Energy Markets
What is the european energy market?
The origins of today’s European energy markets can be traced back to the liberalisation process launched in the 1990s. Prior to this, energy systems across Europe were largely state-owned and vertically integrated, with single or a very few national incumbents controlling generation, transmission, distribution and supply. These monopolistic structures limited competition, restricted market access and constrained cross-border trade.
Liberalisation fundamentally reshaped the sector by unbundling these activities and introducing open, regulated markets for electricity and natural gas. Generation and retail were separated from the natural monopoly elements of transmission and distribution, enabling new market entrants to compete on equal terms. This structural reform created the foundation for transparent and liquid wholesale markets, fostering innovation, efficiency and competitive pricing.
The reform also opened the door to cross-border market integration, allowing national markets to evolve into a more interconnected European framework. This progressively integrated system became known as the Internal Energy Market (IEM), designed to improve economic efficiency, enhance security of supply, and promote price convergence across borders.
Market coupling initiatives, harmonised network codes, and EU-wide regulatory coordination further accelerated this integration, enabling electricity and gas flows to follow market signals rather than national boundaries.
Today, Europe’s market-based framework is central to the energy transition, supporting the integration of renewable generation, demand-side flexibility, storage technologies, and innovative trading mechanisms. It underpins efforts to deliver affordable, secure and sustainable energy to consumers across the continent. Beyond these traditional objectives, European energy markets are increasingly expected to support broader policy goals, including decarbonisation, the deployment of flexible resources and the attraction of investment in a rapidly changing energy landscape shaped by climate targets, geopolitical pressures, electrification trends, and digitalisation of the energy system.
In short, liberalisation and market integration have transformed Europe’s energy landscape from fragmented, state-controlled systems into a dynamic, competitive and increasingly interconnected market, capable of supporting both economic and environmental objectives.
What Are Energy Exchanges ?
At the heart of today’s energy markets are energy exchanges – neutral, regulated platforms that facilitate the buying and selling of electricity, gas, emission allowances and other energy-related products. They provide the market infrastructure, trading rules and operational systems that enable transactions to be conducted transparently, efficiently and on equal terms for all participants.
In liberalised energy markets, where generation and retail activities are legally and functionally separated from the natural monopoly functions of transmission and distribution, energy exchanges form the backbone of competitive wholesale trading. They bring together a diverse range of participants – from generators, retailers and industrial consumers to traders, aggregators and financial institutions – in a single rule-based marketplace.
The core function of an energy exchange, much like securities or other exchanges, is to bring together demand and supply. In the wholesale energy market, bids (to buy energy) and offers (to sell energy) are pooled in the trading system. Based on these bids and offers, the exchange determines a purchase price, also referred to as the market clearing price.
Exchange trading enables liquidity to be pooled, allowing market participants to anonymously and equally express their willingness to buy or sell standardised volumes of energy at a given price. By matching these bids and offers, the exchange helps determine a fair and transparent market price, accessible to all traders and the wider public. The more bids and offers submitted, the more reliable the resulting price. These prices are essential for guiding production and consumption, enabling demand-side flexibility and informing long-term investment in generation, storage, interconnection and other infrastructure.
Essential Functions of Energy and Environmental Shifts
Efficient Dispatch
Ensuring the lowest-cost generation is dispatched first regardless of location, subject to transmission constraints.
Price Formation
providing transparent and reliable reference prices that reflect actual market conditions, support cross-border trade and guide operational decisions.
Investment Signals
delivering forward price curves that inform long-term investment decisions.
Risk Management
enabling participants to hedge price volatility through forwards, futures and options contracts.
Trading can take place across all timeframes, from long-term futures to short-term spot and balancing markets. Market participants can trade physically or via derivatives either bilaterally, over the counter (OTC) or within an exchange. Exchange-based trading, by pooling liquidity and standardising transactions, strengthens transparency, efficiency and fairness across the market.
A key value-added feature of exchange trading is clearing, which mitigates counterparty default risk by financially guaranteeing the fulfilment of concluded transactions. In regulated markets, derivatives are cleared through a Central Counterparty (CCP) Clearing House. Energy exchanges also often serve as the interface for clearing pre-arranged OTC trades, further enhancing market security and reliability.
By fostering liquidity, transparency and trust, energy exchanges support not only operational efficiency but also the broader objectives of the EU energy market, including decarbonisation, market integration and security of supply. They play a central role in balancing supply and demand in real time, integrating growing shares of variable renewable generation and providing the reliable signals that underpin both daily market behaviour and strategic infrastructure planning.
How Are Energy Prices Formed ?
