Consecutive electricity markets
Electricity is one of the most versatile forms of energy. It can be used to produce light, heat and mechanical power in an efficient way. It is very different from other energy commodities due to the fact that electricity can still not be stored cost-efficiently. This means that in our power system generation and consumption have to equal one another at every moment in time. When the balance between supply and demand is distorted, the frequency of the grid will start to deviate from its reference value (50Hz in Europe, 60Hz in the US), in the worst case resulting in a black-out .
To be able to cope with this particular property, different wholesale markets have been set up which play on different time horizons in advance of the actual moment of production and consumption. On the long term, producers and consumers can trade large blocks of power in the futures or forward markets years before actual delivery. In this way, they can safeguard (or in a trader’s language: hedge) themselves against unpredictable fluctuations in energy prices. In Belgium, futures are traded on the ICE Endex and European Energy Exchange (EEX). Another option is that two companies make a deal between one another, then often called an Over The Counter (OTC) contract. The different market types are explained in more detailed in this article.
One day before the actual delivery, a more precise estimate of the demand for the day ahead is possibly based on weather data, big events that might influence demand (like an important football match) and information about plant outages. Producers, suppliers and large industrial consumers therefore trade on the day-ahead market (DAM). It is typically organized as an auction market, based on the merit order curve. In Belgium the day ahead market is managed by Belpex. The electricity is traded on an hourly basis.
In reality, the day-ahead demand forecast will never be completely accurate. Also supply will differ from what was expected, due to different wind conditions, solar insulation or unexpected plant outages. Therefore, a third type of wholesale market was introduced: the intra-day market. This allows market participants to correct for shifts in their injection or off-take of the grid shortly before actual delivery. In Belgium this is the continuous intra-day market (CIM) and organized by Belpex. It is an over-the-counter market (OTC market) where bilateral deals are made between the different market players.
In reality this market based approach will always result in a remaining imbalance in the power system both because traders might not have been able to make all necessary deals and because generation and consumption can never be predicted with 100% accuracy. This final imbalance has to be taken care of by the transmission system operator. In Belgium this is Elia. For this purpose Elia activates so-called reserve power products. This is discussed in more detail in this article.