Contributions to the Market Design for the Swiss Energy Strategy Summary of Consultation Responses and Next Steps

Transcription

1 Contributions to the Market Design for the Swiss Energy Strategy 2050 Summary of Consultation Responses and Next Steps

2 Imprint Swissgrid Ltd Werkstrasse 12 CH-5080 Laufenburg Phone Fax Design: bemerkt gestaltung+kommunikation Text: Swissgrid Graphics: bemerkt Swissgrid AG 2016 This work is protected by copyright. The rights established thereby, especially those of translation, presentation, the removal of illustrations and table, radio broadcast, microfilming or duplication by other means and storage in data processing systems are reserved, even in the case of utilisation only of excerpts. The shorter masculine form was used in the interests of easier legibility in the case of terms, designation and functions. The publication is naturally directed at both genders. Typographical / content errors / omissions excepted. Publication: June 24, 2016

3 3 Contents Management Summary 5 1. Introduction and Description of the Consultation Process 9 2. Introductory Questions Relevance of the Addressed Topics for Market Design Reform Additional Topics to Be Addressed Improvement of the Price Signal Summary of Swissgrid Consultation Proposals Implementation of a Near Real-Time Imbalance Price Introduction of an Independent Aggregator Balancing Responsibility for Renewable Generation Next Steps Optimization of Cross-Border Trading Summary of Swissgrid Consultation Proposals Appraisal of the Proposed Measures to Optimize Cross-Border Trading Additional Topic Proposals Next Steps A Regional Approach to Security of Supply Summary of Swissgrid Consultation Proposals Adequacy Responsibility for Balance Groups Forward Hedging of Sufficient Resources for End-Customer Supply Next Steps Conclusion 37

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5 5 Management Summary Swissgrid launched a consultation in December 2015 on its proposals for future market design in Switzerland. The consultation focused on three themes: improvement of the price signal; optimization of cross-border trading; and a shift towards a regional approach to security of supply. The consultation of stakeholders on the proposals ran from 16th of December 2015 to the 16th of February 2016, and received considerable market interest. Respondents included eleven national and six international stakeholders, as well as nine associations, of which one was non-swiss. The associations represented more than 400 Swiss and foreign companies. A stakeholder meeting to inform on and discuss core consultation results was held with 45 stakeholders on the 22nd of March In the consultation document, Swissgrid invited feedback on ten questions. For each question, the 26 participating stakeholders could express their opinion / preference according to a set menu of tick boxes (e.g. agree, disagree, maybe ). The results from these responses are outlined quantitatively in graph 1 below. These findings provide a useful overview of perceptions towards the proposals. However, given the diversity of participating stakeholders, they are not statistically representative. In addition, respondents were invited to submit their own remarks and comments on each question, which are summarized in the main part of this document.

6 6 Introduction Q1: Topics appropriate? Q2: Additional topics? Q3: Real-time imbalance price? Improve the price signal Q4: Independent aggregator? Q5: Balancing responsibility for RES? Optimize cross-border trading Q6: Suggested measures? Q7: Additional measures? Regional approach to security of supply Q8: Balance group responsibility? Q9: Incl. forward hedging? Q10: Hedge using options? 0% 20% 40% 60% 80% 100% Yes Maybe No Additional Proposals Consultation Questions Question 1: Do stakeholders consider the main market design topics addressed by Swissgrid to be appropriate? Question 2: Are the stakeholders of the opinion that Swissgrid should address additional market design topics besides the three main topic areas of the consultation? Question 3: Do the stakeholders support the Swissgrid proposal to implement a (near) real-time imbalance price? Question 4: Do stakeholders see a benefit from formally introducing a new role for an independent aggregator that bundles and markets flexible resources on the wholesale market? Question 5: Do stakeholders agree with the assessment that a balancing responsibility for renewables would be beneficial? Should Swissgrid implement any other measures to achieve a more efficient integration of renewables? Question 6: Do the stakeholders support the proposed measures for an optimization of cross-border trading? Question 7: Do stakeholders propose additional measures that are not mentioned in the consultation document in order to increase the efficiency of cross-border trading? Question 8: Do the stakeholders agree with the assumption that adequacy responsibility of balance groups in combination with a strengthened price signal will increase market efficiency? Question 9: Do the stakeholders agree that balancing responsibility should include the prognosis and, if necessary, forward hedging of sufficient resources for end-customer supply? Question 10: Do the stakeholders consider the proposed hedging products to be appropriate for the hedging of potentially volatile imbalance prices? Are there other proposals? Graph 1: Consultation stakeholder feedback overview

