Flow Based Market Coupling, Sharma

2007
Manoj Sharma
W h a t we kn o w ,
W h a t we d o n’ t kn o w a nd
Engineering and Policy Analysis
1285238
W h a t we ne ed t o k n o w

Flowbased Market Coupling
To develop a decision‐support model for evaluating the implications of and
impediments to implementing Flow‐based Market Coupling for alleviating
the issue of interconnector congestion in North West European region.

Faculty of
Technology Policy and Management
+31 (0) 620 586 228
manoj.mailbox@gmail.com

Flow‐based Market Coupling
W ha t we kn ow ,
W ha t we do n ’ t k no w an d
W ha t we ne e d t o k no w

Name Manoj Sharma
Student number 1285238
Email address manoj.mailbox@gmail.com
Date August 2007
University Delft University of Technology
Faculty Technology, Policy and Management
Programme Engineering and Policy Analysis
Division Energy and Industry
Economics of Infrastructures
Intern Ministry of Economic Affairs, The Netherlands (EZ)

Graduation Committee

Prof. dr. ir. M. P. C. Weijnen Professor TU Delft
dr. ir. R. A. Hakvoort First Supervisors TU Delft
mw. ir. H.M. de Jong
ir. M. Jonker Second Supervisors TU Delft
Prof. ir. W.L. Kling
drs. André Jurjus External Supervisors EZ
drs. Lineke den Ouden
mr. drs. Jon Eikelenstam
drs. Kick Bruin

Dedicated to my parents

ACKNOWLEDGEMENTS

I am deeply indebted to my supervisor Dr. Rudi Hakvoort, from the Technical University Delft whose support,
stimulating suggestions, encouragement and confidence in my abilities enabled were a source of constant
motivation. I cannot possibly imagine completing this work without his guidance and pragmatism. I also
thank him for providing me the opportunity of working on a real policy issue, in whatever small measure
possible. I also sincerely thank Hanneke de Jong for her daily presence and continuous mentorship through
the period of my thesis. Her continuous feedback and comments have played the most important role in
shaping up this work.
I would like to thank wholeheartedly my supervisors, Professor of the Energy & Industry section, Margot
Weijnen for her scientific advice and astute feedback on the thesis and Prof. Wil Kling for the his support on
understanding the working of complex electricity systems and components and sharing his knowledge of
electricity markets. I would like to thank Martijn Jonker for being on my graduation committee.
I would especially like to thank people from the Ministry of Economic Affairs, Andre Jurjus, Lineke den Ouden,
Jon Eikelenstam and Kick Bruin for their valuable feedback and insightful discussions. Their presence gave a
direction to an otherwise very broad project. Their questions and deadlines were essential to keep the project
on tractable both in terms of focus and duration.
I would also thank my fellow students especially, Siamak Vaezpour and Paul Dailey, for sharing thoughts and
offering an avenue for venting difficulties during much needed and unforgettable coffee brakes. I want to
thank them for all their help, support, interest and valuable hints.
I feel profoundly indebted to TU Delft and Dutch Ministry of Education for offering me financial assistance
during my graduate studies without which I could not have possible undertaken studies in the Netherlands.
Finally and especially, I would like to give my special thanks to my family members back home whose patient
love and encouragement enabled me to complete this work.

August 2007
Manoj

1 ABSTRACT

Since late 90’s the European electricity market has been opened aiming towards development of a single
organized competitive internal electricity market. However given the limited capacities on the tie‐lines
between countries achieving a single market is not a possibility yet. Congestion on these tie‐lines separates
geographic markets into submarkets. Indeed cross‐border congestions run counter to the idea of the creation
of a competitive market. Because one cannot build infrastructures of infinite capacities, congestion is
unavoidable but should not be excessive – and it is desired to economically allocate the limited transmission
resource. In that context the optimal utilization of the available capacities is a major issue. To be economically
efficient the price of transmission capacity should be based on its marginal utility. However, the path that
electricity will take to reach from point A to point B connected by a meshed network is hard to predict on the
day‐ahead basis. Flow based market coupling (FMC) is a suggested mechanism for cross‐border congestion
management for the Northwest continental European region which takes into account both the market and
technical aspects of system to calculate dispatch.
The Dutch government has expressed interest in possibility of further regional market integration. Though
FMC holds a promise of being an upgrade over the current mechanisms, it still is a complex mechanism and is
often not completely understood. It is thus necessary to further research FMC to be able to identify and
delineate possible technical and economical implications from its implementation and search prognostic
solutions prior to its introduction.
This master thesis aims first at giving an understanding of the flow based method. Second objective of the
work was to try validating the claims of efficiency and welfare gains offered by flow‐based method. This
entailed designing a decision‐support model based on the technical‐economic realities which contribute to
making some of the major issues ‘transparent’ to the decision makers – in current case Dutch Minister of
Economic Affairs. The decision support model was based on realistic data from the four countries involved
with FMC and delineates the effects on both regional and national level also offering an understanding into
the distribution of benefits and costs amongst the involved actors. These results would help in further
progress towards acceptance and implementation of FMC. In the last part of the work institutional aspects
involved with adoption of flow‐based method were studied be highlighted along with listing of important
actors, since though FMC might theoretically be efficient to reap these benefits in reality it will require a total
coordination of all the actors concerned, and commitment from the involved governments.
This report aims to be useful for people working on a project related to the cross‐border electricity exchanges‐
especially FMC. The report is written in a manner that it would be understandable to a person with no prior
specialized knowledge of electricity networks or economics, though a basic understanding of concepts from
electricity markets would be of assistance. Report will be useful for anybody who is interested in cross‐border
electricity exchanges even if it is not his domain of study, with special focus on the North West European
markets.
Keywords: power system, electricity market, cross‐border exchanges, flow‐based market coupling.

Chapter: Abstract
i

ii Flow‐based Market Coupling

2 GLOSSARY
2.1 COUNTRY CODES
NL Netherlands
BE Belgium
FR France
DE Germany
2.2 OTHER ABBREVIATIONS
Abbreviation Signification

HV High Voltage
ISO Independent System Operator
TSO Transmission System Operator
ETSO Association of European Transmission System Operators
UCTE Union for the Coordination of Transmission of Electricity
NTC Net Transfer Capacity
ATC Available Transfer Capacity
PTDF Power Transfer Distribution Factor
MCP Marginal Clearing Price
NWER North‐West European Region
OECD Organisation for Economic Co‐operation and Development
FC Fixed cost
VC Variable Cost
TC Total Cost
AD Average demand
Q* Equilibrium demand/supply quantity
P* Equilibrium price
LMP Locational Marginal Pricing
EC European Commission
CM Congestion Management
Chapter: Glossary
FMC Flow‐based Market Coupling
iii

iv Flow‐based Market Coupling

TLC Trilateral Market Coupling
EDF Electricité de France
RTE Réseau de Transport Electrique
MC Market Coupling
2.3 DEFINITIONS

∙ Power system: Set of means of electricity production, transport and distribution and loads (national
electricity network)
∙ Marginal clearing price: Price of the last selected bid in the merit order.
∙ Spot price: Price set by the intersection of the selling and the buying bids on the spot market.
∙ Explicit auction: Auction where the product sold is a right to program an exchange on a given contractual
path.
∙ Implicit auction: Auction for which the allocations capacities are combined with the functioning of an
organized electricity market.
∙ Market coupling: Consists in a coupling of N markets, according to a decentralized approach, resulting in a
unique virtual market as long as the interconnections capacities are not saturated.
∙ Market splitting: One market which is split in N independent virtual markets when the capacities are
saturated.
∙ Market value: The linear combination between the bid price and the allocated capacity
∙ NTC: The net transfer capacity represents the best estimate limit for physical electricity transfer between
two areas
∙ ATC: The available capacity which can be defined for different periods of time (year, month, day…)
∙ Critical branch: A line of the network which could probably limit the commercial exchanges between the
areas because it often reaches its physical limits.
∙ Participating nodes: These nodes represent the junction point of the units to the network where the
production varies significantly when the total production of the zone varies.
∙ PTDF: Based on a state of the initial network, this is the influence on the flow on a critical branch of every
additional MW injected at a participating node.
∙ Netting: Take into account that the exchanges in an opposite direction counterbalance each other.
. Fmax: The maximum amount of electricity that can be exported or imported by a country depends on the
capacity of the interconnector, this is called the Flow‐gate capacity (Fmax), calculated according to flow based
method

. Fref: A part of the maximum allowed flow on the critical branches is already used (i.e. prior to the allocation)
by so‐called already‐occupied flows, this is termed as Fref, this is calculated considering flow based method
∙ Approximation of the direct current load flow solution: approximation where the following hypotheses are
taken into account:
‐ Vi =VN, where VN is the corresponding nominal voltage
‐ R=0
‐ No losses
‐ The angles θ between nodes are small and thus sin(θ) ~ θ

Chapter: Glossary
v

vi Flow‐based Market Coupling

3 STRUCTURE OF REPORT

Section 1 Electricity Markets
Appendix

This section gives a brief introduction to the specifics of
the electricity markets. Details the history of congestion All graphs and numbers for
the results are attached with
management in electricity followed by an introduction to
the the appendix.
idea of flow based market coupling for managing
congestion.
Other important documents
Section 2 Simulation Model
can also be found in the
A step by step description of how the model was Appendix. Report refers to
created is presented in this section. Details and appendix.
relevant data is presented in the appendices.

Section 3 Results

Here the results from the model are

presented and conclusion are drawn
Section 4 Market Design Issues
The final section of the report sums up the research by
identifying and delineating the risks and issues associated
with implementation of a new market design in a multi‐actor
setting. The main focus would hinge around the institutional
and informational aspects
Conclusions and Reflection
The conclusion, reflections and scope for future work is

outlined in this section.

Chapter: Structure of Report
vii

viii Flow‐based Market Coupling

CONTENTS

1 Abstract .................................................................................................................................................... i
2 Glossary ................................................................................................................................................. iii
2.1 Country Codes................................................................................................................................ iii
2.2 Other Abbreviations ....................................................................................................................... iii
2.3 Definitions ..................................................................................................................................... iv
3 Structure of Report ................................................................................................................................ vii
Figures .......................................................................................................................................................... xiv
Tables ........................................................................................................................................................... xvi
1 European Electricity markets ................................................................................................................... 3
1.1 Background ..................................................................................................................................... 4
1.2 Electricity – The special Case ........................................................................................................... 4
1.3 Present European electricity system................................................................................................ 5
1.4 March towards Internal Energy markets .......................................................................................... 7
1.5 Conclusion ...................................................................................................................................... 8
2 Congestion Management ...................................................................................................................... 10
2.1 Congestion Management Methods ............................................................................................... 10
2.2 Trilateral Market Coupling ............................................................................................................. 12
2.3 Market splitting ............................................................................................................................. 15
2.4 Locational marginal prices (LMP) .................................................................................................. 16
2.5 Conclusion .................................................................................................................................... 16
3 Flow‐based market coupling .................................................................................................................. 18
3.1 Operation of market under FMC .................................................................................................... 19
3.2 Flow Based Modeling .................................................................................................................... 20
3.3 Market Coupling............................................................................................................................ 20
3.4 Market Process of FMC ................................................................................................................. 20
3.5 difference between FMC and Market Coupling .............................................................................. 21
3.6 Conclusion .................................................................................................................................... 23
4 Problem Formulation ............................................................................................................................. 25
4.1 Problem Statement ....................................................................................................................... 25
4.2 Scope Definition ............................................................................................................................ 25
4.2.1 Geographical Scope .................................................................................................................. 25
4.2.2 Temporal Scope ........................................................................................................................ 26
4.3 Perspective/Problem owner .......................................................................................................... 26
4.4 Sub‐Questions .............................................................................................................................. 26
4.4.1 System behavior ....................................................................................................................... 27
4.4.2 Security of supply ...................................................................................................................... 27
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x Flow‐based Market Coupling

4.4.3 Welfare effects .......................................................................................................................... 27
4.4.4 Implementation issues .............................................................................................................. 27
4.5 Research design ............................................................................................................................ 27
5 Structure of Simulation Model ............................................................................................................... 31
5.1 Transmission network module ...................................................................................................... 32
5.1.1 Power Transfer Distribution Factor ........................................................................................... 33
5.1.2 Use of PTDF .............................................................................................................................. 34
5.1.3 Calculation of PTDF in PowerWorld .......................................................................................... 34
5.1.4 How to get PTDF from PowerWorld .......................................................................................... 35
5.2 Electricity demand and supply module .......................................................................................... 37
5.2.1 Supply Curve ............................................................................................................................. 38
5.2.2 Cost of electricity generation .................................................................................................... 38
5.2.3 Installed generation capacity .................................................................................................... 41
5.2.4 Calculation of Supply Curve Slope ............................................................................................. 42
5.2.5 Demand Curve .......................................................................................................................... 43
5.3 Tie line capacity ............................................................................................................................ 44
5.4 Electricity day‐ahead market module ............................................................................................ 46
5.4.1 Equilibrium without Market Coupling ........................................................................................ 47
After Market Coupling ........................................................................................................................... 48
5.5 Model Outputs .............................................................................................................................. 53
5.5.1 Outputs for the Non‐Coupled markets ...................................................................................... 53
5.5.2 Outputs for the coupled markets ............................................................................................... 53
5.5.3 Overall Results .......................................................................................................................... 54
5.5.4 Comparative Results ................................................................................................................. 54
Capacity Utilization Results ................................................................................................................... 54
5.6 Graphs .......................................................................................................................................... 54
6 Validation and Verification of model ...................................................................................................... 56
6.1 Validation of transmission model .................................................................................................. 56
6.2 Quality of data used for supply curve ............................................................................................. 56
6.3 Quality of data used for average demand ...................................................................................... 57
6.4 Price of electricity without imports and exports ............................................................................ 59
6.5 Validation of PTDF values from Power World ................................................................................ 60
6.6 Conclusions ................................................................................................................................... 60
7 Results ................................................................................................................................................... 65
7.1 Base Case ...................................................................................................................................... 65
7.1.1 Price of Electricity ..................................................................................................................... 65
7.1.2 Electricity Demand .................................................................................................................... 66
7.1.3 Welfare Data ............................................................................................................................. 67

7.1.4 Interconnector Capacity Utilization ........................................................................................... 68
7.1.5 Conclusions from base case ....................................................................................................... 69
7.2 Current Situation vs FMC............................................................................................................... 69
7.3 Comparison of FMC with Market Coupling .................................................................................... 71
7.4 Scenarios ...................................................................................................................................... 76
7.4.1 Increase generation capacity in Netherlands ............................................................................. 76
7.4.2 Increased tie‐line capacity ......................................................................................................... 80
7.4.3 Discussion on sensitivity of PTDFs ............................................................................................. 84
7.4.4 Effect of Carbon Market ............................................................................................................ 86
7.4.5 Decoupling of German system into North and South Block ....................................................... 92
8 Actor Analysis ........................................................................................................................................ 96
8.1 General Overview .......................................................................................................................... 96
8.2 Structure of the electricity markets ............................................................................................... 97
8.3 List of actors ................................................................................................................................. 98
8.4 Interests ...................................................................................................................................... 100
8.4.1 Generators .............................................................................................................................. 100
8.4.2 Consumers .............................................................................................................................. 100
8.4.3 Regulator ................................................................................................................................ 100
8.4.4 Government ............................................................................................................................ 100
8.4.5 Traders ................................................................................................................................... 100
8.4.6 TSO ........................................................................................................................................ 100
8.4.7 Power Exchanges .................................................................................................................... 101
8.5 Position of Actors ........................................................................................................................ 101
8.5.1 Power Exchanges .................................................................................................................... 102
8.5.2 Generators .............................................................................................................................. 102
8.5.3 TSOs ....................................................................................................................................... 103
8.6 Strategic Generators ................................................................................................................... 104
8.7 Questions raised by the actors .................................................................................................... 105
8.7.1 Regulator ................................................................................................................................ 105
8.7.2 TSO ........................................................................................................................................ 105
8.7.3 Power Exchange ..................................................................................................................... 105
8.8 Results from FMC ........................................................................................................................ 105
8.9 Conclusions ................................................................................................................................. 106
9 Market design issues ........................................................................................................................... 109
9.1 Legal and Organizational Issues .................................................................................................. 109
9.2 Technical Issues........................................................................................................................... 109
9.3 Market related issues .................................................................................................................. 110
9.3.1 Transparency towards the market ........................................................................................... 110
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xii Flow‐based Market Coupling

9.3.2 Economic signals to market participants and sharing of congestion income ............................ 110
9.3.3 Liabilities of TSOs and position of individual regulatory authorities ......................................... 110
9.4 Technical implementation issues ................................................................................................. 110
9.4.1 Regional Base Case ................................................................................................................. 110
9.4.2 Phase‐shifting transformers .................................................................................................... 111
9.4.3 Network representation .......................................................................................................... 111
9.4.4 Generation representation ...................................................................................................... 111
9.4.5 Definition of flow‐gate capacity (Fmax) ..................................................................................... 111
9.4.6 Type of bids ............................................................................................................................ 112
9.5 Possible solutions ........................................................................................................................ 112
10 Conclusions ......................................................................................................................................... 113
10.1 System behavior ......................................................................................................................... 113
10.2 Security of supply ........................................................................................................................ 114
10.3 Welfare effects ............................................................................................................................ 115
10.4 Implementation issues ................................................................................................................ 115
11 limitations and Research recommendations ......................................................................................... 117
11.1 Limitations of the study ............................................................................................................... 117
11.2 Research recommendations ......................................................................................................... 117
A Appendix ............................................................................................................................................. 119
A.1 Cost of electricity generation model ................................................................................................ 1
A.2 Data sources and assumptions for Cost of electricity generation model .......................................... 5
A.3 National Supply Curves ................................................................................................................... 8
A.4 Average Historical Market Price of Electricity ................................................................................ 11
A.5 Demand Worksheet from Market Module ..................................................................................... 14
A.6 Tie line Capacities ......................................................................................................................... 15
A.7 Power Transfer Distribution Factors for North‐West European Region .......................................... 17
A.8 Electricity day‐ahead market module ............................................................................................ 18
A.8.1 Constraints .................................................................................................................................... 18
A.8.2 Objective Function ........................................................................................................................ 18
A.9 Electricity day‐ahead market Results ............................................................................................ 19
A.10 Capacity Utilization Results ........................................................................................................... 20
A.11 Comparison of Market Coupling with Flow‐based Market Coupling............................................... 21
A.11.1 Base Case Flow‐based market coupling ................................................................................ 21
A.11.2 Base Case Flow‐based market coupling with NL reserving 1500MW on DE‐NL border .......... 22
A.11.3 Market Coupling ................................................................................................................... 23
A.12 Result of FMC after installation of 5000MW of coal based power plants in NL ............................... 27
A.13 Result of FMC after installation of 10,000 MW of coal based power plants in NL ............................ 28
A.14 Result of FMC after installation of 2000 MW transmission capacity between DE‐NL ..................... 29
A.15 Increase tie line capacity between Fr‐BE +2000MW ....................................................................... 30

A.16 Result of FMC after installation of 5000 MW transmission capacity between DE‐NL ..................... 31
A.17 Result of FMC after installation of 10,000 MW transmission capacity between DE‐NL ................... 32
A.18 Result of FMC after installation of 2000 MW transmission capacity between DE‐NL with PTDF from
5000 MW case............................................................................................................................................ 33
A.19 Effect of Carbon Market ................................................................................................................ 34
A.18.1 FMC results with emission price of 15 €/ton of CO2 ................................................................ 34
A.18.2 FMC results with emission price of 20 €/ton of CO2 ............................................................... 35
A.18.3 FMC results with emission price of 30 €/ton of CO2 ................................................................ 36
A.18.4 FMC results with emission price of 50 €/ton of CO2................................................................ 37
A.20 List of Actors ................................................................................................................................. 38
A.19.1 Netherlands .......................................................................................................................... 38
A.19.2 Belgium ................................................................................................................................ 39
A.19.3 France ................................................................................................................................... 40
A.19.4 Germany ............................................................................................................................... 42
Bibliography .................................................................................................................................................. 43
Websites ........................................................................................................................................................ 46

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xiv Flow‐based Market Coupling

FIGURES

Figure 1 Present state of integration of electricity markets in Europe ............................................................... 3
Figure 2 Percentage of flows in FR‐BE‐NL‐DE‐CH‐A‐I zone for a commercial transaction of 1 MWh from
France to Germany (IEA Workshop Presentation 2004) .................................................................................... 6
Figure 3 Planned increase of interconnections in the EU (% of installed generation capacity). .......................... 8
Figure 4 Current congestion management methods in NWE region ............................................................... 12
Figure 5 Prices after implementation of TLC showing convergence (http://www.apxgroup.com) ................... 13
Figure 6 Physical energy flows in 2006 (all values in GWh) from http://www.ucte.org .................................... 13
Figure 7. Outline of FMC a combination of flow based modelling that takes care of the physical flow path and
market coupling to maximize the competition and efficiency of electricity markets (ETSO and EuroPEX JWG
2004) ............................................................................................................................................................. 19
Figure 8. Market Coupling between two markets leading to increase in the net welfare (based on H. de Jong
and R. Hakvoort, 2005) .................................................................................................................................. 20
Figure 9. The process of pricing under FMC, this will be modelled for a simplified market case to create a
software model that helps understand the market operation better (ETSO and EuroPEX JWG 2004) ............ 21
Figure 10 Transfer capacity definitions ........................................................................................................... 22
Figure 11 Interdependencies of NTC between two araes (http://www.etso‐net.org) ....................................... 23
Figure 12 The system under consideration ..................................................................................................... 26
Figure 13 Research design .............................................................................................................................. 28
Figure 14 Design of the simulation environment ............................................................................................ 31
Figure 15 Interconnected Network of UCTE (http://www.ucte.org/) ............................................................... 32
Figure 16 Physicl flows because of a transaction of 100 Units of trade between France and Germany
(http://www.etso‐net.org) .............................................................................................................................. 33
Figure 17 Generic Reference case for calculation of PTDF ............................................................................... 33
Figure 18 Schematic of the Transmission Network Module ............................................................................ 34
Figure 19 THe utilization of interconnector between the countries in the nort‐west european region from the
modle run in PowerWorld .............................................................................................................................. 35
Figure 20 UCTE network with enhanced NL‐BE border .................................................................................. 36
Figure 21 Schematic of the Electricity Demand and Supply Module ............................................................... 38
Figure 22 The equation of the demand function for the North‐West European Region ................................... 44
Figure 23 Tie Line capacity for the north west european electricity network (based on data from website of
Tennet, RTE, RWE, Elia and TSO auction website) ......................................................................................... 45
Figure 24 Schematic of the Market Moduel .................................................................................................... 46
Figure 25 Principle of MCP (from http://www.apxgroup.com) ........................................................................ 47
Figure 26 The definition of consumer surplus and producer surplus................................................................ 47
Figure 27 Simple Stylized electricity market ................................................................................................... 48
Figure 28 Effect of import and export on prices and quantity in the country ................................................... 49
Figure 29 Welfare Calculations after inter country trade ................................................................................ 50
Figure 30 Optimization using MS Excel Solver ................................................................................................ 51
Figure 31 Optimization parameters ................................................................................................................ 51
Figure 32 Effect of an inelastic demand for deciding the objective function .................................................... 52
Figure 33 Merit order curves for the North‐West European Region, model data and comparision with actual
data from the past ......................................................................................................................................... 57
Figure 34 Load duration curve for Netherlands ............................................................................................... 58
Figure 35 Load Duration Curve Belgium ......................................................................................................... 58
Figure 36 Load duration curve for France ....................................................................................................... 58
Figure 37 Load Duration curve for Germany ................................................................................................... 59

Figure 38 Comparision of wholesale price of electricity based on the model and actual past data from the
power exchanges for year 2005‐07 ................................................................................................................. 59
Figure 39 MCP, equilibrium demand and surplus calculation without market coupling .................................. 65
Figure 40 Traded volumes for FMC and Trilateral Market Coupling comparision ............................................ 69
Figure 41 results from simulation model for current state of trade in north west European region.................. 71
Figure 42 Flow Direction for comparision of FMC with NTC based Market Coupling ....................................... 72
Figure 43 New Supply curve with additional 5 GW of hard coal based power plant ......................................... 77
Figure 44 Price change in NL, Imports and % tie line utilization for scenario with installation of 5000 MW coal
based generation in NL .................................................................................................................................. 77
Figure 45 New supply curve with additional 10,000 MW of hard coal based power plants ............................... 78
Figure 46 Price change in NL, Imports and % tie line utilization for scenario with installation of 10,000 MW
Hard coal based generation in NL .................................................................................................................. 79
Figure 47 The dialog in PowerWorld to set up the values of parameters for the transmission line ................... 80
Figure 48 New tie‐line capacity values............................................................................................................ 81
Figure 49 Results from FMC after installation of 2000 MW transmission line between DE‐NL ........................ 82
Figure 50 Price change after installation of +2000MW on NL‐DE Tie‐Line ...................................................... 83
Figure 51 Price change with installation of +2000MW on BE‐FR Tie Line ........................................................ 83
Figure 52 Utilization of flow line with +2000 MW on BE‐FR line, COmapre to Figure 45 .................................. 83
Figure 53 Results from FMC after installation of 5000 MW transmission line between DE‐NL ......................... 84
Figure 54 Price change and % Utilization from +2000MW on DE‐NL Border and PTDF's also from +2000MW
case ............................................................................................................................................................... 85
Figure 55 Price change and % utilization of interconnector from +2000MW capacity on DE‐NL border and
PTDFs from +5000MW ................................................................................................................................... 85
Figure 56 Contribution of Electricity and heat generation towrds total carbon emissions
(http://www.defra.gov.uk/environment/climatechange/trading/eu/index.htm). ............................................. 86
Figure 57 Development of Carbon prices in EU, Including the crash in april 2006 (SOurce: Point Carbon) ....... 86
Figure 58 Effect of carbon pricing on the merit order within north‐west european region .............................. 89
Figure 59 Results from FMC after considering carbon pricing ......................................................................... 91
Figure 60 The divisionof Germany into north and south block ........................................................................ 93
Figure 61 Flows after splitting germany into north and south blocks .............................................................. 93
Figure 62 Annual share of daily wind power in respective daily peak demand on e‐on grid (Germany) ........... 94
Figure 63 The difference between transit and loop flows (Green arrows mark the transit flows, Grey arrows
mark the Loop Flows) .................................................................................................................................... 95
Figure 64 The electricity value chain .............................................................................................................. 97
Figure 65 Present position of the power exchanges ...................................................................................... 102
Figure 66 Main strategic actors for the norty‐west European region (From vattenfall annual report 2006) ... 103
Figure 67 The common data for cost of electricity ............................................................................................ 1
Figure 68 Fixed cost data for electricity generation .......................................................................................... 1
Figure 69 Variable cost data for electricity generation along with emission costs ............................................. 2
Figure 70 Formulation for the capital cost calculations ..................................................................................... 3
Figure 71 Formulaiton of the Variable and Total cost ........................................................................................ 4
Figure 72 Data points for the merit curve (supply curve) ................................................................................... 8
Figure 73 Supply curve for Netherlands ............................................................................................................ 8
Figure 74 Electricity supply curve for Belgium .................................................................................................. 9
Figure 75 Electricity supply curve for France ..................................................................................................... 9
Figure 76 Electricity supply curve for Germany ............................................................................................... 10
Chapter: Figures
Figure 77 Equation of the supply curves (linear regression on the merit order curves) ..................................... 10
Figure 78 Distribution of MCP for Netherlands APX, year 2006‐07.................................................................. 11
Figure 79 Distribution of MCP for Belgium Belpex, year 2006‐07 .................................................................... 11
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xvi Flow‐based Market Coupling

Figure 80 Distribution of MCP for France Powernext, year 2006‐07 ................................................................ 12
Figure 81 Distribution of MCP for Germany EEX, September 06 – Jun. 07 ....................................................... 12
Figure 82 Demand Work Sheet Values ........................................................................................................... 14
Figure 83 Demand Worksheet Formulation .................................................................................................... 14

TABLES
Table 1 Senstivity matrix and PTDF based on the UCTE winter peak model from PowerWorld ....................... 37
Table 2 Categories of generation technologies .............................................................................................. 38
Table 3. Total cost of generation for different technologies ........................................................................... 40
Table 4 Formulation of Cost sheet .................................................................................................................. 40
Table 5 Installed generation capacities in the north west european region ..................................................... 42
Table 6 Supply curves slope for the four countries. ......................................................................................... 42
Table 7 Average demand of electricity based on the UCTE system adequacy forecast 2007‐20 ...................... 43
Table 8 Reliable generation capacity based on the UCTE system adequacy forecast 2007‐20 ......................... 43
Table 9 Output list for model from non‐coupled markets ............................................................................... 53
Table 10 Outputs from the model after FMC .................................................................................................. 53
Table 11 Comparative results from the model between FMC case and the base case ...................................... 54
Table 12 Capacity utilization results from the simulation model ..................................................................... 54
Table 13 Comparision of average demand of electricity used in the model and historical data ........................ 58
Table 14 PTDF value comparison from power world model to actaul published values ................................... 60
Table 15 Parameters for the new transmission line between DE‐NL ............................................................... 80
Table 16 Comparision of the PTDF values before and after installation of 2000 MW transmission line between
DE‐NL ............................................................................................................................................................ 81
Table 17 Comparision of the PTDF values before and after installationof 5000 MW transmission line between
DE‐NL ............................................................................................................................................................ 83
Table 18 Impact of Carbon pricing on the merit order based on fuel and energy technology type (the items
marked with olive are the once that moved) .................................................................................................. 87
Table 19 Average demand in north‐west european region (UCTE system Adequacy report 2007‐20) ............. 90
Table 20 PTDF values after splitting Germany into North and south block ..................................................... 94
Table 21 General characteristics of the north west european electricity market ............................................. 96
Table 22 List of all relevant actors for the north west european region ........................................................... 98
Table 23 Interests of the actors and the quantifying/qualifying parameter ................................................... 101
Table 24 Share of generaion companies in the total generation within north west european region............. 102
Table 25 Details about the most strategic players in the North west european market ................................. 104
Table 26 Actors perception of FMC .............................................................................................................. 105
Table 27. Total cost of generation for different technologies based on Vattenfall 2006. ................................... 5
Table 28 Consolidated MCP data for centre west European region for 2006‐07 .............................................. 13
Table 29 TIe line capacity values .................................................................................................................... 16

Section 1: Electricity Markets
A general introduction to the electricity
markets followed by focus on the
European system in general and north‐
west European region in particular.
Congestion management methods are
introduced. Flow‐based market
coupling is also explained. The section
concludes with problem definition.
Chapter: Tables
1

2 Flow‐based Market Coupling

1 EUROPEAN ELECTRICITY MARKETS

With the opening of the electricity markets in Europe through the Directive (EU96/92) enforced on 19
February 1999, the European market integration could not result into a copper plate. The variety of
generation mixes among the fifteen member countries, and the state of interconnection ties between them,
has resulted into regional markets interfaced by bottlenecks, rather than into a single market with a unique
price. European Authorities have quickly understood this situation and defined a new European Regulation
enforced since 1 July 2004, which promotes market based congestion management mechanisms, able to
provide efficient use of the interconnection as well as appropriate market signals giving the right incentives
for transmission or generation investments.
EU Vision

27 Individual electricity markets One Integrated (internal) electricity market
Current Progress
Chapter: European Electricity markets
Several regional markets
FIGURE 1 PRESENT STATE OF INTEGRATION OF ELECTRICITY MARKETS IN EUROPE ‐ BASED ON (PETER SIMIG, CONGESTION
MANAGEMENT PRACTICE AT CROSS‐BORDER TRADE IN ERRA REGION, ERRA EU INTEGRATION WORKING GROUP,
BUDAPEST, HUNGARY, 13 SEPTEMBER 2004)
3


1.1 BACKGROUND
1
Europe faces the problem of congestion on the inter‐country electricity transmission networks
2
(interconnectors ). Notice that the EU definition on congestion is focused only on interconnector congestion,
however it must be realized that congestion can also occur in the internal network. The investment in building
new lines is a feasible long term solution; however the capital costs are high and return on investment
depends strongly on both the regulatory environment and the future cross country demand‐supply trends. As
a short term operational solution regulators and system operators spend considerable time in trying to
optimally allocate capacity at interconnectors.
In its preliminary sector enquiry report (ENERGY SECTOR INQUIRY 2006), DG Competition (European
Commission) concluded that market integration in the European electricity sector is, among others,
hampered by insufficient interconnector capacity. Besides the interconnector congestion issue there are two
other important reasons for concern namely; the deficiency of incentives harbored in the current congestion
management methods for maintaining a desirable level of investment in additional capacity and a lack of
regulations/incentives to enforce/ensure efficient use of existing capacity.
The fact that electricity does not follow the contract path, but flows in the network governed by Kirchoffs
Laws makes the design of a suitable market mechanism for pricing the transactions difficult. For meshed
transmission network, each flow has an effect on power flow conditions over the whole system; the new
congestion management guidelines (amending the existing annex to the European Regulation (EC)
1228/2003) entered into force 1 December 2006. These new binding guidelines prescribe that TSOs should
implement a flow based allocation system as soon as possible. However, currently ministries, regulators and
maybe even TSOs have no clear overview of the political and regulatory consequences; e.g. the effect on the
security of supply of an individual nation, the effect of transparency, the effect on the national welfare, etc. To
be able to answer these questions it is important to understand the behavior of FMC and explore the
sensitivities of the system that can be exploited by market participants. The thesis work aims to create a
simplified representative model of the north‐west European electricity market under FMC; this would be used
to understand the issues that might arise from implementation of FMC. The results would help the Ministries
and regulators in understanding FMC and its behavior and also figuring out what to ask from the involved
actors.
1.2 ELECTRICITY – THE SPECIAL CASE
Several significant features that distinguish the electricity industry from others contribute to the structure of
market institutions:
1. Nonstorability
2. Intertemporal and random variability of demand
3. Necessity of balance in an interconnected transmission network
4. Direct connections to customers without any buffers
5. Capital intensity and economies of scale
The demand for electricity varies continuously and unpredictably from hour to hour, day to day, and season to
season. Practically, however, electricity cannot be stored.

