Playing Monopoly with Renewable Energy

Playing Monopoly with Renewable Energy

By Energy CIO Insights | Tuesday, August 18, 2020

The power trading of Renewable energy is a complicated feat. To understand the market, and dodge the risks presented by it is a tough task. But, with the variations and the non-deterministic feature, the market players need to have their eyes open.

FREMONT, CA: In many markets around the globe, the renewable sources of energy and are gaining increased popularity, mainly at the expense of a reduction in coal and nuclear power. The cost of transitioning these markets to clean energy may be offset or surpassed by the savings of not having to buy fossil fuels. The trades among these markets are occurring since recently. The phenomenon of renewable energy trading is an emerging topic of the utility sector and has been gaining attention.

The spread of clean energy trading, primarily wind and solar, has resulted in the occurrence of disruption in the pricing dynamics, mostly in wholesale power markets. The significant changes are driving energy prices downward. By submitting to the renewable energy power trading, a loss of one percent in GDP is observed. Legacy firms in stronghold regions are becoming more reliant on renewable energy, even though the risk of declination in portfolio value exists. This has forced businesses to adapt to newer asset strategies and trading operations.

The repercussions of the increasing demand for renewable energy in the wholesale power markets are a few. The most dominant of renewable energy are wind and solar energy; these sources are quite different from the fossil fuel-based sources of power generation, which was relied upon until recently. The primary difference is the alternate method of production, which results in a non-deterministic way, as its occurrence is unpredictable. Even though the maintenance set-up required is minimal and no fuel costs exist, significant costs are inflicted by unpredictability.

These factors of renewable energy spark a hint of disappointment and present challenges in terms of innovation in sectors like energy storage. Due to its non-deterministic availability, the wholesale power markets exhibited distaste in the trading and generation.

A sudden upsurge in the renewable energy market in the wholesale power trading scenario occurred, causing a significant penetration with a very different behaviour when compared to before. The large quantities of near-zero variability cost renewable supplies at many hours of the day, the energy prices have fallen in the markets worldwide. There exists a chance at certain times when the rates of renewable energy prices become negative due to the presence of an excess of renewables beyond the grid capacity to absorb.

Many cases have been reported when renewable energy supplies are not generated as expected in times of unforecast clouds or calmer conditions than anticipated. It is a struggle to steer-clear of the variation in the real-time energy markets. Energy levels spike to the highest limits when the same occurs in peak time such as winter or during summer.

The in-depth understanding and occurrence of these instances can be noted in localized power markets due to transmission constraints. These are more often than not, easily solved by investments to expand the inter-regional transfer capacity.

Transmission constraints are likely to occur much frequently in those places where the markets have historically existed. The newer obstacles emerge if the market has historically existed. The large swaths of renewable energy are generated in locations with the necessary resources and fossil plants, retire gradually in the face of the corresponding declines in energy prices. As transmission constraints frequently concentrate on producing sticky situations in the markets. For example, in case surpluses of renewable energy can neither be exported, or deficits of in-region generation cannot be alleviated by imports. These circumstances enable deviations in power prices in neighbouring markets, increasing in both frequency and magnitude.

Among the lower average prices and higher peak prices, the energy markets have experienced increased levels of volatility as part of renewable energy supply increases. In the case of a secondary consequence, evaluation of forward capacity markets becomes more uncertain. The ancillary service pricing will increase, because of the reduced certainty of how energy markets will balance at any moment in time.

For those organizations involved in trading bulk power, there exist a couple of implications, the changes wrought by increasing penetration of renewables on wholesale markets are a mixed blessing.

In any wholesale commodity markets, greater pricing variability creates an enhanced opportunity for traders. In many cases, more divergence is created in localized markets with increasing frequency of transmission constraint. The widening of basis differentials creates many new arbitrage opportunities and eventually finds corresponding trades to conduct.

The increase in the potential rewards naturally correlates with the proximity to greater risk exposure. When it comes to the case of substantial energy penetration in a wholesale market, the risks exhibited are significantly nonlinear—converting it into a much more challenging task to transform it into trading ethics, mark-to-market analyses and risk calculations.

In most cases, renewable assets are not dispatchable. These assets offer only a limited leeway of optionality for the traders to exploit. Many other scenarios occur wherein dispatchable generation assets enact a smaller role in the holistic supply base. In such cases, the internal choices of the traders become highly valuable. The dealings become even more complicated as the power plants are forcefully shut down into a critical number by the grid operators.

To recover from the higher levels of complexities presented by the market, trading operations and mechanisms are frequently rejuvenated of its analytics and accounting systems that deal with current information. The integration among the trading desks and back offices need to be much tighter.

Being the next era of power trading, the contenders at presence in renewable energy trading are continually upgrading the systems responsible for the collection, processing, and reporting of the data. Even with the risks involved, the incremental cost of renewable energy generation is at presences less than the embedded prices of the fossil fuels that exist at present. Keeping in mind the inflating share of the power markets around the globe, the power traders are in position and never once off the pace — the gap in any case formed by mistake while power trading will only widen with time. 

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