NETWORK CODE DEVELOPMENT IN THE EU

November 2013 NETWORK CODE DEVELOPMENT IN THE EU Jan Sundell

Network Code Development in the EU Sammanfattning Det tredje paketet med direktiv och förordningar för energimarknaden, som trädde i kraft den 3 mars 2011 införde ett nytt system för att fastställa bindande EU-gemensamma nätkoder. Nätkoderna ska tas fram, främst i syfte att utveckla villkoren för gränsöverskridande elhandel. Utvecklingen av nätkoderna, vilket täcker de flesta aspekter av kraftsystemet, har en potential att förändra nästan alla regler för elmarknaden och villkoren för hur de tekniska systemen ska fungera, inklusive produktion och efterfrågan. Dessa regler har hittills täckts genom avtal mellan de systemansvariga för varje enskilt synkront system (t.ex. tidigare Nordel och UCTE), och har anpassats till de särskilda förhållandena i varje system. I många fall ersätts också bilaterala avtal eller industriella standardkontrakt och kompletterande myndighetsregler, som har avtalats mellan olika parter. Nätkoderna kommer att vara i form av EU-förordningar, vilket innebär att de - när de träder i kraft - kommer att vara direkt och omedelbart tillämpliga i varje medlemsland, och att det inte finns något behov av att införa dem genom att anpassa den nationella lagstiftningen. Market Design-projektet har beslutat att ägna sin tvåårigt återkommande internationella konferens till nätkoderna. Denna rapport syftar till att förbereda för denna konferens, som ska hållas under vintern 2013/14, i syfte att diskutera och göra deltagarna medvetna om de olika aspekterna av förändringarna, och främst om hur dessa förändringar kommer att påverka elmarknaden. De nätkoder är som är under utveckling är i olika utvecklingsfaser. De koder där arbetet påbörjats är följande: Anslutning av produktion till elnät (Requirement for Generators, RfG) Anslutning av förbrukning till elnät (Demand Connection Code, DCC) Anslutning av HVDC-förbindelser och HVDC-ansluten elkraftproduktion till elnät (High Voltage Direct Current Connection requirements, HVDC) Driftsäkerhet (Operational Security, OS) Driftplanering (Operational Planning and Scheduling, OPS) Frekvensreglering ur systemperspektiv (Load Frequency Control and Reserves, LFCR) Kapacitetsallokering och kapacitetsberäkning (Capacity Allocation and Congestion Management, CACM) Långsiktig kapacitetsallokering (Forward Capacity Allocation, FCA) Balansering (Electricity Balancing, EB) Eftersom kraftsystemet är ett integrerat system där allt hänger ihop och är beroende av vartannat, är det inte möjligt att dela upp frågorna genom att göra fristående nätkoder för olika aspekter av systemet. På grund av detta är nätkoderna kopplade till varandra, antingen genom hänvisningar till varandra eller genom överlappningar. Hittills har ingen av koderna kommit in i beslutsfasen, den s.k. komitologiprocessen, men flera av dem kommer snart att starta denna process. Fyra av dem - RfG, DCC, LFCR och Page 1