1
Regulation on cross‐border trade of electricity (Regulation 1228/2003) Article 2 paragraph 2(c), provides
definition for congestion involving international transactions: ‘‘congestion means a situation in which an
interconnection linking national transmission networks cannot accommodate all physical flows resulting
from international trade requested by market participants, because of a lack of capacity of the
interconnections and/or the national transmission systems concerned’’
2
High‐voltage links that couple national electricity systems and facilitate international competition

In an interconnected network, the demand and supply of electricity must be balanced instantaneously over
time at every point of the network to maintain frequency, voltage, and system stability and to avoid power
outages. Unlike other types of networks, electricity in an AC electric transmission network flows in directions
determined by physical laws rather than by contracts and therefore is more difficult to control. A local
variation of demand or supply of electricity affects power flows throughout the interconnected network. An
equipment failure in one part of the network can cause the entire system to collapse. Efficiently meeting a
new demand may involve coordinated adjustments of generators located far from the source of the demand.
Therefore, the transmission system does not provide a simple physical connection between electricity
generation and consumption facilities; it also involves active coordination of generating units dispersed
throughout the network to meet variations in demand and supply.
Due to these technical characteristics, electricity markets are inherently incomplete. The centralized
organization afforded under the traditional structure of vertical integration facilitated the essential task of
coordinating efficient system operation and balancing the supply and demand of electricity continuously in
response to changing system conditions. The challenge now is to design a market organization that can
accomplish system coordination in transmission without compromising the opportunities for market
competition in energy.
1.3 PRESENT EUROPEAN ELECTRICITY SYSTEM
The north‐west European region is a subset of the larger synchronous UCTE region composed of 18
continental European countries: Portugal, Spain, France (FR), Belgium (BE), Luxemburg, Switzerland, Italy,
Netherlands (NL), Germany (DE), Denmark west, Czech Republic, Slovakia, Poland, Austria, Hungary,
Slovenia, Croatia and part of Bosnia and Herzegovina. Synchronous interconnection means that individual
systems are connected and being run together, at the same frequency, and assist each other if a disturbance
occurs in a system. Vice‐versa this also means that major disturbances might propagate throughout this whole
interconnected system and endanger its stability. UCTE is composed of the highly meshed system of 24
European countries consisting of some 200,000 km of 400 and 220 kV lines, hundreds of generating capacities
directly linked to the system, and hundreds of substations (www.ucte.org). Within a meshed system there will
be parallel flows, which are hard to predict in advance. However, they would use up the available transfer
capacity on the interconnectors. From an economic efficiency viewpoint both transit and loop flows should be
charged for the marginal and opportunity cost of using the available capacity. However the system is
governed by physical laws that do not follow economic reasons. Power flows over the multiple paths
between supply and use according to least impedance, and not according to the shortest path or the path
with the most unused capacity.
In the present scenario tie‐line capacities are based on ATC/NTC values. ATC being the only limit for market
operations greatly simplifies cross‐border trading. Considering that the electric network is a highly complex
non‐linear system, such an abstraction has to be done in a careful manner. For example, one must recognize
the difference between the commercial transfer between zones and actual flows in a system as illustrated in
Figure 2. For a 1 MWh flow occurring between France and Germany, 0.34 MWh is flowing through Belgium
and Netherlands route, while only 0.35 MWh flows directly from France to Germany‐ flows through BE and NL
are termed as transit flows. The remaining flows through networks of other neighbours.
Up to now, most trade arrangements within Europe have been based on the “contract path” concept, where
electricity is supposed to flow according to the chosen trading arrangements. This concept has been
acceptable as long as it has been applied to long term steady transactions between integrated companies.
Although it has severe drawbacks as already outlined in the example above, at least it prevents taking
maximum benefit from existing transmission facilities in meshed networks. At most it can severely jeopardize
power system security (e.g. the chaining contracts without visibility, that have been made possible thanks to
the contract path paradigm, have been the origin of several very dangerous operational situations due to
5


unexpected flows through Belgium). Moving to the “physical flow path” concept while managing physical
flows through the market itself poses a major challenge. ETSO and EuroPEX joint working group presented
the Flow‐based Market Coupling (FMC) as a solution to congestion management which prices according to
the “physical path” concept (ETSO and EuroPEX JWG 2004). However it is still different from the Location
Marginal Pricing (for detail discussion on LMP refer chapter 2) – or nodal pricing, as it would aggregate
multiple nodes, the once belonging to one control area, into one super‐node. This super‐node is expected to
cover all nodes that are geographically located in one country. As the EU directive only dictates FMC for
interconnector congestion management, hence the prices will only be calculated for each region separately
considering the maximum amount of electricity that can flow given the capacity constraints. Next section will
discuss FMC in detail.
FIGURE 2 PERCENTAGE OF FLOWS IN FR‐BE‐NL‐DE‐CH‐A‐I ZONE FOR A COMMERCIAL TRANSACTION OF 1 MWH FROM
FRANCE TO GERMANY (IEA WORKSHOP PRESENTATION 2004)
Other important consideration to be taken into account while designing a market based congestion
management mechanism for electricity trade are the following:
• Electricity transmission is a natural monopoly, and hence needs special governing structures while
dealing with efficiency issues.(Crew and Kleindorfer 1985)
• Transport pricing issues because of “one country one price paradigm” do not agree with the
economic optimization principles (Crampes and Laffont 2001)
• Pricing according to the physical flow path and contract path are different (Borenstein 2001;
Budhraja 2003)
• Markets for electricity have undergone recent restructuring and liberalizing. Operations of electricity
markets after restructuring is different as compared to vertically integrated companies that
proceeded them (Bhattacharya, Bollen et al. 2001)
• Transmission lines are still regulated (as transmission is natural monopoly it needs to be regulated to
prevent abuse of market power) and firm behavior is different under regulation not always
maximizing the profit. (Averch and Johnson 1962) In case of Netherlands the system operator ‐

TenneT ‐ is under a revenue cap with some form of international benchmark. Which is not the most
economically optimal solution but limits the gold‐plating.
• The structure of the market is such that it will never be perfect competition because of huge capital
costs involved. Oligopolies will exist in the generation side which will hinder operation of efficient
markets. (Day, Hobbs et al. 2002)
• TSOs try to reserve some transmission capacity due to security reasons. This further complicates the
efficient operation of any market design.(Harvey, Hogan et al. 1996)
• International transmission trade would call in for standardization of the legal processes to enable
neutral settling of the trade issues. (Knops, De Vries et al. 2001)
• The externalities due to loop flows in a transmission network represent a critical issue that must be
resolved before competition can be successfully introduced into the electric power industry for long‐
term economic benefits.(Chao, Peck et al. 2000)
For the basic understanding of economics concepts book by Samuelson and Nordhaus was used (Samuelson
and Nordhaus 2005). “Power System Economics” was used for more specific understanding into the
operations of electricity markets (Kirschen and Strbac 2004). A book by Hunt was consulted for understanding
the issues faced by efficient operation of electricity markets (Hunt 2002). To gain broader understanding into
risks related to electricity infrastructures within European context book named Critical Infrastructures at Risk
was also consulted (Gheorghe, Masera et al. 2006).
1.4 MARCH TOWARDS INTERNAL ENERGY MARKETS
In 1987 the Single European Act actively promoted integration of national markets into one single European
market and invented the “1992 Internal Market” agenda. The Internal Energy Market (IEM) provides new
opportunities to energy consumers and to energy undertakings. It has the potential to increase economic and
technical efficiency, as well as security of supply, thus improving European welfare and the competitiveness
of European industry. To realize Europeanization of energy sector three concepts were focused on ‐
liberalization, independent regulation and supra‐national integration of electricity markets, which are inter‐
related. The first IEM document (Directive 96/92/EC) defined some common rules to be applied by all Member
States in order to open up their energy markets and established the legal basis for the IEM. For instance, the
directives defined minimum unbundling requirements applicable to vertically‐integrated undertakings,
minimum eligibility thresholds, a menu of network access regimes, etc. With opening up of market the cases
where electricity is significantly cheaper in one member state than in its neighbor, a large demand for cross‐
border transports could occur. In some of these cases the demand for imports exceeded the available
transport capacity on the (cross‐border) interconnector(s) leading to congestion. Transmission system
operators (TSOs) have historically not designed interconnections between their networks with the primary
objective of facilitating international power trade. As a consequence, the integration of national markets is
impeded by the limited amount of cross border transmission capacity. However there have been plans to
increase capacity of the interconnectors, as seen Figure 3, the by 2010 it is planned to raise the capacity of the
interconnectors to almost 20% of the installed generation capacity. It becomes imperative to design efficient
congestion management and capacity allocation methods for this additional capacity in order to maximize
the economic benefit from trade.
7


Interconnector capacity as % of
total installed generation capacity

FIGURE 3 PLANNED INCREASE OF INTERCONNECTIONS IN THE EU (% OF INSTALLED GENERATION CAPACITY).
For 2003 a level of approx 10% were foreseen, while the level graph shows that the actual level of
interconnection capacity was only 7%. Currently the level was approximated at around 15% with the number
growing up to 20% by year 2012. This underscored the importance that inter country trade of electricity has
on the national markets. This would only become more important in the coming time(Source: EU Directorate
General for Energy and Transport, 2000)
Congestion may hamper the full integration of different national electricity markets into a single market. The
existence of negotiated third party access regimes, the limited level of unbundling obligations and the lack of
an obligation to establish a national energy regulator were also viewed as obstacles to creation of competitive
markets. To address these concerns, further measures were proposed by the Commission leading to the
adoption of (Directive 2003/54/EC)(“Second Electricity Directive”) and (Regulation (EC) No. 1228/2003 2003)
(“Cross Border Electricity Trading Regulation”). The content of the Regulation largely reflects the outcome of
the work of the Florence Regulatory Forum (see DG TREN web site http://europa.eu.int/comm./dgs/energy_
transport/). The Forum began its work in 1998, with an aim of identifying obstacles in the way of IEM and
explores solutions, and has since issued several studies on the two subjects addressed by the Regulation.
In 2004, ETSO and EuroPEX launched a joint proposal on Flow‐based Market Coupling (FMC) to achieve the
goals envisioned by 1228/2003. On 1 December 2006 a new annex to the European Regulation (EC) 1228/2003
entered into force (congestion management guidelines) requiring that al congestion management methods
applied must be market based which means that capacity shall be allocated only by means of explicit or
implicit auctions. These new binding guidelines prescribe that TSOs should implement a flow based allocation
system as soon as possible.
1.5 CONCLUSION
Once all the above issues have been studied it would be possible to place FMC into the right perspective while
considering the alternatives. This would contribute to one part of the report which is mostly based on
literature and expert opinion and would study the long and short term implications of implementing FMC on
Dutch interconnectors with Germany and Belgium, and the transactions from France.
There is a need to understand what makes a market design successful. It has been proven in literature that

theoretically all current congestion management methods today have the capability of being economically
efficient (De Vries and Hakvoort 2000b; De Vries 2004). However they differ with respect to distribution of the
costs and welfare. This could lead to opportunistic behavior and hence any market design should be closely
monitored for any such opportunity. FMC also needs to be studied with respect to the distribution of the
benefits and costs. The actors who bear the costs without any benefits will be against any such change and
those who enjoy benefits without any cost would strongly support it. A neutral and efficient method would

need to distribute the benefits and costs justly. FMC has been said to build upon the present system without
major structural changes and it can evolve over time. However it has been shown in past that unsuitable
market designs like the one in California could lead to huge damage. Hence FMC should be scrutinized more
rigorously especially with respect to the impact it would have on the Dutch electricity system and national
energy security.

9


2 CONGESTION MANAGEMENT

Congestion occurs when the demand for transmission capacity exceeds the available transmission network
capabilities. Every power system will from time to time experience this situation. It is not economical to invest
to a level where all constraints are eliminated.
The principles for congestion management in a country or a wider area are based on the legislation and
regulation in place. An increased focus towards handling of congestions has developed over recent years. In
Europe the EU Directive 2003/54/EC and the Regulation 1228/2003/EC draw up the basic principles for
congestion management throughout Europe.
Guidelines are being developed to detail the principles. Only market based methods for congestion
management will be accepted in the future.
Congestion separates geographic markets into submarkets. Congestion arises from the saturation of
transport infrastructure. It may occur in any spatially distributed sector that requires transport facilities.
Because one cannot build infrastructures of infinite capacities, congestion is unavoidable but should not be
excessive. The frequency of congestion and the size of the resulting submarkets depend on both the capacity
and the management of the infrastructure. This also applies to electricity, with the additional complexity that
this product creates. In the next section various congestion management methods would be detailed. This
would be followed by description of the current state of congestion management methods employed in
north‐western Europe.
2.1 CONGESTION MANAGEMENT METHODS
Congestion management in electricity is far from a new subject in the academic and professional literature. Its
analysis began with Hogan’s seminal paper (Hogan 1992) on nodal pricing (also referred to as locational
marginal pricing (LMP)). The subject has since been extensively debated and there is now considerable
theoretical knowledge on it. Market splitting is a simplified form of nodal pricing that was implemented in the
Nordic system in 1993 (http:// www.nordel.org/). New Zealand introduced a first version of nodal pricing as
early as 1997. The real development began with the implementation of this method in PJM in 1998 and the
progressive adoption of it by the voluntary pools of the East Coast of the United States.
Congestion management methods can be divided into different sub‐categories. It can be methods for
handling congestions between areas (inter area) or it can handle congestions within an area (intra area).
Market based or not market based is another subdivision. Finally it should be divided between methods used
to allocate capacity up to the capacity limit (allocation methods) and methods used to alleviate the
transmission network down to the capacity limit (alleviation methods).
Based on the literature review, the three forms of the congestion management have been adopted in
deregulated electricity market (EM) around the world (Christie, Wollenberg et al. February 2000). One form is
based on centralized optimization with some form of optimal power flow program or depending upon the
control measures executed by the TSO for congestion relief. A second form is based on the use of price signals
derived from ex ante market resolution to deter congestion by constraining scheduled generator output prior
to real time operation. A third form seeks to control congestion by allowing or disallowing bilateral
transmission agreements between a producer and a consumer, based on the effect of the transaction on the
transmission system.
Within Europe following are the cross‐border congestion management methods that are currently
implemented (ETSO May 2006)

• Access limitation: Access rationed by one or several independent companies which are not the
owner of the network the link is connected to.
• Priority List: One gets capacity in a priority order until the whole available capacity is allocated.
Examples of priority criteria are: chronological order (first come first served), past use of capacity,
etc.
• Pro rata rationing: All requests are partially accepted in the way that each participant is granted a
fixed share of his requested capacity amount.
• Explicit auction (ATC Based): The applicants have to declare the amount of capacity they want to
obtain and how much they are willing to pay for this capacity. Bids are ordered and allocated by
price. In the SEE region they recently introduces coordinated (regionally optimized) explicit auctions.
• Implicit auctions (Market splitting; Market Coupling): The electricity markets provide initially a
common clearing. If the interconnector is congested, markets split into pre‐determined price areas
cleared individually.

Countries apply the methods of accession according to regulation EC 1228/2003. Regarding inter‐country
transmission capacity within EU, regulation 1228/2003 of prescribes that the congestion management
methods implemented by its member states must be market based and that allocation of capacity shall be
made only by explicit (only capacity) or implicit (both capacity and energy) auctions.(Regulation (EC) No.
1228/2003 2003). Priority based rules, such as first come first served, and pro‐rata rationing are allocation
based and non market based methods. This entails that access‐limitation, priority and pro rata will be soon
phased out within EU.
In Europe different assignment models are used. For example, the cross border capacity between the
Netherlands and Germany is assigned through explicit auctions. Netherlands, Belgium and France day‐ahead
market is assigned through trilateral market coupling; while the long term capacity (month/year) is allocated
via explicit auctions. Nordic System uses the model of market splitting. The selection and implementation of
a well‐suited congestion management model is a necessary precondition for developing a successful regional
market(ETSO May 2006).
Congestion management, in particular at the European level has become a relevant topic since liberalization
of electricity markets is in progress. Boucher and Smeers (2001) analyzed the future organization of cross
border trade in the European electricity market concluding that the economic principles as proposed by the
European Commission in 2001 are not sufficient. Ehrenmann and Smeers (2004) analyze the regulation of
cross border trade of electricity (Regulation 1228/2003) in terms of efficient congestion management. They
conclude that market coupling ‐ although its implementation is more complex ‐ can path the way to a
consistent system integrating the energy and transmission markets. Arriaga and Omos (2004) analyzed
plausible congestion management schemes for the internal electricity market of the European Union. Taking
a joint energy and capacity auction as benchmark they test two alternative approaches, an integrated
transmission and energy auction and a coordinated explicit auction of transmission capacity followed by
separate energy auctions at the different power exchanges. The authors propose the latter since it is relatively
close to the actual market structures.
Chapter: Congestion Management
Explicit and implicit auctions are the favored methods by the European Union. They are market based
allocation methods. Market splitting and market coupling are special cases of implicit auctions. In an implicit
auction energy and capacity are traded at the same time. In an explicit auction only transmission capacity is
traded.
Locational Marginal Pricing (LMP) is similar to implicit auction since both methods consider both energy and
capacity. But LMP is basically the backbone of a market organization with central bid based dispatch.
11


Examples of alleviation methods are counter trading, re‐dispatching, coordinated redispatching and
transmission loading relief (TLR).
Next section would outline the current approach of congestion management that has been implemented
between France, Belgium and Netherlands. It is also important to discuss here the main features of two other
successful market based methods for congestion management that have been implemented elsewhere.
Market splitting (MS) as employed by Nordic countries and LMP as employed by PJM would be discussed
subsequently. The chapter would end would an outline of FMC, which would be dealt in detail in the next
chapter.
2.2 TRILATERAL MARKET COUPLING
On 21 November 2006 the Trilateral Market Coupling (“TLC”) between the Netherlands, Belgium and France
was successfully launched. The success of TLC proves the market coupling concept, and paves the way for the
creation of a North‐West European energy market.
Trilateral Market Coupling was the first coupling of separate, independent exchanges in Europe, so there were
many challenges and new problems to solve. The success of the project was due to increased co‐operation
between the six parties (RTE, Powernext, Elia, Belpex, TenneT and APX) together with the strong support of
the Governments, the European Commission, the regulators and the market parties. However it was not a
smooth sailing.
Market coupling is a way to integrate power markets in different physical areas while requiring minimal
changes to the local arrangements. Under TLC the three power exchanges continue to exist as separate legal
entities with their own trading platform, contracts and clearing. The markets are nonetheless brought
together by using the available transmission capacity to create a single regional market most of the time. The
transmission capacity is used in an optimal way, enabling the best bids and offers to be matched from across
the region.

FIGURE 4 CURRENT CONGESTION MANAGEMENT METHODS IN NWE REGION

TLC replaced a two‐step process: a daily explicit auction of transmission capacity followed by the day‐ahead
energy markets. This sequence has some inherent inefficiency. Market coupling integrates transmission
allocation and energy trading, removing many of the inefficiencies at the day‐ahead stage. Explicit auctions
are still used for the monthly and yearly allocation of transmission capacity rights.
Trilateral market coupling has already had a clear positive impact. There has been strong price convergence
across the three coupled day‐ahead markets, with a single price the large majority of the time (and separation
in to 3 price areas being very occasional). The trend seems to be that convergence is increasing.

FIGURE 5 PRICES AFTER IMPLEMENTATION OF TLC SHOWING CONVERGENCE (HTTP://WWW.APXGROUP.COM)
As a result of the market coupling mechanism, the use of the available daily capacity (import and export flows
between the Netherlands and Belgium) has changed significantly. There has been a marked increase in
utilization of cross border capacity, occasionally reaching 100%, which theoretically must be 100% if there is
any price difference between the countries. Historically, the Netherlands was a net importer but, while this is
usually still the case during peak hours, it is becoming a strong exporter during off‐peak hours. These effects
show that market coupling has contributed significantly to a better integrated and more efficient electricity
market. Figure 6 shows the imports and exports between the countries in North West European region for the
year 2006. Netherlands imports large percentage of electricity from Germany.

FIGURE 6 PHYSICAL ENERGY FLOWS IN 2006 (ALL VALUES IN GWH) FROM HTTP://WWW.UCTE.ORG
13


Considering the benefits it is planned to extend the system to include Germany. The German power exchange
EEX is also considered "a pacemaker" for European power prices. Inclusion of Germany would increase the
number of actors involved in the trading and hence make the markets more competitive and hence more
efficient. It is also proposed to use Flow based market coupling calculation to calculate the available transfer
capacity on the tie‐lines. This is claimed to be more efficient way of allocating the available capacity – as it
considers the physical realities of electricity flow based on the Kirchoff’s laws rather than the contract path
method. Not only would it make more realistic calculations on the flows, it would enable TSO’s to reduce the
security margins as they would now be able to predict the flows more accurately now. Hence balancing would
require reduced amount of reserved margins.
The 11th Florence Regulatory Forum held in Rome on the 16th‐17th September 2004 welcomed the ETSO‐
EuroPEX joint proposal for addressing cross border congestion. Their jointly developed approach ‐ called
Flow‐based Market Coupling or FMC ‐ provides a model for cross‐border congestion management and
integration of electricity markets across Europe. It consists of regional price areas with inter‐regional trading
facilitated by market coupling subject to simplified transmission constraints. The model included detailed
arrangements for day‐ahead trading as well as providing for alternative forward market structures. Since then
the studies have been ongoing over the possibility of introducing flow based market coupling. It has been now
proposed to introduce FMC in the north‐west European region.
On June 6, 2007 ministers of the Pentalateral Energy Forum and the High Level representatives of the
Regulatory Authorities, TSOs, PXs and the Market Parties Platform of the Central Western European (CWE)
region (Belgium, France, Germany, Luxembourg and the Netherlands), signed a Memorandum of
Understanding (MoU) on Market Coupling and Security of Supply in Central Western Europe. The MoU is a
step forward towards a more efficiently functioning cross‐border electricity market in the five countries and
towards further European integration. Key elements are the development of a flow‐based market coupling
system for the region and several measures for increased security of electricity supply. However it is still a
paper and developments in practice have not been visible yet.
The target date for this endeavor is January 2009. The basic underlying assumption is that a pricing method
that couples national markets and maximizes the available interconnector capacity (using flow based
calculations) would be most economically efficient. The flow‐based market coupling will support the global
reliability of the electrical system and increase economic efficiency in the region by introducing a single
region‐wide implicit auctioning system of the cross‐border interconnection capacities, based on a regional
load flow calculation.
A working group of TSOs and PXs will analyze the requirements for design and implementation of the flow‐
based market coupling mechanism. The working group is also in charge of the necessary negotiations,
steering and decision‐making. TSOs and/or PXs will also examine the opportunity of setting up a joint‐TSO
company and/or PX company, which would be in charge of the relevant market issues within the CWE area.
However, FMC is still not completely understood and should be analyzed for pitfalls, if any, before the
implementation can take place. The initial phase would require the involved actors to agree on the terms and
conditions of the FMC. The fact that FMC system is an integrated system governed both the technical realities
and market economics makes it tough to get an intuitive understanding. The results are also non‐linear
making predictions impossible without help of a appropriate tool. The complexity inherent to the
transmission system, compounded by integration of four independent networks and additional complexity
introduced by FMC creates a non‐transparent system that is complicated for the policy makers to understand,
and hence is a stumbling block towards agreements and might lead to rough negotiations. For this it is
important to bring out the distributive effects that FMC would entail for the participants. This can only be
understood by modeling the real system and studying the impact of introducing a flow based system with
market coupling.

The next chapter would introduce FMC is more detail. The salient features of Market Splitting and LMP would
be discussed next.
2.3 MARKET SPLITTING
The market splitting is an implicit auction where the capacity is traded simultaneously with the energy. In
cases with congestions, the markets are split into two or more price areas. Each price area is then balanced
while fully utilizing the transfer capacities between the areas. As stated earlier, larger areas with uniform
prices are important for the competition and the market splitting approach has therefore many advantages
from this point of view. The economic outcome from market splitting would be same as market coupling only
the process of getting there is different.
Market splitting is applied in the Nordic market and some of the designs used there will be described and
discussed for illustration purposes. The steps are:
• The whole market area is divided into smaller bidding areas, mainly defined along the structural
bottlenecks.
• The TSOs calculate transfer capacities and all capacity for each hour is allocated to the power
exchange for trade in the day‐ahead market. Information on capacities are given to the market every
morning.
• Market actors can then submit bids in a bidding area. Bids must be in balance in each area.
• Market clearing is performed for each hour by the latest 2 am the day ahead of operation. First an un‐
congested market clearing is performed for the whole market. Flows between areas are checked
against available capacity. If there are any violations, the market is split in two areas and separate
clearing is done in each area.
• This iteration process continues until all transfers are within capacity limits. All market actors will be
compensated and charged according to the market prices in the area they are located.
• The market actors’ obligations within each price area are then the basis for a detailed planning of the
generation and loads. These detailed schedules are submitted to the
TSO and will be the basis for calculating deviations from the schedules and need for secondary control.
The market splitting method requires a centralized market operator that combines the bids in a market
clearing procedure. As mentioned the market splitting enhances the competition due to relatively many
market actors within the same price areas. The implicit auction principle also guarantees that the capacity is
made available to the market participants in a nondiscriminatory way since no single market actor can reserve
the capacity for own use. In a case of congestion all the market actors can readily see the effect, since the
energy price will rise in the deficit area. This gives the right incentive to market actors on both sides of the
congestion. The price in an area also reflects the value of the electricity for the market actors.
Congestion between the areas will generate a congestion rent to the TSOs. According to EU Directive the
congestion rent can only be used for transmission investments, reduced tariffs or counter‐trade. In the market
splitting method the central load dispatch has been replaced by market forces. This gives as result a system
where generation and load are in balance in the planning phase.
During the operating hour there is a decentralised dispatch where the generators follow their schedules. The
System Operators will take care of the imbalances occurring after the planning by using the balancing market.

15


2.4 LOCATIONAL MARGINAL PRICES (LMP)

More physical network models, for example LMP, make it possible to some extent to operate closer to the
limit. The LMP takes into account that inter area transactions may have different impact on the flow on
congested transmission lines between those areas as well as on loop flows. This impact on the network flow is
the reason for possible enhanced utilization of the transmission system. As long as the prices can be different
on all nodes, it is in principle possible to find a power flow that gives the overall optimal solution and utilizes
the transmission system as good as possible based on the bid curves. This requires however that all technical
and economical details to run an optimal power flow are available when the SO is performing central
dispatch.
There are different types of transactions where some are firm and may have transfer rights while others are
more of opportunistic character. It is important to account for these differences when congestion
management schemes are developed. In the follow description and discussion, the scheme developed by PJM
and MISO will used as an example(PJM Interconnection). The purpose of the scheme (CM Process) was to
balance system security with a market‐sensitive usage of PJM’s available transfer capability.
The cornerstone of CM Process is the delineation between energy flows associated with serving ‘firm’ load;
and other energy flows associated with commercial activity. Firm flows are defined as those flows that would
occur to serve only customer loads and those transactions that have Firm Transmission Rights (FTR). What is
left over would be opportunistic transactions that do not have Firm Transmission Rights. This approach allows
those with firm FTRs to be secure that their respective transactions will flow; and those without FTRs can still
make use of the system as subject to the requirement that there are no actual transfer problems. As long as
the actual tie line flows are within the agreed transfer limit, then there is no reason to preclude additional
transactions.
In an LMP‐based system the bus prices will reflect which resources are more financially attractive and which
resources are not. As long as the Market price shifts keep the flows within the transfer limits, the
opportunistic transactions continue. When the normal market prices are not sufficient to control the flows,
then the opportunistic transactions would be curtailed. This approach allows SO to let transactions continue
as long as the market players are willing to pay the energy costs caused by redispatching the system. The
LMP will diverge until the flows are appropriately reduced.
Another benefit is that the transfers are based on real time flows and not on predicted flows.
This approach increases both reliability (in the case where conditions adversely impact the transfer limits) and
commerce (in the case where conditions support additional interchange.)
The use of the simplified Interconnection Model provides recognition that in a meshed interconnection
transactions themselves are neither good nor bad, it is the effects of the transactions that help or hurt and
those effects are a result of more than just the owner‐area of the point of delivery and point of receipt of the
respective transaction.
2.5 CONCLUSION
Congestion management methods can be divided into different sub‐categories. It can be methods for
handling congestions between areas (inter area) or it can handle congestions within an area (intra area).
Market based or not market based is another subdivision. Finally it should be divided between methods used
to allocate capacity up to the capacity limit (allocation methods) and methods used to alleviate the
transmission network down to the capacity limit (alleviation methods).

It is not possible to state that one method is superior to the others. It is more a question of how it is necessary
to prioritize between the general requirements of congestion management methods given specific systems.
Giving priority to some specific features will often make it necessary to come up with countermeasures for the
requirements not that well covered.
Priority based rules, such as first come first served, and pro‐rata rationing are allocation based and non
market based methods.
Explicit and implicit auctions are the favored methods by the European Union. They are market and allocation
based methods. Market splitting and market coupling are special cases of implicit auctions. In an implicit
auction energy and capacity are traded at the same time. In an explicit auction only transmission capacity is
traded. Flow based market coupling tries to use both the technical specification of the system and market
coupling together. FMC would be discussed in detail in the next chapter.

17


3 FLOW‐BASED MARKET COUPLING

The new congestion management guidelines (amending the existing annex to the European Regulation (EC)
3
1228/2003) entered into force on 1 December 2006. These new binding guidelines prescribe that TSOs should
implement a flow based allocation system/or a similar mechanism that couples the markets and takes care of
the physical flows as soon as possible.(Congestion Management Guidelines 2006)
At the moment, TSOs calculate the ‘for the market available capacity’ for each border separately based on
quite conservative base cases. After this, the calculated available capacity is attributed to the market through
a certain allocation method such as explicit auctions (capacity only) or implicit auctions (capacity and energy
actions).
New regulatory guidelines of the EU prescribe the implementation of flow‐based. In short, (FMC) is a new
method for Cross‐Border Congestion Management. It combines commercial energy bids with physical reality
to optimize network use with respect to market value. Commercial energy bids and available capacity are
evaluated simultaneously in an iterative process which should lead to a more efficient use of transmission
capacity with respect to commercial value. Optimization is performed based upon commercial bids and the
linear relation between accepted bids and physical flows on flowgates (defined in the PTDF‐matrix).
Theoretical FMC has been proven to be an efficient market design: (Chao, Peck et al. 2000)
“System of flow‐based transmission rights enables market‐based congestion management or efficient energy
and transmission markets. Further, once a system of tradable flowgate rights is established, the control of the
transmission system is shifted from line owners to the market, in which the transmission charges are
determined competitively without excessive complexity or monopoly power abuses.”
Flow‐based market coupling is an implicit auction similar to market splitting but performed in opposite order.
First each sub‐market is cleared, and then these markets are coupled. It is a mixture of a “flow based
modelling” and a “Decentralised Market Coupling”. A “flow based modelling” considers the physical flows
that can be exchanged between different electric systems taking into account the mutual influence of the
exchanges. A “Decentralised Market Coupling” is a method to execute a coordinated market among different
markets, using their own market rules in each area. This method is still under development but is likely to
become an important solution in Europe.
A simplification must be made, considering that a joint system can be operated as a number of single‐price
regions, connected with the other regions by notional transmission circuits. The real flow between different
nodes is modelled by flow factors and the limits between nodes are calculated taking into account the
influence of the bottleneck capacities on the crossborder inter‐connectors.
Bottleneck capacities (Fmax and Fref) and flow factors (PTDFs) need to be estimated and published in advance
to inform users and updated before operation of the day‐ahead market by the TSOs. This information is
required by the day‐ahead markets to describe the state of the simplified transmission model used for
flowbased market coupling.
Users have the possibility to submit bids and offers to the regional day‐ahead markets in order to purchase or
sell energy in their region. In the same way they also have the option to submit price‐difference bids in which

3
See guidelines Article 3.2 prescribes that regional coordination shall include, in particular:
(a) Use of a common transmission model dealing efficiently with interdependent physical loop-flows and having regard to
discrepancies between physical and commercial flows,
(b) Allocation and nomination of capacity to deal efficiently with interdependent physical loop-flows

they offer to transfer energy between two markets and pay or receive the inter‐regional congestion rent. This
method allows users to participate for crossborder trade through bilateral‐contract or day‐ahead access in a
non discriminatory manner.
Every market will execute the matching process, firstly without exchanges, and will calculate an import/export
curve for every hour, that represents the market price with different quantities of imported or exported
energy. Every market executes the process with their own rules. A central module with all import/export
curves, considering local prices, and price‐difference bids, optimizes the flows between the regions, subject to
the inter‐regional transmission constraints represented by the simplified transmission model. Every market
with the result (imported/exported energy) will execute its matching process considering imported/exported
energy and calculates a new import/export curve, sending the new curves to the central module. Iteration is
required between the different areas because of ’block’ bids and offers. This sequence is repeated until it
converges.
The described method can coexist with several forms of forward market arrangements. This will be needed

for those users that want to hedge cross‐border price risk (instead of facing the risk in the day‐ahead market).
It should be done independently from the FMC through forward transmission rights, explicit auctions or
electricity financial markets.
Therefore it is not needed to have a single market in a whole area, as it is needed in the market splitting
method. The corridors will always be full of energy from the cheapest market to the most expensive one. The
only problem that must be resolved is that a production shift in an area is a meshed network to some extent
influence the flow on all connections. Therefore, it will be necessary to establish a base case fairly close to the
final schedules for the calculated maximum transfer capacities between market areas to be valid.
3.1 OPERATION OF MARKET UNDER FMC
FMC couples the physical flow path modeling with the market coupling as can be seen in Figure 7. Both these
mechanisms will be discussed in next. (ETSO and EuroPEX JWG 2004)
Chapter: Flow‐based market coupling

FIGURE 7. OUTLINE OF FMC A COMBINATION OF FLOW BASED MODELLING THAT TAKES CARE OF THE PHYSICAL FLOW PATH
AND MARKET COUPLING TO MAXIMIZE THE COMPETITION AND EFFICIENCY OF ELECTRICITY MARKETS (ETSO AND EUROPEX
JWG 2004)
19


3.2 FLOW BASED MODELING
Flow based refers to fact that one takes into account the physical effect of a certain contract on various flow
gates as electricity follows Kirchhoff’s laws. For example, a commercial transaction from A to B could lead to a
physical flow from A to B, B to C and C to A. Bottleneck capacities are the operational limits on variations in
physical bottleneck flows. The relation between a commercial exchange and the physical flows through
flowgates is expressed in so‐called power transfer distribution factors (PTDFs). FMC relies on PTDFs to
evaluate the impact of each transaction on the transmission overload. However, PTDFs provide only
approximate and sometimes even inaccurate results, and are not suitable for the next day line loading
forecast. There is need to be concerned with the accuracy of the PTDF approach. There are deficiencies with
current PTDF which need to be addressed before it can be implemented for cross country electricity trade
(Yan 1999). Also because of asymmetric information with the TSO (they calculate the PTDFs and also earn the
congestion rent) there is a possibility of perverse incentives to keep the congestion on the borders.
3.3 MARKET COUPLING
Market Coupling refers to a capacity allocation method using implicit auctions in which capacity is allocated
implicitly (see Figure 8). Market Coupling may also be used without using a Flow Based capacity calculation
method as is in fact the case today in the North‐West European region. On the other hand, a Flow Based
method could also be used in combination with explicit auctions. However, the introduction of a flow based
mechanism is often explored in combination with implicit auctioning (e.g. market coupling). Market coupling
has obvious benefit of improving net welfare of the whole system. However it is not clear how the customers
of the exporting country would react to increased prices.
PX area A PX area B
Price Import Price

Export
Independent
area price A
Independent
area price B
Volume Volume
Market Coupling
no congestion
congestion Im/export price dependency curve A
Area A
Prices
Independent area Price A
Integral system price
Independent area Price B
B Im/export price dependency curve B
B to A 0 A to B
Interconnector capacity (used)
FIGURE 8. MARKET COUPLING BETWEEN TWO MARKETS LEADING TO INCREASE IN THE NET WELFARE (DE JONG, H. M. AND
R. A. HAKVOORT (2007))
3.4 MARKET PROCESS OF FMC
As it already follows from the discussion thus far FMC is a complex mechanism and is fairly technical and not
transparent to the policy makers. It is hence desired to create a simplified simulation model of the market to
aid in understanding the behavior of the market under various conditions. Figure 9 shows the simplified
model of the market operation under FMC. This process would be modeled for a simplified network and
limited number of actors to understand the distributive effects and sensitivity of the prices to the PTDFs.

