How Europe's power market shakeup could unlock new wave of renewables

A major shakeup of how power is traded in Europe could help unlock a wave of new wind and solar deployment, say analysts, while also offering new opportunities for battery energy storage.

From Tuesday this week, European electricity exchanges started allowing power to be bought and sold in 15-minute intervals in day-ahead markets.

That is a subtle but highly significant change from the hour-long intervals that had until now been the most granular level that power could be traded at on those markets in most countries.

Hour-long trading intervals may have sufficed for steady baseload electricity sources like gas and nuclear – but posed a problem for variable wind and solar generation as Europe ramps up its renewables deployment.

“This is very important for wind and solar producers because it moves the market's granularity closer to the actual production of renewable energy sources,” said Eva Zimmermann, senior research associate at Aurora Energy Research.

“When power is only traded in one-hour blocks, every consumer or producer must consume or deliver the exact same amount of power for a full hour.”

But considering the realities of solar farms, for example, particularly around sunrise and sunset, “producing a constant amount of power for one hour is simply not possible.”

The shift to 15-minute day-ahead markets was envisaged in EU regulation that obliges all Transmission System Operators in its member states to implement a 15-minute imbalance settlement period (ISP).

The regulation also obliges European power exchanges like EPEX SPOT and Nord Pool to offer 15-minute products in Single-Day Ahead Coupling markets.

“This shift makes Europe’s electricity system more flexible, reliable and ready for the growing share of renewable energy,” said the EU Directorate-General for Energy in its own announcement on the shift on Wednesday.

In a research note, Aurora said the introduction of 15-minute power intervals in day-ahead markets may cause the intraday “spike pattern” caused by traders working to refine day-ahead positions to “disappear.”

This could therefore “shift trading that previously existed” on the intraday market – where 15-minute trades were already possible – to the day-ahead market, it said.

Spain and Portugal made the transition to 15-minute day-ahead markets earlier this year – but now other major markets like Germany and France are joining the party.

Although 15-minute products are now available in all SDAC-coupled markets – one-hour products remain available as well.

Major step towards accommodating more renewables

Aside from the fact that hour-long blocks for trading power were ill suited to the variable nature of wind and solar, what this meant was that green power producers had to buy and sell 15-minute products on the intraday market to make sure their positions are all closed by the time of delivery, said Zimmermann.

That usually leads to imbalance costs that “must be subtracted” from the earnings made on the day-ahead market.

The move to 15-minute granularity will reduce these costs, she said, and “thereby improve asset economics, and make it easier to accelerate the renewables buildout.”

“The biggest advantage is that now the typical renewables production profile can be much better integrated into the power system.”

Lorenzo Sani, a market analyst at European independent power producer Fotowatio Renewable Ventures, agreed that the move to 15-minute trading periods will “cut balancing costs for renewables by reducing the impact of weather forecast errors and better aligning production with market positions.”

Ultimately, it’s a key milestone for European market integration and a major step toward accommodating more renewables in the system."

Implications for battery storage market

The shift to 15-minute day-ahead auctions will not only benefit renewables producers but also battery storage operators that “can better match intra-hour fluctuations,” said Bloomberg Intelligence energy and utilities analyst Patricio Alvarez.

There will be more fluctuations as switching from hourly to 15-minute time intervals means that prices will be set 96 times a day instead of 24.

“In the short term,” Alvarez said “volatility could feel higher because trading and liquidity will be spread across more time slots, and forecasting 15-minute periods is harder than forecasting full hours.”

The market may feel more volatile, but that it doesn’t mean that it is. “It simply brings price swings within the hour into the main auction instead of leaving them hidden until the intraday market,” explained Alvarez. In the long run, that could in fact “smoothen volatility.”

Aurora also noted the benefits the shift could bring for battery storage operators in markets with low intraday liquidity – where there are fewer power producers and offtakers to smooth out peaks and troughs in supply and demand.

But effects will vary by market, explained Zimmermann. In some markets in Europe, she said there was “already quite a liquid intraday market that was traded at 15 min granularity.”

This was used to “even out the ramps” from renewables production – “but it was not as liquid and well working in all European markets.”

But in countries without a liquid intraday market, the option of trading in 15-minute intervals on the day-ahead market has a much higher impact, she said, because it creates the possibility to trade with more granularity for the first time.

Writing on LinkedIn, Simon Risanger, CEO of Veriso, a company providing specialised software for electricity markets, channelled astronaut Neil Armstrong in summing the power market shakeup as one “small step for electricity prices” and one “giant leap for the power system.”