COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Commission Regulation (EU) No .../... establishing a Guideline on Electricity Balancing
Date: 2017-11-23
Institutions: Directorate-General for Energy, European Commission
Subjects: European Union Agency for the Cooperation of Energy Regulators, electrical energy, electricity supply, energy distribution, energy grid, energy law, energy storage, energy supply, security of supply, trans-European network

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 23.11.2017  SWD(2017) 383 final  COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT  Accompanying the document Commission Regulation (EU) No .../... establishing a Guideline on Electricity Balancing {C(2017) 7774 final} - {SWD(2017) 382 final}  
 
 
TABLE OF CONTENTS 

Glossary and acronyms ............................................................................................................ 3 

1. 

Introduction ...................................................................................................................... 7 

2.1. 

2.1.1. 
2.1.2. 
2.1.3. 
2.1.4. 

2.  Policy context and scope of the initiative ....................................................................... 8 
Policy context ........................................................................................................................ 8 
The Energy Union Framework Strategy of February 2015 ........................................... 8 
The Third Energy Package: Network Codes and Guidelines ........................................ 9 
ACER Recommendation 03/2015 and link with other Network Codes ...................... 11 
Link with the Market Design initiative ....................................................................... 11 
Scope of the initiative ......................................................................................................... 12 
The EU Target Model in electricity ............................................................................ 12 
The concept of balancing in electricity ....................................................................... 14 
Procurement of balancing services .............................................................................. 15 
Settlement of imbalances ............................................................................................ 16 

2.2.1. 
2.2.2. 
2.2.3. 
2.2.4. 

2.2. 

3.  Problem description ....................................................................................................... 17 
Driver 1: Inappropriate balancing prices and consistency with other timeframes ..... 18 
Driver 2: Non-optimal usage of cross-border transmission capacity ............................ 19 

3.1. 
3.2. 

4.  Subsidiarity ..................................................................................................................... 21 

5.  Objectives ........................................................................................................................ 21 
5.1.  General objectives .............................................................................................................. 21 
Specific objectives .............................................................................................................. 21 
5.2. 

6.  Policy options .................................................................................................................. 21 
6.1. 
Baseline: No further EU action ......................................................................................... 22 
6.2.  Option 1: Harmonisation of the pricing methodology for balancing energy ................ 23 
Sub-Option 1.A: Pay-as-cleared methodology ............................................................ 23 
Sub-Option 1.B: Pay-as-bid methodology .................................................................. 23 
Summary of the identified Sub-Options under 1 ......................................................... 24 

6.2.1. 
6.2.2. 
6.2.3. 

6.3.  Option 2: Usage of cross-border transmission capacity for exchanging balancing 
energy  25 
6.3.1. 
6.3.2. 
6.3.3. 
tasks of supranational balancing operators (discarded) ................................................................ 29 
Summary of the identified Sub-Options under 2 ......................................................... 30 
6.3.4. 

Option 2.A: Binding regulation only on cross-border exchanges ............................... 25 
Option 2.B: Binding regulation on cross-border and national exchanges ................... 28 
Option 2.C: Binding regulation enforcing regional regulated entities performing the 

7.1. 
7.2. 

7.  Assessment of the impacts of the policy options .......................................................... 30 
Baseline: No further EU action ......................................................................................... 31 
Impact of Sub-Option 2.A: Binding regulation on cross-border exchanges ................. 31 
Economic impacts ....................................................................................................... 31 
Administrative impacts ............................................................................................... 33 
Environmental and social impacts ............................................................................... 33 
Impact of Sub-Option 2.B: Binding regulation on cross-border and national exchanges
33 

7.2.1. 
7.2.2. 
7.2.3. 

7.3. 

7.3.1. 
7.3.2. 
7.3.3. 

Economic impacts ....................................................................................................... 33 
Administrative impacts ............................................................................................... 34 
Environmental and social impacts ............................................................................... 35 

Impact of Sub-Option 2.C: Binding regulation enforcing regional regulated entities 

7.4. 
performing the tasks of supranational balancing operators (discarded) ................................... 35 
Economic impacts ....................................................................................................... 35 

7.4.1. 

1 

 
 
 
 
 
7.4.2. 
7.4.3. 

Administrative impacts ............................................................................................... 36 
Environmental and social impacts ............................................................................... 36 

8.  Comparison of the policy options ................................................................................. 37 

9.  Conclusion ....................................................................................................................... 38 

10.  Monitoring and evaluation ........................................................................................ 38 

11. 

List of Annexes ........................................................................................................... 38 
Annex I: Procedural information .................................................................................................. 40 
Annex II: Stakeholders consultations ........................................................................................... 44 
Annex III: Who is affected by the initiative and how .................................................................. 45 
Annex IV: Analytical models used in preparing the impact assessment ................................... 46 
Annex V: Summary of the link with the Market Design initiative ............................................. 49 

2 

 
 
 
GLOSSARY AND ACRONYMS 

ACER 

Balancing 

The Agency for the Cooperation of Energy Regulators, a European 
Union  Agency  that  was created  by  the  Third  Energy  Package  to 
further  progress  the  completion  of  the  internal  energy  market  both 
for electricity and natural gas. 

The  situation  after  markets  have  closed  (gate  closure)  in  which  a 
TSO acts to ensure that demand is equal to supply, in and near real 
time. 

Balancing services 

Balancing  services  refer  to  either  or  both  balancing  energy  and 
balancing capacity. 

Balancing energy  

Energy  activated  by  TSOs  to  maintain  the  balance  between 
injections and withdrawals in real time. 

Balancing capacity 

All  resources  procured  by  TSOs  ex  ante  which  are  available  for 
balancing purposes. It refers technically to the balancing reserves. 

Balancing Guideline 

Commission  Regulation  establishing  a  Guideline  on  Electricity 
Balancing, one of the legal acts to be adopted under Article 8(6) of 
the Electricity Regulation (EC) 714/2009. 

Balancing zone 

Balancing  zone  defines  the  size  of  the  network  area  for  which  the 
balancing  capacities  are  being  procured.  It  refers  technically  to  the 
Load-Frequency Control block. 

BRPs 

BSPs 

Balance  responsible  parties,  such  as  producers  and  suppliers,  keep 
their individual supply and demand in balance in commerical terms. 

Balancing  Service  Providers,  such  as  generators  or  demand 
facilities, balance out unforeseen fluctuations on the electricity grid 
by rapidly increasing or reducing their power output. 

Control area 

A  coherent  part  of  the  interconnected  system,  operated  by  a  single 
TSO  responsible  for  load-frequency-control  for  physical  loads  and 
generation units connected. 

Cross-border 
balancing 

Exchange  of  balancing  services  between  control  areas  and/or 
between bidding zones. 

Electricity Directive 

Directive 2009/72 of the European Parliament and of the Council of 
13  July  2009  concerning  common  rules  for  the  internal  market  in 
electricity  and  repealing  Directive  2003/54/EC,  OJ  L  211, 
14.8.2009,  p.  55–93.  Together  with  the  Electricity  Regulation,  the 
Electricity Directive sets the main parts of the legal framework for 
the EU's electricity markets. 

3 

 
 
 
 
Electricity Regulation  Regulation (EC) No 714/2009 of the European Parliament and of the 
Council of 13 July 2009 on conditions for access to the network for 
cross-border exchanges in electricity repealing Regulation (EC) No 
1228/2003,  OJ  L  211,  14.8.2009,  p.  15–35.  Together  with  the 
Electricity  Directive,  the  Electricity  Regulation  sets  the  main  parts 
of the legal framework for the EU's electricity markets. 

ENTSO-E 

EU Target Model 

FCR 

Florence Forum 

FRR 

Gate closure 

European  Network  of  Transmission  System  Operators 
for 
Electricity. ENTSO-E was created by the Third Energy Package to 
further  progress  the  completion  of  the  internal  energy  market 
for electricity. 

Term refering to the current design of the EU's electricity markets. 
The  EU  target  model  is  based  on  two  broad  principles:  (i)  the 
development  of  integrated  regional  wholesale  markets,  preferably 
established  on  a  zonal  basis,  in  which  prices  provide  important 
signals for generators' operational and investment decisions; and (ii) 
market  coupling  based  on  the  so-called  'flow-based'  capacity 
calculation, a method that takes into account that electricity can flow 
via  different  paths  and  optimises  the  representation  of  available 
capacities in meshed electricity grids. 

Frequency Containment Reserves are supplied by BSPs (generators, 
storage,  demand  response)  and  they  are  used  by  TSOs  to  maintain 
frequency  stable  within  a  given  synchronous  area  (e.g.  continental 
Europe).  This  category  typically  includes  automatically  activated 
reserves with the activation time up to 30 seconds. 

The Florence Forum was set up to discuss the implementation of the 
internal  electricity 
in  Europe.  The  participants  are  national 
regulatory  authorities,  Member  States,  the  European  Commission, 
transmission  and  distribution  system  operators,  electricity  traders, 
consumers, network users, and power exchanges. 

Frequency  Restoration  Reserve  are  supplied  by  BSPs  (generators, 
storage,  demand  response)  and  they  are  used  by  TSOs  to  restore 
system frequency and power balance after sudden system imbalance 
occurrence (e.g. the outage of a power plant). Those reserves replace 
FCR  if  the  frequency  deviation  lasts  longer  than  30  seconds.  This 
category  includes  operating  reserves  with  an  activation  time 
typically  between  30  seconds  up  to  15  minutes.  FRR  can  be 
distinguished  between  reserves  with  automatic  activation  (aFRR) 
and reserves with manual activation (mFRR). 

The  moment  when  contracts  are  frozen.  After  gate  closure,  no 
trading  is  allowed  anymore.  At  this  point,  parties  are  expected  to 
adhere to the physical data submitted to the System Operator and to 
the contracted volumes submitted before gate closure. 

Imbalances 

Deviations  between  generation,  consumption  and  commercial 

4 

 
 
Imbalance netting 

transactions  (in  all  timeframes  –  commercial  transactions  include 
sales  and  purchases  on  organised  markets  or  between  BRPs)  of  a 
BRP within a given imbalance settlement period. 

The process by which TSOs of two or more balancing zones agree 
to  offset  opposing  imbalances  between  adjacent  areas.  Imbalance 
netting  is  intended  to  prevent  the  counteracting  activation  of 
balancing energy. The process result in an effective energy exchange 
from an area with an energy surplus to one with shortage, subject to 
available cross-border capacity.  

Imbalance settlement  A  financial  settlement  mechanism  aiming  at  charging  or  paying 

BRPs for their imbalances.  

Imbalance settlement 
period 

The imbalance settlement period is the time unit used for computing 
BRPs’ imbalances. 

IGCC 

International  Grid  Control  Cooperation 

The 
is  a 
cooperation  between  TSOs  that  deals  exclusively  with  Imbalance 
Netting for aFRR reserves under residual transmission constraints at 
the borders. 

initiative 

Merit order list 

In  the  balancing  markets  a  merit  order  list  is  a  list  of  all  valid 
balancing  bids  submitted  by  BSPs  and  sorted  in  order  of  their  bid 
prices used for the activation of balancing energy bids. 

METIS 

NTC 

NRAs 

Pay-as-bid 

A modelling tool used by the Commission, described in more detail 
in Annex 4.  

Net Transmission capacity is the transmission capacity available for 
commercial 
is 
calculated  as  the  total  transfer  capacity  minus  the  transmission 
reliability margim. 

transactions  across  borders.  The  NTC  value 

National Regulatory Authorities. 

Market  clearing  practice  in  which  each  offers  received  the  amount 
bided. 

Pay-as-cleared 

Market  clearing  practice  in  which  all  selected  offers  received  the 
amount offered by the highest selected offer. 

Power exchange 

RR 

Power  exchanges  facilitate  the  trading  of  electricity  at  wholesale 
level,  often  for  delivery  the  next  day  or  at  even  shorter  intervals 
(intra-day). They cooperate with TSOs in optimising interconnection 
capacity in the contex of market coupling. 

Replacement Reserve Replacement reserves are reserves from BSPs 
(generators, storage, demand response) used by TSOs to restore the 
required level of FCR and FRR due to their earlier usage. Contrary 
to  FCR  and  FRR,  not  all  TSOs  in  the  EU  use  RR.  This  category 

5 

 
 
 
RPM 

Third Package 

includes  operating  reserves  with  activation  time  from  several 
minutes up to hours. 

The Regulating Power Market initiative is a cooperation between the 
Nordics that deals with the exchange of mFRR products. 

A package of legislation adopted in 2009 comprising the Electricity 
Directive  (2009/72/EC),  the  Electricity  Regulation  (714/200/EC), 
the  ACER  Regulation  (713/2009/EC)  as  well  as  similar  legislation 
concerning the gas markets. 

TSO 

Transmission  system  operator,  the  entity  that  operates  the  high 
voltage  network  in  a  given  area  and  that  also  interconnects  with 
neighbouring electricity systems. 

Transmission capacity  The transmission capacity, also called total transfer capacity (TTC), 
is the maximum transmission of active power in accordance with the 
system  security  criteria  which  is  permitted  in  transmission  cross-
sections between the subsystems/areas or individual installations. 

6 

 
 
 
1. 

INTRODUCTION 

This  Impact  Assessment  has  been  compiled  in  support  of  a  draft  Commission  Regulation 
establishing a Guideline on Electricity Balancing: the 'Balancing Guideline'.   

Electricity  balancing  covers  all  actions  performed  by  a  Transmission  System  Operator1 
('TSO')  to  ensure that total  electricity demand is equal to  ('in  balance with')  total electricity 
supply at any given moment. Balancing is thus essential to ensuring the well functioning of 
wholesale electricity markets, given their bearing on system stability and security of supply.  

With  the  progressive  liberalization  of  electricity  markets,  markets  for  the  procurement  and 
activation of energy for the purposes of balancing have generally remained more fragmented 
and less competitive. The draft Balancing Guideline aims to obviate to this.  

As  all  secondary  legal  acts,  the  scope  and  mandate  of  the  proposed  Guideline  flows  from 
primary  acts.  Specifically,  the  proposed  Guideline  follows  from  the  Electricity  Regulation 
(EC) 714/2009 part of the so-called 'Third Energy Package'2. 

The standard process for the adoption of electricity Network Codes and Guidelines places the 
European Commission at the end of a long development phase that involves heavily National 
Regulatory  Authorities  ('NRAs')  and  Transmission  System  Operators;  the  former  acting 
within the Agency for the Cooperation of Energy Regulators3 ('ACER') and the latter within 
the European Network of Transmission System Operators for Electricity4 ('ENTSO-E'). 

