Europe's power markets set to link up in search for best price

FRANKFURT/OSLO Wed Oct 9, 2013 12:15pm BST

A chimney billows smoke behind electricity wires in central Beijing December 21, 2009. REUTERS/David Gray

A chimney billows smoke behind electricity wires in central Beijing December 21, 2009.

Credit: Reuters/David Gray

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FRANKFURT/OSLO (Reuters) - National power markets across Europe will next month begin pooling electricity for millions of consumers across 15 countries, creating the first step towards a common market for nearly three quarters of Europe's demand.

Because the markets used to be isolated, the lack of links between neighbouring countries makes it difficult to tackle situations of over or undersupply, which if properly handled, could lead to lower energy prices for industry.

Fifteen national markets will from November 26 be able to use interconnectors across borders more effectively once so-called market coupling starts in the North-Western Europe (NWE) market region.

It will allow traders to buy and sell available power capacity more easily across borders and according to supply and demand pricing signals.

"The harmonisation of trading rules is one of the core tasks for the creation of an efficient pan-European power market," said Jean-Francois Conil-Lacoste, chairman of Paris-based EPEX Spot, one of four exchanges in the project.

Norwegian grid firm Statnett issued figures showing NWE will account for 2,300 terawatt hours (TWh) per year compared with total European consumption of around 3,200 TWh.

The NWE initiative was originally made up of France, Germany/Austria and the Benelux countries (Belgium, Netherlands, Luxembourg), but has been widened to Britain, the Nordic countries (Denmark, Sweden, Norway and Finland), the Baltics (Lithuania, Latvia and Estonia), as well as Poland.

Apart from power exchanges, the move also includes 13 transmission system operators (TSOs) and their cross border power links, working together by agreeing a central formula to combine trading and the transport of electricity.

While much of continental Europe is set to benefit broadly from the move, analysts say Britain - which is linked to the Netherlands and France by cable - stands less to gain.

"Price differentials will likely remain in place because Britain is quite isolated and there is little scope to fill the cables even more," said Peter Osbaldstone, analyst at energy research and consultancy Wood Mackenzie.

British wholesale power prices are 5-10 euros per megawatt hour (MWh) above those in the Netherlands because of the UK's higher exposure to expensive gas generation and limited interconnector capacity.

PUZZLE COMES TOGETHER

Market coupling mandates that capacities are used efficiently so that supply and demand fundamentals can rule across different national power markets, enabling traders to work under a joint set of rules.

"Market participants trading on a power exchange will... benefit from broader offer and demand across borders," said Wolfram Vogel, spokesman for EPEX Spot.

This means that exchange prices emerging from the process will see a higher price convergence across Europe, making the market more efficient and liquid, and reducing costs for industries operating across Europe.

Market participants say other benefits include greater supply security through access to neighbouring markets, increased cable operator revenues, as well as incentives for financial institutions to participate in power trading.

The European Commission says that more similar prices within the European Union are needed as energy intensive industry profits are already falling behind rivals in the U.S., and that this will worsen unless high energy costs are curbed.

(Editing by Henning Gloystein and James Jukwey)

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