Lecture 5: Electricity Markets Market Coupling: Basics and European Situation Flashcards Preview

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Flashcards in Lecture 5: Electricity Markets Market Coupling: Basics and European Situation Deck (24)
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1
Q

UE05

What is a Quoted spread ?
What is a realized spread ?

A

Quoted Spread is the difference between offered best (highest) bid and best ask (lowest) prices at the same point of time.

we get it by the difference between best ask and best bid price divided by the their Mid * 2 and all * 100.

Realized Spread is the difference between realized bid and realized ask prices, which usually does not happen at the same point of time

we get it by the difference between realiyed price and Mid divided by the their Mid * 2 and all * 100.

2
Q

UE05

Explain the terms wide and narrow spreads. Who profits from a wide/narrow spread?

A

**Narrow spread **When the ask price is close to the bid price
**Wide Spread ** When the ask price is much higher than the bid price

Dealers make money by buying low at their bid prices and selling high at their ask prices

Narrow spread : difference between bid and ask prices is low, impatient traders profit from it

Wide spread : difference between bid and ask prices is high, dealers and market maker profit from it

3
Q

UE05

Why the ask/bid spread is an important factor for traders and dealers when evaluating order markets? (consider which implications a wide/narrow spread has on submitting a market order or limit order and how this is related to immediacy.)

What is a market order?
What is limit order?

A

Market orders:
“A market order is an instruction to trade at the best price currently available in the market”

Limit orders:
“A limit order is an instruction to trade at the best price available, but only if it is no worse than the limit price specified by the trader”

If there is a wide spread Cost of Immediacy is Expensive, the strategy should be limit orders, Dealing will be profitable,

If there is narrow spread Cost of Immediacy is low, the strategy should be market orders, Dealing will not be profitable

4
Q

UE05

Name and illustrate the two components of the bid/ask spread.

A

(1) Transaction cost spread component
is that part of the bid/ask spread that compensates dealers for their normal costs of doing business.

(2) Adverse selection spread component
is that part of the bid/ask spread that compensates dealers for the losses that they suffer when trading with well informed traders

This component allows dealers to earn from un informed traders what they lose to informed traders

Total spread
(1) transaction cost spread component + (2) adverse selection spread component

5
Q

UE05

The European Market Coupling Company (EMCC) is a joint venture between TSOs in Europe. Describe the scope and goal of its operations.

A

Market coupling is the use of implicit auctioning involving two or more power exchanges

Interim Tight Volume Coupling
Coupling of CWE region (Belgium, France, Germany and Luxemburg) with Goal:
Promote an efficient electricity market between regions by using market coupling
Promote the integration of a Europe wide wholesale electricity market

EMCC calculates the optimal electricity flow, based on available transmission capacities
to
achieve a power flow from the low price area into the high price area
to
create schedules and carries out the financial settlement with power exchanges

6
Q

UE05

What is the fundamental idea behind market coupling?

A

Market Coupling optimizes the allocation of cross-border capacities between countries. Thanks to a coordinated calculation of prices and flows, available cross-border capacity is used more efficiently and the price difference between two or more market areas is reduced.

Market A = France; Market B = Germany

TSOs provide transmission capacity available between markets. Furthermore
EMCC possesses order books with energy price and demand of the two countries

EMCC tries to get amount of power, accordingly to the available capacity, for a
special time from France

French power is offered at the German PX for a lower price than the current price
at the German PX

Because of the offer to buy from France, the prices increase at the French PX. At
the same time decrease the German high prices at the German PX due to the
lower offer for sale (= implicit auction approach)

Assimilation of prices and optimal using of available cross border capacities

7
Q

UE05

In the first assignment you did research on the super grid concept do you see a relationship with market coupling?

