The European Power Grid and Power Market: A Symphony of Renewables and Smart Grids

Welcome to the electrifying world of the European power market! If you’ve ever flicked a light switch or charged your electric car, you’re part of a vast, dynamic network that balances supply and demand, incentivizes renewable energy, and ensures electricity flows seamlessly across borders. Let’s dive into the fascinating mechanics of this grid, explore the various markets involved, and discover how it’s paving the way for a sustainable future.

The Backbone: Understanding the European Electricity Grid

Imagine a colossal web of interconnected power lines stretching across Europe. This is the European electricity grid, a marvel of modern engineering that ensures power is delivered wherever and whenever it’s needed.

At its core, the grid is about balance. Electricity generation and consumption must be perfectly matched at all times to maintain stability. This is no small feat, considering the fluctuating nature of both demand (think of how electricity use spikes in the evening) and supply (renewables like wind and solar are, by nature, variable). However, the grid has constraints, such as maximum transfer capacity, which can limit the flow of electricity between regions.

Morever, fossil fuel and CO2 emission prices may make generation prohibitive for conventional generators when there is enough renewable generation in the grid.

Other interesting constraints taken into consideration when balancing electricity supply and demand, are the ramping-up and ramping-down of generators. “Fired” generators (e.g., generators that burn some type of fuel) will incur operational costs. If there is sufficient supply of wind and solar, the price of electricity may be too low and it may make no financial sense to operate them. In fact, there is at least one case of fossil fuel gas power plant, that requested to cease operations due to the competition from renewables (e.g., Irsching power station - Wikipedia).

Simulation of the European Power Market

As it quickly becomes obvious when studying the problem of solving the power grid, putting a price on production and distribution of electricity is not an easy feat. The problem becomes even more interesting and complex when considering gas and oil distribution and prices, but in this post I will focus on the electricity distribution problem. Power systems engineers have been hard at work figuring out algorithms that can provide good estimates on pricing schemes (i.e., market designs) that ballance the power generation and distribution incentives with the need for satisfying electricity demand.

It is possible to simulate when and for what capacity each generator is going to operate, and at what bidding price each zone is going to operate. This can be performed using comercial power systems analysis software, but sophisticated open-source tools are also available.

Below are some animations I produced for the generation of different energy sources (lighter colors are “more” power production). These are optimized jointly, while taking into account the underlying electricity grid, and the marginal prices each different producer is able to bid. For wind and solar the production cost is zero, whereas for the gas/oil/coal powered generators some oil prices are assumed. The model simulations were performed as a “test-bed” for development of ML algorithms and for learning about power market modeling.

Wind production over Europe - January ‘23

CCGT Generator Production over Europe - January ‘23

Oil Generator Production over Europe - January ‘23

The Markets: Day-Ahead, Intra-Day, and Balancing

The European power market operates through several key markets that facilitate the efficient allocation of electricity:

Day-Ahead Market: This market operates on a 24-hour cycle where participants (electricity producers, suppliers, and traders) submit their bids and offers for for price per MWh, per time slot (mostly 1h in Europe), for consumption during the next day. The day-ahead market, is also referred to as the “spot” market (which is a bit confusing, since one could argue that day-ahead traded electricity, is essentially a short-term future contract!).

The market clears through an optimization process that involves a solution to the so-called Optimal Power Flow (OPF) problem, which calculates the most efficient distribution of electricity, taking into account grid constraints and the merit order curve (where the cheapest energy sources are used first and the highest bidders are satisfied first).

In the “zonal” pricing implemented in Europe, for each bidding zone, the same price (the clearing price) is given for all consumers and producers. Interestingly, this incentivizes the producers to bid the lowest price they can produce at, since they will get paid with the Market Clearing Price (MCP), which can only be equal or higher if their bids were accepted.

You can find more information on how the electricity market works at the EPEX SPOT website.

There are further details on the “EUPHEMIA” algorithm that is used to clear the european markets link.

