Energy Trading Reg&Directive
Energy Trading Reg&Directive
Energy Trading Reg&Directive
NOIEMBRIE 2021
What Do Energy Traders Do?
• The main task of a energy trader is to sell or buy shares of
Primary energy at a given price to make a profit.
• Energy traders use computer software programs and other
analytical tools, such as meteorological data to help
Responsibilities determine which way energy prices might be headed.
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Terms (1)
❖Arbitrage refers to the practice of buying an asset then selling it immediately to take advantage of a difference in price.
❖Ask refers to the price at which you can buy an asset or security from a seller. It can be variously referred to as ask, the ask,
or asking price. The ask will be the price you need to pay in order to buy a particular asset: so we usually refer to it as the
'buy' price.
❖Bid in trading and investing, the bid is the amount a party is willing to pay in order to buy a financial instrument. It is the
opposite of an ask
❖Broker is an individual or company that places trades on behalf of a trader e .g TFS.
❖Commodity is a basic physical asset, often used as a raw material in the production of goods or services.
❖Derivative is a financial product that enables traders to speculate on the price movement of assets without purchasing the
assets themselves.
❖Execution In trading, execution is the completion of a buy or sell order from a trader. It is carried out by a broker.
❖Exposure is a general term that can mean three things:
◦ the total market value of your trades at open
◦ the total amount of possible risk at any given point
◦ the portion of a fund invested in a particular market or asset
Terms (2)
❖A forward contract is a contract that has a defined date of expiry. The contract can vary between different instances, making
it a non-standardized entity that can be customized according to the asset being traded, expiry date and amount being
traded.
❖Futures contracts represent an agreement between two parties to trade an asset at a defined price on a specified date in the
future. They are also often referred to simply as ‘futures’.
❖A hedge is an investment or trade designed to reduce your existing exposure to risk. The process of reducing risk via
investments is called 'hedging'. Most hedges take the form of a position that offsets one or more positions you have open,
like a futures contract offering to sell stock that you have bought. Hedging can come in many forms, however, like buying an
asset that tends to move inversely with the asset you are holding. A hedge that removes all risk from a position – except the
cost of the hedge itself – is referred to as a perfect hedge, but most traders will only hedge against part of their position.
❖In the money is a term that describes an option’s state of ‘moneyness’ – or the underlying asset’s status when compared to
the price at which it can be bought or sold (its strike price).
❖Index In trading, an index is a grouping of financial assets that are used to give a performance indicator of a particular sector.
❖Long When used in trading, long refers to a position that makes profit if an asset’s market price increases. Usually used in
context as ‘taking a long position’, or ‘going long’.
❖A market maker is an individual or institution that buys and sells large amounts of a particular asset in order to facilitate
liquidity
Terms (3)
❖Open positions Your open positions are the trades you have made that are still able to incur a profit or a loss. When a
position is closed, all profits and losses are realized and the trade is no longer active.
❖An option is a financial instrument that offers you the right – but not the obligation – to buy or sell an asset when its price
moves beyond a certain price with a set time period.
There are two types of option:
◦ Call give the holder the option to buy an asset at or above the strike price
◦ Put give the holder the option to sell an asset at or below the strike price
❖An option spread is a strategy used in options trading. It involves buying and selling multiple options on the same underlying
asset that are almost identical to each other but with a different strike price or expiry.
❖Order In trading, an order is a request sent to a broker or trading platform to make a trade on a financial instrument.
❖OTC stands for over-the-counter, and refers to a trade that is not made on a formal exchange. It is often referred to as off-
exchange trading.
❖A portfolio refers to group of assets that are held by a trader or trading company. Assets in a portfolio can come in many
forms, including stocks, bonds, commodities or derivatives.
❖Position is the financial term for a trade that is either currently able to incur a profit or a loss (an open position) or has
recently been cancelled (a closed position). Positions are the way in which a trader will hope to make a profit.
Terms (4)
❖ PnL Profit and loss are two terms that are central to trading: the financial returns (or outgoings without returns) from any business
enterprise or trade.
❖Put option Puts are a variety of option that give the purchaser the right, but not the obligation, to sell an asset at a certain price
before the option expires.
❖Quote In trading, the quote is the price at which an asset was last traded, or the price at which it can currently be bought or sold.
❖In trading, short describes a trade that will incur a profit if the asset being traded falls in price. It is also often referred to as going
short, shorting or sometimes selling. Shorting is the opposite of going long, or trading to incur a profit if your market increases in
price.
