Explicit capacity auction
Explicit auction is when the transmission capacity on an interconnector is auctioned to the market separately and independently from the marketplaces where electricity is auctioned. Explicit auction is considered as a simple method of handling the capacity on the international interconnections in Europe. The capacity is normally auctioned in portions through annual, monthly and daily auctions. Since the two commodities transmission capacity and electricity are traded at two separate auctions, there is a lack of information about the prices of the other commodity. This lack of information can result in an inefficient utilization of interconnectors, i.e. less social welfare, less price convergence and more frequent adverse flows.
Implicit capacity auction
With implicit auction the day-ahead transmission capacity is used to integrate the spot markets in the different bidding areas in order to maximize the overall social welfare in both (or more) markets. The flow on an interconnector is found based on market data from the marketplace/s in the connected markets. Thus the auctioning of transmission capacity is included (implicitly) in the auctions of electricity in the market. In implicit auctions the transmission capacity between bidding areas (price areas/control areas) is made available to the spot price mechanism in addition to bid/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. Implicit auctions ensure that electricity flows from the surplus areas (low price areas) towards the deficit areas (high price areas) thus also leading to price convergence.
Implicit auction signifies the concept used for both ‘market coupling’ and ‘market splitting’. There is not necessarily any difference in the calculation algorithms or principals used for market coupling and market splitting. What differentiates market coupling from market splitting is how the algorithm is operated and owned, and which results from the central calculation the local markets use subsequently.
Market splitting
In market splitting the implicit auction of transmission capacity is handled within the day ahead electricity auction by one single power exchange. In the Nordic region Nord Pool Spot performs market splitting since the transmission capacity between the Nordic bidding areas is handled implicitly in the price and bid matching calculation performed at Nord Pool Spot. Sometimes the transmission capacity between the internal bidding areas is not enough to get a complete convergence of price, and the result is that there are different prices in different bidding areas. Thus the term ‘market splitting’ refers to the fact that the limited transmission capacity leads to a split between to market areas.
Market coupling
In market coupling the implicit auction is organized in cooperation between two or more power exchanges. Thus the term refers to the coupling of two or more power exchanges. Each power exchange submits the necessary market information to a central coupling algorithm. The TSOs provide the transmission capacity available between the market areas. The central calculation delivers both flows between, and prices in all market areas. The flows between the coupled markets are at least used further in the local bid matching of the power exchanges, but it is also possible that the local market can adapt also the prices and bid results from the central coupling algorithm. It is common to differentiate between price market coupling and tight and loose volume market coupling.
Price coupling
In price coupling all market data and all market rules of the coupled markets are included in the central market coupling calculation. The central algorithm determines the prices in the underlying bidding areas, a list of selected block orders for each bidding area and the net positions (or flows) between the bidding areas. All this information is then adapted by each power exchange which then merely calculates each participant program based on the prices and block bid selection delivered by the central coupling unit.
Tight volume coupling
In tight volume coupling the same input is required from the power exchanges as for price coupling. However, only the determined flows between each exchange area are adapted by each power exchange which again calculates the prices for the different market areas separately. Since prices are calculated by each power exchange in a second step, volume coupling may result in small adverse flows or price discrepancies due to small differences in matching algorithms, in the implementation of market rules or in the completeness of the market data delivered to the central algorithm. The rationale behind using volume coupling instead of implementing price coupling may be that it is not possible to establish market coupling and at the same time include all market rules and features for all areas at the same time. Volume coupling is by many viewed as a step towards a closer integration of markets on the way towards a common price coupling for larger regions.
Loose volume coupling
As with tight volume coupling, it is only the determined flows (volumes) between each exchange area which are adapted by each power exchange in their local price calculations. However, the more differences there are between the matching algorithms, the less market rules that are implemented in the central algorithm and the less completeness of market data delivered from the power exchanges - the looser becomes the volume coupling. Depending on the ‘degree of looseness’, loose volume coupling will frequently deliver adverse flows and less convergence of prices between the market areas which again gives a lower gain in social welfare than with tight volume coupling or price coupling.
Market coupling of NPS and EPEX through EMCC
On the 9th of November 2009 the market coupling of the Nordic and the German spot market was launched. The market coupling is governed through EMCC - European Market Coupling Company GmbH - which is a joint venture of Nord Pool Spot, EPEX Spot , 50Hertz Transmission GmbH (formerly Vattenfall Europe Transmission), transpower stromübertragungs gmbh (formerly E.ON Netz) and Energinet.dk.
EMCC owns a market coupling algorithm which, by calculating the optimal flow on the connections between Denmark and Germany, couples the Nordic and German day ahead markets of Nord Pool Spot and EPEX Spot.
Currently the market coupling is performed on the two interconnectors between Germany and Denmark (DK West: Capacity northbound 950 MW, southbound 1,500 MW. DK East: Capacity on Kontek cable 550 MW in both directions.) There are also plans to include the Baltic cable of 600 MW between Sweden and Germany in 2010.
The calculation algorithm is physically operated by trading desk personnel of the two power exchanges. NPS and EPEX are taking turns of the operation every second month.
EMCC is accredited as trading participant at both power exchanges and is entitled by the capacity owners, Transpower, 50Hertz and Energinet.dk, to allocate available cross-border capacities for implicit auctions. Thus the congestion rent from these connections is accumulated in EMCC and subsequently paid to the capacity owners.
The coupling of NPS and EPEX is tight volume coupling
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. The market coupling of NPS and EPEX is what is normally referred to as tight volume coupling.
All market rules of the two regions are reflected in the EMCC algorithm and all possible market information from the market places is included in the market coupling calculation.
After gate closure, each power exchange aggregates the bid information for each bidding area and submits these market data in a file to the coupling algorithm of EMCC. The owners of the interconnectors between the market areas put all or part of their capacity at the disposal of EMCC and the capacity values are also sent to the coupling algorithm.
The algorithm uses the economic welfare criterion and on the basis of market coupling capacities and prices, the optimal flow between the market areas is determined. These flows are called market coupling flows (MCF). 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.
More information about EMCC can be found here.