The Nordic aFRR capacity markets

The Nordic TSOs will establish a regional balancing capacity market for automatic Frequency Restoration Reserves (aFRR) balancing capacity. Later, an mFRR capacity market will be developed using a similar methodology and IT solutions. The EB Regulation allows for the reservation of cross-zonal capacity (CZC) for the exchange of balancing capacity. There are substantial socio-economic gains to be made from the exchange of balancing capacity, especially in a power system like the Nordic with many small bidding zones.

The Nordic power system

Norway, Sweden, Finland and Eastern Denmark (DK2) constitutes one common synchronous area, denotated as the Nordic synchronous area. In addition, interconnections from Nordic synchronous area to Western Denmark (DK1), are part of the Nordic Capacity Calculation Region (CCR) but DK1 is also connected to the Continental Europe synchronous area. However, the Nordic market for aFRR balancing capacity will at first only cover the Nordic synchronous area. Western Denmark (DK1) will be able to join the Nordic aFRR capacity market once the Nordic power system has converted from frequency-based balancing to ACE-based balancing.

The Nordic CCR cover of 12 bidding zones, 5 within Norway, 4 within Sweden, 1 constituting Finland and 2 within Denmark. With small bidding zones and unevenly distributed balancing resources the exchange of balancing capacity with allocated CZC is necessary to ensure operational security in all areas. While the Norwegian bidding zones NO2, NO3 and NO5 and Swedish bidding zones SE1 and SE2 have a rather good availability of flexible hydro-based balancing resources, the bidding zones NO1, SE3, SE4, DK2 are deficit areas where currently national capacity procurement schemes are necessary to ensure available resources.

Regulation of capacity reservation for balancing purposes

Regional balancing capacity markets are regulated under the EB Regulation, where Article 33(1) states that:

Two or more TSOs exchanging or mutually willing to exchange balancing capacity shall develop a proposal for the establishment of common and harmonised rules and processes for the exchange and procurement of balancing capacity (…)

According to Article 38(1), if CZC is to be allocated for the purpose of exchanging balancing capacity, one of three alternative processes can be chosen: (a) a co-optimised allocation process, (b) a market-based allocation process, (c) an allocation process based on economic efficiency analysis.

The Nordic TSOs have assessed all options and opted for a market-based allocation. The method is described below.

In accordance with EB Regulation Article 38(5), TSOs may allocate cross-zonal capacity for the exchange of balancing capacity or the sharing of reserves only if cross-zonal capacity is calculated in accordance with the capacity calculation methodologies developed pursuant to Regulation (EU) 2015/1222 and (EU) 2016/1719. For the Nordics, this will be the flow-based approach.

Methodology for capacity reservation and economic efficiency

Reserving the cross-zonal capacity for balancing capacity exchange implies that the capacity given to the day ahead and intraday markets is reduced. However, in order to maintain a safe system operation, the TSOs need to reserve some CZC today as well. With the new market, this will be done in a transparent way.

Different methods for forecasting the value of CZC can be applied in the market-based allocation method. In the Nordic market the forecast will be based on a reference day. The forecasted market value of CZC between two bidding zones will equal the price difference of the corresponding market time unit (MTU) on a reference day for the day-ahead market. The forecast is made more conservative by adding a mark-up on the forecast. To further limit the impact on the energy markets, CZC is only reserved up to a pre-defined maximum level (default 10% of CZC).

With unevenly distributed balancing resources between the different Nordic bidding zones, analyses show huge benefits from a common Nordic aFRR capacity market. The Nordic TSOs believe that the proposed market will deliver annual net benefits for the Nordic region of approximately 50 million euros and that each nation will be a net beneficiary from the market’s implementation.

ACER approval of methodology

On the 5th of August 2020, ACER approved the methodology for the common Nordic aFRR capacity market. The high-level design of the Nordic aFRR capacity market will feature:

• A daily market with common Nordic procurement executed in D-1
• Gate Closure Time for BSPs will be between 07:00 – 10:00 in D-1, to be further specified
• Market will use standard aFRR capacity bids with a minimum bid size of 1 MW and hourly validity
• Pricing of selected bids will use the marginal pricing methodology (pay-as-cleared)
• TSOs will publish and submit an aFRR demand in MW per direction per bidding zone
• The procurement function will optimise procurement across the 11 bidding zones in the Nordic synchronous area (12 bidding zones once DK1 joins) using all the aFRR bids and the cost of cross-zonal capacity as input
• The cost of cross-zonal capacity is the expected price difference in the day-ahead market + a dynamic mark-up of 1-5 euros and is always used to favour the day-ahead market
• By default, maximum 10% of transmission capacity between two bidding zones may be allocated to the exchange of aFRR capacity

Implementation

As mentioned above, the exchange of balancing capacity or the sharing of reserves can only take place when CZC is calculated according to the flow-based methodology in the day-ahead market. The earliest possible go-live date of the Nordic aFRR capacity market is 1 February 2022. However, as a bridge to the Nordic market, several of the Nordic countries plan to implement national aFRR capacity markets. These can go live from the 1st of September 2021 based on the same IT solution as the Nordic market. Each TSO will decide individually whether to have a national market prior to the Nordic market.

More information is found on the Nordic Balancing Model (NBM) website. The NBM programme is a joint effort by the Nordic TSOs, Svenska Kraftnät, Energinet, Fingrid and Statnett.