Study on the General Design of Electricity Market Mechanisms Close to Real Time

Positions and views expressed in this study are only those of the author and do not commit CREG in any way. Competition is the instrument favoured by European Institutions to enhance the efficiency of the power sector. Competition requires trading, an activity that can be organised or spontaneously developed by the market. Experience and theory both suggest that some form of organized market is necessary for trading electricity. The reason goes back to the two special characteristics of this unusual commodity that have been most debated since the early discussions on the reform of the industry: electricity is not storable and it is difficult to transport. We are certainly well aware of these two important properties, but may not have fully drawn their consequences for the reorganization of the sector in Europe. Figure 1 gives a schematic description of the spatial and temporal dimensions of electricity trading. "Forward" Day-ahead Intra-day Real-time  Temporal dimension  zone A  zone A  zone A  zone A spatial dimension     zone B  zone B  zone B  zone B Figure 1: spatial and inter-temporal trading The figure distinguishes four time stages: real-time, intra-day, day-ahead and " forward ". It also refers to different "zones" between which trading takes place and hence introduces a spatial dimension. We assume in the rest of the discussion that a single organised market encompasses real-time, intra-day and day-ahead trading. In contrast we allow for "forward" trading to be organised or decentralised even though it is often admitted that even the "forward" electricity market should be at least partially organised. This over-encompassing trading platform does not reflect the current organisation of the European electricity market. Still we will use it as a reference in the rest of the discussion. We first briefly justify this choice either by invoking first principles or on the basis of existing experience. The sole existence of real-time trading is a first discrepancy between Figure 1 and the current organisation of the European market. The common view in Europe is that day-ahead, possibly extended to intra-day, but not real-time, are the appropriate periods for trading. Still, there are compelling physical and economic reasons for considering real-time as an effective trading period. The physical reason is that electricity is not storable and that real-time is the only moment when the commodity effectively flows from producers to consumers. This physical …