For  the  draft  Balancing  Guideline,  such  process  kicked  off  in  2012.  Most  recently,  the 
Commission  received  on  15  July  2015  from  ACER  a  positive  recommendation  for  the 
adoption  of  the  proposed  Guideline  that  is  the  object  of  this  Impact  Assessment.  Such  a 
prolonged  timeline  is  to  be  considered  as  standard,  as  the  draft  Balancing  Guideline  was 
discussed in parallel to the adoption of a number of other Network Codes and Guidelines on 
other aspects of electricity markets. 

Crucially, the final adoption phase of the draft Balancing Guideline is now concomitant to the 
launching  of  an  initiative  for  the  revision  of  the  basic  acts  included  in  the  Third  Energy 
Package.  A  Consultative  Communication  by  the  Commission  in  July  2015  began  a  process 
that should result in an updated Market Design package by the end of 2016. A separate Impact 
Assessment on Market Design has been submitted at the same time. 

With  a  view  to  possible  revision  of  primary  legislation,  there  was  thus  a  need  to  ensure 
agreement between any future Market Design rules and the draft Balancing Guideline, as the 

1  

2  

3  

4  

TSO is the entity that operates the high voltage network in a given area and that also interconnects with 
neighbouring electricity systems. 
A  package  of  legislation  adopted  in  2009  comprising  the  Electricity  Directive  (2009/72/EC),  the 
Electricity Regulation (714/200/EC), the ACER Regulation (713/2009/EC) as well as similar legislation 
concerning the gas markets. 
ACER is a European Union Agency that was created by the Third Energy Package to further progress 
the completion of the internal energy market both for electricity and natural gas. 
ENTSO-E is the European Network of Transmission System Operators for Electricity that was created 
by  the  Third  Energy  Package  to  further  progress  the  completion  of  the  internal  energy  market 
for electricity. 

7 

 
 
                                                 
latter remained an implementing act of the former. The interplay between the two initiatives 
(Market  Design  and  Balancing  Guideline)  is  fully  explained  under  Section  2.1.4, 
accompanied by a fuller explanation of the reasons justifying such a distinction. 

The remainder of this document is devoted to a presentation of the general policy context in 
which the draft Balancing Guideline comes to light – from the Energy Union Framework to 
the Third Energy Package - as well as a deeper treatment of balancing markets and how they 
fit with the current electricity market model (the so called 'EU target model'5).  

After having presented the reader with sufficient background information on the specificities 
of  balancing  markets  and  the  policy  context  informing  a  proposal  for  a  draft  Balancing 
Guideline, this Impact Assessment will move – as customary – to spelling out in details both 
problems and options to address objectives. 

2. 

POLICY CONTEXT AND SCOPE OF THE INITIATIVE 

2.1. 

Policy context 

2.1.1.  The Energy Union Framework Strategy of February 2015 

The  European  Commission's  'Framework  Strategy  for  a  Resilient  Energy  Union  with  a 
Forward-Looking  Climate  Change  Policy'  of  February  2015  set  out  to  create  an  ever-more 
integrated energy market as a prerequisite to the creation of a true Energy Union. The aim is 
to set the conditions for a reliable and affordable energy for all, to apply the efficiency first, 
and  solidarity  principles  and  to  make  the  European  Union  the  world  leader  in  renewable 
energy.  

A  revised  Energy  Union  governance  system  will  secure  the  implementation  of  the  internal 
energy market and the delivery of the 2030 Energy and Climate Framework and it will deepen 
the  cooperation  between  Member  States  -  including  at  regional  level  -  and  between  the 
Member States and the European Commission. 

These  commitments  take  a  heightened  significance  on  the  back  of  the  climate  agreement 
reached at the 21st meeting of the Conference of the Parties 21 ('COP 21') in December 2015, 
and the ratification of the agreement at EU level. These commitments come on top of biding 
EU Energy and Climate Objectives to 2020 and 2030.   

Achieving the EU's climate and energy goals will require a further evolution in the design of 
the European electricity market, in order to adapt it to the set of new and upcoming challenges 
that have emerged since the adoption of the latest package of legislation in the area, the so-
called 'Third Energy Package'. 

It is worth outlining major such challenges to be addressed: 

  Significant,  ever-growing  shares  of  generation  from  renewable,  decentralised  and 

variable energy sources;  

5  

Term refering to the current design of the EU's electricity markets. The EU target model is based on two 
broad principles:  (i)  the development  of  integrated  regional  wholesale markets, preferably  established 
on a zonal basis, in which prices provide important signals for generators' operational and investment 
decisions; and (ii) market coupling based on the so-called 'flow-based' capacity calculation, a method 
that takes into account that electricity can flow via different paths and optimises the representation of 
available capacities in meshed electricity grids. 

8 

 
 
                                                 
  Lack  of  sufficient  interaction  between  the  electricity  wholesale  and  retail  market, 
depriving consumers of the possibility to participate actively in the energy transition;  

  Lack of investment signals particularly in some Member States; and  

  Recourse to national approaches to address the above challenges; based on solutions 
that  risk  fragmenting  and  undermining  the  functioning  of  the  internal  energy  market 
even more.  

To  address  such  issues,  the  European  Commission  is  currently  reviewing  the  Third  Energy 
Package  and  aims  to  submit  a  package  of  new  legislative  measures  by  the  end  of  2016 
('Market Design initiative'). The main policy objectives of the Market Design initiative are set 
out  in  the  Communication  (COM  (2015)  80  final)  launching  a  public  consultation  on  an 
energy market design of 15 July 2015.  

For  the  purposes  of  this  Impact  Assessment,  it  is  important  to  understand  the  context  and 
scope  of  Market  Design  reform  to  the  extent  to  which  it  touches  upon  balancing  markets 
provisions; so that the overlap with the draft Balancing Guideline is readily seen. 

2.1.2.  The Third Energy Package: Network Codes and Guidelines 

The  Third  Energy  Package  was  adopted  in  2009  with  the  aim  to  further  liberalize  and 
integrate Europe's energy markets.  

Key  changes  included  mandatory  unbundling  of  energy  suppliers  from  network  operators; 
strengthening  the  independence  of  NRAs;  the  establishment  of  ACER;  cross-border 
cooperation between TSOs and the creation of ENTSO-E as well as increased transparency in 
retail markets. 

Crucially  for  the  purpose  of  the  draft  Balancing  Guideline,  the  Third  Energy  Package  also 
provided  the  European  Commission  with  competencies  to  address  the  need  for  more 
harmonised electricity rules via the adoption of specific implementing acts ('Network Codes 
and Guidelines'), adopted under comitology rules.  

The  Third  Energy  Package  has  set  out  a  framework  for  developing  Network  Codes  and 
Guidelines  with  a  view  to  harmonising,  where  necessary,  the  technical,  operational  and 
market rules governing the electricity grids. Under this framework, ACER, ENTSO-E and the 
European Commission have a key role and need to work in close cooperation with all relevant 
stakeholders  on  the  development  of  Network  Codes  and  Guidelines.  The  areas  in  which 
Network Codes and Guidelines can be developed are set out in Article 8(6) of the Electricity 
Regulation  (EC)  714/2009.  Once  adopted,  these  Network  Codes  and  Guidelines  become 
binding Commission Regulations, directly applicable in all Member States. 

The adoption of Network Codes and Guidelines is an important building block of the internal 
energy market, as beyond general principles, the bulk of market integration cannot take place 
without an extensive degree of mutual agreement on a number of highly technical subjects.  

A number of electricity Network Codes and Guidelines have accordingly been approved on a 
regular  basis,  aimed  at  removing  the  main  legal  and  technical  obstacles  resulting  from 
fragmented national electricity transmission rules. Network Codes and Guidelines can notably 
be  adopted  to  harmonise  rules  for  cross-border  electricity  trade  and  for  the  safe  and  stable 
operation of the integrated European electricity grid6.  

6  

The electricity grids of Member States do not operate in isolation, they are interconnected. Electricity 
always follows the path of least resistance, which means that physical flows are unaffected by political 

9 

 
 
                                                 
The Network Code process is defined in Articles 6 and 8 of the Electricity Regulation and it 
can  be  essentially  divided  in  two  phases:  (i)  the  development  phase;  and  (ii)  the  adoption 
phase. At each of the two phases and in-between phases, the European Commission, ACER 
and ENTSO-E consult their draft proposals with stakeholders. 

Figure 1 below illustrates the main stages of the Network Code development process:  

Figure 1: Main stages of the network code development process 

The  development  phase  ends  with  a  recommendation  for  adoption  by  ACER  to  the 
Commission.  At  this  point  the  Commission  launches  the  adoption  phase,  as  illustrated  in 
Figure 2: 

Figure 2: Network code adoption phase 

Once  adopted,  Network  Codes  and  Guidelines  are  acts  implementing  the  Electricity 
Regulation (EC) 714/2009. 

borders.  Three  main  categories  of  Network  Codes  or  Guidelines  exist:  (i)  those  establishing  market 
rules  for  different  timeframes;  (ii)  those  establishing  rules  for  the  safe  connection  of  generators  and 
electricity consumers to the transmission grid; (iii) and those establishing rules for the safe and efficient 
operation of transmission networks. 

10 

 
 
 
 
                                                                                                                                                         
2.1.3.  ACER Recommendation 03/2015 and link with other Network Codes 

It is within the context and the process outlined above, that ACER adopted on 20 July 2015 a 
recommendation7  ('ACER  Recommendation  03/2015')  supporting  the  adoption  by  the 
European  Commission  of  a  Regulation  establishing  a  Guideline  on  Electricity  Balancing8. 
The Agency's recommendation kicked off the adoption phase by the Commission. The scope 
of the initiative and substantive content is explained below under Section 2.2. 

It is important to state at this point that the draft Balancing Guideline closely follows the line 
taken  by  ACER  under  all  aspects  of  Balancing.  One  notable  exception  concerns  the 
geographical  approach  of  the  Guideline:  whereby  ACER  proposed  a  regional  approach  for 
exchanging balancing energy9 as a first step, the proposal endorsed by this Impact Assessment 
opts for a European-wide approach for exchanging balancing energy. This is further explained 
below, but it needs to be said that the move to a European-wide approach follows the same 
line taken by closely related Guidelines that have already been adopted in the meantime.  

The  draft  Balancing  Guideline  in  fact  relates  closely  to  two  previously  adopted  Guidelines 
bearing  on  electricity  trading  rules.  These  are:  (i)  a  Regulation  establishing  a  Guideline  on 
capacity allocation and congestion management ('CACM') which introduces binding rules for 
so-called  'market  coupling'  as  it  affects  short-term  wholesale  trading  (so-called  'day-ahead' 
and 'intraday' trading)10; and (ii) a Regulation  establishing  a Guideline on forward capacity 
allocation ('FCA')11, which provides for harmonised rules for 'forward' electricity trading, that 
is, trading for delivery in the longer term.  

Taken together, the Balancing, CACM and FCA Guidelines complement and expand upon the 
legislation of the Third Energy Package. 

2.1.4.  Link with the Market Design initiative 

This Impact Assessment is concomitant to a parallel Impact Assessment bearing on a review 
of electricity Market Design rules. The latter is aimed at amending legal provisions of the so-
called  Third  Energy  Package  above  cited.  It  is  thus  necessary  to  better  explain  the  linkages 
between the two initiatives.  

Before explaining such linkage, it is worth reminding that the Market Design initiative, at the 
time of writing, is set to be adopted concomitant to a new framework for the 'Energy Union 
Governance'. For clarity, it should be highlighted that the measures to be proposed under the 
draft Balancing Guideline would not have a direct link with the initiative on Governance. The 
main  reason  being  that  balancing  rules  remain  at  too  technical  and  detailed  level  to  be  the 
object of high-level reporting and coordination under the Governance initiative as envisaged. 

7  

8  

9  
10  

11  

ACER Recommendation 03/2015 on a Network Code on Electricity Balancing (July 2015): 
http://www.acer.europa.eu/official_documents/acts_of_the_agency/recommendations/acer%20recomme
ndation%2003-2015.pdf  
It  should be noted,  for  the  sake of  clarity, that ACER's  Recommendation  was  originally  aimed  at  the 
development of a Balancing Network Code. Due to the nature of the subject (market rules rather than 
purely Network Codes) and the less technical nature (Network Codes tend to be much more technical 
and  directly  prescriptive),  the  Commission  later  converted  the  proposed  Network  Code  on  Balancing 
into a Guideline on Balancing. There is no difference as concerns their legally binding effect and direct 
applicability.   
Energy activated by TSOs to maintain the balance between injections and withdrawals in real time. 
Commission  Regulation  (EU)  2015/1222  of  24  July  2015  establishing  a  Guideline  on  capacity 
allocation and congestion management (OJ L 197, 25.7.2015, p. 24). 
Commission  Regulation  (EU)  2016/1719  of  26  September  2016  establishing  a  Guideline  on  forward 
capacity allocation (OJ L 259, 27.9.2016, p. 42). 

11 

 
 
                                                 
Market Design provisions will instead interact with those to be included in the draft Balancing 
Guideline,  although  the  scope  of  the  Market  Design  review  is  much  larger  than  the  single 
topic  of  Balancing.  Although  the  economic  and  technical  impetus  for  integrating  balancing 
electricity markets is one, balancing provisions are being divided between the two initiatives. 
The  question  is  raised  as  to  how  to  divide  balancing  provisions  between  the  two  initiatives 
(that is, between Market Design and the Balancing Guideline). 

From a purely legal perspective, at present the letter of the law leaves a margin of discretion 
as to whether balancing provisions should be part of secondary legislation or its implementing 
measures.  The  Third  Energy  Package  explicitly  states  that  Network  Codes  shall  cover 
'balancing rules including network-related power rules', with the caveat that Network Codes 
and  Guidelines  measures  should  be  designed  to  amend  non-essential  elements  of  the 
Electricity Regulation. 

In  practice,  this  leaves  some  discretion  as  to  which  provisions  to  include  under  which 
initiative.  Remaining  within  the  remit  of  the  current  legal  framework,  the  following  criteria 
and points of considerations have been followed: 

 

In  line  with  a  longer  envisaged  adoption  process  for  new  Market  Design  rules, 
measures under the draft Balancing Guideline should be technically and logically prior 
to those envisaged under the Market Design initiative.  

  Further, it should be noted that the adoption process of the draft Balancing Guideline 
follows  a  long  period  of  many  years  of  deliberation  amongst  stakeholders.  Years  of 
discussions  and  practical  experience,  have  led  Member  States  and  TSOs  to 
unanimously ask  for implementing  a number of  measures which are agreed upon by 
all  stakeholders  –  that  is,  to  go  for  'quick  wins'  that  advance  market  integration.  On 
such widely agreed upon issues, waiting for the end of the legislative process for the 
adoption  of  Market  Design  rules,  would  mean  delaying  implementation  by  several 
years, with all the foregone opportunity costs associated. 

