08. Energy Markets 3

• Electricity is a homogeneous good i.e. nobody will pay more for a specific type of electricity

• The equilibrium price is formed on the basis of marginal costs i.e. the variable costs of generation

• Clearing price determined by the marginal power plant (last power plant required to supply the load) —> determined by available plants, their variable costs, fuel prices and carbon price

• Market clearance price —> determined by the last unit sold

• All infra-marginal power plants (marginal plants offer lower price —> have lower marginal costs) receive the clearing price —> wholsale electricity market is a “pay-as-cleared” market —> receives price which they have offered

• Supply curve of all available generators —> merit order —> vary over time because of availability of wind and solar fluctuations

• Demand is very inelastic —> doesn’t react to price change

• Many small producers —> change in the bid leads to change in the order of the bids

• Bid at marginal costs —> receive market clearing price if it is a marginal or infra-marginal producer

• Bid more than marginal costs —> could get extra margin and miss an opportunity to sell at a profit

• Bid less then marginal costs —> might have to produce at a loss

Borderline or Marginal Producer

• Sells this last unit

• Receives exactly his bid

Infra-marginal producers

• Receive more money than your bid

• Achieve economic profit

Extra-marginal producers

• Sell nothing

• RES have no fuel costs, therefore at top of the merit order —> always used because marginal costs = 0

  • Expensive power plants are forced out of the market

  • Because of these points it is not necessary from the economic theory to have an additional regulatory obligation vor using RES —> BUT in Germany we have it, the “feed-in-priority”

    —> with emerge of RES the merit order would shift to the right and the price falls

    —> High renewable generation —> prices fall more sharply

—> on basis of these factors, (future) market prices can be calculated

—> Reasonable price forecasts possible because of focasts for wind/solar, demand and fuel prices

Fundamental Factors

Other Factors are for example psychological or trading strategies

• Gas and electricity spot markets

• Trading before real/lead time

• Gate closure = latest possible trading time

• Short product sizes are favourable for the integration of variable RES

• Use to procure generation and load in advance to minimise financial risks

• Large proportion of transactions

• Trading centres: EEX (Leipzig), Nordpool

• Trading platforms: EPEX, Nordpool

Day-ahead trading

• Used for short-term optimisation of the generation/load profile

Intraday trading

• Used to correct unforeseen changes

• National markets for grid balancing services

• Used to balance supply and demand in real time

• Procured in advance but dispatched in real life

• Trading platforms managed by TSOs

—> Short-term and flexibility market and grid management

• Imbalances can occure and short-term measures are required —> Power plant outages, forecast errors, line outages, overloading of the line,…

• Solution: Control energy markets or reserve markets or balancing energy markets —> deal with time imbalances i.e. with grid congestion management

• Power plants need same frequency (50 Hz) —> communicate via frequency

  • Load > feed-in: higher frequency

  • Load < supply: lower frequency

No

y- Axis -> 1 stands for the average price (at noon highest demand and during the night low demand)

x- Axis -> Hour of the day (24h)

-> over the years the graph flettend on peak day energy demand bc of installed solar power and on night time it increased

Value factor = 1-> average electricity price (1.3 -> you can earn 30% more money )

-> thats why you can earn more money with solar, bc solar produces electricity when you need it during the day

And the (wind) value of the renewable generation is going down

-> Renewables are reducing the el. prices but they are also reducing their values (problematic)