1. Introduction
Since 1996, the European Union (EU) aims to harmonize and liberalize the internal energy market, by adopting a list of measures to eventually create the “Single European Energy Market”. The need to strengthen competition for the benefit of final consumers via reliable prices, transparency, and reliability are some of the key factors that have pushed Europe to support cross-border electricity trade among Member States. The Target Model is the official tool that Member States need to implement towards the completion of the Single Market. Prior to that, most of the countries operated their wholesale electricity markets according to the guidelines of a Mandatory Pool model.
The EU Target Model is based on two broad principles: (i) the development of integrated regional wholesale markets, preferably established on a zonal basis, in which prices provide important signals for generators’ operational and investment decisions; and (ii) market coupling based on the so-called ‘flow-based’ capacity calculation, a method that takes into account that electricity can flow via different paths and optimize the representation of available capacities in meshed electricity grids. More information on the Target Model are available online:
https://eur-lex.europa.eu/legalcontent/bg/TXT/?uri=CELEX:52017SC0383 (accessed on 13 September 2021), In general, Market Coupling, which is a crucial component of the Target Model refers to the interconnected cross-border electricity market among the Member States of the European Union. Through the physical interconnection among them, the flow of electricity takes place based on the optimal and shortest route from various production sources towards the final consumer. According to [
1], discrepancies between regulatory policies and market designs could distort the normal functioning of the neighboring markets and security of supply. Market Coupling is based on Price Coupling of Regions (PCR), Flow-Based Market Coupling, and the Cross-Border Intraday (XBID) Project. In line with [
2], by maximizing the use of cross-border interconnection capacity, market coupling increases the level of market integration and facilitates the access to low-cost generation by consumers located in high-cost generation countries. Thus, it is expected that a high-priced area could greatly benefit from the introduction of this mechanism. Existing literature supports the above argument [
3,
4].
To achieve market coupling, and for the benefit of all participants, the Mandatory pool was gradually replaced across Europe by the Target model (the Commission pursues the vision of a ‘Target Model’ using a European governance process (Third package, Directive 2009/72/EC.)). The ultimate goal of the Target Model is to enable the energy produced in one country to be delivered to another Member State participating in this Model. The Member States of the European Union are committed to complying with the fundamental principles which ensure a level playing field. Cross-border electricity trade initially takes place at a regional level and aims to achieve pan-European market coupling and consequently convergence to a single electricity price for the whole of Europe [
5]. A prerequisite for the smooth operation of the model is the coordination of national actions between neighboring countries, and the optimal exploitation of cross-border electricity transactions. The implementation of the Target model envisages the creation of four new electricity markets that operate on an energy exchange. Given the above, the purpose of the Target model is to promote competition, convergence of energy prices with the prices of neighboring countries and increase of the overall welfare in the economy. However, considering the case of Greece, the implementation of the Target Model, that took place on the 1 November 2020, provides mixed results [
6]. In theory, the goal of a Single European Energy Market is to favor end consumers. However, wholesale electricity prices in Greece have more than doubled since the beginning of November 2020. This sharp rise is partially attributed to the peculiarities of the introduced model, since both marker participants and regulators broadly accept that the market was not completely prepared for that fundamental shift [
7,
8,
9].
This paper examines the application of the Target Model in the wholesale electricity market of Greece and its impact on electricity prices. To our knowledge, this is the first study to analyze and evaluate this application. The study explores the time period before the implementation of the Target Model and the first nine months of its execution. Based on the feedback received by the rest of the European countries, which are already part of the European Single Market, this transitional period of time is considered crucial, when many distortions and unethical behaviors take place. Empirical findings indicate a relatively successful implementation of the Target Model in Greece, with price disorders mostly met in the Balancing Market. However, those increased prices have caused great market turmoil and unbearable pressure on businesses and small suppliers who are unable to cope financially with the unprecedented situation.
