The procurement of electricity on the wholesale market is a “daily business” for us as an energy service provider. We constantly monitor developments and can therefore react quickly with the aim of achieving prices below the market average for our customers.
In this article, we explain how electricity trading works, what special features there are when trading electricity and more:
Challenges in electricity trading
Trading in electricity is determined by a peculiarity of the commodity: electricity can only be stored to a very limited extent. And the generation of energy always follows the fluctuations in electricity consumption over time.
Therefore, energy quantities are traded that have not yet been produced.
This can be clearly seen in the following graphic, which compares the amount of electricity generated and the amount of electricity required in Germany for the period between January 14th and 24th, 2022.
Electricity generation and consumption in Germany
It can be clearly seen that there are times when too much electricity is generated in Germany – the red line is above the electricity generated – and too little electricity is generated.
These oversupplies or supply deficits are covered by imports and exports. In times of energy oversupply, exports increase and vice versa.
Import and export of electricity
The balancing energy market
Balancing energy is required to compensate for unforeseen short-term fluctuations in the power grid because production and consumption do not match perfectly. It is intended to prevent networks from being overloaded and the supply from failing.
To ensure grid stability, the transmission system operators advertise the amount of electricity they could need at any given time on the separate control reserve market, an online platform. The providers of balancing energy are primarily the electricity producers. These use the control energy contracts operationally only to the extent that is necessary to keep the grid stable at the lowest possible cost.
How does electricity trading work? OTC or over-the-counter power trading?
The majority of transactions with electrical energy, approx. 75% of the total trading volume, takes place in Germany in the so-called OTC trading. “Over-the-counter trading” usually takes place directly between suppliers and buyers, sometimes also mediated by brokers on electronic platforms.
The tenders of regional and national energy suppliers go “over the counter” in these over-the-counter transactions.
These bilateral transactions are not publicly visible and the prices that are established there are usually based on those of the official electricity exchanges.
Electricity trading on the electricity exchange
The electricity exchanges are marketplaces for electrical energy with strict regulations, where standardized electricity products are traded.
How does the electricity exchange work?
On the electricity exchanges, suppliers and buyers face each other in the order of the amount of their bids. The lowest bids are accepted first and the buyers with the highest bid are considered first.
The most important power exchanges for Germany are the Leipzig EEX (European Energy Exchange) and the Paris EPEX (European Power Exchange).
Who can trade electricity on the exchange?
Electricity trading on the exchange is only worthwhile for very large companies that meet the following requirements:
As a rule, it is much more lucrative for companies to participate in electricity trading via their specialized electricity provider for companies.
The load profile as a basis for forecasting power consumption
Since electricity has not yet been able to be stored economically in large quantities, it is necessary for a secure power supply that the amount of electricity required by consumers is produced at all times.
The smallest time unit in which the consumption of the customers and the supply by the supplier are balanced and must be in balance is the quarter of an hour. Customer demand over the course of the day, week and year is determined on the basis of consumption over the last 12 months.
Registering performance measurement for bulk consumers
For consumption points with an annual consumption of more than 100,000 kWh, there is an obligation to register power measurement (RLM). To do this, the consumption point must be equipped with a so-called RLM meter. This meter is used to measure the individual consumption behavior per quarter of an hour over 12 months (load profile), which serves as the basis for the consumption forecast.
The standard load profile procedure for annual consumption below 100,000 kWh
For electricity consumers that fall below the threshold for consumption of 100,000 kWh per year, only the annual amount consumed is recorded. The power consumption must therefore be forecast using the so-called standard load profile method (SLP). For the SLP systems, the network operators provide various standard load profiles according to the consumption behavior and the system type, on the basis of which the suppliers can calculate the consumption of the systems over the course of the year.
Objective of the consumption forecasts
The aim of the consumption forecasts is to supply the required amount of electricity as precisely as possible every quarter of an hour. This can only be achieved if the supplier has the load profiles of all RLM systems and the annual consumption quantities of all SLP systems and there is little deviating consumption behavior on the part of the consumers.
