An integrated model for electricity market coupling simulations: Evidence from the European power market crossroad

• Published in: Utilities policy 2022-12, Vol.79, p.101456, Article 101456
• Main Authors: Halužan, Marko, Verbič, Miroslav, Zorić, Jelena
• Format: Article
• Language: English
• Subjects: ENTSOE-E transparency platform; EU market Coupling; Price elasticity of supply EUPHEMIA; Price shock transmission
• ISSN: 0957-1787; 1878-4356
• DOI: 10.1016/j.jup.2022.101456

Motivated by the project of European Power Exchanges to develop a single price-coupling solution to calculate electricity prices across Europe that respects the cross-border capacity constraints on a day-ahead basis, we empirically examine and quantify market inefficiencies in non-coupled day-ahead electricity markets. These result from inefficient cross-border capacity allocation and its underlying effect on the market clearing prices. Efficient cross-border capacity allocation and new market clearing prices are simulated using a social welfare maximisation algorithm for the capacity of relevant network elements, whereas the order book generation process is reproduced by the econometrically estimated supply price elasticity functions. The estimated vector autoregression model and the underlying impulse response functions examine price shock transmission under different market regimes. The market coupling process is simulated on the historical non-coupled day-ahead market realisations at the junction of three regional power markets: Central Western Europe, Northern Italian, and South Eastern European markets. Simulation results confirm steady, efficient cross-border capacity utilisation, reduced price variance, improved overall price convergence and amplified price shock transmission in coupled electricity markets. Furthermore, in the simulated period, we have estimated an increase in the overall suppliers' and consumers’ surplus of almost EUR 16 million. The proposed simulation framework is a clear choice for applied simulation in coupled day-ahead electricity markets, offering valuable visual insights into the cross-border capacity allocation and its implications on electricity prices. [Display omitted] •The paper proposes a general simulation framework for coupled European day-ahead electricity markets.•Simulation is performed based on the ENTSO-E Transparency Platform data.•EUPHEMIA algorithm is used for capacity allocation and price determination.•Orderbooks are generated by estimating supply price elasticity functions.•Electricity price shock transmission is analysed by impulse response functions.