A plethora of academic papers have reviewed the efficiency of Target Model implementation in various counties across Europe. As a starting point, Ref. [
10] provides an overall estimation considering the benefits of Target Model implementation across Europe. The authors highlight that additional improvements are feasible by reducing unscheduled flows and preventing the curtailment of renewables with improved market design. In general, the study underlines the necessity to assist interconnections and cross-border trading, given that the final outcome, via the provision of balancing services, leads to increased gains for the overall economy. Based on the challenge to achieve a common electricity market design in a multi-regional context, Ref. [
11] analyzed how diverse design approaches, such as cross-border congestion management and capacity mechanisms, affect generation adequacy and welfare in Europe. Their findings confirm the benefits of market coupling in terms of welfare as well as generation adequacy. Earlier investigations of the effectiveness of a common electricity market design suggested a partial successful [
12,
13,
14,
15]. However, recent studies are clearly in favor of the effectiveness of a Single Electricity Market across Europe [
16,
17,
18]. For instance, Ref. [
19] argue that investment in interconnection reduces wholesale electricity prices in France and Ireland as well as the net revenues of thermal generators.
Considering country-by-country analysis, Ref. [
2] evaluated the impact of the Target Model in the Italian electricity market and estimated the welfare benefits using various scenarios. The study concludes that a welfare increase is apparent when market fundamentals are tight. Next, Ref. [
20] examined the evolution of the Irish Single Electricity Market under the European Target Model for electricity. The authors focused on the theoretical and practical circumstances under which derivatives markets stimulate competition in the spot and retail markets. In addition, the authors examined the impact of market concentration on the new capacity payment mechanism, and, eventually, provided specific proposals towards the regulatory authorities to enhance the overall performance of the wholesale market. The authors conclude that regulators should promote competition in the forward market and at the same time extend regulation to the price and quantity that the dominant firm bids.
Another study, considering the case of Britain, [
21], investigates the EU Target Electricity Model and its effectiveness before and after 2015. The paper provides theoretical and empirical implications of delivering capacity, energy, and quality of supply, by paying special attention to the trilemma problem of the country and considers potential solutions. Ref. [
22] provides an exploratory analysis of the price spikes both in the Day-Ahead and Imbalance markets following the implementation of the Electricity Act of 1998 in the Netherlands. The authors argue that market participants gain from more stable economic environment in which they can better forecast future prices and evaluate investment plans. Finally, a recent study considering the case of Spain compares the regulatory framework and the cost of electrical energy among European countries [
23]. The limited electricity interconnection capacity of Spain leads to higher energy bill costs and, eventually, lower competition of electricity intense industries.
Prior studies have analyzed the wholesale electricity market of Greece [
24]. For instance, Ref. [
25] provided a detailed analysis of recent developments in the electricity market of Greece and described the structure of the Hellenic Energy Exchange and the markets that will be formed in the future. The authors presented the basic design variables and respective options for the integration of the Greek wholesale electricity market with the other European markets under the Target. Finally, a recent study by [
26] highlights the recent attempt to liberalize the electricity market, which was hindered for a long time by socio-economic forces that favored the monopolistic system of the market. Overall, the authors argue that the road towards a Single European Energy Market is an opportunity for the country to move forward and in parallel to maintain the pace of “coupling” with the most developed energy economies of Europe.
Over the past decade, national authorities demonstrated a strong commitment on energy policy goals and are constantly in line with the EU’s overall goal to achieve climate neutrality by 2050. Greece aims to achieve a 62–65% share of renewable energy in the electricity mix by 2030. To accomplish the above objective, the Greek government announced various packages of financial incentives, tax cuts, exemptions, and funding programs. In parallel, ambitious incentives for private companies were introduced, to invest in Renewable Energy Sources (RES) and contribute to the gradual decarbonization of the country. In 2020, the renewed National Energy and Climate Plan and the introduction of the Green Legislative Framework played a key role by continuing to support RES penetration in the energy mix of Greece. It is estimated that gross energy consumption in Greece is expected to fall below 22,000 ktoe by the year 2040, while the share of RES will gradually exceed petroleum products. In line with
Figure 1, between 2020 and 2040, RES are expected to play a dominant role in the country’s energy production, increasing their share by up to 36%. Currently, Greece has exceeded the 2020 targets for the production of energy from RES. At the same time, Greece faces the highest wholesale energy price in Europe and in parallel one of the lowest retail prices in the EU. In that context, according to Eurostat (2019), the electricity market is considered as a key sector in Greece, since generation, transportation, distribution, supply, and trade of electricity produce 2% of national Gross Added Value of the total economy. Gross electricity generation in 2019 remained relatively steady compared to 2018 levels, reaching 53.3 TWh, while COVID-19 affected the total electricity consumption in Greece, an index which continued to decline for a third consecutive year.
