Electricity Trading: My First ABC

How to get a quick grasp of the world of renewable electricity trading? The rise of renewables in electricity supply is rapidly changing the nature of the grid infrastructure and how we buy, sell, and trade electricity. From Transmission Service Operators (TSOs), ancillary services, and aggregators to intraday spot markets, it can be hard to keep up (or even begin to understand) the terminology and the web of activity taking place in this electricity grid-market interface.

This glossary, forming part of a larger upcoming publication on renewable electricity trading, is the first step to familiarizing yourself with the key terms, players, markets, and services in this exciting field. We'll make it as easy and comprehensible as A-B-C!

 

A

• aFRR: stands for Automatic Frequency Restoration Reserve. It is a type of grid balancing service that is employed by TSOs automatically during deviations from the regular grid frequency of 50 or 60 Hertz (depending on the country). This reserve of electricity is procured from balancing service providers (energy suppliers) and should be used within 5 minutes after receiving an imbalance signal from the grid.
• Aggregator: A type of energy provider that acts as a broker between consumers and energy suppliers. Essentially, they are responsible for coordinating Distributed Energy Sources (DES) and smaller generating power units and then trading their electricity to optimally supply the grid. Aggregators can take different forms: operators of virtual power plants, coordinators of peer-to-peer platforms, or managers of the distribution and trading of electricity from larger energy suppliers.
• Ancillary services: ensuring proper functioning of the grid. Under this also fall balancing services.

 

B

• Balancing Mechanism: An ad-hoc market used as a tool by TSOs to inject or remove the necessary electricity to balance the grid. Importantly, the BM uses real-time data on supply and demand levels, and makes use of highly dynamic pricing. Only licensed energy suppliers can access the BM to place bids and offers.
• Balancing responsible party (BRP), also known as access responsible party (ARP): entities with a goal to maintain the balance of transmission grids in order to ensure a safe power supply. A BRP can perform injections (adding supply), off-takes (removing supply), and exchanges with other BRPs to maintain an energy balance. Each generator is obligated to have a contract with a BRP or fulfill the role themselves. This is a vital role, as power outages may occur when the amount of electricity demanded is not maintained within the tolerance range of electricity supplied.
• Bidding zones: a geographically determined zone within which parties are allowed to exchange electricity for a uniform price, without having to take into account differentiated prices or capacity allocation.
• Bidirectional electricity trading - trading with no pre-defined direction: both parties can sell and buy electricity from each other.

 

 

C

• Capacity Markets: rather than trading actual electricity, TSOs, and power generators/suppliers trade in capacity, which is the ability to produce electricity when called upon in future years. By providing a guarantee that power will be available at a given time, a flexible grid can operate with stability.
• Cross-border electricity trading: The purchasing and selling of electricity between countries as a mechanism of dealing with demand needs or oversupply on a national grid scale.
• Curtailment: lessening the stress on the grid. We distinguish between load curtailment and generation curtailment.
  • Load curtailment: injecting (adding) some of the electricity when there is a lack of produced power.
  • Generation curtailment: off-taking (removing) some of the electricity when there is a surplus of produced power.

 

D

• Distribution System Operator (DSO): owns and operates the infrastructure of the grid between high voltage transmission lines and end-users (known as the distribution grid). Additionally, DSOs are responsible for maintaining balance of electricity supply and demand along this section.
• Day-ahead trading: when electricity is traded on the spot market or through bilateral contracts on the day prior to actual production & delivery.
• Dynamic containment: A service offered by grid operators in order to respond after rapid drops or rises in frequency on the grid. The utility frequency in perfect balance should be either 50 Hertz or 60 Hertz, depending on the country (in Europe, mostly 50 Hertz). Battery storage systems are currently the most reliable streams of energy to release or absorb power to/from the grid in this situation.

