JAO Transmission Rights Auctions: Towards Long-Term Flow-Based Allocation | Vincent Thevenin, Montel

Good afternoon, everyone, so my name is Vincent Tevinin, market expert at Montel and today is the topic of my presentation. We Japan transmission rights and especially the implementation of long term flow based allocation and also beyond. Don't worry, I'm the last speaker for today. I'm aware of that. It's the last person between you and the drink, so I will be concise in the next 20 minutes. So without waiting, what I'm going to talk about is about today. So it's going to be three parts. First, it's going to explain you what are long-term transmission rights, what they are there for, give you a bit of history. In the second part, in the middle, actually the main interesting part, I will detail what is going to change with the upcoming go-life of a long-term flow-based allocation this November. If you are LTTI traders and you don't know nothing about it, this is your presentation, this is your moment, take information out of it. And finally, I will discuss the target model, being the forward capacity allocation 2.0 and give you a bit of sneak preview what's going to change after that. But we're looking here at a more longer perspective for 2029-2030. So now I want to give you a bit of context, setting the scene. So when I was working on this topic, since the crisis, so long-term and hedging was a really hot topic. Everybody was talking about it and I want to explain you why. I brought two reasons with me. So on the left part of this slide, it's just the prices. So for this curve has been shown many times, so the evolution of prices of a time. For many years, the prices were rather low and stable, not so volatile. And then we had the triple crisis. Boom. And then where are we now? We have higher levels but also more volatile prices. So hedging makes kind of sense, is more important than in the past. This is one reason. The second reason, here on the other side of the past, it's in a crisis, we have seen a liquidity drop. So less volume being traded. And it was especially remarkable for the OTC non-cleared. And now we have seen the trend down and we have been witnessing a recovery of that. So maybe we are out of the crisis, at least in terms of liquidity. And what categories have gained in terms of volume is the OTC cleared and also the exchange volume, which are also cleared. One reason for this back for this crisis in liquidity was most likely the collateral. Because in a crisis, for the same volume you wanted to trade, you need to have 50 times the volume collateral. So impressive bank requirements. It was to set the scene. Now I want to explain to you how does it work, LTTR, long-term transmission-wise. It's a bit exotic product. First, if we look at in Europe, if you want to hedge, the main product instrument you are using are Zono futures. And the main, so the best, the most liquid market in Europe is Germany. And then if you have a price exposure in Austria, how do you do that? Because sadly speaking, Austria is not so liquid, so you need something. And one way of doing that is to combine the German futures and also LTTR. LTTR is an option, so it's a bit different than futures. And it's also auctioned at JAU, being the Joint Allocation Office, which is a subsidy of the TSOs. And I want to give you a bit of history. I think you are aware that Austria and Germany used to be in one bidding zone. And at the same moment when it was decided to split Germany, Austria was a political deal that was made. In exchange for the redispatch capacity reserve for Germany, Xenia explained about this today, there was a deal on the other side, Austrian traders, hedges, could have a lot of capacity given to the market. And that's why the deal was that the sum of the monthly and the yearly capacities were equal to 4.9 gigawatts, almost 5 gigawatts. And if you compare to other borders here, on this part, this is quite massive, quite massive and much more than other borders. And the split between yearly and monthly has changed over time, so you have different split, but the absolute value remains the same. And now, without waiting, I will go to the main part of the presentation, being the long-term flow-based allocation. And believe me, this is quite a big bang. There's a lot of changes. First of all, you have two different parts. You have the capacity calculation and then the capacity allocation. On a part of the capacity calculation, the inputs are different than we used to have. We used to have an ATC value. So the ATC value was not coordinating between TSOs, and so there were some national rules validated by the regulators, and it was quite easy. So the two TSOs had to agree on these values, and pretty much easy. Now what we have, we have a flow-based domain, so a bit similar to the day, not through the same, but much more complex. And the capacity calculation process has evolved over the years. So there were some simulations, and the results were not satisfactory, because the capacity allocated was too low. And that's why we ended to a process which is highlighted on screen here, to a so-called ATC benchmark. What does it mean? So we need to look at the historical capacity, and then if the flow-based domain is too low, the flow-based domain is extended virtually to at least achieve this. That's a way, a technical way, to give more capacity to the market. But there's one drawback for Austria. In this process of ATC benchmark, only 50% of these 5 gigs that I've mentioned earlier are taking into account. So this is working, but not so much. One main also differences that I've not mentioned yet is the fact that there's one big auction. I will come back to that and on the consequences, but this is a major thing. So that was it for the capacity calculation. On the other side, what's also completely different is the capacity allocation. We are moving now from a system which was border to border to one single auction, many borders at the same time. And the formula, the objective function is displayed here. What does the algorithm does? It looks over all borders, try to maximize the sum of the given product, price, time, quantity. Basically, this is the overall revenue for the TSOs, and it tries to maximize that. This formula has quite some consequences. The first one is that the borders are now competing within each other. It was not the case before. And the second thing is that as outputs, as results, if the spread is quite low or it's out of money, then there will be really low capacities that can be allocated to the