7 7 A large majority of respondents considered Swissgrid s overall market design proposals to be appropriate, while more than half suggested additional topics that they felt were relevant for future consideration. There was especially broad support for the proposals to strengthen the price signal and improve existing arrangements for cross-border trading (Q3, Q5 and Q6). However, some doubts were raised concerning the introduction of an independent aggregator model (Q4), and the proposal to increase the adequacy responsibility of balance groups (Q8 to Q10). Based on the consultation results, as well as market developments during the winter of 2015 / 16 and the development of the relationship between Switzerland and the European Union, Swissgrid has now defined its priorities for future measures. The following table summarizes the consultation proposals, the stakeholder support, and the next steps Swissgrid is planning. Table 1: Consultation proposals and next steps by Swissgrid Consultation areas and proposals Improve the price signal Implement real-time imbalance prices Enable demand-side response with independent aggregators Introduce balancing responsibility for renewables Optimize cross-border trading Improve cross-border intraday gate closure times Introduce intraday border auctions Introduce a 15-minute intraday call auction A regional approach to security of supply Strengthen the adequacy responsibility of balance groups Improve cross-border co-operation Enable cross-border trading of adequacy Next steps Development of detailed concept: Swissgrid plans to develop a detailed concept for the implementation of (near) real-time imbalance prices until the end of 2016, with stakeholder involvement in Q4 / 16. No further activities in 2016: Re-evaluation of further activities in Participation of Swissgrid in related industry working groups. No further activities in 2016: The governmental initiative Swiss Energy Strategy 2050 includes planned reform of the present support scheme for renewables. Swissgrid will support the implementation of the resulting political decision. Continuation of analysis: Further evaluation of opportunities to reduce cross-border gate closure times; continuation of Swissgrid s active participation in gate closure timing-related discussions. Development of concept: Swissgrid will undertake analysis of the interfaces of the proposal with the current political framework, network codes and guidelines, lead-time sequences and gate closure times. Start of project on Italian borders. No further activities in 2016: After analysis of implementation opportunities during the last months, the introduction of intraday border auctions (above) presently appears the more promising step to optimize cross-border trading. Re-evaluation of further activities in Development of revised proposal: Further clarification of the theme and elaboration of a proposal in the context of the industry working group Responsibility for Electricity Security of Supply, after which next steps will be evaluated. Continuation of analysis: Follow-up of the measure in relevant industry working groups. Continuation of analysis: Further reflection of proposed measures, e.g. by participation of Swissgrid in relevant international industry working groups.

8 8 As outlined in the table, Swissgrid will focus on the preparation of three core measures in 2016:»» Development of a detailed concept for the implementation of (near) real-time prices till end of 2016; stakeholder involvement to be pursued in Q4 / 16,»» Analysis of the interfaces of the proposal to introduce cross-border intraday auctions with the current political framework, network codes and guidelines, lead-time sequences and gate closure times, and»» Further clarification of the adequacy responsibility for balance groups and elaboration of a proposal in the context of the industry working group Responsibility for Electricity Security of Supply, after which next steps will be evaluated. For most of the remaining consultation proposals, implementation will depend on close collaboration between various stakeholders. Following positive feedback by the market, Swissgrid will try to advance these in respective committees, such as the Pentalateral Energy Forum [on security of supply and optimization of cross-border trading], ENTSO-E as well as VSE working groups. However, it should be taken into consideration that a limiting aspect for market design activities is the current political relationship between Switzerland and the European Union. Based on the vote of the Swiss population regarding a reform of the mechanisms for the immigration of foreigners, the talks on a bilateral energy treaty between Switzerland and the EU are currently on hold. At this point it is not clear, to what extent the above suggestions may be limited by restrictions on participation in the Network Code on Capacity Allocation and Congestion Management (CACM) and potential further codes.

9 9 1. Introduction and Description of the Consultation Process European electricity markets are undergoing enormous change. Innovative energy technologies are replacing conventional systems, new participants are entering the market, and new patterns have arisen in sales and trading. The European Union and its member states are partly driving these changes, through the implementation of reforms to achieve a low-carbon transition and a single energy market. Under its national Energy Strategy 2050, Switzerland faces comparable upheaval, with similar implications for market design. Following constructive, in-depth discussions with multiple stakeholders, Swissgrid published in December 2015 an informal consultation on its proposals for the future market design in Switzerland. Swissgrid applied this informal consultation approach with early stakeholder integration for the first time. This allowed for a fundamental discussion of market design elements and concepts between stakeholders and Swissgrid. In this context, Swissgrid explicitly recognized the merits of existing market design principles, such as the energy only market, efficient trading mechanisms, and European integration of electricity markets. Swissgrid s market design proposals aimed to combine and enhance these concepts, for a consistent, market-based, resilient approach. The proposed reforms focused on three themes: 1. Improvement of the price signal 2. Optimization of cross-border trading 3. Movement towards a regional approach to security of supply. To help structure the consultation responses, Swissgrid provided 10 questions. Respondents were invited to choose between answers which best represented their position. In addition, they were invited to provide additional comments and remarks, in text form, to allow a qualitative assessment. The consultation ran from 16th of December 2015 to the 16th of February Swissgrid received written feedback from 26 stakeholders, representing 17 industry stakeholders (of which 11 were headquartered in Switzerland, and six in other countries), as well as nine associations (of which one was non-swiss). These associations in turn represented more than 400 Swiss and foreign companies.

