Picasso turbulence

The pan-EU balancing mechanism Picasso has caused price turbulence after its introduction in some markets, notably Italy. The country has since exited the platform and other countries have delayed implementation to the mandatory system. Listen to a discussion on the problems experienced by Italy and proposals put forward to change the platform and to increase data transparency.

Host: Snjólfur Richard Sverrisson, Editor-in-Chief, Montel
 Guests: Simon Remppis, Engineer at TransnetBW; Alina Trabattoni, Italy Correspondent, Montel News. 

Transcript

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:05

Hello listeners and welcome to the Montel Weekly podcast, bring You Energy Matters in an informal setting. In today's pod, we discuss Picasso, not the controversial Spanish painter, but the Pan EU balancing platform that TSOs across the 27 block are obliged to join. Recently, Italy experienced some serious issues. What happened and why did the country's TSO Tanner leave the Picasso platform and with other countries delaying participation? What is the wider impact of the mechanism? My name is Richard Sverrisson and today I'm joined by my good colleague, Alina Trabattoni who's Italy Correspondent for montel. A warm welcome to you, Alina,

Alina Trabattoni, Italy Correspondent, Montel News: 0:45

thank you.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:45

And also by Simon Remppis of the TSO TransnetBW. A warm welcome to you Simon.

Simon Remppis, Engineer at TransnetBW: 0:51

Thank you for having me.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:52

I'd like to start off by talking a little bit about the background. What is Picasso and why is it important?

Simon Remppis, Engineer at TransnetBW: 0:58

Well, First of all, maybe I'll start with providing a little bit of background about, myself and the company I'm working for. So I'm Simon working for TransitBW. We are transmission system operator responsible for the operation of yeah, the transmission system in a part of Germany. Actually the southwestern part of Germany. We are the smallest of the four German transmission system operators, but we are located quite in the center of Europe. We also consider the I would say transit of energy and also keeping European energy markets together as part of our mission. And in this role we are also operating the Picasso platform, which aims to yeah, create a common European. Domestic market for balancing energy from yeah, automatically activated reserves. So basically we are aiming to connect the European markets for a FR with each other. And by this of course increasing the efficiency of the whole European energy system and also supporting the energy transition.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 2:07

When you said AFR what do you mean by that? Can you explain what what on what kind of timescale we're talking here? Simon?

Simon Remppis, Engineer at TransnetBW: 2:13

Transmission system operators are not only responsible for the transport of energy from. The consumer to the or from computer producer to the consumer, but they're also responsible for keeping the system in balance. And by this of course, also ensuring that we observe a constant frequency of 50 hertz in the network. In doing so are for doing so we, can use multiple tools and the most important tool is is balancing energy that we can activate. There are different types of different balancing energy or different qualities. There are manually activated with reserves which are nowadays activated. Also on a market based approach in the MFR market, but there are also automatically activated reserves. And those automatically activated reserves are necessary to compensate fast fluctuations in the energy production or consumption. And historically, each TSO in Europe has been locally responsible for keeping its own system in balance using only its local s reserves. Of course this has led to various inefficiencies. So on the one hand, it happened quite frequently that one TSO activated upward reserves while the neighboring TSO activated downward reserves. Both, both in a very costly way while whereas there was a, I would say, possibility to simply perform yeah, netting of tho of those imbalances by yeah. Transporting the power surplus from one control area to the other on the other hand each TSO was of course all the accessing its local reserves, which of course is also not very efficient. And for this reason, the electricity balancing guideline has requested TSOs to create balancing platforms in which those local markets are connected with each other. On the one hand, those imbalances are netted, so that only an overall imbalance requires the actual activation of reserves and the reserves that are needed to cover those remaining imbalances are also then activated based on a common married order list. So basically via this, we ensure that the most economically feasible reserves are used. Across Europe to cover the remaining imbalances. And I'd like to highlight here that those balancing platforms are jointly implemented by all European TSOs. It's a very good example of the cooperation between European TSOs, that European TSOs have created various balancing platforms. They've created a mappy project for the creation of, platform for the exchange of manually activated reserves and the Picasso platform for the exchange of automated reserves. And ance at BW are the common service provider, which is responsible for the technical implementation and technical operation of this Picasso platform. Basically this means that the hardware and software, which is required to operate this Picasa platform is running in our data centers. And also we are responsible for the 24 7 monitoring of the Picasa platform.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 5:27

So this is a pan-European balancing market mechanism, which is picasso certainly is automatic. So it is an automatically response it's a platform responding to to, you know, fluctuations in the grid and responding accordingly, automatically, rather than being mandated or manual. Okay. That's very interesting. When was it implemented, Simon?

