Flow-based market coupling – what's all the fuss about?

In October, the Nordic power market introduced a new calculation method for cross-zonal capacity to improve Nordic grid utilisation. However, so-called flow-based market coupling, in place for almost a decade in continental Europe, has received a rocky reception in the north. Particularly amongst policy makers and small companies. 

So, what exactly is it, and why has it caused a furore in the Nordic region?

In this episode, Richard speaks to TenneT's flow-based expert Frank Boerman, to unpack exactly how the flow-based model works, and two of our Montel experts share insights on some of the challenges that the Nordic energy market has already faced under the new system.   

Host: Richard Sverrisson –  Editor-in-Chief, Montel

Guests: Frank Boerman – Process Specialist at TenneT; Olav Vilnes – Nordic Editor, Montel News; Priyanka Shinde – Nordic Market Expert, Montel News

Editor: Bled Maliqi

Transcript

Richard Sverrisson – Editor-in-Chief, Montel: 0:06

Hello listeners and welcome to the Montel Weekly Podcast where we bring you the latest news issues and changes happening in the energy sector. A perennial complaints amongst some market participants has been that not enough capacity has been made available due to security of supply concerns. But last month, a new calculation method for cross zoneal capacity was introduced to improve Nordic grid utilization. The system is called flow-based Market coupling. Some of your listeners may be familiar with it but some may not. It has received some criticism from lobby groups and smaller firms in the new Nordic region. In this episode, we're gonna try and explain this quite techy system, how it works in practice, what it's meant to do, and what have been some of the concerns so far. To help me unpack this, I'm pleased to be joined by Frank Boerman, process specialist at TSO Tennet in the Netherlands. A warm welcome to you, Frank.

Frank Boerman – Process Specialist at Tennet: 1:00

Thank you. Hello Richard.

Richard Sverrisson – Editor-in-Chief, Montel: 1:01

Great to have you back. Our Nordic editor, Olav Vilnes.

Olav Vilnes – Nordic Editor, Montel News: 1:04

Thank you Richard.

Richard Sverrisson – Editor-in-Chief, Montel: 1:05

Great to have you back as well, and our Nordic market expert, Priyanka Shinde Welcome to the Montel Podcast. Priyanka.

Priyanka Shinde – Nordic Market Expert, Montel News: 1:11

Thank you. It's a pleasure to be here.

Richard Sverrisson – Editor-in-Chief, Montel: 1:13

I'd like to start with you, Frank. Could you explain for those who don't know what flow-based market coupling is exactly, and could, if you can try and put into layman's terms.'cause it is a bit complex.

Frank Boerman – Process Specialist at Tennet: 1:23

It is. But how I usually like to explain it in the most simple fashion is that in the. In the system we had before flow-based, we simply had a capacity number per border, per direction. For example five op megawatts released capacity from the Netherlands to Germany, and then another, let's say 600 from the Netherlands to Belgium. Now, obviously if you as a TSO want to calculate the capacity that is available on the borders, and you look at many scenarios, you in the end, you look at the most conserv, the lowest number, the most con conservative take to be able to say that you're safe in all situations. But that is in practice not always needed because. If there is a large export from S to Germany, it's very possible that there is a large import possible from Belgium to the Netherlands, et cetera. So in other terms, borders are not in isolation. The grid is all connected, and that is what flow-based calculates. So flow-based calculates in such a way that it takes to, into account these dependencies and that it in the end gives you an a capacity a matrix of constraints. So a set of possibilities of capacities. And then in, within which the market can move taken into account dependencies of net positions of various zones. And why was it introduced? It was introduced because European system was looking for more efficient ways to use the grid. Especi specifically because of what I just sketched, so that an ATC as we call it system is too conservative. And then yeah, there was for various trials and attempts and in the end we went with this, which was actually developed in Western Europe. Among French Belgium, German, and Austrian and Toch Tezos. And then we tried it out in 2015. And that worked pretty well. And then we expanded to a larger region to do most of Continental Europe. And now recently the Nordics have switched as well.

