Subject to the obligation to subscribe to a market offer, companies have been suffering from soaring prices for three years. In this uncertain context, how can you build your company's electricity purchase strategy?

Understanding the wholesale electricity market is essential to make the best choices.

A meeting place between supply and demand, the wholesale electricity market sets electricity prices, reflected on your bill.

How does this market work? How are electricity prices determined? SirEnergies deciphers the wholesale electricity market to help you buy your electricity at the best rate.

How does the electricity market work in France?

The French electricity market is distinguished from other European markets by one particularity: the purchase of electricity on the wholesale market only covers part of the French electricity consumption, in addition to the electricity production of the national nuclear fleet.

Electricity market in France: from monopoly to openness to competition

Until the 1990s, the electricity supply market in France was dominated by EDF monopoly. Since then, under the impetus of Europe, the gradual liberalization of energy markets has completely reshuffled the cards.

Since 2007, the French electricity market is totally open to competition. While individuals can still subscribe to offers at the regulated sales rate, this is no longer the case for all professional consumers.

Since 2016, companies with a power greater than 36 kVA have theobligation to contract so-called market offers. The obligation was extended on 1^Er January 2021 to all companies employing more than 10 employees and whose turnover, revenue or balance sheet exceed 2 million euros annually.

The opening up to competition was accompanied byrise of many alternative suppliers. At the end of 2023, more than forty people in France were competing for the market, alongside the historic national supplier EDF.

What is the position of the wholesale electricity market in the French market?

In France, most of the electricity consumed comes from National nuclear production , complemented by supplies on the European electricity market.

To maintain fair competition between the historical supplier EDF and alternative suppliers, France established in 2010 the mechanism of ARENH (Regulated access to historic nuclear energy).

ARENH allows alternative suppliers to buy a volume of nuclear electricity each year at a regulated price. Fixed since 2012 at €42 per MWh, the ARENH tariff allows all French consumers to benefit from the competitiveness of nuclear electricity, regardless of their supplier.

However, the right to ARENH is subject to rules of capping and Of clipping, limiting the volumes of nuclear electricity purchased. To cover all the consumption needs of their customers, alternative suppliers must supplement their supply by buying electricity on the wholesale energy market.

How does the wholesale energy market work?

Electricity is an energy that is difficult to store. The wholesale electricity market Allows you to insure The balance between supply and demand in real time.

Who are the players in the wholesale energy market?

The wholesale electricity market brings together three types of players:

• Electricity suppliers represent demand: they buy electricity on the market to sell it to end consumers, individuals, professionals and businesses.
• Electricity producers represent the supply: they sell the production of their power plants on the market. It can be electricity from nuclear, renewable or fossil sources.
• The traders : traders are intermediaries between producers and suppliers. They buy electricity to resell it or resell electricity to buy it.

The different types of transactions on the wholesale energy market

In Europe, transactions between electricity suppliers and producers are organized within a country or at its borders with interconnected countries:

• Through the European electricity exchanges, including the European stock exchange EPEX SPOT (European Power Exchange) managing short-term electricity markets for Germany, Austria, Belgium, France, Luxembourg, the Netherlands, the Netherlands, the Netherlands, the Netherlands, the United Kingdom and Switzerland.
• Through live over-the-counter (OTC) off-market transactions between suppliers and producers.
• Through over-the-counter (OTC) off-market transactions intermediated by a broker.

How are prices set on the wholesale energy market?

All markets work on the mechanism of supply and demand. The principle is simple: when demand exceeds supply, prices increase; when demand is less than supply, prices fall.

On the European electricity market, however, fixing prices is more complex. A particular factor comes into play in determining the price of electricity, what is called the Merit Order : The marginal cost of the last power plant called up to meet demand (i.e. the cost of producing an additional 1 MWh of electricity).

Concretely:

• When electricity demand is low, nuclear, photovoltaic, hydraulic or wind energy is sufficient to meet the needs. Since these power plants have a low marginal cost, The price of electricity remains moderate.
• When electricity demand is high, gas-fired and coal-fired power plants are called to the rescue. However, their marginal cost is higher due to a higher price of fossil energy and the obligation for the producer to buy CO certificates.₂ to offset its emissions of greenhouse gases. If the last power plant called runs on coal or gas, this results in a Increase in the electricity rate. This is why the increase in the price of gas leads, in turn, to an increase in the price of electricity.

