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ENTSO-E - EU’s Electricity Forward Markets

 Long-term markets are envisaged to play a key role in helping achieve the EU’s
Green Deal ambitious objectives. Increased price volatility in the electricity system, due to the acceleration of renewable energy source (RES) deployment and exceptional geopolitical circumstances, is accelerating the focus on these markets to help market participants manage their risks.

Having received less attention in the past few years compared to the day-ahead
and intraday markets, the long-term markets now face several challenges,
including a lack of liquidity. These challenges are highlighted by the fast adoption of low-carbon generation, which will increase the need for hedging opportunities due to the expected growing price volatility in the years ahead.

>Download ENTSO-E EU’s Electricity Forward Markets

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ENTSO-E considers that the changes in market fundamentals require a reconsideration of the current design of long-term markets to make them fit-for-purpose and to ensure the better protection of market participants, retail suppliers and consumers.

The necessity to review the current long-term market models appears to be acknowledged by other key players beyond the Transmission System Operator (TSO) community such as regulators and policy makers. In particular, ACER and CEER
published a draft policy paper on the ‘Further development of the EU Electricity forward market’ in July 2022, striving to find alternative forward market models. ENTSO-E’s and ACER’s assessments agree on the importance of finding solutions to the current challenges of the forward markets (i. e. low liquidity, undervaluation of long-term transmission rights [LTTRs], etc.) through improved hedging instruments or market models.

In the first part of the paper, ENTSO-E assesses the current forward markets from a comprehensive perspective and provides additional insights from the TSOs’ experiences. In what follows, ENTSO-E provides initial analysis and views on
two alternative Policy Options:

1. TSOs as providers of hedging opportunities. Policy Option 1 considers that market participants are used to LTTRs issued by TSOs which grant access to the
liquidity of neighbouring forward markets. Some general considerations are proposed, for instance amending the allocation framework, ensuring volume adequacy, introducing a minimum auction price or terminating the
current mechanism to ensure revenue adequacy (longterm allocated capacity [LTA] inclusion). Furthermore, two approaches are described which differ in the allocated products. In the first approach, (Approach 1), ENTSO-E proposes to continue issuing Financial Transmission Right (FTR) Options with some adjustments, and in the second approach (Approach 2), it is proposed to introduce FTR Obligations appropriate to the forward and future products traded in Power Exchanges.

2. Purely financial forward markets. Policy Option 2 constitutes a completely new approach, (Approach 3) that questions the economic efficiency of the LTTR market.
It is supposed that the long-term market could evolve without TSOs, and hedging products for the future will be developed based on need by other market operators. Terminating the LTTR market is expected to reduce the complexity of the overall forward market, increase its flexibility and support the formation of correct long-term electricity prices.

The evaluation of the three main approaches shows that all of them will solve some of the observed challenges. However, at the same time, all approaches have drawbacks and come with a shift of risks between TSOs, market participants and
end-consumers. The proposed approaches and improvements shall be further developed and assessed to ensure a deeper understanding of their implications for all stakeholders. Moreover, further questions and insights on key topics such
as the scope of implementation, the design of secondary markets or the design of particular products will be discussed in the next steps. In particular, the significant differences in the maturity of local forward markets will need to be considered in further assessments. Therefore, ENTSO-E expects this paper to serve as a baseline for the ongoing policy debates to reform the electricity market
and will continue investigating the described improvements. In doing so, ENTSO-E will contribute with valuable inputs in the upcoming discussions with policy makers and regulators about how the future forward electricity market can best be
organised.