The rise of renewables and real-time trading decisions

The ongoing growth in wind and solar capacity in Europe is contributing to the emergence of an increasingly volatile and short-term spot market for electricity. With power generation from renewables set to become a major part of the energy mix over the coming decades, how will trading dynamics evolve?

Making real-time decisions: how renewable generation is changing the dynamics of power trading in Europe explores this topic in detail. Fill in the form for a complimentary copy of the full report, or read on for an introduction.

How is the European energy landscape changing?

With nuclear and coal declining in the short term and gas and hydro still gaining momentum, wind and solar are set to become ever more important in the European energy market over the coming decade.

More than 127 GW of European onshore and offshore capacity was added between 2012 and 2020. Currently, offshore wind still only represents a fairly small part of the mix, accounting for only 6% of power generation in the top five offshore wind markets in Europe. Offshore wind buildout in particular has been subdued by changing policy frameworks, however, by 2030 it will grow to represent over a quarter (27%) of the wind capacity mix. This has important implications for the way energy is traded.

What are the implications for energy trading?

The intermittent nature of wind generation creates forecast-error deviations between day-ahead forecasts and intraday prices for electricity. In a market with a high percentage of both wind and solar generation both types of trading are necessary.

Day-ahead auctions help scheduling to avoid the costs of ramping up or down thermal generators. In contrast, intraday auctions are more important for wind as they help with real-time dispatch: the volatility of wind production means markets need to function much closer to consumption in order to adjust as required.

How is the market adapting?

EPEX SPOT created the European Cross-Border Intraday (XBID) trading platform in response to this need for an integrated and dynamic intraday market. Real-time data from the platform enables decisions to be made as late as 15 minutes before gate closure: this allows traders to manage their position on the intraday market with a high degree of granularity and reduce penalties imposed by deviations between actual and scheduled power generation.

XBID is proving successful, with trading volumes on the platform growing by over 20% year on year; they are also increasing relative to day-ahead volumes, showing the displacement of trading activity to the shorter timeframes made possible by the platform.

How do offshore wind’s particular characteristics impact intraday price behaviour?

Capacity factors for offshore wind farms can be significantly higher than for onshore arrays — and they will increase even more thanks to the installation of ever larger turbines and the siting of farms further offshore.

Energy production from offshore is higher in wintertime and so complements demand curves. Meanwhile, average daily and weekly production profiles are relatively flat, presenting upside to capture peak intraday prices but also downside to capture lower overnight or weekend prices.

How do day-ahead and intraday prices interact?

Several European markets with high levels of renewables are now experiencing negative day-ahead prices during periods of high non-dispatchable renewable generation. Meanwhile, extreme events can cause intense forecast deviation errors between expected and actual supply of as much as 10 GW per country. Such events include cold snaps, grid congestion, high unexpected availability and sharp rises and falls in renewables in-feed. Recently, changes in demand patterns during Covid-19 lockdowns also had an impact.

Power plants that manage to anticipate the volatility of intraday prices use it to their advantage to significantly increase revenues.

What are the implications for power trading?

As the volatility and liquidity of prices increase, arbitrage opportunities emerge between the sequential stages of the power market – from the futures market to the balancing market. Information asymmetry between the futures market and the spot market creates volatility when ‘taking a contract into delivery’, i.e. trading in the spot market.

This triggers different trading strategies, including generation optimisation, flexibility valuation and grid constraint trading. Arbitrage relating to optimising generation occurs between the long-term and day-ahead markers; flexibility valuation operates between the day-ahead and intraday markets; and arbitrage around grid constraints takes place within the intraday market.

How are we seeing strategies evolve? What does it all mean for the future of power trading in Europe? For a more detailed look, fill in the form at the top of the page to get a complimentary copy of the full insight.