POLICY BRIEF — MAY 2026
Across 2015–2024, European electricity consumers paid €1.83 billion more than they should have through the Long-Term Transmission Rights (LTTR) auction system. ACER measured this transfer in its 2024 Market Monitoring Report. No paper in the European literature has identified its cause or proposed a structural fix. This brief summarises a discussion paper that does both, at a moment when the FCA 2.0 implementing act is overdue and the Florence Forum provides the live policy window.
Contribution 1: The transfer is architectural, not accidental
The LTTR auction has a structural defect. The seller — the TSO — is forced, has no reserve price, and does not bid against buyers. Buyers bid against each other; the clearing price is set by the lowest winning bid. Every winning participant captures surplus relative to fair value, regardless of whether they are hedging, arbitraging, or reselling. The transfer is mechanical, not behavioural.
ACER’s evidence is direct: at high auction competition (16% of auctions) the risk premium is +3.2 €/MWh — exactly as hedging theory predicts. In the other 84%, the premium turns negative. This is not a market failing to price correctly. It is an auction structure producing a predictable outcome: a forced seller meets strategic buyers.
Contribution 2: Reform must precede any bidding-zone split
ENTSO-E’s Bidding Zone Review recommends splitting Germany–Luxembourg into five zones. Intra-German redispatch cost €2.776 billion in 2024. If any zone split proceeds under the current FCA architecture, Article 30’s mandatory-issuance default automatically applies to the new internal borders — the same forced-seller structure that produced the €1.83 billion transfer now operates on the borders carrying the largest congestion volumes.
Reforming before a split removes the default and allows assessment-based issuance from day one. Reforming after locks in the structural transfer on the borders that matter most. This sequencing argument is original and not made by any current participant in the FCA 2.0 debate.
Contribution 3: The architectural fix is available within FCA Guideline amendment scope
Replacing the forced public counterparty with voluntary counterparties removes the asymmetry at source. A genuine hedger with an internal valuation of €7/MWh has no reason to bid above €2.50 when the seller has no reserve price. Under voluntary counterparty pricing, that hedger pays €7 and gets hedged; the surplus returns to the Article 19(2) waterfall as tariff reduction. The architecture corrects; no participant is punished.
On liquid borders: market-maker obligations on JAO auctions (standard in EEX power forwards and Nordic EPADs). On thin borders: transitional TSO with a reserve price above contemporaneous EEX futures spread, with NRA-monitored exit as voluntary supply develops. Implementable through targeted amendment to Regulation 2016/1719 within Article 9 scope.
Reform pathway: five phases, each improving on the status quo independently
- Phase 0 — Transparency: quarterly publication of LTTR revenues, payouts, and participant-type breakdowns by JAO and TSOs.
- Phase 1 — Reverse Article 30: LTTR issuance requires demonstrated hedging need; burden of proof on those advocating issuance. Consistent with ACER Decisions 12/2022 and 02/2025.
- Phase 2 — FTR Obligations: add to product set alongside options to allow counter-flow netting. ACER has recommended this since 2022; zero borders implement it.
- Phase 3 — Willing sellers: voluntary counterparties at fair-value pricing replace the forced TSO counterparty. Market-makers on liquid borders; TSO-with-reserve on thin borders.
- Phase 4 — Exchange-traded: standardised cross-border spread products. Nordic CfD/EPAD model demonstrates feasibility within Europe.
Why now: Article 9 of Regulation (EU) 2024/1747 requires an implementing act by 16 July 2026. The Impact Assessment is already overdue. ENTSO-E (February 2026) calls for reversing the Article 30 default. ACER has declined LTTR issuance on two borders. The institutional convergence for reform has not existed in any previous window.
Full paper (SSRN): [SSRN link] — Contact: hello@isgarbos.com