EI-FACT SHEET 2015-02 1

Cross-border electricity trading:

towards flow-based market coupling

The transmission network constitutes the limitation for

international trade. Consequently, the way in which the available
capacity for trading is calculated has a substantial impact on the
market. Today, the Available Transfer Capacity (ATC) mechanism
is utilized. However, this methodology is planned to be replaced
by a flow-based (FB) approach for Central Western Europe in
20151. Without actually influencing power flows in the system,
flow-based market coupling leads to a more efficient use of
transmission capacity by better taking into account the effect of
trade on the network. This fact sheet explains the main features
of the flow-based method, in comparison to the current ATC
mechanism.

Cross-border electricity trading in Europe

Electricity trading is conducted through different consecutive

electricity markets in order to guarantee the instantaneous
balance between electricity generation and offtake. Towards this
end, forward and future markets are successively followed by a
day-ahead and intra-day market, concluded by a final real-time
settlement of imbalances2. This fact sheet focusses on the day-
Figure 1: Current bidding zone configuration in Western Europe
ahead market, which represents an important time frame in the
(Source: Ofgem, 2014)
context of electricity trading. A different classification can be
made based on the trading platform. Over-the-counter (OTC)
trading implies bilateral trading at a mutually agreed price. Power Coordinated capacity calculation & allocation
exchanges on the other hand offer standardized trading products method
at a transparent market price.
Cross-border electricity trading requires a coordinated capacity
European “Target Model” calculation and allocation mechanism. Coordination across bidding
zones is essential since electricity flows cannot be restricted by
Historically, electricity markets were organized nationally, each commercial agreements but follow the laws of physics. For
country focusing on self-sufficiency in terms of electric power example, when Germany exports electricity to France, part of the
supply. Based on these foundations, the target model for electricity electric power will flow through the Netherlands and Belgium,
trading proposed by ENTSO-E makes use of a zonal approach, instead of following the direct path between the two countries. As
building on a number of interconnected markets3,4. These markets such, this transaction also has an impact on the remaining
are called bidding zones and typically correspond with Member interconnection capacity at the Dutch and Belgian borders.
States, except for Scandinavia and Italy (Fig. 15). On the other hand,
Germany, Luxemburg and Austria constitute a single bidding zone. Flow-based versus Available Transfer
Capacity
Within each zone electricity can be traded freely, without
taking into account network constraints. In contrast, for cross- The goal of a coordinated capacity calculation mechanism in
border trade, the interconnection capacity with other bidding the context of cross-border trading is to guarantee an efficient
zones is considered in the trading process. allocation of the available transmission capacity. A trade-off
has to be made between offering cross-border transmission
capacity to the market and ensuring a reliable operation of the
1
Central Western European (CWE) region: Belgium, France, Germany, power system. In this respect, a replacement of the current ATC
Luxemburg and the Netherlands method by a new flow-based approach is considered across
2
See KU Leuven EI fact sheet on “The current electricity market design
in Europe”
Europe. Both mechanisms are compared below for the four steps
3
ENTSO-E = European Network of Transmission System Operators for that can be distinguished in the daily coordination process.
Electricity
4
As opposed to the idealized nodal approach, i.e. optimizing energy
exchanges under full network constraints
5
Ofgem, FTA Team, “Bidding Zones Literature Review”, July 2014

KU Leuven Energy Institute EI Fact sheet: Cross-border electricity trading: towards

