The power market design column - The importance of ACER for Europe and therefore for the Netherlands

The energy debate in the Netherlands sometimes seems to care little about European developments. That is unjustified. European legislation determines Dutch energy policy, there is a European gas and electricity market and the climate challenge is an international challenge by definition. One of the leading European bodies is ACER, the European regulator, or rather, the European Agency for the Cooperation of Energy Regulators. I spoke with Martin Godfried and Dennis Hesseling about the importance of ACER for the Dutch energy sector. Both have been a member of ACER's management team for many years. 

(This article is a translation of an article that was published earlier at Energeia.)

• Martin Godfried has been with ACER for 9 years and is head of the Market Surveillance and Conduct Department since 2016.
• Dennis Hesseling has been head of the Gas Department since 2012.
• Both emphasize that ACER is a European agency and that Dutch employees in ACER are therefore not particularly committed to Dutch interests.

An independent agency with a limited but increasing mandate

ACER was founded in 2011 and is based in Ljubljana. ACER is one of the decentralized agencies of the European Union. Agencies are separate legal entities with a specific range of tasks to help Member States and the European institutions in the implementation of European policy. The role of ACER was established in European Regulation 713/2009, which was part of the so-called third package of legislation for the European energy market. ACER's mandate was initially limited. The aim was mainly to coordinate the work of the national regulators in European affairs. ACER's tasks have been expanded with the entry into force of the REMIT Regulation (No. 1227/2011) and the TEN-E Regulation (No. 347/2013). The REMIT Regulation aims to safeguard the integrity and transparency of the wholesale energy market. This Regulation enables ACER and national regulators to monitor the market and detect possible abuse or price manipulation. The TEN-E Regulation contains guidelines for the development of trans-European energy infrastructure. The limited mandate of ACER is caused by the reluctance of Member States to transfer powers to “Brussels”. Last year, with the so-called Clean Energy Package, ACER's mandate was strengthened and the ACER Regulation was replaced by Regulation No. 2019/942. In the electricity sector, for example, ACER was given a stronger role in the development of the European Network Codes, in decision-making on methods that are determined per region, in the supervision of the regional operational centres and in the monitoring of reliability. ACER publishes an annual monitor of the European gas and electricity markets.

What successes has ACER achieved that are also important for the Netherlands?

Hesseling's team focuses on those Member States, such as Bulgaria and Romania, where much remains to be done to establish a properly functioning gas market. “The Netherlands is simply doing very well in that regard. The European network codes for gas are almost fully implemented and the Netherlands often serve as an example for other Member States. The Dutch methods for determining the transmission tariffs and the process in which these methods are established are good practice. In addition, TTF, the Dutch hub for gas trading, has developed tremendously. It is now one of the three most important hubs worldwide, next to Henry Hub and the North East Asia Index. This puts the Netherlands on the map and also helps the European Commission to strengthen the Euro as an international currency. This reduces currency risks for European, and therefore also Dutch, companies. But the direct importance of TTF for Dutch consumers and industries is the gas price. Nowhere else in Europe, the wholesale price for gas is on average so low. Not the proximity of gas sources, but the degree of competition between suppliers is decisive."

Liquidity attracts liquidity. This means that market parties in other Member States will also use TTF to hedge risks. Isn't that at the expense of liquidity on the other gas hubs in Europe?

Hesseling: “That does indeed happen and the TTF benefits from it. The other gas hubs are modelled on the example of TTF, although their futures market will probably never achieve the liquidity of TTF. But that is not necessary. Non-Dutch market participants continue to need their local gas market to balance physical positions. However, if risks for these parties can be better hedged on TTF, these market participants will also save costs. A good example of a win-win situation.”

The REMIT Regulation is the basis for Godfried’s work. ACER collects and assesses all relevant market information at a central level. “The Netherlands and all other member states are benefiting from ACER's work. The central collection and screening of market information is much more efficient. As soon as our team detects something suspicious, the relevant national regulators are informed. ACER has been able to coordinate and harmonize the actions of national regulators. The rules for tackling market abuse are now applied in a consistent manner. All Member States benefit from this because confidence in the proper functioning of the energy market has increased. That is a precondition for more competition. And the advantage of competition has already been mentioned with the example of the TTF.”

“REMIT is a form of decentralized regulation. ACER and the national regulators are jointly responsible for the implementation of the framework. The regulators are responsible for enforcement and investigation of possible misconduct within their jurisdiction. Any fines will flow back to the national treasuries. In total, more than 75 million euros in fines have been handed out since the start of REMIT.”

In addition, ACER has also been able to directly investigate cases of possible REMIT violations itself since 2019. “Unfortunately we don't have enough resources for that. I have therefore informed the national regulators that we are currently unable to follow up on requests to assist with investigations.”

REMIT: no fines yet in the Netherlands

Meanwhile, violations of REMIT and fines have been imposed by national regulators in 14 cases. The first case in Spain immediately resulted in the highest fine. Iberdrola received a € 25 million fine but appealed and the case is still open. It is also striking that the Hungarian TSO has been fined. So not only producers and traders have to deal with REMIT. Until now, Dutch companies have remained out of harm's way.

