Basics of the Power Market

Efficient and liquid wholesale markets are a prerequisite for competitive retail markets, and hence an advantage for the final consumer. The larger supply and demand, the more relevant and competitive the price signal. Therefore, increasing the liquidity of the European market is a means to maximise social welfare for all European citizens.

Electricity - a unique commodity

Electricity is an essential good in our society. It not only provides us with light and warmth, but it is also a basic element of any industrial activity. The liberalisation of power markets in the 1990s was the starting point of the creation of an Internal European Energy market achieving security of supply, competitive prices and enhanced services to customers. Within this Internal European Energy Market, a large variety of companies organise the production, trading, marketing, transmission and supply of electricity; within the framework of appropriate regulation. Electricity is a particular commodity that cannot be stored. Moreover, the frequency on the electricity grid needs to remain stable at all times, meaning users of the transmission grids must be balanced in real-time between their resources and consumption of power.

This makes the short-term spot market an essential tool to balance the overall system. And since the European spot markets are coupled, they help to provide electricity where it is needed and when it is needed, even across borders.

 

Power Exchanges organise trading and operate markets

Power Exchanges offer a trading platform to their exchange members. The members connect to this platform and submit orders for buying and/or selling power, which are registered in an order book. These orders reflect supply and demand for a specific market area at a certain moment in time. Based on the order book, Power Exchanges calculate a market price. Since the trades result from a large, open and transparent competition between the orders of the exchange members, they reflect the best information available at the time under the market conditions. They are hence the most reliable prices available for electricity in short-term delivery. By matching supply and demand, Power Exchanges ensure a transparent and reliable price formation, and they make sure that the traded electricity is delivered and paid.

Markets organized by Power Exchanges are optional, anonymous and accessible to all participants satisfying admission requirements. In opposition to direct transactions, called Over-the-Counter (OTC) trades, the organized market place operated by an Exchange has various advantages such as pooling of liquidity, transparency, emergence of a single reference price, payment and delivery security, anonymity and the application of market rules.
 

Electricity crosses borders, increasing social welfare

European Market Coupling, of which EPEX SPOT has been a major contributor, allows for electricity to flow freely across borders. Electricity is distributed more efficiently all over the continent, because flows follow price signals (see PCR). The efficiency of cross-border trading, therefore, has an impact on social welfare. EPEX SPOT provides such instruments in both the Day-Ahead and Intraday segments, ensuring transparent and secure transactions in all our market areas.
 

Clearing and Settlement

Once a trade is completed on the platform of an exchange, the transaction is cleared and settled. Clearing ensures the proper fulfilment of each contract concluded or registered on the exchange. In its position as the central counterparty, the clearing house steps in after a trade has been concluded, becoming the contractual partner for both buyer and seller. In doing so the clearing house ensures the fulfilment of each trade (payment and delivery) and mitigates the counterparty risk.

All transactions on EPEX SPOT are cleared and settled by ECC, the leading clearing house for energy and commodity products in Europe. ECC conducts all payment flows between the seller and the buyer (financial settlement) and guarantees the delivery of the traded electricity (physical settlement).

As a clearing house specialising in physical commodity markets, ECC works together with a network of Transmission System Operators (TSOs) and registries, supporting various market coupling projects for connecting the European energy markets.

 

Day-Ahead and Intraday – the backbone of the European spot market

EPEX SPOT operates the most liquid Day-Ahead and Intraday markets in Europe. Both markets fulfill different purposes and are indispensable links of the energy value chain.
The Day-ahead market is operated through a blind auction which takes place once a day, all year round. All hours of the following day are traded in this auction. The orders are logged in by the market participants before the order book closes at 12:00 (11:00 for Switzerland). Then the algorithm is launched. Based on the buy-orders it establishes a demand curve, based on the sell-orders it establishes a supply curve, referred to as aggregated curves, both for each hour of the following day. The market clearing price (MCP), which reflects supply and demand, lies at the intersection of both curves.

Aggregated Curve

As a result of this order matching, the Power Exchange determines trades which are legally binding agreements to purchase or sell a determined quantity of electricity to a defined delivery area for the matched (or “cleared”) price. This price is never higher than the purchase price fixed by the buyer or lower than the sale price offered by the seller. An auction has the advantage of gathering liquidity at one point in time while offering full transparency on the traded Market Clearing Volumes (MCV) and creating a level playing field. Exchange members use the auction to sell and buy the largest part of the produced/ needed electricity.

The EPEX SPOT Day-Ahead auction is integrated into the Multi-Regional Coupling (MRC) which encompasses Austria, the Baltics, Belgium, France, Germany, Great Britain, Italy, Luxembourg, the Netherlands, the Nordics, Portugal, Spain and Slovenia.

On the Intraday market, market participants trade continuously, 24 hours a day, with delivery on the same day. As soon as a buy- and sell-order match, the trade is executed. Electricity can be traded up to 5 minutes before delivery and through hourly, half-hourly or quarter-hourly contracts. As this allows for a high level of flexibility, members use the Intraday market to make last minute adjustments and to balance their positions closer to real time. Cross-border trading is essential in Intraday trading, and European Intraday markets are connected via the XBID solution.

The Wholesale Market and renewables

Under the European Union’s 20/20/20 policy ‒ aimed at reducing emissions by 20% whilst simultaneously increasing renewable generation share to 20% by 2020 ‒ renewable electricity capacity has increased significantly in the past 10 years. This growth, fueled by political, economic and environmental imperatives, will see renewables continue to play an increasing role in the European energy mix over the next decade.

