Short-Term and Balancing Markets: Risk, Liquidity and Transparency – Panel Discussion

We have, of course, Luuk Groot Haar from TenneT. And Axel Baudson from Engelhart. Yes. Yes. So thanks for joining everyone. So yeah, talking about short term markets, it's the last topic of the day and it's the most intricate one. So I expect some interesting discussions. What are the biggest challenges that you see from your daily job in the market at this moment? Maybe start with Olivier. Yeah, sure. Yeah, so I'm from Edpa, we're a power exchange operating in short term power markets. Right now in the Netherlands we offer the intraday markets, the expost market, in the GOPACs redispatch market, so that's the context. Yeah, one of the things that also came up in the previous presentation by Luc was the share of regulation state 2. As an exchange you're primarily in contact with BRPs and amongst those BRPs we're focusing on those new market entrants that are often more exposed to imbalance prices because they don't have a large portfolio. They can't net these positions across their assets as well as bigger BRPs can. So that creates a price pressure where when the share of regulation state 2 grows, imbalance becomes increasingly costly for them. And of course at Edpa you have this product where they can trade this. Yes, yes, yes. So at Edpa the expost market is a settlement market whereby you can trade your imbalance positions in regulation state 2. So if you have a BRP that's long and you have another BRP that's short, you can trade these positions on the market and thereby avoid these costly imbalances. Great. So, Jürgen, from a completely different angle, managing the trading department of a large renewable supplier, what do you see in your daily job as the biggest hurdles? Yeah, good question. I actually thought this wasn't a challenge but a business opportunity for Edpa, the expost market. So, yeah, I definitely recognize the regulation state 2. But as mentioned in the previous topic, the price delta actually doesn't change that much or hasn't changed that much over the years. Although the amount of times it occurs, it increases. It basically gives an incentive for a BRP to be balanced in the portfolio. We already had that incentive as a renewable supplier with a lot of customers with solar. So we're used to managing these exposures. What I actually think is bigger when I step a bit back is on a regulatory side. So I see a lot more pressure from regulation on BRPs. Also, the split between BRPs, BSPs, CSPs. It increasingly introduces hurdles for BRPs and risks. And also the developments on the imbalance side. So we've been talking with Tenet about the scarcity component, which was meant to be introduced this year. But I'm happy that it's been put forward a bit. But introducing those risks, also looking at the collateral needed from BRPs. You see that there is quite a bit of pressure on the risk side. And that the revenue side is more and more pushed from the BRP and the supplier. So to me, that's a bigger risk than regulation state 2 in itself. Right. Luke, you've already presented, of course, your biggest challenge, reforming the balancing mechanism. Anything you would add to that, having heard the other presentations? Well, maybe also following what Jörg has said, I think having these different roles in place. I think matching the physics with the market has become increasingly more complex. And it's only starting to become more complex in the coming years, I would say. And not only in the short term. But if we don't manage to maybe more efficiently use the grid in maybe simpler ways, I would hope. No, the Tenet is maybe also to blame for some of the complex systems behind it. But then also actually helping to transition further with more connections. That's, I think, a big challenge. Okay, cool. Axel, Engelhardt, pure traders, mostly? Yes, we have a lot of exposure to renewable. I would say, I agree with a lot of things you have said, Jörg. I would add from an originating perspective, predictability of the effect of the reform. Picasso was introduced. What do we see? At first, if I take a Belgian example, it was introduction of pay as cleared instead of pay as bit. But before having the connection to the platform. What did we see? In a very steep merit order like Belgium, explosion of cost of solar balancing. Within a period, regulatory period, that was supposed to be fixed. That's not something, that's not a risk that you're supposed to price. That's not something that you can put in your PPAs. That's not something you can go to a renewable energy producer and say, sorry, balancing costs have changed. It's not something that you can transfer one-to-one as a risk. And I think it's underestimated by regulators and by TSO, this lack of predictability of their action. Picasso was an example, the way it was implemented. The effect of this gigantic increase, and it's not the first one we've seen increase. I remember 10 years ago, we had a similar, not the same order of magnitude, but we had an increase of second mode regulation. It has directly an impact on balancing cost. Everybody talks about balancing price. Traders originators talk about balancing cost for specific assets. What is the cost to balance a wind turbine? What is the