ACER’s consultancy study assesses the benefits of implementing co-optimisation in the day-ahead electricity market

ACER publishes today a consultancy study on the expected social welfare benefits of implementing co-optimisation in the day-ahead coupling algorithm as compared to the current electricity market design.

The study also examines which benefits can be achieved in an intermediate market design known as market-based allocation of cross-zonal capacity. This design is already in use in the Nordics and is expected to be implemented in other parts of the EU in the coming years.

The study was commissioned in October 2023 to support the ongoing decision-making process on the amendment of the methodology for the price coupling algorithm and the continuous trading matching algorithm.

What is co-optimisation and why is it important?

Amending the day-ahead coupling algorithm is necessary to enable a co-optimised allocation of cross-zonal capacity for the exchange of balancing capacity or sharing of reserves. By allocating cross-zonal capacity where its market value is the highest, co-optimisation facilitates the integration of the balancing capacity markets and allows for a more efficient use of cross-zonal capacity.

Unlike the market-based allocation process, which allocates cross-zonal capacity for the exchange of balancing capacity or sharing of reserves before the day-ahead energy auction, co-optimisation clears both markets simultaneously, thus allowing to fully capture their interdependencies.

What are the key findings of the study?

The study concludes the following:

• Day-ahead energy and balancing capacity markets are strongly interdependent as they rely on the same generating units to operate.
• Co-optimisation could save the EU about €1.3 billion annually compared to the current market design, while moving to the market-based allocation process is expected to provide annual benefits of around €160 million.
• The benefits of co-optimisation are 15% higher in a design where market participants are not required to forecast the day-ahead energy market outcome when bidding for balancing capacity.
• In sequential designs (i.e. the current market design and the market-based allocation process), fixed costs are prone to be misrepresented, leading to inefficient resource commitment. Co-optimisation improves overall system efficiency by accurately optimising both fixed and variable costs, resulting in better resource allocation.
• Under sequential designs, significant adjustments to unit setpoints (i.e. how much power generating units produce) occur after the day-ahead market. If the intraday market cannot accommodate these adjustments, the efficiency gains from co-optimisation nearly double, leading to potential savings of around €2.3 billion annually.

Get involved!

ACER opens today a public consultation to collect stakeholders’ insights on the study’s findings. You have until 19 June 2024 to submit your views.

Register for ACER’s webinar on 10 June 2024 to learn about the main findings of the study, including insights on the design of bids that would allow to best capture the interactions between day-ahead and balancing capacity markets.

The outcomes of the consultation and webinar will inform ACER’s decision-making on the proposed amendments to the methodology, which is scheduled to be finalised by early autumn 2024.