CACM - är i det så kallade pre-kommittéförfarandet, d.v.s. det finns just nu ännu inte ett formellt förslag från EU-kommissionen till kommittén för gränsöverskridande elhandel, the cross-border committee, som ska besluta om koderna. Beslutsprocessen för nätkoderna är mycket omfattande och komplicerad. När en nätkod äntligen är beslutat, är den följaktligen mycket mer slutgiltig än de tidigare avtalen mellan systemansvariga, som den ersätter. Dessa avtal som har utvecklats i en mer kontinuerlig process än EU-förordningar kan utvecklas, och förändringar kan inte göras på ett enkelt sätt, även om behovet skulle vara uppenbart. I förordning 714/2009 sägs inte mycket om hur man ska genomföra förändringar, men ACER arbetar med att utveckla en sådan process. Nätkoderna, som är i olika utvecklingsstadier, diskuteras alla i detalj mellan intressenterna, och varje kod är också föremål för seminarier och konferenser. Market Designs konferens om nätkoder syftar dock inte till att diskutera detaljerna, utan kommer att ta en helhetsgrepp på ämnet nätkoder. Syftet är att knyta (utkasten till) nätkoder samman genom att diskutera kopplingarna mellan dem och vi kommer att titta på hur elmarknaderna kommer att förändras när nätkoderna införs. Vi kommer att sätta nätkoderna i ett större sammanhang och diskutera de utmaningar för elmarknaden som nätkoderna försöker ta itu med. Vi kommer också att diskutera konflikten mellan de nationella regeringarnas åtgärder och EU-arbetet. Till exempel medan nätkoder utvecklas för att underlätta gränsöverskridande handel, snedvrider nationella regeringar marknaden genom att subventionera elproduktion från låga koldioxidutsläpp och genom att införa kapacitetsmarknader. Följande är de viktigaste frågorna att diskutera på konferensen och vissa motiveringar för dem. 1. Kostnadsfördelning mellan marknadsaktörerna Kostnaderna för nätet måste naturligtvis alltid att betalas av den slutliga konsumenten, men på olika sätt beroende på hur kostnaderna fördelas. Mer kostnader kan läggas på producenterna genom hårdare krav på utformningen av produktionsanläggningarna, eller på nätägarna genom mer upphandling av mer nättjänster. Större risker eller kostnader kan läggas på elhandlarna genom uppdelning i prisområden, eller på nätägarna genom mer mothandel. Vad är den "bästa" prisområdesindelningen? Denna typ av val är intressant eftersom olika lösningar inte är lika samhällsekonomiskt effektiva, och därmed påverkas nivån på de totalkostnaderna för den slutliga konsumenten av dem. 2. Processen för utveckling av regleringen För de nordiska länderna innebär den förändrade processen för utvecklingen av koderna en kulturell förändring. Som i de flesta andra områden, där juridiskt baserad utveckling av marknaden mer och mer kommer att ersätta tidigare praxis, baserad på mindre detaljerade lagar och förordningar och utveckling av regleringen genom en process av samarbete och avtal, är det en förändring av den nordiska kulturen. 3. Flexibilitet och utveckling över tid Arbetet med att utveckla nätkoderna är extremt besvärligt och tidskrävande, liksom beslutsprocessen. Inte mycket i förordningen anger hur uppdateringar, som säkert kommer att behövas, bör göras. På grund av de nya ACER-riktlinjerna är det dock något klarare. Det kan ändå finnas en risk för att en nätkod som är beslutad, kommer att vara mycket svår att korrigera, och behovet av täta kontrollstationer kan vara högt. Ändå kan koderna, som ju är mycket detaljerade, vara svåra att ändra på grund av beslutsprocessen, där ändringarna ska baseras på avtal mellan medlemsländerna genom kommittéförfarandet. Page 2

4. Nationellt kontra EU-gemensamt intresse Som alltid i EU finns det en kamp mellan nationell och EU-gemensam lagstiftning. EUförordningen 714/2009 avser tillträde till nätet för gränsöverskridande elhandel, men arbetet har inriktats mot utveckling av universella EU-omfattande regler. Det behövs också en diskussion om de befogenheter som EU-organ som ACER, ENTSO-E har i jämförelse med deras nationella motsvarigheter. Finns det en risk för dubbelstyrning och -rapportering? Kan vissa nationellt beslutade regler och stödsystem urholka den gemensamma utvecklade elmarknaden? Page 3

Introduction The Third Package of directives and regulation for the energy market, which entered into force on 3 March 2011, introduced a new system for establishing binding European-wide network codes. The Network codes should be developed, primarily in order to develop the conditions for access to the network for cross-border exchanges of electricity. The need to improve the cross-border trade in electricity, which has been the issue that so far, have hindered the development of the integrated European market. However, the aim of ACER and ENTSO-E in the Network Code development is to make most rules universal for all Europe in order to create a level playing field for all market participants. During the process so far it has been difficult to fulfill that aim, much because there is no "one size fit all", and many of the proposed rules have changed and become subject to decision of the national TSOs and national regulators. There is consequently a trade-off between subsidiarity and a common European market, and the balance will be made during the process, depending much of the activities by the stakeholders. But the European Commission sees big risks in too many national decision, as they can by nature hinder a common internal market. The Network Code development, which covers most aspects of the power system, has a potential to change almost all of the rules of how the electricity market and the conditions on how the technical systems should be working, including production and demand. These rules have until now been covered by agreements between the TSOs of each individual synchronous system (e.g. Nordel and UCTE), and have been adapted to the specific conditions in each of the systems. In many cases also bilateral contracts or industry standard contracts and complementary authority rules have been used between different parties. Apart from replacing the former agreements between TSOs, in order to ensure security of supply, the Network Codes are also intended to enable renewables, by creating clear connection rules, providing harmonization to benefit manufacturers and creating markets to reduce risks. They are also intended to enhance competition by creating a single market design across Europe (in all timescales), promote cross-border trade and enhancing liquidity and to reduce risks for all market players. It is said that the Internal Electricity Market should be finalized by 2014, and this means that also the network codes should be finalized and in operation by then, but most likely this will not be possible. The decision process, involving framework guidelines, drafting, public consultations, opinion from ACER and finally comitology, is very time consuming The network codes will be in the format of EU Regulation, which means that they when they enter into force will be directly and immediately applicable in each member state, and that there is no need to implement them with some national piece of legislation. Thus, all national legalization have to be adjusted accordingly to and in coherence with the codes. Market Design has decided to dedicate its biennial international conference to the Network Codes. This report aims at preparing for that conference, in winter 2013/14, with the objective to discuss and make participants aware of all different aspects of the potential changes, and primarily of how these changes will influence the electricity market. This report will describe the network codes and how they interact and their points of contact. Page 4