In line with
Figure 2, the further decarbonization process of the electricity generation in Greece continues, with the lignite share plummeting to 15.4% in 2020. The share of RES recorded the most significant growth in the electricity mix, increasing by 9.7% during the period December 2019–October 2020. In addition, April 2020 was characterized as a “Snapshot from the Future” when natural gas and RES prevailed in the electricity mix. At the same time, the price of CO
2 emission allowances directly affects electricity prices and contribute to emissions reduction through Europe. Beyond lignite-fired units, natural gas-fired units are also affected by the increasing cost of CO
2 emissions, however, at a lower magnitude. In 2020, RES and Hydro together represented a greater share of total capacity (53%) compared to coal and natural gas combined (47%). According to
Figure 3, the incumbent, Public Power Cooperation (PPC), retained a dominant share in electricity generation. PPC’s share in the retail market continues the downward trend, reaching 64.2% in May 2020 from 94.3% in January 2016 (
Figure 4).
Considering alternative suppliers, three energy groups are active generators in the Greek energy market (Mytilineos, Heron, Elpedison). The oligopoly that prevails due to the small number of thermal producers has distorted competition in the wholesale market. In recent years, NOME-type auctions have played a key role in the electricity market, mainly towards the reduction of PPC retails’ market share. Essentially, alternative suppliers entered the market, exploiting cheap energy from NOME and achieving increasing their shares without substantial risk. Energy suppliers that are not vertically integrated into the market are forced to buy energy at high prices with the impact of either losing market share, raising their tariffs, or presenting losses on their balance sheets.
Figure 5 shows that, since the financial crisis of 2008, energy demand decreased exponentially and, in 2014, it reached 50,000 GWh. Then, a slight increase occurred, and it reached 50,217.4 GWh in 2019. The appearance of the pandemic stopped the upward trend of demand and, according to the “Reference Scenario” of the Hellenic Transmission System Operator (HTSO), electricity demand will regain its prior level in 2022. In April 2020, when COVID-19 restrictive measures were firstly introduced, a decrease of 9.8% in energy demand was recorded compared to April of 2019. Overall, the first four months of 2020 recorded a decrease in demand of 3.8% compared to the first four months of 2019. The pandemic heavily impacted oil and electricity demand, while natural gas consumption remained stable.
According to prior literature, an efficient design for real-time markets should address the special challenges of electricity system operation and support the intended economic outcomes by providing a spot market basis for development of and reliance on forward contracts [
27,
28]. Hellenic Energy Exchange S.A., (HEnEx) is the entity responsible for the operation of Spot and Derivatives markets in Greece. HEnEx has established the EnEx Clearing House S.A. (EnEx Clear) as the market Clearing House, in order to undertake the responsibilities of clearing, risk management, and settlement of the transactions. Under the Target Model, HEnEx Members are able to participate in the following markets: Day-Ahead Market (DAM), Intra-Day Market (IDM), Balancing Market (BM), and Forward Market (FWM).
2. The Application of the Target Model in Greece
A key energy market improvement was accomplished as the Target Model, a specific commitment of Greece, was implemented on 1 November 2020. This is considered as an important phase in the direction of Greece to fulfill the requirements of the EU energy policy. The innovative structure of the market which include the Day-Ahead Market, the Intra-day Market, the Balancing Market, and Forward Market is anticipated to provide improved price information and broader involvement and market entree of various services. The scheme “produce and forget” that used to be the case for Greece is transforming into a flexible and dynamic one. The novel market design is well-suited with all EU Members, permitting for the quick Day-Ahead and Intraday coupling with the neighboring countries. Considering the case of Greece, coupling with Italy and Bulgaria has already been achieved, which in turn is anticipated to boost energy security, assist the ongoing growth of RES, and promote competition in the wholesale market.