In wholesale energy markets, prices are determined by the interplay of supply and demand. Market participants – buyers such as suppliers, retailers and large industrial consumers, and sellers such as generators – submit bids and offers into a central trading platform. These orders are then matched based on economic merit, meaning that the lowest-priced supply is paired with the highest-priced demand until the market is balanced. The price at which this equilibrium is achieved is referred to as the market clearing price.
Because electricity and, to a lesser extent, gas cannot be easily stored at large scale, prices can fluctuate significantly throughout the day. Variations are driven by changing demand patterns, evolving weather conditions, intermittent renewable generation and system constraints such as transmission bottlenecks. In day-ahead markets, prices are determined for each hour of the following day, based on forecasts of consumption and generation. In intraday markets, prices adjust continuously closer to real time to reflect updated demand forecasts, system imbalances and the availability of flexible resources.
These transparent and time-sensitive prices play a crucial role in the functioning of energy systems. They provide clear signals to market participants about when it is most cost-effective or efficient to produce or consume energy, helping to optimise generation dispatch and demand-side management. By reflecting the true cost of balancing the system at any given moment, market prices also guide investment decisions, incentivising the deployment of flexible generation, storage solutions and other technologies that support reliability, efficiency and the integration of variable renewable energy.
In essence, wholesale market prices act as both an operational tool for day-to-day balancing and a strategic signal for long-term planning, enabling more efficient, flexible and sustainable energy systems.
Who participates in Energy Markets ?
Producers
These include renewable generators such as wind farms and solar parks, as well as conventional plants like gas-fired or hydroelectric facilities. Producers sell electricity or gas into the market, responding to price signals while managing operational constraints and generation costs.
Suppliers and retailers
These include renewable generators such as wind farms and solar parks, as well as conventional plants like gas-fired or hydroelectric facilities. Producers sell electricity or gas into the market, responding to price signals while managing operational constraints and generation costs.
Large industrial consumers
Major energy users may buy directly from the market to optimise their energy costs, manage operational flexibility, or hedge against future price volatility.
Transmission System Operators (TSOs)
TSOs are responsible for maintaining the stability and reliability of the energy system. They operate the transmission network, manage congestion, and procure balancing and ancillary services to keep supply and demand in equilibrium.
Aggregators
These participants optimise energy portfolios, aggregate smaller loads or generation assets and provide liquidity to the market, helping ensure efficient price formation and system flexibility.
Financial institutions
Banks, funds and other financial actors engage in energy markets primarily to offer risk management solutions, such as derivatives trading, or to enhance market liquidity, supporting both physical and financial trading.
All participants benefit from a robust and reliable market framework that ensures open access, transparency, fairness and operational efficiency. Energy exchanges provide a neutral, regulated environment where trading occurs anonymously, based on standardised rules and products. By pooling supply and demand in a centralised and transparent system, exchanges facilitate efficient price discovery, risk management and liquidity, which are essential for both short-term operational decisions and long-term investment planning.
What Are Energy Spot Markets?
Energy spot markets are platforms for trading physical volumes of electricity and gas for delivery in the short term. In electricity markets in particular, where supply (generation) and demand (consumption) must be balanced at every moment, these markets are essential to ensuring the secure and efficient operation of the energy system.
The day-ahead market is the primary short-term trading venue. It operates through a single daily auction in which market participants submit buy and sell orders for each hour of the following day. Orders are anonymously matched, resulting in a market-clearing price and traded volume for each hour. These results create binding delivery obligations for both buyers and sellers. Day-ahead trading serves as the main reference for wholesale energy prices in Europe and provides a crucial foundation for system planning and scheduling.
The intraday market complements day-ahead trading by enabling participants to adjust their positions closer to delivery. Trading is typically continuous, allowing buy and sell orders to be matched in real time for same-day delivery. This market plays a vital role in managing forecast deviations, especially for variable renewable generation such as wind and solar, and for responding to unexpected changes in demand or outages in generation assets.
What are Market Coupling and Cross-Border Trading?
European electricity market coupling enables cross-border electricity trading by simultaneously matching buy and sell orders across multiple bidding zones and taking into account both the available transmission capacity on interconnectors and the volumes of energy traded.
This process is carried out using a common optimisation algorithm that determines prices, traded volumes and cross-border flows in a single calculation.
By integrating national and regional markets in this way, market coupling ensures that electricity is dispatched from the lowest-cost available sources, regardless of national borders, while respecting physical transmission constraints.
The result is a more efficient use of both generation and interconnection assets, improved price convergence between bidding zones, and enhanced overall system security.
