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Connecting the European energy markets

Europe is heading towards a common power market. On 4 February 2014, a new milestone was passed when the power markets in the Nordic region, the UK and on the Continent were connected through one common power price calculation model. Over time, the result will be more efficient energy markets and better utilisation of society's resources.

The Nordic countries lead the way

Norway and the Nordic countries have been at the forefront of energy market deregulation and establishment of multinational power markets, with a common price calculation model.

In 1996, Nord Pool ASA established a common Norwegian-Swedish marketplace, joined by Finland in 1999 and Denmark in 2001. At the time, this was the first multinational marketplace for physical energy trading in the world.

In 2008/09, France, Belgium and the Netherlands established the first multinational market on the Continent. The results for the Nordic region and Europe show a more efficient utilisation of the power grid as well as production.

From the mid-2000s, the agenda became increasingly more focussed on stronger European integration in this area, motivated by factors such as ambitious climate goals, major grid investments and a stronger focus on renewable energy sources such as wind and solar power.

Next generation main grid under construction

For many years, the common Nordic energy market enabled more efficient operation of existing resources, which meant there was no need for major new investment projects in the energy sector. However, as the efficiency gain from the 1990s’ deregulation was exploited, it became clear that Norway's grid was aging. Furthermore, a change in consumption patterns resulted in a more strained security of supply situation in many parts of the country.

Consequently, in 2009, Statnett launched a plan to establish the next generation main grid. The realisation of the grid of the future is now well underway, and Statnett will invest NOK 5-7 billion annually in grid upgrades and construction over the next decade. The plan entails both an upgrade of and investments in new domestic grid capacity and establishment of new international interconnectors to Denmark, Germany and the UK.

The next generation main grid will contribute to increased security of supply, value creation and a more climate-friendly energy system, both in Norway and abroad.

National and regional powermarkets

Until now, the rule of thumb in Europe has been a combination of national and regional power markets. But both in the Nordic region and in Europe there has been an ambition to create a common and integrated European power market.

The political mandate was established through the EUs third energy market package from 2009. Statnett has been a strong driver in this development.

To achieve a common marketplace, close cooperation has been necessary between many players, including 13 transmission system operators, nine energy authorities, and four power exchanges with four different trade algorithms. 

75% of Europe will be connected through a common power market

“In 2010, we established a temporary solution which secured efficient utilisation of the interconnectors between the Nordic region and the Continent. The work on a permanent market solution started in 2012. We have now reached an important goal, where 2000 TWh, or 75% of Europe's power consumption, is connected in a joint operation for calculation of power prices,” says Tore Granli, Statnett's project coordinator for the North West Europe project, which is working towards closer integration of the power markets in northwestern Europe.

From now on, power exchanges in participating countries will estimate prices concurrently using the same algorithm. At present, 13 countries take part in the market coupling, including the four Nordic markets, the markets in the UK and eight countries on the Continent. 

"We expect that Spain and Italy will join the common price coupling, and we are planning to gradually connect other parts of Europe's power markets, to establish one common market," says Granli.

A virtual exchange for buyers and sellers

The core of the new market coupling is a common algorithm which has been jointly developed by the power exchanges on the basis of requirements from the transmission system operators, power exchanges and market players.

In practice, all purchase and sales orders submitted to the local power exchange by noon, are forwarded to a central “virtual exchange”. Prices are then calculated using the algorithm, results sent back to the exchange which will then forward the results to the buyers and sellers. Whereas the actual price formation happens over the course of 30 minutes, all data transfer takes place in real time. 

A virtual exchange

How the price coupling works in practice:

  • Sellers and purchasers of power submit their purchase and sales orders to the local or regional power exchange
  • The three power exchanges (eventually six) that take part in the price coupling forward the purchase and sales orders to the virtual exchange.
  • Prices are calculated on the virtual exchange using an algorithm. Responsibility for managing the virtual exchange alternates between the three power exchanges, including Nord Pool.

Major gains through better power market flow

"Through daily auctions the players display their willingness to pay and their costs, and you achieve a correct price in a very transparent market. A major advantage is that the power will always flow from low-price areas to high-price areas. In this way, you use the resources more efficiently," says Tore Granli.

Furthermore, the power market players will obtain prices which reflect the balance between supply and demand, and a reference price for trading in the financial market for more long-term contracts. This will also provide all players with greater reliability for establishing targeted price hedging mechanisms. Should bottlenecks and major price differences arise over time, this will highlight a potential need for investing in new power production or new interconnectors between the market areas. Efficient market coupling is therefore important in order to estimate the socio-economic profitability of our new cables.

Major overall benefits

More efficient power markets will save money for society in general. This will ensure more efficient use of resources.

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