How the Power Exchange Works
by Vivian Bullinger | 04.10.2019
How does electricity trading on the power exchange work? Who are the players and what role do renewable energies play? To answer these questions and others about the power exchange, we asked the experts at the Virtual power plant of EnBW asked them for an interview:
Why is there an electricity exchange and how is electricity traded there?
Where large energy suppliers used to negotiate bilateral contracts, the electricity exchanges were created in the course of the liberalization of the European energy market. This was done with the aim of establishing more transparent and market-driven prices for energy. This central bundling of supply and demand made it possible to achieve a high level of liquidity, and the creation of standardized products also reduced transaction costs. The power exchanges themselves function similarly to the well-known securities exchanges, with the difference that only electricity is traded as products in time-defined quantities. In addition, trading transactions can be fulfilled not only financially, but also in the form of virtual deliveries to a balancing group (energy account).
Where is the electricity traded?
The EU Commission's goal is a large, uniform European power exchange. However, this is still a long way off and there are currently 12 different power exchanges in Europe, some of which only trade nationally. The major overarching markets that are relevant to us are the Scandinavian NordPool and the European Energy Exchange (EEX) based in Leipzig. In addition to electricity, other products such as natural gas, CO2 or emission rights are also traded on the EEX.
Who are the players on the power exchange?
On the one hand, there are energy producers who sell their generation on the exchange in advance, either for the short term or for the long term. These can be conventional power plants or operators of hydroelectric power plants, wind farms, or photovoltaic plants. On the other hand, there are buyers such as energy supply companies without their own generation, which cover their demand on the exchange. Last but not least, of course, traders and brokers who bring these two parties together.
All companies active on the exchange undergo an elaborate examination procedure. In addition, each exchange trader must be mandatorily assigned to a company. For operators of, for example, one or more PV systems, the testing procedure represents an enormous effort, which is why they resort to direct marketers to market their energy. These have all the prerequisites for trading on the exchanges, the necessary know-how and thus sell the generated energy on behalf of the operator.
What factors influence the price of electricity?
In principle, supply and demand determine the market. Electricity from conventional power plants is usually offered at the respective marginal cost, i.e. the cost of generating the electricity, which depends on the type of power plant and the primary energy used. In this way, power plants are selectively switched on - starting with the lowest marginal costs - until demand is met. This process is known as the merit order effect.
Less predictable is electricity generation from renewable energies (wind, water, solar, biomass, etc.), which, for example, have feed-in priority under the Renewable Energy Sources Act (EEG) and thus displace expensive conventional power plants. Due to the merit order effect, the feed-in priority results in a decrease of the stock exchange prices. In addition to marginal costs and the availability of energy, however, offtake behavior also influences the exchange price. An oversupply of renewable energy, for example, with strong solar radiation at midday and low demand at the same time, increasingly leads to negative electricity prices - in other words, the producers pay money to the purchasers, and not vice versa. This effect is intended to encourage operators of conventional power plants to be more flexible.
What is meant by spot market and forward market?
Basically, the energy industry ticks in 15-minute grids, the entire energy balancing takes place in 15-minute steps. The EEX energy exchange is itself subdivided into different markets: long-term power supply contracts are traded on the futures market, and short-term power supplies are traded on the spot market.
The spot market can in turn be divided into two markets. The day-ahead market is the market for electricity that can be bought or sold by the hour (megawatt hours per hour) today for tomorrow. Each hour has its own price - even if the energy balancing happens in 15 minute intervals. Electricity is traded in 15-minute intervals on the intraday market, which means purchases and sales of electricity for the current day.
Is it possible to track where the electricity comes from? And if so, how?
There is a mandatory label for green electricity in Germany. In such a certificate of origin, a green electricity provider guarantees that the electricity is actually generated from renewable energy sources. However, a guarantee of origin is only issued for green electricity that is not subsidized by law. If a RE plant receives subsidies under the EEG or KWKG, for example, no such green electricity certificate is issued. In the electricity market, guarantees of origin and the actual supply of electricity are separate and are also traded separately. Thus, electricity traded on the electricity exchange is first neutral and detached from the form of generation.
How have renewable energies changed the power exchange?
When electricity from renewables enters the system, the merit order generation curve slips, and prices change. Due to the massive addition of renewables, their volatile generation has exacerbated price fluctuations on the exchanges in recent years. Conventional power plants have to be much more flexible and adjust their generation more specifically to the overall demand. As a result, expensive power plants in particular have come under pressure and been used much less than they were a few years ago.
How does direct marketing contribute to a stable electricity price?
This is an exciting question. If by stable we mean an electricity price at a constant level, then not at all. However, it has become more resilient and more causation-based, because through the Direct marketing not only the large producers sell their energy on the power exchange, but also many smaller producers are now actively involved in trading. Not personally, of course, but represented in bundled form by the respective direct marketers. In general, renewables are taking an increasingly large share of trading volumes, making for a more volatile and dynamic market.
Thank you very much for the fascinating answers. If you have any further questions on the topic, please feel free to ask them via our comment function.
In addition, more information on direct marketing of PV energy can be found in our blog article "Direct marketing of PV electricity without detours", at www.solar-log.com or on the website of the Virtual power plant of EnBW can be found.
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