The latest market formation entails the collaboration of several entities like ADMIE, which is the Transmission System Operator, the Hellenic Energy Exchange, the Clearing House, and the Athex Clear for the Derivatives Market. Moreover, the Regulatory Authority for Energy (RAE) and the Hellenic Capital Market Commission collaborate for the efficient supervision of the legal structure that oversees the daily function of the markets. The recently formed clearing house, EnEx Clear, is in charge for the financial settlement, the invoicing of participants, and eventually the risk management of the system. Financial institutions, such as banks, are already listed as official General Clearing Members to provide their services for both the spot and derivatives market.
The intense unpredictability of electricity prices has constantly concerned academics, generators, retail suppliers, and traders [
29,
30]. Those variations could be attributed to several factors that may be either easily predicted or not. Namely, reasons that crucially affect electricity prices are unexpected modifications in demand, unit availability, established interconnections with neighboring countries, fuel price such as natural gas, coal or oil, CO
2 prices, the stochastic generation of RES, macroeconomic conditions, and broader socioeconomic disorders like the pandemic. Consequently, members are able to exploit the hedging opportunities of the Derivatives Market. However, despite the fact that the Derivatives Market has been available to market participants in Greece since March 2020, it is not utilized by them, and liquidity persists at minimum levels, even after 15 months of official operation.
The Market Clearing Price of the Day-Ahead Market is formed at the point where the aggregate supply and aggregate demand curves intersect. Next, the energy exchange is responsible for submitting priority price taking orders by representing previous transactions as submitted on the Forward Market or the unregulated bilateral Over-The-Counter (OTC) market. In that framework, the recently established energy exchange aims to be a vital component in the growth, of the domestic and regional economy over the utilization of the Target Model. Regardless of the COVID-19 outbreak, the market layout of a totally functional gas exchange is presently under formation. In the wake of the electricity market, a natural gas trading platform will be available to participants at a later stage. Hence, including a gas marketplace in the framework of HEnEx is expected to function as a key step for the overall market, along with the recent developments in Northern Greece with the Trans Adriatic Pipeline, and other pivotal projects being supported by the EU [
31].
According to
Table 1 which depicts the most recent available data provided by the HEnEx, Day-Ahead Market accounts for more than 98.5% (or 3972 GWh) of the total volume traded during May 2021. Hence, the biggest share of market value derives from DAM (€254.7 Million), since the Intraday Market accounts for 1.5% (54.1 GWh) of the total volume by taking into consideration the three Intraday Auctions (LIDA 1, LIDA 2, & LIDA 3). Next, we identify small discrepancies between the Day-Ahead Market Price and the Intraday Prices.
Figure 6 shows that, in May 2021, DAM price was equal to 63.16 €/MWh, while the average Intraday price was slightly lower at 63 €/MWh (LIDA 1 (62.53 €/MWh), LIDA 2 (63.12 €/MWh) and LIDA 3 (63.52 €/MWh)). The analysis that follows provides detailed information considering the comparison between DAM and IDM prices and shows that prices between the two markets were almost identical from November 2020 until June 2021.
Next, in terms of the electricity mix for May 2021, the sell volume of the Day-Ahead Market is dominated by the natural gas (38%) and RES (33%), while imports (18%), hydro (7%), and lignite (5%) account for the remaining share of generation (
Figure 7). Considering the Intraday Market, again, natural gas (49%) and RES (29%) account for 78% of the total generation (
Figure 8). Moreover, on the buy side of the Day-Ahead Market, considering again May 2021, the majority of the volume directed to Low Voltage (LV) Load (56%), Medium Voltage (MV) Load (19%) and High Voltage (HV) Load (15%) (
Figure 9). In the Intraday market, we identify natural gas-fired units absorbing 50%, RES aggregators 28%, and LV load 14% (
Figure 10).
