Lecture 5: Electricity Markets Market Coupling: Basics and European Situation Flashcards
UE05
What is a Quoted spread ?
What is a realized spread ?
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.
UE05
Explain the terms wide and narrow spreads. Who profits from a wide/narrow spread?
**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
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?
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
UE05
Name and illustrate the two components of the bid/ask spread.
(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
UE05
The European Market Coupling Company (EMCC) is a joint venture between TSOs in Europe. Describe the scope and goal of its operations.
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
UE05
What is the fundamental idea behind market coupling?
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
UE05
In the first assignment you did research on the super grid concept do you see a relationship with market coupling?
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
Define and explain the explicit auction of Transmission Capacity
- 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
Define and explain the implicit auction of Transmission Capacity
- 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
*
Which Implicit auction Mechanisms did we learn?
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
Explain the market splitting
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
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.
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.
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.
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.
Characteristics and Benefits
of market coupling
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
Which Different mechanisms to allocate transmission capacities between areas are there ?
Explicit Auction
Implicit Auction (Market Coupling / Market Splitting)