Richard Sverrisson – Editor-in-Chief, Montel: 3:16

Yeah. What are the benefits compared to the system that was in the place before? I know. And maybe you could explain also what ATC is, Frank?

Frank Boerman – Process Specialist at Tennet: 3:23

Yeah, so ATC stands for available transfer capacity. So that's the simple number that I was talking about. And the benefit is actually quite easily summarized. You can release more capacity to the market, not in a linear fashion per border, but as a set of of possibilities.

Richard Sverrisson – Editor-in-Chief, Montel: 3:41

And it's been running in on the continent for many years. Almost 10 years then Frank. And then were there hiccups initially or, can you see some of the concerns that emerge from the, in the Nordic market at the moment that they existed before on the continent?

Frank Boerman – Process Specialist at Tennet: 3:54

Yes. Yeah. Obviously this is a little bit before my time. I fit in the industry for. For a little four years now. But I did see the go life of core and the same concerns were raised maybe in a different way, but in the end it always boils down to the fact that a flow-based system is much more difficult to forecast than ATC systems by nature because you give this set of possibilities. It's not a simple number per border anymore. So it's simply a more complicated system. But on the other hand, it, I would also like to state it's not rocket science, right? So if anybody with a rudimentary knowledge of linear algebra can understand what a constraint matrix is and, and so it is more difficult than the previous systems, but it brings a lot more social welfare because it delivers more capacity. And it is definitely once you do some studying, or as I said during the mental energy day, you have to do your homework. Then it is, it's doable to forecast as many also smaller plays prove every single day on the continent.

Richard Sverrisson – Editor-in-Chief, Montel: 4:56

That's useful to have that background there, but why did the Nordics introduce it so late? Olav?

Olav Vilnes – Nordic Editor, Montel News: 5:00

I think the intention initially was to introduce it already back in 2016, but then there were a lot of it problems. They had to develop new system they had to coordinate the systems they already had. So I think there was almost a habit every year to write about a new delay. For any news desk like motel.'cause there was always news coming out that it were delayed. It problems sometimes difficult to understand what these IT problems consisted of but at least that was the main explanation given. And what's been the reaction so far? I think after, after, yeah. This is of course not something that often reaches the main news in the evenings. But there have been some quite some big reactions in Sweden because you have seen higher prices in the south of Sweden, which even created. Quite a lot of criticism from the industry there, from some politicians as well. Even the social Democrat party in Sweden have actually called for a halt to this launch of market coupling just to investigate the po potential consequences further. So that's quite surprising actually, that you have such strong. Even political reactions on a very technical system.

Richard Sverrisson – Editor-in-Chief, Montel: 6:00

Okay. So it has had some political reverberations and has created some shockwaves there, even though it's quite technical. And is that because of the price differentials then?

Olav Vilnes – Nordic Editor, Montel News: 6:09

It's probably 'cause of the price differentials. There were some news coming out today from the TSO in Sweden, which said that flows had increased by 30% across the country after flow-based was introduced compared to the 20 days before it was introduced. I think that shows that figure shows that it has benefits for the flows. More power is flowing from the north or south. But in the meantime, there are of course issues with connected to counterintuitive flows. You have some bidding zones that have low prices, that actually get inputs, which is difficult to understand from from the perspective that you had before this system was introduced. It also then as Frank said makes it more difficult to predict. They had prices for market participants. So we have had complaints also from power producers, for example, who find it harder to manage their production because they don't really know the price and they're surprised by the outcome. But that is probably a learning process that they need to Yeah. Get used to and align their. Yeah. Adjust their methods models,

Richard Sverrisson – Editor-in-Chief, Montel: 7:04

absolutely. I'd like to put those issues to, to Frank as well. But first, Priyanka, what, you know, you are based in Sweden. What's your take on the experience so far of flow-based market coupling?

