Lesson 3

Electricity Trading


Electricity is a special type of commodity that is traded on it's own market. It differentiates itself from other commodities such as coffee, wine, oil, cotton or gold by the simple fact that it is not easily stored. Electricity has to be consumed as soon as it is produced. This makes it really important for producers to get money for what they generated and that the consumers pay for what they rightfully consumed. To add on that, the power system is pretty complex as it is. In fact, a lot of the dynamics in a power system is automated by control systems. Having these automated systems makes it really hard to settle real-time payments. To work around this problem, the trading of electricity occurs during three periods called ahead, real-time and post-trading. In Sweden, the electricity is traded on an hourly resolution, and that goes for most of the electricity markets in the world. So before we dive into how these trading periods work, we need to get familiar with how an electricity market is structured.

Electricity Market Structures

There are essentially three ways to structure an electricity market. They all have fancy names, but really, they are quite basic.

Vertically Integrated Market. P=Producer, R=Retailer, C=Consumer

The consumers has no other choice than to buy electricity from his or her local retailer or generating company. The power companies however, trade freely between each other.

Centralized Electricity Market. P=Producer, C=Consumer

Every trade goes through the power pool. Example of a power pool is NordPool Spot which is the largest power exchange market in the world. Visit their website at: http://www.nordpoolspot.com/ (they have all kinds of cool production, consumption and price prognosis for the Nordic countries). For a centralized market, all producer must essentially sell their electricity to the power pool and all consumers must buy from it.

Bilateral Electricity Market. P=Producer, R=Retailer, C=Consumer

All players can trade freely. Which is why this image is such a rat nest. This is the more common type of electricity market structures you run into.

Ahead Trading

During this period the players trade as much power they think they need. Depending on the electricity market structure, the players can submit purchase and sell bids to the power pool or sign short- and long-term contracts with retailers for example.

Real-Time Trading

All players can trade in real-time, but note that the Transmission System Operator (TSO) plays a key role here! They need to keep track of all purchases and sales and ensure that the power system remain stable. In some cases the TSO can ask players to reduce or increase their production and consumption to adjust for the occurring power imbalances. There are two scenarios, either a down-regulation or an up-regulation is needed. When down-regulating, the system is supplied with less energy than agreed in the ahead market. Similarly, when up-regulating, the system is supplied with an more energy than needed. The excess is generally sold to the TSO.

Post Trading

During this period, the TSO summarizes all trades that have been made in the previous trading periods. The whole purpose of post trading is to settle the deviations that might have occurred from previous trades. For example, a retailer may have failed to supply the power he was intended to. When this happens, there are different price systems used to punish the players causing the power imbalances in the system. I'm not going to go through all of them, but some may for example punish negative imbalances harder than positive imbalances. It really depends on the state of the system, that is, whether up- or down- regulation is needed.



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