• Print
  • Decrease text size
  • Reset text size
  • Larger text size
13/09/2016

European Market Coupling : blessing or torment ?

Analysis of the difficulties related to the implementation of the European Market Coupling, especially due to new regulations and directives

European Market Coupling is the term used for implicit cross zonal energy trade in Europe, organized in the Day Ahead and Intraday Markets. The main goal of Market Coupling is to optimize the use of the interconnector capacity between countries or bidding zones by matching supply and demand of electricity between players not only within bidding zones, but also across the entire coupled area.

In this article, Sia Partners presents the major impediments of the implementation of a European Market Coupling system. These obstacles, compared with the high expectations of such a system, lead to a reflection about the possible ways to improve the development of a European Market Coupling.

Brief history of the Market Coupling

A solution for Intraday and Day Ahead electricity markets

The Implicit Market Coupling for Day Ahead electricity trade started a decade ago and is already fairly well advanced, with countries gradually joining the initiative. Discussions for the European Cross Border Intraday solution (XBID) started only two years ago. This project is still in development phase.

A new common engine: the Market Coupling Solution

Transmission System Operators (TSOs) and Power Exchanges (PXs), which are the main players involved in the setup of the Market Coupling Solution, commonly developed a calculation engine containing an algorithm. They have to adapt their local systems and operations to interconnect and operate with this common calculation engine. This algorithm is matching the supply and demand across borders, taking into account the cross border capacity constraints provided by TSOs. The Market Coupling Solution necessitates a complex setup of interconnected IT solutions, many contractual arrangements, common governance and operational management according to rigorous procedures.

Non-harmonization, risk for future efficiency

The diversity of local requirements demands a high complexity in the Market Coupling algorithms

For a challenge such as the implementation of the European Market Coupling, it is needless to say that harmonization is definitely an issue. Countries have different energy regulations. TSOs and PXs have different local system solutions dealing with scheduling, nomination, trading. PXs have different market rules and offer different products in different markets. The lack of enthusiasm for harmonization forces parties to develop a one size fits all coupling solution which is able to deal with all local requirements, all products in all markets. This causes a non-negligible complexity in the calculation process, leading to extended calculation time. Given the short operational timeframes, this complexity may cause a threat to operational reliability. Especially in combination with increasing size of the order book due to market growth and growing number of bidding zones entered into the coupling system, permanent investment and research effort must be made to proactively increase the performance of the calculation engine ahead of the market evolution.

CACM: From bottom-up to top-down

Whereas several years ago the coupling initiatives started off in different regions as a contractual cooperation between a number of TSOs and PXs on a voluntary basis, supported by National Regulatory Authorities (NRAs) and TSOs, the recent Capacity Allocation and Congestion Management (CACM) directive which is gradually entering into force, is now enforcing one target solution for the Market Coupling according to a number of set rules.

This causes the parties of the original coupling initiatives to renegotiate the original cooperation modalities and contracts, obtained after quite some effort, according to new common rules.

From one to multiple NEMOs per bidding zone

Whereas in most countries there was only one market operator (called NEMO, Nominated Electricity Market Operator) in the past, competition law encourages the possibility to have multiple NEMOs in one bidding zone. This however induces additional complexity and changes in the IT systems of the Market Coupling Solution which now may need to deal with multiple order books and result distribution to multiple NEMOs. This comes, of course, at additional cost. Energy shipping arrangements across the borders also need to be renegotiated.

Complex Cost ruling: Who controls? Who approves?

Conscious of the cost generated by setup of Market Coupling for society, CACM enforces parties to setup efficient Market Coupling solutions. CACM however leaves some room for interpretation as to what “efficient” actually means and as a consequence, one of the big ongoing discussion items between NRAs, TSOs and NEMOs is the qualification, the sharing and the recovery of common and local costs incurred by TSOS and PXs due to Market Coupling. Despite the existence of the common agency ACER, the decision about cost sharing and recovery pertains to the individual local NRAs, which have inevitably different visions about which costs are considered “efficient” and acceptable for recovery.

Whereas it is simpler for TSOs, who are mostly active in one bidding zone and who directly interact with their NRA about this topic, it is less evident for NEMOs to get clarity on recovery of their costs related to setup and operation of Market Coupling. Some NEMOs are regulated and interact directly with their NRA. Other NEMOs are commercial companies and have to interact with the NRA through the TSO. Some NEMOs obtain cost recovery for the Market Coupling costs and some NEMOs don’t, which causes lengthy discussions among NEMOs on further evolution of the Market Coupling Solution, and the roles they wish to take.

NEMOs may also be active on different bidding zones. Whereas CACM is clear about common cost sharing between parties, the sharing key to split local costs over multiple bidding zones is not set in CACM and needs negotiation and agreement among the involved NRAs. 

The fact that there is no common forum for NRAs to decide about costs for Market Coupling, makes it hard to create uniformity, overview and full transparency of all the costs related to Market Coupling.

Central versus decentral operations?

Day Ahead Market Coupling is organized via the Price Coupling of Regions (PCR) solution, which is a decentralized operations concept with a role turn of NEMOs that take the daily coordinator role alternatingly.  The decentral concept allows for balanced roles and responsibilities, while keeping independence of the power exchanges. It however multiplies investment costs.

XBID, which is the current envisaged solution for Intraday, is however a centralized solution operated by a service provider. The centralization makes the system simpler but it causes another complexity with the need for selection and common management of the service provider hosting and operating the solution.

NRAs may criticize the multiplication of system costs in the decentralized Day Ahead solution, but looking at the slowness of the process to get the centralized XBID concept decided and managed, one may wonder what is best !

Conclusion

Market Coupling has a noble goal, but for the different reasons mentioned above, it takes huge effort from the TSOs and Power Exchanges over many years to get working solutions operational. Non-harmonization and decentral decision taking on common aspects cause considerable lengthy discussions, delay and extra cost.

Where the expectation was that the setup of the centralized XBID Intraday solution was going to be faster than the decentral approach of the Day Ahead, practice shows that procurement and negotiation with the XBID service provider prove to be complicated and very lengthy. The hypothesis that a centralized approach is better than a decentralized setting shall thus be challenged and scrutinized.

Whereas the CACM regulation is imposing top down principles in some degree of detail, it leaves room for interpretation on several key elements. In a setting where the views of multiple NRAs finally need to converge, one can be certain that a higher level of detail in CACM and a more centralized decision taking among NRAs may facilitate faster progress of the market coupling initiatives.

 

Sia Partners and Market Coupling

Sia Partners is a leading global consultancy, with 800 consultants, and specializes in the Energy Sector. Sia Partners is active since 10 years in the project leadership of the European Market Coupling projects in Day Ahead and Intraday. Through these missions Sia Partners has acquired deep understanding of the European framework and operational setup of cross border energy trade, and the impact on the different stakeholders involved in Market Coupling.

Copyright © 2016 Sia Partners. Any use of this material without specific permission of Sia Partners is strictly prohibited.

 

0 comment
Post a comment

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Image CAPTCHA
Enter the characters shown in the image.
Back to Top