Thomas Kieffer, COO at Joint Allocation Office, highlights that while building more cross-border infrastructure is important, it should be accompanied by efforts to make Europe’s electricity markets easier, fairer, and more accessible to a wider range of participants.
The EU recently unveiled new proposals to finance and fast-track grid interconnections, which are central to its goal of reducing reliance on gas imports, accelerating electrification, and reaching net zero. Joining up grids across Europe would allow surplus clean power to flow to areas with scarce supply, boosting collective energy security and sustainability.
Yet building more cables alone will not be enough. Europe also needs measures that enable wider market integration and participation. Renewable energy intermittency, for example, is creating more volatile and variable costs, while there remains a lack of long-term financial instruments to hedge against these risks.
Silos between IT systems are impeding cross-border power trading, while complex settlement processes, high collateral requirements, and opaque rules can deter smaller companies from entering the market. Overcoming these barriers will be important if energy generators, traders, and utilities of all sizes are to participate more fully in the cross-border electricity market and support greater energy system integration.
Renewable intermittency drives market volatility
Europe recently reached a major milestone in the energy transition, as renewables produced more electricity than fossil fuels for the first time in the EU and the UK. Yet the accelerating transition to intermittent renewable power sources is also producing more volatile, regionally variable costs for cross-border transmission capacity.
Extreme fluctuations in renewable output drive price signals to diverge sharply between bidding zones – regions with uniform internal prices – causing a build-up of congestion costs where demand exceeds interconnector capacity. Research also shows that renewable price volatility can spread across borders as markets become more integrated. These growing price variations and fluctuations are creating a riskier market landscape for cross-border power trading.
An unpredictable risk landscape
As renewable generation expands, variability is increasing and price distributions are widening across the continent. As energy price volatility rises, market participants increasingly need the ability to buy long-term transmission capacity to help plan energy portfolios and hedge their risks.
Complex, slow settlement processes, high transaction costs, and large collateral requirements for cross-border capacity auctions also raise barriers to entry for smaller market participants. A lack of interoperable, transparent guarantees, credit limits, and margin calls across different platforms creates further confusion around collateral arrangements. Meanwhile, the fragmented patchwork of IT systems across markets further increases the cost and complexity of market integration.
Lowering the cost of mass market participation
Encouraging market participation among companies of all sizes supports greater integration of Europe’s energy resources and can help deliver secure, sustainable power. This could be supported by lowering barriers to market entry and reducing risks through long-term price certainty, interoperable IT systems, and fairer collateral requirements, underpinned by transparent and consistent market rules.
For example, market participants can buy cross-border transmission capacity at a set price up to a year ahead, which can provide greater predictability in an increasingly volatile environment. To further hedge against long-term risks, market initiatives could introduce more forward auctions anchored in long-term transmission rights.
This could include Financial Transmission Rights (FTR) obligations, requiring TSOs to pay the price difference when congestion costs are higher at their end, while requiring market participants to pay when congestion costs are higher on their side. FTR obligations could help balance risks between buyers and sellers and offer longer-term hedging against congestion costs, helping to de-risk cross-border capacity auctions for utilities and market participants alike.
Lowering cost and complexity is also vital to broaden access to Europe’s cross-border electricity markets. Collateral risks need to be reduced by recalibrating collateral requirements to real-world risk exposure. Collateral arrangements should also be interoperable across borders, further simplifying and streamlining markets. More standardised cross-border collateral requirements would allow market participants in all countries to plan cash and credit more efficiently.
Simplifying and speeding up settlements could lower barriers to entry too. For example, centralised service models can consolidate market activities, from invoicing and clearing to settlements, through a single platform. Settlement processes could be further streamlined to curb transaction costs while keeping key safeguards in place.
An open, equal and democratic marketplace
An open, equal marketplace is a prerequisite for mass participation and, therefore, market liquidity. Harmonised allocation rules have now been implemented across 45 borders within a Single Allocation Platform that shows the calculations behind capacity allocations, increasing transparency for participants. Ongoing regulatory engagement on long-term methodologies could ensure continued clarity around everything from allocation processes to the handling of revenues and risks across timeframes.
Allocation rules and capacity calculation methodologies could also be adapted to evolving market needs in collaboration with transmission system operators, market operators, regulators, and market participants. As methodologies evolve, the aim should be to ensure clarity for participants while maintaining proportionate and prudential safeguards. This creates a more agile and transparent marketplace that is responsive to evolving needs and draws on collective input.
Democratising electricity markets
Europe is rapidly building the infrastructure for interconnected electricity grids. Yet integrating Europe’s energy resources ultimately depends on allowing a wider range of participants and companies to take part in cross-border electricity markets.
The EU is already making progress with initiatives such as the Electricity Market Design Reform (EMDR), which aims to widen market participation and boost liquidity. Work is also underway on a more flexible cross-border transmission capacity marketplace for Europe, designed to improve scalability and third-party interoperability, further enabling broader participation.
Yet achieving a truly integrated European energy market depends on broadening access and ensuring everything from credit models and financial instruments to capacity allocation methodologies is designed to support wider participation.
