion of the perspective features, boundaries and synergies of renewed electricity wholesale and retail markets fit for competitive low-carbon solutions.

2023 - Making energy regulation fit for purpose

In this report, we investigate the role of regulatory experimentation as an innovation tool to enable and facilitate the energy transition. Regulation can help to accelerate the adoption of innovative technologies, solutions and business models, thus reflecting the fast-changing environment that digitalisation and decarbonisation bring about, while continuing to empower and protect consumers. Regulators have a range of tools for engaging with and addressing innovation (e.g. regulatory sandboxes, regulatory pilot projects and pilot regulations).

We analyse regulatory experimentation initiatives conducted in EU Member States to identify forms of regulatory experimentation adopted, areas of experimentation, stakeholders involved, emerging trends and lessons learned.

The analysis, based on the existing literature, desk research and interviews with competent authorities, includes initiatives already implemented at national level, as well as those under development or still in the planning phase.

2020 - A probabilistic analysis of power generation adequacy towards a climate-neutral Europe

This paper proposes an improved version of EUPowerDispatch - a minimum cost dispatch model, was originally developed to investigate the need for cross-border transmission investment in Europe - that aims at analysing the generation adequacy of the European electricity system in a probabilistic manner. Over the last decades, the actions aimed to realize an integrated pan-European electricity market brought about profound modifications on the physical, information and communication systems upon which the electricity delivery process occurs. In order to assess some of the techno-economic challenges relating to the single electricity market functioning, including the future needs of electricity, several dispatch models have been developed in recent years in Europe and the rest of the world. The case study is composed of 33 European countries/regions which are linked through interconnectors. Indexes for the reliability assessment of electric power systems are calculated in order to study the generation adequacy of the European electricity system in 2025.

2020 - Nodal Pricing in the European Internal Electricity Market

This report summarises the findings of a project, awarded to Tractebel-Engie, to analyse the possibility and the effects of implementing nodal pricing in the European Internal electricity market based on the current and proposed legal framework.

In the past there have been studies and discussions regarding the use of nodal pricing in Europe. Indeed, the move to a nodal pricing scheme was considered as one of four possibilities for improving local price signals in the EC Impact Assessment of the Clean Energy package.

The report presents the origins and organisation of nodal pricing and the documented costs and benefits and describes the implementation challenges of applying nodal pricing in the EU.

2019 - A Change is Coming: How Regulation and Innovation Are Reshaping the EU's Electricity Markets

This paper describes some of the main regulatory challenges underpinning the restructuring of electricity markets in the EU. If energy markets are to remain the instruments that enable long-term policy and innovation initiatives, new regulatory arrangements are needed to reconcile the security and competitiveness of sustainable solutions. Promising reforms are outlined (e.g., in the electricity market time and spatial scales), with the objective of properly distributing costs and benefits among current and emerging actors. However, several aspects and interfaces must be properly understood to govern the evolution of the electricity delivery options and services.

We first analyze how policy decisions have contributed to developing the present EU electricity system and markets. Then, we illustrate new policy and regulatory initiatives that aim to redesign the EU markets. In conclusion, we share some thoughts on the interplay of regulatory and technical advances and their impact on future power systems.

2018 - Capacity constraints, transmission investments, and incentive schemes

This paper investigates how price caps, capacity targets and merchant investments affect the critical investment thresholds and characterize the government's optimal incentive. We consider firms facing uncertain demand, and study their problem of investing in an electricity line between two neighbouring countries, under capacity constraints, and incentive schemes.

We consider three ownership structures: a state-owned transmission company, a merchant transmission investor, and a regulated firm. The firm's problem is to choose the optimal time and size of the interconnector. The government is concerned with the incentive design.

We find that price caps speed-up projects' development, while capacity targets reduce under-investments in capacity markets. Finally, we study the effect of investment decisions on the social welfare value.

2018 - Analysis on the interaction between short-term operating reserves and adequacy

This paper proposes a Deterministic Unit Commitment (DUC) model with a set of state-of-the-art probabilistic reserve constraints (DUC-PR). An electricity generation system adequacy assessment aims to generate statistically significant adequacy indicators given projected developments in, i.a., renewable and conventional generation, demand, demand response and energy storage availability. DUC models with exogenous reserve requirements, as often used in today's adequacy studies to represent day-to-day power system operations, do not account for the contribution of operating reserves to the adequacy of the system. Hence, the adequacy metrics obtained from such an analysis represent a worst-case estimate and should be interpreted with care. The performance of the DUC-PR model in the context of adequacy assessments is studied in a numerical case study. The Expected Energy Not Served (EENS) volume obtained with the DUC model is shown to be a poor estimate of the true EENS volume. In contrast, the DUC-PR methodology yields an accurate estimate of the EENS volume without significantly increasing the computational burden. Policy makers should encourage adopting novel operational power system models, such as the DUC-PR model, to accurately estimate the contribution of operating reserves to system adequacy.

2018 - Regulatory and ownership determinants of unbundling regime for European transmission utilities

This paper provides an econometric analysis to understand the individual effect of regulation and ownership structure on the decision to adopt more stringent unbundling regimes by using a dataset of the 35 major electricity transmission utilities in Europe.

