Recent extreme market shocks have resulted in significant volatility in European power markets. Some of which included fuel price shocks due to the war in Ukraine, pipeline outages, and extreme weather events. However, when considering this volatility, the topic that seems to get brushed under the carpet is often Flow-Based Market Coupling (FBMC). In this article, we delve into why it's crucial to incorporate FBMC in Great-Britain (GB) fundamental models, its potential impacts, and how Energy Exemplar, with its advanced PLEXOS tool, is at the forefront of understanding this complex yet potent component.
The GB market has major interconnections to mainland Europe through France, Norway, Belgium, and Netherlands. Additionally, we expect the Denmark link to be available at the end of 2023 too. Many GB traders and analysts discount FBMC since Great Britain is not within FBMC mechanism. However, our simulation results have shown that the knock-on effects from Central-Western Europe (CWE) power markets are significant, and therefore must be considered when building a GB model.
Background on Flow Based Market Coupling (FBMC)
In 2015, FBMC was introduced into the CWE markets, which include Germany, France, the Netherlands, Austria, and Belgium, replacing the old and outdated Net Transfer Capacity (NTC) system. As of 2022, seven Eastern-European countries were also added - Slovakia, Hungary, Poland, Romania, Slovenia, Czech Republic, and Croatia.
In simple terms, FBMC is a market coupling methodology which aims to create a more harmonized and interconnected Europe by providing real-time calculations of cross border capacities unlike the old system of rigid NTC coupling. This allows European infrastructure to be utilized more efficiently, leading to benefits such as less curtailment of renewable sources. High levels of renewable generation in one country can now be efficiently transmitted to another country.
However, even though the methodology is public, many traders and analysts in the market have been unsuccessful in adding FBMC into their models. In simple(r) terms, the methodology takes inbounded net positions of bidding zones into account, multiplies them with zonal Power Transfer Distribution Factors (PTDFs), and restricts them by the maximum flow on the critical branch of interest.
The complexity of developing a calibrated fundamental model is hard enough. Understanding all the grid constraints, predicting zonal PTDFs, and also predicting which constraint will be hit can be overwhelming. For many, FBMC has been characterized as a black box that they choose to ignore.
PLEXOS Insights for Traders - Great Britain
At Energy Exemplar, we have built a complete fundamental view and price forecast of the GB Short-term Power Market. To do this we have fundamentally modelled Great Britain and Central Western Europe (CWE), which has given us an understanding of both the local market as well as neighboring countries. However, to get an understanding of European flows, we have also used machine learning and futures price signals to understand the less liquid eastern and southern European markets. As you can see, this really does mean that you have to model the majority of Europe.
Using PLEXOS, we take all of this fundamental and price information into account. We also provide grid constraints, input PTDFs, attribute maximum flow constraints and leverage PLEXOS to help us understand how capacity is allocated across Europe using the FBMC methodology, and thus the knock-on effect to the GB market.
Many modelers are still focused on an insular GB Fundamental model, however it is clear that understanding the wider market is essential.
Let’s start with how our methodology helped us to model CWE prices. We show PLEXOS generated power prices vs. actuals for 1 week (168 hours) for France (FR), Netherlands (NL) & Belgium (BE). It is evident that PLEXOS is much better at capturing the troughs and peaks with the FBMC methodology. Notably, the Netherlands model show drastic differences.
FBMC modeling resulted in between 10-15% lower Normalised Mean Absolute Error (NMAE) for CWE. This improvement in CWE flows has meant that PLEXOS is able to represent the GB market with much higher accuracy too, as it has a better understanding of interconnector flows to/from mainland Europe.
We cannot underestimate the importance of incorporating Flow-Based Market Coupling (FBMC) in fundamental models, given its vital role in harmonizing European power markets and the knock-on effects to the GB market. The era of disconnected market modeling is behind us, and embracing this complexity holds the key to resilient and effective strategies.
That brings us to Energy Exemplar's PLEXOS INSIGHTS ® for Traders – GB. This state-of-the-art tool offers a comprehensive view of the GB Short-term Power Market by fundamentally modeling Great Britain and Central Western Europe, including the FBMC complexities.
Whether you are a trader, analyst, or anyone keen on Europe's energy landscape, the GB Insights product stands out as a robust, accurate, and insightful tool to predict and understand fundamental market dynamics, ensuring you stay ahead in an ever-changing environment.
Are you interested in what PLEXOS INSIGHTS for Traders – GB has to offer? Contact our team.
Are you interested in learning what PLEXOS Insights for Traders - GB has to offer?