This article comes with a health warning. We will be discussing EU legislation and, as with all things EU, there will be a wealth of unhelpful acronyms and terminology fired at you, none more so than those forming the Commission’s new ‘Energy Union Strategic Framework’, officially revealed last Wednesday. Briefly speaking, this hugely ambitious plan intends to unite gas and electricity markets in the different regions of Europe and, eventually, Europe as a whole whilst facilitating the growth of renewables at the same time.
It must be said that the process of integration is complex, from physically connecting all countries together with big cables, to wading through the minutiae of new trading rules and regulations that will have to be implemented. But this process, a once in a generation infrastructure upgrade, is also fascinating. I will spare you every tiny detail; I don’t know half them myself. But I will pick up on one particular morsel of policy: that of the obscure, but rather wonderful Flow-Based Market Coupling (FBMC – acronym number 1).
First, let’s put this all into context, one of the cornerstones of the Commission’s Energy Union is the idea of ‘price convergence’ via market ‘coupling’ between countries – essentially making sure electricity prices being traded across borders are the same or very similar. To achieve this you can do two things: build more interconnecting cables and manage those interconnections better. The first option is, for the purposes of this article, relatively straightforward. Build more cables between countries and you can trade more electricity back and forth, meaning you get closer to an equilibrium price in both countries. In Germany and France for example, wholesale electricity prices were the same 67% of the time in 2011.
But how do you pursue option two and go about managing interconnections better? More importantly, what is so problematic that it requires management to be better in the first place? When you want electricity, doesn’t it just flow through the cables without a hitch? Well not exactly.
It is true that electricity will always flow along a cable. But if you have a lot of those cables in your network, it may not flow exactly where you want it to go, choosing the path of least resistance over a ‘busy’ line. This phenomenon in the networks is referred to as a ‘loop flow’.
Somewhat unhelpfully, loop flows are sensitive to the variability of solar and wind generation, where the more renewables that come onto the grid the more likely it is these loop flows will occur. This is because if a grid operator is forecasting anticipated demand for the day ahead, the real-time situation on that actual day may be quite different if, say, the wind blows more than expected.
If the day-ahead prediction is indeed inaccurate, the extra electricity generated can ‘flood’ transmission lines in neighbouring countries that might be less congested. Since the bulk of market trading occurs within national borders or cross-border markets that do not correspond with the transmission lines through which this electricity may travel, these forecasting errors can create price imbalances within and between countries.
From an EU perspective, this is potentially disastrous as it drives a wedge between the Commission’s work on market integration and their push for renewable growth, two things which the Energy Union Strategy would dearly like to see as compatible. Yet it does not matter how well designed your market system is, you cannot tell electrons to follow price signals if they have a perfectly free transmission line to go down.
Going in the Wrong Direction
To highlight the problem, between 2011-2012, according to Thema Consulting, out of all of the electricity flowing between Germany and the Netherlands, some of it was physically flowing in the opposite direction to its destination 74% of the time. Between Switzerland and France, this happened 95.5% of the time. Whilst the quantity of energy wasted in these cases varies, with renewable growth being promoted by financial support in different countries (e.g. Feed-in Tariffs in Germany) the situation is only likely to get worse.
It is in this light that FBMC becomes so critical. In very brief terms, FBMC replaces the old notion that Available Transfer Capacity (ATC) should be calculated separately to the price at which electricity is traded. In this way there is a much closer alignment between the direction of prices in the market and the direction of the electricity across the cable itself. As such, through clever algorithms that I will not even begin to unveil (or understand) in this article, FBMC is even able to manipulate the flow of electricity to suit those market prices.
Through such a method, the IEA predicts that price convergence within the Central Western European (CWE) region could increase from 58% to 90%. Researchers have even gone further, to suggest that if by 2050 FBMC is not fully implemented, the EU could end up paying €590 billion more than it would need to.
Plain or Intuitive?
FBMC is not without its demons. In some circumstances, the algorithm on which FBMC is based can end up sending electricity from a high price area to a low price area in order to maximise overall welfare across a region. As a response to this, there is currently a great deal of discussion within the CWE region regarding whether or not FBMC should be ‘plain’ or ‘intuitive’.
In the latter instance, rules would be set such that prices would always flow from low to high across borders, but recognising that there may be a loss in overall welfare. Ultimately, FBMC is problematic if only because of just how complicated it is. Having first been proposed and agreed by grid operators in 2007, it is only now being approved as we speak. Assuming no further delay, FBMC is expected to be implemented in CWE in ‘early 2015’. The computational ICT needs, depending on the scale of future implementation, are astronomical.
When people talk about ‘smart grids’, I often find myself struggling to describe exactly what one might look like, let alone what the technologies involved might be. With FBMC though, the notion that electricity can be controlled by a computer, sent in different directions all across different borders, and produce lower prices as a result certainly seems very smart.
Even better from the Commission’s perspective, FBMC is exactly the sort of methodology that could adapt to the variability of renewables as their proportion of generation throughout the EU increases and the movement away from fossil fuels combustion for energy production commences. Of course, as with most EU ‘packages’, FBMC will be just one of a number of complicated reforms in the grand Energy Union plan.
But when we paint a picture of the future of Europe’s grids, it just might be the smartest.