Introduction to European energy markets

As it currently stands, European energy markets are set up separately from each other, each governed by a National Regulatory Authority (NRA) and a Transmission System Operator (TSO). Physical and financial wholesale energy is traded on energy exchanges and energy can be traded cross-border via Interconnectors.

The wholesale energy market access rules are not harmonized across the EU member states, although it has been a talking point on the EU agenda for over a decade. Licensing requirements are extremely diverse and range from a non-licensed approach (where a market participant does not need a license to trade) to markets with overly onerous licensing requirements.

What are trading and shipping licenses?

Trading and shipping licenses are granted by the local NRA. In licensed markets, a trading or shipping license is required when applying for BRP status. When entering gas markets, trading and shipping licenses are usually mandatory, while they can sometimes be avoided in power markets.  

The type of license a market entrant needs is heavily dependent on whether you plan to trade physical or financial energy. However, if you’re not formally recognized as a shipper, you cannot bid in gas capacity auctions with PRISMA. Regarding power capacities, there is a wide range of options in terms of licensing.

Each new market entry calls for its own licensing procedure.

What is a balance responsible party (BRP)?

A BRP is a market participant that has been granted balance responsibility by the local TSO. Receiving BRP status allows market participants to take physical positions within the TSO’s operational area. A balance responsible party has a financial obligation to help balance the grid and any imbalances they cause, knowingly or otherwise, may be penalized by the TSO via imbalance tariffs.

During the BRP application, TSOs usually require difficult-to-acquire documentation, which ensures that the applicant has the capabilities of balancing the grid. These include a bank guarantee from a settlement or clearing bank and diverse IT tests to prove that the entrant’s systems are secure enough – including communication and nomination tests, as well as power and gas scheduling and bidding. Read more about BRP applications here.

What are the power TSOs in the EU?

With the exception of Germany, which has four transmission system operators, all other EU member states have one TSO, which can be seen on the map below.

What are the natural gas TSOs in the EU?

Energy trading exchanges in the EU

It is up to you which and how many exchanges you become a member of during your trading operations. Some membership processes are a lot simpler than others if you are, for example, already a member of an exchange and only wish to add an additional product. If a market entrant is not already a member of the exchange, there is a rather cumbersome KYC procedure and due diligence, which need to be completed.

What types of exchanges are there?

There are two general types of energy exchanges in the EU: national and regional. National exchanges only allow the buying and selling of energy in that country. Most exchanges in the EU are so-called NEMOs (Nominated Electricity Market Operators), which means the markets they operate in are linked to the rest of the EU by market coupling mechanisms.

Which are the energy exchanges in Europe?

There are 24 national and regional exchanges, which allow short-term, long-term, physical and financial trading of power and gas. Some also offer other commodities.

What are the banking requirements when entering a power or gas market?

Each TSO and Exchange have individual requirements when it comes to the currencies, technical capabilities, and bank accounts that a market entrant needs to comply with. Some counterparties go as far as to publish a list pre-approved banks and do not accept accounts from any other institution.

Furthermore, the individual requirements for clearing and settlement accounts, as well as bank guarantees (where applicable), are very heavy from the counterparty’s side.

On the other hand, financial institutions (incl. banks) are extremely heavily regulated internationally and there are gruesome KYC procedures, which ensure that no criminal activities will be carried out through the bank.

All these factors come together to make this stage of a market entry process one of the most complex and time-consuming, especially for entrants which are based outside of the EU zone.  

Generally, familiarizing yourself with the specific banking requirements early, and starting conversations with the banks as soon as possible, are very beneficial to the timeframe of a market entry project.    

Cross-border trading and Interconnectors in Europe

Cross-border trading in the EU is utilized through Interconnectors, which connect the power or gas grids of separate countries. Off-shore interconnectors, like the Viking Link for example, also include long underwater power lines. Similarly, the BBL Pipeline, is an off-shore gas interconnector between the Netherlands and the United Kingdom.

When discussing the complexity of Cross-border Access, the difference lies in the market entrant’s interest in physical delivery. Generally speaking, purely financial traders who want to use a market only for “transit” can take advantage of a simplified access and entry process, which, however, can become a bottleneck later, if they decide to restructure their trading activities.

The two major capacity auction platforms in the EU are JAO (for power) and PRISMA (for gas). There are other capacity booking platforms on the continent, as well.

How to avoid the most common delaying factors when entering EU markets?

Earlier this year, we held a webinar on speeding up market entry procedures by avoiding common pitfalls, which you can find here.

Among others, we discussed bank guarantees, nominations and scheduling tests, and what the ideal order of document submission is.

Additionally, you can read more about how translations and legalizations can slow down a submission, what the time-validity and expiry of documentation is, and how to choose the correct law firm for your case here.