 

E

• Electricity flexibility: the ability to adjust electricity supply and demand in reaction to external events. On the grid, consistent renewable sources, utility-scale energy storage and demand-response tools contribute to grid flexibility.
• Energy arbitrage: method of purchasing electricity when the price is lowest and storing it for times when demand is high and electricity price is elevated.
• Energy trading platform (also known as power exchanges): sites where buyers and sellers can transact energy generation on different markets (typically short-term spot markets). Among the most popular energy trading platforms in Europe are EPEX SPOT, EEX, Nord Pool and NASDAQ OMX.
• Energy risk hedging: practice of financial contracts that protect parties participating in a trade (for example, a trade between power suppliers and consumers) from price volatility in the energy market.

 

F

• FCR: stands for Frequency Containment Reserve. It is the first-response balancing service that is employed by TSOs automatically during deviations in grid frequency. This reserve of electricity is procured from balancing service providers (energy suppliers) and should be employed within 30 seconds after receiving an imbalance signal from the grid.
• Flexibility services: supporting electricity networks by making changes in electricity generation and electricity consumption, which balances supply and demand. Such services are provided by BRPs and other power suppliers, who can offer to balance electricity to TSOs in case of grid frequency imbalance.
• Future markets: trade of electricity, based on mutual agreement, that will be delivered between one month to four years in the future, based on predicted spot prices. Through these trade agreements, large power generators, suppliers, and BRPs can protect themselves against price fluctuations. For example, an energy supplier can make an agreement with an industrial energy consumer to deliver a certain quantity of electricity in four months for a given fixed price, disregarding any market volatility.

 

 

I-O

• Intraday trading (for electricity market): the electricity exchange takes place on the same day as the electricity delivery. For example, if a BRP’s balancing group has a lower power plant electricity production and it causes an imbalance of supply and demand, it can buy the extra power from another BRP on an energy trading platform within one day to respond to such instability quickly and efficiently.
• mFRR: stands for Manual Frequency Restoration Reserve. It is a type of balancing service that is employed by TSOs manually during more persistent deviations in grid frequency. This reserve of electricity is procured from balancing service providers (energy suppliers, i.e. anybody who can reliably deliver energy when needed for grid stability) and should be employed within 12,5 minutes after receiving an imbalance signal from the grid.
• Over-the-counter (OTC) trading: trading done directly between the seller and the buyer, without any third party´s supervision or assistance.

 

P-S

• Peak Shaving: TSOs can perform a quick and short-term decrease in electricity consumption - also known as load shedding - in order to avoid a consumption spike and thus making the grid unstable.
• Peer-to-peer (P2P) electricity trading: Even consumers who generate their own electricity - for example through residential solar panels - can participate in trading by selling their excess electricity to other consumers. Think of a similar concept as AirBnb. P2P trading is beneficial for the communities involved and helps with grid balancing, as well as eliminates the usual role of an energy retailer.
• RR: Stands for Replacement Reserve. It is a type of balancing service procured from the capacity market from balancing service providers (e.g. power suppliers) that serves as “the last resort” during persistent deviations in grid frequency. This reserve of electricity is usually employed by TSOs about one hour after receiving an imbalance signal, and when none of the previous balancing measures worked.
• Short-term vs. long-term flexibility: (daily vs. seasonal), i.e. one focuses on strong fluctuations throughout the day, the latter one on fluctuations in a season (such as during winter).
• Spot Market: energy on such markets is traded nearly immediately or within a short time span.

 

T-W

• Transmission System Operators (TSO): owns and operates the high-voltage infrastructure of a grid and is responsible for maintaining the balance of electricity along transmission lines.
• Virtual power plant (VPP): A network of decentralized, medium-scale power generating units, flexible power consumers, and storage systems that are grouped together. A VPP’s control system can forecast and coordinate these distributed energy sources, to allow for an optimal feed and balanced electrical grid. The pooling of smaller generating units allows them to be integrated into electricity trading markets as a conventional power plant would.  
• Wholesale Electricity Trading: The act of purchasing and selling electricity between power producers, large industrial consumers, and energy retailers (prior to delivery to end consumers).

 

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This overview and the upcoming white paper are both published in the run-up to the Solarplaza Summit Renewable Electricity Trading, which is set to take place on the 29th of June in Arnhem, The Netherlands.