Priyanka Shinde – Nordic Market Expert, Montel News: 7:14

In my opinion, I think flow-based market coupling in terms of the go live has delivered according to what we were, yeah, contemplating about it because the system operators have been running some parallel runs for about one and a half years. So we had some indications of this. There were several discussions. There were regular stakeholder meetings that were organized and I have actually participated in some of those. So I was aware of what was coming in to see. Yeah, that going into coming live in reality is something, I must say that it has been in line in terms of more capacities being avail, availed and also more flows being facilitated in a socially optimal way where cheaper resources are being sent to the expensive price zones and so on. So this is happening. There's also, we do see that there are kind of market decisions, which already include certain overloading effects of power lines or. Network elements, which otherwise the system operators would have to actually tackle in terms of expensive remedial actions at the real time. So they're already taken into account day in the day ahead, stage in the market clearing. So it's also fascinating that kind of bringing closer, I think the markets to the physics of the system. I think this is one of the biggest takeaways of what. The flow-based has delivered in Nordics. And definitely, this brings us to other questions of counterintuitive flows and so on. But that's like a kind of part and parcel of flow-based market company.

Richard Sverrisson – Editor-in-Chief, Montel: 8:36

So what is a counterintuitive on, I know you prefer the term, a non-intuitive flow there. What is that? So that's basically, you know, the intuitive way is that a power would flow from a lower price from a low price zone. To a higher price to higher. And but what's that? What's accountable? That would be the reverse then

Priyanka Shinde – Nordic Market Expert, Montel News: 8:52

The opposite. Yeah, exactly. And I think the concept itself is quite difficult to understand. So we can keep it to a simpler word by saying non intuitive flows. But yeah, it's actually also something that makes us think in a different way because so far in Nordics, since we have had the older method, which is ATC, which had always the normal direction. The simpler one. But now it's a new way of thinking that we have to get used to because what happens is that the flows can be directed from higher price zones to the lower ones. So one example I can quote is from Sweden. So from se one, which was actually higher priced, SE one is the northern region of Sweden towards the central part, which is SE two. So we were seeing flows. In SE two, which was actually lower priced. But what was happening is eventually these flows were also, some of these were directed towards E three, which is southern part towards Stockholm which is actually really a consumption hub. So we are seeing the, these kind of patterns. So it might seem that from se one to SE two, it's actually counterintuitive or non-intuitive, but eventually they're also being direct. Elsewhere. So this is one, one kind of way to release more cap flows capacity such that they bring overall better social welfare for the overall power system. And the second thing that actually we have been observing sometimes is the interaction with Norway and Sweden. So NO three, which is the. Central part of, nor I would say, so that has that was even having negative prices some days, but it was actually importing so from Sweden. So one would say, why was that happening? And actually that was to avoid some overloads in certain power lines in Sweden. So these kind of lows can be facilitated to avoid expensive remedial action. So it's like a stitch in time saves nine.

Richard Sverrisson – Editor-in-Chief, Montel: 10:33

So it's better for the system as a whole, even though there may be some kind of irregularities in the way that the prices are formed, if that's a, maybe a very simplistic way of putting it. But Frank what's your view on this on these kind of, these concerns have emerged from some Nordic players, and especially the reaction to, to counterintuitive or non-intuitive flows.

Frank Boerman – Process Specialist at Tennet: 10:53

Well, in line with what the previous speaker said both of them is that the Nordic TSOs have run a parallel run for a long time. So any, anybody who is truly surprised by its results simply has not been paying attention over the last year and a half. And I think that's important to stress because a lot of parties seem to be telling the public like, we're completely caught out. That just means that you haven't been paying attention. In terms of knowledge with the flows, a couple of points important to remember. First of all is that a lot of people look at commercial scheduled exchanges. But commercial schedule exchanges are not are not real. They are something that is calculated by UFEMIA after the fact and Nordic flow based actually,

Richard Sverrisson – Editor-in-Chief, Montel: 11:36

sorry, just breaking that. What is UFEMIA? Can you just explain that as well?

