Multi-Market Coupling Model: A Residual Demand Approach

Abstract

The growing share of intermittent renewable infeed calls for deeper integration of electricity markets. For Central Western Europe (CWE), day-ahead prices across bidding zones are often aligned, shaped by transmission capacities implicitly allocated through Flow-Based Market Coupling (FBMC). However, most established electricity price models overlook multi-zone coupling and lack implementable solutions to incorporate FBMC. We develop a multi-market model that embeds FBMC into a residual demand framework to forecast day-ahead electricity prices over a mid-term horizon. Using structural data on interconnectors and flow constraints, our model captures key market interactions across zones. This approach improves price forecasting and supports policy and investment decisions in an increasingly interconnected power system.

Keywords: power markets, electricity prices, market coupling, structural model

JEL Classification: G10, Q40, Q41, Q42, Q47