FIGURE 9. THE PROCESS OF PRICING UNDER FMC, THIS WILL BE MODELLED FOR A SIMPLIFIED MARKET CASE TO CREATE A
SOFTWARE MODEL THAT HELPS UNDERSTAND THE MARKET OPERATION BETTER (ETSO AND EUROPEX JWG 2004)
3.5 DIFFERENCE BETWEEN FMC AND MARKET COUPLING
It is important to understand the fundamental differences between MC and FMC, as both of them on the
surface seems to be very similar – both are implicit market coupling based, and both use a measure of
capacity on the interconnector. To be able to appreciate the difference a few variables would need to be
defined:
• Total Transfer Capacity (TTC): is the maximum exchange programme between two areas compatible
with operational security standards (stated in the grid codes) applicable at each system if future
network conditions, generation and load patterns were perfectly known in advance.
• Net Transfer Capacity (NTC): NTC is the maximum exchange programme between two areas
compatible with security standards applicable in both areas and taking into account the technical
uncertainties on future network conditions.
o NTC = TTC‐TRM
• Available Transfer Capacity (ATC): is the transfer capacity remaining available between two
interconnected areas for further commercial activity over and above already committed utilization of
the transmission networks. ATC is given by the following equation:
o ATC = NTC‐ NTF
• Transmission Reliability Margin (TRM): is a security margin that copes with uncertainties on the
computed TTC values arising from:
o Unintended deviations of physical flows during operation due to the physical functioning of
load‐frequency regulation
o Emergency exchanges between TSOs to cope with unexpected unbalanced situations in real
time
o Inaccuracies, e. g. in data collection and measurements
• Notified Transmission Flow (NTF): can be interpreted as the already occupied part of NTC by the
already accepted transfer contracts at the studied time frame.
21


FIGURE 10 TRANSFER CAPACITY DEFINITIONS
The above set of capacity parameters are in terms of bilateral exchange programmes between two
neighboring areas. In case of MC, the values of NTC and ATCs are calculated for each pair of countries that are
being coupled, without any consideration of parallel flows. The ATC values are used in the implicit auctioning
algorithm as a constraint to the maximum energy exchange that can take place between these two countries.
In the highly meshed interconnected transmission networks in Europe programmed exchanges and physical
flows differ often considerably. They would be closely connected to the power flows through the cross
borders only in the ideal case of a peninsular system and its neighbor if both were interconnected through a
single tie line, in case of market coupling in between Netherlands, Belgium and France there are no parallel
paths hence it is a good approximation to peninsular system with the neighbors lying in a straight line.
However, in a widely interconnected network like for example the UCTE network the power flow through the
cross border tie lines between two neighbor areas A and B may be interpreted as a superposition of a direct
flow, which is related to exchanges between A and B and a parallel flow, which is related to all the other
exchanges in the meshed network and to the location of generations and loads in the several grids. Therefore
there would be a parallel flow even if all the exchanges in the interconnected system were set at zero. With
introduction of Germany into the market coupling there would be large implications due to transit and loop
flows on the values of ATC and NTCs. Hence it would not be advisable to use NTC based MC for integration of
NL, DE, BE and FR markets.
The figures provided about capacities for highly meshed systems are limited in scope, in several senses:
• TTC and NTC values are computed between neighbour areas; these values are the result of assuming
that only the transactions between these two areas are modified and the rest (‘third parties’
transactions) remain unaltered. This fact has two consequences:
‐ The published values cannot be used for an exact planning of transactions if these do not
correspond to generation and to consumption in the pair of control areas for which
capacities are defined, i.e. NTCs cannot be combined to derive possibilities of executing
transactions according to a given transaction path (contract path).
‐ If the pattern of ‘third party transactions’ differs noticeably from that taken into account in
the forecast, TTC values may significantly differ. That may have an important impact upon
the NTC value.
• NTC values between pairs of control areas in meshed network systems are interdependent. For
planning and for the sake of simplicity normally only one set of NTC values, that do not reflect NTC

interdependencies between several borders, is published. In case of strong NTC interdependencies,
better information can be provided by additionally computing values of transfer capacities for groups
of areas. i.e., if there is a strong physical coupling between areas A and B regarding exchanges to
area C, NTC would be provided from area A to area C, from area B to area C and from areas A + B,
considered as a whole, to C. However, during the allocation phases the coupling between the areas
has to be respected. Allocation thus may lead to new restrictions as shown in the following Figure 11.

FIGURE 11 INTERDEPENDENCIES OF NTC BETWEEN TWO ARAES (HTTP://WWW.ETSO‐NET.ORG)
In the figure it is assumed that in the planning phase the NTC value between areas A and C was assessed to
2000 MW and that independently from this the calculation of NTC between areas B and C lead to a value of
4000 MW. For planning purposes the TSOs thus have given to market participants maximum values, not
reflecting the interdependencies between the areas. Indeed the sum of import to area C may be limited to
only 5000 MW. Then, at least during the allocations this fact has to be taken into consideration. It is out of the
scope of this document to define the criteria for the split of this total value into the capacity for allocation
from A to C and from B to C.
• Finally the NTC values itself do not provide the basis for a co‐ordinated method of allocating cross border
trade over several borders in a meshed network. A vision for a coordinated approach was already
4
presented in ETSO document . It relies on the same computation principles as NTC, but the allocation of
transfer capacities would be effected on the basis of the consequences in terms of load flows and not
directly using the bilateral values of NTC. Therefore, the importance that NTC values actually have in the
transaction based concepts of the international trade in Continental Europe will diminish.
From the discussion above it can be concluded that NTC values have significant shortcomings while dealing
with parallel flows, hence it would not be easy to implement this system for coupling Germany into the
current system of MC existing between NL, BE and FR. Even if it can be implemented major changes would
need to be introduced into the algorithm to be able to care of the new additional complexity. TSO’s would
also request higher TRMs to be able to balance the unexpected flows. Hence MC is not a suitable system for
coupling North West European region. FMC is able to address these issues by considering the whole network
at once and calculating the effects of each transaction on each tie line. The details of FMC and power transfer
distribution functions (PTDF’s) are presented in section 5.1.1
By introducing PTDF‐based allocation, the transmission capacity available for each border and exchange
direction is only specified within the allocation process (and thus not ex‐ante before the auction as is the case
with NTC). This is implemented taking the capacity bids and the physical interrelationships between the
exchange directions and the load flows on crucial transmission lines into account. In practical terms, this
facilitates short‐term capacity transfers between borders compared to the NTC model.
3.6 CONCLUSION
In short, FMC is a new method for Cross‐Border Congestion Management. It combines commercial energy
bids with physical reality to optimize network use with respect to market value. FMC is similar to by yet

4
Co-ordinated Auctioning of Transmission Capacity in Meshed Networks, Discussion paper, ETSO, November
2000
23


different from the market splitting approach implemented in the Nordic electricity system, which it tries to

imitate (Glachant and Pignon 2002). Market splitting approach has one common pool where generation
entities submit offers and load entities submit load bids. Then the market is cleared based on merit‐order
while respecting the system constraints and reliability margins, and the subsequent unit‐dispatch and
scheduling is managed by the independent national system operators. The market is split, or has different
prices if there exists any congestion preventing complete convergence of prices across all area. However in
case of FMC the bids are submitted to the individual Power Exchanges who calculate the import‐export curves
for each country and submit it to a supra‐national entity (or an algorithm) that calculates the prices for each
market while respecting the capacity available at the tie‐lines between the countries. Thus it tries to couple
the markets; though the results of the algorithm may be same to that of market splitting the approach is
different. The other major difference lies in the fact that Market Splitting and Market Coupling is still based on
NTC method for capacity calculation and not on flow based method.
FMC is also different from nodal pricing which is implemented in PJM, the largest single energy market in the
world. Nodal pricing calculates price on each node based on the price and congestion, it is also called
Locational Marginal Pricing, and each node has different price. FMC does not give one price for each node,
but gives zonal prices, i.e. it considers set of nodes as a zone and assumes them as being “copper plates” while
the zones are connected by means of tie‐lines. The tie‐line limits the amount of electricity that can be traded
across the regions and so the prices in the two regions may or may not converge depending on congestion of
the tie‐lines. FMC is complex market mechanism to understand and hence its implications on the national
welfare are not fully understood. The thesis would aim to answer some of these questions by developing a
simulation tool to help understand the system and its sensitivities towards aspirations and actions of involved
actors.

4 PROBLEM FORMULATION

For public authorities (who must approve of the congestion management method to be used) the
introduction of a more efficient method such as FMC seems to be an attractive option. As the implementation
of the system is now also prescribed in European legislation, the introduction of FMC is currently high on the
political agenda (especially in the Central West Region – Netherlands, France, Germany, Luxemburg and
Belgium).
The chosen approach for congestion management (FMC) will impact the possibility and incentive to utilize the
transmission network. There are a few but important requirements to congestions management methods as:
fair and non‐discriminatory, economically efficient, transparent, feasible and compatible with different types
of trades.
The currently used method will to an extent fulfill these requirements, but it is important to realize that
systems have different structure and by this technical challenges.
From the feasibility point of view, the methods will have to be analyzed. The market design will also be
important for which kind of method that best suits a particular system.
The functioning of FMC method is quite complex, the sensitivity of the system are unknown and the effects
(on national level) are difficult to predict. Various questions remain unanswered at this moment. The main
research question can be formulated as follows
4.1 PROBLEM STATEMENT
What are the impediments to and implications of implementing Flow‐based Market Coupling as a
Congestion Management Mechanism in the North West European Countries?
To answer the above question one needs to understand FMC, and its operation. Once the operation is
understood next step is to understand the distributive effects of the welfare gain. To this cause a model needs
to be developed for FMC which can enable better understanding of “what if “ scenarios. Thus the research is
hinged on development of an decision support model which would enable the policy maker, in case of present
research the Ministry of Economic Affairs of The Netherlands, to understand the implications of FMC to Dutch
electricity supply. The main research objective can thus be formulated as follows:
To develop a decision‐support model for evaluating the implications of and impediments to implementing
Flow‐based Market Coupling for alleviating the issue of interconnector congestion among European
countries.
4.2 SCOPE DEFINITION
However the scope of the question is broad and needs to be structured to make it easily tractable. The
boundaries of the problem are defined both in geographical sense and temporal sense. The scope covered in
Chapter: Problem Formulation
the research would be:
4.2.1 GEOGRAPHICAL SCOPE
The Netherland and immediate continental neighbors (Northwest European region namely Belgium,
Germany and France). It should also be stated that Luxembourg is also officially a part of the region and is also
participating the regional initiative and pentalateral forum. Luxembourg has two electricity transmission
networks that are not interconnected, but are integrated with the networks of the neighboring countries,
Germany and Belgium. Hence Luxembourg is not considered as a special prices area and because the network
25


is not connected within Luxembourg it does not lead to any parallel flows and can hence be counted out of the
market model.

FIGURE 12 THE SYSTEM UNDER CONSIDERATION
4.2.2 TEMPORAL SCOPE
The study is going to study the distributive effects of the benefits earned through the FMC, so it needs to
consider both the short term and long term effects. Hence the study would be conducted at two levels. Firstly,
from the operational efficiency point of view focusing on day ahead or intraday market, on which much of the
literature is focused and secondly, from a long term capital investment perspective. Given the investment
cycle is usually 15‐20 years; the second analysis should take into consideration this time scale. The former part
of the study would be answered primarily by the outcomes of the model simulations. Once the operational
results have been determined it is possible to predict the longer term implications by a mix of expert opinion
and the literature survey.
4.3 PERSPECTIVE/PROBLEM OWNER
The main problem owner for the given research question is the Dutch Ministry of Economic Affairs. The
problem will be analyzed through their lenses. It is also important to state here hat partly the regulator DTe
and TSO Tennet also could have considerable interest in outcomes study.
By taking the Ministry of Economic Affairs as the problem owner, additional constraints exist for the end
result of this thesis: The results should be such that people at the Ministry who deal with market integration
but who do not want to bother with detailed technical or economic calculations may gain from the results of
the present study.
4.4 SUB‐QUESTIONS
Further the problem statement can be sub‐divided and grouped under the following classifications to make
the research better structured.

4.4.1 SYSTEM BEHAVIOR
a) How sensitive is the system for the choice of a specific set of PTDFs ?
b) What is the effect of constraints on the system? Could it lead to a less optimal outcome with respect
to optimizing market value?
E.g. policy makers may want to reserve a minimum amount of capacity on certain flow gates with respect to the
investments they made regarding those flowgates in the past or with respect to security of supply
c) What will be the net benefit of future network investments on available interconnector capacity and
the Dutch electricity price level?
o What would be the effect on the price level within Netherlands?
o Would it lead to more transits and loop flows?
o How would the actors perceive this change?
4.4.2 SECURITY OF SUPPLY
• What is the risk that FMC would lead to a net reduction of the import capacity?
• How may FMC interfere with security of supply in the Dutch electricity system? (As less or no
capacity at all could be distributed to a certain border if market value is low)?
4.4.3 WELFARE EFFECTS
• What could be the effect of such system on national welfare as the system optimizes regional welfare
in terms of market value?
• What is the effect of the presence of four national systems on the distribution of the welfare for each
of the four systems?
• How many incentives will FMC give to increase electricity production from renewable energy
sources?
4.4.4 IMPLEMENTATION ISSUES
• What is the effect on transparency?
• Would some kind of European central decision making unit be required? (e.g. to decide about the
distribution of capacity on the national borders).
• What about gaming opportunities because of strategic actors?
The questions on system and welfare would be answered primarily by the simulation model. The questions
with respect to security and implementation would be answered using the expert opinion/interviews with the
problem owner/literature survey.
4.5 RESEARCH DESIGN
To be able to answer the above mentioned questions it was necessary to first understand FMC from the
theoretical perspective. It would be possible to gauge the effects of FMC on the national and regional level if a
simulation model with FMC can be set up with the present level of generation, loads and the transmission line
typography. The first step in the research would hence be to study FMC and its working within the North West
European region context. The study would aim to study the impact that FMC would have on the various actors
27


within the four countries defined in the geographical scope of research. The part of research would be based
on the Neo‐classical economics treatment of the market design. The details of the simulation model would
be discussed in the subsequent chapter.

FIGURE 13 RESEARCH DESIGN
The second part that needs to be explored is the institutional aspects of the multi‐actor environment into
which this system would be introduced. The process of implementation of such a market design is further
complicated because of presence of large number of actors and stakeholders. This impact of this market
design on various actors and interests of the various actors would be studies in this section. The last part of
the report would detail in brief the issues associated with implementation of a market design – like
transparency, legal aspects, etc.

Section 2: Simulation Model
A step by step description of how the

model was created is presented in this
section. Details and relevant data is
presented in the appendices.
29


5 STRUCTURE OF SIMULATION MODEL

Flow‐based allocation is a supra‐national approach: all bids for energy and/or cross‐border capacity are
optimized by collected by the national PXs, and are then combined together by using an algorithm that takes
care of final allocation and dispatch. In the flow‐based allocation mechanism, the commercial transactions are
no longer limited to the interconnections where they are reported, but they are converted into physical power
flows by using a simplified representation of the network so that their impacts on third interconnections can
be considered thus ensuring overall security.
NL Supply Curve
€ 80.00
€ 70.00 y = 3 .183x
Pri ce (euro s/MWh)

€ 60.00 R ² = 0.831
€ 50.00
€ 40.00
€ 30.00 N L Supply
€ 20.00 Curve
€ 10.00
€-
0 .00 5.00 1 0.00 15 .00 20.00 2 5.00
Gen eratio n Cap aci ty ( GW)
Prices (euros)
€ 6 0.0 0
€ 5 0.0 0
€ 4 0.0 0
€ 3 0.0 0
€ 2 0.0 0
€ 1 0.0 0
€-
NL BE FR DE
P*

FIGURE 14 DESIGN OF THE SIMULATION ENVIRONMENT
The simulation model for the integrated markets in the four countries of interest was created. None of the
commercially available software was able to address all the aspects of modelling. Hence the work was divided
into three main parts for both data gathering and modelling:
1. Transmission network module for the four countries (BE, NL, FR and DE). This included simulating
the transmission network in the north‐west European region using specialized software used for
solving large transmission network problems (PowerWorld).
Chapter: Structure of Simulation Model
2. Electricity demand and supply module: Includes a sub‐model for calculating the marginal cost of
generation. Marginal cost of generation data along with installed capacity data is used to create a
representative merit order for each country. From the merit order a linear supply function is
extracted. Demand function is also defined.
3. Electricity day‐ahead market module: This is essentially an optimization module that simulates the
implicit flow‐based market coupling for calculating the electricity dispatch on day‐ahead basis.
The process is outlined in Figure 14.
The next sections would elaborate the process of creating each one of the three modules outlined above.
31


5.1 TRANSMISSION NETWORK MODULE
The research required an appropriate benchmark system to base the simulation on. Creation of a realistic
benchmark system is difficult as utilities are often not willing to disclose details of their own systems because
of commercial sensitivity and security reasons. Most TSOs, generators and industrial loads normally refused
to share any information whatsoever citing commercial sensitivity or security reasons. The former excuse is
debatable as transparency is one of the main pre‐requisites for an efficient market. The subject becomes
more complex because of dealing with four countries and hence most of the required information was
inaccessible. Also there was no specialized software available at TU Delft that could be used to simulate such
a complex network. After spending considerable time on trying to resolve these operational and
informational issues – it was considered to look at past research on UCTE region conducted elsewhere.
University of Edinburgh has developed a benchmark transmission network for the UCTE region. It was
possible to get this model and use it for the current research(Qiong and Bialek 2005). With access to the UCTE
transmission network model and purchase of PowerWorld the work could proceed. The entire UCTE
transmission network model was used – as decoupling the four countries of interest from the rest would lead
to imbalance in the system and hence the solution could not converge.

FIGURE 15 INTERCONNECTED NETWORK OF UCTE (HTTP://WWW.UCTE.ORG/)
The approximate model of a European interconnected system was used to study the effects of cross‐border
trades. The system was considered as a realistic representation of the reality for the purpose of the simulation
because the results from the model were tested with the real PTDFs values by the researchers and significant
correlation was found between the two. More details are attached in the chapter on verification and
validation chapter 66 Validation and Verification of model, pg 56
… “Comparison of simulation results conducted on the test system with the published cross‐border flows and
power transfer distribution factors showed a very good correlation, exceeding 90%.”.(Qiong and Bialek 2005)
Using the model as a research tool which would replicate main physical characteristics of the real network
without pretending to be an accurate model, the PTDF’s were derived for the four countries.

5.1.1 POWER TRANSFER DISTRIBUTION FACTOR
Transmission capacities are nowadays allocated at all European borders on the basis of NTCs. The NTC values
indicate the maximum commercial power exchange allowed between two countries (more specifically:
control zones and blocks). They are fixed prior to allocation (e.g. before bids for an explicit capacity auction
are submitted) by the TSOs involved and remain static during the allocation.
Electricity transmission flows fan out across all available parallel paths in accordance with the laws of physics.
This is illustrated in the next figure, in which all countries are balanced and only a 100 MW commercial
exchange from Germany (DE, source) to France (FR, sink) is taking place and the resulting physical cross‐
border flows are shown.

FIGURE 16 PHYSICL FLOWS BECAUSE OF A TRANSACTION OF 100 UNITS OF TRADE BETWEEN FRANCE AND GERMANY
(HTTP://WWW.ETSO‐NET.ORG)
PTDF factors describe what physical flow on a given interconnection would be provoked by a requested
commercial exchange between two countries or two control areas (or ‘hubs’). These two hubs do not
necessarily need to be directly connected. Simply said, the PTDF factors translate a commercial transaction
between two hubs into the expected physical flows over the entire network. The PTDF factors that
correspond to the situation that is illustrated in the Figure 16, can be seen from the column on the right: the
PTDF factor D‐NL with regard to an exchange D‐F is 27%, the PTDF D‐F is 36% etc. Thus it can be easily
derived for example, that a 100 MW commercial exchange from Germany to France results in a 27 MW flow
from Germany to the Netherlands.
In theory the PTDFs are calculated as described below.

FIGURE 17 GENERIC REFERENCE CASE FOR CALCULATION OF PTDF
The PTDF in theory can be calculated as follows:
• Let be the flow of the branch j ‐> k in the reference state.
33


• Let be the flow of the branch j ‐> k after the injection of 1 MW at node I (and compensation at the
hub also referred to as the slack node).

The expression of the nodal PTDF which means the influence of the injection of 1MW at node i on the
branch j ‐> k is:

This process is automated while using PowerWorld. Next section would describe the process followed by
PowerWorld for calculating PTDF, followed by the section on how to actual perform the process.
5.1.2 USE OF PTDF
Allocation on the basis of Power Transmission Distribution Factors (PTDF) represents a further development
of this concept which dynamises the specification of commercially available capacities for each border. This
does not occur prior to the allocation, but is part of it, based on an economical optimization, taking parallel
flows into account, coordinated for several borders and taking account of the differences in price and costs of
power generation between the regions.
To this end, so‐called PTDF coefficients are used that describe how commercial power exchange between
regions is distributed on physical power flows at the interfaces (interconnectors) between these and between
other regions. Compared to traditional NTC‐based allocation, this basically facilitates a transfer of
commercial transmission capacities between the borders that is not at a ratio of 1:1, but at a ratio of the
respective PTDF values
Based on the values of PTDFs, transactions are curtailed and increased in order to relieve lines overloads. Due
to the phenomenon of loop flows in a meshed network, PTDF calculation requires the full network
information.
5.1.3 CALCULATION OF PTDF IN POWERWORLD
The Power Transfer Distribution Factor (PTDF) display is used to calculate the incremental distribution factors
associated with power transfers between two different areas or zones. These values provide a linearized
approximation of how the flow on the transmission lines and interfaces change in response to transaction
between the Seller and the Buyer. These values can then be visualized on the onelines using animated flows
(see below for details). The transaction for which the PTDFs are calculated is modeled by scaling the output of
all generators on Automatic Generation Control in the source and sink areas in proportion to their relative
participation factors,i.e, generators in the source area increase their output, while generators in the sink area
decrease their output.
FIGURE 18 SCHEMATIC OF THE TRANSMISSION NETWORK MODULE

An important aspect to consider in calculating the PTDF is how the losses associated with the transfer are
allocated. Simulator assumes that the Seller increases the output of its generators by 100% of the transfer
amount, while the Buyer decreases the output of its generators by 100% minus any change in system losses.
In other words, the Buyer accounts for the entire change in the system losses. Of course it is possible that a
transfer may result in decreased system losses; for that case, the Buyer’s generation will be greater than 100%
of the transfer.
5.1.4 HOW TO GET PTDF FROM POWERWORLD
Open the *.pwb file using PowerWorld open new file menu. Once the model has been opened perform the
following steps to get the PTDF for each set of the country. Repeat the steps with other combinations of
countries till all the required data has been collected.
• Perform an initial Power Flow Solution.
• In Run Mode, select Tools > Power Transfer Distribution Factors (PTDFs) from the main menu to

open the Power Transfer Distribution Factors Dialog.
• Supply the requested information on the Power Transfer Distribution Factors Dialog and click the
Calculate PTDFs button. The distribution factors are calculated and displayed for the element set of
your choice in the table at the bottom of the dialog.
Figure 20 displays the UCTE model from PowerWorld, while zooming in on the Dutch‐Belgian border. The
circles show the amount of interconnector capacity that is being utilized.

FIGURE 19 THE UTILIZATION OF INTERCONNECTOR BETWEEN THE COUNTRIES IN THE NORT‐WEST EUROPEAN REGION
FROM THE MODLE RUN IN POWERWORLD

35


Zoom‐in on Dutch Belgian Interface

showing the usage of interconnector
capacity and the direction of flow of
electricity for winter offpeak base case

FIGURE 20 UCTE NETWORK WITH ENHANCED NL‐BE BORDER

TABLE 1 SENSTIVITY MATRIX AND PTDF BASED ON THE UCTE WINTER PEAK MODEL FROM POWERWORLD
Sensitivity Matrix

NL→NL BE→NL FR→NL DE→NL
BE → FR 0 0.196 ‐0.484 ‐0.244
BE → NL 0 0.804 0.484 0.244
DE → FR 0 ‐0.138 ‐0.272 0.107
DE → NL 0 0.196 0.516 0.756

PTDF Matrix

Commercial Exchange
BE→NL FR→NL DE→NL FR→BE DE→BE DE→FR
BE → FR 0.196 ‐0.484 ‐0.244 0.31 ‐0.44 0.24
BE → NL 0.804 0.484 0.244 0.31 ‐0.56 ‐0.24
DE → FR ‐0.138 ‐0.272 0.107 ‐0.69 0.245 0.379
DE → NL 0.196 0.516 0.756 0.31 0.56 0.24
Physical Flow

It can be observed that sum of the numbers do not add up to 1,in the PTDF and Sensitivity matrix – the reason
is because the north‐west European region is not completely decoupled from rest of UCTE region and some of
the flows take place through neighboring countries. In case of a commercial transaction between France and
Netherlands almost 14% of flow takes place from France through Switzerland and then into Germany. This is
interesting feature of the FMC as not there could be exchanges between Switzerland and Germany or
Switzerland and France that would make use of the interconnector between France and Germany – however
Switzerland is out of the FMC and hence calculation of the rent or marginal cost for usage of interconnector
capacity would create additional problems.
These PTDF values were used in the market module to calculate the actual flows occurring on the
interconnectors given the commercial exchanges which would maximize the market value, or minimize the
net cost of electricity generation.
5.2 ELECTRICITY DEMAND AND SUPPLY MODULE
Economic model of the system comprised of getting the supply and demand curves for the four countries.
Supply curve was based on the real data for cost of generation and the installed generation in every country.
The demand curve was derived from the supply curve by substituting the average demand in the country and
then obtaining the slope and the intercept. The next sections will describe in detail the procedure to obtain
the demand and supply curves.
37


NL Supply Curve
€ 80.00
€ 70.00 y = 3.183x
Pric e (euros/MWh)
€ 60.00 R² = 0.831
€ 50.00
€ 40.00
€ 30.00 NL Supply
€ 20.00 Curve
€ 10.00
€-
0.00 5.00 10.00 15.00 20.00 25.00
Generation Capacity (GW)
FIGURE 21 SCHEMATIC OF THE ELECTRICITY DEMAND AND SUPPLY MODULE
5.2.1 SUPPLY C URVE

Supply curve for a country needs two basic inputs
1. Cost of electricity generation
2. Installed generation capacity
However the supply curve obtained this way, as also in real life, is not linear – it is a discrete stepwise function.
To simplify the calculations linearity assumption is made. The data for cost of electricity generation and
capacity is plotted and then a best fit for the supply curve is calculated. The data for the cost and capacity is
collected from different sources – as variable cost data is not easily available because it is classified. For the
actual values turn over to Appendix A1.
5.2.2 COST OF ELECTRICITY GENERATION
The sources of electricity generation can be grouped predominantly into two categories – fossil (coal, oil and
gas) and others (wind, hydro, nuclear and biomass). To convert energy from its original form into electricity
many different technologies can be employed – Turbines, Internal Combustion engines, nuclear fission based
power plants, combined cycle plants and combined heat and power plants. Cost structures of electricity
generated from all these resources and technologies vary widely. Hence a comprehensive data base was
collected to get as realistic values of the costs involved as possible. Also there is a debate on use of short term
variable cost or the long term total cost for the market simulation. However fixed costs are also earned back
based on marginal pricing, i.e. equal to only the variable costs(Stoft 2002) because of price volatility and
peaks in prices. Based on the cost of generation the technologies were classified into following categories:
TABLE 2 CATEGORIES OF GENERATION TECHNOLOGIES
Energy Technology Symbol
Hydro H
Wind W
Nuclear N
Hard Coal Condensation HC
Lignite Condensation LC
CHP Natural Gas CHP‐G
Natural Gas Combined Cycle G
Oil O
CHP Biomass CHP‐B
CHP Oil CHP‐O

CHP oil is not present in all countries, and the installed capacity is very low. Also the cost of generation are
usually higher, hence it was removed from the list for further analysis.
The generation companies do not reveal any data about the marginal cost of generation or the variable costs.
It is considered to be sensitive information and is kept secret. Hence data was collected from varied sources: it
was ensured that data be from real plants. The secrecy of the plants was not revealed in the reports by not
declaring the plant name, location or ownership information – thus also respecting the fears of generation
companies. Data from various sources was collected for all three cost categories (more can be looked up in
the Appendix A1), i.e.
1. Fixed cost (FC): Fixed cost comprised mainly of the cost of capital. It includes debt and equity costs
associated with the capital invested in the plant that do not depend on its level of operation. The
upfront investment is distributed over the lifetime operation of the plant for being earned back.
Nominal discount rate is applied to get the NPV of the investment.
2. Variable Cost (VC): A cost that varies with the level of output. In special case of electricity this is also
the generators marginal cost until the full output is reached. This cost is comprised mainly the fuel
cost, though it also includes operation and maintenance costs.
3. Total Cost (TC): This is the total cost of generation of one MW of electricity. It includes fixed costs,
variable costs, start‐up costs and no‐load costs. It is also called total cost of production.
4. Start‐up Costs: The costs associated with additional fuel usage and extra labor and process required
to start generation in a plant. These are usually high for base load coal based power plants and are
much smaller for gas based CCGT power plants.
5. No‐load Costs: The costs associated with just keeping the plant in stand‐by mode, including the
cooling and fuel costs are termed as no‐load costs.
The costs are related as follows:
Total Cost = Variable Cost + Fixed Cost + Start‐up Costs + No‐load Costs
Also in present scenario, with Carbon trading coming in force, emission costs were also included. Hence
information was also collected on the emissions related to each generation technology and the cost of carbon
credits. Thus giving rise to an additional category of costs that would be referred to as environmental costs
(EC) henceforth in the report.
Therefore the total costs can be defined as
Total Cost = Variable Cost + Fixed Cost + Start‐up Costs + No‐load Costs + Environmental Costs
Additionally, given the importance that has been attached to the environmental impact from the generation
technologies and the emission trading a cost for the emissions has also been included. Variable costs as
displayed in the model are the sum of fuel costs, operation and maintenance costs and the CO2 emission
costs.
The No‐Load Cost is defined as the total theoretical heat or fuel input at zero net output multiplied by the
performance factor, multiplied by the (Total Fuel‐Related Cost (TFRC)), plus the No‐Load Additional Labour
Cost(PJM 2006). The dollars per start as determined from start fuel, total fuel‐related cost, performance
factor, electrical costs, start maintenance adder, and additional labour cost, if required above normal station
manning levels (PJM 2006). For the model assumption is made that start‐up costs and no‐load costs are
negligible compared to the rest and are hence assumed to be absent. i.e.
TC = VC + FC
The generation cost for each of the technologies was broadly based on six different sources:
39


1. Risto TARJANNE , “EU POLICY AND CARBON EMISSION TRADING: IMPLICATIONS FOR THE
ENERGY MARKET”, Lappeenranta University of Technology
2. Vattenfall Annual Report 2006 (Vattenfall 2006)
3. Projected Costs of Generating Electricity 2005 Update (OECD)
4. Paper about game theoretic model of the Northwestern European electricity market (Lise, Linderhof
et al. 2006)
5. Federal Energy Regulatory Commission, FERC Form 1, "Annual Report of Major Electric Utilities,
Licensees and Others."
6. Hoogwijk, M., D. van Vuuren, et al. (2007). "Exploring the impact on cost and electricity production of
high penetration levels of intermittent electricity in OECD Europe and the USA, results for wind
energy." Energy 32(8): 1381‐1402.