Frank Boerman – Process Specialist at Tennet: 11:38

Oh, I'm sorry. That's the market, that's the market coupling algorithm. So the thing that puts it all together for the whole of Europe. And Nordic flow base actually allows you to see the actual forecasted physical flows on the borders which are much more in line with physical flows. Then indeed you can still see normal, intuitive flows but sometimes you see them differently. But it is an important, normal, intuitive flows is an important part of making the optimization work, right? So it's important to remember that the market coupling is based on a regional optimization. So that means it finds the optimal point for the whole market region, as I always like to say, from the north of Norway to the south of Italy. And, if you constrain that to only allow it to cross borders from low to to high prices, then you can end up in a point which is not the global optimum. And that's why it's very important that in, in, in as much areas as possible, non ATU flows are possible because it enables, in the end, more welfare for both consumers and producers in the whole region combined. But that's really a zoomed out view that you need to have. In European integration and European market coupling, and unfortunately not everyone sees that. So sometimes people zoom very much in on their area. But that is of course not not the whole picture.

Richard Sverrisson – Editor-in-Chief, Montel: 12:59

When it comes to forecasting both flows and prices, what were the challenges here under the new system?

Frank Boerman – Process Specialist at Tennet: 13:04

Well, partly if you only have to forecast a single number per border, that's obviously much easier than to forecast the whole set of possibilities. But I have seen in the past by multiple companies. That you can do even simpler forms of time series forecasting on the PTDF matrix and still get quite a decent forecast to be able to see what the market direction is combined with the fundamental analysis. The problem with the Nordic is obviously is Ska Ka. Sonet anonymizes, its Connects to be in line with Swedish national security laws, which are unique, I can say in, in Europe, at least for their impact on on my sector. And that makes a bit hard because then you cannot see what Connects are doing from the other constraints are doing from day to day because they're anonymized, so you cannot compare them from day to day. There are ways to de anonymize them and more and more analysis are trying to do that, but that's obviously quite quite an effort and that hurts market transparency. So I know that there's a lot of discussion about that. But so far there's no resolution on that. So that makes the Nordics a bit more difficult. Than the continent, because in the continent we do not have anonymized cakes. Everything is transparent.

Richard Sverrisson – Editor-in-Chief, Montel: 14:17

So it's not just about having the right models, although that's certainly a part of it, I'm sure, but it's also about the level of information that's made available. But could, I know you, you represent Tenet, which is the Dutch and German TSO, but, and not Spencer cnet, but could you highlight some of the issues here around transparency? What are some of the concerns that a TSO would have in making that kind of available data make, making that data available?

Frank Boerman – Process Specialist at Tennet: 14:39

As far as I understood it in Sweden, the rule is simply that a lot of things are named national security, including, for example, stuff like the fiscal co location, fiscal location of substations and power lines because they're afraid of attacks on them or manipulations. However, this is a form of security by obs security, which almost never works when you are talking about such large objects or systems. And that's why basically the rest, almost the rest of Europe, the entirety of rest of Europe has given up on this. It's also good to remember that, that it's in some ways a paper reality because there are quite good map open source maps out there from hobbyists who just, cycle around Sweden and make pictures of of high voltage lines. So it's not like the information isn't there. However the legal reality is there. So as long as the law is there, then Gnet obviously has to comply with that. I don't think you can fault for that, them, for that. I think it's more a political question of how they want to how they, they want to tackle this. Eh, if, is it maybe necessary to make an exception for this? I dunno that's a question for the Swedish politicians and regulators, but from a technical perspective, it is absolutely true that it makes heart. To forecast something if you if some of the data is anonymized. And another problem in the Nordics is small zones. That's also makes it harder to forecast, of course. But that, that's something that we have less in Europe in on the continent.

Richard Sverrisson – Editor-in-Chief, Montel: 16:07

Absolutely. And I think that reflects some of the concerns there and amongst the Nordic market part. But yeah, and we've seen also the the Swedes are very sensitive to these kind of security concerns with a recent decision on offshore wind that we also have covered in a previous podcast. So I think which of they, they've scrapped the plans of up to 32 gigawatts citing security concerns and security. Concerns and defense issues. But Olav, if I can turn to you, there's also been a some comments that the system, the algorithm, whatever you like to call it, the flow-based market coupling, favors larger companies, whoever resources to invest in, in these kind of models that are. Required you know, is that a fair sort of assumption, do you think? A fair concern?

