Electricity trading and sales
Significance and function of wholesale electricity providers
With the liberalisation of European electricity markets, electricity trading has become increasingly important for electricity companies. Before liberalisation, electricity was sourced from a few suppliers – who mostly generated it themselves – and sold to a defined group of customers. Consequently, the quantity and price risks borne by producers were low.
Liberalised electricity trade on the rise
In the liberalised electricity market there is free competition and every customer can freely choose their supplier. It is therefore no longer automatically the case that the electricity produced by a company is sufficient for the customers or that it is completely taken from the producer. The electricity producer is thus exposed to significant risks in terms of quantity and price. The electricity traders adopt the task of buying electricity on the wholesale market and hedge risks on the electricity market. A distinction must be made between power trading and electricity distribution, which sells electricity to end customers such as private households or businesses.
Long-term hedging through the futures market
Electricity will be traded on the so-called futures market for the next few years. For example, a grower can sell his future electricity production through wholesalers at a price that is already known today. Sales, for their part, can obtain in advance the quantity they need in the wholesale market for their customers at a fixed price.
Short-term optimisation through the spot market
The spot market is about optimising the production/consumption portfolio mostly for the next day (day-ahead) or even for the same day (intraday). The buy and sell bids on the spot market are made at short-term marginal costs, only the variable costs such as fuel costs are relevant for making short-term production decisions.
Futures and spot markets minimise the risk for the consumer
Electricity trading on the futures and spot markets minimises both the risks for consumers and producers in the deregulated electricity market and supports the cost-efficient use of the power plant fleet.
Electricity trading places
Electricity trading may take place in regulated marketplaces such as electricity exchanges, organised, multilateral trading facilities or on the so-called OTC (over the counter) market.
Role of electricity exchanges
Electricity exchanges are organised, regulated marketplaces for electricity, where supply and demand determine the price. Standardised products such as futures, which are standardised exchange-traded forward transactions, are traded on the electricity exchange. Electricity exchanges offer a high level of liquidity (sufficient means of payment and trading partners to quickly convert an asset) and a hedge against the risk of counterparty default (counterparty risk) for electricity providers and electricity consumers.
Clearing (clearing of receivables and liabilities from securities and forward transactions) is handled by a clearing house.
Non-standardised forward contracts (forwards), the structure of which is individually agreed by the contracting parties, are not traded on exchanges but on the OTC market. Trading is usually carried out by brokers. Advantages of OTC trading include the opportunity for individual product design, a disadvantage compared to the stock exchange as a trading centre is lower liquidity and that there is no automatic hedging of the counterparty risk. However, these OTC trades can also be cleared on a stock exchange.
For example, the EEX Group offers spot and futures trading for a large number of European electricity market areas. On the spot market, procurement and sales can be optimised up to 30 minutes before delivery. On the futures market, trading participants have the opportunity to protect themselves against future price change risks for up to six years. The approximately 250 trading participants also have the option of having bilateral transactions cleared. Clearing (clearing of receivables and liabilities from securities and forward transactions) and settlement (conclusion and fulfilment of an exchange transaction) of on-exchange and over-the-counter (OTC clearing) transactions in electricity is carried out by the European Commodity Clearing AG (ECC). In addition, the EEX Group offers products which, in view of the increasing share of renewables in the electricity mix, allow greater flexibility in trading.
Separation of the German-Austrian price zone model
Importance of flexibility trading continues to increase with the Energy Revolution, but successful German-Austrian price zone model still separated
In view of the steadily increasing supply of renewable energy in Germany and Europe, the maintenance of large market areas and even the expansion of existing so-called bidding zones is essential for continuation of market integration in the internal European electricity market.
The German-Austrian market area, with a uniform price structure and above-average liquidity in the spot and derivatives markets, was nevertheless separated on October 1, 2018. The transmission network in Germany is not sufficiently capable of transporting the large quantities of renewable energy produced in the north to the load centres in the south. The resulting loop flows, predominantly through the neighbouring eastern countries, had triggered the discussion around a separation of the German-Austrian bidding zone, which finally led to the management of the border between Germany and Austria as of October 2018.