Germany split over bidding zone division

After a long delay, European TSOs finally released their bidding zone review this week. The report was met with much backlash from Germany’s government and industry leaders strongly opposed to the proposal to split its zone into five.

In this week’s podcast episode Richard speaks to commentators for and against dividing Germany’s price zone, and explores how the industry can expect TSOs in Germany and the Nordic region to respond in the next six months.

Presenter: Richard Sverrisson - Editor-in-Chief, Montel
Contributor: Siobhan Hall - Brussel’s Correspondent

Guests:
Casimir Lorenz - Managing Director for Central Europe, Aurora Energy Research
Tobias Federico - Chief Product Officer, Montel 
Morten Pindstrup - International Chief Engineer, Energinet

Editor: Bled Maliqi
Producer: Sarah Knowles

Transcript

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

Hello listeners and welcome to Plugged In - the energy news podcast from Montel, where we bring you the latest news issues and changes happening in the energy sector. We are recording this episode just as power has returned to Spain and parts of Portugal and France. Following the mass blackouts that happened on Monday. Whilst investigations are currently underway to understand what caused the power outage that brought transport businesses and airports to a standstill, we are turning our attention to another prominent news story, which is causing much debate among Europe's energy industry leaders this week. That is the Bidding Zone Review published by European TSOs earlier this week. I'm gonna be speaking to Aurora Energy Research, Danish TSO Energinet, and Montel's Own Tobias Federico. But first, I'm joined by our Brussels correspondent Siobhan Hall, who can tell us more. A warm welcome to you, Siobhan.

Siobhan Hall - Brussel’s Correspondent: 0:58

Thank you, Richard.

Richard Sverrisson - Editor-in-Chief, Montel: 0:59

So Siobhan, what's exactly been released from ENTSO-E and how long have you been waiting for this?

Siobhan Hall - Brussel’s Correspondent: 1:05

Oh, well, what it's been released is a study that has been undertaken by certain transmission system operators on whether power bidding zones should be changed and if they should, how they should be changed. And they looked at very specific incidences. Very specific areas and the ones that are most relevant are they looked at Germany and Sweden, and we have been waiting for this for years. It has been delayed several times. It's something that's been in the making for many years. So for, to actually have the final report, I imagine is essentially a relief to nearly everyone involved in it.

Richard Sverrisson - Editor-in-Chief, Montel: 1:48

Absolutely. So what countries would be affected the most by a proposed changing to the bidding zone is also known as price zones.

Siobhan Hall - Brussel’s Correspondent: 1:54

The study was looking at several possible new configurations of bidding zones, and what the recommendation, final recommendations came out was that they decided that the existing Swedish system set up is fine. So that doesn't need any changing. But the German system, which is currently one price zone with Luxembourg, according to the calculations they did, they recommended that the most efficient way to organize the German Luxembourg price zone would be to split it into five zones.

Richard Sverrisson - Editor-in-Chief, Montel: 2:30

And what we, what's likely to happen over the coming six months?'cause it, you know, nothing's gonna happen overnight, but it may take months or years before we see any changes if we do see them at all.

Siobhan Hall - Brussel’s Correspondent: 2:42

Exactly. So this study is part of a legal process that has very defined timelines in it. I say that. This study was delayed several times before it was published, so it did not meet its own defined legal timelines. What is supposed to happen is the publication of this study starts a six month clock countdown, and within that six months, the government's involved. So in this case it's going to be the German government, I presume the lots and Luxembourg government, but essentially the German government will have to come within six months with a decision whether. It wants to reconfigure the bidding zones as recommended in this study, or if he wants to go for an alternative plan. And then depending on what it decides, it then has further months in order to. Make those changes, we'll come up with an alternative plan.

Richard Sverrisson - Editor-in-Chief, Montel: 3:32

Excellent. Thanks very much, Siobhan. To delve further into this matter. And hopefully have a lively discussion. I'm pleased to be joined by Casimir Lorenz, who's managing director for Central Europe at Aurora Energy Research. Morten Pindstrup, international chief Engineer at Energinet, the Danish TSO and our very own Tobias Federico, who's chief Product Manager at Montel. A very warm welcome to you gentlemen. Casimir let's start with you. Why is the splitting of the German bidding price on such a contentious issue?

