Lecture 2 – Electricity Markets: Basics Flashcards
What are energy markets often defined as?
Energy markets are often defined as commodity markets since they have typical characteristics, e.g. large supply and demand, low quality differentiation
What are the special characteristics that distinguish energy from other economic sectors
▪ Primary energy resources owned by the state
▪ Governments have considerable influence (e.g., policy, regulation, ownership)
▪ Security of energy supply is a concern for most governments and economies
▪ Increasing number of countries dependent on a small number of suppliers (oil, gas, coal)
▪ Large-scale, capital-intensive projects with long lead times
▪ Small number of national and multinational companies with skills to carry out such projects
▪ Financing of projects is increasingly becoming an international activity
▪ Long-distance transportation of energy is a natural monopoly
▪ Major contributor to pollution
▪ Nuclear energy is dependent on technology related to nuclear weapons
Which special characteristics of electricity as a traded commodity influence market setup and outcome?
- Substitutability: Electricity is not easily substitutable by other energy sources (e.g., high energy density, no emissions, low mass and volume); Low price elasticity
- Storage: Electricity storage technology is complex and expensive; Low storage capacity
- Physical characteristics: Electricity consumption and generation need to be simultaneous; Supply and demand need to match at all times; Complex coordination necessary for grid stability
- Product homogeneity: Electricity is a standard/homogenous product; Low differentiation potential
- Generation diversity: Large variety of generation technologies; Different cost structure and environmental impacts
- Transportation grid: Electricity needs lines for transport; Difficult and time-consuming grid planning process
What were the properties of Energy sector before liberalization?
▪ Electricity supply seen as a natural monopoly
▪ Often state-owned companies
▪ Vertically integrated companies along the value chain
- Generation
- Transmission
- Distribution
- Supply
▪ Certain regions exclusively served
▪ Regulated prices
What were the problems with Energy sector before liberalization?
▪ Often poor performance of state- run electricity sector
- High costs
- Inadequate expansion of electricity access
- Unreliable supply
▪ Inability to finance required investments or maintenance
▪ Need to remove subsidies to the sector
▪ Desire to raise immediate revenue for government through asset sales
What are the Objectives of the EU energy policy?
- Achieving an efficient and competitive integrated energy sector
- Maintaining an adequate level of security of supply
- Increasing the effectiveness of environmental protection
What are the properties of OTC- over the counter (all markets) in comparison with Exchanges (developed markets)?
• Cleared or direct bilateral trades between two parties (normally utilities and/or banks)
• Mainly standard trading products (e.g. forward contracts) but can also encompass any other tailored products agreed on between the two parties
• Complete freedom of individual contracts
What are the properties of Exchanges (developed markets) in comparison with OTC- over the counter (all markets)?
• Cleared trades in the exchange (e.g. EEX, APX, Nordpool)
– Market maker secures liquidity and offers prices quotes at any moment in time
– Exchange works as clearing house, requiring daily settlements (margining) eliminating credit risk
• Only standard products (e.g. futures contracts with specific granularity, base and peak products)
• Parties need to be licensed with specific exchange and need to pay fee
What is the definition of market engineering?
Market Engineering comprises the structured, systematic and theoretically founded procedure of analyzing, designing, introducing and also quality assuring of market platforms as well as their legal framework regarding simultaneously their market mechanisms and trading rules, systems and platforms and media rules, and business models and rules
What is Market operation?
Short-term opportunities created by the Smart Grid that affect supply and demand
What is Market evolution?
mid- to long-term efficiency increases in the market by SG
What is market design?
Used to solve problems which are not well defined using an engineering approach. Market design concerns the creation of a venue for buyers and sellers, and a format for transactions.
What is market microstructure?
• Mechanism under which assets are bought and sold
• Consisting of trading rules and trading systems
• Market microstructures examine structural characteristics of markets and explore the determination process of price and volume
What are the types of market microstructures based on trading mechanism?
• Continuous trading
− trader arrange trades whenever the market is open
• Call market
− trades take place when market is called
What are the types of market microstructures based on execution system?
• Quote-driven systems
− dealer arranges most quotes when trading with the customer
• Order-driven systems
− arranging trades by using:
▪ order precedence rules: match buyers to sellers
▪ trade pricing rules: determine price of the trade
• Brokered trading systems
− brokers arrange trades→help buyers and sellers to find each other
