European legislation includes a minimum requirement on the amount of network capacity provided to the market for the trade of power between different areas, or bidding zones. This is the so-called 70 percent rule. In practice, however, the interpretation and monitoring of this rule differs by country with the implication that some countries face more stringent requirements than others. In addition, the current regulatory framework fails to meaningfully distinguish between sustainable compliance and apparent but less useful compliance reliant on so-called ‘virtual capacity’. Both of these weaknesses suggest room for future improvements to the relevant regulation.
The legislation establishing the 70 percent rule provides little detail on how compliance should be assessed. To fill in the gaps, ACER has subsequently published detailed methodological guidance and conducts monitoring relative to the target. However, enforcement remains the responsibility of National Regulatory Authorities and there remain potentially important differences in national monitoring practices.
In recent work for Nordic Energy Research, THEMA has sought to explain some examples of these differences. We look in greater detail at differences in the monitoring approaches of ACER and the German, French and Polish regulatory authorities. Importantly, the work shows clearly how, for example, the German National Regulatory Authority may conclude, based on their methodology, that the German TSOs are compliant even when ACER’s monitoring implies that they are not. The work highlights the need for further regulatory development if the current legislation is to ensure both security of supply and consistent regulatory treatment across Member States.
The report also highlights the need to identify and describe appropriate limits to the use of ‘virtual capacity’ when assessing compliance. Under the current framework, System Operators can offer capacity in the day-ahead market, which is then used to schedule cross-zonal trade, but then have this trade undone, for example through countertrade in the intraday market. The result is the creation of ‘virtual capacity’, capacity which is seemingly there at the day-ahead stage but which is not backed up by genuine transmission capability.
As currently constructed, the relevant European legislation leaves open the possibility that such virtual capacity can be used indefinitely, resulting in both misleading market signals and inflated system operation costs. Although some flexibility may be warranted to help System Operators realise security objectives, the regulatory framework needs to do a better job of distinguishing between genuine improvements in the ability to trade power between zones and virtual compliance. Otherwise, it will end up incentivising and rewarding both despite their very different implications for the efficient operation of the internal energy market.