❖Spread In finance, the spread is the difference in price between the buy (bid) and sell (offer) prices quoted for an asset.
❖Strike In options trading, the strike is the price at which a contract can be exercised, and the price at which the underlying asset will
be bought or sold. It is also known as the strike price.
❖If the option is a call, then when the underlying asset hits the strike price it can be bought. If the option is a put, then hitting the
strike price means the underlying asset can be sold. In order for an option to be exercised, it must reach its strike price before its
expiration date. The more the asset price moves beyond the strike price, the more profit is derived from the option. When the
underlying asset in an option matches its strike price, the option is known as being at the money. When it exceeds the strike price, it
is in the money.
❖A trading floor is the area of a business or an exchange where assets are bought and sold, most commonly associated with stock
exchanges and futures exchanges.
Terms (5)
❖Trading plan is a strategy set by the individual trader in order to systemize evaluation of assets, risk management, types of
trading, and objective setting. Most trading plans will comprise two parts: long Your personal trading plan will be unique to you,
reflecting your risk appetite, preferred markets and trading style. Making a trading plan means taking your short- and long-term
goals into account, as well as expertise and other factors.-term trading objectives, and the route to achieving them.
❖VaR – value at risk A statistical technique used to measure and quantify the level of financial risk within a firm or
investment portfolio over a specific time frame. Value at risk is used by risk managers in order to measure and control the level
of risk which the firm undertakes. The risk manager's job is to ensure that risks are not taken beyond the level at which the firm
can absorb the losses of a probable worst outcome.
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❖Volatility -A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be
measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the
higher the volatility, the riskier the security.
❖'Mark To Market - MTM‘ - a measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark
to market aims to provide a realistic appraisal of an institution's or company's current financial situation.
Who are the Participants in the
Energy Markets?
❖Those with a Physical Interest
• Electric Utilities
• Oil and Gas Producers
• Industrial Oil/Gas Consumers
• Coal Mines
❖Those without a Physical Interest
• Financial Entities Hedge Funds, Banks
• Private Investors via Commodity Indexes
• Local Traders on the Exchanges
WHY?
❖For utilities (and other entities with a physical interest), the intent is to
manage risk.
❖For those without a physical interest, the intent is to take on risk in
hopes of a reward or arbitrage opportunity.
Types of Market Participants
Three types of participants in forward markets:
❖ Hedgers – Producers & Suppliers - Intent is protection, to avoid exposure to adverse price
movements
❖ Speculators – Traders - Intent is profit,
✓ willing to take a position in the market,
✓ betting that the price will go up or down.
✓ Lock in profit by concurrently taking positions in two different markets – cross border trading or
cross commodities trading
✓ Important group for liquid markets and keeping markets in balance
✓ Existence ensures minimal arbitrage opportunities for liquid markets
Market Maker
❖Market Maker are those companies which undertake to keep a buy and sell order in the order
book at all the time (obligation to quote)
❖Market makers ensure a “basic liquidity”;
❖There can be one or several market maker for one OTC platforms;
❖Minimum requirements are put with regard to the market makers obligation to quote:
✓ Minimum volume
✓ Maximum ask – bid range (spread)
✓ Minimum quotation duration during the day
❖They have granted reduced fees for all the transactions – monthly measurement of
performance
Relationship between the Physical &
Financial
❖For those with a physical interest in the market, they are naturally short (in need of a
commodity) or naturally long (with an excess of a commodity).
❖Their participation in the market is in direct relationship to their naturally short or naturally
long position.
❖Those with a physical interest will use the market to balance their naturally short or long
position.
❖This takes much of the risk out of the commodity prices and allows the utility to focus on its
core business.
Physical & Financial
PHYSICAL FINANCIAL
❖ This utility needs (is short) natural gas; it hedges the price risk by
purchasing (going long) a financial natural gas contract.
❖ May also hedge physical delivery risk by entering into a physical
purchase with index based pricing.
How is Energy Traded?
Buys Sells
Different Markets
✓ Exchange Traded
✓ Over the Counter
Exchange
▪ An organization formed to provide an orderly market for trading futures and options.
▪ Provides the requisite infrastructure and support to facilitate trading.
