EMCC - European market integration and next steps - Enno Böttcher

European Market Integration and Next Steps

German Norwegian Energy Forum

Enno Böttcher

Berlin, 24.10.2013

2 © EMCC GmbH, 24 October 2013

Agenda

B: How does market coupling work?

C: How will the European market develop?

A: Market coupling as a means for European integration

D: European Market Coupling Company – EMCC


biomass

households & commerce

transformer station wind

turbine coal-fired

station

nuclear plant

industry

solar panels

European transmission

network

In Germany, production is decentralising.

The interaction between supply, demand, transmission

and distribution is becoming more and

more complex.

hydro production

grey scale: production blue: consumption

Supply and demand need to be balanced – also across borders

On a European scale, this is even more complex:

- differing types of production

- varying demand

- bottlenecks on cross-border cables

Cross-border high-voltage interconnectors (schematic representation)


Market coupling is a system-wide optimisation of prices and flows

EC regulation 1228/2003 (714/2009):

Efficient usage of cross-border

capacities by the introduction of

coordinated, day-ahead, market-based

mechanisms such as explicit and implicit

auctions.

Enabling buyers and sellers on power

exchanges to get automatic access to

cross-border energy trade without having

to acquire the corresponding

transmission capacity.

The EU enforced regional coupling initiatives in 2003

Market coupling increases social economic welfare by a system-wide optimisation of

prices and cross-border flows.


Explicit auction

• exists on several cross-border interconnectors

(capacity and electricity have to be purchased in two

separate steps)

Implicit auction

• Price splitting – in Nordic countries

• Price coupling in complete Central

Western European region (“CWE”)

• Interim Tight Volume Coupling (“ITVC”)

between the Nordic- and CWE regional

electricity markets since 9.11.10

• Price coupling in

Italy – Slovenia

Spain – Portugal

Czech Rep. – Slovakia – Hungary

Embedded solutions (e.g. BritNed)

Various projects in Europe, different state of development ITVC

The European market coupling landscape developed since 2003


Agenda






Efficient use of interconnectors by buying low and selling high

1 DK1: Denmark West - Germany 2 Kontek: Denmark East - Germany 3 Baltic Cable: Sweden - Germany 4 NorNed: Norway - the Netherlands

high price

sell 1

2 3 4

low price

buy

General principle

quantity

MWh

price

EUR/MWh

1 MWh

Buyers’ gain for this MWh: The difference between the market price and the bid price

Sellers’ gain for this MWh: The difference between the market price and the offer price

Demand

Supply

MCP market clearing price

Economic welfare


The benefit of market coupling is price convergence between markets

supply demand

Optimising economic welfare by balancing supply and

demand on interconnectors

• EMCC buys electricity in a low-price area with low demand

and sells it in a high-price are with high demand.

Supply and demand are balanced across borders, prices

converge.

• EMCC carries out a price calculation. Afterwards, the power

exchanges (PXs) calculate their prices.

The price calculation of EMCC and the PXs is very well

aligned.

Adverse flows are seldom

(they occur due to minimal price deviations or ramping).


DK1A SE4

DK1 DK2

NO1

NO3

NO4 SE1

FI

NO2

GE/A

T

NO5

EST ERI

LRI

NL

PL

SE2

SE3

FR

BE

7. EMCC carries out congestion rent

distribution, scheduling and balancing

and provides PXs and clearing houses

with sufficient liquidity positions

TSO task, PX task, EMCC task interconnector ITVC interconnector

EMCC runs Interim Tight Volume Coupling (ITVC), i.e.

combines NORDIC price splitting with CWE price coupling:

Roles in the ITVC setup:

1.TSOs send available capacities to

EMCC

2. PXs aggregate local bids and provide

them to EMCC (anonymized OBK)

3. EMCC calculates “global” prices and

flows (23 price areas / 32 interconnectors)

4. EMCC submits cross-border flow bids

to PXs (market coupling order, MCO)