  On  the  other  hand,  politically  contentious  provisions,  i.e.  regional  approach  to 
balancing  reserves,  would  be  included  under  the  Market  Design  initiative.  A  pre-
requisite  for  a  regional approach  to  balancing  reserves is  the  possibility  to  exchange 
balancing  energy  across  borders.  The  sense  would  be  to  harvest  the  'low-hanging 
fruits' as much as possible. 

In any event, the likely adoption of the Market Design initiative will likely result in the further 
amendments of several of the Network Codes and Guidelines that have already been adopted. 
The idea to retain is that, beyond the logical order in which provisions are drafted, there is a 
degree of interplay and continuous feedback among legislative provisions.  

2.2. 

Scope of the initiative 

2.2.1.  The EU Target Model in electricity 

To achieve an integrated electricity wholesale market in Europe, NRAs led a work stream on 
the  EU  Electricity  Market  Target  Model  in  2008  and  came  to  end  in  2010.  This  work  was 
preceded  by  a  project,  started  in  2007  and  led  by  TSOs  and  power  exchanges12,  on  how  to 
organise the electricity market at different timeframes.  

12  

Power exchanges facilitate the trading of electricity at wholesale level, often for delivery the next day or 
at even shorter intervals (intra-day). They cooperate with TSOs in optimising interconnection capacity 
in the contex of market coupling. 

12 

 
 
                                                 
The  final  outcome  of  such  efforts  was  the  adoption  of  the  'EU  Target  Model'  in  electricity. 
The  EU  Target  Model  foresees  a  specific  cross-border  market  design  for  each  of  the 
timeframe of the market as those move closer to 'real-time'; the moment electricity has to be 
delivered.  

These  markets  are,  in  order  of  timeframe:  forward,  day-ahead,  intraday,  and  balancing 
markets as illustrated in Figure 3. 

The EU Target Model for electricity trading consists notably of the following elements: 

Figure 3: The EU Target Model in electricity 

  For longer timeframes (i.e., longer than day-ahead), a single European platform for the 
explicit allocation of cross-border transmission capacities. Physical transmission rights 
('PTRs') and/or financial transmission rights ('FTRs') on cross-border interconnections 
are to be auctioned by TSOs in case a relevant liquid forward derivatives market does 
not exist; 

  For  the  day-ahead  timeframe,  the  implicit  allocation  of  cross-border  transmission 
capacities  through  a  single  European  price  coupling  process,  replacing  explicit 
auctions. Implicit market coupling implies that all order books from power exchanges 
(all  bids  and  offers)  are  to  be  aggregated  and  optimized  in  one  algorithm  that 
calculates  prices  and  flows,  subject  to  the  available  transmission  capacity  between 
market  areas.  Price  differences  can  still  occur  due  to  bottlenecks  between  different 
market areas (congestion on interconnections);  

  For the intraday timeframe, a single platform where electricity and the corresponding 
cross-border  capacities  are  traded  in  one  (i.e.,  implicit  capacity  allocation)  on  a 
continued basis;  

  For  the  balancing  timeframe,  European-wide  balancing  platforms  where  all  TSOs 
would have access to different types of balancing products while taking into account 
the available transmission capacity between market areas. 

The EU Target Model requires a 'flow-based' method to be used for capacity calculation and 
allocation. Flow-based means that capacity is calculated and allocated taking into account the 
meshed nature of the transmission network and all possible paths through which electricity is 

13 

 
 
 
flowing  in  it.  The  flow-based  calculation  algorithms  will  thus  optimise  directly  the 
commercial power  flows taking into account the limitations of the network.  In  other words, 
the  values  on  available  transmission  capacity  will  be  calculated  as  part  of  the  market 
algorithm itself, i.e. simultaneously (and not ex-ante based on expected flows). The EU Target 
Model  is  based  on  zonal  pricing  and  requires  efficient  price-zones  reflecting  actual  system 
constraints.  

CACM  has  implemented  key  features  of  the  EU  Target  Model,  notably  day-ahead  and 
intraday market coupling, flow-based market coupling, and it has also introduced a structured 
bidding zone review process. FCA has harmonised rules for longer-term capacity allocation. 
The  draft  Balancing  Guideline,  which  is  analysed  in  this  impact  assessment,  will  set  out 
harmonised rules for balancing. 

2.2.2.  The concept of balancing in electricity 

Balancing refers to the situation after markets have closed ('gate closure') in which a TSO acts 
to  ensure  that  demand  is  equal  to  supply.  A  number  of  stakeholders  are  responsible  for 
organising the electricity balancing market: 

  TSOs keep the overall supply and demand in balance in physical terms at any given point 
in time. This balance guarantees the secure operation of the electricity grid at a constant 
frequency of 50 Hertz. 

  Balance responsible parties ('BRPs') such as producers and suppliers; keep their individual 
supply  and  demand  in  balance  in  commercial  terms.  Achieving  this  requires  the 
development  of  well-functioning  and  liquid  markets.  BRPs  need  to  be  able  to  trade  via 
forward markets and at the day-ahead stage. They also need to be able to fine-tune their 
position in the same trading day (e.g. when wind forecasts or market positions change). 
  Balancing service providers ('BSPs') such as generators or demand facilities, balance out 
unforeseen  fluctuations  on  the  electricity  grid  by  rapidly  increasing  or  reducing  their 
power  output.  BSPs  receive  a  capacity  payment  for  being  available  when  markets  have 
closed ('balancing capacity'13) and an energy payment when activated by the TSO in the 
balancing  market  ('balancing  energy').  Payments  for  balancing  capacity  are  often 
socialized  via  the  transmission  network  tariffs,  whereas  payments  for  balancing  energy 
usually shape the price that BRPs who are out of balance have to pay ('imbalance price'). 

The  liberalisation  of  the  electricity  market  introduced  the  concept  of  balancing  as  a 
competitive market, where the demand and supply for balancing services14 are met. Thus, the 
balancing market is characterised by the two core components: the procurement of balancing 
services and the settlement of imbalances15, as illustrated in Figure 4. These two components 
are further described below. 

13  

14  
15  

All resources procured by TSOs ex ante which are available for balancing purposes. It refers technically 
to the balancing reserves. 
Balancing services refer to either or both balancing energy and balancing capacity. 
Deviations settled by a TSO between generation, consumption and commercial transactions of a BRP 
within a given period. 

14 

 
 
                                                 
Figure 4: General description of typical balancing markets 

2.2.3.  Procurement of balancing services 

Due  to  the  physics  of  electricity,  this  must  be  produced  and  transmitted  as  it  is  consumed, 
which  means  that  the  electricity  system  must  always  strike  a  balance  between  what  is 
generated  and  what  is  demanded  at  any  given  moment  in  time.  Further,  any  disturbance 
caused  by  the  failure  of  a  single  component  in  the  system  is  transmitted  across  the  entire 
system almost instantaneously. 

Balancing  markets  are  fundamental  in  keeping  demand  and  supply  matched  in  real  time. 
Being responsible for the safe and secure operation of electricity systems, TSOs manage the 
physical  equilibrium  on  the  grid  by  securing  a  set  of  balancing  services  to  cope  with 
deviations in the supply or the demand of electricity. TSOs can secure balancing services by 
means  of  both  contracted  and  non-contracted  services  delivered  by  BSPs  over  different 
timescales.  

In  the  act  of  balancing,  TSOs  need  to  ensure  that  they  will  always  be  able  to  activate  a 
sufficient  amount  of  energy  to  balance  the  deviations  between  supply  and  demand  in  real 
time.  In  other  words,  the  TSO  must  be  in  the  position  to  be  able  to  call  upon  any  BSPs  to 
make  demand  and  supply  meet.  On  their  side,  BSPs  must  be  able  to  meet  the  necessary 
technical requirements to deliver such a service.  

If  TSOs  are  faced  with  the  risk  that  they  will  not  have  enough  offers  for  balancing  energy 
from  BSPs in real time,  they can  hedge  this uncertainty  by securing in advance a sufficient 
amount  of  power  capacity  available  in  their  control  area16.  An  option,  giving  the  TSOs  the 
possibility  to  activate  a  certain  amount  of  balancing  energy  within  a  certain  timeframe,  is 
defined as 'balancing capacity'. It is typically defined as the available generation or demand 
capacity that can be either automatically or manually activated to balance the system in real 
time.  The  TSOs  usually  check  and/or  conclude  contracts  to  guarantee  they  have  access  to 
these balancing reserves ahead of real time.  

Hence, TSOs can procure balancing energy in real time from balancing resources which were 
secured  in  advance  as  balancing  capacity,  or  by  other  balancing  resources  that  are  offering 
balancing energy on a voluntary basis, subject to their availability in real time. 

16  

A coherent part of the interconnected system, operated by a single TSO responsible for load-frequency-
control for physical loads and generation units connected. 

15 

 
 
 
                                                 
In  order  to  deal  with  disturbances  in  system  operation,  TSOs  may  rely  on  three  types  of 
reserves  (see  Figure  5):  Frequency  Containment  Reserve17  (FCR),  Frequency  Restoration 
Reserve18 (FRR) and Replacement Reserve19 (RR).  

Figure 5: Different kinds of balancing reserves and sourcing 

A balancing market is typically organised by the TSO, which acts as a single buyer, and BSPs 
submit upward and downward balancing energy and capacity bids. In accepting these bids, the 
TSO can therefore ensure an overall balance in supply and demand in real time. 

2.2.4. 

Settlement of imbalances 

In a liberalised market, the market players also have an implicit responsibility to balance the 
system through the balance responsibility of market participants, the so-called 'BRPs'. In this 
respect, the BRPs are financially responsible for keeping their own position (i.e., the sum of 
electricity delivered, electricity taken and electricity trades) balanced over a given timeframe 
– the imbalance settlement period20 ('ISP'). The remaining short and long energy positions in 
real  time  are  described  as  the  BRP’s  negative  and  positive  imbalances  respectively21. 
Depending on the state of the system, an imbalance charge is imposed per settlement period 
on the BRPs that are not in balance. This defines the imbalance settlement22, which is a core 

17  

18  

19  

20  
21  

22  

Frequency  Containment  Reserves  are  supplied  by  reserve  providers  (generators,  storage,  demand 
response) and they are used by TSOs to maintain frequency stable within a given synchronous area (e.g. 
continental  Europe).  This  category  typically  includes  automatically  activated  reserves  with  the 
activation time up to 30 seconds. 
Frequency  Restoration  Reserve  are  supplied  by  reserve  providers  (generators,  storage,  demand 
response)  and  they  are  used  by  TSOs  to  restore  system  frequency  and  power  balance  after  sudden 
system  imbalance  occurrence  (e.g.  the  outage  of  a  power  plant).  Those  reserves  replace  FCR  if  the 
frequency  deviation  lasts  longer  than  30  seconds.  This  category  includes  operating  reserves  with  an 
activation  time  typically  between  30  seconds  up  to  15  minutes.  FRR  can  be  distinguished  between 
reserves with automatic activation (aFRR) and reserves with manual activation (mFRR). 
Replacement  Reserve  Replacement  reserves  are  reserves  from  reserve  providers  (generators,  storage, 
demand  response)  used  by  TSOs  to  restore  the  required  level  of  FCR  and  FRR  due  to  their  earlier 
usage.  Contrary  to  FCR  and  FRR,  not  all  TSOs  in  the  EU  maintain  RR.  This  category  includes 
operating reserves with activation time from several minutes up to hours. 
ISP is the time unit used for computing BRPs’ imbalances. 
If  a  participant  has  a  short  position,  this  means  that  the  difference  between  the  contractual  value  and 
metered position has contributed to a deficit of electricity flowing into the system. If a participant has a 
long  position,  this  means  that  the  difference  between  the  contractual  value  and  metered  position  has 
contributed to a surplus of electricity flowing on to the system.  
Imbalance settlement is the financial settlement mechanism aiming at charging or paying BRPs for their 
imbalances. 

16 

 
 
 
                                                 
element of balancing markets. It typically aims at recovering the costs of balancing the system 
and may include incentives for the market to reduce imbalances – e.g. with references to the 
wholesale market design – while transferring the financial risk of imbalances to BRPs. 

3. 

PROBLEM DESCRIPTION 

Balancing  has  been  historically  entrusted  to  individual  TSOs,  as  the  single  entities  with 
sufficient  information  on  system  frequency,  national  generation,  consumption  and  network 
topology  to  efficiently  balance  the  system.  Being  designed  according  to  historical  national 
specificities  (generation  portfolios,  significant  presence  of  internal  congestions  and  level  of 
interconnections with foreign markets) these systems can significantly differ from one country 
to  another.  The  wide  variety  of  balancing  market  designs  existing  in  Europe  is  generally 
perceived as an important barrier for their integration and cause unnecessary complexities for 
cross-border trade (see ENTSO-E surveys on ancillary services in Europe23). 

Electricity balancing covers all the actions and activities performed by a TSO to ensure that in 
a control area, total electricity withdrawals equal total injections in real time. These activities, 
which are simultaneously performed in all control areas and between control areas, contribute 
to  ensuring  the  balance  and  stability  in  a  synchronous  area.  Balancing  mechanisms  are  not 
only  technical arrangements set  out to  ensure system stability but  also  have  implications  on 
competition as procuring balancing services normally entails commercial arrangements with 
imbalances levied on the market through settlement mechanisms.  

ACER's  market  monitoring  reports  revealed  high  levels  of  concentration  within  national 
balancing  markets.  The  competition  in  the  procurement  of  balancing  services  can  be 
constrained when the upward and downward balancing products are simultaneously procured 
or when TSOs procurement periods are relatively long. This partly explains the relatively high 
concentration in the procurement of balancing services as illustrated in Figure 6 showing the 
cumulative market shares of the three largest suppliers in balancing services from aFRR.  

23  

See ENTSO-E 2016 survey on ancillary services: 
https://www.entsoe.eu/Documents/Publications/Market%20Committee%20publications/WGAS%20Sur
vey_04.05.2016_final_publication_v2.pdf?Web=1 

17 

 
 
 
                                                 
Figure 6: Level of concentration (CR3) in the provisions of balancing services from aFRR – 2014 (%) 
(Source: ACER market monitoring report 2015) 

The high  concentration level in the balancing markets confirms the urgent  need to integrate 
balancing  markets,  not  least  as  a  way  of  increasing  the  number  of  market  participants  and 
thereby reducing the scope of market power. ACER further identifies the possibility that the 
concentration in balancing market could be decreased through a higher degree of cross-border 
integration, a reduction in entry barriers (e.g. for RES which would be able to offer balancing 
services)  and  an  improvement  in  market  efficiency.  This  could  be  done  through  the 
introduction of more competition between BSPs and increased liquidity in balancing energy 
trading. 

