The day-ahead market is the main arena for trading power. Here, contracts are made between seller and buyer for the delivery of power the following day, the price is set and the trade is agreed.
Today there are around 360 buyers and sellers (called members) on the day-ahead market. Most of them trade every day, placing a total of around 2000 orders for power contracts on a daily basis.
Driven by planning
Daily trading is driven by the members’ planning. A buyer, typically a utility, needs to assess how much energy (‘volume’) it will need to meet demand the following day, and how much it is willing to pay for this volume, hour by hour. The seller, for example the owner of a hydroelectric power plant, needs to decide how much he can deliver and at what price, hour by hour. These needs are reflected through orders entered by buyers and sellers into the Nord Pool day-ahead trading system.
Setting the price and closing the deal
12:00 CET is the deadline for submitting bids for power which will be delivered the following day. The trading system feeds the information into a specialist computer system which calculates the price, based on an advanced algorithm. Put simply, the price is set where the curves for sell price and buy price meet.
Hourly prices are typically announced to the market at 12:42 CET or later. Once the market prices have been calculated, trades are settled. From 00:00 CET the next day, power contracts are physically delivered (meaning that the power is provided to the buyer) hour for hour according to the contracts agreed.
The cost of transmission constraints
While supply and demand are the key factors determining the hourly market prices, transmission capacity also plays a role. Bottlenecks can occur where power connections are linked to each other, if large volumes need to be transmitted to meet demand. To relieve this congestion, different area prices are introduced. In other words, when transmission capacity gets constrained, the price is raised to reduce demand in the areas affected.