INTERVIEW: EU's centralized market coupling plan is 'open heart surgery': CEOs

The European Commission's proposal to centralize electricity market coupling operations in a single legal entity (SLE) is a risky and disruptive intervention on the world's most successful cross-border power trading system, the CEOs of Europe's leading spot power exchanges said in a joint interview with S&P Global Commodity Insights.

Epex Spot and Nord Pool, together handling over 1,000 TWh/year of which some 15% is cross-border trade, have called for the deletion of the SLE paragraphs from the European Electricity Market (EMD) reform dossier, currently in trilogue between the EU Council and the European Parliament.

"Europe's market coupling process is one of the most complex market operations in the world. This proposal would be highly disruptive and very difficult to implement. I would say this similar to open heart surgery while we are mid-air, " said Nord Pool CEO Tom Darrell.

The EC added the plan to the EMD reform after European regulator ACER first proposed such an entity in December 2021 with the SLE acting as a central counterparty to the exchanges for market coupling.

In its recommendation, ACER said a working group consultation broadly endorsed the need for reform, highlighting the issue of monopoly exchange operators in some EU member states.

But Epex Spot CEO Ralph Danielski argued the current process worked perfectly well, creating an estimated Eur40 billion in annual welfare benefits.

Attempts to centralize the process would be lengthy, costly and risky, he said.

"Market coupling today works exactly as it should, centralization would add operational risk and reduce security of supply by introducing a single point of failure risk as there would be no back-up as is currently the case," the Epex CEO said.

Hugely disruptive

A detailed cost/benefit analysis of the SLE was still outstanding, the exchanges said.

"We don't know the cost of doing it, we don't know how it's going to be done, or where do you find the people and the competence to build the system," Nord Pool's Darrell said.

The exchanges had invested heavily in the algorithm behind today's calculations before making it available to national regulators.

"Oversight and jurisdiction could get even more complex," Epex' Danielski said. "Right now is not the time for such a disruption and this shouldn't be the scope of the EMD reform," he said.

Epex Spot expects a final agreement by EU co-legislators by late December or in the first quarter of 2024 with Belgium set to take over the rotating presidency in the EU Council in January 2024.

"This is clearly a first step towards a de-facto centralization of the MCO, creating a monopoly, and goes against the principles of proportionality and subsidiarity enshrined in the EU's key texts," Epex said.

CACM 2.0 review

Instead, the exchanges pledged to optimize MCO governance through contractual simplification, and reduce complexity by rejecting for instance veto rights in complex market coupling initiatives with dozens of stakeholders.

"We are ready to continue a proper discussion on the requirements for the amendment of CACM without further delay and to dedicate all necessary resources to this legislative process, as well as pro-actively contributing to a successful and timely outcome," the exchange CEOs said in a joint open letter.

The legislative amendment process for capacity allocation and congestion management (CACM) was interrupted in 2022 by the energy price crisis.

Focus should be on how to evolve the current system to being more prepared for the wave of renewables that is coming, Nord Pool's Darrell said.

Market coupling, which aims to optimize cross-border transmission capacity, was first introduced in the late 1990s by the Swedish and Norwegian TSOs on Nord Pool. Since 2015, the EU's CACM regulation forms the basis for MCO, which has become very complex with the EUPHEMIA price coupling algorithm (Pan-European Hybrid Electricity Market Integration Algorithm) at its core.

Key focus for 2024 is the move to flow-based market coupling across Nordic bidding zones with some 80 expansion projects currently in planning stages.

Market coupling uses implicit auctions with market participants no longer needing to separately reserve cross-border capacity. Under CACM, roughly half of available transmission capacity is auctioned via the Joint Allocation Office with the other half and any unused capacity going into market coupling.

Over 600 TWh of electricity were traded in 2022 across Epex Spot's day-ahead platforms in 13 countries with the Paris-based operator part of EEX Group.

Nord Pool, which counts both buy and sell volumes, meanwhile saw almost 800 TWh traded day-ahead across 14 EU member states as well as Norway.