Inside the Day-Ahead and Intraday markets: where short-term value is won

There are various short-term market structures, with DACH and Nordic short-term options part of the pan-European Single Day-Ahead Coupling (SDAC), with the UK operating its own separate single pan-European Day-Ahead Coupling (SDAC) since Brexit.

Short-term traders, portfolio optimisers and operations teams must understand the short-term value of Day-Ahead and Intraday options compared to other market alternatives. 

We’ll undertake a detailed exploration of the short-term markets that define profitability for generators and traders: where price signals are sharpest and responsiveness matters most.

The structure of day-ahead and intraday markets

Dedicated timelines and operating platforms allow transparency across the European market. 

Timelines, auction schedules, and gate closure rules.

Various timelines are in place to ensure markets operate efficiently. Day-Ahead market auctions are segregated by time slots - contracts can vary from hourly contracts down to as granular as 30-minute slots. Balancing timelines aligns energy generation and consumption to stabilise the market. Gate closure rules dictate when an offer can be submitted to the auction and the latest time it can be done. 

Market operators

Specific market operators exist to ensure that day-ahead and intraday options are transparent across the European market.  European Power Exchange (EPEX SPOT) is one of the larger market operators, servicing 13 European regions. Nord Pool is another large operator which offers trading in day-ahead and intraday markets across 16 European countries. N2EX, however, operated only in the UK, with prices and market data available on the Nord Pool data portal.

Price reference and settlement differences.

Each market option offers different levels of flexibility depending on a business’s risk appetite and energy pricing requirements. For example, the day-ahead market is better suited to planned high-volume purchases. At the same time, companies seeking greater flexibility might opt for the intraday market, which offers greater flexibility but higher risk. Price formation and market coupling differ between these two options: day-ahead uses a single, uniform price auction method. In contrast, intraday typically uses continuous trading with a pay-as-bid structure. Market coupling integrates national markets to enhance efficiency and liquidity. 

Managing forecast errors and imbalance exposure

Day-ahead and intraday markets give traders the opportunity and flexibility to take advantage of changing energy prices more frequently than in other, more rigid markets. This could increase risk as prices rise, or reduce it as participants can trade energy at a lower cost than in the previous time slot. But how do traders correct position imbalances intraday? The imbalance settlement process ensures grid stability in this volatile trading environment. Any remaining imbalances after the intraday market closes are handled by a balancing mechanism, with market participants that still have imbalances after market closes subject to imbalance charges. 

To quantify the volatility of renewable energy on the trading market, forecasting can be integrated to mitigate the effects of renewable output uncertainty. Factors to be forecasted include probabilistic forecasting, which might examine future energy output. Integrating AI to investigate parameters that might affect production, such as temperature or wind speed, can help predict expected levels of renewable generation and how they might affect pricing and, therefore, trading behaviour on the open market.

Trading strategies for volatile conditions

Intraday spreads can profit from short-term price spikes and drops that occur within a single day, exploiting the price difference between two securities. However, task management must be prioritised here, with extremely volatile periods avoided for trading. Risk hedging can also help to mitigate the effects of volatile balancing prices, while spreading risk over a larger portfolio - for example, wind and solar - allows energy producers to adjust their position on the market depending on predicted weather patterns and their effect on certain power plants. 

Speed is often of the essence in day-ahead and intraday markets. Tools such as algorithmic trading allow trades to be executed in fractions of seconds, as they give traders the ability to have vast amounts of data, such as historical and real-time weather signals, analysed and then generate trends extremely quickly, giving fast-changing insight into the state of the market. Automated dispatch of the physical flow of energy is the follow-on action to the insights generated by algorithmic trading. 

Cross-border arbitrage allows readers to make cost savings across different regions. Energy can be bought in a lower-priced area and sold in an area where a higher price is paid for energy. However, congestion rent must also be considered. This is where a transmission system operator charges congestion rent in areas where demand outstrips supply. 

Future developments in short-term trading

Trading intervals are becoming even more granular, allowing trading intervals as close as 15 minutes apart, as close to real-time trading as traders can get. Developments in data transparency will drive the increased use of Blockchain and digital ledgers to enhance security and improve trust among market participants. Focusing on market coupling, expansion, and flexibility markets, efforts are underway to combine national markets into a single European model that aims to increase security and optimise trading across regional borders. However, the market evolves, one thing is for sure: short-term trading is about precision: forecasting, reacting, and executing within minutes to capture volatility.