Flow-Based Market Coupling in the Nordic Day-Ahead Electricity Market: Introducing Water Value Dynamics in Parallel Run Simulations

Abstract

The Nordic Transmission System Operators are jointly conducting External Parallel Run simulations of Flow-Based Market Coupling in the Nordic Day-Ahead electricity market. When simulation results are considered over time, hourly volumes accumulate to changes that, for bidding zones dominated by production from stored hydro power, could stress reservoir levels and may deviate from profit-maximising strategy. Cumulative bias can occur if bid curves used are from a Net Transfer Capacity market environment, not adjusted for changes in opportunity cost when congestion is relieved. To maintain sustainable reservoir levels and maximize production value, producers' willingness to sell is expected to change.

This thesis derives bid curves and reconstructs the external parallel runs for the Nordic Capacity Calculation Region, for 31 hours across 2023. Upon verification of the model’s performance, we re-run the simulations, inducing mutually dependent shifts in the supply curves of bidding zones with hydro reservoirs. The new equilibrium must conform to the supplied volumes from reservoirs in the parallel Net Transfer Capacity solution. The results quantify the market effects of Flow-Based Market Coupling, given that the hourly production volumes of bidding zones with hydro reservoirs do not change by implementing Flow-Based Market Coupling.

The simulation results for all 31 hours combined, accounting for changes in water values, suggest a net surplus loss of 0.48 million euros when replacing Net Transfer Capacity with Flow-Based Market Coupling in the Nordic CCR. The result is 1.93 million lower than in the flow-based EPR for corresponding hours. When reducing the sample to a selected interval with lower variability in estimated water values, net surplus gain totaling 22% of EPR flow-based results is obtained. Results may be in the lower band due to strict assumptions on the optimal production plan, but the direction of effects appear robust. In addition, effects on prices, volumes and distribution are studied.

The Nordic Transmission System Operators are jointly conducting External Parallel Run simulations of Flow-Based Market Coupling in the Nordic Day-Ahead electricity market. When simulation results are considered over time, hourly volumes accumulate to changes that, for bidding zones dominated by production from stored hydro power, could stress reservoir levels and may deviate from profit-maximising strategy. Cumulative bias can occur if bid curves used are from a Net Transfer Capacity market environment, not adjusted for changes in opportunity cost when congestion is relieved. To maintain sustainable reservoir levels and maximize production value, producers' willingness to sell is expected to change.

This thesis derives bid curves and reconstructs the external parallel runs for the Nordic Capacity Calculation Region, for 31 hours across 2023. Upon verification of the model’s performance, we re-run the simulations, inducing mutually dependent shifts in the supply curves of bidding zones with hydro reservoirs. The new equilibrium must conform to the supplied volumes from reservoirs in the parallel Net Transfer Capacity solution. The results quantify the market effects of Flow-Based Market Coupling, given that the hourly production volumes of bidding zones with hydro reservoirs do not change by implementing Flow-Based Market Coupling.

The simulation results for all 31 hours combined, accounting for changes in water values, suggest a net surplus loss of 0.48 million euros when replacing Net Transfer Capacity with Flow-Based Market Coupling in the Nordic CCR. The result is 1.93 million lower than in the flow-based EPR for corresponding hours. When reducing the sample to a selected interval with lower variability in estimated water values, net surplus gain totaling 22% of EPR flow-based results is obtained. Results may be in the lower band due to strict assumptions on the optimal production plan, but the direction of effects appear robust. In addition, effects on prices, volumes and distribution are studied.