(The author is a Reuters market analyst. The views expressed
are his own.)
By Gerard Wynn
LONDON, April 11 Power prices diverged last year
across central Europe for the first time since as far back as
2006 in further signs of a possible conflict between European
Union goals for an internal energy market and more renewable
The European Commission wants an internal energy market
achieved through more cross-border gas and power
interconnections, liberalised prices and coupling of
That should reduce the EU's reliance on imported energy,
bolster security of supply, smooth price differences between
member states and cut prices overall.
The project is meant to be achieved by 2014 but faces
difficulties including the capital cost of and public opposition
to upgrading cable connections and the headache of coordinating
transmission operators across different countries.
The Central Western Europe (CWE) region has been a flagship
for market coupling, which makes price divergence in the region
last year a particular concern which goes against the narrative
of closer integration.
A contributing factor was national circumstances which sent
wholesale power prices in different directions: ample German
wind, solar and coal-fired power contrasted with a shortage of
nuclear power in France and Belgium.
That suggests a possible further knock-on effect, spilling
across borders, of growing renewable power in Germany which has
created a hiatus in national wholesale and retail power prices,
undermining the economics of conventional power and inflating
The Central Western Europe (CWE) power trading region
comprises Austria, Belgium, Germany, France, the Netherlands,
Switzerland and is a flagship for market coupling launched
across the region in November 2010.
Market coupling replaced a two-step process for cross-border
power trade comprising separate auctions for transmission
capacity and power.
The market coupling approach instead integrates transmission
allocation and power trades and so avoids accumulating un-used
Critically for price convergence, it also ensures that
electricity flows from cheaper to more expensive markets.
The European Commission shows how market coupling has
eliminated adverse power flows (from expensive to cheaper
wholesale markets) between Germany and the Netherlands and
France since 2011. (See Chart 1)
The next planned step in the CWE region is to implement
so-called flow-based (FB) market coupling.
That is seen as more efficient still because it optimises
real capacity across a region's borders, rather than optimising
available capacity after this is first calculated separately by
each national transmission system operator (TSO), as at present.
"Under FB, interdependency of the cross-border exchanges is
reflected from the beginning of the process for all the
directions of the capacity space. This is in contrast to the
current ... process where the first step (initial local TSO
computation) is not coordinated," reported transmission
operators in their "CWE Enhanced Flow-Based MC feasibility
report" in 2011.
A go-live date for flow-based coupling in CWE has been
repeatedly delayed. It should be "technically ready by the end
of 2013", the grid operator TenneT said last month,
put back from the end of 2012.
Price divergence was a particular feature of the CWE region.
The Nordic market comprising Norway, Sweden, Finland and
Denmark is already fully coupled. Hungary joined the
Czech-Slovak coupled market in September last year, forming a
trilateral market coupling in the central east European (CEE)
region, where there appears to have been an immediate benefit in
a lower Hungarian wholesale power price premium to Slovakia.
Chart 1: (page 26) goo.gl/Bf3S3
Chart 2: (page 13) goo.gl/Bf3S3
Chart 3: (page 25) goo.gl/Bf3S3
The European Commission's solution for an internal EU power
market is liberalised pricing with market coupling combined with
more physical cross-border interconnector cabling.
Price divergence last year in CWE underlined how more market
coupling is not a panacea, in particular when different
countries have contrasting fuel mixes, as is increasingly the
case since Germany decided to phase out nuclear and ramp up
The ICE Endex exchange is one coupled day-ahead power market
in the CWE region, and reported in January prices diverged last
year across the whole region for the first time since 2006,
falling to 46 percent from 66 percent the year before, referring
to the proportion of hours identically priced.
The European Commission last month showed how price
divergence accelerated in CWE from September, in its "Quarterly
report on European electricity markets, Q3-Q4 2012". (See Chart
The EU executive explained the divergence on national
circumstances which sent wholesale prices in opposite
It contrasted abundant wind and solar power generation and
competitive coal-fired generation in Germany with the low level
of nuclear availability in France and the disconnection of two
nuclear plants from the Belgian grid in August.
"This provided an illustration of how developments at
national level can counter the positive effects of market
coupling on prices," it said in its quarterly report.
Certainly when national market conditions differ greatly
prices cannot converge, although closer interconnection and
market coupling will help.
The Commission cited data which showed gross exports from
cheaper Germany to other CWE markets in the fourth quarter rose
38 percent, to 16.4 gigawatt hours from 10.1 GWh in the
corresponding period in 2011, showing that market coupling was
The abrupt disconnection of two nuclear plants from the
Belgian grid in August, following the discovery of cracks in
their steel structure, was a one-off.
But swings in German wholesale power prices and lower peak
prices as a result of more zero marginal cost wind and solar
power are part of a new trend and possibly destabilising force.
More renewable power is a parallel goal of the European
Commission which may conflict with its aim of closer market
In another example of possible conflict, member states and
in particular Britain are considering intervening in national
wholesale power markets to ensure investment in flexible
gas-fired back-up capacity.
That is intended to overcome declining returns to fossil
fuel power as a result of competition with low marginal cost,
subsidised renewables, but goes against the grain of a
liberalised market approach.
Such conflicts underline how steps to address the
unpredictability of renewables and in particular wind power must
match their rising capacity, for example through a large and
expensive upgrade in interconnectors; more market coupling; and
improved wind and solar forecasting by transmission operators.
(Editing by James Jukwey)