The most liquid and volatile power markets– What are the structural and regulatory differences between US and EU power markets?

The most liquid and volatile power markets that traders are interested in are the American ISOs and the national European markets. To help you make the best informed decision for your business, Time2Market’s experts have compared the structure, function, and market access requirements for US and EU power markets below.

Article by: Paul Pontenagel

What are the structural differences between American and European power markets? ?

How are US power markets organized?

Over the last three decades, the wholesale power market in the USA has been restructured. Currently, over two-thirds of the nation’s electricity load is served in restructured regions, where competitive electricity markets have been formed and are managed by Independent System Operators (ISO). In these regions, wholesale electricity is generated by various utilities, transmitted on high-voltage power lines, which are operated by ISOs, and traded on competitive power markets run by ISOs.

Alternatively, in traditionally regulated areas, utilities own the generation, transmission, and end-consumer distribution systems. These utilities are known as vertically integrated utilities, and as the sole responsible parties for meeting local demand and ensuring the stability of the local power grid, they typically balance the grid through bilateral transactions. You can read more about how American power markets are organized here.

How are EU power markets organized?

In the EU, multiple counterparties are involved in regulating the local power markets, operating the transmission systems, and overseeing the adherence to EU-wide law and regulation (more on that later). Excluding the German power markets, each EU country has one power market, which is overseen by one National Regulatory Authority (NRA) and balanced by one Transmission System Operator (TSO). The products these markets offer can typically be traded on national and regional exchanges (Nominated Electricity Market Operators - NEMOs). In Germany, four TSOs manage the transmission system and ensure the national grid is balanced.

All short-term power markets in the EU are coupled via various market coupling mechanisms, which align the market’s behavior with the physical cross-border flow of power and ensure that grid capacity is allocated in the most efficient way. To ensure the greatest efficiency possible, power markets in the EU are divided into bidding zones, which have an individual price for each market time unit.

What power markets are available to market participants?

What short-term power markets do US ISOs offer?

Independent System Operators usually operate two short-term markets for non-generating market participants: the day-ahead and the real-time market.

Approximately 95% of all power trades are executed on the day-ahead market, where market participants can hedge their trades against the real-time wholesale power prices for the following day. This market typically closes between 9:00 and 11:00 AM local time, and all positions that clear the real-time price for the same location are awarded to the corresponding market participants.

When a market participant takes financial (or virtual) positions in the day-ahead market in the US, they are required to close out every trade with an offsetting trade on the real-time market to keep the grid balanced. Because a virtual trader cannot deliver or receive the physical power they trade with, a measure of profitability for financial trades is the Day-Ahead-Real-Time spread (or DART spread).

Alternatively, physical power traders, which typically need to fulfill many additional ISO requirements to be granted a trading license, do not need to adhere to a DART spread to make profitable trades. To deliver the power they trade with, physical power traders use the Open Access Technology International (OATI) portal to purchase transmission on ISO-owned HVAC power lines.

What short-term power markets are available to traders in Europe?

In the EU, national and regional exchanges also offer two short-term power markets: the day-ahead and the intraday market. Because all short-term markets in the EU are coupled, day-ahead markets clear at the same time in one EU-wide auction, which is held at 12:00 CET on the previous day. The auction results are the clearing prices for each bidding zone for all 24 hours of the following day.

Alternatively, the coupled intraday market clears continuously by directly matching all trades across the continent into a single cross-exchange module. Cross-border capacity is allocated if it is available. ?

Due to market coupling, only day-ahead power markets can be traded financially in the EU.

How do the US and the EU handle cross-border transmission and capacity?

How do congestion management and Locational Marginal Pricing (LMP) affect US power trading?

In the USA, seven Independent System Operators manage the high-voltage power grids. However, due to the vast size of the country, there is not a singular price per market time unit across the entire operational area of an ISO. There are over 12,000 individual power price locations across the country. These power price locations (otherwise known as nodes) are typically affected by the operational cost of power plants in the area and the local end-consumer demand.

The power price for each node is dependent on the cost of production by the local power plant and the transmission congestion of the local grid, which is directly affected by demand. ?

When demand is high, the physical limitations of the local transmission grid affect how much power can safely be transmitted between two points. These limitations are known as grid congestion. Consequently, areas with insufficient energy resources and high demand tend to have higher prices, presenting both a problem and an opportunity for traders.

How does market coupling affect European cross-border power trading?

Currently, all short-term EU power markets are coupled through three market coupling systems: the Price Coupling of Regions (PCR EUPHEMIA), Flow-Based Market Coupling (FBMC), and the XBID mechanism...

What counterparties are involved in American and European power markets?

Who manages and regulates wholesale power markets in the US?

Who manages and regulates wholesale power markets in the EU?

You can read the rest of this article for free on Time2Market's website.

Conclusion

American and European power markets have evolved independently from one another. The functional mechanisms behind these markets, which ensure end-consumers' demand is met in a stable, reliable, and cost-effective way, are affected by local historical, cultural, and political developments. ?

These differences consequently lead to unique trading opportunities and market entry requirements. To help ease the process, Time2Market is ready to support your market entry needs.

If you are interested in trading power in the US, Time2Market offers market access and market entry services into these markets. Book a non-binding consultation with our experts here.

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