What is market coupling?

Market coupling is a way to create a harmonized and interconnected European power market by linking all market areas together. A coupled market integrates the systems of all affected exchanges and aligns market behavior with the physical cross-border electricity flow and capacity availability.  

In the EU, there are multiple market coupling systems across both day-ahead and intraday markets, which align the electricity prices across bidding zones.

What are bidding zones?

Market coupling in the EU is achieved through a “zonal model”. Power markets are divided into bidding zones and each bidding zone has one price per market time unit. The prices between bidding zones are coupled through auctions or continuous trading and ensure that grid capacity is allocated in the most efficient way. These zones do not affect market access or market entry procedures.  

Currently, market coupling in the EU is executed through three market coupling systems — Price Coupling of Regions (PCR, ordinary SDAC coupling), Flow-Based Market Coupling (FBMC), and the Intraday market coupling system XBID.

What is the Price Coupling of Regions (PCR) system?

The PCR system, otherwise known as PCR EUPHEMIA, is a price coupling algorithm for the European Day-ahead power market. The algorithm uses data shared from all cooperating NEMOs to calculate the power price for each bidding zone and implicitly allocate auction-based cross-border capacity across the markets.

The joint SDAC price coupling of regions initiative was introduced in 2009 with the goal to establish the most efficient price calculation and cross-border allocation of electricity. Currently, the system couples15 NEMOs: EXAA, HUPX, OKTE, OPCOM, OTE, TGE, BSP Southpool, CROPEX, SEMOpx, GME, IBEX, HEnEX, OMIE, EPEX and Nord Pool.

The EUPHEMIA algorithm couples 27 countries, as illustrated below:

What is Flow-Based Market Coupling (FBMC)?

The FBMC system is a price coupling mechanism for the European Day-ahead power market in the Core capacity calculation region (Core CCR). The mechanism uses an algorithm to allocate transmission capacity at the same time as the market clearing for the given bidding zone. The closer integration of market activity and capacity allocation ensures greater cross-border capacity between the internal CWE borders.

Flow-Based Market Coupling was implemented in 2015 and was extended to FBMC-Core  in June 2022.  

What is XBID?

XBID is the technical system behind the market coupling system for the European Single Intraday Coupling (SDIC).  

It merges bids from market participants in all participating markets into a single cross-exchange module and allocates sufficient cross-border capacity if it’s available. XBID uses a common IT system with a Standard Order Book (SOB), a Capacity Management Module (CMM), and a Shipping Module (SM).

The first trade using the continuous trading matching algorithm was executed in June 2018. Currently, 15 exchanges participate in the XBID system, which allocates capacity across 25 markets: BSP, CROPEX, EPEX SPOT, GME, HEnEx, HUPX, IBEX, Nord Pool, OKTE, OMIE, OPCOM, OTE, TGE, ETPA and BRM. The system makes it easier for market participants to balance their positions quickly and efficiently, thus lowering energy balancing costs.

How does Single Day-Ahead Coupling (SDAC) function?

Single Day-Ahead Coupling (SDAC) allocates cross-border electricity transmission capacity efficiently by coupling the prices of wholesale electricity across the European bidding zones. The operational area of the SDAC includes 16 NEMOs, 61 bidding zones, and 30 TSOs across 27 countries:

The allocation of cross-zonal capacities is established in one pan-European auction, held at 12:00 CET on the previous day. This auction defines the clearing prices for all bidding zones for all 24 hours of the following day. The auction defines one clearing price per bidding zone per market time unit.

SDAC calculates matched volumes and electricity prices across the participating bidding zones and implicitly allocates cross-zonal capacity based on the EUPHEMIA algorithm.  

How is Single Intraday Coupling (SIDC) designed?

The Single Intraday Coupling (SIDC) facilitates a single cross-zonal intraday market through continuous trading with direct matching. Through the XBID system, SIDC matches bids and offers instantly, provided that a matching set of bids and offers is available and there is sufficient cross-zonal capacity. SIDC operates in 34 bidding zones and 14 NEMOs across 25 countries.

SIDC operates with three daily auctions to address congestion income during continuous trading. These auctions take place at 15:00 CET and 22:00 CET the previous day, as well as 10:00 CET on the current day. During the auctions’ duration, continuous trading is paused to avoid double allocation of cross-zonal capacity.

How are European power markets coupled?

Market coupling is crucial for grid stability and system resistance across Europe. The integrated electricity markets allow for efficient management of fluctuations in supply and demand across the continent, mitigating risks due to unexpected disruptions in the primary energy supply chain. To achieve an integrated, pan-European power market, the European Union has started creating a harmonized regulatory framework back in 1996 and continually updates the market infrastructure and design to reflect market dynamics. In this process, many counterparties have been introduced and defined to ensure coordination.

What counterparties and market infrastructure are required for optimal market coupling?

• The Agency for Cooperation of Energy Regulators (ACER) develops the framework and guidelines on network code.

