How the SDAC mechanism works – and what happens when it fails

Europe’s transition to a low-carbon energy system relies on more than building wind farms and solar parks. An essential but often overlooked factor is interconnection, which ensures electricity can flow seamlessly across borders. Without it, surplus renewable energy in one region might be wasted while another region faces shortages. To advance interconnection, the EU has set a target for at least 15% of each country’s electricity generation capacity to be available for cross-border transmission by 2030.

One of the most important mechanisms enabling interconnection is the Single Day-Ahead Coupling (SDAC). SDAC optimizes cross-border electricity trading by matching supply and demand across different countries for power delivery the following day. It’s a highly complex and time-constrained system that continuously evolves to improve efficiency.

The next major development for SDAC is a shift to 15-minute market time units (MTUs), likely one of the biggest market changes this year. At the time of writing, the go-live is scheduled for June 11th, though its timeline may still change. EPEX SPOT has raised “operational concerns”, while others confirmed readiness.

As we wait for a final decision on the transition to quarterly MTUs, this article explains how SDAC works, why it matters, and what happens when things go wrong. In the next piece, we’ll explore the major market reform that is coming up.

The concept of market coupling

SDAC’s core principle is market coupling, a seemingly complicated yet intuitive idea if considering a simple analogy: buying a car. In a decoupled market, you could only buy cars from local dealerships, meaning that prices come down to the region’s supply and demand. In a coupled market, cars are traded freely, and prices are fairly aligned across neighboring regions. The latter scenario is one we are all familiar with.

Electricity markets operate in a similar way. Instead of each country setting its own electricity prices in isolation, market coupling links market areas and reduces price disparities.

This is achieved through a common algorithm called PCR EUPHEMIA, short for Price Coupling of Regions EU + Pan-European Hybrid Electricity Market Integration Algorithm. This algorithm optimally allocates cross-border transmission capacity, optimizing for the highest overall economic welfare. We’ll get back to this algorithm in more detail later in the article.

A short history and key developments

Market coupling is not new. The first steps to implement it were taken in the early 2000s in the Nordic region and expanded through regional projects, including France, Belgium, and the Netherlands. These early initiatives laid the foundation for what would later become the SDAC, which was officially launched in 2014.

Today, SDAC plays a central role in Europe’s electricity market integration. A few key figures illustrate its scale:

• SDAC coordinates electricity trading across 27 countries and 37 bidding zones.
• It operates as a consortium of 30 transmission system operators (TSOs) and 16 power exchanges (Nominated Electricity Market Operators or NEMOs).
• Traded volumes amount to approximately 1,700 TWh per year.
• EUPHEMIA’s solution time is 17 minutes.

Since its launch, SDAC has both expanded and improved. A major advancement has been the introduction of the Core Flow-Based Market Coupling, which enhances the optimization process by better accounting for transmission constraints. The implementation covered countries from France to Romania, excluding the Nordics and Southern Europe.

As part of recent developments, the Nordic countries are adopting Flow-Based Market Coupling (joining the Core capacity calculation region). This marks a significant step forward, as it enables a more realistic modelling of grid constraints, bringing the market closer to the physical behaviour of the power system.

The main goal is to achieve greater economic efficiency by making better use of available interconnector capacity across the entire market. However, this improvement also comes with a trade-off: larger price differences between individual zones may occur more frequently.

Finally, it’s worth noting that while SDAC manages electricity trading in the day-ahead market, it has a “little brother” that operates in the intraday market – the Single Intraday Coupling (SIDC). Although both mechanisms follow the same economic principle, their implementations differ significantly; we will cover the latter separately.

How market coupling works

SDAC operates through a coordinated process involving TSOs and NEMOs, who jointly carry out the Market Coupling Operator (MCO) function. It roughly consists of these steps:

1. Each TSO provides a list of critical electric network elements and a matrix of parameters about the grid. These are submitted to the local NEMO.
2. The local NEMOs validate the values before sending them on to the MCO to centrally run the optimization.
3. Once the transmission capacities are confirmed, power traders submit their buy and sell bids to the power exchanges.
4. EUPHEMIA matches supply and demand across bidding zones while considering available cross-border resources and constraints. This results in a single market-clearing price for each bidding zone.
5. TSOs and MCOs perform a final check before publication.
6. Once validated, the clearing prices and cross-border exchange volumes are published.