different mechanisms that we have today and need to bear that in mind. Here on this slide, I want to explain further consequences on the similarity of the auctions. So at Jao, it used to be like this. You used to have a sequence of auctions on different days, different hours. So you did have maybe two or three borders in the same time, but not so much. It used to be border by border. And what are the differences now? So in the past, the ATC value which was given for the market would be allocated. So you would know, okay, this is exactly the number of capacity that the trader will achieve. And also a very important fact is that the collateral that you were requiring for that was freed after its auction. So you could reuse a collateral from an auction to the other. And yeah. So now if we move to LTFBA, it's going to be live in November. We have one big auction per capacity region and the borders are competing for the same capacity. So capacity region, it's for example, the core region. If you're not aware of the details, more or less, almost all continental Europe. Here's Mark in red on the slide. And there is one big caveat drawback from the system is that the collateral needs will increase drastically, especially if you're a trader, trading on many borders at the same time. There is a fix which is now being under discussion and looked at from inside. But sadly speaking, it will not be for this year. Hopefully for next year, we'll see when it comes at the end. Now I want to explain to you, analyze together the results of the parallel runs, which are published on JOW. And the goal here is to compare what the real results have been with, on the long term flowbed allocation, what would have been the results. There are two caveats from that is that, so it's, let's say, one to one. Here, the bids have been used, ATC bids have been used from 2025. So the bids, that historical bids were not considering the flow base, so it will not be, will not have the exact same condition. So coming up to the results, oh sorry, on the left part of this slide, you can see the allocated volume. And here, I'm comparing, so in black, this is a real market historical data from 2025 compared to the parallel run. What you can see already, on this slide, I'm focusing on the yearly capacity for one border, the German-Austrian border. We are really far away in terms of capacity compared to the, in that case, two gigs that we had. For, for the, the direction Germany to Austria, only 570 meg were allocated, whereas for the other, the other direction, Austria to Germany, around 160 meg. And the, the reason why is that, I tell you, I told you before, it's because of the optimization function, which is favoring the borders with high spreads. If you look at the prices on the other side, so now, one, one of the, of the caveats, or the, how the formula is working, is that the, the borders are competing with each other. And the level of prices are relatively similar, but we have seen here in a parallel, slightly higher prices in LTFBA compared to historical results. So that was a picture for the yearly auction. Now, I want to deep dive the same, same principle, but for the monthly auction, so we have more data points here. On the left side, we have the allocated volume. On the right side, the clearing price, as on the previous side. On the top, we have the direction Germany to Austria, and at bottom, we have Austria towards Germany. If we look at the allocated capacity first, we have a similar picture that in the yearly. It's just that the drop is a bit, maybe more pronounced sometimes. For the direction Germany to Austria, we do see some capacities allocated, because there is a spread. We have been talking about all day with the hydro and so on. So there's quite some spread here. But the capacity allocated are much lower than it used to be in the past in the ATC in a previous system. For the other direction, which used to be in the past, the direction out of the money, it's not always the case. We even have some months where zero capacity, zero megawatts allocated. So this could be annoying if you want to hedge this position. And looking at the prices, we do have a similar level, but a higher level, just due to the competition. So yeah, and here for the AT to DE border, we do have some clearing price, but they are fictive because zero megawatts were allocated here. So bottom line for monthly, same picture as yearly, but of course within the year, you have different seasonality, so you have more granularity of the data. Now it's about the calendar and the timing. So if you are a LTR trader, this is, I think, one of the big important dates for you, because for the first time this year, the first ever LTFBA auction will take place. The bidding opening window will happen on 30th of November. And the closing of the, so the gate time will be on 4th of December for the yearly auction for delivery 2027. And then we will have, just after that, we will have the first monthly auction for January 27 with different timings. Date time opening 21st of December, gate time closure 23rd of December, just before Christmas. And be aware that these are, at the moment, not final days, that they could change, then you still need pending validation. That was it for the LTFBA. Now I want to give you another view, a sneak preview of what's going to happen after that, and say three, four years from now. I want to discuss now the forward capacity allocation 2.0 being the target model. So it's quite important. Everything that's just now will be there for three or four years, and then a complete new system will appear, and I will try to explain to you. First, here, the legal timeline and the process. The energy regulation has been amended with its European market design reform, so-called EMDR process. And the relevant article for the LTTR was amended, and there were several aspects that need to be looked at on the impact assessment. And the list is here. In the next two slides, I will deep dive what does it mean exactly. And there were actually two legal deadlines within the regulations, so 16th of January, a date for the impact assessment, and also 16th of July this year for the adoption of FCA 2.0. But sadly, the process is delayed. So also we had these deadlines. From my position now, I do not know when it will be, so we'll see. It's quite interesting. And also, basically, in terms of process, at the negotiation table, it will be only member states. So if you're in HondaP about the changes that will explain you, talk with your ministries, because they will be able to negotiate