EuroPEX Decentralized Market Coupling as the preferred cross-border method B. den Ouden, President of Europex APEx Annual Conference 2004 Leipzig, Germany, 12 October 2004

Pagina 2 EuroPEX UKPX/APX Powernext OMEL Borzen GME EEX Opcom Some congested borders in Europe Reasons: n National policies in the past n Fuel decisions n Local taxation / policies New lines: n Slow, huge investment Fragmented market! n Important: method of allocation of limited transmission capacity OTE Nord Pool

Pagina 3 EuroPEX Spot Market Area A Quantity Spot Market Area B Quantity Implicit auctioning (market coupling) Full transparency in constraint management Maximum capacity Maximum capacity Area price difference Δ Price n One-step process n No difference between auction price and area price difference n Stimulates liquidity in each area

Pagina 4 EuroPEX Spot Market Area A Price Quantity Spot Market Area B Quantity One price for both areas Allocated capacity Allocated capacity Implicit auctioning (market coupling): Full area integration when no constraint n Areas merge at that moment n Trade barriers completely gone n Liquidity shared

Pagina 5 EuroPEX Features of Decentralized Market Coupling n Enables coupling of multiple areas together with efficient allowance for loop flows on meshed networks n Supports block bids and other local market requirements n Supports bilateral contracts and netting of counterflows n Requires only limited harmonization of market rules, and no change to local notification/imbalance arrangements n Provides open and fair market access with no additional barriers beyond existing local PX requirements n Transparent, rule based, auditable methodology

Pagina 6 EuroPEX Decentralized market coupling Price Elasticity Curves for each area Area Prices Exports Imports Isolated price X Isolated price Y price of area Y price of area X Elasticity curves Depicting price influence of potential im/exports to/from each individual area 0 © June 2003 Amsterdam Power Exchange Spotmarket BV

Pagina 7 EuroPEX Coupling the areas Import in X = export in Y Area Prices Flow X->Y Flow Y-> X Isolated price X Isolated price Y price of area Y price of area X Daily capacity ? To be supplied by TSOs……… 0 © June 2003 Amsterdam Power Exchange Spotmarket BV

Pagina 8 EuroPEX Decentralized market coupling: result when unconstrained Area Prices Flow X->Y Flow Y-> X price of area Y price of area X Unconstrained case Enough transmission capacity Price for both areas identical: enough capacity to set price at intersection of curves 0 © June 2003 Amsterdam Power Exchange Spotmarket BV Area price X = Area price Y Available transmission capacity

Pagina 9 EuroPEX Decentralized market coupling: result when constrained Area Prices Flow X->Y Flow Y-> X price of area Y price of area X Constrained case Limited transmission capacity Prices for areas differ: set at maximum im/exports Difference=revenue for TSOs 0 © June 2003 Amsterdam Power Exchange Spotmarket BV Area price X Area price Y Available transmission capacity

Pagina 10 EuroPEX Origins of FMC Europex –ETSO (European TSOs) ETSOEuroPEX ETSO-EuroPEX JWG Flow-based market coupling Flow-based modellingMarket coupling Europex working group member from each exchange

Pagina 11 EuroPEX FMC day-ahead market Inter-regional price-difference bids/offers Schedules & prices Transmission model Regional markets Inter-regional calculations Import/export curves Regional price bids/offers Settlement Import/export & price difference schedules

Pagina 12 EuroPEX Forward markets n FMC is compatible with - forward transmission rights - financial hedging instruments - options (UIOLI or UIOSI) n So transmission capacity auctions and/or financial instruments can be used if required

Pagina 13 EuroPEX Benefits of FMC Congestion management -Flow-based approach and netting of schedules maximises use of inter-regional transmission network Market efficiency -Integrating transmission access and energy trading eliminates unnecessary pricing risk and concentrates liquidity -Inherent cross-border access for all market participants -Variety of trading options: bilateral/exchange, blocks Feasibility -Builds on existing trading infrastructure and liquidity -Can evolve over time

Pagina 14 EuroPEX Outstanding issues n Technical development -transmission model - market coupling mechanism n Evolutionary paths (Member State dependent) n Regulatory and contractual matters, including the designated status of power exchanges n Input for consideration by EU Comitology n Advice for local projects

Pagina 15 EuroPEX Step by step approach Implicit auctioning between exchanges: step by step process n 1. Local Projects n 2. Regional developments n 3. European integration Manageable learning curve Manageable learning curve

Pagina 16 EuroPEX European Regulatory Forum conclusions September 2004 n Implicit auctioning/market coupling: best method n European commission: mix –Day-ahead: implicit auctions –Longer: explicit auctions n Regional fora based on: - Commission paper - ETSO/Europex work n Growing consensus Path for further development n Growing consensus Path for further development