A preliminary assessment of the market coupling arrangement on the Kontek cable

This paper presents a preliminary assessment of the market coupling arrangement on the Kontek (KT) cable between East Denmark and Germany and an assessment of the original auction mechanism. KT, the new spot price area, was introduced in Germany on October 5, 2005 to facilitate a market coupling arrangement on the KT cable between East Denmark and Germany. We would expect the KT price to correlate more with the European Energy Exchange (EEX) price because arbitrage normally levelizes the price. However, spot prices in late 2005 were both high and volatile because congestion management practices in Sweden transferred internal bottlenecks to the cable between Sweden and East Denmark. Since spot prices were equal in East Denmark and the KT area for a substantial time, it implies that some hours had no congestion on the KT cable. Market players valued the previous monthly auctions for transmission capacity more than the daily auctions. Compared to the daily auctions, market players received smaller payoffs on average for the market coupling arrangement, and the smallest payoffs for the monthly auctions.