Intra-Day Market: Operating continuously, this market allows participants to make adjustments to their positions as real-time conditions change. It closes just an hour before delivery, providing flexibility to accommodate unexpected changes in demand or supply.

Balancing Market: This market ensures grid stability in real-time by addressing discrepancies between forecasted and actual electricity flows. Grid operators (TSOs) call upon reserve power from various sources to balance the system.

Also related to the balancing market, smart meters can collect data on electricity usage and generation from “prosumers” (i.e., an entity that is both producer and consumer of electricity). That does not only allow grid operators to predict demand and adjust supply accordingly, but also to offer aggregated “demand” or “consumption” as a service to the grid in real-time. Smart meter technology, as of today, is not yet well-adopted (to the best of my knowledge), but may be an interesting development driving even better efficiencies in the grid.

The Merit Order Curve

The merit order curve is a key concept in the electricity market, and it is tightly related to the Day-Ahead market mentioned above. It ranks power generation sources based on their marginal costs, with the cheapest sources (often renewables) at the bottom and the most expensive (like gas plants) at the top. This prioritization ensures that electricity is generated cost-effectively, promoting the use of renewable energy when available.

Smart Grids: The Digital Transformation

The integration of renewables is facilitated by the rise of smart grids. These are electricity networks enhanced with digital technology, enabling real-time monitoring and management of power flows. Smart grids, together with the electricity market, are key to handling the intermittent nature of renewable energy and distributing it efficiently across Europe.

Energy Storage: Batteries and other storage technologies are crucial for storing excess renewable energy and releasing it when production is low, ensuring a constant power supply. Some of the interesting ideas I discovered during my deep-dive into electricity technologies, is the re-purposing of the gas infrastructure (including pipelines) to transport hydrogen, which can be readily produced from electrolysis.

Cross-Border Cooperation: A Unified Energy Market

The European grid isn’t confined by national borders. Countries are interconnected through cross-border interconnectors, enabling the flow of electricity across the continent. This cooperation enhances energy security and efficiency, allowing countries to support each other during peak demand or supply shortages. An often-cited example where such cooperation between European nations becomes valuable, is when there is high production of wind and solar from Spain, which can be used, instead of wasted, by southern France, whereas France exports nuclear energy to Germany.

Europe vs. US: Zonal vs. Nodal Pricing

A key difference between the European and US electricity markets lies in their pricing mechanisms. Europe predominantly uses a zonal pricing system, where each country or region is considered a single price zone. Prices within each (bidding) zone are uniform, as mentioned above in the description of the day-ahead market description.

In contrast, the US employs a nodal pricing system, where prices vary at different points (nodes) in the grid, reflecting local supply, demand, and grid constraints more accurately. This system is more complex but can lead to more efficient outcomes by addressing localized issues directly.

The Future: Towards a Sustainable and Resilient Grid

The journey towards a fully sustainable and resilient European power market is ongoing. Innovations like grid-scale batteries, hydrogen fuel cells, and advanced AI algorithms for accurate demand and supply forecasts, potentially incorporating grid-topology information, promise to further enhance grid stability and renewable integration.

Moreover, the European Green Deal aims to make Europe the first climate-neutral continent by 2050, further accelerating the transition to renewable energy and smarter grids.

Stochastic Market Clearing

The common day-ahead/intra-day/balancing market design, and the engineering problems of unit commitment and economic dispatch, are components of the “Deterministic Market Clearing” mechanism. One can imagine, that since the quantities driving these optimization problems are uncertain, a clearing algorithm that takes stochasticity into account may perform better (e.g., “Stochastic Market Clearing” algorithms). Intuitively, it is also easy to imagine that a market based on uncertainty-aware designs, would be more robust to under and over production at different parts of the grid. Indeed, stochastic market clearing algorithms are a current research topic in power market design.

In stochastic market clearing, instead of using one value for renewable electricity generation in a bidding zone, which is what happens in deterministic market clearing algorithms, we can prepare for all renewable electricity generation scenarios in expectation.