Spot and Forward Prizes: What are the differences?

After a surge in 2021 and 2022, electricity prices have been lull since 2023. Price curves are more stable, marked by upward and downward spikes. But what price are we talking about? Electricity markets are complex and multiple. Between forward prices and spot prices, how can you optimize your company's purchasing strategy and secure your energy budget? Discover the mechanisms and differences between electricity markets to better control your financial risks.

Understanding electricity trade markets

Electricity is an energy that cannot be stored on a large scale. To cover consumers' needs, energy suppliers buy electricity from producers on the wholesale market. The latter ensures the balance between supply and demand. Transactions are carried out within a country or with interconnected countries, either via a European electricity exchange (including EPEX SPOT), or via over-the-counter (OTC) transactions.

Several energy markets coexist. They are distinguished by the time of purchase, delivery and consumption of electricity, and the associated risks.

A long-term market

The electricity futures market

The futures market refers to Long-term market in the world of electricity. It is a market on which MW of electrical power are exchanged for physical delivery delayed in time. It can indeed flow several weeks, months, or years between the date of conclusion of the contract and the delivery period.

Fixed in advance, The Forward Prize per MWh reflects future trends on the electricity market. Its calculation is based on the Predicted average of future Spot prices, by anticipating data such as demand, supply, weather or the cost of raw materials.

Precisely, a distinction is made between:

• The Forward Futures Market when exchanges are carried out over the counter (OTC: Over the counter)
• The Future Futures Market when the exchanges are carried out on an electricity exchange.

Products adapted to the needs of businesses

The electricity futures market offers various products such as:

• Les Baseload products : adapted to businesses that require constant and predictable electricity from the electrical network over a given period of time, these products correspond to a block of electricity delivered continuously 24 hours a day, 7 days a week.
• Peakload products : suitable for businesses that call on the electrical power network mainly from Monday to Friday from 8 a.m. to 8 p.m., these products respond to consumption peaks over part of the day.

The daily market or day-ahead

The Spot electricity market

The Spot market allows you to buy or sell MW of electricity The day before for the next day. We then talk about Day-Ahead or daily products.

It's the reference market for electricity prices. The Spot price per MWh is the price most often mentioned in the media to analyze the day-to-day state of energy markets and their evolution.

In Europe, the Spot price corresponds to daily product price on the EPEX SPOT exchange. It is determined every day between 12:30 p.m. and 13:00 p.m. based on supply and demand in real time, through an auction mechanism between countries. It compares the needs for electricity exchanges and the available interconnection capacities.

The Day-Ahead Market contributes tointegration of electricity production fromrenewables. The principle of Merit Order promotes their use by prioritizing the use of production methods with the lowest marginal cost (or the cost of producing an additional 1 MWh of electricity).

The intra-day or intraday market

On the short-term market, energy suppliers can also buy electricity on the Intraday market, with an intraday expiry date.

This continuous market allows players to exchange volumes of electricity on the same day. In France, the purchase can be made up to 5 minutes before the delivery time. Hourly, half-hourly or hourly products contribute to the balance of electricity supply and demand in real time.

Contracts indexed to the Forward market

Buy electricity at the Forward price?

Energy producers interact on long-term markets to secure their sales and margins over a long time horizon. Suppliers, for their part, source their supplies from these markets in order to secure the supply of electricity and offer consumers stable prices.

In the context of contracts indexed to the Forward market, the price is negotiated on the date the contract is signed. The price per MWh is firm and steady throughout the duration of the contract (excluding the indexation of the rates provided for in the clauses).

Why buy electricity at the Forward price?

Choosing a contract indexed to the Forward market is a long-term commitment. Fixed throughout the duration of the contract, the forward rate offers a long-term visibility and control on the company's energy budget.

In contrast, consumers pay a price per MWh often higher, including the supplier's share of risk related to the unpredictability of the future. They are also not benefiting from price cuts in the electricity markets.

The support of an expert helps to Buy electricity at the right time, when the Forward Prize is the most attractive.

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Contracts indexed to the Spot market

Buy electricity at the Spot price?

Many suppliers offer electricity supply offers indexed to the Spot market. The price per MWh varies every day. Anticipating the electricity bill is difficult, especially since The short-term Spot price is particularly volatile. Reflecting supply and demand in real time, it reacts immediately to the slightest shock (climate event, failure of a power plant, geopolitical crisis, etc.)

Concluding a contract indexed to the Spot market is a wager for businesses. Because of its flexibility, this purchasing strategy can be very profitable when the price of electricity is low. On the other hand, a sudden rise in prices weighs heavily on the energy budget.

Why buy electricity at the Spot price?

Businesses rarely use the Spot Market to cover all of their electricity needs. This market is often used to readjust long-term purchase contracts, by revising consumption forecasts up or down, and by buying or selling volumes of electricity. In particular, the intra-daily market makes it possible to react quickly to a unexpected peak in electricity consumption.

Contracts that include a portion of the volumes indexed to the Spot market are not fundamentally at risk. It all depends on the state of the market. However, the complexity of these contracts justifies the support of an expert.

Spot or Forward: which offer should be preferred for electricity purchases?

The choice between Spot and Forward prices depends on the state of the energy markets at the moment and on the company's risk strategy.

It is generally impossible to perfectly cover a company's electricity consumption only with forward (long term) or spot (short term) products. Many professionals opt for mixed offers. Elles secure a major part of the volume on long-term markets and adjust their purchases on the markets Spot for cash. The share of Forward prices and Spot prices in the contract depends on the company's risk strategy and its budgetary capacity.

With this strategy, the consumer obtains a final price that better reflects the variations in the electricity markets.

How do I track Spot and Forward prices?

At Sirenergies, transparency is not an empty word. Our energy consulting and sourcing firm supports companies to optimize energy consumption and electricity and gas purchases.

With the Sirenergies app, you can access Spot and Forward market prices in real time and free of charge, updated daily. Thanks to a dynamic and proactive management data and prices, you optimize your energy purchasing strategy, your electricity contract and your budget.

Click here to access the App

The choice between Spot price and Forward price depends on the company's purchasing strategy and its appetite for risk. Many businesses are opting for a hybrid offer for their electricity supply. They combine the security of Forward prices over the long term with the responsiveness of Spot prices in the short term.

While the future of energy markets promises to be ever more complex, it is also more promising for businesses and consumers who will be able to anticipate changes thanks to dynamic and proactive management of prices and their consumption of electricity and gas.