The Trading of Electricity

Abstract

After having introduced the theoretical foundations of electricity markets and some of the main design features such as marginal pricing of electricity, spatial distribution of electricity prices and the question of system adequacy, the authors discuss how they function in practice. After a description of the functioning of wholesale electricity markets with a focus on the derivatives and the spot market, the authors analyse their main features such as trading venues, traded products, rules and the processes but also some key trends that can be observed. Going forward, with the energy transition, electricity systems around the world are undergoing nascent but profound changes as market architecture and regulatory framework evolve to meet ambitious climate targets while maintaining efficient investment incentives and security of supply. The authors highlight the need to identify the future requirements of the power system and align them with global policy objectives in order to adapt and enhance the way electricity markets generate social welfare.