In the EU, market coupling is implemented through two complementary mechanisms:
- Single Day-Ahead Coupling (SDAC) – coordinates the day-ahead market across coupled countries through a single daily auction, producing harmonised prices and cross-border flows for each delivery hour of the following day.
- Single Intraday Coupling (SIDC) – integrates intraday markets via continuous trading and scheduled intraday auctions, allowing market participants to adjust positions closer to delivery and make better use of cross-border capacity.
In the future, market coupling is also intended to be progressively expanded beyond the EU to include neighbouring countries, in particular the Contracting Parties of the Energy Community (EnC), further deepening market integration across the wider European region.
More detailed information on SDAC and SIDC is available on the All NEMO Committee website.
What are Futures (Derivatives) Markets?
Futures and forwards contracts are widely used by energy market participants to buy or sell a specific volume of electricity or gas at an agreed price for settlement on a predetermined date in the future. While some contracts result in physical delivery of the commodity, many are cash-settled, meaning no physical transfer occurs and the contract is settled financially based on the difference between the contracted price and the market price at maturity. These instruments are primarily used by generators, suppliers, industrial consumers, retailers and traders to hedge against price risks, manage exposure to volatile energy markets and stabilise revenues or costs.
Derivatives are financial instruments whose value derives from an underlying asset – in this context, electricity, gas or EU ETS emission allowances. Most energy derivatives, including emission allowances, are classified as financial instruments and are subject to financial services regulations designed to promote market integrity, transparency and financial stability.
Key regulatory frameworks include:
Markets in Financial Instruments Directive (MiFID III) and Regulation (MiFIR)
establishing organisational, conduct and transparency rules for trading venues, investment firms and market participants
European Market Infrastructure Regulation (EMIR)
requiring clearing, reporting and risk mitigation measures for over-the-counter derivatives
Market Abuse Regulation (MAR)
prohibiting insider trading, market manipulation and ensuring the timely disclosure of inside information
Benchmark Regulation (BMR)
providing rules for the governance and accuracy of reference prices used in trading and derivatives contracts
These regulations are designed to cover a broad range of asset classes, whereas energy-specific frameworks such as REMIT focus on wholesale electricity and gas markets. A continuing challenge for regulators is ensuring that financial services rules appropriately reflect the unique characteristics of energy markets, such as the physical constraints of supply, the non-storability of electricity and the interaction between physical and financial trading. Proper calibration is critical to safeguarding market integrity while supporting liquidity, risk management and investment signals in Europe’s evolving energy landscape.
Energy exchanges play a central role in facilitating derivative trading and ensuring the integrity of these markets. By providing a neutral, regulated platform, exchanges allow buyers and sellers to trade standardised contracts transparently and efficiently. They pool liquidity, meaning that participants can anonymously submit bids and offers, helping to determine reliable market prices and enhance price discovery. Exchanges also standardise contract terms, making it easier for participants to hedge risk without negotiating complex bilateral agreements.
A key feature is central clearing through a Central Counterparty (CCP), which mitigates counterparty risk by guaranteeing the financial settlement of trades. Many exchanges also act as Registered Reporting Mechanisms (RRMs) under REMIT, reporting relevant transactions to ACER on behalf of participants and contributing to overall market transparency. By combining transparent trading, risk management and regulatory reporting, exchanges ensure that derivative markets function safely and efficiently, providing the hedging and investment tools that underpin Europe’s energy system.
What Are Delegated Operators?
In several EU/EEA Member States and Energy Community Contracting Parties, key functions related to the electricity balancing market are carried out by non-Transmission System Operator (TSO) entities. These third parties, known as ‘delegated operators,’ are recognised in the Electricity Regulation (EU) 2019/943, the Electricity Balancing Guideline (EU) 2017/2195 and the Network Code on Electricity Emergency and Restoration (EU) 2017/2196. Their roles are essential for the efficient operation of electricity markets, bridging the gap between the physical exchange of electricity and the financial outcomes.
Delegated operators perform a range of critical tasks that ensure the integrity, transparency and efficiency of balancing markets. These include imbalance calculation and settlement, publication of data related to electricity balancing and the development and issuance of rules governing balancing markets and imbalance settlement processes. By managing these functions, delegated operators ensure that deviations between scheduled and actual electricity flows are accurately accounted for, promoting transparency and operational clarity for all market participants.
These entities also facilitate market participation by providing market participants with access to balancing services and platforms. They collect and process bids and offers for balancing energy, calculate the activation of balancing resources and determine the corresponding financial settlements. In doing so, delegated operators help maintain system stability in real time and support the integration of variable renewable generation by ensuring that flexibility resources, such as demand response and storage, can participate effectively in balancing markets.
