Complex and volatile - 15-minute power auctions start

The new 15-minute day-ahead auctions went live this week, marking one of the most significant changes in the European power market to date.

In this episode - recorded 48 hours after the first auction - Richard reviews the launch with senior commentators from power exchange Nord Pool, Energy Traders Europe, and Montel Analytics.

They discuss how market participants across Europe have fared under the switch to this new time resolution and why many expect market prices to continue to be volatile amid the complex new granularity.

What does the data on trade volumes from the first 48 hours tell us, and who is the new mechanism is likely to attract?

Host: Richard Sverrisson - Editor-in-Chief, Montel News
Contributor: Gert Ove Mollestad - Norway Editor, Montel News

Guests:
Hans Randen - Executive Vice President for Public Affairs, Nord Pool
Jerome Le Page - Chair of the Electricity Committee, Energy Traders Europe
Jean-Paul Harreman - Director, Montel Analytics

Editors: Oscar Birk
Producer: Sarah Knowles

Transcript

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

Hello listeners and welcome to Plugged In - the Energy News podcast from Montel, where we bring in the latest news issues and changes happening in the energy sector. This week has been a busy one for Europe's wholesale power markets after months of delays. Much anticipation and apprehension. The new 15 minute day ahead auction kicked into action on Tuesday. This is the one of the most significant changes in the European power market to date with most of Europe, switched to the new level of granularity. Many of our listeners will still be getting to grips with a new mechanism, so we'll be taking time to look at what power exchanges and traders have been doing in the lead up to this week, the initial response we've seen from the market, and what long-term issues and what long-term issues still need to be addressed to make the system robust. We are recording this episode on Thursday morning, 48 hours after the first 15 minute day ahead auction. I'm gonna be speaking to Power Exchange Nord Pool, Energy Traders Europe, and our own director at Montel Analytics. But first, I'm joined by a Norway editor, Gert Ove Mollestad, who can bring us up to speed of what has taken place this week. Welcome back to the podcast, Gert.

Gert Ove Mollestad - Norway Editor, Montel News: 1:15

Thank you.

Richard Sverrisson - Editor-in-Chief, Montel News: 1:17

So what are we seeing from these early auctions in terms of prices? Have there been any surprises

Gert Ove Mollestad - Norway Editor, Montel News: 1:21

Yeah,I must say so. Well, a bit like expected, there are more volatility and prices are jumping a bit up and down. Even within the hour. Earlier we just had 24 prices per day, but now we have 96 data points and prices are jumping up a bit within the hour. And that's a bit. Surprising, I would say. And there also with a lot more figures, there's also a lot more to keep track on. And we have also seen kind of some spikes. We saw for instance, in the Baltics on Wednesday, then in the afternoon you had prices at 96 Euro megawatt hour, and then half past four. And then a quarter later, the prices doubled 290 and then 15 minutes after that it fell again to 93. So it's kind of really yo-yo prices here in many instances.

Richard Sverrisson - Editor-in-Chief, Montel News: 2:06

Absolutely. So how has supply and demand signals adapted to the quarter hour granularity?

Gert Ove Mollestad - Norway Editor, Montel News: 2:11

I would say it's a bit early to, perhaps to say that, and maybe it's some lack of demand response. Also maybe driving this within our volatility, I'm not sure, and I, we seen many analysts o on, for instance, LinkedIn also pointing at this and then wondering what's the cause of this? So we have to dig deeper into to the explanations behind this, I would say.

Richard Sverrisson - Editor-in-Chief, Montel News: 2:31

Are there any sort of initial trends that you can see so far? I mean, we've only, it's only been a few days where we've actually seen the auction results, but what are the initial impressions here, do you think of the sort main trends?

Gert Ove Mollestad - Norway Editor, Montel News: 2:42

Firstly it went well. We have had some delays in publication prices, but that's only minutes. And it's also been more precise in the second auction compared to the first, but take for instance, the German curve, it, it rises and then falls again in the late afternoon or night. But then again, you have this variation within the hour, prices jumping up and down a bit. So it's it's, yeah, really interesting.

Richard Sverrisson - Editor-in-Chief, Montel News: 3:05

We'll keep focusing on that and reporting on these developments in the market as and when they occur.

