Market Coupling and Price Coordination between Power
Exchanges
Marek ADAMEC, Michaela INDRAKOVA, Pavel PAVLATKA
Dept. of Economics, Management and Humanities, Czech Technical University, Zikova 4, 166
27, Praha, Czech Republic
[email protected], [email protected], [email protected]
Abstract:
Market coupling is a frequently used method for integrating electricity markets in
different areas. Cross-border transmission capacity between the various areas is not
explicitly auctioned, but it is implicitly made available for the energy deals on all power
exchanges, which are on the same side of the border. Traders on power exchange therefore
benefit automatically from cross-border exchanges without the need to explicitly acquire the
corresponding transmission capacity. The main idea of market coupling mechanism is to
maximize the total economic surplus of market participants and increase social welfare. It is
obvious that sufficient transmission capacity between networks will enable to equalize or
decrease spread across the different countries. The main idea is to maximize total economic
surplus of all participants, while cheaper generated electricity in one country meets demand
and reduces price in another country. Implicit auctioning offers certain advantages that
promote the development and smooth operation of the market. Market participants are not
required to buy transport capacity without information about its market value. This enables to
reduce risk exposure significantly and makes it much easier for trading participants to benefit
from access to cross-border grid. The market value of the transmission right is equal to the
price difference between the areas. Therefore the income of TSO is arising only when
constraints of transmission exist. Market coupling thus represents a major step towards a
more integrated European market. From our point of view market coupling optimizes the
clearing and settlement of the electric energy orders, which are traded in day-ahead auctions.
All orders from different locations are exchanged to the extent that network capacities allow.
Coordination is necessary for coupled exchanges to support location incentives for network
development, consumption and generation. The revenue redistribution among market
participants of power exchange and TSO is also discussed in the paper.
Keywords: Cross border trading, implicit auction, market coupling, day ahead auction
1. Benefits of Market Coupling Mechanism
Market coupling is one of possible methods for integrating electricity markets in
different areas. In Europe, market coupling stands for a further integration of electricity
trading across country borders. The main idea of this method is the improvement of the
effective utilisation of daily cross border capacities between different areas. With market
coupling the daily cross-border transmission capacity between the various areas is not
explicitly auctioned among the particular market parties, but is implicitly made available
through energy transactions on the power exchanges (PEXs) on either side of the border. This
leads to availability of power exchanges to optimize the clearing of their day-ahead auctions.
The optimal solution can be settled at different prices due to verticals in the aggregated order
curves. Therefore we have to place emphasis on price coordination, which is really important
to give correct locational signals for network developement and correct signals for generation
and consumption.The physical flow on an interconnector is based on market data from the
marketplaces in the connected markets. On the other hand, explicit auction is when the
transmission capacity on interconnector is auctioned separately and independent from the
markets where electricity is finaly auctioned. Explicit auction is considered as a very simple
method of dealing with capacity, but it is not sufficiently effective due to current trends.
Market coupling concept thus leads to the state, where the buyers and sellers on PEX benefit
automatically from all cross-border exchanges without the need to explicitly allocate relevant
transmission capacity. The main goal of this method is to maximize the total economic
surplus of all market participants. The main benefits could be gained by matching bids at
lower price in one country, which meet demand at higher price in another country and the
result is a reduction of prices in another country. Sufficient transmission capacity then enables
to equalize prices across adjacent countries. The concept of market coupling is designed to be
operated in a manner that requires minimal changes to market rules of power exchanges.
2. Available transfer capacitites on interconnectors
Market coupling mechanism is working with the concept of available transfer
capacity, which is very important and necessary for effective trading. In order
to correctly calculate the particular available transfer capacity of particular
crossborder interconnector and the total capacity which is their combination,
the Association of European Transmission System Operators (ETSO)
developed methodology for the needs of Czech power system for the
profiles.Czech power system is specificated by five directions of
interconnection. The formula for calculation of available transfer on profiles
is:
ATCp = NTCp – NTFp = TTCp – TRMp – NTFcp – ( kpi * ci )
Where:
ATCp – available transfer capacity on p-th profile.
TTCp – basic transfer capacity of profile is calculated from capacities
of transfer points in profile and it considers their irregular load and N1 criteria.
TRMp – reserve on p-th profile including emergency standby,
blackout of the largest block in each system and a mistake in
regulation of net interchange.
NTCp – it is so called net transfer capacity of p-th profile.
NTFp – typical total physical flow through p-th profile including loop
flow and ratio of all existent trades.
NTFcp – residual flow through profile after subtracting the ratio of
known contracted trades typical for the given period and profile
kpi – coefficient of trade ratio on i- th direction on p- th profile
ci – already included trades from i- th direction
For making values valid for all profiles public in desired lead time it is
necessary to calculate so called tradable capacities which at the same time use
available transfer capacities on all profiles until the first of them is
completely used up. Then this equation applies:
ATCj - (kji * cci) = 0
where
index j – identification of profile at which the available transfer
capacity was first used up; j {p}
kji – coefficient of trade ratio on i-th direction on profile j
cci - available trade capacity in i-th direction
3. Market coupling concept
Market coupling concept is very simple and relies on the obvious principle that the market
with the lower price exports electricity to the market with the higher price. That is of course a
well known principle in economics. There are two cases which may appear: either the
available transfer capacity (ATC) is large enough and the prices and both markets are
equalized (price convergence as we can see on fig. 1) or the available transfer capacity ATC is
too small and the prices cannot be fully equalized (more frequent case, as we can see in fig.