One of the classic issues is to what extent producers are free to offer their production at any price and in the segment of the market of their choice. For that purpose, ACER has issued guidelines that regulators can use. Does these guidelines provide sufficient guidance?

Godfried: “Let me start by saying that ACER has not drawn up guidelines that determine the price at which market parties should offer their energy. REMIT does not prohibit high prices. The possibility of high prices is important, for example to allow for recovery of fixed costs, albeit without any guarantee that this will actually happen. ACER has, however, indicated in which circumstances the withholding of production capacity could constitute a violation of REMIT. Two aspects play a role. Firstly, the question is whether the relevant market party is able to influence the price or the interaction between supply and demand. Secondly, the question is whether there were legitimate technical or regulatory reasons for withholding capacity, or whether there was an economic justification for such bidding behaviour. Offering capacity at a very high price so that the capacity will not be used, can also constitute withholding. The latter is called financial capacity withholding. But each case must be considered individually because, among other things, the factual framework differs from case to case.”

That still leaves a lot of room for interpretation. Strictly speaking, any decision to withhold capacity has an impact on prices. And what does economic justification mean? Can a producer offer his energy at, for example, 100 Euro if he thinks that consumers are willing to pay 100 Euro? If it is too expensive, it will be punished by competition. If not, his energy is worth 100 Euro.

Godfried: “The price level of electricity is so sensitive to withholding available production capacity, precisely because the demand for electricity is relatively price insensitive. Furthermore, I agree that in perfect competition, without market failure, producers are disciplined by the market. In that case, they cannot influence the price level themselves by withholding available production capacity. I wonder then, for what purpose they would do that.”

REMIT: What about Gopacs?

In recent years, much attention has been paid to the introduction of local markets. This usually concerns a platform where the TSO or DSO can contract flexible capacity for congestion management. Gopacs has been launched in the Netherlands for this purpose. The question is whether market parties should be allowed to withhold capacity from the “normal” market places (such as the day-ahead market) if they do offer that capacity for resolving congestions. This is also called the inc-dec game. Could such bidding be a violation of REMIT? And if so, what is required to adequately monitor such behaviour?

Godfried: “That's an excellent question. ACER has not published any guidance on this, but I will give my personal opinion. If market parties can choose between timeframes, opportunity costs play a role. For example, it is logical for a market participant to offer its capacity in a forward market at a premium if it is expected that shortages may arise for the delivery period later. There is nothing wrong with that in itself as long as that party is unable to influence the price for the relevant delivery period at a later stage. Opportunity costs can also arise, for example, if the total amount of energy that can be supplied is limited, such as with batteries. Another example is when a production resource can be used for various purposes such as the production of electricity and heat.” 

Nevertheless, the bidding behaviour in which capacity is withheld from the normal market and offered for congestion management quickly resembles manipulation. The producer expects to earn more from congestion management. However, the market price is increased and the congestion would have been less severe if this producer had offered its capacity on the normal market. Ultimately, the capacity will be used, but that is at the request of the grid operator and this activation will be accompanied by a request to another producer, on the other side of the congestion, to balance it.

Godfried: “I understand your view. We are also interested in this topic in ACER because congestion management is becoming increasingly important. This requires some thinking and I do not rule out that this topic will be discussed in the REMIT Expert Group, which meets at least twice a year.”

Some smaller parties, including Dutch parties, such as aggregators, are complaining about the administrative burden that REMIT entails. Are these complaints justified?

“REMIT has enabled the monitoring of the wholesale energy markets and is proving its value. The integrity and transparency of the markets in the various Member States have clearly improved. That is what we hear at the REMIT meetings and that impression is confirmed by industry, regulators and governments. The administrative burden had to be limited to what is necessary for the implementation of REMIT. The legislator and ACER were well aware of that. For example, consumers with a consumption of less than 600 GWh per year are excluded from the scope of REMIT. Certain contracts for the supply of up to 10 MW electricity and up to 20 MW natural gas from small production facilities do not need to be reported by default. Moreover, the central and standardized data collection reduces the administrative burden compared to a decentralized approach. ACER has also streamlined reporting of financial and energy-related data. Finally, ACER publishes guidelines that explain in detail what is expected of market participants. ACER is open to making improvements where possible. As always with sector-specific regulations, this requires collaboration with many stakeholders. "

New legislation for decarbonisation and new tasks for ACER?

In the latest monitor of the European gas market, ACER not only looked back on the year 2019, but also took a look at the future. Many words have been spent on sector coupling. The use of unabated natural gas will decrease and, insofar as electrification is not feasible, this will have to be covered by decarbonised or sustainable gases such as hydrogen. It seems as if ACER is already excited to be able to respond to these developments. But for the time being there is no European hydrogen network and there is no law that gives ACER a role in this development.

