MARKET COUPLING OF UKRAINIAN AND EUROPEAN SPOT ELECTRICITY MARKETS IS A WIN-WIN STRATEGY

History

The coupling process of spot electricity markets began in Europe in February 2014. Then the countries of North-Western Europe - Belgium, Denmark, Estonia, Finland, France, Germany/Austria, the UK, Latvia, Lithuania, Luxembourg, The Netherlands, Norway, Poland (via SwePol cable), Sweden, Portugal, and Spain created a single pan-European cross-zonal day-ahead electricity market. Cross-border trade between these countries began through implicit auctions of electricity supply for the next day.

In May of the same year countries of North-Western Europe joined their spot electricity market with the countries of South-Western Europe (MRC), experiencing the benefits of the single day-ahead market (SDAC - single day-ahead coupling). After that the launch of the integrated market of 4M MC - the Czech Republic, Hungary, Slovakia, and Romania was held in November.

Just in a year, Italy and Slovenia joined MRC, and Croatia and Bulgaria began operating with the European single spot market in isolation mode a year later. Croatia fully joined the MRC in June 2018. Germany and Austria split into two separate trading zones in October of the same year.

At the end of 2020, Greece joined the MRC and in January of the following year and the UK left the single day-ahead coupling due to its exit from the EU. And four EU countries - the Czech Republic, Hungary, Slovakia, and Romania, which traded electricity together in the 4M MC trading zone, joined the MRC in June 2021.

Single day-ahead market

The global integration process of the day-ahead market and the intraday market in Europe is still ongoing. The European Commission approved recommendations on the day-ahead and intraday market coupling for all EU member states (the Regulation (EU) 2015/1222) in 2015. The European energy market has received harmonized rules for the capacity calculation, congestion management and electricity trade. 

After the CACM Regulation came into force, all the European Union's countries that have cross-border interconnectors with other states, undertook to appoint a nominated electricity market operator - NEMO within four months. Its role in cooperation with the transmission system operator (TSO) is to ensure the efficient operation of the single day-ahead market (SDAC) and the single intraday market (SIDC). Today, there are more than 10 NEMOs in Europe, most of which have a monopoly status. Among the best-known NEMOs there are the Scandinavian Nord Pool power exchange, French EPEX Spot, Slovak market operator - OKTE, Romanian - OPCOM, Hungarian - HUPX, Bulgarian - IBEX, and Czech one - OTE.

How the European single day-ahead market - SDAC works

The day-ahead market coupling requires processing the input data of all involved NEMOs and TSOs - the orders and offers, available capacity, and system restrictions, matching them with a single algorithm, verifying and sending outcomes such as volumes, prices, and planned schedules to nominated market operators and transmission system operators. This process is certainly operated automatically, and take place within a clearly defined deadline. At the same time, it provides businesses with optimal economic solutions and guarantees data reliability.

SDAC uses a common price consolidation algorithm - PCR EUPHEMIA. This software product allows calculating the electricity price in Europe and the cost of cross-border capacity allocation on the auctions basis.

The input data to PCR EUPHEMIA are the available capacity and system restrictions provided by TSOs, as well as orders and offers provided by NEMO. This process maximizes social well-being (buyer's revenue, seller's revenue, and restrictions fee) and includes trading price limits and network restrictions. The algorithm is designed to account for a wide variety of orders and network restrictions, as well as local market rules.

The graphs below show how it works in reality. This is an example of two trading zones coupling, when, with available capacity, there is a flow (export) from a trading zone with a cheaper price of 44 EUR/MWh to a zone with a more expensive price of 60 Euro/MWh. In case of the market coupling and the available capacity, it is possible to equalize the price of 55 EUR/MWh in the two trading zones.

How the European single intraday market - SIDC works

Single intraday coupling is a coordinated activity between NEMO and TSOs, where the cross-border electricity trading is carried out in Europe during the day of electricity supply. The single intraday coupling allows market participants to react to unexpected changes in consumption and disconnections, as well as it makes electricity trading more efficient all around the Europe by promoting competition, increasing liquidity, and sharing electricity generation resources.

SIDC works with the help of a common IT system, which consists of:

- Shared Order Book (SOB),

- Capacity Management Module (CMM),

- Shipping Module (SM).

This means that orders submitted by market participants for approval in one country can be joined with orders submitted by companies in any other country, as long as they are within available capacity limits and have an up-to-date status.

SIDC trading is carried out on a “first come, first served” principle, where those companies that submitted the relevant orders first, receive the highest buying price and the lowest selling price. When the order has to be agreed upon, it is agreed together with the capacity allocation. Therefore, in case of two orders are accepted, the SOB and CMM are updated immediately. The SOB updating means that the relevant orders are removed from the register and the capacity allocation is updated at the same time. The number of borders that update their capacity depends on the location of the relevant orders.

Ukraine and the Single spot market of Europe

The electricity spot market of Ukraine has been operating under the European rules since 2019. The advantage of the Ukrainian day-ahead market and intraday market is that everyone who has sold and bought electricity here receives 100% payment from the Market Operator instantly. This is not the case of all European countries, as well as the fact that the DAM and IDM work 24/7 - even on weekends.

In 2014, Ukraine declared the integration of the Ukrainian power system into the trans-European electricity networks by signing the Association Agreement with the European Union. Synchronization of the Ukrainian power system with the network of continental Europe ENTSO-E took place on March 16, 2022. The next logical step is the Ukrainian spot market coupling with the European one. Such joint electricity trading in the EU is called the market coupling. These are transparent and clear rules on electricity purchase and sale for European companies.

The Ukrainian day-ahead market is in surplus. The low demand situation due to the war makes it impossible to sell adequate volumes, offered by electricity producers, for whom the spot trade is an important source of stable revenue. At the same time, Europe has decided to reduce its dependence on Russian energy resources. Therefore, the market coupling is a win-win strategy, especially considering that the price of Ukrainian kilowatt is many times lower than the European one.

The Law of Ukraine «On the Electricity Market» determines the status of the JSC Market Operator as a nominated electricity market operator. Regardless of the Regulation (EU) 2015/1222 implementation in Ukraine, the JSC Market Operator has been meeting the requirements of NEMO since 2019, as it has been working under the standards of a European market operator from the first day of its operation. And a strategic goal of the Ukrainian market operator`s development, approved by the Cabinet of Ministers of Ukraine in 2020, is market coupling.

We are in dialogue with European market operators, who are co-owners of the EUPHEMIA algorithm, regarding the possibility of granting the right to use this algorithm. Now we are waiting for a response from EPEX SPOT, NORD POOL, OPCOM, TGE, and OTE. In addition, together with the Ministry of Energy of Ukraine, the National Energy and Utilities Regulatory Commission, and the Secretariat of the Energy Community, we are working on a market coupling plan for the Ukrainian spot electricity market and the European one.

There is a great need of joint auctions conduction on the capacity allocation, based on JAO, to make more understandable for us and the European market operators how much free capacity is left for electricity sale on the single day-ahead market. JAO is the central auction office for the allocation of cross-border interconnectors. Its main operating activity is to give understanding on the directions of electricity is flowing in the EU. After that, Ukraine will be able to talk about the electricity market coupling.