The German electricity regulator, the Bundesnetzagentur, is considering splitting Austria from the German power market from as early as 2018, a new report shows. That would put an end to the communal “bidding zone” between Austria and Germany, in a reversal of the European project for ever closer union of energy markets and policy.
At present, Austria and Germany comprise a single electricity market bidding zone. That means that there is no formal matching of traded power market flows with cross-border capacity, as there is for example between Germany and France. Partly as a result, electricity from German suppliers to Austrian users can follow strange routes, for example via the grids of neighbouring Czech Republic and Poland. Separating Germany and Austria into two coupled bidding zones might help relieve some of those so-called loop flows, which can destabilise grids. But it would not get to the root of the problem. The main reason that electricity is taking such convoluted routes is because of congestion between northern Germany (where there is huge wind power supply) and south Germany (where nuclear power has been shut down). Breaking north and south Germany is the more logical, but politically controversial, solution.
The German-Austrian bidding zone, in which prices are uniform and traders do not have to worry about network capacity, was introduced in 2002. The Bundesnetzagentur says that they are considering splitting the zone, to reduce security of power supply risks in Germany, Poland and the Czech Republic. Currently, only substantial re-dispatching guarantees grid stability. With re-dispatch, power stations that are not incentivised to operate by market prices are switched on at the demand of transmission system operators (TSOs). Usually, it happens when networks are congested. Power plants on the other side of the congestion are switched on whilst power stations on the oversupplied side are switched off, both at the cost of TSOs and eventually end consumers.
The Bundesnetzagentur published its thinking in a recent report, on reserve capacity. Reserve capacity is the power generating capacity that may be needed to balance congestion, also called re-dispatch. If there is a grid bottleneck, with excess power generation on one side and insufficient generation on the other, the grid can be balanced by turning off some of the excess generation on one side, and starting up reserve power plants on the other. The Bundesnetzagentur said that the reserve capacity available (mostly for re-dispatch power to balance the German/Austrian market) will fall dramatically, from around 7 gigawatts (GW) in the coming two winters to 1.6 GW in 2019/20. The drop was because they assumed that the currently common power market would be split into a German and an Austrian market. The prospect of splitting the single bidding zone is quite an astonishing conclusion and it is worth digging a little deeper into the numbers.
What is clear is that physical realities trump trade realities. In their calculation, the Bundesnetzagentur assumes trade volumes of around 10 GW flowing from Germany to Austria when German electricity is cheap (mostly at times of high wind power production). Austria imports electricity for its own consumption (and pumped hydro storage), but more importantly, it is an export hub for power exports further south, mostly to Italy, in part via Switzerland and Slovenia. A northern German wind turbine (or lignite power plant) is competing directly with Austrian production and only separated by one interconnection from a gas power plant in the industrial heartland of Italy. But 10 GW of trade volume are not matched by physical capacities and the Bundesnetzagentur assumes that inter-connector capacity to Austria will, even in 2020, not exceed 5.5 GW.
The result of is that is that there are massive “loop flows” around the German/Austrian bidding zone, something which Central Eastern European countries have been complaining about for years. In a study from 2013, they pointed out that at times, around 2.5 GW of electricity was flowing from Poland to the Czech Republic whilst there was virtually no trade volume. What this means is that Germany and Austria, at the moment, use their neighbours networks as free riders to balance their power market. But even then, a ginormous amount of re-dispatch is needed. Quite absurdly (from an economic and political point of view), reserve capacity to balance the German market has to be acquired not only in Austria, but also in Italy! So for instance, in late March a storm swept across Germany and 18 emergency reserve power stations (which are paid all year round for being on stand-by) had to be put on to balance the enormous wind energy production from North Germany (which, of course, led to bargain prices in Germany/Austria and power being sold all across Europe which could not physically be transported to its destination).
The real issue is in Germany, as is the solution, and the decoupling of the Austrian market from Germany would merely be a pawn sacrifice. The real solution would be to split Germany’s electricity market in two price zones. That would be political dynamite, of course. Southern Germans would have to pay more than Northerners for their electricity, whilst duly financing the expansion of wind power up north. Nevertheless, it would be the right step. In the above mentioned storm, as is the case nearly all the time, the critical breaking point of the bidding zone was in Germany. A line from Thuringia to Bavaria would have been at 150% of capacity without re-dispatch, a report from Bundesnetzagentur revealed. All relevant studies that are concerned with redesigning bidding zones conclude that the split should be Northern Germany/Southern Germany-Austria.
The talk about European energy markets converging is more than ever nothing more than “rhetoric”. The European Commission’s goal was a unified electricity market by 2014. That has not happened but there has been some progress. Electricity can be traded (in line with interconnector capacity) across large areas. Trade rules are simpler and markets are more open than a few years back. But all this is being dwarfed by the developments on the ground: the electricity mix is still purely a national decision and interconnection capacities are expanding very slowly. This is a toxic combination. Germany’s share in intermittent renewable energy has been expanding fast over the last years, creating huge price swings, at least, in the spot markets for electricity. Power networks both in and around Germany cannot keep up with this development. Similar developments in other parts of Europe are likely. The result: markets will disintegrate. Political will cannot break the law of physics and the realities of markets.
Auf Wiedersehen, Österreich! The likely decoupling of the Austrian-German energy market, the only larger transnational bidding zone in Europe, would not only be a huge setback for European energy market integration; it would also make the elephant in the room visible and that is that the political will and the facts on the ground are light years apart when it comes to the completion of a single European power market.
Jakob Schlandt is a freelance journalist and widely recognised as one of the leading journalists on energy in Germany.