Photographer: Robert Sullivan/AFP via Getty Images

Eight Years in the Making: Power Without Borders in Europe

Updated on

After almost two years of delays, Germany, France and their neighbors in central-western Europe connected their electricity markets on Wednesday under a system that lets prices dictate where power flows between countries.

Flow-based market coupling matches supply and demand across borders, sending electricity to where prices are highest. Average day-ahead rates are expected to rise in Germany, and decline in Belgium and the Netherlands, according to data compiled by Energy Brainpool GmbH, a Berlin-based consultant.

Eight years ago, a group of 29 energy ministers, regulators, exchanges and grid operators from Germany, France, Belgium and the Netherlands first agreed to improve their cross-border flows. The project, originally scheduled to start in 2013, better manages the way power networks are used, which means that on a breezy day in northern Germany, power from a wind turbine can reach a hospital in France.

“Flow-based market coupling, which is finally starting, might lead to higher exports from Germany into neighboring countries and definitely would be a supportive element for wholesale power prices in Germany,” Alfred Hoffmann, vice president for portfolio management at Vattenfall AB’s energy trading unit in Hamburg, said by phone on May 11, without being more specific.

In flow-based coupling, all cross-border paths between grids are taken into account to maximize capacity. Traditionally, flows are based on the available interconnection capacity at each border, which can hamper price convergence between national networks.

Popping Corks

“After the successful start and intense preparation, we are popping the corks here,” Andreas Preuss, a spokesman at German grid operator Amprion GmbH, said by phone from Dortmund on Wednesday. Hourly prices for tomorrow were calculated according to the new system, he said, without being specific.

Germany has the lowest power prices in the central-west region of Europe, with an average day-ahead rate of 32.11 euros ($35.90) a megawatt-hour for the past year, exchange data show. That compares with 36 euros for France, 41.35 euros in the Netherlands and 43.46 euros for Belgium.

Prices can turn negative when electricity supply outstrips demand, especially when it’s windy and sunny. Germany, Europe’s biggest renewable-energy producer, had 109 hours of negative prices this year, double the amount in the same period of 2014, Epex Spot SE data show.

Flow-based market coupling means negative prices would be “more subdued” because it’s possible to export more from Germany, Preuss said.

Cheaper Rates

Belgian prices would have been 8.7 percent lower on average and Dutch prices 5.8 percent cheaper under market coupling last year, according to Energy Brainpool.

“We won’t see a visible jump in the spot market from one day to another,” Philipp Goetz, a consultant at Energy Brainpool, said by phone on May 13. “In the long run, it will show up” with higher prices in Germany in off-peak times and during the night when demand is lower, he said.

Fluctuating German renewable power generation may still have a bigger effect on prices than market coupling, according to Omar Ramdani, head of analysis at RheinEnergie Trading GmbH in Cologne.

“On average, prices will rise 1 to 2 euros if we don’t see counter-effects from wind and solar production,” Ramdani said Wednesday by phone.

While coupling may improve cross-border flows, the European Commission estimates Europe still needs to spend 200 billion euros on energy infrastructure by 2020, including new power links between countries.

“Market coupling will have some impact but we need more investment in cross-border capacity and interconnectors to see a big difference,” Elchin Mammadov, European utilities analyst at Bloomberg Intelligence, said Monday. “Once these are built the traders will follow.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE