In Belgium, the national regulator and grid operator keep the capacity and energy markets separated and do not show any intention to consider the German mixed price system. They have also committed to transition the historically closed markets to an open and efficient system.
Already today, the market for tertiary reserves is open for all players and all technologies. The Transfer of Energy framework allows parties to valorise flexibility of assets within the balancing group of another BRP. Tenders are awarded based on capacity bids and activation prices to a large extent determine the order of activation. Of course, there are still inefficiencies, but market design is steadily being improved. The Belgian regulator CREG has adopted an activation price cap of 13 500 euros per MWh to avoid abuse of market power. Hence, an activation price as occurred in Germany in 2017 would not be possible here. So far, the price cap has never been reached.
Grid operator Elia is also working on opening the market for secondary reserve power. Of all balancing products, these reserves are the most important for Elia and represents the largest share in the procurement budget for reserve power. Therefore, there is good reason to make this market competitive rather sooner than later. Until then, we are stuck in the current closed market that is a legacy from the days of vertically integrated utilities. As a result, the secondary reserve market in Belgium is supplied by a small number of gas fired power plants.
This oligopoly, a natural result of the current market design, has some market distortive effects. Since the activation price for secondary reserves set the imbalance price (paid by the parties that cause a system imbalance) most of the time, the parties making up the oligopoly can control it to a large extent. The same companies take up such a big share of the Belgian market, that their own imbalance determines the whole system imbalance very often. They have therefore all reason to keep the imbalance prices low (see also info box). For them, it is a matter of optimizing income in the reserve market and imbalance penalties. This is a luxury other market participants don’t have.
This dynamic hampers a fully efficient balancing market in Belgium. The stimulus for market parties to manage their portfolios well is low and therefore the volumes traded on the intraday market are very limited. There is still a lot of room for Belgian market parties to manage their portfolio better, which would lead to less reserve power activations. The opening of the tertiary reserve market already showed that it reduces procurement costs for the grid operator and therefore their effort to open the secondary reserve market should be applauded – especially given the technical complexity of this product.
Our deep dive in the German market developments shows that healthy power exchanges and balancing markets can be reached by keeping reserve capacity and reserve energy markets separated and opening them up to as many market players as possible. The reserve energy market is preferably opened to free bids to increase competition. It could be protected against market manipulation by a sensibly set price cap. Belgium is on its way to such a market design, with grid operator Elia in the process of transitioning away from a system that historically favored large power plants and their owners to one where market parties large and small can participate on an equal basis.
The fact that the biggest Belgian utilities determine the system imbalance for most of the time gives way to a unique market feature. Having the largest portfolio in the market for once means being disadvantaged compared to smaller players: they are at the wrong side of the system imbalance most of the time. While normally large market parties enjoy the benefits of economies of scale, one could speak of diseconomies of scale here. The market parties in question mitigate this effect by controlling the secondary reserve activation prices. And of course… oligopolists have many other advantages that outweigh the effect described above.
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