Implementation of Nordic FBMC in Volue's SpotEx

Introduction

Flow-Based Market Coupling (FBMC) represents a key development in the European electricity markets, optimising cross-border electricity trading through a more precise calculation of interconnector capacities. This approach is grounded in the EU Capacity Allocation and Congestion Management (CACM) guidelines, which prefer the flow-based method for regions with highly interdependent cross-zonal capacities. It necessitates thorough market consultation and preparation for a seamless transition, distinguishing itself from the coordinated net transmission capacity (NTC) approach.

The EU’s endorsement of FBMC underscores its commitment to integrating European power markets and maximising the potential of renewable energy sources. First implemented in Central Western Europe (CWE) in May 2015, this methodology expanded to the CORE region in 2022, encompassing a vast area including countries in CWE, CEE, and SEE. Its success in these regions sets a precedent for its anticipated implementation in the Nordic area, aligning with the CACM's principles.

The Nordic TSOs are now exploring FBMC as a viable option for setting transmission capacities between their bidding zones. Significantly, on March 7, 2022, the Nordic TSOs and the Nordic Regional Coordination Centre (RCC) commenced an external parallel run (EPR) of the Nordic flow-based methodology, comparing market outcomes derived from the NTC methodology with simulations based on the FB approach. This initiative marked a critical step toward the expected go-live of the Nordic Flow-based Market Coupling in October 2024, a revised target following the postponement from Q1 2024 due to the complexity of integrating diverse Nordic IT systems into the European Single Day-Ahead Market Coupling (SDAC).

Insights from Volue's Internal Parallel Run

Volue's SpotEx, a comprehensive Pan-European short-term price model, is adapting to this evolving landscape. SpotEx, offering hourly price forecasts across Europe, factors in a myriad of elements and various fundamental forecasts, thereby providing a holistic view of market dynamics. In light of the Nordic FBMC methodology, SpotEx has been conducting an internal parallel run (IPR) for the last seven months, refining its Power Transfer Distribution Factor (PTDF) forecast and model to accommodate the new market structure in the Nordics.

Our IPR, in principle, is running in parallel to our in-production models. However, the following results a stemming from a backcast extending over the entire EPR period. In this regard, it's retrained every five days to forecast the next five days. For the EPR, we have used the available data from the TSOs, spanning from Week 50 2022 (Dec 12th, 2022) to Week 45 2023 (Nov 11th, 2023). The network topology has been updated to incorporate the characteristics of Nordic FBMC:

Prices

In the comparative analysis of NTC prices, both the EPR and Volue's IPR display a noteworthy alignment, with consistent spreads calculated by evaluating the mean price differences under both FB and NTC. Although the general trends are the same, there are also some differences. The EPR observations indicate a general price rise across Sweden, Finland, and Mid- to Northern Norway, while the three Southern Norwegian regions anticipate reduced prices under FB.

Denmark shows slight variations with higher prices for DK1 and lower for DK2, with minimal impact on neighboring regions like NL, DE, and PL, where prices remain largely unchanged, and a moderate increase for the Baltics. Conversely, the IPR reveals some distinct trends: FI appears slightly cheaper, contradicting the EPR's forecast of higher prices. SE3 remains stable instead of the anticipated rise, and DK1 trends towards higher costs, diverging from the expected decrease. Interestingly, the Baltics and PL are projected to be cheaper, marking a shift from the EPR's predictions of higher or unchanged prices. Notably, the IPR suggests that price increases in the Nordics will be more moderate compared to the EPR.

The provided figure offers a comprehensive comparison of FB prices between EPR and IPR, with the NTC price from EPR represented in color. Each dot in the visualization signifies an hourly price, aligning with the black line when prices are equal.

Key observations include the IPR's tendency to predict lower extreme prices. In terms of regional alignment, there's a strong correlation for the southern Norwegian regions, specifically NO1, NO2, and NO5, indicating a consistent market response in these areas. However, the IPR's projections for FI show a deviation, particularly for moderate prices, where they are higher than expected. Additionally, a broader spread is observed for smaller prices in FI, suggesting a more variable market behavior under the FBMC framework in this region.

Price spreads and price convergence

The figure illustrates price spreads across regions by calculating the difference between the maximum and minimum prices per hour, normalised by the hourly mean price.

Both EPR and IPR distributions show a rise in moderate and small spreads, with a decrease in occurrences where spreads exceed twice the mean price. This trend suggests enhanced price convergence, aligning with expectations from FB. However, approximately 60% of the time, spreads remain larger than twice the mean price, indicating persistent price disparities.

Flow direction

The graph depicts the proportion of hours with identical flow directions in EPR and IPR.

Except for the NO1>SE3 border, predictions indicate alignment in flow directions for both IPR and EPR in over 50% of the hours. Notably, the most significant alignment is observed along the internal Swedish borders. In general, this highlights again that Volue's implementation of IPR is robust and in line with the expected results by the TSOs.

Conclusions

Conclusively, both the TSOs' EPR and Volue's IPR indicate promising results. The process appears stable, with consistent availability of capacity domains, and a notable improvement in price convergence compared to existing systems.

Our mission at Volue Insight is unwavering: to empower stakeholders with accurate, relevant, and timely information, fostering informed decision-making in an intricately connected energy market. Hence, we at Volue are eagerly anticipating the final impact of the Nordic FBMC implementation on price formations, for which we are thoroughly prepared.

For further insights or queries related to this topic, or if you are interested in up-to-date Insight by Volue fundamental data and power market forecasts, feel free to contact us.