Simon Remppis, Engineer at TransnetBW: 5:45

So the Picasso platform itself started its operation in 2022. So the first TSOs joining the Picasso platform where the TSOs from the Czech Republic joining in June, 2022. And then the Austrian and German TSOs followed soon after, also in June. And then last year turnout Italian TSO has also joined the Picasso platform. It's also important to highlight that all TSOs have to join the Picasa platform. It's basically an obligation for all European TSOs. The deadline for connection to the PCAs platform for all European TSOs is actually to July 20, 24. Even though there are of course still sellable technical, but also regulatory hurdles to overcome for sellable TSOs to, to connect to this platform.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 6:38

If I can turn to you, Alina, here and there, there's been a little bit of turbulence in Italy. Could you describe some of the issues that, that you've been reporting about in, in, in the Italian balancing market?

Alina Trabattoni, Italy Correspondent, Montel News: 6:49

Well, yes. As we were saying, Italy is one of the four first four nations to have joined and everything seemed to go smoothly when the first three, the Czech Republic, Germany, and Austria were on Picasso. But after Italy joined in July last year. Italy started experiencing some very high spikes and some very rigid drops in prices. And in fact, it's been the Italian trading community that has raised the alarm for Italy in terms of the effects of Picasso on prices. Because first of all, they say they. Are unable to forecast. They cannot work out exactly how Picasso settles prices. And they're exposed and they've become very vulnerable to these price spikes. And, the result has been, unexpected losses and so forth. Italy has exper had a different experience of Picasso, I would say. And, as we know, this has led to te having pulled outta Picasso last Friday on March the 15th, after Italy's energy regulated regulator closed an investigation into these price spikes.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 7:57

So how do you view this? The fact that the Turner pulled out or pulled out from Picasso? Simon.

Simon Remppis, Engineer at TransnetBW: 8:04

There are multiple aspects to consider. So on the one hand the Picasso platform has already said aims to. Increase the efficiency of the European market and it aims to maximize social welfare. And we also can quantify this effect. So we have performed some assessments that clearly show that pika a platform already creates two efficiency gains with a value of several hundred million euros per year for all European countries participating in Picasso. Those efficiency gains are, yeah, calculated or determined by considering both the consumer rents and the producer rents. So we, and that's, and the picado platform algorithm is actually aiming to maximize this overall efficiency. We can clearly see that this works as intended. What a Picado platform does not do is to aim to minimize prices and, therefore, of course, because a platform can, I would say, lead to some redistribution effects between the producer and consumer side, which is also partially what we're seeing in in the Italian market at the moment. But then on the other hand, it also needs to be considered that those markets that we are aiming to connect with each other. Are at a moment. Not completely. They are highly regulated markets and the Italian market, I think is a very good example for this because on the Italian side we have a so-called central dig dis dispatch model in which the balancing service providers do not place the bits directly on to the platform. But the bits which are sent to the Picasso platform are actually calculated by the respective TSO in this case by Turner. Also the, I would say rise formation in Italy is highly regulated. So we now see basically the consequence of connecting the Italian market, which has its very distinct rules to, a common European market, which works with with slightly different harmonized rules. And on the other hand, we also have effect that there's only limited, especially downward reserves available in in, in Italy. The Picasa platform does not only aim to maximize the efficiency gains, but it also aims to. Increase the operational security and therefore the Picasso platform will always satisfy demands or basically compensate for all imbalances is regardless of the costs. And it happened actually quite frequently that imbalances in Italy were well, could not have been. Compensated with the intelligent reserves which would have been available based on a price, which is I would say subject to strong regulation. And in those cases, the Picasa platform then automatically triggered the import of a FR from neighboring countries to Italy. Which of course supports frequency quality across Europe. It supports the system security and system stability. But on the other hand, of course, it had some, I would say, remarkable effects on the price formation of the Italian market.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 11:22

So if somebody, if, sorry, if I could button that. But could you, is it more. These are more than just teething problems. Then if I understand you correctly, this is more to do with the structural, it's a structural issue of the way the Italian market. Then coexists with the other, the wider European one. And they can potentially expect some of these, as you call them, remarkable prices or, price spikes basically going forward.

