Germany to change balancing auction rules in July

A cap on bids for so-called energy prices in the auctions for minute and secondary balancing energy is likely to be shelved following the introduction in July of new capacity allocations rules, German energy regulator Bnetza said today.

German imbalance prices in March rose to a 14-month high and above average day-ahead intra-day settlements for that month, partly because a lack of competition for energy prices continued to dominate bidding behaviour.

The first delivery day for the new rules in the minute and secondary reserve auctions will be 12 July, Bnetza said.

The regulator expects that a prices cap at €9,999/MWh for bids on the energy price in the tenders will no longer be needed after the introduction of the changes.

Bnetza introduced the price cap in response to high imbalance prices in autumn 2017 which the regulator said did not correlate with the demand-supply balance in the power system at the time. The regulator in February launched a market consultation on changes to the allocation system in the tenders.

Providers of minute and secondary balancing reserve receive a capacity price in €/MW to reserve capacity in case transmission system operators (TSOs) need balancing energy to smooth out power supply and demand discrepancies. They receive the energy price in €/MWh if TSOs 50Hertz, Amprion, Tennet and TransnetBW call on the reserved capacity. TSOs called on minute that received a energy price of €77,777/MWh on 17 October. This increased the so-called imbalance price — which reflects the cost for securing and activating balancing energy — to a new all-time high of around €24,455/MWh for one 15-minute interval and to €20,615/MWh for another 15-minute period on that day. Balancing responsible parties (BRPs) relying on minute reserve had to pay €8mn for the 30-minutes of high imbalance prices on 17 October, Bnetza said.

Bnetza decided to by and large adopt the proposed changes consulted in February, although there are some amendments.

The energy price is not considered at all in the existing allocation rules with capacity in the pay-as-bid auctions awarded based on capacity prices, which encourages low bids.

The changes to be implemented in July will introduce a so-called allocation price at which capacity in the tenders will be awarded. The allocation price will add up the capacity value and the energy value. The capacity value is the quotient of the bid for the capacity price in €/MW and the underlying product duration — the period for which TSOs secure balancing energy — in hours. The energy value is the bid for the energy price in €/MWh multiplied by a weighted factor. Bnetza in its consultation had proposed to leave it up to German TSOs to determine the weighted factor. Following market feedback, the regulator decided that the weighted factor will be set on a quarterly basis. It will be determined on the basis of the relation between the highest actual activated minute or secondary reserve energy and the highest contracted capacity in the respective balancing energy market segments in the 12 preceding months, the regulator said.

March imbalance price

The average German imbalance price rose to €44.32/MWh in March, which was the highest level for any month since January 2017 and compared with an average imbalance price of €39.29/MWh in February. In contrast, the average ID 3 hourly settlement, the weighted average of all transactions concluded in the last three hours of trading, in the German-Austrian intra-day market operated by the Paris-based Epex Spot exchange fell slightly to €39.42/MWh in March from €39.67/MWh in February.

German TSOs reported an average German power market deficit of 219MW in March which lagged behind an average of 246MW a month earlier. But the number of 15-minute intervals with a system deficit of more than 1GW rose to 132 from 79 in February and to the highest level since at least October 2017. And the number of 15-minute intervals in which balancing responsible parties reported a nationwide power system surplus of more than 1GW rose to 22, compared with 19 in February and the highest since December.

While a rising number of 15-minute intervals with a high system deficit or surplus is likely to have been a driver of imbalance prices in March, results in the auction for minute reserve balancing energy indicate that the price cap failed to fundamentally alter bidding behaviour.

Imbalance prices in October averaged €41/MWh, more than €3/MWh below those in March despite the introduction of the price cap since then. The premium of imbalance prices in October over average ID3 intra-day prices was much wider at €11.69/MWh compared with March.

The highest imbalance price for any 15-minute period in March stood at €811/MWh compared with the €24,455/MWh recorded on 17 October as the cap prevented price spikes. But participants in the minute reserve auction continued to bid at or near €0/MW for capacity prices and at much higher levels for energy prices. The average successful bid for energy prices stood at €561.82/MWh, much lower compared with €5,292/MWh in October when a total of 616 energy price bids above €5,000 were successful. This included 480 bids above €10,000/MWh which are no longer allowed until the expected shelving of the price cap.

Successful energy price bids above €5,000/MWh still stood at 160 in March compared with 136 bids above €5,000/MWh but below €10,000/MWh in October 2017.

Wider impact

Efet Germany urged Bnetza to include energy prices in their allocation rules for balancing energy reserve auctions ,and in February welcomed the regulator's consultation to this end.

But the association had warned of a wider impact of the price cap — even though it is temporary only — saying it has undermined the market's confidence in the regulator's and the German government's acceptance of high prices. The price cap was a sign that the political will to pay high electricity prices is "perhaps lip service", Efet Germany said at the time.

A ban on price caps and the aim to strengthen price signals in the wholesale power and balancing energy market was at the core of the German caretaker government's power market reform package form 2016. And the German economy and energy ministry in June 2015 signed a joint declaration with other European countries — its "electrical neighbours" — on regional cooperation on security of supply which include a commitment to refrain from legal price caps in the power market.

German imbalance price vs system balance

German imbalance price vs day-ahead, intra-day market €/MWh