Powering Europe - European Wind Energy Association

3.2 European integration
assisted by interconnection
Before 2006, all markets in Europe were national,
with the exception of the Nordic market. These markets
were characterised by one or a few dominant
power producers that had emerged from the former
utilities which owned a major share of the generation
and transmission capacity. New market entrants that
owned generation capacity abroad faced the difficulty
of transporting variable amounts of power over the
borders.
An integrated power market should be made up of different
countries. In a perfect market, the market prices
between these countries should only differ when
the interconnector capacity between the countries
is insufficient. Interconnectors would be used based
on the evolution of prices in the different markets.
In the past, allocation of interconnector capacity was
not market-based, whereas now mechanisms in Europe
are becoming increasingly market-based, mainly
through auctions. Most auctions are explicit, meaning
tthat
in order to offer energy on a foreign spot market,
a market participant has to buy a cross-border transfer
capacity at the capacity auction and energy at the
concerned spot markets separately.
In order for a power market to be truly competitive, sufficient
transmission capacity is required between the
relevant markets. Moreover, the legal and regulatory
framework must enable an efficient use of interconnectors
between participating countries. This is made
possible by market coupling and splitting, leading to an
implicit allocation of interconnector capacity, which is
when bids and offers from different countries are combined
in order to establish a common market price for
the region. Whenever an interconnector is congested,
2 EMcc: European Market coupling company.
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the prices on either side cannot converge further, and
the price difference represents the value of the interconnector
for trade. Such implicit auctioning ensures
that interconnector capacity is used efficiently.
In the last few years, the European integration of power
markets has accelerated thanks to several initiatives.
First, the Regional Initiatives of the European
Regulators’ Group for Electricity and Gas (ERGEG)
pursued the development of seven regional electricity
markets, each made up of several national markets.
The larger countries such as Germany and France participate
in several regional markets. Consequently, a
market player in one of those countries can choose
any of the available market regions for every bid or offer.
In practice, this is likely to align prices in the different
regional markets.
However, the most concrete steps towards regional
markets were taken in the creation of the NordPool
market and the Pentalateral market between Benelux,
France and Germany. Moreover, in 2007, Germany
joined the NordPool day-ahead market. A further market
coupling between Germany and Denmark operated
by EMCC 2 was put in place at the end of 2009.
The Pentalateral Energy Forum launched the so-called
“North Seas Countries’ Offshore Grid Initiative” in
2010. Other examples of regional integration are the
Irish All-Island market and the Iberian MIBEL.
Ongoing market integration across Europe could provide
a further building block for a future power system
characterised by flexibility and dynamic electricity
markets, where an increased number of market participants,
including the demand side, respond to price
signals, facilitating competition and better integration
of wind power and other variable renewables.
Powering Europe: wind energy and the electricity grid