A

Super grid and market coupling complement one another

Super grid provides cross border DC lines, which expand the cross border transmission capacities

In conjunction with market coupling the two concepts allow a huge, active trade system between Europe, Africa and the Orient

8
Q

Define and explain the explicit auction of Transmission Capacity

A
  • Transmission capacity on an interconnector is
    auctioned separately and independently from electricity
  • simple method of handling with annualy monthly and daily auction
  • result in an inefficient Use of interconnectors because of the lack of information about the prices
9
Q

Define and explain the implicit auction of Transmission Capacity

A
  • Auctioning of transmission capacity is included (implicitly) in the auctions of electricity
  • Day ahead transmission capacity used to integrate the spot markets in different areas to maximize the overall social welfare in the markets
  • Flow on an interconnector based on market data from the marketplace/s in the connected markets
  • Ensure that electricity flows from the surplus areas (low price) towards the deficit areas (high price)  price convergence
    *
10
Q

Which Implicit auction Mechanisms did we learn?

A

Market coupling- Pricing for multiple
markets through several exchanges

Market splitting- Pricing for multiple
markets through one exchange: Example
: Nord Pool Spot performs market splitting as transmission capacity is handled implicitly in the price and bid matching calculation

11
Q

Explain the market splitting

A

Implicit auction of transmission capacity within
the day ahead electricity auction by one single power exchange

If transmission capacity between the internal
bidding areas is not enough to get a complete convergence of price -> different prices in different bidding areas

Market splitting”: limited transmission capacity leads to a split between to market areas

12
Q

Market coupling is a …… method where allocation of ….. capacity is determined according to demand on the respective energy markets. It is an …… approach typically used at the …… stage whereby for every hour of operation either prices across the energy markets converge or all the ……, with power flowing towards the …. price area.

A

Market coupling is a congestion management method where allocation of cross border transmission capacity is determined according to demand on the respective energy markets. It is an implicit auction approach typically used at the day ahead stage whereby for every hour of operation either prices across the energy markets converge or all the available transmission capacity is utilized, with
power flowing towards the high price area.

13
Q

Market Coupling is in contrast to existing approaches such as ….. of transmission capacity, in which the capacity is auctioned to the market separately and independently from the trading of …… . Explicit auctions are a relatively simple method of handling ….., and are widely used across Europe. The capacity is normally allocated in portions, through ……auctions.

A

Market Coupling is in contrast to existing approaches such as explicit auctioning of transmission
capacity, in which the capacity is auctioned to the market separately and independently from the
trading of electricity. Explicit auctions are a relatively simple method of handling cross border
capacity, and are widely used across Europe. The capacity is normally allocated in portions, through
annual, monthly and daily auctions.

14
Q

Characteristics and Benefits
of market coupling

A

a)Non discriminatory opportunities for all
market participants
b) Optimal utilization of cross
border capacities
c) Simultaneous handling of electricity
trading and capacity allocation

a) transparent, neutral and fair for
all players in the market
b) maximal benefit for the market
d) reduced transaction costs

15
Q

Which Different mechanisms to allocate transmission capacities between areas are there ?

A

Explicit Auction
Implicit Auction (Market Coupling / Market Splitting)

16
Q

Which Market Coupling Mechanisms are there?

A

Price coupling
Volume coupling

17
Q

Explain the price and volume coupling? what are the diffrences of these two?

A

The two coupling mechanisms differ mainly in the way they produce prices. The major difference between volume coupling and price coupling is where the price calculation takes place. If the price calculation is done centrally the coupling is called price coupling and if the price calculation is done on a decentralized basis it is called volume coupling. In the case of volume coupling the price calculation can thus be kept at the power exchanges.

In price Coupling , a single coupling algorithm is computing centrally both, prices and cross-border volumes at the same time. This means that the power exchanges of the involved regions, do not set prices but just forward bids to the coupler and receive prices (and volumes) in return. Price coupling between different countries allows the creation of a single exchange zone and consequently a single price zone if interconnection capacities do not limit cross-border power
exchange. Integrated determination of power price and transmission avoids small deviations. Price coupling between different countries allows creating a single exchange zone - and consequently single price zones when intercomnection capacities do not limit cross-border electricity exchanges. It improves the market liquidity and participates in the creation of a single European electricity market.”

