All about Electricity market

Sector coupling has become kind of a buzzword in European energy businesses. Most commonly, it means replacing the traditional separation of the energy sectors of electricity, heating and cooling, transport and industrial consumption processes in favor of a holistic approach.

Sector coupling aims at decarbonizing the national economy by converting the energy supply as completely as possible to electricity, finally reaching an "All Electric Society". A prerequisite for this is the use of the complete flexibility potential of producers and consumers as well as the storage of energy in its various forms.

As in other European countries, transmission system operator Elia monitors the balance of the Belgian grid. It requires each Balancing Responsible Party (BRP) to maintain a balanced portfolio. In concrete terms, this means that the offtake and injection in its portfolio must be balanced every quarter of an hour, taking into account the volumes traded on the electricity markets. In real time, however, BRPs may face imbalances, for example if a customer suddenly consumes more or a production installation produces less than expected. The imbalances of all Belgian BRPs partially cancel each other out, some BRPs have a positive imbalance (a surplus of energy), others a negative imbalance (a shortage of energy). The remaining imbalance is eliminated by the system operator Elia using balancing power, which it purchases in advance in the balancing markets organized for this purpose. In this way, Elia ensures that it has the necessary resources available at all times to maintain the system balance. Market players offering balancing capacity are remunerated on the basis of the price flow in the balancing market.

Day-ahead trading refers to the trading of electricity for the following day, which takes place for example on EPEX Spot in Paris (Spot Market of the European Power Exchange), on EXAA in Vienna (Energy Exchange Austria), or in OTC (Over-the-Counter Trading) via contracts negotiated bilaterally. A less frequently used term for day-ahead trading is auction market.

You don't need to look far to find an energy-only market (EOM). Since power markets were liberalized in the late 1990s, the energy-only market has become a well-established market design in many European countries. In terms of the underlying concepts, an energy-only market is the opposite of a capacity market. An energy-only market only compensates power that has been produced. A capacity market, on the other hand, compensates the mere readiness, or capacity, for power production. To ensure supply is guaranteed, the energy-only market is supplemented by various flexibility options, such as control reserve markets. Beyond that, there are usually additional reserve models similar to a capacity market aimed at guaranteeing supply.

Electricity travels a long way from the place where it is generated to where it is consumed. In the current European electricity system, the different stages of in power provision are split up. There are the generation companies who take care of the production of electricity in their power plants. The electricity is transmitted via the high-voltage grid, often referred to as the transmission grid. It is operated by the transmission grid operator (TSO). The suppliers (or retailers) take care of the actual provision of electricity to the end consumer. They buy electricity at the wholesale market and it is transported to the customer through the distribution grid to which households and companies are connected. This part of the system is characterized by lower voltage levels and is operated by the distribution grid operators (DSOs). You can learn more about the function of the different players in the electricity grid in this article.

Intraday power trading refers to continuous buying and selling of power at a power exchange that takes place on the same day as the power delivery. In Europe, the largest intraday power exchanges are the EPEX Spot (European Power Exchange Spot Market) in Paris and the Nord Pool. It can also take place in an OTC trade (over the counter), which means off-market contracts negotiated between power buyers and sellers. This is also known as the short-term wholesale power market, especially in contrast to long-term power trading on the power futures market.

In the energy industry, the term ‘merit order’ describes the sequence in which power plants are designated to deliver power, with the aim of economically optimizing the electricity supply. The merit order is based on the lowest marginal costs. Power exchange markets are operated by a middleman to whom generators and consumers submit their bids. In Belgium, the intermediate party for both the day-ahead and the intra-day market is EPEX Spot Belgium. As discussed in the section on energy markets, the day ahead market is a power exchange market, while the intraday market is an organized over the counter market. The mechanism to determine the clearing price and volumes in a power exchange market is based on the merit order curve.

The liberalised electricity market includes many parties who all have to work together and at the same time try to make a profit. An overview of the most important players in our current system is given below.

Power trading refers to the act of purchasing and selling power between participants in the electricity sector. Various forms of power trading are possible depending on the market design, ranging from anonymous short-term spot markets to long-term over-the-counter markets. These markets allow trading of electricity between power producers, large industrial consumers, and electricity retailers before it is being delivered to end consumers. They are therefore often called the wholesale electricity markets.

A Power Purchase Agreement (PPA) is a power offtake agreement between two parties, being a (green) electricity producer and an offtaker of this electricity, such as an electricity consumer or trader. A PPA includes all the terms of the agreement, such as the amount of electricity to be supplied, the negotiated price, who bears what risks, the required accounting, and the penalties if the contract is not honored. As it is a bilateral agreement, a PPA can be adapted to the wishes of the parties involved, so the supply contract can take many forms. Electricity can be supplied directly or virtually via a PPA (see below).

Generally, a PPA is a long-term contract, such as ten or fifteen years. It (partially) removes the risk of fluctuations in the electricity markets, which is desirable for large, debt-financed projects. PPAs are also concluded for the continued operation of renewable energy installations when they no longer receive subsidies.

A growth in the number of PPAs is also visible in Belgium. An example is the PPA that Google concluded with Engie for the supply of offshore wind for its data center.