Simon Remppis, Engineer at TransnetBW: 11:46

Of course there are multiple effects or ongoing developments, which. Should solve this issue in the in, in the future. So on the one hand, of course with more and more TSOs joining the Picasso platform as it is expected for this year based on the regulatory deadline, we will of course see less price spikes in the market because we will get an overall longer married auto list and therefore, they will the situations in which the very expensive bits at the end of the merit dollar lists are activated, should get should occur less frequently. On the other hand TSOs have recently publicly, consulted a proposal for an amendment to the regulatory backgrounds, to the implementation framework and methodology for the price formation in which multiple yeah, improvements of the price formation algorithm have been proposed which should also mitigate those effects. And those proposals have now been submitted to Aer and AER will of course have the final say and make a decision on the implementation of those or of those amendments. And given the approval by aer, we will implement those changes to the algorithms with it. This year, which will then of course also yeah, mitigate this price formation issues which have led to such yeah, remarkable prices.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 13:13

So do you expect then Turner to, this, to only to be a temporary aspect that will pull out any temporary and come back maybe later this year? What do you think after these algorithms are in place?

Simon Remppis, Engineer at TransnetBW: 13:23

Well, that's. Further on the one end, this is the, our interpretation of the decision by the tele regulator Ara. So they've basically asked turnout to disconnect from the Picasa platform until the implementation of these mitigation actions or mitigation measures. Also. The EBGL is of course a binding document. So according to the electricity balancing guide guideline, all European TSOs have to connect to the Picasa platform. Therefore, we clearly consider the disconnection of Turner as a temporary measure until those, yeah. Evolutions that I've just mentioned have become effective.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 14:04

And what's been the response in Italy? Alina. How why did it surprise the Italians so much? What are you hearing from your sources and your network?

Alina Trabattoni, Italy Correspondent, Montel News: 14:10

The recurring message that's coming through from people operating on the market, Simon and Richard is that they're unable to forecast the price. They're unable to draw up any forecasts because they don't understand how. Picasso settles prices. So, you know, the message I'm getting is that if this information were available, if the data sets, if the forecasting data sets and calculations were available to market players, then part of the problem could be solved because what they're seeing is, say on a Monday morning at 9 45. There's a certain price let's say plus a hundred, that's the preliminary price. The final price gets set the next day at 1745. So not only are they unable to forecast the price, but they also have literally two days before the final price is confirmed. And that can be, that can actually go from plus 100 to minus 6,000 in some instances. The exposure is massive and the losses are also very big. The losses players, market players, traders have suffered are very big. The gains can also be potentially very big, but navigating in this sort of context is quite complicated.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 15:24

So it is providing that kind of transparency of data or making that available, is that potentially an issue here as well? Simon?

Simon Remppis, Engineer at TransnetBW: 15:31

Of course, clearly the transparency of the data and of the way that Picasa platform works is a very important factor. I would say nature of the A FR market full, let's call it forecastability of the prices will never be possible because by definition ambulances are. Not or cannot be forecasted. Therefore the Picasa platform works in a reactive way. But clearly there is so BST so are also aiming to improve the transparency level of the Picasa platform and of the exchange of a FR. We also had, I would say, some kind of a learning curve with regards to the connection of a central dispatch model as we see in the Italian market with the common European domestic market for balancing energy and what this and the additional challenges that are created by this, I would say very distinct task with regards to transparency. So we were of course informed and became aware after a while that due to the very distinct design of the Italian market some data which is available to market participants in all other European markets are not clearly visible to market participants in Italy. This especially, we first. So yeah, we especially referring on the bit information that is for forwarded from the Italian system operator turnout to the Picasso platform, which is of course not identical to the information that is forwarded from the balancing service providers to turn up. And those challenges, of course, are to be addressed and we are currently addressing them within the picasa project and we are aiming to increase. The level of transparency. And of course we are aiming to provide market participants all the information, which is, necessary to get a good insight in the market. Of course, in a non-disciplinary showy way. As already said, this will never lead to the full force accessibility of pro prices because this is simply not possible in indeed due to the nature of the A FR market. But we have really understood the message that the level of transparency needs to be increased.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 17:45

And that's something that you could see. Putting in place this year clearly. Yes. Yep. Okay. That, that, that's very interesting, Simon. I think that's a move that will be very much welcomed by certainly market participants in Italy and beyond. For sure. Now, I think there's also, we see, I mean, we are reporting, I know others are as well, I'm sure about countries delaying the implementation of Picasso. Is that, was that expected or has that come as a surprise to you, Simon?

