European Market Coupling

Market Coupling optimizes the allocation of cross-border capacities between countries. Thanks to a coordinated calculation of prices and flows, available cross-border capacity is used more efficiently and the price difference between two or more market areas is reduced. 

How Market Coupling works

Before the introduction of Market Coupling, cross-border capacity on one hand and electricity on the other hand, had to be purchased separately. This means that a trading member had to reserve cross-border capacity in a first step, before using this capacity to transport the electricity bought in a second step. Market Coupling uses so-called implicit auctions in which market participants do not individually receive allocations of cross-border capacity, they just bid for the electricity on the Exchange. Power Exchanges then take into account available cross-border capacity in the price calculation process, in order to minimize the price difference in different market areas.
In so doing, Market Coupling maximizes social welfare, avoids artificial splitting of the markets and sends the most relevant price signal for investment in cross-border transmission capacities. The efficiency of Market Coupling is furthermore proven by an increasing price convergence between market areas.

European Market Coupling initiatives

EPEX SPOT has a long-standing experience in Day-Ahead coupling projects. Between November 2006 and November 2010, the EPEX SPOT French auction has been part of the Tri-Lateral Market Coupling (TLC), integrating the French, Belgian and Dutch Day-Ahead markets. The next step of market harmonization was achieved on 9 November 2010, with the launch of market coupling in Central West Europe (covering Benelux, France and Germany), known as CWE.

The most important step of European market integration took place on 4 February 2014, when Price Coupling in North-Western Europe (NWE) went live. This was a project initiated by the Transmission System Operators and Power Exchanges of the countries in North-Western Europe. The 17 partners of this project comprise the Power Exchanges EPEX SPOT (including former APX and Belpex) and Nord Pool as well as the TSOs 50Hertz, Amprion, Creos, Elia, Energinet.dk, Fingrid, National Grid, RTE, Statnett, Svenska Kraftnät, Tennet B.V. (Netherlands), Tennet GmbH (Germany) and TransnetBW. It was the first initiative to use the pan-European PCR (Price Coupling of Regions) solution for the simultaneous calculation of market prices and flows on interconnectors with one single shared algorithm called Euphemia.

At the time of the launch, NWE stretched from France to Finland and from Great Britain to German/Austria, covering the region of CWE, Great Britain, the Nordics and the Baltics. EPEX SPOT played a crucial role in the implementation of this project, in close cooperation with other Exchanges and Transmission System Operators. In May 2015, the calculation of cross-border capacities in CWE countries has switched to a more efficient calculation process called flow-based methodology.

Since the launch of NWE, two extensions of the PCR-coupled area have taken place: In May 2014, Spain and Portugal joined; in February 2015, Italy coupled with France, Austria and Slovenia (IBWT). The now-coupled area is called Multi-Regional Coupling (MRC) and covers 19 countries, standing for about 85% of European power consumption.

In parallel, Within the 4 MMC project, Hungary, Slovakia, the Czech Republic and Romania are coupled among each other. The ultimate goal is to connect these markets to the MRC coupled markets, a process currently being prepared by the CORE initiative.

ELIX: Towards a single European market price

The European electricity index, ELIX, allows a sneak peek into the future: It simulates every day the price developments of a truly integrated European power market without congestion constraints.

Since 18 October 2010, EEX and EPEX SPOT calculate and publish ELIX, the European Electricity Index for each delivery day at EPEX SPOT. The index is calculated on the basis of the actual aggregated bid and offer curves for all EPEX SPOT market areas.

ELIX is the market price that would result from a physically unconstrained market environment, without congestion or capacity issues. This makes it an essential benchmark price for the single European market. The index shows the remaining additional benefit that could be achieved through further market integration.  

Price Coupling of Regions (PCR)

Price Coupling of Regions (PCR) is the project of European Power Exchanges to develop a single price coupling solution to be used to calculate electricity prices across Europe, respecting the capacity of the relevant network elements on a Day-Ahead basis. This is crucial in order to achieve the overall EU target of a harmonised European electricity market. The integrated European electricity market is expected to increase liquidity, efficiency and social welfare. PCR is open to other European power exchanges wishing to join.

What is PCR:

PCR is based on three main principles: a single algorithm, robust operation and individual power exchange accountability

  1. The common algorithm gives a fair and transparent determination of Day-Ahead electricity prices and a net position of a bidding area across Europe. The algorithm is developed respecting the specific features of the various power markets across Europe and the electricity network constraints. It optimises the overall welfare and increases transparency.
  2. The PCR process is based on decentralised sharing of data, providing a robust and resilient operation.
  3. The PCR Matcher and Broker service enables the exchange of anonymised orders and electricity network constraints among the power exchanges to calculate bidding zone prices and other reference prices as well as net positions of all included bidding areas.

History:

The project is currently being carried out by seven Power Exchanges: EPEX SPOT, GME, Nord Pool, OMIE, OPCOM, OTE and TGE. PCR is used to couple the following countries: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Luxembourg, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and UK.

The initiative started in 2009 and the PCR parties signed the PCR Cooperation Agreement and PCR Co-ownership Agreement in June 2012.

One of the key elements of the PCR project is the development of a single price coupling algorithm, which was given the name EUPHEMIA (acronym of Pan-European Hybrid Electricity Market Integration Algorithm). It is used to calculate energy allocation, net positions and electricity prices across Europe, maximising the overall welfare and increasing the transparency of the computation of prices and power flows resulting in net positions.

Cross-Border Intraday Market Project (XBID)

Intraday markets are an important tool for market parties to keep positions balanced as injections and/or off-take may change between the Day-Ahead stage and real-time operations. The growth of intermittent generation capacity has increased the importance of efficient Intraday markets.

Consequently, the European Commission has established a Target Model for Intraday, based on continuous energy trading where cross-zonal transmission capacity is allocated trough implicit continuous allocation. This model has been laid down into the Framework Guidelines for Capacity Allocation and Congestion Management (CACM).

The European Power Exchanges (PXs) EPEX SPOT, GME, Nord Pool Spot and OMIE (PXs) are responding to the needs of the market by establishing a transparent and efficient continuous Intraday trading environment to enable market parties to easily trade out their Intraday positions.

The possibility for market parties to trade out their imbalances is thereby significantly improved as they do not only benefit from the Intraday liquidity available on a national level, but also from the available liquidity in other areas.

In order to help to realize this goal the PXs, together with the Transmission System Operators (TSOs) from 12 countries, have launched an initiative called the XBID Market Project, to create a joint integrated Intraday cross-zonal market. The purpose of the XBID Market Project is to enable continuous cross-zonal trading and increase the overall efficiency of Intraday trading on the single cross-zonal Intraday market across Europe. The wider XBID solution creates one integrated European Intraday market.

This single Intraday cross-zonal market solution will be based on a common IT system forming the backbone of the European solution, linking the local trading systems operated by the Power Exchanges, as well as the available cross-zonal transmission capacity provided by the TSOs. Orders entered by market participants in one country can be matched by orders similarly submitted by market participants in any other country within the IT systems’ reach, provided there is cross-zonal capacity available.

The Intraday solution supports both explicit (where decided by National Regulatory Authorities) and implicit continuous trading and is in line with the EU Target Model for an integrated cross-zonal Intraday market.