Casimir Lorenz - Managing Director for Central Europe, Aurora Energy Research: 4:05

It has like a massive implications. I think it has implications on the power sector, but it has implication also on potentially day-to-day life. That's why it's also very political topic. Furthermore, I think it's a political topic 'cause it's, it comes back to the federal na nature of Germany with having different federal states. And therefore also different interests. So it can easily get into a situation where people think they might be worse off. And this is also one important thing that we need to solve when we want to make a successful bidding sun split. We need to make, ensure that everybody has the feeling they're profiting from it in nobody's structurally worse off.

Richard Sverrisson - Editor-in-Chief, Montel: 4:43

Absolutely. And Tobias, if we stick with Germany. Obviously you are based in Germany. What are your views? Why is the potential splitting of the German price zone so problematic?

Tobias Federico - Chief Product Officer, Montel: 4:54

Casimir already said that a few really good arguments. I think the problem of splitting a zone has at some additional costs and also some additional stress which are not covered in the study from the ENTSO-E. When you come to hedging strategies, hedging approaches, what products to trade, how to change the system, that is much more on the wholesale, on the trading side. But when it comes to the political part and the sentiment within Germany. Splitting up Germany. We had some histories on that and I don't think we want to repeat that again. So that's why it's very political and very emotional. The discussion.

Richard Sverrisson - Editor-in-Chief, Montel: 5:31

I think certainly the response amongst German politicians has been that we are not splitting the zone, but we'll come to that later. But Morten what's your view as a TSO? What why has. ENTSO-E, which is the European body of TSOs, come to this decision, to split it in up to five zones,

Morten Pindstrup - International Chief Engineer, Energinet: 5:48

I think come to a decision to split. I think we have to be careful about the phrasing of this. The history is that with. The introduction of the electricity market regulation in 2019. There, there is an article that very specifically ask us to develop a methodology within three months, and then within 12 months, I'm saying here, almost five years later, we should make a bidding zone study, assessing the the structural congestions in the system, and come up with alternatives if necessary, and. Just creating the methodology was difficult. It is highly technical. It requires modeling a lot of the processes that happens in the electricity markets today among TSOs, RCCs, power exchanges, and all this coming together then ends up in a result where we are assessing 22 different parameters among which economic efficiencies, one CO2 emissions and a lot of other things. So when we sum that up according to the methodology, then we are obligated to come with a recommendation. Which are for the two studies that are done, one for Continental Europe and one for the Nordics, is that there is economic benefit of splitting Germany and and Holland as I remember it. And in, in the Nordic case we have not been able to prove that any of the configurations assessed. Led to an increased economic efficiency. I think it is difficult for us as TSOs because we can look at the technical part, but that is only a part of the solution or of the discussion as both Casimir and an Tobias are mentioning. I think one of the points that I usually make is when we discuss this about splitting Germany is that. While we can look at it on a technical perspective and economics and power markets if we end up in a situation where it means that industries worse off, then it, the becomes an industry policy discussion. It becomes a social policy discussion. And if. When it becomes that, then energy very easily loses out because it, it's much more hard to understand that part. And the other parts are. Are very prescient for everyone.

Richard Sverrisson - Editor-in-Chief, Montel: 8:23

I think you're making some very valid points, and not least it, it's not a decision as such. I think you're right at pointing that it's a recommendation based on the ts o modification, so thank you for that clarification, Morten. But Casimir, if I can turn to you, what would be, the other reasons to favor a split in Germany, and especially into so many zones. It's not just, it's not just one or there's not just two, but there are several that's being recommended here.