Olav Vilnes – Nordic Editor, Montel News: 16:48

Maybe that's just a, it's a general thing. Maybe if things get very complicated, it's good to have many resources to to develop complicated models. But there have been a concern. There were, most recently there was a conference where regulators in Finland, where some market participants highlighted this concern. That it would favor the big ones Statkraft or to what involve the people with most informa, the com companies with most information. But I've even seen Statkraft, the CEO of Statkraft was also out here calling for more transparency when speaking at the, yeah, I think she was presenting their annual results or what, whatever it was saying that that the TSO should provide more. Information on this critical lines as Frank talked about already, to get more information what is actually, where are the constraints in the system so they can better understand it. So I think it is a concern also for the big players, not only for the small ones, but of course I think the small ones think at least they have more resources to develop new models.

Richard Sverrisson – Editor-in-Chief, Montel: 17:38

That's true. And Priyanka you sit in Sweden. Is there something that is discussed amongst your contacts and your network that, and do you expect any kind of movement to be made on making this kind of information public or more transparent?

Priyanka Shinde – Nordic Market Expert, Montel News: 17:51

Yeah, I'm sure there, there will be some. I mean, hopefully there will be something done about it because what we always see in markets is that we learn the best practices from each other, from different markets. And as Frank already mentioned in central Europe, that has been flow-based, functioning very well, very transparently. One really sees the benefit of this. And based on this, I think we can really learn. Also in other parts and see the benefits it brings over giving away a little bit of security. Because if you look at Sweden in general, a lot of data even about the personal data that can be public. So you can find somebody's address or, tax information or such things pretty much openly. It's quite okay to, I think, avail a bit more information in terms of bringing more transparency. But however, I must al already mentioned that flow-based also brings more transparency to the market. Participants in general as compared to the old ATC method. And when it comes to talking about like the forecasting methodology, I feel that it really brings everyone to the same level as Olav mentioned in terms of big players and small players. So it's a. A kind of similar level of transparency. But what might happen is that yeah, it might be that, with more data coming in, there will be more machine learning techniques, so the market participants will figure it out one way or the other. So even if the system operator wants to release the information or not, but yes, it might favor someone over the other. So it maybe brings more information as symmetry. So let's not defeat the purpose of having flow based in the first place. We are trying to bring more transparency, but let's not take it away by not availing data. So that would be, yeah, something.

Frank Boerman – Process Specialist at Tennet: 19:22

I think that's a good point. Eh, it's always even when it's hampered like this, it is still already much more transparent than than what was before. And I think that's indeed good to, to stress that regardless. Of it not being perfect, it is definitely a step forward, not backwards to do this.

Richard Sverrisson – Editor-in-Chief, Montel: 19:40

I think that's an important point, but, and Priyanka, do you expect there to be, more instances of these non-intuitive flows? And where, and where prices mismatched compared to what the market expects?

Priyanka Shinde – Nordic Market Expert, Montel News: 19:51

That's a bit tough to say already now, but we do see even in the forward market, there are some movements compared to the AP pads, which are the price area differentials and so on. So we are seeing some movements there, which kind of reflect the kind of impression of what the trailers think, how the market will be solved at the, in the coming months or coming quarters. So we are seeing some movements there. For example, SE three, which is, south Sweden, like Stockholm and so on. So it's been cleared at a higher price and so on than before and so on. So we do see some movements but it's a bit tough to say if you know how exactly will be the prize formation. I think one important thing is that it will definitely also include the fundamentals. So this month has been quite special of November, where in the beginning there was, let's say quite lack of wind in continental Europe and also in Nordics. But then there have been weeks with. Maybe more wind and less wind. So it's been switching off on and off quite a lot. The price data that we've collected so far is quite special. So it'll only time will tell, but yes. What we are seeing at least one, maybe factor I can mention is that better price coupling, which has been enabled you to flow based is already helping Finland, for example, which was actually quite sensitive to the base load. But this month, there has been some nuclear outages and the spot prices in Finland haven't, hasn't. It as significantly as in the past months because of better coupling with the rest of Nordics and so on. So there are also already some examples of better price coupling. And when it comes to counterintuitive flows, I think that it's as it's part and parcel of flow base. So it's maybe something that will stay with us and we'll figure out more about it with more data and more tools.

