European Energy Market Explained: How European Energy Trading Works

If you’re trading in US power markets, you might wonder about European power markets and the opportunities they present. Both energy markets face many of the same challenges: decarbonization, affordability, and security of supply.

Let’s compare and contrast European energy markets with US power markets, see how European energy markets work, and dive into why you’d want to trade in them.

How Is European Energy Trading Different from US Energy Trading? 

The US has a nodal energy market – a node is a point where power is injected or extracted from the power grid. Power traders can trade power down to the nodal level. 

In contrast, European energy markets are split mostly by country. Each country has a national Transmission System Operator (TSOs), similar to US Regional Transmission Organizations (RTOs), with the only exception being Germany with four.

Source: Time2Market

There are 41 EU bidding zones, which are the equivalent of nodes or hubs in the US power markets. Most countries have only a single bidding zone, meaning they have one wholesale clearing price for the entire nation, the exceptions being Italy (seven bidding zones), Norway (five), Sweden (four), and Denmark (two).

The European power grid is smaller than the US power grid: In 2022, the EU generated 2,700 TWh compared to the US’ 4,200 TWh. However, this doesn’t account for unmetered generation, which is growing rapidly in both areas.

How Does Wholesale Pricing Work in the EU? 

The chart below shows the short-run marginal cost by generation type of a generic country’s supply stack:

Source: Yes Energy

The clearing price comes from the short-run marginal cost (SRMC) of the last unit to run, which are usually thermal units. Every generator in the country receives that price. For example, in the chart above, a coal plant sets the clearing price.

Renewables have the lowest cost and will turn on first. Nuclear is hard to ramp up/down, so it is generally always on. The last units to turn on will be thermal units like coal and thermal (CCGT) plants, followed by peaking plants in extreme times.

As in the US, sometimes the clearing price is negative if demand drops or if there’s a surplus of renewable generation. However, in Europe there are Contracts for Difference (CfDs) that incentivize building and running renewable generation even at negative prices (oversupply).

Generators receive a fixed “strike” price for each unit, regardless of the clearing price. Generators then receive or pay the difference back. For example, a wind farm with a strike price of £100/MWh would still run at a SRMC of £-99/MWh.

Thermal plants like combined-cycle gas turbine (CCGT) plants that use natural gas also have higher costs associated with both commodity prices and carbon taxes.

Coal has been completely eliminated from the supply stack of certain EU countries like the UK and Belgium; however, it remains a large part of thermal generation in others like Germany.

A Closer Look at Germany

Two of the key factors that makes European markets tick are:

• Each country has a different supply stack. 
• Bordering countries are heavily interconnected.

Germany, which relies on plenty of renewable generation (particularly wind), and plenty of "dirty" coal generation, is by far the most liquid EU market.

Why is Germany the most liquid?

• It has the highest load, around 80 GW on an average winter day peak. 
• It has many TSOs (four), generators, suppliers, and market participants.
• It has a high proportion of renewable generation, causing intermittency and arbitrage opportunities.
• It’s highly connected to other markets (Denmark, France, Netherlands, Poland, Czech Republic, Austria, and Switzerland).

The next most liquid countries are the Nordics, France, and the UK.

The Relationship Between Electricity Demand and Spot Price: An Example

The availability of renewable generation drives prices, as seen above. During peak load times, if cheap renewable sources suffer from intermittency, the country must turn on more expensive thermal generators.

Generally, there's a relationship between price and demand: during peaks, thermal generators run, increasing the SMRC and therefore the clearing price.

Looking back to February 2025 in Germany, however, we see a major price spike despite normal demand on the 15th — caused by low wind availability. When the wind doesn’t blow, Germany loses its largest power generator.

Source: Yes Energy Demand Forecasts

This is one illustration of how a country’s supply stack can affect its spot price.