10 10 Swissgrid communicated the initial consultation results at a stakeholder meeting on the 22nd of March A total of 45 industry representatives attended, taking advantage of the opportunity to access the core consultation results, and to discuss specific topics in three parallel workshop sessions. The present document summarizes the written responses to the consultation, and the discussion in this subsequent stakeholder meeting. Finally, it defines the next steps that Swissgrid will take to improve the current market design. 1 The presentations of the stakeholder meeting are available online at:

11 11 2. Introductory Questions 2.1. Relevance of the Addressed Topics for Market Design Reform The consultation sought to establish whether Swissgrid s overall market design proposals were in line with respondents expectations and needs, by asking: Q1: Do stakeholders consider the main market design topics addressed by Swissgrid to be appropriate? The graph below represents the quantitative stakeholder feedback on this question. 70% 26% 4% 0% 100% Yes Maybe No Additional Proposals Graph 2: Stakeholder feedback on consultation question 1 As outlined above, overall a significant majority of stakeholders considered the Swissgrid market design proposals to be appropriate. A more detailed analysis based on the qualitative replies revealed that priorities for improving the price signal and optimizing cross-border trading had the broadest support. Themes covering a regional approach to security of supply and increasing the adequacy responsibility of balance groups attracted more doubt. Five participants considered that such market design reforms may exceed Swissgrid s mandate.

12 Additional Topics to Be Addressed To establish whether market participants saw the need for reforms in additional areas, Swissgrid asked the question: Q2: Are the stakeholders of the opinion that Swissgrid should address additional market design topics besides the three main topic areas of the consultation? The graph below represents the quantitative stakeholder feedback on this question. 57% 0% 100% Yes Maybe No Additional Proposals Graph 3: Stakeholder feedback on consultation question 2 From a quantitative perspective, more than half of respondents would like the consultation to cover additional market design topics. Six stakeholders felt that the consultation should additionally cover the roles of distribution system operator (DSOs) and prosumers, auto-consumption and grid tariffs (6x). Swissgrid notes that industry participants are addressing these questions in a separate process, organised by the Swiss association of electricity companies, VSE. 2 Two participants would have preferred to include the design of ancillary service markets and products (2x). Three stakeholders commented that the consultation should take into account the compatibility of the proposals with the EU (3x). Swissgrid is aware of the political uncertainties in the relationship between Switzerland and the EU, and considers all the topics raised in the consultation to be compatible with EU regulations. Regarding reform to the balancing responsibility of renewables, two participants referred to the challenge of making investments in the context of declining prices / increasing zero marginal cost generation (2x). Four consultation respondents noted that the proposed measures would have benefited from a quantitative impact assessment (4x). Two respondents considered that it was important to clarify how to prevent the abuse of market power during scarcity periods (2x). Swissgrid will consider these comments, when it prepares impact assessments towards implementation of these measures. Five respondents articulated a general wish for additional information on the design of the Integrated TSO Market (5x). Swissgrid has organized a dedicated working group, alongside industry representatives, to satisfy this request. Finally, three respondents requested more information about the stakeholder engagement process, regarding implementation of the specific measures outlined in the consultation (3x). This engagement process is outlined in the next steps section, in the more detailed description of the respective measures below. 2 VSE initiated a dedicated working group on the utility-tso interface;

13 13 3. Improvement of the Price Signal 3.1. Summary of Swissgrid Consultation Proposals 3 Swissgrid based its proposal to improve the price signal on the observation that prices in the Swiss wholesale market do not represent the true value of system resources, and in particular their flexibility and support for system adequacy. Inefficient price signals ultimately endanger supply adequacy, because they may lead to insufficient investment in relevant technologies, and thus prevent a market-based development of the electricity system. Swissgrid therefore proposed several measures to increase the efficiency of the price signal. The figure below illustrates, in blue, the sequence of markets for energy trading across time from day-ahead to delivery. The proposals, in green, include: (1) the introduction of new real-time imbalance prices, (2) measures to enable demand-side response and (3) the introduction of balancing responsibility for renewables. 3 The following paragraph provides a sketch of market design proposals to improve the price signal. For a more detailed explanation of individual measures, pls. refer to: Swissgrid (2015): Contributions to the Market Design for the Swiss Energy Strategy 2050 Consultation Document, CH Laufenburg, December 16th, 2015, pages

14 14 New elements Real-time imbalance prices 1 Auction Trading 3 Balancing responsibility for renewables 2 Demand-side response Integrated TSO Market Day-ahead Intraday Real-time Delivery t Graph 4: Swissgrid consultation proposal to strengthen the price signal First, Swissgrid envisages a new, real-time imbalance price regime, comprising a single imbalance price derived from marginal prices in the Integrated TSO Market, as currently being discussed with the Swiss industry stakeholders. To fortify this price signal, prices would be published closer to real time. In addition, it was proposed to introduce market-based or administrative scarcity pricing. This could allow price increases during tight balancing situations, thus further strengthening the signal. Second, Swissgrid proposed in the consultation document to extend the existing pooling concept from the TSO market to the wholesale market. This would allow the development of independent aggregators in the wholesale market. Such a measure would provide an additional driver to scale up demand-side response. However, it may also severely complicate Swiss market processes. Finally, Swissgrid proposed in the consultation document to move towards balancing responsibility for new renewable energy providers. This would involve a move away from the existing remuneration scheme. Instead, market prices could better account for variable renewables, such as wind and solar power, if suppliers had to meet forecast output in the same way as conventional power generation, and market their production jointly with other sources.