3.1. 

Driver 1: Inappropriate balancing prices and consistency with other timeframes 

Distortions  in  the  balancing  market  have  significant  impacts  on  the  functioning  of  the 
wholesale markets that are more and more integrated. Relevant price signals are important to 
enhance  the  efficiency  of  balancing  markets  as  they  have  a  direct  impact  on  the  volume  of 
residual  imbalances  to  be  balanced  by  TSOs.  A  consistent  balancing  market  design  is  in 
particular  essential  to  ensure  well-designed  and  liquid  intraday  markets,  where  market 
participants  are  able  to  optimise  and  bring  their  position  into  balance  by  closing  trades 
throughout  Europe.  This  can  only  be  achieved  with  settlement  rules  providing  imbalance 
prices that are sufficiently high to incentive BRPs to balance their portfolio through intraday 
participation. 

As  illustrated  on  Figure  7,  large  disparities  exist  in  balancing  energy  prices  in  Europe, 
including  significant price differences between neighbouring countries (e.g.:  there is a price 
spread  of  more  than  80  EUR/MWh  between  Austrian  and  Hungary).  These  differences  are 
significantly  higher  than  in  the  preceding  timeframes  (forward,  day-ahead  and  intraday 
markets).  The  significant  level  of  price  dispersion  across  Member  States  suggests  that 
important  efficiency  gains  can  be  obtained  from  a  further  exchange  of  balancing  energy, 
subject  to  available  cross-border  capacity  and  security  limits.  Moreover,  the  presence  of 
considerably high average prices needs to be carefully considered. On the one hand, this can 
be due to balancing energy prices reflecting the real value of flexibility, which would allow 
setting  adequate  incentives  (through  cost-reflective  imbalance  charges)  for  BRPs  to  correct 
imbalances  in  the  less  costly  preceding  markets.  On  the  other  hand,  Figure  7  suggests  that 
competition  in  balancing  energy  markets  is  often  limited,  partly  as  a  result  of  highly 
concentrated  balancing  markets.  This  is  confirmed  in  Figure  6,  which  shows  that  the 
cumulative  market  shares  of  the  three  largest  suppliers  are  above  70%  in  most  countries,  a 
frequently higher concentration that in the overall wholesale market.  

18 

 
 
Figure 7: Weighted average prices of balancing energy activated from aFRR – 2014 (EUR/MWh)     
(source: ACER market monitoring report 2015) 

The  high  balancing  energy  prices  due  to  a  lack  of  competition  effectively  create  barriers  to 
market entry for suppliers, who face imbalance price risk and/or high network charges (to the 
extent  that  balancing  costs  are  included  in  the  costs  of  the  network).  This  is  especially 
problematic for network users who cannot adjust their generation close to real time (e.g. RES) 
and  adversely  impacts  the  level  of  competition  in  other  segments  of  the  electricity  market, 
such as retail markets. This, combined with a low degree of integration, enables generators to 
heavily influence the balancing market outcome. 

The  large  disparities  in  the  balancing  energy  prices  observed  in  Europe  suggest  that  further 
integration of national balancing markets would deliver efficiency gains. The value of further 
harmonisation  of  national  designs  is  estimated  at  several  hundred  M€  per  year.  As  national 
grids  and  electricity  markets  have  become  more  interconnected,  the  interest  in  cross-border 
balancing has grown. 

3.2. 

Driver 2: Non-optimal usage of cross-border transmission capacity  

An  integrated  cross-border  balancing  market  is  intended  to  maximise  the  efficiency  of 
balancing  by  using  the  most  efficient  balancing  resources  while  safeguarding  operational 
security. However, the exchange of balancing energy across borders is currently limited.  

As  illustrated  in  Figure  8,  the  markets  with  a  relatively  high  cross-border  exchange  of 
balancing energy include Estonia, Lithuania and the Czech Republic, with respectively 44%, 
21% and 12% of the total activated balancing energy for upward mFRR in 2014. The cross-
border exchange of balancing energy from reserves of other types is marginal. 

19 

 
 
 
 
 
Figure 8: EU balancing energy activated abroad as a percentage of the amount of total balancing energy 

activated (upward) from mFRR in national balancing markets                                                                     

(source: ACER market monitoring report 2015) 

However, it should be noted that in the Nordic region, balancing energy markets are currently 
integrated through the Regulating Power Market24 ('RPM'). Moreover, an increased utilisation 
of  imbalance  netting25  has  been  recently  observed  in  Europe.  In  Figure  9,  the  imbalance 
netting  currently  covers  an  important  share  of  the  needs  of  balancing  energy  in  several 
European markets. 

Figure 9: Imbalance netting as a percentage of the total needs of balancing energy (activated [plus avoided 
activation due to netting) from all types of reserves in national balancing markets – 2014 (%)  (Source: 
ACER market monitoring report 2015) 

While  imbalance  netting  is  important  in  itself,  it  accounts  for  only  a  part  of  the  potential 
efficiency gains from the exchange of balancing energy, and in a wider sense, from balancing 
market integration. In the 2013 ACER market monitoring report, the potential benefits from 
imbalance netting and a further exchange of balancing energy were estimated at slightly more 
than 500 M€ for a selection of 15 European borders. Based on the recent estimated, efficiency 
gains calculated for the whole of Europe could be as high as 1.3 B€ annually. 

The exchange of balancing services across European borders is currently limited, particularly 
the cross-border activation of balancing energy. The use of cross-border transmission capacity 
for balancing can be significantly improved compared to the day-ahead timeframe as shown 
in  Figure  10.  There  is  also  room  for  improving  exchange  of  balancing  energy  in  the  other 
direction of the congestion as the need of balancing energy in real time is not always in the 
direction of the congestion (thus contrary to day-ahead and intraday flows). 

24  
25  

RPM is a cooperation between the Nordic TSOs for the exchange of mFRR products. 
The  process  by  which  TSOs  of  two  or  more  balancing  zones  agree  to  offset  opposing  imbalances 
between  adjacent  areas.  Imbalance  netting  is  intended  to  prevent  the  counteracting  activation  of 
balancing  energy.  This  process  results  in  an  effective  energy  exchange  from  an  area  with  an  energy 
surplus to one with shortage, subject to available cross-border capacity. 

20 

 
 
 
 
 
                                                 
Figure 10: Level of efficiency (% use of commercial capacity available in the 'economic' direction) in the 
use of interconnectors in Europe (source: ACER presentation market monitoring report 2015, slide 12) 

4. 

SUBSIDIARITY 

The Electricity Regulation and its Annex contain already some basic rules on balancing. The 
right of the EU to provide a more detailed regulation on electricity balancing in the form of a 
binding Guideline is set out in Articles 8(6) of the Electricity Regulation. 

The  Commission's  initiative  to  adopt  a  Commission  Regulation  establishing  a  Guideline  on 
Electricity  Balancing  is  fully  in  line  with  the  principle  of  subsidiarity.  The  draft  Balancing 
Guideline  addresses  the  inefficient  use  of  the  European  electricity  transmission  network  by 
means  of  improving  coordination,  harmonisation  and  transparency  of  balancing  markets, 
maximising the usage of available cross-border transmission capacity for balancing purposes 
and enhancing, at the same time, the system security and the integration of electricity markets 
to promote competition. This approach is consistent with the Electricity Regulation, which in 
Article  8(7)  states  that  Network  Codes  shall  be  developed  to  address  cross-border  network 
issues and market integration issues. 

In  addition,  the  draft  Balancing  Guideline  sets  the  minimum  degree  of  harmonisation 
necessary  to  achieve  the  EU  Target  Model  in  electricity.  The  Guideline  leaves  the 
implementation of the rules therein to TSOs and NRAs.  

5. 

OBJECTIVES 

5.1. 

General objectives 

The  general  objectives  of  the  EU  energy  policy  are  security  of  supply,  sustainability  and 
competitiveness.  Increasing  amounts  of  renewable  electricity,  in  particular  from  wind 
generation, and other changes to achieve a low carbon economy requires that the electricity 
system is able to integrate more volatile and more distributed production sources. The system 
needs to be able to contribute to more efficient use of electricity and transmission capacities.  

5.2. 

Specific objectives 

The specific objectives are to safeguard a balance between electricity supply and demand at 
the  lowest  possible  cost  to  customers  so  as  to  complete  the  integration  of  the  internal 
electricity  market.  To  this  end,  balancing  should  be  carried  out  less  on  a  national  level  and 

21 

 
 
 
more cross-border; to allow for the different resources available to be used in a more effective 
way, bring down costs and enhance security of supply. 

6. 

POLICY OPTIONS  

The functioning of balancing markets could be improved by addressing the causes for the lack 
of competition for balancing services, namely: 

  By harmonising the pricing methodology for balancing energy; and 
  By using cross-border transmission capacity for exchanging balancing energy. 

To this end, the following policy options are being considered: 

  Baseline: no further EU action 
  Option 1: harmonisation of the pricing methodology for balancing energy 

o  Option 1.A: pay-as-cleared methodology 

o  Option 1.B: pay-as-bid methodology 

  Option  2:  usage  of  the  cross-border  transmission  capacity  for  exchanging  balancing 

energy 

o  Option 2.A: only cross-border exchanges 

o  Option 2.B: cross-border and national exchanges 

o  Option  2.C:  enforcing  regional  regulated  entities  performing  the  tasks  of 

supranational balancing operators 

In all following scenarios, FCR and RR are excluded from the analysis. FCR is not covered 
by the present initiative and RR is not used on a European level. Thus the different options 
only relate to FRR (automatic and manual). 

6.1. 

Baseline: No further EU action 

The  baseline  scenario  consists  of  a  voluntary  approach  to  let  the  system  evolve  without  a 
binding European regulation in place. This way, currently on-going experiences will be free to 
develop  further  and  integrate,  if  deemed  appropriate  by  the  participating  parties.  However, 
fragmented  (and  possibly  incompatible)  projects  may  be  implemented  across  Europe.  Some 
countries  may  decide  not  to  share  their  internal  resources  or  to  integrate  balancing  markets 
with  their  neighbours.  This  would  result  in  a  situation  where  expensive  resources  are  often 
activated in some countries while less expensive resources located in other countries are not 
being offered to neighbours, allegedly for security reasons. 

As regards the estimation of potential costs and benefits, the baseline assumes no further EU 
action  on  cross-border  exchange  of  balancing  energy.  These  assumptions  likely  result  in  an 
overestimation of the benefits and the costs since it disregards the possible implementation of 
regional initiatives, which could emerge even if in case the EU takes no further action. 

Voluntary  cooperation 
levels  of 
harmonisation or certainty to the balancing market. Current initiatives  such as RPM and the 
International  Grid  Control  Cooperation  initiative26  ('IGCC')  and  their  possible  extension  are 

to  provide  for  appropriate 

is,  however,  unlikely 

26  

Cooperation  between  TSOs  from  Austria,  Belgium,  the  Czech  Republic,  Denmark,  Germany,  the 
Netherlands  and  Switzerland  that  net  aFRR  activation  under  residual  transmission  constraints  at  the 
borders. 

22 

 
 
 
                                                 
therefore not part of the baseline. The current EU regulatory framework contains very limited 
rules on balancing markets in a manner that allow to strengthening this market.  

Stakeholders' opinions:  
The Florence Forum27 in March 2016 stresses the importance of balancing markets for a well-
integrated and functionning EU internal energy market. Most stakeholders agree with the need 
to  speed  up  the  development  of  integrated  short-term  (balancing  and  intraday)  markets  and 
cross-border balancing markets, and provide for clear legal principles on non-discriminatory 
participation in these markets. 

6.2. 

Option 1: Harmonisation of the pricing methodology for balancing energy 

In  existing  European  balancing  markets,  the  procurement  of  balancing  energy  products  is 
generally based on the following pricing methods: 

  Pay-as-cleared  methodology:  the  participating  BSPs  receive  the  same  remuneration, 

equivalent to the price of the highest activated balancing energy bid; 

  Pay-as-bid methodology: the participating BSPs receive a remuneration equivalent to 

the price they bid; 

  Administrative (non-market based) pricing in some specific cases. 

Effective  balancing energy  prices  encourage  suppliers  to  balance  their  positions,  which  will 
reduce the imbalances left for the TSO to manage and hence the overall cost. Other features 
from the imbalance settlement such as the imbalance settlement period have also an impact on 
the choice of the pricing methodology for balancing. Such methodology is a key element for 
building effective electricity markets and ensuring pricing consistency across the day-ahead, 
intraday and balancing timeframes.  

6.2.1. 

Sub-Option 1.A: Pay-as-cleared methodology 

The pay-as-cleared methodology depicts a transparent and plain pricing mechanism. The price 
represents a clear reference for all BSPs on the price of the marginal unit of balancing energy 
and would thus incentivise them to offer all the balancing resources at their disposal. As the 
clearing  price  is  determined  by  the  last  accepted  bid,  energy  or  capacity  shortage  can  be 
indicated appropriately. This has also a positive effect on the incentives on BRPs to keep the 
system in balance in particular in case of shortages. This methodology would allow reflecting 
scarcity  for  the  remuneration  of  the  participants  in  the  balancing  market  –  i.e.  the  payment 
that  a  participant  receives  for  providing  a  balancing  service  to  be  the  same  payment  that 
someone who is out of balance has to pay is introduced.  

The possibility to significantly influence the market price by withholding of capacity could be 
considered  as  a  drawback  of  this  methodology,  however  it  has  been  shown  that  such 
behaviour is possible in case of market power exercise, which in turn cannot be prevented by 
any of the two pricing methodology. Another drawback for pay-as-cleared is also that it may 
at  best  lead  to  equal  costs  compared  to  the  pay-as-bid  but  very  unlikely  to  lower  costs. 

27  

The  Florence  Forum  was  set  up  to  discuss  the  creation  of  true  internal  electricity  in  Europe.  The 
participants are national regulatory authorities, Member States, the European Commission, transmission 
and distribution system operators, electricity traders, consumers, network users, and power exchanges. 
Conclusion  from  March  2016:  https://ec.europa.eu/energy/sites/ener/files/documents/Conclusions%20-
%20Florence%20Forum%20-%20Final.pdf  

23 

 
 
 
                                                 
Another possible drawback is that it could lead to a very complex estimation in systems with 
very frequent internal congestions and central dispatch systems.  

6.2.2. 

