Wholesale energy markets: how is energy traded?

The EEF offered MEP Advisers and Assistants an opportunity to better understand the latest and expected developments in energy markets through a dedicated educative briefing on energy trading, chaired by the EEF President MEP Jerzy Buzek.

The session started with a comprehensive explanation of the functioning of electricity markets by Stanislav Kostka, Head of Generation and Dispatch, Trading at CEZ Group. After presenting the different market’s stakeholders as well as their interests and underlying the importance of regulation in defining the boundaries within which they operate, Mr. Kostka explained the very reason for trading is twofold: hedging generation and sell position, and optimization. Both physical and financial products are traded on electricity markets and trading is possible in different timeframes, from year-ahead to almost real time. Depending on that, we may speak about forward electricity markets, spot markets or balancing markets, and here our speaker took the time to explain us how TSOs ensure grid stability in balancing markets by activating ancillary services. Mr. Kotska also offered insights into electricity price formation and clarifications on the main specificities and differences between Over-the-Counter (OTC) and Exchange Trading. He finally touched upon market coupling, highlighting its positive effects on market’s efficiency.

Mathilde Lallemand, Policy Officer “Green Transition and Energy System Integration” at DG ENER, took over to explain how the EU internal electricity market supports the Green Deal by providing security of supply, bringing affordability and promoting decarbonization. The EC has been working hard to get the electricity market design right. Flexibility, a level playing field for renewables and cross-border trading have been the main objectives pursued, always while addressing resource-adequacy issues. Ms. Lallemand explained in EU electricity markets integration has been achieved with different tools: the single allocation platform JAO for forward markets, market coupling for spot markets, and different continuous trading platforms for balancing markets. She stated maximizing cross-border electricity trading, aligning the markets to the physical grid – first by addressing structural congestion –, and unleashing the flexibility of the demand side are key to ensuring the integrated market works at its optimum; the EC is working on that. Finally, on energy prices, she said the EC is considering actions to complement last October’s toolbox and asked ACER to assess what could be considered for changes in the current market design to ensure the right balance between consumer exposure to price volatility and market flexibility, as well as to drive investments towards low-carbon generation.

The focus of the session then turned to gas wholesale markets. Cristiano Campi, Portfolio and Trading Gas – Northern Europe at Eni Global Energy Markets said trading is only the very ending point of a long value chain. Here also, we have several different players who engage in a continued conversation aimed at placing gas volumes in the market and locking prices in an optimized way. He dived deep into long term gas contracts to show us how they are made of different elements entailing different considerations. Although the trade process itself is quite linear and common to other commodities, there is no such thing as a single approach to trading, as the players focus on different elements and bring in different interests. Mr Campi clarified that in the EU we shall not speak of an EU gas market, but of increasingly better coordinated national markets. He finally provided us with an overview on how the performance of a gas market can be evaluated based on the number of active participants, traded products, the volume of gas traded and the churn rate, sharing the results of a study confirming the Dutch TFF as the best-functioning gas market in the EU. 

Last but not least, Nora Topor-Kalinskij, Regulatory and Policy Advisor at EDF Trading, focused on the trading of carbon emissions allowances, guarantees of origin (GOs) and sustainability certificates. After an overview of the EU ETS system and the changes proposed by the Fit for 55 Package, including the CBAM, she dedicated some time to GOs and sustainability certificates. GOs are used by consumers to demonstrate the energy they consume is green. They are traded separately from the physical electricity, in what is called “book & claim”. GOs sales may not affect physical flow, but they do affect cash flow, generating revenues for RES power producers thus supporting investments in renewable generation. Parallel to that, Sustainability certificates for renewable gases are used to count towards the targets set by REDII. In this case, a mass balance principle is applied to the certificates: the paper and physical trade move together. This system is more elaborated than the GOs one as more documentation is needed. Ms Topor-Kalinskij stressed the importance of understanding the interaction between the two systems, particularly in view of the reforms being proposed.

One must say the speakers succeeded in making energy trade-related concepts – often complicated and very technical – almost easy to understand, as well as in keeping our audience engaged. Both MEP advisers and EEF Associate Members actively participated, raising several questions during the Q&A session.