emcc: The Concept of Market Coupling

The Concept of Market Coupling

Principle

By definition, market coupling is the use of so-called implicit auctioning involving two or more power exchanges (PX). Market coupling can in practice be implemented in several ways. Simplified, the model chosen by EMCC works as follows:

The owners of the interconnectors between the market areas put all or part of their capacity at the disposal of EMCC the morning day-ahead. The available transfer capacity (ATC) takes into account all nominations from players with capacities bought in explicit auctions. The capacities put at EMCC´s disposal are called market coupling capacities (MCC).

At noon the exchanges receive bids from the players in their market area and transmit them anonymously to EMCC. On the basis of market coupling capacities and prices, EMCC calculates the optimal flow between the market areas. These flows are called market coupling flows (MCF). The algorithm uses the economic welfare criterion. After the calculation, EMCC submits additional price-independent bids/offers to the power exchanges. These bids and offers reflect the calculated market coupling flow. The exchanges then calculate their own prices taking the bids from EMCC into account.

EMCC also nominates the market coupling flow on the interconnectors by sending it to the Transmission System Operators (TSOs). In hours with different prices on the power exchanges EMCC will collect a congestion rent equal to the MCF multiplied with the difference in prices. The congestion rent is subsequently paid to the owners of the interconnectors. It shall be used to enhance grid quality or extend the transmission network.

In absence of further constraints there is a simple relationship between the optimal flow and the power exchange prices:
Either there is no congestion (MCF) or there is congestion (MCF=MCC) and the prices in the adjacent market areas are different. The market coupling flow is normally in the direction from the low-price area to the high-price area. However, this simple relationship does not always apply, e.g. in case of constraints on the change in the flow direction from hour to hour (“ramping”) or if the gridloss on the interconnector has to be taken account.

For more information, please click Daily Operations.

Benefits

Implicit auctions are superior to explicit auctions because they ensure that the flow is always optimal in relation with exchange prices. This is illustrated in table 1 below for the interconnector between Germany and Western Denmark in 2006.

Table 1. Flow on interconnector with explicit auctioning

The inoptimal flow associated with explicit auctions gives rise to significant socio-economic losses.