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Working paper / Energy

The Achievement of the EU Electricty Internal Market Through Market Coupling

Author(s): GLACHANT Jean-Michel

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ABSTRACT

The achievement of the internal market for energy is going ahead in the EU 15 since a model is emerging for “coupling the national markets for electricity”. For about 15 years the EU 15 was made up of national markets open to each other through rules of access to the grids while organized market pricing was kept national. The main exception was in the Nordic countries (Sweden, Finland and Denmark plus Norway –not a member of the EU). In this region the coupling of national markets is obtained through a single Power Exchange being a common subsidiary of the Nordic transmission system operators (TSOs). This single PX runs a single Day Ahead market pricing zone when the grid is not constrained and splits itself into different pricing areas when structural constraints arise. This model is known as “market splitting”. The Netherlands, Belgium and France did later create a less centralized single pricing mechanism by “coupling” their three national PXs with a common pricing algorithm coordinating the price formation among the three national exchanges. The empirical success of this new model has validated it as an EU model for other regional markets. A counter-model has been experimented between Germany and Denmark. It consisted of a coupling of “volumes” linking the quantities offered and demanded in the two exchanges while keeping the price formation in these two markets separated. That experiment failed and started to work again only when elements of price coupling have been introduced. Having now three workable models of market coupling, the European Union (at least EU 15) should be able to successfully achieve one layer of its internal market soon. However, several further questions are kept open such as how to successfully bridge several regional markets all over the EU 15 or how to integrate more and more PXs having different regulatory frames. A centralized approach (known as CMU) is advocating creating a single pan-European trading entity by a mandatory restructuring of all existing PXs plus a clubbing of all TSOs and the extensive harmonization of all existing national regulatory frames. An alternative approach is the one known as PCR (“Price Coupling of Regions”). It allows building a less demanding common pricing mechanism to coordinate existing PXs in a decentralized network. It is permitting grid access and trading to keep a national flavour when requested by particular local preferences.