Power exchanges - energy marketplace

Short-term trading, i.e. when there is no more than one day between purchase and delivery, takes place on the EPEX spot market. On the spot market, market participants can buy quantities required at short notice or sell quantities no longer required. The spot market consists of the sub-market "Day-Ahead" and the sub-market "Intraday". Both terms are described in more detail in the following text. On the EEX, on the other hand, trading takes place on a forward basis, i.e. the settlement date of the transactions made lies in the more distant future.

What are power exchanges for?

Power exchanges provide a trading platform on which market participants place bids to buy and sell electricity. Power exchanges organize anonymous markets that are accessible to anyone who meets the access requirements.

Transparent pricing

The main purpose of power exchanges is to ensure a transparent and reliable pricing mechanism for the wholesale market. This is done by matching supply and demand at a fair price and actually delivering and settling transactions made on the exchange. Now how does the price on the exchange come about? There are two mechanisms for this: the auction and continuous trading.

Auction in the day-ahead market

On the day-ahead market, the electricity supply for each hour of the following day is auctioned the day before. For this purpose, sellers and buyers submit their bids for the corresponding hours in each case on the previous day until 12 o'clock.

After all bids have been submitted, one considers which quantity of electricity was offered for sale by the sellers at which price. By plotting the price offered against the quantity offered, one obtains the supply curve for the hour in question. The supply curve is rising, since with rising price the offered quantity increases (see blue curve in the diagram).

In the next step one considers, at which prices the buyers are ready to buy river. In this way, one obtains the demand curve. The demand curve is falling, since the lower the price, the more electricity is demanded (see yellow curve in the graph).

The intersection of the supply and demand curves corresponds to the market price in the hour in question.

In the electricity market, the generation plants with the lowest variable costs come first ("merit order"). This minimizes the cost of electricity supply. As a rule, the exchange price for electricity corresponds to the variable costs of the most expensive generation plant in use. This plant is referred to as the "marginal power plant". The exchange price is then also called the marginal cost price.

Since supply and demand are constantly changing, prices also vary from hour to hour.

In 2015, the trading volume on the day-ahead market in the joint German-Austrian price zone rose to around 264 billion kilowatt hours, which corresponds to around half of Germany's electricity consumption.

Continuous trading in the intraday market

The closer the time of the agreed electricity delivery approaches, the better the market participants can estimate the actual feed-in and real consumption. In order to keep shortfalls or surpluses as low as possible and to use the available generation facilities in a cost-efficient manner, market participants can therefore trade electricity quantities for periods ranging from quarter hours to hourly blocks on the intraday market at very short notice up to 30 minutes before the start of delivery. However, no auction takes place here. Rather, trading is continuous. This is to be understood that a transaction and thus a price always comes about when

a buyer calls the exchange a purchase price that is at least as high as a sales offer submitted to the exchange or
a seller calls the exchange a price that is not higher than a purchase offer submitted to the exchange.

Price hedging

The second important function of power exchanges is to enable market participants to hedge against price changes. Buyers hedge against rising prices and sellers hedge against falling prices. For example, a power plant operator can sell his planned electricity production early and thus secure his margin. In the same way, an electricity distributor increases its calculation security if it fixes its procurement costs early.

For price hedging, the futures markets are used. Thus on futures markets price hedging transactions for longer-term electricity supplies are transacted. The most important products traded on the futures market are:

Weekly products: Traded is the current and the next 4 weeks (week futures)
Month products: Traded is the current and the next 9 months (Month futures)
Quarterly products: Traded are the next 11 full quarters (Quarter futures)
Year products: Traded are the next 6 full years

Futures trading is organized as continuous trading. As soon as the exchange has a sell offer, which is not higher than an existing buy bid, a price and thus a transaction occurs. The same applies vice versa. The transaction obligates the buyer to pay the purchase price to the exchange at the delivery date in the future. The seller receives the agreed purchase price from the exchange at the time of delivery.

On the futures market, only standardized electricity products are traded. The corresponding products are called "futures" on the exchange. A distinction is made between base products and peak products. The product annual base load is an electricity delivery evenly distributed over the whole year. A yearly peak load is an electricity delivery with which on Mondays to Fridays in each case from 08:00 o'clock to 20:00 o'clock electricity in constant height is supplied.

Taking over the counterparty default risk

The third important task of the power exchanges is it to take over the so-called counterparty default risk. By this is meant that the power exchange guarantees that the transactions made will be fulfilled under all circumstances.

This is done by the fact that in an exchange transaction, the transaction is not concluded directly between the market participants. Rather, the seller sells to the exchange and the buyer buys from the exchange. Since both buyer and seller have to deposit sufficiently high securities with the exchange, it is ensured that even in the event of insolvency of the buyer or the seller, the transaction is nevertheless fulfilled.

Allows buying and selling at any time

Another important task of the power exchange is to ensure that at any time a seller finds a buyer or a buyer finds a seller, and that at a market price. This is ensured by the so-called "market makers", who simultaneously post an offer to sell and buy at a price close to the market price at any point in time.