What Drives Welfare in Europe’s Approach to Electricity Market Coupling?

HEMF Working Paper No. 08/2019

41 Pages Posted: 24 Jul 2019 Last revised: 25 Nov 2019

See all articles by Simon Voswinkel

Simon Voswinkel

University of Duisburg-Essen - House of Energy Markets and Finance

Björn Felten

University of Duisburg-Essen

Tim Felling

University of Duisburg-Essen

Christoph Weber

University of Duisburg-Essen

Date Written: July 19, 2019

Abstract

Over the last decades, two basic design alternatives for spot markets for electricity have been established: The zonal approach as used, for example, in Europe and the nodal approach as applied notably in US markets. Since 2015, Flow-Based Market Coupling is used as an advanced market coupling approach to facilitate the exchange of electricity between the zonally organized markets in Central Western Europe. But how good is this state-of-the-art zonal approach compared to its nodal benchmark? And can enhancements to its relatively new rules and procedures improve the performance of Flow-Based Market Coupling?

We develop a model framework to analyse and quantify the welfare of Flow-Based Market Coupling relative to benchmarks like nodal designs in a real-world setting. We find that under ideal circumstances, where price zones are well-configured, Flow-Based Market Coupling approaches the efficiency of nodal pricing - realising 87% of the possible gains in comparison to a scenario with unlimited trade as lower benchmark. We also find it to be relatively robust in the presence of forecast errors. When taking the current European price zone configuration into account, however, the efficiency of Flow-Based Market Coupling decreases significantly. Only 59% of the efficiency of the nodal market design can be attained, creating societal losses of more than 500 million Euros each year. Moreover, we find the measures envisaged by European regulators to do further harm in terms of welfare. These measures are designed to enhance trade but, to a certain extent, ignore the physical reality of the transmission network. This entails significant increases of redispatch quantities, and operational system costs further rise by about 100 million Euros per year.

Keywords: Flow-based market coupling, Zonal pricing, Nodal pricing, Generation shift keys, Remaining available margin, Electricity grid modeling, Electricity market modeling, Elecrticity market design, Congestion management, Welfare analysis

JEL Classification: Q40, Q41, Q43, Q49, C60

Suggested Citation

Voswinkel, Simon and Felten, Björn and Felling, Tim and Weber, Christoph, What Drives Welfare in Europe’s Approach to Electricity Market Coupling? (July 19, 2019). HEMF Working Paper No. 08/2019. Available at SSRN: https://ssrn.com/abstract=3424708 or http://dx.doi.org/10.2139/ssrn.3424708

Simon Voswinkel

University of Duisburg-Essen - House of Energy Markets and Finance ( email )

Universitätsstr. 2
Essen, NRW 45141
Germany

Björn Felten

University of Duisburg-Essen ( email )

Universitätsstraße 2
Essen, 45141
Germany

HOME PAGE: http://www.ewl.wiwi.uni-due.de

Tim Felling

University of Duisburg-Essen ( email )

Universitätsstraße 2
Essen, 45141
Germany

HOME PAGE: http://www.ewl.wiwi.uni-due.de

Christoph Weber (Contact Author)

University of Duisburg-Essen ( email )

Universitätsstraße 2
Essen, 45141
Germany

HOME PAGE: http://www.ewl.wiwi.uni-due.de

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