MARKET COUPLING
and finally Denmark. It was this pioneering work by Nord Pool that created the concept of market coupling. Having seen the concept in successful operation, and
having appreciated the advantages, the Nord Pool model was adopted by other European markets. In 2006 we saw France, Belgium and the Netherlands
move to couple their markets. Then in 2009 Germany and Denmark followed suit. The principle of European power market coupling had, in a few short years, moved from concept to accepted and working reality. The concept of coupling is central to European market
integration. It allows for the efficient integration of wholesale power trading arrangements, using the available transmission capacity on each interconnector. Previously the situation was one of having to trade your
day-ahead demand in the wholesale market and then trade your cross-border requirements separately, through the explicit capacity auctions managed by the TSOs. Now, by effectively ‘bundling together’ the available
transmission capacity (ATC) on an interconnector with the daily wholesale trading market, a degree of trading risk could be effectively removed from the market. As previously stated,NordPool Spot has, from the outset,
been proud to be a pioneer of market coupling. We have witnessed our transmission network operate increasingly efficiently, with the flow on the internal network reflecting where constraints lie, allowing them to be addressed. And what that means in practice has been the creation of conditions that allow power to flow more freely from low price areas to high price areas, reducing the amount of price volatility experienced due to the congestion. Make no mistake, on a pan-European level this is
an increasingly significant development. And that is particularly so when you take into consideration the fact
that the electricity market in each country will, of course, define the flow on the network through the results of its internal wholesale power market, through a day-ahead auction. For example, in a situation where demand is high in
France but low in Germany, France can import its power from this cheaper cross-border source, capitalising on the lack of demand in Germany. It is the price difference between the two coupled markets that will determine the flow of electricity between the two countries. In this example that flow would be from Germany to France. The result is a welcome and sought after maximising
of the total economic surplus of market participants and a ‘knock-on’ increase in social welfare. In essence, European market coupling sees cheaper generated electricity in one country transmitted cross-border to meet the demand, and of course reduce the price, in another. As the 2014 market integration deadline rapidly approaches, it is these benefits which the market across Europe is keenly anticipating.
The concept of coupling is central to European market integration
At Nord Pool Spot we continue to play a lead role in the
core market coupling projects currently in train across Europe. Most recently, Nord Pool Spot won the contract to develop and operate a ‘virtual hub’ which will enable the GB power market to participate in the North West European (NWE) market coupling project. As hub operator Nord Pool Spot will facilitate inter-
exchange transactions and manage power flows between the UK and mainland Europe through the cross-channel power interconnector, Interconnexion France-Angleterre (IFA). The hub is designed to allow for multiple party access, meaning that UK power traders can continue with their existing power exchange relationships and still gain access to the hub’s liquidity. The virtual hub will enable the GB market to take
advantage of the efficiencies of cross border trading and market coupling as part of the day-ahead auction, with the index price produced by the hub used to identify the direction of flow on the interconnectors. The benefits for the market also encompass structural
Hans Randen is Director of European Integration at Nord Pool Spot, operator of Europe’s leading power markets, offering both day-ahead and intraday trading.
370 companies from 20 countries trade on Nord Pool Spot’s
markets in the Nordic and Baltic regions, and on the UK N2EX.
www.nordpoolspot.com www.n2ex.com
52 December 2012
issues. The creation of a virtual UK hub by Nord Pool Spot adds impetus and incentives to the development of further electricity interconnectors within the EU. A robust and transparent reference price for power in
the EU makes it easier to assess the cost of construction of an interconnector. In short, improving price discovery provides a solid contribution to cost of capital calculations. Developments like this hold out the tantalising
prospect of more interconnectors being built in the future, furthering the cause of European market coupling. •
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