After mFRR was activated at energy prices of up to 77,777 EUR/MWh on October 17, 2017, and the balancing energy price subsequently rose to over 20,000 EUR/MWh in two quarters of an hour, a discussion began about the lack of competition in the balancing energy market and corresponding countermeasures. This discussion continues to this day and is now taking place at the European level.
As the first countermeasure, the Federal Network Agency reduced the technical price cap in the balancing energy market to 9,999 EUR/MWh. This effective but unpopular measure was supposed to be replaced by an adjustment of the procurement rules in the balancing market. At that time, balancing capacity and balancing energy were still procured in a joint tender, so it was logical to consider the energy price in the procurement. Up to that point, only the capacity price was considered, with the energy price only being taken into account in the event of equality between two capacity prices.
In a swift process, the Federal Network Agency issued a decision to adjust the procurement algorithm. The so-called mixed price procedure was to be introduced on July 14, 2018, and was aimed at reducing the risks of balancing group management to an appropriate level until the introduction of a balancing energy market. However, the decision was challenged, and an expedited procedure initially granted a longer implementation period for balancing service provider. As a result, the mixed price procedure was suspended after just one day. The court set October 15, 2018, as the new start date. The energy price was thereafter considered in the form of a weighting factor that was supposed to reflect the average activation probability. Although the majority had believed that a more complicated procedure, particularly for aFRR, would be advantageous, this was waived to introduce the mixed price procedure as quickly as possible and thus abolish the unpopular technical price cap.
Ironically, the court's expedited decision again led to a reduced price cap, and the now-available implementation period also allowed for a more complex yet more appropriate procedure to be implemented. With the introduction of the mixed price procedure, the reduced price cap was abolished, and the level of energy prices dropped significantly. This demonstrated the effectiveness of the new procedure, relieving balancing group managers of unreasonable risks. Unfortunately, the simplified procedure combined with the overly high weighting of energy prices resulted in such a low price level that there was hardly any incentive to manage the balancing groups in the market, as it was almost always cheaper to procure balancing energy. This culminated in events in June 2019 where the demand for balancing energy rose to multiple times the dimensioned amount and some traders exacerbated the strained situation with short sales in the intraday market, selling energy to the TSOs, which attempted to balance the system by all means, including purchases in the intraday market, that they did not produce and thus received as balancing energy through their unbalanced balancing group. Although this behavior was subsequently sanctioned by the Federal Network Agency, the weaknesses of the mixed price procedure combined with the lack of incentive effect of the balancing energy price became evident.
As a result, the incentive effect of the balancing energy price was significantly strengthened with a revision and initially through the form of an exchange price coupling and later through the scarcity component, which provides for price surcharges in the event of particularly large system imbalances.
With the introduction of the main procedural judgement against the Federal Network Agency's decision to introduce the mixed price procedure, the Higher Regional Court of Düsseldorf ended the mixed price procedure, and on July 31, 2019, the balancing market reverted to awarding based on capacity price. Thus, the old market equilibrium re-established itself, once again introducing existentially threatening energy prices, prompting the Federal Network Agency to reduce the technical price cap to 9,999 EUR/MWh again, which was implemented on October 17, 2019, temporarily until the introduction of the balancing energy market.
On November 2, 2020, the balancing energy market was finally introduced, accompanying the separation of the procurement of balancing capacity and balancing energy. For each MW awarded in the balancing capacity market, a balancing energy bid must also be submitted. Additionally, free balancing energy bids can be submitted. The expectation that this additional competition would lower the level of energy prices to a level observed in wholesale markets was not fulfilled. Only a few, in some time slices no voluntary balancing energy bids could be observed, so the price level re-established itself at an existentially threatening level for balancing group managers, prompting the Federal Network Agency to once again reduce the technical price cap to 9,999 EUR/MWh, which was implemented on January 19, 2021.
This decision was challenged and overturned due to procedural deficiencies. From January 20, 2022, the technical price cap of 99,999 EUR/MWh applied again. With the adjustment to the European target market design according to the Balancing Guideline and the connection to the PICASSO platform on June 22, 2022, the European price cap of 15,000 EUR/MWh applies. This is valid until July 24, 2026, and is then to be raised to 99,999 EUR/MWh.