How European Energy Markets Work: The Coupling Mechanism

Now let’s dive into how European prices clear and flows are settled, looking at the market coupling mechanism. This is a key dynamic of European energy markets that allows the weather and supply stack in one country to affect the price of electricity in another. It only works due to how connected these markets are. 

This is how the coupling mechanism works:

For an example of market coupling in action, imagine a day when France has excess cheap nuclear power (€30/MWh), and Germany has no wind and therefore expensive gas-fired power (€80/MWh). If there’s enough transmission capacity available between the two countries, EUPHEMIA schedules electricity exports from France to Germany – Prices in both countries converge around €50/MWh.

If transmission is congested, France’s prices remain at €30/MWh, while Germany’s stay at €80/MWh.

While this looks like France is “punished” for having a secure, inexpensive supply of nuclear energy, over time ideally Germany will “pay back” France on days when France has nuclear outages or Germany has excess renewable supply.

This design aims to increase efficiency and equity as the end user pays the price for inefficient flows. The goal is that market coupling leads to lower average prices across Europe; because all across Europe electricity flows from low-price zones to high-price zones.

This is similar to US power markets, where power traders can move power from a low-priced area to a high-priced area and increase market efficiency (and often make a profit).

Some countries that are not in the EU are excluded from market coupling:

• Western Europe: UK, Switzerland
• Eastern Europe: Albania, Bosnia, Kosovo, Montenegro, North Macedonia, Serbia.

Source: Time2Market

What Happened to British Power Markets After Brexit?

Source: Ofgem [2024]

The Great Britain and EU electricity markets are heavily interconnected. The graph above shows the 10 GB interconnectors with the Island of Ireland, France, Belgium, the Netherlands, Norway, and Denmark, and the planned German interconnector that is on schedule for a 2028-2030 completion date. The UK is usually a net importer, with the majority (53%) coming from FR IFA & IFA2 nuclear energy. 

Up until 2013, the UK only had two interconnectors (FR, IE).

Data Source: UK Digest of Energy Statistics [2024]

Because of Brexit, the UK has lost access to Day-Ahead Market Coupling. Occasionally, prices may flow from the cheaper Great Britain bidding zone to more expensive zones via their interconnectors. Interconnectors put capacity up for auction one day ahead. Market participants buy this capacity before using it to trade contracts across borders. This has created another opportunity for arbitrage in the GB market.

How Are European Energy Markets Traded? 

The majority of European power trading volume is comprised of forwards or futures. This allows generators to hedge against future price volatility. This is in contrast to US markets that see the most volume of trades occurring in day-ahead markets. 

Intraday spot markets comprise a smaller volume but are growing.

Source: Yes Energy

Selected power exchanges are listed below, along with the regions they serve:

Price granularity is much lower in European power markets than in US power markets, meaning that large zones have uniform prices. EU power markets are also less volatile than US ones – you could argue EU power markets are less efficient because areas in need of investment aren’t necessarily signalled by higher prices.

However, both EU and US power markets confront congestion. The EU manages congestion via the balancing mechanism by EUPHEMIA.

Below is a table comparing key factors of the US/EU/GB markets.

Conclusion

European power markets are interconnected and so face different challenges in terms of extreme weather and the various supply stacks of different countries, offering many opportunities for arbitrage.

At Yes Energy, our demand forecasts predict load all across Europe so you can take advantage of these opportunities, from the day-ahead market up to five years out. Our forecasts particularly excel on hard-to-predict days, such as holidays and times of extreme weather. 

In addition, our weather risk, temperature steps, and weather decomposition tools will help to further mitigate risk and are designed to specifically tackle European markets.

Want to learn more? Tune into our webinar, Breaking into European Power Markets, on May 15 at 8 a.m. MST.

About the author: Ashwin Sivakumar is a data analyst working on EMEA power and gas forecasting models at Yes Energy. He has a passion for big data and turning it into helpful, actionable insights that help our clients make better decisions. You can catch him outside the office staying active, playing the piano, and trying new recipes.