Market Report 2022
European cooperation absorbs upheaval in the electricity market
2021 proved a challenging year for the European electricity market: electricity prices on Germany’s spot markets quadrupled, while gas prices increased almost sevenfold. “This continuing volatility is presenting consumers with significant challenges,” says Dr Hans-Jürgen Brick, CEO of Amprion GmbH. “However, our 2022 market report also shows that the integration of the European electricity markets counteracts such turmoil.”
This development of market integration continued despite last year’s difficult market environment. Among other aspects, this is demonstrated by the high level of price convergence in the Central Western Europe (CWE) region (Germany, France, Luxembourg, the Netherlands, Belgium and Austria), which remained at the previous year’s level in spite of the high prices at the end of 2021. This enabled the electricity price in the CWE market region to develop freely and allowed electricity to be traded without constraints. Buyers on the exchanges therefore paid the same low price for electricity.
Amprion’s market report also indicates that the expansion of the necessary grid structure is a crucial factor for European electricity market integration. “Grid expansion therefore remains our top priority,” says Amprion’s CEO Brick. “In achieving it, we have to give consideration to the needs of both the grid and the market,” adds Brick.
Grid expansion central to success
The extent to which the grid is the limiting factor is shown by power transmission in the CWE region. Sufficient capacities for transporting inexpensive electricity from one market region to another were only available for half of the time in 2021, but restrictions were in place during the other half of the year. On the electricity exchange, this implied a higher price to be paid in one market area compared to its neighbouring region. The average price spread in Q4 was around 25 euros per megawatt hour.
The market design must continue to be developed
One of the conclusions drawn by the report is that the electricity market and the European transmission grid will have to be jointly thought through and evolved more extensively in the future. Amprion has therefore developed a concept for a new market design that could also put the right incentives in place in Europe. In what is called the system market, modular markets are used both to stimulate the necessary generating plants and also to set allocation signals so that they are implemented in locations which are beneficial to the system. The market design also ensures a supply of system services that are necessary for stable grid operation.
Q & A
What are the current developments on the balancing markets?
MARI and PICASSO are the transmission system operators’ (TSO) projects to establish the European mFRR (manual Frequency Restoration Reserve) and aFRR (automatic Frequency Restoration Reserve) platforms, two key deliverables of the European Regulation establishing a guideline for balancing energy (the "EB Regulation"). These European platforms will further improve the efficiency of system balancing in Europe and integrate the balancing energy markets by promoting opportunities for the exchange of mFRR and aFRR energy while contributing to operational security. The Platform for the International Coordination of Automated Frequency Restoration and Stable System Operation (PICASSO) is the implementation project supported by all TSOs through ENTSO-E to establish the European platform for the exchange of aFRR and became operational on 01 June 2022. Germany and thus also Amprion joined the platform on 22 June 2022. Further information can be found at the ENTSO-E website.
The platforms serve the joint auction, clearing and monitoring of the control reserve within the Energy Union. This should result in effective competition, non-discrimination and transparency, ensuring efficiency, operational security and integration of electricity markets in the EU.
With the approval by ACER of the amendment proposal of all European TSOs on the pricing methodology for balancing energy, a reduced price cap for balancing energy of EUR 15,000 EUR/MWh for aFRR and mFRR, applicable at European level, was implemented on a transitional basis with the introduction of the target market design on 22 June 2022. This is applicable for the period of two years after the implementation deadline of the European platforms for the exchange of balancing energy according to EB GL. For the years 2024-2026, a price cap of 22,490 EUR/MWh applies.
Further news on the topic of balancing power will also be published on regelleistung.net.
What influence do the current price developments have on the transmission system operators?
The massive increase in the cost of commodities and fuels, and consequently also of electricity, last year caused significant distortions on the energy markets. Particularly with regard to the compensation of grid losses, redispatch and the provision of balancing energy, these developments also have a strong impact on European transmission system operators. Further cost increases for transmission system operators concern, for example, grid expansion projects, which are also affected by higher costs for materials and services.
The high electricity prices and in some cases high price differences between the individual European bidding zones also had an impact on congestion revenues. These have increased due to the higher average price differences between the bidding zones. According to Article 19.2 of the Electricity Market Regulation (Regulation (EU) 2019/943), these revenues are used by the transmission system operators to resolve congestion and thus for cross-border relevant redispatch measures and cross-border relevant network expansion.
What impact do current developments (e.g. the expansion of renewable energies, political developments) have on grid expansion?
The German transmission grid as well as the Amprion control area are characterised by a structural change in the local generation and demand situation due to the expansion of renewable energies. In terms of their availability throughout the year, solar and wind energy generally complement each other. The peak output of solar energy is produced in summer, while the average wind energy production is usually higher in winter. Due to the higher full load hours and the higher generation during night and base load hours, wind power generation has a greater impact on imports and exports than solar power. In particular, the windy situations regularly lead to congestion in the north of the Amprion control area. In order to ease this bottleneck situation, the construction of new transmission lines from the north to the south of Germany is a top priority for Amprion. In coordination with the other German transmission system operators, numerous new lines and projects will be built over the next few years, such as A-North or Corridor B.
Grid expansion plays a decisive role in achieving Germany's and Europe's ambitious energy and climate goals. The electricity market and the European transmission grid will have to be jointly thought through and evolved more extensively in the future. Amprion has therefore developed a concept for a new market design that could also put the right incentives in place in Europe. In what is called the system market, modular markets are used both to stimulate the necessary generating plants and also to set allocation signals so that they are implemented in locations which are beneficial to the system. In the future, new incentives must be created for flexible producers (e.g. H2/H2-ready gas power plants) and flexible loads (e.g. electrolysers) to settle in locations that serve the system and the grid. In addition, an acceleration of the approval procedures for the implementation of these essential projects for grid expansion must be implemented promptly in order to avoid missing the German and European climate targets.
This has also been recognised at EU level. The acceleration of the approval procedures and a further increase of the 2030 targets for renewables (to at least 45 per cent) and energy efficiency are central components of the REPowerEU plan, which the EU Commission presented on 18 May 2022 and by means of which it wants to end the EU's dependence on fossil fuels from Russia and at the same time tackle the climate crisis and high energy prices. Consideration is also being given to changing the design of the electricity market.
What future challenges do you see with regard to price developments?
The development of electricity prices was soaring last year, especially in the last months of 2021. Day-ahead electricity prices of over €300/MWh were not uncommon. In the short term, it is already apparent that prices have settled at a level of around €200/MWh in the first half of 2022. The price of natural gas also seems to have reached a plateau and is behaving similarly to electricity prices. For the price of oil and hard coal, we currently see an upward trend in the first half of 2022. Medium- to long-term developments are difficult to forecast in the current geopolitical context. Energy policy decisions, such as the withdrawal of coal-fired power plants from the reserve, can have a significant influence on the medium-term price development for fuels.