Overview of the electricity market
An extensive network of powerlines, consumers and producers make sure electricity is there anytime, anywhere. A well-functioning electricity market is the backbone of this system. The following section explains the basics of how the market works and TenneTs’ role in facilitating its development.
Electricity and its characteristics
In principle, the electricity market works like any other market: Sellers can offer their electricity on a market platform and buyers can purchase it to be delivered in specific timeframes.
In principle, the electricity market in the Netherlands works like any other market: Sellers can offer their electricity on a market platform and buyers can purchase it to be delivered in specific timeframes. Buyers and sellers in the market enjoy three fundamental freedoms:
- Freedom to dispatch: Generators and consumers have the right to produce or consume the amount of electricity that they choose, within the limits of their connection and the contractual limits of their connection agreement.
- Freedom of transaction: Market parties can enter into any form of contractual agreements with regard to their demand and supply.
- Freedom of connection: All demand and supply resources can connect into the grid on a non-discriminatory manner
However, electricity is a particular good because of its three physical characteristics:
- Time: Since electricity is difficult to store, supply and demand for it must always be balanced. Therefore, electricity has a different market value at different hours of the day. In the longer term, electricity prices are also strongly dependent on fuel costs (e.g. natural gas) and C02 prices.
- Location: The market is free, but the transmission capacity is limited. Transmission System Operators (TSOs) make sure transmission lines are operated within safe limits to avoid cascading blackouts. Therefore, electricity has a different market value in different load frequency control area’s (for example the Netherlands).
- Flexibility: Demand, generation and location must always be matched, but this becomes difficult when we are integrating more variable and decentral renewables into the gird. Therefore, flexibility in time and location can be of great value.
These three unique physical characteristics explain why electricity is a very special good and its market so complex.
To make this market function as efficient as possible, the European Commission has been promoting a single European electricity market since 1996. TenneT and other TSOs play a key role in this process, since market integration requires sufficient cross-border transmission capacity. Together with its project partners, TenneT is taking the lead in establishing a single European energy market, for instance by facilitating the introduction of flow-based market coupling. This system is based on close collaboration between the power exchanges and TSOs of a large number of countries. It helps to ensure that the production facilities and the available transmission capacity in those countries are used as efficiently as possible.