One of the fundamental provisions of the European electricity directives is the so-called unbundling of structures and functions. Vertical disintegration with Full Unbundling (ownership unbundling or independent system operation) is considered an important step toward electricity market restructuring. While Full Unbundling (FU) models appear to be the most prevalent, several European countries adhered solely to less stringent forms of unbundling.

The overall results show that incentive-based or hybrid regulatory schemes and private ownership, are associated with a higher probability that a country will opt for FU.

2017 - Assessment of underlying capacity mechanism studies for Greece

This report presents recommendations for the Greek power system adequacy assessment. Approaches to generation adequacy assessment vary between countries, not only with regard to the implemented methodology, but also with regard to the generation and demand models used to estimate these elements. Furthermore, the results are very sensitive to the assumptions used to project future resources and demand(s). In this context, there is a need for harmonisation of models, data assumptions, and inputs between national and European adequacy and flexibility studies. Best European and international practices based on the current and future evolution of the power system, should be adopted and implemented to provide a common assessment methodology for the pan-European and national adequacy studies.

Following the assessment of the studies, the main recommendations for potential improvements are summarised below. It should be mentioned that to achieve full alignment with the ENTSO-E standards on generation adequacy studies or the state-ofthe-art on flexibility assessment, the implementation of (at least) these methodological suggestions is needed.

2016 - Market and regulatory factors influencing smart-grid investment in Europe

This paper focuses on market and regulatory factors, based on a review of the European regulatory status and using a dataset of 459 innovative smart grid projects. It performs a series of statistical tests to investigate how the different factor levels affecting smart grid investments in Europe.

Electricity distribution system operators (DSOs) are expected to invest heavily in system innovation in the form of smart grids (SG) in order to help achieve energy policy goals. In this context, regulatory reforms to spur DSOs investments are considered a policy priority.

The results show that lower market concentration in the electricity distribution sector the use of incentive-based regulatory schemes; and the adoption of innovation-stimulus mechanisms are key enablers of smart grid investments.

2016 - Generation Adequacy Methodologies Review

This report presents a review of some European Member States, regions and ENTSO-E’s pan-European methodologies to highlight the latest developments and current trends.

Generation adequacy is a key tool to assess security of supply in an electrical system. Complementing national adequacy assessments with regional and pan-European studies is required for scrutinising the integrated interplay and functioning of the European electricity system and market. What is needed, besides a minimum harmonisation of models and data inputs, is to clearly determine what the scope of each assessment is. Indeed, increasing the model geographical size can be hardly attained at the same time as increasing the time resolution, as well as representing into detail several other system features; additionally, keeping things as simple as possible will avoid constant revisions of the fundamentals and the basic assumptions of the assessment methodologies used by a vast number of stakeholders.

In Europe, the integration of high amount of variable generation, demand response, storage, distributed generation, the increase of interconnection capacities and the electricity markets coupling, motivate a need for a revision of how adequacy is assessed.

2015 - Market Integration Scheme of a Multi-Terminal HVDC Grid in the North Seas

This paper examines the market integration of a centrally dispatched multi-terminalHVDC Grid based on droop control.

The development of a multi-terminal high voltage DC (HVDC) grid based on voltage source converter (VSC) technology has been envisaged as a key development for harnessing the vast offshore wind production potential of the North Seas.

Particular emphasis is given on the management of onshore imbalance volumes due to offshore wind power forecast errors. The economic importance of the control choices of the operator of such an active transmission grid is highlighted, and regulatory implications are briefly discussed.

The main contribution of the paper is the coherent development of a droop-controlled MT HVDC grid scheme that integrates optimal power flow (OPF) dispatch, and imbalance volume management.

2013 - Market-Based Control in Emerging Distribution System Operation

This paper presents a conceptual framework for “Market-based Control” for the operation of emerging distribution systems.

In emerging electrical distribution systems, a multitude of self-interested individual decision makers interacts among themselves and with the power grid. The optimal operation of the grid, according to a set of predefined technical and economic targets, can be achieved by influencing the behaviors of the decision makers with appropriate market signals. The technical feasibility and performance of the system, for example, in terms of line flow limits, network losses, and appropriate voltage profile, can thus be controlled to a certain extent, by market signals.

Characterized by distributed and adaptive control signals over prosumers, market-based control needs to make prosumer benefits aligned with regulator/DSOs concerns, thus satisfying the requirements from both sides. By applying market-based control in network charging, both network and market performances can be improved. The complexity in the environment and in the interactions among players prompt techniques to be derived from complex systems theory. A multiagent model was built up for testing the market control strategies strategy. The concept and applications are illustrated with reference to a standard CIGRE medium-voltage distribution network.

2011 - Distributed generation and distribution market diversity in Europe

This paper firstly reviews the relevant European Union (EU) regulatory framework: specific attention is paid to the concept of unbundling of power distribution sector in Europe. Afterwards, the focus is on the current state of penetration of DG technologies in the EU Member States and the corresponding interrelations with distribution features.

The unbundling of the electricity power system will play a key role on the deployment of distributed generation (DG) in European distribution systems evolving towards Smart Grids.

A comparison between the unbundling of the distribution and supply markets using econometric indicators such as the Herfindahl-Hirschmann (IHH) and the Shannon-Wiener (ISW) indices is then presented. Finally, a comparative analysis between these indices and the current level of penetration of distributed generation in most EU is shown; policy recommendations conclude the paper.