Casimir Lorenz - Managing Director for Central Europe, Aurora Energy Research: 8:46

Yeah. Yeah and maybe also making clear that what I said in the beginning, I think that's why there's such a big discussion about it. But that's, for me, honestly, not a reason not to do it because I think there are op options to. To overcome these problems. I'm happy to go a bit to detail in more detail into this ones to overcome the problems, but maybe starting with why I see it's important to split or what where the benefits of splitting the zone for me there are two things. One is the dispatch. So how power plants are used, how power plants are turned on and turned off. And the other thing is how in new power plants can also be renewables Are the investments are happening. There is an impact on the investment from a price zone split, but that's not the key thing that we need to solve for. We have any, a lot of other options to steer investments. A lot of investments are anyhow, not fully market driven in Germany. But the key thing is that we have a correct dispatch and with a correct dispatch, I mean that we have a correct dispatch signal. And what is the dispatch signal? That is the price. And if the price leads to a wrong dispatch and happy to go into details. What I mean with this in a second, this is something which I find very dangerous. One example is that we are seeing very low or even negative prices in Germany, which is the sign or a signal for flexible assets to increase product increase consumption. That can be batteries, but that can also be EVs. That also is an increase in signal. To export electricity to our neighbors, right?'cause it's cheap for them to buy it. However, if this low prices that we're seeing are actually not low prices everywhere in Germany, but only in the north and not in the south, that can get dangerous. Because if we have a situation, for example, with a lot of wind production in the north. In the winter, that's a very common situation. Low PV production. In the south, we will often see low to even negative prices, and then all these additional consumption will be brought up because the prices are so low and we are making this a bottleneck, which between north to south transmission capacity even worse. So we are adding demand, we are exporting to our southern neighbors because of these low prices. For the entirety of Germany. While these low prices are actually only relevant for the northern part of Germany, and in the southern part of Germany, we don't have access electricity, we don't have that cheap electricity. And this all have, has a lot of additional effects right in, in these moments. We turn on electric, we turn on storages, we export electricity. And because we can't transport this electricity from north to south, we are turning on. Thermal power plants in the south, turning down renewables in the north, and still exporting this electricity more or less for free to our neighbors. And yeah that's something that we definitely need to solve. And a price on split or biddings zone split can be one solution. It is, in my view, the best solution to address this problem. There are alternative solutions, which will always be a second best solution. I don't know if we have time to discuss them. Today, but like solving this patch problem is my key issue. And if somebody says we should not do biddings on splits, good arguments against it, as we discussed, then I would like to hear what are the alternatives to solving this problem with the. Controlling the dispatch.

Richard Sverrisson - Editor-in-Chief, Montel: 12:11

Tobias, I dunno if you are in the right position to answer what the correct dispatch signal or how you solve that problem. But you mentioned liquidity or you mentioned hedging. And price ends a difficulty of hedging. We've seen this as a, been a constant debate in the Nordics as well. When you have so many price earns, it's very difficult to hedge hedge product by production and consumption. But the TSOs also mentioned that in their solutions the liquidity would be hit?

Tobias Federico - Chief Product Officer, Montel: 12:39

Well, it will. I mean, it's a quite easy one that the bigger price owners, the bit the liquidity will be the smaller price owners if you split the products up in, into five different products. The liquidity of each product will be definitely lower. That's a no brainer. I mean, one solution could be as, as it has done in the Nordics with the EPAs or the contracts of differences between a zone price, so let's say a, a German one zone price and five other zones. The big difference is, and that is something which often is ignored, is the fact that most of. The trading and hedging strategies is done OTC bilaterally. Forward contracts and the main reason for that is that most of the industrialists and German municipalities are not allowed to trade futures because marginal accounting, which is part of the future contract, where you have this daily cash settlement, will not, is not allowed for them. Which means if we would have a contract for difference or so-called epa, how it's called in the Nordics for German solution, that will be purely financial hedging instrument and financial hedging instruments are not allowed by German municipalities and by industrial. They could do it, they could open marginal accountings, but it'll increase hugely liquidity risk. Their cashflow risk. And we've seen that in the past, and that is also one of the reasons why in Germany or for German engine strategies, only 20% are exchange driven, which are mostly then financial futures. So what on paper could work in theory, in practice wouldn't work and would cause a lot of problem. This is one thing. The other thing is of course, then. Which has been covered a bit in the study. It's market power. If you're, the smaller design you make, the higher you have the probability of having market who have.

