EU power traders urge market liquidity focus in bidding zone plans

Brussels — EU power bidding zones must retain at least current levels of market liquidity after any changes to their configuration, EU energy traders' lobby group EFET said July 17 in recommendations to grid operators.

EU energy regulatory agency ACER is currently analyzing which, if any, EU bidding zones should be reviewed and how this should be done, before setting the parameters for grid operators to carry out a formal review.

Changing power bidding zones -- whether by merging to make larger or splitting to make smaller -- is a politically sensitive issue, as it affects prices within the zone and power flows between zones.

EFET argues that any drop in liquidity or competition would raise traders' hedging costs, reducing overall welfare gains.

The best way to measure hedging costs is by assessing ex-ante risk premiums, it said.

But if this was too complex, it recommends using bid-ask spreads and traded volumes for different market timeframes per bidding zone.

It also wants more analysis of intraday and balancing market efficiency, given these markets are becoming more important as renewable power volumes increase.

Another key requirement is checking how easy it is for market participants to hedge and trade before and after any change to bidding zones, for all timeframes.

It wants grid operators to project liquidity in various bidding zone configurations and then check the welfare effects of changes.

"It is...important, beyond mere suppositions about market behavior, to truly analyze how far possible increases in cross-border transmission capacities could...compensate welfare losses," EFET said.

The EU's power market design regulation requires grid operators to ensure at least 70% of net transfer capacity between bidding zones is made available for day-ahead and/or intraday trading by the end of 2025.

The issue is particularly sensitive in Germany, where cross-zonal trading capacity is limited by internal congestion creating unplanned loop flows, which carry excess renewable power from the north to the south of the country through its neighbors' grids.