Rajiv Gogna, partner at consultancy LCP, outlines the opportunity negative pricing creates for those able to react intelligently. Plus how it built a ‘NIV bot’ to create a £1,640/MWh profit last Sunday.
On 5th April, day ahead power prices went negative for four consecutive hours and within day prices were trading negatively for almost ten hours. This marks the longest period of negative pricing in GB to date, with longer periods of negative pricing set to increase in the future.
While customers on dynamic tariffs will have been able to enjoy being paid to use power, this also created opportunities for technologies that can benefit from arbitraging markets or traders taking advantage of the volatility this created.
Why do we have negative prices?
Renewables have support schemes in place to incentivise investment in these technologies to meet our carbon commitments.
For example, a wind farm may receive £50/MWh through a support scheme for every MWh of power it produces. Sunday’s conditions of high renewables and low demand resulted in more generation than demand.
This left renewable generators with a choice – either stop producing electricity because there is no one to buy it, or find a way to increase demand so they can continue to be paid for producing and selling. In this example, the wind farm will pay users up to £49/MWh (or sell at -£49/MWh) to consume electricity, because it would still make a £1/MWh profit on the electricity it produced through the support scheme.
With most renewable contracts having no negative price rule (except newer CfD contracts) to remove subsidies when these events occur, it is likely negative pricing will continue until the majority of existing contracts come to an end in the early 2030s.
Who can benefit from Negative Prices?
The obvious beneficiaries of negative prices are technologies that can increase demand during these events such as batteries, pumped storage and final demand. But we also saw opportunities for Net Imbalance Value (NIV) chasing on 5th April, as different views of renewable and demand forecasts resulted in large spreads of what people were willing to pay for power.
LCP Enact uses artificial intelligence to create its own forecasts of demand and renewables. These are used to create our NIV and system price forecasts.
The team developed a trading bot to simulate trades in real time on the Half Hourly intraday EPEX contract, using LCP’s NIV and system price forecast to make decisions.
The bot spotted a number of occasions where the market was trading in the wrong direction, or hadn’t judged the severity of the pricing drops correctly.
Making just one 1MWh trade per half hour, and taking the system price, LCP’s “NIV bot” achieved a £550/MWh profit on Sunday. This amounts to an average profit of £11.50/MWh per half hour. Making one 1MWh trade at three time intervals to adjust its position (30, 20,16 minutes before the period) resulted in a profit of £1,640/MWh over the day.
With the social distancing measures put in place by Government in response to COVID-19 likely to continue in some form over the summer we expect demand and therefore wholesale prices to continue to be depressed – especially when large amounts of solar and wind are generating.
But with volatility still being present in the market, companies can find significant opportunities that are still available through effective forecasting and trading to return a profit.
LCP Enact is a data integration, analytics and forecasting platform for the GB energy market. Enact helps traders, analysts and managers navigate an increasingly competitive market with ease, make better decisions, and monitor performance. LCP Enact provides forecasts for NIV, wind, demand, system price and BSUoS forecasts.
Find out more about Enact at lcpenact.com