Sub-Option 1.B: Pay-as-bid methodology 

Figure 11: Pay-as-cleared methodology 

As the overall market price cannot be influenced by single bids, the pay-as-bid methodology 
might create a lower incentive for BSPs to withhold capacity or deviate from their marginal 
costs.  Bidding  strategies  in  general  might  be  different  when  pay-as-bid  methodology  is 
applied,  as  BSPs  are  in  general  trying  to  guess  the  market  price  and  bid  just  below  this 
expectation.  

However, a major drawback of this methodology is that it does not provide a clear signal on 
the price of the marginal unit of balancing energy and thus does not provide a clear signal and 
incentives to BRPs to be balanced, in particular in case of shortages. In highly concentrated 
markets, furthermore, the price of the last accepted bid could be estimated by BSPs with great 
market  share  and  bidding  prices  could  be  set  close  to  this  theoretical  market  clearing  price 
with the effect that pay-as-bid and pay-as-cleared methodologies lead to the same result.  

6.2.3. 

Summary of the identified Sub-Options under 1 

Figure 12: Pay-as-bid methodology 

Option 1.A: pay-as-cleared methodology 

Option 1.B: pay-as-bid methodology 

PROS 

CONS 

PROS 

CONS 

Gives a transparent 
and plain price 
building and 
imbalance price 
calculation  

BSPs get the price they 
May result in higher 
bid 
procurement costs and           
imbalance settlement 
prices 

Does not define a clear   
market reference price 

24 

 
 
 
 
Provides more 
efficient dispatch and 
more responsive 
balancing market; 

More appropriate for 
standardized products 

Creates a level 
playing field, and 
requires less effort 
for BSPs to prepare 
bids (smaller 
providers) and gives 
them accurate price 
signals  

Can lead to higher 
profits for BSPs, 
which incentivises 
participation and 
investments in 
balancing resources 
(including demand 
response)  

Consistent with the 
auction based model 
(day ahead) 

Withholding of 
capacity may not 
influence the whole 
market price 

Shortage of balancing 
services may not be 
clearly revealed by the 
market. 

Deviations from          
marginal costs may                    
be less profitable. 

BSPs try to guess the 
market price, which is 
more challenging for 
smaller BSPs 

Is more appropriate 
when products cannot 
be sufficiently 
standardised.  

Does not provide the 
correct incentives to 
BRPs to be balanced 

On European scale the 
incentives on BRPs in 
one control area might 
influence the 
incentives on BRPs in 
another control area 
and overreaction of 
BRPs to create 
imbalances 

Possibly high 
complexity of price 
formation with 
continuous or 
sequential activation of 
bids, activation 
duration smaller than 
settlement period and 
in case of frequent 
congestions or in 
central dispatch market 

Higher risk of strategic 
bidding and market 
power in smaller areas 
and in scarcity 
moments 

(e.g. conventional 
generation)        

Unit with marginal or 
negative marginal 
costs capture some 
extra revenue  

Consistent with the 
continuous trading 
model (long-term, 
intraday) 

Consistent with the 
auction based model 
(day ahead) 

Stakeholders' opinions:  

Feedback received from stakeholders during the consultation process (see Annex II) strongly 
supports  the  pay-as-cleared  methodology  ('marginal  pricing').  Most  stakeholders  emphasize 
that  such  pricing  approach  is  key  to  create  positive  incentives  for  market  participants,  to 
develop self-balancing, reduce imbalances and costs for society.  

6.3. 

Option 2: Usage of cross-border transmission capacity for exchanging balancing 
energy 

6.3.1.  Option 2.A: Binding regulation only on cross-border exchanges 

The  Option  2.A  foresees  all  TSOs  to  join  the  current  IGCC  initiative.  The  approach  of 
imbalance netting is to exchange the imbalances with opposite signs in a controlled manner in 
order to avoid counteracting activation of balancing energy. Such netting can also be obtained 
between separate synchronous zones linked with DC interconnectors. The model consists of 

25 

 
 
 
an  exchange  of  information  of  control  zone  imbalances  and  automatic  netting  of  opposing 
energy imbalances in real time, subject to available transmission capacity. In that way, aFRR 
needed  to  restore  the  balance  in  the  power  system  is  reduced  leading  to  a  higher  efficiency 
and cost savings while the security of the power system is elevated due to a lower amount of 
required control actions. 

Additionally,  a  limited  set  of  balancing  energy  would  be  identified  and  participating  TSOs 
would  be  required  to  share  these  products  with  other  TSOs.  Such  exchanges  would  likely 
involve  surplus  resources  that  are  temporarily  not  needed  to  meet  the  local  security  criteria 
and/or balancing expectations, to be exchanged after the gate closure time of the cross-border 
intraday  market  provided  that  sufficient  transmission  capacity  is  available.  TSOs  would 
identify  available  surplus  resources  of  balancing  energy  in  their  local  balancing  market  and 
offer them directly to other TSOs which would then have the possibility to activate balancing 
energy locally or cross-border. 

It can take different forms: 

  The local TSOs act as an intermediary between the BSPs in its area and the requesting 
TSO. From a market point of view, such model is equivalent to a BSP-TSO model; 
  The local TSO is an active provider of balancing services, and acts as the commercial 

counterpart to the requesting TSO, which has no direct link with BSPs. 

POSSIBLE BINDING SOLUTION: BSP-TSO MODEL 

A BSP-TSO model enables a BSP to provide balancing services directly to a requesting TSO 
situated in another control area, if sufficient cross-border capacity is available after the gate 
closure  time  of  the  cross-border  intraday  market.  The  providing  BSP  is  responsible  for 
building  the  balancing  product,  as  well  as  notifying  the  change  in  generation  and/or 
consumption  schedules  (and  possibly  interconnection  capacity  acquisition)  to  both  the 
requesting  TSO  and  the  local  TSO,  with  respect  to  the  rules  for  scheduling  generation, 
consumption and cross-border exchanges. 

The  providing  BSP  needs  to  comply  with  the  balancing  rules  that  are  established  in  the 
control area it is bidding, and the financial settlement is foreseen with the requesting TSO. 

Such scheme may be based on two different designs: 

  BSPs are allowed to  bid in  one market only  and they need to  identify themselves  in 
advance what is the best possible allocation of their resources among different control 
areas, based on the available information; 

  BSPs  are  allowed  to  bid  in  both  systems.  In  this  case  the  TSOs  would  use  the 

balancing energy bids on the basis of a defined allocation process.  

The involved TSOs have agreed procedures for the event of acceptance of a bid/offer:  

  For  a  proper  assessment  of  the  impacts  of  cross-border  exchanges,  the  decision 
process  is  based  on  transparent  rules  for  scheduling  generation,  consumption  and 
cross-border exchanges; 

  For security reasons, the local TSO (in the control area where is located the providing 
BSP)  has  the  possibility  to  veto  the  change  in  the  BSP’s  program  and  inform  the 
requesting TSO that the offer is not available. 

26 

 
 
 
 
Figure 13: BSP-TSO model for cross-border exchanges of balancing energy (source: ACER initial impact 
assessment 2012) 

POSSIBLE BINDING SOLUTION: TSO-TSO MODEL WITHOUT COMMON MERIT ORDER LIST28 

The bids in the balancing markets become available for activation for other TSOs by decision 
of  the  providing  TSO  after  defining  the  amount  of  balancing  energy  that  can  be  exchanged 
based  on  security  criteria  and/or  balancing  expectations  as  well  as  available  cross-border 
capacities. The providing TSO can offer the not needed bids directly to other TSOs or it can 
compile  new  products  to  be  exchanged  across  the  border.  The  ability  to  activate  bids  and 
offers  across  the  border  will  depend  on  the  availability  of  cross-border  capacity.  TSOs  thus 
identify  available  surpluses  of  balancing  energy  and  offer  them  directly  or  through 
aggregation  to  be  traded  on  a  specific  common  pool  that  gathers  offers  and  bids  from  the 
providing TSOs. This common pool represents an additional merit order list complementing 
the  local  merit  order  list.  The  requesting  TSOs  can  thus  decide  to  activate  the  most 
economically advantageous bid or offer from local merit order list of from the specific merit 
order list. The energy is delivered and settled at a given price, depending on the retained rules. 

In practice, exchanges could be implemented twofold: 

  Through  blocks  of  energy  pre-scheduled  before  a  fixed  deadline.  One  concrete 
example is the balancing mechanism implemented between France and GB based on 
standard products of one hour duration; 

  Through  a  flexible  product  directly  activated  via  continuous  process  without  fixed 
deadline: TSOs share bids and activate exchanges on a continuous basis. For instance, 
this flexible product may be designed to implement exchanges of manually activated 
reserves with a 15 minutes activation lead-time and duration. 

28  

In the balancing markets a merit order list is a list of all valid balancing bids submitted by BSPs and 
sorted in order of their bid prices used for the activation of balancing energy bids. 

27 

 
 
 
                                                 
Figure 14: TSO-TSO model without Common Merit Order list for cross-border exchanges of balancing 
energy (source: ACER initial impact assessment 2012) 

6.3.2.  Option 2.B: Binding regulation on cross-border and national exchanges  

The  Option  2.B  assumes  a  far-reaching  standardisation  of  balancing  products  and  some 
coordination  of  operational  processes.  Therefore,  it  would  result  in  a  higher  level  of 
coordination between European TSOs. However, such coordination still relies on the concept 
of local responsibilities within individual balancing zones (or 'control blocks'), which consist 
of one or more control areas but do not necessarily cover more than one Member State. Thus, 
the approach is compatible with the current operational security principles. 

This  option  involves  setting  up  a  binding  European  framework  to  ensure  that  the 
harmonisation  of  key  elements  is  addressed  with  the  aim  to  facilitate  the  development  of 
standard  balancing  products  that  would  be  used  locally  and  cross-border  by  all  TSOs. 
Standard  products  would  be  developed  and  progressively  shared  between  all  TSOs  on 
European-wide  balancing  platforms.  In  order  to  minimise  the  cost  of  balancing  energy,  all 
bids and offers that are available in each control area would be gathered in a single list and 
resources would be activated according to a merit order subject to operational security limits 
and available transmission capacities after the cross-border intraday market.  

POSSIBLE BINDING SOLUTION: TSO-TSO WITH COMMON MERIT ORDER LIST 

The TSOs share their balancing resources and optimise their activation in order to minimise 
the  cost  of  balancing  by  gathering  in  a  common  list  balancing  bids  and  offers  that  are 
available  in  their  control  areas,  and  activate  them  according  to  a  merit  order  list  subject  to 
operational  security  constraints  including  the  availability  of  cross-border  transmission 
capacities. This exchange of standardised balancing energy products between TSOs is based 
on the activation of the cheapest available bids provided by the BSPs on a common program 
time unit basis. The TSOs may be allowed to deviate from the merit order list if congestion 

28 

 
 
 
impedes  cross-border  exchange  of  balancing  energy  or  other  operational  security  limits  that 
prevent the activation of the cheapest bids.  

Figure 15: TSO-TSO model with Common Merit Order list for cross-border exchanges of balancing 
energy (source: ACER initial impact assessment 2012) 

STANDARDISATION OF BALANCING PRODUCTS 

A limited set of standard products will have to be identified and used both locally and across 
borders.  To  enable  participation  of  specific  balancing  resources  and  new  technologies, 
specific  products may  still be defined locally, and the TSOs  would be  able to  convert  them 
into standard products in order to share them on the common merit order list. Key elements of 
the  national  market  design  are  likely  to  be  harmonised  such  as  the  imbalance  settlement 
period as well as the roles and responsibilities of BSPs and BRPs. Some elements may remain 
outside  the  scope  of  harmonisation  requirements,  where  it  is  considered  that  they  do  not 
impede the development of the cross-border exchanges of balancing energy. This exchange of 
standard products between TSOs is based on the activation of the cheapest bids provided by 
the BSPs on a common list. The TSOs may be allowed to deviate from the list if congestion 
impedes  cross-border  exchange  of  balancing  energy  or  other  operational  security  limits  that 
prevent the activation of the cheapest bids. 

6.3.3.  Option 2.C: Binding regulation enforcing regional regulated entities performing the 

tasks of supranational balancing operators (discarded) 

The  Option  2.C  would  result  in  a  significant  evolution  of  the  current  design  in  which 
European  electricity  systems  are  operated.  This  would  have  a  major  impact  on  the  current 
design of system operation procedures and responsibilities. This Option involves setting up a 
binding  European  framework  to  ensure  that  all  Member  States  implement  a  single  regional 
market design for balancing energy.  

Several supranational regulated entities would be responsible for the balancing market design 
and would operate balancing activities in  real time in  cooperation with national TSOs. This 

29 

 
 
 
would  enable  TSOs  to  reduce  the  security  margin  on  transmission  lines,  thus  offering  more 
transmission  capacity  to  the  market  and  allowing  for  more  cross-border  exchanges  of 
balancing energy.  

This  option  is  building  on  the  options  proposed  by  the  ACER  initial  impact  assessment  on 
electricity  balancing29,  but  considers  a  regional  approach  as  foreseen  in  the  Market  Design 
Impact  Assessment  with  the  establishment  of  Regional  Operational  Centres  ('ROCs').  The 
same  assumption  regarding  the  number  and  the  geographical  scope  of  the  regions  used  for 
cooperation in reserve sizing and procurement (see Annex IV) is taken for the establishment 
of regional regulated entities performing the tasks of supranational balancing operators.  

However, it should be noted that there is currently no legal basis in the Third Energy Package 
to  support  a  shift  of  real-time  system  operation  procedures  and  responsibilities  to  regional 
regulated entities.  Therefore this option  has  been discarded. It was, nevertheless, decided to 
further present the different impacts as qualitative and quantitative results were provided by 
the study supporting this Impact Assessment30. 

Figure 16: Regional regulated entities performing the tasks of supranational balancing operators (source: 
ACER initial impact assessment 2012) 

6.3.4. 

Summary of the identified Sub-Options under 2 

Option 2.A 

Option 2.B 

Option 2.C 

29   

30  

Acer Initial Impact Assessment on the Framework Guidelines on Electricity Balancing (Sept. 2012): 
http://www.acer.europa.eu/official_documents/acts_of_the_agency/framework_Guidelines/framework
%20Guidelines/framework%20Guidelines%20on%20electricity%20balancing.pdf  
Artelys report on 'Integration of Electricity Balancing Markets and Regional Procurement of Balancing 
Reserves' (October 2016). 

