Market report 2022/23
Cooperation in Europe curbs consequences of the energy crisis
The war in Ukraine has made for another exceptional year in the electricity market. The acceleration of grid expansion in combination with a new market design thus becomes a top priority.
2022 is the third exceptional year in a row: after the start of the Covid 19 pandemic in 2020, the situation eased for a short time in 2021 before conditions deteriorated drastically again at the end of 2021 in anticipation of the subsequent events in Ukraine. With the Russian invasion of Ukraine early in 2022, gas and electricity prices climbed to an all-time high in Europe in Summer 2022. This has led to exceptional market interventions by the European Commission and was the starting point for a new fundamental discussion of the future market design in Europe. At the same time, the progress in European market integration with the involvement of transmission system operators (TSO) has helped to mitigate the negative impact of the energy crisis.
Especially the go-live of the largest European capacity calculation region (CCR) Core on 8 June 2022, symbolises a milestone for the European market integration. Additionally, the record of German exports to France to partially compensate for the unexpected unavailability of several French nuclear power plants, underlines the cooperation among European TSOs.
Grid investments of more than 22 billion euros
This year's Amprion market report focuses on the interaction between grid expansion and electricity market design. Besides strengthening the market, the European transmission grid expansion is essential in order to enable the further integration of renewable energies and alleviating the transmission constraints. For this reason, Amprion is expanding its grid infrastructure by around 5,500 kilometres.
As a result of the whole situation on energy markets, the European Commission has determined to even accentuate their climate goals by raising the targeted share of renewable energies in the EU energy mix up to 45% in 2030. For Germany to achieve its climate targets, offshore wind farms should provide as much power as around 70 large coal-fired power plants by 2045. Offshore wind power in combination with an interconnected grid in the North Sea will significantly push renewable energy generation in Europe.
Future-proof market design is essential
Accelerating grid expansion on land and at sea is a top priority. It also becomes clear that the course must be set today for a future market design that takes into account the interests of both the market and the grid. This is the only way to achieve Germany's ambitious climate targets while ensuring cost efficiency, system stability and investment security. Amprion’s “Systemmarkt” represents a holistic solution for the future market design.
"How the energy crisis affects the transmission grid and international trading"
Amprion published the market report on 25 May 2023 and presented the key findings in a webinar. The webinar slides are available here.
To what degree are the excess profits in 2022 resulting from the high fossil fuel costs vs from the unavailability of nuclear power plants?
After the start of the war on Ukraine at the end of February 2022, gas prices increased significantly. Electricity prices followed the rising price trend in gas prices, due to the special role of gas-fired power plants in electricity generation and the Merit Order. Gas-fired power plants influence the price determination in electricity markets via the Merit Order where they are, in general, the most expensive production technology which determines the price. The unexpected unavailability of nuclear power plants (and hydro power plants) in Europe has further aggravated the situation. All in all, the root cause for the high electricity price was the high gas price. However, the unavailability of nuclear power plants in France has caused an additional scarcity.
If you normalise the redispatch costs based on market prices, would there still be a fundamental increase in redispatch costs?
The increase in market prices (especially fuel and CO2 prices) is the main reason and driving force for the increase in redispatch costs. Nevertheless, there have also been other factors that have led to an increase in redispatch volume and therefore also in redispatch costs, like e.g. the increased import needs of France as well as formal changes affecting the handling and settlement of the German redispatch processes accompanied by the introduction of “Redispatch 2.0”.
What is your estimate of Redispatch costs in 2025 without a market split?
An estimation of redispatch costs for 2025 heavily depends on the further development of market prices. Based on current future prices, the estimated redispatch costs would be in a range between the costs in 2021 and 2022.
What do you see as the main challenges in accelerating the grid expansion and do you expect the legislative changes introduced in the past years to have a meaningful impact?
Main challenges are the approval processes and resources to implement the grid expansion. Amprion welcomes the legal changes and sees their important contribution to accelerating grid expansion. The legal changes are already being used in the first grid projects with the aim of accelerating the implementation of the projects.
How are market uncertainties affecting grid expansion planning (both interconnection and internal transmission grids)?
The potential risks from market uncertainties are already included in the risk management for the implementation of the grid projects.
How is the integrated infrastructure planning of transmission grid and H2 network progressing?
The German government is currently developing a system development strategy in a participatory process involving representatives of the energy sector, industry, civil society, and politics. The aim is to define a cross-sectoral vision and a robust strategy for the transformation of the energy system that will serve as the basis for infrastructure development plans.
How do you see the future role of solar, wind and battery storages as provider for ancillary services (e.g. balancing, inertia)?
Batteries are already participating actively in FCR. Moreover, their share is increasing in aFRR, due to technical, cost and market price level developments. Some wind turbines are already prequalified in Germany for provision of negative balancing energy. In addition, German TSOs consider introducing shorter balancing capacity products. Among other reasons, this should allow Balancing Service Providers to better address uncertainties of fluctuating renewables.
An overview of prequalified volumes per primary energy source and reserve product in Germany can be found here on regelleistung.net (in German). Please bear in mind that the prequalified volume does not represent the mix of technologies actively participating in the balancing markets.