Core Flow-Based Market Coupling: How Will It Impact the Power Market?

The Flow-Based Market Coupling (FBMC) has been in place for Central Western Europe since 2015. In June 2022, Croatia, the Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia will join the flow-based mechanism, impacting the current dynamics of the power market.

“With this change, the grid will be utilised more efficiently. More capacities will be freed up for trade and this is expected to increase social welfare overall,” says Felix Hofmann from Volue.

With the new approach, European markets will get more intertwined.

“In the pan-European market, no country is isolated. This reflects the physical world where cables interconnect European countries.”

But the power grid sets limitations on what can be traded.

“Cables have limited capacities. To give an example, in practice, not all off-shore wind energy produced on a stormy day can flow anywhere on the mainland without restrictions," says Felix Hofmann.

There are different approaches to allocating capacities and incorporating them into market algorithms.

“The flow-based market coupling is an approach that reflects the state of the grid on a more granular level. For example, it includes information on specific lines and transformers that restrict energy flows.”

With this more granular view, market analysts can pin down which elements are constraining energy flows, in principle.

Bigger price convergence across the region

From a commercial perspective, this will lead to an increased price convergence across Europe. Volue’s own energy market simulations appear to confirm this scenario.

Since early this year, Volue's spot model has been running in parallel incorporating the new Core FBMC constraints in order to test and analyse the changes.

“In our simulations, we see prices converging more. One hour after we switched, we directly observed reshuffled energy flows and changed prices across all regions."

Felix Hofmann says that many market players will see the impact of the new market mechanism when it goes live.

Getting the algorithms to understand electrotechnical constraints

In preparation for the forthcoming change, the Volue team has incorporated hundreds of new grid elements into its algorithms.

“It's no longer just a single number reflecting the cross-border capacity,” says Felix Hofmann.

Crucially, power market players now need a holistic view in order to understand the dynamics. But they also need to understand the drivers.

“On the one hand, there are fundamentals like the weather. On the other hand, the electrotechnical perspective of the grid becomes more relevant. The flow-based market coupling requires us to better understand how the grid works,” says Felix Hofmann.

“There might be one critical element in one country constraining the flows in the European grid that has an effect on the prices on the other side of Europe.“

The team has worked hard to make sure the Volue algorithms can process the massive information and data that needs to be taken into account.

“The market has to do it and our model is also doing it. We try to be as close as possible to the market algorithm. It has been a true team effort with quantitative analysts and market analysts working alongside."

Power market players need more insight

With the launch of Core FBMC, it will become imperative for power market players in the whole of Europe to understand how the markets are getting coupled. With the new market dynamics, data products, price forecasts and market analysis will become even more crucial for power market players.

"We offer forecasts of all grid constraints, the so-called power transfer distribution factors, or PTDFs, for the Core region. This is valuable input to spot price forecasting models to capture the increased mutual influence of the different price regions on each other."

Volue's spot models incorporate this holistic view and predict prices and flows for all 42 price regions on the European continent, leveraging the full power of data from across all regions.