Regulation (EC) No 714/2009 According to Regulation 714/2009 1, which is the basic document for how the network codes should be developed, the following areas should be covered: network security and reliability rules including rules for technical transmission reserve capacity for operational network security; network connection rules; third-party access rules; data exchange and settlement rules; interoperability rules; operational procedures in an emergency; capacity-allocation and congestion-management rules; rules for trading related to technical and operational provision of network access services and system balancing; transparency rules; balancing rules including network-related reserve power rules; rules regarding harmonised transmission tariff structures including locational signals and inter-transmission system operator compensation rules; and energy efficiency regarding electricity networks. The regulation also states how the process should work. Developing binding network codes entails several steps and the maximum time in each of the steps are specified, see figure 1. The codes are divided in groups: Grid Connection Related Codes, System Operation Related Codes and Market Related Codes according to figure 2. First of all, the European Commission (EC) draws the "annual priority list", identifying the areas to be included in the development of network codes. In setting the priorities, the EC has to consult the Agency for the Cooperation of Energy Regulators ("ACER"), the European Network of Transmission System Operators for Electricity (ENTSO-E) and other relevant stakeholders. This process of developing network codes, which consists of extensive consultations in each step, give large opportunities for active stakeholders to influence the results. On the other hand, since it is important to be persistent, there is need for stakeholders to have the resources available to take part in every step. 1 Regulation (EC) No 714/2009 of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003 Page 5

The process for the adoption of the framework guidelines and the network codes is the following: Figure 1 The adoption process for Framework Guidelines and Network Codes Overview of current & future network codes Grid Connection Related Codes Requirements for Generators Demand Connection Code HVDC Connection Code Connection Procedures (RfG) (DCC) (HVDC) (CP) System Operation Related Codes Operational Security Network Operational Planning & Scheduling Load Frequency Control & Reserves Operational Procedures in an Emergency (OS) (OPS) (LFCR) (EP) Market Related Codes Capacity Allocation & Congestion Management (CACM) Forward Capacity Allocation (FCA) Balancing Network Code (EB) Introduction to Network Codes March 2013 Figure 2 Overview of Network Codes Page 6

Priority List Since 2009 a "planning group" including the EC, ACER and the ENTSOs oversees the respect of the third package procedures. The planning group drew up a 3-year work plan which is updated on a regular basis. 3-year work plan ELECTRICITY Once established the annual priority list, the EC invites ACER to develop the "Framework Guidelines", setting clear and objective principles for the development of the network code. They remain non-binding for 6 months. Once the EC realises that the "Framework Guidelines" facilitates the development of the internal market, it requests ENTSO-E to prepare a network code based on the Framework Guideline within one year. The network code is then submitted to ACER for a reasoned opinion. Taking into account their degree of compliance with the Framework Guidelines and the fulfillment of the third package objectives, ACER submits the network code to the EC and may recommend that it be adopted within a reasonable time period via comitology. It is also possible, that as have happened to some of the network codes ACER returns the draft to ENTSO-E for amendments specified by ACER, before it is submitted to EC. The current priority list from the Commission about Network Codes, i.e. the priorities for 2014, is as follows 2 : capacity allocation and congestion management rules including governance for dayahead and intraday markets including capacity calculation (Commission adoption phase), network connection rules: rules on requirements for generators (Commission adoption phase) rules on distribution system operator and industrial load connection (Commission adoption phase) rules on high-voltage direct current transmission system connection (finalise network code and start Commission adoption phase), system operation rules (Rules on operational training and on requirements and operational procedures in emergency will follow later.): rules on operational security (Commission adoption phase) rules on operational planning and scheduling (Commission adoption phase) L 224/16 Official Journal of the European Union 22.8.2013 rules on load-frequency control and reserves (Commission adoption phase) rules on emergency requirements and procedures (finalise network code and start Commission adoption phase), balancing rules including network-related reserve power (Commission adoption phase), 2 Commission Decision of 21 August 2013 on the establishment of the annual priority lists for the development of network codes and guidelines for 2014 Text with EEA relevance Page 7

