UFE response to ACER Public consultation on HMMCP Methodologies Revision

Before answering the public consultation, UFE would like to make some general remarks

For many months, we are yet facing anormal market situations, where unprecedent price levels are regularly observed and many TSOs/institutions alert on the risk of regular failure in some bidding zone – such as France. These high prices are detrimental to the whole economy. Beyond the review of the automatic increase mechanism of the HMMCP methodology, UFE believes that an emergency temporary measure is needed to tackle the acuteness of the problem and avoid uninterrupted price cap increases.

As it stands, the NEMO’s’ proposal doesn’t prevent maximum price cap increases in case very high prices are regularly reached this winter (which is expected at least in certain bidding zones); it therefore doesn’t handle the current emergency situation, which requires, due to the very special circumstances (major inflationist risk with collateral effects on the functioning of the market) to freeze the cap at its initial value or even lower it given the very specific circumstances until the end of the crisis.

This should be done with a cautious implementation that still gives visibility to market parties and avoids undesirable side effects (e.g. impairment of financial hedges, dispatching issues for DSR…). UFE thus warns against potential systemic risks. Indeed, on the electricity market, hedging is usually done financially; if the day-ahead price cap is reached, then financial hedging is capped. Therefore, the missing amounts must be acquired on the intraday markets and spreads where prices and caps are very high. Small players will clearly not be able to finance these amounts. UFE therefore requests that any decrease of the maximum clearing price below the initial level of €3000/MWh be accompanied by measures limiting the opportunistic transfer of capacity from the day-ahead market to the intraday and balancing markets.

Finally, with regard to the current freeze at €4,000/MWh, UFE would like to point out that even if it is a technical measure, in line with the current political context, and whose relevance is not contested, the possibility of such a measure is not foreseen in the HMCCP methodology and creates therefore legal uncertainty. It should not set a precedent for potential further modification of market rules without proper legal background. It is thus essential to put in place the legal basis if, in the future, a similar decision was to be taken.

General comments on the public consultation

UFE notes that the decision to review the HMMCP methodology has been taken in order to monitor this risk by trying to slow down the increase of maximum price and avoid an unsustainable escalade of prices. Therefore, UFE assumes that the aim of this revision is to address the current issue which is expected to last, not to address issue which could be occurred in a normal situation. UFE calls for a further revision of the methodology once the situation is normalized.

As a market principle, UFE recalls it support to the free formation of electricity prices which notably guarantees the optimal dispatching of the available assets. Pursuant to Electricity Regulation Article 10, technical limits in the DA and ID timeframe “shall be sufficiently high so as not to unnecessarily restrict trade, shall be harmonized for the internal market and shall take into account the maximum value of lost load”.

Yet, UFE strongly believes that there are justified reasons to set technical price limits in the DA and ID markets:

1. Prices limits are a possible way to avoid outstanding impacts for market participants in case of IT issues, operational errors, or corrupted input data in the EU market coupling algorithms.
2. Price limits are limiting the risks / financial impacts related to the management of collaterals requested by power exchanges and / or trading limits.
3. Price limits allow to avoid exposure to excessively high prices (as long as market participants have the possibility to bid at any price – as it is the case in some bidding zones) and to mitigate the associated volume risks.
4. Forward prices are driven by the price cap since market participants include failure risks in their bids (simulating themselves the number of hours they expect the Spot prices may reach this cap). An appropriate price cap is therefore essential to limit the impact of failure expectations on the forward prices.

Specific comments on the NEMO proposal

As mentioned above, UFE considers that the NEMO proposal does not go far enough in the revision of the HMMCP methodology to address the current issue. Nevertheless, UFE would like to emphasize the principles of the NEMO proposal that go in the right direction:

• UFE welcomes the fact that the NEMOs’ proposal tightens the criteria for raising the maximum clearing price, as the current methodology is not adapted to current circumstances
• UFE welcomes the expansion of the exception cases (exclusion of fall-back measures days, exclusion of virtual, uncoupled bidding zones and bidding zones with no traded volumes) in the price spike definition for not increasing price limits according to the automatic increase rule
• UFE welcomes the idea of having a decrease mechanism

When it comes to the proposed parameters, UFE would like to highlight following points:

• The starting level of the new methodology should be set to 3000€/MWh at most. it is not explicitly stated in the NEMOs’ proposal whether this initial value applies directly to the entry into force of the methodology or whether the return to this initial value would proceed from the decrease mechanism (after 12 months without reaching a given 70% limit X, HMMCP set back the limit X, with a predefined floor of 3.000 €/MWh). UFE requests that this initial price limit be applied directly at the entry into force of the methodology since this cap would not have been increased if the current NEMOs proposal would have already been applied.
• Increasing the “inertia” of the price cap increase mechanism is relevant in the current market conditions. While prices should be freely formed by the matching of the demand and supply curve, we must not ignore the impact of the value of the price cap on the formation of forward prices and the subsequent financial requirements. In this context, although the NEMO proposal is a step in the right direction, UFE calls for increasing the inertia of maximum clearing price increases through the following levers:
  • Introduce a triggering event definition stricter than the one proposed in the NEMOs’ amendment proposal
  • Increase the triggering threshold beyond 70%
  • Reduce the maximum price increase below the +1000€ proposed by the NEMOs
  • Exclude all cases where reaching the triggering threshold is not linked to market fundamentals but to a technical or operational error (IT issues, operational errors, corrupted data, corrupted orders, bidding errors by participants, decoupling, partial decoupling, flow-based fall back) preventing a proper functioning of SDAC
  • Limit the number of price limit changes to one over a year
  • Shorten the trigger period of the decrease mechanism to 6 months instead of 12 months to limit the impact of the maximum clearing price on forward prices and collateral requirements while maintaining a clear price signal for market participants