Energy Regulations and Economics in the European Union

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European Energy Markets
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Each year, the European Union issues a report on the State of the Energy Union to assess its progress. It draws attention to regulations and economics of the transition to a low-carbon, secure, affordable and integrated energy market.

The ASSET studies below take a closer look at issues such as the management and allocation of cross-border transmission capacity and its associated costs, congestion management and liquidity considerations regarding the size of bidding zones.

Study 1: Key Parameters For Cross-Border Transmission Capacity Calculation

An efficient internal electricity market is of paramount importance in Europe to ensure that all consumers can purchase electricity at an affordable price while maintaining the security of the energy supply.

This study refers to the Commission Regulation (EU) 2015/1222 guidelines, relying on the concept of bidding zones and a flow-based approach to allocating transmission capacity to support the European electricity market.

Through analyses of key parameters currently used for capacity calculation methodologies, our experts concluded:

  • Levels of loop flows and internal flows in the Nordic countries are much lower than in Central Western Europe, ensuring a higher transmission capacity toward the integrated market
  • Although reliability margins taken in the Central Western European region appear to be in the upper range of European practices, they do not increase drastically with the introduction of flow-based market coupling

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Study 2: A Review Of Congestion Cost Allocation

Network congestion management costs represent a non-negligible part of the total system cost of the Core capacity calculation region. Currently, the congestion management cost is borne by the zone in which the congestion occurs. However, congestions may result from loop flows or cross-zonal exchanges. The cost should therefore be shared between those responsible. This study assesses the methodology for congestion cost allocation in two steps:

  • It examines the current cost-sharing methodology and assesses the performances of the five different mapping methodologies that were envisaged throughout the development of the congestion cost allocation methodology
  • It applies the complete methodology for congestion management costs allocation to a test system to assess the performance of the different mapping methodologies according to three criteria: fairness (socio-economic welfare), incentive compatibility and practicality. It concludes that future work on mapping methodologies should primarily focus on the practicality of the solution, and the mapping methodologies should be more thoroughly defined

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Study 3: Cost Sharing and Cost Recovery Arrangements in the EU

The organization of coupled intraday and day-ahead markets generates costs for the Transmission System Operators (TSO) and the Nominated Electricity Market Operators (NEMO). This study lies within the context of the Commission's efforts to support the implementation of market coupling in Europe in line with Commission Regulation (EU) 2015/1222 establishing a guideline on capacity allocation and congestion management (hereafter “CACM”).

Discover our main study findings:

  • Different TSO contributions to NEMO costs do not cause distortions per se in NEMO competition between the Member States
  • The lack of guidance from the CACM Regulation—especially as to the transparency on national costs—may create issues of cross-subsidization

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Study 4: Smaller Bidding Zones in European Power Markets: Liquidity Considerations

The European electricity target model is based upon a zonal pricing approach, as opposed to a nodal pricing system. In a nodal approach, a price is defined at each node of the transmission system, whereas the zonal model aggregates those nodes into zones.

Although the discussion of zonal versus nodal pricing is not new, current zonal inefficiencies are expected to increase with the need to decarbonize the energy system. This ASSET study argues the following:

  • The simplification underlying the representation of the physical system in the zonal pricing system could have negative implications
  • It is essential that physical (spot) markets price the transmission externality in order to provide efficient incentives for production, consumption and investment decisions
  • Liquidity is complex to define or measure accurately, and the data used to support a direct (either positive or negative) correlation with smaller bidding zones may have been incomplete or anecdotal

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Study 5: Regulatory Priorities for Enabling Demand Side Flexibility

Consumers have become increasingly active in their energy affairs, demanding a more affordable, reliable, and clean energy supply. This has a policy backing as the European energy policy puts customers at the heart of its long-term energy strategy for a climate-neutral economy.

This study explores:

  • Various policy options for the European Commission and proposes concrete recommendations on the next steps
  • Elements of the definition of the Demand Side Flexibility concept as well as barriers to its implementation
  • Further codes and guidelines that will be developed for the Demand Side Flexibility concept

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The ASSET project provides studies in support of EU policy-making, research, and innovation in the field of energy.

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