The Vattenfall annual report for 2006 gave detailed break‐up of cost for 7 different generation technologies.
More details about the advantages, disadvantages and brake‐up of the costs can be found in the appendix A.2
TABLE 3. TOTAL COST OF GENERATION FOR DIFFERENT TECHNOLOGIES
Specific Investment Full Load Real Interest

Energy Technology Symbol Installed Capacity Investment Cost Cost Utilization Time Capacity Factor Economic Lifetime Rate Anuity Payment Capital Cost
MW million € €/kW h/a % a % € €/MWh

Hydro H 1 1.5 € 1,500.00 4500 51% 50 5% (€82,165.10) € 18.26
Wind W 1 1.1 € 1,100.00 2200 25% 25 5% (€78,047.70) € 35.48
Nuclear N 1500 3075 € 2,050.00 8000 91% 40 5% (€179,205,345.59) € 14.93
Hard Coal Condensation HC 500 525 € 1,050.00 8000 91% 25 5% (€37,250,040.08) € 9.31
Lignite Condensation LC 150 172.5 € 1,150.00 8000 91% 25 5% (€12,239,298.88) € 10.20
CHP Natural Gas CHP-G 81 104 € 1,283.95 8000 91% 40 5% (€6,060,928.76) € 9.35
Natural Gas Combined Cycle G 400 232 € 580.00 8000 91% 25 5% (€16,460,970.09) € 5.14
Oil O 100 117 € 1,170.00 7450 85% 25 5% (€8,301,437.50) € 11.14

CHP Biomass CHP-B 1 3.415 € 3,415.00 8000 91% 30 5% (€222,150.65) € 27.77

Total
Total Variable Total Cost
O&M Costs, Variable Cost (with (with
Fuel Cost of for given Heat Credit Cost (w/o Total Cost (w/o Emission emission emission
Symbol Fuel Price Net Efficiency Rate Electricity utilization (Only CHP) emission) emission) Emission Price Emissions Cost pricing) pricing)
€/MWh % €/MWh €/MWh €/MWh €/MWh €/tonne kg CO2/MWh €/MWh €/MWhe €/MWhe
H € - 100% € - € 6.60 € 6.60 € 24.86 20 0 € - € 6.60 € 24.86
W € - 100% € - € 10.00 € 10.00 € 45.48 20 0 € - € 10.00 € 45.48
N € 1.10 37% € 2.97 € 8.00 € 10.97 € 25.91 20 0 € - € 10.97 € 25.91
HC € 7.50 42% € 17.86 € 7.50 € 25.36 € 34.67 20 811 € 16.22 € 41.58 € 50.89
LC € 7.40 40% € 18.50 € 7.00 € 25.50 € 35.70 20 954 € 19.08 € 44.58 € 54.78
CHP-G € 27.00 € 59.62 € 8.15 € 29.85 € 37.92 € 47.28 20 348 € 6.96 € 44.88 € 54.24
G € 27.00 58% € 46.55 € 4.00 € 50.55 € 55.70 20 348 € 6.96 € 57.51 € 62.66
O € 25.15 41% € 61.34 € 10.70 € 72.04 € 83.18 20 1 € 0.02 € 72.06 € 83.20
CHP-B € - € 14.59 € 122.50 € 29.85 € 107.24 € 135.01 20 0 € - € 107.24 € 135.01

TABLE 4 FORMULATION OF COST SHEET
Variable Units Significance

Installed Capacity MW The electricity generation capacity of the plant whose data was used
as being representative of plants operating with same fuel type.
Investment Cost million € Overnight cost of installing the plant under consideration.
Specific Investment Cost €/kW Ratio of Investment cost to installed capacity
Full Load Utilization Time h/a Number of hours the plant is expected to operate in a particular year
Capacity Factor % Number of hours of operation divided by total number of hours in a
year
Economic Lifetime a The number of years the plant is expected to be in operation.
Real Interest Rate % The interest rate for the loan that was used to pay for installation of

the power plant
Annuity Payment € It was assumed that the loan was paid back by means of installments
paid annually for the period of lifetime of the plant. Depreciation was
not considered in the model. Annuity was calculated using PMT
function from excel. PMT(rate,nper,pv,fv,type) = PMT(Real Interest
Rate, Economic Lifetime, Investment Cost)
Capital Cost €/MWh The fixed cost associated with generation of 1MWh. It was calculated
by dividing the Annuity Payment by the net electricity generation per
year. Net electricity generation per year was calculated by multiplying
the installed capacity with full load utilization time.
Fuel Price €/MWh The cost of fuel used in the plant in Euros per MWh. This is the major
part in the variable cost for plants based on fossil and nuclear fuels.
Net Efficiency Rate % Net electrical efficiency of the plant
Fuel Cost of Electricity €/MWh Cost of generating one MWh of electricity because of the fuel. It was
calculated by dividing the fuel price by net efficiency rate.
O&M Costs, for given €/MWh The operating and maintenance costs for the plant. It is the second
utilization important contributor to the variable cost of electricity generation.
Heat Credit (Only CHP) In case of CHP, heat as well as electricity is generated. Hence it is
important to consider the profits that are made by selling the heat
which is generated as by product of electricity generation. This was
collected from the reference data as well. (mainly the OECD report)
Total Variable Cost (w/o €/MWh Sum of fuel cost of electricity and O&M costs. In case of CHP the heat
emission) credit was subtracted from the sum to get total variable cost.
Total Cost (w/o emission) €/MWh Sum of the total variable cost and capital cost
Emission Price €/tonne The price of carbon credits in euros per ton of carbon di oxide emission
Emissions kg CO2/MWh Emission of carbon di oxide because of generation of 1 MWh of
electricity using a particular fuel type
Emission Cost €/MWh Product of emission and emission price
Total Variable Cost (with €/MWhe Sum of total variable cost and emission cost
emission pricing)
Total Cost (with emission €/MWhe Sum of capital cost and total variable cost(with emission pricing)
pricing)

The data for the 3 technologies namely ‐ CHP Natural Gas, CHP Oil, Oil was based on assumptions and other
sources. Oil plant data was based on report on projected cost of generation 2005 (OECD). Rest of the data
was based on Vattenfall’s annual report and Risto T. , “EU POLICY AND CARBON EMISSION TRADING:
IMPLICATIONS FOR THE ENERGY MARKET”, Lappeenranta University of Technology. For CHP plants
assumption was made that they share the similar cost structure as the natural gas combined cycle. Detailed
assumptions are outlined in the model itself.
If the markets are working efficiently is reasonable to make assumption that the market players would bid
according to their marginal costs. Though it may sound contradictory as marginal costs would equal to the
variable costs and thus it would not be possible to recover the investment cost. However it must be kept in
mind that the markets are volatile and the prices are set at the market clearing price(MCP) – or equal to the
marginal cost of the most expensive generator that was dispatched, and the generators would make profit
because their marginal costs were lower than MCP. Also in times of price peaks the generators make profits
that substantially offset the investment cost. Hence in the model variable cost of electricity generation was
used for obtaining the merit order. In case of scenario with carbon pricing the total variable cost with emission
pricing was used. The fixed cost data is important for use in investment decisions. It might be used in further
studies on congestion management or investment decisions under FMC system.
5.2.3 INSTALLED GENERATION CAPACITY
The installed generation capacity in based on UCTE system adequacy report: 2007 ‐ 2020 Forecast (UCTE
2007). The data is given for the fossil and renewable sources. However the fossil fuels are not further divided
41


into CHP and non‐CHP based generation. For obtaining this classification data from this aggregated data
results from a previous study (Lise, Linderhof et al. 2006) were used. The data is based on statistics of 2001,
hence assumption was made that most of plants installed post 2001 are based on CHP and hence it was
assumed that the conventional plants capacity stayed at 2001 level. To get CHP capacity difference between
current total capacity and 2001 capacity of conventional plants was taken. Other assumptions that were made
have been elaborated in the model itself.
TABLE 5 INSTALLED GENERATION CAPACITIES IN THE NORTH WEST EUROPEAN REGION
Installed Generation
Variable Cost Capacity
Symbol VC
Avg NL BE FR DE
€/MWh GW GW GW GW
Hydro H € 6.60 0.04 1.42 25.40 9.11
Wind W € 10.00 1.65 0.19 1.40 21.17
Nuclear N € 10.97 0.45 5.80 63.26 20.54
Hard Coal Condensation HC € 25.36 4.49 0.95 12.00 27.19
Lignite Condensation LC € 25.50 0.00 0.00 0.00 19.33
CHP Natural Gas CHP‐G € 37.92 7.65 0.77 2.71 0.70
Natural Gas Combined Cycle G € 50.55 7.17 3.50 1.89 13.82
Oil O € 72.04 0.20 3.07 8.80 7.14
CHP Biomass CHP‐B € 107.24 0.47 0.63 0.90 3.59
5.2.4 CALCULATION OF SUPPLY CURVE SLOPE

The data of capacity and cost was used to generate the merit order curves for each country. The variable cost
of electricity generation was used to sort the electricity sources in increasing order of their variable costs and
get the merit order. It was assumed to use a straight line for the supply curve approximation – hence a linear
2
regression fit was made to the plotted data points. The equation of the curve and the R values were
2
calculated. Based on the R (statistical significance parameter) values it was decide to exclude CHP biomass
from the merit order. It had a very high variable cost and effected the equation of straight line fit
substantially.
TABLE 6 SUPPLY CURVES SLOPE FOR THE FOUR COUNTRIES.
Inverse Supply Function y=mx+c
y Price €/MWh
x Quantity Supplied MWh
m c
NL 3.18 0
BE 4.217 0
FR 0.39 0
DE 0.452 0

The intercept value for each curve was set to zero to have consistent equations, without this assumption
some of the demand curves had negative values for supply at zero price. This value was then entered into the
output matrix for the supply curves. The supply curves for each country and their equation are displayed in
Appendix A.3
5.2.5 DEMAND CURVE
To complete the economic model demand curve was required. It is debatable whether the demand curve for
electricity is inelastic and hence vertical or it is elastic. For the sake of model the demand curve was assumed
to be elastic – which is more realistic especially while considering the wholesale customers. Two set of data
were required to calculate the demand curve:
1. Average electricity demand per country: This data was collected from UCTE System Adequacy
Forecast 2007‐2020 (UCTE 2007). The value for demand was assumed to be equal to the reference
load on the 3rd Wednesday of January, 2007 at 11:00.
TABLE 7 AVERAGE DEMAND OF ELECTRICITY BASED ON THE UCTE SYSTEM ADEQUACY FORECAST 2007‐20
Average Demand
GW
NL 16.30
BE 12.60
FR 79.40
DE 74.00

2. Reliable Available Capacity: The net generation capacity for each country has already been
calculated in the supply curve calculations. However for the demand curve calculation reliable
available capacity was needed. This data was collected from UCTE System Adequacy Forecast 2007‐
2020 (UCTE 2007). The value for demand was assumed to be equal to the reference reliable capacity
available on the 3rd Wednesday of January, 2007 at 11:00. The capacity is given below in the Table 8.
The methodology for calculating the reliable available capacity is as follows
Reliably available capacity = National generating capacity
‐ non‐usable capacity
‐ maintenance and overhauls (nuclear and fossil fuel power stations)
‐ outages (nuclear and fossil fuel stations) ‐ system services reserve

TABLE 8 RELIABLE GENERATION CAPACITY BASED ON THE UCTE SYSTEM ADEQUACY FORECAST 2007‐20
Reliably Available Capacity
GW
NL 17.1
BE 13.5
FR 91.6
DE 83.9

To calculate the slope of demand curve the following procedure was followed.
*
1. Calculation of P : The demand curve and supply curve at equilibrium would intersect to give the
equilibrium price and quantity. Assuming that the average demand (AD) would be the equilibrium
*
demand (Q ) and hence the result of intersection of demand and supply. The AD value was
43


*
substituted into the supply function calculated in 5.2.4. This gives the equilibrium price (P ). This is
one point on the demand curve. If another point on the demand curve can be calculated it would be
*
possible to get the slope and intercept of the demand function. As a validation the value of P were
also compared to the actual energy spot prices in the four countries.
2. The net installed capacity was assumed to be equal to the demand when price of electricity is equal
to zero. This is perhaps not completely true – however the demand curve becomes vertical at a point,
this was assumed to be the point [refer Figure 25 Principle of MCP (from
http://www.apxgroup.com)]. This gives the second point on the demand curve, which is assumed to
be linear in the simulation model
3. With two points known on a linear curve the slope and intercept was calculated . The equation of the
line was given in the form : y = mx + c
Demand data from UCTE System Adequacy Forecast 2007‐2020 Reference load on the 3rd Wednesday of
January, 2007 at 11:00

FIGURE 22 THE EQUATION OF THE DEMAND FUNCTION FOR THE NORTH‐WEST EUROPEAN REGION
5.3 TIE LINE CAPACITY
The constraints for the market model are based on the capacity of the interconnector. The maximum amount
of electricity that can be exported or imported by a country depends on the capacity of the interconnector,
this is called the Flow‐gate capacity (Fmax). A part of the maximum allowed flow on the critical branches is
already used (i.e. prior to the allocation) by so‐called already‐occupied flows that can consist of the following
components:
• ‘natural flows’ (cross‐border physical flows that will always occur, even when there is no scheduled
commercial exchanges between areas); flows that result from sources/sinks that are located in a single control
area
• commercial exchanges resulting from firm nominations in previous auction rounds
• flows caused by exchanges between sources and sinks that are not located in the region that is participating
in the flow‐based allocation
• flows caused by exchanges between areas where the source is located in the region that is participating in
the flow‐based allocation whereas the sink is outside, and vice versa.
These values would be summed up to calculate the base case Fref or the capacity that is already used up. It can
be assumed to be similar to NTF (notified transmission flow) from the NTC based methods, the main
difference being that it considers flow based calculation.
The capacity that is allowed to for the implicit market coupling is then equal to the difference of Fmax and Fref.

These values are not available for the countries right now. Hence couple of assumptions were made. First the
Fmax was assumed to be equal to the current NTC value at the borders. Secondly it was assumed that all the
flows are allocated on day ahead. Hence Fref was assumed to be zero.
It should also be remarked here that NTC values are not the correct measure of how much physical capacity is
available. It is also likely to go up with implementation of FMC, as reserve margin could be reduced because of
better prediction of flows. However it is tough to define actual values that capacities – to get a picture of what
the maximum thermal capacities that exist on the borders more data was collected on the actual transmission
lines that currently connect the national markets. The data on actual thermal capacities is attached in the
appendix for reference A.6. A transmission network consists of a number of transmission elements (e.g. lines
and transformers), each one having a definite maximum transport capacity that is mainly determined by
thermal limits. NTC values reflect real electricity transport possibilities in the meshed and internationally
interconnected transmission systems. Two factors limit transfer capacities at values normally much below the
thermal capacities:
‐ The network element within a transmission system that is the most sensitive to the load flow,
‐ When temporary admissible overloads are taken into account, the security criteria related to voltage or
frequency stability lead to constraints that may limit physical load flows at significantly lower values than the
thermal capacities of lines.

FIGURE 23 TIE LINE CAPACITY FOR THE NORTH WEST EUROPEAN ELECTRICITY NETWORK (BASED ON DATA FROM WEBSITE
OF TENNET, RTE, RWE, ELIA AND TSO AUCTION WEBSITE)
For the model it was assume that the Fmax values are equal to the current NTC values on the borders and were
entered into the interconnector capacity tab. The Figure 23 shows the values that were used in the model.
Also not that the capacity values in two directions are different, this is also because NTC values in both
directions depend on the initial load flow conditions set by the base generation and load patterns due to the
already existing transactions. If a sensitive network element regarding NTC limits has an initial load in one
direction, additional cross‐border transactions that increase the load flow over this element in the same
direction result in tighter NTC‐limits than cross‐border transactions in the opposite direction.
45


5.4 ELECTRICITY DAY‐AHEAD MARKET MODULE
€ 60.00
Prices (euros)
€ 50.00
€ 40.00
€ 30.00
€ 20.00
€ 10.00
€-
NL BE FR DE
P*
FIGURE 24 SCHEMATIC OF THE MARKET MODUEL
In the market module implicit flow‐based day ahead wholesale market four electricity is simulated. The
previous sections have already described the data that would be used as input to this module. Essentially this
module is a optimization module. Here the electricity dispatch is calculated which respects the constraints
while maximizing the market value, or while minimizing the net cost of electricity generation for the whole
region. The description of the market model is divided into two parts, first the description of model which
calculated prices without any imports and exports and then with flow‐based market coupling.

5.4.1 EQUILIBRIUM WITHOUT MARKET COUPLING
FIGURE 25 PRINCIPLE OF MCP (FROM HTTP://WWW.APXGROUP.COM)
Bid blocks are arranged in bid‐price (€/MWh) order to form the merit order for the system. The energy market
is then dispatched by traversing the energy stack, climbing up/down the stacked bid blocks until load demand
is met. The market is not coupled hence both the supply and demand curves are local. It must be mentioned
here that in real life the demand curves move up and down with time, but the dynamics of the system are not
being studied by the current research. Here an average demand function was set up and assumed to be same
over the period of time.
The supply function that was calculated in the sections above and the demand function, also calculated
*
above, would intersect at equilibrium and the values would give equilibrium price or MCP, P and the market
*
clearing quantity, Q . Next step would be to calculate the coupling and optimization.
5.4.1.1 W ELFARE AND NET COST OF GENERATION CALCULATIONS

FIGURE 26 THE DEFINITION OF CONSUMER SURPLUS AND PRODUCER SURPLUS
Consumer surplus is the difference between the price consumers are willing to pay (or reservation price) and
the actual price. If someone is willing to pay more than the actual price, their benefit in a transaction is how
much they saved when they didn't pay that price. It is calculated as the area of triangle ABC from Figure 26
The definition of consumer surplus and producer surplus
The producer surplus is the amount that producers benefit by selling at a market price that is higher than they
would be willing to sell for. Note that producer surplus flows through to the owners of the factors of
47


production, unlike economic profit which is zero under perfect competition. It is calculated as the area of
triangle EBC from the Figure 26.
Combined, the consumer surplus, the producer surplus, and the government surplus (if present) make up the
social surplus or the total surplus or net surplus. The net welfare is calculated as the sum of areas of triangle
ABC and EBC.
Total cost of generation is calculated from the Figure 26 as the area of triangle CBE. This is done for each
country.
Each of the above four values are calculated independently for the four countries in north west European
region. Finally to get the regional values these are summed up together. The formulations are attached in the
appendix.
AFTER MARKET COUPLING
The optimization module simulates merit‐order‐based economic dispatch. Bid blocks are arranged in bid‐
price (€/MWh) order to form the merit order for the system. The energy market is then dispatched by
traversing the energy stack, climbing up/down the stacked bid blocks until load demand is met as shown in
Figure 27. In this case the markets are coupled hence the value of demand and supply functions would have to
optimize over the whole region under the given constraints.

FIGURE 27 SIMPLE STYLIZED ELECTRICITY MARKET
The central dispatch process should aim to maximize the value of spot market trading i.e. to maximize the value
of dispatched load based on dispatch bids less the cost of dispatched generation based on dispatch offers, subject
to:
• dispatch offer and dispatch bid quantity constraints;
• constraints due to availability and commitment;
• non‐scheduled load requirements in each zone;
• constraints due to power system reserve requirements determined;
• intra‐zonal network constraints and intra‐zonal losses;
• inter‐zonal network constraints and inter‐zonal losses;
• constraints consistent with registered bid & offer data;
• current levels of dispatched generation and load; and
• procedures to take account of constraints imposed by ancillary services requirements.
The above statements establish the framework within which more detailed rules on specific topics may be
defined. In the current module, given the non‐availability of data for detailed constraints, only the following
constraints were modeled:

• dispatch offer and dispatch bid quantity constraints;
• intra‐zonal network constraint;
5.4.1.2 E FFECT OF IMPORT AND EXPORT ON PRICES AND QUANTITY DEMANDED

FIGURE 28 EFFECT OF IMPORT AND EXPORT ON PRICES AND QUANTITY IN THE COUNTRY
It is important to calculate the effect of import and export on the prices and quantities demanded and
supplied in the country. The calculations were made as follows, the diagram of the effect is shown above in
Figure 28 Effect of import and export on prices and quantity in the country
Assume that the demand function is defined as follows

The supply function is defined as follows

However the prices would equalize, i.e.

Also since
∆
∆
Replacing value of Qs from above in the equations
∆
∆

And
∆

49


This was programmed into the MS Excel model. The input variable for the optimization was set be ∆Q. Since
there are four countries there were also all four ∆Q’s.
5.4.1.3 W ELFARE CALCULATIONS

FIGURE 29 WELFARE CALCULATIONS AFTER INTER COUNTRY TRADE
• Consumer Surplus = Area (∆AIK)
• Producer Surplus = Area (∆KJD)
• Net Welfare = Area (∆AIK) + Area (∆KJD)
• Cost of Generation = Area (∆DJG)
These values for each country were added up to give the net regional values for the North West European
region.
5.4.1.4 S ETTING UP THE OPTIMIZATION USING SOLVER
Since the main aim of the simulation program is to study the average static behavior of the markets bring out
sensitivities – it was considered sufficient to consider only the above two constraints.
For setting up the optimization problem Solver feature of MS Excel was employed. The optimization variable
was the net import/export into a country. If there are imports, or exports from a country it leads to change in
both supply and demand. This was modeled using the equations that calculate the change in demand and
supply in a country that import/exports some known amount of electricity from outside. This has already been
discussed above in the section, the equations were entered into the excel sheet and the solver was set up as
follows. It needed the reference to the (Figure 30 and Figure 31)
• objective function – net cost of generation,
• what the objective was – minimization of the objective function, and
• constraints

FIGURE 30 OPTIMIZATION USING MS EXCEL SOLVER

FIGURE 31 OPTIMIZATION PARAMETERS
5.4.1.5 C HOICE OF O BJECTIVE F UNCTION

Congestion management methods can have different goals. Before the operating hour, it be hours, days,
weeks or months, the goal may be to optimally allocate available capacity among market parties. In real time
the goal may be to deal with congestions occurring during operation. In the current simulation the focus was
solely on the day ahead markets – hence it was required to decide on an objective function that was suitable
for this situation and was practical with the assumptions made and the data available.
There is a debate on what should be used as an objective function – maximization of market value,
minimization of cost of generation, maximization of traded volume, etc. For the current study it was decided
to use minimization of cost of generation as the objective function mainly because that is the ultimate
objective of coupling markets.
Also there are operational and mathematical issues with using maximization of market value with
approximate linear demand and supply curves – this method works well for explicit auction and also implicit
auctions but when actual merit order is given, but not an approximate supply curve. In case of approximate
linear supply curves with optimization variable are the net imports into the four countries – the optimization
problem that is set up can have multiple solutions. The solution also depends on the initial values of trade
what are entered into the model. Basically it’s a 8 variable problem with only five governing equations, and
can hence have any number of solutions. This issue can be possibly resolved by introducing more constraints
and intelligent actors into the simulation. However as the aim of research was to understand the working of
the market and distinguish it from the effects that might happen due to idiosyncrasy of the actors (bids and
offers) it was decided to use another objective function. The In case of approximate linear supply curve
51


minimization of total cost of generation leads to unique solutions and also to higher net welfare for each
country. However in real implementation of the system it is possible to use net welfare or market value
maximization – when actual bids and offers are available. It is possible to use quadratic programming to solve
such problems.

FIGURE 32 EFFECT OF AN INELASTIC DEMAND FOR DECIDING THE OBJECTIVE FUNCTION
Other reason for using the minimization of the total cost is because of the nature of the demand curve. The
demand curve that was calculated from the model was inelastic. (slope was almost a ‐65 for Netherlands,
meaning that demand would change by 1GWh for a change of €65 in the electricity price). Under such
situation the demand supply graph would look as shown in figure. If the demand function is assumed to be
perfectly inelastic then the consumer surplus would tend towards infinity. More inelastic demand makes the
Net Welfare completely dependent only on consumer surplus. Producer surplus becomes less significant if the
slope of demand function is high. In PJM, with LMP, the optimization function also employs an perfectly
inelastic demand function and minimization of cost of generation as objective function. If net welfare is
completely dependent on consumer surplus, another way of saying maximization of net welfare, hence
consumer surplus is to minimize the cost of generation of electricity. Also if the aim of integration of markets
is to achieve a copper plate – then the final aim of markets would be to minimize the net cost of generation.
The objective function can be formulated as follows:
:
Where, dQsi is the electricity demand in a country fulfilled by local generators.
P’i is the price of electricity after coupling in the national market.
5.4.1.6 C ONSTRAINTS
The constraints were three:
• Net trade should equal to zero

• All electricity that is generated is also consumed
• Tie‐line capacities are respected
Using these inputs to the Microsoft Excel Solver it was possible to obtain a solution to the market
optimization. The results of this would be discussed in the section 7.1Base Case.
5.5 MODEL OUTPUTS
The model gives the following outputs
5.5.1 OUTPUTS FOR THE NON‐COUPLED MARKETS
The following results were calculated for the national markets, assuming there was no coupling.
TABLE 9 OUTPUT LIST FOR MODEL FROM NON‐COUPLED MARKETS
Price and Quantitiy Surplus
GW €/MWh €/hr €/hr €/hr €/hr
Consumer Producer Cost of
Q* P* Surplus Surplus Net Welfare generation
NL
BE
FR
DE
Total Cost of
Net Welfare Generation

5.5.2 OUTPUTS FOR THE COUPLED MARKETS
Following parameter were calculated from the model after FMC.
TABLE 10 OUTPUTS FROM THE MODEL AFTER FMC
Price and Quantity Surplus
GW GW €/MWh GWh €/hr €/hr €/hr €/hr
Net Consumer Producer Net Welfare Cost of
Qd Qs P' Exchange Welfare(FMC) Welfare(FMC) (FMC) generation
NL
BE
FR
DE

53


5.5.3 OVERALL RESULTS
The comparison was made between the results of market after FMC and the independent market case. In
scenarios comparison was also made between the results from the scenario and the results of FMC if applied
in present case. Two main values of interest were the following, which were calculated from the model.
1. ∆ C OST OF G ENERATION : R EGIONAL CHANGE
2. ∆ N ET W ELFARE : R EGIONAL C HANGE

5.5.4 COMPARATIVE RESULTS
The following result were calculated to be able to make decisions on the effectiveness of FMC under different
scenarios.
TABLE 11 COMPARATIVE RESULTS FROM THE MODEL BETWEEN FMC CASE AND THE BASE CASE
€/MWh
% ∆ % ∆ % Installed
Consumer Producer % ∆ Net % Demand Capacity
∆ Price % ∆ Price Surplus Surplus Welfare Imported Used
NL
BE
FR
DE

CAPACITY UTILIZATION RESULTS

It was important to also see what the results were from the utilization perspective of the tie‐lines. It would
help in deciding which tie‐lines need further investments to relieve congestion.
TABLE 12 CAPACITY UTILIZATION RESULTS FROM THE SIMULATION MODEL
Reverse Forward
Reverse Forward Capacity Capacity
Reverse Forward Reverse Forward Unused Unused Utilizatio Utilizatio
Capacity Capacity Flow Flow Capacity Capacity n n
GW GW GW GW GW GW
BE‐FR
BE‐NL
DE‐FR
DE‐NL

5.6 GRAPHS
The following graphs were also plotted to give easier insights and comparisons into the market operation and
comparison.
• Price of Electricity
o Electricity Prices
o Change in Prices
• Electricity Demand
o Consumption per Country
o Imports and Exports

• Welfare Data
o Consumer Surplus
o Producer Surplus
o Net Welfare
o Distribution of Welfare
• Interconnector Capacity Utilization
o Actual Flows
o % Utilization of capacity

55


6 VALIDATION AND VERIFICATION OF MODEL

As it is a simulation model and all simulation models have the property of “garbage in – garbage out”. Hence
there was a need to carefully and considerately ensure quality of the input data. It was tough to ensure this as
most of data was not available directly from the owners, but was picked up from other studies, and was
sometimes dated. It was tried to the utmost degree to have data which reflects reality, so that conclusions
can be made on basis of this data.
In this chapter you would find detailed verification of model and validation of the intermediate results. It is not
possible to validate the final results as the market in this form does not exist yet.
6.1 VALIDATION OF TRANSMISSION MODEL
The model has already been verified in detail by the authors (Qiong and Bialek 2005). After studying the
report it was considered sufficient to take the model as being correct.
6.2 QUALITY OF DATA USED FOR SUPPLY CURVE
This was one of the most important data for the economic calculations‐ as all the rest of calculations would
hinge on it. Any issue with data would reflect in the results of from the model. Hence below the supply curve
calculated from the simulation model and actual merit order curves for the four countries are given below.
Merit order curve based on the cost data from Merit order based on the actual data from the
current model past (DG Competition report on energy sector
inquiry (SEC(2006)1724, 10 January 2007)
NL Supply Curve
€ 80.00
€ 70.00 y = 3.183x
R² = 0.831
Price (euros/MWh)
€ 60.00
€ 50.00
€ 40.00
€ 30.00
€ 20.00
€ 10.00
€‐
0.00 5.00 10.00 15.00 20.00 25.00
Generation Capacity (GW) NL Supply Curve
Linear (NL Supply Curve)

BE Supply Curve
€ 80.00 y = 4.217x
R² = 0.829
€ 70.00
Price (euros/MWh)
€ 60.00
€ 50.00
€ 40.00
€ 30.00
€ 20.00
€ 10.00
€‐
0.00 5.00 10.00 15.00 20.00
BE Supply Curve
Generation Capacity (GW) Linear (BE Supply Curve)

FR Supply Curve
€ 80.00
y = 0.392x
€ 70.00 R² = 0.603
Price (euros/MWh)
€ 60.00
€ 50.00
€ 40.00
€ 30.00
€ 20.00
€ 10.00
€‐
0.00 50.00 100.00 150.00
FR Supply Curve
Linear (FR Supply Curve)
DE Supply Curve
y = 0.452x
€ 80.00 R² = 0.788
€ 70.00
Price (euros/MWh)
€ 60.00
€ 50.00
€ 40.00
€ 30.00
€ 20.00
€ 10.00
€‐
0.00 50.00 100.00 150.00
DE Supply Curve
Linear (DE Supply Curve)

FIGURE 33 MERIT ORDER CURVES FOR THE NORTH‐WEST EUROPEAN REGION, MODEL DATA AND COMPARISION WITH
ACTUAL DATA FROM THE PAST
As can be clearly seen both the graphs are very similar – considering both the prices and the installed
generations. Hence it would be acceptable to use the data that has been collected from the sources and still
be able to get realistic results.
6.3 QUALITY OF DATA USED FOR AVERAGE DEMAND
Second most important data was the data for average demand in a country. There were many sources to
gather this data from – Eurostat website, past studies and UCTE system adequacy report. For the model the
values were picked up from the UCTE system adequacy report 2007‐20. This was the most recent data.
However the values were not averages but were snapshots in time. To see how well these values reflect reality
they were compared to the Load Duration Curves Calculated for the last three years for the north‐west
European region by London Economics report for the DG Trent. (DG Competition report on energy sector
inquiry (SEC(2006)1724, 10 January 2007)

Chapter: Validation and Verification of model
57


TABLE 13 COMPARISION OF AVERAGE DEMAND OF ELECTRICITY USED IN THE MODEL AND HISTORICAL DATA
Average Method of calculation of average demand based on
Average Demand used in Demand based load duration curve = average of values at 3000 and
model (from UCTE one on the load 6000 hours
day value) duration curve
NL 16.30 9

FIGURE 34 LOAD DURATION CURVE FOR NETHERLANDS
BE 12.60 9

FIGURE 35 LOAD DURATION CURVE BELGIUM
FR 79.40 60

FIGURE 36 LOAD DURATION CURVE FOR FRANCE

DE 74.00 50

FIGURE 37 LOAD DURATION CURVE FOR GERMANY
As is clear from the values, the values used in the model are higher than what is reflected from the past load
duration curves. This could be attributed to two factors –
• The values in the study are older, only till 2005. If we consider the annual increase there would be
some convergence of the values.
• The value snapshot considered by UCTE, i.e. Referecne value on the 3rd Wednesday of January, 2007
at 11:00, might not reflect the reality as well.
However the values still are reflective of the trend, and have been achieved at the same instance of time in the
past. Hence it is much better reflective of reality than the average values reflected in the data from duration
curves.
6.4 PRICE OF ELECTRICITY WITHOUT IMPORTS AND EXPORTS
To test the correctness of the supply curve and the demand data it was decided to compare the results of
price calculated from the simulation model without inter‐country trades and the past prices from the day
ahead markets in APX, BelPEX, PowerNext and EEX. This data was tough to gather too. However it was
collected for 24 hours and for the past two years from the respective power exchanges. The data analysis of
the data yielded the statistics given in the Figure 38 Comparision of wholesale price of electricity based on the
model and actual past data from the power exchanges for year 2005‐07 The software SAS and MS Excel were
utilized for the analysis. The results can be found in the appendix A.4.

