Energy Markets — Glossary

A ↑

aFRR — Automatic Frequency Restoration ReserveL4

Secondary reserve, activated automatically by the TSO's AGC signal (typically a 4-second control cycle) and fully deliverable within 5 minutes. Procured asymmetrically (separate up and down products) and remunerated with both a capacity price (€/MW) and an energy price (€/MWh). Cross-border activation runs on PICASSO.

AdditionalityL9

The claim that a green procurement decision caused new renewable capacity to be built, rather than re-labelling existing generation. The central credibility test for corporate PPAs and certificate purchases.

Adequacy / ERAAL11

Resource adequacy is whether installed capacity can meet demand at an acceptable reliability standard. The European Resource Adequacy Assessment (ERAA) is ENTSO-E's probabilistic study that a member state must rely on to justify introducing a capacity mechanism.

ATC — Available Transfer CapacityL2

The older capacity-allocation model: each border is given a single fixed MW limit before the auction. Simple, but it under-uses the grid compared with flow-based coupling because it cannot represent how flows on one border load elements on another.

API2L7

The benchmark price index for thermal coal delivered CIF Amsterdam–Rotterdam–Antwerp, quoted in USD/t on a NAR (net as-received) calorific basis. The reference leg of European dark and clean dark spreads.

B ↑

BackwardationL5

A curve shape where forward prices sit below spot. In commodities it signals physical tightness — holders of the physical good are unwilling to lend it, so convenience yield exceeds the cost of carry. The opposite of contango.

BankingL8

Carrying unused EU ETS allowances forward into later compliance years. Unlimited banking is what turns the ETS into an intertemporal asset market and makes the Hotelling rule the natural price benchmark.

Baseload / Peakload / Off-peakL5

Standard delivery shapes. Baseload is all hours; Peak is typically 08:00–20:00 on working days; Off-peak is the residual. Because volumes must reconcile, peak and off-peak prices are constrained by the volume-weighted baseload price.

Basis riskL9

The residual exposure left when a hedge does not match the underlying in location, shape or timing. For a virtual PPA it is the gap between the project's actual generation-weighted capture price and the hub reference price used for settlement.

Bidding zoneL12

The geographic area inside which electricity is traded at a single uniform price, with the grid treated as an unconstrained copper plate. Congestion inside a zone must be resolved after the market clears, by redispatch.

Block orderL2

A day-ahead order spanning several consecutive hours that is accepted or rejected as a whole (fill-or-kill). Variants include linked blocks (a child can only clear if its parent does) and exclusive groups (at most one member clears). Blocks are what make the auction a mixed-integer problem.

BRP — Balance Responsible PartyL4

The legal entity that carries financial responsibility for a balance group matching its schedules to its physical position. Deviations are settled against the imbalance price, which is the economic force driving intraday trading.

C ↑

Cannibalisation effectL9

As more of one technology is built, it depresses prices precisely in the hours it generates, so its own capture price falls relative to baseload. The core long-run valuation problem for solar and wind PPAs.

Capacity mechanismL11

A payment for availability rather than energy, introduced to close the missing-money gap. Designs range from strategic reserves (capacity held outside the market) through targeted payments to centralised capacity auctions and reliability options.

Capacity payment vs energy paymentL4

Reserve revenue has two legs: €/MW for standing ready over the product window, and €/MWh for energy actually activated. FCR pays capacity only; aFRR and mFRR pay both. The split drives how a battery values a reserve bid against arbitrage.

Capture price / capture rateL9

The generation-weighted average price an asset actually realises. The capture rate expresses it as a fraction of the simple baseload average — a single number summarising how well an asset's profile matches the price shape.

Cascading / shapingL5

Decomposing a long-dated contract into its constituent shorter periods (a calendar year into quarters, quarters into months, months into days and hours) while preserving volume-weighted price consistency. The mechanical backbone of curve construction.

