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Elimination of Imbalance Price Restrictions Brings Negative Prices on the Romanian Balancing Market

Elimination of Imbalance Price Restrictions Brings Negative Prices on the Romanian Balancing Market

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September 2020 has brought negative prices for electricity on the Romanian balancing market (“BM”). How was this possible and what are the consequences?

Last resort mechanism to fine-tune production to consumption

The BM plays a major role in the overall electricity system, as it is the ultimate market on which generation is fine-tuned to consumption (balancing). Electricity systems need balancing to ensure that the generated electricity injected in the grid at any time matches the consumption needs and for this reason the legislation places the balancing responsibility on the shoulders of each market participant.

This means that each generator needs to produce the reported (forecasted) quantities and that it would assume the financial consequences for the actual deviations (excess and / or deficit).

Essentially, a generator has a choice of several voluntary (domestic) markets in order to sell its electricity output:

(a) the bilateral contracts markets, where the generator may negotiate (more or less) long - term contracts (on centralised platforms, or by direct negotiation under the permitted exemptions to the centralized market trading rule);

(b) the day-ahead market, which covers transactions with delivery on the next day, where the generator may sell the electricity that was not contracted under bilateral contracts; and

(c) the intra-day market, which covers transactions concluded up until 1 (one) hour before the start of delivery, allowing the generator to better adjust to its delivery needs, supplementary to the day-ahead market and closer to the real time delivery.

In a way, both the day-ahead market and intra-day market may provide a certain balancing function, but they are voluntary markets (the generators are not obliged to access any of them, although it would certainly be commercially unreasonable not to do it) and they may not ensure the real time balancing, especially for renewables such as wind that are (relatively) unpredictable sources.

If the generator has a deficit or an excess output compared to the reported (forecasted) values, this imbalance would be technically settled on the BM by the market operator (Transelectrica) under dispatch orders to the market participants (dispatchable generators / consumers) for increasing or decreasing their generation / consumption. Therefore, the BM is the last resort mechanism for fine-tuning production to consumption, being the closest to the real time delivery.

Also, the imbalance will be settled financially (through Transelectrica) by passing over / allocating the system balancing costs to all the wholesale electricity market participants that generated imbalances (mostly generators and suppliers). Each of them must incur the costs or receive the revenue generated by its own imbalance by apportionment of the total costs / revenues in the system (mainly based on the BM prices for excess or deficit).

EU rule of free imbalance prices

According to EU Regulation no. 943/2019 on the internal market for electricity (the “EU Market Regulation”), neither a maximum nor a minimum limit shall be imposed on the wholesale electricity price, also with regard to balancing energy and imbalance prices, without prejudice to the technical price limits which may be applied as per the EU Market Regulation in this respect (art. 10 (1)). Also, the EU Market Regulation provides that such technical price limits should be sufficiently high so as not to unnecessarily restrict trade (art. 10 (2)).

Under the previous legal framework in force until 1 September 2020 (i.e., ANRE Order no. 31/2018 approving the regulation on the functioning and clearing of the BM), the offers on the BM had to observe the following price limitations: (i) a floor equal to RON 0.1/MWh and (ii) a cap equal to the day-ahead market closing price plus RON 450/MWh.  

Also, negative imbalance prices were practically forbidden under this mechanism, although they were and still are possible on the day-ahead or intra-day markets (on 11 December 2019, negative transaction prices were reached, it seems for the first time, on the intra-day market, as an effect of coupling with other European markets).

Obviously, such limitations were no longer in line with the EU Market Regulation, since they could not be deemed technical price limits passing the test of unnecessary restriction to trade.

  • ANRE liberalization path

Therefore, ANRE embarked on a path of removing these restrictions in two steps.

Firstly, ANRE issued Order no. 236/2019 which simply copy-pasted the provision of art. 10 (1) of the EU Market Regulation mentioned above, but without expressly abrogating the price limits set under ANRE Order no. 31/2018. Certainly, the EU Market Regulation is directly applicable in Romania as in any other EU member state, and it may be argued that this restatement in the national law was not necessary.

