‘The integration of the European electricity market will transform the European economy’

European power exchanges are fast moving towards the integration of some 80% of the European electricity market. ‘The old ideal of one European copper plate is rapidly coming within reach’, observes Bert den Ouden, CEO of power and gas exchange APX-Endex and one of the long-time champions of European market integration. ‘With highly beneficial consequences for European consumers and producers. It means more efficiency for everybody. An optimal use of generation and transmission capacity in Europe. And a crucial stimulus for the large-scale use of renewable energy.’

Bert den Ouden, CEO of APX-Endex
Sometimes highly significant events take place whose importance is realised only very gradually by the public at large. When on 18 March of this year, six power exchanges announced the creation of a ‘single price coupling region’ across northern, western and southern Europe, ‘potentially as early as next year’, few people sat up and took notice. The news certainly did not make the front pages of the newspapers. It should have, though: this seemingly arcane “price coupling” development may well have a large impact on the European economy.

To explain why this is so, we have to go back a little, to the last decade of the 20th century. In 1998 the EU made the momentous decision to aim for the establishment of a single, liberalised European energy market. At that time, each member state had its own, strictly national energy market, controlled by its own mostly state-owned utility companies, and more often than not characterised by heavy subsidies for large energy users. Cross-border capacity, especially in the electricity sector, was highly limited and used only for emergency situations.

Now, more than 10 years later, all this has changed. The European energy landscape has been altered beyond recognition. National markets have been liberalised, transmission and generation activities have been separated, many energy producers have been privatised, and new, multinational European energy companies have emerged on the crest of a consolidation wave that has swept through the markets. Yet, despite these massive changes, the ideal of a truly single European electricity market (if we concentrate on electricity for a moment) has not yet been realised. For Europe to really become one market, what is needed is that electricity can be transported across national borders just as easily as potatoes or television sets. In other words, anybody who wants to import or export electricity across national borders should be able to do so at reasonable cost. This requires first of all sufficient cross-border transmission capacity – which indeed has been significantly enlarged in the EU in the past decade, even if there are still plenty of bottlenecks – but also, at least as importantly, the possibility for market parties to freely use this capacity.

This last is exactly what the mechanism of “price coupling” or “market coupling” is intended to make possible. Traditionally, the use of interconnection capacity has been greatly restricted in Europe. Only limited capacity tends to be made available by the transmission system operators to market parties, usually in the form of relatively inflexible auctions. “Market coupling”, which was first introduced in the Nordic markets and then at the end of 2006 in Belgium, France and the Netherlands, creates a single market in which market parties can trade electricity across borders, in effect without limitations. This trading is done on the relevant power exchanges that make the capacity available on their trading floors. In the Nordic countries there is only one exchange active (NordPool), in the three countries that participate in the “trilateral market coupling” (Belgium, France and the Netherlands) there are three (Belpex, Powernext and APX-Endex), but the principle remains the same.

It was in particular the spectacular success of the trilateral market coupling (prices in the three countries for the first time largely converged, electricity started to flow consistently from the cheaper to the more expensive markets and the utilisation of cross-border capacity was greatly enhanced) that prompted power exchanges across Europe to start initiatives to follow this example. As Bert den Ouden, CEO of Dutch-British power and gas exchange APX-Endex puts it: ‘People had been sceptical that market coupling could be done outside of Scandinavia. We showed that it was possible.’ This eventually led to the announcement on March 18th by six European power exchanges of a massive “price coupling of regions” (PCR) that will tie together no less than 80% of the European electricity market.

The PCR-project involves APX-Endex, Belpex, EPEX Spot, GME, Nord Pool Spot and OMEL, which together cover Spain, Portugal, Italy, France, Belgium, Germany, Austria, Switzerland, the Netherlands, the UK, Denmark, Norway, Sweden, Finland and the Baltic Countries. As the press release stated, the PCR will form the basis of a ‘truly European market’. It will take off ‘potentially’ as early as next year.
As an intermediate step, already on 9 November the trilateral market coupling of France, Belgium and the Netherlands will be extended into a “pentalateral market coupling” with Germany and Luxemburg included. This market will then also be connected to Scandinavia. Subsequently, a coupling will be established across the new BritNed cable, to be launched in April 2011.