The economic benefits of SDAC are significant, leading to more efficient use of resources, reduced cross-border transmission congestion, and better price signals. As the image below shows, on average, over a year, the day-ahead hourly power prices in European regions are relatively similar.

The mechanism’s advantages for traders include:

• Less volatile electricity prices, as it integrates regional supply and demand, and
• Higher liquidity, enabling them to access a larger market and hedge their positions effectively.

Zooming in on EUPHEMIA

EUPHEMIA is a powerful optimization model that enables market coupling and, as mentioned, goes from input to solution in 17 minutes. In broad strokes, what happens during this time covers the four steps.

1. First, the algorithm collects data, specifically the bids and offers from market participants (buyers and sellers), as well as the transmission capacity limits submitted by the TSOs.
2. Then, it evaluates multiple market scenarios and finds the best solution that maximizes social welfare (i.e., benefits for both producers and consumers). This process takes into account physical and regulatory constraints such as transmission capacity limits and market regulations.
3. Next, it evaluates each scenario based on its economic efficiency. This is determined by factors such as demand, supply, and price signals.
4. Finally, the algorithm generates a single solution that represents the optimal resource allocation and the clearing price of electricity across all regions.

What can go wrong

Although disruptions are rare, the complexity of SDAC can sometimes lead to vulnerabilities.

In October 2023, the Greek bidding zone and two interconnectors were partially decoupled due to an issue with the local NEMO’s implementation of daylight saving time (i.e., the additional hour) in the trading system.

More recently, and notably, on June 25th last year, a technical issue disrupted EPEX’s trading system, partially decoupling the mechanism. Instead of a coordinated auction across regions, certain markets, including Central Western Europe and Poland, had to revert to local auctions, excluding cross-border trading. This led to sharp price deviations. In Germany, for instance, prices averaged €480/MWh, peaking at €2,300/MWh.

Just one month later, a similar situation was narrowly avoided: a potential full decoupling that came down to a small margin. This time, it was due to a technical issue at the Czech NEMO.

Fallback mechanisms

When SDAC experiences errors, it follows a structured fallback process to minimize market disruption. These mechanisms vary depending on whether the problem is anticipated or unexpected.

If a risk is detected before the main auction deadline, fallback processes are prepared in advance and typically consist of:

• Shadow auctions. These are backup auctions for cross-border capacity, run by the Joint Allocation Service (JAO). Bids can be placed daily, but the auction is only run in case of decoupling; in other words, they do not influence the market unless the fallback is activated.
• Explicit capacity auctions may also be triggered for interconnectors without a shadow auction arrangement by JAO. TSOs hold separate auctions for interconnector capacity, allowing traders to buy access rights across borders outside the usual market coupling process.

If the issue is not known in advance (as was the case in June 2024), the fallback response differs.

• Exchanges detect a risk (for example, a corrupted order or system failure) and declare a risk of decoupling. This typically occurs within 20 minutes after the bidding gate closes.
• Shadow auctions are activated if necessary.
• If the risk materializes, the affected bidding zones reopen their order books and run local auctions instead of participating in the central market.
• In the rare case of a full decoupling, all zones revert to local auctions without cross-border coordination. This scenario is extremely uncommon due to built-in fallback measures and regional separation.

Regardless of the incident’s cause or scenario, deadlines are essential within the SDAC mechanism. For example, in the event of a partial decoupling risk, exchanges must notify all traders within 20 minutes of gate closure. The image below shows an overview of these deadlines:

What’s next for SDAC

Although it may not be on people’s minds every day, the SDAC mechanism has delivered massive economic benefits since 2014. It’s not a perfect solution, but it continues to evolve.

What does its future look like? As mentioned, the day-ahead power markets across Europe are expected to transition to a 15-minute MTU this year.

Meanwhile, operational setbacks have prompted new proposals for strengthening the system. For instance, following the recent EPEX decoupling, the exchange proposed a “back-up order book” to help maintain market coupling in case of local technical failures. Beyond day-ahead improvements, attention is increasingly turning to the intraday market.

Our market experts will continue to monitor these developments and keep you up-to-date on their impact on power trading. Make sure to watch this space or subscribe to our newsletter to stay in the know.