Gert Ove Mollestad - Norway Editor, Montel News: 3:10

Absolutely. And the really insight interesting things will be when the system is more under stress when you have, for instance, very cold days with a high demand or very windfall episodes. So how deep will the prices go then and will we see the extreme low price quarters, for instance. And we are this coming weekend is forecast very high wind power production both in the Nordics and in Germanys. And then we will have kind of initial test here and see how the system responds. So that will be very interesting. So maybe on, yeah. Even later today or on Friday, we will have more results and then can de more into the numbers.

Richard Sverrisson - Editor-in-Chief, Montel News: 3:41

Lot's happening. We are keeping up with the, all these developments on Montel News Gert.

Gert Ove Mollestad - Norway Editor, Montel News: 3:45

Absolutely.

Richard Sverrisson - Editor-in-Chief, Montel News: 3:46

Yep. Thanks very much Gert. Now I'm delighted to welcome our panel of commentators to review how the first week has gone. I'm pleased to be joined by Hans Randen executive Vice President at Nord Pool. A warm welcome to the pod, Hans.

Hans Randen - Executive Vice President for Public Affairs, Nord Pool: 4:00

Thank you.

Richard Sverrisson - Editor-in-Chief, Montel News: 4:00

Jerome La Page, chair of the Electricity Committee at Energy Traders Europe. A warm welcome to you, Jerome.

Jerome La Page - Chair of the Electricity Committee, Energy Traders Europe: 4:05

Thank you, Richard. Happy to be here.

Richard Sverrisson - Editor-in-Chief, Montel News: 4:08

And Jean-Paul Harreman, director at Montel Analytics. Oh. Warm. Welcome back to the pod. Jean-Paul. Jean-Paul Harreman - Director, Montel Analytics: Yeah. I'd like to start, Jerome, by looking at the background here and talking about how this sort of system came about. How does this new process come about? What's the context here that we need to be aware of?

Jerome La Page - Chair of the Electricity Committee, Energy Traders Europe: 4:24

Thanks. Thanks very much Richard. I think we looking at a process that has taken a few years starting from legislation a couple of years ago in the aftermath of the energy crisis, the power exchanges and TSOs have been implementing this switch to 15 minute products. So it took a bit of time but it's the end of the process as well, which saw the switch to 15 minutes of imbalance settlement periods. Intraday product and it's the logical step to align the day ahead markets with with this evolution. So this is something that traders and market participants in general have very much welcomed.

Richard Sverrisson - Editor-in-Chief, Montel News: 5:02

So to standardize it across all the different markets, all the timeframes here. Why was it necessary? W hat was the main reason for this change then? Because as we're moving to to a greener renewable space system, the 15 minute granularity is important, is, would that be correct, Jerome?

Jerome La Page - Chair of the Electricity Committee, Energy Traders Europe: 5:16

Absolutely. And I think most market, the old market participant will welcome this, brings more short term flexibility to the market. This is very useful, bearing in mind that it also introduces more complexity in how the market functions. It's not because you divide the hour by four in quarter hours that it only multiplies the complexity by four. It multiplies it exponentially.

Richard Sverrisson - Editor-in-Chief, Montel News: 5:37

Absolutely. Hans, I'd like to get the power exchange view here. How long have you been preparing for this?

Hans Randen - Executive Vice President for Public Affairs, Nord Pool: 5:43

I think we have been preparing in the same window in a way, as Jerome in a way said, this has been a long lasting project for us and for all other exchanges, the TSOs, but not at least also for our customers. It has been a huge change for our customers to prepare for this. This has been demanding both in a way to develop system, develop algorithm to secure and test every process so we could have a successful launch that we really had this week. It has been demanding and I think this is one of the project for first time also covering the whole of Europe in one big goal. Also most of the other implementation has been a bit step by step, but this will change all over Europe at the same day. So it was a huge achievement for all of us.

Richard Sverrisson - Editor-in-Chief, Montel News: 6:30

And Hans, you've been with Nord Pool or you've been at the forefront of the liberalized markets since the start, really. Is this one of the biggest changes that you've seen?

Hans Randen - Executive Vice President for Public Affairs, Nord Pool: 6:39

I think one of the, yeah, most important of course. What's big, you can discuss historically as well. But I think it is a major change and it's really, as Gerome also said, is supporting in a way the new, also the green shift, the changes we see in the market overall. And also then the political goals in a way to get more renewable and get it operational in a fluent way.

Richard Sverrisson - Editor-in-Chief, Montel News: 7:02

And are you happy with the initial results, Hans?

Hans Randen - Executive Vice President for Public Affairs, Nord Pool: 7:05

I'm happy it still only two days that we have had so, so far so good. But of course this need to be followed carefully in the coming weeks. So to make conclusions after two days is a bit hard. But at least we I don't know, start. Yeah, for the first day, pretty smooth

Richard Sverrisson - Editor-in-Chief, Montel News: 7:21

so far, isn't it? I think that's fair to say. Yes. So that's very positive. Jean-Paul, we've seen some degree of volatility in the first two auctions. Was this expected?

Jean-Paul Harreman - Director, Montel Analytics: 7:31

Yes, I think I think it was, of course we've had some insights into how the prices might look by the implementation of the intraday auctions in July last year. June last year. So we were quite familiar with the patterns that we were supposed to be seeing. In general it's also quite useful to have the most of your sub-markets in the same resolution. So the balancing markets went to quarter hourly, so it's only natural that, yeah, continuous intraday and also the day ahead had moved to the same resolution. So it's putting a single standard in USB cables is similar to this. It's a big change and it basically enables the market a lot better in terms of volatility. As you mentioned, so we see bigger differences in the intra hour prices as expected. I did read about assaultive pattern that people observed where the first quarter, hour of the hour was in the morning was higher than the rest of the hour, which we have al also observed in the intraday auctions. So it's not nothing new, but I saw comments about this being due to people still forecasting their generation in hourly blocks, and that's obviously not true. This has to do with the capacity calculation for cross border flows. So the flow-based domain is still calculated in hourly granularity like it was for the intraday auctions as well. And we're just seeing that back now in, into this new intraday sorry, new day ahead auction as well. It's an interesting feature of the market and it highlights that there's another frontier that we still have to go to quarter hourly for. Which is the capacity calculation. Yeah. It's a new feature for for some,

Richard Sverrisson - Editor-in-Chief, Montel News: 9:11

and we've seen prices as you mentioned, being actually quite volatile within the, some of the quarter hours within the hours. So in some cases doubling and then falling dramatically. And, some commentators have noticed this, of zigzag, zigzag prices. This a sign maybe that you know, the market's still learning or what's your view?

Jean-Paul Harreman - Director, Montel Analytics: 9:30

No. This is just a feature of having hourly capacity calculations. So it's nothing out of the ordinary. It's not unexpected, but it is, yeah a feature of a market that's not completely harmonized yet. So there's still, we need to get a USB cable for for capacity auctions, basically.

Richard Sverrisson - Editor-in-Chief, Montel News: 9:47

Absolutely. And if I can turn to you, Jerome now what has been the response and the sentiment from traders and members for the new 15 minute day ahead auctions.

Jerome La Page - Chair of the Electricity Committee, Energy Traders Europe: 9:56

It's been quite positive. As we're taping this, it's, we've only experienced two auctions, so the system's handled well for those two auctions. There's quite some relief from the side of market participants. As the process to switch the 15 minute products was delayed a couple of times, so we were happy that those delays managed to secure a safe system. Now, those two auctions that we've experienced it's also been rather calm days, rather typical days. So for instance this weekend, as maybe some listeners are listening to this podcast we're gonna experience some more wind. So we're gonna see how the auction with those new products handles during more tense days'cause more wind difference means normally more bits, more complex bits, not only from the renewable side but also from the traditional generation. So we're gonna see a little bit how how this turns out and also what the dynamics are gonna be in terms of volume, in terms of prices, in terms of volatility, et cetera. The welcome is warm so far.

Richard Sverrisson - Editor-in-Chief, Montel News: 11:00

That's good to hear Jerome, and I think as you say, you have periods of very high winds or even low, like the dunkelflaute phenomenon, maybe that we get a very cold day with very low winds that's gonna potentially test the system and the complexity there as well. Do you think Jerome?

