Bidding Zone Study - Questionnaire on Transition Costs

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Closes 31 Oct 2022

Introduction

The methodology for the bidding zone review process [1] (hereafter Methodology) asks for the evaluation of the transition costs occurring from a bidding zone reconfiguration. This questionnaire establishes a quantitative basis for the estimation of the market participants’ transition costs. As set out in the methodology, it does so for each bidding zone and bidding zone reconfiguration. As such, it informs the bidding zone review transition cost criterium.

Relevant bidding zone configurations

As established in the ACER decision 11-2022 [2] on the alternative bidding zone configurations from August 8th 2022, the following reconfigurations must be evaluated [3] for the first step:

Those 14 different BZ-configurations can be found in the cost-table to be filled out on page 4 of this questionnaire.

The combinations for central Europe to be analysed in a second step as set forth in ACER decision 11-2022 are not known yet and cannot be found in the cost table to be filled out.

What we mean with transition costs

The definition of transition costs is set forth in article 15.11 (a) of the Methodology. Transition costs:

  • Are one-off costs, expected to be incurred in case the BZ configuration is amended;
  • Shall relate to adaptations that are inherently and unambiguously related to a specific BZ configuration change;
  • Shall not relate to adaptations that are, in general, necessary to ensure sufficient flexibility of the systems to cope with a variable number of BZs due to a potential amendment of the BZ configuration in the future;
  • Shall include an estimation of the cost of amending existing contractual obligations incurred by market participants, NEMOs and TSOs. Such estimation shall reflect the expected implementation timeline for an eventual BZ change, and the fact that when deciding on the implementation date, Member States are required to balance the need for expeditiousness with practical considerations, including forward trade of electricity.

Transition costs arise for different reasons, such as changes to business processes or adjustment of private contracts, and they are incurred by different actors, such as retailers, grid operators, traders or power exchanges. The purpose of this questionnaire is to gather empirically estimates of the different transition costs from different stakeholders. In subsequent steps these estimates will be analysed and extrapolated based on the received information to quantify transition costs for the reconfiguration of bidding zones.

Examples of transition costs include:

  • re-structuring of teams responsible for specific bidding zones;
  • re-negotiation of on-going contracts; and
  • costs of adapting existing IT processes to specific BZ configurations.

Transition costs do not include:

  • IT investments necessary to introduce flexibility of the IT systems in general; or
  • a devaluation of assets due to price changes.

Why we are asking for different lead times

The level of transition costs, in particular costs of amending contracts, will likely depend on the lead-time between the legally binding announcement of a reconfiguration and its full implementation. For estimates in this questionnaire, we assume a lead-time of three years as a reference point, unless otherwise mentioned meaning recipients have three years between the decision of BZ reconfiguration and the reconfiguration itself for adjusting their operations. In order to estimate the impact of lead times on the transition costs, estimations for a lead time of two and four years are also gathered through the questionnaire.

How we are going to treat and process the data

The transition cost evaluation used in the assessment of BZ configurations will greatly depend on the results of this questionnaire as the cost estimates are based on the cleaned data from this questionnaire. Specifically, the data from the questionnaire is checked for robustness by standard methods like a comparison to benchmarks, matching techniques and statistical techniques. Please note that some of the questions are included to control for and test confounding factors and are not included as transition costs themselves. The total cost per market participant group, bidding zone and bidding zone reconfiguration is then extrapolated by scaling the cost estimates using market share and revenue data. Due to the remaining uncertainty following from this approach, the cost estimates are depicted as a range. In addition, the relative importance of the different transition cost categories are evaluated and the impact of a change in lead time for the different market participants is analysed. Therefore, all responses are highly appreciated, and additional written remarks are requested.

We would like to make the respondents aware that the data submitted will not be shared with any market participant. However, anonymised versions of this questionnaire might be shared with the responsible national regulatory authorities and/or ACER.

The next section will provide an overview of the cost categories used for the questionnaire. Afterwards, the questionnaire itself is structured as follows: The first sub-section enquires about the background and market role of the recipient. The second section covers the actual cost estimates. The third and last section addresses the effects of intra-company transactions on liquidity, a topic not directly related to transition costs, but relevant for the overall BZ review.

 

In case of questions, please contact Gjorgji Shemov (gjorgji.shemov@entsoe.eu).

 


[1] ACER 2020: Methodology and assumptions that are to be used in the bidding zone review process in accordance with Article 14(5) of the Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity

[2] ACER 2022: ACER’s Decision on the alternative bidding zone configurations to be considered in the bidding zone review process