10th BES Seminar Podgorica

The event was opened by the Italian Ambassador in Montenegro, H.E. Andreina Marsella, who represented the Italian Ministry of Foreign Affairs and International Cooperation which co-financed through the CEI Fund at the EBRD the European Bank for Reconstruction and Development the project.

The activities centered on the future of electricity forward markets brought together a distinguished panel of experts from across Europe, including representatives from Compass Lexecon, ENTSO-E, DFC- Economics and Terna, who shared valuable insights into the Italian electricity market. The seminar provided a platform to assess current challenges, highlight best practices, and discuss potential reforms aimed at strengthening Europe’s long-term electricity markets.

All speakers emphasized the vital role of forward markets in stabilizing electricity prices amidst rising volatility, largely driven by the growing share of renewable energy sources (RES) and geopolitical uncertainties. They highlighted that the EU’s ambitious decarbonization goals, particularly under the Green Deal, are accelerating the transition to renewables, which in turn contributes to increased price fluctuations in the spot market. As a result, long-term contracts have become essential for hedging risks and ensuring the financial viability of new investments. Key themes emerged from the discussions, including the need for reliable hedging tools to manage spot price volatility, the importance of protecting both market operators and consumers from price spikes, and the critical role of forward markets in achieving decarbonization targets.

Several presenters analyzed the structure of forward markets in Europe, focusing on two primary categories of instruments: commercial contracts (electricity derivatives) and long-term transmission rights, which are further divided into Physical Transmission Rights (PTRs) and Financial Transmission Rights (FTRs). Despite the availability of these instruments, liquidity in European forward markets remains uneven. While markets in regions like Germany and the Nordics are relatively dynamic, many Eastern and Southern European countries face challenges such as limited market depth and transparency. Key challenges identified included: low liquidity in numerous national and regional forward markets, high price volatility complicating hedging strategies, difficulties in transferring risk between regions due to concentrated liquidity in a few hubs (e.g., Germany), and the misalignment between continuous futures trading and the periodic auctions for transmission rights.

A central topic of debate was the proposal to introduce Virtual Hubs—a unified price index spanning multiple geographic zones—to improve the correlation between zones and enhance risk management. While studies, including those by Compass Lexecon, suggest that Virtual Hubs could simplify hedging strategies, other experts, such as those from ENTSO-E, have raised concerns about the model’s financial viability and its potential to actually boost liquidity.

Another key area of discussion focused on the potential evolution of Financial Transmission Rights (FTRs) from options to obligations. FTR-options are often considered undervalued, effectively transferring resources from consumers to those acquiring these rights. By contrast, FTR-obligations could facilitate the “netting” of buy and sell positions, potentially leading to a more liquid secondary market.

A dedicated session focused on the Italian case, presented by Terna, examined the complexities of Italy’s electricity market. With seven internal bidding zones and numerous cross-border interconnections, congestion management and multi-horizon capacity allocation (annual, monthly, daily) are particularly challenging.

In addition to traditional futures and forwards (both physically and financially settled), Italy employs specialized tools such as Congestion Cost Cover (CCC) to manage interzonal congestion charges across the national grid. Cross-border capacity is primarily allocated through explicit auctions organized by the Joint Allocation Office (JAO), with market coupling progressively applied, such as on the French and Austrian borders for day-ahead trading. Key highlights of Italy’s approach include: “Mercato a termine elettrico” (MTE) and “Piattaforma conti energia” (PCE), which serve as key platforms for forward trading and transaction registration; Congestion Cost Cover (CCC), a financial contract managed by Terna to mitigate congestion cost risks within national zones; the nomination of Physical Transmission Rights (PTRs), where right-holders confirm their capacity usage before the day-ahead market. If capacity is not nominated, it reverts to daily auctions, in accordance with the UIOSI (Use It or Sell It) principle.

The seminar also covered the forthcoming revision of the Forward Capacity Allocation (FCA) guidelines at the European level, set for 2026. There was broad consensus that the existing regulatory framework needs to evolve to better address the challenges of the energy transition and increasing market volatility.

Several potential reform measures were discussed, including: Harmonizing capacity allocation mechanisms, (auctions vs. continuous trading), while improving compatibility with the futures market. Increasing auctions frequency for LTTRs and fostering the development of secondary markets to better adapt to ongoing shifts in forward pricing. Introducing new contract types, such as FTR-obligations and Contracts for Difference (CfDs), to strengthen risk management strategies. Carefully evaluating the role of virtual hubs, considering their potential to enhance liquidity while assessing the risk of market fragmentation or insufficient depth.

The presentations at the Balkan Energy School in Podgorica highlighted broad consensus on the critical role of forward markets in ensuring stability and managing risk within an increasingly decarbonized power system. However, opinions diverge on the most effective approach to market reform. While some advocate for innovative solutions such as virtual hubs, FTR-obligations, and Contracts for Difference (CfDs), many Transmission System Operators (TSOs) and regulators remain cautious, citing concerns about financial sustainability and operational complexity.

Ultimately, Europe’s transition to more integrated forward markets seems inevitable. However, achieving this vision will require a delicate balance between fostering innovation and safeguarding the interests of both operators and consumers. The outcome of upcoming policy revisions, alongside ongoing collaboration from key stakeholders, will play a pivotal role in shaping the future design of the electricity market—one that must, to tackle the challenges of the energy transition, become increasingly integrated, liquid, and resilient.

On March 14th, the 6^th Balkan Energy School General Assembly took place. The meeting was opened by the Chairperson of the Balkan Energy School.