Introduction

On April 3rd, N-SIDE Energy hosted the second edition of its Connect Event in Brussels. The event brought together experts and leaders from Transmission System Operators (TSOs) and Regional Coordination Centers (RCCs) to explore "The Next Frontier of European Integration in Power Markets and Systems." 

Among other topics, participants discussed the integration of Balancing Capacity (BC) markets, which is considered a major candidate for further improving the efficiency of European electricity markets. There is significant work that can be done in this area (see Figure 1 below), and it is widely recognized that it would bring significant benefits in terms of efficiency and welfare. To help us navigate the discussion, we welcomed experts from three significant ongoing initiatives—the Nordic Balancing Model (NBM), the Baltic BC market, and the Harmonized Cross Zonal Capacity Allocation initiative, COBRA—who shared their insights on the challenges and benefits involved. Read on to discover the main takeaways of the day.

Figure 1 - N-SIDE. (2025). Integration of the European power system. 

Ongoing initiatives (non-exhaustive)

Since December 2022, the Nordic Balancing Model (NBM) has been implementing cross-border procurement of BC. The market-based approach relies on sequential market clearing. In this setup, the balancing capacity market is cleared first, and cross-zonal capacity allocation is split between balancing capacity and energy markets. This split is performed by considering a forecast of the Cross-Zonal Capacity (CZC) value for energy exchange, which is compared to its actual value for balancing capacity exchange.

Following this process, up to 10% of the Cross-Zonal Capacity (CZC) can be allocated to balancing exchanges, where it is more beneficial compared to the projected CZC allocation for energy exchanges in the Day-Ahead Market (DAM). See our white paper on Designing Cross-Zonal Balancing Capacity Markets for more insights on the options provisioned within the EBGL for the allocation of CZC to balancing purposes: (i) co-optimized allocation, (ii) market-based allocation, and (iii) allocation based on economic efficiency analysis

The Baltic BC Market (BBCM) went live in February 2025 to support the disconnection of the Baltic countries from the BRELL ring, allowing them to secure the BC needed to balance their grids independently from Russia and Belarus. You can read our blogpost about Baltic Grid Integration with Europe: The Role of the Baltic Balancing Market Platform for information about N-SIDE’s contribution to the BBCM.

While largely inspired by the NBM, the design of the BBCM has some very interesting and innovative specificities.

First, the BBCM clears the aFRR and mFRR capacities simultaneously, implementing automatic substitutability (replacing the mFRR need with aFRR if cheaper) and reverse substitutability (replacing the aFRR need with mFRR in case of aFRR supply scarcity). The Enduring Auction Capability developed by N-SIDE for NESO (see N-SIDE and National Grid ESO Collaborate on Ancillary Services Market) is another example of a multi-product auction that supports substitutability. An interesting design distinction, however, is that the responsibility for specifying substitutability is assigned to the Balancing Service Providers (see the Market Design Report for more information).

Second, unlike the Nordic countries, which have implemented the transfer of Balancing Capacity —where 1 MW of reserve can cover the BC needs of its Load-Frequency Control (LFC) area or exclusively of another LFC area—the Baltic countries have adopted a concept to share BC. This means that 1 MW of reserve can simultaneously cover the needs of its LFC area and other LFC areas.
Sharing balancing capacity effectively reduces overall procurement costs by better leveraging independence between events in different LFC areas. This approach makes particular sense for the Baltic TSOs due to the large reserve requirements driven by High Voltage Direct Current (HVDC) interconnectors, which are substantial compared to the locally available BC reserves. In addition to requiring a joint assessment by the TSOs to ensure their security standards are met through their procurement of BC, sharing also involves a different approach to TSO-TSO settlements. Interestingly, sharing BC can lead to bidirectional and non-intuitive allocations, i.e. allocations that go against the price spread (see Figure 2 below).

Figure 2 - Transfer of BC versus sharing of BC for FRR upward product. Fifty MW of CZC is available in both directions. Accepted bids are in bold. Sharing of BC exhibits counter-intuitive and bidirectional allocation of the CZC with 40 MW allocated from Area 2 to Area 1.

The third and last initiative presented is the implementation of a real European market for balancing capacity allocation. This vision is expressed in the Harmonized Cross-Zonal Capacity Allocation Methodology, and the initial step exploring its possible implementation is the Common Optimization of Balancing Reserves & CZC Allocation (COBRA). 14 TSOs from Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, Latvia, Lithuania, the Netherlands, Norway, and Sweden join forces in this ambitious mission to develop a joint Cross-Zonal Capacity Allocation Objective Function (CZCAOF) for the harmonized market-based allocation process. Developing such an objective function is a massive project in itself, and it makes sense to have an entire initiative dedicated to “getting it right” before thinking of the broader market implementation. The focus here is on the harmonization of the optimization function to make it work across the different geographies involved (e.g. the Baltics, the Nordics, part of the CORE/CE region), maintaining national specificities to achieve an overall higher welfare and efficiency. The end goal is to reduce procurement costs and reserve volume by leveraging the enhanced liquidity from cross-border participation.

Benefits, challenges, and future work

The NBM has demonstrated that cross-zonal capacity markets can effectively redistribute capacity from areas of high liquidity to those with lower liquidity, thereby boosting competition and generating economic value estimated at several millions of euros annually as mentioned in Evaluation Report 2023 The Nordic aFRR capacity market (26 April 2024). This increased competition within the Nordic region has positively impacted both bid volumes and average prices. Similarly, pre-implementation studies for the BBCM have estimated its benefits to be in the hundreds of millions of euros as detailed in Notification on the use of market-based allocation of cross zonal capacity for the Baltic Balancing Capacity Market (4 November 2024). These findings indicate that improved integration of BC Markets offers significant value.

Nonetheless, our participants also identified several challenges and unresolved questions that still need to be addressed. Below are a few highlights:

• All three initiatives have chosen market-based allocation of CZC, which requires a forecast model for DAM price spreads. Sensitivity to forecast errors remains a concern, especially when structural market changes are introduced, such as the implementation of Flow-Based computation in the Nordic region.

• While increased collaboration can help mitigate price and procurement cost volatility, using elastic TSO demand might offer additional protection.

• There is an open question about the relevance of procuring BC from several LFC areas, especially if they are further away. Some LFC areas may prefer to procure BC only from nearby markets. Although this topic was debated, it became clear that further investigation was needed before conclusions could be drawn.

• The role of BC market operator was discussed. RCCs have a mandate to facilitate the procurement of balancing capacity that supposedly allows TSOs to delegate the operation of the joint BC market to them. However, pioneering projects have not yet adopted this approach.

Conclusion

In conclusion, the gathering highlighted the benefits of integrating BC markets, as demonstrated by the Nordic and Baltic examples. Nonetheless, challenges remain in refining the design and expanding geographically.
With the N-SIDE Energy Connect Event, we hope to have modestly contributed to promoting BC market integration by fostering open-minded discussions and results-driven debates. As emphasized by participants at the event, it is crucial that 'Challenges, ideas, issues, and threats are discussed with a pragmatic and solution-oriented mindset.'

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