FIGURE 38 COMPARISION OF WHOLESALE PRICE OF ELECTRICITY BASED ON THE MODEL AND ACTUAL PAST DATA FROM THE
POWER EXCHANGES FOR YEAR 2005‐07
As can be seen for NL and BE the prices calculated from the model are much higher than the actual day ahead
prices. However for Germany and France it is much closer to the reality. Other observation is the fact that
mean of prices in Germany is actually higher than the mean in Netherlands and Belgium, which might not be
true. This could be attributed to the fact that a lot of values from the data set for EEX were missing for some
reason. The prices in NL and BE are expected to be higher as all the generation is assumed to be local, and
that would mean it would be expensive. In real life prices in NL and BE are lower because of cheaper imports
from Germany and France.
59


To get better perspective on the prices it was decided to compare the prices to the futures prices, which
showed better correlation.
6.5 VALIDATION OF PTDF VALUES FROM POWER WORLD
The basic tool for congestion management in FMC is Power Transfer Distribution Factor (PTDF) which
assesses sensitivity of a given line flow to the changes in nodal generations and demands. PTDF factors are
used to measure the impacts of a commercial transaction on the physical power flows in the critical
transmission lines/ or interfaces. Based on the values of PTDFs, transactions are curtailed and increased in
order to relieve lines overloads. Due to the phenomenon of loop flows in a meshed network, PTDF calculation
requires the full network information. This next section is based on the paper by (Zhou and Bialek 2005)
TABLE 14 PTDF VALUE COMPARISON FROM POWER WORLD MODEL TO ACTAUL PUBLISHED VALUES

“In order to test the applicability of the UCTE network model under various dispatch conditions, the
published PTDF values were compared with the calculated ones. Although not all PTDF values are
publicly available, some of the PTDFs in the UCTE network were obtained from European
5
Commission reports (Haubrich and Fritz 1999). As our study was focused on the cross‐border
congestions, we were interested only in the values of PTDFs on cross‐country interfaces rather than
individual PTDFs for all internal lines within each country. Tables II–IV give the PTDF factors (in
6
percent) on the crossborder interfaces for the transactions from Belgium to Italy , North France to
7
the Netherlands and France to Italy , respectively. The correlation factors are 97%, 91% and 95%,
proving very good agreement between the expected and actually calculated values.”
6.6 CONCLUSIONS
The conclusions from the validation and verification yielded confidence into the data. The data from the
studies were lower for the marginal costs and average prices seen on the spot markets. Main reason for this is
that the plants right now in operation have been in operation for long and have already paid for their
investments. It is profitable to just bid on the marginal costs in the market. However the data which was

5
http://europa.eu.int/comm/energy/en/elec_single_market/index_en.html
6
Net Transfer Capacities (NTC) and Available Transfer Capacities (ATC) in the Internal Market of Electricity
in Europe (IEM) –Information for User, ETSO, 2000.
7
http://europa.eu.int/comm/energy/en/elec_single_market/index_en.html

collected was mostly for newly installed or planned plants in the cost sheet. Hence the supply curve was
shifted towards higher costs in the model. This was the main difference. Also the demands have risen in the
present case – higher than the once in the published reports from 2004 and 2005. Considering these facts it is
possible to justify the values that were considered in the model. Also counting the fact that the model is built
to give approximate values and is mainly built for the purpose of understanding the behavior of FMC – it was
justified to use the data.

61


Section 3: Results
Here the results from the model are

presented and conclusion are drawn
63


7 RESULTS

This chapter is divided into two main sections. First section would detail the results from the base case. The
second part would detail the results from the scenarios.
7.1 BASE CASE
The base case was run with the values which have already been discusses in Chapter 5(Structure of Simulation
Model).
The model is run first without coupling, i.e. all the markets calculate MCP without any imports or exports. The
results of the calculations are given below in the table.

FIGURE 39 MCP, EQUILIBRIUM DEMAND AND SURPLUS CALCULATION WITHOUT MARKET COUPLING
The prices in Belgium are the highest, followed by Netherlands. France with its huge installation of nuclear
energy has the cheapest energy prices. Germany is also substantially lower priced compared to NL and BE
because of coal installations.
The second step was to run the solver in excel to minimize the net cost of generation by varying the imports
and exports into each country.
7.1.1 PRICE OF ELECTRICITY

Prices (euros/MWh)
7.1.1.1 E LECTRICITY P RICES P RICES
€ 60.00
From the end consumer viewpoint the
€ 50.00 most important indicator is the price of
electricity. It must be considered that this
€ 40.00 graph only gives the price of wholesale
electricity; however it contributes
€ 30.00
substantially to the final electricity price.
As can be seen after flow based market
€ 20.00
coupling Dutch and Belgian customers
€ 10.00 would earn the benefit.
€‐
NL BE FR DE
P* P'

Chapter: Results
65


Prices Change (euros/MWh)
7.1.1.2 C HANGE IN P RICES
€ 2.00
As already said Dutch and Belgium see
substantial decrease in electricity prices.
€‐ The biggest gainer is Netherlands with
NL BE FR DE almost € 8, Belgium also has reduced
€ (2.00)
prices but not as much reduction as seen in
€ (4.00) Netherlands ‐ € 6. It must also be stated
here that the benefit driven by countries
€ (6.00)
shows a very strong dependence on the
€ (8.00)
slope of calculated supply curve. Hence it is
very important to get the supply curves as
€ (10.00) accurate as possible. This was the reason
∆ Price behind creating a costing model for all the
technologies and obtaining real world data

to populate the matrices.
7.1.2 ELECTRICITY DEMAND

7.1.2.1 C ONSUMPTION P ER C OUNTRY
Electricity Demand
The consumption does not change so
(GW)
90.00
much in the countries. However as
expected, the countries in which prices
80.00
went up – namely Germany and France,
70.00
the consumption decreased. This is true
60.00 because of the assumption of elastic
50.00 demand curve. Netherlands and Belgium
40.00 saw more consumption because of falling
30.00 prices.
20.00
10.00
0.00
NL BE FR DE
Q* Qd

Import‐Export (‐ve means import)
7.1.2.2 I MPORTS AND E XPORTS
The high price countries import from the
5.00% low electricity priced countries.
Netherlands imports almost 17%(this
0.00% number is comparable to what
NL BE FR DE Netherlands imports currently at about
20%) of its net consumption. Belgium is
‐5.00%
able to import only 12%. However current
values are based mostly on explicit
‐10.00% contacts, trading on Power exchanges is
still limited. However if all electricity is
‐15.00% traded over the power exchange and
calculations are done according to implicit
‐20.00%
flow based coupling method with objective
% Demand Imported
function being the total cost of generation
then the scenario might change to what is
shown in the figure.

7.1.3 WELFARE D ATA

Consumer Surplus (Meuros/hour)
7.1.3.1 C ONSUMER S URPLUS
$10.00
The consumer surplus has a marginal
Millions
$9.00
increase in importing countries mainly
$8.00
because of reduced prices and also
$7.00
increased demand. Change in consumer
$6.00
surplus in exporting countries is relatively
$5.00
small because of their large size and large
$4.00
spare installations for generation.
$3.00
$2.00
$1.00
$0.00
NL BE FR DE
Consumer Surplus Consumer Welfare(FMC)

Producer Surplus (Meuros/hour)
7.1.3.2 P RODUCER S URPLUS
€ 1.40
Producer surplus did see a substantial
Millions
€ 1.20 reduction in the quantity. This was visible
in both the importing countries and
€ 1.00
exporting countries. Importing countries
€ 0.80 would hurt the local generating
companies. At the same time the
€ 0.60
exporting countries would benefit their
€ 0.40 local generators as they would now be able
€ 0.20
to sell outside of their territory and earn
benefit.
€‐
NL BE FR DE
Producer Surplus Producer Welfare(FMC)

Net Welfare (Meuros/hour)
€ 12.00 7.1.3.3 N ET W ELFARE
Millions
Net Welfare for all countries remained
€ 10.00 almost the same. The benefit earned by
the consumers was countered by the loss
€ 8.00
to the generators in the importing
€ 6.00 countries and was reversed in case of
exporting countries. In general overall for
€ 4.00
the local economy the benefit is almost
€ 2.00 negligible.
€‐
NL BE FR DE
Net Welfare Net Welfare (FMC)

Chapter: Results
67


Distribution of Welfare
7.1.3.4 D ISTRIBUTION OF W ELFARE
10.00%
Looking at percentage is interesting when
5.00%
considering welfare. This would decide the
0.00%
amount of opposition that the proposal
‐5.00% NL BE FR DE
would face from various actors. As can be
‐10.00% clearly seen that the Producers in
‐15.00% Netherlands would oppose this move, and
‐20.00% so would the producers in Belgium.
‐25.00% However the remaining actors would be
‐30.00% more or less neutral to the change.
‐35.00%
% ∆ Consumer Surplus
% ∆ Producer Surplus
% ∆ Net Welfare

7.1.4 INTERCONNECTOR CAPACITY UTILIZATION

% Utilization
7.1.4.1 % U TILIZATION OF CAPACITY
As already said, the utilization on the BE‐
FR and DE‐NL border is the highest. These
150.00%
would be the tie‐lines that would need to
100.00% be reinforced in order to attain the copper
50.00% plate or a successful competitive and liquid
0.00%
market in the north‐west European region.
However it must be noticed that this
‐50.00% BE‐FR BE‐NL DE‐FR DE‐NL
utilization % is of the physical available
‐100.00% capacity and not the NTC values.
‐150.00%
Net Utilization

Utilization of Interconnector Capacity
7.1.4.2 A CTUAL F LOWS
Considering the tie‐line capacity utilization
factor is important. As can be seen BE‐FR
6.00
5.00 and DE‐NL are completely used. This is
4.00 what would be expected as well. Only
3.00 when two of the four interconnectors have
2.00
been fully utilized there could be no
1.00
‐ additional flow from any direction possible
‐1.00 BE‐FR BE‐NL DE‐FR DE‐NL and hence it would lead to a closed
‐2.00 constraint.
‐3.00
Forward Unused Capacity
Forward Flow
Reverse Unused Capacity
Reverse Flow

7.1.5 CONCLUSIONS FROM BASE CASE
On the whole FMC is effective in bringing down the net cost of generation for the whole north‐west European
region. In terms of net welfare every country gained except France, where there was no change observed.
From the perspective of energy prices, they went down significantly for Netherlands and Belgium, though
there was a very insignificant increase in the prices in Germany and France. The interconnectors on BE‐FR and
DE‐NL borders were completely utilized to their limits. Overall it seems to be an efficient system for
optimization of market value and better usage of the interconnector capacity. Hence it can be concluded that
FMC would lead to regional gains if implemented in the North West European region. The detailed numbers
from the analysis are attached in the appendix A.9 and A.10
Next step was to compare FMC with NTC based Market coupling method which is already implemented
between NL, BE and FR. However there was issue of defining the contract path with addition of Germany.
Germany offers a parallel or loop flow, which can not be defined using a contract path, as the flows resulting
from execution of a contract between France and Netherlands would pass through Germany and the German
TSO should be paid for its marginal value. This makes definition of contract path complex. As there are no
documents of how the system would define contract path – if not basing them on PTDFs – it was decided to
base them on assumptions. For testing if FMC is better than Market Coupling, three different contract paths
were defined – clockwise, anti‐clockwise and 50% division. The results of the analysis would be discussed
below.
7.2 CURRENT SITUATION VS FMC
As already discussed in chapter 2.2 Trilateral Market Coupling, the current situation in the North West
European region already has coupled markets. In order to be able to comment on the additional benefits that
FMC entails ‐ it was necessary to make comparison with the current system. Hence a modification was made
to the model with following parameter values.
Chapter: Results

FIGURE 40 TRADED VOLUMES FOR FMC AND TRILATERAL MARKET COUPLING COMPARISION
69


The explicit trades as mentioned in the picture above lead to already some change in the demand and prices
in the countries as compared to the base case of no coupling at all. A new optimization problem was now set
for the trilateral market coupling countries – NL, BE and FR. The optimization objective function was set to be
minimization of generation cost and not net welfare (present system employs Net welfare, for justification
see chapter of methodology). The results from the optimization were plotted against the results from the
base case without any coupling and FMC to clearly delineate the effects.
Prices (euros/MWh) Prices Change Electricity Demand

€ 60.00 Compared to no coupling (GW)
(euros/MWh) 90.00
€ 50.00 € 2.00
80.00
€- 70.00
€ 40.00
NL BE FR DE 60.00
€ (2.00)
€ 30.00 50.00
€ (4.00) 40.00
€ 20.00
30.00
€ (6.00)
20.00
€ 10.00
€ (8.00) 10.00
€- 0.00
€ (10.00)
NL BE FR DE NL BE FR DE
∆ Price(MC) ∆ Price(FMC)
P*(No Coupling) P'(MC) P'(FMC) Q*(No Coupling) Qd(MC) Qd(FMC)

Import-Export (-ve means Consumer Surplus Producer Surplus

import) (euros/hour) (euros/hour)
$10.00 € 1.40
5.00% $9.00
€ 1.20
$8.00
0.00% € 1.00
$7.00
NL BE FR DE $6.00 € 0.80
-5.00% $5.00
€ 0.60
$4.00
-10.00% € 0.40
$3.00
$2.00 € 0.20
-15.00% $1.00
€-
$0.00 NL BE FR DE
-20.00% NL BE FR DE Producer Surplus(No Coupling)
% Demand Imported(MC)
Consumer Surplus(No Coupling) Producer Surplus(MC)
% Demand Imported(FMC)
Consumer Surplus(MC) Producer Surplus(FMC)

Distribution of Welfare Utilization of % Utilization

Interconnector Capacity
0.14%
0.12%
6.00 150.00%
0.10% 5.00
100.00%
4.00
0.08%
3.00 50.00%
2.00
0.06% 0.00%
1.00
BE-FR BE-NL DE-FR DE-NL
0.04% - -50.00%
(1.00) BE-FR BE-NL DE-FR DE-NL
0.02% -100.00%
(2.00)
(3.00) -150.00%
0.00%
NL BE FR DE
Forward Unused Capacity (MC)
% ∆ Net Welfare(MC)
Forward Flow(MC) Net Utilization (MC)
% ∆ Net Welfare(FMC) Reverse Unused Capacity (MC)
Net Utilization(FMC)
Reverse Flow(MC)

FIGURE 41 RESULTS FROM SIMULATION MODEL FOR CURRENT STATE OF TRADE IN NORTH WEST EUROPEAN REGION
Conclusions
As can be clearly seen above FMC is more beneficial as compared to present implementation of trilateral
market coupling between NL, BE, FR and explicit auctions between NL, DE and DE, FR. Clearly there are
benefits for Netherlands – there is almost € 2 per MWh further drop in prices with FMC. For Belgium there is
almost no difference. Germany sees higher prices with FMC as it is able to sell more in the market and
substitute the trades which were otherwise going from France. There is also a net gain the welfare of the
region. The percentages are small however it should be considered that the initial values of consumer surplus
were high due to the inelastic nature of the demand function. It can be concluded on basis of the above
mentioned results the FMC would indeed lead to gains both in national and regional levels. Though it should
also be kept in mind that there was a very insignificant drop in welfare within France, mainly because
Germany replaced some of its export benefits with introduction of FMC.
7.3 COMPARISON OF FMC WITH MARKET COUPLING
The next step was to compare the claim of FMC with Market coupling The following situations were
simulated.

Chapter: Results
71


FIGURE 42 FLOW DIRECTION FOR COMPARISION OF FMC WITH NTC BASED MARKET COUPLING
The results are attached in the appendix A.11
The results can be discussed from perspective of any of the involved countries, and actors. As already stated
the problem owner being the Ministry of Economic Affairs this report would aim to analyze the results from
their perspective.

1. Consumer Perspective: Wholesale MCP after inter‐country trading
FMC MC Clockwise
The end consumers, in this case the
Prices Change (euros/MWh) Prices Change (euros)
domestic users, care only about the € 1.50
price to electricity that is charge to € 2.00 € 1.00
them. From the results of the € 0.50
€‐
analysis the Dutch customers would €‐
NL BE FR DE
pay least in case of NTC based € (2.00) € (0.50) NL BE FR DE
market coupling with equally € (1.00)

€ (4.00)
distributed assumption on the € (1.50)
contract paths(€8.18 /MWh), € (6.00) € (2.00)
followed closely by the results from € (8.00)

€ (2.50)
Flow‐based market coupling based € (3.00)
on actual PTDF values (€8.21 € (10.00) € (3.50)
/MWh). However the difference is ∆ Price ∆ Price
not significant only at the second

decimal value (€0.03) which could be
neglected. Basically both FMC and MC Anti‐Clockwise MC Distributed
distributed contract Market
coupling gave same results on Dutch Prices Change (euros) Prices Change (euros)
€ 3.00 € 2.00
market prices. However considering
prices in Belgium do not get benefit € 2.00
€‐
in case of distributed contract based € 1.00 NL BE FR DE
market coupling (a drop of less than €‐
€ (2.00)
€2) – which dropped substantially NL BE FR DE

€ (1.00) € (4.00)
with FMC (almost a drop of € 6). The
€ (2.00)
results from anti‐clockwise and € (6.00)
clockwise Market coupling are much € (3.00)
different from the other two cases. € (8.00)

€ (4.00)
As can be seen that prices fall by
€ (5.00) € (10.00)
about € 4 in Netherlands
∆ Price ∆ Price

2. Effects on Welfare Distribution:
Welfare distributions can be predicted on basis of above graphs, the importing countries saw the consumer

surplus going up while at the same time exporting countries saw consumer surplus going down because of
slightly higher prices. Also to be noted is the fact in general it is observed that the Net Welfare change for all
countries is always positive but is only a small percentage. More information and graphs can be looked up in
the appendix A.11.3
Chapter: Results
73


3. Dependence on imports: Imports and exports for each of the partners involved in market
coupling after equilibrium
FMC MC Clockwise
To an extent the amount of imports
Import‐Export (‐ve means Import‐Export (‐ve means
decide the level of dependence that import) import)
the country has on its trade 5.00% 6.00%
partners. From the perspective of
4.00%
the supra‐national aspirations this is 0.00%
2.00%
good. However thinking of the NL BE FR DE
energy independence and self ‐5.00%

0.00%
sufficiency – too much imports ‐2.00%
NL BE FR DE
‐10.00%
create a sense of insecurity in the
‐4.00%
local market. In the long term they
‐15.00%
may create incentives for the ‐6.00%
generators to move the generation ‐20.00% ‐8.00%

plants in the countries with lower % Demand … % Demand …
cost of generation, thus causing

further erosion of spare capacity and
could lead to higher volatility in the MC Anti‐Clockwise MC Distributed
markets. In case of FMC Holland
ends up importing almost 15% of its Import‐Export (‐ve means Import‐Export (‐ve means
total demand from outside. This is import) import)
8.00% 10.00%
actual in‐line with the present
6.00%
imports – which stand at around 15‐ 5.00%
4.00%
20%. Other interesting thing to
2.00% 0.00%
notice is the fact that France
0.00% NL BE FR DE
become the sole exporter in case of ‐5.00%
‐2.00% NL BE FR DE
MC. This should not be very
‐4.00% ‐10.00%
surprising given the fact that ‐6.00%
electricity is the cheapest in this ‐15.00%
‐8.00%
country and the objective function ‐10.00% ‐20.00%
for the current simulation is % Demand … % Demand …
minimization of the oveall cost of
generation.

4. Effect on local demand
It was also noted that demand changes only slightly for each case this could be attributed to the fact that
demand function is almost inelastic. The slope of demand function in NL and BE is of the order of 1000, hence
there is not much change in the demand with increasing or decreasing prices. This is in line with the reality
too. For details refer to appendix

5. Tie‐Line capacity % utilization of the interconnector utilization
utilization
FMC MC Clockwise
To make decisions about

% Utilization % Utilization
investment into grid expansion it is
150.00% 80.00%
very important for the government
60.00%
to look at the actual picture of 100.00% 40.00%
congestion. The results from the 20.00%
50.00%
analysis of capacity usage under 0.00%
different market methods were 0.00% ‐20.00% BE‐FR BE‐NL DE‐FR DE‐NL
largely different. This probably also BE‐FR BE‐NL DE‐FR DE‐NL ‐40.00%
‐50.00% ‐60.00%
shows that there would exist
‐80.00%
gaming opportunities for the actors ‐100.00%
‐100.00%
with large market power both
‐150.00% ‐120.00%
generators and large consumers. In
Net Net
case of FMC the most congested Utilization Utilization
borders are BE‐FR and DE‐NL. Is
should be noted that France sort of
determines which tie‐lines would MC Anti‐Clockwise MC Distributed
get congested because of low
prices. In case of MC clockwise the % Utilization % Utilization
BE‐FR tie line gets congested 150.00%
because France is exporting to both
100.00% 150.00%
Belgium and Netherlands. It is also
100.00%
trying to export to Germany, thus 50.00%
50.00%
the DE‐FR tie‐line also gets
0.00% 0.00%
congested. Similar is the case with
BE‐FR BE‐NL DE‐FR DE‐NL BE‐FR BE‐NL DE‐FR DE‐NL
‐50.00%
anti‐clockwise flow but with ‐50.00%
reversed signs. MC distributed leads ‐100.00%
‐100.00%
to appearance of three congested ‐150.00%
lines, i.e. all tie lines except the DE‐ ‐150.00%
NL tie‐line. For details refer Net Net

Utilization Utilization
appendix A.11
7.3.1.1 C ONCLUSIONS
In the highly meshed interconnected transmission networks in Europe programmed exchanges and physical
flows differ often considerably. They would be closely connected to the power flows through the cross
borders only in the ideal case of a peninsular system and its neighbor if both were interconnected through a
single tie line, in case of market coupling in between Netherlands, Belgium and France there are no parallel
paths hence it is a good approximation to peninsular system with the neighbors lying in a straight line.
However, in a widely interconnected network like for example the UCTE network the power flow through the
cross border tie lines between two neighbor areas A and B may be interpreted as a superposition of a direct
flow, which is related to exchanges between A and B and a parallel flow, which is related to all the other
exchanges in the meshed network and to the location of generations and loads in the several grids. Therefore
Chapter: Results
there would be a parallel flow even if all the exchanges in the interconnected system were set at zero. With
introduction of Germany into the market coupling there would be large implications due to transit and loop
flows on the values of ATC and NTCs. These transit flows cannot be handled by the NTC based MC.
75


FMC leads to substantial drop in prices for both NL and BE. The drop is almost twice as much as achieved by
using MC (clockwise and anti‐clockwise). MC with distributed also did perform well if considering only the
prices in Netherlands, however from a regional perspective FMC would be more suitable. FMC also makes
best possible use of the interconnector capacity, the interconnector % utilization ratios in other cases is not
really the physical limit usage – but some approximate flow based on the commercial exchange that does not
take care of parallel flows occurring due to transactions between other countries. Hence it is possible to
conclude that FMC comes across as an ideal method for managing inter‐country electricity trade and
congestion management. It leads to the best use of actual interconnector capacity and hence also optimal
trade volumes.
Next part of the study would focus on the different scenarios that has either been planned in the future or are
expected to happen in the near future. Effect of FMC on these scenarios would be discussed in the next
section.
7.4 SCENARIOS
Scenarios were developed in consultation with the Ministry of Economic Affairs and suggestions from experts
in the field. The scenarios were mainly on policy and investment options that can be employed. Increase of
generation capacity, increase of transmission capacity, effect of carbon markets and the effect of loop flows
because of wind generation in Germany have been investigated.
7.4.1 INCREASE GENERATION CAPACITY IN NETHERLANDS
There is presently no coal production in the Netherlands. All of their coal mining operations were closed down
following the discovery of large indigenous reserves of natural gas in the early 1970s. Most of the coal reserves
are in the southern and east central parts of the country, and recoverable reserves are estimated (as of
January 2005) at about 500 million short tons. The Netherlands currently ranks as the world's 32nd greatest
coal consumer (and 11th in the EU), accounting for about 0.3% of the world's (and about 1.9% of the EU's)
total annual coal consumption (Source: EIA/DOE). With the volatility that has been seen in the Natural Gas
and Oil markets recently there is a renewed interest in Netherlands in investments in coal based power plants.
Two different scenarios were tested in the current research – first with creation of 5000 MW additional
capacity and second with additional capacity of 10 GW. The results would be discussed next.

7.4.1.1 I NSTALLATION OF 5000 MW COAL BASED POWER PLANTS

NL Supply Curve
€ 80.00
y = 2.439x
€ 70.00 R² = 0.848
€ 60.00
Price (euros/MWh)
€ 50.00
€ 40.00
€ 30.00
€ 20.00
€ 10.00
€‐
0.00 5.00 10.00 15.00 20.00 25.00 30.00
NL Supply Curve Linear (NL Supply Curve)

FIGURE 43 NEW SUPPLY CURVE WITH ADDITIONAL 5 GW OF HARD COAL BASED POWER PLANT
The change induced in the model due to increased generation capacity is outlined above, the supply curve of
NL changes and the slope becomes flatter. The market results from this change are presented in the figure
below:
Prices (euros/MWh) Import-Export % Tie-Line Utilization

(-ve means import)
10.00% 150.00%
€ 60.00
5.00%
€ 50.00 100.00%
0.00%
€ 40.00 NL BE FR DE 50.00%
-5.00%
€ 30.00 -10.00% 0.00%

-15.00%
€ 20.00 -50.00%
-20.00%
€ 10.00 -100.00%
-25.00%
€- -30.00% -150.00%
NL BE FR DE
P* (w/o Coupling) P' (FMC Base) % Demand Imported (FMC Base) Net Utilization (FMC Base)
P* P' % Demand Imported Net Utilization

Figure 44 Price change in NL, Imports and % tie line utilization for scenario with installation of 5000 MW coal
based generation in NL
Chapter: Results
The prices in the Dutch electricity market would drop substantially with installation of extra 5000MW, even in
absence of any market coupling ‐ prices drop to almost € 40 per MWh. However there are still substantial
benefits from FMC. If FMC was introduced in the present sate the prices would drop form € 51.83 to €43.62
77


per MWh. Then if government decides to invest in 5000 MW coal based power plants, then the prices would
drop further to € 37.14. NL is also the country that derives most benefit in from FMC with the highest price
drop of € 6.48 per MWh, followed by Belgium € 5.55 per MWh. Also Belgium begins to import more from
other countries; it now imports almost 23% of its demand from outside, while Netherlands has shown an
opposite trend with imports now standing at around 7%. There is also reversal of flow on the Dutch Belgian
flow. In FMC base case the flow was mostly from Belgium to Netherlands due to cheaper imports coming
from France, however now the flows are from Netherlands to Belgium, as electricity in Netherlands is being
supplied more locally. It goes on to prove that NL becomes much more independent of the imports – it’s also
shown in the figure above. However it must to noted that still Netherlands is a net importer – despite
investing so largely in the coal based plants. The detailed results for the analysis are given in the appendix
A.12
One important aspect that should be kept in mind is that installation of coal based power plants though
brings down the prices – they would also push the renewable energy technologies out of business for most of
the time in a year. This should be considered by the ministry before taking such a step. The renewable
technologies would need government support to be able to remain competitive and be able to survive‐ this
might offset some of the benefits of installing more coal based power plants.
7.4.1.2 I NSTALLATION OF 10,000 MW COAL BASED POWER PLANTS
NL Supply Curve
€ 80.00
€ 70.00 y = 1.951x
R² = 0.826
€ 60.00
Price (euros/MWh)
€ 50.00
€ 40.00
€ 30.00
€ 20.00
€ 10.00
€‐
0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00

FIGURE 45 NEW SUPPLY CURVE WITH ADDITIONAL 10,000 MW OF HARD COAL BASED POWER PLANTS
The change induced in the model due to increased generation capacity is outlined above, the supply curve of
NL changes and the slope becomes flatter. The market results from this change are presented in the figure
below:

Prices (euros/MWh) Import-Export % Utilization

(-ve means import)
€ 60.00 10.00% 150.00%
5.00%
€ 50.00 100.00%
0.00%
€ 40.00
NL BE FR DE 50.00%
-5.00%
€ 30.00
-10.00% 0.00%
€ 20.00 -15.00% BE-FR BE-NL DE-FR DE-NL

-50.00%
-20.00%
€ 10.00
-25.00% -100.00%
€-
-30.00%
NL BE FR DE -150.00%
P* (w/o Coupling) P' (FMC Base) % Demand Imported (FMC Base) Net Utilization (FMC Base)
P* P' % Demand Imported Net Utilization

FIGURE 46 PRICE CHANGE IN NL, IMPORTS AND % TIE LINE UTILIZATION FOR SCENARIO WITH INSTALLATION OF 10,000 MW
HARD COAL BASED GENERATION IN NL
The most striking observation from this scenario is that Netherlands becomes a net exporter. Belgium is the
only country which is importing now from both Netherlands and also France and a small amount of exports
from Germany. Belgium prices drop down and also it is importing now almost quarter of its demand from
other countries. The Netherlands ends up exporting electricity amounting to 5% of its local demand. Also the
producer surplus in the Netherlands increases – mainly attributed to the fact that the prices go up and
electricity is being exported to other countries. Another interesting observation is that Germany is almost out
of the loop. This could mainly be because of presence of low cost countries in the neighborhood of Belgium,
and no direct connection between Germany and Belgium. This could however change if there were to be
integration of networks in Luxemburg, allowing Germany to trade electricity directly to Belgium over that tie‐
line. Presently the flows from Germany to Belgium have to pass through either France or Netherlands and
hence have lower value. Also worth noting is the local prices of electricity in Netherlands drops down to €
33.14 per MWh, which is marginally lower than the local prices in Germany which stand at € 33.75 per MWh.
The detailed results for the analysis are given in the appendix A.13
However it should also be noted that if there was no market coupling and Netherlands was to install 10,000
MW coal based power plants than the local prices will drop down to €32.39 per MWh, and actually there is
increase in prices due to coupling‐ as there is exports to Belgium leading to a small increase in prices. Hence
there is no clear cut benefit with installation of 10,000MW and FMC together – if only considering the national
interests of Netherlands. Just going for installation of 10,000MW would give the benefits.
• Conclusion
Installation of additional coal based capacity in Netherlands has strong impact on the local prices and status
of Netherlands as being an net importer of electricity. However it should be noted that installation of large
capacity brings down the benefit that Netherlands was deriving out of FMC, actually with installation of
+10,000 MW of coal based power plants – Netherlands became a net exporter. However one thing that was
not considered here was the carbon prices. The price benefit that has been calculated was based on variable
Chapter: Results
cost of electricity generation – but without any carbon prices. It is possible that with inclusion of carbon prices
(and assuming that it would rise from the present levels of less than a euro per ton of CO2 emission) the
79


variable cost would go up. Also from the purely environmental and health perspective government needs to
investigate the implications such an huge change in generation mix might have on the country.
7.4.2 INCREASED TIE‐LINE CAPACITY
Tennet is working on a new direct Dutch‐German 1‐2 GW power interconnnector from Doetinchem to Wesel,
planned to come onstream 2012, which could physically complete an integrated north‐west European power
market. It was considered important to look at the effect FMC would have on the electricity market landscape
after installation of the new transmission capacity. Two scenarios were modeled to study the effects – first
with installation of 2000 MW and the second with installation of 5000 MW on the DE‐NL borders. The section
below first describes the process of setting up the model, which was similar for both cases. The second part
details the results.
The new transmission line would have effect on two aspects of the model – first it could induce changes in the
PTDFs as there is now an additional path available for the current to pass through and second that the
interconnector capacity now is more hence there could be more exchange of electricity between the
countries, leading to better convergence of the prices. Both these aspects were taken into consideration for
studying the effect on new transmission line on the electricity markets in north‐west European region. The
new line was assumed to be installed between Gronau in Germany and Hengelo in Netherlands (referred to as
Gronau Hengelo, from here on). The line is parallel to already existing transmission line between the two
stations. The technical details for the transmission line that were entered into Power World model are given
below.
TABLE 15 PARAMETERS FOR THE NEW TRANSMISSION LINE BETWEEN DE‐NL
TieLine Records
Series Reactance Meter MW Meter Mvar Status Lim MVA MW Loss Mvar Loss
1. 0.00726 393.3 ‐149.5 Closed 2000 0 11.7
2. 0.00283 590.1 ‐239.8 Closed 5000 0 10.43
The values of series reactance were picked to be similar to the ones of existing lines of similar capacities from
within the model.