that. So my two last slides. Now I'm going to explain to you what is changing with FCA 2.0. It's a bit far away, but quite interesting nevertheless. And also, quite some changes. The first one, the first one is the virtual hops. I'm not sure if you have been following this topic, but that's really prominent. Everybody was talking about it. It's a lot of, yeah, even of resistance. And it's a bit complex, but if you put it in a formula, not so much. So what is a virtual hop, simply speaking, it's just a price index. So you take, it's a volume weighted average of all the prices of a given region. And the virtual hop, it's quite a different change, because in the past, we used to allocate LDTR from country A to country B. With this new product in place, the LDTR will be allocated from country A to the hop. So quite a different change. The virtual hop, the main idea behind, and it would make sense in case the German bidding zone would be split into several bidding zones. In that case, it would perfectly make sense. If we do not have German bidding zone splits, it would not so much make sense, because here, in order for this product to work, the power exchange here present in the room will need to introduce new products, new futures. And we then suddenly, we have a competition with the German futures with this product. So the liquidity will be split. So it's a bit of a difficulty. So that's one of the changes that need to be assessed during the impact assessment. Moving on to the row in the middle, we have here also quite a big of a change, the product type. As I mentioned before, and also in name, the product that Jiao and TSR are auctioning are option. And the plan now is to move from option to obligation, which is a different payout. I will not try to explain you now. But the whole idea behind that is if the allocated product will move to obligation, it would allow to exactly match the products that you can trade at venues, eggs, eggs, and others. So to have a match between the products that are allocated at Jiao and also other poor exchanges. Another change, the last one from this slide, is the longer maturities. Today, the TSOs and Jiao are allocated only for one year ahead. Usually, it happens November, December for the year ahead. And there's a plan to extend the maturities up to three years in advance. For that, the capacity calculation needs to evolve. Today, it's scenario-based, and it's too slow, the way it's working. So the capacity calculation will need to move to a statistical one. And also, then appears a new question. So how do we split the volume between the maturities? Because you only have a finite amount. And it's quite likely that we end up something like that. So the split of the volume will more or less mirror the already existing liquidity. And if you are familiar to the future liquidity, the frontier is usually the most traded. And you can expect a split of volume between the TTRs to match this profile. Three last changes that we can expect. The first one is the full financial firmness. And as I've mentioned earlier, if the product is going to change from an option to an obligation, I think this made quite sense. Then there will be some changes. There will be no more holes in the profile. Because today, when TS was a maintenance period, you are not buying a base load. Buying a base load with maybe a few days or months missing. That's one thing on the volume. The second thing is on the prices. In today's regulation, there are some exceptions, like force majeure, where the price is not equal to the day-to-day spread. And this was fixed, mainly, so this is matching with the obligation, to make a perfect match between the JOW product and the product from the venues. Another change here is the higher auction frequency. Today, as I've mentioned already, we have only one auction, one opening time in November. And the goal is to start early within a year. It's not exactly defined. And so to split the volume. So the volume will be split along all the auction. And there is now a trade-off to be found, it's not fully defined, between the auction frequency and the offered volume per auction. Because once again, here, the overall volume is finite. And last but not least, the last change that needs to be looked at in impact assessment are the secondary market. And as I mentioned before, if we do have the combination of the changes in obligations, high auction frequency, full financial fairness, there's likely no real need for secondary markets. Because the product can exactly be traded at venues. So these market features might actually not happen at all. That was it for my presentation. Just want to give you a summary for you to take away. So on the left part, we are at the Statute Q. And what you need to understand, so be prepared. This year, you have quite some change happening in LTFBA. And the main changes that we have at Summa is here on screen. We have one big auction with two caveats. First one, that can produce and will likely produce low capacities on the spread with, on the borders with low spread. Second thing, you will need a lot of collateral. So if you are LTFR traders, talk to your banks. It will be quite important. And now, and for the last part, we will have at some points a complete new design, but likely to come in the 2030s. So that was it from my side. Thank you very much. Thank you very much. Thank you very much, Wiesent. These things are rather complex matters for many, I believe. Do the traders, are they ready for all this? I've been talking to quite a lot of traders. And yeah, I must admit, many are not prepared for that. And yeah, there's still two and a half months left. So yeah. We can discuss in the breaks. You have a job to do. Christian? But do you think this is going to, are they able to catch up in the remaining months or are some going to be caught off guard? Indeed, some will get caught off guard. And yeah, so I think one of the main problems was I mentioned the collateral. And if you don't have enough money on your bank account, you will not be able to place your bids. And this will also impact the prices. So there will be less competition due to that. So the collateral part is something to look at. Any questions from the floor or are you just question marks? It's crystal clear. They're all thirsty. For sure. So yeah, we will follow up on this further on, Vincent. If you have any questions further on to Vincent and these topics, please address him. So thank you very much, Vincent. A small present from us. Thank you very much. Thank you. Thank you. Thank you.