NODES would like to welcome the European Commission’s, as well as ACER, ENTSO-E’s, and EU DSO Entity’s, effort in providing this draft Network Code. The Network Code on Demand Response is an important step towards more efficient grid operation through the market-based use of flexibility throughout Europe.
In particular, NODES welcomes the clear preference for market-based procurement of flexibility, including a clear derogation process. Although included in the Clean Energy Package (2019), this principle has not yet been implemented in European Member States to a large extent.
However, there are still several points that we hope the European Commission will reconsider. The description of the following subjects in the draft Network Code currently under consultation may result in suboptimal functioning and delays in the development of well-functioning local flexibility markets throughout the EU.
Set-up of local flexibility markets
System operators should have the individual responsibility to organize a local flexibility market. The Network Code allows Member States to assign, through national terms and conditions, the responsibility of setting up local flexibility markets to a given entity. With National Terms and Conditions being available only in 2027 at the earliest, we are concerned that system operators will not set up new local flexibility markets before they know what will be the national decision. The current draft risks postponing its own implementation by three years.
Third party market operators should be default. The Network Code requires third-party market operators to be fully unbundled from buyers and sellers. However, system operators may choose to organize their own markets where they will act as buyers without formal restrictions. Third parties can provide a neutrality that buyers and sellers can’t provide, therefore system operators should only be allowed to operate local flexibility markets where an adequate third-party market operator cannot be found
Derogations from market-based procurement should be subject to stricter regulation. NRAs are allowed to provide derogations from market-based procurement under certain conditions. The process should be further described in the Network Code and include mandatory public consultation and a requirement to explain why the derogation conditions are fulfilled for the whole scope of the derogation (topology, products, voltage level etc). Also, SOs that have received a derogation should be encouraged to test market-based procurement before the end of the derogation period.
Market coordination by default
Coordinating markets by forwarding bids from one market to another, or through simultaneous access, allows for the pooling of liquidity between markets/buyers, avoiding hoarding and splitting of liquidity between markets, and ensuring maximized income for all flexibility service providers. We regret that the Network Code does not set this as a default mechanism for local flexibility markets (with an opt-out possibility for flexibility service providers). Exceptions from this should only be allowed when or where it can be proven that from a system point of view, the costs would exceed the benefits. In particular, TSOs should have the responsibility of facilitating such coordination with relevant balancing markets.
See also SmartEN’s position paper on this topic.
Flexible connection agreements and cost-reflective tariffs in coordination with local flexibility markets
We welcome that flexibility, connection agreements are not to be considered when assessing whether market-based procurement should be applied, and that their activation should be coordinated with the market when these to mechanisms coexist. However, the Network Code should go further and require that, in the absence of a derogation, a local market is set up where a flexible connection agreement is signed. After all, a flexible connection agreement is the proof that the grid capacity is scarce, and only a market can ensure that the resource with the lowest cost is activated. This should apply to all flexible connection agreements, including permanent ones. Also, the Network Code needs to ensure that cost-reflective tariffs, where implemented, and local flexibility markets are designed in order to together ensure the best possible outcome in terms of optimal grid use and social welfare.
European high-level standardised products for local flexibility markets
When each member states have their own description of local flexibility products, national products may differ without any good reason. A common, European description of high level standardised products for local flexibility markets to be followed by default by national terms and conditions would make it easier for services providers (e.g. aggregators) to be active in several markets across member states, and thus enhance competition and liquidity. In order to allow innovation, SOs should be able to receive a derogation from European and national standard products to trial a specific product in a limited period of time.
Are you interested in more information?
Contact Guro Grøtterud (Director Regulatory Affairs / Senior Project Manager) at NODES
