Follow European Markets Price Coupling with ZEMA

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After overcoming a period of setbacks, Europe’s electricity market is on course to initiate the new North-Western Europe (NWE) and South-Western Europe (SWE) integrated market place (IMP) model covering three quarters of the European market. The project start-up phase will take effect on February 4th for the delivery of electricity in the regions on February 5th (APX), while the expected deadline for full price coupling is anticipated for April 2014 (ACER).  This will be the first implementation of the Price Coupling Region (PCR) infrastructure and a major stepping stone in unifying the electricity market to a single entity. European Power Exchanges (EPXs) looking to address market reliability and stability were the main driving force behind this initiative (APX).  If the new models are deemed successful, the electricity market could witness changes in pricing, supply, and transmission capacities (CASC).

Key Stakeholders

The PCR model looks to incorporate several Transmission System Operators (TSOs) and exchanges to eventually form a continental wholesale electricity market. Major NWE TSOs, such as APX, Belpex, and Tennet, consisting of 15 nations, will need to adopt the single algorithm price model using an implicit auction for power and capacity trading (Tennet). As a fallback option, TSOs in SWE will account for decoupling of prices as the France-Spain interconnection will continue to operate with the explicit auction model, separate from the IMP with no changes in data publication processes (APX).

The graph below, created in ZEMA, demonstrates the current pricing structure data from France’s TSO-RTE daily auction. The market structure is based on the laws of supply and demand (InfoSCI); an overall export of available capacity from France to Spain will lead to higher transmission prices in France and vice versa (Figure 1).

The successful implementation of a single algorithm price system is pivotal to the PCR infrastructures stability. Europe’s major energy regulators’ established trading systems must be able to react in unison with each other in terms of sharing input and output data to produce a single market price; furthermore, the risk of extreme price fluctuations from a single area affecting the entire IMP are mitigated by partial decoupling (EREG). Overall, market participants can make better use of their cross-border capacities, as price coupling is anticipated to increase liquidity and reduce risk in electricity trading (CASC).

Planning for a Harmonized Market

The PCR model, meant to improve price transparency, is not exempt from the external factors affecting electricity prices. Recent weather conditions in Northern Europe have displayed a greater need for partial decoupling within regional IMPs. Wind storms in Germany and Scandinavian countries during the final weeks of 2013 have dramatically increased electricity generation from renewable sources (EMT).

The graph below, created in ZEMA, displays extreme spikes in wind speed, which contributed to dramatic slides in prices during the holiday period where electricity demand is usually lower. As wind speeds declined by mid-January, demand for renewable sources decreased. As a result, higher cost natural gas and coal generators were activated (Figure 2).

Negative electricity prices on December 24th can be attributed to increasing wind speeds, and regulations requiring renewable sources to be used for power generation in Germany. Neighboring nations have also felt the effects of decreasing prices, primarily from wind generation, as Germany’s delivery price for electricity fell to nearly -35 EUR/MWh and -62 EUR/MWh in off-peak hours. Denmark and Sweden experienced a similar downward pressure on prices during the same period from a higher demand for wind generation (Reuters).

Germany, a current member nation of Central-Western Europe’s (CWE) market coupling model, has developed into a benchmark of electricity trading, heavily influencing prices across the coupling region. Denmark and Sweden are also members of a market coupling region, Nord Pool Spot (NPS), which is the first to undertake the coupling system. Both of these regions are playing key roles in the NWE PCR initiative, as the CWE-Nordic interconnection will act as a fallback if the NWE is deemed unsuccessful and requires price decoupling (EIR).

Final Words

A completely harmonized European market is set to become a reality in the very near future. The implementation of a single algorithm price model and further expansion of interconnected borders will demand a greater need for coordination between market participants. Immediate and easy access to critical TSO and Power Exchange information for key stakeholders is essential in order to realize the full benefits of the PCR infrastructure across the entire continent.

With a robust library of historical and current European power market data, ZEMA can help market participants track changes in demand and capacity across the European market. For more information on how ZEMA helps businesses in the power markets manage their complex data needs, book a free demo.

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