Coordinating Cross-Border Congestion Management Through Auctions: An Experimental Approach to European Solutions

Abstract

Competition among producers within an integrated electricity system is impeded by any limited transmission capacity there may be at its borders. Two alternative market mechanisms have recently been designed to organize the allocation of scarce transmission capacity at cross-border level: (i) the "implicit auction", already used in some countries, and (ii) the "coordinated explicit auction", proposed by the European Transmission System Operators (ETSO) but not implemented yet. The main advantage of the explicit auction is that it allows each country to keep its own power exchange running. In the European institutional context, this is seen as a factor of success of a market reform, although the explicit auction (not coordinated) is known to be less efficient than the implicit mechanism. The addition of a coordination dimension in the explicit auction is intended to solve problems of international flows. We use an experimental methodology to identify and compare in a laboratory setting the efficiency properties of these two market mechanisms, given a market structure similar to the existing one in continental Europe, i.e. a competitive oligopoly. Our main result highlights the inefficiency of the coordinated explicit auction compared to the performance of the implicit auction, measured in terms of both energy prices and transmission capacity allocation. We suggest that the poor performance of the coordinated explicit auction in the laboratory is due to the level of individual expectations about both energy and transmission prices that the mechanism demands. One solution to resolve this problem when the mechanism is implemented in the field would be to design an additional and secondary market for "used" transmission capacity.

Cost-optimal power system extension under flow-based market coupling

“…For a general discussion of different regimes, the interested reader is referred to Chao et al (2000). Analyses of different congestion management regimes in the European context and possible increases in market efficiency were published in Ehrenmann and Smeers (2005), Jullien et al (2012), Neuhoff et al (2011a) and Neuhoff et al (2011b). Practical feasibility of the concept is currently proven in the Central Western European (CWE) Region, as discussed in Aguado et al (2012).…”

Decomposing changes in competition in the Dutch electricity market through the residual supply index

“…In The direct result of market coupling is that the transmission capacity is utilized more efficiently (Küpper et al, 2008;Jullien et al, 2011). A more efficiently used transmission line can be viewed as an increase in the available cross-border capacity.…”