How Power Trading Operations Must Adapt To Rising Supply Intermittency

Renewable energy trading can be thought of as the power industry's next era.

FREMONT, CA: Renewable energy trading is a relatively new concept in the electricity industry that has received little attention. Indeed, the terms "renewable energy" and "power trading" are infrequently used interchangeably.

Intermittent renewable energy sources—primarily wind and solar—are gaining a more significant share of the global electricity supply in many markets, primarily at the expense of coal and nuclear power. Where this is occurring, wholesale power market pricing dynamics are undergoing significant change, generally resulting in lower energy prices. As a result, firms with long positions in regions increasing their reliance on renewable energy face the risk of portfolio depreciation and may be forced to adapt their asset strategies and trading operations.

For those involved in bulk power trading, the changes brought about by growing renewable energy penetration on wholesale markets are a mixed blessing.

On the plus side, as with any commodity market, increased pricing volatility intrinsically creates more trading opportunities. For example, as localized markets become more divergent as transmission constraints increase, widening basis differentials will create numerous new arbitrage opportunities and corresponding trades to execute.

However, any increase in potential rewards is inevitably associated with increased risk exposure. Furthermore, in wholesale energy markets with a high proportion of renewable energy, risks are highly nonlinear, making them more challenging to translate into trading strategies, mark-to-market analyses, and value-at-risk calculations.

Additionally, because renewable energy assets are not dispatchable, they provide traders with fewer degrees of optionality. On the other hand, as dispatchable generation assets become a smaller share of the overall supply base, their inherent flexibility will become increasingly valuable—albeit more difficult to capture, as grid operators effectively force these power plants into a shrinking number of critical roles.

To deal with this increased market complexity, trading operations will need to perform more frequent refreshes of their analytics and accounting systems, which will require tighter integration between trading desks and back offices.

Renewable energy trading can be thought of as the power industry's next era. For those currently engaged in power trading, upgrades to data collection, processing, and reporting systems will likely be necessary. Given the rapid increase in renewable energy's share of global power markets, this is not a trend in which power traders can afford to fall behind, as any current capability gaps will only widen over time.