An important feature of the BELPEX DAM is its coupling with the neighbouring Power Exchanges.
Market coupling is a method for integrating electricity markets in different areas. With market coupling the daily cross-border transmission capacity between the various areas (here the Netherlands, Belgium and France) is not explicitly auctioned among the market parties, but is implicitly made available via energy transactions on the power exchanges on either side of the border (hence the term implicit auction).
It means that the buyers and sellers on a power exchange benefit automatically from cross-border exchanges without the need to explicitly acquire the corresponding transmission capacity. This system of market coupling has been in use since 2006 and has proven very successful.
The main purpose of this mechanism is to maximize the total economic surplus of all participants: cheaper electricity generation in one country can meet demand and reduce prices in another country. Prices will equalize across adjacent countries where there is sufficient transmission capacity. Coupling the three exchanges also leads to a more efficient use of the daily capacity of the interconnections between the networks of involved national Transmission System Operators (Elia for Belgium).
The market coupling is designed to enable different power exchanges to be coupled in a manner that requires them to make minimal changes to their market rules. For the members of the individual power exchanges, bidding methodologies remain practically unchanged. The involved Power Exchanges continue to exist as legally separate markets, with their own clearing and settlement arrangements.
A short explanation of the market coupling concept, its benefits and the implications for the market is given hereafter. If you would like to have a more in-depth information on the market concept please click here.
Basic market coupling concept
Coupling markets involves handling their respective supply and purchase curves jointly according to the overall merit order - i.e., matching the highest purchase bids and lowest sales bids, regardless of where they have been introduced - but taking into account the available interconnection capacities. The overall aim of market coupling is to maximize the total surplus of all participants.
This 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, until the point that prices converge or available cross-border capacity is exhausted.
The marginal offer price for exports from one exchange is represented by a Net Export Curve (NEC). This is derived from the bids and offers by market participants in the exchange's market.
Net Export Curve
For each period, the Exchange can represent its received bids and offers as ascending bid and offer curves.
An export can be treated as a market bid, moving the overall bid curve across by the export volume. The market-clearing price will increase to from P0 to P*.
The relationship between the export volume and P* defines the NEC. Imports are in this respect treated as negative exports.
The isolated market clearing price, the price the market would clear at without market coupling, is defined where export volume is zero, P0.
Unconstrained Coupling and Constrained Coupling
In a two-market scenario, the export from one market equals the imports of the other. The NECs for each period from each market can be superimposed to identify the prices that would result in each market corresponding to a particular cross-border volume. In this respect there can be distinguished two situations:
1. Unconstrained Coupling
Transmission constraints do not limit the necessary cross border flow for a complete price convergence.
2. Constrained Coupling
Transmission constraints limit the necessary cross border flow, preventing complete price convergence.
Possible market outcomes from coupling France, Belgium and the Netherlands
Given the fact that the Trilateral Market Coupling involves two cross-border connections (FR-BE and BE-NL) which individually can be unconstrained coupled or constrained coupled, there can be considered three possible market outcomes:
Multiperiod coupling
The exchanges offer products, notably block orders, that bridge more than one period. (A block order is where an order (bid) is made for a certain volume over a certain period provided that the average market clearing price is less (more) than the order price). The consequence of these multiperiod products is that the Net Export Curves for each period are not independent. It is, therefore, not possible to solve a settlement day by solving each hourly period separately.
This multiperiod problem is an issue for the exchanges irrespective of market coupling. Most have historically adopted heuristic rules and iterative approaches to calculate their market clearing prices.
The basic market coupling approach developed by EuroPEX and ETSO use a similar iterative approach to solving the multiperiod coupling problem. The basic model is illustrated in figure 3.
Benefits of market coupling through implicit auctioning
Compared to the daily explicit auctioning of physical transmission rights, implicit auctioning offers certain advantages that will promote the development and smooth operation of the market:
- Instead of two steps (buying first the capacity and then trading via the exchange or otherwise), parties are able to trade in one step in an automatically coupled international market. Market players are not required to buy transport capacity without knowing its subsequent market value. This considerably reduces the risk, with a number of benefits:
- Reducing risk 'levels the playing field' and makes it easier for smaller participants to benefit from cross-border access;
- Capacity is optimally used, particularly for periods when the positive price direction is uncertain at the time of nomination of capacity (increasing the risk that the nomination is made in the 'wrong' direction).
- The market value of the transmission connection is exactly identical to the price difference between the areas. This ensures that congestion income only arises when real constraints exist.
- When there are no transmission constraints, the markets will converge entirely and the Power Exchange prices will be identical. Market coupling thus represents a major step towards a more integrated European market.
- The potential for hoarding capacity is reduced. Transmission capacity is automatically used to the maximum extent possible. Surplus capacities are immediately reported back by the exchanges to the Transmission System Operator and could be made available for reallocation (e.g. a later adjustment market or for balancing). Parties can never withhold capacity from the market or be prevented from using capacity they have paid for.
- The uncertainty regarding the eventual use of explicit interconnection capacity options obliges the TSO to put certain safety margins into place. Market coupling results in firm obligations, reducing this uncertainty and enabling the netting of flows. This should enable TSOs to make more capacity available. Moreover, when several borders are involved in an energy exchange (i.e. a sale from France to the Netherlands) uncoordinated methods result in pancaking of allocations, which further heightens uncertainty and inefficiency.
Position of the authorities/regulatory issues
The European Community is seeking to create a competitive market for an enlarged European Union to enable customers to choose their supplier and to remove all unnecessary hurdles to cross-border exchanges. As far as possible, electricity should flow between member states as easily as it currently flows within them (DG Tren, 'Medium Term Vision for the Internal Electricity Market', March 2004, p.3.)
However, cross border trade in European is limited due to congested borders. In order to cope with the physical limitation of cross border electricity trade together with the aim for an integrated European electricity market, the European regulation requires the following criteria concerning congestion management.
- Non-discrimination;
- Market based;
- Economic efficiency.
The general principles further state that the maximum capacity of interconnectors affecting cross-border flows shall be made available to the market and that transmission operators shall net capacity requirements in opposite directions in order to maximise capacity, as far as possible taken into account technical and network security standards.
Implicit auctioning meets these requirements. Next to that, implicit auctioning improves transparency with regard to e.g. specific congestion patterns. Signalling specific congestion patterns might be an incentive to increase cross border capacity (investment covered by TSO's congestion revenue) in order to increase economic efficiency/social economic surplus.
Implications for the traders
The coupling of the Belpex and neighbouring markets has the following high-level implications for the traders:
- Disappearance of the day-ahead import capacity explicit auctions, and nomination of day ahead transmission capacity is no longer incorporated via import-export nomination schedules;
- Possible impact on their bidding strategies and portfolio management due to exchange clearing price being based on a trilateral coupling process;
- Different market procedures (notably synchronization of market closure times).
Most aspects for the traders, however, remain unchanged with the introduction of the TLC, notably:
- The trader interfaces of the respective exchanges - submitting orders to your exchange and retrieving your results from the exchange can be done in exactly the same manner as you are used to (note: matched contracts for an individual member will always apply to the same HUB as the HUB from which the underlying order (which initiated the contract) was submitted);
- The settlement and clearing arrangements of the respective exchanges.