What is electricity trading?

How do we make sure there’s always a balance between the demand and supply of electricity?

Electricity trading is the way companies that generate electricity sell it to the companies that supply power. Power suppliers then sell that electricity on directly to their customers.

The process is managed by the system operator, currently National Grid ESO in Great Britain. It’s the system operator’s responsibility to ensure that the right amount of electricity is traded at any given time, and to make sure that it gets to wherever it’s needed across the country.

Who trades electricity?

The electricity market involves three main participants. Firstly, there is the generator. These could be thermal power plants (what you might think of as ‘power stations’ and electricity storage plants). They could also be other sources of power like solar panels or wind turbines that generate electricity.

Then there is the consumer. These could be homes, factories, hospitals or transport services that use electricity.

Between the generator and the consumer sits the power supplier. They’re the people you buy your electricity from.

The generators sell the energy to the power suppliers through the electricity trading market.

How does the electricity market work?

It’s designed to ensure that there is always enough electricity to meet demand. Some of that is covered by long-term contracts. Any gaps that remain are covered by short-term contracts, with traders buying and selling power to meet demand precisely for every minute of the day.

Long-term contracts factor in information about interest rates, the price of fuel — and how available it is — as well as changing regulations and government policies.

Short-term electricity trading can be much more volatile. Its price can depend on factors such as the weather, what’s happening in the world and even what’s on TV.

To determine the price of electricity, traders analyse live data about generation and events in the world.

That helps them predict how much electricity the system will need in times of high demand. Based on that, they can set the price at which they are prepared to buy energy (offer), and the price at which they prepared to sell it (bid).

It is these agreements that set at what time and for how long a power station runs its generators.

Why does electricity trading matter?

It’s vital that the amount of electricity produced matches the amount of electricity that is needed. It’s also crucial that the companies which produce the power can do so on a stable basis. This is why it’s important to keep a balance between the wholesale price of electricity and the cost of the raw materials and equipment needed to make it. Electricity trading keeps that balance.

Electricity trading — the facts

• The UK was the first country in Europe to adopt a liberalized electricity market at privatisation in 1990. Modern electricity trading can be traced back to Chile’s privatisation of its power industry in 1980.
• It’s has happened that electricity prices have fallen below zero in the UK. If demand is low but there is prolonged sunshine or high winds, then too much power can be produced. This could lead to some customers being paid to use electricity, or generators being paid to produce less power or even switch off altogether.