cost to balance solar? And that predictability, when it's gone, it's an issue for the market. Because a renewable energy producer needs that predictability. That's why they come to a trader to do it, to have it. And a trader needs a certain degree of predictability at least one, two years ahead to fix this balancing risk. And I think this is really underestimated by the parties who are not involved in this. So, I would say that is one of the biggest challenges. Predictability of the action of TSO and regulators. Thank you, Axel. We also saw policy stability as a requirement come back from the investor presentation. And it's a recurring theme, obviously. Right. So, yeah. What shall I ask, Ness? So, something I know is on your mind, Axel. We see the balancing markets and the bids on the balancing markets. And sometimes they show us very extreme prices. Also, for example, the value of avoided activation. Yeah. We do see some weird things. You're surprised, you mean. Yes. But, yeah. What would you say is a reasonable way of bidding in an asset into a balancing market? I want to say two things about this. The first thing is that with Picasso and Marie, I think we did exactly the same that we did with the euro, with the currency. Okay. Let's harmonize everything. Let's have something in common. And we forgot that German economy and Greek economy were not the same. And then we had issues. Here we have exactly the same. What happened in Easter Monday, this infamous Easter Monday with minus 15k of prices in Belgium. It was, okay, we have Picasso. We have rules. But the way a balancing bid is acceptable according to the Belgian regulator, to the Dutch regulator and the German regulator is absolutely not the same. And that's an issue. So, we have a common currency, but everybody is doing it in its own way. And I think that's a major issue. Then what is a reasonable bid? I will bring it to not a German perspective, because the people who put not only the minus 15k, but the minus 12k, minus 10k, minus 11k. We have the full spectrum. We're thinking it was reasonable. I disagree with that. I think a reasonable bid should take into account the physics, the cost of the bid. I understand the idea of opportunity cost, but I would like to see, show me an opportunity cost of minus 10k. And I fail to see it. So, what is a reasonable cost? A cost that agree with certainly with the physics and with opportunity cost. Because let's not forget one thing. The TSO will always call it. It's not a market. There is no elasticity. So, it will eat. Yeah. And, Luke, of course, you see balancing bids in the merit order for the balancing markets. And in the Netherlands, in the interest of speed, sometimes you have to call the whole stack. Is there a mechanism in place within Tenet that checks the viability of bids? In hindsight. In hindsight. But not at the moment itself, no. Okay. Because, yeah, we're now not seeing those extreme bids as we see in Germany in the Dutch market, nor in the Belgian market, actually. But, yeah, it would be worrying, of course, if these suddenly turned up. You want to say something? Yeah. Yeah. I wanted to ask, Luke, because, well, in the Netherlands, of course, we have bids a bit lower, up to 4,200 euros. But there, the official Tenet perspective is that, in some cases, when we run out of all our balancing, then there's a missing money problem. So, you're actually actively pushing to increasing the balancing cost with the scarcity component in an artificial way. So, how do you relate to what Axel just said, given this position of Tenet? Oh, yeah. So, there is a personal opinion about it and a Tenet position there. I think the Tenet position here is that we, well, we have spoken with the ACM, and ACM is listening also to the market. And, therefore, this has been, well, at least postponed for an unknown amount of time. So, I think there is a feedback loop, right, which is in place, which is currently working, maybe with a bit of delay, but it's working. So, if we, in the end, from a societal perspective, say it's not a reasonable thing to do, then I think that will be the conclusion. So, let's see how that discussion brings us further. And from your personal perspective. I mean, in the end, there are a lot of things which you can do at the end of a merit order, right? You can just shut off demand. It's just that the value which we deem it has to still, well, have electricity for everyone is enormously high in the Netherlands. Hence, also a capacity mechanism and stuff like that. And, so, without, like, that's my personal, I feel like, yeah, if you just throw out demand and then, well, see how you can compensate that. And then you could do it for the tariffs, you could do it for the scarcity component. I think right now, as you say, there's a lot of, like, collateral ask from a tenant perspective. I don't really have a strong opinion whether that's fair or not. It's not my expertise, but, yeah, I think the way of which it can be retrieved, there are multiple options here. And whether that's from BRP or whether it's via the tariffs, I think there's a lot of political and, well, societal pressure on tariffs, right? Yeah. So, that's another thing. And then it's just what is the biggest pressure, I guess. Thank you. So, yeah, now, last