Market Coupling: Technical conditions for coupling have been created

Energy is sold from one country to another. However, the cross-border capacities required for the energy transportation are available only to a limited extent. For that reason, energy traders have to bid for the necessary cross-border transport capacities from the transmission system operators before they can carry out a cross-border deal.

In order to make the most efficient possible use of these limited transport capacities, transmission system operators assign its free capacities using a market-oriented allocation process.

Today energy traders forecast the demand for energy and the anticipated generation in the various countries. On the basis of these assumptions they estimate the market prices in the various markets. The limited available transport capacities at the market borders are not fully utilised at all times with this process. This can lead to economic inefficiencies.

Market coupling creates the conditions for exploiting the cross-border transport capacities even more efficiently.

To enable a more efficient utilisation of cross-border transport capacities, the European Union defined standards in 2009 for the interconnection of the markets to create a European internal electricity market – known as «market coupling».

For the day-ahead market, in which the energy trading for the following day is carried out, the foundation stone was laid for the European internal electricity market as long ago as 2006, in the form of the Trilateral Market Coupling between France, Belgium and the Netherlands. In the meantime, this process for the creation of an integrated internal electricity market has already advanced quite considerably.

For the intra-day market, in which energy is traded for the current day, market coupling is only at the preparatory stage.

In the current system Swissgrid conducts the trade in cross-border transmission rights by means of explicit auctions. At the same time the energy is traded across all borders in a separate market on the energy exchanges. So the trading in capacities and the trading of energy are carried out separately from one another, in different processes.

Market coupling means that both the aforementioned processes, and hence the markets for capacity and energy, are merged to form a single, integrated, or in fact coupled electricity market. As a result, the cross-border trading of energy and the allocation of the necessary transport capacity are carried out together – in one implicit auction. The price calculation for energy and cross-border transport capacity is carried out on the spot energy exchange, which thus plays a key role in market coupling. But how does this market coupling work?

Various partners are involved at different times in the market coupling process. These include transmission system operators, collective service providers for capacity calculation, spot energy exchanges and others. So market coupling requires elaborate coordination between all the parties involved. The desired efficiency gains can only be achieved when the complex procedures intermesh perfectly.

In the technical article from the VSE Bulletin under «Downloads» you can read about the detailed chronological process of market coupling.

Market coupling makes it possible to exploit cost-effective energy availability in one country to cover energy demand in another country with a higher price level. Ideally this results in the equalisation of prices in all the coupled markets. This in turn leads to the optimised utilisation of power plants and resources and to the optimum exploitation of cross-border transport capacity, taking into account any bottlenecks.

So there is always an economic benefit for the whole of the region under consideration. According to the Agency for the Cooperation of Energy Regulators (ACER) this may result in a major economic benefit for Switzerland. It is not currently possible to forecast precisely how great this will be for Switzerland on the introduction of market coupling at all borders.

In 2013, Swissgrid made an undertaking to the political establishment, the energy sector and industry to prepare for the introduction of market coupling with the neighbouring countries. For that reason Swissgrid launched a project which both creates the technical and operational conditions and is also intended to implement the commercial coupling to the European internal electricity market.

In close cooperation with its project partners, Swissgrid has ensured technical and operational readiness for coupling as of the end of 2014, thus meeting all the requirements for the coupling of Switzerland with the European internal electricity market. However, the introduction of actual market coupling – i.e. commercial coupling – can only take place when Switzerland and the European Commission have reached the appropriate political agreements. In view of this technical readiness, Swissgrid regrets that the scheduled commercial coupling of Switzerland to the European internal electricity market cannot yet take place for political reasons.

The technical article from the VSE Bulletin under «Downloads» demonstrates how the technical and operational processes intermesh with the commercial processes.

What is the purpose of market coupling?

Market coupling means that cross-border markets for energy trading and energy transport are merged to form a single market. As a result, the low-cost availability of energy in one country can be used to cover the high demand for energy in another country with a higher price level.

Ideally the prices in all the affected markets are equalised in this way and there is optimised utilisation of power plants and resources, as well the optimum exploitation of existing cross-border transport capacity, taking into account any bottlenecks.

Overall this improves market efficiency and helps to integrate local and regional markets into a European electricity market.

When will market coupling be introduced in Switzerland?

In close cooperation with its project partners, Swissgrid has ensured technical and operational readiness for coupling as of the end of 2014, thus meeting all the requirements for the coupling of Switzerland with the European internal electricity market.

Swissgrid and the EPEX SPOT European electricity exchange signed an agreement in November 2013 to couple the Swiss and European electricity markets. However, the introduction of actual market coupling can only take place when Switzerland and the European Commission have reached the appropriate political agreements.

How does market coupling work in practice?

In market coupling (also known as implicit auctions), energy deals and capacity rights are awarded together. The corresponding availabilities and demands of the energy traders are bundled on the spot energy exchange. The available cross-border transport capacities between the markets of the participating countries are then used to offer lower-cost products in more expensive markets. An appropriate algorithm ensures that this process is conducted efficiently across all participating markets. With market coupling, the exchanges are solely responsible for cross-border energy trading.

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