In addition, it may be noted that in November, Belpex, APX-Endex and NordPool will establish an integrated “intraday” trading platform. (The market and price coupling regions are all “day-ahead” rather than “intraday” markets.)

Trilateral market coupling led to price convergence in France, Belgium and the Netherlands
Thus, the dream of a “single European copper plate”, which was implicit in the EU’s decision to liberalise and integrate European energy markets, is finally becoming a reality. Very soon, a Finnish power generator will be able to sell its nuclear power in Italy, a British wind energy producer will be able to sell its wind power in Germany, Spanish solar power can be swapped for Swedish hydropower, etcetera. At the same time, power users will be able to buy electricity anywhere in Europe. Electricity prices are expected to converge across the Continent. All of this will undoubtedly have an important impact on the investment decisions of large producers and consumers of electricity. It will also have important implications for the national energy policies of European countries, including their subsidy schemes for renewable energy.

There are few people who have been more intimately involved in this process of EU energy market integration than Den Ouden, who has led APX-Endex since its inception in 1999. The former civil servant at the Dutch Ministry of Economic Affairs has been a strong proponent of market integration from the start, because he is convinced that the creation of a single European energy market will transform the European economy. He points out that Europe’s competitors, countries like China, India, Brazil, and the US, have the benefit of much more homogeneous energy markets. ‘As electricity consumption forms the basis of a lot of industrial activity, we cannot afford to have a competitive disadvantage in this area. We need to work together to establish a single market so that we can make optimal use of our energy resources.’

EER spoke to Den Ouden about the PCR initiative at the APX-Endex headquarters at the World Trade Centre in Amsterdam.

With the announcement of the “price coupling of regions”, covering 80% of European power consumption, the integration of the EU power market is on the verge of taking a giant step forward. Are we now seeing the realisation of the old dream of one European copper plate?

Den Ouden: I think it’s close. If we do the right things and if we keep working together, and in good spirits – we have to realise that as exchanges we are very much involved not only in price formation but also in the allocation of cross-border capacity – if we work together in the spirit of public service, then yes, it is possible.

What consequences will this have for the market?

Den Ouden: It will mean a much stronger price convergence than we have ever had in Europe. It will also mean less volatility in prices, and more stability. Actually, I know that some traders are worried that they will have fewer opportunities to make money as a result of this! The prices established on the trading floor will also become a much more reliable indicator of the true market situation.

Does this mean cost savings for electricity users?

Den Ouden: It means more efficiency. For everybody. The most efficient mix of generation will be used at any given time across the entire integrated region. The transportation capacity, which is owned by all of us Europeans, will also be allocated in the most optimal way. Everything will be used 100%. Electricity will always flow in the right direction – from the cheaper to the more expensive market. We have seen this happen when we introduced the trilateral market coupling at the end of 2006. Before this market coupling, prices in France and the Netherlands were never the same, never. Now, they are the same two-thirds of the time. Cross-border capacity was much underutilised in the past. Now it is fully used. And the electricity is always flowing in the right direction, which in the past was not always the case.

In September, Germany and Luxemburg will join this market coupling region. What will the effect of this be?

Den Ouden: Germany is the most liquid market in Europe, so this will lead to large changes. For example, for the UK, which will also become part of this market through the BritNed cable (a 1,000 MW interconnection between the UK and the Netherlands scheduled to become operative in 2011, editor), it will mean much more liquidity. The spot market in the Netherlands will also become more liquid, although it is already quite liquid. Recently the Dutch spot market contributed a record 40% of all physical deliveries on one day. Prices will also converge, for instance prices in the Netherlands and the UK and the Netherlands and Germany. The Dutch and British prices are about the same on average now, but they differ greatly per hour throughout the day. As to the flows, they will be multidirectional – they will flow from the cheaper to the expensive markets at any given time.

How important is market coupling for renewable energy?

Den Ouden: It is tremendously important for the efficient use of intermittent sources of energy, such as wind and solar power. Say there is a depression that moves from the British isles to the European continent. First the UK will have excess wind power, which they will be able to export to the continent. Then Belgium, the Netherlands and Germany will have excess power, which they can transport back to the UK or elsewhere, to France or Scandinavia. Another important boost for wind and solar power will be the ability to use the buffering capacity offered by the hydropower resources in Scandinavia. In this respect the Norned cable from the Netherlands to Norway has already been a great success. There are plans now for a second cable, and we think that this will be built. With market couping we are, in effect, talking about a large-scale “smart grid”.