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products on the electricity market
Once a power forecast has been created, the next step is to break it down into tradable standard products.
The futures market – for long-term price hedging
Long-term transactions with electricity are carried out either “OTC” or on organized futures markets such as the EEX (European Energy Exchange) in Leipzig.
So-called electricity futures, binding forward contracts, are traded here to hedge prices for delivery times between one week and six years. The most important products are the standardized monthly, quarterly or annual contracts Base and Peak.
Buyers use the futures market to hedge against rising prices. seller, e.g. Electricity producers, for example, protect themselves against falling prices.
base and peak
There are two types of physically supplied electricity to meet future electricity needs futures market products (Forwards) available: base (base load electricity) and the more expensive in relation to it Peaks (peak load current).
Peak is more expensive than base because additional, more expensive power plants (e.g. gas power plants) are used to produce it.
Base and peak contracts can be traded for different timeframes. On the futures market, these are primarily annual, quarterly or monthly products. They are typically traded in whole megawatts (MW).
Base corresponds to a delivery with constant power (in MW) over the entire delivery period.
Peak is a constant power delivery Monday through Friday from 8 a.m. to 8 p.m.; this also applies to public holidays that fall on a weekday.
Base and peak products are used for long-term price hedging. However, they are too rough to exactly cover the demand per quarter of an hour.
The spot market for short-term trading
In order to reflect the actual consumption behavior of customers, the long-term procurement of base load and peak load band deliveries on the futures market must be supplemented with hourly and quarter-hourly products on the so-called spot market shortly before delivery.
On the spot market, electricity is traded for the next day or hours. Spot trading products are primarily individual hours and quarter hours that are traded separately.
The blend (sale) and the additional requirement (purchase) between the quarter-hour forecast and futures market products are made shortly before delivery to the spot market, with the smallest amount being 0.1 MW (= 100 kW).
After spot trading, the supplier has exactly the amounts of electricity available that he has forecast for his customers.
Day-ahead & intraday market
The spot market is divided into two sub-markets, the day-ahead and the intraday market.
On the day-ahead market electricity auctions are conducted daily for each hour of the following day. The bids must be received by the stock exchange by noon.
On the intraday market purchases and sales are made for electricity that is delivered on the same day.
The products related to the load profile
The following graphic shows how the products and the load profile of a premise are related to each other.
The electricity requirement is characterized by the continuous line and it can be seen, for example, that the points of consumption require the most electricity on weekdays (Monday to Friday) and during the day.
On weekdays, most of the demand is covered by the futures market via the base and the peak. On weekdays, it can also be seen that before 8 a.m. and after 8 p.m., more electricity is regularly required than is covered by purchasing Base. This additional requirement is covered by the spot market via single hours (hourly purchases).
load profile
Learn more? If you want to know more about the Areva procurement strategy, you can read about it in our article “Power procurement”.
Accurate forecast protects against compensation payments
If the forecast of the consumption – the forecast load profile – and thus the delivery quantity does not match the actual consumption, the network operator ensures that the excess or reduced consumption is compensated. However, caution is required here, because the network operator has this compensation paid for by compensation payments.
So it is not only important to predict as precisely as possible when electricity has to be purchased in addition to the base and peak load on an hourly basis, but also when the delivery quantity could probably exceed the required quantity. Expected excess quantity can be resold before delivery.
Since the forecast can never reflect reality 100%, there are always compensation payments. The following applies here: The better the forecast, the fewer compensation payments are due to the network operator.
Effects of renewable energies on electricity trading
With the expansion of renewable energies, there was a need for even shorter-term trading. The continuous intraday market was created in order to adapt the sale of electricity from regenerative generation plants to the constantly changing wind and photovoltaic forecasts. The electricity for hours and quarters of an hour is traded until shortly before the start of delivery. Short-term surpluses are sold here around the clock, and bottlenecks are compensated for. Business transactions are possible up to 5 minutes before the start of delivery.
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