FIGURE 47 THE DIALOG IN POWERWORLD TO SET UP THE VALUES OF PARAMETERS FOR THE TRANSMISSION LINE

After installing a new transmission line as described above, the PowerWorld model is run to get the new
values of the PTDF’s. The new values compared to the previous values are shown below.
TABLE 16 COMPARISION OF THE PTDF VALUES BEFORE AND AFTER INSTALLATION OF 2000 MW TRANSMISSION LINE
BETWEEN DE‐NL
Base Case With 2000 MW transmisison line between DE‐NL
NL→NL BE→NL FR→NL DE→NL NL→NL BE→NL FR→NL DE→NL
BE→FR 0 0.196 ‐0.484 ‐0.244 0 0.197 ‐0.484 ‐0.242
BE→NL 0 0.804 0.484 0.244 0 0.803 0.484 0.242
DE→FR 0 ‐0.138 ‐0.272 0.107 0 ‐0.138 ‐0.272 0.106
DE→NL 0 0.196 0.516 0.756 0 0.197 0.516 0.758
The first observation is that there is no significant variation between the values. There is only a very minor
change in the values at the DE‐NL border. However even that is at the third decimal point. It can thus be
assumed that installation of a 2000 MW line between DE‐NL is an insignificant event considering the whole
network. It can safely be concluded that PTDF values are not very sensitive to such changes. However it is still
not clear what effect this small change in PTDF can have on the outcomes of the market module.
Next step was to increase the tie‐line capacity in the market module by 2000 MW, followed by the
calculations of the final results. The line was assumed to be bi‐directional; hence the capacity was increased in
both directions.

FIGURE 48 NEW TIE‐LINE CAPACITY VALUES

Chapter: Results
81


7.4.2.1 B ETWEEN G ERMANY AND N ETHERLANDS (+2000 MW)

(-ve means import)
15.00% 150.00%
€ 60.00
10.00%
€ 50.00 100.00%
5.00%
€ 40.00 0.00% 50.00%
NL BE FR DE
-5.00%
€ 30.00 0.00%
-10.00% BE-FR BE-NL DE-FR DE-NL
€ 20.00
-15.00% -50.00%
€ 10.00 -20.00%
-100.00%
-25.00%
€-
-30.00% -150.00%
NL BE FR DE
% Demand Imported (FMC Base) Net Utilization (FMC Base)
P* (w/o Coupling) P' (FMC Base) P* P' % Demand Imported Net Utilization

FIGURE 49 RESULTS FROM FMC AFTER INSTALLATION OF 2000 MW TRANSMISSION LINE BETWEEN DE‐NL
The change in prices in the Netherlands is high – it drops by € 4.62 compared to case in which FMC is
implemented in present situation. It shows that there is sensitivity of the FMC market results on the
transmission capacity. Also Germany becomes the only exporter, despite lower prices in France. The
explanation to this also lies in how FMC operates, Netherlands only has an interconnector capacity of 1350
MW with Belgium, that so that means maximum amount of electricity that can come from France to
Netherlands through Belgium is 1350 MW. Additionally the interconnector between France and Germany
allows only 1700MW to flow from France to Germany. Hence there isn’t a possibility of large imports into
Netherlands from France, because of congestion on BE‐FR tie‐line. When the interconnector on Germany and
Netherlands border gets more capacity installed then Germany is able to deliver large amounts of electricity
and 10% of that flows through the parallel path, DE‐> FR‐> BE‐> NL. Hence looking at the whole system it is
more beneficial to dispatch the generators in Germany and not France. This should be kept in mind – the FMC
results have strong dependence on topology of the system. Any change on one tie‐line can lead to completely
different results, which are not intuitive to the sense of dispatching the cheapest generators.
The increased transmission capacity allows more flow from Germany to both Belgium and Netherlands which
allow these two countries to get the benefit. The prices in Belgium also drop by almost € 8, compared to the
drop of € 6, in the base case. The net welfare for all countries is positive. For France the change is almost zero.
The details of the results can be checked from the appendix A.14
Also still there is congestion on the DE‐NL and BE‐FR border. That shows that there could be additional
benefits with increasing the capacity of the DE‐NL border further. A case was also run with increasing BE‐FR
tie line capacity, as that is also congested, in both the base case and current case.

Prices Change (euros) Prices Change (euros) % Utilization

FMC Base ‐ FMC Scenario FMC Base ‐ FMC Scenario
€ 3.00 € 3.00
€ 2.00 € 2.00 150.00%
€ 1.00
€ 1.00 100.00%
€‐
€‐ 50.00%
NL BE FR DE
NL BE FR DE € (1.00)
€ (1.00) 0.00%
€ (2.00)
€ (2.00) -50.00%
€ (3.00)
€ (3.00) -100.00%
€ (4.00)
€ (4.00) € (5.00) -150.00%
€ (5.00) € (6.00)
∆ Price ∆ Price Net Utilization (FMC Base)
Net Utilization

FIGURE 50 PRICE CHANGE AFTER FIGURE 51 PRICE CHANGE WITH FIGURE 52 UTILIZATION OF FLOW LINE
INSTALLATION OF +2000MW ON NL‐DE INSTALLATION OF +2000MW ON BE‐FR WITH +2000 MW ON BE‐FR LINE,
TIE‐LINE TIE LINE COMAPRE TO FIGURE 45
The detailed results are attached in the appendix A.15. It can be seen that clearly the benefit now shifts to
Belgium as an importer and to France as an exporter. France becomes the sole exporter and Germany is also
importing small amount of capacity from France.
7.4.2.2 B ETWEEN G ERMANY AND N ETHERLANDS (+5000 MW)

The case was setup using the same steps as above. The results are discussed below.
TABLE 17 COMPARISION OF THE PTDF VALUES BEFORE AND AFTER INSTALLATIONOF 5000 MW TRANSMISSION LINE
BETWEEN DE‐NL
Base Case With 5000 MW transmission line between DE‐NL
NL→NL BE→NL FR→NL DE→NL NL→NL BE→NL FR→NL DE→NL
BE→FR 0 0.196 ‐0.484 ‐0.244 0 0.197 ‐0.482 ‐0.241
BE→NL 0 0.804 0.484 0.244 0 0.803 0.482 0.241
DE→FR 0 ‐0.138 ‐0.272 0.107 0 ‐0.138 ‐0.273 0.106
DE→NL 0 0.196 0.516 0.756 0 0.197 0.518 0.759
Again the same observation is made about the effect of a new transmission line on the PTDFs, it is very small,
affecting only the third decimal value. This time the value of interconnector transmission capacity between
DE‐NL was increased by 5000 MW, taking it up to 7500 MWs. The results of the FMC would be discussed next.
Chapter: Results
83



(-ve means import)
€ 60.00
15.00%
€ 50.00
10.00% 150.00%
5.00% 100.00%
€ 40.00
0.00% 50.00%
€ 30.00 NL BE FR DE
-5.00%
0.00%
-10.00% BE-FR BE-NL DE-FR DE-NL
€ 20.00 -50.00%
-15.00%
-100.00%
€ 10.00 -20.00%
-150.00%
-25.00%
€-
-30.00%
NL BE FR DE
P* (w/o Coupling) P' (FMC Base) P* P' % Demand Imported Net Utilization

FIGURE 53 RESULTS FROM FMC AFTER INSTALLATION OF 5000 MW TRANSMISSION LINE BETWEEN DE‐NL
As can be seen the results are identical to the results of 2000 MW case, prices change and imports into
Netherlands are almost the same. This shows that congestion is now no longer on the NL‐DE border. The only
congestion now is on BE‐FR line. As can be seen in the first case two of the interconnectos are congested BE‐
FR and DE‐NL. In the case of increased capacity on the DE‐NL border further, the congestion shifts to BE‐NL
border. More details on the model can be found in the appendix A.16
The case was also run with increasing the border capacity on DE‐NL border by 10,000 MW, however the
results resembled the results from additional 5000 MW case, as the congestion is not on that border anymore.
See Appendix A.17
7.4.3 DISCUSSION ON SENSITIVITY OF PTDFS
As seen from the two cases, first with installation of +2000MW and then with +5000MW, the PTDFs do not
change substantially. The effect is seen only at the third decimal place. This could also be expected mainly
because the whole of UCTE network is considered here and an additional 1000’s of MWs only have a minor
impact the topology of the network. Hence it could be assumed that there would not be major changes in the
PTDFs with small changes in the network.
Next it is also important to see what small differences can have on the market results. To check the impact of
PTDF on the solutions case with PTDFs of 5000 MW, and tie‐line capacity on NL‐DE border of additional 2000
MWs. Now the results could be compared to the results of model with the PTDFs from 2000 MW and
additional capacity of 2000 MW on DE‐NL border (A.14). There was no remarkable change with between the
two.

Prices Change (euros) % Utilization

FMC Base - FMC Scenario 150.00%
€ 3.00
€ 2.00 100.00%
€ 1.00
50.00%
€-
€ (1.00) NL BE FR DE 0.00%
€ (2.00) BE-FR BE-NL DE-FR DE-NL
-50.00%
€ (3.00)
€ (4.00) -100.00%
€ (5.00)
-150.00%
∆ Price Net Utilization (FMC Base) Net Utilization

FIGURE 54 PRICE CHANGE AND % UTILIZATION FROM +2000MW ON DE‐NL BORDER AND PTDF'S ALSO FROM +2000MW CASE
Prices Change (euros/MWh) % Utilization

FMC Base - FMC Scenario
€ 3.00
€ 2.00 150.00%
€ 1.00 100.00%
€- 50.00%
€ (1.00) NL BE FR DE 0.00%
€ (2.00) -50.00% BE-FR BE-NL DE-FR DE-NL
€ (3.00) -100.00%
€ (4.00) -150.00%
€ (5.00)
∆ Price
Net Utilization (FMC Base) Net Utilization

FIGURE 55 PRICE CHANGE AND % UTILIZATION OF INTERCONNECTOR FROM +2000MW CAPACITY ON DE‐NL BORDER AND
PTDFS FROM +5000MW
The above two figure show that there is no difference between the results. It is possible that under extreme
change of values the results would change as seen in the comparison of FMC with MC in section 7.3. However
there is no significant dependence on the PTDF’s for minor changes as seen here. Hence though PTDF’s play a
very important role in deciding the market outcome – they are also not very sensitive to small changes in
transmission capacity, neither do small changes in PTDF’s lead to large changes in the market outcomes.
• Conclusion
Tie line capacity has strong effect on the prices in a country. As was seen with installation of 2000MW on the
DE‐NL border and BE‐FR border, the prices change is higher with installation of more capacity on the
congested tie‐lines. However it was also noted that installation of additional 5000MW has very small
additional benefit for the region. The tie line is not fully utilized and hence is not recommended.
PTDFs play an important role in the market outcome from the FMC. However calculation of PTDFs depend

only on the topology of the network. UCTE is composed of the highly meshed system of 24 European
countries consisting of some 200,000 km of 400 and 220 kV lines. Installation of a new tie line between
countries like NL and DE, have small impact on the topology of the system as a whole. Hence there is only a
Chapter: Results
minor change on the PTDFs with installation of new tie‐line. Secondly, though the markets do depend on the
PTDFs, the dependence is not as strong so as to get affected by change on PTDFs in its third decimal. Hence it
85


is possible to be certain that the TSOs won’t be able to guide the market results as much. Markets could still
be efficient, though they might be owned by TSOs, as in case of NL.
Next part of scenario analysis would focus on studying the effect of Carbon Market which has been evolving
over the recent past. As already discusses in the development of model – the cost sheet included carbon
pricing into it. However it was decided in the model thus far not to consider them. In the next section carbon
prices and its effect on the market results would be studied.
7.4.4 EFFECT OF CARBON MARKET
The European Union Emission Trading Scheme (or EU ETS) is the largest multi‐national, greenhouse gas
emissions trading scheme in the world and was created in conjunction with the Kyoto Protocol. It commenced
operation in January 2005 with all 25 (now 27) member states of the European Union participating in it. It
contains the world's only mandatory carbon trading program. The program caps the amount of carbon
dioxide that can be emitted from large installations, such as power plants and carbon intensive factories and
covers almost half of the EU's Carbon Dioxide emissions
FIGURE 56 CONTRIBUTION OF ELECTRICITY AND HEAT GENERATION TOWRDS TOTAL CARBON EMISSIONS
(HTTP://WWW.DEFRA.GOV.UK/ENVIRONMENT/CLIMATECHANGE/TRADING/EU/INDEX.HTM).
As shown above in the Figure 57 electricity and heat generation accounts for 24% of total emissions within EU
(EEA 2006) and also the fact the prices of Carbon have been very volatile over the past two years since
introduction of trading. The prices of Carbon credits since its introduction have been given below in Figure 57.
The prices started at around € 8 per tonne of emission, it increased within the next 18 months to a high of
more than € 30 per tonne and then suddenly dropped in April 2006, since then it has been tumbling down to
below € 1 recently.

FIGURE 57 DEVELOPMENT OF CARBON PRICES IN EU, INCLUDING THE CRASH IN APRIL 2006 (SOURCE: POINT CARBON)
Carbon prices add to the variable cost of generation of electricity based on fossil fuels. Considering the
importance coal and natural gas play in the energy portfolios of the north‐west European countries it was

important to study the effect that carbon prices can have on the merit orders and hence the energy export

and import. On basis of the values for carbon credits given four different scenarios were defined.
• 15 €/ton of CO2
The details of the results are attached in the appendix A.19. Some of the interesting observations would be
discussed below.
7.4.4.1 E FFECT OF C ARBON P RICING ON M ERIT O RDER

The merit order did not change with increasing the prices from € 0.00 till € 20. Till then the merit order was
same as the base case. Only when the prices for carbon rise to €30 there is a change in the merit order. CHP‐
Gas becomes cheaper compared to Lignite coal and hard coal based power plants. At the extreme end of the
spectrum with the prices rising up to € 50 the Gas based plants become cheaper than the Lignite based power
plants. This is mainly an issue for Germany as they have 19.33 GW installed capacity based on Lignite. This
also reflects in the electricity prices in Germany after introduction of carbon pricing.
TABLE 18 IMPACT OF CARBON PRICING ON THE MERIT ORDER BASED ON FUEL AND ENERGY TECHNOLOGY TYPE (THE ITEMS
MARKED WITH OLIVE ARE THE ONCE THAT MOVED)
Environmental Price of Carbon Emission (€/tonne)
Preference Base Case 15 20 30 50
Merit Order H H H H H H
W W W W W W
N N N N N N
CHP‐B HC HC HC CHP‐G CHP‐G
O LC LC LC HC HC
CHP‐G CHP‐G CHP‐G CHP‐G LC G
G G G G G O
HC O O O O LC
LC CHP‐B CHP‐B CHP‐B CHP‐B CHP‐B

Key
Hydro H
Wind W
Nuclear N
CHP Natural Gas CHP‐G
Hard Coal Condensation HC
Lignite Condensation LC
Natural Gas Combined Cycle G
Oil O
CHP Biomass CHP‐B

This is also reflected in the changing equation of the supply curve. The demand curve was assumed to be the
Chapter: Results
same as before, to ensure that the results can be compared to each other. The demand curve changes are
shown in Figure 58.
87


FIGURE 58 EFFECT OF CARBON PRICING ON THE MERIT ORDER WITHIN NORTH‐WEST EUROPEAN REGION
The biggest change is observed within Netherlands and Germany. France has large installations of nuclear
and is predominantly unaffected by the prices. It is interesting to see the operating point of the market as well
the average demand for the north‐west European region.
Chapter: Results

89


TABLE 19 AVERAGE DEMAND IN NORTH‐WEST EUROPEAN REGION (UCTE SYSTEM ADEQUACY REPORT 2007‐20)
Average Demand
GW
NL 16.30
BE 12.60
FR 79.40
DE 74.00
The average demand within France can be satisfied by its installed capacity of Hydro, Wind and Nuclear and is
thus almost not affected by the carbon pricing. However the results of FMC could shed more light into the
details.
Prices Change Import-Export % Utilization

(euros/MWh) (-ve means import)
€ 6.00
5.00%
150.00%
€ 5.00
0.00%
100.00%
50.00%
-5.00%
€ 3.00 0.00%
-10.00% -50.00%
€ 2.00
-100.00%
€ 1.00 -15.00%
-150.00%
€-
-20.00%
NL BE FR DE
∆ Price
% Demand Imported Net Utilization

CO2 Price € 15 per ton

€ 7.00
5.00%
€ 6.00 150.00%
0.00%
100.00%
€ 5.00
NL BE FR DE
50.00%
€ 4.00 -5.00%
0.00%
€ 3.00 BE-FR BE-NL DE-FR DE-NL
-10.00% -50.00%
€ 2.00
-100.00%
€ 1.00 -15.00%
-150.00%
€-
-20.00%
NL ∆BE FR DE
Price



€ 12.00
10.00%
150.00%
€ 10.00
5.00%
100.00%
€ 8.00
0.00% 50.00%
NL BE FR DE
€ 6.00 0.00%
-5.00%
-50.00%
€ 4.00
-10.00%
-100.00%
€ 2.00
-15.00% -150.00%
€-
-20.00%
NL BE FR DE
∆ Price


€ 20.00
5.00%
€ 18.00
150.00%
€ 16.00
0.00% 100.00%
50.00%
€ 12.00
-5.00%
€ 10.00 0.00%
€ 8.00 BE-FR BE-NL DE-FR DE-NL

-10.00% -50.00%
€ 6.00
-100.00%
€ 4.00
-15.00%
-150.00%
€ 2.00
€-
-20.00%
NL BE FR DE
∆ Price

FIGURE 59 RESULTS FROM FMC AFTER CONSIDERING CARBON PRICING
As expected, after implementation of Carbon pricing in the FMC model, the price of electricity in the markets
would go up. Belgium sees the highest price change for prices increasing to €15 and €20 per ton, compared to
the FMC base case with no carbon pricing. The second most affected country is Netherlands. With € 15 per
ton, there is an increase of around € 4.50 per MWh in Netherlands, and an increase of €5 in Belgium. In general
every country sees a price increase of around €4‐€5 per MWh. Still Germany is exporting and the congested
tie‐lines are NL‐DE and BE‐FR.
Chapter: Results
With the price of carbon going up to € 20 per ton of CO2 the pattern of results is similar. Though now the
prices increase in the region is higher – around €5.50 to €6.50. The highest increase in again seen in Belgium
91


and followed by Netherlands at € 6.00. It can be seen that because these countries depend strongly on the

imports they see slightly higher increases in prices as compared to the exporters. Germany is still exporting.
When the prices hit €30, the scenarios begin to change. Germany sees a very high increase in electricity price
– of around €1 per MWh, followed by Belgium at around € 9 per MWh. The lowest price change is now seen in
Netherlands at around €7 per ton. Though still Germany is exporting, mainly the reason for that is good
interconnector that it has with Netherlands and higher flow capacity from DE‐> FR(5000MW), as compared to
FR‐> DE (1700MW). Hence Germany has a good access to the high price areas (NL and BE, as compared to
France.
With further increase in price ‐ € 50 per ton of CO2, the picture looks much different. Now the German prices
shoot up by € 18 per MWh, followed by France at around €14. Netherlands sees a price increase of around € 8
per MWh, which is the lowest among all countries.
The detailed results for each case from every perspective can be checked in the appendix A.19
• Conclusion
It can be concluded from the above results that CO2 pricing though has strong effects on regional price levels.
Netherlands is amongst the least affected countries when it comes to price changes induced by carbon
pricing. With lower prices (around €15) there was an increase of around €4, and with higher prices (€50) there
was a change of around €8. However other countries – most importantly Belgium saw bigger price changes
and Germany gets badly affected when the prices go high.
7.4.5 DECOUPLING OF GERMAN SYSTEM INTO NORTH AND SOUTH BLOCK
Germany was required to be split up into north and south zones in order to study the effect that loop flows
have on the north west European electricity system, that occur due to wind generation in North of Germany
and consumption in the southern industrial demand area within Germany. The PowerWorld model for the
UCTE was used for this purpose. Two new areas were defined out of the current single area. The division was
made along the line shown in Figure 60. The new areas were then used to calculate new set of PTDF’s for the
region. Figure 61 shows the flows after splitting of Germany.
These new PTDF values would be used to understand the effect that these loop flows have on the
interconnector congestion in the North West European region.

FIGURE 60 THE DIVISIONOF GERMANY INTO NORTH AND SOUTH BLOCK

Chapter: Results

FIGURE 61 FLOWS AFTER SPLITTING GERMANY INTO NORTH AND SOUTH BLOCKS
93


7.4.5.1 E FFECT OF W IND GENERATION IN G ERMANY (15,000 MW FROM NÆS)

Current installation of wind generation in Germany is around 21 GW, it is expected to rise to 29 GW by the
year 2010 (www.ucte.org). Wind is highly intermittent and German laws enforce that all wind generation
should be accepted into the grid. Figure 62 shows the share of wind power in the net generation within
Germany.

FIGURE 62 ANNUAL SHARE OF DAILY WIND POWER IN RESPECTIVE DAILY PEAK DEMAND ON E‐ON GRID (GERMANY)
With the fast extension of wind capacities especially in Northern Germany congestion management has
become a serious issue in the North‐Western European electricity grid. Due to power distribution through the
entire European integrated network (UCTE grid) according to relative line impedances, Germany’s neighbors
to the North West, namely Benelux countries, are affected by unintended but inevitable cross border flows
congesting their grids. With the intended expansion of offshore wind capacities in the German North Sea, this
problem is bound to aggravate.
TABLE 20 PTDF VALUES AFTER SPLITTING GERMANY INTO NORTH AND SOUTH BLOCK
Interface % PTDF
BE→FR 9.4
BE→NL ‐9.4
DE‐S→FR ‐0.90
DE‐N→NL 9.4
DE‐N→DE‐S 77.4
As can be seen from the table above 9.4% of all electricity that is supposed to go from DE‐N to DE‐S actually
takes its path through NL. Hence if 20,000 MW of electricity has to go from DE‐N to DE‐S during a storm in
the northern part and operation of the wind generation, 9.4% of this would pass through the DE‐N‐NL tie line.
2500 MW is the capacity, NTC value of this interface. Therefore 1880 MW of this 2500 MW would already be
used up because of German wind energy. This would leave only 620 MW for making trade with other
countries (in the direction DE‐> NL). Also there would be less capacity on the BE‐NL border and also on BE‐FR
border and also on FR‐DE border. BE‐NL border has only a capacity of 1350 MW, it cannot transfer 1880 MW
through. Hence BE‐NL interconnector would already be congested. Hence there is no possibility of making

any trade with any other country. The prices in the countries would stay equal to the prices that would occur
without coupling of networks.
Hence it is concluded that there is significant effect that loop flows from a large market (like Germany and
France) could have on interconnector usage between smaller market like Netherlands and Belgium. Loop
flows because of German wind power are enough to congest the interconnector within other countries. Next
section would discuss the effect of FMC on loop flows because of wind.
7.4.5.2 FMC AND L OOP F LOWS

The relatively large loop flows through the Netherlands and Belgium and France as shown in the previous
discussion due to wind generation within Germany and the law within Germany to consider these flows as
local clearly ignores the physics of the interconnected network.
FMC in present state is not able to deal with the loop flows.

FIGURE 63 THE DIFFERENCE BETWEEN TRANSIT AND LOOP FLOWS (GREEN ARROWS MARK THE TRANSIT FLOWS, GREY
ARROWS MARK THE LOOP FLOWS)
As can be seen from the Figure 63, the green arrows mark the transit flows that occur due to commercial
exchange of electricity between Germany and France (from Germany to France).Please note that there would
be direct flow over the DE‐FR interconnector as well, which is not show in the image above. These flows that
occur in the interconnectors between DE‐NL, NL‐BE and BE‐FR because of commercial flow from DE‐>FR are
termed as transit flows. These flows are all accounted for by using the PTDFs approach – during market
coupling.
The loop flows on the other hand the flows that happen in the whole system due to flows which are assumed
to be local. As can be seen in the picture above, the flow from Germany north to south would also utilize the
networks in NL, BE and FR. However there was no commercial exchange, and hence it was not considered in
the calculation during FMC. Hence FMC would not resolve the issues of loop flows from Germany. Also
interesting is the fact that any other country in North West European region shares its border with every other
country, unlike Germany; hence the issue of loop flows in case of other countries is much smaller.
The only possible solution to this issue is either to consider Germany as two price areas, two independent
markets. If that is the case, then the FMC would be between 5 market areas, and all the flows which are now
considered local to Germany would be from Germany north to south. These flows can then be taken in the
FMC algorithm. The markets would become more efficient and transparent in that situation.
This is a suggestion and might not be acceptable to German policy makers. This however is an important issue
to be discussed with the German TSOs and PXs – in case there can be some other arrangement that can be
Chapter: Results
worked out.

95


8 ACTOR ANALYSIS

Till now the report focused on understanding FMC and its distributive effects on the involved countries.
However, it is important at this point to realize the fact that FMC would have to be implemented in a multi‐
actor environment many of whom might have conflicting interests. The last sections showed that FMC is
indeed an economically efficient method for cross‐border congestion management – it makes most optimal
use of the available transmission capacity while respecting the physical limits of the lines.
This section would focus on researching the actors that would be involved in the process. First step would be
to look at the context in which the present system would be implemented – i.e. very high level understanding
of the market place. Consequently, the section would detail the various actors in the electricity market arena.
After the listing is complete, their interests and positions would be listed. Based on their positions and needs a
framework for analysis of assessing the acceptability of FMC would be outlined. Finally the chapter would end
with detailing the FMC’s effect on the positions of the involved actors.
8.1 GENERAL OVERVIEW
The four countries in focus here are significantly different from other in terms of size, population and
electricity demand and supply characteristics. The table below details some of the important features of the
markets under consideration. The smaller countries NL and BE are also the importers. Net imports for NL
were the highest, underlining the importance imports have for the country. France is the largest exporter.
Germany consumes the highest amount of electricity amongst the four and also produces the highest amount
per year. However the difference in generation between DE and FR are not huge.
TABLE 21 GENERAL CHARACTERISTICS OF THE NORTH WEST EUROPEAN ELECTRICITY MARKET
Installed Annual Electricity Growth Forecast

Area Population
Generation Generation 2007‐20
sq km GW TWh %
NL 41,526 16,570,613 22.1 115 1.8
BE 30,528 10,392,226 16.33 88 1.4
FR 643,427 63,713,926 116.36 482 0.9
DE 357,021 82,400,996 122.59 563 0.3
Annual Electricity Annual Electricity
Electricity Imports Electricity Exports
Consumption Generation
TWh TWh TWh TWh
NL 115.766 94.306 27.346 5.886
BE 92.643 82.391 18.946 8.694
FR 486.187 549.688 8.437 71.938

DE 554.787 570.507 49.407 65.127
8.2 STRUCTURE OF THE ELLECTRICITY MARKETS

AIN
FIGURE 64 THE ELECTRICITY VALUE CHA
The electricity value chain can be described under the following headers:
1. Generation: Refers to geneeration of electricity from coal, gas, nuclear, hydro orr other sources
2. Electricity Trading: Generaators sell energy via market places to sales companies or major resellers. At
places where the generatio on companies are not yet unbundled some generatio on units go directly to
the sales of the generationn company. The price paid by the sales units is determmined in the market
place.
3. Sales: Private persons and industries sign delivery agreements with the differen nt actors at the sales
stage. Prices are regulatedd via various kinds of agreements between sales comp panies and customers.
4. Transmission: The nationaal grids are large high‐voltage networks that transporrt large volumes of
electricity over long distan
nces. National grids are for most part owned by state..
5. Distribution: Regional and local electricity networks transport electricity to the end customer. There
are some large companies coexisting with regional and local network companiees. The networks are
operated by separate legal entities, regardless if they are owned by major poweer utilities,
municipalities or other players.
6. Market Places: Electricity i is traded on electricity exchanges or in the OTC markket. Actors such as
producers, resellers and veery large industrial companies trade on the electricityy exchanges. Some
major actors are both prod ducers and suppliers, and act as both buyer and sellerr on the electricity
exchange. In the OTC market which is outside the exchange, actors trade directtly with one another.
Pricing in the OTC market often reflects expectations regarding the electricity e exchange’s wholesale
price. The import export between national borders take place depending on diffference in the
wholesale prices between countries.
7. Regulators: Electricity marrkets have inherent issues of monopoly and economies of scale there is a
requirement of monitoring g and control from an external agency. Each country h has an agency
committed to making energy markets work as effectively as possible by implem menting various
regulatory instruments. Th his entails safeguarding access to networks, maintain ning sufficient
transparency (access to essential information) and protecting consumers again nst potential
malpractices resulting fromm the (inherent) dominant position of providers.
Chapter: Actor Analysis
In the restructured environment, th here are increasing market actor demands for better power system security
and quality. On the other hand, market
m actors also demand an increase in the pow
wer system limits and
transfer capacities. These demandss work in opposite directions. Considering that the reesearch deals with four
97


countries a detailed list of actors would be prepared. The next section would present the list of all the actors
NL, BE, FR and DE.
8.3 LIST OF ACTORS
TABLE 22 LIST OF ALL RELEVANT ACTORS FOR THE NORTH WEST EUROPEAN REGION
NL BE
Regulator Dienst uitvoering en toezicht Energie Commission de Regulation de l’Electricite et du Gas
(DTe) (CREG)

Power Exchnage APX BelPex

Generation Large Scale Generation: Electrabel SA
Delta
Electrabel
E.ON
Essent
Nuon

Trade Generation and Supply Generation and Supply
APX Belpex
Imports/Exports Imports/Exports
Long Term Contracts Long Term Contracts

Transmission Tennet ELIA

Distribution Cogas Private companies: 1
Delta Municipality companies: 4
Eneco Mixed Inter‐municipality companies: 15
Essent Pure Inter‐municipality companies: 8
NRE Network
Nuon
ONS
Rendo
Westland Energie

Retail, B2B Cogas Many
Delta
Eneco
Energiebedrijf.com
Essent
Intergas
NRE Network
Nuon
ONS
Rendo
Westland Energie

FR DE
Regulator Commission de Régulation de l’Electrité Bundesnetzagentur für Elektrizität, Gas,
Telekommunikation, Post und Eisenbahnen
(BNetzA)

Power Exchnage Powernext European Energy Exchange (EEX)

Generation Electricite de France Berliner Kraft und Licht AG
Energie du Rhône E.ON Energie AG
Société Nationale d’Electricité et de Thermique ENBW Energie‐Versorgung Schwaben
Société Hydroélectrique du Midi (SHEM) Hamburgische Elec‐werke AG
Electrabel (Suez Group) Neckarwerke Suttgart AG (NWS)
RWE Energie AG
STEAG AG
Vattenfal Europe AG

Trade Generation and Supply Generation and Supply
Powernext EEX
Imports/Exports Imports/Exports
Long Term Contracts Long Term Contracts

Transmission Reseau de Transport Electricite (RTE) EnBW Transportnetze AG
E.ON Netz GmbH
RWE Transportnetz Strom GmbH
Vattenfall Europe Transmission GmbH

Distribution Electricité de France (EDF) More than 900 distribution companies
Electricité de Strasbourg (ES)
Gaz et Electricité de Grenoble (GEG)
Usine d’Electricité de Metz (UEM)
Vialis (Colmar)

Retail, B2B Energie du Rhône‐ sales RWE PLUS Citiworks
ENDESA France Electrabel (via SHEM) E.ON Sales & Trading
CNR (Main shareholder Electrabel 49,97) EDF Trading
SNET (Main share holder Endesa 65%) Electrabel Deutschland
Total (via Gas and Power North Europe) EnBW Ges. für Stromhandel
Vattenfall Europe Endesa Trading
Enercity Trade
EOS Avenis
GETEC Energie
MVV Energiehandel
NUON Energy Trade & Wholesale
RWE Trading
Trianel European Energy Trading
More details on the actors can be found in attached appendix A.20.
It is true that most of these actors have different interests and goals. However it is possible to consider them
under groups –generators, consumers, traders, regulator, system operators and power exchanges. Their class
interests are similar, though it would be in favor of their own citizens or industries. The next section would
look at the interests of these groups.
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8.4 INTERESTS
8.4.1 GENERATORS
Generators wish to maximize their profits. It is possible to achieve in two ways – by volume or by price. Price is
usually decided by the market (assuming little or no market power with the generators), and hence cannot be
changed at will by the generator. Hence most important measure is how much of the installed capacity is
being utilized at any given instance. Another parameter that can be monitored is the producer surplus.
8.4.2 CONSUMERS
Consumers can also be categorized further into domestic and industrial. However it can be said that all
consumers want the price of electricity to be low. This is also reflected in the consumer surplus, but
considering that perception also has a role to play in the consumer satisfaction it was decided to consider the
change in price as the indicator for consumers preference towards a system.
8.4.3 REGULATOR
Regulator is a government agency committed to making energy markets work as effectively as possible. This
entails safeguarding access to networks, maintaining sufficient transparency (access to essential information)
and protecting consumers against potential malpractices resulting from the (inherent) dominant position of
providers. Consumer surplus is important from their perspective as this reflects how beneficial the energy
markets are to the end consumer.
8.4.4 GOVERNMENT
The government has an high level goal of ensuring goodwill of people. They have to listen to both producers
and consumers at the same time. At times these two goals contradict each other. However it was decided to
consider net welfare as a measure of acceptance for a market method.
Another issue that government is concerned with is the correct investment signals. When a flow‐based
transmission model is used for regional capacity allocation purposes, the market will choose the most
economically efficient cross‐border trades by itself. The flow‐based method will reveal, in a transparent way,
the location of the limiting constraint. This facilitates an efficient investment foundation for the transmission
infrastructures in the entire region.
8.4.5 TRADERS
From the market actor’s point of view, it is desirable to be able to trade with any other actor in any system and
to rapidly react to changed market conditions. In cases with limited transmission capacity, knowledge about
the actual transfer capacity and consequences for own decisions are required. Such information should be
simple enough to be understood without too detailed knowledge about the dependence and interactions
between the transmission corridors
8.4.6 TSO
The TSOs define the available transfer capacity between regions before the market operators (MO) calculate
the balance prices and exchange volumes. The given transfer capacities will therefore impact the output from
the activities of the market participants. The TSOs are constantly under pressure to give as much transfer
capacity as possible. Since the transfer limit calculations directly affect the market actors, the TSOs are to a
larger extent requested to justify any limits. Different flow conditions may cause different system phenomena
to be limiting even on the same set of lines. The different transfer limits will vary and for an overall system
optimization the set of limits cannot be calculated accurately in advance. With heavy power transfer between
neighboring control areas, the consequences of incidents are more wide‐spread. System wide information is
needed for transfer limit calculation and information exchange between SOs are very important for the
quality of the results.

