Lecture 5 – Electricity Markets: Market Coupling – Basics and Situation in Europe

Question 1

What are the fifferent mechanisms to allocate transmission capacities between areas?

Answer 1

Explicit auction and implicit auction

Question 2

What are the properties of Explicit capacity auction?

Answer 2

▪ Transmission capacity on an interconnector is auctioned separately and independently from electricity
▪ Simple method of handling the capacity on international interconnections
▪ Normally annual, monthly and daily auctions
▪ Lack of information about the prices of electricity during auction of capacity can result in an inefficient utilization of interconnectors (i.e. less social welfare, less price convergence and more frequent adverse flows)

Question 3

What are the properties of implicit capacity auction?

Answer 3

▪ Auctioning of transmission capacity is included (implicitly) in the auctions of electricity
▪ Day-ahead transmission capacity used to integrate the spot markets in different areas to maximize the overall social welfare in the markets
▪ Flow on an interconnector based on market data from the marketplace/s in the connected markets
▪ Resulting prices per area reflect both the cost of energy in each internal bidding area (price area) and the cost of congestion
▪ Ensure that electricity flows from the surplus areas (low price) towards the deficit areas (high price) → price convergence

Question 4

What is market splitting?

Answer 4

▪ Implicit auction of transmission capacity within the day-ahead electricity auction by one single power exchange
▪ If transmission capacity between the internal bidding areas is not enough to get a complete convergence of price → different prices in different bidding areas
▪ “Market splitting”: limited transmission capacity leads to a split between to market areas

Question 5

What is market coupling?

Answer 5

▪ Implicit auction in cooperation between two or more power exchanges
▪ TSOs provide transmission capacity available between market areas
▪ Central calculation of flows between and prices in all market areas
▪ “Market coupling”: Two or more power exchanges submit necessary market information to a central coupling algorithm
▪ typically used at the day-ahead stage whereby for every hour of operation either prices across the energy markets converge or all the available transmission capacity is utilized, with power flowing towards the high price area.

Question 6

What happens between 2 markets in market coupling?

Answer 6

▪ Isolated price market A < Isolated price market B
▪ Market A can export to market B (purchase and sale curve shift)
▪ Prices market A and B converge till price market A = price market B

Question 7

What are the characteristics of market coupling and their benefits?

Answer 7

a) Non-discriminatory opportunities for all market participants - transparent, neutral and fair for all players in the market
b) Optimal utilization of cross-border capacities - maximal benefit for the market
c) Capacity will be used according to price signals - significant reduction of economic losses
d) Simultaneous handling of electricity trading and capacity allocation - reduced transaction costs

Question 8

What are the general advantages of market coupling?

Answer 8

▪ Improvement of congestion management
▪ Maximization of total surplus of all participants; cheaper generation in one country can cover more valuable demand in another country
▪ Capacity withholding as a market power instrument can be weakened, because of higher liquidity from connected markets

Question 9

Describe volume coupling (loose coupling)?

Answer 9

▪ Determination of market coupling flows by market coupling system
▪ Determination of power prices by participating power exchanges
▪ Price derivation: only power flow as input for (local) price calculation

Question 10

Describe price coupling (close coupling)?

Answer 10

▪ Determination of market coupling flows by market coupling system
▪ Determination of power prices by market coupling system
▪ Price derivation: combined power flow and price calculation

Question 11

What are the economic effects of volume coupling?

Answer 11

+ Power exchanges remain responsible for price determination
+ Efficient allocation of cross-border capacities
- Small deviations from optimum possible due to separate determination of power
price and transmission volume

Question 12

What are the economic effects of price coupling?

Answer 12

+ Main market functions performed by one market coupling system
+ Integrated determination is efficient and reduces suboptimal flows
+ Integrated determination of power price and transmission avoids small deviations
- Competition among power exchanges clearly reduced

Question 13

What is the target of EU Regulation regarding market coupling?

Answer 13

▪ Efficient usage of cross-border capacities by the introduction of day- ahead, market based mechanisms
▪ Enabling buyers and sellers on power exchanges to get automatic access to cross-border energy trade without having to acquire the corresponding transmission capacity

Question 14

Which principles is the PCR (Price Coupling of Regions), a project of European Power Exchanges based on?

Answer 14

single algorithm (Euphemia), robust operation and individual power exchange accountability

Question 15

What does the Euphemia algorithm do?

Answer 15

The Euphemia algorithm gives a fair and transparent determination of day-ahead electricity prices and a net position of a bidding area across Europe. It optimizes the overall welfare and increase transparency.

Question 16

Why is the Euphemia Algorithm good?

Answer 16

• It maximizes the welfare of the solution
• Most competitive price will arise
• Overall welfare increases
• Efficient capacity allocation

Question 17

Why is PCR a robust operation?

Answer 17

The PCR process is based on decentralized sharing of data, providing a robust and resilient operation.

Question 18

How does PCR calculate bidding zone prices?

Answer 18

The PCR Matcher and Broker service enables exchange of anonymized orders and electricity network constrains among the power exchanges to calculate bidding zone prices and other reference prices and net positions of all included bidding areas.

Question 19

How has market coupling improved the European energy market?

Answer 19

➢ Increase of efficient use of European electricity interconnections/ interconnectors (especially in the day-ahead market)
➢ Significant efficiency gains (and hence improved social welfare) for the benefit of EU electricity consumers

Question 20

What is causing the loss of social welfare in certain areas and what is the solution for it?

Answer 20

Loss of welfare due to inefficient Day-Ahead allocation methods
➢ Need to finalize the implementation of market coupling

Question 21

What is the situation with balancing energy and capacity prices in Europe?

Answer 21

➢ Persistence of large disparities in balancing energy and balancing capacity prices
• In future, efficiency in the exchange of balancing energy and capacity has to be improved
➢ Across Europe, average prices of activated balancing energy have followed similar trends in most countries in 2020. However, prices remain very different in each member state.
➢Limited exchange of balancing services across EU borders in 2017

Question 22

What is the energy balance concept defined as?

Answer 22

The global supply minus the losses must be equal to the global demand of all markets involved. Depending on the manner the interconnections are modeled, there as different network models.

Question 23

What are the types of network models?

Answer 23

• ATC Network model
• Flow-Based network model
• Hybrid network model

Question 24

Describe ATC network model?

Answer 24

The network is described as a set of lines interconnecting bidding areas. The nomination of the line can be made up to its Available Transfer Capacity (ATC).

Question 25

Describe Flow-based network model?

Answer 25

with all bidding areas connected in a meshed network. It expresses the constraints arising from Kirchhoff’s laws and physical elements of the network in the different contingency scenarios considered by the TSOs. It translates into linear constraints on the net positions of the different bidding areas

Question 26

Describe hybrid network model?

Answer 26

Some bidding areas are connected using the Flow-based network model; the remaining using the ATC network model.

Question 27

How do Available Transfer Capacities (ATC) method and the new Flow-Based method compare with one another?

Answer 27

On average, a decrease in prices and spread has been observed with flow-based method