In Germany, EPEX SPOT’s largest market, renewable-based electricity generation reached 38.5% in 2017, making renewables the most important energy source for four years in a row. The most notable growth has been in solar and wind power, which poses significant challenges for energy markets due to their specific characteristics, notably intermittency and daily ramping increase and decrease.

 

Green power needs to be efficiently integrated into the wholesale market in order to reach the final consumer.

This means short term power trading needs to adapt to the specific characteristics of renewables. Over the past years, EPEX SPOT’s markets have demonstrated their suitability to integrate additional renewable volumes whilst minimising price impacts.

EPEX SPOT’s coupled Day-ahead markets have proven to be a key tool for limiting the potential price impacts of renewable energy. By fully optimising the use of interconnectors, national surpluses and deficits are mitigated in the coupled markets, providing more resilience against supply and demand disturbances. Day to day or seasonal variations in renewable production can be counterbalanced between zones, and converging prices smooth both positive and negative peaks.

Besides Market Coupling, product granularity plays an important role in the integration of renewables. EPEX SPOT’s Intraday markets provide an effective solution for integrating intermittent supply, enabling producers and consumers to balance their positions close to real time. Energy can be traded up to 5 minutes ahead of delivery, which provides a level of flexibility welcomed by market players who trade both renewable and conventional energy. On the Austrian, Belgian, Dutch, German and Swiss market 15-minute contracts are available, providing greater flexibility to handle the daily ramping effects of renewable production and contributing to a more balanced market. In addition to this, 30-minute contracts are available in France, Germany and Switzerland. The European continuous Intraday markets are coupled via the XBID solution since June 2018.

 

Negative Prices - Q&A

  • What are negative prices and how do they occur?

    Negative prices are a price signal on the power wholesale market that occurs when a high inflexible power generation meets low demand. Inflexible power sources can’t be shut down and restarted in a quick and cost-efficient manner. Renewables do count in, as they are dependent on external factors (wind, sun).

    On wholesale markets, electricity prices are driven by supply and demand, which in turn are determined by several factors such as climate conditions, seasonal factors or consumption behavior. This helps to maintain the required balance. Prices fall with low demand, signaling generators to reduce output to avoid overloading the grid. On the French and German/Austrian Day-Ahead market and all Intraday markets of EPEX SPOT, they can thus fall below zero.

    In some circumstances, one may rely on these negative prices to deal with a sudden oversupply of energy and to send appropriate market signals to reduce production. In this case, producers have to compare their costs of stopping and restarting their plants with the costs of selling their energy at a negative price (which means paying instead of receiving money). If their production means are flexible enough, they will stop producing for this period of time which will prevent or buffer the negative price on the wholesale market and ease the tension on the grid.

  • Negative prices are not a theoretical concept. Buyers are actually getting money and electricity from sellers. However, you need to keep in mind that if a producer is willing to accept negative prices, this means it is less expensive for him to keep their power plants online than to shut them down and restart them later.

  • Negative prices are a comparably rare phenomenon, as several factors have to happen at the same time. However, they are nothing unusual. In Germany, where inflexible power generation from renewables is increasing, 146 hours on 24 days with negative prices were observed on the Day-Ahead market in 2017. On the Intraday market there were 185 hours on 34 days. If these markets were not coupled, negative prices would occur more often, and price peaks would be more acute.

  • They were first introduced in 2008 on the German/Austrian Day-Ahead and 2007 in the German Intraday market. In 2010, they were introduced on the French Day-Ahead and Intraday markets. The Austrian and the Swiss Intraday markets, launched in 2012 and 2013 respectively, also provide the possibility of negative prices.

  • Yes. There are price caps that are reached extremely rarely. They are an economically logical barrier for power trading.

  • No. Negative prices are a signal, an indicator for market participants. If producers decide to keep their production up, they have calculated that this is the best, most cost-efficient way for them considering the costs of shutting down and restarting their plants.

    In addition, negative prices are an incentive for producers to invest in the development of more flexible means of production that can react more efficiently to fluctuating energy supply in order to increase security of supply and prevent negative prices.

     

  • Liquidity – based on wide offer and demand – is key for lowering the occurrence of negative prices. This is where cross-border trading solutions come in. On the Day-Ahead market, Market Coupling provides a solution for the optimal use of cross-border capacities between two or more markets. Thanks to the Market Coupling in North-Western Europe (including France, Germany, Benelux, Great Britain, the Nordic and Baltic countries), negative prices are buffered or prevented. For instance, in the case of low or negative prices in Germany, France and Benelux, Denmark and Sweden will import electricity until the cross-border capacity is fully used or prices converge.

    On the Intraday market, the trading system M7 can optimally use cross-border capacities and hence buffer volatility, which also helps to decrease the number of negative prices. As a result, the “quality” of negative prices both on the Intraday and the Day-Ahead markets today is different to the extent that they did not reach -1500 € as in 2009 before the integration process took off.

     

  • Prices on the wholesale markets reflect market fundamentals and the evolution of supply and demand. Power Exchanges like EPEX SPOT provide a transparent and secure price signal to the actors of the wholesale markets. Please contact suppliers on the question if low or negative wholesale prices have an impact on prices for final consumers.

  • Negative prices are a signal of tense situations in the power system. For more information of the impacts on grids, please contact the transmission system operators.