Richard Sverrisson – Editor-in-Chief, Montel: 21:22

That's very interesting with Finland because that, that, that resent. You, what you're saying there is that's an example of how it's evened out or it's become sort of system systemly systematically important for the prices, not just for one price. But what would your message be Frank to the Nordic market participants who are still, concerned and even to some of the. Politicians who have voiced, these kind of concerns about, or these worries about this new system for them, which not new on the continent, obviously.

Frank Boerman – Process Specialist at Tennet: 21:50

I think it's I think it goes back to what I just said, right? That, that it's not perfect, but it's definitely a step forward. It is a major milestone in further market integration, and I would really stress to. That people zoom out for politicians to zoom out and see the bigger picture. It's not only about low prices in certain zones, it is about the social welfare for everyone involved, producers and consumers in the whole in the whole region. And for market parties, it is I always say it's just important to sit down and study to study what we're doing in core to see what is available out there. There are many analytical companies which can help with that. And yes, it is not easy. It is not, you know, just a flick of a speech. But it's not rocket science either. It's definitely possible to do these things. You just need to invest a little bit more, and once you do. Once you are part of the club that actually understands it that is a big advantage because the energy world is not that big. And once you know this, once you understand what flow-based is that can be a competitive advantage. And it will also perhaps help you to expand to the core region. So the, there are really advantages there. It's, you just need to make the investment.

Richard Sverrisson – Editor-in-Chief, Montel: 23:04

That, that's very clear. That's a very clear message there. Thank you for that, Frank. What, when you say the core region what does that consist of for those who don't, who are not aware of that?

Frank Boerman – Process Specialist at Tennet: 23:12

These days? The, let me think the core region, so it's the Bain, Luke, or Netherlands, Belgium France, Germany, Austria. That was the original club. And then we expanded also to Poland, Slovakia, Romania, Hungary, Croatia. I really hope I don't forget one now, Czech Republic. I think I got them all then now and soon we will, in these old terms soon, but in some years we will expand. Legally Ireland has already joined, but they don't have a physical link yet. That will come in, I dunno, a couple of years, I think one to two years. And then Ireland will also be included in the flow-based region. And Italy North will also join in a couple of years.

Richard Sverrisson – Editor-in-Chief, Montel: 23:50

So that's the plan going forward. But Olav what are your expectations in the Nordics, what do you think? The noises will die down as people get used to it once they have their models in place. And, become accustomed to the flow-based system.

Olav Vilnes – Nordic Editor, Montel News: 24:03

Definitely. It's, I, yeah, clearly I, this is just a, it is always a new system. There are some teething problems in the beginning. You don't know how much is down to fundamentals, how much is down to the new system. It takes some time to develop the models. I remember I was, I'm old enough to remember what happened in the continental Europe when it came in 2015, and it was also a lot of complaints about this black box that was difficult to predict. And and, now you don't hear much about that anymore. Maybe more complicated with the bidding zone in Nordic region as mentioned, but I think they will adjust and they have no, no option to adjust. I think going back to the old system is probably not any option anyway now, yeah.

Richard Sverrisson – Editor-in-Chief, Montel: 24:35

Yeah. It's a brave new world and we have to face it. I mean, with all the complexities and difficulties that that, that brings with it. But I'd like to thank you very much, Frank and Priyanka, and Olav for being on the Montel Weekly podcast. A fascinating discussion. It's very technical, but you made it at least for this this simple head very easy to understand. So thank you very much for that. Yeah.