Going in depth

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How New Energy Exchanges Work?

Before the 1990s, power management in France was centralized: a single public utility, EDF, oversaw electricity generation, transmission, distribution and sale to industrial and individual consumers. After the market was progressively opened to competition starting in 1996, a large number of players began operating on the market, which was expanded to encompass all of Europe. First come producers, the largest being EDF, Engie and E.ON. Then come suppliers – EDF and some sixty others1 – which offer consumers energy solutions. Two entities have become independent from EDF: RTE2, France’s transmission system operator, which manages electricity transmission via high-voltage power lines, and Enedis (formerly ERDF), which provides local distribution. Electricity is also bought and sold on wholesale markets, giving rise to exchanges, such as EPEX Spot, and trading companies3.

Image showing spinning wind turbines in front of an extra-high voltage transmission tower.
Wind turbines in front of extra-high voltage power lines. Renewable energies have drastically changed the way power grids work. ©LEE CELANO / AFP

How do all these players work together on any given day, for example July 2, 2018, which, for the sake of discussion, we will call D-day?

60: The number of electricity suppliers (national, regional and international) that offer their services to French consumers (as of August 1, 2018).

Long Before D-Day

By 2017, RTE’s forecast engineers had already started to plot out 2018, asking questions such as: Will it be a harsh winter? (A drop in temperature of one degree across France results in an increase in consumption equal to the production of one nuclear powerIn physics, power is the amount of energy supplied by a system per unit time. In simpler terms, power can be viewed as energy output... plant.) Will spring come early and be sunny? Will the summer be hot? When will school vacations be? Will bank holidays fall on Tuesdays and Thursdays, prompting people to take long weekends? What maintenance programs are in place for nuclear power plants? How much power will renewable energies produce this year? Large producers also have forecasters.

Far in advance, industries that need a substantial amount of electricityForm of energy resulting from the movement of charged particles (electrons) through a conductor... in July purchase forward contracts over the counter with producers to secure supply at the lowest possible cost.

D - 1

At the RTE Control Center in Saint-Denis, Just Outside Paris –RTE is the dispatcher for the central grid. It balances supply and demand among the French regions and oversees exchanges on the country’s six borders, with the United Kingdom, Belgium, Germany, Switzerland, Italy and Spain. Electricity cannot be stored so supply and demand for the next day, July 2, have to be balanced one minute to the next. Production from nuclear and hydropower plants is known in advance but that of solar and wind facilities is not. However, meteorological reports can help predict production with a high degree of accuracy. RTE also sketches out a consumption graph on D minus 1. It predicts peak demand of 55,600 megawatts (MW) at 12:45 p.m.; in winter, the peak occurs at 7:00 p.m.

In Enedis’ Regional Control Centers – Downstream from RTE, Enedis provides local power distribution. Today, the company also fills another role, that of receiving electricity generated by the majority of the country’s solar and wind power facilities. This is revolutionary; the distribution grid no longer receives power solely from the top down but also from the bottom up, with local production flowing back onto the central grid (see the image below). Regional control centers need to know if on the following day, July 2, the winds will be favorable for wind turbines in their area and if cloud cover will reduce production from solar photovoltaic (PV) farms.

Power transmission and distribution

Source : French Energy Regulatory Comission (CRE) 7

 

At EPEX Spot Headquarters in Paris – The exchange oversees a market that now includes Germany, France, the United Kingdom, the Netherlands, Belgium, Austria, Switzerland and Luxembourg. In Europe, there are about ten energy exchanges. These computer platforms allow buyers and sellers of electricity to submit their orders anonymously. Supply and demand determine the wholesale or “spot” price at any given time. Transactions begin on D minus 1, that is, for the day ahead.

