"One answer to the energy price crisis is more flexibility".

Bern/Berlin (energate) - With the energy-price crisis, short-term trading on the power exchange has come into focus as rarely before. In an interview, Davide Orifici, Director Public & Regulatory Affairs and Communications, explains why Epex Spot is opposed to interventions in the current market design despite the price volatility and why it rejects price caps, which are already a reality in some parts of Europe.

energate: Mr Orifici, how did the year 2021 go for Epex Spot?

Orifici: Compared to the previous year, trading on Epex Spot was stable in terms of turnover. In intraday trading, we experienced growth in the low double-digit percentage range, while the volume on the very mature day-ahead market remained largely unchanged. The defining issue - both in trading and in European and German politics - was and is undoubtedly the energy-price crisis. The situation has worsened since last year. We are also seeing extreme volatility this year. While the EU countries are preparing for the gas shortage in the winter of 2022-2023, we as an exchange are preparing for the critical scenarios.

energate: What does that mean in concrete terms?

Orifici: As an exchange, we are responsible for proper and transparent price formation and remain largely neutral in debates on price levels. We only react to political advances on the subject of profit caps for renewable production or subsidy measures for end consumers when we are asked to do so. But as an exchange, we have recently had to take a clear political position. Since March, we have published several policy briefings to clarify the ongoing political debate on electricity prices: The European electricity market is one of the most efficient in the world. The dependence on fossil fuels in combination with high gas prices is causing the energy price crisis, not the market design. If EU Commission President Ursula von der Leyen is already openly talking about an urgent reform of the market design, our exchange - as the party which is directly affected - is also called upon to point out constructive alternatives.

energate: Why are you moving away from fundamental neutrality?

Orifici: Our role as an electricity exchange remains neutral, of course, but in the context of energy price spikes we seek a proactive dialogue with decision-makers, as there is a huge amount of pressure weighing on politicians to act. Unfortunately, we see that some processes are developing in the wrong direction. Basically, this is not about new ideas, but rather rekindling old and familiar views. The discussions about market design in general, the merit order or price zones have already been held, the corresponding studies published. Under the new sign of the crisis and with the new politicians in the discussion rounds, polemic rhetoric is suddenly emerging and it isn't helping. For example, the non-energy specialists make it easy for themselves by saying that it is only the gas price that sets the electricity price level. But gas only sets the price when all other sources of electricity have been exhausted or are unavailable. The strength of cross-border cost-based pricing is that cheap producers are activated first before expensive producers are also used.

energate: What bothers you about the debate?

Orifici: The highly simplified statements quickly result in political demands to decouple the electricity price from the gas price. Such proposals are counterproductive and end up in decisions like the price cap for natural gas in Spain on 14 June. In the meantime, such gas price caps are even being discussed in other southern European countries. This shows that the political pressure to act is great. We at Epex Spot reject such interventions because they distort the market and send the wrong signals to the market participants.

energate: What would those be?

Orifici: Well, the capping of the gas price in Spain affects the whole of Europe through load flow-based market coupling, which covers a total of 24 countries. Here, electricity flows from the cheaper market area to the more expensive one. If the price of electricity is kept artificially low by the price cap, it sends the deceptive signal to the entire European continent that there is enough electricity available. In the next step, this means that electricity is exported to regions with higher market prices, which of course further exacerbates the acute electricity shortage that actually exists. Price signals that would encourage more energy efficiency or greater electricity saving are thus suppressed. Also, in Spain the intervention is currently leading to a higher gas consumption, although gas should be saved. We are therefore against such market interventions as price caps, because even when applied nationally they have a massive influence on pan-European price formation. Instead of such uncoordinated and fragmented national efforts, the European integration of the wholesale energy markets must now be continued and, for example, the capacities for cross-border trading must be expanded.

energate: The intervention in the Spanish market was not the only reason why Epex Spot ventured out of the woods.

Orifici: That's right. A central answer to the current energy price crisis is more flexibility. By this I mean local flexibility markets for congestion management. With new, complementary price signals, such markets can help reduce costs for redispatch and grid investments. But Germany is significantly lagging behind in the marketing of such flexibilities, although this is clearly stipulated in the Clean Energy Package (CEP).

At the level of the transmission system operators, there is already a market-based approach with the balancing market to address the problem of congestion management. With the adoption of the CEP in 2019, the regulatory framework was also clearly specified for the distribution system operators, saying that market-based approaches to congestion management should be preferred. As an exchange, we immediately supported the project and, together with our partners, demonstrated in the Enera project in north Germany that local flexibility markets for avoiding congestion also work in practice. The next step for Epex Spot was the purchase of a platform specifically designed for trading flexibilities, the Local Energy Market platform. We are also cooperating in the Netherlands with "GOPACS", a platform of grid operators for congestion management, through the provision and activation of localised flexibilities. This project will be launched next year.

energate: The introduction of the flexibility market in Germany is nevertheless taking a long time. Why?

Orifici: There are markets that have already made a lot of progress, both in terms of the regulatory framework and in practical implementation, for example the Netherlands and the UK. In Germany, on the other hand, the situation is not so clear-cut. Here, the current legal framework prevents the market-based procurement of flexibility services by grid operators. Germany has chosen a regulated approach to redispatch that does not allow for the integration of consumption-side flexibilities. Therefore, we are strongly in favour of changes to the regulatory framework to prevent this enormous flexibility potential from going unused. Furthermore, electricity grid operators lack incentives to invest in alternative "soft" solutions for grid expansion, such as local flexibility markets. Germany has also chosen not to implement the provisions of the CEP, or at least not to implement them fully. Epex Spot already has local flexibility markets on offer with the aforementioned LEM trading system and can implement these products promptly. The grid operators at all levels know that this market solution exists. Especially with the war in Ukraine, it is enormously important to exploit the full potential of the electricity system, not least to continue reducing dependence on energy imports from Russia.

energate: What potential are we talking about?

Orifici: The studies show a huge potential for load-side flexibilities in the coming years, which can be marketed and used to serve the grid. In Germany alone, for example, 15 million e-cars and more than 20 million heat pumps could be used by 2030. Further potential is offered by batteries, power-to-X, CHP plants and all types of industrial flexibilities. In order to be able to use this potential, the flexibilities and their supply and demand must be made transparent. The most efficient way to do this is through a market.

energate: Is the regulatory framework the only obstacle to the start of the flexibility market?

Orifici: Firstly, we need a discourse on what flexibility is and can ultimately achieve in the electricity market. In Germany, the word "flexibility" actually has an absolutely positive connotation. But if you ask what people understand by it, opinions diverge significantly. So, what falls under this category, who offers flexibilities and how can we effectively use the totality of the existing potential? Secondly, grid competence is a prerequisite that still needs to be worked on. The 2019 European Clean Energy Package sets the pace for a new approach to congestion management: It favours market-based solutions as well as market-based flexibility procurement. But to do so, it first asks grid operators to better coordinate their operations and better understand the topology of their grid - all in the interest of a cost-efficient energy transition.

This then leads to the multitude of use cases for market-based flexibility procurement by grid operators across Europe, such as Gopacs in the Netherlands or the Open Networks project in the UK. The fact is that Germany has to implement this EU directive for the marketing of flexibilities. Here we are experiencing delaying, if not blocking tactics from some quarters. But with the paradigm shift in the wake of the war in Ukraine the issue could gain significant momentum, as trade pressure is increasing and efficiency gains in the electricity system are becoming more urgent.

The questions were asked by Artjom Maksimenko.