- Jump to section
- Negative wholesale prices
- Volatile imbalance prices
- Imbalance management
- Downward FCR prices
- Intraday liquidity
- The takeaways
The 2022 gas crisis underscored the urgency of Europe’s greater self-reliance in energy production, with the rapid installation of renewables as a viable approach. Since then, the increasing affordability of solar PV modules has paved the way for their accelerated integration onto lands and roofs, while the EU’s plan for wind installed capacity is an ambitious 500 GW by 2030.
The shift to weather- and season-dependent renewables is necessary, but it is also fundamentally changing the energy markets, introducing a significant risk component for renewable energy traders. Within this dynamic landscape, both threats and opportunities coexist.
In this article, I delve into the trends that have shaped short-term power trading in Europe in 2023 and reflect on how the market will evolve in 2024. If you’re leading a short-term trading unit or looking to optimize your bidding, you’ll find recommendations you can apply right away.
Negative wholesale prices
Dips in wholesale prices, once infrequent, shallow, and, thus, manageable, have taken an unprecedented turn last year. Negative energy prices have been lower, more common, and longer lasting, on both weekends and weekdays. Oversupply is a challenge we can no longer overlook.
The Netherlands is a noteworthy example with leading per capita generation from solar in the EU, combined with lots of wind. By the end of May 2023, we’ve witnessed not one, not two, but three groundbreaking records in the realm of negative energy prices:
1. 49 hours of negative day-ahead prices in a single month
2. €-400/MWh
3. 105 hours of negative prices, surpassing the entire year of 2020
Hours with negative prices EPEX Spot day-ahead, the Netherlands, 2018-2023. Source: Stratergy.nl
Imagine the consequences of the second record: sell energy to the market at -400 euros per MWh, and one day can ruin profits for the whole month!
Similar patterns have been noticed in other countries, such as Germany, Belgium, and the Nordics, peaking during a day of free electricity across Europe last summer.
This trend will likely continue, with spring 2024 presenting an even bigger challenge. Because of mild temperatures from an El Nino winter in Europe, gas prices will probably remain low. Since they are the main driver for wholesale power prices, it is reasonable to expect the latter will be low into summer and possibly autumn. And, with more solar and offshore wind on the grid, I also expect more frequent and more profound dips this year.
My advice to renewable traders is to ensure trading flexibility on wholesale markets by checking three boxes:
– Be able to physically control (curtail) your assets;
– Allow for curtailment in your Power Purchase Agreements (PPAs) for 2024;
– Be able to (automatically) trade limit orders on wholesale markets – day-ahead and intraday.
Volatile imbalance prices
As we know, imbalance prices went up during the gas crisis, then came back down, mainly driven by day-ahead prices. Now, however, the distribution has changed significantly: the volatility keeps growing.
Zooming in on a specific country illustrates this trend. The graph below shows the imbalance prices in the Netherlands from 2019 until now. Green represents the mean imbalance price in a week, while the shaded area gives the minimum/maximum price in the week.
Weekly imbalance price, the Netherlands, 2019-2024. Data on file
In general, based on our research, balancing costs in the EU are rising by a staggering 40% year-on-year.
Like wholesale prices, imbalance prices are driven by fuel and carbon prices, intermittency of renewables, and integration challenges. In addition to these drivers that are correlated to the wholesale markets, it’s also worth mentioning:
– More volumetric imbalance due to more weather-related short-term supply and demand uncertainty;
– Conventionals being occupied with ramping;
– Conventionals being pushed out of the balancing markets.
Two other aspects of this volatility trend have become more apparent in 2023.
Transmission
It is relevant to consider the simultaneity of a system where much of Europe relies on wind and solar energy.
Picture a scenario where a wind energy surplus in North Germany is mirrored in nearby countries like Belgium, Denmark, and the Netherlands. Previously, Germany, which installed wind turbines before its neighbors, could sell its surpluses through the interconnectors to solve imbalances. With the prevalence of renewables, this is no longer possible, leading to everyone potentially being on ‘the wrong side’ of the market, at the same time.
These transformations in the grid are why we must invest in transmission capacity, an argument well made in this Economist article. Nonetheless, in the short term, the growth in transmission – and its rather slow progress – will not be able to keep up with the growth in solar and wind power, thereby increasing the pain of imbalance volatility.
Harmonization
Another development to keep in mind concerns the continued harmonization of the European energy market. One example is countries like Germany and Italy joining the shared ancillary and balancing price order book (Mari and PICASSO), with more expected to follow, such as France this year. This will have an impact on setting imbalance prices.