30 

 
 
 
 
                                                 
Imbalance netting 

Required 

Required 

Required 

Exchange of surpluses (BSP-TSO or TSO-TSO) 

Required 

- 

- 

Common Merit Order (CMO) 

Possible 

Required 

Required 

Standardisation of products  

Cross-border only 

Required 

Required 

Harmonisation of the pricing methodology 

Cross-border only 

Pay-as-clear 

Pay-as-clear 

Transfer of real-time balancing tasks 

- 

Possible 

Required 

Stakeholders' opinions:  

Most  stakeholders  are  in  favour  of  a  binding  regulation  on  both  cross-border  and  national 
exchanges of balancing energy. In March 2016, the FlorenceForum stressed the importance of 
balancing  markets  for  a  well-integrated  and  functioning  EU  internal  energy  market  and 
encouraged  the  Commission  to  swiftly  bring  the  Regulation  establishing  a  Guideline  on 
Electricity Balancing to Member States. 

7. 

ASSESSMENT OF THE IMPACTS OF THE POLICY OPTIONS  

Wrong incentives can be given by the possibility to arbitrage between balancing markets and 
day  ahead  or  respectively  intraday  markets.  To  avoid  such  incentives  the  methodology  for 
pricing  balancing  energy  should  be  designed  in  a  way  that  balancing  energy  prices  and 
imbalance  settlement  prices  reflects  that  the  prices  for  positive  or  negative  imbalances  are 
settled  around  the  real  time  value  of  energy.  One  way  to  achieve  this  is  through  efficient 
competition and to allow BSPs to change their balancing bids close to real time. 

Therefore,  our  assessment  has  revealed  that  Option  1.A  ('pay-as-clear'  methodology)  is  a 
prerequisite for the operationalization of any of the Sub-Options under 2. Such methodology 
is  therefore  the  most  appropriate  in  order  to  use  the  cross-border  transmission  capacity 
available after the cross-border intraday gate closure for the exchange of balancing energy. 

Baseline: No further EU action 

7.1. 
The  main  assumptions  used  in  the  optimal  dispatch  model  (METIS31)  used  to  assess  the 
activation of balancing energy are the following: 

(a)  National dimensioning of aFRR and mFRR reserves (probabilistic approach); 

(b)  National procurement of balancing aFRR and mFRR reserves; 

(c)  RES participation to balancing; 

(d)  No imbalance netting; 

(e)  No cross-border exchange of balancing energy. 

31  

METIS  is  a  bottom-up  optimal  dispatch  model  using  an  hourly  time  resolution  for  the  day-ahead 
dispatch. The resolution for the generation and dispatch of imbalances has been increased to 5 minutes. 
Technical  characteristics  of  the  generation  technologies  (ramping,  min  off  time,  min  power,  etc.)  are 
used to constrain the ability of power plants to participate to the provision of aFRR and mFRR. 

31 

 
 
 
                                                 
The baseline assumes no further EU action on cross-border exchange of balancing energy. It 
assumes  that  imbalances  are  not  netted,  and  that  there  are  no  cross-border  exchanges  of 
balancing energy. 

In  order to develop the cost estimates,  a review of the literature with the aim of identifying 
data points relevant to each of the costs was performed.  In many cases costs were scaled to 
reflect the fact that the proposed integration covers 30 European countries; but the data points 
themselves  covered  a  far  smaller  number  of  countries  or  states.  To  achieve  this,  a  scaling 
methodology  was developed based on disaggregating data points into  fixed and per  country 
components and scaling up the per country components. 

7.2. 

Impact of Sub-Option 2.A: Binding regulation on cross-border exchanges 

The  main  assumptions  used  in  the  optimal  dispatch  model  (METIS)  used  to  assess  the 
activation of balancing energy are, in addition to the baseline, the following: 

(a) 

(b) 

Imbalance  netting  across  Europe  (even  between  countries  belonging  to  different 
synchronous areas), 

Interconnection  capacity  available  for  balancing  given  by  the  residual  capacity  after 
day-ahead market clearing. 

7.2.1.  Economic impacts 

COSTS 

In  general,  costs  associated  with  implementation  of  various  policy  options  can  be  incurred, 
either: 1) on a one-off basis, reflecting costs incurred at the time of establishing the relevant 
platform; or 2) on an on-going basis, reflecting any annual costs associated with operating the 
platform where these may exist. In addition, costs can be either fixed or variable. Here the key 
distinction is that variable costs vary with number of countries where the particular design is 
being implemented. 

Under Option 2.A, total costs of implementation will fall in the range of €18.1 – 20.7 million 
on a one-off basis, and €0.7 – 1.3 million on an on-going basis. As illustrated in Figure 17, 
the implementation costs would not particularly affect a specific Member state.  

Figure 17: Geographical distribution of the costs under Option 2.A (source: Artelys report 'Integration of 
Electricity Balancing Markets and Regional Procurement of Balancing Reserves' (October 2016)) 

BENEFITS 

32 

 
 
 
 
Allowing  TSOs  to  net  their  imbalances  has  several  effects.  First  the  activation  costs 
associated with the provision of upwards and downwards balancing energy decrease. Second, 
fuel costs related to the upward regulation are avoided. Finally, the benefits associated with 
downward regulation (e.g. diminution of fuel costs and of GHG emissions) are cancelled by 
the netting. The combination of these effects results in generating around 212 M€ of savings 
per year compared with the baseline. As illustrated in Figure 18, most of the Member States 
would directly benefit from the imbalance netting with an annual saving of around 56 M€ for 
France. Neutral or negative impacts (e.g.: Hungary or Poland) need to be carefully considered 
as settlement between TSOs related to imbalance netting (i.e. the way the benefits generated 
by imbalance netting are redistributed) and cross-zonal exchange of balancing energy (i.e. the 
payment of the TSO of zone X to the TSO of zone Y for the provision of balancing energy) 
are  not  modelled.  However,  the  implementation  of  settlement  mechanisms  among  TSOs 
would result in a redistribution of savings that benefit all countries. 

Figure 18: Geographical distribution of the benefits under Option 2.A (source: Artelys report 'Integration 
of Electricity Balancing Markets and Regional Procurement of Balancing Reserves' (October 2016)) 

7.2.2.  Administrative impacts  

The total costs under Option 2.A are associated with two key aspects, and are summarized in 
the  Figure  19  below.  First  set  of  costs  is  associated  with  the  development  of  a  common 
technical  controller,  and a settlement process and system for imbalance netting. The second 
set  of  costs  pertains  to  establishing  the  infrastructure  to  provide  for  TSO-TSO  trading  and 
settlement  arrangements.  These  costs  are  associated  with  standardizing  product  design  on  a 
limited basis, and establishing regional trade and settlement processes.   

Figure 19: Estimation of the costs under Option 2.A (source: Artelys report 'Integration of Electricity 
Balancing Markets and Regional Procurement of Balancing Reserves' (October 2016)) 

7.2.3.  Environmental and social impacts 

The  assessment  has  shown  that  the  total  activation  of  energy  for  balancing  purposes  only 
represents  a  few  per  cent  from  the  total  demand  of  energy  (see  Figure  20).  Hence  the 

33 

One-offOngoingOne-offOngoingOne-offOngoingImbalance netting€360 – 590k€130 – 210k€4.3 – 6.9mTSO-TSO trading€1.2m€60 – 120k€420k€ 20 – 40k€13.8m€660k – 1.3mFixedPer countryTotal 
 
 
 
environmental and social impacts were considered as negligible as the energy used by TSOs 
to balance the grid is marginal compared to the total demand of energy. 

Total demand of energy 

Baseline 

Option 2.A 

3490 TWh 

3490 TWh 

Total demand of balancing energy 

37.0 TWh 

37.0 TWh 

Imbalance netting 
Share of cross-border activation32 

- 

- 

18.6 TWh 

- 

Total activation of balancing energy 

36.8 TWh 

18.4 TWh 

Figure 20: Total activation of balancing energy under Option 2.A (source: Artelys report 'Integration of 
Electricity Balancing Markets and Regional Procurement of Balancing Reserves' (October 2016)) 

7.3. 

Impact  of  Sub-Option  2.B:  Binding  regulation  on  cross-border  and  national 
exchanges 

The  main  assumption  used  in  the  optimal  dispatch  model  (METIS)  used  to  assess  the 
activation  of  balancing  energy  is,  in  addition  to  Option  2.A,  cross-border  exchange  of 
balancing energy across Europe (even between countries belonging to different synchronous 
areas). 

7.3.1.  Economic impacts 

COSTS 

Under Option 2.B, total costs of implementation will fall in range of €76.1 – 96.4 million on a 
one-off  basis,  and  €1.8  –  4.6  million  on  an  on-going  basis.  As  illustrated  in  Figure  21,  the 
implementation costs would mainly affect the bigger Member States such as Germany, Spain, 
France, Italy and UK. This is due to the fact that the costs incurred at a supra-national level 
have been apportioned among Member States based, in part, on each State's modelled share of 
total electricity consumption. 

Figure 21: Geographical distribution of the costs under Option 2.B (source: Artelys report 'Integration of 
Electricity Balancing Markets and Regional Procurement of Balancing Reserves' (October 2016)) 

BENEFITS 

32  

This indicator does not take imbalance netting into account. 

34 

 
 
 
 
                                                 
In  this  Option  TSOs  are  not  only  allowed  to  net  their  imbalances,  but  also  to  exchange 
balancing  products.  The  exchange  of  balancing  products  results  in  a  more  cost-efficient 
utilisation  of  resources:  the  most  expensive  of  the  available  units  are  used  for  downward 
regulation,  while  the  cheapest  ones  provide  upward  regulation.  The  combined  effects  of 
imbalance netting and cross-border exchange of balancing energy result in savings of around 
479 M€ per year compared with the baseline. As illustrated in Figure 22, most of the Member 
States  would  directly  benefit  from  the  exchange  of  balancing  energy  on  European-wide 
balancing platforms. Member States such as Germany, Spain, France, Italy, Slovakia and UK 
would  save  more  than  40  M€  annually.  Neutral  or  negative  impacts  (e.g.:  Hungary  or 
Slovenia)  need  to  be  carefully  considered  as  settlement  between  TSOs  related  to  imbalance 
netting (i.e. the way the benefits generated by imbalance netting are redistributed) and cross-
zonal  exchange  of  balancing  energy  (i.e.  the  payment  of  the  TSO  of  zone  X  to  the  TSO  of 
zone Y for the provision of balancing energy) are not modelled. However, the implementation 
of settlement mechanisms among TSOs would result in a redistribution of savings that benefit 
all countries. 

Figure 22: Geographical distribution of the benefits under Option 2.B (source: Artelys report 'Integration 
of Electricity Balancing Markets and Regional Procurement of Balancing Reserves' (October 2016)) 

7.3.2.  Administrative impacts  

The total costs under Option 2.B are associated with two key aspects, and are summarized in 
the  Figure  23  below.  First  set  of  costs  is  associated  with  the  development  of  a  common 
technical  controller,  and a settlement process and system for imbalance netting. The second 
set of costs pertains to establishing European-wide balancing platforms, including provisions 
for clearing process and algorithms, hosting, maintenance and support. 

Figure 23: Estimation of the costs under Option 2.B (source: Artelys report 'Integration of Electricity 
Balancing Markets and Regional Procurement of Balancing Reserves' (October 2016)) 

35 

One-offOngoingOne-offOngoingOne-offOngoingImbalance netting€360 – 590k€130 – 210k€4.3 – 6.9mEurope-wide exchange€2.8 – 10m€1.8 –  4.6m€2.3 - 2.65m€71.8 – 89.5m€1.8 –  4.6mFixedPer countryTotal 
 
 
 
7.3.3.  Environmental and social impacts 

The assessment has also shown that the total activation of energy for balancing purposes only 
represents  a  few  per  cent  from  the  total  demand  of  energy  (see  Figure  24).  Hence  the 
environmental and social impacts were considered as negligible as the energy used by TSOs 
to balance the grid is marginal compared to the total demand of energy. 

Baseline 

Option 2.B 

Total demand of energy 

3490 TWh 

3490 TWh 

Total demand of balancing energy 

37.0 TWh 

Imbalance netting 
Share of cross-border activation33 

- 

- 

37.0 TWh 

18.6 TWh 

53% 

Total activation of balancing energy 

36.8 TWh 

18.4 TWh 

Figure 24: Total activation of balancing energy under Option 2.B (source: Artelys report 'Integration of 
Electricity Balancing Markets and Regional Procurement of Balancing Reserves' (October 2016)) 

7.4. 

Impact  of  Sub-Option  2.C:  Binding  regulation  enforcing  regional  regulated 
entities performing the tasks of supranational balancing operators (discarded) 

The  main  assumption  used  in  the  optimal  dispatch  model  (METIS)  used  to  assess  the 
activation  of  balancing  energy  is,  in  addition  to  Option  2.B,  increase  by  15%  transmission 
capacity  available  for  balancing  to  account  for  the  lower  security  margins  required  under  a 
model where regulated entities would perform the tasks of supranational balancing operators. 

7.4.1.  Economic impacts 

COSTS 

Under this Option, total costs of implementation will fall in range of €125.5 – 274.2 million 
on a one-off basis, and €27.9 – 39.9 million on an on-going basis. 

BENEFITS 

Increasing the transmission capacity by lowering the security margins result in a greater level 
of  imbalance  netting  and  additional  cross-border  exchanges  of  balancing  energy  compared 
with  Option  2.B.  This  Option  generates  annual  savings  of  the  order  of  817  M€  per  year 
compared  with  the  baseline.  As  illustrated  in  Figure  25,  Germany  would  benefit  the  most 
with  potential  savings  of  more  than  150  M€  annually.  Neutral  or  negative  impacts  (e.g.: 
Hungary or Slovenia) need to be carefully considered as settlement between TSOs related to 
imbalance netting (i.e. the way the benefits generated by imbalance netting are redistributed) 
and cross-zonal exchange of balancing energy (i.e. the payment of the TSO of zone X to the 
TSO  of  zone  Y  for  the  provision  of  balancing  energy)  are  not  modelled.  However,  the 
implementation  of  settlement  mechanisms  among  TSOs  would  result  in  a  redistribution  of 
savings that benefit all countries. 

33  

This indicator does not take imbalance netting into account. 

36 

 
 
 
                                                 
Figure 25: Geographical distribution of the benefits under Option 2.C (source: Artelys report 'Integration 
of Electricity Balancing Markets and Regional Procurement of Balancing Reserves' (October 2016)) 

7.4.2.  Administrative impacts  

The total costs under this Option are associated with three key aspects, and are summarized in 
the  Figure  26  below.  First  set  of  costs  is  associated  with  the  development  of  a  common 
technical  controller,  and a  settlement process and system for imbalance netting. The second 
set  of  costs  pertains  to  establishing  regional-wide  balancing  platforms,  including  provisions 
for clearing process and algorithms, hosting, maintenance, and support. The third set of costs 
relate  to  the  establishment  of  regulated  entities  performing  the  tasks  of  supranational 
balancing operators, one for each of five identified regions, responsible for co-operating with 
national  TSOs.  Associated  cost  categories  for  developing  such  a  supranational  operator 
include,  administrative  costs,  technical  investment  required  to  centralize  SCADAs,  and 
managerial costs relating to establishing regional agreements on funding and responsibilities. 