As
Figure 11 illustrates, since 2008, the daily average market clearing price in Greece fluctuated from 10 €/MWh to 123 €/MWh, with an average price considering the period 1 January 2008 until 1 June 2021 at 54.1 €/MWh. In terms of the overall fluctuation, and prior to the implementation of the Target Model, we identify spikes in electricity prices (values higher than 100 €/MWh) only four times in a period of a 13.5 year period. Specifically, the first spike is identified by the end of 2008, the second at the beginning of 2012, the third in mid-2014, and the fourth in early 2017. However, only following the implementation of the Target Model, the average daily Market Clearing Price skyrocketed to 128 €/MWh. Prior to the launch of the Target Model, a significant drop occurred in wholesale electricity prices during the 1st period of COVID-19 lockdown (March 2020–April 2020), reaching 28.5 €/MWh in April 2020.
4. The Response of the Regulator
Due to the deteriorating situation resulting from the implementation of the Target Model, the regulator was aware of the potential impact of this situation and, in order to curb the rise in wholesale energy costs, on 13 February 2021 (
Figure 17), made the Decision (54/2021) to impose a threshold on the bids of the producers regarding the downward balancing action (The Decision was taken in cooperation with the European Commission and the Ministry of Environment and Energy). RAE also modified the Integrated Scheduling Process (ISP) algorithm. The ISP refers to an action performed by the System Administrator in order to configure the unit allocation program and the distribution of balancing power to the entities that provide it. The exercise is executed three times: once immediately after the resolution of the Day-Ahead Market and twice more after the resolution of each of the two intraday auctions held within the framework of the Intraday Market. It can additionally be performed at the request of the TSO, in case any serious changes occur during the operation of the System, such as serious damage related to loss of unit, loss of interface, and forecast failures.
Based on the above decision, RAE modified the ISP algorithm in such a way as to eliminate the submission of tenders for quantities of energy that are lower than the technical minimum production quantity. In the explanatory memorandum, RAE notes that it recognizes that there is an issue of abusive behavior in the balancing market and states that the measures it promotes aim to balance the market by keeping it essentially able to operate, and, secondly, the restoration of conditions of good operation and competition. In particular, the adoption of these measures strengthened the operational framework of the Balancing Market, by discouraging the occurrence of abusive behaviors and preventing the avoidance of standard rules in order to benefit, to the detriment of the system’s economy and a healthy competition. Another action of RAE regarding the inconsistent operation of the Target model was the imposition of a penalty of five million euros on the TSO, due to the failure of completing the Western Corridor in the Peloponnese. Although the above arrangements prevented the continuous rise in balancing costs, the situation does not remain viable, and more adjustments are needed for the smooth operation of the energy exchange:
- ▪
The causes of the malfunction—Improper operation of the Target model in Greece
- ▪
Price liberalization given that producers providing balancing services were able to provide prices up to 100 times their actual variable unit costs.
- ▪
Oligopoly on the producers of thermal units.
- ▪
Inability of the system administrator algorithm to prevent unethical bids.
- ▪
Congestion of the high voltage network in the Peloponnese due to overload.
- ▪
Low interconnection power transmission of electricity from other countries
- ▪
Low liquidity in the Forward and Intraday market. Both the number of participants and the volume of transactions should increase, aiming to reduce the need for balancing energy and, consequently, the corresponding costs.
Measures to Be Taken
Demand response: The expected development of RES has considerable impacts on the average daily pattern of electricity generation in the current decade. Demand Response concerns the storage of energy that comes from RES during peak hours so that it can be stored and used when demand is increased. According to the TSO, it is estimated that in 2025 the thermal units will only cover the remaining quantities apart from the generation from RES. Nowadays, Demand Response is not available to support the wholesale electricity market in Greece, yet it is crucial for smoothing the typical load curve in the future. In addition, the use of batteries as a means of energy storage is anticipated to provide long-term profits for the overall economy. Hence, the authorities need to establish concrete steps to allow participation of Demand Response and Storage in all stages including in the Balancing Market.