15 Implementation of a Near Real-Time Imbalance Price Swissgrid asked the following consultation question, to establish whether stakeholders agreed that (near) real-time imbalance prices would increase market efficiency: Q3: Do the stakeholders support the Swissgrid proposal to implement a (near) real-time imbalance price? The graph below represents the quantitative stakeholder feedback on this question. 65% 35% 0% 100% Yes Maybe No Additional Proposals Graph 5: Stakeholder feedback on consultation question 3 A two-thirds majority of respondents supported the introduction of a (near) real-time imbalance price. A qualitative analysis of the written feedback showed that 11 participants preferred that the price was published as early as possible (11x). In addition, seven parties expressed their preference for a single price (7x). Other respondents expressed a preference for a separate scarcity price (6x) and marginal price (4x). Potential risks regarding the adjustment of the current imbalance price regime might include a price overshoot reaction, resulting from too early publication of the imbalance price (4x). Two respondents saw a risk of abuse of market power in scarcity situations (2x). More general comments highlighted the risk of potential suppression of secondary and tertiary control energy prices, as a result of the introduction of a scarcity price. Other respondents argued that market participants without smart meters might be disadvantaged by the proposed imbalance price scheme. Two respondents wanted further specification and / or an expansion of the Swissgrid consultation proposal, for a simple solution that included all externalities (2x). One respondent preferred that re-dispatch costs were excluded from price formation on the Integrated TSO Market (1x). One respondent proposed to introduce geographical differentiation of imbalance prices (1x). Finally, one respondent proposed to avoid an overlap between intraday and real-time prices (1x) Additional Feedback from the Stakeholder Meeting on March 22nd, 2016 The implementation of a new imbalance price signal is a wide-reaching design proposal, and the related consultation proposal created extensive written feedback. Swissgrid therefore decided to dedicate one of three workshops during a stakeholder meeting on March 22nd, 2016 to the implementation of (near) real-time imbalance prices. One of the core discussion points at the workshop was the question whether a near real-time imbalance price would incentivize market participants to balance their portfolio. While a number of participants expected an incentivizing effect, others emphasised the

16 16 risk of publishing the wrong price signals. For example, market participants might create huge open positions, when the intraday price was below the imbalance price, or during scarcity situations in neighbouring countries. In this way, the proposed imbalance price system might motivate arbitrage between intraday and imbalance prices. Another part of the discussion focused on the interrelationship between the imbalance price and the Integrated TSO Market. Swissgrid considers that a consensus view emerged that a high sensitivity of the imbalance price to prices on the TSO market would increase the incentive for Balance Responsible Parties (BRPs) to avoid imbalanced positions. Swissgrid also clarified during the workshop discussion that it expected all balancing groups (including those with metering points) to aim to be balanced at all times. There is no intention to incentivize BRPs to create imbalances on purpose, to help the system, e.g. by being intentionally long during periods when the Swiss balancing area as a whole is short. It appeared that this feature was not formulated clearly enough in the consultation document. From an operational perspective, some BRPs with final customers highlighted that they did not have access to real-time metering data of their clients. As a result, the proposed imbalance price scheme could create a risk of higher overall costs. In response, S wissgrid highlighted that an expectation of higher overall imbalance costs would lead to an optimization of demand forecasts, which would ultimately support system stability. Finally, workshop participants expressed a preference for close to real-time publication of relevant data, where balancing energy activation, IGCC exchanges and imbalance prices were published as close to the fact as possible. Swissgrid stated that it intended to achieve publication of such data within one hour, as foreseen in the Network Code on Electricity Balancing.