5. PXs calculate “local” prices and flows

6. PXs publish prices and carry out

settlement and clearing with traders and

non-clearing members

EMCC is the link in the NWE day-ahead market

LV

LT

LRE

LBI

LBE


Benefits of market coupling = better utilisation, correct flows

Explicit auction results (DK-GE)

right quadrant

wrong quadrant

DK1 DK2 Baltic Cable NorNed

-1.500

-1.000

-500

0

500

1.000

1.500

2.000

-40 -30 -20 -10 0 10 20 30 40

MWh

flo

w D

K

GE

flo

w G

E

DK

€/MWh

price spread GE DK price spread DK GE

Left: explicit results from December and January 2009 (29.12.08 – 31.01.2009)

Right: implicit results from 9 November 2010 to 31 May 2011; NorNed from 12 January 2011

Implicit auction results (DK-SE-NO-NL-GE)

€/MWh

flo

w D

K/S

E/N

O

G

E/N

L

flo

w G

E/N

L

D

K/S

E/N

O

price spread

NL/GE DK/SE/NO2

price spread

DK/SE/NO2 NL/GE MWh

ramping

ramping

ramping

ramping


The prices between Germany and the Nordic areas have converged

0,00

20,00

40,00

60,00

80,00

100,00

120,00

1 11 21 31 41 51 61 71 81 91

EU

R/M

Wh

weekly averages Jan 2012 - Oct 2013

GE

DK1

DK2

SE

NO2

weeks


ITVC market coupling has many advantages

Serving social economic welfare

• Optimal utilisation of cross border capacities means significant reduction of economic losses

• Simultaneous handling of electricity trading and capacity allocation means lower transaction costs and

equal opportunities for all market participants

High-quality solution

• Inter-regional coupling mirrors local and regional solutions effectively

• High quality of algorithm, good daily performance of the coupling

Transparency

• Algorithms used to calculate prices* and flows are described and published on EMCC’s webpage

• Daily procedures and the timeline of operations are described and published on EMCC’s webpage

Cost-efficiency

• Low service fees (cost-based pricing)

Trustful governance model

• EMCC is regulated as a public service function, serving social economic welfare

• Clearly defined roles and responsibilities between PXs, TSOs and EMCC

* EMCC does not publish prices


Agenda






TRADERS

Many parties are involved in achieving the overall target

MARKET

COUPLING TSOs

CONSUMERS GENERATORS

GOVERNMENTS

REGULATORS

SPOT

EXCHANGES FUTURES

EXCHANGES CLEARING

HOUSES

POWER

BROKERS


Despite ITVC’s advantages, a new system will start in November ‘13

2 2 Further coordination between the

regional markets and other market

coupling initiatives

3 3

3 3

2 2 1 1

Within the region, local rules, products,

times and constraints need to be further

aligned

The development should consider factors

such as grid loss compensation, e.g. grid

tariffs, deadband or ramping and

harmonised gate closure times 1 1

1 1

Regenerative generation capacities, e.g. off-shore wind or solar production, need to be integrated

into all electricity markets

4 4

4 4 4 4 4 4

4 4

3 3

1 1

2 2

Price Coupling of Regions was

developed by NWE PXs and TSOs; it will

go live on 26 November 2013

PCR will introduce flow-based market

coupling in a second step after the

launch (in 2014)

2 2


Challenges for future market integration (1/2)

Capacities:

• Intraday markets partially transnational low liquidity, high volatility

• Balance energy and reserve capacity markets on national basis national and transnational

bottlenecks remain, especially as decentralised renewable generation increases

International coordination and joint planning of infrastructure are a top necessity

The development of infrastructure needs to be aligned with market-based models

The list of 250 infrastructure projects (Projects of Common Interest PoCI) by DG Energy is a good

starting point, however

Legislation and responsibilities:

• Germany proclaims the “Energiewende” (energy transition) and other countries follow similar aims –

a European concept is missing

• In Germany, legislation and responsibilities are split between two Ministries (Economics and

Environment), several public authorities, the Regulator Bundesnetzagentur and regional cartel offices

More planning reliability and investment security are needed

Harmonisation between EU, national and local authorities of neighbouring countries is essential


Challenges for future market integration (2/2)

Integrated Electricity Market (IEM):

• Flexibility is needed to incorporate and represent different states of development in different member

states

• Entrance barriers for other countries are high and need to be reduced (e.g. when will other countries be

ready to take part in a flow-based system?) are infringement packages efficient?