Figure 26: Estimation of the costs under Option 2.C (source: Artelys report 'Integration of Electricity 
Balancing Markets and Regional Procurement of Balancing Reserves' (October 2016)) 

7.4.3.  Environmental and social impacts 

The  assessment  has  shown  that  the  total  activation  of  energy  for  balancing  purposes  only 
represents  a  few  per  cent  from  the  total  demand  of  energy  (see  Figure  27).  Hence  the 
environmental and social impacts were considered as negligible as the energy used by TSOs 
to balance the grid is marginal compared to the total demand of energy. 

Total demand of energy 

Baseline 

Option 2.C 

3490 TWh 

3490 TWh 

Total demand of balancing energy 

37.0 TWh 

37.0 TWh 

37 

 
 
 
 
 
 
Imbalance netting 
Share of cross-border activation34 

- 

- 

23.3 TWh 

70% 

Total activation of balancing energy 

36.8 TWh 

13.7 TWh 

Figure 27: Total activation of balancing energy under Option 2.C (source: Artelys report 'Integration of 
Electricity Balancing Markets and Regional Procurement of Balancing Reserves' (October 2016)) 

8. 

COMPARISON OF THE POLICY OPTIONS 

Option 2.A is by far the cheapest. Imbalance netting is expected to only incur minor transitory 
costs.  The  costs  associated  with  TSO-TSO  trading  are  also  expected  to  be  minimal  and 
predominantly  one-off.  Option  2.B  is  more  expensive  due  to  the  significant  one-off  cost  of 
creating  European-wide  balancing  platforms  for  exchanging  balancing  energy.  This  cost, 
combined  with  the  one-off  and  on-going  costs  of  setting  up  five  regional  regulated  entities 
performing the tasks of supranational balancing operators, means that Option 2.C is materially 
more expensive again. 

On the benefits side, Option 2.A captures the benefits of allowing TSO to net their imbalances 
taking into account the network constraints (212 M€). Option 2.B introduces the possibility to 
activate  balancing  energy  cross-border,  meaning  that  cheaper  resources  displace  the  more 
expensive ones (479 M€). Finally, in Option 2.C, the introduction of five regional regulated 
entities  performing  the tasks  of supranational balancing operator is assumed  to  decrease the 
need for security margins and that, as a result, more cross-border transmission capacity will 
be available to net imbalances and exchange of balancing energy, leading to savings of 817 
M€ compared to baseline. 

Although  the assumptions of the baseline likely result in an overestimation of the costs and 
benefits, all the Sub-Options under 2 investigated in this impact assessment are overall hugely 
beneficial in terms of Net Present Values ('NPV'): the benefits clearly outweigh the on-going 
costs. Their adoption, by increasing the flexibility of the power system, strengthening TSOs 
cooperation and  pulling  additional  resources in  the  market,  would  lessen  the  overall  cost  of 
the power system. 

Option 2.A 

Option 2.B 

Option 2.C (discarded) 

One-off 

On-going  One-off  On-going  One-off  On-going 

Costs 

18.1–
20.7M€ 

660k–
1.3M€ 

76.1–
96.4M€ 

1.8–
4.6M€ 

125.5–
274.2M€ 

27.2–
39.9M€ 

Benefits 

- 

212 M€ 

- 

479 M€ 

- 

817 M€ 

NPV35 

1.7 B€ 

3.8 B€ 

6.5 B€ 

34  
35  

This indicator does not take imbalance netting into account. 
The Net Present Value (NPV) is computed using a 4% discount rate on an indicative 10-year duration. 
This  should  not  be  interpreted  as  the  benefits  over  a  10-year  period  (the  capacity  mix  and  demand 
would be different). 

38 

 
 
 
 
 
 
 
                                                 
Figure 28: Summary of the costs, benefits and NPV of the different Sub-Options under 2 (source: Artelys 
report 'Integration of Electricity Balancing Markets and Regional Procurement of Balancing Reserves' 
(October 2016)) 

9. 

CONCLUSION 

The assessment has revealed that Option 1.A ('pay-as-cleared' methodology) is a prerequisite 
for the operationalization of any of the Sub-Options under 2 and that Option 1.A and the Sub-
Options  under  2  are  thus  complementary.  Although  Option  2.C  is  expected  to  bring  the 
biggest benefits, there is currently no legal basis in the Third Energy Package to support it and 
it has therefore been decided not to proceed with this Option.  

Therefore, the Commission Services are of the view that Sub-Option 2.B (binding regulation 
on  cross-border  and  national  exchanges)  in  combination  with  Option  1.A  ('pay-as-cleared' 
methodology)  is  the  appropriate  approach  to  achieve  the  objectives  identified  in  this 
assessment,  i.e.  to  implement  efficient  balancing  rules  for  electricity  cross-border  trade  in 
Europe. 

10. 

MONITORING AND EVALUATION 

The  core  indicators  of  progress  concerning  implementation  and  operation  of  cross-border 
balancing trade in Europe are: 

 

 

 

 

 

The  time  to  reach  the  European-wide  balancing  platforms  taking  into  account  the 
intermediate steps; 

The efficiency of the use of interconnectors for the balancing timeframe; 

The monetary gains and savings due to cross-border balancing; 

The economic efficiency and reliability of the balancing markets; 

The evolution of balancing service prices of the previous years. 

Article  9(1)  of  Electricity  Regulation  tasks  ACER  with  the  monitoring  and  analysis  of  the 
implementation of the Network Codes.  

Pursuant to Article 8(8) of said Regulation, ACER can be assisted in performing this duty by 
ENTSO-E.  ENTSO-E  has  also  a  duty  to  make  available  all  information  required  by  ACER 
necessary  to  monitor  the  implementation  of  the  Network  Codes.  This  obligation  has  been 
further developed in the draft Balancing Guideline, which states that ACER will determine a 
list of the information to be communicated by ENTSO-E. In turn, in application of Article 4 of 
the Electricity Regulation, TSOs are obliged to cooperate with ENTSO-E. The draft Balancing 
Guideline restates this provision. 

Article 37 of Directive 2009/72/EC foresees very broad monitoring rights and duties for NRAs.  
Similarly,  Article  19  of  Electricity  Regulation  states  that  regulatory  authorities  shall  ensure 
compliance with the Regulation and the Guidelines adopted pursuant to Article 18.  

In addition, the proposed Guideline provides for specific provisions concerning monitoring of 
the effectiveness and efficiency of the implementation, and establishes a stakeholder committee 
whose task will be to discuss and give advice regarding the development of the European-wide 
balancing platforms, also in view of possible future amendments of the proposed Guideline. 

39 

 
 
11. 

LIST OF ANNEXES  

(1) Annex I: Procedural information 

(2) Annex II: Stakeholders consultations 

(3) Annex III: Who is affected by the initiative and how 

(4) Annex IV: Analytical models used in preparing the impact assessment 

(5) Annex V: Summary of the link with the Market Design initiative 

40 

 
 
Annex I: Procedural information 

Lead DG: DG Energy 

Agenda planning/Work Programme references 

-  AP 2013/ENER/05036; 
-  Commission  Implementing  Decision  (EU)  2012/413  on  the  establishment  of  the 
annual priority lists for the development of Network Codes and Guidelines for 201337; 
-  Commission  Implementing  Decision  (EU)  2013/442  on  the  establishment  of  the 
annual priority lists for the development of Network Codes and Guidelines for 201438; 
-  Commission  Implementing  Decision  (EU)  2014/713  on  the  establishment  of  the 
annual priority lists for the development of Network Codes and Guidelines for 201539; 
-  Commission  Implementing  Decision  (EU)  2015/1960  on  the  establishment  of  the 
annual priority lists for the development of Network Codes and Guidelines for 201640. 

Organization and timing  

The EU Electricity Target Model has been developed in a collaborative process including all 
main stakeholders during 2008 – 2009 in the Project Co-ordination group ('PCG') and during 
2010  in  the  Ad  Hoc  Advisory  Group  ('AHAG').  The  work  continues  as  monitoring  of  the 
implementation  of  the  target  model,  from  2011  onwards  the  group  was  renamed  ACER 
Electricity Stakeholders Advisory Group ('AESAG').  

According to the process defined in the Third Energy Package, the Commission sets annual 
priorities for the work on Network Codes. ACER has six months to prepare the Framework 
Guidelines,  after  which  ENTSO-E  has  12  months  to  prepare  the  network  code.  In  January 
2012, the European Commission requested to ACER the Framework Guidelines on electricity 
balancing  which  were  adopted  in  September  2012.  ACER  also  prepared  an  initial  impact 
assessment  for  the  choices  they  have  made  in  the  Framework  Guidelines  on  electricity 
balancing41.  The  basis  for  the  Framework  Guidelines  has  been  the  EU  Electricity  Target 
Model.  

In December 2013, ENTSO-E delivered the network code on electricity balancing to ACER 
that was rejected in March 2014. In August 2014, ENTSO-E submitted a new version of the 
network code42 with supporting document to justify their choices for the code. In July 2015, 
ACER  issued  an  Opinion  recommending  the  adoption  of  the  network  code43,  however  with 
some amendments.  

36 http://ec.europa.eu/smart-regulation/roadmaps/docs/2013_ener_050_network_code_balancing_en.pdf   
37 http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32012D0413&from=EN  
38 http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014D0713&from=EN  
39 http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014D0713&from=EN   
40 http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32015D1960&from=EN  
41http://www.acer.europa.eu/official_documents/acts_of_the_agency/framework_Guidelines/framework%20Gui
delines/framework%20Guidelines%20on%20electricity%20balancing.pdf  

42 
https://www.entsoe.eu/Documents/Network%20codes%20documents/NC%20EB/140806_NCEB_Resubmission
_to_ACER_v.03.PDF  

43 
http://www.acer.europa.eu/Official_documents/Acts_of_the_Agency/Recommendations/ACER%20Recommend
ation%2003-2015.pdf  

41 

 
 
 
                                                 
This Impact Assessment was discussed in the Inter-Service Group (ISG) on Network Codes 
on  24  September  2015,  20  January  2016  and  15  July  2016  and  revised  in  the  lights  of 
comments  made  by  other  services,  including  the  Secretariat-general.  Not  all  DGs  did 
participate in each ISG. This Impact Assessment comes into play before the Electricity Cross-
Border Committee gives its opinion on the Guideline that is then submitted for scrutiny to the 
European Council and the European Parliament. 

Consultation and expertise 

All  main  stakeholders  affected  by  the  proposed  Regulation  (TSOs,  regulators,  industry  and 
consumer  associations  etc.),  were  intensively  involved  in  the  development  of  the  EU 
Electricity  Target  Model.  Most  of  the  stakeholder  participation  took  place  directly  in  the 
working groups that were preparing the target model for electricity and in workshops during 
the code development. During the preparation of the Framework Guidelines and subsequently 
during the development of the network code, several public consultations were organised by 
ACER and ENTSO-E. 

External expertise 

The Commission used three consultant studies as input to the impact assessment: 

  Booz & Co report 'Benefits of an Integrated European Energy Market', July 201344 

  Mott  McDonald  report  'Impact  Assessment  on  European  Electricity  Balancing 

Market', March 201345 

  Artelys report 'Integration of Electricity Balancing Markets and Regional Procurement 

of Balancing Reserves', October 2016 

ENTSO-E  also  performed  three  additional  studies  as  early  implementation  of  the  draft 
Balancing Guideline:  

  E-Bridge  report  on  the  impact  of  merit  order  activation  of  automatic  Frequency 

Restoration Reserves and harmonised Full Activation Times, February 201646 

  Frontier  Economics  report  on  the  costs  and  benefits  of  a  change  to  the  imbalance 

settlement period, April 201647 

  Public  consultation  document  for  the  design  of  the  Trans  European  Replacement 

Reserves Exchange, March 201648 

Impacts are thus evaluated based on the work of our own studies by consultants and, partly, 
by ENTSO-E as early implementation of the draft Balancing Guideline. 

44 https://ec.europa.eu/energy/sites/ener/files/documents/20130902_energy_integration_benefits.pdf  

45 https://ec.europa.eu/energy/sites/ener/files/documents/20130610_eu_balancing_master.pdf  

46 
https://www.entsoe.eu/Documents/MC%20documents/balancing_ancillary/151224_Report_Study_merit_order_
aFRR_and_harmonising_FAT_vs_0_1_draft_selection_for_BSG_meeting_on_15_January.pdf  

47 
https://www.entsoe.eu/Documents/Network%20codes%20documents/Implementation/CBA_ISP/ISP_CBA_Fina
l_report_29-04-2016_v4.1.pdf 

48 https://consultations.entsoe.eu/markets/terre/supporting_documents/20160307_TERRE_Consultation_FV.pdf  

42 

 
 
 
                                                 
 
RSB opinion (16/09/2016) 

Comments 

Modifications made 

(1) The report should clarify the context and 
the scope of the initiative in view of the 
parallel, more comprehensive review of 
electricity market design. This review also 
addresses balancing markets. 

(2) Since the Electricity Balancing Guideline 
stem from the empowerment in the Third 
Energy Package, any elements that go beyond 
'technical specifications' should be left out of 
the Guidelines' scope. For example, the option 
of establishing Independent System Operators 
requires a fundamental modification to the EU 
electricity market organisation. As such, this 
option should be discarded. The impact 
assessment should indicate whether the scope 
of the initiative is also determined by non-
legalistic factors, such as a desire to codify an 
existing consensus view among market 
participants. 

(3) The report should feature stakeholder views 
more prominently. This applies especially to 
politically sensitive issues, to shed light on 
possible reasons why further market integration 
appears to proceed at a slow pace. 