Jerome La Page - Chair of the Electricity Committee, Energy Traders Europe: 11:14

Absolutely. So the. The full winter period is also gonna be a strong test especially for the central western part of Europe and northern parts of Europe. This summer, next summer is gonna be another test with key waves in the Southeast. So we're gonna see how all this handles. But so far so good. What we can see also with the previous updates and improvements in, in our coupling mechanisms is that. So far it's handled and I think Hans can attest to the fact that every time there's been a reform of the market, more complexity implemented in the algorithm, then there's been also some improvement made to it. So that the algorithm can hold and continue to do its work.

Richard Sverrisson - Editor-in-Chief, Montel News: 11:56

That's the perfect point to bring Hans in here and to talk about the system and obviously it's a massive increase in complexity for you guys in the power exchanges. Are you very confident that the new system can cope and cope well with these kind of phenomenon that, that Jerome is describing, either high wind, low wind, cold weather, et cetera.

Hans Randen - Executive Vice President for Public Affairs, Nord Pool: 12:16

We have done at least an extensive testing also for us to have a robust operation prior. One in a way also to do this market coupling function across Europe is one of the most important things that the power exchanges or nemos are doing on behalf of the whole system. We are putting a lot of effort and a lot of testing and we are quite confident we have developed the algorithm further in a way to handle this. There is never a guarantee, but I think we have prepared well for this and hopefully able to cope with future situation that can occur also.

Richard Sverrisson - Editor-in-Chief, Montel News: 12:52

Absolutely. And do you think this of granularity, this new 15 minute resolution will bring more players onto marketplaces such as yourself, so flexibility providers, what would be the impact there do you think?

Hans Randen - Executive Vice President for Public Affairs, Nord Pool: 13:04

I really hope so, at least because I think the system needs it. And so we need in a way to get the pricing down to consumers on 15 minutes resolution as well. Also, if we are, be able to run the system balancing out, we need in a way to get more of the flexibility into the market and need to even the day ahead market and not only intraday and balancing markets. Get print pricing done. At least an important factor for us in a way to try to get more participants on board and then get the response on the demand side on top of the production side.' Richard Sverrisson - Editor-in-Chief, Montel News: idea here, isn't it? To get that flexibility in this renewables based system by going to that resolution. Yeah. And it's important also that all demand sites see these 50 minutes prices as well.

Richard Sverrisson - Editor-in-Chief, Montel News: 13:52

Absolutely. And react accordingly. Jean-Paul let's talk a little bit on, on this volatility that we're seeing and what impact is it having on liquidity, on the volumes of trade that you're seeing?

Jean-Paul Harreman - Director, Montel Analytics: 14:00

Yeah that's a very interesting thing and the first signs are quite encouraging. Of course, we're now seeing a day ahead auction, and the traded volumes on the day ahead are not really significantly different as a result of this, what we are seeing, for example, in Sweden the liquidity in quarter hourly intraday products is massively increased. So basically you're seeing an increase on liquidity in in the intraday market, which will definitely help better embed renewables into the system. It's not happening across the board. In Norway we don't see a change, which yeah you would expect that's quite kind of a similar country. Don't tell the Norwegians. But yeah, it's, the first signs are quite positive in that respect. But we're also seeing other impacts, so like the intraday auction, the first intraday auction in Germany, the traded volumes almost half and there wasn't too much volume being traded anyway. So yeah, there's not much of a market left for that intraday auction. So it's interesting that basically the trading shifting from day ahead where the shaping of the quarter hourly profiles was already done and then moving straight into the continuous intro day. And that's an interesting feature that we see since since the Go Live, even in two days of with two days of data, you can actually see those trends already developing.

Richard Sverrisson - Editor-in-Chief, Montel News: 15:19

No, that's very interesting. Do you think the new system was also, you talked about the intraday relationship with the day ahead here, but what about with the balancing market? Do you think the new system will reduce imbalances and the need for costly balancing auctions?

