emcc: FAQ

Market coupling leads to a more efficient use of daily cross border transmission capacity compared to explicit auctioning of daily capacity.

Explicit auctions consist of two steps: At first, transmission capacity on an interconnector between two markets (market areas) is auctioned separately at a value not necessarily depending on the value of electricity. These auctions are provided by TSOs themselves or by auction offices acting on behalf of the concerned TSOs. In a second step, electricity needed for the intended deliveries has to be obtained and sold. Normally, these trades take place at power exchanges and/or OTC-markets.

From an economical point of view, explicit auctions don't present an optimal allocation system. The same market participants often obtain transmission capacity in both directions, because they do not know in which direction the power will flow next day. This is the result of a capacity auction without electricity price signals.

At implicit auctions, auctioning of transmission capacity and obtaining or selling of electricity are done in one single step and at one single place. Because of price signals being included in the capacity allocation mechanism, the power will flow from the low-price area to the high-price area. The market parties will not have to obtain border capacity in the opposite direction. The overall picture shows a macro-economical benefit for the market, although some market parties may lose the opportunity to use the inefficiency of the current allocation system.

The overall benefits of market coupling are:

• Instead of at least two steps (e.g. buying first the capacity and then trading via the exchange), parties are able to trade in one single 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:
  • Cutting down on risk 'levels the playing field' and makes it easier for smaller participants to benefit from cross-border access;
  • Capacity is used to its best advantage, in particular in periods when there is uncertainty at the time of nomination of the capacity about the direction of price differences (increasing the risk that the nomination is in the 'wrong' direction).
• The market value of the transmission capacity 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 respective power exchange prices will be identical. Market coupling thus represents a major step towards a more integrated European market.
• Transmission capacity is automatically used to the maximum possible extent. Parties can never withhold capacity from the market or be prevented from using capacity for which they have paid.

The benefits are shared by all participating market parties, which can pass them through to their customers. Individual customers may also directly benefit from the advantages of market coupling by being active at one of the involved Power Exchanges (by buying or selling electricity).

EMCC's shareholders are

Power Exchanges

EEX AG
Nordpool Spot AS

Transmission System Operators (TSOs)

Energinet.dk
transpower stromübertragungs gmbh (formerly E.ON Netz GmbH)
Vattenfall Europe Transmission GmbH

At the beginning, market coupling is carried out between Germany and Denmark. Later on, it is intended to extend market coupling to other interconnectors between northern continental Europe and Scandinavia.

The key objectives of EMCC are 

• Carrying out a daily cross-border capacity allocation for all interconnectors between Denmark and Germany based on implicit auctioning.
• Using a market coupling system sufficiently compatible with and extendable to other interconnectors or markets.
• Considering possibilities for a later integration of cross-border intraday trading and balancing markets in the concept of the auction office.
• Openness to other TSOs and power exchanges according to predefined rules.
• In general terms, EMCC will contribute to market facilitation for all parties involved and increase system security and TSOs’ compliance with EU regulations. 

EMCC will contribute to fair, transparent, efficient, secure, and non-discriminatory trading conditions and enhance security of supply in the region thanks to improved transmission system security management in compliance with EU regulations. 

EMCC improves market efficiency of cross-border capacity trading and promotes the integration of regional markets towards a Europe-wide wholesale electricity market.

Transmission system operators are responsible of guaranteeing  the transmission of electrical power from generators to consumption points at any time and in a secure manner as well as to guarantee the transits for imports and exports on interconnections.

Market players’ requests to buy and sell electricity in each electrical hub results in fixing every days’ hourly prices of day-ahead markets. Available volumes of imports and exports and market players’ forecasts of injections and consumptions for the next day will contribute to fixing these prices.

If sufficient transmission capacities are available between two electrical hubs, price differences will tend to narrow as there will be plenty of room for competition (“copper plate” effect). These structural or occasional market conditions (linked to many factors such as weather conditions, power plant availability, hub generation mix and volatility of oil and gas prices, import and export capacities, etc…), create stable or volatile price differences between European day-ahead markets.The requests for cross-border trade will therefore also be subject to important variations in terms of volumes and directions. Congestions are the result of an amount of commercial requests superior to the available transmission capacities.

One way to improve the situation is to build more interconnection lines and to make sure, through network calculations, that these new lines will bring additional transmission capacities (other constraints may become predominant and limit transit). However, this process is very long and experience from the past shows that it might last 15 to 20 years. It also requires major investments, financed by users via the tariffs, that can be undertaken only if there is a significant pay-back in the long term.Another way to improve the situation is to build new generation capacities. This takes much less time (around 4 years for thermal plants) but depends on market players.

EMCC market coupling is a market-based congestion management mechanism which will optimise, on a day-ahead basis, the transit between the EMCC electrical hubs, in order to meet market requests.

It is difficult to assess the impact which market coupling will have on volumes traded at the power exchanges in the Northern region. Theoretically, with constant order books at the power exchanges, the effect is neutral. But market coupling will certainly change the way market participants bid on the exchanges. 

On the other hand side, market coupling generally increases market resilience, and de-creases price volatility, as well as risk of curtailment.

There are several other initiatives in Europe, each of them being in a different stage of development. For more information, please click The Concept of Market Coupling.

Market coupling services are offered by European Market Coupling Company (EMCC). During the first months of operation, market coupling is carried out on the interconnectors between Germany and Denmark. Moreover, EMCC will include the link between Sweden and Germany, Baltic Calbe, and is negotiating with the owners of the link between Norway and the Netherlands, NorNed.

The set-up of EMCC is designed to allow the inclusion of further interconnectors and markets.