To take into account this comment, we have 
restructured the order of paragraphs in order 
to give more prominence to a treatment of 
interlinks between the Market Design initiative 
and the current proposal for a Balancing 
Guideline. Sections 2.1.3 and 2.1.4 in 
particular have been devoted to an extensive 
treatment of such linkages with the Market 
Design initiative as well as other Network 
Codes and Guidelines. In discussing such 
linkages, we have also provided extensive 
rationales on the reasons for splitting some of 
the balancing provisions between the Guideline 
and the Market Design initiative. 
In line with the comment made, we have 
reformulated the option concerning a proposal 
for an Independent System Operator (ISO). 
Accordingly, the current options do not foresee 
the creation of such a body. The Option2.C now 
foresees the creation of regional regulated 
entities performing the tasks of supranational 
balancing operators. It should be noted that the 
tasks performed by an ISO go way beyond 
balancing activities. At any rate, we note that 
our Impact Assessment concludes that such an 
option is not however a preferred one, since we 
conclude that the legal basis in the Third 
Energy Package for such an option is too thin 
to rely upon. Referring to non-legalistic 
considerations, we also judge that the issue 
remains too contentious – especially amongst 
TSOs – for us to push the letter of the law and 
codify a supposed consensus within the specific 
scope of the current draft Balancing Guideline. 
This is without prejudice to larger 
considerations on the topic as these are made 
in the separate Market Design Impact 
Assessment. 
We have strived to further integrate 
stakeholders' opinions across the Impact 
Assessment. That said, it should be noted that – 
given the process to which Network Codes and 
Guidelines are submitted – stakeholders views 
have already been extensively incorporated into 
the ACER opinion, which forms the basis for 
the Commission proposal on the Guideline. To 
the extent that the Commission proposal 

43 

 
 
 
reflects the consensus reached with ACER's 
opinion, a further detailed description of 
stakeholders' views on the Commission 
proposal would be duplicating information that 
is already widely available under ACER's 
stakeholders' consultation process. As it 
concerns the perceived slowness of progress 
towards market integration, this has to be 
accounted mostly by the high complexity and 
historical differences in national balancing 
markets, as we have strived to show throughout 
this Impact Assessment. We see no particular 
ground for an in-depth discussion of potentially 
politically sensitive issues, given the 
overarching top-level consensus on the 
finalities of the proposed Balancing Guideline. 
In line with the division of tasks between the 
Guideline and the Market Design initiative (as 
explained above) issues of a more political 
nature are being treated under the Market 
Design Impact Assessment. 
In response to the comment, this version of the 
Impact Assessment now integrates the 
geographical distribution effects of the Options 
considered.  

In order to make the Impact Assessment more 
reader-friendly and to ensure widest possible 
access from a generalist readership's point of 
view, we have considerably reviewed the 
structure of the report to make it follow a more 
logical sequence. In addition, the language 
used in the report has been reviewed 
throughout, also with a view to use technical 
language only to the extent that this is 
necessary, as no synonyms exist in the English 
vocabulary to address such topics. Whilst all 
efforts have been made to clarify the language, 
it is inherent in the highly technical nature of 
the subject treated that a certain degree of 
specialist language is used. A glossary of terms, 
already present under the original submission, 
has now been further expanded and placed 
upfront the report, so as to appear at the very 
beginning of the document for ease of reference 
throughout the Impact Assessment. 

(4) The impact assessment expects significant 
efficiency gains in the power sector. The 
geographical distribution of these gains and the 
impact on the power sector in the different 
Member States should be presented, as far as 
possible. 
(5) There is much scope to improve the 
structure of the report so that it reflects the 
natural, logical line of thinking, from defining 
the context, describing the problems, setting the 
objectives, proposing the solutions and 
assessing which one is the best. The report 
would be clearer if there were fewer jargon 
expressions. A glossary of technical terms 
would make the report more reader-friendly. 

44 

 
 
 
Annex II: Stakeholders consultations 

The elaboration of these rules according to the Third Energy Package provisions requires 
extensive public consultations of all concerned parties. ACER and ENTSO-E do these public 
consultations.  

The description of the public consultations is accessible here: 

  http://www.acer.europa.eu/en/Electricity/FG_and_network_codes/Pages/Balancing.as

px 

  https://www.entsoe.eu/major-projects/network-code-development/electricity-

balancing/Pages/default.aspx 

The minimum Commission standards were all adhered to. 

The number of public consultations and workshop are described below: 

ACER consultations49 

  Public workshop on Framework Guidelines on Electricity Balancing – 24/10/2011 

  Public consultation on draft Framework Guidelines on Electricity Balancing – 25/04/2012 

  Public workshop on the Network Code on Electricity Balancing – 30/01/2014 

  Call for comments on the revised version of the Network Code on Electricity Balancing – 

03/12/2014 

ENTSO-E consultations50 

  1st Stakeholder Advisory Group Meeting – 11/10/2012 

  2nd Stakeholder Advisory Group Meeting – 10/12/2012 

  3rd Stakeholder Advisory Group Meeting – 26/02/2013 

  4th Stakeholder Advisory Group Meeting – 23/09/2013 

  1st public stakeholder workshop - 07/05/2013 

  2nd public stakeholder workshop – 17/07/2013 

  3rd public stakeholder workshop – 23/10/2013 

Balancing Stakeholder Group meetings51 

  1st Balancing Stakeholder Group Meetings – 18/03/2015 

  2nd Balancing Stakeholder Group Meetings – 23/09/2015 

  3rd Balancing Stakeholder Group Meetings – 15/01/2016 

  4th Balancing Stakeholder Group Meetings – 13/04/2016 

 

5th Balancing Stakeholder Group Meetings – 30/06/2016 

  Next Balancing Stakeholder Group Meetings planned for 07/12/2016 

49 http://www.acer.europa.eu/en/Electricity/FG_and_network_codes/Pages/Balancing.aspx  

50 https://www.entsoe.eu/major-projects/network-code-development/electricity-balancing/Pages/default.aspx  

51 https://www.entsoe.eu/about-entso-e/market/balancing-and-ancillary-services-markets/Pages/default.aspx  

45 

 
 
 
                                                 
Annex III: Who is affected by the initiative and how 

Affected party 

How are they affected? 

Member States 

Member State authorities define the country's overall policy regarding 
energy mix and power grid investments. 

National 
regulatory 
authorities 
(NRAs) 

NRAs approve the methodology for the activation of balancing energy. 
They are also responsible for any impact on TSOs' tariffs and how cross-
border infrastructure is allocated. 

Transmission 
System  Operators 
(TSOs)  

TSOs analyse system's state and propose the methodology for the 
activation of balancing energy in their control areas.  

Harmonising the activation of balancing energy at European level 
implies a need for strong governance between TSOs. 

Existing physical constraints would still need to be taken into account. 

Major impacts are expected on the current design of system operation 
procedures and responsibilities. Cost allocation and remuneration would 
have to be agreed, requiring the development of a clear and robust 
framework of responsibilities between TSOs. 

Generators, as Balancing Service Providers, would have additional 
opportunity to participate in the balancing market even though 
significant operational impact might increase. Such framework would, 
however, allow the participation of renewable energy sources in the 
balancing market potentially leading to a sharp decrease of balancing 
energy cost. 

Suppliers, as Balance Responsible Parties, will be subject to imbalance 
costs. Imbalance prices will be coupled therefore allowing for increase 
competition of suppliers across borders.  

End consumers will be able to participate in balancing markets via 
demand response aggregators allowing for stronger supplier's 
competition. 

Generators  

Suppliers 

End consumers 

46 

 
 
 
 
Annex IV: Analytical models used in preparing the impact assessment 

For assessing the benefits of specific market design measures and their effect to power system 
operation  and  market  functioning,  a  new  optimization  software  –  METIS  -  was  used.  For 
transparency reasons, all deliverables related to METIS, including all technical specifications 
documents and studies, will be published on the website of DG ENER52. 

Global Description 
METIS  is  an  on-going  project53  initiated  by  DG  ENER  for  the  development  of  an  energy 
modeling  software,  with  the  aim  to  further  support  DG  ENER’s  evidence-based  policy 
making,  especially  in  the  areas  of  electricity  and  gas.  The  software  is  developed  by  a 
consortium  (Artelys,  IAEW,  ConGas,  Frontier  Economics)  and  a  first  version  has  been 
already delivered at the DG ENER premises. 

METIS is an energy modelling software covering with high granularity (in geographical space 
and  time)  the  whole  European  power  system  and  markets.  For  the  scope  of  this  impact 
assessment,  simulations  adopted  a  Member  State  level  spatial  granularity  and  an  hourly 
temporal  resolution  of  year  2030  (8760  consecutive  time-steps  year),  capturing  also  the 
uncertainty related to demand and RES power generation. 

The  software  replicates  in  detail  the  market  participant's  decision  processes,  as  well  as  the 
operation of the power system. For each day of the studied year, all market time frames were 
modelled  in  detail:  day-ahead,  intra-day,  balancing.  Moreover  METIS  also  simulated  the 
sizing and procurement of balancing reserves, as well as imbalances. 

METIS works complementary to long-term energy system models (like PRIMES from NTUA 
and POTEnCIA from JRC). For instance, it can provide hourly results on the impact of higher 
shares of intermittent renewables or additional infrastructure built.  

Uncertainties  regarding  demand  and  RES  power  generation  are  captured  thanks  to  weather 
scenarios  taking  the  form  of  hourly  time  series  of  wind,  irradiance  and  temperature,  which 
influence  demand  (through  a  thermal  gradient),  as  well  as  PV  and  wind  generation.  The 
historical  spatial  and  temporal  correlation  between  temperature,  wind  and  irradiance  are 
preserved. 

Main characteristics of the power market module 

Calibrated  Scenarios  –  METIS  has  been  calibrated  to  a  number  of  scenarios  based 
either  on  ENTSO-E  TYNDP  or  PRIMES  scenarios.  METIS  versions  of  PRIMES 
scenarios  include refinements  on  the  time  resolution  (hourly)  and  unit representation 
(explicit  modeling  of  reserve  supply  at  cluster  and  MS  level).  Data  provided  by  the 
PRIMES  scenarios  include:  demand  at  MS-level,  primary  energy  costs,  CO2  costs, 
installed capacities at MS-level, interconnection capacities.  

Geographical  scope  –  In  addition  to  EU  Member  States,  METIS  scenario 
incorporates  ENTSO-E  countries  outside  of  EU  (Switzerland,  Bosnia,  Serbia, 
Macedonia,  Montenegro  and  Norway)  to  model  the  impact  of  power  imports  and 
exports on the MS. 

52 Once operational, the envisaged link is expect to be the following:  
      https://ec.europa.eu/energy/en/data-analysis/energy-modelling/metis  
53 http://ec.europa.eu/dgs/energy/tenders/doc/2014/2014s_152_272370_specifications.pdf  

47 

 
 
 
                                                 
Market models –METIS market module replicates the participants’ decision process. 
For each day of the studied year, the generation plan (including both energy generation 
and balancing reserve supply) is first optimized based on day-ahead demand and RES 
generation  forecasts.  Market  coupling  is  modeled  via  net  transmission  capacity54 
('NTC') constraints for interconnectors. Then, the generation plan is updated during the 
day,  taking  into  account  updated  forecasts  and  asset  technical  constraints.  Finally, 
imbalances are drawn to simulate balancing energy procurement. 

Figure 27: Simulations follow day-ahead to real-time market decision process (source: METIS) 

Imbalances – Imbalances are the result of events that could not have been predicted 
before  gate  closure.  METIS  includes  a  stochasticity  module,  which  simulates  power 
plant outages, demand and RES-e generation forecast errors from day-ahead to 1-hour 
ahead. This module uses a detailed database of historical weather forecast errors (for 
10 years at hourly and sub-national granularity), provided by ECMWF, to capture the 
correlation  between  MS  forecast  errors  and  consequently  to  assess  the  possible 
benefits  of  Imbalance  Netting.  The  stochasticity  module  will  be  further  extended  to 
include  generation  of  random  errors  picked  from  various  probability  distributions 
either set by the user or based on historical data. 

Reserve product definition – METIS simulates FCR, aFRR and mFRR reserves. The 
product  characteristics  for  each  reserve  (activation  time,  separation  between  upward 
and downward offers, and list of assets able to participate…) are inputs of the model. 

Reserve dimensioning – The amount of reserves (FCR, aFRR, mFRR) that has to be 
secured  by  TSOs  can  be  either  defined  by  METIS  users  or  computed  by  METIS 
stochasticity module to assess the required level of reserve to ensure enough balancing 
resources are available under a given probability. Hence, METIS stochasticity module 
can  take  into  account  the  statistical  cancellation  of  imbalances  between  MS  and  the 
potential benefits of regional cooperation for reserve dimensioning. 

54  

NTC is the transmission capacity available for commercial transactions across borders. 

48 

 
 
 
                                                 
Balancing  reserve  procurement  –  Different  market  design  options  can  be  also 
compared by the geographical area in which TSOs may procure the balancing reserves 
they  need.  METIS  has  been  designed  so  as  to  be  able  to  constrain  the  list  of  power 
plants  being  able  to  participate  to  the  procurement  of  reserves  according  to  their 
location.  The  different  options  will  be  translated  in  different  geographical  areas  in 
which  reserves  have  to  be  procured  (national  level  or  regional  level).  Moreover, 
METIS users can choose whether demand response and renewable energy are allowed 
to provide balancing services. 

Figure 28: Regions used in Option 2.C for the establishment of regional regulated entities 
performing the tasks of supranational balancing operators (source: METIS) 

Balancing energy procurement – The procurement of balancing energy is optimized 
following  the  same  principles  as  described  previously.  In  particular,  METIS  can  be 
configured to ban given types of assets, to select balancing energy products at national 
level,  to  share  unused  balancing  products  with  other  MS,  or  to  optimize  balancing 
merit order at a regional level. 

49 

 
 
 
Figure 29: Simulations follow day-ahead to real-time market decision process (source: METIS)      

Annex V: Summary of the link with the Market Design initiative  

Draft Balancing Guideline 

•European-wide balancing platforms with merit order activation of balancing energy; 
•Standardisation of balancing products; 
•Harmonisation of the imbalance settlement periods  to 15 minutes within 3 years (with exemption); 
•Market-based and close to real time procurement of balancing capacity; 
•Possibilities for two or more TSOs to exchange balancing capacity. 

General provisions (both Balancing Guideline and Market Design initiative) 

•Separate process for the procurement of balancing energy and balancing capacity; 
•Pay-as-cleared methodology ('marginal pricing') for balancing energy prices; 
•No balancing energy price floors or caps below the value of lost load; 
•Balancing energy gate closure time as close as possible to physical delivery and, in any cases, not 
longer than the cross-zonal intraday gate closure time (60 minutes); 
•Methodologies for the allocation of cross-zonal transmission capacity for the exchange of balancing 
capacity; 
•Separate procurement for upward and downward balancing products; 
•Publication of close to real-time information on current balancing state, imbalance price and 
balancing energy price. 

Market Design initiative on Electricity Balancing 

•Regional operational centers to determine the daily balancing reserve needs based on probabilistic 
methodogies; 
•Regional operational centers to facilitate the procurement of balancing capacity on regional level; 
•TSOs to contract for a maximum of one day in advance balancing capacity; 
•No self-provision by TSOs; 
•Harmonisation of the imbalance settlement periods  to 15 minutes by 1 January 2025. 

50