CCGT / OCGTL7

Combined Cycle Gas Turbine — high efficiency (roughly 55–60% LHV), slower to start, the typical marginal unit in many European hours. Open Cycle Gas Turbine — low efficiency but fast-starting, so it lives on scarcity hours and mFRR rather than on the energy spread.

CfD — Contract for DifferenceL9

A purely financial contract settling the gap between a strike price and a reference price; no electrons change hands. Government two-sided CfDs also claw back revenue when the reference exceeds the strike, capping upside as well as downside.

Churn ratioL6

Traded volume divided by physical throughput at a gas hub. The standard liquidity yardstick: TTF's high churn is why it functions as the European pricing reference rather than merely a delivery point.

Clean spark spread / clean dark spreadL7

The spark or dark spread after subtracting the cost of EU ETS allowances: P_power − (P_fuel / η) − (EF / η) × P_EUA. The clean spreads, not the raw ones, determine which plant is actually in merit.

CNEC — Critical Network Element and ContingencyL2

A grid element, paired with the outage case it must survive, that is explicitly modelled as a constraint in flow-based market coupling. The set of CNECs plus their PTDFs and RAM defines the feasible trade domain.

Congestion rentL2

The surplus the coupling algorithm collects when zones clear at different prices: the price difference multiplied by the flow. It accrues to TSOs and is earmarked for grid investment or tariff reduction.

ContangoL5

Forward prices above spot, normally reflecting the cost of carry (storage plus financing). In gas it is the condition that makes a summer-inject / winter-withdraw storage strategy profitable.

Copper plateL12

The simplifying assumption that the network inside a bidding zone has infinite capacity. It makes the day-ahead auction tractable, and it is precisely the assumption redispatch exists to repair.

Cost of carry / convenience yieldL5

Cost of carry is what it costs to hold the physical commodity to a future date (storage, insurance, financing). Convenience yield is the non-monetary benefit of holding it. Their net difference sets the theoretical spot–forward relationship for storables — which is why power, being non-storable, has no such anchor.

CurtailmentL9

Deliberate reduction of renewable output, either because prices are negative (economic curtailment) or because the grid cannot absorb the power (technical curtailment). Who bears the volume loss is one of the most heavily negotiated PPA clauses.

Cushion gas / working gas volumeL6

Cushion gas is the permanent inventory needed to maintain reservoir pressure and is never sold. Working gas volume (WGV) is the tradable capacity above it; together with injection and withdrawal rates it defines a storage product.

D ↑

Dark spreadL7

Power price minus the coal cost of generating it at a stated efficiency. Requires converting API2 USD/t into EUR/MWh thermal via calorific value and FX before the spread means anything.

Day-ahead marketL2

The single daily auction that clears delivery for every hour of the following day, typically at 12:00 D-1 gate closure. It is the reference price for almost every other power contract.

De-rating factorL11

The share of nameplate capacity that counts as firm in a capacity auction, reflecting availability during stress hours. Duration-limited assets are hit hardest: a one-hour battery may de-rate far below a four-hour one.

Demand responseL10

Flexibility delivered by consumers shifting or shedding load. Cheap in capital terms but constrained by baseline measurement, limited activation frequency and process tolerance.

Depth of discharge (DoD) / rainflow countingL10

Battery degradation depends non-linearly on how deep each cycle goes. Rainflow counting decomposes an irregular SoC trajectory into equivalent full cycles so a €/MWh wear cost can be charged against each trade.

Descending clock auctionL11

The standard capacity-market format: the auctioneer announces a falling price and participants drop out until supply meets the administrative demand curve. All remaining capacity is paid the final clearing price.

DSO / TSOL12

Distribution System Operator (lower-voltage networks) and Transmission System Operator (high-voltage backbone, system balancing, reserve procurement). Coordinating congestion actions across the two levels is the problem platforms such as GOPACS address.

E ↑

EB GL — Electricity Balancing GuidelineL4

Regulation (EU) 2017/2195, which harmonises balancing across Europe: standard products, the move to 15-minute imbalance settlement, and the mandate for the PICASSO, MARI and TERRE platforms.

