Importance of Renewable Energy Trading Today

Renewable energy trading is the next generation of electricity trading.

Fremont, CA: Renewable energy trading is a relatively new topic in the power market that has garnered little attention thus far. The terms "renewable energy" and "power trading" are rarely used together in the same sentence.

Intermittent renewable energy sources, especially wind and solar, are obtaining a larger share of electricity production in various markets throughout the world, primarily at the expense of coal and nuclear power. Pricing dynamics in wholesale power markets are drastically shifting where this is happening, driving energy prices down in general. As a result, companies having long holdings in regions that are becoming more reliant on renewable energy stand the danger of losing money on their investments, and may be forced to change their asset strategies and trading operations.

Wind and solar energy, the two most common forms of renewable energy, share two key characteristics that set them apart from the fossil-fuel-based power plants on which the electrical sector has traditionally relied that their variable operational costs — the costs of generating an extra kilowatt-hour of electricity — are almost nil. There are no fuel costs, and the cost of additional maintenance is low. Also, their output is sporadic, reliant on the quantity and quality of solar or wind energy available at any given time. Electricity generation from wind and solar is not deterministic, even though it is predictable in the short future (i.e., a few minutes ahead of time) and on average across large and diverse sample sizes.

As a result, wholesale power markets where renewable energy is gaining traction are acting considerably differently than they did previously.

Energy prices have been lowering in various areas throughout the world as a result of substantial amounts of near-zero variable cost renewable supply available at many hours of the day. Indeed, as noted on Clean Energy Wire in a profile of the German wholesale power markets, energy prices can reach negative (i.e., less than zero) at times when there are excesses of renewables beyond what system demands can easily handle.

Real-time energy markets, on the other hand, might struggle to clear when renewable energy supplies don't "show up" as predicted—unforecasted clouds or calmer weather than expected. If this happens during high demand periods, such as a severe cold spell in the winter or a summer heat wave, energy prices might skyrocket.

These effects are particularly obvious in confined power markets with transmission restrictions, which are frequently difficult to alleviate through expenditures to increase inter-regional transfer capacity. As huge areas of renewable energy are added in locations with favorable resources and fossil plants retire in the face of comparable drops in energy prices, transmission restrictions are anticipated to occur more frequently and new constraints are likely to emerge. As transmission limitations grow more common, preventing renewable energy surpluses from being exported or in-region generation deficits from being relieved by imports, power price differences between neighboring markets will become more frequent and larger.

As the amount of renewable energy supply grows, energy markets see heightened degrees of volatility due to lower average prices and higher peak prices. As a result of the lower certainty of how energy markets will balance at any given time, forward capacity market valuations will become more unpredictable, and ancillary services prices will rise (to the degree they are market-based).