Flash: Exclusive Interview on Flow-Based Market Coupling
6 May 2015
All eyes will be on the Central Western Europe (CWE) region on 19 May 2015 as it launches its flow-based market coupling (FB MC). The first day of trading will be 20 May 2015 and the first delivery is expected on 21 May. The launch of the FB MC and how it works will be the topic of our next Focus, which will be released this month – so stay tuned for all the details!
The launch date was confirmed last week, on 23 April 2015, as the National Regulatory Authorities (NRAs) of the CWE region’s six EU Member States (i.e., Austria, Belgium, France, Germany, Luxembourg and the Netherlands) approved the FB MC.
The CWE region will be the first in Europe to apply the FB MC, which entails taking into account “the impacts of cross-border exchanges on network security constraints when optimising the market flows (i.e. the match of offer and demand) for the concerned region, thus offering more capacity”.[1] The NRAs of the CWE region expect that the use of the FB MC will deliver concrete advantages, such as the better use of the region’s transmission lines, which in turn would have a beneficial impact on the region’s wholesale prices and trading volumes.
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EXCLUSIVE INTERVIEW!
The BEAM Team sat down for an exclusive interview with Mr. Andrew Claxton (“Andrew”), Director Business Development at APX power exchange. We asked him all about the process of NRA approval of the FB MC and how it will work in practice once in place.
BEAM: What are the benefits of the FB MC for the CWE region, as opposed to MC based on Available Transmission Capacity (ATC)?
Andrew: The FB MC implies a calculation that better reflects the physical flows of electricity across the meshed transmission network. Thanks to this approach, transmission system operators (“TSOs”) provide a better representation of the available transmission capacity on the grid for day-ahead trading. This enables a better utilization of the network in the day-ahead market coupling compared to the current ATC MC (which relies on TSO assumptions regarding market demand for the next day). At the end of the day, it should provide more available capacity for the market, leading to more price convergence and gains from trading, while maintaining security standards.
BEAM: What were the biggest hurdles in the process of launching the FB MC?
Andrew: Adopting the FB MC in the CWE region has taken eight years from the signature of a Memorandum of Understanding (“MoU”) in 2007. During the process, one of the key achievements has been the cooperation between the power exchanges (who welcomed increased power trade across borders) and the TSOs (who saw the FB MC as entailing increased coordination of their system operations).
The TSOs for the CWE region had to re-engineer their whole process for jointly calculating capacity in order for the FB MC to work. This was very complex and new issues emerged over time, which explains why the FB MC took eight years to be ready.
In the meantime, the rapid growth of RES generation in the CWE region, and thus varying levels of capacity depending on unstable weather conditions, have added unforeseen challenges to capacity calculations and grid security.
Indeed, when the MoU (see above) was signed in 2007, the focus was on how to manage day-ahead MC – but now, the challenge for TSOs is increasingly to ensure security of supply and to facilitate the intraday markets.
BEAM: What were/are the inherent risks associated with the FB MC?
Andrew: While there has been extensive testing of potential technical issues, if a severe problem were to occur with the FB MC (for example, it is not possible to anticipate changes to market behaviour) it would be possible to revert to ATC MC.
For the CWE region, an ongoing challenge is how to ensure that the FB calculation works fairly across markets of very different sizes (e.g.: Belgium and Germany). For example, while ATC MC always leads to intuitive results (price convergence), the FB MC did not – so new rules were created to provide for fairer, “intuitive” results.
Another important risk was that one market could be curtailed even though other markets were far from being curtailed and transmission capacity was available (not the case in ATC MC where rules to share curtailment operate); this was the risk in the winter of 2014 when Belgium was exposed to serious threats of blackouts. For next winter curtailment sharing rules will be implemented in the CWE FB MC.
It was very important to ensure transparency in implementing the FB MC, with regular feedback from market parties, regulators and stakeholders to make sure all parties will benefit from the new methodology.
BEAM: What next steps after the launch of the FB MC do you foresee for the CWE region?
Andrew: There is a plan of ongoing improvements to the CWE FB methodology, and the stakeholders will have an important role to play. We are setting up a Consultative Committee, building on the successful User Group we had during the project phase, to facilitate this.
Extending the FB MC geographically seems to be quite challenging. The CEE region (Central Eastern Europe) is looking into implementing MC simultaneously with FB, but it could choose a different FB methodology than the CWE region. The PCR market coupling algorithm, Euphemia, has been developed by PXs to handle a mix of possible regional solutions (ATC and different FB regions), so the barrier to extending the European market coupling to CEE is probably more likely to come from the issues associated with the FB methodology.
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Found our Flash interesting? Then you will also enjoy reading our new issue of the Focus that will present an in-depth analysis of the CWE’s Flow Based Market Coupling on 19 May 2015.
In the meantime, be sure to visit our website for regular updates of policy developments and industry news!
[1] APX Power Exchange Spot. https://www.apxgroup.com/services/research-projects/cwe-flow-based-market-coupling/