Hesseling: “We did indeed take an advance on future developments in the latest monitor. It is clear that ACER can and wants to play a role in this. The European Commission has announced that it will come up with a proposal for new European legislation this year. It is an enormous challenge to arrange this properly at European level. There are also major challenges from a regulatory perspective. When it comes to blending sustainable gases, such as biomethane, into the existing natural gas network, the existing framework of laws and regulations for the gas market can simply be used. However, we expect that hydrogen, particularly produced by electrolysis, will also play a major role. At the moment we are still talking about small quantities. But in 2050, hydrogen could play a similar role to natural gas now. On the one hand, hydrogen is comparable to natural gas, also when it comes to transport. On the other hand, the entire infrastructure for hydrogen still has to be developed simultaneously with a market for hydrogen. Obviously, the transport of hydrogen via pipelines should be placed with a regulated monopolist. The Netherlands has a unique position in this regard. The Dutch gas network is highly developed and pipelines are often duplicated for L gas and H gas. As a result, part of the network can be made suitable for hydrogen, while at the same time natural gas can still be transported through the other part. Another difference is that natural gas only has a limited amount of production sources. Hydrogen can be produced in numerous places, on a large and small scale, by means of electrolysis. And that is more comparable to the electricity market. ”

The Dutch TSOs, TenneT and GTS, would like large-scale electrolysis to be developed at locations that are favourable for the transmission infrastructure, for example on the coast where a lot of electricity from offshore wind is available. The electricity grid is then relieved. What is ACER's vision?

Hesseling: “ACER sees electrolysis, or conversion between energy carriers in general, as a technology that must be developed by the market. The TSOs cannot determine the locations for electrolysis, but they can steer them via the tariffs for connection and use of the grid.”

Steering via location-dependent tariffs is possible, but for the TSOs the question remains what the effect of such locational signals will be. Perhaps the TSOs will still receive requests to connect to locations that are unfavourable to them.

Hesseling: “That is certainly possible. In such a case, other factors apparently play a role for the market party, which compensate for the disadvantage of a high connection and transmission tariff. This will lead to more costs for transmission infrastructure, but that does not mean that the outcome is suboptimal. We also welcome the European Commission's proposal to amend the TEN-E Regulation (the Regulation with guidelines for the development of trans-European energy infrastructure). We still see room for improvement, but we welcome that scenario setting will be more neutral based on guidelines to be drawn up by ACER. The joint TSOs are now drawing up these scenarios, largely at their own discretion, while they also have an interest themselves. It is also good, with a view to the necessary sector integration, that scenarios are drawn up jointly for both electricity and gas.”

ACER is also positive about the Commission proposal that allows electrolysis to be classified as a project of common interest. Such projects are eligible for financial support and must be included by the TSOs in their European grid development planning. Would it not be more logical to only include grid infrastructure within the scope of these projects of common interest?

Hesseling: “I understand your reasoning, but I wouldn't separate the two so strictly. There may well be unregulated activities that cannot complete their business case without financial support, certainly not in the early stages of development, as may well be the case with electrolysis now. As investments in electrolysis facilities can have system advantages and can later result in economies of scale and cost reductions, the government can make funds available in the early stages to initiate such developments. At EU level, the TEN-E Regulation is the ideal instrument for this. ”

Dialogue with the market remains important

Is it difficult from Ljubljana to keep in touch with national developments in the various Member States and the Netherlands in particular?

Hesseling: “As mentioned, we do not focus specifically on the Netherlands. In general, the national regulators are our most important partners and therefore also sources of information for national developments. For example, the cooperation with ACM is excellent. At the same time, contacts with other stakeholders are also important. ACER regularly organizes consultations and webinars. The reactions of market parties are essential to us. For example, the Romanian regulator recently reported very positively about the Romanian implementation of the gas balancing code. But the response from a market party made it clear that this high score was incorrect. We then corrected that. In any case, the quantity of identical answers in a consultation is not decisive. We always look at the content and argumentation. ACER recently conducted a survey among stakeholders and was advised to pay more attention to external communication. Under the leadership of our new director, Christian Zinglersen, a new website has been put into use and ACER has become more active on Twitter and LinkedIn. Incidentally, a positive side effect of the corona measures is that we have many more participants in our webinars compared to the physical seminars that we previously organized. At the same time, I miss the direct contacts. A conference like Flame has always been an excellent platform for me, not only to tell the ACER story but also to talk informally with market parties afterwards. This often led to new insights. ”

This is my 29th column on power market design issues. The earlier columns covered the following topics: Flexibility and foisonnement, reliability and load shedding, regulation of congestion income, dynamic network tariffs, energy communities, scarcity pricing, the Florence Forum, active system management, network planning & sector coupling, off-shore assets, intraday capacity hoarding and pricing, interconnectors, international comparison of market designs, cross-border capacity calculation, flexibility, cross-border capacity, electric time and unintended exchanges, EU Network Codes, price formation and zero marginal cost generation, simplicity in the Clean Energy Package, smart grids, storage, auto-generation, balancing, VoLL, demand side response, interconnectors and the Economist on market design.

Disclaimer: The views as expressed in this column do not necessarily reflect the views of Statkraft

Paul Giesbertz

paul.giesbertz@statkraft.com