Implicit auction is the common term for both market coupling and market splitting.

Market splitting

Market splitting is a cross border trading and congestion management method where the available trading capacity on all interconnectors between bidding areas (i.e. TSO grid control areas) is utilised by an implicit auction. This means that the market balance between supply and demand per bidding area automatically is determined by the combination of bids/offers in all bidding areas and utilisation of the available capacity between the various bidding areas.

In other words, in market splitting a price mechanism assures that all bidding area prices reflect both the price of energy and capacity. Therefore, whenever the overall market balance can be achieved without a need to utilise all available capacity between linked bidding areas all areas get equal prices. However, at times the supply/demand balance per area is such that to achieve a common price more capacity is needed between two or more areas then what TSOs can allow based on set grid limitations. When that is the case the price mechanism in the market splitting system ensures that all available capacity will be utilized from the area which has a  sales surplus (lower price) to the area which has a  sales deficit (higher price). Put differently, and when for simplicity only two bidding areas are considered, the mechanism ensures that the balance per bidding area is reached by combining internal purchases/sales volumes and full utilization of all capacity in the direction from the area with an internal sales surplus to the area with an internal sales deficit.

Today, market splitting only exists in the Nordic area and it is carried out by the market place operator Nord Pool Spot based on an agreement among all Nordic TSOs to provide all cross border capacity between bidding areas to the market via the Elspot Market.
Market coupling is based on the same general principles as market splitting, but with mainly the difference that it is organized between two/more separate market operators as briefly explained below.

Market coupling

Let us consider a border, where two power exchanges meet. Market coupling is a process, where a co-operation between the two power exchanges ensures the following (in case of congestion):

• During every hour of operation, all the available trading capacity is utilised with power flowing towards the high price area.

To illustrate how this is achieved, let us consider a simplified case with only two areas and one given hour of operation: Assume the cross-border trading capacity is 400 MW during the hour in question. Then the co-operation between the power exchanges will proceed the following way to reach balance:

• There is a sales surplus in the low price-side of the border of 400 MW that the exchange can show as an own purchase surplus of 400 MW that will be transferred to the high-price side.
• There is an internal sales deficit on the high-price side of the border of 400 MW which is covered by the 400 MW exchange sales surplus that is caused by the transfer from the low price-side.

When we the next day arrive at this hour, the exchange purchase surplus will, somewhat simplified, give rise to a production surplus of 400 MW at the low-price side of the border. Similarly, the exchange sale surplus will together with the internal sales deficit of 400 MW at the high-price side of the border.
Hence the laws of nature will ensure a power flow of 400 MW from the low-price area to the high-price area: The “cheap” power from the low-price area will flow into the high-price area.

Learn more about the present market coupling projects in Europe and the terminology used in a market coupling project here.