Central scheduling: The Balancing Market is governed by the principle of Central Dispatching per unit. The Marker Operator considers the generation offers and, according to an algorithm optimization solution, provides the most efficient nominations to each to the entity providing balancing services. These entities submit bids in the market area per unit, per load zone, and per interconnection border. This model is applied to Greece, Poland, Italy, and Ireland, while the model of Self-Scheduling is selected in other European countries. In countries where the Self-Scheduling model is applied, first the backup auction process takes place, then follows the Day-Ahead Market, the Intraday Market, and finally the self-scheduling nomination. In this way, the simultaneous action of upward and downward balancing is prevented, a fact that is usually observed in the Greek electricity market. The imposition of a penalty for the simultaneous action of upward and downward balancing is one of the best measures to minimize this phenomenon.
6. Conclusions
This paper investigated the implementation of the Target Model in the wholesale electricity market of Greece and its impact on electricity prices. The study explores the time period before the implementation of the Target Model and the first nine months of its execution. In countries like Greece, where a monopoly or oligopoly of producers prevails in the wholesale electricity market, in combination with low capacity in connectivity with other neighboring countries, an upward trend on electricity prices is mostly anticipated. The above, combined with the lack of supervision in order to prevent manipulative behavior, could partially lead to the postponement of energy related investment plans. Energy producers are the only ones who benefit from the price increase and the overall market turmoil since those companies are able to exploit the legislative and technical gaps and implement unethical strategies in order to achieve extremely high profitability.
The peculiarity in this case is that the market itself provides room for the above exploitation since the submitting bids are within the limits set by the European Union. Especially in times of high demand, where there is a low supply from the producers, it is necessary to check by the competent regulator in order to determine whether they meet the reality or whether they use the regulations of the Target model to achieve profit maximization through the Balancing Market. As market participants understand better the dynamics of the new market and RAE monitors competition and costs, the Target Model is expected to become more fluent and efficient eventually increasing competition and reducing costs. In addition, RES seems to be responsible for a large share of the cost of the Balancing Market. This fact is due to the inability of accurately predicting their production, due to their stochastic nature. In addition, in line with [
34], the increase of RES to an electricity market has an ambiguous effect on wholesale prices. The merit order effect has a downward pressure on prices while, with market power, higher inframarginal rents will tend to increase prices. Considering the case of Greece, we observe simultaneous increase in RES share and higher prices which yields to the existence of market power. This could be mainly attributed to the increased share of one RES aggregator in the market, which is equal to 54%. It is apparent that the aforementioned finding has important consequences for the domestic wholesale prices.
Part of prior studies found that Target Model implementation was accompanied by welfare increase, which is not yet the case of the Greek wholesale market. Some benefits that are anticipated to be evident on the wholesale market of Greece are the consumers benefit from lower prices as a buyer will be automatically matched with the cheapest generation in Europe, and the fact that balancing markets will be integrated so that consumers benefit from lower balancing costs and improved security of supply across the EU. However, a study from the United Kingdom (UK) illustrates how market design solutions characterized by good intentions could have adverse effects, depending on the details of how they are implemented in practice [
35]. The author lists some drawbacks in the case of UK such as the increased cost of relieving congestions, increased risk of discrimination by system operators, increase in the potential scope for abuse of market power by generators, and failure to capture positive externalities and perverse incentives. We observe that our findings are in line with the case of Spain, where the limited electricity interconnection capacity of the country led to higher energy bill costs and, eventually, lower competition of electricity intense industries [
23].
At the same time, our research is in line with prior empirical findings towards the direction of extended regulation to the price and quantity of the dominant firm bids. As can be seen from the countries of the European Union where the Target model has been implemented, it takes a period of one and a half years for the market to function properly and for healthy competition to prevail. One of the main limitations of the study is that the study explores only the first nine months of its execution; thus, future research should utilize new data and reevaluate the effectiveness of Target Model implementation in the wholesale market of Greece. This study documents in detail all the developments that took place up to this point, but this is yet to be seen in the future if the Target model achieves functioning properly and effectively in Greece and eventually benefiting the final consumers.