Balancing green markets: Denmark sets the standard in Europe

Denmark is at the forefront of integrating renewable energy into its power system. Wind and solar power are becoming increasingly dominant in its energy mix. Coal and natural gas usage are declining, while heat pumps are increasingly popular for residential heating. 

This shift creates challenges when it comes to balancing the grid. The intermittent nature of wind and solar power requires a robust and flexible grid to balance supply and demand effectively. 

In any power system, matching supply and demand at any given point is crucial to maintain frequency at the nominal value. In Europe, this responsibility falls on the Transmission System Operator (TSO) which organises market instruments to achieve this. The short-term electricity market timeline is illustrated in the chart below.

Danish balancing reserves

In Denmark, balancing reserves include: 

• Automatic Frequency Restoration Reserve (aFRR): Automatically activated to handle minor imbalances and restore frequency. 

• Manual Frequency Restoration Reserve (mFRR): Manually activated for significant or prolonged imbalances.
  

Balancing markets ensure the system has the ability to correct imbalances in real time. These markets are essential for maintaining grid stability, especially with the increasing share of intermittent renewable energy sources. 

A balancing capacity market is essential for TSOs to ensure they have sufficient reserves to stabilise the grid. The Nordic aFRR capacity market has been operational since 7 December 2022, with DK2 (Denmark’s eastern electricity bidding zone) participating as part of the Nordic synchronous region.

DK1 (western Denmark) is connected to the continental European synchronous region and launched its aFRR capacity market on 1 October. 

Price spikes initially occurred due to low trading volumes, as illustrated in the graphic below which was created using Montel Analytics data. 

The aFRR capacity market in DK2 also faces limited liquidity, largely due to high entry barriers. This lack of liquidity often results in significant price volatility, as seen in recent market behaviour. 

In the Nordic aFRR down capacity market, multiple price spikes occurred last month. Prices surged to EUR 5,390/MW for an hour on 22 October across several electricity bidding zones, which are areas within each country where electricity prices can vary. 

These zones saw fluctuations throughout the day, hitting EUR 1,788/MW and later EUR 1,837/MW. 

Three factors explain these spikes: 

1. Capacity Restrictions: Ongoing maintenance work restricted capacity, forcing the bidding zone in southern Sweden to procure downward resources internally. (The cross-zonal capacity for the aFRR capacity market is capped at 10% of available capacity, increasing to 20% only if no domestic bids are available).

2. Fuel Mix: Oil-fired power plants started on 22 October to provide downregulation, requiring block bids to cover operational costs. Low spot prices meant the oil-fired plant had to earn enough in the capacity market to justify its operational cost.

3. Market Timing: The D-1 (the day before the actual delivery day) gate closure for the aFRR capacity market leaves less than two hours for optimisation, which can result in unexpected pricing outcomes due to this limited timeframe.
   

Such price spikes highlight the importance of cross-border capacity and system flexibility.

Danish TSO Energinet projects balancing market capacity needs will double in some parts of the country by 2030. It is considering adjusting the price of balancing reserves to ensure the grid remains stable without overspending. 

This would affect market prices and investor confidence but may result in savings for consumers. Energinet is also exploring the concept of willingness-to-pay for supply security, which is especially relevant as reserves become critical for balancing a renewable heavy system. Active discussions with stakeholders are being conducted to seek suggestions on how to approach this topic and strike a balance.

Denmark’s energy markets operate close to real time to balance the system. The number of hours with mFRR up and down regulation activations per month is shown in the graph below. The high share of renewable energy leads to more down-regulation hours. This is partly due to the need to manage excess generation from wind and solar power. 

In Denmark’s electricity market, imbalance prices are determined by the prices set in the mFRR market, using the marginal clearing mechanism. This system clears the market based on the price of the last (marginal) unit of capacity needed to balance the grid.

High imbalance prices typically occur during periods of insufficient generation capacity, which can be caused by wind/solar forecast errors or limited transmission capacity. The imbalance prices reflect the cost of procuring additional generation or reducing consumption to balance the system. 

Pan-European balancing services: PICASSO

On 13 June, Finland introduced a local aFRR energy market, which modified how imbalance prices are set, likely enhancing flexibility and accuracy in balancing costs.

Denmark will also undergo this change after joining PICASSO, a European initiative that integrates balancing services, on 2 October. This platform increases market transparency and competition by optimising balancing reserves in real time.

It uses a common optimisation model, clearing every four seconds to ensure efficient allocation of aFRR reserves. Other countries involved include Germany, Austria, the Czech Republic and the Netherlands, with more nations expected to join.

Denmark’s transition to a renewables-dominated energy mix requires robust balancing mechanisms. This will include automatic mFRR activations at a Nordic level and 15-minute markets to be implemented in 2025. These measures will provide more flexibility and speed to the grid, allowing better integration of wind and solar power. 

These ongoing changes highlight how Denmark and neighbouring countries are evolving their energy markets to ensure the stability of their grids while accommodating growing renewable energy generation. 

As the country moves towards a greener, renewables dominated power system, its experience offers valuable insights for other European nations facing similar challenges. The ability to maintain grid stability in the face of rising renewable energy generation will be crucial as Europe works towards its own energy transition goals.

With continued innovation in balancing mechanisms and increased cooperation across borders, Denmark is setting a benchmark for the rest of Europe, demonstrating how to manage the complexities of a renewable driven electricity market while ensuring a secure and reliable power supply.

This article originally appeared as a column on montelnews.com