flow-based market coupling
EI-FACT SHEET 2015-02
1. Calculation of available capacity
Available Transfer Capacity (ATC)
Based on historical data for a reference day, taking into account
potential loop flows, seasonal impact and a justified security
margin, each Transmission System Operator (TSO) determines a
Net Transfer Capacity (NTC) value for each direction on each
border of its control area. The NTC values can be interpreted
as the maximum allowable commercial exchanges that push a
critical network element to its maximum physical flow. At this
stage,TSOs of neighboring countries coordinate bilaterally to align
the NTC values on their common border, generally selecting the
lowest NTC. From the NTC figures, the Available Transfer
Capacity (ATC) value can be derived after subtracting long-term
nominations. See further, Fig. 5.
Flow-based (FB)
Instead of supplying fixed commercial capacities, the FB
methodology formulates the constraints which reflect the physical
limits of the grid. To this end, a simplified network model is
constructed, represented by a combination of nodes and lines
(Fig. 2). In line with the European zonal approach, different nodes
are aggregated into zones, indicated by the colored areas. Each
TSO provides input data, which is combined at the regional level.
Two elements are essential to the flow-based mechanism:
• Power Transfer Distribution Factors (PTDFs): Power
Transfer Distribution Factors (PTDFs) are introduced,
denoting the physical flow induced on a transmission line, as
the result of power injected at a specific zone. This way, it can
be monitored which combinations of cross-zonal exchanges
threaten to overload a specific line.
Figure 2: Graphical representation of a transmission network (4 zones)
6
Physical capacity is the amount of power that can flow over a line
without saturating it. Commercial capacity is the amount of trade that
pushes a critical network element to its maximum physical power flow.
KU Leuven Energy Institute
2
• Critical branches (CBs): To arrive at a simplified network
model without having to consider each individual line,
critical branches are introduced. They consist of all cross-
border lines, as well as internal lines that are significantly
impacted by cross-border exchange. An example of a set of
CBs is given by the lines highlighted in red in Fig. 2. Only these
branches are considered in the model. The available physical
capacity for each CB is determined, based on the physical
limit of the line and taking into account necessary security
margins6.
2. Verification of capacity domain
The meshed nature of the European power system calls for
verification to validate the supplied input data. This verification
step is performed two days before delivery and consists of a
combination of tests, such as load flow analyses, checking voltage
limits of components and assessing voltage stability.
Available Transfer Capacity (ATC)
2 Days before delivery, a Congestion Forecast (D2CF) file is
created by each TSO, providing a view on the expected power
flows. Under the ATC regime, this file is constructed for only two
timestamps, namely 3h30 and 10h30, and contains minimally the
following information:
• Available grid topology (+ anticipated outages of
components)
• Generating units and their estimated output levels
(+ anticipated outages)
• Load forecast
• Exchange programs
Next, all individual D2CF files are merged by Coreso, leading
to the so called base case7. This forecast is used to verify the
proposed NTC values. In the ATC regime, two base cases are
created given the two considered timestamps. The consecutive
verification step assesses local grid security and leads to
adaptations in case of security breaches. The ATC methodology
checks all the NTC corners, illustrated by the following example.
Figure 3: ATC domain
7
Coreso (COoRdination of Electricity System Operators)
EI Fact sheet: Cross-border electricity trading: towards
flow-based market coupling
EI-FACT SHEET 2015-02
Example: Consider three bidding zones A, B and C. Zone A is
connected to both B and C. The ATC trading domain can be
illustrated as in Fig. 38. Each combination of commercial
exchanges falling inside the rectangle is allowed for trading
purposes. The four indicated corners are checked. Corner 1
represents a situation in which zone A expor ts the maximally
available commercial flows or NTC values to both zones B
and C.
Flow-based (FB)
Similarly as for the ATC approach, each TSO composes a D2CF
file with the same minimum information requirements. In this
case however, the file has to be constructed for 24 timestamps,
as opposed to only 2 timestamps for ATC.
Consequently, 24 base cases can now be composed from
the individual D2CF files. Merging all constraints on critical
branches leads to a global Security of Supply domain. Each
combination of values inside the trading domain is allowed. The
verification step now consists of checking the ver tices, instead
of the corners under ATC9.
Example: Using the same simple three zone example as above,
the hourly trading domain for the FB mechanism is illustrated
in Fig. 4. Each combination inside this domain is allowed for
trading purposes. The eight vertices that have to be verified
are also indicated. The FB domain corresponds with the global
Security of Supply domain. Instead of assuming one NTC
capacity value per direction on each border, all constraints
imposed by the critical branches are considered. Each
constraint corresponds with a dotted line in Fig. 4.
Figure 4: FB domain
7
Trading domain can be represented on a two-dimensional scale since
we only consider 3 interconnected zones in this simple example
8
“Vertices” is a broader term used to denote the points that describe
the corners or intersections of geometric shapes. Terminologically, it is
convenient to distinguish between “corners” for the ATC domain and
“vertices” for the FB domain
KU Leuven Energy Institute
3
3. Long-Term adjustments
