More thoughts on economic issues related to the Tres Amigas project, an ambitious proposal to connect the Western, Eastern, and Texas electric grids via a three-way high tech transmission link located in eastern New Mexico. (Earlier: Tres Amigas intro and Economics for …).
Europeans have had several years of experience connecting separate national power markets via transmission links, and years of experience with inefficient use of those links. Problems in inefficient use arise in part due to the difficulty in coordinating power transactions with matching transmission transactions. The current best solution to the problem has been to employ a concept of “market coupling.”
Market coupling is a mechanism used to integrate electricity markets in different physical areas while requiring minimal changes to the local arrangements. Market coupling replaces a two-step process: a daily explicit auction of transmission capacity followed by the day-ahead energy markets. Market coupling integrates transmission allocations and energy trading, removing many of the inefficiencies at the day-ahead stage.
Market coupling allows exchanges to remain separate legal entities with individual trading platforms, contracts and clearing; a single regional market is created by optimising the use of the already existing transmission capacity.
There’s more (including a 28-page Trilateral Market Coupling Algorithm Appendix for the interested reader), but in short the neighboring power exchanges share information about the bids and offers submitted to each during the day-ahead market and then adjust their individual clearing of bids and offers such that power flows from low-cost to high-cost areas and the price of power tends to be equalized among the areas. The result is a much more efficient use of the interconnecting links, reduced price volatility, and a reduced cost of producing power over the three-region area.
For a deeper look at market coupling issues: Leonardo Meeus and co-authors have noted that pricing outcomes may not be unique in the market coupling process (i.e. an efficient set of power flows may be consistent with more than one set of possible prices). In “Market coupling and the importance of price coordination between power exchanges,” Energy, 34:3 (March 2009), Meeus et al. explain market coupling, the possible pricing problem, and how to choose among multiple possible price solutions.
Want more? Searching “market coupling” at Google Scholar yields several hundred results.
I also wanted to look at Derek Bunn and Georg Zachmann, “Inefficient arbitrage in inter-regional electricity transmission,” Journal of Regulatory Economics, forthcoming. The pre-print is available online for JRE subscribers, but my institution is not a subscriber so I don’t have access yet. Here is the abstract:
This paper analyzes the efficiency of an explicit ex ante auction for network access to facilitating trade between two separate, but linked, electricity wholesale markets. It is generally assumed that greater regional interconnection will mitigate the exercise of local market power by dominant generators, but we show analytically that when a dominant player has access to a more competitive neighboring market, and is also the lowest cost producer, the exercise of market power becomes attractive and can have negative consumer welfare implications. For an empirical analysis, we use a unique data set of daily company-level flow nominations on the Anglo-French Interconnector (IFA). …We are able to identify evident inefficiencies in the market behavior, for which several explanations, including market power, may contribute.