To ensure affordable prices for consumers, power plants are called in order of increasing variable costs.

What are the products in the wholesale electricity market?

Suppliers can buy their electricity in the short term on the spot market and/or anticipate their purchases on the forward market.

Short-term products (spot)

Spot products are short-term products. The electricity is purchased by the supplier for a same day delivery (intraday products or Intraday) Or the next day (daily products or Day-Ahead). In particular, spot products allow suppliers to readjust their long-term purchase contracts, as close as possible to the delivery of electricity.

Short-term products are traded on spot market. This one Compares supply and demand almost in real time electricity from interconnected countries, members of the same market. The reference spot price is fixed every day before 13:00 p.m., via an auction mechanism between countries, according to their electricity exchange needs and available interconnection capacities.

One platform for continuous price adjustment in real time (XBID) complements the system with hourly or half-hourly products. In France, The purchase of electricity can be negotiated up to 5 minutes before the delivery time to adapt to consumer needs.

These short-term prices are particularly volatile. Very sensitive, they react up or down to the slightest event affecting demand and supply on the market (climate event, failure of a power plant, etc.).

Forward products

Futures products or Forward refer to the electricity purchases made on the wholesale energy market several weeks, months or years before delivery. The price applied is the firm price negotiated on the date of conclusion of the contract.

By buying a portion of their electricity in advance, suppliers secure their electricity supply. They ensure that they can meet the electrical consumption needs of their end customers, by having a greater flexibility over the delivery period.

The products Forward offer a better visibility and price control, the challenge being to buy electricity at a time when the negotiated rate is the most attractive. Less volatile than spot prices, long-term prices are generally those used by suppliers to define the prices of their offers.

Businesses: which product should you choose between the spot product and the forward product?

As a company, you are faced with a choice when subscribing to your market offer: is it more interesting to choose a contract indexed to the market Forward or a contract indexed to the spot market? There is no There is no single answer to this question.

The answer depends on the company's electricity needs and its fiscal capacity to absorb price fluctuations.

SirEnergies is at your side to help you personalize your purchasing strategy Of electricity according to your electricity consumption and your risk profile.

Advantages and disadvantages of a forward product

Offers indexed to the market Forward guarantee the company a stable and determined price until the next indexation of the rates provided for in the contract.

In return for security, the price will often be higher to that of a spot product to take into account the safety margins of producers and suppliers. At the end of August 2023, the price on the long-term market thus exceeded 1,000 euros per MWh in France!

With these contracts, the company protects itself from increases in electricity prices. But she Don't take advantage of price cuts which can be attractive, even in times of inflation.

Thus, in October 2021, the price per MWh reached 0.00 euros in France, due to low demand combined with high wind production.

These contracts do not exclude the additional purchase of electricity on the spot market to adjust delivery to real energy consumption needs.

Advantages and disadvantages of a spot product

Contrary to the fears of many businesses, electricity supply offers indexed to the spot market are not 100% volatile.

A majority of the volume of electricity consumed by the company remains secured by purchases on long-term markets. Only a minority share of consumption is acquired on the spot market in cash, and subject to a variable price not known in advance.

If the reference spot market price is down at the time of purchase, a spot product is a winning financial strategy for the company. On the other hand, the increase in the spot price automatically results in an increase in the electricity bill.

How do I track wholesale electricity market prices?

💡 SirEnergies helps companies to understand the wholesale electricity market and to follow its evolution on a daily basis.

With The SirEnergies app, you will be able to visualize the Forecast over 3 years old and access the history of past products or receive daily prices by SMS. As an added bonus, you'll receive our weekly market analysis.

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Si opening up the wholesale electricity market to competition aimed at maintaining affordable electricity prices for all European consumers, the last few years have demonstrated the limitations of the system.

In particular, the aim is to determine the price of electricity by the last power plant called, with the consequence of combining gas and electricity prices.

To combat the rise in prices and in response to the demand of many countries, the European Commission published on 14 March 2023 a Proposal to reform the European electricity market.

The objective is threefold: to protect consumers by offering them better price stability, to increase investments in renewable energies through financial aid and to strengthen the competitiveness of the industrial sector by signing long-term contracts guaranteeing an affordable energy price.

A first agreement was reached on 17 October between European energy ministers. The next step: the start of tripartite negotiations between the European Parliament, the Member States and the European Commission.