Available Transfer Capacity (ATC)
The Net Transfer Capacity (NTC) is derived from the Total
Transfer Capacity (TTC), after deducting a Transfer Reliability
Margin (TRM). While the TTC is the maximum commercial
exchange possible between two zones in one direction, the
TRM is reserved to be able to cope with emergency situations
or unexpected deviations in neighboring countries. Finally, to
arrive at the Available Transfer Capacity (ATC) value, the
already known long-term nominated power flows are
subtracted from the NTC value, indicated by the red area in
Fig. 5 on the left. The ATC is subsequently available for trade on
the day-ahead market.
Figure 5: Derivation of ATC (ATC) and RAM (FB)
Flow-based (FB)
A similar approach is implemented to derive the margin avail-
able to the market under a FB approach. However, while for
ATC an aggregate value per border is taken into account, the
FB mechanism considers each line individually. Fig. 5 on the
right illustrates the process. Initially, the maximal flow (F_max)
is available. A security margin or Flow Reliability Margin (FRM)
reflects the uncertainty inherent to the process of determin-
ing the remaining capacity, while F_ref represents the physical
flow that will be present due to the already known long-term
nominations. What will eventually be offered to the day-ahead
market is the Remaining Available Margin (RAM).
4. Allocation of available capacity (market
coupling)
For both methodologies, the result of the three preceding
pre-coupling steps is a potential trading area. These areas
actually denote a combination of constraints, which serve as
input to the market coupling algorithm.
Comparing both domains in Fig. 6, it is clear that the larger FB
domain surrounds the ATC domain. As a consequence, the FB
mechanism offers more trading opportunities to the market.
Therefore, FB market coupling leads to a solution equal or
better in terms of social welfare compared to the ATC market
EI Fact sheet: Cross-border electricity trading: towards
flow-based market coupling
EI-FACT SHEET 2015-02
coupling algorithm. Fur thermore, when a TSO provides ATC
constraints, he needs to make a choice in advance on how to
split the capacity among its borders (A to B and A to C), even
before the market par ticipants’ bids are known. In contrast,
under the FB approach, the entire Security of Supply domain
is offered to the market. Driven by bids and offers, the market
itself decides on the repar tition of commercial capacity among
market players.
Figure 6: Comparison of ATC versus FB trading domain
Flow-based market coupling in practice
While the flow-based approach is clearly beneficial compared to
ATC from a theoretical point of view, practical considerations are
also taken into account. The ENTSO-E network codes recom-
mend the use of the FB approach for meshed grids, while ATC
should be maintained in areas where the distribution of power
flows is only slightly influenced by electricity trade in non-adjacent
bidding zones. For the Central Western European (CWE) region,
clearly the FB methodology is preferable.To test the FB procedure,
a parallel run has been organized by CASC to simulate the
outcome of FB day-ahead market coupling, while still operating
under the ATC regime10.This way, gradual improvements to the FB
market coupling mechanism can be made, before the final go-live.
Effect on market functioning
Overall welfare gain
The objective of market clearing is to optimize welfare, defined as
the sum of the consumer and producer surplus and congestion
revenue (CR). The producer surplus equals the benefit to
producers derived from selling at a market price that is higher
than the least that they would be willing to sell for. The consumer
surplus is the gain obtained by consumers as they can purchase
electricity at a price that is less than the highest price that they
would be willing to pay. Fig. 7 displays the average weekly
welfare gain per country, comparing the actual ATC to the
10
CASC is the central auction office for cross-border transmission ca-
pacity for CWE, the borders of Italy, Northern Switzerland and parts of
Scandinavia, providing a single auction platform and single point of contact
KU Leuven Energy Institute
4
offline simulated FB market coupling. Positive values for all
countries are observed. Congestion Revenue (CR) is the product
of the price difference between two zones and the constrained
energy exchanged between them. As the network is less
constrained under FB market coupling, there is less CR. Overall,
welfare (consumer + producer surplus + CR) in the CWE region
is higher for the simulated FB than for ATC market coupling.
Figure 7: Average weekly change in surplus (consumer + producer
surplus) per country and average weekly change in CR for CWE
region in 2014 (Source: Parallel run CASC)
Increased price convergence
FB market coupling leads to increased price convergence, which
can be interpreted as the percentage of time that prices are
equal across the entire CWE region. Fig. 8 pictures the price
convergence rate for each available week of 2014. A higher
convergence rate can be identified for FB than for ATC for each
week of 2014.
Figure 8: Price convergence ATC versus FB in 2014 (Source: Parallel
run CASC)
Main challenges for implementation
Influential design parameters
The input parameters provided by individual TSOs influence the
FB market outcome. Consequently, transparency about the design
of all the parameters is necessary in order to allow a non-
discriminatory, efficient and market-based use of cross-zonal
capacity. Specifically, the freedom of the TSOs in this field should
be limited to prevent them from making choices that could affect
the market outcome in a negative way11.
11
A. Marien, P. Luickx, A. Tirez and D. Woitrin, “Importance of Design
Parameters on Flowbased Market Coupling
EI Fact sheet: Cross-border electricity trading: towards
flow-based market coupling
EI-FACT SHEET 2015-02 5

