Hungary: En Route to the Internal Energy Market – Positive results for CEE Regional Market Coupling
→ Dániel Varga
→ Sándor Habóczky
The market coupling of the Czech, Slovakian and Hungarian power exchanges brought almost immediately positive results for Hungary: less price volatility, lower risk premium and more supply security. The successful integration of power exchanges may attract further countries in the region to join, and promotes the completion of the Internal Energy Market to be reached by 2014.
Market coupling completed
As of 11 September 2012, the Hungarian power exchange joined the integrated power exchanges of the Czech Republic and Slovakia. Thus, the three countries have officially launched common day-ahead electricity market coupling under the project management of the Hungarian power exchange, on the principle of implicit capacity allocation. The market coupling has brought two major operational innovations. One is that day-ahead bids for both purchase and demand in the three countries are traded together up to the available cross-border capacities. Traders registered in any of these countries need not initiate further registrations.
The other innovation is that the former two-steps process related to cross-border capacities (daily explicit cross-border capacity auctions followed by the power trading on local exchanges) has been replaced by a simpler, more effective mechanism. Under the integrated trading system, the trade algorithm takes the energy flow and the cross-border capacities simultaneously into account, thus making it possible for cross-border capacities to be managed implicitly together with the power trading processes. As a result, the reservation of cross-border capacity by the means of daily explicit capacity auction is no longer necessary.
Although the trading algorithm in the background changed, the practical trading mechanisms, including the trading platform, remained the same, so market participants do not experience essential changes in the everyday practice of trading.
The market coupling had immediately positive pricing effects on the Hungarian power exchange. After three weeks, price volatility was reduced while correlation between the Hungarian and other European indexes increased.
The risk premium, which occasionally exceeded EUR 10/MWh compared to the German power exchange, practically disappeared: another benefit for end-users.
Thanks to the above implicit allocation system and the one-step approach, higher efficiency of utilisation of cross-border capacities is expected.
The market coupling also greatly helped improve supply security in the participating countries. Due to the aggregate size of the integrated markets, stability, reduced price volatility and higher liquidity may be reached in the whole region.
En route to the Internal Energy Market
As declared by the European Council in February 2011, the intent is to reach a fully integrated single market of electricity and gas within the EU (Internal Energy Market) by 2014. The integration process is primarily based on the harmonisation of market and network operation rules for electricity and gas under the so-called “third energy package”, and on possible measures under the set of rules referred to as the “energy infrastructure package”. An efficient, interconnected and transparent Internal Energy Market being open for competition is expected to be a key factor for EU competitiveness as a whole by offering consumers a best-price driven choice between different companies supplying gas and electricity, and by making the market accessible to all suppliers.
To gradually reach a completely integrated Internal Energy Market, the Agency for the Cooperation of Energy Regulators, founded in 2011, began to work with partners across the industry to set out a schedule and framework for the regional markets to couple and then join the wider pan-European market. The successful market coupling of the Czech, Slovakian and Hungarian power exchanges fits into the above scenario as an important step towards completing the Internal Energy Market.
The quick positive results following the market coupling, and the necessity of the regional and then EU-wide integration of the national energy markets, may attract further countries to take part in the market coupling in the CEE region.
Romania has already declared that it intends to join the regional initiative, and Poland has shown interest as well. The doors of the three integrated power exchanges are open to neighbouring countries who wish to join the integration, since it is a clearly declared option for adjacent countries.
However, interested countries should note that the support and contribution of their local power exchange, transmission system operator and regulator is required to implement further integration in a reasonable time.