Analysis | How Power Trading Tries to Keep Lights On in Europe – The Washington Post

By Lars Paulsson | Bloomberg,

Europe’s power networks face a crucial test this winter, with supplies compromised by a collapse in imports of Russian energy, nuclear outages in France and dwindling hydropower reserves. The battle to avoid blackouts will be waged partly by the specialist traders who send electricity across borders to where demand, and prices, are highest. There’ll be no room for error. Any unplanned halts of big power stations or sudden failures on transmission cables could plunge cities into darkness and bring factories to a juddering halt.

1. How is European power traded?

The UK and Nordic countries began to liberalize their centrally planned power systems in the early 1990s. That evolved into a trillion-euro market where electricity is bought and sold within regional networks and across national borders. Much of that growth came with the emergence of wind farms and solar arrays as significant sources of energy. The unpredictable availability of wind and sunshine required a greater volume and complexity of trades to even out peaks and troughs in supply. Traders can now buy and sell power in 15-minute periods for the same day on Epex Spot SE, the biggest market for short-term contracts. Other trading teams are focusing on what’s known as “the curve,” or longer-dated contracts. These traders study energy supply trends and subtle changes in household and industrial demand to handle contracts for delivery years in advance. Many thousands of deals are concluded each day.

2. What does a power trader do?

What sets power traders apart from their peers in oil, metals or agriculture is the sheer amount of data they need to track: which fossil-fuel power stations are running, how much energy is required for manufacturing, what market price trends are showing, weather reports and the overall power-generation mix. Some operate in several markets, adding even more complexity to their calculations. Short-term markets are increasingly automated, but human beings still devise the trading strategies. In the longer-term markets, traders analyze factors such as what it will cost to run a gas-fired plant next year or the extent to which surging energy prices will reduce demand from factories across the region.

3. How does trading balance grids?

Demand and supply need to be matched at any given moment to keep voltage stable and avoid outages. Trading between nations is based on a daily auction system. Utilities bid for how much they want to buy and sell on an hourly basis for the following day. Computers at national exchanges are connected to those of the grid operating companies, enabling flows based on price signals. There’s also an intraday market for cross-border trading. The amount of electricity that can be bought and sold between countries is dictated partly by the physical “interconnector” capacity that companies buy in advance.

4. What is an interconnector?

It’s a power cable that runs between two national markets, for example on the seabed between France and the UK, underground or overhead on transmission towers or pylons. They tend to have more capacity — sometimes as much power as a nuclear reactor can produce — than typical high-voltage power lines. There are hundreds of them in Europe, and some connect to countries outside the region’s internal market. Traders make a profit by exploiting price differentials between nations. But the cables also fulfill a larger role in matching supply and demand over a larger area. The record power prices experienced in 2022 would have been even higher if there weren’t interconnectors to bring buyers a wider choice of suppliers, making the market more efficient.

5. What can go wrong?

Grid companies have been busy linking up national markets to help cope with the unpredictability of weather-dependent power sources and take advantage of the lower prices of green energy. Everything depends on keeping a stable grid frequency, which for Europe is 50 Hertz. A failure at a Croatian substation in January last year showed the risk to the entire system from small, unexpected problems. The outage forced network managers to split the European grid into two to avoid continent-wide blackouts. Then there are errors caused when network managers or traders fumble a calculation or a keystroke. In September, a French regional utility accidentally oversold huge amounts of power, forcing the country’s grid operator to ask for backup supplies from the UK and Spain.

6. How are grid operators preparing for winter?

To avoid blackouts, utilities typically have an overhead margin — a buffer in case things go wrong. They can also fire up emergency generators and call on neighbors to boost exports. Consistent warnings from national authorities have girded Europe’s almost 200 million households and companies to expect at least some disruption in the months ahead. France came out early and said on Sept. 14 that it expects to issue alerts to curb winter demand several times over the following six months. For traders, the record volatility in the market makes for a nailbiting few months ahead. Some are poised to make massive profits, while others will lose a lot of money if they make the wrong calls.

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