How does electricity get traded?

How does electricity get traded?

The wholesale electricity market is where generators and suppliers buy and sell electricity. Suppliers wish to purchase enough electricity to meet the demand of their customers. Generators can sell the electricity produced by their power stations on the wholesale market. The trades can be completed on an exchange (ICE and APX) where traders will essentially see a screen full of volumes of power, associated prices and time periods. They can also conduct trades via a broker who will try to match the needs of two clients (buyer and a seller) such that a suitable trade can be completed. Trades can be completed for within day, day-ahead and even as far out as years in advance (however, the most liquid markets are those which are closer to today’s date). Companies can also enter into bilateral agreements with each other to trade an agreed level of electricity at a set price over a defined time period.

Wholesale market prices and trends

The Day-Ahead Baseload[1] Price in the UK has averaged at c£45.70/MW from June 2010 – May 2020[2]. In recent months, this price has fallen due to the significant demand reduction caused by Covid-19 and the resulting lockdown implications (closing of businesses, offices, factories etc). The outturn May 2020 price of £24.13 is considerably lower than the May 2019 price (£41.35).

The long lasting impacts of Covid-19 are unknown however the expectation is that demand will take time to reach pre-Covid-19 levels as the economy shrinks, people work from home, and businesses close permanently. Together with the increasing uptake of renewable generation (and the associated zero ‘fuel’ cost), wholesale energy prices are expected to follow a downward trend.

Auctions

Market players can also participate in auctions that see them entering the volume and price of power that they would like to buy/and or sell for given time periods. An algorithm then matches up the demand and the supply and outturns a clearing price for the auction. The NordPool auctions are some of the most liquid auctions in the market (LINK). An interesting trend is the outturn of negative auction prices for particular times of the day/week (generally overnight periods at weekends) where demand is low yet generation from windfarms may be high. Windfarm operators will look to sell this output, and will accept negative prices for the power as a significant number of these sites were built with subsidies (Renewable Obligation Certificates) that provide them with c£45 for every MW of output they produce!


[1] Baseload refers to a 24-hour daily period, starting from 11pm to 11pm the next day.

[2] Based on the monthly average of the Day-Ahead Baseload price (data source: Ofgem)

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