Emission factor (EF)L7

Tonnes of CO₂ released per MWh of fuel input — around 0.20 t/MWh for natural gas and 0.34 t/MWh for hard coal. Divided by plant efficiency it gives the carbon intensity per MWh of electricity, and hence the ETS cost in the clean spread.

EUA — European Union AllowanceL8

The EU ETS unit: one permit to emit one tonne of CO₂-equivalent. Traded spot, as December futures and as options; installations must surrender enough EUAs to cover verified emissions each compliance year.

EU ETSL8

Europe's cap-and-trade system. A politically set cap declines each year by the Linear Reduction Factor; the market then discovers the price that rations the cap to the cheapest abatement options.

EUPHEMIAL2

The Pan-European Hybrid Electricity Market Integration Algorithm — the single optimisation that clears SDAC. It maximises social welfare subject to network and block-order constraints, using branch-and-bound over a mixed-integer formulation.

Extrinsic valueL10

The additional value of a flexible asset beyond what today's forward curve locks in — the option value of re-optimising as prices move. Captured in practice by rolling intrinsic, LSMC or stochastic dynamic programming.

Exchanges and hubsL1

EPEX SPOT and Nord Pool for power spot; EEX and ICE Endex for power and gas derivatives; TTF (Netherlands) and THE (Germany) as gas virtual trading points; JKM as the Asian LNG benchmark.

F ↑

FCR — Frequency Containment ReserveL4

Primary reserve. Responds automatically and proportionally to frequency deviation (droop control), fully deployed within 30 seconds, procured symmetrically and paid for capacity only. It arrests a frequency excursion; it does not restore frequency to 50 Hz.

Flow-based market couplingL2

Capacity allocation that constrains zonal net positions directly against physical grid limits using PTDFs and RAM per CNEC, instead of fixed per-border ATC values. Yields more cross-border exchange from the same network.

Forward curveL5

The set of prices observable today for delivery at future dates. In power it is not a no-arbitrage construct but an equilibrium of hedging demand and risk premia, which is why the Bessembinder–Lemmon reasoning matters more than cost of carry.

FTR / CRRL12

Financial Transmission Rights (Congestion Revenue Rights in the US) let a holder hedge the price difference between two nodes or zones. They are the standard instrument for managing locational basis in nodal markets.

Fuel-switching / fuel switch priceL7

The carbon price at which clean spark and clean dark spreads are equal, so gas displaces coal in the merit order. Making that switch happen was the ETS's principal short-run abatement channel.

Full activation timeL4

The maximum time a reserve product may take to reach its contracted power: 30 seconds for FCR, 5 minutes for aFRR, 15 minutes for mFRR, 30 minutes for RR. It is the single parameter that sorts technologies into products.

G ↑

Gate closure (GCT)L3

The last moment an order can be submitted. Cross-border intraday closes roughly an hour before delivery, local trading often as late as 5 minutes before — after which the only remaining adjustment channel is imbalance.

GOPACSL12

The Dutch platform on which TSO and DSOs jointly buy local flexibility to relieve congestion, with paired buy/sell orders so the system-wide balance is unaffected. The leading European example of a market-based alternative to cost-based redispatch.

Guarantees of Origin (GO)L9

Tradable certificates attesting that 1 MWh was generated from a given renewable source, issued and cancelled under the AIB framework. Because they can be unbundled from the energy, annual GO matching is far weaker than hourly 24/7 carbon-free matching.

H ↑

Heat rate / thermal efficiency (η)L7

Efficiency is MWh of electricity per MWh of fuel; heat rate is its reciprocal. Every spread calculation is quoted at an assumed efficiency, so spreads at 50% and 55% are different products.

Hotelling ruleL8

For an exhaustible resource held under free banking, the price should rise at the holder's discount rate. It is the theoretical benchmark for the EUA forward curve, and deviations from it are read as policy or liquidity effects.