The Volume Coupling only fixes the the cross-border flows. Power exchanges remain responsible for price determination. The price is auf der Grundlage der zentral berechneten Flüsse durchgeführt. Small deviations from optimum possible due to separate determination of power price and transmission volume

18
Q

What is the background for the EU Market Coupling regulation

A

EC 1228/2003
Article 1- it aims to introduce Efficient usage
of cross border capacities
by the introduction of day ahead, market based mechanisms

19
Q

explain the price coupling of regions

A

PCR, a project of European Power Exchanges to harmonize the European electricity markets, is based on three main principles: a **single algorithm Euphemia **, robust operation and individual power exchange accountability

20
Q

Explain the algorithm Algorithm Euphemia. Which Method does it use?

A

EUPHEMIA
is an algorithm that solves the market coupling problem on the
PCR perimeter and stands for :EU+ P an european H ybrid E lectricity M arket I ntegration A lgorithm

It maximizes the welfare of the solution
Most competitive price will arise
Overall welfare increases
Efficient capacity allocation

EUPHEMIA uses branch and cut method

21
Q

Efficiency can be measured, price Convergence is an indicator the aim is maximizing the social welfare or minimizing the loss of the social welfare. The gained social welfare can also be measured with Euro and it is aroun 15oMil. per year from extending the DayAhaed market Coupling to all EU Borders.

A
22
Q

The energy balance concept is defined as :

A

The global supply minus the losses must be equal to the global demand of all markets involved. Depending on the manner the interconnections are modeled, there are the following:
ATC network model:
Flow based network model:
Hybrid network model:

23
Q

Summary

Transmission capacity allocation: …./…. auction

Implicit auction: market coupling (…… based) / market …..

Market coupling: basic concept, advantages, architecture (players in 2 zones)

European market coupling: regions, development

PCR (Price Coupling of Regions) and EUPHEMIA algorithm

Interconnection efficiency and price convergence

Social welfare losses

Intraday cross border trading and capacity

Average prices of balancing energy and capacity

Cross border exchange of balancing services

ATC versus Flow based network market coupling model

Capacity mechanisms in Europe

A

Transmission capacity allocation: explicit / implicit auction

Implicit auction: market coupling (price or volume based) / market splitting

Market coupling: basic concept, advantages, architecture (players in 2 zones)

European market coupling: regions, development

PCR (Price Coupling of Regions) and EUPHEMIA algorithm

Interconnection efficiency and price convergence

Social welfare losses

Intraday cross border trading and capacity

Average prices of balancing energy and capacity

Cross border exchange of balancing services

ATC versus Flow based network market coupling model

Capacity mechanisms in Europe

24
Q

What is a market splitting

A

Market Splitting ist eine vereinfachte Form der Nodalpreisbildung
Nodalpreisbildung ist ein Konzept, bei dem die Preise für Strom an verschiedenen Knotenpunkten (engl. nodes) im Stromnetz unterschiedlich sind. Diese Preisdifferenzen entstehen aufgrund von Überlastungen im Stromnetz. Wenn es Überlastungen gibt, kann der Strom nicht frei von einem Knotenpunkt zum anderen fließen und es entstehen Preisdifferenzen zwischen den Knotenpunkten.

Market Splitting ist eine Möglichkeit, mit diesen Überlastungen umzugehen. In Fällen von Überlastung teilt der Marktbetreiber den Markt in zwei oder mehrere Preiszonen auf. Jede Preiszone wird dann ausgeglichen, während die Transaktionskapazitäten zwischen den Zonen genutzt werden .
The intra-zone congestion is resolved by splitting the market zone. The structural bottleneck is now located between two price zones, so that redispatch is no longer necessary at this point.
and the transmission capacities can be allocated via explicit or implicit auctions.
auctions. The prices in the two new zones differ and correctly reflect the shortage