A sector in transition: How do power exchanges absorb the challenges of the power system?

The mission of the Power Exchange is complex but valuable. As business partner, EPEX SPOT helps its member community to develop their business based on power trading. This means that the challenges of the actors of the power sector also become the challenges of the Power Exchange. And the story of EPEX SPOT tells just this.

💡The eras of EPEX SPOT – The evolution of the European Power Exchange tells the story of the power system

📈 It’s all about the price signal

When the first trades were completed on EPEX SPOT in 2009, the primary focus was on building liquidity to allow for a meaningful price formation. But what does this mean, concretely? The power markets of Central Western Europe were relatively new at the time. In order to build trust in the market, Power Exchanges had the objective of bringing together production and consumption of as many actors as possible in the order books, mostly per individual country. Based on matching supply and demand, a reference price emerges that truly reflects the situation in the national power system. This is how EPEX SPOT has been establishing robust and reliable reference prices. Just as the temperature announced in the weather forecast will trigger decisions on clothing, means of transportation or activities for the next day, the price for power will indicate what production units will run, who will consume electricity and when. If you want to read more about the role of price signals for the power system, check out this previous edition of our Spotlight newsletter.

🌍 Le prix, der Preis, de prijs, prisen - Power prices become European

Just like its citizens that can freely travel across Europe, electricity doesn’t stop at national borders. Strictly speaking, it never has, because electricity takes the path of least resistance. However, the trading of electricity across borders used to be a cumbersome undertaking: A buyer and seller of electricity would have to find an agreement and then, in a second step, reserve the transmission capacity at the interconnectors to transport the electricity from one country to another. Just imagine if, when buying a train ticket, to also have to reserve and pay the usage of the tracks separately. If your train is delayed or your plans change, you pay for the tracks in vain. The situation for power traders was comparable.

This is why Power Exchanges and Transmission System Operators jointly introduced the concept of Market Coupling. It means that Power Exchanges like EPEX SPOT, when bringing together supply and demand in their orderbook, also consider which buy and sell orders of neighbouring countries can be transported across the borders and also take those into account in the price calculation process. Hence, a buy order from a French industrial consumer, for instance, can be matched with a sell order from a Belgian producer when the physical transmission capacities are available on the interconnectors. For electricity traders, this means that the import and export of electricity, if and when physically possible, happens at the same time as the trade. This increases the robustness of the price and has a beneficial effect on liquidity – particularly relevant for smaller market areas. To pick up our example of the train ticket: by booking the ticket you have automatically and simultaneously reserved the usage of the tracks, all in one step. This mechanism of Market Coupling minimises price differences between markets and maximizes social welfare and efficiency.

The era of Market Coupling initiatives is marked by two parallel action streams: Firstly, the geographical extension, connecting more and more countries. Secondly, the improvement of the calculation method. Regarding the geographical coverage, the initial Trilateral Coupling that connected Belgium, France and the Netherlands in 2006 was extended to Germany and Austria in 2010. Four years later, these coupled markets were connected with the Nordic and Baltic region as well as Poland and Great Britain; Spain and Portugal connected in the same year, followed by Italy in 2015. At this point, the involved stakeholders started to use a shared algorithm for the price calculation.

This brings us to the second aspect that evolved in the Market Coupling era: The calculation method, as the so-called flow-based method was introduced in 2015. What’s new? Instead of considering each border individually, the flow-based methodology considers all involved borders at once and determines the best market price for all areas. To compare: it is efficient to manage the traffic lights at an intersection according to the occurring traffic. What is even better is to optimise the traffic for all the streets and intersections in the whole neighbourhood, instead of just one intersection. During its calculation process of electricity prices, a sophisticated algorithm calculates the best price per area, and determines the optimal flows. This means that electricity flows will always go from a region where prices are low to a region where prices are high, and electricity hence is scarce. This also strengthens the security of supply between interconnected countries.

For our company, this marks a particularly exiting era as we grew our community of EPEXians by joining forces with APX Group, uniting in our mission to deliver best in class services to the power trading community.

Today, Market Coupling connects 27 countries in Day-Ahead and 25 in Intraday. The traded volume of the coupled Day-Ahead market alone represents over half of the production of all EU countries combined. 30 Transmission System Operators and 15 Power Exchanges cooperate daily to operate a market that brings an estimated welfare benefit of 34 billion Euros per year to Europeans. European cooperation has brought us a long way!

🌐 Market Solutions for a sector in transition

While the Market Coupling community grew rapidly over the years, a new challenge emerged for actors of the power sector – three challenges, to be precise: Decarbonisation, Decentralisation and Digitalisation. With an entire sector in transition to reach carbon neutrality, solutions are needed to reach climate objectives fast and efficiently.

Decarbonisation. EPEX SPOT was the first Exchange to launch 15-minute products already in 2011, to respond to a need of adapting to the variable influx of renewable generation. 15-minute Intraday auctions – a European standard in Market Coupling since June 2024 – have been introduced by EPEX SPOT on the German market in 2014. These products provide a reference price for flexible production. With a growing amount of installed renewable capacity grows the necessity for certifying green energy. To further bring transparency to this segment, EPEX SPOT launched a spot auction for Guarantees of Origin in 2022. Over 10 TWh of GOs have been traded on this auction since the launch; transactions that contribute to the financing of the energy transition.

Decentralisation. A decentral power system brings challenges to System Operators to manage variable renewable influx, such as solar and wind, and an increasing electrification of transport and heating. To maintain grid stability, System Operators need ways to steer the input and output of electricity on the grid. This can happen via flexibility providers. Flexibility providers are batteries, industrial consumers, heat pumps or even electric vehicles that can ramp up or down their electricity use in a pilotable manner. By calling on those flexibility providers, System Operators can influence what happens on their grid. The most efficient way to establish such a line of communication is via a market mechanism: via buy-orders System Operators express a need for flexibility, via sell-orders flexibility providers signal their readiness to adapt their consumption. EPEX SPOT has been a pioneer in this type of market, called Local Flexibility market, since 2018, with the first pilot project “Enera” in Germany. Today, we are Service provider to UK Power Networks DSO, Great Britain’s biggest electricity distributor. UK Power Networks owns and runs the cables and substations that deliver electricity to 8.5 million homes and businesses across London, the South East and East of England, serving approximately 20 million people. On behalf of UKPN DSO, EPEX SPOT operates a fully-fledged Local Flexibility Market in Great Britain covering over 100k live assets – and counting.

Digitalisation. A more and more decentralised market becomes more and more complex. This complexity is increasingly managed by automated solutions. We are a pioneer in providing an API-friendly environment, where automated solutions can plug into Europe’s most performant trading systems. Over 13 million orders are submitted on our Intraday continuous system per day, and more than 10 Million per day on average. About 86% of the orders submitted on our Intraday platform are sent through an automated solution (Automated Programming Solution – API). Nearly 70% of the traded Intraday continuous volume stem from APIs.

The European Power Exchange proactively accompanies these developments. Concretely, we provide solutions that create value for companies that operate within these macro-trends that the energy sector is facing. The era of energy transition is in full swing, and with EPEX SPOT as your partner you remain ahead of the curve.

🚀 15 years of making markets

As we kicked off our anniversary celebration, we not only exchanged with those who were a central part of the company’s journey, but we reaffirm and take joy in our mission to support you, Europe’s biggest power trading community, in developing your business. By enabling a price-responsive power system, we will contribute to achieving a climate-neutral Europe.