ACER proposes changes to improve EU electricity forward markets
What is it about?
ACER’s policy paper on the further development of the EU electricity forward market:
- Identifies problems of this market segment, among which market fragmentation and lack of integration are the main ones; and
- Recommends solutions (e.g. regional virtual trading hubs to pool liquidity). Such regional hubs need to be complemented by accessible transmission rights to cover the remaining risks of the market participants.
This policy paper serves as ACER’s key recommendations on how to change the Forward Capacity Allocation Regulation.
In the electricity forward market, market participants can trade electricity up to multiple years ahead of its delivery allowing them to protect or hedge themselves against future price fluctuations. Currently, with the exception of the Nordic region, each zone has its own market, bridged by transmission rights issued by the transmission system operators (TSOs). This leads to a fragmented and unequal distribution of the liquidity amongst the different national markets. Unlike the day-ahead and intraday markets, the EU forward market does not work as a single integrated EU market.
While this problem has been partially addressed in the short term markets through the allocation of cross zonal capacities, ACER identified scope to vastly improve long term forward markets.
What are the proposed changes?
ACER proposes a set of changes to improve the functioning of the EU electricity forward market:
- Creation of virtual trading hubs combined with the issuance of transmission rights between bidding zones and those hubs;
- Improved allocation of the transmission rights (more frequent, over longer period of time, in revised quantities) by the TSOs;
- Transmission rights issued in the form of financial obligations; and
- Optionally, the possibility to assign market making tasks.
What are the expected benefits of the changes?
- Regional hubs will attract and pool the liquidity of many zones, thereby significantly increasing the forward market liquidity.
- Hedging products at such hubs will cover the majority of price risks faced by market participants, whereas the remaining risk would be covered by transmission rights issued by the TSOs.
- Other proposed changes aim to make these transmission rights more accessible, liquid, as well as to better match the hedging needs of the market participants.
What are the next steps?
The recommended policy options are ACER’s proposal for changes to the Regulation on Forward Capacity Allocation. To continue the revision process of this Regulation, the European Commission could request ACER to make a recommendation that would list the proposed amendments. Following the issuance of such recommendation, the European Commission could initiate the comitology phase.
To present its policy paper, ACER organises a workshop on 13 March 2023.