▪ Facilitates the shifting of risk between counter-parties and price discovery.
e.g. EU exchange EEX; APX; Nordpool
Exchange structure: Exchange +Clearing House (e.g. ECC) +Trading participants +clearing
members
Exchange Traded Contracts
❖Product Terms are standardized and non-negotiable (set by the Exchange)
❖Counter-party risk is assumed by the clearing members of the exchange
❖Most contracts are Financially Settled (though a small number may be Physically Delivered)
❖Characterized by generally greater liquidity than Over-the-Counter
❖The trade is between the Exchange and the buyer or seller.
❖The parties buying and selling with the Exchange are required to post a Margin (to mitigate
counterparty credit risk)
Over-the-Counter (OTC)
❖ All transactions completed outside of a regulated exchange (e.g., EEX)
❖ An OTC deal is negotiated between two counter-parties or with a broker(e.g. TFS, ICAP).
❖ The counter-parties take on credit risk.
❖ The terms of an OTC deal are negotiable and can be customized.
❖The contract can be customized as agreed to by the two parties.
❖ Both parties will be subject to credit risk.
• Some “standardized” bilateral contracts have been developed.
✓ International Swaps and Derivatives Association (ISDA) – Standard agreement for financial trading
✓ Energy Federation European Trading (EFET)- Standard agreement for trading physical power
✓ Edison Electric Institute (EEI) – Standard agreement for trading physical power
✓ North American Energy Standards Board (NAESB) – Formerly GISB (Gas Industry Standards Board) – A standard agreement for trading physical
gas
Forward Contract
❖An agreement between two counter-parties to buy/sell the commodity in the future at an
agreed upon price.
❖The terms of the contract are negotiable and may be customized.
❖Since forward contracts are not traded on an exchange, each counter-party takes on
credit risk.
❖Forwards can not always be easily liquidated with an off-setting trade.
❖A forward contract is considered “must take” energy.
❖Many forward contracts for electricity are “fixed price” (though they can also be based
upon an index) and are traded in monthly blocks.
❖May be physically delivered or booked out.
Forward Price Curve = Market
Intelligent in a trading Company
❖A strip of forward prices starting with the prompt month and ending with some point out in the
future. Represents the term structure of forward prices.
❖This is NOT a price forecast! It is the current view of the market on forward prices → Market
signal.
Natural Gas Forward Curve
As of Close April 17, 2007
Monthly Gas Forward Curve
$10.00
$9.75
$9.50
$9.25
$9.00
$8.75
$8.50
$8.25
$8.00
$7.75
$7.50
$7.25
$7.00
$6.75
$6.50
$6.25
$6.00
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
May-07
May-08
May-09
May-10
May-11
Defining Derivatives
Derivatives
A derivative is a financial instrument
Thus a Futures or Option
whose value is based upon the
Contract is a derivative of the
Derivatives underlying physical product/commodity
underlying physical commodity.
(e.g., electricity, natural gas, oil, coal).
Options Futures
Physical Commodity:
Electricity or Natural Gas
Futures Contract
➢A futures contract is a standardized contract to buy or sell the underlying commodity at a given
price, at a specified time.
➢It is traded on a futures exchange and thus is a contract with the exchange.
➢The terms of the contract are non-negotiable and are set by the exchange.
Call option
What is a call option? - it is an option to buy the underlying at a given price.
• The buyer of a Put option has the right, but not the obligation, to sell the underlying at a given
price - Protects against a lower market price.
• The seller of a Put option has an obligation to buy the underlying at a given price at the buyer’s
sole discretion.
Option Terminology
❖ Exercise and Assignment describe the conversion of the option into the underlying forward contract.
❖ The Option buyer exercises the option.
❖ The Option seller is assigned the option.
❖ A strike price is the price at which the underlying is bought or sold in an options contract. E.g., $50.00/MWh Call
Option $6.50/MMBtu Put Option
$55.00
$50.00
$45.00
Purchase Price ($/MWh)
$40.00
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
0
00
00
00
00
00
00
00
00
.0
0.
0.
0.
0.
0.
0.
0.
0.
00
$2
$3
$4
$5
$6
$7
$8
$9
$1
Underlying Market Price ($/MWh)
Purchase of a Call Option
Profit and Loss at Expiration
$50.00
$45.00
$40.00
$35.00
Profit / Loss ($/MWh)
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$-
$(5.00)
$(10.00)
0
00
00
00
00
00
00
00
00
.0
0.
0.
0.
0.
0.
0.
0.
0.