Secondly, ANRE issued Order no. 61/2020 abrogating Order no. 31/2018 and the price limits set by the latter, with effect from 1 September 2020 (“Order 61/2020”). Instead of those, Order  61/2020 sets what appears to be technical price limits: (i) a floor equal to the RON equivalent of EUR -99,999/MWh and (ii) a cap equal to the RON equivalent of EUR 99,999/MWh, obviously not influencing trading in any way (as they are many volumes higher than the imaginable market price range).

Therefore, practically, the price on the BM is now freely determined by the supply-demand mechanism and can reach negative values.

Practical consequences

(a) Immediate general impact

On the same day when Order 61/2020 entered into force, i.e. 1st of September 2020, the excess electricity prices plummeted to negative values (RON -100/MWh for all time slots). They had already been close to zero and on a decreasing trend starting with 2018 after the elimination of the first imbalance price restrictions under Order no. 31/2018. A negative excess price means that the generators with a positive imbalance would no longer receive any (be it even a small) revenue, but, on the contrary, would have to pay for their excess output to be injected in the grid.

(b) Impact on renewable generators

The first impacted could be the wind power generators, for example if the wind availability suddenly increases against the wind forecast. These generators might even find it better to shut down the wind turbines to avoid the positive imbalance, to the extent that the negative prices would trigger a loss for them.

However, the benefit of green certificates should be enough for the moment to prevent the wind power generators from taking such an action (also, the costs of shutting down and restarting the power plant may play in the same way). However, if the negative prices go to higher levels, the generators will have to carefully consider the shutdown as a realistic alternative taking into consideration all costs incurred and the resulting loss of green certificates (based not only on their theoretical price value but rather on their monetization perspectives, given the historical liquidity issues of the green certificates market in Romania).

Also, for the renewable power generators who do not receive green certificates, any positive imbalance might trigger a loss if the prices are negative (again, subject to the costs of shutdown / restarting the plant). Therefore, the future support scheme for renewables planned by the Romanian government should also address these imbalance risks that seem to become increasingly relevant.

Meanwhile, the wind power and other renewable generators might mitigate the imbalance risks by contracting the best forecasting services available, delegating the balancing responsibility to aggregators or, should they have the internal capabilities, by creating their own pragmatic and protean strategy of negative and/or positive imbalances adjusted to market trends.

(c) Impact on electricity imports

An indirect effect of negative imbalance prices might be the possible incentivization of electricity imports on a longer term. This may happen for two reasons: (i) the potential shutdown of certain generation facilities during times with negative prices, as a strategy to avoid losses, might reduce the domestic generation of electricity and this additional deficit could be covered only by increasing imports; and (ii) in the absence of an adequate support scheme to cover this risk too, new capacities in renewables might not be installed at the expected level in the coming years.

In this context, it is worth noting that Romania has already been a net importer of electricity starting with 2019, doubling the amount of energy imported in the first six months of this year compared to the previous year, and the new renewables investments (wind and solar mainly) could and should be the main source to increase domestic electricity generation.

(d) Impact on end consumers

At the same time, these negative prices do not seem to directly benefit end consumers either, as they are acting on the retail market and the revenues and losses resulting from balancing are allocated between the participants on the wholesale market (usually generators and suppliers).

Moreover, the (positive) high deficit prices seem to make irrelevant any beneficial effect of the negative excess prices at market level and contribute to the price increase on the wholesale energy market (eventually to reflect on the retail market). According to ANRE, the balancing market currently represents 5.5% out of the domestic electricity consumption.    

(e) Failure or normality?

We do not believe that the negative prices should be deemed a failure of the Romanian energy market.

As it happens in other countries, negative prices are the expression of a mature energy market showing fluctuations between supply and demand, which may vary day-by-day, hour-by-hour, based on a free interplay of market factors.

Also, negative prices should motivate market participants to upgrade the prevailing standards and technologies, access new business / cooperation opportunities and increase flexibility and adaptability to the ever-changing energy market.

By Cosmin Stavaru, Partner, and Vasile Soltan, Associate, Bondoc si Asociatii

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