17 Introduction of an Independent Aggregator The fourth question in the consultation dealt with a proposed expansion of the existing pooling model into the wholesale market, to utilize demand-side management (DSM) potential in Switzerland more efficiently. Q4: Do stakeholders see a benefit from formally introducing a new role for an independent aggregator that bundles and markets flexible resources on the wholesale market? The graph below represents the quantitative stakeholder feedback on this question. 55% 18% 27% 0% 100% Yes Maybe No Additional Proposals Graph 6: Stakeholder feedback on consultation question 4 A small majority of respondents was in favour of the introduction of an independent aggregator. Within their qualitative replies, six consultation participants supported an independent aggregator role, to increase competition (6x). However, four respondents preferred to unlock DSM potential through retail competition (4x). Concerns about the design / consequences of an aggregator model largely focused on strong opposition to the introduction of one privileged (e.g. mandatory) aggregator (7x). However, during the workshop, Swissgrid clarified that it was proposing the introduction of an independent aggregator role, which could be fulfilled by any number of market participants, rather than the introduction of one single, privileged aggregator. In other concerns, five respondents noted the complexity and cost of creating an independent aggregator (5x). More general comments referred to the concern that an independent aggregator might make it even more difficult for BRPs to maintain a balanced portfolio. One respondent proposed to include a (negotiated) compensation of retailers into the potential market design model, to pay for the extra effort created by an independent aggregator (1x). One respondent expressed the need to set-up a central hub for DSO data in Switzerland, to help the market design proposal work (1x) Additional Feedback from the Stakeholder Meeting on March 22nd, 2016 As this question attracted some of the most vigorous discussion, in the qualitative part of the consultation process, Swissgrid decided to continue and deepen the discussion during one of three parallel workshops of the stakeholder meeting on March 22nd, During this discussion, it became clear that there were diverging views on the need to introduce an independent aggregator role. At the beginning of the discussion, Swissgrid sought to clarify the role of the independent aggregator. Unlike present pooling

18 18 arrangements on the balancing energy market, an independent aggregator would have the opportunity to actively manage and re-direct already scheduled electricity flows from a supplier to a client, until national gate closure time was reached for schedule changes in the Swiss market. As a result, for example, the aggregator would have the opportunity to reduce the load at a client site, and re-direct flows to the intraday market in the case of more attractive prices there. One discussion point was how to deal with schedule imbalances at the current supplier of a client that might be created by such activities. One concern was to introduce a guarantee that the current supplier would not bear any additional (imbalance) cost, in the event that one of its clients cooperated with an independent aggregator. One extreme proposal was to change the supply structure whenever an independent aggregator became involved. In this case, the current supplier would deliver electricity according to the client-agreed schedule to the aggregator. In this way, the aggregator would adopt a supplier role, and so bear the complete imbalance and operational risk related to its activities. A second focus for discussion concerned the financial aspects of independent aggregator activities. Participants pointed out that the DSM activities of an independent aggregator would create more schedule changes, and therefore more work for supply companies. In the opinion of most discussion participants, these efforts should be adequately compensated, through an exact cost allocation. Another discussion point was compensation for so called rebound effects and related cost responsibilities. This topic related to the challenge that the primary, independent load shift activities of an aggregator might lead to secondary adjustment requirements at the supplier of a client, at the supplier s cost. Again, participants highlighted the need to define guidelines for related cost allocation and compensation. Finally, participants pointed out that the potential client market for independent aggregators should be clearly defined, during the specification of a new market design. Specifically, participants wanted to know whether an independent aggregator should only be authorized to manage large customers, which are free to choose their electricity supplier, or also to aggregate electricity consumers at the household level.

19 Balancing Responsibility for Renewable Generation Electricity market design discussions in Switzerland and abroad are increasingly considering full balancing responsibility for new renewable power generators. Swissgrid posed the following question to establish the views of relevant stakeholders: Q5: Do stakeholders agree with the assessment that a balancing responsibility for renewables would be beneficial? Should Swissgrid implement any other measures to achieve a more efficient integration of renewables? The graph below represents the quantitative stakeholder feedback on this question. 90% 10% 0% 100% Yes Maybe No Additional Proposals Graph 7: Stakeholder feedback on consultation question 5 In the quantitative assessment, a significant majority of respondents supported the Swissgrid proposal to implement balancing responsibility for new renewables. Qualitative comments relating to this question revealed strong opposition to the continued use of feed-in tariffs, and instead support for the direct marketing of renewable power, or for schemes which provided a power price premium (6x). A number of concerns were raised regarding the present system of support for renewable energy. These included the difficulty in refinancing investments, in the light of declining prices and an increasing share of zero marginal cost generation (2x). One respondent proposed research into the potential to deregulate other costs, e.g. to allow network costs to be determined in competition with batteries. Further proposals were made, to abolish the priority dispatch of renewable power, as well as to review curtailment priorities in the current market design. However, respondents also emphasised the importance of avoiding retroactive policy changes (1x).

20 Next Steps Swissgrid will develop a detailed concept regarding the strengthening of the price signal with near real-time imbalance prices. Relevant underlying assumptions will be analysed through an impact assessment. For example, this will verify the expected, additional value of the proposed measure, in terms of a fair pricing for flexibility, as well as for increasing security of supply in critical situations, and for the support of investments into innovative, demand-side focused technology. Swissgrid will conduct a detailed impact assessment and implementation plan for this measure by the end of Under present plans, stakeholders will be invited to discuss the implementation proposals during the fourth quarter of this year. The extension of the present pooling concept into the wholesale market, through the introduction of an independent aggregator role, would be expected to support the efficient utilization of additional Swiss demand flexibility potential. However, certain prerequisites for the implementation of efficient processes are not in place. Conceptualization of this market design reform would therefore require the mobilisation of considerable resources from market participants and Swissgrid. Meanwhile, the social welfare value gain is expected to be relatively small over the next three to five years. As a result, Swissgrid has decided not to prioritize an independent aggregator at this point, but to continue to monitor the development of the required prerequisites, and to re-evaluate the situation in The proposal to introduce balancing responsibility for new renewable generation drew very high approval in the consultation process. This measure would support efficient market integration of new renewables, and lead to a level playing field for old and new technologies, and an expected overall increase in social welfare. There is a governmental initiative to reform the support scheme for renewables, through the Swiss Energy Strategy Swissgrid will support the implementation of a resulting political decision.

