Types of electricity markets
We can classify electricity markets based on time or based on characteristics. There are various types of markets, of which the following three are the most common: the electricity exchange, the over-the-counter (OTC) market, and the organized OTC market, which undergoes continuous clearing
The Electricity Exchange
Electricity exchanges are organized to facilitate anonymous and transparent trading in electricity. A multilateral trading platform ( ) is established, within which market participants can submit bids for the supply or demand of energy for a specific time period. These bids are matched by the market operator. The so-called market clearing process is based on the “merit order curve methodology.” In the Netherlands, the market is “cleared” every hour, but other countries may deviate from this time frame. Electricity exchanges are primarily useful for trading standard products for which demand is high enough to ensure a good price and liquidity. The day-ahead market is a good example. In the Netherlands, it is operated by EPEX Netherlands.
OTC markets
Some electricity products, primarily those involving larger volumes and longer-term contracts, are traded bilaterally between producers and large consumers or suppliers. They do so in what is known as an over-the-counter (OTC) market. Trading parties are often brought together by an energy trading intermediary (a broker), usually through a framework agreement. Direct trading between the two parties is also an option. OTC deals can be used for any electricity product under any terms and conditions (such as block contracts, trading during specific time slots, specific terms and restrictions, etc.). Prices are usually indexed to the transparent prices on the electricity exchange but remain confidential and unknown to other market participants.
Organized OTC markets
Similar to electricity exchanges, market participants submit bids for the supply and demand of electricity on the organized OTC market. The main difference is that this market is not cleared on a time-based interval, such as hourly. Instead, this market is continuously cleared, allowing bids for supply and demand to be valued and matched on an ongoing basis. However, the matched bids remain anonymous. This type of organized OTC market is typically used for the intraday market, where electricity can be traded up until shortly before the time of delivery.