At Coreso Headquarters in Brussels – Coreso is a technical center that coordinates power transmission system operators in France (RTE), Germany, Belgium, the United Kingdom and Italy. It has developed “network codes”, which allow for instantaneous exchanges. According to a manager: “The objective is to make it possible for a wind power producer in Spain to sell its surplus with a single click, say at 2:40 p.m., to a supplier in Hungry for an exchange at 4:00 p.m. to 6:00 p.m., while verifying that the transaction is compatible with network capacities.”4

D-Day

At EPEX Spot Headquarters in Paris – Exchange operators continue to act as go-betweens for buyers and sellers. Trades are made based on intraday prices. A purchase can be negotiated up to five minutes before delivery. Sometimes the price settled upon can be negative (see box).

At the RTE Control Center – Overnight, engineers have been further refining consumption forecasts. They have plotted a D‑day curve that predicts of peak of 55,350 megawatts at 12:45 p.m. Consumption ultimately comes in a little higher at 56,122 megawatts. Electricity trading programs are updated hourly. All day, dispatchers balance supply and demand, spending a lengthy amount of time on the phone with their counterparts at Enedis and Coreso and with producers, suppliers and other industry players. A total of more than 200 dispatchers are on staff at RTE and keep it running 24/7.

In Enedis’ Regional Control Centers – All night long, a strong wind blows in the northern regions of France, generating 3,800 megawatts of power. Around 10:00 a.m., the wind slackens but the sun starts shining increasingly brightly in the south, producing 4,700 megawatts of power. All this electricity is fed onto the central grid. This is what experts call backfeeding, that is, energy flowing back into the transmission network, a phenomenon up by 18% in 2017. However, little by little, local loops are being installed and locally produced electricity will eventually be consumed closer to home.

At the RTE Control Center – The trickiest moments are when demand increases sharply, as power shortages must be avoided at all costs. This can be achieved by calling on thermal power plants, which are the most responsive, or by asking consumers to reduce consumption for a specific period of time (this is a possibility with both large companies and individuals, who can sign up to be alerted via text message).

In the event that supply is too high, electricity can be diverted to pumped-storage power plants, hydro facilities that use excess electricity to pump water up into a reservoir to be released through a turbine to generate power during peak demand.

In cases of both excess demand and excess supply, dispatchers can also turn to other countries to import or export the required amount of electricity. These exchanges also fulfill trade contracts, which have been negotiated over the counter or through spot marketAn organized international market where traders buy and sell oil for cash... exchanges as described above.

On the night of July 1, France exports electricity to Germany, Belgium and Switzerland but, at 10:00 a.m. the next day, it begins to import from these same three countries, where renewable energyEnergy sources that are naturally replenished so quickly that they can be considered inexhaustible on a human time scale... production is up. All day, France exports to the United Kingdom, Spain and Italy5 (see the 2017 exchange diagram below).

Trade Agreements Between France and Its Neighbors

Source: RTE, 2017 Annual Electricity Report 7

 

See the Op-Ed articles by Michel Derdevet and Valérick Cassagne and Fabien Roques and Thomas Pellerin-CarlinAll graphs can be consulted in almost real time on the following interactive websites: for France, ECO2mix (in French) , for Germany, SMARD.

 

 

The Paradox of « Negative Prices »

The back and forth between supply and demand on European wholesale electricity markets can sometimes result in “negative prices”.

A classic example is when strong winds increase wind power production in one country, causing a surge in supply with no corresponding change in demand. The producer suddenly finds itself in a situation where it has to pay someone else to take its electricity.

This serves as a signal that production should be stopped due to low demand. However, sometimes, for example in the case of a thermal power plant, it is more costly to stop and then restart production than to accept selling at a loss for half an hour or so. Luckily, periods of negative prices are rare, amounting to only 185 hours of daily exchanges in 2017 in Germany, the country most sensitive to sudden spikes in renewably sourced electricity production10.

 

 

Sources: 

(2) Réseau de Transport d'Électricité.

(3) TradingThe buying and selling of products in financial markets... companies oversee the sale and purchase of electricity on wholesale markets and energy exchanges. Some are part of large energy firms and also trade in other products, including oil, gas and commodities.

(5) Taken over the course of a year, France is generally an exporter of electricity, except in 2016 and 2017 when Germany and northwestern countries filled that role.