21 21 4. Optimization of Cross-Border Trading Switzerland is hugely impacted by on-going electricity system changes in Europe. The country has about 40 cross-border electricity connections, which total about 9 gigawatts (GW) of net transfer capacity. Cross-border flows in Switzerland represent around 10% of the entire cross-border flows in the synchronized European continental grid. However, bilateral negotiations between Switzerland and the EU have delayed market integration and led to increasing isolation of Switzerland from the European internal energy market. As a result, Swissgrid is increasingly focusing on incremental improvements, and proposed three specific measures to facilitate cross-border trade. These are expected to have a higher chance of short-term realisation, although the relationship between the EU and Switzerland may yet pose an obstacle, given its critical impact on cross-border trade.

22 Summary of Swissgrid Consultation Proposals 4 The figure below illustrates, in blue, trading volumes in intraday markets for energy and cross-border transmission rights. The proposals, highlighted in green, include: (1) an alignment of cross-border gate closure times with neighbouring countries, (2) the introduction of cross-border auctions to complement today s first-come, first-served allocation of transmission rights and (3) the participation of Switzerland and possibly Austria in Germany s 15-minute intraday call auctions. Switzerland and cross-border Gate closure Neighbouring countries Energy neighbouring countries Intraday trading Cross-border capacity First come, first served Intraday trading Energy Switzerland 15 min auction Cross-border auctions Improve gate closure t Graph 8: Swissgrid consultation proposals to optimize cross-border trading Swissgrid proposed in the consultation document to seek to reduce the intraday, cross-border gate closure times on its borders with Germany and Austria, as well as the corresponding closure time for trading within Switzerland, to 30 minutes before real time, reflecting current trading times in the German and Austrian intraday markets. Such harmonization would lead to closer market integration at the intraday level. This could create benefits for all market participants. The German, Austrian and Swiss intraday markets would have greater opportunities to exchange flexibility, and benefit from additional liquidity for short-term orders. The main implementation challenge would be to ensure compatibility with international TSO processes and regulations, such as network codes, which are highly interdependent. An intraday opening auction for cross-border transmission rights and electricity on Switzerland s northern borders could address the increasing significance of intraday markets for system optimization. Such an auction would be in addition to present, continuous intraday trading, as well as the expected implementation of the European cross-border intraday project (XBID). It would ensure a more efficient allocation of cross-border transmission rights compared with today s first-come, first-served allocation principle. 4 The following paragraph provides a sketch of market design proposals for the optimization of cross-border trading. For a more detailed explanation of individual measures, pls. refer to: Swissgrid (2015): Contributions to the Market Design for the Swiss Energy Strategy 2050 Consultation Document, CH Laufenburg, December 16th, 2015, pages

23 23 A joint 15-minute intraday call auction covering Switzerland, Germany and possibly Austria would present a further opportunity to improve the exchange of flexibility between these countries. Such a joint, multilateral auction for 15-minute products and related transmission rights for the following calendar day would build upon the success of the present intraday call auction in Germany. This new auction, which was introduced by EPEX SPOT in 2014, already accounts for more than half of the total trading volume of German intraday 15-minute contracts.

24 Appraisal of the Proposed Measures to Optimize Cross-Border Trading In order to establish whether consultation participants supported the proposals to improve cross-border trading, Swissgrid formulated the following question: Q6: Do the stakeholders support the proposed measures for an optimization of cross-border trading? The graph below represents the quantitative stakeholder feedback on this question. 57% 43% 0% 100% Yes Maybe No Additional Proposals Graph 9: Stakeholder feedback on consultation question 6 Consultation responses indicated that participants broadly supported the proposed measures for optimization of cross-border trading, while a minority retained some doubts. A more detailed analysis of qualitative feedback revealed strong support for a reduction of lead-times and the introduction of a 15-minute intraday call auction (10x; 11x). Limited concerns raised included the present, diverging gate closure times at Swiss borders with neighbouring countries (6x). In addition, concern was expressed that the introduction of a 15-minute intraday call auction should not lead to correspondingly delayed transfer capacity corrections, compared with at present. However, there were more diverging views regarding the introduction of cross-border auctions, with almost equal explicit support (6x) and doubts or additional discussion (5x). The stakeholder feedback supported the statement that auctions would remove the technological advantage of some players, and lead to an allocation according to economic principles. This was considered to be an important step to increase market efficiency. Some of the respondents expressed concerns about compliance with a harmonised European, or at least regional, solution, which would be of increasing importance, given the very significant intermittent generation penetration presently increasing interdependencies between countries. For example, one question concerned compatibility with the EU Electricity Target Model, which defines first-come, first-served as one of the pillars for cross-border intraday capacity allocation. Another stakeholder noted that guidelines on Capacity Allocation and Congestion Management (CACM) allowed the introduction of complementary regional intraday auctions within or between bidding zones. However, Swissgrid should consider whether its proposal also fulfilled the CACM obligation to avoid adverse impacts on liquidity or discrimination against market participants.

