FCR prices have become more volatile and will continue to be so in the future due to increased renewable generation, decreasing conventional generation and growing uncertainty across generators – mostly driven by France.
EnAppSys has released its half-yearly update of the FCR long-term Market Outlook and combines this with the launch of a module on its market data platform to allow extensive analysis of the FCR market on the short term.
Frequency Containment Reserve (FCR) is used to act first in case of disturbances in the European synchronous electricity grid. It is a true cross-border reserve product that is contracted through an auction across eight countries.
FCR prices have been under pressure in recent years, with prices slowly declining as the common auction added more countries. With price levels of around € 20/MW/hr until 2016, a significant drop to levels between € 5/MW/hr and € 10/MW/hr after the start of daily auctions in 2019 and a slight recovery after the move to 4-hourly delivery periods in July 2020.
The increased volatility and slightly higher prices since the implementation of 4-hourly blocks is caused by the uncertainty for generators to get bids accepted for a profitable run duration. Furthermore, growth of renewables, especially in France, is starting to impact specific blocks as solar and wind push conventional generation out-of-merit.”
EnAppSys sees this trend to continue in its forecast up to 2040. It expects significant periods of low FCR supply due to high renewable generation. With less conventional power plants online, scarcity of flexible generation will be a significant factor in future auctions.
Batteries play a significant role in FCR in some countries such as France, but as the swings of balancing markets will become larger, due to locational concentration of renewable assets and decreased run hours of conventional power plants, it will take time to fill the void left by retiring coal and lignite plants and CCGT’s that are offline due to negative spark-spreads.
This is apparent when France sees high wind or solar generation. It then exports less FCR capacity, or even switches from exporting to importing energy for some periods. German, Swiss and Austrian capacity that next comes into merit, is more expensive. The market is quite sensitive to a country’s short-notice capacity change. Now that France is starting to get its first offshore wind farms online, this market sensitivity is likely to increase.
Recent additions Slovenia and Denmark seem to follow the common auction prices mostly. Slovenia has hardly offered any capacity into the FCR auction but cannot decouple from it because it does not have a minimum local supply. Denmark has decoupled frequently, it has sufficient FCR capacity and even exports when prices are high enough.
Belgium still sees high local prices due to decoupling of the market. It looks like there is room for new entrants there. The Netherlands is more sensitive as new entrants are starting tip the balance toward lower prices (from the common auction).
The Dutch market is very sensitive, as it switches between decoupling and market coupled prices, depending on just a couple of MW of capacity being available or not.
The coming years will see a moderate recovery of FCR common auction prices due to growing renewables and retiring conventional generation in the main markets. As the market adjusts to shorter delivery periods, prices become more volatile, the market will need to adjust its strategies and analyse the market more actively.
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