Energy price crisis and extreme volatility
Over the last two years, we have seen extreme gas price increases, which not only make heating residential homes and the production of goods more expensive - a high gas price also raises electricity prices for everybody. The price crisis is caused by the current uncertainty and fear in the market, which is forcing companies to pass the risk premium on to end consumers. As the underlying situation that determines the risk quota is constantly changing, taking action on the energy market - whether it be storing large quantities of gas or electricity or not storing any at all - comes with a higher financial risk than usual.
You might think that traders just have to adapt to the increased price level and that’s that, but what traders actually worry about the most is the high volatility in the market that has come in the wake of rising prices. A lack of accurate forecasts is making it difficult for companies to plan long-term and prevents prices from stabilizing. Traders sometimes operate on razor-thin margins, so if they can’t rely on proper forecasts, prices can go on a rollercoaster ride. 2022’s disruption is here to stay, suggesting an increasingly bullish outlook for the commodity trading industry. Sure, as always, volatility is also an opportunity to increase trading performance, but not being able to rely on proper long-term forecasts means less efficiency in the market and, as a rule, everybody loses.
Concerns about the security of supply
Closely related to volatility is the security of supply. Residential homes will be the last ones cut from both gas and electricity supplies - it’s industrial users that will take the first hit, should supply run low. Many countries rely on importing energy resources to power their manufacturing industries, so the European Commission has now mandated gas storage levels: a last-ditch effort to ensure some security of supply. But this also has negative consequences as it prevents free-market principles from leading to peak efficiency. It is also still unclear whether climate goals that were defined before the current hardships affected the market can still be met. Renewables should be able to make up for the supply gap that will be caused by a phase-out of coal power plants, but they must be properly integrated into the market. A possible lack of gas and/or electricity adds to the already high degree of uncertainty in the market. This could cause investors to direct their funds towards other industries, effectively halting the necessary innovation process of the energy transition.
Integration of renewables
Unlike the COVID crisis and the geopolitical landscape, the energy transition has a long-term and transformative effect by leading markets to low-carbon solutions. Yet some of the market’s volatility also originates from the unsolved question of how the energy transition can be brought about. Germany is setting the pace here by bringing forward goals of 100% renewable electricity production to 2035. And where Germany goes, others will follow eventually. But the integration of renewable energy comes with some challenges. The energy mix and its need for flexibility must be closely observed to avoid grid instabilities and a higher risk of blackouts. Batteries, thermal power plants, pumped hydro, etc. - flexibility can come from many different sources, but they can all be traded on wholesale markets. Balancing energy here is still the main market, but more and more flexibility is being traded on short-term intraday markets.
How can one cope with these circumstances?
The economic crisis that we are experiencing right now is taking a heavy toll on all of us, yet it is simultaneously the time when the wheels are set in motion for the new post-crisis energy landscape. The energy transition will not be halted; it will even accelerate and bring radical changes. The winners of this struggle to adapt will be those who have their eye not only on the short- to mid-term changes, but on the economy of 2050.
Decentralization, electrification, and a growing share of fluctuating renewable energies are contributing to the increasing complexity of the energy system. Meanwhile, the energy market of the future will consist of a wide range of assets, the share of which is still to be determined. Hydro, thermal, e-mobility, battery storage, wind, solar, virtual power plants, etc. - each asset type requires its own trading strategy and further increases the complexity of your trading operations. Short-term trading of electricity is playing an increasingly important role in managing the rising share of volatile generation from renewable energies. The intraday market in particular, in which electricity is traded in the last hours to a few minutes before feed-in to the grid, will play a crucial role in the future. This market is extremely fast-moving and volatile, presenting additional challenges and amplifying the complexity of trading even more.
When the focus lay more heavily on long-term markets, energy traders were quite successful with conventional modeling techniques and trading strategies. However, intraday trading is influenced by factors such as micro weather conditions, meter-level consumption data, as well as cross-border capacity, and power plant outages that affect prices and volatility in the short term. This means that the amount of data and the complex interrelationships of information make trading decisions - i.e., what to trade, when, and at what price - more and more difficult. And when we are talking about the amount of data in the intraday market, we mean an astonishing volume, where millions of data points can accumulate in a few hours.
This new complexity requires smart algorithms that trade independently by monitoring and analyzing large volumes of data. The use of machine learning is an especially viable technology in this type of automated electricity trading, where it significantly improves generation and demand forecasts in addition to predicting price movements. With AI-based trading solutions, these systems will become increasingly smart, handling more information, and making decisions based on a wider range of data. This in turn serves to increase grid stability and thus the security of supply, while helping to get the best prices and optimizing different types of assets.
Augmented trading services
At enspired, we are developing augmented trading, which we see as a groundbreaking new way of integrating power assets into the energy markets. AI technology will probably not replace humans in the trading process altogether, but hand on heart, humans are just not great at processing an abundant amount of data-streams on market conditions and power systems in real-time, 24 hours a day, 365 days a year. By combining machine learning with the skills and experience of our in-house trading experts, we create a symbiosis that lifts our human abilities to a completely new level.
By deploying self-learning algorithms, our data science experts design optimization strategies that are tailored to the unique features of a particular physical power asset. Implementing these algos in live trading with embedded monitoring and risk controls is what our proprietary trading platform has been specifically built for. The AI-augmented algorithms are able to learn to recognize changes in market conditions and adapt their behavior accordingly, thereby achieving superior trading performance for our customers today - as well as tomorrow.
Are you ready to market your assets but not sure how to get started? Or just want to avoid the hassles of running your own modern intraday trading desk? Our team of experts in AI-based energy trading can take care of it for you, getting you started in no time with full transparency and no risk.
Book a non-binding call today.