What's the issue?

TSOs are legally responsible for the management of power flows on their national network. As a consequence, if they notice that the power flows resulting from the decisions of market players and the market outcome exceed the maximal flows acceptable through wires and other network devices, they will take redispatching actions in order to modify these flows.¹²⁴ Redispatching actions, which are taken price zone for a whole country assumes that the national power network is a copper plate with no internal bottlenecks. This assumption is usually unrealistic from the physical point of view and TSOs often act and implement redispatching actions as a last resort to relieve internal network congestions.

Congestions also occur at the borders between national price zones. These bottlenecks have been mainly managed in the past with explicit and implicit capacity auctions, but congestion levels along interconnections or on national grid lines highly interactive with cross-border trade have recently become so high, that ‘cross-border redispatching actions’ are now regularly needed. An example of this trend is represented by the power network in the Central Eastern Europe area (CEE), which was stressed or highly stressed for 62% of the time in 2015, requiring cross-border coordination between TSOs at the day-ahead stage (Coreso, 2015).

It is important to note that the real-time network constraints that must be managed through redispatching actions are the consequence of problems occurring earlier, ahead of time, which are not properly addressed by the current market design. In Europe, congestion management is actually based on a set of tools. First, there are mechanisms for transmission capacity calculation between pre-defined bidding zones (ATC-based or flow-based products) and, second, there are mechanisms for the allocation of transmission capacity at different time horizons, from year-ahead to intraday.¹²⁶

124 We assume here that all zero cost actions that TSOs can take in order to reduce the level of power flowing through congested network elements (e.g. changes in network topology via the coupling or decoupling of network nodes, changes in phase-shifting transformer taps, etc.) have already been implemented.

125 Exceptions are represented by Norway, Sweden, Denmark and Italy.

126 In the long run, investments on the transmission network and in generation down the congested lines can also solve the problem. For instance, the installation of phase-shifters at a border can help to manage cross-border congestions. This is what happened in the last few years between Germany and Poland.

It is then the ‘market design’ which nurtures operational constraints. Uniform pricing across large bidding zones creates unscheduled loop-flows and transit flows, while smaller bidding zones with borders more aligned with the congested lines reduce the need for cross-border redispatching actions because, in the latter case, markets are better equipped to take into account the physical limits of what the grid can effectively accommodate.

Nevertheless, better designed bidding zones do not fully eliminate the need for redispatching. First, because unforeseen events like sudden outages or changes in renewables output can trigger congestions. Second, because transmission capacity auctions between smaller and better configured bidding zones may not be optimal to deal with all the network constraints present in the European power system (Sadowska and Willems, 2013). Indeed, zonal pricing alone does not ensure that the available network capacity is entirely used and in the most efficient way, because market players do not have access to the whole physical details of the network topology and to the precise location of all alternative generators. Therefore, a combination of zonal pricing with properly defined zones and limited redispatching can provide a more efficient allocation of resources and welfare maximisation.

It is often extremely difficult and sometimes impossible in practice to distinguish between national and cross-border redispatching.¹²⁷ This happens because the European power grid is highly meshed, at least in the CWE and in the CEE areas, and congestions occur mainly on ‘internal’ lines due to intermingled internal and international power exchanges (Duthaler, 2009).

The difficulty of assessing the origin of many congestions and, as a result, the impossibility of identifying in a thorough and systematic way who is ‘responsible’ for them often prevents any meaningful discrimination between internal and cross-border redispatching. In turn, this makes the sharing of redispatching costs even more important and difficult to perform properly.

Currently, different methods are implemented to share cross-border redispatching costs.¹²⁸ In continental Europe, TSOs distinguish between cross-border redispatching actions required to relieve congestions on interconnections and cross-border redispatching actions required to relieve congestions on internal lines. For cross-border redispatching actions required to relieve congestions on interconnections, the current practice is to equally share costs between the TSOs on both ends of the line. However, this situation represents only a minority of cases. For cross-border redispatching actions required to relieve congestions on internal lines, the most frequent case in fact, the principle of ‘requester pays’ usually applies.

According to it, the costs of remedial measures are paid by the TSOs who have asked other TSOs for assistance, regardless of whether they have or have not

127 An exception is for parts of national networks that are organised as antennas. Consequently, cross-border flows cannot have an impact on them and the cause of a congestion can be more easily identified.

128 ENTSO-E mentioned in 2012 that an agreement on the sharing of cross-border redispatching costs had been decided for 65% of inter-TSOs borders and that similar agreements were under discussion for an additional 10% of borders (ACER & ENTSO-E, 2012).

caused the problem (Vukasovic and Vujasinovic, 2014). However, to our knowledge, it is not mentioned anywhere how the costs of remedial actions resulting from proposals suggested by RSCs like Coreso or TSC are allocated (in these cases the need for redispatching is not flagged by a single TSO but by the RSC and the

‘requester pays’ principle cannot be applied).

In the Nordic power system, a distinction is made between the actions taken day-ahead and the actions taken in real time. The cost of actions taken day-day-ahead is borne by the TSO that takes the decision. As for cross-border redispatching actions decided intraday or in real time, a further distinction is taken between actions to manage flows on interconnections and actions taken to manage flows on internal lines. For congestions on interconnections between bidding zones, cross-border redispatching costs are shared between the TSOs according to the “average market price of the two bidding zones [involved]” (ACER & ENTSO-E, 2012). For congestion within a bidding zone, the respective TSO bears the full technical, financial and operative liability for countertrading, meaning that each TSO bears the costs of countertrading (ACER & ENTSO-E, 2012).

Given the variety of methods for the allocation of costs, it is important to question the incentives such methods provide to i) manage efficiently and reliably the power flows in real time with redispatching; ii) manage efficiently and reliably the power flows before real time by offering adequate cross-border capacity for market exchanges;

and iii) invest adequately in cross-border transmission capacity in the long run.

About the first two points – i.e. the efficient and reliable management of power flows in real time with redispatching and the provision of adequate cross-border capacity for market exchanges – the efficiency of the cost sharing methods currently in use is questionable.

As for the cost sharing of redispatching actions in continental Europe, it incentivises TSOs to wait until the last minute to request coordinated actions for relieving internal constraints. The logic behind it is quite simple. By waiting, it may happen that another TSO faces a stronger constraint on its grid and makes the request first: in this case the payment for the remedial action is going to be borne by that TSO.

However, such logic is risky and consequential for the whole interconnected system, because waiting until the last minute may make it more difficult to find adequate solutions to relieve the congestion or to deal with other, subsequent, congestions that may result from the management of the first one.

A similar problem exists in the cost sharing method applied in the Nordic area, because any redispatching action before real time is to be managed by the country where the constraint is appearing. In addition, TSOs have the incentive to change the transmission capacity they offer for market transactions, because by doing so they influence market prices and the way redispatching costs are shared in real time (history shows that this kind of incentive exists both in theory and practice, Glachant and Pignon, 2005). Due to these inefficient short-term incentives in the current Nordic sharing scheme for cross-border redispatching costs, TSOs do not receive efficient economic signals for investment in network interconnections.