Electricity Electricity rules for longer term (forward) capacity allocation (Commission adoption phase), rules regarding harmonised transmission tariff structures (scoping by ACER to prepare framework guideline). The 3-year plan from June 2013 by the Commission, ACER and ENTSO-E that more in detail shows where each of the Framework Guidelines and Network Codes are in time and their scheduled development is shown in figure 3. This plan is as said above updated regularly. Current Progress Figure 4 by ENTSO-E shows the current status of the network Codes as of spring 2013. Deliverable Scoping Phase ACER FG draft ENTSO-E code drafting ACER evaluation ENTSOE NC revision (if applicable) Start End Start End Start End Start Comitology Products/legislation relevant for effective implemention of the IEM FG on capacity allocation and congestion management Q1/11 Q2/11 NC on capacity allocation and congestion management Q3/11 Q3/12 Q4/12 Q4/13 NC on forward markets Q4/12 Q3/13 Q4/13 Q1/14 Regional progress, setup and testing (incl. AESAG process and Regional Initiatives Work Program) EC comitology guideline on governance Q3/13 Implementation measures Q2/13 Q4/15 FG on grid connection Q2/11 Q2/11 NC on generation connection (RfG) Q3/11 Q2/12 Q3/12 Q1/13 Q4/13 NC on DSO and industrial load connection (DCC) Q1/12 Q4/12 Q1/13 Q4/13 NC on HVDC connection Q2/13 Q2/14 Q3/14 Q4/14 FG on system operation Q2/11 Q4/11 NC on operational security Q1/12 Q1/13 Q2/13 Q1/14 NC on operational planning and scheduling Q2/12 Q1/13 Q2/13 Q1/14 NC on load-frequency control and reserves Q3/12 Q2/13 Q3/13 Q1/14 NC on operational training 1 NC on requirements and operational procedures in emergency Q1/14 Q4/14 Q1/15 Q2/15 FG on balancing Q3/11 Q4/11 Q1/12 Q3/12 NC on balancing Q1/13 Q4/13 Q1/14 Q2/14 EC comitology guideline on transparency FG on Third Party Access NC on third party access NC on data exchange and settlement Possible Guidelines/FG on incentives to TSOs to increase cross-border Adopted (14/06/2013) Possible Guidelines on investment incentives to TSOs EC Comitology Guideline on tariffs Other Deliverables currently particularly uncertain or perceived as lower priority Deliverable NC on connection procedures FG on energy efficiency regarding networks NC on energy efficiency regarding networks ACER FG draft ENTSO-E code drafting ACER Comitology evaluation Start End Start End Start LEGEND Footnote FG Framework Guideline 1) no date attached to this NC because work will start after 2014 NC Network Code Figure 3 EC / ACER / ENTSOE 3-year work plan ELECTRICITY June 2013 Page 8

Figure 4 Network Code status When the Commission is satisfied with the draft of a certain Network Code they will hand it to the EU decision process called Comitology, where the Member States together with the Commission decides that the proposed Network Code is adopted as a Regulation. The final Regulation may, both before it is proposed by the Commission and during the comitology process, be changed, so there is no guarantee that the final result will be the same as was proposed by ACER after the adoption process in figure 1. During the comitology process, the Member States in the committee deciding about the code (i.e. the Cross-border Committee) are free to make any changes. Consequently, when ACER hands over the proposed code to EC, there is no planned stakeholder consultations whatsoever. Of course, stakeholders could try to influence via meetings with the EC or with their national governments, but this part of the process is much less transparent. The Individual Codes The network codes are as shown in figure 3 and 4 in different development stages. In the following the aim and the current status according to ENTSO-E of the network codes which are on the priority list for 2014 is indicated. Of course there are differences of opinion when it comes to in what extent the different draft codes can achieve the objectives and about the costs for different stakeholders to comply with them, but the following is ENTSO-E s official views. Requirement for Generators (RfG) The Network Code on Requirements for Generators is seen as one of the main drivers for creating harmonized solutions and products necessary for an efficient pan-european (and global) market in generator technology. The purpose of this network code is to bring forward a set of coherent requirements in order to meet these challenges of the future. Page 9