00
$2
$3
$4
$5
$6
$7
$8
$9
$1
Underlying Market Price ($/MWh)
Option Example:
Long Call Option Natural Gas
Purchase of a $7.00/MMBtu
Call Option
$7.50
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
.00
.25
.50
.75
.00
.25
.50
.75
.00
.25
.50
.75
.00
.25
.50
.75
.00
$5
$5
$5
$5
$6
$6
$6
$6
$7
$7
$7
$7
$8
$8
$8
$8
$9
Underlying Market Price (MMBtu)
Purchase of a $7.00 Call Option
Profit and Loss at Expiration
$2.00
Profit / Loss ($MMBtu)
$1.00
$-
$(1.00)
$(2.00)
5.00 5.25 5.50 5.75 6.00 6.25 6.50 6.75 7.00 7.25 7.50 7.75 8.00 8.25 8.50 8.75 9.00
Market Price (MMBtu)
Option Example:
Short Put Option
Natural Gas
Sale of a $6.00/MMBtu Put Option
❖This involves the sale of a put option, which obligates Utility ABC to buy
natural gas at the strike price.
❖The strike price is at Utility ABC’s budgeted natural gas cost of
$6.00/MMBtu).
❖Utility ABC will receive an option premium of $0.20/MMBtu for the sale of
this option.
❖The premium received will offset gas costs.
Sale of a $6.00/MMBtu Put Option
❖This is a “Short Put” since Utility ABC is short natural gas
❖The strike price is at Utility ABC’s budgeted natural gas cost of
$6.00/MMBtu)
❖Utility ABC will receive an option premium of $0.20/MMBtu for the sale of
this option
❖The premium received will offset gas costs
Sale of a $6.00 Put Option
Purchase Price
$8.00
$7.50
Gas Cost (MMBtu
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 6.00 6.25 6.50 6.75 7.00 7.25 7.50 7.75 8.00
Underlying Market Price (MMBtu)
Sale of a $6.00 Put Option
Profit and Loss at Expiration
$3.00
Profit / Loss ($MMBtu)
$2.00
$1.00
$-
$(1.00)
$(2.00)
$(3.00)
$(4.00)
3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 6.00 6.25 6.50 6.75 7.00
Market Price (MMBtu)
Option Example:
Long Collar
Long Collar
Long a Call and Short a Put
❖Combining the Sale of a Put Option with the Purchase of a Call Option
❖The short Put premium offsets the cost of the Call option
$6.60
$6.40
$6.20
$6.00
4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 6.00 6.25 6.50 6.75 7.00 7.25 7.50 7.75 8.00
Market Price (MMBtu)
Long $7.00 Call and Short $6.30 Put
Profit & Loss at Expiration
$2.00
$1.00
Profit / Loss ($MMBtu)
$-
$(1.00)
$(2.00)
$(3.00)
4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 6.00 6.25 6.50 6.75 7.00 7.25 7.50 7.75 8.00
Market Price ($/MMBtu)
Option Example:
Long Call and
Short Put Spread
(3-Way)
Long Call and Short a Put Spread
❖Combining the purchase of a Call option with the sale of a higher
strike Put option and the purchase of a lower strike Put option
❖The short put option premium offsets the cost of the call.
❖Price floats down with the market down to the short put strike price
❖If the market drops below the long put strike, this position will be
above the market (by the difference in the put strike prices), but will
float down, providing some benefit from lower market prices.
❖Premiums:
◦ Buy $7.00 Call = $0.38/MMBtu
◦ Sell $6.00 Put = $0.18/MMBtu
◦ Buy $5.00 Put = $0.11/MMBtu
◦ Net Premium Cost of $0.31/MMBtu
Long $7.00 Call, Short $6.00 Put & Long
$5.00 Put
Purchase Price of Natural Gas
$8.00
$7.50
Gas Purchase Cost (MMBtu)
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 10.00 10.50 11.00 11.50 12.00
$1.00
P/L ($MMBtu)
$-
$(1.00)
$(2.00)
4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 10.00 10.50 11.00 11.50 12.00
$6.50
Gas Purchase Cost (MMBtu)
$6.00
$5.50
$5.00
$4.50
$4.00
3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 10.00 10.50 11.00 11.50
Market Price (MMBtu)
Long Futures and Long $5.50 Put
Profit & Loss at Expiration
$3.00
$2.00
P/L ($MMBtu)
$1.00
$-
$(1.00)
$(2.00)
3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 10.00 10.50 11.00 11.50
Market Price (MMBtu)
Hedging Strategies
Hedging Strategies – Part I
Agenda
I. Hedging Strategies for a Naturally Long Utility
1. Sell Forward
2. Sell Call Option
3. Buy Put Option
4. Sell Collar (Sell Call, Buy Put)
* Selling Calls and Selling Puts generates premium revenue and reduces total net delta exposure, but does not provide price
protection.