Richard Sverrisson - Editor-in-Chief, Montel: 14:31

So what would you say then Tobias then just, or just to explain why, is it municipalities, is it law that they can't engage in future trading or futures because that's kinda speculative or speculative action, then they become financial traders. Is that some of the reason?

Tobias Federico - Chief Product Officer, Montel: 14:47

What that could be one that's a topic where I'm not very familiar with, but what I know most from the procurement strategies is that it is seen as a financial instrument. They could do it. It's not really by law, but the risk committees of the German municipalities, because of the fact that it's in public ownership, they would like to avoid these type of products, does not mean that they're not allowed to do it. There are some municipalities doing it. But the majorities of them try to avoid it.

Richard Sverrisson - Editor-in-Chief, Montel: 15:14

Yeah, absolutely. And know we've seen some instances, certainly in, in the Nordics as well, where a lot of these municipalities or smaller companies have been exposed to these massive price fluctuations and huge margin calls. But Morten, before I ask you to respond to what Tobias is saying on the issues around liquidity and hedging this. Bidding zone review has come, has taken years and years. I think you mentioned 2019, but I'm sure I heard about in 2014 or beyond, be before then. Could you explain why it's taken so long to come to pass or to come to light the re with the recommendations and why? And something about the data and something about the data and the validity of data.'cause some people are calling that into question as well, how valid that could be.

Morten Pindstrup - International Chief Engineer, Energinet: 15:59

Yeah. Yeah. I can try. Yeah, it's not very simple. First of all the methodology, it should take three months according to the regulation. I imagine it took a year and a half. The CSO owes made a proposal, submitted it to a as per regulation. It was a little delayed, as I remember it. Then Asia were not happy. So they rewrote the methodology. It went into consultation. It had to make decisions, so it took a lot longer. So when we started the study, we should have almost been finished. Already then we had to do, find out what to assess. So how do we find out which configurations? We did this LMP analysis where a was was very much involved as well, and. Based on that we found out there are these configurations that had to be narrowed down. And then you had the starting point. Then we needed to collect data. This is already maybe three years ago. That took some time making sure that all the data is consistent and it's collected in. In a consistent manner across all the member states that are involved. Then when you start modeling, you find errors in the data. You find out settings in the model chain. The model chain takes a long time to run through. You have to do capacity calculation. You have to do the allocation, you have to do security analysis. You have to do remedial actions, optimization, and. Only then can you actually assess this re-dispatch need that has to outweigh the over optimization that two large bidding zones is. And that's basically the two main components that you hold up against each other to find out what is the economic potential. So this long model chain, and every time you find. Just a tiny era, then you have to start all the way back, and then you have to rerun all the scenarios, all the climate years, and it takes weeks to, to to run all these things. So it is immensely complex and I think, that is often forgotten. We are following very strictly this methodology that we were in the end, given that and that just takes an enormous amount of time. I think one of the points that we can take from this is that, that maybe there is due, due to the comments that I've seen several people make that the data is outdated. If the process is so complex that it takes us years to do the computations, then per definition the results that come out can't be recent based on recent data. It's just not possible. So somewhere, something might have to give and you could argue, at least whether the model chain is so detailed and complex, does it fit with our ability to forecast? What the power system is in the next five and 10 years, because that's what we are bottling.

Richard Sverrisson - Editor-in-Chief, Montel: 19:08

Absolutely. More, I think Yeah, that's a very, that's a very important point. I'm also intrigued to on your view, I mean, Sweden, Reed recently canceled a power interconnected to Germany because it said it wouldn't do anything of the sort until Germany split its power. Power markets. Now into several bidding zones. Splitting Germany up affect the Danish power market, for example.

