Day-ahead market

The day-ahead market allows for efficient electricity trading by matching supply and demand forecasts, setting prices and optimizing energy use. With the increase in renewable energy, smart energy management systems that use day-ahead prices can help to reduce costs, increase flexibility and improve grid stability.

What is a day-ahead market?

The day-ahead market is a forward electricity market in which participants can buy and sell energy on the day before the planned production and delivery, typically in hourly blocks. It’s a core part of the energy value chain that allows electricity to be traded for the next day in advance. Thus it ensures market transparency as well as secure supply and supports in balancing demand and supply not only financially but also physically. 

Purpose and functionality of day-ahead market

The key purpose of the day-ahead market is to provide a mechanism for producers, suppliers and other market participants to align their electricity generation and consumption schedules one day in advance. In doing so, it contributes to grid stability, economic efficiency and overall reliability of the system.

Balancing Responsible Parties (BRPs) use the market to fine-tune their portfolio to ensure that expected generation or consumption matches their contracted loads. This ensures that the expected generation or consumption matches their contractual obligations. It reduces imbalances and minimizes risk in the real-time market. The market also supports transmission system operators (TSOs) by providing a forecast of supply and demand, which helps manage grid congestion and operational security. In this way, the day-ahead market acts as both a financial and physical coordination tool for the overall electricity system.

Pricing mechanism 

In the day-ahead market the prices are set by uniform price auctions, where supply offers and demand bids can be submitted on an hourly basis. The market operator aligns these orders based on algorithms to find a price point in which supply and demand are properly matched. 

If grid congestion is not considered during the pricing process, a single market-clearing price for all accepted trades is set. However, if network constraints and losses are taken into consideration, the locational marginal pricing (LMP) applies. With the LMP, each network node receives a different price which is based on its specific supply-demand dynamics and transmission capacity. This allows to determine optimal energy delivery to different locations and ensures grid-friendly utilization of the energy grid. 

In European markets, this price calculation and order matching process is supported by the Euphemia algorithm, which is used in the Single Day-Ahead Coupling (SDAC) to determine hourly prices for several bidding zones. Its main purpose is to align the electricity demand and supply across different (European) countries by matching orders, determining prices and optimizing cross-border energy flows. 

 Day-ahead trading 

Day ahead trading refers, similar to the market, of buying and selling electricity for delivery on the following day. It is done on formal power exchanges such as EPEX SPOT and Nord Pool, but can also be done through so-called over-the-counter (OTC) agreements between private parties. 

In the trading process, market participants submit price quantity offers and bids in hourly intervals for the next day. At 10:00 CET the TSOs publish the available transmission capacities on cross-border connections and within the grid. Based on this, market participants can see how much electricity can flow between the different bidding zones and can submit their final bids until 12:00 CET on the same day, when the auction is closing. Then the power exchanges run their algorithms, like Euphemia, to match all bids and to calculate the market prices for each hour and bidding zone. Shortly after the accepted volumes and clearing prices are published. For example in the Nord Pool market, participants from 15 countries and across 21 different bidding zones submit over 2000 orders daily, totaling around 500 terawatt hours (TWh) of annual traded volume. 

The auction results of the day-ahead bidding are financially binding, providing the basis for electricity feed-in and reference points for further trading on the intraday and balancing energy markets. This system allows ongoing adjustment and optimization if new information (such as updated weather forecasts) becomes available.

Technological implementation and use-cases

The day-ahead market and pricing integration relies on digital infrastructure and accurate forecasting tools to ensure reliable operation and planning. This is especially important as more and more decentralized and flexible assets (rooftop solar, battery storage and electric vehicles) are getting integrated into the grid. Let’s take a look at how intraday pricing supports and enables smart solutions:  

Energy management 

Day-ahead price data also plays an important role in smart energy management with solutions such as XENON. By integrating forecasted electricity prices, XENON can optimize energy flows between systems such as batteries, EV chargers and heat pumps. Based on day-ahead prices, the system can automatically plan consumption to align with low-cost periods, store energy when it is cheapest and reduce grid usage during peak prices. This makes sure that energy is used more efficiently and cost-effectively.

Dynamic tariffs 

The integration of dynamic tariffs uses day-ahead price signals to optimize when and how energy is consumed. By connecting to dynamic electricity tariffs, XENON allows devices such as EV chargers, batteries or heat pumps to operate in compliance with the most cost-effective time slots. Users can thus respond to price fluctuations automatically and without manual operation.

Day-ahead vs intraday market

The day-ahead market and the intraday market have different functions in the energy trading process:

• The day-ahead market allows electricity to be traded for the following day on the basis of demand and supply forecasts. Bids are submitted in advance and prices and schedules are set in order to optimize planning and minimize the risks of price fluctuations.

• The intraday market allows for adjustments closer to real time and helps participants respond to unexpected changes, such as fluctuations in renewable energy generation. It increases flexibility and allows users to balance supply and demand according to changing conditions. In the intraday market there are also different price formations: auction and continuous based pricing. 

To sum it up, while the day-ahead market lays the groundwork, the intraday market offers room for last-minute adjustments based on real-time developments.

Challenges and how to navigate out of them 

Operating in the day-ahead electricity market comes with challenges such as price volatility, forecast accuracy, and the integration of diverse assets with different needs. Fluctuations in renewable energy sources, particularly wind and solar, can make price predictions more difficult. However, as discussed earlier, accurate forecasting helps optimize energy usage and reduce costs by aligning consumption with lower-priced periods. At the same time, the day-ahead and intraday markets play an important role in the integration of renewable energies. By allowing market participants to regularly adjust their trading positions, these markets help to balance intermittent renewable generation. From an economic perspective, they provide efficient price signals that encourage consumption when the supply of renewable energy is high, contributing to grid stability and ensuring that clean electricity is used as effectively as possible.The integration of various renewable assets requires standardized solutions, but fortunately, these solutions already exist. Thus, the key to navigating the challenges of the day-ahead market lies in holistic energy management. 

Future outlook and expert insights 

The day-ahead market is becoming increasingly important with the growing share of renewable energies and decentralized systems. Accurate forecasting and flexible energy management will be crucial to optimizing energy consumption and reducing costs. Technology, particularly in the form of smart energy management systems that respond to day-ahead price signals, will drive efficiency and cost savings. Demand-side flexibility, the active adjustment of energy consumption by consumers in response to market signals, is already playing an important role in managing price volatility and supporting grid stability. Irene Guerra Gil, Energy Market Expert at gridX explains:

“Demand-side flexibility is no longer just a concept for the future. It’s already happening in the day-ahead market. By actively aligning energy consumption with market signals, we can unlock significant cost savings and play a key role in stabilizing the grid as renewable integration grows.”