Do the existing interconnections provide enough capacity to ensure sufficient liquidity in the market?

Den Ouden: I think so. In fact, each cable creates its own market. And you can smooth out differences. Say you sell in Finland and buy in Holland, and someone else does the opposite, the difference can be settled, so you don’t necessarily have to transport physically all electricity that is being traded. Of course it is always possible to build more interconnection capacity. But this is expensive and time-consuming and it runs into a lot of resistance among the public. The best place to build new transmission capacity is, in fact, across the sea. There you don’t have people who object. But we have not exhausted all the possibilities of market coupling yet. It is possible, for example, to move to flow-based coupling, which is a more advanced system than the one we have now. And you can expand intraday trading. This is in fact what Belpex, NordPool and APX-Endex will be introducing in November 2010 – a cross-border intraday electricity market from Helsinki to Brussels. We see this as a first step towards a European intraday market. Intraday trading is particularly important for wind energy, as wind power capacity varies considerably throughout the day. So expanding transmission infrastructure is important, but we cannot wait for that to happen before we start integrating the markets. It would take much too long. With market coupling you receive maximum results with minimal investments.

Do we need an EU-wide regulatory system to make market coupling work?

Den Ouden: Well, it is working very well now. What is more important in my view is that the exchanges improve their cooperation. It is not necessary that they merge into a single exchange. Consolidation will probably continue, but for market coupling to work all we need is good cooperation. I think all exchanges must realise that they are active in allocating transport capacity, which to my mind is a public service activity.

Do you think the same integration process will happen in the gas market as in electricity?

Den Ouden: In gas we see a different situation. Traditionally the gas market was more international and more mature than electricity. But the liberalised gas market has now fallen behind the electricity market. In the gas sector there is a battle going on between the old and the new order. The old order does not let itself be changed so easily. For example, the practice of “use it or lose it” has been common in electricity for a long time, but is only now starting to gain a foothold in gas. I do think there is a tremendous potential in integrating the European gas market.

What should be done to release this potential?

Den Ouden: I think we should develop a gas hub with a few countries, say the UK, Germany, Belgium and the Netherlands. I am in favour of market coupling for gas. The gas prices are already quite close to each other, so you could make progress very quickly. What it needs is resolution and a strong sense of commitment on the part of everyone involved – exchanges, transmission system operators, market parties, governments. The will to give priority to such a project. At this moment everyone is too busy with too many other things.

Why do you think this is important?

Den Ouden: I think Europe should have its own gas price reference. For example, to set a price for LNG on the world market. I don’t think it is good that the LNG price is set in the US on the Henry Hub. Don’t forget: gas is the fuel of choice for the energy transition. It is the most flexible and environmentally friendly of the fossil fuels. People sometimes ask me if I think the gas price will stay linked to the oil price. But which fuel will be leading in the long term? Oil is leading now, but this will change. Gas will become the major international commodity. So it is very important for Europe to develop its own gas hub. I am convinced that the way to a sustainable, efficient, optimal European energy future is through a well-functioning electricity and gas market.

About APX-ENDEX

In June the Anglo-Dutch energy exchange APX-ENDEX won Energy Risk Magazine’s Exchange of the Year Award 2010. The award recognises excellence within energy trading and risk management industries. APX-ENDEX stood out due to its sharply increasing trade volumes, its ability to reduce fees on gas spot transactions and its push to assist European gas and power market integration through its merger and other initiatives, according to Energy Risk Magazine.
The volumes at APX-Endex, which merged with Belgian exchange Belpex last year, grew 26% during 2009. Strong growth in both gas and power trading has continued throughout 2010. APX-Endex, which last year celebrated its 10th anniversary, subsumes the spot exchanges APX Gas NL, APX Gas UK, APX Gas ZEE, APX Power NL, APX Power UK, and the power exchanges Endex TTF Gas, Endex Power NL, Endex Power UK, Endex Power and Endex Power BE.