Power exchanges can apply for participation in method for capacity calculation

Exchanges that trade electricity can file an application with the Netherlands Authority for Consumers and Markets (ACM) for permission to use a useful method that is able to calculate capacity on the European grid. With this method, electricity can be traded cheaper. This is part of the coupling process of the European energy markets. All measures to improve coupling of the energy markets will generate a combined savings of approximately EUR 2.5 billion for European consumers.

By mid-December 2015, ACM is required to designate one or multiple power exchanges that are allowed to use this new calculation method. A computer algorithm will match as efficiently as possible grid capacity with supply and demand, with the highest welfare gains. This algorithm determines who can buy and sell what electricity, and it also sets the electricity prices. An exchange that has been designated by ACM is called a “NEMO,” which stands for “nominated electricity market operator.” NEMOs are required to cooperate with the development and execution of the market coupling algorithm. NEMOs are allowed to pass on these costs.

To be or not to be designated as a NEMO

Energy exchanges are able to decide for themselves whether or not they wish to be designated as a NEMO. Energy exchanges can file an application with ACM for designation as a NEMO. ACM will then test the applicant energy exchange against several criteria that are aimed at making sure that the applicant is financially, operationally, and technically capable of performing the NEMO function. It is additionally important that NEMOs behave with integrity. If an energy exchange meets the requirements, ACM will have to designate it as a NEMO. This designation is initially valid for four years.

It should be noted that an energy exchange that has been designated as a NEMO by another European regulator is allowed to perform the NEMO function in the Netherlands, without such designation in the Netherlands by ACM. However, if an exchange wishes to become active in the Netherlands, it needs to notify ACM of its plans at least two months in advance.

A single European market

The supply of electricity is of the utmost importance for the European economy. Having a supply of electricity that is secure and affordable is a condition for economic growth. If the European market functions well, so will the Dutch market. After all, if foreign producers are able to supply the Dutch market with electricity, it will create more competition. And, in the end, the cheapest producer will supply the power. However, this will require sufficiently available transmission capacity between countries.

In 2009, the European Commission passed the third European energy legislation package. The basic principle of this third package is that the electricity market is a free market. Supply and demand thus determine the right price for electricity. In addition, national grids have to be efficient and secure. All market participants are allowed to use this grid. Electricity is able to flow from the provider’s network to the buyer.

The CACM regulation

In order to make all of this possible, all countries were required to participate in the European market integration process. Further details are fleshed out in specific regulations. On August 14, 2015, the first regulation will come into force. This regulation is called CACM, which stands for “Capacity Allocation and Congestion Management” and contains harmonized European rules concerning electricity trade on day-ahead basis and hourly basis (called “intraday”). Supply and demand, as well as available capacity in the European grid will be taken into account. This will ensure that, at a European level, electricity is supplied in the cheapest way. European consumers thus pay lower electricity tariffs.

CACM does not prescribe what the rules should be. According to CACM, certain parties (often the transmission system operators in Europe) should make those rules. Those rules should then be approved by the regulators in European countries. These approved rules constitute the European grid codes. In CACM, rules should be established in four areas.

• First, a method must be created to calculate capacity in the European grid properly.
• Next, energy exchanges must collect supply and demand data in a proper way.
• A computer algorithm matches as efficiently as possible grid capacity with supply and demand, with the highest welfare gains. This algorithm determines who can buy and sell what electricity, and it also sets the electricity prices.
• Finally, these activities cost money, and, at the same time, generate certain revenues. Rules should be drawn up about how these costs and revenues are allocated between European parties.

Over the next few years, ACM is expected to receive around 30 proposals from TenneT and the designated energy exchanges in the context of CACM, and it will have to decide whether or not to approve these proposals.

In anticipation of CACM, several European projects have already been launched and completed. These are the so-called “Early Implementation projects.” One such example is the introduction of Flow Based. With regard to day-ahead trade, the implementation of the rules concerning the neighbouring countries of the Netherlands has already progressed quite well. With regard to intraday trade, implementation of the rules is still in its infancy.

Filing an application for designation as a NEMO

Parties wishing to file an application for designation as a NEMO can do so by clicking on the link below.