Delegated operators play an increasingly important role in cross-border electricity trade. They ensure that balancing mechanisms can operate across borders where interconnectors exist, coordinating with neighbouring TSOs and other delegated operators to optimise system reliability and cost efficiency. By standardising procedures for imbalance settlement and balancing energy activation, they contribute to harmonisation across national markets, supporting the development of a more integrated European electricity market.
Delegated operator arrangements are already established in twelve EU Member States and two Energy Community Contracting Parties. Europex members serving as delegated operators include APCS (Austria), Borzen (Slovenia), COTEE (Montenegro), ESCO (Georgia), HROTE (Croatia), MEMO (North Macedonia), OKTE (Slovakia), OPCOM (Romania), OTE (Czech Republic) and SEMO (Ireland and Northern Ireland).
Europex supports the development and recognition of delegated operator arrangements, highlighting their importance for maintaining efficient, transparent and reliable electricity markets. Their work underpins operational efficiency, facilitates market integration, enhances flexibility for renewable integration and provides the essential data and financial settlement mechanisms required to ensure fair, predictable outcomes for all market participants.
How to Ensure Market Integrity and Transparency?
Energy exchanges play a central role in ensuring market integrity and transparency through comprehensive market surveillance. As neutral and regulated platforms, they continuously monitor trading activity to detect anomalies, suspicious behaviour or patterns indicative of market abuse, such as insider trading or market manipulation.
Surveillance is supported by automated tools and algorithms that flag unusual orders or trades, allowing exchanges to investigate and report potential violations promptly. Exchanges also enforce standardised trading rules, contract specifications and anonymised order books, which reduce the risk of manipulation and ensure all participants operate on equal terms. By combining proactive monitoring with transparent price formation and reliable publication of trading data, exchanges provide regulators and market participants with a clear, auditable record of market activity.
In addition, the EU Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) was introduced in 2011 to enhance the integrity, transparency and fairness of wholesale electricity and gas markets across the Internal Energy Market. It established a robust legal framework to prevent market abuse, such as insider trading and market manipulation, and to strengthen the monitoring and oversight of market activities across the European Union.
Under the revised Regulation (REMIT 2), effective from 7 May 2024, energy exchanges play a pivotal role in enhancing market transparency, integrity and efficiency. These exchanges are designated as Organised Market Places (OMPs) and are subject to expanded obligations aimed at preventing market abuse and ensuring fair trading practices.
a. Organised Market Places (OMPs)
OMPs encompass energy exchanges, brokers and capacity platforms where multiple third-party buying and selling interests in wholesale energy products interact in a manner that may result in a transaction. Under REMIT 2, OMPs are required to report order book information to the Agency for the Cooperation of Energy Regulators (ACER) on behalf of market participants. This reporting can be done directly by the OMP or through a designated Registered Reporting Mechanism (RRM). The aim is to enhance market surveillance and prevent market manipulation.
b. Registered Reporting Mechanisms (RRMs)
RRMs are entities authorised to report transaction and order book data to ACER on behalf of market participants. While OMPs can act as RRMs, they are not obligated to do so. Market participants trading on an OMP that does not act as an RRM must ensure that their transactions are reported through an authorized RRM. This dual-layered reporting structure aims to streamline data collection and enhance the quality of market information.
c. Inside Information Platforms (IIPs)
IIPs are ACER-certified electronic platforms where market participants are required to disclose inside information, such as planned and unplanned outages of power plants or the availability of transmission capacity. Some energy exchanges operate IIPs, facilitating the timely and transparent disclosure of information that could impact market prices. This disclosure is crucial for maintaining market integrity and preventing the misuse of non-public information.
d. Persons Professionally Arranging or Executing Transactions (PPAETs)
PPAETs are entities that arrange or execute transactions in wholesale energy products. Under REMIT 2, PPAETs are obligated to report suspicious transactions and orders to ACER and national regulators. They must also establish effective systems and arrangements to detect and prevent market abuse, including monitoring the disclosure of inside information. This responsibility underscores the role of exchanges and trading platforms in upholding market integrity.
e. Role of Energy Exchanges in REMIT 2 Compliance
Energy exchanges, as OMPs, are central to the implementation of REMIT 2. They provide the infrastructure for transparent and efficient trading, facilitate the reporting of transaction and order book data, and support the disclosure of inside information. By fulfilling these obligations, exchanges contribute to the creation of a level playing field, deter market manipulation, and enhance investor confidence. Their role is instrumental in the EU’s broader objectives of market integration, security of supply, and the transition to a low-carbon energy system.