On 27 March 2013, ACER issued a recommendation to the European Commission to adopt the Network Code on Requirements for Generators (NC RfG). The recommendation follows the conclusion of ENTSO-E s extensive process to amend the code based on topics addressed in ACER s earlier reasoned opinion. Demand Connection Code (DCC) The Network Code on Demand Connection will help to accomplish the tasks of facilitating the increase of RES, ensuring system security and implementing the internal electricity market, also by means of smart grid models, DCC has been initiated to define common functional requirements and will mainly focus on the connection of industrial loads and distribution networks. On 27 March 2013, ACER issued a recommendation to the European Commission to adopt the Demand Connection Code (DCC). The recommendation comes jointly with ACER s reasoned opinion which positively acknowledges the code s full compliance with the framework guidelines, ENTSO-E s engagement with stakeholders and NRAs, and the European wide direction given in supporting Demand Side Response. The recommendation lists a few items where the drafting may be improved for clarity and suggests for the EC to keep an open mind on how to implement the DCC provisions on Demand Side Response. The DCC requirements complement those of NC RfG, lowering barriers for consumers to provide demand response, and setting basic requirements on large consumers and distribution network connections to efficiently cope with Europe wide changes in the power system. High Voltage Direct Current Connection requirements (HVDC) The Network Code on High Voltage Direct Current Connections (NC HVDC) will specify requirements for long distance DC connections, links between different synchronous areas and DC-connected Power Park Modules, such as offshore wind farms, which are becoming increasingly prominent in the European electricity system. This is a relatively new area in which fewer standards or grid codes exist, making a pan- European approach particularly beneficial. Following on from the Network Code on Requirements for Generators and the Demand Connection Code, the NC HVDC will build on the same foundations, to create a consistent and complete set of connection codes. A first draft version of the NC HVDC was discussed with the dedicated NC HVDC User Group on 12 September. This early draft focused on the basic technical requirements for HVDC Systems and DC Connected Power Park Modules, as well as on the grid users to who this code would become applicable. The constructive suggestions given are being used by ENTSO-E to further improve the draft code and prepare suitable supporting documentation. ENTSO-E has on November 7 opened a public consultation open until January 7 2014. Operational Security (OS) The Operational Security Network Code (OS) will provide the basis for the power system to function with a satisfactory level of security and quality of supply, as well as efficient utilization of infrastructure and resources. It will do so by focusing on common operational security principles, pan-european operational security, coordination of system operation, and some important aspects for grid users connected to the transmission grid. Page 10

The Network Code on Operational Security and its Supporting Document have been amended in light of ACER s opinion and stakeholder comments. Following ENTSO-E Assembly approval, the final NC OS was resubmitted to ACER on 24 September 2013. ACER has on November 14 recommended the resubmitted code for adoption. Operational Planning and Scheduling (OPS) The OPS NC will help to ensure the coordinated operation of transmission networks and power systems across Europe. The code contribution focuses on the planning phase, ahead of real time operations. It determines the roles and responsibilities for Transmission System Operators (TSOs), Distribution System Operators (DSOs) and significant grid users towards the operational scheduling procedures and prescribes how these different parties exchange data. By optimising the planning phase, this code will contribute to a satisfactory level of operational security delivered in a cost-efficient way. The approach taken is to define the minimum requirements needed to ensure a planning process that is coherent and coordinated across Europe. Firstly, the code determines common methodologies and principles that allows for a coordinated approach towards operational security analysis and adequacy analysis. Secondly, the code determines how to coordinate availability plans, allowing for a more optimal planning of outages for the maintenance of relevant assets. When implemented, the measures proposed in this code will enhance our capacity to maintain operational security and support the efficient functioning of the European internal electricity market. The Network Code on Operational Planning and Scheduling and its Supporting Document have been amended in light of ACER s opinion and stakeholder comments. Following ENTSO-E Assembly approval, the final NC OPS was resubmitted to ACER on 24 September 2013. ACER will now assess the code and hopefully recommend its adoption to European Commission. Load Frequency Control and Reserves (LFCR) The Load-Frequency Control and Reserves Network Code will help ensure coherent and coordinated operation of transmission networks to achieve a satisfactory level of frequency quality. It will do this by focusing on frequency quality criteria, frequency control structure, frequency containment reserves, frequency restoration reserves, replacement reserves, exchange of reserves and synchronous time control. These LFCR provisions will also help to ensure efficient utilization of infrastructure and resources On 27 September, ACER issued a positive reasoned opinion and recommendation to adopt the network code on Load Frequency Control and Reserves. NC LFCR is the 4th network code to be recommended to the European Commission. The network code will now pass to the European Commission where preparation for entering the Comitology process will begin. Capacity Allocation and Congestion Management (CACM) The Network Code on CACM sets out the methods for allocating capacity in day-ahead and intra-day timescales and outlines the way in which capacity will be calculated across the Page 11

