Analysis | How electricity trading is trying to turn on the lights in Europe – The Washington Post | Jewelry Dukan

Europe’s power grids face a crucial test this winter, with supply disrupted by a slump in Russian energy imports, nuclear failures in France and dwindling hydropower reserves. The fight against power outages is led in part by specialist retailers, who send electricity across borders to where demand and prices are highest. There will be no room for error. Any unplanned shutdown of large power plants or sudden failure of transmission cables could plunge cities into darkness and bring factories to a standstill.

1. How is European electricity traded?

The UK and Nordic countries began liberalizing their centrally planned energy systems in the early 1990s. This has developed into a trillion euro market in which electricity is bought and sold in regional grids and across national borders. Much of this growth has come with the emergence of wind farms and solar panels as significant sources of energy. The unpredictable availability of wind and sunshine required greater volume and complexity of trades to smooth out peaks and troughs in supply. Traders can now buy and sell power in 15-minute periods for the same day on Epex Spot SE, the largest short-term contracts market. Other trading teams focus on what is known as “the curve” or longer-dated contracts. These traders study energy supply trends and subtle shifts in domestic and industrial demand to settle supply contracts years in advance. Many thousands of transactions are concluded every day.

2. What does an electricity trader do?

What separates electricity traders from their peers in oil, metals, or agriculture is the sheer volume of data they need to track: which fossil fuel power plants are running, how much energy is needed to produce them, market price trends, the weather Reports and the overall power generation mix. Some operate in multiple markets, making their calculations even more complex. Short-term markets are becoming increasingly automated, but trading strategies are still developed by humans. In the longer-term markets, traders are analyzing factors such as the cost of running a gas-fired plant over the next year or the extent to which rising energy prices will reduce demand from factories across the region.

3. How does balance sheet trading work?

Demand and supply must be coordinated at all times in order to keep the voltage stable and avoid outages. Trade between nations is based on a daily auction system. Utilities bid how much they want to buy and sell hourly for the following day. Computers on national exchanges are connected to those of the network operators and allow flows based on price signals. There is also an intraday market for cross-border trading. The amount of electricity that can be bought and sold between countries is determined in part by the physical “interconnector” capacity that companies buy upfront.

4. What is an interconnect?

It is a power cable that runs between two national markets, for example on the seabed between France and Great Britain, underground or above ground on transmission towers or masts. They tend to have more capacity—sometimes as much electricity as a nuclear reactor can generate—than typical high-voltage lines. There are hundreds of them in Europe and some are linked to countries outside the region’s internal market. Traders make profits by exploiting price differences between nations. But the cables also fulfill a larger role in matching supply and demand over a larger area. Record electricity prices in 2022 would have been even higher had it not been for interconnectors, giving buyers more choice of suppliers and making the market more efficient.

Grid operators have been busy connecting national markets to cope with the unpredictability of weather-dependent power sources and to take advantage of lower green energy prices. Everything depends on maintaining a stable grid frequency, which for Europe is 50 Hertz. An outage at a Croatian substation in January last year exposed the entire system at risk from small, unexpected problems. The outage forced network managers to split the European grid in two to avoid continent-wide blackouts. Then there are errors caused when network managers or traders fumble a calculation or keystroke. In September, a French regional utility accidentally sold large amounts of electricity, forcing the country’s grid operator to call in replacement supplies from the UK and Spain.

6. How are network operators preparing for winter?

To avoid blackouts, utilities typically have an overhead margin — a buffer in case something goes wrong. You can also turn on backup generators and ask neighbors to boost exports. Consistent warnings from national authorities have prompted Europe’s nearly 200 million homes and businesses to expect at least some disruption in the coming months. France came out early, saying on September 14 it expects to issue warnings several times over the next six months to curb winter demand. For traders, the market’s record volatility makes for an exciting few months. Some are ready to make massive profits while others lose a lot of money by making the wrong decisions.

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