Europe’s umbrella body for energy regulators is certain to recommend a split of the Germany-Austria electricity market bidding zone “relatively soon”, it was confirmed on Thursday morning.
The expected split is certain to have far-reaching implications. Energy traders have around €25bn worth of open positions that settle against an index generated by the bidding zone, according to Tobias Paulun, chief strategy officer at EEX, part of the group that operates the bidding zone.
To further complicate the issue, the Agency for the Cooperation of Energy Regulators (ACER) sees a legal challenge to its position through the European courts from the Austrian government – a long-standing and vocal opponent of the split – as inevitable, electricity working group vice chair Mark Copley said.
The comments came at a discussion hosted by EEX in central London on Thursday. A potential split of the bidding zone has been discussed by national regulators, power grid operators, market participants and EU bodies for many months.
It is emerging as the preferred means of dealing with loop flows of electricity which cause Germany’s neighbours headaches when it comes to supply security, particularly those to the east of the country (see EDEM 25 November 2015). These loop flows occur because of a lack of transmission capacity between the north of Germany, where most of its wind power capacity is, and the south where its demand centres are.
ACER issued its informal opinion on the matter, backing a split, last year, so its official stance will come as no surprise to the industry.
But Copley, who is also a partner in the markets section of British regulator Ofgem, said the issue is unlikely to end there. It will instead go all the way to the European Court of Justice before a final resolution is reached.
There are “a multitude of trade-offs between liquidity, efficient signals, and dispatch. It’s hard and it’s immensely political,” Copley said.
“Given they (ACER) have already issued an informal opinion on this in the past, it doesn’t take a genius to work out where they’re going to land.
“That decision will come out relatively soon in the time-scale required by the law. My bet is there will then be a challenge in the European Court of Justice and we will move forward from that point,” he said.
A volume-weighted day-ahead index, commercially known as the Phelix (physical electricity index), is generated through transactions carried out in the conjoined bidding zone.
The zone is run and the index is published by EEX Group company EPEX Spot, while EEX, an exchange with financially-settled electricity futures at the heart of its business, settles its German power futures against this Phelix number.
Quoting the €25bn open position figure, Paulun said a perceived lack of transparency in the decision making process was a problem. “No one knows who will make a decision and when,” he said.
He added there were examples of changes being made to underlying indices in the financial sector that markets had dealt with successfully, but these had followed a “very well defined process”.
Copley said that ACER was playing its part in a due process as laid out in the EU third energy package and that market participants were welcome to challenge its ruling when the time came. “We are regulators. And good regulation needs to be challenged sometimes,” he said. firstname.lastname@example.org