EU-UK Market Integration: Will Multi-Region Loose Volume Coupling Do the Job?

Post-Brexit, the European Commission and the UK government are assessing ways to re-integrate the UK and EU electricity markets. Could the so-called Multi-Region Loose Volume Coupling (MRLVC) be a way forward? This month, European TSOs published an evaluation of this proposal. Unfortunately, the future of MRLVC does not look promising.

A Compromise Between Explicit and Implicit Allocation

As an aftermath of Brexit, in 2021 the UK left the European electricity market (i.e., the Single Day-Ahead Coupling and Single Intraday Coupling). These platforms are the common marketplace for electricity in European countries, where the allocation of transmission capacity occurs “under the hood” when electricity is traded. This mechanism is known as “implicit” allocation. Despite Brexit, the exchange of electricity over the EU-GB interconnectors has not stopped: allocation of this cross-zonal capacity now occurs (mostly) via explicit auctions. This is inherently inefficient compared to implicit auctions, which is how electricity is traded within Europe.

In 2021, the EU-UK Trade and Cooperation Agreement proposed Multi-Regional Loose Volume Coupling (MRLVC) as a compromise to improve the efficiency of capacity allocation. However, it did not specify the details of its implementation. The EU and UK TSOs were mandated to respond to a set of technical questions in a joint proposal by the European Commission and the UK Department for Energy, Security and Net Zero.

How Would Multi-Region Loose Volume Coupling Work?

The overall idea is to introduce a coupling mechanism (loose volume coupling) between the UK market and SDAC by sharing the order books before SDAC (which is a price coupling). The benefit of this would be that the capacities of the cables between the UK and EU would be used more efficiently. In MRLVC, capacity allocation is done with some knowledge (the order books) of the market situation.

What Were the TSOs’ Answers?

On 28th May, TSOs provided answers to technical questions, building on the Cost-Benefit Analysis (CBA) carried out in 2021. In 2023, the UK and EU TSOs performed further studies to assess the proposed MRLVC solutions. The 2021 CBA identified two possible design options to fit the MRLVC steps into the established SDAC process.

1. Preliminary Order Book Design. This would mean that order books are shared before the markets are closed. The CBA highlighted this poses a significant risk of market manipulation since order books are not closed yet. These “gaming” strategies would be very difficult to distinguish from normal portfolio optimisation strategies based on the latest available information. Overall, this solution does not seem acceptable to all parties.
2. Common Order Book Design. MRLVC would use the final order books from market parties to calculate the optimal allocation of the interconnectors between the UK and the EU. This step is done after market parties submit orders but before the SDAC algorithm starts. This means that MRLVC will delay SDAC by 20-40 minutes. This is a tough ask: it would mean either delaying the publication of SDAC results or increasing the risk of full decoupling events. Shortening this delay time is also difficult because, with less time for MRLVC to calculate, the welfare gains will be less. The efficiency of MRLVC would strongly depend on the accuracy of the Bordering Bidding Zone (BBZ) forecast methodology.

The welfare gains of MRLVC are modelled around 136 million euros per year, but this does not include a series of factors that would decrease the gain (e.g., additional SDAC decouplings, BBZ inaccuracy, lack of hedging possibilities in case of partial or full SDAC decoupling, ramping restrictions, trade reductions due to CBAM…).

Both solutions would take more than four and a half years to be implemented. Additionally, it has not been analysed in the study whether MRLVC is “future-proof” in light of future offshore developments (including Offshore Bidding Zones and hybrid interconnectors). As both options for the design (and future implementation) of MRLVC present important drawbacks and uncertainties, the future of MRLVC does not look promising.