8.4.7 POWER EXCHANGES
The power exchanges play an increasing important role in the electricity markets post liberalization. True
competition can only be introduces if all market participants trade energy via an implicit market. The main
interest of PX is to maximize their profits by maximizing market participation and hence fostering liquidity. If
the new system is likely to increase the inter‐country trade taking place via the power exchanges then it can
be said that the PX would support it. The secondary aims of power exchanges are
• increasing competition by creating price transparency and implementing the European single
electricity market.
• supporting the liberalization of the different European Electricity Systems
• dealing with the issue of international trading, with special emphasis on providing a market solution
to the congestion problems.
TABLE 23 INTERESTS OF THE ACTORS AND THE QUANTIFYING/QUALIFYING PARAMETER
Actors Interest Importance Quantifying Parameter
Generators Profits Minimization of cost of % change in producer surplus

generation

% of installed capacity utilized
Consumers The electricity price % Change in electricity price
Regulator For a more fair and efficient To ensure fair operation % Change in Consumer surplus

system of market
Government Welfare of the citizens % Change in Net Welfare
Traders Profit To ensure that arbitrage Complexity of system

possibilities do not exist
Also they like complexity
More risk, more opportunity

to arbitrage and earn profits
Power Profits through maximization Design of market Liquidity

Exchanges of traded volume algorithms
Facilitate the whole

integration process
TSO System Security Ensure reliability of Security margin

system
Method of calculation
8.5 POSITION OF ACTORS
The TSO, regulators, government, traders and consumers have already been covered in detail in the sections
on interests and market structure. The other interesting players that need to be further detiled are PXs and
the strategic generation companies.
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8.5.1 POWER EXCHANGES
Currently there are 4 power exchanges in North West European region – one in each country. The largest
power exchange is in Germany (EEX). It handles both spot and futures market for electricity. Belpex is the
newest one of the lot. The start of the day‐ahead trade of electricity on Belpex started from 21st of November
2006. The Powernext, Belpex and APX are participants in setting up market coupling between the three
countries. Integration of EEX would be crucial for success of FMC. The figure below details the current trades
and prices on the four exchanges.
APX NL
Spot Price Yearly Average (€/MWh):: € 57.3
Electricity Volumes [spot] (TWh): 19
NL
DE
Belpex
Spot Price Yearly Average (€/MWh): 46.0
Electricity Volumes [spot] (TWh): 1 EEX
BE Spot Price Yearly Average (€/MWh): 50.8
Electricity Volumes [forward] (TWh): 1044
Powernext
Spot Price Yearly Average (€/MWh): 47.2
Electricity Volumes [forward] (TWh): 83 FR

FIGURE 65 PRESENT POSITION OF THE POWER EXCHANGES
8.5.2 GENERATORS
The North‐West electricity market represents 1,1 million GWh of electricity consumption, 42% of the EU 25
8
electricity market . There are many generation companies in operation in the region. The detailed list and
statistics could be looked up in the previous section on the list of actors or the appendix A.20. For the
regulator and the government of Netherlands it is important to understand who the possible monopolists
would be in the regional market after integration. Hence The most important players in the market were
identified and data was collected.
TABLE 24 SHARE OF GENERAION COMPANIES IN THE TOTAL GENERATION WITHIN NORTH WEST EUROPEAN REGION
Country Firms capacity % share in % share in four

national market countries
MWe

Netherlands E.ON Energie AG 1813 10% 0%
Electrabel SA 4563 26% 2%
Essent Energy Production BV 3305 18% 1%
Nuon (Reliant) 3578 20% 1%

Belgium Electrabel SA 12587 83% 6%

8
http://www.ergeg.org/portal/page/portal/ERGEG_HOME/ERGEG_RI/ERI/Central-West

France Comp Nationale Du Rhone 3068 3% 1%

Electricite de France 102089 90% 38%

Germany Berliner Kraft und Licht AG 1096 1% 0%
E.ON Energie AG 28743 24% 11%
ENBW Energie‐Versorgung 9360 8% 4%
Hamburgische Elec‐werke AG 4150 3% 2%
Neckarwerke Suttgart AG (NWS) 2181 2% 1%
RWE Energie AG 25625 21% 10%
STEAG AG 4302 4% 2%
Vattenfal Europe AG 11688 10% 4%

FIGURE 66 MAIN STRATEGIC ACTORS FOR THE NORTY‐WEST EUROPEAN REGION (FROM VATTENFALL ANNUAL REPORT
2006)
Looking at the above figures it is visible that EDF, E.ON, RWE, Electrabel and EnBW are the biggest players
even within the regional markets. Hence is was important to look into the detail of what their present
situation was within the region. The next section would detail the information on these companies. Essent
was also considered in the analysis being the big local company to see how it compares with the bigger
European giants.
8.5.3 TSOS
Using the PTDF capacity model increases planning certainty for TSOs and creates the possibility of
distributing cross‐border capacities following the submission of bids, taking into account the willingness to
pay for power in the various zones and the load flows resulting from the market result. However at the same
time they would be forced by the regulator and power exchanges to reduce the reliability margin. Hence they
could be both for and against FMC.

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8.6 STRATEGIC GENERATORS

TABLE 25 DETAILS ABOUT THE MOST STRATEGIC PLAYERS IN THE NORTH WEST EUROPEAN MARKET
E.ON RWE EnBW

Country Germany Germany Germany
Listing info Listed (free float: 85%) Listed (free float: 67%) Listed (EDF owns 45.01%)
Electricity sales 2005, 404 (of which, Europe 367) 299 107
TWh
Number of customers, Electricity: 22 Gas: 8 Electricity: 20 Gas: 10 Electricity: 5 Gas: 0.4
millions
Primary products Electricity, gas (upstream, Electricity, gas. (Water Electricity, gas, (heat,
downstream) operations are being waste, water)
divested)
Primary markets Central and Eastern Europe, UK, Germany, UK, Central and Germany, Central and
Nordic countries, Italy Eastern Europe Eastern Europe
Strategies • To be the world's leading • Focus on electricity and • Focus on core business
power and gas company gas • Strengthen the German
• Integrate and strengthen • Focus on core markets operations. Ambition to
electricity and gas operations • Divestment of water be number three in
• Expand in gas production operations in the USA German energy market
• Organic growth and the UK • Advance positions in
• Focus on new markets, such • Organic growth Central and Eastern
as Russia and Italy Europe
• Focus on value creation

EDF Essent
Country France Netherlands
Listing info Listed in 2005 (85%‐owned by French state) Unlisted
Electricity sales 2005, 628 49
TWh
Number of customers, Electricity: 40 (Of which, Europe 37) Electricity: 2.5 Gas: 1.9
millions
Primary products Electricity, gas Electricity, gas, heat
Primary markets France, UK, Germany, Italy, Eastern Europe Netherlands, Germany, Belgium
(Asia, USA and Africa)
Strategies • Strengthen positions in Western and • Aspiration to become a leading utility in
Central Europe northwestern Europe
• Divest non‐core businesses (e.g., Brazilian • Safeguard the company's independence
assets) and handle demands on transmission grid
• Improve productivity and reduce costs undbundling. (In early 2007, plans were
• Invest in gas assets in order to be able to announced for a merger with the Dutch
offer customers both electricity and gas company Nuon)
• Look for collaboration with other
companies in northwestern Europe,
primarily in the Netherlands

It would be important for DTE and the Dutch ministry of economic affairs to closely monitor the behaviour of
EDF, E.ON, RWE, Electrabel and EnBW. The local company Essent is holding almost 20% of the local market
though from a regional perspective it is a very small player.

8.7 QUESTIONS RAISED BY THE ACTORS
Also during discussions many questions were raised by the involved parties. Which though have not been
answered in the report are still worth mentioning here.
8.7.1 REGULATOR
• How would you calculate the transmission capacities, when 7 different TSO’s are involved?
• What about the aspects of information exchange & Transparency?
• The sensitivity of the system is very important.
8.7.2 TSO
• How would it be able to work out one technical model when 7 TSO’s with different standards on
information have to collaborate?
• Would it lead to a more conservative estimate than the present margins?
• What information is secret and what is open? One solution is creation of a supranational body that
controls the system.
• Going to one supra‐national TSO might jeopardize their existence
• TSOs always want to maximize the reserve to be safe. Negotiations may be get one sided – if system
is very sensitive to the information that TSO’s have monopoly over.
• Wish to have more power on allocation of capacity. Should the importance of Power Exchange be
more or less?
• Issues of uncertainty about the future
8.7.3 POWER EXCHANGE
• Currently PXs are partly owned by the TSOs, would it be still feasible under FMC?
• Is there a need of a central auction office as suggested in OMC?
• If there is a central office, what happens to their existence?
8.8 RESULTS FROM FMC
The final section of the actor analysis chapter would populate the interests matrix that was composed
previously with results from the FMC base case. The FMC base case was already discussed in detail in the
chapters on methodology and results.
TABLE 26 ACTORS PERCEPTION OF FMC
Actors Quantifying Parameter Netherlands Belgium France Germany

Generators % change in producer surplus ‐29.18% ‐20.86% 3.52% 6.30%
% of installed capacity utilized 62.06% 68.64% 69.43% 62.24%
Consumers % Change in electricity price ‐15.85% ‐11.04% 1.74% 3.10%
Regulator % Change in Consumer surplus 1.56% 1.58% ‐0.53% ‐0.83%
Government % Change in Net Welfare 0.12% 0.09% 0.00% 0.01%
Traders Complexity of system
Power Exchanges Liquidity
TSO Security margin
Method of calculation
As can be seen from the table, the Dutch consumers, regulators and government should be pro FMC. The
generators would lose some business due to cheaper imports from France and Germany. Belgium should also
be supportive of the idea as it has gained in almost every front. In France there was a small increase in the
prices (1.74%) but it was compensated by additional income from exports. The net welfare gains in France
remained almost zero. German generators would be supportive, and not the consumers – though there would
105


be an microscopic positive change in the net welfare. The net welfare does not show such large change mainly
because the gain to the consumers is compensated by loss to the producers and vice‐versa.
At the same time it must be noted that FMC of ETSO‐Europex proposal, offer more security to the producers
and consumers since the implicit auction mechanism will ensure congested lines to be fully utilized. On the
other hand, explicit auctions of “options” of international exchange flows do not offer the same security to
TSOs, since the owner of the “options” can decide at the last moment not to use it. Hence from this
perspective FMC should be favored by all producers, consumers and TSOs.
8.9 CONCLUSIONS
In the conclusion it can be said that the negotiation arena is very complicated with large number of actors.
Multiple actors with varied interests and the system under consideration is complex – hence it would be a
problem to get everyone to agree on any issue. The most important consideration identified was that of
strategic behavior from large generation companies. The large French and German generators might be able
to have monopoly position in the North West European region. It is important to check the behavior. Other
important aspect is of co‐operation between the 7 TSO’s, each with own system codes and standards. The
success of the implementation rests almost entirely on the success of the integration of the technical models
– as PTDFs play a very important role in the convergence and results of the market. Also the technical model
is required to calculate Fmax and Fref the most important constraints governing the market outcome.

Section 4: Market Design Issues
The final section of the report sums up
the research by identifying and

delineating the risks and issues
associated with implementation of a
new market design in a multi‐actor
setting. The main focus would hinge
around the institutional and
informational aspects
107


9 MARKET DESIGN ISSUES

Although, ETSO and EuroPEX agreed on FMC as one way of cross‐border congestion management, the
proposal provides a list of still outstanding issues, such as the development of a simplified transmission model
and its consequences, the development of the coordinating algorithms, the definition of performance
measure etc. There is need to dig further into what we do not know and what we need to know aspect of
market design like FMC. Having answered some of the economical and technical questions in the previous
chapters now the focus is shifted towards looking more at the issues that need to be addressed in case
government decides to go ahead with FMC.
9.1 LEGAL AND ORGANIZATIONAL ISSUES
Implementing any sound market based mechanism in coupling separate markets raises some crucial
9
organizational and legal issues whose answers are necessary prerequisites :
• Compatible legal framework must be enforced in each market to be coupled in order to ensure fair
th
conditions to all players (11 Florence Forum requirement for Switzerland)
• China walls must be installed in every remaining vertically integrated firm (especially with
large German producers and French behemoth EDF)
• Non discriminatory behavior of TSOs and MOs(PXs) must be guaranteed and externally
audited
• The discrepancies of the current transparency of each market to be coupled must be reduced
• To avoid the apparition of “gaming” opportunities for the better informed market actors,
the market transparency must be levelised in the whole integrated market. For more refer
to chapter on actor analysis.
• To improve the use of interconnectors and reveal market prices (or one common price,
when the interconnectors are not congested) reflecting the actual situation of the electrical
system, the publication of information has to be improved and harmonized as regards
notably:
• Access grid data: Forecasted interconnection capacities, forecasted and real‐time load
level
• Generation data: Forecasted availability of generation units, actual generation by
market time unit
9.2 TECHNICAL ISSUES
Implementing the ETSO/EUROPEX model raises some important technical issues that will take time to be
fully solved:
• The insufficient coordination between TSOs
• The global approach model to determine the capacities requires a very strong operational
coordination and a very detailed information exchange process between all the involved
Chapter: Market design issues
TSOs (technical systems actually exist but are they fully used?)
• The determination of the PTDFs matrix
• What is the optimal zonal segmentation of the regional network?
• The interaction between TSOs and PXs

9
http://ec.europa.eu/energy/electricity/florence/doc/mini_fora/milan/cre_issues.pdf
109


• It is not yet demonstrated how it can work in order to guarantee simultaneously efficient
trade and operational safety of the grid
• The determination and the operational working of the PXs’ clearing algorithm
• Harmonization of the respective time schedules for bidding, harmonization of the respective
PX’s legal statute, etc.
• If more than two PXs are involved, the complexity of the clearing algorithm is strongly
increased (cf. Belpex project with 3 PX)
• The current unequal level of liquidity of the existing PXs
• In some regions, almost all the market players expressed their strong concerns about the potential
impact on the wholesale PXs prices of allowing PXs to manage suddenly a large amount of
interconnection capacities
The most recent ETSO paper (Regional Flow‐based allocations State‐of‐play, March 2007, www.etsonet.org)
has outlined the following issues in its paper:
9.3 MARKET RELATED ISSUES
9.3.1 TRANSPARENCY TOWARDS THE MARKET
In an NTC‐based allocation mechanism, an Available Transmission Capacity (ATC) is given to the market, and
the market actors send their bids for parts of this capacity to the allocation entity. In case of flow‐based
allocation, there is no such thing as an ATC between two control areas. What is available is the maximum
allowable flow on certain branches (Fmax) and an estimate of the flow that is already present at those branches
prior to the allocation (Fref). Although evolving from an NTC‐based market coupling to flow‐based market
coupling is rather smooth for market participants (they are still buying energy from and selling energy to their
local power exchanges), this is a completely different situation when evolving from NTC‐based explicit
auctions towards flow‐based explicit auctions. In fact, the main challenge of flow‐based allocation is to find
the proper balance between safeguarding the network security on the one hand and facilitating the market,
by providing a transparent allocation mechanism, on the other hand.
9.3.2 ECONOMIC SIGNALS TO MARKET PARTICIPANTS AND SHARING OF CONGESTION INCOME
Market actors with commercial exchanges between two adjacent control areas with uncongested tie lines,
can contribute to congestions somewhere else in the grid. One of the main advantages of flow‐based
allocation in a regional setting, is that this effect is taken into account during the allocation phase. In this way,
low‐priced bids between two control areas of which the interconnections are not congested have to compete
with, amongst others, the high‐priced bids between two control areas with congested interconnections,
according to their contribution to the congestion.
9.3.3 LIABILITIES OF TSOS AND POSITION OF INDIVIDUAL REGULATORY AUTHORITIES
In principle (given the physical laws of the system) any commercial transaction will use capacity on each
interconnection of the interconnected system. Virtually, one could imagine that if a certain TSO offers 0 MW
(or an unrealistically low capacity) on some interconnections in order to cope with congestions in its Control
Area or on its interconnections, all additional transactions in the whole region and all capacities would be
blocked simultaneously. Appropriate revenue distribution methods among TSOs and proper political,
regulatory, and TSO coordination should prevent such situations to occur.
9.4 TECHNICAL IMPLEMENTATION ISSUES
9.4.1 REGIONAL BASE CASE
To calculate the flow‐based parameters (PTDF, Fmax, Fref) as accurately as possible, a common model of the
grid, with predicted generation and load should be prepared. A part of the maximum allowed flow on the

critical branches is already used (i.e. prior to the allocation) by so‐called already‐occupied flows that can
consist of the following components:
• ‘natural flows’ (cross‐border physical flows that will always occur, even when there is no
scheduled commercial exchanges between areas); flows that result from sources/sinks that
are located in a single control area
• commercial exchanges resulting from firm nominations in previous auction rounds
• flows caused by exchanges between sources and sinks that are not located in the region that
is participating in the flow‐based allocation
• flows caused by exchanges between areas where the source is located in the region that is
participating in the flow‐based allocation whereas the sink is outside, and vice versa.
The base case should be representative for the situation/day/time at which the actual allocation should take
place. It is evident that there is a lot of uncertainty involved in creating such a base case. To quantify this
uncertainty, a thorough testing should be applied.
9.4.2 PHASE‐SHIFTING TRANSFORMERS
Some of the phase shifters installed at his moment, or to be installed in the (near) future, are applied in
interconnections. Phase‐shifting transformers offer the possibility to control the active power flow through
the interconnection in which it is installed. Naturally this has an impact on the flows in the vicinity of the
phase shifting transformer too. Therefore, the flow‐based parameters (PTDF, Fref) are influenced by the
operation of phase shifters. In the 'classical' formulation of the flow‐based allocation, the allocated quantity is
the only control variable to optimize the market value. A limited range of tap positions of phase shifters could
be used as an additional control variable.
9.4.3 NETWORK REPRESENTATION
Currently a control area is represented by a single node that is connected to neighboring areas by a single
cross‐border transmission link. It is evident that this is only a rough approximation of the physical reality. The
translation of the grid in the representation that will be used during the flow‐based allocation is a key issue for
the TSOs. The grid representation must be such that the network security is guaranteed, even in the case of
contingencies, but still results in a transparent mechanism for the market actors. Thorough testing should
reveal for the TSOs whether a chosen grid representation in the flow‐based allocation is sufficient to
safeguard the network security.
9.4.4 GENERATION REPRESENTATION
The exact distribution of generation within an area is not known exactly ex‐ante. This means that TSOs or
auction offices cannot know which power plant will be used to serve a requested capacity towards another
area. This is one of the major sources of uncertainty when estimating and assessing future grid situations.
9.4.5 DEFINITION OF FLOW‐GATE CAPACITY (FMAX)
This issue is closely related with the network representation that has been chosen. In case that the network is
represented as a single node that is connected to neighboring areas by a single cross‐border transmission link
the maximum allowed flow between two price areas is referred to as border capacity (BC) or flow‐gate
Chapter: Market design issues
capacity. Such a border capacity is an aggregated value and has no direct relationship with the physical
capacity of a transmission line. Hence computation of the Fmax is an issue. In present case the border capacity
is the aggregated value of the cross‐border flows when maximum exchange between two neighboring, taking
the n‐1 security into account, is applied.
In case that a more refined model, that allows multiple nodes per TSO or control area, is implemented, the

Fmax on the critical branches interconnecting those nodes can be made explicit therefore adding more
accuracy and transparency to the system.
111


9.4.6 TYPE OF BIDS
In a market‐coupling environment, bids for the purchase or sale of energy refer to the market participant’s
price area. In an explicit auction environment, in case of bilateral bids, the market participant specifies both
the source and the sink. In case of a flow‐based allocation mechanism, in a regional setting, it is even possible
that market actors specify a source and sink in, electrically, non‐neighboring countries.
9.5 POSSIBLE SOLUTIONS
The legal and organizational issues need to be resolved by dialogue between the involved countries. One
possible solution could be formation of a supra national entity (similar to the one proposed by Germany’s
Open Market Coupling market design) that serves as auctioning office. Also to sort out the need of sharing of
information and transparency between TSO’s there can be two solutions:
• Setting up of a supra national entity. It would be an effective solution however may not be
acceptable to the TSO’s. A supra national entity would diminish their importance and might in the
long run jeopardize their existence. However it is possible to implement this with clear cut discussion
on duties and responsibilities at national and regional level.
• Technology: Information technology lowers transaction cost. Recent rapid technological advances
should be able to settle the issue of complexity. In the past few years, rapid developments of
advanced metering, two‐way communications and Internet‐based information technologies have
clearly set the trend for lowering market transaction costs. Right technology solutions might be able
to alleviate, if not completely solve the issue of information sharing and transparency.

In conclusion it can be said that the shift from current system to the new system would not be easy, however
considering the benefits it should be worth it. Further integration plans with UK and Norway would also be
bolstered from this experience with integration with German market.

10 CONCLUSIONS

What are the impediments to and implications of implementing Flow‐based Market Coupling as a
Congestion Management Mechanism in the North West European Countries?
Current research was undertaken to provide answer to the above mentioned question. The basic underlying
mechanism of operation of FMC was studied – using a neo‐classical economic approach. Once the operation
was understood a model was created to study its impacts on national and regional level. Then model was used
to understand the effects on national and regional levels for different “what if “scenarios.
The research hinged around development of decision support model which would enable the policy maker, in
case of present research the Ministry of Economic Affairs of The Netherlands, to understand the implications
of FMC to Dutch electricity supply.
A decision‐support model for evaluating the “implications of” implementing Flow‐based Market Coupling for
alleviating the issue of interconnector congestion among European countries was created as the outcome of
research efforts.
Second part of the question was on understanding “impediments to” implementing FMC. This was studied
using the actor analysis and literature survey on market design.
The conclusions are divided into sub sections to discuss each part individually:
10.1 SYSTEM BEHAVIOR
• How sensitive is the system for the choice of a specific set of PTDFs?
PTDFs play an important role in the market outcome from the FMC. However calculation of PTDFs
depends only on the topology of the network. UCTE is composed of the highly meshed system of 24
European countries consisting of some 200,000 km of 400 and 220 kV lines. Installation of a new tie
line between countries like NL and DE, have small impact on the topology of the system as a whole.
Hence there is only a minor change on the PTDFs with installation of new tie‐line. Secondly, though
the markets do depend on the PTDFs, the dependence is not as strong so as to get affected by
change on PTDFs in its third decimal. Hence it is possible to be certain that the TSOs won’t be able to
guide the market results. Markets could still be efficient, though PXs might be owned by TSOs, as in
case of NL.
• What is the effect of constraints on the system? Could it lead to a less optimal outcome with respect
to optimizing market value?
Fmax has an important role to play in the market coupling algorithm. Congestion of one line has
impact on the whole region. DE‐NL tie line constraint also has impact on the welfare gains within
Belgium and congestion on BE‐FR tie‐line has impact on welfare gain in NL. Though this issue was
not represented in the simulations that well, mainly because of presence of one low price country
next to a high priced country (DE for NL and FR for BE). However it becomes more and more
important to consider regional perspective for planning further investment in transmission capacity
(section 7.4.2). The system could lead to less optimal outcomes compared to the hypothetical case of
Chapter: Conclusions
implementing FMC in the current situation only with very extreme low values for tie‐line capacities.
With the current values, the outcomes lead to benefit for all countries, in terms of welfare. The prices
were lowered significantly in NL and BE because of imports. There was a marginal increase in prices
in FR and DE markets because of exports.
113


Policy makers may want to reserve a minimum amount of capacity on certain flow gates with respect
to the investments they made regarding those flowgates in the past or with respect to security of
supply. It should be mentioned here that if countries reserve huge capacity on a certain flow gate –
this might prevent other countries from importing as well (refer A.11.2). While at the same time drop
of prices in their own countries might not drop as much, as there is no netting of flows on a reserved
capacity. So reserving capacity on interconnector is not a good idea if the markets are working well,
it disables the markets from performing well.
• What will be the net benefit of future network investments on available interconnector capacity and
the Dutch electricity price level?
Tie line capacity has strong effect on the prices in a country. As was seen with installation of 2000MW
on the DE‐NL border and BE‐FR border, the prices change is higher with installation of more capacity
on the congested tie‐lines. However it was also noted that installation of additional 5000MW has
very small additional benefit for the region. The tie line is not fully utilized and hence is not
recommended.
o What would be the effect on the price level within Netherlands?
The prices drop till the capacity is increase to a little above 2000MW on the Dutch German
border after which it does not have any significant effect anymore.
o Would it lead to more transits and loop flows?
Loop flows were not modeled implicitly in the model, so it is not possible to predict effect on
them. It is not possible to resolve individual transit flows through the interconnectors, as the
simulation only gives the net sum of all flows over the interconnector. However the net
flows occurring over the interconnectors increase with increasing interconnector capacity –
hinting at higher transit flows. However it must be noted again that transit flows are not
necessary eating up the capacity ‐ with FMC they also ease up the congestion if they are
flowing in opposite direction to the congestion.
o How would the actors perceive this change?
The effect of net capacity is different of different actors. The generators in exporting
countries like FR and DE would be for it, and so would be the consumers in importing
countries. Consumers in FR and DE should have only marginal interest in the issue as the
price change for them is minimal. The generators in NL and BE would be concerned because
of dropping prices and hence they might not be dispatched.
10.2 SECURITY OF SUPPLY
• What is the risk that FMC would lead to a net reduction of the import capacity?
Import capacity as concept does not exist in FMC. Fmax is defined for each tie‐line, but it is possible to
the transactions to net over this line and lead to higher imports than what Fmax value is. It is not
possible to answer this question on basis of the current research, as it requires also consideration of
Fref..The data is required to answer these questions further; it depends on the long term (monthly and
yearly) contracts and consideration of other natural flows that occur in the system. Further work with
a more detailed model and Monte‐Carlo simulation might be able to shed some light on this issue.
(section 9.4.1)
• How may FMC interfere with security of supply in the Dutch electricity system?

Security can be defined in terms of availability and reliability. The reliability aspect cannot be
answered from the present research – it depends on information sharing between PXs and TSOs in
North West European region. However it is possible to talk about the availability aspect. As seen
from all simulation results, Netherlands becomes dependant on the foreign imports. Hence in the
long term high priced local generators would either have to shut down or move their generation
capacity to other countries – FR and DE. However this risk of dependence can be mitigated by
diluting dependence on one particular country. Interconnections with Norway and UK would
mitigate the effect of market power from a single large exporting country.
10.3 WELFARE EFFECTS
• What could be the effect of such system on national welfare as the system optimizes regional welfare
in terms of market value?
It was seen in all the run cases that Net Welfare for each country goes up (except for marginal drop in
France). However it must also be mentioned here that the objective function was minimization of
total cost of generation and not net welfare. It is possible that results would change with a different
objective function. Refer to section 7.2 Current Situation vs FMC.
• What is the effect of the presence of four national systems on the distribution of the welfare for each
of the four systems?
The effect on not welfare was not very pronounced, because net welfare was sum of increasing
producer surplus and decreasing consumer surplus or vice‐versa. However there were substantial
changes in producer and consumer surplus. The producers in exporting countries derived surplus
gains from FMC and so did the consumers in importing countries – compared to the current situation.
• How many incentives will FMC give to increase electricity production from renewable energy
sources?
This is an important question to be answered; till date renewable technologies are expensive when
compared to conventional methods of electricity generation. Even with extremely high carbon prices
(€50 per ton – which is extreme compared to the current carbon prices which are hovering at less
than a euro per ton) most of demand was satisfied by conventional sources. Though it does lower the
dependence on polluting technologies like Lignite based condensation plants, effect on dispatch of
renewable sources is very marginal. Hydro is almost always dispatched, but it is not present within
Netherlands. Wind is intermittent and cannot be described on this high level model. Bio‐mass based
technologies are too expensive and would require support of government to be able to make
profitable business.
10.4 IMPLEMENTATION ISSUES
• What is the effect on transparency?
The FMC is based on PTDFs and the maximum allowable flow on certain branches (Fmax) and an
estimate of the flow that is already present at those branches prior to the allocation (Fref).
Although evolving from an NTC‐based market coupling to flow‐based market coupling is rather
Chapter: Conclusions
smooth for market participants (they are still buying energy from and selling energy to their local
power exchanges), this is a completely different situation when evolving from NTC‐based explicit
auctions towards flow‐based explicit auctions, especially between Germany and Netherlands, and
also on Germany and France border. In fact, the main challenge of flow‐based allocation is to find the
115


proper balance between safeguarding the network security on the one hand and facilitating the
market, by providing a transparent allocation mechanism, on the other hand.
The PTDFs need to be calculated by close cooperation of involved TSOs. PTDFs are not very sensitive
to changes of an order of magnitude 1000MWs, hence it is not possible to impact them significantly
single‐handedly for any TSO. PTDF’s play an important role in the market outcomes and hence
should be closely guarded by the respective regulating authorities.
From transparency point of view – the authorities should request publication of the following
parameters:
a. Optimization Parameters: Publication of the optimization algorithm details namely the
objective function, constraints and process for resolution of non‐convergence of the
optimization process.
b. Prior to trade publications: Publication of PTDF and border capacities for the day ahead
trade
c. Post trade publications: Publications of market outcomes from the day ahead market.
• Would some kind of European central decision making unit be required? (e.g. to decide about the
distribution of capacity on the national borders).
It is important to have higher degree of co‐operation between the involved actors. Hence it is a good
option to form a central agency to take care of issues on the regional level. A central arena to address
only the issue of FMC can be set up to be able to address the issues on national level. For decision
making in complex networks – it is important to have a guiding authority to direct the negotiations.
Overwhelmed with the complexity of the problem relative to the current understanding and success
of the Market Coupling, the actors might fall into defensive positions and might not coordinate well.
There is no common hierarchy to define an authority to set overall direction and resolve differences
in such situation. The first step of the agency would be to study in detail the impact and implications
– which could be better performed with access to real data. Subsequently follow up with the ideas to
address each issue that pops up from the analysis – like distribution of congestion rent, payment to
the actors that make loss by partially taxing those who get the benefit. This way it would be possible
to earn acceptance from all actors towards FMC. It can be seen that theoretically FMC is a better
system at utilizing the system, and hence obstacles to its implementation need to be resolved
through negotiation and collaboration – a central agency solely devoted to this end would be an
intelligent move to speed up the process in a neutral and comprehensive way.
• What about gaming opportunities because of strategic actors?
There are large generation companies in France and Germany, which also own part of transmission
lines. They own significant % of generation while considering regional generation in North West
European region (namely Electricite de France, E.ON Energie AG, RWE Energie AG). These
companies could abuse this market power in a coupled environment. It is important for the
regulatory and competition agencies to observe their behavior. It is also imperative to decouple
these companies from the transmission ownership to level the playing field.