Hub / virtual trading point (VTP)L6

A notional point within an entry–exit gas system where title transfers without reference to physical location. Trading titles at a VTP rather than at pipeline points is what created liquid European gas markets.

I ↑

IDA — Intraday auctionL3

Pan-European intraday auctions (IDA1/IDA2/IDA3) introduced under SIDC 2.0, which interrupt continuous trading to pool liquidity at set times and re-allocate cross-border capacity on a uniform-price basis.

Imbalance priceL4

The price at which a BRP's deviation is settled. Under single pricing, long and short imbalances face the same price, so a BRP that helps the system is rewarded; dual pricing penalises deviation in either direction and weakens that incentive.

In-merit / out-of-meritL7

A unit is in merit when its short-run marginal cost sits below the clearing price, so it runs. Out-of-merit units are dispatched only when the grid — not the market — requires them, which is the definition of a redispatch action.

Intrinsic valueL10

The value a flexible asset can lock in today by transacting against the current forward curve. It is a lower bound on true worth; the remainder is extrinsic.

J ↑

JKM — Japan Korea MarkerL6

The benchmark spot price for LNG delivered into Northeast Asia. The TTF–JKM spread, net of freight and boil-off, determines whether a flexible cargo sails east or west — the destination-flexibility option in practice.

L ↑

LinepackL6

Gas stored within the pipeline system itself by varying pressure. It is the short-term buffer that lets gas balancing work on a within-day obligation rather than the second-by-second balancing electricity demands.

LMP — Locational Marginal PricingL12

Nodal pricing: every node gets its own price, decomposable into energy, congestion and loss components. It internalises grid constraints in the market clearing and removes the need for out-of-market redispatch — at the cost of political and hedging complexity.

LNGL6

Natural gas liquefied for seaborne transport. Cargoes bring three embedded options: destination flexibility, diversion once at sea, and the speed option of sailing faster or slower to hit a better price window.

LRF — Linear Reduction FactorL8

The fixed annual percentage by which the ETS cap declines, raised under Fit for 55. It makes the long-run scarcity trajectory, and therefore the direction of the EUA curve, a matter of legislation rather than fundamentals.

LSMC — Least-Squares Monte CarloL10

A simulation-and-regression technique for valuing assets with path-dependent exercise decisions. The workhorse for gas storage and multi-market battery valuation where a full dynamic program is intractable.

M ↑

MAC — Marginal Abatement CostL8

The cost of avoiding one additional tonne of CO₂. In theory the EUA price settles at the MAC of the marginal abatement option needed to meet the cap — which is why the fuel switch price anchors short-run ETS valuation.

MARI / PICASSO / TERREL4

The European balancing-energy platforms: PICASSO for aFRR, MARI for mFRR, TERRE for RR. Each creates a common merit order so activation draws on the cheapest available bid across borders rather than nationally.

Market couplingL1

Clearing multiple bidding zones in a single algorithm with cross-border capacity as a constraint, so power implicitly flows from low- to high-price zones. SDAC does this day-ahead; SIDC does it continuously intraday.

Marginal (uniform) clearing priceL2

All accepted bids settle at the price of the marginal unit rather than at their own bid. This makes truthful bidding close to optimal and lets infra-marginal units earn the scarcity rent that finances their fixed costs.

Merit orderL1

Generation ranked by short-run marginal cost. Demand is met from the bottom up and the last unit called sets the price — the mechanism linking fuel and carbon prices to the power price.

mFRR — Manual Frequency Restoration ReserveL4

Tertiary reserve, dispatched manually by the TSO and fully delivered within 15 minutes. Used to relieve aFRR and handle sustained deviations; activated cross-border through MARI.

MIC — Minimum Income ConditionL2

A complex-order condition requiring that a unit's accepted volume recovers stated start-up and no-load costs, otherwise the order is withdrawn. A direct source of paradoxically rejected blocks.

