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1Professor, 2Dipl. Eng.
Department of Social Sciences, Faculty of Civil Architecture,
Czech Technical University

Electric Energy Trading in Europe


This contribution is dealing with the problem of electric energy trade. Market description is structured around the market organizers and the place of trade. The separate parts characterize the function of electric energy market operator, time difference between trades and the derivative market.

1. Division of the market according to the organizer and trading place

Trading operations with electric energy is possible to realize in relatively large number of business places and platforms, divided partly according to products, partly according to places and delivery of the energy.

The European electric energy market is divided into several regions, copying the geographical conditions and regularities. They are like islands with high connectivity, where the electric power can flow without any fundamental physical barriers and therefore the conditions for uniform price in the region are fulfilled.

The geographic regions are very often connected with so called bottlenecks Ц profiles Ц of over-the-border capacities, which represent because of their characters a certain holdback to the physical flows and therefore their business exploitation must be regulated. The trading activities are realized in a form of auctions of over-the-border capacities, when the traders in market conformity compete for their gaining and consequently they are paying for using.

The spent expenditures are finally exposed to the financial calculations, with certain price differences between the said geographic structures. Therefore is for example the average price of power energy in German regions different from the price in France. In the above mentioned zones is the power energy traded in form of spot and forward contracts at the stock markets, eventually on base of bilateral deals.

Among the most significant commodity markets in Europe we can include the NordPool, European Energy Exchange (EEX) and Power Exchange Central Europe /PXE). The biggest volumes of trading are dealt at the OTC (over the counter) markets, what means the bilateral trading between the two counterparts. They have all sorts of characters both of business conditions, maturity and the patterns of consumption diagrams.

In every of the mentioned region is organized also a market with spot energy, what is a form of delivery in shortest possible term, usually the next day. The current trading day is treated with help of business variation, when the system operator (TSO) Ц in the Czech Republic it is the corporation CEPS Ц on ground of actual status of the system (surplus/deficit) stipulates the price variation, by what are billed the market participants on the basis of their real take-offs.

2. The Stock markets

There are several stock markets (exchanges) running in Europe, very differentiated from one another as per the variety of traded contracts or as per the significance and liquidity.

In general there is possible to divide the traded products into two groups: physical and financial ones, according to that, if the electric energy being subject of the contract is to be delivered to the energy system in its physical substance, or if it is a subject of mere financial clearing between the contract owner and the stock market.

Financial covering is realized in a form of margin deposits. This is a system successfully and long-term applied at financial and commodities markets, when the buyer and the seller are consigning an aliquot part of the price of the trade value at the stock market in form of margin deposits. From these said financial sources are covered the potential losses of the market re-pricing (daily base) of the purchased or sold contracts. On the other hand, the owner of the contract is credited by the amount corresponding with the eventual profit from the market re-pricing. This system facilitates very effectively to solve the credit risk flowing from the trading.

Another important positive point of the stock market trading is their standardization. The contracts have precisely defined volume, maturity and character of delivery. In case of electric energy there are in question calendar contracts (zonal deliveries during the calendar year), further the contracts per quarter on month. According to the types of delivery there are traded the contracts base load (0.00 Ц 24.00) and peak load (9.00 Ц 20.00) at the power energy stock markets.


The Scandinavian market covers Sweden, Norway, Finland and Denmark and hence it goes over the EU framework. NordPool is the oldest and most developed energy exchange in Europe. It covers this part of Europe, it has more than 100 members and at the local spot-market there is traded nearly a half of power consumption of the region. Mainly there are traded CFD (contract for difference). In this case there are contracts of futures character, what are specific by the technique of their financial clearing.

European Energy Exchange (EEX)

EEX is the German power exchange with seat in Leipzig, created by a fusion of the original power exchanges from Leipzig (LPX Ц Leipziger Power Exchange) and from Frankfurt (EEX European Energy Exchange). This is the most important power energy stock market at the European continent. There are traded contracts from German and French zones here, realized in a form of physical energy deals (day ahead) and futures contracts. Besides futures is here dealt with spot energy. EEX is an exchange of highest liquidity, what is giving the lead to the surrounding markets.


POWERNEXT is a French energy Exchange. In comparison to EEX this market is of lower liquidity. The French market is specific by a high level of presented electric energy production by means of nuclear power plants, what have the character of a base load source, in contrary to Germany, where the energy mix is very colourful. The production of electric energy from nuclear plants, coal and renewable resources is here represented approximately equally. In Great Britain there is no energy exchange, all the contracts are traded in a form of OTC.

Power Exchange Central Europe (PXE)

Power Exchange Central Europe, a.s. is a business platform specialized for trading with electric energy in the Czech Republic and Slovakia. It was founded on March 5th, 2007 (under the original name Energetic Exchange Prague) with aim to specify the new rules for trading the electric energy.

The establishing subject is the Prague Stock Exchange, a.s., PXE can that way use the rich experiences of the investment instruments market organizer. Its specially elaborated business system ties together the uniqueness of the capital and commodities markets.

The highest organ of the PXE is the general meeting. At this meeting are taking participation the founders of the corporation, who are proportionally Prague Stock Exchange a.s., UNIVYC a.s. and Central Counterparty a.s.. The second important organ of the Exchange is the Exchange chamber.