1. Forward Sale
$35.00
Sales Price ($/MWh)
$30.00
$25.00
$20.00
Sell in the market w hen market
$15.00
price is < $35.00/MWh
$10.00
$5.00
$-
00
00
00
00
00
00
00
00
00
0.
5.
0.
5.
0.
5.
0.
5.
0.
$1
$1
$2
$2
$3
$3
$4
$4
$5
Underlying Market Price ($/MWh)
Sale of a Covered Call Option
Profit and Loss at Expiration
$30.00
Capping Profit at $22.00/MWh
(Market Price of $35.00/MWh)
$25.00
$20.00
Net Profit/Loss ($/MWh)
$15.00
$10.00
$5.00
$-
$(5.00)
Breakeven at $13.00/MWh
Market Price
$(10.00)
00
00
00
00
00
00
00
00
00
0.
5.
0.
5.
0.
5.
0.
5.
0.
$1
$1
$2
$2
$3
$3
$4
$4
$5
Underlying Market Price ($/MWh)
3. Purchase a $25.00/MWh
Put Option
$55.00
$50.00
$45.00
Sales Price ($/MWh)
$40.00
Minimum Sales Price of
$25.00/MWh
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00 $16.00 $22.00 $28.00 $34.00 $40.00 $46.00 $52.00
$10.00
Net Profit/Loss ($/MWh)
$5.00
$-
00
00
00
00
00
00
00
00
00
00
00
00
8.
0.
2.
4.
6.
8.
0.
2.
4.
6.
8.
0.
$1
$2
$2
$2
$2
$2
$3
$3
$3
$3
$3
$4
Underlying Market Price ($/MWh)
4. Short Collar
Sell a Call and Buy a Put
❖Combining the Sale of a Call Option with the
Purchase of a Put Option (and the long
underlying) creates a “collar”
❖The long Put provides a floor for the sales
price
❖The short Call limits or caps the sales price,
but offsets the cost of the Put option.
❖Premiums: Buy Put = $3.00
Sell Call = $5.00
Collar Sales Price
Long $25 Put, Short $35 Call & Long Underlying
$45.00
Sell at cap of
$40.00 $35.00/MWh (when call is
exercised)
$35.00
Sales Price ($/MWh)
$30.00
$25.00
$20.00
Sell at floor of $25.00/MWh (exercising
put) when market is < $25.00/MWh
$15.00
$10.00
$18.00
$20.00
$22.00
$24.00
$26.00
$28.00
$30.00
$32.00
$34.00
$36.00
$38.00
$40.00
$42.00
$44.00
$46.00
$48.00
$50.00
$52.00
$54.00
Underlying Market Price ($/MWh)
Collar Profit & Loss at Expiration
Long $25 Put, Short $35 Call & Long Underlying
$25.00
Margin ranges from a minimum of $9.00/MWh
(floor), to a maximum (cap) of $19.00/MWh
(with a generating cost of $18.00/MWh)
$20.00
Net Profit/Loss ($/MWh)
$15.00
$10.00
$5.00
$-
$18.00
$20.00
$22.00
$24.00
$26.00
$28.00
$30.00
$32.00
$34.00
$36.00
$38.00
$40.00
$42.00
$44.00
$46.00
$48.00
$50.00
$52.00
$54.00
Underlying Market Price ($/MWh)
Hedging Strategies – Part I
Agenda
I. Hedging Strategies for a Naturally Long Utility
1. Sell Forward
2. Sell Call Option
3. Buy Put Option
4. Sell Collar (Sell Call, Buy Put)
$45.00
$40.00
Purchase Price ($/MWh)
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$-
00
00
00
00
00
00
00
00
00
0.
5.
0.
5.
0.
5.
0.
5.
0.
$1
$1
$2
$2
$3
$3
$4
$4
$5
Underlying Market Price ($/MWh)
Purchase of a Call Option
Profit and Loss at Expiration
$30.00
$25.00
$20.00
Net Profit/Loss ($/MWh)
$15.00
$10.00
$5.00
$-
$(5.00)
$(10.00)
00
00
00
00
00
00
00
00
00
0.