question about balancing, because I don't want to bore all the non-nerds in the room. So, one of the things that is very cool about Dutch balancing is the visibility of the merit order going forward. So, basically, as a renewable player, you can see tightness in the balancing market coming for the evening peak. Yet, there is a proposal now at ACM to stop publishing this forward and to limit the view of the balancing risk to, like, 15 minutes ahead. Now, you know how I feel personally about this. I don't think this is a good plan. But what's the reasoning behind this? Oh, you're pushing me in a certain corner here. I promise it's the last one. Yeah, yeah, yeah. So... Shut up, Oost. Ask Shut up, Oost. Yeah, I know. I mean, this was pushed forward by the ACM, right? And I think it has something to do with, well, the scare of market manipulation. To be honest, I was not included in this, so I don't have the full expertise on the full reasoning. I was part of the market as well a couple of years ago, and I always liked it. So, in my defense, but still, yeah, I understand why you ask it. Okay, good. Well, Luke is innocent, and that's fine. It's breaking for someone. In Belgium, do they have this as well? We don't have the same degree of publication. We have more information on the renewable. Maybe we didn't publish that much because we had a very poor balancing stack for years. So, maybe that was one of the reasons. The degree of transparency was not the same, I would say. But if you would ask me what would be a quick fix, I would not look at data first. I would look at aligning incentive. Because all the support schemes right now are polluting the balancing scheme. Are polluting the balancing and are making it costly. As long as we don't tackle this, as long as we don't move to a capacity fee, a capacity support, like it is a plan for the new wave of offshore in Belgium, we will continue to pollute the balancing system. And to create extra costs for the society. But how would that work? A capacity support. You could estimate, okay, if you want a target price of 100 euro, let's say, for wind. You could say, okay, wind should produce 2,000 hours. So, this is that much per megawatt installed. And compare it to what they produce, the average. So, you're saying that the subsidies schemes are actually polluting right now the balancing energy prices. Because they can bid in lower maybe. Yes, because typically if you get a support of plus 65 above market price, you will not cut before reaching minus 67, for instance. If I take an example. So, this is polluting. This is creating extra cost. Right. So, yeah, moving on to liquidity and markets. So, what do you think, Olivier? Can we... We've seen traded volumes increase over on the intraday markets quite a lot over the last years. And now with the shorter gate closures in some markets in Europe. Yeah, Vincent did a presentation yesterday on the deep dives where he demonstrated that the volumes in Austria in the last hour have gone up by more than 100%. Netherlands has derogated this. So, has Belgium. But do you already see, yeah, large growth of intraday volume? And do you think the same effect would be... Could be expected in the Benelux markets? Yeah. So, short answer. We've seen consistent growth in intraday trading volumes for a very long period of time now. Far outmatching other power markets. For example, the day ahead market. I think in the Netherlands specifically, there is a greater incentive to trade in the intraday market. And again, to repeat myself, because of regulation state two, BRPs want to avoid that imbalance. In Germany, there's also a push to close positions before delivery to remain balanced, which is going to be changed soon, hopefully. So, we're seeing that more and more flexible assets are coming online, which are difficult to predict in terms of their generation. Also, consumers are becoming more flexible. They're becoming more price reactive as more and more consumers get dynamic energy contracts. So, this makes predictability the day before, in the day ahead auction, how it used to work, more and more difficult. Because it's difficult to predict what the weather does and what consumers do. So, this increased complexity makes the intraday market more important because you can trade up until delivery. And I think that's also why I'm pretty excited about the gate closure time narrowing to 30 minutes. For example, I think the derogation is now in January that the Netherlands and Germany will be able to trade up until 30 minutes until delivery. That kind of liquidity across Europe is only going to bring more volume. That sounds like good news then. Jürgen, do you feel in daily life that liquidity is good enough in the Dutch market? Well, as long as we're coupled with Germany, then liquidity is fine. But I think that's really the story. And obviously, it depends on your position and your portfolio whether or not you want liquidity or not. So, when I want to close a portfolio position on solar, then obviously I like liquidity. But if I'm a battery owner, then I like illiquidity. Because then the volatility is a lot higher, of course. And I think that adding to what you said, Olivier, one of the things that is adding intraday liquidity is the change to Picasso