The Role of Transmission System Operators in Energy Trading

Table of Contents

The Role of Regulators in Energy Trading

Transmission system operators (TSOs) — regulatory entities entrusted with governing the main power lines and grids across Europe — are an essential part of our open, competitive and interconnected energy markets.

ENTSO-e, the European association for the cooperation of transmission system operators, consists of 39 entities across 35 countries. Each entity manages one control zone — typically, a whole country or, in rare cases, a region within a country (as, for example, in Germany where the country is divided into four control zones). The main objective of ENTSO-e and its members is to coordinate the electricity system operation and secure energy supply on both regional and pan-European levels.

Basic structure of the power system
Electricity value chain: place of transmission system operators

Let’s zoom in on the responsibilities of TSOs and describe their role in energy trading.

Main Responsibilities and Instruments of TSOs

To ensure an uninterrupted transmission of electric power across a given control zone, transmission system operators are engaged in a multitude of activities which roughly fall under the following categories:

  • develop, maintain and secure a critical energy infrastructure in a given region
  • balance supply and demand within the power grid (i.e. maintain a nominal frequency of 50 Hertz with very minor deviations) and restore the system balance as fast as possible if a power outage occurs
  • collect and exchange information about power generation/consumption schedules, grid balancing, planned outages, etc.

To predict power spot prices, energy traders are particularly interested in TSO measures related to congestion management and control energy. Let's elaborate.

Congestion Management

A congestion happens when too much energy is crossing a certain node within the grid. The growing number of grid capacity bottlenecks observed today are caused by congestions which occur as a result of forecast complexities associated with the growing share of renewables in today’s energy mix.

To prevent and resolve grid congestions, transmission system operators work in close cooperation with distribution system operators (DSOs) — entities responsible for the distribution of electricity from generation units to end-consumers in relatively small local areas — who often have remote access to power plants installed within their local grids.

TSOs and DSOs apply the following congestion management techniques:

Redispatch an adjustment of scheduled power feed-ins for particular generation units. For example, on the basis of day-ahead generation schedules obtained from local power plants, a TSO/DSO can adjust the output if any potential bottlenecks are identified.

Example of redispatch done by TSO/DSO
How redispatch works

Curtailment a short-term decrease in electricity production, almost exclusively associated with renewables and often utilized during peak production months (e.g. February for wind and June for solar). For example, a TSO/DSO can curtail wind farms in a certain location on a particularly windy day if an oversupply causes congestion.

Example of curtailment done by TSO/DSO
How curtailment works

The Effect of Congestion Management on Energy Trading

The initiation of redispatch and curtailment is often a sign of an energy oversupply that usually leads to complex price changes. Let’s assume that a TSO/DSO initiates wind curtailment at an Intraday price of 55 €/MWh. Energy market participants can interpret the situation in one of the following ways:  

  • speculate that the price will drop below 55 €/MWh due to an energy oversupply and sell power once the curtailment is announced
  • speculate that the price will rise because regional wind suppliers have to buy back the curtailed power which they had previously sold in the Day-Ahead auction

Control Reserve

Whenever the grid frequency deviates from 50 Hertz due to unplanned fluctuations in power consumption/generation, TSOs are bound to act. Given that a significant part of Europe’s electricity is produced by renewable energy sources, those fluctuations often stem from differences between forecasted and actual production volumes, as caused by unforeseen weather developments.

To restore the grid frequency to the nominal 50 Hertz, three different types of control reserves (also referred to as balancing energy) are activated by TSOs:

  • FCR (frequency containment reserve) is the primary control reserve automatically dispatched in response to frequency deviations. With a full activation time of 30 seconds, FCR aims to contain the system frequency and minimize oscillations.
  • aFRR (automatic frequency restoration reserve) is the secondary control reserve which restores the nominal grid frequency and substitutes for FCR if deviations persist. Full aFRR capacities can be activated within 5 minutes and provide system support for 15 minutes.
  • mFRR (manual frequency restoration reserve) is the tertiary control reserve which is manually dispatched in up to 15 minutes to support or replace aFRR when long-lasting deviations occur.
Illustration of control reserve activation
Control reserve activation

The activation of control reserves is communicated by TSOs in regular time intervals (e.g. every 15 minutes in Germany). The relatively low volume of FCR, constantly activated in real-time to ensure a more fine-grained system balancing, has no effect on the market. In turn, any significant change in aFRR and mFRR values announced by TSOs can have a strong impact on Intraday and balancing prices.

The Effect of Control Reserve Activation on Energy Trading

A significant increase/decrease in aFRR can signal a sudden power undersupply/oversupply level in the system.

The activation of mFRR is a fairly rare event which occurs when the system is under extraordinary pressure — it usually causes power prices to increase/decrease sharply. 

Below, you’ll find an example of how a control reserve activation can impact Intraday prices:

Let’s assume the Intraday price is at 150 €/MWh when a TSO publishes  the activation of 160 MW  positive aFRR for the recent quarter hour — i.e. the system is experiencing a significant undersupply of power. If a TSO publishes a 10 MW positive aFRR in the subsequent quarter hour, this can indicate a sudden recovery from the undersupply — e.g. because of actual wind generation catching up with forecasts. With the likelihood of prices going up as a result of the recovered undersupply, most traders would be inclined to sell energy as quickly as possible upon receiving the latest aFRR value.

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