N-SIDE advances collateral management for Long-Term Flow-Based Allocation (LTFBA)

Optimal bid filtering for Long-Term Flow-Based Allocation

A public proof of concept shows how optimal bid filtering can help protect TSOs against settlement risk while preserving market participation and auction efficiency.

Why collateral requirements matter in LTFBA

As European electricity markets move toward more integrated long-term market designs, implementation details become decisive. Long-Term Flow-Based Allocation represents an important evolution for long-term transmission rights. However, it also introduces a practical challenge for market participants: when multiple borders are auctioned simultaneously, collateral requirements can accumulate across borders, significantly limiting participation.

A new collateral-management methodology from N-SIDE Energy

To address this challenge, N-SIDE Energy has developed an improved collateral-management methodology based on optimal bid filtering. The proof of concept is available as supporting material in ENTSO-E’s public consultation on amendments to the Harmonised Allocation Rules (HAR) for long-term transmission rights.

Under today’s per-border auction design, collateral buffers can be reused across separate auctions because settlement risks materialize independently on each border. With LTFBA, however, all borders are auctioned simultaneously. This creates a mechanical increase in collateral needs, raising concerns around liquidity and access for market participants.

The N-SIDE approach focuses on final payment obligations rather than maximum theoretical exposure. Instead of excluding bids ex ante based on conservative Maximum Payment Obligations, the methodology filters bids dynamically based on auction clearing prices and actual settlement obligations. This allows the clearing algorithm to identify when a collateral constraint truly creates a risk, and to intervene only where needed.

Protecting TSOs while preserving market participation

The objective is twofold: keep Transmission System Operators fully protected against settlement risk, while avoiding unnecessary bid exclusions that could reduce liquidity, traded volumes, or auction surplus.

Proof of concept: Stronger auction outcomes with optimal bid filtering

The proof of concept demonstrates that optimal bid filtering is technically feasible and can be embedded directly in the auction clearing process. N-SIDE simulations show that the approach preserves auction outcomes close to the no-filtering benchmark, while delivering better results than ex-ante bid filtering or bid-price-cap approaches. In one 2025 flow-based scenario, optimal bid filtering delivered around EUR 108 million more auction surplus and around 3.5 GW more traded volume compared with ex-ante filtering with price caps, while reducing paradoxically filtered-out volumes by more than 99%.

Market-design safeguards for fair and robust price formation

The methodology also includes important market-design safeguards. N-SIDE recommends combining auction-surplus optimization with merit-order bid filtering per border, ensuring that price formation remains consistent and that filtered bids do not create artificial price reductions disconnected from actual volume adjustments. The proof of concept also identifies bid slicing as a possible additional safeguard to limit the undue influence of large bids.

Supporting Europe’s evolution toward efficient long-term markets

This work reflects N-SIDE’s broader commitment to robust, transparent, and optimization-based market design. A related study by N-SIDE addresses another concern raised by flow-based allocation: the risk that some borders could receive little or no allocated cross-zonal capacity under certain conditions. Together, these contributions show how careful algorithmic design can help market mechanisms evolve while preserving fairness, efficiency, and operational robustness.

For figures, scenario results, and the full public proof-of-concept material, you can consult theENTSO-E HAR methodology consultation and the supporting collateral-management material available on the page.