Jean-Paul Harreman - Director, Montel Analytics: 15:33

No. The balancing market was already in quarter on hourly granularity. Most markets traded already in quarter on hourly periods. The balancing markets are driven by volatility, not by changes in the weather, by outages, by cross border limitations, they're not necessarily driven by a day ahead market. You could see an impact on capacity prices for balancing products because you see a more volatile profile and people will be using smart bids and block bids and and those kinds of constructions to, to get their assets Yeah, matched in the day ahead market. There may be some outliers that appear when people, when things happen that people haven't really thought about ahead of time. But in general, I would not expect a massive impact on balancing markets.

Richard Sverrisson - Editor-in-Chief, Montel News: 16:21

That's very interesting. Jerome if I can turn to you now. Thinking, we've seen in intraday markets a lot of the trading, a lot of the activity has been taken over by machines, by robots. And obviously you recommend you, you represent traders. Do you think that the same could happen in the day ahead Markets that we could see the less of a role for, for people and more for machines.

Jerome La Page - Chair of the Electricity Committee, Energy Traders Europe: 16:43

Time will tell. I remember when we were kids, they were, they told us like, there will be no more books. I still have books in my bookshelves. So machines don't take over everything. Yet of course this is a strong trend, especially in the intraday markets. Algorithmic trading, robot trading. So how much this will also impact and is, or is being introduced in the day head markets. We'll see. There are also two different animals. We're still talking about in the day ahead, talking about an auction that is 12 to 36 hour before the delivery. So the necessity for algorithmic trading is very different. And also it's one auction compared to the algorithmic trading, which is very much using the continuous market intraday. So quite different but the fact that there are machines behind it is of course the sign of times.

Richard Sverrisson - Editor-in-Chief, Montel News: 17:33

If you've talked about we've all talked about the complexities involved, the volatility are some of your members Jerome concerned about potential decoupling or, that the system will struggle to cope with extreme situations?

Jerome La Page - Chair of the Electricity Committee, Energy Traders Europe: 17:45

It's a very good question because we've, the experience incidents in the past couple of years. A couple of important incidents on the day head market last last summer, in summer 24. Also some incidents on the intraday market in the summer of 25. So we need strong backup solutions. And for this this is something that we've traders in general market participants, the wider community, have been insisting on to have common fallback solutions in case of decoupling. The power exchanges are still working on this. But yeah, we, this is definitely something that we need and as we're seeing also now, there's still some details to our run out in how, not really the coupling process works, but like how the transparency around results publication is done because we're, the switch to 15 minute also means that there have been IT systems that needed to be updated and there's still hiccups around, around publication of certain results in some parts of Europe.

Richard Sverrisson - Editor-in-Chief, Montel News: 18:45

Would you like to comment on that Hans? So how are you progressing with these issues that Jerome has raised?

Hans Randen - Executive Vice President for Public Affairs, Nord Pool: 18:50

No, I fully support also what Jerome says as there has been, and a still a huge focus on handling if you have any distortion in the market as the market coupling function has not been, in a way the problem so far. Could not have had any issues in a way related to the market coupling as such. So the incident we have had RB by local exchanges and then to have proper fallback procedures that we are really working hard on and focusing on to secure also that we got only one single price out in the market in the day ahead timeframe. This is a main focus for us in a way to keep to keep a robust operation, but also if something happens to have the robust procedures to handle whatever case that could occur. And of course on transparency, that is also one. So I think at least we as an exchange are putting a lot of effort in a way to have data out available for markets. This transparency is also one of the things we are at least focusing a lot on.

Richard Sverrisson - Editor-in-Chief, Montel News: 19:52

Yep. That's reassuring I think absolutely Hans. We talked about incentivizing smaller flexibility operators, whether they be batteries, whether they be demand side on the demand side to enter this market now, but do you think smaller players will struggle to manage the risks and bids under this more complex mechanism? It's perhaps easier for larger companies, but for the smaller, more nimble players is this gonna be more difficult, do you think?

Hans Randen - Executive Vice President for Public Affairs, Nord Pool: 20:18

I'm not sure only because of this, but I think there is a development in a way. Also, things are getting more complex all over in a way in the market so that there could be a move that smaller are moving away from the market and go behind, bigger utilities, et cetera. That could be either direction. And I don't think that is only limited to this change, but an overall increasing complexity that we see in the market.

Richard Sverrisson - Editor-in-Chief, Montel News: 20:43

What's your view here, Jerome?

