Impacts of Flow-based Market Coupling on Day-ahead Electricity Market Steered by Social Welfare

Abstract

The flow-based market coupling (FBMC) method for calculating cross-border transmission capacities has been introduced in the European day-ahead electricity market. Its purpose is to maximize the benefit of cross-border transmission for the entire market. The price solution in the electricity market is steered by social welfare, which maximizes the surpluses of consumers and producers as well as bottleneck incomes. The shapes of the demand and supply curves determine which component has the strongest impact on the maximization of overall social welfare. In situations having a lot of supply or demand volume around the realized price level, even a large transmission volume does not significantly affect the surpluses and in this case bottleneck incomes can become the most influential factor. This leads to the fact that in certain situations the market can maximize bottleneck income at the expense of other components. FBMC enables counterintuitive flows which can in certain situations increase bottleneck incomes in another cross-border transmission connection. Artificially increased bottleneck incomes from the perspective of the overall market benefit or without a genuine bottleneck is contrary to the principle that bottleneck incomes should serve as a signal to steer investments in removing bottlenecks and strengthening cross-border transmission connections.