11 LIMITATIONS AND RESEARCH RECOMMENDATIONS

The final chapter would discuss the limitations of the current study and possible areas that can be researched
further.
11.1 LIMITATIONS OF THE STUDY
This study focused on the impact of FMC on the North West European considering the effect on electricity
prices, welfare and use of installed generation and tie‐line capacity. It aspired to offer answers to the effect
that FMC would have on the various actors and on national and regional level. It also aimed to understand the
network of actors that would be affected by implementation of this system. It aimed to give study whether
FMC would deliver what it promised and what the possible caveats may be. However there were issues of
information. It is not possible to get detailed information on many aspects of the mode – as the information is
not public. Cost of generation data required for obtaining the supply curves is considered as classified, as their
bidding behavior depends on it. Information of Fmax and Fref is not calculated or published yet. The PTDFs are
also not available from the public source. Even the data on demand and supply that is available is highly
volatile within every time frame – be it within a day, varies from season to season and from country to
country. Hence, during the deployment of this study required making several assumptions. Second issue was
the available time at hand; in the short time available for the study it was only possible to cover certain
aspects and not all. These assumptions led to several limitations, and have been mentioned within the model
methodology section.
The whole analysis was based on average behavior of the system. It was important as the general
observations cannot be based on one set of demand and supply bids and offers. The results are variable and
volatile – using such analysis could not have provided the insights that were required. The model does not
give exact results for the markets. The objective function that was used was minimization of generation cost
and not maximization of net welfare – though both aim towards a similar aim, i.e. maximization of consumer
surplus. It is possible that real results may vary from those of the model.
It is also important to note that there are two parameters that need to be considered before making decisions
– mean behavior and variance. Though mean behavior was studied in the report and it gives insights into
operation of the markets, there were no discussions of the range or variance. Basing the policy on mean
behavior is not recommended, as depicted in the quote below
“Consider the case of the statistician who drowns while fording a river that he calculates is, on average,
Chapter: limitations and Research recommendations
three feet deep. If he were alive to tell the tale, he would expound on the “flaw of averages,”
‐ Sam Savage, Consulting professor at Stanford University
Though behavior of system could be understood by assuming averages, it is also true that FMC can give very
different solutions for different values as seen in the analysis. Hence there is a need to further understand
these effects for all possible variations in of the variables that affect the market output.
11.2 RESEARCH RECOMMENDATIONS
Since the scope of a project is always limited, several proposals can be made for the future continuation of
this project.
• Research further with real data from the agencies.
• Dynamic simulation of the system to obtain the median and mean results from the markets.
117


• Study of the variance and volatility which occur in the results for variation in the input variables.
• Investment analysis using the cost data that is available to study how investment decisions on future
generation capacity would be affected by FMC.
• A detailed actor analysis

A APPENDIX

Chapter: Appendix
119


A.1 COST OF ELECTRICITY GENERATION MODEL

FIGURE 67 THE COMMON DATA FOR COST OF ELECTRICITY

FIGURE 68 FIXED COST DATA FOR ELECTRICITY GENERATION


FIGURE 69 VARIABLE COST DATA FOR ELECTRICITY GENERATION ALONG WITH EMISSION COSTS

TU Delft 3

FIGURE 70 FORMULATION FOR THE CAPITAL COST CALCULATIONS


FIGURE 71 FORMULAITON OF THE VARIABLE AND TOTAL COST

A.2 DATA SOURCES AND ASSUMPTIONS FOR COST OF ELECTRICITY GENERATION
MODEL

TABLE 27. TOTAL COST OF GENERATION FOR DIFFERENT TECHNOLOGIES BASED ON VATTENFALL 2006.
Total cost, 3.7‐4.4 4.4‐6.6 Hard coal: 5.0‐5.6

€ cents/kWh (4,4‐6,6) BLignite: 4.9‐5.5
Nuclear power Hydro power Coal condensing
(hard coal, lignite)
Advantages • Good fuel • High efficiency • Good fuel availability from
availability • No emissions to air or politically stable regions and
• No CO2 emissions water an effective world market for
in electricity • Water (and thus hard coal. The world's coal
generation energy) can be stored reserves are expected to last
• Easy to regulate at least 250 years
generation
Disadvantages • Long construction • Highly dependent on • Relatively long construction
time and high water supply time
technological • Major intrusion on • High environmental impact,
complexity results nature that changes mainly through CO2
in high cost of landscape emissions. Lignite CO2
capital • Few exploitation emissions are roughly 30%
• Safety concerns objects higher than for hard coal
• Final storage of • High investment cost
spent nuclear fuel is
an unsolved issue in
many countries
Cost example* Generation capacity: Generation capacity: Generation capacity: 700 MW

1,600 MW Annual Small scale: up to 10 MW Annual generation Hard coal:
generation: 12 TWh (in EU) Large scale: up to 4.2 TWh Lignite: 5.25 TWh
440 MW Normal
generation: approx. 4,000
hrs/year
Fixed cost, mainly 3.2‐3.9 (incl. tax on 4.4‐6.6 incl. tax, Hard coal: 1.9‐2.3 (incl.
cost of capital, € nuclear capacity of operation and operation and maintenance)
cents/kWh 0.4) maintenance Lignite: 2.0‐2.6 (incl. operation
and maintenance)
Variable cost (mainly 0.5 0 Hard coal: 3.1‐3.3
fuel, including CO2 (incl. cost for final (No value has been Lignite: 2.9‐2.9
emission allowances, storage of 0.2) assigned to the so‐called
€ cents/kWh) water value)

Total cost, 5.6‐6.5 6.0‐6.6 7.3‐9.1

€ cents/kWh
Natural gas combined Combined heat and Wind power
cycle power from biofuels
Advantages • Lower environmental • Low environmental • No emissions to the air
impact and higher impact from large, or water
efficiency than coal modern facilities
and oil • CO2‐neutral
• Low investment cost


Disadvantages • Concerns over fuel • The market for biofuels • Higher need for

availability (the largest is still undeveloped in balancing power due to
reserves are in many countries, and the unpredictability of
politically unstable conflicts with other wind‐based electricity
regions) uses for the fuel can generation
• High and arise • Stability of the
unpredictable fuel cost • Particle emissions from electricity grid can be
(major price poorly equipped adversely affected with
fluctuations) facilities a high share of wind
• Environmental impact power in the system
(emissions of CO2, • Requires subsidies
among other things) • Landscape aesthetics
Cost example* Generation capacity: 400 Generation capacity: 30 Generation capacity: 110

MW MW electricity and 80 MW MW Annual generation:
Annual generation: 2.4 heat Annual generation: 0.33 TWh Pertains to an
TWh 0.14 TWh electricity and offshore wind power farm
0.36 TWh heat
Fixed cost, mainly 1.1‐1.3 4.6‐5.1 7.3‐9.1 (including
cost of capital, € maintenance costs of
cents/kWh approx. 1.7)
Variable cost (mainly 4.5‐5.2 1.4‐1.5 0
fuel, including CO2
emission allowances,
€ cents/kWh)

Data Sources
Cost of electricity technologies
Nuclear EU POLICY AND CARBON EMISSION TRADING:

Natural Gas
Combined
Cycle IMPLICATIONS FOR THE ENERGY MARKET
Hard Coal
Condensation
Lignite
Condensation Risto TARJANNE
Wind Lappeenranta University of
Technology
Federal Energy Regulatory Commission, FERC Form 1, "Annual Report of Major Electric
Hydro Utilities, Licensees and Others."
Oil Projected costs of generating electricity 2005 update book

CHP Natural
Gas
Hoogwijk, M., D. van Vuuren, et al. (2007). "Exploring the impact on cost and electricity
production of high penetration levels of intermittent electricity in OECD Europe and the
CHP Biomass USA, results for wind energy." Energy 32(8): 1381-1402.
TU Delft 7

Installed Generation Capacity
Own
calculations
based on UCTE SYSTEM ADEQUACY: 2007 - 2020 FORECAST
http://www.iaea.org/inisnkm/nkm/aws/eedrb/data/NL-elic.html
CO2 Emission Data

Projected costs of generating electricity 2005 update book
Comparative Data for Validation
http://www.vattenfall.com/annual-reports/vf_com/2006/filter.asp?filename=page_013.html
Wietze et al.(2006)
Assumptions
Cost
1. Fixed cost os all CHP plants is same
2. Variable cost from CHP plants is same as the variable cost of normal plants based on the same fuel type
3. Variable cost for CHP-G, CHP-O and O are based on proportional increase in the data for 2000 based
on W. Lise et al, Energy Policy 34 (2006)
4. Oil prices have almost doubled since 2000, hence the data from W. Lise et al, Energy Policy (2006) was
doubled to get the variable cost data for oil based plants
5. The variable cost range and the fixed cost range for oil are then back calculated from the Total Cost data
and the variable cost data
6. CHP natural gas and CHP oil have similar fixed cost structure as the natural gas combined cycle.
Capacity
1. Based on installed generation in each country on the 3rd Wednesday for the month of July in year 2007.
2. The distribution into CHP is not mentioned in the UCTE adequacy database, hence it is based on the W.
Lise et al, Energy Policy 34 (2006). Assuming that more growth has taken place in CHP
generation since 2001 - it was assumed that the data for conventional plants stayed at the same level as
2001. Using this assumption the remaining data could be calculated
3. Oil and mixed-oil and gas plants were assumed to have cost profile of the fuel oil based plants
4. The non-attributable sources of generation under the fossil fuel geeneraion were added to the Hard Cola
Condensation plants capacity.
5. Renewable sources other than wind were assumed to be the CHP-Biomass based plants.
6. CHP-Oil data was used from W. Lise et al, Energy Policy 34 (2006)
7. All Gas based plants, i.e. combine, closed and open, were assumed to follow the cost structure of a
combined cycle plant.


A.3 NATIONAL SUPPLY CURVES

FIGURE 72 DATA POINTS FOR THE MERIT CURVE (SUPPLY CURVE)
NL Supply Curve
€ 80.00
y = 3.183x
R² = 0.831
€ 70.00
€ 60.00
Price (euros/MWh)
€ 50.00
€ 40.00
€ 30.00
€ 20.00
€ 10.00
€-
0.00 5.00 10.00 15.00 20.00 25.00


FIGURE 73 SUPPLY CURVE FOR NETHERLANDS
TU Delft 9

BE Supply Curve
€ 80.00
€ 70.00 y = 4.217x
R² = 0.829
€ 60.00
Price (euros/MWh)
€ 50.00
€ 40.00
€ 30.00
€ 20.00
€ 10.00
€-
0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00

BE Supply Curve Linear (BE Supply Curve)

FIGURE 74 ELECTRICITY SUPPLY CURVE FOR BELGIUM
FR Supply Curve
€ 80.00
€ 70.00 y = 0.392x
R² = 0.603
€ 60.00
Price (euros/MWh)
€ 50.00
€ 40.00
€ 30.00
€ 20.00
€ 10.00
€-
0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00

FR Supply Curve Linear (FR Supply Curve)

FIGURE 75 ELECTRICITY SUPPLY CURVE FOR FRANCE


DE Supply Curve
€ 80.00
€ 70.00
€ 60.00
y = 0.452x
Price (euros/MWh)
R² = 0.788
€ 50.00
€ 40.00
€ 30.00
€ 20.00
€ 10.00
€-
0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00

DE Supply Curve Linear (DE Supply Curve)

FIGURE 76 ELECTRICITY SUPPLY CURVE FOR GERMANY

FIGURE 77 EQUATION OF THE SUPPLY CURVES (LINEAR REGRESSION ON THE MERIT ORDER CURVES)

TU Delft 11

A.4 AVERAGE HISTORICAL MARKET PRICE OF ELECTRICITY

FIGURE 78 DISTRIBUTION OF MCP FOR NETHERLANDS APX, YEAR 2006‐07
FIGURE 79 DISTRIBUTION OF MCP FOR BELGIUM BELPEX, YEAR 2006‐07


FIGURE 80 DISTRIBUTION OF MCP FOR FRANCE POWERNEXT, YEAR 2006‐07

FIGURE 81 DISTRIBUTION OF MCP FOR GERMANY EEX, SEPTEMBER 06 – JUN. 07

TU Delft 13

TABLE 28 CONSOLIDATED MCP DATA FOR CENTRE WEST EUROPEAN REGION FOR 2006‐07
N Mean Std Dev Range Median Mode Q3‐Q1
Samples €/MWh €/MWh €/MWh €/MWh €/MWh €/MWh
NL 4728 36.48 37.22 949.99 30.13 40 18.91
BE 4765 35.38 38.32 949.99 30.21 30 17.92
FR 2029 24.9 11.45 99.92 23.1 23.01 12.9
DE 4271 38.89 19.8 263.73 35 20 25.65


A.5 DEMAND WORKSHEET FROM MARKET MODULE

FIGURE 82 DEMAND WORK SHEET VALUES
FIGURE 83 DEMAND WORKSHEET FORMULATION

TU Delft 15

A.6 TIE LINE CAPACITIES

Reference actual capacities of the tie‐lines without reliability margins (n‐1) and (n‐2) corrections

Germany ↔ Netherlands
Tie lines UN Capacity [MVA] Net Tie Line Capacity

kV MVA MVA
Conneforde ↔ Meeden 380 1320
Diele ↔ Meeden 380 1320
Gronau ↔ Hengelo 380 1,300
Gronau ↔ Hengelo 380 1,300
Rommerskirchen ↔ Maasbracht 380 1580
Siersdorf ↔ Maasbracht 380 1580 8400

Capacity restricted by phase shifting transformer in Gronau

Belgium ↔ Netherlands
Tie lines UN Capacity [MVA] Net Tie Line Capacity

kV MVA MVA
Zandvliet ↔ Borssele 380 450
Zandvliet ↔ Geertruidenberg 380 1476
Meerhout ↔ Maasbracht 380 1320
Lixhe ↔ Maasbracht 380 1320 4,566

Capacity restricted by phase shifting transformer in Borssele

Maximum Allocable Capacity 3600 MW
Long term contracts 1500 MW

France ↔ Germany
Tie lines UN Capacity Net Tie Line Capacity

kV MVA MVA
Vigy ↔ Uchtelfangen (RWE Net) 380 1170
Vigy ↔ Uchtelfangen (RWE Net) 380 1170
Muhlbach ↔ Eichstetten (EnBW) 380 1790
Vogelgrun ↔ Eichstetten (EnBW) 220 470 4600


France ↔ Belgium
Tie lines UN Capacity Net Tie Line Capacity

kV MVA MVA
Chooz ↔ Jamiolle 220 290
Lonny ↔ Achene 380 1490
Avelin ↔ Avelgem 380 1350
Moulaine ↔ Aubange 220 330 3460

Limited by 220/150 kV transformer in Jamiolle, on 150 kV side

TABLE 29 TIE LINE CAPACITY VALUES
Reverse Capacity Forward Capacity
GW GW
BE‐FR 1.7 2.5
BE‐NL 1.35 1.35
DE‐FR 1.7 5
DE‐NL 2.5 2.5

Data Sources
1. Website of Tennet, RTE, RWE, Elia and TSO auction website

TU Delft 17

A.7 POWER TRANSFER DISTRIBUTION FACTORS FOR NORTH‐WEST EUROPEAN
REGION

PTDFs

Sensitivity Matrix

NL→NL BE→NL FR→NL DE→NL
BE → FR 0 0.196 ‐0.484 ‐0.244
BE → NL 0 0.804 0.484 0.244
DE → FR 0 ‐0.138 ‐0.272 0.107
DE → NL 0 0.196 0.516 0.756

PTDF Matrix

Commercial Exchange
BE→NL FR→NL DE→NL FR→BE DE→BE DE→FR
BE → FR 0.196 ‐0.484 ‐0.244 0.31 ‐0.44 0.24
BE → NL 0.804 0.484 0.244 0.31 ‐0.56 ‐0.24
DE → FR ‐0.138 ‐0.272 0.107 ‐0.69 0.245 0.379
DE → NL 0.196 0.516 0.756 0.31 0.56 0.24
Physical Flow

Data Sources
Own calculation using PowerWorld using the model from (Qiong and Bialek 2005)


A.8 ELECTRICITY DAY‐AHEAD MARKET MODULE
A.8.1 CONSTRAINTS

Flow Based Coupling Optimization Constraints

Constraint 1: Maximum flow through the tie‐line is less than the capacity

Net Calculated
Backward Capacity Forward Capacity
Flow
GW GW GW
BE‐FR ‐1.7 <= ‐1.70 <= 2.5
BE‐NL ‐1.35 <= ‐0.77 <= 1.35
DE‐FR ‐1.7 <= 0.49 <= 5
DE‐NL ‐2.5 <= 2.50 <= 2.5

Constraint 2: Net Exchange should equal to zero. As there is no storage of electricity

Average Installed Absolute

Net Exchange
Demand Generation Exchange
GWh GW GW GW
NL ‐1.731485945 16.30 22.104 1.731485945
BE ‐2.468514055 12.6 16.329 2.468514055
FR 0.797380188 79.4 116.36 0.797380188
DE 3.402619812 74 122.5862568 3.402619812
Net
Net Exchange 0.00 8.4
Exports/Imports

A.8.2 OBJECTIVE FUNCTION

Minimization of Overall Generation Costs

A.9 ELECTRICITY DAY‐AHEAD MARKET RESULTS
Equilibrium without Market Coupling

Price and
Quantitiy Surplus
GW €/MWh €/hr €/hr €/hr €
Q* P* Consumer Surplus Producer Surplus Net Welfare Cost of generation
NL 16.30 € 51.83 € 1,186,403.81 € 422,447.10 € 1,608,850.91 € 422,447.10
BE 12.60 € 53.13 € 1,131,078.79 € 334,745.46 € 1,465,824.25 € 334,745.46
FR 79.40 € 30.97 € 2,640,974.19 € 1,229,350.20 € 3,870,324.39 € 1,229,350.20
DE 74.00 € 33.45 € 1,884,908.00 € 1,237,576.00 € 3,122,484.00 € 1,237,576.00
Net Welfare € 10,067,483.54 € 3,224,118.76

Market Equilibrium under flow based constraints after Market Coupling

Price and
Quantitiy Surplus
GW GW € € €/hr €/hr €/hr
Consumer Producer Net Welfare Cost of
Qd Qs P' P' Welfare(FMC) Welfare(FMC) (FMC) generation
NL 16.75 15.02 € 47.77 € 47.77 € 1,253,510.43 € 358,855.69 € 1,612,366.13 € 358,855.69
BE 13.16 10.70 € 45.10 € 45.10 € 1,234,552.22 € 241,186.19 € 1,475,738.40 € 241,186.19
FR 79.15 79.94 € 31.18 € 31.18 € 2,624,152.32 € 1,246,256.67 € 3,870,408.99 € 1,246,256.67
DE 72.65 76.05 € 34.38 € 34.38 € 1,816,831.37 € 1,307,232.14 € 3,124,063.52 € 1,307,232.14
Net Welfare € Total Cost of
181.72 181.72 (FMC) 10,082,577.03 € 3,153,530.69 Generation (FMC)


A.10 CAPACITY UTILIZATION RESULTS
Reverse Forward
Reverse Forward Reverse Unused Forward Unused
Reverse Flow Forward Flow Capacity Capacity Net Utilization
Capacity Capacity Capacity Capacity
Utilization Utilization
GW GW GW GW GW GW
BE‐FR ‐1.7 2.5 (1.70) ‐ 0.00 2.50 ‐100% 0% ‐100.00%
BE‐NL ‐1.35 1.35 (0.77) ‐ (0.58) 1.35 ‐57% 0% ‐56.93%
DE‐FR ‐1.7 5 ‐ 0.49 (1.70) 4.51 0% 10% 9.76%
DE‐NL ‐2.5 2.5 ‐ 2.50 (2.50) (0.00) 0% 100% 100.00%

TU Delft 21

A.11 COMPARISON OF MARKET COUPLING WITH FLOW‐BASED MARKET COUPLING
A.11.1 BASE CASE FLOW‐BASED MARKET COUPLING


A.11.2 BASE CASE FLOW‐BASED MARKET COUPLING WITH NL RESERVING 1500MW ON DE‐NL BORDER

TU Delft 23

A.11.3 MARKET COUPLING
A.11.3.1 C ONTRACT PATH : C LOCKWISE


A.11.3.2 C ONTRACT PATH : A NTI C LOCKWISE

TU Delft 25

A.11.3.3 C ONTRACT P ATH : DISTRIBUTION (50 C LOCKWISE ‐50 A NTI C LOCKWISE )


A.11.3.4 C OMPARATIVE C APACITY U TILIZATION R ESULTS

Base Case Flow‐based market coupling Contract path: Anti Clockwise

Contract path: Clockwise Contract Path: Equal distribution

TU Delft 27

A.12 RESULT OF FMC AFTER INSTALLATION OF 5000MW OF COAL BASED POWER PLANTS IN NL


A.13 RESULT OF FMC AFTER INSTALLATION OF 10,000 MW OF COAL BASED POWER PLANTS IN NL

TU Delft 29

A.14 RESULT OF FMC AFTER INSTALLATION OF 2000 MW TRANSMISSION CAPACITY BETWEEN DE‐NL


A.15 INCREASE TIE LINE CAPACITY BETWEEN FR‐BE +2000MW

TU Delft 31

A.16 RESULT OF FMC AFTER INSTALLATION OF 5000 MW TRANSMISSION CAPACITY BETWEEN DE‐NL


A.17 RESULT OF FMC AFTER INSTALLATION OF 10,000 MW TRANSMISSION CAPACITY BETWEEN DE‐NL

TU Delft 33

A.18 RESULT OF FMC AFTER INSTALLATION OF 2000 MW TRANSMISSION CAPACITY BETWEEN DE‐NL WITH PTDF FROM 5000 MW CASE


A.19 EFFECT OF CARBON MARKET
A.18.1 FMC RESULTS WITH EMISSION PRICE OF 15 €/TON OF CO2

TU Delft 35




TU Delft 37


A.20 LIST OF ACTORS
A.19.1 NETHERLANDS

• Transmission system operator
o TenneT is since 1998 acting as TSO for the Netherlands. It is responsible for providing
system services for the whole system and transmission services on the 220‐ and 280 kV‐level
in the whole country. Transmission services on lower voltage levels are provided by some 20
network operators. In 2004 TenneT has taken over the transmission service of a regional
network company and its aim is to become the transmission operator for all voltages above
110kV. During 2005 the operational activities of the regional control‐centre of the acquired
network were integrated in the national‐control centre of TenneT.

• Main generators
o The main generators in Netherlands market are E.ON Energie AG, Electrabel SA, Essent
Energy Production BV, Nuon (Reliant).

• Distributors
o There are a large number of suppliers of electrical energy. However, some merging has
taken place among the distributors. The biggest suppliers on the moment are NUON, Essent
and Eneco

• Power Exchange
o The Amsterdam based APX (Power NL) is the first independent internet based power
exchange in continental Europe. Since May 1999 when it began, APX’s Day‐Ahead Market
has provided its members with standardised products and flexible block orders to sell and
purchase electricity in the Netherlands. APX also offers a continuous trading facility for
Intraday and Strips Markets in the Netherlands. APX is the central counterparty in all
electricity trades, retaining anonymity for all members throughout. APX also offers
benchmark data and provides industry indices.

• Main traders & other players
o A very important player is the Amsterdam Power Exchange, which operates a day‐ahead
market and an adjustment market. Furthermore, some brokers are active and all producers
and suppliers may act as trader, directly or via the APX.

• Regulator
o Dienst uitvoering en toezicht Energie (DTe)

TU Delft 39

A.19.2 BELGIUM

• Transmission system operator:
o The high‐voltage network is operated by ELIA, an independent public limited company
founded in June 2001 in order to comply with the federal requirements of independence.
ELIA former shareholders (Electrabel and SPE) reached an agreement with the Federal
Government on the shareholder structure.

• Main generators
o Electrabel (Net generation capacity: about 13 165 MW in Belgium)
o SPE (Gen. capacity: 1 500 MW in Belgium)
o RWE (from 2005 with 50% of 385 MW at BASF Antwerp)
o Essent (from 2006 with 120 MW at INEOS Antwerp)

• Distributors
o The former distribution companies (mainly inter‐municipal companies) have been appointed
as operator of the distribution network for their respective territory. In order to comply with
the regional legal requirements, they transferred their sales activities to another company,
when their customers will become eligible.

o Number of distribution system operators
Private companies 1
Municipality companies 4
Mixed Inter‐municipality companies(a) 15
Pure Inter‐municipality companies 8

• Power Exchange
o Belpex (Belgian Power Exchange) is a day‐ahead spot exchange for the delivery and off‐take
of electricity on the Belgian hub. Belpex is coupled with its two neighbours, APX in the
Netherlands and Powernext in France. The partners of Belpex are APX (Dutch Power
Exchange), Powernext (French Power Exchange), RTE (French Transmission System
Operator) and TenneT (Dutch Transmission System Operator), under the leadership of Elia
System Operator. Endowed with a 3 million euro equity capital, Belpex shares are owned
initially by APX (10%), Elia (60%), Powernext (10%), RTE (10%) and TenneT (10%). Belpex is
the Belgian Power Exchange for anonymous, cleared trading in day‐ahead electricity,
providing the market with a transparent reference price.

o Many

• Regulator
o Commission de Regulation de l’Electricite et du Gas (CREG)


A.19.3 FRANCE

• TSO
o RTE
o The single French Transmission System Operator RTE is responsible for the operation and
maintenance of the French EHV and HV networks between 400kV and 63kV.

• Main generators
o The four main generating companies in France are:
Electricité de France (EDF): Turnover 34400M€, installed capacity‐102GW,
generation‐482TWh, employees‐117000,
Energie du Rhône (former CNR): Turnover 459 M€, installed capacity‐3GW,
generation‐12,5TWh, employees 1060,
Société Nationale d’Electricité et de Thermique (SNET): Turnover 810M€, installed
capacity‐2,5GW, generation‐8,7TWh, employees‐1074,
Société Hydroélectrique du Midi (SHEM): Turnover 75M€, installed capacity‐
0,8GW, generation‐2 TWh, employees‐220,

• Number of distributors
o Based on the French Act of 15 June 1906, the public distribution of electricity has been
placed under the responsibility of local territorial administrations (councils, regions, or
public joint ventures). The management of these local public utilities has been either given
to a public operator (today EDF for 93% of the local councils) or are managed directly by the
local councils through communal subsidiaries, which may work together within syndicates.

o Electricité de France (EDF)
Turnover electricity‐34400M€, sales in distribution‐~316 TWh, employees‐117000
[80000 in the distribution sector], customers‐31000000

o Beside EDF, there are in France 22 municipal distribution companies. The 4 main
distributors are:
Electricité de Strasbourg (ES)
• Turnover electricity‐~415M €, sales electricity ~6 TWh, employees‐1363,
customers‐435000 living in 376 communal entities
Gaz et Electricité de Grenoble (GEG)
• Turnover electricity‐59M€, sales electricity ‐8 TWh, employees‐448
Usine d’Electricité de Metz (UEM)
• Turnover electricity‐135M€, sales electricity ~1,7TWh, employees‐500,
customers‐140000,
Vialis (Colmar)
• Turnover electricity‐53M€, sales electricity –0,4TWh, employees‐259,
customers‐36650,

• Power Exchange
o The introduction of a power exchange (Powernext) in France is a direct response to the
opening up of the European electricity markets. The 1996 European Directive, applied into
the French Law on the 10th of February 2000, create an opportunity to launch a feasibility
study of the French electricity organised market for partners including BNP‐Paribas, ELIA
(Belgium Transmission System Operator), EDF, Electrabel, RTE (French Transmission
System Operator), Société Générale and TotalFinaElf under the leadership of Euronext . The
conclusions of the one year study led to the incorporation of Powernext SA on 30/07/01.

TU Delft 41

• Main traders & other players (exchanges etc.)
o The other actors selling to eligible customers on the French market are:
Energie du Rhône‐ sales on the French market outside EDF‐1,5TWh
RWE PLUS sales on the French market –1TWh
ENDESA France sales on the French market‐ 0,6TWh
Electrabel (via SHEM) sales on the French Market 2TWh
CNR (Main shareholder Electrabel 49,97%)‐sales on the French Market 12,5TWh
SNET (Main share holder Endesa 65%)‐sales on the French market 8,7TWh
Total (via Gas and Power North Europe)‐sales on the French market 9,5TWh
HEW (now Vattenfall Europe)‐sales on the French market 3TWh

• Regulator
o Commission de Régulation de l’Electrité


A.19.4 GERMANY

• Transmission system operator
o 4 German Transmission System Operators bear responsibility for their control areas and the
German system
o (EnBW Transportnetz AG
o E.ON Netz GmbH
o RWE Transportnetz Strom GmbH
o Vattenfall Europe Transmission GmbH

• Main generators
o Main generating companies are (A growing number of IPPs enter into the German market)
RWE
E.ON
Vattenfall
EnBW

• Distributors
o In Germany, there exist more than 900 Distribution System Operators.

• Power Exchange
o EEX
o The European Energy Exchange AG (EEX) currently operates spot and derivatives markets in
power, CO2 emission allowances, coal and gas. It is rapidly expanding its range of services
with the aim of establishing EEX as Europe’s leading, multi‐product energy exchange. EEX is
a product of the recent liberalisation in energy markets and is already Europe’s biggest
energy exchange in terms of both membership, with over 170 trading members from 19
countries, and growth in trading volume. It is fully regulated and can already claim to be
truly pan‐European, with the majority of its members based outside Germany. Traders’
confidence in EEX and its clearing system is underlined by the rapid growth in the volume of
open interest in power futures ‐ more than 300 Terawatt hours in December 2006, valued at
around € 17bn.

o Citiworks, E.ON Sales & Trading, EDF Trading, Electrabel Deutschland, EnBW Ges. für
Stromhandel, Endesa Trading, Enercity Trade, EOS Avenis, GETEC Energie, MVV
Energiehandel, NUON Energy Trade & Wholesale, RWE Trading, Trianel European Energy
Trading, Vattenfall Trading Services

• Regulator
o Bundesnetzagentur für Elektrizität, Gas, Telekommunikation, Post und Eisenbahnen
(BNetzA)

TU Delft 43

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Christie, R. D., B. F. Wollenberg, et al. (February 2000). Transmission management in the deregulated
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Congestion Management Guidelines (2006). amending the Annex to Regulation (EC) No 1228/2003 on
conditions for access to the network for cross‐border exchanges in electricity.

Conscentec and Frontier Economics (June 2004) Analysis of Cross‐Border Congestion Management Methods
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WEBSITES

www.wikipedia.com
general reading on subjects of interest
www.etso‐net.org
Updates on TSOs and policy
http://ec.europa.eu/energy/electricity/florence/index_en.htm
Directives and regulations
www.europex.org
EuroPEX information
http://ksghome.harvard.edu
General information on latest research on electricity markets
http://www.nordel.org
Nord pool market;

http://www.bundesnetzagentur.de/enid/27adb19a3f820ac2e4acd1a2a23b07ff,2a066e5f7472636964092d0934
343230/Special_topics/Open_Market_Coupling_32p.html
Economic and legal analysis of congestion management methods in EU.
http://www.vattenfall.com/annual‐reports/vf_com/2006/filter.asp?filename=page_013.html
Vattenfall's Annual Report 2006 ‐ What does new electricity generation cost?

http://www3.vattenfall.com/annual_report_2005/filter.asp?filename=page_011.html
Vattenfall 2005 ‐ The European electricity market

EEDRB‐Netherlands‐Installed Capacity of Electrical Plants

http://epp.eurostat.ec.europa.eu/portal/page?_pageid=0,1136239,0_45571447&_dad=portal&_schema=PORT
AL
EUROPA ‐ Eurostat ‐ Environment and energy

http://www.ucte.org/
[www.ucte.org] :: Home

http://www.ucte.org/publications/library/e_default_2007.asp
[www.ucte.org] :: Publications : Library : 2007

http://www.apxgroup.com/
TU Delft 47

APX Group

http://www.powernext.fr/modules.php?op=modload&name=PwnStat&file=index&req=stat&bid=129&cld1=1
31&cld2=132&cld3=‐1&graph=Day&graphtype=spot
Powernext.fr

http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html
EUROPA ‐ DG Competition

http://www.dauphine.fr/cgemp/Equipe/CV/CVBoisseleauPUBLI.htm
Dr François Boisseleau thesis on “The role of power exchanges for the creation of a single European electricity
market: market design and market regulation”

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2007

The conclusion, reflections and scope for future work is

There is a need to understand what makes a market design successful. It has been proven in literature that

The described method can coexist with several forms of forward market arrangements. This will be needed

Price Import Price

different from the market splitting approach implemented in the Nordic electricity system, which it tries to

A step by step description of how the

Pri ce (euro s/MWh)

• In Run Mode, select Tools > Power Transfer Distribution Factors (PTDFs) from the main menu to

Zoom‐in on Dutch Belgian Interface

BE → NL 0.804 0.484 0.244 0.31 ‐0.56 ‐0.24

DE → FR ‐0.138 ‐0.272 0.107 ‐0.69 0.245 0.379

DE → NL 0.196 0.516 0.756 0.31 0.56 0.24

5.2.1 SUPPLY C URVE

Specific Investment Full Load Real Interest

MW million € €/kW h/a % a % € €/MWh

Nuclear N 1500 3075 € 2,050.00 8000 91% 40 5% (€179,205,345.59) € 14.93

Oil O 100 117 € 1,170.00 7450 85% 25 5% (€8,301,437.50) € 11.14

W € - 100% € - € 10.00 € 10.00 € 45.48 20 0 € - € 10.00 € 45.48

N € 1.10 37% € 2.97 € 8.00 € 10.97 € 25.91 20 0 € - € 10.97 € 25.91

O € 25.15 41% € 61.34 € 10.70 € 72.04 € 83.18 20 1 € 0.02 € 72.06 € 83.20

CHP-B € - € 14.59 € 122.50 € 29.85 € 107.24 € 135.01 20 0 € - € 107.24 € 135.01

Variable Units Significance

Avg NL BE FR DE

€/MWh GW GW GW GW

Hydro H € 6.60 0.04 1.42 25.40 9.11

Wind W € 10.00 1.65 0.19 1.40 21.17

Nuclear N € 10.97 0.45 5.80 63.26 20.54

Hard Coal Condensation HC € 25.36 4.49 0.95 12.00 27.19

Lignite Condensation LC € 25.50 0.00 0.00 0.00 19.33

CHP Natural Gas CHP‐G € 37.92 7.65 0.77 2.71 0.70

Natural Gas Combined Cycle G € 50.55 7.17 3.50 1.89 13.82

Oil O € 72.04 0.20 3.07 8.80 7.14

CHP Biomass CHP‐B € 107.24 0.47 0.63 0.90 3.59

5.2.4 CALCULATION OF SUPPLY CURVE SLOPE

Inverse Supply Function y=mx+c

5.4.1.5 C HOICE OF O BJECTIVE F UNCTION

1. ∆ C OST OF G ENERATION : R EGIONAL CHANGE

2. ∆ N ET W ELFARE : R EGIONAL C HANGE

CAPACITY UTILIZATION RESULTS

0.00 50.00 100.00 150.00

FR 79.40 60

DE 74.00 50

Here the results from the model are

7.1.3 WELFARE D ATA

Prices (euros/MWh) Prices Change Electricity Demand

Import-Export (-ve means Consumer Surplus Producer Surplus

Distribution of Welfare Utilization of % Utilization

market coupling with equally € (1.00)

contract paths(€8.18 /MWh), € (6.00) € (2.00)

followed closely by the results from € (8.00)

Flow‐based market coupling based € (3.00)

on actual PTDF values (€8.21 € (10.00) € (3.50)

/MWh). However the difference is ∆ Price ∆ Price

not significant only at the second

€2) – which dropped substantially NL BE FR DE

different from the other two cases. € (8.00)

Welfare distributions can be predicted on basis of above graphs, the importing countries saw the consumer

energy independence and self ‐5.00%

generators to move the generation ‐20.00% ‐8.00%

cost of generation, thus causing

To make decisions about

NL tie‐line. For details refer Net Net