The PXE is the youngest and fastest developing leading local exchange covering the market of Central and Eastern Europe, with exception of Poland, what would like to take the ambition in getting a rival to the German exchange EEX.

The PXE Ц according to the financial point of view Ц is possible to characterize with lower liquidity and smaller number of participants Ц the market subjects and as well with wider range of bid and ask prices for the individual products.

3. Over the Counter (OTC) market

The term and typology of the OTC market is taken over from the field of financial and capital markets. In contrary to the stock exchange trade there is not any principle of the margin securing and the contracts are also not standardized from the point of view of maturity, volumes and shapes of consumption patterns. The trading is realized by intermediary of brokers (voice or internet platform) or by direct phone contact. Participants of this market are bigger subjects only.

At the OTC markets are active the intermediates Ц brokers, who effect the liquidity and facilitate the meeting of demand and supply. The effective system of the business organization has been taken over as well for the sector of financial and capital markets. The participants of the market are mainly the subjects, dealing at financial markets as well (financial corporation like TFS, Prebon, GFI, Tullet.).

A specific business technique of the power energy market is the delivery to the final consumer. The businessman calculates here besides the character of the wholesale price also the clientТs variation. The effect is caused because of influence of meteorological conditions. This is a specific feature of an energetic contract, when it is never known in advance, what will be the future volume of consumption of the client in context of various meteorological conditions and of specific production conditions and needs. The supplier undertakes the responsibility towards the system. This duty implements to the trading another risk factor Ц the volume risk.

4. Power energy market operator

The operator of the power energy market constitutes Дthe brain and backboneФ enabling the effective trading with a commodity so hardly sizable like the electricity. Among his main activities we count:

Х Working out the trade balance of electric energy according to the data supplied by the participants of the power energy market
Х Organizing the short-term market with electric energy and in cooperation with the operator of transfer system organizing the compensatory market with regulative energy
Х Evaluation of variations on ground of the contracts on supply of electric energy of the clearing subject or registered market participants and really measured supplies and consumption of the energy by the registered market
Х Providing the clearing and settlement of variations between the clearing subjects
Х Working out the monthly and yearly report on the electric energy market in the Czech Republic;
Х Working out the analysis of the future expected electricity consumption and about the way of its covering by the respective sources and about expected development of the market;
Х Working out the documents for suggested rules of the energy market including rules for clearing the variations and justified additional cost caused to the electric market participants through activities imminently preventing the emergency status, at emergencies and at the liquidation of impacts of emergencies ;
Х Ensuring the real value of the supply and consumption of electric power for the market participants;
Х Working out the trading conditions of the power energy market operator and their publishing after they are approved by the Energetic regulation authority;
Х Working out of the type diagrams of supplies;
Х Clearing and settlement of the regulating energy;
Х Administrative of the public accessible register of trading with greenhouse gas emission permits.

5. Time differentiation of trades

The electric energy, as mentioned already before, can be traded in any optional future time period, as well in a form of standardized Exchange contract as in a form of non-standardized OTC contracts. In case of example of a contract for supply in the year 2015 it is possible to work with a forward curve of the electric energy price, it means that any optional hour of the electricity consumption in 2015 has its price. The forward processes are influenced by a wide variety of factors. Among the most significant we can assort macro-economic influences, sentiment at the commodities markets, long-term fundament of production.

We can divide the forward market into groups: day ahead, short-term market and long-term one. Day ahead is characteristic by high price volatility, however lower than at the spot-market. It is usually influenced by long-term weather forecasts and planned long-term shut-downs of the sources.

The long-term market is characteristic with supply over one month and lower price volatility. The behaviour of the traded contract is here close to the standard commodities marketing.

6. System electric energy

The system variation has its origin in causes of occasional changes in power take-off by final consumers or by producers, because of meteorological conditions, eventual cut-offs of the production, failures or accidents.

Supporting services are represented by sources, contracted in advance, what have a variable start-up character. In this case it is possible to put the source into operation within a very short time period, or vice versa to shut it down. These are the sources like steam-gas plants or the water power stations. The prices of system energy have higher level of volatility in comparison to the prices Дday aheadУ. They are different from the usual spot price because of higher irregularity and unpredictability of impacts, influencing its exploitation.

7. The derivative market

The market with derivatives noted a really thunderous development in last three years. The participants of the power energy markets are not recruiting only from producers, final consumers and independent traders, but as well from great financial institutions like banks and investment funds (hedge funds). This fact is apparent and empirically measurable by increasing the parameter volume (number of the daily traded contracts) and parameter open interest (volume of contracts momentally opened at the Exchange.

The immediate reason of this growth is the raising interest from financial investors and banks because of the expectation of inflation trends. The fundamental reason is ДusefulnessУ of securing the electricity price, higher flexibility and general benefits of free market.

Because of the specific characters of the electric power Ц its non-storability Ц it is not possible to take over merely slavishly the procedures and models of pricing the derivatives from the field of financial products. It is necessary to apply other models and to use alternative procedures.

The price development of the bigger portion of financial instruments and storable commodities is possible to simulate by a lognormal stochastic process. For the power energy it is necessary to use more complicated model (lognormal diffusion process + jump diffusion + mean reversion; Geman H., Madan, D.B.).

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