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The potential for growth in the short-term electricity markets

The potential for growth in the short-term electricity markets

The electricity market design and dynamics need to advance according to the increasing penetration of variable renewable energy sources and distributed generation. The renewable energy sources (RES) share in electricity production has grown significantly and will reach over 70% of gross electricity generation in 2030 (Busch et al. 2023)1. According to the EU Commission, the share of renewable energy production is 38% of electricity in the EU, and it is foreseen that it will exceed 50% by 2025. This requires flexibility services in the power system that are capable of efficiently managing and accessing, inter alia, the fluctuations in system frequency, local network connections, uncertainty, renewable energy production, and market prices. At the same time, flexibility can identify the optimal biding decisions in all electricity markets, thus increasing profitability and reducing imbalance costs.

Wholesale or spot electricity markets

Market agents can increase economic performance due to the participation in multiple markets. There are several electricity markets in Europe, such as balancing energy markets, balancing capacity markets, redispatching markets, forward energy markets, forward transmission markets, reservation for redispatch and capacity mechanisms. But this time the focus is on the wholesale or spot electricity markets, which are short-term markets well-known as day-ahead and intraday markets.

Day-ahead market

It is a specific energy market where buyers and sellers submit their bids and offers a day before the actual delivery of the electricity. This strategy is great for market participants who want to plan and schedule their needs in advance. However, this market implies a pre-commitment to deliver the energy that was specified one day before, if not, the agent can be economically penalized for exceeding or not reaching what was supposed to be delivered as this will suppose a deviation from the forecasted supply or demand and an imbalance on the grid. Buyers and sellers have time until 12:00 CET to submit their bids to the power exchange for the auction. Day-ahead trading takes place either on the spot market or through over the counter (OTC) deals. After the auctions are closed and the day-ahead market is cleared, subsequent shortfalls or surpluses can be traded through the intraday market.

Intraday market

It ensures that energy supply matches demand in real-time. In this case, the electricity is traded to be delivered on the same day through power exchanges or OTC trade. The short-term trading provides more flexibility and balancing services to the grid. Thanks to these constant adjustments, market participants can manage real-time imbalances buying or selling energy to maintain grid stability – which is known as Real-Time Balancing. Additionally, it also address imbalances emerged due to a difference with respect to the scheduled and the actual energy consumption or generation – defined as Imbalance Settlement. Each session within the intraday market has a gate closure time that indicates the last time when a buyer or seller is allowed to trade for that specific delivery period. In the short-term wholesale power market, power is commonly traded in quarter-hour or one-hour intervals.

How can a market participant increase profitability?

It is important to have the right tools to navigate throughout the multi-settlement framework of electricity markets. There are new key players on the market that can reduce risks and imbalances, while increasing profitability, such as aggregators and Virtual Power Plants (VPP). These market players participate in several electricity markets, therefore they can maximize monetization while allowing cross-border trading and fostering an interconnected energy market.

Notwithstanding that, there are still significant barriers for these new agents who are willing to entry in some EU markets. That is why market mechanisms and regulations should be reconfigured in order to facilitate their entry into the energy market and to further advance on the energy transition, integrating more renewable energy.

Multi-marketing and ancillary services

The need to balance supply and demand in very close to real time, plus the possibility to participate in multiple markets fosters this prospective paradigm where market participants can maximize their profitability through multi-marketing, witnessing an increase on revenues through their engagement in short-term electricity markets. At the same time, this implies a need for more ancillary services, that is to say, electricity products that cover balancing energy, voltage support, constraint management, frequency regulation and reserves.

Ancillary services are secondary services provided to help grid operators maintain the reliability of the electricity system. As mentioned, increased variability of renewable energy and uncertainty further boost the need for additional ancillary services that can address the imbalances between supply and demand and keep grid stability.

1 BUSCH, S., KASDORP, R., KOOLEN, D., MERCIER, A., SPOONER, M., Directorate-General for Economic and Financial Affairs (2023). The Development of Renewable Energy in the Electricity Market - Discussion Paper 187. European Commission
Author: Iris Blay
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