different zones. Putting in place harmonised cross border markets in all timeframes will lead to a more efficient European market and will benefit customers. These rules will provide the basis for the implementation of a single energy market across Europe. On 14 March 2013, ACER issued a Recommendation to the European Commission (EC) to adopt the Capacity Allocation and Congestion Management (CACM) Network Code. In a letter to the EC, ENTSO-E welcomed the finalisation of the Agency s Recommendation; and stressed its support for several well-balanced proposals. However, ENTSO-E also expressed concerns about 4 areas of the recommendation, which ENTSO-E considers they may negatively affect the feasibility and quality of the implementation of the EU target model. These concerns focus on ACER s proposed changes on capacity calculation methodologies, deadlines for implementation, intraday auctions and re-dispatching and countertrading arrangements. ENTSO-E hopes that these remarks will contribute to the Commission s assessment of ACER s Recommendation, and is ready to assist the Commission throughout the Comitology process in any way to ensure the smooth adoption of the Capacity Allocation and Congestion Management Network Code. Forward Capacity Allocation (FCA) ENTSO-E is working to develop pan-european markets in all timescales. These timescales range from markets for securing capacity several years ahead of real time, to day ahead, intraday and real time balancing markets. Putting in place harmonised cross border markets in all timeframes will lead to a more efficient European market and benefits to customers. Forward markets have an important role in allowing parties to secure capacity and hedge positions ahead of the day-ahead timeframe. The network code on Forward Capacity Allocation will ensure that this can happen in the future pan-european market. On 1 October, ENTSO-E delivered the Network Code on Forward Capacity Allocation (NC FCA) and supporting document with a letter, to the Agency for the Cooperation of Energy Regulators (ACER). ACER now have three months to assess the code and issue an opinion, and may recommend the code for adoption to the European Commission. Electricity Balancing (EB) Electricity Balancing is one of the key roles of Transmission System Operators where they act to ensure that generation equals demand in real time. This is vital for ensuring security of supply and has an important bearing on costs to customers. The potential for balancing resources to be effectively shared between countries can enhance security of supply and reduce cost, hence there is a strong rationale for developing cross border balancing markets. The network code on Electricity Balancing will ensure that the correct framework will be put in place for this to happen. Following on from the recent public consultation, ENTSO-E is organising a public stakeholder workshop on the Network Code on Electricity Balancing on 23 October 2013 at the Brussels premises. Page 12

Interdependencies between the different Network Codes Since the power system is one integrated system where everything fits together and is interdependent, it is not possible to divide it by making stand-alone Network Codes for different aspects of the system. Because of that the Network Codes relates to each other, either by references to each other s or by overlaps. ENTSO-E has made a mapping of the main interdependencies, and the following is taken from an ENTSO-E presentation. In the Grid connection related network codes RfG was developed first, followed by DCC. HVDC is now started and CP will follow. That s why RfG is referred to so often. These codes link into (and are influenced by) several important policy areas, and are also related to existing standards. Some of the more substantial links to other codes are Electricity Balancing and Operational Security. For System Operation related codes Operational Security was first, closely followed by Operational Planning & Scheduling. Next is Load Frequency Control & Reserves, and they will be followed later by Emergency Procedures. The operational codes have strong links between themselves and to other codes, e.g. OS links to all connection codes, LFCR is closely tied to EB and OS and OPS are linked to the CC part of CACM (because of the Common Grid Model). For the Market related network codes Capacity Allocation and Congestion Management was the first market code to be developed. It contains three main subsections that were merged at an early stage, Intraday, Day Ahead and Capacity Calculation. This was done to ensure consistency between these heavily interrelated areas. Furthermore, the CACM code is based on the EU wide Target Model for market design. The CACM code was followed by Forward Capacity Allocation and Electricity Balancing. All the market related codes tie into transparency regulation. Day Ahead and Intraday are closely linked to the EC Governance Guideline, FCA has links to MIFID. These codes have direct links to others: EB to all connection codes and also to LFCR operational code. Capacity Calculation links to both OS and OPS. This is a very complicated map, see figure 5, and the implications is of course very sensitive to changes is one code. Page 13