Morten Pindstrup - International Chief Engineer, Energinet: 19:32

If we imagine Germany was split tomorrow, basically the northern part of Germany is likely to get on average quite a bit lower prices. That's what the study shows that carries into Denmark as well, especially Jylland. But Sjælland as. A little as well. So it will put put a downward pressure on the prices, especially when we have excess renewables in the system. And that is very correlated between Denmark and Germany in most cases. So the prices will become lower in the low priced hours and will likely to be the same in, in, let's say. The hours where we have less renewables on the system, because it's driven by the same technologies these days. It is gas generally that sets the price. So I think we would see downward pressure, which will be a challenge for the remaining thermal generators on the system, but also for the economic feasibility of some of the renewable projects that we, we have on the system already.

Richard Sverrisson - Editor-in-Chief, Montel: 20:36

Absolutely. So that's also could be quite problematic on those fronts. Casimir, I think. I'd like you also to, to provide some alternatives to the dispatch price signals or the price signals for dispatching power production. But maybe you want to come and, have a view on what's being said so far?

Casimir Lorenz - Managing Director for Central Europe, Aurora Energy Research: 20:52

Yeah. Maybe quick one on the Danish and quick also on the liquidity. I think the example for Denmark, just to show that Denmark has similar generation asset types. They're Northern Germany, but not then southern Germany. And this is also why we have in a situation where we are having a lot of wind production in Denmark and in northern Germany, we will end up with Denmark exporting to Germany because there might be a price differential Germany having a higher price and, but we actually can't transport this electricity from northern Germany to Southern Germany. So it might even result in a situation where we are curte, like we are importing electricity from Denmark, from a wind farm. Let's say it, it's not that simple, but we importing electricity from Denmark, mainly wind production. We can't transport from northern to southern Germany. So we are curtailing German wind farms and increasing again potentially southern coal or gas power plants to then export the electricity even further to Italy or first to Austria, but maybe then even further. So this is really a situation. I as an economist, my heart is bleeding. When hearing about that, of course, there are liquidity issues we need to take into account. And personally, I think a five zone split is maybe shooting a bit too far with the two zone split. This difference in generation type of assets and so forth is already much better addressed with the one zone and with the two zone split market liquidity issues are also significantly. Less of an issue than with five zones. So I'm also happy to hear from you Tobias what do you think if a two zones split with still two very large zones, if you compare to the rest of Europe would give you the same headaches because this would solve, at least from my perspective, this at least 80 to 90% of the issues that I've laid out, and whether it's a one two zone or five zone. I would be happy with two zones.

Richard Sverrisson - Editor-in-Chief, Montel: 22:51

Absolutely. Before I turn to Tobias I'd just like to ask you Casimir, would regional zones, so you go cross border zones, so you have a French, German, or not just, it's all price then seems to be very national focus at the moment. But if, obviously ob you have Germany, Luxembourg of course but if a German a Northern German Danish or Northern German Dutch or something, would that also be a possibility here?

Casimir Lorenz - Managing Director for Central Europe, Aurora Energy Research: 23:12

Yeah the question is, most of our price zones are historically driven. That's why they're also close to how borders are there. And even if we have price zones, as long as there's enough transmission capacity, different price zones still have the same price. So we are not. It always sounds like we're splitting things and you can't exchange electricity and you have immediately dig different prices. You only have different prices in the moments when the physics are not working out anymore. That's why I'm also generally very pro towards more grid build out and having more interconnection is favorable and something we should all strive for. But while the physics are not delivering that we need to have a alternative setup, which is not. Say, violating physics and we're just causing a lot of cost in the system. But generally I don't see a problem with regards to having also non-national price zones,

Richard Sverrisson - Editor-in-Chief, Montel: 24:03

Tobias. So I'm sure you have a view on what's been said so far, but I'd also like to ask you, what are the next steps? The signals from the German government is very clear, but then don't they need to provide some alternatives or some other ways of dealing with the clear congestion and the clear issues that exist with it within Germany there, Tobias?

