Strengthening Price Signals to Value Energy, Flexibility and System Services

Market price signals should be strengthened to drive electricity usage, dispatch and investment. This requires unconstrained price formation in all markets (day-ahead, intraday and balancing) to reflect the real cost of electricity. ENTSO-E welcomes in this regard the reference to such a need in the joint declaration for regional cooperation on security of electricity supply within the European internal market of 12 European countries on 8 June 20151.

The updated market design must reveal system costs and the value of services delivering adequacy, flexibility and resilience. For this purpose, a market-based procurement of such services should be organised whenever possible2, introducing new products and ensuring a level playing field among those delivering them: generation, demand-side measures or storage.

Since the lion’s share of the power mix of the future will be coming from variable renewables, RES need to move to a level playing field and bear the same responsibilities (i. e., balancing) as other market participants. Renewables have to get better trading opportunities, which they currently lack in some markets. They also have to be exposed to price signals, in particular when we see negative prices at wholesale levels. Reserves, for instance, are products through which system adequacy problems should appear first via price signals.

The need for cross-border procurement of these services will be defined by TSOs through assessments3 of the location and the extent of both the existing scarcities and the available resources. Cross-border trade of system services, whenever possible, should take place when it creates value, taking into account its effect on energy trading. The trading of energy and of system services across borders could for instance be achieved via ‘co-optimisation’ of both energy and system services (such as reserves). In fact, such co-optimised trading is already foreseen by ENTSO-E’s Electricity Balancing Network Code for reserve capacity. By 2019 at the latest, ENTSO-E will propose a methodology for ‘co-optimised capacity allocation’.

Recommendations

  1. ENTSO-E and ACER should work together to propose system services markets. These markets should be integrated across borders whenever possible.
  2. The EC should review the Electricity and Renewables Directives to strengthen price signals and ensure that all market participants, including RES, have the same responsibilities (e.g., balancing responsibility).
  1. FIX LINK Joint Decleration for Regional Cooperation on Security of Electricity Supply in the Framework of the IEM.

  2. Depending on the potential to develop competition for each specific ser vice.

  3. TSOs and ENTSO-E assessments will allow the identification of the gap between scarcities and available resources, in respect to location, magnitude and time horizon. For more details on how such assessment will support market design choices see our policy paper Where Markets meet Security of Supply