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(dai­ly explic­it cross-bor­der capac­i­ty auc­tions fol­lowed by the pow­er trad­ing on local exchanges) has been replaced by a sim­pler, more effec­tive mech­a­nism.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.

Positive results

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.

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.