of the imbalance pricing. Because until Picasso, it was very favorable to just steer your wind or solar assets on imbalance. But obviously, things have changed, which means that moving to a different market, shifting Europe positions, makes a lot of sense, of course. How is that in Belgium, Axel? Because Belgium does not have a good history of being a very liquid. We don't know exactly what liquidity is. It's a dream. We know it when we trade Germany. But indeed, if you have no coupling, we have no liquidity. And that's easy to understand. Small bidding zone, very concentrated player. And I don't put the blame on the player. It is a situation as it is. So, the closest we are coming to real time with cross-border opportunities, the better we are. And the better it will be for everyone. Then, I understand sometimes some concern, but I think there must be a solution. And I'm still, here it goes in the right direction, but I'm still finding so stupid the way we behave with the cables towards the UK, which are still allocated more than one hour before. Because National Grid apparently doesn't want to move their practice. I don't know the details about this. But this could be helpful, too. Yeah. Don't mention the B word, I would say. Luke, do you think if gate closures move closer to delivery, that it could potentially help reduce imbalances in the grid as well? Yes, I think so. In general, yes. I do think that it's also a bit depending on what your imbalance price methodology is. I think the Germans have a certain model where it's also a certain link with the intraday price. And they want you to close your position up front. And we're in Belgium and the Netherlands. And there is also this opportunity to do passive steering, which I think also moves a bit of the liquidity from the steering or like the market to the steering. It's also a choice, I guess. Yeah. Okay. Thank you. Yeah. Then part of the higher volumes that we're seeing are also the problems that are caused by higher volumes of trades. We see regular outages of several of the exchanges. We see auction results being postponed. And we hear complaints about latency of trade confirmations, et cetera. Is there anything that you experience as well, Olivier? Sadly, it's conversations we have with clients sometimes. I think around half a year or a bit three months ago, we were experiencing at a central level. So the intraday system has a central order book where all orders are forwarded to. There was the amount of data that's going into this order book, the amount of algorithms that are trading in the intraday market, it meant that the central system was slowing down to a point where we had latency of almost half a second. And those are very interesting conversations with clients that said, I'm submitting an order and I'm looking at order timestamps when they're coming in and when they're being processed. And I'm seeing three seconds what's going on. So as the intraday market becomes more liquid and as there are more and more algorithmic traders active on the intraday market, the load grows and that's just something that's only going to continue into the future. All right. Jürgen, can you confirm this or you are slightly less time constrained? No, we definitely see the same thing happening. At first I thought it was us, so I'm happy to hear that everyone is having these issues. And obviously it is a bit strange nowadays. I mean, we've just talked about how many gigawatts of data centers we're expecting. So somewhere there should be a solution in there. So maybe we should try to see how they do this at the NASDAQ or something like that. Actually. We saw great increase with the new XBIT SLA. But let's be honest. We were trading in terms of volumes like one order of magnitude above the SLA that was agreed with the XBIT platform. So, yeah, let's be honest. It was a problem of dimensioning because we cannot ask someone to deliver an order of magnitude above. It was not meant to. That said, so latency is a problem for the whole market. But that said, I have an issue with the way some exchanges consider to answer this. And I see more and more offer and discussion about collocation and things like this. Why collocation is a big thing for, and I've heard some offers about this. Collocation is a big thing for stocks, for forex and this kind of market. But this market, you are free to enter and to exit when you want. We don't have this freedom in power market. We have some extremely strict timing because we trade a physical power that have a very strict time limit. So I think going, if we agree, if we offer to some market parties for a fee the possibilities to go in front, it will not be good for the market as a whole. So I don't think it should be a commercial direction offered by some exchanges. Great. All right. So, yeah, some good discussions here. I think we have to wrap up because we have to move to the boat at some point. Yes. So, thank you, Olivier, Jörg and Luke Axel for an interesting discussion. I'm sure you guys will be around for more discussions at the bar. I promise not to corny you anymore, Luke. I will. And with that, I will hand over to Richard. Thank you, John Bourne. Thank you to an excellent panel. Fantastic discussions. Thank you. Thank you, gentlemen. Thank you.