EMCC is operating, maintaining and extending a market coupling system according to a set of joint market coupling requirements agreed by PXs and TSOs involved in this market coupling project. 

Market coupling in the Northern region will be governed by a set of contracts, which EMCC concludes with the concerned TSOs and power exchanges respectively. 

• EMCC is a joint venture of Nord Pool Spot, EEX, Energinet.dk, transpower stromübertragungs gmbh (formerly E.ON Netz) and Vattenfall Europe Transmission. They each hold 20% of EMCC.
  
• Major decisions are taken in a General Assembly.
• The organisation may change with the inclusion of further interconnectors.
• During the temporary suspension of market coupling, the relaunch process was supported by a Task Force and external analysts.
• During EMCC’s project status, the Central Working Group and various working groups coordinated the activities. All decisions were taken by consensus of all participants.

Congestion management refers to the principles used by TSO to handle the requests on transmission capacities on interconnectors within an area or between two or more market areas (price areas) in case these commercial requests exceed the available transmission capacities. Most largely accepted market-based methodologies are explicit auctions and implicit auctions. However, continuous trading and pro-rata methodologies are still used as well as explicit auctions for intra-daily allocations.

Explicit Auctions

Explicit auction is when the transmission capacity of an electrical interconnection is auctioned separately at a market value independent from the marketplaces where electricity is auctioned. Explicit auction is now very widespread across Europe since it is a relatively simple market-based method of handling the capacity on the international interconnections. Setting up explicit auctions on all European interconnections has started a very quick harmonisation process concerning capacity allocation rules. This process is still undergoing as harmonisation is now extended to auction tools and contractual processes.

The interconnection capacity is normally auctioned in portions through annual, monthly and daily auctions. Maximum guaranteed volumes are usually allocated for each of these timeframes. Each MW of annual, monthly and daily products are directional options to use an interconnection transmission capacity from one country to another. The annual and monthly capacities that are not used are either sold by the market participants in day-ahead allocations on a secondary capacity market or given back to the market at the daily auction (use-it-or-lose-it principle) and then at the intra-daily capacity allocations.

This process means that market players have to go through two separate steps in order to use these products: One to buy the interconnection capacities and one to buy and sell the energy in each of the concerned countries. In this process, market players have no certainty about what they require for each of these steps. This uncertainty bears both risks and opportunities for market players. For TSOs, however, this bears the risk of an inefficient use of transmission capacities, especially for the daily auction for which the two steps are hold in half a day.

Implicit Auctions

Implicit auction is when the commercial flows on interconnections result from a market coupling algorithm which uses as input the daily available transmission capacities and market data from the marketplaces of the connected markets. Thus, the handling of capacity is included in the auctions of electricity in the coupled markets. In implicit auctions, transmission capacity between bidding areas (price areas / control areas) is made available to the spot market mechanism in addition to bids / offers per area, thus the resulting prices per area reflect both the cost of energy in each internal bidding area (price area) and the cost of congestion.

The main purpose of market coupling is to maximise the total economic surplus of all participants: cheaper electricity offer in one market area can meet demand in another market area and, thus, reduce price in the latter market area. Prices will level out wherever there is sufficient transmission capacity.

Coupling the exchanges also leads to a more efficient use of the allocated transmission capacity on the interconnectors between the concerned market areas, while for the participants of the individual power exchanges, bidding methodologies remain practically unchanged.

Market coupling links two or more market areas with several exchanges. It is a process where a co-operation between two or more power exchanges ensures that during every hour of operation all the available trading capacity is utilised with power flowing towards the high-price area.

With market splitting, one power exchange operates in several market, or bidding, areas. It ensures the right cross-border power flow by establishing production surpluses in the power exchange’s low-price areas, and production deficits in the power exchange’s high-price areas.

Market coupling is a way of coupling different electricity markets into one market area. In this system, all available cross-border transmission capacity is implicitly made available to all market participants by means of energy transactions between the participating power exchanges (hence the term implicit auction). 

This means that the buyers and sellers on every participating power exchange benefit automatically from possible cross-border exchanges without having to acquire explicitly the corresponding transmission capacity right. 

The market coupling system is the technical software tool which EMCC uses to calculate the net positions (the volume of power to be exported or imported) and the market area prices of the respective power exchanges. Net positions will be used to calculate cross borders flows.

In this mode, the whole set of market results (net positions, prices and list of selected block orders) are determined centrally by a central calculation unit (CCU) and the exchange applies as final results for its members these “central” results. Therefore, the market coupling office does not only calculate and publish cross-border flows but also the prices in the adjacent market areas.

In this mode, only the net positions computed by the central calculation unit (CCU) are used by the exchanges which incorporate them as price acceptant orders into their local system. The exchanges thus locally calculate their prices on their own in a second step, only taking into account the net positions of exchanges resulting from the use of electrical interconnectors.

Electric energy always flows from a source (generation of power plants) to a sink (industry, households, etc.). The flow patterns in the grid result from the production of all sources, the consumption at all sinks and the grid topology at any moment in time. Electricity transmission flows fan out across all available parallel paths in accordance with the laws of physics.

The flow-based model is a methodology which is based on the description of the network in order to take into account network security constraints when optimising the market flows (i.e. the match of offer and demand) for the concerned region, thus maximising the economic surplus generated.

The flow-based methodology is recognised to be more efficient than ATC-based methodology to maximise the global economic surplus and to improve the security of the network since it takes into account in a more precise way the constraints of the network. However, he potential risks of using a flow-based model for market coupling could result in non-intuitive market results such as price volatility and price divergence.