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Promising first steps towards open trading

This month we report on wind power that is being traded on European electricity exchanges alongside coal and gas energy. Traders are reporting success - in terms of achieving profits for wind-power producers and reducing the overall costs of balancing supply and demand, and in the likelihood of being able to reduce the cost of wind power for the end user.

Trading on the energy market has been happening to some extent in Denmark for some years, and this year it has been introduced in Germany with an incentive payment. However, it still remains a less well-known system in the wind industry than the use of fixed subsidies and purchase obligations, where power is more commonly fed into a system that by law has to accept it, and the producer is paid a fixed rate. This then leaves the transmission system operator the task of balancing the fluctuating demand and supply, with the costs passed on to the consumer. A trader, on the other hand, keen to maximise profit, works to reduce excess reserve.

The new German premium system still works with a support mechanism, a fee paid to help encourage wind-power operators to enter the market. But this half-way house is a much more flexible system than many subsidy mechanisms and should help wind energy establish a place of its own on the market.

With advances in technology and electricity-network management, energy traders can sell wind power nearer real time, supply power in shorter periods and use sophisticated forecasting techniques to more accurately predict the wind power that will be available. As wind is pushed on to the market to increase revenues, these traders are creating a flexible real-time market.

And the energy traders doing this appear to be successful. They are taking wind power from a large number of small producers and delivering it where it is needed over a wide network, in combination with the other power supplies that they trade.

By allowing market forces to balance supply and demand, trading is achieved in a highly efficient manner. The market finds the cheapest supply, and the need to hold more reserves than is needed is reduced. Efficiency is improved. And who benefits? The consumer.

A lesson for the US

Across the Atlantic, both US presidential candidates have mentioned wind power in their campaigns. They argue over the value of the expiring production tax incentive for wind power and worry that many Americans think that wind power will raise the price of their electricity. Whether it be Barack Obama or Mitt Romney who is tasked with deciding the fate of that particular support mechanism in an era of austerity, he can take some comfort from the European's example of achieving a well functioning market for electricity, where fluctuating supplies of renewable power are an attractive commodity that helps to drive down the overall costs of electricity for the consumer. This could well be a lesson that the US picks up on and runs with.

There is still a need to nurture wind in protected markets until subsidies are removed from nuclear and fossil fuels so that it can compete on the open market without any form of premium. Meanwhile, it looks like the traders are making a good start with the interim supported system.

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