5.
0.
5.
0.
5.
0.
5.
0.
$1
$1
$2
$2
$3
$3
$4
$4
$5
Underlying Market Price ($/MWh)
3. Sale of $25.00/MWh Put
Option
$55.00
$50.00
$45.00
Pruchase Price ($/MWh)
$40.00
Minimum Purchase Price
of $25.00/MWh
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00 $16.00 $22.00 $28.00 $34.00 $40.00 $46.00 $52.00
$10.00
Net Profit/Loss ($/MWh)
$5.00
$-
$(5.00)
$(10.00)
$(15.00)
00
00
00
00
00
00
00
00
00
00
00
00
00
0.
2.
4.
6.
8.
0.
2.
4.
6.
8.
0.
2.
4.
$1
$1
$1
$1
$1
$2
$2
$2
$2
$2
$3
$3
$3
Underlying Market Price ($/MWh)
“Clean energy for all Europeans”
PACKAGE
❑ Provide prices that reflect market fundamentals, including the real time value of ❑ NEMOs shall provide market participants with the opportunity to
energy, on which market participants are able to rely when agreeing on longer- trade in energy in time intervals which are at least as short as the
Intraday markets
term hedging products; imbalance settlment period for both day-ahead and intraday markets;
❑ Ensure operational security while allowing for maximum use of transmission ❑ NEMOs shall provide products for trading in day-ahead and intraday
capacity; markets which are sufficiently small in size, with minimum bid sizes
❑ Be transparent while at the same time protecting the confidentiality of of 500 kW or less, to allow for the effective participation of demand-
commercially sensitive information and ensuring trading occurs in an anonymous side response, energy storage and small-scale renewables including
manner; direct participation by customers;
❑ The imbalance settlement period shall be 15 minutes in all scheduling
❑ Make no distinction between trades made within a bidding zone and across
bidding zones; areas, unless regulatory authorities have granted a derogation or an
exemption;
❑ Be organized in such a way as to ensure that all markets participants are able to
❑ Capacity shall be allocated by means of explicit capacity auctions or
access the market individually or through aggregation;
implicit auctions including both capacity and energy. Both methods
❑ There shall be no specific network charge on individual transactions for cross- may coexist on the same interconnection. For intraday trade,
zonal trading of electricity. continuous trading, which may be complemented by auctions, shall be
used.
Regulation (EU) 2019/943 on the
internal market of electricity
Technical bidding limits
❑TSOs shall issue long-term transmission rights or have equivalent ❑ There shall be neither a maximum nor a minimum limit to the
measures in place to allow for market participants, including owners wholesale electricity price;
of power-generating facilities using RES, to hedge price risks across ❑ NEMOs may apply harmonised limits on maximum and minimum
bidding zone borders; clearing prices for day-ahead and intraday timeframes. Those limits
shall be sufficiently high so as not to unnecessarily restrict trade, shall
❑Long-term transmission rights shall be allocated in a transparent, be harmonised for the internal market and shall take into account the
Forward markets
market based and non-discriminatory manner through a single maximum value of lost load;
allocation platform; ❑ NEMOs shall implement a transparent mechanism to adjust
❑market operators shall be free to develop forward hedging products, automatically the technical bidding limits in due time;
❑ Transmission system operators shall not take any measures for the
including long-term forward hedging products, to provide market
purpose of changing wholesale prices;
participants, including owners of power-generating facilities using
❑ Regulatory authorities shall identify policies and measures applied
renewable energy sources, with appropriate possibilities for hedging within their territory that could contribute to indirectly restricting
financial risks against price fluctuations; wholesale price formation, including limiting bids relating to the
❑MS shall not require that such hedging activity be limited to trades activation of balancing energy, capacity mechanisms, measures by the
within a MS or bidding zone. transmission system operators, measures intended to challenge
market outcomes, or to prevent the abuse of dominant positions or
inefficiently defined bidding zones.
Directive 2019/944 on common rules for the
internal market for electricity
Suppliers are free to set out the prices at which they supply electricity to customers. MS are taking appropriate measures to ensure effective competition between suppliers.
For the purpose of a transitional period where effective competition is established between suppliers in terms of electricity supply contracts and a fully effective, market-based retail pricing for them, MS
can use public interventions in establishing the prices of electricity supply it to the domestic clients and to the micro enterprises that do not benefit from public interventions.