Figure 5 Connections between individual Network Codes Adoption of the Network Codes So far none of the codes has started the adoption phase, but several of them are currently just about to start this process. Four of them RfG, DCC, LFCR and CACM are in the so called pre comitology phase, see figure 6, i.e. there is in this moment not yet a formal proposal from the EC to the Cross-Border Committee. Adoption Phase Figure 6 The Comitology process to adopt Network Codes Page 14

There is a however an unofficial time plan which of course keeps changing, but currently (middle of November 2013) the comitology process for the different codes are planned to start at the following dates: CACM, January 2014 RfG, February 2014 DCC, March 2014, OS, February 2014 OPS, March 2014 LFC, April 2014 It is uncertain how long the comitology process will take, there are no formal time limits, as it is for the drafting of the network Codes. The legal basis for comitology is the Council Decision of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred to the Commission (Consolidated version, OJ C255). Regulation 714/2009 refers to the use of Regulatory Procedure with Scrutiny (RPS) in this document. Another complication in this process is whether the changes of the comitology process due to the Lisbon Treaty is going to be applied or not. This depends on when the EC submits the proposals and the opinion is that the old process, where among others the European Parliament has a lesser role, can be applied. This is a mainly political process in which apart from the EC and the Cross-Border Committee also the European Parliament and the European Council is involved. There is consequently some concern about potential length of the process. Also there is a need to keep a high level of technical expertise and consistency amongst network codes in the process, which is not yet clear how it is going to be achieved. Amendments As is seen above the decision process for the Network Codes is very extensive and cumbersome. When a Network Code finally is decided it is consequently much more final than the former agreements between TSOs that it is replacing. These agreements were developed in a more continues process than the EU regulation can be, and changes cannot easily be introduced even if they are apparent. In Regulation 714/2009 not very much is said about the procedures about this: In Article 7 it is said that: 7(1): Draft amendments to any network code adopted under Article 6 may be proposed to the Agency by persons who are likely to have an interest in that network code. (...). The Agency may also propose amendments on its own initiative. (...). 7(2): The Agency shall consult all stakeholders in accordance with Article 10 of Regulation (EC) No 713/2009. Following that process, the Agency may make reasoned proposals for amendments to the Commission (...) 7(4): Those proposed amendments are without prejudice to other amendments which the Commission may propose. ACER has now submitted an Agency Guideline 3 on how the evaluation process should be. ACER introduces two different procedures to evaluate NC amendments. 3 Agency Guideline on the Evaluation Procedure for Network Code Amendment Proposals under Article 7 of the Electricity and Gas Regulations Page 15