2). Following practical examples show these two cases. First condition is that the price of
market A is lower than the price of market B. Market A will therefore export electricity to
market B. This leads to the fact that the price of market A will increase whereas the price of
market B will decrease. If the available transfer capacity ATC from market A to market B is
sufficiently large, price convergence in the two markets may be reached, so that no market
tends to export or import to the other anymore. In second case the available transfer capacity
isn’t
sufficiently
large
and
therefore
we
can
see
here
Fig. 1: Market coupling without congestion leads to price convergence. (Powernext)
price
divergence.
Fig.2: Market coupling with congestion leads to price difference. (Powernext)
Principle of coupling markets involves agregating their respective supply and purchase
curves jointly according to the overall merit order. This method is based on matching the
highest purchase bids and lowest sales bids, regardless of where they have been introduced.
And this method also takes into account the available transfer capacities (ATC), which are
determined by the ETSO methodics. Maximum surplus can be achieved by considering that
one exchange will export to another for as long as the marginal offered price in one is lower
than the marginal bid price in the other one, until moment of prices convergence or available
transfer capacity is exhausted. The marginal offer price for exports from one exchange to
another is represented by a Net Export Curve (NEC). This is derived from the bids and offers
by market participants in the exchange's market. There are two concepts of market coupling
Price based coupling (close coupling)
In price based coupling the power exchanges leave the price calculations to the market
coupling system. The prices derived from the combined price and physical power flow
calculations are used as settlement price on the local power exchanges. The market area prices
and the volume traded are done by one common office.
Volume based coupling (loose coupling)
In volume coupling only the power flow from the coupling mechanism is used as input in
the local price calculations. The flow is then entered on the local PEX as price independent an
(on?) order, which depends on direction of flow. The extent of price discrepancies, which may
occur due to differences in the PEX price algorithm from market coupling algorithm, will
depend on to what degree the coupling algorithm takes local differences into account in the
flow calculation.
4. Net Export Curve (NEC) concept
For each time period, the power exchange can represent its received bids and offers as
agreggated bid and offer curves. An export can be considered as a market bid, moving the
overall bid curve across by the export volume. The market clearing price will then obviously
increase. The relationship between the export volume and market clearing price defines the
NEC. Imports are in this respect considered as negative exports. Next figure shows the
principle diagram of net export curve concept.
Fig. 3: Concept of net export curve (Powernext)
In a two-market scenario (for example Czech and Slovak market coupling), the export from
one market equals the import of the other one. In this respect there can be distinguished two
situations, congested and uncongested situation, which we can see in the next figure 3. First
situation allows market coupling concept to equalize prices of market 1 and market 2 and
therefore we can see price convergence. Second case shows us the case of congested situation
which leads to price difference between these two markets.
Fig.3: Congested and not congested situation of market coupling concept vs. ATC (Powernext)
5. Market coupling optimization problem
This problem involves interaction of supply and demand curves of different power
exchanges, which are matched in order to maximize the total gains from electricity trading.
Optimization of exchanges is solved for every hour of the next day (day–ahead trading
platform). This case is similar to single exchange optimization problem, where the cheapest
supply orders are matched with the highest price demand orders. The only difference in
market coupling is that curves are aggregated from different exchanges and the result of
optimization depends on the limited available network capacity. Topology and capacities of
the network need to be taken into account in every moment of solving this optimization
problem. The goal is to determine which orders will be accepted at particular hourly price at
exchange. The capacities of the network and topology are determined by TSO. Consider three
exchanges PX1, PX 2 and PX3. The submitted orders are listed in table 1.
Tab. 1: Example of three power exchanges
PEX
BIDs (Demand Orders)
Price €/MWh
Volume MWh
OFFERs (Supply Orders)
Price €/MWh
Volume MWh
Cleared volume MWh
Cleared price €/MWh
PX1
PX2
PX3
60
200
60
100
60
200
45
100
100
60
25
300
100
25
35
300
200
35
Fig. 4: Demand and supply curves of PEXs separately
Fig.5: Aggregated order curve of PXEs jointly
We can consider following example as we can see in figure 4 and figure 5. If the
exchanges are not coupled, they would have cleared a volume of 100, 100 and 200 MWh at
price of 60, 25 and 35 €/MWh. Total gain from this separated (not coupled) exchanges is
equal to 200MWh x (60 – 35) + 100 MWh x (60 – 25) + 200 MWh x (60 – 60), which is
8,500 €. In other case, where there are no network constraints and exchanges are coupled, the
profit and cleared volume are higher. The cleared volume is in case of coupled exchanges 500
MWh at price 35 €/MWh. The traded volume has increased by 100MWh and the total gain
from traiding has moved to 15,500 € (300 MWh x (60 – 25) + 200 MWh x (60 – 35)). The
increase of gain is caused by replacement of more expensive supply offer introduced at PX1
with cheaper supply offer introduced at power exchange PX2. The difference is thus 7,000 €.