Jerome La Page - Chair of the Electricity Committee, Energy Traders Europe: 20:45

When we mention complexity there's complexity in, for the algorithm to handle all the bits, so more bits, but also more complex linkage and conditionality between the bits. That's where a lot of the complexity lies of. Of course, that means from a market participant's perspective that you also need to think about that and those links, for instance, between the different bits. But I don't think that should be a hurdle for the operators of short-term flexibilities and also for the very small market participants or very small actors who don't want to act directly on the market on their own behalf. There are plenty of aggregators providing services, whether you're on the demand side or on the production side, or on the operation of storage.

Richard Sverrisson - Editor-in-Chief, Montel News: 21:28

If I can turn to you Jean-Paul, in terms of the new system, the new mechanism in place, who be benefiting most in the short and long term here. Do you think?

Jean-Paul Harreman - Director, Montel Analytics: 21:37

The main benefit is in, in the integration of renewables, and that's good for all market players, so it means you get a more accurate representation of the value of energy over the day. You're more granular, and that means during ramping periods, you may have differences in the first quarter of the hour and the last quarter of the hour, which reflects the amount of generation from renewables that you that you'll see. So it'll create a battery reflection of the value. And because of that, if you were a conventional generator, or you are a flexibility provider, that means you can also capitalize already on day ahead, on those spreads within those hours. Obviously then during the day you'll be continuously optimizing similar to a renewable operator, but the starting position is already in the right granularity and that helps the whole market.

Richard Sverrisson - Editor-in-Chief, Montel News: 22:30

And do you expect this kind of zigzag pricing pattern to continue? On that kind of, we'll see this volatility to continue in the coming months?

Jean-Paul Harreman - Director, Montel Analytics: 22:37

There's two things. So during ramping periods you are going to see volatility anyway. But this zig zag pattern is really mainly due to to hourly cross border capacity calculations. That will continue because yeah, you might see it decrease a little bit as the sun becomes less of a factor in the winter, but as soon as the summer arrives next year, you will see it come back into those profiles. Unless, of course, we change the capacity calculation methods. But I don't think that's on the cards for now.

Richard Sverrisson - Editor-in-Chief, Montel News: 23:07

Certainly not. Could you just explain to the readers why an hourly cross-border capacity would affect quarterly prices?

Jean-Paul Harreman - Director, Montel Analytics: 23:17

Oh, yeah, sure. So there's limitations on hourly basis of cross-border capacity, which means the maximum you can import or export during the hour, is the same. But during, for example, a solar ramp, you will get this very steep, slope of solar being low at the beginning of the hour and being high at the end of the hour. So in principle, you would want to import a lot more in the beginning of the hour. And you might even want to export at the end of the hour, but because the capacity is the same, yeah. That creates sort of a, within our disconnect of the prices. Yes it's a really interesting feature for energy nerds like me. But yeah. But yeah, it's so we're going to continue to see that and in the morning. That means that the first quarter hour, it's relatively expensive towards, compared to the last quarter hour. And in the afternoon you will see the first quarter hour actually seeing a lower price than the last quarter hour of the hour because the sun is going down. So in beginning of the hour, there's more solar. And then at the end, and this is something we've seen for years on intraday markets. It's more pronounced on day ahead because of the amount of volume that's being transported across borders. Yeah. Yeah, quite interesting.

Richard Sverrisson - Editor-in-Chief, Montel News: 24:31

That's a very interesting phenomenon there, I think. And then thank you for highlighting and explaining that to the listeners who may have found that intriguing. Gentlemen, I'm gonna have to close off here, but thank you for a fascinating discussion. We'll all remain very focused on the auction happening in the coming days and especially over the weekend. But thank you for being guests on the Plugged In - the Energy News podcast from Montel. Our new listeners, thanks for listening to this episode of Plugged In. If you enjoyed this discussion, please like rate and follow to make sure you get the latest podcast episodes as soon as we release them every Friday. We'd also love to read your reviews of the podcast. It helps us to keep up to date with what you, our listeners, think of our podcast and what content you want to receive more of. Finally, you can head to montelnews.com for more news and analysis from our team of journalists across Europe and beyond. See you next time.