Missing money problemL11

Energy-only markets with price caps cannot deliver enough scarcity rent to finance the peaking capacity that reliability requires. This revenue gap is the standard economic justification for capacity mechanisms.

MSR — Market Stability ReserveL8

A rules-based quantity mechanism that withdraws allowances into reserve when TNAC exceeds an upper threshold and releases them below a lower one, with invalidation above a cap. It converts the ETS from a fixed-cap system into a feedback-controlled one.

N ↑

N-1 securityL12

The operating standard that the grid must survive the loss of any single element without violating limits. Because it is assessed on an AC load flow after the market clears, it is what triggers redispatch.

NEMOL2

Nominated Electricity Market Operator — a power exchange formally designated to run day-ahead and intraday coupling in a member state. NEMOs collect orders and operate EUPHEMIA jointly; TSOs supply the network constraints.

Non-firm connectionL12

A grid connection granted on the condition that output may be curtailed when the network is constrained ("connect and manage"). It trades firmness for a much shorter connection queue.

O ↑

OfftakerL9

The buyer under a PPA — a utility, a corporate, or a trading house intermediating between the two. The offtaker's credit quality is what makes a project bankable.

P ↑

PAB / PRB — paradoxically accepted / rejected blockL2

Artefacts of the integer structure of the auction. A PRB is in the money at clearing prices yet rejected; a PAB is out of the money yet accepted. Their existence is why a uniform price supporting all orders may not exist at all.

Pay-as-bid vs pay-as-clearedL3

Continuous intraday trading executes each deal at its own agreed price (pay-as-bid), so there is no single hourly price — only a volume-weighted average. Auctions clear at a uniform price instead.

PPA — Power Purchase AgreementL9

A long-term contract for renewable output. Physical pay-as-produced passes the whole profile to the buyer; baseload or firmed structures shift shape risk to the seller; a virtual (financial) PPA settles as a CfD against a hub reference and leaves basis risk with the buyer.

PrequalificationL4

The TSO's technical certification that an asset or pool can actually deliver a reserve product — response speed, measurement, telemetry, sustained duration. The gatekeeping step before any reserve revenue is available.

PRISMAL6

The European platform on which bundled gas transmission capacity is auctioned. Booking entry and exit capacity there is the practical route to moving gas between hubs and monetising locational spreads.

Profile costL9

The value lost because an asset's output shape does not match the baseload shape it is hedged against. Together with basis risk and volume risk it explains most of the discount on a wind or solar PPA.

Proxy revenue swapL9

A structure that pays a fixed sum against a revenue index built from a weather-based proxy generation profile and hub prices, so the producer sheds both price and volume risk while the provider avoids operational-performance exposure.

PTDF — Power Transfer Distribution FactorL2

The sensitivity of flow on a given network element to a unit of exchange between two zones. PTDFs, applied to the Remaining Available Margin (RAM) of each CNEC, form the constraint matrix of flow-based coupling.

Pumped hydro storage (PHS)L10

Large-scale, long-duration storage with roughly 70–80% round-trip efficiency and negligible cycle-driven degradation, which lets it cycle freely where a battery must price in wear.

R ↑

RedispatchL12

Instructing generation up behind a constraint and down in front of it, at zero net system effect, to keep flows within limits. Germany's Redispatch 2.0 extended the obligation to renewables and small units and moved compensation onto a cost-based footing.

Reliability optionL11

A capacity product shaped as a call option: the provider receives a premium and refunds the difference whenever the spot price exceeds a strike. It pays for availability while automatically capping scarcity prices for consumers.

Rolling intrinsicL10

Re-running the intrinsic optimisation every time the curve moves and trading only the delta. A practical, implementable strategy that captures a substantial share of extrinsic value without a full stochastic model.

Round-trip efficiencyL10

Energy discharged divided by energy charged. It sets the hurdle spread — the minimum price difference that makes a charge/discharge cycle worthwhile before degradation cost is even considered.