Unpredictable auction outcomes
The outcome of the FB market coupling algorithm is not always
intuitive. Although it is reasonable to assume that a low price
country exports electricity to a high price country, with FB market
coupling this is not always the case. As the FB algorithm optimizes
welfare for an entire region, it does not take into account the
prices or volumes of each zone separately. This way, it can happen
that some electricity flows occur from high to low price zones.
Since this raised concern, an adapted algorithm – FB Intuitive
(FBI) market coupling – has been tested during the parallel run
program. Although the FBI solution leads to less overall welfare
gain than the plain FB solution (but still higher welfare than ATC),
it is more acceptable to market parties. Finally, it has been decided
to go-live with the intuitive version of the FB market coupling
algorithm12.
Conclusion
Flow-based market coupling leads to a more efficient use of
generation and transmission resources. While under ATC, TSOs
themselves determine capacity values based on forecasts and
historical data, the FB mechanism allows TSOs only to derive
the impact that trade will have in terms of physical flows on the
network. Subsequently, it is the market who decides how
transmission capacity is allocated over market parties. More
capacity is offered to the market under FB market coupling,
resulting in an overall welfare gain and increased price
convergence.
However, the flow-based solution is less transparent than the ATC
mechanism. The necessary input data TSOs have to provide is
complex and influences the market outcome. Also, the capacity
calculation process is less straight-forward and flow-based market
coupling occasionally leads to unpredictable auctions outcomes.
This may be confusing for market parties.
Finally, flow-based market coupling does not solve the problem
of congestion management inside bidding zones. In this respect,
it might be necessary to review the current bidding zone
configuration in Europe, reflecting also on the idealized nodal
pricing solution.

Available Transfer Capacity Flow-based

1) Calculation of TSO coordination Border-by-border, bilateral Coordination at regional level with
available capacity coordination between TSOs interaction among all TSOs
Result of capacity calculation Available commercial capacity A set of critical branches and their
(NTC) values per direction on corresponding available physical
each border capacity
2) Verification Grain of verification Two timestamps verified daily Twenty-four timestamps verified daily
3) Long-term Grain of adjustments Adjustment on value per Adjustment applied on each
adjustments direction on each border considered critical branch
4) Allocation of Constraints to MC algorithm Constraint for each direction on Constraint for each considered
available capacity each border critical branch
Capacity allocation Capacity is already allocated over Market-oriented capacity allocation,
borders by TSOs in Step 1) based on market bids and offers

Table 1: Summary of the key differences between the ATC and FB methodology. The highlighted boxes indicate at which step capacity is
allocated for both methodologies

12
http://www.casc.eu/media/140801%20CWE%20FB%20MC%20Appro-
val%20document.pdf

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KU Leuven Energy Institute EI Fact sheet: Cross-border electricity trading: towards

flow-based market coupling