Abstract
With the introduction of competition in the electricity sector, trading has become a key activity affecting most segments of the electricity sector. This chapter introduces basic notions like the distinction between bilateral and mediated trading (the latter including energy exchanges) and between auction-based and continuous trading. Also further market design choices including the uniform pricing versus pay-as-bid clearing or the differentiation between single and multi-part (or complex) bids are introduced. These play an important role to understand the main market segments, namely spot and futures markets as well as further derivatives like options. The (asymmetric) link between spot and future markets is discussed in detail as well as its link to the theoretical concept of information efficiency. The law of one price as an implication of information efficiency and the impact of (non-)storability for the link between spot and future prices are also highlighted. Finally the basic option types, namely call options and put options, the role of the option premium and the payoff functions are illustrated, considering both long and short positions of traders.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
More details on options may be found in Hull (2018), yet with a more general perspective on financial markets. Options on electricity have so far not been traded very actively (see Sect. 10.2), yet the concept is important to describe flexibilities (see Chap. 11). Also other derivatives discussed in Hull (2018), such as swaps, are sometimes traded on energy and specifically electricity markets. But they are also of minor importance compared to forwards and futures.
- 2.
A deeper discussion of market design can be found in Roth (2002).
- 3.
Unsealed bid auctions using, e.g. an ascending or descending clock approach (cf. e.g. Krishna 2010) are rarely found in power markets.
- 4.
For a general introduction to auctions with focus on single-object auctions, we refer the interested reader to Krishna (2010).
- 5.
Alternatively, single-sided auctions may also be run on the basis of a collection of purchase orders. Yet this case is not relevant for the power markets and therefore not dealt with subsequently.
- 6.
Some countries also permit passive balancing. In that case, TSOs send a timely price signal to balancing groups which are then allowed to be intentionally unbalanced to compensate the current imbalance (see Hirth et al. 2015).
- 7.
A compensation is possible, e.g. because the provision of negative control reserve might lead to reduced fuel costs for power operators.
- 8.
For some forms of control reserves, the providers are also paid for the reserve capacity provided. This capacity is normally procured for a much longer time period than only a single settlement period (e.g. of 15 min). On this account, these costs are typically not attributed to the balancing groups deviating from their schedules but to all users of the power grid via the use-of-system charges.
- 9.
For a deeper discussion of the relevance of the distinction we refer to Hull (2018).
- 10.
The latter mostly foresee a physical settlement. But since there is a continuous secondary market for trading, the corresponding positions may be closed financially, and they may be used as financial asset.
- 11.
Note that different types of market efficiency may be distinguished following Fama (1970) according to the content of the information set \({\Omega }_{t}\).
- 12.
Or in the absence of future market quotes: a link between the current spot price and expected future spot prices adjusted for risk premia.
- 13.
The opposite case with future prices exceeding spot prices is called “contango”.
References
Benth, F. E., Cartea, A., & Kiesel, R. (2008). Pricing forward contracts in power markets by the certainty equivalence principle: Explaining the sign of the market risk premium. Journal of Banking & Finance, 32, 2006–2021.
Bessembinder, H., & Lemmon, M. L. (2002). Equilibrium pricing and optimal hedging in electricity forward markets. The Journal of Finance, 57, 1347–1382.
ECA. (2015). European electricity forwards and hedging products—State of play and elements for monitoring. Final Report to Acer. Economic Consulting Associates. Available at: https://extranet.acer.europa.eu/en/Electricity/Market%20monitoring/Documents_Public/ECA%20Report%20on%20European%20Electricity%20Forward%20Markets.pdf [Accessed May 28, 2022].
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25, 383–423.
Fama, E. F. (1991). Efficient capital markets II. The Journal of Finance, 46, 1575–1617.
Hirth, L., & Ziegenhagen, I. (2015). Balancing power and variable renewables: Three links. Renewable and Sustainable Energy Reviews, 50, 1035–1051. https://doi.org/10.1016/j.rser.2015.04.180
Hull, J. (2018). Options, futures, and other derivatives (10th ed.). Pearson.
Jevons, W. (1871). The theory of political economy. Macmillan.
Krishna. (2010). Auction theory (2nd ed.). Academic/Elsevier.
Malkiel, B. (1973). A random walk down Wall Street. Norton.
Ockenfels, A. (2018). Marktdesign. Available at: https://wirtschaftslexikon.gabler.de/definition/marktdesign-51491/version-274653 [Accessed December 21, 2018].
Roth, A. (2002). The economist as engineer: Game theory, experimentation, and computation as tools for design economics. Econometrica, 70, 1341–1378.
Stoft, S. (2002). Power system economics—Designing markets for electricity. Wiley.
Vandezande, L. (2011). Design and integration of balancing markets in Europe. Dissertation: KU Leuven.
Wilson, R. (2002). Architecture of power markets. Econometrica, 70, 1299–1340.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2022 The Author(s), under exclusive license to Springer Nature Switzerland AG
About this chapter
Cite this chapter
Weber, C., Möst, D., Fichtner, W. (2022). Markets: Organisation, Trading and Efficiency. In: Economics of Power Systems. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-97770-2_8
Download citation
DOI: https://doi.org/10.1007/978-3-030-97770-2_8
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-97769-6
Online ISBN: 978-3-030-97770-2
eBook Packages: Economics and FinanceEconomics and Finance (R0)