RR — Replacement ReserveL4

The slowest standard product, scheduled by the TSO with a full activation time up to 30 minutes, used to restore the faster reserves. Exchanged through TERRE and not used in every control area.

S ↑

Samuelson effectL5

Volatility rises as a contract approaches delivery, because information that resolves near-term fundamentals has little effect on distant maturities. It is why far-dated power contracts look deceptively calm.

Scarcity pricing / VoLLL11

Value of Lost Load is the administrative estimate of what consumers would pay to avoid being disconnected, and in principle the correct price cap. Prices allowed to approach VoLL during tight hours generate the scarcity rents an energy-only market needs.

SDAC — Single Day-Ahead CouplingL2

The pan-European day-ahead coupling arrangement operated jointly by NEMOs and TSOs, clearing all participating bidding zones simultaneously in EUPHEMIA.

SIDC / XBIDL3

Single Intraday Coupling: a Shared Order Book, a Capacity Management Module and Shipping Agents that together let an order in one zone match against an order in another whenever cross-border capacity remains.

Social welfare maximisationL2

EUPHEMIA's objective: maximise consumer surplus plus producer surplus plus congestion rent. Note that it is a welfare objective, not a volume or revenue objective — which is why paradoxical outcomes are tolerated.

Spark spreadL7

Power price minus the gas cost of producing it at a stated efficiency: P_power − P_gas / η. The gross margin of a gas plant before carbon, and the basic unit of cross-commodity trading.

State of charge (SoC)L10

Stored energy as a fraction of usable capacity. The state variable that couples decisions across time and turns storage scheduling into a dynamic rather than a per-hour problem — and a reserve commitment constrains it.

Strategic reserveL11

Capacity contracted to sit outside the energy market and be dispatched only in emergencies. The lightest-touch capacity mechanism, but it needs a careful activation price so it does not suppress scarcity signals.

Strike price / reference priceL9

In a CfD or virtual PPA, the strike is the agreed fixed level and the reference is the observed market index settled against. Choosing a baseload reference for a solar asset is the usual source of basis risk.

T ↑

T-4 / T-1 auctionL11

Capacity auctions held four years and one year ahead of delivery. The T-4 round gives new build enough lead time to be financed; the T-1 round trues up the volume against updated demand forecasts.

THE / TTFL6

Trading Hub Europe is Germany's single virtual point (merged from GASPOOL and NCG); Title Transfer Facility is the Dutch hub and Europe's benchmark. The TTF–THE spread is the standard European locational gas trade.

TNACL8

Total Number of Allowances in Circulation — the published surplus indicator that mechanically drives MSR intake and release. Traders watch the annual TNAC publication as a scheduled supply event.

Two-sided CfDL9

A government support CfD that tops up revenue below the strike and claws back above it. It removes merchant risk in both directions, which lowers the cost of capital but also removes any incentive to respond to price signals.

U ↑

Unbundled vs bundled certificatesL9

A bundled purchase buys the energy and its GO together from the same asset; unbundled buys the certificate separately, often from a different country and period. Only bundled — ideally hourly matched — supports a credible 24/7 carbon-free claim.

V ↑

Virtual PPA (VPPA)L9

A financial PPA: the generator sells into the market, the parties settle the difference against the strike, and the GOs transfer separately. Avoids the need for the buyer to hold a supply licence or a balance group.

W ↑

Within-day obligation (WDO)L6

The gas balancing regime in which a shipper must be in balance over the gas day rather than continuously, with residual deviations cashed out against a marginal price. Linepack is what makes this tolerance physically possible.

Working gas volumeL6

See cushion gas. Alongside injection and withdrawal rates it defines how fast a storage facility can turn a seasonal spread into cash.

Z ↑

Zonal pricingL12

The European model: one price per bidding zone, internal constraints handled out of market by redispatch. Simple to hedge and politically stable, but it hides locational scarcity — the core of the zonal-versus-nodal debate and of ACER's Bidding Zone Review.