Carlos Hernández González
September 11, 2024

A Simple Guide to Cap and Floor Prices in Electricity Markets

Electricity is a dynamic commodity, and its prices can fluctuate like a roller coaster. To help smooth out the ride, the electricity market has safety measures called cap and floor prices. In this blog post, we’ll unravel the mystery behind these concepts in the simplest terms possible, so everyone can grasp how they work.

Cap Price: The Safety Net for Soaring Peaks

Imagine electricity prices shooting up like a rocket, that’s when cap prices come to the rescue. Cap prices act as a safety net, preventing the cost of electricity from skyrocketing beyond a certain point.

How Cap Prices Work:

1.   Setting a Limit: When electricity market participants enter into agreements, they can set a cap price. This is the maximum amount they’re willing to pay or receive for electricity.

2.   Protection Against Spikes: If the market price exceeds the cap price, the cap acts like a shield. Participants won’t have to pay more than the cap if they’re buying electricity, and they won’t receive less if they’re selling.

3.   Peace of Mind: Cap prices offer peace of mind by capping the risk of unexpectedly high electricity prices. It’s like saying, “I’m willing to take the ride, but let’s not go too high.”

Floor Price: The Safety Cushion for Deep Valleys

Conversely, electricity prices can also plunge to unexpected lows. This is where floor prices come into play, acting as a safety cushion to prevent prices from dropping too low.

How Floor Prices Work:

1.   Setting a Minimum: Users in the electricity market can set a floor price, specifying the minimum amount they’re willing to pay or receive for electricity.

2.   Protection Against Lows: If the market price falls below the floor price, the floor acts as a safety net. Buyers won’t pay less than the floor, and sellers won’t receive less.

3.   Stability Assurance: Floor prices provide stability by ensuring that the price of electricity doesn’t fall below a certain threshold. It’s akin to saying, “I’m up for the ride, but let’s not go too low

Finding Balance in the Electricity Markets

In the electrifying world of electricity markets, cap and floor prices play a crucial role in maintaining balance. They provide a level of certainty and protection for traders, ensuring that the highs and lows of electricity prices remain within manageable bounds. So, whether you’re a business owner or simply someone curious about the electricity market, understanding these concepts can help you navigate the peaks and valley with confidence.

In Watt2Trade, the cap and floor prices are directly related to the maximum losses in order to create or accept a transaction in the decentralized electricity exchange. The governance is the mechanism thought out the cap and floor prices would be determining for each electricity market. The Watt coin is the token that allows users to vote on the markets rules.

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