Tobias Federico - Chief Product Officer, Montel: 24:21

Yeah, there's absolutely a fact. We have the dispatch cost. We have certain bottlenecks in the system. The cost of the bottlenecks are, I think twos, one is really building up root capacities. That was always the plan since 10, 15 years. But it takes a long time. And especially when we have been building up these AC grids AC cables in Germany. At least that was the plan. And that could have solved a few of those problems, increasing the grid capacities when it came to. A quite simple explanation. Why do we want to build up this one AC cable, or it was three back in the days from the north through the south. I was always explaining you can divide Germany into three belts. We have a wind belt in the north, we have a solar belt in the south, and we have a terminal power plant in the middle. According to the loss of ke, of the thermo power plant, in the middle disturbs the floor from north to south. This is also one reason in combination with the grid itself. So the German government, I think the new German government. Hopefully this by the end of this week, dan must provide a solution, and one is of course building up power plant capacities in the right region. Thermal power plant capacities that could help, but it doesn't have really, if we have high north and low pB in the south, that is clear and we must speed up the building up the grid. And that is a bit of a challenge. One was the cost question. We see that infrastructure costs have been quite high. The part of building up grid capacities in Germany should have been mostly underground so that nobody sees it to get public acceptance, but it was too expensive and took too long time. So a quicker solution would be great. And for me, my. And also for the German government, the alternative first alternative is built the dam cables. I mean that, that would've been the best way if that really goes in the right speed. That's an interesting question. One is clear. When the Nordic started up with the Z splittings back in the days and the argument was with a price difference, there is an incentive to build up grid capacities between the north and to south. And I think this was 25 years ago, and I haven't seen any lot of cables be built up from North Norway to South Norway. I, I don't see that the price won't split. Would really lead to new grids. We need really to invest it. So the government must incentivize that. And I'm against any type of splitting, causing because we will have the issues anyhow. We will have, first of all, the unwinding of the different hedging strategies. There will be not a perfect hedge. I think liquidity will be okay with two zones. But the thing is that we will have a high price zone and a low price zone. We, of course, more we can discuss if the price levels are correct or not, and if it's only eight euro price difference or even more today. But there will be a significant price difference and it'll be. Incrementally increase no. Really significantly increase. If we have a, lower production of renewables, regardless of which shown we are. So we will have see high price spikes and that will hit the different industries and mostly the industry in the south. So I think this argument is a killing argument, at least from the German government.

Richard Sverrisson - Editor-in-Chief, Montel: 27:26

Thank you Tobias. That's very clear. Morten, I'd just like to round off, I mean we focus very much on Germany 'cause that's where the controversy is, but there, there are other recommendations about Sweden as well, weren't there? Could you talk us through some of those and the implications for the Nordic market?

Morten Pindstrup - International Chief Engineer, Energinet: 27:40

As I mentioned in the beginning we assessed some of the different configurations of of Sweden. That was where there was a location issue identified early on. Where we both merged some bidding zones. So in the north, in the south tried to create a bidding zone basically around Stockholm of different sizes in different configurations. In the end we could not prove any socioeconomic benefits of making these changes when we look at how the dispatch changes versus the reduction in counter trading, volumes and costs. The decision and recommendation from or the recommendation from the TSOs that is is to maintain the four bidding zones as is in Sweden. I have noticed that Svenska Kraftnet afterwards have said they believe they need to look at this again. In which context that will be? I have no idea. But I'm sure we will hear more of that in the not too distant future. As well as we have from the TSO side recently submitted our latest technical report, which is a congestion report that we are to submit every three years to ASA. And that usually triggers a new bidding zone study. So the ball keeps rolling, you might say.

Richard Sverrisson - Editor-in-Chief, Montel: 29:04

And the discussion keeps on going. I think. And I think certainly I think it, it's been a fascinating discussion, guys. I think it's it's very clear. It's, I think it's, very good to get your different point of views for against and and also the technical side which is very important in this debate especially when, in a week where grid resilience and grid stability has really come to the fore. And if we look at what's happening or what happened in the Iberian Peninsula, so that's absolutely critical. We'll probably do a podcast on that next week. But in the meantime, guys, thank you very much for joining Plugged In. It's been an excellent and insightful discussion. I hope you agree, listeners, and thank you for tuning in to this episode. Our podcast episodes are released every Friday. For the latest news from Montel, please visit montelnews.com and you can follow us on LinkedIn, Bluesky, and other social media channels. See you next time.