• Clear unbundling between monopoly and competitive market service functions has to be ensured

The IEM needs to be non-discriminatory and transparent, stable, independent and credible –

not only for day-ahead, but also for intraday, balancing, reserve capacity markets of any kind of

generation, storage and demand side response


Agenda






Governance structure of EMCC

08/08: EMCC is approved by EC DG Competition;

complying with requirements of Regulation

1228/2003 and 714/2009

08/08: EMCC GmbH is founded by Energinet.DK,

NPS, EEX, E.ON Netz and Vattenfall

Transmission

The company is registered as ordinary trader at

PXs (non-clearing member)

11/09: launch of EMCC market coupling system for

DK1 & DK2

05/10: start of market coupling for Baltic Cable

11/10: launch of ITVC: Nordic-CWE market coupling

01/11: start of market coupling for NorNed

09/12: The owners resolve to close down the company

after the transition from volume to price

coupling in NWE

Setup and Figures

TSOs 60%

PXs 40%

TSOs, 11

PXs, 5

ITVC Steering Comittee

Governance

EMCC

General Assembly

PXs

40% TSOs

60%

5 PXs

11 TSOs

TSOs

Capacity Holders

Clearing Banks

Power Exchanges

EMCC

Balancing Agreements Cash Management &

Collateral Agreements

Order Books / X-border

flow bid Agreements

Available Capacity

Agreements

Contracts


Results of from a small service provider with 6 employees

Sales Purchase Congestion Rent Volume


Contact

European Market Coupling Company GmbH

Enno Böttcher

Managing Director

Hopfenmarkt 31, D-20457 Hamburg

www.marketcoupling.com

+49 40 369 054 60

[email protected]


Types and functioning of Market Coupling

Market coupling (general term for volume and price coupling)

• Market coupling takes place between several price areas with several exchanges

• The optimal electricity flow between two areas is calculated by taking into account the available transfer

capacity (ATC) and anonymous order books (OBK) for the two areas

• Optimal means the electricity flows according to price signals – from low-price area into high-price area

Price splitting

• Market splitting takes place between several price areas with only one exchange

• Example: Nord Pool Spot in the Nordic countries

Price coupling

• Price coupling between different countries allows creating a single exchange zone as the pricing

authority does not remain with single exchanges

• Example: CWE market coupling

Volume coupling

• Prices and flows are determined by an auction reflecting all bidding areas. An auction office publishes

flows on interconnectors while the pricing authority remains with the exchanges

• Example: ITVC market coupling


Capacity holders

• 50Hertz

• Amprion

• Baltic Cable

• EnBW

• Energinet.dk

• Elia

• Fingrid

• RTE

• Statnett

• Svenska Kraftnät

• TenneT

Power exchanges

• APX-ENDEX

• Belpex

• EPEX Spot

• Nord Pool Spot

Calculation

• EMCC

webpage 1)

ATC

schedules

congestion rent

service fee

order books

bids

financial

settlement

info

ATCs from

TSOs/CASC2)/

NPS

publication

ATC

gate closure

anonymized OBKs

from PXs

start market coupling

calculation

sending MC bids to

PXs

CWE PXs market

price publication

NPS market

price publication

PXs trade

confirmation

cross-border flow

publication

schedules

12:00 10:00 at 12:10 at 12:15 before 10:00 before 14:00 at 12:45 at 12:45 thereafter

1) EMCC publishes ATC und cross-border flows („CBF“) for 4 interconnectors.

2) CASC is a TSO service provider

Day-ahead market coupling follows a complex operational procedure

Technology

EMCC - European market integration and next steps - Enno Böttcher