Simon Remppis, Engineer at TransnetBW: 18:10

First of all, the information on the accession planning is regularly published on the accession roadmaps that you can find on the end two e website. So whenever there's I would say new firm information on any delays available we will publish this information on our website through this. No, I would say we do not have any expectation on further delays, which is not publicly available as well. On the other hand, we have to. Take into account that the connection of a TSO to the Picasso platform is a very complex project, both in terms of technical challenges as well as in terms of market design and regulatory challenges. Given the fact that many TSOs are now planning their accession in parallel to the implementation of those, yeah. Changes to the price determination algorithms that we've mentioned before. Of course this does not make this challenge any easier. So with I would say projects of, with this level of complexity and, this high number of European TSOs that are actually affected by those changes, I think it is not completely unexpected that some delays can happen.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 19:17

Absolutely. Do you expect, to see any more of these issues that have plagued Turner and the Italian experience, do you see that could, these kind of issues could. Could reappear or will the modifications that you talked about will alter the situation to ensure that doesn't happen in the same way.

Simon Remppis, Engineer at TransnetBW: 19:33

So first of all, in the target phase when all European TSOs, or almost all European TSOs are connected to the PIKA platform, we are clearly expecting to see less of these effects due to a more efficient market, of course. Every accession of A TSO to the platform changes the dynamics of the markets, and therefore, in the intermediate timeframe certainly I would say unexpected effects can happen despite the TSOs putting a lot of effort in, in trying to forecast the evolution of the market. After Picasso, after the accession of TSOs to Picasso. Nevertheless, of course also with those mitigation actions and changes to the breath determination that have been mentioned before, we, of course, are aiming to make such effects less likely. It also needs to be considered that most of the other European TSOs do not face these very specific challenges of having a central dispatch model connected to a. Yeah. European domestic market that has been created under different circumstances and with different market models in mind. Of course the Telium case is clearly one of the most, I would say, challenging accessions we have to expect.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 20:51

Absolutely. I think that's very clear and I think, your responsibility of course, as a TSO is to keep the lights on and maintain security and supply. And not to prevent obviously price spikes or massive negative prices. But that's very clearly 'cause if the lights were to go out, all the fingers would point in your direction. So that's very clear, Simon. But what I mean in terms of. Next moves and kind of, the next public consultation, what changes are likely there?

Simon Remppis, Engineer at TransnetBW: 21:16

So first of all, today I can only speak for transit BW as common service provider of the Picasso platform, and of course also as TSO operating within the Picasso platform. I cannot speak for the Picasso platform as a whole or for all tso. So even for other. As individual TSOs. Therefore, I also do not I also really cannot inform you about any, I would say further consultations or proposals that TSOs will make towards asap because this is a task that can only be made by all TSOs, not by individual TSOs like s. At the moment, there are no ongoing consultations on changes to the respiratory background of the Picasa platform. There are also no consultations that we will launch within the next couple of days or weeks. But with regards to the future planning, I propose to or I would like to refer to public stakeholder workshops and the electricity balancing stakeholder group. In which all TSOs are informing about such developments.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 22:17

Perfect. And Alina, can we expect more role for the Italians here as well?

Alina Trabattoni, Italy Correspondent, Montel News: 22:21

We're waiting to see the outcome of of because obviously Ana pulling out is just a temporary measure. Italy will also come up with its own requests and explanations. But from my understanding as well there are some, conditions being requested by some of the TSOs across Europe, like the Belgian TSO has requested some conditions and then the European regulators considering them as well at the moment. I was actually curious, do you see if there's a, do you are you seeing any other European market that could operate in a similar way to Italy's in terms of, this central dispatching mechanism? Simon?

Simon Remppis, Engineer at TransnetBW: 23:00

So there are also other TSOs that are applying a central dispatch model. So the first TSOs that comes to my mind is is P-S-E-T-S-O of the of the Polish system. Of course they might have a slightly different design. So I am really not an expert in all the, I would say, different market designs especially in terms of how assemble dispatch models work. Therefore, I. I do not know for sure if they will be facing the sa the same challenges, but I would say the improvements that we are currently making to the platforms and also the fact that more and more TSOs will try to pick out the platform will of course increase the efficiency of the whole system regardless of the mark design.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 23:43

And I think really just to round up there, I think, you know, I think the market participants would welcome modifications and also the increase of transparency on what, what's happening on the bids and on that, on the balancing, balancing mechanism there. So I think Simon, many thanks for finding the time to explain this to us. I know it's a very complex area, it's ever evolving and that, and for your clarifications are very welcome there. Thank you.

Simon Remppis, Engineer at TransnetBW: 24:07

Yeah, thank you for having me in the call.