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28/03/2014

Power market coupling - "Europe's most important IT system"

According to a recent Reuters communication, "Europe took a big step towards a single power market by unifying electricity trading across 15 countries and creating what has been called the continent's most important IT system". Indeed, the 4th of February 2014 can be considered as a landmark in the integration of the European power market as the coupling solution developed by European Power exchanges (PXs) & Transmission System Operators (TSOs) for the day-ahead market went into production. As Sia Partners is involved in this project and has been active in various market coupling initiatives since 2007 we want to inform you, as our relation, about this recent milestone.

The reasons for the European copper plate

It all started with the 2004 EU Electricity Market Target Model, stating the objective to create a single European Power market by 2014, and the goal to achieve a "European copper plate" with a single price for electricity in all EU member states. The EU Commission formulated this objective based on the following underlying reasons:

First of all, if power generation and transmission in Europe is utilized in an optimal way, social welfare will increase significantly. The energy bill for the end consumers (retail and business) will drop by easing cross-border trade and increasing competition between suppliers. In other words, by allowing power to flow more easily across borders, high price differences will smoothen out. In earlier studies the European Commission estimated the yearly aggregated cost reduction for consumers at as much as €4 billion. This estimation was underlined in Q3 2013 by an independent study. One of the main conclusions was that "the benefits of market coupling, if fully implemented across Europe, will be of the order of €2.5 - €4 billion per year, or about €5 to €8 per capita per year".

A second reason for market integration is that coupled markets limit the potential price impacts of unpredictable renewable energy. By fully optimizing the usage of interconnectors, surpluses and shortages are mitigated in a coupled situation. Thirdly, an integrated European electricity market is expected to result in more efficient use of power systems leading to increase in liquidity and more stable prices.

Since this "copper plate" objective, several regional coupling initiatives have successfully taken place, such as the price coupling of the central-western European (CWE) market in 2010 (Germany, France, the Netherlands, Belgium and Luxembourg), the subsequent volume coupling with the Nordic countries and implementation of Market Coupling in Czech Republic, Hungary and Slovakia in 2012. The region however that was now price-coupled in the beginning of this year is of a different magnitude as it covers 75% of the European electricity market. In the visual below the involved countries are highlighted in red:

"The Netherlands, a market with above average day-ahead prices, can anticipate an average drop in the power price levels due to the go-live of the recent coupling solution"

 

Source : ACER

Euphemia & implicit auctioning

The first paragraph and the title of the article refer to the market integration as the "continent's most important IT system". The recent coupling initiative indeed has a large IT component (approximately 50 systems and 150 interfaces), but cannot be solely considered as an IT system. One of the key elements of the recent market coupling is the newly developed unique single price coupling algorithm that has been developed by the Price Coupling of Regions (PCR) Project. The PCR project is an initiative of 7 European PXs, who together developed the procedures, redundant decentralised but interlinked IT systems and a single algorithm that calculates electricity prices, net import and export positions, and cross border electricity flows in one single run. The algorithm called Euphemia (abbreviation for Pan-European Hybrid Electricity Market Integration Algorithm) handles standard and more sophisticated order types to calculate energy allocation and electricity prices across Europe. Euphemia aims at rapidly calculating solutions with the highest possible overall welfare (source: Euphemia public description).

Another feature of implicit market coupling is the fact that cross-border transport capacity is integrated in the auction mechanism of the day-ahead power markets. Before, energy traders had to book separately the transport capacity on an interconnector cable, prior to executing the power trade. Due to this implicit allocation mechanism, this separate transport capacity procurement step is not required anymore. Cross-border capacity is automatically allocated by the PCR system.

Consequences & next steps

It is too early to measure the effects and consequences of the recently implemented single price coupling in the NWE/SWE regions. Hence, detailed insights on the impact on liquidity, efficiency and social welfare will follow in the near future. Nevertheless first observations already show a significant price convergence between market countries. The Netherlands for example, a market with above average day-ahead prices, can anticipate an average drop in the power price levels.

As indicated, a lot of coupling initiatives have been realized, however significant work still has to be done. Currently, the involved PXs and TSOs are occupied with the following integration developments:

Coordinated cross-border coupling of intraday electricity markets, foreseen for the end of 2014

  1. Flow-based grid modelling - an optimized coordinated capacity calculation and allocation process, leading to better overall social welfare.
  2. Coupling of other remaining European regions (Central East Europe & Central South Europe)

The road towards a fully integrated European electricity market is still long and will be challenging, as each step comes with questions about market rule harmonisation, governance etc... Nevertheless, the recent NWE/SWE coupling of the day-ahead market is a major step forward and a big achievement of the involved PXs and TSOs.

Sia Partners

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