• ENTSO-E is established as a coordinating body between EU TSOs, although ENTSO-E also has non-EU members.

• Nominated Electricity Market Operators (NEMOs) are energy exchanges, which are nominated to establish the security and functionality of various market coupling mechanisms. NEMOs develop and maintain the algorithms and systems behind the SDAC and SIDC.

• Transmission System Operators (TSOs) are certified and regulated entities, which have a monopoly over the access to the transmission grid and are required to ensure non-discriminatory access to the grid infrastructure. TSOs cooperate with Regional Coordination Centers (RCCs) to calculate the cross-zonal capacity and provide it to market coupling.

• The Market Coupling Operator (MCO) is a function carried out by NEMOs. They operate the price coupling algorithm to match orders across bidding zones and allocate cross-zonal capacity.

• The Central Counter Party (CCP) carries out the clearing and settlement role in a trade.

• Two CCPs may appoint a shipping agent (SA) to handle energy exchanges between them across national borders.

• Based on the figures for available capacity provided by TSOs, a Coordinated Capacity Calculator (CCC) calculates the cross-zonal transmission capacity between bidding zones.

• A Scheduled Exchange Calculator (SEC) calculates the electricity transfers between bidding zones based on the results from the market coupling algorithm.

• Market Participants can be generators, traders, suppliers, etc.

Please note that the above list gives a guiding overview of these counterparties’ involvement in market coupling and is not an exhaustive description of their responsibilities.

What are the benefits of market coupling?

Currently 98,6% of EU electricity consumption is coupled, which amounts to approximately 1500 TWh of yearly volumes across the coupled Day-ahead markets and 1200 TWh across coupled Intraday markets.

An integrated pan-European market makes trading across the continent more efficient by increasing liquidity, promoting competition and making it easier to incorporate renewable energy sources into all power markets. In a coupled market, electricity is transferred from areas with lower prices to areas with higher prices, resulting in more efficient allocation of resources and lower electricity prices for end customers.

Due to market coupling, prices across European power markets become more similar, creating a level playing field for producers and consumers. Allowing producers to compete across a wider geographical area thus incentivizes increased efficiency and reduced costs. A coupled market reduces the need for expensive and inefficient reserve capacity.

Increased competition and price convergence benefits both consumers and producers, while incentivizing innovation and investments in renewable energy sources, which increases the potential market for electricity producers.

The value and benefits of an integrated pan-European market are most apparent when the current market conditions are compared to a “zero scenario” (a hypothetical market situation, where all cross-border capacities are set to zero) and when the losses of a decoupling incident are calculated.

What is market decoupling?

A “market decoupling” refers to an incident when at least one NEMO is unable to couple with the rest of the market, usually due to a technical issue. In such cases, each market and NEMO have regional fallback procedures set in place to ensure the local markets can continue to operate.

In a market decoupling incident, auctions are usually held locally, which means that local shortages and surplus of electricity affect the auctions result. In these cases, the value of a coupled market becomes apparent. In the most recent market decoupling incident, a partial decoupling on June 25^th, 2024, the following spread showcased how local volumes affect non-coupled power markets.

On June 25^th, 2024, the incident was caused by a technical issue which prevented EPEX SPOT from submitting its order books before the deadline set by the SDAC market coupling procedures. Due to the FBCM system in place in the CWE markets, cross-zonal capacities were successfully implicitly allocated in the Core CCR region (see map below). According to regional fallback procedures, the Nordic and Baltic CCRs were decoupled, and an isolated regional coupling was operated by EPEX SPOT and Nord Pool. Shadow auctions were conducted for the relevant Hansa CCR interconnectors. You can read a full report on the incident by the Market Coupling Steering Committee (MCSC) here.

To ensure that market participants are equipped to handle such decoupling incidents, decoupling training sessions are organized regularly. These training sessions are focused on the successful coordination between TSOs, NEMOs, and JAO (the Joint Allocation Office), and the smooth execution of Shadow Auctions, part of SDAC backup mechanisms.

What is the value of market coupling?

Such decoupling incidents occur once per year on average, but the price paid during a decoupled session is insignificant compared to the value of the complex market coupling systems across Europe, which function extremely well the majority of the time.

To quantify the value of these market coupling mechanisms, European NEMOs collaborate with ACER to analyze a “zero scenario” (a hypothetical market situation, where all cross-border capacities are set to zero) and compare it to the welfare benefits created by single day-ahead market coupling. In 2021, the welfare benefits amounted to approximately 34 billion Euros:

An integrated pan-European power market and harmonized regulatory requirements are crucial to achieving EU-wide energy targets, such as 300GW of offshore wind by 2050. A lot of infrastructure and cooperation is needed to transport such vast electricity supply away from the oversupplied markets to customers in EU countries, where renewable energy is scarcer.

Market coupling leads to price convergence, increased competition, market efficiency, investment incentives, and innovation, which create enormous benefits for both end customers and power producers.  

Are you interested in entering European power markets? Book a meeting with Time2Market’s team here.

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