Intraday Markets: Real-time Position Refinement

1. The Purpose: Refining Positions Closer to Real-Time

After the day-ahead market closes, generators and suppliers have a "contracted position"—a plan for how much electricity they will produce or consume for each half-hour of the next day. But many things can happen between the time that plan is made and the moment the electricity is needed.

• A wind farm operator gets an updated weather forecast showing stronger winds than anticipated, meaning they will generate more power.
• A supplier sees data showing that a large industrial customer has shut down a production line, meaning their demand will be lower than expected.
• A gas power station develops a technical fault and has to shut down, meaning it cannot generate the power it sold.

In all these scenarios, the participant's actual output or demand will not match their contracted position. This creates an imbalance. The intraday market is the platform where they can correct this imbalance by trading electricity closer to the time of delivery.

The following resource provides a concise explanation of this role.

As the article highlights, the intraday market allows participants to "continuously manage" their energy balance by acting on new information. This is particularly vital for intermittent renewables like wind and solar, whose output is harder to predict a full day in advance.

This image provides a simple illustration of how a generator might use the intraday market.

2. How it Operates: Continuous Trading and the Order Book

The most significant difference between the day-ahead and intraday markets is how they operate. The day-ahead market is a "pay-as-clear" auction that runs once a day to set a single price for each half-hour.

The intraday market, however, is a continuous trading platform, much like a stock market. Instead of one big auction, it's a constant flow of individual trades.

To understand how this works, let's explore the core mechanism: the order book.

As the article explains, the process is as follows:

1. Participants submit buy orders (bids) and sell orders (offers) to the exchange at any time. Each order states a price and a volume.
2. These orders accumulate in an order book, which is visible to all participants.
3. A trade happens the instant a new buy order is placed at a price that is equal to or higher than an existing sell order, or vice-versa.
4. The trade is executed at the price of the existing order on the book.
5. Unlike the day-ahead auction, each trade is priced individually. This means that within the same half-hour delivery period, electricity can be traded at many different prices.

The image below shows a real example of an order book, illustrating the buy and sell orders waiting to be matched, and the trades that have already been executed at various prices.

3. The Motivation: Avoiding Imbalance Prices

Why is it so important for participants to balance their position in the intraday market? The alternative is to be "out of balance" and be exposed to the prices set in the Balancing Mechanism (BM).

The BM is the final tool the National Grid Electricity System Operator (ESO) uses to balance the grid in real-time. If you generate less than you sold, or consume more than you bought, you have to buy the shortfall from the system at a price called the "system price". If you generate more than you sold, you sell the surplus to the system. These prices can be very volatile and often punitive.

Therefore, the intraday market is the last chance for participants to sort out their own imbalances before the ESO steps in.

As the article shows, traders constantly speculate on what the final system price will be. If it looks like the system will be 'short' of power (demand > supply) and the ESO will have to pay a high price to a generator in the Balancing Mechanism, anyone who is also short will rush to buy power in the intraday market. This drives up intraday prices, but it is often still cheaper than paying the final system price.

In this way, the intraday market acts as a crucial buffer, allowing the market to self-correct and reducing the amount of work the System Operator has to do to keep the lights on.

Conclusion

In this lesson, we've explored the fast-paced world of intraday electricity trading. We've seen that it's the vital link between the day-ahead plan and the real-time reality of grid operation.

Key Takeaways:

• The purpose of the intraday market is to allow generators and suppliers to refine their energy positions closer to real-time, correcting for forecast errors or unexpected events.
• This is especially important for managing the intermittency of renewable generation.
• The intraday market operates via continuous trading on an order book, similar to a stock exchange, not a single daily auction.
• Trades are cleared instantly whenever a buy and sell order match, and each trade is priced individually.
• A key driver of activity is the desire to avoid being exposed to potentially punitive imbalance prices set in the Balancing Mechanism.

Preview of the next lesson:
We've now seen how market participants try to balance their own books right up to the last minute. But what happens when the system as a whole is still out of balance? In our next lesson, we will finally dive into the Balancing Mechanism, exploring how the National Grid ESO takes control in the final moments to instruct generators to increase or decrease their output to keep the grid stable and the frequency at a steady 50Hz.