How does cross-border electricity trade work in Europe?22.02.2022Media
Trade in electricity between EU member states and countries in the EU’s close vicinity is gaining in importance, and the post-pandemic energy crisis has made it even more significant. The process of building a common energy market is still underway and various proposals for its changes have already been put forward.
Author: Anna Wolska / EURACTIV.pl
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On 6 December last year, the demand for electricity in Poland was so high that – as Polskie Sieci Elektroenergetyczne (Polish Power System – PSE) reported – „there were difficulties in balancing the national power system”. In other words, there could have been a shortage of electricity.
It happened not only because of the increased demand for energy, but also because of the decrease of power in the Polish system. Due to weather conditions wind power plants produced less, and some other „production units” temporarily stopped working due to repairs or failures.
To help us, the neighbouring countries – Ukraine, Lithuania, Germany and Sweden – came to the rescue. On December 6, energy imports from Sweden at certain times provided Poland with even 1/3 of its energy deficit, which amounted to 1000 MW.
Sweden also buys electricity from Poland
It was on that day that many people in Poland became aware of the fact that the electricity needed for the economy or for the functioning of the economy does not have to be produced domestically, but can also be purchased abroad.
Poland in the European market is sometimes an importer and exporter of electric energy. In recent months (when energy prices on exchanges in Europe skyrocketed), despite the above-described emergency situation, we rather sell electricity abroad.
Our wholesale electricity prices were among the lowest on the continent and the additional increase of production was ensured by the commissioning of the seventh power unit in Turów Power Plant, fired with lignite, at the end of July last year.
The aforementioned Sweden in 2021 bought much more energy from Poland than it sold to us, and electricity flowed north most of the time via the submarine cable to Karlshamm. At its peak on December 26, flows from Poland to the Swedish side of the Baltic reached more than 8.8 thousand MWh.
This was due to two more severe Scandinavian winters than recently, as well as wind conditions usually worse at this time of year and the closure of nuclear reactors. Germans and Lithuanians also often sold electricity to Swedes.
In previous years, however, Sweden was a large exporter of electricity, which Stockholm was proud of because the Swedes have been consistently switching to renewable sources (mainly wind and water) and by 2040 they want to base 100% of their energy mix on RES.
With the above argument the Swedish government tried to counter attacks of the opposition, which pointed out that after switching off the nuclear power plants Sweden, having a developed industrial sector, has to buy „dirty”, because of coal, energy from Poland or Germany.
However, thanks to the functioning of the system of cross-border electricity trade in Europe the basic problem is usually solved – there is no shortage of electricity in homes or factories.
Poland as an electricity exporter
Poland has been selling electricity to Lithuania for quite some time now (although we also import it from Lithuania when needed), but above all we export electricity to the Czech Republic and Slovakia.
The former of these countries has been regularly supplied with approximately 30 thousand MWh of electricity on a daily basis in recent months and in September last year even with over 43 thousand MWh. On the other hand, Poland sent to Slovakia ca. 20 thousand MWh per day, and in October it was even almost 27 thousand MWh. Taking into account the prices at that time, this cost 3 million euros (in the case of Czechs) or 2 million euros (in the case of Slovaks) per day.
This large export of Polish energy in recent times was possible not only thanks to one of the lowest wholesale prices in Europe but also thanks to a safety buffer of 5 GW.
That is why we have recently been importing electricity from abroad on an exceptional basis. But demand in Poland is growing and the production of electricity from coal is becoming more and more expensive. Not only do we have to pay more for the coal itself, but also the price of CO2 emission allowances has gone up significantly. And Poland bases its energy reserves on coal energy, while in Western Europe it is mostly gas or nuclear energy.
Moreover, there is a shortage of coal in Poland. This can be seen in the data of the state Industrial Development Agency, which has its branch in Katowice, among others. Between July and October 2021, coal reserves on stockpiles shrank from 4.75 million tonnes to 3.1 million tonnes. Stocks held by power plants and combined heat and power plants are also shrinking.
Imports of coal are increasing – in 2021 Poland imported (mainly from Russia) 6.23 million tons of coal. This is 16% more than in the previous year. In 2022, imports may still increase. The problem is one of transportation of raw material – whether from Polish mines or from abroad. Last year, PKP Cargo had to convert as many as 1.5 thousand of its wagons carrying aggregate into coal cars.
But it is an open secret that Polish power plants have already experienced coal shortages, and some of the sudden shutdowns of units last year were not due to scheduled repairs or failures, but precisely to a lack of raw materials. According to media reports, this happened among others in Kozienice Power Plant.
