Electricity market players
Electricity is one of the most versatile forms of energy. It can be converted to light, heat and mechanical power in an efficient way. And yet, electricity is very different from other energy commodity due to the fact that until this day, it cannot be stored cost-efficiently. As a result, generation and consumption within our power system have to balance one another at every single moment. When the balance between supply and demand is off, the frequency of the grid will start to deviate from its reference value (50Hz in Europe, 60Hz in the US). In the worst case this will result in a black-out.
To be able to cope with this particular challenge, different wholesale markets have been set up with different time frames. In the future or forward markets, producers and consumers can trade large blocks of power years before the actual delivery. This way, they can safeguard (or in a trader’s language: hedge) themselves against unpredictable fluctuations in energy prices. Another option is that two market participants make a deal between one another, often called an Over The Counter (OTC) forward contract.
For Italy, futures are traded on the European Energy Exchange (EEX), forward contracts in the Forward Electricity Market (MTE), operated by GME.
One day before the actual delivery – a more precise estimate of the demand for the delivery day is possible. This estimate is based on current 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 (see link). In Italy, the Day Ahead Market (Mercato del Giorno Prima, MPG) is managed by GME and electricity is traded on an hourly basis.
In reality, the day-ahead demand forecast will never be completely accurate. This is due to changing wind conditions, solar insulation or unexpected plant outages. At the same time, also the supply will never correspond exactly to what was previously predicted. Therefore, a third wholesale market was introduced: the intraday market. This allows the market participants to correct changes in their feed-in or react to network failures shortly before the actual delivery. In Italy, the intraday trade (Mercato Infragiornaliero, MI) is organized in five auction meetings (MI1 - MI5), which take place between 12:55 on the day and 11:15 on the delivery day.
Even with the best market system, a certain imbalance in the energy system can not be avoided. This is due to the fact that the traders might not have been able to make all necessary deals for example. IPlus, production and consumption can never be predicted with 100% accuracy. This remaining imbalance must be eliminated by the transmission system operator Terna. To this end, Terna operates the dispatch market (Mercato per il Servizio di Dispacciamento, MSD). If necessary, the so-called reserve power is called up here in real-time.