On expected behaviour of market participants regarding offering of capacity on the balancing and day-ahead electricity market
Fluctuation of energy prices in 2022, including reaching maximum price on the Nord Pool day-ahead market on August 17, triggered and amplified processes aimed at containing prices within a reasonable level. Consultations of the national regulatory authorities of Estonia, Latvia, and Lithuania (the NRAs) about reviewing and adjusting elements and processes related to planning the use of production capacities and placing of bids as well as providing advice to market participants and other relevant stakeholders have been and continue to be ongoing and result oriented. This approach also remains valid in 2023 in a situation when energy markets have recovered from the turmoil experienced throughout 2022.
In 2022, several balancing service providers (BSPs), balance responsible parties (BRPs) and transmission system operators (TSOs) approached the NRAs for an opinion on how market participants ought to behave on the energy market and what actions shall be considered acceptable or, to the contrary, shall be regarded a breach of Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency (REMIT). Answers have been provided to the respective market participant (MP), however, as both the questions and the answers cover issues fundamental to the functioning of energy market and are relevant to all MPs, the NRAs make their opinion available to all relevant stakeholders.
MPs asked if high prices are acceptable, especially in cases when MPs have not offered their available capacity to the market.
The NRAs provide explanation that based on ACER REMIT Guidance, REMIT does not prohibit prices to be high, provided that they reflect a fair and competitive interplay between supply and demand. It should be noted that technical capacity withholding can under certain circumstances constitute a breach of REMIT Article 5.
MPs asked if MPs are obliged to offer their capacity on the day-ahead market before offering it to the balancing market, and if MPs should act in a way, which ensures that balancing energy prices are not excessively high. MPs also asked if offering capacity in a different sequential electricity market at different price level is in line with REMIT (e.g. day-ahead market and balancing energy market).
The NRAs explain that there exists no formal threshold for balancing energy prices, which are up to the market to determine depending on a particular situation, except for the technical maximum bidding limit. It would be expected that market participants contribute to the day-ahead market before contributing to other markets although it is not an obligation. Market participants have no obligation to offer certain generating capacity on the balancing market, in case this obligation is not coming from contracts within balancing capacity market.
Activity on the market should be guided by market logic, however, respecting the capacity withholding rule according to the ACER REMIT Guidance, that the market participant has to have legitimate technical, regulatory and/or economic justification for not offering its available generation capacity or for offering it above the marginal cost. The NRAs acknowledge that liquidity and competition in the Baltic balancing market is limited, which might create situations where hours with insufficient balancing capacity and / or volatile prices occur.
In Lithuania, manual frequency restoration reserve (mFRR) capacity providers are obliged to offer bids to energy market. In Estonia and Latvia there is no capacity mFRR market currently, therefore market participants making offers to mFRR energy market are free to offer bid volumes that they currently have, respecting the REMIT technical capacity withholding rule (that available capacity should be given to market).
MPs also asked for opinion on how MPs should behave in different market segments.
The NRAs explain that as to the guidance on how market participants should behave in different market segments of the electricity market, the NRAs suggest adhering to the principles outlined in the ACER REMIT Guidance on the application of the REMIT especially paragraph t) of section 6.3.2. The regulatory framework in the Baltic States does not explicitly require a market participant to offer its available generation capacity on the day-ahead market before offering its capacity on the mFRR / automatic frequency restoration reserve (aFRR) or single intraday coupling (SIDC) market. However, the ACER REMIT Guidance elaborates on what kind of action regarding not offering available capacity on the market and under what circumstances would potentially be considered a breach of Article 5 of the REMIT. A deliberate decision to limit capacity available to the day-ahead market and saving that capacity for frequency restoration reserve (FRR) or SIDC market resulting in unusually high prices may result in a situation requiring analysis about whether such behaviour is in line with REMIT or constitute a breach. Also, regarding the guidance in case market participant has no legitimate technical, regulatory and/or economic justification for not offering its available generation capacity to wholesale market or for offering it above the marginal cost, it is considered a breach of REMIT.
ACER REMIT Guidance points toward a case-by-case approach when assessing whether a situation when a market participant is not offering its available generation capacity to day-ahead electricity market, but instead chooses to offer its available generation capacity either to FRR markets (mFRR, aFRR) or SIDC market, may constitute a breach, i.e. such behaviour per se is not forbidden. However, the position of the Baltic NRAs is aligned with that one of the NEMO and Nordic NRAs that such conduct is not acceptable. Such a position stems from the consultation with the Nord Pool and Nordic NRAs, which indicates that offering capacity for the day-ahead market before offering capacities for the intraday and balancing market is considered to be the normal modus operandi.
There are aspects, which support such an approach: for example, day-ahead price serves as a reference price to future and retail contracts, providers of utility services reference their provisional costs to the day-ahead price as well. It cannot be disregarded that transmission capacity is allocated for the day-ahead market, and that complicates the task of transmission system operators, as TSOs are responsible to exchange the balancing energy in order to ensure the operational security and to maintain the balance in the power systems.
Availability of capacity on the balancing market may generally be a valid argument for the generators to be aware of the potential balancing needs, however, under circumstances where even smaller production capacities count, ensuring liquidity of the balancing market does not seem to be an argument strong enough to justify generators / market participants withholding capacity from the day-ahead market.
ACER REMIT Guidance Section 6.2.2 (Securing the price at an artificial level) stipulates that bidding resulting in a high price per se does not necessarily constitute a breach. The ACER REMIT Guidance explains that “the notion of ‘artificiality’ entails that the level of the price of a wholesale energy product does not correspond to the one that would have emerged from a fair and competitive interplay between the supply and the demand in that particular market, reflecting market fundamentals”. The ACER REMIT Guidance also elaborates that “an artificial price is not to be confused with an abnormal price. A market price could evolve to extreme highs or lows (and hence be abnormal compared to the usual on a certain market) and still be totally justified by market fundamentals (e.g. electricity generation shortage). In that sense an abnormally high or low price justified by market fundamentals is not necessarily artificial”. Thus, unless there is evidence, which points to actions by a market participant that can be deemed unjustified, bids resulting in high prices under objective market conditions shall not necessarily constitute a breach. The NRAs point out that “making bids regardless of any justified reasoning” might result in a situation qualified as ‘artificial’ and, therefore also qualify as a breach of REMIT.
In addition to what was mentioned in this document we would like to highlight that there was no obvious indication nor evidence of a systematic manipulative behaviour or insider trading under REMIT likely to affect the previously occurred high energy price situations on the Baltic balancing market. Monitoring activities by the three NRAs are ongoing. The question as to whether there is a dominant company on balancing market and whether it has abused its position can only be answered after an in-depth analysis. Competition authorities typically undertake such analysis only in case there are sufficiently clear indications on the market pointing at a possible abuse. Based on the considerations presented to the NRAs, the NRAs reckon there are no sufficient grounds to initiate proceedings under competition law at this point of time. However, such position might always be reconsidered in the light of further developments on the market.
Also, it is important to mention that in accordance with Article 15 of REMIT, the Baltic TSOs, serving as Persons Professionally Arranging Transactions (PPATs) in the Baltic mFRR balancing energy markets, shall notify the national regulatory authority without further delay, when it’s reasonably suspicious that a transaction might breach Article 3 or 5 of REMIT.