The border between Poland as an exporter and importer of electricity is therefore fluid, and coal shortages combined with growing demand and lack of further investments in other energy sources – be they renewable or nuclear – may make it more and more often that we will have to buy electricity abroad.
How an Energy Market in the EU was developed
Integration of energy markets in the European Union and creation of a common electricity market have been ongoing for over a quarter of a century. The adoption of the First Energy Package in 1996 created conditions for development of competition in distribution and trade of electricity. Subsequent legal frameworks were included in the Second and Third Energy Package of 2003 and 2009.
The key is the third package, which established, among others, the Agency for the Cooperation of Energy Regulators (ACER), which monitors the proper functioning of the market, and the European Network of Transmission System Operators for Electricity (ENTSO-E), which operates even outside the EU, as ENTSO-E represents transmission system operators from 35 countries. They have joined the Council of European Energy Regulators (CEER), which has been in existence since 2000.
The third energy package also proposed so-called network codes, or specific instructions on how to implement a single energy market. Based on the framework guidelines, eight such codes were created, and the most important of them grew into the Capacity Allocation and Congestion Management (CACM) regulation, which was implemented into the EU legal system in 2015. It establishes guidelines for allocation and capacity and management of possible congestion.
Indeed, in the process of integrating energy markets in the EU, it became apparent that administratively integrating the operation of national power exchanges and removing barriers to trade were not enough, and it became very important how congestion, which are the bottlenecks of the system, was approached. The CACM regulation also created the institution of Nominated Electricity Market Operators (NEMOs), which are further exchanges in member states that participate in common market processes and are responsible for implementing inclusive regulation. In some EU countries a NEMO has a monopoly position, in others there is competition in this area.
Ideas for change in the EU electricity market
Currently, the EU electricity market is based on four segments: the futures market, the day-ahead market (operating on the principle of „today’s contract and tomorrow’s delivery”), the intraday market (minimising both own generation shortages and surpluses) and the cross-border balancing market.
The intraday market is the smallest part of the overall electricity market in the EU, but its importance is growing rapidly. The volume of trade on it increased (according to the Polish Energy Regulatory Office) in 2020 by as much as 32% compared to 2019, and in 2021 by 15% compared to 2020.
Although these trades are still only about 1% of the total, the crisis times in the energy sector nevertheless show that there is a growing need for quick transactions on the energy market to fill gaps in the system with immediate effect.
The process of the final shaping of the electricity market in Europe is still ongoing and there are also reservations about it. Spain, France, Italy, Greece and Romania have even proposed changes to the EU law.
These countries are calling for EU rules to force electricity retailers to set their prices to reflect actual production costs. At present, prices on exchanges are determined by wholesale prices, which depend on production costs in the most expensive power plants. It is the sellers who profit from the differences.
Paris in particular wants households to share in this profit by paying lower bills. Madrid, on the other hand, points out that this way consumers will benefit from renewable energy sources that do not have to pay for CO2 emissions and this will increase social acceptance for further such investments.
But nine other countries – Germany, Austria, Denmark, Finland, Estonia, Latvia, Ireland, Luxembourg and the Netherlands – oppose these demands, fearing that excessive state interference in the wholesale market and price regulation could harm security of energy supply.
Polish postulates regarding the energy market in the EU
Since last year, the Polish government has been calling for a reform of the trading system for CO2 emission permits, the price of which has risen sharply. Warsaw, in its January request to the EC for reform, pointed out that the EU ETS allows emissions allowances to be traded almost like other assets, including even on „speculative platforms of the like.”
In turn, PSE argues that the simple zonal model of the so-called single-commodity market chosen at the beginning of the integration of European energy markets has already been exhausted.
„This initially facilitated and accelerated the initial phases of integration. However, what worked well at the beginning is now becoming a barrier to the optimal use of electricity networks. As an example, let us take the problems related to correct delineation of boundaries of currently valid market areas” – Prof. Leszek Jesień from Collegium Civitas, who also heads the International Cooperation Department at PSE, assesses.
He argues that network representation in the zonal model is simplified to such an extent that market operations become separated from the process of electricity system management, which in turn makes the execution of transactions very costly or even physically impossible.
PSE President Eryk Kłossowski, on the other hand, pointed out that the optimization of market processes should be increased as the EU energy market expands. „Electricity suppliers should learn to use both the day-ahead market and the intraday market. The offers made on the market must correspond to generation capacities” – he stressed at the conference „Energy 2030: New Energy for Change”.
Another challenge is also expansion and modernization of transmission networks so that cross-border energy transmission is as effective as possible. Poland currently has such connections with Lithuania, Germany, Sweden, the Czech Republic and Slovakia, and with Ukraine from outside the EU.
Read the article in Polish on EURACTIV.pl.