Energy Supply
• Suppliers are free to set the prices at which they supply their electricity to customers. The MS are taking
appropriate measures to ensure effective competition between suppliers.
Market based supply prices • The MS ensure the protection of domestic customers affected by energy poverty and the vulnerable customers,
through social policy or by means other than public interventions in setting electricity supply prices.
• The MS can use public interventions in establishing electricity supply prices to domestic customers and to micro-
enterprises that do not benefit from public interventions.
• Public interventions:
• (a) they are accompanied by a set of measures to ensure effective competition and a methodology for
evaluating the progress made on the respective measures;
• (b) are established on the basis of a methodology that ensures a non-discriminatory treatment of providers;
• (c) are set at a price that exceeds the cost and at a level at which there can be effective competition in terms
of prices;
Public interventions • (d) they are designed to minimize any negative impact on the wholesale electricity market;
• (e) it ensures that all beneficiaries of such public interventions have the opportunity to choose competitive
offers;
• (f) all beneficiaries of such public intervention have the right to have smart meters and are offered such
meters, which are installed without additional initial costs for the client, are directly informed of the
possibility of installing smart meters and are provided with the necessary assistance;
• (g) do not lead to a direct cross-subsidization between customers fed at free market prices and those fed at
regulated supply prices.
Directive 2019/944 on common rules for
the internal market for electricity
Basic contractual rights – Final customers have the right to conclude with their supplier a contract that specifies fair and transparent general conditions, presented in a simple and
unambiguous language and which does not include non-contractual barriers to the exercise of the clients’ rights, such as: eg excessive contractual documentation. Customers are protected
against incorrect or misleading sales methods.
MS guarantees that the regulations allow suppliers to provide electricity contracts at dynamic prices. MS guarantees end consumers who have a smart meter installed the possibility to
request the conclusion of a supply contract with dynamic prices for at least one supplier and any supplier that has more than 200,000 final customers.
Energy Supply
• No later than 2026, the technical process of switching the supplier should not take more than 24 hours and must be
possible on any business day;
The right to change the supplier • The MS ensures that at least no change commissions are required for domestic customers and small businesses;
and norms regarding commisions • The MS may allow suppliers or market participants involved in the aggregation to collect termination commissions
for change from customers who voluntarily terminate fixed-term supply contracts at fixed prices before their term is reached,
provided that such commissions are made part of a contract that the client voluntarily concluded and clearly
communicated to the client before the conclusion of the contract
• All customers groups (industrial, commercial and households) should have access to the electricity markets to trade
their flexibility and self-generated electricity;
The aggregation contract • Customers should be allowed to make full use of the advantages of aggregation of production and supply over larger
regions and benefit from cross-border competition;
• The MS ensures that, in case an end customer wishes to conclude an aggregation contract, the respective end
customer has this right without the consent of the electricity company.
• MS ensures that at least domestic customers and microentreprises with an expected yearly consumption of below
100,000 kWh have access, free of charge, to at least one tool for comparing the offers of suppliers, including offers
Comparison tools for dynamic electricity price contracts.
• The instruments can be managed by any entity, including private companies and public authorities at bodies
Directive 2019/944 on common rules for
the internal market for electricity
Active customers/ CEC
• MS guarantees to the active customers: (a) entitled to operate either directly or through aggregation; (b) entitled to
sell self-generated electricity, including through power purchase agreements; (c) entitled to participate in flexibility
schemes and energy efficiency schemes; (d) entitled to delegate to a third party the management of the installations
required for this activities, including installations, operation, data handling and maintenance, without that third party
Active customers
being considered to be an active customer; (e) subject to cost-reflective, transparent and non-discriminatory network
charges that account separately for the electricity fed into the grid and the electricity consumed from the grid,
ensuring that they contribute in an adequate and balanced way to the overall cost sharing of the system; (f)
financially responsible for the imbalances they cause in the electricity system.
• MS shall provide an enabling regulatory framework for CEC, ensuring that: (a) participation in a CEC is open and
voluntary; (b) members or shareholders of CEC are entitled to leave the community (C) members or shareholders of
Citizen Energy communities CEC do not lose their rights and obligations as household customers or active customers (d) subject to fair
compensation as assessed by the regulatory authority, relevant distribution system operators cooperators cooperate
with CEC to facilitate electricity transfers within CEC; (e) CEC are subject to non-discriminatory, fair, proportionate
and transparent procedures and charges and to non-discriminatory and cost-reflective network charges
• MS shall allow and foster participation of demand response through aggregation. MS shall allow final customers,
including those offering demand response through aggregation, to participate alongside producers in a non-
discriminatory manner in all electricity markets.
