How it works
Term-ahead contracts cover delivery from the next day out to several months. Typical products are daily, weekly and monthly blocks, often split into round-the-clock, peak or off-peak hours. A contract states a volume in MW, the delivery hours and a price per MWh. Trading is either continuous, with orders matched as they arrive, or through periodic auctions for a set delivery period.
Once a trade is matched, the exchange stands between buyer and seller and holds margin against default. Close to delivery, the contracted volume becomes a daily schedule and is delivered physically over the grid. Some exchanges also list financial futures, which settle in cash against the spot price and involve no delivery. Either way, the price is fixed when the trade is made. Both sides know their cost or revenue for that volume before the spot market clears.
Why it matters
Term-ahead contracts let a buyer or seller fix a price for weeks or months without signing a long-term PPA. An IPP with uncontracted capacity can sell a season forward and cut its exposure to spot prices. An industrial buyer can hedge a known peak in demand, such as summer cooling. For financing, the forward price curve is the market's own view of future prices, and a check on any merchant revenue forecast.
A worked example
A steel plant expects to need an extra 20 MW round the clock for a 30-day month. It buys a monthly contract at $55/MWh. The volume is 20 MW × 24 h × 30 days = 14,400 MWh, costing 14,400 × $55 = $792,000. The month's average spot price turns out to be $68/MWh, so buying spot would have cost 14,400 × $68 = $979,200. The contract saved $187,200.
Illustrative figures.
Across markets
In India, term-ahead is the exchanges' name for physical contracts from the same day out to a few months, all delivered through the grid. Cash-settled electricity futures on Indian commodity exchanges are a recent addition. Europe and the US call this the forward market. Much of the volume there is financial futures on exchanges such as EEX or ICE, with bilateral forwards traded over the counter alongside.