As we can see in previous calculations, equation for maximizing profit from trading is:
q p
MAX
q
e
d
de
de
q p
s
se
se
,
Where pde is the price limit of demand order d introduced to exchange e, pse is the
price limit of supply order s introduced to exchange e. Accepted volume of orders are
represented by variables qde and qse. These volume variables are limited due to load flow
network constraints, which make sure that the physical flow is not higher than the available
capacity of transmission lines between different locations. These technical limits of capacities
are determined by real physical capacity of interconnector, its susceptance and also the
voltage angle. The optimal solution of market coupling optimization algorithm is to settle
locational marginal prices (LMP). This locational marginal price corresponds to the shadow
price of its market clearing constraint. Locational marginal prices give efficient locational
signals for network development and support effectiveness of the market. The properties of
LMPs can be derived from the optimality conditions of the market coupling optimization
problem. The shadow price is zero if constraint is non-binding, which is the case when the
interconnector is not fully used.
Fig.6: Net export curves (NECs) of power exchanges
The optimal solution of market coupling is following: we transfer 200MWh from PX2
to PX1. Figure 6 illustrates the possible locational prices and their corresponding export level.
The situation at power exchange PX 3 can be described like this: demand doesn’t want to
purchase electricity for the price higher than 60€/MWh, while supply side wants to supply
fully at such a high price. The corresponding export level for prices higher than 60€/MWh is
300 MWh. No supplier is offering below 35 €/MWh, while demand would be satisfied fully at
such low prices so corresponding import level is 200 MWh. Between 35€/MWh and
60€/MWh demand and supply want to be fully satisfied, so corresponding export for prices
between 35 and 60 €/MWh is 100 MWh. The export from PX3 corresponds to more possible
locational prices at power exchange. The principle of maximizing value of trades among
different exchanges is similar to the behavior of profit-maximizing firms in perfectly
competitive markets. The objective function is therefore formed by maximizing the value of
demand minus the cost of supply in every moment at particular exchange.
6. Importance of price coordination
The best way to coordinate prices is to use the shadow prices of the clearing
constraint. This is represented by local marginal prices LMPs. The value of congested
interconnector is always positive. The final value of a congested interconnector (€/MWh) is
equal to the amount of congestion rents (€) divided by the physical flow in MWh. These
congested rents are the result of different prices between two power exchanges. The question
is which interconnector has to be further expand expanded rather than only the question which
interconnector just only maintains. It is really important how the price ranges are significant
and how often power exchanges face to them. Based od Belpex study, in 80% of hours the
price range is smaller than 20€/MWh.
Belpex experience – Trilateral Market Coupling
This inventive market mechanism linking the Belgian, Dutch and French electricity
markets was launched on 21th November 2006 by Dutch (APX), Belgian (Belpex) and French
(Powernext) power exchanges and TSOs ( TenneT, Elia and RTE). The price coupling
mechanism has been jointly operated with constant success, enabling a coordinated and
efficient day-ahead power price formation on all three markets. Each electricity market
benefits from reduction of short-term price volatility. Prices on APX, Powernext and Belpex
were identical in 65% of the time on an average basis of the 2 first years of coupling. These
results are improving and the convergence of prices is getting stronger. As we can see in
figure 8, price convergence of Belpex prices are relatively high, the highest price convergence
is in January.
Fig.8: Evolution on price convergence – Month baseload (2008), www.belpex.be
7. Conclusion
Compared to the daily explicit auctioning of transmission capacities, market coupling
offers certain advantages that help to the development of the electricity market. Market
participants are then able to trade in one step instead of two steps in explicit auctioning and
this obviously particulary reduces market risk of electricity trading across borders. This
method also supports integration of the European electricity short-term market. The main
condition for this convergence is no transmission constraints. The congestion income exists
only in case when real constraints of transmission capacities exist. Transmission capacity is
automatically used to the maximum extent possible. Market coupling leads to optimization of
clearing orders submitted to their day-ahead auctions at exchanges. Orders at different
exchanges are trade across the borders to the extent that available network capacity allow.
Due to verticals in the aggregated order curves prices they can be settled as a price range.
Coordination among coupled exchanges is necessary in order not to distort the locational
economic incentives for network development and right economic signals for generation and
consumption.
References
[1]ETSO Europeam Transmission System Operator
[2]Training documents of the Department of Economics, Management and Humanities, under
FEE CTU in Prague
[3]L.MEEUS, L.VANDEZANDE, S. COLE, R.BELMANS. Market coupling and the
importance of price coordination between power exchanges, 2008
[4]Belpex, The Belgian Power Exchange, www.belpex.be
[5]M.ADAMEC, M. INDRAKOVA, P. PAVLATKA. Flow-based Allocation, 2008
About Author
Pavel PAVLATKA was born in Ceske Budejovice in 1982. He was awarded a master´s
degree in February 2008. He is currently a doctoral student at the Department of Economics,
Management and Humanities, FEE, CTU in Prague