The first procedure concerns a general, periodic review of the NC. The Guidance envisages that every 5 years the Agency submits the NC to an overall review. The Agency evaluates the various stakeholders proposals received until that time and verifies to which extent they can improve the NC. A public consultation is held prior to the Agency submitting its proposal to the European Commission. The second review procedure is devoted to ad-hoc NC amendments, which are either urgent or require priority. Essentially the same procedure is followed as in the periodic review, including the public consultation, albeit with shorter deadlines. This procedure is meant to be flexible and could be launched at any time to allow the Agency to react to changing market circumstances or to other situations which require an expedited follow-up. It is expected that the Guidelines will be updated from time to time to reflect the experience gained by the Agency when following the currently described procedure, but it is inevitable that the amendment process as well as the initial process of deciding the Network Codes will be both cumbersome and time consuming. Issues to Discuss at the Conference The Network Codes, which are in different stages of development, are all discussed in detail between the stakeholders, and each code is also subject to seminars and conferences. The Market Design Conference on Network Codes is however aimed at not discussing the details, but is going to take a holistic view on the subject of Network Codes. The aim is to tie the (drafted) Network Codes together by explaining their interactions and we will look at how electricity markets will change once the Network Codes are implemented. We will put the Network Codes into a larger context and discuss the challenges facing electricity markets that the Network Codes are trying to address. We will also discuss the conflict between the actions of national Governments and those of the EC. For instance, while Network Codes are being developed to facilitate cross-border trading, national Governments are distorting markets by subsidizing electricity generation from low carbon sources and by introducing capacity markets. Following are the main subjects to discuss at the conference and some justification for them. 1. Cost allocation among the market participants The costs of the network of course always have to be paid by the final consumers, but in different ways depending on how the costs are allocated. More costs could be put on the producers through harder demands on the design of the generation plant, or on the network owners through more procurement of ancillary services. It could be said that all generators should take their responsibility, e.g. for frequency control, but on the other hand if frequency control could be managed more economically and as secure by some generators this responsibility should preferably be taken by paying for the ancillary service provided by the cheaper generators. Also more risks or costs could be put on the traders through division into price areas, or on network owners due to more counter trade. What is the best price area division? These kind of choices are interesting because different solutions are not equally efficient, and hence the level of total costs for the final consumer are affected of them. The process for deciding network codes has put ENTSO-E in a position as the main driver for drafting and proposing rules. This is natural since the TSOs are responsible for network security (and have to take care of and apply the codes when they are decided) and the TSOs are also enablers for ensuring a well-functioning market. Is there a risk that TSOs will want to reduce their own costs and thereby tariffs by putting more costs on the network users? In what way can a socio economic optimal Page 16

balance be struck? It is important that this issue is discussed in a way that regulators and governments understand the importance, especially as the TSOs are often privately owned and normal commercial companies. 2. The rule development process For the Nordic countries the process in the development of the codes means a cultural change, as in most other areas where legally based development of the market will more and more replace the earlier practice, based on less detailed laws and regulation and a development through a process of cooperation and agreements. Earlier the process of decision making were involving the concerned parties more intimately than the current EU process. Also the laws and regulations are decided by decision makers who are not always technically skilled and might not fully understand the consequences for the whole system. The Nordic culture means that it is often better to develop rules in a piecemeal and more evolutionary and less formal way than through a big bang of a totally new package of rules. And if some decisions are not good they can easily be corrected. What seems not have been realized by most network users in the Nordic countries, is that from now on they will have much less influence in the rule making process than earlier, unless they are very active at this point of time (or rather, even earlier) before most decisions are made. And that the decisions are made in EU bodies rather than in national scale. In other member states the changes are different, but there is a need for the market actors to adjust to the new, very detailed, slow and lengthy legally based process, or try to change it. 3. Flexibility and development over time The work in developing the network codes is extremely cumbersome and time consuming, as well as the decision process. Not much in the regulation states how updates, which will surely be needed over time, should be made. Now, because of the above mentioned ACER Guidelines, the clarity is higher. There may, however, be a risk that, once decided, the network codes will be very difficult to adjust and the need for more frequent control stations may be high. Even then, the codes which are very detailed may be difficult to change, due to the decision process, including agreements through Comitology. Is the level of detail too high? Is the cost of correcting minor errors or flaws in the decided regulation too high, taking into account the extent of the process and the number of involved parties? How can the implications of changing one network code on others codes be handled, due to the interlinking between them described above? Can the mobilization in the industry, especially among the TSOs, be duplicated next time and what will the experts do in the meantime, almost five years? Decision making on EU level often involves give and take between different national interests before a final decision is taken. How will this look like when network codes should be updated? Can some countries due to their national interest block changes that would be beneficial for others? 4. National contra EU wide interest As always in EU there is a struggle between national and EU wide legislation. As said above the regulation is targeted against network access for cross-border exchanges, but has become a development of universal EU wide rules. The basics within the different member states are very different, both when it comes to natural and technical circumstances. This means that different solutions have been chosen, and that the national interests are different from an objective point of view. Even if all member countries have large programs for renewable generation, generation sourcing Page 17

is not an EU competence, but national. Is it possible to have universal network codes without compromising the efficiency in some countries? There is also a discussion of the powers of EU bodies as ACER and ENTSO-E in comparison to their national counterparts. Is there a risk for double governance and reporting? Can certain national decided rules and support systems erode the common developed market? Both ACER and ENTSO-E consist of representatives from national organisations. Is there a EU view that cannot be taken into account by these national organisations? Page 18