Flow-Based Market Coupling: Insights From Current Market Data and Theoretical Benchmarking

The European Union's decarbonisation strategy emphasizes the full integration of its electricity markets to enhance flexibility, competition, and overall efficiency. This study compares the existing Flow-Based Market Coupling (FBMC) mechanism with a theoretical model that incorporates all grid restrictions endogenously in the market clearing, avoiding heuristic assumptions. We address two primary research questions: how would market outcomes, prices, and the generation mix evolve under perfect market coupling, and what challenges persist in the current FBMC design? A three-month case study during the European energy crisis in 2023 provides the empirical basis. Our results reveal significant price convergence-with average prices decreasing by nearly 30 €/MWh-improved integration of renewable energy sources, and enhanced cross-border trade. However, the simplified grid representation to reduce the complexity of the problem may lead to congestion and welfare losses, underscoring the need for more efficient models and more active consideration of congestion management in the cross-border capacity allocation in the integrated European electricity market.