Demand response through • MS shall ensure that regulatory authorities, or their TSO or ODs, act in close cooperation with market participants
aggregation and final customers, establish the technical requirements for participation of demand response in all electricity
markets on the basis of the technical characteristics of those markets and the capabilities of demand response. Such
requirements shall cover participation involving aggregated loads.
Directive 2019/944 on common rules for
the internal market for electricity
Electricity markets differ from other markets such as those for natural gas, for example because they involve the trading in a commodity
which cannot currently be easily stored and which is produced using a large variety of generating installations, including through
distributed generation. This has been reflected in the different approaches to the regulatory treatment of interconnectors in the
electricity and gas sectors. The integration of electricity markets requires a high degree of cooperation among system operators, market
participants and regulatory authorities, in particular where electricity is traded via market coupling.
Member States shall ensure that all final customers are entitled to have their electricity provided by a supplier, subject to the supplier's
agreement, regardless of the Member State in which the supplier is registered, provided that the supplier follows the applicable trading
and balancing rules. In that regard, Member States shall take all measures necessary to ensure that administrative procedures do not
discriminate against suppliers already registered in another Member State.
Member States and the Contracting Parties to the Treaty establishing the Energy Community should cooperate closely on all matters
concerning the development of an integrated electricity trading region and should take no measures that endanger the further
integration of electricity markets or the security of supply of Member States and Contracting Parties
The Commission Communication of 15 July 2015, entitled ‘Launching the public consultation process on a new energy market design’,
highlighted that the move away from generation in large central generating installations towards decentralised production of electricity
from renewable sources and towards decarbonised markets requires adapting the current rules of electricity trading and changing the
existing market roles. The Communication underlined the need to organise electricity markets in a more flexible manner and to fully
integrate all market players – including producers of renewable energy, new energy service providers, energy storage and flexible
demand. It is equally important for the Union to invest urgently in interconnection at Union level for the transfer of energy through high-
voltage electricity transmission systems.
Electricity market auction
settings.
A comparison between
Marginal Pricing System (MPS)
and Pay-as-Bid (PAB)
A comparison between Marginal Pricing
System (MPS) and Pay-as-Bid (PAB)
Key notes:
I. under uniform-price auctions (MPS), all suppliers receive the same market-clearing price
which is set at the offer price of the most expensive resource chosen to provide supply
II. in a pay-as-bid auction (PAB), prices paid to winning suppliers are based on their actual
bids, rather than the bid of the highest priced supplier selected to provide supply
III. some observers advocate a switch from the marginal price system (also called uniform-
price auctions) relied on almost exclusively in all organized wholesale power markets in
the U.S. and Europe, to pay-as-bid auctions.
IV. switch to a pay-as-bid auction may have adverse consequences for market efficiency by
reducing the efficiency of plant dispatch
◦ Pay as bid in day ahead will not solve the problem of Romanian day-ahead market
The goal of economic efficiency in
the production of power
➢ the electric industry’s clear goal has been to provide reliable power as efficiently as
possible
• Hypothesis 1: Payments to generators can be significantly reduced because plants that are
ranked left of the marginal plant in the merit order must not necessarily receive the price of the
most expensive generator. This decreases the average cost of electricity for consumers.
• Hypothesis 2: A pay-as-bid auction is more effective in disciplining market power because
generators cannot influence the market price received by all their infra-marginal plants through
strategically withholding capacity.
Price formation on pay as bid auctions – adjusted bidding
behavior with generators having complete information
• Assuming that generators can perfectly predict the MCP (no uncertainty), they have no
incentives to bid less than 60 €/MWh
• the average electricity prices that have to be paid by consumers in both auctions are the same
and the net cost savings of changing from one regime to the other would be zero
Price formation on pay as bid auctions – adjusted bidding
behavior with generators having uncertain information
• pay-as-bid leads to higher overall bids because generators have strong incentives to bid above
marginal costs
• the bids in the pay-as-bid auction differ relatively little in price illustrating each generator’s
attempt to bid close to the MCP
• small forecasting errors can cause situations in which low-marginal-cost bidders are not
dispatched and average electricity prices rise above the system marginal costs
Conclusions