Other harmony changes are expected in the next few years, e.g., further roll-out of PICASSO, more harmonized intraday auctions, and possibly a quarter-hourly traded product on the day-ahead market.
To survive and even thrive in this new context, short-term power traders need to unlock optimal decisions by minimizing volumetric risk and optimizing their trading results with algorithmic bidding strategies.
Imbalance management
2023 didn’t only bring negative prices on the wholesale but also on the balancing markets. Belgium was a good example, with negative imbalance prices up to July exceeding the total for 2022.
Another example is the Netherlands, as you may have already picked up from Figure 2 above. Below, we zoom in on this pattern of positive and negative imbalance prices:
Imbalance prices, the Netherlands, first half of 2023. Data on file
As a result, substantial financial gains are possible for those who manage their balancing position by trading an asset on the balancing market (e.g., by curtailing a renewable asset at negative imbalance prices) and potential losses for participants unable to do so. Thus, imbalance management, once rare, accelerated last year – in countries allowing for it.
In Germany, the law mandates that variable renewable energy curtailment is only permitted if the issues creating the need for curtailment, i.e., grid congestion or severe threats to system reliability, cannot be solved by curtailing conventional generation. While large utilities with diverse portfolios (including combined-cycle gas turbines, or CCGTs) can potentially ‘hide’ so-called passive balancing curtailments, own asset traders and off-takers with pure renewable portfolios cannot do so.
Given the changing reality in the market, it may be time to revisit this policy and alleviate legislation that prevents renewables from using their flexibility. Curtailment could be used to passively balance the market like, for example, in the Netherlands. Letting the causer of the problem also be the solver is a win-win-win scenario:
– Lower imbalance costs for the TSO (thus, also the taxpayer);
– A win for the climate as CCGTs lose their business advantage;
– Higher profits for traders from actively managing volumetric risk and reducing imbalance costs.
For more on the rationale, I recommend this comprehensive Neon Energy report (in German).
Downward FCR prices
In EU power markets, battery owners have typically been turning a profit with frequency containment reserve (FCR). Currently, FCR prices seem to be decreasing, recovering from the 2022 spike but not yet at pre-crisis levels.
The plot below illustrates this trend for Germany, where the end of 2023 profits are ~ €130K/MW, below those of 2021:
FCR prices, Germany, 2014-2022, 52-week average. Source: Regelleistung-online.de
In the Netherlands, we saw an isolated, significant spike of €77,777 for a 4-hour block in the Netherlands. Without it, FCR prices for the year would have ended under €120K/MW.
Subsequently, other revenue sources are becoming interesting. In 2023, just like in 2022, trading on wholesale markets became more attractive, a trend I expect to solidify in 2024.
Intraday liquidity
While intraday trading has been common in markets like Germany, we also see liquidity in other markets.
In 2023, intraday trade volume followed a steep upward curve, as illustrated in the graph below, where we see a significant increase in the amount of trades on intraday. In addition, more markets are joining the continuous, integrated intraday market SIDC (Single Intraday Coupling, formerly XBID).
Intraday trade volume – order events and trades, SIDC, 12/06/2018-12/02/2023. Source: SIDC Stakeholder Report March 2023
Ultimately, liquidity attracts more liquidity. With more renewables on the grid and the resulting intermittency, this pattern indicates a growing opportunity to mitigate balancing risk. Consequently, intraday trading solutions are becoming increasingly important.
The takeaways
Trends such as negative prices on the wholesale market, highly volatile imbalance prices, and the need for imbalance management pose challenges to the economic viability of renewable energy. Yet, they also present excellent opportunities for flexible assets and sophisticated energy companies capable of capitalizing on this evolving landscape.
Today’s renewable power trading is no longer a matter of straightforward MWh transactions but of actively managing short-term risk on the production and market (prices) sides.
Success lies in flexibility: we’re moving away from MWh into a combination of MWh and managing the MWs. Hence, our recommendations for renewable energy traders can be summarized in three points:
- Minimize volumetric risk with the best possible power forecasting setup;
- Trade flexibly across different markets, infusing price forecasting into optimized trade strategies;
- Build out physical flexibility, be it solar and wind curtailment or batteries, to hedge wholesale trading.
Are you ready for 2024? At Dexter Energy, we are well-equipped to support you in power forecasting, trade and flex optimization so that you can be prepared for the energy market of the future.