25 25 On an operational level, respondents noted the importance of mitigating any loss of liquidity in continuous trading, following modification of the intraday capacity regime. Therefore, one respondent called on Swissgrid to run a separate consultation into how continuous trading and auctions could coexist, without suspending continuous trading, and whilst maintaining OTC intraday trading transactions. Further input focused on the interface between day-ahead and intraday capacity allocation. There was explicit criticism by one respondent that the current methodology for cross-border trading was designed to maximise flows on a day-ahead basis, which might result in an undervaluation of cross-border capacity and an inefficient use of flexible assets across borders. This inefficiency would cause welfare losses. Therefore, it was proposed to reserve some cross-border capacity for allocation in the intraday time frame. Another respondent described in more detail potential approaches for such capacity splitting, and proposed further analysis into achieving greater relevance of the price signals generated by the auction. Three respondents considered that the introduction of a 15-minute intraday call auction involving Switzerland and Germany would have the same effect as an opening auction (3x). An auction that utilizes residual capacity from the day-ahead market would allocate any valuable capacity, thus making an opening auction redundant.

26 Additional Topic Proposals Swissgrid addressed the following question, to establish whether respondents felt that additional measures were needed to optimize cross-border trading, beyond those proposed in the consultation: Q7: Do stakeholders propose additional measures that are not mentioned in the consultation document in order to increase the efficiency of cross-border trading? The graph below represents the quantitative stakeholder feedback on this question. 39% 0% 100% Yes Maybe No Additional Proposals Graph 10: Stakeholder feedback on consultation question 7 Many consultation respondents proposed additional measures to optimize cross-border trading transactions. The most prevalent suggestion was to implement full market coupling with neighbouring countries (5x), which Swissgrid and its partners have sought to establish in recent years. In other suggestions, three respondents proposed to terminate long-term, cross-border capacity contracts with France, and to implement instead cross-border balancing markets (3x). Two respondents proposed research into measures that might increase the market efficiency at Switzerland s southern borders (2x). Finally, one respondent was in favour, and another against, allowing capacity reservation for intraday markets.

27 Next Steps After considering the consultation feedback, Swissgrid will work to develop a more detailed concept on potential solutions for the introduction of implicit cross-border intraday auctions. Depending on how they are implemented, cross-border auctions are expected to increase market efficiency, and lead to a fair distribution of short-term cross-border capacity rights. As noted by the consultation respondents, various market design aspects relate to the cross-border auction theme. Therefore, in an initial phase, Swissgrid will analyse the interfaces of the proposal with the current political framework, network codes and guidelines, lead-time sequences, gate closure times and so forth. In addition, Swissgrid will follow the proposal from consultation respondents to optimize cross-border auctions at Switzerland s southern borders. Reduction of intraday, cross-border gate closure times can make an important contribution to more equal participation and adequate pricing of Swiss flexibility on neighbouring intraday markets. Swissgrid is further evaluating the opportunities for a reduction of cross-border gate closure times. In this context, the interfaces and process sequences between national intraday trading markets, balancing market transactions and grid security calculations are especially relevant. Furthermore, Swissgrid will continue its active participation in gate closure timing-related discussions as part of the pan-european cross-border intraday trading project (XBID) and ENTSO-E working groups. Following the consultation, Swissgrid held initial exploratory stakeholder discussions regarding the implementation of a joint 15-minute intraday call auction covering Switzerland, Germany and possibly Austria. Following these discussions, Swissgrid believes that there are presently considerable obstacles for implementing such a proposal in the short term, including technical challenges, and limited support. The latter is a result of the same difficulties in the bilateral negotiations between Switzerland and the EU that currently prevent the implementation of full market coupling with neighbouring countries, as requested by some consultation respondents. Swissgrid will monitor the situation awaiting more promising conditions. Regarding the suggestion, from some respondents, to optimize cross-border trading through the introduction of cross-border balancing markets, Swissgrid is already an active partner of the TERRE project which serves to advance this purpose. 5 5 For an overview of the TERRE project pls. refer to: DIW (2016): Trans European Replacement Reserves Exchanges (TERRE), Presentation during the Future Power Market Platform, Amsterdam, April 14th, 2016; Online access:

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29 29 5. A Regional Approach to Security of Supply TSOs face growing challenges to ensure security of supply. A well-functioning market provides the best basis for stable, real-time grid operations. However, recently there have been a growing number of national discussions on supply adequacy which have led to the introduction of a variety of different national capacity mechanisms. The resulting patchwork risks distorting the European energy market. Swissgrid therefore seeks to move towards a market-based, regional approach to security of supply, with three measures.

30 Summary of Swissgrid Consultation Proposals 6 The figure below illustrates the responsibilities of balance groups (BG) within and outside Switzerland for security of supply. The proposals include: (1) strengthening the balancing responsibility within Switzerland, (2) improving regional and European co-operation on security of supply and (3) measures to enable cross-border trading of adequacy. BG DE 2 FR 1 AT BG BG BG BG 3 BG IT Graph 11: Swissgrid consultation proposal to strengthen the regional approach to security of supply. Swissgrid seeks to increase the responsibility of balance groups for achieving generation adequacy. Such an approach contrasts with a more centralised regime, where the government or TSO bears such responsibility. Increasing the balancing responsibility of balance groups, for example through incentives to hedge against future market illiquidity or adequacy problems, would add to efficient long-term investment signals. Swissgrid proposed in the consultation document greater co-operation on security of supply, and especially the provision of adequacy, at the regional and European level. Such broader co-operation would be preferable to today s largely national approaches, which may result in an overcapacity in conventional generation. Co-operation would also support the development of a more efficient price signal for the supply of flexibility. Balance groups should have the opportunity to hedge adequacy risk across borders. TSOs could provide security on the long-term availability of cross-border transmission capacity required for participation in international capacity mechanisms. For countries without a capacity mechanism, the cross-border hedging of adequacy could be enabled by the introduction of interconnected markets for hedging contracts, such as physically-backed option contracts. 6 The following paragraph provides a sketch of market design proposals for a regional approach to security of supply. For a more detailed explanation of individual measures, pls. refer to: Swissgrid (2015): Contributions to the Market Design for the Swiss Energy Strategy 2050 Consultation Document, CH Laufenburg, December 16th, 2015, pages

31 Adequacy Responsibility for Balance Groups The following question aimed to establish whether stakeholders agreed that making balance groups more responsible for achieving generation adequacy would generate market efficiency benefits. Q8: Do the stakeholders agree with the assumption that greater adequacy responsibility for balance groups, in combination with a strengthened price signal, would increase market efficiency? The graph below represents the quantitative stakeholder feedback on this question. 30% 45% 25% 0% 100% Yes Maybe No Additional Proposals Graph 12: Stakeholder feedback on consultation question 8 The quantitative responses indicate mixed views regarding the proposed measure. The qualitative feedback indicated support for strengthening the price signal (5x), and the implementation of a real-time imbalance price (5x). However, nine respondents, including some that supported a strengthened price signal, expressed doubts regarding greater adequacy responsibility for balance groups (9x). Concerns included the view that imbalance limits would reduce liquidity (6x), and that balance group responsibility may not be sufficient to ensure adequacy (4x). Some respondents proposed alternative approaches for ensuring security of supply. These ranged from a centralized system for adequacy monitoring (5x), through to supplier responsibility based on obligations (3x), and the introduction of a national capacity remuneration mechanism (1x). One respondent considered that the publication of additional information on import limits may be helpful.

32 Forward Hedging of Sufficient Resources for End-Customer Supply Swissgrid posed the following question to establish whether stakeholders agreed that strengthening resource forecasting, and if necessary hedging, would help guarantee end-customer supply. Q9: Do the stakeholders agree that balancing responsibility should include the forecasting and, if necessary, forward hedging of sufficient resources for end-customer supply? The graph below represents the quantitative stakeholder feedback on this question. 35% 30% 35% 0% 100% Yes Maybe No Additional Proposals Graph 13: Stakeholder feedback on consultation question 9 The quantitative assessment shows an equal distribution of answers for and against balancing responsibility, including forecasting and, if necessary, forward hedging of resources for end-customer supply. In the qualitative assessment, three parties explicitly supported the consultation proposal (3x). In general, respondents accepted the view that forward hedging could contribute to security of supply. And they supported the view that without better hedging and balancing of the difference between production and consumption, it would not be possible to strengthen regional responsibility for security of supply. However, practical concerns were also raised (4x). For example, respondents were concerned that the proposed measure might create unexpected consequences and / or relatively high hedging costs, especially for small companies. Another concern was that market parties may not have a long-term view of their own portfolio and general market developments. Furthermore, the complexity of hedging activities and the regular forecasting of hedging needs might be difficult, especially for small companies. Based on current market responsibilities in the electricity system, two respondents highlighted how balancing groups are responsible for a balanced schedule at the point of time of delivery, but not for mid-term system adequacy (2x). In addition, the balancing price signal would be a short-term indicator, and perhaps therefore of limited use to guide investments which would increase the security of supply (1x). Other risks included the encouragement of over-procurement and related economic inefficiencies, and that physically-backed option contracts would disadvantage pure traders without their own generation. This might lead to a less attractive, less liquid intraday market (2x). Two respondents considered that it might be useful to establish a central authority which imposed efficient measures to guarantee security of supply, such as hedging and capacity obligations (2x).